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SUB: Financial Market

S.Y.B.Com (B&I)

Pre & Post Era of Banking Sector in India

Name of Group members:

1. Introduction

V.E.S Colle e of Arts, Science andCommerce


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INDEX

2. History of Banking Sector

3. Impact of liberalisation on finance &banking

4. Challenges after nationalization

5. Banking sector reform in 1992

6. Current banking structure

7. Increasing risk in banking sector

8. Information Technology in banking

sector

9. Internet banking

10. Challenges in e-banking

11. Bank Transformation

12. Opportunities in banking sector


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IntroductionIndian banking industry, the backbone of the countrys

economy, has always played a key role in prevention the

economic catastrophe from reaching terrible volume in thecountry. It has achieved enormous appreciation for its

strength, particularly in the wake of the worldwide economic

disasters, which pressed its worldwide counterparts to the

edge of fall down. If we compare the business of top three

banks in total assets and in terms of return on assets, the

overall development has been lucrative with enhancement in

banking industry efficiency and productivity. It should beunderlined here is financial turmoil which hit the western

economies in 2008 and the distress effect widened to the

majority of the other countries but Indian banking system

survived with the distress and showed the stable

performance. Indian banks have remained flexible even

throughout the height of the sub-prime catastrophe and the

subsequent financial turmoil.

The Indian banking industry is measured as a flourishing and

the secure in the banking world. The countrys economy

growth rate by over 9 percent since last several years and

that has made it regarded as the next economic power in the

World. Our banking industry is a mixture of public, private

and foreign ownerships.

The major dominance of commercial banks can be easily

found in Indian banking, although the co-operative and

regional rural banks have little business segment.


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remained the exclusive domain of Europeans for next several decades

until the beginning of the20th century.

Pre Nationalization Phase (1935 to 1969)

Organized banking in India is more than two centuries old. Until 1935all, the banks were in private sector and were set up by individuals

and/or industrial houses, which collected deposits from individuals

and used them for their own purposes. In the absence of any

regulatory framework, these private owners of banks were at liberty to

use the funds in any manner, they deemed appropriate and resultantly,

the bank failures were frequent. For many years the Presidency banks

acted as quasi-central banks,

EXAMPLE-Reserve Bank of India.

The Reserve Bank of India was set up on the recommendations Royal

Commission on Indian Currency and Finance also known as the

Hilton-Young Commission. The commission submitted its report in

the year 1926, though the bank was not set up for nine years. Reserve

Bank of India (RBI) was created with the central task of maintaining

monetary stability in India. The Government on December 20, 1934issued a notification and on January 14, 1935, the RBI came into

existence, though it was formally inaugurated only on April 1, 1935.


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Post Nationalization Phase (1969 to 1990)

I think nationalization of banks in India was an important

phenomenon. On July 19, 1969 the erstwhile government of India

nationalized 14 major private banks. Nationalization of bank in

India was not new or happening first time. From 1955 to 1960, State

Bank of India and other seven subsidiaries were nationalized under

the SBI Act of 1955.

It was not a step taken at random or because of the whims of the

leadership of the time, but reflected a process of struggle and political

change which had made this an important demand of the people.

Nationalisation took place in two phases, with a first round in 1969

covering 14 banks followed by another in 1980 covering seven banks.

Currently there are 27 nationalized commercial banks

Reasons for Nationalization1. The need for the nationalization was felt mainly because private

commercial banks were not fulfilling the social and developmental

goals of banking, which are so essential for any industrializing

country. Despite the enactment of the Banking Regulation Act in

1949 and the nationalization of the largest bank, the State Bank ofIndia, in 1955, the expansion of commercial banking had largely

excluded rural areas and small-scale borrowers.

2. The developmental goals of financial intermediation were not being

achieved other than for some favoured large industries and established

business houses. Whereas industrys share in credit disbursed by

commercial banks almost doubled between 1951 and 1968, from 34

percent to 68 per cent, agriculture received less than 2 per cent of total

credit.

3. The stated purpose of bank nationalization was to ensure that credit

allocation occur in accordance with plan priorities.

4. Reduce the hold of moneylenders and make more funds available

for agricultural development. Nationalization of bank was to actively

involve in poverty alleviation and employment generation programs.

Motives for nationalization are political as well as economic.


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Modern Phase from 1991 till dateThis is the phase of New Generation tech-savvy banks. This phase

can be called as The ReformsPhase. Starting of the modern and

current phase of Indian Banking is marked by important events.

Narasimhan Committee-The Committee on Banking Sector ReformsCommittee headed by Mr. M. Narasimhan, it is also known as

Narasimhan Committee The Committee, headed by former Reserve

Bank of India governor M Narasimhan, was appointed by the United

Front government to review the progress in banking sector reforms.

The committee submitted its recommendations to union Finance

Minister Yashwant Sinha in November of 1991.The Committee was

required to review the progress in the reforms in the banking sector

over the past six years with and to chart a programme on FinancialSector Reforms necessary to strengthen the India's financial system

and make it internationally competitive taking into account the vast

changes in the international and financial markets, technological

advances. Some of the recommendations Offered by the committee

are:

1. A reduction, phased over five years in the Statutory Liquidity

Ratio (SLR) to 25 percent, synchronized with the planned

contraction in Fiscal Deficit.2. A progressive reduction in the Cash Reserve Ratio (CRR).

3. Gradual deregulation of interest rates.

4. All banks to attain Capital Adequacy 8% in a phased manner.

5. Banks to make substantial provisions for bad and doubtful

debts.

6. Profitable and reputed banks are permitted to raise capital from

the public.

7. Instituting an Assets Reconstruction Fund to which the bad anddoubtful debts of banks and Financial Institutions could be

transferred at a discount.


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Impact of Economic Liberalization on Finance &

BankingPost nationalization now Indian banking sector was unshackled, and

along with the government banks a thick layer of private and foreign

banks was taking shape. The first of such new generation banks to be

set up was Global Trust Bank, which later amalgamated with Oriental

Bank of Commerce, ICICI Bank, HDFC Bank and Axis Bank. This

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

revitalized the banking sector in India. The next stage for the Indian

banking has been setup with the proposed relaxation in the norms for

Foreign Direct Investment, where all Foreign Investors in banks may

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

present it has gone up to 49% with some restrictions. The new waveushered in a modern outlook and tech-savvy methods of working for

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

just demanded more from their banks but also received more.

Challenges after Nationalisation and

liberalisationAfter nationalisation of banks increasing use of technology continuous mergers

and growth of the Indian banking system by the early 90s the near monopoly of

public sector banks faced competition from more customer focused private

sector entrants. This competition demanded the older and nationalised banks torevitalize their operations.

The year 1992 proved to the Indian banking system owing to

the scam-tainted stock market. Large proportion of household saving moved

into the banking system which recorded an annual growth of 20 percent indeposits.

But along with the continuous growth and modernisation,

several challenges still confront the banking sector. The main challenges are the

deployment of fund in quality assets and the management of revenues and costs

the problem of NPA (Non performing asset) and the overall credit recovery

system exist too.


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Banking Sector Reforms since 1992The first type of reforms mainly based on Narasimhan Committee

recommendations and the principals of new liberalized Indian

economy.

Out of the 27 public sector banks (PSBs), 26 PSBs achieved the

minimum capital to risk assets ratio (CRAR) of 9 per cent by March

2000. To enable the PSBs to operate in a more competitive manner,

the Government adopted a policy of providing autonomous status to

these banks, subject to certain benchmarks. The Reserve Bank

advised banks in February 1999 to put in place an ALM system,

effective April 1, 1999 and set up internal asset liability management

committees (ALCOs) at the top management level to oversee itsimplementation. Banks were expected to cover at least 60 percent of

their liabilities and assets in the interim and 100

per cent of their business by April 1, 2000.

Interest rate deregulation has been an important

component of the reform process. The interest

rates in the banking system have been largely

deregulated except for certain specific classes;these are savings deposit accounts, non-resident

Indian (NRI) deposits, and small loans up to

Rs.2 lakh and export credit.

In 1994, a Board for Financial Supervision (BFS) was constituted

comprising select members of the RBI Board with a variety of

professional expertise to exercise 'undivided attention to supervision'.

The BFS, which generally meets once a month, provides direction on

a continuing basis on regulatory policies including governance issues

and supervisory practices. It also provides direction on supervisory

actions in specific cases.


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The share of the public sector banks in the aggregate assets of the

banking sector has come down from 90 per cent in 1991 to around 75

per cent in 2004. The share of wholly Government-owned public

sector banks has declined from about 90 per cent to 10 per cent

of aggregate assets of all scheduled commercial banks during the

same period. Diversification of ownership has led to greater market

accountability and improved efficiency. Current market value of the

share capital of the Government in public sector banks has increased

manifold and as such, what was perceived to be a bailout of public

sector banks by Government seems to be turning out to be a profitable

investment for the Government.

A Board for Regulation and Supervision of Payment and Settlement

Systems (BPSS) has also been recently constituted to prescribe

policies relating to the regulation and supervision of alltypes of

payment and settlement systems, set standards for existing and future

systems, authorize the payment and settlement systems and determine

criteria for membership to these systems. Both the Houses of the

Parliament have passed the Credit Information Companies

(Regulation) Bill, 2004.

Consolidation in the banking sector has been another feature of the

reform process. This also encompassed the Development Financial

Institutions (DFIs), which have been providers of long-term finance.

Since 1993, twelve new private sector banks have been set up. As

already mentioned, an element of private shareholding in public

sector banks has been injected by enabling a reduction in the

Government shareholding in public sector banks to 51 per cent. As a

major step towards enhancing competition in the banking sector,foreign direct investment in the private sector banks is now allowed

up to 74 per cent, subject to conformity with the guidelines issued

from time to time. Currently, banking in India is generally fairly

mature in terms of supply, product range and reach-even though reach

in rural India still remains a challenge for the private sector and

foreign banks.


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Current Banking StructureBanks in India can be categorized into Scheduled and Non-scheduled

Banks

Scheduled Banks

Scheduled Banks in India constitute those banks, which have been

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

1934. RBI in turn includes only those banks in this schedule which

satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on

30 the June 1999, there were 300 scheduled banks in India having a

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

India comprise of State bank of India and its associates(8),

nationalized banks (19), foreign banks (45), private sector banks (32),co-operative banks and regional rural banks

Non-Schedule Banks

Non-scheduled bank in India" means a banking company as defined in

clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949),

which is not a scheduled bank". Banks in India can also be classified in a

different way.


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Credit riskRisk that arises due to the possibility of a default in the

repayment obligation by borrowers of funds

Contingency Risk- Risk that arises due to the presence of off balance sheet

items such as grantees, letter of credit, underwriting commitments, etc.

The second banking sector reforms gave much

importance to the modernization and technology up gradation.

The IT Act, 1999 started the speedy process of e-banking.

Delivery of banks services to a customer at his office or

home by using electronic technology can be termed as e-banking.The quality, range and price of these e-services decide a banks

competitive position in the industry. The virtual financial services can

be largely categorized as follows:

Automated Teller Machines:- Cash withdrawals

- Details of most recent balance of account- Mini-statement

- Statement ordering facility

- Deposit facility

- Payments to third parties

EFTP:

-EFTPS card used to initiate transactions:

- Authorization and transaction capture processes take place

electronically.- Transaction confirmed manually.

- Funds not debited electronically.

Remote Banking Services:- Balance enquiry

- Statement ordering

- Funds transfer (payment) to third parties

- Funds transfer between customers different accounts


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- Order travellers cheques and other financial instruments.

Services Not Available Through Remote Banking:- Cash withdrawal

- Cash/ cherub deposit

- Sale of the more complex types of financial services such as life

insurance mortgages and (pensions).

Smart Cards:(i) Stored value cards

(ii) As a replacement for all types of magnetic

stripes cards like ATM Cards, Debit/Credit

Cards, Charge Cards etc.- One smart card to carry out all these

functions

- One smart card can contain the functionality of several different

types of cards issued by different banks while running different

types of networks.

- Smart card a truly powerful financial token, giving user access

- STM

- Debit facility- Charge facilities

- Credit facilities

- Electronic purse facilities at national and international level.

Internet Banking:The latest wave in IT is Internet banking. It is

becoming more obvious that the Internet has unleashed a

revolution that is affecting every sphere of life. Internet is aninterconnection of computer communication networks spanning

the entire globe, crossing all geographical boundaries. Touching

lifestyles in every sphere the Net has

redefined methods of communication,

work, study, education interaction,

health, trade and commerce. The Net

is changing everything, from the way

we conduct commerce, to the way we


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distribute information. Being an interactive two-way medium, the

Net, through innumerable websites, enables participation by

individual in B2B and B2C commerce, visits to shopping malls,

books-stores, entertainment sides, and so on cyberspace.

Challenges in E-BankingE-banking is based on technology that by its very nature is

designed to expand the virtual geographic reach of banks and customers

without necessarily requiring a similar physical expansion

Banking organisations have been delivering services to

consumers Electronic funds transfer including small payment and

corporate cash management systems as well as publicity accessible

machine for currency withdrawals and retail account management are

global fixture However, delivering financial services over public networksuch as internet is bringing about a fundamentals shift in the financial

services industry

These development present challenges for both banks and bank

supervisors Bank management needs to re-evaluate the traditional risk

management practices in light of new risk posed by r-banking activities

Bank supervisors need to take a balanced approach to the

introduction of new regulation and supervisory policy on E-banking

Bank Transformation1. The term transformation in Indian Banking Industry relates to

intermediately stage when the industry is passing from the earlier

social banking era to the newly conceived technology based

customer - centric and competitive banking. The activities of

banks have grown in multi-directional as well as in multi-

dimensional manners.2. During transformation, all known parameters of the earlier

regime continuously change.

3. The current transformation process in the Indian Banking has

many aspects. They pertain to:

(i) Capital Restructuring

(ii) Financial Re-engineering

(iii) Information Technology

(iv) Human Resource Development


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OpportunitiesIssue of HRM: Training, development and retaining talented andcommitted staff is a major emerging challenge before the public sector

banks. Today, our employee performance review systems are neither

objective nor transparent. They do not differentiate high performers, risktakers and innovators lot from amongst the total staff. Time has come to

measure the value of human capital and take urgent steps to ensure it to its

optimum level.

Lack of Risk Management:Today, instead of banks managing the risk,risk is managing the banks. A clear understanding of the risk-return profile

of each activity of the bank is crucial to ensure the soundness and solvency

of the organization. Skill up gradation and preparing a cadre for the risk

organization is a major challenge for public sector banks particularly in the

wake of high labour turnover.Lack of Actionable Planning:Lack of planning or ineffective planningis very relevant to public sector banks. Though all the banks have

established elaborate performance budgeting system and created MIS, it

does not meet the managements present requirements. Basically, theentire planning process is still deposit and credit oriented that too, without

any cost and yield linkages

Customers Expectations:In the era of e-banking and severecompetition, the expectations of the bank customers have increased. Due to

this banks should offer a broad range of deposits, investment and creditproducts through diverse distribution channels including upgraded

branches, ATMs, telephone and Internet.

Become more customer centric, offering a wide range of products through

multiple delivery channels

Become proficient in managing assets and liabilities according to risk and

return

Pay greater attention to profitability including cost-reduction and

increasing fee-based income.


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Conclusion:

The face of banking is changing rapidly. Competition is going

to be tough and with financial liberalisation under the WTO,banks in India will have to benchmark themselves against the

best in the world. For a strong and resilient banking and financial

system, therefore, banks need to go beyond peripheral issues

and tackle significant issues like improvements in profitability,

efficiency and technology, while achieving economies of scale

through consolidation and exploring available cost-effective

solutions. These are some of the issues that need to be addressed

if banks are to succeed, not just survive, in the changing milieu.

The first and obvious step they should take is see to it that

the basic problem fuelling dissatisfaction have been

addressed

After repairing this basic deficiency, banks must ensure thattheir services is competitive

To prevent online banking from remaining expensive

additional channel that does little to retain footloose

customers, banks must act quickly

To create the policies which are beneficial to thedevelopment of banking sector

To provide a satisfactory services to customer so that the

growth of the sector will be done


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Concept of DeregulationLessons from banking history in India by Prof .K.V. Bhanu

Murthy, Delhi University.

Innovation in banking sector

Principal and Practices of banking & insurance

History of Banking sector

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