kaleidoscopic view of banking

Kaleidoscopic View Of Banking In India

ST. ANDREW’S COLLEGE OF ARTS,

COMMERCE, SCIENCE AND MANAGEMENT

2012 - 2013

A RESEARCH REPORT ON

“KALEIDOSCOPIC VIEW OF BANKING IN

INDIA”

SUBMITTED BY

RAHUL D’ABREO, T.Y.BBI

ROLL NO. 8206

UNDER THE GUIDANCE OF

PROFESSOR YOGESH ZAVERI

1


DECLARATION

I, Rahul D’abreo, Roll No. 8206 student of St. Andrew’s

College, Bandra, in the third year Bachelor of Commerce

in Banking and Insurance (semester V), hereby declare

that I have completed the research report on the topic of

“KALEIDOSCOPIC VIEW OF BANKING IN INDIA” in the

academic year 2012-2013. The information submitted is

herein is true, to the best of my knowledge

Stamp of College

Signature of student

(St. Andrew’s College of Arts, (RAHUL

D’ABREO)

2


Commerce, Science and

Management)

Signature of co-ordinator Signature of external examiner

(Prof. SHIRLEY PILLAI)

CERTIFICATE

I, YOGESH ZAVERI here by certify that the following

student of St.Andrew’s College of T.Y.B.Com (Banking

& Insurance) semester (v) has completed his research

report on “KALEIDOSCOPIC VIEW OF BANKING IN

INDIA” for the academic year 2012-2013. Information

submitted is true and original to the best of my

knowledge

3


Stamp of college Signature of Professor

(St. Andrew’s College of Arts, (Professor YOGESH ZAVERI)Commerce, Science and Management)

4


ACKNOWLEDGEMENT

It gives me immense pleasure in acknowledging the valuable and

co-operative assistance extended to me by the various individuals

who have helped me successfully in completing this project

First of all I would like to show my gratitude and my guide

professor YOGESH ZAVERI for their assistance, encouragement

and support on the topic “kaleidoscopic”.

I would like to thank my parents, friends and colleagues who have

supported me during the making of this research report. The

information provided by them has helped me gain practical

understanding of the subject.

I would like to thank the Mumbai University for giving me the

opportunity to carry out the research.

It is the encouragement of all these people that has helped me

proceed towards achieving my goals.

SR.NO TOPICSPAGE

NO

1 Introduction 7

2 History of Banking in India 115


Banks in India 15Banking Services in India 18

Reserve Bank of India (RBI) 18

3 General Banking 25Nature of Banking 25

Kinds of Banks 26Role of Banks in a Developing Economy 28

Principles of Bank Lending Policies 304 Management of Banking

Branch Setup and Structure 32Organization and Structure of a Bank

Branch 34Explain Bank Organization System in India 35

Retail Banking-The New Flavor 36

Strategic Issues in Banking Services 40

Knowledge Management 52

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Innovation in Banking 53

Technology in Banking 58

Regulation and Compliance 60

Customer Centric Organization

Ethics and Corporate Governance 63

5 Managing New Challenges 72Recent Micro-economic Development and

Banking System 74

6 Prudential Norms 78

Market Discipline 81

Universal Banking 83

Human Resource Development in Banking 85

7 Conclusion 88

Reference 89

7


Chapter 1: Introduction.

Usually all persons want money for personal and commercial purposes. Banks are the

oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for

their own purposes by their terms. To survive in this modern market every bank implements

so many new innovative ideas, strategies, and advanced technologies. For that they give

each and every minute detail about their institution and projects to Public. They are

providing ample facilities to satisfy their customers i.e. Net Banking, Mobile Banking, Door

to Door facility, Instant facility, Investment facility, Demat facility, Credit Card facility, Loans

and Advances, Account facility etc. And such banks get success to create their own image

in public and corporate world. These banks always accept innovative notions in Indian

banking scenario like Credit Cards, ATM machines, Risk Management etc. So, as a student

business economics I take keen interest in Indian economy and for that banks are the main

source of development. So this must be the first choice for me to select this topic. At this

stage every person must know about new innovation, technology of procedure new

schemes and new ventures.

Objective of Project on Banking view in India

8


Because of the following reasons, I prefer this project work to get the knowledge of the

banking system.

Banking is an essential industry.

It is where we often wind up when we are seeking a problem in financial crisis and

money related query.

Banking is one of the most regulated businesses in the world.

Banks remain important source for career opportunities for people.

It is vital system for developing economy for the nation.

Banks can play a dynamic role in delivery and purchase of consumer durables.

9


THE ROLE OF ECONOMISTS IN BANKS The crucial role of bank economists in transforming the banking system in India. Economists

have to be more ‘mainstreamed’ within the operational structure of commercial banks. Apart

from the traditional functioning of macro-scanning, the interlink ages between treasuries,

dealing rooms and trading rooms of banks need to be viewed not only with the day-to-day

needs of operational necessity, but also with analytical content and policy foresight.

Today, operational aspects of the functioning of banks are attracting intensive research by

professional economists. In particular, measuring and modeling different kinds of risks faced

by banks, the behavior of risk-return relationships associated with different portfolio mixes

and the impact of fluctuations in financial markets on the financial performance of banks are

areas which lend themselves to analytical and empirical appraisal by economists and

econometricians. They, in turn, are discovering the degrees of freedom and room for

analytical maneuver in high frequency information generated by the day-to-day functioning

of banks. It is vital that we develop an environment where these synergies are nurtured so

as to serve the longer-term strategic interests of banks. Even in real time trading and

portfolio decisions, the fundamental analysis of economists provides an independent

assessment of market behavior, reinforcing technical analysis. A serious limitation of the

applicability of standard economic analysis to banking relates to the inadequacies of the

data-base. Absence of long time series data storage in the banking industry often poses

serious problems to the quest for the formal analytical relationships between variables.

Even if such data exist, the presence of structural breaks may blur meaningful analysis

based on traditional formulation. Economists need to think innovatively to overcome this

problem. Use of panel regression, non-parametric methods and multivariate analyses could

go a long way in understanding and validating behavioral relationships in banking.

10


Another important challenge for the economics profession is to develop proper models for

measurement of various risks in Indian conditions. This is a necessity in view of the move

towards risk-based supervision. Quantification of operational risks and calibration of Value

at Risk (VaR) models pose major computational challenge to bankers and policy makers

alike, particularly in India. A major difficulty lies in identifying the right statistical model that

determines the underlying distribution suited to the particular category of operational loss,

and building the necessary database for deriving operationally meaningful conclusions.

In my inaugural address last year, I had also emphasized the need for bank economists to

come out of their narrow specialization and address operational issues relating to banking

and finance. In order to make a meaningful contribution to banking, economists must have

the experience of working in operational areas of banks. For this purpose, economists need

to ‘soil their hands’ in dealing rooms, treasuries and investment units, credit authorization

and loan recovery, strategic management groups and management information systems of

the banks to understand the ground realities. There are also ‘economies’ to be gained from

field-level credit appraisal, asset recovery, debt restructuring, market and consumer

behaviors in which banks are involved. Thus, the profession needs to amalgamate the

objectivity and theoretical soundness of economics with the functional dimensions of

banking and finance. It is this combination of specialist training with operational experience,

which is going to make t he economics profession relevant to the changing face of banking

in India.

Chapter 2: HISTORY OF BANKING IN INDIA

11


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 reasons of India's growth process. The

government's regular policy for Indian bank since 1969 has paid rich dividends with the

nationalization 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 has 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

Nationalization 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 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.

12


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 day’s public

has lesser confidence in the banks. As an aftermath deposit mobilization 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 IIThe government took major initiatives in banking sector reforms after Independence. In

1955, it nationalized the Imperial Bank of India and started offering extensive banking

facilities, especially in rural and semi-urban areas. The government constituted the State

Bank of India to act as the principal agent of the RBI and to handle banking transactions of

the Union government and state governments all over the country. Seven banks owned by

the Princely states were nationalized in 1959 and they became subsidiaries of the State

Bank of India. In 1969, 14 commercial banks in the country were nationalized. In the second

phase of banking sector reforms, seven more banks were nationalized in 1980. With this, 80

13


percent of the banking sector in India came under the 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 : Nationalization of State Bank of India

1959 : Nationalization of SBI subsidiaries

1961 : Insurance cover extended to deposits

1969 : Nationalization of 14 major banks

1971 : Creation of credit guarantees corporation

1975 : Creation of regional rural banks

1980 : Nationalization of seven banks with deposits over 200 crore

After the nationalization 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 IIIThis phase has introduced many more products and facilities in the banking sector as part

of the reforms process. In 1991, under the chairmanship of M Narasimham, a committee

was set up, which worked for the liberalization of banking practices. Now, the country is

flooded with foreign banks and their ATM stations. Efforts are being put to give a

satisfactory service to customers. Phone banking and net banking are introduced. The

entire system became more convenient and swift. Time is given importance in all money

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

14


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

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

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

exchange exposure of banks and their customer

BANKS IN INDIA

In India the banks are being segregated in different groups. Each group has their own

benefits and limitations in operating in India. Each has their own dedicated target market.

Few of them only work in rural sector while others in both rural as well as urban. Many even

are only catering in cities. Some are of Indian origin and some are foreign players. All these

details and many more are discussed over here. The banks and its relation with the

customers, their mode of operation, the names of banks under different groups and other

such useful information are talked about. One more section has been taken note of is the

upcoming foreign banks in India. The RBI has shown certain interest to involve more of

15


foreign banks than the existing one recently. This step has paved a way for few more

foreign banks to start business in India.

Major Banks in India

Abhyudaya Bank Abu Dhabi Commercial Bank Ahmedabad Mercantile Co op Bank Allahabad Bank American Express Bank Ltd Andhra Bank AXIS Bank Bank Of America Bank Of Bahrain and Kuwait Bank of Baroda Bank of Ceylon Bank Of India Bank Of Maharastra Bank of Nova Scotia Barclays Bank Plc BNP Paribas Calyon Bank Canara Bank Catholic Syrian Bank Ltd Central Bank Of India Centurian Bank Of Punjab Chinatrust Commercial Bank Citi Bank N.A Citizen Credit Co op Bank Ltd City Union Bank Ltd CORPORATION BANK Cosmos Co Operative Bank DBS Bank Ltd Dena Bank Deutsche Bank DEVELOPMENT CREDIT BANK LIMITED DICGC Dombivli Nagari Sahakari Bank Ltd Federal Bank HDFC Bank HSBC Bank ICICI Bank IDBI Bank Indian Bank Indian Overseas Bank

16

http://bankinformation.in/bstate-25-indian+overseas+bank.html

http://bankinformation.in/bstate-24-indian+bank.html

http://bankinformation.in/bstate-23-idbi+bank.html

http://bankinformation.in/bstate-99-icici+bank.html

http://bankinformation.in/bstate-98-hsbc+bank.html

http://bankinformation.in/bstate-22-hdfc+bank.html

http://bankinformation.in/bstate-21-federal+bank.html

http://bankinformation.in/bstate-97-dombivli+nagari+sahakari+bank+ltd.html

http://bankinformation.in/bstate-96-dicgc.html

http://bankinformation.in/bstate-95-development+credit+bank+limited.html

http://bankinformation.in/bstate-94-deutsche+bank.html

http://bankinformation.in/bstate-93-dena+bank.html

http://bankinformation.in/bstate-92-dbs+bank+ltd.html

http://bankinformation.in/bstate-91-cosmos+co+operative+bank.html

http://bankinformation.in/bstate-90-corporation+bank.html

http://bankinformation.in/bstate-89-city+union+bank+ltd.html

http://bankinformation.in/bstate-88-citizen+credit+co+op+bank+ltd.html

http://bankinformation.in/bstate-87-citi+bank+n.a.html

http://bankinformation.in/bstate-86-chinatrust+commercial+bank.html

http://bankinformation.in/bstate-85-centurian+bank+of+punjab.html

http://bankinformation.in/bstate-84-central+bank+of+india.html

http://bankinformation.in/bstate-20-catholic+syrian+bank+ltd.html

http://bankinformation.in/bstate-19-canara+bank.html

http://bankinformation.in/bstate-18-calyon+bank.html

http://bankinformation.in/bstate-17-bnp+paribas.html

http://bankinformation.in/bstate-16-barclays+bank+plc.html

http://bankinformation.in/bstate-15-bank+of+nova+scotia.html

http://bankinformation.in/bstate-14-bank+of+maharastra.html

http://bankinformation.in/bstate-13-bank+of+india.html

http://bankinformation.in/bstate-12-bank+of+ceylon.html

http://bankinformation.in/bstate-11-bank+of+baroda.html

http://bankinformation.in/bstate-10-bank+of+bahrain+and+kuwait.html

http://bankinformation.in/bstate-9-bank+of+america.html

http://bankinformation.in/bstate-8-axis+bank.html

http://bankinformation.in/bstate-7-andhra+bank.html

http://bankinformation.in/bstate-6-american+express+bank+ltd.html

http://bankinformation.in/bstate-5-allahabad+bank.html

http://bankinformation.in/bstate-4-ahmedabad+mercantile+co+op+bank.html

http://bankinformation.in/bstate-3-abu+dhabi+commercial+bank.html

http://bankinformation.in/bstate-2-abhyudaya+bank.html


Indusind Bank Ltd ING VYSYA Janakalyan Sahakari Bank Ltd JPMORGAN CHASE BANK N.A Kapole Co Op Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank Lakshmi Vilas Bank Ltd Maharashtra State Co op. Bank Ltd Mashreq Bank PSC Mizuho Corporate Bank, Ltd Nainital Bank New India Co op Bank Ltd NKGSB Co op Bank Ltd Nutan Nagarik Sahakari Bank Ltd Oman International Bank Oriental Bank Of Commerce PARSIK JANATA SAHAKARI BANK LTD Punjab & Maharashtra Co op Bank Ltd Punjab and Sind Bank Punjab National Bank Reserve Bank Of India Shinhan Bank Societe Generale South Indian Bank Standard Chartered Bank State Bank Of Bikaner And Jaipur State Bank Of Hyderabad State Bank Of India State Bank Of Indore State Bank of Mauritius Ltd State Bank Of Mysore State Bank Of Patiala State Bank Of Saurashtra State Bank Of Travancore Syndicate Bank Tamilnadu Mercantile Bank Ltd Bank Of Rajasthan Ltd Bank of Tokyo Mitsubishi UFJ,Ltd Bharat Co op Bank Ltd Dhanalakshmi Bank Ltd Greater Bombay Co op. Bank Ltd Jammu & Kashmir Bank Ltd

17

http://bankinformation.in/bstate-68-the+jammu+%26+kashmir+bank+ltd.html

http://bankinformation.in/bstate-67-the+greater+bombay+co+op.+bank+ltd.html

http://bankinformation.in/bstate-66-the+dhanalakshmi+bank+ltd.html

http://bankinformation.in/bstate-65-the+bharat+co+op+bank+ltd.html

http://bankinformation.in/bstate-64-the+bank+of+tokyo+mitsubishi+ufj%2Cltd.html

http://bankinformation.in/bstate-63-the+bank+of+rajasthan+ltd.html

http://bankinformation.in/bstate-62-tamilnadu+mercantile+bank+ltd.html

http://bankinformation.in/bstate-61-syndicate+bank.html

http://bankinformation.in/bstate-60-state+bank+of+travancore.html

http://bankinformation.in/bstate-59-state+bank+of+saurashtra.html

http://bankinformation.in/bstate-58-state+bank+of+patiala.html

http://bankinformation.in/bstate-57-state+bank+of+mysore.html

http://bankinformation.in/bstate-56-state+bank+of+mauritius+ltd.html

http://bankinformation.in/bstate-55-state+bank+of+indore.html

http://bankinformation.in/bstate-102-state+bank+of+india.html

http://bankinformation.in/bstate-54-state+bank+of+hyderabad.html

http://bankinformation.in/bstate-53-state+bank+of+bikaner+and+jaipur.html

http://bankinformation.in/bstate-52-standard+chartered+bank.html

http://bankinformation.in/bstate-51-south+indian+bank.html

http://bankinformation.in/bstate-50-societe+generale.html

http://bankinformation.in/bstate-49-shinhan+bank.html

http://bankinformation.in/bstate-48-reserve+bank+of+india.html

http://bankinformation.in/bstate-47-punjab+national+bank.html

http://bankinformation.in/bstate-46-punjab+and+sind+bank.html

http://bankinformation.in/bstate-45-punjab+%26+maharashtra+co+op+bank+ltd.html

http://bankinformation.in/bstate-44-parsik+janata+sahakari+bank+ltd.html

http://bankinformation.in/bstate-43-oriental+bank+of+commerce.html

http://bankinformation.in/bstate-42-oman+international+bank.html

http://bankinformation.in/bstate-41-nutan+nagarik+sahakari+bank+ltd.html

http://bankinformation.in/bstate-40-nkgsb+co+op+bank+ltd.html

http://bankinformation.in/bstate-39-new+india+co+op+bank+ltd.html

http://bankinformation.in/bstate-38-nainital+bank.html

http://bankinformation.in/bstate-37-mizuho+corporate+bank%2C+ltd.html

http://bankinformation.in/bstate-36-mashreq+bank+psc.html

http://bankinformation.in/bstate-35-maharashtra+state+co+op.+bank+ltd.html

http://bankinformation.in/bstate-34-lakshmi+vilas+bank+ltd.html

http://bankinformation.in/bstate-33-kotak+mahindra+bank.html

http://bankinformation.in/bstate-32-karur+vysya+bank.html

http://bankinformation.in/bstate-31-karnataka+bank.html

http://bankinformation.in/bstate-30-kapole+co+op+bank.html

http://bankinformation.in/bstate-29-jpmorgan+chase+bank+n.a.html

http://bankinformation.in/bstate-28-janakalyan+sahakari+bank+ltd.html

http://bankinformation.in/bstate-27-ing+vysya.html

http://bankinformation.in/bstate-26-indusind+bank+ltd.html


KALUPUR COMMERCIAL CO OPERATIVE BANK Kalyan Janata Sahakari Bank Ltd Karnataka State Co Operative Apex Bank Lakshmi Vilas Bank Ltd MAHANAGAR CO OP BANK LTD Ratnakar Bank Ltd Royal Bank of Scotland N.V Saraswat Co op Bank Ltd Shamrao Vithal Co operative Bank Limited Tamil Nadu State Apex Co Operative Bank Thane Janata Sahakari Bank Ltd UCO Bank Union Bank Of India United Bank Of India

BANKING SERVICES IN INDIAWith years, banks are also adding services to their customers. The Indian banking industry

is passing through a phase of customers market. The customers have more choices in

choosing their banks. A competition has been established within the banks operating in

India. With stiff competition and advancement of technology, the service provided by banks

has become more easy and convenient. The past days are witness to an hour wait before

withdrawing cash from accounts or a cheque from north of the country being cleared in one

month in the south. This section of banking deals with the latest discovery in the banking

instruments along with the polished version of their old systems.

RESERVE BANK OF INDIA (RBI)

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

April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the

Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully

paid which was entirely owned by private shareholders in the beginning. The Government

held shares of nominal value of Rs. 2, 20,000.Reserve Bank of India was nationalized in the 18

http://bankinformation.in/bstate-81-united+bank+of+india.html

http://bankinformation.in/bstate-80-union+bank+of+india.html

http://bankinformation.in/bstate-79-uco+bank.html

http://bankinformation.in/bstate-78-the+thane+janata+sahakari+bank+ltd.html

http://bankinformation.in/bstate-77-the+tamil+nadu+state+apex+co+operative+bank.html

http://bankinformation.in/bstate-76-the+shamrao+vithal+co+operative+bank+limited.html

http://bankinformation.in/bstate-75-the+saraswat+co+op+bank+ltd.html

http://bankinformation.in/bstate-74-the+royal+bank+of+scotland+n.v.html

http://bankinformation.in/bstate-73-the+ratnakar+bank+ltd.html

http://bankinformation.in/bstate-72-the+mahanagar+co+op+bank+ltd.html

http://bankinformation.in/bstate-103-the+lakshmi+vilas+bank+ltd.html

http://bankinformation.in/bstate-71-the+karnataka+state+co+operative+apex+bank.html

http://bankinformation.in/bstate-70-the+kalyan+janata+sahakari+bank+ltd.html

http://bankinformation.in/bstate-69-the+kalupur+commercial+co+operative+bank.html


year 1949. The general superintendence and direction of the Bank is entrusted to Central

Board of Directors of 20 members, the Governor and four Deputy Governors, one

Government official from the Ministry of Finance, ten nominated Directors by the

Government to give representation to important elements in the economic life of the country,

and four nominated Directors by the Central Government to represent the four local Boards

with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of

five members each Central Government appointed for a term of four years to represent

territorial and economic interests and the interests of co-operative and indigenous banks.

The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of

1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

To regulate the issue of banknotes

To maintain reserves with a view to securing monetary stability and

To operate the credit and currency system of the country to its advantage.

Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank

the Reserve Bank of India.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue

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

coins all over the country is undertaken by the Reserve Bank as agent of the Government.

The Reserve Bank has a separate Issue Department which is entrusted with the issue of

currency notes. The assets and liabilities of the Issue Department are kept separate from

those of the Banking Department. Originally, the assets of the Issue Department were to

19


consist of not less than two-fifths of gold coin, gold bulli0on or sterling securities provided

the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of

the assets might be held in rupee coins, Government of India rupee securities, eligible bills

of exchange and promissory notes payable in India. Due to the exigencies of the Second

World War and the post-was period, these provisions were considerably modified. Since

1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves

of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists

today is known as the minimum reserve system.

Banker to Government

The second important function of the Reserve Bank of India is to act as Government

banker, agent and adviser. The Reserve Bank is agent of central Government and of all

State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has

the obligation to transact Government business, via. to keep the cash balances as deposits

free of interest, to receive and to make payments on behalf of the Government and to carry

out their exchange remittances and other banking operations. The Reserve Bank of India

helps the Government - both the Union and the States to float new loans and to manage

public debt. The Bank makes ways and means advances to the Governments for 90 days. It

makes loans and advances to the States and local authorities. It acts as adviser to the

Government on all monetary and banking matters.

Bankers' Bank and Lender of the Last ResortThe Reserve Bank of India acts as the bankers' bank. According to the provisions of the

Banking Companies Act of 1949, every scheduled bank was required to maintain with the

Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its

time liabilities in India. By an amendment of 1962, the distinction between demand and time

liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per

cent of their aggregate deposit liabilities. The minimum cash requirements can be changed

20


by the Reserve Bank of India. The scheduled banks can borrow from the Reserve Bank of

India on the basis of eligible securities or get financial accommodation in times of need or

stringency by rediscounting bills of exchange. Since commercial banks can always expect

the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank

becomes not only the banker's bank but also the lender of the last resort.

Controller of CreditThe Reserve Bank of India is the controller of credit i.e. it has the power to influence the

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

through open market operations. According to the Banking Regulation Act of 1949, the

Reserve Bank of India can ask any particular bank or the whole banking system not to lend

to particular groups or persons on the basis of certain types of securities. Since 1956,

selective controls of credit are increasingly being used by the Reserve Bank. The Reserve

Bank of India is armed with many more powers to control the Indian money market. Every

bank has to get a license from the Reserve Bank of India to do banking business within

India, the license can be cancelled by the Reserve Bank of certain stipulated conditions are

not fulfilled. Every bank will have to get the permission of the Reserve Bank before it can

open a new branch. Each scheduled bank must send a weekly return to the Reserve Bank

showing, in detail, its assets and liabilities. This power of the Bank to call for information is

also intended to give it effective control of the credit system. The Reserve Bank has also the

power to inspect the accounts of any commercial bank. As supreme banking authority in the

country, the Reserve Bank of India, therefore, has the following powers:

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative controls.

(c) It controls the banking system through the system of licensing, inspection and calling for

information.

(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled

banks.

21


Custodian of Foreign ReservesThe Reserve Bank of India has the responsibility to maintain the official rate of exchange.

According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell

at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of

exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the

exchange rate fixed at lsh.6d. Though there were periods of extreme pressure in favor of or

against the rupee. After India became a member of the International Monetary Fund in

1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all

other member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the

custodian of India's reserve of international currencies. The vast sterling balances were

acquired and managed by the Bank. Further, the RBI has the responsibility of administering

the exchange controls of the country.

Supervisory functionsIn addition to its traditional central banking functions, the Reserve bank has certain non-

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

India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the

RBI wide powers of supervision and control over commercial and co-operative banks,

relating to licensing and establishments, branch expansion, liquidity of their assets,

management and methods of working, amalgamation, reconstruction, and liquidation. The

RBI is authorized to carry out periodical inspections of the banks and to call for returns and

22


necessary information from them. The nationalization of 14 major Indian scheduled banks in

July 1969 has imposed new responsibilities on the RBI for directing the growth of banking

and credit policies towards more rapid development of the economy and realization of

certain desired social objectives. The supervisory functions of the RBI have helped a great

deal in improving the standard of banking in India to develop on sound lines and to improve

the methods of their operation.

Promotional functionsWith economic growth assuming a new urgency since Independence, the range of the

Reserve Bank's functions has steadily widened. The Bank now performs variety of

developmental and promotional functions, which, at one time, were regarded as outside the

normal scope of central banking. The Reserve Bank was asked to promote banking habit,

extend banking facilities to rural and semi-urban areas, and establish and promote new

specialized financing agencies. Accordingly, the Reserve Bank has helped in the setting up

of the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust

of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural

Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of

India in 1972. These institutions were set up directly or indirectly by the Reserve Bank to

promote saving habit and to mobilize savings, and to provide industrial finance as well as

agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural

Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this

field has become extremely important. The Bank has developed the co-operative credit

movement to encourage saving, to eliminate moneylenders from the villages and to route its

short term credit to agriculture. The RBI has set up the Agricultural Refinance and

Development Corporation to provide long-term finance to farmers.

23


Classification of RBIs functionsThe monetary functions also known as the central banking functions of the RBI are related

to control and regulation of money and credit, i.e., issue of currency, control of bank credit,

control of foreign exchange operations, banker to the Government and to the money

market. Monetary functions of the RBI are significant as they control and regulate the

volume of money and credit in the country.

Equally important, however, are the non-monetary functions of the RBI in the context of

India's economic backwardness. The supervisory function of the RBI may be regarded as a

non-monetary function (though many consider this a monetary function).

The promotion of sound banking in India is an important goal of the RBI, the RBI has been

given wide and drastic powers, under the Banking Regulation Act of 1949 – these powers

relate to licensing of banks, branch expansion, liquidity of their assets, management and

methods of working, inspection, amalgamation, reconstruction and liquidation. Under the

RBI's supervision and inspection, the working of banks has greatly improved. Commercial

banks have developed into financially and operationally sound and viable units. The RBI's

powers of supervision have now been extended to nonbanking financial intermediaries.

Since independence, particularly after its nationalization 1949, the RBI has followed the

promotional functions vigorously and has been responsible for strong financial support to

industrial and agricultural development in the country.

General banking

24


NATURE OF BANKING IN INDIAA banking company in India has been defined in the banking companies act,1949.as one

“which transacts the business of banking which means the accepting, for the

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

demand or otherwise and withdraw able by cheque, draft, order or otherwise.”

Most of the activities a Bank performs are derived from the above definition. In addition,

Banks are allowed to perform certain activities which are ancillary to this business of

accepting deposits and lending. A bank's relationship with the public, therefore, revolves

around accepting deposits and lending money. Another activity which is assuming

increasing importance is transfer of money - both domestic and foreign - from one place to

another. This activity is generally known as "remittance business" in banking parlance. The

so called forex (foreign exchange) business is largely a part of remittance albeit it involves

buying and selling of foreign currencies.

FUNCTIONING OF A BANKFunctioning of a Bank is among the more complicated of corporate operations. Since

Banking involves dealing directly with money, governments in most countries regulate this

sector rather stringently. In India, the regulation traditionally has been very strict and in the

opinion of certain quarters, responsible for the present condition of banks, where NPAs are

of a very high order. The process of financial reforms, which started in 1991, has cleared

the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and

regulations that a Bank has to work with makes its operations even more complicated,

sometimes bordering on illogical. This section, which is also intended for banking

professional, attempts to give an overview of the functions in as simple manner as possible.

Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of

lending or investment of deposits of money from the public, repayable on demand or

otherwise and withdraw able by cheques, draft, and order or otherwise."

25


KINDS OF BANKSFinancial requirements in a modern economy are of a diverse nature, distinctive variety and

large magnitude. Hence, different types of banks have been instituted to cater to the varying

needs of the community.

Banks in the organized sector may, however, be classified in to the following major forms:

1. Commercial banks

2. Co-operative banks

3. Specialized banks

4. Central bank

COMMERCIAL BANKSCommercial banks are joint stock companies dealing in money and credit. In India, however

there is a mixed banking system, prior to July 1969, all the commercial banks-73

scheduled and 26 non-scheduled banks, except the state bank of India and its

subsidiaries-were under the control of private sector. On July 19, 1969, however, 14mejor

commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another

six commercial banks of high standing were taken over by the government.

At present, there are nationalized banks plus the state bank of India and its 7 subsidiaries

constituting public sector banking which controls over 90 per cent of the banking business in

the country.

CO-OPERATIVE BANKSCo-operative banks are a group of financial institutions organized under the provisions of

the Co-operative societies Act of the states. The main objective of co-operative banks is to

provide cheap credits to their members. They are based on the principle of self-reliance and

mutual co-operation. Co-operative banking system in India has the shape of a pyramid a

three tier structure, constituted by: Primary credit societies [APEX]26


Central co-operative banks [District level]

State co-operative banks [Villages, Towns, Cities]

CENTRAL BANK

A central bank is the apex financial institution in the banking and financial system of a

country. It is regarded as the highest monetary authority in the country. It acts as the leader

of the money market. It supervises, control and regulates the activities of the commercial

banks. It is a service oriented financial institution.

India’s central bank is the reserve bank of India established in 1935.a central bank is

usually state owned but it may also be a private organization. For instance, the reserve

bank of India (RBI), was started as a shareholders’ organization in 1935, however, it was

nationalized after independence, in 1949.it is free from parliamentary control.

ROLE OF BANKS IN A DEVELOPING ECONOMYBanks play a very useful and dynamic role in the economic life of every modern state. A

study of the economic history of western country shows that without the evolution of

commercial banks in the 18th and 19th centuries, the industrial revolution would not have

taken place in Europe. The economic importance of commercial banks to the developing

countries may be viewed thus:

1. Promoting capital formation

2. Encouraging innovation

3. Monetsation

4. Influence economic activity

5. Facilitator of monetary policy

27


PROMOTING CAPITAL FORMATIONA developing economy needs a high rate of capital formation to accelerate the tempo of

economic development, but the rate of capital formation depends upon the rate of saving.

Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for

saving and, thus encourage the habits of thrift and industry in the community. They mobilize

the ideal and dormant capital of the country and make it available for productive purposes.

ENCOURAGING INNOVATIONInnovation is another factor responsible for economic development. The entrepreneur in

innovation is largely dependent on the manner in which bank credit is allocated and utilized

in the process of economic growth. Bank credit enables entrepreneurs to innovate and

invest, and thus uplift economic activity and progress.

MONETSATION

Banks are the manufactures of money and they allow many to play its role freely in the

economy. Banks monetize debts and also assist the backward subsistence sector of the

rural economy by extending their branches in to the rural areas. They must be replaced by

the modern bank’s branches

INFLUENCE ECONOMIC ACTIVITY

Banks are in a position to influence economic activity in a country by their influence on the

rate interest. They can influence the rate of interest in the money market through its supply

of funds. Banks may follow a cheap money policy with low interest rates which will tend to

stimulate economic activity.

28


FACILITATOR OF MONETARY POLICY

Thus monetary policy of a country should be conductive to economic development. But a

well-developed banking system is on essential pre-condition to the effective implementation

of monetary policy. Under-developed countries cannot afford to ignore this fact. A fine, an

efficient and comprehensive banking system is a crucial factor of the developmental

process.

PRINCIPLES OF BANK LENDING POLICIESThe main business of banking company is to grant loans and advances to traders as well as

commercial and industrial institutes. The most important use of banks money is lending.

Yet, there are risks in lending. So the banks follow certain principles to minimize the risk:

1. Safety

2. Liquidity

3. Profitability

4. Purpose of loan

5. Principle of diversification of risks

SAFETYNormally the banker uses the money of depositors in granting loans and advances. So first

of all initially the banker while granting loans should think first of the safety of depositor’s

money. The purpose behind the safety is to see the financial position of the borrower

whether he can pay the debt as well as interest easily.

LIQUIDITY

29


It is a legal duty of a banker to pay on demand the total deposited money to the depositor.

So the banker has to keep certain percent cash of the total deposits on hand. Moreover the

bank grants loan. It is also for the addition of short term or productive capital. Such type of

lending is recovered on demand.

PROFITABILITY

Commercial banking is profit earning institutes. Nationalized banks are also not an

exception. They should have planning of deposits in a profitability way pay more interest to

the depositors and more salary to the employees. Moreover the banker can also incur

business cost and can give more benefits to customer.

PURPOSE OF LOAN

Banks never lend or advance for any type of purpose. The banks grant loans and advances

for the safety of its wealth, and certainty of recovery of loan and the bank lends only for

productive purposes. For example, the bank gives such loan for the requirement for

unproductive purposes.

PRINCIPLE OF DIVERSIFICATION OF RISKSWhile lending loans or advances the banks normally keep such securities and assets as a

supports so that lending may be safe and secured. Suppose, any particular state is hit by

disasters but the bank shall get benefits from the lending to another states units. Thus, he

30


effect on the entire business of banking is reduced. There are proverbs that do not keep all

the eggs in one basket. a principle of considerations of sound lending is:

1. Safety

2. Liquidity

3. Shift ability

4. Profitability.

BRANCH SETUP AND STRUCTURE

Ever since major commercial banks were nationalized in two phases in 1969 and 1980,

there has been a sea change in their functions, outlook and perception. One of the main

objectives of nationalization of banks has been to help achieve balanced, regional, sectoral

and sectional development of the economy by way of making the banks reach out to the

small man and to the remote areas of the country.

RATIONAL OF A BANK STRUCTURE

An organization consists of people who carry out differentiated tasks which are coordinated

so as to contribute and achieves planned goals. Organizations are created mainly for

producing goods and services to the society for which they have to incorporate a formal

structure.

Indian banking is now operating in a more competitive setting with the induction of new

banks. Both Indian and foreign, who will be bringing in New York technology and specialist

expertise and a variety of new financing instruments

Branch is the primary unit of the bank’s business, particularly for serving the weaker

sections of the society. Branches have to develop close relationship they profess to serve.

This leads to opening up or specialized branches, like industrial finance, small scale

industries, and Hi-tech agriculture, overseas and non-resident Indian, according to market

31


segmentation. This new vision entails a new chain of command, a new technology and

specific delegation of authority

This calls for the branch manager to concentrate on his/her styles, skill and subordinates,

goals, to shape the branch in the competitive environment to become a profit centre and to

Render better customer service. This implies that the branch manger should have adequate

supporting staff to relieve him from the routine table work to developmental activities

In order to serve the customer it is necessary that one should understand and accept role

and relationship with other so as to make sure that none of the supporting staff would be

deemed to be independent of the branch manager. So the structure of branch organization

must, from time to time. Conform to the demands and peculiarities of the locality in which

the branch is functioning

Before looking in to the branch structure of bank, it will be worthwhile examing how a formal

organizational structure of a bank appears. After nationalization, generally banks have a 4-

tier structure represented as under:

During the mid-80’s, banks started diversifying in to various areas like merchant banking,

mutual funds, leasing, hire purchase, etc. to improve their profitability and to cater to the

needs of the customers. These activities are performed by the banks either by separate

departments or as subsidiaries. After liberalization and globalization of the economy, with a

view to meeting the customer’s needs and to avoid delays, a revised organizational

structure of banks was convened by removing one tier. Now banks are going in for a 3-tier

structure as under:

The regional offices are given more powers and jurisdiction so as to enable them to act

quickly.

HEAD OFFICE

ZONAL OFFICE

BRANCH OFFICE

HEAD OFFICE

BRANCH OFFICE

REGIONAL OFFICE32


CENTRAL OFFICE

ORGANISATIONAL STRUCTURE OF A BANK BRANCH

Now let discuss the structure of a branch. The branch is the focal point of all activities. The

structure of the branch may be as under:

Small/Medium Branch

This is the typical structure of a branch bank. In very large branches, the structure will

undergo slight changes as stated below:

Very Large Branch

From the structure we can see how the functional relationship works in a branch. He

structure also explains the reporting authority for each cadre of the employees. It indicates

the communication flow in the branch with well-defined accountability on the part of the

employees’ roles.

TYPES OF BRANCHES

According to locations, there are four types’ bank branches. They are rural, semi urban,

urban and metropolitan branches. The B.M. has special role and functions in managing

different types of branches.

33


Mixed banking Correspondent Banking

BANK ORGANIZATION SYSTEM IN INDIA

The large volume of work passing through the banking system every day in the form of

cash, cheque, and other credit instruments, together with the complexity of the many

services rendered, calls not only for a high degree of skill, accuracy and knowledge on the

part of the officials, but also up-to-date and efficient methods of organization, accountancy

and control. Shareholders and directors

General Managers

Head office

Administration

Branch

Administration Foreign

Departments

The Branch Manager

The day-book or

Control Clerk

The Security Clerk

The cashier

The Chief Clerk

Modern Banking Methods

The Remittance or

Waste Clerk

The Shorthand Typist

34


Rotation of Duties

The junior Clerk

The Ledger-Keeper

The Shorthand Typist

The Ledger-Keeper

RETAIL BANKING-THE NEW FLAVOR The Concept of Retail Banking:-

The retail banking encompasses deposit and assets linked products as well as other

financial services offered to individual for personal consumption. Generally, the pure retail

banking is conceived to be the provision of mass banking products and services to private

individuals as opposed to wholesale banking which focuses on corporate clients. Over the

years, the concept of retail banking has been expanded to include in many cases the

services provided to small and medium sized businesses. Some banks in Europe even

include their private banking business i.e. services to high net worth net worth individuals in

their retail Banking portfolio.

The concept of Retail banking is not new to banks. it is only now that it is being viewed as

an attractive market segment, which offers opportunities for growth with profits. The

diversified portfolio characteristic of retail banking gives better comfort and spreads the

essence of retail banking lies in individual customers. Though the term Retail Banking and

retail lending are often used synonymously, yet the later is lust one side of Retail Banking.

In retail banking, all the banking needs of individual customers are taken care of in an

integrated manner.

Retail Lending ProductsMajor retail lending products offered by banks are the following:

35


1. Housing Loans

2 Loan for Consumer goods

3. Personal Loans for marriage, honeymoon, medical treatment and holding etc.

4. Education Loans

5. Auto Loans

6. Gold Loans

7. Event Loans

8. Festival Loans

9. Insurance products

10. Loan against Rent receivables

11. Loan against Pension receivables to senior citizens

12. Debit and Credit Cards

13. Global and International Cards

14. Loans to doctors to set up their own clinies or for purchase of medical equipments

15. Loans for Woman Empowerment for the Setting up of boutiques

Setting up of beauty parlours

Setting up of crèches

Setting up of flower shops

For making jaipuri quilts etc

Preparation and supply of Food Tiffins

16. Loans for purchase of acoustic enclosures for Diesels Gen, Sets etc

Other Retail Banking ServicesOffer of several frills and goodies is not the end of the game. Banks also offer following

Retail Banking services free of charges to customers:

1. Payment of utility bills like water, electricity, telephone and mobile phone bills

2. Payment of insurance premiums on due dates

3. Payment of monthly/quarterly education fee of children to their respective schools

36


4. Remittance of funds from one account to another

5. Demating of shares, bonds, debentures, and mutual funds

6. Payment of credit card bills on due dates

7. Last but not the least, the filing of income tax returns and payment of income tax

The impact of Retail Banking- The major impact of Retail Banking is that, the customers have become the emperors –

the fulcrum of all banking activities, both on the asset side and the liabilities front. The

hitherto sellers market has transformed into buyers market.

-The customers have multiple of choices before them now for cherry picking products and

services, which suit their life styles and tastes and financial requirements as well. Banks

now go to their customers more often than the customers go to their banks.

- The non-banking finance Companies which have hitherto been thriving on retail business

due to high risk and high returns thereon have been dislodged from their profit munching

citadel.

- Retail banking is transforming banks in to one stop financial super markets.

- The share of retail loans is fast increasing in the loan books of banks.

- Banks can foster lasting business relationship with customers and retain the existing

customers and attract new ones. There is a rise in their service levels as well.

-Banks can cut costs and achieve economies of scale and improve their revenues and

profits by robust growth in retail business. Reduction in costs offers a win win situation both

for banks and the customers.

- It has affected the interface of banking system through different delivery mechanism.

- It is not that banks are sharing the same pie of retail business. The pie itself is growing

exponentially; retail banking has fueled a considerable quantum of purchasing power

through a slew of retail products.

- Banks can diversify risks in their credit portfolio and contain the menace of NPAs.

37


- Re-engineering of business with sophisticated technology based products will lead to

business creation, reduction in transaction cost and enhancement in efficiency of

operations.

Draw-backs of Retail Banking

Despite the numerous advantage of Retail Banking there are some drew-Backs in this

business. These are as under:

a. Management of large number of clients may become a problem if IT systems are not

robust.

b. Rapid evolution of products can lead to IT complications.

c. The cost of maintaining large number of small value transactions in branch networks will

be relatively high, unless the customers use alternate delivery channels like ATMs, internet

and phone banking etc. for carrying out banking transactions.

The Future of Retail Banking Though at present Retail Banking appears to be the best bet for banks to improve their top

and bottom line, yet the future of Retail banking in general, may not be all roses as it

appears to be. There are signs of slowdown in customer growth in some countries, which

will inevitably have an impact on Retail Banking business growth. Secondly the possibility of

deterioration in asset quality cannot be ruled out. With the boom in housing loan market, the

sign of overheating has also started surfacing with potential problem for banks that have not

exercised sufficient caution. Further the pressure on margins is mounting partly because of

fierce competition and partly as a result of falling interest rates environment which has

diminished to some extent the endowment effect of substantial deposit bases from which

most retail banks have been deriving benefits. But banks, which have built a significant retail

banking portfolio may fare relatively well in the current fiscal. Those banks which have a

dynamic retail strategy and are well diversified in products, services and distribution

38


channels and have at the same time managed to achieve a good level of cost efficiency are

the ones that are most likely to succeed in the longer term.

STRATEGIC ISSUES IN BANKING SERVICES

Strategic Planning: is the process of analyzing the organizational external and internal

environments; developing the appropriate mission, vision, and overall goals; identifying the

general strategies to be pursued; and allocated resources.

Mission is an organization's current purpose or reason for existing.

Vision is an organization's fundamental aspirations and purpose that usually appeals

to its member's hearts and minds.

Goals are what an organization is committed to achieving.

Strategies are the major courses of action that an organization takes to achieves

goals.

Resource Allocation is the earmarking of money, through budgets, for various

purposes.

Downsizing Strategy signals an organization's intent to rely on fewer resources

primarily human-to accomplish its goals.

Tactical Planning: is the process of making detailed decisions about what to do, which will

do it, and how to do it-with a normal time and horizon of one year or less. The process

generally includes:

Choosing specific goals and the means of implementing the organization's strategic

plan,

Deciding on courses of action for improving current operations, and

39


Developing budgets for each department, division and project. Strategic issues in

banks services are known as or define by these ways, which are known as

NON-PERFORMING ASSETS OF THE BANKING SECTORThere was a significant decline in the non-performing assets (NPAs) of SCBs in 2003-04,

despite adoption of 90 day delinquency norm from March 31, 2004. The Gross NPAs of

SCBs declined from 4.0 per cent of total assets in 2002-03 to 3.3 percent in 2003-04. The

corresponding decline in net NPAs was from 1.9 per cent to 1.2 per cent. Both gross NPAs

and net NPAs declined in absolute terms. While the gross NPAs declined from Rs. 68,717

crore in 2002-03 to Rs. 64,787 crore in 2003-04, net NPAs declined from Rs. 32,670 crore

to Rs. 24,617 crore in the same period. There was also a significant decline in the

proportion of net NPAs to net advances from 4.4 per cent in 2002-03 to 2.9 per cent in

2003-04. The significant decline in the net NPAs by 24.7 per cent in 2003-04 as compared

to 8.1 per cent in 2002-03 was mainly on account of higher provisions (up to 40.0 per cent)

for NPAs made by SCBs.

The decline in NPAs in 2003-04 was witnessed across all bank groups. The decline in net

NPAs as a proportion of total assets was quite significant in the case of new private sector

banks, followed by PSBs. The ratio of net NPAs to net advances of SCBs declined from 4.4

per cent in 2002-03 to 2.9 per cent in 2003-04. Among the bank groups, old private sector

banks had the highest ratio of net NPAs to net advances at 3.8 per cent followed by PSBs

(3.0 per cent) new private sector banks

(2.4 percent) and foreign banks (1.5 percent) (Table 3.5). 3.31 An analysis of NPAs by

sectors reveals that in 2003-04, advances to non-priority sectors accounted for bulk of the

outstanding NPAs in the case of PSBs (51.24 per cent of total) and for private sector banks

(75.30 per cent of total). While the share of NPAs in agriculture sector and SSIs of PSBs

40


declined in 2003-04, the share of other priority sectors increased. The share of loans to

other priority sectors in priority sector lending also increased. Measures taken to reduce

NPAs include reschedulement, restructuring at the bank level, corporate debt restructuring,

and

Recovery through Lok Adalats, Civil Courts, and debt recovery tribunals and compromise

settlements. The recovery management received a major fillip with the enactment of the

Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest

(SARFAESI) Act, 2002 enabling banks to realise their dues without intervention of courts

and tribunals. The Supreme Court in its judgment dated April 8, 2004, while upholding the

constitutional validity of the Act, struck down section 17 (2) of the Act as unconstitutional

and contrary to Article 14 of the Constitution of India. The Government amended the

relevant provisions of the Act to address the concerns expressed by the Supreme Court

regarding a fair deal to borrowers through an ordinance dated November 11, 2004.

It is expected that the momentum in the recovery of NPAs will be resumed with the

amendments to the Act

3.32 The revised guidelines for compromise settlement of chronic NPAs of PSBs were

issued in January 2003 and were extended from time to time till July 31, 2004. The cases

filed by SCBs in Lok Adalats for recovery of NPAs stood at 5.20 lakh involving an amount of

Rs. 2,674 crore (prov.). The recoveries effected in 1.69 lakh cases amounted to Rs. 352

crore (prov.) as on September 30, 2004.The number of cases filed in debt recovery tribunals

stood at 64, 941 as on June 30, 2004, involving an amount of Rs. 91,901 crore. Out of

these, 29, 525 cases involving an amount of Rs. 27,869 crore have been adjudicated. The

amount recovered was to Rs. 8,593 crore. Under the scheme of corporate debt restructuring

introduced in 2001, the number of cases and value of assets restructured stood at 121 and

Rs. 69,575 crore, respectively, as on December 31, 2004. Iron and steel, refinery, fertilizers

and telecommunication sectors were the major beneficiaries of the scheme. These sectors

accounted for more than two-third of the values of assets restructured. 3.33 As credit 41


information is crucial for the development of the financial system and for addressing the

problems of NPAs, dissemination of credit information on suit-filed defaulters is being

undertaken by the Credit Information Bureau of India Ltd. (CIBIL) from March 2003. In its

annual policy statement for 2004-05, the RBI advised banks and financial institutions to

review the measures taken for furnishing credit information in respect of all borrowers to

CIBIL. In its mid-term review, the RBI again urged the banks to make persistent efforts in

obtaining consent from all the borrowers, in order to establish an efficient credit information

system, which would help in enhancing the quality of credit decisions,

improve the asset quality, and facilitate faster credit delivery.

CAPITAL ADEQUACY RATIOThe concept of minimum capital to risk weighted assets ratio (CRAR) has been developed

to ensure that banks can absorb a reasonable level of losses. Application of minimum

CRAR protects the interest of depositors and promotes stability and efficiency of the

financial system. At the end of March 31, 2004, CRAR of PSBs stood at 13.2 per cent, an

improvement of 0.6 percentage point from the previous year. There was also an

improvement in the CRAR of old private sector banks from 12.8 per cent in 2002-03 to 13.7

per cent in 2003-04. The CRAR of new private sector banks and foreign banks registered a

decline in 2003-04. For the SCBs as a whole the CRAR improved from 12.7 per cent in

2002-03 to 12.9 per cent in 2003-04. All the bank groups had CRAR above the minimum 9

per cent stipulated by the RBI. 3.35 During the current year, there was further improvement

in the CRAR of SCBs. The ratio in the first half of 2004-05 improved to 13.4 per cent as

compared to 12.9 per cent at the end of 2003-04. Among the bank groups, a substantial

improvement was witnessed in the case of new private sector banks from 10.2 percent as at

the end of 2003-04 to 13.5 percent in the first half of 2004-05. While PSBs and old private

42


banks maintained the CRAR at almost the same level as in the previous year, the CRAR of

foreign banks declined to 14.0 per cent in the first half of 2004-05 as compared to 15.0 per

cent as at the end of 2003-04.

TOTAL QUALITY MANAGEMENT

While Total Quality Management has proven to be an effective process for improving

organizational functioning, its value can only be assured through comprehensive and well

thought out implementation process. The purpose of this chapter is to outline key aspects of

implementation of large scale organizational change which may enable a practitioner to

more thoughtfully and successfully implement TQM. First, the context will be set. TQM is, in

fact, a large scale systems change, and guiding principles and considerations regarding this

scale of change will be presented. Without attention to contextual factors, well intended

changes may not be adequately designed. As another aspect of context, the expectations

and perceptions of employees (workers and managers) will be assessed, so that the

implementation plan can address them.

Specifically, sources of resistance to change and ways of dealing with them will be

discussed. This is important to allow a change agent to anticipate resistances and design

for them, so that the process does not bog down or stall. Next, a model of implementation

will be presented, including a discussion of key principles. Visionary leadership will be

offered as an overriding perspective for someone instituting TQM. In recent years the

literature on change management and leadership has grown steadily, and applications

based on research findings will be more likely to succeed. Use of tested principles will also

enable the change agent to avoid reinventing the proverbial wheel. Implementation

principles will be followed by a review of steps in managing the transition to the new system

and ways of helping institutionalize the process as part of the organization's culture. This

section, too, will be informed by current writing in transition management and

institutionalization of change. Finally, some miscellaneous do's and don’ts will be offered.

43


Members of any organization have stories to tell of the introduction of new programs,

techniques, systems, or even, in current terminology, paradigms. Usually the employee,

who can be anywhere from the line worker to the executive level, describes such an incident

with a combination of cynicism and disappointment: some manager went to a conference or

in some other way got a "great idea" (or did it based on threat or desperation such as an

urgent need to cut costs) and came back to work to enthusiastically present it, usually

mandating its implementation. The "program" probably raised people's expectations that this

time things would improve, that management would listen to their ideas. Such a program

usually is introduced with fanfare, plans are made, and things slowly return to normal. The

manager blames unresponsive employees, line workers blame executives interested only in

looking good, and all complain about the resistant middle managers. Unfortunately, the

program itself is usually seen as worthless: "we tried team building (or organization

development or quality circles or what have you) and it didn't work; neither will TQM".

Planned change processes often work, if conceptualized and implemented properly; but,

unfortunately, every organization is different, and the processes are often adopted "off the

shelf" "the 'appliance model of organizational change': buy a complete program, like a

'quality circle package,' from a dealer, plug it in, and hope that it runs by itself" (Kanter,

1983, 249). Alternatively, especially in the underfunded public and notforprofit sectors,

partial applications are tried, and in spite of management and employee commitment do not

bear fruit. This chapter will focus on ways of preventing some of these disappointments.

In summary, the purpose here is to review principles of effective planned change

implementation and suggest specific TQM applications. Several assumptions are proposed:

1. TQM is a viable and effective planned change method, when properly installed; 2. not all

organizations are appropriate or ready for TQM; 3. preconditions (appropriateness,

readiness) for successful TQM can sometimes be created; and 4. leadership commitment to

a large-scale, long-term, cultural change is necessary. While problems in adapting TQM in

government and social service organizations have been identified, TQM can be useful in

such organizations if properly modified (Milakovich, 1991; Swiss, 1992).44


TQM as Large-scale Systems Change

TQM is at first glance seen primarily as a change in an organization's technology its

way of doing work. In the human services, this means the way clients are processed the

service delivery methods applied to them and ancillary organizational processes such as

paperwork, procurement processes, and other procedures. But TQM is also a change in an

organization's culture its norms, values, and belief systems about how organizations

function. And finally, it is a change in an organization's political system: decision making

processes and power bases. For substantive change to occur, changes in these three

dimensions must be aligned: TQM as a technological change will not be successful unless

cultural and political dimensions are attended to as well (Tichey, 1983).

Many (e.g., Hyde, 1992; Chaudron, 1992) have noted that TQM results in a radical change

in the culture and the way of work in an organization. A fundamental factor is leadership,

including philosophy, style, and behavior. These must be congruent as they are presented

by a leader. Many so-called enlightened leaders of today espouse a participative style which

is not, in fact, practiced to any appreciable degree. Any manager serious about embarking

on a culture change such as TQM should reflect seriously on how she or he feels and

behaves regarding these factors. For many managers, a personal program of leadership

development (e.g., Bennis, 1989) may be a prerequisite to effective functioning as an

internal change agent advocating TQM.

Other key considerations have to do with alignment among various organizational systems

(Chaudron, 1992; Hyde, 1992). For example, human resource systems, including job

design, selection processes, compensation and rewards, performance appraisal, and

training and development must align with and support the new TQM culture. Less obvious

but no less important will be changes required in other systems. Information systems will

need to be redesigned to measure and track new things such as service quality. Financial

management processes may also need attention through the realignment of budgeting and

resource allocation systems. Organizational structure and design will be different under

TQM: layers of management may be reduced and organizational roles will certainly change.

In particular, middle management and first line supervisors will be operating in new ways. 45


Instead of acting as monitors, order givers, and agents of control they will serve as

boundary managers, coordinators, and leaders who assist line workers in getting their jobs

done. To deal with fears of layoffs, all employees should be assured that no one will lose

employment as a result of TQM changes: jobs may change, perhaps radically, but no one

will be laid off. Hyde (1992) has recommended that we "disperse and transform, not replace,

midlevel managers." This no layoff principle has been a common one in joint labor

management change processes such as quality of working life projects for many years.

Another systems consideration is that TQM should evolve from the organization's strategic

plan and be based on stakeholder expectations. This type of planning and stance regarding

environmental relations is receiving more attention but still is not common in the human

services. As will be discussed below, TQM is often proposed based on environmental

conditions such as the need to cut costs or demands for increased responsiveness to

stakeholders. A manager may also adopt TQM as a way of being seen at the proverbial

cutting edge, because it is currently popular. This is not a good motivation to use TQM and

will be likely to lead to a cosmetic or superficial application, resulting in failure and

disappointment. TQM should be purpose oriented: it should be used because an

organization's leaders feel a need to make the organization more effective. It should be

driven by results and not be seen as an end in itself. If TQM is introduced without

consideration of real organizational needs and conditions, it will be met by skepticism on the

part of both managers and workers. We will now move to a discussion of the ways in which

people may react to TQM.

People's Expectations and Perceptions

Many employees may see TQM as a fad, remembering past "fads" such as quality

circles, management by objectives, and zerobased budgeting. As was noted above, TQM

must be used not just as a fad or new program, but must be related to key organizational

problems, needs, and outcomes. Fortunately, Martin (1993) has noted that TQM as a

"managerial wave" has more in common with social work than have some past ones such

as MBO or ZBB, and its adaptations may therefore be easier.

In another vein, workers may see management as only concerned about the product, not 46


staff needs. Management initiatives focused on concerns such as budget or cost will not

resonate with beleaguered line workers. Furthermore, staff may see quality as not needing

attention: they may believe that their services are already excellent or that quality is a

peripheral concern in these days of cutbacks and multi problem clients. For a child

protective service worker, just getting through the day and perhaps mitigating the most

severe cases of abuse may be all that one expects. Partly because of heavy service

demands, and partly because of professional training of human service workers, which

places heavy value on direct service activities with clients, there may be a lack of interest on

the part of many line workers in efficiency or even effectiveness and outcomes (Pruger &

Miller, 1991; Ezell, Menefee, & Patti, 1989). This challenge should be addressed by all

administrators (Rapp & Poertner, 1992), and in particular any interested in TQM.

Workers may have needs and concerns, such as lower caseloads and less bureaucracy,

which are different from those of administration. For TQM to work, employees must see a

need (e.g., for improved quality from their perspective) and how TQM may help. Fortunately,

there are winwin ways to present this. TQM is focused on quality, presumably a concern of

both management and workers, and methods improvements should eliminate wasteful

bureaucratic activities, save money, and make more human resources available for core

activities, specifically client service.

Sources of Resistance

Implementation of largescale change such as TQM will inevitably face resistance,

which should be addressed directly by change agents. A key element of TQM is working

with customers, and the notion of soliciting feedback/expectations from customers/clients

and collaborating with them, perhaps with customers defining quality, is a radical one in

many agencies, particularly those serving involuntary clients (e.g., protective services).

Historical worker antipathy to the use of statistics and data in the human services may carry

over into views of TQM, which encourages the gathering and analysis of data on service

quality. At another level, management resistance to employee empowerment is likely. They

may see decision making authority in zerosum terms: if employees have more involvement 47


in decision making, managers will have less. In fact, one principle in employee involvement

is that each level will be more empowered, and managers lose none of their fundamental

authority. There will undoubtedly be changes in their roles, however. As was noted above,

they will spend less time on control and more on facilitation. For many traditional managers,

this transition will require teaching/training, self reflection, and time as well as assurances

from upper management that they are not in danger of being displaced.

Resistance in other parts of the organization will show up if TQM is introduced on a pilot

basis or only in particular programs (Hyde, 1992). Kanter (1983) has referred to this

perspective as segmentalism: each unit or program sees itself as separate and unique, with

nothing to learn from others and no need to collaborate with them. This shows up in the "not

invented here" syndrome: those not involved in the initial development of an idea feel no

ownership for it. On a broader level, there may be employee resistance to industry

examples used in TQM terms like inventory or order backlog (Cohen and Brand, 1993,

122).

Dealing with Resistance

There are several tactics which can be helpful in dealing with resistance to TQM

implementation. Generally, they have to do with acknowledging legitimate resistance and

changing tactics based on it, using effective leadership to enroll people in the vision of TQM,

and using employee participation.

A useful technique to systematically identify areas of resistance is a force field analysis

(Brager & Holloway, 1992). This technique was originally developed by Kurt Lewin as an

assessment tool for organizational change. It involves creating a force field of driving forces,

which aid the change or make it more likely to occur, and restraining forces, which are

points of resistance or things getting in the way of change. Start by identifying the change

goal, in this case, implementation of TQM. Represent this by drawing a line down the middle

of a piece of paper. Slightly to its left, draw a parallel line which represents the current state

of the organization. The change process involves moving from the current state to the ideal

future state, an organization effectively using TQM. To the left of the second line (the

current state), list all forces (individuals, key groups, or conditions) which may assist in the 48


implementation of TQM. These may include environmental pressures leading to reduced

funds, staff who may like to be more involved in agency decision making, and the

successful applications of TQM elsewhere. On the other side, list restraining forces which

will make the change implementation more difficult. Examples may be middle management

fear of loss of control, lack of time for line workers to take for TQM meetings, and skepticism

based on the organization's poor track record regarding change. Arrows from both sides

touching the "current state" line represent the constellation of forces. Each force is then

assessed in two ways: its potency or strength, and its amenability to change. More potent

forces, especially restraining ones, will need greater attention. Those not amenable to

change will have to be counteracted by driving forces.

TQM principles

- Customer satisfaction

- Plan-do-check-act (PDCA) cycle

- Management by ‘fact’—5Ws ( What, Why, Who< When, and Where) +1H (How) approach

- Respect for people

TQM elements

- Total employee involvement (TEI)

- Total waste elimination (TWE)

- Total quality control (TQC)

- TQM focus areas

- Customer satisfaction

- Product quality

- Plant reliability

- Waste elimination

Benefits achieved through TQM

- Increased focus on the customer

- Mindset of ‘continuous improvement’49


- Better product quality

- Better system and procedures

- Better cross-functional teamwork

- Increased plant reliability

- Waste elimination in offices and factories.

KNOWLEDGE MANAGEMENTAccording to Peter Drucker and Daniel Bell, the management Gurus knowledge is the only

meaningful economic resource. Knowledge management can be defined as a systematic

and integrative process of coordinating organization-wide activities of acquiring, creating,

storing, sharing, diffusing, developing and deploying knowledge by individual and groups in

the pursuit of major organizational goals. It also involves the creation of an interacting

learning environment where organization members transfer and share what they know; and

apply knowledge to solve problems, innovate and create new knowledge. Knowledge

management is as much about people and culture as itis about technology. Knowledge

management thrives only when the human communication network operates freely across

the shortest path between the knowledge providers and knowledge seekers. There must be

a culture that promotes and rewards the pooling together of knowledge resources. Thus

organizations must build a culture that motivates people to create, share and use

knowledge. After the preoccupation with system and procedures to collect data ad translate

it into information, it’s time for firms to focus on the next plane- knowledge. Knowledge

management is not a buzzword. Every knowledge management solution, if currently

implemented, has definite measurable business benefits. Future business success

increasingly depends on the retention and the creative use of the knowledge ideas and

experiences of an organization and its employees. And in knowledge economy corporations

need for workers will be more than the workers need for employer. The work will demand

more formal education and more cutting edge knowledge accumulation.

50


INNOVATION IN BANKInnovation drives organizations to grow, prosper and transform in sync with the changes in

the environment, both internal and external. Banking is no exception to this. In fact, this

sector has witnessed radical transformation of late, based on many innovations in products,

processes, services, systems, business models, technology, governance and regulation. A

liberalized and globalize financial infrastructure has provided an additional impetus to this

gigantic effort.

The pervasive influence of information technology has revolutionalized banking. Transaction

costs have crumbled and handling of astronomical number of transactions in no time has

become a reality. Internationally, the number brick and mortar structure has been rapidly

yielding ground to click and order electronic banking with a plethora of new products.

Banking has become boundary less and virtual with a 24 * 7 model. Banks who strongly rely

on the merits of relationship banking’ as a time tested way of targeting and serving clients,

have readily embraced Customer Relationship Management (CRM), with sharp focus on

customer centricity, facilitated by the availability of superior technology.

CRM has, therefore, become the new mantra in customer service management, which is

both relationship based and information intensive. Risk management is no longer a mere

regulatory issue.basel-2 has accorded a primacy of place to this fascinating exercise by

repositioning it as the core of banking.

We now see the evolution of many novel deferral products like credit derivatives, especially

the Credit Risk Transfer (CRT) mechanism, as a consequence. CRT, characterized by

significant product innovation, is a very useful credit risk management tool that enhances

liquidity and market efficiency. Securitization is yet another example in this regard, whose

strategic use has been rapidly rising globally. So is outsourcing.

51


• SOME RECENT INNOVATIONS IN INDIAN BANKING:Tandon can, however, usefully cast an eye at one way of shopping without revealing his

credit card number. HDFC Bank’s ‘Net Safe’ card is a one-time use card with a limit that’s

specified, taken from Tendon’s credit or debit card. Even if Tandon fails to utilize the full

amount within 24 hours of creating the card, the card simply dies and the unspent amount in

the temporary card reverts to his original credit or debit card. Welcome to one of the myriad

ways in which bankers have been trying to innovate. They’re bringing ATMs, cash and even

foreign exchange to their customers’ doorsteps. Indeed, innovation has become the hottest

banking game in town. Want to buy a house but don’t want to go through the hassles of

haggling with brokers and the mounds of paperwork? Not to worry. Your bank will tackle all

this. It’s ready to come every step of the way for you to buy a house. Standard Chartered,

for instance, has property advisors to guide a customer through the entire process of

selecting and buying a house. They also lend a hand with the cumbersome documentation

formalities and the registration.

Don’t fret if you’ve already bought your house or car – you can do other things with both.

You can leverage your new house or car these days with banks like ICICI Bank and

Stanchart ready to extend loans against either, till it’s about five years old. Loans are

available to all car owners for almost all brands of cars manufactured in India that are up to

five years old.

Still, innovation is more evident in retail banking. True, all banks offer pretty much the same

suite of asset and liability products. But it’s the small tweaking here and there that makes all

the difference. Take, for example, the once staid deposits. Some bank accounts combine a

savings deposit account with a fixed deposit. A sweep-in account, as it is called, works like

this: the account will have a cut-off, say, Rs 25,000; any amount over and above that gets

automatically transferred to a fixed deposit which will earn the customer a clean 2 per cent

more than the returns that a savings account gives. Last month, Kotak Mahindra Bank

introduced a variant of the sweep-in account. If the balance tops Rs 1.5 lakh, the excess

52


runs into Kotak’s liquid mutual fund. “Even if the money is there only for the weekend, a

liquid fund can earn you a clean 4.5 percent per annum,” points out Shashi Arora, vice

president, marketing, Kotak Mahindra Bank. That’s not a small gain considering that your

current account does not pay you any interest. And if, meanwhile, you want to buy a big-

ticket home theatre system, the minute you swipe your card the invested sum will return to

your account. There’s plenty of innovation on home loans. ABN Amro sent the home

mortgage market afire with its 6 per cent home loan offering last year. The product offers a

6 per cent interest rate for two years after which the interest rate is reset in tune with the

prevailing market rate. All the other big home loan players slashed their rates after this was

announced.

Look too at the home saver product and its variants from Citibank, HSBC and Stanchart.

The interest rate on the loan is determined by the balance you maintain in the savings

account with the bank. The home builder can maintain a higher balance in his or her

savings account and bring down the interest rate on the home loan. The rate is calculated

on a daily basis on the net loan amount. Stanchart claims that since the launch of its home

saver product in April 2002, close to 40 per cent of its customers have chosen it. Says Vishu

Ramachandran, regional head, consumer banking, Standard Chartered:

“We believe that there are several ways to innovate and create value in the process, even in

developed product areas.”

Banks are also attempting to reach out to residents of metropolitan cities where people are

pressed for time (what with long commuting hours, traffic jams and both spouses working),

beyond conventional banking hours. ICICI Bank, for example, introduced eight to eight

banking hours, seven days of the week, in major cities. Not to be outdone, some of the

other private banks have also done this too. HDFC Bank even has a 24-hour branch at

Mumbai’s international airport. Several banks are even bringing ATMs to customer

doorsteps. ICICI Bank, State Bank of India and Bank of India now have mobile ATMs or

vans that go along a particular route in a city and are stationed at strategic locations for a

few hours every day. This saves the bank infrastructure costs since it has one mobile ATM

instead of multiple stationary ones.53


That’s not all. Even money is delivered to customers at home. Kotak Mahindra Bank, a late

entrant into private banking, delivers cash at the doorstep. A customer can withdraw a

minimum of Rs 5,000 and up to a maximum of Rs 2 lakh and get the money at home. And,

mind you, Kotak is not alone. The list of banks offering a similar service includes Citibank,

Stanchart, ABN Amro and HDFC Bank. HDFC Bank brings even foreign exchange, whether

travellers cheques or cash, to your doorstep courtesy its tie-up with Travelex India. All one

has to do is call up the branch or HDFC Bank’s phone banking number. The bank’s country

head, retail, Neeraj Swaroop, believes that continuous innovation will always make a

difference, with customer needs changing day by day. “Innovation will never become less

important for us,” he says.

HDFC Bank has pioneered other innovations. Take point of sale (POS) terminals, a

prerequisite in any store or restaurant worth its name in the country. Earlier this year, it tied

up with Reliance Info comm. to offer mobile POS terminals. Although this might sound a tad

too fancy today, there could soon be a day when you can swipe your card to pay your

cabby, the pizza home delivery boy and even for the groceries from the local kirana store.

But internet banking and shopping have been slow starters, given the low computer

penetration in the country but banks are going all out to get the customer online. Not only is

electronic fund transfer between banks across cities possible through internet banking today

but banks also offer other features that benefit the customer. HDFC Bank, for instance, has

an option called ‘One View’ on its internet banking site which provides customers a

comprehensive view of their investments and fund movements. Customers can look at their

accounts in six different banks on one screen. These include HDFC Bank accounts and

demat accounts, ICICI Bank, Citibank, HSBC and Standard Chartered Bank accounts, apart

from details of Citibank credit card dues and so on.

Banks are also innovating on the company and treasury operations fronts. In corporate

loans, plain loans are passed. Mumbai inter-bank offered rate (MIBOR)-linked and

commercial paper-linked interest rates on loans are common. MIBOR is a reference rate 54


arrived at every day at 4 pm by Reuters. It is the weighted average rate of call money

business transacted by 22 institutions, including banks, primary dealers and financial

institutions. The State Bank of India was the first to usher in MIBOR-linked loans for top

companies. Soon enough, other banks followed. ICICI Bank carried out the world’s first ever

securitization of a micro finance portfolio last year. The bank securitized Rs 4.2 crore for

Bharatiya Samruddhi Finance Ltd for crop production. Banks, of course, realize that

innovation gives them only a first mover advantage until their rivals catch up. But then, they

can console themselves. Isn’t imitation the best form of flattery?

TECHNOLOGY IN BANKING

Nobel Laureate Robert Solow had once remarked that computers are seen everywhere

excepting in productivity statistics. More recent developments have shown how far this state

of affairs has changed. Innovation in technology and worldwide revolution in information and

communication technology (ICT) have emerged as dynamic sources of productivity growth.

The relationship between IT and banking is fundamentally symbiotic. In the banking sector,

IT can reduce costs, increase volumes, and facilitate customized products; similarly, IT

requires banking and financial services to facilitate its growth. As far as the banking system

is concerned, the payment system is perhaps the most important mechanism through which

such interactive dynamics gets manifested. Recognizing the importance of payments and

settlement systems in the economy, we have embarked on technology based solutions for

the improvement of the payment and settlement system infrastructure, coupled with the

introduction of new payment products such as the computerized settlement of clearing

transactions, use of Magnetic Ink Character Recognition (MICR) technology for cheque

clearing which currently accounts for 65 per cent of the value of cheques processed in the

country, the computerization of Government Accounts and Currency Chest transactions,

operationalisation of Delivery versus Payment (DvP) for Government securities

transactions. Two-way inter-city cheque collection and imaging have been operationalised

55


at the four metros. The coverage of Electronic Clearing Service (Debit and Credit) has been

significantly expanded to encourage non-paper based funds movement and develop the

provision of a centralized facility for effecting payments. The scheme for Electronic Funds

Transfer operated by the Reserve Bank has been significantly augmented and is now

available across thirteen major cities. The scheme, which was originally intended for small

value transactions, is processing high value (up to Rs.2 crore) from October 1, 2001. The

Centralized Funds Management System (CFMS), which would enable banks to obtain

consolidated account-wise and centre-wise positions of their balances with all 17 offices of

the Deposits Accounts Departments of the Reserve Bank, has begun to be implemented in

a phased manner from November 2001. A holistic approach has been adopted towards

designing and development of a modern, robust, efficient, secure and integrated payment

and settlement system taking into account certain aspects relating to potential risks, legal

framework and the impact on the operational framework of monetary policy. The approach

to the modernization of the payment and settlement system in India has been three-

pronged: (a) consolidation, (b) development, and (c) integration. The consolidation of the

existing payment systems revolves around strengthening Computerized Cheque clearing,

expanding the reach of Electronic Clearing Services and Electronic Funds Transfer by

providing for systems with the latest levels of technology. The critical elements in the

developmental strategy are the opening of new clearing houses, interconnection of clearing

houses through the INFINET; optimizing the deployment of resources by banks through

Real Time Gross Settlement System, Centralized Funds Management System (CFMS);

Negotiated Dealing System (NDS) and the Structured Financial Messaging Solution

(SFMS). While integration of the various payment products with the systems of individual

banks is the thrust area, it requires a high degree of standardization within a bank and

seamless interfaces across banks. The setting up of the apex-level National Payments

Council in May 1999 and the operationalisation of the INFINET by the Institute for

Development and Research in Banking Technology (IDRBT), Hyderabad have been some

important developments in the direction of providing a communication network for the 56


exclusive use of banks and financial institutions. Membership in the INFINET has been

opened up to all banks in addition to those in the public sector. At the base of all inter-bank

message transfers using the INFINET is the Structured Financial Messaging System

(SFMS). It would serve as a secure communication carrier with templates for intra-and

inter-bank messages in fixed message formats that will facilitate ‘straight through

processing’. All inter-bank transactions would be stored and switched at the central hub at

Hyderabad while intra bank messages will be switched and stored by the bank gateway.

Security features of the SFMS would match international standards. In order to maximize

the benefits of such efforts, banks have to take pro-active measures to: further strengthen

their infrastructure in respect of standardization, high levels of security and communication

and networking; achieve inter-branch connectivity early; popularize the usage of the scheme

of electronic funds transfer (EFT); and Institute arrangements for an RTGS environment

online with a view to integrating into a secure and consolidated payment system.

Information technology has immense untapped potential in banking. Strengthening of

information technology in banks could improve the effectiveness of asset-liability

management in banks. Building up of a related data-base on a real time basis would

enhance the forecasting of liquidity greatly even at the branch level. This could contribute to

enhancing the risk management capabilities of banks.

REGULATIONS AND COMPLIANCE

Progressive strengthening, deepening and refinement of the regulatory and supervisory

system for the financial sector have been important elements of financial sector reforms. In

the longrun, it is the supervision and regulation function that is critical in safeguarding

financial stability. There is also some evidence that proactive and effective supervision

contributes to the efficiency of financial intermediation. Financial sector supervision is

expected to become increasingly risk-based and concerned with validating systems rather

57


than setting them. This will entail procedures for sound internal evaluation of risk for banks.

As mentioned earlier, bank managements will have to develop internal capital assessment

processes in accordance with their risk profile and control environment.

These internal processes would then be subjected to review and supervisory intervention if

necessary. The emphasis will be on evaluating the quality of risk management and the

adequacy of risk containment. In such an environment, credibility assigned by markets to

risk disclosures will hold only if they are validated by supervisors. Thus effective and

appropriate supervision is critical for the effectiveness of capital requirements and market

discipline. In certain areas, as for instance, in the urban cooperative banking segment, the

regulatory requirements leave considerable scope for regulatory arbitrage and even

circumvention. The problem is rendered more complex by the existence of regulatory

overlap between the Central Government, the State Governments and the Reserve Bank.

Regulatory overlap has impeded the speed of regulatory response to emerging problems.

The need for removing multiple regulatory jurisdictions over the cooperative banking sector

has been reiterated on several occasions. In this regard, the Reserve Bank has proposed

the setting up of an apex supervisory body for urban cooperative banks under the control of

a high-level supervisory board consisting of representatives of the Central governments, the

State governments, the Reserve Bank and experts. The apex body is expected to ensure

compliance with prudential requirements and also supervise on-site inspections and off-site

surveillance. Recent developments in certain segments of the financial sector have also

brought to the fore issues relating to corporate governance in banks. As part of on-going

reforms, boards have been given greater autonomy to prescribe internal control guidelines,

risk management and procedures for market discipline and accountability. It is extremely

important that greater vigilance over adherence to these norms goes hand-in-hand with

greater autonomy. Recent evidence of transgression of prudential guidelines by a few banks

has raised the issue of the audit and supervisory functions of boards. As we move towards

a more deregulated financial regime, these functions have to be transferred from either the

Government or the Reserve Bank to bank boards. This imposes a greater responsibility and

accountability on the bank management. It is in this context that a consultative group of

directors of select banks and other experts has been set up to recommend measures to 58


strengthen the internal supervisory role of boards. The objective is to obtain a feedback on

how boards function vis-à-vis compliance with prudential norms, transparency and

disclosure, functioning of the audit committee, etc., and to devise effective mechanisms for

ensuring management discipline. Several other initiatives in improving the supervisory

function have been undertaken, including a prudential supervisory reporting system for

financial institutions, improvements in procedures for financial inspection, sensitizing the

general public for better regulation of the activities of NBFCs and enactment of appropriate

legislation to protect depositor interests in some States. Major legal reforms have been

initiated in areas such as security laws, the Negotiable Instruments Act, bank frauds and the

regulatory framework of banking. The Reserve Bank has also accepted the principle of

transfer of ownership to the Government in respect of some financial institutions in view of

the conflict of interest that may arise in the conduct of its supervisory function. It is expected

that these initiatives will pave the way for an efficient, and risk-based supervisory

environment in India. The largest set of consolidated regulations that mandate integrity of

data in India are the IT Act and SEBI’s clause 49 for listed companies. These regulations do

not currently enforce the kind of security standards that are common in Europe and the US.

In a global economy, however, no company is an island and India Inc is adopting US and

European compliance procedures and certifications such as Sarbanes Oxley, Safe Harbour,

BS, and ISO. Compliance, regulatory or otherwise, does not directly concern the IT

department. In manufacturing for instance, compliance controls don’t really involve system

security, and a large part of the quality control required by authorities cannot be imposed or

enforced using IT. Companies that deal with sensitive information, financial services and

BPOs, banks, MNC subsidiaries or those with plans to expand beyond Indian shores are all

affected. These will continue to make strides towards compliance. For the medium scale

segment (Rs 100-300 crore turnover), security and audits are not a priority. This segment is

comfortable with public mail servers, and exchanging information over not very secure

connections

CORPORATE GOVERNANCE - CODE OF CONDUCT

59


Need and objective of the CodeClause 49 of the Listing agreement entered into with the Stock Exchanges, requires, as part

of Corporate Governance the listed entities to lay down a Code of Conduct for Directors on

the Board of an entity and its Senior Management. The term "Senior Management" shall

mean personnel of the company who are members of its core management team excluding

the Board of Directors. This would also include all members of management, one level

below the Executive Directors including all functional heads.

Bank's Belief SystemThis Code of Conduct attempts to set forth the guiding principles on which the Bank shall

operate and conduct its daily business with its multitudinous stakeholders, government and

regulatory agencies, media and anyone else with whom it is connected. It recognizes that

the Bank is a trustee and custodian of public money and in order to fulfill fiduciary

obligations and responsibilities, it has to maintain and continue to enjoy the trust and

confidence of public at large.

The Bank acknowledges the need to uphold the integrity of every transaction it enters into

and believes that honesty and integrity in its internal conduct would be judged by its external

behavior. The bank shall be committed in all its actions to the interest of the countries in

which it operates. The Bank is conscious of the reputation it carries amongst its customers

and public at large and shall endeavor to do all it can to sustain and improve upon the same

in its discharge of obligations. The Bank shall continue to initiate policies, which are

customer centric and which promote financial prudence.

Philosophy of the CodeAdherence to the highest standards of honest and ethical conduct, including proper and

ethical procedures in dealing with actual or apparent conflicts of interest between personal

and professional relationships. Full, fair, accurate, sensible, timely and meaningful

60


disclosures in the periodic reports required to be filed by the Bank with government and

regulatory agencies. Compliance with applicable laws, rules and regulations. To address

misuse or misapplication of the Bank's assets and resources. The highest level of

confidentiality and fair dealing within and outside the Bank.

A. General Standards of conductThe Bank expects all Directors and members of the Core Management to exercise good

judgment, to ensure the interests, safety and welfare of customers, employees and other

stakeholders and to maintain a cooperative, efficient, positive, harmonious and productive

work environment and business organization. The Directors and members of the Core

Management while discharging duties of their office must act honestly and with due

diligence. They are expected to act with that amount of utmost care and prudence, which an

ordinary person is expected to take in his/ her own business. These standards need to be

applied while working in the premises of the Bank, at offsite locations where business is

being conducted whether in India or abroad, at Bank-sponsored business and social events,

or at any other place where they act as representatives of the Bank.

B. Conflict of InterestA "conflict of interest" occurs when personal interest of any member of the Board of

Directors and of the Core management interferes or appears to interfere inany way with the

interests of the Bank. Every member of the Board of Directors and Core Management has a

responsibility to the Bank, its stakeholders and to each other. Although this duty does not

prevent them from engaging in personal transactions and investments, it does demand that

they avoid situations where a conflict of interest might occur or appear to occur. They are

expected to perform their duties in a way that they do not conflict with the Bank’s interest

such as

61


:Employment /Outside Employment –

The members of the Core Management are expected to devote their total attention to the

business interests of the Bank. They are prohibited from engaging in any activity that

interferes with their performance or responsibilities to the Bank or otherwise is in conflict

with or prejudicial to the Bank.

Business Interests –

If any member of the Board of Directors and Core Management considers investment in

securities issued by the Bank’s customer, supplier or competitor, they should ensure that

these investments do not compromise their responsibilities to the Bank. Many factors

including the size and nature of the investment; their ability to influence the Bank’s

decisions, their access to confidential information of the Bank, or of the other entity, and the

nature of the relationship between the Bank and the customer, supplier or competitor should

be considered in determining whether a conflict exists. Additionally, they should disclose to

the Bank any interest that they have which may conflict with the business of the Bank.

Related Parties - As a general rule, the Directors and members of the Core Management

should avoid conducting Bank’s business with a relative or any other person or any firm,

Company, association in which the relative or other person is associated in any significant

role. Relatives shall include:

o Father

o Mother (including step mother)

o Son’s Wife

o Daughter (including step daughter)

o Father’s father

o Father’s mother

o Mother’s mother

o Mother’s father

o Son’s son

o Son’s son’s wife

o Son’s daughter 62


o Son’s daughter’s husband

o Daughter’s husband

o Daughter’s son

o Daughter’s son’s wife

o Daughter’s daughter

o Daughter’s husband

o Brother (including step brother)

o Brother’s wife

o Sister (including step sister)

o Sister’s husband

If such a related party Transaction is unavoidable, they must fully disclose the nature of the

related party transaction to the appropriate authority. Any dealings with a related party must

be conducted in such a way that no preferential treatment is given to that party. In the case

of any other transaction or situation giving rise to conflicts of interests, the appropriate

authority should after due deliberations decide on its impact.

C. Applicable LawsThe Directors of the Bank and Core Management must comply with applicable laws,

regulations, rules and regulatory orders. They should report any inadvertent non -

compliance, if detected subsequently, to the concerned authorities.

D. Disclosure Standards

63


The Bank shall make full, fair, accurate, timely and meaningful disclosures in the periodic

reports required to be filed with Government and Regulatory agencies. The members of

Core Management of the bank shall initiate all actions deemed necessary for proper

dissemination of relevant information to the Board of Directors, Auditors and other Statutory

Agencies, as may be required by applicable laws, rules and regulations.

E. Use of Bank’s Assets and ResourcesEach member of the Board of Directors and the Core Management has a duty to the Bank

to advance its legitimate interests while dealing with the Bank’s assets and resources.

Members of the Board of Directors and Core Management are prohibited from: Using

Corporate property, information or position for personal gain, Soliciting, demanding,

accepting or agreeing to accept anything of value from any person while dealing with the

Bank’s assets and resources, Acting on behalf of the Bank in any transaction in which they

or any of their relative(s) have a significant direct or indirect interest.

F. Confidentiality and Fair Dealings (i) Bank’s confidential Information The Bank’s confidential information is a valuable asset. It

includes all trade related information, trade secrets, confidential and privileged information,

customer information, employee related information, strategies, administration, research in

connection with the Bank and commercial, legal, scientific, technical data that are either

provided to or made available each member of the Board of Directors and the core

Management by the Bank either in paper form or electronic media to facilitate their work or

that they are able to know or obtain access by virtue of their position with the Bank. All

confidential information must be used for Bank’s business purposes only. This information

includes the safeguarding, securing and proper disposal of confidential information in

accordance with the Bank’s policy on maintaining and managing records. The obligation

extends to confidential of third parties, which the Bank has rightfully received under non-

disclosure agreements. To further the Bank’s business, confidential information may have to

be disclosed to potential business partners. Such disclosures should be made after

64


considering its potential benefits and risks. Care should be taken to divulge the most

sensitive information, only after the said potential business partner has signed a

confidentiality agreement with the Bank.

Good Corporate Governance PracticesEach member of the Board of Directors and Core Management of the Bank should adhere

to the following so as to ensure compliance with good Corporate Governance practices.

(a) Dos

_ Attend Board meetings regularly and participate in the deliberations and discussions

effectively.

_ Study the Board papers thoroughly and enquire about follow-up reports on definite time

schedule.

_ Involve actively in the matter of formulation of general policies.

_ Be familiar with the broad objectives of the Bank and policies laid down by the

Government and the various laws and legislations.

_ Ensure confidentiality of the Bank's agenda papers, notes and minutes.

(b) Don'ts

_ Do not interfere in the day to day functioning of the Bank.

_ Do not reveal any information relating to any constituent of the Bank to anyone.

_ Do not display the logo / distinctive design of the Bank on their personal visiting cards /

letter heads.

_ Do not sponsor any proposal relating to loans, investments, buildings or sites for Bank's

premises, enlistment or empanelment of contractors, architects, auditors, doctors, lawyers

and other professionals etc.

_ Do not do anything, which will interfere with and/ or be subversive of maintenance of

discipline, good conduct and integrity of the staff.

65


WaiversAny waiver of any provision of this Code of Conduct for a member of the Bank's Board of

Directors or a member of the Core Management must be approved in writing by the Board

of Directors of the Bank.

The matters covered in this Code of Conduct are of the utmost importance to the bank, its

stakeholders and its business partners, and are essential to the Bank's ability to conduct its

business in accordance with its value system.

ENTREPRENEURSHIPEntrepreneurship is the practice of starting new organizations, particularly new businesses

generally in response to identified opportunities. Entrepreneurship is often a difficult

undertaking, as a majority of new businesses fail. Entrepreneurial activities are substantially

different depending on the type of organization that is being started. Entrepreneurship may

involve creating many job opportunities.

Many "high-profile" entrepreneurial ventures seek venture capital or angel funding in order

to raise capital to build the business. Many kinds of organizations now exist to support

would-be entrepreneurs, including specialized government agencies, business incubators,

science parks, and some NGOs.

Our understanding of entrepreneurship owes a lot to the work of economist Joseph

Schumpeter and the Austrian School of economics. For Schumpeter (1950), an

entrepreneur is a person who is willing and able to convert a new idea or invention into a

successful innovation. Entrepreneurship forces "creative destruction" across markets and

industries, simultaneously creating new products and business models and eliminating

others. In this way, creative destruction is largely responsible for the dynamism of industries

and long-run economic growth. Despite Schumpeter's early 20th-century contributions, the

traditional microeconomic theory of economics has had little room for entrepreneurs in their

theories

66


Characteristics of entrepreneurship

-The entrepreneur, who has a vision and the enthusiasm for this vision, is the driving force

of an entrepreneurship

-The vision is usually supported by a set of ideas that have not been awarded by the

majority of the market/industry

-The overall blueprint to realize the vision is clear, however details may be incomplete,

flexible, and evolving

-The entrepreneur promotes the vision with an influential passion

-With a persistent and deterministic mindset, the entrepreneur devises a set of

entrepreneurial strategies to thrive for the vision

Conclusion

We began by asserting that individual entrepreneurs get too much credit and blame for the

fate of new ventures. We also emphasized that successful entrepreneurs are those who can

develop the right kinds of relationships with others inside and outside their firm. Our

perspective suggests that, in trying to predict which entrepreneurs will succeed or fail,

instead of turning attention to the characteristics of individual founders and CEOs,

researchers and teachers would be wiser to turn attention to the other people the

entrepreneur spends time with and how they respond. Our perspective also implies that the

format of the "Entrepreneurs of the Year" competition described at the outset of this chapter

ought to be changed. Rather than using such events to recognize individual CEOs or

founders from successful start-ups, awards could be presented to recognize the intertwined

group of people who made each start-up a success.

67


MANAGING NEW CHALLANGES

INTRODUCTION

In my inaugural address last year, I had indicated a vision for Indian banking in the new

millennium – that of a vibrant, internationally active banking system, drawing upon its innate

strengths and comparative advantages to make India a major banking centre of the world. I

had pointed out then that, while it may take up to 10or even 15 years to achieve this vision,

the time to begin was now. Recent developments have only served to bring forward the

urgency attached to embarking upon this quest. Even as we do so, it is necessary to

recognize that, in view of recent global developments and the economic slowdown, the

progress towards this goal would call for even greater effort and determination. In this

context, the theme chosen for this year’s Conference i.e., "Indian Banking: Paradigm Shift"

is most timely as it provides an opportunity to deliberate on the new challenges ahead, and

the action that we must take to manage them. I am happy to be a part of these deliberate

68


ions and to deliver the inaugural address to the 23rd Conference of Bank Economists here

today.

As you are aware, global economic prospects turned sharply adverse since September

2001 following the terrorist attacks on the US. The possibilities of a recovery in the global

economy have become highly uncertain, belying the initial expectations of a V-shaped

recovery as well as the subsequent hopes of a U-shaped recovery. As of now, the

consensus of forecasts settles around 2.4 per cent for world GDP growth for 2001. World

trade volume growth could slow down to around 1.3 per cent and net capital outflows from

developing countries may now be larger than anticipated earlier. Although the sharp spurt in

international oil prices has abated, their future behavior remains unclear. Macroeconomic

weaknesses have also been associated with an erosion of business confidence. Insurance,

airlines, tourism and hotel industries have been hit hard and the exposure of financial

institutions to these industries can be a potential source of vulnerability.

Despite the relatively inward-looking nature of the Indian economy, it cannot remain

insulated from these international developments. The direct effects of these external

developments on our banking system are expected to be limited. Indirect effects, especially

through exports and subdued industrial activity could, however, impact upon the asset

quality of our banking system and other segments of the financial system. The need to

constantly monitor international developments and take appropriate and often, preemptive

action add an entirely new dimension to the progress of our banking system towards its

longer-term vision.

We have made considerable progress in implementing banking and financial sector

reforms. There is also some improvement in the financial performance of the banking

system in terms of various indicators of operating efficiency. Nevertheless, there are several

areas regarding the efficiency of our banking system – rather than its stability – that raise

concerns, especially during a period of generalized uncertainty. The level of non-performing

assets (NPAs) continues be high by international standards, preempting funds for

provisioning and eating into the performance and profitability of financial intermediaries. The 69


response to the debt recovery and asset restructuring initiatives undertaken as part of

financial sector reforms has also been slow.

In the period ahead, our financial system will also have to prepare for a tightening of the

prudential norms as the new Basel Accord becomes effective and a fuller response to the

current financial environment emerges. Our financial institutions continue to be susceptible

to financial market turbulence, especially in the equity market. Upgrading technical skills,

technology, research and human capital, developing effective ‘front office’ strategies and

fortifying internal rules of governance and responsibility assumes a renewed priority in the

fast changing scenario. The face of banking, as we have known it, is also changing rapidly.

India is approaching an era of financial conglomorisation and ‘bundling’ in the provision of

financial services. Besides infusing heightened competition, there are implications for the

regulatory and supervisory regime. Banks and financial institutions have to prepare for

changes in the regulatory framework towards a more focused, comprehensive and efficient

environment that eschews regulatory forbearance. Legal reforms accordingly will have to

ascend the hierarchy of priorities in the reform process. Against this background, in this talk,

I propose to focus on the main challenges facing Indian banking, such as, the role of

financial intermediation in different phases of the business cycle, the emerging compulsions

of the new prudential norms, and benchmarking the Indian financial system against

international standards and best practices. I will also say a few words about the changing

context of regulation and supervision of the financial system in India, the need for

introducing new technology in the banking and financial system, and the importance of

strengthening skills and intellectual capital formation in the banking industry.

RECENT MACROECONOMIC DEVELOPMENTS AND THE

BANKING SYSTEM

70


For a greater part of the twentieth century, the role of the financial system was perceived as

mobilizing the massive resource requirements for growth. Since the 1970s and 1980s,

development economics underwent a paradigm shift. The financial system is no longer

viewed as a passive mobiliser of funds. Efficiency in financial intermediation i.e., the ability

of financial institutions to intermediate between savers and investors, to set economic prices

for capital and to allocate resources among competing demands is now emphasized.

Developments in endogenous growth theory since the late 1980s indicate that efficiency in

financial intermediation is a source of technical progress to be exploited for generating

increasing returns and sustaining high growth. These changes have provided the rationale

for many developing countries to undertake wide-ranging reforms of their financial systems

so as to prepare them for their true resource allocation function. As important financial

intermediaries, banks have a special role to play in this new dispensation.

The sharp downturn in global macroeconomic prospects and the continuing sluggishness in

domestic industrial activity have necessitated a revision in the forecast for India’s real GDP

growth in 2001-02 from 6.0-6.5 per cent expected at the time of the April 2001 Monetary

and Credit Policy Statement to 5.0-6.0 per cent in the mid-term review of the policy. The

downward revision is primarily predicated on the outlook for the industrial sector which grew

by barely 2.2 per cent in April-October 2001 as against 5.9 per cent in the corresponding

period of last year, mainly on account of the slowdown in manufacturing and mining and

quarrying. Capital goods production declined by as much as 6.6 per cent and several

sectors recorded a slowdown in growth rate or an absolute decline. On the other hand,

agriculture sector, supported by reasonable monsoon, recorded a rebound in growth. The

kharif output is expected to cross a new peak of 105.6 million tonnes and prospects for the

Rabi crop are also good. On the external front, merchandise exports increased marginally

by 0.5 per cent in the first eight months of 2001-02. While oil imports fell by 13.4 per cent,

the non-oil imports showed an increase of 8.4 per cent. Despite a moderate widening of the

trade deficit, continuing buoyancy in net invisible receipts has kept the current account

deficit very low. According to available data, net capital flows are also likely to be of a higher 71


order than in the preceding year. Foreign exchange reserves rose to US $ 48.0 billion as on

December 28, 2001 recording an accretion of the order of the US $ 5.8 billion over the end-

March 2001 level.

In the context of the recent deceleration in the economy the intermediation role assumes

even greater relevance. Banks and financial institutions should endeavor to play a ‘supply-

leading’ rather than ‘demand-following’ role in initiating the upturn by energizing the financial

intermediation process. By virtue of a bird’s eye view of the economy and their superior

credit assessment of the investment proposals and the efficiency of capital, banks should

endeavor to economies on ‘search’ costs in identifying and nurturing growth impulses in the

commodity and service producing sectors of the economy.

In the recent period, monetary policy in India has also moved into a countercyclical stance

signaled by cuts in key interest rates and cash reserve requirements. At the same time,

market operations have ensured adequate liquidity to support the revival of aggregate

demand with a clear preference for softening of interest rates within the overall institutional

constraints on the interest rate regime. Inflation has been steadily falling and this has had a

positive impact on inflation expectations, along with the underlying resilience of the

macroeconomic fundamentals of the Indian economy. The 50 basis point reduction in the

Bank Rate and the 200 basis point reduction in the CRR, announced recently, are expected

to significantly enhance the lend able resources of the banking system.

The current situation of comfortable liquidity provides an opportunity for banks to transform

idle liquidity into investigable resources for growth. The easy interest rate environment

would make it possible for banks to ‘price in’ projects which would have earlier remained

unfunded due to inherently lower returns to capital or due to lack of access to prime lending

rates. This will, however, require reassessment of portfolios and internal liquidity

constraints, even adjustments in risk profiles and risk management. The deceleration in the

industrial growth scenario, of course, opens up the moral hazard of adverse selection and

the possibilities of large-scale contamination of portfolios. In a situation of generalized

slowdown, unviable projects can look potentially bankable given the scarcity of investment

avenues. 72


Nevertheless, the possibilities for financial intermediation in the current situation are too

varied and challenging to ignore. There is no systematic evidence that financial sector

reforms by themselves and without supportive policies in other areas, can contribute to a

revival of the economy; yet this is a time when the responsibility on the financial system to

contribute to the process of economic revival is greater than before. Periods of downturn in

economic activity also provide opportunities for banks to undertake consolidation and

strengthening. There is a strong complementarily between financial stability and

macroeconomic stability. The interests of both are served by a stable and resilient financial

system.

In recent years, various measures have been taken to improve the functioning of different

segments of the financial markets and thereby, to improve the operational effectiveness of

monetary policy. The Liquidity Adjustment Facility (LAF), which was introduced in

June2000, has emerged as an effective and flexible instrument for managing liquidity on a

day-to-day basis. In the second stage of the LAF, which commenced from May 2001,

variable rate repo auctions replaced the collateralized lending facility and Level I support to

primary dealers. Standing facilities were rationalized and a back-stop facility was introduced

at variable market-related rates. Concurrently, LAF operating procedures were recast to

improve operational flexibility and complementary measures were undertaken to improve

the functioning of money and government securities market segments and to facilitate their

orderly integration. In order to enable the call money market to evolve into a pure inter-bank

market, lending by non-banks was reduced to 85 per cent of their average daily call lending

in 2000-01 from May 2001. The minimum maturity for wholesale term deposits of Rs.15 lakh

and above has been reduced to 7 days from the earlier minimum maturity of 15 days. The

maintenance of daily minimum cash reserve requirements has been lowered to 50 per cent

from 65 per cent for the first seven days of the reporting fortnight. Interest paid on eligible

balances under CRR has been raised to the level of the Bank Rate from November 3, 2001.

The market has responded positively with an appreciable rise in turnover and a decline in

volatility.73


Several measures have also been taken to improve the functioning of the government

securities market. 14-day and 182-day Treasury Bills were withdrawn and the notified

amount of 91-day Treasury Bills has been simultaneously increased. A Negotiated Dealing

System (NDS) is being introduced to facilitate electronic bidding and to disseminate

information on trades on a real-time basis. For this purpose, the Reserve Bank has begun

the automation of its public debt offices. An important step is the setting up of the Clearing

Corporation of India Ltd. (CCIL) to act as counterparty in all trades involving government

securities, Treasury Bills, repos and foreign exchange. The entire system will operate in a

networked environment and Indian Financial Network (INFINET) will provide the backbone

for communication.

PRUDENTIAL NORMSA strong and resilient financial system and the orderly evolution of financial markets are key

prerequisites for financial stability and economic progress. In keeping with the vision of an

internationally competitive and sound banking system, deepening and broadening of

prudential norms to the best internationally recognized standards have been the core of our

approach to financial sector reforms. This has been supported concurrently by heightened

market discipline, pro-active and comprehensive supervision of the financial system and the

orderly development of financial market segments. The calibration of the convergence with

international standards is conditioned by the specific realities of our situation; however, the

New Capital Accord of the Basel Committee on Banking Supervision which was released in

January 2001 adds urgency to the process of convergence. It is against the backdrop of

these exigencies that prudential norms are being constantly monitored and refined. In the

recent period, banks are being encouraged to build risk-weighted components of their

subsidiaries into their own balance sheets and to assign additional capital. Risk weights are

being constantly refined to take into recognition additional sources of risk. The concept of

74


‘past due’ in the identification of NPAs has been dispensed with. Banks and financial

institutions are being urged to prepare to move to the international practice of the ‘90 day

norm’ in the classification of assets as non-performing by 2003-04.

The new Basel Accord, as contained in the second Consultative Paper on Capital Adequacy

of the Basel Committee on Banking Supervision released in January 2001 is in response to

the perceived rigidities in the 1988 Accord’s capital requirements, the scope for capital

arbitrage and the increased sophistication in the measurement and management of risk.

The new Accord rests on three mutually reinforcing pillars i.e., minimum capital

requirements, processes of supervisory review and market discipline. Under the first pillar,

the current definition of capital and the minimum requirement of 8 per cent of capital to risk

weighted assets is retained. Capital requirements would be extended on a consolidated

basis to holding companies of banking groups. The primary emphasis of the new Accord is

on improving the measurement of risk. The process of measurement of market risk is

maintained. Three alternatives for calculating credit risk capital requirements are proposed

to be made available to banks, depending on the complexity of their business and the

quality of their risk management operations. The ‘standardized approach’ which can be

employed by less complex banks remains conceptually the same as in the 1988norms;

however, it expands the scale of risk weights and uses external credit ratings to categories

credits. Banks with more advanced risk management capabilities can employ an internal

ratings based (IRB) approach – ‘foundation’ and ‘advanced’ variants are proposed on a

progression scale – in which banks may categories exposures into multiple credit ratings of

their approved internal rating systems. The internally estimated probability of default, the

maturity of exposure and the credit type i.e., corporate or retail, will determine risk weights.

There is a new explicit capital charge proposed on operational risk.

The processes of supervisory review contained in the second pillar emphasize the need for

banks to develop sound internal procedures to assess the adequacy of capital based on a

thorough evaluation of its risk profile and control environment, and to set commensurate 75


targets for capital. The internal processes would be subject to supervisory evaluation,

review and intervention, when appropriate. The third pillar aims at bolstering market

discipline through enhanced disclosure by banks. Disclosure requirements are set out in

several areas under the new Accord, including the way in which banks calculate their capital

adequacy and their risk assessment methods.

The Basel Committee on Banking Supervision has received more than 250 comments on

the January 2001 proposals. The Committee is expected to release a fully specified

proposal, based on these comments, in early 2002 and to finalize the Accord during 2002.

An implementation date of 2005 is envisaged. The Reserve Bank forwarded its comments

to the Basel committee in May 2001. It has supported flexibility, discretion to national

supervisors and a phased approach in implementing the Accord. The Accord could initially

apply to internationally active – banks with over 15 per cent of their business in cross-border

transactions, as proposed by the Reserve Bank – and significant banks whose domestic

market share exceeds 1 per cent – with a simplified standardized approach to be evolved

for other banks. Material limits on cross-holdings of capital and eschewing of direct

responsibility on external credit rating agencies in the assessment of bank assets have also

been proposed by the Reserve Bank. It has also expressed its preference for external credit

rating agencies that publicly disclose risk scores, rating processes and methodologies.

The new accord, when implemented, is likely to have significant implications for the banking

system as a whole. Besides requiring increased capital, it attaches urgency to the

development of efficient and comprehensive internal systems for assessment and

management of risks, setting up and adhering to adequate internal exposure limits and

improving internal control generally. The guidelines for risk management and asset liability

management provided by the Reserve Bank serve as a useful foundation for building more

sophisticated control systems. The feedback received from few banks indicates the need for

substantial up gradation of existing management information systems, risk management

practices and technical skills. Capital allocation is also expected to be more risk sensitive

and, therefore, banks and financial institutions will have to plan in advance so that there are

no disruptions in the capital structure. Further sophistication in risk management and control 76


mechanisms will have to evolve as experience with preferential risk-weighting and

sensitivity to external ratings is accumulated. A key requirement when the new Accord, after

further modification, becomes operational is that of high quality human resources to cope

with and adapt to the new environment. Enhancing technical skills and abilities to handle

new technologies and new risks, exploiting information flows to price them in, and

developing foresight in anticipating changing risk-return relationships will become essential.

MARKET DISCIPLINEProcesses of transparency and market disclosure of critical information describing the risk

profile, capital structure and capital adequacy are assuming increasing importance in the

emerging environment. Besides making banks more accountable and responsive to better-

informed investors, these processes enable banks to strike the right balance between risks

and rewards and to improve the access to markets. Improvements in market discipline also

call for greater coordination between banks and regulators. India has been a participant in

the international initiatives to ensure improved processes of market discipline that are being

worked out in several for a, such as, the multilateral organizations, the BIS, the Financial

Stability Forum, and the Core Principles Liaison Group. Concurrent efforts are underway to

refine and upgrade financial information monitoring and flow, data dissemination and data

warehousing. Banks are currently required to disclose in their balance sheets information on

maturity profiles of assets and liabilities, lending to sensitive sectors, movements in NPAs,

besides providing information on capital, provisions, shareholdings of the government, value

of investments in India and abroad, and other operating and profitability indicators. Financial

institutions are also required to meet these disclosure norms. Banks also have to disclose

their total investments made in equity shares, units of mutual funds, bonds and debentures,

and aggregate advances against shares in their notes to balance sheets. From this year

onwards, notes to banks’ balance sheets will disclose the movement of provisions against

NPAs as well as those held towards depreciation on investments. Guidelines relating to

non-SLR investments through the private placement route mandate the disclosure of

77


information on issuer composition and non-performing investments in a similar manner.

Efforts have been made to identify and monitor early warning indicators of financial crises.

The overall approach is to combine the use of micro-prudential indicators with macro-

economic indicators in order to develop a set of aggregate macro-prudential indicators. This

brings about a mix between bottom-up and top-down assessment. As the methodology gets

refined and the indicators are stress tested for predictive power, financial stability

surveillance will be significantly improved. This process will involve greater transparency

and objectivity in the disclosure practices of banks.

Efforts have also been made to set up a Credit Information Bureau to collect and share

information on borrowers and improve the credit appraisal of banks and financial institutions

within the ambit of the existing legislation. The Bureau has been incorporated by the State

Bank of India in collaboration with Housing Development Finance Corporation (HDFC) and

foreign technology partners. Collection and sharing of some items of information have

already been initiated. Efforts are also going into the collection and sharing of information on

private placement of debt under the Bureau so that there is greater transparency in such

trades.

The possibility of collecting and disseminating information on suit-filed accounts by the

Bureau (in place of the Reserve Bank) is being explored by a Working Group constituted for

this purpose with representation from across the financial system. The Group will also

examine the prospects of on-line supply of information and the processing of queries. A

draft legislation covering various aspects of information sharing, including issues relating to

rights, responsibilities, and privacy has been prepared, which would considerably

strengthen the functioning of the Bureau when it is enacted.

UNIVERSAL BANKINGSince the early 1990s, banking systems worldwide have been going through a rapid

transformation. Mergers, amalgamations and acquisitions have been undertaken on a large

scale in order to gain size and to focus more sharply on competitive strengths.

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This consolidation has produced financial conglomerates that are expected to maximize

economies of scale and scope by ‘bundling’ the production of financial services. The

general trend has been towards downstream universal banking where banks have

undertaken traditionally non-banking activities such as investment banking, insurance,

mortgage financing, securitization, and particularly, insurance. Upstream linkages, where

non-banks undertake banking business, are also on the increase. The global experience

can be segregated into broadly three models. There is the Swedish or Hong Kong type

model in which the banking corporate engages in in-house activities associated with

banking. In Germany and the UK, certain types of activities are required to be carried out by

separate subsidiaries. In the US type model, there is a holding company structure and

separately capitalized subsidiaries

In India, the first impulses for a more diversified financial intermediation were witnessed in

the 1980s and 1990s when banks were allowed to undertake leasing, investment banking,

mutual funds, factoring, hire-purchase activities through separate subsidiaries. By the mid-

1990s, all restrictions on project financing were removed and banks were allowed to

undertake several activities in-house. In the recent period, the focus is on Development

Financial Institutions (DFIs), which have been allowed to set up banking subsidiaries and to

enter the insurance business along with banks. DFIs were also allowed to undertake

working capital financing and to raise short-term funds within limits. It was the Narasimham

Committee II Report (1998) which suggested that the DFIs should convert themselves into

banks or non-bank financial companies, and this conversion was endorsed by the Khan

Working Group (1998). The Reserve Bank’s Discussion Paper (1999) and the feedback

thereon indicated the desirability of universal banking from the point of view of efficiency of

resource use, but it also emphasized the need to take into account factors such as the

status of reforms, the state of preparedness of the institutions, and a viable transition path

while moving in the desired direction.

Accordingly, the mid-term review of monetary and credit policy, October 1999 and the

annual policy statements of April 2000 and April 2001 enunciated the broad approach to 79


universal banking and the Reserve Bank’s circular of April 2001 set out the operational and

regulatory aspects of conversion of DFIs into universal banks. The need to proceed with

planning and foresight is necessary for several reasons. The move towards universal

banking would not provide a panacea for the endemic weaknesses of a DFI or its liquidity

and solvency problems and/or operational difficulties arising from undercapitalization, non-

performing assets, and asset liability mismatches, etc. The overriding consideration should

be the objectives and strategic interests of the financial institution concerned in the context

of meeting the varied needs of customers, subject to normal prudential norms applicable to

banks. From the point of view of the regulatory framework, the movement towards universal

banking should entrench stability of the financial system, preserve the safety of public

deposits, improve efficiency in financial intermediation, ensure healthy competition, and

impart transparent and equitable regulation.

HUMAN RESOURCE DEVELOPMENT IN BANKING

A recurring theme in the annual BECON Conference has been the need to focus on

developing human resources to cope with the rapidly changing scenario. The core function

of HRD in the banking industry is to facilitate performance improvement, measured not only

in terms of financial indicators of operational efficiency but also in terms of the quality of

financial services provided. Factors such as skills, attitudes and knowledge of personnel

play a critical role in determining the competitiveness of the financial sector. The quality of

human resources indicates the ability of banks to deliver value to customers. Capital and

technology are replicable, but not human capital which needs to be viewed as a valuable

resource for the achievement of competitive advantage.

The primary emphasis needs to be on integrating human resource management (HRM)

strategies with the business strategy. HRM strategies include managing change, creating

commitment, achieving flexibility and improving teamwork. These processes underlie the

complementary processes that represent the overt aspects of HRM, such as recruitment,

placement, performance management, reward management, and employee relations. A

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forward looking approach would involve moving towards self-assessment of competency

and developmental needs as a part of a continuous learning cycle.

The Indian banking industry has been an important driving force behind the nation’s

economic development. The emerging environment poses both opportunities and threats, in

particular, to the public sector banks. How well these are met will mainly depend on the

extent to which the banks leverage their primary assets i.e., human resources in the context

of the changing economic and business environment. It is obvious that the public sector

banks’ hierarchical structure, which gives preference to seniority over performance, is not

the best environment for attracting the best talent from among the young in a competitive

environment. A radical transformation of the existing personnel structure in public sector

banks is unlikely to be practical, at least in the foreseeable future. However, certain

improvements can be made in the recruitment practices as well as in on-the-job training and

redeployment of those who are already employed. There are several institutions in the

country which cater exclusively to the needs of human resource development in the banking

industry. It is worthwhile to consider broad-basing the courses conducted in these

institutions among other higher-level educational institutions so that specialization in the

area of banking and financial services becomes an option in higher education curriculums.

In the area of information technology, Indian professionals are world leaders and building

synergies between the IT and banking industries will sharpen the competitive edge of our

banks.

ConclusionHow close are we to the vision of a sound and well-functioning banking system that I

outlined. It is fair to say that despite a turbulent year and many challenges, we have made

some progress towards this goal. There has been progressive intensification of financial

sector reforms, and the financial sector as a whole is more sensitized than before to the

need for internal strength and effective management as well as to the overall concerns for

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financial stability. At the same time, in view of greater disclosure and tougher prudential

norms, the weaknesses in our financial system are more apparent than before.

There is greater awareness now of the need to prepare the banking system for the technical

and capital requirements of the emerging prudential regime and a greater focus on core

strengths and niche strategies. We have also made some progress in assessing our

financial system against international best practices and in benchmarking the future

directions of progress. Several contemplated changes in the surrounding legal and

institutional environment have been proposed for legislation.

The NPA levels remain too large by international standards and concerns relating to

management and supervision within the ambit of corporate governance are being tested

during the period of downturn of economic activity. The structure of the financial system is

changing and supervisory and regulatory regimes are experiencing the strains of

accommodating these changes. Certain weak links in the decentralized banking and

nonblank financial sectors have also come to notice. In a fundamental sense, regulators and

supervisors are under the greatest pressures of change and bear the larger responsibility

for the future. For both the regulators and the regulated, eternal vigilance is the price of

growth with financial stability.

We should strive to move towards realizing our vision of an efficient and sound banking

system of international standards with redoubled vigor. Our greatest asset in this endeavor

is the fund of technical and scientific human capital formation available in the country. The

themes which are being covered in this Conference under structural, operational and

governance issues should help in defining the road map for the future.

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CONCLUSION

The treat of new players over the market has been overplayed. As it is witnessed in our

country where liberalization took place in recent years we can safely conclude that

nationalize players will continue to hold strong market position, but there will be enough

business for the new entrants to be profitable

Opening up the banking sector will certainly mean new products, and better improved

customer service. Both new and existing players will have to explore their branch capacity in

their marketing channels. New banks must segment the market carefully to arrive at

appropriate loans and deposit schemes

Recognizing the competition from international market from the past years, the banks have

already begin to target to improve the infrastructure facility and technologies to provide

quicker services to people

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kaleidoscopic view of banking

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