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Indian Banking- An Introduction

The Indian banking has come a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). The stalwarts of India's financial community nodded their heads sagaciously when Prime Minister Manmohan Singh said in a speech: "If there is one aspect in which we can confidentially assert that India is ahead of China, it is in the robustness and soundness of our banking system." Indian banks have been rated higher than Chinese banks by international rating agency Standard & Poor's. The competition heated up with the entry of private and foreign banks deregulation and globalization resulted in increased competition that refined the traditional way of doing business. They have realized the importance of a customer centric approach, brand building and IT enabled solutions. In the fierce battle for market share and mind share, the most potent weapon is a strong, well recognized and trusted brand name. Brands attract and convince people that they will get what is promised. Banking today has transformed into a technology intensive and customer friendly model with a focus on convenience. The companies have redoubled their efforts to woo the customers and establish themselves firmly in the market. It is no longer an option for a company to provide good customer service, it is expected.

Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The sector is set to witness the emergence of financial supermarkets in the form of universal banks providing a suite of services from retail to corporate banking and industrial lending to investment banking. The financial services market has become a battle ground with the marketers with the latest and the most sophisticated weapons. Currently overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The Indian banking industry is currently in a transition phase. On the one hand, the public sector banks, which are the mainstay of the Indian banking system, are in the process of consolidating their position by capitalizing on the strength of their huge networks and customer bases. On the other, the private sector banks are venturing into a whole new game of mergers and acquisitions to expand their bases. The use of technology has placed Indian banks at par with their global peers. It has also changed the way banking is done in India. ‘Anywhere banking’ and ‘Anytime banking’ have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows. The introduction of Basel II norms from 2009 and the fair level playing field that will be available to foreign banks from 2010 will further enhance the solidarity of the Indian banking sector and open new avenues.

History of Great Indian Banking Early History At the end of late-18th century, there were hardly any banks in India in the modern sense of the term. At the time of the American Civil War, a void was created as the supply of cotton to Lancashire stopped from the Americas. Some banks were opened at that time which functioned as entities to finance industry, including speculative trades in cotton. With large exposure to speculative ventures, most of the banks opened in India during that period could not survive and failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. At the beginning of the 20th century, Indian economy was passing through a relative period of stability. Around five decades have elapsed since the India's First war of Independence, and the social, industrial and other infrastructure have developed. At that time there were very small banks operated by Indians, and most of them were owned and operated by particular communities. The banking in India was controlled and dominated by the presidency banks, namely, the Bank of Bombay, the Bank of Bengal, and the Bank of Madras - which later on merged to form the Imperial Bank of India, and Imperial Bank of India, upon India's independence, was renamed the State Bank of India. There were also some exchange banks, as also a number of Indian joint stock banks. All these banks operated in different segments of the economy.

During Wars The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for the Indian banking. The years of the First World War were turbulent, and it took toll of many banks which simply collapsed despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed during the years 1913 to 1918 as indicated in the following table:

Years

Number

of

banks Authorised

capital Paid-up

that failed

(Rs. Lakhs)

(Rs. Lakhs)

1913

12

274

35

1914

42

710

109

1915

11

56

5

1916

13

231

4

1917

9

76

25

1918

7

209

1

Post Independence Era

Capital

The partition of India in 1947 had adversely impacted the economies of Punjab and West Bengal, and banking activities had remained paralyzed for months. India's independence marked the end of a regime of the Laissezfaire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: •

In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India.

•

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

•

The Banking Regulation Act also provided that no new bank or branch of an existing bank may be opened without a licence from the RBI, and no two banks could have common directors.

RBI (Reserve Bank of India)

Introduction The Reserve Bank of India (RBI) is the central bank of India, and was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. Since its inception, it has been headquartered in Mumbai. Though originally privately owned, RBI has been fully owned by the Government of India since nationalization in 1949. RBI is governed by a central board (headed by a Governor) appointed by the Central Government. The current governor of RBI is Dr.Y.Venugopal Reddy (who succeeded Dr. Bimal Jalan on September 6, 2003). RBI has 22 regional offices across India. The Reserve Bank of India was set up on the recommendations of the Hilton Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for nine years. Formation The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governor sits and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India.

Preamble The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage." Central Board The Reserve Bank's affairs are governed by a central board of directors. The board is appointed by the Government of India in keeping with the Reserve Bank of India Act. •

Appointed/nominated for a period of four years

•

Constitution: o

Official Directors 

Full-time : Governor and not more than four Deputy Governors

o

Non-Official Directors 

Nominated by Government: ten Directors from various fields and one government Official



Local Board

Others: four Directors - one each from four local boards.

•

One each for the four regions of the country in Mumbai, Calcutta, Chennai and New Delhi

•

Membership:

•

consist of five members each

•

appointed by the Central Government

•

for a term of four years

Main Functions

Bank

of

Issuing

currency

Note

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 consist of not less than two-fifths of gold coin, gold bullion 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. Acts As 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.. Bankers'

Bank

And

Lender

of

The

Last

Resort

The 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 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

Credit

The 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. The Reserve Bank of India is armed with many more powers to control the Indian money market. Every bank has to get a licence from the Reserve Bank of India to do banking business within India, the licence 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, (a)

It

has

holds

the

the cash

following

reserves

of

all

the

powers 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.

Custodian

of

Foreign

Reserves

The 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 favour 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

Perform

all

other

member

countries

Supervisory

of

the

I.M.F.

Functions

In 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 authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them.

Performs

promotional

functions

With economic growth assuming a new urgency since Independence, the range of the Reserve Bank's functions has steadily widened. The Bank now performs a variety of developmental and promotional function, which, at one

time, was 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.

Legal Frame Work of RBI

Umbrella Acts •

Reserve Bank of India Act, 1934: governs the Reserve Bank functions

•

Banking Regulation Act, 1949: governs the financial sector

Acts governing specific functions -; •

Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market

•

Securities Contract (Regulation) Act, 1956: Regulates government securities market

•

Indian Coinage Act, 1906:Governs currency and coins

•

Foreign

Exchange

Regulation

Act,

1973/Foreign

Exchange

Management Act, 1999: Governs trade and foreign exchange market Acts Governing Banking Operations •

Companies Act, 1956:Governs banks as companies

•

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks

•

Bankers' Books Evidence Act

•

Banking Secrecy Act

•

Negotiable Instruments Act, 1881

Acts Governing Individual Institutions •

State Bank of India Act, 1954

•

The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003

•

The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993

•

National Bank for Agriculture and Rural Development Act

•

National Housing Bank Act

•

Deposit Insurance and Credit Guarantee Corporation Act.

Nationalization of Banks This is the main turning point in the history of Indian banks. After nationalization all banks were under the control of central government. Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and

any

other

external

and

internal

factors.

For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money 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, Phase

II

and

Phase

III.

Phase I The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in

India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit 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 II Gvernment took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking

transactions

of

the

Union

and

State

Governments

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

commercial

banks

in

the

country

were

nationalised.

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

in

India

under

Government

ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: •

1949 : Enactment of Banking Regulation Act.

•

1955 : Nationalisation of State Bank of India.

•

1959 : Nationalisation of SBI subsidiaries.

•

1961 : Insurance cover extended to deposits.

•

1969 : Nationalisation of 14 major banks.

•

1971 : Creation of credit guarantee corporation.

•

1975 : Creation of regional rural banks.

•

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

After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump

by

11,000%.

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

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

the

liberalisation

of

banking

practices.

The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Banks Which Were Nationalised •

Allahabad Bank

•

Andhra Bank

•

Bank of Baroda

•

Bank of India

•

Bank of Maharashtra

•

Canara Bank

•

Central Bank of India

•

Corporation Bank

•

Dena Bank

•

Indian Bank

•

Indian Overseas Bank

•

Oriental Bank of Commerce

•

Punjab and Sind Bank

•

Punjab National Bank

•

State Bank of Bikaner & Jaipur

•

State Bank of Hyderabad

•

State Bank of India (SBI)

•

State Bank of Indore

•

State Bank of Mysore

•

State Bank of Patiala

•

State Bank of Saurashtra

•

State Bank of Travancore

•

Syndicate Bank

•

UCO Bank

•

Union Bank of India

•

United Bank of India

•

Vijaya Bank

Need For Nationalization of Banks Bank nationalization was a political act and as such the motives for it will have to be found on its sphere. But the policy was founded on economic principles the most influential part of it was RAJ(1974). “ if the dimensions of the problem introduced by market imperfection in the allocation of resources were fully recognised, and the objective of the development programme kept in mind one would have less hesitation being shown in nationalising all commercial banks in country and an using them directly for more optimal distribution of finance in economy. For there are important reasons why banking enterprise maximising their profits would not venture out in these areas and sector of activity to which high priority needs to be attached from a larger social and economic point of view.” RAJ (1974:308)  Compelling banks to carry out a larger social role.  It needs to be recognised that the very basis of profit making in banking industry is the development of habit of deposit money.  The profits of commercial banks depend upon the proportion of their earning assets to the idle cash reserves they have hold- their profits are higher in this case. That’s why they have a natural bias to advancing credit to the sector which have already a developed banking habits.



By letting the private players to operate in the state, the former is merely permitting to make profits where the whole responsibility for social responsibility has to be borne by state at the cost eg general public.



Commercial bank was hardly advancing any loan to social sector.

Merits of Nationalization 1. The intervention of the state in the functioning of the banking sector itself. The ownership of the State gave a new confidence to the savers and being backed by a sovereign the normal suspicions associated with the capabilities of the bankers in the private sector were gone. 2. Banking ceased to be selective. The entry barriers that existed for customers to bank, social economic and political were lowered. This resulted in a massive quantitative expansion of the bank customer base as well

as

in

the

nature

of

services

provided.

3. The reach of banking widened. Absence of concern for profitability and targeting made banks to expand rapidly in un-banked areas thereby the entire country was linked to banking activity. 4. The expansion of banks also expanded the economy. The entire infrastructure that required was built by themselves or by the citizens for their

use.

5. A large employment base was created. Young men and women mostly from middle and poorer sections of society but qualified with the requisites got into the banking system and we see the results today.

6. Customers got acquainted with banking practices faster than it would otherwise

have

taken.

7. The well intentioned policies channeled through the banks helped the borrower

clientele

with

a

generous

disposition.

8. The savings of the community had an efficient channel which otherwise would not have had the benefit of aiding transactions. 9. State intervention to some extent distorted the banking sector. The domination of the State has had a negative effect on the contribution of the banking sector as a whole to the economy. Absence of profitability, non-realization of its potential as a business and also the deterioration in service

has

all

affected

citizens.

10. The intervention by the State and excessive domination and intervention by the bureaucracy and polity into the functioning of banks has led to deterioration on economic efficiency, which runs counter to the principles of a good Government

Effects of Nationalization on Indian Industry 

The two decades since nationalization of banks witness the transformation of the Indian banking scenario. The total number of branches which were 8000 in 1969 increased to 60,000 in 1990. Such expansion was the most rapid in rural sector.

 The share of rural offices has increased from 17.6% in 1969 to 56% in 1990.  The share of rural areas in total deposits rose from about 3% to 15% in the same period.  The rise in share of credit was spectacular from 1.5% in 1969 to 6.3% in 1989. In all the two decades since the nationalization of commercial banking in India saw banks being taken from its urban confines to vast rural stretches. The expansion of banking into rural areas meant a phenomenal expansion in terms of number of deposits and loan accounts.  The total number of loan accounts shows a rapid increase from about 4 million in 1970 to 60 million in 1990.  In terms of agriculture accounts the increase was about 1 million in 1970 to 10 million in early 1980.  Transport and trade also show significant increase.  Totally neglected areas like small artisans, small scale industry also gets a significant place.  By early 1980’s the share of agriculture in credit has risen to 17%, transport operators about 5% and small scale sector about 12%.

 The regional distribution of branches was also shifted away from Maharashtra, south India and Gujarat to rest of the country.  The sharp increase in cash reserve ratio from about 8.3% to 16.8% during the period of 1977 to 1990’s. 

It is much evident that initial result of taking credit to rural areas was taking money out of banks but much later with the development of deposit habit that cash outflow tend to decrease. Therefore the nationalization of banks had and still has a great effect on industry banking industry.

Banking Regulation Act The Banking Regulation Act was passed as the Banking Companies Act 1949 and came into force wef 16.3.49. Subsequently it was changed to Banking Regulations Act 1949 wef 01.03.66. Summary of some important sections is provided hereunder. The section no. is given at the end of each item. For details, kindly refer the bare Act. •

Banking means accepting for the purpose of lending or investment of deposits of money from public repayable on demand or otherwise and withdrawable by cheque, drafts order or otherwise (5 (i) (b)).

•

Banking company means any company which transacts the business of banking (5(i)(c)

•

Transact banking business in India (5 (i) (e).

•

Demand liabilities are the liabilities which must be met on demand and time liabilities means liabilities which are not demand liabilities (5(i)(f)

•

Secured loan or advances means a loan or advance made on the security of asset the market value of which is not at any time less than the amount of such loan or advances and unsecured loan or advances means a loan or advance not secured (5(i)(h).

•

Defines business a banking company may be engaged in like borrowing, lockers, letter of credit, traveller cheques, mortgages etc (6(1).

•

States that no company shall engage in any form of business other than those referred in Section 6(1) (6(2).

•

For banking companies carrying on banking business in India to use at least one word bank, banking, banking company in its name (7).

•

Restrictions on business of certain kinds such as trading of goods etc. (8)

•

Prohibits banks from holding any immovable property howsoever acquired except as acquired for its own use for a period exceeding 7 years from acquisition of the property. RBI may extend this period by five years (9)

•

Prohibitions on employments like Chairman, Directors etc (10)

•

Paid up capital, reserves and rules relating to these (11 & 12)

•

Banks not to pay any commission, brokerage, discount etc. more than 2.5% of paid up value of one share (13)

Prohibits a banking company from creating a charge upon any unpaid capital of the company. (14) Section 14(A) prohibits a banking company from creating a floating charge on the undertaking or any •

property of the company without the RBI permission.

•

Prohibits payment of dividend by any bank until all of its capitalised expenses have been completely written off (15)

•

To create reserve fund and 20% of the profits should be transferred to this fund before any dividend is declared (17 (1))

•

Cash Reserve - Non-scheduled banks to maintain 3% of the demand and time liabilities by way of cash reserves with itself or by way of balance in a current account with RBI (18)

•

Permits banks to form subsidiary company for certain purposes (19)

•

No banking company shall hold shares in any company, whether as pledge, mortgagee or absolute owners of any amount exceeding 30% of its own paid up share capital + reserves or 30% of the paid up share capital of that company whichever is less. (19(2).

•

Restrictions on banks to grant loan to person interested in management of the bank (20)

•

Power to Reserve Bank to issue directive to banks to determine policy for advances (21)

•

Every bank to maintain a percentage of its demand and time liabilities by way of cash, gold, unencumbered securities 25%-40% as on last Friday of 2nd preceding fortnight (24).

•

Return of unclaimed deposits (10 years and above) (26)

•

Every bank has to publish its balance sheet as on March 31st (29).

•

Balance sheet is to be got audited from qualified auditors (30 (i))

•

Publish balance sheet and auditors report within 3 months from the end of period to which they refer. RBI may extend the period by further three month (31)

•

Prevents banks from producing any confidential information to any authority under Idle Disputes Act. (34A)

•

RBI authorized to undertake inspection of banks (35).

•

Amendment carried in the Act during 1983 empowers Central Govt to frame rules specifying the period for which a bank shall preserve its books (45-y), nomination facilities (45ZA to ZF) and return a paid instrument to a customer by keeping a true copy (45Z).

•

Certain returns are also required to be sent to RBI by banks such as monthly return of liquid assets and liabilities (24-3), quarterly return of assets and liabilities in India (25), return of unclaimed deposits i.e. 10 years and above (26) and monthly return of assets and liabilities (27-1).

Banking Legislation And Reforms II While introducing bill of commission of social control in 1967, the then finance minister had mentioned that a banking commission would be set up to study matters which affected the development of banking industry on right lines. Accordingly, the government of India announced in January the appointment of banking commission with Shri R.G Sariya as the chairman. The references were-: 

To enquire into the existing structure of the commercial banking system having particular regard to size, dispersion and areas of operation and to make recommendations for improving the structure.

 To make recommendation for extending the geographical coverage of the commercial banking system. 

To make recommendations for improving and modernizing the operation methods procedures and the management policies of commercial bank.

 To examine the cost and capital structure and to review the adequacy of available surplus and reserves having regard to the development needs of the banking system and to make recommendation in the light of the findings.  To review the existing arrangements relating to recruitment, training and other relevant matters connected with manpower planning of bank personnel and to make recommendation for building up requisite professional cadre of bank personnel at all levels of management.

 To review the working of cooperative banks and to make recommendations with a view to ensuring a coordinated development of cooperative and commercial banks.  To

review

the

various

classes

of

non-banking

financial

intermediaries , to enquire into their structure and methods of operation and recommend measures for their orderly growth. 

To review the workings of various classes of indigenous banking agencies such as multanis and shroffs, evaluate their utility in the money market complex and to make recommendations in the light of findings.



To review the existing legislative enactments relating to commercial and cooperative banking.

 To make recommendations on any other related subject matter as the commission may consider germane to the subject of enquiry or on any related matter which may be specifically referred to the commission by the government.

Liberalization Globalization And Privatization In Banking And Financial Sector

Liberalization In the early 1990s the then Narasimha Rao government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, which included banks such as Global Trust Bank (the first of such new generation banks to be set up)which later amalgamated with Oriental Bank of Commerce, UTI Bank(now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, kick started the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. Privatization Privatization is the incidence or process of transferring ownership of business from the public sector (government) to the private sector (business). In a broader sense, privatization refers to transfer of any government function to the private sector including governmental functions like revenue collection and law enforcement.

Globalization Globalization in a literal sense is international integration.[1] It can be described as a process by which the people of the world are unified into a single society and functioning together. This process is a combination of economic, technological, sociocultural and political forces. Globalization, as a term, is very often used to refer to economic globalization, that is integration of national economies into the international economy through trade, foreign direct investment, capital flows, migration, and spread of technology. The word globalization is also used, in a doctrinal sense to describe the neoliberal form of economic globalization.[4] Globalization is also defined as internationalism, however such usage is typically incorrect as "global" implies "one world" as a single unit, while "international" (between nations) recognizes that different peoples, cultures, languages, nations, borders, economies, and ecosystems exist.

1991 Reforms And Its Effects on Indian Banking Industry India was a latecomer to economic reforms, embarking on the process in earnest only in 1991, in the wake of an exceptionally severe balance of payments crisis. The need for a policy shift had become evident much earlier, as many countries in East Asia achieved high growth and poverty reduction through policies which emphasized greater export orientation and encouragement of the private sector. India’s economic performance in the post-reforms period has many positive features-;  The average growth rate in the ten year period from 1992-93 to 2001-02 was around 6.0 percent, as shown in Table 1, which puts India among the fastest growing developing countries in the 1990s.  India remained among the fastest growing developing countries in the second sub-period because other developing countries also slowed down after the east Asian crisis, but the annual growth of 5.4 percent was much below the target of 7.5 percent which the government had set for the period

Savings, Investment And Fiscal Discipline Fiscal profligacy was seen to have caused the balance of payments crisis in 1991 and a reduction in the fiscal deficit was therefore an urgent priority at the start of the reforms. The combined fiscal deficit of the central and state governments was successfully reduced from 9.4 percent of GDP in 1990-91 to 7 percent in both 1991-92 and 1992-93 and the balance of payments crisis was over by 1993. Industrial Policy Industrial policy has seen the greatest change, with most central government industrial controls being dismantled. The list of industries reserved solely for the public sector -- which used to cover 18 industries, including iron and steel, heavy plant and machinery, telecommunications and telecom equipment, minerals, oil, mining, air transport services and electricity generation and distribution -- has been drastically reduced to three: defense aircrafts and warships, atomic energy generation, and railway transport. Industrial licensing by the central government has been almost abolished except for a few hazardous and environmentally sensitive industries. The requirement that investments by large industrial houses needed a separate clearance under the Monopolies and Restrictive Trade Practices Act to discourage the concentration of economic power was abolished and the act itself is to be replaced by a new competition law which will attempt to regulate anticompetitive behavior in other ways.

Foreign Direct Investment Liberalizing foreign direct investment was another important part of India’s reforms, driven by the belief that this would increase the total volume of investment in the economy, improve production technology, and increase access to world markets. The policy now allows 100 percent foreign ownership in a large number of industries and majority ownership in all except banks, insurance companies, telecommunications and airlines. Procedures for obtaining permission were greatly simplified by listing industries that are eligible for automatic approval up to specified levels of foreign equity (100 percent, 74 percent and 51 percent). Potential foreign investors investing within these limits only need to register with the Reserve Bank of India. For investments in other industries, or for a higher share of equity than is automatically permitted in listed industries, applications are considered by a Foreign Investment Promotion Board that has established a track record of speedy decisions. In 1993, foreign institutional investors were allowed to purchase shares of listed Indian companies in the stock market, opening a window for portfolio investment in existing companies.

Financial Sector Reform India’s reform program included wide-ranging reforms in the banking system and the capital markets relatively early in the process with reforms in insurance introduced at a later stage. Banking sector reforms included: (a) Measures for liberalization, like dismantling the complex system of interest rate controls, eliminating prior approval of the Reserve Bank of India for large loans, and reducing the statutory requirements to invest in government securities; (b) Measures designed to increase financial soundness, like introducing capital adequacy requirements and other prudential norms for banks and strengthening banking supervision; (c) Measures for increasing competition like more liberal licensing of private banks and freer expansion by foreign banks. These steps have produced some positive outcomes. There has been a sharp reduction in the share of non-performing assets in the portfolio and more than 90 percent of the banks now meet the new capital adequacy standards. However, these figures may overstate the improvement because domestic standards for classifying assets as non-performing are less stringent than international standards. India’s banking reforms differ from those in other developing countries in one important respect and that is the policy towards public sector banks which dominate the banking system. The government has announced its intention to reduce its equity share to 33-1/3 percent, but this is to be done while retaining government control. Improvements in the efficiency of the banking system will therefore depend on the ability to increase the efficiency of public sector banks.

Skeptics doubt whether government control can be made consistent with efficient commercial banking because bank managers are bound to respond to political directions if their career advancement depends upon the government. Even if the government does not interfere directly in credit decisions, government ownership means managers of public sector banks are held to standards of accountability akin to civil servants, which tend to emphasize compliance with rules and procedures and therefore discourage innovative decision making. Regulatory control is also difficult to exercise. The unstated presumption that public sector banks cannot be shut down means that public sector banks that perform poorly are regularly recapitalized rather than weeded out. This obviously weakens market discipline, since more efficient banks are not able to expand market share. If privatization is not politically feasible, it is at least necessary to consider intermediate steps which could increase efficiency within a public sector framework (see for example Ahluwalia 2002). These include shifting effective control from the government to the boards of the banks including especially the power to appoint the Chairman and Executive Directors which is at present with the government; removing civil servants and representatives of the Reserve Bank of India from these board; implementing a prompt corrective action framework which would automatically trigger regulatory action limiting a bank’s expansion capability if certain trigger points of financial soundness are breeched; and finally acceptance of closure of insolvent public sector banks (with appropriate protection for small depositors). Unless some initiatives along these lines are taken, it is highly unlikely that public sector banks can rise to the levels of efficiency needed to support rapid growth.

Another major factor limiting the efficiency of banks is the legal framework, which makes it very difficult for creditors to enforce their claims. The government has recently introduced legislation to establish a bankruptcy law which will be much closer to Accepted international standard. This would be an important improvement but it needs to be accompanied by reforms in court procedures to cut the delays which are a major weakness of the legal system at present. Reforms in the stock market were accelerated by a stock market scam in 1992 that revealed serious weaknesses in the regulatory mechanism. Reforms implemented include establishment of a statutory regulator; promulgation of rules and regulations governing various types of participants in the capital market and also activities like insider trading and takeover bids; introduction of electronic trading to improve transparency in establishing prices; and dematerialization of shares to eliminate the need for physical movement and storage of paper securities. Effective regulation of stock markets requires the development of institutional expertise, which necessarily requires time, but a good start has been made and India’s stock market is much better regulated today than in the past. This is to some extent reflected in the fact that foreign institutional investors have invested a cumulative $21 billion in Indian stocks since 1993, when this avenue for investment was opened. An important recent reform is the withdrawal of the special privileges enjoyed by the Unit Trust of India, a public sector mutual fund which was the dominant mutual fund investment vehicle when the reforms began. Although the Unit Trust did not enjoy a government guarantee, it was widely perceived as having one because its top management was appointed

by the government. The Trust had to be bailed out once in 1998, when its net asset value fell below the declared redemption price of the units, and again in 2001 when the problem recurred. It has now been decided that in future investors in the Unit Trust of India will bear the full risk of any loss in capital value. This removes a major distortion in the capital market, in which one of the investment schemes was seen as having a preferred position.The insurance sector (including pension schemes), was a public sector monopoly at the start of the reforms. The need to open the sector to private insurance companies was recommended by an expert committee (the Malhotra Committee) in 1994, but there was strong political resistance. It was only in 2000 that the law was finally amended to allow private sector insurance companies, with foreign equity allowed up to 26 percent, to enter the field. An independent Insurance Development and Regulatory Authority have now been established and ten new life insurance companies and six general insurance companies, many with well-known international insurance companies as partners, have started operations. The development of an active insurance and pensions industry offering attractive products tailored to different types of requirements could stimulate long term savings and add depth to the capital markets. However, these benefits will only become evident over time.

Recommendations of Narasimham Committee on Commercial Banking System (1991) The narasimham committee (1991) assumed that the financial resources of the commercial banks from the general public and were by the banks in trust and that the bank funds were to be deployed for maximum benefit of the depositors. This assumption automatically implied that even the government had no business to endanger the solvency, health and efficiency of the nationalized banks under the pretext of using banks funds for social banking, poverty eradication, etc. Accordingly, the narasimham committee aimed at achieving three major changes in the banking sector in India-;  Ensuring a degree of operational flexibility.  Internal autonomy for the banks in their decision making process.  Greater degree of professionalism in banking operations. Towards this end, narasimham committee recommendations covered such subjects as directed investments, directed credit programmes, structural of rate of interest, structural reorganization of the Indian banking system, and organization, methods and procedures of banks in India.

In Structural Reorganization of The Banking System To bring about greater efficiency in banking operations, the narasimham committee (1991) proposed substantial reduction in number of public sector banks through mergers and acquisition. According to committee, the broad pattern should consist of-;  Three or four large banks including SBI should become international in character.  Eight to ten banks should national bank with wide network of branches through out the country.  The rest should remain as local banks with operations be confined to a specific region.  RBI should permit the establishment of new banks in the private sector, provided they conform to the minimum start-up capital and other requirements. The government should make declaration that no further banks be nationalized.  Foreign banks are allowed to open their branches in India either as fully owned or subsidiaries. This would improve efficiency.  Foreign banks and Indian banks are allowed to set-up joint ventures in regard to merchant and investment banking. 

Since the country had already a network of rural and semi-urban branches, the system of licensing of branches with the objective of spreading the banking habit should be discontinued. Banks should have freedom to open branches.

On Organization And Methods And Procedures In Banks In order to tone up the working of the banks, the narasimham committee (1991) recommended that Each bank should be free and autonomous.  Every bank should go for a radical change in working technology and culture, so to become competitive internally and to be in step with wide- ranging innovations taking place.  Over- regulation and over- administration should be avoided and greater reliance should be placed on internal audit and internal inspection.  The various guidelines issued by government or RBI in regard to internal administration should be examined in the context of the independence and autonomy of bank.  The quality of control over the banking system between RBI and the banking division of ministry and finance should end forthwith and RBI should be the primary agency for regulation.  The appointment of chief executive of bank and the board of directors should not be based on political considerations but on professionalism and integrity. So despite impressive quantitative achievements in resources mobilization and in extending the credit reach, several distortions had crept into the banking system over the years. Several public sector banks had become weak financially and were unable to meet the challenges of the competitive

environment. The narasimham committee was forthright in apportioning the blame to the government of India and the finance ministry of this sad state of affairs. The public sector banks has been used and abused by the government, the officials and the bank employees and the trade unions. The recommendations of narasimham committee(1991) has been revolutionary in many aspects and were opposed by trade unions and even by finance ministry of central government and of course, the progressive economist who generally championed the public sector banks. The government however accepted many of the recommendations of the narasimham committee (1991).

Narasimham Committee on Banking Sector Reforms (1998) The finance ministry of government of India appointed Mr. M. Narasimham as chairman of one more committee, this time it was called as the committee on banking sector reforms. The committee was asked to “review the progress of banking sector reforms to the date and chart a programme on financial sector reforms necessary to strengthen India’s financial system and make it internationally competitive”. The narasimham committee on banking sector reforms submitted this report to the government in April 1998. This report covers the entire issues relating to capital adequacy, bank mergers, the condition of global sized banks, recasting of banks boards etc. some important findings are as follows-;



Need For Stronger Banking System- The narasimham committee has made out a stronger banking system in country, especially in the context of capital account convertibility (CAC) which would involve large amount of inflow and outflow of capital and consequent complications for exchange rate management and domestic liquidity. To handle this India would need a strong resilient banking and financial system.



Experiment With The Concept of Narrow Banking- The narasimham committee is seriously concerned with the rehabilitation of weak public sector banks which have accumulated a high percentage of non-paying assets (NPA), and in some cases, as high as 20% of their total assets. They suggested the concept of narrow banking to rehabilitate such weak banks.



Small Local Banks- The narasimham committee has argued that “While two or three banks with an international orientation and 8 to 10 of larger banks should take care of their needs of the large and medium corporate sector ad larger of the small enterprises, there will still be a need for a large number of local banks.” The committee has suggested the setting up of small local banks which should be confined to states or clusters of districts in order to serve local trade, small industry etc.



Capital Adequacy Ratio- The narasimham committee has also suggested that the government should consider raising the prescribed capital adequacy ratio to improve the inherent strength of banks and to improve their risk taking ability.



Public Ownership And Real Autonomy- The narasimham committee has argued that government ownership and management of banks does not enhance autonomy and flexibility in working of public sector banks. Accordingly, the committee has recommended a review of functions of banks boards with a view to make them responsible for enhancing shareholder value through formulation of corporate strategy.



Review And Updating Banking Laws- The narasimham committee has suggested the urgent need to review and amended the provisions of RBI Act, Banking Regulation Act, State Bank of act etc so as to bring them on same line of current banking needs.

Really speaking there was no purpose of setting up the second narasimham committee on banking sector reforms even before a decade has elapsed for the full implementation of the recommendations of First committee. As one critics has commented: “ barring this is, a stray recommendation here or there like the categorical rejection of the merger of weak with strong banks and the suggestion to try out narrow banking, as far as all other issues are concerned”

The Comparison of Recommendation of 1991 And 1998 Are

1991

1998

More strong banks 

free bank boards from

Merge banks to reduce numbers Free bank board

from Recommendation  move to three tire structure

interference Move to three tier

structure  reduce capital adequacy norms

fix capital adequacy

at 8% 

consider whether autonomy is

Ensure autonomy of banks

Consistent with public ownership

So the government has decided to invite various multinational banks to come to India by opening up their branches in India or by merging with India other Indian banks. But the prior one is more popular and the government allowed foreign direct investment in banking sector to make the environment more competitive and to remove all the bottlenecks from the industry.

FDI- An Introduction

Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC). In order to qualify as FDI the investment must afford the parent enterprise control over its foreign affiliate. The UN defines control in this case as owning 10% or more of the ordinary shares or voting power of an incorporated firm or its equivalent for an unincorporated firm; lower ownership shares are known as portfolio investment.

Foreign Direct Investment In Indian Banking Sector Indian federal government has opened up the banking sector for foreign investors raising the ceiling of foreign direct investment in the Indian private sector banks to 49 percent. However, the ceiling of FDI in the country's public sector banks remains unchanged at 20 percent. Foreign banks having branches in India are also entitled to acquire stakes up to 49% through "automatic routes". It is to be noted that under "automatic route" fresh shares would not be issued to foreign investors who already have financial or technical collaboration in banking or allied sector. They would require FIPB approval. However, some statutory approvals of the Reserve Bank of India (RBI), country's central banking authority, would be required.

Statutory Limits •

Foreign direct investment (FDI) up to 49 percent is permitted

in Indian private sector banks under "automatic route" which includes Initial Public Issue (IPO), Private Placements, ADR/GDRs; and Acquisition of shares from existing shareholders. •

Automatic route is not applicable to transfer of existing shares

in a banking company from residents to non-residents. This category of investors require approval of FIPB, followed by "in principle" approval by Exchange Control Department (ECD), Reserve Bank of India (RBI). •

The "fair price" for transfer of existing shares is determined by

RBI, broadly on the basis of Securities Exchange Board of India (SEBI) guidelines for listed shares and erstwhile CCI guidelines for unlisted shares. After receipt of "in principle" approval, the resident seller can receive funds and apply to ECD, RBI, for obtaining final permission for transfer of shares. •

Foreign banks having branch-presence in India are eligible for

FDI in private sector banks subject to the overall cap of 49% with RBI approval. •

Issue of fresh shares under automatic route is not available to

those foreign investors who have a financial or technical collaboration in the same or allied field. Those who fall under this category would require Foreign Investment Promotion Board (FIPB) approval for FDI in the Indian banking sector. •

Under the Insurance Act, the maximum foreign investment in

an insurance company has been fixed at 26 percent. Application for

foreign investment in banks which have joint venture/subsidiary in insurance sector should be made to RBI. Such applications would be considered by RBI in consultation with Insurance regulatory and Development Authority (IRDA). •

FDI and Portfolio Investment in nationalized banks are subject

to overall statutory limits of 20 percent. •

The 20 percent ceiling would apply in respect of such

investments in State Bank of India and its associate banks.

Voting Rights of Foreign Investors Private Sector

:

Banks Nationalized Banks State of India

:

Bank :

Not more then 10 percent of the total voting rights of all the shareholders Not more than 1 percent of the total voting rights of all the shareholders of the nationalized bank. Not more than 10 percent of the issued capital. This does not apply to Reserve Bank of India (RBI) as a shareholder. However, government in consultation with RBI, ceiling for foreign investors can be raised. Not more than 1 percent. This ceiling will not be

SBI Associates

:

applied to State Bank of India. If any person holds more than 200 shares, he/she will not be registered as a shareholder.

RBI Approval

•

Transfer of shares of 5 percent and more of the paid-up capital of a private sector bank requires prior acknowledgement of RBI.

•

For FDI of 5 percent and more of the paid-up capital, the private sector bank has to apply in the prescribed form to RBI.

•

Under the provision of Foreign Exchange Management Act (FEMA), 1999, any fresh issue of shares of a bank, either through the automatic route or with the specific approval of FIPB, does not require further approval of Exchange Control department (ECD) RBI from the exchange control angle.

•

The Indian banking company is only required to undertake two-stage reporting to the ECD of RBI as follows: (1) the Indian company has to submit a report within 30 days of the date of receipt of amount of consideration indicating the name and address of foreign investors, date of receipt of funds and their rupee equivalent, name of bank through whom funds were received and details of govt. approval, if any. (2) Indian banking company is required to file within 30 days from the date of issue of shares, a report in form FC-GPR (Annexure II) together with a certificate from the company secretary of the concerned company certifying that various regulations have been complied with.

Divestment by Foreign Investors

Sale of shares by non-residents on a stock exchange and remittance of the proceeds thereof through an authorized dealer does not require RBI approval. •

Sale of shares by private arrangement requires RBI's prior approval.

•

Sale of shares by non-residents on a stock exchange and remittance of the proceeds thereof through an authorized dealer does not require RBI approval.

A foreign bank or its wholly owned subsidiary regulated by a financial sector regulator in the host country can now invest up to 100% in an Indian private sector bank. This option of 100% FDI will be only available to a regulated wholly owned subsidiary of a foreign bank and not any investment companies. Other foreign investors can invest up to 74% in an Indian private sector

bank,

through

direct

or

portfolio

investment.

The Government has also permitted foreign banks to set up wholly owned subsidiaries in India. The government, however, has not taken any decision on raising voting rights beyond the present 10% cap to the extent of shareholding.. All entities making FDI in private sector banks will be mandatory required to have credit rating. The increase in foreign investment limit in the banking sector to 74% includes portfolio investment [i.e., foreign institutional investors (FIIs) and non-resident Indians (NRIs)], IPO’s, private placement, ADRs or GDRs and acquisition of shares from the existing shareholders. This will be the cap for any increase through an investment subsidiary route as in the case of HSBC-UTI deal.

In real terms, the sectoral cap has come down from 98% to 74% as the earlier limit of 49% did not include the 49% stake that FII investors are allowed to hold. That was allowed through the portfolio route as the sector cap for FII investment in the banking sector was 49%.The decision on foreign investment in the banking sector, the most radical since the one in 1991 to allow new private sector banks, is likely to open the doors to a host of mergers and acquisitions. The move is expected to also augment the capital needs of the private banks.

Various Private Sector Banks In India There are various private sector banks in India after the historical changes in policies announced by the government of India. After the introduction of liberalization privatization and globalization reforms in India many private investors and multinational banks and companies shows their interest in financial an banking sector of India. Not only multinational groups but also some private investors from India shoe their interest in this field. Some of them are as follows-;

Private Banks  Indusland bank  HDFC  Jammu & Kashmir bank 

Centurion bank

 City union bank  Federal bank  Saraswat bank  Dhanlaksmi bank  Kotak bank  Cosmos bank 

Bank of Rajasthan

 Bank of Punjab  ING VYSYA bank  South Indian bank FOREIGN BANKS  Standard charted bank  City bank  American express bank  ABN Amro bank  HSBC  Asian development bank  Abu Dhabi C bank

Profiles of Some of The Private Banks Are As Follows-;

ICICI Bank Introduction ICICI Bank is India's second-largest bank with total assets of Rs. 3,767.00 billion (US$ 96 billion) at December 31, 2007 and profit after tax of Rs. 30.08 billion for the nine months ended December 31, 2007. ICICI Bank is second amongst all the companies listed on the Indian stock exchanges in terms of free float market capitalisation*. The Bank has a network of about 955 branches and 3,687 ATMs in India and presence in 17 countries

Board Members Mr. N. Vaghul, Chairman Mr. Sridar Iyengar Mr. Lakshmi N. Mittal Mr. Narendra Murkumbi Mr. Anupam Puri Mr. Arun Ramanathan Mr. M.K. Sharma Mr. P.M. Sinha Prof. Marti G. Subrahmanyam Mr. T.S. Vijayan Mr. V. Prem Watsa Mr. K.V. Kamath, Managing Director & CEO Ms. Chanda Kochhar, Joint Managing Director & Chief Financial Officer Mr. V. Vaidyanathan, Executive Director Ms. Madhabi Puri-Buch, Executive Director Mr. Sonjoy Chatterjee, Executive Director

Deposits of ICICI bank

ICICI Bank offers wide variety of Deposit Products to suit your requirements. Convenience of networked branches/ ATMs and facility of Echannels like Internet and Mobile Banking.  SAVINGS ACCOUNT  LIFE PLUS SENIOR CITIZENS SAVINGS ACCOUNT  YOUNG STARS SAVING ACCOUNTS  FIXED DEPOSITS 

RECURRING DEPOSITS

 EASY RECEIVE SAVING ACCOUNT

Loans of ICICI Bank  TWO WHEELER LOANS  FARM EQUIPMENT LOAN  BUSINESS INSTALLMENT LOAN

Cards Provided By ICICI Bank  CREDIT CARDS  DEBIT CARD  TRAVEL CARD  PRE PAID CARDS

Kotak Bank

Introduction Kotak Mahindra is one of India's leading financial conglomerates, offering complete financial solutions that encompass every sphere of life. From commercial banking, to stock broking, to mutual funds, to life insurance, to investment banking, the group caters to the financial needs of individuals and corporate. The group has a net worth of over Rs. 5,609 crore, employs around 17,100 people in its various businesses and has a distribution network of branches, franchisees, representative offices and satellite offices across 344 cities and towns in India and offices in New York, London, Dubai, Mauritius and Singapore. The Group services around 3.6 million customer accounts. Board of Directors Mr. Uday Kotak

Executive Vice Chairman & Managing Director

Mr. Shivaji Dam Mr. C. Jayaram Mr. Deepak Gupta

Deposits Accounts of Kotak

1. Saving Account 

Ace Savings Account

Pro Savings Account Edge Savings Account Nova Savings Account Classic Savings Account Corporate Salary Account

2. Current Account Edge Current Account Pro Current Account Ace Current Account

3. Term Deposits  Liquidity through overdraft or sweep-in facility  No penalty on pre-mature encashment  Ease and convenience of operations  Nomination facility given

Loans Provided By Kotak bank

Personal Loans •

Avail loans from Rs.50,000-50 lakh*

•

Quick Approval & hassle-free processing

•

Minimal paperwork

•

Flexible repayment options

•

Repay with easy EMIs

•

Convenience of service at your doorstep

Home Loans •

Wide range of offerings

•

Attractive interest rates

•

Pre-approved sanctions

•

Free personal accident insurance

•

Life insurance options on your Home Loans

•

No hidden charges

Loans Against Property •

High loan eligibility for businessmen

•

Free personal accident insurance

•

Loans amounts ranging from Rs.10 Lakh - Rs.3 crore!

•

Loans against residential as well as commercial properties

Investment Services

Demat Efficient depository services that allow you to hold your shares in

•

convenient, "demat" formats Leverage opportunities in the stock-market

•

Mutual Fund •

Assistance at every step of the investment process

•

An experienced research team to analyze and research the Mutual Funds available in the market Portfolio assistance

•

Insurance •

Carefully selected insurance policies to suit your needs

•

Experts to help you analyze your insurance needs and develop the solution that works best for you.

Gold •

24 carat pure gold coins and bars carrying a 99.99% Assay Certification

•

Unique number on every certicard, with records maintained in Switzerland

Standard Charted Bank

The Standard Chartered Group was formed in 1969 through a merger of two banks: The Standard Bank of British South Africa founded in 1863 and the Chartered Bank of India, Australia and China, founded in 1853. Both companies were keen to capitalize on the huge expansion of trade and to earn the handsome profits to be made from financing the movement of goods from Europe to the East and to Africa. The Chartered Bank •

Founded by James Wilson following the grant of a Royal Charter by Queen Victoria in 1853.

•

Chartered opened its first branches in Mumbai (Bombay), Calcutta and Shanghai in 1858, followed by Hong Kong and Singapore in 1859.

•

Traditional business was in cotton from Mumbai (Bombay), indigo and tea from Calcutta, rice in Burma, sugar from Java, tobacco from Sumatra, hemp in Manila and silk from Yokohama.

•

Played a major role in the development of trade with the East which followed the opening of the Suez Canal in 1869 and the extension of the telegraph to China in 1871.

•

In 1957 Chartered Bank bought the Eastern Bank together with the Ionian Bank's Cyprus Branches. This established a presence in the Gulf.

The Standard Bank •

Founded in the Cape Province of South Africa in 1862 by John Paterson. Commenced business in Port Elizabeth, South Africa, in January 1863.

•

Was prominent in financing the development of the diamond fields of Kimberley from 1867 and later extended its network further north to the new town of Johannesburg when gold was discovered there in 1885.

•

Expanded in Southern, Central and Eastern Africa and by 1953 had 600 offices.

•

In 1965, it merged with the Bank of West Africa expanding its operations into Cameroon, Gambia, Ghana, Nigeria and Sierra Leone.

In 1969, the decision was made by Chartered and by Standard to undergo a friendly merger. All was going well until 1986, when a hostile takeover bid was made for the Group by Lloyds Bank of the United Kingdom. Principles and Values At Standard Chartered our success is built on teamwork, partnership and the diversity of our people. At the heart of our values lie diversity and inclusion. They are a fundamental part of our culture, and constitute a long-term priority in our aim to become the world's best international bank.

Personal Banking Personal banking includes products and services that support the customer at every stage. These includes-;  Savings and banking services  Loans and mortgages  Credit and debit card facilities  Insurance  Investment  International banking Online Banking Standard charted online is an innovative banking that can be tailored to suit our precise needs. It gives us convenient, round the clock banking services ranging from day to day account transfers to real time valuable financial information. Now we can manage our finances anytime, anywhere.

ABN AMRO Bank With assets over US $504 billion and an AA credit rating, ABN AMRO Bank ranks among the top 10 banks in the world in size and strength. Our international network comprises 3,568 branches and offices in over 320 cities and 76 countries and territories, with over 100,000 highly qualified staff. As a global bank, we can handle the most complicated cross-border transactions, yet we also understand the subtleties of local markets.

ABN AMRO in India Traditionally known as a strong diamond financing bank, ABN AMRO today offers unparalleled suite of client services in India. By leveraging our global reach and drawing on the expertise of our team of research, sales and trading, equity capital market and M&A advisory professionals, we have led many of the biggest and most innovative landmark transactions in India for our Corporate and Institutional Clients. In addition, we also offer a broad range of transaction banking products, fixed income and foreign exchange products and services including sales and trading, fixed income origination, derivatives, structured lending and commodity financing. For our Business Banking clients, we offer top quality services in trade finance, business loans, supply chain management, credit facilities, payment and cash management- solutions that help small to medium size businesses enhance cash flow, boost overall business efficiency and capitalize on new opportunities. Private Banking Services in India offers our select and premium clients a comprehensive range of quality Portfolio Advisory Services along with a sophisticated execution platform. We aid in enhancing their wealth with premium services including investment advisory, non-discretionary portfolio management, investment funds, international estate planning and trust. Asset Management in India is among the fastest growing asset managers with just two years of operations in the country. Backed by the favorable market conditions and a strong focus on the business we have an everincreasing and widening distribution and aim to emerge as a leading player

in the Indian asset management industry. Leveraging our Group's comprehensive research and diverse range of investment products, we offer our clients investment options in fixed income, equities, money markets and structured products. The Microfinance program of ABN AMRO, the largest amongst its peer foreign banks in India, is aimed at delivering credit to our target community of rural poor woman through intermediaries called microfinance institutions. Today service 26 MFIs across 16 states in India with over 390,000 customers receiving micro financing small loans of USD 200 or less. Aim is to reach a million customers by 2009. During the annual Sustainable Banking Awards ceremony held by Financial Times of London, ABN AMRO India was named the Sustainable Bank of the Year in the Emerging Markets category - both in the Asia region as well as globally.

Investment Services Investment Products The right products mix that addresses your requirements and suits your risk profile. Financial Planning Array of Financial Planning tools gives you complete control to match the financial goals you've set.

Various technologies in banking sector

Online banking Online banking solutions have many features and capabilities in common, but traditionally also have some that are application specific. The common features fall broadly into several categories •

Transactional (e.g., performing a financial transaction such as an account to account transfer, paying a bill, wire transfer... and applications... apply for a loan, new account, etc.) o

Electronic bill presentment and payment - EBPP

o

Funds transfer between a customer's own checking and savings accounts, or to another customer's account

•

o

Investment purchase or sale

o

Loan applications and transactions, such as repayments

Non-transactional (e.g., online statements, check links, cobrowsing, chat) o

•

Bank statements

Financial Institution Administration - features allowing the financial institution to manage the online experience of their end users

•

ASP/Hosting Administration - features allowing the hosting company to administer the solution across financial institutions

Features commonly unique to business banking include •

Support of multiple users having varying levels of authority

•

Transaction approval process

•

Wire transfer

Features commonly unique to Internet banking include •

Personal financial management support, such as importing data into a personal finance program such as Quicken, Microsoft Money or TurboTax.

Swift •

Is a co-operative established by and for the financial industry

•

Is the global provider of secure financial messaging services

•

Is the acknowledged leader in international standards-setting for the financial industry

•

Enables its customers to automate and standardize financial transactions, thereby lowering their costs, reducing their operational risk and eliminating inefficiencies from their business operations. SWIFT also provides opportunities for its customers to create new business opportunities and revenue streams.

Facilities Provided By Swift  A sophisticated message transmission of international repute.  This network also facilitates the transfer of messages relating to fixed deposits, interest payment, debit card statements, foreign exchange.  This service is available through-out the year, 24*7  This system ensures against any loss of mutation against transmission  It serves almost all financial institutions and selected range of customers.

Fund Transfer With the development of computers, it has been possible to transfer the funds from one branch to another by the computer networks. There is no physical movement of cash. Fedwire- This network is operational in America. This has been used by Federal Reserve Bank and its member’s allies. Hundreds of terminals are used in this system. Bankwire- It is the cooperative networks which links the thousands of banks. BANKWIRE network has its headquarters in America. Point Of Sale- This is another system of electronic fund transfer. In this system, computer terminals provided to showrooms and other stores by the sponsor banks. The customer of these banks needs not to carry physical cash with them. After purchasing items, he enters his identification number; the computer allows him to do his transaction.

ATM An

automated

teller

machine

(ATM)

is

a

computerized

telecommunications device that provides the customers of a financial institution with access to financial transactions in a public space without the need for a human clerk or bank teller. On most modern ATMs, the customer is identified by inserting a plastic ATM card with a magnetic stripe or a plastic smartcard with a chip, that contains a unique card number and some security information, such as an expiration date or CVC (CVV). Security is provided by the customer entering a personal identification number (PIN).

Hardware Used An ATM is typically made up of the following devices: •

CPU (to control the user interface and transaction devices)

•

Magnetic and/or Chip card reader (to identify the customer)

•

PIN Pad (similar in layout to a Touch tone or Calculator keypad), often manufactured as part of a secure enclosure.

•

Secure crypto processor, generally within a secure enclosure.

•

Display (used by the customer for performing the transaction)

•

Function key buttons (usually close to the display) or a Touch screen (used to select the various aspects of the transaction)

•

Record Printer (to provide the customer with a record of their transaction)

•

Vault (to store the parts of the machinery requiring restricted access)

•

Housing (for aesthetics and to attach signage to)

Recently, due to heavier computing demands and the falling price of computer-like architectures, ATMs have moved away from custom hardware architectures using microcontrollers and/or application-specific integrated circuits to adopting a hardware architecture that is very similar to a personal computer. Many ATMs are now able to use operating systems such as Microsoft Windows and Linux. Although it is undoubtedly cheaper to use commercial off-the-shelf hardware, it does make ATMs vulnerable to the same sort of problems exhibited by conventional computers.

Debit Card A debit card is a plastic card which provides an alternative payment method to cash when making purchases. In most cases: Physically the card is an ISO 7810 card like a credit card; however, its functionality is more similar to writing a Cheque as the funds are withdrawn directly from either the cardholder's bank account (often referred to as a check card), or from the remaining balance on the card. In other cases: some cards are designed exclusively for use on the Internet, and so there is no physical card. In potential cases, the card may be completely different compared to these two examples. Depending on the store or merchant, the customer may swipe or insert their card into the terminal, or they may hand it to the merchant who will do so. The transaction is authorized and processed and the customer verifies the transaction either by entering a PIN or, occasionally, by signing a sales receipt.In some countries the debit card is multipurpose, acting as the ATM

card for withdrawing cash and as a check guarantee card. Merchants can also offer "cashback"/"cashout" facilities to customers, where a customer can withdraw cash along with their purchase.

Credit Cards A credit card is a system of payment named after the small plastic card issued to users of the system. A credit card is different from a debit card in that it does not remove money from the user's account after every transaction. In the case of credit cards, the issuer lends money to the consumer (or the user) to be paid to the merchant. It is also different from a charge card (though this name is sometimes used by the public to describe credit cards), which requires the balance to be paid in full each month. In contrast, a credit card allows the consumer to 'revolve' their balance, at the cost of having interest charged. Most credit cards are the same shape and size, as specified by the ISO 7810 standard. The most common credit card size, known as ID-1, is 85.60 × 53.98 mm.

These are some of the major technological innovations made by these private sector banks in India. There are some other also but they are somehow connected with these as these are the major innovations made.

Conclusions  After nationalization process, the banks advances started getting stingy and bad debts started to increase.  The narasimham committee report on the commercial banking give some relief to bankers but it also prove unaffected as that also cannot change the scenario.  The narasimham committee in 1998 which states some policies regarding the FDI in banking sector has proved some effective for Indian banking industry.  That policies increase the share of banking, making it more competitive.  By the admission of foreign investors in Indian banking sector, the competition and the service value also started to increase. All these reflects that the Indian banking sector has bloomed little due the entrance of foreign investors in Indian banking sector but that ignores one of the main aspects of the Indian economy that is agriculture sector. The private and foreign sector banks ignore this sector because of the chances of default in this sector. This implies that although the Indian economy has grown a lot after the policies and private sector entrance in India but that did not include wholesome development. This is one aspect of the problem but if we see overall performance of Indian economy and the quality of banking sector that is outstanding during all these years.

Bibliography BOOKS 1. Shekhar K.C (2005), Banking Theory and Practice, Vikas Publishing

House. 2. Malhotra T.D (2002), Electronic Banking and Information

Technology in Banks, Sultan Chand and Sons Educational Publishers. 3. Sundharam K.P.M(2004), Money Banking Trade and Finance, Sultan

Chand and Sons Educational Publishers. WEBSITES 1. www.networkmagazineindia.com, accessed in march 2008 2. www.expresscomputerindia.com, accessed in march 2008 3. www.banknationalisationtherecord.com, accessed in march2008 4. www.papermoney.com, accessed in feburary2008 5. www.thehindufdiinbankingsector.com,accessed in feburary2008