INDIAN BANKING SYSTEM

The Indian banking system is significantly different from those prevalent in other countries due to its unique geographic, social and economic characteristics. India has a large population, different cultures in different parts of the country and also disparities in income. Also in India the population spread among rural and urban areas is also skewed in the favour of urban areas. All these features reflect in the size and structure of the Indian banking system. Further in order to fulfil the needs to the government policy it has been subjected to various nationalization schemes at different times. RBI credit policies form the guidelines for banks in India. Since they had to satisfy the domestic obligations, the banks have so far been confined within the Indian borders. Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

The Reserve Bank of India is the central bank of India and controls the monetary policy. The institution was established on 1 April 1935 .The main functions of RBI are 1. Monetary Authority: The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Its objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors 2. Manager of Exchange Control: The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. 3. Issuer of Currency: The bank issues and exchanges or destroys currency and coins not fit for circulation. The Objectives are giving the public adequate supply of currency of good quality and to

provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, of the country. The 1.1 Public 1.2 Private 1.3 Foreign 1.4 Cooperative 2. Financial 2.1 All 2.2 State 2.3 State 3. Non Industrial Banking India Financial Development Financial Financial Indian financial system can Sector Sector be represented as follows Banks Banks Banks Banks Banks Institutions Institutions Corporations Corporations Companies and to maintain the reserves 4. Regulator: Central Bank is also responsible for making policy to be followed by the banking system

1. Commercial

4. Capital Market Intermediaries Around 90% of the banking system is under the government control and the rest are with the private and the foreign banks. The public sector banks can be categorized into a) State Bank Group: It comprises of State Bank of India and its 5 associate banks. Previously there were 7 associate but after the merger of 2 of them with the parent bank only 5 of them remain. The government of India is the majority are 19 stakeholder nationalized in the in largest the bank of the country. of b) Nationalized Banks: There banks country. The process

nationalization in 1969 resulted in creation of 14 government owned banks which were followed by the nationalization of 6 more banks. However upon a merger the total number of banks in the country stands at 19 as of today. All the banks are majority owned by the government of India. c) Regional Rural Banks: The regional rural banks were setup to provide low cost financing and credit facilities to rural people. The nationalized banks were required to setup RRBs in partnership with the individual states.

The foreign and private banks form a miniscule part of the Indian banking system which is dominated by the government owned banks. However the superior offering of the private sector banks aided by the growth in the IT has resulted in the population of the country being attracted towards these banks. This has made the public sector banks recognize the threat from these banks and improve on their services. They have given the PSBs stiff competition and this augurs well for the future of the Indian banking system.

GREEN FINANCIAL PRODUCTS AND SERVICES

With the entire world becoming environment conscious, financial industry is not far behind in its contribution towards greener world. Green financial products are introduced in the financial industry providing platform for ethical and eco-friendly investment. Many organizations have realized that there is direct correlation between competitiveness & profitability and environmental protection. Keeping this in mind financial institutions have developed green financial products with the aim of promotion of sustainable development. These green financial products must reduce negative environmental impacts or provide environmental benefits.

Green Products and Services on Offer Green Home Mortgages: These are special kind of mortgages for new homes which comply green energy consumption standards. The interest rate offered on these mortgages are usually 1-2% lesser than the market rate. In certain countries exemption from income tax can be claimed if an individual has opted for green mortgage product. Green Commercial Building Loan: Attractive loan designs and arrangements have emerged for green commercial buildings, characterized by lower energy consumption (~15-25%), reduced waste and less pollution than traditional buildings. Green Auto and Fleet loan: With below market interest rates, green car loans aim to incentivize the uptake of cars that demonstrate low GHG intensity and/or high fuel efficiency ratings. The number of these products has increased in recent years, with the majority being offered in Australia and Europe. Green credit and debit cards: A broad family of green products includes debit and credit cards linked to environmental activities. Green credit cards offered by most large credit card companies, typically offer NGO donations equal to approximately half a percentage point on every purchase, balance transfer or cash advance made by the card owner. In September 2006, Rabobank launched an innovative climate credit card. The bank pledges to pay a proportionate sum to support WWF projects, depending on the energy intensity of the product or service bought with the card. Green Mortgage Based Securities: A green mortgage-backed security package mortgages on buildings that meet specific energy-use and environmental benchmarks. Green Mortgage-Backed Securities in the early stages of product design and discussion would hold energy efficient and environmentally-friendly commercial buildings. These green products could be rated higher and worth more than traditional mortgage-backed securities as a result of the operational savings and marketability, as well as other tangible and intangible benefits associated with green facilities; added value features that could result in better and cheaper access to capital for potential owners and investor in green building projects. However, like other lending scenarios related to green buildings, this scenario is highly dependent on the financial community being able to accurately measure and value savings and reductions associated with building green. Carbon Funds: A carbon procurement vehicle (or carbon fund) is a collective investment scheme which receives money from investors and uses this money to buy carbon credits from, or invest into, greenhouse gas (GHG) emissions reduction projects, generally through the Kyoto Protocols CDM and

Joint Implementation (JI) schemes. After a certain defined period, the carbon fund will then give investors carbon credits and/or cash in return. Green Insurance: The insurance sector can generally be divided into two categories: Life Insurance; and General (Non-Life) Insurance.Green insurance falls under the latter and typically encompasses two product areas: 1) Those which allow an insurance premium differentiation on the basis of environmentally relevant characteristics; and 2) Insurance products specifically tailored for clean technologies and emissions reducing activities. Mileage-based insurance is offered to vehicle owners. Discount is offered for hybrid and fuel efficient vehicles. Bank can also choose to offset vehicles annual emissions. There are some issues which impede the growth of Green financial products. Green products have still not been able to position themselves as an economically viable option as many lower cost products exist in the market. Unlike of what is happening today in Europe, where the market of "green" financial products & services is growing substantially, globally, even though the market appears to grow, it is in an early stage, with indefinite boundaries and without having gained unified characteristics, differentiating it from the traditional industries.

WALMART IN BANKING ?
http://www.mbaskool.com/business-articles/finance/187-walmart-in-banking-and-financial-sector.html

Banking in India
From Wikipedia, the free encyclopedia

Structure of the organised banking sector in India. Number of banks are in brackets.

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1770; both are now defunct. The oldest

bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955.
Contents
[hide]

1 History 2 Post-Independence 3 Nationalisation 4 Liberalisation 5 Adoption of banking technology 6 Further reading 7 References 8 External links

[edit]History

Merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.

Foreign banks too started to app, particularly in Calcutta, in the 1860s. The Comptoir d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (19141918) through the end of the Second World War (19391945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:
Number of banks that failed Authorised capital (Rs. Lakhs) Paid-up Capital (Rs. Lakhs)

Years

1913

12

274

35

1914

42

710

109

1915

11

56

1916

13

231

1917

76

25

1918

209

[edit]Post-Independence

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. TheGovernment 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:

The Reserve Bank of India, India's central banking authority, was established in April 1934, but was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[1]

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 could be opened without a license from the RBI, and no two banks could have common directors.

[edit]Nationalisation

Banks Nationalisation in India: Newspaper Clipping, Times of India, July 20, 1969

Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it

had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation."[2] The meeting received the paper with enthusiasm. Thereafter, her move was swift and sudden. The Government of India issued an ordinance ('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969')) and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. These banks contained 85 percent of bank deposits in the country[2]. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.
[edit]Liberalisation

In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized 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. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more.

Currently (2010), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.[3][4][5]
[edit]Adoption

of banking technology

The IT revolution had a great impact in the Indian banking system. The use of computers had led to introduction of online banking in India. The use of the modern innovation and computerisation of the banking sector of India has increased many fold after the economic liberalisation of 1991 as the country's banking sector has been exposed to the world's market. The Indian banks were finding it difficult to compete with the international banks in terms of the customer service without the use of the information technology and computers.

Number of branche of scheduled banks of India as of March 2005

The RBI in 1984 formed Committee on Mechanisation in the Banking Industry (1984)[6] whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of India. The major recommendations of this committee was introducing MICR[7] Technology in all the banks in the metropolis in India.This provided use of standardized cheque forms and encoders. In 1988, the RBI set up Committee on Computerisation in Banks (1988)[8] headed by Dr. C.R. Rangarajan which emphasized that settlement operation must be computerized in the clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram.It further stated that there should be National Clearing of inter-city cheques at Kolkata,Mumbai,Delhi,Chennai and MICR should be made Operational.It also focused on computerisation of branches and increasing connectivity among branches through computers.It also suggested modalities for implementing on-line banking.The committee submitted its reports in 1989 and computerisation began form 1993 with the settlement between IBA and bank employees' association.[9] In 1994, Committee on Technology Issues relating to Payments System, Cheque Clearing and Securities Settlement in the Banking Industry (1994)[10] was set up with chairman Shri WS Saraf, Executive Director, Reserve Bank of India. It emphasized on Electronic Funds Transfer (EFT) system, with the BANKNET communications network as its carrier. It also said that MICR clearing should be set up in all branches of all banks with more than 100 branches. Committee for proposing Legislation On Electronic Funds Transfer and other Electronic Payments (1995)[11] emphasized on EFT system. Electronic banking refers to DOING BANKING by using technologies like computers, internet and networking,MICR,EFT so as to increase efficiency, quick service,productivity and transparency in the transaction.

Number of ATMs of different Scheduled Commercial Banks Of India as on end March 2005
[9]

Apart from the above mentioned innovations the banks have been selling the third party products like Mutual Funds, insurances to its clients.Total numbers of ATMs installed in India by various banks as on end March 2005 is 17,642.[12]The New Private Sector Banks in India is having the largest numbers of ATMs which is fol off

site ATM is highest for the SBI and its subsidiaries and then it is followed by New Private Banks, Nationalised banks and Foreign banks. While on site is highest for the Nationalised banks of India. [9]
BANK GROUP NATIONALISED BANKS STATE BANK OF INDIA NUMBER OF BRANCHES ON SITE ATM OFF SITE ATM TOTAL ATM 33627 13661 3205 1548 800 1883 218 1567 3672 441 3729 579 4772 5220 1241 5612 797

OLD PRIVATE SECTOR BANKS 4511 NEW PRIVATE SECTOR BANKS 1685 FOREIGN BANKS [edit]Further 242

reading

The Evolution of the State Bank of India (The Era of the Imperial Bank of India, 1921-1955) (Volume III) Banking Frontiers - a monthly magazine, published by Mumbai based Glocal Infomart. Editor

[edit]References

1. 2.

^ Reference www.rbi.org.in ^ a b Austin, Granville (1999). Working a Democratic Constitution - A History of the Indian Experience. New Delhi: Oxford University Press. pp. 215. ISBN 0-19-565610-5.

3. 4.

^ "ICICI personal loan customer commits suicide after alleged harassment by recovery agents". Parinda.com. Retrieved 2010-07-28. ^ "Karnataka / Mysore News : ICICI Bank returns tractor to farmers mother". Chennai, India: The Hindu. 2008-06-30. Retrieved 2010-0728.

5. 6. 7. 8. 9. 10. 11. 12.

^ "ICICIs third eye : Its Indiatime". Indiatime.com. Retrieved 2010-07-28.[dead link] ^ "Computerisation of banking sector". ^ "MICR technology". ^ "Committee on Computerisation in Banks (1988)". ^a
bc d

INDIAN BANKING SYSTEM. I.K INTERNATIONAL PUBLISHING HOUSE PVT. LTD.. 2006. ISBN 81-88237-88-4.

^ "Reforms in banking system". ^ "Reforms of banking sector". ^ Indian banking system. I.K. International. 2006. ISBN i81-88237-88-4.