2013

Name: Nisha Balkrishna S. College: R.K.T. college (CMC) T.Y.B.C.B.I. Roll No. 36534

 BANKING SYSTEM IN INDIA

1.Introduction:
A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry. A banking system also referred as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, through out the day. The banking system in India, should not only be hassle free but it should be able to meet the new challenges posed by the technology and any other external and internal factors. For the past three decades, Indias banking system has several outstanding achievements to its credit. The Banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguards the money and valuables and provide loans,credit, and payment services, such as checking accounts, money orders, and cashiers cheques. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have
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emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary roleaccepting deposits and lending funds from these deposits.

History of Banking in India

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:

Early phase of Indian banks, from 1786 to 1969 Nationalization of banks and the banking sector reforms, from 1969 to 1991 New phase of Indian banking system, with the reforms after 1991

The first bank in India, the General Bank of India, was set up in 1786. Bank of Hindustan and Bengal Bank followed. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840), and Bank of Madras (1843) as independent units and called them Presidency banks. These three banks were amalgamated in 1920 and the Imperial Bank of India, a bank of private shareholders, mostly Europeans, was established. Allahabad Bank was established, exclusively by Indians, in 1865. Punjab National Bank was set up in 1894 with headquarters in 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. The 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 1,100 banks,
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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 the Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965). The Reserve Bank of India (RBI) was vested with extensive powers for the supervision of banking in India as the Central banking authority. During those days, the general public had lesser confidence in banks. As an aftermath, deposit mobilization was slow. Moreover, the savings bank facility provided by the Postal department was comparatively safer, and funds were largely given to traders.

The government took major initiatives in banking sector reforms after Independence. In 1955, it nationalized the Imperial Bank of India and started offering extensive banking facilities, especially in rural and semi-urban areas. The government constituted the State Bank of India to act as the principal agent of the RBI and to handle banking transactions of the Union government and state governments all over the country. Seven banks owned by the Princely states were nationalized in 1959 and they became subsidiaries of the State Bank of India. In 1969, 14 commercial banks in the country were nationalized. In the second phase of banking sector reforms, seven more banks were nationalized in 1980. With this, 80 percent of the banking sector in India came under the government ownership.

This phase has introduced many more products and facilities in the banking sector as part of the reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up, which worked for the liberalization of banking practices. Now, the country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net
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banking are introduced. The entire system became more convenient and swift. Time is given importance in all money transactions. The financial system of India has shown a great deal of resilience. It is sheltered from crises triggered by external macroeconomic shocks, which other East Asian countries often suffered. This is all due to a flexible exchange rate regime, the high foreign exchange reserve, the not-yet fully convertible capital account, and the limited foreign exchange exposure of banks and their customers. The following are the major 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 : Nationalization 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 Crores.

Banking in India:
in the modern sense originated in the last decades of the 18th century. The first banks were Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct. The largest bank, and the oldest still in existence, 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
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being the Bank of Bombayand the Bank of Madras, all three of which were established under charters from the British East India Company. 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. For many years the presidency banks acted as quasi-central banks, as did their successors, until the Reserve Bank of India was established in 1935. In 1969 the Indian government nationalised all the major banks that it did not already own and these have remained under government ownership. They are run under a structure know as 'profit-making public sector undertaking' (PSU) and are allowed to compete and operate as commercial banks. The Indian banking sector is made up of four types of banks, as well as the PSUs and the state banks, they have been joined since 1990s by new private commercial banks and a number of foreign banks. Banking in India was generally fairly mature in terms of supply, product range and reach-even though reach in rural India and to the poor still remains a challenge. The government has developed initiatives to address this through the State bank of India expanding its branch network and through the National Bank for Agriculture and Rural Development with things like microfinance.

History In ancient India there is evidence of loans from the Vedic period (beginning 1750 BC). Later during the Maurya dynasty (321 to 185 BC), an instrument called adesha was in use, which was an order on a banker desiring him to pay the money of the note to a third person, which corresponds to the definition of a bill of exchange as we understand it today. During the Buddhist period, there

was considerable use of these instruments. Merchants in large towns gave letters of credit to one another. Colonial era During the period of British rule merchants established the Union Bank of Calcutta in 1829, first as a private joint stock association, then partnership. Its proprietors were the owners of the earlier Commercial Bank and the Calcutta Bank, who by mutual consent created Union Bank to replace these two banks. In 1840 it established an agency at Singapore, and closed the one at Mirzapore that it had opened in the previous year. Also in 1840 the Bank revealed that it had been the subject of a fraud by the bank's accountant. Union Bank was incorporated in 1845 but failed in 1848, having been insolvent for some time and having used new money from depositors to pay its dividends.[4] The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India, it was not the first though. That honour 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 appear, 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 inMadras and Pondicherry, then a French possession, 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 centre. 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 capitalised 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
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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:

Years

Number of banks Authorised capital Paid-up Capital that failed (Rs. Lakhs) (Rs. Lakhs)

1913 12

274

35

1914 42

710

109

1915 11

56

1916 13

231

1917 9

76

25

1918 7

209

The Banking Structure in India:

The commercial banking structure in India consists of scheduled commercial banks and unscheduled banks. Scheduled banks constitute those banks that are included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. As on June 30, 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise State Bank of India and its associates (8), nationalised banks (19), foreign banks (45), private sector banks (32), co-operative banks, and regional rural banks. Before the nationalization of Indian banks, the State Bank of India (SBI) was the only nationalized bank, which was nationalized on July 1, 1955, under the SBI Act of 1955. The nationalization of seven State Bank subsidiaries took place in 1959. After the nationalization of banks in India, the branches of the public sector banks rose to approximately 800 percent in deposits and advances took a huge jump by 11,000percent.

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Post-Independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralysing banking activities for months. India's independence marked the end of a regime of theLaissez-faire 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:

The Reserve Bank of India, India's central banking authority, was established in April 1935, but was nationalised on 1 January 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[5]

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.

Banks in India
In India, banks are segregated in different groups. Each group has its own benefits and limitations in operations. Each has its own dedicated target market. A few of them work in the rural sector only while others in both rural as well as urban. Many banks are catering in cities only. Some banks are of Indian origin and some are foreign players.
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Banks in India can be classified into:

Public Sector Banks Private Sector Banks Cooperative Banks Regional Rural Banks Foreign Banks One aspect to be noted is the increasing number of foreign banks in India. The RBI has shown certain interest to involve more foreign banks. This step has paved the way for a few more foreign banks to start business in India.

Classification of Banking Industry in India

Indian banking industry has been divided into two parts, organized and unorganized sectors. The organized sector consists of Reserve Bank of India, Commercial Banks and Co-operative Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc). The unorganized sector, which is not homogeneous, is largely made up of money lenders and indigenous bankers. An outline of the Indian Banking structure may be presented as follows:1. Reserve banks of India. 2. Indian Scheduled Commercial Banks. a) State Bank of India and its associate banks. b) Twenty nationalized banks. c) Regional rural banks. d) Other scheduled commercial banks. 3. Foreign Banks 4. Non-scheduled banks.
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5. Co-operative banks.

Indian Scheduled Commercial Banks

The commercial banking structure in India consists of scheduled commercial banks, and unscheduled banks.

Scheduled Banks:
Scheduled Banks in India constitute those banks which have been included in the second schedule of RBI act 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42(6a) of the Act. Scheduled banks in India means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the s State Bank of India (subsidiary banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank. For the purpose of assessment of performance of banks, the Reserve Bank of India categories those banks as public sector banks, old private sector banks, new private sector banks and foreign banks, i.e. private sector, public sector, and foreign banks come under the umbrella of scheduled commercial banks.

Regional Rural Bank:

The government of India set up Regional Rural Banks (RRBs) on October 2, 1975 [10]. The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, and small

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enterpreneurs. Initially, five RRBs were set up on October 2, 1975 which was sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. The total authorized capital was fixed at Rs. 1 Crore which has since been raised to Rs. 5 Crores. There are several concessions enjoyed by the RRBs by Reserve Bank of India such as lower interest rates and refinancing facilities from NABARD like lower cash ratio, lower statutory liquidity ratio, lower rate of interest on loans taken from sponsoring banks, managerial and staff assistance from the sponsoring bank and reimbursement of the expenses on staff training. The RRBs are under the control of NABARD. NABARD has the responsibility of laying down the policies for the RRBs, to oversee their operations, provide refinance facilities, to monitor their performance and to attend their problems.

Unscheduled Banks:
Unscheduled Bank in India means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank.

NABARD
NABARD is an apex development bank with an authorization for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas. In discharging its role as a facilitator for rural prosperity, NABARD is entrusted with: 1. Providing refinance to lending institutions in rural areas
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2. Bringing about or promoting institutions development and 3. Evaluating, monitoring and inspecting the client banks Besides this fundamental role, NABARD also: Act as a coordinator in the operations of rural credit institutions To help sectors of the economy that they have special credit needs for eg. Housing, small business and agricultural loans etc.

Co-operative Banks
Co-operative banks are explained in detail in Section II of this chapter

Services provided by banking organizations

Banking Regulation Act in India, 1949 defines banking as Accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand and withdrawable by cheques, drafts, orders etc. as per the above definition a bank essentially performs the following functions: Accepting Deposits or savings functions from customers or public by providing bank account, current account, fixed deposit account, recurring accounts etc. The payment transactions like lending money to the public. Bank provides an effective credit delivery system for loanable transactions. Provide the facility of transferring of money from one place to another place. For performing this operation, bank issues demand drafts, bankers cheques, money orders etc. for transferring the money. Bank also provides the facility of Telegraphic transfer or tele- cash orders for quick transfer of money. A bank performs a trustworthy business for various purposes. A bank also provides the safe custody facility to the money and valuables of the general public. Bank offers various types of deposit schemes for security of money. For keeping valuables bank provides locker facility. The lockers are small
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compartments with dual locking system built into strong cupboards. These are stored in the banks strong room and are fully secured. Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the government disbursements like pension payments and tax refunds also take place through banks. There are several types of banks, which differ in the number of services they provide and the clientele (Customers) they serve. Although some of the differences between these types of banks have lessened as they have begun to expand the range of products and services they offer, there are still key distinguishing traits. These banks are as follows: Commercial banks, which dominate this industry, offer a full range of services for individuals, businesses, and governments. These banks come in a wide range of sizes, from large global banks to regional and community banks. Global banks are involved in international lending and foreign currency trading, in addition to the more typical banking services. Regional banks have numerous branches and automated teller machine (ATM) locations throughout a multi-state area that provide banking services to individuals. Banks have become more oriented toward marketing and sales. As a result, employees need to know about all types of products and services offered by banks. Community banks are based locally and offer more personal attention, which many individuals and small businesses prefer. In recent years, online banks which provide all services entirely over the Internethave entered the market, with some success. However, many traditional banks have also expanded to offer online banking, and some formerly Internet-only banks are opting to open branches. Savings banks and savings and loan associations, sometimes called thrift institutions, are the second largest group of depository institutions. They were first
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established ascommunity-based institutions to finance mortgages for people to buy homes and still cater mostly to the savings and lending needs of individuals. Credit unions are another kind of depository institution. Most credit unions are formed by people with a common bond, such as those who work for the same company or belong to the same labour union or church. Members pool their savings and, when they need money, they may borrow from the credit union, often at a lower interest rate than that demanded by other financial institutions. Federal Reserve banks are Government agencies that perform many financial services for the Government. Their chief responsibilities are to regulate the banking industry and to help implement our Nations monetary policy so our economy can run more efficiently

Nationalization in the 1960s

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, the 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 Nationalization." The meeting received the paper with enthusiasm.
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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 19 July 1969. These banks contained 85 percent of bank deposits in the country. 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 nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second dose of nationalisation, 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 nationalised 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.

Nationalization Process

1955: Nationalization of State Bank of India 1959: Nationalization of SBI subsidiaries 1969: Nationalization of 14 major banks 1980: Nationalization of seven banks with deposits over Rs 200 crore
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Nationalisation
By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensured about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the Government of India (GOI) in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation". The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. 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 step of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second step of nationalisation, the GOI controlled around 91% of the banking business in India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalised 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. The nationalised banks were credited by some; including Home minister P.
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Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009.

Liberalization in the 1990s

In the early 1990s, the then 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 andHDFC Bank. This move, along with the rapid growth in the economy of India, revitalised 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 464 method (Borrow at 4%;Lend at 6%;Go home at 4) of
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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.

Liberalisation
In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalisation, 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, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of India revolutionized 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 setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions. The new 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 the traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), 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
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banks are considered to have clean, strong and transparent balance sheets as compared 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. 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 voted 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.

Banking Activities

Retail banking, dealing directly with individuals and small businesses Business banking, providing services to mid-market businesses Corporate banking, directed at large business entities Private banking, providing wealth management services to high networth individuals

Investment banking, activities in the financial markets, such as "underwrite" (guarantee the sale of) stock and bond issues, trade for their own accounts,
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make markets, and advise corporations on capital market activities like mergers and acquisitions

Merchant banking is the private equity activity of investment banks Financial services, global financial institutions that engage in multiple activities such as banking and insurance

Need of the Banks

Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there were no security of public savings and no uniformity regarding loans. So as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized banking sector works within the financial system to provide loans, accept deposits and provide other services to their customers. The following functions of the bank explain the need of the bank and its importance: To provide the security to the savings of customers. To control the supply of money and credit To encourage public confidence in the working of the financial system, increase savings speedily and efficiently. To avoid focus of financial powers in the hands of a few individuals and institutions. To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all types of customers

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Government policy on banking industry (Source:-The federal Reserve Act 1913 and The Banking Act 1933)
Banks operating in most of the countries must contend with heavy regulations, rules enforced by Federal and State agencies to govern their operations, service offerings, and the manner in which they grow and expand their facilities to better serve the public. A banker works within the financial system to provide loans, accept deposits, and provide other services to their customers. They must do so within a climate of extensive regulation, designed primarily to protect the public interests. The main reasons why the banks are heavily regulated are as follows: To protect the safety of the publics savings. To control the supply of money and credit in order to achieve a nations broad economic goal. To ensure equal opportunity and fairness in the publics access to credit and other vital financial services. To promote public confidence in the financial system, so that savings are made speedily and efficiently. To avoid concentrations of financial power in the hands of a few individuals and institutions. Provide the Government with credit, tax revenues and other services. To help sectors of the economy that they have special credit needs for eg. Housing, small business and agricultural loans etc.

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Law of banking
Banking law is based on a contractual analysis of the relationship between the bank and customerdefined as any entity for which the bank agrees to conduct an account. The law implies rights and obligations into this relationship as follows: The bank account balance is the financial position between the bank and the customer: when the account is in credit, the bank owes the balance to the customer; when the account is overdrawn, the customer owes the balance to the bank. The bank agrees to pay the customer's cheques up to the amount standing to the credit of the customer's account, plus any agreed overdraft limit. The bank may not pay from the customer's account without a mandate from the customer, e.g. cheques drawn by the customer. The bank agrees to promptly collect the cheques deposited to the customer's account as the customer's agent, and to credit the proceeds to the customer's account. The bank has a right to combine the customer's accounts, since each account is just an aspect of the same credit relationship. The bank has a lien on cheques deposited to the customer's account, to the extent that the customer is indebted to the bank. The bank must not disclose details of transactions through the customer's
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accountunless the customer consents, there is a public duty to disclose, the bank's interests require it, or the law demands it. The bank must not close a customer's account without reasonable notice, since cheques are outstanding in the ordinary course of business for several days. These implied contractual terms may be modified by express agreement between the customer and the bank. The statutes and regulations in force within a particular jurisdiction may also modify the above terms and/or create new rights, obligations or limitations relevant to the bank-customer relationship.

Regulations for Indian banks

Currently in most jurisdictions commercial banks are regulated by government entities and require a special bank license to operate. Usually the definition of the business of banking for the purposes of regulation is extended to include acceptance of deposits, even if they are not repayable to the customer's order although money lending, by itself, is generally not included in the definition. Unlike most other regulated industries, the regulator is typically also a participant in the market, i.e. a government-owned (central) bank. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries this is not the case. In UK, for example, the Financial Services Authority licenses banks, and some commercial banks (such as the Bank of Scotland) issue their own banknotes in addition to those issued by the Bank of England, the UK government's central bank. Some types of financial institutions, such as building societies and credit unions, may be partly or wholly exempted from bank license requirements, and therefore regulated under separate rules. The requirements for the issue of a bank license vary between jurisdictions but typically include:
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 Minimum capital Minimum capital ratio 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior officers Approval of the bank's business plan as being sufficiently prudent and plausible.

Current period
By 2010, banking in India was 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 timeespecially 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
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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 connexion with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide. Adoption of banking technology The IT revolution has had a great impact on the Indian banking system. The use of computers has led to the introduction of online banking in India. The use of computers in the banking sector in 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. Indian banks were finding it difficult to compete with the international banks in terms of customer service, without the use of information technology. The RBI set up a number of committees to define and co-ordinate banking technology. These have included:

In 1984 was formed the Committee on Mechanization in the Banking Industry (1984) whose chairman was Dr. C Rangarajan, Deputy Governor, Reserve Bank of India. The major recommendations of this committee were introducing MICR technology in all the banks in the metropolises in India. This provided for the use of standardized cheque forms and encoders.

In 1988, the RBI set up the Committee on Computerization in Banks (1988)[12] headed by Dr. C Rangarajan. It emphasized that settlement operation
28

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 from 1993 with the settlement between IBA and bank employees' associations.

In 1994, the Committee on Technology Issues relating to Payment systems, Cheque Clearing and Securities Settlement in the Banking Industry (1994) was set up under Chairman W S Saraf. It emphasized 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 those banks with more than 100 branches.

In 1995, the Committee for proposing Legislation on Electronic Funds Transfer and other Electronic Payments (1995) again emphasized EFT system.

Total numbers of ATMs installed in India by various banks as on end June 2012 is 99,218. The New Private Sector Banks in India are having the largest numbers of ATMs, which is followed by off-site ATMs belonging to SBI and its subsidiaries and then by Nationalised banks and Foreign banks. While on site is highest for the Nationalised banks of India.

29

 FINANCIAL SERVICES
Banking India cannot have a healthy economy without a sound and effective banking system. The banking system should be hassle free and able to meet the new challenges posed by technology and other factors, both internal and external. In the past three decades, India's banking system has earned several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to metropolises or cities in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main aspects of India's growth story. The government's regulation policy for banks has paid rich dividends with the nationalization of 14 major private banks in 1969. Banking today has become convenient and instant, with the account holder not having to wait for hours at the bank counter for getting a draft or for withdrawing money from his account.

Reserve Bank of India (RBI):

30

The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs 5 crore on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into fully paid shares of Rs 100 each, which was entirely owned by private shareholders in the beginning. The government held shares of nominal value of Rs 220,000. The RBI commenced operation on April 1, 1935, under the Reserve Bank of India Act, 1934. The Act (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted to meet the following requirements:

Regulate the issue of currency notes Maintain reserves with a view to securing monetary stability Operate the credit and currency system of the country to its advantage

Functions of RBI:
The Reserve Bank of India Act of 1934 entrusts all the important functions of a central bank with the Reserve Bank of India.

Bank of Issue:
Under Section 22 of the Act, the Bank has the sole right to issue currency 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 an agent of the government.

Banker to the Government:

The second important function of the RBI is to act as the governments banker, agent, and adviser.

Bankers' Bank and Lender of the Last Resort:

31

The RBI acts as the bankers' bank. Since commercial banks can always expect the RBI to come to their help in times of banking crisis, the RBI becomes not only the banker's bank but also the lender of the last resort.

Controller of Credit:
The RBI 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.

Custodian of Foreign Reserves:

The RBI has the responsibility to maintain the official rate of exchange. Besides maintaining the rate of exchange of the rupee, the RBI has to act as the custodian of India's reserve of international currencies.

Supervisory Functions:
In addition to its traditional central banking functions, the RBI has certain nonmonetary 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 Indian Banks Association (IBA) was formed on September 26, 1946,
with 22 members. Today, IBA has more than 156 members, such as public sector banks, private sector banks, foreign banks having offices in India, urban cooperative banks, developmental financial institutions, federations, merchant banks, mutual funds, housing finance corporations, etc. The IBA has the following functions:
32

Promote sound and progressive banking principles and practices. Render assistance and to provide common services to members. Organize co-ordination and co-operation on procedural, legal, technical, administrative, and professional matters.

Collect, classify, and circulate statistical and other information. Pool expertise towards common purposes such as cost reduction, increased efficiency, productivity, and improving systems, procedures, and banking practices.

Project good public image of banking through publicity and public relations. Encourage sports and cultural activities among bank employees.

33

 Globalization of banking in India:

International banks established in India since independence. Today all major international banks have operations in India. International banks aregoverned by applicable banking law. In addition they also fall under purview of FEMA (Foreign Exchange Management Act). With Globalisation, more and more foreign banks would get entry in India. Also, Major indian nationalized and private banks have overseas operations and branches.

Importance of international banking in India:

It is important that international banking has wider spread across india without any hurdles because it a need of the industry and desired growth. Following factorshighlighted the need and importance:

1. India poised to be the third largest in public private partnership PPP by the year 2025. PPP solicits participation of private sector enterprises in infrastructure was so far the monopoly and responsibility of the government. Private sector participation requires greater role of banks in this process. In PPP India is only behind US, China and Japan. 2. India has sixth largest in foreign exchange reserve. 3. India is haven for techno-MNCs- third biggest market for computer goods, cellur industry CAGR- 35%, which is highest in Asia Pacific and Japan. 4. Internationally acknowledged base for ITES (IT enabled services) segment. 5. Identification hub for auto component industry.
34

6. Foreign corporate in outright acquisitions, M&As and JVs 7. Vast industrial7services infrastructure.

Where Do We Stand in the Global Banking Arena?

In the international banking arena, size, innovation, efficiency and best standards of customer service alone matter. The top banks in the world belong to such category. There is no substitute for innovation to survive and lead in the new-age banking. The list of Top 500 Global Financial Brands 2009 brought out by The Banker magazine and Brand Finance Plc. reveals that banks such as HSBC, Bank of America, Wells Fargo, Santander, ICBC, American Express, Citi, BNP Paribas, China Construction Bank, and Chase are in the top ten league. SBI from India appears in the top 100 banks. Some of these banks like Citi, Wells Fargo, Bank of America, HSBC, BNP Paribas suffered huge credit losses during the crisis period requiring large capital infusion. Despite the fallout of global downturn, some banks have emerged winners during 2009. The Banker Awards 2009 enlists banks like Banco Santander (Western Europe), UniCredit (Central & Eastern Europe), Standard Chartered Bank (Asia) which emerged as global winners amidst crisis. Top banks are continuously adapting to changing web technology, applications, business models and competition. Internet banking has emerged as an important strategic mode aimed at reaching new generation customers. Banks such as Citi, HSBC and Standard Chartered are the dominant players in web banking adding next generation new customers. This medium has been extensively used to building deeper relationships with the customers, mobilising deposits, generating
35

payment and trading revenue, and cross-selling products. The Annual Survey of the World's Best Internet Banks 2008, conducted by Global Finance reveals that the top banks in this category are mainly Citi, HSBC and Standard Chartered. In the Asia-Pacific region, the Chinese bank, ICBC, emerges as the best consumer internet bank. If we look at top 100 banks from the emerging market economies, the recent survey indicates that China is at the top in terms of number of banks in this category at 14, followed by Brazil and Taiwan with 11 banks each. India has 7 banks that come in the list of top 100 banks of emerging markets. The top banks are always on the move to improve their standards of operations and customer delivery. In the world of finance, what matters to customers is service, quality of investments and trust. The survey by Global Finance has identified the best banks in 118 countries, as well as the best banks globally based on objective criteria such as growth in assets, profitability, geographic reach, strategic relationships, new business development and product innovation. Subjective criteria included the opinions of equity and credit-rating analysts, banking consultants and others in the industry, as well as corporate financial executives. The best banks are those with effective risk management systems, excellent service and good corporate governance. One might think that the current global financial crisis may put some brake on the ongoing financial liberalization process as part of GATS. The current crisis no doubt would lead to consolidation in global banking and the strong banks would emerge and dominate the scene. With the proposed improvements in the regulatory framework and risk management systems, there would be greater transparency in the global financial system. This should facilitate the WTO process of financial sector liberalization further, as the rules of the game would become clearer.
36

Global Financial Melt-down & the Future Direction

The crisis has shown the limits of the current regulatory and supervisory frameworks at both the domestic and international levels. The crisis was precipitated by monetary excesses in the form of very low interest rates for a long period in line with the policy pursued by the Federal Reserve and some other central banks. The low interest rates led to a housing boom which eventually ended in a bust and was a significant factor in the crisis. The low interest rates also were a probable factor in excessive risk-taking as people searched for higher yields. Although open financial markets provide tremendous benefits by lowering the cost of capital, the crisis has demonstrated that more effective regulation is needed to realize this potential. The financial innovation and integration have increased the speed and extent to which shocks are being transmitted across asset classes and economies. However, it is observed that regulation and supervision remain geared at individual financial institutions and do not adequately consider the systemic and international implications of domestic institutions' actions. Moreover, it is felt that macro-prudential tools did not sufficiently take into account business and financial cycles, which led to an excessive build-up of leverage. The global economy is deeply inter-related, rendering it impossible to isolate a country from the effects of the crisis emanating in major parts of the world. The resultant capital flow reversals, sharp widening of spreads on sovereign and corporate debt and abrupt currency depreciations have invalidated the 'decoupling hypothesis'. Growth prospects of emerging economies were undermined by the cascading financial crisis. Although the governments and central banks across countries responded to the crisis through pro-active and unconventional measures, there has been a contentious debate on whether these measures are adequate or appropriate and on
37

how abandoning the rule book, driven by short-term gains, is compromising medium-term sustainability. The crisis has made clear that new thinking and action are needed in at least three areas related to the global financial architecture: esign of financial regulation needs to be improved.

risk of crises and to address them when they occur. The challenge, therefore, is to design new rules and institutions that reduce systemic risks, improve financial intermediation, and properly adjust the perimeter of regulation and supervision, without imposing unnecessary burdens. It is also viewed that there should be a system of stress testing of financial models, including resulting credit and market risk exposures so that management and regulators can understand where the breakeven points are on liquidity, solvency and capital adequacy and also understand the key drivers or causes to those break even points. There has been a focused attention on enhanced transparency and disclosure of information to ensure financial stability and effective and smooth functioning of the markets.

Impact of Globalisation on Banking Services in India ...

The concept of Globalisation infers that the globe is a single unit which functions as one when it comes to decision-making. In other words, Globalisation implies the free movement of goods, services and capital throughout the world. Globalisation involves the opening up of national economies to global markets. This naturally and simultaneously results in the simultaneous reduction in the role of the State to shape national policies. Many Socialists define Globalisation as a primarily
38

economic phenomenon, which involves increasing interaction and integration of national economic systems. This leads in turn to growth in international trade, investment and capital flows. Moreover, there is a rapid increase in cross-border social, cultural and technological exchanges because of the phenomenon of globalisation. The sociologist defines globalisation as a decoupling of space and time. With the advent of instantaneous communications, knowledge, trade and culture can be shared around the world simultaneously. This will ultimately result in an increase in international trade, investment and capital flows. On the other hand, some critics define Globalisation as ''the worldwide drive towards a globalised economic system, dominated by supranational corporate trade and banking institutions that are not accountable to the democratic processes or national governments. Due to Globalization, all important institutions like the nation, state, family, work, services, trade, leisure, culture, knowledge etc. are changing. As a result of this, life styles of people throughout the world are also changing, making the world a single unit when it comes to decision making. The middle and late 90s witnessed great innovations in financial reforms, restructuring, convergence globalization etc. These were accompanied by a rapid revolution in communication technologies. Moreover, a major development was the evolution of the ''convergence'' of computer and communication technologies, such as the Internet, mobile / cell phones etc. The arrival of foreign and private banks with their superior, sophisticated technology-based services forced Indian Banks also to follow the same by going in for the latest technologies so as to meet the threat of competition and retain their customer base. This also brought in revolutionary products and services which have been orchestrated by the Indian Software Industry.
39

Software Packages for Banking Applications in India had their beginnings in the mid 80''s. This move was spurred on by RBI and the Rangarajan Committee Report which decided to computerize the Indian Banking branches in a limited manner. This move was aimed at promoting competition and allows an easy assessment of relative vendor capabilities. Gradually, even those who opposed computerization in government and banks changed their perspective and within a few years our country became a superpower in Information technology. The early 90s saw a fall in hardware prices and the advent of cheap and inexpensive but high-powered PCs and servers. Banks went in for what was called Total Branch Automation (TBA) Packages. We are now at the point when we have accepted the use of computers in every sphere of our activity today. Categories of Packages: The IT Packages and services available in India can be broadly classified into the following 6 types: 1. Stand-alone branch-level packages; 2. Multi-branch solutions; 3. Foreign packages; 4. Packages for specialized niche areas; 5. Service Branch / high-volume transaction processing packages; 6. IT Services; Thus, we have a wide spectrum of Banking Software available in the market to fulfill the various needs of the banking Industry. There are number of software companies, which are developing software for the banking industry. In today The entire banking sector has undergone a restructuring during recent years as a result of recent developments. New technologies have added to the competition.
40

The I-T revolution has made it possible to provide ease and flexibility in operations to customers thus making life simpler and easier. Rapid strides in information technology have, in fact, redefined the role and structure of banking in India. Further, due to exposure to global trends after Information explosion led by Internet, customers - both Individuals and Corporates - are now demanding better services with more products from their banks. The financial market has turned into a buyer's market. Banks are also coping and adapting with time and are trying to become one-stop financial supermarkets. The market focus is shifting from mass banking products to class banking with the introduction of value added and customised products. Public Sector Banks like SBI have also started focusing on this area. SBI plans to open 100 new branches called Personal Banking Branches (PBB) this year. The PBBs will also market SBI's entire spectrum of loan products: e.g. housing loans, car loans, personal loans, consumer durable loans, education loans, loans against shares and financing against gold. Customised banking products, such as Investment Advisory Services; photo-credit cards; cash Management services; Investment products and Tax Advisory services have already been introduced by a few foreign and private sector banks. A few banks have gone in to market mutual fund schemes. Eventually, the Banks plan to market bonds and debentures, when allowed. Insurance peddling by Banks will be a reality soon. The recent Credit Policy of RBI announced on April 27, 2000 has further facilitated the entry of banks in this sector. Banks also offer advisory services termed as 'private banking' to "high relationship value" clients. The bank of the future has to be essentially a marketing organisation that also sells banking products. New distribution channels are being used; more & more banks are introducing services like disbursement and servicing of consumer loans, Credit
41

card business. Direct Selling Agents (DSAs) of various Banks go out and sell their products. They make house calls to get the application form filled in properly and also take your passport-sized photo. Home banking has already become common. Now, you can order a draft or cash over the phone or internet and have it delivered home. ICICI was the first among the new private banks to launch its net banking service, called Infinity. It allows the user to access account information over a secure line, request cheque books and stop payment, and even transfer funds between ICICI Bank accounts. Citibank has been offering net banking to customers. Products like credit cards, debit cards, flexi deposits, ATM cards, personal loans including consumer loans, housing loans and vehicle loans have been introduced by a number of banks. Advantages for Corporates Corporates are also deriving profits from the increased variety of products and competition among the banks. Certificates of deposit, Commercial papers, Nonconvertible Debentures (NCDs) that can be traded in the secondary market are gaining popularity. Recently, market has also seen major developments in treasury advisory services. With the introduction of Rupee floating rates for deposits as well as advances, products like interest rate swaps and forward rate agreements for foreign exchange, risk management products like forward contracts, option contracts and currency exchange are offered by almost every authorised dealer bank in the market. This list of services is still growing. Conclusion: Unfortunately, several concerns related to the banking sector still remain. The chief among these is the matter of ownership and control. In the near future, India will be forced to apply the norms of developed countries to the Banking Industry. Consequently, many Indian banks (including some of the biggest) will show very poor return ratios and dozens of banks will go bankrupt.
42

Thus, it becomes imperative that the Banking Industry should streamline itself and become more compatible with global norms in the fields of operation and services Indian Banks have huge financial resources at their disposal. We started with aggregate deposits of about 5000 Crores in the Sixties which increased to 10 Lakh Crores this millennium. This denotes a 200-hundred-fold growth in three decades. A major tool which we have at our disposal is our knowledge capital-something which is being grossly under utilized currently. This is an extremely valuable type of capital. In banking we are short of intangible assets. Our knowledge capital is quite crucial to the success of banking in India. This we cannot garner from outside; neither can we go in for a public issue to mobilise intangible assets. Therefore banking employees have to embrace the need for higher learning and better knowledge. Banking in India has immense potential given the population figures in our country. With a little effort, careful planning and timely legislation this industry can be brought on par with the best banks in the world.

Source Article by: Rupali Sagar

43

Globalization of Indian Banking SectorChallenges & Future Prospects

Source: Dr. R.K. Uppal* Rimpi Kaur** * Head, Dept. of Economics, D.A.V. College, Malout (Punjab) **Research Scholar, Punjabi University, Patiala E-mail rkuppal_mlt@yahoo.com Mb. 98729-61700, 01637-261188 (R)

Globalization of Indian Banking Sector - Challenges & Future Prospects _________________________________________________________________ Globalization is both a challenge and an opportunity for Indian banks to gain strength in the domestic market and increase presence in the global market. On the basis of various parameters, paper finds that there is a fast penetration of foreign banks in India and public sector banks, particularly SBI is intensively entering in foreign countries, same is the case of ICICI Bank as this bank is capturing foreign markets at a fast pace. At the end, the present paper finds some challenges and also explores the future opportunities. On the basis of the experience of already global went banks, paper suggests some strategies that how Indian banks can make their presence effective in the global market. __________________________________________________________________

44

Introduction Globalization refers to widening and deeping of international flow of trade, capital, labour, technology, information and services. Globalization has led to an overall economic, political and technological integration of the world. In our country, first economic reforms (1991) gave birth to globalization and second phase of banking sector reforms strengthened the globalization. Various reform measures introduced in India have indeed strengthened the Indian banking system in preparation for the global challenges ahead. The major impact of banking sector reforms can be viewed from the following chart:

Indian Banking on the Reforms Path Reforms Initiatives 1. Deregulation of deposit interest rate 2. Increase in Capital Adequacy Ratio 3. Deregulation of lending rates 4. Lower CRR & SLR 5. Asset classification and provisioning norms 3. Flexibility to price loan products and competitive pricing 4. Availability of more funds for lending 5. Encourage banks to strengthen their credit and this brought down the NPA generate 6. Increase competition rate 2. More stability in the banking system Impact on Banks 1. Helped banks to gain control over cost of deposits

7. Entry into new business

6. Pressure to retain customers, enhance

45

lines 8. Increased thrust on banking supervision and risk management

service quality and efficiency 7. Emerge as financial super markets and build the top and bottom line 8. Help banks in proper allocation of funds across various business lines and adapt global best practices of risk management to enhance their competitiveness.

Globalization, which is outcome of economic reforms, is both a challenge and an opportunity for Indian banks to gain strength in the domestic market and increase presence in the global market. The present paper analyzes the impact of globalization on Indian banking from the point view of penetration of Indian banks in foreign countries and compares the performance of Indian banks particularly the performance of branches operating in foreign countries with that of foreign banks operating in India and at the end suggests some strategies for the globalization of Indian banks. Organization of the paper After the brief introduction, section II fixed the objectives and methodology of the study. Section III analyses the results. Section IV finds some challenges and explores some future opportunities whereas section V suggests some strategies for the effective globalization of Indian banks. Last part concludes the paper. Objectives: The thrust of the paper is to know the extent of globalization of Indian banks and suggests strategies for the globalization of Indian banks especially in the context of the issues raised under this paper. To study and analyze the impact of globalization on Indian banking sector
46

 To find the challenges and explore the future opportunities for Indian banks in the global markets To suggest some strategies for the globalization of Indian banks

Methodology The present paper analyzes the performance of Indian banks in comparison to foreign banks working in our country. The performance of our bank branches in foreign countries also analyzes in this paper. This study is based on secondary data and analysis is made at group level. Time period of the study is 2000-01 to 200405. This period has been chosen taking into consideration the following factors:

The process of interest rate liberalization, which started in 1992, was fully liberalized (especially that of deposit rate) in 1997.

New private sector banks started entering the banking business in a big way from 1997.

Data Sources: 1. Report on Trend and Progress of Banking in India (Various Issues) 2. Performance Highlights of Banks 2000-2001 to 2004-05 Indian Banking Association 3. IBA Bulletin, Vol. XXV, No.3, March 2003 4. Indian Bankers, Vol. I, No. 3, March 2006 To make the comparison of performance of Indian and foreign banks in India, simple and overall %age growth rate is calculated in selected parameters of performance. Parameters of the Study

47

The comparative performance of the bank groups is analyzed on the basis of the following parameters: 1. %age growth in branches of all bank groups separately in India and abroad 2. %age growth in business of all bank groups separately in India and abroad 3. %age growth in per employee business of all bank groups 4. %age growth in per branch business of all bank groups separately in India and abroad 5. %age growth in per employee profit/loss of all bank groups 6. %age growth in per branch profit/loss of all bank groups 7. %age growth in investments of all bank groups separately in India and abroad 8. %age growth in fee-based income of all bank groups

Results & Discussion

Penetration of Indian Banks and Foreign Banks Number of branches of SBI and its associate banks has increased in 2004-05 from 13509 to 13767 i.e. at 1.91 pc rate of growth and the branches of this bank group is penetrating in global markets also with the growth rate of 3.85 pc as these branches increased from 52 to 54 during the study period. Similarly, the number of branches of nationalized banks has increased from 32686 to 33862 at the end of the study period whereas they are fastly penetrating in foreign countries too at 5.63 pc growth rate which is higher than the growth rate of branches in India i.e. 3.60 pc. The penetration of old private sector banks is very less in global market. Overall, branches of new private sector banks have become almost double during the study period and show the growth at the rate of 96.78 pc, which is the highest
48

among all the bank groups. This group is fastly spreading their business in rural, semi-urban, urban and metropolitan cities and capturing Indian market with the greater share. Some banks have started capturing foreign markets particularly ICICI Bank is fastly entering in foreign countries at 100 pc growth rate. Table-I: Bank Group-Wise Percentage Growth Rate of Branches in India and Abroad G-I Years India 200001 Abroa d G-II India Abroa d G-III India Abroa d 1 G-IV India Abroa d 1 G-V India

13509 52

32686 71

4423

808 987 (22.1 5) 989

190 154 (18.95) 184 (19.48)

200102

13542 51 (0.24) (-1.92)

32710 71 (0.07) 00

4211 (-4.79) 3758 (10.76) 4414 (17.46) 4536

1 (00)

1 (00)

200203

13574 48 (0.24) (-5.88)

33060 70 (1.07) (-1.41)

1 (00) 0 (-

(0.20) (00) 1179 (19.2 2 (100.00 ) 2

200304

13630 48 (0.41) 00 13767 54

33343 73 (0.86) (4.29) 33862 75

205 (11.41) 257

100.00) 1) 0 1590

2004-

49

05

(1.01) (12.50)

(1.56) (2.74)

(2.76)

(34.8 6)

00

(20.23)

Overall Growt h Rate (%) Source: Performance Highlights of IBA Publications since 2000-01 to 2004-05 Note: (i) Parentheses values shows simple percent growth rate (1.91) (3.85) (3.60) (5.63) (2.55) ((96.7 (100) (7.32)

100.00) 8)

(ii) G-I (SBI & its Associates), G-II (Nationalized Banks), G-III (Old Private Sector Banks), G-IV (New Private Sector Banks) & G-V (Foreign Banks)

The number of branches of foreign banks are rapidly penetrating in urban and metropolitan cities of our country. There were only 190 branches in the 2000-01 in India and in 2004-05 these have become 257. The overall growth rate of foreign branches in India is 7.32 pc, which is the highest rate among the Indian banking. Citibank, ABN Amro Bank, Grindlays Bank, Standard Charted Bank are prominent which are penetrating in our country with increasing number of their branches in India. Overall, we may conclude that the presence of foreign banks is rapidly increasing and they are capturing Indian market in a big way. Bank Group-Wise Business in India and Abroad (Table-II): At the end of the study period all the bank groups shows positive growth in business inside and
50

outside India as it ranges between 68 to 260 pc in India and 56 to 350 pc outside India. New private sector banks are dominating in overall growth rate of business within the country with the growth at 260.30 pc rate and establishing very effective place in foreign countries too with 350.47 pc growth in their business outside India. ICICI, HDFC and UTI Banks are taking a lions share in business in foreign countries. The business of foreign banks in India shows 58.35 pc growth, which is lesser as compared to business of Indian banks in foreign countries. Overall, we can say that new private sector banks are taking lead to enter in global markets in a big way and it is an alarming bell for our public sector banks to survive in the global market.

Table-II: Bank Group-Wise Percentage Growth Rate of Business in India and Abroad G-I Years India 43980 5 49432 2 2001-02 (12.4 0) (-6.23) (14.7 7) (19.33) 21288 Abroa d 2000-01 22703 77173 9 88568 8 47444 India G-II Abroa d 39757 G-III India 11135 0 G-IV Abroa Indi d 369 a 9300 6 1646 66 00 (77.0 5) Abro ad 00 G-V India 10218 7 10317 7 (0.97)

12009 429 0 (16.26

(7.85) )

51

55907 1 2002-03 (13.1 0) 63082 4 2003-04 (12.8 3) 75222 8 2004-05 (19.2 5) Overall Growth Rate (%) 71.04 68.03 (54.27) 38148 (16.83) 24728 (-0.57) 21166

10006 35 (12.9 8) 11541 10 (15.3 4) 13778 05 (19.3 8) 61826 (17.01) 52836 (10.37) 47873 (0.90)

14038 6 (16.9 0) 16752 7 (19.3 3) 18759 5 (11.9 8)

482 (12.35 )

2052 03 00 (24.6 1) 2432 16 (18.5 2) 3351 04 (37.7 8) 9658 (350. 47) 2144

12146 8 (17.73 ) 13895 2 (14.39 ) 16181 6 (16.45 )

532 (10.37 )

624 (17.29 )

78.53

55.51

68.47

69.11

260.3 350.4 0 7

58.35

Bank Group-Wise Per Employee Business (Table-III): Business (per employee) is the maximum in public sector banks where the overall growth rate is 156 pc and 93 pc respectively of SBI group and nationalized banks whereas it was only 17 pc and 30 pc in case of new private sector banks and foreign banks respectively. The low business per employee in new private sector banks and foreign banks is due to

52

rapid increase in number of employees as these bank groups are in the expansion stage. Table-III: Bank Group-Wise Business Per Employee (Rs. In Lakhs) Years 2000-01 2001-02 2002-03 2003-04 2004-05 Overall Growth Rate (%) 155.63 92.50 61.50 16.82 30.01 G-I 160 182 (13.75) 205 (12.64) 234 (14.15) 409 (74.49) G-II 160 197 (23.12) 221 (12.18) 256 (15.84) 308 (20.31) G-III 200 227 (13.50) 254 (11.89) 286 (12.60) 323 (12.94) G-IV 749 906 (20.96) 740 (18.32) 872 (17.84) 875 (0.34) G-V 723 956 (32.23) 862 (-9.83) 987 (14.50) 940 (-4.76)

Bank Group-Wise Per Branch Business in India and Abroad (Table-IV): The overall growth rate is the maximum in new private sector banks i.e. 83.09 pc in India and it is varying between 68 to 72 pc in public sector banks. Table-IV: Bank Group-Wise %age Growth Rate of Per Branch Business in India and Abroad G-I Years India 32.56 Abroa d 436.60 G-II India 23.61 Abroa d 559.96 G-III India Abro ad G-IV Indi a 115. Abro ad 00 G-V India 537.83
53

2000-

25.18 369.0

01 27.08 (14.7 0) 28.52 (13.2 6)

0 429.0 0 (16.2 6) 482.0 0 (12.3 5)

11 166. 83 00 (44.9 3) 207. 49 00 (24.3 7) 206. 29 1072. 00 (-1.47) 660.15 (24.57) 669.98

200102

36.50 (12.1 0)

417.41 (-4.40)

668.23 (19.34)

200203

41.19 (12.8 5)

440.96 (5.64)

30.27 (11.7 8)

683.90 (2.35)

37.36 (31.0 0)

46.28 200304 (12.3 6)

515.17 (16.83)

34.61 (14.3 4)

723.78 (5.83)

37.95 (1.58 ) 00

677.81 (2.68)

(0.58) 210. 76 00 (2.17 (350. ) 47) 4829. 00

54.64 200405 (18.0 6) Overall Growt h Rate (%) 67.81

706.44 (37.13)

40.69 (17.5 7)

824.35 (13.90)

41.36 (8.99 )

629.63 (-7.11)

61.80

72.34

47.22

64.26 30.62

83.0 9

350.4 7

17.07

54

But the per branch business of foreign banks is increased at the rate of 17.07 pc in our country which is the lowest among all the Indian bank groups. In case of per branch business in foreign countries, new private sector banks show increase of 350.47 pc and in case of public sector banks, it is varying between 47.22 to 61.80 pc. We may conclude that our new generation banks are entering in foreign countries in a big way with the excellent growth of their business. Bank Group-Wise Per Employee Profit/Loss (Table-V): It is also the highest in public sector banks as compared to that of new private sector banks and foreign banks. The overall growth rate is 124 to 162 pc in public sector banks and was only 60 pc and 75 pc respectively in new private sector banks and foreign banks. Hence, the profits of public sector banks are growing at an excellent rate of growth as compared to new private sector banks and foreign banks.

Table-V: Bank Group-Wise Profit Per Employee (Rs. In Lakhs) Years 2000-01 2001-02 G-I 0.78 G-II 0.41 G-III 2.76 1.89 (31.52) G-IV 5.15 4.56 (11.46) G-V 6.60 12.17 (84.39) 15.45 (26.95) 14.35 (7.12)

1.21 (55.13) 0.51 (24.39)

2002-03

1.59 (31.40) 0.65 (27.45) 2.32 (22.75) 6.91 (51.54)

2003-04 2004-05

2.00 (25.79) 0.78 (20.00) 2.76 (18.97) 6.48 (-6.22) 2.04 (2.00) 0.92 (17.95) 0.57 (-

8.26 (27.47) 11.52 (55

79.35) Overall Growth Rate (%) 161.54 124.39 -79.35 60.39

19.72)

74.55

Bank Group-Wise Per Branch Profit/Loss (Table-VI): The overall growth in per branch profits is observed the highest in nationalized banks as it was 366.67 pc and new private sector banks with the growth rate of 159.49 pc and SBI group with the growth rate of 156.25 pc are in succession whereas it was negative in old private sector banks i.e. 36.36 pc and only 55.13 pc in foreign banks. Overall per branch profits of all bank groups except old private sector banks are growing at excellent rate of growth.

Table-VI: Bank Group-Wise Per Branch Profit/Loss (Rs. In Lakhs) Years 2000-01 2001-02 G-I 0.16 0.25 (56.25) G-II 0.06 0.15 (150.00) G-III 0.11 0.24 (118.18) G-IV 0.79 0.84 (6.33) 1.74 (107.14) G-V 4.97 8.55 (72.03)

2002-03 2003-04 2004-05

0.33 (32.00) 0.23 (53.33) 0.33 (37.50) 0.41 (24.24) 0.33 (43.48) 0.33 (00) 0.41 (00) 0.28 (15.15) 0.07 (78.79)

9.88 (15.56)

2.28 (31.03) 10.29 (4.15) 2.05 (10.09) 7.71 (25.04)

56

Overall Growth Rate (%) 156.25 366.67 -36.36 159.49 55.13

Bank Group-Wise Investments in India and Abroad (Table-VII): The overall growth rate in investments is positive in all the bank groups. In case of growth of investments in India, it is the highest in new private sector banks i.e. 186.61 pc whereas it was 67 pc and 70 pc respectively in SBI group and nationalized banks. On the other hand, investments of Indian banks in foreign markets, it is grown at the highest in case of new private sector banks i.e. 18800 pc rate of which is unbelievable. But it ranges between 17 to 40 pc in case of public sector banks and that of foreign banks investments in India shows growth at 18.87 pc rate of growth. Moreover, still investments of our banks in foreign countries are far better than the investments of foreign banks in our country. Table-VII: Bank Group-Wise Percentage Growth Rate of Investments in India and Abroad G-I Years India 200001 15323 1 18095 0 (17.87) (18.0 (12.6 Abroa d 3961 G-II India 23057 9 25977 0 (43.94) (11.8 Abroa d 6336 G-III India 2988 0 3340 9 Abro ad 128 G-IV Indi a 3202 1 Abro ad 8 G-V India

35763

200102

4669

9120

85 (33.59

6395 12 3 (50.0

32846 (-8.16)

(99.7 0)

57

9) 21890 200203 4 (20.9 7) 24331 200304 0 (11.1 5) 25606 200405 (5.24) Overall Growt h Rate (%) 67.11 17.19 3 3992 (10.53) 4462 (-4.43)

6) 31213 4 (20.1 6) 37041 0 (18.6 7) 39107 4 (5.58) 8464 (16.75) 10167 (11.48)

1) 3991 7 (19.4 8) 4960 9 (24.2 8) 4560 8896 (15.10) 6 (8.07)

2) 6731 9

85 (00)

(-

40795 (24.20)

(5.26 25.00 ) ) 361 (3911 .1)

84 (1.18)

8035 0 (19.3 6) 9177 4 (14.2 2)

40886 (0.22)

4642 (16.28)

76 (9.52)

1512 (318. 84)

42518 (3.99)

69.61

40.40

52.63

40.63

186. 61

18800 .0

18.89

Bank Group-Wise Fee-Based Income (Table-VIII): Due to deregulation of interest rates on deposits and advances, fee-based income has become significant part of the total income. Overall, growth rate is the highest in new private sector banks i.e. 373.40 pc and it is the lowest i.e. 26.66 pc in old private sector banks. This rate is varying between 77 to 94 pc in public sector banks. In case of foreign
58

banks, it was 53.76 pc during the study period. Hence, we can conclude that except our old private sector banks, all our banks have more growth in their fee-based income in comparison of foreign banks fee-based income in India. Table-VIII: Bank Group-Wise Fee-Based Income Years 2000-01 2001-02 G-I 5356 6017 (12.34) 7998 (32.92) 10919 (36.52) 9467 (13.30) G-II 7159 10525 (47.02) 13273 (36.11) 17120 (28.98) 13903 (18.79) G-III 1039 2150 (106.93) 2361 (9.81) G-IV 1060 2113 (99.34) 14320 (577.71) 4720 (67.04) 5018 (6.31) G-V 2513 2963 (17.91) 3071 (3.64) 3834 (24.85) 3864 (0.78)

2002-03

2003-04

2522 (6.82) 1316 (47.82)

2004-05 Overall Growth Rate (%)

76.76

94.20

26.66

373.40

53.76

We can make the following inferences based on the analysis of the above parameters: Indian banks are essentially Indian in their operations and have marginal presence in the global markets. New private sector banks are competing successfully with the foreign banks. New private sector banks are rapidly penetrating in foreign countries New private sector banks are making heavy investments in foreign countries Foreign banks are capturing Indian market in a big way
59

 Overall globalization is fastly taking place allover the world On the basis of these aspects, there is a need for Indian banks to look for global opportunities and build their competitive strength to face the challenges accordingly.

Table-I: Overall Percentage Growth Rate in Selected Parameters G-I Years Abro India ad Branches (1.91 ) Business (3.85) G-II India Abro ad G-III India Abroa d (100.00 ) G-IV India Abro ad G-V Indi a (7.32 ) 58.3 5 17.0 7 55.1 3

(3.60 )

(5.63)

(2.55 )

(96.7 8)

(100)

71.04 68.03

78.53 55.51

68.47 69.11

260.3 350.4 0 83.09 159.4 9 7 350.4 7 NA

Business per branch Profit per branch Investments

67.81 61.80

72.34 47.22

64.26 30.62

156.2 5

NA

366.6 7

NA

36.36

NA

67.11 17.19

69.61 40.40

52.63 -40.63

186.6 18800 18.8 1 373.4 0 .0 NA 9 53.7 6

60

Fee-based income 76.76 NA 94.20 NA

26.66 NA

Globalization- Its Challenges for Indian Banks The benefits of globalization have been well documented and are being increasingly recognized, but at the same time it has thrown many challenges for Indian banks. It affects the banking industry in one or more of the following ways: 1. Greater and intensive competition 2. Focus on efficiency, productivity and cost reduction 3. Superior risk management system and practices 4. Strengthening service quality, delivery and cross selling of products/services 5. Product innovation as an integral part of the retail banking revolution 6. Upgradation of technological infrastructure 7. Competency building and investment in human capital as a catalyst for transformation 8. Consolidation within the financial system 9. Opportunity to increase size and scale to gain dominance in the local market and penetrate into the global markets 10.Transparency, disclosure and market discipline It is, therefore, imperative for Indian banks to address all the above issues, if they aspire to play a role in the global arena.

Globalization and Future Opportunities for Indian Banks Globalization will gain greater speed in the coming years with the opening up of the financial sectors under WTO regime. Consolidation of Banks: Consolidation is a crucial preparatory step to be undertaken by banking sector in India. Weak banks need to exit and one of the options will be to merge with a stronger bank. Mergers amongst public sector banks are politically very
61

sensitive, therefore the government has a big role in establishing the framework, which will include flexible labour laws. Increased revenue, size and scale Increased productivity by reducing transaction cost Benefits to stakeholders through lesser intermediation cost Increased ability to meet competition from global banks Easy mobilizing resources from the market Asset Quality: Indian banks should concentrate on asset quality and earnings there from. Global Players and Customers Satisfaction: In the emerging scenario, with more and more global players operating in India, there has been an urgent need to serve the customers promptly and efficiently. Competitiveness in Banks: Domestic banks should begin to make themselves as competitive as possible. They should also increase their productivity and profitability because at the present day context, size is no longer a key indicator in the banking industry. E-Delivery Channels: The Indian banks particularly public sector banks should create awareness among the masses about all the e-delivery channels with demo for how to operate and use. They should provide efficient services through edelivery channels. Autonomy in HRM: Autonomy in HRM areas such as deciding categorization of branches, vacancy, placements should be given to banks. Efficient Capital Markets: An efficient capital market should be developed to channelize private savings into infrastructure financing.
62

Privatization of Public Sector Banks: Productivity, profitability and efficiency is quite higher in partially privatized public sector banks. The government should continue the process to make the Indian banks competitive at the global level. Resources Optimization: Asset optimization, which include unlocking money from real estate investment to strengthening capital, human resources optimization and value sourcing with the focus on risk and associated benefits besides cost arbitrage. Customer Experience: Creating uniform transaction experience, developing appropriate delivery strategies and strengthening CRM are some of the key requirements for banks.

Strategies for Globalization of Indian Banks The following are the strategies for the globalization of Indian banks: Cadre of Experts A cadre of experts needs to be built up; personnel should have exposure in functioning in truly global environment. Information Technology Indian banks must build their expertise in rolling out technology and in Basel- II. IT can explore new possibilities in foreign countries. International Capital Markets We should be active in international capital markets, approaching them off and on for trenches of capital subscription. Indian banks should try to capture at lower cost.

63

Linkages with other financial organization Indian banks have linkage with the rest of the finance infrastructure in India such as term lenders, investment banks, insurance ventures and credit rating agencies. Together they can face even tough competition at global level. Strategic alliances Strategic alliances with national banks in oil rich countries can be very valuable, especially as Indian and China are becoming large consumers and there is an expectation of large India related and Asia- related investments in this sector and these countries. Acquisitions of Retail Banks Acquisitions should be of retail banks in selected markets. The selection will depend on the ability to implement technology, improve customer service and upgrade to Basel-II. Research of Products and Services Indian banks should make comprehensive research in foreign countries regarding the financial requirements of the people and then they should enter in a big way. Prices of Products and Services At the initial stages Indian banks should provide products and services at comparatively lower prices to capture their market share. Change in Mind- Set The bankers should change their own mindset to win the customers in other countries. A friendly customers environment should help to penetrate in other countries.

64

Alliance with Big Houses/Companies Indian banks should make some alliance with profit making big houses and companies to capture foreign market. Effective Advertisements Indian banks should make effective and attractive advertisements according to the customers tastes regarding our financial products. Incentives Indian banks should provide lurement and incentives to the potential customers in the beginning. Effective CRM Indian banks should make effective CRM in foreign countries. It will help to win potential customers. Experiences and Lessons from Banks Which Went Global Going global is the way forward for banks to gain size and scale. It is a natural progression for any organization. However, there are mixed experiences e.g. - In India, Grindlays Bank sold its Indian operation to Standard Charted Bank and exited. - BNP Paribas, though, present in India for more than hundred years, decided to shut its Indian operations - SBI, e.g. had to close its Panama branch for bad external relations - Though there are 33 foreign banks operating in our country, only top four, others only in India have marginal presence - SBI presently has planed to increase its presence in the global market from the present 54 to 75 branches
65

Some of the lessons that can be drawn are as under: - A major lesson is that the management processes in the cross-border initiative should be aligned with the culture. There are two vital aspects, every country should keep in mind: (a) Differing national cultures, and (b) Differing corporate cultures The failures of Japanese banks in US partly relate to culture mismatch. It is necessary to announce at the time of acquisition itself as to what the approach/goals of the acquired entity will be post-acquisition. - After acquisition, effective methods should be adopted for all the transactions. - Risk management needs maximum focus when expanding internationally. - While entering new areas, especially internationally, there is a need for the top management to be aware of the emerging areas in finance.

Conclusion Globalization in its purest form is a global village with no boundaries. The size of the market is the entire world. Indian banks have negligible presence in the global market. But foreign countries are penetrating in our country a big way, their investments are increasing and they are capturing Indian market fastly in urban and metropolitan cities. Globalization is both a challenge and an opportunity for Indian banks to gain strength in the global market. As the legal and state environment is increasingly becoming conducive what is needed is a mindset to look beyond the horizons.

66

Indian banks today have everything, they need to do only one thing dream big. The world will then follow them. Future Areas for Intensive Research The government and other various research organizations should make comprehensive research in the following areas to get the fruits of the globalization: 1. Foreign banks and portfolio investments 2. Indian banks and portfolio investments 3. Profitable segments in foreign countries for investments 4. Possibilities of merger and acquisition of Indian banks 5. Perceptions and expectations about Indian financial products in foreign countries

Bibliography Banerjee, S. (2005), Technological Upgradation: Impact on Service Quality, Charted Financial Analyst, (Oct.), pp. 77-80 Batra, G.S. (2000), Globalization and Liberalization - New Developments, (Deep & Deep Publications: New Delhi) Kern, H (2005), Global Retail Banking: Changing Paradigms, Charted Financial Analyst, (Oct.), pp. 56-58 Mittal, S. (2006), Globalization: Issues and Challenges, Charted Financial Analyst, (Oct.), pp. 42-44

67

Santhanakrishan, S (2005),

Globalization: Impact on Indian Banking,

Charted Financial Analyst, (Oct.), pp. 61-64 Saez, L. (2005), Basel II: Implication on Indian Banking, Charted Financial Analyst, (Oct.), pp. 74-76 Swain, B. K. (2006), Globalization of Banking Services: An Overview, Paper was presented in International Conference organized by IILM, New Delhi (17th-18th, Feb.)

Changing Structure of Indian Banking

The banking sector is the most dominant sector of the financial system in India, and with good valuations and increasing profits, the sector has been among one of the top performers in the economy. The financial sector liberalisation and entry of many private banks have brought about considerable changes in the structure of banking industry. Although public sector banks (PSBs) dominate the Indian banking system, the increasing competition in the banking has led to falling share of PSBs and increasing share of the new private sector banks. The PSBs now (2008-09) account for 71.8% of the aggregate assets, a decline from 79.5% in 2000-01. In deposits, the share of PSBs declined from 81.4% to 76.6% during the same period. The new private sector banks increased their share significantly - from 6% to 15.2% in assets and from 5.9% to 13.2% in deposits. Interestingly, foreign banks' share in assets increased only marginally by 0.6% to 8.5%, while in deposits the share remained the more or less same at about 5.4%. The share of new private banks in profits has gone up substantially by 6% during the period, while that of PSBs
68

declined by 2.2% and old private sector banks by 3.3%. The old private sector banks' share in assets and deposits also went down during the period. Thus, it may be observed that the new private sector banks have dominated the banking industry in terms of growth in assets, deposits and profit.

Table 1: Indian Banks - Growth in Assets, Deposits & Net Profits (% share) (2000-01 & 2008-09) 2000-01 2008-09 2000-01 2008-09 2000-01 2008-09 Public Sector Banks 79.51% 71.87% 81.44% 76.61% 67.42% 65.17% New Private Sector Banks 6.08% 15.18% 5.96% 13.22% 9.99% 16.03% Old Private Banks 6.53% 4.43% 6.99% 4.90% 7.84% 4.56% Foreign Banks 7.88% 8.53% 5.62% 5.27% 14.76% 14.23% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Category of Banks Assets Deposits Net Profit Note: Data on assets & deposits are as on March-end of the year. The Indian banking sector throws open huge potential in the areas of retail banking, rural banking, investment banking, internet banking, and there is scope for greater consolidation in the sector. Retail segment has grown manifold and it is estimated that to grow at a rate of 28-30 per cent during the coming years. It is providing needof- the-hour services like round-the-clock accessibility through automated teller machines (ATMs), mobile and internet banking. It is also offering services like Demat/Depository services, plastic money (credit and debit cards), and online transfers. Banks have increased their ATM network over the past three years. The concept of Core Banking Solution (CBS), which enables a customer to complete numerous banking operations online, has grown significantly especially in the past 5 years. Electronicfund transfer facilities and mobile banking is expected to further strengthen the retail banking segment in the future. Further,
69

rural India's credit requirement is estimated to be huge, which offers immense potential for the banks and corporates alike. It is estimated that banking, financial services and insurance (BFSI), together account for 38-40 per cent of India's outsourcing industry. According to a report by McKinsey and NASSCOM, India has the potential to process 30 per cent of the banking transactions in the US. Outsourcing by the BFSI to India is expected to grow at an annual rate of 30-35 per cent. Also, with numerous mergers and acquisition deals by Indian corporates, investment banking income has gone up to a record high. Investment banking revenue from India is estimated to have crossed the USD 1000 million-mark as against USD 400 million in 2006. This surge in income has propelled India to become one of largest market for investment banking in AsiaPacific. Some Indian banks like ICICI Bank, Kotak Mahindra Bank are already into this space and some banks such as HDFC also are now planning to expand into this area. There have been a large number of mergers in international banking and in the process large banks are growing even bigger as a response to the challenges of competition Indian Banking - Challenges of Globalization and aimed at synergising operations and achieving scale economics. All of us would agree that mergers should, in the normal course, be driven by business needs and should lead to the growth of stronger and sound banks both in public and private sector. Mergers amongst strong units can be both a means of strengthening them as also providing for greater opportunities for competition. Consolidation is seen to be the next big thing in the banking sector, which is yet to gain pace in India. It is viewed that there is a need to develop 5-6 big banks in the country through consolidation in the financial sector to be able to face up to global competition. The issue of consolidation has been addressed by the Narasimham Committee Report on
70

Banking Sector Reforms, but the same is yet to be pursued vigorously. There have been some mergers and amalgamations (details of which are given in the tables below), but not of big scale or size as one would have expected in the light of the ongoing reform process. The consolidation process in recent years has primarily been confined to a few mergers in the private sector segment. Year Target Acquirer 2000 Times Bank HDFC Bank 2001 Bank of Madura (BOM) ICICI Bank 2005 Bank of Punjab (BoP) Centurion Bank 2006 Ganesh Bank of Karundwad Federal bank 2007 Sangli Bank ICICI Bank 2007 Lord Krishna Bank (LKB) Centurion Bank of Punjab (CBoP) 2008 Centurion Bank of Punjab (CBoP) HDFC Bank Table 2: Bank Mergers : 2000-2008 Year Target Acquirer 1999 Bareilly Corp Bank Bank of Baroda 1999 Sikkim Bank Union Bank of India 2004 Global Trust Bank (GTB) Oriental Bank of Commerce (OBC) 2006 United Western Bank (UWB) IDBI Bank Table 3: Amalgamation of Private Sector Banks with Public Sector Banks Year Target Acquirer 2002 ICICI ICICI Bank 2005 IDBI Bank IDBI 1999 Twentieth Century Finance Corp Ltd Centurion Bank 2003 Twentieth Century Finance Corp Ltd IndusInd Bank 2003 Kotak Mahindra Finance Ltd Kotak Mahindra Bank Table 4: Amalgamation between DFIs / NBFCs and Private Sector Banks
71

Any process of consolidation must come out of a felt need for merger rather than as an imposition from outside. The synergic benefits must be felt by the entities themselves. There are three aspects to consolidation viz. clear-cut legal and regulatory regime governing consolidation, enabling policy framework especially where several banks are owned by Government, and market conditions that facilitate such consolidation, recognising that all mergers and acquisitions may not necessarily be in the interest of either the parties concerned or the system as a whole. In order that Indian banks are to rise to global size and scale of operations, there is a need to give thrust on greater consolidation and internationalization of operations, without of course compromising on quality. Any meaningful consolidation among the public sector banks must be driven by commercial motivation by individual banks, with the government and the regulator playing at best a facilitating role. China's Banking Sector In the context of analyzing the challenges facing the Indian financial system, I feel it is pertinenet to look at what is happening in China. Like in India, Chinese banking sector is characterised by the predominance of the state-owned commercial banks. The joint-stock banks and foreign-funded banks have also become more and more active in the banking sector. Before 1995, People's Bank of China, the central bank of China, was the sole regulator of China's financial market. In 1995, for prudential consideration, China decided to adopt a segregated regulatory framework in its financial system, which led to the establishment of two new regulatory authorities, namely China Securities Regulatory Commission, and China Insurance Regulatory Commission, which are responsible for supervising the securities and insurance sectors respectively, while the People's Bank of China remains as the regulator of the banking sector. After this systemic adjustment, China's capacity to regulate the
72

financial market and keep away financial risks and crises seems to have improved. As regards opening up of the sector, way back in 1979, foreign banks were allowed to set up representative offices in China. The representative office of Japan Export and Import Bank was established in Beijing, which was the first representative office of foreign banks in China. In July 1981, foreign banks were allowed to conduct foreign exchange business in Shenzhen and other Special Economic Zones (SEZs). In September 1990, Shanghai became the first coastal city to be opened to foreign banks following five other SEZs, which was further expanded to other seven coastal cities subsequently. In January 1999, the geographic restrictions on the establishment of foreign banks were lifted and foreign banks were allowed to conduct business in all main cities of China. Foreign banks were allowed to conduct the local currency business on a pilot basis. With the deepening of China's reform and opening-up process, foreign banks accelerated their entrance into China's banking market. The regulatory framework of China's banking sector has been gradually reformed and reinforced consistent with international practices. Further, China has made commitments to open up the economy and the banking sector consequent to its accession to the WTO set-up in 2001. While foreign banks have greater access to Chinese market, Chinese banks are also accelerating their pace to "go abroad". It is observed that liberalization of the banking sector has played a major role in improving the function of China's financial system, which should keep the process going on in China. Thus, it is clear that China is making all efforts to be a major player in the global banking sector. India, being only next to China in terms of market size in the developing world, has the challenge of coping with competition that is going to emerge in the years to come.

73

References:
RBI, Entry of New Banks in the Private Sector - Discussion Paper, August 2010. RBI, Monetary and Credit Information Review, Volume I, Issue 6, March 2005. RBI, Annual Monetary Policy Statement, April 20, 2010 RBI, RBI Bulletin, Various Issues. Securities Times, "Progress Made in China's Financial Sector Reform" (Beijing: People's Bank of China). Landau, Jean-Pierre, "Complexity and the Financial Crisis", Deputy Governor of the Bank of France, Speech delivered at the Conference organized by Bank of France and the Deutsche Bundesbank on June 08, 2009. Leeladhar, V., Indian Financial Sector Reforms, Address by Deputy Governor, RBI at the International Banking & Finance Conference 2008 organised by the Indian Merchants' Chamber, Mumbai, April 17, 2008.

74

75

76

Index
1 2 3 4 5 6 7 8 9 10

77