Documente Academic
Documente Profesional
Documente Cultură
Project Report
On
“Kaleidoscopic View on Indian Banking Sector”
PROJECT SUBMITTED TO
NIS Academy, Aurangabad
ACKNOWLEDGEMENTS
The Summer Internship Programme was undoubtedly a great learning experience for
me and has helped me learn immensely. I feel great pleasure in expressing my reg
ards and profound sense of gratitude to my faculty guide Mrs. Rajlaxmi Bhosale (
NIS Academy, Aurangabad) and company guide M/s.Sonali Dixit (Asst. Manager, HDFC
Bank, Aurangabad) for their inspiration, guidance and support in the completion
of this project report. I also express my sincere thanks to ICICI Bank, Auranga
bad which helped me to a great extent in conducting this study by providing me t
he required data. The constant support and inputs rendered by my guides were inv
aluable. I am extremely grateful to them for providing the necessary inputs, and
guidance at every stage of my project.
I express my sincere thanks to the administration of NIS Academy, Aurangabad who
provided adequate support and facilities to accomplish my work of data collecti
on and completion of project report on time. Last but not the least, I am highly
thankful to my friends who were always there whenever their support was needed.
Date:
Place: NIS Academy, Aurangabad.
INDEX
Sr no Title Page no
01 Introduction 4
02 Needs of the project 6
03 Objectives of the project 7
04 The role of economists in Banks 8
05 History of banks in India 10
06 Banks in India 14
07 Reserve Bank of India 15
08 Nature baking in India 20
09 Kinds of Banks 21
10 ROLE OF BANKS IN A DEVELOPING ECONOMY 23
11 BRANCH SETUP AND STRUCTURE 26
12 STRATEGIC ISSUES IN BANKING SERVICES 34
13 INNOVATION IN BANK 39
14 TECHNOLOGY IN BANKING 42
15 REGULATIONS AND COMPLIANCE 44
16 ENTREPRENEURSHIP 50
17 PERFORMANCE AND BENCHMARKING 52
18 RECENT MACROECONOMIC DEVELOPMENTS AND THE BANKING SYSTEM 59
19 HUMAN RESOURCE DEVELOPMENT IN BANKING-
66
20 Conclusion 67
21 Bibliography 68
INTRODUCTION
In my inaugural address last year, I had indicated a vision for Indian banking i
n the new millennium – that of a vibrant, internationally active banking system, d
rawing upon its innate strengths and comparative advantages to make India a majo
r banking centre of the world. I had pointed out then that, while it may take up
to 10 or even 15 years to achieve this vision, the time to begin was now. Recen
t developments have only served to bring forward the urgency attached to embarki
ng upon this quest. Even as we do so, it is necessary to recognize that, in view
of recent global developments and the economic slowdown, the progress towards t
his goal would call for even greater effort and determination. In this context,
the theme chosen for this year’s Conference i.e., "Indian Banking: Paradigm Shift"
is most timely as it provides an opportunity to deliberate on the new challenge
s ahead, and the action that we must take to manage them. I am happy to be a par
t of these deliberate ions and to deliver the inaugural address to the 23rd Conf
erence of Bank Economists here today. As you are aware, global economic prospect
s turned sharply adverse since September 2001 following the terrorist attacks on
the US. The possibilities of a recovery in the global economy have become highl
y uncertain, belying the initial expectations of a V-shaped recovery as well as
the subsequent hopes of a U-shaped recovery. As of now, the consensus of forecas
ts settles around 2.4 per cent for world GDP growth for 2001. World trade volume
growth could slow down to around 1.3 per cent and net capital outflows from dev
eloping countries may now be larger than anticipated earlier. Although the sharp
spurt in international oil prices has abated, their future behavior remains unc
lear. Macroeconomic weaknesses have also been associated with an erosion of busi
ness confidence. Insurance, airlines, tourism and hotel industries have been hit
hard and the exposure of financial institutions to these industries can be a po
tential source of vulnerability. Despite the relatively inward-looking nature of
the Indian economy, it cannot remain insulated from these international develop
ments. The direct effects of these external developments on our banking system a
re expected to be limited. Indirect effects, especially through exports and subd
ued industrial activity could, however, impact upon the asset quality of our ban
king system and other segments of the financial system. The need to constantly m
onitor international developments and take appropriate and often, preemptive act
ion add an entirely new dimension to the progress of our banking system towards
its longer-term vision. We have made considerable progress in implementing banki
ng and financial sector reforms. There is also some improvement in the financial
performance of the banking system in terms of various indicators of operating e
fficiency. Nevertheless, there are several areas regarding the efficiency of our
banking system – rather than its stability – that raise concerns, especially during
a period of generalized uncertainty. The level of non-performing assets (NPAs)
continues be high by international standards, preempting funds for provisioning
and eating into the performance and profitability of financial intermediaries. T
he response to the debt recovery and asset restructuring initiatives undertaken
as part of financial sector reforms has also been slow. In the period ahead, our
financial system will also have to prepare for a tightening of the prudential n
orms as the new Basel Accord becomes effective and a fuller response to the curr
ent financial environment emerges. Our financial institutions continue to be sus
ceptible to financial market turbulence, especially in the equity market. Upgrad
ing technical skills, technology, research and human capital, developing effecti
ve ‘front office’ strategies and fortifying internal rules of governance and respons
ibility assumes a renewed priority in the fast changing scenario. The face of ba
nking, as we have known it, is also changing rapidly. India is approaching an er
a of financial conglomorisation and ‘bundling’ in the provision of financial service
s. Besides infusing heightened competition, there are implications for the regul
atory and supervisory regime. Banks and financial institutions have to prepare f
or changes in the regulatory framework towards a more focused, comprehensive and
efficient environment that eschews regulatory forbearance. Legal reforms accord
ingly will have to ascend the hierarchy of priorities in the reform process. Aga
inst this background, in this talk, I propose to focus on the main challenges fa
cing Indian banking, such as, the role of financial intermediation in different
phases of the business cycle, the emerging compulsions of the new prudential nor
ms, and benchmarking the Indian financial system against international standards
and best practices. I will also say a few words about the changing context of r
egulation and supervision of the financial system in India, the need for introdu
cing new technology in the banking and financial system, and the importance of s
trengthening skills and intellectual capital formation in the banking industry.
BANKS IN INDIA:
In India the banks are being segregated in different groups. Each group has thei
r own benefits and limitations in operating in India. Each has their own dedicat
ed target market. Few of them only work in rural sector while others in both rur
al as well as urban. Many even are only catering in cities. Some are of Indian o
rigin and some are foreign players. All these details and many more are discusse
d over here. The banks and its relation with the customers, their mode of operat
ion, the names of banks under different groups and other such useful information
are talked about. One more section has been taken note of is the upcoming forei
gn banks in India. The RBI has shown certain interest to involve more of foreign
banks than the existing one recently. This step has paved a way for few more fo
reign banks to start business in India. Major Banks in India
ABN-AMRO Bank Abu Dhabi Commercial Bank American Express Bank Andhra Bank Allaha
bad Bank of Baroda Bank of India Bank of Maharashtra Bank of Punjab Bank of Raja
sthan Bank of Ceylon BNP Paribas Bank Canada Bank Catholic Syrian Bank Central B
ank of India Centurion Bank Indian Overseas Bank IndusInd Bank ING Vysya Bank Ja
mmu & Kashmir Bank JPMorgan Chase Bank Karnataka Bank Karur Vysya Bank Laxmi Vil
as Bank Oriental Bank of Commerce Punjab National Bank Punjab & Sind Bank Scotia
Bank South Indian Bank Standard Chartered Bank State Bank of India (SBI) State
Bank of Bikaner & jaipur
China Trust Commercial bank Citi Bank City Union Bank Corporation Bank Dena Bank
Deutsche Bank Development Credit Bank Dhanalakshmi Bank Federal Bank HDFC Bank
HSBC ICICI Bank IDBI Bank Indian Bank State Bank of Hyderabad State Bank of Indo
re State Bank of Mysore State Bank of Saurastra State Bank of Travancore Syndica
te Bank Taib Bank UCO Bank Union Bank of India United Bank of India United Bank
Of India United Western Bank UTI Bank Vijaya Bank
BANKING SERVICES IN INDIA:
With years, banks are also adding services to their customers. The Indian bankin
g industry is passing through a phase of customers market. The customers have mo
re choices in choosing their banks. A competition has been established within th
e banks operating in India. With stiff competition and advancement of technology
, the service provided by banks has become more easy and convenient. The past da
ys are witness to an hour wait before withdrawing cash from accounts or a cheque
from north of the country being cleared in one month in the south. This section
of banking deals with the latest discovery in the banking instruments along wit
h the polished version of their old systems.
RESERVE BANK OF INDIA (RBI):
The central bank of the country is the Reserve Bank of India (RBI). It was estab
lished in April 1935 with a share capital of Rs. 5 crores on the basis of the re
commendations of the Hilton Young Commission. The share capital was divided into
shares of Rs. 100 each fully paid which was entirely owned by private sharehold
ers in the beginning. The Government held shares of nominal value of Rs. 2, 20,0
00. Reserve Bank of India was nationalized in the year 1949. The general superin
tendence and direction of the Bank is entrusted to Central Board of Directors of
20 members, the Governor and four Deputy Governors, one Government official fro
m the Ministry of Finance, ten nominated Directors by the Government to give rep
resentation to important elements in the economic life of the country, and four
nominated Directors by the Central Government to represent the four local Boards
with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards c
onsist of five members each Central Government appointed for a term of four year
s to represent territorial and economic interests and the interests of co-operat
ive and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on A
pril 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the fun
ctioning of the Bank. The Bank was constituted for the need of following:
To regulate the issue of banknotes To maintain reserves with a view to securing
monetary stability and To operate the credit and currency system of the country
to its advantage.
• Functions of Reserve Bank of India
The Reserve Bank of India Act of 1934 entrust all the important functions of a c
entral bank the Reserve Bank of India.
• Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right t
o issue bank notes of all denominations. The distribution of one rupee notes and
coins and small coins all over the country is undertaken by the Reserve Bank as
agent of the Government. The Reserve Bank has a separate Issue Department which
is entrusted with the issue of currency notes. The assets and liabilities of th
e Issue Department are kept separate from those of the Banking Department. Origi
nally, the assets of the Issue Department were to consist of not less than two-f
ifths of gold coin, gold bullion or sterling securities provided the amount of g
old was not less than Rs. 40 crores in value. The remaining three-fifths of the
assets might be held in rupee coins, Government of India rupee securities, eligi
ble bills of exchange and promissory notes payable in India. Due to the exigenci
es of the Second World War and the post-was period, these provisions were consid
erably modified. Since 1957, the Reserve Bank of India is required to maintain g
old and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 c
rores should be in gold. The system as it exists today is known as the minimum r
eserve system.
• Banker to Government
The second important function of the Reserve Bank of India is to act as Governme
nt banker, agent and adviser. The Reserve Bank is agent of Central Government an
d of all State Governments in India excepting that of Jammu and Kashmir. The Res
erve Bank has the obligation to transact Government business, via. to keep the c
ash balances as deposits free of interest, to receive and to make payments on be
half of the Government and to carry out their exchange remittances and other ban
king operations. The Reserve Bank of India helps the Government - both the Union
and the States to float new loans and to manage public debt. The Bank makes way
s and means advances to the Governments for 90 days. It makes loans and advances
to the States and local authorities. It acts as adviser to the Government on al
l monetary and banking matters.
• Bankers Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers bank. According to the provisions
of the Banking Companies Act of 1949, every scheduled bank was required to main
tain with the Reserve Bank a cash balance equivalent to 5% of its demand liabili
ties and 2 per cent of its time liabilities in India. By an amendment of 1962, t
he distinction between demand and time liabilities was abolished and banks have
been asked to keep cash reserves equal to 3 per cent of their aggregate deposit
liabilities. The minimum cash requirements can be changed by the Reserve Bank of
India. The scheduled banks can borrow from the Reserve Bank of India on the bas
is of eligible securities or get financial accommodation in times of need or str
ingency by rediscounting bills of exchange. Since commercial banks can always ex
pect the Reserve Bank of India to come to their help in times of banking crisis
the Reserve Bank becomes not only the banker s bank but also the lender of the l
ast resort.
• Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to i
nfluence the volume of credit created by banks in India. It can do so through ch
anging the Bank rate or through open market operations. According to the Banking
Regulation Act of 1949, the Reserve Bank of India can ask any particular bank o
r the whole banking system not to lend to particular groups or persons on the ba
sis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank. The Reserve Bank of India is armed
with many more powers to control the Indian money market. Every bank has to get
a license from the Reserve Bank of India to do banking business within India, t
he license can be cancelled by the Reserve Bank of certain stipulated conditions
are not fulfilled. Every bank will have to get the permission of the Reserve Ba
nk before it can open a new branch. Each scheduled bank must send a weekly retur
n to the Reserve Bank showing, in detail, its assets and liabilities. This power
of the Bank to call for information is also intended to give it effective contr
ol of the credit system. The Reserve Bank has also the power to inspect the acco
unts of any commercial bank. As supreme banking authority in the country, the Re
serve Bank of India, therefore, has the following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and qualitat
ive controls.
(c) It controls the banking system through the system of licensing, inspection a
nd calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities
to scheduled banks.
• Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate o
f exchange. According to the Reserve Bank of India Act of 1934, the Bank was req
uired to buy and sell at fixed rates any amount of sterling in lots of not less
than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the B
ank was able to maintain the exchange rate fixed at lsh.6d. Though there were pe
riods of extreme pressure in favor of or against the rupee. After India became a
member of the International Monetary Fund in 1946, the Reserve Bank has the res
ponsibility of maintaining fixed exchange rates with all other member countries
of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve
Bank has to act as the custodian of India s reserve of international currencies
. The vast sterling balances were acquired and managed by the Bank. Further, the
RBI has the responsibility of administering the exchange controls of the countr
y.
• Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has c
ertain non-monetary functions of the nature of supervision of banks and promotio
n of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulat
ion Act, 1949 have given the RBI wide powers of supervision and control over com
mercial and co-operative banks, relating to licensing and establishments, branch
expansion, liquidity of their assets, management and methods of working, amalga
mation, reconstruction, and liquidation. The RBI is authorized to carry out peri
odical inspections of the banks and to call for returns and necessary informatio
n from them. The nationalization of 14 major Indian scheduled banks in July 1969
has imposed new responsibilities on the RBI for directing the growth of banking
and credit policies towards more rapid development of the economy and realizati
on of certain desired social objectives. The supervisory functions of the RBI ha
ve helped a great deal in improving the standard of banking in India to develop
on sound lines and to improve the methods of their operation.
• Promotional functions
With economic growth assuming a new urgency since Independence, the range of the
Reserve Bank s functions has steadily widened. The Bank now performs variety of
developmental and promotional functions, which, at one time, were regarded as o
utside the normal scope of central banking. The Reserve Bank was asked to promot
e banking habit, extend banking facilities to rural and semi-urban areas, and es
tablish and promote new specialized financing agencies. Accordingly, the Reserve
Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposi
t Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial
Development Bank of India also in 1964, the Agricultural Refinance Corporation
of India in 1963 and the Industrial Reconstruction Corporation of India in 1972.
These institutions were set up directly or indirectly by the Reserve Bank to pr
omote saving habit and to mobilize savings, and to provide industrial finance as
well as agricultural finance. As far back as 1935, the Reserve Bank of India se
t up the Agricultural Credit Department to provide agricultural credit. But only
since 1951 the Bank s role in this field has become extremely important. The Ba
nk has developed the co-operative credit movement to encourage saving, to elimin
ate moneylenders from the villages and to route its short term credit to agricul
ture. The RBI has set up the Agricultural Refinance and Development Corporation
to provide long-term finance to farmers.
KINDS OF BANKS:
Financial requirements in a modern economy are of a diverse nature, distinctive
variety and large magnitude. Hence, different types of banks have been institute
d to cater to the varying needs of the community. Banks in the organized sector
may, however, be classified in to the following major forms:
1. Commercial banks 2. Co-operative banks 3. Specialized banks 4. Central bank
COMMERCIAL BANKS: Commercial banks are joint stock companies dealing in money an
d credit. In India, however there is a mixed banking system, prior to July 1969,
all the commercial banks-73 scheduled and 26 non-scheduled banks, except the st
ate bank of India and its subsidiaries-were under the control of private sector.
On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Co
rers were nationalized. In April 1980, another six commercial banks of high stan
ding were taken over by the government. At present, there are 20 nationalized ba
nks plus the state bank of India and its 7 subsidiaries constituting public sect
or banking which controls over 90 per cent of the banking business in the countr
y.
CO-OPERATIVE BANKS: Co-operative banks are a group of financial institutions org
anized under the provisions of the Co-operative societies Act of the states. The
main objective of co-operative banks is to provide cheap credits to their membe
rs. They are based on the principle of self-reliance and mutual co-operation. Co
-operative banking system in India has the shape of a pyramid a three tier struc
ture, constituted by:Primary credit societies [APEX] Central co-operative banks
[District level] State co-operative banks [Villages, Towns, Cities]
SPECIALIZED BANKS: There are specialized forms of banks catering to some special
needs with this unique nature of activities. There are thus,
1. Foreign exchange banks, 2. Industrial banks, 3. Development banks, 4. Land de
velopment banks, 5. Exim bank.
CENTRAL BANK: A central bank is the apex financial institution in the banking an
d financial system of a country. It is regarded as the highest monetary authorit
y in the country. It acts as the leader of the money market. It supervises, cont
rol and regulates the activities of the commercial banks. It is a service orient
ed financial institution. India’s central bank is the reserve bank of India establ
ished in 1935.a central bank is usually state owned but it may also be a private
organization. For instance, the reserve bank of India (RBI), was started as a s
hareholders’ organization in 1935, however, it was nationalized after independence
, in 1949.it is free from parliamentary control.
From the structure we can see how the functional relationship works in a branch.
He structure also explains the reporting authority for each cadre of the employ
ees. It indicates the communication flow in the branch with well-defined account
ability on the part of the employees’ roles.
• TYPES OF BRANCHES: According to locations, there are four types’ bank branches. Th
ey are rural, semi urban, urban and metropolitan branches. The B.M. has special
role and functions in managing different types of branches.
• ORGANIZATION AND STRUCTURE OF COMMERCIAL BANK: Unit Bank Un Bank Group Banking G
roup Banking Mixed Banking Mixed Banking Branch Banking Branch Banking Chain Ban
king Chain Banking Correspondent Banking Correspondent Banking
• BANK ORGANIZATION SYSTEM IN INDIA: The large volume of work passing through the
banking system every day in the form of cash, cheque, and other credit instrumen
ts, together with the complexity of the many services rendered, calls not only f
or a high degree of skill, accuracy and knowledge on the part of the officials,
but also up-to-date and efficient methods of organization, accountancy and contr
ol. Shareholders and directors The Branch Manager The Chief Clerk The Remittance
or Waste Clerk The junior Clerk General Managers Branch Administration The Secu
rity Clerk Head office Administration Foreign Departments The cashier The day-bo
ok or Control Clerk Rotation of Duties, The Ledger-Keeper, The Shorthand Typist
Modern Banking Methods
INNOVATION IN BANK:
Innovation drives organizations to grow, prosper and transform in sync with the
changes in the environment, both internal and external. Banking is no exception
to this. In fact, this sector has witnessed radical transformation of late, base
d on many innovations in products, processes, services, systems, business models
, technology, governance and regulation. A liberalized and globalize financial i
nfrastructure has provided an additional impetus to this gigantic effort. The pe
rvasive influence of information technology has revolutionalized banking. Transa
ction costs have crumbled and handling of astronomical number of transactions in
no time has become a reality. Internationally, the number brick and mortar stru
cture has been rapidly yielding ground to click and order electronic banking wit
h a plethora of new products. Banking has become boundary less and virtual with
a 24 * 7 model. Banks who strongly rely on the merits of relationship banking’ as
a time tested way of targeting and serving clients, have readily embraced Custom
er Relationship Management (CRM), with sharp focus on customer centricity, facil
itated by the availability of superior technology. CRM has, therefore, become th
e new mantra in customer service management, which is both relationship based an
d information intensive. Risk management is no longer a mere regulatory issue.ba
sel-2 has accorded a primacy of place to this fascinating exercise by reposition
ing it as the core of banking. We now see the evolution of many novel deferral p
roducts like credit derivatives, especially the Credit Risk Transfer (CRT) mecha
nism, as a consequence. CRT, characterized by significant product innovation, is
a very useful credit risk management tool that enhances liquidity and market ef
ficiency. Securitization is yet another example in this regard, whose strategic
use has been rapidly rising globally. So is outsourcing.
• SOME RECENT INNOVATIONS IN INDIAN BANKING: Tandon can, however, usefully cast an
eye at one way of shopping without revealing his credit card number. HDFC Bank’s ‘N
et Safe’ card is a one-time use card with a limit that’s specified, taken from Tendo
n’s credit or debit card. Even if Tandon fails to utilize the full amount within 2
4 hours of creating the card, the card simply dies and the unspent amount in the
temporary card reverts to his original credit or debit card. Welcome to one of
the myriad ways in which bankers have been trying to innovate. They’re bringing AT
Ms, cash and even foreign exchange to their customers’ doorsteps. Indeed, innovati
on has become the hottest banking game in town. Want to buy a house but don’t want
to go through the hassles of haggling with brokers and the mounds of paperwork?
Not to worry. Your bank will tackle all this. It’s ready to come every step of th
e way for you to buy a house. Standard Chartered, for instance, has property adv
isors to guide a customer through the entire process of selecting and buying a h
ouse. They also lend a hand with the cumbersome documentation formalities and th
e registration. Don’t fret if you’ve already bought your house or car – you can do oth
er things with both. You can leverage your new house or car these days with bank
s like HDFC Bank and Stanchart ready to extend loans against either, till it’s abo
ut five years old. Loans are available to all car owners for almost all brands o
f cars manufactured in India that are up to five years old. Still, innovation is
more evident in retail banking. True, all banks offer pretty much the same suit
e of asset and liability products. But it’s the small tweaking here and there that
makes all the difference. Take, for example, the once staid deposits. Some bank
accounts combine a savings deposit account with a fixed deposit. A sweep-in acc
ount, as it is called, works like this: the account will have a cut-off, say, Rs
25,000; any amount over and above that gets automatically transferred to a fixe
d deposit which will earn the customer a clean 2 per cent more than the returns
that a savings account gives. Last month, Kotak Mahindra Bank introduced a varia
nt of the sweep-in account. If the balance tops Rs 1.5 lakh, the excess runs int
o Kotak’s liquid mutual fund. “Even if the money is there only for the weekend, a li
quid fund can earn you a clean 4.5 per cent per annum,” points out Shashi Arora, v
ice president, marketing, Kotak Mahindra Bank. That’s not a small gain considering
that your current account does not pay you any interest. And if, meanwhile, you
want to buy a big-ticket home theatre system, the minute you swipe your card th
e invested sum will return to your account. There’s plenty of innovation on home l
oans. ABN Amro sent the home mortgage market afire with its 6 per cent home loan
offering last year. The product offers a 6 per cent interest rate for two years
after which the interest rate is reset in tune with the prevailing market rate.
All the other big home loan players slashed their rates after this was announce
d. Look too at the home saver product and its variants from Citibank, HSBC and S
tanchart. The interest rate on the loan is determined by the balance you maintai
n in the savings account with the bank. The home builder can maintain a higher b
alance in his or her savings account and bring down the interest rate on the hom
e loan. The rate is calculated on a daily basis on the net loan amount. Stanchar
t claims that since the launch of its home saver product in April 2002, close to
40 per cent of its customers have chosen it. Says Vishu Ramachandran, regional
head, consumer banking, Standard Chartered: “We believe that there are several way
s to innovate and create value in the process, even in developed product areas.” B
anks are also attempting to reach out to residents of metropolitan cities where
people are pressed for time (what with long commuting hours, traffic jams and bo
th spouses working), beyond conventional banking hours. ICICI Bank, for example,
introduced eight to eight banking hours, seven days of the week, in major citie
s. Not to be outdone, some of the other private banks have also done this too. H
DFC Bank even has a 24-hour branch at Mumbai’s international airport. Several bank
s are even bringing ATMs to customer doorsteps. ICICI Bank, State Bank of India
and Bank of India now have mobile ATMs or vans that go along a particular route
in a city and are stationed at strategic locations for a few hours every day. Th
is saves the bank infrastructure costs since it has one mobile ATM instead of mu
ltiple stationary ones. That’s not all. Even money is delivered to customers at ho
me. Kotak Mahindra Bank, a late entrant into private banking, delivers cash at t
he doorstep. A customer can withdraw a minimum of Rs 5,000 and up to a maximum o
f Rs 2 lakh and get the money at home. And, mind you, Kotak is not alone. The li
st of banks offering a similar service includes Citibank, Stanchart, ABN Amro an
d HDFC Bank. HDFC Bank brings even foreign exchange, whether travelers cheques o
r cash, to your doorstep courtesy its tie-up with Travelex India. All one has to
do is call up the branch or HDFC Bank’s phone banking number. The bank’s country he
ad, retail, Neeraj Swaroop, believes that continuous innovation will always make
a difference, with customer needs changing day by day. “Innovation will never bec
ome less important for us,” he says. HDFC Bank has pioneered other innovations. Ta
ke point of sale (POS) terminals, a prerequisite in any store or restaurant wort
h its name in the country. Earlier this year, it tied up with Reliance Infocomm
to offer mobile POS terminals. Although this might sound a tad too fancy today,
there could soon be a day when you can swipe your card to pay your cabby, the pi
zza home delivery boy and even for the groceries from the local kirana store. Bu
t internet banking and shopping have been slow starters, given the low computer
penetration in the country but banks are going all out to get the customer onlin
e. Not only is electronic fund transfer between banks across cities possible thr
ough internet banking today but banks also offer other features that benefit the
customer. HDFC Bank, for instance, has an option called ‘One View’ on its internet
banking site which provides customers a comprehensive view of their investments
and fund movements. Customers can look at their accounts in six different banks
on one screen. These include HDFC Bank accounts and demat accounts, ICICI Bank,
Citibank, HSBC and Standard Chartered Bank accounts, apart from details of Citib
ank credit card dues and so on. Banks are also innovating on the company and tre
asury operations fronts. In corporate loans, plain loans are pass. Mumbai inter-
bank offered rate (MIBOR)-linked and commercial paper-linked interest rates on l
oans are common. MIBOR is a reference rate arrived at every day at 4 pm by Reute
rs. It is the weighted average rate of call money business transacted by 22 inst
itutions, including banks, primary dealers and financial institutions. The State
Bank of India was the first to usher in MIBOR-linked loans for top companies. S
oon enough, other banks followed. ICICI Bank carried out the world’s first ever se
curitization of a micro finance portfolio last year. The bank securitized Rs 4.2
crore for Bharatiya Samruddhi Finance Ltd for crop production. Banks, of course
, realize that innovation gives them only a first mover advantage until their ri
vals catch up. But then, they can console themselves. Isn’t imitation the best for
m of flattery?
TECHNOLOGY IN BANKING:
Nobel Laureate Robert Solow had once remarked that computers are seen everywhere
excepting in productivity statistics. More recent developments have shown how f
ar this state of affairs has changed. Innovation in technology and worldwide rev
olution in information and communication technology (ICT) have emerged as dynami
c sources of productivity growth. The relationship between IT and banking is fun
damentally symbiotic. In the banking sector, IT can reduce costs, increase volum
es, and facilitate customized products; similarly, IT requires banking and finan
cial services to facilitate its growth. As far as the banking system is concerne
d, the payment system is perhaps the most important mechanism through which such
interactive dynamics gets manifested. Recognizing the importance of payments an
d settlement systems in the economy, we have embarked on technology based soluti
ons for the improvement of the payment and settlement system infrastructure, cou
pled with the introduction of new payment products such as the computerized sett
lement of clearing transactions, use of Magnetic Ink Character Recognition (MICR
) technology for cheque clearing which currently accounts for 65 per cent of the
value of cheques processed in the country, the computerization of Government Ac
counts and Currency Chest transactions, operationalisation\ of Delivery versus P
ayment (DvP) for Government securities transactions. Two-way inter-city cheque c
ollection and imaging have been operationalised at the four metros. The coverage
of Electronic Clearing Service (Debit and Credit) has been significantly expand
ed to encourage non-paper based funds movement and develop the provision of a ce
ntralized facility for effecting payments. The scheme for Electronic Funds Trans
fer operated by the Reserve Bank has been significantly augmented and is now ava
ilable across thirteen major cities. The scheme, which was originally intended f
or small value transactions, is processing high value (up to Rs.2 crore) from Oc
tober 1, 2001. The Centralized Funds Management System (CFMS), which would enabl
e banks to obtain consolidated account-wise and centre-wise positions of their b
alances with all 17 offices of the Deposits Accounts Departments of the Reserve
Bank, has begun to be implemented in a phased manner from November 2001. A holis
tic approach has been adopted towards designing and development of a modern, rob
ust, efficient, secure and integrated payment and settlement system taking into
account certain aspects relating to potential risks, legal framework and the imp
act on the operational framework of monetary policy. The approach to the moderni
zation of the payment and settlement system in India has been three-pronged: (a)
consolidation, (b) development, and (c) integration. The consolidation of the e
xisting payment systems revolves around strengthening Computerized Cheque cleari
ng, expanding the reach of Electronic Clearing Services and Electronic Funds Tra
nsfer by providing for systems with the latest levels of technology. The critica
l elements in the developmental strategy are the opening of new clearing houses,
interconnection of clearing houses through the INFINET; optimizing the deployme
nt of resources by banks through Real Time Gross Settlement System, Centralized
Funds Management System (CFMS); Negotiated Dealing System (NDS) and the Structur
ed Financial Messaging Solution (SFMS). While integration of the various payment
products with the systems of individual banks is the thrust area, it requires a
high degree of standardization within a bank and seamless interfaces across ban
ks. The setting up of the apex-level National Payments Council in May 1999 and t
he operationalisation of the INFINET by the Institute for Development and Resear
ch in Banking Technology (IDRBT), Hyderabad have been some important development
s in the direction of providing a communication network for the exclusive use of
banks and financial institutions. Membership in the INFINET has been opened up
to all banks in addition to those in the public sector. At the base of all inter
-bank message transfers using the INFINET is the Structured Financial Messaging
System (SFMS). It would serve as a secure communication carrier with templates f
or intra- and inter-bank messages in fixed message formats that will facilitate ‘s
traight through processing’. All inter-bank transactions would be stored and switc
hed at the central hub at Hyderabad while intrabank messages will be switched an
d stored by the bank gateway. Security features of the SFMS would match internat
ional standards. In order to maximize the benefits of such efforts, banks have t
o take pro-active measures to: further strengthen their infrastructure in respec
t of standardization, high levels of security and communication and networking;
achieve inter-branch connectivity early; popularize the usage of the scheme of e
lectronic funds transfer (EFT); and Institute arrangements for an RTGS environme
nt online with a view to integrating into a secure and consolidated payment syst
em. Information technology has immense untapped potential in banking. Strengthen
ing of information technology in banks could improve the effectiveness of asset-
liability management in banks. Building up of a related data-base on a real time
basis would enhance the forecasting of liquidity greatly even at the branch lev
el. This could contribute to enhancing the risk management capabilities of banks
.
Conclusion
How close are we to the vision of a sound and well-functioning banking system th
at I outlined. It is fair to say that despite a turbulent year and many challeng
es, we have made some progress towards this goal. There has been progressive int
ensification of financial sector reforms, and the financial sector as a whole is
more sensitized than before to the need for internal strength and effective man
agement as well as to the overall concerns for financial stability. At the same
time, in view of greater disclosure and tougher prudential norms, the weaknesses
in our financial system are more apparent than before. There is greater awarene
ss now of the need to prepare the banking system for the technical and capital r
equirements of the emerging prudential regime and a greater focus on core streng
ths and niche strategies. We have also made some progress in assessing our finan
cial system against international best practices and in benchmarking the future
directions of progress. Several contemplated changes in the surrounding legal an
d institutional environment have been proposed for legislation.
The NPA levels remain too large by international standards and concerns relating
to management and supervision within the ambit of corporate governance are bein
g tested during the period of downturn of economic activity. The structure of th
e financial system is changing and supervisory and regulatory regimes are experi
encing the strains of accommodating these changes. Certain weak links in the dec
entralized banking and nonbank financial sectors have also come to notice. In a
fundamental sense, regulators and supervisors are under the greatest pressures o
f change and bear the larger responsibility for the future. For both the regulat
ors and the regulated, eternal vigilance is the price of growth with financial s
tability. We should strive to move towards realizing our vision of an efficient
and sound banking system of international standards with redoubled vigor. Our gr
eatest asset in this endeavor is the fund of technical and scientific human capi
tal formation available in the country. The themes which are being covered in th
is Conference under structural, operational and governance issues should help in
defining the road map for the future.
BIBILOGRAPHY
REFERENCE •
SITE NAME
WWW.BANKOFBARODA.COM
WWW.ICICIBANK.COM
WWW.STATEBANKOFINDIA.COM
WWW.BAMBOOWEB.COM/
ARTICLES/B/E/BENCHMARKING.HTML
WWW.DENABANK.COM
WWW.SUCCESSFULMANAGERS.COM
WWW.BIS.ORG/PUBL/BCBS123.PDF
WWW.IBA.ORG.IN/
WWW.RBI.ORG.IN
WWW.BANKINGINDIAUPDATE.COM
WWW.BIMALJALAN.COM
WWW.BIMALJALAN.COM
WWW.BANKNETINDIA.COM
• MAGAZINE NAME
BANKING ANNUAL-
BUSINESS STANDARD IBA-
BULLETIN BOBMAITRI
THE FINANCIAL EXPRESS
BANKING ANNUAL-
BUSINESS STANDARD
PROFESSIONAL BANKER-
THE ICFAI UNIVERSITY PRESS
• BOOK NAME
BANKING AND PRACTICE-P.N.VARSHNEW
BUSINESS MANAGEMENT-CAIIB EXAMINATION MONEY,
BANKING, INTERNATIONAL TRADE AND PUBLIC FINANCE ---D.M.MITHANI