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Increasing competition in banking sector in india
CHAPTER-1
HISTORY AND DEVELOPMENT OF BANKING INDUSTRY
Finance is the life blood of trade, commerce and industry. Financial services
refer to services provided by the finance industry. The finance industry
encompasses a broad range of organizations that deal with the management of
money. Among these organizations are credit unions, banks, credit card
companies, insurance companies, consumer finance companies, stock
brokerages, investment funds and some government sponsored enterprises.
A bank is a financial institution that serves as a financial intermediary. In other
words, bank is a financial organization where people deposit their money to
keep it safe. That’s only part of how a bank works, though. A bank is a business
like a video store, a restaurant, or a skating rink. The business needs to make
enough money to pay the people who work there and the cost of things like
electricity, paper, and even paper clips. If you look at the diagram below, you
will see an example of how a bank earns enough money to stay in business.
In order for a bank to stay open, it needs to get a lot of people to put their
money in it. Each bank tries to make THEIR bank look better than all of the
others by offering services that some other banks might not have. Another way
to get more people to put their money in the bank is to pay them interest.
Interest is extra money the bank gives you to keep your money there. This
means that you earn money on every dollar you put into the bank. . Now-a-days,
bank money acts as the backbone of modern business. Development of any
country mainly depends upon the banking system.
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The term bank is derived from the French word Banco which means a Bench or
Money exchange table. In olden days, European money lenders or money
changers used to display (show) coins of different countries in big heaps
(quantity) on benches or tables for the purpose of lending or exchanging.
According to Oxford Dictionary a bank is defined as "an establishment for
custody of money, which it pays out on customer's order."
Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009
financial year to a record $96.4 trillion while profits declined by 85% to
$115bn. Growth in assets in adverse market conditions was largely a result of
recapitalisation. EU banks held the largest share of the total, 56% in 2008/2009,
down from 61% in the previous year. Asian banks' share increased from 12% to
14% during the year, while the share of US banks increased from 11% to 13%.
Fee revenue generated by global investment banking totaled $66.3bn in 2009,
up 12% on the previous year.
The United States has the most banks in the world in terms of institutions (7,085
at the end of 2008) and possibly branches (82,000). This is an indicator of the
geography and regulatory structure of the USA, resulting in a large number of
small to medium-sized institutions in its banking system. As of Nov 2009,
China's top 4 banks have in excess of 67,000 branches (ICBC:18000+,
BOC:12000+, CCB:13000+, ABC:24000+) with an additional 140 smaller
banks with an undetermined number of branches. Japan had 129 banks and
12,000 branches. In 2004, Germany, France, and Italy each had more than
30,000 branches—more than double the 15,000 branches in the UK
The economic functions of banks include:
1. Issue of money- in the form of banknotes and current accounts subject to cheque
or payment at the customer's order. These claims on banks can act as money
because they are negotiable or repayable on demand, and hence valued at par.
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They are effectively transferable by mere delivery, in the case of banknotes, or
by drawing a cheque that the payee may bank or cash.
2. Netting and settlement of payments – banks act as both collection and paying
agents for customers, participating in interbank clearing and settlement systems
to collect, present, be presented with, and pay payment instruments. This
enables banks to economise on reserves held for settlement of payments, since
inward and outward payments offset each other. It also enables the offsetting of
payment flows between geographical areas, reducing the cost of settlement
between them.
3. Credit intermediation – banks borrow and lend back-to-back on their own
account as middle men.
4. Credit quality improvement – banks lend money to ordinary commercial and
personal borrowers (ordinary credit quality), but are high quality borrowers. The
improvement comes from diversification of the bank's assets and capital which
provides a buffer to absorb losses without defaulting on its obligations.
However, banknotes and deposits are generally unsecured; if the bank gets into
difficulty and pledges assets as security, to raise the funding it needs to continue
to operate, this puts the note holders and depositors in an economically
subordinated position.
5. Maturity transformation – banks borrow more on demand debt and short term
debt, but provide more long term loans. In other words, they borrow short and
lend long. With a stronger credit quality than most other borrowers, banks can
do this by aggregating issues (e.g. accepting deposits and issuing banknotes)
and redemptions (e.g. withdrawals and redemptions of banknotes), maintaining
reserves of cash, investing in marketable securities that can be readily converted
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to cash if needed, and raising replacement funding as needed from various
sources (e.g. wholesale cash markets and securities markets).
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it
should be able to meet new challenges posed by the technology and any other
external and internal factors. For the past three decades India's banking system
has several outstanding achievements to its credit. The most striking is its
extensive reach. It is no longer confined to only metropolitans or cosmopolitans
in India. In fact, Indian banking system has reached even to the remote corners
of the country. This is one of the main reason of India's growth process. The
government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalisation of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money. Today, he has a choice. Gone
are days when the most efficient bank transferred money from one branch to
other in two days. Now it is simple as instant messaging or dial a pizza. Money
have become the order of the day.
The first bank in India, though conservative, was established in 1786. From
1786 till today, the journey of Indian Banking System can be segregated into
three distinct phases. They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks
Nationalisation of Indian Banks and up to 1991 prior to Indian banking
sector Reforms.
New phase of Indian Banking System with the advent of Indian Financial
& Banking Sector Reforms after 1991.
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The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:
1949 : Enactment of Banking Regulation Act.
1955 : Nationalisation of State Bank of India.
1959 : Nationalisation of SBI subsidiaries.
1961 : Insurance cover extended to deposits.
1969 : Nationalisation of 14 major banks.
1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks.
1980 : Nationalisation of seven banks with deposits over 200 crore.
After the nationalisation of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a huge jump by
11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith
and immense confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the
liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are
being put to give a satisfactory service to customers. Phone banking and net
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banking is introduced. The entire system became more convenient and swift.
Time is given more importance than money.
The financial system ofx India has shown a great deal of resilience. It is
sheltered from any crisis triggered by any external macroeconomics shock as
other East Asian Countries suffered. This is all due to a flexible exchange rate
regime, the foreign reserves are high, the capital account is not yet fully
convertible, and banks and their customers have limited foreign exchange
exposure.
The Banking Industry was once a simple and reliable business that took
deposits from investors at a lower interest rate and loaned it out to
borrowers at a higher rate.
However deregulation and technology led to a revolution in the Banking
Industry that saw it transformed. Banks have become global industrial
powerhouses that have created ever more complex products that use risk and
securitisation in models that only PhD students can understand. Through
technology development, banking services have become available 24 hours a
day, 365 days a week, through ATMs, at online bankings, and in electronically
enabled exchanges where everything from stocks to currency futures contracts
can be traded .
The Banking Industry at its core provides access to credit. In the lenders case,
this includes access to their own savings and investments, and interest payments
on those amounts. In the case of borrowers, it includes access to loans for the
creditworthy, at a competitive interest rate.
Banking services include transactional services, such as verification of account
details, account balance details and the transfer of funds, as well as advisory
services, that help individuals and institutions to properly plan and manage their
finances. Online banking channels have become key in the last 10 years.
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The collapse of the Banking Industry in the Financial Crisis, however, means
that some of the more extreme risk-taking and complex securitization activities
that banks increasingly engaged in since 2000 will be limited and carefully
watched, to ensure that there is not another banking system meltdown in the
future.
Mortgage banking has been encompassing for the publicity or promotion of the
various mortgage loans to investors as well as individuals in the mortgage
business.Online banking services has developed the banking practices easier
worldwide. Banking in the small business sector plays an important role. Find
various banking services available for small businesses.
BANKING REGULATION ACT, 1949
The legal framework of banking in India can be understood in the Banking
Regulation Act, 1949. The Banking Regulation Act, 1949 defines a banking
company as a company which transacts the business of banking in India
(Section 5-c).
Section 5 (b) of the act defines banking as accepting for the purpose of lending
or investment of deposits of money from the public, repayable on demand or
otherwise and withdrawable by cheque, draft, order or otherwise
Section 49 A of the Act prohibits any institution other than a banking company
to accept deposit of money from public withdrawable by cheque. Thus, the
combination of the functions of acceptance of public deposits and withdrawable
of money by cheque by any institution cannot be performed without the
approval of Reserve Bank.
A banking company must perform both the essential functions of accepting
deposits and lending or investing. Any company which is engaged in the
manufacture of goods or carriers on any trade and which accepts deposits of
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money from the public is important. The banker accepts deposits of money and
not of anything else. The word ‘public’ implies that a banker accepts deposits
from any one who offers money for such purpose. The banker can refuse to
open an account in the name of a person who is considered as an undesirable
person such as a thief or a robber. Acceptance of deposits sjpi;d be the known
business of a banker. The essential feature of banking business is that the banker
does not refund the money on his own accord, even if the period for which it
was deposited expired. The depositor must make a demand for the same. The
Act also specifies that the withdrawal should be effected through order, cheque,
draft or otherwise. It implies that the demand should be made in a proper
manner and through an instrument in writing and not merely by verbal order or
a telephone message.
Section 7 of the Act, makes it essential for every company carrying on the
business of banking in India to use as part of its name at least one of the words-
bank, banker, banking or banking company. It also prohibits any other
company, or firm, individual, or group of individuals, from using any of these
words as part of its/ his name. Under Section 6 of the Act, the following
businesses may be undertaken by a banking company.
1. Borrowing, raising or taking money and lending or advancing money,
discounting of bills, granting letter of credit, traveller’s cheques, buying and
selling of bullion and species, buying and selling of foreign exchange, providing
safe deposit vaults, collection and transmitting money and securities,
underwriting and dealing in shares, debentures, bonds and investments of all
kinds.
2. Act as an agent of the government, local authority a person and can carry on
agency business
3. It may contract for public and private loans and negotiate and issue the same
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4. It may insure, guarantee, underwrite, participate in managing and carrying out of
any issue of state, municipal or other loans or of shares, debentures and may
lend money for the purpose of any such issue.
5. It may carry on and transact every kind of guarantee and indemnity business
6. It may manage, sell and realize any property which may come into its possession
in satisfaction of its claims.
7. It may acquire and hold and deal with any property, or any right, title or interest
in any such property which may form the security for any loan or advance
8. It may undertake and execute trusts and undertake the administration of estates
as executor, trustee or otherwise
9. It may acquire, construct and maintain any building for its own purpose
10. It may sell, improve, manage, develop, exchange, lease, mortgage, dispose of
or turn into account.
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CHAPTER-2
BUSINESS PROHIBITED FOR A BANKING COMPANY
Section 8, of the Banking Regulation Act, 1949, prohibits a banking company from engaging directly or indirectly in trading activities and undertaking trading risks. However, a banking company is permitted to deal in buying or selling or bartering of goods or engage in any trade or buy, sell or barter goods for others in order to:
a) Realize the securities given to it or held by it for a loan, if need arised for
realization of the amount lent.
b) In connection with the bills of exchange received for collection or negotiation
and undertaking the administrative of estates as executor, trustee etc.
For the purpose of this section, goods, means every kind of movable property,
other than actionable claims, stocks, shares, money bullion and species and all
other instruments
Section 9, prohibits a banking company from holding any immovable property,
howsoever acquired, except as is required for its own use for a period exceeding
seven years from the acquisition of the property. This period may be extended
upto 12 years by the Reserve bank. Property for its own use can be held by a
banking company on a permanent basis.
Section 19, of the Banking Act,(Amended in 1983) provides that a banking
company is permitted to form a subsidiary company for any or more of the
following purposes.
a) For undertaking of any business permitted for a banking company
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b) For carrying on the business of banking exclusively outside India (with previous
permission of the Reserve Bank)
MINIMUM PAID UP CAPITAL AND RESERVES
Section 11, contains provisions to ensure adequacy of minimum paid up capital
and reserves. Adequacy of capital is essential for the soundness of a banking
company. The banking companies (Amendment) Act, 1962, raised the
minimum amount of the value of paid up capital to Rs. 5 lakhs for any Indian
Bank commencing business after the commencement of the Act. The term
‘value’ means the real or exchangeable value and not the nominal value which
may be shown in the books of the banking company. The real or exchangeable
value of capital and reserves is computed by estimating the realizable value of
all the assets and deducting therefrom the amounts of outside liabilities. Section
12 also provides that the subscribed capital of a banking company should not be
less than one half of its authorized capital and the paid up capital should not be
less than one-half of the subscribed capital. Banking companies capital may
consist of equity shares or preference shares which were issued prior to 1944.
The minimum paid up capital and reserves of different banks are given below.
1. INDIAN BANKS
A Banking company incorporated in India, should have the minimum aggregate
value of its paid up capital and reserves as prescribed in the Act:
a) If it has places of business in more than one state Rs 5,00,000
b) If any such place of business is situated in Mumbai or Kolkata or both Rs. 10
lakhs
c) If it has all its places of business in one state, none of which is situated in the
city of Mumbai or Kolkata :
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i. In respect of its principal place of business is Rs. 1 lakh plus
ii. In respect of each of its other places of business situated in the district of
principal business is Rs. 10,000 plus
iii. In respect of each place of business situated elsewhere in the state outside
the same district, is Rs. 25,000 subject to the total of Rs. 5 lakhs
d) If it has only one place of business, is Rs. 50,000
e) If it has all its places of business in one state, one or more of which is, or are
situated in the city of Mumbai or Calcutta, Rs. 5 lakhs plus. Inrespect of each
place of business situated outside the city of Mumbai or Kolkatta is Rs. 25,000.
Subject to a total of Rs. 10 lakhs
The above requirements apply to those banks which were established before,
1962. The Banking Companies (Amendement) Act,1962, raised the minimum
amount of the value of the paid up capital to Rs. 5 lakhs for any Indian Bank
commencing businesses after that Act.
2. Foreign Banks
In case of a banking company incorporated outside India, the aggregate value of
its paid up capital and reserves shall not be less than Rs. 15 lakhs, and if it has a
place of business in the city of Mumbai or Kolkatta, or both Rs. 20 lakhs. The
banking company incorporated outside India is also required to deposit with the
Reserve Bank either in cash or in the form of unencumbered approved
securities, or both an amount equal to the minimum amount specified above.
The Act also requires a foreign banking company to deposit with the Reserve
Bank at the end of each calendar year an amount equal to 20% of the profit for
that year in respect of all businesses transacted through its branches in India.
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CHAPTER-3
BANKING IS NEED OF TIME
Although using a bank is the most common method of storing and accessing
your money, there are some alternatives you should consider. If you feel that
your bank isn't giving you what you want, then perhaps it is time for a change.
Here are some banking alternatives that might be able to offer you the features
and services that you require.
Of course, the main reason to use a bank is the fact that banks are widely
available, and they are the first option that comes to mind when dealing with
finances. In fact, some people aren't even aware that there are alternatives to
banking apart from keeping your money at home. Although banking has its
uses, it can cost you money for day-to-day financial matters that you can get for
less. Bank fees can be extremely expensive, but there are some alternatives.
Credit unions are one alternative to using conventional banks. Unlike banks,
credit unions are not for profit organisations that are run by their members.
Credit unions are used by people who share a workplace or occupation, or even
a religion. They offer many of the same services as banks, but because profit is
not their main function they can offer lower fees and higher interest rates on
savings than normal banks. Credit unions can be fairly large and organisations,
and some offer similar levels of convenience to a regular bank. If you are
looking for cheaper fees and better interest rates on savings then a credit union
might be right for you. However, credit unions are still small compared to
banks, and you cannot simply join the credit union of your choice. You have to
meet their specific requirements or be related to someone who is already a
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member in order to join. Also, you generally have to save money with a credit
union before you can have access to other financial products
Perhaps the best alternative to traditional banking is online banking. There are
many banks that operate solely online, and there are a lot of benefits to this sort
of bank. Although you might not be able to get money as easily as you could
with a normal bank, you can transfer funds and pay bills much more efficiently.
Also, online banks usually operate all day every day, meaning that you can
access your account and carry out transactions whenever you want. For paying
bills and transferring money, you can't really beat online banking
Although there are viable alternatives to traditional banking, perhaps the best
way to save yourself time and money is to have a combination of accounts. If
you are eligible for a credit union, then saving with them is probably the best
option as you can get great rates and you might be able to borrow money at a
much more reasonable rate if you need to do so in the future. You could
combine this with an online account to pay your bills, as this allows you to pay
bills quickly and manage your money more effectively so that you always pay
on time. Thirdly, having a traditional bank account is usually a good idea,
because if any problems arise you can go to your bank and speak to someone
face to face. If you look around at all the alternatives to regular banking then
you could save yourself money and make banking work more effectively for
you.
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CHAPTER-4
DIFFERENT TYPES OF BANKS
1. CENTRAL BANK
A central bank, reserve bank, or monetary authority is a public institution that
usually issues the currency, regulates the money supply, and controls the
interest rates in a country. Central banks often also oversee the commercial
banking system of their respective countries. In contrast to a commercial bank, a
central bank possesses a monopoly on printing the national currency, which
usually serves as the nation's legal tender.
The primary function of a central bank is to provide the nation's money supply,
but more active duties include controlling interest rates, and acting as a lender
of last resort to the banking sector during times of financial crisis. It may also
have supervisory powers, to ensure that banks and other financial institutions do
not behave recklessly or fraudulently.
Central banks in most developed nations are independent in that they operate
under rules designed to render them free from political interference. Examples
include the European Central Bank (ECB), the Bank of England, and the
Federal Reserve System of the United States
2. ADVISING BANK
An advising bank (also known as a notifying bank) advises a beneficiary
(exporter) that a letter of credit (L/C) opened by an issuing bank for anapplicant
(importer) is available. Advising Bank's responsibility is to authenticate the
letter of credit issued by the issuer to avoid fraud. The advising bank is not
necessarily responsible for the payment of the credit which it advises the
beneficiary of.
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The advising bank is usually located in the beneficiary's country. It can be (1) a
branch office of the issuing bank or a correspondent bank, or (2) a bank
appointed by the beneficiary. Important point is the beneficiary has to be
comfortable with the advising bank.
In case (1), the issuing bank most often sends the L/C through its branch office
or correspondent bank to avoid fraud. The branch office or the correspondent
bank maintains specimen signature(s) on file where it may counter-check the
signature(s) on the L/C, and it has a coding system (a secret test key) to
distinguish a genuine L/C from a fraudulent one (authentication) .
In case (2), the beneficiary can request the applicant to specify his/her bank (the
beneficiary's bank) as the advising bank in an L/C application. In many
countries, this is beneficial to the beneficiary, who may avail the reduced bank
charges and fees because of special relationships with the bank. Under normal
circumstances, advising charges is standard and minimal. In addition, it is more
convenient to deal with the beneficiary's own bank over a bank with which the
beneficiary does not maintain an account.
3. COMMERCIAL BANK
A commercial bank (or business bank) is a type of financial institution and
intermediary. It is a bank that provides transactional, savings, and money
market accounts and that accepts time deposits Commercial banks engage in
processing of payments by way of telegraphic transfer, EFTPOS, internet
banking, or other means, issuing bank drafts and bank cheques, accepting
money on term deposit, lending money by overdraft, installment loan, or other
means, providing documentary and standby letter of credit, guarantees,
performance bonds, securities underwriting commitments and other forms of off
balance sheet exposures, safekeeping of documents and other items in safe
deposit boxes, distribution or brokerage, with or without advice, of insurance,
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unit trusts and similar financial products as a “financial supermarket”, cash
management and treasury, merchant banking and private equity financing
Traditionally, large commercial banks also underwrite bonds, and make markets
in currency, interest rates, and credit-related securities, but today large
commercial banks usually have an investment bank arm that is involved in the
mentioned activities.
4. COMMUNITY DEVELOPMENT BANK
In the United States, community development banks (CDBs or CDFI Banks) are
commercial banks that operate with a mission to generate economic
development in low- to moderate-income (LMI) geographical areas and serve
residents of these communities. In the United States, community development
banks are certified as such by the Community Development Financial
Institutions Fund, a department within the U.S. Department of the Treasury.
In order to become a certified CDFI, CD Banks must apply to the United States
Community Development Financial Institutions Fund. Successful applicants
will have a primary mission of promoting community development and
principally serve under served markets and provide development services, in
addition to meeting other requirements[1]. CDFI Banks provide retail banking
services, they usually target customers from "financially underserved"
demographics.
While community development banks are one type of community development
financial institution, or CDFI,[2] some organizations use the terms
interchangeably. grants official certification of CDFI status to eligible CDBs.
Organizers wishing to start a new CDB can seek a state or national bank charter.
Federally chartered CDBs are regulated primarily by the Office of the
Comptroller of the Currency, like any national bank. According to the OCC
Charter Licensing Manual, CDBs are required "to lend, invest, and provide
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services primarily to LMI individuals or communities in which it is chartered to
conduct business." State-chartered community development banks are subject to
regulations, qualifications, and definitions that vary from state to state.
The Grameen Bank of Bangladesh is a microfinance organization and
community development bank founded by Muhammad Yunus. The bank has
grown into a family of over two dozen for-profit and nonprofit enterprises
including the Grameen Foundation, and the Grameen Bank and its founder were
awarded the Nobel Peace Prize in 2006.
5. CREDIT UNION
A credit union is a cooperative financial institution that is owned and controlled
by its members and operated for the purpose of promoting thrift, providing
credit at competitive rates, and providing other financial services to its
members. Many credit unions exist to further community development or
sustainable international development on a local level.
Worldwide, credit union systems vary significantly in terms of total system
assets and average institution asset size, ranging from volunteer operations with
a handful of members to institutions with several billion dollars in assets and
hundreds of thousands of members. Credit unions are typically smaller than
banks; for example, the average U.S. credit union has $93 million in assets,
while the average U.S. bank has $1.53 billion, as of 2007.
The World Council of Credit Unions (WOCCU) defines credit unions as "not-
for-profit cooperative institutions". In practice however, legal arrangements
vary by jurisdiction. For example in Canada credit unions are regulated as for-
profit institutions, and view their mandate as earning a reasonable profit to
enhance services to members and ensure stable growth.
This difference in viewpoints reflects credit unions' unusual organizational
structure, which attempts to solve the principal-agent problem by ensuring that
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the owners and the users of the institution are the same people. In any case,
credit unions generally cannot accept donations and must be able to prosper in a
competitive market economy.
6. CUSTODIAN BANK
A Custodian bank, or simply custodian, is a specialized financial institution
responsible for safeguarding a firm's or individual's financial assets and is not
likely to engage in "traditional" commercial or consumer/retail banking such as
mortgage or personal lending, branch banking, personal accounts, ATMs and so
forth.
The role of a custodian in such a case would be to hold in safekeeping
assets/securities such as stocks, bonds, commodities such as precious metals and
currency (cash), domestic and foreign, arrange settlement of any purchases and
sales and deliveries in/out of such securities and currency, collect information
on and income from such assets (dividends in the case of stocks/equities and
coupons (interest payments) in the case of bonds) and administer related tax
withholding documents and foreign tax reclamation, administer voluntary and
involuntary corporate actions on securities held such as stock dividends, splits,
business combinations (mergers), tender offers, bond calls, etc.
It provide information on the securities and their issuers such as annual general
meetings and related proxies, maintain currency/cash bank accounts, effect
deposits and withdrawals and manage other cash transactions, perform foreign
exchange transactions, often perform additional services for particular clients
such as mutual funds; examples include fund accounting, administration, legal,
compliance and tax support services, provide regular and special reporting on
any or all their activities to their clients or authorized third parties such as
MAIC Trust Account services for mergers & acquisitions payments.
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Custodian banks are often referred to as global custodians if they safekeep
assets for their clients in multiple jurisdictions around the world, using their
own local branches or other local custodian banks with which they contract to
be in their "global network" in each market to hold accounts for their respective
clients. Assets held in such a manner are typically owned by larger institutional
firms with a considerable amount of investments such as MAIC Trust services
& (QI) Qualified Intermediary services banks, insurance companies, mutual
funds, hedge funds and pension funds.
7. DEPOSITORY BANK
A depository bank (U.S. usage) is a bank organized in the United States which
provides all the stock transfer and agency services in connection with a
depository receipt program. This function includes arranging for a custodian to
accept deposits of ordinary shares, issuing the negotiable receipts which back up
the shares, maintaining the register of holders to reflect all transfers and
exchanges, and distributing dividends in U.S. dollars.
8. EXPORT CREDIT AGENCY
An export credit agency (known in trade finance as ECA) or Investment
Insurance Agency, is a private or quasi-governmental institution that act as an
intermediary between national governments and exporters to issue export
financing. The financing can take the form of credits (financial support) or
credit insurance and guarantees (pure cover) or both, depending on the mandate
the ECA has been given by its government. ECAs can also offer credit or cover
on their own account. This does not differ from normal banking activities. Some
agencies are government-sponsored, others private, and others a bit of both.
ECAs currently finance or underwrite about $430 billion of business activity
abroad - about $55 billion of which goes towards project finance in developing
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countries - and provide $14 billion of insurance for new foreign direct
investment, dwarfing all other official sources combined (such as the World
Bank and Regional Development Banks, bilateral and multilateral aid, etc.). As
a result of the claims against developing countries that have resulted from ECA
transactions, ECAs hold over 25% of these developing countries' US$2.2 trillion
debt. These data are unreliable in the absence of source, definition, or date.
Export credit agencies use three methods to provide funds to an importing entity
one is Direct lending which is the simplest structure whereby the loan is
conditioned upon the purchase of goods or services from businesses in the
organizing country, second is Financial intermediary loans where the export–
import bank lends funds to a financial intermediary, such as a commercial bank,
that in turn loans the funds to the importing entity and Interest rate equalization
is a commercial lender provides a loan to the importing entity at below market
interest rates, and in turn receives compensation from the export–import bank
for the difference between the below-market rate and the commercial rate.
9. INVESTMENT BANKING
An investment bank is a financial institution that assists individuals,
corporations and governments in raising capital by underwriting and/or acting
as the client's agent in the issuance of securities. An investment bank may also
assist companies involved in mergers and acquisitions, and provide ancillary
services such as market making, trading of derivatives, fixed income
instruments, foreign exchange, commodities, and equity securities.
Unlike commercial banks and retail banks, investment banks do not take
deposits. From 1933 (Glass–Steagall Act) until 1999 (Gramm–Leach–Bliley
Act), the United States maintained a separation between investment banking
and commercial banks. Other industrialized countries, including G8countries,
have historically not maintained such a separation.
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There are two main lines of business in investment banking. Trading securities
for cash or for other securities (i.e., facilitating transactions, market-making), or
the promotion of securities (i.e., underwriting, research, etc.) is the "sell side",
while dealing with pension funds, mutual funds, hedge funds, and the investing
public (who consume the products and services of the sell-side in order to
maximize their return on investment) constitutes the "buy side". Many firms
have buy and sell side components.
An investment bank can also be split into private and public functions with a
Chinese wall which separates the two to prevent information from crossing. The
private areas of the bank deal with private insider information that may not be
publicly disclosed, while the public areas such as stock analysis deal with public
information.
An advisor who provides investment banking services in the United States must
be a licensed broker-dealer and subject to Securities & Exchange Commission
(SEC) and Financial Industry Regulatory Authority (FINRA) regulation.[1]
10. INDUSTRIAL BANK
An industrial loan company (ILC) or industrial bank is a financial institution
in the United States that lends money, and may be owned by non-financial
institutions. Though such banks offer FDIC-insured deposits and are subject to
FDIC and state regulator oversight, a debate exists to allow parent companies
such as Wal-Mart to remain unregulated by the financial regulators. "FDIC-
insured entities are subject to Sections 23A and 23B of the Federal Reserve Act,
which limits bank transactions with affiliates, including the parent company."
(FDIC.gov) The ILC is permitted to have branches in multiple states (which is
permitted by many states on a reciprocal basis). They are state-chartered, and
insured by the Federal Deposit Insurance Corporation. They are currently
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chartered by seven states, with most chartered by Utah. Other states permitting
them
Companies that have set up industrial banks include UBS, General Electric Co.,
General Motors, Merrill Lynch & Co. Inc., Morgan Stanley, American Express
Co. Target Corp, Nordstrom, Harley-Davidson, First Data, UnitedHealth Group,
BMW, and Sallie Mae. In May 2005, Warren Buffett's Berkshire Hathaway,
Inc. announced plans to operate a Utah industrial bank to handle consumer
loans for its R. C. Willey Home Furnishings stores. The Blue Cross and Blue
Shield Association, Ford Motor Co., Ceridian Corp. and Home Depot await
approval.
However, the assets held by an ILC tend to paint an incomplete picture. The
actual loan book amount can be considered more important. In this view, for
example, UBS would replace Merrill Lynch as number 1.
11. MERCHANT BANK
A merchant bank is a financial institution which provides capital to companies
in the form of share ownership instead of loans. A merchant bank also provides
advisory on corporate matters to the firms they lend to.
Today, according to the US Federal Deposit Insurance Corporation (acronym
FDIC), "the term merchant banking is generally understood to mean negotiated
private equity investment by financial institutions in the unregistered securities
of either privately or publicly held companies."[1] Bothcommercial banks and
investment banks may engage in merchant banking activities. Historically,
merchant banks' original purpose was to facilitate and/or finance production and
trade of commodities, hence the name "merchant". Few banks today restrict
their activities to such a narrow scope.
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12. MUTUAL SAVINGS BANK
A mutual savings bank is a financial institution chartered through a state or
federal government to provide a safe place for individuals to save and toinvest
those savings in mortgages, loans, stocks, bonds and other securities.
Mutual savings banks were designed to stimulate savings by individuals; the
exclusive function of these banks is to protect deposits, make limited, secure
investments, and provide depositors with interest. Unlikecommercial banks,
savings banks have no stockholders; the entirety of profits beyond the upkeep of
the bank belongs to the depositors of the mutual savings bank. Mutual savings
banks prioritize security, and as a result, have historically been characteristically
conservative in their investments. This conservatism is what allowed mutual
savings banks to remain stable throughout the turbulent period of the Great
Depression, despite the failing of commercial banks and savings and loan
associations.
13. NATIONAL BANK
In banking, the term national bank carries several meanings:
especially in developing countries, a bank owned by the state
an ordinary private bank which operates nationally (as opposed to regionally or
locally or even internationally)
In the United States, an ordinary private bank operating within a specific
regulatory structure, which may or may not operate nationally, under the
supervision of the Office of the Comptroller of the Currency.
In the past, the term "national bank" has been used synonymously with "central
bank", but it is no longer used in this sense today. Some central banks may have
the words "National Bank" in their name; conversely if a bank is named in this
way, it is not automatically considered a central bank. For example, National-
Bank AG in Essen, Germany is a privately owned commercial bank, just like
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National Bank of Canada of Montreal, Canada. On the other side, National
Bank of Ethiopia is the central bank of Ethiopia and National Bank of
Cambodia is the central bank of Cambodia.
14. OFFSHORE BANK
An offshore bank is a bank located outside the country of residence of the
depositor, typically in a low tax jurisdiction (or tax haven) that provides
financial and legal advantages. These advantages typically include greater
privacy (see also bank secrecy, a principle born with the 1934 Swiss Banking
Act), low or no taxation (i.e. tax havens), easy access to deposits (at least in
terms of regulation) and protection against local political or financial instability
While the term originates from the Channel Islands being "offshore" from the
United Kingdom, and most offshore banks are located in island nations to this
day, the term is used figuratively to refer to such banks regardless of location,
including Swiss banks and those of other landlocked nations such as
Luxembourg and Andorra.
Offshore banking has often been associated with the underground economy and
organized crime, via tax evasion and money laundering; however, legally,
offshore banking does not prevent assets from being subject to personal income
tax on interest. Except for certain persons who meet fairly complex
requirements, the personal income tax of many countries [2] makes no distinction
between interest earned in local banks and those earned abroad. Persons subject
to US income tax
For example, are required to declare on penalty of perjury, any offshore bank
accounts—which may or may not be numbered bank accounts—they may have.
Although offshore banks may decide not to report income to other tax
authorities, and have no legal obligation to do so as they are protected by bank
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secrecy, this does not make the non-declaration of the income by the tax-payer
or the evasion of the tax on that income legal. Following September 11, 2001,
there have been many calls for more regulation on international finance, in
particular concerning offshore banks, tax havens, and clearing houses such as
Clearstream, based in Luxembourg, being possible crossroads for major illegal
money flows.
15. POSTAL SAVINGS SYSTEM
Many nations' post offices operated, or continue to operate postal savings
systems, to provide depositors who did not have access to banks a safe,
convenient method to save money and to promote saving among the poor.
16. PRIVATE BANK
Private banks are banks that are not incorporated. A private bank is owned by
either an individual or a general partner(s) with limited partner(s). In any such
case, the creditors can look to both the "entirety of the bank's assets" as well as
the entirety of the sole-proprietor's/general-partners' assets.
These banks have a long tradition in Switzerland, dating back to at least the
revocation of the Edict of Nantes (1685). However most have now become
incorporated companies, so the term is rarely true anymore. There are a few
private banks remaining in the U.S. One is Brown Brothers Harriman & Co., a
general partnership with about 30 members. Private banking also has a long
tradition in the UK where Coutts & Co has been in business since 1692.
"Private banks" and "private banking" can also refer to non-government owned
banks in general, in contrast to government-owned (or nationalized) banks,
which were prevalent in communist, socialist and some social democratic states
in the 20th century. Private banks as a form of organization should also not be
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confused with "Private Banks" that offer financial services to high net worth
individuals and others.
17. RETAIL BANK
Retail banking refers to banking in which banking institutions execute
transactions directly with consumers, rather than corporations or other banks.
Services offered include: savings and transactional accounts, mortgages,
personal loans, debit cards, credit cards, and so forth.
18. SAVINGS AND LOAN ASSOCIATION
A savings and loan association (or S&L), also known as a thrift, is a financial
institution that specializes in accepting savings deposits and making mortgage
and other loans. The terms "S&L" or "thrift" are mainly used in the United
States; similar institutions in the United Kingdom, Ireland and some
Commonwealth countries include building societies and trustee savings banks.
They are often mutually held (often called mutual savings banks[citation needed]),
meaning that the depositors and borrowers are members with voting rights, and
have the ability to direct the financial and managerial goals of the organization,
similar to the policyholders of a mutual insurance company. It is possible for an
S&L to be a joint stock companyand even publicly traded. However, this means
that it is no longer truly an association, and depositors and borrowers no longer
have managerial control. By law, thrifts must have at least 65 percent of their
lending in mortgages and other consumer loans — making them particularly
vulnerable to housing downturns such as the deep one the U.S. has experienced
since 2007.
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19. SAVINGS BANK
A savings bank is a financial institution whose primary purpose is accepting
savings deposits. It may also perform some other functions.
In Europe, savings banks originated in the 19th or sometimes even the 18th
century. Their original objective was to provide easily accessible savings
products to all strata of the population. In some countries, savings banks were
created on public initiative, while in others, socially committed individuals
created foundations to put in place the necessary infrastructure.
20. UNIVERSAL BANK
A savings bank is a financial institution whose primary purpose is accepting
savings deposits. It may also perform some other functions.
In Europe, savings banks originated in the 19th or sometimes even the 18th
century. Their original objective was to provide easily accessible savings
products to all strata of the population. In some countries, savings banks were
created on public initiative, while in others, socially committed individuals
created foundations to put in place the necessary infrastructure.
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CHAPTER-5
DIFFERENT TYPES OF PRODUCT
Bank deposits serve different purposes for different people. Some people cannot
save regularly; they deposit money in the bank only when they have extra
income. The purpose of deposit then is to keep money safe for future needs.
Some may want to deposit money in a bank for as long as possible to earn
interest or to accumulate savings with interest so as to buy a flat, or to meet
hospital expenses in old age, etc. Some, mostly businessmen, deposit all their
income from sales in a bank account and pay all business expenses out of the
deposits. Keeping in view these differences, banks offer the facility of opening
different types of deposit accounts by people to suit their purpose and
convenience.
On the basis of purpose they serve, bank deposit accounts may be classified as
follows:
1. Savings Bank Account
If a person has limited income and wants to save money for future needs, the
Saving Bank Account is most suited for his purpose. This type of account can
be opened with a minimum initial deposit that varies from bank to bank. Money
can be deposited any time in this account. Withdrawals can be made either by
signing a withdrawal form or by issuing a cheque or by using ATM card.
Normally banks put some restriction on the number of withdrawal from this
account. Interest is allowed on the balance of deposit in the account. The rate of
interest on savings bank account varies from bank to bank and also changes
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from time to time. A minimum balance has to be maintained in the account as
prescribed by the bank.
2. Current Deposit Account
Big businessmen, companies and institutions such as schools, colleges, and
hospitals have to make payment through their bank accounts. Since there are
restriction on number of withdrawals from savings bank account, that type of
account is not suitable for them. They need to have an account from which
withdrawal can be made any number of times. Banks open current account for
them. Like savings bank account, this account also requires certain minimum
amount of deposit while opening the account. On this deposit bank does not pay
any interest on the balances. Rather the accountholder pays certain amount each
year as operational charge. For the convenience of the accountholders banks
also allow withdrawal of amounts in excess of the balance of deposit. This
facility is known as overdraft facility. It is allowed to some specific customers
and upto a certain limit subject to previous agreement with the bank concerned.
3. Fixed Deposit Account
Fixed Deposit Account is also known as Term Deposit Account. Many a time
people want to save money for long period. If money is deposited in savings
bank account, banks allow a lower rate of interest. Therefore, money is
deposited in a fixed deposit account to earn a interest at a higher rate. This type
of deposit account allows deposit to be made of an amount for a specified
period. This period of deposit may range from 15 days to three years or more
during which no withdrawal is allowed. However, on request, the depositor can
encash the amount before its maturity. In that case banks give lower interest
than what was agreed upon. The interest on fixed deposit account can be
withdrawn at certain intervals of time. At the end of the period, the deposit may
be withdrawn or renewed for a further period. Banks also grant loan on the
security of fixed deposit receipt.
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4. Recurring Deposit Account.
This type of account is suitable for those who can save regularly and expect to
earn a fair return on the deposits over a period of time. While opening the
account a person has to agree to deposit a fixed amount once in a month for a
certain period. The total deposit along with the interest therein is payable on
maturity. However, the depositor can also be allowed to close the account
before its maturity and get back the money along with the interest till that
period. The account can be opened by a person individually, or jointly with
another, or by the guardian in the name of a minor. The rate of interest allowed
on the deposits is higher than that on a savings bank deposit but lower than the
rate allowed on a fixed deposit for the same period.
Recurring Deposit Accounts may be of different types depending on the
purpose underlying the deposit. Some of these are as follows:
a) Home Safe Account (also known as Money Box Scheme):
Small savers find it convenient to deposit money under this scheme. For regular
savings, the bank provides a safe or box (Gullak) to the depositor. The safe or
box cannot be opened by the depositor, who can put money in it regularly,
which is collected by the bank’s representative at intervals and the amount is
credited to the depositor’s account. The deposits carry a nominal rate of interest.
b) Cumulative-cum-Sickness Deposit Account:
Regular deposits made in this type of account serve the purpose of having
money to meet large expenses in case there is sudden illness or other unforeseen
expenses. A certain fixed sum is deposited at regular intervals in this account.
The accumulated deposits over time along with interest can be used for payment
of medical expenses, hospital charges, etc.
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c) Home Construction deposit Scheme/Saving Account:
This is also a type of recurring deposit account in which money can be
deposited regularly either for the purchase or construction of a flat or house in
future. The rate of interest offered on the deposit in this case is relatively higher
than in other recurring deposit accounts.
LOANS AND ADVANCES
The term ‘loan’ refers to the amount borrowed by one person from another. The
amount is in the nature of loan and refers to the sum paid to the borrower. Thus.
from the view point of borrower, it is ‘borrowing’ and from the view point of
bank, it is ‘lending’. Loan may be regarded as ‘credit’ granted where the money
is disbursed and its recovery is made on a later date. It is a debt for the
borrower. While granting loans, credit is given for a definite purpose and for a
predetermined period. Interest is charged on the loan at agreed rate and intervals
of payment. ‘Advance’ on the other hand, is a ‘credit facility’ granted by the
bank. Banks grant advances largely for short-term purposes, such as purchase of
goods traded in and meeting other short-term trading liabilities. There is a sense
of debt in loan, whereas an advance is a facility being availed of by the
borrower. However, like loans, advances are also to be repaid. Thus a credit
facility- repayable in instalments over a period is termed as loan while a credit
facility repayable within one year may be known as advances. However, in the
present lesson these two terms are used interchangeably.
Utility of Loans and Advances
Loans and advances granted by commercial banks are highly beneficial to
individuals, firms, companies and industrial concerns. The growth and
diversification of business activities are effected to a large extent through bank
financing. Loans and advances granted by banks help in meeting short-term and
long term financial needs of business enterprises.
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Banks also borrow from other institutions as well as from the Reserve Bank of
India. When the Reserve Bank of India lends money to commercial banks, the
rate of interest it charges for lending is known as ‘Bank Rate’. The rate at which
commercial banks make funds available to people is known as ‘Lending-rate’.
The lending rates also vary depending upon the nature of loans and advances.
The rates also vary according to the purpose in view. For example if the loan is
sanctioned for the purpose of activities for the development of backward areas,
the rate of interest is relatively lower as against loans and advances for
commercial/business purposes. Similarly for smaller amounts of loan the rate of
interest is higher as compared to larger amounts. Again lending rates for
consumer durables, e.g. loans for purchase of two-wheelers, cars, refrigerators,
etc. are relatively higher than for commercial borrowings.
However, the Reserve Bank of India from time to time announces changes in
the interest-rate structure to regulate the lending of funds by banks. Different
rates of interest are prescribed for various categories of advances, such as
advances to agriculture, small scale industries, road transport, etc. Graded rates
of interest are prescribed for backward areas. Lower rate is normally charged
from agencies selling food-grains at fixed price through Govt. approved outlets.
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CHAPTER-6
TYPES OF LOANS
1. Loans
Loan is the amount borrowed from bank. The nature of borrowing is that the
money is disbursed and recovery is made in instalments. While lending money
by way of loan, credit is given for a definite purpose and for a pre-determined
period. Depending upon the purpose and period of loan, each bank has its own
procedure for granting loan. However the bank is at liberty to grant the loan
requested or refuse it depending upon its own cash position and lending policy.
There are two types of loan available from banks:
a) Demand loan
A Demand Loan is a loan which is repayable on demand by the bank. In other
words, it is repayable at short-notice. The entire amount of demand loan is
disbursed at one time and the borrower has to pay interest on it. The borrower
can repay the loan either in lumpsum (one time) or as agreed with the bank. For
example, if it is so agreed the amount of loan may be repaid in suitable
instalments. Such loans are normally granted by banks against security. The
security may include materials or goods in stock, shares of companies or any
other asset. Demand loans are raised normally for working capital purposes, like
purchase of raw materials, making payment of short-term liabilities.
b) Term loan
Medium and long term loans are called term loans. Term loans are granted for
more than a year and repayment of such loans is spread over a longer period.
The repayment is generally made in suitable instalments of a fixed amount.
Term loan is required for the purpose of starting a new business activity,
renovation, modernization, expansion/ extension of existing units, purchase of
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plant and machinery, purchase of land for setting up of a factory, construction
of factory building or purchase of other immovable assets. These loans are
generally secured against the mortgage of land, plant and machinery, building
and the like.
2. Cash credit
Cash credit is a flexible system of lending under which the borrower has the
option to withdraw the funds as and when required and to the extent of his
needs. Under this arrangement the banker specifies a limit of loan for the
customer (known as cash credit limit) up to which the customer is allowed to
draw. The cash credit limit is based on the borrower’s need and as agreed with
the bank. Against the limit of cash credit, the borrower is permitted to withdraw
as and when he needs money subject to the limit sanctioned. It is normally
sanctioned for a period of one year and secured by the security of some tangible
assets or personal guarantee. If the account is running satisfactorily, the limit of
cash credit may be renewed by the bank at the end of year. The interest is
calculated and charged to the customer’s account.
Cash credit, is one of the types of bank lending against security by way of
pledge or /hypothetication of goods. ‘Pledge’ means bailment of goods as
security for payment of debt. Its primary purpose is to put the goods pledged in
the possession of the lender. It ensures recovery of loan in case of failure of the
borrower to repay the borrowed amount. In ‘Hypothetication’, goods remain in
the possession of the borrower, who binds himself under the agreement to give
possession of goods to the banker whenever the banker requires him to do so.
So hypothetication is a device to create a charge over the asset under
circumstances in which transfer of possession is either inconvenient or
impracticable.
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3. Overdraft
Overdraft facility is more or less similar to ‘cash credit’ facility. Overdraft
facility is the result of an agreement with the bank by which a current account
holder is allowed to draw over and above the credit balance in his/her account.
It is a short-period facility. This facility is made available to current account
holders who operate their account through cheques. The customer is permitted
to withdraw the amount of overdraft allowed as and when he/she needs it and to
repay it through deposits in the account as and when it is convenient to him/her.
Overdraft facility is generally granted by a bank on the basis of a written request
by the customer. Sometimes the bank also insists on either a promissory note
from the borrower or personal security of the borrower to ensure safety of
amount withdrawn by the customer. The interest rate on overdraft is higher than
is charged on loan. The following are some of the benefits of cash credits and
overdraft:
i. Cash credit and overdraft allow flexibility of borrowing, which depends upon the
need of the borrower.
ii. There is no necessity of providing security and documentation again and again
for borrowing funds.
iii. This mode of borrowing is simple and elastic and meets the short term financial
needs of the business.
4. Discounting of Bills
Apart from sanctioning loans and advances, discounting of bills of exchange by
bank is another way of making funds available to the customers. Bills of
exchange are negotiable instruments which enable debtors to discharge their
obligations to the creditors. Such Bills of exchange arise out of commercial
transactions both in inland trade and foreign trade. When the seller of goods has
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to realise his dues from the buyer at a distant place immediately or after the
lapse of the agreed period of time, the bill of exchange facilitates this task with
the help of the banking institution.
Banks invest a good percentage of their funds in discounting bills of exchange.
These bills may be payable on demand or after a stated period. In discounting a
bill, the bank pays the amount to the customer in advance, i.e. before the due
date. For this purpose, the bank charges discount on the bill at a specified rate.
The bill so discounted, is retained by the bank till its due date and is presented
to the drawee on the date of maturity. In case the bill is dishonoured on due date
the amount due on bill together with interest and other charges is debited by the
bank to the customers account.
Apart from these the banks also provides financial services to the corporate
sector and business and society
1) Merchant Banking
In banking, a merchant bank is a financial institution primarily engaged in
offering financial services and advice to corporations and to wealthy
individuals. The term can also be used to describe the private equity activities of
banking. The chief distinction between an investment bank and a merchant bank
is that a merchant bank invests its own capital in a client company whereas an
investment bank purely distributes (and trades) the securities of that company in
its capital raising role. Both merchant banks and investment banks provide fee
based corporate advisory services including in relation to mergers and
acquisitions.
2) Leasing
Leasing is a process by which a firm can obtain the use of a certain fixed assets
for which it must pay a series of contractual, periodic, tax deductible payments.
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The lessee is the receiver of the services or the assets under the lease contract
and the lessor is the owner of the assets. The relationship between the tenant
and the landlord is called a tenancy, and can be for a fixed or an indefinite
period of time (called the term of the lease). The consideration for the lease is
called rent. A gross lease is when the tenant pays a flat rental amount and the
landlord pays for all property charges regularly incurred by the ownership from
lawnmowers and washing machines to handbags and jewellry.[1]
Under normal circumstances, a freehold owner of property is at liberty to do
what they want with their property, including destroy it or hand over possession
of the property to a tenant. However, if the owner has surrendered possession to
another (the tenant) then any interference with the quiet enjoyment of the
property by the tenant in lawful possession is unlawful.
Similar principles apply to real property as well as to personal property, though
the terminology would be different. Similar principles apply to sub-leasing, that
is the leasing by a tenant in possession to a sub-tenant. The right to sub-lease
can be expressly prohibited by the main lease.
3) Mutual Funds
A Mutual Fund is a trust that pools the savings of a number of investors who
share a common financial goal. The money thus collected is then invested in
capital market instruments such as shares, debentures and other securities. The
income earned through these investments and the capital appreciation realised
are shared by its unit holders in proportion to the number of units owned by
them. Thus a Mutual Fund is the most suitable investment for the common man
as it offers an opportunity to invest in a diversified, professionally managed
basket of securities at a relatively low cost.
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4) Money Transfer
Banks are helping business and society for transfer of money from place to
place or person to person. For this purpose, Demand Draft, Pay orders,
Telegraphic Transfer, Mail Transfer, Credit Cards etc type methods are used
5) Factoring
Factoring is a financial transaction whereby a business job sells its accounts
receivable (i.e., invoices) to a third party (called a factor) at a discount in
exchange for immediate money with which to finance continued business.
Factoring differs from a bank loan in three main ways. First, the emphasis is on
the value of the receivables (essentially a financial asset),[1][2] not the firm’s
credit worthiness. Secondly, factoring is not a loan – it is the purchase of a
financial asset (the receivable). Finally, a bank loan involves two parties
whereas factoring involves three.
The three parties directly involved are: the one who sells the receivable, the
debtor, and the factor. The receivable is essentially a financial asset associated
with the debtor's liability to pay money owed to the seller (usually for work
performed or goods sold). The seller then sells one or more of its invoices (the
receivables) at a discount to the third party, the specialized financial
organization (aka the factor), to obtain cash. The sale of the receivables
essentially transfers ownership of the receivables to the factor, indicating the
factor obtains all of the rights and risks associated with the receivables.
Accordingly, the factor obtains the right to receive the payments made by the
debtor for the invoice amount and must bear the loss if the debtor does not pay
the invoice amount. Usually, the account debtor is notified of the sale of the
receivable, and the factor bills the debtor and makes all collections. Critical to
the factoring transaction, the seller should never collect the payments made by
the account debtor, otherwise the seller could potentially risk further advances
from the factor. There are three principal parts to the factoring transaction; a.)
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the advance, a percentage of the invoice face value that is paid to the seller upon
submission, b.) the reserve, the remainder of the total invoice amount held until
the payment by the account debtor is made and c.) the fee, the cost associated
with the transaction which is deducted from the reserve prior to it being paid
back the seller. Sometimes the factor charges the seller a service charge, as well
as interest based on how long the factor must wait to receive payments from the
debtor. The factor also estimates the amount that may not be collected due to
non-payment, and makes accommodation for this when determining the amount
that will be given to the seller. The factor's overall profit is the difference
between the price it paid for the invoice and the money received from the
debtor, less the amount lost due to non-payment
6) Finance Housing
There are a variety of housing finance schemes started by banks. Such as
purchase of new house, construction of new home, home improvement, repairs,
extension, land purchase, bridge loans, and balance transfer loans. Commercial
banks through their subsidiaries undertake housing finance as a specialized
business. Now a days, all the banks are permitted to provide housing finance to
the people. They provide housing finance and other related services to the needy
people at reasonable rate of interest.
7) Credit Cards
A Lot of people miscomprehend the usage of credit card thinking that it only
augments their expenditure & nothing else, however they are not aware of the
proper usage of the card. A Credit Card is plastic money which is used as a way
of payment, facilitating you to purchase products/services on credit. It eases
your life & your shopping experience is made simpler as you are not required to
carry cash at all the places; just swipe your credit card & you are given a free
credit period of 50-55 days by the bank. A lot of people think that the credit
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Increasing competition in banking sector in india
period starts from the date of purchase which is not correct; you should note that
the credit period is calculated from the date of billing and not from the date of
purchase. - As soon as you get the credit card, you need to sign on the signature
panel - Spend within your credit limit: You should not cross the limit of the
credit allotted by the bank as they charge hefty fine from the card holders. -
Always check sales vouchers/charge slips and the purchase amount when you
sign them. - Change your PIN regularly & do not give out your card number or
CVV number (three-digit number) to anyone on the phone, unless you are
dealing with a reputable company. - When shopping online, submit credit card
details only through secure websites. - Always keep a track of your billing cycle
& pay bills on time to avoid interest charges & late fees. - Always scan your
credit card statements for unauthorized transactions. If you've been defrauded,
contact the issuing bank instantly. - Withdrawing cash from ATM through your
credit card is really expensive as there is a fee of Rs 350, plus 3.5 percent
interest per day. You must make sure that you withdraw the cash only in an
emergency.
8) Portfolio Management
Portfolio management is a process of investment in securities. It involves a
proper investment decision making. It involves proper money management. The
objective of this service is to help investors with the expertise of professionals.
It involves construction of a portfolio based upon the fact sheet of the investor
giving out his objectives, constraints, preferences and tax liability. The portfolio
should be reviewed and adjusted from time to time in tune with the market
conditions. The portfolio manager is an important person who holds the
financial institutions and banks. They handle the funds of the investors for a fee.
As per SEBI guidelines, the portfolio manager should get a certificate from the
SEBI for rendering the portfolio management services to the clients. The SEBI
has framed the code of conduct for the portfolio managers. The violation of the
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Increasing competition in banking sector in india
regulations of SEBI is an offence and is punishable under the SEBI Act. Banks
usually extend services for managing surplus funds of their corporate customers
either directly or through merchant bankers. It involves helping their clients in
investing their funds in a manner that balances the liquidity, safety and
maximum yield
9) ATM
One of the channels of banking service delivery is vide the Automated Teller
Machine (ATM) whose traditional and primary use is to dispense cash upon
insertion of a plastic card and its unique Personal Identification Number (PIN).
ATM card is a plastic card with a magnetic strip with the account number of the
individual. The bank issues ATM cards to its current and saving accountholders.
A typical transaction would be that of cash withdrawal. The bank generally
restricts the maximum amount and the frequency with which one can withdraw
cash. The amount withdrawn is immediately debited to the concerned account
through accounting entries pre programmed on the ATM. Cash or cheques can
be deposited through the ATM for the credit to an account. ATMs can be
accessed may time. No employee interface is necessary. ATM offers a cost
effective solution alternative to labour costs. The scope of frauds, robberies and
misappropriation are reduced considerably if the PIN is maintained diligently.
10) Tele banking
Tele banking is a banking service offered by banks to enable customers to
access their accounts for information or transactions. A Telephone PIN (T-PIN)
is provided to each accountholder. The customer can call the exclusive tele-
banking numbers and provide the details to identify himself to the automated
voice. Upon the respective numbers matching the computerized systems, the
customer is given access to his account to query or transact on his account. Cash
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Increasing competition in banking sector in india
withdrawal and deposit are not enabled through this service but many banks
offer a cash delivery or collection service to certain classes of cutomers.
11) Internet Banking
Internet is one of the channels of service delivery to a banking customer. The
access to account information as well as transaction is offered through the
worldwide network of computers on the internet. Every bank has special
firewalls and its own security measure to protect the accounts from non-
authentic use from unauthorized users. Each accountholder is provided a PIN
similar to that of the ATM. The access to the account is allowed upon a match
of the account details and PIN entered on the computer system. A higher level
of security may be reached by an electronic finger print. Account querying as
well as transaction are possible on the Internet Banking Platform. The
accounting is instantaneous and funds transfers can be effected immediately.
Financial services companies are using the Internet as the new distribution
channel.
INNOVATIVE STRATEGIES FOR NEW PRODUCT
These days banks are spending larger and larger percentages of their marketing
budgets to acquire customers. These efforts include outbound campaigns, both
online as well as through traditional methods. In this culture of instant response
and connectedness, customers expect to be able to make decisions when
presented with an offer in a very quick manner. However, in many cases the
inability to complete the acquisition process due to process that has does not
lend itself to support this type of behavior gets in the way of closing the loop.
As is demonstrated by the large number of online only banks that are popping
up every day, customers are getting more and more comfortable with these
types of transactions being handled online. Simply put, the ability to complete
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Increasing competition in banking sector in india
the process of account opening online is a price to play in this business these
days.
Collabera's solution starts by streamlining the process by separating the require
steps from steps that can be completed at a later stage. This streamlined process
is then technology enables by leveraging existing platforms or in some cases
introducing new platforms that offer more flexible account opening processes.
Since the account opening process tends to vary by the product being offered, in
some cases providing a seamless and consistent customer experience is
achieved via integrating various services into a customer friendly front end.
Critical to this strategy is the integration of data flows for customer information
across the disparate data stores.
As is well understood, the initial process after the account is setup is a great
time to make a impression on the customer. This initial experience establishes
the foundation for the future. In our experience, there is an opportunity to do
more than just going through a checklist of items that make up the process of
on-boarding. The on-boarding process is a great time to gather information from
the customer that can then be sent off to the appropriate data stores for
consumption by various business functions. In many cases this on-boarding
process gets executed in silos.
The Collabera solution focuses on defining the process and then technology
enabling it in a way that can cover all bases. The process analysis includes all
aspects that are visible to the customer as well as background processes that are
triggered as part of this end to end process. The technical aspects focus on
integration and data enrichment prior to sharing the information with
appropriate resources.
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The cost to acquire new customers is higher that it has ever been. Product
bundling is emerging as a key tactic in being able to offer products that will
increase the "stickiness factor" as well as increasing the revenue per customer
metric. Most banks are able to use the results of propensity analysis to
understand the most likely portfolio of products that would be of interest to a
customer. Using this data to identify the best primary product along with a
secondary set of products allows all customer communication to be much more
tailored. The result is a higher "redemption rate" on offers to the customer.
Executing on this type of a strategy requires a clear understanding of the overall
goals, the associated tactics, a clearly defined and completely integrated channel
strategy as well as a seamless integration amongst the technology platforms. In
many organizations the lack of an overall data strategy can be a challenge.
Collabera has assisted several banks in enabling these type of strategies. In our
opinion, traditional approaches to product bundling are limited to prepackaged
product bundling solutions. This one size fits all type of solution has yielded
some results in the past. However, given the competitive environment these
days, more sophisticated approaches are needed.
As banks struggle to increase the revenue per customer, cross sell strategies
have emerged as a way of achieving this target. In the past these type of
strategies have focused on offering multiple types of products from within a
segment of the banks business. Segments of Lines of Business, are typically
how the banks have internally organized themselves and no surprise that the
lack of customer centricity in this approach failed to deliver on the promise of
increasing wallet share by increase cross sell. Customers have looked for
solutions that cross multiple aspects of their profile – business and personal. As
banks rethink these strategies and align themselves behind better and more
robust cross sell strategies, it has become clear that knowing the customer at a
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Increasing competition in banking sector in india
deeper level then before is key to success in the pursuit of higher cross sell
ratios.
Collabera's solutions associated with cross-sell strategies focus on two aspects.
1) Establishing a process that allows all customer facing function to truly act in
a way that will allow them to offer the entire portfolio of products and they are
incented to do so 2) Establishing metrics that allow the measurement of these
interactions in the form of measureable dashboards such as White Space
Analysis.
Banking customers are demanding tools that help manage their finances and
detect fraud. Alerts are a tool that can assist by proving timely, meaningful and
actionable notifications to customers on events related to their accounts. Alerts
can also be used to help customers conveniently transact business; for instance,
an alert may prompt a payment of a loan or transfer funds to prevent an
overdraft. Furthermore, functionality the functionality of a bank's online/mobile
alerts framework could be enhanced greatly by allowing clients to enroll/un-
enroll and tailor alerts that meet their needs.
In order to ensure customer adoption of these alerts, banks need to create a
positive experience for the user by allowing them to manage their alerts in one
location. This is best done by combining efforts with various business lines and
systems to guarantee that bank customers do not have to go to multiple
locations to manage their preferences. Typical lines of business that could
dramatically benefit from adopting the alerts functionality are Business
Banking, Collections, Credit Card, Debit Card, Deposits, Investments, Lending,
Line of Credit (overdraft), Marketing, Mobile Banking, Mortgage, Retail
Banking, Security, Web Banking. Email, SMS text messaging, and push
notifications are cost effective channels that reach customers quickly, which
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Increasing competition in banking sector in india
increase the value of the products offered by many of these business units. The
Collabera solution focuses on defining the end-to-end alerts architecture,
including the process, technology, system integration, and business change
requirements. Collabera leverages its world-class toolkit of best-practice alerts,
and helps prioritize the adoption of the alerts functionality that meets the
business needs leveraging our proprietary Momentum methodology. Our alerts
architecture and design includes all aspects that are visible to the customer as
well as background processes that are triggered as part of this end to end
solution. A typical business case leveraging the Collabera Alerts framework to
monetize and setup a best practice alerts solution within their banking business
in mid-tier banks reflects between $5MM and $7MM of revenue over 3 years,
as a result of "monetized alerts" fee revenue and overall expense savings.
INNOVATIVE SERVICES TO CUSTOMERS
A conventional bank may treat its customers as coldly as the cash they deposit
or borrow. Many banks have conveniently used control and security as reasons
for their remarkably slow and impersonal services. In recent years, other service
industries, notably fast-food and airlines, have proven that customer service can
be a swift and enjoyable experience for both clients and employees without
sacrificing control, costs, and profits. Some banks have finally adopted these
new service paradigms and are now benchmarking with non-bank institutions to
learn about their best practices.
For instance, BayBanks of Massachusetts, is using the mail-order company L.L.
Bean, known for its superb order-taking and service delivery systems, as its
model for change. A major result of this functional benchmarking was the
establishment of a 24-hour customer service center that can not only respond to
queries and complaints but also promote and sell the bank's products and
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Increasing competition in banking sector in india
services. The center even allows customers to open a checking account anytime
or negotiate an overdraft at 2 am. The ATM was also reconfigured from a mere
cash dispenser to a versatile and tireless account executive. The machine can
now buy and sell mutual funds. Inspired by L.L. Bean, Bay Banks published a
50-page catalogue to help customers appreciate and select from its more than
160 financial services.
Seafirst Bank in Seattle redefined itself from a "retail bank" to a "retailer" and
has benchmarked with retailers known for world class customer service such as
fast-food restaurant chains. Inspired by these models, Seafirst instituted a 5-
minute guarantee that says "Wait any longer than 5 minutes in line and the bank
guarantees $5 to your account." Moreover, if the customer complains of any
other inconvenience, he or she gets a $5 "I'm sorry coupon". Its branch offices
have official "greeters" to greet and guide customers to the right tellers or desks,
much like the guest relations officers (GRO) or receptionists of 5-star hotels.
The greeter mans a kiosk at the entrance of the bank. To reinforce this service
philosophy, branch managers are rated not only on sales but on service goals.
Achieving or even exceeding sales targets without achieving customer
satisfaction goals will not entitle a branch manager to receive the bank's
prestigious "Gold Club" award. Executives from the CEO down are encouraged
and expected to visit branches regularly to monitor service and get a first-hand
feel of the action. When Seafirst decided to redesign and re-layout its offices to
improve service, it acquired the services of an expert from the Godfather's Pizza
chain. One result was making the teller counter waist-high. It is now more open
and personal than the traditional counter that is intimidating and creates a
barrier between the client and the teller.
Like Seafirst, Citicorp looks as itself as less of a bank and more of a "factory".
This factory processes raw materials in the form of documents, application
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Increasing competition in banking sector in india
forms, and customer requests and the final product is a satisfied customer.
Desks, departments, offices, and other work stations serve as the machines and
equipment of this document factory. In reorganizing the bank into a leaner and
better service center, the CEO John Reed, who has an engineering background,
applied the lessons and practices he learned from his visits to Ford Motor,
Cummins Engine, General Electric, Core Industries and Exxon. The first
process his reengineered was the back-room operations which consist of many
repetitive operations. Back-office of banks are known for snail-pace
bureaucracy that hampers front line operations and the ultimate customer
service. By applying the concept of "mass production", streamlining, and
standardization of tasks, Citicorp aims to remove this critical bottleneck. The
bank also benchmarked with Chrysler in getting its functional departments to
work effectively as teams.
Others banks, shedding their conservative "finance and control" images, have
likewise adopted innovative service strategies and practices. Banco Frances has
established an information center or "encyclopaedia" in the waiting lounge.
Here customers can browse through various bits and pieces of important service
information like the average time to finish a transaction and the company's
products and services. Information about the busiest day or days in the branch
are displayed so that customers may want to avoid these periods. In the new
branches of Garanti Bankasi, phone lines dedicated to customer service were
installed. Any customer can pick up this phone and relay his or her a complain,
question, or difficulty. The facility is designed to represent the company's
commitment to service and also serves as the customer's last resort in case
everything else fails.
Similarly, ASB Bank Limited has established a phone center to accept , process,
and resolve customer complaints. It also has a customer feedback programme
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Increasing competition in banking sector in india
whereby whoever the customer complains to, say a staff employee or manager,
will be responsible for giving the client feedback on the status and progress his
or her complaint. The bank’s customer service center has created two customer
flows or lines to deliver services more effectively. One was for loans and
similar products that require customized and personalized services. The other
lines was for the standard and repetitive services like deposits and withdrawals.
By creating two service environments that cater to two different types of needs,
service is enhanced and speeded up.
Bank Pertanian Malaysia (BPM) has extended the concept of "mobile banking."
To the convenience and delight of customers living in longhouses along the
river banks of the Sarawak river, the bank has launched floating branches on
boats that provide full branch bank services. To further enhance service, BPM
has also reconfigured its automated teller machines to dispense not only cash,
but also commodity prices and information about its products and services. The
Korean Technology Banking Corporation (KTB) is setting up a Technology
Financing Information Center to serve the various needs of its clients, most of
which are setting up joint-ventures overseas. The Center will contain a huge
database of information analyzed from various data from internal and external
sources. By accessing this database, clients will get information about specific
technologies, local information, and other data relevant to the ventures they are
setting up. To facilitate processing, development financial institutions like the
Industrial Development Bank of India, requires borrowers to submit loan
application forms in electronic floppy disks.
Some banks and financial institutions have done such a remarkable job in
improving and reinventing customer service that they themselves have become
the benchmarks of other companies outside the banking sector. For instance,
American Express, the credit card company, is the recognized benchmark to
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Increasing competition in banking sector in india
emulate when it comes to improving a company's billing process. Amex's
billing is reportedly the fastest and most accurate in the world in any industry.
Xerox, the benchmark for many quality practices, used the Amex model in
enhancing its billing systems. In China, the benchmark for customer service and
customer courtesy is surprisingly a bank: The Industrial and Commercial Bank.
Hundreds of retail shops and department stores, many of which are known for
rude service, visit the bank's branches to learn a few lessons on satisfying and
delighting customers. Before sweeping changes were made, the Industrial and
Commercial Bank was also known for bad service and discourteous front line
employees who even swear at clients. One radical and highly effective policy it
instituted was coming about with a list of words and phrases their employees
are forbidden to use when dealing with customers. For instance the popular
expression "When will you stop complaining?" is included in the banned list.
While other banks may refuse to change or accept soiled or old currency notes,
the bank will replace these without question.
Even clearing houses have adopted the new service paradigms to support the
banks' initiatives. For instance, the Singapore Clearing House Association has
cut the clearing of US$ checks deposited in Singapore from two weeks to 3
days. The new system requires participating banks to open US dollar accounts
with Citibank to service their respective clients.
Innovative banking in customer service is indeed a welcome and long-awaited
development. We hope that other banks and financial institutions will follow
suit soon. Satisfied customers are the best guarantee of stability and growth. As
in other service sectors, bank customers deserve the very best. In the past, banks
have rarely treated customers as people, preferring to treat them as account
numbers, passbooks, and loan applications. Customer service, in contrast to
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customer processing, is a concept whose time has come for the banking industry
world wide.
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CHAPTER-7
FUTURE OF BANKING IN RURAL AND
URBAN AREAS
The Reserve Bank of India has a mandate to be closely involved in matters
relating to rural credit and banking by virtue of the provisions of Section 54 of
the RBI Act. The major initiative in pursuance of this mandate was taken with
sponsoring of All-India Rural Credit Survey in 1951-52. This study made
agency-wise estimates of rural indebtedness and observed that cooperation has
failed but it must succeed. The Report of the Committee on Directions is still
considered a classic on the subject, and two of the four members were,
incidentally, from Andhra Pradesh. This is the origin of the policy of extending
formal credit through institutions while viewing local, traditional and informal
agencies as usurious. In the first stage, therefore, efforts were concentrated on
developing and strengthening cooperative credit structures. The Reserve Bank
of India has also been making financial contributions to the cooperative
institutions through evolving institutional arrangements, especially for
refinancing of credit to agriculture.
While enacting the State Bank of India Act in 1955, the objective was stated to
be the extension of banking facilities on a large scale, more particularly, in rural
and semi-urban areas. SBI, therefore, became an important instrument of
extending rural credit to supplement the efforts of cooperative institutions. In
1969, 14 major commercial banks were nationalised and the objective, inter
alia, was "to control the heights of economy". The nationalised banks thus
became important instruments for advancement of rural banking in addition to
cooperatives and State Bank of India. The next step to supplement the efforts of
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Increasing competition in banking sector in india
cooperatives and commercial banks was the establishment of Regional Rural
Banks in 1975 in different states with equity participation from commercial
banks, Central and State Governments.
By 1982, to consolidate the various arrangements made by the RBI to promote/
supervise institutions and channel credit to rural areas, NABARD was
established. Though several efforts were made to increase the flow of
institutional credit for agricultural and rural lending, there were mismatches in
credit and production. Field studies conducted to determine the reason, revealed
that it was due to absence of effective local level planning. It was felt that with
the establishment of large network of branches, a system could be adopted to
assign specific areas to 45 each bank branch in which it can concentrate on
focussed lending and contribute to the development of the area. With a view to
implementing this approach, RBI introduced a scheme of "Service Area
Approach" for commercial banks. To further supplement the institutional
mechanism, the concept of Local Area Banks was taken up in 1996-97 and in-
principle approval has been given for 8 Local Area Banks.
As regards cost of credit, for most of the period, the administered interest rate
regime was applicable for bank lending and this included concessional terms for
priority sector. Currently, all interest rates on bank advances including in rural
areas are deregulated and there is no link between priority sector and interest
rate, though there are some regulations on interest rates by size of advance i.e.
below Rs. 2 lakh in respect of commercial banks.
As regards policy measures to enhance flow of credit to rural areas, apart from
availability of credit lines from the Reserve Bank of India, the concept of
priority sector was evolved to ensure directed credit. Currently, the stipulation is
that domestic commercial banks should extend credit to the extent of 40 per
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Increasing competition in banking sector in india
cent of the total net bank credit to priority sector as a whole, of which 18 per
cent should be specifically for agriculture. Out of the target of 18 per cent for
agriculture, at least 13.5 per cent should be by way of direct loans to agriculture
and remaining could be in the form of indirect loans.
Where a bank fails to fulfil its commitment towards priority sector lending, it is
currently required to contribute to Rural Infrastructure Development Fund set
up by NABARD. NABARD in turn provides these funds to State Governments
and state owned corporations to enable them to complete various types of rural
infrastructure projects. It is pertinent to recognise that there are a large number
of credit linked programmes sponsored by the Government for direct assault on
poverty. In programmes relating to self-employment and women welfare, the
multiplicity of programmes has been reduced by having a comprehensive and
consolidated programme named Swaranjayanti Gram Swarojgar Yojna.
The financial sector reforms, which were introduced from 1991 onwards were
aimed at transforming the credit institutions into organisationally strong,
financially viable and operationally efficient units. The measures introduced
include reduction in budgetary support and concessionality of resources,
preparation of Development Action Plans and signing of Memoranda of
Understanding with the major controllers, and introduction of prudential norms
relating to income recognition and asset classification for RRBs and cooperative
banks. The lending rates for these institutions have also been deregulated. Other
measures of liberalization include allowing non-target group financing for
RRBs, direct financing for SCBs and CCBs, and liberalisation in investment
policies and non-fund business.
These measures have contributed to many RRBs turning around and becoming
more vibrant institutions. In the case of cooperative banks, there is greater
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Increasing competition in banking sector in india
awareness of the problems of officialisation and politicisation and initiatives in
this regard include legislative actions on cooperative banks in Andhra Pradesh.
Recently, several policy initiatives have been taken to advance rural banking.
These include46 additional capital contribution to NABARD by the RBI and the
Government of India, recapitalisation and restructuring of RRBs, simplification
of lending procedures as per the Gupta Committee recommendations,
preparation of a special credit plans by public sector banks and launching of
Kisan Credit Cards. Finally, a scheme linking self help groups with banks has
been launched under the aegis of NABARD to augment the resources of micro
credit institutions. A Committee has gone into various measures for developing
micro credit, and has submitted its report, which is under the consideration of
the RBI. In respect of cooperatives, a Task Force under the chairmanship of my
esteemed and affectionate colleague Shri Jagdish Capoor, Deputy Governor has
been constituted to review the status and make recommendations for
improvement.
Undeniably, these initiatives have enabled a very wide network of rural
financial institutions, development of banking culture, penetration of formal
credit to rural areas and a counter to the dominance of moneylenders. These
initiatives have also financed modernisation of rural economies and
implementation of anti-poverty and self-employment programmes. However,
for the purpose of focussing on the future, generalisation on some concerns
regarding the current approach to rural credit and banking would be appropriate.
Firstly, the cooperative banks have different layers and many of them have
significantly large non-performing assets (NPAs). Many cooperatives are
undercapitalised. The public sector banking system also exhibits NPAs, and
some of them have so far been provided with recapitalised funds. The RRBs
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Increasing competition in banking sector in india
also exhibit NPAs and these have been recapitalised from the Government of
India so far, which would imply a total recapitalisation of double the amount
provided by Government of India.
Secondly, according to the All-India Debt and Investment Survey, 1991-92, the
share of debt to institutional agencies in the case of rural households has
increased marginally from 61.2 per cent to 64 per cent between 1981 and 1991.
However, it must be noted that this figure relates to debt outstanding and the
overall share of the institutional credit in the total debt market is likely to be
smaller than what this figure indicates.
Thirdly, the cost of financial intermediation by the various rural financial
institutions is considered to be on the high side. The difference between the cost
of resources made available to NABARD by Reserve Bank of India and the
commercial rates of interest at which the cooperative banks lend for agriculture
in the deregulated interest rate regime is also considered to be on the high side.
Fourthly, empirical studies indicate that institutional credit is more likely to be
available for well to do among the rural community.
Fifthly, empirical studies also indicate that relatively backward regions have
less access to institutional credit than others do.
Sixthly, the non-availability of timely credit and the cumbersome procedures for
obtaining credit are also attributed to the functioning of the financial
institutions, though this is equally valid for rural and urban banking
Finally in regard to Government sponsored schemes, there has been overlap in
accountability in as much as the beneficiaries are identified on a joint basis.
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Increasing competition in banking sector in india
Banks have been indicating that NPAs are proportionately more due to this
overlapping.
An important development in the formal segment of the rural financial markets
is the growing significance of non-banking financial companies, in particular, in
hire purchase and leasing operations. They also finance traders of agricultural
inputs and output. The NBFCs have only recently been brought under the
regulatory regime of RBI. While their importance is recognized in financing
diversified rural agriculture, its extent and scope of operations has not been
adequately researched.
Rural Credit Markets : New Realities
As mentioned earlier in the approach to rural banking, the basic thrust of our
policy has been to promote institutional credit and eliminate or ignore informal
finance. However, in reality, while formal credit has expanded its share,
informal finance continues to be significant. The idea of promotion of Self-Help
Groups and micro financing is an indirect admission of necessity of informal
finance. The future of rural banking cannot be appreciated without fully
understanding both formal and informal rural credit markets, especially their
linkages. Since in the earlier sections, organisation and functioning of the
formal credit system in the rural areas has been explained, in this section nature
of informal markets and the linkages will be explored.
The informal financial market which is legal but officially unrecorded
comprises unregulated financial activities i.e., outside the orbit of officially
regulated financial intermediaries. In the informal financial transactions, one
could treat borrowing and lending among friends and relatives as occasional and
not part of such an informal market. Consequently, there are three broad types
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Increasing competition in banking sector in india
of informal financial transactions, viz., well-defined group,
tied-lending/borrowing; and untied lending/borrowing activities.
In the literature on well-defined groups, there are three broad types namely
Rotating Savings and Credit Associations (ROSCA); Accumulated Savings and
Credit Associations (ASCRA) and hybrid forms of both. There are some
variations under each category. Basic characteristics of these groups are that
they are voluntary in nature, usually among equals, with little or no outside
support or interference. Often, members have some special bonds based on
religion, caste, status, neighbourhood, etc. In brief, there is no patronclient
framework. In essence, therefore, these arrangements among well-defined
groups, though important, should not in my view be included in the concept of
informal financial markets. In the recent past, there have been efforts to provide
a bridge between formal financial markets and these well-defined groups in the
form of ‘micro-finance' initiatives. However, these initiatives do not constitute
marketisation of activities of well-defined groups. Thus, the informal financial
markets are those which are outside the orbit of officially regulated institutions.
These informal debt transactions may involve tied debt transactions and untied
debt transactions.
The general approach, at least at the policy level, to informal market whether
tied or untied, has not been positive since informal debt market has been
historically equated with either landlord or moneylender. The transactions are
considered to be expensive, especially in view of what is held to be of usurious
nature of interest rates. It is considered to be financing unproductive
expenditures since consumption needs are financed. Sometimes, it is said that
there are often unequal and exploitative arrangements, say, between the landlord
and the tenant or the agricultural labourer. Finally, it is held that, since these are
unregulated, they are prima facie not desirable.
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Yet, the fact remains that informal debt markets do prevail, and studies have
shown that in some areas in our country, they account for 70 to 80 per cent of
debt transactions. Studies have also shown that many poor people have no
access to institutional credit. The arrangements in informal debt markets are
said to be flexible, and sometimes have in-built risk sharing arrangements.
These credit arrangements do provide for smoothening of consumption and
production requirements. Transaction costs in terms of certainty, timeliness,
procedural requirements, number of trips, etc. are somewhat negligible although
there may be hidden costs in tied lending. Moreover, while formal markets tend
to cater to less risky borrowings, informal markets provide for the more risky
borrowings and thus serve a purpose. Finally, it has been stated in the literature
that financial repression like directed credit, high reserve ratios, interest rate
ceilings, branch licensing, etc. make informal financial markets relatively
attractive and popular.
Perhaps, one way of reconciling the conflicting views on usefulness of informal
credit is to recognise some emerging realities of both formal and informal
markets. This would also help a rethink on approaches to rural credit and rural
banking.
First, it is no longer the case that the money lender and informal financing are
always synonymous, in view of the dynamics of rural economy already
described involving suppliers credit, buyers credit and credit for services sector.
Second, informal markets are less significant now than before, and have to face
competition or at least accept benchmarking of formal credit. The concept of
monopoly of moneylender in rural areas is not true in many areas now.
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Increasing competition in banking sector in india
Third, when informal financial market is linked to socially undesirable
activities, there is certainly a cause for concern though the available evidence
shows that such a link is more a metropolitan or urban phenomenon rather than
a rural one.
Fourth, bank credit is really not severely restricted to what can be officially
determined as productive, since most of the credit-card financing by the banks
is, in fact, financing of consumption and at interest rates comparable to those
prevailing in the rural informal debt markets. In other words, it is no longer
unethical for banks to finance consumption credit through the credit card route.
Credit card business, so far, is an essentially urban phenomenon.
Hence, the financing of consumption by informal markets in rural areas cannot
be frowned upon when it is being done by banks through their credit card
business.
Fifth, the real extent of informal markets is grossly understated in any survey
that views data on outstanding debt since the turnover of debt is admittedly
much lower for public institutions than for private lending. The turnover-
differential is on account of several factors, including preference for short term
finance and better recovery-performance in informal markets.
Sixth, the social significance of informal credit is more than its proportion in
financial terms since the poorer sections draw far larger amounts from informal
than formal markets.
Seventh, a significant part of informal market is through leasing, hire purchase,
deferred payment, etc. with finance often provided by NBFCs. The informal
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Increasing competition in banking sector in india
market is providing a range of financial products, which the formal banking
system is not able to.
Eighth, studies have demonstrated that expansion of literacy and education
tends to increase the access of rural folk to formal credit, reduce the informal
transaction costs in dealings with formal credit institutions and improves their
resistance to malpractices attributable to landlord or moneylender. The
exploitative nature of informal markets is more pronounced in tribal or less
developed areas while productive nature of informal markets is more
pronounced in prosperous villages. Indeed, one can argue that in many areas,
the formal credit structure has provided a positive institutional alternative to the
moneylenders and thus marginalising his role in providing credit to rural
masses.
Linkages in Rural Debt Markets
Having recognised that one cannot wish away informal markets, some tentative
generalizations on the relative roles of formal and informal markets and on the
linkages between them would also be necessary to capture the emerging but
complex realities. Such generalisations are possible on the basis of empirical
studies.
First, the formal credit has a tendency to flow more easily to agriculturally
developed regions and to relatively larger farmers leaving the backward regions
and small farmers to be largely served by the informal market. This
phenomenon is generally explained by four factors viz., poor-resource
endowment features of the borrower, poor personal factors (education, social
contact etc), underdevelopment of a region and higher transaction costs.
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Increasing competition in banking sector in india
Second, as per empirical studies, transaction costs associated with formal credit
include fees for procuring necessary certificates (open), travel and related
expenses including loss of wages etc., and informal or unofficial commissions
(hidden). The transaction costs vary with type of credit agency involved, the
type of borrower and farm-size.
Third, uncertainties and delays usually associated with formal credit can also be
treated as additions to the transaction costs.
Fourth, the true cost of borrowing from the formal credit system is thus higher
than nominal cost if the above informal transaction costs are also included. To
the extent some transaction costs are fixed, the effective cost of borrowings for
smaller loans tends to be relatively higher than for a larger loan.
Fifth, there are usually hidden costs or concealed interest rates in respect of
informal credit also, which have to be added to the nominal costs to arrive at the
true cost. These hidden costs generally relate to tied lending, tied to land,
labour, input or output. The tied advance in respect of labour is particularly
relevant for migratory labour. The hidden costs are usually in the form of
undervaluation of labour and output of borrowers and overvaluation of inputs
supplied by lender.
Sixth, the choice between formal and informal credit depends on both the access
and relative true costs. Thus, recourse to informal credit, admittedly at far
higher nominal costs, is to be explained partly in terms of effective costs and the
extent of supply of formal credit.
Seventh, in assessing relative roles, both supply and demand side bottlenecks of
formal credit need to be appreciated. The former relate to asset-based lending
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Increasing competition in banking sector in india
policies and complex formalities and procedures, while the latter relate to poor
endowment, lower education and social-contact, usually caste-based in
backward regions. Viewed differently, a larger role for informal credit may
arise due to low level of commercialisation and monopoly power of
moneylender; and it may also arise due to high level of commercialisation of
agriculture when supply from formal channel cannot match significant demand
for credit.
Eighth, it is also necessary to recognise that, to the extent informal markets tend
to lend to borrowers who are relatively less creditworthy, risk-premium is
bound to be higher. This would also get reflected in higher nominal interest
rates in informal markets and indeed higher true cost, though it may not be so
high if it is net of risk premium.
It is clear that the critical issue in respect of informal credit is the manner in
which the linkages among the participants in the market operate and result in
varying degrees of hidden costs. It is possible to make some exploratory
postulates here. First, trader-lenders are likely to provide most of production -
credit, while farmer-lender or moneylender is likely to provide most of
consumption - credit.
It is, of course, possible that some individuals combine the functions of farmer,
trader and moneylender. Second, informal markets are unlikely to finance credit
for investment purposes, given the time preference. Third, the levels of
education are likely to reduce the scope for gross overvaluation or
undervaluation in linked-transactions. Fourth, the inter-linked transactions
among parties with equal bargaining power are likely to minimise the hidden
costs. Fifth, from the supply side, farmer-lenders may tend to be associated with
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Increasing competition in banking sector in india
land and labour market linkages while trader-lender is likely to be associated
with input-output markets.
On the demand side, agricultural labour may be associated with land and labour
markets while the farmer-cultivator with input-output linkages. In the process, it
is likely that a farmer would be a borrower from a trader and a lender to
agricultural labour, a common phenomenon in villages. It will, therefore, be
over simplification to divide the rural population into lenders and borrowers or
exploiters and exploited. Sixth, similarly it is necessary to appreciate the role of
linkages in credit-risk-mitigation. In fact, the risk reducing element of linkages
are not built into formal credit-channels. Incidentally to the extent the
transaction costs are front loaded in respect of formal credit, there is no
incentive to repay while the true costs of informal credit are spread out.
Seventh, in terms of bargaining power among the class of borrowers, the
agricultural labour and migratory labour appear to be weakest except in
agriculturally prosperous areas where labour-shortage is acute to cater to
agricultural and other operations. Similarly, the differential in bargaining power
between large and small borrowers is similar to that between large corporates
and small-industrialists in urban areas.
In brief, the linkages between formal and informal markets are complex,
contextual and dynamic.
CHAPTER-865
Increasing competition in banking sector in india
TECHNOLOGY AND RURAL BANKING
We should recognise that the role of banks, which is central to formal credit in rural areas, is fast changing. Many non-banks are providing avenues for savers and funds for investment purposes. Banks themselves are undertaking non-traditional activities. Banks are also becoming what are called universal banks and are already providing a range of financial services such as investments, merchant banking and even insurance products. Similarly, non banks are also undertaking bank like activities. At present in India, these are mostly confined to urban areas, but they will sooner than later spread to rural areas.
Another development relates to the gradual undermining of the importance of
branches of banks. The emergence of new technology allows access to banking
and banking services without physical direct recourse to the bank premise by
the customer. The concept of Automated Teller Machines (ATMs) is the best
example. At present, ATMs are city oriented in our country. It is inevitable that
ATMs will be widely used, in semi-urban and rural areas.
The technology-led process is leading us to what has been described as virtual
banking. The benefits of such virtual banking services are manifold. Firstly, it
confers the advantage of lower cost of handling a transaction. Secondly, the
increased speed of response to customer requirements under virtual banking vis-
à-vis branch banking can enhance customer satisfaction. Thirdly, the lower cost
of operating branch network along with reduced staff costs leads to cost
efficiency. Fourthly, it allows the possibility of improved quality and an
enlarged range of services being available to the customer more rapidly and
accurately at his convenience
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Increasing competition in banking sector in india
Another development relates to the increasing popularity of credit cards, which
are bound to reach rural areas. Many Public Sector Banks are already in credit
card business. In fact, multipurpose cards could be a facility that IT could usher
in for rural population. The potential can be illustrated with SMART cards.
SMART cards – which are basically cards using computer circuits in them
thereby making them ‘intelligent' – would serve as multipurpose cards. SMART
cards are essentially a technologically improved version of credit and debit
cards and could be used also as ATM cards.
For the spread of virtual-banking and SMART cards to rural areas, it is essential
that electric power and telecom connectivity are continuous and supplies do not
drop especially during the hours when a bank's transactional activity is at
relatively high levels. The banks could, under such assured supply conditions
acquire the required banking software and also put in place the necessary
networking for providing anywhere banking facilities in rural and semi-urban
areas also.
Like banks in other parts of the world, Indian banks will have to get interested
in providing diversified range of financial products and services along with
those that they are already providing, by using technological advances. As the
level of education in rural areas rises and affluence spreads, customers will start
seeking efficient, quicker and low cost services.
As the financial system diversifies and other types of financial intermediaries
become active, in rural areas, savers would turn towards mutual funds or the
savers themselves decide to deploy part of their financial surpluses into equities
and debentures as also other fixed income securities. The bulk of bank deposits
in the rural areas are currently longer term deposits and as these come down;
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Increasing competition in banking sector in india
there would be a distinct shortening of the average maturity structure of bank
deposits with an increase in asset liability mismatches.
The spreads that the banks now enjoy will progressively shrink making it more
difficult for them to survive. As more and more intermediaries enter rural areas
with greater level of technology, traditional banking business will come under
pressure. In order to face the competitive pressures being exerted by the
recently set up market savvy banks, banks which have extensive branch network
in most of the existing and potential rich rural and semi-urban areas may have to
provide such services.
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Increasing competition in banking sector in india
CHAPTER-9
ROLE OF FOREIGN BANKS
A large number of foreign banks are now keen on opening shop in India to gain
a critical mass by April 2009, when private banking space is expected to open
up for foreign players. Foreign Banks in India always brought an explanation
about the prompt services to customers. After the set up foreign banks in India,
the banking sector in India also become competitive and accurative. The share
of foreign banks in the business done in the country (deposits and advances) has
been hovering between 5 and 7 per cent during the past decade.
A new rule announced by the Reserve Bank of India for the foreign banks in
India in this budget has put up great hopes among foreign banks which allow
them to grow unfettered. Now foreign banks in India are permitted to set up
local subsidiaries. The policy conveys that foreign banks in India may not
acquire Indian ones (except for weak banks identified by the RBI, on its terms)
and their Indian subsidiaries will not be able to open branches freely.
There are twenty-nine foreign banks are present in India through 273 branches
and 871 offsite ATMs. Besides, there are 34 foreign banks operating through
representative offices. Four have set up shop in the past one year. They are
Banco Bilbao Vizcaya Argentaria, Spain's second largest bank; Italy's Banca di
Roma; the Dublin-based Depfa Bank Plc.; and National Australia Bank Ltd.
Given a chance, all banks would like to convert their representative offices into
branches.
Standard Chartered Bank, the oldest foreign bank that came to India 150 years
ago, now operates the maximum number of branches, 83. It is followed by
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Increasing competition in banking sector in india
HSBC, which entered India in 1867, with 47 branches. Citibank has 39
branches and ABN Amro, 28 branches. The only other bank that has a double
digit branch presence is Deutsche
India's GDP is seen growing at a robust pace of around 7% over the next few
years, throwing up opportunities for the banking sector to profit from.
The credit of banks has risen by over 25% in 2004-05 and the growth
momentum is expected to continue over the next four to five years.
Participation in the growth curve of the Indian economy in the next four years
will provide foreign banks a launch pad for greater business expansion when
they get more freedom after April 2009.
RBI is following a liberal branch licensing policy for those foreign banks who
want to go to the unbanked pockets. They have started sensing enormous
business opportunities in financing trade and small and medium sectors in small
towns in the world's second fastest growing economy.
India had committed to the World Trade Organzation (WTO) in 1997 to give 12
new branch licenses to foreign banks every year, including those given to new
entrants and the existing players. However, the Indian regulator has all along
been allowing foreign banks to open more branches, going beyond its
commitment to WTO. In fact, in the last four years till October 2007, it has
given its nod to 75 new foreign bank branches and many more ATMs (which do
not come under WTO norms).
Standard Chartered Bank, the oldest foreign bank that came to India 150 years
ago, now operates the maximum number of branches, 83. It is followed by
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Increasing competition in banking sector in india
HSBC, which entered India in 1867, with 47 branches. Citibank has 39
branches and ABN Amro, 28 branches. The only other bank that has a double
digit branch presence is Deutsche, 11.
Despite their growing presence, foreign banks still have a very small market
share in the Indian banking industry—6.11% of total deposits and 6.83% of
total loan advances. But their returns from Indian operations are far higher than
those of their local counterparts. For instance, the average net profit per branch
for foreign banks in India was Rs11.99 crore last year against Rs33 lakh for the
public sector banks that account for close to 70% of the industry. The return on
assets for foreign banks last year was 1.65% and return on equity, 14.02%. The
comparable figures for public sector banks were 0.82% and 13.62%. Now you
know why foreign banks are ready to walk the extra mile to do business
anywhere in India
The Reserve Bank of India would like foreign banks to get a flavour of semi-
urban India and the rural hinterland. Going by the statistics provided in the
RBI's annual report, it appears that foreign banks are being gently nudged away
from metros, when they apply for permission to open a new branch.
The branches of foreign banks that have been approved between July 2006 and
June 2007 are mostly in smaller towns and tier-2 and tier-3 cities. Of the 13
branches for which permission was given, only one branch belonging to
Shinhan Bank has been allowed in New Delhi.
Hong Kong and Shanghai Banking Corporation (HSBC) received approvals for
three branches in Raipur, Jodhpur and Lucknow. ABN Amro got approvals for
branches in Kolhapur, Salem, Udaipur and Ahmedabad. Barclays Bank received
approval for branches in Kanchipuram and Bangalore
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Increasing competition in banking sector in india
Most foreign banks follow a strategy of first setting up base in metros –
Mumbai, New Delhi, Kolkata and Chennai. Then, in the next stage, they move
to the mini-metros such as Bangalore, Hyderabad, Pune and Ahmedabad. Over
the last few years, some banks have talked about expanding their reach beyond
the conventional circuits of these eight places.
Foreign banks in India have got approval from the Reserve Bank of India to
open 10 branches and seven representative offices during the July 2006- June
2007 period. In the calendar year 2006, the RBI issued approvals for opening 13
branches of foreign banks in India. Under the WTO agreements, India is
required to allow the opening of 12 foreign branches every year.
A large number of foreign banks are now keen on opening shop in India to gain
a critical mass by April 2009, when private banking space is expected to open
up for foreign players.
The latest addition to the list of foreign banks wishing to set foot in India is the
Royal Bank of Scotland, which has total assets of over $806 billion.
The sudden interest in India follows the Reserve Bank of India's roadmap for
according foreign banks greater freedom in India.
Switzerland's UBS, ranked the world's best private bank by EuroMoney
magazine, has been preparing itself for India launch. Merrill Lynch and
Goldman Sachs too are believed to be showing interest.
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Increasing competition in banking sector in india
It is not known whether they will go alone or partner with an Indian entity in the
new venture. Some of the new players are targeting the derivatives market to
grow in India. The huge retail space is also an enticing factor.
Merrill Lynch has a joint venture in Indian investment banking space -- DSP
Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms.
US-based GE Capital last week announced its intention to set up a bank last
week soon after the banking sector roadmap was unveiled. It already has wide
presence in consumer finance through GE Capital India.
The RBI roadmap said the removal of limitations on the operations of wholly-
owned subsidiaries of foreign banks and treating them on a par with domestic
banks to the extent appropriate will be designed and implemented after
reviewing the experience till April 2009.
A total of 33 foreign banks are present in India and had total assets of Rs
1,36,315 crore (Rs 1363.15 billion) as at end-March 2004. Roughly they
account for about 7 per cent of the total banking space.
The list of foreign players includes banks like Citibank, Bank of America, Bank
of Nova Scotia, ABN-AMRO Bank, Deutsche Bank and JPMorgan Chase
Bank, which figure in the top 25 global banks ranked by The Banker magazine.
The other top banks like Credit Suisse Group, Industrial and Commercial Bank
of China, are still to start banking business in India.
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Increasing competition in banking sector in india
India is expected to find a place in the strategy of these banks given the
country's growth prospects. There have been cases of foreign banks closing
shops in India too. Dresdner Bank and Commerzbank fall in this category.
India's GDP is seen growing at a robust pace of around 7 per cent over the next
few years, throwing up opportunities for the banking sector to profit from.
The credit of banks in India has risen by over 25 per cent in 2004-05 and the
growth momentum is expected to continue over the next few years.
Participation in the growth curve of the Indian economy in the next four years
will provide foreign banks a launch pad for greater business expansion when
they get more freedom after April 2009
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Increasing competition in banking sector in india
TABLE 1
FINANCIAL PERFORMANCE OF FOREIGN BANKS IN INDIA
Item 2005-06 2006-07 variation
Absolute percentage
A.INCOME (i + ii) 17,662.07 24,959.06 7293.99 41.03
i)Interest Income
of which : Interest on Advance
Income on Investment
ii) Other Income
of which : Commission &Brokerage
12,290.82
7379.75
3,950.57
5,371.25
2,872.39
18,018.92
10,941.49
5,432.04
6,937.14
3,789.29
5728.09
3,561.74
1,481.46
1,565.90
916.89
46.60
48.26
37.50
29.15
31.92
B.EXPENDITURE (i+ii+iii) 14,593.47 20,370.90 5,777.43 39.59
i)Interest Expended
of which :Interest on Deposits
ii) Provisions and Contingencies
of which : Provision for NPAs
iii) Operating Expenses
of which : Wage Bill
5,149.50
3,161.17
3,589.84
96.43
5,854.13
2,005.17
7,615.02
4,758.24
5,014.65
332.48
7,741.22
3,081.11
2,465.53
1,597.07
1,424.81
236.06
1,887.09
1,075.94
47.88
50.52
39.69
244.81
32.24
53.66
C.PROFIT
i) Operating Profit
ii) Net Profit
6,658.44
3,068.60
9,599.81
4,585.16
2,941.37
1,516.56
44.18
49.42
D.NET INTEREST
INCOME/MARGIN
7,141.33 10,403.89 3,262.57 45.69
E.TOTAL ASSETS 1,99,358.03 2,78,016.49 78,658.46 39.46
SOURCE: RBI & BALANCE SHEETS OF RESPECTIVE BANKS
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Increasing competition in banking sector in india
The table 1 which implies that income of foreign bank increased of 41.03 per
cent , while the expenditure of the foreign banks has increased nearly by 11 per
cent. The operating profit amounting Rs. 2941.37 i.e. 44.18 per cent and there is
an increase in net profit amounting to Rs 1516.56 i.e. 49.42 per cent. There also
increase in total asset. It may be concluded that there is a sufficient progress in
the foreign banks and the overall profitability of foreign banks is good
LIST OF FOREIGN BANKS HAVING REPRESENTATIVE OFFICES
IN INDIA AS ON NOVEMBER 3D, 2007
S. No Name and address of the
representative office
Country of
incorporation
Centre Date of
opening
1. Commonwealth Bank Australia Bangalore 7.11.2005
2. National Bank Australia Ltd Australia Mumbai 3.11.2006
3 Raiffeisen Zentral Bank
Osterreich AG
Austria Mumbai 1.11.1992
4 Fortis Bank Belgium Mumbai 6.10.1987
5 KB.C. Bank N.V. Belgium Mumbai 1.02.2003
6 Emirates Bank International Dubai Mumbai 16.06.2000
7 Credit Industriel et Commercial France New Delhi 1.04.1997
8 Natixis France Mumbai 4.01.1999
9 Bayerische Hypo - und
Vereinsbank
Germany Mumbai 12.07.1995
10 DZ Bank AG Deutsche Zentral Germany Mumbai 22.02.1996
11 Landesbank Baden -
Wurtlemberg
Germany Mumbai 1.11.1999
12 Presdner Bank AG Germany Mumbai 6.09.2002
13 Commerzbank Germany Mumbai 23.12.2002
14 DEPFABank Ireland Mumbai 9.2.2007
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Increasing competition in banking sector in india
15 Intesa San paolo Spa Intesa
Sanpaolo Spa
Intesa San
paolo Spa
20.01.1991
16 Uni Credito Italiano Italy Mumbai 1.08.1998
17 Banca Populare Di Verona E
Novara
Italy Mumbai 18.06.2001
18 BPU Banca -Banche Popolari
Unite
Italy Mumbai 16.01.2006
19 Banca Popolare di Vicenza ItaIv Mumbai 29.04.2006
20 Monte Dei Paschi Di Sienna Italy Mumbai 07.04.2006
21 Banca di Roma Italv Mumbai 17.01.2007
22 Everest Bank Ltd Nepal New Delhi 24.03.2004
23 Caixa Geral de Depositos Portugal Mumbai
Goa (EC)
8.11.1999
24 Vnesheconombank (Bank for
Foreign Economic Affairs)
Russia New Delhi 1.3.1983
25 VTB India(Bank for Foreign
Trade)
Russia New Delhi May 2005
26 Promsvvazbank Russia New Delhi 25.04.2006
27 Banco de Sabadell SA Spain New Delhi 2.08.2004
28 Banca Bilbao Vizcava
Aroontaria, BBVA
Spain Mumbai 2.4.2007
29 Hatton National Bank Sri Lanka Chennai 1.01.1999
30 UBSAG Switzerland Mumbai 24.11.1994
31 Zurcher Kantonalbank Switzerland Mumbai 27.06.2006
32 The Bank of New York USA Mumbai 27.10.1983
33 Wachovia Bank NA USA Mumbai 1.11.1996
34 Svenksa Handelsbanken Sweden Mumbai 1.8.2006
35 Westpac Australia Mumbai 1.10.2007
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Increasing competition in banking sector in india
CHAPTER-10
COMPETITION IN BANKING
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Increasing competition in banking sector in india
Indian banking has come a long way since India embarked on the reforms path
about a decade-and-a-half ago in 1991-92. The reforms have unleashed
tremendous change in the banking sector. Today, Indian banks are as
technology-savvy as their counterparts in developed countries. On the
networking front, branch banking –the traditional forte, coupled with ATM
networks-the now imperative, have evolved to place the banking services on a
new trajectory.
The competitive forces have led to the emergence of Internet and mobile
banking too, to let banks attract and retain customers. The banking sector is also
gearing up to embrace the Basel II regime, to benchmark with the global
standards. Similarly, retail lending has emerged as another major opportunity
for banks. All these factors are driving up competition, which in turn forcing
banks to innovate. A slew of innovative products, which could not be imagined
even a couple of years ago, are a reality now.
Even mundane products like Saving Account, Personal Loans and Home Loans
have become subjects of innovation. The Narasimham Committee had proposed
wide-ranging reforms for Improving the financial viability of the banks,
Improving the macroeconomic policy framework for banks; Increasing their
autonomy from government directions; Allowing a greater entry to the private
sector in banking, Liberalizing the capital markets; Improvement in the
financial health and competitive position of the banks and Furthering
operational flexibility and competition among the financial institutions.
A number of reforms initiatives have been taken to remove or minimize the
distortions impinging upon the efficient and profitable functioning of banks.
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Increasing competition in banking sector in india
These include Reduction in SLR & CRR, Transparent guidelines or norms for
entry and exit of private sector banks, Public sector banks have been allowed for
direct access to capital markets, The regulated interest rates have been
rationalized and simplified, Branch licensing policy has been liberalized and A
board for Financial Bank Supervision has been established to strengthen the
supervisory system of the RBI.
These and other measures that have been taken would help the highly regulated
and directed banking system to transform itself into one characterized by
openness, competition, prudential and supervisory discipline. They will also
make the new challenges particularly the growing demands from customers for
high quality services. The objective of this is to study, describe and analyze the
impact of banking sector reforms on the performance of commercial banks. On
the basis of the impact of these reforms, to suggest third new modified reforms
in the changing scenario.
By mid-1997, the RBI reported that the reform process had started yielding
results. But as observed by the NC in its second report, the improvement has
arrested the deterioration of the system earlier but there is still a considerable
distance to traverse. There has been improvement in several of the quantitative
indices but there are many areas in which weaknesses still persist. These include
customer service, technological up gradation, improvement in house keeping in
terms of reconciliation of entries and balancing of books.
The second report was submitted on 23rd April, 1998, which sets the pace for
the second generation of banking sector reforms. These include Merge strong
banks, close weak banks unviable ones; Two or three banks with international
orientation, 8 to 10 national banks and a large number of local banks; Increase
Capital Adequacy to match enhanced banking risk; Rationalize branches and
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Increasing competition in banking sector in india
staff, review recruitment; De-politicize Bank Boards under RBI supervision;
Integrate NBFCs activities with banks.
But many cities saw no purpose in setting up the second NC on banking sector
reforms within six years and before the full implementation of the
recommendations of the first report of 1991. Strictly speaking, there were no
new recommendations made in the second report except two on Merger of
strong units of banks and Adaptation of the “narrow banking” concept to
rehabilitate the weak banks.
Various reform measures introduced in India have indeed strengthened the
Indian banking system in preparation for the global challenges ahead. Some of
the reforms introduced and their impact on banks and furnished in the table
(Indian banking on the reforms path) After the brief introduction of theme,
section II fixes the objectives, hypotheses and methodology along with the
database. Section III reviews the related studies and section IV highlights the
major issues faced by Indian banking sector. Section V analyses the results and
discussions whereas section VII exhibits the future agenda for the third reforms
and concludes the paper.
Banking in India is poised to enter yet another phase of reforms once the door
opens further to foreign players in 2009. This requires further improvement in
technology management, human resource management and the ability to foresee
rapid changes in the financial landscape and adopt quickly. At present, there is a
huge hiatus between the top management earnings of state owned banks and
private, as well as foreign banks. Banks have to lay down sound risk
management strategies and internal capital adequacy assessment committees to
ensure that they do not diverge from the prudential requirements.
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Increasing competition in banking sector in india
Nair (2006) discusses the future challenges of technology in banking. The
author also point out how IT posses a bright future in rural banking, but is
neglected as it is traditionally considered unviable in the rural segment. A
successful bank has to be nimble and agile enough to respond to the new market
paradigm and ineffectively controlling risks. Innovation will be the key
extending the banking services to the untapped vast potential at the bottom of
the pyramid. Singh (2003) analyzed profitability management of banks under
the deregulated environment with some financial parameters of the major four
bank groups i.e. public sector banks, old private sector banks, new private sector
banks and foreign banks, profitability has declined in the deregulated
environment. He emphasized to make the banking sector competitive in the
deregulated environment.
They should prefer non-interest income sources. Singla (2008) examines that
how financial management plays a crucial role industrialists growth of banking.
It is concerned with examining the profitability position of the selected sixteen
banks of banker index for a period of six years (2001-06). The study reveals that
the profitability position was reasonable during the period of study when
compared with the previous years. Strong capital position and balance sheet
place. Banks in better position to deal with and absorb the economic constant
over a period of time. Shroff (2007) gives a summary of how Indian banking
system has evolved over the year.
The paper discusses some issues face by these systems. The author also gives
examples of comparable banking system for other countries and the lesson
learnt. Indian banking is at the threshold of the paradigm shift. The application
of technology and product innovations is bringing about structure change in the
Indian banking system. Subbaroo (2007) concludes the Indian banking system
has undergone transformation itself from domestic banking to international
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banking. However, the system requires a combination of new technologies, well
regulated risk and credit appraisal, treasury management, product
diversification, internal control, external regulations and professional as well as
skilled human resource to achieve the heights of the international excellence to
play its role critically in meeting the global challenge.
This paper mainly concentrates on the major trends that change the banking
industry world over, viz. consolidation of players through mergers and
acquisitions globalization of players, development of new technology, universal
banking and human resource in banking, profitability, rural banking and risk
management. Banks will have to gear up to meet stringent prudential capital
adequacy norms under Basel I and II, the free trade agreements. Banks will also
have to cope with challenges posed by technological innovations in banking
Tiwari (2005) proposed a view that among the financial intermediaries banks
and financial institutions are vital players in running the funding activities of the
industries.
In the bank based system the financial institutions dominate in the aggregate
assets of the financial system while in market based system, equity market has
largest share of assets in the aggregate assets of the financial system. Uppal and
Kaur (2007) analysis the efficiency of all the bank groups in the post banking
sector reforms era. Time period of study is related to second post banking sector
reforms (1999-2000 to 2004-05). The paper concludes that the efficiency of all
the bank groups has increased in the second post banking sector reforms period
but these banking sector reforms are more beneficial for new private sector
banks and foreign banks. This paper also suggests some measures for the
improvement of efficiency of Indian nationalized banks. The sample of the
study in Indian banking industry which comprises five different ownership
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groups and the ratio method is used to calculate the efficiency of different bank
groups. New private sector banks are compelling with foreign banks for
continuous improvement in their performance.
The analysis is based on ratio analysis. We used the following parameters to
assess the efficiency of Indian bank group’s vis-à-vis their counter parts.
Profitability per Employee: The profit per employee is in the range of Rs.0.41 to
2.32 Crores during the study period in G-I, similarly, it was between Rs.0.77 to
2.04 Crores in G-II, Rs.1.08 to 6.15 Crores in G-III and Rs.8.07 to 15.17 Crores
in G-V. The G-I, II (public sector banks), even old private sector banks (G-III)
have shown poor efficiency in terms of profit per employee as compared to new
private sector banks and foreign banks.
But our new private sector banks are competing with the foreign banks whose
average performance is higher (18.14) as compared to foreign banks where
average is only 11.68 in at the end of the study period. This overall trend of
increasing employee profitability may be attributed to the reduction in the
number of employees following the launch of VRS by some of the Indian banks
as well as higher profits by the banks. On an average, new private sector banks
enjoy a higher increase in their profitability per employee, as compared with
their counter part public sector banks.
This may be attributed largely to the better technology that the new private
sector banks employ, besides the advantage of carrying no historical baggage.
ICICI and HDFC Banks in G-IV are dominating in profit per employee whereas
Corporation Bank, OBC and PNB have the higher per employee profit in G-I
whereas Punjab & Sindh Bank, UCO Bank and Dena Bank are responsible for
lowering the profit per employee.
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On average, Indian banks pays less as compared to foreign banks. Among
Indian banks, new private sector banks pay on an average Rs.59.83 crores as
compared to G-I, II & III who pay Rs.14.00, 14.43 & 18.07 crores respectively.
The highest expenses per employee incurred by G-V (foreign banks) having
Rs.79.84 crores per employee. G-IV & G-V pays higher and attractive salary to
the efficient employees; they also provide better facilities and incentives to their
employees. Due to this reason, per employee expenses are higher even return
per employee is much higher as compared to their counterparts. Among the
Indian banks, average per branch expenses incurred by new private sector banks
(G-IV) is at the tune of Rs.1169.06 crores as compared to G-I, II % III with
branch expenses
Overall, we may conclude that among the Indian bank groups, new private
sector banks had shown excellent growth in their efficiency and this group is
competing with foreign banks in terms of many parameters of efficiency.
Number of factors are contributing in their excellent efficiency performance like
work culture, dedication, loyalty, technology, better facilities, new
products/services, management, transparency etc.
Business per Employee: Since different employees in a bank contribute in
different ways to the revenues and profits of a bank, it is difficult to come up
with one universal metric that captures the business per employee accurately.
The business per employee is quite low in G-I, II & III as compared to G-IV &
V. The average per employee business is the highest in G-IV i.e. Rs.905.83
crores and G-V has an average of Rs.901.50 crores in the study period. Thus,
deposits mobilization and advances per employee are higher in G-IV & V.
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These bank groups are providing a better interest on deposits and lower interest
on advances; their market policies are quite effective as compared to Indian
public sector banks. Hence, the new private sector banks in India have led the
way in this regard, because of the better use of technology and other
infrastructure.
The problem of NPAs is a matter of serious concern. It is a very serious
problem for our public sector banks. The report of the RBI on NPAs says that
reducing NPAs should be treated as a “national priority”. The average rate of
NPAs is very high i.e. 6.03 pc in old private sector banks where public sector
banks are in succession with 5.29 pc and 4.62 pc in G-I & II respectively, and
for this internal and external factors are responsible.
Internal factors such as business failure, inefficient management strained labor
relations, inappropriate technology and product obsolescence have also
contributed to the rise in NPAs whereas external factors like raw material
shortage, price escalation, power shortage, industrial recession, excess
capacities and the natural calamities like foods, accidents which leads waiving
heavy loans contributed to the rise in NPAs on the books of banks.
A national priority status will have to be accorded to the financial sector
reforms to strengthen the foundations of the Indian financial system and gear it
to meet the challenges of globalization. The on-going reforms process and the
agenda for the future reforms have to focus on making the financial system
viable and efficient so that it could contribute to enhancing the competitiveness
of the real economy and face the challenges of an increasingly integrated global
financial architecture. The future agenda would certainly have address to the
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following: Policies and strategies to reduce high level of NPAs: High level of
NPAs is the most crucial challenge faced by the Indian banking sector.
The banking sector reforms undertaken in India from 1992 onwards were
basically aimed at ensuring the safety and soundness of financial institutions
and at the same time at making the banking system strong, efficient,
functionally diverse and competitive. The reforms included measures for
arresting the decline in productivity, efficiency and profitability of the banking
sector. Furthermore, it was recognized that the Indian banking system should be
in tune with international standards of capital adequacy, prudential regulations,
and accounting and disclosure standards. Financial soundness and consistent
supervisory practices, as evident in our level of compliance with the Basel
Committeeís Core Principles for Effective Banking Supervision, have made our
banking system resilient to global shocks.
India has not faced any major economic/financial crises, though in 1990-91,
there was some pressure on the external sector with the current account deficit
and external debt servicing reaching large proportions. However, due to prudent
macroeconomic policies, it was possible to return the country to a sustainable
growth path. As well as the long history of regulation and supervision, Indian
banks have limited exposure to sensitive sectors such as real estate, equity, etc,
strict control over off-balance sheet activities, larger holdings of government
bonds (which helps limit credit risk), relatively well diversified credit portfolios,
statutory restrictions on connected lending, adequate control over currency and
maturity mismatches, etc, which has insulated them from the adverse impact of
financial crisis and contagion.
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Banks in India have played a significant role in the development of the Indian
economy. However, with the structural reforms initiated in the real economy
from the early 1990s, it was imperative that a vibrant and competitive financial
system should be put in place to sustain the ongoing process of reforms in the
real sector. The financial sector reforms have provided the necessary platform
for the banking sector to operate on the basis of operational flexibility and
functional autonomy, thereby enhancing efficiency, productivity and
profitability. The reforms also brought about structural changes in the financial
sector and succeeded in easing external constraints on its operation, introducing
transparency in reporting procedures, restructuring and recapitalising banks and
enhancing the competitive element in the market through the entry of new
banks.
The ongoing revolution in information and communication technology has,
however, largely bypassed the Indian banking system given the low initial level
of automation. The competitive environment created by financial sector reforms
has nonetheless compelled the banks to gradually adopt modern technology,
albeit to a limited extent, to maintain their market share. Banks continue to be
the major financial intermediaries with a share of 64% of total financial assets.
However, non-bank financial companies and development finance institutions
are also emerging as alternative sources of funding.
In India, foreign banks account for only around 8% of the total assets of the
banking system. Further, domestic households are not allowed to place deposits
abroad. Similarly, conditions for accessing overseas capital markets by
domestic corporates have been stringent, in terms of size, maturity, pricing, etc.
The impact of the entry of foreign banks on domestic banks is likely to depend
on various factors such as the structure, strength and competitiveness of
domestic banks, the share of foreign banks, and the regulatory/supervisory
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Increasing competition in banking sector in india
framework. While the entry of foreign banks could definitely improve the
competitive environment, they are not likely to weaken domestic banks. With
better technology and expertise in offering specialised banking products such as
derivatives, advisory services, trade finance, etc, the entry of foreign banks can
enhance healthy competition and has a positive spillover effect on the domestic
banks.
The domestic banks would be under peer pressure to improve operational
efficiency. It needs, however, to be recognised that the banking system in India
is quite competitive with the presence of public, private and foreign banks.
Thus, the major forces for change in the Indian context have been the following
consistent and strong regulatory and supervisory framework; structural reforms
in the real and financial sectors; commitment to adopt and refine regulatory and
supervisory standards on a par with international best practices; and competition
from foreign banks and new-generation private sector banks.
State banks in India have, over the years, played a very significant role in the
development of the economy and in achieving the objectives of the
nationalisation undertaken in 1969 and 1980, namely to reach the masses and
cater to the credit needs of all segments, including weaker sections, of the
economy. The period 1969-90 witnessed rapid branch expansion and an
adequate flow of credit to all sectors, including the neglected sectors of the
country. From 1990, however, it was recognised that steps were needed to
improve the financial health of banks to make them visible, efficient and
competitive to serve the emerging needs and enhance the efficiency of the real
sector.
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Increasing competition in banking sector in india
While the role of the large state banks has not undergone any structural changes
and they continue to serve the varying needs of the economy, what has changed
significantly, as a result of the reform process, is the focus on their
consolidation, efficiency, resilience, productivity, asset quality and profitability
through liberalisation, deregulation and adoption of prudential standards in line
with international best practices. As a part of financial sector reforms and with a
view to giving the state banks operational flexibility and functional autonomy,
partial privatisation has been authorised as a first step, enabling them to dilute
the stake of the Indian government to 51%. The government further proposed,
in the Union Budget for the financial year 2000-01, to reduce its holding in
nationalised banks to a minimum of 33% on a case by case basis.
The major problems for gradual privatisation are likely to be resistance from
staff to rationalisation of the branch network and emphasis on higher staff
productivity. The optimal size of a bank depends on several factors and differs
between countries depending on the level of economic development, the
number and diversity of financial institutions/instruments, the competitive
situation in the market, etc. Looking at the typical Indian situation, the big
banks operating in international markets have to coexist with banks operating
only at the national level, regional rural banks and cooperative banks, which
will induce the necessary competition in the market.
Most of the state banks have a strong national presence and are catering to the
needs of various segments of the economy. We do not expect to split the state
banks into smaller entities even after the gradual disinvestment of government
equity in them. Rather, there is a possibility of consolidation for synergising
business/regional strengths, and efforts in this area may be ìboard-drivenî with
the functional autonomy that will emerge as a result of such disinvestment.
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Increasing competition in banking sector in india
Under the Banking Regulation Act, banking companies cannot merge without
the approval of the Reserve Bank of India. The government and the Reserve
Bank do not play a proactive role in either encouraging or discouraging
mergers. It is our endeavour that the government and the RBI should only
provide the enabling environment through an appropriate fiscal, regulatory and
supervisory framework for the consolidation and convergence of financial
institutions, at the same time ensuring that a few large institutions do not create
an oligopolistic structure in the market.
Mergers should be based on the need to attain a meaningful balance sheet size
and market share in the face of heightened competition and driven by synergies
and locational and business-specific complementarities. While there is no
regulatory deterrence to bank mergers, their incidence has not been significant
and hence no problems have occurred in India. Mergers of banks help to reduce
the gestation period for launching/promoting new places of business, strengthen
product portfolios, minimise duplication, gain competitive advantage, etc.
They are also recognised as a good strategy for enhancing efficiency. Ideally,
mergers ought to be aimed at exploiting synergies, reducing overlap in
operations, ìright-sizingî and redeploying surplus staff either by retraining,
alternate employment or voluntary retirement, etc. As banks are leveraged and
the credibility of the top management has tremendous supervisory implications,
we prefer consensual mergers to hostile takeovers. The takeover codes should,
therefore, reflect the supervisory concerns.
It has been our endeavour to preserve the integrity and identity of banks. The
activities that the banks and their subsidiaries can undertake are restrictive, to
ensure that the interests of existing and future depositors are fully protected.
Banks are also not allowed to undertake trading in commodities. In pursuit of
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these objectives, the merger of a bank with a non-bank is generally not
favoured. However, the merger of a non-bank financial company with a bank is
allowed subject to the prior approval of the Reserve Bank of India and
compliance with all the regulatory and supervisory standards applicable to
banks. The issues that may arise in such mergers would be the bank ís ability to
comply with statutory and regulatory requirements in respect of liabilities and
assets taken over by it from the non-bank.
There is no separate agency/mechanism for preserving competition in the
banking sector. Promoting competition is, however, one of the key objectives of
financial sector reforms. The entry of new private sector and foreign banks and
introduction of new products and technology and operational freedom to banks
have ensured a competitive environment in the financial market. India being a
geographically vast country with its rural population constituting almost 70% of
the total, the role of regional rural banks remains important. The banking sector,
characterised by the presence of internationally active banks, national-level
banks and regional rural banks, is likely to be preserved to cater to the needs of
a varied customer base. Consequent to liberalisation and financial sector
reforms, there has been some blurring of distinction between the activities of
banks and DFIs.
In particular, the traditional distinction between commercial banking and
investment banking has tended to narrow somewhat. Banks have been moving
into certain areas which were the exclusive domain of the DFIs, eg project
finance and investment banking. DFIs have recently been given the option to
convert themselves into universal banks with the RBIís approval. To this end, a
DFI would need to prepare a transition path in order to comply fully with the
statutory and regulatory requirements applicable to banks. The RBI will
consider such requests on a case by case basis.
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Domestic banks account for 92% of total banking assets in India. Given the size
of the country and the policy to ensure that foreign banks market share does not
exceed 15%, domestic banks are likely to dominate the banking markets.
The financial sector reforms have brought about significant improvements in the
financial strength and the competitiveness of the Indian banking system. The
prudential norms, accounting and disclosure standards, risk management
practices, etc are keeping pace with global standards, making the banking
system resilient to global shocks. The consolidation and convergence of banks
in India has, however, not kept pace with global phenomena. The efforts on the
part of the Reserve Bank of India to adopt and refine regulatory and supervisory
standards on a par with international best practices, competition from new
players, gradual disinvestment of government equity in state banks coupled with
functional autonomy, adoption of modern technology, etc are expected to serve
as the major forces for change. In the emerging scenario, the supervisors and the
banks need to put in place sound risk management practices to ensure systemic
stability.
CONCLUSION
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Foreign Banks in India always brought an explanation about the prompt
services to customers. After the set up foreign banks in India, the banking sector
in India also become competitive and accurative. India is expected to find a
place in the strategy of these banks given the country's growth prospects. There
have been cases of foreign banks closing shops in India too. India's GDP is seen
growing at a robust pace of around 7 per cent over the next few years, throwing
up opportunities for the banking sector. Participation in the growth curve of the
Indian economy in the next four years will provide foreign banks a launch pad
for greater business expansion when they get more freedom after few years
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