profitability of banking

7/30/2019 profitability of banking

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1.1 INTRODUCTION1.2 ORIGIN OF BANKS1.3 MEANING AND DEFINITIONS OF BANK1.4 FUNCTIONS OF BANKS1.5 IMPORTANCE OF BANKS1.6 STRUCTURE OF INDIAN BANKING SYSTEM

1.6.1 Reserve Bank of India (RBI)1.6.2 Scheduled Banks1.6.3 Non-Scheduled Banks1.6.4 Commercial Banks1.6.5 Co-operative Banks1.6.6 Regional Rural Banks1.6.7 Foreign Banks in India1.6.8 Public Sector Banks1.6.9 Private Sector Banks

1.7 TOP TEN INDIAN BANKING COMPANIES DURING 2008-09REFERENCES


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11..11 IINNTTRROODDUUCCTTIIOONN

Trade is the calm health of nations.

Credit is its lifeblood.Money is its nerve system.

Trade originated in barter between primitive peoples. The first property

was communal owned by a group or a tribe. Personal property developed

out of individual possession of ornaments, usually stones or shells that

gave them a quality of decoration. The possessor of such property could

exchange it for articles of utility, and this gave rise to individual barter andindividual wealth. This principle of barter next extended itself to exchange

between groups or tribes each of which had a surplus of useful things

desired by the other.

Primitive Barter necessitated physical exchange of the things. This

exchange became burdensome and impossible if not been relieved by a

transfer of evidence of value a medium of exchange which in itself was not

wealth, but a token of wealth. That was the beginning of money.

Wealth consists in things that have inherent utility. Land is useful,

therefore it is wealth. A deed to land is only an evidence of ownership of

land; therefore in itself it is not wealth. A gold coin is wealth only in so far

as the metal it contains has a value of utility.

A man may be called a billionaire, and yet have very little money. Hisrating rests upon ownership or control of useful property, whether land,

tools or goods. The wealth of the world could not possibly be represented

by actual money. Exchanges of it could not be carried on through

accompanying transfers of actual money. Money is the active principle the

nerve center of credit. Banking grew out of the necessities of credit in

exchange. The growth was forced, and slow.

The first banking system in known history was perfected about twelve thousand

years ago, in the empire that preceded the Assyrian.


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Banking has enabled a ten-fold increase in general production, and set up

that machinery of exchange without which industry and commerce would

stagnate in a week. It has enabled those groupings of industry by which

production costs and selling prices have in so many familiar cases put basic

necessaries into the hands of all the people.

To quote a valuable book by Earl Dean Howard and Dr. Joseph French

Johnson: "Money is an instrument and banking an institution to assist

production of wealth and thereby increase the material welfare of the

people by facilitating the indispensable operations of exchange without

which all other productive effort would have but a fraction of its efficacy,without which we would still be in a state of industrial barbarism."

Banking, in its crude form, is an age-old phenomenon. It was in existence

even in ancient times. In India, the references to money-lending business

are found in the Manu Smriti. Chaldean, Egyptian and Phoenician history

also records the existence of rudimentary banking in early days.

Prof. Marshall in his book,Money, Credit and Commerce, (1923) writes about

the activities of money-changers in the temples of Olympia and other

sacred places in Greece, around 2,000 B.C. To quote him, Private money-

changers began with the task of reducing many metallic currencies, to a

common unit of value, and even to accept money on deposit at interest,

and to lend it out at higher interest permitting meanwhile drafts to be

drawn on them. As a matter of fact, the origin of banking lies in the

business of money changing in ancient days.

Crowther, speaks about three ancestors of a modern commercial bank, viz.,

the merchant, the money-lender and the goldsmith. The merchants or

traders issued documents like hundi to remit the funds. Modern banks

introduced cheques or demand drafts for remittance purposes. Money-

lenders gave loans. Bankers too gave loans. Goldsmiths received deposits

and created credit. Banks also received deposits and adopted the process of

credit in a similar fashion, by issuing cheques. In short, the evolution of


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commercial banking is related to the practice of safe-keeping of gold and

other valuables with merchants/goldsmiths/ money-lenders.

Etymologically, however, the word bank is derived from the Greek word

banque, or the Italian word banco both meaning a bench referring to a

bench at which money-lenders and money-changers used to display their

coins and transact business in the market place.

In India, however, modern banking started when the English agency

houses in Kolkata and Mumbai began to serve as bankers to the East India

Company and the Hindustan Bank was the first banking institution of its

kind to be established in 1779.

11..22 OORRIIGGIINN OOFF BBAANNKKSS

There is no unanimity among the economists about the origin of the word

Bank. The word bank is itself derived from the Greek word banque i.e.,

a bench. The ancient meaning of bank related with the money changers by

the persons seating on benches. Peoples can change their money from thesepersons. They had funds of different currencies and can change any

currency in another currency as required by the businessman. Afterwards

the word bank was used in the sense of credit. As the second opinion the

word bank was developed from the German word banck. The word

banck means a joint stock firm.

Banking is as old as is the authentic history and origins of moderncommercial banking are traceable in ancient time. The new testament

mentions about the activities of the money changers in the temples of

Jerusalem.

In ancient Greece around 2000 B.C. the famous temples of Ephesus, Delphi

and Olympia were used as depositories fir peoples surplus funds and

these temples were the centres of money-lending transactions. The priests

of these great temples acted as the financial agents until public confidence

was destroyed by the spread of disbelief in the religion. Traces of credit by


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compensation and by transfer orders are found in Assyria, Phoenicia and

Egypt before the system attained full development in Greece and Rome.

In India, the ancient Hindu scriptures refer to the money-lending activities

in Vedic period. During the Ramayana and Mahabharata period, banking

had become a full fledged business. The Vaishyas community earns

interest by lending money. They performed most of those functions which

banks perform in modern times.

As a public enterprise, banking made its first beginning around the middle

of the twelfth century in Italy. The Bank of Venice, founded in 1157, was

the first public banking institution. After its establishment, were

established the Bank of Barcelona and the Bank of Genoa in 1401 and

1407 respectively. Apart from these banks, the famous Bank of

Amsterdam was established in 1609 in Holland and it enjoyed a

prestigious position for a long time in the sphere of international

commerce. In the year 1694 the Bank of England was established. Modern

banking was started with the establishment of the Bank of Amsterdam.The Bank of England is the oldest unit of modern banking.

Joint stock companies had entered in the banking sector in eighteenth

century. The Banking Act of 1833 had opened the way of establishment of

joint stock banks. While banking arose far early and more rapidly in some

countries, it was only in the nineteenth century that the modern joint stock

commercial banking system developed in the leading countries of the

world.

11..33 MMEEAANNIINNGG AANNDD DDEEFFIINNIITTIIOONNSS OOFF BBAANNKK

You know people earn money to meet their day-to-day expenses on food,

clothing, education of children, housing, etc. and to meet future expenses

on marriage, higher education of children, house building and other social

functions. These are heavy expenses, which can be met if some money is

saved out of the present income. Saving of money is also necessary for old


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age and ill health when it may not be possible for people to work and earn

their living.

The necessity of saving money was felt by people even in olden days. They

used to hoard money in their homes. With this practice, savings were

available for use whenever needed, but it also involved the risk of loss by

theft, robbery and other accidents. Thus, people were in need of a place

where money could be saved safely and would be available when

required.

Banks are places where people can deposit their savings with the assurance

that they will be able to withdraw money whenever required. People who

wish to borrow money for business or other purposes can also get loans

from the banks.

A bank is a person who carries on the business of banking, which is:

conducting current accounts for customers

paying cheques drawn on him, and

collecting cheques for his customers.

Bank is a lawful organisation, which accepts deposits that can be

withdrawn on demand. It also lends money to individuals and

business houses that need it.

A Bank is an institution which accepts deposits from the general public

and extends loans to the households, the firms and the government. Banksare those institutions which operate in money. Thus, they are money-

traders. With the process of development, functions of banks are also

increasing and diversifying. Now, the banks are not nearly the traders of

money, they also create credit. Their activities are increasing and

diversifying. Hence, it is very difficult to give a universally acceptable

definition of bank. The important definitions of bank are as follows given

on different bases:


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(A) Definitions given in Dictionaries:

In different dictionaries bank has been defined in different ways:-

(1) Websters Dictionary:Bank is an institution which trades in money,establishment for the deposit, custody and issue of money, as also for

making loans and discounts and facilitating the transmission of

remittances from one place to another.

(2) Oxford Dictionary: Bank is an establishment for custody of money

received from or on behalf of its customers. Its essential duty is to pay

their drafts on it. Its profits arise from the use of the money left

employed by them.

(B) Definitions under Laws of Different Countries or LegalMeaning of Bank:Legal definitions of Bank under different laws are as follows:-

(1) Indian Banking Regulation Act, 1949:Banking Company is one whodoes banking business. Banking business means to accepting for thepurpose of lending or investment of deposits of money from the

public repayable on demand or otherwise and withdrawable by

cheque, draft order or otherwise.

(2) American Federal Acthas defined State Bank as, any bank, banking

federation, trust company, saving bank (excluding mutual banks) or

other institutions who engaged in the business of accepting deposits

and incorporated under any state law.

(C) Definitions on the basis of views of scholars:

The economist defined the term bank are discussed below:-

(1) According to Prof. Kinley:A bank is an establishment which makesto individuals such advances of money or other means of payment as

may be required and safely made; and to which individuals entrust

money or means of payment when not required by them for use.


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(2) According to Prof. R.S. Sayers: Banks are institutions, whose debts

usually referred to as bank deposits are commonly accepted in final

settlement of other peoples debts. In other words, Bankers are not

merely traders in money but also in important sense manufacturers of

money.

(3) According to Prof. Findaly Shirras: A banker is a person, firm or

company, having place of business where credits are opened by the

deposits or collection of money or currency, subject to be paid or

remitted upon draft, cheque or order when money is advanced or

loaned on stock, bonds, bullion, bill of exchange and promissory noteare received for discount or sale.

The most suitable definition of the bank is A bank is an institution which

deals in money and credit.When we say that the bank deals in money and

credit, what we mean is that the bank buys and sells money and credit. By

sale of money, what is meant is the giving of loans. Likewise, by purchase

of money, we mean borrowing money from others. In both the situations,

the price of money is paid in the form of interest.

11..44 FFUUNNCCTTIIOONNSS OOFF BBAANNKKSS

Banks not only deals in money and credit, but also they perform large ###

variety of functions such as agency functions, credit creation and general

service. Here we use the meaning of modern banks in a narrow sense as

commercial banks. Following are the main functions of Commercial Banks

or Modern Banks:-

(a)Primary or Traditional Functions.

(b)Agency or Representative Functions.

(c)General Utility Functions.

(d)Financial and Managerial Arrangement for Foreign Trade.

(e)Function of Credit Creation.


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Functions of Banks

Figure 1.1

(A) (B) (C) (D) (E)

1. Accepting Deposits:(i) Fixed Deposit A/c(ii) Current Account(iii) Savings Bank A/c(iv) Other Accounts

2. Advancing of Loans

(i) Cash Credit(ii) Loans & Advances(iii) Overdraft(iv) Discounting of

Bills of Exchange

1. Collection of chequesand bills

2. Payment of cheques andbills

3. Collecting payment onbehalf of customers

4. Remittance facilities

5. Purchase and Sales ofsecurities

6. Trustee and Executor7. Underwriting Function8. Other Agency Functions

1. Safe custody of valuables2. Issuing of Travellers

cheques3. Information about

customers4. Financial Advisor5. Publication of Statistics

6. Accepting Bills ofExchange

7. Guaranteer of Loans8. Providing Consumer

Loans9. Arrangement of Public

Debts10. Foreign Exchange

Transactions

Primary orTraditionalFunctions

Agency orRepresentative

Functions

General UtilityFunctions

Financial &Managerial

Arrangement forForeign Trade

CreditCreation

Functions of Banks


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(A) Primary or Traditional Functions:

The primary functions of modern banks are as follows:

1. Accepting Deposits: The main function of a commercial bank is to

accept deposits from the public and providing loans. Banks required

money for providing loans. Their share capital does not create

sufficient funds for providing loans. Therefore, banks accept deposits

from the persons or institutions and pay interest to the depositors.

Persons or institutions deposit their surplus funds with banks for the

purpose of earning of interest and safety of funds. Banks play the

reasonable interests on the deposits. The bank not only undertakes to

take care of the deposit but also agree to honour the demands of the

depositors from withdrawal of money from the deposit. The bank

generally accept deposit by the way of opening following accounts:

(i) Fixed Deposit Account: This is also known as term deposit or time

deposit account. Money in this account is accepted for a fixed period,

say one, two or ten years. The money so deposited cannot be

withdrawn before the maturity period or the expiry of the fixed time.

The rate of interest on this account is higher than that on other

accounts and varies according to the period of deposit. It matures at a

definite date. If a depositor withdraws this amount before the

maturity period, he entails an interest penalty. Thus, bank can fully

use this amount for a certain period.(ii) Current Account: This is also known as demand deposit or current

deposit. The depositor can withdraw the money from this account

whenever he requires it. Generally, the bank grants no interest on this

account because it has to keep the cash ready all the time to meet the

requirement of the depositors. This account is generally opened by

businessman, companies, institutions and Government, who may

have to withdraw money several times in a day. In the case of current

account bank has to pay off the debt on demand either to the


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depositor himself or to anyone else whom he authorizes by writing a

cheque. Bank cannot use this money freely, so he does not pay any

interest on current account deposits. The amount deposited in current

account is the debt of the bank. Overdraft facilities are also available

on current account.

(iii) Savings Bank Account: This type of account is generally opened by

small and middle income group persons. They deposit their small

savings in this account and earn interest. By depositing their small

savings they also help in capital formation. Deposits in this account

earn interest at nominal rates, as the banks can always be called upon

by a depositor to release his amount. In practice, the bank imposes a

limit on the number and amount of withdrawals during a particular

period. The depositors are also given cheque facility to withdraw

money from this account.

(iv) Other Accounts: Banks are also providing deposit facilities to

different type of customers by opening different accounts. They also

open Home Safe Account for housewife or very small savers. The

other accounts are: Indefinite Period Deposit Account, Recurring

Deposit Account, Daily Saving Deposit Account, Retirement Scheme,

Monthly Income Scheme, Minor Saving Account, Formers Deposit

Account, Home Deposit Account, Accounts related to Insurance

benefits etc.

2. Advancing of Loans: The important function of commercial bank is

advancing loans to their customers. The bank received deposit by

different ways and pay interest on the deposits. Bank grant loan from

this amount and charge interests at a higher rate. These loans are

generally granted to traders, industrialists, farmers and self-employed

persons. Generally, bank sanctions following type of loans and

advanced:

(i) Cash Credit: In this system bank advances loans on the basis of

security of shares, debentures, other securities and tangible assets. It


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may also be based on the promissory notes of the borrowers. In cash

credit banks grant loans and deposit it in the borrowers account. The

borrower can withdraw this amount at any time and interest is

charged on the used amount. Under this type of loan, borrower

withdraw sum of money according to his requirements but he cannot

exceed the credit limit sanctioned to him. When the borrower

mortgage goods (stock) kept in the godown, the godown remains in

the possession of the bank.

(ii) Loans and Advances: Here the bank gives a specified sum of money

to a person or a firm against some collateral security. The loan money

is credited to the account of the borrower and the borrower can

withdraw loan amount according to his requirements. The borrower

has to pay interest on the entire amount of loan from the date of

sanctioning of loan to the date of repayment. If borrower fails to

repay the loan, its collateral security can be sold by the bank in the

market and recover his loan amount.

(iii) Overdraft: Commercial banks also allow a customer to draw cheques

for a sum which is greater than the balance lying in his account. This

is known as overdraft facility which can be allowed upto an agreed

limit. In the case of overdraft, a customer pays interest on the amount

by which his current account is actually overdrawn. He does not have

to pay interest on the entire amount of overdraft sanctioned to him by

the bank. This facility is granted against some collateral security for

short period.

(iv) Discounting of Bills of Exchange: Banks also lend money by

discounting bills of exchange. In case the holder of a bill needs money

immediately, he can get his bills discounted by a bank. The bank

charges a commission for discounting of bills. When the bill matures,

the bank can get payment directly from the banker of the debtor who

originally accepted the bill.


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(B) Agency or Representative Functions:

The bank performs various agency functions or services for its customers.

For these services, the bank charges commission from its customers. A few

services are rendered by the bank to its customer free of charge.

The various agency services rendered by the bank are as follows:

1. Collection of Cheques, Bills of Exchange and other Credit

Instruments: Bank collects the payment of cheques, bills of exchange or

other credit instruments on behalf of its customers from other banks

and credit it in their accounts. Generally, this service is rendered free of

charge but on outstation credit instruments, bank charges nominal fees.

2. Making Payment of Cheque, Bill of Exchange etc.: Commercial banks

perform the function of making payments of cheque, bills of exchange

etc. Bank pay insurance premium, rent, subscriptions etc. on behalf of

their customers and debit their account. Banks also accept bills of

exchange on behalf of their customers and make payment on due date.

3. Collecting dividends, interest etc. on shares and debentures of the

customers: The bank collects dividends and interests paid by the

companies on shares and debentures on behalf of their customers and

credit it in their account.

4. Remittance Facilities: On request of the customer, bank helps in

transferring funds from one place to another through bank drafts,

cheques, and mail transfers. Bank charges fee for its services.

5. Purchase and Sale of Security: Bank purchases and sells securities in

the share market on order and on behalf of its customers. They charge

appropriate commission for their services.

6. Trustee and Executor: Banks also acts as a trustee, executor,

administrator and attorney. As a trustee, bank takes care of the assets

of the customers. It also helps in the administration of the trust. As an

executor the bank preserves the wills of the customers and execute it


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as per the desire of the customer. As an attorney, the bank signs

transfer forms and documents on behalf of the customer.

7. Underwriting Function: Bank also execute the function of

underwriting shares, debentures, bonds and other securities issued by

the public limited company or Government. Bank provide guarantee of

minimum funds to the company. The underwriting function of bank

creates public confidence in the working of companies. Bank charges

commission for underwriting services.

8. Other agency functions: The bank also acts as an agent, representative

or correspondent of customers. The bank may obtain passports,travellers tickets and even secure air tickets for its customers.

(C) General Utility Functions:

Bank also provides following general utility services to its customers:

1. Safe custody of valuable goods: The bank provides locker facilities to

its customers for safekeeping of their valuables like shares and

debentures certificates, gold ornaments, documents etc. Bank charges

annual rent for providing lockers.

2. Issuing of Travellers Cheques etc.: The bank also issues travellers

cheques or circular letters of credit for the benefit of its customers.

Customer can obtain certain amount at a certain place by presenting

travellers cheque. Thus, customers may free from the problems of

keeping cash with them.

3. Giving Information about its Customers: Since the bank is closely

acquainted with its customers, it can pass on reliable information about

their credit-worthiness to other concerned parties at other places. The

banks information is considered as reliable. It reduces risk and helps in

explanation of trade and business.

4. Financial Advisor: Since the bank is fully acquainted with the

economic situation in the country, it is in a position to render useful


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advice to its customers on financial matters. This helps the customer in

taking appropriate decisions.

5. Publication of Statistics: Large commercial bank collects statistics

about money, banking, trade and commerce and publishes them. They

present the analysis of these economic statistics which helps in

economic and business decisions.

6. Accepting Bills of Exchange: The banks accept exchange bills on

behalf of their customers. This benefits the customers because when the

bank signifies its acceptance on the exchange bill, it becomes readily

discountable in the money market.

7. Guaranteer of Loans: Commercial banks act as guarantor of the loans

of industrial and business houses granted by National and

International Financial Institutions, and thus help to get loans easily.

8. Providing Consumer Loan: Commercial banks grant consumer loan to

their customers on their personal credit, for purchasing of consumer

article such as Television, Refrigerator, Scooter etc. and can be repaid ineasily installments.

9. Arrangement of Public Debts: Commercial banks help in selling of

securities issued by the Government as an agent of RBI.

10. Foreign Exchange Transactions: Some commercial banks also take the

responsibility of foreign exchange transactions and have a separate for

this purpose.

(D) Financial and Managerial Arrangement for Foreign Trade:

Commercial banks have played an important role in the expansion of

foreign trade. They make available short term credit to the traders

engaged in foreign trade and undertake the functioning of acceptance and

discounting of bills, hundies and letter of credit. These banks also take the

task of establishing mutual relationship between exporters and importers.


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(E) Credit Creation:

Commercial banks undertake the function of credit creation according to

the credit policy of Reserve Bank of India. Granting of loans and advances

is an important function of the bank. As we know, when the bank grants

loans to its customers, it generally does not lend out cash, equal to the

amount of the loan, to the customer as an individual money-lender does,

but on the contrary, opens an account in his (borrowers) name and credits

the amount of the loan to his account. Thus, whenever a bank grants a

loan, it creates a deposit or a liability against itself, which leads to a net

increase in the money stock of the economy. This is known as creation ofcredit or money by the bank.

11..55 IIMMPPOORRTTAANNCCEE OOFF BBAANNKKSS

Banks play very important role in the economic life of the nation. The

health of the economy is closely related to the soundness of its banking

system. Banks are essential for all type of economic systems whether they

are developed or developing. No developing country can progress

without setting a sound system of banking in the country. Although banks

create no new wealth but their borrowing, lending and related activities

facilitates the process of production, distribution, exchange and

consumption of wealth.

In this way they become very effective partners in the process of economic

development. Today, modern banks are very useful for the utilization of

the resources of the country. The banks are mobilizing the savings of the

people for the investment purposes. The savings are encouraged and

saving rate increases. If there would be no banks then a great portion of a

capital of the country would remain idle.

A bank as a matter of fact is just like a heart in the economic structure and

the capital provided by it is like blood in it. As long as blood is in

circulation the organs will remain sound and healthy. If the blood is not

supplied to any organ then that part would become useless. The


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importance of a sound system of banking for a developing country may be

depicted as follows:

1. Promotion of Saving: The basic function of commercial banks is to

mobilize the savings of the community and to utilize it in productive

investment. By accepting deposits banks promote the habit of thrift and

saving in the society. People collect their small savings and deposit it in

the bank to earn interest. These small savings later result in capital

formation in the country.

2. Capital formation: By encouraging savings among the people, banks

promote capital formation which is the basis of economic developmentof the country. These savings are used to provide loans to industries

and business. Commercial banks also create credit. This credit and

finance works as capital to the industries. Thus, by collecting small

savings banks help in capital formation and ultimately in the economic

development of the country.

3. Financing for Trade and Industries: The banks also encourage

industrial development and business expansion by providing funds to

entrepreneurs. Modern industries require a huge amount of capital.

They cannot run without sufficient capital. Commercial banks have to

finance small and large industries by giving term loans. Banks collect

scattered small saving in the society and utilize this amount by giving

loans to industries, business and Government. They also help in

increasing productivity of capital by providing funds to theentrepreneurs.

4. Mobility of Capital: Capital is the main factor for developing modern

lines of production. Commercial banks mobilize the dormant capital of

the country for production purposes. Commercial banks can contribute

to capital mobilization by investing capital in more useful places than

less productive places. Thus, by mobilizing capital they contribute in

increasing production, employment, national income and economic

development of the country.


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5. Flexibility of Monetary System and Price Stability: Banks regulate the

supply of money in an economy through credit creation. Price stability

can be maintained by balancing between the demand and supply of

money. Thus, banks help in price stabilizing and in maintaining

flexibility in monetary system.

6. Remittance facility: Banks help in remitting money from one place to

another. Remittance facilities provided by the banks help in promoting

national and international trade. It also reduces business risk and

transfer of money cost.

7. Helps in Public Finance: Banks play an important role in collecting

funds through public debts. They also act as a financial advisor and

financier to the Government, when needed. Profits of public sector

banks are used as a source of public finance. They collect fund through

selling Government security to the public.

8. Employment Generation: Banks help in development and expansion

of industrial and business activities. They have opened the vista of

development in the country. With the growth of industrial, businessand banking activities employment opportunities in the country has

increased to a considerable extent.

9. Finance for priority sectors: In an underdeveloped economy,

commercial banks hesitate in extending financial accommodation to the

priority sectors such as agriculture, small scale industries on account of

the risks involved therein. They mostly extend credits to trade and

commerce where the risk involved is far less. But for the development

of these countries it is essential that banks take risks in extending credit

facilities to the priority sectors. Nationalised commercial banks are

doing this job successfully.

10. Innovations: Innovations are an essential prerequisite for economic

development. These innovations required financial facilities. In

developed countries, banks extend credit facilities for innovations. Butthe entrepreneurs in developing countries cannot bring about these

innovations due to lack of adequate bank credit. The banks should,


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therefore, pay special attention to the financing of business innovations

in developing countries by extending cheap credit to the entrepreneurs.

11. Promotion of Sound Banking System: A sound banking system is

essential for the economic development of a developing country. Bank

helps in promotion of banking trends in public. With the development

of banking activities, cheques and drafts are being used in transactions.

It reduced the requirement of coins and currency in circulation.

12. Balanced Regional Development: Banks help in proper allocation of

funds among different regions of the country and thus help in balanced

regional development. Now, banks have stared acting as powerful

agents of growth. In this role, they do not follow economic

development rather banks create the infrastructure essential for

economic development. Thus, banks can act as engines of balanced

regional development in the country.

13. Expansion of Markets: Banks help in the expansion of markets

through extending funds for large scale production. Commercial banks

encouraged business activities in a number of ways, e.g., act as anintermediary, accepting bills of exchange, issuing of letter of credit etc.

The presence of banks makes it possible for commerce and industry to

extend their area of operation.

14. Developing Entrepreneurs: Banks have assumed the role of

developing entrepreneurs especially in developing countries. This role

is being effectively played by underwriting new scrips, by granting

assistance either as mentor for promoting new ventures or financing

promotional activities under the joint guarantee system.

Thus, commercial banks can play a useful role in promoting the economic

development of an economy. Banks lending and investment activities

lead to changes in the quantity of money in circulation which in turn

influence the nature and quality of production. Therefore, commercial

banks have been rightly crowned as the nerve centre of all economicactivity. In fact, the economic development of a country is not possible

without a sound system of commercial banking.


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11..66 SSTTRRUUCCTTUURREE OOFF IINNDDIIAANN BBAANNKKIINNGG SSYYSSTTEEMM

The banks play a stellar role in the development of the nation with its high

social content and commitment. The banks act as a development agency

and are the source of hope and aspirations of the masses. Banking and

finance is like oxygen to any democracy. The structure of the banking

system is determined by two basic factors economic and legal. The

development of the economy and the spread of banking habit calls for

increasing banking services. The demand for these banking services affects

the banks structure and organisation. National objectives and aspirations

result in government regulations, which have a profound influence on the

banking structure. These regulations are basically of two types

(i) First, regulations which result in the formation of new banks to

meet the specific needs of a group of economic activities and

(ii) Secondly, legislation that affects the structure by means of

nationalisation, mergers or liquidation.

It is no exception in case of India as banking is one of the most heavily

regulated businesses in the world. The Indian banking system has come

from a long way from being a sleepy business institution to a highly

proactive and dynamic entity. Indian economy is having a vibrant

banking sector, powered by both improved-efficiency public sector banks

and growth-hungry private ones.

Banking Segment in India functions under the umbrella of Reserve Bank

of India - the regulatory, central bank. India follows a bank-based financial

system with a multilayered network consisting of scheduled and non-

scheduled banks. These scheduled and non-scheduled banks functions

under different categories consisting of: large state-owned banks, old

private banks, new private banks, foreign banks, regional rural banks,

cooperative banks, non-banking finance companies (NBFCs) anddevelopment financial institutions.


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Structure of Indian Banking System (As on 31st October, 2006)

Figure 1.2

Note: Figures in parentheses indicate number of banks in each group.Source: Reserve Bank of India, Report on Trend and Progress of Banking in India, various issues.

RESERVE BANK OF INDIA[Central Bank and Supreme Monetary Authority]

SCHEDULED BANK NON-SCHEDULED BANKS

COMMERCIAL

BANKS [186]CO-OPERATIVE

BANKS [86]

REGIONALRURALBANKS

[102]

PRIVATESECTORBANKS

[27]

PUBLICSECTORBANKS

28

FOREIGNBANKS IN

INDIA[29]

SCHEDULEDURBAN

COOPERATIVEBANKS [55]

SCHEDULEDSTATE

COOPERATIVEBANKS [31]

STATE BANK OFINDIA AND ITS

ASSOCIATES [08]

NATIONALISEDBANKS

[19]

OTHER PUBLICSECTOR BANK

[ IDBI ]

OLDPRIVATE

BANKS [19]

NEWPRIVATE

BANKS [08]


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The viable banking structure, extremely useful and indispensable, playing

a substantial role in the growth of Indian economy is shown in

Figure 1.2.

1.6.1 Reserve Bank of India (RBI)

A bank which is entrusted with the functions of guiding and regulating

the banking system of a country is known as its Central bank. Such a bank

does not deal with the general public. Indias central bank is the

Reserve Bank of India. Reserve Bank of India (RBI), was established on

April 1, 1935 in accordance with the provisions of the Reserve Bank of

India Act, 1934. Though initially RBI was privately owned, it was

nationalized on January 1, 1949.

The RBI is the apex monetary institution in the money market which acts

as the monetary authority of the country. The RBI is an organ of the

government which, by reason of its operations, influences the working of

financial institutions of the country. In India, the R performs the functions

as depicted in Figure - 1.3.

Functions of Reserve Bank of India

Figure 1.3

ControlBankingSystem

IssueCurrency

Notes

ExecuteMonetary

Policy

Custodianof ForeignReserves

BankersBank

Controllerof Credit

Banker tothe

Government

Publicationof Data


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The Reserve Bank of India also has three fully owned subsidiaries:

National Housing Bank (NHB), Deposit Insurance and Credit Guarantee

Corporation of India (DICGC), Bharatiya Reserve Bank Note Mudran

Private Limited (BRBNMPL). The general administration and direction of

RBI is governed by Central Board of Directors consisting of 20 members

which includes 1 Governor, 4 Deputy Governors, 1 Government Official

appointed by the Government of India to give representation to important

stratas in economic life of the country. Besides, 4 Directors are nominated

by the Government of India to represent 4 local boards situated in

Mumbai, Kolkata, Chennai and New Delhi.

1.6.2 Scheduled Banks

Scheduled banks constitute those banks which have been included in the

Second Schedule of the Reserve Bank of India Act, 1934 and these banks

are entitled to borrowing facilities from the RBI. RBI in turn includes only

those banks in this schedule which satisfy the criteria laid down vide

section 42(6)(a) of the Act. On their part, they are required to maintain acertain minimum balance in their accounts with the RBI. They come

within the direct influence of the various credit control measures of the

RBI; and the effects of these measures diffuse through the length and

breadth of the economy.

1.6.3 Non-Scheduled Banks

The banks, which are not covered by the Second Schedule of Reserve Bank

of India, are called as non-scheduled banks. "Non-scheduled banks in

India" means a banking company as defined in clause (c) of section 5 of the

Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

1.6.4 Commercial Banks

Commercial banks are joint stock companies dealing in money and credit;

the heart of financial system, since they have the ability, in cooperation

with the RBI, to add to the money supply of the nation and create


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additional purchasing power. Commercial banks lending, investments

and related activities facilitate the economic processes of production,

distribution and consumption. Commercial banks have been referred to as

department stores of finance as they provide wide variety of financial

services like transfer of funds, collection, foreign exchange, safe custody,

safe deposit locker, travellers cheque, merchant banking services, credit

cards, gift cheques, etc. in addition to the acceptance of deposits, lending

and investing. The commercial banking structure in India comprises of

(i) Regional Rural Banks

(ii)

Foreign Banks in India(iii) Public Sector Banks

(iv) Private Sector Banks

Development Process of Commercial Banking in India after Independence

Figure 1.4

1949 Re ulation BANKING COMPANIES ACT, 1949

1955Nationalisation

Phase-ISTATE BANK OF INDIA SBI

1959Nationalisation

Phase-IISBI SUBSIDIARIES

1961Insurance Cover to

DepositsDEPOSIT INSURANCE CORPORATION

1968 Social Control NATIONAL CREDIT COUNCIL

1969Nationalisation

Phase-III14 MAJOR COMMERCIAL BANKS

1971 Credit Guarantee CREDIT GUARANTEE CORPORATION

1975 New Rural Banks REGIONAL RURAL BANKS

1980Nationalisation

Phase-IV

SIX COMMERCIAL BANKS WITH OVER

DEPOSITS OF Rs. 200 CRORES

1985Reorganisation of

Banking

1996 New Banks NEW PRIVATE BANKS

1998 Review RE-EXAMINATION


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1.6.5 Co-operative Banks

Farmers in India are scattered all over the country and need short-term

and/or long-term borrowings for agricultural purposes. This need is not

fulfilled by commercial banks which are unsuited for financing

agriculture; land which these farmers can offer to cover bank advances is

not generally accepted as security by commercial banks. Therefore, co-

operative banks best suited for this purpose. Thus, the co-operative

banking sector has been developed in the country to supplant the village

moneylender, the predominant source of rural finance, as the terms on

which he made finance available have generally been usurious anddetrimental to the development of Indian agriculture. Although the co-

operative banking sector receives concessional finance from the RBI, it is

governed by the State legislation.

The co-operative banking structure in India comprises of

(1)Primary Urban Co-operative Banks

(2)Short-Term Lending Oriented Co-operative Banks

(i) Primary Agricultural Credit Societies (PACS)

(ii) Central Co-operative Banks (CCBs)

(iii) State Co-operative Banks (SCBs)

(3)Long-Term Lending Oriented Co-operative Banks

(i) Land Development Banks (LDBs) / State Co-operative

Agriculture and Rural Development Banks (SCARDBs)

1.6.6 Regional Rural Banks

A new category of scheduled banks came into existence in 1975 when 6

Regional Rural Banks (RRBs) came into existence under the Regional

Rural Banks Ordinance, 1975. This ordinance was promulgated by the

Government of India on September 26, 1975. The ordinance was

subsequently replaced by the Regional Rural Banks Act, 1976.

Although co-operative and commercial banks achieved a high reach and

disbursement of credit, there existed a vast gap in the area of rural credit.


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In order to fill up this gap, a new set up of banks, namely, RRBs was

established. RRBs were set up as institutions which combine the local feel

and familiarity with rural problems, which the co-operatives posses and

the degree of business organisation, ability to mobilise deposits, access to

central money markets, and modernized outlook which commercial banks

have. The major objective of setting up RRBs was to develop the rural

economy by providing for the purpose of development of agriculture,

trade, commerce, industry and other productive activities in the rural

areas, credit and other facilities, particularly to the small and marginal

farmers, agricultural labourers, artisans, and small entrepreneurs. The

authorized capital of each RRB is Rs. one crore and the issued capital is Rs.

25 lakh. Of the issued capital, 50 per cent is authorized by the Government

of India, 15 per cent by the concerned state government and the balance,

namely, 35 percent by the sponsor bank. RRBs are required to maintain a

cash reserve ratio of three percent/ they are not liable to pay income tax as

they are deemed to be cooperative societies.

1.6.7 Foreign Banks in India

These banks are registered and have their headquarters in a foreign

country but operate their branches in our country. Foreign banks have

been operating in India since decades or over a century. ANZ Grindlays

has been in India for more than hundred years, while Standard Chartered

Bank has been since 1858. Many other foreign banks set up their branches

in India during the 1990s the liberalisation period.

Some of the foreign banks have set up different entities as subsidiaries in

the form of either non-banking financing companies in the non-financial

sector in India that undertake diverse businesses such as dealing in

securities, leasing and finance, and information and technology. Also,

foreign banks have wholly-owned subsidiaries to run their global business

process outsourcing jobs. A foreign bank can set up a wholly-owned non-

banking subsidiary if it brings in USD 50 million. Unlike the banks there is

no regulation on these NBFCs for setting up branch networks. As per the


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existing norms, a banks exposure to a single corporate entity is restricted

at 15 percent of its capital while for a group it is at 40 percent. The strong

presence of foreign banks in India has benefited the financial system by

enhancing competition, transfer of technology and specialised skills

resulting in higher efficiency and greater customer satisfaction.

In terms of the Press Note No.2 (2004 series) issued by the Ministry of

Commerce and Industry on March 5, 2004, foreign banks will be permitted

to have either branches or subsidiaries not both. They may operate in

India through any one of the three channels viz., (i) branch; (ii) a wholly

owned subsidiary; or (iii) a subsidiary with aggregate foreign investmentupto a maximum of 74 percent in a private bank.

The RBI has prepared a road map for the presence of foreign banks in

India. Under the road map, during the first phase, between March 2005

and March 2009, foreign banks satisfying the eligibility criteria prescribed

by the RBI will be permitted to establish presence by way of selling up a

wholly-owned banking subsidiary or converting the existing branches intoa subsidiary. The wholly-owned banking subsidiary should have a

minimum capital of Rs. 300 crore and sound corporate governance. The

second phase will commence in April after the RBI undertakes a review of

the experience gained and after due consultation with all the stakeholders.

New foreign banks are allowed to conduct business in India after

consideration of the financial soundness of the bank, international and

home country ranking, rating, international presence, and economic and

political relations between the two countries. Foreign banks need to park

20 percent of their profits from India operations with the RBI; and kept as

cash, as unencumbered approved securities or a combination of the two.

1.6.8 Public Sector Banks

These are the banks where majority stake, ownership and control are held

by the Government of India or Reserve Bank of India. Public sector banks

are divided into following categories


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(i) State Bank of India and its Associates

(ii) Nationalised Banks

(iii) Other public sector banks IDBI Bank Ltd.

State Bank of India and its Associates

The evolution of State Bank of India can be traced back to the first decade

of the 19th century. It began with the establishment of the Bank of Calcutta

in Calcutta, on June 2, 1806. The bank was redesigned as the Bank of

Bengal, three years later, on January 2, 1809. It was the first ever joint-

stock bank of the British India, established under the sponsorship of the

Government of Bengal. Subsequently, the Bank of Bombay (established on

April 15, 1840) and the Bank of Madras (established on July 1, 1843)

followed the Bank of Bengal. These three banks dominated the banking

scenario in India, until they were amalgamated to form the Imperial Bank

of India, on January 27, 1921.

An important turning point in the history of State Bank of India is the

launch of the first Five Year Plan of independent India, in 1951. Until thePlan, the commercial banks of the country, including the Imperial Bank of

India, confined their services to the urban sector and were not equipped to

respond to the growing needs of the economic revival taking shape in the

rural areas.

In order to serve the economy as a whole and rural sector in particular, the

All India Rural Credit Survey Committee recommended the formation of astate-partnered and state-sponsored bank and proposed the take over of

the Imperial Bank of India, integrating with it, the former state-owned or

state-associate banks. Subsequently, an Act was passed in the Parliament

of India in May 1955. As a result, the State Bank of India (SBI) was

established on July 1, 1955. This resulted in making the SBI more

powerful, because as much as a quarter of the resources of the Indian

banking system were controlled directly by the State. Later on, the State

Bank of India (Subsidiary Banks) Act was passed in 1959. The Act enabled


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the State Bank of India to make the State-associated banks as its

subsidiaries. These subsidiaries of SBI were

(i) State Bank of Bikaner and Jaipur (SBBJ)

(ii) State Bank of Hyderabad (SBH)

(iii) State Bank of Indore (SBIR)

(iv) State Bank of Mysore (SBM)

(v) State Bank of Patiala (SBP)

(vi) State Bank of Saurashtra (SBS)

(vii) State Bank of Travancore (SBT)

The State Bank of India holds the dominant market position among all

Indian banks. It is the largest commercial bank of India and is ranked as

one of the top banks worldwide. SBI is now planning to position itself as

universal bank catering to the diverse needs of the society. The Table 1.1

hereunder shows the list of the State Bank Group as on March 31, 2009.

Table 1.1

State Bank of India and its Associates as on March 31, 2009

Name of the Bank Year of IncorporationState Bank of India (SBI) 1955

State Bank of Bikaner and Jaipur (SBBJ) 1966

State Bank of Hyderabad (SBH) 1941

State Bank of Indore (SBIR) 1960

State Bank of Mysore (SBM) 1913

State Bank of Patiala (SBP) 1917

State Bank of Saurashtra (SBS) * 1902

State Bank of Travancore (SBT) 1945

Note : * State Bank of Saurashtra was merged with State Bank of India on August 13, 2008.Sources: (i) Annual Reports of various banks for the year 2008-2009.

(ii) Report on Trend and Progress of banking in India, RBI, 2008-2009.


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Nationalised Banks

Nationalised banks dominate the banking system in India. The history of

nationalised banks in India dates back to mid-20th century, when Imperial

Bank of India was nationalised (under the SBI Act of 1955) and

re-christened as State Bank of India (SBI) in July 1955. Before 1969, State

Bank of India (SBI) was the only public sector bank in India.

SBI was nationalised in 1955 under the SBI Act of 1955. Then on July 19,

1960, its seven subsidiaries were also nationalised with deposits over 200

crores. However, the major nationalisation of banks happened in 1969 by

the then-Prime Minister Indira Gandhi. In 1969, fourteen (14) big Indian

joint stock banks in the private sector were nationalised.

In the year 1980, the second phase of nationalisation of Indian banks took

place, in which 7 more banks were nationalised with deposits over 200

crores. With this, the Government of India held a control over 91% of the

banking industry in India.

In all, 28 banks were nationalised from 1955 to 1980.

At present, there are 27 nationalised banks: the State Bank of India and

its seven associates and 19 nationalised banks (New India Bank was

merged with Punjab National Bank).

The major objectives behind nationalisation were to widen the branch

network of banks particularly in the rural and semi-urban areas which, inturn, would help in greater mobilisation of savings and flow of credit to

neglected sectors such as agriculture and small-scale industries. After the

nationalisation of banks there was a huge jump in the deposits and

advances with the banks.

The Table 1.2 shows the list of the nationalised banks of India as on

March 31, 2009.


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Table 1.2

Nationalised Banks of India as on March 31, 2009

Name of the Bank Year of IncorporationAllahabad Bank 1865Andhra Bank 1923

Bank of Baroda 1908

Bank of India 1906

Bank of Maharashtra 1935

Canara Bank 1906

Central Bank of India 1911

Corporation Bank 1906

Dena Bank 1938

Indian Bank 1907

Indian Overseas Bank 1937

Oriental Bank of Commerce 1943

Punjab and Sind Bank 1908

Punjab National Bank 1895

Syndicate Bank 1925

UCO Bank 1943

Union Bank of India 1919

United Bank of India 1950

Vijaya Bank 1931

Sources: (i) Annual Reports of various banks for the year 2008-2009.(ii) Report on Trend and Progress of banking in India, RBI, 2008-2009.

Other Public Sector Banks [IDBI Bank Ltd.]

The Industrial Development Bank of India Limited, now more popularly

known as IDBI Bank, was established as a wholly-owned subsidiary of

Reserve Bank of India. The foundation of the bank was laid down under

an Act of Parliament, in July 1964. The main aim behind the setting up of

IDBI was to provide credit and other facilities for the Indian industry. In

February 1976, the ownership of IDBI was transferred to Government of

India. After the transfer of its ownership, IDBI became the main

institution, through which the institutes engaged in financing, promoting

and developing industry were to be coordinated.


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In April 1990, IDBI set up the Small Industries Development Bank of India

(SIDBI) as a wholly owned subsidiary to cater to specific needs of the

small scale sector. In September 1994, in response to RBI's policy of

opening up domestic banking sector to private participation, IDBI set up

IDBI Bank Ltd., in association with SIDBI. In January 1992, IDBI accessed

domestic retail debt market for the first time, with innovative Deep

Discount Bonds, and registered path-breaking success. It also set up the

IDBI Capital Market Services Ltd., as its wholly-owned subsidiary, to offer

a broad range of financial services, including Bond Trading, Equity

Broking, Client Asset Management and Depository Services.

In August 2000, IDBI became the first All India Financial Institution to

obtain an ISO 9002:1994 certification for its treasury operations. It also

became the first organisation in the Indian financial sector to obtain an ISO

9001:2000 certification for its forex services. It pioneered the setting up of

Asset Reconstruction Company (India) Limited (ARCIL) in 2002 in

association with selected banks and financial institutions. In September

2003, it acquired the entire shareholding of Tata Finance Limited on Tata

Home Finance Limited which has now been renamed as IDBI

Homefinance Limited.

On December 16, 2003, the parliament approved the Indutrial

Development Bank (Transfer Undertaking and Repeal Bill) 2002 to repeal

the IDBI Act, 1964. This act came into force from July 2, 2004. The boards

of IDBI and IDBI Bank Limited took an in-principle decision regarding the

merger of IDBI Bank Limited with proposed Industrial Bank of India

Limited in their respective meetings on July 29, 2004.

The new entity Industrial Development Bank of India was incorporated

on September 27, 2004 and certificate of commencement of business was

issued by the registrar of companies on September 28, 2004. On October 1,

2004, IDBI Ltd. commenced operations as a banking company. The board

of directors of IDBI Ltd. as its meeting held on 20 January 2005 approved


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the scheme of amalgamation, envisaging merging of IDBI Bank Limited

with IDBI Limited.

The government notified the Industrial Development Bank of India as a

bank on April 2, 2004. A bill to convert the institution to a bank was

passed by the parliament. The new bank is now called Industrial

Development Bank of India Limited. A government regulated bank (58 %

Government of India stake) with Other Public Sector Bank status in RBI.

IDBI Ltd., as a DFI (Development Financial Institution) exposed to market

only in 1992 and became government body after merger of IDBI Bank in

Oct 2004, which started working together in April 2005.

1.6.9 Private Sector Banks

Private banking in India was practiced since the beginning of banking

system in India. All the banks in India were earlier private banks. They

were started in the pre-independence era to cater to the banking needs of

the people. In case of private sector banks majority of share capital of the

bank is held by private individuals. These banks are divided into two

major categories-

(i) Old Private Banks which existed with the public sector banks before

the entry deregulation and;

(ii) The New Private Banks that came into existence after the reforms of

1992.

Old Private Sector Banks

For over two decades after the nationalisation of 14 larger banks in 1969,

no banks were allowed to be set up in the private sector. The banks that

existed before 1994 fall under the category of old private sector banks.

These banks are smaller in size and are regional. Interestingly, where the

government owned financial institutions own major equity of the private

banks, the equity share holders of the old private sector banks were

mainly non government bodies.


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Pursuant to the RBI guidelines on entry of new private sector banks issued

in January 1993, the old private sector banks having networth of less than

Rs. 50 crore were advised to attain the level of Rs. 50 crore by March 2001,

and prepare action plans for augmenting capital funds to the level of Rs.

100 crore. Table 1.3 shows the list of old private sector banks of India as

on March 31, 2009.

Table 1.3

Old Private Sector Banks of India as on March 31, 2009

Name of the Bank Year of IncorporationBank of Rajasthan Ltd. 1943Bharat Overseas Bank Ltd. 1973

Catholic Syrian Bank Ltd. 1920

City Union Bank Ltd. 1904

Dhanalakshmi Bank Ltd. 1927

Federal Bank Ltd. 1931

ING Vysya Bank Ltd. 1930

Jammu & Kashmir Bank Ltd. 1938

Karnataka Bank Ltd. 1924Karur Vysya Bank Ltd. 1926

Lakshmi Vilas Bank Ltd. 1926

Lord Krishna Bank Ltd. 1940

Nainital Bank Ltd. 1922

Ratnakar Bank Ltd. 1943

Sangli Bank Ltd. 1948

SBI Comm. & Intl. Bank Ltd. 1993

South Indian Bank Ltd. 1929

Tamilnad Mercantile Bank Ltd. 1921

United Western Bank Ltd. 1936

Notes:(i) Bharat Overseas Bank Ltd. was merged with Indian Overseas Bank on March 31, 2007.

(ii) Lord Krishna Bank Ltd. was amalgamated with Centurion Bank of Punjab Ltd. effective

from August 29, 2007.

(iii)Sangli Bank Ltd. was amalgamated with ICICI Bank Ltd. effective from April 19, 2007.

(iv)United Western Bank Ltd. was amalgamated with IDBI Bank Ltd. effective from

October 3, 2006.

Sources: (i) Annual Reports of various banks for the year 2008-2009.(ii) Report on Trend and Progress of banking in India, RBI, 2008-2009.


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New Private Sector Banks

The Narasimham Committee, in its first report, recommended the freedom

of entry into the financial system. It stated that the RBI should permit the

establishment of new banks in the private sector provided they conform to

the minimum start-up capital and other requirements. The committee also

recommended that there should not be any difference in treatment

between the public sector and private sector and any restrictions in

operation in this regard should be removed. The RBI considered the above

recommendations and allowed banks to be set up in the private sector.

The banks which have been setup after 1990s taking into consideration theguidelines of the Narasimham Committee are referred to as new private

sector banks. The RBI guidelines on entry of new private sector banks

observed that while recognizing the importance and role of the public

sector, there is increasing recognition of the need to introduce greater

competition, which can lead to higher productivity and efficiency of the

banking system. The liberalisation measures attempted to reduce entry

barriers by discarding the earlier licence permit regime. As a consequence,

there were a number of new entrants in the banking business. In 1994,

private sector banking in India received a fillip when the RBI issued a

policy of liberalization to license limited number of private banks, which

came to be known as New Generation tech-savvy banks. These banks are

in the process of reducing promoters stake by raising funds through the

capital market.

Global Trust Bank was, the first private bank after liberalization; it was

later amalgamated with Oriental Bank of Commerce (OBC). Then Housing

Development Finance Corporation Limited (HDFC) became the first to

receive an 'in principle' approval from the RBI to set up a bank in the

private sector. The guidelines for entry of new banks in the private sector

were revised in January 2001; and prescribed an increase in initial

minimum paid-up capital from Rs. 100 crore to Rs. 200 crore. Moreover,

the initial minimum paid up capital shall be increased to Rs. 300 crore in


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subsequent three years after commencement of business. Individual

companies, directly or indirectly are permitted to participate in the equity

of a new private bank upto a maximum of 10 percent, but would not have

controlling interest in the bank. There are at present 8 new private sector

banks the latest entrants are Kotak Mahindra Bank Ltd. in 2003 and Yes

Bank in 2004. The new private sector banks are much larger in size,

operate primarily in metros and are technologically superior. They have

made banking more efficient and customer friendly. In the process they

have jolted public sector banks out of complacency and forced them to

become more competitive.

Table 1.4 shows the list of new private sector banks of India as on

March 31, 2009.

Table 1.4

New Private Sector Banks of India as on March 31, 2009

Name of the Bank Year of IncorporationAxis Bank Ltd. 1994

Centurion Bank of Punjab Ltd. 1994

Development Credit Bank Ltd. 1995#

HDFC Bank Ltd. 1994

ICICI Bank Ltd. 1994

IndusInd Bank Ltd. 1995

Kotak Mahindra Bank Ltd. 2003

Yes Bank Ltd. 2004

Notes:(i) UTI Bank Ltd. was renamed as Axis Bank Ltd. during the year 2006-2007.

(ii) #Converted to private sector bank on May 31, 1995. Started as a Credit Society by the

followers of His Highness the Aga Khan and later converted into Cooperative Bank.

(iii)Centurion Bank of Punjab Ltd. was amalgamated with HDFC Bank Ltd. effective from

May 23, 2008.Sources: (i) Annual Reports of various banks for the year 2008-2009.(ii) Report on Trend and Progress of banking in India, RBI, 2008-2009.


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11..77 TTOOPP TTEENN IINNDDIIAANN BBAANNKKIINNGG CCOOMMPPAANNIIEESS DDUURRIINNGG 22000088--0099

India, since the past few years, has experienced a paradigm shift due to its

competitive stand in the business world. Being a huge market itself, India

became the favorite hunting ground for the companies to explore the

market and grow their business. Banks are the backbone of the global

economy, providing capital for innovation, infrastructure, job creation and

overall prosperity. The presence of a number of top banking companies in

India seconds the thought that the country's market has got enormous

potential.

Numbers count. But they never tell the full story. Traditionally, it was the

norm to rank companies and banks on the basis of their sales or assets

with an assumption the biggest is the best. Today in the era of mega-

mergers, there are still some who swear by this old fashioned thinking.

Others have graduated a bit. Their idea of ranking is to involve a large

number of ratios and indicators, juggle with weightages and finally come

up with relative scores. There is something to be said for this approach. Itis objective and eliminates biases.

Today, banking is no longer about mysterious gnomes juggling millions of

dollars. It is all about service. Convenience, Comprehensive Service and a

Smiling Face are things you cannot put numbers to. Besides, any number-

crunching exercise always throws up some absurdities.

Table 1.5 shows the list of top ten banking companies of India during

2008-2009 on the basis of their performance. Six (6) public sector banks,

three (3) private sector banks and one (1) foreign bank secured place in the

top ten banking companies; that means 60% banks belonged to public

sector, 30% banks belonged to private sector and 10% banks were of

foreign origin.

State Bank of India secured first position and Canara bank stood at tenth

position in the top ten banking companies during 2008-2009. HDFC bank

with second position, Axis bank with third position and ICICI bank with


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Table 1.5

Top Ten Banking Companies in India during the year 2008-2009

Particulars StateBank ofIndia

(No.1)

HDFCBank

(No.2)

AxisBank

(No.3)

Bank ofIndia

(No.4)

PunjabNational

Bank(No.5)

Bank ofBaroda(No.6)

ICICIBank

(No.7)

UnionBank ofIndia(No.8)

Citibank

(No.9)

CanaraBank

(No.10)No. of Offices 11447 1400 786 2934 4323 2916 1408 2569 41 2740

No. of Employees 205896 52687 20624 40155 54780 36838 34596 29014 4795 44090

Business per Employee (in Rs. Lakh) 556.00 446.00 1060.00 833.00 654.92 914.00 1154.00 694.00 1880.10 780.17

Profit per Employee (in Rs. Lakh) 4.74 4.18 10.02 7.49 5.64 6.05 11.00 6.28 45.12 4.97

Capital and Reserves & Surplus 57948 14652 10215 13495 14654 12836 49883 8740 11518 12208

Deposits 742073 142812 117374 189708 209760 192397 218348 138703 51677 186893

Investments 275954 58818 46330 52607 63385 52446 103058 42997 24519 57777

Advances 542503 98883 81557 142909 154703 143986 218311 96534 39920 138219

Interest income 63788 16332 10835 16347 19326 15092 31093 11889 6840 17119

Other income 12691 3291 2897 3052 2920 2758 7604 1483 3582 2311

Interest expended 42915 8911 7149 10848 12295 9968 22726 8076 2429 12401

Operating expenses 15649 5533 2858 3094 4206 3576 7045 2214 2587 3065

Cost of Funds (CoF) 5.85 6.83 5.88 5.79 6.05 5.36 5.97 6.15 3.57 6.75

Return on advances adjusted to CoF 3.83 8.12 4.69 4.00 4.62 3.58 4.09 4.27 9.04 3.69

Wages as % to total expenses 16.64 15.50 9.97 13.90 17.72 17.34 6.62 11.19 17.56 12.14

Return on Assets 1.04 1.28 1.44 1.49 1.39 1.09 0.98 1.27 2.12 1.06

CRAR 14.25 15.69 13.69 13.01 14.03 14.05 13.96 12.01 13.23 14.1

Net NPA ratio 1.76 0.63 0.40 0.44 0.17 0.31 2.09 0.34 2.63 1.09

Source: www. business.mapsofindia.com


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seventh position, secured place in the top ten banking companies list from

the private sector. Looking to the foreign banks, Citibank the only bank

with ninth position secured place in the top ten list during 2008-2009.

Dun & Bradstreet announced Indias top banks for the year 2009 which is

hereunder:

Dun & Bradstreet, the worlds leading provider of global business information,

knowledge and insight, announced Indias Top Banks 2009that captures the

developments in the banking sector during financial year 2008 and profiles the

scheduled commercial banks (SCBs) in India, consisting of 27 Public Sector Banks

(PSBs), 22 Private Sector Banks and 28 Foreign Banks.

Award Winner Category

Bank of India Overall Best Bank

Bank of India Best Public Sector Bank

Axis Bank Ltd. Best Private Sector Bank

Citibank Best Foreign Bank

Punjab National Bank Priority Sector Lending (Public Sector)

The Federal Bank Ltd. Priority Sector Lending (Private Sector)

ABN AMRO Bank Priority Sector Lending (Foreign Banks)

State Bank of India SME Financing (Public Sector)

ICICI Bank Ltd. SME Financing (Private Sector)

HSBC SME Financing (Foreign Banks)

State Bank of Hyderabad Asset Quality (Public Sector)

The South Indian Bank Ltd. Asset Quality (Private Sector)

HSBC Asset Quality (Foreign Banks)

Bank of Baroda Global Business Development (Public Sector)

ICICI Bank Ltd. Global Business Development (Private

Sector)

State Bank of India Rural Reach (Public Sector)

Tamilnad Mercantile Bank Ltd. Rural Reach (Private Sector)


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REFERENCES

1. Bhattacharya, K. M. and Agarwal, O. P., Basics of Banking and Finance,

First Edition, Himalaya Publishing House, Mumbai, 2006, p. 7.

2.

Chowdari, Prasad, Impact of Economic Reforms on Indian Banking,Indian Economic Panorama, A Quarterly Journal of Agriculture,

Industry, Trade and Commerce, Special Banking Issue, 2002, pp. 9-18.

3. Clifford, Gomez, Financial Markets, Institutions and Financial Services,

Prentice Hall of India Pvt. Ltd., New Delhi, 2008, p. 23.

4. Datt, Ruddar and Sundharam, K.P.M., Indian Economy, 56th Revised

Edition, S. Chand & Company Ltd., New Delhi, 2007, pp. 837-859.

5. Gupta, B. P., Vashisth, V. K. and Swami, H. R., Indian Banking and

Financial System, First Edition, Indus Valley Publication, Jaipur, 2005,p. 1.1.

6. IBA, Indian banking year book, Mumbai: Indian Banks' Association,

2008, p. 25.

7. Machiraju, H. R., Indian Financial System, Second Edition, Vikas

Publishing House Pvt. Ltd., New Delhi, 2002, pp. 90-115.

8. Misra, S. K. and Puri, V. K., Indian Economy, 23rd Revised Edition,

Himalaya Publishing House, Mumbai, 2005, pp. 694-710.

9. Mithani, D. M., Money, Banking and Public Finance, First Edition,

Himalaya Publishing House, Mumbai, 2004, p. 113.

10. Pathak, Bharati V., The Indian Financial System Markets, Institutions and

Services, Second Edition, Dorling Kindersely (India) Pvt. Ltd., (Pearson

Education), 2008, pp. 476-483.

11. Ramashastri, A. S. and Samuel, Achamma, Reserve Bank of India

Occasional Papers, Vol. 27, No. 1 and 2, Summer and Monsoon, 2006,

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13. www.bseindia.com

14. www.business.mapsofindia.com

15. www.citehr.com

16. www.ficci.com

17. www.finance.indiamart.com

profitability of banking

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