the banking sector
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- 1. The Banking Sector in India The Banking sector in India has always been one of the most preferred avenues of employment. In the current decade, this has emerged as a resurgent sector in the Indian economy. As per the McKinsey report India Banking 2010, the banking sector index has grown at a compounded annual rate of over 51 per cent since the year 2001, as compared to a 27 per cent growth in the market index during the same period. It is projected that the sector has the potential to account for over 7.7 per cent of GDP with over Rs.7,500 billion in market cap, and to provide over 1.5 million jobs. Today, banks have diversified their activities and are getting into new products and services that include opportunities in credit cards, consumer finance, wealth management, life and general insurance, investment banking, mutual funds, pension fund regulation, stock broking services, custodian services, private equity, etc. Further, most of the leading Indian banks are going global, setting up offices in foreign countries, by themselves or through their subsidiaries.
2. CHAPTER V PROGRESS OF THE BANKING SECTOR IN INDIA AND THE UNION TERRITORY OF PONDICHERRY. 5,l Introduction Banks constitute an important segment in financial arena of all countries whether developed or developing or underdeveloped. Economic development of every country depends upon financial sector particularly commercial banks. In fact economic development and financial infrastructure go hand in hand. From time immemorial, the conventional banker, an indispensable pillar of Indian society, giving and taking of credit in one form or another, must have existed as earlier as the Vedic period. Money lending was one of the recognised occupations under Manu's laws' . The history of modem Indian banking2 goes back to 1683 when the first Indian Bank was established on western lines in Madras. The establishment of the Bank of Calcutta in 1806 marked the beginning of the modern banking era in India. Two more Presidential Banks, namely, Bank of Bombay and Bank of Madras were set up in 1840 and 1843 respectively. With the launching of Swadeshi movement in 1905, there were outbursts of banking activities. Many banks like Bank of Burma (1904), Bank of India (1 906), Canara Bank (1 906), Bank of Rangoon (1 906), Indian Specie Bank (1 906), 1 N.K. Thingalaya, "Manu, Chanakya and the Rate of Interest", Pigmy Economic Review, Vol. 36, Aug - Oct, 1994, pp. 1-5.. 'c. Kugumakara Hebbar, "Growth of Banking in India Before Independence", Pigmy Econgmic Review, August 1 9 89, pp .3 -4. Indian Bank (1 9061, Bank of Baroda (1 908) and Central Bank ( 191 1 ) had their operation with a paid up capital of Rupees Five lakhs and above. But the present Indian banking system had developed considerably since 1935. RBI has started its operation in 1935 3. through an Act. A critical review of the growth of banking in India in the pre- independence period reveals that the banking system had neither a definite shape nor policy except the creation of RBI in 1935. With the enactment of the Banking Companies Act in 1949, the Indiaii banking system had undergone substantial changes structurally, geographically and functionally. Banking in India broadly falls under two categories: (a) Commercial banks and (b) Co-operative banks. Commercial banks are the major players as far as industry and trade sectors are concerned whereas co-operative banks cater to the needs of rural economy particularly agriculture sector. Commercial banks fall under two distinct categories, namely, Scheduled commercial banks and non-scheduled Commercial banks. Scheduled commercial banks means the banks which are listed in the Second Schedule of RBI Act, 1934. Under section 42 (1) of the Act, scheduled commercial banks are expected to maintain cash balance to a minimum of three per cent of their net demand and time liabilities, The cash reserve ratio is subject to upward / downward revision by RBI. The scheduled commercial banks enjoy certain special privileges like availing financial assistance under section 17 of the RBI Act. Non-scheduled Commercial banks are not listed and they do not have any large network. As of now only, one non- scheduled bank is functioning in India as compared to 16 nos on the eve of bank nationalisation. 5.2 Progress of Banking in India The progress of Commercial banking in India can be categorised under the following four distinct phases: Phase I ( 1 860-1 946 ); Phase I1 (1 947-1968 ); Phase 111 (1969-1 990); Phase IV (1991- till date). 5.2.1 Progress of Banking - Phase I (1860 - 1946) With the advent of British rule in India, the business of the indigenous bankers had declined. The banks on western model have come into existence. Financial 4. transactions were handled by them. It was only in 1850's, the British bank actually reached India. The first western type thrift institution introduced in India was the Savings department of the Presidency Bank which, opened in the 1840's and was followed in 1870 by District Savings Bank operated by the treasury and in 1882 by the Postal Saving system. In 1900, the Postal savings system was the only such institution left in the field besides the indigenous private institutions like chit funds, nidhis. Life Insurance was still in the early stage of development at the beginning of World War I and substantial part of this business was done by the British people rather than by the Indian banks. The Central bank in India came into existence on First April , 1935 The bank was organised as a Joint Stock Company whose shares were held privately. This bank had two major departments, namely, System department and Badsing department. The RBI was the largest financial institution in India with about one-third of the assets of all financial institutions. The Imperial Bank which came next was privately owned joint stock campany with all its stock owned by the British ancestors living in India. Since the Government deposits were transferred to RBI after 1935, the Imperial Bank came to rely increasingly on private deposits. About 95 per cent of the total funds of Imperial Bank in 1946 came only through private funds, 5.2.2 Progress of Banking - Phase I1 (1947-1968) The structure of the Indian banking till 1947 was not backed by adequate control or directive measures. The Banking Regulation Act. 1949 provided the much needed framework for proper supervision under RBI. 011 the Boards of directors of PSB, there was a nominee represented from RBI and Government of India. This period witnessed the disappearance of many smaller banks due to tight inspection by RBI. Bigger banks' growth was facilitated by winding of business by smaller ones. This period witnessed consolidation and growth of larger banks. There were attempts at 5. correcting the regional maldistribution in branch network, which was marked by heavy concentration of branches at larger urban centres. Through effective branch licensing policy, many banks were opened in rural unbanked centres. This period witnessed the nationalisation of Imperial Bank, now called as the SBI and its Associate banks in 1955. Between 1955 and 1968, the SBI and its Associates opened many branches. About 80 per cent of 1608 branches opened by SBI and its Associates during 1955 - 1968 were at rural and semi-urban centres. The growth of bank branches during this period can be seen in Table 5.1 Table 5.1: PROGRESS OF BANKING IN INDIA, 1951 - 1968 S1, State Bank of Scheduled Non-Scheduled No. Year India and its Commercial Commercial Total Associates Banks Banks 3. 1968 3379 5104 207 8690 Source: R. Srinivasan, Priority Sector lend in^ - A Study o f Indian Experience, HimalayaPublishing House, Bombay 1995, p.6. Though there were welcome signs in increasing more number of bank branches and intensive banking network, in the absence of policy compulsion. large private sector banks controlled by a few big industrial business houses failed to meet the requirements of small borrowers in agriculture. activities allied to agriculture, trade. small scale industries, transport operations. Between 196 1-7 1. the number of borrowal accounts had come down. Flow of credit to industrial sector was greater whereas agricultural sector was languishing for want of funds. Official recognition of the need to have a closer look at the functioning of the Commercial banking system has necessitated the Social Control of banks in 1968 by the NCC. The first meeting of the NCC in March, 1968 discussed and generally agreed on matters like deposit mobilisation and deployment of credit to the targeted groups in the form of PSL with 6. special reference to agricultural sector. 5.2.3 Progress of Banking - Phase 111 (1969-1990) The nationalisation of 14 Commercial banks in July, 1969 was the culmination of Social control of banks in 1968. The development of Commercial banking in India after the introduction of social control and nationalisation of major banks has certain unique characteristics. The class banking has become mass banking trying to realise the socially oriented objectives stipulated for the banking system under the policy directives of the Government that promote growth with social justice. The following were the major objectives of bank nationalisation: a) to promote social and economic objectives of State policy by effective execution of plans and achieve the ideals of socialistic pattern o f society; b) to remove the control by a few so as to make contribution of adequate credit for agricultural and small industries and exports: c) to give professional bent to bank management; d) to encourage new class of entrepreneurs; and e) to provide adequate training and reasonable service to the bank staff. In April 1980, SIX more commercial banks were nationalised mak~ng the T total nationalised PSB to 20. Another milestone in the progress of the banking sector was the setting up of W s . In July, 1975, the working group under the chairmanship of Narasimham had recommended the setting up of RRBs as fullfledged scheduled banks for mobilising savings and deploying credit in rural areas. These RRBs were sponsored by Commercial banks. At the end of March, 1998 there were 196 IiRBs operating in the country. The banking sector has been made to serve the national economy as a catalytic agent. It was felt that nationalisation was very essential to mob~lise the deposits 7. on a massive scale and sustain employment and to secure a more equitable distribution of credit throughout the country. After the introduction of LBS, nationalised banks have been identified in different selected districts of the country to prepare a blueprint for the development of the respective districts. The designated bank in each district known as "Lead Bank" prepares DCP and ACP. Thus the banking system has been made as an i n s m e n t towards realising the social objectives from its earlier profit oriented approach. Thrust was made towards PSL afker nationalisation. The PSL known as directed credit programme has become an active mechanism and instrument in transforming the neglected segments. Agriculture and allied activities, small scale and cottage industries. small road and water transport operators. retail traders were articulated under PSL. RBI has stipulated that 40 per cent of net hank credit should flow towards priority sector. Weaker sections are taken care of under the Prime Minister's 20-Point Programme announced first in 1975, revised in 1982 and modified in 1986. Thrust was made by Government of India to earmark adequate outlay by banks in implementing the 20-Point Programme after having detailed consultations with RBI. DRI Scheme was introduced to ameliorate the poverty-stricken masses in rural and urban areas to avail bank credit at four per cent concessional bank interest. Minority welfare is also taken care by commercial banks after bank nationalisation. Many of bank branches were opened in the hitherto neglected rural and semi-urban areas. The norms for opening bank branches in different areas are as follows3: i. Rural group includes all centres with a population of less than 10,000. ii. Semi-urban group includes centres with a population of 10,000 to One I&. iii* Urban group includes centres with population of One lakh to 10 lakhs. iv. Metropolitan group includes centres with population of 10 lakhs and more. NABARD was set up on 12.07.1982 for supporting and promoting agriculture and rural development and to provide short-term, medium term and long 8. term credit to state Co-operative banks, RRBs and commercial banks. Refinancing facility is made available for n o n - f m projects also by NABARD. The Industrial Development Bank of India (IDBI) was set up in 1964 to serve as an Apex institution for Term finance for industries in India. Besides, it also plans, promotes and develops industries, undertakes market investments and serves as a techno-economic agency for 3~eserve Bank of India, Banbin? Statistics 1972-95 - Basic Statistical Returns, Bombay, 1998,ppl-2. the development of industries. To take care of the small industries on a sound footing a subsidiary organisation of IDBI. namelj.SIDB1 was set up. Other specialised financial institutions with Government patronage have come into existence during this phase. This phase had witnessed the growth of financial assets in leaps and bounds. More bank branches were opened. There was an abnormal growth of deposits and advances particularly to the priority sectors. The diversification of financial assets had also taken place in the form of diversified portfolio investment in mutual funds, shares, debentures and equities. Stock markets had witnessed many changes and many new investors from different strata entered into stock markets. 5.2.4 Progress of Banking - Phase IV (1991 - Till Date) The advent of Narasimharn Committee on financial sector reforms introduced sweeping changes in the financial sector particularly in the functioning of cornrnercial banks with regard to portfolio management and flow of credit to the target group under PSL. The Narashimham Committee had recommended that directed credit should be phased out to 10 per cent from the stipulated 40 per cent grad~~ally. This is in tune with the World Bank suggestions and also due to the integration of Indian economy into global network. Thanks to this development in financial sector, non-viable bank branches mostly in rural areas were either merged with existing viable bank branches or closed down. This period has been witnessing many irregularities and malpractices in 9. various public sector and private banks thereby warranting the necessary corrective action on the part of the RBI. The issue of Non performing assets has assumed importance due to non-grounding of assets by beneficiaries. The process of financial sector reforms initiated in 1991-92 is pursued with vigour and determination to improve the competitiveness, operational efficiency and transparency of the financial sector. The financial reforms touched a number of areas - monetary and credit policy issues relating to reserve requirements. interest rates, refinancing facilities and indirect monetary control via the securities market and matters relating to strengthening and consolidation of banks, the prescription of prudential norms relating to asset classification and income recognition, adequate provisioning for bad and doubtful assets. introduction of a capital to risk-weighted assets ratio system for banks (including foreign banks) and establishment of a strong supervisory system. All of these are expected to bring about a significant improvement in the f~~nctioning of the banking system. One of the problems faced by banks is the low rate of loan recoveries. This has a bearing on the accounting standards as well as on current operations of banks. It is in this context that the 'Recovery of Debts Due to Banks and Financial Institutions Bill, 1993' was passed in August 1993 which facilitated the establishment of Debt Recovery Tribunals for expeditious adjudication and recovery of debts due to banks and financial institutions. The provisions of this Act shall not apply where the amount of debt due to any bank or financial institution or to a consortium of banks or financial institutions is less than Rs, 10 lakh or such amount, being not less than Rupees One lakh, as the Central Government may, by notification specify. These tribunals will expeditiously deal with applications made by bankslfinancial institutions and endeavor to dispose of such applications within six months from the date of receipt of such applications. This period witnessed the widening gap between the deposits and credit and thereby gradual reduction in CDR eventually affecting the flow of credit towards PSL. The trend and progress of 10. commercial banks on the basis of certain relevant crucial indicators during the tbird and fourth phases are given below: t d 'teqrunyy ~ 6 6 ~ veyy '92 IOA 'swwatl IWsQels=lseg ~ N Q S ~ ~ w B B PIP xuw arvasatl (31 z I -- dd ~WRN '9661 ww ---- sz jon swwau )w~sqrq~ 3rseg- s3gsqwS wryuag apu, lo yueg ahlasaa [ql E 1 dd 'IeqtunyJ 'swn)aH I ~ Q S Q Q S ~ I S W - S ~ - Z L ~ L ' q n l ~ W W E ~ 6mpul~o wea a~asati [el m n o ~ C 9'2 L LE 0 % 9 8E Z 1P 0 % O K LLC Z L E 6!X 09E LZE 9 16 E 62 ,orleu wsodaa lua~safiul pi s ES I ss 985 L S 9 i.s E 9s PSS 909 ~ 0 9 E O ~ 9 ~ 9 ~ 9 9 1 EL s u o~ea11sodaa~par3 EC ( VN 8t.E Z81F LEE S 9E P PE 1LE LLE LOP 9ZP 18E 606 b PZ 0 PI (lua syuea )e~~aunuo=l palnpaps 101 ' I r l p m iwol UI mumpv lopas huoud 40 aJeus 21 VN a 6 9 L6W 6FLCS 8lELP ZLSW L6PIP 99086 EOE91 9G69 1061 POS (a.lOJ3 SU) J O W @OUd 01 SaOUeAPV ,swag leaawm3 palnpaw c I VN 1 US 9 05 L LS L OI; P 0s S6P 1 % 98P SSP S % FEE I. OZ 9 91 .MUJOXU( leUOqEN p afjelUC0 ad SE QlUEg lewwurw pa~npaws 40 w s d a oc F ffi 96L 889 OZ9 PZIi 6t4 Z6E trEE 062 SSZ EPC '36 P9 99 E9LL 6Zf L M L ELL 6F8S ESLS L6S6 OK6 9806 8998 SPL8 Z9E8 OB6CL 99LEL L9SE1 1HXL 068CL 59PLl gL82E QLGZE %61E POOEt GZFSE 68ESE 9lZW @%9 9ZOE9 L9CZ9 60819 69119 PZE ZP08 56% I. I. 11. ZSL6S 16LW ZOZOE LEECL 688L LEOS 6E6E C Z Z E P P 96 t 96 1 96 C 961 961 96 1 162 162 16Z ZLZ ZLZ ZLZ WE 66Z E67. P8Z 9LZ 9LZ (9 b) (GC) (trl (ELI (z1.1 Ibr) 8661 166L 966 1 G66 C % 6 C 561 "w "wi JW J ert lew en Jew 2661 (or) 9LZ ZLZ 96) P Jew 1561 0 9LZ ZLZ 12. 961 P 96 P 1 PLZ OLZ LPZ FPZ 191 P l3m-n the above figures, we can deduce that the number of commercial banks have gone up to 300 in March 1998 as against 89 numbers in 1969. The increase in the number of Commercial banks was mainly due to the increase in W s . The fact to be observed during 1969 to 1998 is that non-scheduled Commercial banks have come down from 16 to one during the same period. Number of bank offices in India has gone up from 8262 in 1969 to 64218 in March '98. There was 7.77 time increase in the growth of bank offices over the last 29 years. Rural branches have increased to 32878 in 1998 from a mere 1833 in 1969 indicating 17.94 times increase. Semi-urban branches have gone up to 13980 from 3342 for the same period, indicating an increase of 4.18 times. There was 6.06 times increase in urban branches from 1584 in 1969 to 9597 in March 1998. An increase of 5.17 times has been noticed in expanding bank branches in metropolitan areas, from 1503 numbers to 7763 numbers for the same period. Opening of more number of branches in rural areas has facilitated intensive banking network and thereby bringing bank to the door steps of the depositors and the loanee. 64000 population had a bank branch in 1969. Due to intensive branch licensing policy of RBI 13. particularly in rural and semi-urban areas, population per bank branch has come down to 15000 in 1998. This means that the gap has been narrowed down to the minimum and close rapport has been established between the banks and the people, Deposits by scheduled commercial banks have grown to a considerable extent from a mere Rs.4646 crores in 1969 to Rs,605410 crores in 1998 denoting, an increase of 130.31 times. The credit of scheduled commercial banks has gone to the extent of Rs.324079 crores in 1998 from Rs.3599 crores in 1969 indicating an increase of 90.04 times. The deposits of commercial banks as a percentage to national income has increased fiam 15.5 per cent in 1969 to 50.1 per cent in 1997. This shows the important role played by commercial banks in determining the national income of the Iiidian economy. This also establishes the fact that major part of the development of Indian economy depends upon the banking sector. Mopping up of large chunk of deposits was mainly possible due to large network of branch expansion p~icularly in rural areas. The share of priority sector advances to the total credit portfolio has moved from a mere Rs.504 crores in 1969 to Rs.93807 crores in March 1997 indicating an increase of 186.13 times. The priority sector advances have gone up from 14 per cent in 1969 to 34.8 per cent in 1997. The stipulated target of 40 per cent was achieved and even exceeded in 1989. Since 1991, the share has come down and reached a level of 34.8 per cent in March., 1997. The reason for such a deceleration in growth of priority sector advances may partly be attributed to reduction in number of bank branches in rural areas from a maximum of 35389 in March, 93 to 3291 8 in March, 97. This might have a direct bearing on the flow of credit to agriculture and allied activities besides non-farm activities. Per capita deposit of commercial banks has increased from Rs.88 in 1969 to Rs.6270 in 1998. Per capita credit has increased from Rs.68 to Rs.3356 for the same period. This period has also witnessed the decline in CDR from 77.5 per cent in 1969 to 14. 53.5 per cent in 1998. The Investment Deposit Ratio (IDR) has gone up moderately from 29.3 per cent to 36.1 per cent in 1997. The progress of banking Sector in India was on a very positive trend despite shortcomings in the nineties mainly in the social arena due to implementation of structural reforms in financial sector. 5.3 Lead Bank Scheme - Rationale and Methodology While discussing progress of banks, a prominent place should also be given for the Lead Bank scheme which is an innovative and development oriented Indian economy based on 'Area Approach' - 96 evolved by a study group. This study group constituted by NCC made a detailed analysis for setting up an appropriate organisational framework for implementing various social objectives set before the country. The Committee report known as Gadgil Committee Report had suggested that banks should adopt area approach and recommended allotment of districts to different commercial banks to take lead role and act as consortium leader. This was mainly intended to the main task of identifying the territorial and functional credit gaps and of making recommendations for the extensive and adequate institutional credit on reasonable terms to neglected sectors and areas. The purpose of nationalisation of 14 Commercial bailks in July, 1969 was to make available the adequate flow of institutional credit to the economy in general and the rural areas and the weaker sections in particular, After nationalisastion of banks, the RBI had appointed a Committee of Bankers under the Chairmanship of Nariman to evolve a co-ordinated programme for setting up of adequate banking facilities in the unbanked and underbanked districts on the lines of the Gadgil study group. This Committee had submitted its report on 15' November 1969 recommending that banks should be allotted specific districts to take care of an integrated area approach relating to the particular district. The allotted bank for the specified district would act as a Nodal or 15. Lead Bank which would take a lead role in surveying the potentials available in the area. The LBS was endorsed by the Standing Committee of Bankers at the meeting held in the RBI on 12' December 1969. After giving a concrete shape to 'area approach', the LBS come into operation. Banks were designated as Lead Bank on the basis of : a) the size of the bank; b) the adequacy of its resources for handling the volume of work; c ) continuity of districts so that a cluster of each district could emerge; d) regional operation of banks and the desirability for each state to have more than one Lead Bank operating in the area and to the extent possible for each bank to operate in more than one State. Though the Lead Bank is treated as the custodian bank as far as a particular district is concerned, it does not mean that it has a monopoly of banking business in that district . It is expected to act as a consortium leader rather than as a big brother. The major functions of the LBS as spelt out by RBI are: i. surveying the lead districts on resources and potential for banking development, ii. surveying the number of industrial and commercial units and other establishments and farms which do not have banking accounts or depend mainly on money lenders and increasing their own resources by the creation of surpluses from the additional production financed by the banking system; iii. examining the facilities for marketing of agricultural and industrial production, storage and warehousing-spare and linking of credit with marketing; iv. surveying the facilities for the stocking of fertilizers and other agricultural inputs and repairing and servicing of equipment; 16. v. recruiting and traning the staff, which would offer advice to small borrowers and farmers in the priority sectors, covered by the proposed credit insurance schemes and follow-up and inspection of the end use loans; vi. assisting other primary lending agencies; and vii. maintaining contacts and liaison with Government and quasi-Government agencies. RBI has designed common formats to elicit information from all the designated Lead Banks on some basic statistical information pertaining to the allotted district(s). In order to monitor the implementation of LBS effectively. as per the guidelines and directions of RBI, each Lead Bank constituted district forum. Lead Banks are expected to enter into a meaningful business with the cornnlercial banks, RRBs, co- operative institutions and relevant developmental departments through an established forum called as DCC with the following objectives. a) to evolve methods for exchanging information between banks about intending borrowers and lending to priority sectors in the districts. b) to identify bankable schemes arnong those furnished by the Govt. and on its own and work-out suitable schemes to finance them and c) to serve as a clearing house for discussing problems arising out of financing priority sectors. The DCC has the following functions : a) to examine whether the credit supplied by the cormnercial banks and co- operatives is adequate from the point of view of the borrowers. 17. b) to discuss as to how the small loans to the socially and economically weaker sections can be efficiently disbursed. c) to find out the measure for avoiding the danger of multiple or double financing. d) to discuss how the State agencies and banks can help the small scale industries to prepare their schemes to increase the production. e) to evolve methods for ensuring better co-ordination between commercial and co- operative banks in exchanging credit information and f) to assess tht: b-g potentials of the district periodically The DCC was formed at the district level covering all the 338 districts in initially. The District Collector or the District Magistrate used to preside over these meetings by convention built up by the bankers. There was no Government order directing the district authorities to preside over these meetings. In order to discuss the problems identified focussed at the DCC, a State level forum was constituted in 1976 at the instance of Government of India. The State Level Bankers' Committee thus came into existence at the State for bringing about better co-ordination among the banks by making all the banks as members of this committee. Banks having large network of bank branches and handling a fairly large volume of banking business in the State was designated as convenor of this Committee. Besides, Regional Consultative Committee (RCC) was set-up at each region grouping all the contiguous States/Union Territories. The States of Tamil Nadu, Kerala, Karnataka, Andhra Pradesh and Union Territories of Pondicherry and 18. Lakshadweep constitute the Southern Regional Consultative Committee. Through this forum, dialogue and exchange of ideas are established between the Union Finance Minister, RBI and Chairman of various public sector banks on the one hand and Chief Ministers / Finance Ministers of various States and Union Territories on the other hand, for better implementation of banking schemes including the LBS for balanced regional development. As at the end of December, 1989 lead districts under LBS have increased to 444 from 338. SBI and its Associates, all Public Sector Banks and one Private Sector Bank were allotted lead districts. By March 1999 567 districts have been covered under the LBS in the country as shown in Table 5.3. Table 5.3: DISTRICTS ALLOCATED TO COMMERCIAL RANKS UNDER LEAD BANKS SCHEME - ALL INDIA. Sl. Number of Number of Number of No. Name of the Lead Bank Lead Districts Lead Districts Lead Districts originally in 1989 in 1999 Public Sector Banks 1. State Bank of India and its Associates 2. Allahabad Bank 3. Andhra Bank 4. Bank of Baroda 5 . Bank of India 6. Bank of Maharashtra 7. Canara Bank 19. 8. Central Bank of India 9. Corporation Bank 10. Dena Bank 1 1. Indian Bank 12. Indian Overseas Bank 13. New Bank of India 14. Oriental Bank of Commerce 1 5. Punj ab National Bank 1 6. Punj ab and Sind Bank 17. Syndicate Bank 1 8. Union Bank of India 19, United Bank of India 20. United Commerical Bank 21. Vijaya Bank Sub-Total Private Sector Bank 1 . Jammu & Kashmir Bank Ltd 2. Bank of Rajasthan Grand Total *Since merged with Punjab National Bank. Source: [a] Reserve Bank of India Bulletin, Bombay January 1970, [b] Sfivasan, Priority Sector Lending - A study o f Indian Experience, HimaIayrm Publishing House, 1995, Bombay, pp.34-37. [c] Eyed on Reserve Bank of India Sources, Chennai, 1999. It was found that even with the implementation of various welfare schemes by the Government and also with the large dispensation of credit by the 20. ~ommercial banks under LBS, majority of the rural population could not cross the poverty line and were still living a hand to mouth existence. To find out the reasons for this state of affairs, RBI advised the top Executives of PSB in 1987 to conduct on the spot survey of villages in 88 districts of 21 states. Survey was carried out by the top Executives themselves. The Report submitted by them revealed the following defficiencies: I . even though large credits were dispensed by banks, the dispensation was sporadic and many pockets of the rural area were left uncovered by banks, 2. the inflow of credit in rural areas did not show a corresponding increase in productivity, 3, the implementation of various Governlent schemes lacked motivation. 5.3.1 Service Area Credit Plan (SACP) The RBI organised a seminar in 1988 in which the top Executives of all the Public Sector Banks participated and was presided over by the Minister of State for Finance. An Action Plan was evolved in the seminar to remove the deficiencies found in the lending system of the banks and to have a proper flow of credit for the entire ma1 population on an objective and realistic basis. It was decided in the seminar, a cluster of villages would be allotted to each bank. The villages allotted would be called the Service Area of that particular bank branch, wherein it would be lending exclusively and extensively. The needs of each one of the village people would be looked after and a village credit plan based on the needs of the people, the resources of the bank would be prepared which would have a direct impact on the lives of the rural poor and would also achieve the goal of the Government of India namely eradication of rural poverty. Thus the concept of Service Area Credit Plan (SACP) under I.BS has been evolved. Government of India has approved this and the SACP has become operational from 01.04. 1989. The service area concept involves the following five major operational 21. aspects: a) identification and allocation of Service Area for each bank branch; b) survey of villages in the Service Area for assessing the potential for lending activities and identification of beneficiaries for assistance: c) Preparation of Credit Plan on an annual basis for the Service Area by each branch; d) Co-ordination between credit institutions on the one hand and field level development agencies on the other hand for effective implementation of Credit Plans and ; e) System of continuous monitoring of progress in the implementation of the plans. The villages have been allocated to all the commercial banks by a committee comprising of: i) Lead District Officer of the RBI as leader, ii) Lead Bank Officer as Convenor, iii) Officer from NABARD as member. Under Service Area Approach, the methodology of planning itself has been changed from district level to village level. Previously the ACP was prepared at the district level by the Lead Bank and the bank branches operating were to implement the Plan. Now under Service Area Approach, the planning starts at the grassroot level. The branch managers themselves prepare the village plan after undertaking a detailed study of their command area and taking into account the potential available in the villages for various activities. Before preparing the Service Area plan by the branch manager. the Potential Linked Credit Plan (PLCP) prepared by NABARD is also taken into account. After which the village level plans are approved by Block Level Bankers' Committee (BLBC) and then the DCP is prepared by Lead Bank. This grassroot level planning 22. enables proper allocation of funds to various activities based on the needs of the villages. This will enable a proper and even growth under all sectors particularly under the priority sector. 5.4 Progress of Banking in the Union Territory of Pondicherry The IIiary4 of Anandaranga Pillai provides some clues about the system of banking in 18" century Pondicherry. During the French regime, sowcars were the professional money lenders in the Union Territory of Pondicherry, Some money lenders used to charge 18 to 36 per cent rate of interest. There was also a practice of charging around 100 to 120 per cent of interest per annum by some unscrupulous money lenders. French Government had setup Ment do I Dioto a bank like pawn ofice in 1827 to overcome the practice of charging higher rate of interest by money lenders. The Institution had provided credit assistance at an eight per cent rate of interest to the needy population particularly to small scale agriculturists. The point to be observed here is that even before the introduction of the concept of PSL in Indian Soil on a preferential scale, the French Government had realised it 142 years back itself for the need to provide credit assistance to the small scale agriculturist at eight per cent which is well below the priority sector rate of interest of 10 to 12.5 per cent charged now. The first and the foremost Commercial bank branch on the modem line of today, namely, ranci cis Cynil Antony (Ed), &d., pp.637-647. Indo-China Bank was set up in Pondicherry in 1875 by a Presidential decree which had dealt all kinds of banking operations. Indian based banks had opened their branches in 1948. The first Indian based bank to have opened the bank branch in Pondicherry was United Commercial bank and then the Indian Overseas bank had come up. State Bank of India had set up a pay office in 1954 and a full fledged bank branch in 1955, Indian Bank had opened its first branch in Pondicherry in 1958. Thus four Commercial banks were in operation on the eve of defacto merger of Pondicherry with the Union of India. 23. The Union Territory of Pondicherry has been witnessing a phenomenal growth of banking activities since bank nationalisation in 1969, thanks to the growing commercial activities in this important Indo-French centre. In 1961, there were 4 bank branches with a deposit of Rs.269 lakhs and an advance of Rs.260 lakhs. The CDR was as high as 96.65 percentage. In 1969, that is, on the eve of nationalisation of banks, ol~ly 12 bank branches were in operation with a deposit of Rs. 552 lakhs and an advance of Rs. 480 lakhs. Since nationalisation, phenomenal banking growth has taken place. By March 1998~, 78 bank branches, that is, 58 in Pondicherry, 13 in Karaikal, 5 in Mahe and 2 branches in Yanam are fbnctioning. The progress of the banking seen at the all India level was reflected in the Union Territory of Pondicherry also. The indicators of progress of banking are also shown in Table 5.4. 'lndian- Bank (Lead Bank), Agenda Notes for 59" State Level Bankers' ~ o d t t e e , Meeting, Pondicherry, August 1999. L d h ePQw E z c It may be seen from the Table 5.4 that the Union Territory of Pondichenj had got 12 branches only in 1969 and this has gone up to 26 in 1974. 44 in 1979, 59 in 1983 and 70 in 1989. The seventies and eighties have brought many bank branches to the Union Territory, thanks to bank nationalisation. 78 bank branches have come into operation by March 1998. The amount of deposits rnobilised till March 1998 was Rs.967 crores. The credit advanced for the same period was Rs.347 crores which works out to a CDR of 35.90 per cent as against the all India average of 53.5 per cent. Pondicherry has emerged as one of the top 100 major centres according to size of deposits and credit as of March 1999. As per ranking, it occupies 81th place in deposit mobilisation and 88" place in credit availment. Despite all these positive developments. 24. a disturbing trend observed is that the CDR has been declining steadily since 199 1 in this Territory. This is detrimental to the economic development of the Union Territory of Pondicherry. Though declining CDR is an all India phenomenon, the trend noticed in the Union Territory of Pondicherry is more alarming which needs immediate corrective measures on the part of commercial banks and RBI. This Territory had witnessed more than the prescribed flow of priority sector credit throughout eighties and the earlier part o f nineties. The advances towards priority sector has been declining since 1994 due to poor deployment of credit to various segments in Pondicherry economy despite the implementation of LBS in the Union Territory of Pondicherry as can be seen from the succeeding chapters. The Banking sector in India has always been one of the most preferred destinations for employment. In this decade, this sector has emerged as a sunrise sector in the Indian economy. Banking sector index has grown at a compounded annual rate of over 51 per cent since the year 2001.The Banking Industry is recruiting in a big way. In the next five years , banks will have to recruit almost 7.5 lakh people . Now, banks have diversified their activities and getting into new products and services that include opportunities in credit cards, consumer finance, wealth management, life and general insurance, investment banking, mutual funds, pension fund regulation, stock broking services, custodian services and private equity etc. Further, most of the leading Indian banks are going global, setting up offices in foreign countries themselves or through their subsidiaries. The expansion of the banking sector and its convergence with the other financial sectors such as insurance,NBFCs and Capital markets,retirement of the existing 25. employees and financial inclusion have created more number of opportunities in the banking sector. Infrastructure, Risk Management, Banking and Financial Services, Management Information Systems and Customer Relations Management are a few areas where specialization is expected. INTRODUCTION A bank is an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans or make an investment to derive a profit from the difference in the interest rates paid and charged, respectively. In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players. Indias economy has been one of the stars of global economics in recent years. It has grown by more than 9% for three years running. The economy of India is as diverse as it is large, with a number of major sectors including manufacturing industries, agriculture, textiles and handicrafts, and services. Agriculture is a major component of the Indian economy, as over 66% of the Indian population earns its livelihood from this area. Banking sector is considered as a booming sector in Indian economy recently. Banking is a vital system for developing economy for the nation. However, Indian banking system and economy has been facing various challenges and problems which have discussed in other parts of project. INDIAN BANKING SYSTEM 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 26. 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.