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Kaleidoscopic view of Banking in India
Introduction
It is a matter of pleasure for me to work on a practical project like
Kaleidoscopic view of Banking in India This project has added value to
my theoretical knowledge. I would like to admit my sincere thanks to the
ICICI BANK for providing me such an opportunity to work in their
organization.
I would like to thank my professors for providing me their valuable
guidance and for taking keen interest in my project. Last but not least I thank
such banks like Bank of Baroda, State Bank of India, City Bank, Dena Bank,
Surat Peoples Co-operative Bank Ltd. These branches had co-operated me
in my project. They had made this project a great valuable event for me.
NEEDS FOR THE PROJECT
Usually all persons want money for personal and commercial
purposes. Banks are the oldest lending institutions in Indian scenario.
They are providing all facilities to all citizens for their own purposes by
their terms. To survive in this modern market every bank implements
so many new innovative ideas, strategies, and advanced technologies.
For that they give each and every minute detail about their institution
and projects to Public.
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They are providing ample facilities to satisfy their customers i.e.
Net Banking, Mobile Banking, Door to Door facility, Instant facility,
Investment facility, Demat facility, Credit Card facility, Loans and
Advances, Account facility etc. And such banks get success to create
their own image in public and corporate world. These banks always
accepts innovative notions in Indian banking scenario like Credit Cards,
ATM machines, Risk Management etc.
So, as a student business economics I take keen interest in Indian
economy and for that banks are the main source of development. So this
must be the first choice for me to select this topic. At this stage every
person must know about new innovation, technology of procedure new
schemes and new ventures.
Objective of Project on Banking view in India Because of the following
reasons, I prefer this project work to get the knowledge of the banking
system.
Banking is an essential industry.
It is where we often wind up when we are seeking a problem in
financial crisis and money related query.
Banking is one of the most regulated businesses in the world.
Banks remain important source for career opportunities for people.
It is vital system for developing economy for the nation.
Banks can play a dynamic role in delivery and purchase of consumer
durables.
THE ROLE OF ECONOMISTS IN BANKS
The crucial role of bank economists in transforming the banking
system in India. Economists have to be more mainstreamed within the
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operational structure of commercial banks. Apart from the traditional
functioning of macro-scanning, the interlinkages between treasuries, dealing
rooms and trading rooms of banks need to be viewed not only with the day-
to-day needs of operational necessity, but also with analytical content and
policy foresight. Today, operational aspects of the functioning of banks are
attracting intensive research by professional economists. In particular,
measuring and modeling different kinds of risks faced by banks, the
behavior of risk-return relationships associated with different portfolio
mixes and the impact of fluctuations in financial markets on the financial
performance of banks are areas which lend themselves to analytical and
empirical appraisal by economists and econometricians. They, in turn, are
discovering the degrees of freedom and room for analytical maneuver in
high frequency information generated by the day-to-day functioning of
banks. It is vital that we develop an environment where these synergies are
nurtured so as to serve the longer-term strategic interests of banks. Even in
real time trading and portfolio decisions, the fundamental analysis of
economists provides an independent assessment of market behavior,
reinforcing technical analysis.
A serious limitation of the applicability of standard economic analysis
to banking relates to the inadequacies of the data-base. Absence of long time
series data storage in the banking industry often poses serious problems to
the quest for the formal analytical relationships between variables. Even if
such data exist, the presence of structural breaks may blur meaningful
analysis based on traditional formulation. Economists need to think
innovatively to overcome this problem. Use of panel regression, non-
parametric methods and multivariate analyses could go a long way in
understanding and validating behavioral relationships in banking.
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Another important challenge for the economics profession is to
develop proper models for measurement of various risks in Indian
conditions. This is a necessity in view of the move towards risk-based
supervision. Quantification of operational risks and calibration of Value at
Risk (VaR) models pose major computational challenge to bankers and
policy makers alike, particularly in India. A major difficulty lies in
identifying the right statistical model that determines the underlying
distribution suited to the particular category of operational loss, and building
the necessary database for deriving operationally meaningful conclusions.
In my inaugural address last year, I had also emphasized the need for bank
economists to come out of their narrow specialization and address
operational issues relating to banking and finance. In order to make a
meaningful contribution to banking, economists must have the experience of
working in operational areas of banks. For this purpose, economists need to
soil their hands in dealing rooms, treasuries and investment units, credit
authorization and loan recovery, strategic management groups and
management information systems of the banks to understand the ground
realities. There are also economies to be gained from field-level credit
appraisal, asset recovery, debt restructuring, market and consumer behaviors
in which banks are involved. Thus, the profession needs to amalgamate the
objectivity and theoretical soundness of economics with the functional
dimensions of banking and finance. It is this combination of specialist
training with operational experience, which is going to make t he economics
profession relevant to the changing face of banking in India.
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History of Banking in India
Banks In India
Banking services in India
Reserve Bank of India (RBI)
General BankingNature of Banking
Kinds of Banks
Role of Banks in a Developing Economy Principles of Bank Lending
Policies
Management of BankingBranch setup and structure Organization and structure of a Bank Branch
Explain bank organization sys tem in India Retail Banking-The New Flavor
Strategic issues in Banking Services Knowledge Management Innovation in
Banking Technology in Banking Regulations and Compliance Customer
Centric Organization Ethics and Corporate Governance Entrepreneurship
Performance and Benchmarking
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Managing New Challenges
Introduction Recent Macroeconomic Development s and the Banking Sys
tem Prudential Norms Market Discipline Universal Banking Human
Resource Development in Banking
HISTORY OF BANKING IN INDIA
Without a sound and effective banking system in India it cannot have
a healthy economy. The banking system of India should not only be hassle
free but it should be able to meet new challenges posed by the technology
and any other external and internal factors.
For the past three decades India's banking system has several
outstanding achievements to its credit. The most striking is its extensive
reach. It is no longer confined to only metropolitans or cosmopolitans in
India. In fact, Indian banking system has reached even to the remote corners
of the country. This is one of the main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters
for getting a draft or for withdrawing his own money. Today, he has a
choice. Gone are days when the most efficient bank transferred money from
one branch to other in two days.
Now it is simple as instant messaging or dial a pizza. Money has
become the order of the day. The first bank in India, though conservative,
was established in 1786. From 1786 till today, the journey of Indian Banking
System can be segregated into three distinct phases.
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They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks
Nationalization of Indian Banks and up to 1991 prior to Indian
banking sector Reforms.
New phase of Indian Banking System with the advent of Indian
Financial & Banking Sector Reforms after 1991. To make this write-
up more explanatory, I prefix the scenario as
PhaseThe General Bank of India was set up in the year 1786. Next came
Bank of Hindustan and Bengal Bank. The East India Company established
Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843)
as independent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which
started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by
Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at
Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank
of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.
Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were
approximately 1100 banks, mostly small. To streamline the functioning and
activities of commercial banks, the Government of India came up with The
Banking Companies Act, 1949 which was later changed to Banking
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Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).
Reserve Bank of India was vested with extensive powers for the supervision
of banking in India as the Central Banking Authority. During those days
public has lesser confidence in the banks.
As an aftermath deposit mobilization was slow. Abreast of it the
savings bank facility provided by the Postal department was comparatively
safer. Moreover, funds were largely given to traders.
BANKS IN INDIA
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. All these details and many more are discussed over
here. The banks and its relation with the customers, their mode of operation,
the names of banks under different groups and other such useful information
are talked about. One more section has been taken note of is the upcoming
foreign banks in India.
The RBI has shown certain interest to involve more of foreign banks
than the existing one recently. This step has paved a way for few more
foreign banks to start business in India.
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Major Banks in India
ABN-AMRO Bank
Punjab National Bank
Standard Chartered Bank
State Bank of India (SBI)
State Bank of Bikaner & jaipur
Citi Bank
Deutsche Bank
Federal Bank
HDFC Bank
HSBC
ICICI Bank
IDBI Bank
Syndicate Bank
United Western Bank
UTI Bank
Vijaya Bank
American Express Bank
Allahabad Bank
Bank of Baroda
Bank of India
Bank of Maharastra
Bank of Punjab
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BNP Paribas Bank
Canara Bank
Central Bank of India
Centurion Bank
Indian Overseas Bank
ING Vysya Bank
JPMorgan Chase Bank
BANKING SERVICES IN INDIAWith years, banks are also adding services to their customers. The
Indian banking industry is passing through a phase of customers market. The
customers have more choices in choosing their banks. A competition has
been established within the banks operating in India.
With stiff competition and advancement of technology, the service
provided by banks has become more easy and convenient. The past days arewitness to an hour wait before withdrawing cash from accounts or a cheque
from north of the country being cleared in one month in the south.
This section of banking deals with the latest discovery in the banking
instruments along with the polished version of their old systems.
RESERVE BANK OF INDIA (RBI)
The central bank of the country is the Reserve Bank of India (RBI). It
was established in April 1935 with a share capital of Rs. 5 crores on the
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basis of the recommendations of the Hilton Young Commission. The share
capital was divided into shares of Rs. 100 each fully paid which was entirely
owned by private shareholders in the beginning. The Government held
shares of nominal value of Rs. 2, 20,000.
Reserve Bank of India was nationalized in the year 1949. The general
superintendence and direction of the Bank is entrusted to Central Board of
Directors of 20 members, the Governor and four Deputy Governors, one
Government official from the Ministry of Finance, ten nominated Directors
by the Government to give representation to important elements in the
economic life of the country, and four nominated Directors by the Central
Government to represent the four local Boards with the headquarters at
Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five
members each Central Government appointed for a term of four years to
represent territorial and economic interests and the interests of co-operative
and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1,
1935. The Act, 1934 (II of 1934) provides the statutory basis of the
functioning of the Bank.
The Bank was constituted for the need of following:
o To regulate the issue of banknotes
o To maintain reserves with a view to securing monetary stability and
o To operate the credit and currency system of the country to its
advantage.
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Functions of Reserve Bank of IndiaThe Reserve Bank of India Act of 1934 entrust all the important
functions of a central bank the Reserve Bank of India.
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the
sole right to issue bank notes of all denominations. The distribution of one
rupee notes and coins and small coins all over the country is undertaken by
the Reserve Bank as agent of the Government. The Reserve Bank has a
separate Issue Department which is entrusted with the issue of currency
notes. The assets and liabilities of the Issue Department are kept separate
from those of the Banking Department. Originally, the assets of the Issue
Department were to consist of not less than two-fifths of gold coin, gold
bulli0on or sterling securities provided the amount of gold was not less than
Rs. 40 crores in value.
The remaining three-fifths of the assets might be held in rupee coins,
Government of India rupee securities, eligible bills of exchange and
promissory notes payable in India.
Due to the exigencies of the Second World War and the post-was
period, these provisions were considerably modified. Since 1957, the
Reserve Bank of India is required to maintain gold and foreign exchange
reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in
gold. The system as it exists today is known as the minimum reserve system.
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Banker to Government
The second important function of the Reserve Bank of India is to act
as Government banker, agent and adviser. The Reserve Bank is agent of
central Government and of all State Governments in India excepting that of
Jammu and Kashmir.
The Reserve Bank has the obligation to transact Government business,
via. to keep the cash balances as deposits free of interest, to receive and to
make payments on behalf of the Government and to carry out their exchange
remittances and other banking operations. The Reserve Bank of India helps
the Government - both the Union and the States to float new loans and tomanage public debt. The Bank makes ways and means advances to the
Governments for 90 days. It makes loans and advances to the States and
local authorities. It acts as adviser to the Government on all monetary and
banking matters.
Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the
provisions of the Banking Companies Act of 1949, every scheduled bank
was required to maintain with the Reserve Bank a cash balance equivalent to
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5% of its demand liabilities and 2 per cent of its time liabilities in India. By
an amendment of 1962, the distinction between demand and time liabilities
was abolished and banks have been asked to keep cash reserves equal to 3
per cent of their aggregate deposit liabilities. The minimum cash
requirements can be changed by the Reserve Bank of India. The scheduled
banks can borrow from the Reserve Bank of India on the basis of eligible
securities or get financial accommodation in times of need or stringency by
rediscounting bills of exchange. Since commercial banks can always expect
the Reserve Bank of India to come to their help in times of banking crisis the
Reserve Bank becomes not only the banker's bank but also the lender of the
last resort.
Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the
power to influence the volume of credit created by banks in India. It can do
so through changing the Bank rate or through open market operations.According to the Banking Regulation Act of 1949, the Reserve Bank of
India can ask any particular bank or the whole banking system not to lend to
particular groups or persons on the basis of certain types of securities. Since
1956, selective controls of credit are increasingly being used by the Reserve
Bank.
The Reserve Bank of India is armed with many more powers to
control the Indian money market. Every bank has to get a license from the
Reserve Bank of India to do banking business within India, the license can
be cancelled by the Reserve Bank of certain stipulated conditions are not
fulfilled. Every bank will have to get the permission of the Reserve Bank
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before it can open a new branch. Each scheduled bank must send a weekly
return to the Reserve Bank showing, in detail, its assets and liabilities. This
power of the Bank to call for information is also intended to give it effective
control of the credit system. The Reserve Bank has also the power to inspect
the accounts of any commercial bank. As supreme banking authority in the
country, the Reserve Bank of India, therefore, has the following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and
qualitative controls.
(c) It controls the banking system through the system of licensing, inspection
and calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the
official rate of exchange. According to the Reserve Bank of India Act of
1934, the Bank was required to buy and sell at fixed rates any amount of
sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was
Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate
fixed at lsh.6d. Though there were periods of extreme pressure in favor of or
against the rupee. After India became a member of the International
Monetary Fund in 1946, the Reserve Bank has the responsibility of
maintaining fixed exchange rates with all other member countries of the
I.M.F.
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Besides maintaining the rate of exchange of the rupee, the Reserve
Bank has to act as the custodian of India's reserve of international
currencies. The vast sterling balances were acquired and managed by the
Bank. Further, the RBI has the responsibility of administering the exchange
controls of the country.
Supervisory functions
In addition to its traditional central banking functions, the Reserve
bank has certain non-monetary functions of the nature of supervision of
banks and promotion of sound banking in India. The Reserve Bank Act,
1934, and the Banking Regulation Act, 1949 have given the RBI wide
powers of supervision and control over commercial and co-operative banks,
relating to licensing and establishments, branch expansion, liquidity of their
assets, management and methods of working, amalgamation, reconstruction,
and liquidation. The RBI is authorized to carry out periodical inspections of
the banks and to call for returns and necessary information from them. The
nationalization of 14 major Indian scheduled banks in July 1969 has
imposed new responsibilities on the RBI for directing the growth of banking
and credit policies towards more rapid development of the economy and
realization of certain desired social objectives. The supervisory functions of
the RBI have helped a great deal in improving the standard of banking in
India to develop on sound lines and to improve the methods of their
operation.
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Promotional functions
With economic growth assuming a new urgency since Independence,
the range of the Reserve Bank's functions has steadily widened. The Bank
now performs variety of developmental and promotional functions, which, at
one time, were regarded as outside the normal scope of central banking. The
Reserve Bank was asked to promote banking habit, extend banking facilities
to rural and semi-urban areas, and establish and promote new specialized
financing agencies. Accordingly, the Reserve Bank has helped in the setting
up of the IFCI and the SFC; it set up the Deposit Insurance Corporation in
1962, the Unit Trust of India in 1964, the Industrial Development Bank of
India also in 1964, the Agricultural Refinance Corporation of India in 1963
and the Industrial Reconstruction Corporation of India in 1972. These
institutions were set up directly or indirectly by the Reserve Bank topromote saving habit and to mobilize savings, and to provide industrial
finance as well as agricultural finance. As far back as 1935, the Reserve
Bank of India set up the Agricultural Credit Department to provide
agricultural credit. But only since 1951 the Bank's role in this field has
become extremely important. The Bank has developed the co-operative
credit movement to encourage saving, to eliminate moneylenders from the
villages and to route its short term credit to agriculture. The RBI has set up
the Agricultural Refinance and Development Corporation to provide long-
term finance to farmers.
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Classification of RBIs functions
The monetary functions also known as the central banking functionsof the RBI are related to control and regulation of money and credit, i.e.,
issue of currency, control of bank credit, control of foreign exchange
operations, banker to the Government and to the money market. Monetary
functions of the RBI are significant as they control and regulate the volume
of money and credit in the country.
Equally important, however, are the non-monetary functions of the RBI in
the context of India's economic backwardness. The supervisory function of
the RBI may be regarded as a non-monetary function (though many consider
this a monetary function).
The promotion of sound banking in India is an important goal of the
RBI, the RBI has been given wide and drastic powers, under the Banking
Regulation Act of 1949 these powers relate to licensing of banks, branch
expansion, liquidity of their assets, management and methods of working,
inspection, amalgamation, reconstruction and liquidation. Under the RBI's
supervision and inspection, the working of banks has greatly improved.
Commercial banks have developed into financially and operationally sound
and viable units. The RBI's powers of supervision have now been extended
to nonbanking financial intermediaries. Since independence, particularly
after its nationalization 1949, the RBI has followed the promotional
functions vigorously and has been responsible for strong financial support to
industrial and agricultural development in the country.
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NATURE OF BANKING IN INDIA
A banking company in India has been defined in the banking
companies act,1949.as one which transacts the business of banking
which means the accepting, for the purpose of lending or investment of
deposits of money from the public, repayable on demand or otherwise
and withdraw able by cheque, draft, order or otherwise.
Most of the activities a Bank performs are derived from the above
definition. In addition, Banks are allowed to perform certain activities which
are ancillary to this business of accepting deposits and lending. A bank's
relationship with the public, therefore, revolves around accepting deposits
and lending money. Another activity which is assuming increasing
importance is transfer of money - both domestic and foreign - from one
place to another. This activity is generally known as "remittance business" in
banking parlance. The so called forex (foreign exchange) business is largelya part of remittance albeit it involves buying and selling of foreign
currencies.
FUNCTIONING OF A BANK
Functioning of a Bank is among the more complicated of corporate
operations. Since Banking involves dealing directly with money,
governments in most countries regulate this sector rather stringently. In
India, the regulation traditionally has been very strict and in the opinion of
certain quarters, responsible for the present condition of banks, where NPAs
are of a very high order. The process of financial reforms, which started in
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1991, has cleared the cobwebs somewhat but a lot remains to be done. The
multiplicity of policy and regulations that a Bank has to work with makes its
operations even more complicated, sometimes bordering on illogical. This
section, which is also intended for banking professional, attempts to give an
overview of the functions in as simple manner as possible. Banking
Regulation Act of India, 1949 defines Banking as "accepting, for the
purpose of lending or investment of deposits of money from the public,
repayable on demand or otherwise and withdraw able by cheques, draft, and
order or otherwise."
KINDS OF BANKS
Financial requirements in a modern economy are of a diverse nature,
distinctive variety and large magnitude. Hence, different types of banks have
been instituted to cater to the varying needs of the community.
Banks in the organized sector may, however, be classified in to thefollowing major forms:
1. Commercial banks
2. Co-operative banks
3. Specialized banks
4. Central bank
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COMMERCIAL BANKS
Commercial banks are joint stock companies dealing in money and
credit. In India, however there is a mixed banking system, prior to July
1969, all the commercial banks-73 scheduled and 26 non-scheduledbanks,
except the state bank of India and its subsidiaries-were under the control of
private sector. On July 19, 1969, however, 14mejor commercial banks with
deposits of over 50 Corers were nationalized. In April 1980, another six
commercial banks of high standing were taken over by the government.
At present, there are 20 nationalized banks plus the state bank of India and
its 7 subsidiaries constituting public sector banking which controls over 90
per cent of the banking business in the country.
CO-OPERATIVE BANKS
Co-operative banks are a group of financial institutions organized
under the provisions of the Co-operative societies Act of the states. The
main objective of co-operative banks is to provide cheap credits to their
members. They are based on the principle of self-reliance and mutual co-
operation. Co-operative banking system in India has the shape of a pyramid
a three tier structure, constituted by: Primary credit societies [APEX]
Central co-operative banks [District level]
State co-operative banks [Villages, Towns, Cities]
CENTRAL BANK
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A central bank is the apex financial institution in the banking and
financial system of a country. It is regarded as the highest monetary
authority in the country. It acts as the leader of the money market. It
supervises, control and regulates the activities of the commercial banks. It is
a service oriented financial institution.
Indias central bank is the reserve bank of India established in
1935.a central bank is usually state owned but it may also be a private
organization. For instance, the reserve bank of India (RBI), was started as a
shareholders organization in 1935, however, it was nationalized after
independence, in 1949.it is free from parliamentarycontrol.
ROLE OF BANKS IN A DEVELOPING
ECONOMYBanks play a very useful and dynamic role in the economic life of
every modern state. A study of the economic history of western country
shows that without the evolution of commercial banks in the 18th and 19th
centuries, the industrial revolution would not have taken place in Europe.
The economic importance of commercial banks to the developing countries
may be viewed thus:
1. Promoting capital formation
2. Encouraging innovation
3. Monetsation
4. Influence economic activity
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5. Facilitator of monetary policy
PROMOTING CAPITAL FORMATION
A developing economy needs a high rate of capital formation to
accelerate the tempo of economic development, but the rate of capital
formation depends upon the rate of saving. Unfortunately, in
underdeveloped countries, saving is very low. Banks afford facilities for
saving and, thus encourage the habits of thrift and industry in the
community. They mobilize the ideal and dormant capital of the country and
make it available for productive purposes.
ENCOURAGING INNOVATION
Innovation is another factor responsible for economic development.
The entrepreneur in innovation is largely dependent on the manner in which
bank credit is allocated and utilized in the process of economic growth. Bank
credit enables entrepreneurs to innovate and invest, and thus uplift economic
activity and progress.
INFLUENCE ECONOMIC ACTIVITY
Banks are in a position to influence economic activity in a country by
their influence on the rate interest. They can influence the rate of interest in
the money market through its supply of funds. Banks may follow a cheap
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money policy with low interest rates which will tend to stimulate economic
activity.
FACILITATOR OF MONETARY POLICY
Thus monetary policy of a country should be conductive to economic
development. But a well-developed banking system is on essential pre-
condition to the effective implementation of monetary policy. Under-
developed countries cannot afford to ignore this fact. A fine, an efficient and
comprehensive banking system is a crucial factor of the developmental
process.
PRINCIPLES OF BANK LENDING POLICIES
The main business of banking company is to grant loans and advances
to traders as well as commercial and industrial institutes. The most important
use of banks money is lending. Yet, there are risks in lending. So the banks
follow certain principles to minimize the risk:
1. Safety
2. Liquidity
3. Profitability
4. Purpose of loan
5. Principle of diversification of risks
SAFETY
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Normally the banker uses the money of depositors in granting loans
and advances. So first of all initially the banker while granting loans should
think first of the safety of depositors money. The purpose behind the safety
is to see the financial position of the borrower whether he can pay the debt
as well as interest easily.
LIQUIDITY
It is a legal duty of a banker to pay on demand the total deposited
money to the depositor. So the banker has to keep certain percent cash of the
total deposits on hand. Moreover the bank grants loan. It is also for the
addition of short term or productive capital. Such type of lending is
recovered on demand.
PROFITABILITY
Commercial banking is profit earning institutes. Nationalized banks
are also not an exception. They should have planning of deposits in a
profitability way pay more interest to the depositors and more salary to the
employees. Moreover the banker can also incur business cost and can give
more benefits to customer.
PURPOSE OF LOAN
Banks never lend or advance for any type of purpose. The banks grant
loans and advances for the safety of its wealth, and certainty of recovery of
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loan and the bank lends only for productive purposes. For example, the bank
gives such loan for the requirement for unproductive purposes.
PRINCIPLE OF DIVERSIFICATION OF RISKS
While lending loans or advances the banks normally keep such
securities and assets as a supports so that lending may be safe and secured.
Suppose, any particular state is hit by disasters but the bank shall get
benefits from the lending to another states units. Thus, he effect on the entire
business of banking is reduced. There are proverbs that do not keep all the
eggs in one basket. a principle of considerations of sound lending is:
1. Safety
2. Liquidity
3. Shift ability
4. Profitability.
BRANCH SETUP AND STRUCTUREEver since major commercial banks were nationalized in two phases
in 1969 and 1980, there has been a sea change in their functions, outlook and
perception. One of the main objectives of nationalization of banks has been
to help achieve balanced, regional, sectoral and sectional development of the
economy by way of making the banks reach out to the small man and to the
remote areas of the country.
ORGANISATIONAL STRUCTURE OF A
BANK BRANCH
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Now let discuss the structure of a branch. The branch is the focal point
of all activities. The structure of the branch may be as under:
Small/Medium Branch
This is the typical structure of a branch bank. In very large branches,
the structure will undergo slight changes as stated below:
Very Large Branch
From the structure we can see how the functional relationship works
in a branch. He structure also explains the reporting authority for each cadre
of the employees. It indicates the communication flow in the branch with
well-defined accountability on the part of the employees roles.
TYPES OF BRANCHES
According to locations, there are four types bank branches. They are
rural, semiurban, urban and metropolitan branches. The B.M. has special
role and functions in managing different types of branches.
BANK ORGANIZATION SYSTEM IN INDIA
The large volume of work passing through the banking system every
day in the form of cash, cheque, and other credit instruments, together with
the complexity of the many services rendered, calls not only for a high
degree of skill, accuracy and knowledge on the part of the officials, but also
up-to-date and efficient methods of organization, accountancy and control.
Shareholders and directors
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General Managers
Head office
Administration
Branch
Administration Foreign
Departments
The Branch Manager
The day-book or
Control Clerk
The Security Clerk
The cashier
The Chief Clerk
Modern Banking Methods
The Remittance or
Waste Clerk
The Shorthand Typist
Rotation of Duties
The junior Clerk
The Ledger-Keeper
The Shorthand Typist
The Ledger-Keeper
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RETAIL BANKING-THE NEW FLAVOR
The Concept of Retail Banking:-
The retail banking encompasses deposit and assets linked products as
well as other financial services offered to individual for personal
consumption. Generally, the pure retail banking is conceived to be the
provision of mass banking products and services to private individuals as
opposed to wholesale banking which focuses on corporate clients. Over the
years, the concept of retail banking has been expanded to include in many
cases the services provided to small and medium sized businesses. Some
banks in Europe even include their private banking business i.e. services to
high net worth net worth individuals in their retail Banking portfolio.
The concept of Retail banking is not new to banks. it is only now that it is
being viewed as an attractive market segment, which offers opportunities for
growth with profits. The diversified portfolio characteristic of retail banking
gives better comfort and spreads the essence of retail banking lies in
individual customers. Though the term Retail Banking and retail lending areoften used synonymously, yet the later is lust one side of Retail Banking. In
retail banking, all the banking needs of individual customers are taken care
of in an integrated manner.
Retail Lending Products
Major retail lending products offered by banks are the following:
1. Housing Loans
2 Loan for Consumer goods
3. Personal Loans for marriage, honeymoon, medical treatment and holding
etc.
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4. Education Loans
5. Auto Loans
6. Gold Loans
7. Loan against Rent receivables
8. Loan against Pension receivables to senior citizens
9. Debit and Credit Cards
10. Global and International Cards
Other Retail Banking Services
Offer of several frills and goodies is not the end of the game. Banks
also offer following Retail Banking services free of charges to customers:
1. Payment of utility bills like water, electricity, telephone and mobile phone
bills
2. Payment of insurance premiums on due dates
3. Payment of monthly/quarterly education fee of children to their respective
schools
4. Remittance of funds from one account to another
5. Demating of shares, bonds, debentures, and mutual funds
6. Payment of credit card bills on due dates
7. Last but not the least, the filing of income tax returns and payment of
income tax
The impact of Retail Banking
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_ The major impact of Retail Banking is that, the customers have become
the emperors the fulcrum of all banking activities, both on the asset side
and the liabilities front. The hitherto sellers market has transformed into
buyers market.
The customers have multiple of choices before them now for cherry
picking products and services, which suit their life styles and tastes and
financial requirements as well. Banks now go to their customers more often
than the customers go to their banks.
_ The non-banking finance Companies which have hitherto been thriving on
retail business due to high risk and high returns thereon have been dislodged
from their profit munching citadel.
_ Retail banking is transforming banks in to one stop financial super
markets.
_ The share of retail loans is fast increasing in the loan books of banks.
_ Banks can foster lasting business relationship with customers and retain
the existing customers and attract new ones. There is a rise in their service
levels as well.
_Banks can cut costs and achieve economies of scale and improve their
revenues and profits by robust growth in retail business. Reduction in costs
offers a win win situation both for banks and the customers.
_ It has affected the interface of banking system through different delivery
mechanism.
_ It is not that banks are sharing the same pie of retail business. The pie
itself is growing exponentially; retail banking has fueled a considerable
quantum of purchasing power through a slew of retail products.
_ Banks can diversify risks in their credit portfolio and contain the menace
of NPAs.
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_ Re-engineering of business with sophisticated technology based products
will lead to business creation, reduction in transaction cost and enhancement
in efficiency of operations.
Draw-backs of Retail Banking
Despite the numerous advantage of Retail Banking there are some
drew-Backs in this business. These are as under:
a. Management of large number of clients may become a problem if IT
systems are not robust.
b. Rapid evolution of products can lead to IT complications.
c. The cost of maintaining large number of small value transactions in
branch networks will be relatively high, unless the customers use alternate
delivery channels like ATMs, internet and phone banking etc. for carryingout banking transactions.
The Future of Retail Banking
Though at present Retail Banking appears to be the best bet for banks
to improve their top and bottom line, yet the future of Retail banking in
general, may not be all roses as it appears to be. There are signs of
slowdown in customer growth in some countries, which will inevitably have
an impact on Retail Banking business growth. Secondly the possibility of
deterioration in asset quality cannot be ruled out. With the boom in housing
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loan market, the sign of overheating has also started surfacing with potential
problem for banks that have not exercised sufficient caution. Further the
pressure on margins is mounting partly because of fierce competition and
partly as a result of falling interest rates environment which has diminished
to some extent the endowment effect of substantial deposit bases from which
most retail banks have been deriving benefits. But banks, which have built a
significant retail banking portfolio may fare relatively well in the current
fiscal. Those banks which have a dynamic retail strategy and are well
diversified in products, services and distribution channels and have at the
same time managed to achieve a good level of cost efficiency are the ones
that are most likely to succeed in the longer term.
STRATEGIC ISSUES IN BANKING SERVICES
Strategic Planning: is the process of analyzing the organizational
external and internal environments; developing the appropriate mission,
vision, and overall goals; identifying the general strategies to be pursued;
and allocated resources.
Mission is an organization's current purpose or reason for existing.
Vision is an organization's fundamental aspirations and purpose that
usually appeals to its member's hearts and minds.
Goals are what an organization is committed to achieving.
Strategies are the major courses of action that an organization takes to
achieves goals.
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Resource Allocation is the earmarking of money, through budgets, for
various purposes.
Downsizing Strategy signals an organization's intent to rely on fewer
resourcesprimarily human-to accomplish its goals.
Tactical Planning: is the process of making detailed decisions about what
to do, which will do it, and how to do it-with a normal time and horizon of
one year or less. The process generally includes:
Choosing specific goals and the means of implementing the organization's
strategic plan,
Deciding on courses of action for improving current operations, and
Developing budgets for each department, division and project. Strategic
issues in banks services are known as or define by these ways, which are
known as
NON-PERFORMING ASSETS OF THE
BANKING SECTOR
There was a significant decline in the non-performing assets (NPAs)
of SCBs in 2003-04, despite adoption of 90 day delinquency norm from
March 31, 2004. The Gross NPAs of SCBs declined from 4.0 per cent of
total assets in 2002-03 to 3.3 percent in 2003-04. The corresponding declinein net NPAs was from 1.9 per cent to 1.2 per cent. Both gross NPAs and net
NPAs declined in absolute terms. While the gross NPAs declined from Rs.
68,717 crore in 2002-03 to Rs. 64,787 crore in 2003-04, net NPAs declined
from Rs. 32,670 crore to Rs. 24,617 crore in the same period. There was also
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a significant decline in the proportion of net NPAs to net advances from 4.4
per cent in 2002-03 to 2.9 per cent in 2003-04. The significant decline in the
net NPAs by 24.7 per cent in 2003-04 as compared to 8.1 per cent in 2002-
03 was mainly on account of higher provisions (up to 40.0 per cent) for
NPAs made by SCBs.
The decline in NPAs in 2003-04 was witnessed across all bank
groups. The decline in net NPAs as a proportion of total assets was quite
significant in the case of new
TOTAL QUALITY MANAGEMENT
While Total Quality Management has proven to be an effective
process for improving organizational functioning, its value can only be
assured through comprehensive and well thought out implementation
process. The purpose of this chapter is to outline key aspects of
implementation of large scale organizational change which may enable a
practitioner to more thoughtfully and successfully implement TQM. First,
the context will be set. TQM is, in fact, a large scale systems change, and
guiding principles and considerations regarding this scale of change will be
presented. Without attention to contextual factors, well intended changes
may not be adequately designed. As another aspect of context, the
expectations and perceptions of employees (workers and managers) will be
assessed, so that the implementation plan can address them.
Specifically, sources of resistance to change and ways of dealing with
them will be discussed. This is important to allow a change agent to
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anticipate resistances and design for them, so that the process does not bog
down or stall. Next, a model of implementation will be presented, including
a discussion of key principles. Visionary leadership will be offered as an
overriding perspective for someone instituting TQM. In recent years the
literature on change management and leadership has grown steadily, and
applications based on research findings will be more likely to succeed. Use
of tested principles will also enable the change agent to avoid reinventing
the proverbial wheel.
.
INNOVATION IN BANKInnovation drives organizations to grow, prosper and transform in
sync with the changes in the environment, both internal and external.
Banking is no exception to this. In fact, this sector has witnessed radical
transformation of late, based on many innovations in products, processes,
services, systems, business models, technology, governance and regulation.
A liberalized and globalize financial infrastructure has provided anadditional impetus to this gigantic effort.
The pervasive influence of in formation technology has
revolutionalized banking. Transaction costs have crumbled and handling of
astronomical number of transactions in no time has become a reality.
Internationally, the number brick and mortar structure has been rapidly
yielding ground to click and order electronic banking with a plethora of new
products. Banking has become boundary less and virtual with a 24 * 7
model. Banks who strongly rely on the merits of relationship banking as a
time tested way of targeting and serving clients, have readily embraced
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Customer Relationship Management (CRM), with sharp focus on customer
centricity, facilitated by the availability of superior technology.
CRM has, therefore, become the new mantra in customer service
management, which is both relationship based and information intensive.
Risk management is no longer a mere regulatory issue.basel-2 has accorded
a primacy of place to this fascinating exercise by repositioning it as the core
of banking.
We now see the evolution of many novel deferral products like credit
derivatives, especially the Credit Risk Transfer (CRT) mechanism, as a
consequence. CRT, characterized by significant product innovation, is a very
useful credit risk management tool that enhances liquidity and market
efficiency. Securitization is yet another example in this regard, whose
strategic use has been rapidly rising globally. So is outsourcing.
TECHNOLOGY IN BANKING
Nobel Laureate Robert Solow had once remarked that computers areseen everywhere excepting in productivity statistics. More recent
developments have shown how far this state of affairs has changed.
Innovation in technology and worldwide revolution in information and
communication technology (ICT) have emerged as dynamic sources of
productivity growth. The relationship between IT and banking is
fundamentally symbiotic. In the banking sector, IT can reduce costs,
increase volumes, and facilitate customized products; similarly, IT requires
banking and financial services to facilitate its growth. As far as the banking
system is concerned, the payment system is perhaps the most important
mechanism through which such interactive dynamics gets manifested.
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Recognizing the importance of payments and settlement systems in the
economy,
CORPORATE GOVERNANCE - CODE OF
CONDUCT
Need and objective of the Code
Clause 49 of the Listing agreement entered into with the Stock
Exchanges, requires, as part of Corporate Governance the listed entities to
lay down a Code of Conduct for Directors on the Board of an entity and its
Senior Management. The term "Senior Management" shall mean personnel
of the company who are members of its core management team excluding
the Board of Directors. This would also include all members of
management, one level below the Executive Directors including all
functional heads.
Bank's Belief System
This Code of Conduct attempts to set forth the guiding principles on
which the Bank shall operate and conduct its daily business with its
multitudinous stakeholders, government and regulatory agencies, media and
anyone else with whom it is connected. It recognizes that the Bank is a
trustee and custodian of public money and in order to fulfill fiduciaryobligations and responsibilities, it has to maintain and continue to enjoy the
trust and confidence of public at large.
The Bank acknowledges the need to uphold the integrity of every
transaction it enters into and believes that honesty and integrity in its internal
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conduct would be judged by its external behavior. The bank shall be
committed in all its actions to the interest of the countries in which it
operates. The Bank is conscious of the reputation it carries amongst its
customers and public at large and shall endeavor to do all it can to sustain
and improve upon the same in its discharge of obligations. The Bank shall
continue to initiate policies, which are customer centric and which promote
financial prudence.
Philosophy of the Code
Adherence to the highest standards of honest and ethical conduct,
including proper and ethical procedures in dealing with actual or apparent
conflicts of interest between personal and professional relationships. Full,
fair, accurate, sensible, timely and meaningful disclosures in the periodic
reports required to be filed by the Bank with government and regulatory
agencies. Compliance with applicable laws, rules and regulations. To
address misuse or misapplication of the Bank's assets and resources. The
highest level of confidentiality and fair dealing within and outside the Bank.
General Standards of conduct
The Bank expects all Directors and members of the Core Management
to exercise good judgment, to ensure the interests, safety and welfare ofcustomers, employees and other stakeholders and to maintain a cooperative,
efficient, positive, harmonious and productive work environment and
business organization. The Directors and members of the Core Management
while discharging duties of their office must act honestly and with due
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diligence. They are expected to act with that amount of utmost care and
prudence, which an ordinary person is expected to take in his/ her own
business. These standards need to be applied while working in the premises
of the Bank, at offsite locations where business is being conducted whether
in India or abroad, at Bank-sponsored business and social events, or at any
other place where they act as representatives of the Bank.
Employment /OutsideEmployment
The members of the Core Management are expected to devote their total
attention to the business interests of the Bank.
They are prohibited from engaging in any activity that interferes with their
performance or responsibilities to the Bank or otherwise is in conflict with
or prejudicial to the Bank.
Business Interests If any member of
the Board of Directors and Core Management considers investment in
securities issued by the Bank's customer, supplier or competitor, they should
ensure that these investments do not compromise their responsibilities to the
Bank. Many factors including the size and nature of the investment; their
ability to influence the Bank's decisions, their access to confidential
information of the Bank, or of the other entity, and the nature of the
relationship between the Bank and the customer, supplier or competitor
should be considered in determining whether a conflict exists. Additionally,
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they should disclose to the Bank any interest that they have which may
conflict with the business of the Bank.
. Applicable Laws
The Directors of the Bank and Core Management must comply with
applicable laws, regulations, rules and regulatory orders. They should report
any inadvertent non - compliance, if detected subsequently, to the concerned
authorities.
. Disclosure Standards
The Bank shall make full, fair, accurate, timely and meaningful
disclosures in the periodic reports required to be filed with Government and
Regulatory agencies. The members of Core Management of the bank shall
initiate all actions deemed necessary for proper dissemination of relevant
information to the Board of Directors, Auditors and other Statutory
Agencies, as may be required by applicable laws, rules and regulations.
Good Corporate Governance Practices
Each member of the Board of Directors and Core Management of the
Bank should adhere to the following so as to ensure compliance with good
Corporate Governance practices.
(a) Dos
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_ Attend Board meetings regularly and participate in the deliberations and
discussions effectively.
_ Study the Board papers thoroughly and enquire about follow-up reports on
definite time schedule.
_ Involve actively in the matter of formulation of general policies.
_ Be familiar with the broad objectives of the Bank and policies laid down
by the Government and the various laws and legislations.
_ Ensure confidentiality of the Bank's agenda papers, notes and minutes.
(b) Don'ts
_ Do not interfere in the day to day functioning of the Bank.
_ Do not reveal any information relating to any constituent of the Bank to
anyone.
_ Do not display the logo / distinctive design of the Bank on their personal
visiting cards / letter heads.
_ Do not sponsor any proposal relating to loans, investments, buildings or
sites for Bank's premises, enlistment or empanelment of contractors,
architects, auditors, doctors, lawyers and other professionals etc.
_ Do not do anything, which will interfere with and/ or be subversive of
maintenance of discipline, good conduct and integrity of the staff.
Waivers
Any waiver of any provision of this Code of Conduct for a member of
the Bank's Board of Directors or a member of the Core Management must be
approved in writing by the Board of Directors of the Bank.
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The matters covered in this Code of Conduct are of the utmost importance to
the bank, its stakeholders and its business partners, and are essential to the
Bank's ability to conduct its business in accordance with its value system.
ENTREPRENEURSHIPEntrepreneurship is the practice of starting new organizations,
particularly new businesses generally in response to identified opportunities.
Entrepreneurship is often a difficult undertaking, as a majority of new
businesses fail. Entrepreneurial activities are substantially different
depending on the type of organization that is being started. Entrepreneurship
may involve creating many job opportunities.
Many "high-profile" entrepreneurial ventures seek venture capital or
angel funding in order to raise capital to build the business. Many kinds of
organizations now exist to support would-be entrepreneurs, including
specialized government agencies, business incubators, science parks, and
some NGOs.
Our understanding of entrepreneurship owes a lot to the work of
economist Joseph Schumpeter and the Austrian School of economics. For
Schumpeter (1950), an entrepreneur is a person who is willing and able to
convert a new idea or invention into a successful innovation.
Entrepreneurship forces "creative destruction" across markets and industries,
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simultaneously creating new products and business models and eliminating
others. In this way, creative destruction is largely responsible for the
dynamism of industries and long-run economic growth. Despite
Schumpeter's early 20th-century contributions, the traditional
microeconomic theory of economics has had little room for entrepreneurs in
their theories
Characteristics of entrepreneurship
The entrepreneur, who has a vision and the enthusiasm for this vision,
is the driving force of an entrepreneurship
We began by asserting that individual entrepreneurs get too much
credit and blame for the fate of new ventures. We also emphasized that
successful entrepreneurs are those who can develop the right kinds of
relationships with others inside and outside their firm. Our perspective
suggests that, in trying to predict which entrepreneurs will succeed or fail,
instead of turning attention to the characteristics of individual founders and
CEOs, researchers and teachers would be wiser to turn attention to the otherpeople the entrepreneur spends time with and how they respond. Our
perspective also implies that the format of the "Entrepreneurs of the Year"
competition described at the outset of this chapter ought to be changed.
Rather than using such events to recognize individual CEOs or founders
from successful start-ups, awards could be presented to recognize the
intertwined group of people who made each start-up a success.
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RECENT MACROECONOMIC
DEVELOPMENTS AND THE
BANKING SYSTEMFor a greater part of the twentieth century, the role of the financial
system was perceived as mobilizing the massive resource requirements for
growth. Since the 1970s and 1980s, development economics underwent a
paradigm shift. The financial system is no longer viewed as a passive
mobiliser of funds. Efficiency in financial intermediation
i.e., the ability of financial institutions to intermediate between savers and
investors, to set economic prices for capital and to allocate resources among
competing demands is now emphasized. Developments in endogenous
growth theory since the late 1980s indicate that efficiency in financial
intermediation is a source of technical progress to be exploited for
generating increasing returns and sustaining high growth. These changes
have provided the rationale for many developing countries to undertake
wide-ranging reforms of their financial systems so as to prepare them for
their true resource allocation function. As important financial intermediaries,
banks have a special role to play in this new dispensation.
The sharp downturn in global macroeconomic prospects and the
continuing sluggishness in domestic industrial activity have necessitated a
revision in the forecast for Indias real GDP growth in 2001-02 from 6.0-6.5
per cent expected at the time of the April 2001 Monetary and Credit Policy
Statement to 5.0-6.0 per cent in the mid-term review of the policy. The
downward revision is primarily predicated on the outlook for the industrial
sector which grew by barely 2.2 per cent in April-October 2001 as against
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5.9 per cent in the corresponding period of last year, mainly on account of
the slowdown
PRUDENTIAL NORMS
A strong and resilient financial system and the orderly evolution of
financial markets are key prerequisites for financial stability and economic
progress. In keeping with the vision of an internationally competitive and
sound banking system, deepening and broadening of prudential norms to the
best internationally recognized standards have been the core of our approach
to financial sector reforms. This has been supported concurrently by
heightened market discipline, pro-active and comprehensive supervision of
the financial system and the orderly development of financial market
segments. The calibration of the convergence with international standards is
conditioned by the specific realities of our situation; however, the New
Capital Accord of the Basel Committee on Banking Supervision which was
released in January 2001 adds urgency to the process of convergence. It is
against the backdrop of these exigencies that prudential norms are being
constantly monitored and refined. In the recent period, banks are being
encouraged to build risk-weighted components of their subsidiaries into their
own balance sheets and to assign additional capital. Risk weights are being
constantly refined to take into recognition additional sources of risk. The
concept of past due in the identification of NPAs has been dispensed with.
Banks and financial institutions are being urged to prepare to move to the
international practice of the 90 day norm in the classification of assets as
non-performing by 2003-04.
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MARKET DISCIPLINE
Processes of transparency and market disclosure of criticalinformation describing the risk profile, capital structure and capital adequacy
are assuming increasing importance in the emerging environment. Besides
making banks more accountable and responsive to better-informed investors,
these processes enable banks to strike the right balance between risks and
rewards and to improve the access to markets. Improvements in market
discipline also call for greater coordination between banks and regulators.
India has been a participant in the international initiatives to ensure
improved processes of market discipline that are being worked out in several
fora, such as, the multilateral organizations, the BIS, the Financial Stability
Forum, and the Core Principles Liaison Group. Concurrent efforts are
underway to refine and upgrade financial information monitoring and flow,
data dissemination and data warehousing. Banks are currently required to
disclose in their balance sheets information on maturity profiles of assets
and liabilities, lending to sensitive sectors, movements in NPAs, besides
providing information on capital, provisions, shareholdings of the
government, value of investments in India and abroad, and other operating
and profitability indicators. Financial institutions are also required to meet
these disclosure norms. Banks also have to disclose their total
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UNIVERSAL BANKING
Since the early 1990s, banking systems worldwide have been going
through a rapid transformation. Mergers, amalgamations and acquisitions
have been undertaken on a large scale in order to gain size and to focus more
sharply on competitive strengths.
This consolidation has produced financial conglomerates that are
expected to maximize economies of scale and scope by bundling the
production of financial services. The general trend has been towards
downstream universal banking where banks have undertaken traditionally
non-banking activities such as investment banking, insurance, mortgage
financing, securitization, and particularly, insurance. Upstream linkages,
where non-banks undertake banking business, are also on the increase. The
global experience can be segregated into broadly three models. There is the
Swedish or Hong Kong type model in which the banking corporate engages
in in-house activities associated with banking. In Germany and the UK,
certain types of activities are required to be carried out by separatesubsidiaries. In the US type model, there is a holding company structure and
separately capitalized subsidiaries
In India, the first impulses for a more diversified financial
intermediation were witnessed in the 1980s and 1990s when banks were
allowed to undertake leasing, investment banking, mutual funds, factoring,
hire-purchase activities through separate subsidiaries. By the mid-1990s, all
restrictions on project financing were removed and banks were allowed to
undertake several activities in-house. In the recent period, the focus is on
Development Financial Institutions (DFIs), which have been allowed to set
up banking subsidiaries and to enter the insurance business along with
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banks. DFIs were also allowed to undertake working capital financing and to
raise short-term funds within limits. It was the Narasimham Committee II
Report (1998) which suggested that the DFIs should convert themselves into
banks or non-bank financial companies, and this conversion was endorsed
by the Khan Working Group (1998). The Reserve Banks Discussion Paper
(1999) and the feedback thereon indicated the desirability of universal
banking from the point of view of efficiency of resource use, but it also
emphasized the need to take into account factors such as the status of
reforms, the state of preparedness of the institutions, and a viable transition
path while moving in the desired direction.
Accordingly, the mid-term review of monetary and credit policy,
October 1999 and the annual policy statements of April 2000 and April 2001
enunciated the broad approach to universal banking and the Reserve Banks
circular of April 2001 set out the operational and regulatory aspects of
conversion of DFIs into universal banks. The need to proceed with planning
and foresight is necessary for several reasons. The move towards universal
banking would not provide a panacea for the endemic weaknesses of a DFI
or its liquidity and solvency problems and/or operational difficulties arising
from undercapitalization, non-performing assets, and asset liability
mismatches, etc. The overriding consideration should be the objectives and
strategic interests of the financial institution concerned in the context of
meeting the varied needs of customers, subject to normal prudential norms
applicable to banks. From the point of view of the regulatory framework, the
movement towards universal banking should entrench stability of the
financial system, preserve the safety of public deposits, improve efficiency
in financial intermediation, ensure healthy competition, and impart
transparent and equitable regulation.
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HUMAN RESOURCE DEVELOPMENT IN
BANKING
A recurring theme in the annual BECON Conference has been the
need to focus on developing human resources to cope with the rapidly
changing scenario. The core function of HRD in the banking industry is to
facilitate performance improvement, measured not only in terms of financial
indicators of operational efficiency but also in terms of the quality of
financial services provided. Factors such as skills, attitudes and knowledge
of personnel play a critical role in determining the competitiveness of the
financial sector. The quality of human resources indicates the ability of
banks to deliver value to customers. Capital and technology are replicable,
but not human capital which needs to be viewed as a valuable resource for
the achievement of competitive advantage.
The primary emphasis needs to be on integrating human resource
management (HRM) strategies with the business strategy. HRM strategies
include managing change, creating commitment, achieving flexibility and
improving teamwork. These processes underlie the complementary
processes that represent the overt aspects of HRM, such as recruitment,
placement, performance management, reward management, and employeerelations. A forward looking approach would involve moving towards self-
assessment of competency and developmental needs as a part of a
continuous learning cycle.
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The Indian banking industry has been an important driving force
behind the nations economic development. The emerging environment
poses both opportunities and threats, in particular, to the public sector banks.
How well these are met will mainly depend on the extent to which the banks
leverage their primary assets i.e., human resources in the context of the
changing economic and business environment. It is obvious that the public
sector banks hierarchical structure, which gives preference to seniority over
performance, is not the best environment for attracting the best talent from
among the young in a competitive environment. A radical transformation of
the existing personnel structure in public sector banks is unlikely to be
practical, at least in the foreseeable future. However, certain improvements
can be made in the recruitment practices as well as in on-the-job training and
redeployment of those who are already employed. There are several
institutions in the country which cater exclusively to the needs of human
resource development in the banking industry. It is worthwhile to consider
broad-basing the courses conducted in these institutions among other
higherlevel educational institutions so that specialization in the area of
banking and financial services becomes an option in higher education
curriculums. In the area of information technology, Indian professionals are
world leaders and building synergies between the IT and banking industries
will sharpen the competitive edge of our banks.
Conclusion
How close are we to the vision of a sound and well-functioning
banking system that I outlined. It is fair to say that despite a turbulent year
and many challenges, we have made some progress towards this goal. There
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has been progressive intensification of financial sector reforms, and the
financial sector as a whole is more sensitized than before to the need for
internal strength and effective management as well as to the overall concerns
for financial stability. At the same time, in view of greater disclosure and
tougher prudential norms, the weaknesses in our financial system are more
apparent than before.
There is greater awareness now of the need to prepare the banking
system for the technical and capital requirements of the emerging prudential
regime and a greater focus on core strengths and niche strategies. We have
also made some progress in assessing our financial system against
international best practices and in benchmarking the future directions of
progress. Several contemplated changes in the surrounding legal and
institutional environment have been proposed for legislation.
The NPA levels remain too large by international standards and
concerns relating to management and supervision within the ambit of
corporate governance are being tested during the period of downturn of
economic activity. The structure of the financial system is changing and
supervisory and regulatory regimes are experiencing the strains of
accommodating these changes. Certain weak links in the decentralized
banking and nonblank financial sectors have also come to notice. In a
fundamental sense, regulators and supervisors are under the greatest
pressures of change and bear the larger responsibility for the future. For both
the regulators and the regulated, eternal vigilance is the price of growth with
financial stability.
We should strive to move towards realizing our vision of an efficient
and sound banking system of international standards with redoubled vigor.
Our greatest asset in this endeavor is the fund of technical and scientific
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human capital formation available in the country. The themes which are
being covered in this Conference under structural, operational and
governance issues should help in defining the road map for the future.
R E F E R E N C E
SITE NAME
WWW.BAMBOOWEB.COM/ARTICLES/B/E/BENCHMARKING.
WWW.SUCCESSFULMANAGERS.COM
WWW.BIS.ORG/PUBL/BCBS123.PDF
WWW.IBA.ORG.IN/PLRMAIN.ASP
WWW.RBI.ORG.IN/SCRIPTS/PUBLICATIONS.ASPX
WWW.BANKINGINDIAUPDATE.COM
WWW.BANKNETINDIA.COM/BANKING/BOVERVIEW.HTM
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