indian banking sector.docx

8/10/2019 indian banking sector.docx

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INDIAN BANKING SECTOR - PROBLEMS AND PROSPECTS

ABSTRACT

The Indian banking sector has emerged as one of the strongest drivers of Indias economic

growth. It has a large geographic and functional coverage. The sector has undergone

significant developments and investments in the recent past. Here commercial banks cater to

short and medium term financing requirements, while national level and state level financial

Institutions meet longer-term requirements. Banking industry in India has also achieved a

new height with the changing times. Most of banks provide various services such as Mobile

Banking, SMS & Net banking and ATMs to their customers for their convenience. The use of

technology has brought a revolution in the working style of the banks. Banking today has

transformed into a technology intensive and customer friendly model with a focus on

convenience. However, changing dynamics of banking business also brings new kind of risk

exposure.

Authors : S. Nandhini

K.G. Shalini

K. Prince

(Sri Krishna Arts and Science College)


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INTRODUCTION OF INDIAN BANKING SECTOR

In modern sense, Banking in India started with the establishment of three presidency

banks under the Presidency Banks Act 1876 i.e. Bank of Calcutta, Bank of Bombay a nd

Bank of Madras.In 1921, all presidency banks were amalgamated to form the imperial Bank of India.

Imperial bank carried out limited central banking functions also prior to establishment of

RBI. Reserve bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was

constituted as an apex bank without major government ownership. Banking Regulations Act

was passed in 1949. Under this act, RBI got wide ranging powers for supervision & control

of banks. In 1955, RBI acquired control of the Imperial Bank of India, which was renamed as

State Bank of India . In 1959, SBI took over control of eight private banks floated in thewhile princely states, making them as its 100% subsidiaries.RBI was empowered in 1960, to

force compulsory merger of weak banks with the strong ones. The total number of banks was

thus reduced from 566 in 1951 to 85 in 1969. In July1969, government nationalized 14 banks

having deposits of Rs.50 crore & above. In 1980,government acquired 6 more banks with

deposits of more than Rs.200 crore.

Nationalization of banks was to make them play the role of catalytic agents for

economic growth &development. The Narsimham Committee report suggested wide rangingreforms for the banking sector in 1992 to introduce internationally accepted banking

practices. After this, until the 1990s, the nationalized banks grew at a pace of around 4%,

closer to the average growth rate of the Indian economy.

The structure of the banking system of India comprises two major parts: Organized

and unorganized sector. The organized sector comprises the institutions which provide

mainlyshort term credit to business, specialized term lending institutions which provide longterm requirements of industry agriculture & foreign trade. The unorganized sector comprise

of the money lenders and the indigenous bankers.


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CLASSIFICATION OF BANKS

NEED OF THE BANKS

To provide the security to the savings of customers.

To control the supply of money and credit.

To encourage public confidence in the working of the financial system, increase savings

speedily and efficiently in Indian Banking System.

To avoid focus of financial powers in the hands of a few individuals and institutions.

To set equal norms and conditions (i.e. rate of interest, period of lending etc.) to all types of

customers


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GOVERNMENT POLICY ON BANKING INDUSTRY

To protect the safety of the publics savings. To control the supply of money and credit in order to achieve a nations

broad economic goal.

To ensure equal opportunity and fairness in the publics access to credit and

other vital financial services in Indian Banking System.

To promote public confidence in the financial system, so that savings are

made speedily and efficiently.

To avoid concentrations of financial power in the hands of a few individuals

and institutions.

Provide the Government with credit, tax revenues and other services. To help sectors of the economy that they have special credit needs for

e.g. Housing, small business and agricultural loans and etc.

TOOLS TO CREDIT CONTROL BY RBI

Cash Reserve Ratio- Cash reserve Ratio (CRR )- It is the amount of funds that the banks

have to keep with RBI. If RBI decides to increase the percent of this, the available amount

with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the

excessive money from the banks. Indian Banking System CURRENLTY CRR- 4.25%.

Repo Rate - Whenever the banks have any shortage of funds they can borrow it from RBI.

Repo rate is the rate at which our banks borrow money from RBI. A reduction in the repo rate

will help banks to get money at a cheaper rate. When the repo rate increases borrowing from

RBI becomes more expensive. CURRENTLY REPO RATE -8.0%. 20


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RECENT DEVELOPMENT

Most of banks provide various services such as Mobile banking, SMS & Net banking

and ATMs to their customers for their convenience. The use of technology has brought a

revolution in the working style of the banks. Banking today has transformed into a

technology intensive and customer friendly model with a focus on convenience.

1) Electronic Payment Services E- Cheques

Now-a-days we are hearing about e-governance, e-mail, e-commerce etc. In the same

manner, a new technology is being developed in US for introduction of e-cheque, which

will eventually replace the conventional paper cheque. In India, the Negotiable

Instruments Act has already been amended to include: Truncated cheque and E-cheque

instruments.

2) Real Time Gross Settlement (RTGS)

Real Time Gross Settlement system, introduced in India since March 2004, is a

system through which electronics instructions can be given by banks to transfer funds from

their account to the account of another bank. The RTGS system is maintained and operated

by the RBI and provides a means of efficient and faster funds transfer among banks

facilitating their financial operations. Therefore, money can reach the beneficiary

instantaneously and the beneficiary's bank has the responsibility to credit the beneficiary's

account within two hours.

3) Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make

payment to another person/company etc. Can approach his bank and make cash payment

or give instructions/authorization to transfer funds directly from his own account to the

bank account of the receiver/beneficiary. RBI is the service provider of EFT.

4) Electronic Clearing Service (ECS)

Electronic Clearing Service is a retail payment system that can be used to make bulk

payments/receipts of a similar nature especially where each individual payment is of a

repetitive nature and of relatively smaller amount. This facility is meant for companies


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and government departments to make/receive large volumes of payments rather than for

funds transfers by individuals.

5) Automatic Teller Machine (ATM)

Automatic Teller Machine is the most popular device in India, which enables the

customers to withdraw their money 24 hours a day 7 days a week. It is a device that

allows customer who has an ATM card to perform routine banking transactions without

interacting with a human teller.

6) Point of Sale Terminal

Point of Sale Terminal is a computer terminal that is linked online to the

computerized customer information files in a bank and magnetically encoded plastic

transaction card that identifies the customer to the computer. During a transaction, the

customer's account is debited and the retailer's account is credited by the computer for the

amount of purchase.

7) Tele Banking

Tele Banking facilitates the customer to do entire non-cash related banking on

telephone. Under this devise Automatic Voice Recorder is used for simpler queries and

transactions .For complicated queries and transactions, manned phone terminals are used.

PROBLEMS FACED

The major Problems faced by banks today are as to how to cope with competitive forces and

strengthen their balance sheet.

High transaction costs : A major concern before the banking industry is the hightransaction cost of carrying non- performing assets in their books. The growth led to

Strains in the operational efficiency of banks and the accumulation of non-performing

assets (NPAs) in their loan portfolios.

IT revolution : The Indian banks are subject to tremendous pressures to perform as

Other wise their very survival would be at stake. The application of IT and e-banking is

becoming the order of the day with the banking system heading towards virtual

banking.


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Timely technological up gradation : Already electronic transfers, clearings,

settlements have reduced translation times. To face competition it is necessary for

banks to absorb the technology and upgrade their services.

Intense Competition : The RBI and Government of India kept banking industry open

for the participants of private sector banks and foreign banks. The foreign banks were

also permitted to set up shop on India either as branches or as subsidiaries. Due to this

lowered entry barriers many new players have entered the market such as private

banks, foreign banks.

The foreign banks and new private sector banks have spearhead the hi-tech

revolution. For survival and growth in highly competitive environment banks have to follow

the prompt and efficient customer service, which calls for appropriate customer centric

policies and customer friendly procedures.

Privacy and Safety : Among the most important aspects of savings, i.e., safety,

liquidity and profitability, safety is at the top most priority. The areas which might

cause danger to security in e-banking can be:

Credit risk Liquidity, interest rate risk, market risks Legal risk

Global banking: The impact of globalization becomes challenges for the domestic

enterprises as they are bound to compete with global players. If we look at the Indian

Banking Industry, then we find that there are 36 foreign banks operating in India,

which becomes a major challenge for Nationalized and private sector banks.

Financial Inclusion: Financial inclusion has become a necessity in todays business

environment. Whatever is produced by business houses, that has to be under the check

from various perspectives like environmental concerns, corporate governance, social

and ethical issues. In India, RBI has initiated several measures to achieve greater

financial inclusion, such as facilitating no-frills accounts and GCCs for small deposits

and credit.


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CONCLUSION

The various problem and opportunities like High transaction costs, IT revolution,

timely technological up-gradation, intense competition, privacy & safety, global banking,

financial inclusion. Banks are striving to combat the competition. The competition from

global banks and technological innovation has compelled the banks to rethink their policies

and strategies. Different products provided by foreign banks to Indian customers have forced

the Indian banks to diversify and upgrade themselves so as to compete and survive in the

market.

we can say that the biggest problem for banking industry is to serve the mass and

huge market of India. On the other hand product differentiation. Apart from traditional

banking services, Indian banks must adopt some product innovation so that they can over

come the range of competition.

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indian banking sector.docx