PROJECT REPORT ON

A project report on KALEIDOSCOPIC VIEW OF BANKING

Submitted by:UDAYRAJ BEHANWAL

Bachelor of Banking & InsuranceSemester VYear 2013-14

Under the guidance ofProf. KISHOR CHAUHAN

Submitted to:University of Mumbai

Smt. Sushiladevi Deshmukh, College of arts, science and commerceSector-4, Airoli, Navi Mumbai-400708

Declaration

I Udayraj Behanwal Student of SUSHILADEVI DESHMUKH College of Arts , Science and Commerce of T.Y.B.COM(Banking &Insurance) (SEM V) hereby declare that I have completed the projeon THE BANKING OMBUDSMAN in the academic year 2013-2014.The information submitted is true and Original to the best of my knowledge.

DATE: UDAYRAJ BEHANWALPLACE: AIROLI T.Y.B.COM(B&I)

SMT. SUSHILADEVI DESHMUKH COLLEGE OF ARTS, SCIENCE & COMMERCE

CERTIFICATE

This is to certify that Udayraj Behanwal , student of third year BMS of Smt. Sushiladevi Deshmukh College of Arts, Science & Commerce has successfully completed the project work titled THE BANKING OMBUDSMAN in partial fulfillment for the degree of Bachelor of Commerce(Banking &Insurance) University of Mumbai. This project is the record of authentic work carried out during the academic year 2013-2014.

PROF. Kishor Chauhan Mrs. Shalini Vermani ( Internal Guide) (I/C Principal)

External Guide (Sign)

Affiliated to university of mumbaiSECTOR - 4 AIROLI (W), NAVI MUMBAI 400 708. Tel. 022 27790760, Fax 022 27790760Email. sdvjrcollege@yahoo.com REGD.NO. E 108 (LATUR) 9-12-1988

Acknowledgement

It gives me great pleasure while submitting this project on the topic

THE BANKING OMBUDSMAN

The completion of project work is milestone in students life and its execution is inevitable in the hands of guide. We are highly indebted to our guide Prof. Kishor Chauhan for his invaluable guidance, appreciation and support given from time to time while preparing this report. It is due to his given sense of direction and execution to this project and ultimately made it success.

We would like to render our sincere thanks to all our college staff members and largely to our project guide for their co-operation and highly valued support and information of this report.We would also like to express our deep regards and gratitude to our I/C Principal SHALINI VERMANI for her invaluable help information of the project and collection of the important database for the purpose of completion of this project. I express my deep gratitude towards my family member in taking effort which helped me in giving final shape and structure to my project work.

I am also thankful to all those seen and unseen heads, which have been a direct or indirect help in completion of this project work.

SR.NOTOPICSPAGE NO

1INTRODUCTION6

2HISTORY OF BANKING IN INDIA10

3GENERAL BANKING24

4ORGANISATIONAL STRUCTURE OF A BANK BRANCH30

5MANAGING NEW CHALLENGES49

6PRUDENTIAL NORMS55

7CONCLUSION60

CHAPTER- 1Introduction

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. 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 accept 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 operational structure of commercial banks. Apart from the traditional functioning of macro-scanning, the interlink ages 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.

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.

CHAPTER- 2

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. * 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

Phase I The 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 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. PHASE IIThe government took major initiatives in banking sector reforms after Independence. In 1955, it nationalized the Imperial Bank of India and started offering extensive banking facilities, especially in rural and semi-urban areas. The government constituted the State

Bank of India to act as the principal agent of the RBI and to handle banking transactions of the Union government and state governments all over the country. Seven banks owned by the Princely states were nationalized in 1959 and they became subsidiaries of the State Bank of India. In 1969, 14 commercial banks in the country were nationalized. In the second phase of banking sector reforms, seven more banks were nationalized in 1980. With this, 80 percent of the banking sector in India came under the government ownership. The following are the steps taken by the Government of India to regulate banking institutions in the country: 1949 : Enactment of Banking Regulation Act 1955 : Nationalization of State Bank of India 1959 : Nationalization of SBI subsidiaries 1961 : Insurance cover extended to deposits 1969 : Nationalization of 14 major banks 1971 : Creation of credit guarantees corporation 1975 : Creation of regional rural banks 1980 : Nationalization of seven banks with deposits over 200 croreAfter the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase IIIThis phase has introduced many more products and facilities in the banking sector as part of the reforms process. In 1991, under the chairmanship of M Narasimham, a committee was set up, which worked for the liberalization of banking practices. Now, the country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking are introduced. The entire system became more convenient and swift. Time is given importance in all money transactions. The financial system of India has shown a great deal of resilience. It is sheltered from crises triggered by external macroeconomic shocks, which other East Asian countries often suffered. This is all due to a flexible exchange rate regime, the high foreign exchange reserve, the not-yet fully convertible capital account, and the limited foreign exchange exposure of banks and their customer

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.Major Banks in India Abhyudaya Bank Abu Dhabi Commercial Bank Ahmedabad Mercantile Co op Bank Allahabad Bank American Express Bank Ltd Andhra Bank AXIS Bank Bank Of America Bank Of Bahrain and Kuwait Bank of Baroda Bank of Ceylon Bank Of India Bank Of Maharastra Bank of Nova Scotia Barclays Bank Plc BNP Paribas Calyon Bank Canara Bank Catholic Syrian Bank Ltd Central Bank Of India Centurian Bank Of Punjab Chinatrust Commercial Bank Citi Bank N.A Citizen Credit Co op Bank Ltd City Union Bank Ltd CORPORATION BANK Cosmos Co Operative Bank DBS Bank Ltd Dena Bank Deutsche Bank DEVELOPMENT CREDIT BANK LIMITED DICGC Dombivli Nagari Sahakari Bank Ltd Federal Bank HDFC Bank HSBC Bank ICICI Bank IDBI Bank Indian Bank Indian Overseas Bank Indusind Bank Ltd ING VYSYA Janakalyan Sahakari Bank Ltd JPMORGAN CHASE BANK N.A Kapole Co Op Bank Karnataka Bank Karur Vysya Bank Kotak Mahindra Bank Lakshmi Vilas Bank Ltd Maharashtra State Co op. Bank Ltd Mashreq Bank PSC Mizuho Corporate Bank, Ltd Nainital Bank New India Co op Bank Ltd NKGSB Co op Bank Ltd Nutan Nagarik Sahakari Bank Ltd Oman International Bank Oriental Bank Of Commerce PARSIK JANATA SAHAKARI BANK LTD Punjab & Maharashtra Co op Bank Ltd Punjab and Sind Bank Punjab National Bank Reserve Bank Of India Shinhan Bank Societe Generale South Indian Bank Standard Chartered Bank State Bank Of Bikaner And Jaipur State Bank Of Hyderabad State Bank Of India State Bank Of Indore State Bank of Mauritius Ltd State Bank Of Mysore State Bank Of Patiala State Bank Of Saurashtra State Bank Of Travancore Syndicate Bank Tamilnadu Mercantile Bank Ltd Bank Of Rajasthan Ltd Bank of Tokyo Mitsubishi UFJ,Ltd Bharat Co op Bank Ltd Dhanalakshmi Bank Ltd Greater Bombay Co op. Bank Ltd Jammu & Kashmir Bank Ltd KALUPUR COMMERCIAL CO OPERATIVE BANK Kalyan Janata Sahakari Bank Ltd Karnataka State Co Operative Apex Bank Lakshmi Vilas Bank Ltd MAHANAGAR CO OP BANK LTD Ratnakar Bank Ltd Royal Bank of Scotland N.V Saraswat Co op Bank Ltd Shamrao Vithal Co operative Bank Limited Tamil Nadu State Apex Co Operative Bank Thane Janata Sahakari Bank Ltd UCO Bank Union Bank Of India United Bank Of India

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 are witness 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 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: To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

Functions of Reserve Bank of India

The 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.

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 to manage 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 ResortThe 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 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 CreditThe 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 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 ReservesThe 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. 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 functionsIn 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.

Promotional functionsWith 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 to promote 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.

Classification of RBIs functionsThe monetary functions also known as the central banking functions of 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.

CHAPTER- 3General banking

NATURE OF BANKING IN INDIAA 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 largely a part of remittance albeit it involves buying and selling of foreign currencies.

FUNCTIONING OF A BANKFunctioning 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 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 BANKSFinancial 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 the following major forms:1. Commercial banks2. Co-operative banks3. Specialized banks4. Central bank

COMMERCIAL BANKSCommercial 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-scheduled banks, 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 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 BANKSCo-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

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 parliamentary control.

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 formation2. Encouraging innovation3. Monetsation4. Influence economic activity5. Facilitator of monetary policy

PROMOTING CAPITAL FORMATIONA 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 INNOVATIONInnovation 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.

BRANCH SETUP AND STRUCTURE

Ever 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.

RATIONAL OF A BANK STRUCTURE

An organization consists of people who carry out differentiated tasks which are coordinated so as to contribute and achieves planned goals. Organizations are created mainly for producing goods and services to the society for which they have to incorporate a formal structure.Indian banking is now operating in a more competitive setting with the induction of new banks. Both Indian and foreign, who will be bringing in New York technology and specialist expertise and a variety of new financing instruments Branch is the primary unit of the banks business, particularly for serving the weaker sections of the society. Branches have to develop close relationship they profess to serve. This leads to opening up or specialized branches, like industrial finance, small scale industries, and Hi-tech agriculture, overseas and non-resident Indian, according to market segmentation. This new vision entails a new chain of command, a new technology and specific delegation of authorityThis calls for the branch manager to concentrate on his/her styles, skill and subordinates, goals, to shape the branch in the competitive environment to become a profit centre and to

Render better customer service. This implies that the branch manger should have adequate supporting staff to relieve him from the routine table work to developmental activitiesIn order to serve the customer it is necessary that one should understand and accept role and relationship with other so as to make sure that none of the supporting staff would be deemed to be independent of the branch manager. So the structure of branch organization must, from time to time. Conform to the demands and peculiarities of the locality in which the branch is functioningBefore looking in to the branch structure of bank, it will be worthwhile examing how a formal organizational structure of a bank appears. After nationalization, generally banks have a 4-tier structure represented as under:During the mid-80s, banks started diversifying in to various areas like merchant banking, mutual funds, leasing, hire purchase, etc. to improve their profitability and to cater to the needs of the customers. These activities are performed by the banks either by separate departments or as subsidiaries. After liberalization and globalization of the economy, with a view to meeting the customers needs and to avoid delays, a revised organizational structure of banks was convened by removing one tier. Now banks are going in for a 3-tier structure as under:The regional offices are given more powers and jurisdiction so as to enable them to act quickly.HEAD OFFICE ZONAL OFFICEBRANCH OFFICEHEAD OFFICEBRANCH OFFICEREGIONAL OFFICECENTRAL OFFICE

CHAPTER- 4

ORGANISATIONAL STRUCTURE OF A BANK BRANCH

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, semi urban, urban and metropolitan branches. The B.M. has special role and functions in managing different types of branches.

Mixed banking Correspondent Banking

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 directorsGeneral ManagersHead officeAdministrationBranchAdministration ForeignDepartmentsThe Branch ManagerThe day-book orControl ClerkThe Security ClerkThe cashierThe Chief ClerkModern Banking MethodsThe Remittance orWaste Clerk

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 an additional impetus to this gigantic effort.The pervasive influence of information 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 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.

SOME RECENT INNOVATIONS IN INDIAN BANKING:Tandon can, however, usefully cast an eye at one way of shopping without revealing his credit card number. HDFC Banks Net Safe card is a one-time use card with a limit thats specified, taken from Tendons credit or debit card. Even if Tandon fails to utilize the full amount within 24 hours of creating the card, the card simply dies and the unspent amount in the temporary card reverts to his original credit or debit card. Welcome to one of the myriad ways in which bankers have been trying to innovate. Theyre bringing ATMs, cash and even foreign exchange to their customers doorsteps. Indeed, innovation has become the hottest banking game in town. Want to buy a house but dont want to go through the hassles of haggling with brokers and the mounds of paperwork? Not to worry. Your bank will tackle all this. Its ready to come every step of the way for you to buy a house. Standard Chartered, for instance, has property advisors to guide a customer through the entire process of selecting and buying a house. They also lend a hand with the cumbersome documentation formalities and the registration.

Dont fret if youve already bought your house or car you can do other things with both. You can leverage your new house or car these days with banks like ICICI Bank and Stanchart ready to extend loans against either, till its about five years old. Loans are available to all car owners for almost all brands of cars manufactured in India that are up to five years old. Still, innovation is more evident in retail banking. True, all banks offer pretty much the same suite of asset and liability products. But its the small tweaking here and there that makes all the difference. Take, for example, the once staid deposits. Some bank accounts combine a savings deposit account with a fixed deposit. A sweep-in account, as it is called, works like this: the account will have a cut-off, say, Rs 25,000; any amount over and above that gets automatically transferred to a fixed deposit which will earn the customer a clean 2 per cent more than the returns that a savings account gives. Last month, Kotak Mahindra Bank introduced a variant of the sweep-in account. If the balance tops Rs 1.5 lakh, the excess runs into Kotaks liquid mutual fund. Even if the money is there only for the weekend, a liquid fund can earn you a clean 4.5 percent per annum, points out Shashi Arora, vice president, marketing, Kotak Mahindra Bank. Thats not a small gain considering that your current account does not pay you any interest. And if, meanwhile, you want to buy a big-ticket home theatre system, the minute you swipe your card the invested sum will return to your account. Theres plenty of innovation on home loans. ABN Amro sent the home mortgage market afire with its 6 per cent home loan offering last year. The product offers a 6 per cent interest rate for two years after which the interest rate is reset in tune with the prevailing market rate. All the other big home loan players slashed their rates after this was announced. Look too at the home saver product and its variants from Citibank, HSBC and Stanchart. The interest rate on the loan is determined by the balance you maintain in the savings account with the bank. The home builder can maintain a higher balance in his or her

savings account and bring down the interest rate on the home loan. The rate is calculated on a daily basis on the net loan amount. Stanchart claims that since the launch of its home saver product in April 2002, close to 40 per cent of its customers have chosen it. Says Vishu Ramachandran, regional head, consumer banking, Standard Chartered: We believe that there are several ways to innovate and create value in the process, even in developed product areas. Banks are also attempting to reach out to residents of metropolitan cities where people are pressed for time (what with long commuting hours, traffic jams and both spouses working), beyond conventional banking hours. ICICI Bank, for example, introduced eight to eight banking hours, seven days of the week, in major cities. Not to be outdone, some of the other private banks have also done this too. HDFC Bank even has a 24-hour branch at Mumbais international airport. Several banks are even bringing ATMs to customer doorsteps. ICICI Bank, State Bank of India and Bank of India now have mobile ATMs or vans that go along a particular route in a city and are stationed at strategic locations for a few hours every day. This saves the bank infrastructure costs since it has one mobile ATM instead of multiple stationary ones. Thats not all. Even money is delivered to customers at home. Kotak Mahindra Bank, a late entrant into private banking, delivers cash at the doorstep. A customer can withdraw a minimum of Rs 5,000 and up to a maximum of Rs 2 lakh and get the money at home. And, mind you, Kotak is not alone. The list of banks offering a similar service includes Citibank, Stanchart, ABN Amro and HDFC Bank. HDFC Bank brings even foreign exchange, whether travellers cheques or cash, to your doorstep courtesy its tie-up with Travelex India. All one has to do is call up the branch or HDFC Banks phone banking number. The banks country head, retail, Neeraj Swaroop, believes that continuous innovation will always make a difference, with customer needs changing day by day. Innovation will never become less important for us, he says.

HDFC Bank has pioneered other innovations. Take point of sale (POS) terminals, a prerequisite in any store or restaurant worth its name in the country. Earlier this year, it tied up with Reliance Info comm. to offer mobile POS terminals. Although this might sound a tad too fancy today, there could soon be a day when you can swipe your card to pay your cabby, the pizza home delivery boy and even for the groceries from the local kirana store. But internet banking and shopping have been slow starters, given the low computer penetration in the country but banks are going all out to get the customer online. Not only is electronic fund transfer between banks across cities possible through internet banking today but banks also offer other features that benefit the customer. HDFC Bank, for instance, has an option called One View on its internet banking site which provides customers a comprehensive view of their investments and fund movements. Customers can look at their accounts in six different banks on one screen. These include HDFC Bank accounts and demat accounts, ICICI Bank, Citibank, HSBC and Standard Chartered Bank accounts, apart from details of Citibank credit card dues and so on. Banks are also innovating on the company and treasury operations fronts. In corporate loans, plain loans are passed. Mumbai inter-bank offered rate (MIBOR)-linked and commercial paper-linked interest rates on loans are common. MIBOR is a reference rate arrived at every day at 4 pm by Reuters. It is the weighted average rate of call money business transacted by 22 institutions, including banks, primary dealers and financial institutions. The State Bank of India was the first to usher in MIBOR-linked loans for top companies. Soon enough, other banks followed. ICICI Bank carried out the worlds first ever securitization of a micro finance portfolio last year. The bank securitized Rs 4.2 crore for Bharatiya Samruddhi Finance Ltd for crop production. Banks, of course, realize that innovation gives them only a first mover advantage until their rivals catch up. But then, they can console themselves. Isnt imitation the best form of flattery?

TECHNOLOGY IN BANKING

Nobel Laureate Robert Solow had once remarked that computers are seen 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. Recognizing the importance of payments and settlement systems in the economy, we have embarked on technology based solutions for the improvement of the payment and settlement system infrastructure, coupled with the introduction of new payment products such as the computerized settlement of clearing transactions, use of Magnetic Ink Character Recognition (MICR) technology for cheque clearing which currently accounts for 65 per cent of the value of cheques processed in the country, the computerization of Government Accounts and Currency Chest transactions, operationalisation of Delivery versus Payment (DvP) for Government securities transactions. Two-way inter-city cheque collection and imaging have been operationalised at the four metros. The coverage of Electronic Clearing Service (Debit and Credit) has been significantly expanded to encourage non-paper based funds movement and develop the provision of a centralized facility for effecting payments. The scheme for Electronic Funds Transfer operated by the Reserve Bank has been significantly augmented and is now available across thirteen major cities. The scheme, which was originally intended for small value transactions, is processing high value (up to Rs.2 crore) from October 1, 2001. The

Centralized Funds Management System (CFMS), which would enable banks to obtain consolidated account-wise and centre-wise positions of their balances with all 17 offices of the Deposits Accounts Departments of the Reserve Bank, has begun to be implemented in a phased manner from November 2001. A holistic approach has been adopted towards designing and development of a modern, robust, efficient, secure and integrated payment and settlement system taking into account certain aspects relating to potential risks, legal framework and the impact on the operational framework of monetary policy. The approach to the modernization of the payment and settlement system in India has been three-pronged: (a) consolidation, (b) development, and (c) integration. The consolidation of the existing payment systems revolves around strengthening Computerized Cheque clearing, expanding the reach of Electronic Clearing Services and Electronic Funds Transfer by providing for systems with the latest levels of technology. The critical elements in the developmental strategy are the opening of new clearing houses, interconnection of clearing houses through the INFINET; optimizing the deployment of resources by banks through Real Time Gross Settlement System, Centralized Funds Management System (CFMS); Negotiated Dealing System (NDS) and the Structured Financial Messaging Solution (SFMS). While integration of the various payment products with the systems of individual banks is the thrust area, it requires a high degree of standardization within a bank and seamless interfaces across banks. The setting up of the apex-level National Payments Council in May 1999 and the operationalisation of the INFINET by the Institute for Development and Research in Banking Technology (IDRBT), Hyderabad have been some important developments in the direction of providing a communication network for the exclusive use of banks and financial institutions. All inter-bank transactions would be stored and switched at the central hub at Hyderabad while intra bank messages will be switched and stored by the bank gateway. Security features of the SFMS would match international standards. In order to maximize the benefits of such efforts, banks have to take pro-active measures to: further strengthen their infrastructure in respect of standardization, high levels of security and communication and networking; achieve inter-branch connectivity early; popularize the usage of the scheme of electronic funds transfer (EFT); and Institute arrangements for an RTGS environment online with a view to integrating into a secure and consolidated payment system. Information technology has immense untapped potential in banking. Strengthening of information technology in banks could improve the effectiveness of asset-liability management in banks. Building up of a related data-base on a real time basis would enhance the forecasting of liquidity greatly even at the branch level. This could contribute to enhancing the risk management capabilities of banks.

REGULATIONS AND COMPLIANCE

Progressive strengthening, deepening and refinement of the regulatory and supervisory system for the financial sector have been important elements of financial sector reforms. In the longrun, it is the supervision and regulation function that is critical in safeguarding financial stability. There is also some evidence that proactive and effective supervision contributes to the efficiency of financial intermediation. Financial sector supervision is expected to become increasingly risk-based and concerned with validating systems rather than setting them. This will entail procedures for sound internal evaluation of risk for banks. As mentioned earlier, bank managements will have to develop internal capital assessment processes in accordance with their risk profile and control environment. These internal processes would then be subjected to review and supervisory intervention if necessary. The emphasis will be on evaluating the quality of risk management and the adequacy of risk containment. In such an environment, credibility assigned by markets to risk disclosures will hold only if they are validated by supervisors. Thus effective and appropriate supervision is critical for the effectiveness of capital requirements and market discipline. In certain areas, as for instance, in the urban cooperative banking segment, the regulatory requirements leave considerable scope for regulatory arbitrage and even circumvention. The problem is rendered more complex by the existence of regulatory overlap between the Central Government, the State Governments and the Reserve Bank. Regulatory overlap has impeded the speed of regulatory response to emerging problems. The need for removing multiple regulatory jurisdictions over the cooperative banking sector has been reiterated on several occasions. In this regard, the Reserve Bank has proposed the setting up of an apex supervisory body for urban cooperative banks under the control of a high-level supervisory board consisting of representatives of the Central governments, the State governments, the Reserve Bank and experts. The apex body is expected to ensure compliance with prudential requirements and also supervise on-site inspections and off-site surveillance. Recent developments in certain segments of the financial sector have also brought to the fore issues relating to corporate governance in banks. As part of on-going reforms, boards have been given greater autonomy to prescribe internal control guidelines, risk management and procedures for market discipline and accountability. It is extremely important that greater vigilance over adherence to these norms goes hand-in-hand with greater autonomy. Recent evidence of transgression of prudential guidelines by a few banks has raised the issue of the audit and supervisory functions of boards. As we move towards a more deregulated financial regime, these functions have to be transferred from either the Government or the Reserve Bank to bank boards. This imposes a greater responsibility and accountability on the bank management. It is in this context that a consultative group of directors of select banks and other experts has been set up to recommend measures to strengthen the internal supervisory role of boards. The objective is to obtain a feedback on how boards function vis--vis compliance with prudential norms, transparency and disclosure, functioning of the audit committee, etc., and to devise effective mechanisms for ensuring management discipline. Several other initiatives in improving the supervisory function have been undertaken, including a prudential supervisory reporting system for financial institutions, improvements in procedures for financial inspection, sensitizing the general public for better regulation of the activities of NBFCs and enactment of appropriate legislation to protect depositor interests in some States. Major legal reforms have been initiated in areas such as security laws, the Negotiable Instruments Act, bank frauds and the regulatory framework of banking.

CORPORATE GOVERNANCE - CODE OF CONDUCT

Need and objective of the CodeClause 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 SystemThis 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 fiduciary obligations 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 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 CodeAdherence 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.

A. General Standards of conductThe Bank expects all Directors and members of the Core Management to exercise good judgment, to ensure the interests, safety and welfare of customers, 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 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.

B. Conflict of InterestA "conflict of interest" occurs when personal interest of any member of the Board of Directors and of the Core management interferes or appears to interfere inany way with the

interests of the Bank. Every member of the Board of Directors and Core Management has a responsibility to the Bank, its stakeholders and to each other. Although this duty does not prevent them from engaging in personal transactions and investments, it does demand that they avoid situations where a conflict of interest might occur or appear to occur. They are expected to perform their duties in a way that they do not conflict with the Banks interest such as :Employment /Outside Employment 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 Banks 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 Banks 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, they should disclose to the Bank any interest that they have which may conflict with the business of the Bank. Related Parties - As a general rule, the Directors and members of the Core Management should avoid conducting Banks business with a relative or any other person or any firm, Company, association in which the relative or other person is associated in any significant role. Relatives shall include: o Father o Mother (including step mother) o Sons Wife o Daughter (including step daughter)

o Fathers father o Fathers mother o Mothers mothero Mothers father o Sons sono Sons sons wife o Sons daughter o Sons daughters husband o Daughters husband o Daughters son o Daughters sons wife o Daughters daughter o Daughters husband o Brother (including step brother) o Brothers wife o Sister (including step sister) o Sisters husband If such a related party Transaction is unavoidable, they must fully disclose the nature of the related party transaction to the appropriate authority. Any dealings with a related party must be conducted in such a way that no preferential treatment is given to that party. In the case of any other transaction or situation giving rise to conflicts of interests, the appropriate authority should after due deliberations decide on its impact.

C. Applicable LawsThe 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.

D. Disclosure StandardsThe 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.E. Use of Banks Assets and ResourcesEach member of the Board of Directors and the Core Management has a duty to the Bank to advance its legitimate interests while dealing with the Banks assets and resources. Members of the Board of Directors and Core Management are prohibited from: Using Corporate property, information or position for personal gain, Soliciting, demanding, accepting or agreeing to accept anything of value from any person while dealing with the Banks assets and resources, Acting on behalf of the Bank in any transaction in which they or any of their relative(s) have a significant direct or indirect interest. F. Confidentiality and Fair Dealings (i) Banks confidential Information The Banks confidential information is a valuable asset. It includes all trade related information, trade secrets, confidential and privileged information, customer information, employee related information, strategies, administration, research in connection with the Bank and commercial, legal, scientific, technical data that are either

provided to or made available each member of the Board of Directors and the core Management by the Bank either in paper form or electronic media to facilitate their work or that they are able to know or obtain access by virtue of their position with the Bank. All confidential information must be used for Banks business purposes only. This information includes the safeguarding, securing and proper disposal of confidential information in accordance with the Banks policy on maintaining and managing records. The obligation extends to confidential of third parties, which the Bank has rightfully received under non-disclosure agreements. To further the Banks business, confidential information may have to be disclosed to potential business partners. Such disclosures should be made after considering its potential benefits and risks. Care should be taken to divulge the most sensitive information, only after the said potential business partner has signed a confidentiality agreement with the Bank.

Good Corporate Governance PracticesEach 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_ 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.

WaiversAny 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.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.

Characteristics of entrepreneurship-The entrepreneur, who has a vision and the enthusiasm for this vision, is the driving force of an entrepreneurship-The vision is usually supported by a set of ideas that have not been awarded by the majority of the market/industry -The overall blueprint to realize the vision is clear, however details may be incomplete, flexible, and evolving -The entrepreneur promotes the vision with an influential passion -With a persistent and deterministic mindset, the entrepreneur devises a set of entrepreneurial strategies to thrive for the vision

ConclusionWe 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 other people 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.CHAPTER- 5

MANAGING NEW CHALLANGESINTRODUCTION

In my inaugural address last year, I had indicated a vision for Indian banking in the new millennium that of a vibrant, internationally active banking system, drawing upon its innate strengths and comparative advantages to make India a major banking centre of the world. I had pointed out then that, while it may take up to 10or even 15 years to achieve this vision, the time to begin was now. Recent developments have only served to bring forward the urgency attached to embarking upon this quest. Even as we do so, it is necessary to recognize that, in view of recent global developments and the economic slowdown, the progress towards this goal would call for even greater effort and determination. In this context, the theme chosen for this years Conference i.e., "Indian Banking: Paradigm Shift" is most timely as it provides an opportunity to deliberate on the new challenges ahead, and the action that we must take to manage them. I am happy to be a part of these deliberate ions and to deliver the inaugural address to the 23rd Conference of Bank Economists here today. As you are aware, global economic prospects turned sharply adverse since September 2001 following the terrorist attacks on the US. The possibilities of a recovery in the global economy have become highly uncertain, belying the initial expectations of a V-shaped recovery as well as the subsequent hopes of a U-shaped recovery. As of now, the consensus of forecasts settles around 2.4 per cent for world GDP growth for 2001. World trade volume growth could slow down to around 1.3 per cent and net capital outflows from developing countries may now be larger than anticipated earlier. Although the sharp spurt in

international oil prices has abated, their future behavior remains unclear. Macroeconomic weaknesses have also been associated with an erosion of business confidence. Insurance, airlines, tourism and hotel industries have been hit hard and the exposure of financial institutions to these industries can be a potential source of vulnerability. Despite the relatively inward-looking nature of the Indian economy, it cannot remain insulated from these international developments. The direct effects of these external developments on our banking system are expected to be limited. Indirect effects, especially through exports and subdued industrial activity could, however, impact upon the asset quality of our banking system and other segments of the financial system. The need to constantly monitor international developments and take appropriate and often, preemptive action add an entirely new dimension to the progress of our banking system towards its longer-term vision. We have made considerable progress in implementing banking and financial sector reforms. There is also some improvement in the financial performance of the banking system in terms of various indicators of operating efficiency. Nevertheless, there are several areas regarding the efficiency of our banking system rather than its stability that raise concerns, especially during a period of generalized uncertainty. The level of non-performing assets (NPAs) continues be high by international standards, preempting funds for provisioning and eating into the performance and profitability of financial intermediaries. The response to the debt recovery and asset restructuring initiatives undertaken as part of financial sector reforms has also been slow.

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 5.9 per cent in the corresponding period of last year, mainly on account of the slowdown in manufacturing and mining and quarrying. Capital goods production declined by as much as 6.6 per cent and several sectors recorded a slowdown in growth rate or an absolute decline. On the other hand, agriculture sector, supported by reasonable monsoon, recorded a rebound in growth. The kharif output is expected to cross a new peak of 105.6 million tonnes and prospects for the Rabi crop are also good. On the external front, merchandise exports increased marginally by 0.5 per cent in the first eight months of 2001-02. While oil imports fell by 13.4 per cent, the non-oil imports showed an increase of 8.4 per cent. Despite a moderate widening of the trade deficit, continuing buoyancy in net invisible receipts has kept the current account deficit very low. According to available data, net capital flows are also likely to be of a higher order than in the preceding year. Foreign exchange reserves rose to US $ 48.0 billion as on December 28, 2001 recording an accretion of the order of the US $ 5.8 billion over the end-March 2001 level.

In the context of the recent deceleration in the economy the intermediation role assumes even greater relevance. Banks and financial institutions should endeavor to play a supply-leading rather than demand-following role in initiating the upturn by energizing the financial intermediation process. By virtue of a birds eye view of the economy and their superior credit assessment of the investment proposals and the efficiency of capital, banks should endeavor to economies on search costs in identifying and nurturing growth impulses in the commodity and service producing sectors of the economy. In the recent period, monetary policy in India has also moved into a countercyclical stance signaled by cuts in key interest rates and cash reserve requirements. At the same time, market operations have ensured adequate liquidity to support the revival of aggregate demand with a clear preference for softening of interest rates within the overall institutional constraints on the interest rate regime. Inflation has been steadily falling and this has had a positive impact on inflation expectations, along with the underlying resilience of the macroeconomic fundamentals of the Indian economy. The 50 basis point reduction in the Bank Rate and the 200 basis point reduction in the CRR, announced recently, are expected to significantly enhance the lend able resources of the banking system. The current situation of comfortable liquidity provides an opportunity for banks to transform idle liquidity into investigable resources for growth. The easy interest rate environment would make it possible for banks to price in projects which would have earlier remained unfunded due to inherently lower returns to capital or due to lack of access to prime lending rates. This will, however, require reassessment of portfolios and internal liquidity constraints, even adjustments in risk profiles and risk management. The deceleration in the industrial growth scenario, of course, opens up the moral hazard of adverse selection and the possibilities of large-scale contamination of portfolios. In a situation of generalized slowdown, unviable projects can look potentially bankable given the scarcity of investment avenues.

Nevertheless, the possibilities for financial intermediation in the current situation are too varied and challenging to ignore. There is no systematic evidence that financial sector reforms by themselves and without supportive policies in other areas, can contribute to a revival of the economy; yet this is a time when the responsibility on the financial system to contribute to the process of economic revival is greater than before. Periods of downturn in economic activity also provide opportunities for banks to undertake consolidation and strengthening. There is a strong complementarily between financial stability and macroeconomic stability. The interests of both are served by a stable and resilient financial system. In recent years, various measures have been taken to improve the functioning of different segments of the financial markets and thereby, to improve the operational effectiveness of monetary policy. The Liquidity Adjustment Facility (LAF), which was introduced in June2000, has emerged as an effective and flexible instrument for managing liquidity on a day-to-day basis. In the second stage of the LAF, which commenced from May 2001, variable rate repo auctions replaced the collateralized lending facility and Level I support to primary dealers. Standing facilities were rationalized and a back-stop facility was introduced at variable market-related rates. Concurrently, LAF operating procedures were recast to improve operational flexibility and complementary measures were undertaken to improve the functioning of money and government securities market segments and to facilitate their orderly integration. In order to enable the call money market to evolve into a pure inter-bank market, lending by non-banks was reduced to 85 per cent of their average daily call lending in 2000-01 from May 2001. The minimum maturity for wholesale term deposits of Rs.15 lakh and above has been reduced to 7 days from the earlier minimum maturity of 15 days. The maintenance of daily minimum cash reserve requirements has been lowered to 50 per cent from 65 per cent for the first seven days of the reporting fortnight. Interest paid on eligible balances under CRR has been raised to the level of the Bank Rate from November 3, 2001.

The market has responded positively with an appreciable rise in turnover and a decline in volatility.Several measures have also been taken to improve the functioning of the government securities market. 14-day and 182-day Treasury Bills were withdrawn and the notified amount of 91-day Treasury Bills has been simultaneously increased. A Negotiated Dealing System (NDS) is being introduced to facilitate electronic bidding and to disseminate information on trades on a real-time basis. For this purpose, the Reserve Bank has begun the automation of its public debt offices. An important step is the setting up of the Clearing Corporation of India Ltd. (CCIL) to act as counterparty in all trades involving government securities, Treasury Bills, repos and foreign exchange. The entire system will operate in a networked environment and Indian Financial Network (INFINET) will provide the backbone for communication.

CHAPTER-6

PRUDENTIAL NORMSA 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. The new Basel Accord, as contained in the second Consultative Paper on Capital Adequacy of the Basel Committee on Banking Supervision released in January 2001 is in response to the perceived rigidities in the 1988 Accords capital requirements, the scope for capital arbitrage and the increased sophistication in the measurement and management of risk. The new Accord rests on three mutually reinforcing pillars i.e., minimum capital requirements, processes of supervisory review and market discipline. Under the first pillar, the current definition of capital and the minimum requirement of 8 per cent of capital to risk weighted assets is retained. Capital requirements would be extended on a consolidated basis to holding companies of banking groups. The primary emphasis of the new Accord is on improving the measurement of risk. The process of measurement of market risk is maintained. Three alternatives for calculating credit risk capital requirements are proposed to be made available to banks, depending on the complexity of their business and the quality of their risk management operations. The standardized approach which can be employed by less complex banks remains conceptually the same as in the 1988norms; however

MARKET DISCIPLINEProcesses of transparency and market disclosure of critical information 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 for a, 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 investments made in equity shares, units of mutual funds, bonds and debentures, and aggregate advances against shares in their notes to balance sheets. From this year onwards, notes to banks balance sheets will disclose the movement of provisions against NPAs as well as those held towards depreciation on investments. Guidelines relating to non-SLR investments through the private placement route mandate the disclosure of information on issuer composition and non-performing investments in a similar manner. Efforts have been made to identify and monitor early warning indicators of financial crises. The overall approach is to combine the use of micro-prudential indicators with macro-economic indicators in order to develop a set of aggregate macro-prudential indicators. This brings about a mix between bottom-up and top-down assessment. As the methodology gets refined and the indicators are stress tested for predictive power, financial stability surveillance will be significantly improved. This process will involve greater transparency and objectivity in the disclosure practices of banks. Efforts have also been made to set up a Credit Information Bureau t