Unit:-1

Concept of Bank and Banking

1.1 Bank and Banking- concept

Bank

A bank is a financial institution licensed to receive deposits and make loans. Banks may also provide financial services such as wealth management, currency exchange, and safe deposit boxes. There are several different kinds of banks including retail banks, commercial or corporate banks, and investment banks. In most countries, banks are regulated by the national government or central bank.

Banks are a very important part of the economy because they provide vital services for both consumers and businesses. As financial services providers, they give you a safe place to store your cash. Through a variety of account types such as checking and savings accounts, and certificates of deposit (CDs), you can conduct routine banking transactions like deposits, withdrawals, check writing, and bill payments .

Banks also provide credit opportunities for people and corporations. The money you deposit at the bank—short-term cash—is used to lend to others for long-term debt such as car loans, credit cards, mortgages, and other debt vehicles. This process helps create liquidity in the market—which creates money and keeps the supply going.

Just like any other business, the goal of a bank is to earn a profit for its owners. For most banks, the owners are their shareholders. Banks do this by charging more interest on the loans and other debt they issue to borrowers than what they pay to people who use their savings vehicles. Using a simple example, a bank that pays 1% interest on savings accounts and charges 6% interest for loans earns a gross profit of 5% for its owners. Banks make a profit by charging more interest to borrowers than they pay on savings accounts.

Types of Banks

• Retail banks deal specifically with retail consumers, though some global financial services companies contain both retail and commercial banking divisions. These banks offer services to the general public and are also called personal or general banking institutions. Retail banks provide services such as checking and savings accounts, loan and mortgage services, financing for automobiles, and short-term loans like overdraft protection. Many larger retail banks also offer credit card services to their customers, and may also supply their clients with foreign currency exchange. Larger retail banks also often cater to high-net-worth individuals, giving them specialty services such as private banking and wealth management. Examples of retail banks include TD Bank and Citibank.
• Commercial or corporate bank provide specialty services to their business clients from small business owners to large, corporate entities. Along with day-to-day business banking, these banks also provide their clients with other things such as credit services, cash management, commercial real estate services, employer services, and trade finance. JPMorgan Chase and Bank of America are two popular examples of commercial banks, though both have large retail banking divisions as well.
• Investment banks focus on providing corporate clients with complex services and financial transactions such as underwriting and assisting with merger and acquisition (M&A) activity. As such, they are known primarily as financial intermediaries in most of these transactions. Clients commonly range from large corporations, other financial institutions, pension funds, governments, and hedge funds. Morgan Stanley and Goldman Sachs are examples of U.S. Investment banks.
• Unlike the banks listed above, central banks are not market-based and don't deal directly with the general public. Instead, they are primarily responsible for currency stability, controlling inflation and monetary policy, and overseeing a country's money supply. They also regulate the capital and reserve requirements of member banks. Some of the world's major central banks include the Reserve Bank of India, the U.S. Federal Reserve Bank, the European Central Bank, the Bank of England, the Bank of Japan, the Swiss National Bank, and the People’s Bank of China.

Banking

Banking is an industry that handles cash, credit, and other financial transactions. Banks provide a Safe place to Store extra cash and credit. They offer savings accounts, Certificates of Deposit, and checking accounts. Banks use these deposits to make loans. These loans include home mortgages, business loans, and car loans.

A Bank is a financial institution licensed to receive deposits and make loans. Two of the most common types of banks are commercial/retail and investment banks. Depending on type, a bank may also provide various financial services ranging from providing safe deposit boxes and currency exchange to retirement and wealth management.

Definition

Banking is defined as “Accepting of deposits of money from public for the purpose of Lending or Investment, repayable on demand or otherwise and withdrawal by cheque, draft, or otherwise”

Banking can be defined as the business activity of accepting and safeguarding money owned by other individuals and entities, and then lending out this money in order to earn a profit. However, with the passage of time, the activities covered by banking business have widened and now various other services are also offered by banks. The banking services these days include issuance of debit and credit cards, providing safe custody of valuable items, lockers, ATM services and online transfer of funds across the country / world.

Objective of Bank

• Business objectives.
• Social objectives.
• Business objectives

• Making profits.
• Providing services.
• Currency issue.
• Creation of transaction media.
• Receiving deposit.
• Making loan.
• Ensuring safety.
• Investment.

• Social objectives

• Creating savings.
• Capital formation.
• Industrialization.
• Employment.
• Developing living standard.
• Economic development.

Features of Banking

• Deals with money

The bank accept deposits from the public and advancing them as loans to the needy people. The deposits may be current, fixed saving etc.

• Provide loans

The banks are the institutions that can create credit i.e. creation of additional money for lending Thus ‘creation of credit is the unique features of banking.

Banks make extra money by providing loans for different Product to the loan. The bank makes the extra money by lending money to the eligible person at certain rates. Nowadays, banks provide loans for various requirements such as study loan, car loan, home loan, personal loans, etc. Different banks provide different loans at different interest rates. You can compare the interest rates of different banks to get a loan at minimum interest rates

• Middle man

Banks serve as a middle man from the money surplus unit to be money deficit unit. They are intermediaries, who transfer funds from savers to investors through grants for business, commerce, education, housing etc.

• Deposits must be withdrawal

The deposits are usually withdrawal on demand. It may be withdrawal by cheque, draft or otherwise.

• Internet Services

Bank is that modern banks are also providing internet services. The development of the internet and its inclusion in the banking sector has made it even more  easy for people to carry out various transactions.

Banks are providing online services through their apps. You can pay bills, buy food, go shopping without having cash with you. With the help of banking apps, you can pay for everything online.

Nowadays, more and more banks are taking their business online. It helps in making safe and risks free transactions, and there are fewer chances of stealing taxes. There are specific terms for these types of transactions, such as internet banking and mobile banking.

• Commercial in nature

Since all the banking activities of Commercial banks are carried on with the aim of Making profit, it is regarded as an commercial institution .

The bank uses our money to lend it to others or by investing it in profitable businesses to make profits. If you think your money is sitting in a banks locker, then you are wrong.

You might have digits of the money mentioned in your passbook, but you might be rotating between one person to another to make more money to the investor.

• Size transformation

Bank Create a reservoir of fund from the numerous small deposits collect from customer and then provide large loan to Investor.

• Nature of agent

Beside the basic function of accepting deposits and lending money as a loan bank possess the characteristics of an agent because of its various agency  services .

KEY TAKEAWAYS

• A bank is a financial institution licensed to receive deposits and make loans.
• There are several types of banks including retail, commercial, and investment banks.
• In most countries, banks are regulated by the national government or central bank.

1.2 Historical Evolution of Banking

Origin and Development of Banking Structure of Banking in Indian Banks and Economic Development

Introduction:

The banking industry in India seems to be unaffected from the global financial crises which started from U.S in the last quarter of 2008. Despite the fallout and nationalization of banks across developed economies, banks in India seems to be on the strong fundamental base and seems to be well insulated from the financial turbulence emerging from the western economies. The Indian banking industry is well placed as compare to their banking industries western counterparts which are depending upon government bailout and stimulus packages. The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and so called close banking culture has favored the banking industry in India in recent global financial turmoil. Although there will no impact on the Indian banking system similar to that in west but the banks in India will adopt for more of defensive approach in credit disbursal in coming period. In order to safe guard their interest, banks will follow stringent norms for credit disbursal. There will be more focus on analyzing borrower financial health .

A nation with 1 billion plus, India is the fastest growing country in terms of population and soon to overtake China as world’s largest populated country. The discerning impact on the over-stretched limited resources explains why India always tends to be deficient in infrastructure and opportunity. The largest economy of the world often frustrated researchers, as there was no single predictable pattern of the market; the multiplicity of government regulations and widespread government ownership had always kept investors away from exploring the vast Indian market. However, with India being liberalised today, banking intermediation has been playing a crucial role in economic development through its credit channel. Foreign banks have entered the soil but that has not yet posed a threat to the vast network of public sector banks that still conduct 92% of banking business in India.

Banking in India has undergone a major revamp. It has come a long way since its creation which dates back to the British era. The present banking systems has come into place after many transformations from the Older systems. Against this background the present chapter deals with the evolution of the Indian Banking systems, the various reforms that has been made to make banks more effective, the role of private and foreign sector banks and last the challenges the Indian banks faces in the New Millennium .

The banking system is central to a nation’s economy. Banks are special as they not only accept and deploy large amounts of uncollateralised public funds in a fiduciary capacity, but also leverage such funds through credit creation. In India, prior to nationalisation, banking was restricted mainly to the urban areas and neglected in the rural and semi-urban areas. Large industries and big business houses enjoyed major portion of the credit facilities. Agriculture, small-scale industries and exports did not receive the deserved attention. Therefore, inspired by a larger social purpose, 14 major banks were nationalised in 1969 and six more in 1980. Since then the banking system in India has played a pivotal role in the Indian economy, acting as an instrument of social and economic change. The rationale behind bank nationalisation has been succinctly put forth by eminent bankers:

‘Many bank failures and crises over two centuries, and the damage they did under laissez faire conditions; the needs of planned growth and equitable distribution of credit, which in privately owned banks was concentrated mainly on the controlling industrial houses and influential borrowers; the needs of growing small scale industry and farming regarding finance, equipment and inputs; from all these there emerged an inexorable demand for banking legislation, some government control and a central banking authority, adding up, in the final analysis, to social control and nationalisation’ (Tandon, 1989).

Post nationalisation, the Indian banking system registered tremendous growth in volume. Despite the undeniable and multifold gains of bank nationalization, it may be noted that the important financial institutions were all state owned and were subject to central direction and control. Banks enjoyed little autonomy as both lending and deposit rates were controlled until the end of the 1980s. Although nationalisation of banks helped in the spread of banking to the rural and hitherto uncovered areas, the monopoly granted to the public sector and lack of competition led to overall inefficiency and low productivity. By 1991, the country’s financial system was saddled with an inefficient and financially unsound banking sector. Some of the reasons for this were (i) high reserve requirements, (ii) administered interest rates, (iii) directed credit and (iv) lack of competition (v) political interference and corruption. As recommended by the Narasimham Committee Report (1991) several reform measures were introduced which included reduction of reserve requirements, de-regulation of interest rates, introduction of prudential norms, strengthening of bank supervision and improving the competitiveness of the system, particularly by allowing entry of private sector banks. With a view to adopting the Basel Committee (1988) framework on capital adequacy norms, the Reserve Bank introduced a risk

Weighted asset ratio system for banks in India as a capital adequacy measure in 1992. Banks were asked to maintain risk-weighted capital adequacy ratio initially at the lower level of 4 per cent, which was gradually increased to 9 per cent. Banks were also directed to identify problem loans on their balance sheets and make provisions for bad loans and bring down the burgeoning problem of non-performing assets. The period 1992-97 laid the foundations for reform in the banking system (Rangarajan, 1998). The second Narasimham Committee Report (1998) focussed on issues like strengthening of the banking system, upgrading of technology and human resource development. The report laid emphasis on two aspects of banking regulation, viz., capital adequacy and asset classification and resolution of NPA-related problems.

Commercial banks in India are expected to start implementing Basel II norms with effect from March 31, 2007. They are expected to adopt the standardised approach for credit risk and the basic indicator approach for operational risk initially. After adequate skills are developed, both at the banks and at the supervisory levels, some banks may be allowed to migrate to the internal rating based (IRB) approach (Reddy 2005).

At present, banks in India are venturing into non-traditional areas and generating income through diversified activities other than the core banking activities. Strategic mergers and acquisitions are being explored and implemented. With this, the banking sector is currently on the threshold of an exciting phase. Against this backdrop, this paper endeavours to study the important banking indicators for the last 25-year period from 1981 to 2005. These indicators have been broadly grouped into different categories, viz., (i) number of banks and offices (ii) deposits and credit (iii) investments (iv) capital to risk-weighted assets ratio (CRAR) (v) non performing assets (NPAs) (vi) Income composition (vii) Expenditure composition (viii) return on assets (ROAs) and (ix) some select ratios. Accordingly, the paper discusses these banking indicators in nine sections in the same order as listed above. The paper concludes in section X by drawing important inferences from the trends of these different banking parameters.

The number of offices of all scheduled commercial banks almost doubledfrom 29,677 in 1980 to 55,537 in 2005. This rapid increase in the number of bank offices is observed in the case of all the bank groups. However, the number of banks in the case of foreign bank group and domestic private sector bank group decreased from 42 in 2000 to 31 in 2005 and from 33 in 2000 to 29 in 2005, respectively. This fall in the number of banks is reflective of the consolidation process and, in particular, the mergers and acquisitions that are the order of the banking system at present (Table 1).

Banking In The Older Days

Banking is believed to be a part of Indian society from as early as Vedic age; transition from mere money lending to banking must have happened before Manu, the great Hindu jurist, who had devoted a large section of his work to “deposits” and “advances” and also formulated rules for calculating interest on both 1. During the Mogul period indigenous bankers (rich individuals or families) helped foreign trades and commerce by lending money to the business. It was during the East Indian period when agency houses started managing the banking business.

The first Joint Stock bank India saw came in 1786 named the General Bank of India followed by the Bank of Hindustan and the Bengal Bank. Only the Bank of Hindustan continued to be in the show until 1906 while the other two disappeared in the meantime. East India Company established three banks in first half of 19th century: the Bank of Bengal in 1809, the Bank of Bombay in 1840, and the Bank of Madras in 1843. Eventually these three banks (which used to be referred to as Presidency Banks) were made independent units and they really did well for almost a century. In 1920, these three were amalgamated and a new Imperial Bank of India was established in 1921. Reserve Bank of India Act was passed in 1934 and finally in 1935, the Central Bank was created and christened as Reserve Bank of India. Imperial Bank was undertaken as State Bank of India after passing the State Bank of India Act in 1955. During the last phase of freedom fighting (Swadeshi Movement) few banks with purely Indian management were established like Punjab National bank (PNB), Bank of India (BOI) Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd, etc.July 19, 1969 was an important day in the history of Indian banking industry. Fourteen major banks of the country were nationalised and on April 15, 1980 six more commercial private banks were taken over by the Indian government.

In the wake of liberalisation that started in the last decade a few foreign banks entered the foray of commercial banks. To date there are around 40 banks of foreign origin that are operating in the market, like ABN AMRO Bank, ANZ Grindlays Bank, American Express Bank, HSBC Bank, Barclays Bank and Citibank groups to name a few major of them.

History Of Indian Banks:

We can identify three distinct phases in the history of Indian Banking.

Early phase from 1786 to 1969

Nationalisation of Banks and up to 1991 prior to banking sector Reforms

New phase of Indian Banking with the advent of Financial & Banking Sector Reforms after 1991.

The first phase is from 1786 to 1969, the early phase up to the nationalisation of the fourteen largest of Indian scheduled banks. It was also the traditional or conservative phase of Indian Banking. The advent of banking system of India started with the establishment of the first joint stock bank, The General Bank of India in the year 1786. After this first bank, Bank of Hindustan and Bengal Bank came to existence. In the mid of 19th century, East India Company established three banks The Bank of Bengal in 1809, The Bank of Bombay in 1840, and bank of Madras in 1843. These banks were independent units and called Presidency banks. These three banks were amalgamated in 1920 and a new bank, Imperial Bank of India was established. All these institutions started as private shareholders banks and the shareholders were mostly Europeans. The Allahabad Bank was established in 1865. The next bank to be set up was the Punjab National Bank Ltd., which was established with its headquarters at Lahore in 1894 for the first time exclusively by Indians. Most of the Indian commercial banks, however, owe their origin to the 20th century. Bank of India, Central Bank of India, Bank of Baroda, the Canara Bank, the Indian Bank, and the Bank of Mysore were established between 1906 and 1913. The last major commercial bank to be set up in this phase was the United Commercial Bank in 1943. Earlier the establishment of Reserve Bank of India in 1935 as the central bank of the country was an important step in the development of commercial banking in India.

The history of joint stock banking in this first phase was characterised by slow growth and periodic failures. There were as many as one thousand one hundred banks, mostly small banks, failed during the period from 1913 to 1948. The Government of India concerned by the frequent bank failures in the country causing miseries to innumerable small depositors and others enacted The Banking Companies Act, 1949. The title of the Act was changed as “Banking Regulation Act 1949”, as per amending Act of 1965 (Act No.23 of 1965). The Act is the first regulatory step undertaken by the Government to streamline the functioning and activities of commercial banks in India. Reserve Bank of India as the Central Banking Authority of the country was vested with extensive powers for banking supervision. Salient features of the Act are discussed in a separate page/article

At the time of Independence of the country in 1947, the banking sector in India was relatively small and extremely weak. The banks were largely confined to urban areas, extending loans primarily to trading sector dealing with agricultural produce. There were a large number of commercial banks, but banking services were not available at rural and semi-urban areas. Such services were not extended to different sectors of the economy like agriculture, small industries, professionals and self-employed entrepreneurs, artisans, retail traders etc.

Draw Back Of Indian Banking System Before Nationalisation

Commercial banks, as they were privately owned, on regional or sectarian basis resulted in development of banking on ethnic and provincial basis with parochial outlook. These Institutions did not play their due role in the planned development of the country. Deposit mobilisation was slow. Public had less confidence in the banks on account of frequent bank failures. The savings bank facility provided by the Postal department was viewed a comparatively safer field of investment of savings by the public. Even the deficient savings thus mobilised by commercial banks were not channeled for the development of the economy of the country. Funds were largely given to traders, who hoarded agricultural produce after harvest, creating an artificial scarcity, to make a good fortune in selling them at a later period, when prices were soaring. The Reserve Bank of India had to step in at these occasions to introduce selective credit controls on several commodities to remedy this situation. Such controls were imposed on advances against Rice, Paddy, Wheat, Other foodgrains (like jowar, millets, ragi etc.) pulses, oilseeds etc.

When the country attained independence Indian Banking was exclusively in the private sector. In addition to the Imperial Bank, there were five big banks each holding public deposits aggregating Rs.100 Crores and more, viz. The Central Bank of India Ltd., the Punjab National Bank Ltd., the Bank of India Ltd., the Bank of Baroda Ltd. And the United Commercial Bank Ltd. Rest of the banks were exclusively regional in character holding deposits of less than fifty Crores. Government first implemented the exercise of nationalisation of a significant part of the Indian Banking system in the year 1955, when Imperial Bank of India was Nationalised in that year for the stated objective of “extension of banking facilities on a large scale, more particularly in the rural and semi-urban areas, and for diverse other public purposes” to form State Bank of India. SBI was to act as the principal agent of the RBI and handle banking transactions of the Union & State Governments throughout India. The step was in fact in furtherance of the objectives of supporting a powerful rural credit cooperative movement in India and as recommended by the “The All-India Rural Credit Survey Committee Report, 1954”. State Bank of India was obliged to open an accepted number of branches within five years in unbanked centres. Government subsidised the bank for opening unremunerative branches in non-urban centres. The seven banks now forming subsidiaries of SBI were nationalised in the year 1960. This brought one-third of the banking segment under the direct control of the Government of India.

But the major process of nationalisation was carried out on 19th July 1969, when the then Prime Minister of India, Mrs.Indira Gandhi announced the nationalisation of fourteen major commercial banks in the country. One more phase of nationalisation was carried out in the year 1980, when seven more banks were nationalised. This brought 80% of the banking segment in India under Government ownership. The country entered the second phase, i.e. the phase of Nationalised Banking with emphasis on Social Banking in 1969/70.

Chronology of Salient steps by the Government after Independence to Regulate Banking Institutions in the Country

1949: Enactment of Banking Regulation Act.

1955 (Phase I): Nationalisation of State Bank of India

1959 (Phase II): Nationalisation of SBI subsidiaries

1961: Insurance cover extended to deposits

1969 (Phase III): Nationalisation of 14 major banks

1971: Creation of credit guarantee corporation

1975: Creation of regional rural banks

1980 (Phase IV): Nationalisation of seven banks with deposits over 200 crores.

Shortcomings in the Functioning of Nationalised Banking Institutions

However Nationalised banks in their enthusiasm for development banking, looking exclusively to branch opening, deposit accretion and social banking,

Neglected prudential norms, profitability criteria, risk-management and building adequate capital as a buffer to counter-balance the ever expanding risk-inherent assets held by them. They failed to recognise the emerging non-performing assets and to build adequate provisions to neutralise the adverse effects of such assets. Basking in the sunshine of Government ownership that gave to the public implicit faith and confidence about the sustainability of Government-owned institutions, they failed to collect before hand whatever is needed for the rainy day. And surfeit blindly indulged is sure to bring the sick hour. In the early Nineties after two decades of lop-sided policies, these banks paid heavily for their misdirected performance in place of pragmatic and balanced policies. The RBI/Government of India has to step in at the crisis-hour to implement remedial steps. Reforms in the financial and banking sectors and liberal re capitalisation of the ailing and weakened public sector banks followed. However it is relevant to mention here that the advent of banking sector reforms brought the era of modern banking of global standards in the history of Indian banking. The emphasis shifted to efficient, and prudential banking linked to better customer care and customer service. The old ideology of social banking was not abandoned, but the responsibility for development banking is blended with the paramount need for complying with norms of prudency and efficiency.

Composition of Indian Banking System

The Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions 2. The Reserve Bank of India acts a centralized body monitoring any discrepancies and shortcoming in the system. Since the nationalization of banks in 1969, the public sector banks  or the nationalized banks have acquired a place of prominence and has since then seen tremendous progress. The need to become highly customer focused has forced the slow-moving public sector banks to adopt a fast track approach. The unleashing of products and services through the net has galvanized players at all levels of the banking and financial institutions market grid to look into their existing portfolio offering. Conservative banking practices allowed Indian banks to be insulated partially from the Asian currency crisis. Indian banks are now quoting al higher valuation when compared to banks in other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble footed in approach and armed with efficient branch networks focus primarily on the ‘high revenue’ niche retail segments. The Indian banking has come from a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advances. Indian nationalized banks (banks owned by the government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization.

The banking system has three tiers. These are the scheduled commercial banks; the Regional rural banks which operate in rural areas not covered by the scheduled banks;

And the cooperative and special purpose rural banks. Under the ambit of the nationalized banks come the specialized banking institutions. These co-operatives, rural banks focus on areas of agriculture, rural development etc., unlike commercial banks these co-operative banks do not lend on the basis of a prime lending rate. They also have various tax sops because of their holding pattern and lending structure and hence have lower overheads. This enables them to give a marginally higher percentage on savings deposits. Many of these cooperative banks diversified into specialized areas (catering to the vast retail audience) like car finance, housing loans, truck finance etc. In order to keep pace with their public sector and private counterparts, the co-operative banks too have invested heavily in information technology to offer high-end computerized banking services to its clients. Given below is the total list of banks operating in India.

Scheduled and Non Scheduled Banks

There are approximately Eighty scheduled commercial banks, Indian and foreign; almost Two Hundred regional rural banks; more than Three Hundred Fifty central cooperative banks, Twenty land development banks; and a number of primary agricultural credit societies. In terms of business, the public sector banks, namely the State Bank of India and the nationalized banks, dominate the banking sector.India had a fairly well developed commercial banking system in existence at the time of independence in 1947. The Reserve Bank of India (RBI) was established in 1935. While the RBI became a state owned institution from January 1, 1949, the Banking Regulation Act was enacted in 1949 providing a framework for regulation and supervision of commercial banking activity.

The first step towards the nationalisation of commercial banks was the result of a report (under the aegis of RBI) by the Committee of Direction of All India Rural Credit Survey (1951) which till today is the locus classicus on the subject. The Committee recommended one strong integrated state partnered commercial banking institution to stimulate banking development in general and rural credit in particular. Thus, the Imperial Bank was taken over by the Government and renamed as the State Bank of India (SBI) on July 1, 1955 with the RBI acquiring overriding substantial holding of shares. A number of erstwhile banks owned by princely states were made subsidiaries of SBI in 1959. Thus, the beginning of the Plan era also saw the emergence of public ownership of one of the most prominent of the commercial banks.

The All-India Rural Credit Survey Committee Report, 1954 recommended an integrated approach to cooperative credit and emphasised the need for viable credit cooperative societies by expanding their area of operation, encouraging rural savings and diversifying business. The Committee also recommended for Government participation in the share capital of the cooperatives. The report subsequently paved the way for the present structure and composition of the Cooperative Banks in the country

There was a feeling that though the Indian banking system had made considerable progress in the ’50s and ’60s, it established close links between commercial and industry houses, resulting in cornering of bank credit by these segments to the exclusion of agriculture and small industries. To meet these concerns, in 1967, the Government introduced the concept of social control in the banking industry. The scheme of social control was aimed at bringing some changes in the management and distribution of credit by the commercial banks. The close link between big business houses and big banks was intended to be snapped or at least made ineffective by the reconstitution of the Board of Directors to the effect that 51 per cent of the directors were to have special knowledge or practical experience. Appointment of whole-time Chairman with special knowledge and practical experience of working of commercial banks or financial or economic or business administration was intended to professionalise the top management. Imposition of restrictions on loans to be granted to the directors’ concerns was another step towards avoiding undesirable flow of credit to the units in which the directors were interested. The scheme also provided for the take-over of banks under certain circumstances.

Political compulsion then partially attributed to inadequacies of the social control, led to the Government of India nationalising, in 1969,fourteen major scheduled commercial banks which had deposits above a cut-off size. The objective was to serve better the needs of development of the economy in conformity with national priorities and objectives. In a somewhat repeat of the same experience, eleven years after nationalisation, the Government announced the nationalisation of seven more scheduled commercial banks above the cut-off size. The second round of nationalisation gave an impression that if a private sector bank grew to the cut-off size it would be under the threat of nationalisation.

From the fifties a number of exclusively state-owned development financial institutions (DFIs) were also set up both at the national and state level, with a lone exception of Industrial Credit and Investment Corporation (ICICI) which had a minority private share holding. The mutual fund activity was also a virtual monopoly of Government owned institution, viz., the Unit Trust of India. Refinance institutions in agriculture and industry sectors were also developed, similar in nature to the DFIs. Insurance, both Life and General, also became state monopolies.

Reform Measures

The major challenge of the reform has been to introduce elements of market incentive as a dominant factor gradually replacing the administratively coordinated planned actions for development. Such a paradigm shift has several dimensions, the corporate governance being one of the important elements. The evolution of corporate governance in banks, particularly, in PSBs, thus reflects changes in monetary policy, regulatory environment, and structural transformations and to some extent, on the character of the self-regulatory organizations functioning in the financial sector. Policy Environment During the reform period, the policy environment enhanced competition and provided greater opportunity for exercise of what may be called genuine corporate element in each bank to replace the elements of coordinated actions of all entities as a “joint family” to fulfill predetermined Plan priorities.

Greater competition has been infused in the banking system by permitting entry of private sector banks (Nine licences since 1993), and liberal licensing of more branches by foreign banks and the entry of new foreign banks. With the development of a multi-institutional structure in the financial sector, emphasis is on efficiency through competition irrespective of ownership. Since non-bank intermediation has increased, banks have had to improve efficiency to ensure survival.

Regulatory Environment

Prudential regulation and supervision have formed a critical component of the financial sector reform programme since its inception, and India has endeavored to international prudential norms and practices. These norms have been progressively tightened over the years, particularly against the backdrop of the Asian crisis. Bank exposures to sensitive sectors such as equity and real estate have been curtailed. The Banking Regulation Act 1949 prevents connected lending (i.e. lending by banks to directors or companies in which Directors are interested).

Periodical inspection of banks has been the main instrument of supervision, though recently there has been a move toward supplementary ‘on-site inspections’ with ‘off-site surveillance’. The system of ‘Annual Financial Inspection’ was introduced in 1992, in place of the earlier system of Annual Financial Review/Financial Inspections. The inspection objectives and procedures, have been redefined to evaluate the bank’s safety and soundness; to appraise the quality of the Board and management; to ensure compliance with banking laws & regulation; to provide an appraisal of soundness of the bank’s assets; to analyse the financial factors which determine bank’s solvency and to identify areas where corrective action is needed to strengthen the institution and improve its performance. Inspection  based upon the new guidelines have started since 1997.

Self Regulatory Organizations

India has had the distinction of experimenting with Self Regulatory Organisations (SROs) in the financial system since the pre-independence days. At present, there are four SROs in the financial system –

Indian Banks Association (IBA),

Foreign Exchange Dealers Association of India (FEDAI),

Primary Dealers Association of India (PDAI) and

Fixed Income Money Market Dealers Association of India (FIMMDAI).

Indian Banks Association

The IBA established in 1946 as a voluntary association of banks, strove towards strengthening the banking industry through consensus and co-ordination. Since nationalisation of banks, PSBs tended to dominate IBA and developed close links with Government and RBI. Often, the reactive and consensus and coordinated approach bordered on cartelisation. To illustrate, IBA had worked out a schedule of benchmark service charges for the services rendered by member banks, which were not mandatory in nature, but were being adopted by all banks. The practice of fixing rates for services of banks was consistent with a regime of administered interest rates but not consistent with the principle of competition. Hence, the IBA was directed by the RBI to desist from working out a schedule of benchmark service charges for the services rendered by member banks. Responding to the imperatives caused by the changing scenario in the reform era, the IBA has, over the years, refocused its vision, redefined its role, and modified its operational modalities.

Foreign Exchange Dealers Association Of India (Fedai)

In the area of foreign exchange, FEDAI was established in 1958, and banks were required to abide by terms and conditions prescribed by FEDAI for transacting foreign exchange business. In the light of reforms, FEDAI has refocused its role by giving up fixing of rates, but plays a multifarious role covering training of banks’ personnel, accounting standards, evolving risk measurement models like the VAR.

1.3 Functions of Commercial banks ( conventional and innovative functions)

Functions

Function of Commercial Bank:

The functions of commercial banks are classified into two main divisions.

(a) Primary functions

• Accepts  deposit : The bank takes deposits in the form of saving, current, and fixed deposits. The surplus balances collected from the firm and individuals are lent to the temporary requirements of the commercial transactions.

• Provides loan and advances : Another critical function of this bank is to offer loans and advances to the entrepreneurs and business people, and collect interest. For every bank, it is the primary source of making profits. In this process, a bank retains a small number of deposits as a reserve and offers (lends) the remaining amount to the borrowers in demand loans, overdraft, cash credit, short-run loans, and more such banks.
• Credit cash: When a customer is provided with credit or loan, they are not provided with liquid cash. First, a bank account is opened for the customer and then the money is transferred to the account. This process allows the bank to create money.

(b) Secondary functions

• Discounting bills of exchange: It is a written agreement acknowledging the amount of money to be paid against the goods purchased at a given point of time in the future. The amount can also be cleared before the quoted time through a discounting method of a commercial bank.
• Overdraft facility: It is an advance given to a customer by keeping the current account to overdraw up to the given limit.
• Purchasing and selling of the securities: The bank offers you with the facility of selling and buying the securities.
• Locker facilities: A bank provides locker facilities to the customers to keep their valuables or documents safely. The banks charge a minimum of an annual fee for this service.
• Paying and gathering the credit : It uses different instruments like a promissory note, cheques, and bill of exchange.

1.4 Central Bank : RBI – Functions,Emerging trends in Banking

RBI-Functions

The Reserve Bank of India (RBI) is India’s central bank, also known as the banker’s bank.

The RBI controls the monetary and other banking policies of the Indian government. The Reserve Bank of India (RBI) was established on April 1, 1935, in

Accordance with the Reserve Bank of India Act, 1934. The Reserve Bank is permanently situated in Mumbai since 1937.

Establishment of Reserve Bank of India

The Reserve Bank is fully owned and operated by the Government of India.

The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as:

• Regulating the issue of Banknotes
• Securing monetary stability in India
• Modernising the monetary policy framework to meet economic challenges

The Reserve Bank’s operations are governed by a central board of directors, RBI is on the whole operated with a 21-member central board of directors appointed by the Government of India in accordance with the Reserve Bank of India Act.

The Central board of directors comprise of:

• Official Directors – The governor who is appointed/nominated for a period of four years along with four Deputy Governors
• Non-Official Directors – Ten Directors from various fields and two government Official

Major Functions of RBI

• Monetary Authority

Formulating and implementing the national monetary policy. Maintaining price stability across all sectors while also keeping the objective of growth.

• Regulatory and Supervisory

Set parameters for banks and financial operations within which banking and financial systems function. Protect investors interest and provide economic and cost-effective banking to the public.

• Foreign Exchange Management

Oversees the Foreign Exchange Management Act, 1999.Facilitate external trade and development of foreign exchange market in India.

• Currency Issuer

Issues, exchanges or destroys currency and not fit for circulation. Provides the public adequately with currency notes and coins and in good quality.

• Developmental role

Promotes and performs promotional functions to support national banking and financial objectives.

• Related Functions

Provides banking solutions to the central and the state governments and also acts as their banker.Chief Banker to all banks: maintains banking accounts of all scheduled banks.

Emerging trends in Banking

The Banking industry and financial institutions are vital sectors of any economy. Development of these two sections of the economy can impact the growth of the country in an incredible way. In the era of “Digital India”, the banking and financial services in India have undergone a massive evolution and the phenomenon continues. The change can be attributed to various components like new regulatory policies and customer expectations. However, the one element that has affected banking and financial services the most is technological advancement.

The emergence of innovative financial technology has revolutionized financial services in India as well as the banking sector. It has resulted in the introduction and advancement of several technology trends that have contributed to the radical transformation, growth, and advancement of these industries. The alliance between the innovative technologies of the financial sector and banking services has changed the conventional systems of handling money, and this collaboration is expected to create a massive shift with emerging trends in financial services.

The rise of Fintech companies, internet banking, and mobile banking are some of the classic examples of emerging trends in the banking sector and financial services. In addition to the betterment of traditional systems, these banking and financial services industry trends are a few steps toward creating a cashless society, complete digital transformation, and the rise of Fintech. In this time of change, the only thing that is constant is change.

Few Trends in Banking and Financial Services in India That Are Changing the Entire Scenario

1. Digitization:

With the rapid growth of digital technology, it became imperative for banking and financial services in India to keep up with the changes and innovate digital solutions for the tech-savvy customers. Besides the financial institutions, insurance, healthcare, retail, trade, and commerce are some of the major industries that are experiencing the enormous digital shift. To stay competitive, it is necessary for the banking and financial industry to take the leap on the digital bandwagon.

In India, it all began not earlier than the 1980s when the banking sector introduced the use of information technology to perform basic functions likes customer service, book-keeping, and auditing. Soon, Core Banking Solutions were adopted to enhance customer experience. However, the transformation began in the 1990s during the time of liberalization, when the Indian economy exposed itself to the global market. The banking sector opened itself for private and international banks which is the prime reason for technological changes in the banking sector. Today, banks and financial institutions have benefitted in many ways by adopting newer technologies. The shift from conventional to convenience banking is incredible.

Modern trends in banking system make it easier, simpler, paperless, signatureless and branchless with various features like IMPS (Immediate Payment Service), RTGS (Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), Online Banking, and Telebanking. Digitization has created the comfort of “anywhere and anytime banking.” It has resulted in the reduced cost of various banking procedures, improved revenue generation, and reduced human error. Along with increased customer satisfaction, it has enabled the customers creating personalized solutions for their investment plans and improve the overall banking experience.

2. Enhanced Mobile Banking:

Mobile Banking technology

Mobile banking is one of the most dominant current trends in banking systems. As per the definition, it is the use of a smartphone to perform various banking procedures like checking account balance, fund transfer, and bill payments, without the need of visiting the branch. This trend has taken over the traditional banking systems. In the coming years, mobile banking is expected to become even more efficient and effortless to keep up with the customer demands. Mobile banking future trends hint at the acquisition of IoT and Voice-Enabled Payment Services to become the reality of tomorrow. These voice-enabled services can be found in smart televisions, smart cars, smart homes, and smart everything. Top industry leaders are collaborating to adopt IoT-connected networks to create mobile banking technologies that require users’ voice to operate.

3. UPI (Unified Payments Interface):

UPI or Unified Payments Interface has changed the way payments are made. It is a real-time payment system that enables instant inter-bank transactions with the use of a mobile platform. In India, this payment system is considered the future of retail banking. It is one of the fastest and most secure payment gateways that is developed by National Payments Corporation of India and regulated by the Reserve Bank of India. The year 2016 saw the launch of this revolutionary transactions system. This system makes funds transfer available 24 hours, 365 days unlike other internet banking systems. There are approximately 39 apps and more than 50 banks supporting the transaction system. In the post-demonetization India, this system played a significant role. In the future, with the help of UPI, banking is expected to become more “open.”

4. Block Chain:

Block chain is the new kid on the block and the latest buzzword. The technology that works on the principles of computer science, data structures and cryptography and is the core component of cryptocurrency, is said to be the future of banking and financial services globally. Block chain uses technology to create blocks to process, verify and record transactions, without the ability to modify it.

NITI Aayog is creating IndiaChain, India’s largest block chain network, which is expected to revolutionize several industries, reduce the chances of fraud, enhance transparency, speed up the transaction process, lower human intervention and create an unhackable database. Several aspects of banking and financial services like payments, clearance and settlement systems, stock exchanges and share markets, trade finance, and lending are predicted to be

Impacted. With its strenuous design, block chain technology is a force to be reckoned with.

5. Artificial Intelligence Robots:

Several private and nationalized banks in India have started to adopt chatbots or Artificial intelligence robots for assistance in customer support services. For now, the use of this technology is at a nascent stage and evolution of these chatbots is not too far away. Usage of chatbots is among the many emerging trends in the Indian banking sector that is expected to grow.

More chatbots with the higher level of intelligence are forecasted to be adopted by the banks and financial institutions for improved customer interaction personalized solutions. The technology will alleviate the chances of human error and create accurate solutions for the customers. Also, it can recognize fraudulent behavior, collate surveys and feedback and assist in financial decisions.

6. The rise of Fintech Companies:

Previously, banks considered Fintech companies a disrupting force. However, with the changing trends in the financial services sector in India, fintech companies have become an important part of the sector. The industry has emerged as a significant part of the ecosystem. With the use of financial technology, these companies aim to surpass the traditional methods of finance. In the past few decades, massive investment has been made in these companies and it has emerged into a multi-billion-dollar industry globally.

Rise of fintech technologies

Fintech companies and fintech apps have changed the way financial solutions are provided to the customers. Besides easy access to financial services, fintech companies have led to a massive improvement in services, customer experience, and reduced the price paid. In India, the dynamic transformation has been brought upon by several important elements like fintech startups, established financial institutions, initiatives like “Start-Up India” by Government of India, incubators, investors, and accelerators. According to a report by National Association of Software and Services Companies (NASSCOM), the fintech services market is expected to grow by 1.7 times into an $8 billion market by 2020.

7. Digital-Only Banks:

It is a recent trend in the Indian financial system and cannot be ignored. With the entire banking and financial services industry jumping to digital channels, digital-only banks have emerged to create paperless and branchless banking systems. This is a new breed of banking institutions that are overtaking the traditional models rapidly. These banks provide banking facilities only through various IT platforms that can be accessed on mobile, computers, and tablets. It provides most of the basic services in the most simplified manner and gives access to real-time data. The growing popularity of these banks is said to be a real threat to traditional banks.

ICICI Pockets is India’s first digital-only bank. These banks are attractive to the customers because of their cost-effective operating models. At the same time, though virtually, they provide high-speed banking services at very low transaction fees. In today’s fast lane life, these banks suit the customer needs because they alleviate the need of visiting the bank and standing in a queue.

8. Cloud Banking:

Cloud technology has taken the world by storm. It seems the technology will soon find its way in the banking and financial services sector in India. Cloud computing will improve and organize banking and financial activities. Use of cloud-based technology means improved flexibility and scalability, increased efficiency, easier integration of newer technologies and applications, faster services and solutions, and improved data security. In addition, the banks will not have to invest in expensive hardware and software as updating the information is easier on cloud-based models.

9. Biometrics:

Biometric payment

Essentially for security reasons, a Biometric Authentication system is changing the national identity policies and the impact is expected to be widespread. Banking and financial services are just one of the many other industries that will be experiencing the impact. With a combination of encryption technology and OTPs, biometric authentication is forecasted to create a highly-secure database protecting it from leaks and hackers attempts. Financial services in India are exploring the potential of this powerful technology to ensure sophisticated security to customers’ account and capital.

10. Wearables:

With smartwatch technology, the banking and financial services technology is aiming to create wearables for retail banking customers and provide more control and easy access to the data. Wearables have changed the way we perform daily activities. Therefore, this technology is anticipated to be the future retail banking trend by providing major banking services with just a click on a user-friendly interface on their wearable device.

These are some of the recent trends in the banking and financial sector of India and all these new technologies are predicted to reshape the industry of business and money. The future is going to bring upon a revolution of sorts with historical changes in traditional models. The massive shift in the landscape has few challenges. Nonetheless, the customers are open to banking innovations and the government is showing great support with schemes like “Jan Dhan Yojana,” which aims at proving a bank account to every citizen. Meanwhile, the competition from the foreign and private sector banks have strained the government regulators, nationalized banks and financial institutions to adopt new technology in order to stay relevant in the race.

References

1. Banking and Insurance system : Jyotsna Sethi
2. Banking and Insurance system : Nishwan Bhatia