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Sparshy and Satbir_35 & 46

Sparshy and Satbir_35 & 46



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Published by Sparshy Saxena
The paper essays the trend of the banking industry pre- and post implementation of reforms leading to the globalisation of the indian banking sector.
The paper essays the trend of the banking industry pre- and post implementation of reforms leading to the globalisation of the indian banking sector.

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Published by: Sparshy Saxena on Jan 22, 2009
Copyright:Attribution Non-commercial


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Impact of Globalisation on The Indian Banking Sector
Impact of Globalization on Indian Banking System
Sparshy Saxena and Satbir Samra
The Indian Banking scene in under a constant cycle of change. The number of banks and their customer-orientation, technology, diversification, competition and the resultant factors have changed the take onthe perception of a bank as merely being a financial institution. Through its take on globalization, the Indian Banking sector has undergone varied changes in terms of reforms and nationalization. Thereforms that have been brought into force have changed the market of Indian banking, increasing the players (both foreign as well as private) and, most importantly, supporting the banking framework with financial stability and risk absorption capacity. The paper maps the trend of the banking sector across anexpanse stretching from 1985 to 2008, the change in the working of the sector pre- and post events likenationalization and globalization. It also analyses the impact of reform implementation on the sector aswell as the challenges faced by the Indian banks.
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Impact of Globalisation on The Indian Banking Sector
A bank is a financial institution whichengages in the business of keeping moneyfor savings and checking accounts or forexchange or for issuing loans and credit etc.(http://wordnet.princeton.edu/perl/webwn,  retrieved Jan 20, 2009). The banking section
is vital to any nation’s economy. It is of 
prime importance as it has a multiplier effecton the economy. It also leverages on thefunds by issuing credit creation. Thebanking institution in India can be broadlydivided into Scheduled and Non-ScheduledBanks. (For the hierarchical display of thebanking structure, refer Exhibit 1.1)
For the past three decades, the Indianbanking sector has had many credits underits sleeve. One of them is its extensive reach.Not confining itself to only themetropolitans, it has shown a reach to eventhe remote areas of the country.The first conservative bank was set up in1786. The banking system has beendifferentiated under various categories witheach section comprising of branches. Theentire history of the banking industry can beclassified under three phases.
 Phase I 
extends from the earlier time periodtill 1969.
 Phase II 
covers the period fromthe nationalization of the banks till beforethe implication of economic reforms. The
 Phase III 
covers the period from after theimplication till present date.(for dataregarding the number of banks under variouscategories on a scale from 1985 to 2005,refer Exhibit 1.2).The banking sector before the economicreforms assumed a very traditional methodof working. Phase III paved way for theadvent of globalization, thereby changingthe Indian banking scene.
 A bank is a financial institution which engagesin the business of keepingmoney for savings and checking accounts or for exchange or for issuingloans and credit. 
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Impact of Globalisation on The Indian Banking Sector
Prior to the nationalization of banks, theservices were enjoyed by only the industrialurban group. 14 banks saw thenationalization in the year 1969 and six in1980. Thus this led to a monopoly of government owned banks till the start of the1990s. The banks faced a risk form factorslike;Need to maintain reserve,Interest ratesLack of CompetitionPolitical influence(Ramasastri A.S & AchammaSamuel (2006), RBI Occasionalpapers)During the early 1990s, the government,under Narasimha Rao, adopted a policy of liberalization which paved the way forprivate participation (mergers andacquisitions) and foreign investors. Thephase of Indian banking from 1991 onwardswas essentially a period of prudentialbanking. The union government appointed acommittee headed by Mr. Narasimha Rao tostudy and formulate reforms within thebanking sector, in the year 1991. Thereforms reviewed the system conformingto the expanding and emerging need of the Indian economy. The capitaladequacy norms, which required banksto have a risk-adjusted capital adequacyratio to absorb risks, as per
 Basel I 
 accord was also implemented at thistime. The regulations that were broughtinto effect are represented in Exhibit 1.3.A second committee was appointed tosuggest remedial measures for the sectorin the year 1998. The resultant reformsare shown in Exhibit 1.4. Accordingly,
 Basel II 
was also implemented in effectfrom March 31, 2007.The reforms have the reduced theamount of equity holdings in banks, butin turn allowing them to access thecapital market to raise funds.Recruitment policies have become moreflexible with time allowing banks toaccess a talent pool of staff. In terms of operations, opening of branches has

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