Introduction

Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest banks in the 1980s.Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively.

Early history Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860 and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

Post-independence The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: y In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India.

In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."

The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on 19 July, 1969.

Nationalisation By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19. Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the

nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased by eight-fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services. During the year 2000, the State Bank Of India (SBI) and its 7 associates accounted for a 25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same period. The share of foreign banks (numbering 42), regional rural banks and other scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in credit during the year 2000.

Current Scenario The industry is currently in a transition phase. On the one hand, the Public sector Banks, which are the mainstay of the Indian Banking system are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (Npas) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. Public sector Banks, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The Public sector Banks are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes.

The private players however cannot match the PSBs great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the Public sector Banks has been through the merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances. For instance, HDFC Banks merger with Times Bank ICICI Banks acquisition of ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger however opened a pandoras box and brought about the realization that all was not well in the functioning of many of the private sector banks.

Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other

services and integrated them into the mainstream banking arena, while the Public sector Banks are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Also, following Indias commitment to the W To agreement in respect of the services sector, foreign banks, including both new and the existing ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches. Talks of government diluting their equity from 51 percent to 33 percent in November 2000 have also opened up a new opportunity for the takeover of even the Public sector Banks. The FDI rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners. Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation.

Aggregate Performance of the Banking Industry Aggregate deposits of scheduled commercial banks increased at a compounded annual average growth rate (Cumulative average growth rate) of 17.8 percent during 1969-99, while bank credit expanded at a Cumulative average growth ratr of 16.3 percent per annum. Banks investments in government and other approved securities recorded a Cumulative average growth rate of 18.8 percent per annum during the same period. In financial year 2001 the economic slowdown resulted in a Gross domestic product growth of only 6.0 percent as against the previous years 6.4 percent. The whole price index (a measure of inflation) increased by 7.1 percent as against 3.3 percent in financial year 2000. Similarly, money supply grew by around 16.2 percent as against 14.6 percent a year ago.

The growth in aggregate deposits of the scheduled commercial banks at 15.4 percent in financial year 2001 percent was lower than that of 19.3 percent in the previous year, while the growth in credit by SCBs slowed down to 15.6 percent in financial year 2001 against 23 percent a year ago. The industrial slowdown also affected the earnings of listed banks. The net profits of 20 listed banks dropped by 34.43 percent in the quarter ended March 2001. Net profits grew by 40.75 percent in the first quarter of 2000-2001, but dropped to 4.56 percent in the fourth quarter of 2000-2001. On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the norms, it was a feat achieved with its own share of difficulties. The CAR, which at present is 9.0 percent, is likely to be hiked to 12.0 percent by the year 2004 based on the Basle Committee recommendations. Any bank that wishes to grow its assets needs to also shore up its capital at the same time so that its capital as a percentage of the risk-weighted assets is maintained at the stipulated rate. While the IPO route was a much-fancied one in the early 90s, the current scenario doesnt look too attractive for bank majors. Consequently, banks have been forced to explore other avenues to shore up their capital base. While some are wooing foreign partners to add to the capital others are employing the M& A route. Many are also going in for right issues at prices considerably lower than the market prices to woo the investors. Reserve Bank of India The Reserve Bank of India acts as a centralized body monitoring any discrepancies and shortcoming in the system. It is the foremost monitoring body in the Indian financial sector. The nationalized banks (i.e. government-owned banks) continue to dominate the Indian banking arena. Industry estimates indicate that out of 274 commercial banks operating in India, 223 banks are in the public sector and 51 are in the private sector. The private sector bank grid also includes 24 foreign banks that have started their operations here. 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.

The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has mostly been true. Growth in Indian Banking Industry Foreign banks are likely to succeed in their niche markets and be the innovators in terms of technology introduction in the domestic scenario. The outlook for the private sector banks indeed looks to be more promising vis--vis other banks. While their focused operations, lower but more productive employee force etc will stand them good, possible acquisitions of PSU banks will definitely give them the much needed scale of operations and access to lower cost of funds. These banks will continue to be the early technology adopters in the industry, thus increasing their efficiencies. Also, they have been amongst the first movers in the lucrative insurance segment. Already, banks such as ICICI Bank and HDFC Bank have forged alliances with Prudential Life and Standard Life respectively. This is one segment that is likely to witness a greater deal of action in the future. In the near term, the low interest rate scenario is likely to affect the spreads of majors. This is likely to result in a greater focus on better asset-liability management procedures. Consequently, only banks that strive hard to increase their share of fee-based revenues are likely to do better in the future. The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 are estimated at Rs 40, 90,000 crores. That will comprise about 65 per cent of Gross Domestic Product at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side. The Indian Banking Industry can be categorized into non-scheduled banks and scheduled banks. Scheduled banks constitute of commercial banks and co-operative banks. There are

about 67,000 branches of Scheduled banks spread across India. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase.

The Public Sector Banks(Public sector Banks), which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.

In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking. Outsourcing The world over, banks are increasingly using outsourcing, to third parties who may be unrelated or member of the group/conglomerate as a means of both reducing cost and accessing specialist expertise, not available internally and achieving strategic aims. Outsourcing brings in its wake, several risks like Strategic Risk, Reputation Risk, Compliance Risk, Operational Risk, Exit Strategy Risk, Counterparty Risk, Country Risk, Contractual Risk, Access Risk Concentration and Systemic Risk. The failure to manage these risks can lead to financial losses/reputational risk for the bank and could also lead to systemic risks within the entire banking system in the country. It would therefore be imperative for the bank outsourcing its activities to ensure effective management of these risks Indian banking industry is witnessing robust growth under the influence of a changing regulatory environment, rapid technological advancements, heightened competition and consolidation. This changing landscape in the banking industry is driving banks to explore the outsourcing option to achieve efficiencies.

Apart from the growth in the industry, centralization and penetration of IT systems need to focus on core services; rapid scale up and introduction of new services are driving outsourcing in this industry. Outsourcing revenues from the Indian banking industry are estimated at Rs. 4 b for FY08 and are expected to grow at a CUMULATIVE AVERAGE GROWTH RATR of 47% to touch Rs. 19 b by FY12. The outsourcing potential in the Indian banking industry will increase rapidly as banks strengthen their IT systems. Consolidation in Indian banks India prepares for competitive times, more banks are planning to combine for competitive advantage. The Raghuram Rajan Committee, in general, has recommended encouraging, but not forcing, consolidation amongst Public Sector Banks (Public sector Banks). The Committee has observed that given the fragmented nature of the Indian banking system and the small size of the typical bank, some consolidation may be in order for banks that aim to play on a larger stage. Indian Government in a recent statement said that the initiatives for consolidation amongst the Public sector Banks should emanate from the management of the banks themselves with Government playing a supportive role as the common stakeholder.

In a recent analysis of total assets of Indias ten largest banks vis--vis size of its Gross domestic product at end of fiscal 2008-09, ASSOCHAM has found that size of Indian banks in terms of their assets stands very small to make optimal use of their capacities to raise funds at internationally competitive rates. Combined assets of top ten banks constitute less than 60 per cent of the Gross domestic product unlike the banking system of European economies, where even after the global financial turmoil, assets of only top five banks has grown to four times of Gross Domestic Product. Even as India is the second largest growth market for banking services after China in terms of the number of wealthy households, the ASSOCHAM Chief said, only two Indian banks, State Bank of India at the 64th position and ICICI Bank Ltd at 81st, figure among the global top 100 by tier I capital - a core measure of a banks financial stringent terms of assets, Indias largest bank, SBI is now the worlds 70th largest bank. On the other hand, ICICI Bank Ltd, the largest private sector lender has attained the 148th position. None of the other Indian banks features among the top 200 banks in the world-in terms of size of assets.

ASSOCHAM feels that hampered by the fragmented nature of the banking industry, Indian banks are not able to compete globally in terms of fund mobilisation, credit disbursal, investment and rendering of financial services. The balance sheets of top 10 Indian banks suggest the greater scope of consolidation to reap the benefits of large sized globally competitive Indian banks. ASSOCHAM has called for Banks consolidation without any delay despite dithering of Reserve Bank of India on the issue. General consensus is that more bank mergers may be inevitable. India needs to slowly but surely move from a regime of large number of small banks to small number of large banks that consists largely of shareholders capital. Emerging scenario The Economic Liberalisation process has increasingly exposed the Banking Sector to international competition. The role of Banking in the process of financial intermediation has been undergoing a profound transformation, owing to changes in the global financial system. Consequently, the revolution in information technology has brought about sea changes in the way, banking transaction are carried out. Hence, the impact and implications of emerging issues have been analysed in the book, keeping in view the perceived competitive environment. It will not only improve the operation efficiency of the banks but also augment their bottom line.