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Recent Trends in Public Sector Banks



1.1 Definition

Banking is "accepting, for the purpose of lending or investment of deposits of

money from the public, repayable on demand or otherwise and withdrawable by
cheques, draft, order or otherwise."

Bank is defined as a person who carries on the business of banking. Banks also
perform certain activities which are ancillary to this business of accepting
deposits and lending. Since Banking involves dealing directly with money,
governments in most countries regulate this sector rather stringently.

Banking in India was defined under Section 5(A) as "any company which
transacts banking, business" and the purpose of banking business defined under
Section 5(B),"accepting deposits of money from public for the purpose of
lending or investing, repayable on demand through cheque/draft or otherwise".
In the process of doing the above-mentioned primary functions, they are also
permitted to do other types of business referred to as Utility Services for their
customers (Banking Regulation Act, 1949).

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1.2 History of Banks

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.

When the American Civil War stopped the supply of cotton to Lancashire from
the Confederate States, promoters opened banks to finance trading in Indian
cotton. With large exposure to speculative ventures, most of the banks opened
in India during that period failed. The depositors lost money and lost interest in
keeping deposits with banks. Subsequently, banking in India remained the

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exclusive domain of Europeans for next several decades until the beginning of
the 20th century.

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 Bank of Bengal, which later
became the State Bank of India.

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.

Around the turn of the 20th Century, the Indian economy was passing through a
relative period of stability. Around five decades had elapsed since the Indian
Mutiny, and the social, industrial and other infrastructure had improved.
Indians had established small banks, most of which served particular ethnic and
religious communities.

The presidency banks dominated banking in India but there were also some
exchange banks and a number of Indian joint stock banks. All these banks
operated in different segments of the economy. The exchange banks, mostly
owned by Europeans, concentrated on financing foreign trade. Indian joint
stock banks were generally undercapitalized and lacked the experience and
maturity to compete with the presidency and exchange banks.
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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.

The fervour of Swadeshi movement lead to establishing of many private banks

in Dakshina Kannada and Udupi district which were unified earlier and known
by the name South Canara ( South Kanara ) district. Four nationalised banks
started in this district and also a leading private sector bank. Hence undivided
Dakshina Kannada district is known as "Cradle of Indian Banking".

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1.3 Pre-Independence

The banks in India were established by the British .The period during the First
World War (1914-1918) through the end of the Second World War (1939-
1945), and two years thereafter until the independence of India were
challenging for Indian banking. The years of the First World War were
turbulent, and it took its toll with banks simply collapsing despite the Indian
economy gaining indirect boost due to war-related economic activities. At least
94 banks in India failed between 1913 and 1918 as indicated in the following

Years Number of banks Authorised Paid-up Capital

that failed capital (Rs. Lakhs)
(Rs. Lakhs)
1913 12 274 35
1914 42 710 109
1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

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World War I and its Impact on Banking in India

The World War I years (1913 to 1918) were indeed difficult years for the world
economy. The alarming inflationary situation that had developed as a result of
war financing and concentration on the war led to other problems like neglect
of agriculture. During the war period, a number of banks failed. Some banks
that failed had combined trading functions with banking functions. More
importantly, several of the banks that failed had a low capital base.

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1.4 Post-independence

The partition of India in 1947 adversely impacted the economies of Punjab and
West Bengal, paralyzing banking activities for months. India's independence
marked the end of a regime of the Laissez-faire for the Indian banking. 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:

➢ In 1948, the Reserve Bank of India, India's central banking authority, was
nationalized, and it became an institution owned by the Government of
➢ In 1949, the Banking Regulation Act was enacted which empowered the
Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in
➢ The Banking Regulation Act also provided that no new bank or branch of
an existing bank may be opened without a license from the RBI, and no
two banks could have common directors.
➢ In 1959, the Government of India passed the State Bank of India
(Subsidiary Banks) Act, which enabled SBI to take over eight former
State-associated banks as its subsidiaries.

Name of the Bank Subsidiary wef

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1. State Bank of Bikaner 1st January 1960

2. State Bank of Jaipur 1st January 1960
3. State Bank of Hyderabad 1st October 1959
4. State Bank of Indore 1st January 1968
5. State Bank of Mysore 1st March 1960
6. State Bank of Patiala 1st April 1960
7. State Bank of Saurashtra 1st May 1960
8. State Bank of Travancore 1st January 1960

In about 5 years after nationalisation of banks, the branch network expanded by

129 per cent. Nationalisation was also visualised as a process that would entail
large scale reorganization of the nationalised banks with only one or two major
banks acting as all-India banks catering to the wholesale market for credit and
with a monopoly of foreign exchange business

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 nationalization of major banks in India on 19th
July, 1969.

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1.5 Banking Regulations Act, 1949

The Banking Regulation Act was passed as the Banking Companies Act 1949
and came into force wef 16.3.49. Subsequently it was changed to Banking
Regulations Act 1949 wef 01.03.66. Summary of some important sections is
provided hereunder. .

➢ Banking means accepting for the purpose of lending or investment of

deposits of money from public repayable on demand or otherwise and
withdrawable by cheque, drafts order or otherwise 5(i) (b).

➢ Banking company means any company which transacts the business of

banking 5(i)(c)

➢ Transact banking business in India 5 (i) (e).

➢ Demand liabilities are the liabilities which must be met on demand and
time liabilities means liabilities which are not demand liabilities 5(i)(f)

➢ Secured loan or advances means a loan or advance made on the security of

asset the market value of which is not at any time less than the amount of
such loan or advances and unsecured loan or advances means a loan or
advance not secured 5(i)(h).

➢ Defines business a banking company may be engaged in like borrowing,

lockers, letter of credit, traveller cheques, mortgages etc 6(1).

➢ States that no company shall engage in any form of business other than
those referred in Section 6(1) & 6(2).

➢ For banking companies carrying on banking business in India to use at

least one word bank, banking, banking company in its name (7).

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➢ Restrictions on business of certain kinds such as trading of goods etc. (8)

➢ Prohibits banks from holding any immovable property howsoever

acquired except as acquired for its own use for a period exceeding 7 years
from acquisition of the property. RBI may extend this period by five years

➢ Prohibitions on employments like Chairman, Directors etc (10)

➢ Paid up capital, reserves and rules relating to these (11 & 12)

➢ Banks not to pay any commission, brokerage, discount etc. more than
2.5% of paid up value of one share (13)

➢ Prohibits a banking company from creating a charge upon any unpaid

capital of the company. (14) Section 14(A) prohibits a banking company
from creating a floating charge on the undertaking or any property of the
company without the RBI permission.

➢ Prohibits payment of dividend by any bank until all of its capitalized

expenses have been completely written off (15)

➢ To create reserve fund and 20% of the profits should be transferred to this
fund before any dividend is declared (17 (1))

➢ Cash reserve - Non-scheduled banks to maintain 3% of the demand and

time liabilities by way of cash reserves with itself or by way of balance in
a current account with RBI (18)

➢ Permits banks to form subsidiary company for certain purposes (19)

➢ No banking company shall hold shares in any company, whether as

pledge, mortgagee or absolute owners of any amount exceeding 30% of its
own paid up share capital + reserves or 30% of the paid up share capital of
that company whichever is less. 19(2)
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➢ Restrictions on banks to grant loan to person interested in management of

the bank (20)

➢ Power to Reserve Bank to issue directive to banks to determine policy for

advances (21)

➢ Every bank to maintain a percentage of its demand and time liabilities by

way of cash, gold, unencumbered securities 25%-40% as on last Friday of
2nd preceding fortnight (24).

➢ Return of unclaimed deposits (10 years and above) (26).

➢ Every bank has to publish its balance sheet as on March 31st (29).

➢ Balance sheet is to be got audited from qualified auditors (30 (i)).

➢ Publish balance sheet and auditor’s report within 3 months from the end of
period to which they refer. RBI may extend the period by further three
month (31).

➢ Prevents banks from producing any confidential information to any


➢ RBI authorized to undertake inspection of banks (35).

➢ Amendment carried in the Act during 1983 empowers Central


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1.6 The Reserve Bank of India

The Reserve Bank of India (RBI) was established through the Reserve Bank of
India Act, 1934 and it commenced its operations on April 1, 1935. It was
established as a private shareholders' bank, then it was nationalized in 1949,
and it became fully owned by the Government of India. It draws its powers and
responsibilities through other legislations also such as the Banking Regulation
Act, 1949. The RBI has over the years been responding to changing economic
circumstances and these organizational developments.

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.

1. Bank of Issue
The Bank has the sole right to issue bank notes of all denominations. The
Reserve Bank has a separate Issue Department which is entrusted with the issue
of currency notes.

2. 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

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helps the Government - both the Union and the States to float new loans and to
manage public debt.

3. Bankers' Bank and Lender of the Last Resort

The 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.

4. Controller of Credit

The 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.

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

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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.

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.

The Banking Ombudsman Scheme provides a forum to bank customers to

seek redressal of their most common complaints against banks, including those
relating to credit cards, service charges, promises given by the sales agents of
banks, but not kept by banks, as also, delays in delivery of bank services, non-
payment or delay in payments or collection of cheques towards bills or
remittances by banks, as also non-acceptance of small denomination notes and
coins or charging of commission.

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1.7 Nationalization of Banks

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi
the then prime minister. It nationalized 14 banks then. Majority of the banks
were mostly owned by businessmen and even managed by them.

Before the steps of nationalization of Indian banks, only State Bank of India
(SBI) was nationalized. It took place in July 1955 under the SBI Act of 1955.
Nationalization of Seven State Banks of India (formed subsidiary) took place
on 19th July, 1960. The State Bank of India is India's largest commercial bank
and is ranked one of the top five banks worldwide. It serves 90 million
customers through a network of 9,000 branches and it offers -- either directly or
through subsidiaries –a wide range of banking services.

The second phase of nationalization of Indian banks took place in the year
1980. Seven more banks were nationalized with deposits over 200 crores. Till
this year, approximately 80% of the banking segment in India was under
Government ownership. After the nationalization of banks in India, the
branches of the public sector banks rose to approximately 800% in deposits and
advances took a huge jump by 11,000%.

➢ 1955: Nationalization of State Bank of India.

➢ 1959: Nationalization of SBI subsidiaries.

➢ 1969: Nationalization of 14 major banks.

➢ 1980: Nationalization of seven banks with deposits over 200 crores.

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The need for the nationalization was felt mainly because private commercial
banks were not fulfilling the social and developmental goals of banking which
are so essential for any industrializing country. Despite the enactment of the
Banking Regulation Act in 1949 and the nationalization of the largest bank, the
State Bank of India, in 1955, the expansion of commercial banking had largely
excluded rural areas and small-scale borrowers. The stated purpose of bank
nationalization was to ensure that credit allocation occur in accordance with
plan priorities. Currently there are 27 nationalized commercial banks.

Objectives of Nationalization of Banks

➢ To control the commercial heights of the economy

➢ To extend banking facilities to unbanked and under banked centres,

especially in rural areas

➢ To ensure an increased flow of assistance to the neglected sectors

➢ To foster the growth of new and progressive entrepreneurs

Consequences of Nationalization
➢ The quality of credit assets fell because of liberal credit extension
➢ Political interference has been as additional malady.
➢ Poor appraisal involved during the loan meals conducted for credit
➢ The credit facilities extended to the priority sector at concessional

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➢ The high level of low yielding SLR investments adversely affected

the profitability of the banks.
➢ The rapid branch expansion has been the squeeze on profitability of
banks emanating primarily due to the increase in the fixed costs.
➢ There was downward trend in the quality of services and efficiency
of the banks.

List of Nationalized Banks

1. Andhra Bank 15.Punjab and Sind Bank

2. Bank of Baroda 16.Punjab National Bank

3. Bank of India 17.State Bank of Bikaner & Jaipur

4. Bank of Maharashtra 18.State Bank of Hyderabad

5. Canara Bank 19.State Bank of India (SBI)

6. Central Bank of India 20.State Bank of Indore

7. Corporation Bank 21.State Bank of Mysore

8. Dena Bank 22.State Bank of Patiala

9. Indian Bank 23.State Bank of Saurashtra

10. Indian Overseas Bank 24.State Bank of Travancore

11. Oriental Bank of Commerce 25.UCO Bank

12. Syndicate Bank 26.Union Bank of India

13. IDBI Bank 27.United Bank of India

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14. Vijaya Bank

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1.8 Liberalization of Banks

In the early 1990s, the then Narsimha Rao government embarked on a policy of
liberalization, licensing a small number of private banks. These came to be
known as New Generation tech-savvy banks, and included Global Trust Bank
(the first of such new generation banks to be set up), which later amalgamated
with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank
and HDFC Bank. This move, along with the rapid growth in the economy of
India, revitalized the banking sector in India, which has seen rapid growth with
strong contribution from all the three sectors of banks, namely, government
banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed
relaxation in the norms for Foreign Direct Investment, where all Foreign
Investors in banks may be given voting rights which could exceed the present
cap of 10%, at present it has gone up to 49% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this
time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at
4) of functioning. The new wave ushered in a modern outlook and tech-savvy
methods of working for traditional banks. All this led to the retail boom in
India. People not just demanded more from their banks but also received more.

Currently, banking in India is generally fairly mature in terms of supply,

product range and reach-even though reach in rural India still remains a
challenge for the private sector and foreign banks. In terms of quality of assets
and capital adequacy, Indian banks are considered to have clean, strong and
transparent balance sheets relative to other banks in comparable economies in

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its region. 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 but without any fixed exchange rate-and this has
mostly been true.

With the growth in the Indian economy expected to be strong for quite some
time-especially in its services sector-the demand for banking services,
especially retail banking, mortgages and investment services are expected to be
strong. One may also expect M&A’s, takeovers, and asset sales.

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1.9 Privatization of Banks

In many ways, India provides an excellent testing ground for hypotheses about
privatization and its impact, except that so far privatization has not been
attempted on a scale that researchers would like to see. The country has a large,
well diversified public sector. Unlike many of the transition economies, it also
has a long tradition of private enterprise, including big companies in the private
sector, although there are certain sectors in which private sector participation is
quite new, these sectors having been reserved until recently for the public

Privatization in India generally goes by the name of ‘disinvestment’ or

‘divestment’ of equity. This is because privatization has thus far not meant
transfer of control or even of controlling interest from government to anybody
else. The government has sold stakes ranging from one per cent to 40% in 40
PSUs, but in no company has its stake fallen below the magic figure of 51%
which is seen as conferring controlling interest.

The privatization program is itself relatively new to the country. It is part of an

ambitious process of economic reforms covering industry, trade, the financial
sector and agriculture and also involving a program of macro-economic
stabilization focused on the federal budget, which commenced in 1991.
Privatization is seen necessary in order to enable firms in the public sector to
compete and survive in the new environment.
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Disinvestment opens the gate for eventual privatization and this route must be
opposed. Instead, the alternative of issuing of bonds and preference shares
should be encouraged. No individual or institution should be permitted to hold
beyond 5 percent of the shares. Already foreign institutional investors are
holding sizeable shares in public sector banks as also in the major new private
sector Indian banks.

In order to finance the private industrial and business activity, a network of

development banking and financial institutions has been organized by the
Government which are as follows:

➢ Industrial Finance Corporation of India (IFCI)

➢ Industrial Credit and Investment Corporation of India (ICICI)
➢ Industrial Development Bank of India (IDBI)
➢ State Finance Corporation
➢ EXIM (Export Import) Bank
➢ Small Industries Development Bank of India (SIDBI)
➢ Unit trust of India (UTI)
➢ Nationalized Banks
➢ Co-operative banking institutions

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Name of the Bank No. of Shares % to Paid up No. of Shares % to Paid

As on Capital As on up Capital

31.03.2006 31.03.2008
Andhra Bank 2,15,77,223 5.39 8,40,30,646 17.32
Bank of Baroda 4,75,40,615 16.14 73,33,56,892 20.13
Bank of India 2,37,64,900 4.86 6,44,68,034 13.19
Canara Bank 4,36,00,569 10.63 7,49,35,787 18.27
Corporation Bank 1,10,83,135 7.72 1,44,47,387 10.07
Indian Overseas 11,31,795 0.20 9,49,49,445 17.42
Oriental Bank of 2,53,75,968 13.17 4,97,68,926 19.86
Punjab National 2,96,25,795 11.16 6,32,47,778 20.00
State Bank of India 6,01,97,755 11.43 6,25,03,693 11.87
Syndicate Bank 36,83,407 0.78 6,37,89,100 13.51
UCO Bank 6,25,000 0.07 1,45,71,873 1.82

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Union Bank 5,39,07,074 11.71 10,06,13,918 19.91

Vijaya Bank 2,19,71,273 5.06 6,94,62,629 16.02

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1.10 Globalization of Banks

Publicly owned banks handle more than 80% of the banking business in India
and the rest is in the hands of private sector banks. However, banking in both
the government and private sector is being revolutionized by this latest
phenomenon called globalization. Globalization has offered a number of
advantages to the banking sector in India.

Remarkable advancements in communication and information technology have

facilitated the globalization of these domestic banks. Apart from the benefits,
several risks are also associated with the opportunities made available by

In order to fortify the Indian baking sector against the risks involved in
globalization, appropriate regulatory, prudential and supervisory framework
need to be adopted. This will help in strengthening the domestic banking
system in a global-environment.

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1.11 Banking Sector Reforms 1999-2000

In the five decades since independence, banking in India has evolved through
four distinct phases. During Fourth phase, also called as Reform Phase,
Recommendations of the Narasimham Committee (1991) paved the way for the
reform phase in the banking. Important initiatives with regard to the reform of
the banking system were taken in this phase. Important among these have been
introduction of new accounting and prudential norms relating to income
recognition, provisioning and capital adequacy, deregulation of interest rates &
easing of norms for entry in the field of banking.

Major Reform Initiatives:

Some of the major reform initiatives in the last decade that have changed the
face of the Indian banking and financial sector are:

 Interest rate deregulation. Interest rates on deposits and lending have been
deregulated with banks enjoying greater freedom to determine their rates. On
the deposit side, interest rates on all deposits, except savings accounts, have
been de-regulated. Similarly, on the bank lending, rates to be charged by the
banks on most of the credit facilities have been deregulated except a small
component for lending related to certain segments.
 Adoption of prudential norms in terms of capital adequacy, asset
classification, income recognition, provisioning, and exposure limits,
investment fluctuation reserve, etc.
 Reduction in pre-emption – lowering of reserve requirements (SLR and
CRR), thus releasing more lendable resources which banks can deploy

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 Government equity in banks has been reduced and strong banks have been
allowed to access the capital market for raising additional capital.
 Banks now enjoy greater operational freedom in terms of opening and
swapping of branches, and banks with a good track record of profitability have
greater flexibility in recruitment.
 New private sector banks have been set up and foreign banks permitted to
expand their operations in India including through subsidiaries. Banks have
also been allowed to set up Offshore banking Units in Special Economic Zones.
 New areas have been opened up for bank financing: insurance, credit
cards, infrastructure financing, leasing, gold banking besides of course
investment banking asset management, factoring, etc.
 New instruments have been introduced for greater flexibility and better
risk management: e.g. interest rate swaps, forward rate agreements, cross
currency forward contracts, forward cover to hedge inflows under foreign direct
investment, liquidity adjustment facility for meeting day-to-day liquidity
 Several new institutions have been set up including the National Securities
Depositories Ltd., Central Depositories Services Ltd., Clearing Corporation of
India Ltd., Credit Information Bureau India Ltd.
 Limits for investment in overseas markets by banks, mutual funds and
corporate have been liberalised. The overseas investment limit for corporate has
been raised to 100% of net worth and the ceiling of $100 million on
prepayment of external commercial borrowings has been removed. Indians are
allowed to maintain resident foreign currency (domestic) accounts. Full
convertibility for deposit schemes of NRIs introduced.

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 Universal banking has been introduced. With banks permitted to diversify

into long-term finance and DFIs into working capital, guidelines have been put
in place for the evolution of universal banks.
 Technology infrastructure for the payments and settlement system in the
country has been strengthened with electronic funds transfer, Centralised Funds
Management System, Structured Financial Messaging Solution, Negotiated
Dealing System and move towards Real Time Gross Settlement.
 Adoption of global standards. Prudential norms for capital adequacy, asset
classification, income recognition and provisioning are now close to global
standards. RBI has introduced Risk Based Supervision of banks (against the
traditional transaction based approach).
 Credit delivery mechanism has been reinforced to increase the flow of
credit to priority sectors through focus on micro credit and Self Help Groups.
The definition of priority sector has been widened to include food processing
and cold storage, software upto Rs 1 crore, housing above Rs. 10 lakh, selected
lending through NBFCs, etc.
 RBI guidelines have been issued for putting in place risk management
systems in banks. Risk Management Committees in banks address credit risk,
market risk and operational risk.
 The limit for foreign direct investment in private banks has been increased
from 49% to 74% and the 10% cap on voting rights has been removed. In
addition, the limit for foreign institutional investment in private banks is 49%.
 Wide ranging reforms have been carried out in the area of capital markets.
Fresh investment in CPs, CDs are allowed only in dematerialised form.

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Impact on performance of banks

There is no doubt that banking sector reforms have increased the profitability,
productivity and efficiency of banks. There has been an improvement in overall
capital adequacy of banks and as on March 31, 2002 92 out of 97 commercial
banks operating in India had capital adequacy above the statutory minimum
level of 9%. Introduction of prudential norms relating to asset classification,
income recognition and the most significant achievement of the financial sector
reforms has been the marked improvement in the financial health of
commercial banks in terms of capital adequacy, profitability and asset quality
as also greater attention to risk management. Further, deregulation has opened
up new opportunities for banks to increase revenues by diversifying into
investment banking, insurance, credit cards, depository services, mortgage
financing, securitisation, etc. At the same time, liberalisation has brought
greater competition among banks, both domestic and foreign, as well as
competition from mutual funds, NBFCs, post office, etc

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1.12 Narasimham Committee Report- I

In August 1991, the Government of India appointed a committee to review the

financial system under the Chairmanship of Sri M Narasimham, former
Governor of the Reserve Bank of India to examine all aspects relating to the
structure, organization and functioning of the financial system. The
Committee’s report was tabled in Parliament on December 17, 1991.

The main recommendations of the committee were the following:

i. Phased reduction of Statutory Liquidity Ration (SLR) to 25 per cent over

a period of five years.

ii. Progressive reduction in Cash Reserve Ratio (CRR).

iii. Phasing out of directed credit programmes and redefinition of the priority

iv. Deregulation of interest rates so as to reflect emerging market conditions.

v. Stipulation of minimum capital adequacy ratio of 4 per cent to risk

weighted assets by March 1993, 8 per cent by March 1996, and 8 per cent by
those banks having international operations by March 1994.

vi. Adoption of uniform accounting practices in regard to income

recognition, asset classification and provisioning against bad and doubtful

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vii. Imparting transparency to bank balance sheets and making full


viii. Setting up of special tribunals to speed up the process of recovery of


ix. Setting up of Asset Reconstruction Fund (ARF) to take over from banks
a portion of their bad and doubtful advances at a discount.

x. Restructuring of the Banking System so as to have three or four large

banks which could become international in character, 8 to 10 national banks
and local banks confined to specific regions and rural banks including RRBs
confined to rural areas.

xi. Setting up one or more rural banking subsidiaries by public sector banks.

xii. Permitting RRBs to engage in all types of banking business.

xiii. Abolition of branch licensing.

xiv. Liberalizing the policy with regard to allowing foreign banks to open
offices in India.

xv. Rationalization of foreign operations of Indian Banks.

xvi. Giving freedom to individual banks to recruit officers.

xvii. Inspection by supervisory authorities based essentially on the internal

audit and inspection reports.

xviii. Ending duality of control over banking system by Banking division and

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xix. A separate authority for supervision of banks and financial institutions

which would be a semi-autonomous body under RBI.

xx. A revised procedure for selection of Chief Executives and Directors on

Boards of Public Sector Banks.

xxi. Segregation of direct lending functions of IDBI to a separate institution.

xxii. Obtaining resources from the market on competitive terms by DFIS.

The committee also recommended proper sequencing of reform of financial


A critical review of the recommendations

The possible impact of these diverse recommendations can now be studied:

a. The lowering of reserve rates will enable banks to enlarge their credit
portfolio thus improving their profits.

b. Relaxation of regulations with respect to licensing will enable banks to

open branches in potential centres freely and as an incentive for better

c. Deregulation of interest rates will enable a competitive environment to

grow and provide for efficiency of the Banking System.

d. Effective supervision of the Banking System through off-site surveillance

and on-site supervision through the new wing of the Reserve Bank of India
under Department of Supervision.

e. Prudential Norms to enable a better and transparent accounting system

for the banks.

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f. Setting up of recovery tribunals will help reduce the non-performing

assets in the banking system.

g. Capital Adequacy Measures will strengthen the banking system.

In short, the recommendations are aimed at strengthening the banking system

so as to enable it to take on its foreign counterparts ably in the wake of
increasing globalization and integration with the world economy.

1.13 Narasimham Committee- II

This Committee is also called the “Committee on Banking Sector Reforms”

and was appointed by Central Government and was headed by Shri M.
Narasimham. This Committee submitted its report on 23.4.1988.


1. Three Tier Banking: There should be three types of banks: ( i ) Two or three
large Indian Banks with international character; ( ii ) Eight or Ten large
National Banks to take care of the needs of large/medium corporate sector, and
(iii ) Large or Local Area/ Regional Banks to serve local trade, small industry
and agriculture.

2. Universal Banking: The distinction between Development Finance

Institutions and commercial banks should disappear paving the way for
universal banking. DFIs should also give working capital finance while
commercial banks term loans.

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3. Narrow Banking: Week banks whose accumulated losses and net NPAs
exceed their capital funds can be rehabilitated by branding them as “Narrow
Banks” (banks which restrict their operation to only certain activities).

4. Mergers: Merger among the banks to be encouraged especially among the

strong banks to obtain “Force Multiplier Effect”.

5. Govt. Holding in Banks: Govt. holding in banks should be reduced to 33%

The Govt. should not disinvest its capital. The capital should be increased by
market subscription to bring down the Govt. holding to 33%.

6. Capital Adequacy Requirement: The Capital Adequacy ratio should be

increased from existing 8% to 9% by 2000 AD. And to 10% by 2002. ( Since
accepted) The start up capital for new private banks be increased.

7. Asset Classification: An account should be classified as NPA if interest or

installment is not serviced for a period of 90 days.

8. Provision Requirement: Banks should make general provision of 1% on their

standard assets.

9. Autonomy to Banks: Functional autonomy should be given to the banks. The

appointment of M.D. / Chairman should be left to the Board of the banks.

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10. Recruitment Policy: The recruitment procedure and remuneration policies

should be changed to attract specialized officers.

11. Other Recommendation:

(a) To revamp existing banking laws, particularly RBI Act, BR Act , SICA, etc;
(b) Setting up of ARC ( Asset Reconstruction Fund for bank NPAs;
(c) Segregating regulatory & supervisory function of RBI;
(d) RBI should become a regulator and maintain arms length form banks. No RBI
nominee in Boards of Banks;
(e) Autonomy Status for Board for Financial Supervision ;
(f) Professionalization of Bank Boards;
(g) Thrust on technology up gradation.

1.14 Universal Banking

Universal Banking is a multi-purpose and multi-functional financial

supermarket (a company offering a wide range of financial services e.g. stock,
insurance and real-estate brokerage) providing both banking and financial
services through a single window.

Definition of Universal Banking: As per the World Bank, "In Universal

Banking, large banks operate extensive network of branches, provide many
different services, hold several claims on firms(including equity and debt) and
participate directly in the Corporate Governance of firms that rely on the
banks for funding or as insurance underwriters".

In a nutshell, a Universal Banking is a superstore for financial products under

one roof. Corporate can get loans and avail of other handy services, while can

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deposit and borrow. It includes not only services related to savings and loans
but also investments.

However in practice the term 'universal banking' refers to those banks that offer
a wide range of financial services, beyond the commercial banking functions
like Mutual Funds, Merchant Banking, Factoring, Credit Cards, Retail loans,
Housing Finance, Auto loans, Investment banking, Insurance etc. This is most
common in European countries.

For example, in Germany commercial banks accept time deposits, lend money,
underwrite corporate stocks, and act as investment advisors to large
corporations. In Germany, there has never been any separation between
commercial banks and investment banks, as there is in the United States.

1.14.1 The Concept of Universal Banking

The entry of banks into the realm of financial services was followed very soon
after the introduction of liberalization in the economy. Since the early 1990s
structural changes of profound magnitude have been witnessed in global
banking systems. Large scale mergers, amalgamations and acquisitions between
the banks and financial institutions resulted in the growth in size and
competitive strengths of the merged entities. Thus, emerged new financial
conglomerates that could maximize economies of scale and scope by building
the production of financial services organization called Universal Banking.

By the mid-1990s, all the restrictions on project financing were removed and
banks were allowed to undertake several in-house activities. Reforms in the
insurance sector in the late 1990s, and opening up of this field to private and

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foreign players also resulted in permitting banks to undertake the sale of

insurance products. At present, only an 'arm's length relationship between a
bank and an insurance entity has been allowed by the regulatory authority, i.e.
IRDA (Insurance Regulatory and Development Authority).

The phenomenon of Universal Banking as a distinct concept, as different from

Narrow Banking came to the forefront in the Indian context with the
Narsimham Committee (1998) and later the Khan Committee (1998) reports
recommending consolidation of the banking industry through mergers and
integration of financial activities.

1.14.2 Universal Banking – Pros and Cons

The solution of Universal Banking was having many factors to deal with, which
can be further analyzed by the pros and cons.

Advantages of Universal Banking

• Economies of Scale. The main advantage of Universal Banking is that it results

in greater economic efficiency in the form of lower cost, higher output and
better products. Many Committees and reports by Reserve Bank of India are in
favour of Universal banking as it enables banks to exploit economies of scale
and scope.

• Profitable Diversions. By diversifying the activities, the bank can use its
existing expertise in one type of financial service in providing other types. So,
it entails less cost in performing all the functions by one entity instead of
separate bodies.
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• Resource Utilization. A bank possesses the information on the risk

characteristics of the clients, which can be used to pursue other activities with
the same clients. A data collection about the market trends, risk and returns
associated with portfolios of Mutual Funds, diversifiable and non diversifiable
risk analysis, etc, is useful for other clients and information seekers.
Automatically, a bank will get the benefit of being involved in the researching

• Easy Marketing on the Foundation of a Brand Name. A bank's existing

branches can act as shops of selling for selling financial products like
Insurance, Mutual Funds without spending much efforts on marketing, as the
branch will act here as a parent company or source. In this way, a bank can
reach the client even in the remotest area without having to take resource to an

• One-stop shopping. The idea of 'one-stop shopping' saves a lot of transaction

costs and increases the speed of economic activities. It is beneficial for the bank
as well as its customers.

• Investor Friendly Activities. Another manifestation of Universal Banking is

bank holding stakes in a form: a bank's equity holding in a borrower firm, acts
as a signal for other investor on to the health of the firm since the lending bank
is in a better position to monitor the firm's activities.

Disadvantages of Universal Banking

• Grey Area of Universal Bank. The path of universal banking for DFIs is strewn
with obstacles. The biggest one is overcoming the differences in regulatory
requirement for a bank and DFI. Unlike banks, DFIs are not required to keep a
portion of their deposits as cash reserves.

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• No Expertise in Long term lending. In the case of traditional project finance,

an area where DFIs tread carefully, becoming a bank may not make a big
difference to a DFI. Project finance and Infrastructure finance are generally
long- gestation projects and would require DFIs to borrow long- term.
Therefore, the transformation into a bank may not be of great assistance in
lending long-term.

• NPA Problem Remained Intact. The most serious problem that the DFIs have
had to encounter is bad loans or Non-Performing Assets (NPAs). For the DFIs
and Universal Banking or installation of cutting-edge-technology in operations
are unlikely to improve the situation concerning NPAs.

1.14.3 Universal Banking in India

In India Development financial institutions (DFIs) and refinancing institutions

(RFIs) were meeting specific sect oral needs and also providing long-term
resources at concessional terms, while the commercial banks in general, by and
large, confined themselves to the core banking functions of accepting deposits
and providing working capital finance to industry, trade and agriculture.
Consequent to the liberalization and deregulation of financial sector, there has
been blurring of distinction between the commercial banking and investment

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Reserve Bank of India constituted on December 8, 1997, a Working Group

under the Chairmanship of Shri S.H. Khan to bring about greater clarity in the
respective roles of banks and financial institutions for greater harmonization of
facilities and obligations. Also report of the Committee on Banking Sector
Reforms or Narasimham Committee (NC) has major bearing on the issues
considered by the Khan Working Group.

The issue of universal banking resurfaced in Year 2000, when ICICI gave a
presentation to RBI to discuss the time frame and possible options for
transforming itself into a universal bank. Reserve Bank of India also spelt out to
Parliamentary Standing Committee on Finance, its proposed policy for
universal banking, including a case-by-case approach towards allowing
domestic financial institutions to become universal banks. Now RBI has asked
FIs, which are interested to convert itself into a universal bank, to submit their
plans for transition to a universal bank for consideration and further
discussions. FIs need to formulate a road map for the transition path and
strategy for smooth conversion into a universal bank over a specified time
frame. The plan should specifically provide for full compliance with prudential
norms as applicable to banks over the proposed period.



2.1 Core Banking Solutions

Core Banking Solutions (CBS) or Centralised Banking Solutions is the process

which is completed in a centralized environment i.e. under which the
information relating to the customer’s account (i.e. financial dealings,
profession, income, family members etc.) is stored in the Central Server of the
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bank (that is available to all the networked branches) instead of the branch
server. Depending upon the size and needs of a bank, it could be for the all the
operations or for limited operations. This task is carried through advanced
software by making use of the services provided by specialized agencies. Due
to its benefits, a no. of banks in India in recent years have taken steps to
implement the CBS with a view to build relationship with the customer based
on the information captured and offering to the customer, the customised
financial products according to their need.

Advantages for Customer:

➢ Transaction of business from any branch,

➢ Lower incidence of errors. Hence accuracy in transactions.
➢ Better funds management due to immediate availability of funds.

For Banks:

➢ Standardisation of process within the bank.

➢ Better customer service leading to retention of customer and increased
customer traffic.
➢ Availability of accurate data & Better use of available infrastructure.

Following are some of the CORE BANKING SERVICES provided by public

sector banks.

1. Internet Banking

The total number of registered users for Internet banking in India is over two
million. But this figure needs to be adjusted for dormant users and multiple
accounts (a user having accounts with more than one bank). India has a little

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less than a million active Internet banking users. Thus indicating that, the
concept of Internet banking is surely catching on.

India lags behind other countries in Internet banking. In the US, the number of
commercial banks with transactional websites is 1,275 or 12 percent of the total
number of banks. Of these, seven could be called ‘virtual banks.’

From the Asian market experience, it is clear that Internet banking is here to
stay and will be a major channel to acquire and service customers. Markets like
Korea and Singapore have nearly 10 percent of their population banking over
the Internet.

The Indian saga

Indian banks have an insignificant Internet banking record. ICICI Bank kicked
off online banking way back in 1996 and a host of other banks soon followed
suit. But even for the Internet as a whole, 1996 to 1998 marked the adoption
phase, while usage increased only in 1999 due to lower ISP online charges,
increased PC penetration and a tech-friendly atmosphere.

Concept of Internet banking is more like an add-on service which the customers
should gradually adopt. In line with this strategy, initially the Net banking
facility was provided in order to meet the information requirements of the
customers and gradually it ventured into fund transfers and third party transfers.

The PSU lethargy

As in all forms of technology innovations, PSU banks have remained laggards

in the race for adopting Internet banking practices. There are very few
nationalized banks like State Bank of India, Bank of Baroda, Allahabad Bank,
Syndicate Bank and Bank of India that offer Internet banking services. Some
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others like Union Bank of India, Canara Bank and Punjab National Bank are on
the verge of doing so. SBI’s Internet banking initiative, launched in July 2001,
is in fact doing quite well and has over 18,000 registered customers across 150

2. Automatic Teller Machine

The introduction of ATM’s has given the customers the facility of round the
clock banking. The ATM’s are used by banks for making the customers dealing
easier. ATM card is a device that allows customer who has an ATM card to
perform routine banking transaction at any time without interacting with human
teller. It provides exchange services. This service helps the customer to
withdraw money even when the banks are closed. This can be done by inserting
the card in the ATM and entering the Personal Identification Number and secret
Password. ATM’s are currently becoming popular in India that enables the
customer to withdraw their money 24 hours a day and 365 days. It provides the
customers with the ability to withdraw or deposit funds, check account
balances, transfer funds and check statement information. The advantages of
ATM’s are many. It increases existing business and generates new business.

It allows the customers:

➢ To transfer money to and from accounts.
➢ To view account information.
➢ To receive cash.

Advantages of ATM’s:

To the Customers

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➢ ATM’s provide 24 hrs. 7 days and 365 days a year service.

➢ Service is quick and efficient
➢ Privacy in transaction
➢ Wider flexibility in place and time of withdrawals.
➢ The transaction is completely secure – you need to key in Personal
Identification Number (Unique number for every customer).

To Banks
➢ Alternative to extend banking hours.
➢ Crowding at bank counters considerably reduced.
➢ Alternative to new branches and to reduce operating expenses.
➢ Relieves bank employees to focus on more analytical and innovative
➢ Increased market penetration.

ATM’s can be installed anywhere like Airports, Railway Stations, Petrol

Pumps, Big Business arcades, markets, etc. Hence, it gives easy access to the
customers, for obtaining cash. The ATM services was provided first by the
foreign banks like Citibank, Grind lays bank and now by many private and
public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc.
The ICICI has launched ATM Services to its customers in all the Metropolitan
Cities in India.
By the end of 1990 Indian Private Banks and public sector banks have come up
with their own ATM Network in the form of “SWADHAN”. Over the past year
upto 44 banks in Mumbai, Vashi and Thane, have became a part of
“SWADHAN” a system of shared payments networks, introduced by the Indian
Bank Association (IBA).
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3. Mobile Banking
Mobile Banking (also known as M-Banking or SMS Banking) is a term used
for performing balance checks, account transactions, payments, etc., via a
mobile device such as a mobile phone. It was Internet Banking, which ushered
in a new era in banking convenience by bringing the entire operations to the
computer, and now mobile banking promises to take it to the next level.

Mobile Banking addresses this fundamental limitation of Internet Banking, as it

reduces the customer requirement to just a mobile phone. Mobile usage has
seen an explosive growth in most of the Asian economies like India, China and
Korea. The main reason that Mobile Banking scores over Internet Banking is
that it enables 'Anywhere Anytime Banking'.

Mobile banking has been at the threshold of a revolution for some time. While
many operators, as well as banks, had introduced mobile banking applications,
it never became popular due to security concerns. The number of people using
mobile banking services has jumped from under 10,000 to 120,000 in two
years. While the trend is growing, lack of awareness of services, apart from
perceived security issues are inhibiting faster take-off.

Reserve Bank of India has set-up the Mobile Payments Forum of India
(MPFI), a 'Working Group on Mobile Banking' to examine different aspects of
Mobile Banking (M-banking).

The Group had focused on three major areas of M-banking, i.e.

(i) Technology and security issues,

(ii) Business issues and

(iii) Regulatory and supervisory issues.

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Various Mobile Banking Services to the Consumers

Banks offering mobile access are mostly supporting some or all of the
following services:

Account Information

➢ Mini-statements and checking of account history

➢ Alerts on account activity or passing of set thresholds

➢ Monitoring of term deposits

➢ Access to loan statements

➢ Access to card statements

➢ Mutual funds / equity statements

➢ Insurance policy management

➢ Pension plan management

Payments & Transfers

➢ Domestic and international fund transfers

➢ Mobile re-charging

➢ Commercial payment processing

➢ Bill payment processing


➢ Portfolio management services

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➢ Real-time stock quotes

➢ Personalized alerts and notifications on security prices


➢ Status of requests for credit, including mortgage approval, and insurance


➢ Check (cheque) book and card requests

➢ Exchange of data messages and e-mail, including complaint submission and


Content Services

➢ General information such as weather updates, news

➢ Loyalty-related offers

➢ Location-based services

4. Telebanking

Telebanking refers to banking on phone services. A customer can access

information about his/her account through a telephone call and by giving the
coded Personal Identification Number (PIN) to the bank. Telebanking is
extensively user friendly and effective in nature.

Telebanking offers the following services to its customers:

➢ To get a particular work done through the bank, the users may leave his
instructions in the form of message with bank.

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➢ Facility to stop payment on request. One can easily know about the cheque
➢ Information on the current interest rates.
➢ Information with regard to foreign exchange rates.
➢ Request for a DD or pay order.
➢ Demat Account related services.
➢ And other similar services.

5. Multi City Cheque

"Multi City Cheque" or MCC is a facility wherein the customer can issue
cheques drawn at the base branch and payable at any branch at remote centre.
These cheques will be treated as local cheques at the remote branch. There will
be no collection charges and the credit will be given on the same day, as
applicable to local cheques. Even if the cheque is dropped at any other bank
other than the base bank, there will not be any collection charges. For example,
if Mr. A is paid a Multi city cheque by Mr. B at SBI branch in Delhi, Mr. A can
drop the same at any bank in Mumbai where he holds an account, and there will
not be any collection charges.
6. Credit Card
The credit card can be defined as a small plastic card that allows its holder to
buy goods and services on credit and to pay at fixed intervals through card
issuing agency. The credit card releases the customers form botheration of
carrying cash and ensures safety.

A person who earns a salary of Rs 60,000 per annum is eligible for card. A
reference from a banker and the employers of the applicant is insisted upon.

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7. Debit Card
Debit cards will offer direct withdrawal of funds from a customer’s bank
account. The spending limit is determined by the user’s bank depending upon
available balance in the account of the user. It is a special plastic card connected
with electromagnetic identification that one can use to pay for things purchased
directly from its bank account. Under the system, cardholder’s accounts are
immediately debited against purchase or service to the computer network.
Hence, under debit card the card holder must have adequate balance in his
account. The system is intended to replace cheque system of payment. These can
be maintained only for customers maintaining satisfactory accounts and for a
minimum period of 6 months.

8. Demat Account
In India, a demat account, the abbreviation for dematerialised account, is a type
of banking account which dematerializes paper-based physical stock shares.
The dematerialised account is used to avoid holding physical shares: the shares
are bought and sold through a stock broker.

This account is popular in India. The Securities and Exchange Board of India
(SEBI) mandates a demat account for share trading above 500 shares. As of
April 2006, it became mandatory that any person holding a demat account
should possess a Permanent Account Number (PAN),

1. Fill demat request form (DRF) (obtained from a depository participant or DP

with the customer’s depository account is opened).

2. Deface the share certificate(s) customer wants to dematerialise by writing

across Surrendered for dematerialisation.

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3. Submit the DRF & share certificate(s) to DP. DP would forward them to the
issuer / their R&T Agent.

4. After dematerialisation, customer’s depository account with DP would be

credited with the dematerialised securities.


➢ A safe and convenient way to hold securities;

➢ Immediate transfer of securities;

➢ No stamp duty on transfer of securities;

➢ Elimination of risks associated with physical certificates such as bad

delivery, fake securities, delays, thefts etc.;

➢ Reduction in paperwork involved in transfer of securities;

➢ Reduction in transaction cost;

➢ Nomination facility.

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2.2 Payment and Settlement Systems

In recent years, alternate money transmission avenues, especially the
development of electronic money schemes, have been gaining currency. While
electronic money has the potential to take over from cash for making small-
value payments, making such transactions are becoming easier and cheaper for
both consumers and merchants. This raises policy issues for central banks in its
role as the guardian of the payment network and implementer of the monetary
policy. The emergence of peer-to-peer money transmission mechanisms poses a
challenge to current role of banks as gatekeepers to traditional payment
systems. Robust payment systems, therefore, are a key requirement in
maintaining and promoting financial stability with technology playing both a
facilitating and disruptive role in them.

Reserve Bank’s initiatives for electronic payments and banking

As part of its public policy objective of promoting a safe, secure, sound and
efficient payment system, the Reserve Bank has taken several initiatives to
develop and promote electronic payments infrastructure. Towards this end, the
RBI introduced the following:

a. Electronic Clearing Service (ECS).

b. Electronic Funds Transfer (EFT) system.
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c. Real Time Gross Settlement (RTGS) system.

d. National Electronic Funds Transfer (NEFT).
e. Cheque Truncation System (CTS).

a. Electronic Clearing Service (ECS)

With a view to upgrading our payment system to the international standards,

the Reserve Bank took the initiative and set up Electronic Clearing Service in
India, in the mid 1990s, which is the counterpart of the automated clearing
house (ACH) system in certain other countries. It has two variants –

ECS - Credit Clearing and ECS - Debit Clearing.

While the Credit Clearing operates on the principle of ‘single debit-multiple

credits’ and is used for making payment of salary, pension, dividend and
interest, etc.

The Debit Clearing functions on the principle of ‘single credit-multiple debits’

and is used for collecting payments by utility service providers like electricity,
telephone bills as well by banks for receiving principal / interest repayments for
housing and personal loans from the borrowers.

At present, about 18 million transactions flow through the ECS system every
month. This facility is currently available at 70 centers in the country.

b. Real Time Gross Settlement System

The payment system in the country largely follows the deferred net settlement
regime, under which the net amount is settled between the banks, on a deferred

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basis. Such a dispensation entails an element of settlement risk. Hence, as a step

towards risk mitigation in the large value payment systems, the RTGS was
operationalised by the RBI in March 2004, which enables settlement of
transactions in real time, on a gross basis. Almost all the inter-bank transactions
in the country and many time-critical customer transactions are now settled
through this system.

RTGS is fully secured electronic funds transfer system where banks and
customers can receive payments on real time basis. The outreach of RTGS
transactions has also grown geographically. Out of about 75,000 bank branches
in the country, more than 48,300 bank branches now accept requests for
remittance through RTGS system for customer transactions as well as inter-
bank transactions.

A minimum threshold of rupees one lakh has been prescribed for customer
transactions to ensure that RTGS system is used only for large value
transactions and retail transactions take an alternate channel of electronic funds
transfer. The daily average of transactions is over 34,000 by volume and over
Rs.2 lakh crore by value.

The RBI also provides collateralised Intra-Day-Liquidity (IDL) support to the

member banks for the RTGS operations.

c. National Electronic Fund Transfer:

The NEFT was launched by the RBI in November 2005 as a more secure,
nation-wide retail electronic payment system to facilitate funds transfer by the
bank customers, between the networked bank branches in the country. It has,
however, been observed that the public sector banks are not the most active

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users of this product and the majority of NEFT outward transactions are
originated by a few new-generation private sector banks and foreign banks.

For instance, in June 2008, while these banks, as a segment, accounted for a
little over 43 per cent each of the aggregate volume of outward and inward
NEFT transactions, the share of public sector banks in total outward NEFT
transactions was rather low at a little over 12 per cent, of which half the volume
was the contribution of the State Bank of India.

The RBI has been pursuing the matter with the PSBs for increasing their
participation in the NEFT system in terms of the number of NEFT-enabled
branches and the number of NEFT transactions originated by them. I would like
to urge upon the bankers present here to initiate appropriate measures to
stimulate greater usage of this payment medium and thereby, improve their
share in this regard.

In order to popularise the e-payments in the country, the RBI, on its part, has
waived the service charges to be levied on the member banks, till March 31,
2009, in respect of the RTGS and NEFT transactions. The RBI also provides,
free of charge, intra-day liquidity to the banks for the RTGS transactions. The
service charges to be levied by banks from their customers for RTGS & NEFT
have, however, been deregulated and left to discretion of the individual bank.
While some of the banks have rationalized their service charges and a few have
made it even cost-free to the customers, there are also certain banks that have
fixed multiples slabs or unreasonably high service charges, at times linked to
the amount of the transaction, for providing these services to their customers –
even though the RBI provides these services to the banks free of charge.

d. Cheque Truncation System (CTS)

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The latest electronic payment product introduced by the RBI is the Cheque
Truncation System, which was launched, on a pilot basis, in the National
Capital Region of New Delhi on February 1, 2008, with the participation of 10
banks. At present all the banks are participating in the system through 53 direct
member banks.

The main objective of the CTS is to improve the efficiency and substantially
reduce the cheque processing time in the system. The traditional clearing
system requiring the physical presentation of cheques in the clearing house for
payment and settlement, inevitably entails consequential inefficiencies in terms
of clearing time and infrastructure required.

In contrast, the main advantage of cheque truncation is that it eliminates the

physical presentation of the cheque to the clearing house; instead, the electronic
image of the cheque would be sent to the clearing house. The CTS would
enable the realisation of cheques on the same day, and provide a more cost-
effective mode of settlement than manual and MICR clearing. Smaller banks,
which may find it unviable to set up the infrastructure, could utilise the services
of service bureaus set up for this purpose by a few larger banks.

Once the CTS become fully operational, the system would be the largest in the
world and would leapfrog the country from the paper-based instruments to a
fully electronic mode of payment and settlement. Necessary amendments have
been made to the Negotiable Instruments Act, 1881, which provides legal
recognition to the electronic image of the truncated cheque. These amendments
provide a legal basis for the cheque truncation system. .

e. National Electronic Clearing Service (NECS)

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The National ECS is a product being developed by the RBI to enable

centralised processing of the ECS transactions, in contrast to the existing ECS
system that has decentralised operations at 70 locations, spread all over the
country. Under the National ECS, the processing of all the ECS transactions
would be centralised at the National Clearing Cell at Nariman Point, Mumbai
and sponsor banks would need to only upload the relative files to a web server,
with online data validation facility.

Destination banks would receive their inward clearing data / file at a central
location, through the web server. The National ECS would leverage the Core
Banking platform of the commercial banks, to enable around 50,000 core-
banking-enabled branches of the various banks, to avail of this service. The
system would facilitate end-to-end seamless posting of the NECS transactions
in a straight-through-processing (STP) environment. This would help the users
and member banks to send, receive and process the data files at one centralised
place, thereby improving the efficiency of the payment system.

f. Negotiated Dealing System

The system which became operational during Feb 2002 facilitates the
submission of bids/applications for auctions/floatation of govt. securities
through pooled terminal facility located at Regional Offices of Public Debt
Offices across the country and through member terminals. The system can be
used for daily Repo and Reverse Repo auctions under Liquidity Adjustment

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The bank of the future has to be essentially a marketing organisation that also
sells banking products. New distribution channels are being used; more & more
banks are outsourcing services like disbursement and servicing of consumer
loans, Credit card business. Direct Selling Agents (DSAs) of various Banks go
out and sell their products. They make house calls to get the application form
filled in properly and also take your passport-sized photo. Home banking has
already become common, where you can order a draft or cash over
phone/internet and have it delivered home. ICICI bank was the first among the
new private banks to launch its net banking service, called Infinity. It allows the
user to access account information over a secure line, request cheque books and
stop payment, and even transfer funds between ICICI Bank accounts. Citibank
has been offering net banking to its Suvidha program to customers. Banks can
no longer confine themselves to selling the traditional way.

Initially the public sector banks were dominating the banking scene so they
never felt the need for marketing. However Post liberalization, several new-
generation private-sector banks changed the face of the industry. Customers no

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longer had to stand in long queues or make 10 trips for loans to be sanctioned.
Private-sector banks brought in concepts like customer relations officers,
focused marketing teams and single-window banking. Moreover, with new
technology, private-sector banks like ICICI Bank and HDFC Bank could offer
customer services like ATMs, phone banking, Internet banking, automatic
money transfers and computerised monthly statements.

Public sector banks have woken up to competition. Industry estimates state that
roughly 12 per cent to 15 per cent of public-sector bank customers shifted to
private-sector banks in the late nineties. Now public-sector banks are finally
getting their act together. Still holding 82 per cent of the lending market, they
are cashing in on their strengths like experience, network, products, and
facility. All it takes is to package it and sell it well.

Some initiatives have been taken by the following banks:

Indian Bank:

 The 96-year-old bank has just turned some executives into

marketing officers at most of its 1,300 branches. To boost its selling efforts it
pulled in 265 MBA students to market the bank's products during their summer
training. It has also introduced 24-hour customer care centres in Mumbai,
Chennai and Bangalore.

State bank of India

 For a start, SBI is refurbishing key branches in a phased manner, to

smarten up and give itself a more customer-friendly look. The makeover will
have taken place at about 20 to 30 key branches. The bank is also turning

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customer friendly in other ways. It is developing customised loan packages like

Doctor Plus and Teacher Plus and has tied up with companies like Maruti.
Apart from this, SBI has opened 69 Personal Banking Branches in key cities
especially to cater to retail customers. Also, the bank is trying to simplify
systems so work is completed fast. Today loans are disbursed within a week
instead of taking over a month for a loan sanction.
 Under a business process re-engineering plan, the bank will have a more
focused marketing team. SBI has computerised nearly 41 per cent of its
branches and has 1,700 networked ATMs located in 176 centres. By next April,
it plans to computerize all its branches and install 3,100 ATMs.

Union bank of India

 UBI is gradually changing the look of its big branches and pumping in Rs
25 lakh (Rs 2.5 million) to Rs 30 lakh (Rs 3 million) for each one. Smaller ones
will undergo Rs 10 lakh (Rs 1 million) refurbishments. Already, 800 branches
out of 2,020 have a new look. And, from launching around one product in a
year about six years ago, this year it has launched close to 30 new products.
UBI also plans to increase the number of marketing officers. In 2001, for the
first time 117 marketing officers were put in place in key branches.
 To give itself a uniform look, in 2001, the bank changed its logo. Today
all the branches sport the same boards. The bank spent close to Rs 11 crore (Rs
110 million) on mass media advertising last year.

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4.1 Retail Banking

Retail banking includes a comprehensive range of financial products viz.

deposit products, residential mortgage loans, credit cards auto finance, personal
loans, consumer durable loans , loans against equity shares, loans for
subscribing to initial public offers (IPO), debit cards bill payment service ,
mutual funds and investment advisory services .

The emergence of middle class with substantial purchasing power in India

during the last one decade or so and its desire to spend according to the
changing life style, has offered to the Indian banking system, a ready market,
for mobilization and deployment of their funds. Given the rising purchasing
power of this class, there is huge untapped potential for business.

While new generation private sector banks have been able to create a niche in
this regard, the public sector banks have not lagged behind. Leveraging their
vast branch network and outreach, public sector banks have aggressively
forayed to garner a larger slice of the retail pie. By international standards,
however, there is still much scope for retail banking in India.

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4.2 Customer Relationship Management

Traditionally, banking was personal, where customer knew the bank employee
and vice versa. The main bondage was the relationship the customer enjoys
with the bank- the closer the customer feels to the bank, the more are his
chances of remaining as future customer. Things have changed now. Newer
technologies result in lack of personal touch and a customer can be lured by big
financial institutions at the end of world by providing better services than any
local bank. So banks are turning to Customer Relationship Management (CRM)
in search of effective ways to woo and retain their clients. The satisfied
customers always help in improving the business turnover through referrals and
positive publicity.

Offering the right product to the right customer at the right time through the
right delivery channel is basic concept of CRM. Now the banks have realized
that they cannot expect to own their customers. The primary goal is to uncover
cross selling opportunities and provide more customized services to retain
customers. In real terms, CRM can be implemented only if proper infrastructure
is created. The introduction of concepts like customer profiling and
segmentation, target marketing, customer’s life time value analysis, campaign
analysis, etc. become necessary. The bank will be required to collect continuous
feedback and take necessary steps to improve the brand image.

Customer Relationship Management (CRM) refers to the ability to

understand, anticipate and manage the needs of the customer, interaction and
relationship resulting in increased profitability through revenue and margin
growth and operational efficiencies. Analytical insight into CRM can provide a

Recent Trends in Public Sector Banks

clearer picture of the profitability of specific customers. The banks can

distinguish between low income generating customers and highly profitable
customers and offer distinguished service based on this. The banks now offer
internet banking, ATM, phone banking, voice response unit, customer care and
other services for the convenience of the customer. Only when customer feels
value will he reciprocate the relationship with loyalty. Banks have now adopted
“Universal Banking” and providing all financial services under one roof.

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4.3 Change of Bank Logos

Logos give a brand its identity. They are a company’s most valuable asset. It’s
no secret that a whole lot of Fortune 500 companies devote millions of dollars
each year to develop their brands and promote their corporate identity. In fact,
logos are what instantly make a brand recognisable. They make a brand
memorable. Logos are strong symbols that have the power to unite, not just
organisations, but people too.

Competitors & competition makes organisations sit up and take charge. Banks
are all about image & service. With a whole lot of multinationals setting up,
Indian banks realised it was time they changed. A whole lot of them developed
new corporate identities to look younger & trendy.

Public sector banks are going in for a change in logo as a means of re-branding
and re positioning their services to the ‘new age customer’ in a new market
scenario. As a part of the strategy to face the changed scenario, one finds the
country's public sector banks, one by one, going in for image overhauls. It
begins with a change in logo –witness the new ‘Rising Baroda Sun’ which the
Bank of Baroda has gone in for, as part of its re-branding. Next in line was
Canara Bank. A couple of months ago, Union Bank of India unveiled its new
logo. Banks don’t want to be perceived as ‘last-generation’s banks’ and a new
logo gives a quick facelift.

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4.4 Recruitments in Public Sector Banks

State Bank of India (SBI) recently advertised for hiring 20,000 clerical staff
across India. Corporation Bank and Bank of Maharashtra have also advertised
for probationary officers, clerks and other officers. Other banks like Union
Bank of India and Bank of Baroda, too, are planning to hire in the range of
1000 employees, while other banks like Indian Overseas Bank (IOB), Canara
Bank are in the process accessing the staff requirements.

Other public sector banks are also hiring since a huge chunk of employees. This
is because government-owned banks had gone in for massive recruitment in the
early 70s. Senior officials from Bank of India said that they are looking at
hiring 500 people for clerical cadre and another 1,000 as officers in the year
2009. According to experts, the large-scale retirements in PSBs and the change
in the business models of banks with the implementation of core banking
solution (CBS) are driving recruitment.

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Punjab National Bank of India, the first Indian bank started only with Indian
capital, was nationalized in July 1969 and currently the bank has become a
front-line banking institution in India with 4525 Offices including 432
Extension Counters. The corporate office of the bank is at New Delhi. Punjab
National Bank of India has set up representative offices at Almaty
(Kazakhstan), Shanghai (China) and in London and a fully fledged Branch in
Kabul (Afghanistan).

Punjab National Bank with 4497 offices and the largest nationalized bank is
serving its 3.5 crore customers with the following wide variety of banking

➢ Corporate banking
➢ Personal banking
➢ Industrial finance
➢ Agricultural finance

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➢ Financing of trade
➢ International banking

Punjab National Bank has been ranked 38th amongst top 500 companies by The
Economic Times. PNB has earned 9th position among top 50 trusted brands in

Punjab National Bank India maintains relationship with more than 200 leading
international banks worldwide. PNB India has Rupee Drawing Arrangements
with 15 exchange companies in UAE and 1 in Singapore.

History of the Bank

Punjab National Bank (PNB) was registered on May 19, 1894 under the
Indian Companies Act with its office in Anarkali Bazaar Lahore. The Bank is
the second largest government-owned commercial bank in India with about
4,500 branches across 764 cities. It serves over 37 million customers. The bank
has been ranked 248th biggest bank in the world by Bankers Almanac, London.
The bank's total assets for financial year 2007 were about US$60 billion. PNB
has a banking subsidiary in the UK, as well as branches in Hong Kong and
Kabul, and representative offices in Almay, Dubai, Oslo, and Shanghai.

➢ 1895: PNB commenced its operations in Lahore. PNB has the distinction of
being the first Indian bank to have been started solely with Indian capital
that has survived to the present. (The first entirely Indian bank, the Ouch
Commercial Bank, was established in 1881 in Faizabad, but failed in 1958.)
PNB's founders included several leaders of the Swadeshi movement such as
Dyal Singh Majithia and Lala HarKishen Lal, Lala Lalchand, Shri Kali

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Prosanna Roy, Shri E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram,
and Lala Dholan Dass. Lala Lajpat Rai was actively associated with the
management of the Bank in its early years.
➢ 1904: PNB established branches in Karachi and Peshawar.
➢ 1940: PNB absorbed Bhagwan Dass Bank, a scheduled bank located in
Delhi circle.
➢ 1947: Partition of India and Pakistan at Independence. PNB lost its premises
in Lahore, but continued to operate in Pakistan.
➢ 1951: PNB acquired the 39 branches of Bharat Bank (est. 1942); Bharat
Bank became Bharat Nidhi Ltd.
➢ 1961: PNB acquired Universal Bank of India.
➢ 1963: The Government of Burma nationalized PNB's branch in Rangoon
➢ September 1965: After the Indo-Pak war the government of Pakistan seized
all the offices in Pakistan of Indian banks, including PNB's head office,
which may have moved to Karachi. PNB also had one or more branches in
East Pakistan (Bangladesh).
➢ 1960s: PNB amalgamated Indo Commercial Bank (est. 1933) in a rescue.
➢ 1969: The Government of India (GOI) nationalized PNB and 13 other major
commercial banks, on July 19, 1969.
➢ 1976 or 1978: PNB opened a branch in London.
➢ 1986 The Reserve Bank of India required PNB to transfer its London branch
to State Bank of India after the branch was involved in a fraud scandal.
➢ 1986: PNB acquired Hindustan Commercial Bank (est. 1943) in a rescue.
The acquisition added Hindustan's 142 branches to PNB's network.
➢ 1993: PNB acquired New Bank of India, which the GOI had nationalized in
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➢ 1998: PNB set up a representative office in Almaty, Kazakhstan.

➢ 2003: PNB took over Nedungadi Bank, the oldest private sector bank in
Kerala. Rao Bahadur T.M. Appu Nedungadi, author of Kundalatha, one of
the earliest novels in Malayalam, had established the bank in 1899. It was
incorporated in 1913, and in 1965 had acquired selected assets and deposits
of the Coimbatore National Bank. At the time of the merger with PNB,
Nedungadi Bank's shares had zero value, with the result that its shareholders
received no payment for their shares.
➢ PNB also opened a representative office in London.
➢ 2004: PNB established a branch in Kabul, Afghanistan.
• PNB also opened a representative office in Shanghai.
• PNB established an alliance with Everest Bank in Nepal that permits
migrants to transfer funds easily between India and Everest Bank's 12
branches in Nepal.
➢ 2005: PNB opened a representative office in Dubai.
➢ 2007: PNB established PNBIL - Punjab National Bank (International) - in
the UK, with two offices, one in London, and one in South Hall. Since then
it has opened a third branch in Leicester, and is planning a fourth in
Birmingham. Gatin Gupta became Chairmen of Punjab National Bank.
➢ 2008: PNB opened a branch in Hong Kong.
➢ 2009: PNB opened a representative office in Oslo, Norway.


➢ Punjab National Bank announced its Q1FY2010 results on 29 July

2009, delivering 62% y-o-y growth in net profits to Rs832 crore
(Rs512cr), substantially ahead of expectations on account of large
treasury gains, apart from healthy operating performance.

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➢ While the bank’s deposit growth was reasonably robust at 4.4%

sequentially and 26.5% y-o-y, unlike the peers its growth in advances
also remained strong at 38% y-o-y.

➢ In spite of being at the forefront of PLR cuts, the bank posted a healthy
growth in Net Interest Income (NII) of 29% y-o-y.

➢ Other Income surged 113% y-o-y, driven by strong treasury gains of

Rs355 crore during the quarter in line with industry trends, even as Fee
income was also robust at 45% y-o-y, on the back of strong balance
sheet growth.

➢ Operating expenses were higher than expected on account of Rs150

crore of provisions for imminent wage hikes.

➢ Gross and Net NPA ratios remained stable sequentially at 1.8% and
0.2%, with the bank not adopting the guidelines of treating floating
provisions as part of tier 2 capital instead of adjusting against NPAs on
express permission from the RBI.

Vision and Mission


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• To evolve and position the bank as a world class, progressive, cost

effective and customer friendly institution providing comprehensive
financial and related services.

• Integrating frontiers of technology and serving various segments of

society especially weaker section.

• Committed to excellence in serving the public and also excelling in

corporate values.


• To provide excellent professional services and improve its position as

a leader in financial and related services.
• Build and maintain a team of motivated workforce with high work
• Use latest technology aimed at customer satisfaction and act as an
effective catalyst for socio economic development.

Values and Ethics

• Bonding and Integrity.

• Ethical conduct.
• Periodic disclosure.
• Confidentiality and fair dealing.
• Compliance with rules and regulations.

Products and Services

Recent Trends in Public Sector Banks

1. Savings Fund Account - Total Freedom Salary Account, PNB Prudent

Sweep, PNBVidyarthi SF Account, PNB Mitra SF.
2. Account Current Account - PNB Vaibhav, PNB Gaurav, PNB Smart
3. Fixed Deposit Schemes - Spectrum Fixed Deposit Scheme, Anupam
Account, Mahabachat Schemes, Multi Benefit Deposit.
4. Scheme Credit Schemes - Flexible Housing Loan, Car Finance, Personal
Loan, Credit Cards.
5. Social Banking - Mahila Udyam Nidhi Scheme, Krishi Card, PNB
Farmers Welfare Trust.
6. Corporate Banking - Gold Card scheme for exporters, EXIM finance.
7. Business Sector - PNB Karigar credit card, PNB Kushal Udhami, PNB
Pragati Udhami, PNB Vikas Udhami.

Apart from these, and the PNB also offers locker facilities, senior citizens
schemes, PPF schemes and various E-services.

Awards And Distinctions

➢ Ranked among top 50 companies by the leading financial daily, Economic
➢ Ranked as 323rd biggest bank in the world by Bankers Almanac (January
2006), London.
➢ Earned 9th place among India's Most Trusted top 50 service brands in
Economic Times- A.C Nielson Survey.
➢ Included in the top 1000 banks in the world according to The Banker,

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➢ Golden Peacock Award for Excellence in Corporate Governance - 2005 by

Institute of Directors.
➢ FICCI's Rural Development Award for Excellence in Rural Development –

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Recent Trends in Public Sector Banks

Recent Trends in Public Sector Banks


Entry of new banks resulted in a paradigm shift in the ways of banking in India.
The growing competition, growing expectations led to increased awareness
amongst banks on the role and importance of technology in banking. The
arrival of foreign and private banks with their superior state-of-the-art
technology-based services pushed Indian Banks also to follow suit by going in
for the latest technologies so as to meet the threat of competition and retain
their customer base. Deregulation and technological change are the two single
biggest changes in the banking environment.
In India, investments in technologies by financial services organizations are
increasing, and new initiatives emerging, albeit at a basic level. However, in the
long run, it is evident that technology investments in transaction and process
automation will cease to be a differentiator.

Technology has enabled banks to overcome the barriers of time and extending
their services to customers. The new technology channels like ATMs, EFT
(Electronic funds transfer), debit and credit cards mobile banking, telebanking,
etc. are accessible to customers on a 24 x 7 basis.

With automation, banks can offer single window service, extend business hours
and provide anywhere anytime banking. It gives bank personnel more time to
devote to business planning and development also facilitates each player in
market to have its unique products and services for competitive advantage. New
technology driven channels help the banks to reduce cost as the cost of
transaction in new channel is a fraction of what it was on branch counter.

Recent Trends in Public Sector Banks

For e.g.: A counter transaction in typical branch would cost around Rs 50-60,
while it is around only Rs.15 to 20, if done through ATM. The cost will be
further lowered if done through internet. Recently RBI issued a circular stating
that withdrawal from ATM would be free irrespective of the card issuing bank
which will be effect from April 1st, 2009.

In view of this, technology has changed major functions performed by banks:

1. Access to liquidity.
2. Transformation of assets.
3. Monitoring of risks.
4. Information technology and the communication networking systems have
a crucial bearing on the efficiency of money, capital and foreign exchange

Recent Trends in Public Sector Banks


The banking system has made considerable investment in the related

infrastructure to upgrade the payment system. However, there are several
challenges that need to be effectively addressed if the full benefits of the
achievements so far are to be reaped.

The primary reason for slow pace of adoption of the electronic modes of funds
transfer, particularly in the retail segment, is the lack of education – particularly
on the part of the bank staff at the branch level that have interface with the

A survey conducted by one of the Regional Offices of the RBI in the recent
past revealed that in the limited sample covered; there were several bank
branches in the State which were not even aware of the National Electronic
Fund Transfer system. The banks, therefore, need to make concerted efforts to
increase the degree of awareness at the level of the branch staff so that the
electronic fund transfer services percolate down to the level of the public in a
significant manner.

The other side of the coin is the lack of customer education and awareness
about the features and benefits of the EFT, which precludes wider adoption of
this product and leads to carrying on with the traditional modes of payment.

Recent Trends in Public Sector Banks

New Trends in Banking – Ravi Kumar VV
4PS Business & Marketing
Innovations in Banking & Insurance – Romeo S. Mascarenhas
Financial Service Management – Gordon & Natrajan