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Banking Services in India I. History of Banking in India: TH TH
Banking Services in India I. History of Banking in India: TH TH
1) Pre-Nationalization Era.
2) Nationalization Stage.
3) Post Liberalization Era.
1) Pre-Nationalization Era:
In India the business of banking and credit was practices even in very early times.
The remittance of money through Hundies, an indigenous credit instrument, was very popular.
The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in
different parts of the country.
The modern type of banking, however, was developed by the Agency Houses of
Calcutta and Bombay after the establishment of Rule by the East India Company in 18 th and 19th
centuries.
During the early part of the 19th Century, ht volume of foreign trade was relatively
small. Later on as the trade expanded, the need for banks of the European type was felt and the
government of the East India Company took interest in having its own bank. The government of
Bengal took the initiative and the first presidency bank, the Bank of Calcutta (Bank of Bengal)
was established in 180. In 1840, the Bank of Bombay and IN 1843, the Bank of Madras was also
set up.
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BANKING SERVICES IN INDIA
These three banks also known as “Presidency Bank”. The Presidency Banks had
their branches in important trading centers but mostly lacked in uniformity in their operational
policies. In 1899, the Government proposed to amalgamate these three banks in to one so that it
could also function as a Central Bank, but the Presidency Banks did not favor the idea. However,
the conditions obtaining during world war period (1914-1918) emphasized the need for a unified
banking institution, as a result of which the Imperial Bank was set up in1921. The Imperial Bank
of India acted like a Central bank and as a banker for other banks.
The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of
the Country. In 1949, the Banking Regulation act was passed and the RBI was nationalized and
acquired extensive regulatory powers over the commercial banks.
In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of
India, Cooperative banks, Exchange banks and Indian Joint Stock banks.
2) Nationalization Stages:
After Independence, in 1951, the All India Rural Credit survey, committee of
Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation of the Imperial
Bank of India and ten others banks into a newly established bank called the State Bank of India
(SBI). The Government of India accepted the recommendations of the committee and introduced
the State Bank of India bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament
and got the president’s assent on 8th May 1955. The Act came into force on 1st July 1955, and the
Imperial Bank of India was nationalized in 1955 as the State Bank of India.
In 1959, the SBI (Subsidiary Bank) act was proposed and the following eight
state-associated banks were taken over by the SBI as its subsidiaries.
With effect from 1st January 1963, the State Bank of Bikaner and State Bank of
Jaipur with head office located at Jaipur. Thus, seven subsidiary banks State Bank of India
formed the SBI Group.
The SBI Group under statutory obligations was required to open new offices in
rural and semi-urban areas and modern banking was taken to these unbanked remote areas.
In 1969, the Lead Bank Scheme was introduced to extend banking facilities to
every corner of the country. Later in 1975, Regional Rural Banks were set up to supplement the
activities of the commercial banks and to especially meet the credit needs of the weaker sections
of the rural society.
Nationalization of banks paved way for retail banking and as a result there has
been an alt round growth in the branch network, the deposit mobilization, credit disposals and of
course employment.
Consequences of Nationalization:
The quality of credit assets fell because of liberal credit extension policy.
Political interference has been as additional malady.
Poor appraisal involved during the loan meals conducted for credit disbursals.
The credit facilities extended to the priority sector at concessional rates.
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.
Against this background, the financial sector reforms were initiated to bring about
a paradigm shift in the banking industry, by addressing the factors for its dismal performance.
In this context, the recommendations made by a high level committee on
financial sector, chaired by M. Narasimham, laid the foundation for the banking sector reforms.
These reforms tried to enhance the viability and efficiency of the banking sector. The
Narasimham Committee suggested that there should be functional autonomy, flexibility in
operations, dilution of banking strangulations, reduction in reserve requirements and adequate
financial infrastructure in terms of supervision, audit and technology. The committee further
advocated introduction of prudential forms, transparency in operations and improvement in
productivity, only aimed at liberalizing the regulatory framework, but also to keep them in time
with international standards. The emphasis shifted to efficient and prudential banking linked to
better customer care and customer services.
Private banking in India was practiced since the begining of banking system in
India. The first private bank in India to be set up in Private Sector Banks in India was Indus Ind
Bank. It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tenth
largest development bank in the world as Private Banks in
India and has promoted a world class institutions in India.
The first Private Bank in India to receive an in principle approval from the
Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank
in the private sector banks in India as part of the RBI's liberalization of the Indian Banking
Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in
Mumbai and commenced operations as Scheduled Commercial Bank in January 1995.
ING Vaysya, yet another Private Bank of India was incorporated in the year 1930.
Bangalore has a pride of place for having the first branch inception in the year 1934. With
successive years of patronage and constantly setting new standards in banking, ING Vaysya
Bank has many credits to its account.
The RBI prescribed a minimum paid up capital of Rs. 100 crores for the new bank and the shares
are to be listed at stock exchange. Also the new bank after being granted license under the
Banking Regulation Act shall be registered as a public limited company under the companies
Act, 1956.
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Subsequently 9 new commercial banks have been granted license to start banking
operations. The new private sector banks have been very aggressive in business expansion and is
also reporting higher profile levels taking the advantage of technology and skilled manpower. In
certain areas, these banks have even our crossed the other group of banks including foreign
banks.
Current scenario
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor
has been allowed to hold more than 5% in a private sector bank since the RBI announced norms
in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.
Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is
with the Government of India holding a stake), 29 private banks (these do not have government
stake; they may be publicly listed and traded on stock exchanges) and 31 foreign banks.
They have a combined network of over 53,000 branches and 17,000 ATMs.
According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign banks holding 18.2%
and 6.5% respectively.
BANKING SERVICES IN INDIA
In India banks are classified in various categories according to differ rent criteria.
The following charts indicate the banking structure:
1) The RBI: The RBI is the supreme monetary and banking authority in the country and has
the responsibility to control the banking system in the country. It keeps the reserves of all
scheduled banks and hence is known as the “Reserve Bank”.
(5) Development Banks: Development Banks mostly provide long term finance for setting up
industries. They also provide short-term finance (for export and import activities)
Industrial Finance Co-operation of India (IFCI)
Role of Banks:
The Reserve Bank of India (RBI) is the central bank of India, and was
established on April 1, 1935 in accordance with the provisions of the Reserve Bank of India Act,
1934. Since its inception, it has been headquartered in Mumbai. Though originally privately
owned, RBI has been fully owned by the Government of India since nationalization in 1949.
Main Objective:
Monetary Authority
Formulates, implements and monitors the monetary policy.
Objective: maintaining price stability and ensuring adequate flow of credit to productive
sectors.
Prescribes broad parameters of banking operations within which the country’s banking
and financial system functions.
Objective: maintain public confidence in the system, protect depositors’ interest and
provide cost-effective banking services to the public. The Banking Ombudsman Scheme
has been formulated by the Reserve Bank of India (RBI) for effective redressal of
complaints by bank customers
Issuer of currency
Issues and exchanges or destroys currency and coins not fit for circulation.
Objective: to give the public adequate quantity of supplies of currency notes and coins
and in good quality.
Developmental role
Banker to the Government: performs merchant banking function for the central and the
state governments; also acts as their banker.
Banker to banks: maintains banking accounts of all scheduled banks.
Owner and operator of the depository (SGL) and exchange (NDS) for government bonds.
There is now an international consensus about the need to focus the tasks of a central bank upon
central banking. RBI is far out of touch with such a principle, owing to the sprawling mandate
described above.
Supervisory Functions:
In addition to its traditional central functions, the Reserve bank has certain non-
monetary functions of the nature of supervision of banks and promotion of sound banking in
India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI
wide powers of supervision and control over commercial and cooperative banks, relating to
licensing and establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction and liquidation. The RBI is authorized to
carry out periodical inspections of the banks and to call for returns and necessary information
from them. The nationalization of 14 major Indian scheduled banks in July 1969 has imposed
new responsibilities on the RBI for directing the growth of banking and credit policies towards
more rapid development of the economy and realization of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in improving the standard of banking
in India to develop on sound lines and to improve the methods of their operation.
Promotional Functions:
With economic growth assuming a new urgency since Independence, the range of
the Reserve Bank’s functions have steadily widened. The Bank now performs a variety of
developmental and promotional functions, which, at one time, were regarded as outside the
normal scope of central banking. The Reserve Bank was asked to promote banking habit, extend
banking facilities to rural and semi-urban areas, and establish and promote new specialized
financing agencies. Accordingly, the Reserve bank has helped in the setting up of the IFCI and
the SFC: it set up the Deposit Insurance Corporation of India in 1963 and the Industrial
Reconstruction Corporation of India in 1972. These institutions were set up directly or indirectly
by the Reserve Bank to promote saving habit and to mobilize savings, and to provide industrial
finance as well as agricultural finance. As far back as 1935, the RBI set up the Agricultural
Credit Department to provide agricultural credit. But only since 1951 the Bank’s role in this field
has become extremely important. The Bank has developed the co-operative credit movement to
encourage saving, to eliminate money-lenders from the villages and to route its short term credit
to agriculture. The RBI has set up the Agricultural Refinance and Development Corporation to
provide long-term finance to farmers.
Co-operative Banks:
The Co-operative bank has a history of almost 100 years. The Co-operative banks
are an important constituent of the Indian Financial System, judging by the role assigned to
them, the expectations they are supposed to fulfill, their number, and the number of offices they
operate. The co-operative movement originated in the West, but the importance that such banks
have assumed in India is rarely paralleled anywhere else in the world. Their role in rural
financing continues to be important even today, and their business in the urban areas also has
increased phenomenally in recent years mainly due to the sharp increase in the number of co-
operative banks.
While the co-operative banks in rural areas mainly finance agricultural based
activities including farming, cattle, milk, hatchery, personal finance etc. along with some small
scale industries and self-employment driven activities, the co-operative banks in urban areas
mainly finance various categories of people for self-employment, industries, small scale units,
home finance, consumer finance, personal finance, etc. Some of the co-operative banks are quite
forward looking and have developed sufficient core competencies to challenge state and private
sector banks.
(b) Long term lending oriented co-operative Banks – within the second category there are
land development banks at three levels state level, district level and village level.
Co-operative Banks are organized and managed on the principal of co-operation, self-help, and
mutual help. They function with the rule of “one member, one vote”. Function on “no profit, no
loss” basis. Co-operative banks, as a principle, do not pursue the goal of profit maximization.
Co-operative bank performs all the main banking functions of deposit mobilization, supply of
credit and provision of remittance facilities. Co-operative Banks provide limited banking
products and are functionally specialists in agriculture related products. However, co-operative
banks now provide housing loans also.
The UCBs can provide advances against shares and debentures also. Co-operative
bank do banking business mainly in the agriculture and rural sector. However, UCBs, SCBs, and
CCBs operate in semi urban, urban, and metropolitan areas also.
The urban and non-agricultural business of these banks has grown over the years.
The co-operative banks demonstrate a shift from rural to urban, while the commercial banks,
from urban to rural. Co-operative banks are perhaps the first government sponsored,
government-supported, and government-subsidized financial agency in India. They get financial
and other help from the Reserve Bank of India NABARD, central government and state
governments. They constitute the “most favoured” banking sector with risk of nationalization.
For commercial banks, the Reserve Bank of India is lender of last resort, but co-operative banks
it is the lender of first resort which provides financial resources in the form of contribution to the
initial capital (through state government), working capital, refinance.
Co-operative Banks belong to the money market as well as to the capital market.
Primary agricultural credit societies provide short term and medium term loans. Land
Development Banks (LDBs) provide long-term loans. SCBs and CCBs also provide both short
term and term loans. Co-operative banks are financial intermediaries only partially. The sources
of their funds (resources) are (a) central and state government, (b) the Reserve Bank of India and
NABARD, (c) other co-operative institutions, (d) ownership funds and, (e) deposits or debenture
issues. It is interesting to note that intra-sectoral flows of funds are much greater in co-operative
banking than in commercial banking. Inter-bank deposits, borrowings, and credit from a
significant part of assets and liabilities of co-operative banks. This means that intra-sectoral
competition is absent and intra-sectoral integration is high for co-operative bank.
Some co-operative banks are scheduled banks, while others are non-scheduled
banks. For instance, SCBs and some UCBs are scheduled banks but other co-operative bank are
non-scheduled banks. At present, 28 SCBs and 11 UCBs with Demand and Time Liabilities over
Rs 50 crore each included in the Second Schedule of the Reserve Bank of India Act.
Co-operative Banks are subject to CRR and liquidity requirements as other scheduled and non-
scheduled banks are. However, their requirements are less than commercial banks. Since 1966
the lending and deposit rate of commercial banks have been directly regulated by the Reserve
Bank of India. Although the Reserve Bank of India had power to regulate the rate co-operative
bank but this have been exercised only after 1979 in respect of non-agricultural advances they
were free to charge any rates at their discretion. Although the main aim of the co-operative bank
is to provide cheaper credit to their members and not to maximize profits, they may access the
money market to improve their income so as to remain viable.
Trade Finance.
Treasury Operations.
Retail Banking and Trade finance operations are conducted at the branch level while the
wholesale banking operations, which cover treasury operations, are at the hand office or a
designated branch.
Retail Banking:
Deposits
Remittances
Trade Finance:
The banks can also act as an agent of the Government or local authority. They
insure, guarantee, underwrite, participate in managing and carrying out issue of shares,
debentures, etc.
Apart from the above-mentioned functions of the bank, the bank provides a whole
lot of other services like investment counseling for individuals, short-term funds management
and portfolio management for individuals and companies. It undertakes the inward and outward
remittances with reference to foreign exchange and collection of varied types for the
Government.
1) Credit Card: Credit Card is “post paid” or “pay later” card that draws from a credit
line-money made available by the card issuer (bank) and gives one a grace period to pay. If
the amount is not paid full by the end of the period, one is charged interest.
A credit card is nothing but a very small card containing a means of identification,
such as a signature and a small photo. It authorizes the holder to change goods or services to his
account, on which he is billed. The bank receives the bills from the merchants and pays on behalf
of the card holder.
Credit cards have found wide spread acceptance in the ‘metros’ and big cities.
Credit cards are joining popularity for online payments. The major players in the Credit Card
market are the foreign banks and some big public sector banks like SBI and Bank of Baroda.
India at present has about 3 million credit cards in circulation.
2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored value.
Debit Cards quickly debit or subtract money from one’s savings account, or if one were taking
out cash.
Every time a person uses the card, the merchant who in turn can get the money
transferred to his account from the bank of the buyers, by debiting an exact amount of purchase
from the card. To get a debit card along with a Personal Identification Number (PIN).
When he makes a purchase, he enters this number on the shop’s PIN pad. When
the card is swiped through the electronic terminal, it dials the acquiring bank system – either
Master Card or Visa that validates the PIN and finds out from the issuing bank whether to accept
or decline the transaction. The customer never overspread because the amount spent is debited
immediately from the customers account. So, for the debit card to work, one must already have
the money in the account to cover the transaction. There is no grace period for a debit card
purchase. Some debit cards have monthly or per transaction fees.
Debit Card holder need not carry a bulky checkbook or large sums of cash when
he/she goes at for shopping. This is a fast and easy way of payment one can get debit card
facility as debit cards use one’s own money at the time of sale, so they are often easier than
credit cards to obtain.
The major limitation of Debit Card is that currently only some 3000-4000 shops
country wide accepts it. Also, a person can’t operate it in case the telephone lines are down.
3) 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 ate
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 order cash.
To receive cash.
To the Customers
Privacy in transaction
The transaction is completely secure – you need to key in Personal Identification Number
(Unique number for every customer).
To Banks
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 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).
4) E-Cheaques: The e-cheaques consists five primary facts. They are the consumers, the
merchant, consumer’s bank the merchant’s bank and the e-mint and the clearing process. This
cheaquring system uses the network services to issue and process payment that emulates real
world chaquing. The payer issue a digital cheaques to the payee ant the entire transactions are
done through internet. Electronic version of cheaques are issued, received and processed. A
typical electronic cheque transaction takes place in the following manner:
The customer accesses the merchant server and the merchant server presents its goods to
the customer.
The consumer selects the goods and purchases them by sending an e-cheque to the
merchant.
The merchant validates the e-cheque with its bank for payment authorisation.
The merchant’s bank forwards the e-cheque to the clearing house for cashing.
The clearing house jointly works with the consumer’s bank clears the cheque and
transfers the money to the merchant’s banks.
The consumer’s bank updates the consumer’s account with the withdrawal information.
The e-chequing is a great boon to big corporate as well as small retailers. Most
major banks accept e-cheques. Thus this system offers secure means of collecting payments,
transferring value and managing cash flows.
5) Electronic Funds Transfer (EFT): Many modern banks have computerised their
cheque handling process with computer networks and other electronic equipments. These banks
are dispensing with the use of paper cheques. The system called electronic fund transfer (EFT)
automatically transfers money from one account to another. This system facilitates speedier
transfer of funds electronically from any branch to any other branch. In this system the sender
and the receiver of funds may be located in different cities and may even bank with different
banks. Funds transfer within the same city is also permitted. The scheme has been in operation
since February 7, 1996, in India.
The other important type of facility in the EFT system is automated clearing
houses. These are the computer centers that handle the bills meant for deposits and the bills
meant for payment. In big companies pay is not disbursed by issued cheques or issuing cash. The
payment office directs the computer to credit an employee’s account with the person’s pay.
To get a particular work done through the bank, the users may leave his instructions in
the form of message with bank.
Facility to stop payment on request. One can easily know about the cheque status.
According to this system, customer can access account details on mobile using the
Short Messaging System (SMS) technology6 where select data is pushed to the mobile device.
The wireless application protocol (WAP) technology, which will allow user to surf the net on
their mobiles to access anything and everything. This is a very flexible way of transacting
banking business.
Already ICICI and HDFC banks have tied up cellular service provides such as
Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking services to
their customers.
8) Internet Banking: Internet banking involves use of internet for delivery of banking
products and services. With internet banking is now no longer confirmed to the branches where
one has to approach the branch in person, to withdraw cash or deposits a cheque or request a
statement of accounts. In internet banking, any inquiry or transaction is processed online without
any reference to the branch (anywhere banking) at any time.
The Internet Banking now is more of a normal rather than an exception due to the
fact that it is the cheapest way of providing banking services. As indicated by McKinsey
Quarterly research, presently traditional banking costs the banks, more than a dollar per person,
ATM banking costs 27 cents and internet banking costs below 4 cents approximately. ICICI
bank was the first one to offer Internet Banking in India.
Reduce the transaction costs of offering several banking services and diminishes the need
for longer numbers of expensive brick and mortar branches and staff.
Increase convenience for customers, since they can conduct many banking transaction 24
hours a day.
Easy online application for all accounts, including personal loans and mortgages
Electronic Cash: Companies are developing electronic replicas of all existing payment system:
cash, cheque, credit cards and coins.
Automatic Payments: Utility companies, loans payments, and other businesses use on
automatic payment system with bills paid through direct withdrawal from a bank account.
Direct Deposits: Earnings (or Government payments) automatically deposited into bank
accounts, saving time, effort and money.
Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls, laundry
service, library fees and school lunches.
Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants for
payment of goods and services. This system has made functioning of the stock Market very
smooth and efficient.
Cyber Banking: It refers to banking through online services. Banks with web site “Cyber”
branches allowed customers to check balances, pay bills, transfer funds, and apply for loans on
the Internet.
1) If the investor wants to sell his shares, he has to place an order with his broker and give a
“Delivery Instruction” to his DP (Depository Participant). The DP will debit hi s account
with the number of shares sold by him.
2) If one wants to buy shares, he has to inform his broker about his Depository Account
Number so that the shares bought by him are credited in to his account.
3) Payment for the electronic shares bought or sold is to be made in the same way as in the
case of physical securities.
Banking covers so many services that it is difficult to define it. However, these
basic services have always been recognized as the hallmark of the genuine banker. These are…
Banking being a service industry, a lot depends on efficient and prompt customer
service. Customer service is the most important duty of the banking operations. Prompt and
efficient service with smile will develop good public relations reduce complaints and increase
business.
Changing customer expectations: Today the customer is more demanding and more
sophisticated than he or she was thirty years ago.
The need for a relationship strategy: To ensure that a customer service strategy that
will create a value preposition for customers should be formulated implemented and
controlled. It is necessary to give it a central role and not one that is subsumed in the
various elements of the marketing mix.
The customer is the kingpim in growth organizations like commercial banks. Only
those institutions which work according to his dictates will flourish. Quality, Consistency and
Durability at low price are the final expectations of a customer. Quality will have to be
unambiguous, of world class quality. Quality cannot be of minimum acceptable standards.
Customer responsiveness must be quick and also competent. Speed, performance and cost will
be the new values “mantra” for success.
The ten key areas of customer’s services to be attended timely and regularly are:
vi. Advance intimation to customers for rewards of Term Deposits Receipts on maturity.
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