Usually all persons want money for personal and commercial purposes. Banks are the oldest lending institutions in Indian scenario. They are providing all facilities to all citizens for their own purposes by their terms. To survive in this modern market every bank implements so many new innovative ideas, strategies, and advanced technologies. For that they give each and every minute detail about their institution and projects to Public. They are providing ample facilities to satisfy their customers i.e. Net Banking, Mobile Banking, Door to Door facility, Instant facility, Investment facility, Demat facility, Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to create their own image in public and corporate world. These banks always accepts innovative notions in Indian banking scenario like Credit Cards, ATM machines, Risk Management etc. So, as a student business economics I take keen interest in Indian economy and for that banks are the main source of development. So this must be the first choice for me to select this topic. At this stage every person must know about new innovation, technology of procedure new schemes and new ventures. Objective of Project on Banking view in India Because of the following reasons, I prefer this project work to get the knowledge of the banking system.  Banking is an essential industry.  financial crisis and money related query.  Banking is one of the most regulated businesses in the world. 

  consumer durables


THE ROLE OF ECONOMISTS IN BANKS The crucial role of bank economists in transforming the banking system in India. Economists have to be more „mainstreamed‟ within the operational structure of commercial banks. Apart from the traditional functioning of macro-scanning, the inter linkages between treasuries, dealing rooms and trading rooms of banks need to be viewed not only with the day-to-day needs of operational necessity, but also with analytical content and policy foresight. Today, operational aspects of the functioning of banks are attracting intensive research by professional economists. In particular, measuring and modeling different kinds of risks faced by banks, the behavior of risk-return relationships associated with different portfolio mixes and the impact of fluctuations in financial markets on the financial performance of banks are areas which lend themselves to analytical and empirical appraisal by economists and econometricians. They, in turn, are discovering the degrees of freedom and room for analytical maneuver in high frequency information generated by the day-to-day functioning of banks. It is vital that we develop an environment where these synergies are nurtured so as to serve the longer-term strategic interests of banks. Even in real time trading and portfolio decisions, the fundamental analysis of economists provides an independent assessment of market behavior, reinforcing technical analysis. A serious limitation of the applicability of standard economic analysis to banking relates to the inadequacies of the data-base. Absence of long time series data storage in the banking industry often poses serious problems to the quest for the formal analytical relationships between variables. Even if such data exist, the presence of structural breaks may blur meaningful analysis based on traditional formulation. Economists need


to think innovatively to overcome this problem. Use of panel regression, non-parametric methods and multivariate analyses could go a long way in understanding and validating behavioral relationships in banking. Another important challenge for the economics profession is to develop proper models for measurement of various risks in Indian conditions. This is a necessity in view of the move towards risk-based supervision. Quantification of operational risks and calibration of Value at Risk (VaR) models pose major computational challenge to bankers and policy makers alike, particularly in India. A major difficulty lies in identifying the right statistical model that determines the underlying distribution suited to the particular category of operational loss, and building the necessary database for deriving operationally meaningful conclusions. In my inaugural address last year, I had also emphasized the need for bank economists to come out of their narrow specialization and address operational issues relating to banking and finance. In order to make a meaningful contribution to banking, economists must have the experience of working in operational areas of banks. For this purpose, economists need to „soil their hands‟ in dealing rooms, treasuries and investment units, credit authorization and loan recovery, strategic management groups and management information systems of the banks to understand the ground realities. There are also „economies‟ to be gained from field-level credit appraisal, asset recovery, debt restructuring, market and consumer behaviors in which banks are involved. Thus, the profession needs to amalgamate the objectivity and theoretical soundness of economics with the functional dimensions of banking and finance. It is this combination of specialist training with operational experience, which is going to make the economics profession relevant to the changing face of banking in India.


History of Banking in India Banks in India Banking services in India Reserve Bank of India (RBI)

General Banking Nature of Banking Kinds of Banks Role of Banks in Developing Economy Principles of Bank Lending Policies

Management of Banking Branch setup and structure Organization and structure of a Bank Branch Explain bank organization system in India Retail Banking-The New Flavor Strategic issues in Banking Services Knowledge Management Innovation in Banking Technology in Banking Regulations and Compliance Customer Centric Organization Ethics and Corporate Governance Entrepreneurship Performance and Benchmarking

Managing New Challenges Introduction Recent Macroeconomic Development s and the Banking System Prudential Norms Market Discipline Universal Banking Human Resource Development in Banking


HISTORY OF BANKING IN INDIA Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases.



In the evolution of this strategic industry spanning over two centuries, immense developments have been made in terms of the regulations governing it, the ownership structure, products and services offered and the technology deployed. The entire evolution can be classified into four distinct phases.
   

Phase I- Pre-Nationalization Phase (prior to 1955) Phase II- Era of Nationalization and Consolidation (1955-1990) Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial Liberalization (1990-2004) Phase IV- Period of Increased Liberalization (2004 onwards)

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).


Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those day‟s public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

BANKS IN INDIA In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players. All these details and many more are discussed over here. The banks and its relation with the customers, their mode of operation, the names of banks under different groups and other such useful information are talked about. One more section has been taken note of is the upcoming foreign banks in India. The RBI has shown certain interest to involve more of foreign banks than the existing one recently. This step has paved a way for few more foreign banks to start business in India.


Major Banks in India  RBS Bank  Punjab National Bank  Standard Chartered Bank  State Bank of India (SBI)  State Bank of Bikaner & jaipur  Citi Bank  Deutsche Bank  Federal Bank  HDFC Bank  HSBC  ICICI Bank  IDBI Bank  Syndicate Bank  United Western Bank  UTI Bank  Vijaya Bank  American Express Bank  Allahabad Bank  Bank of Baroda  Bank of India  Bank of Maharashtra  Bank of Punjab  BNP Paribas Bank  Canara Bank  Central Bank of India  Indian Overseas Bank

 ING Vysya Bank  JPMorgan Chase Bank  First Rand Bank


BANKING SERVICES IN INDIA With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India. With stiff competition and advancement of technology, the service provided by banks has become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south. This section of banking deals with the latest discovery in the banking instruments along with the polished version of their old systems.

RESERVE BANK OF INDIA (RBI) The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. The Government held shares of nominal value of Rs. 2, 20,000. Reserve Bank of India was nationalized in the year 1949. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of

four years to represent territorial and economic interests and the interests of co-operative and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following: o o o To operate the credit and currency system of the country to its advantage.


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.

Bank of Issue Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than two-fifths of gold coin, gold bulli0on or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.


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 helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.

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.

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. According to the Banking Regulation Act of 1949, the Reserve Bank of India can ask any particular bank or the whole banking system not to lend to particular groups or persons on the basis of certain types of securities. Since 1956, selective controls of credit are increasingly being used by the Reserve Bank. 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 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. This power of the Bank to call for information is also intended to give it effective control of the credit system. The Reserve Bank has also the power to inspect the accounts of any commercial bank. 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.

(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign Reserves The Reserve Bank of India has the responsibility to maintain the official rate of exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d. Though there were periods of extreme pressure in favor of or against the rupee. After India became a member of the International Monetary Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.

Supervisory functions In addition to its traditional central banking 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 co-operative 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 has steadily widened. The Bank now performs 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 in 1962, the Unit Trust of India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural Refinance 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 Reserve Bank of India 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 moneylenders 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.


Classification of RBIs functions The monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country. Equally important, however, are the non-monetary functions of the RBI in the context of India's economic backwardness. The supervisory function of the RBI may be regarded as a non-monetary function (though many consider this a monetary function). The promotion of sound banking in India is an important goal of the RBI, the RBI has been given wide and drastic powers, under the Banking Regulation Act of 1949 – these powers relate to licensing of banks, branch expansion, liquidity of their assets, management and methods of working, inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and inspection, the working of banks has greatly improved. Commercial banks have developed into financially and operationally sound and viable units. The RBI's powers of supervision have now been extended to nonbanking financial intermediaries. Since independence, particularly after its nationalization 1949, the RBI has followed the promotional functions vigorously and has been responsible for strong financial support to industrial and agricultural development in the country.


NATURE OF BANKING IN INDIA A banking company in India has been defined in the banking companies act, one “which transacts the business of banking which means the accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheque, draft, order or otherwise.” Most of the activities a Bank performs are derived from the above definition. In addition, Banks are allowed to perform certain activities which are ancillary to this business of accepting deposits and lending. A bank's relationship with the public, therefore, revolves around accepting deposits and lending money. Another activity which is assuming increasing importance is transfer of money - both domestic and foreign - from one place to another. This activity is generally known as "remittance business" in banking parlance. The so called forex (foreign exchange) business is largely a part of remittance albeit it involves buying and selling of foreign currencies.

FUNCTIONING OF A BANK Functioning of a Bank is among the more complicated of corporate operations. Since Banking involves dealing directly with money,

governments in most countries regulate this sector rather stringently. In India, the regulation traditionally has been very strict and in the opinion of certain quarters, responsible for the present condition of banks, where NPAs are of a very high order. The process of financial reforms, which started in 1991, has cleared the cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations that a Bank has to work with makes its operations even more complicated, sometimes bordering on

illogical. This section, which is also intended for banking professional, attempts to give an overview of the functions in as simple manner as possible. Banking Regulation Act of India, 1949 defines Banking as "accepting, for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdraw able by cheques, draft, and order or otherwise."



Financial requirements in a modern economy are of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks have been instituted to cater to the varying needs of the community. Banks in the organized sector may, however, be classified in to the following major forms:

1. Commercial banks 2. Co-operative banks 3. Specialized banks 4. Central bank

COMMERCIAL BANKS Commercial banks are joint stock companies dealing in money and credit. In India, however there is a mixed banking system, prior to July 1969, all the commercial banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Corers were nationalized. In April 1980, another six commercial banks of high standing were taken over by the government. At present, there are 20 nationalized banks plus the state bank of India and its 7 subsidiaries constituting public sector banking which controls over 90 per cent of the banking business in the country.


CO-OPERATIVE BANKS Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to provide cheap credits to their members. They are based on the principle of self-reliance and mutual cooperation. Co-operative banking system in India has the shape of a pyramid a three tier structure, constituted by: Primary credit societies [APEX] Central co-operative banks [District level] State co-operative banks [Villages, Towns, Cities]

CENTRAL BANK A central bank is the apex financial institution in the banking and financial system of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution. India’s central bank is the reserve bank of India established in 1935.a central bank is usually state owned but it may also be a private organization. For instance, the reserve bank of India (RBI), was started as a shareholders’ organization in 1935, however, it was nationalized after independence, in is free from parliamentary control.

ROLE OF BANKS IN A DEVELOPING ECONOMY Banks play a very useful and dynamic role in the economic life of every modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and 19th centuries, the industrial revolution would not have taken place in Europe.

The economic importance of commercial banks to the developing countries may be viewed thus: 1. Promoting capital formation 2. Encouraging innovation 3. Monetsation 4. Influence economic activity 5. Facilitator of monetary policy

PROMOTING CAPITAL FORMATION A developing economy needs a high rate of capital formation to accelerate the tempo of economic development, but the rate of capital formation depends upon the rate of saving. Unfortunately, in

underdeveloped countries, saving is very low. Banks afford facilities for saving and, thus encourage the habits of thrift and industry in the community. They mobilize the ideal and dormant capital of the country and make it available for productive purposes.

ENCOURAGING INNOVATION Innovation is another factor responsible for economic development. The entrepreneur in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate and invest, and thus uplift economic activity and progress.

INFLUENCE ECONOMIC ACTIVITY Banks are in a position to influence economic activity in a country by their influence on the rate interest. They can influence the rate of interest in the money market through its supply of funds. Banks may follow a cheap


money policy with low interest rates which will tend to stimulate economic activity.

FACILITATOR OF MONETARY POLICY Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential precondition to the effective implementation of monetary policy. Underdeveloped countries cannot afford to ignore this fact. A fine, an efficient and comprehensive banking system is a crucial factor of the

developmental process.

PRINCIPLES OF BANK LENDING POLICIES The main business of banking company is to grant loans and advances to traders as well as commercial and industrial institutes. The most important use of banks money is lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the risk: 1. Safety 2. Liquidity 3. Profitability 4. Purpose of loan 5. Principle of diversification of risks

SAFETY Normally the banker uses the money of depositors in granting loans and advances. So first of all initially the banker while granting loans should think first of the safety of depositor‟s money. The purpose behind the


safety is to see the financial position of the borrower whether he can pay the debt as well as interest easily.

LIQUIDITY It is a legal duty of a banker to pay on demand the total deposited money to the depositor. So the banker has to keep certain percent cash of the total deposits on hand. Moreover the bank grants loan. It is also for the addition of short term or productive capital. Such type of lending is recovered on demand.

PROFITABILITY Commercial banking is profit earning institutes. Nationalized banks are also not an exception. They should have planning of deposits in a profitability way pay more interest to the depositors and more salary to the employees. Moreover the banker can also incur business cost and can give more benefits to customer.

PURPOSE OF LOAN Banks never lend or advance for any type of purpose. The banks grant loans and advances for the safety of its wealth, and certainty of recovery of loan and the bank lends only for productive purposes. For example, the bank gives such loan for the requirement for unproductive purposes.

PRINCIPLE OF DIVERSIFICATION OF RISKS While lending loans or advances the banks normally keep such securities and assets as a supports so that lending may be safe and secured. Suppose, any particular state is hit by disasters but the bank shall

get benefits from the lending to another states units. Thus, he effect on the entire business of banking is reduced. There are proverbs that do not keep all the eggs in one basket. a principle of considerations of sound lending is: 1. Safety 2. Liquidity 3. Shift ability 4. Profitability.

BRANCH SETUP AND STRUCTURE Ever since major commercial banks were nationalized in two phases in 1969 and 1980, there has been a sea change in their functions, outlook and perception. One of the main objectives of nationalization of banks has been to help achieve balanced, regional, sectoral and sectional development of the economy by way of making the banks reach out to the small man and to the remote areas of the country.

ORGANISATIONAL STRUCTURE OF A BANK BRANCH Now let discuss the structure of a branch. The branch is the focal point of all activities. The structure of the branch may be as under:

Small/Medium Branch This is the typical structure of a branch bank. In very large branches, the structure will undergo slight changes as stated below:


Very Large Branch From the structure we can see how the functional relationship works in a branch. He structure also explains the reporting authority for each cadre of the employees. It indicates the communication flow in the branch with well-defined accountability on the part of the employees‟ roles.

TYPES OF BRANCHES According to locations, there are four types‟ bank branches. They are rural, semiurban, urban and metropolitan branches. The B.M. has special role and functions in managing different types of branches.

BANK ORGANIZATION SYSTEM IN INDIA The large volume of work passing through the banking system every day in the form of cash, cheque, and other credit instruments, together with the complexity of the many services rendered, calls not only for a high degree of skill, accuracy and knowledge on the part of the officials, but also up-to-date and efficient methods of organization, accountancy and control. Shareholders and directors General Managers Head office Administration Branch Administration Foreign Departments The Branch Manager The day-book or Control Clerk The Security Clerk The cashier

The Chief Clerk Modern Banking Methods The Remittance or Waste Clerk The Shorthand Typist Rotation of Duties The junior Clerk The Ledger-Keeper The Shorthand Typist The Ledger-Keeper

RETAIL BANKING-THE NEW FLAVOR The retail banking encompasses deposit and assets linked products as well as other financial services offered to individual for personal consumption. Generally, the pure retail banking is conceived to be the provision of mass banking products and services to private individuals as opposed to wholesale banking which focuses on corporate clients. Over the years, the concept of retail banking has been expanded to include in many cases the services provided to small and medium sized businesses. Some banks in Europe even include their private banking business i.e. services to high net worth net worth individuals in their retail Banking portfolio. The concept of Retail banking is not new to banks. it is only now that it is being viewed as an attractive market segment, which offers opportunities for growth with profits. The diversified portfolio characteristic of retail banking gives better comfort and spreads the essence of retail banking lies

in individual customers. Though the term Retail Banking and retail lending are often used synonymously, yet the later is lust one side of Retail Banking. In retail banking, all the banking needs of individual customers are taken care of in an integrated manner.

Retail Lending Products Major retail lending products offered by banks are the following: 1. Housing Loans 2 Loan for Consumer goods 3. Personal Loans for marriage, honeymoon, medical treatment and holding etc. 4. Education Loans 5. Auto Loans 6. Gold Loans 7. Loan against Rent receivables 8. Loan against Pension receivables to senior citizens 9. Debit and Credit Cards 10. Global and International Cards

Other Retail Banking Services Offer of several frills and goodies is not the end of the game. Banks also offer following Retail Banking services free of charges to customers: 1. Payment of utility bills like water, electricity, telephone and mobile phone bills 2. Payment of insurance premiums on due dates 3. Payment of monthly/quarterly education fee of children to their respective schools 4. Remittance of funds from one account to another


5. Demating of shares, bonds, debentures, and mutual funds 6. Payment of credit card bills on due dates 7. Last but not the least, the filing of income tax returns and payment of income tax

The impact of Retail Banking _ The major impact of Retail Banking is that, the customers have become the emperors – the fulcrum of all banking activities, both on the asset side and the liabilities front. The hitherto sellers market has transformed into buyers market. The customers have multiple of choices before them now for cherry picking products and services, which suit their life styles and tastes and financial requirements as well. Banks now go to their customers more often than the customers go to their banks. The non-banking finance Companies which have hitherto been thriving on retail business due to high risk and high returns thereon have been dislodged from their profit munching citadel. Retail banking is transforming banks in to one stop financial super markets. The share of retail loans is fast increasing in the loan books of banks. Banks can foster lasting business relationship with customers and retain the existing customers and attract new ones. There is a rise in their service levels as well. Banks can cut costs and achieve economies of scale and improve their revenues and profits by robust growth in retail business. Reduction in costs offers a win win situation both for banks and the customers. It has affected the interface of banking system through different delivery mechanism.


It is not that banks are sharing the same pie of retail business. The pie itself is growing exponentially; retail banking has fueled a considerable quantum of purchasing power through a slew of retail products. _ Banks can diversify risks in their credit portfolio and contain the menace of NPAs. _ Re-engineering of business with sophisticated technology based products will lead to business creation, reduction in transaction cost and enhancement in efficiency of operations.

Draw-backs of Retail Banking Despite the numerous advantage of Retail Banking there are some drew-Backs in this business. These are as under: a. Management of large number of clients may become a problem if IT systems are not robust. b. Rapid evolution of products can lead to IT complications. c. The cost of maintaining large number of small value transactions in branch networks will be relatively high, unless the customers use alternate delivery channels like ATMs, internet and phone banking etc. for carrying out banking transactions.

The Future of Retail Banking Though at present Retail Banking appears to be the best bet for banks to improve their top and bottom line, yet the future of Retail banking in general, may not be all roses as it appears to be. There are signs of slowdown in customer growth in some countries, which will inevitably have

an impact on Retail Banking business growth. Secondly the possibility of deterioration in asset quality cannot be ruled out. With the boom in housing loan market, the sign of overheating has also started surfacing with potential problem for banks that have not exercised sufficient caution. Further the pressure on margins is mounting partly because of fierce competition and partly as a result of falling interest rates environment which has diminished to some extent the endowment effect of substantial deposit bases from which most retail banks have been deriving benefits. But banks, which have built a significant retail banking portfolio may fare relatively well in the current fiscal. Those banks which have a dynamic retail strategy and are well diversified in products, services and distribution channels and have at the same time managed to achieve a good level of cost efficiency are the ones that are most likely to succeed in the longer term.

STRATEGIC ISSUES IN BANKING SERVICES Strategic Planning: is the process of analyzing the organizational external and internal environments; developing the appropriate mission, vision, and overall goals; identifying the general strategies to be pursued; and allocated resources.

s an organization's fundamental aspirations and purpose that usually appeals to its member's hearts and minds.

achieves goals.

various purposes.

resourcesprimarily human-to accomplish its goals. Tactical Planning: is the process of making detailed decisions about what to do, which will do it, and how to do it-with a normal time and horizon of one year or less. The process generally includes:

organization's strategic plan, ciding on courses of action for improving current operations, and

NON-PERFORMING ASSETS OF THE BANKING SECTOR There was a significant decline in the non-performing assets (NPAs) of SCBs in 2003-04, despite adoption of 90 day delinquency norm from March 31, 2004. The Gross NPAs of SCBs declined from 4.0 per cent of total assets in 2002-03 to 3.3 percent in 2003-04. The corresponding decline in net NPAs was from 1.9 per cent to 1.2 per cent. Both gross NPAs and net NPAs declined in absolute terms. While the gross NPAs declined from Rs. 68,717 crore in 2002-03 to Rs. 64,787 crore in 2003-04, net NPAs declined from Rs. 32,670 crore to Rs. 24,617 crore in the same period. There was also a significant decline in the proportion of net NPAs to net advances from 4.4 per cent in 2002-03 to 2.9 per cent in 2003-04. The significant decline in the net NPAs by 24.7 per cent in 2003-04 as compared to 8.1 per cent in 2002-03 was mainly on account of higher provisions (up to 40.0 per cent) for NPAs made by SCBs. The decline in NPAs in 2003-04 was witnessed across all bank groups. The decline in net NPAs as a proportion of total assets was quite significant in the case of new


TOTAL QUALITY MANAGEMENT While Total Quality Management has proven to be an effective process for improving organizational functioning, its value can only be assured through comprehensive and well thought out implementation

process. The purpose of this chapter is to outline key aspects of implementation of large scale organizational change which may enable a practitioner to more thoughtfully and successfully implement TQM. First, the context will be set. TQM is, in fact, a large scale systems change, and guiding principles and considerations regarding this scale of change will be presented. Without attention to contextual factors, well intended changes may not be adequately designed. As another aspect of context, the expectations and perceptions of employees (workers and managers) will be assessed, so that the implementation plan can address them. Specifically, sources of resistance to change and ways of dealing with them will be discussed. This is important to allow a change agent to anticipate resistances and design for them, so that the process does not bog down or stall. Next, a model of implementation will be presented, including a discussion of key principles. Visionary leadership will be offered as an overriding perspective for someone instituting TQM. In recent years the literature on change management and leadership has grown steadily, and applications based on research findings will be more likely to succeed. Use of tested principles will also enable the change agent to avoid reinventing the proverbial wheel. . INNOVATION IN BANK Innovation drives organizations to grow, prosper and transform in sync with the changes in the environment, both internal and external.

Banking is no exception to this. In fact, this sector has witnessed radical transformation of late, based on many innovations in products, processes, services, systems, business models, technology, governance and regulation. A liberalized and globalize financial infrastructure has provided an additional impetus to this gigantic effort. The pervasive influence of information technology has

revolutionalized banking. Transaction costs have crumbled and handling of astronomical number of transactions in no time has become a reality. Internationally, the number brick and mortar structure has been rapidly yielding ground to click and order electronic banking with a plethora of new products. Banking has become boundary less and virtual with a 24 * 7 model. Banks who strongly rely on the merits of relationship banking‟ as a time tested way of targeting and serving clients, have readily embraced Customer Relationship Management (CRM), with sharp focus on customer centricity, facilitated by the availability of superior technology. CRM has, therefore, become the new mantra in customer service management, which is both relationship based and information intensive. Risk management is no longer a mere regulatory issue.basel-2 has accorded a primacy of place to this fascinating exercise by repositioning it as the core of banking. We now see the evolution of many novel deferral products like credit derivatives, especially the Credit Risk Transfer (CRT) mechanism, as a consequence. CRT, characterized by significant product innovation, is a very useful credit risk management tool that enhances liquidity and market efficiency. Securitization is yet another example in this regard, whose strategic use has been rapidly rising globally. So is outsourcing.


TECHNOLOGY IN BANKING Nobel Laureate Robert Solow had once remarked that computers are seen everywhere excepting in productivity statistics. More recent developments have shown how far this state of affairs has changed. Innovation in technology and worldwide revolution in information and communication technology (ICT) have emerged as dynamic sources of productivity growth. The relationship between IT and banking is fundamentally symbiotic. In the banking sector, IT can reduce costs, increase volumes, and facilitate customized products; similarly, IT requires banking and financial services to facilitate its growth. As far as the banking system is concerned, the payment system is perhaps the most important mechanism through which such interactive dynamics gets manifested. Recognizing the importance of payments and settlement systems in the economy, CORPORATE GOVERNANCE - CODE OF CONDUCT

Need and objective of the Code Clause 49 of the Listing agreement entered into with the Stock Exchanges, requires, as part of Corporate Governance the listed entities to lay down a Code of Conduct for Directors on the Board of an entity and its Senior Management. The term "Senior Management" shall mean personnel of the company who are members of its core management team excluding the Board of Directors. This would also include all members of management, one level below the Executive Directors including all functional heads.

Bank's Belief System This Code of Conduct attempts to set forth the guiding principles on which the Bank shall operate and conduct its daily business with its

multitudinous stakeholders, government and regulatory agencies, media and anyone else with whom it is connected. It recognizes that the Bank is a trustee and custodian of public money and in order to fulfill fiduciary obligations and responsibilities, it has to maintain and continue to enjoy the trust and confidence of public at large. The Bank acknowledges the need to uphold the integrity of every transaction it enters into and believes that honesty and integrity in its internal conduct would be judged by its external behavior. The bank shall be committed in all its actions to the interest of the countries in which it operates. The Bank is conscious of the reputation it carries amongst its customers and public at large and shall endeavor to do all it can to sustain and improve upon the same in its discharge of obligations. The Bank shall continue to initiate policies, which are customer centric and which promote financial prudence.

Philosophy of the Code Adherence to the highest standards of honest and ethical conduct, including proper and ethical procedures in dealing with actual or apparent conflicts of interest between personal and professional relationships. Full, fair, accurate, sensible, timely and meaningful disclosures in the periodic reports required to be filed by the Bank with government and regulatory agencies. Compliance with applicable laws, rules and regulations. To address misuse or misapplication of the Bank's assets and resources. The highest level of confidentiality and fair dealing within and outside the Bank.

General Standards of conduct The Bank expects all Directors and members of the Core Management to exercise good judgment, to ensure the interests, safety and welfare of customers, employees and other stakeholders and to

maintain a cooperative, efficient, positive, harmonious and productive work environment and business organization. The Directors and members of the Core Management while discharging duties of their office must act honestly and with due diligence. They are expected to act with that amount of utmost care and prudence, which an ordinary person is expected to take in his/ her own business. These standards need to be applied while working in the premises of the Bank, at offsite locations where business is being conducted whether in India or abroad, at Bank-sponsored business and social events, or at any other place where they act as representatives of the Bank.


The members of the

Core Management are expected to devote their total attention to the business interests of the Bank. They are prohibited from engaging in any activity that interferes with their performance or responsibilities to the Bank or otherwise is in conflict with or prejudicial to the Bank.

Business Interests: If any member of the Board of Directors and Core Management considers investment in securities issued by the Bank's customer, supplier or competitor, they should ensure that these investments do not compromise their responsibilities to the Bank. Many factors including the size and nature of the investment; their ability to influence the Bank's decisions, their access to confidential information of the Bank, or of the other entity, and the nature of the relationship between the Bank and the customer, supplier or competitor should be considered in determining whether a conflict exists. Additionally, they should disclose to

the Bank any interest that they have which may conflict with the business of the Bank.

. Applicable Laws The Directors of the Bank and Core Management must comply with applicable laws, regulations, rules and regulatory orders. They should report any inadvertent non - compliance, if detected subsequently, to the concerned authorities.

. Disclosure Standards The Bank shall make full, fair, accurate, timely and meaningful disclosures in the periodic reports required to be filed with Government and Regulatory agencies. The members of Core Management of the bank shall initiate all actions deemed necessary for proper dissemination of relevant information to the Board of Directors, Auditors and other Statutory Agencies, as may be required by applicable laws, rules and regulations.

Good Corporate Governance Practices Each member of the Board of Directors and Core Management of the Bank should adhere to the following so as to ensure compliance with good Corporate Governance practices. (a) Dos _ Attend Board meetings regularly and participate in the deliberations and discussions effectively. _ Study the Board papers thoroughly and enquire about follow-up reports on definite time schedule.

_ Involve actively in the matter of formulation of general policies. _ Be familiar with the broad objectives of the Bank and policies laid down by the Government and the various laws and legislations. _ Ensure confidentiality of the Bank's agenda papers, notes and minutes. (b) Don'ts _ Do not interfere in the day to day functioning of the Bank. _ Do not reveal any information relating to any constituent of the Bank to anyone. _ Do not display the logo / distinctive design of the Bank on their personal visiting cards / letter heads. _ Do not sponsor any proposal relating to loans, investments, buildings or sites for Bank's premises, enlistment or empanelment of contractors, architects, auditors, doctors, lawyers and other professionals etc. _ Do not do anything, which will interfere with and/ or be subversive of maintenance of discipline, good conduct and integrity of the staff.

Waivers Any waiver of any provision of this Code of Conduct for a member of the Bank's Board of Directors or a member of the Core Management must be approved in writing by the Board of Directors of the Bank. The matters covered in this Code of Conduct are of the utmost importance to the bank, its stakeholders and its business partners, and are essential to the Bank's ability to conduct its business in accordance with its value system.


ENTREPRENEURSHIP Entrepreneurship is the practice of starting new organizations, particularly new businesses generally in response to identified

opportunities. Entrepreneurship is often a difficult undertaking, as a majority of new businesses fail. Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship may involve creating many job opportunities. Many "high-profile" entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business. Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs. Our understanding of entrepreneurship owes a lot to the work of economist Joseph Schumpeter and the Austrian School of economics. For Schumpeter (1950), an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation.

Entrepreneurship forces "creative destruction" across markets and industries, simultaneously creating new products and business models and eliminating others. In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth. Despite Schumpeter's early 20th-century contributions, the traditional

microeconomic theory of economics has had little room for entrepreneurs in their theories

Characteristics of entrepreneurship The entrepreneur, who has a vision and the enthusiasm for this vision, is the driving force of an entrepreneurship


We began by asserting that individual entrepreneurs get too much credit and blame for the fate of new ventures. We also emphasized that successful entrepreneurs are those who can develop the right kinds of relationships with others inside and outside their firm. Our perspective suggests that, in trying to predict which entrepreneurs will succeed or fail, instead of turning attention to the characteristics of individual founders and CEOs, researchers and teachers would be wiser to turn attention to the other people the entrepreneur spends time with and how they respond. Our perspective also implies that the format of the "Entrepreneurs of the Year" competition described at the outset of this chapter ought to be changed. Rather than using such events to recognize individual CEOs or founders from successful start-ups, awards could be presented to recognize the intertwined group of people who made each start-up a success.

RECENT MACROECONOMIC DEVELOPMENTS AND THE BANKING SYSTEM For a greater part of the twentieth century, the role of the financial system was perceived as mobilizing the massive resource requirements for growth. Since the 1970s and 1980s, development economics underwent a paradigm shift. The financial system is no longer viewed as a passive mobiliser of funds. Efficiency in financial intermediation i.e., the ability of financial institutions to intermediate between savers and investors, to set economic prices for capital and to allocate resources among competing demands is now emphasized. Developments in endogenous growth theory since the late 1980s indicate that efficiency in financial intermediation is a source of technical progress to be exploited for generating increasing returns and sustaining high growth. These changes

have provided the rationale for many developing countries to undertake wide-ranging reforms of their financial systems so as to prepare them for their true resource allocation function. As important financial

intermediaries, banks have a special role to play in this new dispensation. The sharp downturn in global macroeconomic prospects and the continuing sluggishness in domestic industrial activity have necessitated a revision in the forecast for India‟s real GDP growth in 2001-02 from 6.0-6.5 per cent expected at the time of the April 2001 Monetary and Credit Policy Statement to 5.0-6.0 per cent in the mid-term review of the policy. The downward revision is primarily predicated on the outlook for the industrial sector which grew by barely 2.2 per cent in April-October 2001 as against 5.9 per cent in the corresponding period of last year, mainly on account of the slowdown

PRUDENTIAL NORMS A strong and resilient financial system and the orderly evolution of financial markets are key prerequisites for financial stability and economic progress. In keeping with the vision of an internationally competitive and sound banking system, deepening and broadening of prudential norms to the best internationally recognized standards have been the core of our approach to financial sector reforms. This has been supported concurrently by heightened market discipline, pro-active and comprehensive

supervision of the financial system and the orderly development of financial market segments. The calibration of the convergence with international standards is conditioned by the specific realities of our situation; however, the New Capital Accord of the Basel Committee on Banking Supervision which was released in January 2001 adds urgency to

the process of convergence. It is against the backdrop of these exigencies that prudential norms are being constantly monitored and refined. In the recent period, banks are being encouraged to build risk-weighted components of their subsidiaries into their own balance sheets and to assign additional capital. Risk weights are being constantly refined to take into recognition additional sources of risk. The concept of „past due‟ in the identification of NPAs has been dispensed with. Banks and financial institutions are being urged to prepare to move to the international practice of the „90 day norm‟ in the classification of assets as non-performing by 2003-04.

MARKET DISCIPLINE Processes of transparency and market disclosure of critical information describing the risk profile, capital structure and capital adequacy are assuming increasing importance in the emerging

environment. Besides making banks more accountable and responsive to better-informed investors, these processes enable banks to strike the right balance between risks and rewards and to improve the access to markets. Improvements in market discipline also call for greater coordination between banks and regulators. India has been a participant in the international initiatives to ensure improved processes of market discipline that are being worked out in several fora, such as, the multilateral organizations, the BIS, the Financial Stability Forum, and the Core Principles Liaison Group. Concurrent efforts are underway to refine and upgrade financial information monitoring and flow, data dissemination and data warehousing. Banks are currently required to disclose in their balance sheets information on maturity profiles of assets and liabilities, lending to sensitive sectors, movements in NPAs, besides providing information on capital, provisions, shareholdings of the

government, value of investments in India and abroad, and other operating and profitability indicators. Financial institutions are also required to meet these disclosure norms. Banks also have to disclose their total

UNIVERSAL BANKING Since the early 1990s, banking systems worldwide have been going through a rapid transformation. Mergers, amalgamations and acquisitions have been undertaken on a large scale in order to gain size and to focus more sharply on competitive strengths. This consolidation has produced financial conglomerates that are expected to maximize economies of scale and scope by „bundling‟ the production of financial services. The general trend has been towards downstream universal banking where banks have undertaken traditionally non-banking activities such as investment banking, insurance, mortgage financing, securitization, and particularly, insurance. Upstream linkages, where non-banks undertake banking business, are also on the increase. The global experience can be segregated into broadly three models. There is the Swedish or Hong Kong type model in which the banking corporate engages in in-house activities associated with banking. In Germany and the UK, certain types of activities are required to be carried out by separate subsidiaries. In the US type model, there is a holding company structure and separately capitalized subsidiaries In India, the first impulses for a more diversified financial intermediation were witnessed in the 1980s and 1990s when banks were allowed to undertake leasing, investment banking, mutual funds, factoring, hire-purchase activities through separate subsidiaries. By the mid-1990s, all restrictions on project financing were removed and banks were allowed

to undertake several activities in-house. In the recent period, the focus is on Development Financial Institutions (DFIs), which have been allowed to set up banking subsidiaries and to enter the insurance business along with banks. DFIs were also allowed to undertake working capital financing and to raise short-term funds within limits. It was the Narasimham Committee II Report (1998) which suggested that the DFIs should convert themselves into banks or non-bank financial companies, and this conversion was endorsed by the Khan Working Group (1998). The Reserve Bank‟s Discussion Paper (1999) and the feedback thereon indicated the desirability of universal banking from the point of view of efficiency of resource use, but it also emphasized the need to take into account factors such as the status of reforms, the state of preparedness of the institutions, and a viable transition path while moving in the desired direction. Accordingly, the mid-term review of monetary and credit policy, October 1999 and the annual policy statements of April 2000 and April 2001 enunciated the broad approach to universal banking and the Reserve Bank‟s circular of April 2001 set out the operational and regulatory aspects of conversion of DFIs into universal banks. The need to proceed with planning and foresight is necessary for several reasons. The move towards universal banking would not provide a panacea for the endemic weaknesses of a DFI or its liquidity and solvency problems and/or operational difficulties arising from undercapitalization, non-performing assets, and asset liability mismatches, etc. The overriding consideration should be the objectives and strategic interests of the financial institution concerned in the context of meeting the varied needs of customers, subject to normal prudential norms applicable to banks. From the point of view of the regulatory framework, the movement towards universal banking should entrench stability of the financial system, preserve the safety of


public deposits, improve efficiency in financial intermediation, ensure healthy competition, and impart transparent and equitable regulation.

HUMAN RESOURCE DEVELOPMENT IN BANKING A recurring theme in the annual BECON Conference has been the need to focus on developing human resources to cope with the rapidly changing scenario. The core function of HRD in the banking industry is to facilitate performance improvement, measured not only in terms of financial indicators of operational efficiency but also in terms of the quality of financial services provided. Factors such as skills, attitudes and knowledge of personnel play a critical role in determining the competitiveness of the financial sector. The quality of human resources indicates the ability of banks to deliver value to customers. Capital and technology are replicable, but not human capital which needs to be viewed as a valuable resource for the achievement of competitive advantage. The primary emphasis needs to be on integrating human resource management (HRM) strategies with the business strategy. HRM strategies include managing change, creating commitment, achieving flexibility and improving teamwork. These processes underlie the complementary processes that represent the overt aspects of HRM, such as recruitment, placement, performance management, reward management, and

employee relations. A forward looking approach would involve moving towards self-assessment of competency and developmental needs as a part of a continuous learning cycle. The Indian banking industry has been an important driving force behind the nation‟s economic development. The emerging environment poses both opportunities and threats, in particular, to the public sector banks. How well these are met will mainly depend on the extent to which

the banks leverage their primary assets i.e., human resources in the context of the changing economic and business environment. It is obvious that the public sector banks‟ hierarchical structure, which gives preference to seniority over performance, is not the best environment for attracting the best talent from among the young in a competitive environment. A radical transformation of the existing personnel structure in public sector banks is unlikely to be practical, at least in the foreseeable future. However, certain improvements can be made in the recruitment practices as well as in onthe-job training and redeployment of those who are already employed. There are several institutions in the country which cater exclusively to the needs of human resource development in the banking industry. It is worthwhile to consider broad-basing the courses conducted in these institutions among other higherlevel educational institutions so that specialization in the area of banking and financial services becomes an option in higher education curriculums. In the area of information technology, Indian professionals are world leaders and building synergies between the IT and banking industries will sharpen the competitive edge of our banks.


Role of FICCI and UNDP 1. As you are all aware, financial inclusion is a mammoth task and it cannot be achieved without the active collaboration of all stakeholders. It is in this context that this particular seminar organised by Federation of Indian Chambers of Commerce and Industry (FICCI), which is an apex industry association and brings a large number of stakeholders under its fold, and United Nations Development Programme (UNDP), which is at the centre of the UN‟s efforts to reduce global poverty, assumes significance. FICCI has been playing a leading role in policy debates touching social, economic and political issues and I believe that corporates have a great role to play in furthering financial inclusion. It is in their interest. UNDP, as I am aware, has always been a solution-oriented, knowledge-based development organization, supporting various countries to reach their development objectives and internationally agreed goals. The strength of UNDP is that it partners with people at all levels of society to help build nations as also helps build capacities for sustained development and to meet the emerging developmental needs. It also brings in global perspective which is much needed. Within the thematic area of poverty reduction, UNDP has also associated itself with state governments to facilitate the design and implementation of pro-poor and inclusive livelihood promotion strategies with focus on excluded groups such as women, Schedule Castes (SCs), Scheduled Tribes (STs), Minorities, below-poverty line and migrant households and involuntarily displaced people. It is indeed an opportune time for FICCI-UNDP to release the paper on “A study on the progress of Financial Inclusion in India” which aims to analyze the role played by banks in creating Financial Inclusion and the future strategy they need to adopt to make further progress. 2. The important objectives under Financial Inclusion were aptly deliberated by the Committee on Financial Inclusion and the Committee on Financial Sector Reforms headed by respected Dr. Rangarajan and Dr. Raghuram Rajan. These reports have spelt out the imperative need to modify the credit and financial services delivery system to achieve greater inclusion. The full implementation of the recommendations made in these Reports will definitely go a long way to modify particularly the credit delivery system of the banks and other related institutions to meet the credit requirements of marginal and sub-marginal farmers in the rural areas in a fuller measure.


National focus on inclusive growth 3. Today, there is a national as well as global focus on inclusive growth. The Financial Stability and Development Council (FSDC) headed by the Finance Minister is mandated to focus on financial inclusion and financial literacy. All financial sector regulators including the Reserve Bank of India are committed to the mission. And, very publicly, so are banks and other financial sector entities. If we are advocating any kind of stability whether financial, economic, political or social and inclusive growth with stability, it is not possible to attain these goals without achieving financial inclusion. Financial inclusion promotes thrift and develops culture of saving, improves access to credit both entrepreneurial and emergency and also enables efficient payment mechanism, thus strengthening the resource base of the financial institution which benefits the economy as resources become available for efficient payment mechanism and allocation. Empirical evidence shows that countries with large proportion of population excluded from the formal financial system also show higher poverty ratios and higher inequality. Thus, financial inclusion is no longer a policy choice today but a policy compulsion. And, banking is a key driver for financial inclusion/inclusive growth.

Role of Banks 4. But, it is well recognized that there are supply side and demand side factors driving inclusive growth. Banks and other financial services players are largely expected to mitigate the supply side processes that prevent poor and disadvantaged social groups from gaining access to the financial system. Access to financial products is constrained by several factors which include lack of awareness about the financial products, unaffordable products, high transaction costs and products which are inconvenient, inflexible, not customized and of low quality. However, we must bear in mind that apart from the supply side factors, demand side factors such as lower income and /or asset holdings also have a significant bearing on inclusive growth. Owing to difficulties in accessing formal sources of credit, poor individuals andsmall and microenterprises usually rely on their personal savings and internal sources or take recourse to informal sources to invest in health, education, housing and entrepreneurial activities to make use of growth opportunities. The mainstream financial institutions like banks have an important role to play in overcoming this constraint, not as a social obligation, but as pure business proposition.


Financial Inclusion - A global policy priority 5. The importance of an inclusive financial system is widely recognized in the policy circles, not only in India, but has become a policy priority in many countries. Several countries across the globe now look at financial inclusion as the means of a more comprehensive growth, wherein each citizen of the country is able to use their earning as a financial resource that they can put to work to improve their future financial status, adding to the nation‟s progress. In advanced markets, it is mostly a demand side issue. Initiatives for financial inclusion have come from the financial regulators, the governments and the banking industry. The banking sector has taken a lead role in promoting financial inclusion. Legislative measures have been initiated in some countries. For example, in the United States, the Community Reinvestment Act (1997) requires banks to offer credit throughout their entire area of operation and prohibits them from targeting only the rich neighborhood. In France, the law on exclusion (1998) emphasizes an individual‟s right to have a bank account. The German Bankers‟ Association introduced a voluntary code in 1996 providing for an „everyman‟ current banking account that facilitates basic banking transactions. In South Africa, a low cost bank account called „Mzansi‟ was launched for financially excluded people in 2004 by the South African Banking Association. In the United Kingdom, a „Financial Inclusion Task Force‟ was constituted by the government in 2005 in order to monitor the development of financial inclusion. The “Principles for Innovative Financial Inclusion” serve as a guide for policy and regulatory approaches with the objectives of fostering safe and sound adoption of innovative, adequate, low-cost financial delivery models, helping provide conditions for fair competition and a framework of incentives for the various bank, insurance, and non-bank actors involved and delivery of the full range of affordable and quality financial services. Definition of Financial Inclusion 6. What is our definition of Financial Inclusion? Financial Inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular, at an affordable cost in a fair and transparent manner by regulated mainstream institutional players.It is in this context that I would like to point that MFIs/NBFCs/NGOs on their own would not be able to bring about financial inclusion as the range of financial products and services which we consider as the bare minimum to qualify as availability of banking services cannot be offered by MFIs/NBFCs/NGOs. But, yes, they have an immense


and extremely important role to play in furthering financial inclusion in the sense that they bring people and communities into the fold of the formal financial system. What it means to us? Objective 7. Our broad objective is to take banking to all excluded sections of the society, rural and urban. Our attention was specifically attracted to provide banking services to all the 6 lakh villages and meet their financial needs through basic financial products like savings, credit and remittance for obvious reasons. Though, the focus initially was to cover villages with population above 2000 by March 2012, banks have since drawn up their Board approved Financial Inclusion Plans to put in place a roadmap for extending banking services in all villages in an integrated manner over a period of next 3 to 5 years. Is it the first time? 8. It is not that efforts have not been made in the past to promote financial inclusion. The Nationalization of banks, Lead Bank Scheme, incorporation of Regional Rural Banks, Service Area Approach and formation of SelfHelp Groups- all these were initiatives to take banking services to the masses. The brick and mortar infrastructure expanded; the number of bank branches multiplied ten-fold - from 8,000+ in 1969 when the first set of banks were nationalized to 80,000+ today. Despite this wide network of bank branches spread across the length and breadth of the country, banking has still not reached a large section of the population. A number of rural households are still not covered by banks. They are deprived of basic banking services like a savings account or minimal credit facilities. The proportion of rural residents who lack access to bank accounts is nearly 40 per cent, and this rises to over three-fifths in the eastern and north-eastern regions of India. The major barriers cited to expand appropriate services to poor by financial service providers are the lack of reach, higher cost of transactions and time taken in providing those services. The existing business model does not pass the test of convenience, reliability, flexibility and continuity. So, what has changed now? 9. It is not correct to surmise that banks were uninterested in increasing penetration. They were constrained by their capacity/ability as, till a few years ago, appropriate banking technology was not available. But, now, with the availability of suitable banking technology, the time has come


when the Indian banking system can make and deliver on that promise. Quite clearly, the task to cover 1.2 billion population with banking services is gigantic and, hence, banks have now realized that technology is the driving force for achieving this. Harnessing this power of technology for making the banking system more efficient for achieving the goals set under financial inclusion is going to be a big opportunity as well as a bigger challenge for the banking system. We should also understand that poor people are bankable and there is tremendous potential for business growth by providing banking services to them. What we need is an appropriate business and delivery model. Is Financial Inclusion a viable Business Model today? 10. Contrary to common perception, financial inclusion is a potentially viable business proposition because of the huge untapped market that it seeks to bring into the fold of banking services. Financial inclusion, prima facie, needs to be viewed as “money at the bottom of the pyramid” and business models should be so designed to be at least self-supporting in the initial phase and profit-making in the long run. It is important to keep in mind that service provided should be at an affordable cost. It is also pertinent to note that providing subsidy does not necessarily lead to a better delivery mechanism. What RBI has done? Removed all regulatory roadblocks 11. It has been RBI‟s endeavour to remove all hurdles in the way of its regulated entities in achieving financial inclusion objectives. While I would mention a couple of enabling policy measures undertaken by RBI a little later, I would first like to highlight certain special characteristics of India‟s financial inclusion model.
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RBI has adopted a bank-led model as its main plank for achieving the goals under financial inclusion. Due to the constraints involved in going for a full-fledged brick & mortar branch model, RBI has adopted the ICT based agent bank model through Business Correspondents for ensuring door step delivery of financial products and services. The approach adopted has been technology and delivery model neutral, whether through handheld devices, mobiles, mini ATMs,etc. We have endeavoured to deliver a minimum of four basic products and services, viz. a savings account with overdraft facility, a remittance product, a pure savings product, preferably, variable recurring deposit, and an entrepreneurial credit product such as


Kisan Credit Card (KCC) or General purpose Credit Card (GCC). Naturally, the front end devices must be able to transact all these four products and services. RBI has undertaken a series of policy measures to make our unique model a success. Some of the important ones are: i. Relaxation on KYC norms: Know Your Customer (KYC) requirements for opening bank accounts were earlier relaxed for small accounts in August 2005, simplifying procedure by stipulating that introduction by an account holder who has been subjected to full KYC drill would suffice for opening such accounts or the bank can take any evidence as to the identity and address of the customer to the satisfaction of the bank. During the year, it has been further relaxed to include job card issued by NREGA duly signed by an officer of the State Government or the letters issued by the Unique Identification Authority of India containing details of name, address and AADHAAR number. Simplified branch authorisation: To address the issue of uneven spread of Bank branches, since December 2009, domestic scheduled commercial banks are permitted to freely open branches in Tier 3 to Tier 6 centres with population of less than 50,000 under general permission, subject to reporting. In the North Eastern States and Sikkim, domestic scheduled commercial banks can now open branches in rural, semi urban and urban centres without the need to take permission from Reserve Bank in each case, subject to reporting. Pricing has been made free: Banks have been given the freedom to price their advances. Liberalisation of Business Correspondents Model: In January 2006, the Reserve Bank permitted banks to engage business facilitator and business correspondent (BC) as intermediaries for providing financial and banking services. The BC model allows banks to provide door step delivery of services especially „cash in cash out‟ transactions at a location much closer to the rural population, thus addressing the last mile problem. The list of eligible individuals/entities who can be engaged as BCs is being enlarged from time to time. For-profit companies have also been allowed to be engaged as BCs. You would be happy to know that as on March 31, 2011, domestic commercial banks have reported deploying 58,361 BCs, providing banking services in 76,081 villages. Opening of branches in unbanked rural centres: To further step up the opening of branches in rural areas so as to improve banking


iii. iv.



penetration and financial inclusion rapidly, the need for opening of more brick and mortar branches, besides the use of BCs, was felt. Accordingly, banks have been mandated in the Monetary Policy Statement – April 2011, to allocate at least 25 per cent of the total number of branches to be opened during a year in unbanked rural centres. Financial Inclusion Plan for Banks: In our effort to achieve sustained, planned and structured financial inclusion, in January 2010, all public and private sector banks were advised to put in place a Board approved three year Financial Inclusion Plan (FIP) and submit the same to the Reserve Bank by March 2010. These banks prepared and submitted their FIPs containing targets for March 2011, 2012 and 2013. These plans broadly include self determined targets in respect of rural brick and mortar branches to be opened; business correspondents (BC) to be employed; coverage of unbanked villages with population above 2000 as also other unbanked villages with population below 2000 through branches/BCs/other modes; no-frill accounts opened including through BC-ICT; Kisan Credit Cards (KCC) and General Credit Cards (GCC); and other specific products designed by them to cater to the financially excluded segments. Banks were advised to integrate Board approved FIPs with their business plans and to include the criteria on financial inclusion as a parameter in the performance evaluation of their staff. The implementation of these plans is being closely monitored by the Reserve Bank.

What has been done by banks so far? Snapshots from FIP 12. A criticism that the bankers' often face is that they are not doing enough or that they are not sincere enough. But is that really true? Let me quote a couple of statistics from the consolidated FIP of the scheduled commercial banks to debunk some of these myths (Detailed statistics in Annex 1). i. Coverage of villages: Banks have, up to June 2011, opened banking outlets in 1.07 lakh villages up from just 54,258 as on March 2010. Out of these, 22,870 villages have been covered through brick & mortar branches, 84,274 through BC outlets and 460 through other modes like mobile vans, etc. Opening of No-frills accounts: Basic banking 'no-frills' account, with 'nil' or very low minimum balance requirement as well as no charges for not maintaining such minimum balance, were introduced as per RBI directive in 2005. As on June 2011, 7.91 crore No-frills






accounts have been opened by banks with outstanding balance of Rs.5,944.73 crore. These figures, respectively, were 4.93 crore and Rs 4257.07 crore in March 2010. Small Overdrafts in No-frills accounts: Banks have been advised to provide small ODs in such accounts. Up to June 2011, banks had provided 9.34 lakh ODs amounting to Rs.37.42 crore. The figures, respectively, were 1.31 lakh and Rs 8.34 crore in March 2010. General Credit Cards: Banks have been asked to consider introduction of a General Purpose Credit Card (GCC) facility up to Rs. 25,000/- at their rural and semi-urban braches. The credit facility is in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned. Based on assessment of household cash flows, the limits are sanctioned without insistence on security or purpose. Interest rate on the facility is completely deregulated. As on June 2011, banks had provided credit aggregating Rs.2,356.25 crore in 10.70 lakh General Credit Card (GCC) accounts. Kisan Credit Cards : Kisan Credit Cards to small time farmers have been issued by banks. As on June 30, 2011, the total number of KCCs issued has been reported as 202.89 lakh with a total amount outstanding to the tune of 1,36,122.32 crore.

Now, these figures in themselves may not seem very impressive considering the gargantuan task that we have at hand. But if we look at the progress that has been achieved in the last one and a quarter years, and if we are able to scale up and sustain our efforts, I am quite hopeful that the targets set by the banks and our objective of achieving universal financial inclusion is attainable. But, it is not automatic and cannot be taken for granted. There are a number of issues and challenges that have to be surmounted. 13. Way Forward – Future of Financial Inclusion i. One of the major challenges under Financial Inclusion has been addressing the last mile connectivity problem. For addressing this issue and for achieving the goals set, experts have recommended the Business Correspondent/Facilitator (BC/BF) model. Though the BC model may not be commercially viable at the initial stage due to high transaction costs for banks and customers, the appropriate use of technology can help in reducing this. The need is to develop and implement scalable, platform-independent technology solutions which, if implemented on a large scale, will bring down the high cost of operation. Appropriate and effective technology, thus, holds the key for financial inclusion to take place on an accelerated scale.





v. vi.

Banks need to perfect their delivery and business model. A number of different models involving handheld devices with smart cards, mobiles, mini ATMs, etc are being tried out and it is necessary that they are integrated with the backend CBS system for scaling up. A good delivery model is also needed and, perhaps, even more so if there is a glitch and customer grievances needs to be resolved expeditiously. Thus, the time is approaching when these various experiments with different models are taken to their logical conclusion and banks start scaling up their implementation. At the same time, banks must also have an integrated business model. These hold the key to the success and failure of the financial inclusion efforts. In addition to this, RBI has advised banks to focus more towards opening of Brick & Mortar branches in unbanked villages. These branches can be low cost intermediary simple structures comprising of minimum infrastructure for operating small customer transactions and supporting up to 8-10 BCs at a reasonable distance of 2-3 kms. This will lead to efficiency in cash management, documentation and redressal of customer grievances. Such an approach will also act as an effective supervisory mechanism for BC operations. Another very important thing is that banks have to realise that for Business Correspondent (BC) model to succeed, the BCs, who are the first level of contact for customers, have to be compensated adequately so that they too see this as a business opportunity As mentioned earlier, banks should strive to provide a minimum of four basic products and, in addition, design new products tailored to income streams of poor borrowers and according to their needs and interests. Banks must be able to offer the entire suite of financial products and services to the poor clients at an attractive pricing. Though the cost of administering small ticket personal transactions is high, these can be brought down if banks effectively leverage ICT solutions. This can be supplemented through product innovation with superior cost efficiency. Mobile banking has tremendous potential and the benefits of m-commerce need to be exploited. It is important that adequate infrastructure such as digital and physical connectivity, uninterrupted power supply, etc. are available. All stakeholders will have to work together through sound and purposeful collaborations to ensure appropriate ecosystem development. This would include government, both Central and State, Regulators, Financial Institutions, Industry Associations, Technology Players, Corporates, NGOs, SHGs, Civic Society, etc. Local and national level organizations have to ensure that these partnerships look at both commercial and social aspects to help


achieve scale, sustainability and desired impact. This collaborative model will have to tackle exclusion by stimulating demand for appropriate financial products, services and advice with appropriate delivery mechanism and by ensuring that there is a supply of appropriate and affordable services available to those that need them. Mindset, cultural and attitudinal changes at grass roots and cutting edge technology levels of branches of banks are needed to impart organisational resilience and flexibility. Banks should institute systems of reward and recognition for personnel initiating, ideating, innovating and successfully executing new products and services in the rural areas.


Conclusion How close are we to the vision of a sound and well-functioning banking system that I outlined. It is fair to say that despite a turbulent year and many challenges, we have made some progress towards this goal. There has been progressive intensification of financial sector reforms, and the financial sector as a whole is more sensitized than before to the need for internal strength and effective management as well as to the overall concerns for financial stability. At the same time, in view of greater disclosure and tougher prudential norms, the weaknesses in our financial system are more apparent than before. There is greater awareness now of the need to prepare the banking system for the technical and capital requirements of the emerging prudential regime and a greater focus on core strengths and niche strategies. We have also made some progress in assessing our financial system against international best practices and in benchmarking the future directions of progress. Several contemplated changes in the surrounding legal and institutional environment have been proposed for legislation. The NPA levels remain too large by international standards and concerns relating to management and supervision within the ambit of corporate governance are being tested during the period of downturn of economic activity. The structure of the financial system is changing and supervisory and regulatory regimes are experiencing the strains of accommodating these changes. Certain weak links in the decentralized banking and nonblank financial sectors have also come to notice. In a fundamental sense, regulators and supervisors are under the greatest pressures of change and bear the larger responsibility for the future. For both the regulators and the regulated, eternal vigilance is the price of growth with financial stability.


We should strive to move towards realizing our vision of an efficient and sound banking system of international standards with redoubled vigor. Our greatest asset in this endeavor is the fund of technical and scientific human capital formation available in the country. The themes which are being covered in this Conference under structural, operational and governance issues should help in defining the road map for the future.