Banking sector growth in India

Introduction
India is one of the top 10 economies globally, with vast potential for the banking sector to grow. The last decade
witnessed a tremendous upsurge in transactions through ATMs, and Internet and mobile banking. In 01!, the
country"s #s $1 trillion %&'( 1.)! trillion* banking industry is set for a greater change. Two new banks have
already received licences from the government. +urthermore, the #eserve ,ank of India"s %#,I* new norms will
provide incentives to banks to spot potential bad loans and take corrective steps that will curb the practices of
rogue borrowers.
The Indian government"s role in e-panding the banking industry has been significant. Through the +inancial
Inclusion .lan %+/ 1001)*, banking connectivity in the country increased more than three1fold to 11,)!
villages in 01) from 23,24! at the beginning of the plan.
,anks are also looking at new ways to attract customers. In 'eptember, 01), I5I5I bank leveraged the
popularity of the social platform, and launched its +acebook banking service, .ockets. The service enables
customers to transfer funds and pay bills from within the website.
Market Size
The revenue of Indian banks increased four1fold from &'( 11.$ billion to &'( !2.4 billion during the period
0010010. In the same period, the profit after ta- increased from &'( 1.! billion to &'( 1 billion.
In 0101), Indian banks had 130 overseas branches %12) in 01101* while foreign banks had )12 branches
in India %)04 in 01101*.
5redit to housing sector grew at a compound annual growth rate %5A6#* of 11.1 per cent during the period +/
00$01). Total banking sector credit is e-pected to grow at a 5A6# of 1$.1 per cent %in terms of I7#* to touch
&'( .! trillion by 013.
Recent Developments
Infrastructure 8evelopment +inance 5ompany %I8+5* and ,andhan +inancial 'ervices .vt 9td have been
chosen among a field of : banks by the #,I to set up banks. ;In1principle" approval has been given to the
banks, which are both non1banking finance companies. <hile Mumbai1based I8+5 is categorised as an
infrastructure finance company, =olkata1based ,andhan is a microfinance establishment.
,andhan covers :.: million customers, nearly all of them women whose loans average #s 10,000. The bank
seeks to continue catering to a rural and unbanked customer base from its current branch network. ><hy go
after the same person and ask him to get another account? <hy not @ust go after those who do not have any
bank accounts,> said Mr 5handra 'hekhar 6hosh, the bank"s Managing 8irector.
,anks and housing finance companies %A+5s* together en@oyed a 0 per cent growth in home loans in +/
01)01!, according to Mr #B Berma, 5hairman and Managing 8irector, 7ational Aousing ,ank. Aome loans
disbursed by banks and A+5s collectively grew by #s 1.20 trillion %&'( 2.:4 billion* in +/ 01)01! to reach
#s 4.20 trillion %&'( 1:4.:$ billion* at the end of the fiscal. C<e e-pect the growth %in home loans* to continue.
There is every reason to believe that,D said Mr Berma.
Eammu and =ashmir %EF=* ,ank is looking at opportunities to increase its presence outside the country. The
bank is likely to establish branches in 9ondon and 8ubai to strengthen its relationships with current customers
who have business interests in Gurope and <est Asia. C<e have a number of business relationships in these
countries and it makes sense for us to have a presence there,D said Mr MushtaH Ahmad, 5hairman and 5hief
G-ecutive Ifficer, EF= ,ank.
Indian banks operating abroad en@oyed a higher credit growth in comparison to foreign banks operating in India,
as per an #,I survey on international trade in banking services for 0101). According to the survey, growth of
credit e-tended by Indian banks" branches operating overseas grew by )1.3 per cent to #s :$:,:30 crore %&'(
43.)2 billion*J credit e-tended by foreign banks based in India increased 3.: per cent to touch #s )03,300
crore %(:1.1: billion*.
'trong growth in agriculture and services sectors as well as the personal loans segment has helped push bank
credit growth during the period April07ovember, 01) to 3. per cent, compared to 2.2 per cent during the
same period of 01, according to a report by credit rating agency 5A#G #atings. 8uring the period, loans to
the agri sector grew by :. per cent compared to .) per cent in 01. >Aigher growth in credit to agriculture
may be attributed to the e-pected better kharif crop which has been announced by the Ministry of Agriculture,>
according to the report.
I5I5I ,ank is looking at different ways to ma-imise the digital opportunity for growth. The bank is doubling the
number of cities it covers with Ktablet bankingK and offering its customers services such as video conferencing,
so they can talk to the money managers from the comfort of their homes. >The idea is thinking ahead of your
customer. 7ot @ust what they may want today but what could they want tomorrow,> said Mr #a@iv 'abharwal,
G-ecutive 8irector, I5I5I.
,ank of India %,oI* launched its card1less cash withdrawal facility in March 01!. &nder this service, a ,II
customer can transfer money to anyone, using the bank"s ATMs or through Internet banking. The sender has to
provide the beneficiary"s mobile number, a sender code, and the amount through internet banking or te-t
message. The beneficiary, after receiving a code from the bank can visit any ,II ATM with instant money
transfer facility and withdraw the money within a fortnight of the transfer.
'imple steps such as memorising oneKs .I7, lowering credit limits on cards, using virtual cards and deactivating
transactional services connected to a mobile number could bring down bank frauds, says e-perts. #egular
changing of the password can also save an account from attacks. CIf there is a change in the email or phone
number, it should be immediately updated with the bank,> said a cyber1crime investigation specialist.
Government Initiatives
The #,I has issued e-tra guidelines for banks giving gold metal loans %6M9s*. To safeguard against fraud, the
central bank has asked lenders to check the credit worthiness of borrowersJ collateral securities against the
loanJ and trade cycle of the manufacturing activity, before sanctioning the loans. >9ack of proper monitoring
mechanism and not ensuring end use of 6M9 has resulted in certain instances of fraudsLmisuse related to 6M9
by certain unscrupulous @ewellers,> stated the #,I in a notification.
The 5abinet 5ommittee on Gconomic Affairs %55GA* has given the green signal to a proposal to increase
foreign holding in A-is ,ank from !4 per cent to 2 per cent. The move could bring in overseas investment of
nearly #s 3,:0 crore %&'( 1.0 billion* into the country. The 55GA nod is dependent on +IIs" holding capped
at !4 per cent.
Road Ahead
India"s banking sector has the potential to become the fifth largest banking sector globally by 00 and the third
largest by 0:. The industry has witnessed discernable development, with deposits growing at a 5A6# of
1. per cent %in terms of I7#* in the period +/ 0201)J in +/ 1) total deposits stood at &'( 1,3!.) billion.
Today, banks are turning their focus to servicing clients. ,anks in the country, including those in the public
sector, are emphasising on enhancing their technology infrastructure, in order to improve customer e-perience
and gain a competitive edge. The popularity of internet and mobile banking is higher than ever before, with
5ustomer #elationship Management %5#M* and data warehousing e-pected to drive the ne-t wave of
technology in banks. Indian banks are also progressively adopting an integrated approach to risk management.
Most banks already have in place the framework for asset0liability match, credit and derivatives risk
management.
G-change #ate &sedM I7# 1 N &'( 0.01221 as on April 3, 01!
6rowth of ,anking 'ector in IndiaM A 5ollective 'tudy of Aistory and
its Iperations

Manish =hannaO
and 'aurabh =aushalOO

O8epartment of Management 'tudies, 5areer .oint &niversity, Aamirpur %A...* I78IA11320!1
Gmail I8M manish.khanna$0Pgmail.com
OO 8epartment of Aumanities, 5areer .oint &niversity, Aamirpur %A...* I78IA11320!1
Gmail I8M kumarsaurabh1!4Pgmail.com

%#eceived 'ept, 01), Accepted )0 7ov, 01)*
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A,'T#A5TM 7o country can have a healthy economy without a sound and effective banking system. The
,anks always remain the main participants of the financial system in any country. The ,anking sector offers
several facilities and opportunities to their customers and, therefore, it should be able to meet the new
challenges posed by technology and other internal and e-ternal factors. <ith the establishment of the first
,ank in India by ,ritish, the ,anking sector has made rapid progress in various phrases. ,efore the
establishment of banks, the financial activities were handled by money lenders and individuals and due to
that people had to suffer a lot because of ignorance and many other reasons. 'o as to overcome such
problems
the organiRed banking sector was established which was fully regulated by the government. In India, #eserve
,ank of India %#,I* is the main governing authority and has been bestowed with e-tensive powers to work as
5entral banking authority. The #eserve ,ank of India was established on April 1, 14): in accordance with
the provisions of the #eserve ,ank of India Act 14):. As it is evident that most of Indian population resides in
rural areas therefore banking sector had to make a number of reforms in its working in order to survive for
its e-istence. As from the origin of banking sector in India, continuously growth is Huite evident. 7owadays
Indian banking system is working very efficiently in the country. In this paper, an attempt has been made to
know the history and growth of banking sector by dwelling upon its growth in various phases. This paper is a
small contribution to the e-isting vast knowledge of banking industry and will be useful for bankers,
Industrialist, policy maker and researchers.
=eywordsM 7ationaliRation Movement, 9iberaliRation, ,anking 'tructure in India, 6overnment policy, 6rowth of
,anking, #egulations, #,I F functions, I,A F functions, A#M F retention of employees and customers, social,
ethical and environmental aspects.
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I7T#I8&5TII7
A bank is a financial institution that provides banking and other financial services to their customers. A
bank is generally understood as an institution which provides fundamental banking services such as
accepting deposits and providing loans. ,ut there is also an e-istence of non1banking institutions that
provides certain banking services without meeting the legal definition of a bank.
A banking system is also referred as a system provided by the bank which offers cash management
services for customers and reporting the transactions of their accounts and portfolios, throughout the day.
7ow with the overgrowing rise of economy in India, the banking system should not only be hassle free
but it should also be able to meet the new challenges posed by the technology and any other e-ternal and
internal factors. +or the past three decades, India"s banking system has made several outstanding
achievements to its credit. The ,anks are the main participants of the financial system in India. The
,anking sector offers several facilities and opportunities to their customers. All the banks safeguard the
money and provide basic facilities such as loans, credit, and other payment services including checking
accounts, money orders, and cashier"s cheHues. In addition, banks also offer investment and insurance
products.

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India cannot have a healthy economy without a sound and effective banking system. The banking system
should be hassle free and able to meet the new challenges posed by technology and other factors, both
internal and e-ternal.
In the past three decades, IndiaKs banking system has earned several outstanding achievements to its
credit. The most striking is its e-tensive reach. It is no longer confined to metropolises or cities in India.
In fact, Indian banking system has reached even to the remote corners of the country. This is one of the
main aspects of IndiaKs growth story.
The governmentKs regulation policy for banks has paid rich dividends with the nationaliRation of 1! ma@or
private banks in 1424. ,anking today has become convenient and instant, with the account holder not
having to wait for hours at the bank counter for getting a draft or for withdrawing money from his
account.
1. 7eed of the ,anksM ,efore the establishment of banks, the financial activities were handled by money
lenders and individuals. At that time the interest rates were very high. Again there were no security of
public savings and no uniformity regarding loans. 'o as to overcome such problems the organiRed
banking sector was established which was fully regulated by the government. The following functions
e-plain the need of the ,ank and its importanceM
S To provide the security to the savings of customers.
S To control the supply of money and credit.
S To encourage public confidence in the working of the financial system, increase savings speedily
and efficiently.
S To avoid focus of financial powers in the hands of a few individuals and institutions.
S To set eHual norms and conditions %i.e. rate of interest, period of lending etc* to all types of
customers.
. Aistory of ,anking in IndiaM The first bank in India, though conservative, was established in 13$2.
+rom 13$2 till today, the @ourney of Indian ,anking 'ystem can be segregated into three distinct phasesM
S Garly phase of Indian banks, from 13$2 to 1424
S 7ationaliRation of banks and the banking sector reforms, from 1424 to 1441
S 7ew phase of Indian banking system, with the reforms after 1441
.1 .hase oneM Garly phase of Indian banks, from 13$2 to 1424M The first bank in India namely, C6eneral
,ank of India,D was set up in 13$2 by the ,ritish. 'ubseHuently, two other banks namely C,ank of
AindustanD and C,engal ,ankD were formed after that. The Gast India 5ompany established ,ank of
,engal %1$04*, ,ank of ,ombay %1$!0*, and ,ank of Madras %1$!)* as independent units and called them
.residency banks. These three banks were merged in 140 and the Imperial ,ank of India, a bank of
private shareholders, mostly Guropeans, was established. Allahabad ,ank was established, e-clusively by
Indians, in 1$2:. .un@ab 7ational ,ank was set up in 1$4! with headHuarters in 9ahore. ,etween 1402
and 141), a number of other banks, i.e., ,ank of India, 5entral ,ank of India, ,ank of ,aroda, 5anara
,ank, Indian ,ank, and ,ank of Mysore were set up. The #eserve ,ank of India came in 14):.
8uring the first phase, the growth in banking sector was Huite slow and banks also e-perienced periodic
failures between 141) and 14!$. There were appro-imately 1,100 banks in total e-isting only in India, but
most of them were small. This was creating a lot of confusion among people regarding their choices and
believes. Therefore, in order to streamline the functioning and activities of commercial banks, the
6overnment of India came up with the ,anking 5ompanies Act, 14!4, which was later on changed to the
,anking #egulation Act, 14!4 as per amending Act of 142: %Act 7o. ) of 142:*. This act bestowed The
#eserve ,ank of India %#,I* with e-tensive powers for the supervision of banking in India as the 5entral
banking authority. ,ut still, even after all that improvement in banking industryJ the general public had
lesser confidence in banks. As an aftermath, deposit mobiliRation was slow. Moreover, people were more
inclined towards .ostal department because they believed that the savings bank facility provided by them
was comparatively safer, and funds were largely given to traders.
. .hase twoM 7ationaliRation of banks and the banking sector reforms, from 1424 to 1441M After
Independence in 143!, the government took ma@or initiatives to reform the banking sector. In 14::,

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Indian government nationaliRed the Imperial ,ank of India and started offering e-tensive banking
facilities, especially in rural and semi1urban areas. The government constituted the 'tate ,ank of India
and gave it powers to act as the principal agent of the #eserve ,ank of India %#,I* and to handle banking
transactions of the &nion government and state governments all over the country. After that, seven other
banks owned by the .rincely states were nationaliRed in 14:4 and were made subsidiaries of the 'tate
,ank of India. In 1424, 1! commercial banks in the country were nationaliRed. 'ubseHuently, 03 more
banks were nationaliRed in 14$0. As a result, $0 percent of the banking sector in India came under the
direct ownership of government.
.) .hase ThreeM 7ew phase of Indian banking system, with periodic reforms after 1441M This phase is
the most important as it introduced many more products and facilities in the banking sector as a part of
the reforming process. In 1441, under the chairmanship of M. 7arasimham, a committee was set up,
which worked for the liberaliRation of banking practices. The result of committee"s efforts are Huite
evident as now, the entire country is flooded with foreign banks and their ATM stations. 7ow all the
banks are more concerned to give a satisfactory service to customers in comparison to the previous times.
<ith the emergence of phone banking and net banking, the entire system has become more convenient
and swift. 7ow time is given more importance in all money transactions.
). 7ationaliRation Movement of ,anksM ,y the 1420s, the Indian banking industry has emerged as an
important tool to facilitate the development of the Indian economy. At the same time, it has also emerged
as a large employer, and a result a debate started concerning about the possibility to nationaliRe the
banking industry. Indira 6andhi, the1then .rime Minister of India e-pressed the intention of the
6overnment of India %6II* in the annual conference of the All India 5ongress Meeting in a paper entitled
>'tray thoughts on ,ank 7ationaliRation>. The paper was received with positive enthusiasm.
Thereafter, her move was swift and sudden, and the 6II issued an ordinance and nationaliRed the 1!
largest commercial banks with effect from the midnight of Euly 14, 1424. Eayaprakash 7arayan, a
national leader of India, described the step as a >Masterstroke of political sagacity>. <ithin two weeks
of the issue of the ordinance, the .arliament passed the ,anking 5ompanies %AcHuisition and Transfer of
&ndertaking* ,ill, and it received the presidential approval on 4 August, 1424.
A second step of nationaliRation of 2 more commercial banks followed in 14$0. The stated reason for the
nationaliRation was to give the government more control of credit delivery. <ith the second step of
nationaliRation, the 6II controlled around 41T of the banking business in India. 9ater on, in the year
144), the government merged 7ew ,ank of India with .un@ab 7ational ,ank. It was the only merger
between nationaliRed banks and resulted in the reduction of the number of nationaliRed banks from 0 to
14. After this, until the 1440s, the nationaliRed banks grew at a pace of around !T, closer to the average
growth rate of the Indian economy.
!. 9iberaliRation in ,anking 'ectorM In the early 1440s, the1then 7arsimha #ao government embarked
on a policy of liberaliRation, licensing a small number of private banks. The policy came to known as
7ew 6eneration tech1savvy banks, and included 6lobal Trust ,ank %the first of such new generation
banks to be set up*, which later on merged with Iriental ,ank of 5ommerce, A-is ,ank %earlier as &TI
,ank*, I5I5I ,ank and A8+5 ,ank. This was a great initiative and along with the rapid growth in the
economy of India, it revolutioniRed the banking sector which witnessed rapid growth with strong
contribution from all the three sectors of banks, namely, government banks, private banks and foreign
banks. The ne-t stage for the Indian banking has been setup with the proposed rela-ation in the norms for
+oreign 8irect Investment, where all +oreign Investors in banks may be given voting rights which could
e-ceed the present cap of 10T, at present it has gone up to !4T with some restrictions.
The new policy transformed the banking sector in India completely. ,ankers, till this time, were used to
the !121! method %,orrow at !TJ 9end at 2TJ 6o home at !* of functioning. The new wave ushered in a
modern outlook and tech1savvy methods of working for the traditional banks. All this led to the retail
boom in India. .eople not @ust demanded more from their banks but also received more. Today, in terms
of Huality of assets and capital adeHuacy, Indian banks are considered to have clean, strong and
transparent balance sheets as compared to other banks in comparable economies in its region. The

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#eserve ,ank of India is an autonomous body, with minimal pressure from the government. The stated
policy of the ,ank on the Indian #upee is to manage instability but without any fi-ed e-change rate.
:. The ,anking 'tructure in IndiaM The commercial banking structure in India consists of scheduled
and unscheduled commercial banks. 'cheduled banks contain a list of those banks that are included in the
second schedule of #eserve ,ank of India %#,I* Act, 14):.
As on Eune )0, 1444, there were )00 scheduled banks in India having a total network of 2!,41$ branches.
The scheduled commercial banks in India comprise 'tate ,ank of India and its associates %$*,
nationaliRed banks %14*, foreign banks %!:*, private sector banks %)*, co1operative banks, and regional
rural banks. ,efore the nationaliRation of Indian banks, the 'tate ,ank of India %',I* was the only
nationaliRed bank, which was nationaliRed on Euly 1, 14::, under the ',I Act of 14::. After the
nationaliRation of banks in India, the branches of the public sector banks rose to appro-imately $00
percent in deposits and advances took a huge @ump by in 11,000 percent.
Table 1M 7ationaliRation .rocess of ,anks in India.






2. Types of ,anks in IndiaM In India, banks are segregated in different groups. Gach group has its own
benefits and limitations in its operations. Gach one has its own dedicated target market. A few of them
work in the rural sector only while others work both in rural as well as urban areas. Many banks are
operating in cities only. 'ome banks are of Indian origin and some are foreign players. ,anks in India can
be classified intoM
S .ublic 'ector ,anks
S .rivate 'ector ,anks
S 5ooperative ,anks
S #egional #ural ,anks
S +oreign ,anks
Ine aspect to be noted is the increasing number of foreign banks in India. The #,I has shown certain
interest to involve more foreign banks. This step has covered the way for a few more foreign banks to
start business in India.
3. 6overnment policy on ,anking Industry %'ourceM1The federal #eserve Act 141) and The ,anking
Act 14))*M ,anks operating in most of the countries must adhere to heavy regulations, rules enforced by
+ederal and 'tate agencies to govern their operations, service offerings, and the manner in which they
grow and e-pand their facilities to better serve the public. A banker works within the financial system to
provide loans, accept deposits, and provide other services to their customers. They must do so within a
climate of e-tensive regulation, designed primarily to protect the public interests. The main reasons why
the banks are heavily regulated are as followsM
S To protect the safety of the public"s savings.
S To control the supply of money and credit in order to achieve a nation"s broad economic goal.
S To ensure eHual opportunity and fairness in the public"s access to credit and other vital financial
services.
S To promote public confidence in the financial system, so that savings are made speedily and
efficiently.
S To avoid concentrations of financial power in the hands of a few individuals and institutions.
S .rovide the 6overnment with credit, ta- revenues and other services.
S To help sectors of the economy that they have special credit needs for e.g. Aousing, small
business, and agricultural loans etc.

'r.7o. 7ame of ,ank /ear of 7ationaliRation
1. 'tate ,ank of India 14::
. ',I subsidiaries 14:4
). 1! ma@or banks of India 1424
!. 03 banks with deposits over two hundred crores 14$0

!0

$. Management of #isksM The growing competition increases the competitiveness among banks. ,ut,
e-isting global banking scenario is seriously posing threats for Indian banking industry. <e have already
witnessed the bankruptcy of some foreign banks.
According to 'hrieves %144*, there is a positive association between changes in risk and capital.
#esearch studied the large sample of banks and results reveal that regulation was partially effective
during the period covered. Moreover, it was concluded that changes in bank capital over the period
studied was risk1based 1
. <olgast, %001* studied the union and gaining activity among financial firms.
The author focused bank supervisors in conte-t with success of mergers, risk management, financial
system stability and market liHuidity. The study concluded that large institutions are able to maintain a
superior level of risk management
. Al1Tamimi and Al1MaRrooei %003* e-amined the risk management
practices and techniHues in dealing with different types of risk. Moreover, they compared risk
management practices between the two sets of banks. The study found the three most important types of
risk i.e. commercial banks foreign e-change risk, followed by credit risk, and operating risk )
.'ensarma
and Eayadev %004* used selected accounting ratios as risk management variables and attempted to gauge
the overall risk management capability of banks. They used multivariate statistical techniHues to
summariRe these accounting ratios. Moreover, the paper also analyRed the impact of these risk
management scores on stock returns through regression analysis.#esearchers found that Indian banksK risk
management capabilities have been improving over time. #eturns on the banksK stocks appeared to be
sensitive to risk management capability of banks. The study suggest that banks want to enhance
shareholder wealth will have to focus on successfully managing various risks !
.
4. 6rowth of ,ankingM Uhao, 5asu and +errari %00$* used a balanced panel data set covering the period
of 144100! and employed a 8ata Gnvelopment Analysis %8GA* based MalmHuist Total +actor
.roductivity %T+.* inde-. The empirical study indicated that, after an initial ad@ustment phase, the Indian
banking industry e-perienced sustained productivity growth, which was driven mainly by technological
progress. ,anksK ownership structure does not seem to matter as much as increased competition in T+.
growth. +oreign banks appear to have acted as technological innovators when competition increased,
which added to the competitive pressure in the banking market. +inally, results also indicate an increase
in risk1taking behaviour, along with the whole deregulation process :
.
It was found in the study of 6oyal and Eoshi %011* that small and local banks face difficulty in bearing
the impact of global economy therefore, they need support and it is one of the reasons for merger. 'ome
private banks used mergers as a strategic tool for e-panding their horiRons. There is huge potential in
rural markets of India, which is not yet e-plored by the ma@or banks. Therefore I5I5I ,ank 9td. has used
mergers as their e-pansion strategy in rural market. They are successful in making their presence in rural
India. It strengthens their network across geographical boundary, improves customer base and market
share 2
.
10. #egulations for Indian banksM 5urrently in most @urisdictions commercial banks are regulated by
government entities and reHuire a special bank license to operate. &sually the definition of the business of
banking for the purposes of regulation is e-tended to include acceptance of deposits, even if they are not
repayable to the customerKs orderValthough money lending, by itself, is generally not included in the
definition.
&nlike most other regulated industries, the regulator is typically also a participant in the market, i.e. a
government1owned %central* bank. 5entral banks also typically have a monopoly on the business of
issuing banknotes. Aowever, in some countries this is not the case. In &=, for e-ample, the +inancial
'ervices Authority licenses banks, and some commercial banks %such as the ,ank of 'cotland* issue their
own banknotes in addition to those issued by the ,ank of Gngland, the &= governmentKs central bank.
'ome types of financial institutions, such as building societies and credit unions, may be partly or wholly
e-empted from bank license reHuirements, and therefore regulated under separate rules. The reHuirements
for the issue of a bank license vary between @urisdictions but typically includeM
S Minimum capital
S Minimum capital ratio
S +it and .roperK reHuirements for the bankKs controllers, owners, directors, andLor senior officers

!1

S Approval of the bankKs business plan as being sufficiently prudent and plausible.
11. #eserve ,ank of India %#,I*M The central bank of the country is the #eserve ,ank of India %#,I*. It
was established in April, 14): with a share capital of : crores on the basis of the recommendations of
the Ailton /oung 5ommission. The share capital was divided into fully paid shares of 100 rupees each,
which was entirely owned by private shareholders in the beginning. The government held shares of
nominal value of 0,000 into its custody.
7ow, as it is already mentioned that the #,I commenced its operation on April 1, 14):, under the
#eserve ,ank of India Act, 14)!. The Act %II of 14)!* under which it was constituted provided the
legislative basis for the functioning of the ,ank. The bank was constituted to meet the following
reHuirementsM
S #egulate the issue of currency notes
S Maintain reserves with a view to securing monetary stability
S Iperate the credit and currency system of the country to its advantage
11.1 +unctions of the #,IM The #eserve ,ank of India Act of 14)! had entrusted all the following
important functions of a central bank to the #eserve ,ank of India. The list of the functions is as
followingM
11.1.1,ank of IssueM &nder 'ection of the Act, the ,ank has the sole right to issue currency notes of
all denominations. The distribution of one1rupee notes and coins and small coins all over the country is
undertaken by the #eserve ,ank as an agent of the government.
11.1. ,anker to the 6overnmentM The second important function of the #,I is to act as the government"s
banker, agent, and adviser.
11.1.) ,ankersK ,ank and 9ender of the 9ast #esortM The #,I acts as the bankersK bank. 'ince
commercial banks can always e-pect the #,I to come to their help in times of banking crisis, the #,I
becomes not only the bankerKs bank but also the lender of the last resort.
11.1.! 5ontroller of 5reditM The #,I 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 ,ank rate or through
open market operations.
11.1.: 5ustodian of +oreign #eservesM The #,I has the responsibility to maintain the official rate of
e-change. ,esides maintaining the rate of e-change of the rupee, the #,I has to act as the custodian of
IndiaKs reserve of international currencies.
11. 'upervisory +unctionsM In addition to its traditional central banking functions, the #,I has certain
non1monetary functions of the nature of supervision of banks and promotion of sound banking in
India. The #eserve ,ank Act, 14)!, and the ,anking #egulation Act, 14!4, have given the #,I wide
powers of supervision and control over commercial and co1operative banks, relating to licensing and
establishments, branch e-pansion, liHuidity of their assets, management and methods of working,
amalgamation, reconstruction, and liHuidation.
1. Indian ,anks" Association %I,A*M The Indian ,anks" Association %I,A* was formed on 'eptember
2, 14!2, with members. Today, I,A has more than 1:2 members, such as public sector banks, private
sector banks, foreign banks having offices in India, urban co1operative banks, developmental financial
institutions, federations, merchant banks, mutual funds, housing finance corporations, etc.
1.1 +unctions of I,AM
S .romote sound and progressive banking principles and practices.
S #ender assistance and to provide common services to members.
S IrganiRe co1ordination and co1operation on procedural, legal, technical, administrative, and
professional matters.
S 5ollect, classify, and circulate statistical and other information.
S 6ain e-pertise towards common purposes such as cost reduction, increased efficiency,
productivity, and improving systems, procedures, and banking practices etc.
S .ro@ect good public image of banking through publicity and public relations.
S Gncourage sports and cultural activities among bank employees.

!

1. ,anking Activities %I,A*M
S #etail banking, dealing directly with individuals and small businesses
S ,usiness banking, providing services to mid1market businesses
S 5orporate banking, directed at large business entities
S .rivate banking, providing wealth management services to high networth individuals
S Investment banking, activities in the financial markets, such as >underwrite> %guarantee the sale
of* stock and bond issues, trade for their own accounts, make markets, and advise corporations on
capital market activities like mergers and acHuisitions
S Merchant banking is the private eHuity activity of investment banks
S +inancial services, global financial institutions that engage in multiple activities such as banking
and insurance
1). Market 8iscipline and TransparencyM According to +ernando %011* transparency and disclosure
norms as part of internationally accepted corporate governance practices are assuming greater importance
in the emerging environment. ,anks are e-pected to be more responsive and accountable to the investors.
,anks have to disclose in their balance sheets a plethora of information on the maturity profiles of assets
and liabilities, lending to sensitive sectors, movements in 7.As, capital, provisions, shareholdings of the
government, value of investment in India and abroad, operating and profitability indicators, the total
investments made in the eHuity share, units of mutual funds, bonds, debentures, aggregate advances
against shares and so on 3
.
1!. Auman #esource ManagementM 6elade and Ivery %00)* e-amined relationships between human
resource management %A#M*, work climate, and organiRational performance in the branch network of a
retail bank. 'ignificant correlations were found between work climate, human resource practices, and
business performance. The results showed that the correlations between climate and performance cannot
be e-plained by their common dependence on A#M factors, and that the data are consistent with a
mediation model in which the effects of A#M practices on business performance are partially mediated
by work climate $
.,artel %00!* studied the relationship between human resource management and
establishment performance of employees on the manufacturing sector. &sing a uniHue longitudinal dataset
collected through site visits to branch operations of a large bank, the author e-tends his research to the
service sector. ,ecause branch managers had considerable discretion in managing their operations and
employees, the A#M environment could vary across branches. 'ite visits provided specific e-amples of
managerial practices that affected branch performance. An analysis of responses to the bank"s employee
attitude survey that controls for unobserved branch and manager characteristics shows a positive
relationship between branch performance and employees" satisfaction with the Huality of performance
evaluation, feedback, and recognition at the branchVthe CincentivesD dimension of a high1performance
work system. In some fi-ed effects specifications, satisfaction with the Huality of communications at the
branch was also important 4
.
1!.1 Gmployees" #etentionM The banking industry has transformed rapidly in the last ten years, shifting
from transactional and customer service1oriented to an increasingly aggressive environment, where
competition for revenue is on top priority. 9ong1time banking employees are becoming disenchanted with
the 8r. =.A. 6oyal F Bi@ay Eoshi International Eournal of ,usiness #esearch and Management %IE,#M*,
Bolume %)*M Issue %1*M 01 : industries and are often resistant to perform up to new e-pectations. The
diminishing employee morale results in decreased revenue. 8ue to the intrinsically close ties between
staff and clients, losing those employees completely can mean the loss of valuable customer relationships.
The retail banking industry is concerned about employee retention from all levelsM from tellers to
e-ecutives to customer service representatives because competition is always moving in to hire them
away. The competition to retain key employees is intense. Top1level e-ecutives and A# departments
spend large amounts of time, effort, and money trying to figure out how to keep their people from
leaving. 'ekaran, &. %14$4* studied a sample of 23 bank employees, this study traced the paths to the @ob
satisfaction of employees at the workplace through the Huality of life factors of @ob involvement and sense
of competence. #esults indicated that personal, @ob, and organiRational climate factors influenced the ego

!)

investment or @ob involvement of people in their @obs, which in turn influenced the intra1psychic reward
of sense of competence that they e-perienced, which then directly influenced employeesK @ob
satisfaction10
. The @ob characteristics like autonomy and fle-ibility clearly stand out as the most
important factor for @ob satisfaction
14
. Mitchell, Aoltom, 9ee and 6raske %001* asserted in their study
that people often leave for reasons unrelated to their @obs. In many cases, une-pected events or shocks are
the cause. Gmployees also often stay because of attachments and their sense of fit, both on the @ob and in
their community 11
. 'a-ena and Monika %010* studied a case of : companies out of 1000 organiRations
and $3: respondents surveyed across $00 cities in India by ,usiness Today. The survey was on nine
basic parameters like career and personal growth, company prestige, training, financial compensation and
benefits and merit based performance evaluation. It was concluded that the biggest challenge for
organiRations is that when new employees appointed, it is difficult to merge them in organiRational
culture. Gach organiRation has its own uniHue culture and most often, when brought together, these
cultures clash. <hen there is no retention, employees point to issues such as identity, communication
problems, human resources problems, ego clashes, and intergroup conflicts, which all fall under the
category of Ccultural differencesD1
.
1!. 5ustomer #etentionM 9evesHue and Mc8ougall %1442* investigated the ma@or determinants of
customer satisfaction and future intentions in the retail bank sector. They identified the determinants
which include service Huality dimensions %e.g. getting it right the first time*, service features %e.g.
competitive interest rates*, service problems, service recovery and products used. It was found, in
particular, that service problems and the bank"s service recovery ability have a ma@or impact on customer
satisfaction and intentions to switch 1)
. 5lark %1443* studied the impact of customer1employee
relationships on customer retention rates in a ma@or &= retail bank. Ae revealed that employee and
customer perceptions of service Huality are related to customer retention rates and that employee and
customer perceptions of service Huality are related to each other 1!
. 5lark %00* e-amined the
relationship between employees" perceptions of organiRational climate and customer retention in a
specific service setting, viR. a ma@or &= retail bank. Gmployees" perceptions of the practices and
procedures in relation to customer care at their branch were investigated using a case study approach. The
findings revealed that there is a relationship between employees" perceptions of organiRational climate
and customer retention at a micro organiRational level. Ae suggested that organiRational climate can be
subdivided into five climate themes and that, within each climate theme, there are several dimensions that
are critical to customer retention W1:X. 8r. =.A. 6oyal F Bi@ay Eoshi International Eournal of ,usiness
#esearch and Management %IE,#M*, Bolume %)*M Issue %1*M 01, 2. Aansemark and Albinsson %00!*
e-plored how the employees of a company e-perience the concepts of customer satisfaction and retention.
They used phenomenological method, allowing the informants" own interpretations to be discovered.
'atisfaction was discussed from three perspectivesM definition of the concept, how to recogniRe when a
customer is satisfied, and how to enhance satisfaction. The informants" e-perience pertaining to these
three categories varied, and a total of seven ways to define, recogniRe or enhance satisfaction were
discovered. These wereM service, feeling, chemistry, relationship and confidence, dialogue, complaints
and retention. All e-cept the first two of these categories of e-perience were found to enhance retention,
implying that the informants have found that strategies for enhancing both satisfaction and retention are
similar 12. The strongest connection between retention and satisfaction strategies turned out to be in terms
of relationship and confidence.
1:. Gnvironmental 5oncernsM It is Huite clear from the recently formed 5openhagen 5limate 5ouncil
%555* that there is a severe need for environmental awareness among all the countries of the world. 555
published Thought 9eadership 'eries on 5limate 5hange which is a collection of inspirational, concise
and clearly argued pieces from some of the worldKs most renowned thinkers and business leaders on
climate change. The ob@ective of the pieces is to assist in enhancing the public and political awareness of
the actions that could have a significant impact on global emissions growth and to disseminate the
message that it is time to act. The Thought 9eadership 'eries was aimed at e-plaining and spreading
awareness of the key elements in the business and policy response to the climate problem. The rationale
for the Thought 9eadership 'eries was to change the focus of people.

!!


12. 'ocial and Gthical AspectsM There are some banks, which proactively undertake the responsibility to
bear the social and ethical aspects of banking. This is a challenge for commercial banks to consider these
aspects in their working. Apart from profit ma-imiRation, commercial banks are supposed to support
those organiRations, which have some social concerns. ,enedikter %011* defines 'ocial ,anks as Cbanks
with a conscienceD. They focus on investing in community, providing opportunities to the disadvantaged,
and supporting social, environmental, and ethical agendas. 'ocial banks try to invest their money only in
endeavors that promote the greater good of society, instead of those, which generate private profit @ust for
a few. Ae has also e-plained the main difference between mainstream banks and social banks that
mainstream banks are in most cases focused solely on the principle of profit ma-imiRation whereas, social
banking implements the triple principle of profit1people1planet 13
. 6oyal and Eoshi %011* have concluded
in their study on social and ethical aspects of ,anking Industry that ,anks can protect themselves as a
socially and ethically oriented organiRation by disbursement of loans merely to those organiRations, which
has social, ethical and environmental concerns 1$
.
5I759&'II7
Iver the years, it has been observed that clouds of an-iety and drops of growth are two important
phenomena of market, which freHuently changes in different sets of conditions. The pre and post
liberaliRation era has witnessed various environmental changes which directly affects the aforesaid
phenomena. It is evident that post liberaliRation era has spread new colors of growth in India, but
simultaneously it has also posed some challenges. This article discusses the various challenges and
opportunities like history and growth of banks, transparency, customer e-pectations, management of
risks, and growth in banking sector, human factor, global banking, environmental concern, social, ethical
issues, and employee and customer retentions. ,anks are striving to combat the competition. As per the
above discussion, we can say that the biggest challenge for banking industry is to serve the mass market
of India. 5ompanies have shifted their focus from product to customer. The better we understand our
customers, the more successful we will be in meeting their needs. In order to mitigate above mentioned
challenges Indian banks must cut their cost of their services. Another aspect to encounter the challenges is
product differentiation. Apart from traditional banking services, Indian banks must adopt some product
innovation so that they can compete in gamut of competition. Technology up gradation is an inevitable
aspect to face challenges.
The level of consumer awareness is significantly higher as compared to previous years. 7owadays they
need internet banking, mobile banking and ATM services. G-pansion of branch siRe in order to increase
market share is another tool to combat competitors. Therefore, Indian nationaliRed and private sector
banks must spread their wings towards global markets as some of them have already done it. Indian banks
are trustworthy brands in Indian marketJ therefore, these banks must utiliRe their brand eHuity as it is a
valuable asset for them.

Q. What do you understand by Financial Sector Reforms? Elucidate some Financial Sector Reforms in Context
with the Banking Industry in India: Answer: Indian economy got itself plunged into deep crisis by the end of the
eighties and early nineties. The Post Gulf war economic retrains, lack of clear financial planning by previous
governments, political instability in the country, lack of fiscal discipline, irregular monsoons, and plethora of
external payment obligations were some of the reasons that pushed our country for the first time, close to
defaulting on its international commitments. The credit rating for India was rated down and India was unable to
borrow from external commercial markets. Stabilization & Economic Reforms started in June 1991, with the
New Government. Finance Minister of that time Dr. Manmohan Singh took some measures which are called
New Economic Policy. This New Economic Policy was divided into two programmes one was short term
stabilization programme and another was medium to long term structural adjustment programme. The short
term stabilization programme was focused around fiscal policy measures and monetary policy measures, social
sector reforms. The medium and long term structural adjustment programs included Industrial Policy, Public
sector reforms and financial sector reforms. The financial sector reforms were based upon the recommendation
of Narsimham Committee. The main features of these reforms were to unshackle the banking system from
excessive government control however without denationalization & to curtail the tendency of the government to
rely on credit control measures (Statutory Liquidity ratio and Cash Reserve Ratio) as extra budgetary sources of
inexpensive credit. Now in these last two decades Banking system in India has undergone significant
metamorphosis and now there are new tools, new technology, new players in the market, new opportunities and
a challenging market. Some of the important financial sector reforms in the banking industry are as follows: 1.
Deregulation of Interest rate regime: Deregulation of Interest rate regime was done with an objective to make
the banks achieve efficient resource allocation. 2. Reducing SLR and CRR: the efforts have been done to make
both CRR and SLR down. SLR which was at a peak of 38.5 % was brought down to 24% . (Now it has been
raise to 25% in the last review of the monetary policy) 3. Constitution of BFS: Board for Financial Supervision
was constituted in 1994 with an aim to establish a regulator for banking sector with effective monitoring and
supervision. 4. OSMOS: RBI also instituted a offsite Monitoring and surveillance system in 1995. 5. Strengthen
the capital base: Capital base of the banks were strengthened by recapitalization, public equity issues and
subordinated debt. 6. Introduction of Prudential norms: Prudential norms were introduced and progressively
tightened for income recognition, classification of assets, provisioning of bad debts, marking to market of
investments. 7. Entry of Private Players: New private sector banks were licensed and branch licensing
restrictions were relaxed. FDI in these banks was allowed up to 74%. 8. Operational changes in the credit
policy: Several operational reforms were introduced in the realm of credit policy: 9. Abolishing of MPBF:
Detailed regulations relating to Maximum Permissible Bank Finance were abolished . 10. Consortium lending:
Consortium regulations were relaxed substantially, 11. Convergence with International practices: Regulatory
norms for capital adequacy, income recognition, asset classification, provision etc. progresses towards
convergence with international best practices. 12. SARFAESI Act 2002: The Securitization and Reconstruction
of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) empowers Banks / Financial
Institutions to recover their non-performing assets without the intervention of the Court. Read Here More about
SARFAESI Act 2002 http://www.gktoday.in/2009/08/sarfeesi-act-2002.html 13. Capital Adequacy Ratio: The
Committee on Banking Regulations and Supervisory Practices (Basel Committee) had released the guidelines
on capital measures and capital standards in July 1988 which were been accepted by Central Banks in various
countries including RBI. In India it has been implemented by RBI w.e.f. 1.4.92. The minimum CRAR (Capital to
Risk-Weighted Assets Ratio) has been kept at 9% for existing banks which is just 1% above the international
norms. (For private banks it is 10% ) 14. Strength in Disclosure Norms: The disclosure norms have been
stregnthed for improving governance and bringing them in alignment with the international norms. Capital
adequacy, asset quality, maturity distribution of assets and liabilities, country risk exposure, risks in derivatives
etc. disclosures were covered. 15. Risk Management: Risk management systems were issued by RBI in 1999
and guidelines have been released by reserve bank of India on time to time basis. 16. Credit Info: Credit
Information bureau (India) Ltd was established in 2000. 17. Banking Ombudsman Scheme: This scheme was
notified in 1995 and further revised from time to time. The objective was to provide an efficient system of
grievance redressal against banks. 18. Banking Codes and standards Board of India: It was set up in 2006 to
ensure comprehensive code of conduct for fair and transparent treatment with customers.
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