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8.4 RTGS




Financial sector reforms have long been regarded as an important part of the agenda for
policy reform in developing countries. Traditionally, this was because they were expected to
increase the efficiency of resource mobilization and allocation in the real economy which in
turn was expected to generate higher rates of growth. Developing countries can expect
increasing scrutiny on this front by international financial institutions, and rating agencies
and countries which fail to come up to the new standards are likely to suffer through lower
credit ratings and poorer investor perceptions. Reform of the financial sector was identified,
from the very beginning, as an integral part of the economic reforms initiated in 1991. As
early as August 1991, the government appointed a high level Committee on the Financial
System (the Narasimhan Committee) to look into all aspects of the financial system and make
comprehensive recommendations for reforms. This paper is an attempt to study the reforms
that has been taking place in financial sector in India. The data and evidences are collected
from various books and journals. The study finds a detail picture of reforms that has been
taking place in the financial sector in India and also a good overview of banking system.
Keywords: Financial sector, Financial sector reforms, Resource mobilization.

A bank is a financial institution that provides banking and other financial services to
theircustomers. A bank is generally understood as an institution which provides
fundamentalbanking services such as accepting deposits and providing loans. There are also
nonbankinginstitutions that provide certain banking services without meeting the
legaldefinition of a bank. Banks are a subset of the financial services industry.
A banking system also referred as a system provided by the bank which offers
cashmanagement services for customers, reporting the transactions of their accounts
andportfolios, through out the day. The banking system in India, should not only be hasslefree
but it should be able to meet the new challenges posed by the technology and anyother
external and internal factors. For the past three decades, Indias banking system hasseveral
outstanding achievements to its credit. The Banks are the main participants of thefinancial
system in India. The Banking sector offers several facilities and opportunities totheir

customers. All the banks safeguards the money and valuables and provide loans,credit, and
payment services, such as checking accounts, money orders, and cashierscheques. The banks
also offer investment and insurance products. As a variety of modelsfor cooperation and
integration among finance industries have emerged, some of thetraditional distinctions
between banks, insurance companies, and securities firms havediminished. In spite of these
changes, banks continue to maintain and perform theirprimary roleaccepting deposits and
lending funds from these deposits.
Need of the Banks:
Before 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. So as to overcome such problems the
organized banking sector was established, which was fully regulated by the government. The
organized banking sector works within the financial system to provide loans, accept deposits
and provide other services to their customers. The following functions of the bank explain the
need of the bank and its importance:

To provide the security to the savings of customers.

To control the supply of money and credit
To encourage public confidence in the working of the financial system,

increasesavings speedily and efficiently.

To avoid focus of financial powers in the hands of a few individuals andinstitutions.
To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all
types of customers.


The first bank in India, called The General Bank of India was established in the year 1786.
The East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay
(1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which was
established in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, and
Bank of Madras) were called as Presidency Banks. Allahabad Bank which was established in
1865, was for the first time completely run by Indians. Punjab National Bank Ltd. was set up
in 1894 with head quarters 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. In
1921, all presidency banks were amalgamated to form the Imperial Bank of India which was

run by European Shareholders. After that the Reserve Bank of India was established in April
At the time of first phase the growth of banking sector was very slow. Between 1913 and
1948 there were approximately 1100 small banks in India. 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 a Central Banking Authority.
After independence, Government has taken most important steps in regard of Indian Banking
Sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name
"State Bank of India", to act as the principal agent of RBI and to handle banking transactions
all over the country. It was established under State Bank of India Act, 1955. Seven banks
forming subsidiary of State Bank of India was nationalized in
1960. On 19th July, 1969, major process of nationalization was carried out. At the same time
14 major Indian commercial banks of the country were nationalized. In 1980, another six
banks were nationalized, and thus raising the number of nationalized banks to 20. Seven more
banks were nationalized with deposits over 200 Crores. Till the year1980 approximately 80%
of the banking segment in India was under governmentsownership. On the suggestions of
Narsimhan Committee, the Banking Regulation Actwas amended in 1993 and thus the gates
for the new private sector banks were opened.The following are the major steps taken by the
Government of India to Regulate Bankinginstitutions in the country:1949: Enactment of Banking Regulation Act.
1955: Nationalisation of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalisation of 14 major Banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalisation of seven banks with deposits over 200 Crores.


By the 1960s, the Indian banking industry has become an important tool to facilitate the
development of the Indian economy. At the same time, it has emerged as a large employer,
and a debate has ensured about the possibility to nationalise the banking industry. Indira
Gandhi, the-then Prime Minister of India expressed the intention of the Government of India
(GOI) in the annual conference of the All India Congress Meeting in a paper entitled "Stray
thoughts on Bank Nationalisation". The paper was received with positive enthusiasm.
Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised
the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash
Narayan, a national leader of India, described the step as a "Masterstroke of political
sagacity" Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential
approval on 9 August, 1969. A second step of nationalisation of 6 more commercial banks
followed in 1980. The stated reason for the nationalisation was to give the government more
control of credit delivery. With the second step of nationalisation, the GOI controlled around
91% of the banking business in India. Later on, in the year 1993, the government merged
New Bank of India with Punjab National Bank. It was the only merger between nationalised
banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After
this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the
average growth rate of the Indian economy. The nationalised banks were credited by some;
including Home minister P. Chidambaram, to have helped the Indian economy withstand the
global financial crisis of 2007-2009.
In the early 1990s, the then NarsimhaRao government embarked on a policy ofliberalisation,
licensing a small number of private banks. These came to be known asNew Generation techsavvy banks, and included Global Trust Bank (the first of suchnew generation banks to be set
up), which later aCommerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank.
This move along with the rapid growth in the economy of India revolutionized the banking
sector in India which has seen rapid growth with strong contribution from all the three sectors
of banks, namely, government banks, private banks and foreign banks. The next stage for the
Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct
Investment, where all Foreign Investors in banks may be given voting rights which could
exceed the present cap of 10%, at present it has gone up to 49% with some restrictions.

The new policy shook the banking sector in India completely. Bankers, till this time,were
used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning.
The new wave ushered in a modern outlook and tech-savvy methods of working for
thetraditional banks. All this led to the retail boom in India. People not just demanded
morefrom their banks but also received more. Currently (2007), banking in India is generally
fairly mature in terms of supply, product range and reach-even though reach in rural India
still remains a challenge for the private sector and foreign banks. In terms of quality of assets
and capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets as compared to other banks in comparable economies in its region. The
Reserve Bank of India is an autonomous body, with minimal pressure from the government.
The stated policy of the Bank on the Indian Rupee is to manage volatility but without any
fixed exchange rate-and this has mostly been true. With the growth in the Indian economy
expected to be strong for quite some time-especially in its services sector-the demand for
banking services, especially retail banking, mortgages and investment services are expected
to be strong.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in
Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has
been allowed to hold more than 5% in a private sector bank since the RBI announced norms
in 2005 that any stake exceeding 5% in the private sector banks would need to be voted by
them. In recent years critics have charged that the non-government owned banksare too
aggressive in their loan recovery efforts in connection with personal loans. There are press
reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.
Housing, vehicle and personal loans.

Government policy on banking industry (Source:-The federal Reserve Act 1913

and The Banking Act 1933)

Banks operating in most of the countries must contend with heavy regulations, rules enforced
by Federal and State agencies to govern their operations, service offerings, and the manner in
which they grow and expand 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 extensive regulation, designed primarily to
protect the public interests.
The main reasons why the banks are heavily regulated are as follows:

To protect the safety of the publics savings.

To control the supply of money and credit in order to achieve a nations broad

economic goal.
To ensure equal opportunity and fairness in the publics access to credit and other vital

financial services.
To promote public confidence in the financial system, so that savings are made

speedily and efficiently.

To avoid concentrations of financial power in the hands of a few individuals and

Provide the Government with credit, tax revenues and other services.
To help sectors of the economy that they have special credit needs for eg. Housing,
small business and agricultural loans etc.

1.5 Law of banking

Banking law is based on a contractual analysis of the relationship between the bank and
customerdefined as any entity for which the bank agrees to conduct an account.The law
implies rights and obligations into this relationship as follows:

The bank account balance is the financial position between the bank and the
customer: when the account is in credit, the bank owes the balance to the customer;

when the account is overdrawn, the customer owes the balance to the bank.
The bank agrees to pay the customer's cheques up to the amount standing to the credit

of the customer's account, plus any agreed overdraft limit.

The bank may not pay from the customer's account without a mandate from the

customer, e.g. cheques drawn by the customer.

The bank agrees to promptly collect the cheques deposited to the customer's account

as the customer's agent, and to credit the proceeds to the customer's account.
The bank has a right to combine the customer's accounts, since each account is just an

aspect of the same credit relationship.

The bank has a lien on cheques deposited to the customer's account, to the extent that

the customer is indebted to the bank.

The bank must not disclose details of transactions through the customer's account
unless the customer consents, there is a public duty to disclose, the bank's interests

require it, or the law demands it.

The bank must not close a customer's account without reasonable notice, since
cheques are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement between the
customer and the bank. The statutes and regulations in force within a particular jurisdiction
may also modify the above terms and/or create new rights, obligations or limitations relevant
to the bank-customer relationship.

Regulations for Indian banks

Currently in most jurisdictions commercial banks are regulated by government entitiesand

require a special bank license to operate. Usually the definition of the business ofbanking for
the purposes of regulation is extended to include acceptance of deposits, evenif they are not
repayable to the customer's orderalthough money lending, by itself, isgenerally not
included in the definition.
Unlike most other regulated industries, the regulator is typically also a participant in
themarket, i.e. a government-owned (central) bank. Central banks also typically have
amonopoly on the business of issuing banknotes. However, in some countries this is not the
case. In UK, for example, the Financial Services Authority licenses banks, and
somecommercial banks (such as the Bank of Scotland) issue their own banknotes in addition
tothose issued by the Bank of England, the UK government's central bank.
Some types of financial institutions, such as building societies and credit unions, may
bepartly or wholly exempted from bank license requirements, and therefore regulated
underseparate rules. The requirements for the issue of a bank license vary between
jurisdictionsbut typically include:

Minimum capital
Minimum capital ratio
'Fit and Proper' requirements for the bank's controllers, owners, directors,

and/orsenior officers
Approval of the bank's business plan as being sufficiently prudent and plausible.

Classification of Banking Industry in India

Indian banking industry has been divided into two parts, organized and unorganizedsectors.
The organized sector consists of Reserve Bank of India, Commercial Banks andCo-operative
Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc). Theunorganized sector,
which is not homogeneous, is largely made up of money lenders andindigenous bankers.An
outline of the Indian Banking structure may be presented as follows:10

1. Reserve banks of India.

2. Indian Scheduled Commercial Banks.
a) State Bank of India and its associate banks.
b) Twenty nationalized banks.
c) Regional rural banks.
d) Other scheduled commercial banks.
3. Foreign Banks.
4. Non-scheduled banks.
5. Co-operative banks.
Reserve bank of India
The reserve bank of India is a central bank and was established in April 1, 1935 inaccordance
with the provisions of reserve bank of India act 1934. The central office ofRBI is located at
Mumbai since inception. Though originally the reserve bank of Indiawas privately owned,
since nationalization in 1949, RBI is fully owned by theGovernment of India. It was
inaugurated with share capital of Rs. 5 Crores divided intoshares of Rs. 100 each fully paid
RBI is governed by a central board (headed by a governor) appointed by the
centralgovernment of India. RBI has 22 regional offices across India. The reserve bank of
Indiawas nationalized in the year 1949. The general superintendence and direction of the
bankis entrusted to central board of directors of 20 members, the Governor and four
deputyGovernors, one Governmental official from the ministry of Finance, ten
nominateddirectors by the government to give representation to important elements in the
economiclife of the country, and the four nominated director by the Central Government
torepresent the four local boards with the headquarters at Mumbai, Kolkata, Chennai and
New Delhi. Local Board consists of five members each central government appointed fora
term of four years to represent territorial and economic interests and the interests of
cooperativeand indigenous banks.
The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides thestatutory
basis of the functioning of the bank. The bank was constituted for the need offollowing:
To regulate the issues of banknotes.
To maintain reserves with a view to securing monetary stability
To operate the credit and currency system of the country to its advantage.




Bank of Issue: The RBI formulates, implements, and monitors the monitory policy.
Itsmain objective is maintaining price stability and ensuring adequate flow of credit

toproductive sector.
Regulator-Supervisor of the financial system: RBI prescribes broad parameters
ofbanking operations within which the countrys banking and financial system
functions.Their main objective is to maintain public confidence in the system, protect

depositorsinterest and provide cost effective banking services to the public.

Manager of exchange control: The manager of exchange control department
managesthe foreign exchange, according to the foreign exchange management act,
1999. Themanagers main objective is to facilitate external trade and payment and

promote orderlydevelopment and maintenance of foreign exchange market in India.

Issuer of currency: A person who works as an issuer, issues and exchanges or
destroysthe currency and coins that are not fit for circulation. His main objective is to
give thepublic adequate quantity of supplies of currency notes and coins and in good

Developmental role:The RBI performs the wide range of promotional functions
tosupport national objectives such as contests, coupons maintaining good public

relationsand many more.

Related functions:There are also some of the related functions to the above
mentionedmain functions. They are such as, banker to the government, banker to

banks etc.
Banker to government performs merchant banking function for the central and

thestate governments; also acts as their banker.

Banker to banks maintains banking accounts to all scheduled banks.
Controller of Credit: RBI performs the following tasks:
It holds the cash reserves of all the scheduled banks.
It controls the credit operations of banks through quantitative and qualitativecontrols.
It controls the banking system through the system of licensing, inspection andcalling

for information.
It acts as the lender of the last resort by providing rediscount facilities toscheduled

Supervisory Functions:In addition to its traditional central banking functions, the
Reserve Bank performs certain non-monetary functions of the nature of supervision
ofbanks and promotion of sound banking in India. The Reserve Bank Act 1934 and
thebanking regulation act 1949 have given the RBI wide powers of supervision and
controlover commercial and co-operative banks, relating to licensing and
establishments, branchexpansion, liquidity of their assets, management and methods

of working, amalgamation,reconstruction and liquidation. The RBI is authorized to

carry out periodical inspectionsof the banks and to call for returns and necessary
information from them. Thenationalisation of 14 major Indian scheduled banks in July
1969 has imposed newresponsibilities on the RBI for directing the growth of banking
and credit policiestowards more rapid development of the economy and realisation of
certain desired socialobjectives. The supervisory functions of the RBI have helped a
great deal in improvingthe standard of banking in India to develop on sound lines and

to improve the methods oftheir operation.

Promotional Functions:With economic growth assuming a new urgency
sinceindependence, the range of the Reserve Banks functions has steadily widened.
The banknow performs a variety of developmental and promotional functions, which,
at one time,were regarded as outside the normal scope of central banking. The
Reserve bank wasasked to promote banking habit, extend banking facilities to rural
and semi-urban areas,and establish and promote new specialized financing agencies.

Indian Scheduled Commercial Banks

The commercial banking structure in India consists of scheduled commercial banks,
andunscheduled banks.

Scheduled Banks: Scheduled Banks in India constitute those banks which have
beenincluded in the second schedule of RBI act 1934. RBI in turn includes only those
banksin this schedule which satisfy the criteria laid down vide section 42(6a) of the
Act.Scheduled banks in India means the State Bank of India constituted under the
StateBank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the s State
Bank ofIndia (subsidiary banks) Act, 1959 (38 of 1959), a corresponding new bank
constitutedunder section 3 of the Banking companies (Acquisition and Transfer of
Undertakings)Act, 1980 (40 of 1980), or any other bank being a bank included in the
Second Scheduleto the Reserve bank of India Act, 1934 (2 of 1934), but does not
include a co-operativebank. For the purpose of assessment of performance of banks,
the Reserve Bank of Indiacategories those banks as public sector banks, old private
sector banks, new private sectorbanks and foreign banks, i.e. private sector, public

sector, and foreign banks come underthe umbrella of scheduled commercial banks.
Regional Rural Bank: The government of India set up Regional Rural Banks (RRBs)
onOctober 2, 1975. The banks provide credit to the weaker sections of the rural
areas,particularly the small and marginal farmers, agricultural labourers, and

smallenterpreneurs. Initially, five RRBs were set up on October 2, 1975 which was
sponsoredby Syndicate Bank, State Bank of India, Punjab National Bank, United
Commercial Bankand United Bank of India. The total authorized capital was fixed at
Rs. 1 Crore which hassince been raised to Rs. 5 Crores. There are several concessions
enjoyed by the RRBs byReserve Bank of India such as lower interest rates and
refinancing facilities fromNABARD like lower cash ratio, lower statutory liquidity
ratio, lower rate of interest onloans taken from sponsoring banks, managerial and staff
assistance from the sponsoringbank and reimbursement of the expenses on staff
training. The RRBs are under thecontrol of NABARD. NABARD has the
responsibility of laying down the policies forthe RRBs, to oversee their operations,

provide refinance facilities, to monitor theirperformance and to attend their problems.

Unscheduled Banks: Unscheduled Bank in India means a banking company as
definedin clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949),
which is nota scheduled bank.


NABARD is an apex development bank with an authorization for facilitating credit flowfor









villageindustries, handicrafts and other rural crafts. It also has the mandate to support all
otherallied economic activities in rural areas, promote integrated and sustainable
ruraldevelopment and secure prosperity of rural areas. In discharging its role as a
facilitatorfor rural prosperity, NABARD is entrusted with:
1. Providing refinance to lending institutions in rural areas
2. Bringing about or promoting institutions development and
3. Evaluating, monitoring and inspecting the client banks. Besides this fundamental role,

NABARD also:
Act as a coordinator in the operations of rural credit institutions
To help sectors of the economy that they have special credit needs for eg.Housing,
small business and agricultural loans etc.

Co-operative Banks
Co-operative banks are explained in detail in Section II of this chapter

Services provided by banking organizations

Banking Regulation Act in India, 1949 defines banking as Accepting for the purpose
oflending or investment of deposits of money from the public, repayable on demand
andwithdrawable by cheques, drafts, orders etc. as per the above definition a bank
essentiallyperforms the following functions: Accepting Deposits or savings functions from customers or public by providingbank
account, current account, fixed deposit account, recurring accounts etc.
The payment transactions like lending money to the public. Bank provides aneffective
credit delivery system for loanable transactions.
Provide the facility of transferring of money from one place to another place.
Forperforming this operation, bank issues demand drafts, bankers cheques,
moneyorders etc. for transferring the money. Bank also provides the facility
ofTelegraphic transfer or tele- cash orders for quick transfer of money.
A bank performs a trustworthy business for various purposes.
A bank also provides the safe custody facility to the money and valuables of
thegeneral public. Bank offers various types of deposit schemes for security ofmoney.










smallcompartments with dual locking system built into strong cupboards. These
arestored in the banks strong room and are fully secured.
Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of
thegovernment disbursements like pension payments and tax refunds also take
placethrough banks.
There are several types of banks, which differ in the number of services they provide
andthe clientele (Customers) they serve. Although some of the differences between
thesetypes of banks have lessened as they have begun to expand the range of products
andservices they offer, there are still key distinguishing traits. These banks are as
Commercial banks, which dominate this industry, offer a full range of services
forindividuals, businesses, and governments. These banks come in a wide range of sizes,from
large global banks to regional and community banks.
Global banksare involved in international lending and foreign currency trading, inaddition to
the more typical banking services.









locationsthroughout a multi-state area that provide banking services to individuals. Banks


havebecome more oriented toward marketing and sales. As a result, employees need to
knowabout all types of products and services offered by banks.
Community banksare based locally and offer more personal attention, which
manyindividuals and small businesses prefer. In recent years, online bankswhich provide
allservices entirely over the Internethave entered the market, with some success.However,
many traditional banks have also expanded to offer online banking, and someformerly
Internet-only banks are opting to open branches.
Savings banks and savings and loan associations, sometimes called thrift institutions,are
the second largest group of depository institutions. They were first established ascommunitybased institutions to finance mortgages for people to buy homes and stillcater mostly to the
savings and lending needs of individuals.
Credit unionsare another kind of depository institution. Most credit unions are formedby
people with a common bond, such as those who work for the same company or belongto the
same labour union or church. Members pool their savings and, when they needmoney, they
may borrow from the credit union, often at a lower interest rate than thatdemanded by other
financial institutions.
Federal Reserve banksare Government agencies that perform many financial servicesfor the
Government. Their chief responsibilities are to regulate the banking industry andto help
implement our Nations monetary policy so our economy can run more efficientlyby
controlling the Nations money supplythe total quantity of money in the country,including
cash and bank deposits. For example, during slower periods of economicactivity, the Federal
Reserve may purchase government securities from commercialbanks, giving them more
money to lend, thus expanding the economy. Federal Reservebanks also perform a variety of
services for other banks. For example, they may makeemergency loans to banks that are short
of cash, and clear checks that are drawn and paidout by different banks.
The money bankslend, comes primarily from deposits in checking and savings
accounts,certificates of deposit, money market accounts, and other deposit accounts
thatconsumers and businesses set up with the bank. These deposits often earn interest fortheir
owners, and accounts that offer checking, provide owners with an easy method formaking
payments safely without using cash. Deposits in many banks are insured by theFederal
Deposit Insurance Corporation, which guarantees that depositors will get theirmoney back,
up to a stated limit, if a bank should fail.



Research Methodology decides the territory of proposed study and givesinformation to the
readers about adopted process of analysis for the respectivestudy. This includes aims for
which the study is undertaken. This also clarifytime, scope, data sources etc. of proposed
study. Another significant aspect istools and techniques which are used for the study. In brief
this chapter helps tothe researcher to decide his path of research work.In the light of the
above, the research study has been undertaken to studythe selected banks to know, what
policies, structural and procedural changestaken place in these selected banks and how these
changes made impact onthese banks. The other individual benefit of undertaking this research
to theresearcher is to grab an opportunity to meet and discuss with AcademicProfessional,
Govt. Officials, regulatory Bodies of Government, PracticalBankers, Business and Industry,
Executives, State Government Officials,
Researchers and Policy Makers on various issues related to the banking sectorreforms and
their impacts in India.The research will help the academic research scholars, policy
makers,students and Government Officials to gain an insight into the future challengesbefore
Indian Banking System.To conduct the research on the subject titled Critical Analysis of


Reforms in Banking Sector in Post Liberalization Period- (With respect to publicand private
sector banks) the following thought provoking objectives wereframed.

To Study the financial performance of the selected public sector and private banks.
To study and analyze of various financial reforms in banking sector during post

liberalization period with respect to public and private sector banks.

To Study the legal and structural and financial status of banking sector prior to

financial reforms period.

To study the changes in banking sector during post financial reform period.
To assess the impact of financial reform on banking sector
To identify the problems and prospects for banking sectors emerged due to financial


The study is carried out with the following hypotheses:

The reforms in banking sector transformed the regulated environment into a market


oriented one and induced competitiveness in banking industry.

The reform measures brought a paradigm shift in the banking industry and enhanced


the overall performance of the banks.

Information technology in banking business has a visible impact on the quality of


customer service.
The performance of public sector banks is not as good as' private sector banks in spite


of their age, size and image.

The introduction of prudential norms improved the financial health and credibility of

The study is exploratory in nature and it is based on the selected sample ofthe banks from
both the public sector as well as private sector banks. Thebanks include the scheduled
commercial banks and non scheduledcommercial banks. The study is concerned with Indian
Banking Industry,which comprises four major Bank groups:
1. Nationalized Banks (27)
2. Old Private Sector Banks(21)

3. New Private Sector Banks(8)

4. Foreign Banks
The regional rural banks are not included in this study. The performance ofthe commercial
banks is analyzed in the period of First generation bankingsector reforms (1991-92 to 199798) ,Second generation reforms (1998-99 to2003-04) and Third generation reforms(2004-05).
For the study I have selected total population of 27 public sector banks, 24private sector
commercial banks and main foreign banks. While selecting thesample for private sector
banks all the leading banks having life span of morethan 10 years have been selected for the

Banking sector reforms in India
The Centre for Policy Research (CPR), Delhi in collaboration with the BSE Ltd., Mumbai
has started a monthly Macro Economic Seminar Series. The objective of these Seminars is to
generate fresh analytical insights into the Indian macroeconomic issues for potential use by
policy makers. The third seminar of the series was Banking Sector Reforms in India. A
panel of Dr. P.J Nayak, Prof T.T. Rammohan and MsUshaThorat , moderated by Dr Rajiv
Kumar presented their views and interacted with the select. Public Sector Banks (PSBs) in
India are struggling with high NPAs (Non-Performing Assets) which have been rising
steadily since 2009-10. These banks continue to face the dual problem of significant asset
quality stress and inadequate capitalisation, which has impacted their growth. Around 27
PSBs wrote off a staggering Rs 1.14 lakh crore of bad loans during FY12- 15. The Punjab
National Bank (PNB), the fourth largest state-owned bank by assets, announced that its gross
NPAs touched 8.5% of the loan book in December 2015, highest in eleven years. Without
government recapitalisation, some of these banks may find its lending activity squeezed. On
14 August 2015, the Government launched a seven pronged plan Indradhanush - for
revamping PSBs. These seven elements include: Appointments of Bank MDs and Chairman,
Bank Board of Bureau, Capitalisation, De-stressing, Empowerment, Framework of
Accountability and Governance Reforms. The government proposed to infuse Rs 70,000
crore in PSBs over four years, while banks are expected to raise Rs 1.1 lakh crore from the
markets to meet their capital requirements in line with Basel III norms. This has opened up a

debate on whether Indradhanush framework is a much diluted version of earlier committee

reports on Banking Sector and may not be enough to help strengthen PSBs and banking
sector in India.


Commercial bank
A commercial bank is a financial institution that is authorized by law to receive money from
businesses and individuals and lend money to them. Commercial banks are open to the public
and serve individuals, institutions, and businesses. A commercial bank is almost certainly the
type of bank you think of when you think about a bank because it is the type of bank that
most people regularly use.
Banks are regulated by federal and state laws depending on how they are organized and the
services they provide. Commercial banks are also monitored through the Federal Reserve
A commercial bank is authorized to serve the following functions:

Receive deposits - take money in from individuals and businesses (called depositors)

Disburse payments - make payments upon the direction of its depositors, such as
honoring a check


Collections - a bank will act as your agent to collect funds from another bank payable
to you, such as when someone pays you by check drawn on an account from a
different bank

Invest funds in securities for a return

Safeguard money - banks are considered a safe place to store your wealth

Maintain and service savings and checking accounts of its depositors

Maintain custodial accounts - accounts controlled by one person but for the benefit of
another person, such as a trust account

Lend money

Growth of commercial bank

A banking revolution occurred in the country during the post-nationalization era.
The commercial banks, especially public sector banks, have drastically changed
from their traditional money dealing business to innovative banking and sub-served
their operations to the needs of nation-building activities and socio-economic
upliftment of the Indian masses.
It is rightly said that Indian banking has changed from class-banking to massbanking or social banking.
There has been a marked diversification of banking business from traditional to
non-traditional and even to non-financial areas of operation during the last two
In recent years, there has been a conscious reorientation of banking policy towards
the attainment of social goals. The following have been the major shifts in the

banking policy of the country:

Urban to rural orientation;
Profit motive to mass banking;
Class banking to mass banking;
Big customers to small customers;
Traditional banking to innovative banking;
Short-term finance to development finance;
Security based lending to purpose oriented lending;
Creditworthiness of the borrower to the purpose of borrowing; and
Self-interest to social perspectives.

Indian banking has become development oriented. There are both quantitative and
qualitative dimensions to the progressive changes that have taken place in our
banking industry, ushering in a new era in the county's economic progress.
Some of these changes, along with the progress of nationalised banks, have been
briefly discussed in the following sections.
One of the major areas of economy that have received renewed focus in recent times is
banking. This sector has become the foundation of modern economic development and
linchpin of development strategy. Any economy can develop by channelizing economic
resources towards productive investment. Banks are special as they not only deploy large
amounts of uncollateralized public funds in fiduciary capacity, but also leverage such funds
through credit creation. Banking system of India consists of the Central Bank (Reserve Bank
of India), commercial banks (Public Sector Banks, New Private Sector Banks, Old Private
Sector Banks.

Indicators of Performance
A performance indicator or key performance indicator (KPI) is a type of
performance measurement. KPIs evaluate the success of an organization or of a
particular activity in which it engages. Often success is simply the repeated, periodic
achievement of some levels of operational goal (e.g. zero defects, 10/10 customer
satisfaction, etc.), and sometimes success is defined in terms of making progress toward
strategic goals. Accordingly, choosing the right KPIs relies upon a good understanding
of what is important to the organization. 'What is important' often depends on the
department measuring the performance - e.g. the KPIs useful to finance will really
differ from the KPIs assigned to sales. Since there is a need to understand well what is
important, various techniques to assess the present state of the business, and its key
activities, are associated with the selection of performance indicators. These
assessments often lead to the identification of potential improvements, so performance
indicators are routinely associated with 'performance improvement' initiatives. A very
common way to choose KPIs is to apply a management framework such as the
balanced scorecard.

Financial soundness
From the mid-1990s, governments and central banks have paid the costs for monitoring
efficiency and health of financial organizations and markets. The market risk is an
important factor affecting the vulnerability of the financial system and its main users. It
has exposure and volatility components. In the analysis of systematic risks, market risk
analysis has been based on overall exposure indicators, partly because related variables
are easily observable and difficult to reverse within a short time frame. By contrast,
volatility analysis has been used only to a limited extent in financial risk assessment at
the national level. The reasons for this include the difficulty of predicting the extent and
periodicity of volatility shocks, the high speed at which volatility correlations change is
periods of turmoil, the delay in volatility indicators to show clear patterns, and doubts
about the additional information content of volatility indicators relative to more
conventional indicators.
This preference for exposure indicators over volatility indicators to assess market risk
at the aggregate level has resulted in a gap between measurement and analysis of
market risk and the repaid development of methodologies to measure and model the
volatility of financial asset returns and correlations. Recent advances in the latter have
moved from the academic community to industry, and then to the regulatory
framework, at the level of individual bank regulation. While more financial decisions
made by economic agents are based on volatility, until now no aggregate indicators
have been used by policymakers and regulators to assess the market risk environment.
Asset quality
Asset quality is related to the left-hand side of the bank balance sheet. Bank
managers are concerned with the quality of their loans since that provides earnings for
the bank. Loan quality and asset quality are two terms with basically the same meaning.
Government bonds and T-bills are considered as good quality loans whereas junk
bonds, corporate credits to low credit score firms etc. are bad quality loans. A bad
quality loan has a higher probability of becoming a non-performing loan with no return.
Profitability Indicators

In the income statement, there are four levels of profit or profit margins - gross profit,
operating profit, pretax profit and net profit. The term "margin" can apply to the
absolute number for a given profit level and/or the number as a percentage of net
sales/revenues. Profit margin analysis uses the percentage calculation to provide a
comprehensive measure of a company's profitability on a historical basis (3-5 years)
and in comparison to peer companies and industry benchmarks.
Basically, it is the amount of profit (at the gross, operating, pretax or net income level)
generated by the company as a percent of the sales generated. The objective of margin
analysis is to detect consistency or positive/negative trends in a company's earnings.
Positive profit margin analysis translates into positive investment quality. To a large
degree, it is the quality, and growth, of a company's earnings that drive its stock price.
Productivity Indicators
Productivity is an average measure of the efficiency of production. It can be expressed
as the ratio of output to inputs used in the production process, i.e. output per unit of
input. When all outputs and inputs are included in the productivity measure it is called
total productivity. Outputs and inputs are defined in the total productivity measure as
their economic values. The value of outputs minus the value of inputs is a measure of
the income generated in a production process. It is a measure of total efficiency of a
production process and as such the objective to be maximized in production process.
Productivity measures that use one or more inputs or factors, but not all factors, are
called partial productivities. A common example in economics is labor productivity,
usually expressed as output per hour. At the company level, typical partial productivity
measures are such things as worker hours, materials or energy per unit of production.
In macroeconomics the approach is different. In macroeconomics one wants to examine
an entity of many production processes and the output is obtained by summing up the
value-added created in the single processes. This is done in order to avoid the double
accounting of intermediate inputs. Value-added is obtained by subtracting the
intermediate inputs from the outputs. The most well-known and used measure of valueadded is the GDP (Gross Domestic Product). It is widely used as a measure of the
economic growth of nations and industries. GDP is the income available for paying
capital costs, labour compensation, taxes and profits.

For a single input this means the ratio of output (value-added) to input. When multiple
inputs are considered, such as labour and capital, it means the unaccounted for level of
output compared to the level of inputs. This measure is called in macroeconomics Total
Factor Productivity TFP or Multi Factor Productivity MFP.
Productivity is a crucial factor in production performance of firms and nations.
Increasing national productivity can raise living standards because more real income
improves people's ability to purchase goods and services, enjoy leisure, improve
housing and education and contribute to social and environmental programs.
Productivity growth also helps businesses to be more profitable.

Regional Rural bank

Regional Rural Banks (also RRBs) are local level banking organizations operating
in different States of India. They have been created with a view to serve primarily the
rural areas of India with basic banking and financial services. However, RRBs may
have branches set up for urban operations and their area of operation may include
urban areas too.
The area of operation of RRBs is limited to the area as notified by Government of
India covering one or more districts in the State. RRBs also perform a variety of
different functions. RRBs perform various functions in following heads Providing
banking facilities to rural and semi-urban areas. Carrying out government operations
like disbursement of wages of MGNREGA workers, distribution of pensions etc.
Providing Para-Banking facilities like locker facilities, debit and credit cards.

Regional Rural Banks were established under the provisions of an Ordinance passed
on September 1975 and the RRB Act. 1976 to provide sufficient banking and credit
facility for agriculture and other rural sectors. These were set up on the
recommendations of The M. Narasimham Working Group during the tenure of Indira
Gandhi's government with a view to include rural areas into economic mainstream
since that time about 70% of the Indian Population was of Rural Orientation. The

development process of RRBs started on 2 October 1975 with the forming of the first
RRB, the Prathama Bank with authorised capital of Rs. 5 crore at its starting. Also on
2 October 1976 five regional rural banks were set up with a total authorised capital
Rs. 100 cRegional Rural bank
Regional Rural Banks (also RRBs) are local level banking organizations operating in
different States of India. They have been created with a view to serve primarily the rural areas
of India with basic banking and financial services. However, RRBs may have branches set up
for urban operations and their area of operation may include urban areas too.
The area of operation of RRBs is limited to the area as notified by Government of India
covering one or more districts in the State. RRBs also perform a variety of different
functions. RRBs perform various functions in following heads providing banking facilities
to rural and semi-urban areas. Carrying out government operations like disbursement of
wages of MGNREGA workers, distribution of pensions etc. Providing Para-Banking
facilities like locker facilities, debit and credit cards.
Regional Rural Banks were established under the provisions of an Ordinance passed on
September 1975 and the RRB Act. 1976 to provide sufficient banking and credit facility for
agriculture and other rural sectors. These were set up on the recommendations of The M.
Narasimham Working Group during the tenure of Indira Gandhi's government with a view to
include rural areas into economic mainstream since that time about 70% of the Indian
Population was of Rural Orientation. The development process of RRBs started on 2 October
1975 with the forming of the first RRB, the Prathama Bank with authorised capital of Rs. 5
crore at its starting. Also on 2 October 1976 five regional rural banks were set up with a total
authorised capital Rs. 100 crore ($10 Million) which later augmented to 500 crore ($50
Million). The Regional Rural Bank were owned by the Central Government, the State
Government and the Sponsor Bank(There were five commercial banks, Punjab National
Bank, State Bank of India, Syndicate Bank, United Bank of India and United Commercial
Bank, which sponsored the regional rural banks) who held shares in the ratios as follows
Central Government-50%, State Government- 15% and Sponsor Banks- 35 [2]%..
Earlier, Reserve Bank of India had laid down ceilings on the rate of interest to be charged by
these RRBs.
Regional Development:

Prior to nationalisation, there has been an uneven geographical coverage by the banking
institutions. There were gross regional imbalances in the development of banking sector in
the country.
Regional imbalances of banking development have been noticed at two levels:

Between urban and rural areas; and

Among different states of the county.

Local area bank

The Local Area Bank Scheme was introduced in August 1996 pursuant to the announcement
of the then Finance Minister. In his budget speech, the Finance Minister referred to the setting
up of new private local banks with jurisdiction over two or three contiguous districts. He
observed that this would enable the mobilization of rural savings by local institutions and
make them available for investments in the local areas. The Local Area Banks (LABs) were
expected to bridge the gap in credit availability and strengthen the institutional credit
framework in the rural and semi-urban areas.
Following this, guidelines for setting up of LABs in the private sector were announced by the
Reserve Bank of India (RBI) on 24th August 1996. Over a period of about five and a half
years, as many as 227 applications for establishment of LABs in the private sector had been
received by the RBI of which 214 applications were rejected while 'in-principle' approvals for
establishment of 10 LABs were issued and 3 applications are under examination. However,
due to the inability of the promoters to fulfil the conditions stipulated in the 'in-principle'
approvals, 4 such approvals were withdrawn. 5 banks were licensed under Section 22 of the
Banking Regulation Act 1949. Of these, only 4 LABs are functioning at present.

Urban-Rural Disparities and Development:

The private sector commercial banks were urban- oriented in their growth. Rural areas were
starved of banking facilities. Many villages did not have any bank branches and were thus
starved of banking facilities.

To improve the situation, therefore, the commercial banks, especially the public sector banks,
undertook a programme of massive expansion of bank branches in the rural, under-banked
and unbanked areas, which aimed at ensuring balanced regional development of the banking
sector in the country.
A comparable picture of the regional disparities which existed prior to bank nationalisation
and the trend of development in the post-nationalisation period can be visualised from the
data pertaining to the population group-wise position of branches of commercial banks.
In June, 1969, there were 8,262 total branches of the commercial banks. Their number has
increased to 61,742 in June 1994. Of these, the rural areas accounted for over 57 per cent in
1994 as against that of 22 per cent in 1969.
The Public Sector Banks (PSB) have done remarkable job in opening a large number of
branches in unbanked areas Unbanked centers accounted for nearly 65 per cent of the total
number of new bank branches opened during last two decades. By 2007, there are 71,781
total bank branches in India.
Crore ($10 Million) which later augmented to 500 crore ($50 Million). The Regional Rural
Bank were owned by the Central Government, the State Government and the Sponsor
Bank(There were five commercial banks, Punjab National Bank, State

Bank of

India, Syndicate Bank, United Bank of India and United Commercial Bank, which sponsored
the regional rural banks) who held shares in the ratios as follows Central Government-50%,
State Government- 15% and Sponsor Banks- 35 [2]%.. Earlier, Reserve Bank of India had laid
down ceilings on the rate of interest to be charged by these RRBs.


3.2 Reserve Requirement Cash Reserve Ratio

Cash Reserve Ratio (CRR) is a specified minimum fraction of the total deposits of
customers, which commercial banks have to hold as reserves either in cash or as deposits
with the central bank. CRR is set according to the guidelines of the central bank of a country.
The amount specified as the CRR is held in cash and cash equivalents, is stored in bank
vaults or parked with the Reserve Bank of India. The aim here is to ensure that banks do not
run out of cash to meet the payment demands of their depositors. CRR is a crucial monetary
policy tool and is used for controlling money supply in an economy.
What is CRR?
The Reserve Bank of India (Amendment) Bill, 2006 has been enacted and has come into
force with its gazette notification. Consequent upon amendment to sub-Section 42(1), the
Reserve Bank, having regard to the needs of securing the monetary stability in the country,
RBI can prescribe Cash Reserve Ratio (CRR) for scheduled banks without any floor rate or
ceiling rate. [Before the enactment of this amendment, in terms of Section 42(1) of the RBI
Act, the Reserve Bank could prescribe CRR for scheduled banks between 3 per cent and 20
per cent of total of their demand and time liabilities].
RBI uses CRR either to drain excess liquidity or to release funds needed for the growth of the
economy from time to time. Increase in CRR means that banks have less funds available and
money is sucked out of circulation. Thus we can say that this serves duel purposes i.e.(a)
ensures that a portion of bank deposits is kept with RBI and is totally risk-free, (b) enables
RBI to control liquidity in the system, and thereby, inflation by tying the hands of the banks
in lending money.


What is CRR (For Non Bankers):

CRR means Cash Reserve Ratio. Banks in India are required to hold a certain proportion of
their deposits in the form of cash. However, actually Banks dont hold these as cash with
themselves, but deposit such case with Reserve Bank of India (RBI) / currency chests, which
is considered as equivlanet to holding cash with RBI. This minimum ratio (that is the part of
the total deposits to be held as cash) is stipulated by the RBI and is known as the CRR or
Cash Reserve Ratio. Thus, When a banks deposits increase by Rs100, and if the cash reserve
ratio is 6%, the banks will have to hold additional Rs 6 with RBI and Bank will be able to use
only Rs 94 for investments and lending / credit purpose. Therefore, higher the ratio (i.e.
CRR), the lower is the amount that banks will be able to use for lending and investment. This
power of RBI to reduce the lendable amount by increasing the CRR, makes it an instrument
in the hands of a central bank through which it can control the amount that banks lend. Thus,
it is a tool used by RBI to control liquidity in the banking system.
The CRR is partly a prudential requirement for banks to maintain a minimum amount of cash
reserves to meet their payments obligations in a fractional reserve system.
The Reserve Bank of India (RBI) Act implicitly prescribed the CRR originally at a minimum
of 3 per cent of any banks net demand and time liabilities. That restriction was removed by
an amendment in 2006. While the RBI is now free to prescribe this rate, any CRR above 3
per cent can still be viewed as a monetary tool to contain expansion of money supply by
influencing the money multiplier. But the way in which the CRR was operated historically
made it serve a much wider role. During the 1990s, when there was influx of foreign funds
through non-resident Indian (NRI) deposits, a differential CRR was prescribed on such
deposits to restrict their inflows.
This role CRR being used as an instrument of regulating NRI deposit flows got
relegated to the background once the relative attraction of such deposits vis-a-vis rupee
deposits was removed. Now that the interest rates on NRI deposits have been freed, the above
role of CRR could well be revived again.
In the more recent period after 2004, when there was a huge influx of foreign capital through
varied forms of debt and non-debt flows, and the RBI ended up accumulating large forex
reserves, the CRR became an optional instrument to sterilise the rupee resources released

from such dollar purchases. This was particularly enabled by not paying any interest on CRR
balances maintained by banks with the RBI. The other options of sterilisation through open
market operations and the repo operations through the liquidity adjustment window (LAF)
cost the central bank, just as the market stabilisation scheme cost the Government fiscally in
terms of interest payments.
The official view on CRR has been changing. During the period of financial repression before
1990s, CRR was the most preferred monetary policy tool. But the Narasimham Committee of
1991 recommended gradual reduction in CRR and increased use of indirect market-based
instruments. This was broadly accepted and the CRR reduced from more than 15 per cent to
4.5 per cent by 2003.
But since 2004, the use of CRR as an instrument of sterilisation and also a monetary tool has
gained ground again. At the same time, the ratio stands now at 4.5 per cent, the previous
historic low. Under these circumstances, the official philosophy on CRR in the current
juncture is not known.
Since CRR acts as a tax that increases their transaction costs, banks in general would want its
role to be restored to being a prudential minimum requirement of not more than 3 per cent.
And since quantitative easing has become a fashion of central banking across the world, the
RBI may well choose to bring the CRR further down gradually to about 3 per cent during the
current easing phase, without losing sight of monetary control in the face of inflation
remaining stubbornly high at around 8 per cent.
Like CRR, SLR can also be viewed as a hybrid instrument of a different variety. The SLR,
according to some, is not a monetary tool and is only a prudential requirement to serve as a
cushion for safety of bank deposits.
The minimum prescription in this manner was 25 per cent of banks demand and time
liabilities. But it was also more a way of finding a captive market for government securities,
particularly when they were bearing below market interest rates. Not surprisingly, this ratio
touched about 38 per cent around 1991.



Statutory liquidity ratio (SLR) is the Indian government term for reserve requirement that
the commercial banks in India require to maintain in the form of gold, government approved
securities before providing credit to the customers. Statutory Liquidity Ratio is determined
by Reserve Bank of India and maintained by banks in order to control the expansion of bank
The SLR is determined by a percentage of total demand and time liabilities. Time
Liabilities refer to the liabilities which the commercial banks are liable to pay to the
customers after a certain period mutually agreed upon, and demand liabilities are such
deposits of the customers which are payable on demand. An example of time liability is a six
month fixed deposit which is not payable on demand but only after six months. An example
of demand liability is a deposit maintained in saving account or current account that is
payable on demand through a withdrawal form such as a cheque.
The SLR is commonly used to control inflation and fuel growth, by increasing or decreasing
it respectively. This counter acts by decreasing or increasing the money supply in the system
respectively. Indian banks holdings of government securities are now close to the statutory
minimum that banks are required to hold to comply with existing regulation. When measured
in rupees, such holdings decreased for the first time in a little less than 40 years (since the
nationalization of banks in 1969) in 200506.currently it is 21.25 percent.
What is SLR?
Every bank is required to maintain at the close of business every day, a minimum proportion
of their Net Demand and Time Liabilities as liquid assets in the form of cash, gold and unencumbered approved securities. The ratio of liquid assets to demand and time liabilities is
known as Statutory Liquidity Ratio (SLR). RBI is empowered to increase this ratio up to


40%. An increase in SLR also restrict the banks leverage position to pump more money into
the economy.
What is SLR?(For Non Bankers) :
SLR stands for Statutory Liquidity Ratio. This term is used by bankers and indicates the
minimum percentage of deposits that the bank has to maintain in form of gold, cash or other
approved securities. Thus, we can say that it is ratio of cash and some other approved
securities to liabilities (deposits) It regulates the credit growth in India.
CRR and SLR continue to be relevant to monetary policy practice in India even today.
October 25, 2012:
The pre-emption of bank funds in India have historically been exercised through three
channels the cash reserve ratio (CRR), statutory liquidity ratio (SLR) and directing credit
to preferred sectors based on so-called priority sector norms.
The above pre-emptions have different implications for banking operations. This article deals
with the first two channels.
For the SLR too, the Narasimham Committees view was to bring it down to 25 per cent and
resort to auctioning government securities at market related rates. Accordingly, the SLR was
reduced to 25 per cent by 1997. Just as for CRR, RBI now has the freedom to also fix the
level of SLR.
The effective SLR, ironically though, never fell to 25 per cent at least for public sector banks.
These banks found investments in SLR securities as a safe haven to optimise their riskweighted capital adequacy requirements during late 1990s and the early 2000s, when Basel II
norms became applicable. The Governments ever-increasing borrowings appetite also served
this purpose well. It was only between 2004 and 2008, as non-performing asset (NPA) levels
fell and fiscal consolidation was also in place, that banks shifted their portfolio more in
favour of credit rather than SLR investments.
During the current post-global financial crisis period when fiscal consolidation has been
given a permanent holiday, the noose of Basel III is on the neck of the banking system, and


NPAs have remerged as a potential threat public sector banks seem to be reverting to their
safe-haven approach to SLR investments.
The SLR now has, thus, regained its earlier status of being a tool for providing a captive
market for government securities. With the Government taking over the function of issuing
regulatory guidelines to public sector banks, in parallel with or even over-riding that of the
central bank, this role is bound to further strengthen.
That, of course, is not a desirable trend at all. It would be worth recalling the Narasimham
Committees view that the ownership of banks by the Government should not interfere with
the conduct of banking regulation. The other dimension of SLR prescription, from the point
of view of new Basel III liquidity norms, is whether the latter would be over and above, or
within, the SLR prescriptions.
It must be a matter of great relief to the banking system that the RBI Deputy Governor,
AnandSinha, has recently hinted that the SLR will be tweaked to accommodate the new Basel
norms on liquidity.
This notably keeps the spirit behind SLR that though it is statutorily prescribed, it is
mainly for the purpose of serving as a cushion to meet contingencies against potential
liquidity threats to banking operations.
(The author is Director, EPW Research Foundation. The views are personal.)
(This article was published on October 25, 2012)


Financial sector is the mainstay of any economy and it contributes immensely in the
mobilisation and distribution of resources. Financial sector reforms have long been viewed as
significant part of the program for policy reform in developing nations. Earlier, it was thought
that they were expected to increase the efficiency of resource mobilization and allocation in
the real economy to generate higher rates of growth. Recently, they are also seen to be critical
for macroeconomic stability. It was due to the repercussion of the East Asian crisis, since
weaknesses in the financial sector are broadly regarded as on of the major causes of collapse
in that region.
The elements of the financial sector are Banks, Financial Institutions, Instruments and
markets which mobilise the resources from the surplus sector and channelize the same to the
different needy sectors in the economy. The process of accumulative capital growth through
institutionalisation of savings and investment fosters economic growth. Reform of the
financial sector was recognized, from the very beginning, as an integral part of the economic
reforms initiated in 1991. The economic reform process occurred amidst two serious crisis
involving the financial sector the balance of payments crisis that endangered the international
credibility of the country and pushed it to the edge of default; and the grave threat of
insolvency confronting the banking system which had for years concealed its problems with
the help of faulty accounting strategies. Furthermore, some deep rooted problems of the
Indian economy in the early nineties were also strongly related to the financial sector such as
large scale pre-emption of resources from the banking system by the government to finance
its fiscal deficit. Excessive structural and micro regulation that inhibited financial innovation

and increased transaction costs. Relatively inadequate level of prudential regulation in the
financial sector. Poorly developed debt and money markets. And outdated (often primitive)
technological and institutional structures that made the capital markets and the rest of the
financial system highly inefficient (Mathieu, 1998).
Major aims of the financial sector reforms are to allocate the resources proficiently,
increasing the return on investment and hastened growth of the real sectors in the economy.
The processes introduced by the Government of India under the reform process are intended
to upturn the operational efficiency of each of the constituent of the financial sector.
The major delineations of the financial sector reforms in India were found as under:

Removal of the erstwhile existing financial repression.

Creation of an efficient, productive and profitable financial sector.

Enabling the process of price discovery by the market determination of interest rates that
improves allocate efficiency of resources.

Providing operational and functional autonomy to institutions.

Preparing the financial system for increasing international competition.
Opening the external sector in a calibrated manner.
Promoting financial stability in the wake of domestic and external shocks.

At global level, financial sector reforms have been driven by two apparently contrary forces.
The first is a thrust towards liberalization, which seeks to decrease, if not eliminate a number
of direct controls over banks and other financial market participants. The second is a thrust in
favour of strict regulation of the financial sector. This dual approach is also apparent in the
reforms tried in India.
Financial and banking sector reforms are in following areas:

Financial markets
The banking system
Non-banking finance companies
The capital market
Mutual funds
Overall approach to reforms
Deregulation of banking system
Capital market developments
Consolidation imperative

4.1 Regulators
The Finance Ministry constantly formulated major strategies in the field of financial sector of
the country. The Government acknowledged the important role of regulators. The Reserve
Bank of India (RBI) has become more independent. Securities and Exchange Board of India
(SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important
institutions. Some opinions are also there that there should be a super-regulator for the
financial services sector instead of multiplicity of regulators.

Indian Banking Sector and Financial Reforms:

The main intent of banking sector reforms was to uphold a diversified, efficient and
competitive financial system with the aim of improving the allocative efficiency of resources
through operational flexibility, improved financial viability and institutional solidification.
As early as August 1991, the government selected a high level Committee on the Financial
System (the Narasimham Committee) to look into all facets of the financial system and make
comprehensive recommendations for improvements. The Committee submitted its report in
November 1991, making several recommendations for reforms in the banking sector and also
in the capital market. Soon thereafter, the government announced broad acceptance of the
approach of the Narasimham Committee and a process of gradualist reform in the banking
sector and in the capital market was set in motion, a process that has now been under way for
more than six year of the major causes of collapse in that region.
In India, around 80% of businesses are regulated by public sector banks. PSBs are still
governing the commercial banking system. The RBI has given licenses to new private sector
banks as part of the liberalization process. The RBI has also been granting licenses to
industrial houses. Many banks are effectively running in the retail and consumer segments
but are yet to deliver services to industrial finance, retail trade, small business and
agricultural finance. Major change observed by individuals is many transformation in policies
of the banking sector. The reforms have focussed on eliminating financial repression through
reductions in statutory pre-emptions, while stepping up prudential regulations at the same

time. Additionally, interest rates on both deposits and lending of banks have been gradually

The major reforms relating to the banking system were:

Capital base of the banks were strengthened by recapitalization, public equity issues

and subordinated debt.

Prudential norms were introduced and progressively tightened for income recognition,

classification of assets, provisioning of bad debts, marking to market of investments.

Pre-emption of bank resources by the government was reduced sharply.
New private sector banks were licensed and branch licensing restrictions were

Similarly, several operational reforms were introduced in the area of credit policy:

Detailed regulations relating to Maximum Permissible Bank Finance were abolished.

Consortium regulations were relaxed substantially.
Credit delivery was shifted away from cash credit to loan method.

Many reports signified that the initial steps have been taken in the form of allowing new
banks to set up shop. Private Corporates, public sector entities and Non-Banking Finance
Companies with a strong track record can now apply to set up new banks and the Reserve
bank of India will consider these applications in the coming months. The addition of new
banks will mean more competition for this sector in the country and it will lead to a
development in services for the end customer. It is anticipated to increase financial enclosure
as more and more people across the country will be able to access banking facilities. In
reforms for the existing banks the public sector banks have been allowed to increase or
decrease the authorised capital without the presence of an overall ceiling. This will provide
greater flexibility to the banks to conduct their fund raising activities as per the requirements.
The strict restriction of voting rights in banks will also be relaxed and this will aid the
banking sector to develop, as large investors will be able to get a bigger voice in the coming
days in the banks and the manner in which they operate.
When evaluating banking sector reform, it can be identified that banks have experienced
strong balance sheet growth in the post-reform period in an environment of operational
flexibility. Enhancement in the financial health of banks, reflected in noteworthy
improvement in capital adequacy and improved asset quality, is distinctly observable. It is
striking that this progress has been realised despite the espousal of international best practices

in prudential norms. Competitiveness and productivity gains have also been enabled by
proactive technological deepening and flexible human resource management. These
significant gains have been achieved even while renewing goals of social banking viz.
maintaining the wide reach of the banking system and directing credit towards important but
underprivileged sectors of civilisation.

Forex market reform:

Forex market reform took place in 1993 and the successive adoption of current account
convertibility were the acmes of the forex reforms introduced in the Indian market. Under
these reforms, authorised dealers of foreign exchange as well as banks have been given
greater sovereignty to perform in activities and numerous operations. Additionally, the entry
of new companies have been allowed in the market. The capital account has become
effectively adaptable for non-residents but still has some reservations for residents.

Impact on the Reform Measures

The broader objectives of the financial sector reform process are to articulate the policy to
enhance the financial condition and to reinforce the institutions. As part of the reforms
process, many private banks were granted licence to operate in India. This has resulted into a
competitive environment in the banking industry which in turn has assisted in using the
resources more competently. Conventionally, the industrial units were sanctioned term loan
by the development banks and working capital by the commercial banks. The reform process
has transformed the pattern of financing and now both the institutions are willing to extend
long term loan as well as working capital loan. But there is some difference in the mode of
operation. This has empowered the industrial units to avail credit facilities from a single
institution. Despite the fact that the banks provide both the term loan and the working capital
loans, the industrial units prefer the development banks for the following reasons.

It provides equal support to the new as well as existing industries.

The period of repayment of loan is comparatively longer.

Besides providing financial backing, it acts as the implementing agency for the different
government sponsored schemes. Hence the industrial units can avail of both the financial
assistance as well as the incentives offered under various development schemes through a
Single Window System. As lending is the main activity of these institutions, it acquires
specialisation in this field and can share its expertise with the industrial units.

Capital Market Reform

Capital market is defined as a financial market that works as a channel for demand and
supply of debt and equity capital. It channels the money provided by savers and depository
institutions (banks, credit unions, insurance companies, etc.) to borrowers and investees
through a variety of financial instruments (bonds, notes, shares) called securities. A capital
market is not a compact unit, but a highly decentralized system made up of three major parts
that include stock market, bond market, and money market. It also works as an exchange for
trading existing claims on capital in the form of shares. The Capital Market deals in the longterm capital Securities such as Equity or Debt offered by the private business companies and
also governmental undertakings of India.
4.2 Regulatory Framework
As the time passed, SEBI has implemented a modern regulatory framework with rules and
regulations to control the behaviour of major market participants such as stock exchanges,
brokers, merchant bankers, and mutual funds. It has also sought to control activities such as
takeovers and insider trading which have implications for investor protection. The governing
structure of stock exchanges has been changed to make the boards, of the exchanges more
broad based and less dominated by brokers. The new regulatory framework intended to
support investor protection by ensuring disclosure and transparency rather than through direct
control. SEBI acts as a supervisor of the system undertaking supervision of the activities of
various participants including stock exchanges and mutual funds and violations of the rules
are punishable by SEBI.
The regulatory framework is new and there is a need to be advanced with experience gained
and also as gaps and insufficiencies are identified. SEBI needs to be further strengthened in
some areas and its disciplinary powers.

Opening the Capital Market to Foreign Investors

Significant policy initiative in 1993 was the opening of the capital market to foreign
institutional investors (FIIs) and allowing Indian companies to raise capital abroad by issue of
equity in the form of global depository receipts (GDRs).


Modernization of Trading and Settlement Systems

Major developments occurred in trading methods which were highly antiquated earlier. The
National Stock Exchange (NSE) was established in 1994 as an automated electronic
exchange. It empowered brokers in 220 cities all over the country to link up with the NSE
computers via VSATs and trade in a unified exchange with automatic matching of buy and
sell orders with price time priority, thus ensuring maximum transparency for investors. The
initiation of electronic trading by the NSE generated competitive pressure which forced the
BSE to also introduce electronic trading in 1995.
The settlement system was old-fashioned which involved physical delivery of share
certificates to the buyer who then had to deliver them to a company registrar to record change
of ownership after which the certificates had to be returned to the buyer. This process was
consuming and also had significant risks for investors. The first step towards paperless
trading was put in place by enacting legislation which allowed dematerialization of share
certificates with settlement by electronic transfer of ownership from one account to another
within a depository. The National Securities Depository Ltd (NSDL) opened for business in

Futures Trading

Currently, an important gap in India's capital market is future markets. Good market in index
futures would help in risk management and provide greater liquidity to the market. A decision
to present futures trading has been taken and the legislative changes needed to implement this
decision have been submitted to parliament.



Though, there are numerous reforms made in the regulatory framework and trading and
settlement systems, the functioning of the capital market in the post-reform period has been
heavily criticized. Investors, particularly small investors who entered the market in the early
stages of liberalization, did not get good value of their investments. It was perceived that
many dishonest companies took advantage of the exclusion of government control over issue
prices to raise capital at inflated prices, at the expense of inexperienced investors. Merchant
bankers and underwriters involved in these issues.
Issuers of capital must also understand that the capital market should not be viewed, as a
passive source of equity capital which can be tapped by companies at will to raise equity on
favourable terms. Cross-country studies have revealed that stock markets in developing
countries have been an important source for financing of new investments through IPOs than
in developed countries where financing of new investment has relied mainly on internal
generation of surpluses. New companies raising funds have typically relied on venture capital
or private placement rather than public issues.

Mutual Funds

Presently, the mutual funds industry is controlled under the SEBI (Mutual Funds)
Regulations, 1996 and amendments thereto. With the issuance of SEBI rules, the industry had
a framework for the setting up of many more companies, both Indian and foreign firms. The
Unit Trust of India is biggest mutual fund controlling a quantity of nearly Rs.70,000crores,
but its share is going down. With the growth in the securities markets and tax advantages
granted for investment in mutual fund units, mutual funds became widespread. The foreign
owned AMCs are the ones which are now setting the pace for the industry. They are
introducing new products, setting new standards of customer service, improving disclosure
standards and experimenting with new types of distribution.

Reform of the Insurance Sector


The Insurance sector in India directed by Insurance Act, 1938, the Life Insurance Corporation
Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory
and Development Authority (IRDA) Act, 1999 and other related Acts. The basis of
liberalizing the banking system and encouraging competition among the three major
participants' viz. public sector banks, Indian private sector banks, and foreign banks, applies
equally to insurance. There is a strong case for ending the public sector monopoly in
insurance and opening it up to private sector participants subject to suitable prudential
Cross-country data advocates that contractual savings institutions are highly significant
determinant of the aggregate rate of savings and insurance and pension schemes are the most
important form of contractual savings in this reference. A competitive insurance industry
providing diversified insurance products to fulfil differing customer needs, can help increase
savings in this situation and allocate them efficiently. The insurance and pensions industry
has long-term liabilities which it seeks to match by investing in long-term secure assets. A
healthy insurance is an important source of long-term capital in domestic currency which is
especially for infrastructure financing. Improvements in insurance will strengthen the capital
market at the long-term end by adding new companies in this section of the market, giving it
greater depth or liquidity. Reforms in insurance are likely to create a flow of finance for the
corporate sector if people can simultaneously make progress in reducing financial deficit.
The Malhotra Committee had suggested opening up the insurance sector to new private
companies as early as 1994. It took five years to build an agreement on this issue and
legislation to open up insurance, allowing foreign equity up to 26 per cent was finally
submitted to Parliament in 1999.
Overall Approach to Reforms
It is assessed that since last many years, there have seen major improvements in the working
of various financial market contributors. The government and the regulatory authorities have
followed a step-by-step approach. The entry of foreign companies has helped in the start of
international practices and systems. Technology developments have enhanced customer
service. Some gaps however remain such as lack of an inter-bank interest rate benchmark, an
active corporate debt market and a developed derivatives market. In general, the cumulative
effect of the developments since 1991 has been quite encouraging. An indication of the


strength of the reformed Indian financial system can be seen from the way India was not
affected by the Southeast Asian crisis.
To summarize, the financial sector is main element of the Indian economic system. Financial
experts suggested that there is a need for effective reforms to ensure that this remains
competitive and attractive for investors from across the world. The economic reforms have
preferred the need for changing the policy objective to promotion of industries and the
formation of more integrated infrastructural facilities. Financial sector reforms are centre
point of the economic liberalization that was introduced in India in mid-1991. It was
witnessed that national financial liberalisation has brought about the deregulation of interest
rates, dismantling of directed credit, improving the banking system, enhancing the
functioning of the capital market that include the government securities market. Regulators
and economic experts put more emphasis on banking reforms to enhance economy and
enable people to access numerous facilities. Fundamental objective of financial sector
reforms in the 1990s was to create an effectual, competitive and steady that could contribute
in greater measure to inspire progression.





Performance of public sector bank

Having discussed the development of Indian banks and the rationale for banking sector
reforms and various reform measures undertaken to improve productivity, efficiency and
profitability of banks by freeing them from a number of regulations and review of literature,
it is felt desirable to evaluate the performance of public and private sector banks separately
and as a next step attempt made for comparison between the relative performances of these
two groups. This chapter deals with performance evaluation of Public Sector Banks
comprising of three Parts. The First Part covers evolution of PSBs and examines the recent
trends. The Second Part is devoted to the performance analysis in terms of efficiency and
profitability indices of PSBs for the entire study period. The Third Part deals with periodwise analyses of performance of PSBs and grouping of banks is carried out using principle
component analysis.
Public sector in the banking industry emerged with the nationalization of Imperial Bank of
India (1921) and creating the State Bank of India (1955) as a part of integrated scheme of
rural credit proposed by the All India Rural Credit Survey Committee (1951). The Bank is
unique in several respects and it enjoys a position of preeminence as the agent of RBI
wherever RBI has no branches. It is the single largest bank in the country with large
international presence, with a network of 48 overseas offices spread over 28 countries
covering all the time zones. One of the objectives of establishing the SBI was 97 to provide
extensive banking facilities in rural areas by opening as a first step 400 branches within a
period of 5 years from July 1, 1955. In 1959, eight banking companies functioning in
formerly princely states were acquired by the SBI, which later came to be known as Associate
Banks. Later, two of the subsidiary banks', viz., the State Bank of Bikaner and Jaipur were

merged to form the State Bank of Bikaner and Jaipur, thus form eight banks in the SBI group
then making banks in the state bank group. The Public sector in the Indian banking got
widened with two rounds of nationalization-first in July 1969 of 14 major private sector
banks each with deposits of Rs. 50 crore or more, and thereafter in April 1980, 6 more banks
with deposits of not less than Rs. 2 Crore each. It resulted in the creation of public sector
banking with a market share of 76.87 per cent in deposits and 72.92 per cent of assets in the
banking industry at the end of March 2003. With the merger of 'New Bank of India' with
'Punjab National Bank' in 1993, the number of nationalized banks became 19 and the number
of public sector banks 27. The number of branches of public sector banks, which was 6,669
in June 1969, increased to 41874 by Mach 1990 and again to 46,752 by March 30, 2003. The
public sector banks thus came to occupy a predominant position in the Indian banking scene.
It is however, important to note that there has been a steady decline in the share of PSB's in
the total assets of SCB's during the latter - half of 1990s. While their share was 84.5 per cent
at the end of March 1996, it declined to 81.7 per cent in 1998 and further to 81 per cent in


New private sector bank

The private-sector banks in India represent part of the Indian that is made up of both
private and public sector banks. The "private-sector banks" are banks where greater parts of
state or equity are held by the private shareholders and not by government.
Banking in India has been dominated by public sector banks since the 1969 when all major
banks were nationalised by the Indian government. However, since liberalisation in
government banking policy in the 1990s, old and new private sector banks have re-emerged.
They have grown faster & bigger over the two decades since liberalisation using the latest
technology, providing contemporary innovations and monetary tools and techniques.
The private sector banks are split into two groups by financial regulators in India, old and
new. The old private sector banks existed prior to the nationalisation in 1969 and kept their
independence because they were either too small or specialist to be included in
nationalisation. The new private sector banks are those that have gained their banking license
since the liberalisation in the 1990s.


The banks, which came in operation after 1991, with the introduction of economic reforms
and financial sector reforms are called "new private-sector banks". Banking regulation act
was then amended in 1993, which permitted the entry of new private-sector banks in
the Indian banking s sector. However, there were certain criteria set for the establishment of
the new private-sector banks, some of those criteria being: The bank should have a minimum
net worth of Rs. 200 crores.
1. The promoters holding should be a minimum of 25% of the paid-up capital.
2. Reliance Capital, India Post, Larsen & Toubro, Shriram Transport Finance are
companies pending a banking license with the RBI under the new policy, while IDFC
& Bandhan were given a go ahead to start banking services for 2015.
3. Within 3 years of the starting of the operations, the bank should offer shares to public
and their net worth must increased to 300 crores.
List of the new private-sector banks in India


1. Axis Bank (earlier UTI Bank)


2. Bank of Punjab (actually an old generation private bank since it was not founded
under post-1993 new bank licensing regime)

3. Centurion Bank Ltd. (Merged Bank of Punjab in late 2005 to become Centurion
Bank of Punjab, acquired by HDFC Bank Ltd. in 2008)

4. Development Credit Bank (Converted from Co-operative Bank, now DCB Bank


Bank (previously













6. IndusInd Bank


7. Kotak Mahindra Bank


8. Yes Bank


10. Times Bank (Merged with HDFC Bank Ltd.)


11. Global Trust Bank (India) (Merged with Oriental Bank of Commerce)


12. Balaji Corporation Limited - Private Loan Company, not a Bank


13. HDFC bank


14. Bandhan bank


15. IDFC Bank


Old Private Sector Bank

The banks, which were not nationalized at the time of bank nationalization that took place
during 1969 and 1980, are known to be the old private-sector banks. These were not
nationalized, because of their small size and regional focus. Most of the old private-sector
banks are closely held by certain communities their operations are mostly restricted to the
areas in and around their place of origin. Their Board of directors mainly consist of locally
prominent personalities from trade and business circ QQQ les. One of the positive points of
these banks is that, they lean heavily on service and technology and as such, they are likely to
attract more business in days to come with the restructuring of the industry round the corner.


List of the old private-sector banks in India



1. Bank of punjab merged with Centurion Bank to form Centurion Bank of 1943
Punjab in June 2005
2. City Union Bank
3. Dhanlaxmi Bank
4. Federal Bank
5. ING Vysya Bank Merged with kotak Mahindra bank
6. Jammu and Kashmir Bank
7. Karnataka Bank
8. Karur Vysya Bank
9. Lakshmi Vilas Bank
10. abc and evergreen Bank
11. SBI Commercial and international Bank
12. South Indian Bank
13. Tamilnad Mercantile Bank
14. RBL Bank
15. IDB Bank Ltd (reverse merged with parent IDBI in 2004 to become


IDBI Bank. Making this public sector bank private)





The Basel Committee on Banking Supervision has its origins in the financial market turmoil
that followed the breakdown of the Bretton Woods system of managed exchange rates in
1973. After the collapse of Bretton Woods, many banks incurred large foreign currency
losses. On 26 June 1974, West Germany's Federal Banking Supervisory Office withdrew
Bankhaus Herstatt's banking licence after finding that the bank's foreign exchange exposures
amounted to three times its capital. Banks outside Germany took heavy losses on their
unsettled trades with Herstatt, adding an international dimension to the turmoil. In October
the same year, the Franklin National Bank of New York also closed its doors after incurring
large foreign exchange losses.
In response to these and other disruptions in the international financial markets, the central
bank governors of the G10 countries established a Committee on Banking Regulations and
Supervisory Practices at the end of 1974. Later renamed the Basel Committee on Banking
Supervision, the Committee was designed as a forum for regular cooperation between its
member countries on banking supervisory matters. Its aim was and is to enhance financial
stability by improving supervisory knowhow and the quality of banking supervision
The Committee seeks to achieve its aims by setting minimum standards for the regulation and
supervision of banks; by sharing supervisory issues, approaches and techniques to promote
common understanding and to improve cross-border cooperation; and by exchanging
information on developments in the banking sector and financial markets to help identify
current or emerging risks for the global financial system. Also, to engage with the challenges
presented by diversified financial conglomerates, the Committee also works with other
standard-setting bodies.
Since the first meeting in February 1975, meetings have been held regularly three or four
times a year. After starting life as a G10 body, the Committee expanded its membership in
2009 and again in 2014 and now includes 28 jurisdictions. The Committee now also reports
to an oversight body, the Group of Central Bank Governors and Heads of Supervision
(GHOS), which comprises central bank governors and (non-central bank) heads of
supervision from member countries.


Countries are represented on the Committee by their central bank and also by the authority
with formal responsibility for the prudential supervision of banking business where this is not
the central bank. The present Chairman of the Committee is Stefan In gves, Governor of
Sveriges Risk bank, Sweden's central bank. (List of past Basel Committee chairmen)
The Committee's decisions have no legal force. Rather, the Committee formulates
supervisory standards and guidelines and recommends sound practices in the expectation that
individual national authorities will implement them. The Committee encourages full, timely
and consistent implementation of its standards by members and, in 2012, began monitoring
implementation to improve the resilience of the global banking system, promote public
confidence in prudential ratios and encourage a regulatory level playing field for
internationally active banks.
International cooperation between banking supervisors
At the outset, one important aim of the Committee's work was to close gaps in international
supervisory coverage so that (i) no foreign banking establishment would escape supervision;
and (ii) supervision would be adequate and consistent across member jurisdictions. A first
step in this direction was the paper issued in 1975 that came to be known as the "Concordat".
The Concordat set out principles for sharing supervisory responsibility for banks' foreign
branches, subsidiaries and joint ventures between host and parent (or home) supervisory
authorities. In May 1983, the Concordat was revised and re-issued as Principles for the
supervision of banks' foreign establishments.
In April 1990, a supplement to the 1983 Concordat was issued. This supplement, Exchanges
of information between supervisors of participants in the financial markets, aimed to improve
the cross-border flow of prudential information between banking supervisors. In July 1992,
certain principles of the Concordat were reformulated and published as the Minimum
standards for the supervision of international banking groups and their cross-border
establishments. These standards were communicated to other banking supervisory authorities,
who were invited to endorse them.
In October 1996, the Committee released a report on The supervision of cross-border
banking, drawn up by a joint working group that included supervisors from non-G10
jurisdictions and offshore centres. The document presented proposals for overcoming the
impediments to effective consolidated supervision of the cross-border operations of

international banks. Subsequently endorsed by supervisors from 140 countries, the report
helped to forge relationships between supervisors in home and host countries.
The involvement of non-G10 supervisors also played a vital part in the formulation of the
Committee's Core principles for effective banking supervision in the following year. The
impetus for this document came from a 1996 report by the G7 finance ministers that called
for effective supervision in all important financial marketplaces, including those of emerging
economies. When first published in September 1997, the paper set out 25 basic principles that
the Basel Committee believed should be in place for a supervisory system to be effective.
After several revisions, most recently in September 2012, the document now embraces 29
principles, covering supervisory powers, the need for early intervention and timely
supervisory actions, supervisory expectations of banks, and compliance with supervisory
Joint Forum
In 1996, a Joint Forum was established under the aegis of the Basel Committee on Banking
Supervision (BCBS), the International Organization of Securities Commissions (IOSCO) and
the International Association of Insurance Supervisors (IAIS) to deal with issues common to
the banking, securities and insurance sectors, including the regulation of financial
conglomerates. It comprised an equal number of senior bank, insurance and securities
supervisors representing each supervisory constituency. The Joint Forum was discontinued in
2015, after it was superseded by bilateral and other arrangements for cooperation. The
secretariat for the Joint Forum was provided by the Basel Committee.

6.2 BASLE COMMTTIEE 1: the Basel Capital Accord

With the foundations for supervision of internationally active banks laid, capital adequacy
soon became the main focus of the Committee's activities. In the early 1980s, the onset of the

Latin American debt crisis heightened the Committee's concerns that the capital ratios of the
main international banks were deteriorating at a time of growing international risks. Backed
by the G10 Governors, Committee members resolved to halt the erosion of capital standards
in their banking systems and to work towards greater convergence in the measurement of
capital adequacy. This resulted in a broad consensus on a weighted approach to the
measurement of risk, both on and off banks' balance sheets.
There was strong recognition within the Committee of the overriding need for a multinational
accord to strengthen the stability of the international banking system and to remove a source
of competitive inequality arising from differences in national capital requirements. Following
comments on a consultative paper published in December 1987, a capital measurement
system commonly referred to as the Basel Capital Accord (1988 Accord) was approved by the
G10 Governors and released to banks in July 1988.
The 1988 Accord called for a minimum capital ratio of capital to risk-weighted assets of 8%
to be implemented by the end of 1992. Ultimately, this framework was introduced not only in
member countries but also in virtually all other countries with active international banks. In
September 1993, the Committee issued a statement confirming that G10 countries' banks with
material international banking business were meeting the minimum requirements set out in
the Accord.
The Accord was always intended to evolve over time. it was amended in November 1991.
The 1991 amendment gave greater precision to the definition of general provisions or general
loan-loss reserves that could be included in the capital adequacy calculation. In April 1995,
the Committee issued an amendment, to take effect at end-1995, to recognise the effects of
bilateral netting of banks' credit exposures in derivative products and to expand the matrix of
add-on factors. In April 1996, another document was issued explaining how Committee
members intended to recognise the effects of multilateral netting.
The Committee also refined the framework to address risks other than credit risk, which was
the focus of the 1988 Accord. In January 1996, following two consultative processes, the
Committee issued the so-called Market Risk Amendment to the Capital Accord (or Market
Risk Amendment), to take effect at the end of 1997. This was designed to incorporate within
the Accord a capital requirement for the market risks arising from banks' exposures to foreign
exchange, traded debt securities, equities, commodities and options. An important aspect of
the Market Risk Amendment was that banks were, for the first time, allowed to use internal

models (value-at-risk models) as a basis for measuring their market risk capital requirements,
subject to strict quantitative and qualitative standards. Much of the preparatory work for the
market risk package was undertaken jointly with securities regulators.
6.3 BASLE COMMITEE2: the New Capital Framework
In June 1999, the Committee issued a proposal for a new capital adequacy framework to
replace the 1988 Accord. This led to the release of the Revised Capital Framework in June
2004. Generally known as "Basel II", the revised framework comprised three pillars, namely:
1. minimum capital requirements, which sought to develop and expand the standardised
rules set out in the 1988 Accord;
2. supervisory review of an institution's capital adequacy and internal assessment
process; and
3. effective use of disclosure as a lever to strengthen market discipline and encourage
sound banking practices.
The new framework was designed to improve the way regulatory capital requirements reflect
underlying risks and to better address the financial innovation that had occurred in recent
years. The changes aimed at rewarding and encouraging continued improvements in risk
measurement and control.
The framework's publication in June 2004 followed almost six years of intensive preparation.
During this period, the Basel Committee consulted extensively with banking sector
representatives, supervisory agencies, central banks and outside observers in an attempt to
develop significantly more risk-sensitive capital requirements.
Following the June 2004 release, which focused primarily on the banking book, the
Committee turned its attention to the trading book. In close cooperation with the International
Organization of Securities Commissions (IOSCO), the international body of securities
regulators, the Committee published in July 2005 a consensus document governing the
treatment of banks' trading books under the new framework. For ease of reference, this new
text was integrated with the June 2004 text in a comprehensive document released in June
2006: Basel II: International Convergence of Capital Measurement and Capital Standards: A
Revised Framework - Comprehensive Version.
Committee member countries and several non-member countries agreed to adopt the new
rules, albeit on varying timescales. Thereafter, consistent implementation of the new

framework across borders became a more challenging task for the Committee. One challenge
that supervisors worldwide faced under Basel II was the need to approve the use of certain
approaches to risk measurement in multiple jurisdictions. While this is not a new concept for
the supervisory community - the Market Risk Amendment of 1996 involved a similar
requirement - Basel II extended the scope of such approvals and demanded an even greater
degree of cooperation between home and host supervisors. To help address this issue, the
Committee issued guidance on information-sharing in 2006. In the following year, it followed
up with advice on supervisory cooperation and allocation mechanisms in the context of the
advanced measurement approaches for operational risk.
Even before Lehman Brothers collapsed in September 2008, the need for a fundamental
strengthening of the Basel II framework had become apparent. The banking sector had
entered the financial crisis with too much leverage and inadequate liquidity buffers. These
defects were accompanied by poor governance and risk management, as well as inappropriate
incentive structures. The dangerous combination of these factors was demonstrated by the
mispricing of credit and liquidity risk, and excess credit growth.
Responding to these risk factors, the Basel Committee issued Principles for sound liquidity
risk management and supervision in the same month that Lehman Brothers failed. In July
2009, the Committee issued a further package of documents to strengthen the Basel II capital
framework, notably with regard to the treatment of certain complex securitisation positions,
off-balance sheet vehicles and trading book exposures. These enhancements were part of a
broader effort to strengthen the regulation and supervision of internationally active banks, in
the light of weaknesses revealed by the financial market crisis.
In September 2010, the Group of Governors and Heads of Supervision announced higher
global minimum capital standards for commercial banks. This followed an agreement reached
in July regarding the overall design of the capital and liquidity reform package, now referred
to as "Basel III". In November 2010, the new capital and liquidity standards were endorsed at
the G20 Leaders Summit in Seoul and subsequently agreed at the December 2010 Basel
Committee meeting.
The proposed standards were issued by the Committee in mid-December 2010 (and have
been subsequently revised). The December 2010 versions were set out in Basel III:

International framework for liquidity risk measurement, standards and monitoring and Basel
III: A global regulatory framework for more resilient banks and banking systems. The
enhanced Basel framework revised and strengthen the three pillars established by Basel II. It
also extended the framework with several innovations, namely:

an additional layer of common equity - the capital conservation buffer - that, when
breached, restricts payouts of earnings to help protect the minimum common equity

a countercyclical capital buffer, which places restrictions on participation by banks in

system-wide credit booms with the aim of reducing their losses in credit busts;
a leverage ratio - a minimum amount of loss-absorbing capital relative to all of a
bank's assets and off-balance sheet exposures regardless of risk weighting (defined as
the "capital measure" (the numerator) divided by the "exposure measure" (the

denominator) expressed as a percentage);

liquidity requirements - a minimum liquidity ratio, the liquidity coverage ratio (LCR),
intended to provide enough cash to cover funding needs over a 30-day period of
stress; and a longer-term ratio, the net stable funding ratio (NSFR), intended to

address maturity mismatches over the entire balance sheet; and

additional proposals for systemically important banks, including requirements for
supplementary capital, augmented contingent capital and strengthened arrangements
for cross-border supervision and resolution.

In January 2012, the GHOS endorsed a comprehensive process proposed by the Committee to
monitor members' implementation of Basel III. The Regulatory Consistency Assessment
Programme (RCAP) consists of two distinct but complementary work streams to monitor the
timely adoption of Basel III standards, and to assess the consistency and completeness of the
adopted standards including the significance of any deviations in the regulatory framework.
The Basel Committee has worked in close collaboration with the Financial Stability Board
(FSB) given the FSB's role in coordinating the monitoring of implementation of regulatory
reforms. The Committee designed its programme to be consistent with the FSB's
Coordination framework for monitoring the implementation of financial reforms (CFIM) as
agreed by the G20.
These tightened definitions of capital, significantly higher minimum ratios and the
introduction of a macro prudential overlay represent a fundamental overhaul for banking
regulation. At the same time, the Basel Committee, its governing body and the G20 Leaders

have emphasised that the reforms will be introduced in a way that does not impede the
recovery of the real economy.
In addition, time is needed to translate the new internationally agreed standards into national
legislation. To reflect these concerns, a set of transitional arrangements for the new standards
was announced in September 2010, although national authorities are free to impose higher
standards and shorten transition periods where appropriate.
The strengthened definition of capital will be phased in over five years: the requirements
were introduced in 2013 and should be fully implemented by the end of 2017. Capital
instruments that no longer qualify as common equity Tier 1 capital or Tier 2 capital will be
phased out over a 10-year period, beginning 1 January 2013.
Turning to the minimum capital requirements, the higher minimums for common equity and
Tier 1 capital were phased in from 2013, and will become effective at the beginning of 2015.
The schedule is as follows:

The minimum common equity and Tier 1 requirements increased from 2% and 4% to

3.5% and 4.5%, respectively, at the beginning of 2013.

The minimum common equity and Tier 1 requirements rose to 4% and 5.5%,

respectively, at the beginning of 2014.

The final requirements for common equity and Tier 1 capital will be 4.5% and 6%,
respectively, beginning in 2015.

The 2.5% capital conservation buffer, which will comprise common equity and is in addition
to the 4.5% minimum requirement, will be phased in progressively starting on 1 January
2016, and will become fully effective by 1 January 2019.
The leverage ratio will also be phased in gradually. The test (the so-called "parallel run
period") began in 2013 and will run until 2017, with a view to migrating to a Pillar 1
treatment on 1 January 2018 based on review and appropriate calibration. The exposure
measure of the leverage ratio was finalised in January 2014.
The liquidity coverage ratio (LCR) will be phased in from 1 January 2015 and will require
banks to hold a buffer of high-quality liquid assets sufficient to deal with the cash outflows
encountered in an acute short-term stress scenario as specified by supervisors. To ensure that
banks can implement the LCR without disruption to their financing activities, the minimum


LCR requirement will begin at 60% in 2015, rising in equal annual steps of 10 percentage
points to reach 100% on 1 January 2019.
The other minimum liquidity standard introduced by Basel III is the net stable funding ratio.
This requirement, which takes effect as a minimum standard by 1 January 2018, will promote
longer term funding mismatches and provide incentives for banks to use stable funding



An evaluation of the Indian banking industry during the pre-liberalization era revealed the
presence of several shortcomings which crept into the financial system over the years
notably reduced productivity, deteriorated asset quality and efficiency and increased cost
structure due to technological backwardness. Among these deficiencies, policy makers
identified the erosion of asset quality as the most significant obstacle for the development of
a sound and efficient banking sector. In fact, the various practices that were followed during
pre-liberalization period that includes asset classification using health code system, accrual
basis used to book interest in bank accounts etc., concealed the gravity of asset quality issues
of the banking sector. The asset quality is a prime concern and impacts various performance
indicators, i.e., profitability, intermediation costs, liquidity, credibility, income generating
capacity and overall functioning of banks. The reduction in asset quality results in
accumulation of Non-Performing Assets (NPAs).
The intermediation process is the principal function of a commercial bank. Since it involves
counterparty risk; risk is inherent in banking. A banker should expect that all loan
portfolioswill not fetch returns/earnings in the normal course. The loans/advances is an
important source of income for the banks. The strength and soundness of the banking system
primarily depend on the quality and performance of the loan portfolio, i.e. the fulfillment of
obligations by borrowers promptly.
Non-performing assets indicate an advance for which interest or repayment of principal or
both remains overdue for a period of 90 days or more. An advance/loan is treated as nonperforming when it fails to satisfy its repayment obligations. Thus, non-performing assets are
loans in jeopardy of default. The level of NPAs is an indicator of the efficiency of bankers
credit risk management and efficiency of resource allocation to productive sectors. The Basel
Committee on Banking Supervision defines credit risk as potential default of a borrower to
meet the obligation in accordance with the agreed terms (BIS, 2005). Higher nonperforming assets resulted in many bank failures (Nayak et al, 2010). NPAs represent a real
economic cost in modern days as they reflect the application of scarce capital and credit
funds to unproductive use. It also affects the lending capacity since funds are blocked and
repayment is disturbed and has also resulted in additional cost for intermediation and
realizing the NPAs.
The banking sector reforms in India during the post-liberalization period mostly focused on
improving the efficiency of the banking sector by incorporating prudential norms for income

recognition, asset classification and provisioning and through integrating international

standards. The alarming level of NPAs is recognized as one of the major explanations for
implementing structural changes and reform measures in the banking sector during this
period. Keeping in view the inefficiencies in the banking sector and the presence of nonperforming assets, the Committee on Financial System (Narasimham Committee I) was set
up. Few observations of Narasimham Committee I on the banking sector and its
inefficiencies include;

Gross profits before provisions were no more than 1.10% of working funds indicating

low profitability of banks.

Net profit of public sector banks (PSBs) as a percentage of total assets show as low as

Average operating costs of banks as a percentage of assets was about 2.3% in India,
while it was as low as 1.10% in China, 1.60% in Malaysia, 1.90% in Thailand, 1.00%

Japan and 2.10% in European countries.

The Cash Reserve Ratio (CRR) stood at its legal upper limit of 15% and SLR at

The Credit to Deposit Ratio (CDR) shows 62.54% and Investment Deposit Ratio of

Huge amount of NPA without any clear cut regulation.
40% of bank credit channelize to priority sector at concessional rate.
Restriction on entry and expansion of domestic, private and foreign banks.
Non-interest income as percentage of total income shows 9.25%
High intermediation cost as 2.61%
The Capital adequacy ratio was 1.5% in India as compared to 4% in Korea and
Pakistan, and 4% to 6% in Taiwan, Thailand and Singapore.

Banking reforms were initiated to upgrade the operating standards, health and financial
soundness of banks to internationally accepted levels in an increasingly globalized market
(Pathak, 2009). The reforms have been undertaken gradually with mutual consent and wider
debate amongst the participants and in a sequential pattern that is reinforcing to the overall
economy (Badola and Verma, 2006). These reform measures substantiate the views that
highlight the key role in economic development that could be played by a banking system
free from the types of controls on interest rates and quantities that were prevalent at the time
(Barajas et al, 2012).


Two decades had completed since the banking sector initiated measures to uplift the banking
sector in line with international standards and to improve productivity and efficiency of
banks. Many researches on NPA illustrated the relationship between asset quality and
financial distress and considered management of NPA as a major prerequisite to counter the
recessionary pressures and foster economic development. Some of the major observations
from previous researches include;

The problem of the NPA is severe in countries where severe government intervention
had led to the institutional decay of banks or prevented their sound development

(Renaud, 1997)
NPA management assumes priority over other aspects of bank functioning (Batra,

The existing capital adequacy regulations tried to protect the interest of depositors
(avoiding bankruptcy), but impacted availability of funds for productive purposes.

(Murinde and Yaseen, 2004)

Reduction in NPA ratios does not indicate a reduction of fresh NPA. For ex, Banks
have aggressively provided for their bad debts from the treasury profits during 2003-

04 in order to show a better

NPA picture, resulting a decline in NPA by 24.7% as against a decline of 8% in 2002-

03. (Pathak, 2009)

The NPA is a significant threat to Indian Banking Sector (Estrella et al, 2000;

Gopalakrishan, 2004; Ahmed et al, 2007; Heid and Kruger, 2011)

The Slowdown in economic growth and rapid credit growth are independently
associated with higher levels of NPA (Bock and Demyanets, 2012)

Upon analyzing the banking sector in India, it is evident that the NPAs still pose a significant
threat to the banking sector. This research is an attempt to examine the non-performing assets
of public sector banks (PSBs) in India and to evaluate the various facets of NPA and its
management in Indian banking sector.
The developments of last few months are now pointing out towards the changing face of
Indian PS Banks in 2015-16 onwards. Most of the bankers are ignorant of these as they are
too busy in their day to day working and are usually are not privy to the needs of the bank
relating to capital and their impact. Union leaders are too busy in securing their own forts as


it is fast crumbling with the arrival of Modi Government and complete wipe out of
communists at the central level.
However, this topic being a really important, I thought of sharing with our readers, these facts
in a simple language (having worked in Treasury Division and Risk Management Divisions
of banks, I have small edge in knowledge about some of the intricacies associated with this

I am sure it will help young bankers to get the basics cleared and upgrade their

banking knowledge. Seniors too will be able to better appreciate the discussions relating to
Basel II and III. This topic can be useful for those who are appearing in interview for
promotions in April onwards. It can be useful right from Scale I to Scale VII officers in their
forthcoming promotions.

I know it is slightly long article, but you will enjoy it if you really

wish to upgrade your knowledge about this complex subject.

Why is Capital Needed by Banks?
Capital is needed in every business.

However, in banks capital is of higher importance as

banks are in the business of leveraging. A major portion of the banks balance sheet consists
of Deposits from public, which are required to be returned on demand or on maturity.
However, capital is that part of the liabilities of the banks which are not needed to be repaid,
and there is no legal liability on the banks to pay dividend or interest on such capital. They
may do so if their profits permit these.
Capital is that part of the balance sheet of the banks which is used to absorb shocks during
turmoils and may be needed to pay its depositors, customers and other claimants when bank
does not have enough liquidity due to losses it suffers from its operations.

Nomenclature used in Banks About Types of Capital :

As per RBI, in India capital of banks is divided into tiers according to the characteristics /
qualities of each qualifying instrument. For supervisory purposes capital is split into two


(a) Tier I: It capital consists mainly of share capital and disclosed reserves and it is a banks
highest quality capital because it is fully available to cover losses.
(b)Tier II: capital on the other hand consists of certain reserves and certain types of
subordinated debt.
The loss absorption capacity of Tier II capital is lower than that of Tier I capital. When
returns of the investors of the capital issues are counter guaranteed by the bank, such
investments will not be considered as Tier I / II regulatory capital for the purpose of capital

Tier 1 is considered the safest. Tier 2 is less safe. A strong capital base is an

indicator of a banks strength to depositors and investors.

There is also Tier III capital, which at present is not used for regulatory purposes in India.
1. Elements of Tier I Capital: The elements of Tier I capital include:
2. Perpetual Non-cumulative Preference Shares (PNCPS) eligible for inclusion as Tier I
capital - subject to laws in force from time to time;
3. Innovative Perpetual Debt Instruments (IPDI) eligible for inclusion as Tier I capital; a
4. Capital reserves representing surplus arising out of sale proceeds of assets.
5. Elements of Tier II Capital: The elements of Tier II capital include
(a) Undisclosed reserves,
(b) revaluation reserves,
(c) General provisions and loss reserves,
(d)Hybrid capital instruments,
(e) Subordinated debt and investment reserve account.
International Requirements for capital in banks:
Every countrys banking regulator lays down certain requirements to ensure banks are
prudently managed and hold enough capital to ensure that these entities themselves, their
customers and other stakeholders are safe and able to withstand any foreseeable problems.
With the increasing inter-dependence of the financial system across the world, it was realized
that failure of banking system in one country can have ripples across the world.

Thus, an

attempt was made to establish a framework of capital requirements across the world.


major international effort to establish rules relating to capital requirements have been laid

down in Basel Accords, published by the Basel Committee on Banking Supervision housed at
the Bank for International Settlements.
The first set of such a framework as to how banks and depository institutions need to
calculate their capital was introduced in 1988 and is popularly known as Basel I. Later on, it
was in June 2004 that Basel I framework was replaced by Basel II, which was significantly
more complex capital adequacy framework. Inspite of all these regulations, world witnessed
the financial crisis of 200708, Thus, a need was felt to upgrade even this framework and it
was replaced by Basel III which is now under implementation even in India since 2013 and
will be gradually fully implemented by 2019.
It was as early as April 1992 that Reserve Bank of India decided to introduce a risk asset ratio
system for banks (including foreign banks) in India as a capital adequacy measure in line
with the Capital Adequacy Norms prescribed by Basel Committee.
What Are Risk Weighted Assets:
We know it well that banks primary business is to make money (in the form of interest
earnings) from its assets, which primarily are in the form of loans and advances. A part of its
assets also consist of investments in government securities, corporate bonds, equity shares,
mutual funds etc.
All such assets have some sort of risk of default in interest or / and principal. Loans that are
given by a banks to a corporate that has AAA rating will have a lower risk as the chance of
default by such corporate will be lower. However, loans and advances given by bank to a
corporate with BB rating will carry a much higher risk. Similarly, an investment in
government securities will carry almost zero risk, much less than an investment in a BBB
rated bonds.
Thus all bank assets do not carry the same risk. Therefore, to calculate risk-weighted assets of
a bank, first of all we segregate a banks loans and investments into separate categories. Each
category has a risk weight prescribed by the regulator (in case of India, it is RBI). For less
risky loans and investments, this risk-weighted value is low. For more risky assets and
investments, this risk-weighted value is high. To arrive at the total risk weighted assets, the
amount of loans / investments in each category is then multiplied by its corresponding riskweights to get the banks risk-weighted assets.


What is Capital Requirement / Capital Adequacy Ratio (CAR):

Capital Adequacy Ratio (CAR) or capital-to-risk-weighted assets ratio is nothing but the ratio
of capital a bank has divided by its risk-weighted assets. The capital includes both tier one
and tier two capital
Thus, we can say capital requirement (also known as regulatory capital or capital adequacy)
is the amount of capital a bank or other financial institution has to hold as required by its
financial regulator. Banks are required to put in place these requirements so as ensure that
these institutions do not take on excess leverage and become insolvent. RBI has specifically
mentioned that the basic approach of capital adequacy framework is that a bank should have
sufficient capital to provide a stable resource to absorb any losses arising from the risks in its
[Note: Capital requirements govern the ratio of equity to debt, recorded on the assets side of a
firm's balance sheet. It should not be confused with reserve requirements like SLR, CRR,
which govern the liabilities side of a bank's balance sheetin particular, i.e. the proportion of
assets it must hold in cash or highly-liquid assets].



Virtual banking


direct-banking entity that


its services primarily

based infrastructure. Customer servicessuch



asdepositing, withdrawals,

and money transfers are facilitated through a network of compatible technologies such
as automated teller machines,








online account management.

8.1 ATMs

An ATM card is any payment card issued by a financial institution that enables a customer to
access an automated teller machine (ATM) in order to perform transactions such as deposits,
cash withdrawals, obtaining account information, etc. ATM cards are known by a variety of

names such as bank card, MAC (money access card), client card, key card or cash card,
among others. Most payment cards, such as debit and credit cards can also function as ATM
cards, although ATM-only cards are also available. Charge and proprietary cards cannot be
used as ATM cards. The use of a credit card to withdraw cash at an ATM is treated differently
to a POS transaction, usually attracting interest charges from the date of the cash withdrawal.
Interbank networks allow the use of ATM cards at ATMs of private operators and financial
institutions other than those of the institution that issued the cards.
ATM cards can also be used on improvised ATMs such as "mini ATMs", merchants' card
terminals that deliver ATM features without any cash drawer.These terminals can also be
used as cashless scrip ATMs by cashing the receipts they issue at the merchant's point of sale.
ATM uses
All ATM machines, at a minimum, will permit cash withdrawals of customers of the
machine's owner (if a bank-operated machine) and for cards that are affiliated with any ATM
network the machine is also affiliated. They will report the amount of the withdrawal and any
fees charged by the machine on the receipt. Most banks and credit unions will permit routine
account-related banking transactions at the bank's own ATM, including deposits, checking the
balance of an account, and transferring money between accounts. Some may provide
additional services, such as selling postage stamps.
Non-ATM uses
Some ATM cards can also be used at a branch, as identification for in-person transactions
The ability to use an ATM card for in-store EFTPOS purchases or refunds is no longer
allowed, however, if the ATM card is also a debit card, it may be used for a pin-based debit
transaction, or a non-pin-based credit-card transaction if the merchant is affiliated with the
credit or debit card network of the card's issuer. Banks have long argued with merchants over
the fees that can be charged by the bank for such transactions. Despite the fact that ATM
cards require a PIN for use, banks have decided to permit the use of a non-PIN based card
(debit or credit) for all merchant transactions.


For other types of transactions through telephone or online banking, this may be performed
with an ATM card without in-person authentication. This includes account balance inquiries,
electronic bill payments, or in some cases, online purchases.
8.2 Debit card

A debit card (also known as a bank card or check card) is a plasticpayment card that can be
used instead of cash when making purchases. It is similar to a credit card, but unlike a credit
card, the money comes directly from the user's bank account when using a debit card.
Some cards may bear a stored value with which a payment is made, while most relay a
message to the cardholder's bank to withdraw funds from a payer's designated bank account.
In some cases, the primary account number is assigned exclusively for use on the Internet and
there is no physical card.
In many countries, the use of debit cards has become so widespread that their volume has
overtaken or entirely replaced cheques and, in some instances, cash transactions. The
development of debit cards, unlike credit cards and charge cards, has generally been country
specific resulting in a number of different systems around the world, which were often
incompatible. Since the mid-2000s, a number of initiatives have allowed debit cards issued in


one country to be used in other countries and allowed their use for internet and phone
Unlike credit and charge cards, payments using a debit card are immediately transferred from
the cardholder's designated bank account, instead of them paying the money back at a later
Debit cards usually also allow for instant withdrawal of cash, acting as the ATM card for
withdrawing cash. Merchants may also offer cashback facilities to customers, where a
customer can withdraw cash along with their purchase.

A credit card is a payment card issued to users (cardholders) as a method of payment. It

allows the cardholder to pay for goods and services based on the holder's promise to pay for
them. The issuer of the card (usually a bank) creates a revolving account and grants a line
ofcredit to the cardholder, from which the cardholder can borrow money for payment to a
merchant or as a cash advance.
A credit card is different from a charge card, where it requires the balance to be repaid in full
each month. In contrast, credit cards allow the consumers a continuing balance of debt,
subject to interest being charged. A credit card also differs from a cash card, which can be
used like currency by the owner of the card. A credit card differs from a charge card also in


that a credit card typically involves a third-party entity that pays the seller and is reimbursed
by the buyer, whereas a charge card simply defers payment by the buyer until a later date.
The point of sale (POS) or point of purchase (POP) is the time and place where a retail
transaction is completed. It is the point at which a customer makes a payment to the merchant
in exchange for goods or after provision of a service. At the point of sale, the merchant would
prepare an invoice for the customer (which may be a cash register printout) or otherwise
calculate the amount owed by the customer and provide options for the customer to make
payment. After receiving payment, the merchant will also normally issue a receipt for the
transaction. Usually the receipt is printed, but it is increasingly being dispensed
The POS in various retail situations would use customized hardware and software tailored to
their particular requirements. Retailers may utilize weighing scales, scanners, electronic and
manual cash registers, EFTPOS terminals, touch screens and a variety of other hardware and
software available. For example, a grocery or candy store may use a scale at the point of sale,
while a bar and restaurant may use software to customize the item or service sold when a
customer has a meal or drink request.
The point of sale is often referred to as the point of service because it is not just a point of
sale but also a point of return or customer order. Additionally, today POS software may
include additional features to cater for different functionality, such as inventory management,
CRM, financials, warehousing, etc.
Businesses are increasingly adopting POS systems and one of the most obvious and
compelling reasons is that a POS system does away with the need for price tags. Selling
prices are linked to the product code of an item when adding stock, so the cashier merely
needs to scan this code to process a sale. If there is a price change, this can also be easily
done through the inventory window. Other advantages include ability to implement various
types of discounts, a loyalty scheme for customers and more efficient stock control.



Mobile banking is a service provided by a bank or other financial institution that allows its
customers to conduct a range of financial transactions remotely using a mobile device such as
a mobile phone or tablet, and using software, usually called an app, provided by the financial
institution for the purpose. Mobile banking is usually available on a 24-hour basis. Some
financial institutions have restrictions on which accounts may be accessed through mobile
banking, as well as a limit on the amount that can be transacted.
The types of financial transactions which a customer may transact through mobile banking
include obtaining account balances and list of latest transactions, electronic bill payments,
and funds transfers between a customer's or another's accounts. Some also enable copies of
statements to be downloaded and sometimes printed at the customer's premises; and some
banks charge a fee for mailing hardcopies of bank statements.
From the bank's point of view, mobile banking reduces the cost of handling transactions by
reducing the need for customers to visit a bank branch for non-cash withdrawal and deposit
transactions. Transactions involving cash or documents (such as cheques) are not able to be
handled using mobile banking, and a customer needs to visit an ATM or bank branch for cash
withdrawals and cash or cheque deposits.
Mobile banking differs from mobile payments, which involves the use of a mobile device to
pay for goods or services either at the point of sale or remotely,[1] analogously to the use of a
debit or credit card to effect an EFTPOS payment.


8.5 Telephone banking

Telephone banking is a service provided by a bank or other financial institution, that

enables customers to perform a range of financial transactions over the telephone, without the
need to visit a bank branch or automated teller machine. Telephone banking times are usually
longer than branch opening times, and some financial institutions offer the service on a 24hour basis. Most financial institutions have restrictions on which accounts may be accessed
through telephone banking, as well as a limit on the amount that can be transacted.
The types of financial transactions which a customer may transact through telephone banking
include obtaining account balances and list of latest transactions, electronic bill payments,
andfunds transfers between a customer's or another's accounts.
From the bank's point of view, telephone banking minimises the cost of handling transactions
by reducing the need for customers to visit a bank branch for non-cash withdrawal and
deposit transactions. Transactions involving cash or documents (such as cheques) are not able
to be handled using telephone banking, and a customer needs to visit an ATM or bank branch
for cash withdrawals and cash or cheque deposits.


8.6 Real time gross settlement

Real-time gross settlement systems (RTGS) are specialist funds transfer systems where
transfer of money or securities takes place from one bank to another on a "real time" and on
"gross" basis. Settlement in "real time" means payment transaction is not subjected to any
waiting period. The transactions are settled as soon as they are processed. "Gross settlement"
means the transaction is settled on one to one basis without bundling or netting with any other
transaction. Once processed, payments are final and irrevocable.
RTGS systems are typically used for high-value transactions that require immediate clearing.
In some countries the RTGS systems may be the only way to get same day cleared funds and
so may be used when payments need to be settled urgently. However, most regular payments
would not use a RTGS system, but instead would use a national payment system or network
that allows participants to batch and net payments.
RTGS systems are usually operated by a country's central bank as it is seen as a critical
infrastructure for a country's economy. Economists believe that an efficient national payment
system reduces the cost of exchanging goods and services, and is indispensable to the
functioning of the interbank, money, and capital markets. A weak payment system may
severely drag on the stability and developmental capacity of a national economy; its failures
can result in inefficient use of financial resources, inequitable risk-sharing among agents,
actual losses for participants, and loss of confidence in the financial system and in the very
use of money.


Electronic clearing service

ELECTRONIC CLEARING SERVICE (ECS) ECS is an electronics mode of

payment/receipt for transactions that are repetitive and periodic in nature. ECS is used by
institutions for making bulk payment or bulk collection of amounts. Essentially, ECS
facilitates bulk transfer of monies from one bank account to many bank accounts or vice
versa. Primarily, there are two variants of ECS - ECS Credit and ECS Debit. ECS Credit is
used by an institution for affording credit to a large number of beneficiaries having accounts
with bank branches at various locations within the jurisdiction of a ECS Centre by raising a
single debit to the bank account of the user institution. ECS Credit enables payment of
amounts towards distribution of dividend, interest, salary, pension, etc., of the user institution.
ECS Debit is used by an institution for raising debits to a large number of accounts
maintained with bank branches at various locations within the jurisdiction of an ECS Centre
for single credit to the bank account of the user institution. ECS Debit is useful for payment
of telephone / electricity / water bills, cess / tax collections, loan installment repayments,
periodic investments in mutual funds, insurance premium etc., that are periodic or repetitive
in nature and payable to the user institution by large number of customers etc.


In the post-era of IT Act, global environment is continuously changing and providing new
direction, dimensions and immense opportunities for the banking industry. Keeping in mind
all the changes, RBI should appoint another committee to evaluate the on-going banking
sector reforms and suggest third phase of the banking sector reforms in the light of above said
recommendations. Need of the hour is to provide some effective measures to guard the banks
against financial fragilities and vulnerability in an environment of growing financial
integration, competition and global challenges. The challenge for the banks is to harmonize
and coordinate with banks in other countries to reduce the scope for contagion and maintain
financial stability. However, a few trends are evident, and the coming decade should be as
interesting as the last one.
We have got a detail picture of reforms that has been taking place in the financial sector in
India and also a good overview of banking system.
1. Bhole, L M & Mahakud. Financial Institutions and Markets, Tata McGraw-Hill
2. Pathak, Bharati, V. Indian Financial System, Pearson Publication
3. Rambhia, Ashok. Fifty years of Indian Capital Market. Capital Market, August 1997
4. Rangarajan, C, (1997), The Financial Sector Reforms: The Indian Experience, RBI
Bulletin, July 1997.
5. Sundharam & Varshney. Banking theory Law & Practice, Sultan Chand & Sons.


1. Business Economics - Mananprakasahan(T.Y.B.COM)
2. Reforming Indias Financial Sector Montek S Ahluwalia
3. Banking Sector Reforms & NPAs Meenakshi Rajiv & H P
4. Banking Sector Reforms Sultan Singh