Banking Sector

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INTRODUCTION OF A BANK
The Banking Companies Act of 1949, define
Banking Company as a company which transacts the business of banking in India. It defines banking as, accepting for the purpose of lending or investment of deposit money from the public, repayable on demand or otherwise and withdraw able by cheque draft , order or otherwise A bank as an institution dealing in money and credit. It safeguard of the savings of the public and gives loans and advances.

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Origin of Banking

The word of Bank is said to be of Germanic origin , cognate with the French wordBanque and the Italian word Banca , both meaning bench. Banking is as old as the authentic history and origins of modern Commercial banking tare traceable to ancient times. The New Testament mention about activities of the money changers in the temple of Jerusalem. In ancient Greece around 2000 B.C . The famous temples of Ephesus, Delphi and Olympia were used as depositories for peoples surplus funds and these temples were the centers of Money lending transaction. In, India the ancient Hindu scriptures refer to money lending activities in the Vedic period. In India The Ramayana and Mahabharata eras, banking had become a full fledged activity and during the Smriti period 4/10/12 which followed the Vedic period and Epic age the business of banking was carried onby the members of the Vaish community.

Pre Independence banking system of India

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal . This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.

The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks.The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the 4/10/12 Punjab National Bank, established in Lahore in 1895, which has survived to

Post Independence Banking system of India

In the post-independence period, India observed the emergence of large number of institutions for providing finance to different sectors of the economy.

There were two nationalizations of banks in India, one in 1969 and the other in 1980. The entry activities of private sector and foreign banks were restricted through branch licensing and regulation norms.

The over regulated and over administered polices eroded the capital base of most of the public Sector banks and recapitalization of 19 nationalized banks was made by government through of budgetary provision Nevertheless, acute problem arises in productivity, efficiency 4/10/12 and profitability

Liberal policies facilitate to increase market competition among banks to augment efficiency and by productivity by the management to choose independent decisions about inputoutput and their prices individual banks. The Committee on Financial Systems (GOI, 1998) suggested the road map for second -generation reform to keep pace with liberalization of financial sector in other parts of the world.

The other remarkable developments to enhance competition in banking sector reforms 1) It abolished administered interest rate regime by allowing banks to determine lending and deposit rates. 2) Competition has infused by allowing the operation of new private banks and more liberal entry of foreign banks. 3) Measures to broaden the ownership base of PSBs have also taken. 4) The system has also observed greater levels of transparency and standards of disclosure. 5) It introduced ratification of the legal structure to strengthen banks position in 4/10/12 the areas of loan and default loan. sector

Nationalization of Indian banking

Indian marched towards the establishment of public sector banking through The progressive nationalisation of commercial banks. There were three phases of bank nationalisation:

system

Nationalistion of Imperial Bank of India in1955 and its seven associate banks in 195960. Nationlisation of the 14 major commercial banks in 1969. Nationlisation of 6 more commercial banks in 1980.

On July 1, 1955 the government of India nationlised the Imperial Bank of India and converted it into the State Bank of India. The establishment of the State Bank of India was a pioneering attempt in public introducing sector banking in the country. Later on in 1959-60, seven subsidiary State Banks were also nationalised to form the SBI Group.

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Types of Banks
1)

Central Bank
A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank.

2)

Commercial Banks
Commercial banks are of three types (i) Public Sector Banks (ii) Private Sectors Banks (iii) Foreign Banks

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3) Development Banks
Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development banks. 4)

Co-operative Banks

There are three types of co-operative banks operating in our country. (i) Primary Credit Societies

(ii) Central Co-operative Banks

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5) Specialised Banks
There are some banks, which cater to the requirements and provide overall support for setting are examples of such banks. They engage themselves in some specific area or activity and thus, are called Specialised banks. Let us know about them.

(i) Export Import Bank of India (EXIM Bank)

(ii) Small Industries Development Bank of India (SIDBI)

(iii) National Bank for Agricultural and Rural Development (NABARD)

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Policies of Indian Banking System during 1991

Recommendations of Narasimhan committee:
1) Establishment of 4 tier hierarchy for the banking structure with 3 to 4 large banks at the top and rural banks at bottom mainly engaged in agriculture and allied activities.

2) The supervisory functions over banks and financial institutions can be assigned to aquasi autonomous body sponsored by RBI.

3) Phased achievement of 8 % capital adequacy ratio. Abolition of branch licensing policy. Phased reduction in Statutory Liquidity Ratio. Deregulation of interest rates which are related to the bank rateCompetition among financial institutions on a syndicating or participating approach .

4) Delegation of direct lending activity of the IDBI to a separate corporatebody . Proper classification of assets and full disclosure and transparency of of accounts of banks and other financial institutions.

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Globalization Of Indian Banking System

Banking sector in India is expanding at an incredibly faster pace, with more and more banks reliazing the benefits offered by globalization. Publicly owned banks handle more than 80% of the banking business in India and the rest is in the hands of private sector banks. However, banking in both the government and private sector is being revolutionized by this latest phenomenon called globalization.

As per the latest market research report named, Indian Banking Sector Analysis (2006-2007),published, by RNCOSThe banking sector in India is heading towards consolidation. There are about 90 players in .the banking sector in India, with 30competitors from each of the public, private and foreign sectors With so many players present in the banking sector in India, a few of them will emerge 4/10/12 competitors as global

Bank of India

Bank of India, founded on 7th September in the year 1906 was nationalised along with 13 other banks in July 1969. Then its paid-up capital was Rs.50 lakh with only 50 employees and the only office in Mumbai The promoters incorporated the Bank of India on 7 September, 1906 under Act VI of 1882 with an authorized capital of Rs. 1 crore divided into 100,000 shares each of Rs. 100. The promoters placed 55,000 shares privately, and issued 45,000 to the public by way of IPO on 3 October, 1906; the bank commenced operations on 1 November, 1906. Today Bank of India has been spread with 2594 branches including 93 specialised branches controlled by 48 Zonal Offices. Bank of India came up with its maiden public issue in the year 1997 and the total number of shareholders stands to 3,17,890 as on 30/06/2004.

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Main competitors for banking sector

Post offices. Mutual fund Share market Insurance. Money lenders Family and friends

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Present scenario

Banking industry has been undergoing a rapid transformation. Banks today are market driven and market responsive. With the entry of new players and multiple channels, customers (both corporate and retail) have become more discerning and less "loyal" to banks. This makes it imperative that banks provide best possible products and services to ensure customer satisfaction. They have been managing a world of information about customers - their profiles, location, needs, requirements, cash positions, etc. Furthermore, banks have very strong in-house research and market intelligence units in order to face the future challenges of competition, especially customer retention.

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Contd.

They are focusing on region-specific campaigns rather than national media campaigns as effective strategy for a diverse country like India. Customer-centricity also implies increasing investment in technology. Apart from the Mobile Banking, including of SMS Banking, Net Banking and ATMs are the major steps taken by the banks in India towards modernization.

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Services given by banks

Demat account Lockers Cash management Insurance product Mutual fund product Loans ECS(Electronic clearance system) Taxes
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Marketing strategies

Financing rapid industrial growth

With the Indian economy growing at a blistering pace on the back of strong industrial and services growth, the Indian companies are looking to build up capacity to meet future demand. Banks play a pivotal role in financing this industrial growth.

Technological innovations & challenges

Banks are aggressively adopting the latest technology in order to improve product offerings, customer service, operational efficiency and risk management systems.

Financial inclusion & Rural Microfinance

In the quest for new markets and customer segments, as well as with the RBI directives in this area, banks are looking at the rural and unbanked segments in a new light as a huge business opportunity.

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Contd.

Convergence to a single solution provider

With pressures on the spreads and the competition in the urban markets increasing rapidly, banks need to develop new ways to sustain profitability. Banks led to a plethora of new products, hence becoming a one stop shop for all financial solutions.

Roadmap by RBI for foreign banks

The RBI has laid out a two phased roadmap for giving greater freedom to the foreign banks in India. This has spurred the entry of several other foreign banks in India, along with acting as a signal to the domestic players to pull up their socks to face the new competitors.

Growth in retail lending

The under banked Indian population as well as the high margin on retail products makes this a very attractive market for the banks. The all-inclusive nature of this growth in terms of sectors covers all consumer segments as well as product segments.

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Contd.

Demand for derivatives & other risk management products

The increasingly dynamic business scenario and financial sophistication also increase the need for customized exotic financial products. The complex and peculiar nature of risks faced by the companies are passed onto the banks. Innovative financial tools and advanced risk management methods are required by the banks to capitalize on this business opportunity.

Consolidation
The process of consolidation in India aims at ironing out these deficiencies. The Indian banking industry may soon be characterized by fewer but very competitive banks.

Basel II

With the Basel II norms on Operational Risk come into force 2007 the banks will need more superior risk 4/10/12on the March 31, quantification and provisioning techniques.

Contd.

Capital account convertibility

With the possible introduction of capital account convertibility in India, it will provide additional inflow and outflow of foreign currency. This exposes banks to additional exchange risk apart from providing an additional source of revenue generation.

Global expansion plans

Most Indian banks including the PSU banks already have branches abroad, albeit with minimal presence in terms of market share. E.g. ICICI and SBI

SME Financing
SMEs, with the recent growth, are the new goldmine that the banks have hit upon. With a host of services ranging from bill discounting, factoring and even venture capital funding, banks are knocking at their doors, ready to customize offerings to suit their needs and acquire these customers.

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EBANKING electronically is Banking done

electronic banking. In other words, it is the products and services provided by the banks by using the electronic media or internet.

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RANGE OF SERVICES OFFERED

Electronic Funds Transfer (EFT) Automated Teller Machines (ATM) Point of Sales (PoS) Electronic Data Interchange (EDI) Credit Cards Debit Cards Smart Cards Digital Cash
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BENEFITS TO THE BANK

Competitive advantage Unlimited network Lesser work load Marketing tool Lesser establishment costs Lesser chances of fraud & misappropriation Better profitability

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BENEFITS OF E-BANKING

Any time banking Any where banking Cash free banking Reduction in Cost of transaction Easy to make utility payments On-line purchases
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Drawbacks

Difficult in the adoption of technology Fear of technology High cost of technology Lack of preparedness Restrictions on usage of technology

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E-banking in India
Finland was the first country in the world to have taken in E-banking. In India, it was ICICI Bank which E-banking as early as 1997 under the brand name Infinity
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Impacts in India

ICICI s profit to equity holders registered a growth of 21% percent in 2001. Citibank claims that its project Suvidha, which started off in Bangalore in early in 1998, has encouraged customers to interact with electronically, using telephones, the Internet, and ATMs.
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Impacts in India

The Vice President of Global Trust Bank, P.C. Narayan says,

An electronic transaction costs as much as 65% less than a physical one. ATMs have definitely emerged as the new business model for the banks and the way banking has been conducted. I think it is one of the remarkable things that has happened to Indian Banking Industry.
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Measures taken by RBI

A Reserve Bank of India (RBI) committee has come out with the road map for electronic banking and has sought legislation on EFT systems to facilitate multiple payment systems for banks and financial institutions. The RBI has been gearing up to upgrading itself as a regulator and supervisor of the technologically 4/10/12

Initiatives taken by RBI

Several initiatives taken by the Government of India as well as the RBI have facilitated the development of E-banking in India. The Govt. of India enacted the IT Act, 2000 with effect from Oct.17,2000, which provides recognition to electronic transactions and other means of electronic commerce.
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Conclusion
The potential of E-banking is huge. With the increase in connectivity, the number of users will explode, says K.V. Kamat, the CEO of ICICI Bank. The strategy for banks is to provide value-added services to products to customers utilizing the Internet extensively.

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Web based banking service or EBanking, the latest generation of banking transactions, has opened up new window of opportunity to the banks and existing financial institutions. Since its evolution in 90th decade, it is having unprecedented growth.

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