CHAPTER 1

INTRODUCTION

BANKING

1.1 Meaning of Banking

1.2 Definition of Banking

1.3 Functions of a Commercial Bank

1.4 Economic role of Banks

1.5 Size of global banking industry

1.6 Regulation

1.7 Types of Banks

1.8 Banking in India:

(a) History

(b) Structure of banking industry

(c) Business Segmentation

1.9 Banking in Rajasthan

1.10Role of banking institution in Indian Economy

Chapter -1: Introduction 2

1.1 Meaning of Banking

The Banking industry of India has been a partner in the development story of

the economy to a large extent. It has provided the edifice on which the

industrialisation of the nation has taken place. Banks are institutions which help in

channelizing funds from unproductive to productive sectors to make them available

for industrialisation. The credit structure enables the household and the business

sector to invest in future and an institution where funds can be parked for use at a

future date.

‘Bank’ word was originated from Middle English and originally it came from

Middle French ‘banque’ to Middle English from Italian word ‘banca’ & from German

word ‘banc’ that referred to “bench counter”. There bench was used as desk covered

by green tablecloths or the counter of exchange by bankers of Florentine.

The oldest substance known is the money exchange system represented by a

banker’s table loaded with coins engraved on the silver coin of Greek drachm;

presented at British Museum, London. Actually, even today in Modern Greek the

word Trapeza (Τράπεζα) means both a table and a bank.

Another possible origin of the word is from the Sanskrit words ( ) Baya

(Expense) and Onka (Calculation) = BayaOnka. This word still survives in Bangla,

which is one of the Sanskrit's child languages. + = . Such expense

calculations were the major part of mathematical treaties written by Indian

mathematicians as early as 500 B.C.

Chapter -1: Introduction 3

1.2 Definition

The definition of bank differs from nation to nation. According to English

Common Law, a banker is a person that carries the banking business which is

specified as:

Conducting current accounts for his customers

Paying cheques drawn on him, and

Collecting cheques for his customers.

The Bill of Exchange Act defines banking in almost every common law. This

act defines banker as a person or body of persons either incorporated or not that carry

banking business (Bills of Exchange Act, Section 2 and Interpretation). Though this

definition seems to be based on circular function but in reality, it is a functional

definition as it makes sure that the legal base for bank operations, as, payment of

cheque issued do not depend upon the way bank is organised.

In most of the English common law nations, the banking business have defines

by common law not by the Statute. But we can still find some statutory definition of

banking business in some other English common law jurisdictions. When taking in to

consideration at these definitions it is necessary to keep in minds that they are

defining the business of banking for the objectives of the legislation, and not

necessarily in general. In particular, most of the definitions are from legislation that

has the objectives of entry regulating and supervising banks rather than regulating the

actual banking business. Although, in many cases the statutory definition closely

replicates the common law one. Examples of statutory definitions:

"banking business" means the business of receiving money on current or

deposit account, paying and collecting cheques drawn by or paid in by

customers, the making of advances to customers, and includes such other

business as the Authority may prescribe for the purposes of this Act; (Banking

Act (Singapore), Section 2, Interpretation).

"banking business" means the business of either or both of the following:

Chapter -1: Introduction 4

1. receiving deposits on current, deposit, savings or other similar account

repayable on demand or within less than [3 months] or with a period of

call or notice of less than that period from the general public;

2. paying or collecting cheques drawn by or paid in by customers

Since the introduction of EFTPOS (Electronic Funds Transfer at Point Of

Sale), direct credit, direct debit and internet banking, the cheque has lost its domination

in most banking systems as a payment instrument. Therefore legal theorists have to

recommend that the cheque based definition should be broadened to include financial

institutions that conduct current accounts for customers and enable customers to pay

and be paid by third parties, even though they do not pay and collect cheques.

Primarily, banks work as a payment mechanism for its clients by providing

current account facility, make payment of cheques drawn by its clients on the bank

and collecting cheques deposited to customer’s current accounts. Bank also provides

various payment modes to its customers as ACH, ATM, Wire t/f or telegraphic t/f,

EFTOS etc. To borrow fund, bank accepts deposits on saving account, current

deposit account, on fix deposits accounts and through issuance of debt securities like

bond.

To lend money, bank provides loan and advances facilities to its clients, by the

way of advance on current account, by providing instalment, by investing in

marketable securities and other way of fund lending. Generally, bank provides all the

available mode of payment to its customers. Today, bank account is been essential to

the individuals, businessmen and government. Majority of fund raised through

household and non financial business deposits and majority of lending as well

provided to household customers and non financial businesses. Even non –banking

institutions engaged in lending services provides adequate alternative for bank loans

and advances. As an alternative deposit substitute to bank, money market funds, cash

management trusts and other non-banking financial institutions are present to the

public.

Chapter -1: Introduction 5

Banks provide almost all payment services, and a bank account is considered

essential by most businesses, individuals and governments. Banks borrow most funds

from households and non-financial businesses, and lend most funds to households and

non-financial businesses, but non-bank lenders provide a significant and in most cases

adequate substitute for bank loans, and money market funds, cash management trusts

and other non-bank financial institutions in many cases provide an appropriate

alternative to banks for lending savings too.

Chapter -1: Introduction 6

1.3 Functions of a Commercial Bank

The traditional functions of banking were recognized as (a) accepting deposits

(b) giving loans. But the industry has traversed a long path and has seen a vast

expansion in the functions it is performing currently. The industry has revolutionised

itself and it can be said that traditional banking has been relegated to a secondary

position. The functions now include:

1. Accept deposit from public

2. Providing loans

3. Overdraft Facility

4. Bill Discounting

5. Investment of Funds

6. Agency Functions

7. Other Functions

1. Accept Deposits from public: This is the core activity of the bank to accept deposit

from public and make it available for investors, as and when required by them.

Collecting funds from lower and fixed income public and making it available for

prospective producers channelizes funds for production which would have remained

unutilised if they had not been accepted by the bank on one hand, lent back to the

industry on the other hand. Thus, accepting deposits helps in speeding up the process

of economic growth of the economy. There are three major types of the deposit

schemes:

(a) Current Deposits:

This type of deposit is opened by the businessmen and traders. The money

deposited by these people can be withdrawn as and when required. They are the most

liquid form of assets and are termed as demand deposits. These deposits are

conducive for business as there is no limit to the number of withdrawals in these

accounts.

Chapter -1: Introduction 7

(b) Fixed Deposits

These deposits also termed as time deposits. The basic purpose of these

deposits is to park surplus funds from those who possess it for a fixed period of time,

generally more than a year. It carries the highest rate of interest as the banks can

conveniently lend this money for a specific long period without making provision for

withdrawals. Such deposits are not withdraw-able prior to the maturity period of the

term for which the money has been kept.

(c) Saving Deposits

These deposits are generally done by small households or public at large who

wish to save money. There is a limit of 2-3 withdrawals in a week. Since this money

can be withdrawn and thus bank has to provide for these withdrawals the rate of

interest on such accounts is low. The basic purpose is to encourage the public to save

money.

2. Giving Loans:

These loan accounts are operated for the profitability of the banks. Deposits

taken from the public are lent out to investors on a higher rate of interest, leading to a

profit margin for the banks.

The greater the number of loans given, greater would be the level of

productivity and capital formation necessary for the economic growth of the

economy. It can be said that loans are necessary not only for the success of banks, but

also for the growth to take place.

Banks create credit on the basis of prime deposits with them. They end up

creating credit which is several times more than the initial deposits. This process lays

foundation of the growth of the economy.

Loans advanced to the people are generally secured but are sometimes also

given on the basis of personal security. Following are the forms of lending provided

by a bank:

(a) Cash Credit:

Chapter -1: Introduction 8

The bank opens a cash credit account in the name of the customer seeking a

loan, a limit of the loan is fixed and he is allowed to withdraw money up to that limit

from the account. This limit would be fixing based on debt instruments and stocks.

(b) Demand loans:

In this loan account, debtors are given a lump sum payment in their account by

the bank and be recalled on demand. The interest would be charged on the whole

lending amount with immediate effect.

(c) Short-term loan:

Such lending is generally provided to the priority sectors to finance their

requirements of working capital or farmers during the sowing season. The whole

lending amount credited to the borrower’s bank account.

3. Over-Draft Facility:

Banks provide loan facility to the high credibility customers through overdraft

facility up to a pre-described and definite amount, if there is no credit balance in the

current account of the customers. Bank demands collateral and charges high interest

rate for such type of lending.

4. Bills Discounting:

It is mode of providing advances for short period to the businessmen and

traders. Trade bills are discounted by banks and loans are given in exchange of these

bills before the maturity time.

5. Investment of Funds:

This is the mode of parking surplus fund of commercial banks through

investment in government securities, approved securities and other securities.

The government securities can be central and state government securities like

NSC and treasury bills etc.

Other securities include electricity boards’ securities, housing boards’

securities, LDBs’ securities, RRBs’ securities, units of UTI etc.

In the third category, all the securities issued by private sector come.

Chapter -1: Introduction 9

6. Agency Functions:

These are specific functions performed by the banks for their customers as

their agents and representatives on the consent of their banking customers. They

include:

(a) Bank conduct collection of customers’ cheques, demand drafts, trade bills

and dividend on equity shares on the behalf of their customers.

(b) Bank makes payment of insurance premium due on its clients on the

behalf of the clients. Added to it as per the directions of its clients bank

also deposits customers’ loan instalments, interest due, income tax to be

paid etc.

(c) Bank pays their clients’ trade bills and sometimes accepts their bill of

exchange that has fixed future maturity date as well.

(d) On the directions of its customers, bank provides buying and selling

facility of securities on their behalf.

(e) Banks provides fund transfer facility to their clients from one place to

another.

7. Other Functions:

In addition the functions mentioned above, banks perform many other

functions of general utility which are as follows:

(a) Banks provide the facility of lockers for the safe custody of valuable assets of

their customers such as gold, silver, legal documents etc.

(b) Banks give reference for their customers.

(c) Banks collect necessary and useful business information and statistics relating

to trade and industry.

(d) For facilitating foreign trade, banks undertake to sell and purchase foreign

exchange.

(e) Banks as a specialist advise their clients relating to investment decisions as

specialist

(f) Bank works as the under-writer of shares and debentures.

(g) Banks issue letters of credit.

Chapter -1: Introduction 10

(h) Banks are highly useful in mobilizing funds and donations during natural

calamities.

(i) Banks provide loans for consumer durables like watching machine,

automobiles, air-conditioner, and furniture etc.

1.4 Economic role of Banks

A proper financial system has a vital role in economic growth of developing

countries. The commercial banking sector which forms one of the backbones of the

financial sector should be well organized & efficient for the growth dynamics of a

developing economy. Banks have played a very vital role in the economic

development of India and still playing the important role in the development.

Under the economic role a bank performs various functions. These include:

1. Issue of money- It is in the form of banknotes and current accounts subject

to cheque or payment at the customer's order. These claims on banks can act

as money as they are negotiable or repayable on demand, and therefore valued

at par. In the case of banknotes, or by drawing a cheque that the payee may

bank or cash, are successfully transferable by mere delivery.

2. Netting and settlement of payments – banks act as both collection and paying

agents for their customers, participating in interbank clearing and settlement

systems to collect, present, be presented with, and pay payment instruments.

This enables banks to economize on reserves held for settlement of payments,

as inward and outward payments offset each other. It also enables the

offsetting of payment flows between geographical areas that leads to falling

the cost of settlement between them.

3. Credit intermediation – Bank acts as a middleman in credit providing process.

It accepts deposits from public and lends it back to its customers and it

referred to credit intermediation.

4. Credit quality improvement – Bank borrows fund from customers of ordinary

credit quality but lends fund to its individual and commercial customers that

have high credit quality. The credit enhancement earned through diversified

Chapter -1: Introduction 11

assets & capital of bank that provides a shield to handle losses without evasion

on banks obligations. Although generally, bank deposits and bank notes are

not secured, in case banks get into impenetrability and to raise fund, it pledges

it assets as security, it requires to continually functioning and it resulted into

putting bank note holders and deposit account holders in an inexpensively

subordinated position.

5. Maturity Transformation: - Bank transforms the maturity of fund by accepting

deposits more on short term deposits and lends it more on long term loans.

6. Money Creation: - Every time banks provide a loan in a fractional-reserve

banking system, a new fund of virtual fund is created.

1.5 Size of global banking industry

In the financial year 2008-09 the assets of the biggest one thousand banks in

the world has increased by 6.8% ($96.4 trillion), although returns decreased to 8.5%

($115 bn). The increase in the assets due to recapitalization was not in favour of the

market conditions. The biggest share i.e.56% of the total assets was held by EU Banks

in 2008-09, decreased by 5% from proceeding year. US bank gained 13% whereas the

share of Asian banks rose to 14% from 12% of the previous year. Fee revenue of the

global investment banking was increased by 12% in the preceding year i.e. $66.3bn in

the year 2009.

The US has the majority of banks around the globe. It was 7085 banks and

almost 82000 branches in 2008. USA gained this position in number of small &

medium sized institutions in its banking system due to its geography and regulatory

structure. The top four banks of China have in excess of 67,000 branches i.e. ICBC

has 18000 plus, BOC has 12000 plus, CCB has 13000 plus, ABC has 24000 plus

branches. Same way there is tremendous increase in the banking business of Japan,

Germany, France and Italy.

1.6 Regulation

Chapter -1: Introduction 12

All the commercial banks operate under the contract of the RBI. No bank can

operate without obtaining a license from the RBI and it continues in operation till

such time as the RBI permits it. It also has the authority to cancel the license if a bank

does not follow its directives.

Generally to define the banks’ business banking for the regulatory purposes, it

always include two main functions of banking, first, accepting the deposits and

second, lending the funds to the public.

Reserve Bank of India has a unique dual role to play in the Indian economy. It

is a regulator as well as a major participant in the financial market of the Indian

economy. RBI also has a monopoly on the business of issuing banknotes. On the other

hand, in some nation, the case is not like this. For example, in the United Kingdom,

the regulatory body who issue license to the bank is Financial Services Authority.

Although, the authority of issuing banknotes majorly lies in the hands of the Bank of

England i.e. central bank of the country, but still few other banks have given authority

to issue banknotes, such as, the Bank of Scotland.

The relationship between bank and its customers resulted from the contractual

investigation to open and operate a bank account, is the base for any banking law.

The Banking Law covers the obligations as well as rights of a bank and its

customers into their contractual relationship. These are as follows:

1. The financial position between the bank and its customers is represented by

the balance of their bank account. Whenever bank account shows a debit

entry, customer owns the balance to its bank and if it shows a credit entry,

bank owns the fund to the customer.

2. Bank provides a cheque clearing service to its customers up to the prior

specified limit of amount standing to the credit of the customer’s bank account

and additional limit of overdraft if permitted.

3. Bank would not make any payment from its customer’s bank account without

having consent from customer regarding the payment. As, clearing of cheque

drawn by the customer.

Chapter -1: Introduction 13

4. Bank acts as a agent of its clients to collect customers’ cheques that are

deposited to his bank account and bank would draw a credit entry of the same

amount that collected to his bank account.

5. If a customer of bank is having more than one account with the bank, then

bank has the right to combine those accounts, as all accounts have same credit

relationship with the bank.

6. The bank has encumbrance on the cheques deposited to its client’s bank

account to the extent of customer is indebted to the bank.

7. The bank has to disclose the transaction details of the customer’s account with

their consent, in case it is legally required or required under public interest.

8. Bank should not make customer’s account dysfunctional without giving

proper prior notice regarding the same to the customer. Because the cheques

drawn on customers could be pending as it can take couple of days.

The above mentioned inferred rights and obligations can be customized by the

agreement between the bank and its customer at the time of opening the account

and it could be modified through the interference or guidelines of the relevant

statutes and regulatory. Few financial institutions may be either wholly or partly

exempted from the requirement of banking license specified by the regulators and

therefore governed and regulated under other regulations. The basic requirement

to have a banking license differs between the various regulators, although in

general, these are as follows:

1. Minimum capital required to have

2. Minimum capital Ratio

3. 'Fit and Proper' requirements for the bank's controllers, owners, directors,

or senior officers

4. Approved banking business plan which specify that it is adequately

prudent and feasible.

1.7 Types of banks

Majorly functions of a bank could be classified into following four types:

Chapter -1: Introduction 14

(1) Retail Banking: It is the banking functioning directly with the individual

customers and smaller business houses.

(2) Business Banking: It is type of banking that giving services to the medium

level businesses.

(3) Corporate Banking: It is the banking that providing services to the large

sized business houses.

(4) Private banking is the banking that provides services to its HNI customers,

such as, wealth management services.

(5) Investment banking is also known as merchant banking. It provides various

financial market related services to corporate customers.

The other way to classify banks is as follows-

(1) Commercial bank: this term is used for a normal bank to differentiate it from

an investment bank. The term "commercial bank" is referring to a bank or a

division of a bank that generally deals with deposits and loans from

corporations or large businesses.

(2) Community banks: it is locally operated financial institutions that empower

employees to make local decisions to serve their customers and the partners.

(3) Community development banks: it is regulated banks that provide financial

services and credit to under-served markets or populations.

(4) Credit unions: it is not-for-profit cooperatives owned by the depositors and

frequently offering rates more favourable than for-profit banks. Typically,

membership is restricted to employees of a particular company, residents of a

defined neighbourhood, members of a certain labour union or religious

organizations, and their immediate families.

(5) Postal savings banks: these are savings banks associated with national postal

systems.

(6) Private Banks: these are the banks that manage the assets of high net worth

individuals.

Chapter -1: Introduction 15

(7) Offshore banks: these banks are come under jurisdictions with low taxation &

regulation. Most of the banks are private banks.

(8) Savings bank: The prime purpose of such banks is to easily provide deposit

products to all strata of the society to encourage habit of saving. In few

nations, these were founded on public initiative and in other nations, these

were created by socially committed individuals to place necessary

infrastructure. In Europe, these laid their foundation in 18th

century.

(9) Building societies and Lands banks: these are the banks that engaged in

retail banking business.

(10) Ethical banks: their focus is primarily on the managing of socially responsible

investments and they ensure the transparent operating system.

(11) Direct or Internet-Only bank: These are the future of banking institutions.

They usually operate entire banking functions virtually through computers and

internet.

Other types of banks

Central Bank is the bank which controls all the financial activities of the

country. It has the monopoly of issuing banknotes. It is the regulator of the credit, is the

banker’s bank and a representative of the government. It is also the lender of last resort

in all emergencies. In India the RBI is the central bank of the country.

Banking wouldn't be very effective in supplying liquidity without central

banks. Central bank in India is the Reserve Bank of India. The RBI manages the

money supply or amount of money banks can lend.

Islamic banks Under the Islamic code of law all interest payments are

forbidden. All Islamic banks adhere to the tents of Islam. These banks earn profit by

mark up and the fees on the financing facilities that it extends to all banking

customers.

1.8 Banking in India

The history of Indian banking can be said to have originated in 1786 with the

establishment of the General Bank of India and the Bank of Hindustan in 1790

Chapter -1: Introduction 16

although both the banks became bankrupt soon. The State Bank of India originated in

1806 which can be said to be the oldest bank in existence and was initially named as

the Bank of Calcutta. It was renamed as the Bank of Bengal later.

The Bank of Calcutta was one of the three Presidency banks namely Bank of

Bombay, The Bank of Madras. ThePresidency banks were founded according to the

charter of British East India Company and were functioning as quasi central banks.

The Presidency banks were merged into the Imperial Bank of India in 1921 which

became the precursor of State Bank of India which was established post independence

period in 1955.

(a) History

The history of the Indian banking can be divided into four main stages. First,

the pre- independence period of 18th

century in which the Presidency banks and the

Imperial Bank were working. Second, the post independence period up to the year

1969, when Indian were performing the basic function of trading and financing. The

ownership of the banks was basically in the private. Third phase was from 1969 to

1980. The year 1969 can be said to be a milestone in the Indian banking history,

when 14 major banks of the country were nationalised. This led to a change in the

priorities and a vast expansion in branch banking as well as the functions. The second

step during this period was taken in 1980 with the nationalisation of 6 more banks

making a total number of 20 nationalised banks in the country. This led to a total

revolution in the industry. The fourth stage in the transition of the industry can said to

have been initiated since 1990 onwards. The era of LPG led to far reaching changes

in the banking industry also. The system has been liberalised as a result of major

banking sector reforms and a distinct trend of privatisation of banks in visible with

the emergence of ICICI bank, HDFC bank etc.

Chapter -1: Introduction 17

Since the introduction of strategic industry with journey of 200 years, drastic

changes have been experienced in its every area, such as, regulatory framework, the

ownership structure, services & products provided and the technology used. This

whole development of the industry can be classified into following four phases:

Phase I- Pre-Nationalisation Phase (prior to 1955)

Phase II- Era of Nationalisation and Consolidation (1955-1990)

Chapter -1: Introduction 18

Phase III- Introduction of Indian Financial & Banking Sector Reforms and

Partial Liberalisation (1990-2004)

Phase IV- Period of Increased Liberalisation (2004 onwards)

The oldest bank in India was the Bank of Upper India established in 1863 and

survived until 1913, when it failed, some of its assets and liabilities being transferred

to the Alliance Bank of Shimla. The country experienced the economic crisis in 1848-

49, during this period The Union Bank which was established in 1839 by the Indian

merchants of the Calcutta failed. The oldest joint stock bank was the Allahabad Bank

established in 1865.

After the end of the American Civil War a number of banks were opened to

finance the trading of Indian cotton to Lancashire from the Confederate States. With

the immense exposure of speculative ventures mostly Indian banks established during

this phase lost interest in keeping deposits with banks. Therefore during the 20th

century the banking industry was dominated by the Europeans.

Since Calcutta was the most active trading port of India a number of foreign

banks arrived in 1860’s. The Comptoire d'Escompte de Paris opened a branch in

Calcutta in 1860 and another in Bombay in 1862; branches in Madras

and Pondicherry, was a French colony then, followed. HSBC was first established

in Bengal in 1869.

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 Punjab National

Bank, established in Lahore in 1895, which has survived to the present and is now one

of the largest banks in India.

During the 20th

century the Indian Banking scenario experienced a period of

stability, as the social, industrial and infrastructure of the economy has been re-

Chapter -1: Introduction 19

established after the Mutiny. As a result a number of small banks catering to

particular ethnic and religious communities came up.

There were three major kinds of banks during this period (a) The Presidency

Banks which were dominating the banking sector (b) Exchange Banks are the banks

were operated and owned by the Europeans. They were established for the primary

purpose of financing foreign trade (c) Joint Stock Bank of India- they were

undercapitalized and were in the period of infancy. They were unable to compete with

the large and experienced Presidency Banks. This segmentation let Lord Curzon to

observe, "In respect of banking it seems we are behind the times. We are like some old

fashioned sailing ship, divided by solid wooden bulkheads into separate and

cumbersome compartments."

The Swadeshi movement (1906-1911) - a part of the freedom struggle of India

had influenced the Indian leaders and businessmen to set up Banks of Indian

community. A number of Indian banks established during this period were – Bank of

India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central

Bank of India are in existence even today.

The Swadeshi movement inspired the establishment of the many private

banks. Banks in Dakshina Kannada and Udupi district which were later unified by the

name of South Canara ( South Kanara ) district. Four nationalised banks and one

private bank were set up in the region leading to this region being nicknamed as

“Cradle of Indian Banking”.

The First World War during 1914-18 to the Second World War in 1939- 45

took a heavy toll of Indian Banks. The phase from that period to the independence of

the country was very tough & testing years for Indian banks. At least 94 Indian banks

collapsed during this period. The detailed report is given in the following table:

Chapter -1: Introduction 20

Table 1: Number of banks failed

Years Number of banks

that failed

Authorised capital

(Rs. Lakhs)

Paid-up Capital

(Rs. Lakhs)

1913 12 274 35

1914 42 710 109

1915 11 56 5

1916 13 231 4

1917 9 76 25

1918 7 209 1

Post-Independence

After the partition of the country in 1947 the state of Punjab and Bengal

suffered greatly and the banking activities stagnated. The period of Laissez- faire in

Indian banking has ended with the independence of India and the government of the

country started taking an active role in the promotion of banking in the country as was

evident by the Industrial Policy Resolution of 1948. This resulted into greater

participation of the state in different segments of the economy including banking and

finance. The major steps taken by the government to regulate banking were as

follows:

The Reserve Bank of India (RBI), India's central banking authority, was

established in April 1934, but was nationalized on January 1, 1949 under the

terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948

(RBI, 2005b).

In Banking Regulation Act was enacted in 1949, which empowered the

Reserve Bank of India (RBI) "to regulate, control and inspect the banks in

India."

The Banking Regulation Act also provisioned that no new bank or branch of

an existing bank could be opened without a license from the RBI and no two

banks could have common directors.

Nationalisation

Subject to the indirect control of the RBI the major banks of India continued to

be under the private sector till the 1960’s. The only exception was the State bank of

Chapter -1: Introduction 21

India who was in public sector in India. By 1960’s it was felt that the Indian banking

had a large potential for employment and that it was integral for the development of

the economy. Therefore the question of its nationalisation was being raised by many

people. Mrs. Indira Gandhi, then Prime Minister of India, expressed the intention of

the Government of India in the annual conference of the All India Congress Meeting

in a paper entitled "Stray thoughts on Bank Nationalisation." It was well received by

the party members. The result was the nationalisation of the 14 major banks in 1969.

J.P. Narayan described nationalisation as “a master stroke of political sagacity”. The

ordinance became an Act within two weeks of its being declared, as an ordinance. The

parliament passed the Banking Companies Bill (Acquisition & transfer of

undertaking) and it received Presidential approval on Aug. 9th

1969.

The second stage of the nationalisation took place in 1980 with the

nationalisation of six additional banks taking the total tally of nationalised banks to

20. The stated rationale for the nationalization was to give the government more

control of credit delivery. Subsequently this telly was again reduced to 19, the two

major banks the Punjab National Bank and the New Bank of India merged with each

other. It was the only merger between nationalized banks. The government thus

controlled 91% of the banking in the country by 1993. The nationalised banks grew at

a rate of 4% during 1990’s that was near to the average growth rate of the Indian

economy.

Liberalisation

The era of 1990’s ushered in a period of Liberalization-Privatisation-

Globalization. Narasimha Rao was the prime minister of the country – who was bold

enough to liberalise the economy. In keeping with the trends of privatisation a number

of private sector banks were set up who were termed as the New Generation tech- savvy

banks. The first of such banks was the Global Trust Bank which later merged to the

Oriental Bank of Commerce. Other private banks to obtain license were the Axis Bank,

ICICI Bank and HDFC. There were new three types of banks in our banking system (1)

Private sector banks (2) PSUs (3) The Foreign Banks. All the three contributed to the

rapid growth of the economy and re-energised the banking system.

Chapter -1: Introduction 22

At a subsequent stage the Indian Banking has been set up with the proposed

relaxation of norms for FDI where all the foreign investors in banks may be given

voting rights which could exceed the present cap of 10%. At present it has increased

up to 74% with some restrictions.

The new policy of liberalisation led to a retail boom in India. The New

Generation tech- savvy banks revolutionised the banking technology in the country.

Traditional bankers of India were used to a 4-6-4 method (Borrow at 4%, Lend at 6%,

Go home at 4) of operating, but the new technology completely changed the economic

scenario.

The Indian banking has a fairly good image of clean transparent and strong

working in terms of quality of assets and capital adequacy in comparison to the other

countries in its region under the supervision of RBI. The RBI is an autonomous body

functioning without any interference from the government of India. Commercial

banking has said to have achieved maturity in terms of supply range of products

offered though the private banks have still not adequately penetrated into the rural

India. 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.

Mergers & Amalgamations are expected to increase as the Indian economy is

likely to speed up the growth of the economy in the future. With the increase in

growth rate there is a possibility that the demand for banking services especially in the

retail banking sector would go up. Mortgages and investment services would be

strong in future.

In 2006 the RBI made a path breaking departure from its previous policy

according to which no private stakeholder could own more than 5% of stake of a

private bank. The RBI permitted Warburg Pincus to hold up to 10% of its stake in

Kotak Mahindra Bank.

It has been observed that the non- government banks are too aggressive in

their loan recovery procedures in case of vehicle loan, personal loan & housing loan.

Chapter -1: Introduction 23

Adoption of banking technology

With the advent of liberalisation in 1991 and the IT revolution the Indian Banking has

witnessed a sea change. ‘Online’ Banking has been introduced in India. Most if not all

the banks are computerised in the country. Globalisation has exposed the Indian banks

to the global market. The banks are finding it difficult to compete with the global

banks in terms of customer services without the use of the information technology and

computers.

Number of branches of scheduled banks of India as of March 2005

The committee on Mechanisation of Banking Industry was formed in 1984 by

the RBI with Dr. C. Rangarajan as chairman; he was also the Deputy Governor of

RBI. The major recommendation of this committee was introducing MICR

Technology in all the banks in metropolis in India. This provided the utilization of

standardised cheque forms and encoders. In 1988 the RBI set up the committee on

computerisation of banks headed by Dr. C. Rangrajan which emphasised the

settlement operation must be computerised in the clearing houses of RBI in

Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. The committee

suggested that National Clearing House should be set up at all metros like Kolkata,

Mumbai, Chennai and Delhi to facilitate clearing of intercity cheques. It also stated

0

5000

10000

15000

20000

25000

30000

35000

NATIONALISED BANKS

STATE BANK OF INDIA

OLD PRIVATE SECTOR BANKS

NEW PRIVATE SECTOR BANKS

FOREIGN BANKS

33627

13661

4511 1685 242

NUMBER OF BRANCHES

Chapter -1: Introduction 24

that MICR should be made functional. The focuses were on computerisation of all

branches and inter branch connectivity through computers. The framework for

implementing internet banking was given. The report of the committee was submitted

on 1989 and a settlement was arrived at between the IBA and the Employees

Association in 1993- as a result of which the process of computerisation of banks was

initiated.

Mr. W.S. Saraf, Executive Director of RBI headed the committee on

technology issues relating to payment systems, Cheque Clearing and Securities

Settlement in the Banking Industry which was instituted in 1994. The

recommendations of the committee included the Electronic Fund Transfer (EFT)

system with the BANKNET communication network as its carrier and the

establishment of MICR clearing in all branches which have more than 100 branches.

Committee for proposing Legislation on Electronic Funds Transfer and other

Electronic Payments (1995) emphasized on EFT system. Electronic banking refers to

DOING BANKING by using technologies like computers, internet and networking,

MICR, EFT so as to boost efficiency, quick service, productivity and transparency in

the transaction.

Number of ATMs of different Scheduled Commercial Banks of India as on end

March 2005

0 1000 2000 3000 4000 5000 6000

NATIONALISED BANKS

STATE BANK OF INDIA

OLD PRIVATE SECTOR BANKS

NEW PRIVATE SECTOR BANKS

3205

1548

800

1883

1567

3672

441

3729

4772

5220

1241

5612

TOTAL ATM OFF SITE ATM ON SITE ATM

Chapter -1: Introduction 25

Innovations other than the above mentioned innovations in modern banking include

introducing the use of ATM in India. The total number of ATM’s installed by the end

of March 2005 is17,642 by various banks in India. In India Private sector banks have

maximum number of ATM’s followed by SBI and its subsidiaries, next are new

private banks, Nationalised banks and foreign banks. Indian banks are also working in

the 3rd

party products and service field, such as MFs, life & general insurance to its

clients etc.

Table 2: Number of branches of scheduled banks of India as of March 2005

Bank Group Number of

Branches

On Site

ATM

Off Site

ATM

Total

ATM

Nationalised Banks 33627 3205 1567 4772

State Bank Of India 13661 1548 3672 5220

Old Private Sector Banks 4511 800 441 1241

New Private Sector Banks 1685 1883 3729 5612

Foreign Banks 242 218 579 797

(b) Structure of Banking Industry

The diverse structure of the Indian Banking can be analysed on the basis of –

(1) Organised status (2) Business Segmentation (3) Product Segmentation.

Organisational Structure

The Indian Banking can be bifurcated into (1) Scheduled Banks- which

account for the most important sector of Banks and (2) Non- Scheduled Banks-

catering to economically weaker sections of the population. The non- scheduled

bankers can be further divided into money lenders, pawn brokers and indigenous

bankers.

Chapter -1: Introduction 26

Table 3: Number of ATMs of different Scheduled Commercial Banks Of India

as on end March 2005

Important Indicators

September

2010

December

2010

March

2011

June

2011

September

2011

1 2 3 4 5

1. No. of Commercial Banks 168 167 167 169 170

i) All Scheduled

Commercial Banks

164 163 163 165 166

Regional Rural Banks 82 82 82 83 83

ii) Non-scheduled

Commercial Banks

4 4 4 4 4

2. No. of Reporting Offices

i) Rural 32580 32870 33325 33513 33927

ii) Semi-urban 21004 21552 22419 22860 23371

iii) Urban 17163 17392 17706 17917 17825

iv) Metropolitan 15139 15338 15660 15857 16435

Total 85886 87152 89110 90147 91558

3. Population Group- Annual Growth Rates (Per Cent)

Rural

(i) Aggregate Deposits 14.4 18.1 17.3 17.6 20.1

(ii) Gross Bank Credit 17.4 21.0 17.7 18.5 21.1

Semi-urban

(i) Aggregate Deposits 13.9 17.5 16.7 17.6 20.6

(ii) Gross Bank Credit 17.9 21.8 19.6 20.4 22.8

Urban

(i) Aggregate Deposits 15.8 20.3 17.4 17.2 18.6

(ii) Gross Bank Credit 20.6 20.6 26.1 22.5 22.1

Metropolitan

(i) Aggregate Deposits 13.1 17.5 18.5 19.0 24.1

(ii) Gross Bank Credit 19.4 28.2 22.5 20.1 24.3

Chapter -1: Introduction 27

Important Indicators

September

2010

December

2010

March

2011

June

2011

September

2011

1 2 3 4 5

4. Bank Group- Annual Growth Rates (Per Cent)

SBI and its Associates

(i) Aggregate Deposits 7.8 11.4 13.1 14.6 18.2

(ii) Gross Bank Credit 16.4 20.4 16.7 16.8 18.2

Nationalised Banks

(i) Aggregate Deposits 15.4 21.1 20.4 21.5 24.7

(ii) Gross Bank Credit 20.2 29.2 23.8 20.9 25.1

Foreign Banks

(i) Aggregate Deposits 6.1 2.6 3.7 5.6 7.4

(ii) Gross Bank Credit 13.1 20.4 19.5 16.4 24.7

Regional Rural Banks

(i) Aggregate Deposits 17.0 19.1 15.1 13.2 15.8

(ii) Gross Bank Credit 21.0 23.0 17.7 16.7 20.4

Private Sector Banks

(i) Aggregate Deposits 20.1 24.3 21.4 18.4 24.9

(ii) Gross Bank Credit 22.4 27.3 24.2 24.8 25.9

Old Private Sector Banks

(i) Aggregate Deposits 22.4 22.7 22.2 23.2 28.6

(ii) Gross Bank Credit 21.1 30.9 26.2 27.1 30.5

New Private Sector Banks

(i) Aggregate Deposits 19.3 18.1 21.1 16.7 23.7

(ii) Gross Bank Credit 22.3 26.6 23.5 24.1 24.4

All Scheduled Commercial Banks

(i) Aggregate Deposits 13.9 18.1 17.9 18.3 22.1

(ii) Gross Bank Credit 19.3 26.6 21.9 20.3 23.5

5. Population Per Office

(In Thousands) @

13.8 13.6 13.4 13.3 13.1

6. Credit-deposit Ratio

(Per Cent)

73.6 76.3 75.1 75.2 74.4

Source: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=14198

Chapter -1: Introduction 28

Scheduled Banks

All banks listed under the second schedule of RBI Act of 1934, having a paid

up of capital reserve of at least 0.5 million can be termed as a Scheduled Bank. Such

banks have to satisfy the RBI that their ways of functioning are not detrimental to the

interests of the depositors only then they are granted a license from RBI. Commercial

banks and cooperative banks are basically offshoots of scheduled banks. The mode

of operation of scheduled commercial banks and scheduled cooperative banks is

different, whereas the holding pattern of scheduled cooperative banks are identical to

cooperative credit societies being registered under the Cooperative Societies Act, the

scheduled banks run in accordance with the principle of mutual assistance.

Scheduled Commercial Banks (SCBs):

Scheduled commercial banks (SCBs) are the most important portion of the

Scheduled Banking in India. There were a total of 80 SCBs by March 2009. On the

basis of ownership and/ or the nature of functioning these banks have been further

classified into (1) State Bank of India and six branches of SBI with the exception of

State Bank of Saurashtra; (2) Nationalised Banks which control round 70% of total

credit and deposit of Indian Banking System; (3) as a result of fresh instructions of

RBI, the name of IDBI ltd. also figures in the list of nationalised banks since

Dec.2004 (4) along with four Private sector banks in March 2009 the total number

of new generation banks stood at 22 (which included include 15 old and 7 new

generation private banks in the country).

By June 2009 there were 32 foreign banks operating in India. Their branches

totalled to 293. In addition to the above, 43 foreign banks were also functioning in

India through their representative offices which were opened in India. The mode of

entry of foreign banks in India is either by establishing branches in India or by

having representative offices in the country.

Chapter -1: Introduction 29

The concept of Regional Rural Banks was introduced in 1975. The main

purpose of RRBs was (i) upliftment of the rural economy (ii) catering to the local

needs of the people in the villages (iii) providing a strong financial base. The equity

of RRB is contributed by the central government, state government and parent bank

of RRB in the ratio of 50:15:35. The sponsor bank provides funds, managerial aid,

financial assistance and trains the personnel.

The total number of RRBs was 196 in 1987. These banks have primarily been

functioning in rural areas catering to the financial needs of the sector. Their presence

was visible in 585 districts out of the total 622 districts of the country by June 2008.

However, a disturbing trend was witnessed in the year 2009, was that a large number

of RRBs were amalgamated with their sponsor banks. As a result their number

drastically came down to 86 in the same year.

Scheduled Cooperative Banks:

The scheduled cooperative banks in India can largely divided into (i) those

credit cooperative banks which cater to the urban area and (ii) those which operate in

Chapter -1: Introduction 30

the rural sectors. The major function of the rural cooperative bank is to provide loans

for long period as well as the short period also. Cooperative credit banks are majorly

organised at three levels, first, at the primary level; second, at district level and third,

at state level.

Non-Scheduled Banks:

Along with the scheduled banks some non- scheduled banks are also

functioning in the Indian economy. They have been termed as Local Area Banks. In

March 2009 there were only four LABs in India, established under the government

scheme of 1996. According to the scheme the LABs were private banks with a local

orientation. Their area of operations was limited to adjoining districts. Earlier six

LABs had been given license to operate. One of them was cancelled because

irregularities were found in its operations and another one was merged with Bank of

Baroda in 2004 due to its poor economic status.

List of banks in India

1. Central bank

Reserve Bank of India

2.State Bank Group

State Bank of India

State Bank of Bikaner & Jaipur

State Bank of Hyderabad

State Bank of Mysore

State Bank of Patiala

State Bank of Travancore

IDBI Bank

3.Nationalized banks

Allahabad Bank

Andhra Bank

Bank of Baroda

Bank of India

Bank of Maharashtra

Chapter -1: Introduction 31

Canara Bank

Central Bank of India

Corporation Bank

Dena Bank

Indian Bank

Indian Overseas Bank

Oriental Bank of Commerce

Punjab National Bank

Punjab and Sind Bank

Syndicate Bank

UCO Bank

Union Bank of India

United Bank of India

Vijaya Bank

4.Old private sector banks

Catholic Syrian Bank

City Union Bank

Dhanlaxmi Bank

Federal Bank

Jammu & Kashmir Bank

Karnataka Bank

Karur Vysya Bank

Lakshmi Vilas Bank

Nainital Bank

South Indian Bank

Tamilnad Mercantile Bank

UP Agro Bank

5.New private sector banks

Axis Bank

HDFC Bank

ICICI Bank

Chapter -1: Introduction 32

IndusInd Bank

ING Vysya Bank

Kotak Mahindra Bank

Yes Bank

DCB Bank

6.Foreign banks operating in India

ABN AMRO Bank N.V. (Now merged with RBS)

Abu Dhabi Commercial Bank

American Express Bank

Bank International Indonesia

Bank of America NA

Bank of Bahrain & Kuwait B.S.C.

Bank of Ceylon

Bank of Nova Scotia (Scotia Bank)

Bank of Tokyo Mitsubishi UFJ

Barclays Bank PLC

BNP Paribas

Calyon Bank

Chinatrust Commercial Bank

Citibank N.A.

DBS Bank

Deutsche Bank AG

FirstRand Bank

Fidelity Bank Plc

HSBC

JPMorgan Chase Bank

Krung Thai Bank

Mashreq Bank psc

Mizuho Corporate Bank

Royal Bank of Scotland

Shinhan Bank

Société Générale

Chapter -1: Introduction 33

Sonali Bank

Standard Chartered Bank

State Bank of Mauritius

UBS

VTB

7.Co-operative Banks

8.Non-Scheduled Urban Co-operative Banks

(c) Business Segmentation

Entire banking operations were segmented into four broad heads- retail

banking business, wholesale banking businesses, treasury operations and other

banking activities. Banks have dedicated business units and branches for retail

banking and wholesale banking. These were further subdivided into banking services

to large corporate and mid corporate.

1. Retail banking

Chapter -1: Introduction 34

This type of banking is primarily related to individuals or small businesses.

Retail banking activities are based on the four criteria of orientation, granularity,

product criterion and low value of individuals’ exposures whose annual turnover is

limited to Rs.0.50 billion and could take any form of credit like cash credit,

withdrawals etc. The total limit of an entity is fixed up to 0.2% of the total retail

amount of the institution up to a maximum limit of Rs. 50 million. On the side of the

payments to be made in retail banking sector, we can include all forms of accounts,

mortgages and loans. Products like credit cards, DEMAT account and other ancillary

products are also included.

By March end 2009 Retail Banking accounted for 21.3% of the total loans

disbursed by Scheduled Commercial Banks. Retail banking portfolio included

housing loans and auto loans. This segment of banking offers a variety of services.

Retail banking constitutes a major share of banking activities of most banks. The

most important bank in this sector is the ICICI Bank, State Bank of India, Bank of

India, Punjab National Bank, HDFC and Canara Bank.

ICICI Bank has emerged as the most important bank in retail banking. Its

primary focus is on the movement in the direction of finding alternate cheap

distributive channels which is necessary for a business in which the intensity of

transactions is great. State Bank of India’s retail business is also increasing and is

fast acquiring the status of a strategic business unit for the bank. Small players are

also making a mark in retail business specifically in the auto loan segment. The

reliance on the retail business is quite significant as many of the retail banks design

schemes in advance which concentrate on auto and consumer durables loans. The

competition is likely to increase in this segment as foreign banks are fast expanding

their operation in this segment.

2. Wholesale banking

Wholesale banking focuses on giving preferential treatment to the corporate.

Internal process of the wholesale banks can be further bifurcated into mid corporate

banking and large corporate sector banking, on the basis of the size or number of

Chapter -1: Introduction 35

transactions of their clients. A large number of wholesale banking clients account for

off balance sheet business of these banks. Corporate indulge in hedging in their

transactions. This segment of the wholesale business is vital for these banks as they

are helpful in getting more business for them. Project financing, lease finance,

financing of working capital and term finance, all are a part of wholesale banking

transactions. Among other services provided to the corporate by the wholesale

bankers are loan syndication and merchant banking services.

Wholesale banking is also a well diversified banking vertical. All banks are

performing wholesale banking functions. But this vertical is primarily dominated by

the bigger Indian banks. Even though a substantial portion of the business of bigger

foreign banks consists of wholesale banking, their total contribution to the total

banking is still less than that of bigger Indian banks. In the wholesale banking

segment a great many bigger Indian private sector banks have made a significant

contribution. Among such banks the names of State Bank of India, ICICI Bank, IDBI

Bank, Canara Bank, Bank of India, Punjab National Bank and Central Bank of India

and Bank of Baroda can be stated. These banks have made noteworthy progress in

this segment of banking.

1.9 Banking in Rajasthan

The development and progress of a nation is inextricably linked to its

infrastructure. Banking and financial institutions form one of its primary pillars. The

booming economy of Rajasthan is a case in point.

One of the coveted tourist destinations, a plethora of banks and financial

institutions dots the state. Besides easy availability of loans, these banks and financial

institutions offers a gamut of services.

The Rajasthan Financial Corporation, instituted in the year 1955, is also

rendering pioneering services in the financial sector. It offers monetary assistance to

very small, small and medium sized industrial ventures. The following is a list of all

banking and financial institutions of Rajasthan.

1.Reserve Bank of India

Chapter -1: Introduction 36

2.Co-operative Banks

Punjab and Maharashtra

Gaurdian Sahakara Bank Niyamita

Jammu & Kashmir Bank

Development Credit Bank

Lakshmi Vilas Bank

Ratnakar Bank Ltd.

Saraswat Co-operative Bank Ltd.

Kalyan Bank

Co-operative Bank Pvt. Ltd.

The Thane Janata Sahakari Bank Ltd.

Kapol Co-operative Bank Ltd

Mandvi Co-operative Bank Ltd.

Cosmos Bank

3.Private Sector Banks

HDFC Bank Limited

Bank of Punjab

IndusInd Bank Limited

The Nedungadi Bank Limited

Vysya Bank

The South Indian Bank Limited

Federal Bank Limited

Bank of Madura

Global Trust Bank

Centurion Bank Limited

IDBI Bank

ICICI Bank

Times Bank

The Karur Vysya Bank Limited

UTI Bank

Punjab and Sind Bank

The United Western Bank Limited

Chapter -1: Introduction 37

4.Nationalised Banks

Bank of Baroda

Vijaya Bank

UCO Bank

Canara Bank

State Bank of India

Indian Overseas bank

State Bank of Hyderabad

EXIM Bank of India

Dena Bank

State Bank of Indore

Export Import Bank of India

State Bank of Travancore

Indian Bank

Syndicate Bank

Union Bank of India

Central Bank of India

State Bank of Mysore

Allahabad Bank

Bank of Maharashtra

State Bank of Saurashtra

Oriental Bank of Commerce

State Bank of India

Corporation Bank

Punjab National Bank Andhra Bank

Bank of India

5.Developmental Banks

IDBI

IFCI

NABARD

RFC

Chapter -1: Introduction 38

ADB

ICICI

SIDBI

RIICO

6.Banks of Foreign Origin

Banque Nationale De Paris

Citibank

Abu Dhabi Commercial Bank

ICICI Bank

1.10 Role of Banking in Indian Economy

Among one of the most important functions of the banking has been money

lending which started with the traditional indigenous bankers in India. The business of

money lending was monopolised by Sahukars and Zamindars since the ancient time

the reference to ‘Shylocks’ who made unreasonable demands in case the loans were

not repaid in time along with interest in the Shakespeare play is perhaps in the same

connection.

The British established the RBI in 1935 that laid the foundation for modern

banking in India. Although it’s primary purpose was to establish a regulatory

institution in the country. In the initial stages the rate of growth of banking had been

very slow primarily because of the shortage of capital and low rate of industrialisation

in the country. Although modern banking received an impetus in urban areas and the

rural sector continued to be at the mercy of traditional money lenders for their credit

requirement.

The post independence period saw the inception of many commercial banks in

the country. The growth of modern banking though was slightly imbalanced as it

favoured the urban areas and the rich capitalists in the initial stage. The interests of

the poor people were ignored.

Fourteen major banks of the country were nationalised in 1969 and six in 1980

taking the total tally to twenty. With the nationalisation the banks were brought under

Chapter -1: Introduction 39

the direct surveillance of the Reserve Bank of India. The RBI could directly plan the

priority sector operations and could issue notifications to the commercial banks to

provide funds the national programmes, the rural sector, the plan priorities at different

rates of interest in accordance with their relative importance. The Reserve Bank of

India gave a special preference to the rural sector, the economically weak sector and

the under privileged sector. This encouragement resulted in the financial inclusion of

these sectors in the regions of the country.

An analysis of the performance of the nationalised banks in the past two

decades revealed some important issues which needed immediate governmental

action. Among the important issues which needed consideration were- a significant

rise in the Non Performing Assets of the PSU Banks, a decline in the services

rendered by them fall in profitability and inefficiency of the staff members. It was felt

that the governmental action was needed which came in the form of financial sector

reforms and also allowing the establishment of new banks in the private sector.

The establishment of new generation private sector banks in the country posed

challenges for the established public sector banks. They have set new standards of

service and efficiency increasing the level of competition in the banking sector.

(a) Modern Day Role

The financial system makes important contribution to the growth of any

economy. The major function of banking in India is to provide credit to all the sections of

the society. Credit has laid the foundation of industrial growth of the developed

economies in the world. An efficient banking system has to balance the needs of the high

end investors who require huge amounts of capital to finance massive industrial and

infrastructural ventures on one hand has to attend to the requirement of small and medium

investors requiring capital for setting up of new units and expanding existing ones. The

development of the rural sector would also depend on the availability of cheap credit

short and medium term.

The infrastructural credit is also very important. The success of any financial

system can be fathomed by finding out the availability of reliable and adequate credit

for infrastructure projects. Infrastructural projects requiring capital have so far depended

on public sector banks but now situation is changing. In past one decade private sector

participation in infrastructural credit has been increased.

Chapter -1: Introduction 40

An important work done by the banks and financial institutions in India is to

channelize the small investors by providing them with multiple options and using them

for productive purposes. The common man has the option to park his savings under a few

alternatives including the small saving schemes introduced by the government from time

to time in bank deposits in the form of saving accounts, recurring deposit and time

deposits. Stock and mutual funds are also gaining importance recently.

Modern banking in India is completely revolutionised itself. The banks and the

financial institutions also perform certain new-age functions which could not be thought

of a couple of decades ago. The facility of internet banking which helps a consumer to

access and operate his account without being physically present has helped him

enormously. The introduction of ATM, credit and debit cards has revolutionised the

banking system providing much needed relief to the customers. Some new functions

performed by banks is making payment for income tax, online bill payments etc. In the

modern age where customers perpetually face shortage of time to perform these tasks

banks are doing commendable job. The customers have been given the option to invest in

the mutual funds or in various stocks.

The commercial banks cater to the needs of urban customers while the

Regional Rural Banks (RRBs) cater to the requirements of the rural customers.

Regional Rural Banks (RRBs) have been sponsored by many commercial banks in

several States. These banks, along with the cooperative banks, take care of the farmer-

specific needs of credit and other banking facilities.

(b) Future

In the past the government was helping the small investors by initiating a

number of small saving schemes with high interest rates and was also offering a

rebate on the income tax. As a result small savings were very popular with the people.

Now-a-days the trend has reversed the small saving bank deposits have all been

brought at the same level as far as income tax rebate is concerned. Interest on small

savings is no longer higher than those offered by the banks.

Chapter -1: Introduction 41

The Reserve Bank of India has given the freedom to commercial banks to

determine their own rates of interest within the prescribed limit of RBI. The opening

procedure of branches of banks is simpler now than before. In spite of the above

mentioned reforms much more needs to be done to improve the functioning of public

sector banks. Mergers and amalgamation is the next measure on the agenda of the

government. The government is also preparing to disinvest some of its equity from the

public sector banks. The option of allowing FDI beyond 50% in the Indian banking is

under active consideration.

The banks have played a pivotal role in the growth of the Indian economy. A

number of credit related schemes designed to uplift the poorer section have been

initiated by the banks. The future shall see the banks assuming a greater role in the

economy as there is still a vast potential for the development of the Indian economy.