Chapter: 1

IntroductionHuman economics grows out of efforts and enterprise by

individuals/groups organisations i.e. Businesses. Valuable and useful

products and services; or/and their mix are produced, which are

consumed by different people/entities/organisations etc. according to

their needs and for different motivations. This becomes source of

another need viz. Need to Exchange within the community. Need to

Exchange was originally met by way of “Barter”. But it had its own

problems related to size/divisibility/preservation of Value requirements/

convenience of carriage and security etc. It gave rise to search for

innovative ways of substitutes for actual mode of barter, which was

search for Money in Effect. It led to path breaking innovation in the form

of Currency and Coins. It was money (Cash). This was also a method of

preserving the value of Efforts, put in producing goods and services. In

due course , representative money in the form of Money Instruments

e.g. Cheques/ Drafts etc. with nature of negotiability like cash, also

emerged. With development of Industrialisation and Banking, the

productive entities got categorised broadly as Savers and Users of

money, channelised through Moneylenders and intermediation

mechanism of Banks. It was financing function and money and its

instruments etc. which became means for it.

In present day world, Finance is a factor of productive activity and

Tool “of” as well as “for” Economic Growth. The rapid pace of research

and innovation in the field of finance, which has converted money into a

Commodity, on its own, leading to development of Capital Markets’

Securities, Insurance sector, financing by Non-Banking-Sector,Units,

Mutual Funds, Pension funds, Hedge/Venture Capital Funds etc.

Broadly speaking the word Finance envelops all these areas. However,

Banks being creator of money, the word Finance, in a Narrow sense,

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conjures up the relationship with Banks alone. (in absence of specific

mention about any area other than Banking).

All the above areas have developed now as separate subjects of

study, just like other traditional subjects viz. Physics/Chemistry/ maths/

sociology/medical science/Engineering/ management etc. While dealing

with or using the knowledge acquired in these traditional subjects, one

will succeed only if the concepts/ ideas/ contents etc. of any subject are

well learnt and understood by the User/ Student etc. Stating in other

words, i.e. technically speaking one needs to be Literate First in any

Subject. This Literacy if applied in the given environment having

supporting as well as constraining factors, gets upgraded into

Education, in the subject.

One’s ability to use knowledge of a Subject, according to his/her

requirement is, thus, intrinsically co-related with the level and

proficiency of Literacy and education, one has in any Subject/

Discipline. It appears to be an obvious and long held belief/premise,

which is foundation of the proposed study.

Finance in broad sense as well as in narrow (i.e. banking related

matters), has its own intricacies and has developed into vast area of

knowledge and specialised skills, leading to newer innovations and

ongoingresearch on day today basis. It is not merely theoretical but

application oriented, touching daily lives of common man and economic

entities-directly/indirectly/incidentally, which is called financial services

broadly / banking services in narrow sense. Actually it has become a

very specialised area of applied field of knowledge, where exist and

operate- concepts/ skill sets/ products/markets/ relevant organisations/

consumers/ service providers/ intermediaries/laws/rules/regulations/

government/regulators and entire environment /history /Economics /

grievance redressal mechanism etc., which may affect locally/

nationally/internationally, all or any of us.

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Applying the aforesaid premise, Literacy and education in the

area of finance i.e. certain level of knowledge/skill about financial

products/ services/ markets/ service providers /laws /regulators/policies

of Government/International practices/grievance redressal and dispute

resolution mechanism and practices prevalent in the relevant financial

organisations/ basic economics/ and enveloping environment including

History/Geography /culture and socio-political norms etc. occurring in a

place/community/state/nation etc.; is necessary to increase/ improve,

once capability/capacity/ability to make financially useful and efficient

decisions for self or others, or both.

The questions immediately arise about state of literacy

&education first of general nature and then of financial nature, amongst

general public and also amongst the finance professionals themselves-

especially banking related services and bankers as well as its clients.

The special mention of banks is necessary because it is sine-qua-non

for financial inclusion in the country. As on date, financial inclusion is

most wanted result, which goverments/ Central Banks and development

economists’ desire for which banking is most essential financial Service.

Everyone deals with one or the other banking institution –actively or

passively; directly or indirectly; as service provider or its consumer or

beneficiary or as an intermediary. Also what are the facts regarding

regional disparity in the level of financial literacy & education; as well as

what are the direct/indirect benefits of such literacy/education for the

individuals and other stake holders?

There are many benefits, which are documented and are

expected of increasing Financial Literacy/Education correlated with

financial inclusion, which in turn shall have effect on economic growth

and development affecting the wellbeing of commonman- specially the

poor in the world in general and emerging economies like India and its

states/ union territories. But the History indicates rise of exploitation and

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white colour crimes of different hues and intensity are also born

parallely in the society. There are number of instances of irregularities in

banking transactions/investment matters/credit card operations/

remittance matters/ accounts/ credit operations and grievance redressal

etc. Naturally there arises a question whether the said financial

literacy/education can have impact on people indulging in malpractices

intentional/negligent/convenience and ignorance related etc. in general

and specially in banking field?

Justification:

This study is proposed to be in the nature of cross disciplinary

discussion, within the ambit of banking functions, finance, development

economics and human behaviour as seen in different hues, coloured by

legal compulsions, bank employees’ psychology and socio-cultural

imperatives within a specific region of the country. The idea is not

merely Theoretical, but rooted in the practical day to day life of

individuals/ groups/ businesses etc. with reference to their banking

transactions, which are undertaken with a view to deriving economic

wellbeing, in a normal expected pattern, presumed to be a natural

outcome, on the face value of an operative rule/ regulation/ policy/

guideline/ statement of intention etc. But, in real life, it turns out to be

different, leaving a bad taste in mouth, due to deviant behaviour on part

of bank/employees/authorities affecting existing or potential customers;

and occasionally vice-versa too.

Crimes are always Intentional or due to strict liability statute.

There are set procedures under criminal justice system to deal with.

The victims can be advised to seek remedy under it and as a preventive

strategy can be advised to be careful enough to avoid it as far as

possible. The remedies are in criminal justice system, serving anyone or

more of the punitive motive/ objectives–retributive/preventive/

reformative/ vindictive/deterrence etc. If victim reports the crime- State

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is on his/her side pursuing the case and if it succeeds there is

satisfaction in the society at large. If it fails, the victim is unhappy with

Justice dispensation system, and not with the business of banking per

se most often, (if the culprit has been booked and punished under

prevailing disciplinary system in the organisation along with recovery of

loss, the victims of white collar crime do not wish to get involved also in

the judicial process, most often). But, the Softer category of such

events are altogether different cup of the tea. The intention to commit

such acts, may not be there in the first place. Quite often, the “Contract”

involved in any human transaction- voluntary or involuntary, for value or

without value in it, is not operated or understood properly by both the

parties to the transaction. The victim is told about the circumstances

which are responsible for any wrong done, and not the bank employee,

per se. There is no set system which can deliver quick justice through

judiciary, in such cases. The system of dispensation of civil justice

system in the country is too slow to give relief to victim of such soft

category inconveniences. One copes up with the situation, by cursing

the organisation/ bank etc. and trying to become fatalist i.e. cursing

one’s own fate for inconveniences caused. If hurt is deep, one may

disconnect his/her relationship with the bank and spew venom against

it in his own circle, tending to malign the image of the bank; which is

much greater loss for any financial Institution but in the long run and the

victim and perpetrator both never realise it.

Going a step further, if there is an intention present in doing such

soft hurtful event, it will be a Malpractice. Mostly, it will be an irregularity

done by bank’s employees for some motive and always they may be

able to take shelter behind some circumstance, which may commonly

be used in that particular locality/ community/ culture or some

commonly accepted humanitarian issue, to avoid responsibility for the

misdeed. The victim may be knowingly or unknowingly compelledto

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keep quiet and not to raise any hue and cry. There is a kind of

camaraderie amongst the employees to defend each other if any one

protests. The natural question is whether awareness about the

functioning of a financial Institution and rules / regulations governing

any financial entity, will encourage people to protest more often, leading

to reduction in malpractices in such entities. A hypothesis emerges that

in case of financial entities- specially banks, if sufficient level of literacy

and education exists on part of a relevant client, the operators of the

financial system will desist from deviations which are done taking

advantage of other’s ignorance. To investigate into this hypothesis, the

title of research project has been chosen.

Scope of Work:

It is true that many questions about impact of financial literacy &

education needs to be answered in the changing scenario in “ Finance

Areas”, like its products/ markets/related and incidental financial

services, which really embrace the entire firmament having banking/

Securities of Government and Corporate world (Primary and Secondary

markets etc.)/ Insurance Sector Mutual Funds/Pension Funds/ hedge&

venture Capital Funds/ and various financial institutions in Non-Banking

Financial Sector (N.B.F.S.). For this study Banking has been chosen

and reference to other areas is going to be only incidental. Banking is

very broad topic. Within this also the study will focus on “all those

activities which can be a classified as “Malpractices”. The word

malpractice can be used in specific sense as civil wrongs, in the instant

study, and not merely as a general broad enveloping connotation which

includes all banking related non-violent crimes like serious frauds/

forgeries etc. where perpetrator has serious intentions of making gains

at the cost of another, and without bothering for the costs which may be

awaiting themselves also, mostly. They commit crime, remaining

insensitive to laws/rules etc. (not ignorant but insensitive) and do it for

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gain (not for convenience and not due to negligence alone).

Malpractice, which is focus of attention in the present study, is practice

which is not on expected lines and quite often done in banks for very

much convenience of self or somebody else, gain or no gain, and it can

be termed as mala fide because the perpetrator knows that his/her

action/inaction/ delays etc. should not be done and organisation may

not rescue him if the same is caught and proved (word is ‘may’i.e. there

is scope of such rescue. No such scope exists in case of an act or

omission, which is ‘crime’). Of course, certain malpractices are done

due to shear ignorance and certain are result of carelessness and

negligence. Depending on consequences some of the malpractices may

look like or become technically ‘crimes’/ frauds/forgeries / or any other

civil wrong/strict liability offence, but actually mens- rea may be missing.

In all such cases, the perpetrator is conscious and sensitive to protect

his own interest and does not wish to be accused of any wrong doing,

while taking advantage of victims’ignorence/ weakness/ dependence/

trust & confidence etc. to serve his /her own purpose. This study

proposes to focus on such Malpractices mainly.

Localisation of the problems in this regard differ from place to

place hence the research is geographically limited to present day U.P.

that is post 2001 when original U.P. was bifurcated into Uttara Khand

and present day U.P. This point can be explained by a couple of

examples: In southern India, anyone visiting Ayyappa temple has to

wear black. Suppose, one is a security guard, his not wearing of

officially prescribed dress will be overlooked by an Inspection Team. In

Bengal, during Durga Puja customers have to wait if Durga puja is on in

the branch premises. In U.P. may be it is Vishwakarma Puja. Point is

that limitation on geography is relevant though hypothesis if proved

right, it will be true for all India with certain different conditions.

However, here we limit our investigation to U.P. It is a vast state, with

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huge population having almost all the religious/cultural/ political

denominations, number of local languages and dialects, different

customs and a long history/ low literacy/high poverty/doubtful

governance/ debatable law & order situation/ low economic

development/ big banking structure of all kinds etc. which makes it

appropriate for the study. Huge population ensures availability of

different groups of people from all similar/all dissimilar/all mixed

cultural/linguistic/ideological background. It is a known principle of

behavioural science that people in groups behave differently than as

individuals and there are principles of group dynamics which determine

this behaviour which can be ‘peculiar in nature. Bankers and their

clients and vice-versa, face these situations on day today basis, and

provide wide arena in the State of U.P. to study these aspects as well

as to do analysis as to how these affect the commissions/omissions in

banking operations, resulting in identifiable malpractices. It is expected

to give some glimpses into psychology of general masses and banks’

personnel also.

The word finance also needs limitation. When some one uses this

word, immediately “banks” come to the mind. The study is to be done

with reference to the banks only. Actually finance does include within its

ambit areas like Insurance/capital market/ Mutual funds/ Penssion

funds/ Govt.Tax Revenue/ Borrowings etc also. In fact, the findings of

this study may mutis mutandis apply in other financial sector areas also.

Literacy and education used in the title have same commonly accepted

meaning but in actual life get used in intermingled way. Besides, since

these concepts are used with reference to operation of banks, it is no

limitation that a client may be really illiterate. Financial literacy and

education is possible to be imparted to even illiterates, though a difficult

proposition. The period upto which the data and information has been

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mostly kept updated is limited upto March, 2013. However, there can be

exceptions.

The need and utility of such study derives relevance from the

present movement about “Financial Inclusion” in the country, since turn

of this century (2005 onwards). Financial literacy/education is extremely

essential ingredient for achieving core objectives of movement for

Financial Inclusion in the Country.It is a very wide subject and within

this study it covers a very limited space, leaving much more to be

explored; but this study is expected to be very useful to carry the flag

forward. It is expected that findings in the banking environment of U.P.,

will also be representative of all India situation.

Hypothesis of the Study:

It is common experience that one may not hesitate to take

recourse to malpractices in any field, if he is sure that it will not hurt him

to do so. Hypothesis is that such persons predominantly take “unfair

advantage” of victim’s lack of knowledge/ or they are convinced about

their action being right though it may not be so; or they are sure about

no complaint being either made/ or of non cognizance by authorities,

regarding their action/inaction, which they do negligently. In case there

is knowledge on part of victims’/ or on part of perpetrators of

malpractices,/ or on part of authorities, regarding existence of such

“unfair advantage”, there is a definite probability that such unfair

advantage will cease to be a motivation, and this can be achieved

through financial literacy & education of all stake holders in banking

field.

Objectives of Study:

Present study has been conducted keeping in view of the

following objectives:

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To review the existing literature and knowledge about financial

literacy and financial education;

To examine the status of financial literacy and education in India

and particularly in the state of Uttar Pradesh;

To study the nature, dimension and magnitude of malpractices in

field of banking in Uttar Pradesh;

To examine the relationship between financial inclusion and

financial literacy/ education;

To examine the role and and responsibility of government and other

stakeholding agencies regarding financial literacy / education;

To suggest policy measures for promoting financial literacy and

education as well as effective check on banking malpractices in

India.

Research Methodology:

Present study is empirical in nature and based on mainly primary

data collected through feld survey in the state of Uttar Pradesh.

However, pertinent literature, secondary data and information has been

compiled from published and documented sources. The research

method is a mix of table and field research. The material for study is

sourced from libraries/ personal collection of written matter people who

know the subject, reports of various committees and Institutionslike RBI/

Nabard/ banks etc., publications of governments/International bodies/

Articles and speeches of knowledgeable person, Economic print

media/newspapers/ magazines ,as well as Internet searches and

existing research work in this area. It will clarify the mist around this

topic as part of Financial Inclusion.

There is a system of grievance redressal machinery in place in all

banks/ R.B.I./Banking Ombudsman office. Also there are cases decided

10

in various courts / forums and discussions take place in various

committees dealing with customer issues, at various levels in various

Institutions/Agencies etc. These are likely to be good source of actual/

perceived malpractices (all kinds including criminal in nature) as well as

state of ignorance in people/ bank employees/ bank clients etc, in

financial matters. Since we are using the term ‘Malpractice in specific

sence as being behavioural deviations with limits not exceeding Civil

Wrongs, the cases decided by Banking Ombuds men around the nation

and wherever available with reference to U.P., will be the base for case

analysis. Field methods include questionnaires/interviews primarily to

collect necessary data, but method of on the spot observation also had

to be used where subject audience did not either reveal the truth for fear

or avoidance of direct involvement in the process, or stating opposite of

perceived facts when interviewed or asked to fill a questionnaire. This

has been observed as normal experience that fiery critics in their

drawing rooms are most vocal in appeasing (those criticised by them),

when they are face to face. Such people have lot to say when

anonymous, but have all pleasant things to say when any disquieting

situation is to be made any type of evidence, including answering a

questionnaire or interview. Actually a set of Questionnaire having space

for writing name, address, and mobile no. had to be discarded because

no one either took them or returned them as good as unfilled. The field

methods had to be used to verify the fact(s) behind the findings

emanating from table research. Besides it is the way to assess the

impact of anything at ground level as for as hypothesis of the study is

concerned. The survey was conducted single handed over a period of

3years plus starting December, 2009 till March 2013. Some times some

local help was taken from some students.

It was decided to do the survey in 30 Districts (viz. Agra,

Allahabad, Azamgarh, Bahraich, Balia, Barabanki, Basti, Bareilly,

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Chitrakut, Faizabad, Farrukhabad, Gaziabad, Gorakhpur,

Hathras( Maha Maya Nagar now), Jhansi, Kanpur Nagar, Kanpur

Dehat, Kushinagar, Lalitpur, Lakhimpur-Kheri, Lucknow, Mahoba,

Mathura, Mirzapur, Moradabad, Raibareli, Saharanpur, Sitapur,

Sonbhadra, Varanasi.) out of which one (Lakhimpur-Kheri) was chosen

as pilot district where the methodology of questionnaire and interviews

was tested first and needed modifications were done before launching

these for use in other districts. Efforts were made to select the sample

of study, as applicable, on representative basis depending upon the

topic of investigation and place.The topics selected were relevant from

the point of view of Financial Inclusion viz. Savings, credit, A.T.M.,

currency management, Banking Ombudsman and citizen Charter on

which Ques. were prepared and distributed. Besides, face to face

interaction was conducted with unstructured questionnaire devised

some times extempore. About 2000 individuals singly or in groups were

interviewed/ observed.Questionnaires were given and collected back

after sufficient gap. Almost equal proportion between genders,

Rural/Urban/, Excluded/included already,etc., were tried to be

maintained.

During the research, due to long period, some data has become

old. It has not been updated if revisits to various places was involved,

after ensuring that inference/ deductions involved on its basis does not

materially change on date.Old reports which have been used are also

not updated with new data, with notes etc. being appended, rather

separately all data has been collected at one place which is updatd as

upto March 2013.Efforts were made to contact parties involved in cases

decided by B.O., to get direct information.

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Chapter: 2

Banking in IndiaA bank is a financial institution that provides banking and other

financial services to their customers. A bank is generally understood as

an institution which provides fundamental banking services such as

accepting deposits and providing loans. In Indian context, the Statutes

do not define bank, rather Company Act, 1956 defines, and a banking

company is one which conducts business of banking. The Banking

Regulation Act, 1949, defines: banking means accepting deposits for

the purpose of lending and investment which is payable on demand or

otherwise, withdraw able by cherub, draft or otherwise.

Origin of the ‘Bank’:

The word ‘bank’ is derived from the word ‘bancus’ or ‘banque’ that

is bench. The early bankers, the Jews in Lombardy, transacted their

business on benches on market place. It is also believed that the word

‘bank’ is derived from the German word ‘back’ meaning joint stock fund

which was Italianised into ‘banco’ when Germans were masters of

great part of Italy. Whatever be the origin of the word ‘bank’, it would

trace the history of banking from the middle age. During reign of Edward

III money exchange, an important function of banks was taken up by

Royal Echange for the benefit of Crown. It exchanged foreign coins

tendered by travellers and merchants enterin England and supplied

foreign money to persons going out of the country. The ground for

modern banking in England was prepared by influx of gold from

America and simultaneous growth of foreign trade in Elgabethian Age.

The city merchants started keeping their cash with goldsmith who had in

those days strong room and employed watchman. Thus large sum of

money was kept with goldsmith for safe custody against their signed

receipt called ‘Goldsmith Notes’ embodying an undertaking to return

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money to the depositor or bearer on demand. The goldsmith gradually

discovered that it was safe and profitable to lend out a part of

customers’ money provided such loans were repaid within a fixed time.

As the business increased along with the confidence of the people, the

goldsmith discovered that they could receive money on ‘current

account’ ie money withdrawable without notice. The Bank of England

started in 1694 as a result of financial difficulties faced by Edward III

who was carrying war with France and there was public distrust on the

goldsmith. It was established to act as Government’s banker. Monopoly

of note issue was given to Bank of England which later on became

central banking authority of England. The private banks concentrated on

deposit banking. Withdrawal by cheque was introduced during 1749 to

1759.

Banking System in U.K.:

Different aspects of the Banking System in U.K. include: High

Street Banks providing services to the general public. In the UK the Big

Five banks are HSBC, Halifax, Lloyds TSB, Natwest and Alliance &

Leicester.

Business Banking: Many high street banks provide specialised

services for businesses. They operate similar to ordinary accounts, but

usually have more services and more fees.

Investment Banking: These are financial institutions who invest

money on behalf of investment trusts, pension funds and high street

Banks. They look for the best way to invest money through knowledge

of different bond markets, exchange rate markets and the stock market.

Central Banks: Underpinning most modern banking systems is

the Central Bank. Usually a quasi government organisation, Central

Banks have various tasks besides being sole Note issuing Authority,

such as ensuring sufficient liquidity, acting as lender of last resort and in

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some cases setting Monetary Policy. In the UK, The Bank of England is

responsible for Monetary Policy. Financial Services Authority (FSA) is

the supervisory athourity in U.K.

Banking System in Germany:

The banking system in Germany is composed essentially of the

German Central Bank, on one hand and the various commercial

banking groups on the other. According to definition used by Deutsche

Bundesbank, banks in Germany can be divided into a large group of

universal banks and a smaller group of more specialised banks. The

group of universal banks can be divided into three categories on the

basis of ownership and legal form: These categories are the

Commercial Bank Sector, the Saving Bank Sector and the Credit

Cooperative Sector. They are universal banks in the sense; they offer

whole range of commercial and investment banking services.

Banking System in USA:

U.S. commercial banks are of three types:

The banks chartered by federal government are national banks;

The banks chartered by state are state banks; and

Unchartered smaller independent banks.

Regulations and supervision of banks vest with the Federal

Reserve System with 12 Reserve Banks and its network of branches.

12 Reserve Banks are each responsible for a particular geographical

area or districts of United States. Besides carrying out functions for the

System as a whole, such as administering nationwide banking and

credit policies, each Reserve Bank acts as a depository for the banks in

its own District and fulfills other District responsibilities.

Indian Banking System:

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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) which was called the Presidency Banks. The next bank

was Bank of Hindustan which was established in 1870. 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. The Swadeshi movement inspired local

businessmen and political figures to have banks of and for the Indian

community. Between 1906 and 1911 Bank of India, Corporation Bank,

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

were set up. In 1921, the three presidency banks were amalgamated to

form the Imperial Bank of India which was run by European

Shareholders.

The Reserve Bank of India was established in April 1935, as

Central Bank of the Dominion i.e. ‘British India’,by R.B.I. Act, 1934,

which is country’s Central Bank now, after its Nationalisation in 1948, by

‘The Reserve Bank( Transfer to Public Ownership) Act,1948.Its parent

Statute remains R.B.I. Act,1934 as ameded from time to time. In 1955,

Imperial Bank of India was nationalised to form State Bank of India

under State Bank of India Act, 1955. In order to increase area of

operation of State Bank, the Bank of Bikaner, Bank of Indore, Bank of

Jaipur, Bank of Mysore, Bank of Patial, Travancore Bank, State Bank of

Hyderabad and State Bank of Sourashtra were constituted under State

Bank of India (subsidiary Banks) Act, 1959. Thus, by 1960, the Indian

banking industry became an important tool for economic development

as part of the Public Sector under central Govrnment. In 1967, social

control of commercial banks were introduced so as to deploy and

allocate credit such as would promote economic development,

especially in the backward areas of the country. This led to introduction

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of Lead Bank Scheme by Reserve Bank of India in December 1969 to

involve commercial banks, cooperative banks, government and semi

government agencies in the process of economic development.

In order to give government more power to control credit delivery,

14 major commercial banks were nationalised in 1969 and in 1980, six

more commercial banks with deposit of Rs. 200 crore or more were

nationalised, thus raising the number of nationalised banks to 20. Later

on, in 1993 New Bank of India was merged with Punjab National Bank,

reducing this number to 19. For the purpose of bank nationalization, the

two Acts passed were The Banking companies( Acquisition andTransfer

of Undertaking) Act, 1970; and The Banking companies( Acquisition

andTransfer of Undertaking) Act, 1980. The first event in 1969, did

cause legal challenges in the form of Bank Nationalisation case. The

govt. lost the case in Supreme Court

Legal Foundation and Framework: To streamline the

functioning and activities of commercial banks, the provisions of law

relating to banking companies which were scattered as subsidiary

portions of general law applicable to companies, were first incorporated

in 1936 as part XA of Indian Companies Act, 1913; and then the

Banking companies Act, 1949 was passed putting all such provisions

and amendments at one place as a separate Statute. This Act remained

as such till 1966, when the Banking Laws (Application to Co –operative

Societies) Act, 1965 became Law and by its section 11 changed the

name of the Banking Companies Act, 1949 (10 of 1949) as “The

Banking Regulation Act, 1949 (10 of 1949)” with effect from 1st

March,1966. Inter alia one of the main features of this historical

amending Act was that the Reserve Bank of India was vested with

extensive powers for the supervision of banking in India as a Central

Banking Authority,besides defining banking and laying down its

business activities.

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In Hart's Law of Banking, a banker or bank is defined as one who,

in the ordinary course of his business, receives money which he pays

by honouring the cheques of persons from or on whose account he

receives it. Sir John Paget in his book On Banking has pointed out that

"no person or body corporate or otherwise can be a banker who does

not (1) take deposit accounts, (2) take current accounts, (3) issue and

pay cheques, and (4) collect cheques crossed and uncrossed for his

customers." Sheldon in his book on the Practice and Law of Banking,

seventh edition at page 183, formulates the definition of a banker.

"Banking Company" means any company which transacts the

business of banking in India. Explanation: Any company which is

engaged in the manufacture of goods or carries on any trade and which

accepts the deposits of money from public merely for the purpose of

financing its business as such manufacturer or trader shall not be

deemed to transact the business of banking within the meaning of this

clause." 

As per Section 5(b) of Banking Regulation Act, 1949, banking

means the accepting, for the purpose of lending or investment, of

deposits of money from the public, repayable on demand or otherwise,

and withdrawable by cheque, draft, order or otherwise. As per Section

5(d) of Banking Regulation Act, 1949, company means any company as

defined in Section 3 of the Companies Act, 1956 and includes a foreign

company within the meaning of Section 591 of that Act. As per section

51 of Banking Regulation Act, 1949, certain provisions of the Banking

Regulation Act are also applicable to the State Bank of India, any

corresponding new bank, a regional rural bank and any subsidiary bank.

"Corresponding new bank" has been defined under clause (ee) of

section 2 of the DICGC Act to mean a corresponding new bank

constituted under the Banking Companies (Acquisition and Transfer of

Undertakings) Acts of 1970 or 1980.

18

Now this definition makes it clear that receiving money on deposit

from customers and honouring their cheques is the essential

characteristic of banking. The money deposited by the customers can

be utilised by the banker for lending it or for investing it but the bank

also undertakes the obligation to repay the deposit on demand or

otherwise and the mode by which the withdrawal of the deposit can be

effected is by the issue of cheques, drafts, orders or otherwise, that is,

by like methods. "A person cannot claim to be carrying on the business

of banking unless he receives money or instruments representing

money on current account, honours cheques drawn thereon, and

collects: the proceeds of cheques which his customers place into his

hands for collection.'

Essential Elements of Banking:

Accepting deposts of money from public, it must be for the

purpuse of lending or investment, deposit must be repable on the

demand or otherwise. The instruments which can be used are in form of

cheque, draft, order or otherwise.\ Forms of business in which banking

companies may engage—(section 6 of The banking Regulation Act,

1949).

In addition to the business of banking, a banking company may

engage in any one or more of the following forms of business,

namely:

the borrowing, raising, or taking up of money; the lending or

advancing of money either upon or without security; the

drawing, making, accepting, discounting, buying, selling,

collecting and dealing in bills of exchange, hoondees,

promissory notes, coupons, drafts, bills of lading, railway

receipts, warrants, debentures, certificates, scrips and other

instruments and securities whether transferable or negotiable

or not; the granting and issuing of letters of credit, traveller's

19

cheques and circular notes; the buying, selling and dealing in

bullion and specie; the buying and selling of foreign exchange

including foreign bank notes; the acquiring, holding, issuing on

commission, underwriting and dealing in stock, funds, shares,

debentures, debenture stock, bonds, obligations, securities and

investments of all kinds; the purchasing and selling of bonds,

scrips or other forms of securities on behalf of constituents or

others, the negotiating of loans and advances; the receiving of

all kinds of bonds, scrips or valuables on deposit or for safe

custody or otherwise; the providing of safe deposit vaults; the

collecting and transmitting of money and securities;

acting as agents for any Government or local authority or any

other person or persons; the carrying on of agency business of

any description including the clearing and forwarding of goods,

giving of receipts and discharges and otherwise acting as an

attorney on behalf of customers, but excluding the business of

a managing agent or secretary and treasurer of a company;

contracting for public and private loans and negotiating and

issuing the same;

the effecting, insuring, guaranteeing, underwriting, participating

in managing and carrying out of any issue, public or private, of

State, municipal or other loans or of shares, stock, debentures,

or debenture stock of any company, corporation or association

and the lending of money for the purpose of any such issue;

carrying on and transacting every kind of guarantee and

indemnity business;

managing, selling and realising any property which may come

into the possession of the company in satisfaction or part

satisfaction of any of its claims;

acquiring and holding and generally dealing with any property

or any right, title or interest in any such property which may

20

form the security or part of the security for any loans or

advances or which may be connected with any such security;

undertaking and executing trusts;

undertaking the administration of estates as executor, trustee

or otherwise;

establishing and supporting or aiding in the establishment and

support of associations, institutions, funds, trusts and

conveniences calculated to benefit employees or ex-employees

of the company or the dependents or connections of such

persons; granting pensions and allowances and making

payments towards insurance; subscribing to or guaranteeing

moneys for charitable or benevolent objects or for any

exhibition or for any public, general or useful object;

the acquisition, construction, maintenance and alteration of any

building or works necessary or convenient for the purposes of

the company;

selling, improving, managing, developing, exchanging, leasing,

mortgaging, disposing of or turning into account or otherwise

dealing with all or any part of the property and rights of the

company;

acquiring and undertaking the whole or any part of the business

of any person or company, when such business is of a nature

enumerated or described in this sub- section;

doing all such other things as are incidental or conducive to the

promotion or advancement of the business of the company;

any other form of business which the Central Government may,

by notification in the Official Gazette, specify as a form of

business in which it is lawful for a banking company to engage.

No banking company shall engage in any form of business other

than those referred to in sub-section (1).

21

Expansion of Bank Branches:

There are four categories of bank branches viz., Scheduled

Commercial Banks, Regional Rural Banks, Cooperative Banks and

Private Banks. The number of offices of all scheduled commercial

banks almost doubled from 29,677 in 1980 to 55,537 in 2005. This rapid

increase in the number of bank offices is observed in the case of all the

bank groups. However, the number of banks in the case of foreign bank

group and domestic private sector bank group decreased from 42 in

2000 to 31 in 2005 and from 33 in 2000 to 29 in 2005, respectively. This

fall in the number of banks is reflective of the consolidation process and,

in particular, the mergers and acquisitions that are the order of the

banking system at present. During 2011, 93080 bank offices were found

functional in India. Out of these offices, about 69 per cent offices were

related to public sector banks while private sector banks offices

accounted for 12.89 per cent. SBI and its associate’s offices were

reported to be 20.22 per cent. There has been significant increase in

the number of offices of private sector banks while the ratio of public

sector banks has slightly declined (Table 2.1).

Table: 2.1

Offices of Commercial Banks in India As on March 31

Bank Group 2007 2008 2009 2010 2011State Bank of India and its Associates

14673 15848 16894 18186 18823

Nationalised Banks $ 37415 39235 40937 43467 45850

Public Sector Banks 52088 55083 57831 61653 64673

Old Private Sector Banks 4826 4690 4908 5221 5028

New Private Sector Banks 2598 3634 4332 5231 6973

Private Sector Banks 7424 8324 9240 10452 12001

Foreign Banks 272 279 295 310 319

Regional Rural Banks 14822 15054 15484 15740 16034

Non- Scheduled 47 47 47 48 53

22

Commercial Banks

All Commercial Banks 74653 78787 82897 88203 93080

Source: Department of Statistics and Information Management, RBI.

More than 1/3rd branches of SBI and its associates were found

located in rural areas while only 10 per cent bank branches of other

public sector banks were found located in rural areas. Similarly, only 17

per cent branches of old private sector banks were found situated in

rural areas. Thus, majority of the branches were found located in urban

areas including metropolitan cities. The proportion of branches located

in metropolitan cities was reported high in case of other public sector

banks followed by nationalized banks while only 16 per cent branches

of State Bank of India and its associates were found situated in

metropolitan cities. The proportion of urban branches was found more

pronouncing in case of other public sector banks and old private sector

banks (Table 2.2).

Table: 2.2

Bank Group-wise Distribution of Branches in India in 2010

Banks Groups Rural Semi-Urban

Urban Metro-politan

Grand Total

SBI and Its Associates 5931 5236 3338 2792 17297

Nationalized Banks 13606 9368 9420 8810 41204

Other Public Sector Bank 69 146 269 220 704

Old Private Sector Banks 838 1671 1451 1038 4998

Source: Department of Statistics & Information Management, RBI.

Deposits and Credit:

The credit-deposit ratio (C-D ratio) provides an indication of the

extent of credit deployment for every unit of resource raised in the form

of deposits. The C-D ratios of all scheduled commercial banks

decreased gradually from 63.3 per cent in 1980 to 49.3 per cent in

2000. This declining trend has been reversed in the recent years, with

23

the ratio increasing to 62.7 per cent in 2005. The foreign bank group

recorded the highest C-D ratio (87.1 per cent) and State Bank Group

the lowest (56.3 per cent) in 2005. The C-D ratios of all the banks group

had fallen drastically in 2000, except for foreign banks. With respect to

domestic private sector banks group, this ratio was high at 70.5 per cent

in 2005. With respect to State Bank Group and nationalized bank group,

the C-D ratios were lower at 56.3 per cent and 61.3 per cent,

respectively, which were less than the C-D ratio of all scheduled

commercial banks at 62.7 per cent in 2005. There has been a

significant increase in the C-D ratios in 2005 across all the bank groups.

Western region has lions share in total deposits in scheduled

commercial banks (32.6 per cent) while northern region constituted

21.52 per cent share in total deposits in scheduled commercial banks.

The lowest share was reported for north-eastern region (1.7 per cent).

Western region again enjoying the largest share of credits (33.9 per

cent) while the north-eastern region has a nominal share of 0.8 per cent

in total credits disbursed by scheduled commercial banks during 2011

(Table 2.3).

Table: 2.3Region-Wise Distribution of Deposits and Credit of

Scheduled Commercial Banks in IndiaRegions As on March 31

Deposits CreditsAmount

(n Rs. Crores)(2011)

Per cent Share in

total Deposits

(2011)

Amount (n Rs.

Crores)(2011)

Per cent Share in

total Deposits

(2011)Northern Region 1164262 21.5 962807 23.6North East Region 94482 1.7 30999 0.8Eastern Region 617022 11.4 315680 7.7Central Region 619673 11.4 293475 7.2Western Region 1768123 32.6 1380158 33.9Southern Region 1162945 21.4 1093748 26.8All India 5426508 100.0 4076867 100.0

24

Source: Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks, March 2010 & 2011, RBI.

The Scheduled Commercial Banks (SCBs) in India have shown

an impressive growth since the initiation of financial sector reforms.

‘Banking sector recorded credit growth of 33.3 per cent in 2005 which

was highest in last 2 and half decades and credit growth in excess of 30

per cent for three consecutive years from 2004 to 2007, which is best in

the banking industry so far. From the above table it can be conducted

that the growth in number of accounts among different population group

is almost double in all population groups. Even the amount outstanding

in last two decades has shown phenomenon growth. Increase in

economic activity and robust primary and secondary markets during this

period have helped the banks to gain larger increase in their incomes

(Table 2.4).

Table: 2.4

Deposit of Scheduled Commercial Banks According to Population Groups

(Number of accounts in thousands & Amounts in Rs. Crore)

Year

Rural Semi-urban Urban Metropolitan

No.

of A

ccou

nts

Am

ount

Out

stan

ding

No.

of A

ccou

nts

Am

ount

Out

stan

ding

No.

of A

ccou

nts

Am

ount

Out

stan

ding

No.

of A

ccou

nts

Am

ount

Out

stan

ding

1991

108876

31010 98084 41439 80889 49140 67342 78979

1995

109944

51820 108129

71464 88828 84129 83134 171761

2000

125852

120539 114109

161972 89831 188963 83023 349945

25

2005

141908

213104 125198

295685 101376

374891 98310 863134

2008

168034

303423 148361

430280 128021

657699 137241

1858544

2009

199695

363910 169725

529758 142272

822914 150611

2205399

Source: Reserve Bank of India

The overall business of foreign banks per office is higher than the

per office business of other bank groups. Across the board, per office

deposits are more than the per office credit as expected. With respect to

all scheduled commercial banks, deposits per office increased from

Rs.1.4 crore in 1980 to Rs. 33 crore in 2005 and credit per office also

increased from Rs. 0.9 crore to Rs. 20.7 crore during the same period.

Over the years, there has been a shift in the composition of deposits.

While the savings bank deposits of all scheduled commercial banks

remained more or less constant at around one fourth of the total

deposits, term deposits increased from 55.1 per cent in 1980 to 63.0 per

cent in 2005. On the other hand, demand deposits fell from 19.7 per

cent in 1980 to 12.8 per cent in 2005. More or less similar trend is

observed for both State Bank Group and also for the nationalized bank

group. In the case of foreign banks and domestic private sector bank

groups, the pattern in the composition of deposits differs from that of the

public sector banks. In the case of foreign banks, demand deposits,

which formed 25.7 per cent in 1980, increased to 30.1 per cent in 2005.

The share of savings bank deposits in total deposits of foreign banks,

decreased from 21.5 per cent in 1980 to 9.9 per cent in 2000. This

share was 17.9 per cent in 2005. The analysis showed that more funds

of short-term nature are parked with the foreign banks group. This may

be an indication that the business class is attracted towards better

service offered by foreign banks. In the case of domestic private sector

26

bank group, while the composition of demand deposits did not vary

much over the 25-year period, the share of savings deposits fell from

26.8 per cent in 1980 to 16.0 per cent in 2005, whereas term deposits

increased from 56.7 per cent to 69.5 per cent over the same period.

Even though bank deposit rates are low, people prefer to park major

portion of their funds in the form of term deposits because of the risk

free returns and assured returns it provides. We can infer that the

interest rate structure has definitely influenced the maturity structure of

bank deposits. For example, since 2000, the share of term deposits to

total deposits declined across bank groups except for State Bank group.

The deposit rates of 1 to 3 yrs maturity show that there is a clear fall in

the rates since 2000. This could be the major reason for decline in term

deposits after 2000.

Regional Rural Banks:

In 1976, Regional Rural Banks were established under an Act of

Parliament with a view to developing rural economy by providing, for the

purpose of development of agriculture, trade, commerce, industries and

other productive activities in the rural areas, credit and other facilities, to

the small and marginal farmers, agricultural labourers, artisans, small

entrepreneurs, etc.

Cooperative Banks:

The co-operative banking structure in India comprises two main

components, viz., urban co-operative banks and rural co-operative

credit institutions. The urban co-operative banks have a single tier

structure. Rural cooperative credit institutions have two distinct

structures, viz., the short-term co-operative credit structure (STCCS)

and the long-term cooperative credit structure (LTCCS). Within the

STCCS, primary agricultural credit societies (PACS) at the village level

form the base level, while district central cooperative banks (DCCBs)

are placed at the district level, and the State co-operative banks (SCBs)

27

at the apex level. The STCCS mostly provide crop and other working

capital loans primarily for a short period to farmers and rural rtisans.

The long-term structure of rural co-operatives comprises State co-

operative agriculture and rural development banks (SCARDBs) at the

State level, and primary co-operative agriculture and rural development

banks (PCARDBs) at the district or block level. These institutions focus

on providing typically medium to long-tem loans for making investments

in agriculture, rural industries, and lately housing.There are at present

53 Scheduled Urban Cooperative Banks and 31 State Cooperative

Banks in India. There is only one scheduled cooperative bank in U.P.

Scheduled Commercial Banks:

The banks which are included in the second schedule of Reserve

Bank of India Act, 1934 are scheduled banks. All the 170 commercial

banks, 82 regional rural banks, 53 urban cooperative banks, and 31

state cooperative banks are included in second schedule of RBI Act

1934. However, 4 local area banks are non-scheduled banks.

Development Financial Institutions:

DFIs were established mainly to cater to the demand for long-

term finance by the industrial sector. The first DFI established in India in

1948 was Industrial Finance orporation of India (IFCI) followed by

setting up of State Financial Corporations (SFCs) at the State level after

passing of the SFCs Act, 1951. Subsequently, ICICI Ltd. was set up in

1955, LIC in 1956, Refinance Corporation for Industries Ltd. in 1958

(later taken over by IDBI), Agriculture Refinance Corporation (precursor

of ARDC and NABARD) in 1963, UTI and IDBI in 1964, Rural

Electrification Corporation Ltd. and HUDCO Ltd. in 1969-70, Industrial

Reconstruction Corporation of India Ltd. (precursor of IIBI Ltd.) in 1971

and GIC in 1972. The FIs set up after 1974 have been as follows.

NABARD was set up in 1982, EXIM Bank (functions carved out of IDBI)

in 1982, SCICI Ltd. in 1986 (set up by ICICI Ltd. in 1986 and later

28

merged into ICICI Ltd. in 1997), PFC Ltd. and IRFC Ltd. In 1986, IREDA

Ltd. in 1987, RCTC Ltd. and TDICI Ltd. (later known as IFCI Venture

Capital Funds Ltd. and ICICI Venture Funds Management Ltd.) in 1988,

NHB in 1988, TFCI Ltd. (set up by IFCI) in 1989, SIDBI (functions

carved out of IDBI) in 1989, NEDFI Ltd. in 1995 and IDFC Ltd. in 1997.

Local Area Banks:

Local area banks are banks that are set up under the scheme

announced by the government of India in 1996, for the establishment of

new private banks of a local nature; with jurisdiction over a maximum of

three contiguous districts. LABs aid in the mobilisation of funds of rural

and semi urban districts. Six LABs were originally licensed, but the

license of one of them was cancelled due to irregularities in operations,

and the other was amalgamated with Bank of Baroda in 2004 due to its

weak financial position. As at end-March 2009 there were only 4 LABs

operating in India viz Capital Local Area Bank, Coastal Local Area

Bank, Krishna Bhim Samruddhi Local Area Bank and Subhadra Local

Area Bank. These four banks are non-scheduled banks. None of the

LABs operate in Uttar Pradesh.

Reserve Bank of India:

It is Central Bank of the country. It is regulatory, supervisory and

monitory policy authority of India.Banker to the Banks & Govt.( Central

Govt. by statutory provision, and state govt. by Agreement), Note

issuing Authority, Lender of Last resort and many development related

functions as provided in RBI Act.

Public Sector Banks:

a) SBI and its Associates

29

b) Nationalised Banks

c) Regional Rural Banks

Private Sector Banks:

a) Old Private Sector Banks

b) New Private Sector Banks

c) Foreign Banks operating in India

Cooperative Banks:

a) State Cooperative Banks

c) Central Cooperative Banks

d) Primary Agricultural Credit Societies

e) Urban Cooperative Banks (scheduled and nonscheduled)

Role of Banks:

On account of growing business and commerce activities,

technological advancement, increse of cross-border banking and

customers demanding more and more products and services, banks’

functioning expanded beyond accepting deposits and lending activity.

Now banks play vital role in the development of an economy. A general

list of role of banks with brief explanation given detailed below:

Banks Promote Capital Formation:

In any Merchant Account, capital occupies a position of crucial

and strategic importance. The bank plays an important role in removing

the deficiency of capital by mobilising savings from individuals and

business and then lending to the merchants. A sound banking system

helps in mobilisation of the savings of the public including merchants

and makes them available for investment in productive merchandise

30

industries. No economic development of sizeable extent in merchant

account is possible unless there is sufficient degree of capital formation.

Investment in New Enterprises:

Businessmen normally hesitate to invest their money in risky

enterprises. The commercial banks generally provide short and medium

term loans to entrepreneurs to invest in new enterprises and adopt new

methods of production. The banks also contribute to the borrowing

programme of the enterprises or government or government owned

enterprises/corporations,etc. like issue of shares, debentures or any

other debt instruments for raising resources. The provision of timely

credit increases the productive capacity of the economy.

Promotion of Trade and Industry:

With the growth of commercial banking, there is vast expansion in

trade and industry. The use of bank draft, check, bill of exchange, credit

cards and letters of credit etc has revolutionized both national and

international trade.

Development of Agriculture & SSI:

The commercial banks provide credit for development of

agriculture and small scale industries in rural areas. The provision of

credit to agriculture sector and Small Scale Industries also depend on

banks to meet their working capital needs.large employment is

generated by it. Credit greatly helps in raising agriculture productivity

and income of the farmers.

Balanced Development of Different Regions:

The commercial banks help in transferring surplus capital from

developed regions to the less developed regions. The traders,

industries etc of less developed regions are able to get adequate capital

for meeting their business needs. This in turn increases investment in

trade and production in the economy.

31

Financial sector is of a particular importance; as this sector

provides money for many Plans and the development Projects that

result from them. There is much that financial sector particularly banks

can do to assist efforts to achieve sustainability i.e. the banks provide

sustainable finance which means financing such Plans and Projects

which are important due to the environmental and social consequences

of projects; and financial products should be developed by banks to

achieve E&S impact, rather than just the economic impact. In short,

Banks should have an agenda of achieving “Net Economic Welfare” in

The Society. {In most of the Developed world E&S assessments are

incorporated into financial analysis or developing products with E&S

focus.} (CLA-Section I- Statute, VOL 82)

The banks can also influence the economic activity of the country

through its influence on availability of credit and the rate of interest. If

the commercial banks are able to increase the amount of money in

circulation through credit creation or by lowering the rate of interest, it

directly affects economic development. A low rate of interest can

encourage investment. The credit creation activity can raise aggregate

demand which leads to more production in the economy.

Implementation of Monetary Policy:

The central bank of the country controls and regulates volume of

credit through the active cooperation of the banking system in the

country. The banking system acts as transmission channel for monetary

policy instances. It helps in bringing price stability and promotes

economic growth within the shortest possible period of time.

In order to increase the exports of the country, the commercial

banks have established export promotion cells. They provide

information about general trade and economic conditions both inside

and outside the country to its customers. They also provide export credit

(preshipment & post shipment) on concessional rate. The banks also

32

provide foreign exchange/ foreign currency and coins at market rates as

facility to the citizens of the country for personal, business, educational,

medical, etc. purposes. Imports are the 2nd leg of International Trade. It

is not a dirty word. It is necessary for the successful International Trade.

Banks facilitate smooth imports in the country by providing letters of

credit, foreign exchange and guarantees etc.

Banks help in bringing foreign exchange in the country by

providing remittance facility and maintaining Accounts of Non –Resident

Indians/Indian entities, within the country in foreign currency/ Indian

Rupee , on repatriable and non-repatriable basis, as applicable. Banks

help Tourism industry by providing currency conversion facility to

foreign tourists and others who wish to convert foreign currency into

Indian Rupee and vice-versa by providing money exchange facility in

their branches or at its extension counters. The branches authorised to

deal in foreign exchange accept foreign currency from the foreign

tourists coming In India at the strategic centres like airports, tourist

places, market places, etc.

General Business of Banks:

Banks can do any and only that business which is authorized in

section 6 of the Banking Regulation Act, 1949. But all banks are not

doing all the listed activities.They decide on what to do on basis of their

Business plan/ market research and own priorities. However, generally

the banks perform other functions as a paid service to their customers/

Clients, like:

Currency Distribution:

The banks provide good quality notes and coins to its customers

and also to the general public. They also maintain currency-chest as

agent of note issuing authority, i.e. central bank of the country i.e. R.B.I.

The banks have to provide facility to exchange notes and coins at the

33

counter and also exchange soiled/mutilated notes to facilitate customer

service. In this regard as per instructions of R.B.I., every power which

R.B.I. has, stands delegated to banks so that this facility can be

available to all, within a reasonable distance of one’s residence/work

place. Banks have been encouraged to establish coin vending

machines, static and mobile ATMs. The banks maintain and take part in

clearing system in which settlement of dues to/from other banks is

undertaken by exchanging instruments drawn on banks. This facilitates

timely credit of amounts to the customers’ accounts.

Remittance of Funds:

The banks facilitate remittance of funds from one place to another

by issuing draft, bankers’ cheque, payment order, etc. Now modern

banks with increased technology remit fund through RTGS, ECS ,NEFT

instantatly through internet. The banks maintain accounts by way of

issuing pass-books, cheque books, statement of accounts, issue of

ATM cards and updating the same periodically, collection of cheques

etc.

Locker Facility:

The banks provide locker facility to its customer for keeping

jewelleries, documents and other valuables for fee.The valuables

remain under safe custody of banks and lockers are operated jointly by

customers and bankers. The above facilities are provided for customers’

satisfaction in particular and society’s convenience in general.

Virtual Banking:

The principal types of virtual banking services include automated

teller machines (ATM’s), phone banking and most recently internet

banking. With the increasing use of internet banking there is greater

reliance now on information technology and the decrease of physical

bank branches to deliver the banking services to the customer. The

34

above activities are generally undertaken by banks allover world.

However, banks in India are required to fulfill certain mondatory

obligations as a measure of social objective. In this direction, they are to

meet prescribed level under priority sector i.e. agriculture, small scale

industries, weaker sections of society, export, etc. They are also

required to provide personal loans, housing loans, educational loans,

etc. and provide banking facilities to remote villages to fulfill criterion of

Financial Inclusion, a latest addition to banks’ activities.

Miscellaneous Functions:

In addition to the main functions, banks are seen doing following

activities also

The issue of various forms of credits,e.g. letter of credits,

travellers’ cheques, credit cards, ATM/Debit cards, circular

notes;

Underwriting of capital issues;

Acceptance of bills of exchange, whereby banker lends his name

to his customer in return for a commission;

The safe custody of valuables/documents;

Acting as executors and trustees for customers;

Preparing income-tax returns for their customers;

Furnishing guarantees on behalf of customers; and

Selling of insurance products, mutual funds, gold coins, etc.

Payment of utility bills like, water, electricity, telephone bills etc.

Payment of monthly/quarterly education fee of choldren.

Payment of insurance premium on due dates.

Xii) Demating of shares, debentures, and bonds.

Selling of insurance products.

Concept of Assets with Reference to Banking Business:

35

The assets are composed of all the items which are in possession

of or due to the bank, and it relies upon these assets to meet the

liabilities which it owes to others. In the balance sheet of a bank,

besides cash and bank’s balances, the assets comprise loans and

advances, investments, fixed assets and other assets and liabilities

comprise, besides capital and reserves and surpluses, deposits,

borrowings and other liabilities and provisions. Other Assets comprise

inter-office adjustment (net), interest accrued, tax paid in advance,

stationery and stamps, etc and other liabilities and provisions comprise

bills payable, inter-office adjustment (net), interest accrued, provision

against standard assets, etc. Amongst the assets, loans and advances

and balances with banks earn income to the bank and hence they are

called earning assets. As long as interest and instalments are paid in

the account regularly, the loans and advances are treated as performing

assets and is categorised as standard asset. If interest and instalments

in the account are not paid on due date, and remains unpaid for quite

some time such advances are non-performing assets. Prudential Norms

for Income Recognition, Asset Classification and Provisioning issued by

RBI gives detailed guidelines in this regard.

Non Performing Assets:

Any asset which ceases to generate income to the bank becomes

a non- performing asset. A non performing asset (NPA) is a loan or an

advance where;

Interest and/ or instalment of principal remain overdue for a

period of more than 90 days in respect of a term loan,

The account remains ‘out of order’. An account should be treated

as 'out of order' if the outstanding balance remains continuously

for 90 days, in excess of the sanctioned limit/drawing power in

respect of an overdraft/cash credit(OD/CC).

36

The bill remains overdue for a period of more than 90 days in the

case of bills purchased and discounted,

The instalment of principal and or interest thereon remains

overdue for two crop seasons for short duration crops,

The instalment of principal or interest thereon remains overdue

for one crop season for long duration crops,

The amount of liquidity facility remains outstanding for more than

90 days, in respect of a securitisation transaction undertaken in

terms of existing guidelines.

In respect of derivative transactions, the overdue receivables

representing positive mark-to-market value of a derivative

contract, if these remain unpaid for a period of 90 days from the

specified due date for payment

in respect of derivative transactions, the overdue receivables

representing positive mark-to-market value of a derivative

contract, if these remain unpaid for a period of 90 days from the

specified due date for payment.

The banks should, classify an account as NPA only if the interest

due and charged during any quarter is not serviced fully within 90 days

from the end of the quarter.

Asset Classification:

Standard Assets

Non-Performing Assets (NPAs)

Categories of NPAs

The banks are required to classify non-performing assets into the

following three categories based on the period for which the asset has

remained nonperforming and the realisability of the dues:

Substandard Assets

Doubtful Assets

37

Loss Assets

Substandard Assets:

A substandard asset is one, which has remained NPA for a

period less than or equal to 12 months. In such cases, the current net

worth of the borrower/ guarantor or the current market value of the

security charged is not enough to ensure recovery of the dues to the

banks in full. In other words, such an asset will have well defined credit

weaknesses that jeopardise the liquidation of the debt and are

characterised by the distinct possibility that the banks will sustain some

loss, if deficiencies are not corrected.

Doubtful Assets:

An asset would be classified as doubtful if it has remained in the

substandard category for a period of 12 months. A loan classified as

doubtful has all the weaknesses inherent in assets that were classified

as sub-standard, with the added characteristic that the weaknesses

make collection or liquidation in full, doubtful– on the basis of currently

known facts, conditions and values.

Loss Assets:

A loss asset is one where loss has been identified by the bank or

internal or external auditors or the RBI Inspection but the amount has

not been written off wholly. In other words, such an asset is considered

uncollectible and of such little value that its continuance as a bankable

asset is not warranted on bank’s balance sheet,although there may be

some salvage or recovery value, which ofcourse, banks try to recover.

According to prudential norms laid down by RBI, sufficient provision has

to be made by banks to meet such contingency, out of its profits, each

year.

Criterion for Classification of AssetsL

38

In the matter of classification of accounts as NPA banks have

obsrve the following guidelines:

The outstanding in the account based on drawing power

calculated from stock statements older than three months, would

be deemed as irregular. A working capital borrowal account will

become NPA if such irregular drawings are permitted in the

account for a continuous period of 90 days even though the unit

may be working or the borrower's financial position is satisfactory.

An account where the regular/ ad hoc credit limits have not been

reviewed/ renewed within 180 days from the due date/ date of ad

hoc sanction will be treated as NPA.

Upgradation of Loan Accounts Classified as NPAs:

If arrears of interest and principal are paid by the borrower in the

case of loan accounts classified as NPAs, the account should no longer

be treated as non-performing and may be classified as ‘standard’

accounts. Asset Classification to be borrower-wise and not facility-wise

All the facilities granted by a bank to a borrower and investment

in all the securities issued by the borrower will have to be treated

as NPA/NPI and not the particular facility/investment or part

thereof which has become irregular.

If the debits arising out of devolvement of letters of credit or

invoked guarantees are parked in a separate account, the

balance outstanding in that account also should be treated as a

part of the borrower’s principal operating account for the purpose

of application of prudential norms on income recognition, asset

classification and provisioning.

(iii) In case documents under LC are not accepted on

presentation or the payment under the LC is not made on the due

date by the LC issuing bank for any reason and the borrower

does not immediately make good the amount disbursed as a

39

result of discounting of concerned bills, the outstanding bills

discounted will immediately be classified as NPA with effect from

the date when the other facilities had been classified as NPA.

The overdue receivables representing positive mark-to-market

value of a derivative contract will be treated as a non-performing

asset, if these remain unpaid for 90 days or more. In case the

overdues arising from forward contracts and plain vanilla swaps

and options become NPAs, all other funded facilities granted to

the client shall also be classified as non-performing asset

following the principle of borrower-wise classification as per the

existing asset classification norms.

Advances Under Consortium Arrangements:

Asset classification of accounts under consortium should be

based on the record of recovery of the individual member banks and

other aspects having a bearing on the recoverability of the advances.

Where the remittances by the borrower under consortium lending

arrangements are pooled with one bank and/or where the bank

receiving remittances is not parting with the share of other member

banks, the account will be treated as not serviced in the books of the

other member banks and therefore, be treated as NPA. In respect of

accounts where there are potential threats for recovery on account of

erosion in the value of security or non-availability of security and

existence of other factors such as frauds committed by borrowers it will

not be prudent that such accounts should go through various stages of

asset classification. In cases of such serious credit impairment the asset

should be straightaway classified as doubtful or loss asset as

appropriate:

Advances to PACS/FSS Ceded to Commercial Banks:

In respect of agricultural advances as well as advances for other

purposes granted by banks to PACS/ FSS under the on-lending system,

40

only that particular credit facility granted to PACS/ FSS which is in

default for a period of two crop seasons in case of short duration crops

and one crop season in case of long duration crops, as the case may

be, after it has become due will be classified as NPA and not all the

credit facilities sanctioned to a PACS/ FSS. The other direct loans &

advances, if any, granted by the bank to the member borrower of a

PACS/ FSS outside the on-lending arrangement will become NPA even

if one of the credit facilities granted to the same borrower becomes

NPA.

Advances against Term Deposits, NSCs, KVP/IVP, etc.:

Advances against term deposits, NSCs eligible for surrender,

IVPs, KVPs and life policies need not be treated as NPAs, provided

adequate margin is available in the accounts. Advances against gold

ornaments, government securities and all other securities are not

covered by this exemption.

Agricultural Advances:

A loan granted for short duration crops will be treated as NPA, if

the instalment of principal or interest thereon remains overdue for two

crop seasons. A loan granted for long duration crops will be treated as

NPA, if the instalment of principal or interest thereon remains overdue

for one crop season. For this purpose, “long duration” crops would be

crops with crop season longer than one year and crops, which are not

“long duration” crops, would be treated as “short duration” crops. The

crop season for each crop, which means the period up to harvesting of

the crops raised, would be as determined by the State Level Bankers’

Committee in each State. Depending upon the duration of crops raised

by an agriculturist, the above NPA norms would also be made

applicable to agricultural term loans availed of by him.

Government Guaranteed Advances:

41

The credit facilities backed by guarantee of the Central

Government though overdue may be treated as NPA only when the

Government repudiates its guarantee when invoked. State Government

guaranteed advances and investments in State Government

guaranteed securities would attract asset classification and provisioning

norms if interest and/or principal or any other amount due to the bank

remains overdue for more than 90 days.

Project Loans for Infrastructure Sector:

A loan for an infrastructure project will be classified as NPA if it

fails to commence commercial operations within two years from the

original DCCO(Date of Commencement of Comercial Operation), even

if it is regular as per record of recovery, unless it is restructured and

becomes eligible for classification as 'standard asset'.

Project Loans for Non-Infrastructure Sector:

A loan for a non-infrastructure project will be classified as NPA if

it fails to commence commercial operations within six months from the

original DCCO (date of Commencement of Commercial Operation),

even if is regular as per record of recovery, unless it is restructured and

becomes eligible for classification as 'standard asset'.

Restructuring of Advances:

Restructuring of advances can be divided into four categories:

Restructuring of advances extended to industrial units.

Restructuring of advances extended to industrial units under the

Corporate Debt Restructuring (CDR) Mechanism.

Restructuring of advances extended to Small and Medium

Enterprises (SME).

Restructuring of all other advances.

Under the present prudential guidelines, the accounts of

borrowers engaged in industrial activities (under CDR Mechanism, SME

42

Debt Restructuring Mechanism and outside these mechanisms) will

continue to be classified in the existing asset classification category

upon restructuring. This benefit of retention of asset classification on

restructuring is not available to the accounts of borrowers engaged in

non-industrial activities except to SME borrowers.

Corporate Debt Restructuring (CDR) Mechanism:

The CDR mechanism is an organisational institutionalized

method for speedy disposal.. Restructuring proposals are of large

borrowers availing finance from more than one bank/FI with outstanding

of Rs.10 crores and above. CDR system of the country consists of three

tier structures viz: CDR Standing Forum and its Core Group, CDR

Empowered Group and CDR Cell. Receving of proposals, scrutiny

thereof and final approval package is grnated by these three structure

mechenism.

Eligible Accounts for CDR:

The CDR mechanism will cover only multiple banking accounts/

syndication / consortium accounts of corporate borrowers

engaged in any type of activity with outstanding fund-based and

non-fund based exposure of Rs.10 crore and above by banks

and institutions.

The Category 1 CDR system will be applicable only to accounts

classified as 'standard' and 'sub-standard'.

The corporates indulging in frauds and malfeasance even in a

single bank will be ineligible for restructuring under CDR

mechanism.

BIFR cases are not eligible for restructuring under the CDR

system.

43

Category 2 CDR has also been introduced for cases where the

accounts have been classified as 'doubtful' in the books of

creditors, and if member banks/Fis satisfy themselves of the

viability of the account and consent for such restructuring.

SME Debt Restructuring Mechanism:

Unlike in the case of CDR Mechanism, the operational rules of

the mechanism have been left to be formulated by the banks

concerned. This mechanism will be applicable to all the borrowers

which have funded and non-funded outstan /consortium banking

arrangement. Under this mechanism, banks may formulate, with the

approval of their Board of Directors, a debt restructuring scheme for

SMEs within the prudential norms laid down by RBI. Banks may frame

different sets of policies for borrowers belonging to different sectors

within the SME if they so desire.

Provisioning:

In conformity with the prudential norms, provisions are to be

made on the non-performing assets on the basis of classification of

assets into prescribed categories as follows:

Loss Assets:

Loss assets should be written off. If loss assets are permitted to

remain in the books for any reason, 100 percent of the outstanding

should be provided for.

Doubtful Assets:

100 percent of the extent to which the advance is not covered by

the realisable value of the security to which the bank has a valid

recourse and the realisable value is estimated on a realistic basis.

In regard to the secured portion, provision may be made on the

basis, at the rates ranging from 25 percent to 100 percent of the

44

secured portion depending upon the period for which the asset

has remained doubtful.

Substandard Assets:

A general provision of 15 percent on total outstanding should be

made without making any allowance for ECGC guarantee cover

and securities available.

The ‘unsecured exposures’ which are identified as ‘substandard’

would attract additional provision of 10 per cent, i.e., a total of 25

per cent on the outstanding balance. However, in view of certain

safeguards such as escrow accounts available in respect of

infrastructure lending, infrastructure loan accounts which are

classified as sub-standard will attract a provisioning of 20 per

cent instead of the aforesaid prescription of 25 per cent. To avail

of this benefit of lower provisioning, the banks should have in

place an appropriate mechanism to escrow the cash flows and

also have a clear and legal first claim on these cash flows. The

provisioning requirement for unsecured ‘doubtful’ assets is 100

per cent. Unsecured exposure is defined as an exposure where

the realisable value of the security, as assessed by the

bank/approved valuers/Reserve Bank’s inspecting officers, is not

more than 10 percent, ab-initio, of the outstanding exposure.

‘Exposure’ shall include all funded and non-funded exposures

(including underwriting and similar commitments). ‘Security’ will

mean tangible security properly discharged to the bank and will

not include intangible securities like guarantees (including State

government guarantees), comfort letters etc.

Standard Assets:

Banks should make general provision for standard assets at the

following rates for the funded outstanding on loan portfolio basis:

45

direct advances to agricultural and Small and Micro Enterprises

(SMEs) sectors at 0.25 per cent;

advances to Commercial Real Estate (CRE) Sector at 1.00 per

cent;

housing loans extended at teaser rates(i.e. comparatively lower

rates of interest in the first few years, after which rates are reset

at higher rates) at 2% and restructured advances at 2% from

date of restructuring.

all other loans and advances at 0.40 per cent.

Income Recognition:

The policy of income recognition has to be objective and based

on the record of recovery. Income from non-performing assets

(NPA) is not recognised on accrual basis but is booked as

income only when it is actually received. Therefore, the banks

should not charge and take to income account interest on any

NPA.

However, interest on advances against term deposits, NSCs,

IVPs, KVPs and Life policies may be taken to income account on

the due date, provided adequate margin is available in the

accounts.

Fees and commissions earned by the banks as a result of

renegotiations or rescheduling of outstanding debts should be

recognised on an accrual basis over the period of time covered

by the renegotiated or rescheduled extension of credit.

If Government guaranteed advances become NPA, the interest

on such advances should not be taken to income account unless

the interest has been realised.

Credit: Deposit Ratio- Some Reflections:

In answer to the Question ‘whether Credit deposit ratio- Is a

reliable measure?’ for assessing Development in a region, following

46

article written by former chairman of NABARD and a professor of

Reading University, U.K., is reproduced, which is enlightening: It was in

1980 that the Reserve Bank of India (RBI) first advised public sector

banks (PSBs) to achieve a CDR of 60% in their rural and semi urban

branches on a continuing basis. This was done in order to encourage

the reduction of inter-regional imbalances in credit delivery and to

persuade banks to lend in the same rural and semi urban areas where

they mobilised deposits. Both in concept and origin this target was

provided as an “advisory” to banks, in order to correct the rural-urban

bias in their lending portfolios. The CDR was not meant as a yardstick

to evaluate the performance of PSBs at the regional, state or district

levels. And yet, to all intents and purposes, the CDR is now seen, and

often quoted, as a yardstick to assess the commitment of PSBs to the

rural and semi-urban sectors. Nearly 30% of India’s poor people live in

the urban environment. The urban poor also need a variety of financial

services to increase their income and to reduce their vulnerability, to

send the children to school and to buy medicines when they are sick.

The density of population in the urban environment means that bank

officers and their clients do not have to travel the large distances

required in many rural areas, and thus this market is easier to serve on

a sustainable, commercial basis. Despite the pressing needs of the

urban poor for access to financial services, the emphasis in India

continues to be on meeting the rural needs of the rural poor. In the

words of the Government of India constituted Expert Group on the

Credit-Deposit Ratio (which reported early in 2005) “Historically, the

Credit- Deposit Ratio (C-D Ratio) has been a measure of banks’

performance in lending.” In particular, the CDR has been used as an

indicator of PSBs duty to offer rural finance - the question is whether it

is a useful indicator.

47

The Expert Group provides an overview of the trends of the CDR

over the last thirty two years, “Although between 1972 and 1990 the

CDR at the All India level fell from 66.4 to 60.7, the ratio improved in

many less developed States and regions. … Between 1990 and 2000,

the CDR at the All India level declined from 60.7 to 56.0.” The Expert

Group notes that the recent declines in the CDR have been most

marked in the North- Eastern (from 54.9% in 1990 to 29.8% in 2004)

and Southern (from 82.4% in 1990 to 68.1% in 2004) regions and that

the Northern and Western regions have seen a significant increase in

the ratio over the same period. These apparently inconsistent trends

mask significant district variances and are compounded by the fact that,

as the Expert Group point out, the CDR is often a misleading yardstick.

Part of the CDR decline may well be as a result of more stringent

provisioning requirements and policies of the banks. As one of the

bankers consulted in West Bengal noted to the Expert Group, the CDR

has gone down partly as a result of write off of loans in recent years.

This cleansing of the banks’ balance sheets is essential for the long-

term viability of the rural financial system. In other areas, such as

Kerala, where loan collection has been effective, this success has also

depressed the CDR. In addition, there are also a growing number of

sources of credit such as education loans, microfinance, housing loans,

small trade, retail loans, etc. outside the PSBs which are not counted in

traditional measures of the CDR.

These growing alternative sources of credit reflect the diversity of

needs for financial services within rural households. Indeed poor

households need financial services in much the same way as more

affluent households do – to borrow not just for their businesses or

agriculture but also to build or repair their houses, to buy more

expensive capital items and in response to emergencies and so on.

Furthermore, contrary to the myth that the poor are “too poor to save”,

48

their vulnerability to sudden crises and shocks and indeed their

aspirations for their children are such that they are “too poor not to

save”. Evidence from all over the world suggests that the poor want and

need to save, and indeed are saving in a wide variety of ways. In

addition to traditional ways of saving “in-kind” (in livestock, tin roofing,

jewellery etc.), the poor have created an extraordinary variety of their

own systems for saving money: peripatetic savings collectors, reciprocal

arrangements between family, friends and neighbours, marriage and

funeral funds, annual savings clubs, chit funds, cooperatives and so on.

This, of course has significant implications for the dependence on the

CDR as an indicator of the health of rural finance in India.

But there are still more problems with the CDR as a yardstick, in

the words of the Expert Group, “Although CDR is generally computed

on the basis of data relating to credit outstanding as per the place of

sanction, a better indicator is credit as per [the place of] utilisation …”,

since a significant proportion of rural and semi-urban credit is

sanctioned in cities and metros, but used in the villages and towns. As

the Expert Group notes, “The CDR for rural branches stood at 48.6 as

per sanction as at the end of March 1995, improved to 64.7 in the same

year if credit is computed as per utilisation.” With the impressive

improvement in communication in India over the past decade, banks

have understandably centralised some of the decision-making on

sanctioning credit … and as communication improves still further and e-

banking solutions extend into the rural areas this trend is likely to

continue and grow. And with it so the disparity between the CDR

calculated on the basis of place of sanctioning and the CDR calculated

on the basis of place of use will also grow.

More provocatively, many would note that with over-indebtedness

as a persistent problem in rural India, it might be time to place greater

emphasis on assisting the rural poor to save. We have already

49

discussed the importance that poor people place on have access to

secure and accessible savings facilities. However, many studies have

already demonstrated that well in excess of half (indeed the 1999 Task

Force on a Supportive Policy and Regulatory Framework for

Microfinance estimated as much as two thirds) of borrowing by the rural

poor is for consumption purposes. According to the recently completed

World Bank-NCAER Rural Finance Access Survey, 2003, well over

one-half (58%) of rural households do not have a bank account – and

are thus left stranded in the risky informal sector. Poor people’s ability to

curb frivolous spending, and protect precautionary savings in readiness

for the crises that so regularly affect their households, is severely

compromised if much of their savings are held at home or in a village

savings club. Perhaps we should be looking to encourage banks to

decrease the CDR by offering accessible and appropriate savings

services for this section of society in order to help reduce their

vulnerability in preference to leveraging their risk by providing them

credit!

There is perhaps another, more worrying, reason that is already

encouraging banks to decrease their CDR. In 2004, a World Bank

report concluded, “For [Regional Rural Banks] RRBs and cooperative

banks, poor performance on capital adequacy, profitability and asset

quality indicate that there are serious issues across critical financial

parameters and indicate that systematic and drastic change in the way

[Rural Finance Institutions] RFIs are operating needs to be made

urgently if these institutions are to continue playing an important role in

the provision of rural finance services.” These problems are primarily

driven by state interference through directives on deposit and lending

rates, lending priorities etc. or postponing/waiving of recovery of

repayment of loans given by cooperatives. With the resulting credit

indiscipline, and the rural finance system in India in such a perilous

50

state, from an institutional point of view it may indeed be prudent not to

lend many cases. Indeed the World Bank report notes that, “While the

cooperative banks have had a lending focused approach with high CD

ratios, the poor quality of assets and low financial margins have led to

weak performance on earnings.” In this context, the Expert Group made

an admonition essential to address the perennial problem of

interference by well-intentioned Stage Governments. It notes, “while

banks would be responsible for credit disbursement, the State

Government would be required to give an upfront commitment

regarding its responsibilities for creation of identified rural infrastructure

together with support in creating an enabling environment for banks to

lend and to recover their dues.”

Categories of Priority Sector:

The broad categories of priority sector for all scheduled

commercial banks are as under:

Agriculture (Direct and Indirect Finance):

Direct finance to agriculture shall include short, medium and long

term loans given for agriculture and allied activities directly to individual

farmers, Self-Help Groups (SHGs) or Joint Liability Groups (JLGs) of

individual farmers without limit and to others (such as corporates,

partnership firms and institutions) up to Rs. 20 lakh, for taking up

agriculture/allied activities. Indirect finance to agriculture shall include

loans given for agriculture and allied activities as specified in Section I,

appended to annexure-I.

Small Scale Industries (Direct and Indirect Finance):

Direct finance to small scale industries (SSI) shall include all

loans given to SSI units which are engaged in manufacture, processing

or preservation of goods and whose investment in plant and machinery

(original cost) excluding land and building does not exceed the amounts

51

specified in Section I, appended. Indirect finance to SSI shall include

finance to any person providing inputs to or marketing the output of

artisans, village and cottage industries, handlooms and to cooperatives

of producers in this sector.

Small Business:

Service Enterprises shall include small business, retail trade,

professional & self employed persons, small road & water transport

operators and other service enterprises as per the definition given in

Section I and other enterprises that are engaged in providing or

rendering of services, and whose investment in equipment does not

exceed the amount specified in Section I, appended.

Micro Credit:

Provision of credit and other financial services and products of

very small amounts not exceeding Rs. 50,000 per borrower to the poor

in rural, semi-urban and urban areas, either directly or through a group

mechanism, for enabling them to improve their living standards, will

constitute micro credit.

Education Loans:

Education loans include loans and advances granted to only

individuals for educational purposes up to Rs. 10 lakh for studies in

India and Rs. 20 lakh for studies abroad, and do not include those

granted to institutions;

Housing Loans:

There is provision of loans up to Rs. 15 lakh for construction of

houses by individuals and loans given for repairs to the damaged

houses of individuals up to Rs.1 lakh in rural and semi-urban areas and

up to Rs.2 lakh in urban areas. Investments by banks in securitised

52

assets, representing loans to agriculture (direct or indirect), small scale

industries (direct or indirect) and housing, shall be eligible for

classification under respective categories of priority sector (direct or

indirect) depending on the underlying assets, provided the securitised

assets are originated by banks and financial institutions and fulfil the

Reserve Bank of India guidelines on securitisation. The targets and sub-

targets under priority sector lending would be linked to Adjusted Net

Bank Credit (Net Bank Credit plus investments made by banks in non-

SLR bonds held in HTM category) or Credit Equivalent of Off-Balance

Sheet Exposures, whichever is higher, as on March 31 of the previous

year. In order to encourage banks to increasingly lend directly to the

priority sector borrowers, the banks' deposits placed with

NABARD/SIDBI on account of non-achievement of priority sector

lending targets would not be eligible for classification as indirect finance

to agriculture/SSI, as the case may be.

Foreign Exchange:

Any currency other than Indian currency is foreign currency.

Foreign exchange means foreign currency and includes:

deposits, credits, balances payable in any foreign currency,

drafts, travellers’ cheques, letter of credit or bills of exchange,

expressed or drawn in Indian currency but payable in foreign

currency,

drafts, travellers’ cheques, letter of credits or bills of exchange

drawn by banks, Institutions,or persons outside India but payable

in Indian currency.

The legal framework to deal in foreign exchange is provided

under provisions of the Foreign Exchange Management Act (FEMA),

1999 which has been enacted with the objective of facilitating external

trade and payments and for promoting the orderly development and

maintenance of foreign exchange market in India. Entire premises of

53

FEMA is divided into two types of transactions i.e. capital account

transactions and current account transactions.

Capital Account Transaction:

Transactions which alter assets or liabilities outside India of

resident in India or assets or liabilities in India of persons resident out

side India, are capital account transactions. Viz.: A person resident in

India may hold, own, transfer or invest in foreign currency, foreign

security or any immovable property situated outside India if acquired

when he was resident outside India and vice-versa. Transactions which

are not in the nature of capital account transactions are current account

transactions. Resident in India means a person who has stayed in India

for more than one hundred and eighty-two days during the course of

preceding financial year. A person resident outside India is one who is

not a person resident in India.

Foreign Exchange Inward Remittances:

Recept of foreign exchange in India is called Inward remittance.

The Export generates inward remittances. Besides export Non-Resident

Indians remit foreign exchange to their relatives in India. Inward

remittances are usually in the nature of foreign currency notes,

travellers’cheques, demand drafts, and inward telex trasfers, etc. Inward

remittances through normal banking channel are freely permitted under

the Foreign Exchange Management Act 1999 (FEMA).

Dealing in Foreign Exchange:

Only authorised entities holding license from Reserve Bank of

India, be it current or capital account transactions, can deal in foreign

exchange (Table 2.5).

Table: 2.5Foreign Exchange Categories

S.No. Entities Category Activities1. Commercial Banks Authorised All current and capital account

54

State Co-op BanksUrban Co-op Banks

Dealer -Category - I

transactions according to RBI directions issued from time-to-time.

2. Upgraded FFMCsCo-op. Banks

Regional Rural Banks(RRBs)Others

AuthorisedDealer -

Category – II

Specified non-trade related current account transactions as also all the activities permitted to Full Fledged Money Changers. Any other activity as decided by the Reserve Bank.

3. Select Financial andother Institutions

AuthorisedDealer -

Category - III

Transactions incidental to the foreign exchange activities undertaken by these institutions.

4. Full Fledged MoneyChangers (FFMCs)

Dept. of PostsUrban Co-op.

Banks.Other FFMCs

Purchase of foreign exchange and sale forprivate and business visits abroad.

Under FEMA wide ranging powers are delegated to AD. R-

Returns are prescribed as off-site monitoring returns to be submitted by

AD (Category A and B branches). Categoty A branch is one which

maintains independent NOSTRO account with foreign correspondence

in its own name. Category B branch does not maintain NOSTRO

account but operate on NOSTRO account of category A branch.

Category C branch conduct foreign exchange operations through

Category A or Category B branch. Category C branches are not

required to submit R- Returns. R-Returns are fortnightly returns and are

of two type’s viz. R-Returns (NOSTRO) and R-Returns (VOSTRO).

NOSTRO account means ‘our account with you’ i.e. a bank in India

opens account with a bank in foreign country for international payment

is NOSTRO account. The foreign bank where account is opened is

called correspondence bank of Indian bank. Likewise foreign bank

opening account with a bank in India is VOSTRO account i.e. ‘their

account with us’.

Foreign Exchange Remittances in India:

Remittances from overseas Indians comprise of the inflows

towards family maintenance and the funds domestically withdrawn from

the Non-Resident Indian (NRI) rupee deposits (NRERA and NRO

55

deposit schemes). Such remittances are treated as private unrequited

transfers, which are included in the current account of the balance of

payments and influence the disposable income of the country. Foreign

exchange remittances are generally made through the banking channel

under the following routs:

FCNR(A): Foreign currency non-resident account, NR(E)RA : Non-resident external rupee account

FCNR(B): Foreign currency non-resident (banks), NR(NR)RD :Non-resident (non-repatriable)rupee deposits

FC(B&O)D: Foreign currency (banks&other) deposits, FC(O)N: Foreign currency (ordinary) non-repatriable deposits.

NRO: Non-resident ordinary rupee accounts.

Foreign Investment Inflows in India:

Remittances, as an important source of external finance, can

serve as an engine of economic growth. Since remittances are the part

of balance of payment (BOP) account, the increase in it can reduce the

BOP deficit (particularly current account deficit) of the country

(remittances have provided ignificant support to India’s BOP position for

the last three decades). Reduction in BOP deficit can create conducive

environment for foreign investment in the country. Apart from that, it can

also solve the problem of financial constraint faced by many small scale

enterprises in India (by utilizing migrant’s family small savings if the

financial institutions in the country are strong enough). The expansion of

small scale enterprises (also through increase in consumption

expenditure by households) can increase the indirect tax revenue of the

government. All of these have positive impact on the overall GDP of the

country as a whole.

Foreign Contribution:

There is another law in the country and it is called Foreign

Contribution (Regulation) Act, 1976 which has since been repealed and

56

new law enacted known as Foreign Contribution (Regulation) Act 2010.

This law is administered by the Ministry of Home Affairs, Government of

India, New Delhi and not by Reserve Bank of India. Beneficiaries of

inward remittances are advised to comply with the provisions of this law

wherever considered necessary. This law applies to Associations

having a definite cultural, economic, educational, religious or social

programme. These types of associations must be registered with the

Home Ministry of Central Government before they could accept foreign

contribution. Under the existing instructions, all the branches of the

bank dealing in foreign exchange are required to receive foreign

contribution on behalf of such association and credit the proceeds to

respective associations’ accounts and send a half yearly statement to

Government of India for the period ending 30th September and 31st

March every year as per prescribed format giving the details of the

contributions received for crediting into the account of associations/

organizations concerned. Such statements are required to be furnished

to Government of India within two months of the closure of the half-year.

The table below gives 10 year trends of foreign contribution as updated

upto 2009-10. Commercial banks’ contribution is confined to openning

of accounts, receipt of foreign cotribution, crediting to the accounts of

respective associations and reporting the same to the Ministery of

Home Affaires, Govt. of India.

Other Activities under taken by Banks:

Facilities of release of foreign echange to Resident (Indians) for

travel, medical, educational, gift, etc. purposes;

Facilities to Non-Resident Indians/Person of Indian Origin for

openning various types of accounts; and

Remittance facilities to Indians.

Money and Currency:

57

Money as a means of payment consists of coins, paper money

and withdrawable bank deposits. Today, credit cards and electronic

cash form an important component of the payment system. For a

common person though, money simply means currency and coins. This

is so because in India, the payment system, especially for retail

transactions still revolves mainly around currency and coins. Here is an

attempt to answer some of the Frequently Asked Questions on Indian

Currency.

Coins: The first documented coinage seems to have started with

'Punch Marked' coins issued between the 7th-6th Century BC and 1st

Century AD. The coinage can be classified into the following periods:

Ancient, Medival, Mughal, Late pre-colonial, British India, Republic

India, Others. India won its independence on August 15, 1947. During

the period of transition India retained the monetary system and the

currency and coinage of the earlier period. India brought out its

distinctive coins on 15th August, 1950. Coins in India are presently

being issued in denominations of 1 paise,2 paise,5 paise,10 paise,20

paise, 25 paise, 50 paise, one rupee, two rupees , five rupees and 10

rupees for circulation in public. Coins upto 50 paise are called 'small

coins' and coins of Rupee one and above are called 'Rupee Coins'.

Coins can be issued up to the denomination of Rs.1000 as per the

Coinage Act, 1906. Due to Inflation and consequent Price rise coins

upto 25 paise are rarely accepted, though these are neither

demonetized nor have lost their legal tender character, till so notified by

Govt.of.India.. Ofcourse theircoinage is not done now. Actually even 50

paise is on road to extinction in due course.

Currency: Financial Instruments and 'Hundies' in India have a

venerable history. Paper Money, in the modern sense, traces its origins

to the late eighteenth century with the issues of private banks as well as

those of semi-government banks. The Paper Currency Act of 1861

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conferred upon Government of India the monopoly of Note Issue

bringing to end banknote issues of Private and Presidency Banks.

Government of India continued to issue currency notes till the Reserve

Bank of India (RBI) was established on 1st April, 1935. Reserve Bank

issued banknotes in January 1938 when the first Five Rupee banknote

was issued bearing the portrait of George VI. This was followed by Rs.

10 in February, Rs. 100 in March and Rs. 1,000 and Rs. 10,000 in June

1938. The George VI series continued till 1947 and thereafter as a

frozen series till 1950 when post independence banknotes were issued,

with the Ashoka Pillar watermark. Banknotes in the Mahatma

Gandhi( MG) Series were introduced in 1996 and were issued in a

phased manner in the denominations of Rs.5, Rs.10, Rs.20, Rs.50,

Rs.100, Rs.500 and Rs.1000. Banknotes in MG series 2005, in the

denomination of Rs.10, Rs.20, Rs.50, Rs.100 Rs.500, and Rs.1000 with

additional / new security features are presently being issued. 5/- notes

are out of Print.

Indian Currency:

The Currency Department in RBI attends to the core statutory

function of note and coin issue on behalf of itself as well as G.o.I; and

currency management. This involves forecasting the demand for fresh

notes and coins, placing the indent with four printing presses and mints,

receiving supplies against those indents and distributing them through

the 18 offices of the Bank, a wide network of currency chests,

repositories and small coin depots. The Department also keeps an

account of notes in circulation and also the stocks at RBI offices and

currency chests.

Banknotes:

The design of banknotes is approved by the central government,

on the recommendation of the central board of the Reserve Bank of

India. Currency notes are printed at the Currency Note Press in Nashik,

59

the Bank Note Press in Dewas, the Bharatiya Note Mudra Nigam (P)

presses at Salboni and Mysore and at the Watermark Paper

Manufacturing Mill in Hoshangabad. The current series of banknotes

(which began in 1996) is known as the Mahatma Gandhi series.

Banknotes are issued in the denominations of 5, 10, 20, 50, 100,

500 and 1000. The printing of 5 notes (which had stopped earlier)

resumed in 2009,(temporarily). ATMs usually distribute 100, 500 and

1,000 notes. (There have been instances when some persons received

the zero rupee note. It is not an official government issue, but as a

symbol of protest against falling value of money; it is printed (and

distributed as per unconfirmed reports) by an NGO in India-name could

not be ascertained).

Symbol: The new sign is a combination of the Devanagari letter

"र" (ra) and the Latin capital letter "R" without its vertical bar (similar to

the R rotunda). The parallel lines at the top (with white space between

them) are said to make an allusion to the tricolor Indian flag and depict

an equality sign, which symbolizes the nation's desire to reduce

economic disparity. Rupee coins in denominations of 1, 2, 5 and 10 with

the new rupee symbol have been put into circulation. As of January

2012, the new Indian rupee sign has been incorporated into currency

notes in denominations of s 10, 100, 500 and 1000.

Origin of the Symbol:

On 5 March 2009, the Indian government announced a contest to

create a sign for the Indian rupee. During the 2010 Union Budget

presentation, then Finance Minister Pranab Mukherjee mentioned that

the proposed sign would reflect and capture the Indian ethos and

culture. Five signs (created by Nondita Correa-Mehrotra, Hitesh

Padmashali, Shibin KK, Shahrukh J Irani and Udaya Kumar) were

short-listed from 3,331 responses received, and one of them would be

finalized at the Union Council of Ministers of India meeting on 24 June

60

2010. The decision was deferred by request of the finance minister, and

it was decided when they met again on 15 July 2010 to select the

symbol created by D. Udaya Kumar (son of N. Dharmalingam, a former

DMKMLA). The selection process was challenged under the Right to

Information Act in the Delhi High Court. The petitioner, Rakesh Kumar

(a participant in the competition), described the process as "full of

discrepancies" and "flawed", and named the Finance Ministry and the

chairman of Indian Rupee Symbol Selection Committee as

respondents. On 26 November 2010 the Delhi High Single-Bench Court

dismissed the writ petition, stating there was no justifiable ground for the

allegations. However, on 31 March 2011 the Chief Justice and Justice

Sanjiv Khanna of the Delhi High Court allowed RTI activist Rakesh

Kumar Singh to file a PIL against the Indian rupee symbol selection

process. According to guideline number five of the contest, submitted

symbols were required to be "in the Indian National Language Script or

a visual representation". It has been argued that this violates the

Constitution of India, because it does not specify a particular language

script as the Indian National Language Script. On April 25, 2012 the

Delhi High court issued a notice to the government of India on the rupee

(and other symbols) selection process. On July 11, 2012 in court

hearing Government of India-Ministry of Home Affaires (MHA) did not

respond to the serious charges made in PIL.

Indian Numbering System:

The Indian numeral system is based on the decimal system, with

two notable differences from Western systems using long and short

scales. The system is ingrained in everyday monetary transactions in

the Indian subcontinent (Table 2.6).

Table: 2.6

Indian Numbering SystemIndian International Indian Comma International

61

Semantic Semantic Placement Comma Placement

1 lakh 1 hundred thousand

1,00,000 100,000

10 lakhs 1 million 10,00,000 1,000,000

1 crore 10 million 1,00,00,000 10,000,000

10 crores 100 million 10,00,00,000 100,000,000

1 sael (arab) 1 billion 1,00,00,00,000 1,000,000,000

10 sael (kharab)

10 billion 10,00,00,00,000 10,000,000,000

100sael(marab) 100 billion 1,00,00,00,00,000 100,000,000,000

Security Features

The main security features of current banknotes are:

Watermark- White side panel of notes has Mahatma Gandhi

watermark.

Security Thread- All notes have a silver security band with

inscriptions (visible when held against light) of Bharat in Hindi and "RBI"

in English.

Latent Image- On notes of denominations of 20 and upwards, a

vertical band on the right side of the Mahatma Gandhi’s portrait contains

a latent image showing the respective denominational value numerally

(visible only when the note is held horizontally at eye level).

Microlettering- Numeral denominational value is visible under

magnifying glass between security thread and latent image.

Intaglio- On notes with denominations of 10 and upwards the

portrait of Mahatma Gandhi, the Reserve Bank seal, guarantee and

promise clause, Ashoka Pillar Emblem on the left and the RBI

Governor's signature are printed in intaglio (raised print).

62

Identification Mark- On the left of the watermark window,

different shapes are printed for various denominations ( 20: vertical

rectangle, 50: square, 100: triangle, 500: circle, 1,000: diamond).

This also helps the visually-impaired to identify the denomination.

Fluorescence- Number panels glow under ultraviolet light.

Optically-Variable Ink- Notes of 500 and 1,000 denominations

have their numerals printed in optically-variable ink. The number

appears green when the note is held flat, but changes to blue when

viewed at an angle.

See-Through Register- Floral designs printed on the front and

the back of the note coincide and perfectly overlap each other when

viewed against light.

Eurion Constellation- A pattern of symbols found on the

banknote helps software detect the presence of a banknote in a digital

image, preventing its reproduction with devices such as color

photocopiers.

Management of Currency:

Currency Management essentially relates to planning, designing,

issue and withdrawal of currency, ensuring its integrity, availability and

the maintenance of quality. The Department of Currency Management

(DCM) of the Reserve Bank located at Central Office, Mumbai, takes

policy decisions on the designs of bank notes, forecasts the demand for

notes and coins, ensures the smooth distribution of bank notes and

coins throughout the country, arranges to withdraw unfit notes,

administers the RBI Note Refund Rules and reviews/rationalizes the

work system/procedures at the Issue Office on ongoing basis. The

operational work is conducted by the Issue Departments of the Bank

with responsibility for managing the inventory, distribution and servicing

of currency in its respective issue circles, all the aspects of storage in

63

vault and overall security including liason with State Govt. and Police/

intelligence authorities etc. The Reserve Bank is responsible for issuing

coins and notes to the public on demand and for maintaining the quality

of the notes issued. Reserve Bank's responsibility thus is not only to put

currency into such other denominations of notes and/or coins as may be

required by the public. With a view to mitigating the hardship to the

public in genuine cases, the Bank arranges to make refund of the value

of mutilated notes as per the Note Refund Rules.

Currency Chests:

In order that the Bank's obligations may be satisfactorily

discharged without recourse to extensive and frequent physical

remittance of notes and coins between various centres, the Bank

maintains currency chests of its own at treasuries and branches of the

banks at all important centres. In the State of UP, there are 466

currency chests of different banks scattered all over the State. These

currency chests are intended to facilitate the distribution, exchange and

remittance of notes, including one rupee notes and rupee coins and

small coins.

RBI has launched a special drive under its clean note policy to

withdraw all soiled and mutilated notes from the members of public and

put in its place fresh and clean notes. In order to facilitate the members

of public, to exchange such notes, RBI has delegated powers to all the

banks’ currency chest branches in UP to exchange soiled, torn,

damaged/ mutilated/ defective notes. Soiled and cut notes should also

be accepted over bank counters in payment of Government dues and

for credit of accounts of the public maintained with banks. Reserve

Bank of India, Regional offices at Lucknow and Kanpur have opened

special counters, for exchange of soiled notes of all denominations and

solely for exchange of mutilated notes. Notes which have turned

64

extremely brittle or badly burnt, charred or inseparably stuck up together

and therefore can not withstand normal handling, are also accepted at

RBI’s.

Facilities/ Services at the Currency Chest Branches:

Salient features of genuine notes are required to be displayed at

bank branches for information of public. The bank branches should

have adequate number of dual display note counting machines provided

at the payment counters for the benefit of customers. Stapling of

currency note packets has been done away with and information on non

stapling of note packets should be displayed on the notice boards.

Citizens' Charter for exchange of notes and coins should be displayed

at notice board for information and benefit of common persons. All the

notice boards are trilingual. Exchange value of soiled notes will be paid

in coins and/or notes of denomination Rs.10/- and above, across the

counter as per extant rules. While the intention of the RBI is to mop up

all such soiled/mutilated Re.1/-, Rs.2/- and Rs.5/- notes and above in

exchange, all Re.1/-, Rs.2/- and Rs.5/- notes would continue to be legal

tender. Any note with slogans and message of a political nature written

across it ceases to be a legal tender and a claim on such a note will be

rejected. Similarly, notes which are disfigured may also be rejected. The

notes which are found to be deliberately cut or tampered with, if

presented for payment of exchange value, will be rejected.

The banks have been advised to direct all their branches to

accept coins of all denominations tendered at their counters either for

exchange or for deposit in accounts. However, as accepting coins

packed in polythene sachets of 100 each would be more convenient,

the banks have been advised to keep such sachets at the counters and

make them available to the customers. A notice to this effect should be

displayed suitably inside as also outside the branch premises for

information of the public. Normally, a coin vending machine is also

65

installed in its premises which can be used by the public to get coins in

exchange for notes. All the currency chest branches are required to

display at their branch premises, at a prominent place, a board

indicating the availability of note exchange facility with the legend,

"Mutilated notes are accepted and exchanged here". Banks should

ensure that all their designated branches provide facilities for exchange

of notes and coins and place details of designated branches in public

domain. RBI has devised a scheme of penalties for those banks which

refuse to exchange soiled/mutilated notes tendered by any member of

public. All members of public are advised to avail of the aforesaid

facilities to the fullest extent. Any suggestion / complaint / grievance as

regards exchange of soiled notes and non-availability of coins/notes

(denomination of Rs.10/- and above) may be addressed to RBI. RBI has

issued detailed guidelines prescribing the procedure to be followed on

detection of counterfeit currency notes and reporting there of. However,

the general view gathered by the sub-Group suggests that the banks‟

branches are generally hesitant in reporting of counterfeit notes to RBI /

FIU-IND and in lodging FIRs with the police authorities, primarily

because of fear of lower level police harassment at branch level. The

sub-Group is fully conscious of the hazards associated with the

counterfeit notes in circulation. The sub-Group is of the opinion that the

employees of the banks need to be assured that mere reporting of

counterfeit currency notes would not land them in trouble, and they are

encouraged to promptly report such instances without any sense of

fear. Further, adequate training should be imparted to the field staff of

banks in detection of counterfeit currency notes.

Reporting of fake notes should be limited to making the

information available to RBI / FIU-IND. Based on its assessment, FIU-

IND may decide about the cases to be converted into an FIR and

investigated further. The Government and RBI may consider waiver of

66

filing of FIR by banks in the cases of detection of counterfeit currency

notes, to improve reporting in such cases. RBI may frame a policy for

mandatorily providing Note Sorting machines (NSMs) to all bank

branches with average cash receipt of Rs.25 lacs and above so that

detection of forged notes may be made at the point of entry at each

counter of the bank branch. RBI should incentivise for extensive use of

technology (NSMs) for preventive measures to the Banks and also

provides a subsidy of 50% for acquiring Note Sorting Machines (NSMs)

by the banks. RBI may conduct training programme / seminars for the

field staff of banks in the detection of fake notes.

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Chapter: 3

Profile of Uttar PradeshUttar Pradesh called united provinces during British period which

is the biggest Northern State of India was divided into two states Uttar

Pradesh and Uttarakhand or Uttaranchal in 2001, in which plains and

Hill areas separated from each other. The U.P. as we have to day

(2013) consists of 74 districts after removal of Amethi as district and 75

if Amethi will be restored as a District`. This number keeps on changing

according political whims and fancies. The original area which remained

after bifurcations consisted of 70 districts. The State has its boarders

with National States and a foreign country. In north and North-East, it

borders with Himanchal Pradesh and Uttaranchal while it shares

International borders with Nepal, Haryana, Delhi and Rajasthan

boarders it on North and North-west. In south East Bihar meets its

boundaries, while Madhya Pradesh lies in South west. It has its

boarders on south with Allahabad and Chandigarh. Northern most

Saharanpur borders with 3 states (H.P., Haryana, Uttaranchal) and

Sonbhadra on the Southern tip of the State has distinctions of sharing

borders with 4 Indian states (M.P., Chandigarh, Jharkhand and Bihar).

Pilibhit, Lakhimpur, Baharaich, Shravasti and Balrampur have the

distinctions of having international Borders with Nepal. The entire region

has been traditionally divided into 7 sub regions:- Upper Doab (7

districts), Middle Doab (6 districts), Lower Doan (10 district), Rohilkhand

(8 districts), Awadh (15 district), Purvanchal (17 districts), Bundelkhand

(6 district), Baghelkhand (1 district).

At the time of Independence, U.P. was united province, which got

changed to Uttar Pradesh. It had 83 districts on 09.11.2000, when the

long standing demand of Himalayan Region Hill areas to become a

separate State was acceded to and 13 districts- Pauni Garhwal, Tehri

Garhwal, Uttarkashi, Chamoli, Dehradun, Nainital, Thmara, Pittoragarh,

68

Udhamsingh Nagar, Bageshwar, Champawat, Rudrapur and Haridwar

got separated to form Uttaranchal/Uttarakhand. At the time of

Independence it was fifth largest state in the country by area and

biggest as per population. After creation of various other states like

Jharkhand and Chhatisgarh, now U.P. is 4th largest State area wise,

while populations wise it is still the biggest. Present Uttar Pradesh has

two distinct hypsographical regions-

Region-1

The Gangetic Plain: It lies in central parts dotted with many

rivers. It is highly fertile with alluvial soil. Topography is flat, populated

by numerous ponds/lacks/rivers. Slope is some thing like 2 meters/KM.

Region-2

Vindhya Hills and Plateau: It lies in south. It has hard rock strata

and topography is hills/plain valleys and plateau. Limited water

availability. Total area of State divided in 75 districts (70+5) is 240928

square Kilosmeter. Himalayas lie in north while deccan plateau is in

south. Amongst main rivers which flow eastward are

Ganga/Yamuna/Ghaghra/ Sharda/Saryu/Gomti etc. There are good

lengths of canal system e.g. Ganga Canal and Sharda Canal etc. which

exists.

Natural Wealth in the State:

It is commonly said that Uttar Pradesh as it was united provinces

at the time of independence was endowed with natural wealth i.e.

minerals/forests/vegetation and animals. Certain sections of thinkers

also tend to consider human population as a national resource. There

are variety of rocks of different ages found in Himalayan and Vindhyan

range in north and south respectively, with very rich geology and

Minrology. There are numerous small and big rivers/lakes and ponds,

which naturally dot the topography of the state of U.P. Although

69

Uttaranchal (13 districts in Himalayan Region) has been separated, but

even present U.P. has abundance of Natural wealth in the form of

river/minerals/forests/vegegation and flora and fauna, lying in vast

areas. Land mass and soils of different kinds are available here.

Minerals:

Sand stones, pebbles, reh, salt punter, Maurang common sand,

and other minor mineral verities are available in entire state, but district

of Mirzapur (Garuma/Karchhana tehsil), Banda (Karvi and Rajhgewar

etc.), Lakhimpur, Districts top the list for minerals like limestone,

dolomite, marble, non-plastic fireclay, barites and Edalusite, Glass sand

bauxite etc. Uranium is found is Lalitpur district.

Flora and Vegetation:

The flora of a region includes all varieties of plants while

vegetation is the general tract produced by the growth of some or all the

plants. The plains of Uttar Pradesh have been quite rich in natural

vegetation since ages, but same has declined now due to human

intervention for meeting wide range of human needs. Natural forests are

sine qua none of flora of any geography. These were aplenty when U.P.

had not been divided as natural forests were found in regions, which

has become Uttaranchal now. However, even now, in plain areas large

patches of these forests are available but these are diminishing.

a) Tropical Moist Deciduous forests are formed in Terai region,

with rainfall of 100 to 150 am annual and with average atmospheric

temperature between 260C - 270C with appreciable humidity. The trees

are deciduous of normal size- some of the important verities of trees are

Bamboo, Climbers, and green shrubs. Amongst trees, Sal, Ber, Gular,

Jhingal, Palash, Mahuwa, Semal, Dhah, Amla, Mango and Jamun etc,

are found.

70

b) Tropical Dry Deciduous Forests These are found in plaines of

central eastern/western parts. Grass grows in the area. Tree varieties

are Sal, Palash, Amaltas, Bel, Anjeer, Neem, Peepal, Sheesham,

Mango, Jamun, Bablool, Imli etc. These grow along river bands, and

other moist regions.

c) Tropical Thorny Forests are found in southern parts of state,

with low annual rain fall e.g. 50-70 cms and average temperature of

250C to 270C with low humidity. Trees are small in size -variety of trees

are - Phulai, Khair, Kokke, Dhama, Danjha, Neem, thorney trees like

Babool, Thorney Legumes, Euphorbia's etc. The trees give different

types of rasins and gums also.

Fauna:

It means, Animal Kingdom. It depends on Flora and Vegetation.

These include Fishes of different varieties, Amphibia i.e. Frog/tode etc.,

Reptiles e.g. different snakes etc. Birds like vulture, peacocks etc.,

mammals like Cow and buffalows, and wild animals as well as

miscellaneous animals e.g. Tiger, Panther, Snow Leopard, Sambhar,

Cheetah, Kaztura Chinkara, Black Deer, Nilgai, Back-Brown Beer,

mountain Goat, Hyena, Hill Dod, Elephant etc. In perspective, it is clear

that geography of state of U.P. is rich - wide spread area, minerals,

good climate for agriculture and forestry, fishery and animals, water

sources, flora and fauna etc naturally occurring resources are present.

There is large population. It is the entreprenurship which is to be

harnessed properly which is not possible till there is proper

infrastructure and smooth and steady financing. Government / polity/

banks have joint responsibility to achieve this because finance works

for development only in acceptable conditions of sufficient Infrastructure

of all kinds.It is an important point to be kept in view.

71

Historical Perspective:

Uttar Pradesh was known as Madhya desh in ancient times. It

was located between Delhi and Patna. Its history is connected to

antiquity as is evidenced form the finds of Excavations done in U.P.'s

districts like Mirzapur, Sonbhadra, Bundelkhand, Pratapgarh and

Meerut. Aparently, during vedic period aryans settled first in area called

Sapta Sindhu (seven rivers) i.e. undivided Punjab. Then they moved to

East. This expansion resulted in creation of new states/ new people is

this area between river saraswati (which disappeared is Rajasthan

desert) and Ganga. There were numerous kinddoms which ruled this

area - Kuru, Panchal, Kashi, Koshal, Vats, Malla, Kashi, Vajji, Chedi,

which ruled Meerut, Bareilly, Budaun, Farukhabad; Mathura; Allahabad

and around; Ausadh; Deoria; Varanasi; and Muzaffarpur, respectively.

Ironically all kingdoms believed in perpetual wars were more prominent

rather than those who believed in peace. Kingdom of Magadh (present

Bihar/Patna) gradually became mighty and subjugated these kingdoms

in Madhya Desh (U.P. of present). It is said that might of Magadh

deflected path of Alexander in 326 B.C. when he invaded India. Nand

was ruler of Magadh then. After retreat of Alexander the region and

Magadh faced revolutions, which brought Chandragupt Maurya - a

Khashtriya as ruler. Whole of (Uttar Pradesh) Madhya desh enjoyed

peace and prosperity then his grandson "Ashok" the legendry ruler. of

Magadh also provided stablity. The importance of 'Ashok' for Indian

polity is well known. Ashokn Pillar in Sarnath (which is in U.P.) is state

Emblem for the nation. Such pillars have been found in Sarnath,

Allahabad, Meerut, Kaushambi, Sonkisa Kalri, Siddhartha Nagar and

Mirzapur - all of these being in U.P. indicate towards importance of

U.P. i.e. Madhya Desh then. Chinese Travellers F.A. Hien and Huan-

Chawng have been witness to many Rock Adicts. The Dharamrajika

Stupa also was built by Ashok in Sarnath. After Ashok's death in 232

72

B.C. decline of Magadh Empire started. His Grandson Dashrath and

Samprathi divided the Empire amongst themselves. Area south of

Narmada became independent and Punjab went to others in 210 B.C.

Last ruler of this dynasty Brihdrath, was killed by his commander in

chief PUSHYAMITRA SHUNG in 185 B.C. For Magadh the dynasty

changed, but empire got a foothold once again. As for as U.P. is

concerned,Patanjali's commentary refers to the seize of Saket

(Ayodhya) by Greeks, in 182 B.C. Invader, were menander and his

brother, who had already taken Kathiawad in extreme South West,

Sagal (Sialkot in unified Punjab) and Mathura in Central areas i.e.

Madhya Desh (U.P. of Present). They were advancing in Ganga valley,

when Pushyamitra and his grandson Vasumitra defeated Greeks. They

retreated to SAGAL (Sialkot), but Mathura remained a prominent city of

Menander empire. He was also known as MILIND and ruled up to 145

B.C. Actually small Indo-Greek and Greek States existed in Punjab up

to 1st century A.D. During same period in Magadh SHUNG dynasty was

changed to KANVA dynasty which was established by VASDEV, when

he killed last ruler of SHUNG dynasty - who was a bad character.

Vasdev was a minister of slain king. In 75 BC ,SIMUK or satvahana or

Andhra Dynasty came. It was time, when central Asian rulers too got

attracted to Indian sub continent. By 60 B.C.they had established

Kashatraps in Mathura.

First Saka king was Maues who ruled till 38 B.C. Parthians

attacked North India and Sakas were defeated by 1st Century A.D.

Spectacular success was of Kushanas- one of the five Yueh-Chih

castes of central Asia, who established their Empire right from Central-

Asia to river indus. Gradudally they occupied entire north India

(including Madhya Desh i.e. U.P. now North India). Kujul Kadphises I

was founder of Kushan Dyanasty. Followed by his son Kadphises II,

who came up to Ganga Valley. He was succeeded by greatest of all

73

rulers of Kushan viz. Kanishk. Chinese and Tibetan Historians have

accounted for stories of war between Kanishk and King of Soked (Saket

or Ayodhya). Excavations in extensive parts of U.P. have yielded coins,

and inscriptions on these indicate that this territory was once part of

Kushan Empire, and Mathura was at that time well known centre of Art.

Ironically details of reign of Kanishk and line of Kushan rulers is some

what uncertain.Some scholars’ view is that Kanishk ruled from 78 A.D. -

140 A.D., while some others’ view is that he ruled between 120 A.D.-

140A.D.. He had 2 capitals - one in Purushpur (Peshawar) and 2nd in

Mathura. Gandhar (Afganishtan), Kashmir and Indo-Gangetic

Basins/plains/valley were part of his Kingdom. Kanishk was followed by

son Huvishk and Grandson Vasudev. Vasudev's reign saw declinie of

Kushan Kingdom which disintegrated after his death and split into

several small border kingdoms. In Madhya Desh too, by 3rd century

A.D. Kushan sovereignity had collapsed and number of smaller states

had sprung up. Some names are preserved in the inscription on pillar of

Samudragupta (4th century A.D.) at Allahabad. Apparently most

powerful dynasty to rule north India around this time was NAGAS,

including its other sect called Bharshiwas. Typically they performed ten

Ashwamedh Yajnas (to proclaim their sovereignty over surrounding

kings) and were annointed with 'Gangajal' at the time of coronations.

History of the period middle of 2nd century A.D. to 4th century A.D.

(where Gupta Dynasty took over) is signified by rise of smaller states

after Kushan in which Panchalas of Ahichhatra (extending up to

Mathura) and Kingdom of Kunindas (comprising of Kumaau and

Garhwal and extending upto Kulu and Simla Hills) were most powerful.

Remains found in Kashipur and other places in Terai region indicate

toward this fact. Kaushambi (Kosam near Allahabad) had apparently

become independent. In magadh a local dynasty held the power till

GUPTA dynasty emerged in 4th century A.D., which also ruled Madhya

Desh (U.P.). During two countries of their rule when political unity of

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entire region was once again restored (which had dissipated after

Kushan) U.P. enjoyed general peace and prosperty along with other

regions. In 6 A.D. decline of Gupta dynasty took place and power was

again decentralized. Maukharis of Kannauj ruled over large parts of

Madhya Desh for some time but had to face ire of kings of Malwa who

belonged to Gupta clan. Last ruler of Mukharis - Grihvarman was killed

in 606 A.D. by Malwa’s king Devgupta. The minister of Grihvarman

handed over reins to slain king’s brother in Law 'Harshvardhan - who

was king of Janeshwar. It was joining of Dynasties of Kannauj and

Janeshwar. Result was that for next many centuries Kannauj became

major centre in North India and enjoyed same prestige which Patliputra

had enjoyed is Magadh. Its grandeur and prosperity made it known as

'Mahodaya Shri' and its acquisitions remained Goal of many Hindu

Kings after Harsh’s reign came to an end in 647 A.D. Yuan - Chawang -

the Chinese traveller has given description of Kannauj very well. After

Harsha - North India was again in turmoil. Clear facts are not available.

However, yashoverma ruled Kannauj during first quarter of 8th century

and had sway over entire India & Tibet where his armies went in

alliance with Lalitaditya Muktapid of Kashmir - who killed Yashoverman

in 740 A.D. Gurjar pratihar became famous ruler of Kannauj thereafter

and ruled North India during 9th and 10th century and decline came

with Muslim invader coming to North - India.

The beginnign of 11th century saw invasion of Mahmud of

Ghaznavi (1018-19 A.D.). He defeated Gurjar pratihar. Ghaznavi could

be stopped only due to the glorious war put by 2 chandel rulers of Jejak

– Bhukti (present Bundelkhad Viz. : Dhang & Vidyadhar). The fort of

Kalinjar & its invincibility played a role in this resistance. Ghaznavi did

not have probably, territorial ambitions and went back only to return

successively to India, to plunder its wealth. It is said, he attacked India

17 times. Decline of Pratihar in Madhya Desh saw rise of Anarchy, till

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Gharwars took the reigns in their hands. Govind Chandra (1104 – 1154

A.D.) and Jaychandra (1170 – 1193 A.D.) were two prominent rulers of

this dynasty. Jaichandra – showed his lack of vision, when due to

personal vendetta he helped Mahammad Ghori at Battle of Taran (1192

A.D.) in which Chauhan King Prithraj III, was defeated. Actually,

Jaichandra himself was defeated and slain at Chhandawar (in Etwah

District now) the very next year. The Invaders continued with their

success and Meerut, Koli (Aligarh), Asani, Kannauj and Varanasi fell to

invaders. Resitence to Invaders came from Chandels of Jeijal – Bhukti.

Parmardidew (Veer Parmal of folklore sung in Bundelkhand region),

was first defeated by Qutub – din –Aibaq in 1203 A.D., but latter on they

won back their substantial Territory & Chandels continued to rule Jeijab

– Bhukti (with reduced territory of course) for about 2 centuries more.

Invaders, of course, could never over come the residence from distant

North Hills & it remained safe.

Uttar Pradesh (Madhya Desh), now became territory of Slave

dynasty, which was founded by Qutubdin Aibak in 2016 A.D. in Delhi,

followed by Khiljis and Tuglaq (s). But somehow there was general

tendency in entire Madhya Desh region to oppose and resist the

Sultan’s of Delhi. Such resistance resulted even though Sambha, Kara,

& Budaun were given to chosen Feudal Lords. Most of resistance came

from Katehar, Kampil, Bhojpur, and Patiali. Actually history of 13th and

14th century of Madhya Desh is full of stories of Brave resistance and

barbaric repression, as per accounts of contemporary historians. Tuglaq

(s) of Delhi started to disintegrate in 1394 A.D. in Eastern Parts of Uttar

Pradesh (Madhya Desh) independent Sharqui kingdom was established

by Malik Sarvar Khwaza Jahan in Jaunpur, who was rebel Governor in

Tuglaq Empire. Sharqui rulers resisted Delhi Sultanats for 84 years and

never accepted Delhi’s Suzerainty over Kannauj and border districts.

Chugtai Turk of Samarkand or Taimurlang (or Tamerlane also called

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Taimur – the brutal by some) invaded India in 1398 A.D. and practically

ended rule of Tuglaq. He did massacres in Meerut, Harwar & Katehar.

Mohammad Tuglaq – last ruler of Tuglaq dynasty died in 1412 A.D., and

this dynasty came to an end.

Syeds & Lodies continued to rule Delhi – the remaining territory

left after independence of many areas, between 1414 – 1526. However

during this time, the name Madhya Desh, practically changed to DOAB

(two river) in ligua franca of Invaders. Mostof Doab, now (U.P.)

remained under several Hindu & Muslim chieftains. Notably Sikandar

Lodi made Agra his sub-capital (capital being Delhi). It was time when

Mughals started eyeing India. Ibrahim Lodi – last ruler of Lodi dynasty at

Delhi, was defeated by Babar in 1526 at Panipat who established

Mughal Empire and occupied Agra. There was resistance to his rule in

Doab, at Sambhal, Jaunpur, Ghazipur, Kalpi, Etawah and Kannauj,

while Afgans also continued their resistance, Babar’s son Humayun was

defeated by Afgan chief Sher Shah. In this conflict between Sher Shah

and Humayun main battlefields were located at Chunar, Chausa and

Bilgram. In 1545 A.D., Sher Shah decided to overrun famous Kalinjar

Fort of Chandels (in Bundelkhand) and he was killed in this war.

Chandels once again came out invincible. Thanks to Kalinjar Fort.

Humayun got the throne once again and after his death, 2nd battle of

Panipat was fought. In 1556, Akbar became Mughal emperor. Akbars’

reign was era of peace, prosperity, libaralism and integration of Hindu

and Muslim cultures in Doab (UP) along with Good and strong

Administration. His successors Jahangir and shahjehan continued this

policy and role of Doab (UP) became quite significant in taking,

‘Hindustan’ to the pinnacle of progress, prosperity and Glory, according

to certain Historious UP gave 2 very famous and important ministers of

Akbar’s inner cabinet called ‘Navratnas’ – viz. Birbal and Todarmal.

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Mughal continued to have ‘Agra’ as capital of Mughal Empire till

Shahjahan decided to shift it once again to Delhi. Till then Mughal

empire was mighty and acceptable to all. Even ever resistant

Bundelkhand was under control of Mughal emperors, due to their

friendly, tolerant policies as well as ‘iron fist in velvet gloves’ mode of

implementation. However, every thing that is good comes to an end.

Aurang Jeb dethroned Shahjahan and became emperor. He reversed

the liberal policies of his predecessor and introduced religious rigidity

including forced conversions. Though, personally he was strong, devout

and pious person. The decline of Mughal Empire had begun.

Resistance sprang up to rule of Aurangjeb. Bundelkhand had sounded

the siren of revolt under legendry ‘Veer Chhatrasal’. The war of Buhdels

was fought intermittently for 50 years. When Chhatrasal found it difficult

to go it alone, he accepted help of Peshwa Bajirao, which helped

Marathas to get a foothold in U.P. Within few decades of Aurangjeb’s

death, the might of Mughal Empire came to an end. Empire did continue

but without any bite. Within U.P., the region of Avadh under local

Governor, Sadat Ali khan declared independence from Mughal Empire

in 1732 A.D. Almost simultaneously, Rohillas dedared independence in

Rohilkhand region. Successors of Sadat Ali Khan ruled till 1850 A.D. as

Nawab of Avadh. Rohillas ruled till 1774 A.D., when nawab of Avadh

defeated them and annexed Rohilkhand – but it was done with the help

of ‘East India Company’. Before this Marathas also tried to establish

themselves but post 3rd battle of Panipat in 1761 A.D., in which

Marathas were vanquished, they did not try it further except having

some sporadic pressure in certain local principalities. However, now

Madhya Desh or Doab or U.P. was in crosshair of Brithshers – through

its politico commercial venture i.e. East India Company.

East India Company and Avadh Rulers came in contact in the

reign of Nawab Shuja –ud Daul (1754 -1775). Nawab of Avadh & Mir

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Kasim (fugitive Nawab of Bengal) joined hands against company. But in

1784, the British defeated Mir Kasim and forced him to cede Kora and

Allahabad. Britishers followed policy of carrot and stick with rulers of

Avadh and large areas of Avadh were usurped by them from Nawab in

1775, 1779, 1801. They took some territories from Scindia also in 1803

A.D. All these territories acquired by British East India Company were

initially attached with Bengal province and called ‘conquered and ceded

provinces’. In 1816, territories of present Kumaoun, Garhwal and

Dehradun were won by Brithshers from Gorakha invaders under treaty

of Sanguli. By now the Britishers had large territory under their control

and they formed an administrative unit (inclusive of conquered and

ceded provinces) which were initially attached to Bengal. This unit was

called ‘north-western provinces in 1836 A.D. Lord Dalhausi continued

with policy of annexation by giving ‘Doctrine of Lapse’ and finally

annexed Avadh in 1856 A.D. Post of chief commissioner of Avadh was

created. The last Nawab ‘Wajid Ali Shah was externed and put on a

pension. Almost simultaneously Jhansi was also annexed by Britishers.

The policy of ‘annexations’ persued by Brithshers was indicator of

their arrogance, might and betrayal. Usurpation of Avadh and Jhansi

had an all India impact and in 1857 – revolution against Britishers took

place – which is called by the English people as “Mutiny’ while we call it’

first war of independence’. People of Uttar Pradesh played

overwhelming role in it. The revolt was seen as struggle for freedom

from foreign rule by the people at large and feudal lords and kings in

particular. Many heroes and herions came upon historical page i.e

Mangal Pandey, Rani Lakshmibai of Jhansi, Nana Saheb, Raja Beni

Madhav, Begum Hazrat Mahal, Bakht Khan, Maulvi Ahmadulla Shah,

Azimulla Khan etc. are only few names. The fire of patriotism had been

ignited. Effert for a unified India under last Mughal descendent Bahadur

Shah Jafar who had seated in Delhi as a symbol of Indian identity of

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revolt, had been made. But the revolt did not succeed. In 1858 A.D. the

Delhi division was separated from administrative unit, i.e. North Western

Province and state capital of N.W.P. was shifted from Agra to

Allahabad. However, East India Company too did not survive for long to

enjoy the fruits of their repression. In November the same year (1858),

political power was taken over by Queen Victoria through a Royal

proclamation. Now the U.P. was part of British Empire. In 1877 A.D., the

posts of Governor – N.W.P. and chief Commissioner of Avadh were

merged. This large territory was renamed as North East province of

Agra and Avadh. This was again changed in 1902 to United Provinces

of Agra and Avadh under a Lt. Governor.It was made in to a Governors

province in 1921 and shortly thereafter capital was shifted from

Allahabad to Lucknow. In 1937 its name was shortened to ‘United

Provinces’ (U.P.), and continued to be known by same name till 12 th

January, 1950, (almost two and half years after independence) when it

got its present name Uttar Pradesh. On 26th January, 1950, India

became a republic and Uttar Pradesh became its full-fledged

province/state of Republic of India. On 9th November, 2000, Uttar

Pradesh was divided into Uttar Pradesh and Uttaranchal/Uttarakhand in

which original U.P. lost 13 of its Himalayan region/Hill areas districts

and truncated Uttar Pradesh remained with 70 districts. Different

governments keep on experimenting with delineation of boundaries of

districts, hence after some time it became state with 71 districts and

thereafter with 75 districts & further to 74 districts once again in2012

after status of Amethi having been de-recognized by High court. Again

Legislature has made Amethi as fullfledged District. Presently (June,

2013) U.P. is with 75 districts.

The Area comprising Uttar Pradesh (original which included Hill

areas of Himalayan ranges) has been full of Holi places. Many Saints

& Rishi/Munies are supposed to have taken birth in these regions.

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Upnishads and Purans detailing Vedas etc. have mostly originated in

this land. Eminent sages like Bhardwaj, Yajnavalkya, Vashistha,

Valmiki, Vishwamitra, Markandey, Suta etc. had their Ashramas in the

state of Uttar Pradesh. Apparently, most of the important Avatars

(incarnations) of God Vishnu have been in Uttar Pradesh. Ram and

Krishna were born here. Lord Shiva established his dearest place in

Varanasi and brought river Ganga from heavens in hights of Gangotri.

Ramayan and Mahabharat was penned in the State - according to

belivers in Brahmavart (Bithoor in Kanpur) and Mishrikh in district

Sitapur, by Valmiki and Suta (as heard from sage Vyasji) Smrities and

Puranas were written in this land. State has been home to Lord Budha,

Mahaveer, etc. Shanharacharya established one of 'Dhams' in

Badrinath. Allahabad has mythological Sangam of 3 holy rivers -

Ganga, Jamuna and Saraswati. Without going into further details; it can

be mentioned in this perspective that U.P. has rich mythological

connections, which form part of mythologically oriented history.

Culture of State:

Uttar Pradesh is most ancient repository of Indian culture of

mixed religious Faiths - Hindu, Muslim, Budhists, Jains, Sikhs and

Christianity. Jews and Parasies are generally absent or not visible.

Looking at antiquity there may not have been finds like Harappa and

Mohan Jodaro, but finds in Bandra (Bundelkhand), Mirjapur and Meerut

indicate Links towards early Stone Age and Harappan era. Discoveries

have been made in Atranji Khera, Kaushambi, Rajghat and Sonakh,

Kanpur, Unnao, Mirjapur and Mathura. It is probable that links between

Indus valley civilization and vedic civilization lie buried under ruins of

ancient sites, found in the state. In early VEDIC period U.P. in any

manner does not get mentioned. Even rivers Ganga and Jamuna find

places at distant fringes but during latter vedic period,, Madhya Desh

finds mention and evidences show that it was considered as a holy

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place of India and foremost centre of Vedic culture and knowledge.

State of Kuru - Panchal, Kashi, Kosal have been mentioned in Vedic

texts as persuing Vedic culture prominently. People of these states

enjoyed great respect form out siders for their knowledge of Sanskrit

language (which is language of vedas) and oratory in it. Schools and

institutions had laudable performance and they presented that pattern of

life style, which was model for other kingdoms. Brahmins of these

places were held in very high esteem, for their piety and scholarship.

For Governance, Panchal Parishads were mentioned in Upnishads -

which is probably fore runner of Panchayati Raj system of present day.

Panchal king Pravaham Jaivalli and Kashi's king Ajatshatru was

philosopher - kings and thinkers in their own right and Brahmin scholars

like shilik, Dalabhya, Shvetketu, Uddalak Aruni, Dripti, Valhabi, Gargya

etc. held these kings in very high esteem. Literature in various

disciplines, leading to creation of Upnishads, was written in Ashramas

of well known sages. Ram - ideal king - who could give 'Ram Raj' and

supposed to be incarnations of God played his life role - preaching the

ideals of life.- in Kosal (Ayodhya), while Krishna the legendry 'Sutradhar'

of Mahabharat and Geeta, played his role in Mathura and Brindavan in

Uttar Pradesh, before moving to Dwarka (Gujrat) now.

Gautam (Lord) Budha, though born in Lumbini Nepal, was son of

Suddodhana - ruler of Kapilvastu (now in Siddhartha Nagar) and Maya -

Gautam's mother came from ruling family of Deodah (in Deoria District).

Buddha got enlightenment in Bihar (Bodh Gaya), but he gave his first

sermon and laid foundation of his order (which is called Buddhism now),

in Isipattan or Mrigdav in Sarnath (UP). Thus Sarnath has distinctions of

being called as birth place of Dhamma and Sangha - the 2 elements of

holi trinity of Budhism (the third being Buddha himself). In Shravasti &

Sankashyar Sankisa, (Etah District) he performed great miracles at

different times and in Kushinara of Kushi Nagar (in Deoria district) he

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attained his 'Mahaparinirvana' .Many rulers in state adopted Budhism

and latter on the people of state had same love & devotions for

Tathagat. That is why U.P. is also sometimes called as 'Karmakshetra'

(field of work/mission) of Budhism. Makkhaliputta Goshal, born at

sharvan near Shravasti founded Ajivika sect. He alongwith many more

thinkers, brought lot of revolutionary changes in the community.

Mahavir - 24th Tirthankar of 'Jains' thought to be born in Bihar, spend

time twice in U.P. in Shravasti and Padrauna (Deoria District) and had

large following. Several other Tirthankars viz. Parshwanath,

Sambharnath and Chandraprabha were born in different Cities of State.

Magnificent Jain Stupa has been found in excavation near Kankali Tila

of Mathura. Jain Shrives of early middle ages are still there in Deogarh

and Chanderi. Budhism and Jainism has ben preceeded in this region

by ever existing Puranic Brahminism, with deepest of roots. Ancient

images of Gods and Goddesses of Brahmanical order, found in this

State, provide evidence for it. A temple of Kushan period has been

found. Temples and deities and places of worship in Ayodhya, Mathura,

Brindavan, Chitrkut, Varanasi, Allahabad, Balia, Ghazipur, Jhansi and

Kanpur areas indicate towads existence of this faith in all periods.

Actually it is prime donor to cutlural and religious history of the state.

Many rulers of the region acquired fame because of Vedic

rituals/Ashwamedh Yagya etc. performed by them; as well as

patronage extended by them to the language (mainly Sanskrit) and to

the learned scholars. The scholars like Ashwaghosh, Kalidas, Ban,

Mayur, Diwakar, Vakpati, Bhavbhuti, Rajshekhar, Laxmidhar, Sriharsh,

Mandan Mishra, Krishna Mishra, were improtant members of courts of

these rulers. Yuan chawang recounts in his writings that people (of UP)

were full masters of language & spoke it correctly, and their

pronunciation was elegant and beautiful and their intonation clear and

distinct, worthy of emulation by other. The rules framed by these people

were readily accepted by others. Rajshekhar of Pratihar dynasty also

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pays homage in similar way to the people and poets of Panchal.

Varanasi/Kashi was prominent place of learning.

Ayodhya and Mathura were famous as birth place of God-

incarnations Ram and Krishna. Prayag (in Allahabad) was famous as

Tirthraj, while almost entire hill area and Himalayan region (present

Uttaranchal) was called Devbhumi itself with Hardwar, Rishikesh,

Kedarnath, Badrinath, Gangotri, Yamunotri, Hemkund Sahib etc. in its

hold, besides places and forests of tourist interest like

Dehradun/Musoorie etc. also adoring its Geography. People and

Pigrims for religious or tourist purposes have been visiting these places

since ages and continue to do it even as on date. The temples like

Vishwanath temple, Vindyanchal Devi, Kailash, Mansarover (now in

Chinese occupation) Hemkund Sahib (Highest Gurudwara established

by Guru Govind Singh Ji) etc. all in U.P. itself (details of such religious

places at all other places small and big are being omitted - but fact is

that entire state and all districts have one or other points of religious,

social, educational, environmental importance). Most of these places

are sacred for visitors from all over the country specially BadriKashram

(in Badri Nath), which is one of the 4 sacred Dhams established by

Shaharcharya in this region and as the saying goes every Hindu must

visit these 4 dhams during his life to attain salvations. In middle ages

(around 1000 A.D. onwards), Muslim culture became part of cultural

milleu of U.P. Important mosques and centres of Learning came up

under SHARQI Rulers. 'Jaunpur' beacame a prominent centre of Islamic

culture and it was described as SHIRAJ of India. SHARQI rulers were

patrons of Music, and there were many famous musicians in his court in

the middle ages. UP is also home to SUFIS, who took inspiration from

Hindu thought and philosophy. The Sikh religion also spread in the

State with benign visits of Nanak Sahib and other Gurus - especially

Guru Govind Singh Ji, who established important field Gurudwara in

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Hemkund Sahib in hill regions of U.P. (undivided). It needs real devotion

to visit this place, which is near valley of flowers in Uttaranhal now. Sikh

Gurus also contributed and encouraged to establish Gurudwaras at

each place/district in U.P. with the help of followers of Sikh religion and

Hindus. Of coruse, they had a role to play in maintenance of renovation

of many old temple and mosques too. The latest entrant in the social

religious cultural firmament is Christianity, which was brought by

Britishers in this state. Of course, churches of both denominations –

catholic and protestants are available in important towns of Uttar

Pradesh, but it did not took root amongst masses and Rural UP,

probably due to circumstances in which East India Company and British

empire landed in this state and secondly, the Anglo-Indian community,

which grew out of mutual interaction between ‘Local and Sahib’ had too

much of superiority complex, to further the Christians culture and

religions here in the State (according to some of the scholars of

sociology).

Tribal population is significant along with Nepal border, especially

in Terai region (e.g. Lakhimpur Kheri), but they are still not fully in

mainstream and number of such communities are under influence of left

philosophies like ‘Communism’, “Marxim”,”Naxalism” & “Maoism”.

Meeting needs of such Tribunal communities is need of hour, besides

their handling in very sensitive and dexterous manner. Caste and sub

castes (within castes) are prevalent in the state and do carry a bias –

favorably/unfavorably depending upon interests involved. Culturally, it is

very powerful motivator in social systems of the state. Religious

polarizations are also present and can affect many types of decisions.

Some historians and sociologists suggest that caste/sub-caste divide is

more powerful in this State than the Economic divide though poverty,

illiteracy and ‘belief in fate more than activity’, is rampant here in U.P.

The position unfortunately has became part of culture inspite of great

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men like Ramanand, Kabir and other saints like Ravidas, Daryashah,

Guru Gorakhnaths etc. having given a new directions to the life and

culture of this state. Actually Hindu and Sikh teachers and Gurus laid

emphasis on monotheism (one name of God) and focused attention on

the meaninglessness of caste system. Literature like Geeta, Ramayan

and Mahabharat having been writeen in which caste system is no where

eulogized, though Varnashram Dharm is mentioned, but that does not

divide or make any community/ group of people higher or lower or more

important than anybody else. Saint poets/Sufies belonging to almost all

religions decry caste system. Saint poets from amongst Hindus and

Muslims contributed to development of good and inspiring poetry and

literature in Sanskrit, Hindi and Urdu. Actually the contriutations of

Sultan Feroz Tuglaq is notable, where in Sanskrit works were translated

in Persian and authors like Zia-Uddin Barni have to be held in high

esteem. Era of cultural synthesis was started by Saints and Sufies in

times of Sultanat and continued with greater emphasis during period of

wise mughals. This synthesis and distinct Liberal outlook got reflected in

all spheres of human life and thought process i.e. religion, art and

literature, drama and Architecture etc. besides style of living, dress and

behaviour as well as mannerism. Poets like Tulsidas, Surdas,

Keshvdas, Bhushan, Malik Muhammad Jayasi, Raskhan, Motiram,

Rahim Khankhana, Ghananand, Bihari, dev, Gridhar Kaviraj, Mirza

Ghalib etc. are few names amongst famous poets, who have brought

laurels to Uttar Pradesh. Even after disintegration of Mughal Empire,

smaller states, Nawabs etc. continued to give patronage to poets,

musicians and literary people. Those, who did not; have vanished into

ananimity and have been washed out of the pages of History. Culture,

thus is very important for society, as much as environment is for

existence of life. Every thing what we humans do it, is within the culture

in which we have been brought up and this aspect must not be

forgotten. Culture determines, the way, we think talk, behave

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communicate and interact. Basically culture & character of persons,

organizations, community, group and nations are closely linked.It also

affects our economic activity.

Political Perspective:

Uttar Pradesh is full-fledged State of Indian union. After division in

2000 into Uttar Pradesh and Uttaranchal both the resultant States are

States in the union. In Uttar Pradesh Head of State is Governor.

Legislature is Bicameral i.e two houses e.g. Vidhan Sabha and Vidhan

Parishad both are there, and function as per constitution. Executive is

run in the name of Governor but real executive is Chief Minister, who is

chosen by the party having majority in the legislature (Vidhan Sabha). If

single party does not have the majority, colliation of parties will choose

the C.M., who must have a cabinet of minsters to assist in running of

the state. The Bureaucracy of the state is headed by the Chief

Secretary, who heads secretriate aided by principal secretaries and

other secretaries, who head individual departments of Government of

Uttar Pradesh. Police Machinery is headed by a D.G.P., but functions

under home department under Home secretary – Chief Secretary-

Home Minister – C.M. – (Legislature + Governor). Official language of

use in state, government & legislature is Hindi with Devnagri Script, but

work done in English/Urdu is also acceptable. Thus state has 3

language formula. Elections are conducted under E.C. of India and

almost all political parties of importance and National Statue are

functioning in the state. Governments have been formed by

Congress/BJP/Samajwadi Party/BSP or a coliation led by any of these

from time to time. U.P. has distinction of providing 3 prime ministers to

the country- Pt. Jawahar Lal Nehru, Sri Lal Bahadur Shastri and Smt.

Indira Gandhi. Being the largest state, it has largest number of

Parliamentary seats, and no party can ignore this fact, when it comes to

forming Government at centre, becomes an issue.

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Judiciary is headed by Chief Justice of High Court at Allahabad.

There is High Court at Lucknow also, which is under a senior judge and

functions under overall superintendence of Chief Justice at Allahabad.

At subordinate level, at district level it is District judge who is controller

under over all jurisdictions and supervision of Chief Justice or a Judge

designated by Chief Justice/Senior Judge. Other subordinate judges

belong to either U.P. Civil Judicial services or Uttar Pradesh Higher

Judicial services. The first one consists of munsif and Civil Judges

(including Small causes Judges) and latter one consists of Civil and

Session’s judges (now additional session’s judges).State is divided in

46 judicial districts, each under control of a District judge. (Very rarely

even a munsif/Assistant Collector/Assistant Session’s Judge can look

after a Judicial district)). Thus, one district judge may look after more

than one revenue district.

In hierarchy on civil side Munsif court is lowest and next is civil

judge’s court. On criminal side Munsif in also a judicial Magistrate and

next is sessional judge. Till 1967, Judicial Magistrates were under

control of Government, but after that under doctrine of separation of

powers, judicial magistrates also functions under high court. Of course

revenue side still remains under collectors and thus with government.

On revenue side S.D.M.’s court is lowest (of course even Tehsil level

hearings are these but there but these are not courts proper; and

appeal in revenue matters lie to additional collector/collector. Districts

have been grouped into divisions. There are 18 divisions (Annex-5)

covering entire State consisting of 70/ 71/74/75 districts (as applicable

at any point of time). Each division is headed by a Divisional

Commissioner, aided by additional Divisional Commissioners etc.. They

also exercise Appelate Jurisdiction in revenue matters. Highest court on

revenue side is Board of revenue in the state. High court is not an

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appellate authority from Board, of revenue generally, but under Article

226, and 227, high Court can also hear cases even in revenue matters.

Other miscellaneous courts are Nyaya Panchayat under U.P.

panchayti Raj Act. These Nyaya Panchayats hear certain cases up to

Rs. 500/- value. They can not give prison sentences under IPC or any

other law .Districts are further subdivided into sub-divisions or Tehsils

and Blocks, which are put under SDM and DO respectively. Under

Panchayati Raj System it is 3 tier structure in UP. The smallest or

atomic unit is Gram Panchayat (Panchayat or Jarisations or a Collection

of villages under Gram Pradhan. At Block level these are panchayat

samit under block pramukh and at district level it is Zila Parishad). Lok

Adalats and family courts have been set up which deal with specified

cases. There is also a Debt recovery tribunal & Uttar Pradesh Public

Services Tribunal to hear case of UP Government’s employees as well

as employees of state corporations and state government companies.

Economic Perspective:

The following is taken from a report on Economy of U.P.

searched online.It is for a period of approximately 50 years i.e. appox.

Since Independence – say up to 2000 A.D. No Updation of data has

been done and its value is in describing the trend which appears not to

have changed even now. The name Uttar Pradesh was given to this

region only when India became a republic i.e. 1950. A holistic overview

of social and human welfare and elements of Economy can be done

upto year 2000 A.D. to get an idea of Economic growth and

development in 50year’s period.

Population:

Uttar Pradesh is most populous and 4th largest in the country

having almost 9% of India’s geographical area (approximately 1294411)

(undivided) Uttar Pradesh had 83 districts, 901 development blocks and

89

112804 inhabited villages. Density of population stood at 473/per sq.

k.m. as against 274/per sq.km. in the country. Decadal (10 years

average) growth of populations is higher than average national growth

as evidenced by censor reports of 1971, 1981 and 1991. It remained

25% for U.P., while for all India it declined from 25 to 23.8%.

Urbanization:

Pace is slower in state. Level of urbanization is also lower than

most other states. When centre with populations more than 1.00 lakh

grew slower, while centres with population less than 5000, grew faster

i.e. smaller towns are proping up. This phenomenon is significant is

vertner past of State.

Income of State:

Past 1974, it grew faster than national average of 5.3% per anum

and achieved levels of 5% to 7%. Unfortunately, population too grew

faster and gain in income increase got neutralizd. Thus shortfall in

percapita income of state was likely to exist unchanged. Apparently by

post 1991 – the trend of lower growth of income has reappeared, while

population is growing at faster pace. Analysts of State’s income

structure, show that during these 50 years in question primary sector

i.e. Agriculture, contributed approximately 41% of income (less than

previous periods) and had to sustain 73% of total working force. Thus

pressure of working populations in Agriculture sector remained.

Contributions of secondary sector i.e. Industry went up slightly to

20% of total income but it employed only 9% of working force.

Incidentally this percentage is lowest amongst all major states barring

BIHAR (4.6 ^ - census 1991), MP (8.4 – Census 1991), Orrisa (7.5% -

Census 1991). Contributions of tertiary secotr i.e. service sector rose

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from 25% (in 70-71) to 37% in 1994, and share in employment rose

from 15% to 18% (1991 census). The simple inferences were that

economic growth of U.P. during last 50 years has been:-

More capital intensive than labour intensive

More urban based than rural based

Shift in income is there from agriculture to industry and services

sector.

Employment pattern has remained unchanged. Hence per capita

income in agriculture sector appears to have not increased.

Regional imbalance is visible in the state, based on economic

indicators – e.g.

Agricultural productivity

Infrastructural facilities e.g. Roads/electricity

Industrial growth

Amongst the distinctive regions – western UP is agriculturally

prosperous & relatively more industrialised and more developed

urbanization. At other end is Bundelkhand with low agricultural growth,

lessor industrialization and less infrastructures. Though poverty, as per

applicable parameters of consumptions and expenditure, has fallen

from 57% (1973-74) to 42% (1987-88), this decrease is more in rural

than in urban. However, number of people below poverty line, has

increased, which shows – non inclusive growth with disparity. Intensity

of poverty has also grown i.e. poor has become poorer. The root cause

of poverty is identified by certain economist is problem of slow

urbanization. Some opinions point towards lack of discipline, uneven

and uncontroled law and order situations in state, increasing corruption

and lack of vision and attitude, are also at the root of lack lusture

economic growth and poverty removal in the state.

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Economic growth, though very essential and powerful ingredient

of economic development, the resultant welfare due to growth is also

equally important. For that social indicators will have to be seen. During

the period under review the study found that amongst 16 major states,

UP was 13 or 14th in some cases. Only Bihar and Orissa lagged behind

with respect to following social indicators e.g.

Medical facilities

Teacher pupil ratio (at primary level)

Birth and death rate

Infant mortality

Literacy

Percapita income

Rural electrification

Per capita power consumption etc.

UP is in same group as Bihar, Madhya Pradesh, and Rajasthan

(BIMARU). There are important differences between all these states,

but there are remarkable similarities and commonalities, as per

comparative research done, in social, cultural and political factors, as

cause of socio-economic weakness and backwardness. Some areas of

social indicators as an illustration can be mentioned as below (as per

appox.50 years’review-1947-1998).

Health: Life in UP is short and uncertain. Female can expect to

live upto 55yrs. Under the age of five years death rate is 141 per

thousand. (According to one of the experts UP compare with Sahara

AFRICA on this count- where it is 53 and 160/per thousand). UP has

highest mortality rate under 5 yrs., amongst all major States; 2nd highest

is crude death rate; and 3rd lowest life expectancy. Maternal deaths/per

100000 live births is 931 in (mid) 1980(s) (comparison with Kerala

shows a female in Kerala can expect 20 year more life and a new borne

has 6 times less chances of mortality compared to UP). In under

nutrition UP is second only to be beaten by Bihar with reference to

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children below 5 years. Thus the statement gets reinforced that there

are lower chances of survival of a child in UP (as per 50 years reveiw).

Above positions is somewhat neutralized by higher birth rate and

highest fertility rate which has resulted in slow demographic transitions.

Literacy: According to 1991 census UP (along with other

BIMARU states) had lowest literacy level. Female literacy was

dismal.Only 1 out of 4 i.e.(25%) in 7yrs.+ age group could read and

write. It deteriorates in rural areas to 19%. Caste-wise for schedule

caste it was 11%. In 1992-93, the statistics indicate that only 50% of

literate male and 40% of female populations could complete 8 year of

primary and secondary schooling. Also low literacy is persisting in

younger age group and it was endemic is rural areas. Reason for such

state of literacy backwardness is linked to state of education. Schools

are in disarray. Pvt. Schools functions but are within reach of only better

off people and beyond reach of ordinary. State government has

programms like World Bank aided DDEP. Reach of educations is

sought to be encouraged through NGO participations. There were

many upcoming engineering and Industrial training institutes and

polytechnics. It can be said to providing silver lining to above sluggish

economic situation, as these educational infrastructures could become

firm basis for providing opportunities of educations to its youth of future

generations. Definitely there have been improvements, though scope of

improvement is immense and U.P. remains backward when compared

to national benchmarks regarding similar/same statistical parameters.

Uttar Pradesh State Report, Done By Basics Ltd.-June 2010, gives

following data regarding demographic etc facts, based on census 2001,

internet searches and their own research:(covering period from2007-

2009, but giving strong reasons to presume that similar trends must

have continued on more or less same lines): The state of Uttar Pradesh

(UP) has a population of 166.20 million. The decadal growth rate of the

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state population is 37.80% as against 21.54% for the country and the

population of the state continues to grow at a much faster rate than the

national rate. The Total Fertility Rate of the State is 3.8. The Infant

Mortality Rate is 67 and Maternal Mortality Ratio is 440 (SRS 2004-

2006) which are higher than the National average. The Sex Ratio in the

State is 898 (as compared to 933 for the country) (Table 3.1).

Table: 3.1

Health Status in Uttar PradeshS. No. Item Uttar Pradesh India

1 Total population (Census 2001) (in million)

166.20 1028.61

2 Decadal Growth (Census 2001) (%)

37.80 21.54

3 Crude Birth Rate (SRS 2008)

29.1 22.8

4 Crude Death Rate (SRS 2008) 8.4 7.4

5 Total Fertility Rate |(SRS 2008)

3.8 2.6

6 Infant Mortality Rate (SRS 2008)

67 53

7 Maternal Mortality Ratio (SRS 2004 - 2006)

440 254

8 Sex Ratio (Census 2001)

898 933

9 Population below Poverty Line (%)

31.15 26.10

10 Schedule Caste population (in million)

35.15 166.64

11 Schedule Tribe population (in million)

0.11 84.33

12 Female Literacy Rate (Census 2001) (%)

42.2 53.7

Source: NRHM, 2010 Information extracted from census 2011, which is of comparative

nature, in very brief is shown in Table 3.2.

Table: 3.2

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Demographic Statistics

Population (As per census 2011 Provisional data) : 19,95,81,477(a)Males (As per census 2011 ) : 10,45,96, 415b)Females (As per census 2011 ) : 94, 985,062Decennial Growth rate (2001-2011) (As per census 2011)

: 20.09 percent

Sex Ratio (As per census 2011 ) : 908 per thousandDensity (persons per sq. km.) (As per census 2011 ) : 828 per sq.KmChild Population (0-6 years) (As per census 2011 ) : 29,728,235Child sex ratio (0-6 years) (As per census 2011 )) : 899 per thousandTotal Literacy rate-    Persons : 69.72 percenta)Male Literacy : 79.24 percentb)Female Literacy : 59.26 percentDistricts : 75

Environment:

The forest cover, which was quite good, is showing declining

trends. There is no control as yet of floods & draughts, Climate appears

to become some what uncertain. In brief – Environment may not remain

supportive as it has remained till now, if due attention is not focused on

these issues and proper solutions found and implemented with sincerity

and honesty.

Tourism:

It has not flourished inspite of natural settings being beautiful. The

necessary causes and demotivating factors need to be identified

because flourishing tourism is a very good source of Revenue and

future development.

Role of Banks: 

Covering an area of 240,928 square kms, UP is one of the largest

states of India. Administratively divided into 71 districts and 820 blocks,

the state has 107,452 villages. Ranking first in the country in terms of

population, the state is densely populated. As against the national

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average of 324 persons/sq.km., the state has a population density of

689 persons/sq. km. The other elements of the state demographic

profile include its predominantly rural character, high level of poverty

and low percentage of working population. About 80% of the population

lives in rural areas and more than 30% of the population still lives below

poverty line. The state economy is predominantly agrarian and more

than 70% of the work force is engaged in agriculture and allied

activities. The importance of agriculture in the state economy can be

gauged from the fact that share of agriculture in State Domestic Product

is 35% as against its 22% share in the National GDP.

The State has a wide network of banks. It is being served by 39

Commercial Banks, 12 Regional Rural Banks (RRBs) and 2

Cooperative Banks. Out of total 9,632 branches of all Scheduled

Commercial Banks (including RRBs) operating in the state, 4,972

branches are operating in the rural areas and 1,715 in semi-urban

areas. In addition to this, 1,658 branches of District/Central Cooperative

and Land Development Banks are also serving in the state. Apart from

this, 70 Urban Cooperative Banks are also functioning through their 184

branches in the state (Table 3.3).

Table: 3.3

Bank Branch Network in Uttar PradeshCategory March 07 March 08 March 09

Rural 6,049 6,098 6,210

Semi-Urban 1,828 1,946 2,078

Urban / Metro 2,460 2,720 3,002

Total 10,337 10,764 11,290

Source: Uttar Pradesh State Report, Done by Basics Ltd.-June 2010 Data and Statistics left as it is without updation

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There were 36 RRBs in the state but now after amalgamation

process the number has reduced to 12. These RRBs are sponsored by

10 banks and catering to the needs of people of 71 districts through

their 2,961 branches.

Deposits/Advances/CD Ratio (All Banks):

Total deposits with the banking sector in the state increased by

21.56% in 2008-09 over 2007-08. At the end of March 2009, the total

deposits stood at Rs.2, 72, 736.94 crore. Commercial Banks which

have the maximum share (86.46%) in total deposits registered a growth

of 21.90%. Deposits of RRBs and Cooperative Banks registered a

growth of 18.60% and 21.31% respectively over the level as at March

2008. Similarly, during the same period, the total advances with the

banking sector increased by 13.51%. At the end of March 2009, the

total outstanding advances stood at Rs.1,27,639.76 crore. The growth

registered by Commercial Banks was 14.44%, while outstanding loans

of RRBs registered a growth of 18.58%. Cooperative Banks have

registered a negative growth of 2.45% compared to their levels at March

2008. The share of Commercial Banks in total advances was 83.97%

whereas the share of RRBs and Cooperative Banks was 9.57% and

6.45% respectively. The CD Ratio of the State has witnessed a

quantum jump at the end of 2007, however it has slide down in March

2009. National commercial banks with All India jurisdiction work as

intermediaries for mobilizing finance and savings for deploying as credit

and investment in society at large.  They are one of the core source of

the above mentioned ‘resources’ of Economic activity and for

development.  Being managers of payment system in the economy as

well as agencies legally authorized to move funds within and across the

national boundaries, the ability of banks to raise the deposits at one

place and use it at another is unique.  In a federal polity like our, where

Centre/States/Union Territories are considered sovereign within their

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own constitutionally assigned subject matters, it is obvious to ask as to

how this ‘unique ability’ ie being used by the banks.  Naturally, the

possibility of raising doubts, about impact of banking activity in a ‘State’,

not being beneficial for the State’s development, can not be ruled out. 

if banks take deposits in one “State’s jurisdiction and give it as ‘loan’ in

another State’s jurisdiction, from narrow parochial angle (disregarding

National out look) it will appear as if money is taken out from the State,

where deposits have been mobilized, to the State where credit and

Investment has been done by the Banks i.e. finance has been provided

to other States.  It is obvious that the former State will raise dust and fire

that though money comes from its jurisdiction but deployment and

consequent development, takes place in other State(s).  This debate

has remained alive all over the country, since beginning, and almost all

the State Government(s) try to put the banks (specially commercial

banks) in dock, on this issue and banks find it difficult to answer this

aspect of their activity. 

 Recognising above debate Reserve Bank of India/Central

Government has fixed a bench mark percentage ratio between Credits

– Deposit, in any region.  This is called C.D. Ratio and ideally it should

be  60% for any region ( national/state/District/Block/any other defined

jurisdiction). This percentage was fixed taking into account the various

statutory requirements of C.R.R./S.L.R. under Reserve Bank of India

Act/Banking Regulation Act at their maximum and then the balance

remaining with banks, as deployable funds.  Thus, if a bank raised Rs.

100/- as deposits, C.R.R. and S.L.R. needed Rs. 40/- to be

allocated ,for meeting statutory requirement ,and Rs. 60/- remained

available with it, for being used for giving loans and making

investments.  It is expected that while functioning in a ‘State’ any and

every bank will make (ideally) deployment of these Rs. 60/- (per Rs.

100/- deposit mobilization), in that ‘State’ itself.  This is at Macro level

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and a statistical bench mark, prescribed by Regulator (R.B.I.) and

owner i.e. central Government, of all public sector banks (20

nationalised + S.B.I and its subsidiaries + I.D.B.I. Bank+ all R.R.B.s. ) .

Hence, the primary role of Banks becomes achieving the prescribed

C.D. ratio, in each identified region be it Block/District/State/Nation. 

Deployment of funds properly and as per plan and intentions, if

used properly and as expected it must result in creation of productive

assets directly (in case of credit) or indirectly (in case of Investment).  A

Productive Asset creates employment (self or plural for family/group

etc.), profits for share holders/profit sharers; services for consumers,

market for suppliers/service providers and Revenues – directly/Indirectly

for Government/Local Bodies etc. A profitable venture working

prudentially, shall generate surplus, which as saving/ploughed-back

portion of part/full profits into business, shall be catalyst for further

growth and development.  On and on, this is development process,

which becomes vibrant due to appropriate deployment of funds by

banks, suo moto or under planned policy of those who are responsible

for overseeing development process i.e. Governments/Government

agencies.

In case, the aforesaid credit purveyed by Banks is not deployed

properly affecting creations of asset/asset quality, the repaying capacity

of borrower/entrepreneur gets affected and the loan (which is banks’

asset), becomes, non-performing, and affects bank’s income/

profitability/viability.  In case of severe losses the existence of banks/

organizations itself can be threatened.  While it can be said, obviously

for Banks, that their role of monitoring the proper declared utilization of

funds lent out by them is as important as maintaining C.D. Ratio; role of

concerned State Government/ central Government and its agencies

also , to ensure , that Bank’s are facilitated in recovering their dues from

the borrowers. 

99

In case, State Government does not play its role, to support

Banks in case of distress due to N.P.As., it is natural that deployable

funds will reduce with banks, affecting in turn the C.D. Ratio to be

maintained by them.  Hence, on Bank’s part, correct utilization of

credit/investment by borrowers is another important role, to be

effectively played. There are regional/sectoral imbalances in the country

where states inter-se are compared on Development parameter (with

reference to education, health services, infrastructure, poverty, per

capita income etc.) besides, seeing performance in different sectors of

economy i.e. Agriculture/Industry/Services/Export/Social sector,in the

State .Generally one ‘State’ will differ from another, but certain national

benchmarking is always done and large deviations indicate towards

success or failure as well as efficacy of overall Finances deployed

including’ Bank finance’ , to the extent ‘Productive Assets’ get created in

these sectors.  In brief, monitoring of ‘end use’ of credit/investment done

by Banks, is a very important role of banks for ensuring balanced

development of State economy specially with reference to “PRIORITY

SECTOR LENDING” where Governmental Plans are directly involved. 

Of course, banks may find difficulties in doing this role, as mentioned

above, due to lack of ‘State’ co-operation or due to lack of appropriate

laws/dispute resolutions processes and to that extent a supplementary

role of banks does emerge i.e. their ability, to influence State

Government machinery   through various forums like BLBC/DCC/DLRC/

SLBC/SLSC etc. (where Bank officials and government officials jointly

participate, along with representatives of Regulatory and Apex

refinance/supervisory Institutions e.g. R.B.I./NABARD/SIDBI/NHB etc.

who too actively participate).  In State of U.P. there is a Government

Department called D.I.F., which continuously interact with Banks,

specially, when banks need Government help in recovering their loans

by issue of Recovery Certificate, for which Revenue Authorities of State

Government has to provide necessary administrative help whereby

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loans are recovered as dues of Land Revenue without which banks will

end up using normal court procedures which is costly for both – banks

and its clients, besides involving inordinate delays. Besides, D.I.F. also

helps in raising banking related issues of bankers with the Government

of State. 

Additionally, banks perform functions like currency distribution,

providing means of payment mechanism, Remittance of funds, helping

in Government payments – Centre as well as State – under authority

from Reserve Bank of India or as demanded by State Govt.

Departments or on their own.  General customer service like

maintaining Account, Security lockers, Exchange of notes/coins etc.

besides providing many more services – free or for a fee – specially to

trading and business community, also are important roles of the Bank. 

This can be called a Bank’s role to provide satisfactory customer

service to the clients in a State or an a nation at large. If satisfied the

portion of population becomes part of the satisfied society and surely

‘credit’ goes to the polity of the day – at Centre/State both. In brief, the

community, has a “Feel Good” sense, which is the purpose of any

developmental activity and an indicator that development has taken

place. In words of Noble Laureate Prof. Amartya Sen it will be the

“Good Change”. Amongst above, the satisfactory services provided to

clients/enterprises, engaged in International Trade i.e. Exporters/

Importers, N.R.I.(s)/foreign nationals and Institutions with reference to

movement of funds/ remittances/ facilitator services by banks are most

important for Bank in its effective role in promoting cross-border Trade-

specially Exports. Additionally, Banks play a role in facilitating

‘tourism’ involving foreign nationals, by providing adequate

“Exchange” facilities between Rupee-Foreign currency and vice-versa.

Taking all the above roles of Banks in State and seeing it as a “buque’

(normally contains flowers but here it means stated assortment of

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banking services), the over all impression about Banks can be formed

regarding their contributions in States Development. Such contribution

would be enhanced by increasing Financial Inclusion and by corollary

by increasing Financial Literacy and Financial Education.

According to the Banking Companies Act, 1970, the aim of

nationalization of banks in India is “to control the heights of the

economy and to meet progressively and serve better the needs of

development of the economy in conformity with national policy and

objectives.” The elimination of concentration of economic power in the

hands of a few, diversification of the flow of bank economic credit

towards priority sectors such as agriculture, small industry and exports,

weaker sections and backward areas, fostering of new classes of

entrepreneurs, so as to create, sustain and accelerate economic

growth, Professionalization of bank management, providing adequate

training as well as reasonable terms of service to bank staff, extending

banking facilities to unbanked rural areas and semi rural areas to

mobilize savings of people to the largest possible extent and to utilize

for productive purposes, to curb the use of bank credit for speculative

and other unproductive purposes, and to bring banks under the control

of RBI. (Seeing from the point of view of banks’ personnel, imparting

F.L./F.E., relevant for them and of their level is bounden duty of all the

nationalised banks).

 Role of Banks in Promoting Economic Development:

Banks play a very significant role in the economic development of

the country. Banking system as a whole has an important influence on

the tempo of economic activity. The economic importance of banks are-

Banks mobilize the small, scattered and idle savings of the

people and make them available for productive purposes. They

help the process of capital formation.

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By offering attractive interests on the savings of the people

deposited with them banks promote the habit of saving in them.

By accepting the savings of the people banks provide safety and

security to the surplus money of the customers.

Banks provide a convenient and economical mean of transfer of

funds from one place to another. Even cheques are used for the

movement of funds from one place to another.

Banks help the movement of funds from one region where they

are not very useful to regions where they can be more usefully

employed. By moving funds from one place to another banks

contribute to the economic development of backward regions.

Banks influence the rate of interest in the money market, through

the supply of money. They exercise a powerful influence on the

interest rate in money market.

Banks help trade, commerce, industry and agriculture by meeting

their financial requirements. Without the financial assistance the

growth of trade and commerce industry would have been very

slow.

Banks direct the flow of funds into productive channels while

lending money. They discriminate in favour of essential activities

as against non-essential activities. Thus they encourage the

development of right type of activities which the society desires.

Banks help the industrious, the prudent, the punctual, the honest

and discourage the dishonest by not giving finance for wrongful

purpose. Thus banks act as public conservator of value system in

commercial activities.

Banks serve as the best financial intermediaries between the

borrowers and the lenders.

103

Through the process of creation of money, banks acquire control

over the supply of money in the country. Through their control

over supply of money they influence economic activities,

employment, income and general price level in the economy.

Banks monetize the debts of others that is they convert the debts

of others into money by exchanging bank deposits in return for

securities.

Thus, a strong and a sound banking system is indispensable for

the economic development of any country, and obviously for parts &

sub parts of the country i.e. State. In present context it is U.P., if banks

perform these functions effectively they are contributing to the

development of U.P., if people appreciate it and feel the change in

common man’s life and if that can be catagorised as good. Then it is

good change as argued by shri Sen (referred above). “By this argument,

Sen urges the development discourse into considering that the concept

of achieving good change or human well-being goes beyond just

providing commodities and their use to considering their functioning;

that is, “what a person does with the commodities of given

characteristics that they come to possess or control (or can do with

them)” . The ability to carry out this functioning is defined by the

capabilities of the person. Since one may have different abilities -

capabilities in Sen’s perspective - what characterises development is

“the freedom that a person has in terms of the choice of functioning,

given his personal features (conversion of characteristics into

functioning) and his command over commodities….”. Hence, if what

really matters in achieving good change centres on the “capability to

function”, then development within this perspective is about “enabling”,

particularly, “the enlargement of people choices” of functioning in

society.”

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Taking above spirit of development aided by banks in the state/

country, the fact and measuremet of the factor of “ Enabling the people

to feel the enlargement of their choices to function in chosen ways for

which credit and other banking services are provided by the banking

system in state of U.P.”( and by extended logic the ‘Nation as whole) is

also the subject of this research, which is aimed at finding strength of

Financial Literacy/Education as a tool for avoiding and pre-empting the

mischief of non-violent and non-criminal deviations falling at worst in

the category of Civil Wrongs theoretically, and in actual practice.

Finding spirit of it has been treated as of importance and statistics

quoted and generated is likely to be subsidiary only. Whether banks

specially commercial banks have also started taking into account the

factors of Human centered Development, sustainable development

etc.? as these are the concerns globally now. U.P. is a region where

Agriculture is predominant sector of economy- whether banks are aware

about concept of sustainability of agriculture and whether banks are

doing something about it? It is also a Global concern now. Answer to

these questions at least in U.P. may not come out which will give an

impulse to say”wow”. Whether there can be some thing like sustainable

banking? After all Financial Inclusion is a tool for that and Financial

Literacy its cutting edge- Have the man on the bank’s counter realised

this fact? We wish to find out by measuring some how that sensitivity

which stops someone from doing a malpractice.

Generally, the report contains information in its context. As seen

from the theoretical information and actual Ground Level Survey and

Observation of banks branches and individuals, the important elements

of contributions of SCB(s) interalia can be assessed as follows:

Towards developments in Priority Sectors in U.P. during post

divison period till 31st March, 2013, is Rs.356666 crores in form of

focused lending, by All Scheduled Commercial Banks.

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Contribution in other banking specific areas, taking different

parameters-

The branch expansions have been done by all SCB(s)

extensively. The number has increased to 12724 in 2013, from

8093 as on 31-12-2003.( data for 2001&2002 could not be

verified).

Banks by their definitions take deposit and lend & invest for

productive purposes. Each of these activities, since 2001, has

never shows any deceleration till date. This is indicative of the

fact that banks are operating normally and doing their job inspite

of odds, which they encounter.

The deposits which stood at Rs84541.79crores in 2001 are

Rs518542.26crores as on 31st March 2013. On annual real

accretion basis, thus ASCBs collected Rs. 281361.74 crores

upto 31st march 2011 and Rs. 434400.47 crores upto 31st

March, 2013.

The advance which stood at Rs28426.55crores in 2001 was

Rs174167.89 in 2011 and 291095.87crores in 2013. Real

annual accretion being Rs. 145741.34 crores upto2011 and

Rs.262669.32crores upto 2013 (Table 3.4).

Table: 3.4

Credit Deposit Ratio2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

33.63 30.25 33.04 35.67 40.49 46.63 51.22 48.37 45.69 49.75 47.60 48.00

Source: Handbook of Statistics on the Indian Economy.In 2013 (as on 31-03-2013), it is reported to be 56.14%. It is not

too rosy and below the Bench mark fixed by R.B.I.(60%), indicating the

need of improvement. Though, the findings of our research clearly show

that C.D. Ratio cannot be said to be exact measure of Economic

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Development and Growth & Development. Hence, efforts are needed to

improve credit deployment besides process of Data Collections and its

reporting which has lot of scope of improvement.The data needs to be

more authenticand timely. The investment of all SCB(s) in State of U.P.

which was Rs20369.59crores,in 2004 stands at Rs43430.78crores, in

2013. It is not very glorious but this also goes to improve the

developmental expenditure (Table 3.5).

Table: 3.5

Credit Investment Deposit Ratio2001 200

22003 2004 2005 2006 2007 2008 2009 2010 2011 2012

N.A. N.A. 46.70 53.31 55.98 61.15 64.24 59.17 59.73 61.25 57.73 57.67

Source: Handbook of Statistics on the Indian Economy.In 2013 (as on 31-03-2013), it is reported to be 64.51%. State

Government of Uttar Pradesh has been generating revenue (In

Crores,as componentof Net State Domestic Product at Factor Cost and

Current Prices, Base 1999-2000) from Banking & Insurance sector as

follows:

Table: 3.6

Net State Domestic Products

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

6100

.9

7107

.8

8512

.6

9237

.4

9669

.4

9884

.1

1191

8.2

1437

1.0

1770

5.1

N.A

.

N.A

.

N.A

.

Source: Handbook of Statistics on the Indian Economy.Share of banks is major in it. The expansion of A.T.M.s in the

country as a substitute for brick and mortar branches, has been taking

at fast pace. As per available data for last 5 years the growth has been

shown in Table 3.7.

Table: 3.7

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ATMs in India2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

N.A. N.A. N.A. N.A. N.A. N.A. 960 34789 43651 60153 74505 95686

Source: Handbook of Statistics on the Indian Economy.The percentage of A.T.M. (s) to bank branches as worked out in

U.P. should be at least the same, in the same period. But it does not

appear to have gained the same pace due to infrastructural deficiencies

.There are 9020 A.T.M.s as on 31-03-2013 in U.P.

Lending to agriculture/Industry/Services Sector has increased but

still scope of improvement exists.

Housing & Educational loans are being given comparatively with

lesser formalities which encourages some borrows to approach

the bank now.

Health related Banking products and lending does not catch eye

in the state.

Environmental aspects are not apparently of any importance in

banks presently, except providing some tree guards and

maintenance of some parks etc.

Areas where contribution is not significant:

Reductions of N.P.A. (s) and loan recovery due to insufficient

support from Authorities in the State.

Customer service especially in the areas of currency & cash

management. Availability of coins and exchange of soiled/

cut/mutilated notes needs to increase and banks have to take

extra effort to tackle menace of fake notes. R.B.I. needs to remain

in the game actively otherwise there will be severe problem for

banks and common man.

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Banks have to do extra effort to increase financial educations of

public who need to be aware about their own duties and rights,

Grievance Redressal Mechanism, especially of Banking

Ombudsman and Citizen’s Rights under Citizen Charter & R.T.I.

etc.

SLBC of U.P. must increase its list of reporting Banks as certain

SCB(s) are there in U.P., but SLBC book does not mention it.

Data collections and its analysis can be done by SLBC in more

professional manner. SLBC needs to re-think on method of calculation

of C: D Ratio, so that it can be more representative of truth about

development. Probably number of districts should always remain 70

which were at the time of State’s Division in 2001 for compiling Banking

Statistics, irrespective of actual no. districts created from Time to time

by administrative measure. All this will go a long way in increasing

overall contribution of SCB(s) to economy of State.

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