V.E.

S College of Arts, Science and Commerce

SUB: Financial Market

1.

Introduction

S.Y.B.Com (B&I) Pre & Post Era of Banking Sector in India

Name of Group members:

Pranesh-21 Rupesh-37 Rohit-41 Mahesh-51 Submitted to:Sanjay Sir.

2. 3.

History of Banking Sector Impact of liberalisation on finance & banking Challenges after nationalization Banking sector reform in 1992 Current banking structure Increasing risk in banking sector Information Technology in banking sector Internet banking Challenges in e-banking Bank Transformation Opportunities in banking sector

4. 5. 6. 7. 8. 9. 10. 11. 12.

INDEX
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OBJECTIVE
To know how the invention of banks helped the people who were dominated by the money lender in earlier times To know how people started investing in their saving with the banks & how banks mobilised this savings How banks played an important role in the industrial development of the country and how banks change their operation, services & everything under one roof.

Research methodology:
Primary data- We got the information by way of actual going in the banks and used the technology like ATM card, Smart card, etc. So we talk with the experience people. Secondary data-some information got by the books like Principal and practices of banking and insurance, Innovation in banking sector, etc.

Introduction
Indian banking industry, the backbone of the countrys economy, has always played a key role in prevention the economic catastrophe from reaching terrible volume in the country. It has achieved enormous appreciation for its strength, particularly in the wake of the worldwide economic disasters, which pressed its worldwide counterparts to the edge of fall down. If we compare the business of top three banks in total assets and in terms of return on assets, the overall development has been lucrative with enhancement in banking industry efficiency and productivity. It should be underlined here is financial turmoil which hit the western economies in 2008 and the distress effect widened to the majority of the other countries but Indian banking system survived with the distress and showed the stable performance. Indian banks have remained flexible even throughout the height of the sub-prime catastrophe and the subsequent financial turmoil. The Indian banking industry is measured as a flourishing and the secure in the banking world. The countrys economy growth rate by over 9 percent since last several years and that has made it regarded as the next economic power in the World. Our banking industry is a mixture of public, private and foreign ownerships. The major dominance of commercial banks can be easily found in Indian banking, although the co-operative and regional rural banks have little business segment.

History of Banking sector In India

Early Phase (1786 to 1935)

Banking in India originated in the last decades of the 18thcentury. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The East India Company established Bank of Bengal, Bank of Bombay and Bank of Madras as independent units and called it Presidency Banks. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. EXAMPLE -General Bank of India was voluntarily liquidated, due to inability to earn profits following the currency difficulties in 1787. Bengal Bank failed around 1791, due to a run on it caused by emergence of difficulties of a related firm. A large number 14 of banks failed within a short time, and public confidence in banks was destroyed. The currency confusion during 1873-1893 caused trade uncertainties and also played its role in creating an atmosphere unfavourable to establishment of new banks. Due to war and uncertainty in Europe let to speculative activity, which eventually caused bank failures. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India

remained the exclusive domain of Europeans for next several decades until the beginning of the20th century.
Pre Nationalization Phase (1935 to 1969)

Organized banking in India is more than two centuries old. Until 1935 all, the banks were in private sector and were set up by individuals and/or industrial houses, which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent. For many years the Presidency banks acted as quasi-central banks,

EXAMPLE-Reserve Bank of India.

The Reserve Bank of India was set up on the recommendations Royal Commission on Indian Currency and Finance also known as the Hilton-Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for nine years. Reserve Bank of India (RBI) was created with the central task of maintaining monetary stability in India. The Government on December 20, 1934 issued a notification and on January 14, 1935, the RBI came into existence, though it was formally inaugurated only on April 1, 1935.

Post Nationalization Phase (1969 to 1990)

I think nationalization of banks in India was an important phenomenon. On July 19, 1969 the erstwhile government of India nationalized 14 major private banks. Nationalization of bank in India was not new or happening first time. From 1955 to 1960, State Bank of India and other seven subsidiaries were nationalized under the SBI Act of 1955. It was not a step taken at random or because of the whims of the leadership of the time, but reflected a process of struggle and political change which had made this an important demand of the people. Nationalisation took place in two phases, with a first round in 1969 covering 14 banks followed by another in 1980 covering seven banks. Currently there are 27 nationalized commercial banks

Reasons for Nationalization

1. The need for the nationalization was felt mainly because private commercial banks were not fulfilling the social and developmental goals of banking, which are so essential for any industrializing country. Despite the enactment of the Banking Regulation Act in 1949 and the nationalization of the largest bank, the State Bank of India, in 1955, the expansion of commercial banking had largely excluded rural areas and small-scale borrowers. 2. The developmental goals of financial intermediation were not being achieved other than for some favoured large industries and established business houses. Whereas industrys share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34 percent to 68 per cent, agriculture received less than 2 per cent of total credit. 3. The stated purpose of bank nationalization was to ensure that credit allocation occur in accordance with plan priorities. 4. Reduce the hold of moneylenders and make more funds available for agricultural development. Nationalization of bank was to actively involve in poverty alleviation and employment generation programs. Motives for nationalization are political as well as economic.

Modern Phase from 1991 till date

This is the phase of New Generation tech-savvy banks. This phase can be called as The Reforms Phase. Starting of the modern and current phase of Indian Banking is marked by important events. Narasimhan Committee-The Committee on Banking Sector Reforms Committee headed by Mr. M. Narasimhan, it is also known as Narasimhan Committee The Committee, headed by former Reserve Bank of India governor M Narasimhan, was appointed by the United Front government to review the progress in banking sector reforms. The committee submitted its recommendations to union Finance Minister Yashwant Sinha in November of 1991.The Committee was required to review the progress in the reforms in the banking sector over the past six years with and to chart a programme on Financial Sector Reforms necessary to strengthen the India's financial system and make it internationally competitive taking into account the vast changes in the international and financial markets, technological advances. Some of the recommendations Offered by the committee are: 1. A reduction, phased over five years in the Statutory Liquidity Ratio (SLR) to 25 percent, synchronized with the planned contraction in Fiscal Deficit. 2. A progressive reduction in the Cash Reserve Ratio (CRR). 3. Gradual deregulation of interest rates. 4. All banks to attain Capital Adequacy 8% in a phased manner. 5. Banks to make substantial provisions for bad and doubtful debts. 6. Profitable and reputed banks are permitted to raise capital from the public. 7. Instituting an Assets Reconstruction Fund to which the bad and doubtful debts of banks and Financial Institutions could be transferred at a discount.

Impact of Economic Liberalization on Finance & Banking

Post nationalization now Indian banking sector was unshackled, and along with the government banks a thick layer of private and foreign banks was taking shape. The first of such new generation banks to be set up was Global Trust Bank, which later amalgamated with Oriental Bank of Commerce, ICICI Bank, HDFC Bank and Axis Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights, which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more.

Challenges after Nationalisation and liberalisation

After nationalisation of banks increasing use of technology continuous mergers and growth of the Indian banking system by the early 90s the near monopoly of public sector banks faced competition from more customer focused private sector entrants. This competition demanded the older and nationalised banks to revitalize their operations. The year 1992 proved to the Indian banking system owing to the scam-tainted stock market. Large proportion of household saving moved into the banking system which recorded an annual growth of 20 percent in deposits. But along with the continuous growth and modernisation, several challenges still confront the banking sector. The main challenges are the deployment of fund in quality assets and the management of revenues and costs the problem of NPA (Non performing asset) and the overall credit recovery system exist too.

Banking Sector Reforms since 1992

The first type of reforms mainly based on Narasimhan Committee recommendations and the principals of new liberalized Indian economy. Out of the 27 public sector banks (PSBs), 26 PSBs achieved the minimum capital to risk assets ratio (CRAR) of 9 per cent by March 2000. To enable the PSBs to operate in a more competitive manner, the Government adopted a policy of providing autonomous status to these banks, subject to certain benchmarks. The Reserve Bank advised banks in February 1999 to put in place an ALM system, effective April 1, 1999 and set up internal asset liability management committees (ALCOs) at the top management level to oversee its implementation. Banks were expected to cover at least 60 percent of their liabilities and assets in the interim and 100 per cent of their business by April 1, 2000. Interest rate deregulation has been an important component of the reform process. The interest rates in the banking system have been largely deregulated except for certain specific classes; these are savings deposit accounts, non-resident Indian (NRI) deposits, and small loans up to Rs.2 lakh and export credit. In 1994, a Board for Financial Supervision (BFS) was constituted comprising select members of the RBI Board with a variety of professional expertise to exercise 'undivided attention to supervision'. The BFS, which generally meets once a month, provides direction on a continuing basis on regulatory policies including governance issues and supervisory practices. It also provides direction on supervisory actions in specific cases.

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The share of the public sector banks in the aggregate assets of the banking sector has come down from 90 per cent in 1991 to around 75 per cent in 2004. The share of wholly Government-owned public sector banks has declined from about 90 per cent to 10 per cent of aggregate assets of all scheduled commercial banks during the same period. Diversification of ownership has led to greater market accountability and improved efficiency. Current market value of the share capital of the Government in public sector banks has increased manifold and as such, what was perceived to be a bailout of public sector banks by Government seems to be turning out to be a profitable investment for the Government. A Board for Regulation and Supervision of Payment and Settlement Systems (BPSS) has also been recently constituted to prescribe policies relating to the regulation and supervision of alltypes of payment and settlement systems, set standards for existing and future systems, authorize the payment and settlement systems and determine criteria for membership to these systems. Both the Houses of the Parliament have passed the Credit Information Companies (Regulation) Bill, 2004. Consolidation in the banking sector has been another feature of the reform process. This also encompassed the Development Financial Institutions (DFIs), which have been providers of long-term finance. Since 1993, twelve new private sector banks have been set up. As already mentioned, an element of private shareholding in public sector banks has been injected by enabling a reduction in the Government shareholding in public sector banks to 51 per cent. As a major step towards enhancing competition in the banking sector, foreign direct investment in the private sector banks is now allowed up to 74 per cent, subject to conformity with the guidelines issued from time to time. Currently, banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks.

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Current Banking Structure

Banks in India can be categorized into Scheduled and Non-scheduled Banks

Scheduled Banks
Scheduled Banks in India constitute those banks, which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. As on 30 the June 1999, there were 300 scheduled banks in India having a total network of 64,918 branches. The scheduled commercial banks in India comprise of State bank of India and its associates(8), nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural banks

Non-Schedule Banks
Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank". Banks in India can also be classified in a different way.

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At present the banking system can be classified into following categories:

Public Sector Banks
o o o o Reserve bank of India State bank of India Nationalised banks Regional Rural bank

Private Sector Banks o Old Generation Private Banks o New Generation Private Banks o Foreign Banks in India o Scheduled Co-operatives banks o Non-scheduled banks

Co-operative sector banks

o o o o o o State co-operative banks Central co-operative banks Primary Agriculture credit societies Land development banks Urban co-operative banks State land development banks

Development Banks
o o o o Industrial Development Bank of India Industrial Investment Bank of India Small Industries Development Banks Export- Import bank

Increasing risk in banking sector

Interest rate risk Risk rate arises when the interest income of bank is sensitive to the interest rate fluctuation Foreign Exchange reserve Risk that arises due to unanticipated changes in exchange rate and become relevant due to the presence of multicurrency assets or liabilities in the banks balance sheet

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Credit risk Risk that arises due to the possibility of a default in the repayment obligation by borrowers of funds Contingency Risk- Risk that arises due to the presence of off balance sheet items such as grantees, letter of credit, underwriting commitments, etc.

Information Technology and Bank Transformation

The second banking sector reforms gave much importance to the modernization and technology up gradation. The IT Act, 1999 started the speedy process of e-banking. E-Banking: Delivery of banks services to a customer at his office or home by using electronic technology can be termed as e-banking. The quality, range and price of these e-services decide a banks competitive position in the industry. The virtual financial services can be largely categorized as follows: Automated Teller Machines: - Cash withdrawals - Details of most recent balance of account - Mini-statement - Statement ordering facility - Deposit facility - Payments to third parties EFTP: -EFTPS card used to initiate transactions: - Authorization and transaction capture processes take place electronically. - Transaction confirmed manually. - Funds not debited electronically.

Remote Banking Services:

- Balance enquiry - Statement ordering - Funds transfer (payment) to third parties - Funds transfer between customers different accounts

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- Order travellers cheques and other financial instruments.

Services Not Available Through Remote Banking:

- Cash withdrawal - Cash/ cherub deposit - Sale of the more complex types of financial services such as life insurance mortgages and (pensions).

Smart Cards:
(i) Stored value cards (ii) As a replacement for all types of magnetic stripes cards like ATM Cards, Debit/Credit Cards, Charge Cards etc. - One smart card to carry out all these functions - One smart card can contain the functionality of several different types of cards issued by different banks while running different types of networks. - Smart card a truly powerful financial token, giving user access - STM - Debit facility - Charge facilities - Credit facilities - Electronic purse facilities at national and international level.

Internet Banking:
The latest wave in IT is Internet banking. It is becoming more obvious that the Internet has unleashed a revolution that is affecting every sphere of life. Internet is an interconnection of computer communication networks spanning the entire globe, crossing all geographical boundaries. Touching lifestyles in every sphere the Net has redefined methods of communication, work, study, education interaction, health, trade and commerce. The Net is changing everything, from the way we conduct commerce, to the way we

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distribute information. Being an interactive two-way medium, the Net, through innumerable websites, enables participation by individual in B2B and B2C commerce, visits to shopping malls, books-stores, entertainment sides, and so on cyberspace.

Challenges in E-Banking

E-banking is based on technology that by its very nature is designed to expand the virtual geographic reach of banks and customers without necessarily requiring a similar physical expansion Banking organisations have been delivering services to consumers Electronic funds transfer including small payment and corporate cash management systems as well as publicity accessible machine for currency withdrawals and retail account management are global fixture However, delivering financial services over public network such as internet is bringing about a fundamentals shift in the financial services industry These development present challenges for both banks and bank supervisors Bank management needs to re-evaluate the traditional risk management practices in light of new risk posed by r-banking activities Bank supervisors need to take a balanced approach to the introduction of new regulation and supervisory policy on E-banking

1. The term transformation in Indian Banking Industry relates to intermediately stage when the industry is passing from the earlier social banking era to the newly conceived technology based customer - centric and competitive banking. The activities of banks have grown in multi-directional as well as in multidimensional manners. 2. During transformation, all known parameters of the earlier regime continuously change. 3. The current transformation process in the Indian Banking has many aspects. They pertain to: (i) Capital Restructuring (ii) Financial Re-engineering (iii) Information Technology (iv) Human Resource Development

Bank Transformation

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Issue of HRM: Training, development and retaining talented and

Opportunities

committed staff is a major emerging challenge before the public sector banks. Today, our employee performance review systems are neither objective nor transparent. They do not differentiate high performers, risk takers and innovators lot from amongst the total staff. Time has come to measure the value of human capital and take urgent steps to ensure it to its optimum level. Lack of Risk Management: Today, instead of banks managing the risk, risk is managing the banks. A clear understanding of the risk-return profile of each activity of the bank is crucial to ensure the soundness and solvency of the organization. Skill up gradation and preparing a cadre for the risk organization is a major challenge for public sector banks particularly in the wake of high labour turnover. Lack of Actionable Planning: Lack of planning or ineffective planning is very relevant to public sector banks. Though all the banks have established elaborate performance budgeting system and created MIS, it does not meet the managements present requirements. Basically, the entire planning process is still deposit and credit oriented that too, without any cost and yield linkages Customers Expectations: In the era of e-banking and severe competition, the expectations of the bank customers have increased. Due to this banks should offer a broad range of deposits, investment and credit products through diverse distribution channels including upgraded branches, ATMs, telephone and Internet. Become more customer centric, offering a wide range of products through multiple delivery channels Become proficient in managing assets and liabilities according to risk and return Pay greater attention to profitability including cost-reduction and increasing fee-based income.

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Conclusion:
The face of banking is changing rapidly. Competition is going to be tough and with financial liberalisation under the WTO, banks in India will have to benchmark themselves against the best in the world. For a strong and resilient banking and financial system, therefore, banks need to go beyond peripheral issues and tackle significant issues like improvements in profitability, efficiency and technology, while achieving economies of scale through consolidation and exploring available cost-effective solutions. These are some of the issues that need to be addressed if banks are to succeed, not just survive, in the changing milieu.

Suggestion:
The first and obvious step they should take is see to it that the basic problem fuelling dissatisfaction have been addressed After repairing this basic deficiency, banks must ensure that their services is competitive To prevent online banking from remaining expensive additional channel that does little to retain footloose customers, banks must act quickly To create the policies which are beneficial to the development of banking sector To provide a satisfactory services to customer so that the growth of the sector will be done

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Bibliography Concept of Deregulation Lessons from banking history in India by Prof .K.V. Bhanu Murthy, Delhi University. Innovation in banking sector Principal and Practices of banking & insurance History of Banking sector

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