3rd SEMESTER

BANKING SYSTEM IN INDIA

SUBMITTED BY

ADITYA KATOCH

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 Roll No.: 30
Smt. P.D. Hinduja Trusts

K.P.B. HINDUJA COLLEGE OF COMMERCE

315, New Charni Road, Mumbai 400 004 Tel.: 022- 40989000 Fax: 2385 93 97. Email:

NAAC Re-Accredited A

001:2008 THE BEST COLLEGE OF UNIVERSITY OF MUMBAI FOR THE ACADEMIC YEAR 201
Prin. Dr. Minu Madlani (M. Com., Ph. D.)

CERTIFICATE

This is to certify that MR. ADITYA KATOCH of M. Com (Banking &

Finance) Semester 3rd [2016-2017] has successfully completed the Project

on BANKING SYSTEM IN INDIA under the guidance of Ms SHITAL

MODY

________________ ________________

Project Guide Co-coordinator

________________ ________________

Internal Examiner External Examiner

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________________ _______________

Principal College Seal

DECLARATION

I Mr. ADITYA KATOCH student of M. Com - Banking and finance, 3rd

semester (2016-2017), hereby declare that I have completed the project on

BANKING SYSTEM IN INDIA

The information submitted is true and original copy to the best of our

knowledge.

3
 (Signature)

Student

TABLE OF CONTENTS

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Sr.No CHAPTER Page

no.
1. CHAPTER INTRODUCTION 06

1.1 Introduction
1.2 Objective
1.3 Scope
1.4 Research Methodology
1.5 Limitations

2. BANKING SYSTEM 08

2.1 Standard Business

2.2 Channels
2.3 Products
2.4 Banks in the Economy
2.5 Regulations
2.6 Types of Banks

3. BANKING SYSTEM IN INDIA 21

3.1 Introduction
3.2 Banking Structure
3.3 Current Period
3.4 Banking codes
3.5 Adopting New Banking Technology
3.6 Automated Teller Machine Growth
3.7 Cheque Truncation Initiative
3.8 Expansion of Banking Structure

4. CONCLUSION 30

5. BIBLIOGRAPHY 32 5
1. CHAPTER INTRODUCTION

1.1 Introduction.

A bank is a financial institution that accepts deposits from the public and creates

credit. Lending activities can be performed either directly or indirectly

through capital markets. Due to their importance in the financial system and

influence on national economies, banks are highly regulated in most countries.

Most nations have institutionalized a system known as fractional reserve

banking under which banks hold liquid assets equal to only a portion of their

current liabilities. In addition to other regulations intended to ensure liquidity,

banks are generally subject to minimum capital requirements based on an

international set of capital standards, known as the Basel Accords.

Banking in its modern sense evolved in the 14th century in the rich cities

of Renaissance Italy but in many ways was a continuation of ideas and concepts

of credit and lending that had their roots in the ancient world. In the history of

banking, a number of banking dynasties notably, the Medicis, the Fuggers,

the Welsers, the Barenbergs and the Rothschilds have played a central role

over many centuries. The oldest existing retail bank is Banca Monte dei Paschi di

Siena, while the oldest existing merchant bank is Berenberg Bank.

1.2 Objectives of the Project

To study about the Banking System.

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 To study the Banking system in India

1.3 Scope of the Project.

To acquire and gain practical knowledge over the Banking system.
To gather an overall idea about how the Indian Banking system works.

1.4 Research Methodology.

The data and information in this project are based on collected information

from secondary sources such as books, journals, articles & the internet.

1.5 Limitations.
The limitations of my projects were the time constraint I had only a period of

one week to find out the details about publicity and public relations in

international marketing, otherwise apart from time I found no difficulty doing

this project. Mostly everything was available on the internet and the journals.

2. BANKING SYSTEM
2.1 Standard Business

Banks act as payment agents by conducting checking for customers,

paying cheques drawn by customers on the bank, and collecting cheques

deposited to customers' current accounts. Banks also enable customer payments

via other payment methods such as Automated Clearing House(ACH), Wire

transfers or telegraphic transfer, EFTPOS, and automated teller

machines(ATMs).

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 Banks borrow money by accepting funds deposited on current accounts, by

accepting term deposits, and by issuing debt securities such

as banknotes and bonds. Banks lend money by making advances to customers

on current accounts, by making installment loans, and by investing in

marketable debt securities and other forms of money lending.

Banks provide different payment services, and a bank account is considered

indispensable by most businesses and individuals. Non-banks that provide

payment services such as remittance companies are normally not considered as

an adequate substitute for a bank account.

Banks can create new money when they make a loan. New loans throughout the

banking system generate new deposits elsewhere in the system. The money

supply is usually increased by the act of lending, and reduced when loans are

repaid faster than new ones are generated. In the United Kingdom between

1997 and 2007, there was an increase in the money supply, largely caused by

much more bank lending, which served to push up property prices and increase

private debt. The amount of money in the economy as measured by M4 in the

UK went from 750 billion to 1700 billion between 1997 and 2007, much of

the increase caused by bank lending. If all the banks increase their lending

together, then they can expect new deposits to return to them and the amount of

money in the economy will increase. Excessive or risky lending can cause

borrowers to default, the banks then become more cautious, so there is less

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 lending and therefore less money so that the economy can go from boom to bust

as happened in the UK and many other Western economies after 2007.

2.2 Channels

Banks offer many different channels to access their banking and other

services:

Automated teller machines

A branch in a retail location

Call center

Mail: most banks accept cheque deposits via mail and use mail to

communicate to their customers, e.g. by sending out statements

Mobile banking is a method of using one's mobile phone to conduct banking

transactions

Online banking is a term used for performing multiple transactions, payments

etc. over the Internet

Relationship managers, mostly for private banking or business banking, often

visiting customers at their homes or businesses

Telephone banking is a service which allows its customers to conduct

transactions over the telephone with automated attendant, or when requested,

with telephone operator

Video banking is a term used for performing banking transactions or

professional banking consultations via a remote video and audio connection.

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 Video banking can be performed via purpose built banking transaction

machines (similar to an Automated teller machine), or via a video

conference enabled bank branch clarification

DSA is a Direct Selling Agent, who works for the bank based on a contract.

Its main job is to increase the customer base for the bank.

2.3 Products

1) Retail Banking

Savings account

Recurring deposit account

Fixed deposit account

Money market account

Certificate of deposit (CD)

Individual retirement account (IRA)

Credit card

Debit card

Mortgage

Mutual fund

Personal loan

Time deposits

ATM card

Current accounts

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 Cheque books

Automated Teller Machine (ATM)

2) Business (or commercial/investment) Banking

Business loan

Capital raising (equity / debt / hybrids)

Revolving credit

Risk management (foreign exchange(FX)), interest

rates, commodities, derivatives)

Term loan

Cash management services (lock box, remote deposit capture, merchant

processing)

Credit services

2.4 Banks in the Economy

1) The Economic Functions.

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a) Issue of money, in the form of banknotes and current accounts subject

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

as money because they are negotiable or repayable on demand, and hence

valued at par. They are effectively transferable by mere delivery, in the case

of banknotes, or by drawing a cheque that the payee may bank or cash.

b) Netting and settlement of payments banks act as both collection and paying

agents for customers, participating in interbank clearing and settlement

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

This enables banks to economize on reserves held for settlement of

payments, since inward and outward payments offset each other. It also

enables the offsetting of payment flows between geographical areas,

reducing the cost of settlement between them.

c) Credit intermediation banks borrow and lend back-to-back on their own

account as middle men.

d) Credit quality improvement banks lend money to ordinary commercial and

personal borrowers (ordinary credit quality), but are high quality borrowers.

The improvement comes from diversification of the bank's assets and capital

which provides a buffer to absorb losses without defaulting on its

obligations. However, banknotes and deposits are generally unsecured; if the

bank gets into difficulty and pledges assets as security, to raise the funding it

needs to continue to operate, this puts the note holders and depositors in an

economically subordinated position.

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 e) Asset liability mismatch/Maturity transformation banks borrow more on

demand debt and short term debt, but provide more long term loans. In other

words, they borrow short and lend long. With a stronger credit quality than

most other borrowers, banks can do this by aggregating issues (e.g. accepting

deposits and issuing banknotes) and redemptions (e.g. withdrawals and

redemption of banknotes), maintaining reserves of cash, investing in

marketable securities that can be readily converted to cash if needed, and

raising replacement funding as needed from various sources (e.g. wholesale

cash markets and securities markets).

f) Money creation/destruction whenever a bank gives out a loan in

a fractional-reserve banking system, a new sum of money is created and

conversely, whenever the principal on that loan is repaid money is destroyed

2.5 Regulations

Currently commercial banks are regulated in most jurisdictions by government

entities and require a special bank license to operate.

Usually the definition of the business of banking for the purposes of regulation

is extended to include acceptance of deposits, even if they are not repayable to

the customer's orderalthough money lending, by itself, is generally not

included in the definition.

Unlike most other regulated industries, the regulator is typically also a

participant in the market, being either a publicly or privately governed central

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 bank. Central banks also typically have a monopoly on the business of

issuing banknotes. However, in some countries this is not the case. In the UK,

for example, the Financial Services Authority licenses banks, and some

commercial banks (such as the Bank of Scotland) issue their own banknotes in

addition to those issued by the Bank of England, the UK government's central

bank.

Banking law is based on a contractual analysis of the relationship between

the bank (defined above) and the customerdefined as any entity for which the

bank agrees to conduct an account.

The law implies rights and obligations into this relationship as follows:

The bank account balance is the financial position between the bank and the

customer: when the account is in credit, the bank owes the balance to the

customer; when the account is overdrawn, the customer owes the balance to the

bank.

The bank agrees to pay the customer's checks up to the amount standing to the

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

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

customer, e.g. a cheque drawn by the customer.

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

account as the customer's agent, and to credit the proceeds to the customer's

account.

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 The bank has a right to combine the customer's accounts, since each account is

just an aspect of the same credit relationship.

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

extent that the customer is indebted to the bank.

The bank must not disclose details of transactions through the customer's

accountunless the customer consents, there is a public duty to disclose, the

bank's interests require it, or the law demands it.

The bank must not close a customer's account without reasonable notice, since

cheques are outstanding in the ordinary course of business for several days.

These implied contractual terms may be modified by express agreement

between the customer and the bank. The statutes and regulations in force within

a particular jurisdiction may also modify the above terms and/or create new

rights, obligations or limitations relevant to the bank-customer relationship.

Some types of financial institution, such as building societies and credit unions,

may be partly or wholly exempt from bank license requirements, and therefore

regulated under separate rules.

The requirements for the issue of a bank license vary between jurisdictions but

typically include:

1) Minimum capital

2) Minimum capital ratio

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

senior officers

4) Approval of the bank's business plan as being sufficiently prudent and

plausible.

2.6 Types of Banks

A. Banks' Activities can be divided into:

1) Retail banking, dealing directly with individuals and small businesses;

2) Business banking, providing services to mid-market business;

3) Corporate banking, directed at large business entities;

4) Private banking, providing wealth management services to high-net-worth

individuals and families;

5) Investment banking, relating to activities on the financial markets.

6) Most banks are profit-making, private enterprises. However, some are owned

by government, or are non-profit organizations.

B. Types of Banks

1) Commercial Banks:

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 The term used for a normal bank to distinguish it from an investment

bank. After the Great Depression, the U.S. Congress required that banks

only engage in banking activities, whereas investment banks were limited

to capital market activities. Since the two no longer have to be under

separate ownership, some use the term "commercial bank" to refer to a

bank or a division of a bank that mostly deals with deposits and loans from

corporations or large businesses.

2) Community Banks:

Locally operated financial institutions that empower employees to make

local decisions to serve their customers and the partners.

3) Community Development Banks:

Regulated banks that provide financial services and credit to under-served

markets or populations.

4) Land Development Banks:

The special banks providing long-term loans are called land development

banks (LDB). The history of LDB is quite old. The first LDB was started

at Jhang in Punjab in 1920. The main objective of the LDBs are to

promote the development of land, agriculture and increase the agricultural

production. The LDBs provide long-term finance to members directly

through their branches.

5) Credit Unions or Co-Operative Banks:

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 Not-for-profit cooperatives owned by the depositors and often offering

rates more favorable than for-profit banks. Typically, membership is

restricted to employees of a particular company, residents of a defined

area, members of a certain union or religious organizations, and their

immediate families.

6) Postal Savings Banks:

Savings banks associated with national postal systems.

7) Private Banks:

Banks that manage the assets of high-net-worth individuals. Historically a

minimum of USD 1 million was required to open an account, however,

over the last years many private banks have lowered their entry hurdles to

USD 250,000 for private investors.

8) Offshore Banks:

Banks located in jurisdictions with low taxation and regulation. Many

offshore banks are essentially private banks.

9) Savings Bank:

In Europe, savings banks took their roots in the 19th or sometimes even in

the 18th century. Their original objective was to provide easily accessible

savings products to all strata of the population. In some countries, savings

banks were created on public initiative; in others, socially committed

individuals created foundations to put in place the necessary infrastructure.

Nowadays, European savings banks have kept their focus on retail

banking: payments, savings products, credits and insurances for

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 individuals or small and medium-sized enterprises. Apart from this retail

focus, they also differ from commercial banks by their broadly

decentralized distribution network, providing local and regional outreach

and by their socially responsible approach to business and society.

10) Building Societies and Lands Banks:

Institutions that conduct retail banking.

11) Ethical Banks:

Banks that prioritize the transparency of all operations and make only

what they consider to be socially responsible investments.

12) A direct or internet-only bank is a banking operation without any physical

bank branches, conceived and implemented wholly with networked

computers.

C. Types of Investment Banks

Investment banks "underwrite" (guarantee the sale of) stock and bond issues,

trade for their own accounts, make markets, provide investment

management, and advise corporations on capital market activities such as

mergers and acquisitions.

Merchant banks were traditionally banks which engaged in trade finance.

The modern definition, however, refers to banks which provide capital to

firms in the form of shares rather than loans. Unlike venture caps, they tend

not to invest in new companies.

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D. Both combined
Universal banks, more commonly known as financial services companies,

engage in several of these activities. These big banks are very diversified

groups that, among other services, also distribute insurance hence the

term bancassurance, a portmanteau word combining "banque or bank" and

"assurance", signifying that both banking and insurance are provided by the

same corporate entity.

E. Other Types of Banks

Central banks are normally government-owned and charged with quasi-

regulatory responsibilities, such as supervising commercial banks, or

controlling the cash interest rate. They generally provide liquidity to the

banking system and act as the lender of last resort in event of a crisis.

3. BANKING SYSTEM IN INDIA

3.1 Introduction

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 Banking in India, in the modern sense, originated in the last decades of the

18th century. Among the first banks were the Bank of Hindustan, which was

established in 1770 and liquidated in 1829-32; and the General Bank of

India, established in 1786 but failed in 1791.

The largest bank, and the oldest still in existence, is the State Bank of

India (S.B.I). It originated as the Bank of Calcutta in June 1806. In 1809, it

was renamed as the Bank of Bengal. This was one of the three banks funded

by a presidency government, the other two were the Bank of Bombay and

the Bank of Madras. The three banks were merged in 1921 to form

the Imperial Bank of India, which upon India's independence, became

the State Bank of India in 1955. For many years the presidency banks had

acted as quasi-central banks, as did their successors, until the Reserve was

established in 1935, under the Reserve Bank of India Act, 1934.

In 1960, the State Banks of India was given control of eight state-associated

banks under the State Bank of India (Subsidiary Banks) Act, 1959. These are

now called its associate banks. In 1969 the Indian government

nationalized 14 major private banks. In 1980, 6 more private banks were

nationalized. These nationalized banks are the majority of lenders in

the Indian economy. They dominate the banking sector because of their large

size and widespread networks.

The Indian banking sector is broadly classified into scheduled banks and

non-scheduled banks. The scheduled banks are those included under the 2nd

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 Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are

further classified into: nationalized banks; State Bank of India and its

associates; Regional Rural Banks (RRBs); foreign banks; and other Indian

private sector banks. The term commercial banks refers to both scheduled

and non-scheduled commercial banks regulated under the Banking

Regulation Act, 1949.

Generally banking in India is fairly mature in terms of supply, product range

and reach-even though reach in rural India and to the poor still remains a

challenge. The government has developed initiatives to address this through

the State Bank of India expanding its branch network and through the

National Bank for Agriculture and Rural Development with facilities

like microfinance.

3.2 Banking Structure

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3.3 Current Period

The Indian banking sector is broadly classified into scheduled banks and

non-scheduled banks. All banks included in the Second Schedule to the

Reserve Bank of India Act, 1934 are Scheduled Banks. These banks

comprise Scheduled Commercial Banks and Scheduled Co-operative Banks.

Scheduled Co-operative Banks consist of Scheduled State Co-operative

Banks and Scheduled Urban Cooperative Banks. Scheduled Commercial

Banks in India are categorized into five different groups according to their

ownership and/or nature of operation:

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 State Bank of India and its Associates

Nationalized Banks

Private Sector Banks

Foreign Banks

Regional Rural Banks.

By 2010, banking in India was generally fairly mature in terms of supply,

product range and reach-even though reach in rural India still remains a

challenge for the private sector and foreign banks. In terms of quality of assets

and capital adequacy, Indian banks are considered to have clean, strong and

transparent balance sheets relative to other banks in comparable economies in

its region. The Reserve Bank of India is an autonomous body, with minimal

pressure from the government.

With the growth in the Indian economy expected to be strong for quite some

time-especially in its services sector-the demand for banking services,

especially retail banking, mortgages and investment services are expected to be

strong. One may also expect M&As, takeovers, and asset sales.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase

its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the

first time an investor has been allowed to hold more than 5% in a private sector

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 bank since the RBI announced norms in 2005 that any stake exceeding 5% in

the private sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are

too aggressive in their loan recovery efforts in connation with housing, vehicle

and personal loans. There are press reports that the banks' loan recovery efforts

have driven defaulting borrowers to suicide.

By 2013 the Indian Banking Industry employed 1,175,149 employees and had a

total of 109,811 branches in India and 171 branches abroad and manages an

aggregate deposit of67,504.54 billion (US$1.0 trillion or 910 billion)

and bank credit of52,604.59 billion (US$780 billion or 710 billion). The net

profit of the banks operating in India was 1,027.51 billion(US$15 billion or

14 billion) against a turnover of 9,148.59 billion (US$140 billion or

120 billion) for the financial year 2012-13.

Pradhan Mantri Jan Dhan Yojana (Prime Minister's People Money Scheme) is a

scheme for comprehensive financial inclusion launched by the Prime Minister

of India, Narendra Modi, in 2014. Run by Department of Financial

Services, Ministry of Finance, on the inauguration day, 1.5 Crore (15 million)

bank accounts were opened under this scheme. By 15 July 2015, 16.92 crore

accounts were opened, with around20,288.37 crore (US$3.0 billion) were

deposited under the scheme, which also has an option for opening new bank

accounts with zero balance.

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3.4 Banking Codes

The Banking Codes and standards Board of India is an independent and

autonomous banking industry body that monitors banks in India. To improve

the quality of banking services in India. S S Tarapore (former deputy governor

of RBI) had the idea to form this committee.

3.5 Adopting New Banking Technology

The IT revolution has had a great impact on the Indian banking system. The use

of computers has led to the introduction of online banking in India. The use of

computers in the banking sector in India has increased many fold after the

economic liberalization of 1991 as the country's banking sector has been

exposed to the world's market. Indian banks were finding it difficult to compete

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 with the international banks in terms of customer service, without the use of

information technology.

The RBI set up a number of committees to define and co-ordinate banking

technology. These have included:

In 1984 was formed the Committee on Mechanization in the Banking Industry

(1984) hose chairman was Dr. C Rangarajan, Deputy Governor, Reserve Bank

of India. The major recommendations of this committee were

introducing MICR technology in all the banks in the metropolises in India. This

provided for the use of standardized cheque forms and encoders.

In 1988, the RBI set up the Committee on Computerization in Banks

(1988) headed by Dr. C Rangarajan. It emphasized that settlement operation

must be computerized in the clearing houses of RBI in

Bhubaneshwar, Guwahati, Jaipur, Patna and Thiruvananthapuram. It further

stated that there should be National Clearing of inter-city

cheques at Kolkata, Mumbai, Delhi, Chennai and MICR should be made

operational. It also focused on computerization of branches and increasing

connectivity among branches through computers. It also suggested modalities

for implementing on-line banking. The committee submitted its reports in 1989

and computerization began from 1993 with the settlement between IBA and

bank employees' associations.

In 1994, the Committee on Technology Issues relating to Payment

systems, Cheque Clearing and Securities Settlement in the Banking Industry

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 (1994) was set up under Chairman W S Saraf. It emphasized on Electronic

Funds Transfer (EFT) system, with the BANKNET communications network as

its carrier. It also said that MICR clearing should be set up in all branches of all

those banks with more than 100 branches.

In 1995, the Committee for proposing Legislation on Electronic Funds Transfer

and other Electronic Payments (1995) again emphasized on EFT system.

3.6 Automated Teller Machine Growth

The total number of automated teller machines (ATMs) installed in India by

various banks as of end June 2012 was 99,218. The new private sector banks in

India have the most ATMs, followed by off-site ATMs belonging to SBI and its

subsidiaries and then by nationalized banks and foreign banks, while on-site is

highest for the nationalized banks of India.

Branches and ATMs of Scheduled Commercial Banks as of end December 2015

Number of
Bank type On-site ATMs Off-site ATMs Total ATMs
branches

Nationalized
33,627 38,606 22,265 60,871
banks

State Bank 13,661 28,926 22,827 51,753

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of India

Old private
4,511 4,761 4,624 9,385
sector banks

New private
1,685 12,546 26,839 39,385
sector banks

Foreign
242 295 854 1,149
banks

TOTAL 53,726 85,134 77,409 1,62,543

3.7 Cheque Truncation Initiative

In 2008 the Reserve Bank of India introduced a system to allow cheque

truncation in India, the cheque truncation system as it was known was first

rolled out in the National Capital Region and then rolled out nationally.

3.8 Expansion of Banking Structure

Physical as well as virtual expansion of banking through mobile banking,

internet banking, tele banking, bio-metric and mobile ATMs is taking

place since last decade and has gained momentum in last few years

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4. CONCLUSION

The banking sector in India is passing through a period of structural change under the

combined impact of financial sector reforms, internal competition, changes in

regulations, new technology, global competitive pressure and fast evolving strategic

objectives of banks and their existing and potential competitors.

Until the last decade, banks were regarded largely as institutions rather akin to public

utilities. The market for banking services were oligopolies and Centralized while the

market place was regulated and banks were expected to receive assured spreads over

their cost of funds. This phenomenon, which was caricatured as 3-6-3 banking in the

united states, meaning that banks accepted deposits at 3%, lent at 6%, and went home

at 3 p.m. to play golf, was the result of the sheltered markets and administrated prices

for banking products. Existence of entry barriers for new banks meant that

competition was restricted to existing players, who often operated as a cartel, even in

areas where the freedom to price their products existed.

The market place began to change for banks in India as a result of reforms of the

financial sectors initiated in the current decade. On account of policy measures

introduce to infuse greater competitive vitality in the system, the banking has entered

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in to a competitive phase. Competition has emerged not only from within the banking

system but also from non-banking institutions. Lowering of entry barriers,

deregulation of interest rates and growing sophistication of customers have made

banking far less oligopolistic today. Introduction of capital adequacy and other

prudential norms, freedom granted to enter into new turf's and greater overlap of

functions between banks and non-banks have forced banks to get out of their cozy

little world and think of the future of the banking.

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5. BIBLIOGRAPHY
The information required for this project was taken from the

following-
1. Websites
a. www.investopedia.com/university/banking-system/
b. www.yourarticlelibrary.com/banking/indian-banking-

system-structure-and-other-details-with-diagrams/23495/
2. Book Reference
a. S.M. Jawed Akhtar Banking System in India.
b. Steven Jones Banking System.

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