MEANING OF BANK

A bank is a financial institution that accepts deposits and channels those deposits into lending activities. Banks primarily provide financial services to customers while enriching investors. Government restrictions on financial activities by banks vary over time and location. Banks are important players in financial markets and offer services such as investment funds and loans. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies.

ORIGIN OF WORD BANK

The name bank derives from the Italian word banco "desk/bench", used during the Renaissance by Jewish Florentine bankers, who used to make their transactions above a desk covered by a green tablecloth. [2] However, there are traces of banking activity even in ancient times, which indicates that the word 'bank' might not necessarily come from the word 'banco'.

In fact, the word traces its origins back to the Ancient Roman Empire, where moneylenders would set up their stalls in the middle of enclosed courtyards called macella on a long bench called a bancu, from which the words banco and bank are derived.

In the earlier societies functions of a bank were done by the corresponding institutions dealing with loans and advances. Britishers brought into India the modern concept of banking by the start of Bank of England in 1694. In 1708, the bank of England was given the monopoly for the issue of currency notes by an Act. In nineteenth century various banks started operations, which primarily were receiving money on deposits, lending money, transferring money from one place to another and bill discounting.

HISTORY OF BANKING IN INDIA

Banking in India has a very old origin. It started in the Vedic period where literature shows the giving of loans to others on interest. The interest rates ranged from two to five percent per month. The payment of debt was made pious obligation on the heir of the dead person.

Modern banking in India began with the rise of power of the British. To raise the resources for the attaining the power the East India Company on 2nd

June 1806 promoted the Bank of Calcutta. In the mean while two other banks Bank of Bombay and Bank of Madras were started on 15 th April 1840 and 1st July, 1843 respectively. In 1862 the right to issue the notes was taken away from the presidency banks. The government also withdrew the nominee directors from these banks. The bank of Bombay collapsed in 1867 and was put under the voluntary liquidation in 1868 and was finally wound up in 1872. The bank was however able to meet the liability of public in full. A new bank called new Bank of Bombay was started in 1867.

On 27th January 1921 all the three presidency banks were merged together to form the Imperial Bank by passing the Imperial Bank of India Act, 1920. The bank did not have the right to issue the notes but had the permission to manage the clearing house and hold Government balances. In 1934, Reserve Bank of India came into being which was made the Central Bank and had power to issue the notes and was also the banker to the Government. The Imperial Bank was given right to act as the agent of the Reserve Bank of India and represent the bank where it had no braches.

In 1955 by passing the State Bank of India 1955, the Imperial Bank was taken over and assets were vested in a new bank, the State Bank of India.

Bank Nationalization:After the independence the major historical event in banking sector was the nationalization of 14 major banks on 19th July 1969. The nationalization was deemed as a major step in achieving the socialistic pattern of society. In 1980 six more banks were nationalized taking the total nationalized banks to twenty.

STRUCTURE OF INDIAN BANKING INDUSTRY

Land Mortgage IFCIRural Credit SFCs Industrial Dev. IRBIHousing Finance NABARD

EXIM Bank HDFCSIDBI

Private Sector

Commercial Banks

Specialized banks

Institutional banks

Non Banking Financial Institutions

Nationalised banks (20) SBI and

Associate

Banks

Private Sectors Banks

Foreign Banks

Old private sector banks

New private sector banks

CENTRAL BANK

STRUTURE OF SCHEDULED COMMERCIAL BANKS

The composition of the board of directors of a scheduled commercial bank shall consist of whole time chairman. Section 10A of the Banking Regulation Act, 1949 provides that not less than fifty-one per cent, of the total number of members of the Board of directors of a banking company shall consist of persons, who shall have special knowledge or practical experience in respect of one or more of the matters including accountancy, agriculture and rural economy, banking, co-operation, economics, finance, law, small-scale industry, or any other matter the special knowledge of, and practical experience in, which would, in the opinion of the Reserve Bank, be useful to the banking company. Out of the aforesaid number of directors, not less than two shall be persons having special knowledge or practical experience in respect of agriculture and rural economy, co-operation or small-scale industry.

Besides the above the board of the scheduled bank shall consist of the directors representing workmen and officer employees. The Reserve Bank of India and the Central Government also has right to appoint their nominees into the board of the banks.

PRESENT SCENARIO OF BANKS IN INDIA

Banks are extremely useful and indispensable in the modern community. The banks create the purchasing power in the form of bank notes, cheques bills, drafts etc, transfers funds bring borrows and lenders together, encourage the habit of saving among people.

The banks have played substantial role in the growth of Indian economy. From the meager start in 1860 the banks have come to long way. At present in India there are 19 nationalized banks, State bank of India and its seven Associate banks, 21 old private sector banks and 8 new private sector banks. Besides them there are more than 30 foreign banks either operating themselves or having their branches in India.

State bank of India and its associates

Name of bank Year of incorporation No. of OfficesState Bank of Bikaner & Jaipur

833

State Bank of Hyderabad

1941 943

State Bank of India 1955*. 9161

State Bank of Indore 1960 456State Bank of Mysore 1913 639State Bank of Patiala 1917 754State Bank of Saurashtra

1902 429

State Bank of Travancore

1945 681

Nationalized Banks

Name of bankYear of incorporation No. of Offices

Allahabad Bank 1865 2027Andhra Bank 1923 1159Bank of Baroda 1908 2772Bank of India 1906 2668Bank of Maharashtra 1935 1330Canara Bank 1906 2627Central Bank of India 1911 3239Corporation Bank 1906 799Dena Bank 1938 1072Indian Bank 1907 1417Indian Overseas Bank 1937 1583Oriental Bank of Commerce 1943 1166Punjab & Sind Bank 1908 787Punjab National Bank 1895 4117Syndicate Bank 1925 1905UCO Bank 1943 1801Union Bank of India 1919 2140

United Bank of India 1950 1343Vijaya Bank 1931 966

Old private Sector Banks

Name of bank Year of incorporation No. of OfficesBank of Rajasthan 1943 388Bharat Overseas Bank 1973 91Catholic Syrian Bank 1920 314City Union Bank 1904 137Development Credit Bank 1995** 88Dhanalakshmi Bank 1927 180Federal Bank 1931 471Ganesh Bank of Kurundwad -- 31ING Vysya Bank 1930 381Jammu & Kashmir Bank 1938 439Karnataka Bank 1924 398Karur Vysya Bank 1926 249Lakshmi Vilas Bank 1926 239Lord Krishna Bank 1940 118Nainital Bank 1922 69Ratnakar Bank 1943 75Sangli Bank 1948 192SBI Comm. & Intl. Bank 1993 3South Indian Bank 1929 438Tamilnad Mercantile Bank 1921 183United Western Bank 1936 237

** Converted to a private sector commercial bank on 31st May, 1995. Started as a Credit Society set up by the followers of His Highness the Aga Khan in the 1930s and later converted into Co-operative Bank.

New Private Sector banks

Name of bank Year of incorporation No. of OfficesBank of Punjab* 1995 120Centurion Bank 1994 77HDFC Bank 1994 446ICICI Bank 1994 519IDBI Bank Ltd. 1994 157IndusInd Bank 1995 127Kotak Mahindra Bank 1985 54

UTI Bank 1994 249Yes Bank 2003 3

* Now merged with Centurion Bank

Foreign Banks

Name of bank No. of Offices

ABM Amro Bank

19

Abu Dhabi Commercial Bank 2American Express Bank 8Antwerp Diamond Bank 1Arab Bangladesh Bank 1Bank International Indonesia 1Bank of America 5Bank of Bahrain & Kuwait 2Bank of Ceylon 1Bank of Nova Scotia 5Bank of Tokyo Mitsubishi 3Barclays Bank 1BNP Paribas 9Calyon Bank 4Chinatrust Commercial Bank 1Cho Hung Bank 1Citibank 35DBS Bank 1Deutsche Bank 5Hongkong & Shanghai Banking Corpn. 39JP Morgan Chase Bank 1Krung Thai Bank 1Mashreq Bank 2Mizuho Corporate Bank 1Oman International Bank 2Societe Generale 2Sonali Bank 1Standard Chartered Bank 85State Bank of Mauritius 3UFJ Bank 1

(Source: A profile on banks 2004-05, RBI))

Future is bright:

The Information Technology (IT) is becoming an important component of the banking sector. The customers have become more demanding and they need value added services from the banks. The foreign banks have raised the expectations of the customers causing the bank to invest strongly on IT. The Indian banks have started to meet the expectations of the people by opening both onsite and offsite ATMs. Banks have also started telebanking, anytime/anywhere banking, mobile banking and Internet banking to give the facilities to the customers. Banks have also following the RBI sponsored technology programmes like mail messaging, Electronic fund transfers (EFT), Structured Financial Messaging System (SFMS), (Real Time Gross Settlement (RTGS), Centralized Fund Management System (CFMS) and Negotiated Dealing System / Public Debt Office (NDS/PDO).

Banks have been given more teeth to tackle the Non performing assets by passing the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. Under this Act, the banks can take over the assets of the defaulters either by themselves or with the help of Court. The power is in addition to the power to recover through the Debt Recovery Tribunal. The Asset Reconstruction Companies have been formed which also take over the distress assets from the banks.

REFORMS IN BANKING SECTOR IN INDIA

The Indian banking sector is an important constituent of the Indian financial system. The banking sector plays a vital role through promoting business in urban as well as in rural areas in recent years. Without a sound and effective banking system, India can not be considered as a healthy economy. For the past three decades India's banking system has several outstanding achievements to its credit. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. ‘With total deposits of over Rs. 22 lakh crores in 2007-08, the Indian commercial banking sector is one of the largest in the world. Over the decades, the Indian banking sector has grown steadily in size, measured in terms of total deposits, at a fairly uniform average annual growth rate of about 22%.

CHARACTERISTICS OF BANKING REFORMS

1. Financial sector reform was undertaken early in the reform-cycle in India

2. The financial sector was not driven by any crisis and the reforms have not been an outcome of multilateral aid.

3. The design and detail of the reform were evolved by domestic expertise, though international experience is always kept in view.

4. The Government preferred that public sector banks manage the over-hang problems of the past rather than cleanup the balance sheets with support of the Government.

5. It was felt that there is enough room for growth and healthy competition for public and private sector banks as well as foreign and domestic banks.

SCENARIO OF BANKING SECTOR IN PRE-REFORM PERIOD:

Banking is an ancient business in India. Initially, the growth of Indian banks was very slow and also experienced periodic failures between 1913 and 1948. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act, 1949 as per amending Act of 1965 (Act No. 23 of 1965).During those days, public had lesser confidence in the banks. As an aftermath deposit mobilization was slow. Government took major steps in Indian banking sector reform after independence. On 19th July 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. Fourteen major commercial banks were nationalized. Second phase of nationalization of Indian banking sector reform was carried out in 1980 with seven more banks having deposits over 200 crore. This step brought 80 percent of the banking segment in India under Government ownership. After the nationalization, the branches of the public sector bank in India rose to approximately 800 percent and deposits and advances took a huge jump by 11,000 percent. Thus, the Indian banking system became predominantly government owned by the early 1990s.

Banking sector in pre reform period was facing very poor performance due to excessive loans in comparison to total deposits having a ratio more than 50 percent consisting of about 90 percent of all commercial banking and continuous escalation in non-performing assets (NPAs) in the portfolio of banks also posed a significant threat to the very stability of the financial system.

WAVE OF BANKING SECTOR REFORMS IN 1991

In 1991, the country was caught into a deep crisis. The government at this juncture decided to introduce comprehensive economic reforms. The banking sector reforms were part of this package. The main objective of banking sector reforms was to promote a diversified, efficient and competitive financial system with the ultimate goal of improving the allocative efficiency of resources through operational flexibility, improved financial viability and institutional strengthening. Many of the regulatory and supervisory norms were initiated first for the commercial banks and were later extended to other types of financial intermediaries. While nudging the Indian banking system to better health through the introduction of international best practices in prudential regulation and supervision early in the reform process, the main idea was to increase competition in the system gradually. The reforms have focused on removing financial repression through reductions in statutory preemptions, while stepping up prudential regulations at the same time. Furthermore, interest rates on both deposits and lending of banks had been progressively deregulated. In August 1991, the Government appointed a committee under the chairmanship of M. Narasimham, which worked for the liberalization of banking practices. The aim of this Committee was to bring about ‘operational flexibility’ and ‘functional autonomy’ so as to enhance efficiency, productivity and profitability of banks.

The Committee submitted its report in November, 1991 and recommended - 1. ‘Reduction in CRR to 8.5 percent and SLR to 25 percent over a period of

about five years.

2. Deregulation of interest rates structure and decreasing the emphasis laid on directed credit and phasing out the concessional rates of interest to priority sector.

3. To raise fresh capital through public issue by the profit making banks.

4. Transparency in Balance sheets

5. Establishment of Special Tribunals to speed up the process of debts recovery

6. Establishment of an Assets Reconstruction Fund with special power of recovery

7. Bank restructuring through evolving a system of a broad pattern consisting of 3 or 4 large banks including SBI, 8-10 national Banks engaged in ‘Universal’ Banking with a network of branches, local banks confined to a specific region and RRBs confined to the rural areas engaged in financing of agriculture and allied activities.

8. Abolishment of branch licensing and leaving the matter of opening and closing of branches to the commercial judgment of individual banks

9. Progressive reduction in pre-emptive reserves. 10.Introduction of prudential norms to ensure capital adequacy norms,

proper income recognition, more stringent recognition of NPAs, classification of assets based on their quality and provisioning against bad and doubtful debts by constituting the special debt recovery tribunals

11.Introduction of greater competition by entry of private sector banks and foreign banks and permitting them to access capital market

12.Partial deviation from directed lending 13.Strengthening the supervisory mechanism by creating a separate Board

for Banking and Financial supervision 14.Up gradation of technology through the introduction of computerized

system in banks.15.Freedom to appoint chief executive and officers of the banks and changes

in the constitutions of the board 16.Bringing NBFC’S under the ambit of regulatory framework.

The Government also appointed another committee on banking sector reforms under the Chairmanship of M. Narasimham which submitted its report in April 1998. The committee focused on bringing about structural changes so as to strengthen the foundations of the banking system to make it more stable. The major recommendations of Narasimham Committee II were- 1. ‘In case of capital adequacy, strengthening the banking system through

an increase in the minimum capital adequacy ratio (CRAR) from 8 percent to 10 percent by 2002, 100 percent of fixed income portfolio marked-to-market by 2001 (up from 70 percent), 5 percent market risk weight for fixed income securities and open foreign exchange positions limits (no market risks weights previously) and 100 percent commercial

risks weight to Government-Guaranteed advances (previously treated as risk free)

2. To bring down net NPAs below 5 percent by 2000 and to 3 percent by 2002.

Reducing the minimum stipulated holding of the Government or RBI in the equity of nationalized banks or SBI to 33 percent

1. Merging financially strong institutions and giving a revival package to the weak banks

2. Strengthening the operation of rural financial institutions in terms of appraisal, supervision and follow-up, loan recovery strategies and development of bank-client relationships in view of higher NPAs in public sector banks due to directed lending.

3. Amendment to RBI Act and Banking Regulation Act’4

The Government focused on competition enhancing measures by way of granting operational autonomy to public sector banks, reduction of public ownership in public sector banks by allowing them to raise capital from equity market up to 49 percent of paid-up capital; setting of transparent norms for entry of Indian private sector, foreign and joint-venture banks and insurance companies, giving permission for foreign investment in the financial sector in the form of foreign direct investment (FDI) as well as portfolio investment, giving permission to banks to diversify product portfolio and business activities, to prepare aroadmap for presence of foreign banks and guidelines for mergers and amalgamation of private sector banks, public sector banks and NBFCs, and providing guidelines on ownership and governance in private sector banks. Government focused through reform process on enhancing the role of market forces by making sharp reduction in pre-emption through reserve requirement, market determined pricing for government securities, disbanding of administered interest rates with a few exceptions and enhanced transparency and disclosure norms to facilitate market discipline;introduction of pure inter-bank call money market, auction-based repos-reverse repos for short-term liquidity management, facilitation of improved payments and settlement mechanism, and requirement ofsignificant advancement in dematerialization and markets for securitized assets are being developed. A provision was made for introduction and phased implementation of international best practices and norms on risk-weighted capital adequacy

requirement, accounting, income recognition, provisioning and exposure, taking suitable measures to strengthen risk management through recognition of different components of risk, assignment of risk-weights to various asset classes, norms on connected lending, risk concentration, application of marked-to-market principle for investment portfolio and limits on deployment of fund in sensitive activities, and'Know Your Customer' and 'Anti Money Laundering' guidelines, roadmap for Basel II, introduction of capital charge for market risk, higher graded.

SCENARIO OF BANKING SECTOR IN POST REFORM PERIOD:As the Indian banking system had become predominantly government owned by the early 1990s, banking sector reforms essentially took a two pronged approach. First, the level of competition was gradually increased within the banking system while simultaneously introducing international best practices in prudential regulation and supervision tailored to Indian requirements. In particular, special emphasis was placed on building up the risk management capabilities of Indian banks while measures were initiated to ensure flexibility, operational autonomy and competition in the banking sector. Second, active steps were taken to improve the institutional arrangements including the legal framework and technological system. The supervisory system was revamped in view of the crucial role of supervision in the creation of an efficient banking system. . ‘Measures to improve the health of the banking system had included (i) restoration of public sector banks' net worth through recapitalization where needed; (ii) streamlining of the supervision process with combination of on-site and off-site surveillance along with external auditing; (iii) introduction of risk based supervision; (iv) introduction of the process of structured and discretionary intervention for problem banks through a prompt corrective action (PCA) mechanism; (v) institutionalization of a mechanism facilitating greater coordination for regulation and supervision of financial conglomerates; (vi) strengthening creditor rights (still in process); and (vii) increased emphasis on corporate governance.During the 90’s quite a few new private sector banks made their appearance, predominantly floated by public sector or quasi-public sector financial institutions. Several foreign banks also made their entry into the Indian banking scenario while the existing foreign banks expanded their operations. Meanwhile, the performance of public sector banks continued to be saddled

with operational and lending inefficiencies. ‘The Verma Committee in 2000 identified Indian Bank, UCO Bank and United Bank of India as the weakest of the twenty-seven public sector banks, in terms of NPAs and accumulated losses. In March 2002, the gross NPAs of scheduled commercial banks amounted to Rs. 71,000 crores out of which Rs. 57,000 crores or roughly 80 percent came from the public sector banks. Financial liberalization has, however, had a predictable effect in the distribution of scheduled commercial banking in India. Between 1969 and 1991 for instance, the share of the rural branches increased from about 22 percent to over 58 percent. The number of rural bank branches actually declined from the 1991 figure of over 35,000 branches by about 3000 branches. Between 1969 and 1991 the share of urban and metro branches fell from over 37 percent to less than 23 percent. In the years since it has crawled back up to over 31 percent.

EFFECT OF REFORMS

These reform measures have had major impact on the overall efficiency and stability of the banking system in India. The present capital adequacy of Indian banks is comparable to those at international level. There has been a marked improvement in the asset quality with the percentage of gross non-performing assets (NPAs) to gross advances for the banking system reduced from 14.4 per cent in 1998 to 7.2 per cent in 2004. The reform measures have also resulted in an improvement in the profitability of banks. The Return on Assets (RoA) of the banks rose from 0.4 per cent in the year 1991-92 to 1.2 per cent in 2003-04. Considering that, globally, the RoA has been in the range 0.9 to 1.5 per cent for 2004, Indian banks are well placed. The banking sector reforms also emphasized the need to review the manpower resources and rationalize the requirements by drawing a realistic plan so as to reduce the operating cost and improve the profitability. During the last five years, the business per employee for public sector banks more than doubled to around Rs.25 million in 2004.

CONCLUSIONSince the process of liberalization and reform of the financial sector were introduced in 1991, banking sector has undergone major transformation. The underlying objectives of the reform were to make the banking system more competitive, productive and profitable. Indian banks especially the public sector banks and the old private sector banks are lagging far behind their competitors in terms of both productivity and profitability so the public sector banks and old private sector banks need to go for the major transformation program for increase their productivity and profitability. No doubt, the banking sector has been successful in improving the health and efficiency of banking sector in India but they have failed in achieving growth with equity. Privatization and globalization have also introduced excessive competition (domestic as well as foreign) before Indian public sector banks which has created an unstable banking environment. After studying banking reform process it can be suggested that the public sector banks must create strategic alliance with the rural regional banks to open up rural branches and increased use of technology for improved products and services for the same. ‘Banks must reinvent themselves so that they can make a viable market out of the middle and low corporates.’9 Government should be strong enough to ensure accountability of professionally managed firms causing the sub prime crisis in well known financial institutions. Branch and ATM licensing should be abolished in order to reduce competition. Prevailing conditions in current scenario are not opportunistic in terms of fee income. ‘Although liberalization of financial services and competition has improved customer services but experience shows that customers' interests are not always accorded priority.’10 The banks need to focus at ensuring greater financial stability to tackle lots of challenges successfully to keep growing and strengthen the Indian banking sector.

REFERENCES

1. www.google.com2. www.rbi.org.in 3. www.wikepedia.org 4. “Report on Trend and Progress of Banking in India” by RBI .5. www.jstor.org 6. www.ssrn.com

ANASSIGNMENT

ON

“STRUCTURE OF BANKING IN INDIAAND

REFORMS IN BANKING SECTOR”

SUBMITTED TO: SUBMITTED BY:Mrs. Supreet Kaur Prabhjot Kaur Roll No.5525 MBA Finance 10th sem

COMMERCE AND BUSINESS MANAGEMENTGURU NANAK DEV UNIVERSITY

AMRITSAR