The Banking Sector in India 

The Banking sector in India has always been one of the most preferred avenues of employment. In the current decade, this has emerged as a resurgent sector in the Indian economy. As per the McKinsey report ‘India Banking 2010’, the banking sector index has grown at a compounded annual rate of over 51 per cent since the year 2001, as compared to a 27 per cent growth in the market index during the same period. It is projected that the sector has the potential to account for over 7.7 per cent of GDP with over Rs.7,500 billion in market cap, and to provide over 1.5 million jobs. 

Today, banks have diversified their activities and are getting into new products and services that include opportunities in credit cards, consumer finance, wealth management, life and general insurance, investment banking, mutual funds, pension fund regulation, stock broking services, custodian services, private equity, etc. Further, most of the leading Indian banks are going global, setting up offices in foreign countries, by themselves or through their subsidiaries.

CHAPTER V

PROGRESS OF THE BANKING SECTOR IN INDIA AND

THE UNION TERRITORY OF PONDICHERRY.

5,l Introduction

Banks constitute an important segment in financial arena of all countries

whether developed or developing or underdeveloped. Economic development of every

country depends upon financial sector particularly commercial banks. In fact economic

development and financial infrastructure go hand in hand. From time immemorial, the

conventional banker, an indispensable pillar of Indian society, giving and taking of

credit in one form or another, must have existed as earlier as the Vedic period. Money

lending was one of the recognised occupations under Manu's laws' .

The history of modem Indian banking2 goes back to 1683 when the first

Indian Bank was established on western lines in Madras. The establishment of the Bank

of Calcutta in 1806 marked the beginning of the modern banking era in India. Two more

Presidential Banks, namely, Bank of Bombay and Bank of Madras were set up in 1840

and 1843 respectively. With the launching of Swadeshi movement in 1905, there were

outbursts of banking activities. Many banks like Bank of Burma (1904), Bank of India

(1 906), Canara Bank (1 906), Bank of Rangoon (1 906), Indian Specie Bank (1 906),

1

N.K. Thingalaya, "Manu, Chanakya and the Rate of Interest", Pigmy Economic

Review, Vol. 36, Aug - Oct, 1994, pp. 1-5..

'c. Kugumakara Hebbar, "Growth of Banking in India Before Independence",

Pigmy Econgmic Review, August 1 9 89, pp .3 -4. Indian Bank (1 9061, Bank of Baroda (1 908) and Central Bank ( 191 1 ) had their operation

with a paid up capital of Rupees Five lakhs and above. But the present Indian banking

system had developed considerably since 1935. RBI has started its operation in 1935

through an Act. A critical review of the growth of banking in India in the pre-

independence period reveals that the banking system had neither a definite shape nor

policy except the creation of RBI in 1935. With the enactment of the Banking

Companies Act in 1949, the Indiaii banking system had undergone substantial changes

structurally, geographically and functionally.

Banking in India broadly falls under two categories: (a) Commercial

banks and (b) Co-operative banks. Commercial banks are the major players as far as

industry and trade sectors are concerned whereas co-operative banks cater to the needs of

rural economy particularly agriculture sector. Commercial banks fall under two distinct

categories, namely, Scheduled commercial banks and non-scheduled Commercial banks.

Scheduled commercial banks means the banks which are listed in the Second Schedule

of RBI Act, 1934. Under section 42 (1) of the Act, scheduled commercial banks are

expected to maintain cash balance to a minimum of three per cent of their net demand

and time liabilities, The cash reserve ratio is subject to upward / downward revision by

RBI. The scheduled commercial banks enjoy certain special privileges like availing

financial assistance under section 17 of the RBI Act. Non-scheduled Commercial banks

are not listed and they do not have any large network. As of now only, one non-

scheduled bank is functioning in India as compared to 16 nos on the eve of bank

nationalisation. 5.2 Progress of Banking in India

The progress of Commercial banking in India can be categorised under

the following four distinct phases: Phase I ( 1 860-1 946 ); Phase I1 (1 947-1968 ); Phase

111 (1969-1 990); Phase IV (1991- till date).

5.2.1 Progress of Banking - Phase I (1860 - 1946)

With the advent of British rule in India, the business of the indigenous

bankers had declined. The banks on western model have come into existence. Financial

transactions were handled by them. It was only in 1850's, the British bank actually

reached India. The first western type thrift institution introduced in India was the

Savings department of the Presidency Bank which, opened in the 1840's and was

followed in 1870 by District Savings Bank operated by the treasury and in 1882 by the

Postal Saving system. In 1900, the Postal savings system was the only such institution

left in the field besides the indigenous private institutions like chit funds, nidhis. Life

Insurance was still in the early stage of development at the beginning of World War I

and substantial part of this business was done by the British people rather than by the

Indian banks.

The Central bank in India came into existence on First April , 1935 The

bank was organised as a Joint Stock Company whose shares were held privately. This

bank had two major departments, namely, System department and Badsing department.

The RBI was the largest financial institution in India with about one-third of the assets of

all financial institutions. The Imperial Bank which came next was privately owned joint

stock campany with all its stock owned by the British ancestors living in India. Since the

Government deposits were transferred to RBI after 1935, the Imperial Bank came to rely increasingly on private deposits. About 95 per cent of the total funds of Imperial Bank

in 1946 came only through private funds,

5.2.2 Progress of Banking - Phase I1 (1947-1968)

The structure of the Indian banking till 1947 was not backed by adequate

control or directive measures. The Banking Regulation Act. 1949 provided the much

needed framework for proper supervision under RBI. 011 the Boards of directors of PSB,

there was a nominee represented from RBI and Government of India. This period

witnessed the disappearance of many smaller banks due to tight inspection by RBI.

Bigger banks' growth was facilitated by winding of business by smaller ones. This

period witnessed consolidation and growth of larger banks. There were attempts at

correcting the regional maldistribution in branch network, which was marked by heavy

concentration of branches at larger urban centres. Through effective branch licensing

policy, many banks were opened in rural unbanked centres. This period witnessed the

nationalisation of Imperial Bank, now called as the SBI and its Associate banks in 1955.

Between 1955 and 1968, the SBI and its Associates opened many branches. About 80

per cent of 1608 branches opened by SBI and its Associates during 1955 - 1968 were at

rural and semi-urban centres. The growth of bank branches during this period can be

seen in Table 5.1

Table 5.1: PROGRESS OF BANKING IN INDIA, 1951 - 1968

S1, State Bank of Scheduled Non-Scheduled

No. Year India and its Commercial Commercial Total

Associates Banks Banks

3. 1968 3379 5104 207 8690

Source: R. Srinivasan, Priority Sector lend in^ - A Study o f Indian Experience,

HimalayaPublishing House, Bombay 1995, p.6. Though there were welcome signs in increasing more number of bank

branches and intensive banking network, in the absence of policy compulsion. large

private sector banks controlled by a few big industrial business houses failed to meet the

requirements of small borrowers in agriculture. activities allied to agriculture, trade.

small scale industries, transport operations. Between 196 1-7 1. the number of

borrowal accounts had come down. Flow of credit to industrial sector was greater

whereas agricultural sector was languishing for want of funds. Official recognition of

the need to have a closer look at the functioning of the Commercial banking system has

necessitated the Social Control of banks in 1968 by the NCC. The first meeting of the

NCC in March, 1968 discussed and generally agreed on matters like deposit

mobilisation and deployment of credit to the targeted groups in the form of PSL with

special reference to agricultural sector.

5.2.3 Progress of Banking - Phase 111 (1969-1990)

The nationalisation of 14 Commercial banks in July, 1969 was the

culmination of Social control of banks in 1968. The development of Commercial

banking in India after the introduction of social control and nationalisation of major

banks has certain unique characteristics. The class banking has become mass banking

trying to realise the socially oriented objectives stipulated for the banking system under

the policy directives of the Government that promote growth with social justice. The

following were the major objectives of bank nationalisation:

a) to promote social and economic objectives of State policy by effective execution of

plans and achieve the ideals of socialistic pattern o f society; b) to remove the control by a few so as to make contribution of adequate credit for

agricultural and small industries and exports:

c) to give professional bent to bank management;

d) to encourage new class of entrepreneurs; and

e) to provide adequate training and reasonable service to the bank staff.

In April 1980, SIX more commercial banks were nationalised mak~ng the

T

total nationalised PSB to 20. Another milestone in the progress of the banking sector

was the setting up of W s . In July, 1975, the working group under the chairmanship of

Narasimham had recommended the setting up of RRBs as fullfledged scheduled banks

for mobilising savings and deploying credit in rural areas. These RRBs were sponsored

by Commercial banks. At the end of March, 1998 there were 196 IiRBs operating in

the country.

The banking sector has been made to serve the national economy as a

catalytic agent. It was felt that nationalisation was very essential to mob~lise the deposits

on a massive scale and sustain employment and to secure a more equitable distribution of

credit throughout the country. After the introduction of LBS, nationalised banks have

been identified in different selected districts of the country to prepare a blueprint for the

development of the respective districts. The designated bank in each district known as

"Lead Bank" prepares DCP and ACP. Thus the banking system has been made as an

i n s m e n t towards realising the social objectives from its earlier profit oriented

approach. Thrust was made towards PSL afker nationalisation. The PSL known as

directed credit programme has become an active mechanism and instrument in

transforming the neglected segments. Agriculture and allied activities, small scale and cottage industries. small road and water transport operators. retail traders were

articulated under PSL. RBI has stipulated that 40 per cent of net hank credit should

flow towards priority sector. Weaker sections are taken care of under the Prime

Minister's 20-Point Programme announced first in 1975, revised in 1982 and modified

in 1986. Thrust was made by Government of India to earmark adequate outlay by banks

in implementing the 20-Point Programme after having detailed consultations with RBI.

DRI Scheme was introduced to ameliorate the poverty-stricken masses in rural and urban

areas to avail bank credit at four per cent concessional bank interest. Minority welfare is

also taken care by commercial banks after bank nationalisation. Many of bank branches

were opened in the hitherto neglected rural and semi-urban areas.

The norms for opening bank branches in different areas are as follows3:

i. Rural group includes all centres with a population of less than 10,000.

ii. Semi-urban group includes centres with a population of 10,000 to One I&.

iii* Urban group includes centres with population of One lakh to 10 lakhs.

iv. Metropolitan group includes centres with population of 10 lakhs and more.

NABARD was set up on 12.07.1982 for supporting and promoting

agriculture and rural development and to provide short-term, medium term and long

term credit to state Co-operative banks, RRBs and commercial banks. Refinancing

facility is made available for n o n - f m projects also by NABARD. The Industrial

Development Bank of India (IDBI) was set up in 1964 to serve as an Apex institution for

Term finance for industries in India. Besides, it also plans, promotes and develops

industries, undertakes market investments and serves as a techno-economic agency for

3~eserve Bank of India, Banbin? Statistics 1972-95 - Basic Statistical Returns,

Bombay, 1998,ppl-2. the development of industries. To take care of the small industries on a sound

footing a subsidiary organisation of IDBI. namelj.SIDB1 was set up. Other specialised

financial institutions with Government patronage have come into existence during this

phase. This phase had witnessed the growth of financial assets in leaps and bounds.

More bank branches were opened. There was an abnormal growth of deposits and

advances particularly to the priority sectors. The diversification of financial assets had

also taken place in the form of diversified portfolio investment in mutual funds, shares,

debentures and equities. Stock markets had witnessed many changes and many new

investors from different strata entered into stock markets.

5.2.4 Progress of Banking - Phase IV (1991 - Till Date)

The advent of Narasimharn Committee on financial sector reforms

introduced sweeping changes in the financial sector particularly in the functioning of

cornrnercial banks with regard to portfolio management and flow of credit to the target

group under PSL. The Narashimham Committee had recommended that directed credit

should be phased out to 10 per cent from the stipulated 40 per cent grad~~ally. This is in

tune with the World Bank suggestions and also due to the integration of Indian economy

into global network. Thanks to this development in financial sector, non-viable bank

branches mostly in rural areas were either merged with existing viable bank branches or

closed down. This period has been witnessing many irregularities and malpractices in

various public sector and private banks thereby warranting the necessary corrective

action on the part of the RBI. The issue of Non performing assets has assumed

importance due to non-grounding of assets by beneficiaries. The process of financial

sector reforms initiated in 1991-92 is pursued with vigour and determination to improve

the competitiveness, operational efficiency and transparency of the financial sector. The financial reforms touched a number of areas - monetary and credit policy issues relating

to reserve requirements. interest rates, refinancing facilities and indirect monetary control

via the securities market and matters relating to strengthening and consolidation of

banks, the prescription of prudential norms relating to asset classification and income

recognition, adequate provisioning for bad and doubtful assets. introduction of a capital

to risk-weighted assets ratio system for banks (including foreign banks) and

establishment of a strong supervisory system. All of these are expected to bring about a

significant improvement in the f~~nctioning of the banking system. One of the problems

faced by banks is the low rate of loan recoveries. This has a bearing on the accounting

standards as well as on current operations of banks. It is in this context that the

'Recovery of Debts Due to Banks and Financial Institutions Bill, 1993' was passed in

August 1993 which facilitated the establishment of Debt Recovery Tribunals for

expeditious adjudication and recovery of debts due to banks and financial institutions.

The provisions of this Act shall not apply where the amount of debt due to any bank or

financial institution or to a consortium of banks or financial institutions is less than Rs,

10 lakh or such amount, being not less than Rupees One lakh, as the Central Government

may, by notification specify. These tribunals will expeditiously deal with applications

made by bankslfinancial institutions and endeavor to dispose of such applications within

six months from the date of receipt of such applications. This period witnessed the

widening gap between the deposits and credit and thereby gradual reduction in CDR

eventually affecting the flow of credit towards PSL. The trend and progress of

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P l3m-n the above figures, we can deduce that the number of commercial

banks have gone up to 300 in March 1998 as against 89 numbers in 1969. The increase

in the number of Commercial banks was mainly due to the increase in W s . The fact

to be observed during 1969 to 1998 is that non-scheduled Commercial banks have come

down from 16 to one during the same period. Number of bank offices in India has gone

up from 8262 in 1969 to 64218 in March '98. There was 7.77 time increase in the

growth of bank offices over the last 29 years. Rural branches have increased to 32878 in

1998 from a mere 1833 in 1969 indicating 17.94 times increase. Semi-urban branches

have gone up to 13980 from 3342 for the same period, indicating an increase of 4.18

times. There was 6.06 times increase in urban branches from 1584 in 1969 to 9597 in

March 1998. An increase of 5.17 times has been noticed in expanding bank branches in

metropolitan areas, from 1503 numbers to 7763 numbers for the same period. Opening

of more number of branches in rural areas has facilitated intensive banking network and

thereby bringing bank to the door steps of the depositors and the loanee. 64000

population had a bank branch in 1969. Due to intensive branch licensing policy of RBI

particularly in rural and semi-urban areas, population per bank branch has come down to

15000 in 1998. This means that the gap has been narrowed down to the minimum and

close rapport has been established between the banks and the people,

Deposits by scheduled commercial banks have grown to a considerable

extent from a mere Rs.4646 crores in 1969 to Rs,605410 crores in 1998 denoting, an

increase of 130.31 times. The credit of scheduled commercial banks has gone to the

extent of Rs.324079 crores in 1998 from Rs.3599 crores in 1969 indicating an increase

of 90.04 times. The deposits of commercial banks as a percentage to national income

has increased fiam 15.5 per cent in 1969 to 50.1 per cent in 1997. This shows the

important role played by commercial banks in determining the national income of the Iiidian economy. This also establishes the fact that major part of the development of

Indian economy depends upon the banking sector. Mopping up of large chunk of

deposits was mainly possible due to large network of branch expansion p~icularly in

rural areas.

The share of priority sector advances to the total credit portfolio has

moved from a mere Rs.504 crores in 1969 to Rs.93807 crores in March 1997 indicating

an increase of 186.13 times. The priority sector advances have gone up from 14 per cent

in 1969 to 34.8 per cent in 1997. The stipulated target of 40 per cent was achieved and

even exceeded in 1989. Since 1991, the share has come down and reached a level of

34.8 per cent in March., 1997. The reason for such a deceleration in growth of priority

sector advances may partly be attributed to reduction in number of bank branches in rural

areas from a maximum of 35389 in March, 93 to 3291 8 in March, 97. This might have

a direct bearing on the flow of credit to agriculture and allied activities besides non-farm

activities. Per capita deposit of commercial banks has increased from Rs.88 in 1969 to

Rs.6270 in 1998. Per capita credit has increased from Rs.68 to Rs.3356 for the same

period. This period has also witnessed the decline in CDR from 77.5 per cent in 1969 to

53.5 per cent in 1998. The Investment Deposit Ratio (IDR) has gone up moderately from

29.3 per cent to 36.1 per cent in 1997. The progress of banking Sector in India was on a

very positive trend despite shortcomings in the nineties mainly in the social arena due to

implementation of structural reforms in financial sector.

5.3 Lead Bank Scheme - Rationale and Methodology

While discussing progress of banks, a prominent place should also be

given for the Lead Bank scheme which is an innovative and development oriented

Indian economy based on 'Area Approach' -

96 evolved by a study group. This study group constituted by NCC made a detailed

analysis for setting up an appropriate organisational framework for implementing various

social objectives set before the country. The Committee report known as Gadgil

Committee Report had suggested that banks should adopt area approach and

recommended allotment of districts to different commercial banks to take lead role and

act as consortium leader. This was mainly intended to the main task of identifying the

territorial and functional credit gaps and of making recommendations for the extensive

and adequate institutional credit on reasonable terms to neglected sectors and areas.

The purpose of nationalisation of 14 Commercial bailks in July, 1969 was

to make available the adequate flow of institutional credit to the economy in general and

the rural areas and the weaker sections in particular, After nationalisastion of banks, the

RBI had appointed a Committee of Bankers under the Chairmanship of Nariman to

evolve a co-ordinated programme for setting up of adequate banking facilities in the

unbanked and underbanked districts on the lines of the Gadgil study group. This

Committee had submitted its report on 15' November 1969 recommending that banks

should be allotted specific districts to take care of an integrated area approach relating to

the particular district. The allotted bank for the specified district would act as a Nodal or

Lead Bank which would take a lead role in surveying the potentials available in the area.

The LBS was endorsed by the Standing Committee of Bankers at the meeting held in the

RBI on 12' December 1969. After giving a concrete shape to 'area approach', the LBS

come into operation. Banks were designated as Lead Bank on the basis of :

a)

the size of the bank;

b)

the adequacy of its resources for handling the volume of work; c )

continuity of districts so that a cluster of each district could emerge;

d) regional operation of banks and the desirability for each state to have more than

one Lead Bank operating in the area and to the extent possible for each bank to

operate in more than one State.

Though the Lead Bank is treated as the custodian bank as far as a

particular district is concerned, it does not mean that it has a monopoly of banking

business in that district . It is expected to act as a consortium leader rather than as a big

brother. The major functions of the LBS as spelt out by RBI are:

i. surveying the lead districts on resources and potential for banking development,

ii. surveying the number of industrial and commercial units and other

establishments and farms which do not have banking accounts or depend mainly

on money lenders and increasing their own resources by the creation of surpluses

from the additional production financed by the banking system;

iii. examining the facilities for marketing of agricultural and industrial production,

storage and warehousing-spare and linking of credit with marketing;

iv. surveying the facilities for the stocking of fertilizers and other agricultural inputs

and repairing and servicing of equipment;

v. recruiting and traning the staff, which would offer advice to small borrowers and

farmers in the priority sectors, covered by the proposed credit insurance schemes

and follow-up and inspection of the end use loans;

vi. assisting other primary lending agencies; and

vii. maintaining contacts and liaison with Government and quasi-Government

agencies. RBI has designed common formats to elicit information from all the

designated Lead Banks on some basic statistical information pertaining to the allotted

district(s). In order to monitor the implementation of LBS effectively. as per the

guidelines and directions of RBI, each Lead Bank constituted district forum. Lead Banks

are expected to enter into a meaningful business with the cornnlercial banks, RRBs, co-

operative institutions and relevant developmental departments through an established

forum called as DCC with the following objectives.

a)

to evolve methods for exchanging information between banks about intending

borrowers and lending to priority sectors in the districts.

b)

to identify bankable schemes arnong those furnished by the Govt. and on its own

and work-out suitable schemes to finance them and

c)

to serve as a clearing house for discussing problems arising out of financing

priority sectors.

The DCC has the following functions :

a)

to examine whether the credit supplied by the cormnercial banks and co-

operatives is adequate from the point of view of the borrowers.

b)

to discuss as to how the small loans to the socially and economically weaker

sections can be efficiently disbursed.

c)

to find out the measure for avoiding the danger of multiple or double financing.

d)

to discuss how the State agencies and banks can help the small scale industries to

prepare their schemes to increase the production.

e)

to evolve methods for ensuring better co-ordination between commercial and co-

operative banks in exchanging credit information and

f)

to assess tht: b-g potentials of the district periodically The DCC was formed at the district level covering all the 338 districts in

initially. The District Collector or the District Magistrate used to preside over these

meetings by convention built up by the bankers. There was no Government order

directing the district authorities to preside over these meetings. In order to discuss the

problems identified focussed at the DCC, a State level forum was constituted in 1976 at

the instance of Government of India. The State Level Bankers' Committee thus came

into existence at the State for bringing about better co-ordination among the banks by

making all the banks as members of this committee. Banks having large network of

bank branches and handling a fairly large volume of banking business in the State was

designated as convenor of this Committee.

Besides, Regional Consultative Committee (RCC) was set-up at each

region grouping all the contiguous States/Union Territories. The States of Tamil Nadu,

Kerala, Karnataka, Andhra Pradesh and Union Territories of Pondicherry and

Lakshadweep constitute the Southern Regional Consultative Committee. Through this

forum, dialogue and exchange of ideas are established between the Union Finance

Minister, RBI and Chairman of various public sector banks on the one hand and Chief

Ministers / Finance Ministers of various States and Union Territories on the other hand,

for better implementation of banking schemes including the LBS for balanced regional

development.

As at the end of December, 1989 lead districts under LBS have increased

to 444 from 338. SBI and its Associates, all Public Sector Banks and one Private

Sector Bank were allotted lead districts. By March 1999 567 districts have been covered

under the LBS in the country as shown in Table 5.3. Table 5.3: DISTRICTS ALLOCATED TO COMMERCIAL RANKS UNDER LEAD

BANKS SCHEME - ALL INDIA.

Sl.

Number of Number of Number of

No. Name of the Lead Bank

Lead Districts Lead Districts Lead Districts

originally in 1989 in 1999

Public Sector Banks

1. State Bank of India and its

Associates

2. Allahabad Bank

3. Andhra Bank

4. Bank of Baroda

5 . Bank of India

6. Bank of Maharashtra

7. Canara Bank

8. Central Bank of India

9. Corporation Bank

10. Dena Bank

1 1. Indian Bank

12. Indian Overseas Bank

13. New Bank of India

14. Oriental Bank of Commerce

1 5. Punj ab National Bank

1 6. Punj ab and Sind Bank

17. Syndicate Bank

1 8. Union Bank of India

19, United Bank of India

20. United Commerical Bank

21. Vijaya Bank

Sub-Total

Private Sector Bank

1 . Jammu & Kashmir Bank Ltd

2. Bank of Rajasthan

Grand Total

*Since merged with Punjab National Bank.

Source: [a] Reserve Bank of India Bulletin, Bombay January 1970,

[b] Sfivasan, Priority Sector Lending - A study o f Indian Experience,

HimaIayrm Publishing House, 1995, Bombay, pp.34-37.

[c] Eyed on Reserve Bank of India Sources, Chennai, 1999. It was found that even with the implementation of various welfare

schemes by the Government and also with the large dispensation of credit by the

~ommercial banks under LBS, majority of the rural population could not cross the

poverty line and were still living a hand to mouth existence. To find out the reasons for

this state of affairs, RBI advised the top Executives of PSB in 1987 to conduct on the

spot survey of villages in 88 districts of 21 states. Survey was carried out by the top

Executives themselves. The Report submitted by them revealed the following

defficiencies:

I . even though large credits were dispensed by banks, the dispensation was sporadic

and many pockets of the rural area were left uncovered by banks,

2. the inflow of credit in rural areas did not show a corresponding increase in

productivity,

3, the implementation of various Governlent schemes lacked motivation.

5.3.1 Service Area Credit Plan (SACP)

The RBI organised a seminar in 1988 in which the top Executives of all

the Public Sector Banks participated and was presided over by the Minister of State for

Finance. An Action Plan was evolved in the seminar to remove the deficiencies found in

the lending system of the banks and to have a proper flow of credit for the entire ma1

population on an objective and realistic basis. It was decided in the seminar, a cluster of

villages would be allotted to each bank. The villages allotted would be called the

Service Area of that particular bank branch, wherein it would be lending exclusively and

extensively. The needs of each one of the village people would be looked after and a

village credit plan based on the needs of the people, the resources of the bank would be

prepared which would have a direct impact on the lives of the rural poor and would also achieve the goal of the Government of India namely eradication of rural poverty. Thus

the concept of Service Area Credit Plan (SACP) under I.BS has been evolved.

Government of India has approved this and the SACP has become operational from

01.04. 1989. The service area concept involves the following five major operational

aspects:

a)

identification and allocation of Service Area for each bank branch;

b) survey of villages in the Service Area for assessing the potential for lending

activities and identification of beneficiaries for assistance:

c) Preparation of Credit Plan on an annual basis for the Service Area by each

branch;

d) Co-ordination between credit institutions on the one hand and field level

development agencies on the other hand for effective implementation of Credit

Plans and ;

e) System of continuous monitoring of progress in the implementation of the plans.

The villages have been allocated to all the commercial banks by a

committee comprising of:

i) Lead District Officer of the RBI as leader,

ii) Lead Bank Officer as Convenor,

iii) Officer from NABARD as member.

Under Service Area Approach, the methodology of planning itself has

been changed from district level to village level. Previously the ACP was prepared at the

district level by the Lead Bank and the bank branches operating were to implement the

Plan. Now under Service Area Approach, the planning starts at the grassroot level. The

branch managers themselves prepare the village plan after undertaking a detailed study

of their command area and taking into account the potential available in the villages for various activities. Before preparing the Service Area plan by the branch manager. the

Potential Linked Credit Plan (PLCP) prepared by NABARD is also taken into account.

After which the village level plans are approved by Block Level Bankers' Committee

(BLBC) and then the DCP is prepared by Lead Bank. This grassroot level planning

enables proper allocation of funds to various activities based on the needs of the villages.

This will enable a proper and even growth under all sectors particularly under the

priority sector.

5.4 Progress of Banking in the Union Territory of Pondicherry

The IIiary4 of Anandaranga Pillai provides some clues about the system

of banking in 18" century Pondicherry. During the French regime, sowcars were

the professional money lenders in the Union Territory of Pondicherry, Some money

lenders used to charge 18 to 36 per cent rate of interest. There was also a practice of

charging around 100 to 120 per cent of interest per annum by some unscrupulous money

lenders. French Government had setup Ment do I Dioto a bank like pawn ofice in 1827

to overcome the practice of charging higher rate of interest by money lenders. The

Institution had provided credit assistance at an eight per cent rate of interest to the

needy population particularly to small scale agriculturists. The point to be observed here

is that even before the introduction of the concept of PSL in Indian Soil on a preferential

scale, the French Government had realised it 142 years back itself for the need to

provide credit assistance to the small scale agriculturist at eight per cent which is well

below the priority sector rate of interest of 10 to 12.5 per cent charged now. The first

and the foremost Commercial bank branch on the modem line of today, namely,

ranci cis Cynil Antony (Ed), &d., pp.637-647. Indo-China Bank was set up in Pondicherry in 1875 by a Presidential decree which had

dealt all kinds of banking operations. Indian based banks had opened their branches in

1948. The first Indian based bank to have opened the bank branch in Pondicherry was

United Commercial bank and then the Indian Overseas bank had come up. State Bank of

India had set up a pay office in 1954 and a full fledged bank branch in 1955, Indian

Bank had opened its first branch in Pondicherry in 1958. Thus four Commercial banks

were in operation on the eve of defacto merger of Pondicherry with the Union of India.

The Union Territory of Pondicherry has been witnessing a phenomenal

growth of banking activities since bank nationalisation in 1969, thanks to the growing

commercial activities in this important Indo-French centre. In 1961, there were 4 bank

branches with a deposit of Rs.269 lakhs and an advance of Rs.260 lakhs. The CDR was

as high as 96.65 percentage. In 1969, that is, on the eve of nationalisation of banks, ol~ly

12 bank branches were in operation with a deposit of Rs. 552 lakhs and an advance of

Rs. 480 lakhs. Since nationalisation, phenomenal banking growth has taken place. By

March 1998~, 78 bank branches, that is, 58 in Pondicherry, 13 in Karaikal, 5 in Mahe

and 2 branches in Yanam are fbnctioning.

The progress of the banking seen at the all India level was reflected in the

Union Territory of Pondicherry also. The indicators of progress of banking are also

shown in Table 5.4.

'lndian- Bank (Lead Bank), Agenda Notes for 59" State Level Bankers'

~ o d t t e e , Meeting, Pondicherry, August 1999. L d h

ePQ\w

E z c It may be seen from the Table 5.4 that the Union Territory of Pondichenj

had got 12 branches only in 1969 and this has gone up to 26 in 1974. 44 in 1979, 59 in

1983 and 70 in 1989. The seventies and eighties have brought many bank branches to the

Union Territory, thanks to bank nationalisation. 78 bank branches have come into

operation by March 1998. The amount of deposits rnobilised till March 1998 was

Rs.967 crores. The credit advanced for the same period was Rs.347 crores which works

out to a CDR of 35.90 per cent as against the all India average of 53.5 per cent.

Pondicherry has emerged as one of the top 100 major centres according to size of

deposits and credit as of March 1999. As per ranking, it occupies 81th place in deposit

mobilisation and 88" place in credit availment. Despite all these positive developments.

a disturbing trend observed is that the CDR has been declining steadily since 199 1 in this

Territory. This is detrimental to the economic development of the Union Territory of

Pondicherry. Though declining CDR is an all India phenomenon, the trend noticed in

the Union Territory of Pondicherry is more alarming which needs immediate corrective

measures on the part of commercial banks and RBI. This Territory had witnessed more

than the prescribed flow of priority sector credit throughout eighties and the earlier part

o f nineties. The advances towards priority sector has been declining since 1994 due to

poor deployment of credit to various segments in Pondicherry economy despite the

implementation of LBS in the Union Territory of Pondicherry as can be seen from the

succeeding chapters.

The Banking sector in India has always been one of the most preferred destinations for employment. In this decade, this sector has emerged as a sunrise sector in the Indian economy. Banking sector index has grown at a compounded annual rate of over 51 per cent since the year 2001.The Banking Industry is recruiting in a big way. In the next five years , banks will have to recruit almost 7.5 lakh people . 

Now, banks have diversified their activities and getting into new products and services that include opportunities in credit cards, consumer finance, wealth management, life and general insurance, investment banking, mutual funds, pension fund regulation, stock broking services, custodian services and private equity etc. Further, most of the leading Indian banks are going global, setting up offices in foreign countries themselves or through their subsidiaries. 

The expansion of the banking sector and its convergence with the other financial sectors such as insurance,NBFCs and Capital markets,retirement of the existing employees and financial inclusion have created more number of opportunities in the banking sector. 

Infrastructure, Risk Management, Banking and Financial Services, Management Information Systems and Customer Relations Management are a few areas where specialization is expected.

INTRODUCTION

A bank is an institution that deals in money and its substitutes and provides other financial services. Banks accept deposits and make loans or make an investment to derive a profit from the difference in the interest rates paid and charged, respectively. In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players.

India’s economy has been one of the stars of global economics in recent years. It has grown by more than 9% for three years running. The economy of India is as diverse as it is large, with a number of major sectors including manufacturing industries, agriculture, textiles and handicrafts, and services. Agriculture is a major component of the Indian economy, as over 66% of the Indian population earns its livelihood from this area. Banking sector is considered as a booming sector in Indian economy recently. Banking is a vital system for developing economy for the nation.

However, Indian banking system and economy has been facing various challenges and problems which have discussed in other parts of project.

INDIAN BANKING SYSTEM

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. 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.