banking sector essay introduction

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What Is Banking?

Definition and Examples of Banking

• A Special Type of Bank

Notable Happenings

The Balance / Lara Antal

Banking is an industry that handles cash, credit, and other financial transactions for individual consumers and businesses alike. Banking provides the liquidity needed for families and businesses to invest in the future, and is one of the key drivers of the U.S. economy.

Banking consists of many activities that can be done through a number of financial institutions that accept deposits from individuals and other entities, and then use this money to offer loans and to invest and earn profit.

Banks can be placed into certain categories based on the type of business they conduct. Commercial banks provide services to private individuals and businesses. Retail banking provides credit, deposit, and money management to individuals and families. 

Community Banking

Community banks are smaller than commercial banks. They concentrate on the local market. They provide more personalized service and build relationships with their customers. 

Internet Banking

Internet banking provides these services via the world wide web. The sector is also called e-banking, online banking , and net banking. Most other banks now offer online services. There are many online-only banks. Since they have no branches, they can pass cost savings onto the consumer.

Much like online banking, many banking services can now be done completely through your phone digital device. Banking and investing apps continue to grow in popularity and may mean you never have to visit a brick-and-mortar bank at all.

Savings and Loan Banking

Savings and loans are specialized banking entities, created to promote affordable home ownership. Often these banks will offer a higher interest rate to depositors as they raise money to lend for mortgages.

Credit Unions

Credit unions are financial institutions that operate similarly to standard banks in many ways, but with a different structure. Customers own their credit unions . This ownership structure allows them to provide low-cost and more personalized services. You must be a member of their field of membership to join. That could be employees of companies or schools or residents of a geographic region. 

Investment Banking

Investment banking finds funding for corporations through initial public stock offerings or bonds. They also facilitate mergers and acquisitions. The largest U.S. investment banks include Bank of America, Citigroup, Goldman Sachs, J.P. Morgan Chase, Wells Fargo, Charles Schwab, and Morgan Stanley.

After Lehman Brothers failed in September 2008, signaling the beginning of the global financial crisis of the late-2000s, investment banks became commercial banks. That allowed them to receive government bailout funds. In return, they must now adhere to the  Dodd-Frank Wall Street Reform and Consumer Protection Act regulations.

Merchant Banking

Merchant banking provides similar services for small businesses. They provide mezzanine financing, bridge financing, and corporate credit products.

Sharia Banking

Sharia banking conforms to the Islamic prohibition against interest rates.  Also, Islamic banks don’t lend to alcohol and gambling businesses. Borrowers profit-share with the lender instead of paying interest. Because of this, Islamic banks avoided the risky asset classes responsible for the 2008 financial crisis.

How Banking Works

Banks are a safe place to deposit excess cash, and to manage money through products like savings accounts,  certificates of deposit , and checking accounts. The Federal Deposit Insurance Corporation (FDIC) insures them. Banks also pay savers a small percent of the deposited amount based on an interest rate.

Banks are currently not required to keep any percentage of each deposit on hand, though the Federal Reserve can change this. That regulation is called the  reserve requirement . They make money by charging higher interest rates on their loans than they pay for deposits.  

The Central Bank

Banking wouldn't be able to supply liquidity without central banks. In the United States, that's the Federal Reserve, but most countries have a version of a central bank as well. In the U.S., the Fed manages the money supply banks are allowed to lend. The Fed has four primary tools:

• Open market operations occur when the Fed buys or sells securities from its member banks. When it buys securities, it adds to the money supply.
• The reserve requirement lets a bank lend up to the entire amount of its deposits.
• The Fed funds rate sets a target for banks' prime interest rate. That's the rate banks charge their best customers.
• The discount window is a way for banks to borrow funds to support liquidity and stability.

In recent years, banking has become very complicated. Banks have ventured into sophisticated investment and insurance products. This level of sophistication led to the  banking credit crisis of 2007 .

Banking underwent a period of deregulation when Congress repealed the  Glass-Steagall Act . That law had prevented commercial banks from using ultra-safe deposits for risky investments. After its repeal, the lines between investment banks and commercial banks blurred. Some commercial banks began investing in derivatives, such as mortgage-backed securities. When they failed, depositors panicked.  

Another deregulation change came from the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. The Act repealed constraints on interstate banking. This repeal allowed large regional banks to become national. The large banks gobbled up smaller ones as they competed with one another to gain the market share.

By the 2008 financial crisis, a small number of large banks controlled most of the banking industry's assets in the U.S. That consolidation meant many banks became too big to fail. The federal government was forced to bail them out. If it hadn't, the banks' failures would have threatened the U.S. economy itself. 

Key Takeaways

• Banking offers savings, loans, and investment products and services to individuals and businesses.
• There are many types of banks, or financial institutions, with specialized functions and populations they serve.
• Banking is regulated at the national level by a central bank—the Federal Reserve in the U.S.—that works to maintain liquidity and economic stability.
• If left unregulated, banks compete in an open market which has historically proven to be risky and led to numerous financial crises.

Federal Financial Institutions Examination Council. " Large Holding Companies ." Accessed July 2, 2021.

Federal Deposit Insurance Corporation. " The Orderly Liquidation of Lehman Brothers Holdings Under the Dodd-Frank Act ." Accessed July 2, 2021.

Federation of American Scientists. " The Dodd-Frank Wall Street Reform and Consumer Protection Act: Background and Summary ," Page 4-12. Accessed July 2, 2021.

Corporate Finance Institute. " What Is a Merchant Bank? " Accessed July 2, 2021.

International Monetary Fund. " Islamic Finance and the Role of the IMF ." Accessed July 2, 2021.

International Monetary Fund. " Islamic Financial Systems ," Page 43. Accessed July 2, 2021.

International Monetary Fund. " IMF Survey: Islamic Banks: More Resilient to Crisis? " Accessed July 2, 2021.

Federal Deposit Insurance Corporation. " Who Is the FDIC? " Accessed July 2, 2021.

Board of Governors of the Federal Reserve System. " Reserve Requirements ." Accessed July 2, 2021.

Federal Reserve Bank of St. Louis. " What Are Open Market Operations? Monetary Policy Tools, Explained ." Accessed July 2, 2021.

Board of Governors of the Federal Reserve System. " What Is the Prime Rate, and Does the Federal Reserve Set the Prime Rate? " Accessed July 2, 2021.

Board of Governors of the Federal Reserve System. " Discount Window Lending ." Accessed July 2, 2021.

Arthur E. Wilmar, Jr. " The Road to Repeal of the Glass-Steagall Act ." The CLS Blue Sky Blog . Accessed July 2, 2021.

Center for Economic and Policy Research. " A Short History of Financial Deregulation in the United States ," Page 1-2. Accessed July 2, 2021.

Federal Reserve Bank of Richmond. " Changes in the Size Distribution of U.S. Banks: 1960–2005 ," Page 291. Accessed July 2, 2021.

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• Understanding Banking History

Banking in the Roman Empire

European monarchs discover easy money, adam smith gives rise to free-market banking, merchant banks come into power, j.p. morgan rescues the banking industry, the end of an era, the birth of the fed, world war ii and the rise of modern banking, banking goes digital.

• History of Banking FAQs

The Bottom Line

• Personal Finance

The Evolution of Banking Over Time

From the ancient world to the digital age

Banking has been in existence since the first currencies were minted and wealthy people realized they needed a safe place to store their money. Ancient empires also needed a functioning financial system to facilitate trade, distribute wealth, and collect taxes. Banks were to play a major role in that, just as they do today.

Key Takeaways

• Religious temples became the earliest banks because they were seen as safe places to store money.
• Before long, temples got into the business of lending money at interest, much as modern banks do.
• By the 18th century, many governments gave banks a free hand to operate, based on the theories of economist Adam Smith.
• Numerous financial crises and bank panics over the decades eventually led to increased regulation.

Banking Is Born

The barter system of exchanging goods for goods worked reasonably well for the earliest communities. It prove problematic as soon as people started traveling from town to town in search of new markets for their goods and new products to take home.

Over time, coins of various sizes and metals began to be minted to provide a store of value for trade.

Coins, however, need to be kept in a safe place, and ancient homes did not have steel safes. Wealthy people in Rome stored their coins and jewels in the basements of temples. They were seen to be secure, given the presence of priests and temple workers, not to mention armed guards.

Historical records from Greece, Rome, Egypt, and Babylon suggest that temples loaned money in addition to keeping it safe. The fact that temples often functioned as the financial centers of their cities is one reason why they were inevitably ransacked during wars.

Coins could be exchanged and hoarded more easily than other commodities, such as 300-pound pigs, so a class of wealthy merchants took to lending coins, with interest , to people in need of them. Temples typically handled large loans, including those to various sovereigns, while wealthy merchant money lenders handled the rest.

The Romans, who were expert builders and administrators, extricated banking from the temples and formalized it within distinct buildings. During this time, moneylenders still profited, as loan sharks do today, but most legitimate commerce—and almost all government spending—involved the use of an institutional bank.

According to the World History Encyclopedia, Julius Caesar initiated the practice of allowing bankers to confiscate land in lieu of loan payments. This was a monumental shift of power in the relationship of creditor and debtor , as landed noblemen had previously been untouchable, passing debts on to their descendants until either the creditor’s or debtor’s lineage died out.

The Roman Empire eventually crumbled, but some of its banking institutions lived on in the Middle Ages through the services of papal bankers and the Knights Templar. Small-time moneylenders who competed with the church were often denounced for usury .

Eventually, the monarchs who reigned over Europe noted the value of banking institutions. As banks existed by the grace—and occasionally, the explicit charters and contracts—of the ruling sovereignty, the royal powers began to take loans, often on the king’s terms, to make up for hard times at the royal treasury.

This easy access to financing led kings into gross extravagances, costly wars, and arms races with neighboring kingdoms, not to mention crushing debt.

In 1557, Philip II of Spain managed to burden his kingdom with so much debt due to several pointless wars that he caused the world’s first national bankruptcy —as well as the world’s second, third, and fourth, in rapid succession. These events occurred because 40% of the country’s gross national product (GNP) went toward servicing the nation's debt.

The practice of turning a blind eye to the creditworthiness of powerful customers continues to haunt banks today.

Banking was already well-established in the British Empire when economist Adam Smith introduced his invisible hand theory in 1776. Empowered by his views of a self-regulating economy, moneylenders and bankers managed to limit the state’s involvement in the banking sector and the economy as a whole. This free-market capitalism and competitive banking found fertile ground in the New World, where the United States of America was about to emerge.

In its earliest days, the United States did not have a single currency. Banks could create a currency and distribute it to anyone who would accept it. If a bank failed, the banknotes that it had issued became worthless. A single bank robbery could crush a bank and its customers. Compounding these risks was a cyclical cash crunch that could disrupt the system at any time.

Alexander Hamilton , the first secretary of the U.S. Treasury, established a national bank that would accept member banknotes at par , thus keeping banks afloat through difficult times. After a few stops, starts, cancellations, and resurrections, this national bank created a uniform national currency and set up a system by which national banks backed their notes by purchasing Treasury securities , thus creating a liquid market . The national banks then pushed out the competition through the imposition of taxes on the relatively lawless state banks .

The damage had been done, however, as average Americans had grown to distrust banks and bankers in general. This feeling would lead the state of Texas to outlaw corporate banks with a law that stood until 1904.

Most of the economic duties that would have been handled by the national banking system, in addition to regular banking business like loans and corporate finance , soon fell into the hands of large merchant banks . During this period, which lasted into the 1920s, the merchant banks parlayed their international connections into enormous political and financial power.

These banks included Goldman Sachs ; Kuhn, Loeb & Co.; and J.P. Morgan & Co. Originally, they relied heavily on commissions from foreign bond sales from Europe, with a small backflow of American bonds trading in Europe. This allowed them to build capital.

As large industries emerged and created the need for major corporate financing, the amounts of capital required could not be provided by any single bank. Initial public offerings (IPOs) and bond offerings to the public became the only way to raise the amount of money needed.

Successful offerings boosted a bank’s reputation and put it in a position to ask for more to underwrite an offer. By the late 1800s, many banks demanded a position on the boards of the companies seeking capital, and if the management proved lacking, they ran the companies themselves.

J.P. Morgan & Co. emerged at the head of the merchant banks during the late 1800s. It was connected directly to London, then the world’s financial center, and had considerable political clout in the United States.

Morgan & Co. created U.S. Steel, AT&T, and International Harvester, as well as duopolies and near- monopolies in the railroad and shipping industries, through the revolutionary use of trusts and a disdain for the Sherman Antitrust Act .

It remained difficult, however, for average Americans to obtain loans or other banking services. Merchant banks didn’t advertise and rarely extended credit to the “common” people. Racism was widespread. Merchant banks left consumer lending to the lesser banks, which were still failing at an alarming rate.

The collapse in shares of a copper trust set off the Bank Panic of 1907 , with a run on banks and stock sell-offs. Without a Federal Reserve Bank to take action to stop the panic, the task fell to J.P. Morgan personally. Morgan used his considerable clout to gather all the major players on Wall Street and persuade them to deploy the credit and capital that they controlled, just as the Fed would do today.

Ironically, Morgan’s move ensured that no private banker would ever again wield that much power. In 1913, the U.S. government formed the Federal Reserve Bank (the Fed). Although the merchant banks influenced the structure of the Fed, they were also pushed into the background by its creation.

Even with the establishment of the Fed, enormous financial and political power remained concentrated on Wall Street. When World War I broke out, the United States became a global lender, and by the end of the war, it had replaced London as the center of the financial world.

At that point, the government decided to put some handcuffs on the banking sector. It insisted that all debtor nations pay back their war loans—which traditionally were forgiven, especially in the case of allies—before any American institution would extend them further credit.

This slowed world trade and caused many countries to become hostile toward American goods. When the stock market crashed on Black Tuesday in 1929, the already-sluggish world economy was knocked out. The Fed couldn’t contain the damage, which led to some 9,000 bank failures from 1929 to 1933.

New laws emerged to salvage the banking sector and restore consumer confidence. With the passage of the Glass-Steagall Act in 1933, for example, commercial banks were no longer allowed to speculate with consumers’ deposits, and the Federal Deposit Insurance Corp. (FDIC) was created to insure accounts up to certain limits. The insured limit as of 2023 is $250,000 per account.

World War II may have saved the banking industry from complete destruction. For the banks and the Fed, the war required financial maneuvers involving billions of dollars. This massive financing operation created companies with huge credit needs that, in turn, spurred banks into mergers to meet the demand. These huge banks spanned global markets.

More importantly, domestic banking in the United States finally settled to the point where, with the advent of deposit insurance and widespread mortgage lending , the average citizen could have confidence in the banking system and reasonable access to credit. The modern era had arrived.

The most significant development in the world of banking in the late 20th and early 21st centuries has been the advent of online banking , which in its earliest forms dates back to the 1980s but really began to take off with the rise of the internet in the mid-1990s.

The growing adoption of smartphones and mobile banking apps further accelerated the trend. While many customers continue to conduct at least some of their business at brick-and-mortar banks, a 2021 J.D. Power survey found that 41% of them have gone digital-only.

What Does a Central Bank Do?

A central bank is a financial institution that is authorized by a government to oversee and regulate the nation’s monetary system and its commercial banks. It produces and manages the nation's currency. Most of the world’s countries have central banks for that purpose. In the United States, the central bank is the Federal Reserve System.

Who Regulates Banks in the U.S. Today?

Depending on how they are chartered, commercial banks in the United States are regulated by a number of government agencies, including the Federal Reserve, the Office of the Comptroller of the Currency (OCC) , and the Federal Deposit Insurance Corp. (FDIC).

State-chartered banks are also regulated by the state in which they do business.

Investment banks are largely regulated by the U.S. Securities and Exchange Commission (SEC) .

What Is the Difference Between a Commercial Bank and an Investment Bank?

Commercial banks provide services to the general public and to businesses. They take deposits, issue loans, and operate ATMS.

Investment banks provide services only to large companies, institutional investors , and some high-net-worth individuals . Those services include helping companies raise money by issuing stocks or bonds or obtaining loans. They may also be deal-makers, facilitating corporate mergers and acquisitions.

Investopedia / Yurle Villegas

Banks have come a long way from the temples of the ancient world, but their basic business practices have not changed much. Although history has altered the finer points of the business model, a bank’s purposes are still to make loans and to protect depositors’ money.

Even today, where digital banking and financing are replacing traditional brick-and-mortar locations, banks still perform these fundamental functions.

World History Encyclopedia. “ Banking in the Roman World .”

World History Encyclopedia. “ Caesar as Dictator: His Impact on the City of Rome .”

World History Encyclopedia. " Knights Templar ."

New World Encyclopedia. “ Philip II of Spain .”

Adam Smith Institute. “ The Theory of Moral Sentiments .”

JSTOR. " Banks' Own Private Currencies in 19th-Century America ."

Office of the Historian, United States House of Representatives. " The First Bank of the United States ."

Federal Reserve History. " National Banking Acts of 1863 and 1864 ."

Texas Department of Banking. " History of the Banking Industry in Texas and the Department ."

National Bureau of Economic Research. " Banks, Insider Connections, and Industrialization in New England: Evidence from the Panic of 1873 ."

JPMorgan Chase & Co. " History of Our Firm ."

National Bureau of Economic Research. " Did J. P. Morgan's Men Add Value? An Economist's Perspective on Financial Capitalism ," Table 6.2.

Federal Reserve History. “ The Panic of 1907 .”

Federal Reserve History. " Overview: The History of the Federal Reserve ."

East Tennessee State University. " Neither a Borrower Nor a Lender Be: America Attempts to Collect its War Debts 1922-1934 ," Pages 5-6.

Federal Deposit Insurance Corp. “ The First 50 Years: A History of the FDIC .”

Federal Reserve History. " Banking Act of 1933 (Glass-Steagall) .

Federal Deposit Insurance Corporation. " Deposit Insurance at a Glance ."

J.D. Power. “ U.S. Retail Banks Nail Transition to Digital During Pandemic, J.D. Power Finds .”

Board of Governors of the Federal Reserve System. " About the Fed ."

Federal Reserve Bank of San Francisco. “ Are All Commercial Banks Regulated and Supervised by the Federal Reserve System, or Just Major Commercial Banks? ”

U.S. Securities and Exchange Commission. " The Role of the SEC ."

• A Primer on Important U.S. Banking Laws 1 of 29
• Dodd-Frank Act: What It Does, Major Components, and Criticisms 2 of 29
• Major Regulations Following the 2008 Financial Crisis 3 of 29
• Too Big to Fail: Definition, History, and Reforms 4 of 29
• Volcker Rule: Definition, Purpose, How It Works, and Criticism 5 of 29
• Understanding the Basel III International Regulations 6 of 29
• What Is Basel I? Definition, History, Benefits, and Criticism 7 of 29
• Basel II: Definition, Purpose, Regulatory Reforms 8 of 29
• Basel III: What It Is, Capital Requirements, and Implementation 9 of 29
• What Basel IV Means for U.S. Banks 10 of 29
• A Brief History of U.S. Banking Regulation 11 of 29
• The Evolution of Banking Over Time 12 of 29
• How the Banking Sector Impacts Our Economy 13 of 29
• What Agencies Oversee U.S. Financial Institutions? 14 of 29
• Dual Banking System: Meaning, History, Pros and Cons 15 of 29
• Glass-Steagall Act of 1933: Definition, Effects, and Repeal 16 of 29
• Bancassurance: Definition, How It Works, Pros & Cons 17 of 29
• Electronic Fund Transfer Act (EFTA): Definition and Requirements 18 of 29
• Bank Secrecy Act (BSA): Definition, Purpose, and Effects 19 of 29
• How Banking Works, Types of Banks, and How To Choose the Best Bank for You 20 of 29
• Chartered Bank: Explanation, History and FAQs 21 of 29
• Nonbank Financial Institutions: What They Are and How They Work 22 of 29
• Shadow Banking System: Definition, Examples, and How It Works 23 of 29
• Islamic Banking and Finance Definition: History and Example 24 of 29
• What Is Regulation E in Electronic Fund Transfers (EFTs)? 25 of 29
• What Is Regulation CC? Definition, Purpose and How It Works 26 of 29
• Regulation DD: What it is, How it Works, FAQ 27 of 29
• Regulation W: Definition in Banking and When It Applies 28 of 29
• Deregulation: Definition, History, Effects, and Purpose 29 of 29

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Banking Industry in India: Intro, Need, History, Structure, Growth and Challenges

In this article we will discuss about:- 1. Introduction to the Banking Industry 2. Need of the Banks 3. History 4. Structure 5. Growth 6. Banking and Insurance Sectors after Liberalization 7. Challenges 8. Strategic Options to Cope with the Challenges.

• Strategic Options to Cope with the Challenges

1. Introduction to the Banking Industry:

The rapid transformation in the banking industry over the last decade has made the industry stronger, cleaner, transparent, efficient, faster, disciplined and a lot more competitive. The banking industry in India has a huge canvass of history, which covers the traditional banking practices from the time of Britishers to the reforms period, nationalization to privatization of banks and now increasing numbers of foreign banks in India. Therefore, banking in India has been through a long journey. Rural banking and micro financing are the two gateways for the Indian banks to grow and compete with international banks.

The use of technology has brought a revolution in the working style of the banks and it has pervaded each and every aspect of human life in a drastic manner. Advent of anytime, anywhere banking has become possible due to technology adoption. Life has changed enormously due to gadgets and appliances becoming easy to use and that too, in affordable prices.

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Mobile phones, Digital cameras, I- phones, Dish TV are now common household goods and no more come in category of luxury items. Together with that, the entry of plastic money has opened new avenues for cashless transactions considered safer and more convenient than watching every time whether the wallets are still struck in our hip pockets, vanity bags or not when we move out for shopping or on journeys.

As we know finance is considered as the life blood of all economic activities and has become integral part of modern business. A country’s financial system works in a set of financial markets, financial services and financial institutions.

Broadly, the financial market is categorized into two groups viz.:

(a) Money market which deals only with short term finance, and

(b) Capital market which deals with long- term funds.

Banking industry is the back bone for the growth of any economy. In the recent time, we are witnessed that the World Economy is passing through some small details or parts circumstances as bankruptcy of banking and financial institutions, debt crisis in major economies of the world and euro zone crisis. The banking scenario has become very uncertain causing recession in major economies like US and Europe.

Generally banking in India was 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 things like microfinance. This also included the 2014 plan by the then prime minister to bring bank accounts to the estimated 40% of the population that were still unbanked. Banks are a subset of the financial services industry.

A banking system also referred as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, throughout day. The banking system India should not only be hassle free but it should be able to meet the new challenges posed by the technology and any other external and internal factors.

For past three decades, India’s banking system has several outstanding achievements to its credit. The banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguard the money and valuables and provide loans, credit, and payment services, such as checking accounts, money order, and cashier’s cheques.

2. Need of the Banks :

Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there were no security of public savings and no uniformity regarding loans. So, as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized baking sector works within the financial system to provide loans, accept deposits and provide other services to their customers.

The following functions of the bank explain the need of the bank and its importance:

i. To provide the security to the savings of customers.

ii. To control the supply of money and credit.

iii. To encourage public confidence in the working of the financial system, increase savings speedily and efficiently.

iv. To avoid focus of financial powers in the hands of a few individuals and institutions.

v. To set equal norms and conditions (i.e. rate of interest, period of lending etc.) to all types of customers.

After Liberalization :

In the early 1990s, the then Narashimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech- savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (since renamed Axis), ICICI Bank and HDFC Bank.

This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been set up with the proposed relaxation in the norms for foreign direct investment, where all foreign investors in banks may be given voting rights which could exceed the present cap of 10% at present. It has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (borrow at 4%; lend at 6%; go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People demanded more from their banks and received more.

Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets as compared to other banks incomparable economies in its region.

The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. 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.

3. History of Indian Banking System :

The first banks were Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct. The largest bank, and the oldest still in existence, is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company.

The three banks 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 acted as quasi- central banks, as did their successors, until the Reserve Bank of India was established in 1935. In 1955, RBI acquired control on Imperial Bank of India, which was renamed as State Bank of India. In 1959, SBI took over control of eight private banks floated in the erstwhile princely states and making them as its 100% subsidiaries.

In 1969 the Indian government nationalized all the major banks that it did not already own and these have remained under government ownership. They are run under a structure known as ‘profit-making public sector undertaking’ (PSU) and are allowed to compete and operate as commercial banks. The Indian banking sector is made up of four types of banks, as well as the PSUs and the state banks; they have been joined since the 1990s by new private commercial banks and a number of foreign banks.

4. Structure of Indian Banking Industry :

All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are Scheduled Banks. These banks comprise Scheduled Commercial Banks and Scheduled Co­operative Banks. Scheduled Commercial Banks in India are categorized into five different groups according to their ownership and/or nature of operation.

These bank groups are:

i. State Bank of India and its Associates

ii. Nationalized Banks Private Sector Banks Foreign Banks

iii. Regional Rural Banks.

In the bank group-wise classification, IDBI Bank Ltd. is included in Nationalized Banks. Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Cooperative Banks.

5. Growth of Banking in India :

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. 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 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 connection 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 of Rs. 67504.54 billion (US$1.1 trillion or 840 billion) and bank credit of 52604.59 billion (US$870 billion or 650 billion). The net profit of the banks operating in India was 1027.51 billion (US$17 billion or 13 billion) against a turnover of 9148.59 billion (US$150 billion or 110 billion) for the financial year 2012-13.

6. Banking and Insurance Sectors after Liberalization :

Prior to liberalization these two sectors were controlled and regulated by the government. Nationalized banks and insurance companies had a firm grip over the market. After liberalization the banking sector and insurance domain opened up for private participation.

Banking Sector :

The three major changes in the banking sector after liberalization are:

i. Step to increase the cash outflow through reduction in the statutory liquidity and cash reserve ratio.

ii. Nationalized banks including SBI were allowed to sell stakes to private sector and private investors were allowed to enter the banking domain. Foreign banks were given greater access to the domestic market, both as subsidiaries and branches, provided the foreign banks maintained a minimum assigned capital and would be governed by the same rules and regulations governing domestic banks.

iii. Banks were given greater freedom to leverage the capital markets and determine their asset portfolios. The banks were allowed to provide advances against equity provided as collateral and provide bank guarantees to the broking community.

India’s services sector has always served the Indian economy well, accounting for nearly 57 per cent of the gross domestic product (GDP). Here, the financial services segment has been a significant contributor.

The financial services sector in India is dominated by commercial banks which have more than 60 per cent share of the total assets; other segments include mutual funds, insurance firms, non-banking institutions, cooperatives and pension funds.

The Government of India has introduced reforms to liberalize, regulate and enhance the country’s financial services industry. Presently, the country can claim to be one of the world’s most vibrant capital markets. In spite of the challenges that are still there, the sector’s future looks good.

Market Size:

The size of banking assets in India reached US$ 1.8 trillion in FY 13 and is projected to touch US$ 28.5 trillion by FY 25. Information technology (IT) services, the largest spending segment of India’s insurance industry at Rs 4,000 crore (US$ 665.78 million) in 2014, is anticipated to continue enjoying strong growth at 16 per cent. Category leaders are business process outsourcing (BPO) at 25 per cent and consulting at 21 per cent.

Investments:

During FY 14, foreign institutional investors (FIIs) invested a net amount of about Rs. 80,000 crore (US$ 13.31 billion) in India’s equity market, according to data by Securities and Exchange Board of India (SEBI).

Insurance companies in India will spend about Rs. 12,100 crore (US$ 2.01 billion) on IT products and services in 2014, a 12 per cent increase over the previous year, according to Gartner Inc. The forecast includes spending by insurers on segments such as internal IT (including personnel), telecommunications, hardware, software, and external IT services. The Rs. 1200 crore (US$ 202.47 million) software segment is predicted to be the fastest growing external segment, with overall growth of 18 per cent in 2014.

The following are some of the key developments and investments in the Indian financial services sector:

i. About 75 per cent of the insurance policies sold by 2020 would be in one way or another influenced by digital channels during the pre-purchase, purchase or renewal stages, according to a report by Boston Consulting Group (BCG) and Google India. This report, Digital(at)Insurance 20X By 2020, predicts that insurance sales from online channels will increase 20 times from present-day sales by 2020, and overall internet influenced sales will reach Rs. 300,000-400,000 crore (US$ 49.9-66.54 billion).

ii. Export-Import Bank of India (Exim Bank) will focus more on supporting project exports from India to South Asia, Africa and Latin America, as per Mr Yaduvendra Mathur, Chairman and MD, Exim Bank. The bank has moved up the value chain by lending support to project exports so that India earns foreign exchange. In 2012- 13, Exim Bank had supported 85 project export contracts valued at Rs 24,255 crore (US$ 4.03 billion) secured by 47 companies in 23 countries.

iii. Private-sector lender Induslnd Bank will soon begin its asset reconstruction business. It plans to partner asset reconstruction companies (ARCs) for this venture. “I think our new initiative, which is going to launch in the next two months, is about asset reconstruction. We will do asset reconstruction within the bank but in tie-ups with ARCs. The business plan is ready. We believe a huge stock of assets is coming into the ARCs as a business area that we need to look at and we will exploit,” said Mr Romesh Sobti, CEO and MD, Induslnd Bank.

iv. Association of Mutual Funds in India (AMFI) has reported that the mutual fund industry’s assets under management (AUM) have gone past the Rs 10 trillion (US$ 166.37 billion) mark in May, 2014. The AUM of the Indian mutual fund industry rose to Rs 10.11 trillion (US$ 168.19 billion) in May from Rs 9.45 trillion (US$ 157.21 billion) in April.

7. Challenges Faced by Banking Industry :

The bank marketing is than an approach to market the services profitability. It is a device to maintain commercial viability. The changing perception of bank marketing has made it a social process. The significant properties of the holistic concept of management and marketing has made bank marketing a device to establish a balance between the commercial and social considerations, often considered to be opposite of each other.

A collaboration of two words banks and marketing thus focuses our attention on the following:

i. Bank marketing is a managerial approach to survive in highly competitive market as well reliable service delivery to target customers.

ii. It is a social process to sub serve social interests.

iii. It is a fair way of making profits.

iv. It is an art to make possible performance-orientation.

v. It is a professionally tested skill to excel competition.

1. Users of Banking Services :

The emerging trends in the level of expectation affect the formulation of marketing mix. Innovative efforts become essential the moment it finds a change in the level of expectations. There are two types of customers using the services of banks, such as general customers and the industrial customers.

General Users :

Persons having an account in the bank and using the banking facilities at the terms and conditions fixed by a bank are known as general users of the banking services. Generally, they are the users having small sized and less frequent transactions or availing very limited services of banks.

Industrial Users :

The industrialists, entrepreneurs having an account in the bank and using credit facilities and other services for their numerous operations like establishments and expansion, mergers, acquisitions etc. of their businesses are known as industrial users. Generally, they are found a few but large sized customers.

2. Bank Marketing in the Indian Perspective :

The formulation of business policies is substantially influenced by the emerging trends in the national and international scenario. The GDP, per capita income, expectation, the rate of literacy, the geographic and demographic considerations, the rural or urban orientation, the margins in economic systems, and the spread of technologies are some of the key factors governing the development plan of an organization, especially banking organization.

In ours developing economy, the formulation of a sound marketing mix is found a difficult task. The nationalization of the Reserve Bank of India (RBI) is a landmark in the development of Indian Banking system that have saved numerous paths for qualitative-cum quantities improvements in true sense.

Subsequently, the RBI and the policy makers of the public sector commercial banks think in favor of conceptualizing modern marketing which would bring a radical change in the process of quality up gradation and village to village commercial viability.

3. Bank Marketing Mix and Strategies:

The first task before the public sector commercial Banks is to formulate that Bank marketing mix which suits the national socio­economic requirements. Some have 4 P’s and some have 7 P’s of marketing mix.

The common four Ps of marketing mix is as follows:

(i) Product:

To be more specific the peripheral services need frequent innovations, since this would be helpful in excelling competition. The product portfolio designing is found significant to maintain the commercial viability of the public sector banks. The banks professionals need to assign due weight age to their physical properties. They are supposed to look smart active and attractive.

(ii) Price:

Price is a critical and important factor of bank marketing mix due numerous players in the industry. Most consumers will only be prepared to invest their money in search of extraordinary or higher returns. They are ready to pay additional value if there is a perception of extra product value. This value maybe improved performance, function, services, reliability, and promptness for problem solving and of course, higher rate of return.

(iii) Promotion:

Bank Marketing is actually is the marketing of reliability and faith of the people. .It is the responsibility of the banking industry to take people in favor through Word of mouth publicity, reliability showing through long years of establishment and other services.

(iv) Place:

This is choice of where and when to make a product available will have significant impact on the customers. Customers often need to avail banking services fast for this they require the bank branches near and convenient to their official area or the place of easy access.

4. Challenges to Indian Banking :

The banking industry in India is undergoing a major change due to the advancement in Indian economy and continuous deregulation. These multiple changes happening in series has a ripple effect on banking industry which is trying to be organized completely, regulated sellers of market to completed deregulated customers market.

a. Deregulation:

This continuous deregulation has given rise to extreme competition with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized norms and policies for foreign exchange in banking market. The deregulation of the industry coupled with decontrol in the interest rates has led to entry of a number of players in the banking industry. Thereby reduced corporate credit off which has resulted in large number of competitors battling for the same pie.

b. Modified New Rules:

As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. New channels squeezed spreads, demanding customer’s better service, marketing skills heightened competition, defined new rules of the game pressure on efficiency. Need for new orientation diffused customer loyalty. Bank has led to a series of innovative product offerings catering to various customer segments, specifically retail credit.

c. Efficiency:

Excellent efficiencies are required at banker’s end to establish a balance between the commercial and social considerations Bank need to access low cost funds and simultaneously improve the efficiency and efficacy. Owing to cutthroat competition in the industry, banks are facing pricing pressure; have to give thrust on retail assets.

d. Diffused Customer Loyalty:

Attractive offers by MNC and other nationalized banks, customers have become more demanding and the loyalties are diffused. Value added offerings bound customers to change their preferences and perspective. These are multiple choices; the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.

e. Misaligned Mindset:

These changes are creating challenges, as employees are made to adapt to changing conditions. The employees are resisting changing and the seller market mindset is yet to be changed. These problems coupled with fear of uncertainty and control orientation. Moreover banking industry is accepting the latest technology but utilization is far below from satisfactory level.

f. Competency Gap:

The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. Placing the right skill at the right place will determine success. The focus of people will be doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

8. Strategic Options to Cope with the Challenges of Banking Industry:

Dominant players in the industry have embarked on a series of strategic and Tactical initiatives to sustain leadership.

The major initiatives incorporate:

a) Focus on ensuring reliable service delivery through Investing on and implementing right technology.

b) Leveraging the branch networks and sales structure to mobilize low cost current and savings deposits.

c) Making aggressive forays in the retail advances segments of home and personal loans.

d) Implementing initiatives involving people, process and technology to reduce the fixed costs and the cost per transaction.

e) Focusing on fee based income to compensate foe squeezed spread.

f) Innovating products to capture customer ‘mind share’ to begin with and later the wallet share.

The banking environment of today is rapidly changing and the rules of yesterday no longer applicable. The corporate and the legal barriers that separate the various banking, investment and insurance sectors are less well-defined and the cross-over are increasing. As a consequence the marketing function is also changing to better support the bank in this dynamic market environment.

The key marketing challenge today is to support and advice on the focus positioning and marketing resources needed to deliver performance on the banking products and services. Marketing, as an investment advisor, is about defining 4Ps and implementing key strategic initiatives to Market segments, increasingly redefined, relevant micro-segments to survive and flourish in the highly competitive market.

Government Initiatives Regarding Banking Scenario :

In an effort to enable banks to provide greater choice in insurance products through their branches, a proposal could be made which will allow banks to act as corporate agents and tie up with multiple insurers. A committee set up by the Finance Ministry of India is likely to suggest this model as an alternative to the broking model.

The Reserve Bank of India (RBI) has simplified the rules for credit to exporters. Exporters can now receive long-term advance credit from banks for up to 10 years to service their contracts. They have to a satisfactory record of three years to get payments from banks, who can adjust the payments against future exports.

The RBI has enabled foreign investors, including foreign portfolio investors (FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in insurance and related activities via the automatic route. “Effective from February 4, 2014, foreign investment by way of FDI, investment by FIIs/FPIs and NRIs up to 26 per cent under automatic route shall be permitted in insurance sector,” as per the RBI.

Road Ahead :

India is among the world’s top 10 economies, driven by its strong banking and insurance sectors. The country is expected to become the fifth largest banking sector in the world by 2020, as per a joint report by KPMG-CII. The report anticipates bank credit to increase at a compound annual growth rate (CAGR) of 17 per cent in the medium term which will lead to better credit penetration. Life Insurance Council, the industry body of life insurers in India, has also estimated a CAGR of 12-15 per cent over the next few years for the segment.

Exchange Rate Used- INR 1 = US$ 0.0166 as on July 25, 2014. The global slowdown has taken its toll on Indian economy. Besides, the domestic economy too is having its own set of problems. High inflation, subdued growth, slowing investments, undesirable current account deficit levels, high fiscal deficit and battered currency have together made the growth visibility rather muted.

The banking sector, being the barometer of the economy, has succumbed to these challenges. Amidst this challenging scenario, the Indian banking system is continues to deal with improvement in operational efficiency and execution of prudent risk management practices.

Indian banking industry, valued at Rs 77 trillion (Source- IBEF), is growing at a slower pace and plagued by bad loans. In what could be termed as a challenging year, FY 13 witnessed steep increase in bad loans of Indian banks and turning them skeptical to extend loans to companies. As a share of sector loan book, the bad loans have gone up from 1.3% in March 2009 to 3.4% in March 2013. Public sector banks that account for 60% of the total banking assets have been the worst hit vis-a-vis its private and foreign counterparts.

Key Points:

1. Supply – Liquidity is controlled by the Liquidity is controlled by the Reserve Bank of India (RBI).

2. Demand – India is a growing economy and demand for credit is high though it could be cyclical.

3. Barriers to Entry- Licensing requirement, investment in technology and branch network, capital and regulatory requirements.

4. Bargaining Power of Suppliers- High during periods of tight liquidity. Trade unions in public sector banks can be anti-reforms and orchestrate strikes. Depositors may invest elsewhere if interest rates fall.

Financial Year 2013 :

i. The central statistical organization (CSO) reported the lowest real GDP growth at 5% during FY13. This growth stands lowest in the decade and even weaker than the recorded during the first year of global financial crisis. Banking sector, being inextricably linked to the economy, stood in a state of limbo for major part of FY13.

ii. During FY 13, the gross bank credit grew at a slower pace recording 15.1% YoY growth as against 17.3% a year ago. The numbers also stood below RBI’s projections for FY13. Sluggish demand conditions, weak monetary policy transmission, poor asset quality and debilitating macro-economic conditions led to lower credit growth during FY13.

iii. Except retail, the slowdown in credit was witnessed across sectors such as agriculture, industry and service segments. The RBI data reveals that retail trade and credit card outstanding were the only buoyant segments during FY13. Mid-sized businesses and loans for professional services were the worst hit.

iv. Against a backdrop of GDP growth deceleration, weak IIP data and persistent inflation during FY13, banks became more risk averse to lending credit. This deceleration also reflected banks’ risk aversion in face of rising NPAs and increased leverage of corporate balance sheets. The deceleration was observed across all bank groups, being high for PSUs and private sector banks, which jointly account for above 90% of the total bank credit.

v. The RBI had administered a 1% repo rate cut and injected liquidity through CRR and SLR cuts as also through open market operations during FY13. However, banks have only cut their base rate by meager 0.25%- 0.30% owing to the liquidity constraints and weak deposit growth.

vi. The aggregate deposits grew marginally to 14.2% at the end of March 2013 as against 13.8% in FY12. The growth differential between deposit and credit continued to hover between 2-3% with deposit growth outpacing the credit growth. The credit-deposit ratio was recorded at 78.1% during the same period. This ensured tight liquidity conditions during the whole of the FY13.

vii. CASA, the cheap source of funds for banks, also remained sluggish for the major part of FY13. The elevated interest rates during FY 13 led to migration of money from CASA deposits to fixed deposits.

viii. Slower loan growth and weak CASA accretion resulted in margin (NIM) pressures for the banking industry. Furthermore, lower NIMs combined with higher credit costs that were earmarked for the bad and restructured loans dampened the earnings performance of Indian banks during FY13.

ix. The sharp industrial slowdown during FY 12 and FY 13 took a toll on the asset quality of the banks. Gross NPAs of 40 listed banks went up by 43.1% from levels a year ago. The restructured book also spiked up dramatically with recast assets under CDR standing around 50% more than the previous year. The repercussions were largely felt by public sector banks as they were the ones to support the productive sectors of the economy.

As per the census of 2011, 58.7% of households are availing banking services in the country. There are 102,343 branches of Scheduled Commercial Banks (SCBs) in the country, out of which 37,953 (37%) bank branches are in the rural areas and 27,219 (26%) in semi-urban areas, constituting 63% of the total numbers of branches in semi-urban and rural areas of the country.

However, a significant proportion of the households, especially in rural areas, are still outside the formal fold of the banking system. To extend the reach of banking to those outside the formal banking system, Government and Reserve Bank of India (RBI) are taking various initiatives from time to time some of which are enumerated below:

x. Opening of bank branches – Government had issued detailed strategy and guidelines on Financial Inclusion in October 2011, advising banks to open branches in all habitations of 5,000 or more population in under-banked districts and 10,000 or more population in other districts. Out of 3,925 such identified villages/habitations, branches have been opened in 3,402 villages/habitations (including 2,121 Ultra Small Branches) by end of April, 2013.

xi. Business Correspondent model – With the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, banks were permitted by RBI in 2006 to use the services of intermediaries in providing financial and banking services through the use of Business Facilitators (BFs) and Business Correspondents (BCs). Business correspondents are retail agents engaged by banks for providing banking services at locations other than a bank branch/ATM.

BCs and the BC agents (BCAs) represent the bank concerned and enable a bank to expand its outreach and offer limited range of banking services at low cost, particularly where setting up a brick and mortar branch is not viable. BCs as agents of the banks, thus, are an integral part of the business strategy for achieving greater financial inclusion. Banks had been permitted to engage individuals/entities as BC like retired bank employees, retired teachers, retired government employees, ex- servicemen, individual owners of kirana/medical/fair price shops, individual Public Call Office (PCO) operators, agents of Small Savings Schemes of Government of India, insurance companies, etc.

Further, since September 2010, RBI had permitted banks to engage “for profit” companies registered under the Indian Companies Act, 1956, excluding Non-Banking Financial Companies (NBFCs), as BCs in addition to individuals/ entities permitted earlier. According to the data maintained by RBI, as in December, 2012, there were over 152,000 BCs deployed by Banks. During 2012-13, over 183.8 million transactions valued at 165 billion (US$2.7 billion) had been undertaken by BCs till December 2012.

xii. Swabhimaan Campaign – Under “Swabhimaan” — the Financial Inclusion Campaign launched in February 2011, banks had provided banking facilities by March, 2012 to over 74,000 habitations having population in excess of 2000 using various models and technologies including branchless banking through Business Correspondents Agents (BCAs).

Further, in terms of Finance Minister’s Budget Speech 2012-13, the “Swabhimaan” campaign has been extended to habitations with population of more than 1,000 in North and to habitations which have crossed population of 1,600 as per census 2001. About 40,000 such habitations have been identified to be covered under the extended “Swabhimaan” campaign.

xiii. Setting up of ultra-small branches (USBs) – Considering the need for close supervision and mentoring of the Business Correspondent Agents (BCAs) by the respective banks and to ensure that a range of banking services are available to the residents of such villages, Ultra Small Branches (USBs) are being set up in all villages covered through BCAs under Financial Inclusion.

A USB would comprise a small area of 100 sq ft (9.3 m 2 ) – 200 sq ft (19 m 2 ) where the officer designated by the bank would be available with a laptop on pre-determined days. While the cash services would be offered by the BCAs, the bank officer would offer other services, undertake field verification and follow up on the banking transactions. The periodicity and duration of visits can be progressively enhanced depending upon business potential in the area. A total of over 50,000 USBs have been set up in the country by March 2013.

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Current Problems of the Banking Industry Essay

Introduction, digitalization period (banking sector), corporate social responsibility, privatizations in banking industry, list of references.

The business environment has undergone numerous revolutions since the 19 th century. Many modern business organizations are now characterized by sophisticated strategies as competition continues to exert more pressure. In fact with the quest to reduce operational costs and achieve marketing efficiencies, critical thinking has become an instrumental value. The ever-growing business sector has imposed a lot of implications for organizational strategies. At the rudimental level, dynamism and uncertainty of the technological, economic and political environments have made company’s see the light of flexibility and responsiveness. (Ed.6 Grant 2007, p.320)

The pace at which these developments are taking place has called for unique responses to certain business strategies. In the current business environment especially in the financial sector, new emerging problems have proved significantly controversial that traditional means can never be employed to achieve the best solution. This has subordinated business entrepreneurs into research specialists as they attempt to devise appropriate mechanisms in order to try solving these problems. In this chapter we look at some of the current problems facing these financial institutions and how they try to counter them. (ed.2 Baylis1987)

Digitalization has affected banking industry in the following ways:

Competition

Competition in the banking sector has gone overboard. The introduction of new and powerful technologies has brought stiff competition in the banking industry where each and every financial organization has an ATM station where customers can go make withdrawals and deposits. Any bank that does not have this feature is likely to be left out as customers try to change their tastes to match those in the current economic world. With increased economic difficulties people are looking for financial institutions where they can be able to carry out their transactions with maximum cost efficiency. Banks would want to take the lead in recouping any benefits associated with adoption of a particular technology. (Beck etal 2000)

Money transfer

The introduction of credit and debit cards has ensured that banking can be done internationally. Business organizations and retail clients can transfer money through technological methods like wire transfers, master cards, visa electrons, express cards etc. This clearly shows how the banking sector has undergone revolution. Due to intense pressure from other small financial organizations any banks must change in order to continue being in operation. (Berger 2003)

Communication

Technology has transformed the whole world into a global village where communication across the international borders is possible within few seconds. Banks have ensured that communication between domestic branches as well as international is steadfast and important information can be sent and received via mails, websites and etc. Using laptops sales representatives can sell various bank policies and feedback sent to the headquarters online. Many banks are now moving towards virtual recruiting where they can be able to access the personal details of the candidates sought through online recruitment process. This eliminates lengthy normal interview processes characterized by paperwork. (Devlin 1995)

Under the notion of Strategic fit, a firm is looked at in terms of its social environment as well. Management scholars once argued that the survival of every organization depends on its acceptability among customers, readiness and willingness of its staff to use their expertise and creativity in its service. This implies that an organization is a social setting that is comprised of social beings and at the same time depends on the society as well. Social responsibility has been one of the biggest challenges for big and small size organizations. Many banks have begun feeling the pressure and are actually plying their cards safe. Recently there are quite a number of financial institutions which are sponsoring charitable organizations. Barclays bank is undertaking so many environmental conservation projects. (CSR wire 2008)

Standard Chartered Bank is known to support many social events including sports where it has sponsored many athletic championships. An example of this includes the Boston marathon, Beijing and Olympic events. In Kenya for example Kenya Commercial bank is a major sponsor of a program dubbed Mercy Train. This is a program aimed at ensuring that the less fortunate and hungry people are fed by a donation received from well-wishing organizations and persons. (Devlin 1995)

Because banking institutions are private businesses with different shareholders, following the Enron scandal that left so many shareholders bankrupt, it is in the best interest that banks have initiated ethical practices including corporate governance, social ethics and etc. These practices are geared towards securing investors’ confidence so that they can develop a person that the activities of the organization are credible and transparent. (Berger 2003)

This is one of the current trends in business; most banking organizations are now finding it increasingly strategic to join hands in the private sector than in corporations. Mergers and acquisitions have become the order of the day in business. One of the reasons that make banking organizations adopt this strategy is that there is a strong belief that privately-owned organizations are more cost-efficient than in the public sector. (JPMorgan 2008)

Secondly mergers and acquisitions create a platform for competitive advantages. This has been seen in many banking organizations as they try to form a formidable force to counter their rivals i.e. the Bank of India and the Bank of Africa recently agreed to share one banking network, the AIM alliance between the Apple and the Microsoft. The businesses are now trying to retreat under the anonymity afforded by private ownership. Business anonymity ensures that business strategy is not susceptible to any exposure. This will in turn make the business remain ever competitive. (Steven, et al 2006)Private organizations are more flexible and can therefore adapt to any kind of an environment. This makes the private entities to be more responsive to both local and international market needs.

Banks should ever remain conscious about the current digital era, look into the effects of the current technological advancement and review their strategy to determine if they are up to date and where possible make necessary adjustments. Strategy should now be tailored towards the needs of the business if maximum potential is to be achieved.

Beck, T etal 2000, Finance and the Sources of Growth, Journal of Financial Economics, Vol 58, no 1-2, pp.261-300.

Berger, A.N 2003, The economic effects of technological progress: Evidence from the Banking industry, Journal of Money, Credit, and Banking , Vol 35, no 2, pp.141-176.

Baylis, J (ed.2) 1987, Contemporary Strategy, Taylor & Francis, ISBN 0709950713, 9780709950714.

CSR wire 2008, The Latest Corporate Social Responsibility News –Banking on Sustainability, Web.

Devlin, J.F, 1995, Technology and Innovation in Retail Banking Distribution, International Journal of Banking Marketing, Vol 13, no 4, pp.19-25

Grant, R (ed.6) 2007, Contemporary strategy Analysis, Wiley, John & Sons, Incorporated, pp.210-496, ISBN-13: 9781405163095.

J.P.Morgan.2008, Private Banking , Web.

Steven F, Damien N, Paul S & Anita T,2006, Market entry, privatization and bank performance in transition, Journal compilation © 2009 The European Bank for Reconstruction and Development ,Vol.14,no.4,pp.579-610.

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• Essay On Bank

Essay on Bank

500+ words essay on bank.

Banks are an integral part of the modern economy. They play a major role in the economic growth and development of a country. The idea of banking evolved with the idea of money. In India, public sector banks (PSBs) have been working to provide banking services in urban and rural areas since 1970. These public sector banks account for nearly 70% of banking activity in India. With the help of this essay on banks, students will get to know the functions performed by banks and their importance for individuals and the country. To help students in improving their essay-writing skills, we have also compiled a list of CBSE Essays on different topics. By practising these essays, they can boost their writing skills and also score good marks on the English exam.

Meaning of Bank

Banks are mainly linked to depositing and lending money. In Indian society, moneylenders used to give money to people in ancient times. They charged a high rate of interest to people as there were no banks or banking systems available at that time. But, with the change in time, the banking system was introduced in India. Now, we have public sector banks and private banks.

A bank is a financial institution that deals with deposits, withdrawals and other related banking services. Bank receives money from those who want to save in the form of deposits, and it lends money to those who need it. A bank is a financial institution that works as an intermediary to accept deposits and channels those deposits into various lending activities. It does so through loans or capital markets. A bank establishes the connection between the customers who have capital surpluses and those with capital deficits. In India, all banks operate under the guidelines of the Reserve Bank of India, which is known as the banker’s bank.

Functions of Bank

Banking is the lifeline of the modern economy. It has played a very important role in the economic development of all the nations of the world. We can not think of modern commerce without banking. Banking is a business which seeks profits like any other business. The banking business mainly constitutes borrowing and lending as their basic functions. Now, banks are providing many other services to people, such as net banking, online shopping, mobile banking, granting loans and advances, short-term credit, pension payments, acting as a dealer in foreign currency etc. A common person can safely deposit their money in the banks.

How Important are Banks for Development?

Banks are the most important financial pillars. They play a vital role in the economic development of a country. The financing requirements of industries, trades, agriculture and other business are met with the help of banks. Therefore, if the banking system of a country becomes strong, then the development of the country will also be at a faster rate. In today’s economy, banks are not only dealing with money, but they are also contributing to the development of the nation. They play a crucial role in the disbursement of credit and the mobilisation of deposits to various sectors of the economy. Banks also represent the economic health of the country. The strength of a nation’s economy depends on the strength of the financial system, which depends on the banking system.

In India, banks play a crucial role in the social and economic growth of the country after independence. The banking sector in India accounts for more than half the assets of the financial sector. The Indian banks have shown much growth after the implementation of financial sector reforms.

Banks are the backbone of any country’s economy. They are responsible for running the economy and controlling the price of the markets. They perform various important functions. However, there are default NPAs, cases of corruption and security threat-related issues, but these can be resolved by implementing strict laws and rules by the government.

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Introduction to Banking Sector In India Essay Example

• Pages: 17 (4648 words)
• Published: April 19, 2017
• Type: Essay

1. 1 Introduction

A bank is a financial institution that provides banking and other financial services to their customers. A bank is generally understood as an institution which provides fundamental banking services such as accepting deposits and providing loans. There are also nonbanking institutions that provide certain banking services without meeting the legal definition of a bank. Banks are a subset of the financial services industry.

A banking system also referred as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, through out the day. The banking system in India, should not only be hassle free but it should be able to meet the 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 cred

it. The Banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers.

All the banks safeguards the money and valuables and provide loans, credit, and payment services, such as checking accounts, money orders, and cashier’s cheques. The banks also offer investment and insurance products. As a variety of models for cooperation and integration among finance industries have emerged, some of the traditional distinctions between banks, insurance companies, and securities firms have diminished. In spite of these changes, banks continue to maintain and perform their primary role—accepting deposits and lending funds from these deposits.

1.2 Need of the Banks

Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Read also article

"A nation should require all of its students to study the same national curriculum until they enter college".

Again there were no security of public savings and no uniformity regarding loans. So as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized banking sector works within the financial system to provide loans, accept deposits and provide other services to their customers. The following functions of the bank explain the need of the bank nd its importance: To provide the security to the savings of customers. To control the supply of money and credit To encourage public confidence in the working of the financial system, increase savings speedily and efficiently. To avoid focus of financial powers in the hands of a few individuals and institutions. To set equal norms and conditions (i. e. rate of interest, period of lending etc) to all types of customers

1. 3 History of Indian Banking System

The first bank in India, called The General Bank of India was established in the year 1786. The East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which was established in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras) were called as Presidency Banks. Allahabad Bank which was established in 1865, was for the first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894 with head quarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank

of Mysore were set up.

In 1921, all presidency banks were amalgamated to 21 form the Imperial Bank of India which was run by European Shareholders. After that the Reserve Bank of India was established in April 1935. At the time of first phase the growth of banking sector was very slow. Between 1913 and 1948 there were approximately 1100 small banks in India. 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. 3 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as a Central Banking Authority. After independence, Government has taken most important steps in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name "State Bank of India", to act as the principal agent of RBI and to handle banking transactions all over the country. It was established under State Bank of India Act, 1955. Seven banks forming subsidiary of State Bank of India was nationalized in 1960.

On 19th July, 1969, major process of nationalization was carried out. At the same time 14 major Indian commercial banks of the country were nationalized. In 1980, another six banks were nationalized, and thus raising the number of nationalized banks to 20. Seven more banks were nationalized with deposits over 200 Crores. Till the year 1980 approximately 80% of the banking segment in India was under government’s ownership. On the suggestions of Narsimhan Committee, the Banking Regulation Act

was amended in 1993 and thus the gates for the new private sector banks were opened.

 1. 3.1 Nationalisation

By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensured about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the Government of India (GOI) in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation".

The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "Masterstroke of political sagacity" Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August, 1969.

A second step of nationalisation of 6 more commercial banks followed in 1980. The stated reason for the nationalisation was to give the government more control of credit delivery. With the second step of nationalisation, the GOI controlled around 91% of the banking business in India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19.

After this, until the 1990s, the nationalised banks grew at a pace of

around 4%, closer to the average growth rate of the Indian economy. The nationalised banks were credited by some; including Home minister P. Chidambaram, to have helped the Indian economy withstand the global financial crisis of 2007-2009.

1. 3. 2 Liberalisation

In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalisation, licensing a small number of private banks.

These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of 23 Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move along with the rapid growth in the economy of India revolutionized the banking sector in India which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 49% with some restrictions. The new policy shook the banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for the traditional banks.

All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), banking in India is generally fairly mature in

terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets as compared to other banks in comparable economies in its region.

The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. 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. 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 bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be voted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and 24 personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide.

1. 3. 3 Government policy on banking industry (Source:-The federal Reserve Act 1913 and The Banking Act 1933)

Banks operating in most of the countries must contend with heavy regulations, rules enforced by Federal and State

agencies to govern their operations, service offerings, and the manner in which they grow and expand their facilities to better serve the public. A banker works within the financial system to provide loans, accept deposits, and provide other services to their customers. They must do so within a climate of extensive regulation, designed primarily to protect the public interests. The main reasons why the banks are heavily regulated are as follows: To protect the safety of the public’s savings.

To control the supply of money and credit in order to achieve a nation’s broad economic goal. To ensure equal opportunity and fairness in the public’s access to credit and other vital financial services. To promote public confidence in the financial system, so that savings are made speedily and efficiently. To avoid concentrations of financial power in the hands of a few individuals and institutions. Provide the Government with credit, tax revenues and other services. To help sectors of the economy that they have special credit needs for eg. Housing, small business and agricultural loans etc.

1. 3.4 Law of banking

Banking law is based on a contractual analysis of the relationship between the bank and customer—defined 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 cheques 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. cheques 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.  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 account—unless 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 ights, obligations or limitations relevant to the bank-customer relationship.

1. 3. 5 Regulations for Indian banks

Currently in most jurisdictions commercial banks are regulated 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 order—although 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, i. . a government-owned (central) bank. Central banks also typically have a monopoly on the business of issuing banknotes. However, in some countries this is not the case. In 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. Some types of financial institutions, such as building societies and credit unions, may be partly or wholly exempted 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:

Minimum capital

Minimum capital ratio 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior officers Approval of the bank's business plan as being sufficiently prudent and plausible.

1. 4 Classification of Banking Industry in India

Indian banking industry has been divided into two parts, organized and unorganized sectors.

The organized sector consists of Reserve Bank of India, Commercial Banks and Co-operative Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc). The 27 unorganized sector, which is not homogeneous, is largely made up of money lenders and indigenous bankers. An outline of the Indian Banking structure may be presented as follows:

1. Reserve banks of India.

2. Indian Scheduled Commercial Banks.

a) State Bank of India and its associate banks.

b) Twenty nationalized banks.

c) Regional rural banks.

d) Other scheduled commercial banks.

3. Foreign Banks

4. Non-scheduled banks.

5. Co-operative banks.

4. 1.1 Reserve bank of India

The reserve bank of India is a central bank and was established in April 1, 1935 in accordance with the provisions of reserve bank of India act 1934. The central

office of RBI is located at Mumbai since inception. Though originally the reserve bank of India was privately owned, since nationalization in 1949, RBI is fully owned by the Government of India. It was inaugurated with share capital of Rs. 5 Crores divided into shares of Rs. 100 each fully paid up. RBI is governed by a central board (headed by a governor) appointed by the central government of India.

RBI has 22 regional offices across India. The reserve bank of India was nationalized in the year 1949. The general superintendence and direction of the bank is entrusted to central board of directors of 20 members, the Governor and four deputy Governors, one Governmental official from the ministry of Finance, ten nominated directors by the government to give representation to important elements in the economic life of the country, and the four nominated director by the Central Government to represent the four local boards with the headquarters at Mumbai, Kolkata, Chennai and 8 New Delhi. Local Board consists of five members each central government appointed for a term of four years to represent territorial and economic interests and the interests of cooperative and indigenous banks. The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the statutory basis of the functioning of the bank. The bank was constituted for the need of following: To regulate the issues of banknotes. To maintain reserves with a view to securing monetary stability To operate the credit and currency system of the country to its advantage.

Functions of RBI as a central bank of India are explained briefly as follows:

Bank of Issue: The RBI formulates, implements, and

monitors the monitory policy. Its main objective is maintaining price stability and ensuring adequate flow of credit to productive sector. Regulator-

Supervisor of the financial system: RBI prescribes broad parameters of banking operations within which the country’s banking and financial system functions. Their main objective is to maintain public confidence in the system, protect depositor’s interest and provide cost effective banking services to the public.

Manager of exchange control: The manager of exchange control department manages the foreign exchange, according to the foreign exchange management act, 1999. The manager’s main objective is to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency: A person who works as an issuer, issues and exchanges or destroys the currency and coins that are not fit for circulation. His main objective is to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role: The RBI performs the wide range of promotional functions to support national objectives such as contests, coupons maintaining good public relations and many more.

Related functions: There are also some of the related functions to the above mentioned main functions. They are such as, banker to the government, banker to banks etc….

Banker to government performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks maintains banking accounts to all scheduled banks.

Controller of Credit: RBI performs the following tasks:  It holds the cash reserves of all the scheduled banks. It controls the credit operations of banks through quantitative and qualitative controls. It controls the banking system through the system of licensing, inspection and calling

for information. It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Supervisory Functions: In addition to its traditional central banking functions, the Reserve Bank performs certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India.

The Reserve Bank Act 1934 and the banking regulation act 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction and liquidation. The RBI is authorized to carry out periodical inspections of the banks and to call for returns and necessary information from them.

The nationalisation of 14 major Indian scheduled banks in July 1969 has imposed new responsibilities on the RBI for directing the growth of banking and credit policies towards more rapid development of the economy and realisation of certain desired social objectives. The supervisory functions of the RBI have helped a great deal in improving 30 the standard of banking in India to develop on sound lines and to improve the methods of their operation.

Promotional Functions: With economic growth assuming a new urgency since independence, the range of the Reserve Bank’s functions has steadily widened.

The bank now performs a variety of developmental and promotional functions, which, at one time, were regarded as outside the normal scope of central banking. The Reserve bank was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies.

1. 4. 2 Indian Scheduled Commercial Banks

The commercial banking structure in India consists of scheduled commercial banks, and unscheduled

banks. Scheduled Banks: Scheduled Banks in India constitute those banks which have been included in the second schedule of RBI act 1934.

RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42(6a) of the Act. “Scheduled banks in India” means the State Bank of India constituted under the State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the s State Bank of India (subsidiary banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the Banking companies (Acquisition and Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second Schedule to the Reserve bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank”.

For the purpose of assessment of performance of banks, the Reserve Bank of India categories those banks as public sector banks, old private sector banks, new private sector banks and foreign banks, i. e. private sector, public sector, and foreign banks come under the umbrella of scheduled commercial banks.

Regional Rural Bank: The government of India set up Regional Rural Banks (RRBs) on October 2, 1975.  The banks provide credit to the weaker sections of the rural areas, particularly the small and marginal farmers, agricultural labourers, and small enterpreneurs. Initially, five RRBs were set up on October 2, 1975 which was sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United Commercial Bank and United Bank of India. The total authorized capital was fixed at Rs. 1 Crore which has since been raised to Rs. 5 Crores.

There are several

concessions enjoyed by the RRBs by Reserve Bank of India such as lower interest rates and refinancing facilities from NABARD like lower cash ratio, lower statutory liquidity ratio, lower rate of interest on loans taken from sponsoring banks, managerial and staff assistance from the sponsoring bank and reimbursement of the expenses on staff training. The RRBs are under the control of NABARD. NABARD has the responsibility of laying down the policies for the RRBs, to oversee their operations, provide refinance facilities, to monitor their performance and to attend their problems.

Unscheduled Banks: “Unscheduled Bank in India” means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank”.

1. 4. 3 NABARD

NABARD is an apex development bank with an authorization for facilitating credit flow for promotion and development of agriculture, small-scale industries, cottage and village industries, handicrafts and other rural crafts. It also has the mandate to support all other allied economic activities in rural areas, promote integrated and sustainable rural development and secure prosperity of rural areas.

In discharging its role as a facilitator for rural prosperity, NABARD is entrusted with: 1. Providing refinance to lending institutions in rural areas 2. Bringing about or promoting institutions development and 3. Evaluating, monitoring and inspecting the client banks 32 Besides this fundamental role, NABARD also:  Act as a coordinator in the operations of rural credit institutions To help sectors of the economy that they have special credit needs for eg. Housing, small business and agricultural loans etc.

1. 4. 4 Co-operative Banks

Co-operative banks are explained in detail in Section – II of this chapter 1.

Services provided by banking organizations Banking Regulation Act in India, 1949 defines banking as “Accepting” for the purpose of lending or investment of deposits of money from the public, repayable on demand and withdrawable by cheques, drafts, orders etc. as per the above definition a bank essentially performs the following functions:

• Accepting Deposits or savings functions from customers or public by providing bank account, current account, fixed deposit account, recurring accounts etc. The payment transactions like lending money to the public.

Bank provides an effective credit delivery system for loanable transactions. Provide the facility of transferring of money from one place to another place. For performing this operation, bank issues demand drafts, banker’s cheques, money orders etc. for transferring the money. Bank also provides the facility of Telegraphic transfer or tele- cash orders for quick transfer of money.

• A bank performs a trustworthy business for various purposes. A bank also provides the safe custody facility to the money and valuables of the general public.

Bank offers various types of deposit schemes for security of money. For keeping valuables bank provides locker facility. The lockers are small compartments with dual locking system built into strong cupboards. These are stored in the bank’s strong room and are fully secured.

• Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the government disbursements like pension payments and tax refunds also take place through banks. 33 There are several types of banks, which differ in the number of services they provide and the clientele (Customers) they serve.

Although some of the differences between these types of banks have lessened as they have begun to expand the

range of products and services they offer, there are still key distinguishing traits.

These banks are as follows: Commercial banks, which dominate this industry, offer a full range of services for individuals, businesses, and governments. These banks come in a wide range of sizes, from large global banks to regional and community banks. Global banks are involved in international lending and foreign currency trading, in addition to the more typical banking services.

Regional banks have numerous branches and automated teller machine (ATM) locations throughout a multi-state area that provide banking services to individuals. Banks have become more oriented toward marketing and sales. As a result, employees need to know about all types of products and services offered by banks. Community banks are based locally and offer more personal attention, which many individuals and small businesses prefer. In recent years, online banks—which provide all services entirely over the Internet—have entered the market, with some success.

However, many traditional banks have also expanded to offer online banking, and some formerly Internet-only banks are opting to open branches. Savings banks and savings and loan associations, sometimes called thrift institutions, are the second largest group of depository institutions. They were first established as community-based institutions to finance mortgages for people to buy homes and still cater mostly to the savings and lending needs of individuals. Credit unions are another kind of depository institution.

Most credit unions are formed by people with a common bond, such as those who work for the same company or belong to the same labour union or church. Members pool their savings and, when they need money, they may borrow from the credit union, often at a lower interest

rate than that demanded by other financial institutions. Federal Reserve banks are Government agencies that perform many financial services for the Government. Their chief responsibilities are to regulate the banking industry and to help implement our Nation’s monetary policy so our economy can run more efficiently 4 by controlling the Nation’s money supply—the total quantity of money in the country, including cash and bank deposits. For example, during slower periods of economic activity, the Federal Reserve may purchase government securities from commercial banks, giving them more money to lend, thus expanding the economy. Federal Reserve banks also perform a variety of services for other banks. For example, they may make emergency loans to banks that are short of cash, and clear checks that are drawn and paid out by different banks.

The money banks lend, comes primarily from deposits in checking and savings accounts, certificates of deposit, money market accounts, and other deposit accounts that consumers and businesses set up with the bank. These deposits often earn interest for their owners, and accounts that offer checking, provide owners with an easy method for making payments safely without using cash. Deposits in many banks are insured by the Federal Deposit Insurance Corporation, which guarantees that depositors will get their money back, up to a stated limit, if a bank should fail.

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Banking Sector Reforms in India Since 1991, Complete Details

Banking Sector Reforms in India aimed to modernize & strengthen the banking system through liberalization, improved regulations & increased financial inclusion. Know all about Banking Sector Reforms.

Table of Contents

Banking Sector Reforms in India

Banking sector reforms in India refer to the various policy measures and initiatives undertaken to enhance the efficiency, stability, and competitiveness of the banking industry in the country. These reforms aim to strengthen the financial system, improve governance and risk management practices, promote financial inclusion, and facilitate economic growth. 

Read about: Commercial Banks

Banking Sector Reforms Since 1991

The banking sector reforms in India after 1991 aimed to liberalize and modernize the banking system, enhance efficiency, and promote financial stability. Several committees were formed to recommend measures and suggest reforms. Let’s discuss the key committees and their recommendations:

Narsimham Committee I (1991)

• Headed by M. Narasimham, former RBI Governor.
• The committee suggested measures to strengthen the banking system, including reducing government interference, increasing the role of the RBI in supervising banks, and enhancing transparency.
• It recommended the reduction of statutory liquidity ratio (SLR) and cash reserve ratio (CRR), which were high reserve requirements for banks, to improve their liquidity.
• The committee also recommended the recapitalization of weak banks, the strengthening of bank management, and the introduction of prudential norms.

R. H. Khan Committee (1997)

• Headed by R. H. Khan, former Deputy Governor of the Reserve Bank of India (RBI), this committee examined the financial system’s effectiveness for the small-scale sector and the role of primary dealers.
• The committee made recommendations to improve credit delivery to the small-scale sector and enhance the functioning of primary dealers.

Narsimham Committee II (1998)

• This committee was a follow-up to Narsimham Committee I and aimed to review the progress of reforms.
• The committee emphasized the need for structural reforms, consolidation of the banking sector, and the establishment of strong and autonomous regulatory bodies.
• It recommended reducing the government’s stake in public sector banks (PSBs) to less than 33% and enhancing corporate governance standards in PSBs.
• The committee also suggested the adoption of international accounting standards and the introduction of risk-based supervision.

Raghuram Rajan Committee (2008)

• Chaired by Raghuram Rajan, former Chief Economist of the International Monetary Fund (IMF), this committee was appointed to examine the financial sector reforms in India.
• The committee provided recommendations to strengthen the banking system, enhance financial inclusion, and promote financial stability.

Financial Sector Legislative Reforms Commission (FSLRC) (2011)

• The FSLRC was headed by Justice B. N. Srikrishna and tasked with reviewing and restructuring the legal and regulatory framework of the financial sector in India.
• It aimed to consolidate and streamline the laws governing the financial sector, including banking, insurance, securities, and pensions.

PJ Nayak Committee (2014)

• Led by P. J. Nayak, this committee was constituted to examine the governance of PSBs.
• The committee highlighted the need for reforms in the governance structure, such as strengthening the board’s role, empowering bank management, and professionalizing the appointment process of top executives.
• It suggested reducing government interference and advocated for a greater role of the board in key decisions, including appointments and capital allocation.

Nachiket Mor Committee (2014)

• This committee, headed by Nachiket Mor, was formed to examine the Comprehensive Financial Services for Small Businesses and Low-Income Households.
• The committee recommended measures to increase financial inclusion, such as the establishment of payment banks, small finance banks, and the creation of a universal electronic bank account (Jan Dhan Yojana).
• It proposed the concept of “payment banks” to provide basic banking services, including payments and remittances, to underserved sections of society.

Indradhanush Framework

• The Indradhanush framework was introduced in 2015 by the Government of India to revitalize and reform public sector banks (PSBs) in the country. The Indradhanush framework aimed to improve the efficiency, transparency, and governance of PSBs and strengthen their ability to support economic growth.
• Appointments: Enhancing the selection process of top management positions in PSBs to attract skilled professionals.
• Bank Board Bureau (BBB): Setting up the BBB as an autonomous body to provide guidance and enhance governance in PSBs.
• Capitalization : Injecting capital into PSBs to strengthen their balance sheets and enable them to meet Basel III capital adequacy norms.
• De-stressing : Implementing measures to address the issue of non-performing assets (NPAs) and stressed assets in PSBs.
• Empowerment : Granting more autonomy to bank boards and empowering them with greater decision-making authority.
• Framework of Accountability : Introducing a framework to hold the management of PSBs accountable for their performance.
• Governance reforms : Enhancing transparency, risk management, and governance practices in PSBs.

HR Khan Committee (2015)

• Led by H. R. Khan, former Deputy Governor of RBI, this committee was formed to examine the existing framework for monetary policy in India.
• The committee made recommendations on issues such as inflation targeting, monetary policy transmission, and improving the decision-making process of the RBI’s Monetary Policy Committee (MPC).

4R Framework (Recognition, Recapitalization, Resolution, and Reforms)

• The 4R framework was introduced in 2017 as part of the government’s strategy to address the issue of mounting bad loans in the banking system.
• Recognition : Prompt identification and classification of stressed assets as NPAs to accurately assess the extent of the problem.
• Recapitalization : Injecting capital into banks to improve their financial health and enhance their lending capacity.
• Resolution : Establishing mechanisms for the timely resolution of stressed assets through processes like the Insolvency and Bankruptcy Code (IBC) and other resolution frameworks.
• Reforms : Undertaking structural reforms to improve the governance, risk management, and operational efficiency of banks.
• The 4R framework aimed to address the issue of stressed assets, promote transparency and accountability, and strengthen the resilience of the banking sector.

EASE (Enhanced Access and Service Excellence) Framework

EASE is an initiative launched in 2018 to improve public sector banks (PSBs) in India. Key features of the EASE framework include:

Governance Reforms

• Strengthening the governance structure of public sector banks (PSBs).
• Enhancing the effectiveness of boards and improving transparency.
• Bolstering risk management practices.

Responsible Banking

• Encouraging PSBs to align their activities with national development goals.
• Promoting social objectives and environmental sustainability.

Credit Offtake

• Improving credit processes and streamlining lending procedures.
• Promoting digital lending platforms.
• Enhancing credit access for small and medium-sized enterprises (SMEs), agriculture, and retail borrowers.

Deepening Financial Inclusion

• Expanding banking services in unbanked and underbanked areas.
• Leveraging technology for greater reach and accessibility.
• Providing affordable banking services to all sections of society.

Customer Responsiveness

• Adopting a customer-focused approach in PSBs.
• Simplifying processes and leveraging technology for seamless banking experiences.

Responsible Banking Index

• Introducing an index to assess and rank PSBs on responsible banking practices.
• Evaluating governance, credit, and customer service parameters.
• Promoting healthy competition and continuous improvement.

Bimal Jalan Committee (2019)

• Chaired by Bimal Jalan, this committee was constituted to review the economic capital framework of the Reserve Bank of India (RBI).
• The committee recommended transferring a portion of RBI’s surplus reserves to the government and revising the framework for determining RBI’s capital requirements.
• It aimed to strike a balance between the central bank’s need for capital buffers and the government’s fiscal requirements.

Read about: Monetary Policy

Banking Sector Reforms UPSC 

Understanding banking sector reforms is crucial for UPSC (Union Public Service Commission) aspirants as it is an important topic covered in the UPSC Syllabus , particularly in the Economics and Finance sections. UPSC Online Coaching and UPSC Mock Test provide candidates with the necessary guidance and practice to master such topic and excel in the examination. 

Read about: Public Sector Banks

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Banking Sector Reforms in India FAQs

What are the banking sector reforms in india in 1991.

The banking sector reforms in India began in 1991.

What is Basel norms in banking?

Basel norms in banking are international regulatory standards that provide guidelines on capital adequacy, risk management, and liquidity to ensure stability in the banking sector.

What were the banking reforms?

The banking reforms included reducing government interference, increasing transparency, and strengthening prudential norms.

Who is the father of banking reform?

Narasimham is considered the father of banking reforms in India.

What is the first phase of reforms of banking sector?

The first phase of banking sector reforms in India is often associated with the recommendations of the Narsimham Committee I.

I, Sakshi Gupta, am a content writer to empower students aiming for UPSC, PSC, and other competitive exams. My objective is to provide clear, concise, and informative content that caters to your exam preparation needs. I strive to make my content not only informative but also engaging, keeping you motivated throughout your journey!

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