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TENTS
Pages No.
Need of the project 01
Objective of the project 02
Role of economist in banking 03
Chapter 1 : History of Banking Sector 05-19
Chapter 2 : General banking 20-28
Chapter 3 : Management of banking 29-86
Conclusion 87
Bibliography 90
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Need of the project:
Usually all persons want money for personal and commercial purposes. Banks arethe oldest lending institutions in Indian scenario. They are providing all facilities to all
citizens for their own purposes by their terms. To survive in this modern market every bank
implements so many new innovative ideas, strategies, and advanced technologies. For that
they give each and every minute detail about their institution and projects to Public.
They are providing ample facilities to satisfy their customers i.e. Net Banking,
Mobile Banking, Door to Door facility, Instant facility, Investment facility, De mat facility,
Credit Card facility, Loans and Advances, Account facility etc. And such banks get success to
create their own image in public and corporate world. These banks always accepts innovative
notions in Indian banking scenario like Credit Cards, ATM machines, Risk Management etc.
So, as a student business economics I take keen interest in Indian economy and for that
banks are the main source of development.
So this must be the first choice for me to select this topic. At this stage every person
must know about new innovation, technology of procedure new schemes and new ventures.
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Objective of the project:
Because of the following reasons, I prefer this project work to get the knowledge of thebanking system.
Banking is an essential industry.
It is where we often wind up when we are
seeking a problem in financial crisis and
money related query.
Banking is one of the most regulated
businesses in the world.
Banks remain important source for career
opportunities for people.
It is vital system for developing economyfor the nation.
Banks can play a dynamic role in delivery
and purchase of consumer durables.
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The role of economist in banks:
The crucial role of bank economists in transforming the banking system in India.Economists have to be more mainstreamed within the operational structure of commercial
banks. Apart from the traditional functioning of macro-scanning, the inter- linkages between
treasuries, dealing rooms and trading rooms of banks need to be viewed not only with the
day-to-day needs of operational necessity, but also with analytical content and policy
foresight.
Today, operational aspects of the functioning of banks are attracting intensive
research by professional economists. In particular, measuring and modeling different kinds
of risks faced by banks, the behavior of risk-return relationships associated with different
portfolio mixes and the impact of fluctuations in financial markets on the financial
performance of banks are areas which lend themselves to analytical and empirical appraisal
by economists and econometricians. They, in turn, are discovering the degrees of freedom
and room for analytical maneuver in high frequency information generated by the day-to-
day functioning of banks. It is vital that we develop an environment where these synergies
are nurtured so as to serve the longer-term strategic interests of banks. Even in real timetrading and portfolio decisions, the fundamental analysis of economists provides an
independent assessment of market behavior, reinforcing technical analysis.
A serious limitation of the applicability of standard economic analysis to banking
relates to the inadequacies of the data-base. Absence of long time series data storage in the
banking industry often poses serious problems to the quest for the formal analytical
relationships between variables. Even if such data exist, the presence of structural breaks
may blur meaningful analysis based on traditional formulation. Economists need to thinkinnovatively to overcome this problem. Use of panel regression, non-parametric methods and
multivariate analyses could go a long way in understanding and validating behavioral
relationships in banking.
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Another important challenge for the economics profession is to develop proper models for
measurement of various risks in Indian conditions. This is a necessity in view of the move
towards risk-based supervision. Quantification of operational risks and calibration of Value
at Risk (VaR) models pose major computational challenge to bankers and policy makers
alike, particularly in India. A major difficulty lies in identifying the right statistical model
that determines the underlying distribution suited to the particular category of operational
loss, and building the necessary database for deriving operationally meaningful conclusions.
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History ofbanking
Chapter -1
HISTORY OF BANKING IN INDIA-----
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Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should be able to
meet new challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer confined to
only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached
even to the remote corners of the country. This is one of the main reasons of India's growth
process. The government's regular policy for Indian bank since 1969 has paid rich dividends
with the nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for getting
a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the
most efficient bank transferred money from one branch to other in two days. Now it is simple
as instant messaging or dial a pizza. Money has become the order of the day. The first bank
in India, though conservative, was established in 1786. From 1786 till today, the journey of
Indian Banking System can be segregated into three distinct phases. They are as mentioned
below:
Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector
Reforms.
New phase of Indian Banking System with the advent of Indian Financial &
Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and
Phase III.
Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan
and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of
Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency
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Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was
established which started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters 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. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline
the functioning and activities of commercial banks, the Government of India came up with
The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949
as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with
extensive powers for the supervision of banking in India as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an aftermath deposit
mobilization was slow. Abreast of it the savings bank facility provided by the Postal
department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive banking
facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of
India to act as the principal agent of RBI and to handle banking transactions of the Union
and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on
19th July, 1969, major process of nationalization was carried out. It was the effort of the then
Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country
were nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in India under
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Government ownership. The following are the steps taken by the Government of India to
Regulate Banking Institutions in the Country:
1949 : Enactment of Banking Regulation Act.
1955 : Nationalization of State Bank of India.
1959 : Nationalization of SBI subsidiaries.
1961 : Insurance cover extended to deposits.
1969 : Nationalization of 14 major banks.
1971 : Creation of credit guarantee corporation.
1975 : Creation of regional rural banks.
1980 : Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank India rose
to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in
the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.
Phase III
This phase has introduced many more products and facilities in the banking sector in
its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was
set up by his name which worked for the liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being
put to give a satisfactory service to customers. Phone banking and net banking is introduced.
The entire system became more convenient and swift. Time is given more importance than
money. The financial system of India has shown a great deal of resilience. It is sheltered from
any crisis triggered by any external macroeconomics shock as other East Asian Countries
suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their customers have limited
foreign exchange exposure.
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Banks in India:
In India banks are segregated in different groups. Each group has their own benefits and
limitations in operating in India. Each has their own dedicated target market. Few of them
work on only rural market but others work both on rural as well as urban market. Many
even are only catering only in cities. Some of them are Indian origin and some of them are
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foreign players. And the details are discussed here. The banks with their relation with their
customers, the mode of operation,the names of the banks under different groups and such
other useful information are talked about.
One more important section has been note of these upcoming foreign banks in India. RBI
has shown certain interest in the inclusion of foreign banks than the existing one. These step
has paved away more foreign banks to do their banks in India.
Major banks in India :
ABN AMRO Bank
Abu Dhabi commercial Bank
American Express Bank
Andhra Bank
Bank of Baroda
Bank of Maharashtra
Bank of India
Bank of Punjab
Bank of Rajasthan
Bank of Ceylon
BNP Paribus Bank
Canara Bank
Catholic Syrian Bank
Central bank of India
Indian Overseas bank
Indusland Bank
ING Vysya Bank
Jammu and Kashmir Bank
JP Morgan Chase Bank
Karnataka Bank
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Oriental Bank of Commerce
Punjab National Bank
Punjab Sind Bank
South Indian Bank Standard Chartered Bank
State Bank of India
State Bank of bikener and jaipur
China trust commercial Bank
City Bank
City union Bank
Corporation Bank Dena bank
Deutsche Bank
Dhanlakshmi Bank
Federal Bank
HDFC Bank
ICICI Bank
IDBI Bank
Indian Bank
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Saurastra
State Bank of Travancore
Syndicate Bank
Taib Bank
UCO Bank
Union Bank of India
United Bank of India
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United Western Bank
UTI Bank
Vijaya Bank
Banking services in India:
With years, banks are also adding services to their customers. The Indian banking industry
is passing through a phase of customers market. The customers have more choices in
choosing their banks. A competition has been established within the banks operating in
India.
With stiff competition and advancement of technology, the service provided by
banks has become more easy and convenient. The past days are witness to an hour wait
before withdrawing cash from accounts or cheque from north of the country being cleared in
one month in south.
This section of banking deals with the latest discovery in banking instruments
along with the polished version of their old systems.
Reserve Bank of India:
The central bank of the country is the Reserve Bank of India (RBI). It was
established in April 1935 with a share capital of Rs. 5 crores on the basis of the
recommendations of the Hilton Young Commission. The share capital was divided into
shares of Rs. 100 each fully paid which was entirely owned by private shareholders in thebeginning. The Government held shares of nominal value of Rs. 2, 20,000.
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 Government official from the
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Ministry of Finance, ten nominated Directors by the Government to give representation to
important elements in the economic life of the country, and four nominated Directors by the
Central Government to represent the four local Boards with the headquarters at Mumbai,
Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial and economic
interests and the interests of co-operative and indigenous banks.
The Reserve Bank of India Act, 1934 was commenced on April 1, 1935. The Act,
1934 (II of 1934) provides the statutory basis of the functioning of the Bank.
The Bank was constituted for the need of following:
To regulate the issue of banknotes
To maintain reserves with a view to securing monetary stability and
To operate the credit and currency system of the country to its advantage.
Functions of resrve bank of India:
The Reserve Bank of India Act of 1934 entrust all the important functionsof a central bank the Reserve Bank of India.
Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank
notes of all denominations. The distribution of one rupee notes and coins and small coins all
over the country is undertaken by the Reserve Bank as agent of the as the agent of the
Government. The Reserve Bank has a separate Issue Department which is entrusted with the
issue of currency notes. The assets and liabilities of the Issue Department are kept separate
from those of the Banking Department. Originally, the assets of the Issue Department were
to consist of not less than two-fifths of gold coin, gold bullion or sterling securities provided
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the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the
assets might be held in rupee coins, Government of India rupee securities, eligible bills of
exchange and promissory notes payable in India. Due to the exigencies of the Second World
War and the post-was period, these provisions were considerably modified. Since 1957, the
Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200
crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is
known as the minimum reserve system.
Banker to Government
The second important function of the Reserve Bank of India is to act as Government
banker, agent and adviser. The Reserve Bank is agent of Central Government and of allState Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has
the obligation to transact Government business, via. to keep the cash balances as deposits
free of interest, to receive and to make payments on behalf of the Government and to carry
out their exchange remittances and other banking operations. The Reserve Bank of India
helps the Government - both the Union and the States to float new loans and to manage
public debt. The Bank makes ways and means advances to the Governments for 90 days. It
makes loans and advances to the States and local authorities. It acts as adviser to the
Government on all monetary and banking matters.
Bankers' Bank and Lender of the Last Resort:
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the
Banking Companies Act of 1949, every scheduled bank was required to maintain with the
Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its
time liabilities in India. By an amendment of 1962, the distinction between demand and time
liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent
of their aggregate deposit liabilities. The minimum cash requirements can be changed by the
Reserve Bank of India.
The scheduled banks can borrow from the Reserve Bank of India on the basis of
eligible securities or get financial accommodation in times of need or stringency by
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rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank
of India to come to their help in times of banking crisis the Reserve Bank becomes not only
the banker's bank but also the lender of the last resort.
Controller of Credit:
The Reserve Bank of India is the controller of credit i.e. it has the power to influence
the volume of credit created by banks in India. It can do so through changing the Bank rate
or through open market operations. According to the Banking Regulation Act of 1949, the
Reserve Bank of India can ask any particular bank or the whole banking system not to lend
to particular groups or persons on the basis of certain types of securities. Since 1956,
selective controls of credit are increasingly being used by the Reserve Bank.
The Reserve Bank of India is armed with many more powers to control the Indian
money market. Every bank has to get a license from the Reserve Bank of India to do banking
business within India, the license can be cancelled by the Reserve Bank of certain stipulated
conditions are not fulfilled. Every bank will have to get the permission of the Reserve Bank
before it can open a new branch. Each scheduled bank must send a weekly return to the
Reserve Bank showing, in detail, its assets and liabilities. This power of the Bank to call for
information is also intended to give it effective control of the credit system. The Reserve
Bank has also the power to inspect the accounts of any commercial bank. As supreme
banking authority in the country, the Reserve Bank of India, therefore, has the following
powers:
(a)It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative andqualitative controls.
(c)It controls the banking system through the system of licensing, inspectionand calling for
information.
(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled
banks.
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Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate of
exchange. According to the Reserve Bank of India Act of 1934, the Bank was required to buy
and sell at fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of
exchange fixed was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange
rate fixed at lsh.6d. Though there were periods of extreme pressure in favor of or against the
rupee. After India became a member of the International Monetary Fund in 1946, the
Reserve Bank has the responsibility of maintaining fixed exchange rates with all other
member countries of the I.M.F.
Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as
the custodian of India's reserve of international currencies. The vast sterling balances were
acquired and managed by the Bank. Further, the RBI has the responsibility of administering
the exchange controls of the country.
Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has 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 nationalization of 14 major Indian scheduled banks in
July 1969 has imposed new responsibilities on the RBI for directing the growth of bankingand credit policies towards more rapid development of the economy and realization of
certain desired social objectives. The supervisory functions of the RBI have helped a great
deal in improving the standard of banking in India to develop on sound lines and to improve
the methods of their operation.
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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 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. Accordingly, the Reserve Bank has helped in the setting up of
the IFCI and the SFC; it set up the Deposit Insurance Corporation in 1962, the Unit Trust of
India in 1964, the Industrial Development Bank of India also in 1964, the Agricultural
Refinance Corporation of India in 1963 and the Industrial Reconstruction Corporation of
India in 1972. These institutions were set up directly or indirectly by the Reserve Bank topromote saving habit and to mobilize savings, and to provide industrial finance as well as
agricultural finance. As far back as 1935, the Reserve Bank of India set up the Agricultural
Credit Department to provide agricultural credit. But only since 1951 the Bank's role in this
field has become extremely important. The Bank has developed the co-operative credit
movement to encourage saving, to eliminate moneylenders from the villages and to route its
short term credit to agriculture. The RBI has set up the Agricultural Refinance and
Development Corporation to provide long-term finance to farmers.
Classification of RBIs functions
The monetary functions also known as the central banking functions of the RBI are
related to control and regulation of money and credit, i.e., issue of currency, control of bank
credit, control of foreign exchange operations, banker to the Government and to the money
market. Monetary functions of the RBI are significant as they control and regulate the
volume of money and credit in the country.
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Equally important, however, are the non-monetary functions of the RBI in the context of
India's economic backwardness. The supervisory function of the RBI may be regarded as a
non-monetary function (though many consider this a monetary function). The promotion of
sound banking in India is an important goal of the RBI, the RBI has been given wide and
drastic powers, under the Banking Regulation Act of 1949 - these powers relate to licensing
of banks, branch expansion, liquidity of their assets, management and methods of working,
inspection, amalgamation, reconstruction and liquidation. Under the RBI's supervision and
inspection, the working of banks has greatly improved. Commercial banks have developed
into financially and operationally sound and viable units. The RBI's powers of supervision
have now been extended to non- banking financial intermediaries. Since independence,
particularly after its nationalization 1949, the RBI has followed the promotional functions
vigorously and has been responsible for strong financial support to industrial andagricultural development in the country.
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General
Banking
Chapter -2
NATURE OF BANKING IN INDIA--- ---
A banking company in India has been defined in the banking companies
act,1949.as one which transacts the business of banking which means the accepting, for the
purpose of lending or investment of deposits of money from the public, repayable on demand
or otherwise and withdraw able by cheque, draft, order or otherwise.
Most of the activities a Bank performs are derived from the above definition. In
addition, Banks are allowed to perform certain activities which are ancillary to this business
of accepting deposits and lending. A bank's relationship with the public, therefore, revolves
around accepting deposits and lending money. Another activity which is assuming increasing
importance is transfer of money - both domestic and foreign - from one place to another.
This activity is generally known as "remittance business" in banking parlance. The so called
forex (foreign exchange) business is largely a part of remittance albeit it involves buying and
selling of foreign currencies.
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FUNCTIONING OF A BANK:-
Functioning of a Bank is among the more complicated of corporate operations. Since
Banking involves dealing directly with money, governments in most countries regulate this
sector rather stringently. In India, the regulation traditionally has been very strict and in the
opinion of certain quarters, responsible for the present condition of banks, where NPAs are
of a very high order. The process of financial reforms, which started in 1991, has cleared the
cobwebs somewhat but a lot remains to be done. The multiplicity of policy and regulations
that a Bank has to work with makes its operations even more complicated, sometimes
bordering on illogical. This section, which is also intended for banking professional, attempts
to give an overview of the functions in as simple manner as possible. Banking Regulation Act
of India, 1949 defines Banking as "accepting, for the purpose of lending or investment ofdeposits of money from the public, repayable on demand or otherwise and withdraw able by
cheques, draft, and order or otherwise."
KINDS OF BANKS---
Financial requirements in a modern economy are of a diverse nature, distinctive
variety and large magnitude. Hence, different types of banks have been instituted to cater to
the varying needs of the community.
Banks in the organized sector may, however, be classified in to the following
major forms:
1.Commercial banks
2.Co-operative banks
3.Specialized banks
4.Central bank
-: COMMERCIAL BANKS:-
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Commercial banks are joint stock companies dealing in money and credit. In India,
however there is a mixed banking system, prior to July 1969, all the commercial banks-73
scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-
were under the control of private sector. On July 19, 1969, however,
14mejor commercial banks with deposits of over 50 Corers were nationalized. In April
1980, another six commercial banks of high standing were taken over by the government.
At present, there are20 nationalized banks plus the state bank of India and its 7
subsidiaries constituting public sector banking which controls over 90 per cent of the
banking business in the country.
-:CO-OPERATIVE BANKS:-
Co-operative banks are a group of financial institutions organized under the provisions of
the Co-operative societies Act of the states.
The main objective of co-operative banks is to provide cheap credits to their members. They
are based on the principle of self-reliance and mutual co-operation. Co-operative banking
system in India has the shape of a pyramid a three tier structure, constituted by:
Primary credit
societies(APEX)
Centralcooperativebanks(district)
State cooperativebank(village ,towns ,cities)
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-: SPECIALIZED BANKS:-
There are specialized forms of banks catering to some special needs with this
unique nature of activities. There are thus,
1.Foreign exchange banks,
2.Industrial banks,
3.Development banks,
4.Land development banks,
5.Exim bank.
-: CENTRAL BANK:-
A central bank is the apex financial institution in the banking and financial system of
a country. It is regarded as the highest monetary authority in the country. It acts as the
leader of the money market. It supervises, control and regulates the activities of the
commercial banks. It is a service oriented financial institution.
Indias central bank is the reserve bank of India established in 1935.a central
bank is usually state owned but it may also be a private organization. For instance, the
reserve bank of India (RBI), was started as a shareholders organization in 1935, however, it
was nationalized after independence, in 1949.it is free from parliamentary control.
ROLE OF BANKS IN A DEVELOPING ECONOMY-----
Banks play a very useful and dynamic role in the economic life of every modern state.
A study of the economic history of western country shows that without the evolution ofcommercial banks in the 18th and 19th centuries, the industrial revolution would not have
taken place in Europe. The economic importance of commercial banks to the developing
countries may be viewed thus:
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Banks are in a position to influence economic activity in a country by their influence
on the rate interest. They can influence the rate of interest in the money market through its
supply of funds. Banks may follow a cheap money policy with low interest rates which will
tend to stimulate economic activity.
FACILITATOR OF MONETARY POLICY:-
Thus monetary policy of a country should be conductive to economic development.
But a well-developed banking system is on essential pre-condition to the effective
implementation of monetary policy. Under-developed countries cannot afford to ignore this
fact.
A fine, an efficient and comprehensive banking system is a crucial factor of the
developmental process.
PRINCIPLES OF BANK LENDING POLICIES---------------
The main business of banking company is to grant loans and advances to traders as
well as commercial and industrial institutes. The most important use of banks money is
lending. Yet, there are risks in lending. So the banks follow certain principles to minimize the
risk:
1.Safet y
2.Liquidit y
3.Profitabilit y
4.Purpose of loan
5.Principle of diversification of risks
SAFETY: -
Normally the banker uses the money of depositors in granting loans and advances. So first of
all initially the banker while granting loans should think first of the safety of depositors
money. The purpose behind the safety is to see the financial position of the borrower whether
he can pay the debt as well as interest easily.
LIQUIDITY: -
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It is a legal duty of a banker to pay on demand the total deposited money to the
depositor. So the banker has to keep certain percent cash of the total deposits on hand.
Moreover the bank grants loan. It is also for the addition of short term or productive capital.
Such type of lending is recovered on demand.
P ROF ITABILITY: -
Commercial banking is profit earning institutes. Nationalized banks are also not an
exception. They should have planning of deposits in a profitability way pay more interest to
the depositors and more salary to the employees. Moreover the banker can also incur
business cost and can give more benefits to customer.
PURPOSE OF LOAN:-
Banks never lend or advance for any type of purpose. The banks grant loans and
advances for the safety of its wealth, and certainty of recovery of loan and the bank lends
only for productive purposes. For example, the bank gives such loan for the requirement for
unproductive purposes.
PRINCIPLE IOF DIVERSIFICATION OF RISKS:-
While lending loans or advances the banks normally keep such securities and assets
as a supports so that lending may be safe and secured. Suppose, any particular state is hit by
disasters but the bank shall get benefits from the lending to another states units. Thus, he
effect on the entire business of banking is reduced. There are proverbs that do not keep all
the eggs in one basket.
-a principle of considerations of sound lending is: 1.Safety
2.Liquidity3.Shiftability
4.Profitability.
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Management of banking
Chapter-3
BRANCH SETUP AND STRUCTURE-------
Ever since major commercial banks were nationalized in two phases in 1969 and 1980, there
has been a sea change in their functions, outlook and perception.
One of the main objectives of nationalization of banks has been to help achieve
balanced, regional, sectoral and sectional development of the economy by way of making the
banks reach out to the small man and to the remote areas of the country.
RATIONAL OF A BANK STRUCTURE:-
An organization consists of people who carry out differentiated tasks which are
coordinated so as to contribute and achieves planned goals. Organizations are created mainly
for producing goods and services to the society for which they have to incorporate a formal
structure.
Indian banking is now operating in a more competitive setting with the induction of
new banks. Both Indian and foreign, who will be bringing in new work technology and
specialist expertise and a variety of new financing instruments.
Branch is the primary unit of the banks business, particularly for serving the weaker
sections of the society. Branches have to develop close relationship they profess to serve. This
leads to opening up or specialized branches, like industrial finance, small scale industries,
and Hi-tech agriculture, overseas and non-resident Indian, according to market
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segmentation. This new vision entails a new chain of command, a new technology and specific
delegation of authority.
This calls for the branch manger to concentrate on his/her styles, skills and
subordinates, goals, to shape the branch in the competitive environment to become a profit
centre and to render better customer service. This implies that the branch manager should
have adequate supporting staff to relieve him from the routine table work to developmental
activities.
In order to serve the customer it is necessary that one should understand and accept role and
relationship with other so as to make sure that none of the supporting staff would be deemed
to be independent of the branch manger. So the structure of branch organization must, from
time to time, conform to the demands and peculiarities of the
locality in which the branch is functioning.
Before looking in to the branch structure of bank, it will be worthwhile examining
how a formal organizational structure of a bank appears. After nationalization, generally
banks have a 4-tier structure represented as under:
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During the mid-80s, banks started diversifying in to various areas like merchant
banking, mutual funds, leasing, hire purchase, etc., to improve their profitability and to cater
to the needs of the customers. These activities are performed by the banks either by separate
departments or as subsidiaries. After liberalization and globalization of the economy, with a
view to meeting the customers needs and to avoid delays, a revised organizational structure
of banks was convened by removing one tier. Now banks are going in for a 3-tier structure as
under:
The regional offices are given more powers and jurisdiction so as to enable them to act
quickly.
ORGANISATIONAL STRUCTURE OF A BANK BRANCH--
Now let discuss the structure of a branch. The branch is the focal point of all activities. The
structure of the branch may be as under:
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This is the typical structure of a branch bank. In very large branches, these structure will undergo
slight changes as stated below:
BANK ORGANIZATION SYSTEM IN INDIA:-
The large volume of work passing through the banking system every day in the form
of cash, cheque, and other credit instruments, together with the complexity of the manyservices rendered, calls not only for a high degree of skill, accuracy and knowledge on the
part of the officials, but also up-to-date and efficient methods of organization, accountancy
and control.
Share holder and directors General Managers Head office AdministratorsThe Branch Manager Branch Administrators Foreign Departments
The chief clerks The security clerk The cashierThe Remittance or waste
clerk
The ledger keeper The day book or contrl
clerkThe junior clerk The shorthand typist Rotation of duties
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RETAIL BANKING-THE NEW FLAVOR---
The Concept of Retail Banking:-
The retail banking encompasses deposit and assets linked products as well as other
financial services offered to individual for personal consumption. Generally, the pure retail
banking is conceived to be the provision of mass banking products and services to private
individuals as opposed to wholesale banking which focuses on corporate clients. Over the
years, the concept of retail banking has been expanded to include in many cases the servicesprovided to small and medium sized businesses. Some banks in Europe even include their
private banking business i.e. services to high net worth net worth individuals in their retail
Banking portfolio.
The concept of Retail banking is not new to banks. it is only now that it is being
viewed as an attractive market segment, which offers opportunities for growth with profits.
The diversified portfolio characteristic of retail banking gives better comfort and spreads the
essence of retail banking lies in individual customers. Though the term Retail Banking and
retail lending are often used synonymously, yet the later is lust one side of Retail Banking. In
retail banking, all the banking needs of individual customers are taken care of in an
integrated manner.
Retail Lending Products:-
Major retail lending products offered by banks are the following:
I.Housing Loans
II.Loan for Consumer goods
III.Personal Loans for marriage, honeymoon, medical treatment and holding etc.
IV.Education Loans
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V.Auto Loans
VI.Gold Loans
VII.Event Loans
VIII.Festival Loans
IX.Insurance Products
X.Loan against Rent receivables
XI.Loan against Pension receivables to senior citizens
XII.Debit and Credit Cards
XIII.Global and International Cards
XIV.Loan to Doctors to set up their own Clinics or for purchase of medical equipments
XV.Loan for Woman Empowerment for the Setting up of boutiques Setting up of beauty parlours
Setting up of creches
Setting up of flower shops
For making jaipuri quilts etc.
Preparation and supply of Food Tiffins
XVI.Loan for purchase of acoustic enclosures for Diesel Gen. Sets etc.
Retail Banking Products for Depositors:-
Retail banking products for depositors in various segments of customers like;
children, salaried persons. Senior citizens, professionals, technocrats business men, retail
traders and farmers etc. include:
a.Flexi deposit Accounts
b.Savings Bank Accounts
c.Recurring Deposit Accounts
d.Short Term Deposits
e.Deferred pension Linked Deposit Schemes
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Today pure deposit type products are giving way to multi-benefit, multi-access genres of
banking products. Most of the innovation is taking place in saving bank accounts to make the
meager return of 3.5% p.a. that they earn, more attractive. Most of the banks now offer
Sweep in and sweep out account, called 2-in-1 accounts or value added savings bank
accounts. This account is a combination of savings bank and term deposit accounts and
offers twin benefit of liquidity of a savings bank account and higher interest earning of term
deposit accounts.
Add-ons and Freebies:-
To make their products and services more service more attractive so as to woo
maximum number of customers, the banks are vying with each other with whole lot off rills,
goodies, freebies are as under:
1.Free collection of specified number of outstation instruments
2.Instant credit of outstanding cheques up to Rs.15000/-
3.Concession in exchange on demand drafts and pay-orders and commission onbills of
exchange .
4.Issuance of free personalized cheques books.
5.Free issuance of ATM, Debit, Credit and add-on Cards.
6.Free investment advisory services.
7.Grant of redeemable reward points on use of credit cards.
8.Free internet banking, phone banking and any where banking facilities.
9.Issuance of discount coupons for purchase of various products like computeraccessories,
music CDs, cassettes, books, toys, garments etc.etc. 10.Last but not the least, issuance of free
PVR, Trade Fair tickets etc. etc.11.Concession in rate of interest on Group advances
12.Exemption in upfront fees
These concessions, freebies and add-ons are based on the True Relationship Value of
customers and is calculated by the return on various products and services of the banks
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availed by them. These concessions and freebies are usually offered for purchase of consumer
goods but now they have become an integral part of retail Banking products and services
also.
Other Retail Banking Services:-
Offer of several frills and goodies is not the end of the game. Banks also offer following
Retail Banking services free of charges to customers:
1.Payment of utility bills like water, electricity, telephone and mobile phone bills
2.Payment of insurance premiums on due dates
3.Payment of monthly/quarterly education fee of children to their respective schools
4.Remittance of funds from one account to another
5.Demating of shares, bonds, debentures, and mutual funds
6.Payment of credit card bills on due dates
7.Last but not the least, the filing of income tax returns and payment of income tax
Retail Lending at Point of Sale:-
More and more banks have since entered into tie up arrangement with leading
automobile, electronic and consumer goods dealers, builders and real estate agents,
universities and colleges etc. for promoting and selling their Retail Banking products
including housing and educational loans to customer at the very point of sale.
New delivery channels for Retail Banking Products and Services:-
The advent of new delivery channels viz. ATM, Interest and Telebanking haverevolutionalised the retail banking activities. These channels enable Banks to deliver retail
Banking products and services in an efficient and cost effective manner. Now-a- days the
banks are under great pressure to attract new and retain old customers, as margins are
turning wafer thin. In these circumstances reducing administrative a transaction cost has
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become crucial. Banks are making special offerings to customers through these channels.
Retail banking has been immensely benefited with the revolution in IT. and communication
technology. The automation of the Banking processes is facilitating extension of their reach
and rationalization of their costs as well. They are the engine for growth of retail banking
business of Banks. The networking of branches has extended the scope of banking to
anywhere and anytime 24 * 7 days week banking. It has enabled customer to be the customer
of a bank rather then the customers of a particular branch only. Customers can transact
retail Banking transactions at any of the networked branches without any extra cost. As a
matter of fact the Retail Banking per se has taken off because of the advent of multiple
banking channels. These channels have enabled banks to go on a massive customer
acquisition mode since transaction volumes spread over multiple channels lessen the load on
the brick and mortar bank branches.
The impact of Retail Banking:-
The major impact of Retail Banking is that, the customers have become the emperors the
fulcrum of all banking activities, both on the asset side and the liabilities front. The hitherto
sellers market has transformed into buyers market. The customers have multiple of choices
before them now for cherry picking products and services, which suit their life styles and
tastes and financial requirements as well. Banks now go to their customers more often than
the customers go to their banks.
The non-banking finance Companies which have hitherto been thriving on retail
business due to high risk and high returns thereon have been dislodged from their profit
munching citadel.
Retail banking is transforming banks in to one stop financial super markets.
The share of retail loans is fast increasing in the loan books of banks.
Banks can foster lasting business relationship with customers and retain the
existing customers and attract new ones. There is a rise in their service levels aswell.
Banks can cut costs and achieve economies of scale and improve their revenues
and profits by robust growth in retail business. Reduction in costs offers a win
win situation both for banks and the customers.
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It has affected the interface of banking system through different delivery
mechanism.
It is not that banks are sharing the same pie of retail business. The pie itself is
growing exponentially; retail banking has fueled a considerable quantum of
purchasing power through a slew of retail products.
Banks can diversify risks in their credit portfolio and contain the menace of
NPAs.
Re-engineering of business with sophisticated technology based products will
lead to business creation, reduction in transaction cost and enhancement in
efficiency of operations.
Draw-backs of Retail Banking :-
Despite the numerous advantage of Retail Banking there are some drew-Backs in thisbusiness. These are as under
a. Management of large number of clients may become a problem if IT systems arenot
robust.
b. Rapid evolution of products can lead to IT complications.
c. The cost of maintaining large number of small value transactions in branch
networks will be relatively high, unless the customers use alternate delivery channels likeATMs, internet and phone banking etc. for carrying out banking transactions.
The Future of Retail Banking :-
Though at present Retail Banking appears to be the best bet for banks to improve their top
and bottom line, yet the future of Retail banking in general, may not be all roses as it appears
to be. There are signs of slowdown in customer growth in some countries, which will
inevitably have an impact on Retail Banking business growth. Secondly the possibility of
deterioration in asset quality cannot be ruled out. With the boom in housing loan market, the
sign of overheating has also started surfacing with potential problem for banks that have not
exercised sufficient caution. Further the pressure on margins is mounting partly because of
fierce competition and partly as a result of falling interest rates environment which has
diminished to some extent the endowment effect of substantial deposit bases from which most
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retail banks have been deriving benefits. But banks, which have built a significant retail
banking portfolio may fare relatively well in the current fiscal. Those banks which have a
dynamic retail strategy and are well diversified in products, services and distribution
channels and have at the same time managed to achieve a good level of cost efficiency are the
ones that are most likely to succeed in the longer term.
STRATEGIC ISSUES IN BANKING SERVICES----
Strategic Planning: is the process of analyzing the organizational external and internal
environments; developing the appropriate mission, vision, and overall goals; identifying the
general strategies to be pursued; and allocated resources.
Mission is an organization's current purpose or reason for existing.
Vision is an organization's fundamental aspirations and purpose that usually appeals to its
member's hearts and minds.
Goals are what an organization is committed to achieving.
Strategies are the major courses of action that an organization takes to achieves goals.
Resource Allocation is the earmarking of money, through budgets, for various purposes.
Downsizing Strategy signals an organization's intent to rely on fewer resources- primarily
human-to accomplish its goals.Tactical Planning: is the process of making detailed decisions about what to do, which
will do it, and how to do it-with a normal time and horizon of one year or less. The process
generally includes:
Choosing specific goals and the means of implementing the
organization's strategic plan,
Deciding on courses of action for improving current operations, and
Developing budgets for each department, division and project.Strategic issues in banks services are known as or define by these ways, which are known as
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NON-PERFORMING ASSETS OF THE BANKING SECTOR:-
There was a significant decline in the non-performing assets (NPAs) of SCBs in 2003-
04, despite adoption of 90 day delinquency norm from March 31, 2004. The Gross NPAs of
SCBs declined from 4.0 per cent of total assets in 2002-03 to 3.3 percent in 2003-04. The
corresponding decline in net NPAs was from 1.9 per cent to 1.2 per cent. Both gross NPAs
and net NPAs declined in absolute terms. While the gross NPAs declined from Rs. 68,717
crore in 2002-03 to Rs. 64,787 crore in 2003-04, net NPAs declined from Rs. 32,670 crore to
Rs. 24,617 crore in the same period. There was also a significant decline in the proportion of
net NPAs to net advances from 4.4 per cent in 2002-03 to 2.9 per cent in 2003-04. The
significant decline in the net NPAs by 24.7 per cent in 2003-04 as compared to 8.1 per cent in
2002-03 was mainly on account of higher provisions (up to 40.0 per cent) for NPAs made bySCBs.
The decline in NPAs in 2003-04 was witnessed across all bank groups. The decline in
net NPAs as a proportion of total assets was quite significant in the case of new private sector
banks, followed by PSBs. The ratio of net NPAs to net advances of SCBs declined from 4.4
per cent in 2002-03 to 2.9 per cent in 2003-04. Among the bank groups, old private sector
banks had the highest ratio of net NPAs to net advances at 3.8 per cent followed by PSBs (3.0
per cent) new private sector banks (2.4 per cent) and foreign banks (1.5 per cent)
An analysis of NPAs by sectors reveals that in 2003-04, advances to non-priority sectors
accounted for bulk of the outstanding NPAs in the case of PSBs (51.24 per cent of total) and
for private sector banks (75.30 per cent of total). While the share of NPAs in Agriculture
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sector and SSIs of PSBs declined in 2003-04, the share of other priority sectors increased.
The share of loans to other priority sectors in priority sector lending also increased.
Measures taken to reduce NPAs include re schedulement, restructuring at the bank level,
corporate debt restructuring, and recovery through Lok Adalats, Civil Courts, and debt
recovery tribunals and compromise settlements. The recovery management received a major
fillip with the enactment of the Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest (SARFAESI) Act, 2002 enabling banks to realize their dues
without intervention of courts and tribunals. The Supreme Court in its judgment dated April
8, 2004, while upholding the constitutional validity of the Act, struck down section 17 (2) of
the Act as unconstitutional and contrary to Article 14 of the Constitution of India. The
Government amended the relevant provisions of the Act to address the concerns expressed
by the Supreme Court regarding a fair deal to borrowers through an ordinance datedNovember 11, 2004. It is expected that the momentum in the recovery of NPAs will be
resumed with the amendments to the Act.
The revised guidelines for compromise settlement of chronic NPAs of PSBs were
Issued in January 2003 and were extended from time to time till July 31, 2004. The cases
filed by SCBs in Lok Adalats for recovery of NPAs stood at 5.20 lakh involving anamount of
Rs. 2,674 crore (prov.). The recoveries effected in 1.69 lakh cases amounted to Rs.352 crore
(prov.) as on September 30, 2004.The number of cases filed in debt
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recovery tribunals stood at 64, 941 as on June 30, 2004, involving an amount of Rs. 91,901
crore. Out of these, 29, 525 cases involving an amount of Rs. 27,869 crore have been
adjudicated. The amount recovered was to Rs. 8,593 crore. Under the scheme of corporate
debt restructuring introduced in 2001, the number of cases and value of assets restructured
stood at 121 and Rs. 69,575 crore, respectively, as on December 31, 2004. Iron and steel,
refinery, fertilizers and telecommunication sectors were the major beneficiaries of the
scheme. These sectors accounted for more than two-third of the values of assets restructured.
As credit information is crucial for the development of the financial system and for
addressing the problems of NPAs, dissemination of credit information on suit-filed defaulters
is being undertaken by the Credit Information Bureau of India Ltd. (CIBIL) from March
2003. In its annual policy statement for 2004-05, the RBI advised banks and financial
institutions to review the measures taken for furnishing credit information in respect of all
borrowers to CIBIL. In its mid-term review, the RBI again urged the banks to make
persistent efforts in obtaining consent from all the borrowers, in order to establish an
efficient credit information system, which would help in enhancing the quality of credit
decisions, improve the asset quality, and facilitate faster credit delivery.
CAPITAL ADEQUACY RATIO:-
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The concept of minimum capital to risk weighted assets ratio (CRAR) has been
developed to ensure that banks can absorb a reasonable level of losses. Application of
minimum CRAR protects the interest of depositors and promotes stability and efficiency of
the financial system. At the end of March 31, 2004, CRAR of PSBs stood at 13.2 per cent, an
improvement of 0.6 per centage point from the previous year. There was also an
improvement in the CRAR of old private sector banks from 12.8 per cent in 2002-03 to 13.7
per cent in 2003-04. The CRAR of new private sector banks and foreign banks registered a
decline in 2003-04. For the SCBs as a whole the CRAR improved from 12.7 per cent in 2002-
03 to 12.9 per cent in 2003-04. All the bank groups had CRAR above the minimum 9 per cent
stipulated by the RBI.
During the current year, there was further improvement in the CRAR of SCBs. The ratio inthe first half of 2004-05 improved to 13.4 per cent as compared to 12.9 per cent at the end of
2003-04. Among the bank groups, a substantial improvement was witnessed in the case of
new private sector banks from 10.2 per cent as at the end of 2003-04 to 13.5 per cent in the
first half of 2004-05. While PSBs and old private banks maintained the CRAR at almost the
same level as in the previous year, the CRAR of foreign banks declined to 14.0 per cent in the
first half of 2004-05 as compared to 15.0 per cent as at the end of 2003-04
TOTAL QUALITY MANAGEMENT:-
While Total Quality Management has proven to be an effective process for improving
organizational functioning, its value can only be assured through a comprehensive and well
thought out implementation process. The purpose of this chapter is to outline key aspects of
implementation of large scale organizational change which may enable a practitioner to more
thoughtfully and successfully implement TQM. First, the context will be set. TQM is, in fact,
a large scale systems change, and guiding principles and considerations regarding this scale
of change will be presented. Without attention to contextual factors, well intended changes
may not be adequately designed. As another aspect of context, the expectations and
perceptions of employees (workers and managers) will be assessed, so that the
implementation plan can address them. Specifically, sources of resistance to change and ways
of dealing with them will be discussed. This is important to allow a change agent to anticipate
resistances and design for them, so that the process does not bog down or stall. Next, a model
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of implementation will be presented, including a discussion of key principles. Visionary
leadership will be offered as an overriding perspective for someone instituting TQM. In
recent years the literature on change management and leadership has grown steadily, and
applications based on research findings will be more likely to succeed. Use of tested
principles will also enable the change agent to avoid reinventing the proverbial wheel.
Implementation principles will be followed by a review of steps in managing the transition to
the new system and ways of helping institutionalize the process as part of the organization's
culture. This section, too, will be informed by current writing in transition management and
institutionalization of change. Finally, some miscellaneous do's and dont will be
offered.Members of any organization have stories to tell of the introduction of new programs,
techniques, systems, or even, in current terminology, paradigms. Usually the employee, who
can be anywhere from the line worker to the executive level, describes such an incident witha combination of cynicism and disappointment: some manager went to a conference or in
some other way got a "great idea" (or did it based on threat or desperation such as an urgent
need to cut costs) and came back to work to enthusiastically present it, usually mandating its
implementation. The "program" probably raised people's expectations that this time things
would improve, that management would listen to their ideas. Such a program usually is
introduced with fanfare, plans are made, and things slowly return to normal. The manager
blames unresponsive employees, line workers blame executives interested only in looking
good, and all complain about the resistant middle managers. Unfortunately, the program
itself is usually seen as worthless: "we tried team building (or organization development or
quality circles or what have you) and it didn't work; neither will TQM". Planned change
processes often work, if conceptualized and implemented properly; but, unfortunately, every
organization is different, and the processes are often adopted "off the shelf" "the 'appliance
model of organizational change': buy a complete program, like a 'quality circle package,'
from a dealer, plug it in, and hope that it runs by itself" (Kanter, 1983, 249). Alternatively,
especially in the under funded public and not for profit sectors, partial applications are tried,
and in spite of management and employee commitment do not bear fruit. This chapter will
focus on ways of preventing some of these disappointments.
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In summary, the purpose here is to review principles of effective planned change
implementation and suggest specific TQM applications. Several assumptions are proposed:
1. TQM is a viable and effective planned change method, when properly installed
2. Not all organizations are appropriate or ready for TQM
3. Preconditions (appropriateness, readiness) for successful TQM can sometimes be
created
4. Leadership commitment to a large scale, long term, and cultural change is necessary.
While problems in adapting TQM in government and social service organizations have been
identified, TQM can be useful in such organizations if properly modified.
For survival, banks have to make efforts to improve their quality and
competitiveness by planning and taking innovative in fall areas:
Increase emphasis on customer focused activities
Intro a total quality program
Developing differential value added services
Educating employees through involvement programs
Increase quality through management and system Increase effectiveness of product development
Developing product with lower uses costs
TQM principles
Customer satisfaction
Plan-do-check-act (PDCA) cycle Management by 'fact' -- 5Ws (what, why, who, when, and where) + 1H
(how) approach
Respect for people
TQM elements
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Total employee involvement (TEI)
Total waste elimination (TWE)
Total quality control (TQC)
TQM focus areas
Customer satisfaction
Product quality
Plant reliability
Waste elimination
Benefits achieved through TQM
Increased focus on the customer
Mindset of 'continuous improvement'
Better product quality
Better systems and procedures
Better cross-functional teamwork
Increased plant reliability
Waste elimination in offices and factories
INNOVATION IN BANK-----
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Innovation drives organizations to grow, prosper and transform in sync with the
changes in the environment, both internal and external. Banking is no exception to this. In
fact, this sector has witnessed radical transformation of late, based on many innovations in
products, processes, services, systems, business models, technology, governance and
regulation. A liberalized and globalize financial infrastructure has provided an additional
impetus to this gigantic effort.
The pervasive influence of in formation technology has revolutionalized banking.
Transaction costs have crumbled and handling of astronomical number of transactions in no
time has become a reality. Internationally, the number brick and mortar structure has been
rapidly yielding ground to click and order electronic banking with a plethora of new
products. Banking has become boundary less and virtual with a 24 * 7 model. Banks whostrongly rely on the merits of relationship banking as a time tested way of targeting and
serving clients, have readily embraced Customer Relationship Management (CRM), with
sharp focus on customer centricity, facilitated by the availability of superior technology.
CRM has, therefore, become the new mantra in customer service management, which is both
relationship based and information intensive.
Risk management is no longer a mere regulatory issue.basel-2 has accorded a
primacy of place to this fascinating exercise by repositioning it as the core of banking. Wenow see the evolution of many novel deferral products like credit derivatives, especially the
Credit Risk Transfer (CRT) mechanism, as a consequence. CRT, characterized by significant
product innovation, is a very useful credit risk management tool that enhances liquidity and
market efficiency. Securitization is yet another example in this regard, whose strategic use
has been rapidly rising globally. So is outsourcing.
SOME RECENT INNOVATIONS IN INDIAN BANKING:-
Tandon can, however, usefully cast an eye at one way of shopping without revealing his
credit card number. HDFC Banks Net Safe card is a one-time use card with a limit thats
specified, taken from Tendons credit or debit card. Even if Tandon fails to utilize the full
amount within 24 hours of creating the card, the card simply dies and the unspent amount in
the temporary card reverts to his original credit or debit card.
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Welcome to one of the myriad ways in which bankers have been trying to innovate. Theyre
bringing ATMs, cash and even foreign exchange to their customers doorsteps. Indeed,
innovation has become the hottest banking game in town.
Want to buy a house but dont want to go through the hassles of haggling with
brokers and the mounds of paperwork? Not to worry. Your bank will tackle all this. Its
ready to come every step of the way for you to buy a house. Standard Chartered, for
instance, has property advisors to guide a customer through the entire process of selecting
and buying a house. They also lend a hand with the cumbersome documentation formalities
and the registration.
Dont fret if youve already bought your house or car you can do other things with
both. You can leverage your new house or car these days with banks like ICICI Bank and
Stanchart ready to extend loans against either, till its about five years old. Loans are
available to all car owners for almost all brands of cars manufactured in India that are up to
five years old.
Still, innovation is more evident in retail banking. True, all banks offer pretty much
the same suite of asset and liability products. But its the small tweaking here and there that
makes all the difference. Take, for example, the once staid deposits. Some bank accountscombine a savings deposit account with a fixed deposit. A sweep-in account, as it is called,
works like this: the account will have a cut-off, say, Rs 25,000; any amount over and above
that gets automatically transferred to a fixed deposit which will earn the customer a clean 2
per cent more than the returns that a savings account gives.
Last month, Kotak Mahindra Bank introduced a variant of the sweep-in account. If
the balance tops Rs 1.5 lakh, the excess runs into Kotaks liquid mutual fund. Even if the
money is there only for the weekend, a liquid fund can earn you a clean 4.5 per cent perannum, points out Shashi Arora, vice president, marketing, Kotak Mahindra Bank. Thats
not a small gain considering that your current account does not pay you any interest. And if,
meanwhile, you want to buy a big-ticket home theatre system, the minute you swipe your
card the invested sum will return to your account.
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Stanchart, ABN Amro and HDFC Bank. HDFC Bank brings even foreign exchange, whether
travellers cheques or cash, to your doorstep courtesy its tie-up with Travelex India. All one
has to do is call up the branch or HDFC Banks phone banking number. The banks country
head, retail, Neeraj Swaroop, believes that continuous innovation will always make a
difference, with customer needs changing day by day. Innovation will never become less
important for us, he says. HDFC Bank has pioneered other innovations. Take point of sale
(POS) terminals, a prerequisite in any store or restaurant worth its name in the country.
Earlier this year, it tied up with Reliance Infocomm to offer mobile POS terminals. Although
this might sound a tad too fancy today, there could soon be a day when you can swipe your
card to pay your cabby, the pizza home delivery boy and even for the groceries from the local
kirana store.
But internet banking and shopping have been slow starters, given the low computer
penetration in the country but banks are going all out to get the customer online. Not only is
electronic fund transfer between banks across cities possible through internet banking today
but banks also offer other features that benefit the customer. HDFC Bank, for instance, has
an option called One View on its internet banking site which provides customers a
comprehensive view of their investments and fund movements. Customers can look at their
accounts in six different banks on one screen. These include HDFC Bank accounts and demat
accounts, ICICI Bank, Citibank, HSBC and Standard Chartered Bank accounts, apart from
details of Citibank credit card dues and so on.
Banks are also innovating on the company and treasury operations fronts. In
corporate loans, plain loans are passe. Mumbai inter-bank offered rate (MIBOR)-linked and
commercial paper-linked interest rates on loans are common. MIBOR is a reference rate
arrived at every day at 4 pm by Reuters. It is the weighted average rate of call money
business transacted by 22 institutions, including banks, primary dealers and financial
institutions.
The State Bank of India was the first to usher in MIBOR-linked loans for top
companies. Soon enough, other banks followed. ICICI Bank carried out the worlds first ever
securitization of a micro finance portfolio last year. The bank securitized Rs 4.2 crore for
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Bharatiya Samruddhi Finance Ltd for crop production. Banks, of course, realize that
innovation gives them only a first mover advantage until their rivals catch up. But then, they
can console themselves. Isnt imitation the best form of flattery?
TECHNOLOGY IN BANKING---
Nobel Laureate Robert Solow had once remarked that computers are seen
everywhere excepting in productivity statistics. More recent developments have shown how
far this state of affairs has changed. Innovation in technology and worldwide revolution in
information and communication technology (ICT) have emerged as dynamic sources of
productivity growth. The relationship between IT and banking is fundamentally symbiotic.
In the banking sector, IT can reduce costs, increase volumes, and facilitate customized
products; similarly, IT requires banking and financial services to facilitate its growth. As far
as the banking system is concerned, the payment system is perhaps the most important
mechanism through which such interactive dynamics gets manifested.
Recognizing the importance of payments and settlement systems in the economy, we
have embarked on technology based solutions for the improvement of the payment and
settlement system infrastructure, coupled with the introduction of new payment productssuch as the computerized settlement of clearing transactions, use of Magnetic Ink Character
Recognition (MICR) technology for cheque clearing which currently accounts for 65 per cent
of the value of cheques processed in the country, the computerization of Government
Accounts and Currency Chest transactions, operationalisation of Deliveryversus Payment
(DvP) for Government securities transactions. Two-way inter-city cheque collection and
imaging have been operationalised at the four metros. The coverage of Electronic Clearing
Service (Debit and Credit) has been significantly expanded to encourage non-paper based
funds movement and develop the provision of a centralized facility for effecting payments.
The scheme for Electronic Funds Transfer operated by the Reserve Bank has been
significantly augmented and is now available across thirteen major cities. The scheme, which
was originally intended for small value transactions, is processing high value (up to Rs.2
crore) from October 1, 2001. The Centralized Funds Management System (CFMS), which
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would enable banks to obtain consolidated account-wise and centre-wise positions of their
balances with all 17 offices of the Deposits Accounts Departments of the Reserve Bank, has
begun to be implemented in a phased manner from November 2001.
A holistic approach has been adopted towards designing and development of a modern,
robust, efficient, secure and integrated payment and settlement system taking into account
certain aspects relating to potential risks, legal framework and the impact on the operational
framework of monetary policy. The approach to the modernization of the payment and
settlement system in India has been three-pronged: (a) consolidation, (b) development, and
(c) integration. The consolidation of the existing payment systems revolves around
strengthening Computerized Cheque clearing, expanding the reach of Electronic Clearing
Services and Electronic Funds Transfer by providing for systems with the latest levels oftechnology. The critical elements in the developmental strategy are the opening of new
clearing houses, interconnection of clearing houses through the INFINET; optimizing the
deployment of resources by banks through Real Time Gross Settlement System, Centralized
Funds Management System (CFMS); Nego tiated Dealing System (NDS) and the Structured
Financial Messaging Solution (SFMS). While integration of the various payment products
with the systems of individual banks is the thrust area, it requires a high degree of
standardization within a bank and seamless interfaces across banks.
The setting up of the apex-level National Payments Council in May 1999 and the
operationalisation of the INFINET by the Institute for Development and Research in
Banking Technology (IDRBT), Hyderabad have been some important developments in the
direction of providing a communication network for the exclusive use of banks and financial
institutions. Membership in the INFINET has been opened up to all banks in addition to
those in the public sector. At the base of all inter-bank message transfers using the INFINET
is the Structured Financial Messaging System (SFMS). It would serve as a secure
communication carrier with templates for intra- and inter-bank messages in fixed message
formats that will facilitate straight through processing. All inter-bank transactions would
be stored and switched at the central hub at Hyderabad while intra- bank messages will be
switched and stored by the bank gateway. Security features of the SFMS would match
international standards.
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In order to maximize the benefits of such efforts, banks have to take pro-active measures
to:
further strengthen their infrastructure in respect of standardization, high levels
of security and communication and networking;
achieve inter-branch connectivity early;
popularize the usage of the scheme of electronic funds transfer (EFT); and
Institute arrangements for an RTGS environment online with a view to integrating
into a secure and consolidated payment system.
Information technology has immense untapped potential in banking. Strengthening of
information technology in banks could improve the effectiveness of asset-liability
management in banks. Building up of a related data-base on a real time basis would enhance
the forecasting of liquidity greatly even at the branch level. This could contribute toenhancing the risk management capabilities of banks.
BANKING SECTOR REFORMS
As the real sector reforms began in 1992, the need was felt to restructure
the Indian banking industry. The reform measures necessitated the
deregulation of the financial sector, particularly the banking sector. The
initiation of the financial sector reforms brought about a paradigm shift in
the banking industry. In 1991, the RBI had proposed to from the
committee chaired by M. Narasimham, former RBI Governor in order to
review the Financial System viz. aspects relating to the Structure,
Organisations and Functioning of the financial system. The Narasimham
Committee report, submitted to the then finance minister, Manmohan
Singh, on the banking sector reforms highlighted the weaknesses in theIndian banking system and suggested reform measures based on the
Basle norms. The guidelines that were issued subsequently laid the
foundation for the reformation of Indian banking sector.
The main recommendations of the Committee were: -
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i. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a
period of five years
ii. Progressive reduction in Cash Reserve Ratio (CRR)
iii. Phasing out of directed credit programmes and redefinition of the
priority sector
iv. Deregulation of interest rates so as to reflect emerging market
conditions
v. Stipulation of minimum capital adequacy ratio of 4 per cent to risk
weighted assets by March 1993, 8 per cent by March 1996, and 8
per cent by those banks having international operations by March
1994
61.1 Introduction
vi. Adoption of uniform accounting practices in regard to income
recognition, asset classification and provisioning against bad and
doubtful debts
vii. Imparting transparency to bank balance sheets and making more
disclosures
viii. Setting up of special tribunals to speed up the process of recovery
of loans
ix. Setting up of Asset Reconstruction Funds (ARFs) to take over from
banks a portion of their bad and doubtful advances at a discount
x. Restructuring of the banking system, so as to have 3 or 4 large
banks, which could become international in character, 8 to 10
national banks and local banks confined to specific regions. Rural
banks, including RRBs, confined to rural areas
xi. Abolition of branch licensing
xii. Liberalising the policy with regard to allowing foreign banks to open
offices in India
xiii. Rationalisation of foreign operations of Indian banks
xiv. Giving freedom to individual banks to recruit officers
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xv. Inspection by supervisory authorities based essentially on the
internal audit and inspection reports
xvi. Ending duality of control over banking system by Banking Division
and RBI
xvii. A separate authority for supervision of banks and financial
institutions which would be a semi-autonomous body under RBI
xviii. Revised procedure for selection of Chief Executives and Directors
of Boards of public sector banks
xix. Obtaining resources from the market on competitive terms by DFIs
xx. Speedy liberalisation of capital market
7
xxi. Supervision of merchant banks, mutual funds, leasing companiesetc., by a separate agency to be set up by RBI and enactment of a
separate legislation providing appropriate legal framework for
mutual funds and laying down prudential norms for such
institutions, etc.
Several recommendations have been accepted and are being
implemented in a phased manner. Among these are the reductions in
SLR/CRR, adoption of prudential norms for asset classification and
provisions, introduction of capital adequacy norms, and deregulation of
most of the interest rates, allowing entry to new entrants in private sector
banking sector, etc.
Keeping in view the need of further liberalisation the Narasimham
Committee II on Banking Sector reform was set up in 1997. This
committees terms of reference included review of progress in reforms in
the banking sector over the past six years, charting of a programme of
banking sector reforms required to make the Indian banking system more
robust and internationally competitive and framing of detailed
recommendations in regard to make the Indian banking system more
robust and internationally competitive.
This committee constituted submitted its report in April 1998. The major
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recommendations are :
i. Capital adequacy requirements should take into account market
risks also
ii. In the next three years, entire portfolio of Govt. securities should be
marked to market
iii.Risk weight for a Govt. guaranteed account must be 100 percent
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iv. CAR to be raised to 10% from the present 8%; 9% by 2000 and 10%
by 2002
v. An asset should be classified as doubtful if it is in the sub-standard
category for 18 months instead of the present 24 months
vi.Banks should avoid ever greening of their advancesvii.There should be no further re-capitalization by the Govt.
viii.NPA level should be brought down to 5% by 2000 and 3% by 2002.
ix.Banks having high NPA should transfer their doubtful and loss
categories to ARCs which would issue Govt. bonds representing the
realisable value of the assets.
x. International practice of income recognition by introduction of the
90-day norm instead of the present 180 days.
xi. A provision of 1% on standard assets is required.
xii.Govt. guaranteed accounts must also be categorized as NPAs under
the usual norms
xiii.There is need to institute an independent loan review mechanism
especially for large borrowal accounts to identify potential NPAs.
xiv.Recruitment of skilled manpower directly from the market be given
urgent consideration
xv.To rationalize staff strengths, an appropriate VRS must be
introduced.
xvi.A weak bank should be one whose accumulated losses and net
NPAs exceed its net worth or one whose operating profits less its
income on recap bonds is negative for 3 consecutive years.
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To start with, it has assigned a 2.5 per cent risk-weightage on gilts by
March 31, 2000 and laid down rules for provisioning; shortened the life of
sub-standard assets from 24 months to 18 months (by March 31, 2001);
called for 0.25 per cent provisioning on standard assets (from fiscal 2000);
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100 per cent risk weightage on foreign exchange (March 31, 1999) and a
minimum capital adequacy ratio of 9 per cent as on March 31, 2000.
Only a few of these mainly constitute to the reforms in the banking sector
REDUCTION IN CRR AND SLR
The South East Asian countries introduced banking reforms wherein bank
CRR and SLR was reduced, this increased the lending capacity of banks.
The markets fell precipitously because banks and corporates did not
accurately measure the risk spread that should have been reflected in
their lending activities. Nor did they manage such risks or provide for
them in their balance sheets. And followed the South East Asian Crisis.
The monetary policy perspective essentially looks at SLR and CRR
requirements (especially CRR) in the light of several other roles they play
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