Modern banking in india Published: 23, March 2015 Modern banking in India INTRODUCTION OF BANKING:Modern banking in India is said to be developed during the British era. In the first half of the 19th century, the British East India Company established three banks the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. But in the course of time these three banks were amalgamated to a new bank called Imperial Bank and later it was taken over by the State Bank of India in 1955. Allahabad Bank was the first fully Indian owned bank. The Reserve Bank of India was established in 1935 followed by other banks like Punjab National Bank, Bank of India, Canara Bank and Indian Bank. In 1969, 14 major banks were nationalized and in 1980, 6 major private sector banks were taken over by the government. Today, commercial banking system in India is divided into following categories. 1. Central Bank TheReserve Bank of Indiais the central Bank that is fully owned by the Government. It is governed by a central board (headed by a Governor) appointed by the Central Government. It issues guidelines for the functioning of all banks operating within the country 2. PUBLIC SECTOR BANKS a. State Bank of India and its associate banks called the State Bank Group b. 20 nationalized banks c. Regional rural banks mainly sponsored by public sector banks 3. Private Sector Banks a. Old generation private banks b. New generation private banks c. Foreign banks operating in India
d. Scheduled co-operative banks e. Non-scheduled banks 4. Co-operative Sector The co-operative sector is very much useful for rural people. The co-operative banking sector is divided into the following categories. a. State co-operative Banks b. Central co-operative banks c. Primary Agriculture Credit Societies
In the modern world, banks offer variety of services to attract customers. However, some basic modern services offered by the banks are discussed below: 1. Advancing of Loans Banks are profit oriented business organizations. So they have to advance loan to public and generate interest from them as profit. After keeping certain cash reserves, banks provide short-term, medium-term and longterm loans to needy borrowers.
2. Overdraft Sometimes, the bank provides overdraft facilities to its customers though which they are allowed to withdraw more than their deposits. Interest is charged from the customers on the overdrawn amount.
3. Discounting of Bills of Exchange This is another popular type of lending by the modern banks. Through this method, a holder of a bill of exchange can get it discounted by the bank, in a bill of exchange, the debtor accepts the bill drawn upon him by the creditor (i.e., holder of the bill) and agrees to pay the amount mentioned on maturity. After making some marginal deductions (in the form of commission), the bank pays the value of the bill to the holder. When the bill of exchange matures, the bank gets its payment from the party, which had accepted the bill.
4. . Cheque Payment Banks provide cheque pads to the account holders. Account holders can draw cheque upon bank to pay money. Banks pay for cheques of customers after formal verification and official procedures..
5. Collection and Payment Of Credit Instruments In modern business, different types of credit instruments such as bill of exchange, promissory notes, cheques etc. are used. Banks deal with such instruments. Modern banks collect and pay different types of credit instruments as the representative of the customers.
6. Foreign Currency Exchange Banks deal with foreign currencies. As the requirement of customers, banks exchange foreign currencies with local currencies, which is essential to settle down the dues in the international trade.
7. Consultancy Modern commercial banks are large organizations. They can expand their function to consultancy business. In this function, banks hire financial, legal and market experts who provide advices to customers in regarding investment, industry, trade, income, tax etc.
8. Bank Guarantee Customers are provided the facility of bank guarantee by modern commercial banks. When customers have to deposit certain fund in governmental offices or courts for specific purpose, bank can present itself as the guarantee for the customer, instead of depositing fund by customers.
9. Remittance of Funds Banks help their customers in transferring funds from one place to another through cheques, drafts, etc.
10. Credit cards Credit card are cards that allow their holders to make purchases of goods and services in exchange for the credit card’s provider immediately paying for the goods or service, and the card holder promising to pay back the amount of the purchase to the card provider over a period of time, and with interest.
11. ATMs Services ATMs replace human bank tellers in performing basic banking functions such as deposits, withdrawals, account inquires. Key advantages of ATMs include:
24 hour availability
Elimination of labor cost
Convenience of location
12. Debit cards Debit cards are used to electronically withdraw funds directly from the cardholders’ accounts. Most debit cards require a Personal Identification Number (PIN) to be used to verify the transaction.
13. Home banking Home banking is the process of completing financial transaction from one’s own home as opposed to utilizing a branch of a bank. It includes actions such as making account inquiries, transferring money, paying bills, applying for loans, directing deposits.
14. Online banking Online banking is a service offered by banks that allows account holders to access their account data via the internet. Online banking is also known as "Internet banking" or "Web banking." Online banking through traditional banks enable customers to perform all routine transactions, such as account transfers, balance inquiries, bill payments, and stop-payment requests, and some even offer online loan and credit card applications. Account information can be accessed anytime, day or night, and can be done from anywhere.
15. Mobile Banking Mobile banking (also known as M-Banking) is a term used for performing balance checks, account transactions, payments, credit applications and other banking transactions through a mobile device such as a mobile phone or Personal Digital Assistant (PDA),
16. Accepting Deposit Accepting deposit from savers or account holders is the primary function of bank. Banks accept deposit from those who can save money, but cannot utilize in profitable sectors. People prefer to deposit their savings in a
bank because by doing so, they earn interest.
17. Priority banking Priority banking can include a number of various services, but some of the popular ones include free checking, online bill pay, financial consultation and information.
18. Private banking Personalized financial and banking services that are traditionally offered to a bank's rich, high net worth individuals (HNWIs). For wealth management purposes, HNWIs have accrued far more wealth than the average person, and therefore have the means to access a larger variety of conventional and alternative investments. Private Banks aim to match such individuals with the most appropriate options.
RECESSION IN INDIA:Global economic meltdown has affected almost all countries. Strongest of American, European and Japanese companies are facing severe crisis of liquidity and credit. The truth is, Indian economy is also facing a kind of slowdown. The prime reason being, world trade does not functions in isolation. According to official data, industrial growth in august has plummeted to mere 1.3% compared to the same month in 2007. That definitely is cause of concern for policy makers and industries. This data also raised fear of low GDP growth of India. It is being suspected that, our country will face huge problems in achieving even 7.5% growth rate in this fiscal. 1.3 percent industrial growth is the lowest IIP (index of industrial production) data ever registered since last ten years. Aprilaugust industrial growth rate is 4.9% which is also the lowest for the first five months of a financial year in 14-year period except 1998 and 2001. The demand for houses have reduced significantly and property prices across India has registered 15-20% fall. Financial services segment is also likely to be a major victim of economic slowdown because of less demand for credit and reduced liquidity in market. Transport companies are likely to witness drastic fall in their
business and profits. Global recession will also lead to less tourists coming to India. That will negatively affect tours and travels industry. IMPACT OF RECESSION ON INDIAN ECONOMY:A recession normally takes place when consumers lose confidence in the growth of the economy and spend less. This leads to a decreased demand for goods and services, which in turn leads to a decrease in production, lay-offs and a sharp rise in unemployment. Investors spend less as they fear stocks values will fall and thus stock markets fall on negative sentiment. The impacts in India are:1. Reduced liquidity in the Indian economy. 2. Reduced industry output. 3. Reduced job opportunities. 4. Stock market is lingering in the bottom. 5. Real estate take market has started to take a beating. 6. Inflation is increased. 7. GDP has come down and the GDP forecast for the next quarter are only average. 8. Change in consumer behavior and purchasing power. "Indian economy is based on robust fundamentals and enjoys the status of one of the most dynamic and growing economies in the world with over 9 percent GDP last year." Indian economy 'faces slowdown not recession':India is a different economy and known as one of the most promising economies in terms of growth and investment.
India, with $1.1 trillion or the second largest GDP among the world's developing economies is treading on the right path of sustained progress and development. While most Western economies are heading toward recession, the Indian GDP growth is likely to witness a slowdown from 9 percent. CHANGES IN BANKING SCETORS BY RBI:As per the expert analysis saying thatrecession is not going to affect their banks in any way, and they have enough liquidity and assets to bank up the shares, deposits and assets of customers. The nationalized banks in India, taking cue from the RBI, keeps the Indian liquidity as liquid as possible as to keep the global monetary Tsunami off our financial bays. It's all good from the bankers' point of view. Due to recession in 2007 there is huge crisis of money thus it affects almost all sector of entire world hence there is also impact on Indian industry for that RBI which is the central bank of India makes several changes to make low impact of recession. 1. RBI cuts its CRR to 6% as CRR is the main factor in which every financial bank have to deposited certain percentage money to RBI due to which shortage of money but RBI cuts its CRR up to 6% to make money available to the financial banks. So financial banks had a great money in their hand. 2. REPO rate is also reduced up to 3.25%through which other financial banks make available loan at a lower in interest so make money for every one every nationalized bank reduced its repo rate at the time of recession major factor behind that RBI wants to make loan policy to every field. 3. Reserve Repo rate also changes by RBI and cuts repo rates up to 4.25%to increase the facilities and improve to condition of the market. Due to reduction in these terms there is not heavily effect of recession in India. BY CHANGES IN LAW OF BANKING ITS IMPACT ON DIFFERENT BUSINESS:Due to low interest rate people have money to invest thus these financial sectors supports different industries. These financial institutions helps and renew its works regarding buying and selling whatever they have an opportunity to learn a thing or two with regard to the value of money and its needs to be placed its needs.
Following are the sectors which are affected by recession and banking sectors help them to work:AVITATION SECTOR:Due to the low income and scarcity of many people cannot afford to travel through several air buses that is are plans due to reduction in passengers airlines has faces many crises thus company like JET AIRLINES fired their employees which effects on the employees life. KING FISHER also faced many difficulties at the time of recession looses are bearded by these airlines due to the shortage of passengers and less demand for airlines facilities several problems are created. By making low interest rate financial sectors improves the condition of aviation sector. SAHARA AIRLINES FACED MANY PROBLEMS:The biggest problem of these airlines shortage of passengers and also many crisis like less ROI and they occurred huge loss. If there is low facilities of loan then these air line suffered huge loss with the help of loan facilities it covers all the loses. JET AIRLINES ALSO SUFFERED: On that time JET AIRLINES suffered from many problems they fired one third of its staff. That was the biggest problem suffered by the employees REAL ESTATE SECTOR:Due to crisis of money real estate corporations are at the bank of destroy in recession period at that time due to shortage of moment people e cannot afford to buying homes and buildings due to which real-estate industry facing huge crises and people which are working in real estate looses their jobs. By this due to lower rate of financial sectors makes available money to consumer give real estate oxygen type of energy as due to lower rate of interest people makes investment in the real estate and real estate industry also reduces its prices. DLF:DLF is really effected due to recession the reason behind that low level of income consumers are not willing to buy flats huge amount of looses are beared by the co.
The huge investment which was incurred by the co. is reducing many peoples of DLF became unemployed. ASHIRWAD GROUP:ASHIRWAD GROUP also facing many problems at the time of recession the main problem which was faced by the group is huge amount of investment but capital is too much law regarding this the effects are following :1. Low level of capital. 2. Lower level of financial resources 3. Huge investment outside 4. Low level of consumer But financial institutions provide loans at low rate of interest. AUTOMOBILE SECTOR:When India's growth are slopes down there is huge scarcity of money at that time people lost its jobs and several peoples are unemployed. Every body knows that in recession there is lots of impact on the automobile sector. impact of recession people does not invest on automobile sector industry on that days people are not in a condition to buy vehicles due to lower per capital income several people are fired from the company and they get unemployed FOLLOWING AUTOMOBILE INDUSTRY IMPACTED: 1) TATA MOTORS : TATA MOTORS which is the leading company of automobile sectors faces huge problems in their investment. The TATA motors are mainly invest huge amount in project jaguar but due to recession they faced huge loss at that time RBI changes its policies so industry in such ratio lowering the price financial sector money available to their customer at very low interest rate and banking sectors provided loans to every customers at easy terms and condition. The loan interest rate for
vehicles at 12%. So consumers start buying vehicles and investing in automobile sector. The company earn profit but not at maximum level. 2) BAJAJ AUTOMOBILE: Bajaj automobile faces many problems due to recession their investments is huge due to low consumption of goods per capita income of this industry is very low. At the time of recession they needs loans banking sector provide them loans at lower rate of interest. Many other companies like maruti Honda Hyundai are facing many financial problems but banking helps them to providing loans. EXPORT IMPORT SECTOR: AS recession hits entire world does there is huge scarcity of money hence export import industries also effectuated by it due to low demand of commodities people don't have money to purchase anything excluding basic needs. Such as export import are in huge loses. Outsiders did not import things in India. Several industries like ORAS and FISHES bearing loses at the time of recession. At the time of recession financial resources are at low rate to export things outside the countries. RBI cuts SLR due to this export and import sectors make benefits easily availability of loans provided by the bank thus it gives the backbone to export import industries. HOW BANKING SECTORS HELPS? OARS INDUSTRY: OARS industry is the biggest industry of export and import in india. They faces many financial problems at the time of recession because less financial resources of oars but the demand of oars product are increasing rate so banks provide them loans at lower interest rate within ten days and they complete its near about RS1 crore 20 lakh tender within 10 days with the help of bank loan. FISHES INDUSTRY: FISHES INDUSTRY also faces many problems of financial resources at the time of recession. Banking sector provide them loan to achieve their tender in a successive way. At the time of recession FISHES INDUSTRY reduces its cost of
production so they increased the sale of the product and earned more profits to repay the loans at minimum level. EDUCATION SECTOR: As in India education sector in boom. Meanwhile due to lack of money and everything people can't afford study. Education loans are not provided\ to every students the basic terms and conditions are very strict and the interest rate of education very high in recession due to the change in RBI the rate of education loans are less as compare to past years hence by lowering the interest rate 9% students can take education loan easily. The main impact of recession is mainly on private institute the demand of these institutes are less at the time of recession but with the help of banking sector student can easily studied in these institutes. TOUR AND TRAVEL: Tour and travel sectors also face many problems regarding financial resources. People can't travel outside so it hits very badly on this sector. Various steps taken by this sector:1. They reduces the EMI 2. They invest more money in the market in term of advertising banking helps them in a way of bank loan 3. RBI providing different type of policies regarding tour and travel. SHARE MARKET: In 2007 share market was almost down due to the impact of recession. People have don't money to invest in the share market so the rate of sensex also decreases the share values of different companies is also decreases due to the low investment of money by the Indian people but RBI cuts the CRR upto 6% and government gives the backbone to the share market different type of policies provided by the RBI who invest the share market..Due to changes in banking sector its helps the share markets. RECENTLY MAJOR CHANGES IN BANKING:
1. EXPOSURE NORMS:The Reserve Bank has prescribed regulatory limits on banks' exposure to individual and group borrowers to avoid concentration of credit, and has advised banks to fix limits on their exposure to specific industries or sectors (real estate) to ensure better risk management. In more information banks are also analysis the statuary and regulatory limits in respect of share and capital market. This is the major change by RBI in banking sector to analysis the different type of market. 2. ASSET AND LIABILITY MANAGEMENT:In this view need for bank to identify the measure monitor and control risk appropriate risk management guidelines have been issued time by time by the reserve bank. These guidelines are intended to serve as benchmark for banks to establish an integrated risk management system. However, banks can also develop their own systems compatible with type and size of operations as well as risk perception and put in place a proper system for covering the existing deficiencies and the requisite upgrading. Detailed guidelines on the management of credit risk, market risk, operational risk, etc. have also been issued to banks by the Reserve Bank with regard management techniques, banks are at different stages of drawing up a comprehensive credit rating system, undertaking a credit risk assessment on a half yearly basis, pricing loans on the basis of risk rating, adopting the Risk-Adjusted Return on Capital (RAROC) framework of pricing, etc In respect of market risk, almost all banks have an Asset-Liability Management Committee. They have articulated market risk management policies and procedures that's why this is the major changes in the asset liability management. 3. NPL MANAGEMENT:Banks have been provided with a menu of options for disposal/recovery of NPLs (non-performing loans). Banks resolve/recover their NPLs through compromise/one time settlement, filing of suits, Debt Recovery Tribunals, the Lok Adalat (people's court) forum, Corporate Debt Restructuring (CDR), sale to securitization/reconstruction companies and other banks or to non-banking finance companies.
This is also the major change in the banking sector this is mainly for the financial sectors for the credit policy provided by the RBI. With the enactment of the Credit Information Companies (Regulation) Act, 2005, the legal framework has been put in place to facilitate the full fledge operation allocation of CIBIL and the introduction of other credit bureaus. 4. BOARD OF FINANCIAL SUPERVISON:An independent Board for Financial Supervision (BFS) under the aegis of the Reserve Bank has been established as the apex supervisory authority for commercial banks, financial institutions, urban bank sand NBFCs. Consistent with international practice, the Board's focus is on offsite and on-site inspections and on banks' internal control systems. Offsite surveillance has been strengthened through control returns. The role of statutory auditors has been emphasized with increased internal control through strengthening of the internal audit function. Significant progress has been made in implementation of the Core Principles for Effective Banking Supervision. The supervisory ratings CAMELS has been established coupled with a move towards risk-based supervision. Consolidated supervision of financial conglomerates has since been introduced with bi-annual discussions with the financial conglomerates. There have also been initiatives aimed at strengthening corporate governance through enhanced due diligence on important shareholders, and fit and proper tests for directors. CONCLUSION: As per India is a developing country the banking sector has been played a major role in Indian economy. We always considered banking sector as a back bone of business world. Banking sectors provides much type of facilities regarding loans in every sector of business banking policies regarding different type of business helps them to invest more and more and earned profits the changes of laws of banking sector help in recession from the downfall of every sector. Banking sector provides a loan to students with the help of the loans students makes his future bright. In recession every sector is in downfall. The new policies of RBI help in every sector to earn profits at the time of downfall economy. So banking is the life blood of Indian economy at the time of downfall.
