What is banking?
Basic Definition: A system of trading money which: provides a
safe place to save excess cash, known as deposits.
supplies liquidity to the economy by loaning this money out to
help businesses grow and to allow consumers to purchase
consumer products, homes, cars etc.
Section 5 (b) of the Banking Regulation Act 1949 defines
“Banking” as “Accepting for the purpose of lending and
investment, deposits of money from the public repayable on
demand or otherwise and withdraw able by cheque, draft,
order or otherwise” No definition of banking can be
comprehensive enough in the present context

What are banks?
Institutions which deals in money and credit. An
intermediary, which handles other people’s money
both for their advantage and to its own profits. A
financial institution that links the flow of funds from
savers to the users. Plays an important role in the
economy of any country as they hold the saving of
the public.

Banking in India

Objectives
 To make an account of evolution of
present day banking in India
 To evaluate the interventions of state
in banking sector over years and
 To appraise the entry of foreign banks

They said
 "More and more these days I
find myself pondering how to
reconcile my net income with
my gross habits."
John Nelson.
 "If you owe the bank $100
that's your problem. If you owe
the bank $100 million, that's
the bank's problem."
JP Getty.
 "We didn't actually overspend
our budget. The allocation
simply fell short of our
expenditure."
Keith Davis.
 "Anyone who lives within their
means suffers from a lack of
imagination."
Oscar Wilde.

Evolutionary Phases
 Indigenous Reign
 Direct Intervention
of the State
 Liberalization
 Transition
 Entry of Foreign
Banks

Phase I: Indigenous banks
 Vedas and the
Manusmriti:
 Kautalya’s Arthashastra:
Suggested Maximum
and Minimum Interest
rate
 Kautalya, Yajnyavalkya
and Manu
recommended 15 per
cent interest per annum
on capital.
 British rule almost wiped
out these tribes by
bringing European
Banks from urban
 They moved to villages.
They survive even today.

How did Sahukar lend?
 Borrower is known
 Very little documentation
 Sahukar usually a bad
guy
 Exorbitant rates of
interests
 Compounded Shorter
Intervals
 Records Tampered
 Mostly Mortgaged
lending on Land,
Properties, Jewels etc
 Most cases poor
borrowers surrendered
their properties.

Phase II: Direct Intervention
 Government Interventions
began in 1930s
 The Reserve Bank which is
the Central Bank was
created in 1935 by passing
RBI Act 1934.
 The RBI is the sole
authority for
◦ issuing bank notes and
◦ the supervisory body for
banking operations in India .
◦ Supervising exchange
control and banking
regulations, and
◦ administers the government's
monetary policy.
◦ granting licenses for new
bank branches.

Intervention: Nationalization
 In the wake of the Swadeshi
Movement, a number of banks
with Indian management were
established in the country
namely,
◦ Punjab National Bank Ltd, Bank
of India Ltd, Canara Bank Ltd,
Indian Bank Ltd, the Bank of
Baroda Ltd, the Central Bank of
India Ltd.
 In 1955, Govt. 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

Intervention: Nationalization
 On July 19, 1969, 14
major banks nationalized
and
 in 15th April 1980 six
more commercial
 80% of the banking
segment in India under
Government ownership
in 1990.
 the branches of the
public sector bank India
rose to approximately
800% in deposits and
advances took a huge
jump by 11,000%.

Effect of Nationalization
 the focus of lending
 priority sectors were
agriculture, small-scale
industry, retail
trade, small business
and small transport
operators
 poverty alleviation and
employment
generation programs.
 the success of green
revolution and the
increase of aggregate
food grain production

Other sides of
Nationalization
 Borrowings and lending restricted, not on
business line
 Deterioration of Banker-customers
relationship
 Poor Services
 Employees Strikes
 No Healthy competition among banks
 Mounting hidden NPAs

Phase III - Liberalization
 Constitution of Narasimham
committee and its report on
Banking reforms in 1991.
 It covered the areas of interest
rate deregulation & directed credit
rules,
 Statutory preemptions and entry
deregulation for both domestic
and foreign banks.
 Lowering of the CRR and SLR
 Interest rate liberalization
 Do away with Entry barriers. By
March 2004, the new private
sector banks and the foreign
banks share shared almost 20%
of total assets
 Prudential Norms act against
NPAs

Phase IV: Transition
 Most Indian banks lagging
behind the areas of customer
funds transfer and clearing
systems.
 Over-staffed and not able to
compete with new generation
private banks
 While these new banks and
foreign banks still face
restrictions in their activities.
 New banks are well-capitalized,
 Use modern equipment and
 Attract high-caliber
employees. Indian banks were
given time to
 Indian Banks to strengthen
their balance sheets,
consolidate and overall
become more robust, so that
they could compete.

Phase V: Entry of Foreign
Banks
 Two of domestic banks in
India have turned like Foreign
Banks. About 74 per cent of
holdings of ICICI and HDFC
bank are in the hands of
foreigners.
 Phase II of roadmap foreign
banks may be permitted to
have overall investment of 74
per cent in the private banks
of India in April 2009
 New banks to be in India
◦ Royal Bank of Scotland
◦ Switzerland's UBS
◦ US-based GE Capital
◦ Credit Suisse Group
◦ Industrial and Commercial Bank
of China
 Areas of Concentration are
Risk Management,
customizing the products and
Value creation.

Types of banks in India
 Central Bank: The Reserve Bank of India is the
central Bank that is fully owned by the
Government
 Public Sector Banks: State Bank Group,
Regional rural banks
 Private Sector Banks: Foreign Banks,
Scheduled and Non- Scheduled Banks
 Co-operative Sector: State Co-operative
Banks, Central Co-operative Banks, Primary
Agriculture Credit Societies
 Development Banks/Financial Institutions:
IDBI, NABARD

Commercial Banking
INTRODUCTION
Commercial banks are type of financial institutions that
lends money and provides transactional, savings, and
money market accounts and that accepts time deposits.
Commercial banking play very important role in economy by
mobilizing savings from various sectors.

INDIAN BANKING SYSTEM

Public Sector Banks
A Public Sector bank is one in which, the Government of India
holds a majority stake. It is as good as the government
running the bank. Since the public decide on who runs the
government, these banks that are fully/partially owned by the
government are called public sector banks. The public sector
commercial banking started with setting up of State bank of
India in 1955.
Public Sector Banks (Nationalised banks):
State Bank of India (SBI)
Canara Bank
Indian overseas bank
Dena Bank
Oriental Bank of Commerce

Private sector banks
 Banks which are owned by individuals corporations
and not by government or cooperative societies fall
into this category. Private banks use the word
‘limited’ after their names.
 Private Sector Banks:
 HDFC Bank
 ICICI Bank
 Federal Bank
 ING Vysya Bank
 Axis Bank (formerly UTI Bank)

Regional rural banks(RRB’s)
 The Government of India set up Regional Rural Banks
(RRBs) on
October 2, 1975 which were sponsored by Syndicate Bank,
State
Bank of India, Punjab National Bank, United Commercial
Bank and United Bank of India. Capital share being 50% by
the central government, 15% by the state government and
35% by the scheduled bank. The objective was to provide
credit and other facilities to small and marginal farmers and
agricultural labourers.

CO-OPERATIVE BANKS
 A co-operative bank is a financial entity which belongs to its
members, who are at the same time the owners and the
customers of their bank. Co-operative banks are often
created by persons belonging to the same local or
professional community or sharing a common interest. Co-operative
banks are playing an important role in small towns
and villages.
 List of Co-operative bank
 Ahmedabad Mercantile Co-Op Bank Ltd.
 Kalupur Commercial Coop.Bank Ltd.
 Madhavpura Mercantile Co-Op Bank Ltd.
 Mehsana Urban Co-Op Bank Ltd.
 Nutan Nagarik Sahakari Bank Ltd

National Bank For agricultural and rural
development (NABARD)
 NABARD was set up through an Act of the Indian Parliament
on 12 July 1982 as an apex development bank for agriculture
and rural development.
 NABARD is an apex DevelopmentBank that facilitates credit
flow for promotion and development ofagriculture, small-scale
industries, cottage and village industries, handicrafts and
other rural crafts.

Foreign banks
 Foreign banks are those banks which are registered or
incorporated outside India. They have their office or branch in
India. The globalisation of Indian economy will encourage the
presence of more foreign banks.
 Some of the foreign banks have successfully introduced
latest technologies in the banking practices in India. This has
made the banking business in the country more smooth and
interesting for the customers.
 List of foreign banks in India
 ABN AMRO
 Citibank India
 HSBC (Hongkong & Shanghai Banking Corporation)
 Standard Chartered Bank

Commercial banking – primary
and secondary functions
Primary functions
 Accepting deposits
 Granting loans and advances
Secondary functions
 Issuing letters of credit, travellers cheques
 Undertaking safe custody of valuables, important documents,
and securities by providing safe deposit vaults or lockers
 Providing customers with facilities of foreign exchange
 Transferring money from one place to another; and from one
branch to another branch of the bank. Collecting and
supplying business information. Issuing demand drafts and
pay orders
 Providing reports on the credit worthiness of customers.

Role of Commercial Banks
 Providing documentary and standby letters of credit (trade
finance), guarantees, performance bonds, securities
underwriting commitments and other forms of off-balance
sheet exposures
 Safekeeping of documents and other items in safe deposit
boxes
 Currency exchange
 Issue of banknotes (promissory notes issued by a banker and
payable to bearer on demand) Processing of payments by
way of telegraphic transfer, EFTPOS, internet banking or
other means Issuing bank drafts and bank cheques
 Accepting money on term deposit Lending money by way of
overdraft, installment loan or otherwise
 Credit intermediation
 Credit quality improvement

Credit Creation
Credit creation is considered to be the main function of
commercial banks these days. “Credit creation refers to the
power of commercial banks to expand secondary deposits
either through the process of making loans or through
investment in securities”.

Basic concepts used in the
process of credit creation
1. Bank deposits
2. Business Institutions
3. Cash Reserve Ratio
4. Excess Reserves
5. Credit Multiplier

Process of Credit Creation
 Single Bank System
 Multiple Bank System

Limitations of credit creation
 Cash Reserve Ratio
 Amount of Primary Deposits
 Banking Habits of the People
 Credit Policy of the Central Bank
 Policy of other banks
 Nature of Securities or Availability of Good
Borrowers
 Commercial and Industrial Condition

Services rendered by banks
Banks offer the following services to account holders at their
specified branches
 multi-city / Payable at Par (PAP) cheque facility
 anywhere banking facility
 trade services
 phone banking facility
 internet banking facility
 credit card
 debit/ATM card
 mobile banking and Real Time Gross Settlement (RTGS)
 Locker facilities

Clearing Procedure
 Bank Clearing house: The clearing house is a voluntary
association of banks under the management of a bank where
the settlement accounts are maintained. Wherever Reserve
Bank of India has its office (and a banking department), the
clearing house is managed by it. In the absence of an office
of the Reserve Bank, the clearing house is managed by the
State Bank of India, its associate banks and in a few cases by
public sector banks.
 In India there are about 1050 cheques clearing houses.
These clearing houses clear and settle transactions relating
to various types of paper based instruments like cheques,
drafts, payment orders, interest / dividend warrants, etc.

Clearing Process
The clearing process begins with the deposit of a
cheque/other clearing instruments referred above in a bank.
The bank arranges the cheques submitted to it for clearing
bank wise and presents it in the clearing house to other
banks. When there are more than one bank branch for a bank
in the clearing area, they would have a coordinating branch/
service branch to take care of presenting the cheques to the
clearing house.
Upon receipt of the cheques/other instruments, they are
passed for payment if the funds are available and the banker
is satisfied about the genuineness of the instrument. The
cheques that are unpaid are returned to the presenting bank
through another clearing called the Return Clearing. The
realization of the funds occurs after the completion of return
clearing and by the absence of an unpaid cheque

Settlement of Funds: The settlement of funds in clearing
occurs at several levels. The aggregate amount or value of
cheques presented by a bank on other banks represents the
claim by that bank on other banks. Similar claims are made
by all the banks on every other bank in the clearing.
A net settlement is arrived at the clearing house and the debit
or credit position of the bank is determined. These are
booked in their current accounts maintained by the settling
bank. This represents the inter- bank settlement. The
settlement of funds between the service branch and the
branch concerned represents the transfer of funds to the
branch level. The payment process is completed only when
the funds are debited from the drawer’s account and credited
to the payee’s account. This occurs after the completion of
the return clearing mentioned earlier

Modern technology in banking
 Information technology is one of the most important
facilitators for the transformation of the Indian banking
industry in terms of its transactions processing as well as for
various other internal systems and processes.The various
technological platforms used by banks for the conduct of their
day to day operations, their manner of reporting and the way
in which interbank transactions and clea
 The process of computerisation marked the beginning of all
technological initiatives in the banking industry.
Computerisation of bank branches had started with
installation of simple computers to automate the functioning
of branches, especially at high traffic branches. Thereafter,
Total Branch Automation was in use, which did not involve
bank level branch networking, ring is affected has evolved
substantially over the years.

Core banking
Networking of branches are now undertaken to ensure better
customer service. Core Banking Solutions (CBS) is the
networking of the branches of a bank, so as to enable the
customers to operate their accounts from any bank branch,
regardless of which branch he opened the account with. The
networking of branches under CBS enables centralized data
management and aids in the implementation of internet and
mobile banking. Besides, CBS helps in bringing the complete
operations of banks under a single technological platform.
CBS implementation in the Indian banking industry is still
underway. The vast geographical spread of the branches in
the country is the primary reason for the inability of banks to
attain complete CBS implementation.

ATM
 ATMs were introduced to the Indian banking industry in the
early 1990s initiated by foreign banks. Most foreign banks
and some private sector players suffered from a serious
handicap at that time- lack of a strong branch network. ATM
technology was used as a means to partially overcome this
handicap by reaching out to the customers at a lower initial
and transaction costs and offering hassle free services. Since
then, innovations in ATM technology have come a long way
and customer receptiveness has also increased manifold.
Public sector banks have also now entered the race for
expansion of ATM networks. Development of ATM networks is
not only leveraged for lowering the transaction costs, but also
as an effective marketing channel resource.

Electronic fund transfer
system
There are various types of electronic clearing systems
functioning in the retail payments area in the country. Some of
them are ECS, NEFT etc.
Electronic Clearing Service (ECS) is a retail payment
system that can be used to make bulk payments / receipts of
a similar nature especially where each individual payment is
of a repetitive nature and of relatively smaller amount. This
facility is meant for companies and government departments
to make/receive large volumes of payments rather than for
funds transfers by individuals. The ECS facility is available in
47 centers across India operated by RBI at places where it
manages the clearing houses and by SBI and its associates
in other centers. The ECS is further divided into two types –
ECS (Credit) to make bulk payments to individuals/vendors
and ECS (Debit) to receive bulk utility payments from
individuals

National Electronic Funds Transfer (NEFT) system:- is a
nationwide funds transfer system to facilitate transfer of funds
from any bank branch to any other bank branch. This is typically
for individual / single payments. The system uses the concept of
centralized accounting system and the bank’s account that is
sending or receiving the funds transfer instructions, gets
operated at one center, viz. Mumbai only. The individual
branches participating in NEFT could be located anywhere
across the country. The beneficiary gets the credit on the same
Day or the next Day depending on the time of settlement. NEFT
operates on a deferred net settlement (DNS) basis which settles
transactions in batches. Presently it is settled in six batches the
last one being 1600 hrs. on a weekday and 3 batches with the
last one being 1200hrs on a Saturday. To participate in NEFT the
participating banks branch needs to have IFSC code
Indian Financial System Code (IFSC) is an alpha numeric code
designed to uniquely identify the bank-branches in India. This is
11 digit code with first 4 characters representing the banks code,
the next character reserved as control character (Presently 0
appears in the fifth position) and remaining 6 characters to
identify the branch. The MICR code has 9 digits to identify the
bank-branch.

Real Time Gross Settlement(RTGS)
It is a large value funds transfer system whereby financial
intermediaries can settle interbank transfers for their own
account as well as for their customers on a “real time” and on
“gross” basis. The system effects final settlement of interbank
funds transfers on a continuous, transaction- by-transaction
basis throughout the processing day(RTGS business hours).
The RTGS system is primarily for large value transactions.
The minimum amount to be remitted through RTGS is Rs.1
lakh. There is no upper ceiling for RTGS transactions. On a
typical day, RTGS handles about 14000 transactions a day
for an approximate value of Rs.1,50,000 crore
While RTGS remittance would be credited to a beneficiary’s
account by maximum time lag of two hours, NEFT transaction
depending on the timing of the transfer will be transferred the
same day or the next day and in both the cases when the
transfer has not happened the money would be returned to
payer’s account

Internet Banking
Internet banking in India began taking roots only from the early
2000s. Internet banking services are offered in three levels. The first
level is of a bank’s informational website, wherein only queries are
handled; the second level includes Simple Transactional Websites,
which enables customers to give instructions, online applications
and balance enquiries. Under Simple Transactional Websites, no
fund based transactions are allowed to be conducted. Internet
banking in India has reached level three, offering Fully Transactional
Websites, which allow for fund transfers and various value added
services.
Internet banking poses high operational, security and legal risks.
This has restrained the development of internet banking in India.
The guidelines governing internet banking operations in India covers
a number of technological, security related and legal issues to be
addressed in relation to internet banking. According to the earlier
guidelines, all internet banking services had to be denominated in
local currency, but now, even foreign exchange services, for the
permitted underlying transactions, can be offered through internet
banking.

Phone Banking and Mobile Banking
Phone and mobile banking are a fairly recent phenomenon for the
Indian banking industry. There exist operative guidelines and
restrictions on the type and quantum of transactions that can be
undertaken via this route. Phone banking channels function through
an Interactive Voice Response System (IVRS) or tele-banking
executives of the banks.
The transactions are limited to balance enquiries, transaction
enquiries, stop payment instructions on cheques and funds transfers
of small amounts (per transaction limit of Rs 2500, overall cap of Rs
5000 per day per customer). According to the draft guidelines on
mobile banking, only banks which are licensed and supervised in
India and have a physical presence in India re allowed to offer
mobile banking services. Besides, only rupee based services can be
offered. Mobile banking services are to be restricted to bank account
and credit card account holders which are KYC and AMC compliant.

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