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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
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 cards 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 ones 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

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
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
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.
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
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
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.
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.
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.
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 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.
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 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.
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

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

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.
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.