A STUDY ON FOREIGN EXCHANGE OPERATIONS IN UNION BANK OF INDIA EXECUTIVE SUMMARY The Reserve Bank of India administers exchange

e controls in accordance with theGovernments policy designed to maintain general control over the foreign exchangesituation, particularly outgoing financial flows. The Foreign Exchange Regulation Act(FERA), 1973 confers powers to the Reserve Bank of India concerning foreign exchangecontrol. General or specific permission is required from the Reserve Bank of India for allforeign exchange transactions. Foreign companies operating in India are governed by theForeign Exchange Regulation Act (FERA), 1973, which sets guidelines for bankaccounts, loans, foreign exchange trading and the remittance of dividends and profits.The Asian Clearing Union (ACU) was established in 1974 under the auspices of theEconomic and Social Commission for Asia and the Pacific as a mechanism for settlementof payments among participating countries central banks. The Reserve Bank of India isone of the original participants. The other participants are Bangladesh, the IslamicRepublic of Iran, Nepal, Pakistan, Sri Lanka, and Myanmar. All authorized banks in Indiacan handle transactions cleared through the Asian Clearing Union. It is compulsory thatall eligible payments among participants be settled through the Asian Clearing Union. In March 1993, the government ended certain FERA restrictions on domesticborrowing, trading and acquisition of immovable property by companies with more than40 % foreign equity. Residents may use up to 25 % of foreign exchange earnings tomaintain a foreign currency bank account in India. Foreign employees, liaison offices,project offices and branches of foreign companies may open and use a resident bankaccount in Indian currency provided that they have approval from the Reserve Bank foroperations in India. In August 1994, the rupee was made fully convertible on the current account.Rupee convertibility on the trade account is restricted by the negative list of imports andexports and limited to those involved in trade. All export and import transactions areconducted at the market rate of exchange.

RESEARCH METHODOLOGY The project study has been done with the help of Observation method. The value of observation is that we can collect the original data at the time they occur. We need not depend on reports by others. Another strength is that we can secure information that most participants would ignore either because it is so common and expected or because it is not seen as relevant. The third advantage of observation is that it alone can capture the whole event as it occurs in its natural environment. Whereas the environment of an experiment may seem contrived to participants, and the number and types of questions limit the range of responses gathered from respondents, observation is less restrictive than most primary collection methods. Finally, participants seem to accept an observational intrusion better than they respond to questioning. Observation is less demanding of them and normally has a less biasing effect on their behavior than does questioning. Direct observation occurs when the observer is physically present and personally monitors what takes place. This approach is very flexible because it allows the observer to react to and report subtle aspects of events and behaviors as they occur. A weakness of this approach is that observers perception circuits may become overloaded as events move quickly, and observers must later try to reconstruct what they were not able to record.

Treasury :
Credit Policy
Resources mobilization and deployment thereof in the most profitable manner within the frame work stipulated by the Regulator i.e. the Reserve Bank of India are the main functions of any bank. The major portion of the deployment of resources is through credit dispensation and hence the returns thereon and safety thereof are of paramount importance. Hence the policy of lending is formulated mainly from this angle. The policy envisages, in the light of the dynamic and multifarious changes in the financial sector in the recent past, as also the various directives issued by the Regulator during the intervening period, a sustained growth plan of the advances portfolio. It is designed with a focus on optimum usage of resources without compromising on the asset quality, the strategies for deployment of credit, system of assessments, financial parameters, pricing, prudential norms, risk management, etc,. It also indicates the chosen areas for credit deployment, low priority areas, borrower standards, group approach, consortium arrangements, geographical spread and sectoral deployment of credit.

The primary objectives of the credit policy are as under : Ensuring the loan assets remain safe & secure, Ensuring the loan assets remain performing, Ensuring the profitable deployment of resources enduring Asset Liability matching and recycling of funds, Ensuring due compliance of regulatory norms, particularly Capital Adequacy norm issues, Income Recognition, Asset Classification etc., Ensuring balanced deployment of credit to various sector and geographical regions, and Introduction of Risk Management concepts for credit portfolio in a scientific manner.

Chosen Areas for Credit Policy :

1) Priority Sector lending

Agricultural Sector. Small Scale Industry: Cottage Industries, Khadi Village Industries, Artisans and Tiny Industries, etc,.

Weaker Section Credit to Women for upliftment and economic development

2 ) Export Finance 3 ) Software Developers and Service providers 4 ) Credit to Midsized Corporates This includes both short term and long term requirements such as Commercial papers, external commercial borrowing, foreign currency loans, public deposits, private placement of debentures and bonds, etc,. The top corporate borrowers having good credit rating reduce their dependence on bank finance and large limits sanctioned to them remain unutilised to a great extent. 5 ) Infrastructure Financing Activities involved in Infrastructure Financing are Roads, Ports, Power, Telecom, Urban infrastructure facilities, Development of Industrial areas.

Credit policy

Fund Based Credit limit

Non Fund Based Credit Limit

Methods to access bank finance :

1. Turnover Method The working capital requirement under this method is to be computed on thebasis of 20 % of the projected annual turnover. In order to ensure that there is aminimum margin by way of promoters contribution to support the working capitalneeds, the borrowers are required to bring in at least 5 % of the projected annualturnover as their contribution towards margin. The projected turnover has to beinterpreted as gross sales inclusive of excise duty. As regards 5 % of the promotersstake, the same should be brought in by way of Net Working Capital and it isexpected that wherever the level of holding of Current Assets / Production /Processing cycle is longer, then the borrower should bring in proportionately higherstake in relation to his requirement of Bank Finance. 2.Flexible Bank Finance Under the system, Fund based working capital requirement will be assessed asthe difference between Working Capital Gap and Projected Net Working Capital.Though the benchmark for Current Ratio will continue to be 1.33: 1, we may acceptsome deviation in the same provided the Current Ratio is not less than 1.17: 1 . Incases where the Current Ratios have deteriorated on account of diversions takingplace because of short term funds flow to Fixed Assets, we may correct the positionby giving a Term Loan to be repaid within 12 to 36 months provided the Debt ServiceCoverage Ratio, Debt Equity Ratio, and security coverage are at acceptable levels. In the assessment method based on the Maximum Permissible Bank Finance(MPBF) concept, the amount of working capital Finance is arrived at as a residualsource after netting off from the Working Capital Gap, the available Net WorkingCapital or the required minimum Net Working Capital whichever is higher. Theprojected bank borrowing which reflects the finance sought by the borrower, will bevalidated as hitherto with reference to the operating cycle of the borrower, projectedlevel of operations, nature of projected build up of Current / Current Liability,profitability, liquidity, etc,. Where these parameters are acceptable, the projected bank borrowing will stand validated for sanction. This amount will be termed as Flexible Bank Finance .

3.The Cash Budget System Presently Cash Budget method is in use for assessing working capital financefor seasonal industries and for construction activity. In these cases, the requiredfinance is quantified from the projected cash flows and not from the projected valuesof assets and liabilities. In this method of assessment, besides the cash budget, otheraspects like the borrowers projected profitability, liquidity, gearing, funds flow etc,.are also analysed.

INTRODUCTION TO FOREIGN EXCHANGE :

The exchange of one currency for another, or the conversion of one currency into another currency. Foreign exchange also refers to the global market where currencies are traded virtually around-the-clock. The Foreign Exchange market, also referred to as the "FOREX" market, is the largest financial market in the world, with a daily average turnover of approximately $1.5 trillion. The term foreign exchange is usually abbreviated as "forex" and occasionally as "FX. Foreign exchange transactions encompass everything from the conversion of currencies by a traveler at an airport kiosk to billion-dollar payments made by corporate giants and governments for goods and services purchased overseas. Increasing globalization has led to a massive increase in the number of foreign exchange transactions in recent decades. The global foreign exchange market is by far the largest financial market, with average daily volumes in the trillions of dollars. Foreign Exchange is not much popularly heard; the only reason is that the currency market was simply financially inaccessible to the general population of investors and traders, and the minimum account requirements were beyond the resources of the average investor. Since then, the situation has changed dramatically. Now under new bank regulations, instead of a minimum investment of $200K, accounts can be opened for $10 - $50K.

Definition:
Foreign exchange as defined in Foreign Exchange Management Act 1999 means foreign currency and include 1) All deposits, credits, balance payable in any foreign currency. 2) Drafts, travelers cheques, letters of credit and bills of exchange expressed or drawn in Indian currency and payable in foreign exchange.

3) Drafts, travelers cheques, letter of credit or bill of exchange drawn banks, institution or person outside India but payable in Indian currency.

Importance of Foreign Exchange:

The importance of foreign exchange is described in brief as under:1. Foreign exchange reserves shows the financial strength and the stage of development of the economy. 2. The acceptance of currency at a predetermined rate makes the international trade easy. 3. The foreign exchange ratio shows direct relationship between the prices of the commodities in the national and international market. 4. The foreign exchange balances of a country directly affect the rates of exchange. A hard currency nation has stability in foreign exchange rate. 5. The rising foreign exchange balances of a nation increases its credit worthless in the international capital market. Foreign Exchange does not involve trade and services alone, but also includes external borrowing and investment. The countrys external receipts and payment can be classified broadly under : 1) Current Account 2) Capital Account

1) Current Account:
Current account is divided into two types Merchandise trade and Invisibles. Merchandise Trade: Defined as comprises of export and import of goods and services Invisibles: Refers to current international payment for other than merchandise trade. Example: Travel, transportation, interest.

2) Capital Account:

Capital account means include transfer connected with external borrowings, external investment of divestments. Current Account transaction means a transaction other than a capital account transaction.

FOREX Market Working 24*7: A true 24-hour market begins at 7 p.m. Sunday evening through 3 p.m. Friday EST. FOREX trading begins each day in Sydney, and moves around the globe as the business day begins in each financial center, first to Tokyo, then London, and New York. Unlike any other financial market, investors can respond to currency fluctuations caused by economic, social and political events at the time they occur - day or night.

Currencies traded in Foreign Market : The most often traded or 'liquid' currencies are those of countries with stable governments, respected central banks, and low inflation. Today, over 85% of all daily transactions involve trading of the major currencies, which include the US Dollar, Japanese Yen, Euro, British Pound, Swiss Franc, Canadian Dollar and the Australian Dollar. Margin : Margin is a faith deposit for each opened position. This deposit is used to secure a position within the market and is added to or deducted from when profits or loss is in effect, then returned to the account when positions are closed.

Participants in Foreign Market :

The FOREX market is called an 'Interbank' market due to the fact that historically it has been dominated by banks, including central banks, commercial banks, and investment banks. However, the percentage of other market participants is rapidly growing, and now includes large multinational corporations, global money managers, registered dealers, international money brokers, futures and options traders, and private speculators. Participants in foreign exchange market.

The main players in foreign exchange market are as follows:

1. CUSTOMERS The customers who are engaged in foreign trade participate in foreign exchange market by availing of the services of banks. Exporters require converting the dollars in to rupee and importers require converting rupee in to the dollars, as they have to pay in dollars for the goods/services they have imported. 2.COMMERCIAL BANK They are most active players in the forex market. Commercial bank dealing with international transaction offer services for conversion of one currency in to another. They have wide network of branches. Typically banks buy foreign exchange from exporters and sells foreign exchange to the importers of goods. As every time the foreign exchange bought or oversold position. The balance amount is sold or bought from the market. 3. CENTRAL BANK In all countries Central bank have been charged with the responsibility of maintaining the external value of the domestic currency. Generally this is achieved by the intervention of the bank. 4. EXCHANGE BROKERS Forex brokers play very important role in the foreign exchange market. However the extent to which services of foreign brokers are utilized depends on the tradition and practice prevailing at a particular forex market center. In India as per FEDAI guideline the Ads are free to deal directly among themselves without going through brokers. The brokers are not among to allowed to deal in their own account allover the world and also in India.

5. OVERSEAS FOREX MARKET Today the daily global turnover is estimated to be more than US $ 1.5 trillion a day. The international trade however constitutes hardly 5 to 7 % of this total turnover. The rest of trading in world forex market is constituted of financial transaction and speculation. As we know that the forex market is 24-hour market, the day begins with Tokyo and thereafter Singapore opens, thereafter India, followed by Bahrain, Frankfurt, paris, London, new york, Sydney, and back to Tokyo. 6. SPECULATORS The speculators are the major players in the forex market.

Bank dealing are the major speculators in the forex market with a view to make profit on account of favorable movement in exchange rate, take position i.e. if they feel that rate of particular currency is likely to go up in short term. They buy that currency and sell it as soon as they are able to make quick profit. Corporations particularly multinational corporation and transnational corporation having business operation beyond their national frontiers and on account of their cash flows being large and in multi currencies get in to foreign exchange exposures. With a view to make advantage of exchange rate movement in their favor they either delay covering exposures or do not cover until cash flow materialize. Individual like share dealing also undertake the activity of buying and selling of foreign exchange for booking short term profits. They also buy foreign currency stocks, bonds and other assets without covering the foreign exchange exposure risk. This also result in speculations.

FOREIGN EXCHANGE MARKET OVERVIEW :

In todays world no economy is self sufficient, so there is need for exchange of goods and services amongst the different countries. So in this global village, unlike in the primitive age the exchange of goods and services is no longer carried out on barter basis. Every sovereign country in the world has a currency that is legal tender in its territory and this currency does not act as money outside its boundaries. So whenever a country buys or sells goods and services from or to another country, the residents of two countries have to exchange currencies.

Exchange rate System :

Countries of the world have been exchanging goods and services amongst themselves. This has been going on from time immemorial. The world has come a long way from the days of barter trade. With the invention of money the figures and problems of barter trade have disappeared. The barter trade has given way ton exchanged of goods and services for currencies instead of goods and services. The rupee was historically linked with pound sterling. India was a founder member of the IMF. During the existence of the fixed exchange rate system, the intervention currency of the Reserve Bank of India (RBI) was the British pound, the RBI ensured maintenance of the exchange rate by selling and buying pound against rupees at fixed rates. The inter bank rate therefore ruled the RBI band. During the

fixed exchange rate era, there was only one major change in the parity of the rupeedevaluation in June 1966. Different countries have adopted different exchange rate system at different time. The following are some of the exchange rate system followed by various countries.

THE GOLD STANDARD SYSTEM : Many countries have adopted gold standard as their monetary system during the last two decades of the 19th century. This system was in vogue till the outbreak of world war I. Under this system the parties of currencies were fixed in term of gold. There were two main types of gold standard: 1) Gold Specie Standard : Gold was recognized as means of international settlement for receipts and payments amongst countries. Gold coins were an accepted mode of payment and medium of exchange in domestic market also. A country was stated to be on gold standard if the following condition were satisfied: Monetary authority, generally the central bank of the country, guaranteed to buy and sell gold in unrestricted amounts at the fixed price. Melting gold including gold coins, and putting it to different uses was freely allowed Import and export of gold was freely allowed. The total money supply in the country was determined by the quantum of gold available for monetary purpose. 2) Gold Bullion Standard : Under this system, the money in circulation was either partly of entirely paper and gold served as reserve asset for the money supply.. However, paper money could be exchanged for gold at any time. The exchange rate varied depending upon the gold content of currencies. This was also known as Mint Parity Theory of exchange rates. The gold bullion standard prevailed from about 1870 until1914, and intermittently thereafter until 1944. World War I brought an end to the gold standard. BRETTON WOODS SYSTEM : During the world wars, economies of almost all the countries suffered. In order to correct the balance of payments disequilibrium, many countries devalued their currencies. Consequently, the international trade suffered a deathblow. In1944, following World War II, the United States and most of its allies ratified the Bretton Woods

Agreement, which set up an adjustable parity exchange-rate system under which exchange rates were fixed (Pegged) within narrow intervention limits (pegs) by the United States and foreign central banks buying and selling foreign currencies. This agreement, fostered by a new spirit of international cooperation, was in response to financial chaos that had reigned before and during the war. In addition to setting up fixed exchange parities ( par values ) of currencies in relationship to the International Monetary Fund (IMF) to act as the custodian of the system. Under this system there were uncontrollable capital flows, which lead to major countries suspending their obligation to intervene in the market and the Bretton Wood System, with its fixed parities, was effectively buried. Thus, the world economy has been living through an era of floating exchange rates since the early 1970. FLOATING RATE SYSTEM In a truly floating exchange rate regime, the relative prices of currencies are decided entirely by the market forces of demand and supply. There is no attempt by the authorities to influence exchange rate. Where government interferes directly or through various monetary and fiscal measures in determining the exchange rate, it is known as managed of dirty float.

PURCHASING POWER PARITY (PPP) Professor Gustav Cassel, a Swedish economist, introduced this system. The theory, to put in simple terms states that currencies are valued for what they can buy and the currencies have no intrinsic value attached to it. For example India has a higher rate of inflation as compared to country US then goods produced in India would become costlier as compared to goods produced in US. This would induce imports in India and also the goods produced in India being costlier would lose in international competition to goods produced in US. This decrease in exports of India as compared to exports from US would lead to demand for the currency of US and excess supply of currency of India. This in turn, cause currency of India to depreciate in comparison of currency of US that is having relatively more exports.

Functions of the Foreign Exchange Market :

There are three main functions of the foreign exchange market: 1) Transfer Function : The basic and primary function of foreign exchange market is to transfer

purchasing power between countries. The transfer function is performed through T.T, M.T, Draft, Bill of Exchange, Letters of Credit, etc. The bill of exchange is the most important and effective method of transferring purchasing power between two parties located in different countries.

2) Credit Function : Another important function of foreign exchange market is to provide credit to the importer debtor. The exports draw the bill of exchange on Importers or on their bankers. On acceptance of the bills by importer or their banker, the exporter will get the money realized on the maturity of the bills. In case the exporters are anxious to receive the payment earlier, the bills can be discounted from their bankers, or foreign exchange banks or discount houses. 3) Hedging Function : The foreign exchange market performs the hedging function covering the risks on foreign exchange transactions. There are frequent fluctuations in exchange rates. If the rate is favourable, the exporter will gain and vice versa. In order to avoid the risk involved, the foreign exchange market provides hedges or actual claims through forward contracts in exchange against such fluctuations. The agencies of foreign currencies guarantee payment of foreign exchange at a fixed rate. The exchange agencies bear the risks of fluctuation of exchange rates.

Factors Influencing The Flow Of Foreign Exchange:

The main factors which influence the movement of foreign exchange from one country to another are as follows:

1. Leads and Lags:

If a country expects that a change in the rate of exchange is likely to be in its favour, there will be a movement of funds to that country. Efforts will also be made to create delay in the settlement of debts. Payments for the imports will be made before they fall due. On the other hand, if a country fears that a change in the rate of exchange is likely to be unfavorable to it, then attempts will be made to secure early payments of debt. Efforts will also be made to make payments to the creditor country before they fall due. These factors which influence the movement of foreign exchange are know as 'leads and lags'.

2. Arbitrate:
Arbitrate is a process of buying a thing in one market and selling it at the same time in another market in order to take advantage of price difference. For instance, if there arises a difference in the stock exchange rates between Pakistan and England, the businessmen can take advantage of the price difference by buying the foreign exchangeor shares in the cheaper market and sell them in the dear market. They can thus make profit out of the difference in the prices of shares or foreign exchange rates.

3. Political and Economic Conditions:

If there is political instability and labour unrest in the country, the industrial growth will be adversely affected. There will be movement of foreign capital outside the country. In case the government of a country encourages private enterprise and gives liberal concessions, the growth of exports will be stimulated and the supply of foreign exchange increases.

4. Seasonal Factors:
The rate of foreign exchange is also affected by the seasonal fluctuations in the export and import of commodities. The central bank and other foreign exchange dealers try to smooth down the fluctuations in the rate of foreign exchange by purchasing foreign exchange when the exports are at its height and sell the held upforeign exchange when the imports are liberalized.

Export Finance And Risk Management : Every business requires finance. Export finance refers to the finance of the goods from the home country to the importers port. The export financing begins with as soon as an export order is received and accepted. The manufacturing activity or assembling starts with the confirmation of export order. The export order needs finance for transportation, taxes, documentation, insurance, packing, clearing & forwarding and payment of freight. Most of the export trade is carried out on credit basis. It takes 3 to 6 months to realize the export bills. Meantime, the exporter has to execute further orders for which additional working capital is required.

The importer sometimes purchases the goods on payment of cash in advance. However, on many occasions the payment for importer are made on shipment of goods. Thus, the importer also needs finance for importing capital goods, raw materials, technology, etc. The various agencies involved in the provision of finance are the Reserve Bank Of India, EXIM bank, Commercial Banks, ECGC and other financial institutions. Export Import Finance : Export finance means the credit required by exporters for financing their export transactions from the time of getting an export order to the time of full realization of the payment from the importer. Importer also needs finance for making payments for their imports. The success of export-import depends upon extension of credit. This credit may be short term or medium term. The determination of a credit policy may be more important than any other element of an export policy. The credit policy may depend upon sales volume, types of organization, pricing policy and product policy. The nature of export-import finance may be short term or long term credit. Short term facilty is extended for a period from 30 days to 180 days. The exporter and importer both may require short term credit which is granted by the commercial banks. Long term credit is extended for a period from 5 to 20 years. Long term finance is provided for long term development activities such as purchase of capital goods, machinery and the volume of credit is generally large. The long term credit may be provided by ECGC, IDBI, EXIM bank. Pre- Shipment Finance : Pre-shipment finance is defined by the Reserve Bank of India as : Any loan to an exporter for financing the purchase, processing, manufacturing or packing of goods. It is an interim advance provided by banks for helping the exporter to purchase process, packing and shipment of the goods for export. It is also known as Packing Credit. It is provided by any bank or financial institution. The exporters generally require finance at the pre-shipment stage for the following purpose :

 To purchase raw materials, components, machinery equipment and technology. To pay for transportation and warehouse expenses. For specialized export packing of goods. To pay insurance premium on shipment of goods. To clear the goods after inspection, customs and excise authorities. To pay commission to overseas agents. To pay freight for shipment of goods. To provide additional working capital from time to time. Post Shipment Finance : When the exporter needs an advance after completing the process of shipment of goods is called as post shipment finance. The export needs finance at post shipment stage for the following purposes :

Introduction to Banking Sector :

The Indian Banking industry, which is governed by the Banking Regulation Act of India,1949 can be broadly classified into two major categories, non-scheduled banks andscheduled banks. Scheduled banks comprise commercial banks and the co-operativebanks. In terms of ownership, commercial banks can be further grouped into nationalizedbanks, the State Bank of India and its group banks, regional rural banks and private sectorbanks (the old / new domestic and foreign). These banks have over 67,000 branchesspread across the country.

Phases of Banking Sector:

The first phase of financial reforms resulted in the nationalization of 14 major banks in1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted ina significant growth in the geographical coverage of banks. Every bank had to earmark aminimum percentage of their loan portfolio to sectors identified as priority sectors. Themanufacturing sector also grew during the 1970s in protected environments and thebanking sector was a critical source. The next wave of reforms saw the nationalization of6 more commercial banks in 1980. Since then the number of scheduled commercial banksincreased four-fold and the number of bank branches increased eightfold. After the second phase of financial sector reforms and liberalization of the sector in theearly nineties, the Public Sector Banks (PSBs) found it extremely difficult to competewith the new private sector banks and the foreign banks. The new private sector

banksfirst made their appearance after the guidelines permitting them were issued in January1993. Eight new private sector banks are presently in operation. These banks due to theirlate start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provides better services. During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banksaccounted for 53.2 percent of the deposits and 47.5 percent of credit during the sameperiod. The share of foreign banks (numbering 42), regional rural banks and otherscheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in credit during the year 2000. The industry is currently in a transition phase. On the one hand, the Public Sector Banks, which are the mainstay of the Indian Banking system, are in the process of shedding their flab in terms of excessive manpower, excessive Non Performing Assets (NPAs) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. After the first phase and second phase of financial reforms, in the 1980s commercial banks began to function in a highly regulated environment, with administered inter estate structure, quantitative restrictions on credit flows, high reserve requirements and reservation of a significant proportion of lendable resources for the priority and the government sectors. The restrictive regulatory norms led to the credit rationing for the private sector and the interest rate controls led to the unproductive use of credit and low levels of investment and growth. The resultant financial repression led to decline in productivity and efficiency and erosion of profitability of the banking sector in general. This was when the need to develop a sound commercial banking system was felt. This was worked out mainly with the help of the recommendations of the Committee on the Financial System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector reforms called for interest rate flexibility for banks, reduction in reserve requirements ,and a number of structural measures. Interest rates have thus been steadily deregulated in the past few years with banks

being free to fix their Prime Lending Rates (PLRs) and deposit rates for most banking products.
Credit market reforms included introduction of new instruments of credit, changes in the credit delivery system and integration of functional roles of diverse players, such as, banks, financial institutions and non-banking financial companies (NBFCs). Domestic Private Sector Banks were allowed to be set up ,PSBs were allowed to access the markets to shore up their Cars.

The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The total assets of all scheduled commercial banks by end-March 2010 are estimated at Rs 40, 90,000 crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per cent during the rest of the decade as against the growth rate of 16.7 per cent that existed between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base and reserves on the liability side.