Dissertation project on

“Banking Structure in India”

Submitted By
NEHA ZAREEN

In partial fulfilment for the award of the degree of

POST GRADUATE DIPLOMA IN MANAGEMENT

Under Dr. TANUSREE CHAKRABORTY

Of
GLOBSYN BUSINESS SCHOOL

Approved by AICTE
Academic Session (2017 – 2019)
Enrolment-030107057

1
 CERTIFICATE FROM INTERNAL GUIDE
Date :

The Principal Globsyn Business School

Kolkata

Dear Sir,

Sub: Candidate for Post Graduate Management Course

I have the pleasure of forwarding the following project dissertation.

1. Name of the Candidate : Neha Zareen

2. Title of Study : Banking Structure in India

3. Date of Submission : 20.3.2019

4. Specialization Field : Major Finance and Minor Marketing.

5. Pages in Study : (35)

I further certify the following: The candidate has completed the work to my
satisfaction. This is an original work of the candidate and to best of my knowledge
has not been published. The use of existing works have been duly acknowledged.
The candidate has spend a minimum of 30 hours while conducting the study. The
dissertation may now be evaluated for the purpose of awarding Postgraduate
Diploma.

Guide Name : Dr. TANUSREE CHAKRABORTY

Signature :

2
 Preface

As a partial fulfilment of the MBA Programme we need to make a Management

Research Project-Dissertation, So we have prepared this project report on
“Banking Structure in India”.

This project work is basically meant to acquire knowledge about the Banking
Structure in India.

This project report includes comparison of various banking sectors ,department

and their growth.

To understand measures taken by different banks for recovery management under

take Bank’s executive survey.

Preparing this project report is a good learning experience for to us where in we

came to know about the various new aspects and structure of banking .

We feel great pleasure in submitting this Management Research Project –

Dissertation. We hope you will accept and appreciate our efforts.

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 ACKNOWLEDGEMENT

Acknowledgement is the expression of gratitude or appreciation for something. So,

I would like to express my sincere gratitude to all those supportive in this project
work. First of all, I would like to thank Globsyn business school for giving us this
opportunity to do this project and learn from it.

We express our sincere thanks to Dr. Tanusree Chakraborty, our project guide for
helping us in giving us all relevant information and constant guidance throughout
the project.

We would also express our thanks for providing their valuable suggestions and
knowledge regarding project work.

Finally we would like to thank all lecturers, friends and our families for their kind
of support and to all who directly or indirectly helped us in preparing this project
report.

Date: Place: Kolkata

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 TABLE OF CONTENTS

SL.NO PARTICULARS PAGE NO.

1. INTRODUCTION 6

2. LITERATURE REVIEW 9

3. RESEARCH 10
METHODOLOGY
4. INTRODUCTION TO 11
INDIAN BANKING
STRUCTURE
5. HISTORY AND 16
EVOLUTION
6. CLASSIFICATION OF 18
BANKS
7. DATA ANALYSIS 24

8. FINDINGS 31

9. CONCLUSION 33

10. REFERENCE 35

5
INDIAN BANKING STRUCTURE

INRODUCTION
Study background
Introduction: The existing banking structure in India, evolved over several
decades, is elaborate and has been serving the credit and banking services needs of
the economy. There are multiple layers in today's banking structure to cater to the
specific and varied requirements of different customers and borrowers. The
banking structure played a major role in the mobilisation of savings and promoting
economic development. In the post financial sector reforms (1991) phase, the
performance and strength of the banking structure improved perceptibly. Financial
soundness of the Indian commercial banking system compares favourably with
most of the advanced and emerging countries.

India cannot have a healthy economy without a sound and effective banking
system. The banking system should be hassle free and able to meet the new
challenges posed by technology and other factors, both internal and external.

In the past three decades, India's banking system has earned several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to metropolises or cities in India. In fact, Indian banking system has
reached even to the remote corners of the country. This is one of the main aspects
of India's growth story.

The government's regulation policy for banks has paid rich dividends with the
nationalization of 14 major private banks in 1969.

6
Study area
 The Indian banking system consists of 27 public sector banks, 21 private
sector banks, 49 foreign banks, 56 regional rural banks, 1,562 urban
cooperative banks and 94,384 rural cooperative banks, in addition to
cooperative credit institutions.
 As of Q1 FY19, total credit extended by commercial banks surged to Rs
86,976.2 billion (US$ 1,297.4 billion) and deposits grew to Rs 115,070.3
billion (US$ 1,716.4 billion).
 Indian banks are increasingly focusing on adopting integrated approach to
risk management. Banks have already embraced the international banking
supervision accord of Basel II, and majority of the banks already meet capital
requirements of Basel III, which has a deadline of 31 March 2019.
 Reserve Bank of India (RBI) has decided to set up Public Credit Registry
(PCR) an extensive database of credit information which is accessible to all
stakeholders. The Insolvency and Bankruptcy Code (Amendment)
Ordinance, 2017 Bill has been passed and is expected to strengthen the
banking sector.
 Credit off-take has been surging ahead over the past decade, aided by strong
economic growth, rising disposable incomes, increasing consumerism &
easier access to credit.
 During FY07-18, credit off-take grew at a CAGR of 11%. As of Q1 FY19,
total credit extended surged to Rs 86,976 billion (US$ 1,297.4 billion).
 Demand has grown for both corporate & retail loans; particularly the
services, real estate, consumer durables & agriculture allied sectors have led
the growth in credit.
 Total banking sector assets (including public and private sector banks) have
increased at a CAGR of 6% to US$ 2.2 trillion during FY13–18. FY13-18
saw grrowth in assets of banks across sectors.

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AIM AND OBJECTIVE

The reason of choosing such topic is banks are considered the backbone of a
country's economy. It is truer for a developing country like India. Banking in India
is not only strong but also growing very fast. The Banking sector in India is poised
for a high trajectory growth with prospects for a bright career to thousands of new
entrants. According to the different studies, banking sector is one of the fastest
growing industries in the country. Today aspirants have this unique opportunity for
a career in around 20 Public Sector Banks through a Single Common Examination
(IBPS). Banking today is a niche career for job enthusiasts. With new banks
coming up every year owing to privatization of services, the industry indeed
provides sufficient room for job seekers from any field. Banking is a career that
offers opportunities to students from all streams, be it humanities, commerce or
science. The aim is to show the performance and improvements of banks which
has been achieved overtime.

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 Literature Review
Literature reviews that Indian banking system consist of a larger structure on of
financial institutions, Commercial banks, foreign financial institutions. These
structural transformations of Indian finance system can be divided into three parts.
First, the post independence period (1947-1968). The Reserve bank of India,
performed role as a supervisor and controller of finance system. RBI, dominated
over all the forms of finance controls in India. In this time RBI, worked on
financial stability, credit control, and regulation of interest rates and formation
banking structure. The second financial repression, period <1969 to 1990>
the movement commenced with the nationalization of banks. This nationalization
of commercial banks derives the base for changes in finance and banking system.
The result into interest rate regulation and credit programmers deposit and banking
working methods etc. The third period known as financial reform and liberalization
period. Started in early 90’s. In that period government of India was more likely to
more liberalized. The three committee in 1985, vagual in 1987 and the
Narasimham committee 1991. The most influential recommendations made by the
committee of Narasimham regarding liberalization, consolidation and privatization
in banking system. And the government of India started a financial reform era with
the financial sector liberalization program. The main aims of financial
liberalization program is to regulate the rates of interest, cash reserves and
performance financial system consist of financial institute stocks exchanges and
banks. It makes liberalization program enhance the importance of banking sector
and make it more efficient and competitive.
The globalization, deregularisation and privatization system emphasized on
Washington consensus. These leads country to simplistic way of transforming
system by functioning of market and state owned institution’s restructuring. The
liberalization program made changes internal economy. It restated more
competitive and productive in shorter period. The liberal interest rates and reserve
limits of banks resulted into stable and sound borrowing and lending market and
monetary policy of government. The bank requires to keep certain amount of
reserves to avoid too uncertainty an future due to competitive market another
element of banking reforms is stabilization, non performing loan, which
burdensome for banks are recapitalized and require standard working environment
one of the most effective part is alteration of state owned banks into private sector
banks. Under the government controls state owned banks recommends to sell out
its public portion to private sector and consume the public property in other
economic project which needs more funds and these funds are taken from the
privatization of state owned banks.

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Under the Nationalization act 1969, the largest banks were nationalized with the
aim of increase in public deposits. The reason behind the nationalization of banks
to grow the economy and bank network expansion. The government of India
requires enhancing the economy and serving to prior areas. In 1980, more six
banks were nationalized added into public share in banks to keep landing to
priories’ areas. It was material to control on banking system and resulted into
increase in priority area landing and five year plans of Indian Government.
Moreover, these turned into inefficiency in banking system instead of providing
equal distribution of funds. Addition banking system faced problems in 1980s
these are the period of unprofitability and inefficiency and in mid 80s creates more
limitations on returns and capital and reserves. These leads banks to the unrealistic
performance standards. As mention above the 1991 Narasimham committee caters
a influencing idea on banking sector reforms which idealized on interest rate
deregulation, credit services and entry of new banks on Indian market private as
well as foreign banks.
Before the committee, interest rates were medium of subsidiary between different
sectors of economy. Deregulation of interest rates was major part of making
reforms that gave growth to financial savings and improve organizational finance
system. On the other hands committee recommended total liberalization on
deposits rates. In 2004 RBI set only rates for the savings and NRI deposits rates
rest of the other deposits banks are free to levy their rates. The last major
recommendation of committee was on entry of new banks in Indian market. Before
it was a limited authority to the banks to do with interest rates and deposits, there
were totally restrictions for new banks entry. Due to liberal view of new banks
entry in Indian market seven private and twenty foreign banks started their
operations in India after 1990. As per RBI (2004), the liberal aspect of new banks
entry improved the quality of operation, risk management, technological changes
and competition.

RESEARCH METHODOLOGY
The study is based on secondary data collected from the select bank records and
other secondary sources like research papers, review papers, published papers of
related Banks,. Banks’ websites, periodicals, Bank’s publications, newspapers
etc.A list of the related articles from various journals is also used to develop the
basic idea about the topic.
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 CHAPTER 1
INTRODUCTION TO INDIAN BANKING STRUCTURE
Structure of Organised Indian Banking System: The Indian banking system has
emerged as a sluggish business institution to a highly proactive and dynamic entity.
It is highly fragmented with 30 banking units contributing to almost 50 percent of
deposits and 60 percent of advances. India’s banking system mainly consists of
“non-scheduled” banks and “scheduled banks”. Scheduled banks refer to those that
are included in the Second Schedule of the Banking Regulation Act of 1965 and
satisfy the twin conditions that a bank must have paid-up capital and reserves of
not less than Rs. 500,000 and secondly satisfy the Reserve Bank of India (RBI) as
its affairs are not conducted in a manner detrimental to the interests of its
depositors. Scheduled banks consist of scheduled commercial banks and scheduled
cooperative banks. The former are divided into four categories: (i) public sector
banks (which are further classified as nationalised banks and State Bank of India
[SBI] banks); (ii) private sector banks (which are further classified as old private
sector banks and new private sector banks that emerged after 1991); (iii) foreign
banks in India; and, (iv) regional rural banks (which operate exclusively in rural
areas to provide credit and other facilities to small and marginal farmers,
agricultural workers, artisans, and small entrepreneurs). Non-scheduled banks are
those banks which does not come under the Schedule of the Banking Regulation
Act of 1965 and, thus, do not satisfy the conditions laid down by that schedule.
Nonscheduled banks are further divided into two classifications non-scheduled
cooperative banks and non-scheduled commercial banks. The scheduled
commercial banks with the exception of foreign banks are registered in India under
the Companies Act. The SBI banks consist of eight independently capitalised
banks: seven associate banks, and SBI itself.
Fig 3.1: Banking Structure in India (As on March 31, 2010)

Source: Report on Trend and Progress of Banking in India, 2009, RBI. The SBI is
the largest commercial bank in India in terms of assets, deposits, branches, and
employees and has 13 head offices governed each by a board of directors under the
supervision of a central board. It was originally established in 1806 when the Bank
of Calcutta (latter called the Bank of Bengal) was established, and then
amalgamated as the Imperial Bank of India after merger with the Bank of Madras

11
and the Bank of Bombay. The shares of Imperial Bank of India were sold to the
RBI in 1955. Nationalised banks refer to private sector banks that were
nationalised (14 banks in 1969 and six in 1980) by the Central Government. Unlike
SBI, nationalised banks are centrally governed by their respective head offices.
Thus, there is only one board for each bank and meetings are less frequent. In
1993, Punjab National Bank merged with another nationalized bank, New Bank of
India, so the number of nationalized banks fell from 20 to 19. Regional rural banks
account for only 4 percent of total assets of scheduled commercial banks.
Scheduled cooperative banks are further divided into scheduled urban

cooperative banks and scheduled state cooperative banks. As at the end of March
2010, the number of scheduled banks is as follows: 19 nationalized banks, eight
SBI banks, 23 old private sector banks, 8 new private sector banks, 38 foreign
banks, 82 regional rural banks, 53 urban cooperative banks, and 31 state
cooperative banks.

Reserve Bank of Inida (RBI) the RBI is India’s central bank. The RBI was
established on April 1, 1935 in accordance with the provisions of the Reserve Bank
of India Act, 1934. RBI acts as a banker to the Government and Banks. The
Central Bank maintains record of Government revenue and expenditure under
various heads. It maintains deposit accounts of all other banks and advances money
to other banks, when needed. Another important function of the Central Bank is the
issuance of currency notes, regulating their circulation in the country by different
methods. Banks in the country are broadly classified as scheduled banks and non-
scheduled banks.

Scheduled Banks All banks which are included in the Second Schedule to the
Reserve Bank of India Act, 1934 are scheduled banks. These banks comprise
Scheduled Commercial Banks and Scheduled Cooperative Banks. These banks are
eligible for certain facilities such as financial accommodation from RBI and are
required to fulfill certain statutory obligation. The RBI is empowered to exclude
any bank from the schedule whose: (1) Aggregate value of paid up capital and
reserves fall below Rs 5 lakh (2) Affairs are conducted in a manner detrimental to
the interests of depositors (3) Goes into liquidation and ceases to transact banking
business

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Commercial Banks Commercial banks may be defined as, any banking
organization that deals with the deposits and loans of business organizations.
Commercial banks issue bank checks and drafts, as well as accept money on term
deposits. Commercial banks also act as moneylenders, by way of installment loans
and overdrafts. Commercial banks also allow

for a variety of deposit. These institutions are run to make a profit and owned by a
group of individuals. Public Sector Banks These are banks where majority stake is
held by the Government.
The organised banking system in India can be classified as given below:

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Reserve Bank of India (RBI):
The country had no central bank prior to the establishment of the RBI. The RBI is
the supreme monetary and banking authority in the country and controls the
banking system in India. It is called the Reserve Bank’ as it keeps the reserves of
all commercial banks.

Commercial Banks:
Commercial banks mobilise savings of general public and make them available to
large and small industrial and trading units mainly for working capital
requirements.

Commercial banks in India are largely Indian-public sector and private sector with
a few foreign banks. The public sector banks account for more than 92 percent of
the entire banking business in India—occupying a dominant position in the
commercial banking. The State Bank of India and its 7 associate banks along with
another 19 banks are the public sector banks.

Scheduled and Non-Scheduled Banks:

The scheduled banks are those which are enshrined in the second schedule of the
RBI Act, 1934. These banks have a paid-up capital and reserves of an aggregate
value of not less than Rs. 5 lakhs, hey have to satisfy the RBI that their affairs are
carried out in the interest of their depositors.

All commercial banks (Indian and foreign), regional rural banks, and state
cooperative banks are scheduled banks. Non- scheduled banks are those which are
not included in the second schedule of the RBI Act, 1934. At present these are only
three such banks in the country.

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Regional Rural Banks:
The Regional Rural Banks (RRBs) the newest form of banks, came into existence
in the middle of 1970s (sponsored by individual nationalised commercial banks)
with the objective of developing rural economy by providing credit and deposit
facilities for agriculture and other productive activities of al kinds in rural areas.

The emphasis is on providing such facilities to small and marginal farmers,

agricultural labourers, rural artisans and other small entrepreneurs in rural areas.

Other special features of these banks are:

(i) their area of operation is limited to a specified region, comprising one or more
districts in any state; (ii) their lending rates cannot be higher than the prevailing
lending rates of cooperative credit societies in any particular state; (iii) the paid-up
capital of each rural bank is Rs. 25 lakh, 50 percent of which has been contributed
by the Central Government, 15 percent by State Government and 35 percent by
sponsoring public sector commercial banks which are also responsible for actual
setting up of the RRBs.

These banks are helped by higher-level agencies: the sponsoring banks lend them
funds and advise and train their senior staff, the NABARD (National Bank for
Agriculture and Rural Development) gives them short-term and medium, term
loans: the RBI has kept CRR (Cash Reserve Requirements) of them at 3% and
SLR (Statutory Liquidity Requirement) at 25% of their total net liabilities, whereas
for other commercial banks the required minimum ratios have been varied over
time.

Cooperative Banks:
Cooperative banks are so-called because they are organised under the provisions of
the Cooperative Credit Societies Act of the states. The major beneficiary of the
15
Cooperative Banking is the agricultural sector in particular and the rural sector in
general.The cooperative credit institutions operating in the country are mainly of
two kinds: agricultural (dominant) and non-agricultural. There are two separate
cooperative agencies for the provision of agricultural credit: one for short and
medium-term credit, and the other for long-term credit. The former has three tier
and federal structure.

HISORY AND EVOLUTION OF INDIAN BANKING

Historical Perspective of Indian Banking The existence of money lending activity

in India is as old as about 2000 to 1500 B.C. evident from the literature of Vedic
times (Macdonnell and Keith)[1]. There is however no confirmation available for
professional pursuance of this activity except in the case of a community around
500 B.C The Buddhist literature also contains evidences of the existence of the
bankers called sreshthis who were present in all the important trade centres having
a far-reaching influence on the life of the community. Their chief activity was to
lend money to the traders, to merchant adventurers who went to foreign countries,
to explorers who marched through forests to discover valuable materials and to
kings who were in financial difficulties due to war or other reasons, against the
pledge of movable or immovable property or personal surety (Panandikar,
1966)[2]. “Usury was practiced but was held in contempt. From the laws of Manu,
it appears that money lending and allied problems had assumed considerable
importance, and that deposit banking in some form had come into existence by the
second or third century of the Christian era” (Ibid)[3]. The evidence of banking
activities is also found in the works of some Muslim historians and European
travelers as well. Further the Ain-e-Akbri and the state records of that time indicate
that bankers played an important role and money lending was important in Mughal
era. The earliest moneychangers in India were “Seths” or “Sahukars” or “Sowcars”
who dealt with this business in various parts of the country. They were mostly
“Banias” belonging to the trading community and dealt with “hundies” i.e.
indigenous bills of exchange and functioned simultaneously as moneylenders.
They catered to the needs of agriculturists and businessmen in a similar way. They
formed a significant links between the producers and middlemen. Further they
advanced loans to the consumers as well. The modern concept of “Banking” has its
16
roots in the European Continent. According to one galaxy of economists, the word
‘Bank’ has been derived from the German word “BANK” which means “joint
stock of firm”. Another opinion of economists indicates that it has been derived
from the Italian word ‘BANCO’ meaning “a heap or mound”. As a matter of fact,
the Germans were highly influential at the time of

establishment of the Bank of Venice in 1157, this most probably was the reason
behind the use the word “BANCO” by the Italians to denote the accumulation of
securities with joint stock firm which later on with the passage of time came to be
known as Bank. A concise description of this development is essential to get a fair
historical background because the East India Company is the precursor of modern
banking in India. Being European entity, it brought the concept of commercial
banking from Europe. East India Company (EIC) was granted Royal Charter for
the purpose of trading in 1600 A.D., the nature and volume of trade necessitated
establishment of banking system to facilitate inward and outward remittances;
collection and negotiation of bills, cheques, notes etc. and provision of credit.

Modern banking in India which is the form of joint stock companies may be dated
back to 1786, with the establishment of the General Bank of India. In 1806, the
East India Company established the first Presidency Bank in Kolkata with the
name “The Bank of Calcutta Limited”. It received Royal Charter in 1809 and was
renamed as the “Bank of Bengal”. In the same manner, two more banks were
established in 1840 and 1843 named “Bank of Bombay” and “Bank of Madras”,
respectively. The Royal Charter governed the three Presidency banks, which was
revised from time to time. There were no legally recognised commercial banks
with special right within India other than the Presidency banks. The East India
Company’s government reserved the right to regulate the monetary and credit
system to itself. The Paper Currency Act of 1861 abolished the right to issue
currency notes bestowed upon the Presidency banks. The only authority now
empowered to perform this function was the Government. January 1868 marked
the establishment of the New Bank of Bombay on the collapse of Bank of Bombay.
Further in 1876 the Presidency Bank Act came into existence, which brought the
three Presidency banks under the common statute and restriction on business.

17
Classification of Banks Today is the age of specialization and we can find
specialization in all fields including banking. The banks have specialized in a
particular line of finance. Various types of banks have developed to suit the
economic development and requirements of the country. The principal banking
institutions of a country may be classified into following types: (1) Central Banks
(2) Commercial Banks (3) Industrial Or Development Banks (4) Exchange Banks
(authorized dealers in foreign exchange) (5) Co-operative Banks (6) Land-
mortgage Banks (7) Indigenous Banks (8) Savings Banks (9) Supranational Banks
(10) International Banks Central Banks: Central Bank is the bank of a country – a
nation. Its main function is to issue currency known as ‘Bank Notes’. This bank
acts as the leader of the banking system and money market of the country by
regulating money and credit. These banks are the bankers to the government; they
are banker’s banks and the ultimate custodian of a nation’s foreign exchange
reserves. The aim of the Central Bank is not to earn profit, but to maintain price
stability and to strive for economic development with all round growth of the
country.

Commercial Banks: A bank, which undertakes all kinds of ordinary banking

business, is called a commercial bank.

Industrial Banks or Financial Institutions: An Industrial Bank is one which

specializes by providing loans and fixed capital to industrial concerns by
subscribing to share and debenture issued by public companies.

Exchange Banks (Authorised Dealers in Foreign Exchange): These types of banks

are primarily engaged in transactions involving foreign exchange. They deal in
foreign bills of exchange import and export of bullion and otherwise participate in
the financing of foreign trade.

Co-operative Banks: They are organized on co-operative principles of mutual help

and assistance. They grant short-term loans to the agriculturists for purchase of
seeds, harvesting and for other cultivation expenses. They accept money on deposit
from and make loans to their members at a low rate of interest.

Land-mortgage Banks (Presently known as Agriculture and Rural Development

Banks):They are agriculture development banks. The Land-mortgage banks supply
long-term loans for a period up to 15 years for development of land to improve

18
agricultural yields. They grant loan for permanent improvements in agricultural
lands. The National Bank for Agriculture and Rural Development (NABARD) was
constituted by the Government to promote rural development. Indigenous Banks:
The Central Banking Enquiry Commission defined an indigenous banker as an
individual or film accepting deposits and dealing in indigenous lending of money
to the needy. They form unorganized part of the banking structure, i.e., these are
unrecognized operators in receiving deposits and lending money.

Savings Banks: These are institutions which collect the periodical savings of the
general public. Their main object is to promote thrift and saving habits among the
middle and lower income sections of the society.

Supranational Banks: Special Banks have been created to deal with certain
international financial matters. World Bank is otherwise known as International
Bank for Reconstruction and Development (IBRD) which gives long-term loans to
developing countries for their economic and agricultural development. Asian
Development Bank (ADB) is another Supranational Bank which provides finance
for the economic development of poor Asian countries.

International Banks: International Banks are those which are operating in different
countries. While, the registered office/head office is situated in one country, they
operate through their branches in other countries. They specialize in Banking
business pertaining to foreign trade like opening of letters of credit, providing
short-term finance in foreign currency, issue of performance guarantee, arranging
foreign currency credits, etc. They are the main traders in International Currencies
like US 'dollars', Japanese 'Yen', the new-born European Currency 'Euro', etc.

3.11 Banking System The structure of banking system differs from country to
country depending upon their economic conditions, political structure and financial
system. Banks can be classified on the basis of volume of operations, business
pattern and areas of operations. They are termed as system of banking. The
commonly identified systems are, 1. Unit banking 2. Branch Banking 3.
Correspondent Banking System 4. Group Banking 5. Chain Banking 6. Pure
Banking 7. Mixed Banking 8. Relationship banking 9. Narrow Banking 10.
Universal Banking 11. Retail Banking

12. Wholesale Banking 13. Private Banking:

19
Unit banking: Unit banking is originated and developed in U.S.A. In this system,
small independent banks are functioning in a limited area or in a single town i.e.,
the business of each bank is confined to a single office, which has no branch at all.
It has its own board of directors and stockholders. It is also called as "localized
Banking".

Branch Banking: The Banking system of England originally offered an example of

the branch banking system, where each commercial bank has a network of
branches spread throughout the country.

Correspondent Banking: Correspondent banking system is developed to remove

the difficulties in unit banking system. It is the system under which unit banks are
linked with bigger banks. The big correspondent banks are linked with still bigger
banks in the financial centers. The smaller banks deposit their cash reserve with
bigger banks. The bigger banks with whom such deposits are so made are called
correspondent banks.

Therefore, correspondent banks are intermediaries through which all unit banks are
linked with bigger banks in financial centers. Through correspondent banking, a
bank can carry-out business transactions in another place where it does not have a
branch.

Group Banking: Group Banking is the system in which two or more independently
incorporated banks are brought under the control of a holding company. The
holding company may or may not be a banking company. Under group banking,
the individual banks may be unit banks, or banks operating branches or a
combination of the two.

Chain Banking: Chain banking is a system of banking under which a number of

separately incorporated banks are brought under the common control by a device
other than holding company. This may be:

(a) Through some group of persons owning and controlling a number of

independent banks. (b) Each bank retains its separate identity. (c) Each one carries
out its operations without the intervention of any central organization.

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Pure Banking and Mixed Banking: On the basis of lending operations of the bank,
banking is classified into: (a) Pure Banking (b) Mixed Banking (a) Pure Banking:
Under pure Banking, the commercial banks give only shortterm loans to industry,
trade and commerce. They specialize in short term finance only. This type Of
banking is popular in U.K.

(b) Mixed Banking: Mixed banking is that system of banking under which the
commercial ban s perform the dual function of commercial banking and investment
banking, i.e., it combines deposit and lending activity with investment banking.
Commercial banks usually offer both short-term as well as medium term loans.
The German banking system is the best example of mixed Banking.

Relationship banking: Relationship banking refers to the efforts of a bank to

promote personal contacts and to keep continuous touch with customers who are
very valuable to the bank. In order to retain such profitable accounts with the bank
or to attract new accounts, it is necessary for the bank to serve their needs by
maintaining a close relationship with such customers.

Narrow Banking: A bank may be concentrating only on collection of deposits and

lend or invest the money within a particular region or certain chosen activity like
investing the funds only in Government Securities. This type of restricted
minimum banking activity is referred to 'Narrow Banking’.

Universal Banking: As Narrow Banking refers to restricted and limited banking

activity Universal Banking refers to broad-based and comprehensive banking
activities.

Under this type of banking, a bank will deal with working capital requirements as
well as term loans for developmental activities. They will be dealing with
individual customers as well as big corporate customers. They will have expanded
lines of business activity combining the functions of traditional deposit taking,
modern financial services, selling long-term saving products, insurance cover,
investment banking, etc.

Regional banking: In order to provide adequate and timely credits to small

borrowers in rural and semi-urban areas, Central Government set up Regional
Banks, known as Regional Rural Banks all over India jointly with State

21
Governments and some Commercial Banks. As they are permitted to operate in
particular region, it may help develop the regional economy.

Local Area Banks: With a view to bring about a competitive environment and to
overcome the deficiencies of Regional Banks, Government has permitted
establishment of a one type of regional banks in rural and semi-urban centers under
private sector known as “Local Area Banks”.

Wholesale Banking: Wholesale or corporate banking refers to dealing with limited

large-sized customers. Instead of maintaining thousands of small accounts and
incurring huge transaction costs, under wholesale banking, the banks deal with
large customers and keep only large accounts. These are mainly corporate
customer. Private Banking: Private or Personal Banking is banking with people —
rich individuals instead of banking with corporate clients. Private or Personal
Banking attends to the need of individual customers, their preferences and the
products or services needed by them. This may include all round personal services
like maintaining accounts, loans, foreign currency requirements, investment
guidance, etc.

Retail Banking: Retail banking is a major form of commercial banking but mainly
targeted to consumers rather than corporate clients. It is the method of banks'
approach to the customers for sale of their products. The products are consumer-
oriented like offering a car loan, home loan facility, financial assistance for
purchase of consumer

durables, etc. Retail banking therefore has large customer-base and hence, large
number of transactions with small values. It may therefore be cost ineffective in a
highly competitive environment. Most of the Rural and semi-urban branches of
banks, in fact, do retail banking. In the present day situation when lending to
corporate clients lead to credit risk and market risk, retail banking may eliminate
market risk. It is one of the reasons why many a wholesale bankers like foreign
banks also prefer to go for consumer financing albeit for marginally higher net
worth individual.

rnment of India. Foreign Banks These banks are registered and have their
headquarters in a foreign country but operate their branches in our country.

22
Private Sector - Banks These are banks majority of share capital of the bank is
held by private individuals. These banks are registered as companies with limited
liability.

Regional Rural Banks Regional Rural Banks were established under the
provisions of an Ordinance promulgated on the 26th September 1975 and the RRB
Act, 1976 with an objective to ensure sufficient institutional credit for agriculture
and other rural sectors. The area of operation of RRBs is limited to the area as
notified by Government of India covering one or more districts in the state. RRBs
are jointly owned by Government of India, the concerned State Government and
Sponsor Banks (27 Scheduled commercial banks and one State Cooperative Bank);
the issued capital of a RRB is shared by the owners in the proportion of 50%, 15%
and 35% respectively. Prathama bank is the first Regional Rural Bank is India
located in the city Moradabad in Uttar Pradesh.

Cooperative Banks A cooperative bank is a financial entity which belongs to its

members, who are at the same time the owners and the customers of their bank.
Cooperative banks are often created by persons belonging to the same local or
professional community or sharing a common interest. Co operative banks
generally provide their members with a wide range of banking and financial
services (loans, deposits, banking and accounts, etc.). They provide limited
banking products and are specialists in agriculture-related products. Cooperative
banks are the primary financiars of agricultural activities, some small-scale

industries and self employed workers. Cooperative banks function on the basis of
“noprofit no-loss”. Anyonya Co-operative Bank Limited (ACBL) is the co-
operative bank in India located in the city of Vadodara in Gujarat.

The Co-operative Credit system consists of a. Short-term agricultural credit

institutions b. Long-term agricultural credit institutions c. Non-agricultural credit
institutions

Export-Import Bank of India (EXIM BANK) Export-Import Bank of India is the

premier export finance institution of the country, established in 1982 under the
Export-Import Bank of India Act, 1981.

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 DATA ANALYSIS

Appendix Table IV.1: Indian Banking Sector at a Glance

Sr. No Items Amount Outstanding Per cent

(At end-March) Variation
2017 2018* 2016-17 2017-18*
1 2 3 4 5 6
1 Balance Sheet Operations
1.1 Total Liabilities/assets 141,746 152,533 8.0 7.6
1.2 Deposits 111,114 117,940 10.1 6.1
1.3 Borrowings 12,807 16,823 -11.6 31.4
1.4 Loans and advances 81,161 87,460 2.8 7.8
1.5 Investments 36,523 41,263 9.7 13.0
1.6 Off-balance sheet exposure (as percentage of 107.1 113.4 - -
on-balance sheet liabilities)
1.7 Total consolidated international claims 7,168 6,371 24.2 -11.1
2 Profitability
2.1 Net profit 439 -324 28.6 -
2.2 Return on Assets (RoA) (Per cent) 0.4 -0.2 - -
2.3 Return on Equity (RoE) (Per cent) 4.2 -2.8 - -
2.4 Net Interest Margin (NIM) (Per cent) 2.5 2.5 - -
3 Capital Adequacy
3.1 Capital to risk weighted assets ratio (CRAR) 13.7 13.8 - -
@**
3.2 Tier I capital (as percentage of total capital) 82.3 84.3 - -
@**
3.3 CRAR (tier I) (Per cent) @** 11.2 11.7 - -
4 Asset Quality
4.1 Gross NPAs 7,918 10,397 29.4 31.3
4.2 Net NPAs 4,331 5,207 23.8 20.2
4.3 Gross NPA ratio (Gross NPAs as percentage of 9.3 11.2 - -
gross advances~)
4.4 Net NPA ratio (Net NPAs as percentage of net 5.3 6.0 - -
advances)
4.5 Provision Coverage Ratio (Per cent)** 43.5 48.3 - -
4.6 Slippage ratio (Per cent)** 5.9 7.6 - -
5 Sectoral Deployment of Bank Credit
5.1 Gross bank credit 71,455 77,303 7.5 8.2
5.2 Agriculture 9,924 10,302 12.4 3.8

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5.3 Industry 26,798 26,993 -1.9 0.7
5.4 Services 18,022 20,505 16.9 13.8
5.5 Personal loans 16,200 19,085 16.4 17.8
6 Technological Development
6.1 Total number of credit cards (in million) 30 37 19.4 24

6.2 Total number of debit cards (in million) 772 861 17.0 12
6.3 Number of ATMs 208,354 207,052 4.7 -0.6
7 Consumer Protection#
7.1 Total number of complaints received during the 130,987 163,590 27.3 24.9
year
7.2 Total number of complaints addressed 136,511 174,805 28.0 28.1
7.3 Percentage of complaints addressed 92 96.5 - -
8 Financial Inclusion
8.1 Credit-deposit ratio (Per cent) 73.0 74.2 - -
8.2 Number of new bank branches opened 5,306 3,948 -41.3 -25.6
8.3 Number of banking outlets in villages (Total) 598,093^ 569,547^ 2.0 -4.8

Chart II.19: Bank Soundness

a. Distribution of top 100 Banks by Leverage Ratio b. Distribution of top 100 Banks by CRAR

(Capital to Asset Ratio)

47 49
42 36
34 31 30
29
13 17
20 20 9
00 4

54 4 6

scheduled commercial Banks

2016 2017 2016 2017
(Amount in ₹ billion)
Source: The Banker Database - Financial Times.

Soundness indicators are barometers of the financial health of the banking sector.

25
 During 2017-18 and 2018-19 (up to September 2018), capital adequacy
remained above regulatory requirements in spite of the NPA ratio
increasing. Leverage and liquidity coverage ratios (LCR) also witnessed
improvement.

An overwhelming share3 of deposits with SCBs has always comprised

term deposits — especially in the one-to-two year maturity bucket

— due to higher returns across comparable financial assets. The year 2016-17
was, however, an outlier with the share of current account and saving account
(CASA) deposits surging five percentage points above the five-year average
on account of the return flow of SBNs into bank deposits especially to PSBs
(Chart IV.2). With the rapid pace of remonetisation, growth in CASA deposits
moderated in both PSBs and private sector banks (PVBs) while it increased
in foreign banks (FBs) during 2017-18.

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During H1:2018-19, net interest income of SCBs picked up as interest income
outpaced interest expenses sizably as lending rates rose. However, non-interest
income declined on a y-o-y basis due to treasury losses. Operating Expenditure

On the expenditure side, interest expended by SCBs declined marginally from

a year ago, due to slowdown in deposit growth and a decline in interest rates.
This boosted net interest income (NII), although due to an uptick in average
assets, the net interest margin (NIM) remained unaffectedGrowth in operating
expenses remained broadly the same as in 2016-17, although the wage
bill decelerated on account of rationalisation of bank branches.

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PERFORMANCE OF PUBLIC AND PRIVATE BANKS
DURING GLOBALISATION
Customer deposit is a major part of total liabilities of any bank and it is a major
source of fund for banks. Since deposit is the main concern for any bank therefore
it becomes important to examine the deposit of each bank groups in India.
Customer deposits provide funds for investment and financing. Growth in
customer deposits is a positive indicator of banking growth. Bank group-wise,
public sector banks accounted for the largest CAGR (56.19 per cent) in total
deposits followed by private sector banks (54.57 per cent). Foreign banks showed
the lowest CAGR (49.77 Percent). High levels of public deposit ensured that most
of the banks had a comfortable liquidity profile.

28
29
30
FINDINGS
 Public sector banks account for over 68.3% of interest income in the sector
in FY18.
 They lead the pack in interest income growth with a CAGR of 6.6% over
FY09-18. Overall, the interest income for the sector (including public and
private sector banks) has grown at 6.9% CAGR during FY09-18.
 Total lending has increased at a CAGR of 10.9% during FY07-18 and total
deposits has increased at a CAGR of 11.6%, during FY07-18 & are further
poised for growth, backed by demand for housing and personal finance.
 India's retail credit market is the fourth largest in the emerging countries. It
increased to US$ 281 billion on December 2017 (FY18) from US$ 181
billion on December 2014.
 The digital payments system in India has evolved the most among 25
countries, including UK, China and Japan, with the IMPS being the only
system at level 5 in the Faster Payments Innovation Index (FPII). India
stepped up to 28th position on the government's adoption of e-payments
ranking in 2018.
 Digital influence in the Indian banking sector has been growing faster due to
the rising digital footprint. India’s digital lending stood at US$ 75 billion in
FY18.

top ↑
PROSPECTS

 Favorable demographics and rising income levels. India ranks among the top
six economies with a GDP of US$ 2,597 in 2017 and economy is forecasted
to grow at 7.3% in 2018. The sector will benefit from structural economic
stability and continued credibility of Monetary Policy.
 Increase in working population & growing disposable incomes will raise
demand for banking & related services. Housing & personal finance are
expected to remain key demand drivers. Rural banking is expected to witness
growth in the future.

31
 Rising fee incomes improving the revenue mix of banks. High net interest
margins, along with low NPA levels, ensure healthy business fundamentals.
 Wide policy support in the form of private sector participation & liquidity
infusion. Healthy regulatory oversight & credible Monetary Policy by the
Reserve Bank of India (RBI) have lent strength & stability to the country’s
banking sector.
 As of August 2018, total number of ATMs in India increased to 213,004 and
is further expected to increase to 407,000 ATMs in 2021.
 With entry of foreign banks, competition in the Indian banking sector has
intensified. Banks are increasingly looking at consolidation to derive greater
benefits such as enhanced synergy, cost take-outs from economies of scale,
organizational efficiency & diversification of risks.

32
CONCLUSION

Indian banking industry has recently witnessed the roll out of innovative banking
models like payments and small finance banks. RBI’s new measures may go a long
way in helping the restructuring of the domestic banking industry.

In August 2017, Global rating agency Moody’s announced that its outlook for the
Indian banking system was stable. In November 2017, Global rating agency
Moody’s upgraded four Indian banks from Baa3 to Baa2.

Investments/developments

Key investments and developments in India’s banking industry include:

 The bank recapitalisation plan by Government of India is expected to push

credit growth in the country to 15 per cent and as a result help the GDP grow
by 7 per cent in FY19.
 Public sector banks are lining up to raise funds via qualified institutional
placements (QIP), backed by better investor sentiment after the Government
of India’s bank recapitalization plan and an upgrade in India’s sovereign
rating by Moody’s Investor Service.
 The RBI amends statutes thereby allowing lenders to invest in real estate
investment trusts (REITs) and infrastructure investment trusts (InvITs) not
exceeding 10 per cent of the unit capital of such instruments.

Government Initiatives

 The Government of India is planning to introduce a two percentage point

discount in the Goods and Services Tax (GST) on business-to-consumer
(B2C) transactions made via digital payments.
 A new portal named ‘Udyami Mitra’ has been launched by the Small
Industries Development Bank of India (SIDBI) with the aim of improving
credit availability to Micro, Small and Medium Enterprises

Now let’s conclude about Indian banking sector analysis, outlook for 2018.

What would be you first reaction if somebody says this to you? The back bone or
the strongest pillar of a sector has posted quarterly loss; nearly after two decades of
consecutive quarterly profits.
33
What would be your impression if you hear this? Second largest pillar of a sector
has involved in serious fraud.

These are the story of State Bank of India and Punjab National Bank in public
sector banks.

Would you be too much enthusiastic about investing in these sectors?

So as expected we are going with NO in investing in public sector banks until

next 1 year. Hopefully situation would turn positive in 2019.
What about private sector banks then? There is no doubt many private sectors
banks are much better than public sector banks on various parameters. Even if we
have carefully selected two mid sized private banks for an investment horizon of 2
to 3 years; Overall sentiment remains bearish or stagnant for 2018.

34
REFERENCE

 RBI reports
 www.omisonline.org
https://www.jstor.org/stable/4414806
https://www.coursehero.com › ... › FINANCE › FINANCE
 https://www.ibef.org › Archives › Industry › Banking Reports
 ourstockpick.com/indian-banking-sector-analysis-2018/
https://www.crisil.com/en/home/our-analysis/reports/.../sector-report-
banking.html
https://www.ibef.org › Industry
 https://economictimes.indiatimes.com › Industry › Banking/Finance ›
Banking
 https://www.onlinejournal.in/IJIRV3I1/127.pdf
https://www.equitymaster.com/...it/sector.../bank/Banking-Sector-
Analysis-Report.asp

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