Trends in Banking Industry in India

Bank Information
Computerization and developments in information technology brought in new trends in banking business. One of the offshoots of this development is internet banking. This facility enables customers to access their accounts and perform a variety of bank transactions from anywhere. This saves time, cost and paper work for the banks as well as the clients. However internet banking has inherent risks such as security risk, technology risk and financial frauds. 

Banks also face legal risk since the jurisdiction in which the bank is operating could be different from its registered place of operation. Another development in the banking sector is the introduction of virtual banks that do not have any physical presence and all banking operations are in electronic mode. The bank exists on a virtual ground with the internet address as the only link with its customers. New products have been introduced by the banks to cope with increasing competition and customer needs. 

They can be categorized into investment based products and innovative services offered by the banks. Investment products include offer of gold and silver coins, marketing of insurance products and floating of mutual funds, and issue of different types of credit and debit cards.

Innovative services include establishing ATM facilities and providing ASBA (Applications Supported by Blocked Accounts) facility to investors applying for initial public offerings of the corporate sector. Technological developments enable banks to offer electronic fund transfer facility to meet their customer requirements. National electronic fund transfer facility has been created at Mumbai to offer this service.
Posted by All India Banks, On 02:10

Functions of Banks in an Economy

Bank Information
Banks being financial intermediaries provide money in the economy through credit creation and facilitating liquidity. Banks are able to generate credit many times more than the initial deposits they receive from the public subject to regulations relating to cash reserves to be maintained and customers' cash requirements. The resources of banks are generated mainly through a variety of deposits, both short time and long term from the public.

The ability of the bank to generate more deposits depends on the interest rate offered and the marketing skills of the bank. Shorter duration and higher interest on deposits will add to the operational risk of the banks. Bank's role in the economy is necessitated on account of differences in the preference of public in terms of maturity requirements, risk requirements, denomination of currency and access to adequate information. The existence of market imperfection such as transaction and contracting cost also strengthen the need for the functioning of banks. 

Banking industry differs from other industries in the economy in terms of its asset structure and legal obligations and developmental functions. Besides offering a variety of loans and advances to different needy clients, banks also provide a lead role in translating the development objectives of the government through lead bank schemes and priority sector lending and financial inclusion. In the process of performing these functions, banks have to manage a variety of risks which are inherent in banking operations.

One of the major risks that affect the bank is credit risk which is reflected in the proportion of non-performing assets (NPA) held by the banks. The maturity structure of various assets and liabilities of the bank poses liquidity risk to the bank. The fluctuation in interest rates is another source of risk. Exchange rate risk arises to the bank when they provide foreign currency loans to their customers or when they make investments in foreign securities or accept foreign currency deposits.
Posted by All India Banks, On 02:08

Organization of Banking Industry in India

Bank Information
There are mainly three forms of banks. In India branch banking is the most applied structure of a banking entity. In this structure a single bank will have number of branches under its control operating at different places. Holding banking companies are large banking entities controlling several subsidiaries. Banks can also be classified on the basis of ownership into nationalized banks, private banks and foreign banks. Another way of classifying banks is on the basis of size. These can be large banks, small banks. The basis of classification can be capital size or deposit size.

Further banks can be classified basis of type of business and level of operations. On basis of area it can be classified as national banks, regional banks or international banks. On basis of business specialization it can be classified as development banks, core banks or service banks. 

Commercial banks primarily focus on deposit mobilization and lending operations. It has to operate under the overall regulatory environment created by central banks. Investment banks on other hands focused on investment needs of client. Also provide portfolio management service and performing corporate advisory services.

To view the different types of banks by category follow the below link:

Posted by All India Banks, On 02:06

Basic Structure of Banking Industry in India

Bank Information
The financial system of an economy is expected to support the changes in the economy. Financial system is reflected by the structure of banking industry. The banking industry that was functioning fully under a regulated environment shifted towards a competitive environment. Changes in technology are another factor that has contributed towards the structural change in the banking industry. The structural change in the banking industry that can be highlighted is the increased participation of international financial players in the Indian financial system as well as Indian financial players exhibiting a tendency towards becoming global players. 

The Government represented by the Ministry of Finance, the Reserve Bank of India and other regulatory bodies for the banking sector have a coordinated policy measure towards bringing in a cautious change in the structure of the banking industry. Banking industry being the backbone of the nation has to live up to meet the economic needs and provide a protective backdrop for the economic entities by assuming certain inherent risks in the financial system. Besides the change in the overall structure, the structure of each entity within the banking industry has also undergone the necessary changes to meet these economic and risk taking needs. 

Most often it has been observed that changing market requirements if not being considered by the financial system in an economy has not reflected in the expected growth rates of the productive economy. A banking structure hence is expected to be strong to support economic growth and contribute towards the long-term progress of the nation. The structure of the banking industry in this context has to be flexible enough to allow for economic expansion and simultaneously provide stability to the financial system of the economy. 

The participation of private capital in the banking industry is sought though is still being regulated and monitored to support the economic requirements of the country. Public sector participation thus dominates the structure of the banking industry and this has given the Indian financial system benefits in terms of supportive growth, reduced conflict of interest in the administration and ownership structure and the ability to meet risks that are unique to the industry. However, there is also a need to recognize the possible benefits that are foregone by our present structure in terms of cost and quality efficiency required for the ability of the financial system to meet its expectations in the economy. The structure of banking industry in India can be mapped through the functions performed by banks associated with the economy. 

The prominent role of the Reserve Bank of India as the central bank governs other banking structures in the economy. Reserve Bank of India monitors and controls the entire banking system of the Indian economic activity. These activities of the Reserve Bank of India do not deal with the government public mechanisms. This helps the Reserve Bank of India to retain its independent status of functions. The Reserve Bank of India acts as a banker to the Government and maintains the deposit and other business activities of other banks that have been allowed to operate in the economy. It is responsible for monitory and credit policies. 

Besides the primary function of accepting deposits and lending through loans and advances, banks perform a variety of services such as providing safe custody for the valuables of customers, providing foreign exchange, facilitating transfer of money and providing guarantees and letters of credit. Investment banks are specialized banks providing investment services to individuals and institutions besides arranging loans, lease and mortgage facilities. Development banks are established for the purpose of catering to long term capital needs of business and industry. 

These banks operate at three levels. State co-operative banks are apex banks in the state. District cooperative and primary co-operative banks operate at lower levels rendering localized services. Non banking finance companies offer a variety of services like leasing and hire purchase and investment services. Some NBFCs accept deposits, others render only financial intermediation. Some NBFCs operate as investment companies. Mutual funds are financial intermediaries that help investors through sale of units under different schemes and offer of returns from investments in these schemes.
Posted by All India Banks, On 01:55

Basics of Banking Industry in India

Bank Information
Basics of Banking Industry in INDIA

Indian banking is the lifeline of the growth for the nation. Banking has helped in developing the vital sectors of the economy. The sector has translated the hopes and aspirations of millions of people into reality. Indian banks can confidently compete with modern banks of the world. Entry of Joint stock banks and development of Cooperative movement have taken over a good deal of business from the hands of the Indian money lender, who although still exist, have lost his menacing teeth.

In the Indian Banking System, Cooperative banks exist side by side with commercial banks and play a supplementary role in providing need-based finance, especially for agricultural and agriculture-based operations including farming, cattle, milk, hatchery, personal finance etc. along with some small industries and self-employment driven activities.

RBI – Reserve Bank of India is regulatory authority for banks in India since 1966. The Reserve Bank is responsible for licensing of banks and branches, and it also regulates credit limits to state co-operative banks on behalf of primary co-operative banks for financing SSI units.

Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. After this, the Indian government established three presidency banks in India. The first of three was the Bank of Bengal, which obtains charter in 1809, the other two presidency bank, the Bank of Bombay and the Bank of Madras, were established in 1840 and 1843, respectively. The three presidency banks were subsequently amalgamated into the Imperial Bank of India - IBI under the Imperial Bank of India Act, 1920 – which is now known as the State Bank of India. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai – both of which were founded under private ownership. The Reserve

Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India’s independence in 1947, the Reserve Bank was nationalized and given broader powers. As the banking institutions expand and become increasingly complex under the impact of deregulation, innovation and technological upgradation, it is crucial to maintain balance between efficiency and stability. During the last 30 years since nationalization tremendous changes have taken place in the financial markets as well as in the banking industry due to financial sector reforms. The banks have shed their traditional functions and have been innovating, improving and coming out with new types of services to cater emerging needs of their customers. Banks have been given greater freedom to frame their own policies.

Rapid advancement of technology has contributed to significant reduction in transaction costs, facilitated greater diversification of portfolio and improvements in credit delivery of banks. Prudential norms, in line with international standards, have been put in place for promoting and enhancing the efficiency of banks. The process of institution building has been strengthened with several measures in the areas of debt recovery, asset reconstruction and securitization, consolidation, convergence, mass banking etc.

Despite this commendable progress, serious problem have emerged reflecting in a decline in productivity and efficiency, and erosion of the profitability of the banking sector. There has been deterioration in the quality of loan portfolio which, in turn, has come in the way of bank’s income generation and enhancement of their capital funds.

The banking industry is entering a new phase in which it will be facing increasing competition from non-banks not only in the domestic market but in the international markets also. The operational structure of banking in India is expected to undergo a profound change during the next decade. With the emergence of new private banks, the private bank sector has become enriched and diversified with focus spread to the wholesale as well as retail banking. The existing banks have wide branch network and geographic spread, whereas the new private banks have the clout of massive capital, lean personnel component, the expertise in developing sophisticated financial products and use of state-of-the-art technology.

The banking system in India will give a good account of itself only with the combined efforts of cooperative banks, regional rural banks and development banking institutions which are expected to provide an adequate number of effective retail outlets to meet the emerging socio-economic challenges during the next two decades. The electronic age has also affected the banking system, leading to very fast electronic fund transfer. However, the development of electronic banking has also led to new areas of risk such as data security and integrity requiring new techniques of risk management.

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 and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country. The Public Sector Banks - PSBs, which are the base of the Banking sector in India account for more than 78 per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non Performing assets - NPAs, massive manpower and lack of modern technology. On the other hand the Private Sector Banks are making tremendous progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to succeed in the Indian Banking Industry.

In the Indian Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank among others. ABN-AMRO Bank, American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian Banking Industry. As far as the present scenario is concerned the Banking Industry in India is going through a transitional phase. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks -PSBs found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services.

The industry is currently in a transition phase. On the one hand, the PSBs, 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. PSBs, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes.

Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller Machines - ATMs and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes.
Posted by All India Banks, On 05:19

Cooperative Banks

Cooperative Banks
The term Urban Co-operative Banks (UCBs) refers to primary cooperative banks located in urban and semi-urban areas. These banks, were allowed to lend money only for non-agricultural purposes.These banks were traditionally centered on communities, localities, work place groups. They essentially lend to small borrowers and businesses. Their scope of operations has widened considerably. Urban Co-operative banking Sector is an important constituent of Multi Agency banking system operation in the India. These institutions play an important role in the economic enlistment of lower and middle-income group of persons. The Reserve Bank of India in its annual report on trends and progress in banking states that urban banks are important purveyors of credit to small borrowers and to weak sections of the society.

Below is the list of major UCBs in India with their websites.

Urban Cooperative Banks (UCBs)

Posted by All India Banks, On 12:02