74 banking services in india

BANKING SERVICES IN INDIA

I. HISTORY OF BANKING IN INDIA

There are three different phases in the history of banking in India.

1) Pre-Nationalization Era.
2) Nationalization Stage.
3) Post Liberalization Era.

1) Pre-Nationalization Era:

In India the business of banking and credit was practices even in very
early times. The remittance of money through Hundies, an indigenous credit
instrument, was very popular. The hundies were issued by bankers known as Shroffs,
Sahukars, Shahus or Mahajans in different parts of the country.

The modern type of banking, however, was developed by the Agency
Houses of Calcutta and Bombay after the establishment of Rule by the East India
Company in 18th and 19th centuries.

During the early part of the 19th Century, ht volume of foreign trade was
relatively small. Later on as the trade expanded, the need for banks of the European
type was felt and the government of the East India Company took interest in having its
own bank. The government of Bengal took the initiative and the first presidency bank,
the Bank of Calcutta (Bank of Bengal) was established in 180. In 1840, the Bank of
Bombay and IN 1843, the Bank of Madras was also set up.

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These three banks also known as “Presidency Bank”. The Presidency
Banks had their branches in important trading centers but mostly lacked in uniformity
in their operational policies. In 1899, the Government proposed to amalgamate these
three banks in to one so that it could also function as a Central Bank, but the Presidency
Banks did not favor the idea. However, the conditions obtaining during world war
period (1914-1918) emphasized the need for a unified banking institution, as a result of
which the Imperial Bank was set up in1921. The Imperial Bank of India acted like a
Central bank and as a banker for other banks.

The RBI (Reserve Bank of India) was established in 1935 as the Central
Bank of the Country. In 1949, the Banking Regulation act was passed and the RBI was
nationalized and acquired extensive regulatory powers over the commercial banks.

In 1950, the Indian Banking system comprised of the RBI, the Imperial
Bank of India, Cooperative banks, Exchange banks and Indian Joint Stock banks.

2) Nationalization Stages:
After Independence, in 1951, the All India Rural Credit survey,
committee of Direction with Shri. A. D. Gorwala as Chairman recommended
amalgamation of the Imperial Bank of India and ten others banks into a newly
established bank called the State Bank of India (SBI). The Government of India
accepted the recommendations of the committee and introduced the State Bank of India
bill in the Lok Sabha on 16th April 1955 and it was passed by Parliament and got the
president’s assent on 8th May 1955. The Act came into force on 1st July 1955, and the
Imperial Bank of India was nationalized in 1955 as the State Bank of India.

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The main objective of establishing SBI by nationalizing the Imperial Bank of India was
“to extend banking facilities on a large scale more particularly in the rural and semi-
urban areas and to diverse other public purposes.”

In 1959, the SBI (Subsidiary Bank) act was proposed and the following
eight state-associated banks were taken over by the SBI as its subsidiaries.

Name of the Bank Subsidiary with effect from
1. State Bank of Hyderabad 1st October 1959

2. State Bank of Bikaner 1st January 1960

3. State Bank of Jaipur 1st January 1960

4. State Bank of Saurashtra 1st May 1960

5. State Bank of Patiala 1st April 1960

6. State Bank of Mysore 1st March 1960

7. State Bank of Indore 1st January 1968

8. State Bank of Travancore 1st January 1960

With effect from 1st January 1963, the State Bank of Bikaner and State
Bank of Jaipur with head office located at Jaipur. Thus, seven subsidiary banks State
Bank of India formed the SBI Group.

The SBI Group under statutory obligations was required to open new
offices in rural and semi-urban areas and modern banking was taken to these unbanked
remote areas.

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On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi
announced the nationalization of 14 major scheduled Commercial Banks each
having deposits worth Rs. 50 crore and above. This was a turning point in the
history of commercial banking in India.
Later the Government Nationalized six more commercial private
sector banks with deposit liability of not less than Rs. 200 crores on 15th April
1980, viz.
i) Andhra Bank.
ii) Corporation Bank.
iii) New Bank if India.
iv) Oriental Bank of Commerce.
v) Punjab and Sind Bank.
vi) Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking
facilities to every corner of the country. Later in 1975, Regional Rural Banks were set
up to supplement the activities of the commercial banks and to especially meet the
credit needs of the weaker sections of the rural society.

Nationalization of banks paved way for retail banking and as a result
there has been an alt round growth in the branch network, the deposit mobilization,
credit disposals and of course employment.

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The first year after nationalization witnessed the total growth in the
agricultural loans and the loans made to SSI by 87% and 48% respectively. The overall
growth in the deposits and the advances indicates the improvement that has taken place
in the banking habits of the people in the rural and semi-urban areas where the branch
network has spread. Such credit expansion enabled the banks to achieve the goals of
nationalization, it was however, achieved at the coast of profitability of the banks.

Consequences of Nationalization:
 The quality of credit assets fell because of liberal credit extension policy.
 Political interference has been as additional malady.
 Poor appraisal involved during the loan meals conducted for credit disbursals.
 The credit facilities extended to the priority sector at concessional rates.
 The high level of low yielding SLR investments adversely affected the
profitability of the banks.
 The rapid branch expansion has been the squeeze on profitability of banks
emanating primarily due to the increase in the fixed costs.
 There was downward trend in the quality of services and efficiency of the
banks.

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3) Post-Liberalization Era---Thrust on Quality and Profitability:
By the beginning of 1990, the social banking goals set for the banking
industry made most of the public sector resulted in the presumption that there was no
need to look at the fundamental financial strength of this bank. Consequently they
remained undercapitalized. Revamping this structure of the banking industry was of
extreme importance, as the health of the financial sector in particular and the economy
was a whole would be reflected by its performance.
The need for restructuring the banking industry was felt greater with the
initiation of the real sector reform process in 1992. the reforms have enhanced the
opportunities and challenges for the real sector making them operate in a borderless
global market place. However, to harness the benefits of globalization, there should be
an efficient financial sector to support the structural reforms taking place in the real
economy. Hence, along with the reforms of the real sector, the banking sector
reformation was also addressed.
The route causes for the lackluster performance of banks, formed the
elements of the banking sector reforms. Some of the factors that led to the dismal
performance of banks were.
 Regulated interest rate structure.
 Lack of focus on profitability.
 Lack of transparency in the bank’s balance sheet.
 Lack of competition.
 Excessive regulation on organization structure and managerial resource.
 Excessive support from government.

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Against this background, the financial sector reforms were initiated to
bring about a paradigm shift in the banking industry, by addressing the factors for its
dismal performance.
In this context, the recommendations made by a high level committee
on financial sector, chaired by M. Narasimham, laid the foundation for the banking
sector reforms. These reforms tried to enhance the viability and efficiency of the
banking sector. The Narasimham Committee suggested that there should be functional
autonomy, flexibility in operations, dilution of banking strangulations, reduction in
reserve requirements and adequate financial infrastructure in terms of supervision, audit
and technology. The committee further advocated introduction of prudential forms,
transparency in operations and improvement in productivity, only aimed at liberalizing
the regulatory framework, but also to keep them in time with international standards.
The emphasis shifted to efficient and prudential banking linked to better customer care
and customer services.

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Private Sector Banks

Private banking in India was practiced since the begining of banking
system in India. The first private bank in India to be set up in Private Sector Banks in
India was Indus Ind Bank. It is one of the fastest growing Bank Private Sector Banks in
India. IDBI ranks the tenth largest development bank in the world as Private Banks in
India and has promoted a world class institutions in India.

The first Private Bank in India to receive an in principle approval from
the Reserve Bank of India was Housing Development Finance Corporation Limited, to
set up a bank in the private sector banks in India as part of the RBI's liberalization of
the Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank
Limited with registered office in Mumbai and commenced operations as Scheduled
Commercial Bank in January 1995.

ING Vaysya, yet another Private Bank of India was incorporated in the
year 1930. Bangalore has a pride of place for having the first branch inception in the
year 1934. With successive years of patronage and constantly setting new standards in
banking, ING Vaysya Bank has many credits to its account.

Entry of Private Sector Banks:
There has been a paradigm shift in mindsets both at the Government
level in the banking industry over the years since Nationalization of Banks in 1969,
particularly during the last decade (1990-2000). Having achieved the objectives of
Nationalization, the most important issue before the industry at present is survival and
growth in the environment generated by the economic liberalization greater competition
with a view to achieving higher productivity and efficiency in January 1993 for the
entry of Private Sector banks based on the Nationalization Committee report of 1991,
which envisaged a larger role for Private Sector Banks.

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The RBI prescribed a minimum paid up capital of Rs. 100 crores for the new bank and
the shares are to be listed at stock exchange. Also the new bank after being granted
license under the Banking Regulation Act shall be registered as a public limited
company under the companies Act, 1956.

Private Sector Banks

Old Pvt. Sector Banks (25) New Pvt. Sector Banks (9)

Subsequently 9 new commercial banks have been granted license to start
banking operations. The new private sector banks have been very aggressive in
business expansion and is also reporting higher profile levels taking the advantage of
technology and skilled manpower. In certain areas, these banks have even our crossed
the other group of banks including foreign banks.

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Current scenario

Currently (2007), overall, banking in India is considered as fairly mature
in terms of supply, product range and reach-even though reach in rural India still
remains a challenge for the private sector and foreign banks. Even in terms of quality of
assets and capital adequacy, Indian banks are considered to have clean, strong and
transparent balance sheets-as compared to other banks in comparable economies in its
region. The Reserve Bank of India is an autonomous body, with minimal pressure from
the government. The stated policy of the Bank on the Indian Rupee is to manage
volatility-without any stated exchange rate-and this has mostly been true. With the
growth in the Indian economy expected to be strong for quite some time-especially in
its services sector, the demand for banking services-especially retail banking,
mortgages and investment services are expected to be strong. M&As, takeovers, asset
sales and much more action (as it is unraveling in China) will happen on this front in
India.

In March 2006, the Reserve Bank of India allowed Warburg Pincus to
increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the
first time an investor has been allowed to hold more than 5% in a private sector bank
since the RBI announced norms in 2005 that any stake exceeding 5% in the private
sector banks would need to be vetted by them. Currently, India has 88 scheduled
commercial banks (SCBs) - 28 public sector banks (that is with the Government of
India holding a stake), 29 private banks (these do not have government stake; they may
be publicly listed and traded on stock exchanges) and 31 foreign banks.

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They have a combined network of over 53,000 branches and 17,000
ATMs. According to a report by ICRA Limited, a rating agency, the public sector
banks hold over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively.

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II. BANKING IN INDIA
Overview of Banking:

Banking Regulation Act of India, 1949 defines Banking as “accepting,
for the purpose of lending or of investment of deposits of money from the public,
repayable on demand or otherwise or withdrawable by cheque, draft order or
otherwise.” The Reserve Bank of India Act, 1934 and the Banking Regulation Act,
1949, govern the banking operations in India.

Organizational Structure of Banks in India:

In India banks are classified in various categories according to differ
rent criteria. The following charts indicate the banking structure:

Reserve Bank of India

Commercial Banks Co-operative Banks Development Banks

Nationalized Private Short-term Long-term
credit credit

Agricultural Urban
EXIM Industrial Agricultural
Credit Credit

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Broad Classification of Banks in India:

1) The RBI: The RBI is the supreme monetary and banking authority in the
country and has the responsibility to control the banking system in the country.
It keeps the reserves of all scheduled banks and hence is known as the “Reserve
Bank”.
2) Public Sector Banks:
• State Bank of India and its Associates (8)
• Nationalized Banks (19)
• Regional Rural Banks Sponsored by Public Sector Banks (196)

(3) Private Sector Banks:

• Old Generation Private Banks (22)
• Foreign New Generation Private Banks (8)
• Banks in India (40)

(4) Co-operative Sector Banks:

• State Co-operative Banks
• Central Co-operative Banks
• Primary Agricultural Credit Societies
• Land Development Banks
• State Land Development Banks

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(5) Development Banks: Development Banks mostly provide long term finance for
setting up industries. They also provide short-term finance (for export and import
activities)

• Industrial Finance Co-operation of India (IFCI)
• Industrial Development of India (IDBI)
• Industrial Investment Bank of India (IIBI)
• Small Industries Development Bank of India (SIDBI)
• National Bank for Agriculture and Rural Development (NABARD)
• Export-Import Bank of India

Role of Banks:

Banks play a positive role in economic development of a country as
repositories of community’s savings and as purveyors of credit. Indian Banking has
aided the economic development during the last fifty years in an effective way. The
banking sector has shown a remarkable responsiveness to the needs of planned
economy. It has brought about a considerable progress in its efforts at deposit
mobilization and has taken a number of measures in the recent past for accelerating the
rate of growth of deposits. As recourse to this, the commercial banks opened branches
in urban, semi-urban and rural areas and have introduced a number of attractive
schemes to foster economic development.

The activities of commercial banking have growth in multi-directional
ways as well as multi-dimensional manner. Banks have been playing a catalytic role in
area development, backward area development, extended assistance to rural
development all along helping agriculture, industry, international trade in a significant
manner. In a way, commercial banks have emerged as key financial agencies for rapid
economic development.

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By pooling the savings together, banks can make available funds to
specialized institutions which finance different sectors of the economy, needing capital
for various purposes, risks and durations. By contributing to government securities,
bonds and debentures of term-lending institutions in the fields of agriculture, industries
and now housing, banks are also providing these institutions with an access to the
common pool of savings mobilized by them, to that extent relieving them of the
responsibility of directly approaching the saver. This intermediation role of banks is
particularly important in the early stages of economic development and financial
specification. A country like India, with different regions at different stages of
development, presents an interesting spectrum of the evolving role of banks, in the
matter of inter-mediation and beyond.

Mobilization of resources forms an integral part of the development
process in India. In this process of mobilization, banks are at a great advantage, chiefly
because of their network of branches in the country. And banks have to place
considerable reliance on the mobilization of deposits from the public to finance
development programmes. Further, deposit mobalization by banks in India acquired
greater significance in their new role in economic development.

Commercial banks provide short-term and medium-term financial
assistance. The short-term credit facilities are granted for working capital requirements.
The medium-term loans are for the acquisition of land, construction of factory premises
and purchase of machinery and equipment. These loans are generally granted for
periods ranging from five to seven years. They also establish letters of credit on behalf
of their clients favouring suppliers of raw materials/machinery (both Indian and
foreign) which extend the banker’s assurance for payment and thus help their delivery.
Certain transaction, particularly those in contracts of sale of Government Departments,
may require guarantees being issued in lieu of security earnest money deposits for

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release of advance money, supply of raw materials for processing, full payment of bills
on the assurance of the performance etc. Commercial banks issue such guarantees also.

The Role of Reserve Bank of India (RBI) – Banker’s Bank:

The Reserve Bank of India (RBI) is the central bank of India, and was
established on April 1, 1935 in accordance with the provisions of the Reserve Bank of
India Act, 1934. Since its inception, it has been headquartered in Mumbai. Though
originally privately owned, RBI has been fully owned by the Government of India since
nationalization in 1949.

RBI is governed by a central board (headed by a Governor) appointed by
the Central Government. The current governor of RBI is Dr.Y.Venugopal Reddy
(who succeeded Dr. Bimal Jalan on September 6, 2003). RBI has 22 regional offices
across India.The Reserve Bank of India was set up on the recommendations of the
Hilton Young Commission. The commission submitted its report in the year 1926,
though the bank was not set up for nine years.

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Main Objective:

Monetary Authority
• Formulates, implements and monitors the monetary policy.
• Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors.

Regulator and supervisor of the financial system

• Prescribes broad parameters of banking operations within which the country’s
banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors’ interest
and provide cost-effective banking services to the public. The Banking
Ombudsman Scheme has been formulated by the Reserve Bank of India (RBI)
for effective redressal of complaints by bank customers

Manager of Exchange Control

• Manages the Foreign Exchange Management Act, 1999.
• Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.

Issuer of currency

• Issues and exchanges or destroys currency and coins not fit for circulation.
• Objective: to give the public adequate quantity of supplies of currency notes and
coins and in good quality.

Developmental role

• Performs a wide range of promotional functions to support national objectives.

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Related Functions

• Banker to the Government: performs merchant banking function for the central
and the state governments; also acts as their banker.
• Banker to banks: maintains banking accounts of all scheduled banks.
• Owner and operator of the depository (SGL) and exchange (NDS) for
government bonds.

There is now an international consensus about the need to focus the tasks of a central
bank upon central banking. RBI is far out of touch with such a principle, owing to the
sprawling mandate described above.

Supervisory Functions:

In addition to its traditional central functions, the Reserve bank has
certain non-monetary functions of the nature of supervision of banks and promotion of
sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act,
1949 have given the RBI wide powers of supervision and control over commercial and
cooperative banks, relating to licensing and establishments, branch expansion, liquidity
of their assets, management and methods of working, amalgamation, reconstruction and
liquidation. The RBI is authorized to carry out periodical inspections of the banks and
to call for returns and necessary information from them. The nationalization of 14
major Indian scheduled banks in July 1969 has imposed new responsibilities on the
RBI for directing the growth of banking and credit policies towards more rapid
development of the economy and realization of certain desired social objectives. The
supervisory functions of the RBI have helped a great deal in improving the standard of
banking in India to develop on sound lines and to improve the methods of their
operation.

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Promotional Functions:

With economic growth assuming a new urgency since Independence, the
range of the Reserve Bank’s functions have steadily widened. The Bank now performs
a variety of developmental and promotional functions, which, at one time, were
regarded as outside the normal scope of central banking. The Reserve Bank was asked
to promote banking habit, extend banking facilities to rural and semi-urban areas, and
establish and promote new specialized financing agencies. Accordingly, the Reserve
bank has helped in the setting up of the IFCI and the SFC: it set up the Deposit
Insurance Corporation of India in 1963 and the Industrial Reconstruction Corporation
of India in 1972. These institutions were set up directly or indirectly by the Reserve
Bank to promote saving habit and to mobilize savings, and to provide industrial finance
as well as agricultural finance. As far back as 1935, the RBI set up the Agricultural
Credit Department to provide agricultural credit. But only since 1951 the Bank’s role in
this field has become extremely important. The Bank has developed the co-operative
credit movement to encourage saving, to eliminate money-lenders from the villages and
to route its short term credit to agriculture. The RBI has set up the Agricultural
Refinance and Development Corporation to provide long-term finance to farmers.

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Co-operative Banks:

The Co-operative bank has a history of almost 100 years. The Co-
operative banks are an important constituent of the Indian Financial System, judging by
the role assigned to them, the expectations they are supposed to fulfill, their number,
and the number of offices they operate. The co-operative movement originated in the
West, but the importance that such banks have assumed in India is rarely paralleled
anywhere else in the world. Their role in rural financing continues to be important even
today, and their business in the urban areas also has increased phenomenally in recent
years mainly due to the sharp increase in the number of co-operative banks.

While the co-operative banks in rural areas mainly finance agricultural
based activities including farming, cattle, milk, hatchery, personal finance etc. along
with some small scale industries and self-employment driven activities, the co-
operative banks in urban areas mainly finance various categories of people for self-
employment, industries, small scale units, home finance, consumer finance, personal
finance, etc. Some of the co-operative banks are quite forward looking and have
developed sufficient core competencies to challenge state and private sector banks.

According to NAFCUB the total deposits & lendings of Co-operative
Banks is much more than Old Private Sector Banks & also the New Private Sector
Banks. This exponential growth of Co-operative Banks is attributed mainly to their
much better local reach, personal interaction with customers, their ability to catch the
nerve of the local clientele. Though registered under the Co-operative Societies Act of
the Respective States (where formed originally) the banking related activities of the co-
operative banks are also regulated by the Reserve Bank of India. They are governed by
the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act,
1965.

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There are two main categories of the co-operative banks.

(a) Short term lending oriented co-operative Banks – within this category there are
three sub categories of banks viz state co-operative banks, District co-operative banks
and Primary Agricultural co-operative societies.

(b) Long term lending oriented co-operative Banks – within the second category
there are land development banks at three levels state level, district level and village
level.

Features of Cooperative Banks

Co-operative Banks are organized and managed on the principal of co-operation, self-
help, and mutual help. They function with the rule of “one member, one vote”.
Function on “no profit, no loss” basis. Co-operative banks, as a principle, do not pursue
the goal of profit maximization. Co-operative bank performs all the main banking
functions of deposit mobilization, supply of credit and provision of remittance
facilities. Co-operative Banks provide limited banking products and are functionally
specialists in agriculture related products. However, co-operative banks now provide
housing loans also.

UCBs provide working capital loans and term loan as well.
The State Co-operative Banks (SCBs), Central Co-operative Banks (CCBs) and Urban
Co-operative Banks (UCBs) can normally extend housing loans upto Rs 1 lakh to an
individual. The scheduled UCBs, however, can lend upto Rs 3 lakh for housing
purposes.

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The UCBs can provide advances against shares and debentures also. Co-
operative bank do banking business mainly in the agriculture and rural sector.
However, UCBs, SCBs, and CCBs operate in semi urban, urban, and metropolitan
areas also.

The urban and non-agricultural business of these banks has grown over
the years. The co-operative banks demonstrate a shift from rural to urban, while the
commercial banks, from urban to rural. Co-operative banks are perhaps the first
government sponsored, government-supported, and government-subsidized financial
agency in India. They get financial and other help from the Reserve Bank of India
NABARD, central government and state governments. They constitute the “most
favoured” banking sector with risk of nationalization. For commercial banks, the
Reserve Bank of India is lender of last resort, but co-operative banks it is the lender of
first resort which provides financial resources in the form of contribution to the initial
capital (through state government), working capital, refinance.

Co-operative Banks belong to the money market as well as to the capital
market. Primary agricultural credit societies provide short term and medium term loans.
Land Development Banks (LDBs) provide long-term loans. SCBs and CCBs also
provide both short term and term loans. Co-operative banks are financial intermediaries
only partially. The sources of their funds (resources) are (a) central and state
government, (b) the Reserve Bank of India and NABARD, (c) other co-operative
institutions, (d) ownership funds and, (e) deposits or debenture issues. It is interesting
to note that intra-sectoral flows of funds are much greater in co-operative banking than
in commercial banking. Inter-bank deposits, borrowings, and credit from a significant
part of assets and liabilities of co-operative banks. This means that intra-sectoral
competition is absent and intra-sectoral integration is high for co-operative bank.

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Some co-operative banks are scheduled banks, while others are non-
scheduled banks. For instance, SCBs and some UCBs are scheduled banks but other co-
operative bank are non-scheduled banks. At present, 28 SCBs and 11 UCBs with
Demand and Time Liabilities over Rs 50 crore each included in the Second Schedule of
the Reserve Bank of India Act.

Co-operative Banks are subject to CRR and liquidity requirements as other scheduled
and non-scheduled banks are. However, their requirements are less than commercial
banks. Since 1966 the lending and deposit rate of commercial banks have been directly
regulated by the Reserve Bank of India. Although the Reserve Bank of India had power
to regulate the rate co-operative bank but this have been exercised only after 1979 in
respect of non-agricultural advances they were free to charge any rates at their
discretion. Although the main aim of the co-operative bank is to provide cheaper credit
to their members and not to maximize profits, they may access the money market to
improve their income so as to remain viable.

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III. PRODUCTS AND SERVICES OFFERED BY BANKS

Broad Classification of Products in a bank:

The different products in a bank can be broadly classified into:

• Retail Banking.
• Trade Finance.
• Treasury Operations.

Retail Banking and Trade finance operations are conducted at the branch level while
the wholesale banking operations, which cover treasury operations, are at the hand
office or a designated branch.

Retail Banking:

• Deposits
• Loans, Cash Credit and Overdraft
• Negotiating for Loans and advances
• Remittances
• Book-Keeping (maintaining all accounting records)
• Receiving all kinds of bonds valuable for safe keeping

Trade Finance:

• Issuing and confirming of letter of credit.
• Drawing, accepting, discounting, buying, selling, collecting of bills of
exchange, promissory notes, drafts, bill of lading and other securities.

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Treasury Operations:

• Buying and selling of bullion. Foreign exchange
• Acquiring, holding, underwriting and dealing in shares, debentures, etc.
• Purchasing and selling of bonds and securities on behalf of constituents.

The banks can also act as an agent of the Government or local authority.
They insure, guarantee, underwrite, participate in managing and carrying out issue of
shares, debentures, etc.

Apart from the above-mentioned functions of the bank, the bank
provides a whole lot of other services like investment counseling for individuals, short-
term funds management and portfolio management for individuals and companies. It
undertakes the inward and outward remittances with reference to foreign exchange and
collection of varied types for the Government.

Common Banking Products Available:

Some of common available banking products are explained below:

1) Credit Card: Credit Card is “post paid” or “pay later” card that draws from a
credit line-money made available by the card issuer (bank) and gives one a
grace period to pay. If the amount is not paid full by the end of the period, one
is charged interest.

A credit card is nothing but a very small card containing a means of
identification, such as a signature and a small photo. It authorizes the holder to change
goods or services to his account, on which he is billed. The bank receives the bills from
the merchants and pays on behalf of the card holder.

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These bills are assembled in the bank and the amount is paid to the bank by the card
holder totally or by installments. The bank charges the customer a small amount for
these services. The card holder need not have to carry money/cash with him when he
travels or goes for purchasing.

Credit cards have found wide spread acceptance in the ‘metros’ and big
cities. Credit cards are joining popularity for online payments. The major players in the
Credit Card market are the foreign banks and some big public sector banks like SBI and
Bank of Baroda. India at present has about 3 million credit cards in circulation.

2) Debit Cards: Debit Card is a “prepaid” or “pay now” card with some stored
value. Debit Cards quickly debit or subtract money from one’s savings account,
or if one were taking out cash.

Every time a person uses the card, the merchant who in turn can get the
money transferred to his account from the bank of the buyers, by debiting an exact
amount of purchase from the card. To get a debit card along with a Personal
Identification Number (PIN).

When he makes a purchase, he enters this number on the shop’s PIN
pad. When the card is swiped through the electronic terminal, it dials the acquiring
bank system – either Master Card or Visa that validates the PIN and finds out from the
issuing bank whether to accept or decline the transaction. The customer never
overspread because the amount spent is debited immediately from the customers
account. So, for the debit card to work, one must already have the money in the account
to cover the transaction. There is no grace period for a debit card purchase. Some debit
cards have monthly or per transaction fees.

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Debit Card holder need not carry a bulky checkbook or large sums of
cash when he/she goes at for shopping. This is a fast and easy way of payment one can
get debit card facility as debit cards use one’s own money at the time of sale, so they
are often easier than credit cards to obtain.

The major limitation of Debit Card is that currently only some
3000-4000 shops country wide accepts it. Also, a person can’t operate it in case the
telephone lines are down.

3) Automatic Teller Machine: The introduction of ATM’s has given the
customers the facility of round the clock banking. The ATM’s are used by banks for
making the customers dealing easier. ATM card is a device that allows customer who
has an ATM card to perform routine banking transaction at any time without interacting
with human teller. It provides exchange services. This service helps the customer to
withdraw money even when the banks ate closed. This can be done by inserting the
card in the ATM and entering the Personal Identification Number and secret Password.

ATM’s are currently becoming popular in India that enables the
customer to withdraw their money 24 hours a day and 365 days. It provides the
customers with the ability to withdraw or deposit funds, check account balances,
transfer funds and check statement information. The advantages of ATM’s are many. It
increases existing business and generates new business. It allows the customers.

• To transfer money to and from accounts.
• To view account information.
• To order cash.
• To receive cash.

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Advantages of ATM’s:

To the Customers

• ATM’s provide 24 hrs., 7 days and 365 days a year service.
• Service is quick and efficient
• Privacy in transaction
• Wider flexibility in place and time of withdrawals.
• The transaction is completely secure – you need to key in Personal
Identification Number (Unique number for every customer).

To Banks

• Alternative to extend banking hours.
• Crowding at bank counters considerably reduced.
• Alternative to new branches and to reduce operating expenses.
• Relieves bank employees to focus an more analytical and innovative work.
• Increased market penetration.

ATM’s can be installed anywhere like Airports, Railway Stations, Petrol
Pumps, Big Business arcades, markets, etc. Hence, it gives easy access to the
customers, for obtaining cash.

The ATM services provided first by the foreign banks like Citibank,
Grind lays bank and now by many private and public sector banks in India like ICICI
Bank, HDFC Bank, SBI, UTI Bank etc. The ICICI has launched ATM Services to its
customers in all the Metropolitan Cities in India. By the end of 1990 Indian Private
Banks and public sector banks have come up with their own ATM Network in the form
of “SWADHAN”. Over the past year upto 44 banks in Mumbai, Vashi and Thane, have
became a part of “SWADHAN” a system of shared payments networks, introduced by
the Indian Bank Association (IBA).

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4) E-Cheaques: The e-cheaques consists five primary facts. They are the
consumers, the merchant, consumer’s bank the merchant’s bank and the e-mint and the
clearing process. This cheaquring system uses the network services to issue and process
payment that emulates real world chaquing. The payer issue a digital cheaques to the
payee ant the entire transactions are done through internet. Electronic version of
cheaques are issued, received and processed. A typical electronic cheque transaction
takes place in the following manner:

• The customer accesses the merchant server and the merchant server presents its
goods to the customer.
• The consumer selects the goods and purchases them by sending an e-cheque to
the merchant.
• The merchant validates the e-cheque with its bank for payment authorisation.
• The merchant electronically forwards the e-cheque to its bank.
• The merchant’s bank forwards the e-cheque to the clearing house for cashing.
• The clearing house jointly works with the consumer’s bank clears the cheque
and transfers the money to the merchant’s banks.
• The merchant’s bank updates the merchant’s account.
• The consumer’s bank updates the consumer’s account with the withdrawal
information.

The e-chequing is a great boon to big corporate as well as small retailers.
Most major banks accept e-cheques. Thus this system offers secure means of collecting
payments, transferring value and managing cash flows.

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5) Electronic Funds Transfer (EFT): Many modern banks have computerised
their cheque handling process with computer networks and other electronic
equipments. These banks are dispensing with the use of paper cheques. The
system called electronic fund transfer (EFT) automatically transfers money
from one account to another. This system facilitates speedier transfer of funds
electronically from any branch to any other branch. In this system the sender
and the receiver of funds may be located in different cities and may even bank
with different banks. Funds transfer within the same city is also permitted. The
scheme has been in operation since February 7, 1996, in India.

The other important type of facility in the EFT system is automated
clearing houses. These are the computer centers that handle the bills meant for deposits
and the bills meant for payment. In big companies pay is not disbursed by issued
cheques or issuing cash. The payment office directs the computer to credit an
employee’s account with the person’s pay.

6) Telebanking: Telebanking refers to banking on phone services.. a customer can
access information about his/her account through a telephone call and by giving
the coded Personal Identification Number (PIN) to the bank. Telebanking is
extensively user friendly and effective in nature.

• To get a particular work done through the bank, the users may leave his
instructions in the form of message with bank.
• Facility to stop payment on request. One can easily know about the cheque
status.
• Information on the current interest rates.
• Information with regard to foreign exchange rates.
• Request for a DD or pay order.
• D-Mat Account related services.
• And other similar services.

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7) Mobile Banking: A new revolution in the realm of e-banking is the emergence
of mobile banking. On-line banking is now moving to the mobile world, giving
everybody with a mobile phone access to real-time banking services, regardless
of their location. But there is much more to mobile banking from just on-lie
banking. It provides a new way to pick up information and interact with the
banks to carry out the relevant banking business. The potential of mobile
banking is limitless and is expected to be a big success. Booking and paying for
travel and even tickets is also expected to be a growth area.

According to this system, customer can access account details on mobile
using the Short Messaging System (SMS) technology6 where select data is pushed to
the mobile device. The wireless application protocol (WAP) technology, which will
allow user to surf the net on their mobiles to access anything and everything. This is a
very flexible way of transacting banking business.

Already ICICI and HDFC banks have tied up cellular service provides
such as Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile
banking services to their customers.

8) Internet Banking: Internet banking involves use of internet for delivery of
banking products and services. With internet banking is now no longer
confirmed to the branches where one has to approach the branch in person, to
withdraw cash or deposits a cheque or request a statement of accounts. In
internet banking, any inquiry or transaction is processed online without any
reference to the branch (anywhere banking) at any time.

The Internet Banking now is more of a normal rather than an exception
due to the fact that it is the cheapest way of providing banking services. As indicated by
McKinsey Quarterly research, presently traditional banking costs the banks, more than

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a dollar per person, ATM banking costs 27 cents and internet banking costs below 4
cents approximately. ICICI bank was the first one to offer Internet Banking in India.


Benefits of Internet Banking:

• Reduce the transaction costs of offering several banking services and diminishes
the need for longer numbers of expensive brick and mortar branches and staff.
• Increase convenience for customers, since they can conduct many banking
transaction 24 hours a day.
• Increase customer loyalty.
• Improve customer access.
• Attract new customers.
• Easy online application for all accounts, including personal loans and mortgages

Financial Transaction on the Internet:

Electronic Cash: Companies are developing electronic replicas of all existing payment
system: cash, cheque, credit cards and coins.

Automatic Payments: Utility companies, loans payments, and other businesses use on
automatic payment system with bills paid through direct withdrawal from a bank
account.

Direct Deposits: Earnings (or Government payments) automatically deposited into
bank accounts, saving time, effort and money.

Stored Value Cards: Prepaid cards for telephone service, transit fares, highway tolls,
laundry service, library fees and school lunches.

Point of Sale transactions: Acceptance of ATM/Cheque at retail stores and restaurants
for payment of goods and services. This system has made functioning of the stock
Market very smooth and efficient.

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Cyber Banking: It refers to banking through online services. Banks with web site
“Cyber” branches allowed customers to check balances, pay bills, transfer funds, and
apply for loans on the Internet.

9) Demat: Demat is short for de-materialisation of shares. In short, Demat is a
process where at the customer’s request the physical stock is converted into
electronic entries in the depository system.

In January 1998 SEBI (Securities and Exchange Board of India) initiated
DEMAT ACCOUNTANCY System to regulate and to improve stock investing. As on
date, to trade on shares it has become compulsory to have a share demat account and all
trades take place through demat.

How to Operate DEMAT ACCOUNT?

One needs to open a Demat Account with any of the branches of the
bank. After opening an account with any bank, by filling the demat request form one
can handover the securities. The rest will be taken care by the bank and the customer
will receive credit of shares as soon as it is confirmed by the Company/Register and
Transfer Agent. There is no physical movement of share certification any more. Any
buying or selling of shares is done via electronic transfers.

1) If the investor wants to sell his shares, he has to place an order with his broker
and give a “Delivery Instruction” to his DP (Depository Participant). The DP
will debit hi s account with the number of shares sold by him.
2) If one wants to buy shares, he has to inform his broker about his Depository
Account Number so that the shares bought by him are credited in to his account.

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3) Payment for the electronic shares bought or sold is to be made in the same way
as in the case of physical securities.


IV. BANKING SERVICES

Banking covers so many services that it is difficult to define it.
However, these basic services have always been recognized as the hallmark of the
genuine banker. These are…

• The receipt of the customer’s deposits
• The collection of his cheques drawn on other banks
• The payment of the customer’s cheques drawn on himself

There are other various types of banking services like:

1) Advances – Overdraft, Cash Credit, etc.
2) Deposits – Saving Account, Current Account, etc.
3) Financial Services – Bill discounting etc.
4) Foreign Services – Providing foreign currency, travelers cheques, etc.
5) Money Transmission – Funds transfer etc.
6) Savings – Fixed deposits, etc.
7) Services of place or time – ATM Services.
8) Status – Debit Cards, Credit Cards, etc.

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Customer Services in Commercial Banks:

Customer service is the service provided in support of a bank’s core
products. Customer service often includes answering questions; handling complaints.
Customer service can occur on site (as when an onstage employee helps a customer or
answers a question) or it can occur over the phone or the Internet. Quality customer
service is essential to building cordial customer relationship.

Banking being a service industry, a lot depends on efficient and prompt
customer service. Customer service is the most important duty of the banking
operations. Prompt and efficient service with smile will develop good public relations
reduce complaints and increase business.

Why is Customer Service Important?

 Changing customer expectations: Today the customer is more demanding and
more sophisticated than he or she was thirty years ago.
 The increased importance of customer service: With changing customer
expectations, competitors are seeing customer service as a competitive weapon
with which they differentiate their products and services.
 The need for a relationship strategy: To ensure that a customer service
strategy that will create a value preposition for customers should be formulated
implemented and controlled. It is necessary to give it a central role and not one
that is subsumed in the various elements of the marketing mix.

The customer is the kingpim in growth organizations like commercial
banks. Only those institutions which work according to his dictates will flourish.
Quality, Consistency and Durability at low price are the final expectations of a
customer. Quality will have to be unambiguous, of world class quality. Quality cannot

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be of minimum acceptable standards. Customer responsiveness must be quick and also
competent. Speed, performance and cost will be the new values “mantra” for success.


The ten key areas of customer’s services to be attended timely and
regularly are:

i. Submission of statement of A/Cs to customers
ii. Updating of savings pass books.
iii. Teller system efficiency.
iv. Cleanliness and Upkeep of premises.
v. Intermediate Credit for institution cheques/land bills.
vi. Advance intimation to customers for rewards of Term Deposits Receipts on
maturity.
vii. Advance for Debit/credit to accounts.
viii. Punctuality of staff.
ix. Handling of complaint register.
x. Maintain a complaint register.

Customer’s dissatisfaction in the banking industry is neither recent nor
unknown. This is mainly due to delays in handling transactions across the counter in
collections, update of passbooks supply of statements of accounts, etc.

Failure to provide prompt and efficient customer service is likely to lead
to reduction in the number of customers and they may have to face closure. To event
such situation the following improvements in the customer services may be carried out:

1) Personal relations of the bank employee with customers will improve customer
satisfaction. 1 service with smile should be the motto of every bank employee.
2) Rapid customer services should be provided through automation of work and
simplification of procedures.

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3) ATM’s may be introduced in all the branches of the banks, based upon the
volume of transactions. This shall facilitate non-stop banking.


4) Credit Cards Services, Debit Card Services, which should be provided to the
customers, must a link service with all the banks and branches if possible to
facilitate the customer and the business organizations.
5) E-mail service made freely available at all banking centers.
6) Foreign Exchange transactions are to be extended to all the branches to facilitate
trade and industries.
7) All the customers are not homogenous in their needs. Hence need based
schemes may be introduced.
8) Totally deregulated interest rate structure should be there.
9) The banking staff must be trained to understand the customer’s psychology, so
they may provide customer service in a qualified manner.
10) Educating the customers will increases better utilisation of banking services.

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V. BANK MARKETING:

The banking business is essentially other people’s money and banker’s
brain. The secret of its success lies in satisfying customer needs for which the banks
have to rediscover the marketing cmocept.

It is right to mention that bank marketing is a managerial process by
which services are matched with markets. The matching of services with market is
meant formulation of overall marketing strategies which suit the taste, temperament,
needs and requitements of customers.

In view of the above, marketing of banking services is concerned with
product, promotion, pricing, and place. In addition, it is also concerned with people,
process and physical appearance.

Objectives of Bank Marketing:

 Profitability
 Providing high return on investment
 Achieving certain market share/growth
 Development of an image
 Developing new products to meet emerging customer requirements.
 Increase in deposits and loans
 Directing customers to certain products
 Increasing awareness
 Increasing customer base through greater customer satisfaction.

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VI. ROLE OF INFORMATION TECHNOLOGY (IT) IN
THE BANKING SECTOR

Banking environment has become highly competitive today. To be able
to survive and grow in the changing market environment banks are going for the latest
technologies, which is being perceived as an ‘enabling resource’ that can help in
developing learner and more flexible structure that can respond quickly to the dynamics
of a fast changing market scenario. It is also viewed as an instrument of cost reduction
and effective communication eith people and institutions associated with the banking
business.

The Software Packages for Banking Applications in India had their
beginnings in the middle of 80s, when the Banks started computerising the branches in
a limited manner. The early 90s saw the plummeting hardware prices and advent of
cheap and inexpensive but high powered PC’s and Services and banks went in for what
was called Total Branch Automation (TBA) packages. The middle and late 90s
witnessed the tornado of financial reforms, deregulation globalisation etc. coupled eith
rapid revolution in communication technologies and evolution of novel concept of
convergence of communication technologies, like internet, mobile/cell phones etc.
Technology has continuously played on important role in the working of banking
institutions and the services provided by them. Safekeeping of public money, transfer
of money, issuing drafts, exploring investment opportunities and lending drafts,
exploring investment being provided.

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Information Technology enables sophisticated product development,
better market infrastructure, implementation of reliable techniques for control of risks
and helps the financial intermediaries to reach geographically distant and diversified
markets. Internet has significantly influenced delivery channels of the banks. Internet
has emerged as an important medium for delivery of banking products and services.

The customers can view the accounts; get account statements, transfer
funds and purchase drafts by just punching on few keys. The smart card’s i.e., cards
with micro processor chip have added new dimension to the scenario. An introduction
of ‘Cyber Cash’ the exchange of cash takes place entirely through ‘Cyber-books’.
Collection of Electricity bills and telephone bills has become easy. The upgradeability
and flexibility of internet technology after unprecedented opportunities for the banks to
reach out to its customers. No doubt banking services have undergone drastic changes
and so also the expectation of customers from the banks has increased greater.

IT is increasingly moving from a back office function to a prime
assistant in increasing the value of a bank over time. IT does so by maximizing banks
of pro-active measures such as strengthening and standardising banks infrastructure in
respect of security, communication and networking, achieving inter branch
connectivity, moving towards Real Time gross settlement (RTGS) environment the
forecasting of liquidity by building real time databases, use of Magnetic Ink Character
Recognition and Imaging technology for cheque clearing to name a few. Indian banks
are going for the retail banking in a big way

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The key driver to charge has largely been the increasing sophistication
in technology and the growing popularity of the Internet. The shift from traditional
banking to e-banking is changing customer’s expectations.


E-Banking:

E-banking made its debut in UK and USA 1920s. It becomes
prominently popular during 1960, through electronic funds transfer and credit cards.
The concept of web-based baking came into existence in Eutope and USA in the
beginning of 1980.

In India e-banking is of recent origin. The traditional model for growth
has been through branch banking. Only in the early 1990s has there been a start in the
non-branch banking services. The new pribate sector banks and the foreign banks are
handicapped by the lack of a strong branch network in comparison with the public
sector banks. In the absence of such networks, the market place has been the emergence
of a lot of innovative services by these players through direct distribution strategies of
non-branch delivery. All these banks are using home banking as a key “pull’ factor to
remove customers away from the well entered public sector banks.

Many banks have modernized their services with the facilities of
computer and electronic equipments. The electronics revolution has made it possible to
provide ease and flexibility in banking operations to the benefit of the customer. The
e-banking has made the customer say good-bye to huge account registers and large
paper bank accounts. The e-banks, which may call as easy bank offers the following
services to its customers:

 Credit Cards – Debit Cards

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 ATM
 E-Cheques
 EFT (Electronic Funds Transfer)
 D-MAT Accounts


 Mobile Banking
 Telephone Banking
 Internet Banking
 EDI (Electronic Data Interchange)

Benefits of E-banking:

 To the Customer:
 Anywhere Banking no matter wherever the customer is in the world.
Balance enquiry, request for services, issuing instructions etc., from
anywhere in the world is possible.
 Anytime Banking – Managing funds in real time and most importantly, 24
hours a day, 7days a week.
 Convenience acts as a tremendous psychological benefit all the time.
 Brings down “Cost of Banking” to the customer over a period a period of
time.
 Cash withdrawal from any branch / ATM
 On-line purchase of goods and services including online payment for the
same.
 To the Bank:

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 Innovative, scheme, addresses competition and present the bank as
technology driven in the banking sector market
 Reduces customer visits to the branch and thereby human intervention
 Inter-branch reconciliation is immediate thereby reducing chances of fraud
and misappropriation
 On-line banking is an effective medium of promotion of various schemes
of the bank, a marketing tool indeed.
 Integrated customer data paves way for individualised and customised
services.


Impact of IT on the Service Quality:

The most visible impact of technology is reflected in the way the banks
respond strategically for making its effective use for efficient service delivery. This
impact on service quality can be summed up as below:

 With automation, service no longer remains a marketing edge with the large
banks only. Small and relatively new banks with limited network of branches
become better placed to compete with the established banks, by integrating IT
in their operations.
 The technology has commoditising some of the financial services. Therefore the
banks cannot take a lifetime relationship with the customers as granted and they
have to work continuously to foster this relationship and retain customer
loyalty.
 The technology on one hand serves as a powerful tool for customer servicing,
on the other hand, it itself results in depersonalising of the banking services.
This has an adverse effect on relationship banking. A decade of computerization
can probably never substitute a simple or a warm handshake.
 In order to reduce service delivery cost, banks need to automate routine
customer inquiries through self-service channels. To do this they need to invest

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in call centers, kiosks, ATM’s and Internet Banking today require IT
infrastructure integrated with their business strategy to be customer centric.


Impact of IT on Banking System:

The banking system is slowly shifting from the Traditional Banking
towards relationship banking. Traditionally the relationship between the bank and its
customers has been on a one-to-one level via the branch network. This was put into
operation with clearing and decision making responsibilities concentrated at the
individual branch level. The head office had responsibility for the overall clearing
network, the size of the branch network and the training of staff in the branch network.
The bank monitored the organisation’s performance and set the decision making
parameters, but the information available to both branch staff and their customers was
limited to one geographical location.

Traditional Banking Sector

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CUSTOMER CUSTOMER CUSTOMER

BANK BRANCH BANK BRANCH BANK BRANCH

CLEARING DECISION CLEARING DECISION CLEARING DECISION

CENTRAL CLEARING HEAD OFFICE


The modern bank cannot rely on its branch network alone. Customers
are now demanding new, more convenient, delivery systems, and services such as
Internet banking have a dual role to the customer. They provide traditional banking
services, but additionally offer much greater access to information on their account
status and on the bank’s many other services. To do this banks have to create account
information layers, which can be accessed both by the bank staff as well as by th
customers themselves.

The use of interactive electronic links via the Internet could go a ling
way in providing the customers with greater level of information about both their own
financial situation and about the services offered by the bank.

The New Relationship Oriented Bank

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CUSTOMER

TELEPHONE, BRANCH, ELECTRONIC BANKING, etc

SHARED INFORMATION

CLEARING SYSTEM HEAD OFFICE RISK MONITOIRING


Impact of IT on Privacy and Confidentiality of Data:

Data being stored in the computers, is now being displayed when
required on through internet banking mobile banking, ATM’s etc. all this has given rise
to the issues of privacy and confidentially of data are:

 The data processing capabilities of the computer, particularly the rapid
throughput, integration, and retrieval capabilities, give rise to doubts in the
minds of individuals as to whether the privacy of the individuals is being
eroded.
 So long as the individual data items are available only to those directly
concerned, everything seems to be in proper place, but the incidence of data

46

being cross referenced to create detailed individual dossiers gives rise to privacy
problems.
 Customers feel threatened about the inadequacy of privacy being maintained by
the banks with regard to their transactions and link at computerised systems
with suspicion.

Aside from any constitutional aspect, many nations deem privacy to be a
subject of human right and consider it to be the responsibility of those who concerned
with computer data processing for ensuring that the computer use does not revolve to
the stage where different data about people can be collected, integrated and retrieved
quickly. Another important responsibility is to ensure the data is used only for the
purpose intended.


VII. RECENT TRENDS IN BANKING

Today, we are having a fairly well developed banking system with
different classes of banks – public sector banks, foreign banks, private sector banks –
both old and new generation, regional rural banks and co-operative banks with the
Reserve Bank of India as the fountain Head of the system.

In the banking field, there has been an unprecedented growth and
diversification of banking industry has been so stupendous that it has no parallel in the
annals of banking anywhere in the world.

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During the last 39 years since 1969, tremendous changes have taken
place in the banking industry. The banks have shed their traditional functions and have
been innovating, improving and coming out with new types of the services to cater to
the emerging needs of their customers.

Massive branch expansion in the rural and underdeveloped areas,
mobilisation of savings and diversification of credit facilities to the either to neglected
areas like small scale industrial sector, agricultural and other preferred areas like export
sector etc. have resulted in the widening and deepening of the financial infrastructure
and transferred the fundamental character of class banking into mass banking.

There has been considerable innovation and diversification in the
business of major commercial banks. Some of them have engaged in the areas of
consumer credit, credit cards, merchant banking, leasing, mutual funds etc. A few
banks have already set up subsidiaries for merchant banking, leasing and mutual funds
and many more are in the process of doing so. Some banks have commenced factoring
business.


The major challenges faced by banks today are as to how to cope with
competitive forces and strengthen their balance sheet. Today, banks are groaning with
burden of NPA’s. It is rightly felt that these contaminated debts, if not recovered, will
eat into the very vitals of the banks. Another major anxiety before the banking industry
is the high transaction cost of carrying Non Performing Assets in their books. The
resolution of the NPA problem requires greater accountability on the part of the
corporate, greater disclosure in the case of defaults, an efficient credit information
sharing system and an appropriate legal framework pertaining to the banking system so
that court procedures can be streamlined and actual recoveries made within an

48

acceptable time frame. The banking industry cannot afford to sustain itself with such
high levels of NPA’s thus, “lend, but lent for a purpose and with a purpose ought to be
the slogan for salvation.”

The Indian banks are subject to tremendous pressures to perform as
otherwise their very survival would be at stake. IT plays an important role in the
banking sector as it would not only ensure smooth passage of interrelated transactions
over the electric medium but will also facilitate complex financial product innovation
and product development. The application of IT and e-banking is becoming the order of
the day with the banking system heading towards virtual banking.

As an extreme case of e-banking World Wide Banking (WWB) on the
pattern of World Wide Web (WWW) can be visualised. That means all banks would be
interlinked and individual bank identity, as far as the customer is concerned, does not
exist. There is no need to have large number of physical bank branches, extension
counters. There is no need of person-to-person physical interaction or dealings.
Customers would be able to do all their banking operations sitting in their offices or
homes and operating through internet. This would be the case of banking reaching the
customers.


Banking landscape is changing very fast. Many new players with
different muscle powers will enter the market. The Reserve Bank in its bid to move
towards the best international banking practices will further sharpen the prudential
norms and strengthen its supervisor mechanism. There will be more transparency and
disclosures.

In the days to come, banks are expected to play a very useful role in the
economic development and the emerging market will provide ample business
opportunities to harness. Human Resources Management is assuming to be of greater

49

importance. As banking in India will become more and more knowledge supported,
human capital will emerge as the finest assets of the banking system. Ultimately
banking is people and not just figures.


VIII. STRAINS AND CHALLNGES

Liberalisation process has increasingly exposed Indian Industry to
international competition and banking being a service industry is also not an exception.
Banking Sector in India too faces same strains and challenges at local, national and
international level.

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Indian Banks, functionally diverse and geographically widespread, have
played a crucial role in the socio-economic progress of the country after independence.
However, the growth led to strains in the operational efficiency of banks and the
accumulation of non-performing assets (NPA’s) in their loan portfolios.

Banks face increasing pressure to stand out from the crowd. On the
Internet, this means offering your target customers an increasingly broader range of
services than your competitors and that too in unique way.

All this has resulted in a challenge to managers of banks to develop the
right mix of acquired and internally grown IT applications which suits customer’s
expectations.

Banking sector reforms and liberalisation process raised many
challenges before Indian Banks and for sustainable development it has become
necessary to face these challenges effectively:

 Intense Competition: The RBI and Government of India kept banking industry
open for the participants of private sector banks and foreign banks. The foreign
banks were also permitted to set up shop on India either as branches or as
subsidiaries. Due to this lowered entry barriers many new players have entered
the market such as private banks, foreign banks, non-banking finance
companies, etc. The foreign banks and new private sector banks have
spearheaded the hi-tech revolution. Heavy weight foreign banks with huge


base, latest technology innovative and globally tested products are spreading
their wings and wooing away customers form other banks. For survival and
growth in highly competitive environment banks have to follow the new “Guru
Mantra” of prompt and efficient customer service, which calls for appropriate
customer centric policies and customer friendly procedures.

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 Technological Up gradation: Already electronic transfers, clearings,
settlements have reduced translation times. To face competition it is necessary
for banks to absorb the technology and upgrade their services.

However use of High-Tech sophisticated technology leaves the predominantly
rural, poor and even illiterate mans in the lurch to which the level of automation
and efficiency of services are immaterial.

 Privacy and Safety: Among the most important aspects, of savings, i.e., safety
liquidity and profitability, safety has to be accorded top most priority. The
safety aspect assumes more significance in the emerging scenario as the
economic loss caused internationally by these types of crimes might risk area
and any lacunae is safety would result in erosion of confidence and the same
might possibly paralyse the entire network. The areas among other things,
which might endanger security in e-banking can be:
 Changes in input data such as changing the amount in ledges, increasing
the limits in accounts or face value of cheaques. Though these trends
could be detected consequently, prevention is a major problem with
these types of crimes.
 Use of stolen or falsified cards in ATM machines.


 Computer forgery could be committed by way of gaining access to other
account, deliberate damage through viruses on data stored in computers.
In this case, same criminals might gain entry into the computers and
cause damage to the system. This apart, another through which security
and privacy are maintained. If a hacker has found out the password, he

52

can cause havoc to the entire network. Also, if the password is stolen
money could be transferred from one account to another.
 Software privacy is another area of potential danger faced by the
banking industry. In this the entire software could be stolen. If this is
done, the hackers could operate a parallel network.
 Human Resources Management: In the recent past the human resource
Policies in banks were mainly guided by the comcept of permanent employment
and its necessary concomitants of creating career paths, terminal benfits, etc. for
the employees. In today’s fast-changing world of employee mobility both
horizontally and vertically and value systems, the public sector banks need to
hire the right talent at market related compensation and to shed surplus
manpower/staff. Thus many banks are going for URS schemes to reduce the
burden of excessive staff. Schemes like VRS are going to change the nature of
workforce with many senior and experienced persons opting for it.

The key elements that shall provide a competitive edge to banking sector will
not be physical assets but knowledge assets and information. Therefore, banks
must understand how to retain knowledge based employees and prevent them to
migrating to some other organisation. Banks must believe in people, customer
orientation, and continuous improvement of excellence. Therefore it becomes
necessary for banks to encourage all employees to take risks and work towards
continuous improvements and breakthroughs.


Successful banks overcoming the challenges will be those that harness
technology in a customer friendly yet cost effective way. This requires
enormous internal and external management and the crux of the solution lies in
blending human resources with information technology.

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IX. CASE STUDY

CO-OPERATIVE BANK AND ITS SERVICES

SARASWAT CO-OPERATIVE BANK LIMITED

54

The Bank has a very humble but a very inspiring beginning. On 14th
September 1918, "The Saraswat Co-operative Banking Society" was founded. Mr. J.K.
Parulkar became its first Chairman, Mr. N.B. Thakur, the first Vice-Chairman, Mr. P.N.
Warde, the first Secretary and Mr. Shivram Gopal Rajadhyaksha, the first Treasurer.
These were the people with deep and abiding ideals, faith, vision, optimism and
entrepreneurial skills. These dedicated men in charge of the Society had a
commendable sense of service and duty imbibed in them. Even today, our honourable
founders inspire a sense of awe and respect in the Bank and amongst the shareholders.

The Society was initially set up to help families in distress. Its objective
was to provide temporary accommodation to its members in eventualities such as
weddings of dependent members of the family, repayment of debt and expenses of
medical treatment etc. The Society was converted into a full-fledged Urban Co-
operative Bank in the year 1933.

The Bank has the unique distinction of being a witness to History. The
Bank, which was originally founded in 1918, i.e. close on the heels of the Russian
Revolution, also witnessed as a Society and as Bank-the First World War, the Second
World War, India's freedom Movement and the glorious chapter of post-independence
India. During this cataclysmic cavalcade of history, the Bank as a financial institution
and its members could not of course remain unaffected by the economic consequences
of the major events. The two wars in particular brought in their wake, paucities of all
kinds and realities and stand by its members in distress as a solid bulwark of strength.


The Founder Members and the later-day management's of the Bank
continued to demonstrate their unwavering faith in the destiny of the common man and
the co-operative movement and they encouraged the shareholder to save despite all
odds.

55

MISSION STATEMENT
"To emerge as one of the premier and most preferred banks in the
country by adopting highest standards of professionalism and excellence in all the areas
of working.”

MILESTONES
Thanks to these sustained and assiduous efforts over 25 years after its
inception, the Bank had gained Strong foundation in terms of its membership,
resources, assets and profits. By 1942, the Bank was fulfilling all the banking needs of
its customers.

During the late fifties, the Bank grew from strength to strength. The
Bank had established five branches within the city of Mumbai and one each at Pune
and Belgaum. In its 50th year, the Bank chose a bee motif to symbolise the Bank's
emblem - a fitting and appropriate characteristics of a Bank that believed in hard work,
a search for all that is good, a team spirit to achieve its objectives and a selfless service
to its members and customers. The Bank has grown in stature, progressed in its social
and economic objectives and produced an image of what an ideal bank should be.
Resultantly, in the year 1977-78, the Bank's gross income crossed the Rs.3.00 crore
mark for the first time.


Last two decades the bank has witnessed a steady growth in the
business. The bank has a network of 86 fully computerised branches covering five
states viz. Maharashtra, Gujarat, Madhya Pradesh, Karnataka and Goa. The Bank is
providing 24- hour service through ATM at 41 locations.

56

In 1988 the bank was conferred with "Scheduled" status by Reserve
Bank of India.The bank is the first co-operative bank to provide Merchant Banking
services. The bank got a permanent license to deal in foreign exchange in 1978.
Presently the Bank is having correspondent relationship in 45 countries covering 9
currencies with over 125 banks

SERVICES PROVIDED

Saraswat Co-operative Bank being the No.1 co-operative bank in Asia,
our efforts are always directed towards developing and offering competitive and
innovative products and services. In the wholesale banking business, the Saraswat Co-
operative Bank Ltd. provides a wide range of products from a traditional term loans to
short term products like Bills discounting under Letter of Credit etc.

The Bank also offers a bouquet of Retail Loan Products such as Vastu Siddhi Home
Loan, Saraswati Education Loan, Car Loan etc. and wide array of Deposit schemes
with customer friendly features and attractive Rate of Interest. With a view of fulfilling
all the needs of the customers under one roof Bank has entered into tie-ups with various
premium institutions, through which we are offering third party products like Life and
non-Life Insurance, Mutual Funds and Demat Services.


Following are the Services Provided by the Saraswat Bank

PERSONAL

 Deposits Scheme
 Personal Loans

57

1. Deposits Scheme

Saraswat Bank provides information of it's various deposit schemes customers
can avail of with the bank.

 CUBS Deposit
 Current Deposit
 Elite Savings
 Janhit Account (No frills account)
 Savings Deposit
 Co-operative Societies


 Savings for Kids (CUBS)

Features:

a) You should be a minor/student (upto the age of 21 years) to become
'CUBS' account holder.

58

b) Initial deposit of Cubs account is Rs 50/- and subsequent deposits in
multiples of Rs 10/- no periodic compulsion for subsequent Deposit.

c) Starting with a small amount of Rs. 50/-, a CUB Account holder has to
save Rs. 500 /- over a period of one year.
d) Facility to deposit cash in school premises on predetermined days.
e) After completion of 14 years of age minor/student can operate the
account
Cheque book facility not available.
f) No charges for non-maintenance of minimum balance for first year.

Benefits
"Free Gift" for all account holders.
Earn Interest @ 3.5 p.a. every quarter possess specially designed passbook.

Minimum Balance:
Account opening - Rs. 50/- with further deposit of Rs. 10/- Rs. 500/- after one year of
opening account.


 Current Deposits

Features:

Minimum Average Balance.
Eligibility - Individual, Businessmen, Organizations.
Minimum Balance of Rs 5000/- .

59

Free ATM cards.
Non-Maintenance of minimum average quarterly balance require to pay
service charges of Rs. 200/- per month.
If account is closed within 6 months Rs. 30/- plus Rs. 2/- per unused
cheaques.

 Elite Savings

Eligibility: Individuals, Minor by guardian, Organisations, Co-operative Societies.

Minimum Balance: Rs. 5000/- (Average Quarterly Balance)

Rate of Interest: 3.50% p.a.

Penalty for Non-maintenance of minimum balance:

Minimum quarterly average balance:

Below Rs. 4000/- to Rs. 4999/- - Rs. 50 per quarter.

Below Rs. 4000/- - Rs. 100 per quarter.


Special features / facilities:

• Free Personal Accident Insurance Cover of Rs. 2.00 Lakhs for one year.
• Free Utility Bills Payment facility.
• Free Issue of Demand Draft / Pay Order (one occasion per month without
ceiling on maximum amount)

60

• Free ATM Card.

 Janhit Account (No Frills Account)

Eligibility:

1) Persons whose balances do not exceed Rs 50,000/- in all the accounts taken
together.
2) Total credits to the Janhit account should not exceed Rs 1 lakh in a year.
3) Once a customer opens a Janhit Account with the Bank, he/she will have to
close all other transaction accounts with any other bank within a period of 60
days from the date of opening the Janhit Account with our bank.
4) The initial deposit amount required to open account would be Rs.250/-.

Minimum Balance:
Minimum Balance required to be maintained would be Rs.100/-.


 Savings Deposits

Minimum Average Balance
Rs. 1000 /- with or without Cheque Book
Free ATM card

61

Interest
3.5% p.a. with quarterly rest

Penalty / Service Charges
Non-Maintenance of minimum average quarterly balance of Rs 1000/- require to pay
Rs 50/- per month
If account is closed within 6 months
Without cheque book - Rs. 10 /-
With cheque book - Rs. 15 /- plus Rs. 2 per unused cheque

 Co-operative Societies

Eligibility
Co-operative societies
Minimum Amount
Minimum quarterly average balance of Rs. 15000/- in Saving/Current Account
Minimum Rs. 3.00 lacs in Term Deposit
Rate Of Interest
0.5% extra interest as compared to General Public for Term Deposit.
For Saving Account 3.5%
For Current Account – Nil


Special Features/Facilities

• Free Affinity Card
• Free Cheque Collection Service.
• Free delivery of Statement of Account (once in a month)
• Free Utility Bill Payment (Easy Pay Scheme)

62

• Free transfer of Funds from the account of member of the Society to Society’s
account for monthly maintenance
• Free issue of D.D./P.O. upto Rs. 25000/- each.

IX. Personal Loans

Saraswat Co-operative Bank offers various loans to its customers, one can opt for any
of the below listed loans for their assortment of needs.

 Medical Loan

Purpose
Term Loan for acquiring Nucleus Cochlear Implant

Banking Relation
Previous banking relations are not compulsory.
Applicant should be residing in the city where the branch is located.

Eligibility
Hearing Impaired individual OR their Parents


Limit of Loan
Rs. 10.00 Lakhs

100% of the cost of equipment and hospitalisation and allied charges 70% of the
Market value based on valuation by approved valuer of the commercial or residential

63

property

EMI
Fixed Monthly Installments: ( For Rs 1.00 Lakh )

Year 1 2 3 4 5
Amount 8839 4661 3274 2585 2175

Repayment Period
Maximum 5 Years

Security
Equitable mortgage of residential / commercial premises Pledge of tangible securities
viz. NSCs, KVPs.LIC policies, FDRs, Gold or any other approved securities 2
Guarantors of well placed means


 Property Loan

64

Purpose
Acquiring another asset, for any other purpose, but end use should be ensured.

Limit of Loan
Minimum - Rs.2 lakhs
Maximum - Rs. 50 Lakhs

Basis of Advance
a) 25 times of net salary in case of salaried person Or
b) 3 times of net cash accruals.(Net of tax and drawing plus depreciation) Or
c) 60% of agreement cost (If the property is less than 3 years old.). In other cases, 60%
of value as per valuation report.

a,b,c Whichever is lower

Eligibility
a) Individual who are salaried employees having minimum net salary of Rs.10000/-
p.m. (The income of the spouse may be added)
b) Professional, Self-Employed and others who are income tax assessee having net
annual taxable income of Rs.150000/- for at least 3 years continuously.
c) Firm/Company, whose net annual taxable income is Rs.150000/- p.a. and
firm/company, is in operation for last 3 years and making cash profit for last 3 years, at
the above level.

Rate of Interest
Term loan - 12.50% on Daily Reducing Balance
Cash credit - 13% on Daily Reducing Balance


Repayment Period
Term Loan - Maximum 5 years

65

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