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NAAC ACCREDITED This is to certify that, Mr.BHASKAR DURAISWAMY. Of B.com Banking & Insurance Semester V (2011- 2012) has successfully completes


guidance of prof.RASHNA GAIRA.

_____________________ (Signature of Project Guide) _________________________ (Signature of External Examiner) ______________________ (Signature of co-ordinator)


It is my great privilege to thanks Dr. Ambedkar College of Commerce and Economics particularly to Prof. Z.Y.Khan (Co-ordinator of BBI ) for giving this opportunity to complete this project and support us

I also sincerely thank to my guide

Prof. ___________

without whose support

and guidance it would be impossible to complete the project work.

I also thanks to my parents, relatives and colleagues for their encouragement and support.

Place: _______________

________________ Date: ______________




Mr. ________________________

the student of Dr. Ambedkar College of

Commerce and Economics, studying T.Y.B.Com-Banking & Insurance (Semester v), hereby declare that I have completed this work on. ―ROLE OF BANKS IN INDIAN FINANCIAL SYSTEM‖ 2011-2012The information is genuine and practical to the best of my Knowledge.

Date: _____________

Place: ____________

BHASKARDURAISWAMY ____________________























Introduction financial system

The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations.

There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

CHAPTER 1 INTRODUCTION OF FINANCIAL SYSTEM Introduction financial system The economic development of a nation is

The word "system", in the term "financial system", implies a set of complex and closely connected or interlined institutions, agents, practices, markets, transactions, claims, and liabilities in the economy. The financial system is concerned about money, credit and finance-the three terms are intimately related yet are somewhat different from each other. Indian financial system consists of financial market, financial instruments and financial intermediation. These are briefly discussed below;

Traditional financial systems in India

The National Bank for Agriculture and Rural Development has planned to conduct a study on the traditional micro-finance system in the northeast for exploring ways to link them with formal banking institutions. In many remote areas of the northeast, where formal banking institutions have not yet reached, traditional micro-finance systems are the only means for savings and credit. These systems have become so popular in some parts of the northeast that people prefer to invest more money in these financial bodies than banks. Marup in Manipur and Sonchoi in Assam were some of the most popular traditional micro-finance systems in the northeast. Nabard executive director A K Bandyopadhyay said it was absolutely necessary to study the traditional micro-finance systems so that they could be formally linked to banks and financial institutions. "We need to know how the traditional micro-finance systems are working and how exchange of ideas can take place. That is why we want to carry out a comprehensive study on this," added Bandyopadhyay. The study of traditional micro-finance system has become necessary to find out what has made them more popular than banks. Experts, however, said access barriers to banks have made the traditional system so popular among people. Over the years, these systems have evolved into efficient financial institutions. "For instance, there are places in Manipur where there are no bank branches. In such a situation it is the Marup which serves as the most dependable financial institution.


A Financial Market can be defined as the market in which financial assets are created or transferred. As against a real transaction that involves exchange of money for real goods or services, a financial transaction involves creation or transfer of a financial asset. Financial Assets or Financial Instruments represents a claim to the payment of a sum of money sometime in the future and /or periodic payment in the form of interest or dividend.

Money Market- The money market is a wholesale debt market for low-risk, highly-liquid, short-term instrument. Funds are available in this market for periods ranging from a single day up to a year. This market is dominated mostly by government, banks and financial institutions.

Capital Market - The capital market is designed to finance the long-term investments. The transactions taking place in this market will be for periods over a year.

Forex Market - The Forex market deals with the multicurrency requirements, which are met by the exchange of currencies. Depending on the exchange rate that is applicable, the transfer of funds takes place in this market. This is one of the most developed and integrated market across the globe.

Credit Market- Credit market is a place where banks, FIs and NBFCs purvey short, medium and long-term loans to corporate and individuals.


Having designed the instrument, the issuer should then ensure that these financial assets reach the ultimate investor in order to garner the requisite amount. When the borrower of funds approaches the financial market to raise funds, mere issue of securities will not suffice. Adequate information of the issue, issuer and the security should be passed on to take place. There should be a proper channel within the financial system to ensure such transfer. To serve this purpose, Financial intermediaries came into existence. Financial intermediation in the organized sector is conducted by a widerange of institutions functioning under the overall surveillance of the Reserve Bank of India. In the initial stages, the role of the intermediary was mostly related to ensure transfer of funds from the lender to the borrower. This service was offered by banks, FIs, brokers, and dealers. However, as the financial system widened along with the developments taking place in the financial markets, the scope of its operations also widened. Some of the important intermediaries operating ink the financial markets include; investment bankers, underwriters, stock exchanges, registrars, depositories, custodians, portfolio managers, mutual funds, financial advertisers financial consultants, primary dealers, satellite dealers, self regulatory organizations, etc. Though the markets are different, there may be a few intermediaries offering their services in more than one market e.g. underwriter. However, the services offered by them vary from one market to another.

FINANCIAL INSTRUMENTS Are those assets that are near substitutes for money. The term short-term means generally


Are those assets that are near substitutes for money. The term short-term means generally a period upto one year and near substitutes to money is used to denote any financial asset which can be quickly converted into money with minimum transaction cost.

Some of the important money market instruments are briefly discussed below;

  • 1. Call/Notice Money

  • 2. Treasury Bills

  • 3. Term Money

  • 4. Certificate of Deposit

  • 5. Commercial Papers

  • 1. Call /Notice-Money Market

Call/Notice money is the money borrowed or lent on demand for a very short period. When money is borrowed or lent for a day, it is known as Call (Overnight) Money. Intervening holidays and/or Sunday are excluded for this purpose. Thus money, borrowed on a day and repaid on the next working day, (irrespective of the number of intervening holidays) is "Call Money". When money is borrowed or lent for more than a day and up to 14 days, it is "Notice Money". No collateral security is required to cover these transactions.

  • 2. Inter-Bank Term Money

Inter-bank market for deposits of maturity beyond 14 days is referred to as the term money market. The entry restrictions are the same as those for Call/Notice Money except that, as per existing regulations, the specified entities are not allowed to lend beyond 14 days

  • 3. Treasury Bills.

Treasury Bills are short term (up to one year) borrowing instruments of the union government. It is an IOU of the Government. It is a promise by the Government to pay a stated sum after expiry of the stated period from the date of issue (14/91/182/364 days i.e. less than one year). They are issued at a discount to the face value, and on maturity the face value is paid to the holder. The rate of discount and the corresponding issue price are determined at each auction.

  • 4. Certificate of Deposits

Certificates of Deposit (CDs) is a negotiable money market instrument nd issued in dematerialised form or as a Usance Promissory Note, for funds deposited at a bank or other eligible financial institution for a specified time period. Guidelines for issue of CDs are presently governed by various directives issued by the Reserve Bank of India, as amended from time to time. CDs can be issued by (i) scheduled commercial banks excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs); and (ii) select all-India Financial Institutions that have been permitted by RBI to raise short-term resources within the umbrella limit fixed by RBI. Banks have the freedom to issue CDs depending on their requirements. An FI may issue CDs within the overall umbrella limit fixed by RBI, i.e., issue of CD together with other instruments viz., term money, term deposits, commercial papers and intercorporate deposits should not exceed 100 per cent of its net owned funds, as per the latest audited balance sheet.

  • 5. Commercial Paper

CP is

a note


evidence of the debt obligation of the issuer. On issuing

commercial paper the debt obligation is transformed into an instrument. CP is

thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet, is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

Capital Market Instruments

The capital market generally consists of the following long term period i.e., more than one year period, financial instruments; In the equity segment Equity shares, preference shares, convertible preference shares, non-convertible preference shares etc and in the debt segment debentures, zero coupon bonds, deep discount bonds etc.

Hybrid Instruments

Hybrid instruments have both the features of equity and debenture. This kind of instruments is called as hybrid instruments. Examples are convertible debentures, warrants etc.

Chapter 3 Banking Services in India

With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India.

With stiff competition and advancement of technology, the services provided by banks has become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south.

This section of banking deals with the latest discovery in the banking instruments along with the polished version of their old systems.

Banking in India

Structure of the organised banking sector in India. Number of banks are in brackets. Banking inBank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. BankingChannels Banks offer many different channels to access their banking and other services: " id="pdf-obj-15-3" src="pdf-obj-15-3.jpg">

Structure of the organised banking sector in India. Number of banks are in brackets.

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.


Banks offer many different channels to access their banking and other services:

ATM is a machine that dispenses cash and sometimes takes deposits without the need for a human bank teller. Some ATMs provide additional services. A branch is a retail location Call center Mail: most banks accept check deposits via mail and use mail to communicate to their customers, e.g. by sending out statements Mobile banking is a method of using one's mobile phone to conduct banking transactions Online banking is a term used for performing transactions, payments etc. over the Internet Relationship Managers, mostly for private banking or business banking, often visiting customers at their homes or businesses Telephone banking is a service which allows its customers to perform transactions over the telephone without speaking to a human Video banking is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a videoconference enabled bank branch.clarification


History of banking financial system

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.

When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.

The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and

maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments."

The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen

and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".

During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:


Number of


Paid-up Capital




that failed

(Rs. Lakhs)

(Rs. Lakhs)

  • 1913 12



  • 1914 42



  • 1915 11



  • 1916 13



  • 1917 9



  • 1918 7




The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater

involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in] In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

Traditional Banking Services

Banks provide a number of services to consumers around the world. Traditional bank locations as well as electronic banking systems allow us to access bank accounts, deposit and withdraw funds, pay bills and more.

Traditional Banking Services


Bank locations and branch locations offer a full range of services to the customer. Physical bank locations are fully staffed with knowledgeable employees ranging from tellers to loan officers.



At a traditional bank, the customer can conduct a number of banking transactions. These include cashing a check, withdrawing funds, opening a new account and applying for a loan.


Many consumers utilize both traditional banking services and electronic banking systems for different reasons. Some people prefer to cash checks at the

bank, however they may pay bills online. Convenience of electronic banking makes it a very popular option for many peopleBanks In India

In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players.

All these details and many more is discussed over here. The banks and its relation with the customers, their mode of operation, the names of banks under different groups and other such useful informations are talked about.

One more section has been taken note of is the upcoming foreign banks in India. The RBI has shown certain interest to involve more of foreign banks than the existing one recently. This step has paved a way for few more foreign banks to start business in India.



Modern Banking

"Modern Banking" is a sequel to the highly successful "Modern Banking in Theory and Practice," first published in 1996. Over the last decade many aspects of banking have changed considerably, though the key features that distinguish banks from other financial institutions remain. Some might question the need for a book on banking rather than one on financial institutions - while

banks remain special and unique to the financial sector, books need to be devoted to them.

"Modern Banking" focuses on the theory and practice of banking, and its prospects in the new millennium. The book is written for courses in banking and finance at Masters/MBA level, or undergraduate degrees specialising in this area. Bank practitioners wishing to deepen and broaden their understanding of banking issues may also be attracted to this book. While they often have exceptional and detailed knowledge of the areas they have worked in, busy bankers may be all too unaware of the key broader issues. Consider the fundamental questions: "What is unique about a bank?" and "What differentiates it from other financial institutions?" Answering these questions begins to show how banks should evolve and adapt - or fail. If bankers know the underlying reasons for "why" profitable banks exist, it will help them to devise strategies for sustained growth.

"Modern Banking" concludes with a set of case studies that give practical insight into the key issues covered in the book: The core banking functionsDifferent types of banks and diversification of bank activitiesRisk management: issues and techniquesGlobal regulation: Basel 1 and Basel 2.Bank regulation in the UK, US, EU, and JapanBanking in emerging marketsBank failure and financial crisesCompetitive issues, from cost efficiency to mergers and acquisitionsCase Studies including: Goldman Sachs, Bankers Trust/Deutsche Bank, Sumitomo Mitsui, Bancomer

Public sector Banks

Among the Public Sector Banks in India, United Bank of India is one of the 14 major banks which were nationalised on July 19, 1969. Its predecessor, in the Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd. (1932).

Oriental Bank of Commerce (OBC), a Governmet of India Undertaking offers Domestic, NRI and Commercial banking services. OBC is implementing a GRAMEEN PROJECT in Dehradun District (UP) and Hanumangarh District (Raiasthan) disbursing small loans. This Public Secotor Bank India has implemented 14 point action plan for strengthening of credit delivery to women and has designated 5 branches as specialized branches for women entrepreneurs.

This means that all the resources should be used efficiently to improve the productivity and ensure a win-win situation. To survive in the long run, it is essential to focus on cost saving. Previously, banks focused on the 'revenue' model which is equal to cost plus profit. Post the banking reforms, banks shifted their approach to the 'profit' model, which meant that banks aimed at higher profit maximization.

Banks such as State Bank of India, Bank of Baroda, Syndicate Bank and Canara Bank are known as Public sector banks. Public sector banks are controlled and managed by the Government of India. Public sector banks have been serving the nation for over centuries and are well known for their affordable and quality services.

The banking sector in India is mostly dominated by the Public sector banks. The Public sector banks in India alone account for about 75 percent of the total advances in the Indian banking industry. Public sector banks have shown remarkable growth over the last five four decades.

Private sector BankS

Private Banks are banks like HDFC bank, ICICI Bank, UTI bank and IDBI bank. The concept of private banking was introduced about 15 years ago. These are the banks that do not have any government stakes.

Private Banks have gained quite a strong foothold in the Indian banking industry over the last few years especially because of optimum use of technology. The Private Banks are accountable for a share of 18.2 percent of the Indian banking industry.

IndusInd Bank was the first private bank in India. Currently the bank is among the fastest growing Bank Private Banks in the country. IDBI which is ranked as the tenth largest global development bank is counted as one of the finest financial institutions in the subcontinent.


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 IndusInd Bank. It is one of the fastest growing Bank Private Sector Banks in India. IDBI ranks the tength 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 liberalisation of the Indian Banking Industry. It was incorporated in August

1994 as HDFC Bank Limited with registered office in Mumbai and commenced







January 1995.

ING Vysya, 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 Vysya Bank has many credits to its account.

Co--operative BANKS

The Co operative banks in India started functioning almost 100 years ago. The Cooperative bank is an important constituent of the Indian Financial System, judging by the role assigned to co operative, the expectations the co operative is supposed to fulfil, their number, and the number of offices the cooperative bank operate. Though the co operative movement originated in the West, but the importance of such banks have assumed in India is rarely paralleled anywhere else in the world. The cooperative banks in India plays an important role even today in rural financing. The businessess of cooperative bank in the urban areas also has increased phenomenally in recent years due to the sharp increase in the number of primary co-operative banks.

Co operative Banks in India are registered under the Co-operative Societies Act. The cooperative bank is also regulated by the RBI. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Urban Cooperative Banks in India

The term Urban Co-operative Banks (UCBs), though not formally defined, refers to primary cooperative banks located in urban and semi-urban areas. These banks, till 1996, were allowed to lend money only for non-agricultural purposes. This distinction does not hold today. These banks were traditionally centred around communities, localities work place groups. They essentially lent to small borrowers and businesses. Today, their scope of operations has widened considerably.

The origins of the urban cooperative banking movement in India can be traced to the close of nineteenth century when, inspired by the success of the experiments related to the cooperative movement in Britain and the cooperative credit movement in Germany such societies were set up in India. Cooperative societies are based on the principles of cooperation, - mutual help, democratic decision making and open membership. Cooperatives represented a new and alternative approach to organisaton as against proprietary firms, partnership firms and joint stock companies which represent the dominant form of commercial organisation.

The Beginnings

The first known mutual aid society in India was probably the

‗Anyonya Sahakari Mandali‘ organised in the erstwhile princely

State of Baroda in 1889 under the guidance of Vithal Laxman also known as Bhausaheb Kavthekar. Urban co-operative credit

societies, in their formative phase came to be organised on a community basis to meet the consumption oriented credit needs of

their members. Salary earners‘ societies inculcating habits of thrift

and self help played a significant role in popularising the

movement, especially amongst the middle class as well as organized labour. From its origins then to today, the thrust of UCBs, historically, has been to mobilise savings from the middle and low income urban groups and purvey credit to their members - many of which belonged to weaker sections.

The enactment of Cooperative Credit Societies Act, 1904, however,

gave the real impetus to the movement. The first urban cooperative credit society was registered in Canjeevaram (Kanjivaram) in the erstwhile Madras province in October, 1904. Amongst the prominent credit societies were the Pioneer Urban in Bombay (November 11, 1905), the No.1 Military Accounts Mutual Help Co- operative Credit Society in Poona (January 9, 1906). Cosmos in Poona (January 18, 1906), Gokak Urban (February 15, 1906) and Belgaum Pioneer (February 23, 1906) in the Belgaum district, the Kanakavli-Math Co-operative Credit Society and the Varavade

Weavers‘ Urban Credit Society (March 13, 1906) in the South

Ratnagiri (now Sindhudurg) district. The most prominent amongst the early credit societies was the Bombay Urban Co-operative Credit Society, sponsored by Vithaldas Thackersey and Lallubhai Samaldas established on January 23, 1906 ..

The Cooperative Credit Societies Act, 1904 was amended in 1912, with a view to broad basing it to enable organisation of non-credit societies. The Maclagan Committee of 1915 was appointed to review their performance and suggest measures for strengthening them. The committee observed that such institutions were eminently suited to cater to the needs of the lower and middle income strata of society and would inculcate the principles of banking amongst the middle classes. The committee also felt that the urban cooperative credit movement was more viable than agricultural credit societies. The recommendations of the Committee went a long way in establishing the urban cooperative credit movement in its own right.

In the present day context, it is of interest to recall that during the banking crisis of 1913-14, when no fewer than 57 joint stock banks collapsed, there was a there was a flight of deposits from joint stock

3banks to cooperative urban banks. Maclagan Committee chronicled this event thus:

―As a matter of fact, the crisis had a contrary effect, and in most

provinces, there was a movement to withdraw deposits from non- cooperatives and place them in cooperative institutions, the distinction between two classes of security being well appreciated

and a preference being given to the latter owing partly to the local character and publicity of cooperative institutions but mainly, we

think, to the connection of Government with Co







Introduction Rural Cooperative Banking and Credit Institutions play an important role in meeting the growing credit needs of rural India. The volume of credit flowing through these institutions has increased. The performance of these institutions, however (apparent in the share of total institutional credit and the indicators of their financial health), has been less than satisfactory and is deteriorating rapidly. Of late, a

number of Committees have gone into the reasons for this situation and suggested remedial measures, but there has been little progress in implementing their recommendations. The Government of India, which is committed to reviving and

revitalising the rural cooperative credit structure (CCS) and attributes high priority and urgency to it, felt it necessary to commission a fresh review. The Union Government constituted a Task Force (vide Government of India notification dated 05 August 2004 reproduced in Annexure I) to formulate a practical and implementable plan of action to rejuvenate the rural cooperative credit structure. The Task Force comprises the following members and permanent invitees:

Commercial Banks

The commercial banking structure in India consists of:

Scheduled Commercial Banks Unscheduled Banks

Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934.

RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI.

For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.


For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.

Different methods of Granting Loans by Bank The basic function of a commercial bank is to make loans and advances out of the money which is received from the public by way of deposits. The loans are particularly granted to businessmen and members of the public against personal security, gold and silver and other movable and immovable assets. Commercial bank generally lend money in the following form:

  • i) Cash credit

ii) Loans iii) Bank overdraft, and iv) Discounting of Bills

  • i) Cash Credit :

A cash credit is an arrangement whereby the bank agrees to lend money

to the borrower upto a certain limit. The bank puts this amount of money to the credit of the borrower. The borrower draws the money

28 :: Business Studies

as and when he needs. Interest is charged only on the amount actually drawn and not on the amount placed to the credit of borrower‘s account. Cash credit is generally granted on a bond of credit or certain other securities. This a very popular method of lending in our country. ii) Loans :

A specified amount sanctioned by a bank to the customer is called a

‗loan‘. It is granted for a fixed period, say six months, or a year. The

specified amount is put on the credit of the borrower‘s account. He can

withdraw this amount in lump sum or can draw cheques against this sum for any amount. Interest is charged on the full amount even if the borrower does not utilise it. The rate of interest is lower on loans in comparison to cash credit. A loan is generally granted against the security of property or personal security. The loan may be repaid in lump sum or in instalments. Every bank has its own procedure of granting loans. Hence a bank is at liberty to grant loan depending on its own resources. The loan can be granted as:

  • a) Demand loan, or

  • b) Term loan

  • a) Demand loan

Demand loan is repayable on demand. In other words it is repayable at short notice. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lumpsum (one time) or as agreed with the bank. Loans are normally granted by the bank against tangible securities including securities like N.S.C., Kisan Vikas Patra, Life Insurance policies and U.T.I. certificates.

  • b) Term loans

Medium and long term loans are called ‗Term loans‘. Term loans

are granted for more than one year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable instalments of fixed amount. These loans are repayable over a period of 5 years and maximum upto 15 years.

Functions of Commercial Banks :: 29

Term loan is required for the purpose of setting up of new business activity, renovation, modernisation, expansion/extension of existing units, purchase of plant and machinery, vehicles, land for setting up a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and other securities. The normal rate of interest charged for such loans is generally quite high. iii) Bank Overdraft Overdraft facility is more or less similar to cash credit facility. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to withdraw a specified amount over and above the credit balance in his/her account. It is a short term facility. This facility is made available to current account holders who operate their account through cheques. The customer is permitted to withdraw the amount as and when he/she needs it and to repay it through deposits in his account as and when it is convenient to him/her. Overdraft facility is generally granted by bank on the basis of a written request by the customer. Some times, banks also insist on either a promissory note from the borrower or personal security to ensure safety of funds. Interest is charged on actual amount withdrawn by the customer. The interest rate on overdraft is higher than that of the rate on loan. iv) Discounting of Bills Apart from granting cash credit, loans and overdraft, banks also grant financial assistance to customers by discounting bills of exchange. Banks purchase the bills at face value minus interest at current rate of interest

for the period of the bill. This is known as ‗discounting of bills‘. Bills

of exchange are negotiable instruments and enable the debtors to discharge their obligations towards their creditors. Such bills of exchange arise out of commercial transactions both in internal trade and external trade. By discounting these bills before they are due for a nominal amount, the banks help the business community. Of course, the banks

foreign banks Foreign Banks in India always brought an explanation about the prompt services to customers. After the set up foreign banks in India, the banking sector in India also become competitive and accurative.

New rules announced by the Reserve Bank of India for the foreign banks in India in this budget has put up great hopes among foreign banks which allows them to grow unfettered. Now foreign banks in India are permitted to set up local subsidiaries. The policy conveys that forign banks in India may not acquire Indian ones (except for weak banks identified by the RBI, on its terms) and their Indian subsidiaries will not be able to open branches freely. Please see the list of Foreign banks in India till date.

Development Banks In India

A Development Bank is a polygonal development finance institution devoted to improving the social and monetary development of its associate nations. Its main emphasis is the welfare of the people. For example the Asian Development Bank's overarching goal is to decrease poverty in Asia and the Pacific. It helps improve the value of people's lives by providing loans and scientific support for a broad variety of development activities.




following priorities:







  • a) Economic Growth

  • b) Human Development

  • c) Gender and Development

  • d) Good Governance

  • e) Environmental Protection

  • f) Private Sector Development

  • g) Regional cooperation

The main functions of a Development Bank:

  • a) Increase loans and equity investments to its developing associate countries

(DMCs) for their monetary and social development.

  • b) Provides technical help for the planning and implementation of development

projects and programs and for advisory services.

  • c) Promotes and facilitates speculation of public and private capital for growth

and development.

d) Responds to requests for assistance in coordinating growth policies and plans of its increasing member countries.

Formation of Development Banks In India:

Development banks were set up in India at various points of time starting from the late 1940s to cater to the medium to long term financing requirements of industry as the capital market in India had not developed sufficiently. The endorsement of planned industrialization at the national level provided the critical enticement for organization of Development banks at both all-India and state levels.

In order to perform their role, Development Banks were extended funds in the shape of Long Term Operations (LTO) Fund of the Reserve bank of India and government guaranteed bonds, which constituted main sources of their funds. Funds from these sources were not only available at concessional rates, but also on a long term basis with their maturity period ranging from 10-15 years.

On the asset side, their operations were marked by near absence of competition. A large variety of economic institutions have come into existence over the years to perform a type of financial actions While some of them operate at all-India level, others are state level institutions.

Besides providing direct loans, financial institutions also extend economic assistance by way of underwriting and direct contribution and by issuing guarantees. Recently, some Development Banks have started extending short term/working capital finance, although long term lending continues to be their major activity.



Money lending in one form or the other has evolved along with the history of the mankind. Even in the ancient times there are references to the moneylenders.

Shakespeare also referred to ‗Shylocks‘ who made unreasonable demands in case

the loans were not repaid in time along with interest. Indian history is also replete with the instances referring to indigenous money lenders, Sahukars and Zamindars involved in the business of money lending by mortgaging the landed property of the borrowers.

Towards the beginning of the twentieth century, with the onset of modern industry in the country, the need for government regulated banking system was felt. The British government began to pay attention towards the need for an organised banking sector in the country and Reserve Bank of India was set up to regulate the formal banking sector in the country. But the growth of modern banking remained slow mainly due to lack of surplus capital in the Indian economic system at that point of time. Modern banking institutions came up only in big cities and industrial centres. The rural areas, representing vast majority of Indian society, remained dependent on the indigenous money lenders for their credit needs.

Independence of the country heralded a new era in the growth of modern banking. Many new commercial banks came up in various parts of the country. As the modern banking network grew, the government began to realise that the banking sector was catering only to the needs of the well-to-do and the capitalists. The interests of the poorer sections as well as those of the common man were being ignored.

In 1969, Indian government took a historic decision to nationalise 14 biggest private commercial banks. A few more were nationalised after a couple of years. This resulted in transferring the ownership of these banks to the State and the Reserve Bank of India could then issue directions to these banks to fund the national programmes, the rural sector, the plan priorities and the priority sector at differential rate of interest. This resulted in providing fillip the banking facilities to the rural areas, to the under-privileged and the downtrodden. It also resulted in

financial inclusion of all categories of people in almost all the regions of the country.

However, after almost two decades of bank nationalisation some new issues became contextual. The service standards of the public sector banks began to decline. Their profitability came down and the efficiency of the staff became suspect. Non-performing assets of these banks began to rise. The wheel of time had turned a full circle by early nineties and the government after the introduction of structural and economic reforms in the financial sector, allowed the setting up of new banks in the private sector.

The new generation private banks have now established themselves in the system and have set new standards of service and efficiency. These banks have also given tough but healthy competition to the public sector banks.


Banking system and the Financial Institutions play very significant role in the economy. First and foremost is in the form of catering to the need of credit for all the sections of society. The modern economies in the world have developed primarily by making best use of the credit availability in their systems. An efficient banking system must cater to the needs of high end investors by making available high amounts of capital for big projects in the industrial, infrastructure and service sectors. At the same time, the medium and small ventures must also have credit available to them for new investment and expansion of the existing units. Rural sector in a country like India can grow only if cheaper credit is available to the farmers for their short and medium term needs.

Credit availability for infrastructure sector is also extremely important. The success of any financial system can be fathomed by finding out the availability of reliable and adequate credit for infrastructure projects. Fortunately, during the past about one decade there has been increased participation of the private sector in infrastructure projects.

The banks and the financial institutions also cater to another important need of the society i.e. mopping up small savings at reasonable rates with several options. The common man has the option to park his savings under a few alternatives, including the small savings schemes introduced by the government from time to time and in bank deposits in the form of savings accounts, recurring deposits and time deposits. Another option is to invest in the stocks or mutual funds.

In addition to the above traditional role, the banks and the financial institutions also perform certain new-age functions which could not be thought of a couple of decades ago. The facility of internet banking enables a consumer to access and operate his bank account without actually visiting the bank premises. The facility of ATMs and the credit/debit cards has revolutionised the choices available with the customers. The banks also serve as alternative gateways for making payments on account of income tax and online payment of various bills like the telephone, electricity and tax. The bank customers can also invest their funds in various stocks or mutual funds straight from their bank accounts. In the modern day economy, where people have no time to make these payments by standing in queue, the service provided by the banks is commendable.

While the commercial banks cater to the banking needs of the people in the cities and towns, there is another category of banks that looks after the credit and banking needs of the people living in the rural areas, particularly the farmers. Regional Rural Banks (RRBs) have been sponsored by many commercial banks in several States. These banks, along with the cooperative banks, take care of the farmer-specific needs of credit and other banking facilities.


Till a few years ago, the government largely patro-nized the small savings schemes in which not only the interest rates were higher, but the income tax rebates and incentives were also in plenty. The bank deposits, on the other hand, did not entail such benefits. As a result, the small savings were the first choice of the investors. But for the last few years the trend has been reversed. The small savings, the bank

deposits and the mutual funds have been brought at par for the purpose of incentives under the income tax. Moreover, the interest rates in the small savings schemes are no longer higher than those offered by the banks.

Banks today are free to determine their interest rates within the given limits prescribed by the RBI. It is now easier for the banks to open new branches. But the banking sector reforms are still not complete. A lot more is required to be done to revamp the public sector banks. Mergers and amalgamation is the next measure on the agenda of the government. The government is also preparing to disinvest some of its equity from the PSU banks. The option of allowing foreign direct investment beyond 50 per cent in the Indian banking sector has also been under consideration.

Banks and financial intuitions have played major role in the economic development of the country and most of the credit- related schemes of the government to uplift the poorer and the under-privileged sections have been implemented through the banking sector. The role of the banks has been important, but it is going to be even more important in the future.

Role of banks and development finance institutions (DFIs)

India being a geographically vast country with its rural population constituting almost 70% of the total,

the role of regional rural banks remains important. The banking sector, characterised by the presence

of internationally active banks, national-level banks and regional rural banks, is likely to be preserved

to cater to the needs of a varied customer base. Consequent to liberalisation and financial sector

reforms, there has been some blurring of distinction between the activities of banks and DFIs. In

particular, the traditional distinction between commercial banking and investment banking has tended

to narrow somewhat. Banks have been moving into certain areas which were the exclusive domain of

the DFIs, eg project finance and investment banking. DFIs have recently been given the option to

convert themselves into universal banks with the RBI.s approval. To this end, a DFI would need to

prepare a transition path in regulatory requirements

order to comply fully with the statutory and

applicable to banks. The RBI will consider such requests on a case by case basis.

Banks play a large role in the economy of every country in the world. They offer a large and ever expanding number of services to the public and private sector such as long and short-term loans, annuities, savings accounts, mortgages, financial advice, and other financial services. Today people want more and more innovative services and with more competition in the banking industry, advertising has become much more common and it is vital for banks looking to survive in a tough market.

One of the main jobs for a banking executive today is to identify who their target market is and to market services that will appeal to that segment. Part of identifying your target market is determining the age, race, and ethnic make-up of the main customers and designing a campaign that will appeal to that group of people. If the target market for example is young married couples a good marketing campaign may involve long-term savings programs, college funds for any children they may have, and loans for a home.

If the target market is older couples who are in general better off financially the focus should be accounts that pay a fair market rate in interest. Since people in this category tend to have larger bank balances offering them more for their money makes it much more likely that you'll land their business and loyalty.

Banks are getting more serious about marketing and it shows. All you have to do is watch television for a short period of time and you'll see a number of ads for banks that have branches all over the country. Expect this trend to continue as banks add more services in attempt to get more return on their money. In a competitive marketplace, effective marketing can be the difference between success and failure.

Chapter 3 Role of banks in Indian financial system

In India , as in many developing countries , the commercial banking sector has been the dominant element in the countrys financial system . The sector has performed the key functions of providing liquidity and payment services to the real sector and has accounted for the Bulk of the financial intermediation process . Besides institutionalizing savings , the banking sector has contributed to the process of economic development by serving as a major source of credit to households , government , business and to weaker sectors of the economy like village and small scale industries and agriculture. Over the years, over 30- 40% of gross household savings , have been in the form of bank deposits and around 60% of the assets of all financial institutions accounted for by commercial banks.

An important landmark in the development of banking sector in recent years has been the initiation if reforms following the recommendations of the first Narasimham Committee on Financial System. In reviewing the strengths and

weaknesses of these banks , the Committee suggested several measures to transform the Indian banking sector from a highly regulated to a more market oriented system and to enable it to compete effectively in an increasingly globalised environment . Many of the recommendations of the Committee especially those pertaining to Interest rate , an institution of prudential regulation and transparent accounting norms were in line with banking policy reforms implemented by a host of developing countries

Banking services in Indian Financial system

With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India.

With stiff competition and advancement of technology, the services provided by banks has become more easy and convenient. The past days are witness to an hour wait before withdrawing cash from accounts or a cheque from north of the country being cleared in one month in the south.

This section of banking deals with the latest discovery in the banking instruments along with the polished version of their old systems.

Hire purchase

Hire purchase (abbreviated HP) is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in China, Japan, Malaysia, India, Australia, Jamaica and New Zealand. It is also called closed- end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In Canada and the United States, a hire purchase is termed an installment plan; other analogous practices are described as closed-end leasing or rent to own.

The British concept of hire-purchase has, however, been there in India for more than 6 decates. The first hire-purchase company is believed to be Commercial Credit Corporation, successor to Auto Supply Company. While this company was based in Madras, Motor and General Finance and Instalment Supply Company were set up in North India. These companies were set up in the 1920s and 1930s.











Consumer durables hire-purchase was promoted by the dealers in the respective equipment. Thus, Singer Sewing Machine company, or Murphy radio dealers would provide instalment facilities on hire-purchase basis to the customers of their products.

The other side developed very fast - hire-purchase of commercial vehicles. The dealers in commercial vehicles as well as pure financing companies sprang up.

The value of the asset being good and repossession being easy, this branch of financing activity flourished fast, although until recently, most of automobile financing business was in hands of family-owned businesses.

Essentially, asset-based financing in India particularly by non-banking financial companies is split in two documentation modes - lease and hire-purchase. These two are technically different instruments, but in essence, there is not much that differs between the two, except for the caption. Click here for more on comparison between lease and hire-purchase.

In spite of the substantive similarity, historically, there has been a diametric separation between these two forms. The assets usually subject matter of hire- purchase have been different from those generally leased out. Leasing has been used mostly for plant and machinery, while hire-purchase has commonly been used for vehicles. Even the players have been different.

The reasons for this diametric distinction are more historical than logical. Hire- purchase, essentially a British form, entered India during the Colonial era, and thrived as almost the only form of external finance available for commercial vehicles. For the financiers, as witnessed World-over, commercial vehicles was the natural choice for several asset-features he loves: lasting value, ready secondary market, self-paying feature, etc. Hence, the industry of hire-purchase became synonymous with truck-financing. Besides, the motor vehicles laws gave the surest legal protection any law could give to a financier: the financier would not have to carry any of the operational risks of a motor vehicle, and yet, any transfer of the vehicle would not be possible without the financier's assent.

Leasing, essentially a US-innovation, entered the country significantly in the early 80s, and was propagated as an alternative to traditional modes of industrial finance. Besides, the early motivation (which continues with a

number of players even now) of leasing was capital allowances, more significantly the investment allowance, which was not available for transport vehicles. Hence, the leasing form historically clung to industrial plant and machinery.

For several years, there was no lease of vehicles, because the Motor Vehicles law protection was not applicable to a lease, and there was no investment allowance on vehicles, and for reciprocal reasons, there was no hire-purchase of industrial machinery.

These reasons have vanished over time.

The Motor Vehicles law now treats leases and hire-purchase at par from the viewpoint of financier-protection.

Investment allowance has been abolished, and hence, there are no predominant tax-preferences to a lease.

The RBI treats lease and hire-purchase at par and has stopped giving a distinctive classification to leasing and hire-purchase companies.

The accounting norms lead to the same effect on pre-tax income, as also balance sheet values, be it a lease or hire-purchase transactions.


Financial service are an important component of financial system. Thesmooth functioning of financial system depends upon the range of financialservices extended by the providers. Financial services in India havewitnessed remarkable changes in the recent past after the implementation of

―Liberalization, privatization and globalization‖

.Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role asspecialized agencies. The resources raising functions remains to be the primary business of a merchant banker. The primary market holds the key torapid capital formation, growth in industrial productions and exports. Therehas to be accountability to the end use of funds raised from the market. Theincrease in the number of issues and amount raised the number of merchant bankers. Therefore, the field became highly competitive market where itrequires a specialized skill in handling the situation. The merchant bankershave a social responsibility to in building an industrial structure in India.


Investment has different meanings in finance and economics. In Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security of principle, as well as security of return, within an expected period of time.[1] In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling.

Investment is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments.

Mutual funds

Investing in the stock market requires in-depth analysis of the scrip and the companies and the business that they are involved in. Retail investors seldom have the time and expertise to analyse stocks.

In India, Mutual funds come to the rescue of such investors. All wary investors know that the best way to make money is to involve in stock market investing and buying Indian mutual funds.

Mutual Funds in India comprise of a group of investors come together and create a corpus which in invested in the stock market by a fund manager. Thus, the investors can depend on the expertise of the fund manager in order to maximise the returns on their mutual fund portfolio.

In India, Mutual Funds invest in different securities subject to the investment objective as set forth in the prospectus. The prospectus is a legal document under SEBI laws and contains a lot of information about the mutual fund.

Investing in mutual funds in India has many benefits:

The expertise of the fund manager of the AMC that manages mutual funds money in India helps the investor to maximise the profits on the amount invested in the mutual fund.

Indian Mutual Funds invest money in a widespread basket of shares and equities, depending on the nature of the Fund and switch investments to different securities depending on the Equity market conditions

In India, Mutual funds are an easy and cost efficient way of investing along with tax benefits.

There are many kinds of mutual funds available for the investors to choose from.

Sector Specific Mutual Fund Large/Small/Mid cap Mutual Fund Index Mutual Funds

Here is some information on companies that would enable you to invest in some of the best mutual funds in India:

SBI Mutual Fund Franklin Templeton Mutual Fund Reliance Mutual Fund Tata Mutual Fund Sundaram BNP Paribas MutualFund Fidelity Investments Mutual Fund

Portfolio Management

The capital markets today have not only become far more complex in terms of compliances, methodologies, effects and analysis but also need a constant tracking mechanism. As is the case globally, the Indian investor has also realized the advantages of seeking professional advice in order to not only manage but also augment his portfolio.

The Portfolio Management Schemes of the Company offer Discretionary Schemes (Unicon Optimizer & Unicon Growth) for Individuals, Corporate Bodies, Partnership firms, Proprietors, Non Resident Indians etc. The Company is registered with SEBI enabling it to undertake Portfolio Management activities under a specific license.

For any market condition:

Choose from our range of PMS products that are designed to perform in any market based on your investment objectives

Professional Fund Management:

The Schemes, duly approved by SEBI, are managed by a highly competent team comprising of portfolio managers and equity strategists, backed by a team of fundamental, technical and derivatives analysts

Personalized Service:

Proactive management of your funds by fund manager; backed by a Central Research team of Analysts and serviced by your dedicated Relationship Manager

Timely Review & Reporting:

Periodic review and rebalancing with timely performance reporting

Chapter 4 Fee based and fund based What are the different types of services offered by banks?

(The Economic Times (India) Via Thomson Dialog NewsEdge)Banks offer the following services to account holders at their specified branches - multi-city / Payable at Par (PAP) cheque facility, anywhere banking facility, trade services, phone banking facility, internet banking facility, credit card, debit/ATM card, mobile banking and Real Time Gross Settlement (RTGS).

Foreign banks are expanding the number of products on offer, their complexity such as derivatives, leverage financing. Doorstep banking facilities are being offered by some of these banks to cater to convenience lifestyle of its customers. Private banks are extending services including wealth management and equity trading apart from credit cards.

How do banks price their services?

The pricing mechanism is dependent on client relationship and the nature of the transaction. The pricing can be arrived at by profiling customers into different segments. The large corporate segment comprises of the bulk and large value transactions.

This segment is characterised by multiple service relationships. The pricing in this segment is transaction based and depends on the size of transactions and on the banks' relationship with the corporate. Hence, the pricing is decided on a one to one basis and public.

The other segments comprise the brokers, small and medium enterprises (SME), other banks and the retail segment. In each of these cases, the pricing is not made public and is determined on the basis of the nature of the transaction and the banks' relationship with the client, on a one to one basis.

Typically, high volumes and low value characterise the SME segment. Therefore the pricing for this segment differs from that of the large corporates. Similarly the pricing for the banks is very different. In the retail segment, the bank publishes its tariff.

How do services contribute to the bank's income?

Increasingly banks are witnessing a growth in their non-interest or fee-based incomes. With interest spreads decreasing, banks have little option but to ramp up their revenues from fee-based income.

Fee-based income constitutes a major portion of a bank's other income. The ratio of other income to total income is an indicator of the size of fee-based income. Treasury incomes of public sector banks are no longer the major revenue driver and have been coming down as a result of rising interest rates. Volatility of interest rates are compelling banks to increase their fee based income.

What is non-fund based income?

The non-fund based income comprises of revenues from both financial commitment and services rendered. Financial commitment includes guarantees, letters of credit and bankers acceptances etc.

The fees charged may vary from bank to bank and is dependant on the relationship of the bank with the client and the size of the transaction. On the

other hand, the revenues from services rendered include fees from funds transfer and enabling services like ATM, internet banking etc. The revenues from funds transfer come from corporate services such as cash management, foreign exchange remittances and from retail services including drafts, pay orders etc.

Which is the most important component for the fee-based income of banks?

The cash management business contributes to banks' fee based revenue stream in a major way. The cash management business comprises four types of services including collection of outstation cheques, disbursement of outstation cheques, payment of dividends, interest, and refunds and e-business.

The tariff differs depending on the volumes, the banks' profitability and the banks' relationship with the client. As a proportion of the total fee based income, cash management is the most important component. The other streams of income like auto loans, personal loans, loans against shares among others are residual. State Bank of India

When did RBI grant freedom to banks to prescribe service charges?

Indian Banks' Association (IBA) has dispensed with the practice of prescribing service charges to be levied by banks for various services rendered by them. With effect from September 1999, the Reserve Bank has granted freedom to

Why is RBI taking note of different service charges levied by banks?

RBI has been receiving representations from the public about unreasonable and non-transparent service charges being levied by the banks. The RBI has directed the banks to display and update on their web sites, offices and branches, the details of the charges pre-scribed by them for various services. It has advised the banks to display the charges in specified formats. The display may also be in local language.

Hitherto, it was left to the banks to fix charges consistent with the cost of providing these services and also to ensure that customers with low value/volume of transactions were not penalised.


Role of Commercial Banks in the Economic Development of a Country

Commercial banks play an important and active role in the economic development of a country.

If the banking system in a country is effective, efficient and disciplined it brings about a rapid growth in the various sectors of the economy.

The following is the significance of commercial banks in the economic development of a country.

Role of Commercial Banks in the Economic Development of a Country

Banks promote capital formation

In any Merchant Account, capital occupies a position of crucial and strategic importance. The bank plays an important role in removing the deficiency of capital by stimulating savings and investments. A sound

banking system helps in mobilisation of the savings of the merchants and makes them available for investment in productive merchandise industries. No economic development of sizeable extent in merchant account is possible unless there is sufficient degree of capital formation.

Capital is must in all businesses. Capital is also considered as life-blood of any business. Banks help a lot in pushing up small business to a certain height by giving financial help and also by promoting capital formation. There are other non-banking financial institutions that also provide monetary help. But these financial institutions charge a higher rate of interest than the banks. Merchant account is maintained with lots of withdrawals and deposits and also various other transactions. Credit card processing is an example of a merchant account. In modern days, going to the bank for making transactions like withdrawal is eliminated. These services are replaced by e-commerce and electronic banking systems. Internet is used as a main medium for such kind of transactions. But it is also important to visit banks sometimes to make deposits into the respective account.

Merchant account is accessed at any time of the day. A high level of technological support is needed in the background. Merchants usually accept credit cards to receive payments from the customers. Banks perform two important functions in the capital formation of merchant account holders. They are: (a) Banks attract deposits by offering attractive rates of interests and thus converting savings which would have remained as immobile capital into active capital; and (b) The banks distribute these savings through loans amongst the merchant account holders which are directly or indirectly connected to economic development. Bank plays an important role in encouraging savings and making merchandise business stand firmly in the poorest market situations. The merchants also find satisfaction in the offers provided by the banks. This improves the bank and merchant relationship.

It is the customer who saves hardly 5 percent of the national income. The more savings are done, the more capital formation improvises. To secure a reasonable level of development, the common people should save at least 12 percent of the national income. A small rate of saving does not permit large investment in merchant accounting system. A merchant should

always be ready to face even the worst situation that may come in the economy which is very uncertain and un-predictable in nature. Banks also act as a backbone to any monetary terms and dealings. The banks provide financial assistance in the establishment of various businesses. It is difficult to see how, in the absence of banks, small merchandise business of various merchants could be made possible or mobilised. The capital deficiencies in any merchant account are the serious handicaps in the development of any economy. These deficits in financing of the merchant business are covered up by the banks. Thus banks helps in promoting capital formation for merchant account holders.

Investment in new enterprises

With the Standard & Poor's 500 Stock Index up 4.89 percent and the Lehman Aggregate Bond Index up 2.41 percent last year, you could be thinking of adjusting your portfolio to improve its performance by taking bigger risks-- perhaps more than would be appropriate for you. Given the potential losses inherent in such a plan, the following resolutions may be helpful as you review your investment strategies this year:

Allocate your assets among bonds, stocks, money-market instruments and funds in proportions that reflect the amount of risk necessary to achieve your goals. In many cases, that may mean your portfolio shouldn't be more conservative "just because" you're older or because that's what a rule of thumb tells you. It should really be about allocating for your particular goals, tax situation, risk tolerance and unique circumstances, and not just because you're at a certain age or point in your life. Be wary of recommendations of all-purpose model portfolio asset allocations. While they may indicate how various investment strategists feel about the near-term relative attractiveness of stocks and bonds, they're not taking your particular investment goals and risk tolerance into account. On the other hand, if you don't have the time or inclination to do the necessary initial portfolio construction, disciplined re-balancing and

continuous re-alignment over time, you may want to consider "lifestyle" or "life cycle" funds, which perform
continuous re-alignment over time, you may want to consider "lifestyle"
or "life cycle" funds, which perform these functions for you.
Have realistic expectations about the performance of your portfolio. On
average, the years of exceptional returns for stocks are just a memory
now. Annual returns below the long-term average of about 10 percent per
annum seem more likely in the foreseeable future. With that in mind,
understand that the average returns for balanced portfolios are likely to
be in the single-digit range.
Resolve to maximize your net returns by minimizing commissions when
buying or selling individual securities and purchasing mutual funds with
reasonable expense ratios. When investing in taxable accounts, be
mindful of the tax consequences of owning mutual funds that make large
taxable distributions of capital gains. Consider placing funds with low
turnover ratios that distribute long-term capital gains in taxable accounts
and funds that have large amounts of short-term gains distributions in
retirement accounts, such as IRAs, 401(k)s, or other tax-deferred
 When investing for income, resist the temptation to chase high yields.
Higher yields are generally associated with higher risk. Plus, with some
investments, what appears to be a yield may actually be a return of
Don't forget about tax-exempt bonds and bond funds. Tax-exempt state
or local government bonds or bond funds, whose yields are usually lower
than those of taxable issues of comparable credit quality and maturity,
may pay more than the after-tax return you'd receive when investing in
comparable taxable securities. So do the math and make sure you
compare apples with apples--meaning, compare your prospective after-
tax income from taxable securities with the return from tax-exempts.
 Accept that there's no shortcut to mutual fund selection. Whether you do
it or an adviser does it for you, funds need to be researched to determine
if they're suitable for your portfolio. One of the best and most robust
sources of research is the prospectus. Data indicating superior past
performance--which funds must report in accordance with the Securities
and Exchange Commission (SEC)--don't assure you of superior future
performance. Neither do ratings, such as the star rating calculated by
Morningstar. They may provide the additional dimension of past
performance, but, as Morningstar points out, the stars don't have

predictive value. Such data constitute the beginning, not the end, of the selection process and provide a first-round screen as to which funds you might want to study further. Don't be too impressed by high absolute returns. It's important to compare performance data for a mutual fund with performance data for the relevant benchmark index for the same time period. You can find the appropriate index in the fund's prospectus. For domestic stock funds, the index will generally either be the S&P, Russell or another broad market index. For domestic bond funds, you'll generally see a Lehman Brothers bond index. You should also consider comparing fund returns with the returns of its peer group, as computed by Lipper or Morningstar. By focusing on relative returns, you should get a sense as to whether the fund has performed as well as could be expected.

Promotion of trade and industry

Department ofCommerce

The department is entrusted with formulating and implementing the foreign trade policy and responsibilities relating to multilateral and bilateral commercial relations, state trading, export promotion measures, and development and regulation of certain export oriented industries and commodities.

In order for the smooth functioning, the Department is divided into eight divisions: [5]

Administrative and General Division

Finance Division

Economic Division

Trade Policy Division

Foreign Trade Territorial Division

State Trading & Infrastructure Division

Supply Division

Plantation Division

The subjects under the administrative control of the Department include: [6]

International trade

Foreign Trade

State trading

Management of Indian Trade Services

This department was established in the year 1995, and in the year 2000 Department of Industrial Development was merged with it. This department is responsible for formulation and implementation of promotional and developmental measures for growth of the industrial sector, keeping in view the national priorities and socio-economic objectives. While individual administrative ministries look after the production, distribution, development and planning aspects of specific industries allocated to them, Department of Industrial Policy & Promotion is responsible for the overall Industrial Policy. It is also responsible for facilitating and increasing the FDI flows to the country.











intellectual property rights relating to patents, designs, trademarks, and geographical indication of goods and oversees the initiative relating to their promotion and protection.

Development of agriculture

From a nation dependent on food imports to feed its population, India today is not only self-sufficient in grain production but also has a substantial reserve. The progress made by agriculture in the last four decades has been one of the biggest success stories of free India. Agriculture and allied activities constitute the single largest contributor to the Gross Domestic Product, almost 33 percent of it. Agriculture is the means of livelihood of about two-thirds of the workforce in the country.

This increase in agricultural production has been brought about by bringing additional area under cultivation, extension of irrigation facilities, the use of improved high-yielding variety of seeds, better techniques evolved through agricultural research, water management, and plant protection through

judicious use of fertilizers, pesticides and cropping practices.

Balanced development of different regions

Growing regional disparities are a real and present danger to Indian growth and poverty reduction, and to Indian politics. The specifics of regional policies can be debated, but India should strive for regionally balanced development, between states and within states. In doing so, it would be in good global company.

India has lower spatial income disparities than countries such as Brazil, China and Indonesia, but these disparities have grown dramaticallythe standard deviation of state level per capita GDP rose from just below 0.3 in the 1980s to over 0.4 in the 1990s, an increase of more than one third (World Bank, 2006). The gap between rural and urban areas also widened despite average growth in both (Sen and Himanshu, 2005). The contribution of rural-urban disparities to overall inequality has grown correspondingly (Gajwani et al., 2007). A remarkable feature of Indian spatial disparities is the presence of backward areas even within states that have grown faster and are at relatively high income levels on average. Eastern and Northern Karnataka, and Inland Eastern Maharashtra, are examples of lagging regions within prosperous states. Moreover, they form a contiguous corridor with deprived areas of Andhra Pradesh, Orissa, Chhattisgarh, Jharkhand and Bihar. Income disparities are matched, even exceeded, by disparities in non-income indicators. Disparities in access to toilets range from 70 per cent in some districts of India to 10 per cent in others. Although Maharashtra‘s Infant Mortality Rate (IMR) is near the best in the country, its worst districts have IMRs that are higher than those of states with lower ranks. Thus while income and non-income poverty in some parts of India is at the relatively low levels of Latin America averages, in other parts of India it approaches or is worse than African averages (World Bank, 2006). India is not unique. High and rising spatial disparities are a feature of many developing countries. In Peru, for example, the incidence of income poverty in districts at sea level is three quarters of that in mountain districts. In China rural per capita income in Shanghai province is more than five times that in Guizhou province. Moreover, Chinese regional inequality increased throughout the 1990s and early 2000s, reaching an all time historical high. In Indonesia, the poverty reducing impact of growth has been higher in Java and Bali than in the

remote areas of Kalimantan and Irian Jaya, with a resulting widening poverty gap between regions (Kanbur and Venables, 2007). Globally, opening up of an economy appears to be correlated with rising spatial inequality. This is not surprising, since global integration leads to a sharper expression of comparative advantage, and regions well placed in terms of location, education, governance and other initial conditions tend to surge ahead as global opportunities are better accessed while others lag behind. This is the case for China and for India, where sharply rising regional disparities have coincided with the period of external liberalization. The same argument applies to liberalization in general (Gajwani et al., 2007 and Kanbur and Venables,


India should strive for regionally balanced development, between states and within states. In doing so, it would be in good global company.

Influencing economy activity

While consumers and producers make most decisions that mold the economy, government activities have a powerful effect on the U.S. economy in at least four areas.

Stabilization and Growth. Perhaps most importantly, the federal government guides the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By adjusting spending and tax rates (fiscal policy) or managing the money supply and controlling the use of credit (monetary policy), it can slow down or speed up the economy's rate of growth -- in the process, affecting the level of prices and employment.

For many years following the Great Depression of the 1930s, recessions -- periods of slow economic growth and high unemployment -- were viewed as the greatest of economic threats. When the danger of recession appeared most serious, government sought to strengthen the economy by spending heavily itself or cutting taxes so that consumers would spend more, and by fostering rapid growth in the money supply, which also encouraged more spending. In the 1970s, major price increases, particularly for energy, created a strong fear of

inflation -- increases in the overall level of prices. As a result, government leaders came to concentrate more on controlling inflation than on combating recession by limiting spending, resisting tax cuts, and reining in growth in the money supply.

Ideas about the best tools for stabilizing the economy changed substantially between the 1960s and the 1990s. In the 1960s, government had great faith in fiscal policy -- manipulation of government revenues to influence the economy. Since spending and taxes are controlled by the president and the Congress, these elected officials played a leading role in directing the economy. A period of high inflation, high unemployment, and huge government deficits weakened confidence in fiscal policy as a tool for regulating the overall pace of economic activity. Instead, monetary policy -- controlling the nation's money supply through such devices as interest rates -- assumed growing prominence. Monetary policy is directed by the nation's central bank, known as the Federal Reserve Board, with considerable independence from the president and the Congress.


Role of Commercial Banks in the Economic Development of a Country

Banks promote capital formation:

Commercial banks accept deposits from individuals and businesses, these deposits are then made available to the businesses which make use of them for productive purposes in the country.

The banks are, therefore, not only the store houses of the country‘s wealth, but also provide financial resources necessary for economic development.

Role of Commercial Banks in the Economic Development of a Country

Investment in new enterprises:

Businessmen normally hesitate to invest their money in risky enterprises. The commercial banks generally provide short and medium term loans to entrepreneurs to invest in new enterprises and adopt new methods of production.

The provision of timely credit increases the productive capacity of the economy.

Economic Development of a Country

Promotion of trade and industry:

With the growth of commercial banking, there is vast expansion in trade and industry.

The use of bank draft, check, bill of exchange, credit cards and letters of credit etc has revolutionized both national and international trade.

Economic Development of a Country

Development of agriculture:

The commercial banks particularly in developing countries are now providing credit for development of agriculture and small scale industries in rural areas.

The provision of credit to agriculture sector has greatly helped in raising agriculture productivity and income of the farmers.

Role of Commercial Banks in the Economic Development of a Country

Balanced development of different regions:

The commercial banks play an important role in achieving balanced development in different regions of the country.

They help in transferring surplus capital from developed regions to the less developed regions.

The traders, industrialist etc of less developed regions are able to get adequate capital for meeting their business needs.

This in turn increases investment, trade and production in the economy.

Role of Commercial Banks in the Economic Development of a Country

Influencing economic activity:

The banks can also influence the economic activity of the country through its influence on

Availability of credit

The rate of interest

If the commercial banks are able to increase the amount of money in circulation through credit creation or by lowering the rate of interest, it directly affects economic development.

A low rate of interest can encourage investment.

The credit creation activity can raise aggregate demand which leads to more production in the economy.

Role of Commercial Banks in the Economic Development of a Country

Implementation of Monetary policy:

The central bank of the country controls and regulates volume of credit through the active cooperation of the banking system in the country.

It helps in bringing price stability and promotes economic growth with in the shortest possible period of time.

Role of Commercial Banks in the Economic Development of a Country

Monetization of the economy:

The commercial banks by opening branches in the rural and backward areas are reducing the exchange of goods through barter.

The use of money has greatly increased the volume of production of goods.

The non monetized sector (barter economy) is now being converted into monetized sector with the help of commercial banks.

Role of Commercial Banks in the Economic Development of a Country

Export promotion cells:

In order to increase the exports of the country, the commercial banks have established export promotion cells.

They provide information about general trade and economic conditions both inside and outside the country to its customers.

The banks are therefore, making positive contribution in the process of economic development.


Role of Banks in 21 st century

The commercial banks are now not confined to local banking.

They are fast changing into global banking i.e, understanding the global customer, using latest information technology, competing in the open market with high technology system, changing from domestic banking to investment banking etc.

The commercial bank are now considered the nerve system of all economic development in the country.

Virtual Banking What is virtual banking?

Providing the banking services through extensive use of information technology without direct recourse to the bank by the customer is called virtual banking.

The origin of virtual banking can be traced to the 1970,s with the installation

of ATM‘s.

The principal types of virtual banking services include automated teller

machines (ATM‘s), phone banking and most recently internet banking.

With the increasing use of internet banking there is greater reliance now on information technology and the decrease of physical bank branches to deliver the banking services to the customer.

Credit creation by commercial bank?

Central bank is the first source of money supply in the form of currency in circulation. The Reserve Bank of Indian is the note issuing authority of the country. The RBI ensures availability of currency to meet the transaction needs of the economy. The Total Volume of money in the economy should be adequate to facilitate the various types of economic activities such as

production, distribution and consumption.


The commercial banks are the second most important sources of money supply.











The process of 'Credit Creation' begins with banks lending money out of primary deposits. Primary deposits are those deposits which are deposited in banks. In fact banks cannot lend the entire primary deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with

the RBI under RBI & Banking Regulation Act. After maintaining the required reserves, the bank can lend the remaining portion of primary deposits. Here bank's lend the money and the process of credit creation starts.

Bank Bank Bank So 2, on. 3, & 1, Suppose there are a number of Commercial
Suppose there are a number of Commercial Banks in the Banking System –

To begin with let us suppose that an individual "A" makes a deposit of Rs. 100 in bank 1. Bank "1" is required to maintain a Cash Reserve Requirement of 5% (Prevailing Rate) which is decided by the RBI's Monetary Policy from the deposits made by 'A'. Bank "1" is required to maintain a cash reserve of Rs. 5 (5% of 100). The bank has now lendable funds of Rs. 95(100 5). Let the Bank "1" lend Rs. 95 to a borrower; say B. the method of lending is the same that is bank 1 opens an account in the name of the borrower cheque for the loan amount. At the end of the process of deposits & lending, the balance sheet of

bank reads as given below:-


Balance Sheet of Bank "1"





A's deposits

  • 100 Cash Reserve




Loan to "B"



  • 100 Total



Now suppose that money that borrowed from bank "1" is paid to individual "C" in settlement of his past debts. The individual "C" deposits the money in his bank say, bank 2. Now bank 2 carries out its banking transaction. It keeps a cash reserve to the extent of 5%, that is Rs. 4.75 (5% of 95) and lend Rs. 90.5 to a borrower D. at the end of the process the balance sheet of Bank 2 will be look like:-

Balance Sheet of Bank "2"







B's deposits


Cash Reserve




Loan to "C"







The amount advanced to D will return ultimately to the banking system, as described in case of B and the process of deposits and credit creation will continue until the reserve with the banks is reduced to zero. The final picture that would emerge at the end of the process of deposit & credit creation by the banking system is presented in the consolidated balance sheet of all banks are as under:-

The combined Balance sheet of Banks




Assets Credits


Total Assets


Bank 1





Bank 2





Bank 3















Bank n










It can be seen from the combined balance sheet that a primary deposits of Rs. 100 in a bank 1 leads to the creation of the total deposit of Rs. 2,000. The combined balance sheet also shows that the banks have created a total credit of Rs. 2,000. And maintained a total cash reserve of Rs.100.Which equals the primary deposits. The total deposit created by the commercial banks constitutes the money supply by the banks.

A study on SBI

State Bank of India (BSE:SBI), a public sector bank, is the largest bank in India. [1] SBI accounts for almost one-fifth of the nation‘s loans. [1]

Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. The bank has 21 subsidiaries and 10,186 branches. SBI was recognized as the best bank in India in 2008 by The Banker magazine of The Financial Times. [2]

Banks across Asia are looking to shore up their balance sheets as they prepare for a tougher business environment amid a global economic downturn. SBI, which had no direct exposure to sub-prime mortgages, has said that it would still need to raise USD $2-4 billion capital to boost its Tier-1 capital adequacy ratio, but whether it would be done through a rights issue or other means has not been finalized. [3] Tier 1 capital is a core measure of a bank's financial strength. It is composed of core capital, which consists primarily of equity capital and cash reserves.

Company Overview

SBI offers banking services as well as an array of financial services which include Mutual Funds, Credit cards, Life Insurance, Merchant Banking, Security Trading & Primary dealership in the Money market. The Bank is actively involved in non-profit activity called community services banking apart from its normal banking activity.

Associate banks

There are six associate banks that fall under SBI, and together these seven banks constitute the State Bank Group. They are:

State Bank of Indore State Bank of Bikaner & Jaipur State Bank of Hyderabad State BankIndian bank that figures in Fortune‘s top 100 banks. Its 11,000 branches and 5,600 automatic teller machines give it a reach throughout the length and breadth of the country; its work force of 200,000 dwarfs all other banks in India (its nearest competitor is Punjab National Bank, which has around 56,000 employee s ) . It is also the second largest bank in the world, measured by the number of branches and employees . Joint Ventures SBI has entered into strategic agreements with banks, insurers and other companies. Insurance Australia Group (IAG) has signed a $170 million joint venture agreement with the State Bank of India (SBI) to establish a general insurance company in India . SBI will become the first public sector bank in India to enter the custody services sector. State Bank of India (SBI) and Societe Generale Securities Services (SGSS), part of Societe Generale Group , have announced a joint venture which will offer custody and related services in India . The new company, SBI SG Custodial Services, will be based in Mumbai and offer a range of services to both foreign and domestic investors and clients, covering custody, depository, fund administration, registration and transfer agent services. The joint v enture will leverage SBI‘s strength in the Indian financial sector . India is a preferred destination for private equity funds in real estate . SBI has planned to capitalize on this opportunity by teaming up with Australia‘s " id="pdf-obj-68-3" src="pdf-obj-68-3.jpg">

State Bank of Indore State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

SBI is the only Indian bank that figures in Fortune‘s top 100 banks. Its 11,000 branches and 5,600 automatic teller machines give it a reach throughout the length and breadth of the country; its work force of 200,000 dwarfs all other banks in India (its nearest competitor is Punjab National Bank, which has around 56,000 employees [4] ). [5] It is also the second largest bank in the world, measured by the number of branches and employees. [6]

Joint Ventures

SBI has entered into strategic agreements with banks, insurers and other companies. Insurance Australia Group (IAG) has signed a $170 million joint venture agreement with the State Bank of India (SBI) to establish a general insurance company in India.

SBI will become the first public sector bank


India to enter the custody

services sector. State Bank of India (SBI) and Societe Generale Securities Services (SGSS), part of Societe Generale Group, have announced a joint venture which will offer custody and related services in India. The new company, SBI SG Custodial Services, will be based in Mumbai and offer a range of services to both foreign and domestic investors and clients, covering

custody, depository, fund administration, registration and transfer agent services. The joint venture will leverage SBI‘s strength in the Indian financial sector. [7]

India is a preferred destination for private equity funds in real estate. SBI has planned to capitalize on this opportunity by teaming up with Australia‘s

Macquarie Group for a $2 billion infrastructure fund, and with an affiliate of Unitech Ltd, the country‘s second largest publicly traded real estate company, to float a private equity (PE) real estate fund. [8]

Punjab National bank - Punjab National Bank (PNB) is the second largest government-owned commercial bank in India with about 4,500 branches across 764 cities. [15] This financial institution offers services in personal and corporate banking, including industrial, agricultural, and export finance, as well as international banking. It competes with SBI mostly in retail lending and wholesale businesses [16]

ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank and second largest overall in terms of assets. Together with its subsidiaries, ICICI Bank offers a complete spectrum of financial services and products ranging from commercial banking to investment banking, mutual fund to insurance. It is also the largest issuer of credit cards in India.

HDFC - Housing Development Finance Corporation Limited Bank Limited or HDFC Bank is the second largest private bank in India, catering to the whole universe of financial services from commercial to investment banking, mutual fund to insurance. [17] On February 25, 2008 HDFC agreed to buy Centurion Bank of Punjab. The combined entity has the largest branch network among private banks in India, a strong deposit base of around Rs 1220 billion and net advances of around Rs 890 billion. [18]

Bank of Baroda - Bank of Baroda is another private player. It has a rich countrywide network of over 2800 branches. It also has significant international presence with a network of 74 offices in 25 countries. [19]



The financial sector reforms have brought about significant improvements in the financial strength and

the competitiveness of the Indian banking system. The prudential norms, accounting and disclosure

standards, risk management practices, etc are keeping pace with global standards, making the

banking system resilient to global shocks.

The consolidation and convergence of banks in India has, however, not kept pace with global

phenomena. The efforts on the part of the Reserve Bank of India to adopt and refine regulatory and

supervisory standards on a par with international best practices, competition from new players,

gradual disinvestment of government equity in state banks coupled with functional autonomy, adoption

of modern technology, etc are expected to serve as the major forces for change. In the emerging

scenario, the supervisors and the banks need to put in place sound risk management practices to

ensure systemic stability. The face of banking is changing rapidly. Competition is going to be tough and with financial liberalisation under the WTO, banks in India will have to benchmark themselves against the best in the world. For a strong and resilient banking and financial system, therefore, banks need to go beyond peripheral issues and tackle significant issues like improvements in profitability, efficiency and technology, while achieving economies of scale through consolidation and exploring available cost-effective solutions.

In India money market is regulated by Reserve bank of India (www.rbi.org.in) and Securities Exchange Board of India (SEBI) [www.sebi.gov.in ] regulates capital market. Capital market consists of primary market and secondary market. All Initial Public Offerings comes under the primary market and all secondary market transactions deals in secondary market. Secondary market refers to a market where securities are traded after being initially offered to the public in the primary market and/or listed on the Stock Exchange. Secondary

market comprises of equity markets and the debt markets. In the secondary market transactions BSE and NSE plays a great role in exchange of capital market instruments.


Aai, K., The Optimal Insurance Against Consumption Price Risks, Hitotsubashi Journal of Economics, Vol. 35, No. 1, June 1994. Adams, T.F.M. and Hoshii, Iwao, A Financial History of the New Japan, Kodansha International Ltd., Lokyo 1972.

Ambrose, J.M. and Carroll, A.M., Using Best‘s Ratings in Life Insurer

Insolvency Prediction, Journal of Risk and Insurance, Vol. 61, No. 2, June 1994. American Council of Life Insurance, Life Insurance Factbook, Washington D.C.,


Anyahwu, J.C., Housing Finance in Nigeria: The Role of Financial Institutions, Prajnan, Vol. XIX, No. 4, Oct-Dec. 1990. Baltensperger, Ernst, Alternative Approaches to the Theory of the Banking Firm, Journal of Monetary Economics, Vol. 6, 1980. Bandyopadhyay, Tarun and Ray, Indrajit, The Role of IDBI in the Correction of Regional Imbalances in West Bengal: An Empirical Assessment, Prajnan, Vol. XX, No. 3, July-September 1991. Banerjee, Bhabaotosh, Capital Structure in Public Enterprises: The Role of Banking and Financial Institutions: An Analysis, Journal of Accounting and Finance, Vol. III, No. 1, Spring 1989.

Banerjee, G. and Banerjee, S., Borrowing from Financial Institutions, UDH Publishing House, Delhi. Banerjee, G., Law Relating to State Financial Corporations, UDH Publishing House, Delhi. Bank for International Settlement, Recent Innovations in International Banking, April


Bank Profitability, Statistical Supplement, Financial Statements of Banks 1981-


Organisation for Economic Co-operation and Development, Paris 1991. Barkovec, J.A., et al., Race, Redlining and Residential Mortgage Loan

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Improving Depository Institution Efficiency in a Competitive Environment,

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Industry in Turmoil: A Report on the Condition of the U.S. Banking Industry and the Bank Insurance Fund, U.S. Government Printing Office, Washington D.C., December


Basch, Antonian, Financing Economic Development, New York 1964.

Bauer, P.W., The Efficiency of Financial Institutions: Discussants Comment on Berger et al, and English et al, Journal of Banking and Finance, Vol. 17, No. 2-3, April


Bayliss, B.T. and Philip, A.A.S. Butt, Capital Markets and Industrial Investment in Germany and France, Saxon House, Westmead, England, 1980. Bell, Clive, Interactions between Institutional and Informal Credit Agencies in Rural India, The World Bank Economic Review, September 1990.

Beneficial Corporation Annual Report 1990, Peapack, New Jersey.

Benston, G.J., International Harmonization of Banking Regulations and Cooperation among National Regulators: An Assesment, Journal of Financial Services Research, Vol. 8, No. 3, September 1994. Benston, George J. and Kaufman, George G., Risk and Solvency Regulation of Depository Institutions: Past Policies and Current Options, Saloman Brothers‘ Centre for the Study of Financial Institutions at the Graduate School of Business Administration of New York University, New York 1988. Berger, A.N., Hunter, W.C. and Timmes, S.G., The Efficiency of Financial Institutions:

A Review and Perview of Research Past, Present and Future, Journal of Banking and Finance, Vol. 17, No. 2-3, April 1993. Bernstein, B. and Boughton, J., Adjusting to Development: The IMF and the Poor, Finance and Development, Vol. 31, No. 3, September 1994. Bhabatosh, Dutta, Essays on Plan Economics, Chapter 12. Bhatia, V.V., Structure of Financial Institutions, Vora and Company, Bombay


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Bibliography : Financial Institutions & Services

Literature review


Indian Financial System



Dr G Ramesh Babu


Students Edition

Edition Number:


Critics who previewed this presentation before its going to press are of the Opinion that after going through the classic gem. One does not have to delve into any of its kind. Because, it offers all one needs to know both theoretically and practically about: (I) FINANCIAL INSTITUATIONS; (II) FINANCIAL MARKET; and (III) FIANCIAL SERVICE, besides the introductory very INDIAN FINANCIAL SYSTEM itself. It covers all the institutions that deal with public fianc and recommends itself best to anyone scholar or practitioner in ay capacity wanting to have masterly grip on the subject.


Indian Financial System Textbook



D K Murthy, Venugopal



Indian Financial System explains the changing dimensions of the country's financial set-up owing to the financial sector reforms. The book assesses the Indian financial system in the light of contemporary changes that have taken place in financial markets, mutual funds industry, insurance and banking sectors etc. The book provides a sound theoretical foundation, giving a clear conceptual understanding of the subject. It gives a complete picture of the structure, operations and functions of various components of the Indian financial system. Every chapter in the book begins with the objectives of learning and is followed by objective, analytical and essay-type questions. The book would be useful for graduate and postgraduate level students of commerce, management and economicsContents:

* Financial System * Commercial Banks * Financial Institutions * Regulatory Institutions * Banking Innovations




Indian Financial System Pearson Bharati V Pathak

About the Book:

The Financial System is the mirror reflection of an economy. The performance of any economy to a large extent, is dependent on the performance of the financial institution. In such an environment the agility to adopt to emerging dynamics is the deciding the growth of sound financial system. The rules of the game is on Mergers and Acquisitions. The financial services industry is seeing a consolidation, with all segments of players offering of a plethora of services. In the post liberalisation era, the finance sector is witnessing a complete metamorphosis. Deregulation measures have included the freeing up of direct controls over ownership, liberalising interest rates and credit allocation, deregulating foreign exchange transaction controls, freeing up the entry of new firms, and expanding and broadening the base of the banking system both for nationals and international business ventures. At the same time, non-banking financial institutions, securities markets and money markets have developed to mobilize and allocate savings. Experience suggests that financial liberalisation needs to be undertaken alongside macro-economic reform. In this context, "Fundamentals of the Indian Financial System" is a subject that is assuming greater importance and is bound to be one of the key topics of discussion during the next two/three decades. This is, as it should be, to consider what sorts of financial institutions will be best suited to be economic environment in the 21st century.

The Debt Market.

New Financial Instruments.

Disinvestment of Public Sector Undertakings.

The Derivatives Market.

Credit Rating.

Factoring and Forfaiting.

Development Financial Institutions.

Banking and Non-Banking Institutions.

Mutual Funds.


Financial Regulation.


The process to restructure Indian financial system launched since 1991 has been accompanied by a surge of financial particularly private flows. Driven by a number of internal and external factors these private financial flows pose risks to financial systems. Several countries that have received substantial

financial flows have faced costly banking crises. The present book attempts to study the impact of international financial flows particularly private flows on

Indian financial system. Based on the analysis of data, the book attempts to spell out what restructuring is needed in Indian financial system to attract and sustain inflows and to avert the risks posed by inflows to India. It holds various policy implications to restructure Indian financial system in response to financial flows and should be of interest to policy makers and academicians. This book intends to enlighten the readers regarding: .

Changing nature and composition of international financial



Issues/concerns raised by private, international

flows. .

Trends in private non-

debt flows to India since

1990s. .

Empirical work on impact of financial flows

on financial

Indian initiatives to restructure its capital market and

banking sector in

Policy implications on restructuring Indian

financial system in response to private financial flows.

Book Details

Restructuring Indian Financial System




Nidhi Jain




Indian financial system is one of the largest in the world with a broad variety of

banking, financial and capital market institutions and instruments. What kind of structural changes in the Indian financial system are required to cope with an increasing complex and faster moving international economic and financial environment? Some of the important issues in the context of financial sector are: (1) Is there any need of heavy reforms in financial sector along with the adjustment process?; (2) Is it necessary that the reforms should be supplemented by significant inflow of foreign direct investments?; (3) Is the internal adjustment progress (for the promotion of exports) more important than the package of DFL, imported technology and enhanced productivity?; (4) Is there any relationship between inefficiency and adjustment process'; and, finally, (5) Is technical process pre-requisite for the success of adjustment process? Adequate attention to these may effectively take care of the distortions on the financial side and the process of reforms may be smooth, politically and administratively sustainable and bring the desired, effective and quick results by making the Indian financial system vibrant and competitive, a necessary concomitant of trade and industrial policy liberalization. Indian Financial System analyses the initiatives aimed at developing a healthy, efficient and market-oriented system by deregulating interest rates, development of market instruments for pricing public debt and bank loans, upgrading of India's regulatory and accounting standards to international norms, adjustments in monetary and financial policies, and exchange rate management for an increasingly liberalised and open economic and financial environment.

Book Details


Indian Financial System



V K Bhalla



Indian financial system, anmol publication, author V.K Bhalla