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Project Report
“Kaleidoscopic View on Indian Banking Sector”
NIS Academy, Aurangabad

In partial fulfillment of the requirements

For the
Master in Business Administration
Academy year 2008-10
Avinash S. Ashture
Enroll No. 4740800340


The Summer Internship Programme was undoubtedly a great learning experience for
me and has helped me learn immensely. I feel great pleasure in expressing my reg
ards and profound sense of gratitude to my faculty guide Mrs. Rajlaxmi Bhosale (
NIS Academy, Aurangabad) and company guide M/s.Sonali Dixit (Asst. Manager, HDFC
Bank, Aurangabad) for their inspiration, guidance and support in the completion
of this project report. I also express my sincere thanks to ICICI Bank, Auranga
bad which helped me to a great extent in conducting this study by providing me t
he required data. The constant support and inputs rendered by my guides were inv
aluable. I am extremely grateful to them for providing the necessary inputs, and
guidance at every stage of my project.
I express my sincere thanks to the administration of NIS Academy, Aurangabad who
provided adequate support and facilities to accomplish my work of data collecti
on and completion of project report on time. Last but not the least, I am highly
thankful to my friends who were always there whenever their support was needed.

Place: NIS Academy, Aurangabad.

Sr no Title Page no
01 Introduction 4
02 Needs of the project 6
03 Objectives of the project 7
04 The role of economists in Banks 8
05 History of banks in India 10
06 Banks in India 14
07 Reserve Bank of India 15
08 Nature baking in India 20
09 Kinds of Banks 21
20 Conclusion 67
21 Bibliography 68

In my inaugural address last year, I had indicated a vision for Indian banking i
n the new millennium – that of a vibrant, internationally active banking system, d
rawing upon its innate strengths and comparative advantages to make India a majo
r banking centre of the world. I had pointed out then that, while it may take up
to 10 or even 15 years to achieve this vision, the time to begin was now. Recen
t developments have only served to bring forward the urgency attached to embarki
ng upon this quest. Even as we do so, it is necessary to recognize that, in view
of recent global developments and the economic slowdown, the progress towards t
his goal would call for even greater effort and determination. In this context,
the theme chosen for this year’s Conference i.e., "Indian Banking: Paradigm Shift"
is most timely as it provides an opportunity to deliberate on the new challenge
s ahead, and the action that we must take to manage them. I am happy to be a par
t of these deliberate ions and to deliver the inaugural address to the 23rd Conf
erence of Bank Economists here today. As you are aware, global economic prospect
s turned sharply adverse since September 2001 following the terrorist attacks on
the US. The possibilities of a recovery in the global economy have become highl
y uncertain, belying the initial expectations of a V-shaped recovery as well as
the subsequent hopes of a U-shaped recovery. As of now, the consensus of forecas
ts settles around 2.4 per cent for world GDP growth for 2001. World trade volume
growth could slow down to around 1.3 per cent and net capital outflows from dev
eloping countries may now be larger than anticipated earlier. Although the sharp
spurt in international oil prices has abated, their future behavior remains unc
lear. Macroeconomic weaknesses have also been associated with an erosion of busi
ness confidence. Insurance, airlines, tourism and hotel industries have been hit
hard and the exposure of financial institutions to these industries can be a po
tential source of vulnerability. Despite the relatively inward-looking nature of
the Indian economy, it cannot remain insulated from these international develop
ments. The direct effects of these external developments on our banking system a
re expected to be limited. Indirect effects, especially through exports and subd
ued industrial activity could, however, impact upon the asset quality of our ban
king system and other segments of the financial system. The need to constantly m
onitor international developments and take appropriate and often, preemptive act
ion add an entirely new dimension to the progress of our banking system towards
its longer-term vision. We have made considerable progress in implementing banki
ng and financial sector reforms. There is also some improvement in the financial
performance of the banking system in terms of various indicators of operating e
fficiency. Nevertheless, there are several areas regarding the efficiency of our
banking system – rather than its stability – that raise concerns, especially during
a period of generalized uncertainty. The level of non-performing assets (NPAs)
continues be high by international standards, preempting funds for provisioning
and eating into the performance and profitability of financial intermediaries. T
he response to the debt recovery and asset restructuring initiatives undertaken
as part of financial sector reforms has also been slow. In the period ahead, our
financial system will also have to prepare for a tightening of the prudential n
orms as the new Basel Accord becomes effective and a fuller response to the curr
ent financial environment emerges. Our financial institutions continue to be sus
ceptible to financial market turbulence, especially in the equity market. Upgrad
ing technical skills, technology, research and human capital, developing effecti
ve ‘front office’ strategies and fortifying internal rules of governance and respons
ibility assumes a renewed priority in the fast changing scenario. The face of ba
nking, as we have known it, is also changing rapidly. India is approaching an er
a of financial conglomorisation and ‘bundling’ in the provision of financial service
s. Besides infusing heightened competition, there are implications for the regul
atory and supervisory regime. Banks and financial institutions have to prepare f
or changes in the regulatory framework towards a more focused, comprehensive and
efficient environment that eschews regulatory forbearance. Legal reforms accord
ingly will have to ascend the hierarchy of priorities in the reform process. Aga
inst this background, in this talk, I propose to focus on the main challenges fa
cing Indian banking, such as, the role of financial intermediation in different
phases of the business cycle, the emerging compulsions of the new prudential nor
ms, and benchmarking the Indian financial system against international standards
and best practices. I will also say a few words about the changing context of r
egulation and supervision of the financial system in India, the need for introdu
cing new technology in the banking and financial system, and the importance of s
trengthening skills and intellectual capital formation in the banking industry.


Usually all persons want money for personal and commercial purposes. Banks are t
he oldest lending institutions in Indian scenario. They are providing all facili
ties to all citizens for their own purposes by their terms. To survive in this m
odern market every bank implements so many new innovative ideas, strategies, and
advanced technologies. For that they give each and every minute detail about th
eir institution and projects to Public. They are providing ample facilities to s
atisfy their customers i.e. Net Banking, Mobile Banking, Door to Door facility,
Instant facility, Investment facility, Demat facility, Credit Card facility, Loa
ns and Advances, Account facility etc. And such banks get success to create thei
r own image in public and corporate world. These banks always accept innovative
notions in Indian banking scenario like Credit Cards, ATM machines, Risk Managem
ent etc. So, as a student business economics I take keen interest in Indian econ
omy and for that banks are the main source of development. So this must be the f
irst choice for me to select this topic. At this stage every person must know ab
out new innovation, technology of procedure new schemes and new ventures.


Because of the following reasons, I prefer this project work to get the knowledg
e of the banking system.
• Banking is an essential industry.
• It is where we often wind up when we are seeking a problem in financial crisis a
nd money related query.
• Banking is one of the most regulated businesses in the world.
• Banks remain important source for career opportunities for people.
• It is vital system for developing economy for the nation.
• Banks can play a dynamic role in delivery and purchase of consumer durables.


The crucial role of bank economists in transforming the banking system in India.
Economists have to be more ‘mainstreamed’ within the operational structure of comme
rcial banks. Apart from the traditional functioning of macro-scanning, the inter
link ages between treasuries, dealing rooms and trading rooms of banks need to b
e viewed not only with the day-to-day needs of operational necessity, but also w
ith analytical content and policy foresight. Today, operational aspects of the f
unctioning of banks are attracting intensive research by professional economists
. In particular, measuring and modeling different kinds of risks faced by banks,
the behavior of risk-return relationships associated with different portfolio m
ixes and the impact of fluctuations in financial markets on the financial perfor
mance of banks are areas which lend themselves to analytical and empirical appra
isal by economists and econometricians. They, in turn, are discovering the degre
es of freedom and room for analytical maneuver in high frequency information gen
erated by the day-to-day functioning of banks. It is vital that we develop an en
vironment where these synergies are nurtured so as to serve the longer-term stra
tegic interests of banks. Even in real time trading and portfolio decisions, the
fundamental analysis of economists provides an independent assessment of market
behavior, reinforcing technical analysis. A serious limitation of the applicabi
lity of standard economic analysis to banking relates to the inadequacies of the
data-base. Absence of long time series data storage in the banking industry oft
en poses serious problems to the quest for the formal analytical relationships b
etween variables. Even if such data exist, the presence of structural breaks may
blur meaningful analysis based on traditional formulation. Economists need to t
hink innovatively to overcome this problem. Use of panel regression, non-paramet
ric methods and multivariate analyses could go a long way in understanding and v
alidating behavioral relationships in banking. Another important challenge for t
he economics profession is to develop proper models for measurement of various r
isks in Indian conditions. This is a necessity in view of the move towards risk-
based supervision. Quantification of operational risks and calibration of Value
at Risk (VaR) models pose major computational challenge to bankers and policy ma
kers alike, particularly in India. A major difficulty lies in identifying the ri
ght statistical model that determines the underlying distribution suited to the
particular category of operational loss, and building the necessary database for
deriving operationally meaningful conclusions. In my inaugural address last yea
r, I had also emphasized the need for bank economists to come out of their narro
w specialization and address operational issues relating to banking and finance.
In order to make a meaningful contribution to banking, economists must have the
experience of working in operational areas of banks. For this purpose, economis
ts need to ‘soil their hands’ in dealing rooms, treasuries and investment units, cre
dit authorization and loan recovery, strategic management groups and management
information systems of the banks to understand the ground realities. There are a
lso ‘economies’ to be gained from field-level credit appraisal, asset recovery, debt
restructuring, market and consumer behaviors in which banks are involved. Thus,
the profession needs to amalgamate the objectivity and theoretical soundness of
economics with the functional dimensions of banking and finance. It is this com
bination of specialist training with operational experience, which is going to m
ake the economics profession relevant to the changing face of banking in India.

History of Banking in India:

Banks In India
Banking services in India
Reserve Bank of India (RBI)
General Banking
Nature of Banking Kinds of Banks Role of Bank sina Developing Economy Principles
of Bank Lending Policies Branch set up and structure Organization and structure
of a Bank Branch Explain bank organization system in India Retail Banking. The
New Flavor Strategic issues in Banking Services Knowledge Management. Technology
in Banking Regulations and Compliance Customer Centric Organization Ethics and
Corporate Governance Entrepreneurship Managing New Challenges.
Introduction Recent Macro economic Developments and the Banking System Prudentia
l Norms Market Discipline Universal Banking Human Resource Development in Bankin
g co Performance and Benchmarking nt Innovation in Banking en Management of Bank
Without a sound and effective banking system in India it cannot have a healthy e
conomy. The banking system of India should not only be hassle free but it should
be able to meet new challenges posed by the technology and any other external a
nd internal factors. For the past three decades India s banking system has sever
al outstanding achievements to its credit. The most striking is its extensive re
ach. It is no longer confined to only metropolitans or cosmopolitans in India. I
n fact, Indian banking system has reached even to the remote corners of the coun
try. This is one of the main reasons of India s growth process. The government s
regular policy for Indian bank since 1969 has paid rich dividends with the nati
onalization of 14 major private banks of India. Not long ago, an account holder
had to wait for hours at the bank counters for getting a draft or for withdrawin
g his own money. Today, he has a choice. Gone are days when the most efficient b
ank transferred money from one branch to other in two days. Now it is simple as
instant messaging or dial a pizza. Money has become the order of the day. The fi
rst bank in India, though conservative, was established in 1786. From 1786 till
today, the journey of Indian Banking System can be segregated into three distinc
t phases. They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks an
d up to 1991 prior to Indian banking sector Reforms.
New phase of Indian Banking System with the advent of Indian Financial & Banking
Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I, Phase
II and Phase III.
• Phase I
The General Bank of India was set up in the year 1786. Next came Bank of Hindust
an and Bengal Bank. The East India Company established Bank of Bengal (1809), Ba
nk of Bombay (1840) and Bank of Madras (1843) as independent units and called it
Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank
of India was established which started as private shareholders banks, mostly Eur
opeans shareholders. In 1865 Allahabad Bank was established and first time exclu
sively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarter
s at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank o
f Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank
of India came in 1935. During the first phase the growth was very slow and bank
s also experienced periodic failures between 1913 and 1948. There were approxima
tely 1100 banks, mostly small. To streamline the functioning and activities of c
ommercial banks, the Government of India came up with The Banking Companies Act,
1949 which was later changed to Banking Regulation Act 1949 as per amending Act
of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive p
owers for the supervision of banking in India as the Central Banking Authority.
During those day’s public has lesser confidence in the banks. As an aftermath depo
sit mobilization was slow. Abreast of it the savings bank facility provided by t
he Postal department was comparatively safer. Moreover, funds were largely given
to traders.
• Phase II
Government took major steps in this Indian Banking Sector Reform after independe
nce. In 1955, it nationalized Imperial Bank of India with extensive banking faci
lities on a large scale especially in rural and semi-urban areas. It formed Stat
e Bank of India to act as the principal agent of RBI and to handle banking trans
actions of the Union and State Governments all over the country. Seven banks for
ming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 19
69, major process of nationalization was carried out. It was the effort of the t
hen Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in th
e country were nationalized.
Second phase of nationalization Indian Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the banking segment in Indi
a under Government ownership. The following are the steps taken by the Governmen
t of India to Regulate Banking Institutions in the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crores.
After the nationalization of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a huge jump by 11,000%
. Banking in the sunshine of Government ownership gave the public implicit faith
and immense confidence about the sustainability of these institutions.
• Phase III
This phase has introduced many more products and facilities in the banking secto
r in its reforms measure. In 1991, under the chairmanship of M Narasimham, a com
mittee was set up by his name which worked for the liberalization of banking pra
ctices. The country is flooded with foreign banks and their ATM stations. Effort
s are being put to give a satisfactory service to customers. Phone banking and n
et banking is introduced. The entire system became more convenient and swift. Ti
me is given more importance than money. The financial system of India has shown
a great deal of resilience. It is sheltered from any crisis triggered by any ext
ernal macroeconomics shock as other East Asian Countries suffered. This is all d
ue to a flexible exchange rate regime, the foreign reserves are high, the capita
l account is not yet fully convertible, and banks and their customers have limit
ed foreign exchange exposure.

In India the banks are being segregated in different groups. Each group has thei
r own benefits and limitations in operating in India. Each has their own dedicat
ed target market. Few of them only work in rural sector while others in both rur
al as well as urban. Many even are only catering in cities. Some are of Indian o
rigin and some are foreign players. All these details and many more are discusse
d over here. The banks and its relation with the customers, their mode of operat
ion, the names of banks under different groups and other such useful information
are talked about. One more section has been taken note of is the upcoming forei
gn 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 fo
reign banks to start business in India. Major Banks in India
ABN-AMRO Bank Abu Dhabi Commercial Bank American Express Bank Andhra Bank Allaha
bad Bank of Baroda Bank of India Bank of Maharashtra Bank of Punjab Bank of Raja
sthan Bank of Ceylon BNP Paribas Bank Canada Bank Catholic Syrian Bank Central B
ank of India Centurion Bank Indian Overseas Bank IndusInd Bank ING Vysya Bank Ja
mmu & Kashmir Bank JPMorgan Chase Bank Karnataka Bank Karur Vysya Bank Laxmi Vil
as Bank Oriental Bank of Commerce Punjab National Bank Punjab & Sind Bank Scotia
Bank South Indian Bank Standard Chartered Bank State Bank of India (SBI) State
Bank of Bikaner & jaipur
China Trust Commercial bank Citi Bank City Union Bank Corporation Bank Dena Bank
Deutsche Bank Development Credit Bank Dhanalakshmi Bank Federal Bank HDFC Bank
HSBC ICICI Bank IDBI Bank Indian Bank State Bank of Hyderabad State Bank of Indo
re State Bank of Mysore State Bank of Saurastra State Bank of Travancore Syndica
te Bank Taib Bank UCO Bank Union Bank of India United Bank of India United Bank
Of India United Western Bank UTI Bank Vijaya Bank
With years, banks are also adding services to their customers. The Indian bankin
g industry is passing through a phase of customers market. The customers have mo
re choices in choosing their banks. A competition has been established within th
e banks operating in India. With stiff competition and advancement of technology
, the service provided by banks has become more easy and convenient. The past da
ys 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 wit
h the polished version of their old systems.
The central bank of the country is the Reserve Bank of India (RBI). It was estab
lished in April 1935 with a share capital of Rs. 5 crores on the basis of the re
commendations of the Hilton Young Commission. The share capital was divided into
shares of Rs. 100 each fully paid which was entirely owned by private sharehold
ers in the beginning. The Government held shares of nominal value of Rs. 2, 20,0
00. Reserve Bank of India was nationalized in the year 1949. The general superin
tendence and direction of the Bank is entrusted to Central Board of Directors of
20 members, the Governor and four Deputy Governors, one Government official fro
m the Ministry of Finance, ten nominated Directors by the Government to give rep
resentation to important elements in the economic life of the country, and four
nominated Directors by the Central Government to represent the four local Boards
with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards c
onsist of five members each Central Government appointed for a term of four year
s to represent territorial and economic interests and the interests of co-operat
ive and indigenous banks. The Reserve Bank of India Act, 1934 was commenced on A
pril 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the fun
ctioning of the Bank. The Bank was constituted for the need of following:
To regulate the issue of banknotes To maintain reserves with a view to securing
monetary stability and To operate the credit and currency system of the country
to its advantage.
• Functions of Reserve Bank of India
The Reserve Bank of India Act of 1934 entrust all the important functions of a c
entral bank the Reserve Bank of India.
• Bank of Issue
Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right t
o issue bank notes of all denominations. The distribution of one rupee notes and
coins and small coins all over the country is undertaken by the Reserve Bank as
agent of the Government. The Reserve Bank has a separate Issue Department which
is entrusted with the issue of currency notes. The assets and liabilities of th
e Issue Department are kept separate from those of the Banking Department. Origi
nally, the assets of the Issue Department were to consist of not less than two-f
ifths of gold coin, gold bullion or sterling securities provided the amount of g
old was not less than Rs. 40 crores in value. The remaining three-fifths of the
assets might be held in rupee coins, Government of India rupee securities, eligi
ble bills of exchange and promissory notes payable in India. Due to the exigenci
es of the Second World War and the post-was period, these provisions were consid
erably modified. Since 1957, the Reserve Bank of India is required to maintain g
old and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 c
rores should be in gold. The system as it exists today is known as the minimum r
eserve system.
• Banker to Government
The second important function of the Reserve Bank of India is to act as Governme
nt banker, agent and adviser. The Reserve Bank is agent of Central Government an
d of all State Governments in India excepting that of Jammu and Kashmir. The Res
erve Bank has the obligation to transact Government business, via. to keep the c
ash balances as deposits free of interest, to receive and to make payments on be
half of the Government and to carry out their exchange remittances and other ban
king operations. The Reserve Bank of India helps the Government - both the Union
and the States to float new loans and to manage public debt. The Bank makes way
s and means advances to the Governments for 90 days. It makes loans and advances
to the States and local authorities. It acts as adviser to the Government on al
l monetary and banking matters.
• Bankers Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers bank. According to the provisions
of the Banking Companies Act of 1949, every scheduled bank was required to main
tain with the Reserve Bank a cash balance equivalent to 5% of its demand liabili
ties and 2 per cent of its time liabilities in India. By an amendment of 1962, t
he distinction between demand and time liabilities was abolished and banks have
been asked to keep cash reserves equal to 3 per cent of their aggregate deposit
liabilities. The minimum cash requirements can be changed by the Reserve Bank of
India. The scheduled banks can borrow from the Reserve Bank of India on the bas
is of eligible securities or get financial accommodation in times of need or str
ingency by rediscounting bills of exchange. Since commercial banks can always ex
pect the Reserve Bank of India to come to their help in times of banking crisis
the Reserve Bank becomes not only the banker s bank but also the lender of the l
ast resort.
• Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to i
nfluence the volume of credit created by banks in India. It can do so through ch
anging the Bank rate or through open market operations. According to the Banking
Regulation Act of 1949, the Reserve Bank of India can ask any particular bank o
r the whole banking system not to lend to particular groups or persons on the ba
sis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank. The Reserve Bank of India is armed
with many more powers to control the Indian money market. Every bank has to get
a license from the Reserve Bank of India to do banking business within India, t
he license can be cancelled by the Reserve Bank of certain stipulated conditions
are not fulfilled. Every bank will have to get the permission of the Reserve Ba
nk before it can open a new branch. Each scheduled bank must send a weekly retur
n to the Reserve Bank showing, in detail, its assets and liabilities. This power
of the Bank to call for information is also intended to give it effective contr
ol of the credit system. The Reserve Bank has also the power to inspect the acco
unts of any commercial bank. As supreme banking authority in the country, the Re
serve Bank of India, therefore, has the following powers:
(a) It holds the cash reserves of all the scheduled banks.
(b) It controls the credit operations of banks through quantitative and qualitat
ive controls.
(c) It controls the banking system through the system of licensing, inspection a
nd calling for information.
(d) It acts as the lender of the last resort by providing rediscount facilities
to scheduled banks.
• Custodian of Foreign Reserves
The Reserve Bank of India has the responsibility to maintain the official rate o
f exchange. According to the Reserve Bank of India Act of 1934, the Bank was req
uired to buy and sell at fixed rates any amount of sterling in lots of not less
than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d. Since 1935 the B
ank was able to maintain the exchange rate fixed at lsh.6d. Though there were pe
riods of extreme pressure in favor of or against the rupee. After India became a
member of the International Monetary Fund in 1946, the Reserve Bank has the res
ponsibility of maintaining fixed exchange rates with all other member countries
of the I.M.F. Besides maintaining the rate of exchange of the rupee, the Reserve
Bank has to act as the custodian of India s reserve of international currencies
. The vast sterling balances were acquired and managed by the Bank. Further, the
RBI has the responsibility of administering the exchange controls of the countr

• Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has c
ertain non-monetary functions of the nature of supervision of banks and promotio
n of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulat
ion Act, 1949 have given the RBI wide powers of supervision and control over com
mercial and co-operative banks, relating to licensing and establishments, branch
expansion, liquidity of their assets, management and methods of working, amalga
mation, reconstruction, and liquidation. The RBI is authorized to carry out peri
odical inspections of the banks and to call for returns and necessary informatio
n from them. The nationalization of 14 major Indian scheduled banks in July 1969
has imposed new responsibilities on the RBI for directing the growth of banking
and credit policies towards more rapid development of the economy and realizati
on of certain desired social objectives. The supervisory functions of the RBI ha
ve helped a great deal in improving the standard of banking in India to develop
on sound lines and to improve the methods of their operation.
• Promotional functions
With economic growth assuming a new urgency since Independence, the range of the
Reserve Bank s functions has steadily widened. The Bank now performs variety of
developmental and promotional functions, which, at one time, were regarded as o
utside the normal scope of central banking. The Reserve Bank was asked to promot
e banking habit, extend banking facilities to rural and semi-urban areas, and es
tablish and promote new specialized financing agencies. Accordingly, the Reserve
Bank has helped in the setting up of the IFCI and the SFC; it set up the Deposi
t Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial
Development Bank of India also in 1964, the Agricultural Refinance Corporation
of India in 1963 and the Industrial Reconstruction Corporation of India in 1972.
These institutions were set up directly or indirectly by the Reserve Bank to pr
omote saving habit and to mobilize savings, and to provide industrial finance as
well as agricultural finance. As far back as 1935, the Reserve Bank of India se
t up the Agricultural Credit Department to provide agricultural credit. But only
since 1951 the Bank s role in this field has become extremely important. The Ba
nk has developed the co-operative credit movement to encourage saving, to elimin
ate moneylenders from the villages and to route its short term credit to agricul
ture. The RBI has set up the Agricultural Refinance and Development Corporation
to provide long-term finance to farmers.

• Classification of RBIs functions

The monetary functions also known as the central banking functions of the RBI ar
e related to control and regulation of money and credit, i.e., issue of currency
, control of bank credit, control of foreign exchange operations, banker to the
Government and to the money market. Monetary functions of the RBI are significan
t as they control and regulate the volume of money and credit in the country. Eq
ually important, however, are the non-monetary functions of the RBI in the conte
xt of India s economic backwardness. The supervisory function of the RBI may be
regarded as a non-monetary function (though many consider this a monetary functi
on). The promotion of sound banking in India is an important goal of the RBI, th
e RBI has been given wide and drastic powers, under the Banking Regulation Act o
f 1949 - these powers relate to licensing of banks, branch expansion, liquidity
of their assets, management and methods of working, inspection, amalgamation, re
construction and liquidation. Under the RBI s supervision and inspection, the wo
rking of banks has greatly improved. Commercial banks have developed into financ
ially and operationally sound and viable units. The RBI s powers of supervision
have now been extended to nonbanking financial intermediaries. Since independenc
e, particularly after its nationalization 1949, the RBI has followed the promoti
onal functions vigorously and has been responsible for strong financial support
to industrial and agricultural development in the country.


A banking company in India has been defined in the banking companies act,1949.as
one “which transacts the business of banking which means the accepting, for the p
urpose of lending or investment of deposits of money from the public, repayable
on demand or otherwise and withdraw able by cheque, draft, order or otherwise.” Mo
st of the activities a Bank performs are derived from the above definition. In a
ddition, Banks are allowed to perform certain activities which are ancillary to
this business of accepting deposits and lending. A bank s relationship with the
public, therefore, revolves around accepting deposits and lending money. Another
activity which is assuming increasing importance is transfer of money - both do
mestic and foreign from one place to another. This activity is generally known a
s "remittance business" in banking parlance. The so called forex (foreign exchan
ge) business is largely a part of remittance albeit it involves buying and selli
ng of foreign currencies.
• FUNCTIONING OF A BANK: Functioning of a Bank is among the more complicated of co
rporate operations. Since Banking involves dealing directly with money, governme
nts in most countries regulate this sector rather stringently. In India, the reg
ulation traditionally has been very strict and in the opinion of certain quarter
s, responsible for the present condition of banks, where NPAs are of a very high
order. The process of financial reforms, which started in 1991, has cleared the
cobwebs somewhat but a lot remains to be done. The multiplicity of policy and r
egulations that a Bank has to work with makes its operations even more complicat
ed, sometimes bordering on illogical. This section, which is also intended for b
anking professional, attempts to give an overview of the functions in as simple
manner as possible. Banking Regulation Act of India, 1949 defines Banking as "ac
cepting, for the purpose of lending or investment of deposits of money from the
public, repayable on demand or otherwise and withdraw able by cheques, draft, an
d order or otherwise."

Financial requirements in a modern economy are of a diverse nature, distinctive
variety and large magnitude. Hence, different types of banks have been institute
d to cater to the varying needs of the community. Banks in the organized sector
may, however, be classified in to the following major forms:
1. Commercial banks 2. Co-operative banks 3. Specialized banks 4. Central bank
COMMERCIAL BANKS: Commercial banks are joint stock companies dealing in money an
d credit. In India, however there is a mixed banking system, prior to July 1969,
all the commercial banks-73 scheduled and 26 non-scheduled banks, except the st
ate bank of India and its subsidiaries-were under the control of private sector.
On July 19, 1969, however, 14mejor commercial banks with deposits of over 50 Co
rers were nationalized. In April 1980, another six commercial banks of high stan
ding were taken over by the government. At present, there are 20 nationalized ba
nks plus the state bank of India and its 7 subsidiaries constituting public sect
or banking which controls over 90 per cent of the banking business in the countr
CO-OPERATIVE BANKS: Co-operative banks are a group of financial institutions org
anized under the provisions of the Co-operative societies Act of the states. The
main objective of co-operative banks is to provide cheap credits to their membe
rs. They are based on the principle of self-reliance and mutual co-operation. Co
-operative banking system in India has the shape of a pyramid a three tier struc
ture, constituted by:Primary credit societies [APEX] Central co-operative banks
[District level] State co-operative banks [Villages, Towns, Cities]
SPECIALIZED BANKS: There are specialized forms of banks catering to some special
needs with this unique nature of activities. There are thus,
1. Foreign exchange banks, 2. Industrial banks, 3. Development banks, 4. Land de
velopment banks, 5. Exim bank.
CENTRAL BANK: A central bank is the apex financial institution in the banking an
d financial system of a country. It is regarded as the highest monetary authorit
y in the country. It acts as the leader of the money market. It supervises, cont
rol and regulates the activities of the commercial banks. It is a service orient
ed financial institution. India’s central bank is the reserve bank of India establ
ished in 1935.a central bank is usually state owned but it may also be a private
organization. For instance, the reserve bank of India (RBI), was started as a s
hareholders’ organization in 1935, however, it was nationalized after independence
, in 1949.it is free from parliamentary control.


Banks play a very useful and dynamic role in the economic life of every modern s
tate. A study of the economic history of western country shows that without the
evolution of commercial banks in the 18th and 19th centuries, the industrial rev
olution would not have taken place in Europe. The economic importance of commerc
ial banks to the developing countries may be viewed thus: 1. Promoting capital f
ormation 2. Encouraging innovation 3. Molestation. 4. Influence economic activit
y 5. Facilitator of monetary policy Above all view we can see in briefly, which
are given below:
• PROMOTING CAPITAL FORMATION:A developing economy needs a high rate of capital fo
rmation to accelerate the tempo of economic development, but the rate of capital
formation depends upon the rate of saving. Unfortunately, in underdeveloped cou
ntries, saving is very low. Banks afford facilities for saving and, thus encoura
ge the habits of thrift and industry in the community. They mobilize the ideal a
nd dormant capital of the country and make it available for productive purposes.
• ENCOURAGING INNOVATION: Innovation is another factor responsible for economic de
velopment. The entrepreneur in innovation is largely dependent on the manner in
which bank credit is allocated and utilized in the process of economic growth. B
ank credit enables entrepreneurs to innovate and invest, and thus uplift economi
c activity and progress.
• MONETSATION: Banks are the manufactures of money and they allow many to play its
role freely in the economy. Banks monetize debts and also assist the backward s
ubsistence sector of the rural economy by extending their branches in to the rur
al areas. They must be replaced by the modern commercial bank’s branches.
• INFLUENCE ECONOMIC ACTIVITY:Banks are in a position to influence economic activi
ty in a country by their influence on the rate interest. They can influence the
rate of interest in the money market through its supply of funds. Banks may foll
ow a cheap money policy with low interest rates which will tend to stimulate eco
nomic activity.
• FACILITATOR OF MONETARY POLICY:Thus monetary policy of a country should be condu
ctive to economic development. But a well-developed banking system is on essenti
al pre-condition to the effective implementation of monetary policy. Under-devel
oped countries cannot afford to ignore this fact. A fine, an efficient and compr
ehensive banking system is a crucial factor of the developmental process.
PRINCIPLES OF BANK LENDING POLICIES--------------The main business of banking co
mpany is to grant loans and advances to traders as well as commercial and indust
rial institutes. The most important use of banks money is lending. Yet, there ar
e risks in lending. So the banks follow certain principles to minimize the risk:
1. Safety 2. Liquidity 3. Profitability 4. Purpose of loan 5. Principle of dive
rsification of risks
• SAFETY: Normally the banker uses the money of depositors in granting loans and a
dvances. So first of all initially the banker while granting loans should think
first of the safety of depositor’s money. The purpose behind the safety is to see
the financial position of the borrower whether he can pay the debt as well as in
terest easily.
• LIQUIDITY: It is a legal duty of a banker to pay on demand the total deposited m
oney to the depositor. So the banker has to keep certain percent cash of the tot
al deposits on hand. Moreover the bank grants loan. It is also for the addition
of short term or productive capital. Such type of lending is recovered on demand
• PROFITABILITY: Commercial banking is profit earning institutes. Nationalized ban
ks are also not an exception. They should have planning of deposits in a profita
bility way pay more interest to the depositors and more salary to the employees.
Moreover the banker can also incur business cost and can give more benefits to
• PURPOSE OF LOAN: Banks never lend or advance for any type of purpose. The banks
grant loans and advances for the safety of its wealth, and certainty of recovery
of loan and the bank lends only for productive purposes. For example, the bank
gives such loan for the requirement for unproductive purposes.
• PRINCIPLE OF DIVERSIFICATION OF RISKS: While lending loans or advances the banks
normally keep such securities and assets as a supports so that lending may be s
afe and secured. Suppose, any particular state is hit by disasters but the bank
shall get benefits from the lending to another states units. Thus, he effect on
the entire business of banking is reduced. There are proverbs that do not keep a
ll the eggs in one basket. ---a principle of considerations of sound lending is:
1. Safety 2. Liquidity 3. Shift ability 4. Profitability.


Ever since major commercial banks were nationalized in two phases in 1969 and 19
80, there has been a sea change in their functions, outlook and perception. One
of the main objectives of nationalization of banks has been to help achieve bala
nced, regional, sectoral and sectional development of the economy by way of maki
ng the banks reach out to the small man and to the remote areas of the country.
• RATIONAL OF A BANK STRUCTURE: An organization consists of people who carry out d
ifferentiated tasks which are coordinated so as to contribute and achieves plann
ed goals. Organizations are created mainly for producing goods and services to t
he society for which they have to incorporate a formal structure. Indian banking
is now operating in a more competitive setting with the induction of new banks.
Both Indian and foreign, who will be bringing in new work technology and specia
list expertise and a variety of new financing instruments. Branch is the primary
unit of the bank’s business, particularly for serving the weaker sections of the
society. Branches have to develop close relationship they profess to serve. This
leads to opening up or specialized branches, like industrial finance, small sca
le industries, and Hi-tech agriculture, overseas and non-resident Indian, accord
ing to market segmentation. This new vision entails a new chain of command, a ne
w technology and specific delegation of authority. This calls for the branch man
ger to concentrate on his/her styles, skills and subordinates, goals, to shape t
he branch in the competitive environment to become a profit centre and to render
better customer service. This implies that the branch manager should have adequ
ate supporting staff to relieve him from the routine table work to developmental
activities. In order to serve the customer it is necessary that one should unde
rstand and accept role and relationship with other so as to make sure that none
of the supporting staff would be deemed to be independent of the branch manger.
So the structure of branch organization must, from time to time, conform to the
demands and peculiarities of the locality in which the branch is functioning. Be
fore looking in to the branch structure of bank, it will be worthwhile examining
how a formal organizational structure of a bank appears. After nationalization,
generally banks have a 4-tier structure represented as under: HEAD OFFICE OFFIC
During the mid-80s, banks started diversifying in to various areas like merchant
banking, mutual funds, leasing, hire purchase, etc., to improve their profitabi
lity and to cater to the needs of the customers. These activities are performed
by the banks either by separate departments or as subsidiaries. After liberaliza
tion and globalization of the economy, with a view to meeting the customer’s needs
and to avoid delays, a revised organizational structure of banks was convened b
y removing one tier. Now banks are going in for a 3-tier structure as under: CEN
TRAL OFFICE REGIONAL OFFICE BRANCH OFFICE. The regional offices are given more p
owers and jurisdiction so as to enable them to act quickly.
ORGANISATIONAL STRUCTURE OF A BANK BRANCH -Now let discuss the structure of a br
anch. The branch is the focal point of all activities. The structure of the bran
ch may be as under: Small/Medium Branch BRANCH MANAGER (B.M.) ACCOUNTANT/ASSISTA
NT BRANCH MANAGER (A.B.M.) OFFICER CLERKS SUB-STAFF This is the typical structur
e of a branch bank. In very large branches, the structure will undergo slight ch
anges as stated below: Very Large Branch

From the structure we can see how the functional relationship works in a branch.
He structure also explains the reporting authority for each cadre of the employ
ees. It indicates the communication flow in the branch with well-defined account
ability on the part of the employees’ roles.
• TYPES OF BRANCHES: According to locations, there are four types’ bank branches. Th
ey are rural, semi urban, urban and metropolitan branches. The B.M. has special
role and functions in managing different types of branches.
roup Banking Mixed Banking Mixed Banking Branch Banking Branch Banking Chain Ban
king Chain Banking Correspondent Banking Correspondent Banking
• BANK ORGANIZATION SYSTEM IN INDIA: The large volume of work passing through the
banking system every day in the form of cash, cheque, and other credit instrumen
ts, together with the complexity of the many services rendered, calls not only f
or a high degree of skill, accuracy and knowledge on the part of the officials,
but also up-to-date and efficient methods of organization, accountancy and contr
ol. Shareholders and directors The Branch Manager The Chief Clerk The Remittance
or Waste Clerk The junior Clerk General Managers Branch Administration The Secu
rity Clerk Head office Administration Foreign Departments The cashier The day-bo
ok or Control Clerk Rotation of Duties, The Ledger-Keeper, The Shorthand Typist
Modern Banking Methods


The Concept of Retail Banking: The retail banking encompasses deposit and assets
linked products as well as other financial services offered to individual for p
ersonal consumption. Generally, the pure retail banking is conceived to be the p
rovision of mass banking products and services to private individuals as opposed
to wholesale banking which focuses on corporate clients. Over the years, the co
ncept of retail banking has been expanded to include in many cases the services
provided to small and medium sized businesses. Some banks in Europe even include
their private banking business i.e. services to high net worth net worth indivi
duals in their retail Banking portfolio. The concept of Retail banking is not ne
w to banks. it is only now that it is being viewed as an attractive market segme
nt, which offers opportunities for growth with profits. The diversified portfoli
o characteristic of retail banking gives better comfort and spreads the essence
of retail banking lies in individual customers. Though the term Retail Banking a
nd retail lending are often used synonymously, yet the later is lust one side of
Retail Banking. In retail banking, all the banking needs of individual customer
s are taken care of in an integrated manner.
• Retail Lending Products: Major retail lending products offered by banks are the
following: I. Housing Loans II. Loan for Consumer goods III. Personal Loans for
marriage, honeymoon, medical treatment and holding etc. IV. Education Loans V. A
uto Loans VI. Gold Loans VII. Event Loans VIII. Festival Loans IX. Insurance Pro
ducts X. Loan against Rent receivables XI. Loan against Pension receivables to s
enior citizens XII. Debit and Credit Cards XIII. Global and International Cards
XIV. Loan to Doctors to set up their own Clinics or for purchase of medical equi
pments XV. Loan for Woman Empowerment for the Setting up of boutiques. Setting u
p of beauty parlors Setting up of crèches Setting up of flower shops For making ja
ipuri quilts etc. Preparation and supply of Food Tiffin’s. XVI. Loan for purchase
of acoustic enclosures for Diesel Gen. Sets etc.
• Retail Banking Products for Depositors: Retail banking products for depositors i
n various segments of customers like; children, salaried persons. Senior citizen
s, professionals, technocrats’ business men, retail traders and farmers etc. inclu
Flexi deposit Accounts Savings Bank Accounts Recurring Deposit Accounts Short Te
rm Deposits Deferred pension Linked Deposit Schemes
Today pure deposit type products are giving way to multi-benefit, multi-access g
enres of banking products. Most of the innovation is taking place in saving bank
accounts to make the meager return of 3.5% p.a. that they earn, more attractive
. Most of the banks now offer Sweep in and sweep out account, called 2-in-1 acco
unts or value added savings bank accounts. This account is a combination of savi
ngs bank and term deposit accounts and offers twin benefit of liquidity of a sav
ings bank account and higher interest earning of term deposit accounts.
• Add-ons and Freebies:-
To make their products and services more service more attractive so as to woo ma
ximum number of customers, the banks are vying with each other with whole lot of
f rills, goodies, freebies are as under:
Free collection of specified number of outstation instruments Instant credit of
outstanding cheques up to Rs.15000/Concession in exchange on demand drafts and p
ay-orders and commission on bills of exchange Issuance of free personalized cheq
ues books Free issuance of ATM, Debit, Credit and add-on Cards Free investment a
dvisory services Grant of redeemable reward points on use of credit cards Free i
nternet banking, phone banking and any where banking facilities Issuance of disc
ount coupons for purchase of various products like computer accessories, music C
Ds, cassettes, books, toys, garments etc.etc. Last but not the least, issuance o
f free PVR, Trade Fair tickets etc. etc. Concession in rate of interest on Group
advances Exemption in upfront fees
These concessions, freebies and add-ons are based on the True Relationship Value
of customers and is calculated by the return on various products and services o
f the banks availed by them. These concessions and freebies are usually offered
for purchase of consumer goods but now they have become an integral part of reta
il Banking products and services also.
• Other Retail Banking Services: Offer of several frills and goodies is not the en
d of the game. Banks also offer following Retail Banking services free of charge
s to customers:
Payment of utility bills like water, electricity, telephone and mobile phone bil
ls Payment of insurance premiums on due dates Payment of monthly/quarterly educa
tion fee of children to their respective schools Remittance of funds from one ac
count to another Demating of shares, bonds, debentures, and mutual funds Payment
of credit card bills on due dates Last but not the least, the filing of income
tax returns and payment of income tax
• Retail Lending at Point of Sale: More and more banks have since entered into tie
up arrangement with leading automobile, electronic and consumer goods dealers,
builders and real estate agents, universities and colleges etc. for promoting an
d selling their Retail Banking products including housing and educational loans
to customer at the very point of sale.
• New delivery channels for Retail Banking Products and Services: The advent of ne
w delivery channels viz. ATM, Interest and Telebanking have revolutionaries the
retail banking activities. These channels enable Banks to deliver retail Banking
products and services in an efficient and cost effective manner. Now-a day the
banks are under great pressure to attract new and retain old customers, as margi
ns are turning wafer thin. In these circumstances reducing administrative a tran
saction cost has become crucial. Banks are making special offerings to customers
through these channels. Retail banking has been immensely benefited with the re
volution in IT. and communication technology. The automation of the Banking proc
esses is facilitating extension of their reach and rationalization of their cost
s as well. They are the engine for growth of retail banking business of Banks. T
he networking of branches has extended the scope of banking to anywhere and anyt
ime 24 * 7 days week banking. It has enabled customer to be the customer of a ba
nk rather then the customers of a particular branch only. Customers can transact
retail Banking transactions at any of the networked branches without any extra
cost. As a matter of fact the Retail Banking per se has taken off because of the
advent of multiple banking channels. These channels have enabled banks to go on
a massive customer acquisition mode since transaction volumes spread over multi
ple channels lessen the load on the brick and mortar bank branches.
• The impact of Retail Banking:- The major impact of Retail Banking is that, the c
ustomers have become the emperors – the fulcrum of all banking activities, both on
the asset side and the liabilities front. The hitherto sellers market has trans
formed into buyers market. The customers have multiple of choices before them no
w for cherry picking products and services, which suit their life styles and tas
tes and financial requirements as well. Banks now go to their customers more oft
en than the customers go to their banks. The non-banking finance Companies which
have hitherto been thriving on retail business due to high risk and high return
s thereon have been dislodged from their profit munching citadel. Retail banking
is transforming banks in to one stop financial super markets. The share of reta
il loans is fast increasing in the loan books of banks. Banks can foster lasting
business relationship with customers and retain the existing customers and attr
act new ones. There is a rise in their service levels as well. Banks can cut cos
ts and achieve economies of scale and improve their revenues and profits by robu
st growth in retail business. Reduction in costs offers a win win situation both
for banks and the customers. It has affected the interface of banking system th
rough different delivery mechanism. It is not that banks are sharing the same pi
e of retail business. The pie itself is growing exponentially; retail banking ha
s fueled a considerable quantum of purchasing power through a slew of retail pro
ducts. Banks can diversify risks in their credit portfolio and contain the menac
e of NPAs. Re-engineering of business with sophisticated technology based produc
ts will lead to business creation, reduction in transaction cost and enhancement
in efficiency of operations.
• Draw-backs of Retail Banking :Despite the numerous advantage of Retail Banking t
here are some drew-Backs in this business. These are as under:
a. Management of large number of clients may become a problem if IT systems are
Not robust.
b. Rapid evolution of products can lead to IT complications. c. The cost of main
taining large number of small value transactions in branch networks will be rela
tively high, unless the customers use alternate delivery channels like ATMs, int
ernet and phone banking etc. for carrying out banking transactions.
• The Future of Retail Banking: Though at present Retail Banking appears to be the
best bet for banks to improve their top and bottom line, yet the future of Reta
il banking in general, may not be all roses as it appears to be. There are signs
of slowdown in customer growth in some countries, which will inevitably have an
impact on Retail Banking business growth. Secondly the possibility of deteriora
tion in asset quality cannot be ruled out. With the boom in housing loan market,
the sign of overheating has also started surfacing with potential problem for b
anks that have not exercised sufficient caution. Further the pressure on margins
is mounting partly because of fierce competition and partly as a result of fall
ing interest rates environment which has diminished to some extent the endowment
effect of substantial deposit bases from which most retail banks have been deri
ving benefits. But banks, which have built a significant retail banking portfoli
o may fare relatively well in the current fiscal. Those banks which have a dynam
ic retail strategy and are well diversified in products, services and distributi
on channels and have at the same time managed to achieve a good level of cost ef
ficiency are the ones that are most likely to succeed in the longer term.


Strategic Planning: is the process of analyzing the organizational external and
internal environments; developing the appropriate mission, vision, and overall g
oals; identifying the general strategies to be pursued; and allocated resources.
• Mission is an organization s current purpose or reason for existing. Vision is
an organization s fundamental aspirations and purpose that usually appeals to it
s member s hearts and minds. • • Goals are what an organization is committed to achi
eving. Strategies are the major courses of action that an organization takes to
achieves goals. • Resource Allocation is the earmarking of money, through budgets,
for various purposes. • Downsizing Strategy signals an organization s intent to r
ely on fewer resources primarily human-to accomplish its goals. Tactical Plannin
g: is the process of making detailed decisions about what to do, which will do i
t, and how to do it-with a normal time and horizon of one year or less. The proc
ess generally includes: • Choosing specific goals and the means of implementing th
e organization s strategic plan, • as, Deciding on courses of action for improving
current operations, and Developing budgets for each department, division and pr
oject. Strategic issues in banks services are known as or define by these ways,
which are known
• NON-PERFORMING ASSETS OF THE BANKING SECTOR: There was a significant decline in
the non-performing assets (NPAs) of SCBs in 2003-04, despite adoption of 90 day
delinquency norm from March 31, 2004. The Gross NPAs of SCBs declined from 4.0 p
er cent of total assets in 2002-03 to 3.3 percent in 2003-04. The corresponding
decline in net NPAs was from 1.9 per cent to 1.2 per cent. Both gross NPAs and n
et NPAs declined in absolute terms. While the gross NPAs declined from Rs. 68,71
7 crore in 2002-03 to Rs. 64,787 crore in 2003-04, net NPAs declined from Rs. 32
,670 crore to Rs. 24,617 crore in the same period. There was also a significant
decline in the proportion of net NPAs to net advances from 4.4 per cent in 2002-
03 to 2.9 per cent in 2003-04. The significant decline in the net NPAs by 24.7 p
er cent in 2003-04 as compared to 8.1 per cent in 2002-03 was mainly on account
of higher provisions (up to 40.0 per cent) for NPAs made by SCBs. The decline in
NPAs in 2003-04 was witnessed across all bank groups. The decline in net NPAs a
s a proportion of total assets was quite significant in the case of new private
sector banks, followed by PSBs. The ratio of net NPAs to net advances of SCBs de
clined from 4.4 per cent in 2002-03 to 2.9 per cent in 2003-04. Among the bank g
roups, old private sector banks had the highest ratio of net NPAs to net advance
s at 3.8 per cent followed by PSBs (3.0 per cent) new private sector banks (2.4
per cent) and foreign banks (1.5 per cent) An analysis of NPAs by sectors reveal
s that in 2003-04, advances to non-priority sectors accounted for bulk of the ou
tstanding NPAs in the case of PSBs (51.24 per cent of total) and for private sec
tor banks (75.30 per cent of total). While the share of NPAs in Agriculture sect
or and SSIs of PSBs declined in 2003-04, the share of other priority sectors inc
reased. The share of loans to other priority sectors in priority sector lending
also increased. Measures taken to reduce NPAs include re schedulement, restructu
ring at the bank level, corporate debt restructuring, and recovery through Lok A
dalats, Civil Courts, and debt recovery tribunals and compromise settlements. Th
e recovery management received a major fillip with the enactment of the Securiti
zation and Reconstruction of Financial Assets and Enforcement of Security Intere
st (SARFAESI) Act, 2002 enabling banks to realize their dues without interventio
n of courts and tribunals. The Supreme Court in its judgment dated April 8, 2004
, while upholding the constitutional validity of the Act, struck down section 17
(2) of the Act as unconstitutional and contrary to Article 14 of the Constituti
on of India. The Government amended the relevant provisions of the Act to addres
s the concerns expressed by the Supreme Court regarding a fair deal to borrowers
through an ordinance dated November 11, 2004. It is expected that the momentum
in the recovery of NPAs will be resumed with the amendments to the Act. The revi
sed guidelines for compromise settlement of chronic NPAs of PSBs were Issued in
January 2003 and were extended from time to time till July 31, 2004. The cases f
iled by SCBs in Lok Adalats for recovery of NPAs stood at 5.20 lakh involving an
amount of Rs. 2,674 crore (prov.). The recoveries effected in 1.69 lakh cases a
mounted to Rs.352 crore (prov.) as on September 30, 2004.The number of cases fil
ed in debt recovery tribunals stood at 64, 941 as on June 30, 2004, involving an
amount of Rs. 91,901 crore. Out of these, 29, 525 cases involving an amount of
Rs. 27,869 crore have been adjudicated. The amount recovered was to Rs. 8,593 cr
ore. Under the scheme of corporate debt restructuring introduced in 2001, the nu
mber of cases and value of assets restructured stood at 121 and Rs. 69,575 crore
, respectively, as on December 31, 2004. Iron and steel, refinery, fertilizers a
nd telecommunication sectors were the major beneficiaries of the scheme. These s
ectors accounted for more than two-third of the values of assets restructured. A
s credit information is crucial for the development of the financial system and
for addressing the problems of NPAs, dissemination of credit information on suit
-filed defaulters is being undertaken by the Credit Information Bureau of India
Ltd. (CIBIL) from March 2003. In its annual policy statement for 2004-05, the RB
I advised banks and financial institutions to review the measures taken for furn
ishing credit information in respect of all borrowers to CIBIL. In its mid-term
review, the RBI again urged the banks to make persistent efforts in obtaining co
nsent from all the borrowers, in order to establish an efficient credit informat
ion system, which would help in enhancing the quality of credit decisions, impro
ve the asset quality, and facilitate faster credit delivery.
• CAPITAL ADEQUACY RATIO: The concept of minimum capital to risk weighted assets r
atio (CRAR) has been developed to ensure that banks can absorb a reasonable leve
l of losses. Application of minimum CRAR protects the interest of depositors and
promotes stability and efficiency of the financial system. At the end of March
31, 2004, CRAR of PSBs stood at 13.2 per cent, an improvement of 0.6 per centage
point from the previous year. There was also an improvement in the CRAR of old
private sector banks from 12.8 per cent in 2002-03 to 13.7 per cent in 2003-04.
The CRAR of new private sector banks and foreign banks registered a decline in 2
003-04. For the SCBs as a whole the CRAR improved from 12.7 per cent in 2002-03
to 12.9 per cent in 2003-04. All the bank groups had CRAR above the minimum 9 pe
r cent stipulated by the RBI. During the current year, there was further improve
ment in the CRAR of SCBs. The ratio in the first half of 2004-05 improved to 13.
4 per cent as compared to 12.9 per cent at the end of 2003-04. Among the bank gr
oups, a substantial improvement was witnessed in the case of new private sector
banks from 10.2 per cent as at the end of 2003-04 to 13.5 per cent in the first
half of 2004-05. While PSBs and old private banks maintained the CRAR at almost
the same level as in the previous year, the CRAR of foreign banks declined to 14
.0 per cent in the first half of 2004-05 as compared to 15.0 per cent as at the
end of 2003-04.
• TOTAL QUALITY MANAGEMENT: While Total Quality Management has proven to be an eff
ective process for improving organizational functioning, its value can only be a
ssured through a comprehensive and well thought out implementation process. The
purpose of this chapter is to outline key aspects of implementation of large sca
le organizational change which may enable a practitioner to more thoughtfully an
d successfully implement TQM. First, the context will be set. TQM is, in fact, a
large scale systems change, and guiding principles and considerations regarding
this scale of change will be presented. Without attention to contextual factors
, well intended changes may not be adequately designed. As another aspect of con
text, the expectations and perceptions of employees (workers and managers) will
be assessed, so that the implementation plan can address them. Specifically, sou
rces of resistance to change and ways of dealing with them will be discussed. Th
is is important to allow a change agent to anticipate resistances and design for
them, so that the process does not bog down or stall. Next, a model of implemen
tation will be presented, including a discussion of key principles. Visionary le
adership will be offered as an overriding perspective for someone instituting TQ
M. In recent years the literature on change management and leadership has grown
steadily, and applications based on research findings will be more likely to suc
ceed. Use of tested principles will also enable the change agent to avoid reinve
nting the proverbial wheel. Implementation principles will be followed by a revi
ew of steps in managing the transition to the new system and ways of helping ins
titutionalize the process as part of the organization s culture. This section, t
oo, will be informed by current writing in transition management and institution
alization of change. Finally, some miscellaneous do s and don’t will be offered. M
embers of any organization have stories to tell of the introduction of new progr
ams, techniques, systems, or even, in current terminology, paradigms. Usually th
e employee, who can be anywhere from the line worker to the executive level, des
cribes such an incident with a combination of cynicism and disappointment: some
manager went to a conference or in some other way got a "great idea" (or did it
based on threat or desperation such as an urgent need to cut costs) and came bac
k to work to enthusiastically present it, usually mandating its implementation.
The "program" probably raised people s expectations that this time things would
improve, that management would listen to their ideas. Such a program usually is
introduced with fanfare, plans are made, and things slowly return to normal. The
manager blames unresponsive employees, line workers blame executives interested
only in looking good, and all complain about the resistant middle managers. Unf
ortunately, the program itself is usually seen as worthless: "we tried team buil
ding (or organization development or quality circles or what have you) and it di
dn t work; neither will TQM". Planned change processes often work, if conceptual
ized and implemented properly; but, unfortunately, every organization is differe
nt, and the processes are often adopted "off the shelf" "the appliance model of
organizational change : buy a complete program, like a quality circle package,
from a dealer, plug it in, and hope that it runs by itself" (Kanter, 1983, 249
). Alternatively, especially in the under funded public and not for profit secto
rs, partial applications are tried, and in spite of management and employee comm
itment do not bear fruit. This chapter will focus on ways of preventing some of
these disappointments. In summary, the purpose here is to review principles of e
ffective planned change implementation and suggest specific TQM applications. Se
veral assumptions are proposed: 1. TQM is a viable and effective planned change
method, when properly installed 2. Not all organizations are appropriate or read
y for TQM 3. Preconditions (appropriateness, readiness) for successful TQM can s
ometimes be created 4. Leadership commitment to a large scale, long term, and cu
ltural change is necessary. While problems in adapting TQM in government and soc
ial service organizations have been identified, TQM can be useful in such organi
zations if properly modified. For survival, banks have to make efforts to improv
e their quality and competitiveness by planning and taking innovative in fall ar
• Increase emphasis on customer focused activities • Intro a “total quality” program • Dev
eloping differential value added services • Educating employees through involvemen
t programs • Increase quality through management and system • Increase effectiveness
of product development • Developing product with lower uses costs TQM principles
Customer satisfaction Plan-do-check-act (PDCA) cycle Management by fact -- 5Ws
(what, why, who, when, and where) + 1H (how) approach Respect for people TQM el
ements Total employee involvement (TEI) Total waste elimination (TWE) Total qual
ity control (TQC) TQM focus areas Customer satisfaction Product quality Plant re
liability Waste elimination Benefits achieved through TQM Increased focus on the
customer Mindset of continuous improvement Better product quality Better syst
ems and procedures Better cross-functional teamwork Increased plant reliability
Waste elimination in offices and factories.
KNOWLEDGE MANAGEMENT: According to Peter Drucker and Daniel Bell, the management
Gurus knowledge is the only meaningful economic resource. Knowledge management
can be defined as a systematic and integrative process of coordinating organizat
ion-wide activities of acquiring, creating, storing, sharing, diffusing, develop
ing and deploying knowledge by individual and groups in the pursuit of major org
anizational goals. It also involves the creation of an interacting learning envi
ronment where organization members transfer and share what they know; and apply
knowledge to solve problems, innovate and create new knowledge. Knowledge manage
ment is as much about people and culture as it is about technology. Knowledge ma
nagement thrives only when the human communication network operates freely acros
s the shortest path between the knowledge providers and knowledge seekers. There
must be a culture that promotes and rewards the pooling together of knowledge r
esources. Thus organizations must build a culture that motivates people to creat
e, share and use knowledge. After the preoccupation with system and procedures t
o collect data ad translate it into information, its time for firms to focus on
the next plane- knowledge. Knowledge management is not a buzzword. Every knowled
ge management solution, if currently implemented, has definite measurable busine
ss benefits. Future business success increasingly depends on the retention and t
he creative use of the knowledge ideas and experiences of an organization and it
s employees. And in knowledge economy corporations need for workers will be more
than the workers need for employer. The work will demand more formal education
and more cutting edge knowledge accumulation.

Innovation drives organizations to grow, prosper and transform in sync with the
changes in the environment, both internal and external. Banking is no exception
to this. In fact, this sector has witnessed radical transformation of late, base
d on many innovations in products, processes, services, systems, business models
, technology, governance and regulation. A liberalized and globalize financial i
nfrastructure has provided an additional impetus to this gigantic effort. The pe
rvasive influence of information technology has revolutionalized banking. Transa
ction costs have crumbled and handling of astronomical number of transactions in
no time has become a reality. Internationally, the number brick and mortar stru
cture has been rapidly yielding ground to click and order electronic banking wit
h a plethora of new products. Banking has become boundary less and virtual with
a 24 * 7 model. Banks who strongly rely on the merits of relationship banking’ as
a time tested way of targeting and serving clients, have readily embraced Custom
er Relationship Management (CRM), with sharp focus on customer centricity, facil
itated by the availability of superior technology. CRM has, therefore, become th
e new mantra in customer service management, which is both relationship based an
d information intensive. Risk management is no longer a mere regulatory issue.ba
sel-2 has accorded a primacy of place to this fascinating exercise by reposition
ing it as the core of banking. We now see the evolution of many novel deferral p
roducts like credit derivatives, especially the Credit Risk Transfer (CRT) mecha
nism, as a consequence. CRT, characterized by significant product innovation, is
a very useful credit risk management tool that enhances liquidity and market ef
ficiency. Securitization is yet another example in this regard, whose strategic
use has been rapidly rising globally. So is outsourcing.
• SOME RECENT INNOVATIONS IN INDIAN BANKING: Tandon can, however, usefully cast an
eye at one way of shopping without revealing his credit card number. HDFC Bank’s ‘N
et Safe’ card is a one-time use card with a limit that’s specified, taken from Tendo
n’s credit or debit card. Even if Tandon fails to utilize the full amount within 2
4 hours of creating the card, the card simply dies and the unspent amount in the
temporary card reverts to his original credit or debit card. Welcome to one of
the myriad ways in which bankers have been trying to innovate. They’re bringing AT
Ms, cash and even foreign exchange to their customers’ doorsteps. Indeed, innovati
on has become the hottest banking game in town. Want to buy a house but don’t want
to go through the hassles of haggling with brokers and the mounds of paperwork?
Not to worry. Your bank will tackle all this. It’s ready to come every step of th
e way for you to buy a house. Standard Chartered, for instance, has property adv
isors to guide a customer through the entire process of selecting and buying a h
ouse. They also lend a hand with the cumbersome documentation formalities and th
e registration. Don’t fret if you’ve already bought your house or car – you can do oth
er things with both. You can leverage your new house or car these days with bank
s like HDFC Bank and Stanchart ready to extend loans against either, till it’s abo
ut five years old. Loans are available to all car owners for almost all brands o
f cars manufactured in India that are up to five years old. Still, innovation is
more evident in retail banking. True, all banks offer pretty much the same suit
e of asset and liability products. But it’s the small tweaking here and there that
makes all the difference. Take, for example, the once staid deposits. Some bank
accounts combine a savings deposit account with a fixed deposit. A sweep-in acc
ount, as it is called, works like this: the account will have a cut-off, say, Rs
25,000; any amount over and above that gets automatically transferred to a fixe
d deposit which will earn the customer a clean 2 per cent more than the returns
that a savings account gives. Last month, Kotak Mahindra Bank introduced a varia
nt of the sweep-in account. If the balance tops Rs 1.5 lakh, the excess runs int
o Kotak’s liquid mutual fund. “Even if the money is there only for the weekend, a li
quid fund can earn you a clean 4.5 per cent per annum,” points out Shashi Arora, v
ice president, marketing, Kotak Mahindra Bank. That’s not a small gain considering
that your current account does not pay you any interest. And if, meanwhile, you
want to buy a big-ticket home theatre system, the minute you swipe your card th
e invested sum will return to your account. There’s plenty of innovation on home l
oans. ABN Amro sent the home mortgage market afire with its 6 per cent home loan
offering last year. The product offers a 6 per cent interest rate for two years
after which the interest rate is reset in tune with the prevailing market rate.
All the other big home loan players slashed their rates after this was announce
d. Look too at the home saver product and its variants from Citibank, HSBC and S
tanchart. The interest rate on the loan is determined by the balance you maintai
n in the savings account with the bank. The home builder can maintain a higher b
alance in his or her savings account and bring down the interest rate on the hom
e loan. The rate is calculated on a daily basis on the net loan amount. Stanchar
t claims that since the launch of its home saver product in April 2002, close to
40 per cent of its customers have chosen it. Says Vishu Ramachandran, regional
head, consumer banking, Standard Chartered: “We believe that there are several way
s to innovate and create value in the process, even in developed product areas.” B
anks are also attempting to reach out to residents of metropolitan cities where
people are pressed for time (what with long commuting hours, traffic jams and bo
th spouses working), beyond conventional banking hours. ICICI Bank, for example,
introduced eight to eight banking hours, seven days of the week, in major citie
s. Not to be outdone, some of the other private banks have also done this too. H
DFC Bank even has a 24-hour branch at Mumbai’s international airport. Several bank
s are even bringing ATMs to customer doorsteps. ICICI Bank, State Bank of India
and Bank of India now have mobile ATMs or vans that go along a particular route
in a city and are stationed at strategic locations for a few hours every day. Th
is saves the bank infrastructure costs since it has one mobile ATM instead of mu
ltiple stationary ones. That’s not all. Even money is delivered to customers at ho
me. Kotak Mahindra Bank, a late entrant into private banking, delivers cash at t
he doorstep. A customer can withdraw a minimum of Rs 5,000 and up to a maximum o
f Rs 2 lakh and get the money at home. And, mind you, Kotak is not alone. The li
st of banks offering a similar service includes Citibank, Stanchart, ABN Amro an
d HDFC Bank. HDFC Bank brings even foreign exchange, whether travelers cheques o
r cash, to your doorstep courtesy its tie-up with Travelex India. All one has to
do is call up the branch or HDFC Bank’s phone banking number. The bank’s country he
ad, retail, Neeraj Swaroop, believes that continuous innovation will always make
a difference, with customer needs changing day by day. “Innovation will never bec
ome less important for us,” he says. HDFC Bank has pioneered other innovations. Ta
ke point of sale (POS) terminals, a prerequisite in any store or restaurant wort
h its name in the country. Earlier this year, it tied up with Reliance Infocomm
to offer mobile POS terminals. Although this might sound a tad too fancy today,
there could soon be a day when you can swipe your card to pay your cabby, the pi
zza home delivery boy and even for the groceries from the local kirana store. Bu
t internet banking and shopping have been slow starters, given the low computer
penetration in the country but banks are going all out to get the customer onlin
e. Not only is electronic fund transfer between banks across cities possible thr
ough internet banking today but banks also offer other features that benefit the
customer. HDFC Bank, for instance, has an option called ‘One View’ on its internet
banking site which provides customers a comprehensive view of their investments
and fund movements. Customers can look at their accounts in six different banks
on one screen. These include HDFC Bank accounts and demat accounts, ICICI Bank,
Citibank, HSBC and Standard Chartered Bank accounts, apart from details of Citib
ank credit card dues and so on. Banks are also innovating on the company and tre
asury operations fronts. In corporate loans, plain loans are pass. Mumbai inter-
bank offered rate (MIBOR)-linked and commercial paper-linked interest rates on l
oans are common. MIBOR is a reference rate arrived at every day at 4 pm by Reute
rs. It is the weighted average rate of call money business transacted by 22 inst
itutions, including banks, primary dealers and financial institutions. The State
Bank of India was the first to usher in MIBOR-linked loans for top companies. S
oon enough, other banks followed. ICICI Bank carried out the world’s first ever se
curitization of a micro finance portfolio last year. The bank securitized Rs 4.2
crore for Bharatiya Samruddhi Finance Ltd for crop production. Banks, of course
, realize that innovation gives them only a first mover advantage until their ri
vals catch up. But then, they can console themselves. Isn’t imitation the best for
m of flattery?

Nobel Laureate Robert Solow had once remarked that computers are seen everywhere
excepting in productivity statistics. More recent developments have shown how f
ar this state of affairs has changed. Innovation in technology and worldwide rev
olution in information and communication technology (ICT) have emerged as dynami
c sources of productivity growth. The relationship between IT and banking is fun
damentally symbiotic. In the banking sector, IT can reduce costs, increase volum
es, and facilitate customized products; similarly, IT requires banking and finan
cial services to facilitate its growth. As far as the banking system is concerne
d, the payment system is perhaps the most important mechanism through which such
interactive dynamics gets manifested. Recognizing the importance of payments an
d settlement systems in the economy, we have embarked on technology based soluti
ons for the improvement of the payment and settlement system infrastructure, cou
pled with the introduction of new payment products such as the computerized sett
lement of clearing transactions, use of Magnetic Ink Character Recognition (MICR
) technology for cheque clearing which currently accounts for 65 per cent of the
value of cheques processed in the country, the computerization of Government Ac
counts and Currency Chest transactions, operationalisation\ of Delivery versus P
ayment (DvP) for Government securities transactions. Two-way inter-city cheque c
ollection and imaging have been operationalised at the four metros. The coverage
of Electronic Clearing Service (Debit and Credit) has been significantly expand
ed to encourage non-paper based funds movement and develop the provision of a ce
ntralized facility for effecting payments. The scheme for Electronic Funds Trans
fer operated by the Reserve Bank has been significantly augmented and is now ava
ilable across thirteen major cities. The scheme, which was originally intended f
or small value transactions, is processing high value (up to Rs.2 crore) from Oc
tober 1, 2001. The Centralized Funds Management System (CFMS), which would enabl
e banks to obtain consolidated account-wise and centre-wise positions of their b
alances with all 17 offices of the Deposits Accounts Departments of the Reserve
Bank, has begun to be implemented in a phased manner from November 2001. A holis
tic approach has been adopted towards designing and development of a modern, rob
ust, efficient, secure and integrated payment and settlement system taking into
account certain aspects relating to potential risks, legal framework and the imp
act on the operational framework of monetary policy. The approach to the moderni
zation of the payment and settlement system in India has been three-pronged: (a)
consolidation, (b) development, and (c) integration. The consolidation of the e
xisting payment systems revolves around strengthening Computerized Cheque cleari
ng, expanding the reach of Electronic Clearing Services and Electronic Funds Tra
nsfer by providing for systems with the latest levels of technology. The critica
l elements in the developmental strategy are the opening of new clearing houses,
interconnection of clearing houses through the INFINET; optimizing the deployme
nt of resources by banks through Real Time Gross Settlement System, Centralized
Funds Management System (CFMS); Negotiated Dealing System (NDS) and the Structur
ed Financial Messaging Solution (SFMS). While integration of the various payment
products with the systems of individual banks is the thrust area, it requires a
high degree of standardization within a bank and seamless interfaces across ban
ks. The setting up of the apex-level National Payments Council in May 1999 and t
he operationalisation of the INFINET by the Institute for Development and Resear
ch in Banking Technology (IDRBT), Hyderabad have been some important development
s in the direction of providing a communication network for the exclusive use of
banks and financial institutions. Membership in the INFINET has been opened up
to all banks in addition to those in the public sector. At the base of all inter
-bank message transfers using the INFINET is the Structured Financial Messaging
System (SFMS). It would serve as a secure communication carrier with templates f
or intra- and inter-bank messages in fixed message formats that will facilitate ‘s
traight through processing’. All inter-bank transactions would be stored and switc
hed at the central hub at Hyderabad while intrabank messages will be switched an
d stored by the bank gateway. Security features of the SFMS would match internat
ional standards. In order to maximize the benefits of such efforts, banks have t
o take pro-active measures to: further strengthen their infrastructure in respec
t of standardization, high levels of security and communication and networking;
achieve inter-branch connectivity early; popularize the usage of the scheme of e
lectronic funds transfer (EFT); and Institute arrangements for an RTGS environme
nt online with a view to integrating into a secure and consolidated payment syst
em. Information technology has immense untapped potential in banking. Strengthen
ing of information technology in banks could improve the effectiveness of asset-
liability management in banks. Building up of a related data-base on a real time
basis would enhance the forecasting of liquidity greatly even at the branch lev
el. This could contribute to enhancing the risk management capabilities of banks


Progressive strengthening, deepening and refinement of the regulatory and superv
isory system for the financial sector have been important elements of financial
sector reforms. In the long run, it is the supervision and regulation function t
hat is critical in safeguarding financial stability. There is also some evidence
that proactive and effective supervision contributes to the efficiency of finan
cial intermediation. Financial sector supervision is expected to become increasi
ngly risk-based and concerned with validating systems rather than setting them.
This will entail procedures for sound internal evaluation of risk for banks. As
mentioned earlier, bank managements will have to develop internal capital assess
ment processes in accordance with their risk profile and control environment. Th
ese internal processes would then be subjected to review and supervisory interve
ntion if necessary. The emphasis will be on evaluating the quality of risk manag
ement and the adequacy of risk containment. In such an environment, credibility
assigned by markets to risk disclosures will hold only if they are validated by
supervisors. Thus effective and appropriate supervision is critical for the effe
ctiveness of capital requirements and market discipline. In certain areas, as fo
r instance, in the urban cooperative banking segment, the regulatory requirement
s leave considerable scope for regulatory arbitrage and even circumvention. The
problem is rendered more complex by the existence of regulatory overlap between
the Central Government, the State Governments and the Reserve Bank. Regulatory o
verlap has impeded the speed of regulatory response to emerging problems. The ne
ed for removing multiple regulatory jurisdictions over the cooperative banking s
ector has been reiterated on several occasions. In this regard, the Reserve Bank
has proposed the setting up of an apex supervisory body for urban cooperative b
anks under the control of a high-level supervisory board consisting of represent
atives of the Central governments, the State governments, the Reserve Bank and e
xperts. The apex body is expected to ensure compliance with prudential requireme
nts and also supervise on-site inspections and off-site surveillance. Recent dev
elopments in certain segments of the financial sector have also brought to the f
ore issues relating to corporate governance in banks. As part of on-going reform
s, boards have been given greater autonomy to prescribe internal control guideli
nes, risk management and procedures for market discipline and accountability. It
is extremely important that greater vigilance over adherence to these norms goe
s hand-in-hand with greater autonomy. Recent evidence of transgression of pruden
tial guidelines by a few banks has raised the issue of the audit and supervisory
functions of boards. As we move towards a more deregulated financial regime, th
ese functions have to be transferred from either the Government or the Reserve B
ank to bank boards. This imposes a greater responsibility and accountability on
the bank management. It is in this context that a consultative group of director
s of select banks and other experts has been set up to recommend measures to str
engthen the internal supervisory role of boards. The objective is to obtain a fe
edback on how boards function vis-à-vis compliance with prudential norms, transpar
ency and disclosure, functioning of the audit committee, etc., and to devise eff
ective mechanisms for ensuring management discipline. Several other initiatives
in improving the supervisory function have been undertaken, including a prudenti
al supervisory reporting system for financial institutions, improvements in proc
edures for financial inspection, sensitizing the general public for better regul
ation of the activities of NBFCs and enactment of appropriate legislation to pro
tect depositor interests in some States. Major legal reforms have been initiated
in areas such as security laws, the Negotiable Instruments Act, bank frauds and
the regulatory framework of banking. The Reserve Bank has also accepted the pri
nciple of transfer of ownership to the Government in respect of some financial i
nstitutions in view of the conflict of interest that may arise in the conduct of
its supervisory function. It is expected that these initiatives will pave the w
ay for an efficient, and risk-based supervisory environment in India. The larges
t set of consolidated regulations that mandate integrity of data in India are th
e IT Act and SEBI s clause 49 for listed companies. These regulations do not cur
rently enforce the kind of security standards that are common in Europe and the
US. In a global economy, however, no company is an island and India Inc is adopt
ing US and European compliance procedures and certifications such as Sarbanes Ox
ley, Safe Harbour, BS, and ISO. Compliance, regulatory or otherwise, does not di
rectly concern the IT department. In manufacturing for instance, compliance cont
rols don t really involve system security, and a large part of the quality contr
ol required by authorities cannot be imposed or enforced using IT. Companies tha
t deal with sensitive information, financial services and BPOs, banks, MNC subsi
diaries or those with plans to expand beyond Indian shores are all affected. The
se will continue to make strides towards compliance. For the mediumscale segment
(Rs 100-300 crore turnover), security and audits are not a priority. This segme
nt is comfortable with public mail servers, and exchanging information over not
very secure connections.
1. Need and objective of the Code
Clause 49 of the Listing agreement entered into with the Stock Exchanges, requir
es, as part of Corporate Governance the listed entities to lay down a Code of Co
nduct for Directors on the Board of an entity and its Senior Management. The ter
m "Senior Management" shall mean personnel of the company who are members of its
core management team excluding the Board of Directors. This would also include
all members of management, one level below the Executive Directors including all
functional heads.
2. Bank s Belief System
This Code of Conduct attempts to set forth the guiding principles on which the B
ank shall operate and conduct its daily business with its multitudinous stakehol
ders, government and regulatory agencies, media and anyone else with whom it is
connected. It recognizes that the Bank is a trustee and custodian of public mone
y and in order to fulfill fiduciary obligations and responsibilities, it has to
maintain and continue to enjoy the trust and confidence of public at large.
The Bank acknowledges the need to uphold the integrity of every transaction it e
nters into and believes that honesty and integrity in its internal conduct would
be judged by its external behavior. The bank shall be committed in all its acti
ons to the interest of the countries in which it operates. The Bank is conscious
of the reputation it carries amongst its customers and public at large and shal
l endeavor to do all it can to sustain and improve upon the same in its discharg
e of obligations. The Bank shall continue to initiate policies, which are custom
er centric and which promote financial prudence.
3. Philosophy of the Code
The code envisages and expects a. Adherence to the highest standards of honest a
nd ethical conduct, including proper and ethical procedures in dealing with actu
al or apparent conflicts of interest between personal and professional relations
hips. b. Full, fair, accurate, sensible, timely and meaningful disclosures in th
e periodic reports required to be filed by the Bank with government and regulato
ry agencies. c. Compliance with applicable laws, rules and regulations. d. To ad
dress misuse or misapplication of the Bank s assets and resources. e. The highes
t level of confidentiality and fair dealing within and outside the Bank. A. Gene
ral Standards of conduct
The Bank expects all Directors and members of the Core Management to exercise go
od judgment, to ensure the interests, safety and welfare of customers, employees
and other stakeholders and to maintain a cooperative, efficient, positive, harm
onious and productive work environment and business organization. The Directors
and members of the Core Management while discharging duties of their office must
act honestly and with due diligence. They are expected to act with that amount
of utmost care and prudence, which an ordinary person is expected to take in his
/ her own business. These standards need to be applied while working in the prem
ises of the Bank, at offsite locations where business is being conducted whether
in India or abroad, at Bank-sponsored business and social events, or at any oth
er place where they act as representatives of the Bank.
B. Conflict of Interest
A "conflict of interest" occurs when personal interest of any member of the Boar
d of Directors and of the Core management interferes or appears to interfere in
any way with the interests of the Bank. Every member of the Board of Directors a
nd Core Management has a responsibility to the Bank, its stakeholders and to eac
h other. Although this duty does not prevent them from engaging in personal tran
sactions and investments, it does demand that they avoid situations where a conf
lict of interest might occur or appear to occur. They are expected to perform th
eir duties in a way that they do not conflict with the Bank s interest such as :
Employment /Outside Employment - The members of the Core Management are expecte
d to devote their total attention to the business interests of the Bank. They ar
e prohibited from engaging in any activity that interferes with their performanc
e or responsibilities to the Bank or otherwise is in conflict with or prejudicia
l to the Bank. Business Interests - If any member of the Board of Directors and
Core Management considers investment in securities issued by the Bank s customer
, supplier or competitor, they should ensure that these investments do not compr
omise their responsibilities to the Bank. Many factors including the size and na
ture of the investment; their ability to influence the Bank s decisions, their a
ccess to confidential information of the Bank, or of the other entity, and the n
ature of the relationship between the Bank and the customer, supplier or competi
tor should be considered in determining whether a conflict exists. Additionally,
they should disclose to the Bank any interest that they have which may conflict
with the business of the Bank. Related Parties - As a general rule, the Directo
rs and members of the Core Management should avoid conducting Bank s business w
ith a relative or any other person or any firm, Company, association in which th
e relative or other person is associated in any significant role. Relatives shal
l include : o Father o Mother (including step mother) o Son s Wife o Daughter (i
ncluding step daughter) o Father s father o Father s mother o Mother s mother o
Mother s father o Son s son o Son s wife o Son s daughter o Son s daughter s hus
band o Daughter s husband o Daughter s son o Daughter s son s wife o Daughter s
daughter o Daughter s husband o Brother (including step brother) o Brother s wif
e o Sister (including step sister) o Sister s husband If such a related party Tr
ansaction is unavoidable, they must fully disclose the nature of the related par
ty transaction to the appropriate authority. Any dealings with a related party m
ust be conducted in such a way that no preferential treatment is given to that p
arty. In the case of any other transaction or situation giving rise to conflicts
of interests, the appropriate authority should after due deliberations decide o
n its impact. C. Applicable Laws. The Directors of the Bank and Core Management
must comply with applicable laws, regulations, rules and regulatory orders. They
should report any inadvertent non compliance, if detected subsequently, to the
concerned authorities. D. Disclosure Standards
The Bank shall make full, fair, accurate, timely and meaningful disclosures in t
he periodic reports required to be filed with Government and Regulatory agencies
. The members of Core Management of the bank shall initiate all actions deemed n
ecessary for proper dissemination of relevant information to the Board of Direct
ors, Auditors and other Statutory Agencies, as may be required by applicable law
s, rules and regulations. E. Use of Bank s Assets and Resources. Each member of
the Board of Directors and the Core Management has a duty to the Bank to advance
its legitimate interests while dealing with the Bank s assets and resources. Me
mbers of the Board of Directors and Core Management are prohibited from: Using C
orporate property, information or position for personal gain, Soliciting, demand
ing, accepting or agreeing to accept anything of value from any person while dea
ling with the Bank s assets and resources, Acting on behalf of the Bank in any t
ransaction in which they or any of their relative(s) have a significant direct o
r indirect interest. F. Confidentiality and Fair Dealings (i) Bank s confidentia
l Information The Bank s confidential information is a valuable asset. It includ
es all trade related information, trade secrets, confidential and privileged inf
ormation, customer information, employee related information, strategies, admini
stration, research in connection with the Bank and commercial, legal, scientific
, technical data that are either provided to or made available each member of th
e Board of Directors and the core Management by the Bank either in paper form or
electronic media to facilitate their work or that they are able to know or obta
in access by virtue of their position with the Bank. All confidential informatio
n must be used for Bank s business purposes only. This information includes the
safeguarding, securing and proper disposal of confidential information in accord
ance with the Bank s policy on maintaining and managing records. The obligation
extends to confidential of third parties, which the Bank has rightfully received
under non-disclosure agreements. To further the Bank s business, confidential i
nformation may have to be disclosed to potential business partners. Such disclos
ures should be made after considering its potential benefits and risks. Care sho
uld be taken to divulge the most sensitive information, only after the said pote
ntial business partner has signed a confidentiality agreement with the Bank.
Any publication or publicly made statement that might be perceived or construed
as attributable to the Bank, made outside the scope of any appropriate authority
in the Bank, should include a disclaimer that the publication or statement repr
esents the views of the specific author and not the Bank. (ii) Other Confidentia
l Information The bank has many kinds of business relationships with many compan
ies and individuals. Sometimes, they will volunteer confidential information abo
ut their products or business plans to induce the Bank to enter into a business
relationship. At other times, the Bank may request that a third party provide co
nfidential information to permit the Bank to evaluate a potential business relat
ionship with the party. Therefore, special care must be taken by the Board of Di
rectors and members of the Core Management to handle the confidential informatio
n of others responsibly. Such confidential information should be handled in acco
rdance with the agreements with such third parties. The Bank requires that every
Director and the member of Core Management, General Managers should be fully co
mpliant with the laws, statutes, rules and regulations that have the objective o
f preventing unlawful gains of any nature whatsoever. Directors and members of C
ore Management shall not accept any offer, payment, promise to pay or authorizat
ion to pay any money, gift or anything of value from customers, suppliers, share
holders/ stakeholders etc that is perceived as intended, directly or indirectly,
to influence any business decision, any act or failure to act, any commission o
f fraud or opportunity for the commission of any fraud.
4. Good Corporate Governance Practices
Each member of the Board of Directors and Core Management of the Bank should adh
ere to the following so as to ensure compliance with good Corporate Governance p
ractices. (a) Dos Attend Board meetings regularly and participate in the deliber
ations and discussions effectively. Study the Board papers thoroughly and enquir
e about follow-up reports on definite time schedule. Involve actively in the mat
ter of formulation of general policies. Be familiar with the broad objectives of
the Bank and policies laid down by the Government and the various laws and legi
slations. Ensure confidentiality of the Bank s agenda papers, notes and minutes.
(b) Don ts Do not interfere in the day to day functioning of the Bank. Do not r
eveal any information relating to any constituent of the Bank to anyone. Do not
display the logo / distinctive design of the Bank on their personal visiting car
ds / letter heads. Do not sponsor any proposal relating to loans, investments, b
uildings or sites for Bank s premises, enlistment or empanelment of contractors,
architects, auditors, doctors, lawyers and other professionals etc. Do not do a
nything, which will interfere with and/ or be subversive of maintenance of disci
pline, good conduct and integrity of the staff.
5. Waivers
Any waiver of any provision of this Code of Conduct for a member of the Bank s B
oard of Directors or a member of the Core Management must be approved in writing
by the Board of Directors of the Bank. The matters covered in this Code of Cond
uct are of the utmost importance to the bank, its stakeholders and its business
partners, and are essential to the Bank s ability to conduct its business in acc
ordance with its value system.
Entrepreneurship is the practice of starting new organizations, particularly new
businesses generally in response to identified opportunities. Entrepreneurship
is often a difficult undertaking, as a majority of new businesses fail. Entrepre
neurial activities are substantially different depending on the type of organiza
tion that is being started. Entrepreneurship may involve creating many job oppor
Many "high-profile" entrepreneurial ventures seek venture capital or angel fundi
ng in order to raise capital to build the business. Many kinds of organizations
now exist to support would-be entrepreneurs, including specialized government ag
encies, business incubators, science parks, and some NGOs. Our understanding of
entrepreneurship owes a lot to the work of economist Joseph Schumpeter and the A
ustrian School of economics. For Schumpeter (1950), an entrepreneur is a person
who is willing and able to convert a new idea or invention into a successful inn
ovation. Entrepreneurship forces "creative destruction" across markets and indus
tries, simultaneously creating new products and business models and eliminating
others. In this way, creative destruction is largely responsible for the dynamis
m of industries and long-run economic growth. Despite Schumpeter s early 20th-ce
ntury contributions, the traditional microeconomic theory of economics has had l
ittle room for entrepreneurs in their theories
• Characteristics of entrepreneurship: The entrepreneur, who has a vision and the
enthusiasm for this vision, is the driving force of an entrepreneurship The visi
on is usually supported by a set of ideas that have not been awared by the major
ity of the market/industry The overall blueprint to realize the vision is clear,
however details may be incomplete, flexible, and evolving The entrepreneur prom
otes the vision with an influential passion With a persistent and deterministic
mindset, the entrepreneur devises a set of entrepreneurial strategies to thrive
for the vision
• Conclusion: We began by asserting that individual entrepreneurs get too much cre
dit and blame for the fate of new ventures. We also emphasized that successful e
ntrepreneurs are those who can develop the right kinds of relationships with oth
ers inside and outside their firm. Our perspective suggests that, in trying to p
redict which entrepreneurs will succeed or fail, instead of turning attention to
the characteristics of individual founders and CEOs, researchers and teachers w
ould be wiser to turn attention to the other people the entrepreneur spends time
with and how they respond. Our perspective also implies that the format of the
"Entrepreneurs of the Year" competition described at the outset of this chapter
ought to be changed. Rather than using such events to recognize individual CEOs
or founders from successful start-ups, awards could be presented to recognize th
e intertwined group of people who made each start-up a success.
PERFORMANCE MANAGEMENT: Performance management is a systematic approach to impro
ving worker productivity through a year-round, ongoing process of communicating
and managing performance expectations. With Performance-based Management, perfor
mance improvement becomes the joint responsibility of employees and their manage
rs. Generally there are two things which determine how successful a performance
appraisal system is in place in an organization.
1) The contents/design of the performance appraisal form and
2) The manner in which Performance Appraisal is conducted.
While organizations lay great emphasis on the contents/design part, spending muc
h of time, money and energy on designing most suitable, objective, comprehensive
formats, it serves no purpose if the appraising process is not conducted proper
ly. Performance-based Management measures, evaluates and improves performance on
the job. You can expect employee productivity to increase because performance a
ssessments and performance feedback will always be job-related, even if the duti
es of a particular job expand or change. Furthermore, because this type of perfo
rmance management focuses on productivity and not personality and since it invol
ves ongoing, open, two-way communication between manager and employee, it greatl
y reduces many of the stereotypes, problems and anxieties associated with tradit
ional labor-intensive annual performance reviews. In other words, the desired ou
tcomes of performance management can happen more easily and quickly.
• LITTLE BASIC OF BENCHMARK: A benchmark is a point of reference for a measurement
. The term presumably originates from the practice of making dimensional height
measurements of an object on a workbench using a graduated scale or similar tool
, and using the surface of the workbench as the origin for the measurements. In
surveying, benchmarks are landmarks of reliable, precisely-known altitude, and a
re often man-made objects, such as features of permanent structures that are unl
ikely to change, or special-purpose "monuments", which are typically small concr
ete obelisks, approximately 3 feet tall and 1 foot at the base, set permanently
into the earth. In computing, a benchmark is the result of running a computer pr
ogram, or a set of programs, in order to assess the relative performance of an o
bject, by running a number of standard tests and trials against it. The term is
also commonly used for specially-designed benchmarking programs themselves. Benc
hmarking is usually associated with assessing performance characteristics of com
puter hardware, e.g., the floating point operation performance of a CPU, but the
re are circumstances when the technique is also applicable to software. Software
benchmarks are, for example, run against compilers or database management syste
ms. Benchmarks provide a method of comparing the performance of various subsyste
ms across different chip/system architectures. As computer architecture advanced
, it became more and more difficult to compare the performance of various comput
er systems simply by looking at their specifications. Therefore, tests were deve
loped that could be performed on different systems, allowing the results from th
ese tests to be compared across different architectures. For example, Intel Pent
ium 4 processors have a higher hertz rating than AMD Athlon XP processors for th
e same computational speed, in other words a slower AMD processors could be as
fast on benchmark tests as a higher hertz rated Intel processors. Benchmarks ar
e designed to mimic a particular type of workload on a component or system. "Syn
thetic" benchmarks do this by specially-created programs that impose the workloa
d on the component. "Application" benchmarks, instead, run actual real-world pro
grams on the system. Whilst application benchmarks usually give a much better me
asure of real-world performance on a given system, synthetic benchmarks still ha
ve their use for testing out individual components, like a hard disk or networki
ng device. Computer manufacturers have a long history of trying to set up their
systems to give unrealistically high performance on benchmark tests that is not
replicated in real usage. For instance, during the 1980s some compilers could de
tect a specific mathematical operation used in a well-known floating-point bench
mark and replace the operation with a mathematically-equivalent operation that w
as much faster. However, such a transformation was rarely useful outside the ben
chmark. Manufacturers commonly report only those benchmarks (or aspects of bench
marks) that show their products in the best light. They also have been known to
mis-represent the significance of benchmarks, again to show their products in th
e best possible light. Taken together, these practices are called bench-marketin
g. Users are recommended to take benchmarks, particularly those provided by manu
facturers themselves, with ample quantities of salt. If performance is really cr
itical, the only benchmark that matters is the actual workload that the system i
s to be used for. If that is not possible, benchmarks that resemble real workloa
ds as closely as possible should be used, and even then used with skepticism. It
is quite possible for system A to outperform system B when running program "fur
ble" on workload X (the workload in the benchmark), and the order to be reversed
with the same program on your own workload.
• BENCHMARKING: Benchmarking (Comparing) is a selective method of finding out how
and why some companies can perform tasks much better than other companies. There
can be as much as a tenfold difference in the quality, speed and cost-performan
ce of an average company versus a world-class company.
It involves the following seven steps
1) Determine functions to benchmark. 2) Identify the key performance variables t
o measure. 3) Identify the best-in-class companies. 4) Measure performance of be
st-in-class companies 5) Measures the company s performance. 6) Specify programs
and actions to close the gap 7) Implement and monitor results A company can ide
ntify "best practices" companies by asking employees, customers, suppliers and d
istributors what they rate as doing the best. Major Consulting Firms can also be
contacted for this purpose. To keep costs under control, a company should focus
primarily on benchmarking those critical tasks that deeply affect customer sati
sfaction and Cost Management and where substantially better performance is known
to exist.
• What is benchmarking? What is it valuable?
Benchmarking is finding and implementing best practices with a view to improving
organizations Competitive position. Benchmarking is valuable as it provides ins
ight into superior management practices, sets achievable Standards and targets b
efore the work-groups, and instill a spirit of competition.
• BENCHMARKING: The purpose of benchmarking is to improve the organization’s competi
tive position and its learning Abilities. This perspective goes well with the un
authorized definition.
“The practice of being humble enough to Admit that someone else is better at somet
hing, And wise enough to learn how to match and even surpass...”
• Operationally defined, benchmarking is: Finding and implementing best practices
An ongoing process of measuring and improving company’s products, services and pra
ctices against Those companies that distinguish themselves in that same category
of performance. The first step in creating the recognition that changes and imp
rovements are needed. Why is benchmarking valuable? Benchmarking helps in three
ways: Providing breakthrough insights by examining superior management practices
. Inspiring people by demonstrating: “We can’t .... but others are ...” Setting object
ive targets by highlighting the gaps between “us” and “them”. Benchmarking as a quality
tool is simple to apply and does not require advance and sophisticated technique
s. More importantly, this process can provide an external stimulus to encourage
a reflective environment of continuous learning. A powerful learning experience
such as benchmarking can be a vehicle for creating sustainable business solution
s. This type of learning parallels Peter Senge’s description of a learning organiz
ation as one that is continually expanding its capacity to create its future. Be
nchmarking facilitates learning. Benchmarking is a process used in management an
d particularly strategic management, in which businesses use industry leaders as
a model in developing their business practices. This involves determining where
you need to improve, finding an organization that is exceptional in this area,
then studying the company and applying it s best practices in your firm. Benchma
rking systematically studies the absolute best firms, then uses their best pract
ices as the standard of comparison, a standard to meet or even surpass. Benchmar
king recognizes that no company is exceptional at everything. That is why it is
an ongoing process involving firms from any industry and any country. It is not
a one-shot event. There is no room for complacency. Benchmarking requires that y
ou constantly search for better solutions. The rationale is, If you continuously
search for best practices in the best firms around the world, you should become
an exceptional company. Every function and task of your business can be benchma
rked, from production, to marketing, to purchasing, to information technology ma
nagement, to customer service. Some authors call benchmarking "best practices be
nchmarking" or "process benchmarking". This is to distinguish it from what they
call "competitive benchmarking". Competitive benchmarking is used in competitor
analysis. When researching your direct competitors you also research the best co
mpany in the industry (even if it serves a different location or market segment
and is therefore not a direct competitor). This benchmark company is then used a
s a standard of comparison when assessing your direct competition and yourself.
A process similar to benchmarking is also used in technical product testing and
in land surveying. See the article benchmark for these applications.
• PROCEDURE: Identify your problem areas Because benchmarking can be applied to an
y business process or function, a range of research techniques may be required.
They include: informal conversations with customers, employees, or suppliers; ex
ploratory research techniques such as focus groups; or in-depth marketing resear
ch, quantitative research, surveys, questionnaires, reengineering analysis, proc
ess mapping, quality control variance reports, or financial ratio analysis. Iden
tify organizations that are leaders in these areas Look for the very best in any
industry and in any country. Consult customers, suppliers, financial analysts,
trade associations, and magazines to determine which companies are worthy of stu
dy. Study their best practices An initial study can be done at a good university
library or online. This will give you an overview; however more detailed inform
ation will require an in-person visit. Phone the CEO and ask if a group of your
managers and employees can visit their operations for an hour. Be forthright as
to the purpose of the visit. Most CEOs will be flattered and agree to the reques
t. Make it clear that any information obtained from the visit will be shared wit
h them. Determine what subject areas will be off-limits. Ask if camera or video
recorders are acceptable. Prepare two lists well in advance: a list of your obje
ctives, and a list of questions. Choose 2 to 5 visitors, people that are closest
to the issue, that will be responsible for implementing any recommendations, an
d cover a broad range of functional responsibilities. Occasionally an outside co
nsultant is included in the visit team so as to provide an alternative perspecti
ve. Meet with your employees to explain the purpose of the visit and assign one
or two questions to each employee. Explain what subject areas are off limits. As
k them to think about how the visit could benefit their area, and ask them to de
vice more questions. Stay away from questions that could cause legal problems (e
g. price fixing or new product development). Send a confirmation letter one week
before the visit stating the date, time, and location of the visit, the number
of visitors and their positions, your objectives, and a list of possible questio
ns. Visits are typically 1 to 3 hours long. When at the site, provide a token gi
ft to show that you appreciate the opportunity, keep focused on your objectives,
give praise where it is due, and do not criticize. Look for anything remarkable
or unexpected. As soon as you get back to your office (or hotel), have an immed
iate debriefing. Discuss what you have learnt and how you can apply it. Make sur
e that every visitor has an action plan detailing how they will be implementing
the new information in their job. Some formal analysis (such as process mapping)
of the benchmarked process may be necessary. After several weeks, phone back th
e CEO to express your appreciation and give concrete examples of how the knowled
ge gained from the visit will be used in your company. Send them a copy of any w
ritten reports about the visit before they are distributed. This allows them to
correct inaccuracies and modify sensitive or proprietary information. Implement
the best practices Delegate responsibility for actions to individuals or cross-f
unctional teams. Set measurable goals that are to be accomplished within a speci
fied time frame. Monitor the results. Get key personnel to give you a brief (one
page) summary of how the implementation is proceeding. Spread the information t
hroughout the entire organization. Repeat Benchmarking is an ongoing process. Be
st practices can always be made better.


The impetus given to the strengthening of domestic financial systems and the int
ernational financial architecture by the Asian crisis has gathered momentum in r
ecent years. An important development In this regard has been the move to set up
universally acceptable standards and codes for benchmarking domestic financial
systems. Moreover, multilateral assessments of country performance are increasin
gly focusing on observance of standards. The IMF’s Article IV consultations, its F
inancial Sector Stability Assessment and the Reports on Observance of Standards
and Codes of the IMF and the World Bank are indicative of the fact that a countr
y’s adherence to benchmark standards and codes is being considered integral to the
preservation of international monetary and financial stability. While the proce
ss has begun with the predominant involvement of governments and regulators, the
search for standards and codes is progressively encompassing the private sector
with consideration of issues relating to market discipline, corporate governanc
e, insolvency procedures and credit rights. It is important to recognize that ne
w standards and codes are not being regarded as final goals but as instruments o
r enabling conditions for enhancing efficiency in financial intermediation while
ensuring financial stability. There are three levels at which action is necessa
ry, viz., legal, policy and procedures, and market practices by participants. In
several areas, fundamental changes in the legal and institutional infrastructur
e are pre-requisites. Since these changes can impinge upon the socio-cultural as
well as politico-economic ethos, appropriate adoption and some prioritization i
n implementation are unavoidable. We have made some noteworthy progress in gener
ating a constructive debate on the applicability of international standards and
codes to the Indian financial system. Participative consultation has been suppor
ted by internal self-assessments as well as external assessment. In several area
s, the issues are of a technical nature. Accordingly, the Standing Committee on
International Standards and Codes, set up in December 1999, constituted ten Advi
sory Groups comprising eminent experts, generally nonofficial, to bring objectiv
ity and experience into studying the applicability of relevant international cod
es and standards to each area of competence. The Advisory Groups have submitted
their reports. They have set out a roadmap for implementation of appropriate sta
ndard and codes in the light of existing levels of compliance, the cross-country
experience, and the existing legal and institutional infrastructure. The Adviso
ry Group on Banking Supervision has assessed the Indian banking system vis-à-vis t
he principles of the Basel Committee on Banking Supervision. It has found the le
vel of compliance to be generally of a high order. The Advisory Group on Bankrup
tcy Laws has, inter alias, recommended a comprehensive bankruptcy code incorpora
ting various aspects including cross-border insolvency and the repeal of the Sic
k Industrial Companies Act. The Advisory Group on Corporate Governance has made
recommendations relating to rules and responsibilities of boards and has advised
amendments to the Companies Act. The Advisory Group on Data Dissemination has f
ound that India’s data dissemination compares favorably with many other countries
and has proposed the compilation of forward-looking indicators. The Advisory Gro
up on Fiscal Transparency is of the view that current fiscal practices meet the
IMF’s Code of Good Practices on Fiscal Transparency. It has recommended amplifying
the scope of fiscal responsibility legislation in order to include the essentia
l elements of a budget law. The Advisory Group on Insurance regulation has recom
mended flexible minimum capital requirements depending on the class of business.
With regard to actuarial and solvency issues, the Group has found the Indian st
andards to be at par with international norms. The Advisory Group on Internation
al Accounting and Auditing Standards has set out an agenda for the future for co
nvergence in auditing and accounting practices. It has recommended a single stan
dard setting authority and the need for convergence of corporate and tax laws. T
he Advisory Group on Transparency in Monetary and Financial Policies has recomme
nded inflation as the single mandated objective for the central bank and necessa
ry autonomy to fulfill the mandate. It has also made recommendations on the oper
ating procedures of monetary policy. The Advisory Group on Payments and Settleme
nt has recommended legal reforms to empower the Reserve Bank to supervise the pa
yment and settlement system, application of the Lamfalussy standards to deferred
net settlement (DNS) and introduction of Real Time Gross Settlement (RTGS). It
has also recommended the setting up of the Clearing Corporation and a separate g
uarantee fund for foreign exchange clearing. The Advisory Group on Securities Ma
rket Regulation has compared India against the International Organization of Sec
urities Commissions (IOSCO) principles and emphasized the need to strengthen int
er-regulator cooperation. Thus, in India, we have made considerable progress in
the identification of international standards and codes in relevant areas, exper
t assessment regarding their applicability, including comparator country evaluat
ion and building up possible course of action for the future. The next step is t
o sensitize all concerned – policy makers, regulators and market participants – to t
he issues involved and to seek the widest possible debate on issues as well as e
xpert assessments with a view to generating a broad consensus on implementation
of a universally recognized set of codes and standards.


For a greater part of the twentieth century, the role of the financial system wa
s perceived as mobilizing the massive resource requirements for growth. Since th
e 1970s and 1980s, development economics underwent a paradigm shift. The financi
al system is no longer viewed as a passive mobiliser of funds. Efficiency in fin
ancial intermediation i.e., the ability of financial institutions to intermediat
e between savers and investors, to set economic prices for capital and to alloca
te resources among competing demands is now emphasized. Developments in endogeno
us growth theory since the late 1980s indicate that efficiency in financial inte
rmediation is a source of technical progress to be exploited for generating incr
easing returns and sustaining high growth. These changes have provided the ratio
nale for many developing countries to undertake wide-ranging reforms of their fi
nancial systems so as to prepare them for their true resource allocation functio
n. As important financial intermediaries, banks have a special role to play in t
his new dispensation. The sharp downturn in global macroeconomic prospects and t
he continuing sluggishness in domestic industrial activity have necessitated a r
evision in the forecast for India’s real GDP growth in 2001-02 from 6.0-6.5 per ce
nt expected at the time of the April 2001 Monetary and Credit Policy Statement t
o 5.0-6.0 per cent in the mid-term review of the policy. The downward revision i
s primarily predicated on the outlook for the industrial sector which grew by ba
rely 2.2 per cent in April-October 2001 as against 5.9 per cent in the correspon
ding period of last year, mainly on account of the slowdown in manufacturing and
mining and quarrying. Capital goods production declined by as much as 6.6 per c
ent and several sectors recorded a slow down in growth rate or an absolute decli
ne. On the other hand, agriculture sector, supported by reasonable monsoon, reco
rded a rebound in growth. The kharif output is expected to cross a new peak of 1
05.6 million tonnes and prospects for the Rabi crop are also good. On the extern
al front, merchandise exports increased marginally by 0.5 per cent in the first
eight months of 2001-02. While oil imports fell by 13.4 per cent, the non-oil im
ports showed an increase of 8.4 per cent. Despite a moderate widening of the tra
de deficit, continuing buoyancy in net invisible receipts has kept the current a
ccount deficit very low. According to available data, net capital flows are also
likely to be of a higher order than in the preceding year. Foreign exchange res
erves rose to US $ 48.0 billion as on December 28, 2001 recording an accretion o
f the order of the US $ 5.8 billion over the end-March 2001 level. In the contex
t of the recent deceleration in the economy the intermediation role assumes even
greater relevance. Banks and financial institutions should endeavor to play a ‘su
pply-leading’ rather than ‘demand-following’ role in initiating the upturn by energizi
ng the financial intermediation process. By virtue of a bird’s eye view of the eco
nomy and their superior credit assessment of the investment proposals and the ef
ficiency of capital, banks should endeavor to economies on ‘search’ costs in identif
ying and nurturing growth impulses in the commodity and service producing sector
s of the economy. In the recent period, monetary policy in India has also moved
into a countercyclical stance signaled by cuts in key interest rates and cash re
serve requirements. At the same time, market operations have ensured adequate li
quidity to support the revival of aggregate demand with a clear preference for s
oftening of interest rates within the overall institutional constraints on the i
nterest rate regime. Inflation has been steadily falling and this has had a posi
tive impact on inflation expectations, along with the underlying resilience of t
he macroeconomic fundamentals of the Indian economy. The 50 basis point reductio
n in the Bank Rate and the 200 basis point reduction in the CRR, announced recen
tly, are expected to significantly enhance the lend able resources of the bankin
g system. The current situation of comfortable liquidity provides an opportunity
for banks to transform idle liquidity into investigable resources for growth. T
he easy interest rate environment would make it possible for banks to ‘price in’ pro
jects which would have earlier remained unfunded due to inherently lower returns
to capital or due to lack of access to prime lending rates. This will, however,
require reassessment of portfolios and internal liquidity constraints, even adj
ustments in risk profiles and risk management. The deceleration in the industria
l growth scenario, of course, opens up the moral hazard of adverse selection and
the possibilities of large-scale contamination of portfolios. In a situation of
generalized slowdown, unviable projects can look potentially bankable given the
scarcity of investment avenues. Nevertheless, the possibilities for financial i
ntermediation in the current situation are too varied and challenging to ignore.
There is no systematic evidence that financial sector reforms by themselves and
without supportive policies in other areas, can contribute to a revival of the
economy; yet this is a time when the responsibility on the financial system to c
ontribute to the process of economic revival is greater than before. Periods of
downturn in economic activity also provide opportunities for banks to undertake
consolidation and strengthening. There is a strong complementarily between finan
cial stability and macroeconomic stability. The interests of both are served by
a stable and resilient financial system. In recent years, various measures have
been taken to improve the functioning of different segments of the financial mar
kets and thereby, to improve the operational effectiveness of monetary policy. T
he Liquidity Adjustment Facility (LAF), which was introduced in June 2000, has e
merged as an effective and flexible instrument for managing liquidity on a day-t
o-day basis. In the second stage of the LAF, which commenced from May 2001, vari
able rate repo auctions replaced the collateralized lending facility and Level I
support to primary dealers. Standing facilities were rationalized and a back-st
op facility was introduced at variable market-related rates. Concurrently, LAF o
perating procedures were recast to improve operational flexibility and complemen
tary measures were undertaken to improve the functioning of money and government
securities market segments and to facilitate their orderly integration. In orde
r to enable the call money market to evolve into a pure inter-bank market, lendi
ng by non-banks was reduced to 85 per cent of their average daily call lending i
n 2000-01 from May 2001. The minimum maturity for wholesale term deposits of Rs.
15 lakh and above has been reduced to 7 days from the earlier minimum maturity o
f 15 days. The maintenance of daily minimum cash reserve requirements has been l
owered to 50 per cent from 65 per cent for the first seven days of the reporting
fortnight. Interest paid on eligible balances under CRR has been raised to the
level of the Bank Rate from November 3, 2001. The market has responded positivel
y with an appreciable rise in turnover and a decline in volatility. Several meas
ures have also been taken to improve the functioning of the government securitie
s market. 14-day and 182-day Treasury Bills were withdrawn and the notified amou
nt of 91-day Treasury Bills has been simultaneously increased. A Negotiated Deal
ing System (NDS) is being introduced to facilitate electronic bidding and to dis
seminate information on trades on a real-time basis. For this purpose, the Reser
ve Bank has begun the automation of its public debt offices. An important step i
s the setting up of the Clearing Corporation of India Ltd. (CCIL) to act as coun
terparty in all trades involving government securities, Treasury Bills, repos an
d foreign exchange. The entire system will operate in a networked environment an
d Indian Financial Network (INFINET) will provide the backbone for communication
PRUDENTIAL NORMS: A strong and resilient financial system and the orderly evolut
ion of financial markets are key prerequisites for financial stability and econo
mic progress. In keeping with the vision of an internationally competitive and s
ound banking system, deepening and broadening of prudential norms to the best in
ternationally recognized standards have been the core of our approach to financi
al sector reforms. This has been supported concurrently by heightened market dis
cipline, pro-active and comprehensive supervision of the financial system and th
e orderly development of financial market segments. The calibration of the conve
rgence with international standards is conditioned by the specific realities of
our situation; however, the New Capital Accord of the Basel Committee on Banking
Supervision which was released in January 2001 adds urgency to the process of c
onvergence. It is against the backdrop of these exigencies that prudential norms
are being constantly monitored and refined. In the recent period, banks are bei
ng encouraged to build risk-weighted components of their subsidiaries into their
own balance sheets and to assign additional capital. Risk weights are being con
stantly refined to take into recognition additional sources of risk. The concept
of ‘past due’ in the identification of NPAs has been dispensed with. Banks and fina
ncial institutions are being urged to prepare to move to the international pract
ice of the ‘90 day norm’ in the classification of assets as non-performing by 2003-0
4. The new Basel Accord, as contained in the second Consultative Paper on Capita
l Adequacy of the Basel Committee on Banking Supervision released in January 200
1 is in response to the perceived rigidities in the 1988 Accord’s capital requirem
ents, the scope
for capital arbitrage and the increased sophistication in the measurement and ma
nagement of risk. The new Accord rests on three mutually reinforcing pillars i.e
., minimum capital requirements, processes of supervisory review and market disc
ipline. Under the first pillar, the current definition of capital and the minimu
m requirement of 8 per cent of capital to risk weighted assets is retained. Capi
tal requirements would be extended on a consolidated basis to holding companies
of banking groups. The primary emphasis of the new Accord is on improving the me
asurement of risk. The process of measurement of market risk is maintained. Thre
e alternatives for calculating credit risk capital requirements are proposed to
be made available to banks, depending on the complexity of their business and th
e quality of their risk management operations. The ‘standardized approach’ which can
be employed by less complex banks remains conceptually the same as in the 1988
norms; however, it expands the scale of risk weights and uses external credit ra
tings to categories credits. Banks with more advanced risk management capabiliti
es can employ an internal ratings based (IRB) approach – ‘foundation’ and ‘advanced’ varia
nts are proposed on a progression scale – in which banks may categories exposures
into multiple credit ratings of their approved internal rating systems. The inte
rnally estimated probability of default, the maturity of exposure and the credit
type i.e., corporate or retail, will determine risk weights. There is a new exp
licit capital charge proposed on operational risk. The processes of supervisory
review contained in the second pillar emphasize the need for banks to develop so
und internal procedures to assess the adequacy of capital based on a thorough ev
aluation of its risk profile and control environment, and to set commensurate ta
rgets for capital. The internal processes would be subject to supervisory evalua
tion, review and intervention, when appropriate. The third pillar aims at bolste
ring market discipline through enhanced disclosure by banks. Disclosure requirem
ents are set out in several areas under the new Accord, including the way in whi
ch banks calculate their capital adequacy and their risk assessment methods. The
Basel Committee on Banking Supervision has received more than 250 comments on t
he January 2001 proposals. The Committee is expected to release a fully specifie
d proposal, based on these comments, in early 2002 and to finalize the Accord du
ring 2002. An implementation date of 2005 is envisaged. The Reserve Bank forward
ed its comments to the Basel committee in May 2001. It has supported flexibility
, discretion to national supervisors and a phased approach in implementing the A
ccord. The Accord could initially apply to internationally active – banks with ove
r 15 per cent of their business in cross-border transactions, as proposed by the
Reserve Bank – and significant banks whose domestic market share exceeds 1 per ce
nt – with a simplified standardized approach to be evolved for other banks. Materi
al limits on cross-holdings of capital and eschewing of direct responsibility on
external credit rating agencies in the assessment of bank assets have also been
proposed by the Reserve Bank. It has also expressed its preference for external
credit rating agencies that publicly disclose risk scores, rating processes and
methodologies. The new accord, when implemented, is likely to have significant
implications for the banking system as a whole. Besides requiring increased capi
tal, it attaches urgency to the development of efficient and comprehensive inter
nal systems for assessment and management of risks, setting up and adhering to a
dequate internal exposure limits and improving internal control generally. The g
uidelines for risk management and asset liability management provided by the Res
erve Bank serve as a useful foundation for building more sophisticated control s
ystems. The feedback received from few banks indicates the need for substantial
up gradation of existing management information systems, risk management practic
es and technical skills. Capital allocation is also expected to be more risk sen
sitive and, therefore, banks and financial institutions will have to plan in adv
ance so that there are no disruptions in the capital structure. Further sophisti
cation in risk management and control mechanisms will have to evolve as experien
ce with preferential risk-weighting and sensitivity to external ratings is accum
ulated. A key requirement when the new Accord, after further modification, becom
es operational is that of high quality human resources to cope with and adapt to
the new environment. Enhancing technical skills and abilities to handle new tec
hnologies and new risks, exploiting information flows to price them in, and deve
loping foresight in anticipating changing risk-return relationships will become
MARKET DISCIPLINE: Processes of transparency and market disclosure of critical i
nformation describing the risk profile, capital structure and capital adequacy a
re assuming increasing importance in the emerging environment. Besides making ba
nks more accountable and responsive to better-informed investors, these processe
s enable banks to strike the right balance between risks and rewards and to impr
ove the access to markets. Improvements in market discipline also call for great
er coordination between banks and regulators. India has been a participant in th
e international initiatives to ensure improved processes of market discipline th
at are being worked out in several fora, such as, the multilateral organizations
, the BIS, the Financial Stability Forum, and the Core Principles Liaison Group.
Concurrent efforts are underway to refine and upgrade financial information mon
itoring and flow, data dissemination and data warehousing. Banks are currently r
equired to disclose in their balance sheets information on maturity profiles of
assets and liabilities, lending to sensitive sectors, movements in NPAs, besides
providing information on capital, provisions, shareholdings of the government,
value of investments in India and abroad, and other operating and profitability
indicators. Financial institutions are also required to meet these disclosure no
rms. Banks also have to disclose their total investments made in equity shares,
units of mutual funds, bonds and debentures, and aggregate advances against shar
es in their notes to balance sheets. From this year onwards, notes to banks’ balan
ce sheets will disclose the movement of provisions against NPAs as well as those
held towards depreciation on investments. Guidelines relating to non-SLR invest
ments through the private placement route mandate the disclosure of information
on issuer composition and non-performing investments in a similar manner. Effort
s have been made to identify and monitor early warning indicators of financial c
rises. The overall approach is to combine the use of micro-prudential indicators
with macro-economic indicators in order to develop a set of aggregate macro-pru
dential indicators. This brings about a mix between bottom-up and top-down asses
sment. As the methodology gets refined and the indicators are stresstested for p
redictive power, financial stability surveillance will be significantly improved
. This process will involve greater transparency and objectivity in the disclosu
re practices of banks. Efforts have also been made to set up a Credit Informatio
n Bureau to collect and share information on borrowers and improve the credit ap
praisal of banks and financial institutions within the ambit of the existing leg
islation. The Bureau has been incorporated by the State Bank of India in collabo
ration with Housing Development Finance Corporation (HDFC) and foreign technolog
y partners. Collection and sharing of some items of information have already bee
n initiated. Efforts are also going into the collection and sharing of informati
on on private placement of debt under the Bureau so that there is greater transp
arency in such trades. The possibility of collecting and disseminating informati
on on suit-filed accounts by the Bureau (in place of the Reserve Bank) is being
explored by a Working Group constituted for this purpose with representation fro
m across the financial system. The Group will also examine the prospects of on-l
ine supply of information and the processing of queries. A draft legislation cov
ering various aspects of information sharing, including issues relating to right
s, responsibilities, and privacy has been prepared, which would considerably str
engthen the functioning of the Bureau when it is enacted.
UNIVERSAL BANKING: Since the early 1990s, banking systems worldwide have been go
ing through a rapid transformation. Mergers, amalgamations and acquisitions have
been undertaken on a large scale in order to gain size and to focus more sharpl
y on competitive strengths. This consolidation has produced financial conglomera
tes that are expected to maximize economies of scale and scope by ‘bundling’ the pro
duction of financial services. The general trend has been towards downstream uni
versal banking where banks have undertaken traditionally non-banking activities
such as investment banking, insurance, mortgage financing, securitization, and p
articularly, insurance. Upstream linkages, where non-banks undertake banking bus
iness, are also on the increase. The global experience can be segregated into br
oadly three models. There is the Swedish or Hong Kong type model in which the ba
nking corporate engages in in-house activities associated with banking. In Germa
ny and the UK, certain types of activities are required to be carried out by sep
arate subsidiaries. In the US type model, there is a holding company structure a
nd separately capitalized subsidiaries In India, the first impulses for a more d
iversified financial intermediation were witnessed in the 1980s and 1990s when b
anks were allowed to undertake leasing, investment banking, mutual funds, factor
ing, hire-purchase activities through separate subsidiaries. By the mid-1990s, a
ll restrictions on project financing were removed and banks were allowed to unde
rtake several activities in-house. In the recent period, the focus is on Develop
ment Financial Institutions (DFIs), which have been allowed to set up banking su
bsidiaries and to enter the insurance business along with banks. DFIs were also
allowed to undertake working capital financing and to raise short-term funds wit
hin limits. It was the Narasimham Committee II Report (1998) which suggested tha
t the DFIs should convert themselves into banks or non-bank financial companies,
and this conversion was endorsed by the Khan Working Group (1998). The Reserve
Bank’s Discussion Paper (1999) and the feedback thereon indicated the desirability
of universal banking from the point of view of efficiency of resource use, but
it also emphasized the need to take into account factors such as the status of r
eforms, the state of preparedness of the institutions, and a viable transition p
ath while moving in the desired direction. Accordingly, the mid-term review of m
onetary and credit policy, October 1999 and the annual policy statements of Apri
l 2000 and April 2001 enunciated the broad approach to universal banking and the
Reserve Bank’s circular of April 2001 set out the operational and regulatory aspe
cts of conversion of DFIs into universal banks. The need to proceed with plannin
g and foresight is necessary for several reasons. The move towards universal ban
king would not provide a panacea for the endemic weaknesses of a DFI or its liqu
idity and solvency problems and/or operational difficulties arising from underca
pitalization, non-performing assets, and asset liability mismatches, etc. The ov
erriding consideration should be the objectives and strategic interests of the f
inancial institution concerned in the context of meeting the varied needs of cus
tomers, subject to normal prudential norms applicable to banks. From the point o
f view of the regulatory framework, the movement towards universal banking shoul
d entrench stability of the financial system, preserve the safety of public depo
sits, improve efficiency in financial intermediation, ensure healthy competition
, and impart transparent and equitable regulation.


A recurring theme in the annual BECON Conference has been the need to focus on d
eveloping human resources to cope with the rapidly changing scenario. The core f
unction of HRD in the banking industry is to facilitate performance improvement,
measured not only in terms of financial indicators of operational efficiency bu
t also in terms of the quality of financial services provided. Factors such as s
kills, attitudes and knowledge of personnel play a critical role in determining
the competitiveness of the financial sector. The quality of human resources indi
cates the ability of banks to deliver value to customers. Capital and technology
are replicable, but not human capital which needs to be viewed as a valuable re
source for the achievement of competitive advantage. The primary emphasis needs
to be on integrating human resource management (HRM) strategies with the busines
s strategy. HRM strategies include managing change, creating commitment, achievi
ng flexibility and improving teamwork. These processes underlie the complementar
y processes that represent the overt aspects of HRM, such as recruitment, placem
ent, performance management, reward management, and employee relations. A forwar
d looking approach would involve moving towards self-assessment of competency an
d developmental needs as a part of a continuous learning cycle. The Indian banki
ng industry has been an important driving force behind the nation’s economic devel
opment. The emerging environment poses both opportunities and threats, in partic
ular, to the public sector banks. How well these are met will mainly depend on t
he extent to which the banks leverage their primary assets i.e., human resources
in the context of the changing economic and business environment. It is obvious
that the public sector banks’ hierarchical structure, which gives preference to s
eniority over performance, is not the best environment for attracting the best t
alent from among the young in a competitive environment. A radical transformatio
n of the existing personnel structure in public sector banks is unlikely to be p
ractical, at least in the foreseeable future. However, certain improvements can
be made in the recruitment practices as well as in on-the-job training and redep
loyment of those who are already employed. There are several institutions in the
country which cater exclusively to the needs of human resource development in t
he banking industry. It is worthwhile to consider broad-basing the courses condu
cted in these institutions among other higherlevel educational institutions so t
hat specialization in the area of banking and financial services becomes an opti
on in higher education curriculums. In the area of information technology, India
n professionals are world leaders and building synergies between the IT and bank
ing industries will sharpen the competitive edge of our banks.

How close are we to the vision of a sound and well-functioning banking system th
at I outlined. It is fair to say that despite a turbulent year and many challeng
es, we have made some progress towards this goal. There has been progressive int
ensification of financial sector reforms, and the financial sector as a whole is
more sensitized than before to the need for internal strength and effective man
agement as well as to the overall concerns for financial stability. At the same
time, in view of greater disclosure and tougher prudential norms, the weaknesses
in our financial system are more apparent than before. There is greater awarene
ss now of the need to prepare the banking system for the technical and capital r
equirements of the emerging prudential regime and a greater focus on core streng
ths and niche strategies. We have also made some progress in assessing our finan
cial system against international best practices and in benchmarking the future
directions of progress. Several contemplated changes in the surrounding legal an
d institutional environment have been proposed for legislation.
The NPA levels remain too large by international standards and concerns relating
to management and supervision within the ambit of corporate governance are bein
g tested during the period of downturn of economic activity. The structure of th
e financial system is changing and supervisory and regulatory regimes are experi
encing the strains of accommodating these changes. Certain weak links in the dec
entralized banking and nonbank financial sectors have also come to notice. In a
fundamental sense, regulators and supervisors are under the greatest pressures o
f change and bear the larger responsibility for the future. For both the regulat
ors and the regulated, eternal vigilance is the price of growth with financial s
tability. We should strive to move towards realizing our vision of an efficient
and sound banking system of international standards with redoubled vigor. Our gr
eatest asset in this endeavor is the fund of technical and scientific human capi
tal formation available in the country. The themes which are being covered in th
is Conference under structural, operational and governance issues should help in
defining the road map for the future.