INTRODUCTION A bank is an institution that deals in money and its substitutes and provides other financial services.

Banks accept deposits and make loans or make an investment to derive a profit from the difference in the interest rates paid and charged, respectively. In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players. Indias economy has been one of the stars of global economics in recent years. It has grown by more than 9% for three years running. The economy of India is as diverse as it is large, with a number of major sectors including manufacturing industries, agriculture, textiles and handicrafts, and services. Agriculture is a major component of the Indian economy, as over 66% of the Indian population earns its livelihood from this area. Banking sector is considered as a booming sector in Indian economy recently. Banking is a vital system for developing economy for the nation. However, Indian banking system and economy has been facing various challenges and problems which have discussed in other parts of project.

INDIAN BANKING SYSTEM

Without a sound and effective banking system in India it cannot have a healthy economy. 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 and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. 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 nationalization 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 withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: 1. Early phase from 1786 to 1969 of Indian Banks. 2. Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. 3. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. After 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. This resulted that Indian banking is growing at an astonishing rate, with Assets expected to reach US$1 trillion by 2010. After 1991, under the chairmanship of M Narasimham, committee was set up by his name which worked for the liberalization of banking practices. The country is flooded with foreign banks and their ATM

stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. This resulted that Indian banking is growing at an astonishing rate, with Assets expected to reach US$1 trillion by 2010.

The banking industry should focus on having small number of large players that can compete globally and can achieve expected goals rather than having a large number of fragmented players.

KINDS OF BANKS Financial requirements in a modern economy are of a diversenature, distinctive variety and large magnitude. Hence, different types ofbanks have been instituted to cater to the varying needs of thecommunity. Banks in the organized sector may, however, be classified into the following major forms: Commercial banks. Co-operative banks. Specialized banks. Central bank.

COMMERCIAL BANKS:

Commercial banks are joint stock companies dealing in money and 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 state bank of India and its subsidiaries-were under the control of private sector. On July 19, 1969, however, 14 major commercial banks with deposits of over50 Corers were nationalized. In April 1980, another six commercial banks of high standing were taken over by the government. At present, there are20 nationalized banks plus the state bank of India and its 7 subsidiaries constituting public sector banking which controls over 90 per cent of the banking business in the country. CO-OPERATIVE BANKS: Co-operative banks are a group of financial institutions organized 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 members. They are based on the principle of self-reliance and mutual co-operation. Cooperative banking system in India has the shape of a pyramid three tier structure, constituted by:

SPECIALIZED BANKS:

There are specialized forms of banks catering to some special needs with this unique nature of activities. There are thus, Foreign exchange banks, Industrial banks, Development banks, Land development banks, Exim bank. CENTRAL BANK: A central bank is the apex financial institution in the banking and financial system of a country. It is regarded as the highest monetary authority in the country. It acts as the leader of the money market. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution. Indias central bank is the Reserve Bank of India established 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 shareholders organization in 1935, however, it was nationalized after independence, in 1949. It is free from parliamentary control.

CHALLENGES FACED BY INDIAN BANKING INDUSTRY The banking industry in India is undergoing a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after other has a ripple effect on a bank trying to graduate from completely regulated sellers market to completed deregulated customers market.

DEREGULATION: This continuous deregulation has made the Banking market extremely competitive with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized norms for foreign exchange. The deregulation of the industry coupled with decontrol in interest rates hassled to entry of a number of players in the banking industry. At the same time reduced corporate credit off take thanks to sluggish economy has resulted in large number of competitors battling for the same pie. NEW RULES: As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. Natural fall out of this has led to a series of innovative product offerings catering to various customer segments, specifically retail credit.

EFFICIENCY: This in turn has made it necessary to look for efficiencies in the business. Banks need to access low cost funds and simultaneously improve the efficiency. The banks are facing pricing pressure, squeeze on spread and have to give thrust on retail assets. DIFFUSED CUSTOMER LOYALTY: This will definitely impact Customer preferences, as they are bound to react to the value added offerings. Customers have become demanding and the loyalties are diffused. There are multiple choices; the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.

MISALLIGNED MINDSET: These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowly creeping in but the utilization is not maximized. COMPETENCE GAP: Placing the right skill at the right place will determine success. The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. The focus of people will be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell. STRATEGIES OPTIONS WITH BANKS TO COPE WITH THOSE CHALLENGES: Leading players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership. The major initiatives include: Investing in state of the art technology as the back bone of to ensure reliable service delivery.

 Leveraging the branch network and sales structure to mobilize low cost current and savings deposits. Making aggressive forays in the retail advances segment of home and personal loans. Implementing organization wide initiatives involving people, process and technology to reduce the fixed costs and the cost per transaction. Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade services). Innovating Products to capture customer mind share to begin with and later the wallet share. Improving the asset quality as per Basel II norms.

INDIAN ECONOMY The Indian Economy is consistently posting robust growth numbers in all sectors leading to impressive growth in Indian GDP. The Indian economy has been stable and reliable in recent times, while in the last few years its experienced a positive upward growth trend. A consistent 8-9% growth rate has been supported by a number of favorable economic indicators including a huge inflow of foreign funds, growing reserves in the foreign exchange sector, both an IT and real-estate boom, and a flourishing capital market. All of these positive changes have resulted in establishing the Indian economy as one of the largest and fastest growing in the world. The process of globalization has been an integral part of the recenteconomic progress made by India. Globalization has played a major rolein export-led growth, leading to the enlargement of the job market in India. As a new Indian middle class has developed around the wealth that the IT and BPO industries have brought to the country, a new consumer base has developed. International companies are also expanding their operations in India to service this massive growth opportunity. The same thing has followed by international banks that are entering in Indian market and pulling their huge investments in Indian economy. This is helping to accelerate the growth of Indian economy.

Economy can be studied from two points of views MICRO ECONOMIC POINT OF VIEW: The branch of economics that analyzes the market behaviour of individual consumers and firms in an attempt to understand the decision-making process of firms and households. It is concerned with the interaction between individual buyers and sellers and the factors that influence the choices made by buyers and sellers. In particular, microeconomics focuses on patterns of supply and demand and the determination of price and output in individual markets. Microeconomics looks at the smaller picture and focuses more on basic theories of supply and demand and how individual businesses decide how much of something to produce and how much to charge for it. MACRO ECONOMIC POINT OF VIEW: It is a field of economics that studies the behaviour of the aggregate economy. Macroeconomics examines economy-wide phenomena such as changes in unemployment, national income, rate of growth, gross domestic product, inflation and price levels. Macroeconomics looks at the big picture (hence "macro"). It focuses on the national economy as a whole and provides a basic knowledge of how things work in the business world. For example, people who study this branch of economics would be able to interpret the latest Gross Domestic Product figures or explain why a 6% rate of unemployment is not necessarily a bad thing. Thus, for an overall perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro levels. ECONOMIC SYSTEMS: An economic system is loosely defined as countrys plan for its services, goods produced, and the exact way in which its economic plan is carried out. In general, there are three major types of economic systems prevailing around the world they are... Market Economy Planned Economy Mixed Economy

MARKET ECONOMY: In a market economy, national and state governments play a minor role. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a countrys economic development. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the predetermination of prices for different commodities, and the amount of regulation controlling different industrial sectors. The absence of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly. PLANNED ECONOMY: A planned economy is also sometimes called a command economy. The most important aspect of this type of economy is that all major decisions related to the production, distribution, commodity and service prices, are all made by the government. The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility that is present a market economy, and because of this, the planned economy reacts slower to changes in consumer needs and fluctuating patterns of supply and demand. On the other hand, a planned economy aims at using all available resources for developing production instead of allotting there sources for advertising or marketing. MIXED ECONOMY: A mixed economy combines elements of both the planned and the market economies in one cohesive system. This means that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where neither the government nor the business entities control the economic activities of that country both sectors play an important role in the economic decision-making of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include both capitalist and socialist economic policies and often arise in societies that seek to balance a wide range of political and economic views.

IMPORTANT BANKING AND ECONOMIC INDICATORS CASH RESERVE RATIO: Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. The amount of which shall not be less than three per cent of the total of the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly basis and RBI is empowered to increase the said rate of CRR to such higher rate not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL) under the RBI Act, 1934. STATUTORY LIQUIDITY RATIO: In terms of Section 24 (2-A) of the B.R. Act, 1949 all Scheduled Commercial Banks, in addition to the average daily balance which they are required to maintain in the form of. In cash, Or In gold valued at a price not exceeding the current market price, Or In unencumbered approved securities valued at a price as specified by the RBI from time to time. REPO RATE: Repo rate, also known as the official bank rate, is the discounted rate at which a central bank repurchases government securities. The central bank makes this transaction with commercial banks to reduce some of the short-term liquidity in the system. The repo rate is dependent on the level of money supply that the bank chooses to fix in the monetary scheme of things. Repo rate is short for repurchase rate. The entity borrowing the security is often referred to as the buyer, while the lender of the securities is referred to as the seller. The central bank has the power to lower the repo rates while expanding the money supply in the country. This enables the banks to exchange their government security holdings for cash. In contrast, when the central bank decides to reduce the money supply, it implements a rise in the repo rates. At times, the central bank of the nation makes a decision regarding the money supply level and the repo rate is determined by the market. The securities that are being evaluated and sold are transacted at the current market price plus any interest that has accrued. When the sale is

concluded, the securities are subsequently resold at a predetermined price. This price is comprised of the original market price and interest, and the pre-agreed interest rate, which is the repo rate. BANK RATE: Bank rate is referred to the rate of interest charged by premier banks on the loans and advances. Bank rate varies based on some defined conditions as laid down the governing authority of the banks. Bank rates are levied to control the money supply to and from the bank. From the consumers point of view, bank rate ordinarily denotes to the current rate of interest acquired from savings certificate of Deposit. It is most frequently used by the consumers who are concerned in mortgage. Some commonest types of bank interest rates are as follows: Bank rate on CD, i.e., on certificate of deposit Bank rate on the credit of a credit card or other kind of loan Bank rate on real estate loan. INTERBANK RATE The rate of interest charged on short-term loans made between banks. Banks borrow and lend money in the interbank market in order to manage liquidity and meet the requirements placed on them. The interest rate charged depends on the availability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length. Banks are required to hold an adequate amount of liquid assets, such as cash, to manage any potential withdrawals from clients. If a bank cant meet these liquidity requirements, it will need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity requirements. These banks will lend money in the interbank market, receiving interest on the assets. There is a wide range of published interbank rates, including the LIBOR & MIBOR, which is set daily based on the average rates on loans made within the London interbank market& Mumbai Interbank Market.

GROSS DOMESTIC PRODUCT: The monetary value of all the finished goods and services produced within a country's borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX

Where: "C" is equal to all private consumption, or consumer spending, in a nation's economy. "G" is the sum of government spending. "I" is the sum of all the country's businesses spending on capital. "NX" is the nation's total net exports, calculated as total exports minus total imports. (NX = Exports - Imports) GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a country's standard of living. INFLATION: Inflation can be defined as a rise in the general price level and therefore a fall in the value of money. Inflation occurs when the amount of buying power is higher than the output of goods and services. Inflation also occurs when the amount of money exceeds the amount of goods and services available. As to whether the fall in the value of money will affect the functions of money depends on the degree of the fall. Basically, refers