PEOPLES EDUCATION SOCEITYS DR. AMBEDKAR COLLEGE OF COMMERCE AND ECONOMICS, WADALA, MUMBAI 400 031.

NAAC ACCREDITED
PROJECR REPORT ON RISK MANAGEMENT IN BANKING SECTOR SUMITTED IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE AWARD OF DEGREE OF B.COM-BANKING & INSURACE BY BHASKAR DURAISWAMY ROLL NO 02 T.Y.B.BANKING & INSURANCE (SEMESTER V)

UNDER THE GUIDANCE OF PROF. RASHNA Z GAIRA

ACADEMIC YEAR 2011-2012

PEOPLES EDUCATION SOCIETY DR.AMBEDKAR COLLEGE OF COMMERCE & ECONOMICS WADALA, MUMBAI-400031.

CERTIFICATE

NAAC ACCREDITED This is to certify that, Mr.BHASKAR DURAISWAMY. Of B.com Banking & Insurance Semester V (2011- 2012) has successfully completes project on ROLES OF BANKS IN INDIAN FINANCIAL SYSTEM under the guidance of prof.RASHNA GAIRA.

_____________________ (Signature of Project Guide) _________________________ (Signature of External Examiner) ______________________ (Signature of Co-ordinatore)

ACKNOWLEDGEMENT

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

I also sincerely thank to my guide Prof. ___________ for guidance to me through his research and experience work with her assist completes this project work.

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

Place: _______________

Date: ______________

________________ (Signature)

DECLARATION

I Mr. ________________________ the student of Dr. Ambedkar College of Commerce and Economics, studying T.Y.B.Com-Banking & Insurance (Semester v), hereby declare that I have complete this work on. ROLES OF BANNKS IN INDIAN FINANCIAL SYSTEM 2011-2012The information is genuine and practical to best of my Knowledge.

Date: _____________

Place: ____________

BHASKARDURAISWA____________________

OBJECTIVE

INDEX 1. INTRODUCTION DEFINATION, MEANING, ,CONCEPT,OBJECTIVE 2. NATUR, SCOPE

3.

4.

5.

6. 7. 8. 9. 10.

Introduction financial system

The economic development of a nation is reflected by the progress of the various economic units, broadly classified into corporate sector, government and household sector. While performing their activities these units will be placed in a surplus/deficit/balanced budgetary situations. There are areas or people with surplus funds and there are those with a deficit. A financial system or financial sector functions as an intermediary and facilitates the flow of funds from the areas of surplus to the areas of deficit. A Financial System is a composition of various institutions, markets, regulations and laws, practices, money manager, analysts, transactions and claims and liabilities.

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

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

FINANCIAL MARKETS

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

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

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

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

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

FINANCIAL INTERMEDIATION

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

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

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

1. Call/Notice Money 2. Treasury Bills 3. Term Money 4. Certificate of Deposit 5. Commercial Papers 1. Call /Notice-Money Market

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

2. Inter-Bank Term Money

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

3. Treasury Bills.

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

4. Certificate of Deposits

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

5. Commercial Paper

CP is a note in evidence of the debt obligation of the issuer. On issuing commercial paper the debt obligation is transformed into an instrument. CP is thus an unsecured promissory note privately placed with investors at a discount rate to face value determined by market forces. CP is freely negotiable by endorsement and delivery. A company shall be eligible to issue CP provided - (a) the tangible net worth of the company, as per the latest audited balance sheet,

is not less than Rs. 4 crore; (b) the working capital (fund-based) limit of the company from the banking system is not less than Rs.4 crore and (c) the borrowal account of the company is classified as a Standard Asset by the financing bank/s. The minimum maturity period of CP is 7 days. The minimum credit rating shall be P-2 of CRISIL or such equivalent rating by other agencies.

Capital Market Instruments

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

Hybrid Instruments

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

Banking system in India The banking section will navigate through all the aspects of the Banking System in India. It will discuss upon the matters with the birth of the banking concept in the country to new players adding their names in the industry in coming few years.

The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA) and top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined under three separate heads with one page dedicated to each bank.

However, in the introduction part of the entire banking cosmos, the past has been well explained under three different heads namely:

History of Banking in India

The first deals with the history part since the dawn of banking system in India. Government took major step in the 1969 to put the banking sector into systems and it nationalised 14 private banks in the mentioned year. This has been elaborated in Nationalisationof Banks in India. The last but not the least explains about the scheduled and unscheduled banks in India

Chap 2 Banking Services in India With years, banks are also adding services to their customers. The Indian banking industry is passing through a phase of customers market. The customers have more choices in choosing their banks. A competition has been established within the banks operating in India.

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

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

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

History Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint

stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: Years 1913 1914 1915 1916 1917 1918 Number of banks Authorised capital Paid-up Capital that failed (Rs. Lakhs) (Rs. Lakhs) 12 274 35 42 710 109 11 56 5 13 231 4 9 76 25 7 209 1

[edit] Post-Independence

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

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

Nationalisation

Banks Nationalisation in India: Newspaper Clipping, Times of India, July, 20, 1969 Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian

economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The meeting received the paper with enthusiasm. Thereafter, her move was swift and sudden. The Government of India issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. [edit] Liberalisation In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign

Investors in banks may be given voting rights which could exceed the present cap of 10%,at present it has gone up to 74% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%;Lend at 6%;Go home at 4) of functioning. The new wave ushered in a modern outlook and techsavvy methods of working for traditional banks.All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide[

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

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

At a traditional bank, the customer can conduct a number of banking transactions. These include cashing a check, withdrawing funds, opening a new account and applying for a loan. Considerations Many consumers utilize both traditional banking services and electronic banking systems for different reasons. Some people prefer to cash checks at the bank, however they may pay bills online. Convenience of electronic banking makes it a very popular option for many peopleBanks In India In India the banks are being segregated in different groups. Each group has their own benefits and limitations in operating in India. Each has their own dedicated target market. Few of them only work in rural sector while others in both rural as well as urban. Many even are only catering in cities. Some are of Indian origin and some are foreign players.

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

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

Chap 3 Role of banks in Indian financial system In India , as in many developing countries , the commercial banking sector has been the dominant element in the countrys financial system . The sector has performed the key functions of providing liquidity and payment services to the real sector and has accounted for the Bulk of the financial intermediation process . Besides institutionalizing savings , the banking sector has contributed to the process of economic development by serving as a major source of credit to households , government , business and to weaker sectors of the economy like village and small scale industries and agriculture. Over the years, over 3040% of gross household savings , have been in the form of bank deposits and around 60% of the assets of all financial institutions accounted for by commercial banks.

An important landmark in the development of banking sector in recent years has been the initiation if reforms following the recommendations of the first Narasimham Committee on Financial System. In reviewing the strengths and weaknesses of these banks , the Committee suggested several measures to transform the Indian banking sector from a highly regulated to a more market oriented system and to enable it to compete effectively in an increasingly globalised environment . Many of the recommendations of the Committee especially those pertaining to Interest rate , an institution of prudential

regulation and transparent accounting norms were in line with banking policy reforms implemented by a host of developing countries

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

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

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

Hire purchase Hire purchase (abbreviated HP) is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. It was developed in the United Kingdom and can now be found in China, Japan, Malaysia, India, Australia, Jamaica and New Zealand. It is also called closed-end leasing. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a

hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. In Canada and the United States, a hire purchase is termed an installment plan; other analogous practices are described as closed-end leasing or rent to own. The British concept of hire-purchase has, however, been there in India for more than 6 decates. The first hire-purchase company is believed to be Commercial Credit Corporation, successor to Auto Supply Company. While this company was based in Madras, Motor and General Finance and Instalment Supply Company were set up in North India. These companies were set up in the 1920s and 1930s.

Development of Hire-purchase took two forms: consumer durables and automobiles.

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

The other side developed very fast - hire-purchase of commercial vehicles. The dealers in commercial vehicles as well as pure financing companies sprang up. The value of the asset being good and repossession being easy, this branch of financing activity flourished fast, although until recently, most of automobile financing business was in hands of family-owned businesses. Essentially, asset-based financing in India particularly by non-banking financial companies is split in two documentation modes - lease and hire-purchase. These two are technically different instruments, but in essence, there is not

much that differs between the two, except for the caption. Click here for more on comparison between lease and hire-purchase.

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

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

Leasing, essentially a US-innovation, entered the country significantly in the early 80s, and was propagated as an alternative to traditional modes of industrial finance. Besides, the early motivation (which continues with a number of players even now) of leasing was capital allowances, more significantly the investment allowance, which was not available for transport vehicles. Hence, the leasing form historically clung to industrial plant and machinery.

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

These reasons have vanished over time.

The Motor Vehicles law now treats leases and hire-purchase at par from the viewpoint of financier-protection. Investment allowance has been abolished, and hence, there are no predominant tax-preferences to a lease. The RBI treats lease and hire-purchase at par and has stopped giving a distinctive classification to leasing and hire-purchase companies. The accounting norms lead to the same effect on pre-tax income, as also balance sheet values, be it a lease or hire-purchase transactions.

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

.Funds are tapped from the capital market to finance various mega industrial projects. In attracting public savings, merchant bankers play a vital role asspecialized agencies. The resources raising functions remains to be the primary business of a merchant banker. The primary market holds the key torapid capital formation, growth in industrial productions and exports. Therehas to be accountability to the end use of funds raised from the market. Theincrease in the number of issues and amount raised the number of merchant bankers. Therefore, the field became highly competitive market where itrequires a specialized skill in handling the situation. The merchant bankershave a social responsibility to in building an industrial structure in India. Investment Investment has different meanings in finance and economics. In Finance investment is putting money into something with the expectation of gain, that upon thorough analysis, has a high degree of security of principle, as well as security of return, within an expected period of time.[1] In contrast putting money into something with an expectation of gain without thorough analysis, without security of principal, and without security of return is speculation or gambling.

Investment is related to saving or deferring consumption. Investment is involved in many areas of the economy, such as business management and finance whether for households, firms, or governments. Mutual funds Investing in the stock market requires in-depth analysis of the scrip and the companies and the business that they are involved in. Retail investors seldom have the time and expertise to analyse stocks.

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

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

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

The expertise of the fund manager of the AMC that manages mutual funds money in India helps the investor to maximise the profits on the amount invested in the mutual fund. Indian Mutual Funds invest money in a widespread basket of shares and equities, depending on the nature of the Fund and switch investments to different securities depending on the Equity market conditions In India, Mutual funds are an easy and cost efficient way of investing along with tax benefits. There are many kinds of mutual funds available for the investors to choose from.

Sector Specific Mutual Fund

Large/Small/Mid cap Mutual Fund Index Mutual Funds

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

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

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

The Portfolio Management Schemes of the Company offer Discretionary Schemes (Unicon Optimizer & Unicon Growth) for Individuals, Corporate Bodies, Partnership firms, Proprietors, Non Resident Indians etc. The Company is registered with SEBI enabling it to undertake Portfolio Management activities under a specific license. For any market condition: Choose from our range of PMS products that are designed to perform in any market based on your investment objectives

Professional Fund Management: The Schemes, duly approved by SEBI, are managed by a highly competent team comprising of portfolio managers and equity strategists, backed by a team of fundamental, technical and derivatives analysts Personalized Service: Proactive management of your funds by fund manager; backed by a Central Research team of Analysts and serviced by your dedicated Relationship Manager

Timely Review & Reporting: Periodic review and rebalancing with timely performance reporting Chap 4 fee What are the different types of services offered by banks?

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

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

How do banks price their services?

The pricing mechanism is dependent on client relationship and the nature of the transaction. The pricing can be arrived at by profiling customers into different segments. The large corporate segment comprises of the bulk and large value transactions. This segment is characterised by multiple service relationships. The pricing in this segment is transaction based and depends on the size of transactions and on the banks' relationship with the corporate. Hence, the pricing is decided on a one to one basis and public. The other segments comprise the brokers, small and medium enterprises (SME), other banks and the retail segment. In each of these cases, the pricing is not made public and is determined on the basis of the nature of the transaction and the banks' relationship with the client, on a one to one basis.

Typically, high volumes and low value characterise the SME segment. Therefore the pricing for this segment differs from that of the large corporates. Similarly the pricing for the banks is very different. In the retail segment, the bank publishes its tariff. How do services contribute to the bank's income? Increasingly banks are witnessing a growth in their non-interest or fee-based incomes. With interest spreads decreasing, banks have little option but to ramp up their revenues from fee-based income. Fee-based income constitutes a major portion of a bank's other income. The ratio of other income to total income is an indicator of the size of fee-based income. Treasury incomes of public sector banks are no longer the major revenue driver and have been coming down as a result of rising interest rates. Volatility of interest rates are compelling banks to increase their fee based income. What is non-fund based income? The non-fund based income comprises of revenues from both financial commitment and services rendered. Financial commitment includes guarantees, letters of credit and bankers acceptances etc. The fees charged may vary from bank to bank and is dependant on the relationship of the bank with the client and the size of the transaction. On the other hand, the revenues from services rendered include fees from funds transfer and enabling services like ATM, internet banking etc. The revenues from funds transfer come from corporate services such as cash management, foreign exchange remittances and from retail services including drafts, pay orders etc. Which is the most important component for the fee-based income of banks?

The cash management business contributes to banks' fee based revenue stream in a major way. The cash management business comprises four types of services including collection of outstation cheques, disbursement of outstation cheques, payment of dividends, interest, and refunds and e-business. The tariff differs depending on the volumes, the banks' profitability and the banks' relationship with the client. As a proportion of the total fee based income, cash management is the most important component. The other streams of income like auto loans, personal loans, loans against shares among others are residual. State Bank of India A study on SBI State Bank of India (BSE:SBI), a public sector bank, is the largest bank in India.[1] SBI accounts for almost one-fifth of the nations loans.[1] Besides personal and corporate banking, SBI is also involved in NRI (Non Resident Indian) services through its network in India and overseas. The bank has 21 subsidiaries and 10,186 branches. SBI was recognized as the best bank in India in 2008 by The Banker magazine of The Financial Times.[2] Banks across Asia are looking to shore up their balance sheets as they prepare for a tougher business environment amid a global economic downturn. SBI, which had no direct exposure to sub-prime mortgages, has said that it would still need to raise USD $2-4 billion capital to boost its Tier-1 capital adequacy ratio, but whether it would be done through a rights issue or other means has not been finalized.[3] Tier 1 capital is a core measure of a bank's financial strength. It is composed of core capital, which consists primarily of equity capital and cash reserves. Company Overview SBI offers banking services as well as an array of financial services which include Mutual Funds, Credit cards, Life Insurance, Merchant Banking, Security Trading & Primary dealership in the Money market. The Bank is

actively involved in non-profit activity called community services banking apart from its normal banking activity. Associate banks There are six associate banks that fall under SBI, and together these seven banks constitute the State Bank Group. They are:

State Bank of Indore State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore SBI is the only Indian bank that figures in Fortunes top 100 banks. Its 11,000 branches and 5,600 automatic teller machines give it a reach throughout the length and breadth of the country; its work force of 200,000 dwarfs all other banks in India (its nearest competitor is Punjab National Bank, which has around 56,000 employees[4]).[5] It is also the second largest bank in the world, measured by the number of branches and employees.[6] Joint Ventures SBI has entered into strategic agreements with banks, insurers and other companies. Insurance Australia Group (IAG) has signed a $170 million joint venture agreement with the State Bank of India (SBI) to establish a general insurance company in India. SBI will become the first public sector bank in India to enter the custody services sector. State Bank of India (SBI) and Societe Generale Securities Services (SGSS), part of Societe Generale Group, have announced a joint venture which will offer custody and related services in India. The new company, SBI SG Custodial Services, will be based in Mumbai and offer a range of services to both foreign and domestic investors and clients, covering custody, depository, fund administration, registration and transfer agent

services. The joint venture will leverage SBIs strength in the Indian financial sector.[7] India is a preferred destination for private equity funds in real estate. SBI has planned to capitalize on this opportunity by teaming up with Australias Macquarie Group for a $2 billion infrastructure fund, and with an affiliate of Unitech Ltd, the countrys second largest publicly traded real estate company, to float a private equity (PE) real estate fund.[8] Punjab National bank - Punjab National Bank (PNB) is the second largest government-owned commercial bank in India with about 4,500 branches across 764 cities.[15] This financial institution offers services in personal and corporate banking, including industrial, agricultural, and export finance, as well as international banking. It competes with SBI mostly in retail lending and wholesale businesses[16] ICICI Bank (formerly Industrial Credit and Investment Corporation of India) is India's largest private sector bank and second largest overall in terms of assets. Together with its subsidiaries, ICICI Bank offers a complete spectrum of financial services and products ranging from commercial banking to investment banking, mutual fund to insurance. It is also the largest issuer of credit cards in India. HDFC - Housing Development Finance Corporation Limited Bank Limited or HDFC Bank is the second largest private bank in India, catering to the whole universe of financial services from commercial to investment banking, mutual fund to insurance.[17] On February 25, 2008 HDFC agreed to buy Centurion Bank of Punjab. The combined entity has the largest branch network among private banks in India, a strong deposit base of around Rs 1220 billion and net advances of around Rs 890 billion.[18] Bank of Baroda - Bank of Baroda is another private player. It has a rich countrywide network of over 2800 branches. It also has significant international presence with a network of 74 offices in 25 countries.[19]

Business and Financial Metrics First Quarter Fiscal 2011 During the first quarter of fiscal 2011, State Bank of India reported operating profit increased year-over-year by 66.97%. Net Profit for Q1 FY2011 increased to Rs. 2914.20 crores from Rs. 2330.37 crores in Q1 FY2010, representing growth of 25.05%. Net interest income increased by 45.35% in Q1 FY11 over Q1FY10 by 4.30%. Interest expenses on deposits decreased by 11.85% during Q1 FY11 through strategic shedding of high cost bulk deposits. Interest expenses have come down despite deposits increasing by 6.78%. Interest income on advances increased by 8.62% year-over-year driven by growth of 20.74% in advances.

Interest earnings from Investments increased by 3.08%. Cumulative net interest margin improved significantly by 88 bps to 3.18% from 2.30% as at the end of June 2009. Total non interest income increased by 3.40% despite profit on sale of investments decreasing by 75.54% (Rs.535 crores). Non interest income excluding profit on sale of investments was up by 22.96%. Fee income increased by 29.41% year-over-year, driven by robust growth in loan processing charges, non fund based business, government business, and crossselling. Business Segments Global Markets In keeping with its integrated approach to all treasury activities in various markets in different time zones i.e., Forex, Interest Rates, Bullion, Equity and Alternative Assets, the Bank re-designated its Treasury Operations into Global Markets. Wholesale Banking Group The Bank's Wholesale Banking Group consists of three Strategic Business Units: Corporate Accounts Group, Project Finance & Leasing, and Stressed Assets Management Group. The Bank has recently launched the "Wholesale Banking Initiative" to harness the SBI Group synergy for the benefit of the

corporate customers by providing them with a "One Stop Shop" facility for all their banking needs.[10] Mid-Corporate Group The Mid-Corporate Group (MCG) has been immensely successful in attracting the business of Mid-Corporate units through relationship management and quicker credit processing. It is estimated that 38% of the Mid-Corporate universe in the country is covered by the bank. The total credit portfolio (fund based) of the Group stands at Rs 1,090.02 billion. This is more than the aggregate business handled by many of the top banks in the country. = National Banking Group The Bank's National Banking Group (NBG) consists of three Business Groups: Personal Banking, Small & Medium Enterprise (SME), and Government Banking.[10] Rural Business Group Rural Business Group comprises rural and semi urban branches, accounting for about 70% of the branch network of the Bank. International Banking Group The Bank has a network of 84 overseas offices spread over 32 countries covering all time zones. Net Profit from the Banks overseas operations (including subsidiaries and joint ventures with more than 50% shareholding) registered a growth of 84% during the fiscal year mainly driven by significant growth of 48% in Net Customer Credit. Trends and Forces Macro economic risk is the largest risk for SBI, given its size, penetration and exposures in India Government regulations and the country's macroeconomic policies affect SBI's expansion and liquidity the most. Key ratios such as Cash Reserve Ratio (CRR), Statutory Liquidity Ratio (SLR), Repo rate and Reverse Repo rate are all controlled by the government and affect the bank's liquidity.

Source: Dun & Bradstreet Report[11] SBI and ICICI Bank Ltd, two of the nations largest banks, have been worst hit by the Reserve Bank of Indias (RBI) decision to increase the amount of cash they must hold with it (CRR).[12] In 2008, RBI hiked CRR from its longstanding value of around 6%, in steps, to 7.5%. Changes in interest rates adversely affect net interest margin the difference between the yield the bank earns on assets and the interest rate it pays for deposits and other sources of funding which in turn affects earnings. As SBI works to broaden its products and services and to increase its branch network, it will have to gain approval from the Reserve Bank of India and other government agencies. International operations' increasing contributions to total income expected to continue and boost income further SBI is laying greater and greater thrust on its international operations, capitalizing on its presence in 32 countries. Being the largest commercial bank in India, it is one of the most capable banks to cater to corporate India's growing appetite for international mergers and acquisitions. Net profit from the banks overseas operations (including subsidiaries and joint ventures with more than 50% shareholding) registered a growth of 84% during FY 2007-08 mainly driven by significant growth of 48% in Net Customer Credit. The bank was ranked No. 1 in the Asia Pacific (excluding Japan and Australia) in

the mandated arranger/book runner league table for syndicated loans by IFR Asia in 2007-08.[10] 11,111 branches and still counting - a source of low-cost deposits Bank branch expansion in India is regulated by RBI and banks cannot expand their branch network without RBIs approval. As low-cost deposits are directly tied to the size of the branch network, the number of branches a bank has, is a key success factor for any bank in India. Branch expansion is particularly a key factor for SBI, given that SBI's profit growth is driven by core business. The operating profit increased by 54.5% year-over-year, given a robust increase in the net interest income and a modest rise in the noninterest income. Net profit rose by 40.2% year-over-year after accounting for a 30% increase in the tax paid.[13] Public sector banks facing stiff competition from private sector banks Public sector banks are facing competition from their private sector counterparts and foreign banks entering India in all realms of financial services. While public sector banks enjoy a pre-eminent position in terms of low-cost deposit base (also called CASA deposits in India stands for Current Accounts and Savings Account), private-sector banks have been increasing their CASA base steadily over the years. ICICI Bank, the largest private bank in India, has expanded its CASA market share by 218% over the period of 2003-2007. The banks CASA deposits have grown at a CAGR of 61% over the same period, compared with a growth of 17.1% for public-sector banks, 32.5% for private sector banks and 29% for foreign banks in India.[14] Private sector banks, armed with usually more efficient management and employees, are employing all tricks - branch expansion, mergers and acquisitions, and international operations - to compete with public sector banks. Competition

Comparison of Competitors[20] [21] [22] Total Deposits Total Advances Net profit Total Assets Branches

State Bank of India ICICI Bank Punjab National Bank HDFC Bank Bank of Baroda

4,355.21 2,305.10 1, 398.60 1,007.69 1,520.34

3,373.36 1,958.66 1,990.48 634.27 1,067.01

45.41 31.10 20.48 15.90 14.35

5,665.65 3,453.12 1,990.48 1,332.51 1,795.99

10,186 1,400 4,500 1,412

When did RBI grant freedom to banks to prescribe service charges? Indian Banks' Association (IBA) has dispensed with the practice of prescribing service charges to be levied by banks for various services rendered by them. With effect from September 1999, the Reserve Bank has granted freedom to banks to prescribe service charges with the approval of respective board of directors. Why is RBI taking note of different service charges levied by banks? RBI has been receiving representations from the public about unreasonable and non-transparent service charges being levied by the banks. The RBI has directed the banks to display and update on their web sites, offices and branches, the details of the charges pre-scribed by them for various services. It has advised the banks to display the charges in specified formats. The display may also be in local language.

deposits 10 Banking by country 11 See also

o

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

12 References 13 External links

History Main article: History of banking

[edit] Origin of the word The word bank was borrowed in Middle English from Middle French banque, from Old Italian banca, from Old High German banc, bank "bench, counter". Benches were used as desks or exchange counters during the Renaissance by Florentine bankers, who used to make their transactions atop desks covered by green tablecloths.[6] One of the oldest items found showing money-changing activity is a silver Greek drachm coin from ancient Hellenic colony Trapezus on the Black Sea, modern Trabzon, c. 350325 BC, presented in the British Museum in London. The coin shows a banker's table (trapeza) laden with coins, a pun on the name of the city. In fact, even today in Modern Greek the word Trapeza () means both a table and a bank. [edit] Definition The definition of a bank varies from country to country. See the relevant country page (below) for more information. Under English common law, a banker is defined as a person who carries on the business of banking, which is specified as:[7]

conducting current accounts for his customers paying cheques drawn on him, and collecting cheques for his customers.

Banking

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

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

TRADITIONAL BANKING

Traditional banking and e-banking are two way for getting the benefits from bank. Both have benefits and disadvantages. Customer can use both or any of these facilities. Here we are showing the differences between traditional banking and e-banking 1. (a) Basic Traditional Introduction Banking

In traditional banking system, a customer can open any bank account in banks, take the facility of saving his money by depositing money in local bank. He can withdraw his

money through check, counter payment and through bank draft. He can meet the bank manager and ask his problem. He can take the physical help for getting loan from bank. (b) E-banking

E-banking means Internet banking or modern banking or online bill. In this method, customer gets his bank account ID and password and he can check his account, pay his bill and print his receipt through his home personal computer which is connected with Internet. E-banking is development of today banking system. In other words, e-banking is electronic banking whose facility, you can take through your regular broadband Internet connect. 2. (a) Traditional Benefits Banking

Traditional banking has totally improved from previous face. Few days ago, I went to State bank of India for withdrawing my money where I saw many monitoring cameras. My one friend is also doing duty in that bank. I asked question from my friend why have these cameras been attached here? Are these on? My friend explained me that it is more than Rs. 500,000 cost project per branch of SBI. We do not want to take risk of customer's money. Customer's loss is our loss. We deduct fraud case by monitoring the activities through this surveillance cameras. I feel happy because now traditional banking has improved and there is minimum change of fraud. (b) (i) E-banking Convenient

I think e-banking is convenient because we can use e-banking for tracking my money in bank without going to bank. I am already changing everything from traditional to online. I am tracking my courier letter by opening the site of courier and writing the track no. after this I can easily know when my letter will come from foreign country.

(ii)

Protection

of Environment

If we all start to use e-banking, we can also protect our environment. Suppose, you have to withdraw Rs. 500,000 from HDFC bank and deposit it to SBI. What will you do? You will start your vehicle and go to HDFC bank and withdraw the money and then go to SBI for depositing this money. By using vehicle, you are increasing the pollution in the environment. Today is 5th June 2010, the day of world environment. We can protect our environment by using e-banking. Just within 5 minute, we can transfer our money from HDFC bank to SBI bank through home e-banking facility. You can also use e-bill facility of your Internet bill. 3. (a) (i) Traditional Disadvantages Banking Robbery

Open any day newspaper, you will see the new bank robbery case. This is the disadvantages. Two and more thieves came and taken bank's money is general news. No one can do same thing in e-banking. (ii) Time limitation

Banks are opened from 9: 00 to 5:00 p.m. But, it may possible that we have to pay at 11:00 p.m. which can be done through e-banking not traditional banking. (b) E-banking

Hacking, spyware program, computer virus and breaking online password are the weakness of e-banking or online banking. Online big hackers are using computer virus and after spreading it, they compromise your computer. After this, they know all detail of your computer and banking password and illegally transfer all your money. Next

day, your bank account may be zero. Even you can stop this crime by writing strong password but you can not remove it totally. Modern Banking "Modern Banking" is a sequel to the highly successful "Modern Banking in Theory and Practice," first published in 1996. Over the last decade many aspects of banking have changed considerably, though the key features that distinguish banks from other financial institutions remain. Some might question the need for a book on banking rather than one on financial institutions - while banks remain special and unique to the financial sector, books need to be devoted to them. "Modern Banking" focuses on the theory and practice of banking, and its prospects in the new millennium. The book is written for courses in banking and finance at Masters/MBA level, or undergraduate degrees specialising in this area. Bank practitioners wishing to deepen and broaden their understanding of banking issues may also be attracted to this book. While they often have exceptional and detailed knowledge of the areas they have worked in, busy bankers may be all too unaware of the key broader issues. Consider the fundamental questions: "What is unique about a bank?" and "What differentiates it from other financial institutions?" Answering these questions begins to show how banks should evolve and adapt - or fail. If bankers know the underlying reasons for "why" profitable banks exist, it will help them to devise strategies for sustained growth. "Modern Banking" concludes with a set of case studies that give practical insight into the key issues covered in the book: The core banking functions Different types of banks and diversification of bank activities Risk management: issues and techniques Global regulation: Basel 1 and Basel 2. Bank regulation in the UK, US, EU, and Japan Banking in emerging markets Bankfailure and financial crises Competitive issues, from cost efficiency to mergers and acquisitions Case Studies including: Goldman Sachs, Bankers Trust/Deutsche Bank, Sumitomo Mitsui, Bancomer "Modern Banking" focuses on the theory and practice of banking, and its prospects in the new millennium. The book is written for courses in banking and finance at Masters/MBA level, or undergraduate degrees specialising in this area. Bank practitioners wishing to deepen and broaden their understanding of banking issues may also be attracted to this book. While they often have exceptional and detailed knowledge of the areas they have worked in, busy bankers may be all too unaware of the key broader issues. Consider the fundamental questions: "What is unique about a bank?" and "What differentiates it from other financial institutions?" Answering these questions begins to show how banks should evolve and adapt - or fail. If bankers know

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

ROLE OF COMMERCIAL BANKS IN THE ECONOMIC DEVELOPMENT OF A COUNTRY Role of Commercial Banks in the Economic Development of a Country Commercial banks play an important and active role in the economic development of a country. If the banking system in a country is effective, efficient and disciplined it brings about a rapid growth in the various sectors of the economy. The following is the significance of commercial banks in the economic development of a country. Role of Commercial Banks in the Economic Development of a Country Banks promote capital formation
In any Merchant Account, capital occupies a position of crucial and strategic importance. The bank plays an important role in removing the deficiency of capital by stimulating savings and investments. A sound banking system helps in mobilisation of the savings of the merchants and makes them available for investment in productive merchandise industries. No economic development of sizeable extent in merchant account is possible unless there is sufficient degree of capital formation.

Capital is must in all businesses. Capital is also considered as life-blood of any business. Banks help a lot in pushing up small business to a certain height by giving financial help and also by promoting capital formation. There are other non-banking financial institutions that also provide monetary help. But these financial institutions charge a higher rate of interest than the banks. Merchant account is maintained with lots of withdrawals and deposits and also various other transactions. Credit card processing is an example of a merchant account. In modern days, going to the bank for making transactions like withdrawal is eliminated. These services are replaced by e-commerce and electronic banking systems. Internet is used as a main medium for such kind of transactions. But it is also important to visit banks sometimes to make deposits into the respective account. Merchant account is accessed at any time of the day. A high level of technological support is needed in the background. Merchants usually accept credit cards to receive payments from the customers. Banks perform two important functions in the capital formation of merchant account holders. They are: (a) Banks attract deposits by offering attractive rates of interests and thus converting savings which would have remained as immobile capital into active capital; and (b) The banks distribute these savings through loans amongst the merchant account holders which are directly or indirectly connected to economic development. Bank plays an important role in encouraging savings and making merchandise business stand firmly in the poorest market situations. The merchants also find satisfaction in the offers provided by the banks. This improves the bank and merchant relationship. It is the customer who saves hardly 5 percent of the national income. The more savings are done, the more capital formation improvises. To secure a reasonable level of development, the common people should save at least 12 percent of the national income. A small rate of saving does not permit large investment in merchant accounting system. A merchant should always be ready to face even the worst situation that may come in the economy which is very uncertain and un-predictable in nature. Banks also act as a backbone to any monetary terms and dealings. The banks provide financial assistance in the establishment of various businesses. It is difficult to see how, in the absence of banks, small merchandise business of various merchants could be made possible or mobilised. The capital deficiencies in any merchant account are the serious handicaps in the development of any economy. These deficits in financing of the merchant business are covered up by the banks. Thus banks helps in promoting capital formation for merchant account holders.

Investment in new enterprises

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

Allocate your assets among bonds, stocks, money-market instruments and funds in proportions that reflect the amount of risk necessary to achieve your goals. In many cases, that may mean your portfolio shouldn't be more conservative "just because" you're

older or because that's what a rule of thumb tells you. It should really be about allocating for your particular goals, tax situation, risk tolerance and unique circumstances, and not just because you're at a certain age or point in your life.

Be wary of recommendations of all-purpose model portfolio asset allocations. While they may indicate how various investment strategists feel about the near-term relative attractiveness of stocks and bonds, they're not taking your particular investment goals and risk tolerance into account. On the other hand, if you don't have the time or inclination to do the necessary initial portfolio construction, disciplined re-balancing and continuous realignment over time, you may want to consider "lifestyle" or "life cycle" funds, which perform these functions for you.

Have realistic expectations about the performance of your portfolio. On average, the years of exceptional returns for stocks are just a memory now. Annual returns below the long-term average of about 10 percent per annum seem more likely in the foreseeable future. With that in mind, understand that the average returns for balanced portfolios are likely to be in the single-digit range.

Resolve to maximize your net returns by minimizing commissions when buying or selling individual securities and purchasing mutual funds with reasonable expense ratios. When investing in taxable accounts, be mindful of the tax consequences of owning mutual funds that make large taxable distributions of capital gains. Consider placing funds with low turnover ratios that distribute long-term capital gains in taxable accounts and funds that have large amounts of short-term gains distributions in retirement accounts, such as IRAs, 401(k)s, or other tax-deferred accounts.

When investing for income, resist the temptation to chase high yields. Higher yields are generally associated with higher risk. Plus, with some investments, what appears to be a yield may actually be a return of capital.

Don't forget about tax-exempt bonds and bond funds. Tax-exempt state or local government bonds or bond funds, whose yields are usually lower than those of taxable issues of comparable credit quality and maturity, may pay more than the after-tax return you'd receive when investing in comparable taxable securities. So do the math and make sure you compare apples with apples--meaning, compare your prospective after-tax income from taxable securities with the return from tax-exempts.

Accept that there's no shortcut to mutual fund selection. Whether you do it or an adviser does it for you, funds need to be researched to determine if they're suitable for your portfolio. One of the best and most robust sources of research is the prospectus. Data indicating superior past performance--which funds must report in accordance with the Securities and Exchange Commission (SEC)--don't assure you of superior future performance. Neither do ratings, such as the star rating calculated by Morningstar. They may provide the additional dimension of past performance, but, as Morningstar points out, the stars don't have

predictive value. Such data constitute the beginning, not the end, of the selection process and provide a first-round screen as to which funds you might want to study further.

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

Finally, always remember that stocks and bonds--and the funds that own them--are long-term investments, requiring patience and the ability to ride out market cycles. Debra Neiman, CFP, is and principal of Neiman & Associates Financial Services, a financial planning firm and registered investment advisor in Watertown, Massachusetts. She's also the coauthor of the recently released book, Money Without Matrimony: The Unmarried Couple's Guide to Financial Security.

Promotion of trade and industry

Department ofCommerce
The department is entrusted with formulating and implementing the foreign trade policy and responsibilities relating to multilateral and bilateral commercial relations, state trading, export promotion measures, and development and regulation of certain export oriented industries and commodities. In order for the smooth functioning, the Department is divided into eight divisions:[5]

Administrative and General Division Finance Division Economic Division Trade Policy Division Foreign Trade Territorial Division State Trading & Infrastructure Division Supply Division Plantation Division

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

International trade Foreign Trade State trading Management of Indian Trade Services Special Economic Zones

Department of Industrial Policy & Promotion

Main article: Department of Industrial Policy & Promotion (India)

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

Development of agriculture
From a nation dependent on food imports to feed its population, India today is not only self-sufficient in grain production but also has a substantial reserve. The progress made by agriculture in the last four decades has been one of the biggest success stories of free India. Agriculture and allied activities constitute the single largest contributor to the Gross Domestic Product, almost 33 percent of it. Agriculture is the means of livelihood of about two-thirds of the workforce in the country. This increase in agricultural production has been brought about by bringing additional area under cultivation, extension of irrigation facilities, the use of improved high-yielding variety of seeds, better techniques evolved through agricultural research, water management, and plant protection through judicious use of fertilizers, pesticides and cropping practices. Crops The 1970s saw a multi-fold increase in wheat production that heralded the Green Revolution. In the next decade rice production rose significantly; in 1995-96, rice production was 79.6 million tonnes. The total grain production crossed 211 million tonnes in 2001-02, a big leap from 51 million tonnes in 1950-51. Irrigation To carry improved technologies to farmers, a National Pulse Development Programme, covering 13 states, was launched in 1986. Efforts to boost pulse production were augmented further by the Special Food Production Programme. In 2001-02, pulse production was 13.52 million tonnes. With some states offering more than the statutory minimum price, sugar cane production also received a boost, and in 2001-02 a record 292.2 million tonnes was registered. As efforts continued to increase the irrigation potential in the country, the last 40

years saw the gross irrigated area reach 85 million hectares. Flood forecasting has become an important activity over the years. Over 500 hydrological stations collect and transmit data through 400 wireless stations for issuing forecasts for 157 sites. About 5,000 forecasts are issued in a year with 94 percent accuracy. The country also receives international support, with the World Bank as a primary source, for developing its water resources. International cooperation is also envisaged in setting up a National Centre for Information on Water and Power. As there is a broad seismic belt in the country, particularly along the Himalayan, and the Kutch region and parts of Maharashtra, a scheme is being evolved to collect all data on seismic activity at various dam sites. Fertilizers The fertilizer industry in India has grown tremendously in the last 30 years. The Government is keen to see that fertilizer reaches the farmers in the remote and hilly areas. It has been decided to decontrol the prices, distribution and movement of phosphatic and potassic fertilizers. Steps have been taken to ensure an increase in the supply of non-chemical fertilizers at reasonable prices. There are 66 fertilizer quality control laboratories in the country. Since bio-fertilizers are regarded as an effective, cheap and renewable supplement to chemical fertilizers, the Government is implementing a National Project on Development and Use of Bio-fertilizers. Under this scheme, one national and six regional centers for organizing training, demonstrating programmes and quality testing of bio-fertilizers has been taken up. It was a challenging decision of the Government to take Bombay High gas through a 1,700 km pipeline to feed fertilizer plants located in the consumption centers of North India. However, the major policy which has ensured the growth of the fertilizer industry is the thrust on accelerating fertilizer consumption by fixing, on the one hand, low and uniform price for fertilizers, and on the other hand providing the manufacturers adequate compensation through the retention price and subsidy scheme. As expected, fertilizer nutrient demand has gone up from 0.29 million tonnes in 1960-61 to 16.7 million tonnes at the end of 2000-01, compared to 12.15 million tonnes during 1992-93. Fisheries Fish production achieved an all-time high of 5.6 million tonnes at the end of 2001-02. Programmes that have helped boost production include the National Programme of Developing Fish Seeds, Fish Farmers' Development Agencies and Brackish Water Fish Farmers' Development Agencies. The Central Institute of Fisheries Nautical and Engineering Training trains the necessary manpower.To diversify fishing methods and introduce processed fish products on a semi-commercial scale, an Integrated Fisheries Project has been launched. A National Fisheries Advisory Board has also been established. Food Processing The Ministry of Food Processing Industries, set up in July 1988, is the central agency of the Government responsible for developing a strong and vibrant food-processing sector with a view to create increased job opportunities in rural areas, enable the farmers to reap benefit from modern technology, create surplus for exports and stimulating demand for processed food. A new seeds policy has been adopted to provide access to high-quality seeds and plant material for vegetables, fruit, flowers, oilseeds and pulses, without in any way compromising quarantine conditions. Initiatives have been taken to encourage private sector investment in the food processing industry.

Balanced development of different regions

Growing regional disparities are a real and present danger to Indian growth and poverty reduction, and to Indian politics. The specifics of regional policies can be debated, but India should strive for regionally balanced development, between states and within states. In doing so, it would be in good global company. India has lower spatial income disparities than countries such as Brazil, China and Indonesia, but these disparities have grown dramaticallythe standard deviation of state level per capita GDP rose from just below 0.3 in the 1980s to over 0.4 in the 1990s, an increase of more than one third (World Bank, 2006). The gap between rural and urban areas also widened despite average

growth in both (Sen and Himanshu, 2005). The contribution of rural-urban disparities to overall inequality has grown correspondingly (Gajwani et al., 2007). A remarkable feature of Indian spatial disparities is the presence of backward areas even within states that have grown faster and are at relatively high income levels on average. Eastern and Northern Karnataka, and Inland Eastern Maharashtra, are examples of lagging regions within prosperous states. Moreover, they form a contiguous corridor with deprived areas of Andhra Pradesh, Orissa, Chhattisgarh, Jharkhand and Bihar. Income disparities are matched, even exceeded, by disparities in non-income indicators. Disparities in access to toilets range from 70 per cent in some districts of India to 10 per cent in others. Although Maharashtras Infant Mortality Rate (IMR) is near the best in the country, its worst districts have IMRs that are higher than those of states with lower ranks. Thus while income and non-income poverty in some parts of India is at the relatively low levels of Latin America averages, in other parts of India it approaches or is worse than African averages (World Bank, 2006). India is not unique. High and rising spatial disparities are a feature of many developing countries. In Peru, for example, the incidence of income poverty in districts at sea level is three quarters of that in mountain districts. In China rural per capita income in Shanghai province is more than five times that in Guizhou province. Moreover, Chinese regional inequality increased throughout the 1990s and early 2000s, reaching an all time historical high. In Indonesia, the poverty reducing impact of growth has been higher in Java and Bali than in the remote areas of Kalimantan and Irian Jaya, with a resulting widening poverty gap between regions (Kanbur and Venables, 2007). Globally, opening up of an economy appears to be correlated with rising spatial inequality. This is not surprising, since global integration leads to a sharper expression of comparative advantage, and regions well placed in terms of location, education, governance and other initial conditions tend to surge ahead as global opportunities are better accessed while others lag behind. This is the case for China and for India, where sharply rising regional disparities have coincided with the period of external liberalization. The same argument applies to liberalization in general (Gajwani et al., 2007 and Kanbur and Venables, 2007). High and rising inequality in general dissipates the impact of growth on poverty reduction. Spatial inequality contributes to overall inequality, but is important in and of itself where location aligns with differences in group identity. The deepening North-South divide in a small country like Ghana in West Africa is of major concern because the North is primarily Islamic, while the South is primarily Christian. Such divides are of course more likely to exist in large countries, as they do in China, Indonesia, Brazil and India. Spatial disparities in India align with other cleavages which threaten national unity and peace, whether it is the extreme of the Maoist corridor that matches the corridor of deprivation described earlier, or whether it is fissiparous tendencies within states, some of which have been accommodated but others of which continue to fester. The regional policy debate has been between location-blind and location-sensitive approaches. The former encourage current locational comparative advantage and tolerate rising regional inequality with a view to relying on the eventual movement of people from lagging to growing regions. The latter attempt to (i) equalize comparative advantage by investing in lagging regions, and (ii) directly redistribute the gains of growth to the lagging regions through the central government. The former appears to be strongly supported by the World Banks 2009 Word Development Report (World Bank, 2009). A combination of the two, migration with purposive

regional policies, is the strategy actually followed by most countries with deep spatial divides (Fan et al. 2009). Location blind policies, while perhaps preferable from a purist economic perspective, are problematic in plural societies where extreme depopulation of an established spatial entity is not politically acceptable. Most polities, including China and India, have strong regional policies that combine direct redistribution of the gains of growth with investment in lagging regionsindeed, this investment is part of the redistribution. In China, after two decades of tolerating rising regional inequality, the government began a concerted series of policies to balance development between the fast growing coastal provinces and the lagging inland areas (Fan et al., 2009). Moreover, some redistributional policies that appear locationally blind can have a strong effect on regional inequality. Thus Indias National Rural Employment Guarantee Act (NREGA) addresses lagging states, as they will in general have lagging rural economies. It can also address contiguous corridors of deprivation that span states. In any weighing of the costs and benefits of NREGA, this potential impact on regional inequality should also be assessed. Flush with the growth success of the past two decades, there is an argument from some quarters that balanced regional development is a thing of the past, that lagging regions should essentially send their populations to the fast growing areas and that is that. However, in the context of overall rising inequality, growing regional disparities are a real and present danger to Indian growth and poverty reduction, and to Indian politics. India has a strong tradition of regional concerns, and policy instruments and frameworks that can and do address regional disparities. These policies of course have their problems of formulation and implementation, and we should discuss the specifics of better instruments, but this is different from a wholesale rejection of regional policy and sole reliance on migration. India should strive for regionally balanced development, between states and within states. In doing so, it would be in good global company.
References

Influencing economy activity

While consumers and producers make most decisions that mold the economy, government activities have a powerful effect on the U.S. economy in at least four areas. Stabilization and Growth. Perhaps most importantly, the federal government guides the overall pace of economic activity, attempting to maintain steady growth, high levels of employment, and price stability. By adjusting spending and tax rates (fiscal policy) or managing the money supply and controlling the use of credit (monetary policy), it can slow down or speed up the economy's rate of growth -- in the process, affecting the level of prices and employment. For many years following the Great Depression of the 1930s, recessions -- periods of slow economic growth and high unemployment -- were viewed as the greatest of economic threats. When the danger of recession appeared most serious, government sought to strengthen the economy by spending heavily itself or cutting taxes so that consumers would spend more, and by fostering rapid growth in the money supply, which also encouraged more spending. In the 1970s, major price increases, particularly for energy, created a strong fear of inflation -- increases in the overall level of prices. As a result, government leaders came to concentrate more on controlling inflation than on combating recession by limiting spending, resisting tax cuts, and reining in growth in the money supply.

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

Implementation of Monetary policy

Monetization of the economy Export promotion cells

Role of Commercial Banks in the Economic Development of a Country Banks promote capital formation: Commercial banks accept deposits from individuals and businesses, these deposits are then made available to the businesses which make use of them for productive purposes in the country. The banks are, therefore, not only the store houses of the countrys wealth, but also provide financial resources necessary for economic development. Role of Commercial Banks in the Economic Development of a Country Investment in new enterprises:

Businessmen normally hesitate to invest their money in risky enterprises. The commercial banks generally provide short and medium term loans to entrepreneurs to invest in new enterprises and adopt new methods of production. The provision of timely credit increases the productive capacity of the economy. Role of Commercial Banks in the Economic Development of a Country Promotion of trade and industry: With the growth of commercial banking, there is vast expansion in trade and industry. The use of bank draft, check, bill of exchange, credit cards and letters of credit etc has revolutionized both national and international trade. Role of Commercial Banks in the Economic Development of a Country Development of agriculture: The commercial banks particularly in developing countries are now providing credit for development of agriculture and small scale industries in rural areas. The provision of credit to agriculture sector has greatly helped in raising agriculture productivity and income of the farmers. Role of Commercial Banks in the Economic Development of a Country Balanced development of different regions: The commercial banks play an important role in achieving balanced development in different regions of the country. They help in transferring surplus capital from developed regions to the less developed regions.

The traders, industrialist etc of less developed regions are able to get adequate capital for meeting their business needs. This in turn increases investment, trade and production in the economy. Role of Commercial Banks in the Economic Development of a Country Influencing economic activity: The banks can also influence the economic activity of the country through its influence on Availability of credit The rate of interest If the commercial banks are able to increase the amount of money in circulation through credit creation or by lowering the rate of interest, it directly affects economic development. A low rate of interest can encourage investment. The credit creation activity can raise aggregate demand which leads to more production in the economy. Role of Commercial Banks in the Economic Development of a Country Implementation of Monetary policy: The central bank of the country controls and regulates volume of credit through the active cooperation of the banking system in the country. It helps in bringing price stability and promotes economic growth with in the shortest possible period of time. Role of Commercial Banks in the Economic Development of a Country Monetization of the economy:

The commercial banks by opening branches in the rural and backward areas are reducing the exchange of goods through barter. The use of money has greatly increased the volume of production of goods. The non monetized sector (barter economy) is now being converted into monetized sector with the help of commercial banks. Role of Commercial Banks in the Economic Development of a Country Export promotion cells: In order to increase the exports of the country, the commercial banks have established export promotion cells. They provide information about general trade and economic conditions both inside and outside the country to its customers. The banks are therefore, making positive contribution in the process of economic development. Role of Banks in 21 st century The commercial banks are now not confined to local banking. They are fast changing into global banking i.e, understanding the global customer, using latest information technology, competing in the open market with high technology system, changing from domestic banking to investment banking etc. The commercial bank are now considered the nerve system of all economic development in the country. Virtual Banking What is virtual banking? Providing the banking services through extensive use of information technology without direct recourse to the bank by the customer is called virtual banking.

The origin of virtual banking can be traced to the 1970,s with the installation of ATMs. The principal types of virtual banking services include automated teller machines (ATMs), phone banking and most recently internet banking. With the increasing use of internet banking there is greater reliance now on information technology and the decrease of physical bank branches to deliver the banking services to the customer.

Credit creation by commercial bank Central bank is the first source of money supply in the form of currency in circulation. The Reserve Bank of Indian is the note issuing authority of the country. The RBI ensures availability of currency to meet the transaction needs of the economy. The Total Volume of money in the economy should be adequate to facilitate the various types of economic activities such as production, distribution and consumption. The commercial banks are the second most important sources of money supply. The money that commercial banks supply is called credit money. The process of 'Credit Creation' begins with banks lending money out of primary deposits. Primary deposits are those deposits which are deposited in banks. In fact banks cannot lend the entire primary deposits as they are required to maintain a certain proportion of primary deposits in the form of reserves with the RBI under RBI & Banking Regulation Act. After maintaining the required reserves, the bank can lend the remaining portion of primary deposits. Here bank's lend the money and the process of credit creation starts. Suppose there are a number of Commercial Banks in the Banking System Bank 1, Bank 2, Bank 3, & So on. To begin with let us suppose that an individual "A" makes a deposit of Rs. 100 in

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

Liabilities A's deposits

Amount 100

Total

100

Assets Amount Cash 5 Reserve Loan to 95 "B" Total 100

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

Total

95

The amount advanced to D will return ultimately to the banking system, as described in case of B and the process of deposits and credit creation will continue until the reserve with the banks is reduced to zero. The final picture that would emerge at the end of the process of deposit & credit creation by the banking system is presented in the consolidated balance sheet of all banks are as under:The combined Balance sheet of Banks Bank Bank Bank Bank Bank Total 1 2 3 Liabilities Deposits 100 95 90.5 00 2,000 Assets Credits 95 90.5 85.98 00 1,900 Reserve 5 4.75 4.52 00 100 Total Assets 100 95 90.5 00 2,000

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

Nationalised Banks in India

Nationalised banks dominate the banking system in India. The history of nationalised banks in India dates back to mid-20th century, when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Then on 19th July 1960, its seven subsidiaries were also nationalised with deposits over 200 crores. These subsidiaries of SBI were State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore (SBIR), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashtra (SBS), and State Bank of Travancore (SBT). However, the major nationalisation of banks happened in 1969 by the thenPrime Minister Indira Gandhi. The major objective behind nationalisation was to spread banking infrastructure in rural areas and make cheap finance available to Indian farmers. The nationalised 14 major commercial banks were Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Oriental Bank of Commerce (OBC), Punjab and Sind Bank, Punjab National Bank (PNB), Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India (UBI), and Vijaya Bank. In the year 1980, the second phase of nationalisation of Indian banks took place, in which 7 more banks were nationalised with deposits over 200 crores. With this, the Government of India held a control over 91% of the banking industry in India. After the nationalisation of banks there was a huge jump in the deposits and advances with the banks. At present, the State Bank of India is the largest commercial bank of India and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches.

Private Sector Banks

Private banking in India was practiced since the begining of banking system in India. The first private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It is one of the fastest

growing Bank Private Sector Banks in India. IDBI ranks the tength largest development bank in the world as Private Banks in India and has promoted world class institutions in India. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI's liberalisation of the Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled Commercial Bank in January 1995. ING Vysya, yet another Private Bank of India was incorporated in the year 1930. Bangalore has a pride of place for having the first branch inception in the year 1934. With successive years of patronage and constantly setting new standards in banking, ING Vysya Bank has many credits to its account.

Literature review

Title: Publisher:

Indian Financial System Himalaya

Author: Edition: Edition Number:

Dr G Ramesh Babu Students Edition 1

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

Title: Publisher: Author: Edition:

Indian Financial System Textbook IK International Pvt. Ltd. D K Murthy, Venugopal Paperback

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

Title: Publisher: Author:

Indian Financial System Pearson Bharati V Pathak

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

The Debt Market. New Financial Instruments. Disinvestment of Public Sector Undertakings. The Derivatives Market. Credit Rating. Factoring and Forfaiting. Development Financial Institutions. Banking and Non-Banking Institutions. Mutual Funds.

Insurance. Financial Regulation.

Commercial Banks
The commercial banking structure in India consists of: Scheduled Commercial Banks Unscheduled Banks Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.

Commercial Banks The commercial banking structure in India consists of: Scheduled Commercial Banks Unscheduled Banks Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector

banks and foreign banks. Commercial Banks

The commercial banking structure in India consists of: Scheduled Commercial Banks Unscheduled Banks Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60 of the Act. Some co-operative banks are scheduled commercial banks albeit not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accomodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI. For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.

33 Functions of Commercial Banks

33.1 Introduction
You have studied in the earlier lesson about different types of banks and their nature. It may be of interest to you now to know about the various services/functions performed by commercial banks. In this lesson, you will study about the various services provided by commercial banks to the business community in particular and the public in general.

33.2 Objectives
After studying this lesson, you will be able to l describe the various functions of commercial banks; l differentiate between primary and secondary functions of commercial banks; l classify and discuss the primary functions of modern commercial banks; l enumerate the various modes of acceptance of deposits; l identify various methods of granting loans;

l describe

agency and general utility services of modern commercial

banks.
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33.3 Functions of Commercial Banks

The functions of a commercial banks are divided into two categories: i) Primary functions, and ii) Secondary functions including agency functions.

i) Primary functions:
The primary functions of a commercial bank include: a) accepting deposits; and b) granting loans and advances; a) Accepting deposits The most important activity of a commercial bank is to mobilise deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank. b) Grant of loans and advances The second important function of a commercial bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a banks income. i) Loans A loan is granted for a specific time period. Generally, commercial banks grant short-term loans. But term loans,
Functions of Commercial Banks :: 23

that is, loan for more than a year, may also be granted. The borrower may withdraw the entire amount in lumpsum or in instalments. However, interest is charged on the full amount of loan. Loans are generally granted against the security of certain assets. A loan may be repaid either in lumpsum or in instalments. ii) Advances An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may

be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day to day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount. Modes of short-term financial assistance Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting. a) Cash Credit Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per agreed terms and conditions with the customers. b) Overdraft Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security, or both.
24 :: Business Studies

c) Discounting of Bills Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can recover the amount from the customer.

ii) Secondary functions

Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary functions. These are as follows a) Issuing letters of credit, travellers cheques, circular notes etc. b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit vaults or lockers; c) Providing customers with facilities of foreign exchange. d) Transferring money from one place to another; and from one branch to another branch of the bank. e) Standing guarantee on behalf of its customers, for making payments for purchase of goods, machinery, vehicles etc.

f) Collecting and supplying business information; g) Issuing demand drafts and pay orders; and, h) Providing reports on the credit worthiness of customers.

33.4 Difference between Primary and Secondary Functions of Commercial Banks

Primary Functions Secondary Functions 1. These are the main activities 1. These are the secondary of the bank. activities of the bank. 2. These are the main sources These are not the main souof income of the bank. rces of income of the banks.
Functions of Commercial Banks :: 25

3. These are obligatory on the These are not obligatory on part of bank to perform. the part of bank to perform. But generally all commercial banks perform these activities.

Intext Questions 33.1

Write T against the statements which are true, and F against those which are false. a) A country cannot make commercial and industrial progress without a well organised banking system. b) Loans may be granted only for long period by bank. c) Primary activity of commercial banks includes accepting deposits and lending money. d) Difference of interest allowed to public on deposits and charged on loan is the main source of income of banks. e) In case of dishonour of a bill, which was discounted by a bank, the amount cannot be recovered from the customer. f) A loan cannot be repaid in lumpsum by the borrower. g) Primary functions of banks refer to basic activities of banks. h) Overdraft is not a credit facility granted by bank. i) Loans are generally granted against the security of certain assets.

33.5 Different modes of Acceptance of Deposits

Banks receive money from the public by way of deposits. The following types of deposits are usually received by banks: i) Current deposit ii) Saving deposit iii) Fixed deposit
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iv) Recurring deposit v) Miscellaneous deposits

i) Current Deposit

Also called demand deposit, current deposit can be withdrawn by the depositor at any time by cheques. Businessmen generally open current accounts with banks. Current accounts do not carry any interest as the amount deposited in these accounts is repayable on demand without any restriction. The Reserve bank of India prohibits payment of interest on current accounts or on deposits upto 14 Days or less except where prior sanction has been obtained. Banks usually charge a small amount known as incidental charges on current deposit accounts depending on the number of transaction.

Savings deposit/Savings Bank Accounts

Savings deposit account is meant for individuals who wish to deposit small amounts out of their current income. It helps in safe guarding their future and also earning interest on the savings. A saving account can be opened with or without cheque book facility. There are restrictions on the withdrawls from this account. Savings account holders are also allowed to deposit cheques, drafts, dividend warrants, etc. drawn in their favour for collection by the bank. To open a savings account, it is necessary for the depositor to be introduced by a person having a current or savings account with the same bank.

Fixed deposit
The term Fixed deposit means deposit repayable after the expiry of a specified period. Since it is repayable only after a fixed period of time, which is to be determined at the time of opening of the account, it is also known as time deposit. Fixed deposits are most useful for a commercial bank. Since they are repayable only after a fixed period, the bank may invest these funds more profitably by lending at higher rates of interest and for relatively longer periods. The rate of interest on fixed deposits depends upon the period of deposits. The longer the period, the higher is the rate of interest offered. The rate of interest to
Functions of Commercial Banks :: 27

be allowed on fixed deposits is governed by rules laid down by the Reserve Bank of India.

Recurring Deposits
Recurring Deposits are gaining wide popularity these days. Under this type of deposit, the depositor is required to deposit a fixed amount of money every month for a specific period of time. Each instalment may vary from Rs.5/- to Rs.500/- or more per month and the period of account may vary from 12 months to 10 years. After the completion of the specified period, the customer gets back all his deposits alongwith the cumulative interest accrued on the deposits.

Miscellaneous Deposits
Banks have introduced several deposit schemes to attract deposits from

different types of people, like Home Construction deposit scheme, Sickness Benefit deposit scheme, Children Gift plan, Old age pension scheme, Mini deposit scheme, etc.

33.6 Different methods of Granting Loans by Bank

The basic function of a commercial bank is to make loans and advances out of the money which is received from the public by way of deposits. The loans are particularly granted to businessmen and members of the public against personal security, gold and silver and other movable and immovable assets. Commercial bank generally lend money in the following form: i) Cash credit ii) Loans iii) Bank overdraft, and iv) Discounting of Bills

i) Cash Credit :
A cash credit is an arrangement whereby the bank agrees to lend money to the borrower upto a certain limit. The bank puts this amount of money to the credit of the borrower. The borrower draws the money
28 :: Business Studies

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

ii) Loans :
A specified amount sanctioned by a bank to the customer is called a loan. It is granted for a fixed period, say six months, or a year. The specified amount is put on the credit of the borrowers account. He can withdraw this amount in lump sum or can draw cheques against this sum for any amount. Interest is charged on the full amount even if the borrower does not utilise it. The rate of interest is lower on loans in comparison to cash credit. A loan is generally granted against the security of property or personal security. The loan may be repaid in lump sum or in instalments. Every bank has its own procedure of granting loans. Hence a bank is at liberty to grant loan depending on its own resources. The loan can be granted as: a) Demand loan, or b) Term loan a) Demand loan Demand loan is repayable on demand. In other words it is repayable at short notice. The entire amount of demand loan is disbursed at one time and the borrower has to pay interest on it. The borrower can repay the loan either in lumpsum (one time)

or as agreed with the bank. Loans are normally granted by the bank against tangible securities including securities like N.S.C., Kisan Vikas Patra, Life Insurance policies and U.T.I. certificates. b) Term loans Medium and long term loans are called Term loans. Term loans are granted for more than one year and repayment of such loans is spread over a longer period. The repayment is generally made in suitable instalments of fixed amount. These loans are repayable over a period of 5 years and maximum upto 15 years.
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Term loan is required for the purpose of setting up of new business activity, renovation, modernisation, expansion/extension of existing units, purchase of plant and machinery, vehicles, land for setting up a factory, construction of factory building or purchase of other immovable assets. These loans are generally secured against the mortgage of land, plant and machinery, building and other securities. The normal rate of interest charged for such loans is generally quite high.

iii) Bank Overdraft

Overdraft facility is more or less similar to cash credit facility. Overdraft facility is the result of an agreement with the bank by which a current account holder is allowed to withdraw a specified amount over and above the credit balance in his/her account. It is a short term facility. This facility is made available to current account holders who operate their account through cheques. The customer is permitted to withdraw the amount as and when he/she needs it and to repay it through deposits in his account as and when it is convenient to him/her. Overdraft facility is generally granted by bank on the basis of a written request by the customer. Some times, banks also insist on either a promissory note from the borrower or personal security to ensure safety of funds. Interest is charged on actual amount withdrawn by the customer. The interest rate on overdraft is higher than that of the rate on loan.

iv) Discounting of Bills

Apart from granting cash credit, loans and overdraft, banks also grant financial assistance to customers by discounting bills of exchange. Banks purchase the bills at face value minus interest at current rate of interest for the period of the bill. This is known as discounting of bills. Bills of exchange are negotiable instruments and enable the debtors to discharge their obligations towards their creditors. Such bills of exchange arise out of commercial transactions both in internal trade and external trade. By discounting these bills before they are due for a nominal amount, the banks help the business community. Of course, the banks

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

ABN-AMRO Bank Abu Dhabi Commercial Bank Bank of Ceylon BNP Paribas Bank Citi Bank China Trust Commercial Bank Deutsche Bank HSBC JPMorgan Chase Bank Standard Chartered Bank Scotia Bank Taib Bank

By the year 2009, the list of foreign banks in India is going to become more quantitative as number of foreign banks are still waiting with baggage to start business in India.