""INDIAN BANKING SECTOR - PROBLEMS AND PROSPECTS""

ABSTRACT
The Indian banking sector has emerged as one of the strongest drivers of Indias economic
growth. It has a large geographic and functional coverage. The sector has undergone
significant developments and investments in the recent past. Here commercial banks cater to
short and medium term financing requirements, while national level and state level financial
Institutions meet longer-term requirements. Banking industry in India has also achieved a
new height with the changing times. Most of banks provide various services such as Mobile
Banking, SMS & Net banking and ATMs to their customers for their convenience. The use of
technology has brought a revolution in the working style of the banks. Banking today has
transformed into a technology intensive and customer friendly model with a focus on
convenience. However, changing dynamics of banking business also brings new kind of risk
exposure.

Authors : S. Nandhini
K.G. Shalini
K. Prince
(Sri Krishna Arts and Science College)

INTRODUCTION OF INDIAN BANKING SECTOR

In modern sense, Banking in India started with the establishment of three presidency
banks under the Presidency Banks Act 1876 i.e. Bank of Calcutta, Bank of Bombay and
Bank of Madras.
In 1921, all presidency banks were amalgamated to form the imperial Bank of India.
Imperial bank carried out limited central banking functions also prior to establishment of
RBI. Reserve bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was
constituted as an apex bank without major government ownership. Banking Regulations Act
was passed in 1949. Under this act, RBI got wide ranging powers for supervision & control
of banks. In 1955, RBI acquired control of the Imperial Bank of India, which was renamed as
State Bank of India. In 1959, SBI took over control of eight private banks floated in the
while princely states, making them as its 100% subsidiaries.RBI was empowered in 1960, to
force compulsory merger of weak banks with the strong ones. The total number of banks was
thus reduced from 566 in 1951 to 85 in 1969. In July1969, government nationalized 14 banks
having deposits of Rs.50 crore & above. In 1980,government acquired 6 more banks with
deposits of more than Rs.200 crore.
Nationalization of banks was to make them play the role of catalytic agents for
economic growth &development. The Narsimham Committee report suggested wide ranging
reforms for the banking sector in 1992 to introduce internationally accepted banking
practices. After this, until the 1990s, the nationalized banks grew at a pace of around 4%,
closer to the average growth rate of the Indian economy.

The structure of the banking system of India comprises two major parts: Organized
and unorganized sector. The organized sector comprises the institutions which provide
mainlyshort term credit to business, specialized term lending institutions which provide long
term requirements of industry agriculture & foreign trade. The unorganized sector comprise
of the money lenders and the indigenous bankers.

CLASSIFICATION OF BANKS

NEED OF THE BANKS

To provide the security to the savings of customers.
To control the supply of money and credit.
To encourage public confidence in the working of the financial system, increase savings
speedily and efficiently in Indian Banking System.
To avoid focus of financial powers in the hands of a few individuals and institutions.
To set equal norms and conditions (i.e. rate of interest, period of lending etc.) to all types of
customers

GOVERNMENT POLICY ON BANKING INDUSTRY

To protect the safety of the publics savings.
To control the supply of money and credit in order to achieve a nations
broad economic goal.
To ensure equal opportunity and fairness in the publics access to credit and
other vital financial services in Indian Banking System.
To promote public confidence in the financial system, so that savings are
made speedily and efficiently.
To avoid concentrations of financial power in the hands of a few individuals
and institutions.
Provide the Government with credit, tax revenues and other services.
To help sectors of the economy that they have special credit needs for
e.g. Housing, small business and agricultural loans and etc.

TOOLS TO CREDIT CONTROL BY RBI

Cash Reserve Ratio- Cash reserve Ratio (CRR)- It is the amount of funds that the banks
have to keep with RBI. If RBI decides to increase the percent of this, the available amount
with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the
excessive money from the banks. Indian Banking System CURRENLTY CRR- 4.25%.
Repo Rate- Whenever the banks have any shortage of funds they can borrow it from RBI.
Repo rate is the rate at which our banks borrow money from RBI. A reduction in the repo rate
will help banks to get money at a cheaper rate. When the repo rate increases borrowing from
RBI becomes more expensive. CURRENTLY REPO RATE -8.0%. 20

RECENT DEVELOPMENT
Most of banks provide various services such as Mobile banking, SMS & Net banking
and ATMs to their customers for their convenience. The use of technology has brought a
revolution in the working style of the banks. Banking today has transformed into a
technology intensive and customer friendly model with a focus on convenience.

1) Electronic Payment Services E- Cheques

Now-a-days we are hearing about e-governance, e-mail, e-commerce etc. In the same
manner, a new technology is being developed in US for introduction of e-cheque, which
will eventually replace the conventional paper cheque. In India, the Negotiable
Instruments Act has already been amended to include: Truncated cheque and E-cheque
instruments.

2) Real Time Gross Settlement (RTGS)

Real Time Gross Settlement system, introduced in India since March 2004, is a
system through which electronics instructions can be given by banks to transfer funds from
their account to the account of another bank. The RTGS system is maintained and operated
by the RBI and provides a means of efficient and faster funds transfer among banks
facilitating their financial operations. Therefore, money can reach the beneficiary
instantaneously and the beneficiary's bank has the responsibility to credit the beneficiary's
account within two hours.

3) Electronic Funds Transfer (EFT)

Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make
payment to another person/company etc. Can approach his bank and make cash payment
or give instructions/authorization to transfer funds directly from his own account to the
bank account of the receiver/beneficiary. RBI is the service provider of EFT.

4) Electronic Clearing Service (ECS)

Electronic Clearing Service is a retail payment system that can be used to make bulk
payments/receipts of a similar nature especially where each individual payment is of a
repetitive nature and of relatively smaller amount. This facility is meant for companies

and government departments to make/receive large volumes of payments rather than for
funds transfers by individuals.

5) Automatic Teller Machine (ATM)

Automatic Teller Machine is the most popular device in India, which enables the
customers to withdraw their money 24 hours a day 7 days a week. It is a device that
allows customer who has an ATM card to perform routine banking transactions without
interacting with a human teller.

6) Point of Sale Terminal

Point of Sale Terminal is a computer terminal that is linked online to the
computerized customer information files in a bank and magnetically encoded plastic
transaction card that identifies the customer to the computer. During a transaction, the
customer's account is debited and the retailer's account is credited by the computer for the
amount of purchase.

7) Tele Banking
Tele Banking facilitates the customer to do entire non-cash related banking on
telephone. Under this devise Automatic Voice Recorder is used for simpler queries and
transactions .For complicated queries and transactions, manned phone terminals are used.

PROBLEMS FACED
The major Problems faced by banks today are as to how to cope with competitive forces and
strengthen their balance sheet.
High transaction costs: A major concern before the banking industry is the high
transaction cost of carrying non- performing assets in their books. The growth led to
Strains in the operational efficiency of banks and the accumulation of non-performing
assets (NPAs) in their loan portfolios.
IT revolution: The Indian banks are subject to tremendous pressures to perform as
Other wise their very survival would be at stake. The application of IT and e-banking is
becoming the order of the day with the banking system heading towards virtual
banking.

 Timely technological up gradation: Already electronic transfers, clearings,

settlements have reduced translation times. To face competition it is necessary for
banks to absorb the technology and upgrade their services.
Intense Competition: The RBI and Government of India kept banking industry open
for the participants of private sector banks and foreign banks. The foreign banks were
also permitted to set up shop on India either as branches or as subsidiaries. Due to this
lowered entry barriers many new players have entered the market such as private
banks, foreign banks.
The foreign banks and new private sector banks have spearhead the hi-tech
revolution. For survival and growth in highly competitive environment banks have to follow
the prompt and efficient customer service, which calls for appropriate customer centric
policies and customer friendly procedures.
Privacy and Safety: Among the most important aspects of savings, i.e., safety,
liquidity and profitability, safety is at the top most priority. The areas which might
cause danger to security in e-banking can be:

Credit risk

Liquidity, interest rate risk, market risks

Legal risk

Global banking: The impact of globalization becomes challenges for the domestic
enterprises as they are bound to compete with global players. If we look at the Indian
Banking Industry, then we find that there are 36 foreign banks operating in India,
which becomes a major challenge for Nationalized and private sector banks.
Financial Inclusion: Financial inclusion has become a necessity in todays business
environment. Whatever is produced by business houses, that has to be under the check
from various perspectives like environmental concerns, corporate governance, social
and ethical issues. In India, RBI has initiated several measures to achieve greater
financial inclusion, such as facilitating no-frills accounts and GCCs for small deposits
and credit.

CONCLUSION
The various problem and opportunities like High transaction costs, IT revolution,
timely technological up-gradation, intense competition, privacy & safety, global banking,
financial inclusion. Banks are striving to combat the competition. The competition from
global banks and technological innovation has compelled the banks to rethink their policies
and strategies. Different products provided by foreign banks to Indian customers have forced
the Indian banks to diversify and upgrade themselves so as to compete and survive in the
market.
we can say that the biggest problem for banking industry is to serve the mass and
huge market of India. On the other hand product differentiation. Apart from traditional
banking services, Indian banks must adopt some product innovation so that they can over
come the range of competition.