RBI and Commercial

Banking

By : Gaurang Badheka
FSM, Sem - 3

Commercial Banking in India

Indigenous Reign
Direct Intervention of the State
Liberalization
Transition
Entry of Foreign Banks

Phase - 1
General bank of India 1786(first bank)
Reserve bank of India
Slow growth and periodic failure
The Banking Company Act 1949
People mostly save in postal deposits

Phase - 2
Nationalization of imperial bank of India
and
formation of State Bank Of India (1955)
Nationalization of SBI and subsidiaries
(1960)
Insurance cover extended to deposits
Creation of regional rural banks

Phase - 3
Entry of Foreign Banks
Phone banking and net banking
Shelter from external macroeconomic
shock
System become more convenient
and swift

Role of banks in Indian

economy

Capital formation
Monetization
Innovations
Finance for priority sector
Provision for medium and long term
finance
Cheap money policy
Financing export

Functions of banks

Acceptance of deposits.
Advancing loans
Investment of funds
Purchase and sales of foreign
exchange
Other functions
Issue of travelers cheque
Safe custody of valuable goods.

Growth indicators

No. of banks
Branch network
Increase in deposit
Increase in advances
Reduction of NPA
Contribution in GDP
Population per branch
Geographic coverage
Product innovation
Risk management and credit quality

Driver of growth

Growing disposable incomes

Youngest population in the world
Increasing literacy levels
Higher adaptability to technology
Growing consumerism
Fiscal incentives for home loans
Changing
mindsets-willingness
borrow/lend
Desire to improve lifestyles
Banks vying for higher market share

to

Industrys response to
change

Any where, Any time Banking

Improved processes/Bundled product offerings
Faster service/Reduced TATs
Customer specific products/offerings on a
regular basis
Bank customer has replaced Branch
customer
Focus on understanding customer needs/
preferences
Segmentation/Differentiation of customers
Customer driven strategies
Building relationships

A decade of change and

evolution
Pre-reform

The 1990s

Liberalisati
on
Indian
Globalisati

economy
on
Structural
change
Highly
services
Opening
segmented
Financial
up of
Public
sector
various
sector
subdominance
sectors
Private
..financial sector mirroring
macrosector
economic change
participati

Extensive
regulation
Focus on
industrial
sector

Today

Resilient
industry
Buoyant
services
sector
Diversified
financial
groups
Globally
benchmark
ed

The banking sector today

Depth

Diversification

Countrywide
coverage
Large number of
players
Technology
Increasingly
sophisticated
financial markets
Increasing use of
technology in
operations
Poised to expand and

Emergence of
integrated players
Diversifying capital
deployment
Leveraging synergies

Regulation

Robust regulatory
system aligned to
international
standards
Efficient monetary
management

Banks: then and now

Old world

New world

1.

Confined market
place

Unlimited market
place

2.

Competition b/w
banks

Competition from
brands

3.

Limited product line

Extensive product
breadth

4.

One size fit to all

Customisation &
innovation

5.

Branch focused

E-enabled, multichannel player

6.

Focus on business
growth

Focus on revenue
growth & cost

Why banking sector reforms

High Regulated Sector

Prevalence of High Reserve Requirements
Interest Rate Controls
Large Allocations to Priority Sector
Poor Lending Strategies
Lack of Internal Risk Management
Waiver of Loans on Political Grounds
Lack of Competition
High Cost of Operations
Poor Customer Service
Poor Loan Recovery
Weak Capital Position
Lack of Institutional Autonomy
Lack of Accountability in Banks
Vague Reporting Formats
Technology Deficiency

Focus aspects of Commercial

Banking now are:

RAISING
DEPOSITS

Core
Banking (CBS)
Electronic
Banking
Any Branch
Banking
CRM

MIS &
Intranet

Corporate
Network
Risk
Manageme
nt

ATMs
POS
Terminals
and
Cash
Card
dispenser

Manage
ment
Document
Manageme
nt
Resource
Manageme
nt

LOANS & MISC.

SERVICES

BANKS
BUSINESS

Banking Technology
Data Center to host servers for:

CBS
ATM/Financial Switch
Internet Banking
CRM/MIS etc.
Back-office Application
E-mail Servers, Internet Server,
Enterprise-wide Network & Networking Equipment
Security Systems
Systems at Branches/RO/ZO/CO Depts.
Supporting Systems
Disaster Recovery Site & Business Continuity

Benefits of Technology
Increased operational efficiency,
profitability & productivity
Superior customer service
Multi-channel, real-time transaction
processing
Better cross-selling ability
Improved management and
accountability
Efficient NPA and risk management
Minimal transaction costs
Improved financial analyses capabilities