“AN ANALYTICAL STUDY OF CURRENT SCENARIO OF INDIAN

BANKING”

A PROJECT SUBMITTED TO

UNIVERSITY OF MUMBAI FOR PARTIAL COMPLETION OF THE

DEGREE OF

BACHELOR IN COMMERCE (BANKING AND INSURANCE)

BY

MR. BHARATPRASAD.S.DHUSIYA

ROLL NO: 15

UNDER THE GUIDANCE OF

MR. MILIND SARAF

K. J. SOMAIYA COLLEGE OF ARTS & COMMERCE

VIDYAVIHAR, GHATKOPAR - 400077

SEMESTER VI

2019-20
 K. J. SOMAIYA COLLEGE OF ARTS & COMMERCE
(AUTONOMUS)

Vidyavihar, Ghatkopar, Mumbai - 400077

CERTIFICATE

This is to certify that Mr.Bharatprasad.S.Dhusiya has worked and duly

completed his Project work for the degree of Bachelor in Commerce (Banking
and Insurance) under the Faculty of commerce in the subject of Project in
Banking & Insurance and his project is entitled, “An Analytical Study Of
Current Scenario Of Indian Banking” under my supervision I further certify
that the entire work has been done by the learner under my guidance and that no
part of it has been submitted previously for any Degree or Diploma of any
university.

It is his own work and facts reported by his personal findings and investigations.

Seal of
the
college Mr. Bharatprasad.S.Dhusiya

Roll No. 15

Date of submission:

………………………..............
…………………….....

Mr. Milind Saraf External Guide

(Project Guide) ……………………….....

………………… …………..............……

Mr. Milind Saraf Dr. (Smt.) Veena Sanekar

(BBI Coordinator) (I/C Principal)

 DECLARATION

I the undersigned Mr.Bharatprasad.S.Dhusiya here by, declare that the work

embodied in this project work titled “An Analytical Study of Current
Scenario Of Indian Banking” forms my own contribution to the research work
carried out under guidance of Mr. Milind Saraf is a result of my own search
work and has not been previously submitted to any other University for any
other Degree / Diploma to this or any other University.

Whenever reference has been made to previous works of other, it has been
clearly indicated as such and included in the bibliography.

I, here by further declare that all information of his document has been obtained
and presented in accordance with academic rules and ethical conduct.

Mr. Bharatprasad.S.Dhusiya

Certified by

Mr. Milind Saraf

Internal Guide
 ACKNOWLEDGEMENT

To list who all have helped me is difficult because they are so numerous and the depth is so
enormous.

I would like to acknowledge the following as being idealistic channels and fresh dimensions
in the completion of this project.

I take this opportunity to thank the University of Mumbai for giving me chance to do this
project.

I would like to thank my Principal, Dr. (Mrs.) Veena Sanekar for providing the necessary
facilities required for completion of this project.

I take this opportunity to thank our Coordinator Mr. Milind Saraf. For this moral support
and guidance.

I would also like to express my sincere gratitude towards my project guide Mr. Milind Saraf
whose guidance and the care made the project successful.

I would like to thank my College Library, for having provided various references books and
magazines related to my project.

Lastly, I would like to thank each and every person who directly or indirectly helped me in
the completion of the project especially my Parents and Peers who supported me
throughout my project.
 INDEX

CHAPTERS PARTICULARS PAGE NO.

NO.
EXECUTIVE SUMMARY 1-2
1. INTRODUCTION 3
1.1 Introduction of banking 3
1.2 Evaluation of banking 3-4
1.3 Origin of the word bank 4-5
1.4 History of banking 5
1.5 History banking services in India 5-8
1.6 Phases of banking 9-12
1.7 Indian banking structure 12-19
2. RESEARCH METHODOLOGY
2.1 Introduction
20
2.2 Objective of the study 21
2.3 Scope of study 21
2.4 Significant of study 21
2.5 Data collection 22
2.6 Problem of study 22-23
2.7 Title of study 24
2.8 Selection of sample 24
2.9 Research design 24-25
2.10 Type of study 25
2.11 Hypotheses for the study 26
2.12 Limitation of study 26-27
3. REVIEW OF LITERATURE 28-30
4. DATA ANALYSIS & INTERPRITATION
4.1 Survey 31-35
4.2 RBI current monetary policy rate and reserves 35-62
requirement
5. CURRENT ROLE OF BANK IN INDIAN 63-65
ECONOMY
5.1 The impact of banking on national economy 65-67
5.2 NPA 67-73
6. CURRENT INDIAN BANKING SCENARIO 74-87
7. THE CURRENT CRISIS IN BANKING 88-95
INDUSTRY
8. CURRENT IMPLICATION OF RBI RECENT 96-103
MEASURES
9. CONCLUSION , FINDINGS & 104-106
SUGGESTIONS
10 BIBLIOGRAPHY & WEBLIOGRAPHY 107

11. ANNEXURES 108-109

 EXECUTIVE SUMMARY

An over view of banking services with reference to recent growth and development in the
field of automized way of providing customer services has been given. Similarly in order to
understand the background of the establishment of the respective selected public sector banks
viz. Canara bank, Indian overseas bank and state bank of India banks its profile were given in
a brief note.

Banking system plays an important role in growth of economy. The banking sector is the
lifeline of any modern economy. It is one of the important pillars of financial system, which
plays a vital role in the success or failure of an economy. It is a well known fact that banks
are one of the oldest financial intermediaries in the financial system. They play a crucial role
in the mobilization of deposits from the disbursement of credit to various sectors of the
economy. The banking system reflects the economic health of the country. The strength of
the economy of any country basically hinges on the strength and efficiency of its financial
system, which in turn depends on a sound and solvent banking system.
A banking sector performs three primary function in economy, the operation of the payment
system, the mobilization of savings and the allocation of saving to investment products.
Banking industry has been changed after reforms process. The government has taken this
sector in a basic priority and this service sector has been changed according to the need.
A bank is a financial institution which accepts deposits from the general public and extends
loans to the households, the firms, and the government. The Indian banking sector is the
lifeline of the nation and its people. It is a vital component of the economy of the country.
The banking sector is considered to be the backbone of the modern economy. The efficiency
and growth of a nation depend on the strength and efficiency of its financial institutions. The
banking sector of India is the hope and aspiration of millions of people in the country. But
to achieve this success the banking sector had to pass many hurdles. The cooperative banks in
connivance with the Indian banking sector is now providing need-based finance especially for
the development of the agricultural sector which is the backbone of Indian economy.

1
It has been seen that the growth of the Indian banking sector has been more
qualitative rather than quantitative. Further, the credits take-off has been surging
ahead over the past few decades aided by strong economic growth, rising disposable
incomes, increasing consumerism and easier access to credit. The Indian banking
sector has also witnessed an increase in demand for both corporate and retail loans
particularly the services, real estate, consumer durables and agriculture allied sectors
have led to the growth of credit. The Indian banking sector is recently now focusing
on adopting an integrated approach to risk management. The Indian banking sector
has already embraced the international banking supervision accord. The Reserve Bank
of India has decided to set up the public credit registry (PCR), an extensive database
of credit information which is accessible to all stakeholders.

2
 CHAPTER - 1

1. INTRODUCTION OF BANKING

Banks are the most important constituents of the financial infrastructure of a country.
They play an imperative role in bringing about desired change in the economic
development of the country. Banks provide to the saver a convenient avenue for
investment of surplus funds, and to the investor a source to finance (Desai, Vasant
1991). Commercial banking in India has undergone several structural changes during
last three centuries. Indian banking system, over the years has been marked by
substantial growth, innovation, diversification, complexity and integration (Das &
Chakrabarty, 2003). A brief account of it has been given by the researcher in this
chapter.

Modern banking in India originated in the last decade of the 18th century. Among the
first banks were the Bank of Hindustan, which was established in 1770 and liquidated
in 1829–32; and the General Bank of India, established in 1786 but failed in 1791.

1.2 The evolution of banking

The word ‘bank’ is used in the sense of a commercial bank. It is of Germanic origin
though some persons trace its origin to the French word ‘Banqui’ and the Italian word
‘Banca’. It referred to a bench for keeping, lending, and exchanging of money or
coins in the market place by money lenders and money changers.

There was no such word as ‘banking’ before 1640, although the practice of safe-
keeping and savings flourished in the temple of Babylon as early as 2000 B.C.
Chanakya in his Arthashastra written in about 300 B.C. mentioned about the existence
of powerful guilds of merchant bankers who received deposits, and advanced loans
and issued hundis (letters of transfer). The Jain scriptures mention the names of two
bankers who built the famous Dilware Temples of Mount Abu during 1197 and 1247
A.D.

The first bank called the ‘Bank of Venice’ was established in Venice, Italy in 1157 to
finance the monarch in his wars. The bankers of Lombardy were famous in England.
But modern banking began with the English goldsmiths only after 1640. The first
bank in India was the ‘Bank of Hindustan’ started in 1770 by Alexander & Co., an
English agency house in Calcutta which failed in 1782 with the closure of the agency

3
house. But the first bank in the modern sense was established in the Bengal
Presidency as the Bank of Bengal in 1806.

History apart, it was the ‘merchant banker’ who first evolved the system of banking
by trading in commodities than money. Their trading activities required the
remittances of money from one place to another. For this, they issued ‘hundis’ to
remit funds. In India, such merchant bankers were known as ‘Seths’.

The next stage in the growth of banking was the goldsmith. The business of goldsmith
was such that he had to take special precautions against theft of gold and jewellery. If
he seemed to be an honest person, merchants in the neighbourhood started leaving
their bullion, money and ornaments in his care. As this practice spread, the goldsmith
started charging something for taking care of the money and bullion.

As evidence for receiving valuables, he issues a receipt. Since gold and silver coins
had no marks of the owner, the goldsmith started lending them. As the goldsmith was
prepared to give the holder of the receipt and equal amount of money on demand, the
goldsmith receipt became like cheques as a medium of exchange and a means of
payment.

The next stage in the growth of banking is the moneylender. The goldsmith found that
on an average the withdrawals of coins were much less than the deposits with him. So
he started advancing the coins on loan by charging interest. As a safeguard, he kept
some money in the reserve. Thus the goldsmith-money- lender became a banker who
started performing the two functions of modern banking, that of accepting deposits
and advancing loans.

1.3. “Origin of the word “bank”

There seems no uniformity amongst the economist about the origin of the word
“Bank“. According to some authors the word “Bank”, itself is derived from the word
“Bancus” or “Banque” that is a bench. The early bankers, the Jews in Lombardy,
transacted their business on benches in the market place, when, a banker failed,
his „Banco‟ was broken up by the people; it was called „Bankrupt‟. This
etymology is however, ridiculed by mcleod on the ground that “the Italian money
changers as such were never called Banchier in the middle ages.”It is generally said

4
that the word "BANK" has been originated in Italy. In the middle of 12th century
there was a great financial crisis in Italy due to war. To meet the war expenses, the
government of that period a forced subscribed loan on citizens of the country at the
interest of 5 per cent per annum. Such loans were known as 'Compare', 'minto' etc.
The most common name was "Monte'. In Germany the word 'Monte was named as
'Bank' or 'Banke'. According to some writers, the word 'Bank' has been derived from
the word bank.

It is also said that the word 'bank' has been derived from the word 'Banco' which
means a bench. The Jews money lenders in Italy used to transact their business
sitting on benches at different market places. When any of them used to fail to meet
his obligations, his 'Banco' or banch or bench would be broken by the angry
creditors. The word 'Bankrupt' seems to be originated from broken Banco. Since, the
banking system has been originated from money leading business; it is rightly
argued that the word 'Bank' has been originated from the word "Banco'.

Today the word bank is used as a comprehensive term for a number of institutions
carrying on certain.
kinds of financial business. In practice, the word 'Bank' means which borrows
money from one class of people and again lends money to another class of people
for interest or profit.

Actually meaning of bank is not specifies in any regulation or act. In India, different
people have different type of meaning for bank. Normal salary earner knows means
of bank that it is a saving institution, for current account holder or businessman
knows bank as a financial institutions and many other. Bank is not for profit making,
it creates saving activity in salary earner.

A Bank is an institution which accepts deposits from the general public and extends
loans to thehouseholds, the firms and the government. Banks are those institutions
which operate in money. Thus, they are money traders, with the process of
development functions of banks are also increasing and diversifying now, the banks
are not nearly the traders of money, they also create credit. Their activities are
increasing and diversifying. Hence it is very difficult to give a universally
acceptable definition of bank.

5
1.4 History of banking
The first banks were probably the religious temples of the ancient world, and were
probably established sometime during the third millennium B.C. Banks probably
predated the invention of money. Deposits initially consisted of grain and later other
goods including cattle, agricultural implements, and eventually Precious metals such
as gold, in the form of easy-to-carry compressed plates. Temples and palaces were
the safest places to store gold as they were constantly attended and well built. As
sacred places, temples presented an extra deterrent to would-be thieves. There are
extant records of loans from the 18th century BC in Babylon that were made by
temple priests/monks to merchants. By the time of Hammurabi`s Code, banking was
well enough developed to justify the promulgation of laws governing various
banking operations.

The fourth century B.C. saw increased use of credit-based banking in the
Mediterranean world. In Egypt, from early times, grain had been used as a form
Money in addition to precious metals, and state granaries functioned as banks. When
Egypt fell under the rule of a Greek dynasty, the Ptolemies (332-30 B.C.), the
numerous scattered government granaries were transformed into a network of grain
banks, centralized in Alexandria where the main accounts from all the state granary
banks were recorded. This banking network functioned as a trade credit system in
which payments were affected by transfer of fund from one account to another
without money passing.

1.5 History of banking services in Indian

1.5.1 Ancient India

The origin of banking in dates back to the Vedic period. There are repeated
references in the Vedic literature to money lending which was quite common as a
side business. Later, during the time of the Smritis, which followed the Vedic Period
and the Epic age, banking become a full-time business and got diversified with
bankers performing most of the functions of the present day. The Vaish community,
who conducted banking business during this period. As far back as the second or
third century Asian Development. Manu the great Hindu Jurist, devoted a section of
his work to deposits and advances and laid down rules relating to rates of interest to

6
be charged. Still later, that is during the Buddhist period, banking business was
decentralized and become a matter of volition. Consequently, Brahmins and
Kshatriyas, who were earlier not permitted to take to banking as their profession
except under exceptionally rare circumstances, also took to it as their business.
During this period banking became more specific and systematic and bills of
exchange came in wide use. “Shresthis” or bankers influential in society and very
often acted as royal treasurers.

From the ancient periods in India, an indigenous banking system has prevailed. The
businessmen called Shroffs, Seths, Sahukars, Mahajans, Chettis etc. had been
carrying on the business of banking since ancient times. These indigenous bankers
included very small money lenders to shroffs with huge businesses, who carried on
the large and specialized business even greater than the business.

1.5.2 Mughal Period

Mughal dynasty started with Babur ascending the throne of Agra in 1526 A.D.
During Mughal period the indigenous bankers played a very important role in
lending money and financing of foreign trade and commerce. They were also
engaged in the profitable business of money changing. Banking business was,
however particularly during the secular and settled reign of Emperor Akbar was gave
the much needed political stability to the country. Every city, big or small had a
„Sheth‟ also known as a „Shah‟ or „Shroff‟, who performed a number of banking
functions. He was respected by all parts of people as an important citizen. In
Principal cities, besides shroffs, there was a „Nagar Sheth‟ or „Town Banker‟.
They were instrumental in changing funds from place to place and doing collection
business mainly through Hundis. The Hundis were accepted mode of change of
money for commercial transactions.

1.5.3 British Period

The seventeenth century witnessed the arrival of English traders in India. The
English traders established their own agency houses at the port towns of Bombay,
Calcutta and Madras. These agency houses, apart from engaging in trade and
commerce, also carried out on the banking business. The development of the means

7
of transport and communication causing deflection of trade and commerce along
new routes, changing the nature of trade activities in the country were the other
factor which also contributed to the downfall of the indigenous bankers. Partly to fill
the void caused by their downfall and partly to finance the growing financial
requirements of English trade. The East India Company now came to favor the
establishment of the banking institutions patterned after the Western style.

The first Joint Stock Bank established in the country was the Bank of Hindustan
founded in 1770 by the famous English agency house of Messerss Alexander and
Company. The Bengal Bank and The Central Bank of India were established in
1785. The Bank of Bengal, the first of the three Presidency Banks was established in
Calcutta in 1806 under the name of bank of Calcutta. It was renamed in 1809 on the
grant of the charter as a Bank of Bengal. The two other presidency banks, namely
the bank of Bombay and the Bank of Madras, were established in 1840 and 1843
respectively. After the implementation of Paper Currency Act of 1862, however the
right of the note issue was taken away from them. The Presidency Banks had
branches in important towns of the country. The banking crisis of 1913 to 1917
however brought out the serious deficiencies in the existing banking system in the
country showing the need for effective co-ordination through the establishment of
the Central Bank. After repeated efforts, the three presidency bank was fused into a
single bank under the name of the Imperial Bank of India in 1921.

The bank was authorized to hold government balances and manage public debt. It
was not, however, given power to issue notes. The issuing of the currency continued
to be close preserving of the Government of India. The branches of the bank were to
work as clearing houses. It was mainly a commercial bank competing with other
banks. The Imperial Bank of India was nationalized in 1955 by the State Bank of
India Act.

In the wake of the Swadeshi Movement, a number of banks with Indian management
were established in the country. The Punjab National Bank Limited lending money
discounting and collection bills and variousagency services. They insist higher
security for loans.

8
1.6 Phases of Indian Banking

1.6.1 Nationalization

By the 1960s, the Indian banking industry has become an important tool to facilitate
the development of the Indian economy. At the same time, it has emerged as a large
employer, and a debate has ensured about the possibility to nationalize the banking
industry.

Indira Gandhi, the-ten Prime Minister of India expressed the intention of the
Government of India (GOI) in the annual conference of the All India Congress
Meeting in a paper entitled "Stray thoughts on Bank Nationalisation". The paper was
received with positive enthusiasm. Thereafter, her move was swift and sudden, and
the GOI issued an ordinance and nationalized 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 step 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 step of nationalization, the GOI controlled around 91% of the banking
business in 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 nationalized banks from 20 to 19. 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 nationalized banks were credited by some; including
Home minister P. Chidambaram, to have helped the Indian economy withstand the
global financial crisis of 2007-2009.

1.6.2 Liberalization

In the early 1990s, the then Narsimha 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

9
move along with the rapid growth in the economy of India revolutionized 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 setup 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 49% 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 tech-savvy methods of
working for the 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 as compared 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. 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 voted 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.

10
1.6.3 Privatization

Privatization has become a popular measure for solving the organizational problems
of governments by reducing the role of the state and encouraging the growth of the
private sector enterprises. However, privatization takes a number of forms and has
been approached in various ways during the move away from government control to
other forms of ownership in developing countries. Privatization has leaded the
corporate world into the new world of dynamic competition with the search of new
resources, global markets, expanded global networking. The consequences of
privatization have focused onto the fields of economics, international relations,
management and sociology. The scope of the privatization aspect is different for
different fields of business and different sectors.

Privatization is the process of transferring ownership of a business, enterprise,

agency, public service or public property from the public sector (a government) to
the private sector, either to a business that operates for a profit or to a non-profit
organization. Privatization is both a challenge and an opportunity for Indian banks to
gain strength in the domestic market and increase presence in the global market. On
the basis of various parameters, paper finds that there is a fast penetration of foreign
banks in India and public sector banks, particularly SBI is intensively entering in
foreign countries, same is the case of ICICI Bank as this bank is capturing foreign
markets at a fast pace. At the end, the present paper finds some challenges and also
explores the future opportunities. On the basis of the experience of already global
went banks, paper suggests some strategies that how Indian banks can make their
presence effective in the global market. Globalization refers to widening and
Deeping of international flow of trade, capital, labour, technology, information and
services.

Privatization has led to an overall economic, political and technological integration

of the world. In our country, first economic reforms (1991) gave birth to
globalization and second phase of banking sector reforms strengthened the
globalization. Various reform measures introduced in India have indeed
strengthened the Indian banking system in preparation for the global challenges
ahead. The banking sector in India has remained regulated since nationalization in
1969. Private bank entry was restricted after nationalization to prevent unfair

11
competition, urban concentration and lending to rich and well known firms. This
resulted in elimination of competition among public sector banks, public-private
sector banks. India is the largest country in South Asia with a huge financial system
characterized by many and varied financial institutions and instruments. The Indian
financial sector was well-developed even prior to the political independence of the
country in 1947. However, privatization takes a number of forms and has been
approached in various ways during the move away from government control to other
forms of ownership in developing countries.

1.7 Indian Banking Structure

The structure of Indian banking system that developed during the pre- independence
period was without any purposive control and direction. There were no
comprehensive banking laws except the Bank Charter Act 1876 which regulated the
three presiding bank and the Indian Companies Act 1913 provided some safe guards
against bank failures.

In today’s dynamic world banks are inevitable for the development of a country.
Banks play a pivotal role in enhancing each and every sector. They have helped bring
a draw of development on the world’s horizon and developing country like India is no
exception.

Banks fulfills the role of a financial intermediary. This means that it acts as a vehicle
for moving finance from those who have surplus money to (however temporarily)
those who have deficit. In everyday branch terms the banks channel funds from
depositors whose accounts are in credit to borrowers who are in debit.

Without the intermediary of the banks both their depositors and their borrowers would
have to contact each other directly. This can and does happen of course. This is what
has lead to the very foundation of financial institution like banks.

Before few decades there existed some influential people who used to land money.
But a substantially high rate of interest was charged which made borrowing of money

12
out of the reach of the majority of the people so there arose a need for a financial
intermediate.

The Bank have developed their roles to such an extent that a direct contact between
the depositors and borrowers in now known as disintermediation.

Banking industry has always revolved around the traditional function of taking
deposits, money transfer and making advances. Those three are closely related to each
other, the objective being to lend money, which is the profitable activity of the three.
Taking deposits generates funds for lending and money transfer services are necessary
for the attention of deposits. The Bank have introduced progressively more
sophisticated versions of these services and have diversified introduction in
numerable areas of activity not directly relating to this traditional trinity

13
 INDIAN BANKING SYSTEM
Reserve Bank of India

Schedule Banks
Non-Schedule
Banks

Central co-op
State co-op Commercial Banks Commercial Banks
Banks and Primary
Banks
Cr. Societies

Indian Foreign

Public Sector
Private Sector Banks HDFC,
Banks
ICICI etc.

State Bank of India Other Nationalized Banks Regional Rural

and its Subsidiaries Banks

14
1.7.1Banking Services

In the recent changing scenario, the role of banks is very important for the growth
and development economical conditions of the country. Banking Sector is offering
traditional and other service as under:

- Regular Saving and current accounts

- Regular fixed deposits

- Asynchronous Transfer Mode (ATM) services

- Credit cards

- Demat cards

- Student banking

- Special Non Resident Indian (NRI) Services

- Home loan, Vehicle loan

- Tele and internet banking

- Online trading

- Business multiplies Accounts

- Insurance

- Relief bonds and mutual fund

- Loans against shares

- Retail banking

- Special deposit scheme

- Senior citizen – special deposit scheme

- Other facilities for customers.

15
1.7.2 Retail banking services

1.7.2.1 Credit Cards

A credit card is an instrument, which provides immediate credit facilities to its

holder to avail variety of goods and services at the merchant outlets. It is made of
plastic and hence popularly called as Plastic Money. Such cards are issued by bank
to persons with minimum income ranging between Rs. 50000 and Rs. 100000 per
annum and are accepted by a variety of business establishments which are notified
by the card issuing bank. Some banks insist on the cardholder being their customers
while others do not. Few banks do not charge any fee for issuing credit cards while
others impose an initial enrolment fee and annual fee also. If the amount is not paid
within the time duration the bank charges a flat interest of 2.5 per cent. Leading
Indian Banks such as: SBI, Bank Of Baroda, Canara Bank, Industrial Credit
Investment Corporation of India, Housing Development Finance Corporation and a
few foreign banks like CITIBANK, Standard Chartered etc are the important issuers
of credit card in India.

1.7.2.3 Debit Cards

It is a new product introduced in India by Citibank a few years ago in association

with MasterCard. A debit card facilitates purchases or payments by the cardholder. It
debit the money from the account of the cardholder during each and every
transaction. This implies that the cardholder can spend only if his account having
sufficient balance.

1.7.2.4 Net Banking

This facilitates the customers to do all their banking transaction and operations from
their home by using the internet facility. With Net Banking one can carry out all
banking and shopping transactions safely and with total confidentiality. With Net
Banking one can easily perform various functions:

a. Check Account Balance

b. Download Account Statement

c. Request for a stop payment of a cheque.

16
 d. Request for a new cheque book.

e. Access demats account

f. Transfer funds.

g. Facilitate bill Payments.

h. Pay Credit Card dues instantly.

1.7.2.5 Mobile Banking and Phone Banking

Phone and mobile banking are a fairly recent phenomenon for the Indian banking
industry. There exist operative guidelines and restrictions on the type and quantum
of transactions that can be undertaken via this route. Phone banking channels
function through an Interactive Voice Response System (IVRS) or telebanking
executives of the banks. The transactions are limited to balance enquiries, transaction
enquiries, stop payment instructions on cheques and funds transfers of small
amounts in which per transaction limit is Rs. 2500. According to the draft guidelines
on mobile banking, only banks which are licensed and supervised in India and have a
physical presence in India are allowed to offer mobile banking services. Besides,
only rupee based services can be offered. Mobile banking services are to be
restricted to bank account and credit card account holders which are Know Your
Customer (KYC) and AMC compliant.

With the rapidly growing mobile penetration in the country, mobile banking has the
potential to become a mass banking channel, with very minimum investment
required by the banks. However, more security issues need to be addressed before
banking can be conducted more freely via this channel. While using the mobile
banking facility a customer can enjoy the following services.

i. Check Balance

j. Check last three transactions.

k. Request for a statement

l. Request for a cheque book.

17
 m. Enquire on a cheque status.

n. Instruct stock cheque payment.

o. View FD details.

p. Transfer funds.

q. Pay Utility Bills

Phone Banking helps to conduct a wide range of banking transactions from the
comfort of one‟s home or office. Using phone banking facility offers the following
services.

a. Check Balance

b. Check last three transactions.

c. Request for a cheque book

d. Transfer funds.
e. Enquire on a cheque status, and much more.

1.7.2.6 Anywhere banking

Anywhere Banking is a highly secure and convenient system for online, real-time
inter branch transactions across the Bank. Anywhere banking offers you greater
flexibility, transaction power, convenience and ease in banking. The benefits of
anywhere banking come to light in the context that it is no longer practically possible
to carry money everywhere we go and also to restrict banking to one branch or open
multiple bank accounts wherever we go. One can deposit or withdraw cash from any
branch of a Particular bank all over the country up to a prescribed limit. One can also
transfer funds.

1.7.2.7 Automated Teller Machines (ATM)

ATMs feature user-friendly graphic screens with easy to follow instructions. The
ATMs Interact with customers in their local language for increased convenience.

18
ICICI Bank‟s ATM network is one of the largest and most widespread ATM network
in India. Following are the features available on ATMs which can be accessed from
any whereat anytime:

a. Cash Withdrawal

b. Cash Deposit

c. Balance Enquiry

d. Cheque Book Request

e. Transaction at various merchant establishments

19
 CHAPTER 2
RESEARCH METHODOLOGY

2.1 Introduction

The new economic policy of globalization has opened the financial markets of India
to outside world and infused competitiveness there in. The financial sector plays a
crucial role in mobilizing community‟s saving and channeling them into effective
investment avenues in the country. The present banking system in India was evolved
to meet the financial needs of trade and industry and to satisfy the institutions of the
country. The world has become aglobal market. The impact of globalization,
privatization and liberalization hastotally changed the style of banking sector in India.
Banks are essential instruments of accelerated growth in a developing economy.

Productivity is one of the factors affecting the profitability among others like
expansion of banks‟ operation in the areas characterized by deployment of funds is
non-profitable coupled with higher overhead expenses, increase in sickness in
industrial units, mounting of NPAs over the years etc. Higher the productivity results
in proportionately lower in the establishment cost. The experience of Indian banking
systems since nationalization has brought to the forefront the immense potential of
banking as a level of economic development .Since banking, development and
economic development are closely associated with each other. It would be pertinent to
have an analytical study of the activities of the Public Sector Banks and Private Sector
Banks in the field of economic development in India. It is necessary to examine the
extent to which the banks have moved towards their goal. Research methodology is a
way to solve the research problem systematically. It may be understood as a science
of studying how research is done scientifically. Research Methodology includes the
assumptions and values ,which is useful for interpreting data and reaching to
conclusions.

The presentanalytical study is an attempt to study the productivity measurement for

selected unit of Public Sector Banks and Private Sector Banks for particular period.
Thepurpose of this analytical study is, thus to make an in-depth study of what
thePublic Sector Banks and Private Sector Banks in India have done during theperiod
of last 6 month.

20
2.2 Objectives of the study
 To evaluate the overall productivity and profitability of Public Sector Banks
and Private Sector Banks.
 To evaluate the financial performance of Public Sector Banks and Private
Sector Banks under study.
 To evaluate labour productivity of Public Sector Banks and Private Sector
Banks.
 To evaluate branch productivity of Public Sector Banks and Private Sector
Banks.
 To evaluate capital productivity of Public Sector Banks and Private Sector
Banks.
 To evaluate the profitability of Public Sector Banks and Private Sector Banks.
 To suggest the remedial measures for overall development of Public
 Sector Banks and Private Sector Banks

2.3 Scope of the study

The scope of the study is very wide. For an analytical, study of productivity of
banking Industry in India and meaningful research some parameters in relation to
productivity and profitability selected like labour information, branch information,
capital information, and profitability information of selected banks. To evaluate
productivity effectiveness, some cases developed. In this research work, researcher
has tried to measure the productivity of selected banks researcher has used various
ratios. The problems and suggestions from the banks to improve productivity
effectiveness also covered.

2.4 Signification of the Study

This study makes a clear picture of Public Sector and Private Sector Banks related to
the productivity. The bank management of India faced two important challenges one
of which was to improve their profitability and productivity by employee and branch
level the other was to achieve the social objective in an efficient manner. After the
submission of Narshimhan committee recommendations in 1991, the whole banking
scenario changed in India. The committee proposed reforms in the financial sector.
These reforms permit

21
operational flexibility efficiency, productivity and profitability. Indian banking
Industry is passing through critical financial position and efforting to improve their
profitability and productivity on one hand and carters the social need on the other, the
study of the research problem is contemporary. It can search out the
major problems and prospects and can suggest an appropriate strategy
forimprovement of financial performance.

2.5 Data Collection

2.5.1 Primary data

The primary data is collected from the basis of the questionnaire method which
was conducted through the google form.

2.5.2 Secondary Data

The present study is mainly based on secondary data obtained from the current
scenario of selected Public Sector Banks and Private Sector Banks. To supplement the
data RBI publication, IBA Bulletin, different publications, Bank quest, various books,
periodicals, journals and different website related banking industries etc. have used
for better reliability. Opinions expressed in Business standard, Newspapers,
accounting literature, Annual review and different publications also used in this study

2.6 Problem of the Study

The life standard of a person has become very high. More needs, more demands and
more production process are there. Thus in a state of large strides in economy activity
and determined efforts for increased production and holding the price-line, the role,
which the banking systems is called upon to play, must necessarily be significant. The
year 1990 ushered in financial and banking sector reforms in India. The main reason
behind the introduction of reforms was the deteriorating financial health and the sub-
standard performance of Public Sector Banks, which until then almost enjoyed a
monopoly position. These banks were not only burdened with rising Non-Performing
Assets but also scored low in terms of customer service and the usage of information

22
technology while carrying out banking operations, soon after the liberalization of the
India economy, banks began to enter into the real of financial services. The beginning
of the 1990s witnessed the structural modifications of fundamental magnitude in
global banking systems. Large-scale mergers, amalgamations and acquisitions
between the banks and financial institutions helped them in their growth due to their
sheer size and financial strengths of the merged entities. Thus, in recent times, the
newly developed financial conglomerates could maximize economies of scale and
scope by extending all the financial services under a single umbrella. Private and
foreign banks have entered India in a big way and have introduced an element of
competition riding on the wave of technology and customer service. By making of
cutting-edge technology, these banks have reduced the number of physical branches
and the associated overhead costs thereby, increasing the volume of business and
profits.

During the post reform period, because of liberalization, privatization and

globalization, Indian banking sector is facing some problems and challenges. Major
problems and challenges, which Indian commercial banks are facing today, are as
below.

 Lower profitability

 Low productivity

 High NPAs

 High operating costs

 High provisioning

 Problem of Scandals

 Problem of customer satisfaction

 Complex and non-responsive organizational structure

 Poor asset management

23
  Low work culture

 Low credit-deposit ratio

 Global crisis period and its impact on Indian banks

 Limited automation

2.7 Title of the Research Study

In the present research work title of research study is “An Analytical Study of
Current Scenario Of Indian Banking With this research work researcher aims at
measuring the productivity of selected Public Sector Banks and Private Sector Banks.

2.8 Selection of Sample Units

The overall areas of the study focused on Public Sector Banks and Private Sector
Banks of India and RBI . The researcher has selected 14 units as the sample for this
study. As a part of the research, study researcher has selected Public Sector Banks and
Private Sector Banks at macro level. The selection has been done from Public and
Private Sector Banks with the help of random sampling method.

 The sample has been selected on the following bases:

 The data that is available for period of last 6 month.

 The banks should be working in Public Sector Banks and Private Sector Banks
in India

2.9 Research Design

The present analytical study relate to critical evaluation of Public Sector and Private
Sector Banking for the period of six months. Any project requires a basic plan of
action, or a series of actions chalked out, in order to accomplishes the objectives
effectively and efficiently with in a time framework, without deviating from the
original target. In other words, we can say that, from where we are and where we

24
want to go, the process involved is carefully transformed in to a blue print called the
research design.

“According to Claire Selitiz83 “A research design is the arrangement of the condition

for collection and analysis of data in a manner that aims to combine relevance to
research purpose with economy in procedure”.

According to Bernard S. Philips “The research design constitutes the blue print of the
collection, measure and analysis of data.” The definition highlights that research
design includes the methods of research, viz. survey, observation, experiment, the
content analysis or their combinations. Thus, according to the author, the research
design is the overall framework of research project and which mentions about the
types and sources of information and procedure to be followed in collecting it. In
other words, Decisions regarding
what, where, when, how much, by what means concerning an inquiry or a research
study constitutes a research design.

There is a competition between Public Sector Banks and Private Sector Banks
regarding the productivity. Therefore, it is a keen need to study this matter. The study
mainly on bases of secondary data obtained from the annual reports of selected Public
Sector Banks and Private Sector Banks. The population of the study consists of all
type of Indian banking industries in Public Sector Banks and Private Sector Banks.
Design of the study indicates two things The researcher pick-up the Simple statistical
techniques, such as mean and one-way ANOVA test, for testing hypothesis relating to
various variables of productivity, profitability and financial efficiency of various
banks under the study.

2.10 Type of the Study

The present study being empirical in nature under taken to examine the capital
structure patterns and their impact on the productivity of banks. This study useful how
the capital structure works, how the labour units are works-and its relevant decision in
financial management. In analytical research, on the other hand the researcher also
uses facts already available, and analyses these as a critical evaluation of the
materials. Thus, the study is an analytical study. So, the study undertaken based on
adequate size of sampled banks discussed in sampling design.

25
2.11 Hypotheses for the study
Hypothesis is usually considered as the principal instrument in research. Its main
function is to suggest new experiments and observations. In the simple meaning,
hypothesis means a mere assumption or some supposition to be proved or disproved.
According to Michel, A hypothesis is a special proposition formulated to be tested in
a certain given situation as a part of a research which stats what the researcher is
looking for... Thus, a hypothesis may be defined as a proposition or a set of
proposition set forth as an explanation for the occurrence of some specified group of
phenomena either asserted merely as a provisional
conjecture to guide some investigation or accepted as highly probable in the light of
established facts. For the present study, the researcher has formulated null hypothesis.
The hypotheses are as under:

Null Hypothesis (H0):

 There is no significant difference between the productivity ratios of the Public

Sector Banks and Private Sector Banks.

 There is no significant difference between the profitability ratios of Indian

banking

 Productivity and profitability performance of banks under study is not

independent of banking sector reforms.

 Financial performance of banks unit under study is not independent of banking

sector reforms

2.12 Limitations of the study

 The researcher is well aware of the following limitations with which the study are
undertaken as under.

 This study is related to selected Public Sector Banks and Private Sector Banks
only.

 The secondary data, which used for this study is based on annual reports of

26
 the bank. The quality of this research depends on quality and reliability of
data published in annual reports of banks.

 There are different methods to measure the productivity and profitability of

the banks. View of expert can be different in this matter from one another.

 The present study of common size analysis has been made but common size
analysis has its own limitations, which also applies to the study.

 The present study is largely based on current scenario of Indian banking such
analysis has its own limitations, which also applies to the study.

 This study is related with selected Public Sector Banks and Private Sector
Banks. Any generalization for universal application cannot be applied here.

 This study is in the nature of a positive empirical research. It is not being

proposed to enter in the normative aspect and offer suggestion for
improvement in the working.

27
 CHAPTER-3

REVIEW OF LITERATURE
Banking is a prime mover in the economic development of a nation and research is so
essential to improve its working results. The management without any right policy is
like "building a house on sand". It means an effective management always needs a
thorough and continuous search into the nature of the reasons for, and the
consequences of organization. In line with this, some related earlier studies conducted
by individuals and institutions are reviewed to have an in-depth insight into the
problem and exploring the reformation of banking policy. The main theme and
essence of few relevant studies are presented below.

Domar and Timbergen (1946)'', measured the profitability of banks for the
economic development purpose and settled the theoretical framework in expanded
form which was first introduced by Jorgenson and Nishimizudin for international
economic growth comparison and development. Sharma (1974)^^ said, "The
expansion of banking facilities was uneven and lopsided and banks were
concentrating their operations in metropolitan cities and towns. A fairly large number
of rural and semi urban Centre with reasonable potentialities of growth failed to
attract the attention of commercial banks. As far as the deposit mobilization in the
rural areas is concerned, much remains to be done. “This gives emphasis on the rural
and semi urban growth of banks.

Gopal Karkal (1977) said, "Some regions have done well in spreading the banking
facilities, while some regions have still very backward. Further, our clients are larger
merchants and big industrialists. They approach with their demand for larger loans
and advances, and in return give large business. If we transfer our limited resources to
small industry, agriculture etc., how can we increase our deposits, advances etc., and
how can we survive." As it give emphasis on a policy of planned and systematic
branch expansion laying stress not only on opening branches in the underdeveloped
and neglected areas but also in the providing additional banking facilities to the
growing metropolitan and urban areas to cope with the ever-increasing requirements
of trade, industry and commerce is more desirous.

V. K Ramachandran and Madhura Swaminathan (2001) conducted a study to

describe and evaluate rural credit policy in India over the last three decades and

28
examined its effects on rural workers at the level of single village. This study found
that a significant expansion and consolidation of banking infrastructure in rural areas
and correspondingly, a rise in the deposit mobilization and advances in rural areas
after nationalization.

Narinder Kaur and G. S. Batra (2001) made a attempt to study the banking sector
reforms and its policy implications. This study throws light on financial performance
of commercial banks, NPAs, capital adequacy and overall impact of reforms.
A Gnanadoss (2001) focused the services of banking operations to the priority sector
besides reviewing the organizational perspective and the spheres of the services
rendered to the priority sector. The study stressed the need for a critical role to be
played by the banks, especially in respect of Agriculture, small scale industries and
other priority sectors which cannot have access to the capital market directly.

Chatterjee. S (2004) stressed on the retail banking and studied the reasons behind the
euphemism regarding the retail focus of Indian banks and found that competition is
fierce, particularly from banks like HDFC and ICICI in business of home, car and
consumer loan. He found that Indian banks has shown little or no interest in
innovative tailor made products.

Chatterjee. S (2004) stressed on the retail banking and studied the reasons behind the
euphemism regarding the retail focus of Indian banks and found that competition is
fierce, particularly from banks like HDFC and ICICI in business of home, car and
consumer loan. He found that Indian banks has shown little or no interest in
innovative tailor made products.

Manoj. P. K (2005) examined the financial system in Kerala, its peculiar features and
its evolution in to present state, especially in the context of financial reforms and also
the scope of the financial system in view of the latest developments in Kerala
economy.

Monika Aggarwal and Rishi Raj Sharma (2005) analyzed the present picture of the
Indian banking system by comparing PUSBs, PRSBs and FSBs and attempted to
establish the relationship between various performance indicators such as total
employees, total business and return on investments of commercial banks. This study
revealed that the growth rate of various indicators of public sector banks, PRSBs and

29
FSBs was better in the preliberalization period as compared to the post-liberalization
period.

Usha Arora and Richa Varma (2007) conducted a study on the operational and
productivity efficiency of public sector banks in India. It revealed that after
liberalization, the performance of public sector banks has improved a lot and they
have become more innovative and have a largest market share in today’s competitive
era.

30
 CHAPTER-4
DATA ANALYSIS & INTERPRITATION

4.1 Survey Questionnaire

1. Do you have bank account?

BANK

5%

YES
NO

95%

In the above pie chart diagram there is almost 95% people have a bank
account and the rest of the 5% don’t have a bank account.

31
2. Do you trust the security of Indian banking system?

70

60

50

40

30

20

10

0
yes no

In the above bar chart most of the people don’t trust the Indian banking
system .

There is 60% of people don’t trust the indian banking system and the 40
% of people are trust the system.

32
3. Which category of the banks do you consider as most technologically
advanced?

banks

70

60

50

40

30

20

10

0
private secotr public sector

In the above bar chart the most of the people prefer the public sector bank as
compared to private sector

70% of people select the public sector bank and 30% of people select the private
sector bank.

4. Are you aware about the Indian banking mergers ?

BANKS

NO

YES

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

33
 In the above diagram 90% of people are know about the current mergers of Indian
banking and 10% of people don’t know about the mergers of bank.

5. Does the mergers of Indian bank could Effects the Indian banking
system?

BANKS

70%

60%

50%

40%

30%

20%

10%

0%
YES NO

In the above diagram the 65% people feels that’s merger should effects
the Indian banking system and rest of 35% people feels mergers should
not effects the banking system.

6. The current RBI monetary rate policy should effects the current Indian
banking scenario?

34
 15%

YES
NO

85%

In the above diagram there is 85% of people thing that the RBI policy
shout Effects the current scenario of Indian system. And the rest of the
15% people thing that the rate should not affects the current scenario.

4.2 RBI current major monetary policy rate and reserve requirement

Monetary policy is a central bank's actions and communications that manage

the money supply. That includes credit, cash, checks, and money market mutual
funds. The most important of these forms of money is credit. It includes loans, bonds,
and mortgages.

Monetary policy increases liquidity to create economic growth. It reduces liquidity to

prevent inflation. Central banks use interest rates, bank reserve requirements, and the
amount of government bonds that banks must hold. All these tools affect how much
banks can lend. The volume of loans affects the money supply.

35
 4.2.1 Objectives of Monetary Policy

While the main objective of the monetary policy is economic growth as well as price
and exchange rate stability, there are other aspects that it can help with as well.

 Promotion of saving and investment: Since the monetary policy controls the rate of
interest and inflation within the country, it can impact the savings and investment of
the people. A higher rate of interest translates to a greater chance of investment and
savings, thereby, maintaining a healthy cash flow within the economy.
 Controlling the imports and exports: By helping industries secure a loan at a
reduced rate of interest, monetary policy helps export-oriented units to substitute
imports and increase exports. This, in turn, helps improve the condition of the
balance of payments.
 Managing business cycles: The two main stages of a business cycle are boom and
depression. The monetary policy is the greatest tool using which the boom and
depression of business cycles can be controlled by managing the credit to control
the supply of money. The inflation in the market can be controlled by reducing the
supply of money. On the other hand, when the money supply increases, the demand
in the economy will also witness a rise.
 Regulation of aggregate demand: Since the monetary policy can control the demand
in an economy, it can be used by monetary authorities to maintain a balance
between demand and supply of goods and services. When credit is expanded and
the rate of interest is reduced, it allows more people to secure loans for the purchase
of goods and services. This leads to the rise in demand. On the other hand, when
the authorities wish to reduce demand, they can reduce credit and raise the interest
rates.
 Generation of employment: As the monetary policy can reduce the interest rate,
small and medium enterprises (SMEs) can easily secure a loan for business
expansion. This can lead to greater employment opportunities.
 Helping with the development of infrastructure: The monetary policy allows
concessional funding for the development of infrastructure within the country.
 Allocating more credit for the priority segments: Under the monetary policy,
additional funds are allocated at lower rates of interest for the development of the
priority sectors such as small-scale industries, agriculture, underdeveloped sections
of the society, etc.

36
 Managing and developing the banking sector: The entire banking industry is
managed by the Reserve Bank of India (RBI). While RBI aims to make banking
facilities available far and wide across the nation, it also instructs other banks using
the monetary policy to establish rural branches wherever necessary for agricultural
development. Additionally, the government has also set up regional rural banks and
cooperative banks to help farmers receive the financial aid they require in no time.

4.2.2 Flexible Inflation Targeting Framework (FITF)

The Flexible Inflation Targeting Framework (FITF) was introduced in India post the
amendment of the Reserve Bank of India (RBI) Act, 1934 in 2016. In accordance with
the RBI Act, the Government of India sets the inflation target every 5 years after
consultation with the RBI. While the inflation target for the period between 5 August
2016 and 31 March 2021 has been determined to be 4% of the Consumer Price Index
(CPI), the Central Government has announced that the upper tolerance limit for the
same will be 6% and the lower tolerance limit can be 2% for the same.

In this framework, there are chances of not achieving the inflation target fixed for a
particular amount of time. This can happen when:

 The average inflation is greater than the upper tolerance level of the inflation target
as predetermined by the Central Government for 3 quarters in a row.
 The average inflation is less than the lower tolerance level of the target inflation
fixed by the Central Government beforehand for 3 consecutive quarters

4.3.3 Monetary Policy Tools

To control inflation, the Reserve Bank of India needs to decrease the supply of money
or increase cost of fund in order to keep the demand of goods and services in control.

4.2.3.1 Quantitative tools –

The tools applied by the policy that impact money supply in the entire economy,
including sectors such as manufacturing, agriculture, automobile, housing, etc.

1. Reserve Ratio:
Banks are required to keep aside a set percentage of cash reserves or RBI approved
assets. Reserve ratio is of two types:

37
 Cash Reserve Ratio (CRR) – Banks are required to set aside this portion in cash
with the RBI. The bank can neither lend it to anyone nor can it earn any interest rate
or profit on CRR.

Statutory Liquidity Ratio (SLR) – Banks are required to set aside this portion in
liquid assets such as gold or RBI approved securities such as government securities.
Banks are allowed to earn interest on these securities, however it is very low.

2. Open Market Operations (OMO):

In order to control money supply, the RBI buys and sells government securities in
the open market. These operations conducted by the Central Bank in the open
market are referred to as Open Market Operations.

When the RBI sells government securities, the liquidity is sucked from the market,
and the exact opposite happens when RBI buys securities. The latter is done to
control inflation. The objective of OMOs is to keep a check on temporary liquidity
mismatches in the market, owing to foreign capital flow.

4.2.6.4 Qualitative tools:

Unlike quantitative tools which have a direct effect on the entire economy’s money
supply, qualitative tools are selective tools that have an effect in the money supply of
a specific sector of the economy.

1. Margin requirements – The RBI prescribes a certain margin against collateral,

which in turn impacts the borrowing habit of customers. When the margin
requirements are raised by the RBI, customers will be able to borrow less.
2. Moral suasion – By way of persuasion, the RBI convinces banks to keep money in
government securities, rather than certain sectors.
3. Selective credit control – Controlling credit by not lending to selective industries or
speculative businesses.

4.2.5 Market Stabilization Scheme (MSS) -

4.2.5.1 Policy Rates:
1. Bank rate – The interest rate at which RBI lends long term funds to banks is
referred to as the bank rate. However, presently RBI does not entirely control

38
 money supply via the bank rate. It uses Liquidity Adjustment Facility (LAF) – repo
rate as one of the significant tools to establish control over money supply.
Bank rate is used to prescribe penalty to the bank if it does not maintain the
prescribed SLR or CRR.

2. Liquidity Adjustment Facility (LAF) – RBI uses LAF as an instrument to adjust

liquidity and money supply. The following types of LAF are:
1. Repo rate: Repo rate is the rate at which banks borrow from RBI on a short-term
basis against a repurchase agreement. Under this policy, banks are required to
provide government securities as collateral and later buy them back after a pre-
defined time.
2. Reverse Repo rate: It is the reverse of repo rate, i.e., this is the rate RBI pays to
banks in order to keep additional funds in RBI. It is linked to repo rate in the
following way:
Reverse Repo Rate = Repo Rate – 1

3. Marginal Standing Facility (MSF) Rate: MSF Rate is the penal rate at which the
Central Bank lends money to banks, over the rate available under the rep policy.
Banks availing MSF Rate can use a maximum of 1% of SLR securities.
MSF Rate = Repo Rate + 1

4.2.6 Monetary Policy Transmission

Borrowers fail to fully benefit from RBI’s repo rate cut due to the following reasons:

 Banks are not affected by RBI rate cuts as the Central Bank is not their primary
money supplier.
 Deposits already made are fixed at the rates when taken and cannot be reduced; the
rate cuts will only reflect in the new deposit rates.
 PPF, Post Office accounts and other small saving instruments are available at high
administered interest rates and in case of reduction of bank deposit rates, customers
have the choice to move to those funds.
 Banks do not prefer to lower their rates as high lending rates keep their profit
margins up.
 India does not have a well-developed corporate bond market, therefore corporate
customers have little choice but to reach out to banks for borrowing.

39
 4.2.6.1 Steps to improve monetary transmission:
Both the government and RBI has taken and plans to take some steps in order to
accelerate the transmission of monetary policy.

 Government intends to bring down the interest rates on small saving accounts. If the small
saving rates are linked to the bank rate, this could serve as a permanent solution.
 In order to improve monetary transmission, RBI wants banks to change the calculation
methodology of base rate to marginal cost of funds from average cost of funds.
Despite banks raising the lending rates immediately after RBI’s rate cuts, the Central
Bank is unable to control inflation due to the following reasons:

 Financial deficit in the higher government.

 Issues at the supply side, such as crude oil prices, issues in agri marketing, etc.
 Lack of financial inclusion as borrowers still depend on moneylenders, who are not
under RBI’s control.
 Non-monetized economy in certain rural areas.

4.2.6.2 Dear Money Policy or Contractionary Monetary Policy:

Dear money policy is a policy when money becomes more expensive with the rise of
interest rate. Due to this, the supply of money also decreases in the economy,
therefore it is also referred to as the contractionary monetary policy.

This policy leads to a drop in business expansions owing to a high cost of credit, as
well as a fall in business expansion. This in turn affects employment as it brings down
growth rates. Therefore, interest rate cuts such as SLR and CRR are preferred by the
government and the corporates.

4.2.6.3 Fiscal Policy:

A policy set by the finance ministry that deals with matters related to government
expenditure and revenues, is referred to as the fiscal policy. Revenue matter include
matters such as raising of loans, tax policies, service charge, non-tax matters such as
divestment, etc. While expenditure matters include salaries, pensions, subsidies, funds
used for creating capital assets like bridges, roads, etc.

40
4.2.6.4 Demand Pull Inflation:
This is a state when people have excess money to buy goods in the market. RBI
practices easier control on this as it can lead to a fall in money supply in the economy,
which in turn would mean a drop in the prices.

4.2.6.5 Supply Side Inflation:

Inflation in the economy owing to constraints in the supply side of goods in the
market. This cannot be controlled by RBI as it does not control prices of commodities.
The government plays an important role in this case through fiscal policy.

4.2.3 Statutory Liquidity Ratio (SLR)

4.2.3.1 What is Statutory Liquidity Ratio (SLR)?

SLR means the ratio of specified securities banks must maintain in relation to their
Demand and Time Liabilities (DTL), as prescribed by the central bank.

In India, the Statutory liquidity ratio (SLR) is the Government term for the reserve
requirement that commercial banks are required to maintain in the form of cash, gold
reserves, Reserve Bank of India (RBI)- approved securities before providing credit to
the customers. The SLR to be maintained by banks is determined by the RBI in order
to control the expansion.

The SLR is determined as a percentage of total demand and time liabilities. Time
liabilities refer to the liabilities which the commercial banks are liable to repay to the
customers after an agreed period, and demand liabilities are customer deposits which
are repayable on demand. An example of a time liability is a six-month fixed deposit
which is not payable on demand but only after six months. An example of a demand
liability is a deposit maintained in a saving account or current account that is payable
on demand.

The SLR is commonly used to control inflation and fuel growth, by decreasing or
increasing the money supply. Indian banks' holdings of government securities are now
close to the statutory minimum that banks are required to hold to comply with existing
regulation. When measured in rupees, such holdings decreased for the first time in a
little less than 40 years (since the nationalization of banks in 1969) in 2005–06.
Currently it is 18.25 percent as on January 2019.

41
Main Objectives of SLR are:

1. SLR (Statutory Liquidity Ratio) is a tool which aids the RBI to ensure the
solvency a commercial bank.
2. SLR helps to control the expansion of Bank Credits. By changing the SLR
rates, RBI can increase or decrease bank credit expansion.
3. Through SLR, the Central Bank compels the commercial banks to invest in
government securities.
4. SLR (like CRR) is a tool of monetary policy to control money supply in the
economy. Lower SLR rates releases liquidity into the system, as banks require
holding less government bonds and vice versa.

4.2.3.2 Usage of SLR

SLR is used by bankers and indicates the minimum percentage of deposits that the
bank has to maintain in form of gold, cash or other approved securities. Thus, we can
say that it is ratio of cash and some other approved liability (deposits). It regulates the
credit growth in India.

The liabilities that the banks are liable to pay within one month's time, due to
completion of maturity period, are also considered as time liabilities. The maximum
limit of SLR is 40% and minimum limit of SLR is 0 In India, Reserve Bank of India
always determines the percentage of SLR.

There are some statutory requirements for temporarily placing the money in
government bonds. Following this requirement, Reserve Bank of India fixes the level
of SLR. However, as most banks currently keep an SLR higher than required (>26%)
due to lack of credible lending options, near term reductions are unlikely to increase
liquidity and are more symbolic.

The SLR is fixed for a number of reasons. The chief driving force is increasing or
decreasing liquidity which can result in a desired outcome. A few uses of mandating
SLR are:

42
 Controlling the expansion of bank credit. By changing the level of SLR, the
Reserve Bank of India can increase or decrease bank credit expansion.
 Ensuring the solvency of commercial banks
 By reducing the level of SLR, the RBI can increase liquidity with the commercial
banks, resulting in increased investment. This is done to fuel growth and demand.
 Compelling the commercial banks to invest in government securities like
government bonds

If any Indian bank fails to maintain the required level of the statutory liquidity ratio,
then it becomes liable to pay penalty to Reserve Bank of India. The defaulter bank
pays penal interest at the rate of 3% per annum above the bank rate, on the shortfall
amount for that particular day. However, according to the Circular released by the
Department of Banking Operations and Development, Reserve Bank of India, if the
defaulter bank continues to default on the next working day, then the rate of penal
interest can be increased to 5% per annum above the bank rate. This restriction is
imposed by RBI on banks to make funds available to customers on demand as soon as
possible. Gold and government securities (or gilts) are included along with cash
because they are highly liquid and safe assets.

The RBI can increase the SLR to control inflation, suck liquidity in the market, to
tighten the measure to safeguard the customers' money. Decrease in SLR rate is done
to encourage growth. In a growing economy banks would like to invest in stock
market, not in government securities or gold as the latter would yield less returns. One
more reason is long term government securities (or any bond) are sensitive to interest
rate changes. However, in an emerging economy, interest rate change is a common
activity.

4.2.3.3 Valuation and Formula

The quantum is specified as some percentage of the total demand and time liabilities (
i.e. the liabilities of the bank which are payable on demand anytime, and those
liabilities which are accruing in one months time due to maturity) of a bank.

SLR rate = (liquid assets / (demand + time liabilities)) × 100%

This percentage is fixed by the Reserve Bank of India. The maximum limit for the
SLR was 40% in India.[ Following the amendment of the Banking regulation Act

43
(1949) in January 2017, the floor rate of 20.75% for SLR was removed. As on 30th
November 2019, the SLR is 18.25%.

4.2.3.4 Current SLR Rate

 The current Statutory Liquidity Ratio (SLR) is 19.00%
. The Statutory Liquidity Ratio (SLR) last witnessed a change in its level on April 13,
2019 when it declined by 0.25% from its previous level of 19.25%.

As of today, i.e. on January 30, 2020, the Policy Rates which include Repo Rate stood
at 5.40%, Reverse Repo Rate at 5.15%, Marginal Standing Facility (MSF) Rate at
5.65% and Bank Rate at 5.65%. The Reserve Ratios which include Cash Reserve
Ratio (CRR) stood at 4.00% and the Statutory Liquidity Ratio (SLR) at 19.00%,
according to data of Major Monetary Policy Rates and Reserve Requirements released
by the Reserve Bank of India.

Reserve Bank has specified that every SCB shall continue to maintain in India
specified assets, the value of which shall not, at the close of business on any day, be
less than 19.00 per cent of the total NDTL (not exceeding 40 per cent of its total
DTL) as on the last Friday of the second preceding fortnight.

4.2.3.5 Specified Assets for SLR

 Cash or
 Gold valued at a price not exceeding the current market price, or

44
  Investment in the following instruments which are referred to as "Statutory
Liquidity Ratio (SLR) securities":

i. Dated securities issued up to May 06, 2011;

ii. Treasury Bills of the Government of India;
iii. Dated securities of the Government of India issued from time to time
under the market borrowing programme and the Market Stabilization
Scheme;
iv. State Development Loans (SDLs) of the State Governments issued
from time to time under the market borrowing programme; and
v. Any other instrument as may be notified by the Reserve Bank of India.

4.2.3.6 Procedure for Computation of SLR

The procedure to compute total NDTL for the purpose of SLR under Section 24 (2A)
of Banking Regulation Act, 1949 is broadly similar to the procedure followed for
CRR except that there are no exemption on certain liabilities as prescribed for
maintenance of CRR.

The value of SLR assets and NDTL are valued in accordance with the method of
valuation specified by the Reserve Bank of India from time to time.

4.2.3.7 Maintenance of SLR on Daily Basis

Unlike CRR, RBI does not permit any flexibility in the maintenance of SLR, i.e., SLR
has to be maintained at 100% level (or higher) on a daily basis.

4.2.3.8 Penalties
If a banking company fails to maintain the required amount of SLR, it shall be liable
to pay to RBI in respect of that default, the penal interest for that day at the rate of
three per cent per annum above the Bank Rate on the shortfall and if the default
continues on the next succeeding working day, the penal interest may be increased to
a rate of five per cent per annum above the Bank Rate for the concerned days of
default on the shortfall.

45
4.2.3.9 Return in Form VIII (SLR)

 Banks should submit to the Reserve Bank before 20th day of every month, a
Return in Form VIII showing the amounts of SLR held on alternate Fridays
during immediate preceding month with particulars of their DTL in India held
on such Fridays or if any such Friday is a public holiday under the Negotiable
Instruments Act, 1881, at the close of business on preceding working day.

 Banks should also submit a statement as Annexure to Form VIII Return giving
daily position of (a) assets held for the purpose of compliance with SLR, (b)
excess cash balances maintained by them with RBI in the prescribed format,
and (c) mode of valuation of securities.

4.2.3.10 Components of Statutory Liquidity Ratio

Section 24 and Section 56 of the Banking Regulation Act 1949 mandates all
scheduled commercial banks, local area banks, Primary (Urban) co-operative banks
(UCBs), state co-operative banks and central co-operative banks in India to maintain
the SLR. It becomes pertinent to know in detail about the components of the SLR, as
mentioned below.

a. Liquid Assets
These are assets one can easily convert into cash – gold, treasury bills, govt-approved
securities, government bonds, and cash reserves. It also consists of securities, eligible
under Market Stabilisation Schemes and those under the Market Borrowing
Programmes.

b. Net Demand and Time Liabilities (NDTL)

NDTL refers to the total demand and time liabilities (deposits) of the public that are
held by the banks with other banks. Demand deposits consist of all liabilities, which
the bank needs to pay on demand. They include current deposits, demand drafts,
balances in overdue fixed deposits, and demand liabilities portion of savings bank
deposits.
Time deposits consist of deposits that will be repaid on maturity, where the depositor

46
will not be able to withdraw his/her deposits immediately. Instead, he/she will have to
wait until the lock-in tenure is over to access the funds.
Fixed deposits, time liabilities portion of savings bank deposits, and staff security
deposits are some examples. The liabilities of a bank include call money market
borrowings, certificate of deposits, and investment deposits in other banks.

C. SLR Limit
SLR has an upper limit of 40% and a lower limit of 23%.

4.2.4 Current Repo Rate and Reverse Repo Rate

 The current Repo Rate is 5.40% and Reverse Repo Rate is 5.15%

The Repo Rates last witnessed a change in its level on August 07, 2019 when Repo
Rate declined by 0.35% from its previous level of 5.75%. and the Reverse Repo Rate
declined by 0.35% from its previous level of 5.50%.

As of today, i.e. on January 30, 2020, the Policy Rates which include Repo Rate stood
at 5.40%, Reverse Repo Rate at 5.15%, Marginal Standing Facility (MSF) Rate at
5.65% and Bank Rate at 5.65%. The Reserve Ratios which include Cash Reserve
Ratio (CRR) stood at 4.00% and the Statutory Liquidity Ratio (SLR) at 19.00%,
according to data of Major Monetary Policy Rates and Reserve Requirements released
by the Reserve Bank of India.

4.2.4.1 What is Repo Rate?

Repo rate is the rate at which the country’s central bank lends money to the
commercial banks generally against government securities. Reverse Repo rate is the
rate at which country’s central bank borrows money from the commercial banks.

4.2.4.3 Objectives of Repo

Repo and reverse repo rates form a part of the liquidity adjustment facility of the
Central Bank. Reduction in Repo rate helps the commercial banks to get money at a

47
cheaper rate and increase in Repo rate discourages the commercial banks to get
money as the rate increases and becomes expensive.

The increase in the Repo rate will increase the cost of borrowing and lending of the
banks which will discourage the public to borrow money and will encourage them to
deposit. This ultimately reduces the money supply in the economy. As the rates are
high the availability of credit and demand decreases resulting to decrease in inflation.

4.2.4.4 Repo Rate in India

 The Reserve Bank of India Act, 1934, defines

 "repo" means an instrument for borrowing funds by selling securities of the

Central Government or a State Government or of such securities of a local
authority as may be specified in this behalf by the Central Government or
foreign securities, with an agreement to repurchase the said securities on a
mutually agreed future date at an agreed price which includes interest for the

48
 funds borrowed;
 "reverse repo" means an instrument for lending funds by purchasing securities
of the Central Government or a State Government or of such securities of a
local authority as may be specified in this behalf by the Central Government
or foreign securities, with an agreement to resell the said securities on a
mutually agreed future date at an agreed price which includes interest for the
funds lent;

4.2.4.5 Term Repo under Liquidity Adjustment Facility

In October 2013, RBI introduced Term Repo under the Liquidity Adjustment Facility
(LAF) for 14 days and 7 days tenors for banks (scheduled commercial banks other
than RRBs) in addition to the existing daily LAF (repo and reverse repo) and MSF.
Term repo auctions are conducted on CBS (E-KUBER) platform through electronic
bidding.

While the 14 day term repo of tenor is conducted every reporting Friday, the 7 day
term repo is conducted on every non-reporting Friday. In case the notified amount for
the 14-day term repo is not fully subscribed, a 7-day term repo is conducted on the
following Friday for the remaining un-subscribed amount. In case of full subscription
in the 14-day term repo, the 7 day term repo auction on the following Friday does not
take place.

RBI announces the amount to be auctioned under term repo along with its tenor one
day prior to the auction. The minimum bid amount for the auction is Rupees one crore
and multiples thereof. Term repo auctions are conducted on Fridays between 11.00 -
11.30 AM. In case Friday falls on a holiday, the auction takes place on the preceding
working day at Mumbai. The eligible collateral for term repo and the applicable
haircuts remains the same as daily LAF repo and MSF.

4.2.4.6 Straight through Processing (STP)

Reserve Bank of India introduced Straight through Processing (STP) in fixed rate
LAF Repo, fixed rate LAF Reverse Repo with effect from August 3, 2015. This
enables the eligible participants to receive the credit or debit immediately on
placement of the bids or offers, subject to the availability of the collateral or funds,
within the prescribed time window.

49
Eligible participants can place multiple bids/offers in the respective liquidity facilities.
Settlement of the transaction are automatic and immediate after the placement of the
bid/offer. The transactions undertaken by a participant will be final and request for
cancellation of bids or offers are not entertained.

4.2.5 Current Repo Rate and Reverse Repo Rate

 The current Reverse Repo Rate is 5.15%
Reverse Repo Rate: Reverse repo as the name suggests is an opposite contract
to the Repo Rate. Reverse Repo rate is the rate at which the Reserve Bank of
India borrows funds from the commercial banks in the country. In other words, it
is the rate at which commercial banks in India park their excess money with
Reserve Bank of India usually for a short-term. Current Reverse Repo Rate as of
October 2019 is 4.90%.

The Repo Rates last witnessed a change in its level on August 07, 2019 when Repo
Rate declined by 0.35% from its previous level of 5.75%. and the Reverse Repo Rate
declined by 0.35% from its previous level of 5.50%.

As of today, i.e. on January 30, 2020, the Policy Rates which include Repo Rate stood
at 5.40%, Reverse Repo Rate at 5.15%, Marginal Standing Facility (MSF) Rate at
5.65% and Bank Rate at 5.65%. The Reserve Ratios which include Cash Reserve
Ratio (CRR) stood at 4.00% and the Statutory Liquidity Ratio (SLR) at 19.00%,
according to data of Major Monetary Policy Rates and Reserve Requirements released
by the Reserve Bank of India.

50
4.2.5.1 Significance of Repo Rate and Reverse Repo Rate

Liquidity Regulation: Under the liquidity framework designed by RBI, many

facilities are offered to commercial banks to meet their requirement of immediate
liquidity or deficiency of funds. The main motive of the liquidity framework is to
avoid any liquidity crisis in the Indian banking system through implementation of
repo agreements. In the similar way, RBI has a framework for managing surplus
funds/cash in the banking system which ensures there is no excess liquidity in the
system. And this framework is referred to as reverse repo. Basically, repo transactions
inject liquidity into the Indian banking system. On the other hand, reverse repo
absorbs liquidity from the Indian banking system.

Inflation Control: Reserve Bank of India holds a key responsibility with respect to
striking a balance between inflation and economic growth by managing the repo rate
and/or reverse repo rate periodically. By changing the repo/reverse repo rate, the RBI

51
can control money flow i.e. liquidity in the economy – too much liquidity usually
leads to inflation which can adversely affect the economy, while too little liquidity
can lead to an economic slowdown.

4.2.5.2 Impact of Repo Rate and Reverse Repo Rate Increase by RBI

 The following is the impact of increase in repo rate and reverse repo rate
by the RBI:

 Increase in Repo Rate: Increase in repo rate makes borrowing from the RBI
more expensive for commercial banks and this can lead to increase in rates
applicable to loans. As the interest rates on various loans increases, fewer
loans are applied for disbursed, which restricts the money supply in the
economy and may adversely affect the country’s economic growth.
 Increase in Reverse Repo Rate: If there is excessive liquidity in the banking
system, RBI may decide to increase the reverse repo rate. When there is a hike
in reverse repo rate, banks can earn higher interest on their excess funds
deposited with the Reserve Bank of India. This is a safer investment option for
banks so overall flow of money into the markets will be decreased as more of
the bank’s surplus funds are deposited with RBI instead of being lent out.

4.2.5.3 Impact of Repo Rate and Reverse Repo Rate cuts by RBI

 The following is the impact of repo rate and reverse repo rate cuts by
RBI:

 Repo Rate Cut Impact: Banking is the first sector to get affected by any
change in monetary policies. A cut in repo rate can allow banks to borrow
from the Reserve Bank of India at a cheaper rate and infuse higher liquidity in
the banking system. This can lead banks to reduce their lending rates for
customer leading to cheaper loans in the long term. As bank loans get cheaper,
consumers can borrow and spend more which boosts consumption and can
eventually lead to economic growth. However, this is depends on the decision

52
 by the bank whether to pass on the RBI repo rate cut benefits to their
customers through cheaper loan offers.
 Reverse Repo Rate Cut Impact: Whenever RBI decides to reduce the
reverse repo rate, banks earn less on their excess money deposited with the
Reserve Bank of India. This leads the banks to invest more money in more
lucrative avenues such as money markets which increases the overall liquidity
available in the economy. While this can also lead to lower interest rate on
loans for the bank’s customers, the decision will depend on multiple factors
including the bank’s internal liquidity situation and the availability of other
potentially less risky and equally lucrative investment opportunities.

4.2.6 Marginal Standing Facility (MSF) Rate

 Definition: Marginal standing facility (MSF) is a window for banks to

borrow from the Reserve Bank of India in an emergency situation when
inter-bank liquidity dries up completely.
Banks borrow from the central bank by pledging government securities at a rate
higher than the repo rate under liquidity adjustment facility or LAF in short. The MSF
rate is pegged 100 basis points or a percentage point above the repo rate. Under MSF,
banks can borrow funds up to one percentage of their net demand and time liabilities
(NDTL).

4.2.6.1 Current MSF Rate

The current Marginal Standing Facility (MSF) Rate is 5.65%
The Marginal Standing Facility (MSF) Rate last witnessed a change in its level on
August 07, 2019 when it declined by 0.35% from its previous level of 6.00%.

As of today, i.e. on January 31, 2020, the Policy Rates which include Repo Rate stood
at 5.40%, Reverse Repo Rate at 5.15%, Marginal Standing Facility (MSF) Rate at
5.65% and Bank Rate at 5.65%. The Reserve Ratios which include Cash Reserve
Ratio (CRR) stood at 4.00% and the Statutory Liquidity Ratio (SLR) at 19.00%,
according to data of Major Monetary Policy Rates and Reserve Requirements released
by the Reserve Bank of India.

53
4.2.6.2 Marginal Standing Facility (MSF) Rate
Marginal Standing Facility (MSF) was announced by the RBI in the Monetary Policy
for the year 2011-12. This facility is effective from May 9, 2011.

Under this facility, the eligible entities may borrow up to two per cent of their
respective Net Demand and Time Liabilities (NDTL). In the event, the banks’ SLR
holding falls below the statutory requirement up to two per cent of their NDTL, banks
will not have the obligation to seek a specific waiver for default in SLR compliance
arising out of use of this facility.

4.2.6.3 Eligibility
All Scheduled Commercial Banks having Current Account and SGL Account with
Reserve Bank, Mumbai are eligible to participate in the MSF Scheme.

54
6.6.4 Rate of Interest
During inception, i.e. in May 2011 it was decided by RBI that the rate of interest on
amount availed under this facility will be 100 basis points above the LAF repo rate, or
as decided by the Reserve Bank from time to time. In April 2016, RBI narrowed the
policy rate corridor from +/-100 basis points (bps) to +/- 50 bps, thus MSF was fixed
at 50 basis points above repo rate. In April 2017, RBI again narrowed the LAF
corridor from +/-50 basis points (bps) to +/- 25 bps, since then marginal standing
facility (MSF) rate is fixed 25 basis points above repo rate.

4.2.6.5 Eligible Securities

MSF is undertaken in all SLR-eligible transferable Government of India (GoI) dated
Securities/Treasury Bills and State Development Loans (SDL). Oil Bonds issued by
Government of India also qualify as eligible securities for Marginal Standing Facility
(MSF).

Pricing of all securities including Treasury Bills is taken at face value for MSF
operations by Reserve Bank. Accrued interest as on the date of transaction is ignored
for the purpose of pricing of securities.

4.2.6.6 Margin Requirement

A margin of 5 per cent is applied in respect of GoI dated securities and Treasury Bills.
In respect of SDLs, a margin of 10 per cent is applied by the RBI. Thus, the amount
of securities offered on acceptance of a request for Rs.100 is Rs.105 (face value) of
GoI dated securities and Treasury Bills or Rs.110 (face value) of SDLs.

4.2.6.7 Mechanics of Operations

The MSF requests is submitted by the SCBs to RBI electronically in the Negotiated
Dealing System (NDS). On acceptance of MSF requests, the applicant’s Repo
Constituents’ Subsidiary General Ledger Account (RC SGL) is debited by the
required quantum of securities and credited to Bank’s RC SGL Account. Accordingly,
the applicant’s current account is credited with the MSF application amount. The
transactions is reversed in the second leg. In case the second leg falls on a holiday, the
reversal date is the next working day.

55
RBI introduced Straight through Processing (STP) MSF operations with effect from
August 3, 2015. This enables eligible participants to receive the credit or debit
immediately on placement of the bids or offers, subject to the availability of the
collateral or funds, within the prescribed time window.

Eligible participants can, as hitherto, place multiple bids/offers in the respective

liquidity facilities. Settlement of the transaction is automatic and immediate after the
placement of the bid/offer. The transactions undertaken by a participant is final and
hence request for cancellation of bids or offers is not entertained.

4.2.6.8 Timing
Marginal Standing Facility (MSF) is available on all working days in Mumbai, excluding
Saturdays between 5.30 P.M. and 7.30 P.M.

4.2.6.9 Minimum request size

MSF requests have to be received by RBI for a minimum amount of Rs. One crore and in
multiples of Rs. One crore thereafter.

4.2.6.10 Settlement of Transactions

The settlement of all applications received under the MSF Scheme takes place on the same
day after the closure of the window for acceptance of applications.

4.2.7 Bank rate

A bank rate is the interest rate at which a nation's central bank lends money to
domestic banks, often in the form of very short-term loans. Managing the bank rate is
a method by which central banks affect economic activity. Lower bank rates can help
to expand the economy by lowering the cost of funds for borrowers, and higher bank
rates help to reign in the economy when inflation is higher than desired.

4.2.7.1 How Bank Rates Work

The bank rate in the United States is often referred to as the federal funds rate or the
discount rate. In the United States, the Board of Governors of the Federal Reserve
System sets the discount rate as well as the reserve requirements for banks.

56
The Federal Open Market Committee (FOMC) buys or sells Treasury securities to
regulate the money supply. Together, the federal funds rate, the value of Treasury
bonds, and reserve requirements have a huge impact on the economy. The
management of the money supply in this way is referred to as monetary policy.

4.2.7.2 Current Bank Rate

 The current Bank Rate is 5.65%
. The Bank Rate last witnessed a change in its level on August 07, 2019 when it
declined by 0.35% from its previous level of 6.00%.

As of today, i.e. on January 31, 2020, the Policy Rates which include Repo Rate stood
at 5.40%, Reverse Repo Rate at 5.15%, Marginal Standing Facility (MSF) Rate at
5.65% and Bank Rate at 5.65%. The Reserve Ratios which include Cash Reserve
Ratio (CRR) stood at 4.00% and the Statutory Liquidity Ratio (SLR) at 19.00%,
according to data of Major Monetary Policy Rates and Reserve Requirements released
by the Reserve Bank of India.

4.2.7.3 Bank Rate in India

Section 49 of Reserve Bank of India Act, 1934 defines Bank Rate as the standard rate
at which RBI is prepared to buy or re-discount bills of exchange or other commercial

57
paper eligible for purchase under the Act. In simple terms, Bank Rate is a discount
rate at which the commercial banks and the financial institutions borrows loan from
the central bank.

Bank rate was used as a Monetary Policy Key Rate through which RBI controlled the
liquidity and inflation and which directly affected the Commercial Banks Lending
Rates. But with the introduction of Liquidity Adjustment Facility (LAF), Bank rate is
now not used by RBI for the monetary management.

Bank Rate is now aligned with Marginal Standing Facility (MSF) and hence the
movement of MSF rates results in change in the Bank Rate. Nowadays, Bank Rate is
more a benchmark rate which is only used in calculating penalty on default in the
maintenance of cash reserve ratio (CRR) and the statutory liquidity ratio (SLR).

4.2.8 Cash Reserve Ratio (CRR)

Cash Reserve Ratio (CRR) is the share of a bank’s total deposit that is mandated by
the Reserve Bank of India (RBI) to be maintained with the latter in the form of liquid
cash.

4.2.8.1 Current CRR Rate

 The current Cash Reserve Ratio (CRR) is 4.00%
The Cash Reserve Ratio (CRR) last witnessed a change in its level on February 09,
2013 when it declined by 0.25% from its previous level of 4.25%.

As of today, i.e. on January 31, 2020, the Policy Rates which include Repo Rate stood
at 5.40%, Reverse Repo Rate at 5.15%, Marginal Standing Facility (MSF) Rate at
5.65% and Bank Rate at 5.65%. The Reserve Ratios which include Cash Reserve
Ratio (CRR) stood at 4.00% and the Statutory Liquidity Ratio (SLR) at 19.00%,
according to data of Major Monetary Policy Rates and Reserve Requirements released
by the Reserve Bank of India.

58
4.2.8.2 Objectives of Cash Reserve Ratio
The Cash Reserve Ratio acts as one of the reference rates when determining the base
rate. Base rate means the minimum lending rate below which a bank is not allowed to
lend funds. The base rate is determined by the Reserve Bank of India (RBI). The rate
is fixed and ensures transparency with respect to borrowing and lending in the credit
market. The Base Rate also helps the banks to cut down on their cost of lending to be
able to extend affordable loans.

Apart from this, there are two main objectives of the Cash Reserve Ratio:

1. Cash Reserve Ratio ensures that a part of the bank’s deposit is with the Central
Bank and is hence, secure.
2. Another objective of CRR is to keep inflation under control. During high
inflation in the economy, RBI raises the CRR to lower the bank’s loanable
funds.

59
4.2.8.3 How does Cash Reserve Ratio work?
When the RBI decides to increase the Cash Reserve Ratio, the amount of money that
is available with the banks reduces. This is the RBI’s way of controlling the excess
flow of money in the economy. The cash balance that is to be maintained by
scheduled banks with the RBI should not be less than 4% of the total NDTL, which
are the Net Demand and Time Liabilities. This is done on a fortnightly basis.

NDTL refers to the total demand and time liabilities (deposits) that are held by the
banks. It includes deposits of the general public and the balances held by the bank
with other banks. Demand deposits consist of all liabilities which the bank needs to
pay on demand like current deposits, demand drafts, balances in overdue fixed
deposits and demand liabilities portion of savings bank deposits.

Time deposits consist of deposits that need to be repaid on maturity and where the
depositor can’t withdraw money immediately. Instead, he is required to wait for a
certain time period to gain access to the funds. This includes fixed deposits, time
liabilities portion of savings bank deposits and staff security deposits. The liabilities
of a bank include call money market borrowings, certificate of deposits and
investment in deposits other banks.

In short, the higher the Cash Reserve Ratio, the lesser is the amount of money
available to banks for lending and investing.

NDTL = Demand and time liabilities (deposits) with public and other banks –
deposits with other banks (liabilities)

4.2.8.4 How does CRR affect the economy?

Cash Reserve Ratio (CRR) is one of the main components of the RBI’s monetary
policy, which is used to regulate the money supply, level of inflation and liquidity in
the country. The higher the CRR, the lower is the liquidity with the banks and vice-
versa.

During high levels of inflation, attempts are made to reduce the flow of money in the
economy. For this, RBI increases the CRR, lowering the loanable funds available with
the banks. This, in turn, slows down investment and reduces the supply of money in
the economy. As a result, the growth of the economy is negatively impacted.
However, this also helps bring down inflation.

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On the other hand, when the RBI needs to pump funds into the system, it lowers CRR.
Which increases the loanable funds with the banks. The banks thus extend a large
number of loans to businesses and industry for different investment purposes. It also
increases the overall supply of money in the economy. This ultimately boosts the
growth rate of the economy.

4.2.8.5 Difference between CRR & SLR

Both CRR & SLR are the components of the monetary policy. However, there are a
few differences between them. The following table gives a glimpse into the
dissimilarities:

Statutory Liquidity Ratio (SLR) Cash Reserve Ratio (CRR)

In the case of SLR, banks are asked to have reserves The CRR requires banks to have
of liquid assets, which include both cash and gold. only cash reserves with the RBI

Banks earn returns on money parked as SLR Banks don’t earn returns on
money parked as CRR

SLR is used to control the bank’s leverage for credit The Central Bank controls the
expansion. liquidity in the Banking system
with CRR.

In the case of SLR, the securities are kept with the In CRR, the cash reserve is
banks themselves, which they need to maintain in the maintained by the banks with the
form of liquid assets. Reserve Bank of India.

4.2.8.6. Why is Cash Reserve Ratio changed regularly?

As per the RBI guidelines, every bank is required to maintain a ratio of their total
deposits that can also be held with currency chests. This is considered to be the same
as it is kept with the RBI. The RBI can change this ratio from time to time in regular
intervals. When this ratio is changed, it impacts the economy.

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For banks, profits are made by lending. In pursuit of this goal, banks may lend out to
the max to make higher profits and have very less cash with them. An unexpected
rush by customers to withdraw their deposits will lead to banks being unable to meet
all the repayment needs. Therefore, CRR is vital to ensure that there is always a
certain fraction of all the deposits in every bank, kept safe with them. RBI curbs these
issues with the help of the CRR.

While ensuring liquidity against deposits is the prime function of the CRR, it has an
equally important role in controlling interest rates in the economy. The RBI controls
the short-term volatility in the interest rates by adjusting the amount of liquidity
available in the system. Too much availability of cash leads to the fall in rates while
the scarcity of it leads to a sudden rise in rates, both of which are unhealthy for the
economy.
Thus, as a depositor, it is good for you to know of the CRR prevailing in the market
that ensures that regardless of the performance of the bank, a certain percentage of
your cash is safe with the RBI.

4.2.8.7 Current Repo Rate and its impact

Apart from CRR, there are other metrics used by RBI to regulate the economy. RBI
revises the repo rate and the reverse repo rate in accordance with the fluctuating
macroeconomic factors. Whenever RBI modifies the rates, it impacts each sector of
the economy; although in different ways. Some segments gain as a result of the rate
hike while others may suffer losses. RBI recently cut down the repo rate by 25 basis
points to 5.75% from 6%. In the same line, the reverse repo rate was also reduced by
25 basis points to 5.5% from 5.75%.

Changes in the repo rates can directly impact big-ticket loans such as home loans. An
increase/decrease in the repo rates can result in banks and financial institutions
revising their MCLR proportionately. The MCLR (Marginal Cost of Funds Based
Lending Rate) is the benchmark rate below which a bank/financial institution cannot
lend.

A decline in the repo rate can lead to the banks bringing down their lending rate. This
can prove to be beneficial for retail loan borrowers. However, to bring down the loan
EMIs, the lender has to reduce its base lending rate. As per the RBI guidelines.

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 CHAPTER-5

CURRENT ROLE OF BANKS IN INDIAN ECONOMY

Banking is an important segment of the tertiary sector and acts as a backbone of

economic progress. Banks play a very useful and dynamic role in the economic life
of every modern state. They are important constituents of the money market and their
demand deposits serve as money in the modern community. The banks render vital
services to the masses belonging to the various sectors of the economy like
Agriculture, industry whether small scale large scale. The Indian financial sector has
considerably widened and depends there by on lending strong support to capital
accumulation and overall economic growth. And the commercial banks in India
constitute the single most important component of the Indian Financial System in
bringing about the financial intermediation process in India. Within the banking
institutions, the role of commercial banks has occupied a new meaning and
significance, in view of the changing structure and requirements of a developing
economy. The increasing horizon of commercial banks identifies itself with the
problems and responsibilities for making banking an instrument for bringing about
social and economic transformation of a developing country, Social responsibilities
have undergone far-reaching changes. Banks have become the prime movers and
pace setters for the achievement of socio-economic objectives of the country.

The operations of commercial banks record the economic pulse of economy of

almost all countries big or small, rich or poor, socialist or capitalist and they are faced
with the problem of regional disparities in economic development. In modern
economy, bankers are to be considered not merely as “dealers in money” but move
realistically as the “lenders in development”. Similarly, banks are not just the
storehouses of the country’s wealth but are the reservoirs of resources necessary for
economic development. Banks are the purveyors of money and credit to the factors of
production in every country and thus help in the acceleration of growth. Banks are the
pivot of modern commerce; industrial innovations and business expansions become
possible through finance provided by banks. Economic Development needs an
appropriate monetary policy. But a well-defined banking is a necessary pre-condition
for the effective implementation of the monetary policy.

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The commercial banks help the agricultural sector in a number of ways. They open a
network of branches in rural areas to provide agricultural credit. They also finance
agricultural sector for the modernization and mechanization of farms, for the
marketing of their products, for providing irrigation facilities, for high yielding seeds
and fertilizers.

The industrial sector is also not away from the help of the commercial banks. They
finance the industrial sector in many ways. They provide short term, medium term
and long term loans to industry, to secure labour and other factors of production. In
this way, the commercial banks not only help in the industrialization process, but also
have a say in the type of economic development which the community would like.
This is so because banks prefer only those entrepreneurs whose products are in great
demand by the public. In India, Commercial banks grant loans to small scale
industries for expansion, modernization and renovation and also provide them with
working finance. Besides industrial units, loans are also granted to technocrats,
technologists, technicians and entrepreneurs to set-up small scale industrial units.
Banks also
give finance to promotion of industrial estates for purchase of land and construction
of sheds. Besides, they underwrite the shares and debentures of large scale industries.

The Commercial banks help in developing both internal and external trade of a
country. The banks provide loans to retailers and wholesalers for their inventory.
They also help in the movement of goods from one place to another, or between the
countries, by providing all types of facilities such as discounting and accepting bills of
exchange, providing overdraft facilities, issuing drafts, etc. Moreover, they finance
both exports and imports of developing countries, by providing foreign exchange
facilities for export of goods. In India, financing of exports by commercial banks
have been given top priority. Commercial Banks have refinance facilities against
loans granted to this sector. Besides, in order to make available credit at a cheaper
rate to this sector, the Reserve bank of India has fixed ceiling on interest rates to be
changed from exporters .

The commercial banks advance credit for the development of employment generating
activities in developing countries. They provide loans for the education of young

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person studying in Engineering, Medical and other Vocational institutions of higher
learning. They advance loans to young entrepreneurs,
medical and engineering graduates and other technically trained persons in
establishing their own business. Such loan facilities are provided by a number of
Commercial banks in India through various schemes implemented by the Government
of India. Thus, the banks not only help in human capital formation but also in
increasing entrepreneurial activities in developing countries. Commercial Banks also
facilitate the activation of the Government motive and force for economic
development by providing help in arranging finance to the Government through
various methods like: direct credit to the Government undertakings and through
subscribing public debt and investing money in various Government securities.

This process of credit supply enables the Government to implement various schemes
of development. The Commercial Banks may also help the Planning Commission to
achieve its targets through their coordinated working with the commission by
providing credit to the needy in the country side. They help in the balancing of
economic development, thereby decentralizing it. Their working also indirectly helps
the Government to solve many problems of development, like: shortage of savings,
rising prices, unemployment, unbalanced economic development, lack of
entrepreneurship etc. The Commercial Banks help the economic development of a
country by faithfully following the monetary policy of the Central Bank. They
represent the focal point of monetary policy of the Central Bank. In fact, the Central
Bank depends upon the Commercial Banks for the success of its monetary policy in
tune with the requirements of a developing economy.

Thus, banking is a basic industry, which not only caters to the development of a trade,
commerce and industry, but also helps in removing many obstacles in the way of
economic development.

5.1 The Impact of Banking Sector on National Economy

The banking sector is nothing less than the backbone of any economy. This pertains to
the Indian economy as well, where the banking sector is displaying the potential for
becoming the 5th largest banking industry globally by 2020. With a continued boost in

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banking performance bolstered by numerous technological advancements, the Indian
banking sector is likely to assume the 3rd largest position in the world by 2025.

Not just globally, the Indian banking sector has proved its true worth back home as
well. This can be inferred from the valuable contribution of our banks, both
nationalized and private, for boosting up the national economy. Currently, the banking
industry holds pride in contributing nearly 7.7% to the national GDP. Besides that,
our banks are the prime employment generators for almost 1.5 million people in the
country.

All this goes on to prove the fundamental, almost indispensable, role the banking
sector plays in shaping the Indian economy’s progress graph every year. In this
article, we will present to you a clearer picture of how the Indian banking sector
contributes to the progressive growth of the national economy.

5.1.1 Various Means of Contribution to the Indian Economy

The banking sector plays a significant role in lending financial support to the various
components of our economy – individuals and organizations alike. Without the
banking structure, the financial growth experienced by the Indian economy could
have been inconceivable.

Banks contribute to economic growth in more ways than one. They are significant
credit generators for the economy and work in interesting ways. People deposit their
savings in banks, which are then channelized to entities/individuals in need of funds
in the form of different types of loans. Further, people use the loan amount to make
investments, which in turn generates more income for the economy.

Apart from income produced through credit-creation techniques, banks also generate
revenue for the economy in other ways. One example could be the income earned for
lending services to the people of the country. The income earned by bank employees
in this case in the form of wages and the like also contributes to the larger GDP pool.
Besides, any expenditure incurred by banks in the name of various bills, rent,
stationery, internet cost, etc., also invariably contributes to the country’s GDP.

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5.1.2 Changing Face of the Indian Banking Sector

Banks in India have been in existence since decades now, and they surely have
witnessed numerous opportunities and challenges along the way. But one thing that
has remained consistent is the progressive, rather rapid, growth of the Indian banking
sector over the years in light of various technological advancements. The boom of
technology from the 1990s onward succeeded in impacting the banking sector as well.
We need not go that far either. The very recent demonetization move in India was
ostensibly aimed at eradicating corruption, exercising restraint on the flow of “black
money” within and outside the country, and doing away with the concept of fake
currencies. Besides, of course, the movement brought about a cashless Indian
economy in place, which is a feather in its cap indeed.

Not to forget, those sections of the society that had remained untouched all these
years by the banking community slowly came under the wide umbrella of banking
services. And this directly means more cash flow in the country, which is always good
news for the economy.

Today, there’s a dire need to educate more people in India on the vital place our banks
hold in the national economy. Also, since the banking industry has advanced to a
whole new level, it has become all the more necessary that individuals aspiring to
make a career in the same remain updated with its fundamentals. We, at TimesPro,
through our PGDM programme, intend to deliver the aspirants with an industry-
centric professional education that can help them gain a clear insight into the working
of the banking industry. The postgraduate diploma in banking programme at
TimesPro has been designed to not only make the candidates job-ready but also
enable them to start off their career right away upon course completion. Students are
equipped with the qualities, skills, and know-how that smoothen out their path to
becoming a truly successful banking professional in future.

5.2 Non Performing Assets (NPAs)

 Definition of 'Non Performing Assets'

Definition: A nonperforming asset (NPA) is a loan or advance for which the principal
or interest payment remained overdue for a period of 90 days.

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Description: Banks are required to classify NPAs further into Substandard, Doubtful
and Loss assets.

1. Substandard assets: Assets which has remained NPA for a period less than or
equal to 12 months.

2. Doubtful assets: An asset would be classified as doubtful if it has remained in the

substandard category for a period of 12 months.

3. Loss assets: As per RBI, “Loss asset is considered uncollectible and of such little
value that its continuance as a bankable asset is not warranted, although there may be
some salvage or recovery value.”

Authentic history of banking tells that it deals with lending and collection of money.
However, it followed the basic law of demand and supply where persons having excess
money lent to persons who needed it for more productive purposes and were willing to pay a
price for this. The operations were limited to the money lender knowing every person he lent
money to. Proper regulation and organization of these activities was necessitated, over a
period of time, as the operations began to grow because of increase in the number of clients.
Gradually, simple banking transformed itself into commercial banking and the commercial
banking itself has undergone numerous changes all over the world, during the last five
decades. In the regard, India is not an exception and in fact, the changes that have taken
place in India have been far more significant and much more radical in some regards, than
elsewhere in the world.

The concept of Non-Performing Assets (NPAs) was introduced for the first time in the
Narasimham Committee on “Financial System Reforms” that was tabled in Parliament on
December 17th,1991. The Committee studied the prevailing financial system, identified its
short comings and weaknesses and made with ranging suggestions and recommendations in
line with internationally accepted norms. Based on the recommendations of the Committee
on “Financial System Reforms”, the RBI evolved prudential norms on Income recognition,
Asset classification and Provisioning and issued revised instructions to banks in April 1992.

While conveying non-performing category and their anxiety to present rosy picture of their
affairs the above instructions to banks also advised them that as per practice followed
internationally, income on NPAs is not to be recognized on accrual basis but is to be looked

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only when it is actually realized because an asset becomes non-performing when it ceases to
generate income.

The above instructions of RBI have since been implemented by banks from the financial year
ended March 1998. The problem of NPAs is linked to the function of lending money. The
lending of money collected from the public, for interest, instead of one’s own money, was the
beginning of banking. Though the present day banking does not restrict itself to traditional
deposit collection and money lending, encompassing a wide sphere of financial activity,
lending still remains the prime activity connected with banking. Most credit needs of the
society, for carrying, commercial activities are fulfilled by the banks.

The conventional credit from the banking system to the Commercial sector comprises bank
loans and advances in the form of term loans, demand loans, cash credit, overdrafts, inland
and foreign bills purchased and discounted as well as investments in instruments issued by
non-government sector .

Non-performing assets (NPAs) constitute integral part of banks' operations. A bank gives out
money upfront and earns income over a time on the promise of a borrower to repay. When
loans are not repaid, the bank loses both its income stream, as well as its capital. Lending is
always accompanied by the credit risk arising out of the borrower’s default in repaying the
money17. The level of nonperforming loans is recognized as a critical indicator for assessing
banks' credit risk, asset quality and efficiency in allocation of resources to productive sectors.
The most calamitous problem facing commercial banks all over the world in recent times is
spiraling non- performing assets which are affecting their viability and solvency and thus
posing challenge to their ultimate survival. So the problem of NPAs should be nipped in the
bud. It is possible only if the check is placed on NPAs from the very beginning. The major
cause for the NPA can be attributed to:

 Improper selection of borrower’s activities

 Weak credit appraisal system

 Industrial problem

 Inefficiency in management of borrower

 Slackness in credit management & monitoring

 Lack of proper follow up by bank

 Recession in the market

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  Due to natural calamities and other uncertainties

Banks are ultimately made to finance the losses incurred by constituent industries and
businesses. The lack of preparedness and structural weakness of our banking system
led to the emerging scenario and trying to switch over to globalization were only
aggravating the crisis. The major reason for this situation was that the threat of
NPAs was being surveyed and summarized by Reserve Bank of India (RBI) and
Government of India with a bird’s eye-view of the banking industry, independent
from the rest of the economy.

5.2.1 Significance of the Present Study

Indian banks may have an over Rs30,00,00,00,00,000 bad loan storm

coming

As if the bad loan crisis at Indian banks wasn’t alarming enough, there is a ticking
time bomb that can spark another crisis for the industry. Loans worth Rs3.5 lakh crore
($48.88 billion) have not been recognized by banks in India as non-performing assets
(NPAs) and they run the risk of turning sour, India Ratings, a part of the global ratings
agency Fitch, said in a report on Feb. 05. These loans are still being serviced by
borrowers, and categorized as “standard” on banks’ books, the report added.

A loan slips into the NPA category if the principal or the interest amount on it is
overdue by 90 days or more, till then it remains standard. Apart from the risk of not
recovering the loans, banks have to set aside a higher sum for NPAs as provisions that
adversely affect business.

“In the worst-case scenario, about half of the unrecognized stressed assets can slip
into NPAs in two years from October 2018,” said Jindal Haria, associate director of
banking and financial institutions, India Ratings & Research. Of the Rs13.5-14 lakh
crore stressed corporate loans, banks have recognized only Rs10 lakh crore as of
September 2018, he added. This will be a big blow for the Indian banks that may have
to keep aside an additional sum of up to Rs40,000 crore as provisions for these loans,
which may turn toxic.

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5.2.2 The NPA Nightmare

Indian banks have been sitting on bad loans worth over $150 billion and the clean-up
exercise has been a huge challenges for the sector.

This is in contrast to the Reserve Bank of India’s (RBI) latest financial stability report
released in December 2018. The gross NPA ratio of banks is expected to decline from
10.8% in September 2018 to 10.3% in March 2019 and 10.2% in September 2019, the
central bank had noted, then. The RBI’s optimism had stemmed from the fact that the
quantum of bad loans had decreased between March 2018 and September 2018 for the
first time in three years. The gross NPA ratio declined to 10.8% in September 2018
from 11.5% in March 2018.

Public sector banks (PSBs) had been the worst-hit due to this crisis as they accounted
for a lion’s share of the toxic loans. The condition was so alarming that at one point,
the banking regulator had to put 12 Indian banks under a corrective action framework
where they had to face strict operational restriction, while one of them was even
barred from lending.

Last month, due to better performance, three out of the 12 banks have managed to
come out the framework. Things are unlikely to change drastically for most of the
other lenders that are under stress. “Most large private banks and the two large PSBs
(State Bank of India and Bank of Baroda) are adequately poised to benefit from
growth opportunities over FY19-FY20 and gain market share at a faster pace…The
agency has retained its negative outlook on mid-sized and smaller PSBs with weak
capitalization, relatively lower provisions coverage for identified stressed assets and a
larger stock of unrecognized assets across non-corporate segments,” added the report.
In order to pull the PSBs out of this vicious cycle of bad loans, the Narendra Modi
government has been pumping in more capital to shore up their position and improve
loan growth in the economy. However, it may take a while before the efforts yield

significant results.

5.2.3 Bank NAP

As per Reserve Bank of India (RBI) data on global operations, aggregate gross
advances of Public Sector Banks (PSBs) increased from Rs. 18,19,074 crore as on

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31.3.2008 to Rs. 52,15,920 crore as on 31.3.2014. As per RBI inputs, the primary
reasons for spurt in stressed assets have been observed to be, inter-alia, aggressive
lending practices, wilful default / loan frauds / corruption in some cases, and
economic slowdown. Asset Quality Review (AQR) initiated in 2015 for clean and
fully provisioned bank balance-sheets revealed high incidence of NPAs.

As a result of AQR and subsequent transparent recognition by banks, stressed

accounts were reclassified as NPAs and expected losses on stressed loans, not
provided for earlier under flexibility given to restructured loans, were provided for.
Further, all such schemes for restructuring stressed loans were withdrawn. Primarily
as a result of transparent recognition of stressed assets as NPAs, gross NPAs of PSBs.

As per RBI data on global operations, rose from Rs. 2,79,016 crore as on 31.3.2015,
to Rs. 8,95,601 crore as on 31.3.2018, and as a result of Government’s 4R’s strategy
of recognition, resolution, recapitalisation and reforms, have since declined by Rs.
89,189 crore to Rs. 8,06,412 crore as on 31.3.2019 (provisional data).Data on NPAs is
regularly published by RBI as part of its Financial Stability Reports. NPA data is not
collated by RBI in terms of corporate houses / companies. PSB-wise details of gross
NPA (GNPA) for Industry category advances in domestic operations and total GNPA
in global operations, as per RBI data, are at Annex.

As per RBI provisional data on global operations, as on 31.3.2019, the aggregate

amount of gross NPAs of PSBs and Scheduled Commercial Banks (SCBs) were Rs.
8,06,412 crore and Rs. 9,49,279 crore respectively.

Over the last four years, Government has taken comprehensive steps under its 4R’s
strategy of recognising NPAs transparently, resolving and recovering value from
stressed accounts, recapitalising PSBs, and reforms in banks and financial ecosystem
to ensure a responsible and clean system.
Steps taken to expedite and enable resolution of NPAs of PSBs, include, inter-alia, the
following:

(1) The Insolvency and Bankruptcy Code, 2016 (IBC) has been enacted, which has
provided for the taking over management of the affairs of the corporate debtor at the
outset of the corporate insolvency resolution process. Coupled with debarment of

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wilful defaulters and persons associated with NPA accounts from the resolution
process, this has effected a fundamental change in the creditor-debtor relationship.
Further, the Banking Regulation Act, 1949 has been amended to provide for
authorisation to RBI to issue directions to banks to initiate the insolvency resolution
process under IBC. As per RBI’s directions under the aforesaid amended provision in
the Banking Regulation Act, 1949, banks have been filed cases under IBC before the
National Company Law Tribunal in respect of RBI-specified borrowers.

(2) Securitisation and Reconstruction of Financial Assets and Enforcement of Security

Interest Act has been amended to make it more effective, with provision for three
months’ imprisonment in case the borrower does not provide asset details and for the
lender to get possession of mortgaged property within 30 days. Also, six new Debts
Recovery Tribunals have been established to expedite recovery.

(3) Under the PSB Reforms Agenda, PSBs have created Stressed Asset Management
Verticals to focus attention on recovery, segregated monitoring from sanctioning roles
in high-value loans, and entrusted monitoring of loan accounts of above Rs. 250 crore
to specialised monitoring agencies for clean and effective monitoring, and created
online end-to-end One-Time Settlement platforms for timely and better realisation.

Enabled by the above steps, as per RBI data on global operations (provisional data
for the financial year ending March 2019), gross NPAs of PSBs have declined from
the peak of Rs. 8,95,601 crore in March 2018 to Rs. 8,06,412 crore in March 2019
(provisional data). PSBs have recovered Rs. 3,59,496 crore over the last four financial
years, including record recovery of Rs. 1,23,156 crore during 2018-19.

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 CHAPTER- 6
CURRENT INDIAN BANKING SCENARIO

A bank is a financial institution which accepts deposits from the general public and
extends loans to the households, the firms, and the government. The Indian banking
sector is the lifeline of the nation and its people. It is a vital component of the
economy of the country. The banking sector is considered to be the backbone of the
modern economy. The efficiency and growth of a nation depend on the strength and
efficiency of its financial institutions. The banking sector of India is the hope and
aspiration of millions of people in the country. But to achieve this success the banking
sector had to pass many hurdles. The cooperative banks in connivance with the Indian
banking sector is now providing need-based finance especially for the development of
the agricultural sector which is the backbone of Indian economy.

It has been seen that the growth of the Indian banking sector has been more
qualitative rather than quantitative. Further, the credits take-off has been surging
ahead over the past few decades aided by strong economic growth, rising disposable
incomes, increasing consumerism and easier access to credit. The Indian banking
sector has also witnessed an increase in demand for both corporate and retail loans
particularly the services, real estate, consumer durables and agriculture allied sectors
have led to the growth of credit. The Indian banking sector is recently now focusing
on adopting an integrated approach to risk management. The Indian banking sector
has already embraced the international banking supervision accord. The Reserve Bank

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of India has decided to set up the public credit registry (PCR), an extensive database
of credit information which is accessible to all stakeholders. The current scenario of
the Indian banking sector is also witnessing a surge in the deposits made under
Pradhan Mantri Jan Dhan Yojana. Efforts are also being made to raise the income
level so as to enhance the banking sector in the rural areas.

6.1 Top Trends in Banking and Financial Services in India

The Banking industry and financial institutions are vital sectors of any economy.
Development of these two sections of the economy can impact the growth of the
country in an incredible way. In the era of “Digital India”, the banking and financial
services in India have undergone a massive evolution and the phenomenon continues.
The change can be attributed to various components like new regulatory policies and
customer expectations. However, the one element that has affected banking and
financial services the most is technological advancement.

The emergence of innovative financial technology has revolutionized financial

services in India as well as the banking sector. It has resulted in the introduction and
advancement of several technology trends that have contributed to the radical
transformation, growth, and advancement of these industries. The alliance between
the innovative technologies of the financial sector and banking services has changed
the conventional systems of handling money, and this collaboration is expected to
create a massive shift with emerging trends in financial services.

The rise of Fintech companies, internet banking, and mobile banking are some of the
classic examples of emerging trends in the banking sector and financial services. In
addition to the betterment of traditional systems, these banking and financial services
industry trends are a few steps toward creating a cashless society, complete digital
transformation, and the rise of Fintech. In this time of change, the only thing that is
constant is change.

6.1.1 Digitization

With the rapid growth of digital technology, it became imperative for banking and
financial services in India to keep up with the changes and innovate digital solutions

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for the tech-savvy customers. Besides the financial institutions, insurance, healthcare,
retail, trade, and commerce are some of the major industries that are experiencing the
enormous digital shift. To stay competitive, it is necessary for the banking and
financial industry to take the leap on the digital bandwagon.

In India, it all began not earlier than the 1980s when the banking sector introduced the
use of information technology to perform basic functions likes customer service,
book-keeping, and auditing. Soon, Core Banking Solutions were adopted to enhance
customer experience. However, the transformation began in the 1990s during the time
of liberalization, when the Indian economy exposed itself to the global market. The
banking sector opened itself for private and international banks which is the prime
reason for technological changes in the banking sector. Today, banks and financial
institutions have benefitted in many ways by adopting newer technologies. The shift
from conventional to convenience banking is incredible.
Modern trends in banking system make it easier, simpler, paperless, signatureless and
branchless with various features like IMPS (Immediate Payment Service), RTGS
(Real Time Gross Settlement), NEFT (National Electronic Funds Transfer), Online
Banking, and Telebanking. Digitization has created the comfort of “anywhere and
anytime banking.” It has resulted in the reduced cost of various banking procedures,
improved revenue generation, and reduced human error. Along with increased
customer satisfaction, it has enabled the customers creating personalized solutions for
their investment plans and improve the overall banking experience.

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  What is meant by digitization :-

 Digitization is the process of converting data into digital format. Digitalization

means the adoption of technology. But these two words are being used
interchangeably.

 Role of digitization in banking :-

 Banks are not just a part of our lives, but have a significant role in our daily
lives. For many, day will not end without at least a single financial transaction.
Thus banks always try to adopt latest technologies to enhance customer
experience.

 Digitization is not an option for banking industry, rather it is

inevitable because every industry is being digitized and banking sector is no
exception.
 Mobile banking is increasing at a fast pace more than online banking.

With the increasing usage of smartphones, digitization of banking sector is inevitable

to catch up the increasing expectations of the world. It indeed reduced human errors
and increased convenience. But the fact that cyber threats are on the rise, banks must
be very careful and should be prepared to handle cyber attacks.

6.2. Enhanced Mobile Banking

Mobile banking is one of the most dominant current trends in banking systems. As per
the definition, it is the use of a smartphone to perform various banking procedures
like checking account balance, fund transfer, and bill payments, without the need of
visiting the branch. This trend has taken over the traditional banking systems. In the
coming years, mobile banking is expected to become even more efficient and
effortless to keep up with the customer demands. Mobile banking future trends hint at
the acquisition of IoT and Voice-Enabled Payment Services to become the reality of
tomorrow. These voice-enabled services can be found in smart televisions, smart cars,
smart homes, and smart everything. Top industry leaders are collaborating to adopt
IoT-connected networks to create mobile banking technologies that require users’
voice to operate.

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6.2.1 Latest Trends of Mobile Banking Sector
Take a look at the mobile banking technology trends that must be followed to stay in
the race in 2020:

6.2.1.1 Mobile App ATM Withdrawals

This is an exciting trend for people who hate rifling through their wallets and one of
the crucial new trends in banking. In the next couple of years, many banks will be
introducing near-field communications technologies to their ATMs and integrating
apps like Apple Pay, Google Pay, and Samsung Pay.

Some banks will also be adding QR codes, which you can scan to log into your
account instantly. These technologies will take the hassle out of using ATMs.

6.2.1.2 More Biometric Authentication

One of the main challenges that mobile banking faces is security. If your phone is
stolen, what is stopping the thieves from accessing your bank accounts or making
purchases with your money? The answer to this problem is integrating more
sophisticated biometric technology into mobile devices.

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In the coming years, we can expect to see the fingerprint scanner and facial
recognition software being added to more mobile banking apps. Biometric identify
checks will eventually replace passwords completely. Not only will biometric
authentication add more security to mobile banking, but it will also make it more
efficient and convenient.

6.2.1.3. Voice Banking

Most mobile phone users are now familiar with performing voice searches using
Google and Bing. It’s a convenient way to search the internet while on the move.
Voice commands are expected to make a move to banking in the next few years,
which will make online banking more secure and serviceable for consumers.
Many banks have already added voice recognition as one of the methods for two-way
authentication. It acts as an additional layer of biometric security for accessing bank
accounts.Some financial institutions also allow customers to make inquiries about
transactions, transfer money, and report stolen cards using voice queries. As voice
recognition technology improves, we expect to see voice banking enter the
mainstream as well.

6.2.1.4. Machine Learning and Smart Bots to Improve Customer Service

One of the most exciting online banking trends is the delivery of personalized real-
time customer service via “smart bots.” A smart bot is an artificial intelligence (AI)
system that uses machine learning, predictive analytics, and cognitive-communication
to emulate a real human being.

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Smart bots will allow mobile users to obtain instant customer assistance via their
device. The bot will be able to determine the support request quickly and
instantaneously provide the user with the required assistance.

It is expected that smart bots will eventually be able to provide far better support than
a real human being and help customers avoid wasting time.

6.2.1.5. Big Data Will Improve Fraud Detection

Financial institutions are increasingly using “big data” to analyze consumer and
market trends. Big data refers to large data sets that are analyzed using computers to
reveal patterns, trends, and relationships. It’s one feature that shouldn't be missed in a
banking app.

In the coming years, more financial institutions will be harnessing big data to identify
security threats that might affect mobile and online banking. Several financial
institutions have revealed plans to harness the vast amount of data gathered through
the use of mobile devices to identify fraudulent activity. This will also help businesses
identify risks within their organization and protect customers.

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6.2.1.6. Easier Debt Management
Thanks to easy access to credit and online shopping, it’s become easier to incur
consumer debt in the United States. Unfortunately, it can be tough to successfully pay
back debt, particularly if it’s credit card debt. If you’re struggling to manage your
debt, this next mobile trend in banking will provide some much-needed relief.

There have been several sophisticated mobile apps like Debt Tracker Pro and Debt
Eliminator released in the past few years, which are designed to help consumers deal
with debt. They provide useful spending breakdowns and can help you understand the
best way to pay back your debts.There are also apps which round-up the cost of your
purchases and help you pay back at the end of the month (an effortless way to put
aside some money for debt repayments).

So, we can expect these apps to become more powerful in the coming years.

6.2.1.7 Future of Mobile Banking

For many people, the concept of mobile banking might sound new, but with the
introduction of smartphones, the adoption rate is on a roll. Also, with the launch of
advanced communication infrastructure and 5G services, people are bound to embrace
mobile banking technology more rapidly.The other notable banking trends in line are
wear ables for retail banking and machine learnings . All these trends are aimed at

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enhancing the user experience and give added freedom to the users. We hope you
found these mobile banking trends useful. For more articles on managing your
finances, please bookmark our website and follow us on social media.

6.1.3 UPI (Unified Payments Interface)

UPI or Unified Payments Interface has changed the way payments are made. It is a
real-time payment system that enables instant inter-bank transactions with the use of a
mobile platform. In India, this payment system is considered the future of retail
banking. It is one of the fastest and most secure payment gateways that is developed
by National Payments Corporation of India and regulated by the Reserve Bank of
India. The year 2016 saw the launch of this revolutionary transactions system. This
system makes funds transfer available 24 hours, 365 days unlike other internet
banking systems. There are approximately 39 apps and more than 50 banks
supporting the transaction system. In the post-demonetization India, this system
played a significant role. In the future, with the help of UPI, banking is expected to
become more “open.”

6.1.4. Block Chain

Block chain is the new kid on the block and the latest buzzword. The technology that
works on the principles of computer science, data structures and cryptography and is
the core component of crypto currency, is said to be the future of banking and
financial services globally. Block chain uses technology to create blocks to process,
verify and record transactions, without the ability to modify it.

NITI Aayog is creating IndiaChain, India’s largest blockchain network, which is

expected to revolutionize several industries, reduce the chances of fraud, enhance
transparency, speed up the transaction process, lower human intervention and create
an unhackable database. Several aspects of banking and financial services like
payments, clearance and settlement systems, stock exchanges and share markets, trade
finance, and lending are predicted to be impacted. With its strenuous design,
blockchain technology is a force to be reckoned with.

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6. 1.5. Artificial Intelligence Robots

Several private and nationalized banks in India have started to adopt chatbots
or Artificial intelligence robots for assistance in customer support services. For now,
the use of this technology is at a nascent stage and evolution of these chatbots is not
too far away. Usage of chatbots is among the many emerging trends in the Indian
banking sector that is expected to grow.

More chatbots with the higher level of intelligence are forecasted to be adopted by the
banks and financial institutions for improved customer interaction personalized
solutions. The technology will alleviate the chances of human error and create
accurate solutions for the customers. Also, it can recognize fraudulent behavior,
collate surveys and feedback and assist in financial decisions.

6.1.6. The rise of Fintech Companies

Previously, banks considered Fintech companies a disrupting force. However, with

the changing trends in the financial services sector in India, fintech companies have
become an important part of the sector. The industry has emerged as a significant part
of the ecosystem. With the use of financial technology, these companies aim to
surpass the traditional methods of finance. In the past few decades, massive
investment has been made in these companies and it has emerged into a multi-billion-
dollar industry globally.

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Fintech companies and fintech apps have changed the way financial solutions are
provided to the customers. Besides easy access to financial services, fintech
companies have led to a massive improvement in services, customer experience, and
reduced the price paid. In India, the dynamic transformation has been brought upon
by several important elements like fintech startups, established financial institutions,
initiatives like “Start-Up India” by Government of India, incubators, investors, and
accelerators. According to a report by National Association of Software and Services
Companies (NASSCOM), the fintech services market is expected to grow by 1.7
times into an $8 billion market by 2020.

6.1.7. Digital-Only Banks

It is a recent trend in the Indian financial system and cannot be ignored. With the
entire banking and financial services industry jumping to digital channels, digital-only

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banks have emerged to create paperless and branchless banking systems. This is a
new breed of banking institutions that are overtaking the traditional models rapidly.
These banks provide banking facilities only through various IT platforms that can be
accessed on mobile, computers, and tablets. It provides most of the basic services in
the most simplified manner and gives access to real-time data. The growing
popularity of these banks is said to be a real threat to traditional banks.
ICICI Pockets is India’s first digital-only bank. These banks are attractive to the
customers because of their cost-effective operating models. At the same time, though
virtually, they provide high-speed banking services at very low transaction fees. In
today’s fast lane life, these banks suit the customer needs because they alleviate the
need of visiting the bank and standing in a queue.

6.1.8. Cloud Banking

Cloud technology has taken the world by storm. It seems the technology will soon
find its way in the banking and financial services sector in India. Cloud computing
will improve and organize banking and financial activities. Use of cloud-based
technology means improved flexibility and scalability, increased efficiency, easier
integration of newer technologies and applications, faster services and solutions, and
improved data security. In addition, the banks will not have to invest in expensive
hardware and software as updating the information is easier on cloud-based models.

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6.1.9. Biometrics

Essentially for security reasons, a Biometric Authentication system is changing the

national identity policies and the impact is expected to be widespread. Banking and
financial services are just one of the many other industries that will be experiencing
the impact. With a combination of encryption technology and OTPs, biometric
authentication is forecasted to create a highly-secure database protecting it from leaks
and hackers attempts. Financial services in India are exploring the potential of this
powerful technology to ensure sophisticated security to customers’ account and
capital.

6.1.10. Wearables

With smart watch technology, the banking and financial services technology is aiming
to create wearables for retail banking customers and provide more control and easy
access to the data. Wearables have changed the way we perform daily activities.
Therefore, this technology is anticipated to be the future retail banking trend by
providing major banking services with just a click on a user-friendly interface on their
wearable device.

These are some of the recent trends in the banking and financial sector of India and all
these new technologies are predicted to reshape the industry of business and money.
The future is going to bring upon a revolution of sorts with historical changes in

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traditional models. The massive shift in the landscape has few challenges.
Nonetheless, the customers are open to banking innovations and the government is
showing great support with schemes like “Jan Dhan Yojana,” which aims at proving a
bank account to every citizen. Meanwhile, the competition from the foreign and
private sector banks have strained the government regulators, nationalized banks and
financial institutions to adopt new technology in order to stay relevant in the race.

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 CHAPTER-7

THE CURRENT CRISES IN INDIAND BANKING INDUSTRY

Banking headlines over the last few months have been dominated by a decline in
specific bank share prices that have highlighted both the broader credit issues in the
economy and the lack of speed in recognition of Non-Performing Assets (NPAs).
However, the problems around the Punjab & Maharashtra Co-operative Bank Limited
(PMC) came as a stark reminder that the banking system clean up in India still has
significant work to be done not just in terms of credit quality selection but also
structural corporate governance issues that form the fundamental pillar of the
economic growth agenda.

The four primary issues that the recent news around Indian banks bring to the fore are

i) Poor decision making due to a lack of capacity to judge project quality

ii) A structural asset-liability mismatch for the banks due to longer-dated assets and
short-dated liabilities

iii) A delay in recognising NPAs on the books

iv) Outright fraud and absence of fundamental corporate governance standards. While
the first two factors have received significant coverage, the last two factors probably
deserve even greater attention going forward given the grave issues that have once
again reared their ugly head over the previous few months.

An alternative way to view the issues above is as the building blocks on which any
credit framework is built. Solutions that address the fourth point mentioned are the
basic premise of a robust and functional credit mechanism. Solutions for the third
point build on those for the fourth, and so on. Essentially, the banking system
solutions need to build on one over the other. Otherwise, solutions that provide higher
capacity for lending institutions to judge project quality will be rendered useless
without basic corporate governance standards.

It is also vital to once again emphasise that the solutions for all four problems
mentioned above are distinct. While the first two revolve primarily around the skill

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and capacity of the lender to assess sectoral, company and project risk keeping in
mind the micro-structure of their balance sheets, the last two are to a large extent
related to the level of corporate governance. The solutions needed to tide over the four
main banking issues are therefore distinct, and yet equally necessary to and yet
equally necessary to resolve the problems at hand.
Going forward, both the central bank and the banking regulators must further
emphasise solutions that allow for better, more precise and more consistent
classification of NPAs on banking books, while at the same time ensuring that the
information flows through the system. At its very core, the issues revolving around
information asymmetry need to be urgently addressed. Timely recognition of NPAs is
essential not just for the asset quality reviewal of the bank in question, but also to
ensure that the NPA classification information regarding the credit instrument or
company in question is passed onto the market for better decision.

7.1 Offer ESOPs to public sector bank staff, suggests Economic Survey

The Economic Survey released today suggests providing ESOPs to public sector bank
employees to enable them to become owners in the banks. Employee stock ownership
plans (ESOPs) will incentivise the bank employees to embrace risk-taking and
innovation continuall survey.

The survey suggests that a portion of the government stakes can be transferred to
employees exhibiting good performance across all levels of the organisation through
ESOPs. Part-ownership of PSBs by employees who own shares are incentivized to

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increase market value of equity, since their direct compensation depends on share
values, says the Survey.

The Survey states: "Employees paid largely in salaries-as PSBs employees currently
are-have claims that resemble debt contracts in the sense that they are fixed pay-outs
made by banks. Employees paid through such fixed compensation contracts rely on
implicit promise by the state to make good on their salaries (and post-retirement
pensions) in the event of bank distress. Given the current flat compensation contracts
of employees and the pressures from ex-post monitoring by the vigilance agencies, it
is hardly surprising that bank employees of state-owned banks prefer safety and
conservatism over risk-taking and innovation."

The Survey explains that there are several benefits of giving out ESOPs to the PSB
employees. These benefits include the possible change of the mind-set that of an
employee to that of an owner. Employees can constitute one of the blocks of new
owners of PSBs through an ESOP that is conditioned on employee performance.

7.2 Bank deposit cover may be doubled to Rs 5 lakh

The government is discussing a proposal to double the insurance cover on bank

deposits to Rs 2 lakh and an announcement to this effect may be made in the February
1 budget, said several people with knowledge of the matter.

The move comes after the government and the Reserve Bank of India (RBI) faced flak
over their handling of the closure of Punjab & Maharashtra Co-operative Bank
(PMC), which downed shutters in September last year, leaving thousands of
depositors high and dry.The government is expected to bring about these changes
through an enabling amendment that would increase the deposit cover in the future
without tinkering with the Deposit Insurance & Credit Guarantee Corporation
(DICGC) Act.

“Looking at the aftermath of the PMC Bank crisis, doubling of the deposit cover will
be a much-anticipated breather for bank deposit holders,” said Ashvin Parekh,
proprietor of Ashvin Parekh Advisory Services. “The only challenge to my mind is
who will now bear the added cost of a higher insurance premium? ”

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Safety of bank deposits took centre-stage after the collapse of PMC Bank. Currently,
the DICGC Act, 1961, provides deposit insurance of up to RS 5 Lakh and the rest of
the amount is forfeited in the event of a bank failure. This compensation was last
fixed more than 25 year.

The government is also considering proposals on allowing emergency access to

deposit insurance when a bank fails, inflation indexation of the insurance cover and
risk-based pricing of the insurance premium depending on the health of the financial
institution.“The biggest bone of contention is higher premium payout if the deposit
cover is raised. I think banks will have to bear the burden of that, but at least they
should consider forcing less robust institutions to pay a higher premium payout if the
deposit cover is raised. I think banks will have to bear the burden of that, but at least
they should consider forcing less robust institutions to pay a higher premium cover,”
said a senior banking official.

Many Requests Made to Raise Limit

RBI data showed more than 78% of PMC Bank depositors had deposits below Rs
50,000. As per an SBI analysis, 61% of the total deposit accounts in India are under
Rs 1lakh, around 70% are under Rs 2 lakh and 98.2% are under Rs 15 lakh. There
have been several calls to raise the deposit cover. The issue had come up at the time
of the Financial Resolution and Deposit Insurance Bill, which the previous
government introduced in 2017 and then withdrew the next year. Data on Cross
Country Deposit Insurance Coverage limit shows that deposit insurance coverage in

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India is one of the lowest at $1,508 as against $250,000 in the US and $111,143 in the
UK.

7.3India has to clean up its finance sector ‘fast’ to see stronger growth

 India needs to clean up its troubled financial sector fast in order to get
economic growth back on track, according to Raghuram Rajan, former
governor of the Reserve Bank of India.

 Rajan served as RBI governor from Sept. 2013 to Sept. 2016 and during
his tenure, the central bank told troubled Indian lenders to clean up their
books, which included identifying non-performing assets.

 He added that if the economy doesn’t grow at a pace above 5%, it will be
hard to create enough jobs to keep people employed.

 Under Rajan’s successor Urjit Patel, the RBI tightened regulation last
February, which stopped banks from using loan restructuring schemes to delay
recognizing bad debt.
 However, those guidelines were scrapped by India’s top court in April.
 India’s non-banking financial sector is also facing a crisis as many non-bank
lenders struggle with bad assets and corporate governance issues, according to
reports.

‘Worst phase’
 Earlier this month, Indian Finance Minister Nirmala Sitharaman said public
sector banks had their “worst phase” during Rajan’s tenure at the central bank,
local media reported.
 When asked about those comments, Rajan pointed out that most of his term as
RBI governor was served under Indian Prime Minister Narendra Modi’s
government, which won power in 2014.
 India’s banking troubles began in 2007 and 2008, before the global financial
crisis, when a lot of investments were made, Rajan explained. Those
investments created a lot of bad loans that needed to be cleaned up in order to
spur lending. Banks are the biggest source of funding for Indian companies.
 “There are people who say, why did we clean up? We could have gone on,”
the former RBI governor said. “We simply couldn’t have gone on because

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 banks were stopping lending because their balance sheets were getting clogged
with non-performing assets.”
 “So, you had to force the recognition and the recapitalization to set them back
on track — that is a half-finished job right now. It has to be finished,” Rajan
added. “We need to clean up, but also clean up the new risks that have
emerged, for example, in the non-bank financial system. If we don’t do that,
the financial system is going to be an overhang over the economy.”

 More reforms

 India is undergoing a major slowdown — growth hit a six-year low in the

April-to-June quarter, where the economy grew 5% from a year ago. Even
then, the way India calculates its GDP has been called into question by some.
 Rajan said that if the economy doesn’t grow at a pace above 5%, it will be
hard to create enough jobs to keep people employed. “We’re adding one
million people to the workforce every month, so, in that sense, I think India
needs far stronger growth,” he said.
 But growing the economy at a faster clip also requires “another generation of
reforms,” he said.

7.4 NBFC crisis: Indian banks could face a $50-billion capital shortfall

Global rating agency Fitch Ratings on Tuesday said Indian banks might face a capital
shortfall of about $50 billion in the event of a systemic crisis in the non-bank financial
company (NBFC) sector.

A stress test conducted on Indian banking entities showed that credit profiles of state
banks would come under significant pressure. The weakest, including those with
Viability Ratings in the 'b' range, would face heightened solvency risks without
capital injections from the government, the rating agency said.

The sector is already $7 billion short of the capital required to meet a 10 per cent
weighted-average common equity Tier-I (CET1) ratio — the level that would give it
an adequate buffer above regulatory minimums. The gap is estimated to rise to about
$50 billion by FY21 under the stress scenario. Banks would also be $10 billion short

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of the capital required to meet the regulatory minimum of 8 per cent set to apply from
the end of March 2020.

The stress test conducted on banks examined the potential impact on banks of
liquidity pressures in the NBFC sector developing into widespread failures. The rating
agency assumed that 30 per cent of banks' NBFC exposure becomes non-performing.
This is close to a worst-case scenario but the figure also reflects the proportion of the
sector that is characterised by riskier business and financial profiles.

The agency said it also pictured a scenario where 30 per cent of banks' real estate
exposure would become non-performing amid tight liquidity and weak sales. The
property development sector is particularly reliant on NBFC financing.

These defaults would reverse the recent progress that banks have made in reducing
their non-performing loan (NPL) ratios. The banking system's gross NPL ratio would
rise to 11.6 per cent by FY21 from 9.3 per cent at FY19, compared with the agency’s
baseline expectation of a decline to 8.2 per cent. Increased credit costs and a weaker
economic environment would result in significant losses over the next two years, it
said.

Fitch expects the capital shortfall at state banks to be larger; private banks would
remain generally above the minimum. Aside from the weaker state-owned banks
facing heightened solvency risks in the absence of additional fresh equity, those in the
'bb' category could breach the minimum regulatory additional Tier-I (AT1) threshold
of 5.5 per cent CET1, triggering compulsory AT1 write-downs.

7.5 India’s Shadow Banking Crisis

A health check on India’s shadow banks shows the crisis in the industry is far from
over.Indicators from liquidity to share performance show weakness, according to data
compiled by Bloomberg as of Sept. 30. In recent weeks, another financier defaulted, it
got harder for investors to cut losses in the sector’s debt and a mortgage lender altered
financing plans due to waning appetite for shadow bank bonds.

Banking system liquidity stayed lower last month, the premium that investors demand
to hold shadow lender bonds over sovereign notes remained elevated and a custom

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gauge of shares of 20 financial firms and other companies impacted by the crisis was
stagnant. One silver lining: difficulty accessing the bond market has prompted total
outstanding debt at 50 such borrowers to hold at lower levels than earlier this year.

“The non-bank crisis is having a contagious effect, and if not tackled in time, the
situation looks scary,” said Ajay Manglunia, managing director and head of
institutional fixed income at JM Financial Products Ltd. “That’s because these
financiers have a reach across the smallest to the largest borrower in the country.”

A resolution to the crisis that’s over a year old is imperative to revive India’s flagging
economy. Non-bank firms fund everyone from poor entrepreneurs to business titans
looking to roll over debt. Altico Capital India Ltd., a realty financier, last month
became the latest to default, while Punjab & Maharashtra Co-operative Bank
Ltd. duped regulators and extended outsize loans to an insolvent developer.

Troubles began last year when major shadow bank IL&FS Group unexpectedly
defaulted, prompting broader shock that made it hard for many companies to
refinance debt. The fallout persists: this month the Reserve Bank of India slashed its
economic growth projection to 6.1% from 6.9%, the biggest cut in at least five years.

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 CHAPTER-8

THE CURRENT IMPLICATION OF RBI RECENT MEASURES

8.1 Central bank approve reduced fees of UPI RUPAY payment

 Central Banks in India approve that they will not charge a part of the fees on
Unified Payments Interface UPI and RuPay card transactions as long as the
merchant discount rate MDR remains zero following the government
announcement.

29 January 2020 Current Affairs: Central Banks in India approve that they will not
charge a part of the fees on Unified Payments Interface UPI and RuPay card
transactions as long as the merchant discount rate MDR remains zero following the
government announcement. The move was discussed and approved in the NPCI
steering committee meeting.

NPCI to remove multiple charges like interchange fees, payments service provider
(PSP) fee, and switching fees.A bank, which used to get MDR from merchants for
facilitating the payments, would pay interchange fees to the issuer bank and then pay
a switching fee to the network NPCI along with a price to PSPs like PhonePe or
Google-Pay. Most banks have stopped ATM expansion and might also allocate less
money towards POS (point-of-sale) expansion. The MDR becoming zero, it was
inevitable that the interchange fee also becomes zero, industry experts.

 Unified Payments Interface

It is an instant real-time payment system developed by the National Payments
Corporation of India facilitating inter-bank transactions.

8.2 RBI increased VEE limit for FPI TO RS. 1,50,000 crore

 RBI has increased the investment limit under VRR to Rs.1,50,000 crore from
the Rs.75,000 crore, with a minimum retention period of three years.

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The Reserve Bank of India (RBI) reopened the allotment of the investment limit
under the revised Voluntary Retention Route (VRR) for debt investments
by foreign portfolio investors (FPIs) from 24 January. RBI has increased the
investment limit under VRR to Rs.1,50,000 crore from the Rs.75,000 crore, with a
minimum retention period of three years. The move aims to attract more foreign funds
into a security.

History:
In March 2019, the RBI introduced a separate channel named 'Voluntary Retention
Route'. The channel was aimed to enable FPIs to invest in debt markets in India.
Under the move, investments through VRR are free of the macro-prudential, if the
FPIs voluntarily commit to retain a required minimum percentage of their investments
in India for a specified period. The RBI has already invested Rs.54,300 crore under
the previous scheme.

8.3 RBI create digital payment index

The Reserve Bank of India (RBI) is to create a digital payments index (DPI) by July
2020. This index will indicate the level of digitalization prevailing in the
country. Digital Payments Index (DPI):

 DPI will help the regulator and government to understand the adoption of
digital payments in the country. ♦ The DPI by RBI will be based on multiple
parameters.

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  It will reflect the penetration and deepening of various digital payment
modes

 It is expected that DPI's benchmark will reflect the progress of digitization in

the country.

 The government and central bank have been working on enabling the
adoption of cashless payment modes that include, digital mobile wallets,
debit and credit cards, internet banking and the Unified Payments Interface
(UPI) system.

 DPI data will have a classification of urban, semi-urban and rural

geographies to analyze the kind of digital payments that are gaining
acceptance.

8.4 Cabinet approved amendments to bring cooperative banks under RBI

The Union Cabinet approved the proposal to amend the Banking Regulation Act. The
move comes after the Punjab and Maharashtra Co-operative (PMC) Bank
crisis. Amendment to Banking Regulation Act:

 The amendment will bring the cooperative banks under the regulatory
mechanism of the Reserve Bank of India (RBI).

 It will ensure greater accountability and transparency in the functioning of

cooperative banks.

 The cooperative banks need to fulfill regulatory requirements set for

scheduled commercial banks.

 The amendment will give RBI the power to take control of weak co-operative
banks.

 As per the proposed amendment, the cooperative bank should take RBI
approval for the appointment of the CEO and do audits as per RBI
guidelines. Background: In September 2019, RBI has imposed a ban on the

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 operation of PMC bank. The PMC bank was not allowed to issue loans or
open fixed deposit accounts after a multi-crore scam. The withdrawal limit
was set to Rs.50,000.

8.5 RBI directs issuers to provide a facility to switch on, off cards

The Reserve Bank of India (RBI) has directed banks and other card-issuing
companies to provide a facility to customers to switch on and off their debit or credit
cards. The move by RBI aims to enhance the security of digital transactions. It
assumes significance amid rising instances of cyber fraud. New instructions:

 RBI observed the volume and value of transactions made through cards have
increased manifold.

 It stated that all cards at the time of issue or re-issue, physical and virtual,
should be enabled for use only at contact-based points of usage, ATMs, and
Point-of-Sale (PoS) devices, within India.

 It also suggested the card issuers to enable set or modify transaction limits,
within the overall card limit, if any, set by the issuer, for all types of
transactions including domestic and international at PoS/ATMs/online
transactions/contactless transactions. It should be provided on a 24x7 basis
through multiple channels.

 The channels must include mobile applications, ATMs, internet banking, and
interactive voice response.

 RBI instructed the issuers to decide, based on their risk perception, whether
to disable the card not present, domestic and international, transactions, card-
present in international transactions, and contactless transaction rights.

 The existing cards that were never used for online, international or contactless
transactions will be mandatorily disabled for this purpose.

 The new instructions by RBI are not mandatory for prepaid gift cards, and
those used at mass transit systems.

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8.6 RBI to impose fines on banks with poor progress

The Reserve Bank of India (RBI) is to impose heavy penalties on banks, and stipulate
higher provisioning for stressed loans. RBI announced it earlier on 7 June 2019. For
the first time, RBI has said that the chief executive officers (CEOs) and senior
management of banks can also be held liable for lack of progress. The fresh set of
guidelines will be in the public domain by the end of March. New guidelines:

 The new guidelines are expected to usher in a stricter compliance regime.

 The RBI indicated that banks can start the resolution of stressed loans less
than Rs.1,500 crore without waiting for a formal notification.

 It also mentioned that the 7 June 2019 circular was only applicable for
stressed accounts in excess Rs.2,000 crore.

 RBI review of 7 June circular notes Inter-creditor Agreement (ICA) (of 13

banks) yet to be signed for exposures amounting to Rs.3,610 crore.

 Embedded frauds will be monitored as it might hold up stressed loan

resolution

 It highlighted the number of frauds of Rs.50 crore and above in H1 FY20

rose to 398 involving Rs.1.056 trillion up from 322 cases and Rs.61,759
crore in FY19 Note: Outlier frauds are defined as those in excess of Rs.1,000
crore. Such fraud cases have increased up to 21 cases and Rs.44,951 crore up
from 4 cases and Rs.6,505 crore in FY19.

8.7 RBI launched the Aadhaar-based Video Customer Identification Process

The Reserve Bank of India (RBI) launched the Aadhaar-based Video Customer
Identification Process (V-CIP) on 9 January 2020. The aim of the move is to allow
banks and other lenders to remotely complete Know Your Customer (KYC) of
customers on videos.

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V-CIP:
♦ RBI has allowed consent-based video-based KYC as an option to establish a
customer's identity.
♦ It is expected that it will make the process easier for banks and other regulated
entities to adhere to the RBI's KYC norms.
♦ It moves with a view to leveraging the digital channels for the Customer
Identification Process (CIP) by Regulated Entities (REs).
♦ RES has been encouraged to take the assistance of the latest available technology
like Artificial Intelligence (AI) and face matching technologies, to ensure the integrity
of the process and the information furnished by the customer.
♦ This consent-based method will be an alternate method of establishing the
customer's identity, for customer onboarding.
♦ This approval by RBI was a long-standing industry demand for several years as
many banks, especially digital NBFCs and fin-tech startups, as it will reduce the costs
of physically reaching out to customers in remote locations where they did not
otherwise have branches.

8.8 RBI goes beyond rates to make loans cheaper

 Cash reserve ratio norms eased for new retail loans to improve credit flow
 MPC projected economic growth for FY21 at 6%— in the range of 5.5-6% in the
first half and 6.2% in the third quarter.
The Reserve Bank of India (RBI) stepped in to do the heavy lifting to revive the
economy, after the Union budget appeared to have few measures to spur credit growth
and boost demand.

On Thursday, the central bank introduced a direct incentive framework to boost credit
growth, even as the six-member monetary policy committee (MPC) kept benchmark
rates unchanged because of uncertainty in the inflation outlook.

“While this (MPC) decision may be on expected lines and widely discounted, it is
important not to discount the Reserve Bank of India," governor Shaktikanta Das said.
“It has to be kept in mind that the central bank has several instruments at its command
that it can deploy to address the challenges the Indian economy faces."

To improve credit flow, RBI temporarily removed the cash reserve ratio (CRR)—
which requires banks to set aside 4% of their deposits—for every new retail loan

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made to finance automobiles, homes, and to small businesses. This move, while
making it attractive for banks to lend to retail and small businesses, essentially
translates into a short-term cut in cash reserve ratio. This scheme will be available for
new loans given till 31 July.

In addition, the central bank will now conduct one-year and three-year term repo
auctions to inject up to ₹1 trillion into the banking system, giving lenders the
opportunity to raise money at current rates.When viewed in the context of elevated
headline inflationary pressures, this is another incentive for banks to lock medium-
term funding at current low rates.“This should encourage banks to undertake maturity
transformation smoothly and seamlessly so as to augment credit flows to productive
sectors," the statement read.The central bank has introduced these growth-inducing
measures after MPC, in a unanimous decision, left policy rates unchanged for the
second straight time.“This was more of a credit policy than monetary policy," said
Gaurav Kapoor, chief economist at IndusInd Bank. “Monetary policy’s effectiveness
in driving credit and overall growth is limited, keeping in mind the inflation is high. It
needed some direct measures to ensure credit reaches to the sectors where there is
appetite and requirement."

The repo rate, the rate at which banks borrow from RBI, remained unchanged at
5.15%. This is in line with the results of a Mint survey, which showed that bankers
and economists expect no change in policy. RBI had cut policy rates by 135 basis
points in 2019.

“The MPC recognizes that there is policy space available for future action. The path
of inflation is, however, elevated and on a rising trajectory through Q4:2019-20. The
outlook for inflation is highly uncertain at this juncture. On the other hand, economic
activity remains subdued and the few indicators that have moved up recently are yet
to gain traction in a more broad-based manner," said the policy statement.

Given the uncertainty, MPC pegged consumer price inflation for the first half of FY21
at 5-5.4% as compared to 3.8-4% earlier. For the third quarter of FY21, the forecast
stands at 3.2% with risks broadly balanced. According to the committee, the recent
increase in prices of milk, pulses and crude oil are likely to weigh on inflation.

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MPC also noted that the inflation trajectory will be determined by several factors,
including the pass-through of telecom charges, increase in prices of drugs and
pharmaceuticals and the impact of new emission norms.
“The MPC anticipates that the combination of these factors may keep headline
inflation elevated in the short-run, at least through H1:2020-21. Overall, the inflation
outlook remains highly uncertain. Accordingly, the MPC will remain vigilant about
the potential generalisation of inflationary pressures as several of the underlying
factors cited earlier appear to be operating in concert," read the statement.

MPC projected economic growth for fiscal 2021 at 6%—in the range of 5.5-6% in the
first half and 6.2% in the third quarter. This is in line with its past GDP growth
projections and that of the Economic Survey, which has pegged growth at 6-6.5%.
The committee noted that the economy continues to be weak and the output gap
remains negative.

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 CHAPTER -9

CONCLUSION, FINDING & SUGGESTION

Finance and banking is the life blood of trade, commerce and industry. Now-days,
banking sector acts as the backbone of modern business. Development of any country
mainly depends upon the banking system. A bank is a financial institution which deals
with deposits and advances and other related services. It receives money from those
who want to save in the form of deposits and it lends money to those who need it. The
banking is one of the most essential and important parts of the human life. In current
faster lifestyle peoples may not do proper transitions without developing the proper
bank network. The banking System in India is dominated by nationalized banks. The
performance of the banking sector is more closely linked to the economy than perhaps
that of any other sector. The growth of the Indian economy is estimated to have
slowed down significantly. The economic slowdown and global developments have
affected the banking sectors' performance in India in FY12 resulting in moderate
business growth. It has forced banks to consolidate their operations, re-adjust their
focus and strive to strengthen their balance sheets. Here researcher's objective is to
study the Indian banking sector and performance of Indian banks.

Banking sector in Indian has given a positive and encouraging responses to the
financial sector reforms. Entry of new private banks and shaken up Public sector
banks to competition. The financial sector reforms have brought India financial
system closer to global standards. With the India increasingly getting integrated with
the global financial world, the Indian banking sector has a still long way to go to
catch up with their counter parts.

Indian banking industry is one of the most important pillar in the Indian economy,
banking sector is a backbone of economy of any country. Development of banking
sector always leads development of country we can judge if this sector grow
positively it means economy growing. That why everyone say the Indian banking
sector, being the barometer of the economy, is reflective of the macro-economic
variables. While the Indian economy is yet to catch strength, the Indian banking
system continues to deal with improvement in asset quality, execution of prudent risk
management practices and capital adequacy, improving customer services experience

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and expansion of banking activities in rural area. In this paper an attempt has been
made to study changing scenario of Indian banking sector and also study opportunities
and challenges ahead of Indian banking sector.

India’s banking sector now in new era, there so many challenges and opportunities we
already discussed in this paper. In coming year Indian banking sector will is real
backbone of economy there are huge scope for banker to expand his operation and
earn more profit with help of new technology like mobile banking, cloud computing,
internet bank etc. In my point of view banker should give more focus on customer
relationship management than new technology and also train and recruit good
employees for the organization so they can handled customer properly. Indian
banking sector will be the world biggest market in the world.

FINDING:-

Indian Banking Industry: Challenges And Opportunities

The banking industry in India has a huge canvas of history, which covers the
traditional banking practices from the time of Britishers to the reforms period,
nationalization to privatization of banks and now increasing numbers of foreign banks
in India. Therefore, Banking in India has been through a long journey. Banking
industry in India has also achieved a new height with the changing times. The use of
technology has brought a revolution in the working style of the banks. Nevertheless,
the fundamental aspects of banking i.e. trust and the confidence of the people on the
institution remain the same. The majority of the banks are still successful in keeping
with the confidence of the shareholders as well as other stakeholders. However, with
the changing dynamics of banking business brings new kind of risk exposure. In this
paper an attempt has been made to identify the general sentiments, challenges and
opportunities for the Indian Banking Industry. This article is divided in three parts.
First part includes the introduction and general scenario of Indian banking industry.
The second part discusses the various challenges and opportunities faced by Indian
banking industry. Third part concludes that urgent emphasis is required on the Indian
banking product and marketing strategies in order to get sustainable competitive edge
over the intense competition from national and global banks. This article is a small

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seed to existing branch of knowledge in banking industry and is useful for bankers,
strategist, policy makers and researchers.

To an activist like me, the greatest loss is the fall in the quality of banking services to
the smaller customers, more particularly the elders, disabled, home maker-women,
widows and pensioners

Indians, traditionally have inherited a conservative philosophy that is at odds with that
propounded by global conglomerates fired by the self-serving urge of super-profits as
defining their reasons for existence untouched by the real economic niceties. Basic
regulation is a must to ensure that the system doesn’t collapse—there is fiduciary
responsibility.

SUGGESTION:-

The study suggests that there are mixed results to conclude overall performance of
Indian banks. However, we can see productivity of banks improving significantly
than that of profitability. Since there are not enough studies to come across in this area
of study, we take inferences from studies done on reforms. They suggest that the entry
of new private sector banks (which are outcome of policy) have made industry more
competitive improving the productivity of staff i.e. Business per Employee (BPE) and
Profit per Employee (PPE). New private sector banks threw competition to existing
old private sector banks and public sector banks in the industry which made them to
change their outlook to become more customers centric. More products came in to
suit needs of different customers; foreign capital brought new banking technology
such as ATM, Debit and Credit Cards etc. which also brought in more customers in
the banking network making financial inclusion possible with good speed for a
country like India. All this has resulted in improved overall performance of Banks. It
is to be noted that there is hardly any study found with respect to performance of
bank.

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 CHAPTER-10

BIBLIOGRAPHY

 Indian Banking 2019-2020 Report.

 Opportunities & Challenges of Indian Financial Markets Report By PwC India
 Reimagining Banking in India Report by RBI.
 Current reports and current journals, newspaper articles.

WEBLIOGRAPHY

 https://www.rbi.org.in/
 Wikipedia.com

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 11.ANNEXURES

1. Email Id

……………………………

2. Name

……………………………

3. Age

a) 18-25
b) 25-30
c) 30-35
d) 35-40
e) 40-45

4. Gender

a) Male
b) Female

5. Occupation

a) Student
b) Business
c) Housewife
d) Service

6. Do You Have Bank Account?

a) Yes
b) No

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7. Do You Trust The Security Of Indian Banking System?

a) Yes
b) No

8. Which Category Of The Bank Do You Consider As Most Technologically

Advance?

a) Private Bank
b) Public Bank

9. Are You Aware About Indian Banking Mergers?

a) Yes
b) No

10. Does The Merger Of Indian Bank Could Effects the Indian Banking System?

a) Yes
b) No

11. The Current RBI Monetary Rate Policy Should Affect the Current Banking
Scenario

a) Yes
b) No

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