CHAPTER-1

INTRODUCTION
 INTRODUCTION

INTRODUCTION OF BANKING IN INDIA

What is a Bank?

A bank is a financial institution that is authorized to receive deposits and offer loans to their customers including
individuals, corporates, and groups. Additionally, they provide financial services to regular public such as loans, wealth
management, investment services, currency exchange, safe deposit boxes and more.

Banks are important to a country’s growth and development and essential to its financial stability. This is why most of the
banks are highly regulated by a governmental authority of the country.

In the modern era, there are different types of banks that are essential to the smooth functioning of the economy. Let’s
learn more about them in detail.

1. Commercial Banks:

They are also known as retail banks. These types of banks are extremely important as they manage money for individuals
and small businesses. Apart from withdrawal and deposits, these banks are also allowed to provide short term loans to
individuals and small enterprises. Customers can perform most of the fundamental banking activities in these banks. The
top commercial and retail banks of India are State Bank of India, ICICI Bank, HDFC Bank, and Axis Bank.

2. Investment Banks:

These banks are essential to the functioning of big corporations, big enterprises, government, and other entities. These
banks act as a financial intermediary and provide a variety of services for the large industries. Some of the most reliable
investment banks are JP Morgan, Citigroup, Bank of America, Deutsche Bank, and Barclays.

3. Postal Savings Banks:

This is a reference to banks that are associated with national postal system to provide the citizens with basic banking
activities.
 4. Regional Rural Banks:

Also referred to as RRBs are banks that are created to serve rural and agricultural sectors with basic banking facilities.

5. Co-operative Banks:

Co-operative Banks in India are registered under Co-operative Societies Act, 1912. These banks operate at the urban and
rural level both. They were created to serve entrepreneurs, small businesses, industries, and self-employed personnel, and
more.

6. Central Bank:

Central banks are mostly apex banks in the banking industry. These banks provide banking services to the government. It
creates financial stability in the country, controls irregularity, designs monetary policies, and it is responsible for the
money supply in the country. Reserve Bank of India is a classic example of central banks.

Apart from these types of banks, other classifications in India include development banks, land-development banks, and
foreign banks. In addition, in the light of technological development, there is a new inclusion in the list, and it is online
banks or digital-only banks. Even though most of the banks have their own digital platform, a new breed of banks is
emerging that can only be accessed through the internet. These banks do not have brick-and-mortar branches and provide
customers the convenience of performing banking activities from any location.

History of Banking

The earliest example of banking activities has been recorded at various times in ancient history. During 2000 BCE, in
Babylonia, temples were the center of economic activity as trade was limited to the internal borders. Both palaces and
temples issued loans and wealth to the people.

Ancient Greece was more sophisticated in their banking system as the lenders based in temples not only provided loans
but also deposited and offered change of money. Merchants used goldsmiths vault to store their wealth and gold in
exchange for a fee. With passing time, goldsmiths started lending money to people. The first bank to open in the world is
Banca Monte dei Paschi di Siena, established by Giovanni Medici in 1397, Italy. This bank is headquartered at Siena,
Italy and continues to operate. Meanwhile, modern banking practices emerged in the 17th and 18th centuries.

When it comes to ancient India, there is proof of banking activities in the form of the lending system during the Vedic
period. However, modern banking in India emerged in the last decade of the 18th century when the very first bank of
India originated. Bank of Hindustan was established in the year 1770 and dissolved in 1829. General Bank of India was
the second bank to establish in India in the year 1786 and liquidated in 1791. It was Bank of Calcutta that was incepted in
the year 1806 and grew to become the largest bank of India that still exists in the form of State Bank of India.

This was one of the three banks founded by presidency government of India. The other two were Bank of Bombay and
Bank of Madras. All three were merged into Imperial Bank of India in 1921. Years after independence, it became State
Bank of India. As for Reserve Bank of India, it was established and registered under the Reserve Bank of India Act, 1934,
in 1935. It was in 1949 when Banking Regulation Act was enacted, RBI was made the apex bank that could control,
regulate and, monitor the banks of India.

Under the nationalization phase, the Indian banking industry was recognized as an important instrument of development
of economy, especially after the independence. During the first phase of nationalization, the Government of India
nationalized 14 banks in 1969. This includes Allahabad Bank, Bank of Baroda, Bank of India, Bank of Maharashtra,
Central Bank of India, Canara Bank, Dena Bank, Indian Bank, Indian Overseas Bank, Punjab National Bank, Syndicate
Bank, UCO Bank, Union Bank, and United Bank of India.

n the second wave of nationalization, six more banks were nationalized in the year 1980. These banks were Punjab and
Sind Bank, Vijaya Bank, Oriental Bank of India, Corporate Bank, Andhra Bank, and New Bank of India. Another
landmark movement for the Indian Banking industry was liberalization in the 1990s. During this time, the government
opened the economy for private and foreign banks. These banks were termed as New Generation tech-savvy banks. This
move along with technological development and rapid growth of the Indian economy caused a massive transformational
shift in the banking sector. Banks started adopting technology and opened itself to new opportunities.

In 1984, MICR technology was introduced. In the year 1988, the computerization of banks started. Since then the
industry has experienced massive technological upliftment.  There has been a digital revolution of sorts that has changed
Indian banking system from conventional banking to convenient banking. Over the decades, banks have developed
enormously with the help of information technology and artificial intelligence.
Recently, Indian Government created another milestone in the development of Indian banking industry by launching
online payment systems United Payments Interface (UPI) and Bharat Interface for Money (BHIM) by National Payments
Corporation of India (NPCI). Today, banks in India aim to provide fast, accurate, and quality banking experience to their
customers with the help of internet banking and online banking.

Importance of Banking System

 Before the banking system originated, banking activities were performed by merchants, money
lender, and individuals. This was certainly not the best way to handle currency and people’s
personal wealth. The system lacked regulations and standardization making general public
vulnerable to debauchery and fraud. Therefore, there was an urgent need of organized banking
sector that will enable smooth functioning of the economy and safe way to handle money. 
Additionally, a well-organized banking system provides:

 Money for the economic growth of the country.

 It is the main pillar of the financial sector of the country.

 It offers a safe place to the individuals or group of individuals to deposit their wealth and
keep it secure.

 It offers loans for the personal or developmental purpose to dealers, households, small and
large enterprises.

 It provides government money and power to carry out development work.

 To equally distribute the money to the citizens of the country and prevent the focus of
financial power in the hands of a few.

 It helps in implementing monetary policies.

 It ensures financial stability in the country.

 It provides financial assistance to the industrial sector of the economy.

 It helps in generating employment opportunity.

 In India, it plays a major role in providing assistance to the agricultural sector.

 It ensures balanced economic development of the country.

 It enables capital formation and promotes the habit of saving.

 And provides finance for trade and industries that is essential to our economic
development.
 Major players of Indian banking industry

The Indian banking space is an exciting and dynamic one. Here is a list of the major players of banking companies in the
country going by market capitalization companies.

 HDFC Bank

Going by market capitalization, HDFC Bank is the largest bank in India. Its market cap is pegged at about INR
261,226.94 crore. As of end 2014, the bank boasted of a strong network of 3,659 branches in 2,287 cities. To facilitate
NRI banking, the bank also has overseas branches in Bahrain, Hong Kong, Abu Dhabi, Kenya and Dubai. HDFC Bank
has over 11,633 ATMs and a customer base of over 28 million. It is also ranked 45th among the top 50 banks of the
world. Employing over 69,065 employees, HDFC Bank is one of the strongest contenders in the private banking space.

 State Bank Of India

With a market capitalization of about INR 216,128.73 crore, SBI is the second most-valued bank in India It and is
perhaps the most trusted one, being a state-owned bank. The bank has a strong network of over 13,000 branches spread
across the nation and has about 190 foreign offices in 36 countries. Along with HDFC Bank, SBI also features among the
top 50 global banks (going by market capitalization). It is also one of the largest employers in the country and provides
employment to over 220,000 personnel. SBI manages assets worth about USD 390 billion in all.

 ICICI Bank
ICICI Bank is the third largest entity in the Indian banking space, with a market capitalization of INR 184,547.26 crore.
ICICI Bank has a customer base of over 2.5 million and boasts of an extensive network of 4050 branches across the
country. With 12,475 ATMs and assets worth USD 99 billion, the bank is currently celebrating 60 years of existence.
ICICI was formed as a World Bank initiative in 1955.The bank is headquartered in Vadodara, Gujarat and has an
international presence in 19 countries. The bank‟s employee strength was estimated at over 72,000 last year when it
overtook HDFC Bank in terms of people employed.

 Axis Bank

With a market capitalization of about INR 134,685.68 crore, Axis Bank takes its place at the fourth position among
Indian banks. Founded in 1994 as UTI Bank, Axis Bank now has a network of 2402 domestic branches and 12922 ATMs
spread across the nation. The bank also has seven international offices including the ones in Hong Kong, Singapore,
Colombo, Dubai, Abu Dhabi, and Shanghai. Axis Bank employs over 37,901 employees and is reported to have net
assets worth about USD 53 billion. Apart from retail banking, Axis Bank also operates in NRI Services, Investment
banking and treasury operations and corporate banking.

 Kotak Mahindra Bank

Kotak Mahindra Bank, headed by Mr. Uday S Kotak, and with a market capitalization of INR 109,631.60 crore comes
next. Kotak Mahindra Bank is currently poised for a spectacular growth due to an all-stock merger with ING Vysya
Bank. Kotak Mahindra shall now become the fourth largest private bank in the country in terms of the business done.
The combined banking company will now have a network of 1,214 branches across the country. The bank is likely to
have employee strength of about 30,000 after the merger. The combined market capitalization is estimated to be about
INR 1.25 lakh crore

 Indusind Bank

Founded in 1994, Hinduja Group owned IndusInd Bank has a market capitalization of about INR 50,100.41 crore. The
bank employs over 15,500 employees and has a network of 638 branches and 1238 ATMs across the country. With
international offices in London and Dubai, IndusInd Bank is known for its strong remittances business. The bank has an
exceptionally strong business base in Mumbai, Delhi, and Chennai.

 Bank Of Baroda

Bank of Baroda is another large PSU banking company in India with a market capitalization of about INR 38601.08
crore. The bank is estimated to have over 5193 branches and 38,737 employees. With a significant presence in about 25
countries, the Bank of Baroda balances out NRI services with rural and agricultural finance. The bank is one of the major
banking operators in India‟s rural sectors.

 Yes Bank

Yes Bank was incorporated in the year 2004 by Mr. Rana Kapoor and Mr. Ashok Kapoor, and currently has a market
capitalization of about INR 35,169.20 crore. With a strong network of about over 630 branches in 375 cities, and with
over 1150 ATMs spread across the country, Yes Bank is among the fastest growing banks o India. The bank employs
about 12000 employees and has high ambitions for the years to come.

 PUNJAB NATIONAL BANK

Founded in 1894, Punjab National bank is one of the oldest banks in India. Unlike most Indian banks that have their
headquarters in Mumbai or Gujarat, the Punjab National Bank has its headquarters in Delhi and has a market
capitalization of about INR 30312.73 crore. Like other PSU banks, the bank has a major focus on agricultural and rural
financing but also has a widespread international presence. The bank has 8.9 crore customers, 6081 branches in India and
abroad and a network of 6940 ATMs spread across the country.

 Canara Bank

Canara Bank is another PSU that has made its mark in the Indian banking sector with a market capitalization of about
INR 18630.10 crore. Nationalized in 1976, the bank has a network of about 3600 branches spread across the country.
With 7599 ATMs, the bank is among the first PSUs in the country to emphasize on e-banking and online services. Apart
from commercial banking, Canara Bank has also become a strong provider of corporate banking services in India.
List of Banking Services offered by Banks

Apart from primary jobs accepting deposits and granting loans, there are several other
functions of banks in the modern banking era. Consider a few services offered by the
banks.

1.Payment and Remittance Services:

This is another important function of banks that enables us to transfer funds from one
account to another, from one city to another. Alongside, modern banking systems allow
us to make the direct online money transfer, pay utility bills, collection of cheques, and
more. With the evolution of technology, payments can be made and collected from any
part of the world.

2. Overdraft:

Overdraft services allow account holders to withdraw more than what their deposits
allow. Though, interest is charged on the overdrawn amount. This is one of the many
ways banks lend money to their customers.

3. Currency Exchange:

Imagine if there were no banks where you would acquire foreign currency for travel or
trading purposes. The banks provide foreign currency exchange with local currency in
an easy manner.

4. Consultancy:

Modern banks have a holistic approach and they aim to provide all kinds of services to
their customers that involve their financial situation. Modern banks are hiring financial
and legal experts to provide advice and solutions about customers wealth, investment,
and trading.

5. Online Banking:
In the digital world, every bank is striving to make space in online banking world. With
the help of the internet, banks allow their customers to perform banking activities
through their official website. This allows the customer to access their account 24/7
without having to visit a physical branch.

6. Mobile Banking:

Similarly, banks are also providing mobile banking services wherein customers can perform
banking activities through their smartphone apps.

7. Home Banking:

Home banking is another rising trend wherein banking transaction can be made from
home directly. These services require an internet connection or access to online
banking.

8. Credit and Debit Cards:

Most of the banks offer credit and debit cards to their customers that can be used to
purchase products and services, and even borrow or withdraw money. This is one of the
most important steps towards a cashless society.

9. Lockers:

Banks also offer safe deposit to their clients to store their valuables safely, at minimal
fees.

10. Money Transfer:

There are several ways banks offer to transfer money from one part of the world to the
other with the help of demand drafts, money orders, cheques, online banking, and more.

11. Investment Banking:

Many banks now offer financial services to their customers. They help them make the
best of their wealth by offering several investment products.

12.Wealth Management:
Wealth management is one of the many investment services offered by banks. It allows the
customers to plan their finances to grow long-term wealth.

Apart from all this, banks also offer several auxiliary services to the customers such as
solvency certificates, mutual funds, insurance services, gold coins, and more.

13.Loans

Loans are a common banking service offered, and they come in all shapes and sizes.
Some common types of loans that banks provide include:

 Personal loans

 Auto and boat loans

 Home equity lines of credit

 Home loans

 Business loans

SO IN THIS TOPIC WE ARE GOING TO LEARN

MORE ABOUT HOME LOAN

What is a Home Loan?

A home loan is an amount an individual borrows from a financial institution such as a

housing finance company to buy a new or a resale home, construct a home or renovate
or extend an existing one. The money is borrowed at a specific interest rate and repaid
within a particular duration in smaller instalments known as EMIs (Equated monthly
instalments).
What are the types of Housing Loans available in India?

In India, financial institutions offer different types of home loans to suit the specific
needs of customers.

 Home Loans

This is the most common type of home loan. As the name suggests, these loans are
meant for buying a new apartment, row house, or bungalow, from a developer or a
development authority. You can use this type of loan to purchase under-construction or
ready properties.

 Home Construction Loan

You can avail a home construction loan if you already own a plot and require funds for
the construction of the house on that land.

 House Renovation Loan

If you already own a house and want to renovate it, you can apply for a house renovation
loan. You can use a house renovation loan for painting, tiling, roof repairs, etc.

 Home Extension Loan

As your family grows, you may need a bigger house to accommodate all the members
comfortably. A home extension loan could be helpful in such a situation. You can get
this type of loan to fund the cost of adding a new room/floor to your home, extending
the kitchen, building a new bathroom, etc.

 Plot Loan

If you wish to buy a plot with the intention of constructing your own home in the future,
you can avail a plot loan.

 Balance Transfer Loan

Housing Finance Companies (HFCs) offer this unique service that allows you to
transfer your existing home loan from one lender to another. A Balance Transfer is
usually done to get loans at a lower interest rate, flexible repayment terms and some
other benefits.

HISTORY OF HOME LOAN

Banking in India is very old. Nationalised banks are in existence since 1969. However,
Home Loans are a comparatively new product. In the 1970s, there was no concept
of Home Loans in India. HDFC was the only organized player in the Home Loan
market.

The first Home Loan borrower

The credit for availing the first Home Loan goes to one D B Remedios took a Home
Loan of 30,000 from HDFC in 1978 to construct his house in Malad, Mumbai. The total
cost of the house was 70,000. Thus, you can see that Home Loans are just four
decades old.
The Home Loan scenario

In the past, the mentality of the people was to save and purchase. People used to dip
into their Provident Fund savings and retirement benefits to raise money for
constructing houses. HDFC started the trend of Home Loans in 1978. Banks were
reluctant to finance Home Loans because there was no recovery mechanism in place.
The only recourse available to banks was to file a civil suit in the court of law. The
litigation expenses were higher than the actual loan amount.

It can surprise you that the Home Loan interest rates were around 11-14% up to
1994.The average age of the Home Loan borrower was about 42 years with the average
amount of loan being 39,000 (Source HDFC).

With the opening of the economy in 1991, banks started to enter the Home Loan
market. ICICI Ltd (later on merged with ICICI Bank) ventured into the Home Loan
market in 1999. The year 2000 saw the introduction of the floating rate concept by
ICICI Bank. The rates started plummeting from around 2003-04 when floating rates for
Home Loans were in the range of 7% to 7.25%. The fixed rates were around 7.5-
8%.State Bank of India entered the market in a big way and introduced the teaser rate
concept. They could afford to do so because of the high proportion of CASA (Current
Account Savings Account) deposits. Other banks did not have this advantage. They
resorted to measures like maintaining high Loan to Value (LTV) ratios to attract
customers.

During the early days of Home Loans, the LTV ratio used to be less than 50%. The
increase in the competition saw the LTV ratios go up to even 120%. Subsequently, the
Reserve Bank of India (RBI) capped it at 80%. Banks have the freedom to go up to
90% in case the loan is for less than 30 Lakhs.

SARFAESI Act 2002

Before 2002, there were no regulations to deal with defaults on home loans. There was
a need for strong legislation. The introduction of the Securitisation and Reconstruction
of Financial Assets and Enforcement of Security Interest Act (SARFAESI) in 2002 gave
banks the power to deal with Home Loan defaults. This Act encouraged the banks to
foray into the home loan sector.
The freeing of the interest rate regime:

With the opening of the economy, the RBI gave banks the freedom to fix their rates of
interest on Home Loans depending on the cost of funds. It blew out into an interest rate
war with banks competing against each other to offer the best rates to the customers.
There was a spate of Home Loan offers from banks trying to entice customers.

Even today, the floating rate regime is prevalent in the industry. Some banks offer fixed
rates but only for a specific period, after which they convert to the floating rate concept.

The growth of the Home Loan sector

As banks started feeling comfortable giving Home Loans, customers began availing
them. Hence, the average age of the Home Loan borrower began reducing. Today, the
average age is around 32 years.

Customers have realised that taking a Home Loan to buy a house is better than doing
so with their savings. The Government of India has played the role of the catalyst in the
growth of the Home Loan sector by introducing concessions in income tax for home
loan borrowers.

Today, these concessions are one of the principal reasons why people opt for home
loans. Banks have also come up with various new products like Home Loan Balance
Transfers, loans for purchase of plots, loans for home renovation and improvement,
and so forth. Today, home loans constitute a significant portion of the bank’s loan
portfolio.

STATEMENT OF THE PROBLEM

In recent times, banks via with one another in organizing loan melas with prior
arrangement with the ultimate aim of reaching new heights in the area of disbursal of
loans. In the falling interest rate scenario it is quite understandable that every bank in its
pursit of capturing the market in exp loring all avenues to offer a competitive rate to
bring more and more customers in its fold. The housing loan segment has received
much impetus and is balanced for stupendous growth. Streamling of housing loans
through lead banks have become a source of su pport to pursue housing facilities and
materialize the dream of future. Housing loan is one of the fastest growing retail
banking products. Almost all banks are offering housing loan at attractive interest rates
for meritorious and needy customers. The recent budget offers welcome initiatives
towards infrastructure development. Though both the public and private sector banks
are offering housing loan as per the same guidelines of RBI there may be same
difference in a some of the factors such as insurance coverage, concession for
preclosure cash back offer etc., In this context it is important to study the insight about
the level of customer preference with respect to housing loan and to identify the
problems faced by the customer

Current scenario of banking industry

In recent time, we have witnessed that the World Economy is passing through intricate
circumstances as bankruptcy of banking and financial institution, death crisis in major
economies of the world and euro zone crisis. The scenario has become very uncertain
causing recession in major economies like US and Europe. This poses some serious
questions about the survival, growth and maintaining the sustainable development.

However, amidst all this turmoil India‟s banking industry has been amongst the few to
maintain resilience. The tempo of development for the Indian banking industry has been
remarkable over the past decade. It is evident from the higher pace of credit expansion,
expanding profitability and productivity similar to banks in developed markets; lower
incidents of non-performing assets and focus on financial inclusion have contributed to
making Indian banking vibrant and strong. Indian banks have begun to revise their
growth approach and reevaluate the prospects on hand to keep the economy rolling.
 Future outlook of banking industry

The future of banking in India looks not only exciting but also transformative. Despite
the somewhat difficult current operating environment, banks remain the largest
financial sector intermediary in India. In future, technology will make the engagement
with banks more multi- dimensional even as other entities, markets and instruments for
credit and financial services continue to develop and expand. The current weakness in
economic activity has muted credit demand from banks. Part of this slowdown is due to
excess capacities in many sectors, together with the increase in leverage on corporate
balance sheets, impeding their ability to absorb credit. In addition, alternative sources of
financing, both domestic and offshore, have also emerged.

As India‟s integration with the global economy increases, and the rupee gets
internationalized, Indian banks will facilitate corporate access to offshore markets and
capital pools. Bond, currency and derivatives markets will develop and deepen; rather
than being a threat to banks, these markets will complement banking services and
products, with a diversity of risk management and hedging options, and enable banks to
hand off credit risk.However, as global markets become more competitive and volatile,
commercial success will depend on the ability to operate and scale up in an uncertain
environment. Managing risk will become increasingly important. Technology and
analytics will become the cornerstones of improved risk management in the
country.The biggest impact of technology will be the ability to personalize delivery of
products and services to customers. Data analytics is an integral part of this ability to
customize. Increasing use of unstructured data, generated largely from social media,
will vastly add to behavioral understanding and prediction. In an environment where
delivery of financial services will become increasingly commoditized, customer
experience will become the differentiating norm for a preferred service provider. The
ability to tailor financial solutions to customers across

multiple platforms will unleash a wave of product innovations and thereby demand for
financial services.