OVERVIEW OF BANKING DEVELOPMENT 1947 – 2007...CONTENTS Chapter Particulars Page Nos....

OVERVIEWOF

BANKING DEVELOPMENT1947 – 2007

ByD. T. Pai

Second Edition : 2007

Copyright © 2007, D. T. Pai

Published by : D. T. Pai16-108, “Saraswathi Sadan”, Ananth NagarManipal – 576 104Tel.: 0820-2570656

Printed by : Manipal Press LimitedPress CornerManipal – 576 104Karnataka, IndiaTel.: +91-820-2571151 to 2571155 (5 lines)

Price : Rs. 120$ 30

All rights reserved. No part of this book may be reproduced or utilized in any form

or by any means without permission in writing from the publisher.

“Dedicatedto my motherSaraswathi.”

D. T. Pai

CONTENTS

Chapter Particulars Page Nos.

Acknowledgements (i)

Preface (ii)

Part – I

I Banking in the Pre-Independence Era 1-8

II Banking Development 1947 – 68 9-18Enactment of Banking Regulation Act 1949Role of Banks definedBranch Expansion PolicyCredit Authorisation SchemeDeployment of CreditSocial ControlNational Credit CouncilBanking Statistics at a glance 1951-68Term Lending Institutions

III Banking Development in the Seventies 19-34Nationalisation of major banksLead Bank SchemeInnovative Deposits / Credit Schemes20 Point ProgrammeCredit PlanningTandon CommitteeChore CommitteeMassive Branch ExpansionComparative position of Banking Business1969 – 79

IV Banking Development in the Eighties 35-46Nationalisation of six banksIntegrated Rural Development ProgrammeBranch ExpansionImpact of Massive Branch ExpansionSteps to improve profitability of banksService Area ApproachIntroduction of Mechanisation in banks


Part – II

V Banking Sector Reforms – Phase I 47-67Rationale of Financial ReformsBackground of Basel CommitteeIntroduction to Prudential Norms in banksPolicy and supportive initiations for reformsPriority Sector Credit PolicyMicro Finance Scheme – 1992Introduction of Prime Lending RateCredit Delivery SystemBranch Licensing PolicyBanking Ombudsman SchemeChanges in Banking Supervisory mechanismImpact of Reforms - 1st PhaseIntegration of Financial MarketSouth Asian crisisBasel Core Principles of Banking Supervision

VI Banking Sector Reforms – Phase II 68-110Implementation of Recommendations ofNarasimham Committee – 1998Important Banking Developments 1998-2007Universal BankingRevolution of Information TechnologyPayment and Settlement SystemRisk Management System in BanksRisk Based Supervision in BanksNew Basel AccordNew Banks – Mergers/Amalgamation (BanksRRBs, and LAB)Corporate GovernanceFinancial Inclusion


Bank / Branch LicencingOther Developments:Fair Practice Code – Lenders LiabilityAnti Money LaunderingBanking Codes and StandardCredit Information BureauWTO and Financial ServicesCredit to Small and Medium EnterprisesPara Banking/ Retail BankingChanging role of Indian Banks’ AssociationCredit Rating Agencies

VII Indian Banking System Vs GlobalBenchmarks 111-114

VIII Public Sector Banks Vs Private Sector Banks 115-121

TABLES

Tables Particulars Page Nos.

I Sector wise credit deployment –1951 - 1968 13II Sources of credit to Agricultural Sector 14III Co-operative Banks 15IV Banking statistics at a glance 1951 to 1968 17V Population group wise of Deposit/Advances/Branches

– June 6920

VI Branch Expansion – 1969-79 – year wise 31VII Population Group wise – Branches 32VIII Population Group wise Deposits/Advances Dec. 1979 33IX Sectoral credit deployment 1974 to 1979 34X Population groupwise Deposit/Advances/Branches –

1980-8538

XI Working results of Sch. Com. Banks 1992-93 to 1996-97 61XII Branches/ATMs – March 2006 77XIII Mergers of Banks 1995-96 & 2007 90XIV Financial parameters of developed countries – 2005 113XV Financial Soundness Indicaters – Major Banks 114XVI Branches – ownership groupwise 116XVII Market share of business 117XVIII Priority sector advances group wise 118XIX Lending to sensitive sector 119XX Financial Parameters 119XXI Profitability Ratios 120

ANNEXURESI Bank wise Deposits and Advances – 1947-1997-2007 122II Growth of Deposit/Advances – 1969 to 2007 123III Branch Expansion 1969 to 2007 124IV State-wise Branches/Credit Deposit Ratio – 2006 126V Grounds for Complaints to Ombudsman 127

References 129List of Abbreviations 130

(i)

Acknowledgements

I am grateful to Shri K.K. Pai, Chairman, T.A. Pai Management Institute,who has witnessed banking development in India since pre independenceera for inspiring me to write this book.

I am thankful to Shri P.S.V. Mallya, former Chairman of Syndicate Bank,Shri B. Sambamurthy, Chairman & Managing Director, Corporation Bankand Shri M.S. Sundara Rajan, Chairman & Managing Director, IndianBank for sharing their knowledge with me.

I thank Shri B. Pramod, Shri N. Prasannakumar, General Managers ofSyndicate Bank, Shri V.K. Khanna, General Manager, Union Bank of Indiaand Shri V.T. Pai (my brother) for review of the text.

I acknowledge secretarial services rendered by Sarvashri Ashok Kumar,Sudeendra Bhandary, Yashwanth Nayak, S. Vadiraja Acharya, RamdasUpadhya and staff of Syndicate Institute of Bank Management for allassistance.

My sincere thanks go to my wife Sandhya for her gentle support.

31st August, 2007 D. T. Pai

(ii)

Preface

The Indian Banking System has been transformed into a strong and

sound banking system as a result of wide ranging policy initiations and

supportive measures undertaken by Government of India and Reserve

Bank of India. Today our banking system is perceived as sound by

International standards.

The global banking and financial system has undergone fundamental

changes because of revolution of Information and Communication

Technology. In the 21st century, Information Technology and Electronic

Fund Transfer have emerged as the new pillars of modern banking. In

today’s liberalized environment banks will have to prepare to face the

challenges of global competition. Thrust on greater use of technology,

upgrading skills and knowledge of banks’ personnel, to meet changing

expectations of customers will be the key for business growth.

I have made an attempt to bring out this book for the benefit of young new

entrants in banks and students of banking to give an overview of Banking

Developments of our country since independence.

The contents have been divided into two parts. Part I deals with Banking

Development from 1947 to 1991 focusing impact of nationalization

of banks. Part II gives rationale of banking reforms and its successful

implementation and preparedness of Indian banking sector for future

reforms.

A brief comparison of Indian banking system with global benchmarks as

well as performance of public sector banks and private sector banks have

been covered to enable the readers to know positive impact of reforms on

the health of the banks.

I hope the contents of this book will be useful to prospective bankers and

students community.

D. T. Pai

Foreword

Indian Banking has seen a sea-change in the last about 80 years. From

the earlier simple banking operations of acceptance of deposits from well

– to do sectors of the community and money lending on the basis of trust

and confidence in the integrity and reputation of the borrowers indigenous

bankers were lending money by specially designed instruments of credit

and money transactions. Banking in India as in other countries of the

World, has acquired new dimensions and sophistication. Unless one

keeps in close touch with the fast changes and reforms which have

been ushered in the ever evolving economy and the globalisation of

once secluded economies of each country has now exposed to world

economic and financial scenario and banking has become very complex

comprehensive in its scope and operations.

In this fast changing economic world, banking concepts practices and

operations too have seen rapid transformation and changes. From the

days of individual bankers, banking has acquired a social purpose and

also political ideologies too have influenced the character of banking as

an economic activity.

In India, we can recognise specific periods of banking development and

reforms. Indigenous bankers have been replaced by limited Companies

and banking laws and practices too have seen a sea change. Instruments

of credit too have undergone rapid changes. Credit worthiness and trust

in the borrower has given place to credit assessment through diverse

methods. Though economies is not an exact science as human and social

behaviour cannot be correctly assessed and forecast at any given point

of time and the group behaviour hardly predictable till we have evolved

(iii)

certain criteria of credit assessment of the borrowers with reference to the

risks involved. The Government Control and supervision over economic

affairs of the individual, society and public interest are a serious concern

in financial management and risk management. Specialisation in these

areas has become necessary and important in the economic life of a

nation.

I belong to a business family. In the early twenties of last century, one

could notice the Multani businessmen cum bankers travelling through out

the Country from their permanent locations, money lending and selling

their commodities on credit, some times credit extending to period of

six months to 12 months. They used to visit their borrowers to recover

the loans and if they found the borrowers honest and prompt in setting

the debts, they would refix the credit limits on mere Hundies, Bills of

Exchange or Promissory Notes. How they assessed the credit worthines

of a person and trusted persons as deserving long term credit of 6 months

to 12 months on mere promissory notes or Hundies cannot be imagined in

the present times. It is worthy of research in credit gathering for which we

have evolved elaborate formulas and credit rating systems. The Multani

and Sindhi Bankers had their own system of risk sharing through their

associations which helped the bankers in distress and rehabilitated them

to revive their money lending business. BIFR, etc. are recent institutions

which have taken the place of Multani Associations.

The Government of the day have brought into force comprehensive laws,

to protect public interest, Social control over banking business gave place

to nationalisation of bigger banks. Today public sector Banks coexist with

private Banks and such reforms and changes are brought about due to

prevailing situation in the economy. New dimensions are added and some

(iv)

given up or diverted according as the economists and the Government

feel necessary.

I had started my banking career with the Canara Industrial and Banking

Syndicate Bank Ltd. (Founded in 1925) in the year 1943 (and now

nationalised Syndicate Bank) soon after I passed out as a Commerce

Graduate of the Bombay University. This Bank was a elaboratory for

innovations in Banking as no other Banks have done in this Country. It

is this Bank which had a vision of years ahead of its times and what it

experimented with various aspect of the modern banking has in a way

given a lead to later developments in the character and scope of banking

in India. In this brief foreword to this book written and published by my

esteemed friend. Colleague and eminent Banker Sri D. T. Pai, it is not

possible to glance through the evolution of banking in India up to the

modern times. Suffice it to say that Sri Pai, brought up in the traditions

and philosophy of the SyndicateBank, has done a remarkable contribution

to the study, understanding and evolution of the Banking in India down

the decades by tracing the transformation that has taken place during

this period. This exposition of the banking History in simple narratives,

quoting essential statistics and figures and scientifically arranging the

various features of Indian Banking in separate chapters is commendable.

This book is bound to serve the students of Banking with required

information well-arranged to know the fundamentals and the history of

Indian Banking.

The book makes easy reading, clear in exposition of the main subject,

comprehensive yet simple survey of the journey Indian Banking has

travelled over the last about 100 years.

(v)

I have no doubt that the hard and sincere efforts of Sri D. T. Pai has a

historian of Indian Banking will be amply rewarded if students of Banking

approach read and appreciated the contents of this book.

I have to thank Sri D. T. Pai for the respect and affection he has shown

to his erstwhile colleagues by insisting on my writing this foreword to his

book and for all the co-operation and instituted devotion and loyalty he

had shown when we worked together in the Syndicate Bank, and even

afterwards after my retirement from Bank service in the year 1978.

Though he has retired from active Banking service, it is heartening to

observe that he keenly chronicles the development and progress of

Banking in modern India.

Manipal – 576 104 (K. K. Pai)21st September, 2007 Former, Chairman and Managing Director

SyndicateBank, Manipal

(vi)

Part I

PROGRESS OF COMMERCIAL BANKING IN INDIAAT GLANCE

Year 1947 1956 1967 1977 1987 1997 2007*

1. No.of Banks 648 423 91 126 277 299 181

2. No.ofBranches

2987 4067 6982 28016 55141 63534 71781

3. Populationper Office(‘000)

– 98 73 23 12 14 16

4. Deposits(Rs.in cr)

1080 1159 3962 18903 127289 505499 2608309

5. Credit(Rs. in cr)

475 824 2747 13491 69453 278401 1928913

6. Per CapitaDeposits(Rs.)

– 29 77 299 1861 5323 25356

7. Per CapitaCredit (Rs.)

– 21 54 214 1016 2931 18737

8. Deposit as %of NationalIncome

– 10 14 26.3 46 46.4 65**

* Provisional ** 2005

Banking in the Pre-Independence Era

Banking in India is as old as its Trade and Commerce. It had developedgood social organization.Manu, the great Hindu law-giver of ancient Indiahad dealt with law relating to deposits and money lending. The operationsof the then bankers comprised of accepting deposits, advancing moneyagainst pledge of goods, securities as well as mortgages, granting personalloans, acting as bankers for King or the Government, as custodian forvaluables and sometime even managing currency of State. The use ofHundis (now known as Bill of Exchange) was made in large scale.

Indigenous bankers of India were held in high esteem by the Kings as theyplayed important role in the economic life of the country. Their businessand power started declining in the 18th century with changing politicaland economic scenario. While East India Company recognized theirimportance for domestic trade they were not found useful by foreignersin India as indigenous bankers could not take part in financing foreigntrade.

It was in the year 1770, the first bank was started by M/s Alexandura &Company in the name of “Hindustan”. However, it was wound up in 1832with failure of the Chief Principal of the Company. In 1773, General Bankof Bihar and Bengal (which was at that time the main British Territory inIndia) was established. It too could not survive as the Court of Directorsof England expressed its disapproval. Bank of Bengal and General Bankestablished in 1780 also voluntarily wound up in 1791 because of non-profitability.

I

4 Overview of Banking Development

Thereafter, three Presidency Banks were established in 19th century. Thefirst Presidency Bank, in the name of Bank of Bengal, was established on1st May 1806, with a share capital of Rs.50 lakhs. The share capital waspartly subscribed by Government and by the virtue of that it had the rightto nominate directors of the Bank.

The second Presidency Bank, called the “Bank of Bombay” wasestablished in 1840, with a paid up capital of Rs.50 lakhs. The thirdPresidency Bank, “Bank of Madras” was established in 1843 with a capitalof Rs.32.50 lakhs. These three Presidency banks were acting as centralbanks for the then three major Provinces (Zones) of the British East IndiaCompany, namely Kolkata, Bombay and Madras. They opened branchesin towns like Agra, Bombay, Madras, Banaras, Simla and Delhi. The Bankof Bombay got into financial difficulties in 1865. By virtue of power vestedwith the Government, it decided to wind up the Bank in January 1868.Subsequently, ‘New Bank of Bombay’ was set up.

The Presidency Banks were acting as central banks and were permittedto carry on business of:a) Lending on

i) Government Securities, Shares in Railways guaranteed byGovernment.

ii) Goods, wares, merchandise of unperishable kind;iii) Drawing, discounting, buying and selling Bills of Exchange and

other negotiable securities payable in Her Majesty’s IndianTerritories;

iv) Buying and selling Gold, Silver and Bullion.b) Making investments or loans on bonds secured by imperial Parliament

on revenues in India or independently.c) Operating cash accounts,d) Transactions pecuniary agency business on commission and in

selling property or securities deposited with the bank as security toloan in satisfaction of debt/claims.

The presidency Banks were also permitted to issue notes up to certainspecified limits till 1862, when under the Paper Currency Act, the soleright of issue notes came to be vested with Government of India.

These three presidency banks were amalgamated and Imperial Bank ofIndia was created in 1921. The Imperial Bank was primarily a commercialbank transacting all the business formerly carried on by the presidencybanks. The Bank was entrusted with certain functions of Central Bank viz.

(i) to act as the sole banker to Government of India, (ii) banker to banks,(iii) manage public debt, (iv) provide accommodation to banks, (v) conductclearing houses in the country and (vi) provide remittance facilities tobanks and the public.

In 1860 the concept of limited liability was introduced in Banking. Asa result, several joint stock companies were floated. Some of the jointsector banks started were [1] Allahabad Bank (1865) with Europeanmanagement, [2] Allien Bank of Simla, [3] Oudh Bank (1881) and[4] Punjab National Bank (1894].

The Swadeshi Movement started in early 1900 gave impetus to growthof Indian banks. Some of the Indian banks started in early 20th centuryinclude, Peoples Bank of India, Bank of India, Bank of Baroda, CanaraBank, Corporation Bank.

Initiatives for establishment of Central Banking Authority andBanking Regulation:As during 1890 to 1929 many banks failed a Central Banking EnquiryCommittee was set up in 1929 by Government to examine circumstanceswhich led to failure of banks and the need for establishing Central BankingAuthority for India. The Committee found that the main reasons attributedfor the failure were insufficient capital, poor liquidity of assets, combinationof non-banking activities with banking activities, irrational credit policy,and incompetence and lack of experience of directors. The Committeealso recommended in 1931 establishment of central banking authority.Accordingly in 1934 Reserve Bank of India Act was passed and ReserveBank of India came into existence in 1935 with a paid up capital of Rs.5crores. Shares of nominal value of Rs.2,20,000 were allotted to CentralGovernment to enable it to appoint Directors on the Board. Balance sharecapital was owned by private share-holders.

On the eve of establishment of RBI, the banking system comprised of(a) Imperial Bank of India with 160 branches and deposits of Rs.81 crore,(b) 320 joint stock banks with 688 branches and deposits of Rs.81.88 croreand (c) 17 exchange banks with 98 branches and Rs.71 crore deposits.The 1269 offices (323 Head Offices and 946 Branches) were located in475 towns. The population per office of commercial bank was around3 lakh. The remaining towns numbering 2100 and the villages, wherebulk of the population lived were not provided with banking facilities bycommercial banks. The total deposits of banks were Rs.234 crore spreadover 31 lakh deposit accounts.

Banking in the Pre-Independence Era 5


The banks which had paid up capital and reserves not less than Rs.5 lakhwere listed in the second schedule of RBI Act and called as scheduledbanks and others as non-scheduled banks.

As there was no comprehensive legislation covering organisation,management, audit and liquidation of Banks, in 1936, a separate charterwas added to the Company Act 1813 containing provision relating toBanking Companies. These provisions prescribed –

i] Minimum capital for new banks;

ii] Mandatory reserve fund and cash reserve;

iii] Restricting the nature of subsidiaries and activities of managingagency system and prohibiting banks from conducting types ofbusiness other than specified in the Act.

Bank Failures:

The banking business primarily rests on trust and confidence. WhileBanks which foster the trust in them progress on the contrary any thingcreating distrust leads to the devastation of the system. The bank failuresnot only deprive the depositors of their hard-earned savings but its effecton trade is equally bad if supply of credit is stopped.

Between the year 1913 and 1943 as many as 949 banks failed. Thecauses for such failure of joint stock banking companies includedmismanagement, over-lending, low cash reserve, investment on lessliquid assets, unsecured loans to officers/directors, offering unbusinesslike rates on deposits to attract them and absence of strong central bankwith unified control of currency and credit. Failure of banks in those daysconfined not only to India, but also other countries like USA, England.

The failure of Travancore National and Quilon Bank Ltd in 1938 drewthe attention of the Government for urgent need for comprehensive bankreforms and legislation. Reserve Bank of India in 1939 submitted proposalfor comprehensive Banking Act. However, in view of abnormal conditionsprevailing in the country due to outbreak of II World War and divergentopinions received, enactment of the legislation was held up. In order torestrict mushroom growth of banking companies and weed out unsoundbanks amendments were passed in 1942 and 1944 restricting use of theword ‘Bank’ or ‘Banker’ or ‘Banking’ as a part of name of the companyand also imposing certain restrictions on employment of persons andcomposition of different categories of capital and voting rights.

Powers to inspect banking companies under directions from Governmentand control on opening new branches were conferred on RBI in 1946.These measures compelled banks to close some of their unremunerativebranches and decline in the number of new banks.

Indian Banks’Association (IBA):Indian Banks’ Association was formally established on 26th January 1946with 22 member banks, to promote inter-bank co-operation, provide aforum for exchange of views between banks and a means to tackle theircommon problems. In fact, in 1931, Central Banking Enquiry Committeehad recommended formation of such an association for co-operationamong banks and to improve banking standard in India. Banks also hadbeen feeling its need for protecting and advancing the interest of thebanks and for dealing with executive, legislative and other Governmentmeasures affecting them.

In the pre-independence period, a major portion of the deposits mobilisedby the banks was invested (more than 50%) in Government and TrusteeSecurities and proportion of loans and advances to total liabilities was nothigh. Lending was primarily security oriented. They extended credit mainlyfor trade and industry and personal purposes. As domestic banks werenot permitted to do foreign business, exchange banks (i.e. incorporatedabroad) took the cream of profitable business of foreign exchange.

Co-operatives:The Co-operative movement gathered momentum in 19th centuryas it spread to the deep interiors of rural places where 75% of Indianpopulation lived, The Government also passed a separate Act governingco-operative credit with simple business procedure in 1904, liberatingsocieties from provision of Company Act 1813. With passage of time co-operative societies of different character appeared and various centralunions and central banks came up to finance and control primary co-operative societies. Recognizing this fact, in 1912 an Act was passedmaking provisions for these kinds of societies viz., Unions amongco-operative societies, central co-operative banks and provincial co-operative banks. The co-operative agencies acted as credit providers tocultivators, rural artisans and persons of smaller means. Although therewere 1.08 lakh co-operative societies well spread in the villages, theylacked financial strength and operating capacity. Many of them had lowmembership and were incurring losses. Majority co-operative societieswere located in Maharashtra and Madras States.

Banking in the Pre-Independence Era 7


Agriculture, despite being an important sector of the economy, receivedvery little credit from commercial banks for the following reasons:

i] The activities of agriculturists depended on vagaries of weather andwere subject to risk and the period of their credit requirements wasfor more than 6 months whereas banks were permitted to extendcredit for short term of not exceeding 6 months.

ii] The commercial banks had confined their operation mainly to urbancentres barring a few rural centres in Southern States. They did nothave net work of branches, staff and expertise.

iii] The various committees, which examined the problem of AgricultureSector, had concluded that responsibility of providing AgricultureCredit to be that of co-operative sector.

iv] Agricultural borrowers could offer only land as security, whichwas not generally acceptable to banks because of legal and othercomplications.

Indigenous bankers and moneylenders were the main sources of financefor farmers, cottage industry and small business/trade. The unorganisedsector of money market broadly comprised of indigenous bankers (knownby name as Multani Shroffs, Marwari Shroffs, Gujarati Shroffs, Chettiars)and money lenders. Main features of operations of indigenous bankerswere distinct from money lenders. They received deposits and also creditarrangements with joint stock banks generally in the form of discountingof hundies. They mainly financed Trade and Small Industry and alsoprovided general banking facilities through buying and selling remittances.The money lenders did not generally receive deposits and little borrowingfrom banking sector. They had advantages of their proximity, simplifiedprocedures and quickness in arranging the loan even without security andeven for non-productive expenditure. They provided 90% credit to thissector and also exploited the borrowers charging high rate of interest.

On the day of Independence 15thAugust 1947, there were 648 commercialbanks comprising 97 scheduled banks, 551 non-scheduled banks with2987 branches with total deposits of Rs.1080 crore and advances ofRs.475 crore. 70% of bank credit was extended to commerce (36%) andindustry (34%). Agricultural sector received only 2% followed by personalloans 6.0% and others 22%. There were no branches of banks in centreswhere population was less than 5000 people.

Banking Development – 1947 to 1968

On the eve of Independence on 15th August 1947, the country hadinherited an urban oriented and weak banking system. There was noefficient co-ordination between currency management and extension ofbank credit. As the banks were operating in Port and urban towns exceptin southern States, they were catering banking facilities primarily in urbanareas. The responsibility of catering banking facilities in rural and semi-urban areas was left to co-operative banks as a matter of consciouspolicy. Commercial banks predominantly extended credit to Trade andCommerce. Governments then did not plan or aim use of banking systemas an instrument to foster economic development of the country.

The Indian banking system consisted of a large number of small and verysmall banks, majority of them were financially and operationally weak andneeded amalgamation with bigger and more viable units to strengthen thebanking system. During the post war period (1946 to 1950), 207 bankswith paid up capital of Rs.5.33 crore had failed.

Co-operative banks, although wide spread in villages could not playsignificant role because of their poor financial position. Indigenous bankersand moneylenders became the main source of finance for farmers, cottageindustries, rural artisans and small businessmen. The task of Governmentof India was to strengthen the existing entities and create new financialinstitutions for mobilisation of savings and investing them in appropriatemanner in the desired sectors of the economy.

II


On 1st January 1949, Reserve Bank of India was changed into Stateowned institution in terms of the Reserve Bank (Transfer to publicownership) Act 1948. The main concern of RBI was to consolidate the wartime growth and ensure the development of banking on sound lines byeliminating the unhealthy features in the system. Its major objectives onmonetary and credit policy aimed at (a) containing inflationary pressureswithout affecting production, (b) discouraging the hoarding of particularstrategic commodities in short supply, (c) encouraging the flow of credit todesired channel and (d) introducing the measures for strengthening thebanking system and credit institutions for filling the credit gaps.

Enactment of Banking Regulation Act 1949:To protect the interest of the depositors and to strengthen the bankingsystem, separate Bill for Banking Companies Act was passed in 1949,which came into effect from 16.3.1949. The Act contained among otherthings the following important provisions:

[i] Classification of company into banking and non-banking.[ii] Restriction on certain types of employment.[iii] Minimum paid up capital and reserves.[iv] Prohibition on commissioned directors.[v] Restriction on declaring dividends and transfer of certain portion of

profit to Reserve Fund.[vi] Maintenance of minimum Cash Reserve and Liquid Asset Ratio.[vii] Restriction on nature of subsidiary companies[viii] Licensing of Banking Company.[ix] Control on Branch Expansion.[x] Accounts and Balance Sheet.[xi] Inspection of Banking Company.[xii] Suspension of business, winding up and scheme of acquisition and

amalgamation, and[xiii] Maintenance of minimum assets in India by foreign banks.

Role of Banks:Commencement of the process of planned economic development in1950-51 meant that the Indian economy has to achieve predeterminedtargets in terms of rate of growth of national income.As banking constitutesa vital link between various production elements of economic activity, the

First Five-Year Plan defined the role of banks, financial institutions andcentral banking in the following manner:

“Central banking in a planned economy can hardly be confined toregulation of flow of bank credit. It would have to take a direct and activerole first in creating or helping to create a machinery needed for financingdevelopment activities all over the country and secondly in ensuring thatfinance available flows to directions intended. For successful fulfillment ofthe plan, it may be necessary to direct special credit facilities to certainlines of high priority. Banking system will thus have to be fitted into thescheme of development.”

The above laudable objective set the tone for development of modernbanking in India. The All India Rural Credit Survey 1951-52, whichhad undertaken comprehensive investigation of rural credit in India,recommended creation of one strong, integrated State sponsored, Statepartnered commercial bank with an effective network of branches spreadover whole country. The recommendation was accepted and the StateBank of India Act was passed on 8th May 1955. By this Act, State Bankof India was created for the purpose of taking over Imperial Bank of India.Nearly 92% shares were transferred to Reserve Bank of India [RBI] andState Bank of India [SBI] became subsidiary of RBI. This was the first stepin introducing public sector banks in the country, for extension of bankingfacilities on large scale in the rural and semi-urban areas. Subsequentlyin the year 1959, seven banks promoted by erstwhile princely States, viz.(i) Bank of Indore Ltd., (ii) The Bank of Mysore Ltd., (iii) Bank of Patiala Ltd.,(iv) Bank of Bikaner Ltd., (v) The Travancore Bank Ltd., (vi) HyderabadBank Ltd. and (vii) Saurashtra Bank Ltd. were made as subsidiaries ofSBI. (The shareholding of RBI has been taken over by Govt. of India in2007)

With a view to extend banking facilities to rural and semi-urban areas onlarge scale, statutory provision made in SBI Act 1955 provided that SBIshall open not less than 400 rural branches within 5 years from the date ofits establishment. The places for opening were to be decided by CentralGovernment in consultation with RBI and SBI. As the rural brancheswere likely to be unremunerative at least for the first few years, it wasprovided in the Act to create Integration and Development Fund by SBI.The dividend payable to RBI on shares of the State Governments held byit upto 55% of the issued capital was credited to this Fund. The amount in

Banking Development – 1947 to 1968 11


the Fund was to be applied exclusively to meet losses attributable to thebranches in rural places.

From July 1955 to 1960, SBI opened 416 centres covering their 274treasury centres, and other locations were semi-urban places withpopulation of more than 25,000.

Banking Companies Act – Amendments:Several amendments were made to Banking Companies Act between1949 and 1956, for speedy disposal of winding up petitions, simplifyingprocedure for amalgamation of banks on voluntary basis and regulationof opening branches by Indian banks in foreign countries, extension ofpower to RBI in respect of appointment of Directors/Managing Directorsand CEOs, issue of directives to banking companies relating to matterof policies. In 1959 the Act was further amended to provide a degree offlexibility in the operations of banking companies. It also enhanced powersof RBI for control over banks, e.g. removal of Directors or Managers ofbanks if they were found to have contravened any law.

The failure of Laxmi Bank and Palai Central Bank in 1960 received specialattention of public and Government regarding the inherent risk involvedin allowing large number of substandard banks to continue to function.Banking Companies Act was therefore further amended to empower RBIto apply to Central Government to grant moratorium to banks to acceptdeposits and submit scheme for reconstitution or amalgamation withbigger banks. As a result, 204 banks were merged with other banks.

Branch Expansion Policy:Till 1962 RBI did not bring pressure on other commercial banks to openrural branches except that emphasis was laid to open branches inunbanked centres keeping in view the set back banks had in post-war andpost-Independence period. As most of them were small, and financially &operationally weak, SBI and its subsidiaries were given the major task ofexpanding branches in unbanked centres.

In 1962, RBI adopted new branch licensing policy under which extensionof banking facilities to all parts of the country in a systematic fashionwas to be carried out. Under this, banks were categorized as “All IndiaBanks”, “Regional Banks” and “Semi-Regional Banks”. To ensure that allbanks played their role, they were asked to submit their branch expansion

programme to seek prior approval of RBI. RBI also supplied banks with listof unbanked centres. This enabled a rapid expansion of bank branchesduring the sixties.

Credit Authorisation Scheme:As a part of the credit policy announcement on 20th November 1965, inorder that growth of bank credit is aligned to the requirements of desiredsectors and as additional measure of credit regulation, RBI introducedCredit Authorisation Scheme. Under the scheme, commercial bankswere required to obtain the Reserve Bank’s prior authorisation beforesanctioning a fresh credit of Rs.1 crore or more to any single party or anylimit that would take total limit enjoyed by such party from banking systemto Rs.1 crore or more.

Deployment of Credit:With the implementation of the Five Year Plans, a major transformationwas taking place in the economic structure and the country was witnessingindustrial revolution. To keep pace with industrialization, banking systemwas called upon to finance industrial sector in greater measure and thisled to substaintial increase in credit flow to the industrial sector andshrinkage in the portfolio of commercial advance of banks. Deployment ofbank credit in the first 3 Plans, 1951 to 1966, is summarised below:

Table – I[Rs. in crores]

Sector 1951 March 1956 March 1961 March 1966 March 1968Industry 196

(33%)278

(36%)688

(53%)1510

(64%)2067

(67.5%)Commerce 310

(53%)388

(50%)408

(31%)573

(24%)587

19.2%Others 79

(14%)104

(14%)210

(16%)264

(16%)410

13.3%TOTAL 585 770 1306 2347 3064[Figures in brackets indicate share]

Major portion of credit in the industrial sector was extended to agro basedindustries like cotton, sugar, jute etc. The close relationship betweenvarious Industrial Houses and the banks facilitated this remarkable shiftin the structure of bank credit.

The small scale sector, which accounted for 30% of the industrial


production did not receive its due attention as only 5% of the total bankcredit was extended this sector.

Agricultural Sector:Although Agricultural Sector supported 70% of the population and wasthe mainstay of the economy it didnot receive adequate amount ofcredit. Several expert committees had studied the problems and roleof commercial banks in rural credit. None of them made any positivesuggestions that commercial banks should enter in large way in to ruralcredit. It was felt that co-operatives were most suitable for the purpose.

Although responsibility of agriculture credit was left to co-operative sector,agricultural moneylenders and professional moneylenders continued tobe major provider of credit to farmers:

Table – II(Rs. in crores)

Sources of Credit 1951-52 1961-62Amount % Share Amount % Share

Government 24.8 3.3 26.8 2.0Co-operatives 23.2 3.1 159.6 15.5Commercial Banks 6.8 0.9 6.2 0.6Sub-Total 54.8 7.3 192.6 18.7Land-lords 16.2 1.5 6.2 0.6Agri. Money Lenders 186.8 24.9 270.8 36.0Prof. Money Lenders 336.0 44.8 136.0 13.2Traders Community 41.2 5.5 90.6 8.8Agriculturists’ relatives 106.5 14.2 90.6 8.8Others 13.5 1.8 143.2 13.9TOTAL 750.0 1030.0

[Source: All India Rural Credit Survey and Rural Debt & InvestmentSurvey of RBI]

Committee of Directors of All India Rural Credit Survey made an attemptto give a new direction to co-operative credit movement and co-ordinateits growth with planned effort for the development of rural sector. Itsrecommendations aimed at –

(i) Reorganization and strengthening of primary co-operative societies;(ii) Introduction of production oriented crop loan system instead of usual

security oriented one;(iii) Reorganisation and strengthening of the State and Central


Co-operative banks through share capital participation by theGovernment and liberal credit facility from RBI so that in turn theywould be in a position to extend appropriate support to primaryinstitutions for providing credit to agriculturists;

(iv) Integration of co-operative credit with co-operative marketing &procuring activities and to provide suitable training arrangements forpersonnel of co-operative credit institutions.

The above recommendations had become part of Second Five-Year Planand were implemented vigorously by RBI and State Governments.

The position of co-operative banks is summarised below:

Table – IIIYear 1951 1956 1961 1965No. of co-operative banks 415 578 427 412No. of branches 837 1229 1564 2375Deposits [Rs. in cr.] 99.9 184.4 184.4 330.06Advances [Rs. in cr.] 73.4 134.4 386.7 678.9

The total number of primary co-operative societies which increased to 2.12lakhs by 1960-61 were brought down to 1.63 lakhs in 1969 through theprocess of reorganisation which covered 85% villages by active primarysocieties. Membership increased from 48 lakhs in 1951-52 to 298 lakhsin 1969-70. The loans made by societies against membership increasedfrom Rs.34 crores in 1951-52 to Rs.711 crores during the period. Overduesalso increased from 25.3% in 1951-52 to 37.7% in June 1970.

Despite the structural changes and extension of banking to rural and semi-urban centres, advances continued to meet primary needs of Industryand organised trade. Even deposits mobilised from rural and semi-urbanareas went to finance urban based industry and trade. Credit needs ofAgriculture, SSI, rural artisans and small business did not receive dueattention it deserved. This led to a demand that there should be review ofbanking policies and attempt was made to bring credit activities of banksin alignment with the planning policy.

Social Control:It was felt by the Government to bring most of the banking institutionsunder social control to serve the cause of economic growth, and fulfilsocial purpose more effectively making credit available to all productiveendeavours. Accordingly, on 14th December 1967 Social Control was


introduced. Announcing the decision in Parliament, then Deputy PrimeMinister and Finance Minister stated, “The fundamental aim of socialcontrol of banks within the framework of democracy, is to regulatecountry’s social and economic life so as to attain the optimum growth ratefor country’s economy and to prevent, at the same time, any monopolistictrend, concentration of economic power and misdirection of resources”.

The scheme of social control was introduced in 1968, which aimed at –(a) making credit as an instrument of economic development spreading

the banking habit in the country duly aligning credit policy and practicewith national development programme and priorities;

(b) making available credit facilities to wider section of population; and(c) ensuring production in all fields where it is received.

National Credit Council:National Credit Council was set up in 1967 with a view to provide forumfor discussing and assessing credit priorities on all India basis. The mainfunctions of National Credit Council were –

(i) To assess demand for credit from various sectors of economy;(ii) To determine priorities for grant of loans and advances or for

investment having regard to the availability of resources andrequirement of priority sector in particular i.e. Agriculture, SSI andExports;

(iii) To co-ordinate lending and investment policies as betweencommercial and co-operative banks and specialized agencies toensure optimum utilisation of resources.

In 1968 Banking Regulation Act 1949 was further amended and bankingpolicy was for the first time statutorily defined as under:

“Banking Policy means any policy which is specified from time to timeby RBI in the interest of banking system or in the interest of monetarystability or sound economic growth having due regard to the interest ofdepositors, the volume of deposits and other resources of the banks andthe need for equitable allocation and the efficient use of these depositsand resources.”

In February 1969 Banking Law was also amended providing organisationalchanges and reconstitution of the Board of Directors of Banks with majorityof Directors having special knowledge in Agriculture, SSI, Co-operation,Banking, etc.


Subsequently Boards of Directors of banks were reconstituted providingmajority of members having special knowledge in Economics, Law,Co-operation, Agriculture & Rural Economy, Banking & Finance, SmallScale Industry, etc. The Chairman of the Board to be appointed as fulltime Executive and not an industrialist or businessman. The banks wereprohibited to make loans to directors or concerns wherein directors areinterested.

The foundation of Indian banking system was strengthened in Sixties byencouraging mergers among small banks and compulsory amalgamationsand a beginning was made to take banking to rural India.

The number of banks operating in India was brought down from 566in 1951 to 86 in 1968. The number of branches of commercial banksincreased from 4151 to 7647 and population per office of commercialbank fell from 87,000 to 69,000. Deposits of the banking system recordedrise from Rs.908 crore to Rs.4478 crore from 1951 to 1968 and advancesincreased from Rs.627 crore to Rs.3159 crore. The share of deposits innational income increased from 9 to 16 per cent.

The key banking statistics given below highlight the banking developmentduring 1951 to 1968.

Table – IV

BANKING STATISTICS AT A GLANCE(Amount: Rs. in Crores)

Year

End of

1951 1956 1961 1966 1967 1968

1. No. of Banks 566 423 292 100 91 86

Scheduled 92 89 82 73 71 70

Non-scheduled 474 334 210 27 20 16

2. No. of Offices in India 4151 4067 5012 6593 6982 7647

Scheduled 2647 2966 4390 6380 6779 7444

Non-scheduled 1504 1101 622 213 203 203

3. Population per office (‘000) 87 98 88 76 73 694. Deposit per capita Rs. 25 29 46 72 77 85

5. Deposit as % of National Income 9 10 14 15 14 166. Composition of Deposits 908.5 1159 2011.5 3586.8 3962 4478

(%)

Current 50 39 28 27 26 25

Savings 16 17 16 24 24 25

Fixed & others 34 44 56 49 50 50



Year

End of

1951 1956 1961 1966 1967 1968

7. Credit Rs. 626.9 824.2 1293 2454.5 2747 3158.7

Scheduled 581.4 781.7 1268 2440.8 2734 3145.6

Non-scheduled 45.5 42.5 25 13.7 13 13.1

8. Paid Capital + Reserves Rs. 75.2 72.2 76.4 98.9 102.2 105.7

Profits before Tax Rs. 13.1 13.6 28.3 39.6 42.1 44.9

9. Ratio of Paid Capital + Reserveto Deposit

9.7 6.7 4.1 3.1 2.9 2.6

10. No. of Bank Employees (‘000) 79 115 170 184 197

Source: Statistical Tables relating to Banks in India, RBI Report of BankingCommission, government of India 1972

Term Lending Institutions:Commercial banks were mainly extending credit on short term and to a verylimited extent on long term in view of the nature of deposits and absenceof expertise in term lending. There was no institutional structure in termlending to take care of the needs of industrial development. Governmentof India therefore set up in 1948, Industrial Finance Corporation of India(IFCI) to finance long term loans. Similarly, at the State level to serve theneeds of medium and small scale industries, State Finance Corporations(SFCs) were set up in early fifties.

Industrial Credit & Investment Corporation of India (ICICI) was establishedin 1955 as development bank for assisting private enterprises throughproviding loans, participating in equity and underwriting of new issues.

Under the Government aegis National Industrial Development Corporationwas set up to not only act as a financial body but also as an industrialpioneer. National Small Scale Industries Development Corporation wasestablished for assisting small scale industries. These institutions haveplayed vital role in promotion and development of the industrial sector.

As there was need to co-ordinate the activities of various term lendinginstitutions, Industrial Development Bank of India (IDBI) was set up in1964 as the apex institution of an integrated structure of industrial financeinstitutions of the country. IDBI, apart from making term lending toindustries and refinancing the commercial banks, acted as a coordinatingagency of financial institutions.

Banking Development in the Seventies

A role was defined for the banking system in the document of First Five-Year Plan and special efforts were made in subsequent plan periods byGovernment and RBI to align economic policies with banking policies.This enabled the country to record spectacular progress in mobilisationof deposits, extension of credit in big way to Industry and Commerce,expansion of branch network in unbanked centres, decline in per-officepopulation from 85,000 in 1947 to 65,000 and increase in the clientele ofthe banks.

During the period 1947 to June 1969 the deposits of all commercialbanks increased from Rs.1164 crore to Rs.4665 crore and advancesfrom Rs.531 crore to Rs.3609 crore with Credit-Deposit ratio of 77.3%.The number of bank branches increased from 2987 to 8262, and 62%of the branches were located in rural and semi-urban areas. However,under credit deployment, only 14.6% of net bank credit of public sectorbanks went to priority sectors comprising Agriculture (5.4%), Small ScaleIndustries (SSI) (8.5%) and other priority sector (0.7%). Out of 2.6 lakhborrowal accounts, Agriculture constituted 1,70,000, SSI 50,000 and4,000 accounts of other priority sector credit. Share of bank depositsto National Income increased from 9% to 15.3%. However, the branchnetwork and credit deployed were not evenly spread and there were widedisparities in all the States.

III


The position of deposits, credit deployment and branch network accordingto population group as on June 1969 is given in the following table:

Table – VPopulationGroup

No. ofBranches

Deposits[Rs. in crores]

Advances[Rs. in crores]

Credit-Deposit Ratio

Rural 1832(22.2%)

145(3.1%)

54(1.5%)

37.2%

Semi-Urban 3322(40.2%)

1024(22.0%)

407(11.3%)

39.7%

Urban 1447(17.5%)

1209(25.9%)

722(20.0%)

59.7%

Metropolitan 1661(20.1%)

2287(49.0%)

2426(67.2%)

106.0%

TOTAL 8262 4665 3609 77.3%

(Figures in brackets indicate percentage share in total)Rural Centre – less than 10000 populationSemi Urban Centre – less than 1 lakh populationUrban Centre – less than 10 lakh populationMetros – above 10 lakh population

Nationalisation of major banks in July 1969:The scheme of ‘Social Control’ of banks introduced in 1968 was aimed atmaking bank credit an instrument of economic development, spreadingthe banking habit in the country duly aligning credit policy and practiceswith national development programmes and priorities.

With a view to ensure that banks were motivated towards speedierachievement of objectives of social control measures, the following 14major scheduled commercial banks with deposits of Rs.50 crore andabove as on 18th July 1969, were nationalised. The banks accounted for56% of the total deposits of scheduled commercial banks:

1. Allahabad Bank 2. Indian Bank3. Bank of Baroda 4. Indian Overseas Bank5. Bank of India 6. Punjab National Bank7. Bank of Maharashtra 8. Syndicate Bank9. Canara Bank 10. Union Bank of India

11. Central Bank of India 12. United Bank of India13. Dena Bank 14. United Commercial Bank

With this, 83.3% of deposits of scheduled commercial banks (includingdeposits of SBI and its 7 subsidiaries) came within the ambit of publicsector. The share of other Indian banks was 6.4% and of foreign banks10.3%. Broad objectives of Bank Nationalisation set out by the then PrimeMinister in her statement to the Parliament on 21st July 1969 included –

i. Mobilisation of savings of the people to the largest possible extentand to utilise them for productive purposes in accordance with ourPlans and priorities;

ii. Operations of the Banking System should be infused by the largersocial purpose and subject to close public regulation;

iii. Legitimate credit needs of priority sector, industry and trade, big orsmall, to be met;

iv. It should be the endeavour of banks to ensure that needs ofproductive section of economy and in particular those of farmers,small scale industries and self-employed professional group, aremet in increasing manner;

v. Nationalisation of banks will actively foster the growth of new andprogressive entrepreneurs and create fresh opportunities for hithertoneglected and backward areas in different parts of the country.

As far as foreign banks were concerned, they provided by and large,business of specialized nature such as facilitating foreign trade andtourism. The operations of banks of one country in another, subject to lawsof the land, was mainly for such purposes and was part of an internationalfacility and Indian banks also maintained their branches in many countries.Having regard to this, branches of foreign banks incorporated outsideIndia were kept outside the purview of the ordinance of nationalisation ofbanks by the Government.

Taking banking to the masses in villages called for massive expansion ofnetwork of branches in rural areas. This was a stupendous task not onlyin terms of number but also in terms of spatial distribution, as the countryhad as many as 5.75 lakhs villages. Only 6332 villages had populationof more than 5000 inhabitants, 36003 villages had population of 2000to 4999 and 5.34 lakh villages had population between 500 and 1999according to 1971 census.

Banking Development in the Seventies 21


Lead Bank Scheme:The Study Group of National Credit Council on Organisation & Frameworkfor Implementation of Social Objectives (Gadgil Committee) examined thespread of banking. Its main findings were as under:

i. The magnitude of under development of banking be judged on thecriteria of population per office of commercial banks. In 1967 Indianpopulation per office of commercial banks was 73,000 against 4,000in UK, 7000 in USA and 15,000 in Japan.

ii. Banking services were extended to hardly 5000 villages.iii. There was uneven spread of bank offices.

Judged by the population serviced by commercial banks, Kerala was themost developed State (37,000) followed by Tamilnadu (39,000), Gujarat(41,000), and Maharashtra. Some of the least developed States wereOrissa (2,27,000), Bihar (2,18,000), Nagaland (2,05,000) and Assam(1,99,000).

Gadgil Committee suggested Area Approach in evolving plans andprogrammes for development of banking and credit structure. TheCommittee of Bankers (Nariman Committee) also recommended AreaApproach for banking development. Gadgil Committee recommendedthat depending upon area of operations and location, commercial banksshould be assigned particular districts where they should act as pace-setters for banking development.

RBI accepted the recommendations of the Committees and introduced,in December 1969, the Lead Bank Scheme. All the districts of the country(except metropolitan cities and union territories) were allotted amongcommercial banks mainly depending upon their network of branches.Syndicate Bank and Canara Bank who had done pioneering work in ruralbanking and lending to priority sectors, were allotted a few districts inthe State of Uttar Pradesh and Haryana. In fact, share of priority sectoradvances of Syndicate Bank in 1969 was as high as 37.8% of its advancesand it was pioneer in extending credit to agriculture sector as early as1964.

The Lead Banks were asked toi. conduct impressionistic survey of districts to get familiar with salient

features of economy of the district allotted;ii. identify unbanked growth centres having potential for banking

facilities;

iii. formulate Area Development Plans and Programmes in consultationwith development agencies of the State Government dovetailing withDistrict Development Plans.

The functions of lead banks (contained in the circular of RBI) were asunder:

i. Survey the resources and potential for banking development in theDistrict;

ii. Survey thenumberof industrial,commercialandotherestablishments/firms who do not have banking accounts or who are primarilydependent on money lenders;

iii. Examine the facilities for marketing agricultural produce & industrialproducts, storage & warehousing spaces and linkage of credit withmarketing;

iv. Survey the facilities for stocking of fertilizers & other agriculturalinputs and for repairs & servicing of the equipments.

v. Recruit and train staff for offering advice to small borrowers/farmersand for follow up, inspection and ensuring end-use of the moneylent;

vi. Assist other primary lending agencies; andvii. Maintain contact and liaison with Government and Quasi-Government

Agencies.

RBI drew up detailed proforma for conducting survey by banks.

District Consultative Committees were formed to provide a forum todiscuss problems as well as to review progress made in implementationof the scheme. The Committee consisted of representatives offinancial institutions/banks and District Development Agencies. Initiallyrepresentatives of RBI also were associating with the Committee forallotting identified unbanked centres among the banks for speedy openingof branches. The banks conducted the impressionistic surveys of all 338districts by 1973.

The scheme aimed at, geographical spread of network of branches ofcommercial banks in the unbanked centres, acceleration of mobilisationof deposits and stepping up lending by the banking system with specialattention to the priority sector, for growth of the economy.

In 1972, RBI defined priority sector more elaborately. Besides Agriculture,SSI and Export, advances to Transport Operators, Retail Traders, Small



Business, Professionals & Self-Employed and Education were alsobrought under priority sector. In 1974, Banks were also advised to raisethe share of credit to priority sectors to 33.3% by 1979.

Innovative Deposit/Credit schemes:

Deposit Schemes:Traditionaly banks used to mobilise deposits under Savings Bank,Current Account and Fixed Deposit Schemes. After nationalisation,banks introduced novel schemes to cater to all sections of society, whichincluded monthly income deposit scheme for those who desire to earnregular income, cash certificates intended to help parents in providingfor their children’s future, recurring deposit for salaried persons for theirmonthly saving, annual retirement scheme, farmers’ deposits, minors’deposits, insurance linked saving, housing deposit, etc.

Credit Schemes for Rural Development:The Government of India had started in the planning era in 1952,Community Development Programme to address to the problem ofrural areas. In 1953, National Extension Service was introduced as anextension of the Community Development Programme. However, due tofinancial constraints and other impediments, the programme could notsucceed to great extent. It was therefore felt that on area basis, intensivedevelopment of agriculture should be given priority to combat food crisisfaced in sixties by the country. The programmes were launched forintensive development of agriculture and generation of employment inrural areas.

In the seventies, of 350 million of people living below poverty line, 300millions were in rural areas. They comprised of small farmers, marginalfarmers, agricultural labourers, rural artisans, persons engaged in cottageindustries and other allied activities. In order to assist the people belowpoverty line, number of area development programmes were launched. In1973, Drought Prone Areas Programme (DPAP) and Desert DevelopmentProgramme were launched, with the major objective of restorationof ecological balance through proper development of land and waterresources and minimise programme effects of drought on poor villagers.Command Area Development was started in 1974-75 for bridging thegap between creation and utilisation of irrigation potential and optimisingagricultural production from irrigated land and minimise drought effects.

Districts where small and marginal farmers were concentrated wereidentified and Small Farmers Development Agency (SFDA) in 46 districtsand Marginal Farmers Development Agency (MFDA) in 41 districts werestarted to provide subsidy linked credit for undertaking minor irrigation,dairy, poultry, piggery, sheep rearing, lift irrigation, sericulture, bee keepingetc., to identified eligible farmers, with tie up with banks for loans.

RBI issued guidelines for Village Adoption Scheme in 1972 for adoption ofvillages for general lending and other economic activities.

The public sector banks evolved area specific and economic activityspecific credit schemes for dry farming, intensified cropping, dairy farming,hire purchase scheme for farmers for purchase of tractors, diesel engines/electric motors, lift irrigation, fertiliser distribution and energising wells.

Similarly, to extend credit to other priority sectors viz. small scale industry,cottage industry, transport operators, small business, professionals, selfemployed, education and exports, special credit schemes were launched.The objective of the credit schemes was to meet credit needs of theseneglected sectors for acquiring productive assets and working capitalrequirements to increase production, employment and income and tocontribute to economic development of the country.

Differential Rate of Interest Scheme:Government of India announced on March 25, 1972 a Differential Rateof Interest Scheme (DRI) where loans to very poor at concessional rateavailable at 4% interest, to those who have potential to develop with theassistance of the bank, the productive endeavours, who can not offer anysecurity or guarantee of well to do party. The deserving persons engagedin agriculture, cottage industries and in vocation in urban areas such ascutting cloth, besides intelligent student going on higher education andphysically handicaped person pursuing occupation were to be identified.The income criteria was fixed at Rs. 2000 annual income in rural andsemi-urban areas and Rs. 3000 in urban areas and maximum amount ofloan for working capital Rs.1500 and term loan of Rs.5000. Banks wereasked to lend ½% of its advances outstanding at the end of previousyear.

The Composite loan scheme was introduced to assist small artisans.Finance was made available in the form of term loan to acquire assetsand working capital requirements.



Bank Credit – as an instrument of Socio-economic Change:

A small bank loan can bring a change in the social and economic life of anindividual. The following example explains the rationale:

In Uttar Pradesh and Bihar, in the Seventies, rickshaw pulling was oneof the self employment-oriented occupations. As no bank credit wasavailable to Rickshaw Pullers, it was the practice that rickshaw used tobe owned by person of means. The rickshaw owner used to give therickshaw on hire to a rickshaw puller on a daily-wage basis. The rickshawpuller although was earning daily Rs.60 to 70 after working 10 to 12 hoursof his labour, he used to get Rs.10 as his daily wage and pay the balanceto his employer. The cost of a Rickshaw in those days was Rs.1200.

When the rickshaw puller was provided bank loan of Rs.1200 to own arickshaw, his income level increased from Rs.10 to 60 per day. Even afterpayment of Rs.10 towards the bank loan, Rs.50 was available to him tohave better food, clothes, shelter, health and education for his family.

Twenty Point Programme:20 Point Programme was launched in 1975 and revised in 1982 forhelping poor in rural areas. The areas of 20 Point Programmes, wherebanks could play their role by extending financial assistance, included –

(i) increasing irrigation potential;(ii) special efforts to increase production of pulses & oil seeds;(iii) distribution of surplus land after implementing land ceiling;(iv) rehabilitation of bonded labourers;(v) programme for development of Scheduled Caste/Scheduled Tribes;(vi) assistance for construction of houses to rural poor and economically

weaker section in urban areas;(vii) maximum power generation and development of biogas;(viii) expand public distribution and programmes for handicrafts,

handloom, small scale village industries.

Credit Deposit Ratio of Rural/Semi-urban Branches:The public sector banks were directed in 1979 to attain 60% credit depositratio in rural and semi urban branches separately to achieve twin objectivesof reducing intra State imbalance in utilisation of deposit resources andrestrain its migration to urban areas.

Progress in first five years of Lead Bank Scheme:With the introduction of the Lead Bank Scheme, commercial banks madeconcerted efforts to conduct impressionistic survey and identify sizablenumber of unbanked centres in the first five years, 1970 to 1974. Therehas been rapid expansion of branches of commercial banks, mobilisationof resources and credit deployment with accent on priority sector. Thenumber of branches of commercial banks increased from 8262 in June1969 to 16,936 in June 1974, of which 66.4% were in rural and semi-urban areas. Deposits of scheduled commercial banks increased fromRs.4,646 crore to Rs.10,745 crore and Advances from Rs.3,599 croreto 7,858 crore with Credit-Deposit Ratio of 73.4%. Share of deposits inNational Income increased from 15.3% to 20.05%.

Regional Rural BanksThe entry of commercial banks in to the field of Agricultural Finance afternationalization of banks mainly took care of big farmers, mobilised ruralsavings and invested them in urban/metropolitan centres. The smallfarmers (having land holding of less than 5 acres), marginal farmers(having land holding of less than 2.5 acres) who constituted nearly 62%of land holdings, did not receive due attention. Similarly, rural artisans didnot get adequate credit from commercial banks.

As commercial banks were not able to make a dent in rural lending becauseof lack of expertise and the high cost of operations, Government of Indiaset up Working Group under the Chairmanship of Sri M Narasimham,to examine the issue. The Working Group recommended establishmentof Regional Rural Banks (RRBs) to provide credit and other bankingfacilities especially to small and marginal farmers, agricultural labourers,artisans and small entrepreneurs in rural areas. The recommendationof the Working Group was accepted and ordinance was issued on 26thSeptember 1975 to establish Regional Rural Banks (RRBs).

RRBs were created under Regional Rural Bank Act 1976. RRBs hadauthorized capital of Rs.1 crore and paid up capital of Rs.25 lakhssubscribed by Central Government (50%), State Government (15%) andsponsor bank i.e. lead bank (35%).

The lead districts where co-operative banks were weak and commercialbanks’ operations were low, were selected for establishment of RRBsto supplement efforts of existing lending institutions to extend credit to



small/ marginal farmers, agricultural labourers, rural artisans and smallborrowers to improve their economic level. Each sponsor bank wasgiven the responsibility of establishing RRB with jurisdiction of 1 to 3contiguous districts and also to provide managerial and administrativeassistance for its smooth running till it recruits and develops its personneland organisation. RRBs were scheduled banks with separate Boardsof Directors nominated by Central Government, State Government andsponsor banks. The first Regional Rural Bank was set up by SyndicateBank on 2nd October 1975 in the name of Prathama Bank in MoradabadDistrict, U.P.

Establishment of RRBs gave further impetus for opening of bank branchesin unbanked rural centres and extending credit to small/marginal farmersand other weaker sections. Over 92% of their advances were to thesecategories. RRBs opened as many as 1965 branches during the periodfrom 1975 to June 1979.

Credit Planning of Banking System:It was felt that in spite of 5-Year plans for economic development andcommand over 83% of the resources of the banking system with publicsector banks, the credit needs ofAgriculture, SSI, Export and other weakersections did not receive due attention. Introduction of social control overbanks brought serious thrust for credit planning. The National CreditCouncil formulated in quantitative term, objectives of banks’ policy ondeposit mobilisation and credit allocation. RBI prepared the Credit Planfor the Banking System keeping in view the national priorities, anticipateddeposit accretion and general economic situation. Subsequentlydiscussions were held with individual banks in working out their depositmobilisation and credit plans & programmes. As 31 banks had controlled95% of deposits and 96% of advances, RBI asked them to supply datain special format for close monitoring. The main purpose of the exercisewas to make available credit to all sectors of the economy adopting a newapproach for lending based on development potential rather than onlysecurity.

Cash Credit System:The important mode of extending credit for working capital requirementsof industry was in the form of Cash credit System. Under Cash Creditsystem of lending, banks used to sanction maximum credit limit within

which borrower can borrow based on securities. The level of advances ofthe bank was determined not by the bank as to how much it can lend ata particular time, but by the borrowers who decide to borrow under cashcredit system. When borrower decides to borrow low the banks facedwith the problem of unutilized funds and when borrower needs enhancedfunds without notice banker faced with the problem of meeting with thedemand. At the end of June 1974 the deposits of banking system wereRs.10,706 crore against credit limit sanctioned of Rs.12,880 crore andactual utilization was 57%.

A worldwide flare up of prices and stagnation of Agricultural and industrialproduction in the early seventies fuelled unprecedented rise in prices withinflation level rising to 31%. This led to rise in demand for credit from largeindustry and commerce, which were availing of 57% of bank credit. Therewas an imbalance in demand for and supply of funds.

Tandon Committee:It was against this background that a Study Group was constituted by RBIin June 1974 (led by Shri Prakash Tandon, CMD of Punjab National Bank)to frame guidelines for –

i. follow up and supervision of credit;ii. inventory norms for different types of industries in private and public

sector;iii. statutory capital structure and sound financial basis in relation to

borrowings; andiv. sources for financing minimum capital requirements.

With a view to making lending system more amenable to credit planningby banks and in order to prevent speculative build-up of inventory, theTandon Group suggested -

i. norms for inventory and receivables for 15 industries which covered50% of industrial advances of the banks;

ii. change in style of credit;iii. methods for computing maximum permissible finance on the basis of

inventory/receivable norms; andiv. Quarterly reporting system for follow up and supervision of use of

credit.

The Tandon Group gave an objective technique for assessment of workingcapital requirements. The whole exercise is based on projections of sales,



the accepted level of Inventory, Receivable and other Current Assets andCurrent Liabilities to support the contemplated level of production. Threealternative methods for working out maximum level of bank borrowingwere suggested.

I. It proposed the concept of Working Capital Gap i.e. total currentassets less current liabilities other than bank borrowings and financemaximum of 75% of the gap and the balance to come out from longterm funds i.e. owned funds and term borrowing. Under this firstmethod the Current Ratio requirement (Current Assets to CurrentLiabilities) is 1.17%.

II. Under second method of lending, borrower is expected to providea minimum of 25% of current assets out of long term funds whereCurrent Ratio requirement to be maintained is 1.33%.

III. Same as in (II) above, but excluding core current assets i.e.minimum level of current assets requirement to be maintained whichare required to be financed from long term funds. This calls formaintaining Current Ratio of 1.79%.

Accepting the recommendation of Tandon Working Group in August 1975,RBI issued guidelines for banks to adopt the 1st method of assessingthe working capital, where borrower is required to maintain current ratioof 1.17% and rationalize industrial credit facilities enforcing well-definednorms for inventory, receivable and have grip over credit utilizationthrough follow up action. The guidelines were made applicable to allindividual borrowers including SSI, enjoying aggregate credit facilities ofRs.10 lakhs and above from the banking system.

The objective of the guidelines was that the bank was to supplementborrower’s resources to carry acceptable level of current assets (i.e.inventory, bills receivables, etc.). A part of fund requirements mustcome from owned funds and term borrowings, and over a period of timedependence on bank finance should be reduced. It also aimed at curbingany tendency on the part of borrower to build undue inventories as earlierunder security oriented system, advances were sanctioned against thesecurity of stocks without growth of production.

CHORE COMMITTEE:As the guidelines were not fully implemented by banks, in March 1979RBI appointed Working Group headed by Shri K B Chore to review thecash credit system with reference to gap between sanctioned credit limit

and the extent of their utilization for rational management of funds bycommercial banks.

The Chore Committee recommended to introduce second method oflending for assessment of working capital requirements where borrowerhas to maintain 1.33% Current Ratio. To the borrowers who are not in aposition to improve their current ratio bringing long term funds, to 1.33%, itsuggested to segregate excess borrowings and treat it as working capitalterm loan to be repaid in instalments at a higher rate of interest. It alsosuggested making available at least 50% of cash credit limit against rawmaterials to manufacturing units by way of drawee bills.

The recommendations of Chore Committee were accepted and bankswere asked to implement.

Massive Branch Expansion (1969-79):In line with branch licensing under the Lead Bank Scheme, branchexpansion programme was drawn district by district basis for each State bythe Reserve Bank, in consultation with State Government and banks. Thebanks worked with missionary zeal to take banking facilities to unbankedand under-banked centres and opened large number of branches everyyear during seventies. Year-wise opening of branches during 1969-70 to1978-79 given in the following Table speaks for itself.

Table – VIPeriod

June to JuneNo. of offices opened

during the yearPeriod

June to JuneNo. of offices opened

during the year1969-70 1869

(65.8)1974-75 1794

(35.7)1970-71 1882

(64.7)1975-76 2490

(35.4)1971-72 1609

(33.4)1976-77 3582

(51.5)1972-73 1740

(42.8)1977-78 3214

(70.6)1973-74 1574

(38.4)1978-79 2186

(70.0)

(Figures in brackets indicate percentage of branches opened in ruralareas)



The Regional Rural Banks played an important role by opening 2678branches during 1975 to June 1980 in 130 districts in 17 States.

Table – VIIBRANCH EXPANSION – 1969-79

Commercial Banks(Population group wise)

PopulationGroup

Rural Semi-urban

Urban Metro-politan

Total

June 1969 1832(22.4)

3322(40.1)

1447(17.5)

1661(20.0)

8262

1970 3062(30.2)

3695(36.5)

1583(15.6)

1791(17.7)

10141

1971 4279(35.6)

4016(33.4)

1778(14.8)

1940(16.2)

12013

1972 4814(35.3)

4385(32.2)

2323(17.1)

2100(15.4)

13622

1973 5561(36.2)

4723(33.8)

2573(16.7)

2503(16.3)

15362

1974 6165(36.4)

5089(30.0)

2897(17.1)

2783(16.5)

16936

1975 6806(36.4)

5570(29.7)

3266(17.4)

3088(16.5)

18730

1976 7687(36.2)

6387(30.1)

3739(17.6)

3407(16.1)

21220

1977 9532(38.4)

7211(29.1)

4263(17.2)

3796(15.3)

24802

1978 11802(42.2)

7546(27.0)

4542(16.2)

4086(14.6)

27976

1979 13333(44.1)

7845(26.0)

4717(15.6)

4307(14.3)

30202

(Figures in brackets indicate percentage of total)

During June 1969 to June 1979, the total number of branches increasedfrom 8262 to 30,202, recording a phenomenal growth in network ofbranches by 21,940. Share of rural branches increased from 22.4 to44.1. As many as 11,573 branches were opened in unbanked centres.Population per office of commercial banks was declined from 65,000 to20,000. In the following under-banked States also population per office ofcommercial banks was declined significantly:

(Population per office)State June 1969 June 1979 State June 1969 June 1979

Manipur 4,97,000 31,000 Assam 1,88,000 33,000Tripura 2,76,000 23,000 Madhya

Pradesh1,16,000 26,000

Orissa 2,12,000 31,000 UttarPradesh

1,16,000 26,000

Bihar 2,07,000 35,000

The comparative position of population group-wise Deposits andAdvances given in the following table indicates phenomenal growth ofbanking business in the first decade of nationalisation of banks.

Table – VIII(Rs. in core)

PopulationGroup

June 1969 December 1979

Dep.Rs.

Adv.Rs.

CreditDepositRatio (%)

Dep.Rs.

Adv.Rs.

CreditDepositRatio (%)

Rural 145(3.1)

54(1.5)

37.2 3583(11.5)

2014(9.3)

56.0

Semi-urban 1024(22.0)

407(11.3)

39.7 7006(22.4)

3471(16.1)

49.5

Urban 1209(25.9)

722(20.0)

59.7 7836(25.1)

4784(22.2)

60.0

Metro 2287(49.0)

2426(67.2)

106.0 12800(41.0)

11290(52.4)

88.0

Total 4665 3609 77.3 31225 21559 69.0

(Figures in brackets indicate % of total)

The data reflects significant increase in share of deposits of rural branches,from 3.1% in June 1969 to 11.5% in December 1979 as a result of massiveopening of branches in unbanked rural centres. Similarly the resourcesmobilised from rural and semi urban branches were increasingly lentin those areas, as Credit Deposit Ratio of rural and semi urban areasimproved from 37.2% and 39.7% in June 1969 to 56% and 49.5% inDecember 1979 respectively. This also indicates deployment of resourcesmobilised from these areas for their economic development and arrestingshifting of deposits to urban and metropolitan centres for investments.

During the period number of deposit accounts rose from 183 lakhs in



1969 to 1100 lakhs, borrowal accounts from 11 lakhs to 155 lakhs andpriority sector borrowal accounts from 2.6 lakhs to 102 lakhs.

In the seventies, banking system witnessed spectacular progress in theareas of branch expansion, deposit mobilisation and extending credit topriority sectors. Earnest attempt were made for making banking facilitiesavailable to a large number of weaker sections and rural population whowere devoid of these facilities for centuries.

Credit Deployment:There was steady increase in flow of credit to priority sector as theirshare increased from 14.6% in June 1969 to 30.6% in June 1979. Theshare advances to large & medium sector declined from 60.6 per cent inJune 1969 to 34.9 per cent. The deployment of credit in line with the planpriorities in the first decade after banks’ nationalisation can be seen fromthe following table.

Table – IXSectoral Deployment of Credit

Rs. in croresMarch1968

June1974 1976 1977 1978 1979

Large & Med. Inds. 1857(60.6)

3550(44.4)

4462(38.2)

4779(35.5)

5762(36.1)

6686(34.9)

S S I 211(6.9)

1005(12.5)

1251(10.7)

1462(10.9)

1848(11.6)

2277(11.9)

Agrl. & Allied 67(2.2)

709(8.9)

1214(10.4)

1400(10.4)

1961(12.3)

2521(13.1)

Internal Trade 588(19.2)

1396(17.5)

3115(26.7)

3828(28.4)

4198(26.3)

4864(25.4)

Others 341(11.1)

1339(16.7)

1636(14.0)

1987(14.8)

2182(13.7)

2815(14.7)

Total 3064 7999 11678 13457 15961 19163

(Figures in brackets indicate percentage of total)

Banking Development in the Eighties

Government of India nationalised on 1st April 1980 the following sixprivate sector banks, which had deposits of Rs.200 crore and above andextended further public ownership of Banking System.

1. Andhra Bank 4. New Bank of India2. Oriental Bank of Commerce 5. Punjab & Sindh Bank3. Corporation Bank 6. Vijaya Bank

The preamble to the ordinance issued to the acquisition of above banksstated that these banks have been taken over in having regard to theirsize, resources coverage and organisation in order to further controleconomy and promote welfare of the people in conformity with the policyof the State.

With this, share of 28 public sector banks in deposits increased to 90.7and 90.6 per cent in advances.

Revision of Priority Sector Target:

To make available greater share of advances to priority sector, targetwas revised upward from 33¯ % to 40% of net credit to be achieved byMarch 1985. Banks were advised to ensure disbursement of minimum of40% of additional credit every year to priority sector. At the end of June1980, banks’ advances to priority sector constituted 32.1%, with 13.4% toagriculture, against the target of 33¯ %. The sub-target for agriculture wasraised from 12% to 14% and revised to 16% in 1983 to be achieved by1987 and further raised to 17% in 1988 and 18% in 1989 to be achievedby March 1990.

IV


Integrated Rural Development Programme (IRDP):IRDP was launched in 1979 with twin objectives of raising family incomeof identified group of below poverty line and create sustained employmentin rural areas. Initially the programme covered 2300 blocks excludingDistricts covered under Small Farmer Development Agency and MarginalFarmer Development Agency. It was subsequently extended to 3500blocks in 1983 and all 5004 blocks of the country in 1985.

It was planned to cover 600 families per year. The target group comprisedsmall/marginal farmers, rural artisans, rural women and persons belongingto Scheduled Caste/Tribe. Family of 5 members was taken as unit whoseannual income is less than Rs.3500. The subsidy component was fixedat 25 per cent for small farmers and 33¯ per cent for marginal farmersand 50 per cent for Scheduled Caste/Tribe beneficiaries. The banks weregiven annual target for assisting the identified persons to extend loans forthe productive endeavours. The subsidy given by the Government wasto be considered by the bank as margin money for considering the loanapplication.

NABARD:National Bank for Agriculture and Rural Development (NABARD) was setup on 1.2.1982 to provide credit for promotion of Agriculture, Small ScaleIndustries, Cottage and Village Industries, Handicrafts and other ruralcrafts and allied economic activities in rural areas. It took over functionsof Agriculture Refinance and Development Corporation (ARDC) as wellas refinancing functions of Reserve Bank of India in relation to State Co-operative Banks and Regional Rural Banks.

The banks were asked to actively participate in other poverty alleviationand employment generation programme sponsored by Govt. of India,such as Self Employment for Educated Unemployed Youth (SEEUY).

District Industries Centres:The programme for establishing District Industries Centres to prepareindustries profile and identify new entrepreneurs was launched tofacilitate the bankers to extend financial assistance to identified activitiesand entrepreneurs.

The annual district credit plan spelt out target allotted under Statesponsored special schemes. The progress was monitored at District levelreview meeting of bankers to achieve planned targets.

Branch Expansion Policy – 1980-85:The branch licensing policy of RBI formulated for 1980-85 laid mainemphasis on increasing banking facilities in rural and semi-urban areasand reducing the inter-regional disparities in spread of branch banking.With the extension of IRDP to all blocks of the country, the policy aimedat covering all unbanked blocks and coverage of one bank office for anaverage population of 17,000 (1981 census) in rural & semi-urban areasof each block. Regional Rural Banks were given priority to give licence toopen branches in unbanked centres in their operational areas.

Parameters for Assessment of Performance of Banks:To ensure that banking system achieves the objectives of national bankingpolicies, banks’ performance was assessed on the following parameters,by RBI.

A. 1. Ratio of rural branches to total bank offices.2. Credit Deposit Ratio in rural and semi urban branches in relation

to target (60%).3. Credit Deposit and Credit Deposit + Investment Deposit Ratio of

States.

B. Priority Sector:1. Ratio of bank credit to priority sector and sub-target to Agriculture,

Weaker Sections Ratio.2. DRI advances with sub-target to SC/ST category.3. Credit under IRDP and other programmes sponsored by Central

Government in relation to annual target.4. Credit under 20 Point Programme and other employment

generation schemes.C. Export Credit.

Performance during 1980-85:The main objectives of branch licensing namely, improving the bankingfacilities in rural & semi-urban areas with greater emphasis on properspatial distribution of banking offices and reduction in inter regionaldisparities in the banking development were largely achieved. As againstthe policy aim of achieving coverage of one bank office for an averagepopulation of 17,000 in rural and semi-urban areas in each district, thepopulation coverage for these areas for the country as a whole was 15,500at the end of March 1985. The total number of bank offices at the end

Banking Development in the Eighties 37


of March 1985 was 50,980. Population group-wise deposits/advances/branches given in the following table:

Table – X

June 1969 March 1980June1980

March 1985June1985

Dep. Adv. Brs. Dep. Adv. Brs. Dep. Adv. Brs.

Rural 145(3.1)

54(1.5)

1832(22.2)

3966(11.9)

2162(9.7)

15101(46.6)

9918(13.6)

6632(13)

30185(58.8)

Semi-urban 1024(22.0)

407(11.3)

3322(40.2)

7712(23.2)

3641(16.3)

8079(24.9)

16077(22.0)

8669(17)

9816(19.0)

Urban 1209(25.9)

722(20.0)

1447(17.5)

8368(25.1)

5026(22.4)

4856(15.0)

18840(26.0)

11533(23)

6578(12.8)

Metropolitan 2287(49.0)

2426(67.2)

1661(20.1)

13275(39.8)

11552(51.6)

4384(13.5)

27913(38.4)

23906(47.0)

4806(9.4)

Total 4665 3609 8262 33321 22381 32420 72748 50740 51385

(Figures in brackets indicate % of total)

Credit Deployment:Public sector banks made significant progress in extending financialassistance to priority sector as well as under special schemes. By the endof March 1985, these banks, with ratio of 41.3% exceeded priority sectortarget of 40% of net bank credit with an outstanding amount of Rs.17,971crore. However, their direct advances to agriculture and weaker sectionwas 14.2% and 9.4% respectively, marginally lower than target of 15%and 10%.

During 1980-85, 16.56 million families were assisted under IRDP againstthe target of 15 million families and Rs.3102 crore was disbursed under 20Point Programme. Public sector banks had covered 114.83 lakh accountswith financial assistance of Rs.5531 crore.

DRI advances of the banks exceeded target of 1 per cent, benefittingnearly 43 lakh borrowal accounts. 51 per cent of financial assistance wasextended to Scheduled Caste/Tribes against the sub-target of 40%.

Credit Deposit Ratio of rural branches improved from 56.7% to 66.9% andof semi-urban branches from 49.1% to 53.9% against target of 60%.

Impact of Expansion:The rapid expansion of banking business gave rise to number of problems,which affected image, operational efficiency, productivity, quality of serviceand profitability of banking system.

Rs. in crores

Essential house keeping functions were not well performed resulting innot tallying upto date books of accounts, delay in reconciliation of interbank /branch transactions, which provided scope for malpractice suchas frauds and increase in complaints from its customers. The absenceof effective follow up and supervision of advances and managementinformation system contributed to deterioration in quality of loan assets.

Industrial Sickness:Industrial sickness which appeared in modest way in seventies assumedlarger proportion in eighties and banks were asked to minimise risingsickness in their industrial credit portfolio by timely action, identifyingincipient sickness and considering rehabilitation programme. Thedimension of problem of industrial sickness resulted in loss of employment,wasting of capital assets, loss of production and reduction in revenueto exchequer. The banks and financial institutions also face the problemof recycling of their funds lent to sick units and realising the interestincome and recovery of loan instalments, rendering their loan asset non-performing, affecting their profitability and health adversely.

Periodical returns from sick units, which will help in diagnosing incipientsickness, were introduced by RBI and higher level forum was set up ineach bank. Banks and financial institutions sought from Government legaland tax relief in their efforts to revival of sick units.

Because of complexity of factors that contributed to industrial sicknessand in view of large scale lending to industry by banks and financialinstitutions, the banks had to develop adequate expertise in analysingindustrial and financial trends and likely changes in current environmenthaving bearing on industrial outlook and in monitoring the performance ofthe borrowing concerns so that early warning system could be devised todetect incipient sickness to take possible corrective action.

RBI introduced in 1985 Health Code System to classify loan assets asan effective tool for monitoring loan portfolio. Under health code systemborrower accounts were classified under 8 codes as under for follow upand making adequate provisions for bad and doubtful debt.

Health code:1. Satisfactory 2. Irregular 3. Sick viable4. Sick non viable 5. Advances recalled 6. Suit filed7. Decreed Debts 8. Bad and Doubtful Debts



In 1992 this was discontinued with introduction of prudential norms.

Nearly 8% of total bank credit was blocked in sick units between 1983and 1985. The number of identified sick units in large, medium and othersectors was 99,668 involving outstanding amount of Rs.3805 crore ofbank credit.

To put in place an effective mechanism to detect incipient sickness inindustrial units and rehabilitation of viable sick units, the Government ofIndia passed the Sick Industrial Companies Act (Special Provision Act1985) and established Board for Industrial and Financial Reconstruction(BIFR).

Further the Industrial Reconstruction Corporation of India (IRCI)was converted into a Statutory Corporation in the name of IndustrialReconstruction Bank of India (IRBI), with a view to strengthening its roleas the principal Credit and Reconstruction Agency for industrial revival,enabling it to coordinate the work of other institutions engaged in revivalof sick industries.

The banks also faced the problem of overdues under priority sectoradvances. On an average, recovery to demand of agricultural advancesranged from 50% to 52%, whereas it was as low as 30% to 40% underpoverty alleviation and employment generation credit schemes.

Steps to improve profitability:

The profitability of the banking system continued to be under severestrain as a result of large and growing number of sick industrial units andmounting overdues under priority sector.

Apart from increasing non-performing loan assets, the following factorsalso contributed for declining profitability of banking system in earlyeighties.

(i) Substantial portion of funds (53% to 53.5%) got locked up underSLR/CRR with low rate of return.

(ii) 40% of bank credit to priority sector and food credit had to be lentat lower rate and only 12 to 15% of total funds were available forcommercial lending at higher rate. With the administered regime ofminimum and maximum rates on deposits and advances by RBI,banks had limited maneuverability to improve income.

(iii) Opening of branches in unbanked centres to provide bankingfacilities without taking into account its viability.

(iv) Increasing wage bill.

The growing concern with narrowing profit margin of the banking system,prompted RBI to take following measures in 1984.

(i) The rate of interest on cash balance maintained with RBI in excessof statutory minimum balance was raised from 9 to 10 per cent.

(ii) The rate of interest charged on advances by commercial banks forfood grain procurement was raised from 12.5% to 14%.

(iii) Interest on Govt. securities was also raised.

Banks also revised upward service charges levied for various services,which was not done for continuously long period.

Branch Expansion Policy – 1985-90:It was felt, there was need for banks to concentrate on consolidation oftheir position by improving, among others, customer service, resourcesbase, lending operations, house keeping, supervision and control systemand financial viability. The RBI therefore formulated the Branch LicensingPolicy for 1985-90 for filling spatial gap in rural areas and opening urbanand metro branches on the basis of demonstrated need and potentialviability, to enable the banks to concentrate on improving their operationalefficiency, productivity and profitability.

Consolidation and Diversification:During mid eighties, the phase of consolidation, diversification andliberalisation was initiated. The key ingredients of phase of consolidationwere (i) significant slow down in branch expansion while emphasisingcoverage of spatial gaps in rural areas, (ii) comprehensive action plansof individual banks covering organisation and structure, training, housekeeping, customer service, credit management, recovery of dues, staffproductivity, profitability and phased introduction of modern technologyin banking operations, (iii) relieving policy related constraints on bankprofitability by raising coupon rates on Government bonds, return on cashbalances with Reserve Bank and allowing greater flexibility regardingbanking service charges and strengthening capital base of banks.

Withdrawal of Credit Authorisation Scheme:As the share of priority sector in outstanding credit had been rising at wellabove the target of 40 per cent and as the purpose of credit authorisationscheme was broadly achieved, mainly due to the enforcement of basicfinancial discipline to large borrowers and diverting flow of credit to prioritysector target level, the scheme was withdrawn in 1988. However, the



banks were asked to ensure CAS borrowers observe basic descriptionof maintaining the prescribed level of Current Ratio, Inventory norms andsubmission of quarterly information system. A system of post-sanctionscrutiny called Credit Monitoring Arrangement was introduced by RBI.

Bank deposit rates were rationalised and large spread of rates for differentmaturities was narrowed. To adjust better to interest rates changes, themaximum deposit rates was made applicable to 2 years maturity insteadof 5 years maturity. Banks were allowed to charge beyond floor rate onadvances to their large and medium borrowers in non-priority sectors,depending upon their assessment of borrowers’ track record.

Service Area Approach:Although banking system made significant progress in extending bankingfacilities and credit to rural areas, it was felt that there is need to improvequality of credit planning to reach the benefits of banks assistance torural masses. In April 1989, Service Area Approach was launched tocover nearly 6 lakh villages of the country under credit planning through78% of branch network of banks in rural and semi-urban areas. As perRBI guidelines, 15 to 20 villages were allotted to each branch of thebank. However, where number of branches were less in a block, morenumber of villages were allotted. The allocation of villages was done by aCommittee headed by Lead District Officer of RBI, Lead District Officersof lead banks and concerned officer of NABARD.

The objective of credit plan was to formulate realistic credit plan forall villages based on genuine needs of household in villages for theirproductive endeavours. The credit plan covered Agriculture, Cottage andSmall Scale Industries and Tertiary (i.e. other priority sector) and non-priority sector.

Uniform methodology was adopted for credit planning at Block, Districtand State level. Each bank was expected to arrive at quantum of creditrequired to be lent in the areas and make it part of its total credit plan.

As per RBI guidelines, Annual Action Plan was prepared and progress wasreviewed to achieve targeted level under the scheme by management ofbanks/RBI apart from District Level Bankers’ Committees.

Kisan Credit Cards:The Kisan Credit Card (KCC) scheme was introduced in 1988-89 forproviding crop loans to farmers in a flexible and cost effective manner.Beneficiaries covered under the scheme are issued credit card cum passbook incorporating name, address particulars of land and borrowing limit.Production credit limits are fixed taking into account entire productioncredit needs for full year (In 2004 Investment credit has been coveredunder the scheme).

Establishment of SIDBI:Small Industrial Development Bank of India (SIDBI), a wholly ownedsubsidiary of IDBI, was set up as a principal financial institution forpromotion of financing and development of Small Scale Industries. It wasalso expected to coordinate the functions of existing institutions engagedin similar activities. SIDBI commenced its operation in April 1990, takingover from IDBI its responsibility of administering the Small IndustriesDevelopment Fund and National Equity Fund.

Debt Relief Scheme – 1989:As the recovery of bank overdues to weaker sections posed specialproblem, the Government of India announced Agriculture and Rural DebtRelief Scheme 1989 for affording relief to farmers, rural artisans andhandloom weavers. The scheme covered waiver upto Rs.10,000 in eachcase of overdues under both production and investment credit includingwilful defaulters.

Introduction of Mechanisation/Computerisation:With the phenomenal increase in activities of banks, its clientele and widergeographical coverage, a degree of mechanisation and computerisationwas imperative to improve customer service, house keeping functionsand generation of data for control and monitoring, apart from improvingdecision making, productivity and profitability of banks.

In 1983, RBI constituted a Committee headed by Dr. C Rangarajan,Dy. Governor to identify the areas and functions where mechanisationis essential and examine all related issues taking into account extentand level of technology available in the country in early eighties. Anagreement entered into by Indian Banks’ Association with Employees’Unions in 1983, which imposed limitations on the extent and degreein terms of types of machines to be used, application areas, etc. The



recommendations of the Committee submitted in 1984 were acceptedand introduced mechanisation and computerisation at Branch, RegionalOffice, Zonal Office and Head Office level.

At the end of June 1990, public sector banks had installed 5007 advancedledger posting machines (ALPM) at over 1300 branches. Banks hadinstalled 253 mini-computers at Regional/Zonal Offices and 3 banks hadinstalled mainframes at their head offices. About 40,500 members of staffwere imparted training in computer awareness, machine operation.

The steps were initiated to prepare comprehensive computerisation plan,with major thrust to on-line banking at branch level, with a view to providesingle window services for major branch activities, computerisation ofthe remaining Regional/Zonal Offices and Head Office, setting up ofBANK-NET as a common data communication network for public sectorbanks and financial institutions and establishing links between identifiedbranches and Regional/Zonal Office, to facilitate quick transfer of fundsand information and eventually providing gateway to the Society forWorldwide Inter Bank Financial Telecommunication (SWIFT) for easier,faster and cheaper transmission of messages abroad on behalf of banksand customers.

Performance of Banking System – 1985-90:The banking industry started consolidation of its network of branches. Thetotal number of branches of commercial banks at the end of 31.3.1990increased to 58914 of which 57.6 per cent were in rural areas. Thepopulation per office of the commercial bank came down to 11,600. Thetotal number of branches opened during 7th five year plan (1985-90) were8408 against 18,560 during 6th plan period (1980-85).

The total deposits of scheduled commercial banks as at last Friday ofMarch 1990 were Rs.1,72,759 crore and advances of Rs.1,13,592 crore,with Credit Deposit Ratio of 65.8 per cent. The share of deposits of ruraland semi-urban branches constituted 15 per cent and 20.8 per centrespectively. While Credit Deposit Ratio of rural branches was 63.9%, itwas 51.6% in semi-urban branches.

Credit Deployment:Out of total outstanding credit at the end of March 1990 of banks, 43.2%was extended to priority sector and 37.3% to large and medium industries,which was 60% in June 1969. Under IRDP, 18.18 million families were

actually assisted against the target of 16.03 millions. Against the sub-target of 30 per cent each of actual assisted beneficiaries fixed for SC/STand women beneficiaries, the achievement was 45 per cent and 18.9 percent respectively. The recovery of public sector banks of their IRDP loanwas 39 per cent of demand in 1989.

Status of Economy – 1991:As Financial Reforms were initiated in 1990-91, it is worthwhile tostate status of Indian Economy at the end of 7th plan (1985-90) and itsperformance during the plan period in key sectors.

The planned targets in terms of overall growth as well as others forAgriculture and Industry were exceeded. The average growth rate foragriculture production was close to planned target of 4 per cent perannum. The average growth of industrial output was 8.4 per cent againsttarget of 8 per cent per annum.

Despite the satisfactory performance of real sector, serious macroeconomic imbalances and distortion surfaced during 1985-90, include highlevel budget deficits incurred almost year after year. With consequenceexpansionary impact on money supply, sectioned by the strain on balanceof payments with current account deficits as a portion of gross domesticproduct for exceeding level indicated in 7th plan documents. Anotherdisgusting feature was slow growth of employment which declined from2.2% per annum during 1977-78 to 1983 to 1.55% between 1983-87. Thedecline in growth rate of employment in agriculture as well as organisedsector was quite sharp and whatever growth that had taken place inorganised sector in eighties was primarily in public sector.

External Sector: The large and sustained growth in current accountdeficit in balance of payments with average 2.2 per cent of GDP during7th plan was substantially higher than plan estimate of 1.6 per cent. Theannual debt service coverage ratio (excluding interest on non-residentdeposits) rose sharply from 13.6 per cent in 1984-85 to 23 per cent.

FinancialSystem:The Indian Financial System had grown and diversifiedgreatly and the financial market from short end to long developed intocontinuum. Banks’ links with capital market were increasing and theywere diversifying the activities through establishment of subsidiaries,which mobilised deposits and undertook various financial services. At thesame time, non-banking financial institutions including Unit Trust of India



(UTI), Life Insurance Corporation of India (LIC) and General InsuranceCorporation of India (GIC) were important lenders for term finance as wellas money market. The financial asset of financial institutions at the endof March 1989 was Rs.89,000 crore, which compared with commercialand co-operative banks at around Rs.1,77,000. The share of financialinstitutions increased from 28% in March 1981 to 34% at the end ofMarch 1989.

Money Market: There had been significant development in moneymarket. New Money Market Instruments such as 182 days TreasuryBills, Certificates of Deposits (CDs) and Commercial Papers (CP) wereintroduced.

Discount and Finance House of India Ltd. (DFHI) was set up in April1988 as a specialised money market institution with an objective ofproviding liquidity to money market.

StockHoldingCorporation of India Ltd., a depository institution was setup in August 1988 sponsored by financial institutions viz. IDBI, IFCI, ICICI,UTI, LIC, GIC and IRBI. Main objective has been introducing book entrysystem for transfer of shares and other types of scrips, thereby avoidingvolumes of paper work involved and thus reducing delay in transfer.

Securities and Exchange Board of India (SEBI) was established inMarch 1992 to promote orderly and healthy growth of security marketto ensure investors protection as a regulatory authority of the CapitalMarket. It regulates and supervises functions of stock exchanges as wellas intermediaries.

Part II

Banking Sector Reforms

PROGRESS OF COMMERCIAL BANKINGYear 1991 1995 1996 1997No. of Banks 272 284 293 299

No. of Branches 60113 62264 62849 63534

Population per Office (’000) 14 15 15 14

Per Capita Deposits (Rs.) 2368 4242 4644 5323

Per Capita Credit (Rs.) 1434 2320 2719 2931

Deposits to NationalIncome (%)

48 48 46.3 46.4

Priority Sector in TotalAdvances (%)

39.0 33.7 32.8 34.8

Banking Sector Reforms: Phase I

Rationale of Financial Reforms:The Indian Financial System comprised an impressive network of banksand financial institutions and wide range of financial instruments. Therehas been considerable widening and deepening of the Indian financialsystem since nationalisation of major banks and establishment of variousfinancial institutions. The extension of banking and other financialfacilities to large cross-section of the people stands out as a significantachievement in nineties. The Deposits of scheduled commercial banks aspercentage of National Income increased from 16.5% in 1969-70 to 48.6%in 1990-91.. The financial sector constituted an important component inthe economy and growth of financial flows in relation to economic activity.The banking system is the most dominant segment of financial sector,accounting for over 80% of the funds flowing through it.

The Committee on the Financial Sector Reforms headed by Shri MNarasimham was set up which gave its recommendations in November1991, to improve productivity, efficiency and profitability of the bankingsystem on the one hand and providing greater operational flexibility andfunctional autonomy in decision making on the other.

However, operational efficiency of banking system had been unsatisfactorycharacterised by low profitability, high and growing non-performing assetsand relatively low capital base.

In 1992-93, the net profits of public sector banks (excluding RRBs) afterprovision and contingencies were (-)1.00 per cent of working funds.Several banks were in fact not in a position to make adequate provision

V


for doubtful debts. The paid-up capital and reserves to deposits of publicsector banks was around 2.85 in 1990-91 – much lower than internationalstandards. Lack of proper disclosure norms had led many banks tokeep the problem under cover. The financial position of RRBs was evenworse.

The balance sheet performance of banking sector was thus a mixed one– large in asset base, strong in widening the credit coverage, but weak asfar as viability and sustainability was concerned.

The Economic Reforms initiated in 1990-91 aimed at enhancing theproductivity and efficiency of the economy as a whole and about increasingcompetitiveness of Indian firms both domestically and internationally.Banking system reforms formed a part of overall structural reforms ofthe economy. The banking sector reforms broadly covered (a) modifyingthe policy framework, (b) improvement in financial health, (c) creating acompetitive environment and (d) institutional strengthening to address theconcerns.

(a) Policy Framework: The external factors bearing on the profitabilityof the banking system related to the administered structure of interestrates, high level of the pre-emption in the form of Cash Reserve Ratio(CRR) and Statutory Liquidity Ratio (SLR) requirements and creditallocation to certain sectors. Easing of these external constraintsconstitutes a major part of banking reforms.

Imbalance in banking system operated for long time with high level ofreserve requirements. This was really a consequence of the high fiscaldeficit and a high degree of monetisation of the deficit. In 1991, pre-emption in the form of CRR/SLR requiremental deposits amounted to63.5 per cent. Reform process initiated steps to lower both CRR andSLR in a phased manner.

The lending interest rate structure was characterised by multiplicityof rates with concessionality in the rates depending on the numberof criteria, such as size of the loan, priority nature, sector, locationof activity, programme specific lending, income of borrowers andso on. The interest rate structure was simplified and introduced inSeptember 1990. Similarly RBI prescribed only maximum depositrates for maturity up to one year.

(b) Improvement in financial health: Another important element ofreform has been the introduction of prudential norms and regulationsaimed at ensuring the safety and soundness of the financial system,imparting greater transparency and accountability in operations andrestoring the credibility and confidence in the Indian financial system.Prudential norms introduced in India relate to income recognition,asset classification, provisioning for bad and doubtful debts and capitaladequacy. This brings out the factual position of banks loan portfolioand also helps to arrest its deterioration by timely corrective action.

(c) Creating a Competitive Environment: For creating a competitiveenvironment, state owned banks were allowed to go to the market toraise funds from public upto 49 per cent. It was expected to involve thepublic in the ownership of the bank, make the bank more consciousof the need to run institution efficiently and earn profits with greateraccountability. Secondly, within the current provisions of BankingRegulation Act, new banks in private sector were allowed to be setup.

(d) Institutional Strengthening: Along with relaxing the externalconstraints and introducing prudential norms, a major effort was madeto strengthen the banking system through appropriate institution- building measures, such as recapitalisation of banks who had lowcapital adequacy ratio, strengthening the supervisory process andnew institutions.

Basel Committee:As the new prudential norms of international standard are introducedin the reform process, it is worthwhile to know the background of BaselCommittee.

The Basel Committee on banking supervision is a Committee of bankingsupervision authorities, which was established by Central Bank Governorsof Group of ten countries (viz. Belgium, Canada, France, Germany, Italy,Japan, Sweden, Switzerland, The United Kingdom and United States) in1975. It introduced the concept of minimum capital requirements, whichwas adopted by UK and USA in 1987.

In 1988, G-10 Countries reached an accord for adoption of minimumcapital requirements, which was introduced in 10 countries in 1988.

Banking Sector Reforms: Phase I 51


The main objective behind adoption of single standard by internationallyactive G-10 contries is to help strengthen the soundness and stability ofinternational banking system by encouraging banks to boost their capitalbase which acts as shock absorber during unforeseen crisis. This newframework established a structure that was intended to make regulatorycapital more sensitive to differences in risk profiles.

Capital Adequacy Ratio:This is the ratio banks are required to maintain unimpaired capital funds toaggregate risk weighted assets (CRAR) and other exposures prescribedby Regulation.

The capital funds are classified as –(i) Tier-I or Core Capital (the most permanent and readily available

support against unexpected loss) includes paid-up capital, statutoryreserves, share premium capital reserves (representing surplus onsale of assets held in separate account) and other disclosed freereserves minus equity investments in subsidiaries plus intangibleassets plus losses.

(ii) Tier-II Capital includes:(a) undisclosed reserves and fully paid-up cumulative perpetual

preference shares;(b) revaluation reserves arising out of revaluation of assets (banks

premises and marketable securities);(c) general provisions and loss reserves;(d) hybrid debt capital instruments which combine the characteristics

of equity and debt;(e) subordinated debt which is fully paid-up, unsecured and

subordinated to creditors, free of restrictive clauses and notredeemable at the initiative of the holder or without consent ofsupervisory authority of banks.

Prudential Norms:The prudential norms internationally relate to (a) Capital requirementsto risks weighted assets, which is popularly known as Capital AdequacyRatio (CRAR), (b) Income recognition, (c) Asset classification, and(d) provisioning for bad and doubtful assets.

Assets Classification:An asset becomes non performing when ceases to generate income forthe bank. A non performing asset (NPA) is a loan or an advance whereinterest and or installment of principal amount remain overdue for a periodof more than 90 days.(a) Classification of NPA:

The non performing assets are classified into the following threecategories based on the period for which the asset has remained nonperforming and the realisability of dues.

(i) Substandard: An asset which has remained NPA for a periodless than or equal to 12 months.

(ii) Doubtful assets: An asset would be classified as doubtful if.If has remained in substandard category for a period of 12months.

(iii) Loss Assets is one where loss has been indentified by thebank or internal or external auditor or the RBI inspection butthe amount has not been written off wholly.

(b) Provisioning Norms:Provision is required to be made on non performing assets on thebasis of classification of assets

(i) For substandard assets provision 10 percent on the outstandingamount in loan account required to be made.

(ii) In case of Doubtfull assetsa) Which are not covered by realisable value of security 100

percent provision.b) For secured advances provision ranges from 20 percent

to 100 percent of the secured portion depending upon theperiod for which asset has remained doubtful category. Forone year 20% 2 year 30% and more than 3 years 100%.

(iii) Loss Assets should be provided for 100 percent(iv) The standard Asset (which are not classified as non performing)

minimum provisions ranging from 0.25 to 2 percent is madeaccording to guidelines by RBI depending upon category ofadvance

(v) Apart from this banks can create floating provisions for advanceand investments.

(c) Income Recognisation:Income from non performing assets is not recognised on accrualbasis but is booked as income only when it is actually received.



These prudential norms were introduced from 1.4.1992 in a phasedmanner taking into account weak financial position of banks disclosed bybank balance sheets and other procedural problems likely to emerge in itsimplementation. (From March 2005 they have been fully adopted).

Reserve Bank of India and Government of India took series of stepsbringing about reforms in banking sector. The major policy and supportiveinitiations taken in reform process for its successful implementation inphased manner are summarised below.

(i) Revision of Balance Sheet Format:RBI revised formats of Balance Sheet and Profit & Loss Accountsand asked the banks to prepare their financial statements in therevised format for the year ended 31.3.1993 (1992-93), applyingnew prudential norms of Income Recognition, Asset Classificationand Provisioning for non-performing assets, to reflect actual financialhealth of the bank and also to obtain capital requirements to attain 8per cent Capital Adequacy Ratio.

(ii) Recapitalisation of Banks:The banks were asked to comply with Capital Adequacy Ratio of8 per cent by March 1996. However, the banks having branchesabroad were required to attain this ratio of 8% by March 1995 andforeign banks by March 1993.

At the end of March 1993, 19 public sector banks had CapitalAdequacy Ratio far below 8%. In order to enable nationalised banksto meet the prescribed CRAR and the gap created by applicationof prudential accounting norms, Government of India contributedRs.5700 crore in the budget 1993-94 for recapitalisation of the lessprofitable and loss incurring nationalised banks with the conditionthat recipient banks would give an undertaking for certain level ofperformance obligations and commitments and prepare the plansunder key areas of their working viz. reduction in non-performingassets, profit planning, upgradation of technology and increasein staff productivity. Banks were also required to invest the sumreceived from the Government in 10 per cent RecapitalisationBonds 2006 which give an yield of 10 per cent as annual interestincome. The objective of the assistance was to make banks viableover a period of 2 to 3 years by improved performance. Similarly in1994-95, further Rs.5600 crore and during 1995-96, Rs.850 crore

was provided in the budget for the purpose. A sum of Rs.924.58crore was taken under World Bank assistance for financial sectordevelopment loan, which was given to six banks in cash. [Govt. ofIndia has provided recapitalisation support to nationalised banks ofRs. 22,516 Crores till 31st March 2004].

(iii) Introduction of income recognition norms:According to the norms of international standards an asset is treatedas a non-performing one, if interest is not received within 90 daysfrom its due date, RBI permitted the banks to treat loan assets asnon-performing if interest is not received within 180 days from duedates to start with.

(iv) Provisioning Norms:The assets of the banks are classified in four categories viz. Standard,Sub-standard, Doubtful and Loss Assets. While provision is made at10 per cent on sub-standard for doubtful assets, it is 50 per cent and100 per cent on loss assets.

Those banks who were not in a position to provide for the amountso computed, were permitted to provide only 30 per cent for the year1992-93.

(v) Measures for recovery of NPAs:(i) Debt Recovery Tribunals (DRTs) were established in 1993

to deal with defaulting borrowal accounts of Rs.10 lakhs andabove.

(ii) Lok Adalats were permitted to deal with bank’s loan uptoRs.10 lakhs (now raised to Rs.20 lakhs).

(iii) RBI permitted banks to form a policy for non-discriminatoryand non-discretionary one-time settlement scheme.

(iv) RBI issued guidelines on Corporate Debt Restructuring (CDR)and Board for Industrial and Financial Reconstruction (BIFR).

(v) Governmentof IndiaenactedSecuritisationandReconstructionof Financial Assets and Enforcement of Securities Interest Actin 2002. It inter alia provides enforcement of security interestfor realisation of dues without the intervention of courts ortribunal).

(vi) Access to Capital Market:The amendment of Banking Companies (Acquisition and Transfer ofUndertakings) Act, 1970/80 was made to enable nationalised banks



to access the market for capital funds through public issue, subjectto a provision that holding of Central Government will not fall below51 per cent of paid-up capital.

Defaulting Borrowers’ List:In April 1994, RBI announced a scheme of disclosing names of defaultingborrowers of banks and financial institutions with total outstanding ofRs.1 crore and above as on 31st March and 30th September, to havediscipline among borrowers and to create climate for loan recovery. RBIalso published a list of borrowal accounts against which banks have filedsuits for recovery of funds.

Priority Sector Credit – Post-reform period:While introducing reforms of financial system, care was taken to ensurethat social content of bank lending was not reduced. The target of 40 percent to priority sector, with sub-target to agriculture, was retained. Banksand financial institutions were advised to ensure that social concerns metin a manner consistent with viability of the lending institutions.

The performance of commercial banks in priority sector advances wasmarginally lower than the target during the initial years of post reform1993-94 and 1994-95. This was partly due to write-off under AgriculturalDebt Relief Scheme 1990 and partly because of various other factors, likethe vitiated recovery climate and unsatisfactory recovery performance,lack of requisite infrastructure and inadequate support and cooperationfrom the concerned Development Agencies of the State Governments andbanks’ hesitation in lending to high-risk borrowers due to the introductionof prudential norms relating to income recognition, asset classification,provisioning and capital adequacy.

As reform process had conscious objective to ensure adequate flow ofcredit to priority sector, changes in the scope and coverage of prioritysector were introduced.

Contribution to Rural Infrastructure Development Fund with NABARDequivalent to bank’s shortfall in lending, subject to 1.5% of bank’s netcredit was treated as priority sector. Lending to Khadi & Village IndustriesCommission (KVIC) through consortium of banks formed for this purposeand also advances made to primary weavers’co-operatives were reckonedas their indirect lending to small scale industries.

PrimeMinister Rozgar Yojana (PMRY) was launched in 1994 to provideself employment in micro enterprise to educated unemployed youth withfamily income not exceeding Rs.24,000 per annum.

A scheme of opening specialised branches for agriculture and small scaleindustries was introduced during 1995-96 with a view to augmenting ofcredit to agriculture and SSIs.

Micro Finance Scheme – 1992:Despite the phenomenal increase in the physical outreach of formalcredit institutions, the rural poor continue to depend on informal sourcesof credit. Micro Credit Programme was launched in 1992 by NABARD asmodel pilot project of linking around 500 Self-Help Groups (SHGs). Thisis a new credit delivery system alternative to the conventional banking inreaching the hitherto unreached poor.

The programme envisages organisation of the rural poor into Self-HelpGroups of about 10 members each, for building their capacities to managetheir own finances and then negotiate bank credit on commercial terms.The poor are encouraged to come together voluntarily to save smallamounts regularly and extend micro loans among themselves. Once thegroup attains the required maturity of handling resources, the bank creditflows. India has adopted a multi-agency approach for the development ofmicro finance programme.All major rural credit institutions viz. commercialbanks, RRBs and co-operatives, along with non-government agencies(NGOs) have been associated with micro finance.

Micro Finance Models:There are three distinct linkage models of micro credit followed in India.

Model – I: Banks themselves take up the work of forming and nurturingthe Self-Help groups, opening their Savings Accounts and provide loans.Nearly 15 per cent of micro finance is under this model.

Model – II: Self-Help Groups are formed by NGOs and formal Agenciesbring together SHGs and banks. Banks directly finance SHGs. This modelconstitutes 80% of SHGs financed by banks.

Model – III: SHGs are financed by banks using NGOs and other Agenciesas financial intermediaries.

The Self-Help Group – Bank linkage programme has been consideredby banking system as a commercial proposition with lower transaction



cost, low non-performing assets (NPAs) and coverage of maximumnumber of the rural clientele of the banks. 102 (Oct. 2006) RRBs, 47commercial banks and 306 central co-operative banks have participatedin the programme. As on 31.3.2007 nearly 400 lakh poor families havebeen extended credit through 30 lakh Self-Help Groups. While share ofcommercial banks and RRBs is 53% and 33% respectively, it is only 14%by co-operative banks in the number of SHGs assisted.

Other Developments towards Liberalisation:(i) Introduction of Prime Lending Rate (PLR):

To provide banks with necessary freedom to quote different ratescommensurate with their competitive strengths and cost structure,banks were asked to declare prime lending rate for loans which wouldbe applicable uniformly to all borrowers. The system of minimumlending rate was abolished in 1997.

(ii) Measures for improving credit delivery system:(i) To provide greater freedom in assessing working capital

requirements for borrowers, from 5th April 1997 all instructionsrelating to Maximum Permissible Bank Finance (MPBF) werewithdrawn and banks were instructed to evolve their ownmethods.

(ii) To introduce flexibility in credit delivery system, the generalrules for consortium arrangements (such as restriction of thenumber of banks in respect of consortium of credit limit uptoRs.50 crore to 5, requirement of no objection letter by existingbank to take over of liability of accounts above Rs.5 croreetc.) were withdrawn. It was entirely left to the discretion ofparticipating banks and it was not obligatory to form consortiumif credit limits exceed Rs.50 crore. The banks were alsopermitted to have credit syndication route without consortiumarrangement, provided the arrangement suits borrowers andfinancing banks.

(iii) All commodities covered under Selective Credit Control(except buffer stock of unreleased sugar of sugar mills) wereexempted from all the stipulations of Selective Credit Control.

(iii) Branch Licensing Policy:The banks were given freedom to rationalise their branch network,open new branches or to upgrade existing Extension Counters,subject to attaining following preconditions:

(a) Eight per cent CRAR.(b) Net profit for three consecutive years.(c) Proportion of NPA to total outstanding loans being not more than

15 per cent.(d) Minimum owned funds Rs.100 crore. (This has been raised to

Rs. 300 Cr.)

(iv) Customer Service – Banking Ombudsman Scheme:Reserve Bank of India, in June 1995 introduced under Section 36‘A’ Banking Regulation Act 1949, the Banking Ombudsman Schemefor expeditious and inexpensive resolution of customers’ complaintsagainst deficiency in banking services, including non-observanceof directions on loans and advances and other specified matters.Under the scheme, any person whose grievance as regards anymatters specified in the scheme is not resolved to his satisfaction bythe bank within a period of two months can approach the BankingOmbudsman for redressal within a period of one year.

The scheme was revised in January 2006. In the revised scheme-2006 new grounds of complaints such as credit card issues, failure inproviding the promised facilities, non-adherence to the fair practicecode and levying of excessive charges without prior notice havebeen incorporated. (See Annexure V)

The complaint can be registered with Banking Ombudsman on-lineor through E-Mail. The scheme covers all commercial banks andscheduled primary co-operative banks. The scheme is executed byReserve Bank at 15 centres covering the entire country appointingits serving officer as Banking Ombudsman.

(v) Strengthening Institutional Framework:(i) Board for Financial Supervision (BFS) for financial supervision

was constituted by RBI under chairmanship of Governor, RBIto strengthen supervision and surveillance over the entirefinancial system and provide sharper focus to supervisory policyand skill.. It started functioning on 16th November, 1994. TheBoard consists of Vice Chairman (a Deputy Governor of RBI)and 6 members - two of whom Deputy Governors and fourothers members of the Central Board of Directors of RBI. Theintegrated supervision and surveillance over commercial banks,



financial institutions, non-banking financial intermediaries andother para banking financial institutions rests with the Board.

(ii) The primary objective of the new supervisory mechanism wasto identify banks which show financial deterioration and whichcould be in trouble in the near future and actually as a trigger foron-site examination of banks.

(iii) The new approach to on-site inspection of banks was adoptedfrom 1st July, 1997 in accordance with the recommendations ofPadmanabhanWorkingGroup(1995). It focuseson themandatedaspects of solvency, liquidity, financial and operational health. Itevaluates banks’ capital adequacy, asset quality, management,earnings, liquidity and systems (CAMELS) shedding the auditelements under inspection system.

The banks are rated on CAMELS model, which enables RBI toidentify the banks whose condition warrants special supervisoryattention. Foreign banks are rated on CACS (Capital Adequacy,Asset Quality and Compliance & System) model.

(iv) The role of external auditors was strengthened and they wererequired to verify and certify adherence to statutory liquidityrequirements, prudential norms relating to income recognition,classification of borrowal accounts and provisioning and alsofinancial ratios to be disclosed in the balance sheets.

Impact of Reforms:The commercial banks themselves endeavoured to improve theirperformance in key areas including quality and contents of their bankingbusiness. They demonstrated considerable resilience in adjusting to thenew operating environment and acquiring high level business strength.They formulated concrete policies in the key areas of performance viz.Deposit, Credit, Investment, Recovery of NPAs, Human ResourcesDevelopment, Internal Control and Computerisation to improve operationalefficiency, productivity and profitability. In the first five years of reformsthere has been significant improvement in financial position and workingresults of scheduled commercial banks.

Compliance toMinimumCapitalAdequacyRatio:There was significantimprovement in CRAR of public sector banks. At the end of March 1997,out of 27 public sector banks, 25 banks had complied with the requirement

of minimum CRAR of 8 per cent and above, as against only 6 banks as on31.3.1992. All foreign banks operating in India attained 8 per cent norm atthe end of March 1993. 23 private sector banks complied with 4 per centnorm at the end of 31st March, 1994.

Profits:Although working results of scheduled commercial banks recordedoperating loss during 1992-93 and 1993-94, as a result of applicationof prudential norms for income recognition and provisioning of NPAs,it started showing steady improvement in operating results. At the endof 31.3.1997 the banking system recorded operating profit of Rs.12239crore and net profit of Rs.4504 crore.

Decline in NPAs: The Gross NPAs also declined from 23.2% as on31.3.1993 to 17.8% at the end of 31.3.1997.

The working results of scheduled commercial banks in the post-reformperiod, (1992-93 to 1996-97) given in the following table depict the positiveresults of reforms of banking system.

Table – XIWorking Results of Scheduled Commercial Banks

1992-93 to 1996-97(Amount: Rs. in crores)

Sl. No. 1992-93 1993-94 1994-95 1995-96 1996-971 Income: 41978

* (10.9)41125

(7.5)50964

(9.9)65057(10.9)

76225(11.3)

(i) Interest 37489(9.7)

35581(6.5)

44568(8.7)

56082(9.4)

66483(9.85)

(ii) Other Income 4489(1.2)

5541(1.0)

6396(1.2)

8975(1.5)

9741(1.45)

2 Expenditure: 46127(12.0)

44825 48810(9.9)

64118(10.7)

71720(10.66)

(i) Interest 27836(7.2)

25216(4.6)

29041(8.7)

37319(6.2)

44838.5(6.66)

(ii) Operating Exp. 10148(2.7)

10804(2.0)

14229(1.2)

17589(2.9)

19147(2.85)

(iii) Provisions 8043(2.1)

8805(1.6)

5540(2.7)

9210(1.6)

7735(1.5)

3 Operating Profit/Loss

-4150 -5287 2154(0.4)

10149(1.69)

12239(1.82)

Net Profit 939(0.16)

4504(0.67)



Sl. No. 1992-93 1993-94 1994-95 1995-96 1996-974 Working Fund /

Total Asset385742 550785 514691 599468 672975

5 N P As: (PSBs)A. Gross 39253

** (23.2)41041(24.8)

38385(19.4)

41661(18.0)

43599(17.8)

Net -- -- 17567(10.7)

18297(8.9)

20285(9.2)

B. Sectorwise NPAs:

Priority 50.1 48.3 47.7

Non-priority 46.5 48.2 49.0Public Sector 3.4 3.6 3.3

6 Credit DepositRatio

56.6 51.6 54.7 58.6 55.1

7 Investment DepositRatio

39.3 41.2 38.6 38.0 37.7

(Figures in brackets indicate: * % of working funds,** % of total advances)

*PSBs : Public Sector Banks

Integration of Financial Markets in India:The integration among various segments of financial markets began withfinancial reforms. The main segments of organised financial markets inIndia are:

(i) Credit market which is dominated by commercial banks and co-operative banks.

(ii) Money Market with Call and Notice include Term Money, CommercialPaper, Mutual Funds, Commercial bills, Treasury bills, inter corporatebonds. The banks, financial institutions and primary dealers aremajor players.

(iii) Equity and Term lending market(iv) Corporate Debt market comprising of PSU (Public Sector

Undertakings) bonds and corporate debentures.(v) Guilt-edged market for government securities.(vi) Housing Finance market(vii) Hire Purchase and leasing finance market where non-banking

finance companies predominate(viii) Foreign Exchange market and(ix) Insurance market.

The reform measures facilitated inter linkages among money market,government security market and foreign exchange market and free flowof and efficient utilisation of scarce resources. This is also reflected inimprovement in liquidity and softening of various money market rates,interest rates and forward premia in foreign exchange market. Similarlythere was increasing complementality between credit market and capitalmarket on the one hand and external sources of financing on the other,giving corporate world wider choices of alternative sources of funds.

Strengthening of Institutional FrameWork:

The Government of India took a series of measures to create requisiteinstitutional infrastructure of financial market in post-reform period whichinclude the following:

(i) National Stock Exchange (NSE): NSE was incorporated in 1992and recognised as stock exchange in 1993 under Securities Control(Regulations) Act 1956. The objectives of NSE were (a) establishinga nation-wide trading facility for all types of securities, (b) ensuringequal access to investors all over the country through appropriatecommunication network (c) providing a fair, efficient and transparentsecurities market using electronic trading system (d) enablingshorter settlement cycles and book entry settlement and (e) meetingthe international benchmarks and standards.

NSE is one of the largest interactive VSAT based stock exchangesin the world. The NSE net work is the largest private Wide AreaNetwork in the country and the 1st extended C band VSAT networkin the world. More than 9000 users are trading on real time on lineNSE Applications. It covers 400 cities and towns across the country.It has brought about unparalleled transparency, speed, efficiency,safety and market integrity.

(ii) Securities Trading Corporation of India Ltd. (STCI): RBI set upSTCI a leading market maker of Government of India securities inMay 1994 jointly with public sector banks and All India FinancialInstitutions with the new objective of fostering the development ofan active secondary market for government securities and bondsissued by public sector undertakings.

RBI has accredited STCI as a primary dealer in government securities.Government of India have notified STCI as an approved financial



institution for the purpose of Section 18 of the Banking RegulationAct 1949 and Section 42(1) of the Reserve Bank of India Act 1934.RBI provides liquidity support to STCI at Bank Rate to enable it tofulfil its obligations in regard to participation in underwriting of primaryissuances and market making of government securities.

Its activities include:(a) underwriting of GoI Securities/Treasury bills.(b) participation in the auctions of GoI Securities and Treasury

bills.(c) market making and trading in GoI securities and Treasury bills.(d) trading in PSU bonds and other corporate debt instruments.(e) participation in Repo market and government securities

and Treasury bills, in the inter bank call/notice/term moneymarkets.

(iii) National Securities Clearing Corporation Ltd. (NSCCL) : It is whollyowned subsidiary of NSE and was incorporated inAugust 1995. It wasset up to bring and sustain confidence in clearing and settlement ofsecurities, to promote and maintain short and consistent settlementcycles, to provide counter party risk guarantee and to operate a tightrisk containment system. It commenced clearing operations in April1996.

(iv) National Securities Depository Ltd. (NSDL) : It is the first depositoryin India set up in November 1996 to solve the myriad problemsassociated with trading in physical securities. It has established aNational Information of international standards to provide trading andsettlement in dematerialized form and thus completely eliminatedthe risks to investors associated with bad/stolen paper and delay intransfer of title.

(v) India Index Services and Products Ltd. (IISL) : A joint venturebetween NSE and Credit Rating Information Services of India Ltd.(CRISIL) was set up in May 1998 to provide variety of indices andindex-related services and products for Indian Capital market. It hasa consulting and licensing agreement with Standard and Poor, theworld’s leading provider of investable equity indices for co-brandingequity indices.

(vi) Inter Connecting Stock Exchange and Industries (ISE): It has beenpromoted by 14 Regional Stock Exchanges to provide cost effectivetrading linkage, connectivity to all members of the participating

exchanges with the objective of widening the market for securitieslisted on these stock exchanges. It endeavours to consolidate thesmall fragmented and less liquid market into a natural level liquidmarket by using the state of the art infrastructure and supportsystems.

(vii) The Clearing Corporation of India Ltd. (CCIL) : was incorporated on30th April 2001. The primary objective of setting up CCIL has been toestablish a safe institutional structure for the clearing and settlementof trades in the Government Securities, Forex (Fx) Monetary andDebt markets so as to bring in efficiency in transaction settlementprocess and insulate the financial system from shocks emanatingfrom the operations-related issues and to undertake other relatedactivities that would help to broaden and deepen those markets.It commenced its operations on 15th February 2002. CCIL settlesalmost all deals in the government securities market and more than90% of the inter bank Forex transactions.

By reducing durations of settlement exposure and by reducing liquiditypressures CCIL has achieved a perceptible reduction in settlementrisk, besides bringing tangible benefit in the form of improvedefficiency and easy reconciliation of accounts with the correspondentbanks and lower cost to the participating banks.

South East Asian Currency Crisis – 1997The South East Asian countries comprising of Thailand, Indonesia,Singapore, Malaysia, Hong Kong and Republic of Korea managed theirintegration into global Economy successfully through controlled openingup continual regulations and interventions by governments expanded theefficiency and efficacy of financial markets. The economies paved forcapital formation through higher national saving rate and rapid growthrate twice faster than average rate of growth of the rest of the world.

The fascinating growth rates of 8 to 10 per cent per annum, maintaining fullemployment for years and achieving near eradication of poverty becamethe eyesore to countries like India who were striving for an acceleratedgrowth and development through liberalization and globalisation. Theglobalisation means free cross border movement of information, goodsand services, capital and people. This necessitates intra country and intercountry integration of market.



On 2nd July, 1997 the South Asian currency crisis emanated fromThailand. Thai Currency “Bhat” tumbled and depreciated by over 60 percent. Subsequently other south Asian currencies depreciated by over 30per cent. The crisis was characterized by debt deflation spiral and hadvery little to do with fundamentals of economies. The reasons for flare upof currency crisis include:(a) Huge volatile short term borrowing was invested for long term projects

such as real estate.(b) Mismatch of assets and liabilities of banks(c) Reckless horizontal and vertical integration of enterprises and excess

manufacturing capacities(d) Fast growing Current Account deficits(e) High speculative activities in derivative markets(f) Absence of proper disclosure in the Balance Sheet and financial

intermediaries.

The concerned governments could not manage the integration of capitalmarkets with the same acumen as they did in the other areas of economy.Indian financial system was relatively unaffected by the South East Asiancrisis due to meagre exposure to real estate sectors, short term externaldebt and the relatively transparent infrastructure, among other reasons.

South East Asian crisis gave a lesson to developing countries thatstrengthening of financial system is of immense importance before openingup economy and need for ensuring asset and liabilities management,quality of assets and efficient forex operations.

Basel Core Principles for Banking Supervision:The experience of Asian crisis reiterated the need for adequate andeffective regulatory and supervisory system of financial intermediaries.The role risk of supervisor is to promote financial market stability andminimise systemic risk.

The Basel Committee on Banking Supervision released in 1997, 25 coreprinciples for effective Banking supervision.

The basic elements of core principles cover preconditions for effectivebanking supervision, lincensing and structure, prudential regulationrequirements, methods of an on going banking supervision, informationrequirements, formal powers of supervisor and cross border banking.

The Bank for International Settlement (BIS) endorsed 25 core principlesfor adoption for all countries and India was an active participant in draftingof the core principles.

Thirteen of the 25 core principles on banking supervision were covered byRBI on the basis of legal provision enshrined in the Banking RegulationAct and RBI Act and/or executive instructions issued by RBI. Theremaining 12 core principles relate to prescribing prudential requirementfor additional capital charge for market risk, framing guidelines foraddressing country and currency risk, need for assessing the sourcesand quality of capital, supervisory co-operation with regulators inside andoutside the country and consolidated supervision of institutions and theirsubsidiaries or conglomerates. These have been covered by RBI in itsBanking Supervision Policy in the year 2003.


PROGRESS OF COMMERCIAL BANKING

Year 1998 2000 2005 2007*

No. of Banks 300 297 284 181

No. of Branches 64267 65521 68549 71781

Population per Office (’000) 14 15 16 16

Per Capita Deposits (Rs.) 6270 8452 16699 25356

Per Capita Credits (Rs.) 3356 4555 10135 18737

Priority Sector in totalAdvances (%)

34.6 35.4 35.8 35.8

Financial Soundness Indicators percent

C R A R 11.5 11.1 12.8 12.3

Return on Assets 0.82 0.9 0.9 0.9

Net NPA to Net Advances 14.4 12.7 5.2 1.0

* Provisional

Banking Sector Reforms: Phase II

As global integration of financial services was making forward movementit called for greater measure of competitive efficacy of our financial systemto take competition from abroad. In order to charter further reforms tomake Indian banking system stronger and equip it better to competeeffectively in the fast changing international economic environment.Government of India appointed a high level committee headed by Sri M.Narasimham on Banking Sector in December 1997 to review the progressof implementation of financial sector reform recommendations of theCommittee on Financial System (CFS) 1991, and to suggest measuresfor further strengthening the banking system covering areas of bankingpolicies, institutional structure, supervisory system, legislative dimensionand technological upgradation.

In the first phase of banking reforms the focus was on arresting qualitydeterioration of performance of banks judged by parameters of assetquality, profitability and net worth. The task in the second phase of reformswas to draw up strategy for enhancing the ability of banking system tomeet challenges of international competition and adopt its functioning tochanging environment.

Recommendations implemented :The Narasimham Committee submitted its recommendations in April1998. The important recommendations which were considered in full orpart and implemented by RBI in consultation with Government of India inphases include the following:

VI

1. To increase the minimum Capital Adequacy Ratio from 8 to 9 percent by March 2000.

2. While computing Risk Weighted Assets for Capital requirementsthe Government approved securities, government guaranteedadvances/guarantees, Foreign Exchange open position to be takeninto account (which was not done hitherto) and also provision to bemade.

3. General provision of 1 per cent on Standard Assets.4. Put in place formal Asset Liability Management System.5. Introduction of independent loan review mechanism especially

for large borrowal accounts to identify potential non-performingassets.

6. Constitution of Asset Reconstruction Company to address theproblem of hard core NPAs classified as Doubtful and Loss assets.

7. Disclosure of maturity pattern of assets and liabilities, foreigncurrency assets and liabilities, movements in provision accountsand non-performing assets.

8. Adoption of statistical Risk Management Technique (i.e. Value atRisk) in respect of balance sheet items which are susceptible tomarket price fluctuations, forex rate volatility and interest ratechanges.

9. Dismantling Banking Service Recruitment Board.10. Introduction of voluntary retirement scheme, redeployment of

surplus staff (26 out of 27 public sector banks introduced VoluntaryRetirement Scheme in the year 2000-01 and resulted in nearly12 per cent reduction in staff strength).

11. Identification of new areas of training and recruitment of skilledmanpower.

12. Upgradation and introduction of Information Technology.13. Consolidation and convergence of banks and financial institutions.14. Integrated system of regulations to regulate and supervise banks,

financial institutions and non-banking companies.15. To make changes in legal framework to keep pace with changing

commercial policies and the financial reforms particularly the lawspertaining to (a) Transfer of Property Act (b) Indian Contracts Act (c)Stamp Act (d) Bankers Book Evidence Act etc.

Reserve Bank of India had initiated proactive steps, appointed WorkingGroup to study the issues involving harmonizing of roles of DevelopmentFinancial Institutions and commercial banks, upgrading Technology and


other relevant issues. The recommendations of Narasimham Committeehelped in charting future path for banking policies.

Banking Sector Reforms: Phase II 71

HIGHLIGHTS OFREFORMS IN THE BANKING SECTOR

A. Competition Enhancing Measures• Granting of operational autonomy to public sector banks,

reduction of public ownership in public sector banks by allowingthem to raise capital from equity market up to 49 per cent ofpaid-up capital.

• Transparent norms for entry of Indian private sector, foreignand joint-venture banks and insurance companies, permissionfor foreign investment in the financial sector in the form ofForeign Direct investment (FDI) as well as portfolio investment,permission to banks to diversify product portfolio and businessactivities.

• Roadmap for presence of foreign banks and guidelines formergers and amalgamation of private sector banks and banksand NBFCs.

• Guidelines on ownership and governance in private sectorbanks.

B. Measures Enhancing Role of Market Forces• Sharp reduction in pre-emption through reserve requirement,

market determined pricing for government securities,disbanding of administered interest rates with a few exceptionsand enhanced transparency and disclosure norms to facilitatemarket discipline.

• Introduction of pure inter-bank call money market, auction-based repos-reverse repos for short-term liquidity management,facilitation of improved payments and settlement mechanism.

• Significant advancement in dematerialization and markets forsecuritized assets are being developed.

C. Prudential Measures• Introduction and phased implementation of international

best practices and norms on risk-weighted capital adequacy

requirement, accounting, income recognition, provisioning andexposure.

• Measures to strengthen risk management through recognitionof different components of risk, assignment of risk-weightsto various asset classes, norms on connected lending, riskconcentration, application of marked-to-market principle forinvestment portfolio and limits on deployment of fund in sensitiveactivities.

• ‘Know Your Customer’ and ‘Anti Money Laundering’ guidelines,roadmap for Basel II, introduction of capital charge for marketrisk, higher graded provisioning for NPAs, guidelines forownership and governance, securitization and debt restructuringmechanisms norms, etc.

D. Institutional and Legal Measures• Setting up of Lok Adalats (people’s courts), debt recovery

tribunals, asset reconstruction companies, settlement advisorycommittees, corporate debt restructuring mechanism, etc. forquicker recovery/restructuring.

• Promulgation of Securitisation and Reconstruction of FinancialAssets and Enforcement of Securities Interest (SARFAESI) Act,2002 and its subsequent amendment to ensure creditor rights.

• Setting up of Credit Information Bureau of India Limited (CIBIL)for information sharing on defaulters as also other borrowers.

• Setting up of Clearing Corporation of India Limited (CCIL) to actas central counter party for facilitating payments and settlementsystem relating to fixed income securities and money marketinstruments.

E. Supervisory Measures• Establishment of the Board for Financial Supervision as the

apex supervisory authority for commercial banks, financialinstitutions and non-banking financial companies.

• Introduction of CAMELS supervisory rating system, movetowards risk-based supervision, consolidated supervision offinancial conglomerates, strengthening of off-site surveillancethrough control returns.

• Recasting of the role of statutory auditors, increased internalcontrol through strengthening of internal audit.


• Strengthening corporate governance, enhanced due diligenceon important shareholders, fit and proper tests for directors.

F. Technology Related MeasuresSetting up of INFINET as the communication backbone for thefinancial sector, introduction of Negotiated Dealing System (NDS)for screen-based trading in government securities and Real TimeGross Settlement (RTGS) System.


(From Financial Sector Reforms and Monetary Policy: The IndianExperience – Paper presented by Dr. Rakesh Mohan, Dy. Governor, RBIat the conference on Economic Policy in Asia at stanford on June 2006.)

The Banking developments in the second phase of banking reforms since1998 can be broadly categorised as under:

1. Emergence of Universal Banking.2. Revolution of Information Technology3. Payment and Settlement System4. Risk Management System.5. Introduction of Risk Based Supervision6. New Basel Accord - 20017. Mergers and Amalgamations8. Corporate Governance9. Financial Inclusion

10. Bank/Branch Licensing11. Other Developments

1. Universal Banking:In the international banking a new phenomena was emerging i.e.‘Universal Banking’ in terms of which distinction between commercialbanking, investment banking and development banking were gettingblurred. In India too operating environment for banks and DevelopmentFinancial Institutions (DFI) was changing as a result of reforms andderegulation of interest rates.The banks were participating increasinglyin project finance which was the domain of DFIs and DFIs also madeforays into the realm of working capital and short term finances.

Till 1991 DFIs had low cost resources from Long Term operations,Fund from RBI. Drying up of these sources DFIs were forced togo both domestic and international markets for raising resources

at market determined rates. DFIs started competing for the samehousehold segment for mobilizing resources. There was thereforegreater need for maneuverability and level playing field in resourcemobilization as banks were subject to maintenance of CRR/SLR ontheir liabilities, and DFIs had no such restrictions except overall ceilingto raise resources by way of term deposits, term money borrowings,Certificate of Deposits and Inter Corporate deposits. As there werecertain regulatory issues and need for harmonization of role ofbanks and DFIs, RBI set up a working group headed by Shri H.S.Khan to study the issue of ‘Universal Banking’. The Working Grouprecommended that they should gradually move towards ‘UniversalBanking’.

In October 1998 RBI took a decision that universal banking is adesirable goal and initiated steps to evolve a policy for the purposeand permitted banks to provide diversified services either in-house orthrough subsidiary route.

As DFIs have to play developmental role in Indian Financial Systemtill debt market demonstrates substantial improvement in terms ofliquidity and depth it gave options to DFIs to transform themselvesinto banks provided they fully satisfied the applicable prudential normsand complied with regulatory requirements. (ICICI got merged withICICI Bank in 2002 and IDBI with IDBI Bank in 2004.)

Under ‘Universal Banking’ banks will also extend other financialservices including trading in foreign exchange, derivatives and allkinds of securities, securities underwriting, money broking, assetmanagement, settlement and clearing service, provision and transferof financial information and advisory and other auxiliary financialservices apart from providing traditional banking services whichincludes acceptance of deposits, lending of all types and paymentand money transmission services.

2. Information and Communication Technology:The global banking and financial system has undergone fundamentalchanges because of revolution in Information and CommunicationTechnology. Information Technology and Electronic Fund transferhave emerged as new pillars of modern banking.

In developed countries banking and related services are madeavailable to its customers on line with extensive use of Information


Communication Technology without direct recourse to branch calledVirtual banking. It includes Automated Teller System, shared ATMNetwork, Electronic Fund Transfer at Point of Sale (EFTPoS), SmartCard, Phone Banking and Internet Banking.

It has advantage of having (I) lower cost of handling (ii) increasedspeed and response to customers requirement and enhancement ofcustomer satisfaction (iii) lower cost of operation of branch networkwith higher efficiency (iv) improved quality and enlarges servicesattracting potential customers without network of branches.

The ATM network has changed the need for front office for the bankand gives 24 hour access to their accounts any time, anywhere.

The Committee on Technology Upgradation in Banking Sectorwas appointed by RBI in 1998. It gave its report in 1999 providingroad map for absorption of technology in public sector banks andinstitutions. The report covered (i) areas of certain upgradation whichinclude communications, information structure and uses of internet(ii) standardisation and security (iii) computerisation of governmenttransactions (iv) Data Mining and Management Information System (v)legal framework for electronic banking and reorganisation of businessprocess to equip the Indian banking system with modern technologycomparable with international standards.

The public sector banks had initiated mechanisation andcomputerisation in 1983 for day-to-day transactions of deposits andadvances although numerous areas were not covered. The partial/fullcomputerisation of branches did result in less waiting time for customerfor encashing cheque, obtaining Demand Draft, balance enquiry andimproved customer service.

The post-reforms period marked the entry of new generation privatesector banks and foreign banks who inducted technology extensivelyand offered services on multiple delivery channel with ATMs on24 (hours) x 7 (days) basis. These banks leveraged technology toserve the changing needs of high networth and younger generationclientele and garnered the business of public sector banks from urbanand metropolitan branches and increased their market share. In theabsence of networking of branches public sector banks were not ina position to enter services through electronic delivery channels till2000.


2. (a) Establishment of IDRBT:The Institute of Development and Research in Banking Technology(IDRBT) was set up in Hyderabad with the object of setting upIndian Financial Network (INFINET) – backbone for electronicbanking on 19th June 1999 by Reserve Bank of India. The INFINETis the most preferred communication channel for transmissionof electronic information by banks for the systematic inter bankpayment systems of Reserve Bank. It is being used by banks forinter office communications as well. INFINET uses StructuredFinancial Messaging System (SFMS) which is a messageprocessing system similar to Society for Worldwide FinancialTelecommunication (SWIFT) messaging system. It provides forsafe and secure transmission of electronic messages with useof Public Key Infrastructure (PKI) which has the legal backing ofInformation Technology Act 2000.

The INFINET is a Wide Area Terrestrial and Satellite (using VerySmall Aperature Terminals (VSATS) based banded network. Theterrestrial links are provided by means of leased optical fibrechannel with adequate bandwidth. The network is operated andmanaged by the IDRBT.

2. (b) Centralised Banking Solution – Core Banking Solutions:Under the above backdrop public sector banks were askedin November 2005 to draw road map for implementation of theCore Banking Solution and cover major business centres/clusterof branches before end of March 2006. Core Banking Solution(CBS) envisages networking or connecting the computers ofidentified branches and all the ATMs of the bank to a powerfulCentral Computer System at the Data Centre. The connectivitybetween branches and Data Centre is established through leasedtelephone lines. The data of the networked branches would beuploaded on the Central Computer System in the Data Centre. Thismechanism enables the customer to do banking transactions fromany of the networked branches during their working hours, throughATM access at “any time” or through Internet from “anywhere” andat “anyhow”. In other words, the customer of any CBS branchesbecomes customer of the bank (and not of a particular branch)and can do banking transactions anywhere, any time and anyhow(i.e. through ATM, or internet or telephones). The CBS system


enables banks to render financial services on the lines ofinternational banks taking advantage of the channels and toreduce transaction cost, improve efficiency and provide customerdelight.

Syndicate Bank was the first bank among public sector banks tointroduce CBS in the year 2001.

Banking Sector has made a quantum leap forward in terms ofswitching over from paper based transactions which include useof currency notes, cheques and chalans to electronic means whichinclude Real Time Gross Settlement, National Electronic FundTransfer and other electronic modes. The public sector banks paidspecial attention to computerization of their operations through theirannual IT plans. Between September 1999 and March 2007 theyincurred capital expenditure of Rs.12,826 crore on computerizationand development of communication network.

99 per cent of branches of public sector banks are partly or fullycomputerized. The branches providing Core Banking Solutionincreased from 28.9% in March 2006 to 44.4% in March 2007.

The number of branches and ATMs installed by banks at the endof March 2007 given in the following table:

Table – XIIBRANCHES ATMs

Rural SemiUrban

Urban Metro Total OnSite

OffSite

Total

NationalisedBank

12986 7573 7612 7465 35636 6634 3254(27.4)

9888

SBI 5126 4155 2556 2193 14030 3655 2786(43.3)

6441

Old Pvt.Banks

855 1510 1294 947 4606 1104 503(31.3)

1607

New Pvt.Banks

130 554 824 989 2497 3154 5038(61.5)

8192

ForeignBanks

– 2 44 227 273 249 711(74.1)

960

Total 19097 13794 12330 11821 57042 12796 12292 27088

Figures in bracket % of off-site ATMs


3. Payment and Settlement System:A payment system means “a system that enables payment to beeffected between a payer and beneficiary and includes clearing,settlement or payment service”.

The modes of payment in vogue in India include cash, cheque,demand draft, bankers’ cheque, pay order, travellers cheque,cheques payable at par, interest/dividend warrants payable at par.These non-cash payment instruments involve a chain of related fundtransfers, a lot of book entries and exchange of instruments andclaims are settled through Clearing Houses. The place where theexchange of instruments occurs and claims are settled is known asClearing House. If facilitates the exchange of instruments and alsothe process of payment of instruments at a central point. ClearingHouse is a voluntary association. Wherever RBI has its office theclearing management is done by them, where RBI does not have itsoffice activities are managed by State Bank of India or by public sectorbanks.

As the volume of instruments exchanged in clearing houses increasedsubstantially in the eighties computerization of clearing house wastaken up as a first step towards modernisation of payment system.This step reduced the time taken for balancing of settlement. Manualsorting and listing of huge volumes of cheques was delaying theclearing process, which was mechanized and Magnetic Ink CharacterRecogniser (MICR) a reader-sorter machine was introduced:-Subsequently to reduce the volume of paper instruments in MICRclearings Electronic Clearing services were introduced, whereservices of electronic payment instructions are generated to replacepaper instruments and facilitate faster payment and settlement.

The key difference between a cheque and an electronic paymentlies in the process. A cheque is a “pulling device” which can drawfunds from the payer’s account whereas an electronic payment is a“pushing device” which carries the funds to receivers’ account Whileit is possible for the payer to issue cheque without sufficient balancein his account (which he can fund later exploiting inherent delay inclearing process) making payment electronically would require tohave the funds to effect the payment. Thus an electronic payment isas good as cash.


Real Time Gross Settlement:In the year 2000, steps were initiated to introduce “Real Time GrossSettlement System (RTGS)” which acts as the backbone of paymentsystem. RTGS enables real time on line fund transfer and adjustmentfor the financial system as a whole. It significantly reduces the risk astransactions are settled bilaterally on real time basis.

The demand for liquidity at short-end of the market depends uponthe type of settlement system in operation and has implication forconducting monetary policy. The pricing of resources at short-end alsodepends upon the payment and settlement system in place. In theday liquidity requirements would be minimal if the Real Time GrossSettlement mechanism is in operation.

The RTGS system in India currently covers more than 28000 branchesof banks. RBI intends to introduce straight through processingmechanism for equities clearing settlement system of Bombay StockExchange (BSE) and National Stock Exchange (NSE) and alsoGovernment Securities (G.sec) and Foreign Exchange SettlementSystem linked by Clearing Corporation of India (CCIL). RBI is alsocontemplating to expand RTGS to cover major co-operative banks.

The Reserve Bank of India has been taking initiatives on continuingbasis:

(i) to enhance the usage of the RTGS system.(ii) In providing incentives and guidelines for reducing transaction

cost for electronic payment system.(iii) In improving legal infrastructure for the payment system.(iv) In introducing nationwide payment system for retail payment.(v) In improving international services and facilitating newer

channels of different payment and settlement.

Cheque Truncation System:The Cheque Truncation system (CTS) is image based clearingprocess. It has been introduced in national capital region Delhi onpilot basis. Under CTS the physical movements of cheques fromthe branch to the clearing house and vice-versa is stopped and isreplaced by the images of the instrument and data is transmittedover a electronic network to the clearing house and back. It enablesthe banks to handle payment against instruments in the easier way.


Customers enjoy the benefit of encashing the cheques faster apartfrom reduction in transaction cost for banks and customers.

Under the Negotiable Instruments (Amendments and MiscellaneousProvisions) Act 2002 electronic cheques and cheque truncation hasbeen recognised under law and the ‘cheque’ has been redefined toenable payment based on electronic image of cheques.

Payment of Cards, Electronic bills presentment, Internet banking,mobilepaymentsaresomeof theotherelectronicpaymentmechanismsthat are likely to replace paper based payments in future.

The important events in the evolution of new age payment systems inIndia in the post-reforms period can be summarised as under:

Arrival of Card Based payments – Debit Card, Credit Card late 1980’sand early 1990’s

Introduction of Electronic Clearing Services (ECS) in late 1990’s

Introduction of Electronic Fund Transfer (EFT) in early 2000’s

Introduction of Real Time Gross Settlement (RTGS) in March 2004

Introduction of National Electronic Fund Transfer (NEFT) as areplacement to Electronic Fund Transfer/Special Electronic FundTransfer in 2005/2006

Cheque Truncation System in 2007.

4. Risk Management:

(a) Asset Liability Management:In deregulated and liberalised environment the banks have todetermine their own interest rates on deposits and advancesin both domestic and foreign currencies. The interest rates ongovernment securities and other debt instruments are market-related. The mismatch between assets and liabilities in terms ofeither maturity and currency or value has serious implications onfinancial risks. The experience of the banks which faced assetliabilities mismatches in the South Asian countries in the year 1997provides evidence on the need for putting in place Asset LiabilityManagement System to save banks from problems of liquidity andsolvency arising from mismatches between assets and liabilities interms of maturity.


Before introduction of prudential norm, banks were primarilyconcentrating on asset management with liquidity and profitability.The banks did not have comprehensive management informationsystem to provide position of assets and liabilities to plan, organiseand control financial risk the banks assume in the process ofproviding financial services as a result of the volatility in interestand exchange rates.

In order to proactively address the risks, banks were asked byRBI to put in place a comprehensive Asset Liability ManagementSystem w.e.f. 1st April 1999. This encompasses a process ofcontinuous management (in terms of planning, organising andcontrolling) of asset and liability volumes, rates and yields andincorporating the maturities of assets and liabilities. This is the firststep towards establishing Risk Management system in banks.

(b) Types of Risks:

Banks in the process of providing various kinds of financialproducts and services assume financial and non-financial risks.The financial risks include credit risks, Interest Rate risks, ForeignExchange Rate risk, Liquidity risk, Price risk and CommodityPrice risks. The other risks are legal, regulatory, reputational andoperational.

Asthefinancialmarketgets integrated thereis linkageamongmoneymarket, capital market, equity and foreign exchange markets. Thevolatility in interest/exchange rate would be transmitted to thefinancial sector as a whole. Effective Risk Management by bankscan reduce the adverse effect of Macro economy instability on thesoundness of the financial system.

The kinds of major Risks the banks assume are broadly classifiedas Credit Risk, Market Risk and Operational Risk.

Credit Risk:

It is defined as the potential that a borrower or counterparty will failto meet his obligation in accordance with agreed upon terms.

The credit risk arises from bank’s dealings with or lending tocorporate individual, another bank, financial institution or country.The credit risk may take various forms such as in case of (a) direct


lending that fund will not be paid (b) guarantee/ letter of creditfunds will not be forthcoming from customer upon crystallisationof liability and contract (c) treasury products that the payment duefrom the counterparty under contract is not forthcoming or ceases(d) in securities trading business the settlement will not be effectedand (e) cross border exposure that the availability and free transferof currency is restricted or ceases.

Credit risk depends on both internal and external factors. Externalfactors include the state of economy, commodity, equity prices,exchange rates and interest rates. The internal factors comprisedeficiencies in loan policies and administration of loan portfolio,weakness in prudential credit concentration limits, appraisal ofborrower financial position, excess dependence on collaterals,inadequate risk pricing, deficiency in loan review mechanism andpost-sanction surveillance. Credit risk management enables banksto identify assets and manage credit risks proactively.

Market Risk:

Market risk is defined as the risk of losses on and off balancesheet positions arising from movement of market prices. Thus themarket risk arises from adverse change in the market variablessuch as interest rates, foreign exchange rates, equity price andcommodity price. This causes substantial changes in income andeconomic value of banks. The market risk takes the form of :(a) Liquidity Risk: Liquidity is the ability to efficiently

accommodate deposit and other liabilities decreases as wellas fund loan portfolio growth and possible funding of balancesheet claims. The liquidity risk of banks arises from fundinglong term assets by short term liabilities, thereby making theliabilities subject to roll over or refinancing risks.

(b) Interest Rate Risk: Interest rate risk arises from holdingassets and liabilities and off balance sheet items with differentprinciple amount, maturity dates or repricing rates therebycreating exposures to unexpected changes in level of marketinterest rates. The changes in interest rates affect banks’earnings through the net interest income and level of otherinterest sensitive income and operating expenses. This alsoimpacts the underlying value of banks assets, liabilities andother off balance sheet items.


(c) Foreign Exchange Risk: It arises in running open foreignexchange position (in Spot/Forward transactions) due toadverse exchange rates or maturity mismatches.

(d) Equity/Commodity Prices Risks: It arises as a result ofadverse movements in prices or equity and commodityprices.

Operational Risk:Operational Risk has been defined by the Basel Committee onBanking Supervision as the risk of loss resulting from inadequateor failed internal process, people and systems or from externalevents. This definition includes legal risk but excludes strategicand reputational risk.

The following types of operational risk events are identified byBasel Committee as having the potential to result in substantiallosses:• Internal Fraud – Intentional misreporting of positions, employee

theft, insider trading on employee account etc.• External Fraud – Robbery, Forgery, Cheque Kiting and damage

from computer hatchery.• Employment practices and workplace safety - Workers’

compensation claims, violation of employees health and safetyrules, organised labour activities, etc.

• Clients’ products and business practices - fiduciary branches,misuse of confidential customer information, improper tradingactivities on bank’s account, money laundering and sale ofunauthorised products, business disruptions and systemfailure – Hardware and software failures, Telecommunicationproblems and utility outages.

• Damage of physical assets – terrorism, vandalism, flood,earthquake.

• Execution, delivery and process management – data entryerrors, incomplete legal documents and unauthorized accessgiven to clients’ accounts and vendor disputes etc.

(c) Risk Management System:

The basic components of a Risk Management System areidentifying the risks the institution is exposed to, assessing their


magnitude, monitoring them , controlling or mitigating them, fixingappropriately risk limits and using variety of risk managementprocedures and setting aside capital for potential losses.

An Integrated Risk Management System provides an institutionalframework independent of operational departments to identify,assess or measure, monitor and control, Credit Risk, MarketRisk and Operational Risks inherent in business of banking andfinancial services to develop quality business.

The Risk Management system develops strong risk managementinformation system and assists in formulation of loan, investmentand business policies, procedure with built-in checks and balancesto control risks. It broadly indicates parameters to govern Credit,Investment and other business decisions. The parametersinclude:

(i) exposure limits to individual/group of individual, Sector andCountry in relation to Bank’s capital.

(ii) exposure limits for Inter Bank business in domestic andforeign money market operations.

(iii) Minimum requirement of financial ratios viz; Debt Equity, Networth to total liabilities, Current Ratio, Return on assets, andother profitability ratios.

(iv) Credit rating by external credit rating agencies

Risk Management System spells out internationally acceptedmodels/methods of risk measurements for various types of risksto compute capital charge required for Capital Adequacy Ratioprescribed by Regulator.

Banks have set up Risk Management Department (in the lightof guidance note provided by the Reserve Bank of India) as aseparate department independent of operational departments toreview and evaluate risks on ongoing basis in various segmentsof business and bank as a whole as a result of changes in interestrate, exchange rate, commodity and equity prices and marketenvironment. This is still in infant stage. Banks have to makegreater efforts to create an effective Institutional Framework andput in place comprehensive Risk Management system, adoptfocused internal audit, and upgrade Management InformationSystem and Information Technology System.


5. (a) Risk Based Supervision:

The supervisory system of RBI apart from on site inspectionsinvolves off site monitoring, Internal Control System in banks anduse of external auditors.

The On-site Annual Financial Inspection (AFI) system is basedon CAMELS (Capital Adequacy, Asset Quality, Management,Earnings, Liquidity and System and Control) for Indian banks andCALCs (Capital Adequacy, Asset Quality, Liquidity, Complianceand System) for foreign banks. A system of supervisory rating ofbanks based on CAMELS concept is being used to summariseperformance of individual banks and assess the aggregatestrength and soundness of the banking system.

With changing scenario of banking where risk management iscrucial, the RBI moving from CAMELS-based approach to Risk-Based Supervision (RBS) from the year 2003 in a phased mannerto enhance the supervisory standards and practices in alignmentwith international best practices.

The Risk-Based Supervision assesses five business risks (Credit,Market, Operational, Liquidity and Group exposure) managementand compliance-two control risks. This enables the supervisorsto separately assess the risk for inherent/control risk areas anddomestic/overseas operations in respect of all business risks,thereby providing important input for specific supervisory action.

Under Risk-Based Supervision, banks are differentiated onthe basis of their risk profile and the risk posed by them to thestability of the institution and financial system. Banks with highrisk and critical areas with high risk within the banks receive moresupervisory attention.

RBS approach envisages continuous monitoring and evaluation ofthe appropriateness of the risk management system in supervisedinstitution in relation to business strategy and exposures with aview to assessing the risks.

The banks have initiated steps to set up comprehensive RiskManagement System, Risk-Based Audit system, upgradeManagement Information and Information Technology-Based


system. Banks have also established dedicated compliance unitand to address the issues related to human resources and skilldevelopment as a preparatory step for Risk-Based Supervisionfrom the year 2002-03 by RBI.

5. (b) System of Prompt Corrective Action:

The core principle of effective banking supervision of the banksInternational Banking Settlement (IBS) mandate that bankingsupervision must have at their disposal adequate supervisorymeasures backed by legal sanctions to bring about timelycorrective action. If the banks are not to be allowed to fail it isessential that corrective action has to be taken while the banksstill have a manageable cushion of capital. Once the capital fallsbelow the prescribed threshold limit the bank has to draw upplans for recapitalisation limit or prohibit dividend or impose limitof risk taking. Restrictions often involve limiting new acquisitionsor restrictions on interest rates on deposits. When capital falls tovery low levels or negative, regulator can force merger or proceedclosure.

The RBI has put in place system of Prompt Corrective Actions(PCA) from December 2002. Under PCA System, RBI will initiatecertain structured actions in respect of banks which will hit triggerpoints in terms of three parameters viz; CRAR, Net NPAs to NetAdvances and Return on Assets.

On every trigger point a set of mandatory and discretionary promptcorrective actions has been laid down. The rationale for classifyingthe rule based action into mandatory and discretionary componentsis that some actions are essential to restore the financial health ofthe banks while other actions will be left to the discretion of thesupervisors depending on the profile of each bank.

6. New Basel Accord – IIThe Basel Capital Adequacy Accord was introduced in 1988 as ameans of setting Capital Asset Ratio for international banks. Thepost-Basel 1988 international banking witnessed a global blurring offunctional distinction covering financial intermediaries. The speed andcomplexity of adjustment made it difficult for supervisory authorities foraffecting regulations on financial entities in other countries since the


banks in different countries experienced different degrees of risks, therule of one size fits all as part of Capital Adequacy Ratio was subjectto intense debate as it had emphasised only credit risk aspects ofbanking operations, ignoring the other important risk factors involvedin interest rate risk, market risk and operational risk.

The structure and operations of banks and financial intermediarieshas undergone a sea change as a result of revolution in Informationand communication Technology. The major financial intermediarieshad become global in geographical coverage and universal in theirfinancial operations comprising wide range of activities. The speedand complexities in financial services made it difficult to effectivelyregulate financial entities. This led to the review of the Basel Accord1988 with the primary objective of (i) the promotion of safety andsoundness of financial system (ii) enhancement of competitive qualityand (iii) constitution of more comprehensive approval to addressingthe risks. The new Basel Accord 2001 is based on the following threepillars (i) Minimum capital requirements (ii) supervisory review process(iii) effective use of market discipline.

(i) When Basel 1988 Accord was established it was primarilyconcerned with minimum capital standard to cover credit risk.The capital charges for other types of risks were assumedproportionate to credit risk. In view of the increasing Inter-nationalisation of activities of banks the new accord providesfor separate capital charge for operational risk and interest raterisk.

(ii) Supervisory Review of Capital Adequacy envisages a moreproactive role for the regulator by requiring that they ensurethat banks’ capital position is in consistent with risk profile andstrategy. This is to be achieved through supervisory review ofbanks’ specific internal capital assessment process. This placessignificant emphasis on the supervisory authorities for identifyingand reviewing and evaluation of a bank’s internal capital adequacyassessment as well as compliance with regulatory capital ratiosfailing which the supervisors are supposed to intervene so as toensure that banks are able to withstand normal business risks.

(iii) Market Discipline calls upon banks to conduct their business ina safer and sound and efficient manner. This requires banks to


disclose to the public all key features of the capital held as acushion against losses and risk exposures that may give rise tosuch losses. The rationale behind market discipline is to providesufficient information to enable the user to assess whether theavailable capital is sufficient to meet credit risk, market risk andother risk requirements and how well it is able to withstand futurevolatility.

Implication of New Accord:

Under Basel II the regulatory capital requirement is determined bythe quality of the asset portfolio and business mix. Thus two bankswith same balance sheet size would have widely different capitalrequirement depending on the riskiness of their assets portfolio.Depending upon credit rating given by external rating Agencies theyhave to risk weight which varies from zero to 100%. For instanceexposure of Rs.100 cr. to a corporate with AAA rating carries only 20per cent risk weight; the bank will have to keep on 1.8 cr. (100x20x9%)as capital compared to Rs.9 cr. earlier as per Basel I accord where allloans are treated alike and risk weight is given as 100 irrespective ofcredit rating of loan assets.

Basel II has indicated three methodologies for measuring operationalrisk. Basic Indicator approach, Standard approach and AdvancedMeasurement approach. The RBI has advised bank follow the BasicIndicator approach to begin with. The Basic Indicator approachspecifies that banks should hold capital charge for operational riskequal to the average 15 percent of annual gross Income over the lastthree year excluding any year when the gross income is negative.Gross income is defined as net interest Income and non interestincome grossed up for any provision, unpaid interest and operatingexpenses. It should only exclude Treasury gains/losses from bankingbook and other extra- ordinary and irregular income (such as incomefrom insurance).

Implementation of the Basel new accord by RBI will require morecapital for banks in India due to the fact that operational risk is notcaptured under Basel 1 for the capital charge.

The banks will have to plan their business growth and size of theBalance Sheets depending upon their profitability, quality of asset and


capacity to raise additional capital to maintain Capital Adequacy Ratioprescribed by the Regulator.

To enable the banks to raise additional capital RBI has issued policyguidelines to facilitate issue of several instruments by banks suchas perpetual debt instrument, perceptual non-cumulative preferenceshares, redeemable cumulative preference shares and high-brid debtinstruments.

Taking into account the state of preparedness of the banking systemthe foreign banks and Indian banks operating overseas have beengiven time frame to migrate to the new approach for operationalrisk under Basel II w.e.f. 31.3.2008 and other commercial banks by31.3.2009.

7. New Private Banks – Mergers/Amalgamations:

New Banks:The Banking Sector Reforms initiated during the early nineties,with policy measures by the government as well as the ReserveBank of India 10 new generation private sector banks emerged viz;HDFC Bank, ICICI Bank, UTI Bank, IDBI Bank, Indusind Bank Ltd;Development Credit Bank Ltd; Bank of Punjab Ltd; Times Bank, KotakMahindra Bank and Yes Bank.

Mergers of Banks:It was felt that the economy of scale is necessary to take on the foreignbanks whose balance sheet size is very huge when compared withthe size of the biggest bank in India. Mergers and Acquisitions gainedmomentum though not at the rate at which they were expected. TheTimes Bank merged with HDFC Bank Ltd. and Bank of Madura withICICI Bank. Oriental Bank of Commerce took over Global Trust Bank.The Centurian Bank Ltd. took over Bank of Punjab and changed entityto become the Centurian Bank of Punjab. IDBI Bank took over UnitedWestern Bank. While a few of these mergers were strategic a fewothers were out of compulsion.

There were two mergers in early nineties i.e. New Bank of India withPunjab National Bank and Bank of Karad Ltd. with Bank of India during1993-94. There has been a spate of mergers from 1995-96 onwards.(see Table – XIII)


Table – XIII

Banks/DFI Merged with YearKashinath Seth Bank Ltd. State Bank of India 1995-96

Barelley Corps Bank Bank of Baroda 1999

Briton Bank of Mid East HSBC 1999

Sikkim Bank Ltd. Union Bank of India 1999-2000

Times Bank Ltd. HDFC Bank 2000

Bank of Madurai Ltd. ICICI Bank 2001

Banaras State Bank Ltd. Bank of Baroda 2002

I.C.I.C.I. Ltd. ICICI Bank 2002

Nedungadi Bank Ltd. Punjab National Bank 2003

South Gujarat Local AreaBank

Bank of Baroda 2004

Bank of Muscat SAOG Centurian Bank 2004

Global Trust Bank Ltd. Oriental Bank ofCommerce

2004

IDBI Ltd. IDBI Bank Ltd. 2004

Bank of Punjab Ltd. Centurian Bank Ltd. 2005

United Western Bank IDBI Bank Ltd. 2006

Ganesh Bank ofKurundwad Ltd.

Federal Bank Ltd. 2006

Sangli Bank Ltd. ICICI Bank Ltd. 2007

Lord Krishna Bank Ltd. Centurion Bank ofPunjab Ltd.

2007

Government of India on its part encouraged merger moves amongPublic Sector Banks and assured all support for any such moves tobe initiated by any bank. With the imminent further opening up of theIndian Banking Sector to the Foreign Banks in 2009, we may witnesssome such mergers in the near future.

Amalgamation of RRBs:In the wake of introduction of banking sector reforms in 1991-92 thecommerical viability of RRBs emerged as the most crucial factorin deciding about their desired role to provide agriculture and rural


credit to the target group. The financial health of RRBs turned weakmainly due to its limited business flexibility with hardly any scope ofexpansion/diversification, small size of loans with higher exposure torisk prone advances. To strengthen RRB Government of India hasbeen infusing capital though budgetory allocation from 1994-95.

To improve their performance the RBI allowed RRBs to lend non targetgroups, deregulated their deposits and lending rates and permittedinvestment of their surplus funds in profitable avenues. RRBs werealso permitted to setup off site ATMs, issue debit credit card and alsoto handle pension and Cash business as sub agents of banks andconduct certain types of Foreign exchange transactions. In order toimprove the operational viability of RRBs and to take advantage of theeconomies of scale the route of amalgamation of RRBs at state levelsponsor bank-wise was initiated in Sept. 2005.

196 RRBs were operating in 26 states across 525 districts. Withamalgamation process number of RRBs were brought down to 96 with14506 branches as on 30.6.2007.

The Asset base of RRBs at the end of 31.3.2007 was Rs. 105768crore. Out of 96 RRBs functioning at the end of March 2007 15 wereincurring losses. The return on asset ratio of RRBs was 0.7 percentGross NPAs to total advances was 6.39 percent and net NPAs to NetAdvances 3.41 percent.

Local Area Banks:With a view to providing an institutional mechanism for promotingrural, savings as well as provision of credits for viable economicactivities in local areas, Local Area Banks (LAB) were permitted inAug. 1996 to be established in the Private sector.

The LAB has to get registered as public Ltd Co. under the companiesAct 1956 and will be licensed under the Banking Regulation Act 1949and eligible for including in the second schedule of RBI Act 1934.The minimum paid up capital for such banks is Rs. 5 Cr. Contributionof promoters has to be at least Rs. 2 Cr. The bank has to observe thePriority sector lending target of 40 percent of net bank credit. Thearea of operations of LAB is maximum three contiguous Districts. Thebank has to locate its Head/Registered office at a centre within thearea of operations.


Following five local area banks were established:1. Coastal Local Area Bank Ltd., Vijayawada, A.P.2. Capital Local Area Bank Ltd., Phagwada, Punjab.3. Krishna Bhima Samridhi Local Area Bank Ltd., Mehboob Nagar A.P.4. South Gujrat Local Area Bank Ltd. Navsari Gujrat, Maharashtra5. The Subhadra Local Area Bank Ltd., Kolhapur.

South Gujarat Local Area Bank had suffered net losses in consecutiveyears and witnessed a significant decline in its capital and reservewas merged with Bank of Baroda on June 2004.

At the end of March 2007 remaining four banks were functioning withnetwork of 30 branches and marking profits. They have asset baseof Rs. 497 crores, with deposits of Rs. 388 crores and advancesRs. 262 crores.

8. Corporate Governance :

Corporate Governance from Banking Industry perspective involvesmeasures which the business and offices of individual institutionsare conducted by Board of Directors and Management to protectinterest of depositors and enhance shareholders’ value, operating ina safe and sound manner and in compliance with applicable laws andregulations.

Thus good corporate governance has as its backbone, a set oftransparent relationshipbetweenan institution,management, itsBoard,shareholders and other stakeholders. It spells out manners in whichbusiness affairs of banks are to be directed and managed by Boardof Directors and senior management. It provides the structure throughwhich objectives of institutions are set and strategies for attainingthese objectives are determined and performance monitored.

As banks accept and deploy large amounts of deposits ofuncollaterised public funds and leverage such funds through creditcreation mechanism, the ownership and governance of banks havebeen brought within comprehensive Banking Regulations Act andsupervisory frame of RBI for safeguarding depositors’ interest andpublic policy consideration.

With the increasing participation of public shareholders in public


sector banks and entry of new private sector banks and need forraising capital from domestic and global capital market, the bankshave to establish credible and widely accepted corporate governancearrangements.

Public Policy framework in regard to corporate governance involvesmultiplicity of agencies in all countries. In India for instance, there areDepartment of Company Affairs, Securities Exchange Board of Indiain respect of listed entities apart from Banking Regulator for banks.

Corporate Governance deals with composition of directors,remuneration of directors, qualitative standards for internal control,Risk Management, disclsoure norms, constitution of Audit Committee,its role and responsibilities, procedural aspects of Board meeting,reporting to shareholders, servicing of shareholders/ investors’grievances etc.

“However, there is a basic difference between Private Sector banks andPublic Sector banks as far as the Reserve Bank’s role in governancematter relevant to banking is concerned. The current regulatoryframework ensures by and large uniform treatment of private andpublic sector banks by Reserve Bank in so far as prudential aspectsare concerned. However, some of the governance aspects of PublicSector banks though they have a bearing on prudential aspects areexempt from applicability of the relevant provisions of the BankingRegulations and they are governed by the respective legislations underwhich various Public Sector banks were set up. In regard to governanceaspects relevant to banking, RBI prescribes policy framework forthe private sector banks while suggesting to the government sameframework for adoption as appropriate and consistent with the legaland policy imperatives.” (An extract from address of Dr. Y. V. ReddyGoverner of RBI in the conferance on Corporate Governance for bankdirection of Indian banks 14 Dec. 2005 organised by IBA).

9. Financial Inclusion:The Indian Banking system has made earnest attempt to reachunreached banking services by expanding its network of branchesto over 71800 and bringing down the population per office of thecommercial banks to 16000. However nearly 41 per cent of adultpopulation still remains uncovered.


One of the benchmarks employed to assess the degree of reach offinancial services to the population of the country, is the quantumof deposit accounts (current and savings) held as a ratio to adultpopulation. According to census of 2001 on all India basis 59 percentof adult population in the country have bank accounts. In rural areasthe coverage is 39 percent against 60 percent in urban areas.

The extent of exclusion from credit market is much more as number ofloan accounts constituted only 14 percent of adult population. In ruralareas coverage is only 9.5 percent. Out of 203 millions house holdsin the country 147 millions are in rural areas. 89 millions are farmerhouse holds. 73 percent have no access to formal sources of credit.

Looking at the different sources of credit it is observed that share ofnon-institutional sources reduced from 70.8 percent in 1971 to 42.9percent in 2002. However after 1991 the share of non institutionalsources has increased specifically the share of money lenders in debtof rural household from 17.5 in 1991 to 29.6 percent in 2002. In urbanareas the share of non institutional sources has come down from 40percent in 1981 to 25 percent in 2002.

The financialy excluded sections largely comprise, marginal farmers,landless labourers, oral lessers self employed and unorganisedenterprises urban slum-dwellers, migrants, senior citizens andwomen.

The uncovered population indicates, the scope and magnitude of thetask before the banking system to take banking services to masseswith the help of Information Technology and network of branches.

What is Financial Inclusion:

The Financial Inclusion is the delivery of banking services at affordablecost to the vast sections of disadvantaged and low income groups.

The Financial Inclusion Task Force in the United Kingdom (U.K.) hasidentified three priority areas for the purpose of financial inclusionviz.; access to banking, access to affordable credit and access to freeface-to-face money advice.

With a view to achieving the objective of greater financial inclusion, allbanks were advised by RBI in November 2005 to make available basicbanking “No Frills account” either Nil or very low minimum balancesas well as charges that would make such accounts accessible to vast


sections of population. RBI also simplified the Know Your Customer(KYC) procedure for opening small accounts asking banks to seekonly a photograph of the account holder and self-certification ofaddress. The amount of outstanding balances in these accountswould be limited to Rs.50,000/-, and the total transactions would belimited to Rs.2 lakh in one year. As and when the balances or the totaltransactions exceed these limits, banks would be required to convertthese accounts into normal accounts and follow normal procedure,KYC etc.

Use of NGOs:

With the objective of ensuring greater financial inclusion and increasinggreater outreach of banking sector, banks have been allowed to useservices of Non Government Organisations (NGOs), Self Help Group(SHG), Micro Financial Institutions (MFI) and Central StatisticalOrganisations (CSO) as intermediaries in providing financial andbanking services through use of business facilitator and businesscorrespondent models.

Under the business facilitator model they could use the intermediariessuch as NGOs, Farmers Clubs, Co-operatives and Communitybased organisations. It enables rural outlets of corporate entities,post offices, Insurance Agents, well functioning panchayats, VillageKnowledge centres, Agri Clinics/Agro Business Centres, Krishi VigyanKendras and Khadi Village Industries Commission Board (KVIB) unitsfor providing financial services depending on the comfort level of theBank.

Similarly NGOs/MFIs set up under the Societies / Trust Act, SocietiesAct or societies registered under the Mutually Aided Co-operativeSociety Act or the Co-operative Societies Acts. States, companiesmentioned under Section 25 of the Companies Act 1956, RegisteredNBFCs not accepting public deposits and post offices are permittedas business correspondents.

General Credit Card:

With a view to providing hassle free credit by banks to customersin rural areas General Credit Card Scheme has been introduced in2006. The credit facility extended under the scheme is in the nature of


overdraft or cash credit without insisting on security, purpose or enduse of the credit. The maximum limit for an individual is Rs.25000.

Banks are redesigning their business strategies to incorporate specificplans to promote financial inclusion of low income group treating itboth a business opportunity as well as social responsibility. Over aperiod of time Financial Inclusion will emerge as commercial andprofitable business.

10. Licensing Policy of Reserve Bank of India:To establish a bank or branch office of bank there is need to obtainlicense from Reserve Bank of India complying with requirementsof Banking Regulations Act 1949. The broad policy guidelinesfollowed by RBI to consider the requirements for grant of license for(a) establishing banks in private sector, (b) branch or wholly ownedsubsidiary by foreign banks in India and (c) opening branches in Indiaare summarised below:

A. Guidelines for entry of new Private Sector banks of RBI:1. The initial minimum paid up capital for a new bank should

be Rs.200 crore which shall be increased to Rs.300 crore insubsequent 3 years after commencement of business.

2. Promoters’ Capital share 40 per cent.

3. A large industrial house should not promote any new bank.However individuals, can directly or indirectly connected withlarge industrial houses are permitted to participate in the equityof new private sector bank up to 10 per cent but would nothave controlling interest in the bank. The bank shall not extendany credit facilities to the promoters and companies investingup to 10 per cent of equity.

4. The new bank need to observe prescribed target of prioritysector lending (40 per cent of net bank credit)

5. A Non-banking Finance Company (NBFC) can also convert itinto commercial bank if it satisfied the prescribed criteria of(a) minimum networth of Rs.200 crore, (b) a credit rating of notless than AAA (c) capital adequacy of not less than 12 per centand (d) Net NPAs not more than 5 per cent.

6. Preference would be given to promoters with expertise of


financing priority areas and in setting up banks specialising infinancing of rural and agro-based industries.

7. The directors and Chief Executive Officer are fit and proper andobserve sound corporate governance principles as indicatedby RBI.

B. Guidelines for setting up Off-shore Banking Unit by Indianbanks:The Reserve Bank of India following the announcement of EXIM(Export and Import) Policy 2002-07 by Government of India issuedguidelines in November 2002 allowing banks operating in Indiato set up Off-shore Banking Units (OBUs) in Special EconomicZones (SEZs) which would be virtually foreign branch of Indianbanks located in India. The salient features for setting up OBUs inSEZs are:

(i) All banks operating in India authorised to deal in foreignexchange are eligible to set up OBUs with a preference forbanks having overseas branches and experience in runningOBUs.

(ii) Banks would be required to obtain prior permission of ReserveBank of India for opening OBU in SEZ under Section 23(1)(a)of Banking Regulation Act 1949.

(iii) Since OBUs would be branches of Indian banks no separateassigned capital for such branches would be required.However to start operations by OBU the parent bank wouldbe required to provide a minimum of US$ 10 million.

(iv) The RBI would grant exemption from CRR requirements toparent banks in respect of OBUs.

(v) The sources of raising foreign currency funds would be onlyexternal.

(vi) Deposits of OBU will not be covered by Deposit Insurance.

(vii) Loans/advances of OBU would not be reckoned as net bankcredit for computing priority sector lending obligations.

C. Policy for foreign banks:RBI considers requests of foreign banks for conducting businessin India keeping in view the financial soundness of the bank,


International and home country ranking, rating Internationalpresence and economic and political relations between twocountries. In particular the home country of the bank should notdiscriminate against Indian bank.(i) Foreign banks are required to bring minimum assigned capital

of US $ 25 million upfront while opening its first branch.(ii) The foreign banks are also permitted to operate through Wholly

Owned Subsidiary (WOS) or a subsidiary with an aggregateforeign investment up to a maximum of 74 per cent in privatebank.

(iii) RBI has released a roadmap for presence of foreign banksin February 2005 under which foreign banks are permitted toestablish presence by way of setting up WOS or conversion ofexisting branches into WOS. The WOS should have minimumcapital of Rs.300 crore and would need to ensure soundcorporate governance. The WOS will be treated at par withthe existing branches of foreign banks for giving license toopen branches up to 12 per annum (in conformity with India’scommitment to World Trade Organisation) excluding off-site ATM which also require license. This policy is valid upto31.3.2009.

C. Branch Authorisation Policy – 2005:In terms of the existing provisions of banking regulations Act, 1949banks are not allowed without the prior approval of the ReserveBank to open a new place of business in India or change thelocation of the place of business other than the some city, townor village.

While considering applications of bank for opening branches RBI(i) gives weightage to the nature and scope of banking facilities

provided by bank to common person particularly in un-banked areas, actual flow of credit to the priority sector,pricing of products and overall efforts for promoting financialinclusion including introduction of appropriate new productsand enhanced use of Technology for delivery of bankingservices.

(ii) Makes such assessment on the, basis of policy of the bank onminimum balance requirements and whether depositors haveaccess to minimum banking or “no frills” banking services.


(iii) Commitment to the basic banking activity and quality ofcustomer service as evidenced by number of complaintsreceived and redressal mechanism in place in the bank forthe purpose.

(iv) Regulatory comfort which encompasses (i) compliancewith principles of regulation (ii) the activities of the bankinggroups and the nature of relationship of the bank with itssubsidiaries, affiliates and associates and (iii) quality ofcorporate governance, proper risk management system andinternal control mechanism.

The system of granting authorization for opening individualbranches from time to time has been replaced by a system ofgiving approvals on an annual basis through a consultativeand interactive process from September 2005 in order to givereasonable freedom to banks for opening new branches andshifting/closing of all catagories of branches/offices includingATMs.

The new branch authorisation policy for Indians banks is alsoapplicable to foreign banks, subject to other conditions mentionedunder policy for foreign banks.

11. (a) Fair Practice Code – Guidelines for lenders’ liability:

To improve the quality of services to the borrowers by makingtheir own service obligation more transparent, the Fair PracticeCode was introduced on May 5, 2003.

Salient features of the Code are as follows:1. Loan application form in respect of priority sector advances

upto Rs.2 lakh should include information such as fees/charges payable for processing and prepayment option.

2. Banks must have a system of giving acknowledgement forreceipt of all applications and the main reason for rejectionshould be conveyed in writing in respect of small borrowersupto Rs.2 lakhs.

3. Lender should ensure proper assessment of credit applicationby borrowers. The margin and security stipulation should notbe used as substitute to due diligence on the credit worth ofborrower.


4. Lender should ensure timely disbursement of loan sanctionedin terms and conditions covering such sanction and give noticeif any changes are effected.

5. Lender should refrain from interference in the affairs ofthe borrowers except for what is provided in the terms andconditions of loan document.

11. (b) Anti-Money Laundering:

Money laundering is the process whereby proceeds of crimes suchas drug trafficking, smuggling etc. are converted into legitimatemoney through a series of financial transactions making itimpossible to trace back the origin of funds and ownership. UnitedNations has appealed to all member countries to enact specificlegislation for prevention of money laundering to prevent the useof financial system. Basel principles adopted in 1988 had broughtat the commitment of International financial community to operatewith government agencies in preventing money laundering.In 1989 at the instance of OECD countries a Financial ActionTask Force (FATF) was set up for enabling banking systems toadopt anti money laundering guidelines with the twin objectivesof preventing use of banking channels for money launderingand assisting law enforcement authorities to tackle the problem.The FATF guidelines on Know Your Customer (KYC) and othermeasures to fight money laundering have been widely accepted.

The Prevention of Money Laundering Act (PMLA) 2002 hasbeen enacted in India in 2002. The PMLA provides broad legalframework for countering money laundering. Under the Actbanking companies, financial institutions and intermediaries arerequired to maintain a record of all transactions (the nature andvalue of which will be prescribed) and further information of suchtransactions shall be furnished to designated authorities.

The technological advancement facilitated on-line transfer offunds and real time settlement between banks across the globe.This has helped money launders to adopt innovative means andmove/transfer funds, across continents making detection andpreventive action much more difficult.


The banks have therefore adopted anti money laundering policyto establish governing principles and standards to (a) protect thebank from being used to launder money. (b) To adhere to theinternationally accepted Know Your Customer (KYC) policiesand procedures in day-to-day business. (c) To take appropriateactions once suspicious activity is detected and make report todesignated authorities in accordance with applicable law/laiddown procedure.

Know Your Customer (KYC): The banks have adopted KYCpolicies, procedure and internal controls designed to :(a) determine and document the true identity of the customer

who establishes relationships, opens accounts or conductssignificant business transactions and obtain basic backgroundinformation.

(b) obtain and document any additional customer informationcommensurate with assessment of money laundering riskposed by customers’ expected use of bank products andservices.

(c) protect the bank from the risks of doing business with anyindividual or entity or those who have provided informationthat contains glaring inconsistencies which cannot be resolvedafter investigation.

Before the introduction of KYC norms the procedure for openingaccount by any Indian National resident/non-resident/partnershipforms/Limited companies/Trust, the prospective account holderwas required to:a) provide introduction by person/account holder acceptable to

the Bank.b) to submit 2 passport size photos.c) to provide specimen signature in presence of verifying

official.d) to provide documents for identifications and proof of

residence.e) to indicate Permanent Account Number (PAN) given by tax

authorities or declaration as applicable.f) to obtain Registration Certificate in case of Partnership

firm, Certificate of Incorporation, Memorandum / Article of


Association from Companies and Resolution by Boards foraccount of companies.

In the context of KYC identification means establishing whoa person purport to be. This is done by reconciling informationprovided by customer covering elements of his identity. (i.e. name,all other names used and the addresses which can be located).Some of the documents accepted by banks for establishingidentity of a person include Passport, Driving Licence, IdentityCard of any institution, PAN Card, Voter Identity Card, copy ofElectricity Bill or Telephone bill having residential address.

11. (c) Banking Codes and Standards Board of India:

Reserve Bank of India together with 11 other banks in India set upBanking Codes and Standards Board of India (BCSBI) in February2006 to monitor and ensure that banking codes and standardsvoluntarily adopted by banks are adhered to while providingservices to individual customers. These industry-wise normshave been codified in the form of a code of Banks’ commitmentto customers’ code. Its objective is to locate and rectify systemicdeficiencies by taking collaborative remedial action.

The code is a landmark in the development of banking in India asfor the first time the individual customer has been provided withcharter of rights which he can enforce against his bank.

The cardinal principle of the code is that bank should not relyon implicit consent from customers and all products and servicesshould be sold to the customer only after obtaining his explicitconsent in writing.

The code sets out minimum standards of banking products forbanks to follow and emphasizes transparency in banks dealingwith the customers. It covers the third party products sold throughbank branches and banks are under obligation to ensure thatdirect sale agents also comply with the code.

11. (d) Credit Information Bureau of India Ltd. (CIBIL):Banks and lending Institution have a traditional resistance toshare credit information because of confidential nature of bankercustomer relationship. However exchange of credit informationbetween banks and other financial institutions is critical for


preventing misutilisation of money lent. Similarly default in a bankis recognized as defaulter by the system. The system will have toensure that the unscrupulous borrowers are unable to play onebank against the other. Credit Information Bureaus have thereforebeen setup to function as a repository of credit information bothcurrent and historical data on existing and potential borrowers.These institutors maintain data base on credit information onborrower which can be accessed by lending credit Institutions.They act as facilitators for credit dispensation and helps mitigatecredit risk involved in Lending.

Based on cross-country expediencies Credit Information Bureauof India Ltd. (CIBIL) has been set up in year 2001 by StateBank of India in collaboration with HDFC Ltd. and mls. Dun andBradstreet Information Sevices (India) Pvt. Ltd. and Trans UnionInternational Inc (as Foreign Technology partners) with paidup capital of Rs. 25 cr. to serve as an effective mechanism forexchange of Information between banks and Financial Institutionsfor curbing growth of non performing assets. RBI has put in placea scheme for collecting and disseminating data about borrowers.

The Credit Information companies Regulation Act 2005 has beenenacted for regulation of Credit Information Companies andfacilitating efficent distribution of credit and for matters connectedthere with or incidental thereto. After coming into force of the Act,the existing obligation on the part of credit institutions such asBanks and Financial Institutions to maintain secrecy with respectto affairs of their constituents would not be a legal constraints forthem.

11. (e) WTO and Financial Services:In 1944 representatives of 44 nations met in Bretton Woods, NewHampshire, USA to discuss the major international economicproblems including reconstruction of economies ravaged by thewar and to evolve practical solutions for them. The InternationalMonetary Fund was established to alleviate the problems ofBalance of Payments deficits by member countries, InternationalBank for Reconstruction and Development (IBRD) known asWorld Bank to help reconstruction and development of variousnational economies by providing long term capital assistance in


1946. The International Trade Organisations (ITO) was proposedto work towards the liberalisation of International trade as thevarious countries were imposing trade barriers to protect domesticindustries from foreign competition, guard against dumpingand promote indigenous resource development and conseveforeign exchange resources of the country. As the proposal forthe establishment of International Trade Organisation did notmaterialise the GeneralAgreement on Trade and Tariff (GATT) wasformed in 1948 and later in 1995 the GATT was replaced by theWorld Trade Organisation (WTO) with the backing of 85 countriesincluding India. The objective of WTO has been a) fair and moreopen rule based trading system b) progressive liberalization oftrade and service and elimination of tariff and non-tariff barriersand discriminatory treatment in International trade and all formsprotectionism to ensure that developing countries secure a sharein the growth in International Trade commensurate with the needsof their economic development.

International trade and financial services have grown rapidlyover the last three decades influenced by the development ofNew Information and other technologies, spread of financialliberalisation and expansion of foreign investment, which play animportant role in the overall economic development of countries.WTO therefore initiated negotiations in 1993 in Uruguay to bringfinancial services under General Agreement Trade and Services(GATS). In December 1997 the negotiations were concluded andfinancial services brought under WTO commitments.

The financial services include two broad categories ‘Bankingand Insurance’ which are the largest service sectors. The coreprovision of General Agreement on Trade and Services (GATS)relate to market access national treatment and additionalcommitments which are governed by multilateral rules.

Financial services are defined under GATS to include acceptanceof deposits, lending, financial leasing payment and moneytransaction services, guarantees and commitments, trading(in money market instruments, Foreign Exchange derivativesproducts, exchange rate and interest rate instruments, transferablesecurities and other negotiable instruments and financial assets)participation in issues of securities, money broking, asset


management, settlement and clearing services, provision andtransfer of financial information and advisory and intermediaryservices.

Commitment in financial services under WTO and India are madewith GATS subject to entry requirement domestic laws, rules andregulations and terms and conditions of Reserve Bank of India,Securities and Exchange Board of India and any other competentauthority in India.

WTO today has 146 member countries covering 90% of the worldtrade.

11. (f) Credit to Small and Medium Enterprises:Given the importance of small scale industry to overall especiallytheir employment generating potential and contribution toindustrial production, Special thrust was given for financing smalland medium enterprises in 2004.

The units with investment in plant and machinery in excess ofsmall scale industry limit and upto 10 crore is treated as mediumenterprise.

Banks were asked to open specialised SME branches in identifiedclusters/centres with preponderance of SSI and SME units toenable enterpreneur to have easy access to the bank credit and toequip bank personnel to develop the requisite expertise keepingin view they primarily depend on finance from banks and financialinstitutions and they have no access to other sources of financeavailable to large industries.

The SME has been redifined under Micro, Small and MediumEnterprises Act, 2006 (MSMED Act 2006) as under coveringservice sector.

A. Manufacturing – the basis is investment (original cost) inplant & machinery –

Micro: investment not exceeding Rs. 25 lacs

Small: investment above Rs. 25 lacs, not exceeding Rs. 500lacs

Medium: investment above Rs. 500 lacs, not exceeding Rs.1000 lacs.


B. Services – the basis is investment (original cost) inequipments –

Micro: investment not exceeding Rs. 10 lacs

Small: investment above Rs. 10 lacs, not exceeding Rs. 200lacs

Medium: investment above Rs. 200 lacs, not exceedingRs. 500 lacs.

11.(g) (a) Para BankingBanks were permitted to underrate Para Banking Activitieswhich include, Housing Finance, Factoring, Equipmentleasing etc. by setting up subsidiaries. Govt. of India issuednotification inAug. 2000 specifying Insurance as a permissibleform of business under the Banking Regulation Act, 1949 andBanks are permitted to setup Life Insurance subsidiary onrisk participation basis with 74 percent equity holding.

Banks are also permitted to make investment in the life andnon life Insurance Joint Ventures on risk participation basisand in a distribution and services company. Banks can alsoact as CorporateAgents of Insurance Company for distributionof Insurance products on fee basis with approval of InsuranceRegulatory Authority.

(b) Retail BankingThe retail banking portfolio encompasses deposit and assetlinked products as well as other financial services offered toindividuals for personal consumption. The products offered inthe retail banking segment are housing loans, consumptionsloan for purchase of durables, auto loans, education loans,credit cards, Insurance, investment, products. The loan valuerange between Rs. 20,000 and Rs. 100 lakh. The loans aregranted for duration of 5 to 7 years. With Housing loansgranted for a longer duration of 15 years.

The Technological innovations relating to increasing use ofcredit/debit cards, ATMs, direct debit and internet and phonebanking have contributed to the growth of retail banking withrising young middle to high income households. This segmentis viewed by banks as good business for profit maximationand growth.


11.(h) Changing role of Indian Banks’Association:With the changing scenarios of banking the role of Indian banks’Association (IBA) has expanded from assisting member bank withtheir activities to function as a self regulatory organisation and asan effective liasioning agency between Industry and authoritiesand preparing the members to keep pace with the changingtimes.

IBA is playing an important role in a diverse set of Initiatives toaddress issues of universal concern and work closely with theregulators to ensure that the system becomes stronger and moreefficient. Its vision is to work proactively for the growth of healthy,professional and forward looking, banking and financial servicesindustry in a manner consistant with public good.

It has membership of 120 ordinary members and 20 associatemembers overing public sector banks, private sector banks foreignbanks urban corporate banks development financial institutionsmutual funds and district centre coperative banks.

CREDIT RATING AGENCIES:As financial markets have grown increasingly complex andglobal and borrower base has become diversified, investors andregulators have increased their reliance on opinions of creditrating agencies.

The rating of business has a long history of 9 decades or so. Itwas in USA when larger funds had to be raised by the companiesfor building railroads that they wanted to tap savers directly. Itwas then felt that credit rating would be an aid for instillingconfidence in the minds of the people who are able and willingto invest in such companies. Rating commenced in 1909 whenJohn Moody, financial analyst on Wall Street published ratingson bonds issued by railroad companies using rating symbols. In1916 Poors Publishing company issued its first rating. In 1922another company called Standard Statistic Company and in 1924Fitch Publishing Company started their business as Credit RatingAgencies. Even today these are the most prominent credit ratingagencies in the world.



The rating offers an opinion regarding the issues, ability to maketimely payment of interest and principal on debt instruments towhich the rating has been assigned. The rating agencies attemptto provide consistent and reasonable rank of relative credit riskwith reference to specific debt instrument.

The rating methodology for banks and financial institutions is basedon the Capital Adequacy Resources, Asset quality, ManagementEvaluation, Earnings and Liquidity approach.

Long term Debt Rating Symbols used by International RatingAgencies are given below:

Investment Grade: Speculative Grade:

Symbols Interpretation Symbols Interpretation

S & P Others S & P Others

AAA, or Aaa Highest quality BB+ or Ba1 Likely to fulfilAA+ Aa1

High quality

BB Ba2 obligations.

AA Aa2 BB- Ba3

AA- Aa3

A+ or A1Strong Payment

B+ B1High Risk

A A2Capacity

B 2 obligations

A- A3 B- B3

BBB+ Baa1Adequate Pay-

CCC+ Current vulnerability

BBB Baa2ment Capacity

CCC Caa to default or in

BBB- Baa3 CCC- default.

C Ca In bankruptcy or in

D D default

The selected Rating Agencies include:Moody Investor Services, Standards & Poor’s Corporation,(S & P) Thomson Bank Watch, Duff & Philips Credit Rating (USA)Japanese Credit Rating Agency (Japan)IBCA Ltd. (U.K.)Credit Rating Agencies in India:

(i) CRISILThe first Credit Rating and Information Services of IndiaLtd. (CRISIL) was set up in India in 1987. It offers acomprehensive range of integrated products and service

offerings, real time news, analyse data, and expert adviceto enable investors, issuers, policy makers to de-risk theirbusiness and take informed investment decisions anddevelop workable solutions.

CRISIL is a subsidiary of Standard & Poors, the world’slargest rating agency. CRISIL expertise in developingRating criteria has been acknowledged by InternationalRating agencies.

(ii) ICRAInvestment Information and Credit Rating Agency of IndiaLtd. (ICRA) was established in 1991 as an independentand professional company for providing informationand credit rating services by IFCI, SBI, LIC, GIC, PNB,EximBank, HDFC etc.

It provides Rating services, Information services andAdvisory services to the corporate and financial sectors.

(iii) CARECredit Analysis & Research Ltd. (CARE) incorporatedin April 1993 was promoted by Industrial DevelopmentBank of India (IDBI), Canara Bank, Unit Trust of India andleading banks and financial services companies. CARE’sratings are recognised by Government of India and allother regulatory authorities including Reserve Bankof India. CARE has been granted registration by SEBIunder the Securities and Exchange Board of India (CreditRating Agencies) Regulation 1999.

Care ratings coverage includes Industrial companies,utilities financial institutions, infrastructure projects,special purpose vehicles, state government and municipalbodies. CARE rates all types of debt instruments likecommercial paper, fixed deposits, bonds, debentures,structured obligations etc.

(iv) FITCH RATING INDIA LTD., a 100% subsidiary of theFitch Group covers corporate sector, structured financesand bank and financial institutions in its credit ratinginformation and advisory services. It has access to FitchInternationals, large global information network and



interaction with other areas of Fitch Ratings such as theirsovereign, structure finance, public finance corporations.

(v) SMERA:SME Rating Agency of India Limited (SMERA) is a jointinitiative by Small Industries Development Bank of India(SIDBI), Dun & Bradstreet Information Services IndiaPrivate Limited (D & B), Credit Information Bureau (India)Limited (CIBIL) and several leading banks in the country.

SMERA is the country’s first rating agency that focuses primarily onthe Indian SME segment. SMERA’s primary objective is to provideratings that are comprehensive, transparent and reliable. Thiswould facilitate greater and easier flow of credit from the BankingSector to SMEs. The better rating from SMERA could help SME toobtain favourable credit terms such as finer rate of interest, lowercollateral requirements and simplified lending norms.

Regulation of Credit Rating Agencies:SEBI is the regulators of credit rating agencies in India and creditrating agencies have to register with SEBI for commencing theirbusiness in India. SEBI and RBI issue certain norms and guidelinesfor the functioning of credit rating agencies’ surveillance.

Indian Banking System Vs GlobalBenchmarks

Initiation of Banking Sector reforms in early 1990s and wide rangingsupportive measures undertaken by the Government of India and ReserveBank of India have made the Indian banking system strong and sound.

The banks have been able to show strong balance sheet growth inthe post-reforms period in an environment of operational flexibility.Improvement in financial health of banks is reflected in the improvementin Capital Adequacy and Asset quality. This progress has been achieveddespite the adoption of international best practices in prudential normsand renewing our goals of social banking viz; maintaining wide reach ofbanking system and directing credit towards important disadvantagedsections of the society.

The overall Capital Adequacy Ratio of Indian of Banking System hasincreased from 10.4 per cent in 1997 to 12.3 percent at the end of March2007. The asset quality has recorded significant improvement. The ratio ofnon performing assets (NPAs) to net advances declined from 8.1 percentin March 1997 to 1.0 percent at the end of March 2007. The profitability ofbanks defined by the Return on Assets (ROA) increased from 0.7 percentto 0.9 in 2006-07.

In an increasingly integrated world it is necessary that our banking systemis perceived as sound by International standards, if we compare it withfinancials and soundness indicators.

VII

An attempt is made in the following para to give comparative positionof Indian banking system with global benchmarks. Balance Sheet andprofitability indicators reveal that the Indian banking sector compareswell with global range under these parameters. Normally the followingparameters are used for assessing soundness and performance offinancial institutions:1) CapitalAdequacy Ratio: The capital to risk-weighted assets (CRAR)

is the most widely employed measure of soundness of a bank. TheCRAR of the banks reflects their ability to withstand shocks in theevent of adverse development. The global range for Capital AdequacyRatio lies between 8.8% and 37%. The overall Capital Adequacy Ratioof SCBs at the end of March 2005 was 12.8% as against regulatoryrequirement of 9 per cent which itself is higher than Basel norms of8%.

2) Return on Assets: The Return on total Assets (ROA) of banks isthe rate of net profit to total assets. This ratio is widely employedmeasure of profitability. A bank performing on sound commercial linesis expected to exhibit a healthy ROA. Globally ROA of Banking Sectorfor 2004 range lies between 1.2 per cent and 6.2 per cent. The ROAof SCBs in India stood at 0.9 close to International bench mark.

3) Net Interest Margin (NIM) reflects the efficiency of inter mediationprocess. NIM of SCBs in India is 2.9 per cent comparable with globalrange of 1.2 to 6.2%.

4) Cost Income Ratio (CIR) is also commonly employed as an indicatorof bank efficiency. It is calculated as the ratio of operating expenses tonet total income (total income less interest expenses). Lower ratio isindicative of more efficiency. Globally the Cost Income Ratio for 2004varied between 0.46% and 0.68% CIR of Indian banks stands at 0.5%and is comparable.

5) Non Performance Loans (NPL) Ratio: A common measure of bank’sAsset quality is the ratio of Gross Non-Performing Advances to GrossAdvances. Globally non-performing loans ratio varies from a low of0.3 per cent to 30 per cent. The ratio of NPL to total loans of SCBswhich was as high as 23 per cent in 1992 and 15.7 per cent in 1997declined to 5.2 per cent at the end of March 2005 and is comparablewith the global range.

6) Provisioning of NPLs Ratio: This ratio of provisioning to Non-Performing loans reflects the ability of bank to withstand losses inAsset value. The vulnerability of bank’s balance sheet mitigated to theextent of non-performing loans is fully covered by loan loss provisions.


Indian Banking System Vs Global Benchmarks 113

The provisions to NPLs ratio of Indian banks of 60 per cent is withinthe global range.

7) Capital Asset Ratio: The simple Capital to Asset Ratio of banksindicates the extent of leverage enjoyed by the banking sector. Thelower the ratio, the more vulnerable is the bank. Globally the ratiovaries between 2.7 per cent and 20.2 per cent. The leverage of theIndian banking sector at present which is 6.30 per cent comparesfavourably with global range.

8) Funding Volatility Ratio (FVR) : FVR indicates the extent to whichbanks rely on volatile liabilities to finance their assets. The smallerthe ratio, the better the bank’s liquidity profile. Globally the FVR hashovered in the range of 0.71 and 0.11. In India dependence on bankingsector on volatile liabilities to finance their assets is quite limited andthe ratio of –17 compares favourably with the global range.

The comparative position of Indian banking sector with developedcountries under important financial parameters given below also revealsthat the Indian banking has come of age.

Table – XIVPercent

Parameter – March 2005

Country ROA Capital toAssets NPL NPL to

Provision CRAR

India 0.9 6.3 5.2 60.3 12.8U S A 1.4* 10.3 0.8 167.8 13.2U.K. 0.8 6.8 2.2 -- 12.3Japan 0.3 3.9 2.9 43.9 11.6Canada 0.8 4.7 0.7 47.6 13.3Australia 1.2 6.0 0.3 175.7 10.5Global -1.2 to

6.22.7 to20.2

0.3 to30

7.8 to266.2

8.8 to37.1

*2004

It has to be remembered that the performance of banking system dependsupon the state of economy of the country and its trading partners in theworld. With liberalization and growing integration of Indian financial sectorwith the international market, the banks will have to put in place an effectiverisk management system to assess the business risk on an ongoing basisand take timely corrective action to sustain financial soundness.


Table – XVFINANCIAL SOUNDNESS INDICATERS – MAJOR BANKS

CRAR ROA GROSS NPA1997 2007 1997 2007 1997 2007

Sch.Com. Banks 11.0 12.3 0.67 0.9 15.7(8.1)

2.5(1.0)

State Bank of India 12.17 12.34 0.86 0.84 16.2(7.3)

2.92(1.56)

Allahabad Bank 11.00 12.52 0.49 1.28 23.93(14.84)

2.61(1.07)

Andhra Bank 12.50 11.33 0.43 1.31 11.81(4.10)

1.41(0.17)

Bank of Baroda 11.80 11.80 0.73 0.72 17.15(7.53)

2.47(0.60)

Bank of India 10.26 11.58 0.95 0.88 11.78(6.93)

2.42(0.74)

Bank of Maharashtra 9.07 12.06 0.54 0.76 20.67(9.66)

3.50(1.21)

Canara Bank 10.17 13.50 0.41 0.98 20.26(9.32)

1.51(0.94)

Central Bank of India 9.41 10.40 0.57 0.82 25.00(14.40)

4.81(1.70)

Corporation Bank 11.30 12.78 1.53 1.17 9.92(3.63)

2.05(0.47)

Dena Bank 10.81 11.52 0.75 0.71 15.10(9.38)

3.98(1.99)

Indian Bank -18.81 14.14 -2.28 1.46 39.12(25.24)

1.85(0.35)

Indian Overseas Bank 10.07 13.27 0.58 1.36 15.80(7.64)

2.34(0.55)

Oriental Bank ofCommerce

17.53 12.51 1.56 1.21 7.36(5.64)

3.20(0.50)

Punjab National Bank 9.15 12.29 0.68 1.03 16.31(10.38)

3.45(0.76)

Syndicate Bank 8.80 11.74 0.38 0.91 19.32(7.54)

2.95(0.76)

UCO Bank 3.16 11.56 -1.08 0.47 28.35(13.73)

3.17(2.14)

Union Bank of India 10.53 12.80 0.96 0.92 10.38(6.98)

2.94(0.96)

United Bank of India 8.23 12.02 0.89 0.73 36.20(19.20)

3.60(1.50)

Vijaya Bank 11.53 11.21 0.24 0.92 18.73(9.56)

2.29(0.59)

ICIC Banks 13.4 11.69 2.25 0.90 1.01(0.77)

(1.2)

HDFC 22.25 13.8 2.23 1.25 1.01(0.77)

(0.43)

Axis Bank 14.43 11.57 2.25 0.90 1.63(1.25)

(0.72)

IDBI Bank Ltd. 17.90 13.72 0.46 0.61 0.80(0.62)

(1.16)

CRAR: Capital to Risk weighted Assets Ratio; ROA - Return On Assets; NPA: Non-Performing Assets (Figures in bracket indicate net NPAs to net advances)

Percent (March)

Public Sector Banks Vs Private Sector Banks

The Financial Sector reforms liberalisation and globalisation havecreated a new environment with greater degree of competition in allfields of Economy. The Banking Sector reforms have brought prudentialnorms for income recognition and provisioning of non performing assetsand minimum capital adequacy requirement for banks to ensure theirsoundness to protect the interest of depositors and stakeholders. It hasalso provided an opportunity for entry of new private sector banks withlatest information technology. The coexistance of public sector privatesector and Foreign banks has generated competiton in banking sectorleading to a significant improvement in effiency and customer service.The share of private and foreign banks in total assets which was lessthan 10 per cent at the inception of reforms in 1991 has steadily risento 29.5 percent (private sector banks 21.5 percent and Foreign banks 8percent).

The reform process has also made the banks improve their workingqualitatively in terms of financial parameters and match with internationalbanks.

In the following paras an attempt is made to give a comparative position ofnetwork of branches, market share in business, compliance of mandatoryrequirement of extending credit to priority sector and financial performanceof major players to give a clear picture and their place in Indian Bankingindustry.

VIII


Network of Branches:There are 181 Banks operating in the country as on 30.6.2007 comprisingof 28 public sector banks, 24 Indian private sector banks, 29 foreign banks,96 regional rural banks and 4 local area banks with 71781 branches.

The Public Sector banks and Regional Rural banks have a share of 90per cent in total network of branches in the country. They have a share of96.7 per cent in rural branches and 90 per cent in semi-urban branches.

The share of Private Sector banks in branch network is 9.85 per cent with7077 branches. Their 13.9 per cent branches are in rural areas and 29.3per cent branches are in semi-urban areas. They operate mainly in urbanand metropolitan centres with 57.1 per cent of their branches and ATMs,Foreign banks mainly operate in metropolitan centres with 83.5 per centof their branches in these centres.

The position of network of branches under major group of ownership ason 30.6.2007 and share of Deposits and advances of the end of March2007 according to population group wise branches is given in the followingtables:

Table – XVIRural Semi-Urban Urban Metro Total

Public Sector 18197(36.5)

11736(23.5)

10247(20.5)

9726(19.5)

49896(100)

Private Sector 987(13.9)

2077(29.3)

2102(30.0)

1911(26.8)

7077(100)

RRBs 11444(78.9)

2481(17.1)

522(3.6)

59(0.4)

14506(100)

Foreign Bank – 2(0.7)

43(15.8)

227(83.5)

272(100)

Non Sch. BankLocal Area

5(16.7)

14(46.7)

11(36.7)

– 30(100)

Total 30633(42.7)

16310(22.7)

12925(18.0)

11913(16.6)

71781(100)

Share of (March 2007)

Deposit (%) 9.9 13.7 20.4 55.9 –

Advances (%) 7.9 9.7 16.2 66.1 –

(The figures in the bracket indicate per centage to total)

(June 2007)

Indian Banks’Operations Abroad:At the end of March 2007, 16 Indian banks (11 public sector and 5 privatesector banks) had overseas operations with a network of 125 branches.Bank of Baroda has highest overseas presence with 43 branches followedby State Bank of India with 33 branches and Bank of India, 22 branches.

Foreign Banks in India:

Twenty nine foreign banks originated from 19 countries were operating inIndia at 40 centres across 19 states / union territories with 273 branchesat the end of October 2007. The Standard Charterd Bank had maximumnumber 83 branches followed by HSBC Ltd. 47 branches Citi Bank NA 39branches and ABN AMRO Bank N.V. 28 branches.

Market Share of Business:

Market share is one of the good indicators to know the trends and growthrate of institutions. The following table gives the trends in market share ofassets, deposits, advances and investments:

Table – XVIIPercent (March)

GroupAssets Deposits Advances Investment2007 2007 2007 2007

Public Sector Banks 70.5 73.9 72.7 69.9Private Sector Banks 21.5 20.5 20.9 22.6Old Private Sector Banks 4.6 5.1 4.7 4.6New Private Sector Banks 16.9 15.3 16.2 18.0Foreign Banks 8.0 5.6 6.4 7.5

It will be observed from the above data that there has been steadyincrease in the share of assets of private sector banks which increasedfrom 11.9 per cent in the year 2000 to 20.4 per cent in 2006 showinghigher growth rate of business of new generation private sector banks(merger of Industrial Credit & Investment Corporation of India (ICICI) andterm lending institutions with ICICI Bank Ltd. in the year 2002 has partlycontributed to the increase in share)

Advances to Priority Sector:It is mandatory for Indian commercial banks to lend at least 40 per centof their net credit to priority sector (viz; Agriculture, Small Scale Industry,

Public Sector Banks Vs Private Sector Banks 117


Small Business, Retail Business, Professional & Self Employed andEducation) with sub target of 18 per cent to agriculture. Foreign banksare required to extend a minimum of 32 per cent of net credit to prioritysector with sub target of 10 per cent to SSI and 12 per cent to exports (forIndian banks export is not included in target of priority sector advances).The share of Priority Sector in net bank credit of Public Sector Banks andprivate sector banks was 39.6 per cent and 42.7 per cent respectively atthe end of March 2007. It was 33.4 per cent in case of Foreign Banks.Sector wise advances given in the following table. There is a shortfall inachieving the target of Agricultural lending by Indian banks.

Table – XVIII(Rs. in crore) (March 2007)

Public SectorBanksRs.

Private SectorBanksRs.

Foreign BanksRs.

Agriculture 2,05,091(15.6)

52,056(12.8)

No target(Export) 20,714

(18.3)

Small ScaleIndustries

1,04,703(8.0)

13,063(3.9)

11,648(10.3)

Priority Sector 5,21,180(39.6)

1, 43,768(42.7)

37,835(33.4)

(Figures in bracket indicate percentage of Net Bank Credit) * Provisional

Lending to Sensitive Sector :

The lending by Scheduled Commercial Banks (SCBs) to Capital Market,Real Estate and Commodities is treated as Sensitive Sectors. The totalexposure of SCBs to the Sensitive Sector constituted 20.4 per cent inaggregate bank loans and advances comprising 18.7 per cent to RealEstate, 1.5 per cent to Capital Market and 0.1 per cent to the CommoditySector at the end of March 2007.

Lending to the Sensitive Sector:

Table – XIXPercent (March 2007)

Group Capital Market Real Estate CommodityPublic Sector 1.3 15.1 0.1

New Private Sector 2.2 32.3 –

Old Private Sector 1.5 16.6 0.5

Foreign Banks 2.4 26.3 –

Among bank groups new private sector banks and foreign banks havehigher exposure to Sensitive Sector with 32.4 and 27.9 per cent of theirtotal credit respectively.

Financial PerformanceCapital and Asset Quality:Capital and Asset quality are two important parameters which reflectsoundness of banks. This is assessed on the basis of Capital Adequacyand Non-Performing Assets to Total Advances and Assets ratios. Thecomparative position is given in the following table for the years endingMarch 2000 to March 2006.

Table – XXPercent (March)

Group CRAR Gross NPA Net NPA NPA to TotalAssets

2000 2007 2000 2007 2000 2007 2000 2007Public SectorBanks

10.7 12.4 6.0 2.7 2.9 1.1 2.9 0.62

Old PrivateSector Banks

12.4 12.0 5.2 3.1 3.3 1.0 3.3 0.56

New PrivateSector Banks

13.4 12.0 1.6 1.9 1.1 1.0 1.1 0.54

Foreign Banks 11.9 12.4 3.2 1.8 1.0 0.7 1.0 0.33SCBs 11.1 12.3 5.5 2.5 2.7 1.0 3.0 0.58

It will be observed that Capital Adequacy Ratios of all the bank group areabove the minimum requirement of 9 per cent. Gross Non-PerformingLoans as well as Net NPA to Total Assets Ratio are low reflectingsoundness of banks of all categories.



The Operating Profit/Net Profit to Total Assets:

To assess the financial performance as regards efficacy of the Banks’‘Returns on Assets’, Net Interest Income (NII) (difference between Interestincome and Interest expenses) Operating/Net Profit to Total Assets Ratioare used as indicators of efficiency with which banks deploy their assets.The trends of these ratios (Bank Groupwise) in the year ending March2000 and 2007 are given below:

Table – XXI(March) (Rs. in crore)

Group

OperatingProfit Net Profit NII

(percent) Total Assets

2000Rs.

2007Rs.

2000Rs.

2007Rs.

2000 2007 2000Rs.

2007Rs.

SCBs 18306(1.66)

65917(1.90)

7245(0.66)

31203(0.90)

2.73 2.69 1105464 3463406

Public SectorBanks

13042(1.46)

42268(1.73)

5116(0.57)

20152(0.83)

2.20 2.65 890600 2339985

Old PrivateSector Banks

1333(1.82)

3027(1.89)

591(0.81)

1122(0.70)

2.3 2.83 73122 160561

New PrivateSector Banks

1243(2.11)

11021(1.88)

569(0.97)

5343(0.91)

1.95 2.34 58930 584842

Foreign Banks 2687(3.24)

9600(3.45)

967(1.17)

4585(1.65)

3.92 3.74 82810 278016

(Figures in bracket indicate percentage to Assets)NII – Net Interest Income (%) of total assets.

It will be observed from the above table that there has been decline inreturn on Assets ratio of old private sector banks. The ratio is higher incase of Foreign banks in relation to the ratio of public sector and newprivate sector banks. However there is no much variation in these ratiosin public sector banks and new private sector banks.

Use of Technology:

The new private sector banks and foreign banks have all their brancheslinked to networking with Core Banking Solutions (CBS) one stop shopfor financial services with exhaustive range of products including depositproducts, loans, Credit Cards, Debit Cards, Depository (Custody services)Investment advice, bills payment and various transactions. They alsohave been entering into business of selling Third party products such asmutual funds and insurance to the retail customers.

However, although more than 95 per cent branches of public sector banksare computerised fully or partly only 28.9 per cent branches are linkedand networked providing Core Banking Solutions. They are positioningthemselves with greater use of Technology and innovative products tomatch with private banks and foreign banks.

If we compare the financial performance of the public, private and foreignbanks, there is no significant variation in the financial position and workingresults of the banks, except that income ratios of foreign banks are better.With their major branches in urban & metropolitan cities and greater use oftechnology and IT linked products e.g. ATM, Debit Card, Credit Card andInternet Banking, the new private sector and foreign banks have madetremendous impact on the customer services. With their customer-centricmarketing strategies and through new products and financial servicesparticularly investment banking, they have been able to garner profitablebusiness of the corporate sector and high net worth clientele. Foreignbanks have also taken advantage of their global presence and capturedsizeable share of foreign exchange and non-fund based business. Withprofessionally skilled personnel and quick decision-making backed byinformation technology, they will continue to have an edge over publicsector banks. However, public sector banks have strength of their vastresources, larger network of branches and clientele. They will have todevelop their professional skills, induct greater degree of technology inbanking operations, innovate customer-specific new products/services.The management of change will be the key to success.

Indian Banking system has moved into market driven competitionsystem. The dynamics of diverse markets and consumer preferencesare now dictating the drivers of growth in business. With everincreasing expectations of customers for new products and servicesthe banks will have to innovate on an ongoing basis new productsas well as alternative delivery channels tailored to the needs of thecustomer using the state of art of Technology. Internet will be theengine of banking revolution in the decades to come and ‘e’commerceits fuel.



Annexure – IBank-wise Branches/Deposits/Advances

(Rs. in crore)Bank & Year ofEstablishment

Branches * Deposits Advance

1947 1997 2007 1947 1997* 2007* 1947 1997* 2007*

State Bank of India 362 8888 9286(4407)

287 1107011 435521 77 62233 342232

Allahabad BankApril 1885

17 1863 2042(208)

26 11541 59544 13 4398 41914

Andhra BankNovember 1923

41 974 1207(522)

4 7091 41452 3 2907 28235

Bank of Baroda July1908

38 2493 2727(1000)

33 32156 124916 11 16532 83621

Bank of IndiaSeptember 1906

31 2475 2637(337)

69 31973 119882 27 18337 86791

Bank of Maharashtra1935

17 1147 1337(302)

2 7365 33919 1 3111 23436

Canara BankJuly 1906

40 2262 2595(1132)

5 31445 142381 1 14413 98506

Central Bank of IndiaDecember 1911

285 3087 3203(261)

123 23051 82776 43 8790 53489

Corporation BankMarch 1906

32 507 901(929)

2 6673 42357 1 3015 29950

Dena BankMay 1938

47 1143 1033(269)

7 7861 27690 1 4044 18683

Indian BankMarch 1907

70 1472 1459(426)

18 13315 47091 3 7873 29502

Indian OverseasBankFebruary 1937

43 1365 1772(369)

7 15973 68746 8 7254 47923

Oriental Bank ofCommerceFebruary 1943

15 773 1224(666)

68 10054 63996 0.39 4886 45395

Punjab & Sind BankJune 1908

3 704 827(5)

3 6400 – 0.68 3550 -

Punjab NationlaBankApril 1895

196 3575 4059(1009)

60 30806 139860 23 14067 96597

Syndicate BankOctober 1925

58 1611 2070(701)

3 14946 78634 2 5832 52839

UCO BankJanuary 1943

57 1796 1866(158)

35 12614 64860 11 4612 47471

Union Bank of IndiaNovember 1919

5 2030 2230(769)

5 20197 85180 1 9612 63858

United Bank of India - 1333 1323(144)

– 8790 37167 – 2851 22641

Vijaya BankOctober 1931

13 836 981(171)

0.30 6827 37605 0.27 2734 24396

ICICI Bank 895(3335)

– – 230510 – – 195865

HDFC Bank – 639(1605)

– – 68298 – 46945

Axis Bank – 505(2341)

– – 58786 – 36876

* March **(Figures in Bracket indicate No. of ATMs March 2007)

Major Banks

Annexure – IIGrowth of Deposit and Advances SCBs – 1969 to 2007

(Rs. in Crore)

Deposit (Rs.) Y+YGrowth (%)

Advances(Rs.)

Y+YGrowth (%)

1969 5173 3729Dec. 1970 5685 10 4452 18Dec. 1971 6937 22.02 5052 13.48Dec. 1972 8360 20.51 5534 9.54Dec. 1973 10087 20.66 7062 27.61Dec. 1974 11587 14.87 7993 13.18Dec. 1975 13482 16.35 10076 26.06Dec. 1976 17595 30.51 13553 34.51Dec. 1977 21214 20.57 15303 12.91Dec. 1978 26509 24.96 18571 21.36Dec. 1979 31225 17.79 21559 16.09Dec. 1980 36997 18.49 24760 15.05Dec. 1981 44260 16.63 30155 21.79Dec. 1982 52279 18.49 34760 14.85Dec. 1983 61726 18.07 40280 12.9Dec. 1984 71711 16.18 47951 19.04Dec. 1985 85867 19.74 56326 17.47Dec. 1986 102625 19.52 64677 14.83Dec. 1987 119023 15.98 72549 12.17Dec. 1988 131362 13.69 82161 14.73Mar. 1989 146890 23.41 96008 --Mar. 1990 172759 17.61 113592 18.32Mar. 1991 200036 15.79 132510 16.65Mar. 1992 233086 16.52 142211 7.32Mar. 1993 274068 17.58 165836 16.61Mar. 1994 317917 16.00 180017 8.55Mar. 1995 375864 18.23 222507 23.60Mar. 1996 426073 13.36 263533 18.44Mar. 1997 492227 15.53 282237 7.10Mar. 1998 592068 20.28 328637 16.44Mar. 1999 714025 20.60 368837 12.23Mar. 2000 810665 13.53 434182 17.72Mar. 2001 958008 18.18 509082 17.25Mar. 2002 1100454 14.87 637943 25.31Mar. 2003 1304347 18.53 741770 16.27Mar. 2004 1533052 17.53 856685 15.49Mar. 2005 1708610 11.45 1092008 27.47Mar. 2006 2109049 23.4 1507077 38.0Mar. 2007 2608309 23.6 1928913 27.9

Annexure 123

(Reporting Fridays)


Annexure – IIIBranch Expansion – 1969-2007

Year Rural SemiUrban

Urban Metro Total

June 69 1832 3322 1447 1661 8262(22.4) (40.1) (17.5) (20.0) (100.0)

Dec. 70 3767 3904 1836 1677 11184(33.7) (34.9) (16.4) (15.0) (100.0)

Dec. 71 4889 4224 1850 2022 12985(37.7) (32.5) (14.2) (15.6) (100.0)

Dec. 72 5325 4587 2461 2366 14739(36.1) (31.1) (16.7) (16.1) (100.0)

Dec. 73 6024 5012 2983 2484 16503(36.5) (30.4) (18.1) (15.1) (100.0)

Dec. 74 6031 5434 3144 2971 18180(36.5) (29.9) (17.3) (16.3) (100.)0

Dec. 75 7378 6192 3836 3031 20437(36.1) (30.3) (18.8) (14.8) (100.0)

Dec. 76 8588 7133 4413 3351 23485(36.6) (30.4) (18.8) (14.3) (100.0)

Dec. 77 10856 7702 4769 3631 26958(40.3) (28.6) (17.7) (13.5) (100.0)

Dec. 78 12534 8019 5037 3886 29476(42.5) (27.2) (17.1) (13.2) (100.0)

Dec. 79 14105 8223 5183 3981 31492(44.8) (26.1) (16.5) (12.6) (100.0)

Dec. 80 16111 8678 5462 4131 34385(46.9) (25.2) (15.9) (12.0) (100.0)

Dec. 81 18888 9053 5720 4274 37935(49.8) (23.9) (15.1) (11.3) (100.0)

Dec. 82 21265 9332 5983 4386 40966(51.9) (22.8) (14.6) (10.7) (100.0)

Dec. 83 23642 9949 4517 6186 44294(53.4) (22.5) (10.2) (14.0) (100.0)

Dec. 84 25485 10295 5041 7258 48079(53.0) (21.4) (10.5) (15.1) (100.0)

Dec. 85 29318 10576 7570 5257 52721(55.6) (20.1) (14.4) (10.0) (100.0)

Dec. 86 29700 10658 7649 5357 53364(55.7) (20.0) (14.3) (10.0) (100.0)

Dec. 87 30585 10731 7722 5393 54431(56.2) (19.7) (14.2) (9.9) (100.0)

Dec. 88 32228 11110 7473 5946 56757(56.8) (19.6) (13.2) (10.5) (100.0)

Year Rural SemiUrban

Urban Metro Total

Mar. 89 32179 11190 8003 5588 56960(56.5) (19.6) (14.1) (9.8) (100)

Mar. 90 33914 11286 8062 5652 58914(57.6) (19.2) (13.7) (9.5) (100)

Mar. 91 35042 11323 8081 5667 60113(58.3) (18.8) (13.4) (9.4) (100)

Mar. 92 35218 11397 8285 5790 60690(58.0) (18.8) (13.7) (9.5) (100)

Mar. 93 35301 11417 8628 5889 61235(57.6) (18.6) (14.1) (9.6) (100)

Mar. 94 35379 11720 8824 5929 61852(57.2) (18.9) (14.3) (9.6) (100)

Mar. 95 33089 13217 8833 7125 62264(53.1) (21.2) (14.2) (11.4) (100)

Mar. 96 33092 13399 9025 7333 62849(52.7) (21.3) (14.4) (11.7) (100)

Mar. 97 33008 13641 9298 7587 63534(52.0) (21.5) (14.6) (11.9) (100)

Mar. 98 32890 13876 9637 7864 64267(51.2) (21.6) (15.0) (12.2) (100)

Mar. 99 32856 14140 9971 8151 65118(50.5) (21.7) (15.3) (12.5) (100)

Mar. 2000 32719 14301 10176 8325 65521(49.9) (21.8) (15.5) (12.7) (100)

Mar. 01 32533 14508 10354 8513 65908(49.4) (22.0) (15.7) (12.9) (100)

Mar. 02 32423 14688 10540 8625 66276(49.0) (22.0) (16.0) (13.0) (100)

Mar. 03 32315 14786 10665 8644 66410(49.0) (22.0) (16.0) (13.0) (100)

Mar. 04 32080 15018 10990 8882 66970(47.9) (22.4) (16.4) (13.2) (100)

June 05 30755(44.9)

15174(22.1)

11678(17.0)

10942(16.0)

68549(100)

June 06 30776(44.3)

15370(22.1)

12008(17.3)

11263(16.2)

69417(100)

June 07 30633 16310 12925 11913 71781(42.7) (22.7) (18.0) (16.6) (100)

(Figures in bracket is share in total)

Annexure 125

Annexure – IVState-wise Distribution of Branches/Credit Deposit Ratio

State No. ofBranchesJune 2007

Populationper Br.office (in

1000s) June2007

DepositA/c per100 adultpopulation

CreditDepositRatio in %March 2006

ALL INDIA 71781 16 59 72.5Andhra Pradesh 5692 14 57 82.0Assam 1280 23 39 42.0Bihar 3621 26 33 30.2Chattisgarh 1080 22 32 50.2Goa 370 4 187 23.0Gujarat 3927 14 60 56.4Haryana 1849 13 76 57.4Himachal Pradesh 862 8 72 40.5Jammu & Kashmir 893 14 63 44.9Jarkhand 1544 19 44 33.7Karnataka 5229 11 66 76.8Kerala 3734 9 89 61.7Madhya Pradesh 3578 19 39 60.0Maharashtra 6786 16 60 101.5Manipur 76 34 17 50.6Meghalaya 191 13 44 39.3Mizoram 79 12 25 51.4Nagaland 78 28 21 22.3Orissa 2406 16 34 65.2Punjab 2914 9 105 49.7Rajastan 3572 18 45 78.4Sikkim 62 10 45 45.2Tamil Nadu 5162 13 60 105.9Tripura 188 19 38 31.6Uttar Pradesh 8672 22 57 42.0Uttarakhand 935 10 78 25.8West Bengal 4691 19 49 57.2UNION TERRITORIESAndaman & Nicobar 37 12 59 27.9Chandigarh 221 5 221 80.2Dadar & Nagar Haveli 20 19 61 49.8Daman & Diu 18 11 93 11.1Delhi 1838 9 166 68.9Lakshadweep 10 7 70 11.5Pondicherry 95 12 90 44.8


Annexure – VGrounds of Complaints:The Banking Ombudsman can receive and consider any complaintrelating to the following deficiency in banking services:• Non-payment or inordinate delay in the payment or collection of

cheques, drafts, bills, etc.;• Non-acceptance, without sufficient cause of small denomination notes

tendered for any purpose, and for charging of commission for thisservice;

• Non-acceptance, without sufficient cause, of coins tendered and forcharging of commission for this service;

• Non-payment or delay in payment of inward remittances;• Failure to issue or delay in issue, of drafts, pay orders or bankers’

cheques;• Non-adherence to prescribed working hours;• Failure to honour guarantee or letter of credit commitments;• Failure to provide or delay in providing a banking facility (other than

loans and advances) promised in writing by a bank or its direct sellingagents;

• Delays, non-credit of proceeds to parties’ accounts, non-payment ofdeposit or non-observance of the Reserve Bank directives, if any,applicable to rate of interest on deposits in any savings, current orother account maintained with a bank;

• Delays in receipt of export proceeds, handling of export bills, collectionof bills etc., for exporters provided the said complaints pertain to thebank’s operations in India.

• Refusal to open deposit accounts without any valid reason forrefusal;

• Levying of charges without adequate prior notice to the customer,• Non-adherence by the bank or its subsidiaries to the instructions

of Reserve Bank on ATM/debit card operations or credit cardoperations;

• Non-disbursement or delay in disbursement of pension to the extentthe grievance can be attributed to the action on the part of the bankconcerned, (but not with regard to its employees);

• Refusal to accept or delay in accepting payment towards taxes, asrequired by Reserve Bank/Government;

Annexure 127

• Refusal to issue or delay in issuing, or failure to service or delay inservicing or redemption of Government securities;

• Forced closure of deposit accounts without due notice or withoutsufficient reason;

• Refusal to close or delay in closing the accounts;• Non-adherence to the fair practices code as adopted by the bank;

and• Any other matter relating to the violation of the directives issued by the

Reserve Bank in relation to banking or other services.


References:1. History of the Reserve Bank of India 1935-51

2. Banking Commission Report –1972

3. ‘Report on Trend and Progress of Banking in India’ of RBI for theyears 1980 to 2006 – 2007

4. Reserve Bank of India – Fifty years – 1935-1985

5. Report of Study Group to frame guidelines for follow-up of bankcredit.

6. Report of working group on Cash Credit System.

7. Report of the Committee on Computerisation in Banks.

8. Report Currency and Finance Economy Review 1978-79 to 1980-81, 1981-82, 1990-91, 1994-95, 1995-96.

9. Report of the Committee to review Credit Authorisation Scheme.

10. Statistical Table relating to Banks in India 1988-89, 2000.

11. Banking Sector Reforms – Report by M. Narasimham (1998)

12. Annual Report of RBI – 1997

13. RBI Newsletter Vol.-3. 1 December 2005.

14. Economic Survey Reports – 1979-80, 1981-82, 1993-94, 1994-95,1996-97, 1998-99.

15. Indian Banking Year Book – 2005

16. IBA Journals – Indian Banker. Jan. 2006, April 2007.

17. RBI Bulletin July 2007

LIST OF ABBREVIATIONS:ALM - Asset-Liability ManagementAML - Anti Money LaunderingATM - Automated Teller SystemBIFR - Board for Industrial and Financial ReconstructionBOS - Banking Ombudsman SchemeB R Act 1949 - Banking Regulations Act 1949CALCS - Capital Adequacy, Asset quality, Liquidity, Compliance

and System.CAMELS - Capital Adequacy, Asset quality, Management, Earnings,

Liquidity System and ControlC B S - Core Banking SolutionCCIL - Clearing Corporation of India LimitedCD - Certificate of DepositsCDR - Corporate Debt RestructuringCEO - Chief Executive OfficerCFMS - Centralised Funds Management SystemCIBIL - Credit Information Bureau of India Ltd.CP - Commercial PaperCRAR - Capital to Risk Weighted Assets RatioCRR - Cash Reserve RatioCSO - Central Statistical OrganisationCTS - Cheque Truncation SystemDFI - Development Financial InstitutionDRI - Differential Rate of InterestECS - Electronic Clearing ServiceEFT - Electronic Fund TransferEXIM Bank - Export Import Bank of IndiaFDI - Foreign Direct InvestmentGCC - General Credit CardIDBI - Industrial Development Bank of IndiaIDRBT - Institute for Development and Research in Banking

TechnologyINFINET - Indian Financial NetworkIT - Information TechnologyKVIB - Khadi and Village Industries Commission BoardKYC - Know Your CustomerLAB - Local Area BankLIC - Life Insurance Corporation of IndiaMFI - Micro Finance Institution

List of Abbreviations 129


MICR - Magnetic Ink Character RecognitionMIS - Management Information SystemNABARD - National Bank for Agriculture and Rural DevelopmentNBC - Net-Bank CreditNDS - Negotiated Dealing SystemNEFT - National Electronic Fund TransferNGO - Non-Government OrganisationNPA - Non-Performing AssetNPL - Non-Performing LoanNSE - National Stock ExchangeOBU - Off-shore Banking UnitOECD - Organisation for Economic Co-operation and DevelopmentPKI - Public Key InfrastructurePLR - Prime Lending RatePMLR Act - Prevention of Money Laundering ActPMRY - Prime Minister Rojgar YojnaPSB - Public Sector BanksRBI Act - Reserve Bank of India ActRBIA - Risk Based Internal AuditRBS - Risk Based SupervisionRIDF - Rural Infrastructural Development FundRRB - Regional Rural BankRTGS - Real Time Gross Settlement SystemSAA - Service Area ApproachSARFAESI - Securitisation and Reconstruction of Financial Assets

and Enforcement of Security InterestSCB - Scheduled Commercial BankSEBI - Securities Exchange Board of IndiaSEZ - Special Economic ZonesSFC - State Finance CorporationSFMS - Structured Financial Messaging System.SHG - Self-Help GroupSIDBI - Small Industries Development Bank of IndiaSLR - Statutory Liquidity RatioSME - Small and Medium EnterpriseSWIFT - Society for Worldwide Financial Telecommunica-tionsUTI - Unit Trust of IndiaVaR - Value at RiskVRS - Voluntary Retirement Scheme

VSAT - Very Small Aperture Terminal

OVERVIEW OF BANKING DEVELOPMENT 1947 – 2007...CONTENTS Chapter Particulars Page Nos....

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