CHAPTER – 1

Introduction to Banking business in India

1.1 Introduction

“Money in the Economy is like blood in the human body”. The money also referred as
finance is important for the sustenance of economic world. The flow of money in the
economy determines a lot of characteristics of an economy. Robust money and capital
markets are essentials of a developed society. The short term and long term needs of
money of individual and institutions can be efficiently met by financial intermediaries.
Commercial banks perform large part of this efficiency. Pooling of scanty deposits into
a large capital base and lending it to the desirable sectors is the core of banking
business. In a developing economy like India, the role of banking sector becomes even
more critical. In the Initial years of economic development, were other sophisticated
financial institutions were not present, banks were the only financial intermediaries
which helped in bring about the change.1 Indigenous banks and moneylenders usually
tend to exploit the conditions of the underdeveloped market. The sense of confidence in
the ethical functioning of financial intermediaries, in the minds of common man, was
brought about by well regulated commercial banks in the beginning.

1.2 Functions of Commercial banks2

Banks are essentially those financial intermediaries who accept deposits for the purpose
of lending.

Deposits generated through millions of people - accepting deposits of various types in

one of the important function of banks. People keep money with the banks for two
motives a) safe keeping of their money and b) earn some interest for parting with the
money.

1
L.M. Bhole& J Mahakud (2009), “Financial Institutions and Markets” Tata McGraw Hill
Publishing Company, New Delhi.
2
D Muraleedharan,(2013) “Modern Banking” PHI Learning Private Limited, New Delhi.

1
Advances to various sectors- the second most important function of commercial banks
is to lend money to individuals and institutions who need short term and long term
funds. The economic growth can only be achieved through creating adequate demand in
the economy with cash and borrowed money. The role of management of the bank
becomes important in this since appraisal of various loan proposals, distribution of loan
portfolio such that risk is minimized, and keeping social objectives in mind are critical.

Transfer of money- banks also work as system through which a lot of financial
transactions are completed seamlessly. The transfer of money from one account to other
account or to multiple accounts can be done without hassle.

Corporate banking- banks do the financial business of all corporate. Funds are raised by
the banks for corporate clients in various forms. In fact there are specialized bank
branches or subsidiaries that do this job for corporate.

Government business- a lot of welfare schemes of central and state governments are
done through commercial banks. In India, State Bank of India has been playing this role
for years. Now with the direct transfer of money to the beneficiaries’ account would
mean banks are the link between the two parties.

International banking- globalization has increased the scope of banking as never before.
The increase in foreign trade from India to the rest of the world has to be facilitated by
commercial banks. Indian banks are gearing up for this role.

1.3 Importance of commercial banks in economic development3

The role of money churning is with banks and without money flowing in the economy
with right direction and quantity, it is impossible to achieve economic development.

National savings- banks generate flow of small savings and divert them to productive
sectors in term of loans

3
Ray Partha (2013), “Monetary Policy” Oxford India Short Introduction, New Delhi

2
Creator of money- credit creation capacity of banks is well established. This credit
creation boosts economic development.

Capital formation- idle money obtained through saving is helpful in providing huge
needs of capital by the corporate and institutions.

Entrepreneurial development- banks have special scheme to promote entrepreneurship

in the economy. People with new ideas and new products can change the economy for
better.

Agriculture and industrial development- both these sectors are benefitted immensely
through banks.

Monetary policy – the major objectives of RBI can be achieved through banking system
and periodic changes in interest rates, credit exposure limits, and foreign exchange
management can be done.

1.4 Structure of Indian banking sector4

1.4.1 Money lenders and indigenous bankers

Before independence, for thousands of years, private money lenders and indigenous
bankers dominated this sector in India. The history of banking in India is as old as trade.
Even in Vedas and ancient texts the references of indigenous bankers can be found. The
modern day indigenous bankers and moneylenders are believed to have exploited the
masses.

1.4.2 Commercial banks

Commercial banks are financial intermediary that accepts deposits and grant short term
and long term advances to their customers. Commercial banks are mainly of three types

4
Machiraju, H.R (2001), “Modern Commercial Banking”, Vikas Publishing House P Ltd, New

Delhi

3
 a) Public sector banks – these are the banks where the majority of the ownership is
held by the Government. These banks have dominated banking space for last
couple of decades.
b) Private sector banks- these are the banks where majority shareholding is with
private individuals and institutions. These banks are registered as companies
with limited liability. These banks have been more aggressive since the
globalization process has started. It won’t be an over statement if it is said that
these banks brought about competition in real sense in banking sector.
c) Foreign sector banks- these are the banks whose head office is registered in
foreign country. These banks operate through branches in India and in rest of the
world. The number of foreign banks operating in India has been on the rise since
1991.

1.4.3 Regional Rural banks (RRBs)

Regional rural banks have actively contributed to the growth of the rural sector in India.
The growth of rural industries and development of rural business and economy is
largely dependent on financial aid and investment made by these banks. The area of
operation is restricted by the notification of the government. Commercial banks sponsor
these banks where State Bank of India has largest number of RRBs under its working.

1.4.4 Development banks

Big businesses require medium to long term capital to finance machinery, purchase of
land, setting up the entire factory and so on. During the initial years of independence,
the then private sector banks did not have the finances or willingness to support
requirements of these big industries. To support massive industrialization and to provide
techno commercial help to big industries, Government of India established a number of
development financial institution (DFI). After globalization process a number of
development finance institutions were given commercial banking licenses, still a
number of such institutes still exists such as Industrial Finance Corporation of India
(IFCI) and State Financial Corporations.

4
1.4.5 Cooperative banks

The cooperative banks are almost 100 years old in India. The cooperative banks play an
important role in rural financing. The cooperative banks are registered under the
Cooperative Societies Act. These banks are regulated by RBI. Cooperative banks
usually finance activities such as, Farming, cattle, milk, hatchery, personal finance.
These banks are present in urban areas as well. They finance self-employment, small
industries, home finance, and consumer finance. It is in fact true that some multi state
cooperative banks are more advanced compared to some public sector banks. There are
three types of cooperative banks operating in the country.5

1.4.6 Primary credit societies

These village level societies are formed with all types of borrowers and non-borrowers
as members. The activities of each society are confined to a small area to facilitate
identification of defaulters by members.

1.4.7 Central cooperative banks

The operational area of these banks is confined to district level. The same district
primary credit societies are members of these banks. These banks provide loan to these
members. They function as link between Primary credit societies and state cooperative
banks.

1.4.8 State cooperative banks

These banks function as apex cooperative banks in the respective state of the country.
They mobilize funds and help in their proper channelization among various sectors. The
money reaches the borrower from the state cooperative banks through the Central
cooperative banks and the Primary credit societies.

5Khan M.Y (1974), “Indian Financial System Theory & Practice”, Vikas Publishing House P Ltd, New
Delhi.

5
1.4.9 Specialized banks

Apart from the banks mentioned above there are some specialized banks which cater to
the specific requirement of a sector.

1.4.10 Export Import Bank of India (EXIM Bank)

EXIM bank provides the required support and assistance to set up a business for
exporting products abroad and importing products from the foreign countries for sale in
our country. The bank grants loans to exporters and importers. It also provides
information about the international market and business opportunities available.

1.4.11 Small Industries Development Bank of India (SIDBI)

This bank provides loan on easy terms to establish a small scale business unit or
industry. It finances modernization, technology up gradation, and market activities. Its
aim and focus is to promote, finance and develop small scale industries as they provide
large chunk of employment to the nation.

1.4.12 National bank for Agriculture and Rural Development (NABARD)

It is a central or apex institution for financing agriculture and rural areas. It provides
loans to those engaged in agriculture or other activities such as handloom waving and
fishing. It provides both short term and long term loans through regional rural banks. It
mainly focuses on financial assistance in the areas of agriculture, micro, small and
medium scale industries, cottage and village industries, handicrafts and allied economic
activities in rural areas.

1.5 RBI the central authority of commercial banks6

1.5.1 Importance of RBI
RBI has a major role to play in the development of the nation as a financial sector
regulator. Trust and confidence in banking system is essential for the smooth
functioning of the economy.

6
Ray Partha (2013), “Monetary Policy” Oxford India Short Introduction, New Delhi.

6
The primary functions of the Reserve Bank of India are to control the issue of Bank
notes and the keeping of reserves with a view to securing monetary stability in India
and generally to operate the currency and credit system of the country to its advantage.
- From the Preamble of the Reserve Bank of India Act, 1934
Main objectives of monetary policy

1. Price stability- it is said that inflation hits poor as nothing else. India being a
developing country since independence RBI has been mandated with control of
inflation. Per capita income was growing at a very slow rate in the first forty
years of independence, hence protecting the purchasing power of income was
essential
2. Adequate flow of credit to all productive sectors to boost economic growth- as it
is said capital is blood in the body of an economy. The major objective of
central bank is to create framework and rules to ensure adequate availability of
credit to all sectors of the economy.
3. Maintain financial stability- the global financial crisis of 2008 has highlighted
the importance of prudent regulation of financial sector to ensure its stability.
Proactive regulation and right checks and balance in the financial sector are
utmost priority of central bank in India.

RBI monitors and analyzes a number of indicators such as inflation rate, money supply,
credit, interest rates, exchange rate, capital flows and fiscal position to develop policy
prospective.

The major tools used by RBI in monetary policy

1.5.2 Direct instruments

CRR (Cash Reserve Ratio) - the percentage of net demand and time liabilities that
banks must maintain in cash with RBI

SLR (Statutory Liquidity ratio) – the percentage of net demand and time liabilities that
banks must retain in safe and liquid assets, like government securities, cash and gold.

7
Refinance facilities – sector specific refinance facilities provided to banks like refinance
against lending to export sector.

1.5.3 Indirect instruments

Bank rate- The rate at which RBI is ready to buy or rediscount the bills of exchange or
other commercial papers. It signals the medium term stance of monetary policy.

Repo/Reverse Repo Rate – these rates determine the corridor for short term money
market interest rates which is maintained at 100 bps. This influences the rate
movements in other segments of financial markets and the real economy.

Open market operations (OMO) – The sales/ purchases of government securities as a

tool to determine the level of liquidity over medium term.

Liquidity adjustment facility (LAF) – consists of daily infusion or absorption of

liquidity on a repurchase basis, through repo (liquidity injection) and reverse repo
(liquidity absorption) auction operations, using government securities as collateral.

MSF (Marginal Standing Facility) – scheduled commercial banks can borrow overnight
at their discretion up to one percent of their respective NDTL at 100 basis points above
the repo rate to provide safety against unanticipated liquidity shock.

MSS (Market Stabilization Scheme) – liquidity arising from large capital inflows is
absorbed through sale of short – dated government securities and treasury bills. The
cash mobilized through this instrument is kept in a separate government account with
the RBI.

1.5.4 Role of RBI as regulator of banking system

Sound banking system is fundamental necessity for economic growth. The central bank
has major role to play in maintain financial stability and public confidence in the
banking system. RBI protects the interest of the depositors and ensures orderly
development and conduct of banking operations.7

7
S. G Gupta, (2005), “Monetary Economics”,S. Chand & Company Ltd., New Delhi.

8
The RBI makes sure of several supervisory tools such as on-site inspections, off site
surveillance by making use of required reporting by the banks. Thematic inspections,
scrutiny and periodic meetings are held.

As a regulator RBI undertakes following activities

1. Issue of Bank licenses

2. Monitoring governance
3. Prescribing capital requirements
4. Prudential regulation for solvency and liquidity of the banks
5. Lending rules for priority sector
6. Prudential norms to reduce NPAs
7. Regulating interest rates for certain areas
8. Initiating new regulations

The global financial crisis of 2008 made RBI even more cautious about financial
stability. It set up financial stability unit in 2009. This unit has put in place a system of
continues monitoring of macro financial system.

The department ensures that

• Macro prudential surveillance of financial system is done on an ongoing basis

• econometric models to assess financial stability going forward
• Financial stability reports are prepared on half yearly basis
• Key indicators database is developed in coordination with supervision wing to
assess the impact of these indicators on financial stability

Systematic stress tests are developed to assess resilience of financial system.

1.6 The new age policy tools introduced by RBI post financial reforms

Market Stabilization Scheme (2004) - Indian economy witnessed large foreign capital
inflows in this period. To stabilize fluctuations in the exchange rate and to effectively
suck out unnecessary liquidity, RBI introduced MSS in 2004. Like CRR and OMOs this
is a sterilization instrument.

9
Risk Weights for specific sectors (2004) - prudential norms were announced in respect
of risk weights and provisioning norms for commercial real estate and capital market
loans. This would protect the portfolio of banks against these sectors’ excessive price
fluctuations.
Response to the financial crisis by reducing interest rates (2008-09) – RBI considered
and calibrated reduction of interest rates until the volatile situation stabilized in the
financial markets. It took various steps to boost confidence of people in financial
system. It promptly made available domestic and foreign liquidity to reduce
speculations.
Marginal Standing Facility (2011) –the problem of liquidity for commercial banks was
taken care of by allowing banks to borrow 1% of their NDTL (Net Demand and Time
Liabilities), even by dipping into SLR portfolio, at 200 bps more interest compared to
the Repo rate.

1.7 Developments in Indian Banking8

Commercial Banks are among the major structure of Indian financial system. Banking
sector performs the role of financial intermediary in almost all modern business
transactions. The study of Indian banking in the aspects such as functions, mobilization
of resources, socio economic role becomes important to analyze future prospects of the
economy. The evolution of modern banking in India happened with establishment of
early 18th century banks. The Presidency banks which were set up in Bombay, Bengal
and Madras were the major banks of that time.1
As the time progressed and economies become more complex so does banking system.
The Indian banks have also changed over a period of time. Private Banks became
nationalized; regulatory authority was set up to monitor the functioning of financial
sector. The opening of Indian economy to foreign competition saw the privatization of
Development Financial Institutions and real reentry of foreign banks in India. Recently
two financial institutions have been given new banking licenses for improving financial

8
Machiraju, H.R (2001), “Modern Commercial Banking”, Vikas Publishing House P Ltd, New
Delhi

10
inclusion. The progress and coming of age of Indian banking can be divided broadly in
to four phases.
Banking during British raj and before nationalization
The planed era of banking
The post globalization banking
The financial inclusion banking
The fourth phase will start from 2014 as new banking licenses will introduce a new
rigor in financial inclusion which is the latest objective of RBI in the development of
holistic banking.

Banking before major Nationalization

The modern banking in India started in 18th century. There were many banks created
during British raj and east India company regime. The thriving mercantile business was
to be financed by financial institutions. There were many banks created in 19th and 20th
century banks which still exist. The lack of monetary authority created the imbalance
between the functions of banks. The private business motive was central in the banking
business. The private sector banks of that time were owned largely by Britishers and
business communities in India. The early business between Britain and India created a
lot of business opportunities and a lot of banking companies were created. The First
World War ended this high business scenario for banks and a lot of banks went
bankrupt during 1913 to 1921. The need was felt to introduce a banking regulation
authority to streamline the business of banking. The Reserve Bank of India (RBI) was
established in 1935. The Reserve bank of India was established as an apex bank without
major government ownership. The Government of India introduced the Banking
Companies act, 1949 later came to be known as banking Regulation Act 1949. As per
the Banking regulation (Amendment) Act of 1965 (Act No. 23 of 1965), RBI was
authorized with extensive powers for the supervision of banking in India.
Initially RBI had to manage the unregulated and largely owned by private businesses
banks. The banking system of that time prompted RBI to introduce regulations to
restrict the use of word “bank”. The regulations of minimum capital requirements and
reserves were introduced by the central bank.

11
Government of India took major steps in the Indian banking sector reforms after
independence. Imperial Bank of India was nationalized in 1955. The new name given to
the bank was State bank of India. SBI with its extensive banking facilities on the large
scale, especially in rural and semi urban areas was first major bank of India. SBI used to
act as the principle agent of RBI and handle banking transactions of the union and state
governments of the country.
1949: Enactment of the Banking Regulation Act
1955: Nationalization of Imperial Bank (SBI)
1959: Nationalization of SBI subsidiaries
1961: Insurance cover extended to deposits

The Plan Era of banking

The banking business was concentrated in urban areas of India. Banks use to fund the
trade and commerce which was the most profitable proposition. The large businesses
enjoyed large funds of banking sector. This concentration of banks in urban areas left
large part of India and Indian population away from banking services. The rural areas
and small businesses were left out of banking system. The Indian economy adopted
socialist pattern since independence. Financial system had to be reframed to help all
sections of the society to have just distribution of credit. The need to achieve efficient
distribution of banking resources in tune with the requirement of the economy and to
meet the needs of priority sectors, nationalization of banks was required.9
The banks had been kept under government’s control to achieve the targets of credit
distribution. The objective of credit planning became an integral part of formulation of
credit policy.

OBJECTIVES OF NATIONALISATION:
1. To help agriculture sector in promoting agricultural production and rural
development to augment the major sector of Indian economy.
2. To make sure that credit is not distributed to speculative purposes

9
Rangarajan, C. (1989), “Banking Developments since 1947: Achievements and Challenges”, RBI
Bulletin
12
3. To help syndication of loans and reduce the exposure of one bank in a particular
industry or business.
4. To bring professionalism in the functioning of banking and awareness of social
objectives of the economy.
5. To Provide credit and other facilities to small entrepreneurs with a view to have a
self-generating economy so as to enable the improvement of poor and down trodden
economically and socially.

In 1969, a major drive was undertaken to nationalize the banks. SBI subsidiaries were
nationalized. The 14 major banks of that time were nationalized. This started new phase
of banking in India. A focused effort was made to open more branches of banks in rural
areas. The priority was to employ more manpower to educate rural folks to the
advantages of formal banking. The next twenty years witnessed a large presence of
banks in rural areas. The objective was to get rid of indigenous bankers and
moneylenders out of the financial system.

The next phase of nationalization of Indian banks was carried out in 1980.
Nationalization happened with seven more banks. This process brought 80% of the
banking business in India under government ownership. The government took
following steps to regulate banking institutions.

Private Sector Bank that became Nationalized Banks

The nationalization process partly helped government to achieve its major objectives of
economic growth and reduction in regional imbalances. Banking reached rural areas
during nationalization era and reduced the importance of indigenous money lenders.
Nationalization also helped in mobilizing small savings in rural and semi urban areas
and reduced the credit gap. Nationalized banks started giving credit to small scale
businesses and agriculture which helped introduce many government schemes launched
after words. The aim was to bring large areas of economic activity within the
organized banking system. The two important aspects of nationalization were fast
branch expansion and directing credit according to priorities.

13
The banking sector achieved huge success, during the period of nationalization era, and
became much sophisticated with deposits increasing every year, credit being disbursed
to all sectors and branch expansion.

The post globalization banking

The Narsimham committee gave revolutionizing recommendations to match Indian
banks with the world’s best. The phased autonomy proposed in the report help Indian
banks to come out of its own shackles. The reduction in CRR and SLR were the major
recommendations to free up liquidity to reduce overall interest rates. Determination of
interest rate was to be deregulated and it was recommended that market forces should
be prime movers of interest rates. It was recommended that to increase competition and
efficiency public sector banks should be given more autonomy. The third phase is
characterized by process of globalization and reforms in the financial sector. Erstwhile
Development Financial Institutions were allowed to do banking business and in the
process new private sector banks emerged to give real impetus and competition to
nationalized banks.10 A number of committees were formed to get advice on how to
reform financial sector and make it competent to face global competition.
The new private sector banks are
1. ICICI Bank
2. HDFC Bank
3. Axis Bank
4. Development Credit Bank
5. IndusInd Bank
6. Kotak Mahindra Bank
7. Yes Bank
The Narsimham committee 1998 gave more important and path breaking suggestions to
bring in more efficiency and readiness for more competition. It was felt that in the
context of Current Account Convertibility banks should be able to handle domestic
liquidity and foreign exchange. This required Indian banks to be strong enough to
handle the pressure of globalization and they should have international presence to be

10
D.P Gupta, R.k Gupta, (2012) “Modern Banking in India”, Asian Books, New Delhi.

14
better equipped to handle these issues. Capital adequacy was given more importance as
non-performing assets were as high as 20% of banks’ advances. Market risk should be
considered along with credit risk in the banking sector. The committee recommended
that minimum capital to risk assets ratio should be increased to 10% from 8%.
Capitalization of public sector banks was to happen either from government or by
diluting the government ownership in these banks; banks were to be allowed to accesses
Indian capital market and abroad. It was observed that directed credit had major role in
creation of NPAs, it was suggested that loans to agriculture and small scale industries
should be granted on commercial considerations and on the basis of credit worthiness of
the borrower. Income from an asset use to consider to be stopped when installment of
principle or interest or both was not paid for 180 days, the committee recommended that
this time limit should be reduced to 90 days.

The necessity of reforms

The RBI had control over all the functions of banks before reform process started. The
need was felt that commercial banks will have to be given some autonomy. The interest
rates in India were very high. The system of regulations hardly left any space for banks
to implement the policy of their choice. The CRR and SLR were maintained at very
high levels. The deposit interest rate and interest rates charged on advances were
dictated by monetary authority. The banking sector was increasing demanding
autonomy in the couple of functions. The process began of initiating reforms in banking
sector as India started liberalizing and globalizing its economy since 1991. The foreign
competition in all sectors which was foreseen made it compulsory to liberalize functions
of banks in step by step manner.

THE REFORM PROCESS

The globalization process prompted every sector in the economy for the readiness for
the competition. All major sectors in the economy were experiencing the changes.
Improvement in the productivity and use of latest technology were the only ways to
stands the competition. The economic reforms were to bring in real and financial sector
out of license raj. The external shock could be felt in the domestic economy, thereby a

15
sound and flexible policy was needed to benefit from the changes in long run. Financial
sector reforms were needed to augment the changes in other sectors.
1.8 Reforms in the Banking sector
The banking sector at that time was dominated by public sector banks. The inherent
drawbacks attached to these banks were weighing down on the performance and
profitability of these banks. The major objectives of reform process were to develop
efficient, productive and profitable banks. This could have been possible only if more
autonomy was given to the banks in decision making on day to day basis business.

Banking sector reforms include

1. Enhancing the role of market forces – banks were regulated and runned on the
preset objectives of government policies. It was felt the market forces should
move the changes in the sector. It was facilitated by reduction in reserve
requirements, market determined price of government securities, ending the
government determined interest rates, in order to help market discipline
enhanced disclosure norms were introduced.11
2. Measures to increase competition – banking sector lacked robust competition in
pre 1991 era. Allowing private sector banks in 1994, giving operational
autonomy to public sector banks, permission to Foreign Institutional Investors
(FIIs) to invest in Indian capital markets, allowing public sector banks to tap
capital markets by reducing government ownership were some of the steps
which were taken.
3. Legal and institutional measures – the entire system needs to have appropriate
legal backing to introduce latest change. It is facilitated through setting up
lokadalats, asset reconstruction companies, corporate debt restructuring
mechanism; debt recovery tribunals etc. to improve the recovery of bad loans
and restructuring if required. The most important legal development was
introduction of securitization and Reconstruction of Financial Assets and

11
Natarajan S, Parameswaran R, (2004), “Indian Banking”, S Chand & Company. New Delhi.

16
 Enforcement of Securities Interest (SARFAESI) Act and its subsequent
amendment to ensure creditor rights was the major step12.
4. Measures to improve supervision – financial sector in India mostly comprised of
commercial banks at that time. Improving efficient supervision on banks would
ensure financial stability. In the light of this RBI established the Board for
Financial Supervision for commercial banks, financial institutions and non-
banking financial companies as the apex supervisory authority. The broad based
supervision needed broad based parameters to analyze the functioning of banks
for this purpose RBI introduced CAMELS supervisory rating system. Overall
auditing of banks was also improved by more directives to these firms. The
introduction of risk based supervision; offsite surveillance through control
returns and consolidated supervision of financial conglomerates were the
highlights of these reforms. RBI also introduced fit and proper tests for directors
of commercial banks and guidelines for corporate governance with enhanced
due diligence on important shareholders.
5. Prudential measures- Indian banking sector was geared up to follow
international best practices and norms. RBI introduced phased implementation
of these practices through norms on accounting, income recognition,
provisioning and exposure of credit to different sectors and risk – weighted
capital adequacy requirements. Risk management has been given utmost
importance, which can be done through recognition of different components of
risk, norms on connected lending, concentration of risk, assignment of risk
weights to various assets classes. For prudent risk management application of
marked to market principle for investment portfolio was introduced.13
6. Measures related to technology – new era banking has to be equipped with latest
technology that can help huge amounts of transactions that take place daily. The
millions of transactions can happen seamlessly only if technology help is
available. The INdianFInancialNETwork (INFINET) has been set up as a

12
Mukharjee Sampat, Ghosh Amitava, “Principles of Macroeconomics” (2009) new Central Book Agency
P Ltd, New Delhi.
13
Datt, R. and Sundharam, K.P.M. (2004), Indian Economy, S. Chand & Company Ltd.,
New Delhi.

17
 backbone for the financial sector. The Negotiated Dealing System (NDS) has
been introduced for screen based trading in government securities. The fast
clearances of transactions are made possible with Real Time Gross Settlement
(RTGS) system.
1.9 Current trends in Banking
The banking sector has been under stress of bad loans and the corporate debt
restructuring has been on the rise. The public sector banks usually fund the
infrastructural projects and priority sectors more than any other type of banks. The
recent economic slowdown has reduced the viability of many such projects. The
infrastructural projects have faced problem in last couple of years since government has
been trying to reduce its fiscal deficit. The availability of funds by government to these
sectors has been going down.

The deposits and credit growth has been slowing down in last couple of years.
Rs in Billion
Year 2009 2010 2011 2012 2013
Credit 28575.25 33456.19 40768.68 47827.75 55064.96
Deposits 39373.36 46019.26 54265.10 61741.47 70513.32
Source: Compiled from various issues of RBI publications
The graph below is the percentage growth in the deposits and credit of all commercial
banks in India. This has been showing the downward trend over the last four years.
Graph 1: Deposits and Credit of all commercial banks in India (2009-2012)
20.00

15.00

10.00 Credit
Deposits
5.00

0.00
2009 2010 2011 2012

Source: Compiled from various issues of RBI publications

The overall gross non- performing assets have been increasing in all commercial banks.

18
The graph below explains the rise of non-performing assets in priority and non-priority
sectors.
Graph 2: Non-Performing Assets in priority and non-priority sectors
1,200.00

1,000.00
Priority
Sector
800.00

600.00 Non Priority

Sector
400.00
Gross NPAs
200.00

0.00
2009 2010 2011 2012 2013
Source: Compiled from various issues of RBI publications
The non-performing assets have given rise to corporate debt restructuring in last couple
of years. The following table reflects the reducing rate of credit and increasing rate of
restructured assets to gross advances.
Mar-09 Mar-10 Mar-11 Mar-12
Gross Advances Growth Rate (%) 17.21 23.41 16.88
Restructured Standard to
Ratio (%) 2.73 4.23 3.45 4.68
Gross Advances
Source: Compiled from various issues of RBI publications
Graph 3: Restructured Loans to Total Advances
25

20
Gross Advances
Growth Rate (%)
15

10
Restructured
Standard to Gross
5 Advances Ratio (%)

0
Jan/09 Jan/10 Jan/11 Jan/12

19
The following table showcases how banks have performed in recent times
Table 1: Important indicators of Commercial Banks

Important indicators of
Commercial Banks
Mar Mar Mar Mar Mar Mar Mar Mar
Indicators March ch ch ch ch ch ch ch ch
200 200 200 200 201 201 201 201
2005 6 7 8 9 0 1 2 3
Number of Commercial
Banks 288 222 182 173 170 167 167 173 155
(a) Scheduled
Commercial Banks 284 218 178 169 166 163 163 169 151
of which: Regional
Rural Banks 196 133 96 90 86 82 82 82 64
(b) Non-Scheduled
Commercial Banks 4 4 4 4 4 4 4 4 4
Number of Bank 720 746 787 828 882 940 102 109
Offices in India 70373 72 53 87 97 03 19 377 811
Population per Office
(in thousands) 16 16 15 15 15 14 13 13 12
Aggregate deposits of
Scheduled Commercial
Banks in India (Rs. 210 261 319 383 449 520 590 675
billion) 17002 90 19 69 41 28 79 90 04
Bank credit of
Schedule Commercial
banks in India (Rs in 150 193 236 277 324 394 461 526
Billion 11004 70 11 19 55 47 20 18 04
SLR investments of
Scheduled Commercial
Banks in India (Rs in 717 791 971 116 138 150 173 200
Billion) 7391 4 5 7 64 47 16 77 61
Credit of Scheduled
Commercial Banks per
office (Rs. millions) 170 221 276 322 362 398 458 498 526
Per capita Deposit of
Scheduled Commercial 191 233 286 339 391 455 501 563
Banks (Rs.) 16281 30 82 10 19 07 05 83 80
Per capita Credit of
Scheduled
Commercial Banks 138 175 212 246 284 341 388 440
(Rs.) 10752 69 41 18 17 31 87 74 28

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Deposits of Scheduled
Commercial Banks as
percentage to Gross
National Product at
factor cost (at current 64. 68. 72. 77. 78. 78.
prices) 62.3 3 8 8 1 2 2 78 79.4
Share of Priority Sector
Advances in Total
Advances of Scheduled
Commercial Banks (per 33. 33. 31. 30. 31. 30.
cent) 32.2 8 1 6 3 2 6 29.5 28.8
Credit-Deposit Ratio 70. 73. 74. 73. 73. 76.
(per cent) 62.6 1 5 6 8 7 5 78.6 79.1
Investment-Deposit 35. 35. 35. 36. 34.
Ratio (per cent) 47.3 40 3 5 7 4 3 34.6 35.2
Cash-Deposit Ratio
(per cent) 6.4 6.7 7.2 9.7 7.3 7.7 8.2 5.8 5.1
Source: Compiled from RBI various issues
1.10 Conclusion

Banking sector has come a long way. The pre independence private sector banks to
nationalization era of 1950s and 1960s. The major bank expansion happened largely
because of nationalization of banks. The government ownership and lack of direct
accountability created rigidities in the system. The high regulation, high interest rate
regime stopped banks from reaching their potential levels. The globalization process
coincided with privatization and computerization process in banking system. The
financial and banking sector reforms freed banks from high level of regulations. The
intensified competition helped banks in developing high level of professional services.

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