INDUSTRIAL PROFILE

SUBMITTED BY: Parvathy.S.Menon Reg no: 22052 BBA Vth SEM

INTRODUCTION MEANING AND DEFINITION "Accepting Deposits for the purpose of lending or Investment of deposits of money from the public, repayable on demand or otherwise and withdraw by cheque, draft or otherwise." Banking Companies (Regulation) Act, 1949 The concise oxford dictionary has defined a bank as "Establishment for custody of money which it pays out on customers order." In fact this is the function which the bank performed when banking originated. The origin of the word bank is shrouded in mystery. According to one view point the Italian business house carrying on crude from of banking were called banchi, bancheri" According to another viewpoint banking is derived from German word "Branck" which mean heap or mound. In England, the issue of paper money by the government was referred to as a raising a bank. The oldest bank still in existence is Monte dei Paschi di Siena, headquartered in Siena, Italy, which has been operating continuously since 1472. A bank is a financial intermediary that accepts deposits and channels those deposits into lending activities, either directly or through capital markets. A bank connects customers with capital deficits to customers with capital surpluses. Banking is generally a highly regulated industry, and government restrictions on financial activities by banks have varied over time and location. Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as telegraphic transfer, EFTPOS, and ATM. Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making instalments loans, and by investing in marketable debt securities and other forms of money lending. Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank account. Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings to. Banks comes under the tertiary or the service sector. Services or the tertiary sector of the economy covers a wide gamut of activities like trading, banking & finance, infotainment

BANKING IN INDIA Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honour belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking centre. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.

The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918. POST INDEPENDENCE The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included: In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to The Banking Regulation Act also provided that no new bank or branch of an existing bank could be

institution owned by the Government of India. regulate, control, and inspect the banks in India." opened without a license from the RBI, and no two banks could have common directors.

However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalisation of major banks in India on 19 July 1969. NATIONALISATION The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b). By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation." The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 20 to 19. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy. LIBERLISATION In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been set up with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions.

The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2007), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide. STRUCTURE OF INDIAN BANKING SECTOR The Reserve Bank of India acts as a centralized body monitoring any discrepancies and shortcoming in the system. It is the foremost monitoring body in the Indian financial sector. The nationalized banks (i.e. government-owned banks) continue to dominate the Indian banking arena. Industry estimates indicate that out of 274 commercial banks operating in India, 223 banks are in the public sector and 51 are in the private sector. The private sector bank grid also includes 24 foreign banks that have started their operations here. Under the ambit of the nationalized banks come the specialized banking institutions. These co-operatives, rural banks focus on areas of agriculture, rural development etc. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility-without any stated exchange rate-and this has

mostly been true. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector, the demand for banking services-especially retail banking, mortgages and investment services are expected to be strong. M&As, takeovers, asset sales and much more action (as it is unravelling in China) will happen on this front in India. With the credibility of the Indian banking system on a high, a number of Indian banks are now leveraging it to expand overseas. State Bank of India, the countrys largest bank has acquired 76 per cent stake in a Kenyan bank, Giro Commercial Bank, for US$ 7 million. Canara Bank is helping Chinese banks recover their huge non-performing assets (NPA). To meet the challenges of going global, the Indian banking sector is implementing internationally followed prudential accounting norms for classification of assets, income recognition and loan loss provisioning. The scope of disclosure and transparency has also been raised in accordance with international practices. India has complied with almost all the Core Principles of Effective Banking Supervision of the Basel Committee. Some Indian banks are also presenting their accounts as per the U.S. GAAP. The roadmap for adoption of Basel II is under formulation.

RESERVE BANK OF INDIA

CENTRAL BANK AND SUPREME MONETARY AUTHORITY

SCHEDULED BANKS

COMMERCIAL BANKS

CO-OPERATIVE BANKS

FOREIGN BANKS (40)

REGIONAL RURAL BANKS (196)

PUBLIC SECTOR BANKS (27)

PRIVATE SECTOR BANKS (27)

URBAN COOPERATIVES (52)

STATE COOPERATIVES (16)

STATE BANK OF INDIA AND ASSOCIATE BANKS (8) OTHER NATIONALISED BANKS (19)

OLD (22)

NEW (6)

CLASSIFICTAION OF BANKS (I) CLASSIFICATION ON BASIS OF OWNERSHIP On the basis of ownership banks are of the following types: 1. PUBLIC SECTOR BANK

Public sector banks are those banks which are owned by the Government. The Govt. runs these Banks. In India 14 banks were nationalized in 1969 & in 1980 another 6 banks were also nationalized. Therefore in 1980 the number of nationalized bank 20. But at present there are 9 banks are nationalized. All these banks are belonging to public sector category. Welfare is their principle objective. 2. PRIVATE SECTOR BANKS

These banks are owned and run by the private sector. Various banks in the country such as ICICI Bank, HDFC Bank etc. An individual has control over there banks in preparation to the share of the banks held by him. 3. CO-OPERATIVE BANKS

Co-operative banks are those financial institutions. They provide short term & medium term loans to there members. Co-operative banks are in every state in India. Its branches at district level are known as the central co-operative bank. The central co-operative bank in turn has its branches both in the urban & rural areas. Every state co-operative bank is an apex bank which provides credit facilities to the central co- operative bank. It mobilized financial resources from richer section of urban population by accepting deposit and creating the credit like commercial bank and borrowing from the money mkt. It also gets funds from RBI. (II) CLASSIFICATION ACCORDING TO RESERVE BANK OF INDIA ACT 1935 Banks are classified into following two categories son the basis of Reserve bank Act. 1934. 1. SCHEDULED BANK

These banks have paid up capital of at least Rs.5 lacks. These are like a joint stock company. It is a cooperative organization. These banks find their mention in the second schedule of the reserve bank. 2. NON SCHEDULED BANK

These banks are not mentioned in the second schedule of reserve bank paid up capital of these banks is less then Rs.5 lacks. The number of such bank is gradually tolling in India.

(III) CLASSIFICATION ACCORDING TO FUNCTION

On the basis of functions banks are classified as under:1. COMMERCIAL BANKS

The commercial banks generally extend short-term loans to businessmen & traders. Since their deposits are for a short-period only. They cannot lend money for a long period. These banks reform various types or agency job for their customers. These banks are not in a position to grant long-term loans to industries because their deposits are only for a short period. The majority of joint stock banks in India are commercial banks which finance trade & commerce only. 2. SAVING BANKS The principle function of these banks is to collect small saving across the country and put them into productive use. These banks have shown marked development in Germany & Japan. These banks are established in HAMBURG City of Germany in 1765. In India a department of post offices functions as saving banks. 3. FOREIGN EXCHANGE BANKS These are special types of banks which specialize in financing foreign trade. Their main function is to make international payments through purchase & sale of exchange bills. As it well known, the exporters of a country prefer to receive the payments for exports in their own currency. Thus these banks convert home currency into foreign currency and vice versa. It is on this account that these banks have to keep with themselves stock of the currency of various countries. Along with that, they have to open branches in foreign countries to carry on their business. 4. INDUSTIRAL BANKS The industrial bank extends long term loans to industries. In fact, they also help industrials firms to sell their debentures and shares. Some times, they even underwrite the debentures & shares of big industrial concerns. 5. INDIGENIOUS BANKS These banks found their origin in India. These banks made a significant contribution to the development of agricultural and industries before independence. Mahajans, rural moneylenders have been the forerunner of these banks in India. 6. CENTRAL BANK The central bank occupies a pivotal position in the monetary and banking structure of the country. The central bank is the undisputed leader of the money market. As such it supervises controls and regulates the

activities of commercial banks affiliated with it. The central bank is also the higher monetary institution in the country charged with the duty & responsibility of carrying out the monetary policy formulated by the government. India's central bank known as the reserve bank of India was set up in 1935. 7. AGRICULTURAL BANK The commercial and the industrial banks are not in a position to meet the credit requirements of agriculture. Hence, there arises the need for setting up special type of banks of finance agriculture. The credit requirements of the farmers are two types. Firstly the farmers require short term loans to buy seeds, fertilizers, ploughs and other inputs. Secondly, the farmers require long-term loans to purchase land, to effect permanent improvements on the land to buy equipment and to provide for irrigation works. There are two types of agriculture banks. Agriculture co-operative banks Land mortgage banks.

CURRENT SCENARIO The Indian banking industry is currently in a transition phase. On the one hand, the public sector banks, which are the mainstay of the Indian banking system, are in the process of consolidating their position by capitalizing on the strength of their huge networks and customer bases. On the other, the private sector banks are venturing into a whole new game of mergers and acquisitions to expand their bases. The use of technology has placed Indian banks at par with their global peers. It has also changed the way banking is done in India. Anywhere banking and Anytime banking have become a reality. The financial sector now operates in a more competitive environment than before and intermediates relatively large volume of international financial flows The competition heated up with the entry of private and foreign banks. Deregulation and globalization resulted in increased competition that refined the traditional way of doing business. They have realized the importance of a customer centric approach, brand building and IT enabled solutions. In the fierce battle for market share and mind share, the most potent weapon is a strong, well recognized and trusted brand name. Brands attract and convince people that they will get what is promised. Banking today has transformed into a technology intensive and customer friendly model with a focus on convenience. The companies have redoubled their efforts to woo the customers and establish themselves firmly in the market. It is no longer an option for a company to provide good customer service, it is expected.

Reforms are continuing as part of the overall structural reforms aimed at improving the productivity and efficiency of the economy. The sector is set to witness the emergence of financial supermarkets in the form of

universal banks providing a suite of services from retail to corporate banking and industrial lending to investment banking. The financial services market has become a battle ground with the marketers with the latest and the most sophisticated weapons. Currently overall, banking in India is considered as fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. Even in terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets-as compared to other banks in comparable economies in its region. The introduction of Basel II norms from 2009 and the fair level playing field that will be available to foreign banks from 2010 will further enhance the solidarity of the Indian banking sector and open new avenues for consolidation and the increased competition will ensure that in the end the Customer is the king. Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Also, following Indias commitment to the WTO agreement in respect of the services sector, foreign banks, including both new and the existing ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches. Talks of government diluting their equity from 51 percent to 33 percent in November 2000 have also opened up a new opportunity for the takeover of even the PSBs. The FDI rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners. Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation. TECHNOLOGICAL ADVANCEMENTS At present, modern technology allows banking to exist in four very different environments. The first of which is the rise and rise of telephone banking. Introduced in the early 80s, telephone banking allows customers to access and administer their accounts using a handset or keyboard attached to a phone line.

'Home banking' also refers to the use of a numeric keypad that sends tones down the phone line that instructs certain changes to be made to the individual's bank account.

Hot on the heels of telephone banking, the internet would soon provide individuals with another means to administer their bank accounts. Introduced in 1994, internet banking enhanced and developed the service already provided by phone lines and allowed customers to conduct tasks such as fund transfer, investment, electronic bill payment and complete applications for other financial features such as loans and credit cards. It is though the number of internet users who bank online now exceeds 50%. Technological advances don't only extend to phone and telephone however as the ATM (automated teller machine) or cash kiosk, has undergone numerous changes as well. Invented in 1960, the ATM machine is now a familiar feature on the high street and provides an accessible and familiar means to access funds for those going about their daily business or even holidaying and travelling abroad. Of particular interest is the development of highly advanced banking software that allows multiple ATMs to be controlled remotely from one financial institution as well as technology that allows ATMs to speak a variety of languages, thus providing globally friendly machines. Although the most noticeable technological changes to banking have occurred out with the walls of these financial institutions themselves, there are also other noteworthy developments that aid the experience of employees and customers within the banks themselves. Enhanced databases and in-house software packages mean tellers can access numerous customer accounts at once. For individuals working within the credit or loan sector, software packages now exist that help to calculate lending risk as well as borrowing time which ultimately provides a safer, secure and speedier banking experience from the bank and beyond.