CHAPTER:-1

INTRODUCTION OF BANK

1.1 INTRODUCTION:-

A bank is a financial institution that accepts deposits from the public and
creates credit. Lending activities can be performed either directly or indirectly
through capital markets. Due to their importance in the financial stability of a
country, banks are highly regulated in most countries. Most nations have
institutionalized a system known as fractional reserve banking under which
banks hold liquid assets equal to only a portion of their current liabilities. In
addition to other regulations intended to ensure liquidity, banks are generally
subject to minimum capital requirements based on an international set of capital
standards, known as the Basel Accords.

Banking in its modern sense evolved in the 14th century in the prosperous
cities of Renaissance Italy but in many ways was a continuation of ideas and
concepts of credit and lending that had their roots in the ancient world. In
the history of banking, a number of banking dynasties notably, the Medici’s,

1
the Fugger’s, the Bahrenberg’s and the Rothschild’s have played a central role
over many centuries. The oldest existing retail bank is Banka Monte deiPaschi
di Siena, while the oldest existing merchant bank is Berenberg Bank.

Finance is the life blood of trade, commerce and industry. Now-a-days,

banking sector acts as the backbone of modern business. Development of any
country mainly depends upon the banking system. The tem bank either derived
from old italian word banca or from a french word banque both mean a bench or
money exchangeable. In olden days, european money lenders or money
changers used display (show) coins of different countries in big heaps (quantity)
on benches or tables for the purpose of lending or exchanging. Services. It
receives money from those who want to save in the form of deposits and it lends
money to those who need it.

1.2 DEFINITION OF BANK:-

The term ‘Bank’ has been defined in different economists. A few

definitions are:-

According to Walter Leaf “A bank is person or corporations which hold

itself out to receive from the public, deposits on demand by cheque.” Horace
white has defined a bank, “as a manufacture of credit and machine for
facilitating exchange.”

The Banking Companies Act of India defines Bank as “A Bank is a

financial institution which accepts money from the public for the purpose of
lending or investment repayable on demand or otherwise withdraw able by
cheques, draft or order or otherwise.”

Thus, we can say that a bank is a financial institution which deals in debts
and credits. It accepts deposits, lends money and also creates money. It bridges
the gap between the savers and borrowers. Banks are not merely traders in
money but also in an important sense manufacturer of money.
2
1.3HISTORY:-

Banking began with the first prototype banks of merchants of the ancient
world, which made grain loans to farmers and traders who carried goods
between cities. This began around 2000 BC in Assyria and Babylonia. Later,
in ancient Greece and during the Roman Empire, lenders based in temples
made loans and added two important innovations they
accepted deposits and changed money. Archaeology from this period in ancient
China and India also shows evidence of money lending activity.

The origins of modern banking can be traced to medieval and

early Renaissance Italy, to the rich cities in the Centre and north
like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families
dominated banking in 14th-century Florence, establishing branches in many
other parts of Europe. One of the most famous Italian banks was the Medici
Bank, set up by Giovanni di Bicci de' Medici in 1397. The earliest known state
deposit bank, Banco di San Giorgio (Bank of St. George), was founded in 1407
at Genoa, Italy.

Modern banking practices, including fractional reserve banking and the

issue of banknotes, emerged in the 17th and 18th centuries. Merchants started to
store their gold with the goldsmiths of London, who possessed private vaults,
and charged a fee for that service. In exchange for each deposit of precious
metal, the goldsmiths issued receipts certifying the quantity and purity of the
metal they held as a bailee these receipts could not be assigned only the original
depositor could collect the stored goods.

Gradually the goldsmiths began to lend the money out on behalf of

the depositor, which led to the development of modern banking
practices; promissory notes (which evolved into banknotes) were issued for
money deposited as a loan to the goldsmith. The goldsmith paid interest on
these deposits. Since the promissory notes were payable on demand, and the
3
advances (loans) to the goldsmith's customers were repayable over a longer
time period, this was an early form of fractional reserve banking. The
promissory notes developed into an assignable instrument which could
circulate as a safe and convenient form of money backed by the goldsmith's
promise to pay, allowing goldsmiths to advance loans with little risk
of default. Thus, the goldsmiths of London became the forerunners of banking
by creating new money based on credit.

The Bank of England was the first to begin the permanent issue
of banknotes, in 1695. The Royal Bank of Scotland established the
first overdraft facility in 1728. By the beginning of the 19th century a bankers
clearing house was established in London to allow multiple banks to clear
transactions. The Rothschild’s pioneered international finance on a large scale,
financing the purchase of the Suez canal for the British government.

1.4 FUNCTION OF BANK

1.4.1.Primary Functions of Banks :-

The primary functions of a bank are also known as BANKING

FUNCTIONS. They are the main functions of a bank.

These primary functions of banks are explained below:-

1.4.1.1.Accepting Deposits
The bank collects deposits from the public. These deposits can be of
different types, such as:-

4
 a) Saving Deposits

This type of deposits encourages saving habit among the public. The rate
of interest is low. At present it is about 4% p.a. Withdrawals of deposits are
allowed subject to certain restrictions. This account is suitable to salary and
wage earners. This account can be opened in single name or in joint names.

b) Fixed Deposits

Lump sum amount is deposited at one time for a specific period. Higher
rate of interest is paid, which varies with the period of deposit. Withdrawals are
not allowed before the expiry of the period. Those who have surplus funds go
for fixed deposit.

c) Current Deposits

This type of account is operated by businessmen. Withdrawals are freely

allowed. No interest is paid. In fact, there are service charges. The account
holders can get the benefit of overdraft facility.

d) Recurring Deposits

This type of account is operated by salaried persons and petty traders. A

certain sum of money is periodically deposited into the bank. Withdrawals are
permitted only after the expiry of certain period. A higher rate of interest is
paid.

1.4.1.2 Granting of Loans and Advances

The bank advances loans to the business community and other members of
the public. The rate charged is higher than what it pays on deposits. The
difference in the interest rates (lending rate and the deposit rate) is its profit.

The types of bank loans and advances are:-

5
 a. Overdraft

These types of advances are given to current account holders. No separate

account is maintained. All entries are made in the current account. A certain
amount is sanctioned as overdrafts which can be withdrawn within a certain
period of time say three months or so. Interest is charged on actual amount
withdrawn. An overdraft facility is granted against a collateral security. It is
sanctioned to businessman and firms.

b. Cash Credits

The client is allowed cash credit up to a specific limit fixed in advance. It

can be given to current account holders as well as to others who do not have an
account with bank. Separate cash credit account is maintained. Interest is
charged on the amount withdrawn in excess of limit. The cash credit is given
against the security of tangible assets and guarantees. The advance is given for a
longer period and a larger amount of loan is sanctioned than that of overdraft.

c. Loans

It is normally for short term say a period of one year or medium term say a
period of five years. Now-a-days, banks do lend money for long term.
Repayment of money can be in the form of installments spread over a period of
time or in a lump sum amount. Interest is charged on the actual amount
sanctioned, whether withdrawn or not. The rate of interest may be slightly lower
than what is charged on overdrafts and cash credits. Loans are normally secured
against tangible assets of the company.

d. Discounting of Bill of Exchange

The bank can advance money by discounting or by purchasing bills of

exchange both domestic and foreign bills. The bank pays the bill amount to the
drawer or the beneficiary of the bill by deducting usual discount charges. On

6
maturity, the bill is presented to the drawee or acceptor of the bill and the
amount is collected.

1.4.2. Secondary Functions of Banks :-

The bank performs a number of secondary functions, also called as non-

banking functions. These important secondary functions of banks are explained
below.1

1.4.2.1. Agency Functions

The bank acts as an agent of its customers. The bank performs a number of
agency functions which includes:-

a. Transfer of Funds:-

The bank transfer funds from one branch to another or from one place to
another.

b. Collection of Cheques:-

The bank collects the money of the cheques through clearing section of its
customers. The bank also collects money of the bills of exchange.

c. Periodic Payments:-

On standing instructions of the client, the bank makes periodic payments in

respect of electricity bills, rent, etc.

d. Portfolio Management:-

7
 The bank also undertakes to purchase and sell the shares and debentures on
behalf of the clients and accordingly debits or credits the account. This facility
is called portfolio management.

e. Periodic Collections:-

The bank collects salary, pension, dividend and such other periodic
collections on behalf of the client.

f. Other Agency Functions:-

They act as trustees, executors, advisers and administrators on behalf of its

clients. They act as representatives of clients to deal with other banks and
institutions.

1.4.2.2. General Utility Functions :-

a. Issue of Drafts and Letter of Credits:-

Banks issue drafts for transferring money from one place to another. It also
issues letter of credit, especially in case of, import trade. It also issues travellers'
cheques.

b. Locker Facility:-

The bank provides a locker facility for the safe custody of valuable
documents, gold ornaments and other valuables.

c. Underwriting of Shares:-

The bank underwrites shares and debentures through its merchant banking
division.

d. Dealing in Foreign Exchange:-

The commercial banks are allowed by RBI to deal in foreign exchange.

8
e. Project Reports :-

The bank may also undertake to prepare project reports on behalf of its
clients.

f. Social Welfare Programmes:-

It undertakes social welfare programmes, such as adult literacy

programmes, public welfare campaigns, etc.

g. Other Utility Functions:-

It acts as a referee to financial standing of customers. It collects

creditworthiness information about clients of its customers. It provides market
information to its customers, etc. It provides travellers' cheque facility.

1.5 TYPES OF BANKS :-

1.5.1 Commercial banks:

The term used for a normal bank to distinguish it from an investment

bank. After the Great Depression, the U.S. Congress required that banks only
engage in banking activities, whereas investment banks were limited to capital
market activities. Since the two no longer have to be under separate ownership,
some use the term "commercial bank" to refer to a bank or a division of a bank
that mostly deals with deposits and loans from corporations or large businesses.

1.5.2 Community banks:

Locally operated financial institutions that empower employees to make

local decisions to serve their customers and the partners.

9
1.5.3 Community development banks:

Regulated banks that provide financial services and credit to under-served

markets or populations.

1.5.4 Land development banks:

The special banks providing long-term loans are called LAND

DEVELOPMENT BANKS (LDB). The history of LDB is quite old. The first
LDB was started at Jhang in Punjab in 1920. The main objectives of the LDBs
are to promote the development of land, agriculture and increase the agricultural
production. The LDBs provide long-term finance to members directly through
their branches.

1.5.5 Credit unions or co-operative banks:

Not-for-profit cooperatives owned by the depositors and often offering

rates more favorable than for-profit banks. Typically, membership is restricted
to employees of a particular company, residents of a defined area, members of a
certain union or religious organizations, and their immediate families.

1.5.6 Postal savings banks:

Savings banks associated with national postal systems.

1.5.7 Private banks:

Banks that manage the assets of high-net-worth individuals. Historically a

minimum of USD 1 million was required to open an account, however, over the
last years many private banks have lowered their entry hurdles to USD 350,000
for private investors.

10
1.5.8 Savings bank:
In Europe, savings banks took their roots in the 19th or sometimes even in
the 18th century. Their original objective was to provide easily accessible
savings products to all strata of the population. In some countries, savings banks
were created on public initiative; in others, socially committed individuals
created foundations to put in place the necessary infrastructure. Nowadays,
European savings banks have kept their focus on retail banking payments,
savings products, credits and insurances for individuals or small and medium-
sized enterprises.

1.5.9 Investment banks:

"Underwrite" stock and bond issues, trade for their own accounts, make
markets, provide investment management, and advise corporations on capital
market activities such as mergers and acquisitions.

1.5.10 Merchant banks:

Were traditionally banks which engaged in trade finance. The modern

definition, however, refers to banks which provide capital to firms in the form
of shares rather than loans.

1.5.11 Universal banks:

More commonly known as financial services companies, engage in

several of these activities. These big banks are much diversified groups that,
among other services, also distribute insurance hence the term bancassurance,
a portmanteau word combining "banque or bank" and "assurance", signifying
that both banking and insurance are provided by the same corporate entity.

11
1.6. ROLE & IMPORTANT OF BANK

Banking plays an important role in the financial life of a business, and the
importance of banks can be seen from the fact that they are considered as to be
the life-blood of modern economy. Although no wealth is created by Bank, but
their essential activities facilitates the process of production, exchange and
distribution of wealth. In this way they become the effective partners in the
process of economic development and growth. In the words of Stephenson &
Britain “Banks are the custodians and distribution of liquid capital, which is the
life-blood of our commercial and industrial activities and upon the prudence of
their administration depend the economic well-being of the nation”.

1.6.1. Importance of Banks

On the basis of these Important Functions of Banks, we may easily
describe the importance of banks in today’s global life.

a) Collections of Savings and Advancing Loans

Acceptance of deposit and advancing the loans is the basic function of
commercial banks. On this function, all other functions depend accordingly.
Bank operates different types of accounts for their customers.

b) Money Transfer
Banks have facilitated the making of payments from one place or persons
to another by means of cheques, bill of exchange and drafts, instead of cash.
Payment though cheques, draft is more safe and convenient, especially in case
of huge payments, this facility is a great help for traders and businessmen. It
really enhances the importance of banks for business community.

c) Encourages Savings
Banks perform an invaluable service by encouraging savings among the
people. They induce them to save for profitable investment for themselves and
for national interest. These savings help in capital formation.
12
d) Transfer Savings into Investment
Bank transfer the savings collected from the people into investment and
thus increase the amount of effective capital, which helps the process of
economic growth.

e) Overdraft Facilities
The banks allow the overdraft facilities to their trusted customers and thus
help them in overcoming of temporary financial difficulties.

f) Discounting Bill of Exchange

Importance of banks can be seen through the facility of discounting bill of
exchange. Banks discount their bill of exchange of consumers and help them in
the financial difficulties. By discounting bill of exchange, they able to get the
desire amount for investment they want.

g) Fi1nancing Internal & External Trade

Banks help merchants and traders in financing internal and external trade
by discounting foreign bill of exchange, issuing of letter of credit and other
guarantees for their customers.

h) Act as an Agent
The bank act as a agent and help their customers in the purchase and sales
of shares, provision of lockers payment of monthly and dividends on stock.

i) Issue of Traveler’s Cheques

For the convenience and security of money for travelers and tourists, bank
provides the facility of traveler’s cheques. These cheques enable the travelers
and tourists to meet their expenses during their journey, as these are accepted by
issuing bankers, restaurants, and other businessmen both at home and abroad.
No doubt, this is also one of the great functions of banks and shows the
importance of banks for us in more precise ways.

13
j) General Utility Services
Existence of commercial banks is essential for contribution to general
prosperity. Banks are the main factors in raising the level of economic
development of the world. In addition to above-cited advantages, banks also
provide many services of general utilities to the customers and the general
public.

1.6.2. Role Of Bank

As we know that main objectives of a commercial bank is to earn profit by
the process of accepting of deposits and advancing loans through different
methods. Although these functions are the basic function of commercial banks,
but there are a lot more functions which enhances the importance of banks
today.

a) Acceptance of deposits, by opening different kinds of bank accounts.

b) Advancing of loans to needy persons through different methods and
requirements.
c) Provisions of agency and general utility services to his customers.
d) Making new investments in different organizations and increasing the
productive capacity of the country.
e) Promote capital formation in the country by mobilizing and collection of
savings for the purpose of investments.
f) Development of industries in the country according to the requirements of
the economy.
g) A balanced development in the economy is achieved in different sectors &
regions through the resources of bank funds.
h) Development in agricultural production is made possible by providing
different kinds of loans.
i) These banks help in reducing reliance in foreign assistance by their efforts in
the mobilization of domestic savings.

14
j) These banks help in the implementation of an effective monetary policy
according to the objective to central bank.
k) Commercial banks also help in the creation and distribution of money
through the sales and purchase of securities.
l) Commercial banks are the custodian and distributor of liquid capital of the
country, which is the life blood of all commercial activities of a country.

1.7. CHARACTERISTICS/FEATURES OF BANK

1.7.1. Dealing in Money:-
Bank is a financial institution which deals with other people's money i.e.
money given by depositors.
1.7.2. Individual / Firm / Company:-
A bank may be a person, firm or a company. A banking company means a
company which is in the business of banking.
1.7.3. Acceptance of Deposit:-
A bank accepts money from the people in the form of deposits which are
usually repayable on demand or after the expiry of a fixed period. It gives safety
to the deposits of its customers. It also acts as a custodian of funds of its
customers.
1.7.4. Giving Advances:-
A bank lends out money in the form of loans to those who require it for
different purposes.
1.7.5 Payment and Withdrawal:-
A bank provides easy payment and withdrawal facility to its customers in
the form of cheques and drafts, It also brings bank money in circulation. This
money is in the form of cheques, drafts, etc.
1.7.6. Agency and Utility Services:-
A bank provides various banking facilities to its customers. They include
general utility ser-vices and agency services.

15
1.7.7. Profit and Service Orientation:-
A bank is a profit seeking institution having service oriented approach.

1.7.8. Ever increasing Functions:-

Banking is an evolutionary concept. There is continuous expansion and
diversification as regards the functions, services and activities of a bank.
1.7.9. Connecting Link:-
A bank acts as a connecting link between borrowers and lenders of money.
Banks collect money from those who have surplus money and give the same to
those who are in need of money.
1.7.10. Name Identity:-
A bank should always add the word "bank" to its name to enable people to
know that it is a bank and that it is dealing in money.
1.8. Indian Banking System: Structure and other Details:-
Bank is an institution that accepts deposits of money from the public.
Anybody who has account in the bank can withdraw money. Bank also lends
money.
1.8.1. Indigenous Banking:
The exact date of existence of indigenous bank is not known. But, it is
certain that the old banking system has been functioning for centuries. Some
people trace the presence of indigenous banks to the Vedic times of 2000-1400
BC. It has admirably fulfilled the needs of the country in the past.

However, with the coming of the British, its decline started. Despite the
fast growth of modern commercial banks, however, the indigenous banks
continue to hold a prominent position in the Indian money market even in the
present times. It includes shroffs, Seth’s, mahajans, chettis, etc. The indigenous

16
bankers lend money; act as money changers and finance internal trade of India
by means of hands or internal bills of exchange.

Defects:

The main defects of indigenous banking are:-

a. They are unorganized and do not have any contact with other sections of
the banking world.

b. They combine banking with trading and commission business and thus
have introduced trade risks into their banking business.

c. They do not distinguish between short term and long term finance and
also between the purpose of finance.

d. They follow vernacular methods of keeping accounts. They do not give

receipts in most cases and interest which they charge is out of proportion
to the rate of interest charged by other banking institutions in the country.

1.8.2 Suggestions for Improvements:

a. The banking practices need to be upgraded.

b. Encouraging them to avail of certain facilities from the banking system,

including the RBI.

c. These banks should be linked with commercial banks on the basis of

certain understanding in the respect of interest charged from the
borrowers, the verification of the same by the commercial banks and the
passing of the concessions to the priority sectors etc.
d. These banks should be encouraged to become corporate bodies rather
than continuing as family based enterprises.

17
1.8.3. Structure of Organised Indian Banking System:
The organised banking system in India can be classified as given below:

Reserve Bank of India (RBI):-

The country had no central bank prior to the establishment of the RBI. The
RBI is the supreme monetary and banking authority in the country and controls
the banking system in India. It is called the Reserve Bank’ as it keeps the
reserves of all commercial banks.
A. Commercial Banks:
Commercial banks mobilize savings of general public and make them
available to large and small industrial and trading units mainly for working
capital requirements. Commercial banks in India are largely Indian-public
sector and private sector with a few foreign banks. The public sector banks
account for more than 92 % of the entire banking business in India-occupying a
dominant position in the commercial banking.

18
 B. Scheduled and Non-Scheduled Banks:-
The scheduled banks are those which are enshrined in the second schedule
of the RBI Act, 1934. These banks have a paid-up capital and reserves of an
aggregate value of not less than Rs. 5 lakhs, hey have to satisfy the RBI that
their affairs are carried out in the interest of their depositors.
All commercial banks (Indian and foreign), regional rural banks, and state
cooperative banks are scheduled banks. Non- scheduled banks are those which
are not included in the second schedule of the RBI Act, 1934. At present these
are only three such banks in the country.

C. Regional Rural Banks:-

The Regional Rural Banks (RRBs) the newest form of banks, came into
existence in the middle of 1970s (sponsored by individual nationalised
commercial banks) with the objective of developing rural economy by
providing credit and deposit facilities for agriculture and other productive
activities of al kinds in rural areas. The emphasis is on providing such facilities
to small and marginal farmers, agricultural laborer’s, rural artisans and other
small entrepreneurs in rural areas.
Other special features of these banks are:-
(i) Their area of operation is limited to a specified region, comprising one
or more districts in any state;
(ii) Their lending rates cannot be higher than the prevailing lending rates
of cooperative credit societies in any particular state;
(iii) The paid-up capital of each rural bank is Rs. 25 lakh, 50 percent of
which has been contributed by the Central Government, 15 percent by
State Government and 35 percent by sponsoring public sector
commercial banks which are also responsible for actual setting up of
the RRBs.

19
D. Cooperative Banks:-
Cooperative banks are so-called because they are organised under the
provisions of the Cooperative Credit Societies Act of the states. The major
beneficiary of the Cooperative Banking is the agricultural sector in particular
and the rural sector in general.
The cooperative credit institutions operating in the country are mainly of
two kinds: agricultural (dominant) and non-agricultural. There are two separate
cooperative agencies for the provision of agricultural credit: one for short and
medium-term credit, and the other for long-term credit. The former has three
tier and federal structure.
Long-term agriculture credit is provided by the Land Development Banks.
The funds of the RBI meant for the agriculture sector actually pass through
SCBs and CCBs. Originally based in rural sector, the cooperative credit
movement has now spread to urban areas also and there are many urban
cooperative banks coming under SCBs.

1.9. PRINCIPLES OF BANKING :-

The bank which deals with money and money a worth with a view to
earning prom is known as the commercial bank.
Commercial banks must maintain some principles which are very
important for banks to remain in the competition in modem days.
Some principles are discussed below:-
1.9.1. Principle of Liquidity:-
The principle of liquidity is very important for the commercial bank.
Liquidity refers to the ability of an asset to convert into cash without loss within
the short time. Paying the deposited money on demand of’ customers are called
liquidity in sense of banking.

1.9.2. Principle of Solvency

20
 Solvency means the financial capability or sufficiency in capital. To stay in
these competitive market commercial banks must have sufficient capital. If the
funds are not sufficient the bank cannot run his business. The main source of
fund of the commercial bank is the deposited money by the depositors’ through
the different type of account. Depositors keep cash in the bank, especially for
safety.
1.9.3. Principle of Profitability
The main objective of the commercial bank is to earn a profit. For earning
profit commercial bank have to make the investment by providing short term
loan, before providing loan commercial bank have to compensate a certain
amount of money as liquidity.
1.9.4. Principle of Loan and Investment
The main source of profit of bank is granting loans to any individual or
organization. Investment is the profitable and sound source of income.
Commercial banks invest in business and investment sector.
1.9.5. Principle of Savings
Commercial banks collect fund by creating savings facilities. Commercial
banks try to collect savings from society surplus. The commercial bank makes
the investment from this savings to generate profit. So, more savings, more
investment, and more profit.
1.9.6. Principle of Services
Commercial bank ensures best services to their customers. The success of
a bank depends on the services provided by the bank. Customer chooses those
banks that provide improved services.
1.9.7. Principle of Secrecy
Customers want to keep secret about their valuable assets and money. So
banks must have to keep secret about their customer’s account. If a commercial
bank does not maintain secrecy the customer will be dissatisfied.

21
1.9.8. Principle of Efficiency
The commercial bank should operate their business efficiently. So that
they can succeed at the objective. In this competitive market, there is no
alternative way without efficiency in management. So commercial bank must
train their employees to increase the efficiency in management.
1.9.9. Principle of Location
Commercial banks must have to locate their branches in the commercial
area where many customers are available. The location must be safe for the
customers and easy communication system must exist.

1.10 SWOT ANAYLISIS

1.10.1 STRENGHTS

Banking is as old as Human race : Banking industry is the driving force to

any nation. It helps in shaping the life of human race may be some time merely
by Exchange (which was called barter system), or by transaction or by
facilitating advances.

Source of employment & GDP growth : There is a consensus among

economists that development of the financial system contributes to economic
growth. Financial development creates enabling conditions for growth through
either a supply-leading (financial development spurs growth) or a demand-
following. It is this industry which continuously works to secure financial
stability, facilitate international trade, promote employment, & reduce poverty
around the world.

A. Hedge from risk: Whether it is natural calamity or man-made calamity

banks mitigate the after effect of the destruction by providing financial
support to the victims to stand –up & lead a peaceful life again.
B. Diversified services: Banking industry offer services from CASA to
insurance, to loan, to investment.
22
 C. Connecting People: With the advent of new age technological
advancement Banks have made the life of the common man easier.
People can transact on real time basis in many places.
D. Changing from mere savings & loan facilitator role: Top priorities of
banks now days include regulatory compliance, improving asset quality,
enhancing customer centricity, focusing on digital convergence, and
tackling competition from non-banks. Banks are therefore making
business and technology investments to change their business models.

1.10.2 WEEKNESSES

E. Lack Of coordination: The global banking industry faces short-term

uncertainty due to the debt crises that challenge several major economies.
Industry assets stand at $143 trillion (2013)&the EU is the largest
regional market, with over 57% of the global market. Volatility in
different market/Currencies has created problems for the banks in order to
work properly across the borders.
F. Vulnerable to risk: Since this sector deals with finances, it is the most
risky sector which can change the fate of any business/Industry.
G. High NPA’s: Rise in Retail & corporate NPA’s (Non-performing assets)
is the single major issue this sector is going through worldwide.
H. Can’t reach to Under-penetrated market: Due to several conflicting
objectives of government & banks which goes hand in hand, rural areas
of developing nations are still not in the shadow of banks. Although
PMJDY (PradhanMantri Jan DhanYojna) implemented by the Indian
banks got acknowledged by World Bank for financial inclusion but the
Idea is not fully capitalized even in the home country.

Structural weaknesses such as a fragmented industry structure,

restrictions on capital availability and deployment, lack of institutional support

23
infrastructure, restrictive labor laws, weak corporate governance, Political
pressure and ineffective regulations.

1.10.3. OPPORTUNTIES

A. Expansion: Penetrating to the rural markets & bringing the rural masses
under the purview of organized banking will be the objective of the
Banks in decades to come.

Changing Socio-cultural & demographic factors: Given the demographic

shifts resulting from changes in age profile and household income,
consumers will increasingly demand enhanced institutional capabilities
and service levels from banks.

B. Rise in private sector banking: Banking Industry across the world is

highly regulated &lead by PSU’s with their respective central banks.
With the advent of private sector banks this sector is going through
structural & functional changes mainly due to the adaptation of the
advanced technologies & increased competition thereby benefiting to the
end customers.

1.10.4. THREATS

A. Recession: It is one of the major threats to the financial system of the

nation. Traumatic shock of Economic crises & collapse of the several
businesses can affect the banks and vice-versa.
B. Stability of the system: Failure of some weak banks has often threatened
the stability of the system.
C. Competition: Competition from NBFC’s (Non-banking financial
companies) like insurance companies & mutual fund companies can
affect the business of Banks.

Here are some popular banks, the SWOT analysis of which is analysed on

24
Marketing.

25
 CHAPTER:-2
REVIEW OF LITERATURE

A study on public and private sector banks and their study shows that
quality gap between expectations of consumers and perceptions of service
delivered is highest in public sector banks and lowest in private sector banks.
Another study found out that public sector banks are better than private sector
banks. Other studies and their findings are given below

Joseph M. et al (1999)- The study investigates role of technology on

Australian banking sector and 300 customers were surveyed. The findings
suggested that except from convenience/accuracy and efficiency e banking
services did not match with importance rating specified by customers.

Bahia, K and J Nantel (2000)- The paper suggested an alternative scale

for measuring service quality in retail banking. The study developed a scale
called as Banking Service Quality Scale which contained factors like
effectiveness and assurance, access, price, tangibles, service portfolio and
reliability. This model was found to be more reliable than SERVQUAL

Jamal, A., Naser, K., 2002- The study examined key drivers of customer
satisfaction using 167 customers and it was found that core and relational
performances had impact on customer satisfaction and there was negative
relationship between customer expertise and customer satisfaction

Sureshchandar et al(2002).- The study examined relationship between

service quality and customer satisfaction in Indian banking sector. These were
found to be independent but closely related. Both constructs vary significantly
in core services ,human element, systematization of service delivery, tangibles
and social responsibility.

26
 GaniA,Mushtaq Bhatt(2003)-The study is conducted to do a comparative
study of service quality of commercial banks and its dimensions in commercial
banks. SERVQUAL is used and sample size was 800 customers. The study
found out that CITI bank and Standard chartered bank are good in tangibility
and in reliability also they are good. In responsiveness parameter Indian banks
are inferior to foreign banks. In Assurance and empathy Indian banks are
inferior.

Zhou, L( 2004)- The study analysed impact of service quality in banks on

customer satisfaction in china’s retail banking and it was found out that
reliability and assurance were the primary drivers of customer satisfaction. It
was also found out that there were significant variations in expectations and
perceptions in customers

Arora S (2005)- This study analysed factors influencing customer

satisfaction in public sector, private sector and foreign banks in northern India.
300 customers were given questionnaires which reveled that significant
differences exist in customer satisfaction level of customers in each group of
banks regarding routine operation and situational and interactive factors.
Foreign banks were found to be the leaders in mechanization and automation
Debashis.

Mishra(2005)-The study analysed and measured customer satisfaction in

branch services provided by nationalized banks in northern India . 1200
customers were given questionnaires and it was found out that computerization,
accuracy in transactions, attitude of staff and availability of staff influenced
customer satisfaction. Least important factor was promotion of the products and
various schemes.

27
 A J, V Moli, P. Koshi (2005)- The study evaluated and compared service
quality in old and new banks using sample size of 480. The study found out that
customers were satisfied in reliability, empathy and price and for other
parameters the difference between expectations and perceptions were smaller
than public sector banks

Sharma and Sharma( 2006)-The study analysed customer delight in

urban consumer banking. The study found out that customers were satisfied
with loan facilities, bank environment, routine work procedures, location
,interest rates etc and were dissatisfied with loan formalities and promotion
through media.

Sharma S, et al (2007)-The study did a comparison of public and private

banks with respect to perceptions of customers regarding service quality. It was
found out that service quality is associated with satisfaction and there was
significant difference between quality of services provided by banks. Banks in
smaller cities are far behind big cities in this regard

P K Gupta(2008)-Objective of this study was to find out the behavior of

customers with respect to internet banking vis-à-vis conventional banking. The
study found out that internet banking was found to be easier and speedier than
conventional banking and trust, accuracy and confidentiality were the most
important factors here.

Padhy P K and B N Swar(2009)- the paper investigated role of

technology in banking and its impact on perceived service quality in public,
private and foreign banks in Orissa using a s ample size of 300 customers.
Foreign bank was found to be very close to expectations of customers followed
by ICICI and AXIS. Service quality in public sector banks was found to be very
low Rod et al(2009)-The study focused on relationship between service quality,
overall internet banking service quality and customer satisfaction in New

28
Zealand. The study found out that online customer service quality and online
information systems were significantly and positively related to overall
customer internet banking service quality. Overall internet banking service
quality and customer satisfaction were positively correlated

Dr Ravichandran et al(2010)- The paper analyses existing study and tries

to understand socio demographic and rational profile of public retail banking
consumers. It also finds out the importance of service quality dimensions to
predict the multidimensional model of behavioral intentions among public
sector consumers in India. Loyalty was found to be influenced by operating
hours, modern equipments, error free records etc. Service quality parameters
like tangibility, responsiveness and empathy dimensions were also found to be
very important.

Kumbhar, Vijay (2011)- It examined the relationship between the

demographics and customers’ satisfaction in internet banking,. It also found out
relationship between service quality and customers’ satisfaction as well as
satisfaction in internet banking service provided by the public sector bank and
private sector banks. The study found out that overall satisfaction of employees,
businessmen and professionals are higher in internet banking service. Also it
was found that there is significant difference in the customers’ perception in
internet banking services provided by the public and privates sector banks.

Kailash M (2012)- The paper compares public and private sector banks in
Vijayawada city using SERVQUAL model. The findings revealed that private
sector banks have good services to customers and they retained customers by
providing better facilities. The study finds out importance of new products and
services for banks for retaining customers. The studies mentioned above clearly
points out to the importance of having a structured study on this where banks in
different categories are compared with respect to the service quality aspect

29
which will help them to find out their core competencies and to capitalize on
them and at the same time find out the areas where they can improve.

30
 CHAPTER:-3
Research And Methodology

Methodology is the systematic method of an activity which is use to

collect the information required to complete this project work.

3.1 Research problem

A study was conducted to know the definition of the problem and an

understanding of the environment. This help to concentrate on important areas
of the problem of various factors that affect consumer behaviour.

3.2 Research design

A research design call for developing the most efficient plan for gathering
the needed information the design of research study is based on the purpose of
the study.

There is one way to collect information and data and information are as
follows,

3.3 Secondary data:

This is secondary in nature i.e already collected information.

This secondary data is collected through-

 Magazine
 Internet

31
 CHAPTER:-4

INTRODUCTION OF IDBI BANK

4.1 INTRODUCTION:-
IDBI Bank is an Indian government-owned financial service company,
formerly known as Industrial Development Bank of India, Headquartered
in Mumbai, India. It was established in 1964 by an Act of Parliament to provide
credit and other financial facilities for the development of the fledgling Indian
industry. Central government is the owner of this bank and employees will be
called as Central Government staffs.
It is currently 10th largest development bank in the world in terms of
reach, with 3700 ATMs, 1995 branches, including one overseas branch at
Dubai, and 1382 centers. It is one of 21 commercial banks owned by the
Government of India. The Bank has an aggregate balance sheet size of INR
3.74 trillion as on 31 March 2016.

32
4.2 FORMATION OF INDUSTRIAL DEVELOPMENT BANK OF INDIA
(IDBI):-
The Industrial Development Bank of India (IDBI) was established in 1964
under an Act of Parliament as a wholly owned subsidiary of the Reserve Bank
of India. In 1976, the ownership of IDBI was transferred to the Government of
India and it was made the principal financial institution for coordinating the
activities of institutions engaged in financing, promoting and developing
industry in India. IDBI provided financial assistance, both in rupee and foreign
currencies, for green-field projects as also for expansion, modernization and
diversification purposes. In the wake of financial sector reforms unveiled by the
government since 1992, IDBI also provided indirect financial assistance by way
of refinancing of loans extended by State-level financial institutions and banks
and by way of rediscounting of bills of exchange arising out of sale of
indigenous machinery on deferred payment terms.
After the public issue of IDBI in July 1995, the Government shareholding
in the Bank came down from 100% to 75%.IDBI played a pioneering role,
particularly in the pre-reform era (1964–91), in catalyzing broad based
industrial development in India in keeping with its Government-ordained
development banking’ charter.
Some of the institutions built with the support of IDBI are the Securities
and Exchange Board of India (SEBI), National Stock Exchange of India (NSE),
the National Securities Depository Limited (NSDL), the Stock Holding
Corporation of India Limited (SHCIL), the Credit Analysis & Research Ltd,
the Exim Bank (India), the Small Industries Development Bank of
India (SIDBI) and the Entrepreneurship Development Institute of India.

4.3 LISTINGS AND SHAREHODING:-

IDBI Bank's equity shares are listed on Bombay Stock Exchange and
the India. As on 31 March 2016, Government of India held 73.98% shares in

33
IDBI Bank and Life Insurance Corporation of India held approx. 14.37% of the
shares.

4.4 CONVERSION OF IDBI INTO A COMMERCIAL BANK:-

A committee formed by RBI recommended the industrial development
financial institution (IDBI) to diversify its activity and harmonies the role of
development financing and banking activities by getting away from the
conventional distinction between commercial banking and developmental
banking. To keep up with reforms in financial sector, IDBI reshaped its role
from a development finance institution to a commercial institution. With
the Industrial Development Bank (Transfer of Undertaking and Repeal) Act,
2003, IDBI attained the status of a limited company viz., IDBI Ltd.
Subsequently, in September 2004, the Reserve Bank of India incorporated
IDBI as a 'scheduled bank' under the RBI Act, 1934. Consequently, IDBI,
formally entered the portals of banking business as IDBI Ltd. from 1 October
2004. The commercial banking arm, IDBI BANK, was merged into IDBI in
2005.

4.5AWARDS AND RECOGNITIONS:-

A. IDBI Bank was ranked 1197 in the Forbes Global 2000 in May 2013.

B. It received the 'Overall Best Bank' and 'Best Public Sector Bank' awards in

the Dun & Bradstreet Banking Awards, 2011.

C. In 2011, it received Banking Technology awards for best use of Business

Intelligence and the best Risk Management from Indian Banks Association.

34
 4.6 ISSUES:-
A. On 29 feb 2016, the Finance Minister Shri Arun Jaitley declared that there
is a chance of dilution of the Government of India stake in IDBI Bank to
below 50%.

35
 CHAPTER:-5

FUNCTIONS OF IDBI BANK

Prior to the setting up of the IDBI, a fairly wide network of Financial

Institutions (FIs) have emerged in India as a result of deliberate and purposive
efforts made by Government and RBI after independence. Though these
institutions have served with a degree of success to meet the growing
requirements of the expanding industrial sector, but they didn’t adequately meet
the requirements of long term finance and of rendering promotional services to
the industry. Statutory obligations and the traditions of these financial
institutions were serious constraints in this regard. Moreover, their overlapping
services created confusion in the minds of borrowers and there was no effective
mechanism to co-ordinate and integrate the functioning of the diverse
institutions in the field. Thus, there was the need for “a co-ordinating machinery
which could establish working relationship with other financial institutions and
build up a pattern of inter-institutional cooperation that can facilitate the
evaluation of a rational and cohesive structure of financial institutions, adapted
to the changing needs of emerging industrial structure with its growing
complexity of inter-relationship. Further, a central development institution was
essential to provide dynamic leadership in the task of promoting a widely
diffused and diversified yet viable process of industrialization”. It was against
this background that IDBI was established in July 1964. It is functioning as an
apex institution co-ordinating and supplementing the operations of Financial
Institutions providing long term finance to industry and as an agency for giving
direct finance assistance to fillin the gaps. IDBI was established as a wholly
owed subsidiary of RBI, but it was delinked from Reserve Bank Act 1976. IDBI
is empowered to undertake considerably broader range of functions as
compared with other financial institutions. IDBI Act permit full operational
flexibility and freedom to meet any problem related to industrial development in
36
general and industrial finance in particular. This covers all kinds of industrial
organisations, both in the public and private sector and there is no upper or
lower limit with regard to the amount of assistance or the size of project which
it can finance. There is no restrictive provision in the IDBI act regarding the
nature and type of security to be obtained. The main functions of IDBI, as its
name suggests, is to finance industrial enterprises such as manufacturing,
mining, processing, shipping and other transport industries and hotel industry.

Broadly, the functions of IDBI can be classified into the following

categories:

a) Co-ordinating function

b) Financing function

c) Promotional function

a) CO-ORDINATING FUNCTION

According to George Terry “Co-ordination deals with the task of binding

efforts in order to ensure successful attainment of an objective. It is
accomplished by means of planning, organizing, actuating and controlling”. Co-
ordination is like a thread in a garland and therefore, its presence is felt in all the
activities and functions management” Co-ordination is the effort to ensure a
smooth interplay of the functions and forces of all the different institutions
doing the same work so that its purpose will be realized with a minimum of
friction and a maximum of collaborative effectiveness. “It makes diverse
elements and sub systems of organizations to work harmoniously towards the
realization of common objectives”.“Co-ordination is the process whereby an
Apex institution develops an orderly pattern & group effort among his
subordinates and secures unity of action in the pursuit of common purpose”.

37
 Co-ordination is a conscious and rational process of pulling together the
different parts of an organization and unifying them into a team to achieve
predetermined goals in an effective manner. According to Henry Fayol – “To
co-ordinate is to harmonise all the activities of different concerns so as to
facilitate the working and success. In a well co-ordinated team, each institution
works in harmony with others and is fully informed of its role in the
organization. The working schedules of various institutions are constantly tuned
to circumstances.” The IDBI co-ordinates the functions and operations of all
the financial institutions, including the IFCI, the ICICI, the LIC, GIC and the
UTI into as single integrated financial structure so that each may contribute to
the total effect – the growth of the economy. To serve as the apex institution for
term finance for industry, to co-ordinate the working of institutions engaged in
financing, promoting or developing industries and to assist in the development
of these institutions. The IDBI is vested with the responsibility of co-ordinating
the working institutions engaged in financing, promoting or developing
industries. It has evolved an appropriate machinery for this purpose. The
appraisal and supervision of projects assisted on a consortium basis one co-
ordinated to avoid duplication work and delay.

b) FINANCING FUNCTION

The main function of IDBI, as its name suggests, is to finance industrial

enterprise such as manufacturing, mining, processing, shipping and other
transport industries and hotel industry. As an industrial financier, the IDBI
would assist all the deserving projects (regardless of their size), which
experience enormous problems in assembling funds from normal channels. Its
endeavour in this regard is to ensure that no worthwhile project, however, small,
is allowed to languish for want of, or insufficiency of, institutional support. The
bank can assist a project, directly and indirectly. Financial assistance sanctioned
by IDBI consists of broadly two groups:

38
i) Direct Assistance

ii) Indirect Assistance

i) Direct Assistance /Finance

Direct financial assistance to industrial projects are given by IDBI in

similar ways in which other financial institutions normally provide. It grants
direct assistance by way of project loans, under writing of and direct
subscription to industrial securities, soft loans, technical refunds loans and
equipment finance loans. It subscribes to purchase and underwrites the issue of
stocks, shares and bonds of debentures. The loans and advances which IDBI
makes to any industrial concern may be converted into equity stocks and shares
at a later date by IDBI. The bank is also empowered to guarantee loans raised
by industrial concerns in the open market from scheduled banks, the state co-
operative banks, IFCI and other ‘notified financial institutions. IDBI can also
accept, discount or rediscount bonafidecommercial bills or promising notes of
industrial concern. In direct lending the bank resembles IFCI and ICICI.
However, it has greater freedom of operation and can endeavour to secure
collaboration of other institutions in the fields of technical scrutiny and financial
partnership. IDBI also grants export finance in the form of direct loans and
guarantee to exporters in participation with banks refinancing of medium term
export credit granted by banks and overseas buyer’s credit. Direct assistance is
usually granted for the acquisition of fixed assets for new units as well as for
expansion, modernization or renovation of existing units. It is usually provided
to large scale and medium sized projects which have not been able to obtain
their full requirements from other term financing institutions. Since the IDBI
has been created to supplement and not to supplant other activities of other
financial institutions, it normally prefers not to assist projects whose needs can
be met by other institutions.

39
ii) Indirect Assistance /Finance

The Industrial Development Bank of India (IDBI) can assist industrial

concerns in an indirect manner also, i.e. through other institutions. IDBI
assistance to other institution also includes its rediscounting scheme. Firstly, it
can refinance term loans to industrial concerns, repayable within 3 to 25 years
given by the IFCI, the state Financial Corporations and other Financial
Institutions. Secondly, it can refinance term loans repayable between 3 and 10
years given by scheduled banks or state co-operative banks. Thirdly, it can
refinance export credit given by the Scheduled banks and State co-operative
banks. Thus, IDBI finances those banks and financial institutions which are
lending to industrial concerns. Finally, IDBI has subscribed to the stocks,
shares, bonds and debentures of I.F.C.I., the State Financial Corporations and
other “notified” financial institutions so as to increase their financial resources
and enable them to provide larger assistance to industry.

5.1 COMPOSITION OF ASSISTANCE

Financial assistance sanctioned by IDBI consists of broadly two groups:

i) Direct Assistance, and

ii) Indirect Assistance

i) Direct Assistance

IDBI, approach with regard to direct financial assistance has been

governed by its apex character, its vantage position for assisting the financing of
industry in participation with other financial institutions and the special
responsibility vested in it to fill the gaps in the industrial structure and to
develop certain vital and strategic sectors of the economy. As the lender of the
last resort, it endeavours not only to fill in the gaps that remain after taking into
account the assistance provided by other financial institutions, but also takes

40
lead in the appraisal of the project and in arranging for the necessary quantum
of financial assistance.

IDBI’s direct assistance to industry is extended mainly under its project

finance scheme in the form of loans, underwriting of and direct subscription to
shares and debentures and guarantees and to a Limited extend under the
Technical Development Fund Scheme. Assistance under the Textile
Modernisation Fund, Venture Capital Fund, Technology Upgradation and
Equipment Finance for Energy Conservation Schemes also included under the
project finance scheme. Direct assistance sanctioned by IDBI to industrial
concerns consists of four different forms as follows :

a) Grant term loans and advances

b) Underwriting and Direct Subscription

c) Guarantees, and

d) Technical Development Fund.

a) Grant Term Loans and Advances

IDBI generally provides loans to industrial concerns directly for periods

ranging between ten to twelve years inclusive of grace period of 2-3 years.
Loans constitutes the single most important component of IDBI’s direct
assistance.

b) Underwriting and Direct Subscription

IDBI also finances industrial concerns through underwriting and direct

subscription to shares and debentures issued by them, but their magnitude has
been limited. IDBI like other financial institutions such as IFCI, SFS, etc. acts
primarily as a term lending agency and its underwriting and investment activity
is at a miserably low level. Despite this, IDBI has emerged as the most

41
important development bank in the sphere of underwriting in India next only to
ICICI. A notable feature is that its underwriting operations are reflecting the
accent on ‘promotional’ aspects as a major share of its underwriting operations
pertains to issues of risk capital. Equally important is the fact that the issues of
capital by new companies occupy a permanent place in IDBI’sunderwriting
operations.

c) Guarantees

Guarantee the differed payments due from industrial concerns to third

parties and the loans raised by them in the pan market or from financial
institutions. Apart from loans and underwriting, IDBI also grants direct
assistance to industries in the form of guarantees for loans and deferred
payments. In fact, IDBI seems to have discontinued the practice of extending
guarantees facility to industrial concerns since 1974-75.

d) Technical Development Fund

IDBI providing working capital to projects assisted by the Bank. Since

1976, IDBI also provided direct assistance to industrial enterprises under the
technical Development Assistance Scheme. The Government of India in March
1976 created a special fund called Technical Development Fund, in order to
promote fuller utilization of capacity, technical upgradation and export
development. Technical Development Fund provides foreign exchange for
imports of small value balancing equipment, technical know-how, foreign
consultancy services and drawings and designs.Over the years, IDBI is taking
an increasing interest in the Technical Development Assistance Scheme. This is
a healthy development.

42
ii) Indirect Assistance

IDBI provides a significant part of its total assistance to industrial

concerns indirectly through other financial institutions like SFCs, SIDCs,
Commercial banks and cooperative banks, etc. There has been continuous
increase in the amount of indirect assistance sanctioned by IDBI, but the rate of
increase of assistance has varied from year to year. It is clear that in consonance
with its evolving role as apex development bank, IDBI has been adapting its
operational policies as a natural concomitant of which more emphasis has
progressively come to be placed on indirect assistance for financing of
industrial enterprises.

IDBI extends its indirect assistance basically through four important

way. They are :

a) Refinancing of Industrial Loans

b) Rediscounting Assistance

c) Subscription of Shares and Bonds of Financial Institutions.

d) Seed Capital Assistance.

Since 1976-77, IDBI is providing indirect assistance in a limited amount

through its Seed Capital Assistance Scheme also.

a) Refinance of Industrial Loans

A major proportion of IDBI’s indirect assistance to industrial sector is

provided by way of refinance of industrial loans, its refinance facility is
available to IFCI, SFCs, commercial banks, cooperative banks and SIDCs,
SIICs. Regional Rural Banks are also eligible to avail of refinance assistance
from, IDBI. The loans to be refinanced must have a maturity of 3 to 25 years in
case of IFCI and SFCs and 3 to 10 years in the case of commercial and

43
cooperative banks. Generally IDBI provides 80 percent of the loans given by
financial institutions, but in case of small enterprises and units located in
backward areas it can beupto 100 percent of the loans given by financial
institutions. Refinance assistance has been single most important form of
indirect assistance of IDBI. A notable feature of IDBI’s refinance assistance is
that about two-third of its total refinance assistance has gone to the small
scalesector. IDBI is providing assistance to small sector indirectly through
SFCs, SIDCs/ SIICs, commercial banks, cooperative banks and regional rural
banks which are the major beneficiaries of refinance assistance of IDBI.

Institution-wise refinance assistance has undergone significant changes

over the years. Though SFCs continue to get the largest share in the total
refinance assistance of IDBI, but their relative share has declined significantly.

b) Rediscounting Assistance/ Bills Finance

There are two schemes viz. Bills Rediscounting Scheme and Direct
Discounting of Bills Scheme through which IDBI grants bills finances to
industrial concerns. Bills Rediscounting Scheme was introduced in April 1965
to help the use of indigenous machinery. Under the scheme, IDBI rediscounts
bills of exchange/ promissory notes covering instalments payment basis.
Originally scheme was applicable to only six industries, namely, cotton, jute,
silk, cement, sugar and paper machinery. But, over the years, scheme has been
considerably expanded in scope and now it covers all machinery manufacturing
industries in India. Since 1968 it has been extendedto cover purchase – users in
the public sector such as State Electricity Boards, State Road Transport
Corporations and Government companies.

Direct Discounting of Bills Scheme has been introduced by IDBI in June

1988. Under the scheme, IDBI directly discounts bills promissory notes to
machinery manufacturers who have been in production for a minimum period of

44
five years with a good track record. Scheme has initially been extended on a
selective basis. Under the Bills Rediscounting Scheme, there has been sharp
increase in the absolute amount sanctioned by IDBI. Other industries assisted
under the scheme were food manufacturing, jute, chemicals transport
equipment, paper, etc., but their share is very low. IDBI’s bills rediscounting
assistance is mainly concentrated to four industries viz. electricity generation,
textiles, road transport and machinery. This is not a healthy trend and assistance
should be spread to other industries too.

c) Subscription to Shares and Bonds of Financial Institutions

As a purveyor of supplementary resources, IDBI has provided financial

assistance to other financial institutions through subscription to their share
capital and bond issues. Financial institutions to which such assistance has been
extended are IFCI, ICICI, IRBI, UTI, SFCs, SIDCs and NSIC, etc. Despite
increase in the absolute amount of IDBI’s resources support to other financial
institutions, its relative importance has declined over the years. This should not
be surprising as these subscriptions are intended only to strengthen the financial
position of financial institutions so that their lending capacity is increased.

d) Seed Capital Assistance

Since 1976, IDBI has introduced Seed Capital Assistance Schemes. The
objective of these schemes is to help such entrepreneurs who have technically
feasible and economically viable projects and possess the enterprise but lack
adequate financial resources to put in the promoter’s contribution. Thus, Seed
Capital Assistance Scheme is intended to make-up or supplement promotor’s
contribution. IDBI should reverse this trend and take active part to help the new
entrepreneurs to set-up new projects and accelerate the pace of industrial
development in the country. SPECIAL ASSISTANCE. The industrial
Development Bank of India Act, 1964, has provided for creation of a special

45
fund known as the Development Assistance Fund. This fund is used to assist
those industrial areas which are not able to secure finances in the normal course
because of low rate of return.

5.2 FOREIGN CURRENCY REQUIREMENTS

IDBI raises foreign funds from international money markets and

international funding organizations and makes them available to Indian
industrial units. It is interesting to note that unlike the other existing statutory
financial corporations, IDBI has no restrictions imposed regarding the nature
and type of security which it should accept. IDBI provides direct loans to
industrial concerns, refinance of industrial loans and export credits,
rediscounting of bills, underwriting of and direct subscription of shares and
debentures of industrial units and direct loans for exports. Till 2000-01, IDBI
became the most important institution assisting industrial units.

5.3 ASSISTANCE TO BACKWARD AREAS

With a view to promote industrial development in backward areas, IDBI

announced in July 1969 a scheme for assistance to small and medium projects
in such areas on softer terms, such as concessional rates of interest, longer grace
and repayment periods. IDBI adopted several measures to encourage flow of
institutional finance to the small scale sector. The scheme was revised and
liberalized later. Under the liberalized scheme, IDBI in participation with IFCI
and ICICI gave concessional rupee assistance up toRs. 2 crores and
underwriting assistance up to Rs. 1 crore. The IDBI’s concessional assistance
and refinance of loans for backward areas increased steadily in terms of number
of applications and amounts sanctioned and utilized.

46
5.3 Refinance facilities by IDBI, IDBI took over the Refinance

Corporation of India in November 1964 and was providing refinance

facilities to industrial units through member banks. As an apex institution, the
IDBI assists State Financial Corporations, the IFCI, Leasing Companies and
others working in the field of industrial finance by subscribing to their shares
and bonds. IDBI also participates in loans and guarantees to supplement the
refinance operations as a measure of risk sharing with other institutions.
Assistance to Small Scale Sector. IDBI extends assistance to small scale
industries and small road transport operators indirectly through State Level
Institutions and commercial Banks by way of refinance of industrial loans. IDBI
introduced a scheme to cover promissory notes arising out of sales of new
trucks and jeeps to road transport operators in the private sector. The IDBI’s
assistance to small scale industries and small road transport operators was
picking up very fast.

IDBI launched the National Equity Fund Scheme in 1988 for providing
support, in the nature of equity to tiny and small scale industrial units engaged
in manufacturing cost not exceeding Rs. 5 lakhs. The scheme was administered
by IDBI through nationalized banks. IDBI introduced the single window
scheme for grant of term loans and working capital assistance to new tiny and
small scaleunits. Finally, IDBI set up a Voluntary Executive Corps Cell
(VECC) to utilize the services of experience professionals for counselingsmall
units, tiny and cottage units and for providing consultancy support in specific
areas.

The Government of India set up the Small Industries Development Bank

of India (SIDBI) under SIDBI Act, 1989 as a wholly-owned subsidiary of IDBI.
SIDBI started functioning from April 1990 and has taken over the responsibility
of administering small industries Fund and National Equity Fund which were

47
formerly administered by IDBI. SIDBI has become the principal financial
institution for promotion, financing and development of small scale industries.

Balanced Regional Development. Since 1970 IDBI had initiated certain

promotional and developmental activities to meet the twin objectives of
balanced regional development and accelerated industrial growth. In co-
operation with other term-lending institutions. IDBI had completed industrial
potential surveys in all States and Union Territories.

Soft Loan Scheme. IDBI introduced in 1976 the soft loan scheme to
provide financial assistance to productive units in selected industries, viz.,
cement, cotton textiles, jute, sugar and certain engineering industries on
concessional terms to enable them to overcome the backlog in modernization,
replacement and renovation of their plant and equipment so as to achieve higher
and more economic levels of production. The scheme was administered by IDBI
with financial participation by IFCI and ICICI. The basic criterion for assistance
under the scheme was the weakness of the units on account of obsolescence of
machinery. The rate of interest was 7.5 percent and the period of loan was 15
years. The pace of disbursement was very slow as the soft loan scheme was not
attractive to the private sector units because of the convertibility clause. In
January 1984, the soft loan scheme was modified – now called Soft Loan
Scheme for Modernisation so as to cover deserving units in all industries. Under
the modified scheme, assistance is available to production units for financing
modernization primarily aimed at upgradation of process, technology and
product, export orientation, import substitution, energy saving, prevention of
pollution, recycling of wastes and by-product etc. Other changes and relaxations
were also made to make the scheme attractive and popular.

IDBI permitted by SEBI to carry out merchant banking activities which

cover professional advice and services to industry for raising capital from the

48
market, acquisition of assets on lease, mergerstake-over of existing units etc.
The Merchant Banking Division of IDBI, in the first 2 years of its existence had
lead-managed 118 issues and had helped to mobilize Rs. 12,340 crores from the
market.

5.4 PROMOTIONAL FUNCTION

Promotional function under this category includes such activities as

marketing and investment research and surveys as well as technological studies.
It can also provide technical and administrative assistance to any industrial
concern for promotion management or expansion. IDBI also plans, promotes
and develops industries to fill gaps in the industrial structure of the country.
During the many years of its operations, IDBI evolved number of innovative
scheme of assistance and under look various promotional activities to meet the
growing needs of the industrial sector. Since 1970, IDBI has taken several
measures to step up pace of industrialization in the relatively backward regions
of the country. The IDBI is authorized to perform promotional activities with a
view to bringing about a viable industrial development especially in the less
developed areas. These promotional activities are oriented towards meeting the
dual objectives of balanced regional development and acceleration in industrial
growth. The activities directed towards the first objective include the
identification and follow-up of projects located in backward areas. These
directed towards fulfilling the second objective include efforts at building up an
appropriate framework for industrial development. In fulfillment of its
developmental role, IDBI continues to perform a wide range of promotional
activities relating to developmental programmes for new entrepreneurs,
consultancy services for small and medium enterprises and programme
designed for accredited voluntary agencies for economic upliftment of the under
privileged. This includes entrepreneurship development, self employment and
wage employment in industrial sector for weaker sections of the society through

49
voluntary agencies. Support to science and Technology Entrepreneurs’ Parks,
Energy Conservation

and Common Quality Testing Centres for small industries. IDBI has
contributed to the creation and widening of the entrepreneurial base and
building up the requisite infrastructure to support this process through a range of
activities. In particular, it has set up, in participation with other financial
institutions, a network of institutes like Entrepreneurship Development Institute
of India (EDII)at Ahmedabad, which also acts as the principal agency to
coordinate the activities of various agencies in this field, and Institutes of
Entrepreneurship Development (IED) with the objectives to foster the spread of
Entrepreneurship development, initiating surveys and studies to identify
industrial potential etc. Thus we see that IDBI has been doing its best since
1964 for the promotion and development of industries in the country. It has
been the most important financial institution meeting the different needs of
industries through its operations since inception. The aboveand many other
schemes of assistance of IDBI are designed to promote industrial development
in the country. IDBI also plays an important role in under taking export
guarantees which constitute a major support for achieving contracts abroad.
The focus of IDBI’s promotional thrust during these years has been to
strengthen the existing institutional network, including the inter-institutional co-
ordination, and to evolve appropriate strategy for the development of industries
in backward areas.

5.5 RTGS SOLUTION FROM IDBI BANK LTD.

When time is of the essence, IDBI Bank Ltd. launches its latest offering,
Real Time Gross Settlement (RTGS) payment, a solution for faster and most
efficient settlement of esteemed customers. This payment mechanism will
enable funds to be received recipient intraday rather than the net settlement

50
system exchanges that occur and coined the banking hours. The RTGS product
would enable beneficiary the following:

 Speed – Guaranteed & Fast settlement of transactions.

 High Liquidity – Lowering interest cost.
 Better Funds Management – Ensures optimum planning
 and utilization of funds.
 Hassel free HV settlement – Elimination of collections
 through physical HV clearing.
 Reduces Paper work and improve efficiency.
 Reduces operational risk & systematic risk.
 IDBI Bank Ltd. offers the beneficiary the following RTGS
 product solution competitive terms.
 Products
 Single Transaction/ Regular Transaction
 Bulk Payment Product
 Transaction Initiation By Customer For Outward Payouts
 The customer fills in the RTGS Application form in duplicate
 giving the particular Beneficiary and authorizes the
 Remitting branch of IDBI Bank to remit a specified amount
 the beneficiary by raising a debit to the customer’s
 (remitter’s) account.
 After verification, IDBI Bank will debit the customer account.
 If all the details of beneficiary are correct, the transaction
 will successfully procure the funds which will be transferred
 to the beneficiary’s bank branch.
 Each message thus set will have a Unique Transaction

51
 Reference Number which will be given to customer and can be used as a
reference for future enquiry.

52
 CHAPTER:-6

CONCLUSIONS

1. Consumers of Mumbai have good awareness level about IDBI bank as

well as about its services and products.
2. The advertising campaign has successfully been able to increase the
market share of IDBI in Mumbai.
3. The modern day’s technology like internet banking, phone banking, used
by IDBI bank for providing banking services has sent positive signals in
the mind of consumes.
4. The network of IDBI in Mumbai is lagging behind a little than its
competitors like ICICI bank and HDFC bank.
5. It can be distilled from data that IDBI bank has good market share as
compared to its competitors considering the amount of resources
deployed by them in the market.

53
 CHAPTER:-7
BIBLOGRAPHY
7.1 BOOKS
 R.S. Sharma, Business statistics, First India Print, India, 2004,
 Aaker Kumar and Day, Marketing research, 6thEd.,john willy &
sons,1997.
 ICFAI Journal of Banking
 Mishra And Pury (2006) “Indian Economy” Himalaya Publishing House.
 Indian Economy S Chand & Co. K KDewett (2002) “ Finance”.
 Jayashree Bose,(2001) “Bank Merger The Indian Scenaring” the ICFAI
University press.
 Amitbasak (2010) “IDBI Bank” new century publication.
 Dr. N. Kannan (2008) “Banking Sector In India” Abhishek Publication.
 E. Gordon, p.kgupta (2008) “Banking And Insurance” Himalaya
Publication.
 The Economics times
 The Times of India

7.2 WEBSITES

 www.idbibank.com
 http://en.wikipedia.org/wiki/Bank#History
 http://en.wikipedia.org/wiki/BankinginIndia#Early_history
 http://en.wikipedia.org/wiki/Banking regulation.
 http://rbi.org.in>scripts>ic-currency

54