CHAPTER II

BANKING SECTOR REFORMS IN INDIA AND DEPOSIT

MOBILIZATION

2.1 Introduction

2.2 Banking Sector Reforms in India

2.3 Deposit Mobilization by Banks In India

2.4 Expert Committees Recommendations on Deposit Mobilization

2.5 Government Intiatives for Deposit Mobilization

2.6 Summary
 CHAPTER II

BANKING SECTOR REFORMS IN INDIA AND DEPOSIT

MOBILIZATION

2.1 INTRODUCTION

Banking is an ancient business in India. The Indian banking system is

unique due to its geographic, social and economic characteristics and perhaps
has no parallels in the annals of banking in the world. The period of five
decades witnessed many macro-economic developments, changes in monetary
and banking policies and the external forces that influenced the evolution of
Indian banking system in different ways over a period of time. In this chapter, a
sincere attempt has been made to highlight the banking sector reforms,
conceptual framework of deposits and their mobilization by banks in India and
the salient features of deposit mobilization by scheduled commercial banks
(SCBs) in India. The strategies adopted by the Central Government and
Reserve Bank of India (RBI) to increase the level of deposit mobilization by
banks have also been evaluated.

2.2 BANKING SECTOR REFORMS IN INDIA

The evolution of reform in Indian banking can be broadly classified into

three important phases.

2.2.1 FIRST PHASE: 1968 (BEFORE NATIONALISATION)

The banking industry which faced a turmoil due to spate of bank failures
prior to and after independence, got the opportunity to breath in a changed
environment (with nationalization of Reserve Bank of India on 1-January
1949). After independence, the institutional structure of banks and all matters
concerning policy, planning, operations and procedures have undergone a
radical range. Reserve Bank of India was conferred with wide powers of

32
supervision, control, direction and inspection of scheduled and non –scheduled
banks under the Banking Companies Act, 1949 which was later christened as
Banking Regulation Act 1949, in the year 1966.1

The Reserve Bank of India, which was vested with greater powers of
control over the banks, started collecting data from 1949 on various aspects of
banking. There were 620 banking companies, big and small, scheduled and non
–scheduled, operating mostly in state capitals and in urban centers. The total
number of branches was 4,263. Total deposits and advances were ` 997crore
and ` 518crore respectively. Investments were ` 376 crore. Imperial Bank of
India was the biggest one in those days with 433 branches2. Another important
during this phase was the nationalization of Imperial Bank of India on July1,
1955 and was restyled as State Bank of India (SBI).3 The banking system at the
time of independence suffered from many deficiencies Banks were almost
urban-oriented. Hence the large percentage of the rural population had to
depend on money lenders as their main source of credit. Thus the agricultural
sector, the crucial segment of the Indian economy, was not supported by
banking system in any form in this phase4

2.2.2 SECOND PHASE: 1969 TO 1991 (AFTER NATIONALISATION)

This phase began in a sedate manner with the appointment of Banking

Commission in 1969 for recommending changes in structure, procedure and
policy in the Indian banking system5. 20 commercial banks in private sector
were nationalized on July19,1969 ( 14 banks having deposits of ` 50 crore and
above which constituted 87.5 per cent of the total deposits of the scheduled

1
Dilip,Chellani,K. (2012). Banking in India: An Assessment of Changes. Southern Economist.50
(19). 5-8.
2
Velayudhan,T.K. (2002). Developments in Indian Banking Past, Present and Future. The Journal
of The Indian Institute Of Bankers. 73(4).23-27
3
Dilip,Chellani,K. (2012). Banking in India: An Assessment of Changes. Southern Economist.50
(19). 5-8..
4
Velayudhan,T.K. (2002). Developments in Indian Banking Past, Present and Future.The Journal
of The Indian Institute Of Bankers. 73(4).23-27
5
Ibid.

33
banks in the private sector, as on 31-12-1968) on April 15,1980 six more
private sector banks were nationalized having deposits of ` 200 crore and
above . The many fold objectives of nationalization were i ) A wide network of
branches ii) Huge Deposit resources and nationalization iii) Extensive credit
creation led to the banks opening more branches across the country including
remote areas and banking to mass banking6.

The total number of bank branches increased eight-fold between 1969

and 1980. This was mainly because of the opening of many rural branches
which increased 2000 in 1969 to over 15000 in 1980 and to 35000 in 1991.
The per cent age share of rural and semi urban branches in them in India. It
rose from 22 per cent and 4 per cent respectively in 1969 to 45 per cent and
25per cent in 1980 and to 58 per cent and 18 per cent in 1991.

The share of rural and semi urban branches together, in the total number
of branches increased from 26 per cent in 1969 to 76 per cent in 1991. The
objective of this phenomenal growth was to bring down the population per
branch from 60000 in 1969 to about 14000 in 1991. Even on the eve of banking
reforms, the bank branch network was widespread. Between 1969 and 1989
total deposits increased six-fold and between 1980 and 1991 the increase was
five fold. The substantial increase in total deposits was because in the rise in
the term deposits and savings deposits, which represent the savings of the
community. These two categories of deposits recorded a six fold increase in
each of the periods 1969-1980 and 1981-1999. The share of time deposits was
an average 56 per cent of total deposits for the period 1969-1991 while the
average share of savings deposits was 27 per cent. It is noteworthy that
deposits per branche was Rs0.6 crore in 1969 rose to ` 1.2 crore in 1980 and to
` 3.8 crore in 1991.


6
Reddy,N.S.N. (2011). Human Assets in PSBS Emerging Challenges. The Analyst.28
34
 Bank credit increased seven-fold between 1969 and 1980 and by five
times between 1980 and 1991. The share of priority sector in the total bank
credit increased from 18 percent in 1969 to 33 per cent in 1991. Within the
priority group, the share of agriculture was 39 per cent, in 1969, 42 per cent it
was in 1980 and it remained at that in 1991 the share of SSI sector which was
52 per cent in 1969 showed a relative decline to 37 per cent in 1980 and it was
at 42 per cent in 1991. The advance per branch was ` 0.4 crore in 1969 and it
rose to ` 0.8 crore in 1969 to ` 0.8 crore in 1980 and ` 2.1 crore in 1991.
Owing to the rural spread of bank branches, deposits were mobilized and credit
extended to genuine productive and constructive purposes of the nation7.

2.2.3 THIRD PHASE:(BAKING SECTOR REFORMS)

In India the blueprint for financial sector reform was provided by the
Narasimham Committees I and II. The first phase of reform in the banking
sector concentrated on lowering of statutory preemptions deregulation of
deposit and lending rates, initiation of prudential norms, infusion of
competition, transparency strengthening and rationalization of the regulatory
and supervisory systems. The licensing of new private sector banks and the
expansion in the number of foreign bank branches brought about a new
competitive culture in the banking system. Simultaneously, the RBI has taken
the responsibility of developing deep, liquid transparent markets.

The reform agents in the second half of the nineties focused on

structural issues such as diversification of ownership of public sector banks,
strengthening weak banks and corporate governance. In fact, there was a
feeling that inefficiency of the banking system was encouraging diversion of
domestic financial savings away from banks.


7
Velayudhan,T.K. (2002). Developments in Indian Banking Past, Present and Future. The Journal
of The Indian Institute Of Bankers. 73(4).23-27

35
 Hence the Government introduced the New Economic Policy in 1991
(NEP-1991) which is based on Liberalization, Privatization and Globalization
(LPG). Banking sector is one of the most important factors of NEP-19918.

2.2.3.1 Recommendations of Narasimham Committee on Financial System

The recommendations of the committee on financial system chaired by

M.Narasimhan, former governor of Reserve Bank of India are worth
mentioning in the context of improving the working of commercial banks. The
committee presented its report in December 1991 and its recommendations
cover a wide spectrum of public sector banks, financial institutions and also
capital markets. Some of the significant recommendations relating to banks in
brief are as follows:

New Banking Structure: The committee recommended some basic

changes in the banking structure. They are as under: (a) three or four large
banks (including State Bank of India) should be international in character;
(b) about 10 nationalized banks with a network of branches throughout the
country should be engaged in universal banking; (c) local banks functioning in
specific regions of the country; and (d) rural banks including Regional Rural
Banks should be confine themselves to rural areas and their prime business
shared financing agriculture and allied activities. Thus restructuring of banks
on four-tier system was proposed.

Enhancement of Capital Base of Banks: The committee suggested that

the banks should be allowed to raise fresh capital from the public as
inadequacy of capital becomes a cause of concern among banks. It felt that, the
capital adequacy ratio in relation to risk weighted assets should be 8 per cent by
March 1996, (it was only 2 per cent at the time of presenting the
recommendations).


8
Medhe Dilip Devidas (2007) Profitability Trends in Public Sector Banks in India During Post
Reform Period. Southern Economist.44(14).19-26.
36
 Deregulation of Interest Rates: The committee desired deregulation of
interest on loans so that it reflects market conditions. It also proposed that
interest rate on government borrowings should be closer to market-determined
rate. However, the interest rate on bank deposits may continue to be regulated.

Recovery of Bad Debts and Tribunals: Banks experience a lot of

difficulties in the recovery of loans and the over dues are mounting up. The
committee suggested that special Tribunals should be set up to speed up the
process of recovery of debts. Further, the committee recommended the setting
up of Asset Reconstruction Fund (ARF) which could take over from the banks
and financial institutions, a portion of bad debts and doubtful debts at a
discount and recover them the borrowers. The committee also suggested that
the banks should follow uniform accounting practices which should include
recognition of income from non-performing assets, and provision against
different types of debts.

Cut in Statutory Liquidity Ratio and Cash Reserve Ratio: The

committee recommended to cut down statutory liquidity ratio in phased manner
to 25 per cent over a period of five years from 1991. The committee also
recommended that the RBI should progressively reduce Cash Reserve Ratio
from its present high level.

Ending Dual Control and Functional Autonomy: The committee

suggested that the duality of control by the banking division of Ministry of
Finance as well as Reserve Bank of India should come to an end and the former
should be abolished leaving the latter to regulate the banking system. The
committee recommended functional autonomy to public sector banks and this
should be ensured by encouraging ‘competition’ in the financial sector so that
the banks could prove their ability in marketing their services and products.

Liberalization of Capital Market: The committee strongly favored

dispensation of prior approval of any issue by the government of Securities
37
Exchange Board of India (SEBI). The issuing company should be free to
decide on the nature of shares and bonds, their terms and pricing. Further, the
capital market should be gradually opened up for foreign portfolio investment.

Abolition of Branch Licensing: The committee recommended abolition

of branch licensing and opening or closing of branches at the discretion of the
individual banks except to rural branches.

Appointments and Recruitments: The committee strongly believes

that in the matters of appointment of the chief executives of the banks and
members of the board of banks, professionalism and integrity should be the
prime considerations.

The Narasimham Committee Report recommending market orientation

of the banking structure, with functional autonomy and motivation towards
profitability and competition would have far reaching consequences and the
changes outlined by the committee are in tune with the New Economic Policy
of Liberalization of the Government of India.9

“Financial liberalization program involves a system of prudential

regulation, provisioning capital adequacy, competition among the banks,
building financial infrastructure which is related to supervision, audit,
technology and legal framework, managerial competence quality of human
resources etc10.

2.2.3.2 Banking Sector Reforms – 1998

The reforms of the banking sector related to money market, Foreign

Exchange Market, Government Securities Market and Capital Market reforms.


9
Sundharam,K.P.M.(2000). Money Banking and International Trade. New Delhi, Sultan Chand &
Sons.
10
Subramanian,K.,& Velayadhan,T.K. (1997). Banking Reforms in India : Managing Change, New
Delhi,Tata MacGrew Hills Publishing Co. Ltd.
38
The below given information are the reforms undertaken in India’s financial
sector.

The reforms in the banking sector started with nationalization of 14

private banks in 1969 and 6 of them in 1980. Bank nationalization focused on
social banking. The emphasis was on branch expansion in rural, semi-urban
and urban areas, to mobilize deposits on a massive scale and to lend funds for
productive activities, with greater emphasis on the weaker sections of the
society. These public sector banks were successful in extending their
geographical coverage and increasing deposit mobilization and advancing
loans. But they were afflicted with low profitability, inefficiency and a high
proportion of Non-Performing Assets (NPAs), i.e., advances not yielding any
return at all.

One of the serious problems of banking system was the massive pre-
emption of bank’s resources to finance government’s budgetary needs. At the
beginning of the reforms in 1991, the statutory pre-emption under both Cash
Reserve Ratio and Statutory Liquidity Ratio on an incremental basis was as
high as 63.5per cent. Of the remaining 36.5 per cent, there were 40 per cent
pre-emption under the priority sector, export credit, food credit and other
formal and informal pre-emption. This pre-emption along with administered
interest rates was referred to as “financial repression”. There were restrictions
on the use of funds by banks affecting their profitability. Many of the public
sector banks became unprofitable and under-capitalized. To ameliorate this in
the Indian banking sector, the Government of India set up the Narasimham
Committee on financial system in 1991. It recommended deregulation and
liberalization of the banking sector. This was followed by the recommendations
of Narasimham Committee (II) 1998. Besides, prior to the pre-reform era, there
were administered controls over interest rates on term deposits of varied
periods and that on different categories of loans by banks.

39
 There was no transparency as to the working of accounting policies of
banks. There were no prudential norms to banks and risk management
techniques like Capital Adequacy Ratio (CAR), Capital to Risk-Weighted
assets ratio (CRAR), Non-Performing Assets (NPAs) norms, Income Ratios,
Asset-Liability Management, and Risk Management Guidelines for banks, etc.
Due to lack of these norms and guidelines in the Indian banking system, there
were bank failures. Therefore, there was an urgent need for adequate regulation
and supervision of banks.

Moreover, the banking sector did not have sufficient competition

because there were restrictions on the entry and expansion of domestic and
foreign private banks. The branch expansion of banks was rigidly controlled by
Reserve Bank of India. No bank was allowed to open a branch without its
permission. Despite reforms, there have been direct administrative controls on
the direction of credit allocation and rates at which credit is given. Last but not
the least, the customer service in public sector banks was at its lowest level due
to lack of competition from private and foreign banks. To remedy all the above
noted defects in the Indian banking system, the following policy measures have
been adopted.11

The Finance Ministry of the Government of India appointed

Mr.M.Narasimham as chairman of one more committee, this time it was called
the committee on the banking sector reforms. The committee was asked to
“review the progress of banking sector reforms to-update and chart out a
programme on financial sector reforms necessary to strengthen India’s
financial system and make it internationally competitive”. The Narasimham
committee on banking sector reforms submitted its report to the Government in
April 1998. This report covers the entire gamut of issues ranging from Capital
Adequacy bank mergers, the creation of global banks, recasting bank boards


11
Jhingan,M.L.(2012).Monetary Economics.New Delhi, Vrinda Publications Pvt.,Ltd.
40
and revamping Banking Legislation. Important findings and recommendations
of this new Narasimham Committee (1998) are as follows:

Need for a stronger banking system: The Narasimham Committee

(1998) made out a strong case for a stronger banking system in the country,
especially in the context of capital account convertibility (CAC) which would
involve large inflows and outflows of capital and consequent complications for
exchange rate management and domestic liquidity. To handle such problems,
India would need a strong and of the resilient banking and financial system. For
this purpose, the Narasimham Committee (1998) recommended the merger of
strong banks which will have a “multiplier effect” on industry. The committee
has, however, cautioned the merger of strong with weak banks, as this may
have a negative impact on the asset quality of the stronger bank. The committee
has also suggested that two or three large Indian banks be given international or
global character.
Experiment with the concept of Narrow Banking: The Narasimham
committee on banking sector reforms (1998) is seriously concerned with the
rehabilitation of weak public sector banks which have accumulated a high
percentage of non-paying assets (NPAs), and, in some cases, as high as 20 per
cent of their total assets. The Narasimham committee (1998), therefore,
suggested the adoption of the concept of Narrow Banking to rehabilitate such
weak banks. Narrow Banking implies that the weak banks place their funds
only in short term, free risk assets-these banks attempt to match their Demand
Deposits by safe liquid assets. In case the concept of narrow banking is found
to be non-applicable to rehabilitate weak banks, the Government should
examine the issue of their closure.
Small Local Banks: The Narasimham committee (1998) suggested:
“while two or three banks with an international orientation and 8 to 10 large
national banks should take care of the needs of the large and medium corporate
sector and the larger of the small enterprises, there will still be a need for a

41
large number of local banks”. The committee felt that the setting up of small,
local banks should be confined to states or cluster of districts in order to server
local trade, small industry and agriculture. At the same time, these banks
should have strong correspondent relationships with the larger national and
international banks.
Capital Adequacy Ratio: The Narasimham committee (1998) has
recommended that the Government should consider raising the prescribed
Capital Adequacy Ratio to improve the inherent strength of banks so that their
risk absorbing capacity could be increased. The committee suggested a higher
Capital Adequacy Requirements banks and the setting up of an Asset
Reconstruction Fund (ARF) to take over the bad debts of the banks.
Public Ownership and Real Autonomy: The Narasimham Committee
(1998) has argued that the government ownership and management of bank
does not enhance autonomy and flexibility in the working of public sector
banks. Accordingly, the committee has recommended review of the functions
of banks boards with a view to make them responsible for enhancing
shareholder value through formulation of corporate strategy.
The Narasimham Committee (1998) considered the issue of
“autonomous status” for the board for financial supervision of Reserve Bank of
India and the need to segregate regulatory and supervisory functions of Reserve
Bank India. The committee has expressed the need for Reserve Bank India to
distance itself from banks which are regulated and hints at the need for
withdrawing Reserve Bank of India nominees from bank boards. The
committee states: “Regulation should be confined with laying down prudential
and disclosure norms and sound procedures and ensure adherence to these and
not get into the day-to-day management of bank”.

Review and updating Banking laws: The Narasimham committee

(1998) suggested the urgent need to review and amend the provisions of
Reserve Bank of India Act, Banking Regulation Act, State Bank of India Act,

42
Bank Nationalisation Act, etc.; so as to bring them in line with the current
needs of the banking industry.
Other recommendations relate to the need for computerization in public
sector banks, professionalizing and depoliticizing bank boards, review of
recruitment procedures, training and remuneration policies, etc.12

2.2.4 BANKING SECTOR REFORMS ABROAD

The reforms are not limited. In South Korea, a Financial Supervision

Commission was set up in 1998 which closed a few banks that incurred a loss.
Five such banks were merged with other banks Malaysia set up an Asset
Management Company with relatively small capital. The Greek Government
sold away weak public sector banks. In Russia the number of branches were
downsized from 2500 to 1600. In France, the Government sold its holding in
respect of banks. In China, a troubled and high profiled finance company was
closed. The Czech bank has fought provisionary norms with sharp reduction in
reserve management. Argentina reduced number of banks from 118 to 80.
Brazil reduced the number of banks from to 253 to 180.

2.2.5 COMPOSITION OF BANKING SYSTEM IN INDIA

Scheduled Commercial Banks (SCBs) account for a major proportion of

the total business, of the Scheduled Commercial Banks. As on end March,
2013, 89 Scheduled Commercial Banks were operational in India. Scheduled
Commercial Banks are categorized into five groups based on their ownership
and nature of operations. State Bank of India (SBI) and its six associates
(excluding State Bank of Saurashtra, which has been merged with the SBI with
effect from August 13,2008) are recognized as a separate category of
Scheduled Commercial Banks, because of the distinct status(State Bank of
India Act,1955 and State Bank of India Subsidiary Banks Act.1959) that
govern them. Nationalized banks (20) and State Bank of India and associates

12
Sundharan & Varshney.(2006). Banking Laws& Practice. New Delhi,Sultan Chand & Sons.
43
(6), together form the public sector banks group and control around 83 per cent
of branches in India. Industrial Development Bank of India Ltd has been
included among the nationalized banks in December 2004. Private Sector
Banks include the Old Private Sector banks and the new generation private
sector banks. which were incorporated according to the revised guidelines
issued by the RBI regarding the entry of private Sector banks in 1993. As on
March 2013, there were 13 old and 7 new generation private sector banks
operating in India.

2.2.5.1 Public Sector Banks

The Public Sector Banks are those in majority stake is held by the
Government.which are the foundation of the Indian banking system have more
than 78 per cent of the total banking industry’s assets.13 The Public Sector
Banks (PSB) in the Indian Commercial Banking developed in four stages. The
first stage was the nationalization of the imperial bank of India and the
subsequent organization of the State Bank of India on 1st july1955 merging its
eight former state associates in 1955. Later eight former state associated banks
were reconstituted in to seven and made the subsidiary of the state bank of
India. These banks are now called the associate of the state bank of India.

The second stage in the development of public sector banking was the
nationalization of 14 major Indian commercial banks on 19th July 1969.
Another important land mark in the history of the development of public sector
bank was the establishment of a few commercial banking intuitions called
regional rural banks in 1974. Again on the 15th April 1980. Six more Indian
banks were nationalized. On14th September 1993, the new bank of India was
merged with the Punjab National Bank. This merger reduced the number of
nationalized banks from 20 to 19.


13
Prakash Tiwari, & Hemraj Verma.(2009). A Fundamental Analysis of Public Sector Banks in
India.Indian Journal of Commerce.3(3).24-32.
44
 The banking sector in India has been characterized by the predominance
of public sector banks with more than 80 per cent share in the total assets of
scheduled commercial banks. An analysis of the combined performance of 27
Public Sector Banks shows that the operating profits of these banks increased
by 33per cent from ` 50.307 crore in 2007- 2010 ` 66972 crore in 2008-2009.

To enable the public sector banks to function competitively, the

Government of India adopted the policy of providing autonomous status to
these banks subject to certain bench marks. The criteria for a modern bank and
assessing its eligibilities status for autonomous were set out in the union budget
presented in March 1998. Based on these criteria, so far, as at the end of
March 199 as many as 17 (out of 27) Public Sector Banks have become eligible
for autonomous status.

Accepting the recommendations of the Narasimnam Committee, the

Government proposed in the budget presented in the Lok Sabha on 20th
February 2000 to reduce the minimum share holding of the Government to
33per cent. However, it is assumed that the public sector character of the banks
would be retained by ensuring that the fresh issue of shares will be widely held
among the public. This is proposed to be done since the budget was under
severe strain and capital has to be raised from the public

The Verma working group on Public Sector Banks concluded that only
two out of the 27 Public Sector Banks are strong and all others are semi-sicker
from their inception to the advanced stage.14

Public Sector Banks play a vital role in Indian financial system. Prior to
reforms, in the autocratic economy, there was a lack of functional flexibility.
The banks had to work with a framework formed by Reserve Bank of India.
The Government Policy was acts responsible for their failure. The pre-emption


14
Verma,M.S.(1999).Report of The Working Group on Restructuring Weak Public Sector Banks.
Government of India.
45
was about 53.5 per cent in the form of Statutory Liquidity Ratio (38.5 per cent)
Cash Reserve Ratio (15 per cent) besides the Government imposed certain
policies like lending to priority sectors at concessional rate of interest, rules and
regulations regarding resource requirement and lending policy. Public Sector
Banks branches form nearly 70 per cent of the total banks branches and
account for nearly 83 per cent of banking business. There was an increase in
their deposits, credit leading to a hike in income. But at the same time, they
failed to curtail their expenditure and hence their profit level was severely
affected. In 1990, the Public Sector Banks incurred losses of ` 1699 core
certain Public Sector Banks proved to be weak and unenviable. Due to the
hasty decision of branch expansion, a lot of lacking was found in their
functioning. No professional was appointed by them leaving to indiscipline in
the staff and their efficiency reasonable rate of return and efficient customer
services were not possible. Therefore it was necessary to overcome all these
problems and improve the performance of Public Sector Banks.15

Since the onset of reforms there has been a change in the ownership
pattern of banks. The legislative framework governing public sector banks
(PSBs) was amended in 1994 to enable them to raise capital funds from the
market by way of public issue of shares. Many public sector banks have
accessed the markets since then to meet the increasing capital requirements,
and until 2001-02. Government made capital injections out of the budget to
public sector banks, totaling about 2 per cent of GDP. The Government has
initiated legislative process to reduce their Government ownership in
nationalized banks from 51 to 33 per cent without altering their public sector
character.16


15
Medhe Dillip Devidas.(2007). Profitability Trends in Public Sector Banks in India During Post-
Reform Period. Southern Economist.25-27.
16
Y.V. Reddy, Monetary and Financial Sector Reforms in India A Practioner’s Perspective USA
(2002)
46
 Deregulation in Indian banking industry (especially public sector banks)
achieved the aim of reduction in intermediation costs and improving Total
Factor Productivity (TFP). Public Sector Banks perform significantly better
than private banks but not differently from foreign banks. Further, the superior
performance of PSBs is due to the usage of improved technology.17

The response of the banks to the reforms has been impressive. The
following was the position of public sector banks at the end of March 2001.

a. Capital required was 9 per cent but the actual was 10 per cent in
excess in March 2001.
b. Ratio of 23.4 steps NPAS to Gross Advances in 1992-93 was
reduced to 12.4 percent.
c. The loss of ` 4705 crore public sector banks in 1993-94 was
coverted in to a profit of Rs 2905 crore in March 2001.
d. Total number of branches at the end of March 2001, was 65901.18

There was a number of beneficial impacts of the reform process in terms

of a large and diversified institutional base, better price discovery, larger
availability of funds, new infusion of technology and diversification banking
services and greater transparency (in what Profitability of public sector banks
increased while the Indian banking system showed resilience and avoided the
contagion effects of the global crises. The introduction of better prudential
norms has induced banks to reduce the proportion of Non Performing Assets in
the banking system.

The banking industry is entering a new phase in which it is facing

increasing competition from private banks and non-banks.As per study by
moody’s Credit Rating Agency, The share of public sector banks in total


17
Ram Mohan T.T. & Ray S. (2004). Productivity Growth are Efficiency in Indian Banking A
Comparasion of Public and Private are Foreign Banks. Department of Economics Working Paper
no.2004/27, University of Connecticet cannecticut.
18
Agarwal,O.P.(2010).Banking and Insurance.New Delhi,Himalaya Publication.
47
deposits of banks have reduced to 70.5 per cent in2007(earlier 75.6 per cent in
2003) and Private Sector Banks share is enhanced on 21.5 per cent.19

2.2.5.2 Indian Private Sector Banks

The public sector banks are those in majority of share capital is held by
private individuals and corporate.The private sector banks are playing a major
role in the development of Indian banking industry as well as national
economy. They have made banking more efficient and customer friendly.
They are leaders in Internet banking, mobile banking phone banking, ATMs
etc.

With a view to infusing more competing ability in the banking sector,

the policy of providing autonomous status to the public sector banks, as
discussed earlier, has been further supplemented by the policy of encouraging
the setting up of more private sector banks. So far in addition to the 25 old
private sector banks, nine have been newly established.

Old Private Sector Banks

The private banks which were not nationalized in 1969 and 1980 are
collectively known as the old private banks.The old private sector banks
constitute an important part of the private sector banks in the total assets of
private sector banks. The old private sector banks constituted a predominant
share of 62.9 per cent during 1998-99. In 1998-99 the key strength of the old
private sector banks were as below:

(a) Strong regional presence, contributing to better, knowledge of the

economic activities in the region resulting in the mitigation of credit
risk.


19
Ibid.

48
 (b) Ability to offer personalized services to customers, as they had much
competence with them because of their small size.
(c) Better management control over their operations. But the entry of new
private sector banks has lessened the competitive strength of the private
sector banks. Further they have to face competition from foreign banks,
and a few rejuvenated public sector banks. An analysis of the financial
performance of the old private sector banks indicates that their
performance in the year 1998. 1999 was less than the average of
scheduled commercial banks.20
New private sector banks

The new private sector banks have been established on the basis of the
recommendations of the Narasimham committee report. The committee
recommended that “there be no barriers to new banks being set up in the
private sector” in recognition of the need to introduce greater completion of the
need to introduce greater completion with a view to achieving higher
productivity and efficiency in the banking system. The banking system was
liberalized after 1990 accordingly deposits were increased by nearly 500 per
cent during the period of 2002 – 2007. Here the growth of deposit was
increased nearly more than 600 per cent in ICICI bank, which shows its
leadership over the other banks under study, Axis bank, HDFC bank,
CENTARIAN bank of Punjab and KOTAK Bank which also saw an increased
trend in deposits viz. 378 per cent, 287per cent, 320 per cent, 537 per cent
respectively.21

In the year 2004 – 2005, the rate of expansion of deposit was the highest
in respect of new private sector banks (21.1 percent) followed by public sector
banks (15.6 per cent) old private sector banks (10.8 percent) and foreign banks


20
Clifford Gomez. (2011).Banking and Finance Theory,Law and Practice.New Delhi, PHI Learning
Pvt.Ltd.
21
Vohra, P.S.(2011). Operational Efficiency of Selected Private Banks in India.Finance India
15(1).209- 214.
49
(7.9 percent). Thus the share of new private sector banks in the total deposits
has gradually increased over the years.22

The Indian banking industry was predominantly in the public sector

accounting for about 80 per cent of the banking operations. In recent years a
number of new well capitalized private sector banks as such have been set up.
While these banks will increasingly provide a spur to public sector banking, its
impact will be limited. At present the new private sector banks account for
about 3 per cent of the total deposits. At this rate of grow in the next five years,
average increase of year in the deposits private sector banks would be 16 per
cent of the total deposits. Private sector banks will account for only 6 per cent
of the total deposits of the banks. Thus, the new private sector banks while
competing with others will become a force to be reckoned quite soon.23

2.2.5.3 Impact of Reforms on Banking Sector in India

These reform measures have had major impact on the overall efficiency
and stability of the banking system in India. The present capital adequacy of
Indian banks is comparable to that at international level. There has been a
marked improvement in the asset quality with the percentage of Gross
Non- Performing Assets (GNPAs) to Gross Advances for the banking system
reduced from 14.4 per cent in 1998 to 7.2 per cent in2004. The reform
measures have also resulted in improvement in the profitability of banks. The
Return On Assets (ROA) of the banks rose from 0.4 per cent in the year 1991 -
92 to 1.2 per cent in 2003-04. Considering that, globally, the Return on Assets
been in the range of 0.9 to 1.5 per cent for 2004, Indian banks are well placed.

The banking sector reforms also emphasized the need to review the
manpower resources and rationalize the requirements by drawing a realistic


22
Gopakumar,K.C.(2006).Changes in Banking Practices-Current Scenario.Southern
Economist.45(14).15-17.
23
Tarapore,S.S.(1998). Need for Second Generation Banking Sector Reforms.Journal of Indian
Insitute of Bankers-62(2).51-58.
50
plan so as to reduce the operating cost and improve the profitability. During the
last five years. The business per employee in the public sector banks more than
doubled to around ` 25 million in 2004.24

Prior to reforms, the RBI prescribed the deposit rates and the maturities
of deposits that could be offered by banks. There was no price competition
among suppliers of banking services and the customer had only limited
products to choose from. The post reform period, as a result of
deregulation,barring saving deposits, banks are free to fix their own deposit
rates for different maturities, which implies choices for the depositor. Also, a
customer can earn interest on a term deposit for a minimum period of 15 days
as against 30/46 days until recently. Banks are now also free to offer varying
rates of interest for different sizes of deposits above a cut-off points since the
cost of transaction differ by size. Earlier, the RBI decided the penalty structure
for premature withdrawal of deposits but this has now been left to each bank so
that banks can manage interest rates.

2.3 DEPOSIT MOBILISATION BY BANKS IN INDIA

The saving and investment process in an economy is organized around a

financial framework which facilitates economic growth. A well designed
financial system promotes growth through effective mobilization of savings
and their allocation to the most productive uses by either following a
centralized approach or a decentralized approach or a combination of both.
Typically, economies with underdeveloped capital markets adopt a centralized
approach whereby financial intermediaries mobilize resources from savers and
allocate them to borrowers. Traditionally, banks have played a curtail role in
the financial intermediation process as they are able to deal more appropriately
with transaction costs and information asymmetries in a financial system. As

24
Y.V. Reddy : Banking Sector Reforms in India – An Overview BIS Review 35/2005. 4.
51
financial markets develop, transaction costs and information asymmetries
reduce, the decentralized approach for guiding the saving-investment process
also gains significance and household with surplus resources increasingly
invest in capital market instruments. The empirical experience shows that
virtually in all the economies, including the market intermediated ones, banks
have played a key role in resource mobilization, supporting the growth process,
and the development of bank and other intermediaries there by facilitating the
development of financial markets.

The genesis of bank’s role in the resource mobilization process lies in

firms relying critically on external sources of finance, especially in their
formative stages. In particular, banks have played a key role in co-coordinating
investment efforts in many economies such as Belgium, Germany, Italy and
Japan in engineering ‘take-offs’ during critical phases of development.
Resource mobilization by banks became a critical factor in their ability to act as
‘catalysts’ of economic development during the ‘take-off stages’ of these
economies. Large and powerful banks initially relied on capital contributions
from a small number of founders and thereafter as their industrial lending
portfolio grew, they took recourse to deposits as a major source of funds. With
the development of markets, borrowings also became important source of funds
for these banks.

Historically, financial intermediation by banks has played a pivotal role

in India in supporting the growth process by mobilizing savings, particularly
after the nationalization of the 14 major private banks in the late 1960s. Banks
have been particularly instrumental in mobilizing deposits from the household
sector, the major surplus sector of the economy, which, in turn, has helped to
raise the financial savings of the household sector and hence the overall saving
rate notwithstanding the liberalization of the financial sector and increased
competition from various other saving, instruments, banks continue to play a
dominant role in the financial intermediation of the Indian economy the
52
deregulation of interest rates has opened up new avenues for banks to mobilize
funds at competitive rates. Moreover, banks, by virtue of being the ultimate
platform for clearing and settlement for all financial transactions, provide
accounts and resources to other sectors as also other financial intermediaries.

The Indian economy has witnessed robust growth performance in recent

years and banks have played a major role in providing the required resources.
In order to sustain the growth process, banks would have to continue to provide
fund on a large scale. In India, there exists an enormous potential of savings in
rural and semi urban areas. Also, in India quite a large part of domestic savings
is locked up in unproductive physical assets. The mobilization of savings from
hitherto untapped areas and conversion of physical savings into financial
savings would necessitate introduction of appropriate products to suit the
demand of savers. Banks are indeed in an ideal position to do so because of
certain inherent characteristics of deposits such as safety and liquidity.

Apart from mobilization of deposits, banks, for meeting their resource

needs, also depend on non deposit resources both at home and abroad. A part of
non deposit comes from borrowings, which help augment the funding needs of
the banks instantly. However, they also pose a challenge in terms of their
availability and management of borrowing costs, amidst potential interest rate
and exchange rate risks. Thus an effective use of borrowings require a system
of appropriate risk management by banks. Hence mobilization of deposit for a
bank is as essential as oxygen for a human being. In the post rerform scenario,
the number of players in banking industry has increased considerably which
has developed competition in bank marketing. ‘The survival of the fifteen
concepts has become applicable for the banks. To enhance profitability, banks
take steps to minimize the interest expenditure and so banks are forced to
mobilize low cost deposits.25


25
http:rbi.org.in/scrpts/publications view.aspx?id=10488.

53
2.3.1 THEORETICAL CONSIDERATIONS

Commercial banks are dependent on depositor’s money as a source of

funds. According to the Keynesian theory of demand for money, there are three
main motives for people to hold money. They are transaction, precautionary
and investment motives. In order to materialize their motives, commercial
banks offer three categories of deposit facilities viz. Demand, Savings and
Time Deposits. Demand deposit facility is most commonly referred to as
current account and is designed for those who need money for business
purposes. The motive can be looked at from the point of view of consumers
who want income to meet their household expenditure and from the viewpoint
of businessmen who require money and want to hold it in order to carry out
their day to day business activities. Hence, the purpose of deposit facility is the
convenience or for meeting out daily commitments.

The second one is the savings deposit, which caters to the need of those
who wish to save money with some income. Depositors of savings account do
so with precautionary motive coupled with the desire to earn some income
through not substantial. Precautionary motive for holding money refers to the
desire of people to hold cash in hand for meeting out unforeseen,
contingencies. The speculative motive for holding money. The speculative
motive relates to the desire to hold one’s resources in liquid form in order to
take advantage of market movements regarding the future changes in the rate of
interest. The final category of deposit facility is time deposits. Such facility if
offered by banks to cater for the investment motives of customers who
normally have idle funds and are looking for better returns on their money.

However, from the depositor’s perspective, there are three main theories
governing their savings behavior. They are :

1. The traditional models of life cycle hypothesis (modgliani and

Brumberg, 1954)
54
 2. Permanent income hypothesis (friedman,1970)
3. Buffer stock theory of savings behavior (Deaton 1991 and Carroll 1992)
The life cycle model of savings behaviour predicts that consumption in a
particular period depends on the expectations about lifetime income which
implies that people save in order to smooth consumption over time. Therefore,
fluctuates income systematically over the course of a person’s life, saving
behavior is determined by one’s stage in the life cycle. Individuals smooth
consumption over their lifetime and are consequently net savers during their
working years and dissevers during retirement. Hence, the cornerstone of the
life cycle hypothesis is age related consumer heterogeneity and the prediction
that savings follow a hump-shaped pattern, which is high at middle age and low
at young and old ages.
The permanent income hypothesis predicts that higher future income
reduces current savings. In contrast to the life cycle hypothesis, which predicts
that consumption function depends upon consumer’s lifetime income, the
permanent income hypothesis focuses attention on the income of the consumer
in the recent past as well as in the future. It distinguishes permanent and
temporary incomes. Temporary income changes are met out by consumption
smoothing whereby part of today’s income windfall is saved to sustain higher
spending tomorrow. Permanent income changes, on the other hand, do not
justify current savings since more can be consumed now and in future.

According to buffer stock theory of saving, consumers hold assets

mainly so that they can shield their consumption against unpredictable
fluctuations in income. The buffer stock behavior arises because when
consumers face important income uncertainty, they are both impatient and
prudence. Impatience means that if income were certain, consumers would like
to borrow against future income to finance current consumptions and prudence
in the sense that they have precautionary motive.

55
 Carroll (1992) showed that under plausible circumstances this tension
would imply the existence of a target wealth stock. Whenever wealth is below
the target, fear of prudence will dominate impatience and consumers will try to
save. Meanwhile, if wealth is above the target, impatience will have a stronger
role and consumers will plan to dissave.26

2.3.2 CONCEPT OF DEPOSITS

The term “Bank” originally referred to an individual or organization

which acted as a money changer and exchanged one currency for another. But
these days, a bank is an institution in which people keep their cash balances in
the form of deposits. According to Prof. Sayers, “Banks are institutions whose
debts usually referred to as ‘bank deposits’ are commonly accepted in financial
settlement of other people’s debts.”

According to the Oxford Dictionary, the term “Deposits” means a place

meant for storing or keeping in safe custody money. Deposit is the amount put
in an account of a bank private or public company. The bank or the company
pays interest on such amount.

The deposit may be in the form of cash, cheque or electronic transfect.

Usually it is a sum of money lodged in a bank for the purpose of earning
interest. Deposit is repayable according to the terms of acceptance.

The deposits from the public constitute the biggest proportion of the
bank’s working funds. There are risk-free and more liquid as compared to other
financial instruments. The largest single item on the liabilities side of the
balance sheet of a Bank. The amount of Deposits connected into Buildings,
Furniture, Machinery and stock are assets for the bank.


26
Sudin Haron & Drwan Nursofiza Wan Azmi . (2006) Deposit Determinants of Commercial
Banking in Malaysia. Finance India 20(2),531-551.
56
 An important function of a commercial bank is to attract deposits from
the public. Those who want to keep their money in a safe place, deposit the
same with a bank. The commercial bank not only protects the money but also
provides the depositors with convenient methods for transferring funds through
the use of cheques.27

Deposits are the vital sources of funds for commercial banks. Banking is
highly competitive in nature due to the level of economic influences. Deposits
are higher during the prosperity period then in period of recession and
depression.28

Deposits may be created in two ways:

i) Primary deposits and

ii) Derivative deposits

a) People may deposit their cash with a bank i.e., they convert their cash into
bank deposits. In this case, one form of money (i.e., cash with the public) is
changed into another form of money (i.e., bank money). Such deposits are
known as primary deposits. They bring cash to the bank.

b) Using the cash received from the depositors, the bank buys assets from the
market (bills, bonds, debentures, etc.) or it lends to businessmen and
industrialists. Now, whenever a bank buys assets from the market or lends to
certain parties, it does not provide cash to them directly but creates demand
deposits in their name. Or in the alternative when a bank buys an asset and pays
through a cheque (on itself, of course), the cheque will be deposited in the
account of the seller of the asset. These deposits are secondary ones since they
are based on or derived from the primary deposits. Hence they are also known


27
Sundharam, K.P.M. & Varshney P.N. (2006). Banking Theory Law & Practice, New Delhi :
Sulthan Chand and Sons.
28
Selva Kumar,M.& Nagalakshmi M.(2010). Deposi Mobilization of Scheduled Commercial Banks
in India- Bank Group Wise Analysis.Economic Affairs. 55(3).281-292.
57
as derivative deposits. The initiative for creating these secondary or derivative
deposits comes from the banking system. In a modern money economy, the
second form of deposits has become quite significant. The banking is able to
create derivative deposits by through acquisition of assets.29

When the bank creates derivative deposits the total stock of money in
the hands of the community is increased. In other words, the purchasing power
of the community is increased on par with the deposits created. Therefore, the
proportion of derivative deposits in the total deposits of commercial banks is
significant.30

2.3.3 FORMS OF DEPOSITS

The relationship between a banker and his customer begins with the
opening of an account by the latter with the former. Initially, all accounts are
opened by the customer accounts are by depositing money and hence these
accounts are called as deposit accounts. The bulk of the resources of a bank are
mobilized by accepting deposits from the public. One of the main functions of
commercial banks is to accept deposits of various types from different
customers on different terms and conditions. The deposits accepted by banks
may be categorized as below:

1. Demand deposits

2. Term deposits


29
Sundharam, & Varshney .(2006).Banking Theory Law & Practice.New Delhi, SultanChand &
Sons.
30
Clifford Gomez. (2011).Banking and Finance Theory,Law and Practice.New Delhi, PHI Learning
Pvt.Ltd.

58
2.3.3.1 Demand Deposits

Demand deposits are those that can be withdrawn by the customer on

demand that is without notice. Banks undertake to repay such deposits on
demand. Hence they are known as Demand Deposits. These deposits include:

a) Current deposits

b) Savings bank deposits

c) Call deposits

a) Current Deposits

Current deposits are the ones that can be withdrawn by the depositor at
any time by means of cheques. The bank does not pay any interest on these
deposits but in fact makes a small charge on the customers having current
account. Demand deposits may be created in two ways – either by the
depositors converting cash into a demand deposit with a bank or by borrowing
from banks and using the amount to create a demand deposit with it. Demand
deposits constitute the most important source of circulating medium of
exchange. For instance, in the USA, nearly 85 per cent of money consists of
demand deposits and only 15 per cent is in the form of currency notes and
coins. They provide to convenience only in making payments; they do not yield
any interest to the depositors.

b) Savings Deposits

Savings deposits are those on which the bank pays a certain percentage
of interest but the bank places certain restrictions on their frequency of
withdrawal. For instance, they may not be allowed to be withdrawn more than
once or twice a week or more than a fixed sum of money at a time.

59
c) Call Deposits

Call deposits are accepted from fellowbanks and are repayable on demand.
Interest on call deposits normally depends upon demand for the money and its
supply in the financial market.

2.3.3.2 Term Deposits

Term deposits are those which are not repayable on demand. Such
deposits are repayable after a fixed date or utter a fixed period of notice. Such
deposits include:

a) Fixed deposits, b) Recurring deposits, c)Flexi deposits

a) Fixed Deposits

Fixed deposits are repayable on the expiry of a specific period, chosen

by the depositor to suit his purpose and to enable him to get back the money as
and when he needs it. As the date of repayment of a fixed deposit is determined
in advance, the banker need not keep more cash reserves against it and can
utilize such amount more profitably. The banker, therefore, offers higher rate of
interest on such deposits because the depositor parts with his money for a
definite period. Fixed deposits have grown in importance and acquired much
popularity in India during recent years. These deposits constitute more than
half of the total bank deposits in India?

b) Recurring deposits

With the object of giving the small depositor an incentive and

convenience to save, banks allow recurring deposit facility to their customers.
This facility is intended to inculcate the habit of savings on a regular basis as
an inducement is offered in the form of a comparatively higher rate of interest
as compared to savings bank deposit. Under this the depositors may pay a
fixed sum of money every month for various periods, say 12 to 120 months.

60
c) Flexi Deposits

Under this scheme the amount over and above a certain pre determined
level is transferred from a savings, current account to a term deposit account
automatically for a particular period and such amount starts earning higher rate
of interest.

These are the broad categories of deposits accepted by banks in India.

However, banks may develop various products by incorporating different
customer friendly and attractive features/services in such deposits like
periodicity of payment of interest, and re-investment facility for principal or
interest before maturity.31

2.3.4 IMPORTANCE OF BANK DEPOSITS AS SAVINGS

As stated earlier, financial intermediation by commercial banks has

played a key role in India in supporting economic growth. An efficient
financial intermediation process, as is well known, has two components: viz. 1)
effective mobilization of savings and 2) their allocation to the most productive
purposes. In this chapter, focus is on one part of the financial intermediation
by banks: viz. mobilization of savings. Banks mobilize savings, in the form of
deposits, which is the money accepted by banks from customers to be held
under stipulated terms and conditions. Deposits are thus an instrument of
savings.

Since the first episode of bank nationalization in 1969, banks have been
at the core of the financial intermediation process in India. They have
mobilized a sizeable share of savings of the household sector, the major surplus
sector of the economy. This in turn has raised the financial savings of the
household sector and hence the overall savings rate. Notwithstanding the
liberalization of the financial sector and increased competition from various

31
Bhattacharya, K.M. Agarwal, O.D.(2000). Basics of Banking and Finance, New Delhi : Himalaya
Publications.
61
other saving instruments, bank deposits continue to be the dominant instrument
of savings in India.

It can be seen from table 2.1 that gross domestic savings of the Indian
economy has been growing over the years and the household sector has been
the most significant contributor to savings. Household sector saves in two
major ways, viz. Financial assets and physical assets. Table 3.2 shows that
within the financial savings of the household sector, bank deposits are the most
prominent, accounting for nearly half to total financial savings of the household
sector. The higher the amount of deposits mobilized, the larger is the amount of
funds lent. The growth of deposits depends on savings. For economic growth,
It is essential that savings are mobilized and channelized for capital formation
which, in turn accelerates economic growth.

TABLE 2.1
GROSS DOMESTIC SAVINGS

Percent of (at current market prices)

Items
2000-01 2006-07 2007-08 2008-09 2009-10 2010-11

1. Household savings 21.9 24.1 24.3 23.6 25.4 22.8

a) Financial assets 10.7 11.7 11.7 10.1 12.9 10.0
b) Physical assets 11.3 12.4 12.6 13.5 12.4 12.8
2. Private corporate sector 4.1 8.3 8.8 7.4 8.2 7.9
3. Public sector -2.3 3.3 4.5 1.0 0.2 1.7
4. Gross domestic saving 23.7 35.7 37.7 33.3 33.8 32.3
Source: Central Statistical Organization.

62
 TABLE 2.2
FINANCIAL SAVINGS OF THE HOUSEHOLD SECTOR (GROSS)

Percent to total financial savings of household sector

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

Financial savings 100 100 100 100 100 100

a) Currency 10.2 11.4 12.5 9.8 13.8 11.3

b) Deposits 49.1 52.2 58.5 41.9 41.3 52.8

i) With banks 47.8 50.4 54.9 36.6 45.6 48.5

ii) Non-banking cos. 0.2 0.5 1.8 1.9 0.4 1.5

iii) Co-operative banks /
0.0 0.0 0.0 3.7 3.1 2.3
societies
a) Shares& debentures 9.0 12.4 2.6 4.5 0.2 -0.7

b) Claims on government 3.0 -4.0 -3.1 4.4 4.1 -2.1

c) Insurance funds 17.7 18.0 20.1 26.2 22.3 23.1

d) Provident & pension funds 11.1 9.9 9.5 13.1 14.0 15.6
Source: RBI annual report, 2008-09

2.3.5 SRATEGIES OF MOBILIZING DEPOSITS

Banks mobilize deposits by making finances and by investing in various

financial markets. Basically deposit mobilization is related to the creation of
credits. The banks interact with a lot of people though special campaigns and
collect deposits from customers. Sometimes banks conduct campaigns with
advertisements and attracting gifts to lure deposits. These methods of collection
deposits from the public by the banks are known as strategies of mobilizing
deposits.

To maximize their profits, commercial banks always attempt to mobilize

savings at the lowest cost possible. While mobilizing deposits, banks have to
comply with various directives issued by the Reserve Bank of India, the Indian
Bank Association (IBA), Government of India and other Statutory Authorities /

63
agencies. At the same time, since banks operate in a very competitive
environment, they have to access a large number of customers and also offer
deposit products so that the customer is made to get the higher satisfaction.

Banks devise various strategies to expand the customer base and reduce
the cost of raising deposits. This is done by identifying target markets, designing
the products to suit the requirements of customers and taking measures for
marketing and promoting the deposit products. It is essential not only to expand
the customer base but also to retain it. This is done by providing counseling,
after-sales through prompt and sincere handing of customer complaints and
active at amicable solutions for them.

It is interesting to more than when there is diversity among banks in the

strategies for mobilizing deposits one there is commonality in maximizing
Current And Savings Account (CASA) deposits .The other common features
noted among the banks with regard to these are as below:

x Posting and trained personal in branches to educate the customers as to

their rights and obligations.

x Appointing Customer Relationship Managers (CRMs) for personalized

service to be important customers.

x Developing products to meet the specific requirements of senior citizens/

pensioners.

While banks endeavor to provide services to the satisfaction of customers,

they place an expeditious mechanism to redress their complaints.

The following are the strategies to attract more the deposits.

i) Understanding services and facilities provided to the customers

by other banks and analyses of their actual requirements.

64
 ii) Recognizing important customers by furnishing the information
related to them suo more and advising them as to fund
management will beneficial to them as well as the bank.

iii) Persuading a customer from withdrawing money from his

account for purchase of home assets by extending credit facilities
voluntarily.

iv) Advising customer withdrawing money for investing executive to

get more return to ensure that it would be safe there.

v) Requesting the bank staff to collect details to customers

depositing with companies for short term.

vi) Reviewing the customer credit balances base and getting target
list of customers who appear to have surplus funds.

vii) Prompt communication of the account transaction to the

customers. So that their confidence on the organization is
improved.

viii) Rendering service with smile to the customers.

2.3.6 DEPOSIT MOBILIZATION IN INDIA

Financial intermediation by banks has played a major role in India in

supporting the growth process by mobilizing savings, particularly after the
nationalization of 14 major private banks in the late 1960s. Banks mobilize
deposits from the household sector, the major surplus sector of the economy,
there enabling it to raise its financial savings and the overall saving rate.
Notwithstanding the liberalization of the financial sector and increased
competition from various other saving instruments banks continue to play a
dominant role in the financial intermediation of the Indian economy. The
deregulation of interest rates has opened up new avenues for banks to mobilize

65
funds at competitive rate. Moreover, banks, being in charge of clearing and
settlement of all financial transactions, provide accounts and resources to other
sectors as also other financial intermediaries.

The performance of Indian economy in recent years and Banks role in it

is commendable. They provide required amount of resources. To sustain the
growth process, banks would have to continue to provide funding on a large
scale. In India, there exists an enormous potential for savings in rural and semi
urban areas. Also, in India quite a large part of domestic savings is locked up in
unproductive physical assets. The mobilization of savings would necessitate
introduction of appropriate products to suit the demand of savers. Banks are
indeed in an ideal position to do so because of certain inherent characteristics
of deposits such as safety and liquidity.

The Indian banking system has passed through crisis and consequently,
its growth was quite slow during the first half of the 20th century. But after
independence, the Indian banking system recorded rapid progress. This was
due to planned economic growth, increase in money supply, inculcation of
banking habit, setting up of the state Bank of India and its associate banks in
the 1950’s nationalization of banks in July 1969. In this regard, commercial
banks play a very important role in India and they are the heart of the financial
structure. Deposits are the vital source of funds to commercial banks. Deposit
mobilization by commercial banks acquired significance in the economic
development of the country.

2.4 EXPERT COMMITTEES RECOMMENDATIONS ON DEPOSIT

MOBILIZATION
With regard to the behavior of bank deposits and the factors influencing
that influence their growth in India several committees were appointed by the

66
Government of India. Reserve Bank of India and the Indian banks association
at different periods have made many recommendations.

The banking commission (1972) under the chairmanship of R. G.

Saraiya studied the structure and coverage of the commercial banking system
in India. Its report reviewed the efforts of commercial banks in innovating and
designing schemes which cater to the needs of different classes of deposits. It
stated that banks, particularly those owned by the Government, can convert idle
savings of the community to deposits for the betterment of the economy. In a
manner that conforms to the requirements of planned growth of the economy.
Further banks have several advantages as mobilizes of savings over other
agencies, viz. a wider network of branches and a variety of deposits.32

According to the study group (1969) headed by T.A.Pai, the problem of

deposits mobilization can be viewed in terms of both economic and
institutional factors that influenced the pace and pattern of growth of deposits.33

The Chakravarty Committee (1985) while studying the monetary system

in India, observed that the growth rate of deposits at an accelerated pace in
more recent years could be attributed to the higher real growth achieved by the
economy, expansion of bank branches and a strong preference of households to
bank deposits as a medium for savings. In this connection the committee have
concluded that the ‘wide network of branches’ and expansion of bank branches
respectively, are the important factors contributing to the growth of bank
deposits.34

A significant National Level Survey (1986) on the trend and pattern of

deposits was conducted by NIBM, Pune. It studied the savings behavior of
households and institutions, identified the factors which affected it, evaluated


32
Report of the Banking Commission, Government of India, New Delhi, 1972.
33
Report on Deposit Mobilization by Commercial and Co-operative Banks (T. A. Pai Committee),
National Credit Council, Mumbai, 1969.
34
Report on Review the Working of the Monetary System, RBI, Mumbai, 1985
67
the preferences for various types of financial assets and developed broad
marketing strategies for promoting banking services and deposits
35
mobilization.

According to the Narasimham Committee (1991) the growth of bank

deposits had been as much a function of the level of income and savings, as of
institutional factors. In this connection, massive branch expansion, was perhaps
the most important institutional factor in deposit mobilization. The report also
pointed out that the rural penetration of the banking system had played an
important role in the transformation that was taking place in the pattern of asset
holding in rural areas. It stated the importance of mobilizing the savings from
the household sector. Hence, it recommends commercial banks to compete on
par with other institutions that they were permitted to offer market rates of
interest to their depositors.36

The Narasimham Committee on banking sector reforms (1998) is

seriously concerned with the rehabilitation of weak public sector banks with
recommended high per centage of Non Performing Assets (NPAs). Therefore
it has suggested the adoption of the concept of narrow banking to rehabilitate
such weak banks. Narrow banking implies that the weak banks place their
funds only in short term, free risk assets. These banks attempt to match their
demand deposits by liquid assets.37

K. B. Chore Committee (1979) banks should discourage the borrower

from approaching them for temporary limits in excess of sanctioned limits. The


35
Report of the National Level Survey, 1986
36
Report of the Committee on Banking Sector Reforms (Narasimhan Committee I), RBI, Mumbai,
1991.
37
Report of the Committee on Banking Sector Reforms (Narasimhan Committee II), RBI, Mumbai,
1998.
68
banks should charge an additional interest of one per cent over the normal rate
on the accommodation of temporary limits.38

Committee on Customer service in banks (2010)

Dhamodaran Committee on Customer Service in Banks (2010)

suggested that the Banks should offer no-frill savings accounts with certain
basic facilities such as cheque book and ATM card without prescribing any
minimum balance. All fixed deposit receipts should prominently indicate the
annualized interest rate to help customers take more informed decisions. The
Indian Banks Association should standardize the account opening form for all
banks, similar to the one used for loans.39

Committee on Comprehensive Financial Services for Small Business and

Low Income Households(2013)

In its final report, the committee has outlined statements for full
financial inclusion and financial deepening in India.

1. Universal Electronic Bank Account (UEBA); each major Indian

resident should have an individual, with all service facilities, safe and
secure electronic bank account.

2. Ubiquitous access to payment services and deposit products at

reasonable charges: The committee envies ages that every resident in
India must have a bank that can be reached in fifteen minute’s walk.

3. Universal access to a range of deposit and investment products at

reasonable charges: Each low income household and small business


38
Report on Review the Cash Credit System (K.B. Chore Committee), Reserve Bank of India,
Mumbai, 1979.
39
Report of the Committee on Customer Service in Banks,( M.Damodaran, RBI, Mumbai, 2010.
69
 should have a bank that can offer them suitable investment and deposit
products at reasonable charges.40

2.5. GOVERNMENT INITIATIVES FOR DEPOSIT MOBILIZATION

Mobilisation of resources leads to the development of Inida, Deposit

mobilization by banks in India acquired greater significance in their new role in
economic development and their growing obligations in the socio economic
field. Deposit mobilization is a challenge to all development banking
institutions in India. In brief, the following points are essential for the
significance of deposit mobilization.
1. To enhance the inflow of funds for a bank
2. To make the finance utility for both segments of customer’s viz.,
Borrowers and deposit holders freely
Deposits would be increased if income take exemption limit on interest
on bank deposits is interested. It is essential that these savings are mobilized
and channelized for capital formation which, in turn, accelerates economic
growth. Deposits are the basic raw material for bank’s operation and deposit
mobilization is one of the basic innovations Bank deposits are risk free and
more liquid as compared to other financial instruments. The following are the
sample evidence of various strategies measures adopted by the Government
and Reserve Bank of India (RBI) to increase the level of deposit mobilization
in India.
The move for relaxed tax norms on FDs would help the banking sector
tide over the current liquidity shortage following the Reserve Bank’s decision
to tighten monetary policy to take the rising inflation.41


40
Report of the Committee on Comprehensive Financial Services for Small Business and Low
Income Households,(DR.Nachiket mor,RBI,Mumbai,2013.
41
Financial Express,17 February 2011.
70
 During the quarter, 110 new branches were opened newly in Gujarat
State including 16 in metro areas, the amount of deposits and the guarantees of
credit will be in direct proportion. More the deposit higher would be the
credit and vice versa nine in urban areas, 28 in semi urban areas and 57 in rural
areas. Further 117 licenses for opening new branches are pending, according to
RBI data, to promote banking activities among the rural populations. State
Bank of India, Bank of Baroda and Dena Bank have been asked to
functionalise financial literacy centres in their respective lead districts.42
City based private sector bank, Karnataka Bank has raised its interest
rate on deposits by 25 basis points on all fresh retail term deposits on one year
to two years maturity period.
P. Jayarama Bhat, Managing Director and Chief Executive Officer of
the Bank, said enhancement of interest on deposit will have positive impact on
resource mobilization, although, the liquidity position of the bank is
comfortable, interest rate has been enhanced to extend the benefit to the
depositors and retain customers.43
West Bengal Chief Minister Mamata Banerjee today proposed to launch
a government sponsored deposit taking scheme to provide a secured saving
option to the rural people of the state as an alternative.44
2.5.1 FINANCIAL INCLUSION
Financial inclusion is nothing but the delivery of banking services at
affordable cost to the mention the new here down tramed and low income
groups. To build a structure and roadmap for Financial Inclusion, the
Government of India appointed a committee on Financial Inclusion under the
chairmanship of Dr.C.Rangarajan, (then Deputy Governor of Reserve Bank of
India) in 2008. The Rangarajan Committee suggested that the financial
inclusion should include access to mainstream financial products such as bank


42
Business Line, 25 May 2013.
43
The Times of India 2 May 2013.
44
The Business-Standard,9 May 2013.
71
accounts, credit, remittances and payment services, financial advisory services
and insurance facilities.
The RBI broad approach to financial inclusion has been aimed at
‘connecting people with the banking system and enabling them to access the
payment system at not higher credit dispensations’. The RBI has taken several
initiatives. For Financial Inclusion Plan and constituted a Financial Inclusion
Advisory Committee (FIAC). Keeping in view the enormity of the task
involved, the Committee on Financial Inclusion recommended the setting up of
a mission mode National Rural Financial Inclusion Plan (NRFIP) with a target
of providing access to comprehensive financial services to at least 50 per cent
(55.77 million) of the excluded rural households by 2012 and the remaining by
2015. The Committee is helping banks develop a viable and sustainable model
of banking services that focuses on accessible and affordable financial services.
It also adopts a decentralized approach in this regard with close involvement of
the state government and banks and uses multiple channels for population it.45
2.5.2 PRADHAN MANTRI JAN DHAN YOJANA
Prime Minister's People Money Scheme is a scheme for comprehensive
financial inclusion launched by the Prime Minister of India, Narendra Modi on
28th August 2014. He had announced this scheme on his first Independence
Day speech on 15th August 2014.
Run by Department of Financial Services, Ministry of Finance, on the
inauguration day, 1.5 Crore (15 million) bank accounts were opened under this
scheme. By 7 January 2015, 10.63 crore accounts were opened, with around
8369 crore (US$1.3 billion) were deposited under the scheme, which also has
an option for opening new bank accounts with zero balance.
SBI, India's largest bank had opened 11,300 camps for Jan Dhan Yojana
over 30 lakhs accounts were opened so far, which include 21.16 lakh accounts
in rural areas and 8.8 lakh accounts in urban areas. On the contrast, even taking
together all the major private sector banks, have opened just 5.8 lakh accounts.

45
http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1082
72
In a run up to the formal launch of this scheme, the Prime Minister personally
mailed to Chairmans of all PSU banks to gear up for the gigantic task of
enrolling over 7.5 crore (75 million) households and to open their accounts.[ In
this email he categorically declared that a bank account for each household was
a "national priority".
The scheme has been started with a target to provide 'universal access to
banking facilities' starting with "Basic Banking Accounts" with overdraft
facility of ` 5000 after six months and RuPay Debit card with inbuilt accident
insurance cover of Rs. 1 lakh and RuPay Kisan Card. In next phase, micro
insurance and pension etc. will also be added.46
The above are sample of evidence of various measures which have been
taken by Governmet and RBI for the development of the deposit mobilization.

2.6 SUMMARY
In order to mobilize deposits a large number of branches have been
opened in un-banked areas. By improving the ways and means much deposit
could be mobilized. It would create confidence in the minds of the public. The
extension of banking facilities to rural and semi urban areas has facilitated
mobilization of deposits and also inculcation of banking habits among the
rustics.They are benefitted by improved technological services that has
replaced cheques, pay orders, demand draft etc.The success of a scheduled
commercial bank depends upon its deposits. Deposits constitute it’s backbone.
Descendance deposit growth would affect the economic growth of rural
area.Hence it is imperative to mobilize deposits.At the same time the banking
system has emerge more strong, resilient with the capacity to meet the
challenges of globalization.


46
http://en.wikipedia.org/wiki/Pradhan_Mantri_Jan_Dhan_Yojana
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