CHAPTER – III

AN INTRODUCTION TO BANKING AND BANKING SERVICES

A bank is a financial institution that provides banking and other financial services
to their customers. A bank is generally understood as an institution which provides
fundamental banking services such as accepting deposits and providing loans. There are
also nonbanking institutions that provide certain banking services without meeting the
legal definition of a bank. Banks are a subset of the financial services industry. A banking
system also referred as a system provided by the bank which offers cash management
services for customers, reporting the transactions of their accounts and portfolios,
throughout the day. The banking system in India should not only be hassle free but it
should be able to meet the new challenges posed by the technology and any other external
and internal factors. For the past three decades, India’s banking system has several
outstanding achievements to its credit.

The Banks are the main participants of the financial system in India. The Banking
sector offers several facilities and opportunities to their customers. All the banks
safeguards the money and valuables and provide loans, credit, and payment services, such
as checking accounts, money orders, and cashier’s cheques. The banks also offer
investment and insurance products. As a variety of models for cooperation and
integration among finance industries have emerged, some of the traditional distinctions
between banks, insurance companies, and securities firms have diminished. In spite of
these changes, banks continue to maintain and perform their primary role is accepting
deposits and lending funds from these deposits.

History of banking in India

There are three different phases in the history of banking in India.

Pre-Nationalization Era.

Nationalization Stage.

Post Liberalization Era.

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Pre-Nationalization Era:

In India the business of banking and credit was practices even in very early times.
The remittance of money through Hundies, an indigenous credit instrument, was very
popular. The hundies were issued by bankers known as Shroffs, Sahukars, Shahus or
Mahajans in different parts of the country.The modern type of banking, however, was
developed by the Agency Houses of Calcutta and Bombay after the establishment of Rule
by the East India Company in 18th and 19th centuries.

During the early part of the 19th Century, ht volume of foreign trade was relatively
small. Later on as the trade expanded, the need for banks of the European type was felt
and the government of the East India Company took interest in having its own bank. The
government of Bengal took the initiative and the first presidency bank, the Bank of
Calcutta (Bank of Bengal) was established in 180. In 1840, the Bank of Bombay and IN
1843, the Bank of Madras was also set up.

These three banks also known as “Presidency Bank”. The Presidency Banks had
their branches in important trading centers but mostly lacked in uniformity in their
operational policies. In 1899, the Government proposed to amalgamate these three banks
in to one so that it could also function as a Central Bank, but the Presidency Banks did
not favour the idea. However, the conditions obtaining during world war period (1914-
1918) emphasized the need for a unified banking institution, as a result of which the
Imperial Bank was set up in1921. The Imperial Bank of India acted like a Central bank
and as a banker for other banks.

The RBI (Reserve Bank of India) was established in 1935 as the Central Bank of
the Country. In 1949, the Banking Regulation act was passed and the RBI was
nationalized and acquired extensive regulatory powers over the commercial banks.
In 1950, the Indian Banking system comprised of the RBI, the Imperial Bank of India,
Cooperative banks, Exchange banks and Indian Joint Stock banks.

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Nationalization Stages:

After Independence, in 1951, the All India Rural Credit survey, committee of
Direction with Shri. A. D. Gorwala as Chairman recommended amalgamation of the
Imperial Bank of India and ten others banks into a newly established bank called the State
Bank of India (SBI). The Government of India accepted the recommendations of the
committee and introduced the State Bank of India bill in the Lok Sabha on 16thApril 1955
and it was passed by Parliament and got the president’s assent on 8th May 1955. The Act
came into force on 1st July 1955, and the Imperial Bank of India was nationalized in 1955
as the State Bank of India.

The main objective of establishing SBI by nationalizing the Imperial Bank of

India was “to extend banking facilities on a large scale more particularly in the rural and
semi-urban areas and to diverse other public purposes.” In 1959, the SBI (Subsidiary
Bank) act was proposed and the following eight state-associated banks were taken over
by the SBI as its subsidiaries.

Name of the Bank Subsidiary with effect from

1. State Bank of Hyderabad 1st October 1959

2. State Bank of Bikaner 1st January 1960

3. State Bank of Jaipur 1st January 1960

4. State Bank of Saurashtra 1st May 1960

5. State Bank of Patiala 1st April 1960

6. State Bank of Mysore 1st March 1960

7. State Bank of Indore 1st January 1968

8. State Bank of Travancore 1st January 1960

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 With effect from 1st January 1963, the State Bank of Bikaner and State Bank of
Jaipur with head office located at Jaipur. Thus, seven subsidiary banks State Bank of
India formed the SBI Group.

The SBI Group under statutory obligations was required to open new offices in
rural and semi-urban areas and modern banking was taken to these unbanked remote
areas.

On 19th July 1969, then the Prime Minister, Mrs. Indira Gandhi announced the
nationalization of 14 major scheduled Commercial Banks each having deposits worth Rs.
50 crore and above. This was a turning point in the history of commercial banking in
India.

Later the Government Nationalized six more commercial private sector banks
with deposit liability of not less than Rs. 200 crores on 15th April 1980, viz.

Andhra Bank.

Corporation Bank.

New Bank of India.

Oriental Bank of Commerce.

Punjab and Sind Bank.

Vijaya Bank.

In 1969, the Lead Bank Scheme was introduced to extend banking facilities to
every corner of the country. Later in 1975, Regional Rural Banks were set up to
supplement the activities of the commercial banks and to especially meet the credit needs
of the weaker sections of the rural society.

Nationalization of banks paved way for retail banking and as a result there has
been an alt round growth in the branch network, the deposit mobilization, credit disposals
and of course employment.

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 The first year after nationalization witnessed the total growth in the agricultural
loans and the loans made to SSI by 87% and 48% respectively. The overall growth in the
deposits and the advances indicates the improvement that has taken place in the banking
habits of the people in the rural and semi-urban areas where the branch network has
spread. Such credit expansion enabled the banks to achieve the goals of nationalization, it
was however, achieved at the coast of profitability of the banks.

Post-Liberalization Era—Thrust on Quality and Profitability:

By the beginning of 1990, the social banking goals set for the banking industry
made most of the public sector resulted in the presumption that there was no need to look
at the fundamental financial strength of this bank. Consequently they remained
undercapitalized. Revamping this structure of the banking industry was of extreme
importance, as the health of the financial sector in particular and the economy was a
whole would be reflected by its performance.

The need for restructuring the banking industry was felt greater with the initiation
of the real sector reform process in 1992. The reforms have enhanced the opportunities
and challenges for the real sector making them operate in a borderless global market
place. However, to harness the benefits of globalization, there should be an efficient
financial sector to support the structural reforms taking place in the real economy. Hence,
along with the reforms of the real sector, the banking sector reformation was also
addressed.

The route causes for the lacklustre performance of banks, formed the elements of
the banking sector reforms. Some of the factors that led to the dismal performance of
banks were.

Regulated interest rate structure.

Lack of focus on profitability.

Lack of transparency in the bank’s balance sheet.

Lack of competition.

Excessive regulation on organization structure and managerial resource.

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Excessive support from government.

Against this background, the financial sector reforms were initiated to bring about
a paradigm shift in the banking industry, by addressing the factors for its dismal
performance.
In this context, the recommendations made by a high level committee on financial
sector, chaired by M. Narasimham, laid the foundation for the banking sector reforms.
These reforms tried to enhance the viability and efficiency of the banking sector. The
Narasimham Committee suggested that there should be functional autonomy, flexibility
in operations, dilution of banking strangulations, reduction in reserve requirements and
adequate financial infrastructure in terms of supervision, audit and technology. The
committee further advocated introduction of prudential forms, transparency in operations
and improvement in productivity, only aimed at liberalizing the regulatory framework,
but also to keep them in time with international standards. The emphasis shifted to
efficient and prudential banking linked to better customer care and customer services.

Classification of Banking Industry in India

Indian banking industry has been divided into two parts, organized and
unorganized sectors. The organized sector consists of Reserve Bank of India, Commercial
Banks and Co-operative Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC
etc). The 28unorganized sector, which is not homogeneous, is largely made up of money
lenders and indigenous bankers.

The Indian Banking structure may be taken as in exhibit 1

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 RBI

Non Schedule
Schedule Bank
Banks

Schedule Scheduled
Commercial Co-operative
k Banks

Public Sector Private Regional Rural Schedule Urban

Banks Sector Banks Foreign Banks Co-operative
Banks Banks
Nationalised Old Private
Bank Sector Banks Schedule State
Co-operative

SBI & its New private

associates sector Banks
Banks
Exhibit : 1
Indian Banking Structure
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Need for Banks

Before the establishment of banks, the financial activities were handled by money
lenders and individuals. At that time the interest rates were very high. Again there were
no security of public savings and no uniformity regarding loans. So as to overcome such
problems the organized banking sector was established, which was fully regulated by the
government. The organized banking sector works within the financial system to provide
loans, accept deposits and provide other services to their customers. The following
functions of the bank explain the need of the bank and its importance:

To provide the security to the savings of customers.

To control the supply of money and credit

To encourage public confidence in the working of the financial system, increase
savings speedily and efficiently.

To avoid focus of financial powers in the hands of a few individuals and
institutions.

To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all
types of customers

Banking services

Banking services are regarded as one of the important service. Banks provide
financial services to the customers. Due to the rising competition and liberalization the
banking industry has become the buyer’s market. Banks need to create and develop the
services which can satisfy the consumer needs. Customer satisfaction is a very important
construct in today’s market and it is directly influenced by service quality as per earliest
studies. Therefore, the present research work has been carried out to analyze the rural
customers’ attitude towards public sector banks.

Banking in India is so convenient and hassle free that one (individual, groups or
whatever the case may be) can easily process transactions as and when required.
The most common services offered by banks in India are as follows

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Bank accounts: It is the most common service of the banking sector. An individual can
open a bank account which can be either savings, current or term deposits.

Loans: You can approach all banks for different kinds of loans. It can be a home loan,
car loan, personal loan, loan against shares and educational loans.

Money Transfer: Banks can transfer money from one corner of the globe to the other by
issuing demand drafts, money orders or cheques

Credit and debit cards: Most banks offer credit cards to their customers which can be
used to purchase products and services, or borrow money.

Lockers: Most banks have safe deposit lockers which can be used by the customers
for storing valuables, like important documents or jewellery.

Public sector banks

The term public sector banks are used commonly in India. This refers to banks
that have their shares listed in the stock exchanges NSE and BSE and also the
government of India holds majority stake in these banks. They can also be termed as
government owned banks. Ex: State bank of India. The public sector banks hold over
75% of total assets of the banking industry, with the private and foreign banks holding
18.2% and 6.5% respectively.

Recent trends in Indian banking sector

Today, we are having a fairly well developed banking system with different
classes of banks – public sector banks, foreign banks, private sector banks – both old and
new generation, regional rural banks and co-operative banks with the Reserve Bank of
India as the fountain Head of the system.

In the banking field, there has been an unprecedented growth and diversification
of banking industry has been so stupendous that it has no parallel in the annals of banking
anywhere in the world.

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 During the last 41 years since 1969, tremendous changes have taken place in the
banking industry. The banks have shed their traditional functions and have been
innovating, improving and coming out with new types of the services to cater to the
emerging needs of their customers.

Massive branch expansion in the rural and underdeveloped areas, mobilisation of

savings and diversification of credit facilities to the either to neglected areas like small
scale industrial sector, agricultural and other preferred areas like export sector etc. have
resulted in the widening and deepening of the financial infrastructure and transferred the
fundamental character of class banking into mass banking.

There has been considerable innovation and diversification in the business of

major commercial banks. Some of them have engaged in the areas of consumer credit,
credit cards, merchant banking, leasing, mutual funds etc. A few banks have already set
up subsidiaries for merchant banking, leasing and mutual funds and many more are in the
process of doing so. Some banks have commenced factoring business.

The major challenges faced by banks today are as to how to cope with
competitive forces and strengthen their balance sheet. Today, banks are groaning with
burden of NPA’s. It is rightly felt that these contaminated debts, if not recovered, will eat
into the very vitals of the banks. Another major anxiety before the banking industry is the
high transaction cost of carrying Non Performing Assets in their books. The resolution of
the NPA problem requires greater accountability on the part of the corporate, greater
disclosure in the case of defaults, an efficient credit information sharing system and an
appropriate legal framework pertaining to the banking system so that court procedures
can be streamlined and actual recoveries made within an acceptable time frame. The
banking industry cannot afford to sustain itself with such high levels of NPA’s thus,
“lend, but lent for a purpose and with a purpose ought to be the slogan for salvation.”

The Indian banks are subject to tremendous pressures to perform as otherwise

their very survival would be at stake. Information technology (IT) plays an important role
in the banking sector as it would not only ensure smooth passage of interrelated

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transactions over the electric medium but will also facilitate complex financial product
innovation and product development. The application of IT and e-banking is becoming
the order of the day with the banking system heading towards virtual banking.

As an extreme case of e-banking World Wide Banking (WWB) on the pattern of

World Wide Web (WWW) can be visualised. That means all banks would be interlinked
and individual bank identity, as far as the customer is concerned, does not exist. There is
no need to have large number of physical bank branches, extension counters. There is no
need of person-to-person physical interaction or dealings. Customers would be able to do
all their banking operations sitting in their offices or homes and operating through
internet. This would be the case of banking reaching the customers.

Why is Customer Service Important?

 Changing customer expectations: Today the customer is more demanding and

more sophisticated than he or she was thirty years ago.

 The increased importance of customer service: With changing customer

expectations, competitors are seeing customer service as a competitive weapon
with which they differentiate their products and services.

 The need for a relationship strategy: To ensure that a customer service strategy
that will create a value preposition for customers should be formulated
implemented and controlled. It is necessary to give it a central role and not one
that is subsumed in the various elements of the marketing mix.

The customer is the kingpin in growth organizations like commercial banks. Only
those institutions which work according to his dictates will flourish. Quality, Consistency
and Durability at low price are the final expectations of a customer. Quality will have to
be unambiguous, of world class quality. Quality cannot be of minimum acceptable
standards. Customer responsiveness must be quick and also competent. Speed,
performance and cost will be the new values “mantra” for success.

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The ten key areas of customer’s services to be attended timely and regularly are:

Submission of statement of A/Cs to customers

Updating of savings pass books.

Teller system efficiency.

Cleanliness and Upkeep of premises.

Intermediate Credit for institution cheques/land bills.

Advance intimation to customers for rewards of Term Deposits Receipts on
maturity.

Advance for Debit/credit to accounts.

Punctuality of staff.

Handling of complaint register.

Maintain a complaint register.

Customer’s dissatisfaction in the banking industry is neither recent nor unknown.

This is mainly due to delays in handling transactions across the counter in collections,
update of passbooks supply of statements of accounts, etc.

Failure to provide prompt and efficient customer service is likely to lead to

reduction in the number of customers and they may have to face closure. To event such
situation the following improvements in the customer services may be carried out:

Personal relations of the bank employee with customers will improve customer
satisfaction. 1 service with smile should be the motto of every bank employee.

Rapid customer services should be provided through automation of work and
simplification of procedures.

ATM’s may be introduced in all the branches of the banks, based upon the
volume of transactions. This shall facilitate non-stop banking.

Credit Cards Services, Debit Card Services, which should be provided to the
customers, must a link service with all the banks and branches if possible to
facilitate the customer and the business organizations.

E-mail service made freely available at all banking centres.

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Foreign Exchange transactions are to be extended to all the branches to facilitate
trade and industries.

All the customers are not homogenous in their needs. Hence need based schemes
may be introduced.

Totally deregulated interest rate structure should be there.

The banking staff must be trained to understand the customer’s psychology, so
they may provide customer service in a qualified manner.

Educating the customers will increases better utilisation of banking services.

Customer service strategies in banking sector

Today, banking sector is seen as a catalyst in economic growth of a country and,

lot is expected from the banking fraternity. The recognition of banking, as a tool for all
inclusive growth by economists, financial planners, reformist etc has made it an
important sector in the Government’s planning of economic growth. The banking sector
in India is therefore witnessing tremendous changes because of political, social and
economic changes that are taking place domestically and internationally.

The concept of banking, which was earlier restricted to accepting of deposits from
public for the purpose of, has also undergone sea change. Today the banking sector is
seen as a vehicle for all inclusive economic growth, social responsibility and equiv-
distribution of national resources.

Today banks are wooing existing customers, prospective customers by offering

new facilities, products, and services in order to retain/increase their base in market. The
way the banking has changed, so has the customer changed. The customer of today is not
what he was yesterday. Today the customer is more knowledgeable, demanding,
analytical and aware of his rights. It is therefore a challenging task before the banking
sector to revisit their entire working modules, up gradation of skills, technology, and
policies so that they are competent to withstand the international competitive
environment in future.

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 All customers from different backgrounds have different expectations. Unless the
service standards fit to each person’s expectations, he will not be satisfied. Therefore one
has to understand each type of customer thoroughly to be able to provide customer
specific services.

The entire process of customer service is dependent on following.

 Human resources
Any organization’s success or failure is the result of success or failure of its
employees collectively. Here the employee doesn’t mean only the staff working down the
ladder, but also includes people right up to the top. All the functions in an organization
are undertaken by humans, whether it is selection of staff, development of product,
making software, formulating policies, devising systems, procedures, defining processes,
delivery channels, undertaking market studies etc. Humans may be assisted by the
technology for arriving at the decisions. In all the functions enumerated above, different
departments do the work separately but the same are ultimately linked to each other to
achieve the corporate goal. It is just like gears though rotating independently, move the
entire structure in the desired direction. If any gear malfunctions, it brings the entire
process to halt. Thus the human beings working in an organization are very important.
Handling of humans by humans is a very complex job also.

The job requirements of HRD are to select, train, develop, deploy, and motivate
the human resources in the organization so as to get optimum results for the organization.

 Products/services
Banks do not provide physical goods to its customers. The products which a bank
offers are mostly financial products and along with these products also provide other
services which are not financial in nature, like safe deposit vaults, Locker facilities etc.
In financial products there are basically two types of activities, namely deposit
procurement and its deployment profitably. These two activities constitute more than
80% of banking business in all the banks.

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Deposits: Basic structure of deposit is to attract the customer by offering interest on
funds or some facility in lieu of interest. However depending upon the needs of different
set of customers various types of deposit schemes are formulated. For example, savings
bank accounts are for those who want short term savings with liquidity and to make
regular deposits and withdrawals etc. Term deposits are for those who want to invest for
longer duration having surplus funds not needed immediately. Some may want savings to
grow gradually by contributing smaller amounts at set intervals. The ultimate goal of
depositor is to keep his money safely in the bank and be able to use when needed.
Likewise there are various combinations of deposit schemes based on liquidity, returns
and safety.

Advances: Banks, in a similar way deploy deposits by lending to those who need it at a
cost in the shape of interest. Here again the products differ depending upon the need of
the customer. It may be overdraft facility, working capital finance, term loan, etc for
business or personal needs.

Other products/ services: Apart from deposit and advances, banks offer various other
facilities/services to their clients, like remittances, investment services, fund
management, financial advisory services, tax collections, bill payment services etc. to
earn fee based incomes.

The flexibility of banks to adopt changing needs and expectation of customers and
bring out products/ services to suit customers is an important area in banking services. A
robust Research and Development department which can effectively and efficiently bring
out newer products/ services based on market feel and futurist visualization of customer
preferences is an important aspect in banking services.

 Processes.
Today’s customer is short of time and feels uncomfortable when the process
involved in getting the product or service is lengthy and cumbersome. The customer
wants very simple processes to get his work done. The processes for any product or
service should be at the minimum and at one go. Frequent back references and repeated

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information and excessive documentation dissatisfy the customer. The processes devised
for getting the services should be very customer friendly, easy to understand and
complete. The forms, applications, documents should be simple, easy to understand with
proper column and space to write. Sometimes it is observed that the space provided for
writing is very small. The quality of paper, the font size and the language should be
proper.

 Delivery channels.
Customer satisfaction is also dependent upon the delivery channels used by banks
in providing the services. Today’s customer wants effortless, efficient, secure, simple and
dependable channels of delivery, whether it is through humans or technology driven
channels. To quote an example, suppose a customer uses internet banking and made a
third party payment. He would like to know what happened to his payment instructions.
He should be able to track the payment on line till it reaches the beneficiaries account. If
this facility is not available, he may not be comfortable with the internet banking.
Another thing mostly observed in Public sector banks is that their websites are not
updated regularly and navigation is very tardy. The forms/ applications are scanned and
cannot be filled on line. The information/ forms etc. are outdated and not properly tagged.

 Customer feedback and complaints.

Feedback from customers is of immense help in formulating products, fine tune
services and plug the loopholes. However most of the time, feed backs are generally not
available and public sector banks are normally not enthused about taking feedback on
their services. Rather wherever a customer gives his feedback (read complaint), it is not
taken in right spirit by the bank/ concerned staff. Instead of looking into the real cause an
effort is made to provide alibis or blame the staff. It may be possible that that the
procedure itself is the cause of complaint or it is because of reasons which are not under
control of the branch.

Customers may be of three types. One type of customer never complains and
continues the relationship. Second type of customer does not complain but changes the

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bank silently and third type of customer complains. First and second type of customers
does not give an opportunity to bank to improve upon its services. Third type of customer
however gives opportunity to the bank to improve the service though he may not be
preferred over the other two types of customers.

Today no bank is willing to accept complaints from the customers and normally
effort is made to somehow get the complaint withdrawn or resolved without analyzing
why the complaint has originated. It becomes very difficult for field level staff to get the
complaint redressed when the cause or reason of complaint is not because of them.
However they are made to beg the customer to give satisfaction letter.

Each complaint when made may be because of so many factors, not necessarily
the fault of the person or branch against which it is made. It may be due to system lapse,
procedural deficiency, inapt technology, poor in-house work allocation, work flow
module etc. Sometimes the complaints are frivolous and made to harass the person
concerned. Though in customer oriented markets, customer is always right but care
should be taken that the staff is also protected from frivolous complainants. Each
complaint of the customer should be properly analyzed, assessed. It may be possible that
route cause may be somewhere else which should be rectified rather than the concerned
staff or branch made the scapegoat.

 Grievances redressed Mechanism.

Improving upon the services is an ongoing process. The essential inputs are
customer feedback, market surveys and the complaints received by an organization. No
organization can say that they have zero customer complaints. However an organization
which has robust mechanism to redress the complaints and resolve problem of the
customer gets recognition as a customer friendly organization. Accepting the mistake and
offering compensation goes a long way in retaining the customer. Most of the banks have
come out with their compensation policies and customer grievances cells. However they
are mostly on paper and seldom followed in the spirit in which they are framed. Even
where the compensation policy provides automatic payment of compensation, interest in
case of delays etc., it is seldom paid unless the customer demands it.

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 Market Studies.
Market studies are effective tools to study the behavior of customers and their
response to present standard of services. It also helps to understand future trends and
requirements as needs of the customer’s keeps of changing with change of times. Market
research gives way to innovations in products and services. Market studies may be done
in-house, or assigned to outside expert agencies or both depending upon the vision of the
bank.

Bank Marketing Mix and Strategies:

The first task before the public sector commercial Banks is to formulate that Bank
marketing mix which suits the national socio-economic requirements. Some have 4 P's
and some have 7 P's of marketing mix. The common four Ps of Marketing mix is as
follows:-

i) Product:

To be more specific the peripheral services need frequent innovations, since this
would be helpful in excelling competition. The product portfolio designing is found
significant to maintain the commercial viability of the public sector banks. The banks
professionals need to assign due weight age to their physical properties. They are
supposed to look smart active and attractive.

ii) Price:

Price is a critical and important factor of bank marketing mix due numerous
players in the industry. Most consumers will only be prepared to invest their money in
search of extraordinary or higher returns. They are ready to pay additional value if there
is a perception of extra product value. This value may be improved performance,
function, services, reliability, promptness for problem solving and of course, higher rate
of return.

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iii) Promotion:

Bank Marketing is actually is the marketing of reliability and faith of the people
.It is the responsibility of the banking industry to take people in favor through Word of
mouth publicity, reliability showing through long years of establishment and other
services.

iv) Place:

The choice of where and when to make a product available will have significant
impact on the customers. Customers often need to avail banking services fast for this they
require the bank branches near to their official area or the place of easy access.

Bank Marketing Strategies:

The marketing research considered being a systematic gathering, recording and

analysis of data makes ways for making and innovation the marketing decisions. The
information collected from the external sources by conducting surveys helps bank
professional in different wants. In the bank services, the formulation of overall marketing
strategies is considered significant with the view point of tapping the potentials,
expanding the business and increasing the marketing share. The increasing domination
and gaining popularity banks, the popularity banks, the profitable schemes of the non-
banking organization mounting craze among the customers for private banks have made
the task of influencing the impulse of customers a bit difficult. The marketing research
simplifies the task of studying the magnitude of competition by opinion surveys and the
feedback customers, the multidimensional changes in the services mix can be made
productive if it is based on marketing research.

Challenges to Indian Banking:

The banking industry in India is undergoing a major change due to the

advancement in Indian economy and continuous deregulation. These multiple changes
happening in series has a ripple effect on banking industry which is trying to be
organized completely, regulated sellers of market to completed deregulated customers
market

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i) Deregulation:

This continuous deregulation has given rise to extreme competition with greater
autonomy, operational flexibility, and decontrolled interest rate and liberalized norms and
policies for foreign exchange in banking market. The deregulation of the industry
coupled with decontrol in the interest rates has led to entry of a number of players in the
banking industry. Thereby reduced corporate credit off which has resulted in large
number of competitors battling for the same pie.

ii) Modified New rules:

As a result, the market place has been redefined with new rules of the game.
Banks are transforming to universal banking, adding new channels with lucrative pricing
and freebees to offer. New channels squeezed spreads, demanding customers’ better
service, marketing skills heightened competition, defined new rules of the game pressure
on efficiency. Need for new orientation diffused customer loyalty. Bank has led to a
series of innovative product offerings catering to various customer segments, specifically
retail credit.

iii) Efficiency:

Excellent efficiencies are required at banker's end to establish a balance between

the commercial and social considerations Bank need to access low cost funds and
simultaneously improve the efficiency and efficacy. Owing to cutthroat competition in
the industry, banks are facing pricing pressure; have to give thrust on retail assets.

iv) Diffused customer loyalty:

Attractive offers by MNC and other nationalized banks, customers have become
more demanding and the loyalties are diffused. Value added offerings bound customers
to change their preferences and perspective. These are multiple choices; the wallet share
is reduced per bank with demand on flexibility and customization. Given the relatively
low switching costs; customer retention calls for customized service and hassle free,
flawless service delivery.

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v) Misaligned mindset:

These changes are creating challenges, as employees are made to adapt to

changing conditions. The employees are resisting to change and the seller market mindset
is yet to be changed. These problems coupled with fear of uncertainty and control
orientation. Moreover banking industry is accepting the latest technology but utilization
is far below from satisfactory level.

vi) Competency gap:

The competency gap needs to be addressed simultaneously otherwise there will be

missed opportunities. Placing the right skill at the right place will determine success. The
focus of people will be doing work but not providing solutions, on escalating problems
rather than solving them and on disposing customers instead of using the opportunity to
cross sell.

Strategic options to cope with the challenges:

Dominant players in the industry have embarked on a series of strategic and

tactical initiatives to sustain leadership. The major initiatives incorporate:

Focus on ensuring reliable service delivery through Investing on and

implementing right technology.

Leveraging the branch networks and sales structure to mobilize low cost current
and savings deposits.

Making aggressive forays in the retail advances segments of home and personal
loans.

Implementing initiatives involving people, process and technology to reduce the
fixed costs and the cost per transaction.

Focusing on fee based income to compensate foe squeezed spread.

Innovating products to capture customer 'mind share' to begin with and later the
wallet share.

Improving the asset quality.

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Rural banking

Rural banking is the process of conducting banking transactions out in the country
where bank branches are too far away to be of use. Rural banking is popular for very
small towns and farmers who live far away from areas of larger population and cannot
make the drive to these locations whenever they need to use banking services. Typically,
an agent of the bank will visit these rural locations and offer to make transactions in an
official capacity.

The institutional structure of rural banking (As shown in Exhibit : 2) will explain
functioning of rural banks in nutshell.

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 Structure of Rural
Banking

Primary Co-operative
Three tier Federal Regional Rural
Commercial agriculture & Rural
Co-operative Bank Banks
Banks development Banks

District Central Primary

State Co- Co-operative Agricultural
operative Banks Banks Credit societies

Exhibit : 2
Institutional Structure of Rural Banking

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Rural and Social Banking Issues

Since the second half of 1960s, commercial banks have been playing an important
role in the socio-economic transformation of rural India. Besides actively implementing
Government sponsored lending schemes, Banks have been providing direct and indirect
finance to support economic activities. Mandatory lending to the priority sectors has been
an important feature of Indian banking. The Narasimham committee had recommended
for doing away with the present system of directed lending to priority sectors in line with
liberalization in the financial system. The recommendations were, however, not accepted
by the Government. In the prevailing political climate in the country any drastic change
in the policy in this regard appears unlikely.

The banking system is expected to reorient its approach to rural lending. “Going
Rural” could be the new market mantra. Rural market comprises 74% of the population,
41% of Middle class and 58% of disposable income. Consumer growth is taking place at
a fast pace in 17113 villages with a population of more than 5000. Of these, 9989 villages
are in 7 States, namely Andhra Pradesh, Bihar, Kerala, Maharashtra, Tamilnadu, Uttar
Pradesh and West Bengal. Banks approach to the rural lending will be guided mainly by
commercial considerations in future.

Commercial Banks, Co-operatives and Regional Rural Banks are the three major
segments of rural financial sector in India. Rural financial system, in future has a
challenging task of facing the drastic changes taking place in the banking sector,
especially in the wake of economic liberalization. There is an urgent need for rural
financial system to enlarge their role functions and range of services offered so as to
emerge as "one stop destination for all types of credit requirements of people in
rural/semi-urban centres.

Barring commercial banks, the other rural financial institutions have a weak
structural base and the issue of their strengthening requires to be taken up on priority. Co-
operatives will have to be made viable by infusion of capital. Bringing all cooperative
institutions under the regulatory control of RBI would help in better control and
supervision over the functioning of these institutions. Similarly Regional Rural banks

59
(RRBs) as a group need to be made structurally stronger. It would be desirable if
NABARD takes the initiative to consolidate all the RRBs into a strong rural development
entity.

Small Scale Industries have, over the last five decades, emerged as a major
contributor to the economy, both in terms of employment generation and share in
manufactured output and exports. SSIs account for 95% of the industrial units and
contribute about 40% of the value addition in the manufacturing sector. There are more
than 32 lack units spread all over the country producing over 7500 items and providing
employment to more than 178 lack persons. The employment generation potential and
favourable capital-output ratio would make small scale sector remain important for policy
planners.

Removal of quantitative restrictions on a large number of items under the WTO

and opening up of Indian market to greater international competition have thrown both
challenges and opportunities for the SSI sector. Low capital base and weak management
structure make these units vulnerable to external shocks, more easily. However the units
which can adapt to the changing environment and show imagination in their business
strategy will thrive in the new environment.

Instead of following the narrow definition of SSI, based on the investment in

fixed assets, there is a move to look at Small and Medium Enterprises (SME) as a group
for policy thrust and encouragement. For SMEs, banks should explore the option of E-
banking channels to develop web-based relationship banking models, which are
customer-driven and more cost-effective. Government is already considering legislation
for the development of SME sector to facilitate its orderly growth.

In the next ten years, SME sector will emerge more competitive and efficient and
knowledge-based industries are likely to acquire greater prominence. SMEs will be
dominating in industry segments such as Pharmaceuticals, Information Technology and
Biotechnology. With SME sector emerging as a vibrant sector of the Indian economy,
flow of credit to this sector would go up significantly. Banks will have to sharpen their

60
skills for meeting the financial needs of this segment. Some of the Banks may emerge as
niche players in handling SME finance. Flow of credit to this Sector will be guided
purely by commercial considerations as Banks will find SMEs as an attractive business
proposition.

Do’s for Rural Banking:

The focus of the service quality should be customer driven and hence need to be
customized as per the rural requirements of customers having low income group
as major target group. Hence more of benefits driven by the customer from
savings schemes should be included in the Services provided through account
maintenance with the banks.

The service providers should be clearly aware of the local languages, culture and
behaviour of the rural customers. Thus the inclusion of local employees would be
beneficial for the banks to deal effectively with the customers.

The banks should be able to provide these banking services such as loan and
microfinance services at lowest and most profitable interest rates with flexible and
customized repayment options to the customers. The Bank need to clearly
understand the best possible location for its setup and operations as the location
and facility layout of the service provider plays a very significant role in rural
banking because the rural areas do not have sufficient transport facilities like
urban markets.

The customers should be made aware clearly about the services provided by the
bank through effective physical evidence and promotions that should be made as
simple as possible to the rural customers to understand properly. The assistance
should be provided regularly to the customers to educate them about the current
as well as prospective facilities and benefits derived from the banking services
provided.

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Don’t’s for the Rural Banking:

Do not put much focus on providing any complex and unessential services like
corporate loans and credit card facilities as still the market demand for such
services are much lesser as compared to other banking services.

Do not use any illegal or unethical means for repayment of loans and other
services as this would result in more of customer dissatisfaction and grievance
which would harm the brand equity and image of the banking company.

Do not provide services to the customer before properly educating the customer
about the details product and process of the service so as to avoid confusion and
discrepancy.

Do not focus on the short term profitability but the bank needs to focus on the
building long term relationship with the customer by putting more concentration
on:

Service quality.
Service recovery.
Reach to the customer and building prospective future customers.
Improving market share.
Building Brand loyalty.
Providing new facilities as per the customer needs and requirements.

However it cannot be denied that rural banks face lot of hurdles (As shown in
Exhibit : 3) in achieving their target and fulfilling their objectives. As applicable to any
service sector, banking sector particularly rural banks too are not exceptions in facing
hurdles. The objective and strategic functioning of rural banks will be of solution to the
problems/hindrances faced.

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 Information Gap

Accessibility & Reach

Infrastructure

Illiterate Populace

Foolproof Identity

Exhibit : 3
Hurdles In Rural Banking
63