PROJECT REPORT ON

ROLE OF BANKS IN INDIAN ECONOMY

SUBJECT
BANKING AND INSURANCE

SUBMITTED TO
PROF. TUSHAR PADVAL

PREPARED BY:
AVANTIKA UDAS – 63
NEERAJ UPADHYAY - 64
(MMS – II YEAR)

INSTITUE OF COMPUTER STUDIES AND

MANAGEMENT THANE
 Acknowledgement

Behind every fruitful endeavour lie the advice, guidance

and inspiration of all the people directly or indirectly involved
with the report. The project on Role of banks in Indian
economy was a great opportunity to learn.
With the help of this project we were able to understand
how bank functions at macro level, importance of banks,
financial institutions and Role of RBI.
We are very thankful to Prof. Tushar Padval for giving
this opportunity to learn and for guiding us.

Avantika Udas - 63
Neeraj Upadhyay- 64
MMS 2nd year
 1. What is bank and Banking?

Bank: An organisation usually a corporation chartered by

state or federal govt which carry out wide array of activities.

A bank is an institution that deals in money and its

substitutes and
provides other financial services. Banks accept deposits and
make loans or make an investment to derive a profit from
the difference in the interest rates paid and charged,
respectively.

In India the banks are being segregated in different groups.

Each
group has their own benefits and limitations in operating in
India. Each
has their own dedicated target market. Few of them only
work in rural
sector while others in both rural as well as urban. Many even
are only
catering in cities. Some are of Indian origin and some are
foreign players.

Banking: A system of trading in money which involved

safeguarding deposits and making funds available for
borrowers
 2. Role of banks in developing
economy
A safe and sound financial sector is a prerequisite for
sustained growth of any economy. Globalization,
deregulation and advances in information technology in
recent years have brought about significant changes in the
operating environment for banks and other financial
institutions. These institutions are faced with increased
competitive pressures and changing customer demands.
These, in turn, have engendered a rapid increase in product
innovations and changes in business strategies. While these
developments have enabled improvement in the efficiency of
financial institutions, they have also posed some serious
risks.

Banks play a very useful and dynamic role in the economic

life of every modern state. A study of the economic history of
western country shows that without the evolution of
commercial banks in the 18th and19th centuries, the
industrial revolution would not have taken place in Europe.

India’s economy has been one of the stars of global

economics in recent years. It has grown by more than 9% for
three years running.
The economy of India is as diverse as it is large, with a
number of major sectors including manufacturing industries,
agriculture, textiles and handicrafts, and services.
Agriculture is a major component of the Indian economy, as
over 66% of the Indian population earns its livelihood from
this area. Banking sector is considered as a booming sector
in Indian economy recently. Banking is a vital system for
developing economy for the nation.

3. Evolution of Indian banking

The banking evolution in India has happened in 3 major

phases:

- Phase I ( Pre- independence)

- Phase II ( post –independence)
- Phase III (post nationalization)

Phase I
The General Bank of India was set up in the year 1786. Next
came Bank of Hindustan and Bengal Bank. The East India
Company established Bank of Bengal (1809), Bank of
Bombay (1840) and Bank of Madras (1843) as independent
units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was
established which started
as private shareholders banks, and mostly the European,
Europeans-shareholders. In 1865 Allahabad Bank was
established and first time exclusively by Indians, Punjab
National Bank Ltd. was set up in 1894 with headquarters at
Lahore. Between 1906 and 1913, Bank of India, Central Bank
of India, Bank of Baroda, Canara Bank, Indian Bank, and
Bank of Mysore were set up. Reserve Bank of India came
in1935. During the first phase the growth was very slow and
banks also experienced periodic failures between 1913 and
1948. There were approximately 1100 banks, mostly small.
To streamline the functioning and activities of commercial
banks, the Government of India came up with The Banking
Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No.
23 of 1965).

Reserve Bank of India was vested with extensive powers for

the supervision of banking in India as the Central Banking
Authority. During those days public has lesser confidence in
the banks. As an aftermath deposit mobilization was slow.

Phase II:

Government took major steps in this Indian Banking Sector

Reform after independence. In 1955, it nationalized Imperial
Bank of India with extensive

banking facilities on a large scale especially in rural and

semi-urban areas. It formed State Bank of India to act as the
principal agent of RBI and to handle banking transactions of
the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was
nationalized in 1960 on 19th July, 1969, major process of
nationalization was carried out.
It was the effort of the then Prime Minister of India, Mrs.
Indira Gandhi. 14 major commercial banks in the country
was nationalized. Second phase of nationalisation Indian
Banking Sector Reform was carried out in
1980 with seven more banks. This step brought 80% of the
banking segment in India under Government ownership.

After the nationalisation of banks, the branches of the public

sector bank India rose to approximately 800% in deposits
and advances took a huge jump by 11,000%. Banking in the
sunshine of Government ownership gave the public implicit
faith and immense confidence.

Phase III
This phase has introduced many more products and facilities
in the banking sector in its reforms measure. In 1991, under
the chairmanship of M Narasimham, a committee was set up
by his name which worked for the liberalisation of banking
practices. The country is flooded with foreign banks and their
ATM stations. Efforts are being put to give a satisfactory
service to customers. Phone banking and net banking is
introduced. The entire system became more convenient and
swift. Time is given more importance than money.
The financial system of India has shown a great deal of
resilience. It is sheltered from any crisis triggered by any
external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange rate
regime, the foreign reserves are high, the capital account is
not yet fully convertible, and banks and their customers have
limited foreign exchange exposure.
 4. Reserve Bank of India

The Reserve Bank of India was established on April 1, 1935

in accordance with the provisions of the Reserve Bank of
India Act, 1934.

The Central Office of the Reserve Bank was initially

established in Calcutta but was permanently moved to
Mumbai in 1937. The Central Office is where the Governor
sits and where policies are formulated.

Though originally privately owned, since nationalisation in

1949, the Reserve Bank is fully owned by the Government of
India.

Preamble: "...to regulate the issue of Bank Notes and

keeping of reserves with a view to securing monetary
stability in India and generally to operate the currency and
credit system of the country to its advantage."

Functions of RBI

Monetary Authority:

• Formulates, implements and monitors the monetary

policy.
• Objective: maintaining price stability and ensuring
adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

• Prescribes broad parameters of banking operations

within which the country's banking and financial system
functions.
• Objective: maintain public confidence in the system,
protect depositors' interest and provide cost-effective
banking services to the public.
Manager of Foreign Exchange

• Manages the Foreign Exchange Management Act, 1999.

• Objective: to facilitate external trade and payment and
promote orderly development and maintenance of
foreign exchange market in India.

Issuer of currency:

• Issues and exchanges or destroys currency and coins

not fit for circulation.
• Objective: to give the public adequate quantity of
supplies of currency notes and coins and in good
quality.

Developmental role

• Performs a wide range of promotional functions to

support national objectives.

Related Functions

• Banker to the Government: performs merchant banking

function for the central and the state governments; also
acts as their banker.
• Banker to banks: maintains banking accounts of all
scheduled banks.

Banking Structure
 5. Services offered by Banks
Banking is service industry and bank provides a wide array of
services to its customers, corporate, government and public
at large.

Banking services can be classified under 3 categories:

-Retail banking
- Trade finance
-Treasury Operations

Retail banking:
It includes meeting banking requirements of individual.
Retail Banking:
- Deposits
- Loans, Cash Credit and Overdraft
- Negotiating for Loans and advances
- remittances
- Book-Keeping (maintaining all accounting records)
- Receiving all kinds of bonds valuable for safe keeping

Trade Finance:
-Issuing and confirming of letter of credit.
-Drawing, accepting, discounting, buying, selling, collecting
of bills of exchange,
promissory notes, drafts, bill of lading and other securities.
Treasury Operations:
-Buying and selling of bullion. Foreign exchange
-Acquiring, holding, underwriting and dealing in shares,
debentures, etc.
-Purchasing and selling of bonds and securities on behalf of
constituents.

The banks can also act as an agent of the Government or

local authority. They
insure, guarantee, underwrite, participate in managing and
carrying out issue of shares, debentures, etc.
Apart from the above-mentioned functions of the bank, the
bank provides a whole lot of other services like investment
counseling for individuals, short-term funds management
and portfolio management for individuals and companies. It
undertakes the inward and outward remittances with
reference to foreign exchange and collection of varied types
for the Government.

To meet with changing needs and demands of customers so

many have come up with many technological driven
products. Again banks have diversified in their products and
services basket. They are continuously reviving their
products and making innovations in that also adopting new
business strategies.

Some of the new and modern services are:

- Investment and merchant banking:

An investment bank is a financial institution that

assists corporations and governments in raising capital
by underwriting and acting as the agent in the issuance
of securities. An investment bank also assists
companies involved in mergers and acquisitions,
derivatives, etc. Further it provides ancillary services
such as market making and the trading of derivatives,
 fixed income instruments, foreign exchange,
commodity, and equity securities.

In banking, a merchant bank is a financial institution

primarily engaged in offering financial services and
advice to corporations and to wealthy individuals. The
term can also be used to describe the private equity
activities of banking.[1] The chief distinction between an
investment bank and a merchant bank is that a
merchant bank invests its own capital in a client
company whereas an investment bank purely
distributes (and trades) the securities of that company
in its capital raising role. Both merchant banks and
investment banks provide fee based corporate advisory
services, including in relation to mergers and
acquisitions

- Foreign exchange transfer

There are many banks which offer foreign exchange
transfer or deal in currency conversion. These are new
types of service. In India Thomas Cook and Western
Union money transfer can be taken as example.

- RTGS ( Real Time Gross Settlment)

Real time gross settlement systems (RTGS) are funds

transfer systems where transfer of money or securities[1]
takes place from one bank to another on a "real time" and on
"gross" basis. Settlement in "real time" means payment
transaction is not subjected to any waiting period. The
transactions are settled as soon as they are processed.
"Gross settlement" means the transaction is settled on one
to one basis without bunching or netting with any other
transaction. Once processed, payments are final and
irrevocable.
6. Role of Banks in Industrial
Development
Banks have been playing a phenomenal role in Industrial
banking. Especially after independence industrial banking
grown Development banks were set up India in 1940’s to
cater to medium term and long term financing requirement.

In India , emphasis was always on industrial development.

India has private as well as public sector development banks.
Some of the prominent institutions are:

1. IDBI Bank:

The IDBI was set up as a wholly-owned subsidiary of the RBI

on July 1, 1964 under the Act of parliament, and by merging
the Industrial Refinance Corporation (IRC) which, in turn, was
set up by the government earlier in June 1958. In February
1976, the IDBI was delinked from the RBI and since then, it
has become a separate and independent entity wholly
owned by the government. It is now the central or apex
institution in the field of industrial finance. Its main objective
is to provide credit, term finance and financial services for
the establishment of new projects as well as expansion,
diversification, modernization and technology up gradation
of the existing industrial enterprise in order to bring about
industrial development in the country. It also
provides several diversified financial products of non-project
nature such as equipment finance,asset credit and
equipment leasing, merchant banking, debenture trusteeship
and Forex services to corporate. It functions as a
development financing agency in its own right, in addition to
its work of co-coordinating, supplementing, and monitoring
the operations of other term-lendinginstitutions in the
country. It also provides indirect assistance in the form of
discounting/rediscounting long term bills/promissory notes of
term loans given by SFCs, banks and so on and subscribing
to resources of notified financial institutions such as SFCs,
ICICI, IRBI, and so on. There are more than 850 primary
lending institutions which are eligible for refinancing facilities
of the IDBI. It also takes up various promotional activities
such as balance
development of regions, entrepreneurship development,
technology development, and so on.

During the four decades of its existence, IDBI has been

instrumental not only in establishing a well-developed,
diversified and efficient industrial and institutional structure
but also adding a qualitative dimension to the process of
industrial development in the country. IDBI has played a
pioneering role in fulfilling its mission of promoting industrial
growth through financing of medium and long-term projects,
in consonance with national plans and priorities. Over the
years,
IDBI has enlarged its basket of products and services,
covering almost the entire spectrum of industrial activities,
including manufacturing and services.
In 2003 IDBI became public sector and become IDBI bank

Some of the functions:

Promotional activities
In fulfillment of its developmental role, the Bank continues to
perform a wide range of promotional activities relating to
developmental programmes for new entrepreneurs,
consultancy services for small and medium enterprises and
programmes designed for accredited voluntary agencies for
the economic upliftment of the underprivileged. These
include entrepreneurship development, self-employment and
wage employment in the industrial sector for the weaker
sections of society through voluntary agencies, support to
Science and Technology Entrepreneurs' Parks, Energy
Conservation, Common Quality Testing Centres for small
industries.

Technical Consultancy Organisations

With a view to making available at a reasonable cost,
consultancy and advisory services to entrepreneurs,
particularly to new and small entrepreneurs, IDBI, in
collaboration with other All-India Financial Institutions, has
set up a network of Technical Consultancy Organisations
(TCOs) covering the entire country. TCOs offer diversified
services to small and medium enterprises in the selection,
formulation and appraisal of projects, their implementation
and review.

Entrepreneurship Development Institute

Realising that entrepreneurship development is the key to
industrial development, IDBI played a prime role in setting
up of the Entrepreneurship Development Institute of India for
fostering entrepreneurship in the country. It has also
established similar institutes in Bihar, Orissa, Madhya
Pradesh and Uttar Pradesh. IDBI also extends financial
support to various organisations in conducting studies or
surveys of relevance to industrial development.

EXAMPLE: IDBI has funded so many independent power

projects one among them was Dabhol power project.

2. SIDBI ( Small Industries Development Bank of India)

SIDBI was established on April 2, 1990. The Charter
establishing it, The Small Industries Development Bank of
India Act, 1989 envisaged SIDBI to be "the principal financial
institution for the promotion, financing and development of
industry in the small scale sector and to co-ordinate the
functions of the institutions engaged in the promotion and
financing or developing industry in the small scale sector and
for matters connected therewith or incidental thereto.

The business domain of SIDBI consists of small scale

industrial units, which contribute significantly to the national
economy in terms of production, employment and exports.
Small scale industries are the industrial units in which the
investment in plant and machinery does not exceed Rs.10
million . About 3.1 million such units, employing 17.2 million
persons account for a share of 36 per cent of India's exports
and 40 per cent of industrial manufacture. In addition,
SIDBI's assistance flows to the transport, health care and
tourism sectors and also to the professional and self-
employed persons setting up small-sized professional
ventures.

Major functions:

Indirect assistance to primary lending institutions (PLIs)

- SIDBI's Schemes of indirect assistance envisages credit

to SSIs through a large network of 913 PLIs spread across
the country with a branch network of over 65000. The
assistance is provided by way of refinance, bills
rediscounting, and resource support in the form of short
term loans/Line of Credit (LoC) in lieu of refinance, etc.

Direct assistance to small units; and

The objective behind SIDBI's direct assistance schemes has

been to supplement the efforts of PLIs by identifying the
gaps in the existing credit delivery mechanism for Small
Scale Industries. Direct assistance is provided under several
tailor made schemes through SIDBI's 41 Regional/Branch
offices spread across the country.

Development and Support Services:

There are so many products and services available with

SIDBI through which it provides is assists customers. Again it
offers category wise products to suit needs of different
segment of customers. Eg: Existing customers, women
entrepreneurs, microfinance institutions.

Example: With intent to facilitate increased flow of credit to

MSMEs and support other developmental initiatives, SIDBI is
implementing a multi-agency / multi-activity flagship Project
on Financing and Development of Small and Medium
Enterprises in India. The World Bank, Department for
International Development (DFID), UK, KfW and GTZ,
Germany are the major international partners in the Project.

3. EXIM Bank (Export Import Bank Of India)

Export-Import Bank of India is the premier export finance

institution of the country, set up in 1982 under the
Export-Import Bank of India Act 1981. Government of
India launched the institution with a mandate, not just to
enhance exports from India, but to integrate the country’s
foreign trade and investment with the overall economic
growth. Since its inception, Exim Bank of India has been
both a catalyst and a key player in the promotion of cross
border trade and investment. Commencing operations as
a purveyor of export credit, like other Export Credit
Agencies in the world, Exim Bank of India has, over the
period, evolved into an institution that plays a major role
in partnering Indian industries, particularly the Small and
Medium Enterprises, in their globalisation efforts, through
a wide range of products and services offered at all
stages of the business cycle, starting from import of
technology and export product development to export
production, export marketing, pre-shipment and post-
shipment and overseas investment.

Services provided by EXIM bank:

-Export Credit
Exim Bank offers the following Export Credit facilities,
which can be availed of by Indian companies, commercial
banks and overseas entities.

Pre-shipment credit
Exim Bank’s Pre-shipment Credit facility, in Indian Rupees
and foreign currency, provides access to finance at the
manufacturing stage – enabling exporters to purchase
raw materials and other inputs.
Supplier’s Credit
This facility enables Indian exporters to extend term
credit to importers (overseas) of eligible goods at the
post-shipment stage.

-Finance for export credit units

Term Finance (For Exporting Companies)

• Project Finance
• Equipment Finance
• Import of Technology & Related Services
• Domestic Acquisitions of
businesses/companies/brands
• Export Product Development/ Research &
Development
• General Corporate Finance

Working Capital Finance (For Exporting Companies)

- Overseas Investment Finance:

- Finance for Indian Company’s equity participation in
the overseas Joint Venture (JV)/ Wholly Owned
Subsidiary (WOS)

- Direct Finance (Term & Working Capital) to the

overseas JV / WOS

- Finance (for equity/debt component) for acquisition

of overseas businesses / companies including
leveraged buy-outs including structured financing
options

- Direct Equity by Exim Bank in the overseas JV/ WOS

of an Indian Company

SME and Agri Finance:

Exim Bank of India has been endeavouring to provide a
suite of services to its SME clients. These include
providing business leads, handholding during the
process of winning an export contract and thus
assisting the generation of export business on success
fee basis, countries/ sector information dissemination,
 capacity building in niche areas such as quality, safety,
export marketing, etc. and financial advisory services
such as loan syndication, etc.

Financial assistance is provided by way of term loans,

pre-shipment/post-shipment credit, overseas buyers’
credit, bulk import finance, guarantees etc. Term loans
with varying maturities are provided for setting up
processing facilities, expansion, modernization,
purchase of equipment, import of
equipment/technology, financing overseas joint
ventures and acquisitions etc.

The Bank has strong linkages with other stakeholders

in agri sector such as Ministry of Food Processing
Industries, GoI, NABARD, APEDA, Small Farmers’ Agri-
Business Consortium (SFAC), National Horticultural
Board etc. Apart from financing, the Bank also provides
a range of advisory services to agri exporters.

Export Sevices:
Exim Bank offers a diverse range of information,
advisory and support services, which enable exporters
to evaluate international risks, exploit export
opportunities and improve competitiveness.

4. Industry and Finance Corporation of India

The Industrial Finance Corporation of India (IFCI) on July 1,

1948, as the first Development Financial Institution in the
country to cater to the long-term finance needs of the
industrial sector. The newly-established DFI was provided
access to low-cost funds through the central bank’s Statutory
Liquidity Ratio or SLR which in turn enabled it to provide
loans and advances to corporate borrowers at Concessional
rates. It was also felt that IFCI should directly access the
capital markets for its funds needs. It is with this objective
that the constitution of IFCI was changed in 1993 from a
statutory corporation to a company under the Indian
Companies Act, 1956. Subsequently, the name of the
company was also changed to “IFCI Limited” with effect from
October 1999.

5. IRBI( Industrial Reconstruction Bank of India)

Industrial Reconstruction Corporation of India Ltd. (IRCI) was

set up in April 1971 with anobjective to undertake re-
construction and rehabilitation of sick and closed industrial
units. This was later converted to Industrial Reconstruction
Bank of India (IRBI) in 1984 by an Act of Parliament. IRBI is a
specialized primary all-India financial institution with primary
objective of functioning as principal credit and reconstruction
agency for revival of sick and closed units.
IRBI undertakes the projects of modernization, expansion,
and diversification and rationalization of industrial units and
extends financial assistance in the form of (i) granting loans
and advances to third parties granting loan to the unit, and
subscribing and underwriting of shares and debentures.

6. ICICI bank ( Industrial Credit and investment corporation of

India)
ICICI Bank (formerly Industrial Credit and Investment
Corporation of India) is a major banking and financial
services organization in India. It is the second largest bank in
India and the largest private sector bank in India by market
capitalization. The bank also has a network of 2,016
branches (as on 31 March 2010) and about 5,219 ATMs in
India and presence in 18 countries, as well as some 24
million customers (at the end of July 2007). ICICI Bank offers
a wide range of banking products and financial services to
corporate and retail customers through a variety of delivery
channels and specialization subsidiaries and affiliates in the
areas of investment banking, life and non-life insurance,
venture capital and asset management. (These data are
dynamic.)
 7. Role of Banks in Agriculture
Banks contribution to agriculture sector has been
phenomenal. Almost all bank offers suitable products to
farmers according by taking into consideration special
farming requirements.
Banks play role in boosting agriculture economy.

- Banks helps in inculcating saving habits.

- Agriculture credit finance facility – so many banks offers
agriculture credit facility
- Liberal terms of loan – the loans which are offered to
farmers they are offered at low interest rate and with easier
repayment schedule
- Schemes offered by banks- various schemes are offered
by different banks.
Such as Kisan credit card, homestead farming.

Role Of NABARD:
NABARD is set up as an apex Development Bank with a
mandate for facilitating credit flow for promotion and
development of agriculture, small-scale industries, cottage
and village industries, handicrafts and other rural crafts. It
also has the mandate to support all other allied economic
activities in rural areas, promote integrated and sustainable
rural development and secure prosperity of rural areas.

Functions of Nabard:
- Credit functions: NABARD's credit functions cover
planning, dispensation and monitoring of credit.
- Development and promotional functions: Credit is a
critical factor in development of agriculture and rural
sector as it enables investment in capital formation and
technological upgradation. Hence strengthening of rural
financial institutions, which deliver credit to the sector,
has been identified by NABARD as a thrust area.
- Supervisory functions: As an apex bank involved in
refinancing credit needs of major financial institutions in
the country engaged in offering financial assistance to
agriculture and rural development operations and
programmes, NABARD has been sharing with the
Reserve Bank of India certain supervisory functions for
cooperative banks and Regional Rural Banks (RRBs).
- Training:NABARD has varoius traning centers which
provides training facilities to all staff members.
Training, dissemination of information and promotion of
research
8. Role of Banks- Employment
Generation

Employment in the Banking and Financial Services industry

has not grown in the aggregate last year due to low
additional employment by public sector financial institutions.
However, with greater efforts in financial inclusion, this trend
is expected to turn around. Moreover, average age of an
employee in PSU banks being 53, we will witness
replenishment of talent soon there. Last year’s troubles in
the financial sector have taught the sector many lessons and
its impact will be visible this year on employment numbers
and criteria. This sector is looking to hire over 46,000 people
in 2010.

Following table shows data of employment in banks.

9. Role Of banks: Overall Economic

Role
The role of banks can be summerised in following points.
PROMOTING CAPITAL FORMATION
A developing economy needs a high rate of capital formation
to accelerate the tempo of economic development, but the
rate of capital formation depends upon the rate of saving.
Unfortunately, in underdeveloped countries, saving is very
low. Banks afford facilities for saving and, thus encourage
the habits of thrift and industry in the community. They
mobilize the ideal and dormant capital of the country and
make it available for productive purposes.

ENCOURAGING INNOVATION
Innovation is another factor responsible for
economicdevelopment. The entrepreneur in innovation is
largely dependent on the manner in which bank credit is
allocated and utilized in the process of economic growth.
Bank credit enables entrepreneurs to innovate and invest,
and thus uplift economic activity and progress.

MONETSATION
Banks are the manufactures of money and they allow many
to play its role freely in the economy. Banks monetize debts
and also assist the backward subsistence sector of the rural
economy by extending their branches in to the rural areas.
They must be replaced by the modern commercial bank’s
branches.

INFLUENCE ECONOMIC ACTIVITY

Banks are in a position to influence economic activity in a
country by their influence on the rate interest. They can
influence the rate of interest in the money market through
its supply of funds. Banks may follow a cheap money policy
with low interest rates which will tend to stimulate economic
activity.

FACILITATOR OF MONETARY POLICY

Thus monetary policy of a country should be conductive to
economic development. But a well-developed banking
system is on essential pre-condition to the effective
implementation of monetary policy. Under-developed
countries cannot afford to ignore this fact. A fine, an efficient
and comprehensive banking system is a crucial factor of the
developmental process of economy.

10. Challenges facing Banking

industry in India

The banking industry in India is undergoing a major

transformation due to changes in Economic conditions and
continuous deregulation. These multiple changes happening
one after other has a ripple effect on a bank trying to
graduate from completely regulated seller market to
completed deregulated customers market.

Deregulation: This continuous deregulation has made the

Banking market extremely competitive with greater
autonomy, operational flexibility and decontrolled interest
rate and liberalized norms for foreign exchange. The
deregulation of the industry coupled with decontrol in
interest rates has led to entry of a number of players in the
banking industry. At the same time reduced corporate credit
off take thanks to sluggish economy has resulted in large
number of competitors batting for the same pie.

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. Natural fall out of this has led
to a series of innovative product offerings catering to various
customer segments, specifically retail credit.

Efficiency: This in turn has made it necessary to look for

efficiencies in the business. Banks need to access low cost
funds and simultaneously improve the efficiency. The banks
are facing pricing pressure, squeeze on spread and have to
give thrust on retail assets.
Diffused Customer loyalty: This will definitely impact
Customer preferences, as they are bound to react to the
value added offerings. Customers have become demanding
and the loyalties are diffused. There 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.

Misaligned mindset: These changes are creating challenges,

as employees are made to adapt to changing conditions.
There is resistance to change from employees and the Seller
market mindset is yet to be changed coupled with Fear of
uncertainty and Control orientation. Acceptance of
technology is slowly creeping in but the utilization is not
maximized.

Competency Gap: Placing the right skill at the right place will
determine success. The competency gap needs to be
addressed simultaneously otherwise

there will be missed opportunities. The focus of people will

be on 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.
 Conclusion
In the wake of globalization, Indian banking industry is also
growing. New forms of banking are taking emerged. Now
Indian banks are evolving themselves into number of other
operations.

Despite core banking solutions they are offering

consultations, portfolio management, fund transfers. On
positive side more banks are going for merger to expand
capacities.

Continuous expansion and product innovation is going. They

have captured rural markets by offering tailor maid products.
But in the wake of challenges and competition India has to
grow and sustain it self in global markets.
Annexure: Saving Deposit data
 Year Indian Banks

• 2001-02 272119
• 2002-03 302816
• 2003-04 373137
• 2004-05 443573
• 2005-06 55630
• 2006-07 64958
• 2007-08 747189
• 2008-09 874046