Chapter 2 INDUSTRY PROFILE

Chapter 2 INDUSTRY PROFILE 2.1 DEFINATION Bank - As per Section 5(c) of the Banking Regulation Act, 1949 a "Banking Company" means any company which transacts the business of banking in India. Any company which is engaged in the manufacture of goods or carries on any trade and which accepts the deposits of money from public merely for the purpose of financing its business as such manufacturer or trader shall not be deemed to transact the business of banking within the meaning of this clause." As per Section 5(b) of the Banking Regulation Act, 1949, "banking" means the accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, order or otherwise. A Bank does most or all of the following: Dealing in Money - Bank is a financial institution which deals with other people's money i.e. money given by depositors. Individual / Firm / Company - A bank may be a person, firm or a company. A banking company means a company which is in the business of banking. Deposit - A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. It gives safety to the deposits of its customers. It also acts as a custodian of funds of its customers. Loan - A bank lends out money in the form of loans to those who require it for different purposes. Payment and Withdrawal - A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts, it also brings bank money in circulation. This money is in the form of cheques, drafts, etc. 2.2 HISTORY OF INDIAN BANKING A bank is a financial institution that provides banking and other financial services. By the term bank is generally understood an institution that holds a Banking Licenses. Banking licenses are granted by financial supervision authorities and provide rights to conduct the most fundamental banking services such as accepting deposits and making loans. There are also financial institutions that provide certain banking services without meeting the legal definition of a bank, a so-called Non-bank. Banks are a subset of the financial services industry. The word bank is derived from the Italian banca, which is derived from German and means bench. The terms bankrupt and "broke" are similarly derived from banca rotta, which refers to an out of business bank, having its bench physically broken. Moneylenders in Northern Italy originally did business in open areas, or big open rooms, with each lender working from his own bench or table. Typically, a bank generates profits from transaction fees on financial services or the interest spread on resources it holds in trust for clients while paying them interest on the asset. Development of banking industry in India followed below stated steps. Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. Banking in India has an early origin where the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, was the turn of the agency houses to carry on the banking business. The General Bank of India was first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank Hindustan and the Bengal Bank. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established in 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken by the newly constituted State Bank of India. The Reserve Bank of India which is the Central Bank was created in 1935 by passing Reserve Bank of India Act, 1934 which was followed up with the Banking Regulations in 1949. These acts bestowed Reserve Bank of India (RBI) with wide ranging powers for licensing, supervision and control of banks. Considering the proliferation of weak banks, RBI compulsorily merged many of them with stronger banks in 1969. The three decades after nationalization saw a phenomenal expansion in the geographical coverage and financial spread of the banking system in the country. As certain rigidities and weaknesses were found to have developed in the system, during the late eighties the Government of India felt that these had to be addressed to enable the financial system to play its role in ushering in a more efficient and competitive economy. Accordingly, a high-level committee was set up on 14 August 1991 to examine all aspects relating to the structure, organization, functions and procedures of the financial system. Based on the recommendations of the Committee, a comprehensive reform of the banking system was introduced in 1992-93. The objective of the reform measures was to ensure that the balance sheets of banks reflected their actual financial health. One of the important measures related to income recognition, asset classification and provisioning by banks, on the basis of objective criteria was laid down by the Reserve Bank. The introduction of capital adequacy norms in line with international standards has been another important measure of the reforms process. In the post-nationalization era, no new private sector banks were allowed to be set up. However, in 1993, in recognition of the need to introduce greater competition which could lead to higher productivity and efficiency of the banking system, new private sector banks were allowed to be set up in the Indian banking system. These new banks had to satisfy among others, the following minimum requirements: It should be registered as a public limited company, The minimum paid-up capital should be Rs 100 crore, Should be listed on the stock exchange, The headquarters of the bank should be preferably located in a centre which does not have the headquarters of any other bank, and The bank will be subject to prudential norms in respect of banking operations, accounting and other policies as laid down by the RBI. It will have to achieve capital adequacy of 8% from the very beginning. A high level Committee, under the Chairmanship of M. Narasimham, was constituted by the Government of India in December 1997 to review the record of implementation of financial system reforms recommended by the CFS in 1991 and chart the reforms necessary in the years ahead to make the banking system stronger and better equipped to compete effectively in international economic environment. The Committee has submitted its report to the Government in April 1998. Some of the recommendations of the Committee, on prudential accounting norms, particularly in the areas of Capital Adequacy Ratio, Classification of Government guaranteed advances, provisioning requirements on standard advances and more disclosures in the Balance Sheets of banks have been accepted and implemented. The other recommendations are under consideration. The banking industry in India is in a midst of transformation, thanks to the economic liberalization of the country, which has changed business environment in the country. During the pre-liberalization period, the industry was merely focusing on deposit mobilization and branch expansion. But with liberalization, it found many of its advances under the non-performing assets (NPA) list. More importantly, the sector has become very competitive with the entry of many foreign and private sector banks. The face of banking is changing rapidly. There is no doubt that banking sector reforms have improved the profitability, productivity and efficiency of banks, but in the days ahead banks will have to prepare themselves to face new challenges. Table 2.1 Indian Banking: Key Developments 1969 Government acquires ownership in major banks Almost all banking operations in manual mode Some banks had Unit record Machines of IBM for IBR & Pay roll 1970- 1980 Unprecedented expansion in geographical coverage, staff, business & transaction volumes and directed lending to agriculture, SSI & SB sector Manual systems struggle to handle exponential rise in transaction volumes. Outsourcing of data processing to service bureau begins 1981- 1990 RBI led IT introduction in Banks Product level automation on standalone PCs at branches. Mainframes in corporate office 1991-1995 Expansion slows down Banking sector reforms resulting in progressive de-regulation of banking, introduction of prudential banking norms entry of new private sector banks Total Branch Automation in Govt. owned and old private banks begins. 1996-2000 New delivery channels like ATM, Phone banking and Internet banking and convenience of any branch banking and auto sweep products introduced by new private and MNC banks Retail banking in focus, proliferation of credit cards Govt. owned banks feel the heat and attempt to respond using intermediary technology, TBA implementation surges ahead under fiat from Central Vigilance Commission and Y2K threat consumes last two years 2000-2003 IT Bill passed lending legal validity to electronic transactions Govt. owned banks and old private banks start implementing CBSs, but initial attempts face problems Banks enter insurance business launch debit cards 2.3 Initial Phase of Nationalization: Government implemented the exercise of nationalization of significant part of the Indian Banking system in the year 1955, when Imperial Bank of India was Nationalized in that year for the stated objective of "extension of banking facilities on a large scale, more particularly in the rural and semi-urban areas, and for diverse other public purposes" to form State Bank of India. SBI was to act as the principal agent of the RBI and handle banking transactions of the Union & State Governments throughout India. The step was in fact in furtherance of the objectives of supporting a powerful rural credit cooperative movement in India and as recommended by the "The All-India Rural Credit Survey Committee Report, 1954". State Bank of India was obliged to open an accepted number of branches within 5 years in unbanked centres. The seven banks now forming subsidiaries of SBI were nationalized in the year 1960. This brought one-third of the banking segment under the direct control of the Government of India. The major process of nationalization was carried out on 19th July 1969, when the Prime Minister of India, Mrs. Indira Gandhi announced the nationalization of 14 major commercial banks in the country. One more phase of nationalization was carried out in the year 1980, when seven more banks were nationalized. This brought 80% of the banking segment in India under Government ownership. The country entered the second phase, i.e. the phase of Nationalized Banking with emphasis on Social Banking in 1969/70. 2.4 TYPES OF BANK SECTORS AND THERE INTRODUCTION In modern sense banking in India originated in the last decades of the 18th century. Among the first banks were the Bank of Hindustan, which was established in 1770 and liquidated in 1829-32, and the General Bank of India, established 1786 but failed in 1791. The largest, oldest and still in existence, is the State Bank of India. It originated as the Bank of Calcutta in June 1806. In 1809, it was renamed as the Bank of Bengal. This was one of the three banks funded by a presidency government. The other two were the Bank of Bombay and the Bank of Madras. The three banks were merged in 1921 to form the Imperial Bank of India, which upon India's independence, became the State Bank of India in 1955. For many years the presidency banks had acted as quasi-central banks, as did their successors, until the Reserve Bank of India was established in 1935, under the Reserve Bank of India Act, 1934. In 1960, the State Banks of India was given control of eight state-associated banks under the State Bank of India (Subsidiary Banks) Act, 1959. These are now called its associate banks. In 1969 the Indian government nationalised 14 major private banks. In 1980, 6 more private banks were nationalised. These nationalised banks are the majority of lenders in the Indian economy. They dominate the banking sector because of their large size and widespread networks. The Indian banking sector is broadly classified into scheduled banks and non-scheduled banks. The scheduled banks are those which are included under the 2nd Schedule of the Reserve Bank of India Act, 1934. The scheduled banks are further classified into: Nationalised Banks, State Bank of India and its associates, Regional Rural Banks, foreign banks, and other Indian private sector banks. The term commercial banks refer to both scheduled and non-scheduled commercial banks which are regulated under the Banking Regulation Act, 1949. Generally banking in India was fairly mature in terms of supply, product range and reach-even though reach in rural India and to the poor still remains a challenge. The government has developed initiatives to address this through the State Bank of India expanding its branch network and through the National Bank for Agriculture and Rural Development with things like microfinance. 2.4.1 Private Sector Banks: HDFC Bank: Housing Development Finance Corporation Limited, popularly known as HDFC Bank was incorporated in the year 1994. Headquartered in Mumbai, HDFC was founded by Hasmukhbhai Parekh, who was awarded the “Padma Bhushan” in the year 1992 for his remarkable contribution to the finance industry of the country. Among all private sector banks, HDFC was the first to receive approval from Reserve Bank of India to set up a bank and started its operations in the year 1995. It provides various products like Insurance, Credit cards, Loans, FOREX services, Premium Banking, Private Banking etc. ICICI Bank: Industrial Credit and Investment Corporation of India, popularly known as ICICI was originally formed in the year 1994 by the initiative of the World Bank and ICICI. Headquartered in Vadodara, Gujarat, it’s an Indian Multinational Bank, which is a wholly owned subsidiary of ICICI Limited. ICICI Bank won the award for the Best Bank – Global Business Development in 2014. It offers various services like Privilege Banking, Loans, NRI Accounts, Insurance, Credit cards, etc. AXIS Bank: Axis Bank is ranked 3rd in the list of top 10 private sector banks in India. Axis Bank is one of the largest private sector banks in India, which started its operations in 1994. Axis Bank offers diverse spectrum of financial services to its customers. Its products are credit cards, consumer banking, corporate banking, finance and insurance, investment banking, mortgage loans etc. Kotak Mahindra Bank: Kotak Mahindra Bank, previously known as Kotak Mahindra Finance Limited is a non-banking financial company, which was established in the year 1995. This bank got the license to carry banking business in the year 2003. The bank is not only present in Metro Cities but also in Tier-2 cities. Some of the services provided by this bank are Wholesale Banking, Privileged Banking, NRI Banking, Insurance and Finance. Induslnd Bank: Induslnd Bank started its operations in the year 1994 and has it’s headquarter in Mumbai, Maharashtra. The concept of Induslnd Bank was given by Srichand P. Hinduja, Chairman of the Hinduja Group. The bank derived its name from the Indus Valley Civilization. Induslnd Bank has specialized in the retail banking and their clients are Corporate & Investment, Financial Institutions and Private and Government Banking Institutions. 2.4.2 Public Sector Banks: State Bank of India: State Bank of India is a government-owned corporation with its headquarters in Mumbai, Maharashtra. As of March 2014, it had assets of US$ 402 billion and 17,000 branches, including 190 foreign offices, making it the largest banking and financial services company in India by assets. State Bank of India is one of the Big Four banks of India, along with Bank of Baroda, Punjab National Bank and ICICI Bank. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding, in 1806, of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of Madras merged into the other two "presidency banks" in British India, Bank of Calcutta and Bank of Bombay, to form the Imperial Bank of India, which in turn became the State Bank of India. Government of India owned the Imperial Bank of India in 1955, with Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of India. State Bank of India is a regional banking behemoth and has 20% market share in deposits and loans among Indian commercial banks. Punjab National Bank: Punjab National Bank is based in New Delhi, India. Founded in 1894, the bank has over 6,300 branches and over 7,900 ATMs across 764 cities. It serves over 80 million customers. It is the third largest bank in India in terms of asset size. The bank has been ranked 248th biggest bank in the world by the Bankers' Almanac.PNB has a banking subsidiary in the UK, as well as branches in Hong Kong, Dubai and Kabul. It has representative offices in Almaty, Dubai, Shanghai, Oslo and Sydney. PNB has the distinction of being the first Indian bank to have been started solely with Indian capital that has survived to the present. PNB has had the privilege of maintaining accounts of national leaders such as Mahatma Gandhi, Jawaharlal Nehru, Lal Bahadur Shastri, Indira Gandhi, as well as the account of the famous Jalianwala Bagh Committee. Union Bank Of India: Union Bank of India is listed on the Forbes 2000, and has assets of USD 13.45 billion. All the bank's branches have been networked with its 6420 ATMs. Its online Telebanking facility is available to all its Core Banking Customers - individual as well as corporate. It has representative offices in Abu Dhabi, United Arab Emirates, Beijing, Peoples Republic of China, London, Shanghai, and Sydney, and branches in Hong Kong, Dubai and Antwerp, Belgium. The bank is in the process of upgrading its representative offices in London and Sydney to branches. UBI is active in promoting financial inclusion policy and is a member of the Alliance for Financial Inclusion (AFI). UBI began its international expansion in 2007 with the opening of representative offices in Abu Dhabi, United Arab Emirates, and Shanghai, Peoples Republic of China. The next year, UBI established a branch in Hong Kong, its first branch outside India. In 2009, UBI opened a representative office in Sydney, Australia. At present, the offshore banking operations of Union Bank of India are led by its branches in Hong Kong and newly opened branch in Dubai. Bank of Baroda: Headquartered in Vadodara in Gujarat, India it is the second-largest bank in India, after State Bank of India, and offers a range of banking products and financial services to corporate and retail customers through its branches and through its specialised subsidiaries and affiliates. In addition to its headquarters in its home state of Gujarat, it has a corporate headquarters in Mumbai. Based on 2014 data, it is ranked 801 on Forbes Global 2000 list. Bank of Baroda has total assets in excess of ₹ 3.58 trillion, a network of 5089 branches in India and abroad, and over 8000 ATMs. The bank was founded by the Maratha, Maharaja of Baroda, H. H. Sir Sayajirao Gaekwad III on 20 July 1908 in the Princely State of Baroda, in Gujarat. The bank, along with 13 other major commercial banks of India, was nationalised on 19 July 1969, by the Government of India and has been designated as a profit-making public sector undertaking . Canara Bank: Canara Bank is headquartered in Bangalore, Karnataka. It was established in 1906, making it one of the oldest banks in the country. The bank was nationalised in 1969. As of December 2014, the bank had a network of 5641 branches and more than 7000 ATMs spread across India. The bank also has offices abroad in London, Hong Kong, Moscow, Shanghai, Doha, Dubai, and New York. In 1996 Canara Bank became the first Indian Bank to get ISO certification for "Total Branch Banking" for its Seshadripuram branch in Bangalore. Canara Bank has now stopped opting for ISO certification of branches. Canara Bank opened its seventh overseas branch in New York, USA in 2014. 2.5 CHALLENGES FOR THE FUTURE: The regulatory and political regimes vary considerably in some cases. A retreat-and-cut loss policy will be necessary where very adverse circumstances are encountered. Wholesale banking in the global markets is likely to yield diminishing returns, unless the wholesale activities embrace non-traditional areas such as derivatives. As of today Indian banks are less global than their developed country counterparts. This is an initial competitive disadvantage. Basically Indian banks need to ride on the India story in the global economy. Risk management is a major challenge both in domestic and foreign assets. In the domestic area, the risk arises from the greater un-hedged for-ex exposure of domestic borrowers as well as the greater competition they face. To meet this challenge, Indian banks must go beyond Basel II and manage their risk on the basis of lower correlation in a diversified portfolio, which is the advantage that they enjoy. Thus, we see that the Indian banks have a wide sea of opportunity in front of them because of opening up of the global markets. But, at the same time, it also poses several challenges for the same. As legal and state environment is increasingly becoming conducive, what is needed is a mindset to look beyond the horizon. Indian banks today have everything. They need to do only one thing –dream big. The world will then follow them. 2.6 FUTURE OF THE INDIAN BANKING INDUSTRY In the past few years, the Indian banking industry has come of age. There have been several new developments and innovations that are responsible for the growth of the same. One of the major drivers of growth of the Indian banking industry is the advent of globalization and liberalization. Globalization refers to extensive and liberal movement of goods, capital and people across nations. In India, the globalization process took off after 1991 in the shape of the banking reforms, which can rightly be called a watershed event in our march towards globalization. There have been several changes in the banking scenario due to globalization, which have been listed below: Interest rates have moved downward to conform to the global pattern. Even spreads have fallen as much as 3%, while the figure was 6% prior to 1991, necessitating a quantum jump in the need for cost control measures and productivity goals. Foreign trade as a percentage of GDP, which was less than 10% before 1991, now exceeds 20%. Thus, the demand for trade finance, payment services and investment volumes has a higher foreign component than before. The legal and regulatory regime governing commerce, banking and industry in India is converging to global standards. This includes freer markets, privatization, securitization, etc. of particular importance to banks are international accounting standards and capital norms under Basel I and Basel II.