Boca Assignment: Issues and Challenges of Banking Sector and Alloted Bank: Bank of India

SUBMITTED BY AASHI SHARMA ROLL NO.
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BOCA ASSIGNMENT
ISSUES AND CHALLENGES OF BANKING SECTOR AND ALLOTED BANK:
BANK OF INDIA
Submitted to- Prof. AK Puri
A bank generally is a joint stock fund. A bank denotes a money-dealing financial institution. A
bank is an entity that is prepared to accept cash deposits and pay the same on request.
A banker, i.e. a person or corporation, deals in credit and money, i.e., accepts deposits from
those who want to commit their wealth to safety and earn interest on it, and lends money
through checks and advances and loans of various kinds to the needy.
Functions of a Bank:
A bank performs the following functions:
(a) This accepts the customers' deposits, who can take their money back at will. A savings bank
also pays interest on its deposits to clients and is popular with small savers.
As a Saving Account, Current Account, or Fixed Deposit Account, clients can leave their cash
with the bank.
In order to save a part of their current income to meet their future needs, customers deposit
their money in the Saving Bank Account and also intend to earn an income from their savings
(bank interest). However, for the depositor, there is a limited number of withdrawals over a
period of time and the total amount of one or more withdrawals on any date.
On the other hand, a Current Account is an account that can be operated on any number of
times during a working day. The number and quantity of with-drawls is not constrained. The
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bank does not pay any interest; rather, in some cases, it takes incidental charges on such
accounts from the depositor.
The deposits are made for a fixed period (say 36 months) in a Fixed Deposit Account and a
higher rate of interest is paid to the depositor.
(b) At a certain interest rate, a bank lends money to needy individuals. Banks lend to farmers,
manufacturers and entrepreneurs who invest in their ventures for their own benefit and for the
country's economic development.
(c) A bank issues notes and produces other cheap means of exchange, such as a note or a
cheque. The issue of notes is entrusted to the country's Reserve Bank. Banks create credit
instruments, such as bank notes, bank drafts, cheques and letters of credit. These things save
the use of metallic cash and make the transfer of cash cheap and convenient over long
distances.
(d) Deposits may be created by the bank itself through the provision of loans to its customers,
in which case the borrower is credited with a deposit account which, where necessary, is
eligible for receipt. The money borrowed from the bank is usually deposited by the borrowers
in the same bank, either because the bank insists on it or because of the benefits of depositing
the current account. These deposits are known as Deposits of Credit.
(e) A bank's other functions are:
(i) To collect cheques drawn from other banks.
(ii) Acceptance of and collection of exchange bills.
(iii) Foreign exchange trading to assist in the settlement of foreign debts.
(iv) Trustee and Executor of the Stock Exchange business.
(v) Facilities for safe deposits.
(vi) Making payments for standing order.
(vii) Providing change and helping the central bank / reserve bank to maintain the issue of notes
in good condition.
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ISSUES AND CHALLENGES OF BANKING SECTOR
1. Losses in Rural Branches:

Roughly 69 percent of the population of India resides in rural areas. Lately, the government has
set some ambitious targets, such as access to bank accounts for all of the country's households.
But many villages do not have adequate branches and ATMs to feed the market in rural areas,
even if everyone gets access to a bank account. The banking sector currently does not have the
infrastructure at the bottom of the pyramid (BOP) to reach out to the market. Many economists
say that, due to a large population, the infrastructure will always be inadequate. But there is a
need for a better framework for supervision and tracking. Due to high overheads and the
prevalence of the barter system in most regions of rural India, most of the rural branches are
running at a loss.
2. Large Over-Dues:
A new problem, a large number of overdue advances for farmers, is now faced by the small
branches of commercial banks. The decision to waive all loans to farmers up to the value of Rs.
10,000 crores by the former National Front Government has added to the plight of such banks.
3. Non-Performing Assets:
At present, commercial banks do not have any machinery to ensure that their loans and
advances are actually used productively in the greater public interest. They incur enormous
losses because of a high percentage of non-performing assets or outstanding due to borrowers'
banks. Most of them are also unable to maintain the ratio of capital appropriateness.
The term NPAs could be referred to as bad loans and the issues in the agricultural and
corporate sector will surely be seen. There's more clarification, though, about this. Out of the
total NPAs in the nation that have recently crossed 10 lakh crores, more than 70% are from the
corporate sector. On the other hand, farmers were reported to have defaulted on 8 % of the
total NPAs.
4. Advance to Sector Priority:
As for progress in the priority sectors, progress has been slow. This is partly attributable to the
fact that nationalization, i.e. the transfer of a certain portion of resources to the top priority
and previously neglected sectors, could not be gracefully accepted by bank officials from top to
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bottom. This is also attributable to poor and unsatisfactory rates of recovery of loans from small
and agricultural sectors.
5. Non-Banking Financial Institution Competition:
Commercial banks have faced severe challenges from non-banking financial intermediaries,
such as mutual funds, housing finance companies, leasing and investment firms, as far as
deposit mobilization is concerned. In attracting public deposits, all these institutions compete
closely with commercial banks and offer higher interest rates than are payable by commercial
banks.
6. Competition with Foreign Banks:

Foreign banks and smaller banks in the private sector have experienced higher deposit
increases. One explanation appears to be that non-nationalized banks offer customer service to
bettors. This creates the impression that there has probably been a diversion of deposits from
nationalized banks to other banks.
7. Gap between Promise and Performance:

The failure to sustain the desired credit pattern and to fill credit gaps in different sectors is one
of the major weaknesses of the nationalized banking system in India. Although bank goals have
been reoriented, bank employees have remained virtually static, and bank procedures and
practices have continued to remain old and outdated. The post-nationalization period has seen
a widening gap between promise and performance. The main reason seems to be the failure of
the bank staff to appreciate the new work philosophy and new social objectives.
8. Bureaucratization:
Bureaucratization of the banking system is another problem faced by commercial banks.
Indeed, this is a result of nationalization. Red-tapism, long delays, lack of initiative and failure to
take swift decisions have hindered the smooth functioning of banks.
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9. Political Pressures:
Increasing political pressures from the Centre and the States have also hampered the smooth
work of nationalized banks. Due to various political pressures, nationalized banks often face lots
of difficulties. Such pressures are created without taking into account their creditworthiness
when selecting personnel and granting loans to specific parties.
10. Frauds
Individuals tend to use the words NPAs and fraud in the banking sector interchangeably. There
is a line, however, that differentiates the two. An NPA may or may not be deliberate, and the
borrower may want to pay back but is unable to do so. A fraud, on the other hand, is an
intentional act by the borrower in which a scam of funds is involved. Accounting frauds,
Demand Draft Fraud, Uninsured Deposits, Bill Discounting Fraud, Fraudulent Loans, Cheque
Kiting, and the list continues, could include such frauds. The most relevant example is the
recent PNB case in which a fake Letter of Undertakings worth Rs. 11,000 crores were issued.
Other instances include Vijay Mallya accused of defrauding a consortium of Rs.9,000 crores
lenders and Rotomac Global accused of allegedly cheating a Rs. 3700 Crores consortium of 7
lenders.

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SUBMITTED BY AASHI SHARMA ROLL NO.

Submitted to- Prof. AK Puri

A bank performs the following functions:

(e) A bank's other functions are:

(i) To collect cheques drawn from other banks.

(ii) Acceptance of and collection of exchange bills.

(iii) Foreign exchange trading to assist in the settlement of foreign debts.

(iv) Trustee and Executor of the Stock Exchange business.

(v) Facilities for safe deposits.

(vi) Making payments for standing order.

ISSUES AND CHALLENGES OF BANKING SECTOR

1. Losses in Rural Branches:

4. Advance to Sector Priority:

5. Non-Banking Financial Institution Competition:

6. Competition with Foreign Banks:

7. Gap between Promise and Performance:

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