CBSE Class 11 Business Studies Business Services Notes Set 04

Banking Knowledge & General Awareness

HISTORY OF BANKING

For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons for India's growth. The government's regular policy for Indian banks since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India in 1969. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of the Indian Banking System can be segregated into three distinct phases. They are as mentioned below:

• Phase I: Early phase from 1786 to 1969.
• Phase II: Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
• Phase III: New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

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 them Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as a private shareholders bank with mostly Europeans shareholders. In 1865 Allahabad Bank was established and for the 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 in 1935. 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 had lesser confidence in the banks. As an aftermath, deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially 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 which were subsidiaries of State Bank of India were nationalised in 1960. On 19th July, 1969, a major process of nationalisation were carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalised. The second phase of nationalisation of Indian Banking Sector was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. In summary, the following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

• 1949 : Enactment of Banking Regulation Act.
• 1955 : Nationalisation of State Bank of India.
• 1960 : Nationalisation of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 : Nationalisation of 14 major banks.
• 1975 : Creation of regional rural banks.
• 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector banks in India rose 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 about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector and is a major reforms measure. In 1991, under the chairmanship of M Narasimhan, a committee was set up in his name which worked for the liberalisation of banking practices. Now-a-days 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 has become more convenient and swift. The oldest bank in existence in India is the State Bank of India, which originated as the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49.

The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. Joint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company's debt. It was not the first though. That honour belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Puducherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation led Lord Curzon to observe, "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments." The period between 1906 and 1911 saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishment of many private banks in Dakshina Kannada and Udupi districts which were unified earlier and known by the name South Canara (South Kanara) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as the "Cradle of Indian Banking". During the First World War (1914-1918) through to the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:

• 1913: 12 banks failed; Authorised capital (Rs. Lakhs): 274; Paid-up Capital (Rs. Lakhs): 35
• 1914: 42 banks failed; Authorised capital (Rs. Lakhs): 710; Paid-up Capital (Rs. Lakhs): 109
• 1915: 11 banks failed; Authorised capital (Rs. Lakhs): 56; Paid-up Capital (Rs. Lakhs): 5
• 1916: 13 banks failed; Authorised capital (Rs. Lakhs): 231; Paid-up Capital (Rs. Lakhs): 4
• 1917: 9 banks failed; Authorised capital (Rs. Lakhs): 76; Paid-up Capital (Rs. Lakhs): 25
• 1918: 7 banks failed; Authorised capital (Rs. Lakhs): 209; Paid-up Capital (Rs. Lakhs): 1

INDIAN BANKS AFTER INDEPENDENCE

The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps to regulate banking included:

• The Reserve Bank of India, India's central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[Reference www.rbi.org.in]
• In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."
• The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

BANK NATIONALISATION IN INDIA

Despite the provisions, control and regulations of Reserve Bank of India, banks in India except the State Bank of India or SBI, continued to be owned and operated by private persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India to nationalize banks. Thereafter, her move was swift and sudden. The Government of India issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received the presidential approval on 9 August 1969. A second dose of nationalization of 7 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalised banks from 21 to 20. After this, until the 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy.

LIBERALISATION

In the early 1990s, the Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier known as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely government banks, many private banks and foreign banks. The next stage for the Indian banking has been set with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%. At present it has gone up to 74% with some restrictions. Currently banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in this region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide. The three different phases in the history of banking in India are described in detail below.

Pre-Nationalization Era

In India the business of banking and credit was practiced 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, 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 1860. In 1840, the Bank of Bombay and in 1843, the Bank of Madras was also set up. These three banks are 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 into 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 I period (1914-1918) emphasized the need for a unified banking institution, as a result of which the Imperial Bank was set up in 1921. 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.

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 16th April 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.

• State Bank of Hyderabad: 1st October 1959
• State Bank of Bikaner: 1st January 1960
• State Bank of Jaipur: 1st January 1960
• State Bank of Saurashtra: 1st May 1960
• State Bank of Patiala: 1st April 1960
• State Bank of Mysore: 1st March 1960
• State Bank of Indore: 1st January 1968
• State Bank of Travancore: 1st January 1960

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. 1. Andhra Bank. 2. Corporation Bank. 3. New Bank of India. 4. Oriental Bank of Commerce. 5. Punjab and Sind Bank. 6. 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. 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.

Consequences of Nationalization

• The quality of credit assets fell because of liberal credit extension policy.
• Political interference has been as additional malady.
• Poor appraisal involved during the loan meals conducted for credit disbursals.
• The credit facilities extended to the priority sector at concessional rates.
• The high level of low yielding SLR investments adversely affected the profitability of the banks.
• The rapid branch expansion has been the squeeze on profitability of banks emanating primarily due to the increase in the fixed costs.
• There was downward trend in the quality of services and efficiency 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 lackluster 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.
• 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. Since the days of the Rural Credit Survey Committee (1954), India has come a long way in its search for an appropriate rural banking set-up. Though there has been some improvement, the problem remains. There has been tremendous progress in quantitative terms but quality has suffered, progress has been slow and halting and significant regional disparities persist. Stagnation in rural banking is noticed in the north and northeastern regions. The focus should be on assisting and guiding small farmers. It is in this context that the role of rural banking institutions has to be reconsidered. The development strategy adopted and the increasing diversification and commercialisation of agriculture underline the need for the rapid development of rural infrastructure and a larger flow of credit. Progressive and not-so-small farmers have no difficulty in obtaining credit from the commercial banks. Credit for the poorer households is the real problem. Experience of RRBs that have locally-recruited employees; the employees are unhappy in view of the lack of adequate career prospects. Apart from having a basic knowledge of agriculture and rural development, a rural banker is required to handle credit extension work, scheme appraisal work in connection with farm and non-farm investments and the production of different crops, the monitoring/supervision and recovery of loans spread over villages which are not even connected by all-weather roads and in an environment in which vested interests are quite powerful. A person who says he has been in bank service for more than 25 years writes: "That rural credit has become unfashionable is evident from the fact that the subject is accorded only residual focus in the various congregations of our bankers. The placement policy in vogue in our banks is such that exposures in rural credit or agro-financing rarely count for promotions. Unfortunately a uniform standardized approach to lending has led to rigidities as a result of which a farmer-borrower becomes a defaulter for no fault of his. Also, the agricultural sector is beset with considerable uncertainties - the weather and rainfall problem, the pest problem and the market and price problem. Government interference that leaves no scope for these apex bodies to show initiative and work out action plans for development on their own is partly responsible for this situation. Another reason for such a state of affairs is that the apex bodies have expanded and prospered at the cost of primary bodies by taking over functions like deposit mobilisation even at the rural level. 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. 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.
• 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 information and excessive documentation dissatisfy the customer. The processes devised for getting the services should be very customer friendly, easy to understand and complete.

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 can not be filled on line.

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, feedbacks are generally not available and public sector banks are normally not enthused about taking feed back 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. 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. Some times 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 some where else which should be rectified rather then the concerned staff or branch made the scapegoat.

Grievances redressal 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.

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. The Reserve Bank of India participates in the payment systems as a user of the system, as the service provider for various components of the systems and is also the regulator of the systems in many instances. As a user, the RBI submits instruments for clearing in the cheque-based clearing operations. RBI also participates as a user in the Electronic Clearing Service (ECS)and EFT systems for making its own internal payments to its employees, vendor payments etc. Similarly, RBI transactions in Repo / Reverse Repo under LAF, Open Market Operations etc., would also be settled through the respective components of payment systems. As a provider of payment system services, the RBI has taken many initiatives as can be seen under the evolution of payment systems in the country in the development and operationalisation of the systems. Under this, the clearing houses and ECS systems are managed by the Reserve Bank of India at 16 and 15 centres respectively and EFT systems are completely managed by RBI at the 15 centres. The CFMS, NDS/SSS and RTGS systems have been fully developed, operationalised and maintained by RBI. Besides the above, RBI (through IDRBT) has also provided the communication back bone to the financial system in the country in the form of Indian Financial Network (INFINET). By way of being the central bank, the RBI derives regulatory powers in certain jurisdictions of payment systems. However, specific oversight powers for payment systems for RBI is sought to be obtained through appropriate legislation in the form of the Payment Systems Legislation and the setting of Board for Payment and Settlement Systems.

ORGANIZATIONAL FRAMEWORK

Moving from a technology-based solution towards issues of Payment and Settlement Systems, the Reserve Bank of India has adopted a holistic approach, in which Information Technology is an integral component. In order to usher in and establish a modern, robust payments and settlement system consistent with international best practices, the Reserve Bank has adopted a three-pronged strategy of Consolidation of existing Payment Systems, Development of Payment Systems and Integration of the Payment and Settlement System. In order to drive this Payment System reform process an institutional framework and structure has been created within the Reserve Bank. The base layer of this structure consisted of the Payment Systems Group, which included an exclusive team of inter-disciplinary professionals representing IT, Banking Operations, Supervision, Legal, Economics, Government & Bank Accounts, and Foreign Exchange operations. The Group focused on the System Design of an integrated payments system, Payment Instruments, Electronic Banking systems, Clearing and settlement arrangements, technological infrastructure, legal issues, Monetary Policy implications, Change management and responsibilities of banks. The Group was disbanded in December 2002. The next tier in the institutional framework is the Payment Systems Advisory Committee which is a permanent body and oversees the operations of the Payment Systems Group and reviews the developments in the area of Payment Systems. The apex layer in the institutional structure is the National Payments Council. The council lays down the broad policy framework and guidelines for the implementation of a sound and efficient payments and settlement system for the country. The NPC is chaired by the Deputy Governor in charge of the Department of Information Technology and represented by the Executive Director-in-Charge of the Department of Information Technology, Chairman of the Indian Banks Association, Joint Secretary, Banking Division, Ministry of Finance, Chairmen and Managing Directors of two Public Sector banks, one Private bank, a Nonbanking financial company, Securities Exchange Board of India and the National Stock Exchange. The National Payments Council is assisted by five permanent Task Forces, each of which is headed by a member of the National Payments Council and comprises of a few experts appointed by the Chairman from different disciplines / institutions. It is assisted by the respective Head of the Department concerned within the Reserve Bank. These are the:

• Task Force on Monetary Policy and related issues;
• Task Force on Payment and Settlement Systems Oversight;
• Task Force on Legal Issues;
• Task Force on Technology Related Issues;
• Task Force on Systems and Procedures related issues.

IMPORTANT FACTS

The first major step was Nationalization of the Imperial Bank of India in 1955 via State Bank of India Act. State Bank of India was made to act as the principal agent of RBI and handle banking transactions of the Union and State Governments. In a major process of nationalization, 7 subsidiaries of the State Bank of India were nationalized by the Indira Gandhi regime. In 1969, 14 major private commercial banks were nationalized. These 14 banks Nationalized in 1969 are as follows:

• Central Bank of India
• Bank of Maharastra
• Dena Bank
• Punjab National Bank
• Syndicate Bank
• Canara Bank
• Indian Bank
• Indian Overseas Bank
• Bank of Baroda
• Union Bank
• Allahabad Bank
• Union Bank of India
• UCO Bank
• Bank of India.

The above was followed by a second phase of nationalization in 1980, when Government of India acquired the ownership of 6 more banks, thus bringing the total number of Nationalised Banks to 20. The private banks at that time were allowed to function side by side with nationalized banks and the foreign banks were allowed to work under strict regulation. After the two major phases of nationalization in India, the 80% of the banking sector came under the public sector / government ownership.

Banking History : at a glance

• Creation of Reserve bank of India: 1935
• Nationalization of Reserve Bank of India : 1949 (January)
• Enactment of Banking Regulation Act : 1949 (March)
• Nationalization of State Bank of India : 1955
• Nationalization of SBI Subsidiaries : 1959
• Nationalization of 14 major Banks : 1969
• Creation of Credit Guarantee Corporation: 1971
• Creation of Regional Rural Banks : 1975
• Nationalization of 7 more banks with deposits over Rs. 200 Crore: 1980

The result was outstanding. The public deposits in these banks increased by 800% , as the government ownership gave the public faith and trust. The third phase of development of banking in India started in the early 1990s when India started its economic liberalization.

Reserve Bank of India

The Reserve Bank of India (RBI, ) is the central banking institution of India and controls the monetary policy of the rupee as well as US$300.21 billion (2010) of currency reserves. The institution was established on 1 April 1935 during the British Raj in accordance with the provisions of the Reserve Bank of India Act, 1934 and plays an important part in the development strategy of the government. It is a member bank of the Asian Clearing Union. The central bank was founded in 1935 to respond to economic troubles after the first world war.

Policy rates and Reserve ratios

• Bank Rate: RBI lends to the commercial banks through its discount window to help the banks meet depositor’s demands and reserve requirements. The interest rate the RBI charges the banks for this purpose is called bank rate. If the RBI wants to increase the liquidity and money supply in the market, it will decrease the bank rate and if it wants to reduce the liquidity and money supply in the system, it will increase the bank rate. As of January, 2013 the bank rate was 9%.
• Cash Reserve Ratio(CRR): Every commercial bank has to keep certain minimum cash reserves with RBI. RBI can vary this rate between 3% and 15%. RBI uses this tool to increase or decrease the reserve requirement depending on whether it wants to affect a decrease or an increase in the money supply. An increase in Cash Reserve Ratio (CRR) will make it mandatory on the part of the banks to hold a large proportion of their deposits in the form of deposits with the RBI. This will reduce the size of their deposits and they will lend less. This will in turn decrease the money supply. The current rate is 6%.
• Statutory Liquidity Ratio(SLR): Apart from the CRR, banks are required to maintain liquid assets in the form of gold, cash and approved securities. Higher liquidity ratio forces commercial banks to maintain a larger proportion of their resources in liquid form and thus reduces their capacity to grant loans and advances, thus it is an anti-inflationary impact. A higher liquidity ratio diverts the bank funds from loans and advances to investment in government and approved securities.

Facts about Banking System in India

• The first bank in India to be given an ISO Certification – Canara Bank
• The first bank in Northern India to get ISO 9002 certification for their selected branches – Punjab and Sind Bank
• The first Indian bank to have been started solely with Indian capital - Punjab National Bank
• The first among the private sector banks in Kerala to become a scheduled bank in 1946 under the RBI Act – South Indian Bank
• India's oldest, largest and most successful commercial bank, offering the widest possible range of domestic, international and NRI products and services, through its vast network in India and overseas – State Bank of India
• India's second largest private sector bank and is now the largest scheduled commercial bank in India – The Federal Bank Limited
• Bank which started as private shareholders banks, mostly Europeans shareholders – Imperial Bank of India
• The first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974 - Bank of India, founded in 1906 in Mumbai
• The oldest Public Sector Bank in India having branches all over India and serving the customers for the last 132 years. – Allahabad Bank
• The first Indian commercial bank which was wholly owned and managed by Indians – Central Bank of India
• Bank of India was founded in 1906 in Mumbai. It became the first Indian bank to open a branch outside India in London in 1946 and the first to open a branch in continental Europe at Paris in 1974.

List of Public Sector Banks in India

• Allahabad Bank
• Andhra Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Oriental Bank of Commerce
• Punjab & Sind Bank
• Punjab National Bank
• Syndicate Bank
• UCO Bank
• Union Bank of India
• United Bank of India
• Vijaya Bank

List of Private Banks in India

• Bank of Punjab
• Bank of Rajasthan
• Catholic Syrian Bank
• Centurion Bank
• City Union Bank
• Dhanalakshmi Bank
• Development Credit Bank
• Federal Bank
• HDFC Bank
• ICICI Bank
• IDBI Bank
• IndusInd Bank
• ING Vysya Bank
• Jammu & Kashmir Bank
• Karnataka Bank
• Karur Vysya Bank
• Laxmi Vilas Bank
• South Indian Bank
• United Western Bank
• UTI Bank

List of Foreign Banks in India

• ABN-AMRO Bank
• Abu Dhabi Commercial Bank
• Bank of Ceylon
• BNP Paribas Bank
• Citi Bank
• China Trust Commercial Bank
• Deutsche Bank
• HSBC
• JPMorgan Chase Bank
• Standard Chartered Bank
• Scotia Bank
• Taib Bank

Upcoming Foreign Banks In India

By 2009 few more names is going to be added in the list of foreign banks in India. This is as an aftermath of the sudden interest shown by the Reserve Bank of India paving roadmap for foreign banks have greater freedom in India. Among them is the world's best private bank by EuroMoney magazine, Switzerland's UBS. The following are the list of foreign banks going to set up business in India:

• Royal Bank of Scotland
• Switzerland's UBS
• US-based GE Capital
• Credit Suisse Group
• Industrial and Commercial Bank of China

Merrill Lynch is having a joint venture in Indian investment banking space – DSP Merrill Lynch. Goldman Sachs holds stakes in Kotak Mahindra arms. GE Capital is also having a wide presence in consumer finance through GE Capital India. India's GDP is seen growing at a robust pace of around 7% over the next few years, throwing up opportunities for the banking sector to profit from the present economic scenario.