Indian Banking Sector

A beach is an institution that deals in coin and its substitutes and provides contourer(a) pecuniary attends. avers accept deposits and make lends or make an investment to win a pro tote up from the dissentence in the quest computes salaried and load upd, respectively. In India the cusss be being segregated in different groups. several(prenominal)ly group has their feature benefits and limitations in operating in India. Each has their own dedicated target merc mintise. Few of them except work in outlandish celestial sphere plot of ground current(prenominal)s in ii campestral as comfortably as urban. Mevery in clock cadence argon barely catering in cities. approximately be of Indian origin and just about argon inappropriate anticers. Indias thrift has been one of the stars of orbicular sparings in new-made years. It has fully findn by more than 9% for three years running. The frugality of India is as several(a) as it is large, with a number of study vault of heavens including manufacturing industries, agriculture, textiles and handicrafts, and run. Agriculture is a major component of the Indian prudence, as oer 66% of the Indian population earns its livelihood from this bea. buzzwording bea is considered as a bellowinging welkin in Indian thriftiness re pennyly. beveling is a vital st whole stepgy for snap off miserliness for the nation. However, Indian hopeing dust and thriftiness has been facing diverse ch in aloneenges and problems which oblige discussed in other parts of project. Indian BANKING SYSTEM Without a straits and resultant roleive buzzwording outline in India it support non petition a healthy parsimoniousness. The banking system of India should non entirely be hassle free save it should be able to meet new contests posed by the technology and both other external and internal factors. For the past three decades Indias banking system has several outstanding actionmen ts to its credence.The around striking is its extensive reach. It is no longer hold in to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached up to now to the remote corners of the orbit. This is one of the main reasons of Indias step-up process. The presidencys regular constitution for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major surreptitious banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money.Today, he has a choice. Gone be days when the most efficient bank transferred money from one offset printing to other in two days. Now it is wide of the mark as instant messaging or dial a pizza. notes has be rally the regulate of the day. The first bank in India, though conservative, was found in 1786. From 1786 till today, the journey of Indian entrusting System wad be segregated into three distinct phases. They atomic number 18 as mentioned be unhopeful earliest phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sphere of influence Re mental strains. New phase of Indian Banking System with the advent of Indian pecuniary Banking Sector Reforms after 1991. After 1991, at a debase stick the chairmanship of M Narasimham, a committee was go under up by his name which worked for the liberalization of banking practices. The country is flooded with hostile banks and their ATM stations. Efforts are being put to utilise a satisfactory service to nodes. Phone banking and net banking is introduced. The faultless system became more convenient and swift. beat is abandoned more importance than money.This resulted that Indian banking is maturement at an astonishing rate, with Assets expect to reach US$1 trillion by 2010. The banking exertion should contract on having a miserable number of large players that croup compet e glob in ally and house achieve expected goals rather than having a large number of fragmented players. KINDS OF BANKS Financial carryments in a modernistic font miserliness are of a diverse nature, distinctive assortment and large magnitude. Hence, different types of banks adopt been instituted to cater to the varying earn of the community.Banks in the organized vault of heaven whitethorn, however, be classified in to the following major forms oCommercial banks oCo-operative banks oSpecialized banks oCentral bank COMMERCIAL BANKS Commercial banks are enounce stock companies dealing in money and course realization. In India, however there is a mixed banking system, prior to July 1969, all the commercial banks-73 scheduled and 26 non-scheduled banks, except the state bank of India and its subsidiaries-were under the match of snobbish welkin. On July 19, 1969, however, 14 major commercial banks with deposits of everyplace 50 Corers were nationalized.In April 1980, another sestet commercial banks of high standing were taken over by the political sympathies. At present, there are 20 nationalized banks plus the state bank of India and its 7 subsidiaries constituting manity sector banking which affirms over 90 per cent of the banking melodic phrase in the country. CO-OPERATIVE BANKS Co-operative banks are a group of pecuniary institutions organized under the victuals of the Co-operative societies Act of the states. The main objective of co-operative banks is to provide cheap credits to their members.They are based on the principle of self-reliance and mutual co-ope symmetryn. Co-operative banking system in India has the shape of a pyramid a three tier organise, established by SPECIALIZED BANKS There are specialized forms of banks catering to well-nigh special strikes with this unique nature of activities. There are thus, o unusual change banks, oIndustrial banks, oDevelopment banks, oLand cultivation banks, oExim bank. CENTRAL BANK A interchange bank is the meridian financial institution in the banking and financial system of a country.It is regarded as the highest pecuniary authority in the country. It acts as the leader of the money food food marketplaceplace. It supervises, realise and regulates the activities of the commercial banks. It is a service oriented financial institution. Indias substitution bank is the Reserve Bank of India established in 1935. A profound bank is usually state owned but it may as nearly be a hidden organization. For inposture, the Reserve Bank of India ( rbi), was started as a shareholders organization in 1935, however, it was nationalized after independence, in 1949. It is free from parliamentary confine.CHALLENGES face BY Indian BANKING INDUSTRY The banking effort in India is undergoing a major trans defining collectable to changes in stintingalal conditions and continuous deregulation. These septuple changes adventure one after other has a ripple effect on a bank trying to graduate from completely regulated sellers market to completed deregulated customers market. oDEREGULATION This continuous deregulation has make the Banking market extremely secluded-enterp produce(a) with greater autonomy, operational tractableness, and de arrestled chase rate and liberalized norms for hostile interchange.The deregulation of the industry coupled with decontrol in pursuance range has led to entryway of a number of players in the banking industry. At the identical time tame corporate credit off take thanks to sluggish economy has resulted in large number of competitors battling for the same pie. oNEW RULES As a result, the market authority has been re delineate with new rules of the game. Banks are transforming to universal banking, adding new channels with mercenary pricing and freebees to offer. Natural fall out of this has led to a serial of innovative harvesting offerings catering to motley customer segments, specifically sell credit. EFFICIENCY This in turn has do it infallible to look for efficiencies in the business. Banks submit to rag low cost funds and simultaneously reform the efficiency. The banks are facing pricing pressure, squeeze on spread and hit to give thrust on retail summations. oDIFFUSED CUSTOMER LOYALTY This ordain definitely uphold Customer preferences, as they are bound to controvert to the tax added offerings. Customers require become implying and the loyalties are diff employ. There are multiple choices the wallet share is diluted per bank with demand on flexibility and customization.Given the relatively low switching costs customer retention calls for customized service and hassle free, flawless(prenominal) service delivery. oMISALLIGNED MINDSET These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the trafficker market mindset is yet to be changed coupled with Fear of incred ulity and Control orientation. Acceptance of technology is slowly creeping in but the utilization is not maximized. oCOMPETENCE GAPPlacing the right skill at the right place get out determinusine success. The competency gap needs to be communicate simultaneously otherwise there allow be missed opportunities. The focus of multitude forget be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the probability to cross sell. STRATEGIES OPTIONS WITH BANKS TO COPE WITH THOSE CHALLENGES Leading players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership.The major initiatives take oInvesting in state of the art technology as the back dress up of to ensure reliable service delivery oLeveraging the branch network and gross gross revenue structure to mobilize low cost topical and redemptives deposits oMaking battleful forays in the retail advances se gment of home and personal loanwords oImplementing organization wide initiatives involving people, process and technology to reduce the situated costs and the cost per deed oFocusing on fee based income to compensate for squeezed spread, (e. . CMS, trade service) oInnovating Products to capture customer mind share to begin with and later the wallet share oImproving the addition quality as per Basel II norms INDIAN delivery The Indian parsimony is consistently posting robust breakth numbers in all sectors hint to impressive gain in Indian GDP. The Indian economy has been stable and reliable in recent times, plot of land in the defy few years its experienced a positive upward growth trend.A consistent 8-9% growth rate has been supported by a number of loving economic indications including a huge in lead of foreign funds, growing lets in the foreign exchange sector, both an IT and corporeal estate boom, and a flourishing jacket market. All of these positive changes have resulted in establishing the Indian economy as one of the largest and fastest growing in the world. The process of globalization has been an integral part of the recent economic progress made by India.Globalization has played a major office in export-led growth, leading to the enlargement of the job market in India. As a new Indian middle class has highly- bristleed most the wealth that the IT and BPO industries have brought to the country, a new consumer base has developed. International companies are as well expanding their operations in India to service this massive growth opportunity. The same thing has followed by international banks that are entering in Indian market and pulling their huge investments in Indian economy. This is alleviateing to drive the growth of Indian economy.Economy can be studied from two points of views ? wasted frugal POINT OF VIEW The branch of economic science that analyzes the market demeanor of one-on-one consumers and firms in an attempt t o understand the decision-making process of firms and abodeholds. It is concerned with the interaction amongst individual buyers and sellers and the factors that enamour the choices made by buyers and sellers. In particular, micro economic science focuses on patterns of provide and demand and the determination of footing and output in individual markets.Microeconomics looks at the smaller envisage and focuses more on staple theories of put out and demand and how individual businesses decide how much of something to produce and how much to charge for it. ?MACRO ECONOMIC POINT OF VIEW It is a field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena much(prenominal)(prenominal) as changes in un meshing, national income, rate of growth, gross domestic product, ostentation and price trains. Macroeconomics looks at the big picture (hence macro). It focuses on the national economy as a unit and provides a basic k insta ntaneouslyledge of how things work in the business world.For example, people who study this branch of economics would be able to interpret the in style(p) Gross Domestic Product figures or explain why a 6% rate of un enjoyment is not necessarily a bad thing. Thus, for an bpetroleumersuit perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro directs. ECONOMIC SYSTEMS An economic system is loosely defined as countrys plan for its services, goods produced, and the exact way in which its economic plan is carried out. In general, there are three major types of economic systems prevailing around the world they are Market Economy oPlanned Economy o commingle Economy MARKET ECONOMY In a market economy, national and state governments play a insignificant type. Instead, consumers and their buying decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the rig ht path for a countrys economic development. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of prices for different commodities, and the tot up of regulation haughty different industrial sectors.The absence of exchange proviso is one of the major features of this economic system. Market decisions are mainly predominate by channel and demand. The role of the government in a market economy is to simply make sure that the market is stable comely to carry out its economic activities properly. PLANNED ECONOMY A be after economy is exorbitanceively sometimes called a command economy. The most beta aspect of this type of economy is that all major decisions related to the production, distribution, trade good and service prices, are all made by the government.The planned economy is government directed, and market forces have very little say in such an economy. This type of economy lacks the kind of flexibility tha t is present a market economy, and because of this, the planned economy reacts s pass up to changes in consumer needs and fluctuate patterns of proviso and demand. On the other hand, a planned economy aims at using all usable resources for develop production instead of allotting the resources for advertise or marketing. MIXED ECONOMY A mixed economy combines elements of both the planned and the market economies in one cohesive system.This instrument that authoritative features from both market and planned economic systems are taken to form this type of economy. This system prevails in m each countries where neither the government nor the business entities control the economic activities of that country both sectors play an serious role in the economic decision-making of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies let in both heavy(p)ist and socialist economic policies and practically re uncutsce in s ocieties that seek to balance a wide cast of polity-making and economic views. heavy BANKING AND ECONOMIC INDICATORS CASH declare dimension change reserve Ratio (CRR) is the derive of funds that the banks have to keep with run batted in. If RBI decides to maturation the percent of this, the available enumerate with the banks comes dash off. RBI is using this manner ( amplification of CRR rate), to drain out the excessive money from the banks. The amount of which shall not be less than three per cent of the follow of the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly basis and RBI is sceptered to add the said rate of CRR to such high rate not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL) under the RBI Act, 1934. STATUTORY LIQUIDITY RATIO In terms of share 24 (2-A) of the B. R. Act, 1949 all Scheduled Commercial Banks, in addition to the second-rate daily balance which they are inevitable to maintain in the form of. oIn cas h, Or oIn gold cherished at a price not exceeding the genuine market price, Or oIn unencumbered approved securities valued at a price as specified by the RBI from time to time. ?REPO RATE Repo rate, to a fault known as the official bank rate, is the discounted rate at which a central bank repurchases government securities.The central bank makes this transaction with commercial banks to reduce some of the brusque-term liquidness in the system. The repo rate is dependent on the level of money turn in that the bank chooses to fix in the financial strategy of things. Repo rate is short for repurchase rate. The entity acceptation the security is often referred to as the buyer, while the loaner of the securities is referred to as the seller. The central bank has the power to lower the repo range while expanding the money add in the country. This enables the banks to exchange their government security holdings for cash.In contrast, when the central bank decides to reduce the mon ey supply, it implements a outset in the repo rates. At times, the central bank of the nation makes a decision regarding the money supply level and the repo rate is repaird by the market. The securities that are being evaluated and sell are transacted at the current market price plus every divert that has accrued. When the sale is concluded, the securities are subsequently resold at a influence price. This price is comp standd of the original market price and interest, and the pre-agreed interest rate, which is the repo rate. ?BANK RATEBank rate is referred to the rate of interest charged by premier banks on the loans and advances. Bank rate varies based on some defined conditions as placed peck the governing authority of the banks. Bank rates are levied to control the money supply to and from the bank. From the consumers point of view, bank rate ordinarily denotes to the current rate of interest acquired from nest egg certificate of Deposit. It is most frequently used by th e consumers who are concerned in mortgage Some commonest types of bank interest rates are as follows oBank rate on CD, i. e. , on certificate of deposit Bank rate on the credit of a credit card or other kind of loan oBank rate on real estate loan ?INTERBANK RATE The rate of interest charged on short-term loans made surrounded by banks. Banks borrow and lend money in the interbank market in order to curb fluidness and meet the requirements placed on them. The interest rate charged depends on the approachability of money in the market, on prevailing rates and on the specific terms of the contract, such as term length. Banks are required to hold an decent amount of liquid assets, such as cash, to manage any electric potential withdrawals from clients.If a bank cant meet these liquidity requirements, it pull up stakes need to borrow money in the interbank market to cover the shortfall. Some banks, on the other hand, have excess liquid assets above and beyond the liquidity require ments. These banks testamenting lend money in the interbank market, receiving interest on the assets. There is a wide range of published interbank rates, including the LIBOR & MIBOR, which is set daily based on the average rates on loans made within the London interbank market & Mumbai Interbank Market. ?GROSS DOMESTIC PRODUCTThe monetary value of all the finished goods and services produced within a countrys borders in a specific time period, though GDP is usually mensurable on an annual basis. It includes all of private and prevalent consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX Where ?C is equal to all private consumption, or consumer spending, in a nations economy. ?G is the sum of government spending. ?I is the sum of all the countrys businesses spending on detonating device. ?NX is the nations native net exports, calculated as summarise exports minus total imports. NX = Exports Imp orts) GDP is commonly used as an indicator of the economic health of a country, as well as to infer a countrys standard of supporting. ?INFLATION Inflation can be defined as a rise in the general price level and therefore a fall in the value of money. Inflation occurs when the amount of buying power is higher(prenominal) than the output of goods and services. Inflation to a fault occurs when the amount of money exceeds the amount of goods and services available. As to whether the fall in the value of money leave behind affect the work outs of money depends on the degree of the fall.Basically, refers to an increment in the supply of specie or credit relative to the approachability of goods and services, resulting in higher prices. Therefore, inflation can be measured in terms of percentages. The percentage incr succor in the price proponent, as a rate per cent per unit of time, which is usually in years. The two basic price indexes are used when measuring inflation, the produ cer price index (PPI) and the consumer price index (CPI) which is likewise known as the cost of living index number. ?DEFLATION It is a condition of falling prices accompanied by a decreasing level of employment, output and income.Deflation is just the opposite of inflation. Deflation occurs when the total ingestion of the community is not equal to the existent prices. Consequently, the supply of money decreases and as a result prices fall. Deflation can also be brought about by direct contractions in spending, either in the form of a lessening in government spending, personal spending or investment spending. Deflation has often had the side effect of increasing unemployment in an economy, since the process often leads to a lower level of demand in the economy. ?DISINFLATIONWhen prices are falling due to anti-inflationary measures adopted by the authorities, with no corresponding decline in the existing level of employment, output and income, the result of this is disinflation. W hen acute inflation burdens an economy, disinflation is apply as a cure. Disinflation is said to take place when deliberate attempts are made to curtail expenditure of all sorts to lower prices and money incomes for the benefit of the community. ?REFLATION Reflation is a seat of rising prices, which is deliberately undertaken to relieve a depression.Reflation is a means of motivating the economy to produce. This is achieved by increasing the supply of money or in some instances reducing taxes, which is the opposite of disinflation. governments can use economic policies such as reducing taxes, changing the supply of money or adjusting the interest rates which in turn motivates the country to increase their output. The situation is described as semi-inflation or reflation. ?STAGFLATION Stagflation is a stagnant economy that is unite with inflation. Basically, when prices are increasing the economy is deceasing.Some economists believe that there are two main reasons for stagflation. initially, stagflation can occur when an economy is slowed by an unfavourable supply, such as an increase in the price of oil in an oil importing country, which tends to raise prices at the same time that it slows the economy by making production less profitable. In the 1970s inflation and recession occurred in different economies at the same time. Basically, what happened was that there was plenty of liquidity in the system and people were spending money as quickly as they got it because prices were going up quickly.This gave rise to the second reason for stagflation. ?FOREIGN institutional INVESTMENTS unknown Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are holded to invest in the primary and secondary capital markets in India by means of the portfolio investment scheme (PIS). below this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investme nt for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per cent for NRIs/PIOs.The limit is 20 per cent of the paid up capital in the case of general sector banks, including the State Bank of India. ?FOREIGN deputise RESERVES Foreign exchange militia (also called Forex reserves) in a strict sense are only the foreign notes deposits held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official reserves or international reserves.These are assets of the central bank held in different reserve currencies, such as the dollar, euro and yen, and used to back its liabilities, e. g. the topical anaesthetic currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions. Large reserves of foreign currency allow a government to manipulate exchange rates usually to perk up the foreign exchange rates to provide a more favorable economic environment. ROLE OF BANKS IN DEVELOPING OF ECONOMY A rubber eraser and sound financial sector is a prerequisite for sustained growth of any economy.Globalization, deregulation and advances in in physical composition 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 austere 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 eightsomeeenth and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to ontogenesis countries may be viewed thus oPromoting capital formation oEncouraging innovation oMonetsation oInfluence economic activity oFacilitator of monetary constitution Above all view we can see in briefly, which are given belowPROMOTING 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 elevated and dormant capital of the country and make it available for productive purposes. agitate INNOVATION Innovation is another factor responsible for economic development.The enterpriser in innovation is largely dependent on the manner in which bank credit is allocated and put ond in the process of economic growth. Bank credit enables entrepreneurs to enclose 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 mustiness be replaced by the modern commercial banks branches. INFLUENCE ECONOMIC ACTIVITYBanks 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 fiscal form _or_ system of government Thus monetary policy of a country should be conductive to economi c 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 all-encompassing banking system is a crucial factor of the developmental process of economy. RESERVE BANK OF INDIA AS A REGULATORY INSTITUTION IN INDIAN ECONOMY The RBI was established under the Reserve Bank of India Act, 1934 on April 1, 1935 as a private shareholders bank but since its nationalization in 1949, is fully owned by the Government of India. The Preamble of the Reserve Bank describes the basic functions as to regulate the issue of Bank notes and keeping of reserves with a view to securing monetary stability in India and largely, to operate the currency and credit system of the country to its advantage.The twin objectives of monetary policy in India have evolved over the years as those of maintaining price stability and ensuring adequate flow of credit to facilitate the growth process. The relative emphasis between the twin objectives is modulated as per the prevailing circumstances and is articulated in the policy statements by the Reserve Bank from time to time. Consideration of macro-economic and financial stability is also subsumed in the mandate. The Reserve Bank is also entrusted with the caution of foreign exchange reserves (which include gold holding also), which are reflected in its balance sheet.While the Reserve Bank is essentially a monetary authority, its founding statute mandates it to be the manager of market borrowing of the Government of India and banker to the Government. The Reserve Banks affairs are governed by a Central jump on of Directors, consisting of fourteen non-executive, independent directors nominated by the Government, in addition to the governor and up to four Deputy Governors. Besides, one Government official is also nominated on the Board who participates in the Board meetings but cannot vote. I MPORTANT FUNCTIONS PLAYED BY RESERVE BANK OF INDIA IN ECONOMY of import FUNCTIONS oMONITORY AUTHORITY The Reserve Bank of India formulates implements and monitors the monetary policy. Its main objective is maintaining price stability and ensuring adequate flow of credit to productive sectors. oREGULATOR AND SUPERVISOR OF fiscal SYSTEM Prescribes broad parameters of banking operations within which the countrys banking and financial system functions. Their main objective is to maintain public confidence in the system, protect depositors interest and provide cost-effective banking services to the public. MANAGER OF EXCHANGE CONTROL The manager of the exchange control department manages the Foreign rally Management Act, 1999. Its main objective is to facilitate external trade and stipend and promote orderly development and maintenance of foreign exchange market in India. oISSUER OF THE CURRENCY The person who is issuer issues and exchanges or destroys currency and coins not fit for c irculation. His main objective is to give the public adequate quantity of supplies of currency notes and coins and in good quality. oDEVELOPMENTAL ROLEThe reserve bank of India performs a wide range of promotional functions to support national objectives. The promotional functions are such as contests, coupons, maintaining good public relations, and many more.. oRELATED FUNCTIONS There are also some of the relating functions to the above mentioned main functions. They are such as Banker to the Government, Banker to banks etc.. ?BANKER TO THE presidential term It performs merchant banking function for the central and the state governments also acts as their banker. ?BANKER TO THE BANKS Maintains banking accounts of all scheduled banks. ?SUPERVISORY FUNCTIONSThe Reserve Bank act, 1934 and the Banking Regulation act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to licensing and establishments, branch enlargement, liq uidity of their asset, vigilance and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out fortnightly inspections of banks and to call for returns and needed information from them. The supervisory functions of the RBI have helped a great deal in improving the standard of banking in India to develop on sound lines and to improve the methods of their operation. PROMOTIONAL FUNCTIONS With economic growth presumptuous a new urgency since Independence, the range of the Reserve Banks functions has steadily widened. The bank now performs a variety of developmental and promotional functions, which, at one time were regarded as outside the normal ambit of central banking. The RBI was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. PROBLEMS FACED BY INDIAN ECONOMY Macro-economic environment in India has taken a serious turn since the pedi gree of the year.Unprecedented rise in crude prices, surge in inflation and keep strong growth in money supply (M3) have coerce the government and RBI to take strong fiscal and monetary measures leading to liquidity tightening, significant rise in interest rates and retardent in economic growth. Economic shocks are events which adversely affect the economy and the governments macroeconomic objectives such as growth, inflation, unemployment and the balance of pay upments. received PROBLEMS FACED BY INDIAN ECONOMY oFALL IN SAVINGS RATIO The nest egg ratio is the % of income that is saved not spent.A fall in the savings ratio implies that consumer spending is increasing often this is payd through increased borrowing. personal do OF FALL IN SAVINGS RATIO ?HIGHER LEVEL OF outgo This results in increase in Aggregate Demand. The increase in AD will cause an increase in economic growth and lower unemployment. However, rising Aggregate Demand may cause inflation. Inflation will occ ur when growth is faster than the long run trend rate. This is now a potential problem in the India. Inflation has recently done for(p) above 12% ?BOOM AND BUST A fall in the savings ratio is usually accompanied by a rise in confidence.It is the rise in confidence which encourages borrowing and consumers to run down savings. Therefore, there is always a danger that a falling savings ratio can be a precursor to a boom and bust situation. ?ECONOMY MORE SENSITIVE TO INTEREST RATES With a fall in the savings ratio interest rate changes will have a bigger effect in reducing spending. This is because levels of borrowing are higher and therefore a rise in interest rates has a significant impact on increasing interest repayments. Also, higher rates will not be increasing incomes from savings as much. ?BALANCE OF PAYMENTWith higher levels of consumer spending, there will be an increase in imports. Therefore this will lead to deterioration in the current account. The current account deficit c ould put downward pressure on the exchange rate in the long term. However, some people cope a fall in the savings ratio is not a problem, but, it is just a reflection of strong economy and booming lodging market, which increases scope for equity withdrawal. oINFLATION Inflation is posing a serious challenge to the economic growth of India. Since Jan08 onwards, inflation in the country has surged by 8. 2% to hit a 13-year high of 12%.M3 growth in the economy too continued to remain strong at 20% (in July08), well above the RBIs comfort level of 17%. The WPI inflation rate flared up during the period driven by significant increase in the prices of commodities, primary articles and manufactured products, even though very small part of global crude price increase has been passed on to the Indian consumers. oGLOBAL RECESSION It appears that Europe, Japan and the US are entering into recession. Falling house prices, crisis in the financial system, and lower confidence could lead to a ha sty downturn, with the worst settle down to come.Many argue that Indias growth is not so dependent on growth in the West. However, the Indian stock markets have been hit by the global crisis. Indias growing service sector and manufacturing sector would be adversely impacted by a global downturn. oRISE IN CRUDE PRICES How global crude prices would behave probably has no easy answers however we believe that the current challenging and uncertain macro-economic conditions does not lead Indian financials into a state of crisis. But continued rise in crude prices and its resultant impact on inflation, interest rates and government finances has the potential to do so.Hence, crude price system the key risk to our positive stance on the Indian financials. In the last couple of months oil prices have surged by 45% from US$ 100 to US$ 145 (and now back to US$ 115). India presently imports 70% of its crude requirement, resulting in pressure on government coffers on back of rising crude pric es. oDEPRICIATING INR Surge in crude prices has poorly impacted current account deficit of the country. This coupled with the outflow of FII investments has resulted in INR to depreciate sharply a adoptst dollar just fueling inflation. IMPACT OF ECONOMIC PROBLEMS ON INDIAN FINANCIALSThe current macro-economic conditions are expected to result in oSLOWDOWN IN CREDIT GROWTH oIMPACT ON MARGINS OF BANKS oPREASURE ON CREDIT bore SLOWDOWN IN CREDIT GROWTH While the rise in interest rates should lead to a moderation in demand for credit, Indian banks too are exercising caution while lending. creed growth of 18% in FY09E and 17% in FY10E vs. 22% in FY08. Risks and uncertainties in the system have increased given the higher crude and commodity prices and its inflationary impact. This would curtail consumption, which would impact economic growth adversely.Further higher rates will not only impact the profitability of Indian corporate but also impact IRRs of various proposed capex projects . This coupled with elections adjoining year could lead to some postponement of capex plans of corporate, leading to negative impact on demand for credit. Higher rates have particularly impacted retail loan growth. As can be seen in the butt on below, retail loan growth has slowed down significantly from 26. 5% in FY07 to 13% in FY08. SLR Ratio of the system has started rising since mid FY08 and presently stands at 28. %. Given the expected negative impact on credit growth. IMPACT ON MARGINS OF BANKS During the past 18 months, CRR has increased by four hundred bps to 9. 0% before long and RBI has also discontinued with interest payment on CRR balances. Every 50 bps hike in CRR generally negatively impacts margins by 5 bps. Till June08, most of the banks had unruffled from hiking lending rates despite significant monetary tightening. However on account of recent measures by RBI, banks have resorted to hiking PLRs in July/August by 50-150 bps to preserve their margins.In fact in an environment, where liquidity is tight, interest rates are at elevated levels and risk premiums have increased, the banks tend to recollect the pricing power. This would not only help the banks to adequately price in risks but also help protect their margins. Apart from hiking PLRs, banks are also resorting to reprising (in fact right-pricing) the loans that were sanctioned well below PLRs. Significant portion of fixed rate loans would also get re-priced over the period of 12-18 months. PRESSURE ON CREDIT QUALITY Higher lending rates are expected to impact credit quality for the banking system.The extent of the impact on credit quality would also be bank specific given the loan mix (retail vs. corporate), proportion of unsecured lending, credit profile of corporate loan book and industry wise exposure. Indian banks fundamentals are relatively resilient with better risk management systems, dramatically improved asset quality, stronger recovery mechanisms ( wakeless provisions) and with adequate capitalization and provisioning. Even Certain sectors ( give care real estate, airlines industry) ability feel the stress due to the changing macro environment and rise in interest rates.Many companies where crude forms a key raw literal component are expected to get hit more severely. Similarly, sectors identical real estate and SMEs, which are interest rate sensitive, would face higher delinquencies if interest rates tone up further by 100-200 bps. NECESSARY INITIATIVES interpreted BY RBI & MINISTRY OF FINANCE TO TACKLE ECONOMIC PROBLEMS As most of economists feel that the most horrible problem which India is facing currently is inflation which has crossed 12%. To come out of these problems RBI and ministry of finance and other relevant government and regulative entities are taking various initiatives which are as follows RBI MONITORY POLICY With the introduction of the v year plans, the need for appropriate adjustment in monetary and fiscal policies to sui t the pace and pattern of planned development became imperative. The monitory policy since 1952 emphasized the twin aims of the economic policy of the government oSpread up economic development in the country to raise national income and standard of living, and oTo control and reduce inflationary pressure in the economy. This policy of RBI since the First plan period was termed broadly as one of controlled expansion, i. e. a policy of adequate financing of economic growth and at the same time the time ensuring reasonable price stability. Expansion of currency and credit was essential to meet the increased demand for investment funds in an economy like India which had embarked on rapid economic development. Accordingly, RBI helped the economy to expand via expansion of money and credit and attempted to check in rise in prices by the use of selective controls. OBJECTIVES OF MONITORY POLICY ?PRICE STABILITY ?MONITORY TARGETTING ?INTEREST RATE POLICY ?RESTRUCTURING OF currency MARKET ? REGULATION OF FOREIGN EXCHANGE MARKET WEAPONS OF MONITORY POLICYCentral banks generally use the three numerical measures to control the volume of credit in an economy, namely oRaising bank rates oOpen market operations and oVariable reserve ratio However, there are various limitations on the effective working of the quantitative measures of credit control adapted by the central banks and, to that extent, monetary measures to control inflation are weakened. In fact, in absolute inflation guarded monetary measures, by themselves, are relatively ineffective. On the other hand, forceful monetary measures are not good for the economic system because they may easily send the economy into a decline.In a developing economy there is always an increasing need for credit. Growth requires credit expansion but to check inflation, there is need to contract credit. In such a encounter, the best course is to resort to credit control, constrictive the flow of credit into the unproductive, inflat ion-infected sectors and speculative activities, and diversifying the flow of credit towards the most desirable needs of productive and growth-inducing sector. It should be noted that the impression that the rate of spending can be controlled rigorously by the contraction of credit or money supply is wrong in the context of modern economic societies.In modern community, tangible, wealth is typically represented by claims in the form of securities, bonds, etc. , or near moneys, as they are called. Such near moneys are highly liquid assets, and they are very close to being money. They increase the general liquidity of the economy. In these circumstances, it is not so simple to control the rate of spending or total outlays merely by controlling the quantity of money. Thus, there is no immediate and direct relationship between money supply and the price level, as is normally conceived by the traditionalistic quantity theories.When there is inflation in an economy, monetary restraints c an, in junction with other measures, play a useful role in controlling inflation. FISCAL POLICY Fiscal policy is another type of budgetary policy in relation to taxation, public borrowing, and public expenditure. To curve the effects of inflation and changes in the total expenditure, fiscal measures would have to be implemented which involves an increase in taxation and decrease in government spending. During inflationary periods the government is supposed to counteract an increase in private spending.It can be unfasteneded noted that during a period of full employment inflation, the aggregate demand in relation to the limited supply of goods and services is reduced to the extent that government expenditures are shortened. Along with public expenditure, governments must simultaneously increase taxes that would effectively reduce private expenditure, in an effect to minimise inflationary pressures. It is known that when more taxes are imposed, the size of the usable income diminis hes, also the magnitude of the inflationary gap in regards to the availability of the supply of goods and services.In some instances, tax policy has been directed towards restricting demand without restricting level of production. For example, excise duties or sales tax on various commodities may take away the buying power from the consumer goods market without disapprove the level of production. However, some economists point out that this is not a right-hand(a) way of combating inflation because it may lead to a regressive condition within the economy. As a result, this may lead to a further rise in prices of goods and services, and inflation can spread from one sector of the economy to another and from one type of goods and services to another.Therefore, a diminution in public expenditure, and an increase in taxes produces a cash wasted in the budget. Keynes, however, suggested a programme of compulsory savings, such as deferred pay as an anti-inflationary measure. Deferred pay indicates that the consumer defers a part of his or her wages by buying savings bonds (which, of course, is a sort of public borrowing), which are recoverable after a particular period of time, this is sometimes called forced savings. Additionally, private savings have a strong disinflationary effect on the economy and an increase in these is an important measure for controlling inflation.Government policy should therefore, include devices for increasing savings. A strong savings drive reduces the spendable income of the consumers, without any harmful effects of any kind that are associated with higher taxation. Furthermore, the effects of a large deficit budget, which is mainly responsible for inflation, can be partially offset by covering the deficit through public borrowings. It should be noted that it is only government borrowing from non-bank lenders that has a disinflationary effect.In addition, public debt may be managed in such a way that the supply of money in the coun try may be controlled. The government should reduce paying back any of its past loans during inflationary periods, in order to prevent an increase in the circulation of money. Anti-inflationary debt management also includes cancellation of public debt held by the central bank out of a budgetary surplus. Fiscal policy by itself may not be very effective in combating inflation therefore a combination of fiscal and monetary tools can work together in achieving the desired outcome. DIRECT MEASURESDirect controls refer to the regulative measures undertaken to convert an open inflation into a repressed one. Such regulative measures involve the use of direct control on prices and rationing of scrimpy goods. The function of price control is a fix a legal ceiling, beyond which prices of particular goods may not increase. When ceiling prices are fixed and enforced, it means prices are not allowed to rise further and so, inflation is suppressed. Under price control, producers cannot raise the price beyond a specified level, even though there may be a pressure of excessive demand forcing it up.In times of the severe scarcity of certain goods, particularly, food grains, government may have to enforce rationing, along with price control. The main function of rationing is to divert consumption from those commodities whose supply needs to be certified for some special reasons such as, to make the commodity more available to a larger number of households. Therefore, rationing becomes essential when necessities, such as food grains, are relatively scarce. Rationing has the effect of limiting the variety of quantity of goods available for the good cause of price stability and separative impartiality.Another control measure that was suggested is the control of wages as it often becomes necessary in order to stop a wage-price spiral. During galloping inflation, it may be necessary to apply a wage-profit freeze. Ceilings on wages and profits keep down disposable income and, t herefore the total effective demand for goods and services. On the other hand, restrictions on imports may also help to increase supplies of essential commodities and ease the inflationary pressure. However, this is possible only to a limited extent, depending upon the balance of payments situation.Similarly, exports may also be reduced in an effort to increase the availability of the domestic supply of essential commodities so that inflation is eased. In general, monetary and fiscal controls may be used to repress excess demand but direct controls can be more useful when they are applied to specific scarcity areas. As a result, anti-inflationary policies should involve change programmes and cannot exclusively depend on a particular type of measure only. RECENT INNOVATIONS IN INDIAN BANKING HDFC Banks Net untroubled card is a one-time use card with a limit thats specified, taken from Tendons credit or debit card.Even if Tandon fails to utilize the full amount within 24 hours of cr eating the card, the card simply dies and the odd amount in the temporary card reverts to his original credit or debit card. Welcome to one of the myriad ways in which bankers have been trying to innovate. Theyre bringing ATMs, cash and even foreign exchange to their customers doorsteps. Indeed, innovation has become the hottest banking game in town. Want to buy a house but dont want to go through the hassles of haggling with brokers and the mounds of paperwork? Not to worry.Your bank will tackle all this. Its ready to come every step of the way for you to buy a house. Standard Chartered, for instance, has property advisors to guide a customer through the entire process of selecting and buying a house. They also lend a hand with the cumbersome documentation formalities and the registration. Dont fret if youve already bought your house or car you can do other things with both. You can leverage your new house or car these days with banks like ICICI Bank and Stanchart ready to extend loans against either, till its about quintuplet years old.Loans are available to all car owners for almost all brands of cars manufactured in India that are up to five years old. stand firm month, Kotak Mahindra Bank introduced a variant of the sweep-in account. If the balance tops Rs 1. 5 lakh, the excess runs into Kotaks liquid mutual fund. Even if the money is there only for the weekend, a liquid fund can earn you a flashy 4. 5 per cent per annum, points out Shashi Arora, vice president, marketing, Kotak Mahindra Bank. Thats not a small gain considering that your current account does not pay you any interest.And if, meanwhile, you want to buy a big-ticket home theatre system, the small you swipe your card the invested sum will return to your account. Banks are also attempting to reach out to residents of metropolitan cities where people are pressed for time (what with long commuting hours, traffic jams and both spouses working), beyond conventional banking hours. ICICI Bank, for example, introduced eight to eight banking hours, seven days of the week, in major cities. Not to be outdone, some of the other private banks have also done this too.HDFC Bank even has a 24-hour branch at Mumbais international airport. INDIAN BANKING IN 2010 The interplay between policy and regulatory interventions and management strategies will determine the doing of Indian banking over the next few years. Legislative actions will shape the regulatory stance through six key elements industry structure and sector consolidation freedom to deploy capital regulatory coverage corporate governance labor reforms and human capital development and support for creating industry utilities and service bureaus.Management success will be refractory on three fronts fundamentally upgrading organizational capability to stay in tune with the changing market adopting value-creating M&A as an avenue for growth and continually innovating to develop new business models to access untapped oppo rtunities. Through these scenarios, we can paint a picture of the events and outcomes that will be the consequence of the actions of policy makers and bank managements. These actions will have dramatically different outcomes the costs of inaction or insufficient action will be high. Specifically, at one extreme, the sector could account for over 7. per cent of GDP with over Rs.. 7,500 billion in market cap, while at the other it could account for just 3. 3 per cent of GDP with a market cap of Rs. 2,400 billion. Banking sector intermediation, as measured by total loans as a percentage of GDP, could grow marginally from its current levels of 30 per cent to 45 per cent or grow significantly to over 100 per cent of GDP. In all of this, the sector could generate employment to the tune of 1. 5 million compared to 0. 9 million. Today availability of capital would be a key factor the banking sector will require as much as Rs. 00 billion (US$ 14 billion) in capital to fund growth in advance s, non-performing loan (NPL) write offs and investments in IT and human capital up gradation to reach the high-performing scenario. Three scenarios can be defined to characterize these outcomes oHIGH PERFORMANCE In this scenario, policy makers intervene only to the extent required to ensure system stability and protection of consumer interests, sledding managements free to drive far reaching changes. Changes in regulations and bank capabilities reduce intermediation costs leading to increased growth, innovation and productivity.Banking becomes an even greater driver of GDP growth and employment and large sections of the population gain access to quality banking products. Management is able to overhaul bank organizational structures, focus on industry consolidation and transform the banks into industry shapers. In this scenario we witness consolidation within public sector banks (PSBs) and within private sector banks. Foreign banks begin to be active in M&A, buying out some old p rivate and newer private banks. Some M&A activity also begins to take place between private and public sector banks.As a result, foreign and new private banks grow at rates of 50 per cent, while PSBs improve their growth rate to 15 per cent. The share of the private sector banks (including through mergers with PSBs) increases to 35 per cent and that of foreign banks increases to 20 per cent of total sector assets. The share of banking sector value adds in GDP increases to over 7. 7 per cent, from current levels of 2. 5 per cent. Funding this dramatic growth will require as much as Rs. 600 billion in capital over the next few years. oEVOLUTION Policy makers adopt a pro-market stance but are cautious in liberalizing the industry.As a result of this, some constraints still exist. Processes to create highly efficient organizations have been initiated but most banks are still not best-in-class operators. Thus, while the sector emerges as an important driver of the economy and wealth i n 2010, it has still not come of age in comparison to developed markets. Significant changes are still required in policy and regulation and in capability-building measures, especially by public sector and old private sector banks. In this scenario, M&A activity is driven primarily by new private banks, which take over some old private banks and also merge among themselves.As a result, growth of these banks increases to 35 per cent. Foreign banks also grow faster at 30 per cent due to a residuum of some regulations. The share of private sector banks increases to 30 per cent of total sector assets, from current levels of 18 per cent, while that of foreign banks increases to over 12 per cent of total assets. The share of banking sector value adds to GDP increases to over 4. 7 per cent. oSTAGNATION In this scenario, policy makers intervene to set restrictive conditions and management is futile to execute the changes needed to enhance returns to shareholders and provide quality pro ducts and services to customers.As a result, growth and productivity levels are low and the banking sector is unable to support a fast-growing economy. This scenario sees limited consolidation in the sector and most banks remain sub-scale. New private sector banks continue on their growth trajectory of 25 per cent. There is a slowdown in PSB and old private sector bank growth. The share of foreign banks remains at 7 per cent of total assets. Banking sector value adds meanwhile, is only 3. 3 per cent of GDP. oNEED TO CREATE A MARKET DRIVEN BANKING welkin WITH ADEQUATE FOCUS ON SOCIAL DEVELOPMENTThe term policy makers, refers to the Ministry of pay and the RBI and includes the other relevant government and regulatory entities for the banking sector. The coordinated efforts between the various entities are required to enable positive action. This will gad on the performance of the sector. The policy makers need to make coordinated efforts on six fronts Help shape a superior industry structure in a phased manner through managed consolidation and by enabling capital availability.This would create 3-4 global sized banks controlling 35-45 per cent of the market in India 6-8 national banks controlling 20-25 per cent of the market 4-6 foreign banks with 15-20 per cent share in the market, and the rest being specialist players (geographical or product/ segment focused). Focus strongly on social development by moving away from universal directed norms to an explicit incentive-driven framework by introducing credit guarantees and market subsidies to encourage leading public sector, private and foreign players to leverage technology to innovate and profitably provide banking services to lower income and rural markets. Create a unified regulator, distinct from the central bank of the country, in a phased manner to overcome supervisory difficulties and reduce ossification costs. Improve corporate governance primarily by increasing board independence and accountability. Accelerate the creation of world class supporting groundwork (e. g. , payments, asset reconstruction companies (ARCs), credit bureaus, back-office utilities) to help the banking sector focus on core activities. Enable labor reforms, focusing on enriching human capital, to help public sector and old private banks become competitive. NEED FOR deciding(prenominal) ACTION BY BANK MANAGEMENT Management imperatives will differ by bank. However, there will be common themes across classes of banks PSBs need to fundamentally strengthen institutional skill levels especially in sales and mar marketing, service operations, risk management and the overall organizational performance ethic. The last, i. e. , strengthening human capital will be the single biggest challenge. ageing private sector banks also have the need to fundamentally strengthen skill levels.However, even more imperative is their need to examine their mesh in the Indian banking sector and their ability to remain independent i n the light of the discontinuities in the sector. New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/ HNI segments actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms.Attracting, developing and retaining more leadership capacity would be key to achieving this and would pose the biggest challenge. Foreign banks committed to making a play in India will need to adopt alternative approaches to win the race for the customer and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset will be their greatest challenge.T he extent to which Indian policy makers and bank managements develop and execute such a clear and complementary agenda to tackle emerging discontinuities will lay the foundations for a high-performing sector in 2010. CONCLUSION We can conclude that the financial sector is a nerve system of Indian economy. Banking plays an important role in development of economy. For steady growth in economy innovations and development in financial sector is very important. Economy of any country faces lots of challenges and problems. To tackle those problems financial sector plays a vital role.The financial sector makes the economy efficient to the extent where it can rival other developed economies in the world. Financial sector also faces lots of problems but it should develop certain strategies to come out of these problems which is very important for healthy growth of economy. 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