Banking Industry Analysis

Introduction

(Indian banking industry experienced a 360 - degree change)

The history of banking system in India started with the establishment of the first joint stock bank, the General bank of India in the year 1786. In the mid of 19th century, East India Company established three banks. These banks were independent units and called Presidency banks. These three banks

were amalgamated in 1920 and a new bank, Imperial bank of India was established which started as private shareholders bank, mostly European shareholders. Reserve Bank of India (RBI) was constituted in the year 1935 as an apex bank without major government ownership. In the year 1949, Govt. of India enacted "The Banking Regulations Act" in order to streamline the functioning and activities of commercial banks. This act brought Reserve Bank of India under government control. Under the act, RBI got wide ranging powers for supervision & control of banks. In 1955, RBI acquired control of the Imperial bank of India, which was renamed as SBI. In 1959, SBI took over control of eight private banks floated in the erstwhile princely states, making them as its 100% subsidiaries. In July 1969, government nationalized 14 banks having deposits of Rs. 50 Crores & above. In 1980, government acquired 6 more banks with deposits of more than Rs 200 Crores. The purpose of nationalization of banks was to make them play the role of catalytic agents for economic growth.

The financial sector reforms undertaken in India from 1991 onwards were basically to ensure the safety and soundness of financial institutions and at the same time making the banking system strong, efficient, functionally diverse and competitive. The reforms included lowering of CRR and SLR, liberalization of the interest rate regime, allowing banks the freedom to choose their deposit and lending rates, infusing competition by allowing more liberal entry of foreign banks and permitting the establishment of new private banks. Furthermore, it was recognized that the Indian banking system should be in tune with international standards of capital adequacy, prudential regulations, and accounting and disclosure standards.

The Indian banking sector underwent metamorphosis on the back of structural reforms initiated during early 90s. Empowerment of debt recovery tribunal (DRT) and the securitization and reconstruction of financial assets and enforcement of security interest (SARFAESI) Act in 2002 have helped recovery efforts of banks, gradual move towards granting operational autonomy to State Owned Banks and implementation of Basel accord. Treasury gains booked over the last 4-5 years helped banks to clean up their balance sheets by undertaking a write-off of bad loans. As a result, today their balance sheets look much healthier. While treasury gains may dry down going forward, continuous improvement in corporate, agriculture, retail and housing demand for credit is likely to augment core business income, these would help offset this decline. Implementation of the Basel II norms will enhance corporate governance practices and induce more transparency in the functioning of banks, while also promoting more and more efficient use of the banking capital. It will force weaker players to scout for consolidation and induce others to augment their capital base. The comprehensive risk management systems that are being established by banks will enhance the

long-term viability and profitability of their operations.

Banking in India has moved from traditional banking to anywhere and anytime banking. Gone are the days when one had to stand in a queue, technology has changed the face of Indian banking. With the introduction of services like net banking, mobile banking, doorstep banking, ATMs and money transfer. Whole banking is just under arms length. As per the latest developments, RBI is in the process of declaring all offsite ATMs as bank branches. Banks are now trying to convert ATMs into a customer relationship management (CRM) tool to communicate and cross sale their diversified products and services to masses.

Industry Structure

Despite growth in banking branches major portion of rural population still depends on moneylenders. The Indian banking industry comprises of Scheduled banks and non- Scheduled banks that are permitted