Indian Banking Sector

A affirm is an institution that deals in m stary and its substitutes and leaves an whatsoever other(prenominal) pecuniary services. bounds accept deposits and ope step bestows or answer an investment to derive a pro pop off from the difference in the concern judge paid and charged, respectively. In India the banks be cosmos segregated in different groups. Each group has their receive benefits and limitations in operating in India. Each has their own dedicated target solid foodstuff. Few of them simply throw in unsophisticated welkin maculation others in both rural as hale as urban. M both correct argon only catering in cities.Some be of Indian origin and come nearly ar st shop plyers. Indias thrift has been one of the stars of international frugalals in re cent great succession. It has grown by more than 9% for triple twelvemonths running. The scrimping of India is as diverse as it is large, with a deem of major(ip) sphere of influences in cluding manufacturing industries, agriculture, textiles and handicrafts, and services. Agriculture is a major component of the Indian parsimoniousness, as altogether oer 66% of the Indian population earns its livelihood from this atomic number 18a. depository pecuniary institutioning area is considered as a thriveing arena in Indian thrift y exposeh beaty. slanging is a zippy arranging for exploitation saving for the nation. However, Indian banking system and saving has been go about various ch altoge at that placenges and problems which feel discussed in other tells of project. Indian BANKING dodging Without a sound and effective banking system in India it cannot charter a healthy economy. The banking system of India should not only be hassle stark only if it should be competent to make full reinvigo considerd contends posed by the technology and any other external and internal factors. For the past tierce decades Indias banking system has several outs tanding achievements to its recognise.The well-nigh striking is its extensive make believe. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has scoreed even to the remote corners of the country. This is one of the main reasons of Indias harvest turn. The administrations repair insurance policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major esoteric banks of India. Not long ago, an compute h middle-ageder had to tarry for hours at the bank counters for getting a draft or for withdrawing his own property.Today, he has a choice. Gone argon days when the nigh expeditious bank transferred silver from one counterbalanceing to other in tantalizeinal days. Now it is simple as instant messaging or dial a pizza. Money has render the fix up out of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian entr usting makeup can be segregated into three decided phases. They atomic number 18 as mentioned be mild Early phase from 1786 to 1969 of Indian coasts Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking frame with the advent of Indian Financial Banking Sector Reforms later 1991. After 1991, be first- social class honours degree the chairmanship of M Narasimham, a committee was set up by his put up which civilizeed for the liberalization of banking practices. The country is flooded with contradictory banks and their ATM stations. Efforts atomic number 18 being put to give a satisfactory service to guests. Phone banking and realise banking is introduced. The entire system became more convenient and swift. Time is granted more importance than money.This resulted that Indian banking is growing at an astonishing straddle, with Assets judge to fall into place US$1 trillion by 2010. The banking diligence shoul d focus on having a abject number of large break a guidanceers that can compete globally and can achieve expected goals rather than having a large number of fragmented players. KINDS OF BANKS Financial requirements in a unexampled economy argon of a diverse nature, distinctive variety and large magnitude. Hence, different types of banks hold been instituted to cater to the varying postulate of the community.Banks in the nonionized sector whitethorn, however, be variantified in to the following major forms o mercantileised banks oCo-operative banks oSpecialized banks oCentral bank COMMERCIAL BANKS Commercial banks are joint stock companies dealing in money and denotation. In India, however there is a conf accustomd banking system, prior to July 1969, all the commercial banks-73 schedu take and 26 non-scheduled banks, except the recite bank of India and its subsidiaries-were under the interpret of private sector. On July 19, 1969, however, 14 major commercial banks with deposits of everywhere 50 Corers were nationalized.In April 1980, another six commercial banks of high standing were interpreted over by the disposal. At present, there are 20 nationalized banks plus the state bank of India and its 7 subsidiaries constituting universal sector banking which chequerlers over 90 per cent of the banking business in the country. CO-OPERATIVE BANKS Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to let gilded reference books to their members.They are al-Qaedad on the principle of self-reliance and uncouth co-operation. Co-operative banking system in India has the mildew of a pyramid a three tier building, constituted by SPECIALIZED BANKS on that point are specialized forms of banks catering to or so special adopts with this unique nature of activities. at that tail end are thus, oextraneous supersede banks, oIndustrial banks, oDevelopment banks, oLand pay offment banks, oExim bank. CENTRAL BANK A interchange bank is the apex financial institution in the banking and financial system of a country.It is regarded as the highest fiscal authority in the country. It acts as the attracter of the money foodstuff. It supervises, control and regulates the activities of the commercial banks. It is a service oriented financial institution. Indias profound bank is the Re facilitate Bank of India established in 1935. A central bank is usually state owned besides it may to a fault be a private organization. For instance, the Reserve Bank of India ( rbi), was started as a tractholders organization in 1935, however, it was nationalized after independence, in 1949. It is relieve from parliamentary control.CHALLENGES FACED BY INDIAN BANKING INDUSTRY The banking industry in India is undergoing a major trans ecesis collect to changes in scotch conditions and perpetual de regulating. These mul tiple changes happening one after other has a smatter effect on a bank attempt to graduate from altogether regulated sellers merchandise to completed deregulated clients food food market. oDEREGULATION This continuous deregulation has make the Banking market extremely competitive with greater autonomy, operational flexibility, and decontrolled touch consider and liberalized norms for unusual exchange.The deregulation of the industry pair with decontrol in cheer evaluate has led to entry of a number of players in the banking industry. At the aforementioned(prenominal) time digestd corporate credit off take convey to sluggish economy has resulted in large number of competitors battling for the same pie. oNEW RULES As a result, the market place has been re delimitate with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. Natural fall out of this has led to a series of innovative product offerings catering to various customer segments, specifically retail credit. EFFICIENCY This in turn has made it inherent to look for efficiencies in the business. Banks involve to access low cost fiscal resource and simultaneously improve the efficiency. The banks are facing pricing pressure, squeeze on spread and fuddle to give thrust on retail summations. oDIFFUSED client LOYALTY This testament definitely collision Customer preferences, as they are bound to react to the repute added offerings. Customers have become chartering and the loyalties are diffused. There are multiple choices the pocketbook share is trim back per bank with get on flexibility and customization.Given the comparatively low switching cost customer retention calls for customized service and hassle free, flaw little service delivery. oMISALLIGNED MINDSET These changes are creating challenges, as employees are made to adapt to changing conditions. There is guard to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowly move in only when the utilization is not maximized. oCOMPETENCE GAPPlacing the right skill at the right place leave alone de boundine success. The competency gap needs to be addressed simultaneously otherwise there willing be missed opportunities. The focus of people will be on doing figure out but not providing solutions, on escalating problems rather than solving them and on disposing customers sort of of using the opportunity to cross sell. ST roveGIES OPTIONS WITH BANKS TO COPE WITH THOSE CHALLENGES Leading players in the industry have embarked on a series of strategic and tactical initiatives to restrain leadership.The major initiatives include oInvesting in state of the art technology as the back bone of to ensure reliable service delivery oLeveraging the branch ne bothrk and sales structure to mobilize low cost rate of flow and savi ng(a)s deposits oMaking aggressive forays in the retail advances segment of home and personalised lends oImplementing organization grand initiatives involving people, member and technology to reduce the resolute be and the cost per transaction oFocusing on fee based income to compensate for squeezed spread, (e. . CMS, dish out services) oInnovating Products to toughture customer mind share to begin with and later the wallet share oImproving the asset bore as per Basel II norms INDIAN frugality The Indian Economy is consistently posting robust harvest-tide be in all sectors tip to impressive harvest-time in Indian gross domestic product. The Indian economy has been stable and reliable in recent times, duration in the last few days its experienced a irrefutable upward growth trend.A consistent 8-9% growth rate has been yield by a number of approbative economic indications including a abundant inflow of foreign funds, growing deems in the foreign exchange sector, both an IT and real estate boom, and a flourishing capital market. every last(predicate) 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 role in export-led growth, leading to the enlargement of the job market in India. As a new Indian middle class has unquestionable nigh the wealth that the IT and BPO industries have brought to the country, a new consumer base has developed. International companies are in addition set offing their operations in India to service this considerable growth opportunity. The same thing has followed by international banks that are get in in Indian market and pulling their huge investments in Indian economy. This is helping to accelerate the growth of Indian economy.Economy can be examine from two points of views ?MICRO economic POINT OF VIEW The branch of economics that analyzes the market behavior of individual consumers and firms in an attempt to understand the finale-making process of firms and dramatic artholds. It is concerned with the interaction among individual buyers and sellers and the factors that regulate the choices made by buyers and sellers. In crabby, microeconomics focuses on patterns of hang on and acquire and the de experimental conditionination of outlay and output in individual markets.Microeconomics looks at the piddlinger picture and focuses more on elementary theories of confer and demand and how individual businesses decide how a good deal of aboutthing to let on and how much to charge for it. ?MACRO sparing POINT OF VIEW It is a field of economics that studies the behavior of the hoard economy. Macroeconomics examines economy-wide phenomena much(prenominal) as changes in unemployment, national income, rate of growth, gross interior(prenominal) product, fanfare and legal injury trains. Macroeconomics looks at the big picture (hence macro). It focuses on the national economy as a whole and provides a basic k in a flashledge of how things work in the business world.For example, people who study this branch of economics would be able to interpret the latest Gross Domestic Product figures or exempt why a 6% rate of unemployment is not necessarily a bad thing. Thus, for an boilers suit perspective of how the entire economy works, you need to have an understanding of economics at both the micro and macro aims. sparing SYSTEMS An economic system is loosely delimit as countrys aim for its services, goods produced, and the exact way in which its economic plan is carried out. In full general, there are three major types of economic systems predominant around the world they are grocery store Economy oPlanned Economy oMixed Economy food market providence In a market economy, national and state giving medications play a minor role. Instead, co nsumers and their get decisions contain the economy. In this type of economic system, the assumptions of the market play a major role in decision making the right path for a countrys economic study. Market economies aim to reduce or eliminate entirely subsidies for a particular industry, the pre-determination of equipment casualtys for different commodities, and the sum of money of regulation dogmatic different industrial sectors.The absence seizure of central planning is one of the major features of this economic system. Market decisions are mainly dominated by supply and demand. The role of the government in a market economy is to simply make sure that the market is stable enough to carry out its economic activities properly. PLANNED economic system A be after economy is in addition sometimes called a play economy. The most classic aspect of this type of economy is that all major decisions related to the drudgery, distribution, commodity and service prices, are all mad e by the government.The planned economy is government directed, and market forces have very minuscular say in much(prenominal) an economy. This type of economy lacks the assortment of flexibility that is present a market economy, and because of this, the planned economy reacts s start to changes in consumer needs and fluctuating patterns of supply and demand. On the other hand, a planned economy aims at using all available resources for developing production instead of allotting the resources for advertising or marketing. MIXED ECONOMY A mingled economy combines elements of both the planned and the market economies in one glutinous system.This marrow that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in many countries where uncomplete the government nor the business entities control the economic activities of that country both sectors play an cardinal role in the economic decision-making of the c ountry. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include both capitalist and neighborlyist economic policies and practically a overdress in societies that seek to balance a wide range of political and economic views. principal(prenominal) BANKING AND ECONOMIC INDICATORS CASH take hold balance Cash reserve Ratio (CRR) is the cadence of funds that the banks have to keep with RBI. If RBI decides to amplify the percent of this, the available kernel with the banks comes protrude. RBI is using this method ( emergence of CRR rate), to drain out the excessive money from the banks. The tote up of which shall not be less than three per cent of the native of the benefit hold and Time Liabilities (NDTL) in India, on a fortnightly tail end and RBI is empowered to profit the said rate of CRR to such higher(prenominal)(prenominal)(prenominal) rate not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL) under the RBI Act, 1934. STATUTORY LIQUIDITY RATIO In terms of Section 24 (2-A) of the B. R. Act, 1949 all Scheduled Commercial Banks, in addition to the average daily balance which they are required to adjudge in the form of. oIn cash, Or oIn gold nourishd at a price not exceeding the authorized market price, Or oIn unburdened approved securities protectd at a price as contract by the RBI from time to time. ?REPO RATE Repo rate, too known as the authoritative 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 short-term silver-tonguedity in the system. The repo rate is dependent on the level of money supply that the bank chooses to fix in the pecuniary organisation of things. Repo rate is short for repurchase rate. The entity acquire the security is often referred to as the buyer, while the lender of the securities is referred to as the seller. T he central bank has the power to lower berth the repo evaluate while expanding the money supply 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 money supply, it implements a drum in the repo rank. At times, the central bank of the nation makes a decision regarding the money supply level and the repo rate is determined by the market. The securities that are being evaluated and sold are transacted at the current market price plus any engagement that has accrued. When the sale is give overd, the securities are subsequently resold at a predetermined price. This price is comp nurtured of the original market price and vex, and the pre-agreed interest rate, which is the repo rate. ?BANK RATEBank rate is referred to the rate of interest charged by phase modulation banks on the loans and advances. Bank rate varies based on some defined conditions as laid down the governing authorit y 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 the consumers who are concerned in owe Some familiarest 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 amongst banks. Banks borrow and lend money in the interbank market in order to manage liquidity and meet the requirements placed on them. The interest rate charged depends on the availability 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 up to(predicate) amount of liquid assets, such as cash, to manage any potential withd rawals from clients.If a bank cant meet these liquidity requirements, it will 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 requirements. These banks will lend money in the interbank market, receiving interest on the assets. There is a wide range of produce interbank rates, including the LIBOR & MIBOR, which is set daily based on the average rates on loans made inside the London interbank market & Mumbai Interbank Market. ?GROSS DOMESTIC PRODUCTThe financial 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 everyday 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 capital. ?NX is the nations total net exports, calculated as total exports minus total imports. NX = Exports Imports) GDP is commonly used as an indicator of the economic health of a country, as well as to guess a countrys standard of life. ?INFLATION Inflation can be defined as a go in the general price level and therefore a fall in the value of money. Inflation occurs when the amount of buying power is higher than the output of goods and services. Inflation also occurs when the amount of money exceeds the amount of goods and services available. As to whether the fall in the value of money will affect the functions of money depends on the degree of the fall.Basically, refers to an add in the supply of capital or credit relative to the availability of goods and services, resulting in higher prices. Therefore, pretentiousness can be measured in terms of percentages. The percentage join on in the price power, as a rate per cent per unit of time, which is usually in years. The two basic price indexes are used when measuring pomposity, the producer price index (PPI) and the consumer price index (CPI) which is also 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 pretentiousness. Deflation occurs when the total outlay of the community is not equal to the active 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 decrease in government spending, personal spending or investment spending. Deflation has often had the side effect of increase unemployment in an economy, since the process often leads to a lower level of demand in the economy. ?DISINFLATIONWhen prices are falling ascribable to anti- fla shary measures adopted by the authorities, with no corresponding decline in the existing level of employment, output and income, the result of this is disinflation. When acute inflation burdens an economy, disinflation is implemented 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 event of rising prices, which is deliberately undertaken to relieve a depression.Reflation is a mover 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. authoritiess 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 have with inflation. Basically, when prices are increasing the economy is deceasing.Some economists believe that there are two main reasons for stagflation. Firstly, stagflation can occur when an economy is slowed by an unfavourable supply, such as an increase in the price of anele 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 grind away to the second reason for stagflation. ?FOREIGN institutional INVESTMENTS irrelevant Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are stick outed to invest in the primary and secondary capital markets in India through the p ortfolio investment design (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment 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 commonplace sector banks, including the State Bank of India. ?FOREIGN commuting bearS overseas exchange reserves (also called Forex reserves) in a strict sense are only the foreign coin 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 local anest hetic 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 steady the foreign exchange rates to provide a more favorable economic purlieu. ROLE OF BANKS IN DEVELOPING OF ECONOMY A fail-safe and sound financial sector is a prerequisite for sustained growth of any economy.Globalization, deregulation and advances in information 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 entrys and changes in business strategies. While these developments have enabled improvement in the efficiency of financial institutions, they have also posed some unsafe 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 eight-spoteenth and 19th centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to developing countries may be viewed thus oPromoting capital formation oEncouraging innovation oMonetsation oInfluence economic activity oFacilitator of monetary policy 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 deification and dormant capital of the country and make i t available for tillable purposes. further INNOVATION Innovation is another factor responsible for economic development.The enterp spring upr in innovation is largely dependent on the manner in which bank credit is allocated and utilized in the process of economic growth. Bank credit enables entrepreneurs to innovate 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 must 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 pecuniary POLICY Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on all-important(a) pre-condition to the effective implementation of monetary policy. Under-developed countries cannot afford to ignore this fact.A fine, an high-octane and schoolwide 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 generally, 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 seemly 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 solicitude 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 come on of Directors, consisting of fourteen non-executive, independent directors nominated by the Government, in addition to the governor and up to four Dep uty Governors. Besides, one Government official is also nominated on the Board who participates in the Board meetings but cannot vote. IMPORTANT FUNCTIONS PLAYED BY RESERVE BANK OF INDIA IN ECONOMY chief(prenominal) 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 monetary 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 vary vigilance Act, 1999. Its main objective is to facilitate external trade and salary and move on orderly development and maintenance of fo reign exchange market in India. oISSUER OF THE CURRENCY The person who is issuer issues and exchanges or destroys currency and coins not fit for circulation. His main objective is to give the public adequate beat 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 expansion, liquidity of their asset, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out half-hourly inspections of banks and to call for returns and necessary 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 presume 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 scene 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 speci alized financing agencies. PROBLEMS FACED BY INDIAN ECONOMY Macro-economic environment in India has taken a serious turn since the head start of the year.Unprecedented rise in jolty prices, surge in inflation and move strong growth in money supply (M3) have laboured the government and RBI to take strong fiscal and monetary measures leading to liquidity tightening, significant rise in interest rates and stave 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 payments. certain(a) 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 financed through increased borrowing. make OF FALL IN SAVINGS RATIO ?HIGHER LEVEL OF economic consumption 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 occur when growth is faster than the long run trend rate. This is now a potential problem in the India. Inflation has recently gone 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 spen ding, there will be an increase in imports. Therefore this will lead to deterioration in the current account. The current account deficit could put downward pressure on the exchange rate in the long term. However, some people repugn a fall in the savings ratio is not a problem, but, it is just a reflection of strong economy and booming hall 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 uphold 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 make 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 rear prices, crisis in the financial system, and lower confidence could lead to a great downturn, with the worst still 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 equipment casualtyS 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 mud the lynchpin 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 b ack to US$ 115). India soon imports 70% of its crude requirement, resulting in pressure on government coffers on back of rising crude prices. oDEPRICIATING INR Surge in crude prices has ill impacted current account deficit of the country. This coupled with the outflow of FII investments has resulted in INR to depreciate sharply against dollar further 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 pure tone 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. book of facts 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 gro wth 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 attached 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 abut 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% currently 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 self-effacing from hiking lending rates despite significant monetary tightening. H owever 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 rela tively resilient with better risk management systems, dramatically improved asset quality, stronger recovery mechanisms (legal provisions) and with adequate capitalization and provisioning. Even Certain sectors ( equivalent real estate, airlines industry) aptitude feel the stress due to the changing macro environment and rise in interest rates.Many companies where crude forms a key raw existent component are expected to get hit more severely. Similarly, sectors like real estate and SMEs, which are interest rate sensitive, would face higher delinquencies if interest rates strengthen further by 100-200 bps. NECESSARY INITIATIVES taken 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 M ONITORY POLICY With the introduction of the Five year plans, the need for appropriate adjustment in monetary and fiscal policies to crusade the pace and pattern of planned development became imperative. The monitory policy since 1952 evince 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 MONEY marketplace ?REGULATION OF FOREIGN EXCHANGE trade WEAPONS OF MONITORY POLICYCentral banks generally use the three quantitative measures to control the volume of credit in an economy, videlicet 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 controlling inflation moderate monetary measures, by themselves, are relatively ineffective. On the other hand, drastic monetary measures are not good for the economic system because they may good 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 cont ract credit. In such a encounter, the best course is to resort to credit control, restricting the flow of credit into the unproductive, inflation-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 exceedingly 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 measuring of money. Thus, there is no immediate and direct relationship between money supply and the price level, as is normally conceived by the traditional measure theories.When there is inflation in an economy, monetary restraints can, in conjunction 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 assumes 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 cleared 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 expendi ture, in an effect to inform inflationary pressures. It is known that when more taxes are imposed, the size of the usable income diminishes, 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 discouraging the level of production. However, some economists point out that this is not a correct way of combating inflation because it may lead to a regressive status 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 reduction in public expenditure, and an increase in taxes produces a cash surplus 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 redeemable 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 counterproductive 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 part offset by covering the deficit through public borrowings. It should be noted that it is only government borrowing from non-bank l enders that has a disinflationary effect.In addition, public debt may be managed in such a way that the supply of money in the country may be controlled. The government should avoid paying back any of its past loans during inflationary periods, in order to close out 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 regulatory measures undertaken to shift an open inflation into a repressed one. Such regulatory measures involve the use of direct control on prices and limit of scarce 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 restricted 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 distributive 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 accept a wage-profit freeze. Ceilings on wages and profits keep down disposable income and, therefore 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 apply to specific scarcity areas. As a result, anti-inflationary policies should involve varied programmes and cannot merely depend on a particular type of measure only. late(a) INNOVATIONS IN INDIAN BANKING HDFC Banks Net Safe card is a one-time use card with a limit thats spec ified, taken from Tendons credit or debit entry card.Even if Tandon fails to utilize the full amount within 24 hours of creating the card, the card simply dies and the unspent 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 penury to go through the hassles of words with brokers and the mounds of paperwork? Not to worry.Your bank will tackle all this. Its furbish up to come every step of the way for you to buy a house. banner 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 cumbrous 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 five 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. Last 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 clean 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 minute you vellicate 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 procedure of Indian banking over the next few years. Legislative actions will shape the regulatory stance through six key elements industry structure and sector desegregation freedom to deploy capital regulatory reportage corporate governance labor reforms and human capital development and support for creating industry utilities and service bureaus.Management success will be determined on three fronts fundamentally upgrading organizational capability to stay in song with the changing market adopting val ue-creating M&A as an avenue for growth and continually innovating to develop new business models to access untapped opportunities. through these scenarios, we can paint a picture of the events and outcomes that will be the solvent of the actions of policy makers and bank managements. These actions will have dramatically different outcomes the be 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 fa ctor the banking sector will require as much as Rs. 00 billion (US$ 14 billion) in capital to fund growth in advances, 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 qualify these outcomes oHIGH PERFORMANCE In this scenario, policy makers intervene only to the extent required to ensure system stability and protection of consumer interests, leaving 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 integration and transform the banks into industry shapers. In this scenario we witness integration within public sector bank s (PSBs) and within private sector banks. Foreign banks begin to be active in M&A, buying out some old private 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. support 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 in 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, oddly 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 relaxation 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 unable to execute the changes needed to enhance returns to shareholders and provide quality products 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 SECTOR WITH ADEQUATE FOCUS ON SOCIAL DEVELOPMENTThe term policy makers, refers to the Ministry of Finance 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 spur on the performance of the sector . The policy makers need to make coordinated efforts on six fronts Help shape a fantabulous 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 specializer players (geographical or product/ segment focused). Focus strongly on social development by moving away from universal directed norms to an uttered 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 compliance c osts. Improve corporate governance primarily by increasing board independence and accountability. Accelerate the creation of world class supporting infrastructure (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 DECISIVE 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. Old private sector banks also have the need to fundamentally strengthen skill levels.However, even more imperative is their need to examin e their participation in the Indian banking sector and their ability to remain independent in 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. Mai ntaining a fundamentally long-term value-creation mindset will be their superior challenge.The 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 full of life role.The financial sector makes the economy efficient to the extent where it can mate 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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