Banking Industry in India

BANKING INDUSTRY OF INDIA

The Indian banking sector has been an integral part of the overall economy growing with and supporting the growth of other sectors. The Reserve Bank of India (RBI) is the topmost body monitoring the Banking Industry. In year 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. The banking industry in India is sufficiently capitalized and regulated. The economic and financial conditions here are better than in any other country. Liquidity, credit, and market studies have proven Indian banks to be resilient. They have negotiated the downturn in the global economy well. Any short comings or discrepancies are dealt with by the RBI.

Banking history tells itself by their growth and its increases demand. Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. The first fully Indian owned bank was the Allahabad Bank, established in 1865. By the 1960s, the Indian banking industry has become an important tool to facilitate the development of the Indian economy. At the same time, it has emerged as a large employer, and a debate has ensued about the possibility to nationalize the banking industry. In the early 1990s, the Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank(now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

The strong economic growth in the past, low defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and close banking culture has favored the banking industry in India in recent global financial market .The banking industry in India is divided into scheduled and non-scheduled banks. 67,000 scheduled bank branches are located in India. They consist of cooperative banks and commercial banks. The PSBs (Public Sector Banks) form the base of this sector in India. They account for 78% of the assets in the banking sector. The Private Sector banking is making headway. They are leading in mobile banking; phone banking, ATMs, and Internet Banking sectors. . Sectors of the banking industry include investment banking, retail, and private banking. Investment banking is a growing sector with more Indians looking to invest funds in mutual funds and stocks rather than the traditional fixed deposits and schemes.

Technology has played a key role in the Indian banking sector. As per the FY10 RBI release, around 90% of the public sector branches have been updated with core banking software, while around 97.8% of the public sector banks branches have been fully computerized. The trend of transactions too can be seen to have shifted from paper based to electronic based. In FY10, the share of electronic transactions to total transactions stood at around 89% in value terms and around 40% in volume terms As per RBI data there have around 25 mergers in the banking sector in the last two decades. Some of the key mergers which have taken place in the last couple of years have been Global Trust Bank with Oriental Bank of Commerce, Bank of Punjab with Centurion Bank, further Lord Krishna Bank with Centurion Bank of Punjab and then eventually with HDFC Bank, The Sangli Bank with ICICI Bank and the latest one being Bank of Rajasthan with ICICI Bank. Having a minimum capital of more than Rs. 10 billion is one of the options that RBI is contemplating as the minimum capital requirement to obtain a new bank license. Given that around eight domestic banks still have a net worth lower than Rs.10 billion, in FY10, there is further scope for consolidation. Also, this would help banks in meeting capital adequacy requirements and financing large transactions and investments made by the Indian corporate sector. The Indian Banking sector moved to the base rate system from July 2010 as against the incumbent PLR (Prime Lending Rate) system. The base rate is calculated as the cost of deposits and cost of keeping aside cash to meet CRR and SLR requirements. Retail banking is when the bank deals with individual customers rather than corporations. Services offered by these banks are normal savings, personal loans, checking accounts, and debit/credit cards amongst others. This is also a growing sector as the drive for cashless transactions is growing. . Thus, the entire banking sector is growing and offers immense potential. This is why foreign banks are increasingly establishing their base in India. JP Morgan, Standard Chartered, Bank of America, and many other international banks have established a center in India to tap its potential. FDI in this sector has been raised. 74% FDI via the automatic route is allowed in the private sector banks. This means that the aggregate foreign investment in any private bank considering all sources should be up to 74% of the paid-up capital. In the case of nationalized banks, the Portfolio and FDI investment's maximum limit is 20%. This cap also applies to the investment in state banks and other associated ones. Even with the global recession, the investment in the banking industry is still prevalent though the volume may have been reduced. FDI in India grew by 145% between 2006 and 2007 and by 46.6% during 2007–2008. The FDI in 2009 was down to 18.6%. However, with the recession abating the investments are sure to rise. The government is also encouraging foreign investment in this sector.

The most important issue is that we should pay a fee for inter-bank transactions conducted through mobile phones from April 2011, as the National Payment Corporation of India (NPCI) intends to charge lenders Rs.0.25 per transaction. " NPCI will be providing services to member banks free of charge till March 31, 2011. Thereafter, a switching fee of Rs.0.25 per transaction will be levied by NPCI on member banks," Currently, NPCI is providing inter-bank mobile payment services free of charge to seven banks - State Bank of India , ICICI Bank , Union Bank of India , Bank of India, Yes Bank , Axis Bank and HDFC Bank . Inter-bank mobile payment service (IMPS) allows a customer in one bank to remit funds to an account holder in another bank. Mobile phones are used as the service delivery channel. For providing this offer, the bank needs to have authorization from Reserve Bank of India and has to be admitted as a member of IMPS. Overall, the Indian banking industry has immense potential for further growth and expansion.