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1. INTRODUCTION OF BANKS

DEFINITION OF BANKS:

The Oxford dictionary defines the Bank as,
An establishment for the custody of money, which it pays out, on a customers order.
According to Whitehead,
A Bank is defined as an institution which collects surplus funds from the public, safeguards
them, and makes them available to the true owner when required and also lends sums to their true
owners those who are in need of funds and can provide security.
Banking Company in India has been defined in the Banking Companies act1949 under section
5(a),
Banking in India was defined as, Any company which transacts banking, business"
and the purpose of banking business defined under section5 (b),"accepting deposits of money
from public for the purpose of lending or investing, repayable on demand through cheque/draft or
otherwise". In the process of doing the above-mentioned primary functions, they are also permitted
to do other types of business referred to as utility services for their customers (banking regulation
act, 1949).
INTRODUCTION:
A bank is a financial institution and a financial intermediary that accepts deposits and
channels those deposits into lending activities, either directly or through capital markets. A bank
connects customers that have capital deficits to customers with capital surpluses
Due to their critical status within the financial system and the economy

generally, banks
are highly regulated in most countries. Most banks operate under a system known as fractional
reserve banking where they hold only a small reserve of the funds deposited and lend out the rest

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for profit. They are generally subject to minimum capital requirements which are based on an
international set of capital standards, known as the Basel Accords.
A financial institution licensed as a receiver of deposits. There are two types of banks:
commercial/retail banks and investment banks. In most countries, banks are regulated by the
national government or central bank. Commercial banks are mainly concerned with managing
withdrawals and deposits as well as supplying short-term loans to individuals and small businesses.
Consumers primarily use these banks for basic checking and savings accounts, certificates of deposit
and sometimes for home mortgages. Investment banks focus on providing services such as
underwriting and corporate reorganization to institutional clients
While many banks have a brick-and-mortar and online presence, some banks have only an
online presence. Online-only banks often offer consumers higher interest rates and lower fees.
Convenience, interest rates and fees are the driving factors in consumers decisions of which bank to
do business with. As an alternative to banks, consumers can opt to use a credit union
EVOLUTION OF INDIAN BANKING SYSTEM

Modern banking in India could be traced back to the establishment of Bank of Bengal (Jan
2, 1809), the first joint-stock bank sponsored by Government of Bengal and governed by the royal
charter of the British India Government. It was followed by establishment of Bank of Bombay
(Apr 15, 1840) and Bank of Madras (Jul 1, 1843). These three banks, known as the presidency
banks, marked the beginning of the limited liability and joint stock banking in India and were also
vested with the right of note issue.
In 1921, the three presidency banks were merged to form the Imperial Bank of India, which
had multiple roles and responsibilities and that functioned as a commercial bank, a banker to the
government and a bankers bank. Following the establishment of the Reserve Bank of India (RBI)
in 1935, the central banking responsibilities that the Imperial Bank of India was carrying out came
to an end, leading it to become more of a commercial bank. At the time of independence of India,
the capital and reserves of the Imperial Bank stood at Rs 118 mn, deposits at Rs 2751 mn and
advances at Rs 723 mn and a network of 172 branches and 200 sub offices spread all over the
country.

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In 1951, in the backdrop of central planning and the need to extend bank credit to the rural
areas, the Government constituted All India Rural Credit Survey Committee, which recommended
the creation of a state sponsored institution that will extend banking services to the rural areas.
Following this, by an act of parliament passed in May 1955, State Bank of India was established in
Jul, 1955. In 1959, State Bank of India took over the eight former state-associated banks as its
subsidiaries. To further accelerate the credit to flow to the rural areas and the vital sections of the
economy such as agriculture, small scale industry etc., that are of national importance, Social
Control over banks was announced in 1967 and a National Credit Council was set up in 1968 to
assess the demand for credit by these sectors and determine resource allocations. The decade of
1960s also witnessed significant consolidation in the Indian banking industry with more than 500
banks functioning in the 1950s reduced to 89 by 1969.
For the Indian banking industry, Jul 19, 1969, was a landmark day, on which nationalization
of 14 major banks was announced that each had a minimum of Rs 500 mn and above of aggregate
deposits. In 1980, eight more banks were nationalized. In 1976, the Regional Rural Banks Act
came into being, that allowed the opening of specialized regional rural banks to exclusively cater to
the credit requirements in the rural areas. These banks were set up jointly by the central
government, commercial banks and the respective local governments of the states in which these
are located.
The period following nationalisation was characterized by rapid rise in banks business and
helped in increasing national savings. Savings rate in the country leapfrogged from 10-12% in the
two decades of 1950-70 to about 25 % post nationalisation period. Aggregate deposits which
registered annual growth in the range of 10% to 12% in the 1960s rose to over 20% in the 1980s.
Growth of bank credit increased from an average annual growth of 13% in the 1960s to about 19%
in the 1970s and 1980s. Branch network expanded significantly leading to increase in the banking
coverage.
Indian banking, which experienced rapid growth following the nationalization, began to face
pressures on asset quality by the 1980s. Simultaneously, the banking world everywhere was
gearing up towards new prudential norms and operational standards pertaining to capital adequacy,
accounting and risk management, transparency and disclosure etc. In the early 1990s, India
embarked on an ambitious economic reform programme in which the banking sector reforms

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formed a major part. The Committee on Financial System (1991) more popularly known as the
Narasimham Committee prepared the blue print of the reforms.
A few of the major aspects of reform included:
(a) Moving towards international norms in income recognition and provisioning and other related
aspects of accounting
(b) Liberalization of entry and exit norms leading to the establishment of several New Private
Sector Banks and entry of a number of new Foreign Banks
(c) Freeing of deposit and lending rates (except the saving deposit rate)
(d) Allowing Public Sector Banks access to public equity markets for raising capital and diluting
the government stake
(e) Greater transparency and disclosure standards in financial reporting
(f) Suitable adoption of Basel Accord on capital adequacy
(g) Introduction of technology in banking operations etc.
The reforms led to major changes in the approach of the banks towards aspects such as
competition, profitability and productivity and the need and scope for harmonization of global
operational standards and adoption of best practices. Greater focus was given to deriving
efficiencies by improvement in performance and rationalization of resources and greater reliance on
technology including promoting in a big way computerization of banking operations and
introduction of electronic banking.
These reforms led to significant changes in the strength and sustainability of Indian banking.
In addition to significant growth in business, Indian banks experienced sharp growth in
profitability, greater emphasis on prudential norms with higher provisioning levels, reduction in the
non performing assets and surge in capital adequacy. All bank groups witnessed sharp growth in
performance and profitability. Indian banking industry is preparing for smooth transition towards
more intense competition arising from further liberalization of banking sector that was envisaged in
the year 2009 as a part of the adherence to liberalization of the financial services industry.

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HISTORY OF BANKING SYSTEM IN INDIA
Without a sound and effective banking system in India it cannot have a healthy economy. The
banking system of India should not only be hassle free but it should be able to meet new
challenges posed by the technology and any other external and internal factors.
For the past three decades Indias banking system has several outstanding achievements to
its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of
the country. This is one of the main reasons of Indias growth process.
The governments regular policy for Indian bank since 1969 has paid rich dividends with the
nationalization of 14 major private 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 are days when the most efficient bank transferred money from one branch to other in
two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the
day.
The first bank in India, though conservative, was established in 1786. From 1786 till today,
the journey of Indian Banking System can be segregated into three distinct phases.
They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks
Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
New phase of Indian Banking System with the advent of Indian Financial & Banking Sector
Reforms after 1991.
To make this write-up more explanatory Phase I, Phase II and Phase III
PHASE- I
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National
Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India,
Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set
up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the
functioning and activities of commercial banks, the Government of India came up with The

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Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per
amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive
powers for the supervision of banking in India as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an aftermath deposit mobilization
was slow. Abreast of it the savings bank facility provided by the Postal department was
comparatively safer. Moreover, funds were largely given to traders.

PHASE-II
Government took major steps in this Indian Banking Sector Reform after independence. In 1955,
it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially
in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI
and to handle banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalized in 1960. On 19th
July, 1969 major process of nationalisation was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised.
Second phase of nationalizing Indian Banking Sector Reform was carried out in 1980 with seven
more banks. This step brought 80% of the banking segment in India under Government
ownership.
The following are the steps taken by the Government of India to Regulate Banking Institutions in
the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalisation of State Bank of India.
1959: Nationalisation of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalisation of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalisation of seven banks with deposits over 200 core.


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After the nationalisation of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%. Banking is the
sunshine of Government ownership, which gave the public implicit faith and immense confidence
about the sustainability of these institution.

PHASE-III
This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by
his name which worked for the liberalization of banking practices. The country is flooded with
foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to
customers. Phone banking and net banking is introduced. The entire system became more
convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered from any
crisis triggered by any external macroeconomics shock as other East Asian Countries suffered.
This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account
is not yet fully convertible, and banks and their customers have limited foreign exchange
exposure.

STRUCTURE OF THE BANKING SYSTEM IN INDIA:
According to the RBI definition, commercial banks which conduct the business of banking
in India and which
(a) have paid up capital and reserves of an aggregate real and exchangeable value of not less than
Rs 0.5 mn.
(b) satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest
of their depositors, are eligible for inclusion in the Second Schedule to the Reserve Bank of India
Act, 1934, and when included are known as Scheduled Commercial Banks.
Scheduled Commercial Banks in India are categorized in five different groups according to their
ownership and/or nature of operation:-

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These bank groups are (i) State Bank of India and its associates, (ii) Nationalised Banks, (iii)
Regional Rural Banks, (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in
the private sector). All Scheduled Banks comprise Schedule Commercial and Scheduled operative
Banks. Scheduled Cooperative banks consist of Scheduled State Co-operative Banks and Scheduled
Urban Cooperative Banks.


Banking structure in India
DIFFERENT TYPES OF BANKS:
1. Saving Banks:-

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Saving banks are established to create saving habit among the people. These banks
are helpful for salaried people and low income groups. The deposits collected from
customers are invested in bonds, securities, etc. At present most of the commercial
banks carry the functions of savings banks. Postal department also performs the functions of
saving bank.
2. Commercial Banks:-
Commercial banks are established with an objective to help businessmen. These
banks collect money from general public and give short-term loans to businessmen by way
of cash credits, overdrafts, etc. Commercial banks provide various services like collecting
cheques, bill of exchange, and remittance money from one place to another place.
In India, commercial banks are established under Companies Act, 1956. In 1969, 14
commercial banks were nationalised by Government of India. The policies regarding
deposits, loans, rate of interest, etc. of these banks are controlled by the Central Bank
3. Industrial Banks / Development Banks:-
Industrial / Development banks collect cash by issuing shares & debentures and
providing loans for expansion and modernisation of industries. Long-term loans to
industries. The main objective of these banks is to provide long-term
In India such banks are established on a large scale after independence. They are Industrial
Finance Corporation of India (IFCI), Industrial Credit and Investment Corporation of India
(ICICI) and Industrial Development Bank of India (IDBI).
4. Land Mortgage / Land Development Banks:-
Land Mortgage or Land Development banks are also known as Agricultural
Banks because these are formed to finance agricultural sector. They also help in land
development.In India, Government has come forward to assist these banks. The Government
has guaranteed the debentures issued by such banks. There is a great risk involved in the
financing of agriculture and generally commercial banks do not take much interest in
financing agricultural sector
5. Indigenous Banks:-

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Indigenous banks mean Money Lenders and Sahukars. They collect deposits from
general public and grant loans to the needy persons out of their own funds as well as from
deposits. These indigenous banks are popular in villages and small towns. They perform
combined functions of trading and banking activities. Certain well-known Indian
communities like Marwaries and Multani even today run specialised indigenous banks.
6. Central / Federal / National Bank:-
Every country of the world has a central bank. In India, Reserve Bank of India, in
U.S.A, Federal Reserve and in U.K, Bank of England. These central banks are the bankers of
the other banks. They provide specialised functions i.e. issue of paper currency, working as
bankers of government, supervising and controlling foreign exchange. A central bank is a
non-profit making institution. It does not deal with the public but it deals with other banks.
The principal responsibility of Central Bank is thorough control on currency of a country.
7. Co-operative Banks:-
In India, Co-operative banks are registered under the Co-operative Societies Act, 1912. They
generally give credit facilities to small farmers, salaried employees, small-scale industries, etc. Co-
operative Banks are available in rural as well as in urban areas. The functions of these banks are just
similar to commercial banks.
8. Exchange Banks:-
Hong Kong Bank, Bank of Tokyo, Bank of America are the examples of Foreign Banks
working in India. These banks are mainly concerned with financing foreign trade.
Following are the various functions of Exchange Banks:-
Remitting money from one country to another country
Discounting of foreign bills
Buying and Selling Gold and Silver, and
Helping Import and Export Trade.
9. Consumers Banks:-
Consumers bank is a new addition to the existing type of banks. Such banks are usually found only
in advanced countries like U.S.A. and Germany. The main objective of this bank is to give loans to

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consumers for purchase of the durables like Motor car, television set, washing machine, furniture,
etc. The consumers have to repay the loans in easy installments.
CLASSIFICATION OF BANKS

On the basis of Ownership
PUBLIC SECTOR BANKS
Public sector banks are those banks that are owned by the government. The government owns these
banks. In India 20 banks were nationalized in 1969 and 1980 respectively. Social welfare is there
main objective.
PRIVATE SECTOR BANKS
These banks are those banks that are owned and run by private sector. An individual has control
over these banks in proportion to the shares of the banks held by him.
CO-OPERATIVE BANKS
These are those banks that are jointly run by a group of individuals. Each individual has an equal
share in these banks. Its shareholders manage the affairs of the bank.

According to the Law
SCHEDULED BANK
Schedule banks are the banks, which are included in the second schedule of the banking regulation
act 1965. According to this schedule bank:
1. Must have paid-up capital and reserve of not less than Rs500, 000.
2. Must also satisfy the RBI that its affairs are not conducted in a manner
Determinate to the interest of its depositors.

Schedule banks are sub-divided as:-
a) State co-operative banks

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b) Commercial banks

NON-SCHEDULED BANKS
Non -schedule banks are the banks, which are not included in the second schedule of the banking
regulation act 1965. It means they do not satisfy the conditions lay down by that schedule. These are
the banks having paid up capital, less than Rs.5Lakhs. They are further classified as follows:-
A. Central Co-operative banks and Primary Credit Societies.
B. Commercial banks

According to Function
COMMERCIAL BANKS
These are the banks that do banking business to earn profit. These banks make loans for short to
business and in the process create money. Credit creation is the main function of these banks.
FOREIGN BANKS
These are those banks that are incorporated by foreign company. They have set up their branches in
India. These banks have their head offices in foreign countries. Their principle function is to make
credit arrangement or the export and the import of the country and these banks deals in foreign
exchange.
INDUSTRIAL BANKS
Industrial banks are those banks that offer long term and medium term loan to the industries and also
work for their development. These banks help industries in sale of their shares, debentures and
bonds. They give loan to the industries for the purchase of land and machinery.
AGRICULTURAL BANKS
Agricultural banks are those banks that give credit to agricultural sector of the economy.
SAVING BANKS
The principle function of these banks is to collect small savings across the country and put them to
the productive use. In India department of post office functions a savings banks.

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CENTRAL BANK
Central Bank is the apex bank of the banking system of the country. It issues currency notes and acts
a banker's bank. Economic stability is the principle function of this bank. In short, it regulates and
controls the banking system of the country. RBI is the Central Bank of India.

PRIVATIZATION OF INDIAN BANKING
For the public sector banks, the era of bumper profit is over. For much of the last decade the process
of collaborated financial liberalization had cleared up the Banks balance sheet enabling them to
with stand increased competition, global financing, turmoil and even unprotected industrial slow
down. But the cycle of liberalization has run its full course. Now it is the time for the big structural
leap, rationalization, mergers, and privatization. Unless the banks undertake these fundamental
changes, their profit will stay under pressure.

There are twp areas of competitions which banking industry is facing internationally and nationally.
In the pre-liberalization era, Indian banks could grow in a closed economy but the banking sector
opened up for private competition. It is possible that private banks could become dominant players
even within India. It has been recorded a rapid rise of the new private sector banks and it has tracked
the transformation of the public sector banks as they grapple with the changes of financial
deregulation.

Use of ATM cards, Internet Banking, Phone Banking, Mobile Banking are the new innovative
channels of banking which are being widely used as they result in saving both time and money
which are two essential things that every one is short of and is running to catch hold of them.
Moreover private sector banks are aligning its infrastructures, marketing quality and technology to
build deep commitment in building consumer and retail banking. The main focus of these banks is
on innovative range of services or products.
STRUCTURE OF BANKING SYSTEM


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Different countries of the world have different types of banking systems. However, commercial
banking had grown under all these banking systems. To understand the structure of banking system,
let us take up various types of banking systems one by one. These types are:

(1) UNIT BANKING
Unit Banking originated in the United State of America. It grew in the United States of America. As
a counter part of independent or industrial units.
An independent unit bank is a corporation that operates one office and that is not related to other
banks through either ownership or control.
Shaper, Solomon and White.
Thus under unit banking, a single bank is a complete organization in itself having its own
management. The scale of operation is small and the area is restricted to a locality only. Unit
banking is localized banking and is much more responsive to the needs of the locality. It has better
understanding of the local problems and conditions, which helps it to cater to the needs of the area in
a better way. The staff of the unit bank is generally local and is in a better position to determine the
standing or desirability of the customers. The failure of the unit bank will not endanger the banking
system and economy. It is free from the difficulties and diseconomies of large scale operations. It
will not drain out the financial resources of villages and small towns to big industrial centers and
will ensure a balanced growth.
(2) BRANCH BANKING:
Economic and Managerial problems faced by the unit banks let to the emergence of banking system.
Now, This the most popular and important banking system. In branch banking, a bank has a large
network of branches scattered all over the country. Branch banking developed in England.
Subsequently most of the countries of the world adopted the system. In terms of branches, the State
Bank of India has emerged as one of the largest banks in the world.
As under the system the resources of a number of branches get pooled under the same management,
any individual branch is in a better position to face excessive withdrawals by the customers. It
facilitates diversification of activities because the area covered by the branches is generally

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widespread. Under the system branches can operate without keeping large idle cash reserves. It
becomes possible for the bank to hire the services of competent and professionally qualified
managers, capable of understanding the handling technical problems and complex situations. The
cost of remitting or transferring funds from one place to another works out to be less. The staff stays
at a branch only for a limited period, so the chances of objective decision making in the branch
banking are high.
Branch Banking tends to bring homogeneity in the prevailing Interest Rates as it increases the
mobility of resources from one place to another. It is easier for the Central Bank to exercise Control.
It will communicate only with a few Registered /Head Offices of the Banks and not with each
individual branch. In this system there more safety and liquidity of funds. The choice of securities
and investments is larger. Branch banking makes complete banking services available to the
smallest communities. The branches in small localities can be initially operated at loss in
expectation of future gains.
The comparative study of unit banking and branch banking is a case of small scale banking versus
large scale banking. It is evident that the scale is clearly titled towards branch banking. With the
growth of large scale business it is no wonder that the trend is almost every country towards the
branch banking i.e. big banks with a network of branches all over the country. Even in the U.S.A.
The birthplace of unit banking. The Bank of America has now more than 500 branches in the state
of California itself.
(3) CHAIN BANKING :
Shaper, Solomon and White have defined Chain Banking as
An arrangements by which two or more banks each of which retains its identity, capital and
personnel are brought under common control by any device other than a Holding Company.
Under the system there is pooling of resources. Chain banking overcomes certain limitations of unit
banking. But the system suffers from certain limitations of its own. There may be a lack of co-
ordination, proper control etc. The system is inflexible.
(4) GROUP BANKING :

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It is similar to Chain Banking, the difference being that under Group Banking two or more banks are
brought under the control of the same management through a Holding Company. Both the systems
aim at gaining the advantages of large scale operations. The banks are able to pool their resources in
case of emergency or when large amount of cash is required to meet the loan requirements of the
customer. The advantages and disadvantages of both the systems are similar. Both the systems
developed in the United State of America as a result of attempts to overcome the difficulties or
limitations of unit banking.
(5) CORRESPONDENT BANKING:
Under Correspondent banking, small banks serving local communities hold deposits with joint
banks serving in big cities. This kind of banking is prevalent in U.S.A. The correspondent banks
perform two important services of outstation cheque clearing and loan participation for the
respondent banks while they benefit for the deposit funds of respondent banks.



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2. PRIVATE SECTOR BANKS IN INDIA

DEFINITION:
According to RBI;
All those banks where greater parts of stake or equity are held by the private shareholders
and not by government are called as the private banks.

INTRODUCTION OF PRIVATE SECTOR BANKS:
These are the major players in the banking sector as well as in expansion of the business
activities India. The present private sector banks equipped with all kinds of contemporary
innovations, monetary tools and techniques to handle the complexities are a result of the
evolutionary process over two centuries. They have a highly developed organizational structure and
are professionally managed. Thus they have grown faster and stronger since past few years.
EVOLUTION OF PRIVATE SECTOR BANKS :-
Historically, the private sector banks played a crucial role in the growth of joint stock banking in
India. The first half of the 20th century witnessed phenomenal growth of private sector banks.
Reserve Bank of India (RBI) came in picture in 1935 and became the centre of every other bank
taking away all the responsibilities and functions of Imperial bank. Between 1969 and 1980 there
was rapid increase in the number of branches of the private banks. In April 1980, they accounted for
nearly 17.5 percent of bank branches in India. In 1980, after 6 more banks were nationalized, about
10 percent of the bank branches were those of private sector banks.
The share of the private bank branches stayed nearly same between 1980 and 2000.As a
result in 1951, there were 566 private banks of which 474 were non scheduled and 92 scheduled
classified on the basis of their capital size. The role of private sector banking started declining when
the Government of India entered banking business with the establishment of State Bank of India in
1955 and subsequently two rounds of bank nationalization one in July 1969 (14 major banks),
another in April 1980 (take over of 6 banks). Consequently, the presence of public sector banks has
increased. At present, there are 32 private banks comprising of 24 old banks, which existed prior to

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1993-94 and eight new private banks, which were established during 1993-94 and onwards after the
RBI announced guidelines in January 1993 for establishment of new banks in private sector
following the recommendations of Narsimha Committee-I (1991). Compared to New private sector
banks, the old banks are smaller in size.
The NPBs are extremely cautious in expanding their branch network and business because
their managers, mostly drawn from the public sector banks, know very well the ills of unbridled
expansion of branches by public sector banks in the post nationalization era. The Narsimha
Committee-I that advocated competition in the banking industry, made unequivocal
recommendation to allow private and foreign banks into the industry. Acting on the
recommendations of the committee, the RBI laid down guidelines for the establishment of the
private sector banks on January 1993. Then from early 1990s, RBI's liberalization policy came in
picture and with this the government gave licenses to a few private banks, which came to be known
as new private sector banks.
There are two categories of the private sector banks- old and new.









The old private sector banks have been operating since a long time and may be referred to those
banks, which are in operation from before 1991 and all those banks that have commenced there
business after 1991 are called as new private sector banks.

Housing Development Finance Corporation Limited was the 1st private bank in India to receive
OLD BANKS (22) NEW BANKS (8)
PRIVATE BANKS

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license from RBI as a part of the RBIs liberalization policy of the banking sector, to setup a bank in
the private sector banks in India

2.4-OLD PRIVATE SECTOR BANKS:
The banks, which were not nationalized at the time of bank nationalization that took place
during 1969 and 1980, are known to be the old private banks. These were not nationalized, because
of their small size and regional focus. Most of the old private sector banks are closely held by
certain communities their operations are mostly restricted to the areas in and around their place of
origin. Their Board of directors mainly consists of locally prominent personalities from trade and
business circles. One of thepositive points of these banks is that, they lean heavily on service and
technology and as such, they are likely to attract more business in days to come with the
restructuring of the industry round the corner.
Name of the banks Year of establishment

1. Bank of Rajasthan 1943
2. Catholic Syrian bank 1920
3. City union bank 1904
4. Dhanlakshmi bank 1927
5. Federal bank 1931
6. ING Vyasa bank 1930
7. Jammu & Kashmir bank 1938
8. Karnataka bank 1924
9. Karur vyasa bank 1916
10. Lakshmi vilas bank 1926
11. Nainital bank 1912
12. Ratnakar bank 1943
13. SBI commercial &international
bank
1955
14. South India bank 1905
15. Tamilnadu mercantile bank 1921
16. United western bank 1936

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2.5-NEW PRIVATE SECTOR BANKS:
The banks, which came in operation after 1991, with the introduction of economic reforms
and financial sector reforms are called as new private banks. Banking regulation act was then
amended in 1993, which permitted the entry of new private sector banks in the Indian
banking sector. However, there were certain criteria set for the establishment of the new private
sector banks.
Some of those criteria being :-
1. The bank should have a minimum net worth of Rs. 100 crores.
2. The promoters holding should be a minimum of 25% of the paid up capital.
3. Within 3 years of the starting of the operations, the bank should offer to public company.
List of New Private Banks:-

2.6-THE IMPACT OF NEW PRIVATE SECTOR BANKS ON OLD PRIVATE
SECTOR BANKS IN INDIA

Name of the banks Year of establishment

1. Axis bank ( earlier UTI bank) 1995
2. Bank of punjab 1989
3. Centurian bank of punjab 1994
4. Development credit bank 1995
5. HDFC bank 1994
6. ICICI bank 1996
7. Indusland bank 1994
8. Kotak Mahindra bank 1985

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The existence and success of banks depend on their ability to meet the various needs and wants of
the customers. The new millennium has brought with it challenges as well as opportunities in
various fields of economic activities including banking. The banking sector in India has undergone
several changes in the areas of prudential, regulatory, disclosure and supervisory norms. The
financial reforms launched during the early 1990s have dramatically changed the banking scenario
in the country. New prudential norms, capital adequacy prescriptions, identification of bad debts,
provision requirements etc. were enforced and interest rates were deregulated. As a result of these
reforms, new private sector banks were allowed entry into the market.
Many of these new private sector banks have brought them state-of-the-art technology and
lean structures. These new private sector banks have built a wide network of branches, set superior
standards in productivity, they introduced global best practices and more importantly they have built
durable competencies by attracting the best manpower, and creating strong brand image in the
financial market within a short span of time. This forced the old private sector banks to respond to
the new challenges with aggressive restructuring measures. On the other hand, some of the old
private banks have not introduced innovative services, not set the superior standards in productivity
and even not shown their competencies so all of that they given indirect benefit to new private sector
banks. This research mainly focuses on the impact of the entry of these new private sector banks on
the old private sector banks in Indian banking sector.

2.7-IMPORTANCE OF PRIVATE SECTOR BANKS
The private sector banks play a vital role in the Indian economy. They indirectly motivate the public
sector banks by offering a healthy competition to them. The following are their importance:
1. Offering high degree of Professional Management:
The private sector banks help in introducing a high degree of professional management and
marketing concept into banking. It helps the public sector banks as well to develop similar skill and
technology.
2. Creates healthy competition:

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The private sector banks provide a healthy competition on general efficiency levels in the
banking system.
3. Encourages Foreign Investment:
The private sector banks especially the foreign banks have much influence on the foreign
investment in the country.
4. Helps to access foreign capital markets:
The foreign banks in the private sector help the Indian companies and the government agencies
to meet out their financial requirements from international capital markets. This service becomes
easier for them because of the presence of their head offices/other branches in important foreign
centres. In this way they help a large extent in the promotion of trade and industry in the country.
5. Helps to develop innovation and achieve expertise:
The private sector banks are always trying to innovate new products avenues (new schemes,
services, etc.) and make the industries to achieve expertise in their respective fields by offering
quality service and guidance.
They introduce new technology in the banking service. Thus, they lead the other banks in
various new fields. For example, introduction of computerised operations, credit card business,
ATM service, etc.
2.8-LIMITATIONS OF PRIVATE SECTOR BANKS
1.Surplus employees:
The defect of the system is that some of the workers are declared surplus. There is an
increase in the rate of unemployment. The unemployed workers commit crimes in this society.

2. No of branches in rural areas:
The private bank owners do not like to setup there branches in rural areas. The banking
facilities remain confined to cities where sufficient deposits are available. A large part of population
will be deprived of banking facilities.

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3. Unbalanced growth:
The management of privatized banks provides credit in specific areas and people. As a
result, there is unbalanced growth in the country; especially rural areas may remains under
developed where credit facilities do not exist.

4. Jobs for relatives:
The management of privatized banks may provide jobs to their friends and relatives. The
deserving persons are ignored.

5. Loans for few persons:
The management of privatized bank can extend loans of their favored persons. In this way
only few persons are benefited.

6. Owners association:
The aim of privatized banks is to earn profit. For these purpose owners associations are made
which enter into agreement of earning high profit. The bank can increase the rate of service charges.
Such associations may not care for customer's welfare.



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3. PUBLIC SECTOR BANK IN INDIA

DEFINITION:

According to RBI;
A Public Sector bank is one in which, the Government of India holds a majority stake. It is
as good as the government running the bank. Since the public decide on who runs the government,
these banks that are fully/partially owned by the government are called public sector banks.


EVOLUTION OF PUBLIC BANKS IN INDIA:
Nationalised banks dominate the banking system in India. The history of nationalised banks in India
dates back to mid-20th century. when Imperial Bank of India was nationalised (under the SBI Act of
1955) andre-christened as State Bank of India (SBI) in July 1955. Then on 19th July 1960, its seven
subsidiaries were also nationalised with deposits over 200 crores. These subsidiaries of SBI were
State Bank of Bikaner and Jaipur (SBBJ), State Bank of Hyderabad (SBH), State Bank of Indore
(SBIR), State Bank of Mysore (SBM), State Bank of Patiala (SBP), State Bank of Saurashtra (SBS),
and State Bank of Travancore (SBT).

However, the major nationalisation of banks happened in 1969 by the then-Prime Minister
Indira Gandhi. The major objective behind nationalisation was to spread banking infrastructure in
rural areas and make cheap finance available to Indian farmers. The nationalised 14 major
commercial banks were Allahabad Bank, Andhra Bank, Bank of Baroda, Bank of India, Bank of
Maharashtra, Canara Bank, Central Bank of India, Corporation Bank, Dena Bank, Indian Bank,
Indian Overseas Bank, Oriental Bank of Commerce (OBC), Punjab and Sind Bank, Punjab National
Bank (PNB), Syndicate Bank, UCO Bank, Union Bank of India, United Bank of India (UBI),and
Vijaya Bank.

In the year 1980, the second phase of nationalisation of Indian banks took place, in which 7
more banks were nationalised with deposits over 200 crores. With this, the Government of India

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held a control over 91% of the banking industry in India. After the nationalisation of banks there
was a huge jump in the deposits and advances with the banks. At present, the State Bank of India is
the largest commercial bank of India and is ranked one of the top five banks worldwide. It serves 90
million customers through a network of 9,000 branches.
List of Public Sector Banks in India is as follows:
Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of India (SBI)
State Bank of Indore
State Bank of Mysore
State Bank of Patiala
State Bank of Saurashtra
State Bank of Travancore
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India

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Vijaya Bank
IDBI Bank
OBJECTIVES OF NATIONALISATION OF BANKS IN INDIA

The nationalisation of commercial banks took place with an aim to achieve following major
objectives:

1. Social Welfare :
It was the need of the hour to direct the funds for the needy and required sectors of the Indian
economy. Sector such as agriculture, small and village industries were in need of funds for their
expansion and further economic development.

2. Controlling Private Monopolies:
Prior to nationalisation many banks were controlled by private business houses and corporate
families. It was necessary to check these monopolies in order to ensure a smooth supply of credit
to socially desirable sections.

3. Expansion of Banking:
In a large country like India the numbers of banks existing those days were certainly
inadequate. It was necessary to spread banking across the country. It could be done through
expanding banking network (by opening new bank branches) in the un-banked areas.

4. Reducing Regional Imbalance:
In a country like India where we have a urban-rural divide; it was necessary for banks to go
in the rural areas where the banking facilities were not available. In order to reduce this regional
imbalance nationalisation was justified


5. Priority Sector Lending :
In India, the agriculture sector and its allied activities were the largest contributor to the
national income. Thus these were labeled as the priority sectors. But unfortunately they were

27

deprived of their due share in the credit. Nationalisation was urgently needed for catering funds to
them.

6. Developing Banking Habits:
In India more than 70% population used to stay in rural areas. It was necessary to develop
the banking habit among such a large population.

LIMITATIONS OF NATIONALISATION OF BANKS IN INDIA

Though the nationalisation of commercial banks was undertaken with tall objectives, in
many senses it failed in attaining them. In fact it converted many of the banking institutions in the
loss making entities. The reasons were obvious lethargic working, lack of accountability, lack of
profit motive, political interference, etc. Under this backdrop it is necessary to have a critical look to
the whole process of nationalisation in the period after bank nationalisation.
The major limitations of the bank nationalisation in India are:-

1. Problem of pressure on profitability
The problem of pressure on productivity was experienced during 1993-95 as revealed from the
losses caused to banking sector . With continuous expansion in number of branches and manpower,
thrust on social and rural banking, directed sector lending, maintenance of higher reserve ratios, loan
concession, repayment default by large industrial corporate and other borrowers, etc. had their
impact on the profitability of the banks. Further, with the introduction of prudential norms, made
effective from March end 1993, balance sheet of a majority of the commercial banks had reflected
huge losses. In order to improve financial health of these banks, the Government provided a capital
and in return these banks were made to sign a memorandum of understanding with RBI.
2. Problem of Low Productivity
Another problem which Indian public sector banks are confronting is low productivity. The low
productivity has been due to huge surplus manpower, poor work culture and absence of employees
commitment to the organizatio

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3. Problem of Non-Performing Assets (NPAs)

A serious threat to survival and success of Indian PSBs is the emergence of uncomfortably high
level of non-performing assets. In its report on Trends and Progress of Banking in India, 1997-98,
the Reserve Bank of India (RBI) reported the gross NPAs as percentage of advances of PSBs,
which was 16 per cent as on March 31, 2000 blocking about Rs. 52,000 crore in non-performing
loans. The huge nonperforming assets were hurting banks profitability and even the basic inability
of the banking system by way of both non-recognition of interest income and loan loss provisioning.
4. Challenge of Competition from New Banks
The present era of competition has witnessed various large multinational banks like American Bank,
Hong Kong Bank, Swiss Bank, Citi Bank, etc. and other multinational banks coming very
aggressively. The new banks have set the tone and to an extent also the standard for technological
improvements with product innovations, which dominated the traditional PSBs. So, these banks
have to run in a market which has no geographical barriers and will have to develop abilities of
product innovation as well as delivery comparable to the best in the world.

5. Problem of IT Infrastructure
In the age of computerization, although the banks have started computerisation process, this has
provided little comforts to the customers. Still the customer has to wait for some time in long
queues. Further, the operation by computer is delayed by the fact that some operating staff are not
very skilled and thus it takes more time. The problem of breakdowns of electricity and even of the
computers is so usual that the whole work comes to a halt and no work is performed. It takes hours
to get it rectified i.e., even the smaller problems take time as most of the branches do not have
system specialist who can look after the system and other operational problems. An inexperienced
person means more time and more delays in providing services o the customers.
6. Bureaucratic Interference

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Another very important reason for the plight of the customers of PSBs is the bureaucratic set-up
within the banks whereby it takes months together to get the loan sanctioned. By the time loan gets
sanctioned, the project cost gets escalated giving rise to defaults in the payments by the organisation
and ultimately bank is forced to have larger NPAs in their hands. Being Government owned, these
banks are politically led. Political agenda tops at the cost of banks profitability and stability. Delays
in formation of legislature that to full of pitfalls with easy escape route to defaulters are common.
Political interference in delaying credit instalments to bank and channelling of bank funds are
common features giving rise to NPAs. Political motives have led to the problem of overstaffing in
the banks. All those and much more have paralysed Indian public sector banks and means to come
out of this glut is not very easy.
7. Problem of Consumer Unfriendly
Another reason is that the people working in the banks have a very strong feeling that they are
Government demands. Thus nobody can shunt them out and therefore they do not work. The
productivity, output in banks is so low that one will find most of the staff in the banks busy
gossiping and the so-called bechara customer standing helpless cursing his fate. Further, the union
politics with strikes every seventh day makes the life of the customer more miserable. It can be well
imagined that one-day closure of banks hits the economy with around Rs. 2000 crore loss, but who
cared about it. Further, the absence of implementation of relationship of performance rewards and
punishment has made the whole affair unmanageable, which leads to obstruction of services to the
customers.


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4. DIFFERENCE BETWEEN PUBLIC AND PRIVATE SECTOR BANKS

The major difference between the public and private sector is their motive to exist. The
public sector is present to cater to the citizens of a country and profit motive is generally not the
criteria for them to exist. The private sector firms on the other hand base their existence on making
profits. The public sector is run on the money collected by the general public through taxes, which is
the income for the public sector. They are also run on state loans. Private sector companies are run
by the capital input made by individuals or by share owners. The income is then retained in the
company or a part of it is given out as dividends to the share owner
An example:-
COMPARISION BETWEEN BOTH BANKS:
At first glance trying to compare SBI with ICICI would look like comparing a grand old man with a
toddler.
SBI vs ICICI

1. ICICI is the largest private sector bank in India while SBI is the largest public
sector bank.

2. In just 25 years of its existence, ICICI has put up a great performance because of
high quality of services and has come very close to SBI in terms of deposits
mobilized despite having a smaller workforce.


3. It is really surprising that SBI pays a higher savings interest rate and gives out
loans at a cheaper rate but customers are getting attracted to ICICI. Perhaps it is
more due to the brand image being created by ICICI having appointed Amitabh
Bachchan as its brand ambassador. An account in ICICI has become a status
symbol.


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4. Of late SBI has modernized and is today rubbing shoulders with ICICI in all
banking needs.

5. On the financial front, though SBI has been performing impressively over the
years, ICICI is progressing at a brisker pace and the rate at which ICICI is
mobilizing deposits every year, it seems that it will overtake SBI in near future.


CHALLENGES OF THE SURVIVAL OF PUBLIC SECTOR BANKS (PSBS) IN INDIA
The improvement of operational and distribution efficiency of commercial banks has always
been an issue for Government of India (GOI) in consultation with RBI. However, the economic rise
of 1990s gave birth to the new economic macro level thinking to improve the economic health of the
Indian economy. Financial sector reforms, particularly banking sector, gave new sound and healthy
direction to the Indian economy. Under the regime of Liberalisation, Privatisation and Globalisation
(LPG), some public sector banks are still facing very serious problems as their survival has become
very difficult in the competitive world.
1. Competitive Environment
The Foreign Banks and New Private Sector Banks have witnessed a significant growth but on
the other side, PSBs are at the edge of survival among them with huge capital base, latest
technology, innovative and globally tested products/services are fetching the consumers attention.
However, to make Indian PSBs competitively strong, they should follow the strategies of New
Private Sector Banks and Foreign Banks as benchmark with an introduction of latest technology,
innovative and globally accepted products/services followed by appointment of experienced, skilled
and tech-friendly professionals.
2. Consumer Focus
Consumer is a king in todays market. The PSBs never try to focus on their needs and hence lose
their market share. The first and foremost thing that banks require to do is to treat the consumer as a
consumer of the bank and not as a consumer of any other branch. The banks require improving on
providing services and profitability efficiency of services. The banks have to explore out fastest and

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efficient means of providing services with the use of IT applications, telebanking, internet banking
and improving delivery system by improving the attitude and behavior of the staff also.
3. Marketing Strategies
The PSBs are required to devise suitable market strategies to augment the volume of business
level. So, the PSBs should research on the vast knowledge they have about the consumer, devise
about specific products for specific segments, differentiate according to consumer potentials and its
expectations, and focus on few potential customers with customized products and services rather
than serving all customers with universal products. Using CRM, appointment of young employees
with fresh and creative minds with expertise in latest technology, as a matter of choice is desirable
to survive in the globalised market.
4. Profit Accountability
Another challenge is profit accountability that the PSBs give more stress on profitability not on
the accountability. If the required profit target is achieved, nobody is accountable to reward and
similarly, in case it is not achieved, then also nobody is accountable for punishment. To cope up
with the problem, PSBs should make proper policies for profit accountability. Therefore, the PSBs
should fix accountability with targets on each unit and employee of the banks and award to those
people who have achieved the target.
5. Reorganisation, Restructuring and Reengineering (RRR)
The time is the most precious thing; banks should understand the value of consumers time. The
unnecessary paper work and lengthy process need to be cut short in PSBs. However, reorganization,
restructuring and reengineering (RRR) are the need of the hour. In order to lead, capture and retain
the customer, banks have to utilise their knowledge about consumer to determine about product
configuration, promotion, pricing and service level, channel mix all that suit the consumer better.
The CRM (Customer Relationship Management) system helps to make more accurate commitment
to customer based on informed judgment adding value to customer relationship at every stage
regardless of the interaction point, branch, call centre or the internet and that full details of each
interaction are always captured for analysis and decision making.


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SUGGESTIONS
Based on the study conducted, There are some of the suggestions given by the customers of how the
modern banking should be. These are the comment given by them about the improvement of the
banking sector in India.

Banks should obey the RBI norms and provide facilitiesas per the norms, which are not
being followed by the banks. While the customer must be given prompt services and the
bank officer should not have any fear on mind to provide the facilities as per RBI norms to
the units going sick.
Banks should increase the rate of saving account
Banks should provide loan at the lower interest rate and education loans should be given
with ease without much documentation. All the banks must provide loans against shares.
Fair dealing with the customers. More contribution from the employee of the bank. The staff
Should be co-operative, friendly and must be capable of understanding the problems of
customers
Internet banking facility must be made available in all the banks.
Prompt dealing with permanent customers and speedy transaction without harassing the
customers
Each section of every bank should be computerized even in rural areas also.
Real time gross settlement can play a very important role.
More ATM coverage should be provided for the convenience of the customers.
No limit on cash withdrawls on ATM cards.
The bank should bring out new schemes at time-to-time so that more people can be attracted.
Even some gifts and prizes may be offered to the customers for their retention.
24 hours banking should be induced so as to facilitate the customers who may not have a free
time in the daytime. It will help in facing the competition more effectively.
The charges for saving account opening are high, so they should also be reduced.

34

Customers generally complain that full knowledge is not granted to them. Thus the bank
should properly disclose the features of the product and services to the customers. Moreover
door to door services can also be introduced by bank.
The need of the customer should properly be understood so that customer feels satisfied. The
relationship value should be maintained.
The branch should promote cooperation and coordination among employees which help
them in efficient working.
Maintenance of proper hierarchy should be done. A good hierarchy set up can ensure better
results with in the bank.

Banking sector is improving by leaps but still it needs to be improved. Proper and efficient
relationship staffs having knowledge for one stop banking, customer friendly atmosphere, and
better rate of interest are need of the hour.the concept of privatization has overall improved the
services in all the banks. Home banking will be order of the day.



35

RECOMMENDATIONS

For Public Sector Banks:
1. Bank staff should be customer friendly and highly motivated to serve the normal customer.
2. As far as possible, banks should reduce its documentation process while providing loans.
3. Computerization should be done in banks at all level and the operators should de properly
trained.
4. Token system should be induced so as to minimize the waiting lines in the banks.
5. Proper ambience in the banks can develop a healthy working culture.
6. Quick services should be provided.
For Private sector Banks:
1. 24 hours banking should be induced so as to facilitate the customers who may not have free
time in the day time. It will help in facing the competition more effectively.
2. More ATM coverage should be provided for the convenience of the customers.
3. Customer care services should be provided by banks.

LIMITATIONS OF THE STUDY

Due to constraints of time and resources, the study is likely to suffer from certain limitations. Some
of these are mentioned here under so that the findings of the study may be understood in a proper
perspective.
The limitations of the study are:
Some of the respondents of the survey were unwilling to share information.
The research was carried out in a short period of 6 weeks . Therefore the sample size
and other parameters were selected accordingly so as to finish the work within the given
time frame.

36

The information given by the respondents might be biased because some of them might not
be interested to give correct information.
The officials of the bank supported me a lot, but did not have sufficient time to make the
points more clear.




37

CONCLUSION
Hence, the study throws light on different aspects, positive as well as negative drawback of
services of the both public sector banks as well as the private sector banks in India. The customers
now days are not only exposed of what type of service is being provided by banks in India but in the
world as a whole.
They expect much more than what is actually being provided.
So the new coming banking sector has to provide and cater to all the needs of the customers
otherwise it is difficult to survive in the competition coming up.
They not only expect the safety of money but also best ways to invest that money which
need needs to be fulfilled. Banks need to have a better outlook towards to actually what customers
are requiring. Entries of the private sector banks have made the competition tougher for the public
sector banks. If a bank is not functioning properly it is being closed. So it is difficult to face these
types of conditions. Here a simple philosophy can work that customers are God and we need to
follow this to survive and serve better.
The banking sector is poised for explosive growth. In this, scenario, it is imperative that
banks adopt technology at an aggressive Pace, if they wish to remain competitive. Banks needs to
outsource their technology infrastructure requirement, thus enabling early adoption and increased
efficiencies. In the prevailing scenario, a number of banks have adopt a new deployment strategy of
infrastructure outsourcing, to lower the cost of service channels. As a result, other banks too will
need to align their reinvented business models. The required changes at both the business and
technology levels are enormous .
At last by taking an overall overview of this sector I came to the conclusion that, In highly
competitive banking markets, early adopters are profiting from increased efficiencies. Therefore
Nationalized banks need to improve their certain things to compete with private banks in India as
day by day most of the peoples are getting attracted towards private sector banks due to quality of
services provided by them and branches of private banks should be increased for easy accessibility.

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