Development of Indias Banking System

emergence of Indias briming SystemIntroductionWith a tribe of over 1 billion, India is one of the most important countries with accelerating sparing growth. concord to the World cashbox (2009), the annual GDP growth of India has been more than 7% over the past ten years.The financial crises in 1997 and 2008 pack betrayed the importance of robust avowing dodging towards economic maturement. Indian Government liberalized the banking system through and through with(predicate) Indian bordering Sector Reform in 1991.From the first bank in India in 1786, the development of Indian cashboxing System has three distinct phases. premature Phase (1786 1969)There were 1100 refined banks in India. The Government implemented the shoreing Companies comprise 1949 to facilitate the functioning of cashmaking(prenominal) banks. qualification Bank of India (run batted in) was authorized to negociate the Indian banking welkin and became the Central Banking Authority. pip Nationaliz ation Period (1969 1991) defer Bank of India was formed to act as a principal agentive role of rbi and handle banking transactions in India. Fourteen major mer good dealtile banks were nationalized as there was a decline in public trustingness during the early phase. Nationalization guaranteed the sustainability of banking industry and aroused public confidence.Post- relaxation behavior Period (1991 now)Liberalization of banking practices occurred. Foreign banks, ATMs, phone banking, net banking were introduced to make the banking system more cheery and efficient.The development of banking system is transiting. habitual-Sector Banks contributes to 78% of get banking industry as gear up. Private-Sector Banks, on the a nonher(prenominal) hand, be experiencing great progress in internet banking, ATMs and other engine room advancements. They atomic number 18 likely to expand in India.Central Bank reliever Bank of IndiaIt was established in 1935 and was nationalized in 1949 . It has 8 functions explained as follows circular Issuance It has the sole right to issue bank notes of all denominations as an agent of the Government.Government Banker It acts as Government banker, agent and adviser. It controls the banking system through licensing, inspection and calling for information. It also supervises and controls commercial and cooperative banks.Maintenance of token(prenominal) Reserve Ratio RBI set the cash reserve proportion is 5% and repo rate is 4.75 % in 2009.Lender of Last Resort It acts as the lender of last resort by providing rediscount facilities to plan banks.Credit ascendence It controls the credit operations of banks quantitatively and qualitatively like open market operations, discount policies and reserve requirements.Settlement of Clearing Functions RBI facilitates the inter-bank clearing of up-to-the-minute accounts in 1050 clearing houses in India.Custodian of Foreign Reserves RBI sets a limit on money transfer in and discover of In dia under Foreign Exchange Management Act. It examines Indias reserve of international currencies and maintains the semiofficial rate of supplant with all member countries of International Monetary Fund.promotional Functions RBI is responsible to extend banking facilities to cracker-barrel and semi-urban areas, and establish and promote newfangled specialized financing agencies.Banking System Banks in IndiaThe Reserve Bank of India heads the Indian commercial banks. Banks in India endure be categorized into three tiers scheduled commercial banks regional rural banks which operate in rural areas not covered by scheduled banks and cooperative and special pur show rural banks.There are approximately 98 scheduled commercial banks, some(prenominal) Indian and foreign, almost 200 regional rural banks, more than 350 primeval cooperative banks, 20 land development banks, and a number of artless credit societies.Commercial BanksCommercial banking is dominated by 28 state- haveed ba nks compulsory 69.9% of assets in the sector in 2007/08. Private domestic held 21.7% and foreign banks had the remain 8.4%. Commercial banks can be categorized into domestic banks and foreign banks. internal BanksThey include public-sector banks, private-sector banks and savings, mortgage and co-operative banks. The biggest domestic bank is a public-sector bank, State Bank of India with market character 16.83%. The second biggest domestic bank is a private-sector bank, ICICI Bank with market per centum 9.11%.Public-Sector BanksThey provoke a country wide networks and to each one has its own geographic stronghold. They provide a full range of banking function and are an important acknowledgment of short-term funds. State Bank of India is the largest bank providing 16.83$ of loan advances in 2007/08. In 2008, SBI integrate its subsidiary, State Bank of Saurashtra, and is change magnitude its international presence.The introduction of stringent capital-adequacy, income-recogn ition and asset-classification norms in economic reform promoted public-sector banks to reveal true positions in financial statements. The gap between strong and worn down banks is thus widened.Private-Sector BanksThere were 41 private-sector banks and 18 of them were listed on the stock exchange as of 2009. They usually have strong regional client bases and climbing their technology and services.ICICI, the largest private-sector bank, merged with Bank of Madura in 2001 and Shangli Bank in 2007. behavior Insurance Corporation of India raised its stake in Corporation Bank to 27% from 12.32% in 2001. It is expected that more mergers and eruditenesss go forth be gear up in the coming decade.Savings, mortgages and co-operative banksThey are small and contribute slightly to the source of funds for most companies. They tend to finance rural and small sectors and have geographically-restricted operations. New RBI regulations have imposed restrictions on them in 2001 as some urban coo perative banks were discovered to have a spirited exposure to the stock market.Foreign BanksThe biggest foreign bank is Citibank with market share 1.55%. Standard Chartered Bank ranked the second. Citibank, Standard Chartered Bank, HSBC and ABN Amro Bank dominate the sector in the diagram shown below.Comparing the advances of foreign banks and that of commercial banks, it is shown that foreign banks play a small role in banking industry. They accounted for 8.4% of total commercial-bank assets in 2007/08. But the rising net profits of the banks to Rs66.12bn in 2007/08 from Rs45.85bn in 2006/07 suggested the increase importance of this sector.Foreign banks offer borrowing terms connatural to local banks, but their benchmark prime lending rates are 1 to 3 percentage points higher. Foreign banks usually form expose of a lending consortium.Foreign banks without a branch presence can conduct business through representative offices. These banks concentrate on providing offshore currenc y loans and related foreign-exchange products, quite than retail banking or local-currency lending. coronation Banks and BrokeragesInvestment banks and brokerages rely on advisory business. They have a limited intimacy in risk capital. They can weather the downturn without the risk of overtaking out of business. However, if the downturn continues in 2010, some banks may leave the small Indian market.Citi(US) and JM Financial Group have the greatest market share in this sector with their contribution of more than half deal value. effrontery the growth of Indian market, major foreign enthronement banks have reworked their partnerships with investment banks to help them to capture a greater market share.Development BanksPublic-sector development banks were traditionally the principle source of long-term capital. Development banks provide strong point and long-term rupee and foreign-currency financing, underwrite and subscribe to stocks and debentures. Due to the financial sector reform, they offer new services and products, set up organizations to provide a variety of financial services. Some countrywide development banks are industrial Finance Corp of India and Industrial Investment Bank of India.The Post duty Saving BankIt has the largest retail-bank network, with over 155,000 branches. A growing number of contribute offices are also connected electronically. Given its large distribution network, India Post now leverages its presence to become a general financial-services distributor. It provides various mutual funds and bonds. It also offers an inward international money-transfer service.Offshore BanksBanks are throw ined to set up abroad banking units within the countrys special economic zones functioning as overseas branches of domestic banks. Six domestic banks set up overseas banking units Bank of Baroda, Canara Bank, ICICI Bank, Punjab National Bank, State Bank of India and Union Bank. Domestic banks can enjoy a tax deduction on the income from OBUs and advantages of global presence.Banks determine CompositionThe deposits of national banks dominate the banking industry because they are backed up by the government and the public thus have confidence in nationalized banks. However, regional rural banks have a small share of deposits. It is in the first place due to the lower income level in rural areas. Although foreign banks have a second smallest share of deposits, liberalization of the banking industry will allow them to expand their business.Competitive SituationMore aggressive merger and acquisition are stemming in India. One advantages stemming from merger is the ability to cross-sell a pickle of retail products including housing loans, car loans, personal finance and credit cards. Further, merged entity will be able to compete with threats from global players, for instance, HSBC and Citibank.However, challenges of merger are the integration of financial and human resources, as well as substantive statutory requir ements. Also some FIs faced the problem of relying on an increasing cagey market to raise capital. As FIs were funding long-term projects with money rose short term, there was a critical asset-liability disparity. RBI therefore proposed to convert financial institutions into universal banks recently. A reverse merger with their own subsidiary banks will now give FIs access to low-cost funds.The arc of mergers and acquisitions will prevail in the coming years.Economic ConditionsIndian banks relaxation sheets are not directly exposed to sub-prime mortgage leading in US. The GDP and GDP per capital are expected to grow in the coming decade. The global financial crisis does not undermine the banking industry in India in a great extent. The assessment of the banking sector risk is rather low compared to that in Asia and Australasia in 2009.The expansion of consumer credit does not pose a high risk to the banking industry as the level of debts per client remains low. In contrast, RBI m oved the focus of its policy from boosting economic growth to containing inflation. Interest rates are expected to rise and tighter financial policy are expected to be implemented.ConclusionsThe liberalization of banking system has (1) assure the banking sector (2) provide more operational flexibility to banks (3) enhance the free-enterprise(a) efficiency of banks (4) strengthen the legal framework governing bank operations. This well-developed banking system is favourable when it comes to expansion in India.However, a keen competition is anchor in India. Each sector has various existing banks with strong guest loyalty. Numerous state-owned banks and FIs are the dominant players in India.Despite the stable Indian economy and the steady and slow movement towards liberalization of banking system, the Government will probably strengthen the financial regulatory system sufficiently sooner a complete liberalization. Therefore, it is concluded that India is not suitable for expansio n.ReferencesWorld Bank (2009). Word Bank in India. Retrieved November 25, 2009, from http//web.worldbank.org/WBSITE/EXTERNAL/COUNTRIES/SOUTHASIAEXT/0,,contentMDK22398481menuPK2246552pagePK2865106piPK2865128theSitePK223547,00.hypertext markup languageIndia Finance Investment snuff it (2009). Introduction. Retrieved November 25, 2009, from http//finance.indiamart.com/investment_in_india/banking_india.htmlMaps of India (2008). Banks in India. Retrieved November 25, 2009, from http//business.mapsofindia.com/banks-in-india/Kamath, G.B. (2009). Emerald. The Intellectual Capital Performance of Indian Banking Sector, pp.4. 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