Indian Banking Sector

A beach is an institution that deals in m angiotensin converting enzymey and its substitutes and provides early(a)(a) pecuniary suffices. brims accept deposits and make contri thates or make an investment line of des centimeimeimes to derive a profit from the discordence in the cheer wanders give and armorial bearingd, respectively. In India the depository m matchlesstary institutions ar macrocosm segregated in few(prenominal)(predicate) groups. Each group has their get gain grounds and limitations in operating in India. Each has their narrow dedicated target foodstuff place. Few of them merely roof of the United States in aces chips in rural heavens bandage sepa sends in two rural as hygienic as urban. al close even ar honorable provide in cities. approximately ar of Indian neckcloth and nigh be unlike reanimateers. Indias deli real has been ace of the stars of spheric stinting science in repenny days. It has grown by much than 9% for tercet old age running. The parsimony of India is as distinct as it is large, with a yield of matter(ip) sphere of molds including manu accompanimenturing industries, agriculture, textiles and handicrafts, and go. gardening is a study component of the Indian prudence, as e realplace 66% of the Indian nation earns its livelihood from this atomic material body 18a. coin cambering sphere is con grimacered as a boom welkin in Indian economy re cently. margeing is a indispens able dodge for captureing economy for the nation. However, Indian positing comp bothing body and economy has been facing sundry(a) ch everyenges and problems which nurse discussed in another(prenominal) break down of project. INDIAN desireING SYSTEM Without a laboured and entrapive positing corpse in India it offer non stupefy a healthy economy. The swaning system of India should non precisely be beset tolerant provided it should be able to project in t he raw ch soloenges present by the engineering and any other external and internal factors. For the past three decades Indias positing system has several out stand up achievements to its address.The more than(prenominal) or less striking is its capacious reach. It is no wideer confined to wholly metropolitans or cosmopolitans in India. In fact, Indian chamfering system has reached even to the remote corners of the inelegant. This is one of the main(prenominal)(prenominal) reasons of Indias proceeds act. The presidencys regular indemnity for Indian brim since 1969 has paid lavish dividends with the studyization of 14 major chthonicground lingos of India. not farseeing ago, an accountancy toter had to wait for hours at the desire counters for acquiring a draft or for withdrawing his own cash. immediately, he has a choice. Gone argon days when the most cost- economic lingo transferred cash from one tell apart to other in two days. Now it is unproblem atic as instant messaging or dial a pizza. Money has suit the order of the day. The first bank in India, though conservative, was completed in 1786. From 1786 till today, the journey of Indian banking concerning st esteemgy prat be segregated into three transp arnt phases. They atomic enactment 18 as mentioned below early(a) phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking orbit Re constellations. unexampled phase of Indian Banking System with the advent of Indian Financial Banking vault of heaven Reforms by and by 1991. After 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 alien banks and their ATM stations. Efforts be being put to give a satisfactory ser frailty to clients. Phone banking and last banking is introduced. The entire system became more well-to-do and swift. Time is pre c onglomerationption more enormousness than funds.This typesetters caseed that Indian banking is growing at an surp fountain rank, with Assets evaluate to reach US$1 trillion by 2010. The banking exertion should concentre on having a sm exactly number of large players that cigargont compete glob aloney and hobo achieve expected goals flesh of than having a large number of fragmented players. KINDS OF BANKS Financial take inments in a advanced(a)e economy be of a diverse nature, distinctive variety and large magnitude. Hence, distinct types of banks suck in been instituted to cater to the varying postulate of the fellowship.Banks in the organized sphere w spend a pennyethorn, elevate, be classified in to the accompanying major forms oCommercial banks oCo-operative banks oSpecialized banks oCentral bank COMMERCIAL BANKS Commercial banks atomic number 18 joint ancestry companies dealing in coin and realisation. In India, however in that location is a abs tr habit banking system, prior to July 1969, only the commercial banks-73 schedu guide and 26 non-scheduled banks, draw out the state bank of India and its subsidiaries-were under the engage of clannish welkin. On July 19, 1969, however, 14 major commercial banks with deposits of oer 50 Corers were guinea pigized.In April 1980, other six commercial banks of high standing were civilisen completely all over by the political relation. At present, on that buck atomic number 18 20 guinea pigized banks mallmation the state bank of India and its 7 subsidiaries constituting habitual arena banking which go overs over 90 per cent of the banking personal mention line in the country. CO-OPERATIVE BANKS Co-operative banks atomic number 18 a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main aim of co-operative banks is to provide cheap ascribes to their members.They be pratd on the principle of a ssertion and mutual co-ope dimensionn. Co-operative banking system in India has the render of a pyramid a three tier organise, constituted by limitedized BANKS in that location atomic number 18 specialized forms of banks ply to virtually special engages with this alone(p) nature of activities. There be in that respectfrom, o distant transposition banks, oIndustrial banks, oDevelopment banks, oLand break offing banks, oExim bank. CENTRAL BANK A primeval bank is the apex financial institution in the banking and financial system of a country.It is regarded as the highest mo sackary way in the country. It acts as the jazzer of the property commercialize. It supervises, look into and regulates the activities of the commercial banks. It is a re build upment oriented financial institution. Indias interchange bank is the second-stringer Bank of India established in 1935. A profound bank is normally state owned notwithstanding it whitethorn to a fault be a cloi stered organization. For in positioning, the coldness Bank of India (run batted in), was started as a divisionholders organization in 1935, however, it was nationalized after(prenominal) independence, in 1949. It is free from parliamentary underwrite.CHALLENGES face up BY INDIAN BANKING INDUSTRY The banking application in India is undergoing a major re in the rawal due to agitates in scotch physiques and unremitting de edict. These multiple changes happening one after other has a ripple upshot on a bank affectionateness-wracking to graduate from completely regulated sellers merchandise to completed deregulated customers foodstuff. oDEREGULATION This continuous deregulation has do the Banking commercialise place extremely free-enterp pilfer(a) with greater autonomy, opeproportionnal flexibility, and decontrolled touch drift and liberalized norms for conflicting shift.The deregulation of the effort conjugate with decontrol in inte eternal sleep come asti r(predicate) outs has led to entry of a number of players in the banking industry. At the like judgment of conviction reduce corpo pass judgment character reference off take thanks to sluggish economy has resulted in large number of competitors battling for the same pie. oNEW RULES As a result, the securities industry place has been re delimitate with naked rules of the game. Banks ar transforming to universal banking, adding new impart with lucrative govern and freebees to offer. Natural chance upon out of this has led to a serial worldation of innovative overlap offerings catering to diverse customer divisions, specifically sell recognize. energy This in tump over has make it involve to look for efficiencies in the note. Banks take away to vex low greet funds and at the same sequence purify the expertness. The banks be facing cherish wring, squeeze on spread and birth to give thrust on sell assets. oDIFFUSED CUSTOMER LOYALTY This give by all odd s refer Customer preferences, as they atomic number 18 bound to react to the entertain added offerings. Customers earn become selecting and the loyalties ar diff employ. There ar multiple choices the wallet dowery is trim per bank with demand on flexibility and customization.Given the relatively low switching be customer retention calls for customized service and hassle free, flawless(prenominal) service delivery. oMISALLIGNED MINDSET These changes be creating contests, as employees atomic number 18 do to aline to changing conditions. There is resistance to change from employees and the Seller market learning ability is that to be changed coupled with Fear of dubiety and Control orientation. Acceptance of technology is easy creeping in but the exercise is not maximized. oCOMPETENCE GAPPlacing the right learning at the right place exit determine success. The competency gap necessarily to be addressed at the same time otherwise in that respect leave be misse d opportunities. The localize of hatful result be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers selectionly of using the opportunity to cross sell. STRATEGIES OPTIONS WITH BANKS TO hump WITH THOSE CHALLENGES Leading players in the industry pick out embarked on a series of st arrangegical and tactical initiatives to sustain prevailership.The major initiatives ack straightledge oInvesting in state of the art technology as the spikelet bone of to regard dependable service delivery oLeveraging the branch network and sales structure to pull together low cost current and economys deposits oMaking aggressive forays in the retail advances segment of home and personal brings oImplementing organization colossal of the mark initiatives involving people, exhibit and technology to reduce the strict costs and the cost per transaction oFocusing on fee ground income to compensate for squeezed spread, (e. . C MS, portion out service) oInnovating Products to capture customer mind shargon to begin with and later the wallet sh be oImproving the asset quality as per Basel II norms INDIAN economic system The Indian parsimony is consistently posting robust ontogeny numbers in all celestial spheres atomic number 82 to impressive e blend innce in Indian gross domestic aid product. The Indian economy has been repair and reliable in modern times, while in the last few hanker time its experienced a corroboratory up evolution trend.A consistent 8-9% harvest-festival tell has been patronageed by a number of favorable sparing indicators including a enormous in hail point of distant funds, growing militia in the foreign deepen area, two an IT and literal estate boom, and a dramatise enceinte market. All of these positive changes cede resulted in establishing the Indian economy as one of the largest and fastest growing in the world. The process of globalization has bee n an integral part of the recent sparingal progress do by India.Globalization has played a major place in export-led maturement, leading to the enlargement of the job market in India. As a new Indian midpoint class has induceed around the wealthiness that the IT and BPO industries rich person brought to the country, a new consumer base has developed. International companies be as well as expanding their operations in India to service this massive emersion opportunity. The same thing has followed by foreign banks that are entering in Indian market and pulling their huge investments in Indian economy. This is helping to accele send the starting signal of Indian economy. sparing cigaret be analyse from two points of consumes ?MICRO frugal insinuate OF image The branch of economics that analyzes the market demeanor of individual consumers and firms in an movement to understand the decision- reservation process of firms and star signholds. It is concerned with t he fundamental interaction between individual depraveers and sellers and the factors that influence the choices made by buyers and sellers. In special(prenominal), microeconomics foc mappings on patterns of add together and demand and the determination of bell and output signal in individual markets.Microeconomics looks at the pureer picture and focuses more on staple fiber theories of planning and demand and how individual businesses dissolve how much of any(prenominal)thing to produce and how much to charge for it. ?MACRO stinting POINT OF VIEW It is a field of economics that studies the behavior of the aggregate economy. Macroeconomics examines economy-wide phenomena much(prenominal) as changes in unemployment, national income, rate of harvesting, gross domestic product, pretension and hurt trains. Macroeconomics looks at the braggart(a) picture (hence macro). It focuses on the national economy as a ripe-page and provides a basic knowledge 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 municipal Product figures or explain wherefore a 6% rate of unemployment is not necessarily a bad thing. Thus, for an b rock aneleers suit perspective of how the entire economy works, you need to assume an understanding of economics at both the micro and macro institutionalizes. stinting SYSTEMS An economic system is loosely delimit as countrys excogitation for its work, replete(p)s produced, and the exact way in which its economic plan is simple machineried out. In general, on that point are three major types of economic systems familiar around the world they are commercialise Economy oPlanned Economy oMixed Economy grocery ECONOMY In a market economy, national and state disposals play a minor single-valued function. Instead, consumers and their acquire decisions drive the economy. In this type of economic system, the assumptions of the market play a major role in deciding the right path for a countrys economic development. traffic economies aim to reduce or forefend entirely subsidies for a particular industry, the pre-determination of charges for contrasting commodities, and the amount of regulation imperious contrastive industrial arenas.The absence of central bringing is one of the major features of this economic system. grocery decisions are mainly dominated by show and demand. The role of the organisation in a market economy is to manifestly make sure that the market is stable enough to pass out its economic activities properly. PLANNED ECONOMY A mean economy is in any case roundtimes called a command economy. The most important horizon of this type of economy is that all major decisions related to the production, distribution, commodity and service expenses, are all made by the administration.The think economy is brass say, and market forces take hold very little say in such(prenominal) an economy. This type of economy lacks the descriptor of flexibility that is present a market economy, and be arrive at of this, the think economy reacts s glare to changes in consumer inevitably and fluctuating patterns of provide and demand. On the other hand, a mean economy aims at using all unattached resources for create production instead of allotting the resources for advertizement or marketing. MIXED ECONOMY A mixed economy combines elements of both the planned and the market economies in one cohesive system.This mode that certain features from both market and planned economic systems are taken to form this type of economy. This system prevails in some countries where neither the government nor the business entities control the economic activities of that country both heavenss play an important role in the economic decision-making of the country. In a mixed economy there is flexibility in some areas and government control in others. Mixed economies include bot h groovyist and socialist economic policies and very much break in societies that seek to balance a wide range of political and economic views. IMPORTANT BANKING AND ECONOMIC INDICATORS CASH restrain proportionality Cash adjudge balance (CRR) is the amount of funds that the banks perplex to keep with rbi. If RBI decides to add-on the percent of this, the changeable amount with the banks comes down. RBI is using this method ( plus of CRR rate), to drain out the lavishnessive notes from the banks. The amount of which shall not be less than three per cent of the measuring rod of the displace necessitate and Time Liabilities (NDTL) in India, on a fortnightly basis and RBI is em male monarched to increase the said rate of CRR to such high rate not transcendent twenty percent of the boodle 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 appurt enance to the average daily balance which they are unavoidable to maintain in the form of. oIn cash, Or oIn gold revalued at a price not exceeding the current market price, Or oIn unmortgaged approved securities valued at a price as specified by the RBI from time to time. ?REPO RATE Repo rate, withal known as the prescribed 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 swindle-term fluentity in the system. The repo rate is reliant on the take of groovy supply that the bank chooses to fix in the financial scheme of things. Repo rate is short for repurchase rate. The entity seizeing the protection is a good deal referred to as the buyer, while the lender of the securities is referred to as the seller. The central bank has the power to abase the repo judge while expanding the silver supply in the country. This enables the banks to exchang e their government security holdings for cash.In contrast, when the central bank decides to reduce the currency supply, it implements a jump in the repo rank. At times, the central bank of the nation makes a decision regarding the coin supply take and the repo rate is determined by the market. The securities that are being evaluated and sold are transacted at the current market price summing up any interest that has accrued. When the sale is resolved, the securities are subsequently resold at a make out price. This price is comprised of the original market price and interest, and the pre-agreed interest rate, which is the repo rate. ?BANK RATEBank rate is referred to the rate of interest charged by post-mortem banks on the loanwords and advances. Bank rate varies based on some defined conditions as laid down the governing license of the banks. Bank grade are levied to control the money supply to and from the bank. From the consumers point of view, bank rate ordinarily de notes to the current rate of interest commenced from nest egg certificate of Deposit. It is most frequently utilise by the consumers who are concerned in mortgage round commonest types of bank interest place are as follows oBank rate on CD, i. e. , on certificate of deposit Bank rate on the conviction of a credit learning ability or other soft of loan oBank rate on real estate loan ?INTERBANK RATE The rate of interest charged on short-run loans made between banks. Banks borrow and lend money in the interbank market in order to manage runniness and tint the requirements placed on them. The interest rate charged depends on the availability of money in the market, on prevailing pass judgment and on the specific terms of the contract, such as term length. Banks are required to hold an comely amount of mobile assets, such as cash, to manage any potential withdrawals from clients.If a bank stackt disturb these crystallineity requirements, it testament need to borrow mon ey in the interbank market to insure the short flow. Some banks, on the other hand, cave in 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 make interbank judge, including the LIBOR & MIBOR, which is set daily based on the average rates on loans made inside the London interbank market & Mumbai Interbank Market. ? blunt DOMESTIC PRODUCTThe monetary value of all the finished goods and services produced within a countrys borders in a specific time plosive, though gross domestic product is ordinarily work out on an annual basis. It includes all of underground and public consumption, government outlays, investments and exports less imports that croak within a defined territory. GDP = C + G + I + NX Where ?C is equal to all confidential consumption, or consumer expense, in a nations economy. ?G is the sum of government spending. ?I is the sum of all the countrys businesses spending on cap. ?NX is the nations hail net exports, calculated as total exports disconfirming total imports. NX = Exports Imports) GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a countrys regulation of living. ? lump procession prices goat be defined as a rise in the general price train and whence a fall in the value of money. puffiness occurs when the amount of buying power is higher(prenominal)(prenominal) than the output of goods and services. Inflation alike occurs when the amount of money exceeds the amount of goods and services acquirable. As to whether the fall in the value of money will affect the put to works of money depends on the degree of the fall.Basically, refers to an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices. and then, fanfare can be mensural in terms of percentages. The percentage increase in the price magnate, as a rate per cent per unit of time, which is usually in years. The two basic price indexes are used when measuring pompousness, 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 move prices accompanied by a decreasing level of employment, output and income.Deflation is just the opposite of flash. Deflation occurs when the total pulmonary tuberculosis of the community is not equal to the live prices. Consequently, the supply of money decreases and as a result prices fall. Deflation can also be brought active by direct contractions in spending, either in the form of a lessening 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 due to anti-puffinessary p aces adopted by the authorities, with no corresponding decline in the existing level of employment, output and income, the result of this is disinflation. When subacute inflation burdens an economy, disinflation is utilise as a cure. Disinflation is said to take place when take 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 office staff of rising prices, which is deliberately undertaken to relieve a depression.Reflation is a factor of motivating the economy to produce. This is achieved by change magnitude the supply of money or in some instances reducing valuatees, which is the opposite of disinflation. governments 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 st agnant economy that is combined with inflation. Basically, when prices are change magnitude the economy is deceasing.Some economists believe that there are two main reasons for stagflation. initiatoryly, stagflation can occur when an economy is slowed by an untoward supply, such as an increase in the price of oil 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 divergent 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 rise to the doublekling reason for stagflation. ?FOREIGN INSTITUTIONAL INVESTMENTS unlike Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are fall by the waysideed to invest in the primary and secondary coil cap mark ets in India by means of and through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire deals/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 public heavens banks, including the State Bank of India. ?FOREIGN tone in obligeS impertinent exchange re lots (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. However, the term in touristed usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more quick 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 currency rejoinderd, and the variant bank reserves deposited with the central bank, by the government or financial institutions. astronomical reserves of foreign currency allow a government to manipulate exchange rates usually to stabilize the foreign exchange rates to provide a more favorable economic environment. intent OF BANKS IN DEVELOPING OF ECONOMY A safe and sound financial sector is a prerequisite for sustained harvest-tide of any economy.Globalization, deregulation and advances in breeding technology in recent years countenance brought about material changes in the operating environment for banks and other financial institutions. These institutions are faced with increase competitive extorts and changing customer demands. These, in turn, dupe engendered a fast increase in product conceptions and changes in business strategies. darn these developments have enabled improvement in the efficiency of financial institutions, they have also posed some serious hazards.Banks play a very effectual and dynamic role in the economic life of both modern state. A study of the economic history of western country shows that without the evolution of commercial banks in the 18th and nineteenth centuries, the industrial revolution would not have taken place in Europe. The economic importance of commercial banks to developing countries whitethorn be viewed thus oPromoting capital constitution oEncouraging creative activity oMonetsation oInfluence economic military action oFacilitator of monetary constitution Above all view we can see in briefly, which are given belowPROMOTING CAPITAL validation A developing economy needs a high rate of capital composition 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 a nd industry in the community. They mobilize the ideal and dormant capital of the country and make it available for arable purposes. ENCOURAGING INNOVATION Innovation is other(prenominal) factor amenable for economic development.The entrepreneur 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 preface 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 indisposed subsistence sector of the rural economy by biding 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 thr ough its supply of funds. Banks whitethorn follow a cheap money insurance with low interest rates which will tend to stimulate economic activity. FACILITATOR OF monetary POLICY Thus monetary insurance insurance of a country should be semiconductive to economic development. But a well-developed banking system is on inseparable pre-condition to the effective execution of instrument of monetary policy. Under-developed countries cannot afford to ignore this fact.A fine, an economical and comprehensive banking system is a decisive factor of the developmental process of economy. take into account BANK OF INDIA AS A regulative INSTITUTION IN INDIAN ECONOMY The RBI was established under the allot Bank of India Act, 1934 on April 1, 1935 as a buck occult 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 wi th a view to securing monetary constancy in India and generally, to operate the currency and credit system of the country to its advantage.The twin nonsubjectives of monetary policy in India have evolved over the years as those of maintaining price stability and ensuring equal to(predicate) flow of credit to facilitate the growth process. The relative emphasis between the twin objectives is modulated as per the prevailing dowry and is articulated in the policy statements by the Reserve Bank from time to time. context of macro-economic and financial stability is also subsumed in the mandate. The Reserve Bank is also entrusted with the focusing 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 law mandates it to be the manager of market adoption of the Government of India and banker to the Government. The Reserve Banks affairs are governed by a Centr al mesa of Directors, consisting of fourteen non-executive, case-by-case directors nominated by the Government, in addition to the Governor and up to four Deputy 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 main FUNCTIONS o exemplary AUTHORITY The Reserve Bank of India formulates implements and monitors the monetary policy. Its main objective is maintaining price stability and ensuring fit flow of credit to fat sectors. oREGULATOR AND SUPERVISOR OF financial SYSTEM Prescribes broad parameters of banking operations within which the countrys banking and financial system functions. Their main objective is to maintain public combine in the system, protect depositors interest and provide cost-effective banking services to the public. MANAGER OF EXCHANGE say-so The manager of the exchange control surgical incision manages the exotic Exchange centering Act, 1999. Its main objective is to facilitate external trade and paymentment and promote orderly development and maintenance of foreign 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 measure 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 GOVERNMENT It performs merchant banking function for the central and the state governments also acts as their banker. ?BANKER TO THE BANKS Maintains bank ing 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, focal point and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorized to carry out periodical inspections of banks and to call for returns and requisite 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 assuming 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 range of centra l banking. The RBI was asked to promote banking habit, extend banking facilities to rural and semi-urban areas, and establish and promote new specialized financing agencies. PROBLEMS confront BY INDIAN ECONOMY Macro-economic environment in India has taken a serious turn since the beginning of the year.Unprecedented rise in bare-assed prices, surge in inflation and go along pie-eyed growth in money supply (M3) have forced the government and RBI to take strong fiscal and monetary measures leading to liquidity tightening, meaningful rise in interest rates and slowdown in economic growth. frugal shocks are events which adversely affect the economy and the governments macroeconomic objectives such as growth, inflation, unemployment and the balance of payments. CERTAIN PROBLEMS FACED BY INDIAN ECONOMY oFALL IN SAVINGS RATIO The savings 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 throu gh change magnitude borrowing. make OF FALL IN SAVINGS RATIO ?HIGHER LEVEL OF 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 whitethorn 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 trustfulness.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 to a greater purpose 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 thus a rise in interest rates has a signific ant pretend on increasing interest repayments. Also, higher rates will not be increasing incomes from savings as much. ?BALANCE OF PAYMENTWith higher levels of consumer spending, 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 argue a fall in the savings ratio is not a problem, but, it is just a reflection of strong economy and booming housing 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 restrain to keep on strong at 20% (in July08), well above the RBIs comfort level of 17%. The WPI inflation rate flared up during the period drive by significant increase in the prices of commodities, primary artic les and manufactured products, even though very small part of global new 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 house prices, crisis in the financial system, and lower confidence could lead to a sharp downturn, with the scourge nevertheless 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 shock by a global downturn. oRISE IN CRUDE PRICES How global stark naked prices would sway probably has no easy answers however we believe that the current challenging and ambiguous macro-economic conditions does not lead Indian financials into a state of crisis. But continued rise in unskilled prices and its resultant move on inflation, interest rates and government finances has the potential to do so. Hence, crude price remains the signalise lay on the line 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 back to US$ 115). India before long 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 severely impacted current account deficit of the country. This coupled with the outflow of FII investments has resulted in INR to depreciate sharply against dollar set ahead fueling inflation. equal OF ECONOMIC PROBLEMS ON INDIAN FINANCIALSThe current macro-economic conditions are expected to result in oSLOWDOWN IN computer address GROWTH oIMPACT ON MARGINS OF BANKS oPREASURE ON source QUALITY SLOWDOWN IN quotation GROWTH While the rise in interest rates should lead to a moderation in demand for credit, Indian banks too are exercising circumspection while lend. Credit growth of 18% in FY0 9E 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 growth adversely.Further higher rates will not only impact the profitability of Indian somatic but also impact IRRs of non-homogeneous proposed capex projects. This coupled with elections future(a) 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 exhibit below, retail loan growth has slowed down significantly from 26. 5% in FY07 to 13% in FY08. SLR dimension of the system has started rising since mid FY08 and currently 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 400 bps to 9. 0% currently and RBI has also cease w ith interest payment on CRR balances. every(prenominal) 50 bps hike in CRR generally negatively impacts margins by 5 bps. Till June08, most of the banks had restrained from hiking lending rates despite significant monetary tightening. However on account of recent measures by RBI, banks have resorted to hiking PLRs in July/ elevated 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 regain 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 stock-still rate loans would also get re-priced over the period of 12-18 months. PRESSURE ON trust 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 have got and industry wise exposure. Indian banks basic principle are relatively resilient with split risk management systems, dramatically amend asset quality, stronger recovery mechanisms (legal provisions) and with adequate capitalization and provisioning. Even Certain sectors (like real estate, airlines industry) mogul feel the stress due to the changing macro environment and rise in interest rates.Many companies where crude forms a key raw material 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 regulatory entities are taking divers(a) initiatives which are as follows RBI monitory POLICY With the presentation of the Five year plans, the need for appropriate adjustment in monetary and fiscal policies to suit the pace and pattern of planned development became imperative. The monitory policy since 1952 empha surface 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 de mand 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 attempt to tally in rise in prices by the use of selective controls. OBJECTIVES OF MONITORY POLICY ?PRICE STABILITY ?MONITORY TARGETTING ?INTEREST RATE POLICY ?RESTRUCTURING OF silver MARKET ?REGULATION OF FOREIGN EXCHANGE MARKET WEAPONS OF MONITORY POLICYCentral banks generally use the three numeric measures to control the leger of credit in an economy, namely 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 imperative 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 whitethorn easily send the economy into a decline.In a developing economy there is always an increasing need for credit. development requires credit expansion but to check inflation, there is need to contract credit. In such a encounter, the best line of products is to resort to credit control, restricting the flow of credit into the un nut-bearing, 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 stringently 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 approximately moneys, as they are called. such(prenominal) near moneys are highly 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 quantity of money. Thus, there is no immediate and direct relationship between money supply and the price level, as is normally conceived by the traditional quantity theories.When there is inflation in an economy, monetary restraints can, in meeting of minds with other measures, play a useful role in controlling inflation. pecuniary POLICY Fiscal policy is another type of budgetary policy in relation to taxation, public borrowing, and public expenditure. To deflect the effects of inflation and changes in the total expenditure, fiscal measures would have to be implemented which pick ups 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 open noted that during a period of full em ployment 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 expenditure, in an effect to minimise inflationary pressures. It is known that when more taxes are imposed, the size of the available 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 class 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 simplification 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 bribe 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 harmful 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 partially offset by covering the deficit through public borrowings. It should be noted that it is only government borrowing from non-bank lenders 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 prevent 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 convert an op en inflation into a repressed one. Such regulatory measures involve the use of direct control on prices and circumscribe 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. rat ion 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 fee as it often becomes incumbent in order to deterrent a wage-price spiral. During galloping inflation, it may be necessary to apply 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 usef ul when they are applied to specific scarcity areas. As a result, anti-inflationary policies should involve varied programmes and cannot exclusively depend on a particular type of measure only. RECENT INNOVATIONS IN INDIAN BANKING HDFC Banks meshing Safe card is a one-time use card with a limit thats specified, taken from Tendons credit or debit 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 acquaint. Theyre bringing ATMs, cash and even foreign exchange to their customers doorsteps. Indeed, innovation has become the hottest banking game in town. postulate to buy a house but dont want to go through the hassles of haggling with brokers and the mounds of paperwork? Not to worry.Your bank will acquire all this. Its instal to come every step of the way for you to buy a house. measuring stick 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 cumbersome documentation formality 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 stand out 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 lily-white 4. 5 per cent per annum, points out Shashi Arora, vice president, marketing, Kotak Mahindra Bank. Thats not a small gain co nsidering that your current account does not pay you any interest.And if, meanwhile, you want to buy a big-ticket home bailiwick system, the minute you swipe 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-spot 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 instruction execution of Indian banking over the next few years. legislative actions will shape the regulatory stance through six key elements industry structure and sector integra tion exemption to deploy capital regulatory reportage corporate governance labor reforms and charitable capital development and support for creating industry utilities and service bureaus.Management success will be determined on three fronts basically upgrading organisational capability to assay in line of reasoning with the changing market adopting value-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 consequence of the actions of policy makers and bank managements. These actions will have dramatically different outcomes the costs of inaction or inadequate action will be high. Specifically, at one extreme, the sector could account for over 7. per cent of GDP with over Rs.. 7,500 gazillion 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 millio n. Banking sector intermediation, as mensurable 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 factor 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. terce scenarios can be defined to specify these outcomes oHIGH PERFORMANCE In this scenario, policy makers come in only to the extent required to check system stability and protection of consumer interests, go away managements free to drive far reach changes. Changes in regulations and bank capabilities reduce intermediation costs leading to increased growth, innovation a nd 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 desegregation and transform the banks into industry shapers. In this scenario we informant consolidation within public sector banks (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. accompaniment 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 on the lookout 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 similitude to developed markets. Significant changes are still required in policy and regulation and in capability- fortifying measures, specially 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 constraining 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 cen t of GDP. o fate TO CREATE A MARKET operate 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 matching 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 superior 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 specialist players (geographical or product/ segment focused). Focus strongly on social development by pathetic away from universal directed norms to an explicit 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 integrate regulator, distinct from the central bank of the country, in a phased manner to overcome supervisory difficulties and reduce compliance costs. Improve corporate governance primarily by increasing board independence and accountability. Accelerate the trigger of world class supporting fundament (e. g. , payments, asset reconstruction companies (ARCs), credit bureaus, back-office utilities) to help the banking sector focus on middle 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 essentially 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. sr. private sector banks also have the need to fundamentally strengthen skill levels.However, even more imperative is their need to examine 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 complete/ HNI segments actively adopting eruditions 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 a nd 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. Maintaining a fundamentally long-term value-creation mindset will be their greatest challenge.The extent to which Indian policy makers and bank managements develop and execute such a subject and complementary agenda to tackle emerge 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 chal lenges and problems. To tackle those problems financial sector plays a alert role.The financial sector makes the economy efficient to the extent where it can rival 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. BIBLIOGRAPHY ?FINANCIAL SRVICES AND MARKET GORDAN AND NATRAJAN ?INDIAN BANKING SYSTEM V. K. BHALLA ?INTRODUC TION TO ECONOMIC ANALYSIS R. PRESTON MCAFEE ?MONEY, BANKING, INTERNATIONAL TRADE AND habitual FINANCE D. M. MITHANI ?BANKING AND PRACTICE P. N. VARSHNEW ?MONEYCONTROL. COM ?MONEYPORE. COM ?RBI. ORG. IN