The So banks are investing a lot to

Topic: BusinessInternational Marketing
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Last updated: August 30, 2019

Thebanking sector is one of the growing sectors in India, the reason being an increasein disposable income of the people.

There has been an increase in large number of digital transaction inIndia post demonetisation. Official data indicates an 80%rise in digital transactions in 2017-18, with the total amount expected totouch Rs.1800 crore. So banks are investing a lot to increase their banking networkso that they can reach to more and more customers. The Indian banking industry has a potential of becoming thefifth largest banking industry in the world by 2020 and third largest by 2025according to KPMG CII report. India’s banking and financial sector is expandingrapidly by adopting various technologies and skills to make them futureready.

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Banks have withstood theinitial hurdles hence becoming more adaptive to today’s dynamic environment.In the complex and rapidly changing environment, the only way for the banks tosurvive is to provide customer service through advanced technology. The Indian bankingsector has been strong throughout the last decade and has supported the economicgrowth of India. Indian banking system could withstand multiple challengesincluding the following: ·       GreatDepression·       The1997 Asian Financial crisis ·       The2008 sub-prime meltdownRBIhas acted as a vigil body keeping a close eye on banking system so that thebanks are never allowed to take excessive risk. The Indian banking system hasmajorly revamped itself.

The new infrastructure adopted by the Indian bankingsystem is mainly comprised of information technology (IT) products and servicesHISTORY Banking in India has existed since the Vedicperiod but due to informal system of banking, most of the bank dealing wasbased on mutual trust and dishonouring of the hundis (Hundi is a financialinstrument that developed in Medieval India for use in trade and credittransactions) was a rare event. First joint stock banking was introduced inIndia in early 18th century under which Bank of Bombay wasestablished in 1720 by English house Agency. The first presidency bank withgovernment shareholding was established in 1806 which undertook the tasks ofissuing currency notes and discounting of treasury bills to provide monetaryaccommodation to the Government.

Formal regulations were introduced in themid-19th century with the enactment of the Companies Act in 1850 which was thefirst regulation covering banks. Banks were also allowed to be organised asprivate shareholding companies with limited liability whereby majority ofshareholding were held by Europeans. However Indian owned private bank cameinto existence in 1865 with Establishment of Allahabad Bank and followed bymany other banks such as Punjab National Bank and Bank of India. The individualborrowers were still juggling with the money lenders who charged extortionaterates of interest because these banks were only available to the industrialsector.

Due to this, co-operative credit movement started, which addressed theneed of lower income population and resulted in several urban cooperative banksand giving legal recognition to credit societies.Fraudulent activities began rising (such asactivities by directors on one hand and gross mismanagement on account ofmanagement inexperience on the other) which resulted in Bank failures in India.There was a strong need of regulatory framework, even the establishment ofImperial Bank of India via amalgamation of three Presidency Banks had created aconflict of interest with the Imperial Bank acting as Central Bank and Bankerto the Government as well as engaging in commercial banking activities. Finallyan Act was passed in 1934 for the establishment of Reserve Bank of India withthe dual objective of addressing the issue of bank failures and promoting reachof credit to the agricultural sector. The Reserve Bank of India took over several responsibilities including(a) Issuing currency notes and acting asbanker to the Government(b) Acting as lender of last resort for thebanking system whereby it required banks to maintain cash reserves,(c) Encouraging the co-operative creditmovement to enhance the reach of agricultural credit.(d) Supervisory role with the power toconduct audit and inspection to detect fraudulent activities (e) Strengthening the banking regulatoryframework by proposing new banking regulations to the Government.High level of bank failures continued withReserve Bank of India, even after the enactment of the Banking Companies Act in1949, RBI tried to protect its depositor’s interest through forcedincorporation of concerned banks with stronger banks by cancelling the licenseof unviable banks and transferring their assets and liabilities to other banks.To promote depositor’s trust in the banking system deposit insurance was introducedin India in 1961.

Post-Independence, the flow of credit tothe agriculture sector was extremely limited and agricultural sector accounted tojust 2 percent of banking credit. To solve the problem of under penetration ofbanking in rural areas, RBI took the approach of giving targets for branchopening.Withthe establishment of Imperial Bank of India in 1955 nationalization of bankswas started and it was followed by enactment of State Bank of India Act also in1955. To operate free from political interference, Government vested theownership of the new entity to Reserve Bank of India. Encouraging results wereachieved in the initial period due to nationalization as State Bank of Indiawas able to compete with post office and physical assets.

RBI allowed the entryof new private sector banks to encourage more competitive environment in thebanking sector. Universal Banking model was adopted by new private sector banksand they entered into various segments of the financial sector through varioussubsidiaries. The main reason behind this was to leverage the opportunity ofunder penetration of various financial products.

STRUCTURE OF BANKINGIN INDIA  As per Section 5(b) of the BankingRegulation Act 1949 “Banking” means accepting, for the purpose of lending orinvestment, of deposits of money from the public, repayable on demand orotherwise, and withdrawal by cheque, draft, order or otherwise.”. All bankswhich are included in the Second Schedule to the Reserve Bank of India Act,1934 are scheduled banks. These banks comprise Scheduled Commercial Banks andScheduled Cooperative Banks. Scheduled Commercial Banks in India are categorisedinto four different groups according to their ownership and nature ofoperation. These bank groups are:1.

    PublicSector Banks2.    PrivateSector Banks3.    RegionalRural Banks4.

    ForeignBanks Besides the Nationalized banks(majority equity holding is with the Government), the State Bank of India (majorityequity holding being with the Reserve Bank of India) and the associate banks ofSBI (majority holding being with State Bank of India), the commercial bankscomprise foreign and Indian private banks. While the State bank of India andits associates, nationalized banks and Regional Rural Banks are constituted underrespective enactments of the Parliament, the private sector banks are bankingcompanies as defined in the Banking Regulation Act. These banks, along with regionalrural banks, constitute the public sector (state owned) banking system inIndia. The Public Sector Banks in India are back bone of the Indian financialsystem. Scheduled Co-operative Banks consist of Scheduled State Co-operativeBanks and Scheduled Urban Co-operative Banks. Regional Rural Banks (RRB’s) arestate sponsored, regionally based and rural oriented commercial banks.

TheGovernment of India promulgated the Regional Rural Banks Ordinance on 26thSeptember 1975, which was later replaced by the Regional Rural Bank Act 1976.The preamble to the Act states the objective to develop rural economy byproviding credit and facilities for the development of agriculture, trade,commerce, industry and other productive activities in the rural areas,particularly to small and marginal farmers, agricultural labourers, artisansand small entrepreneurs.

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