The banking sector in india

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  • 1. The Banking Sector in IndiaThe Banking sector in India has always been one of the most preferredavenues of employment. In the current decade, this has emerged as aresurgent sector in the Indian economy. As per the McKinsey report ‘IndiaBanking 2010’, the banking sector index has grown at a compounded annualrate of over 51 per cent since the year 2001, as compared to a 27 per centgrowth in the market index during the same period. It is projected that thesector has the potential to account for over 7.7 per cent of GDP with overRs.7,500 billion in market cap, and to provide over 1.5 million jobs.Today, banks have diversified their activities and are getting into newproducts and services that include opportunities in credit cards, consumerfinance, wealth management, life and general insurance, investmentbanking, mutual funds, pension fund regulation, stock broking services,custodian services, private equity, etc. Further, most of the leading Indianbanks are going global, setting up offices in foreign countries, by themselvesor through their subsidiaries.
  • 2. CHAPTER VPROGRESS OF THE BANKING SECTOR IN INDIA ANDTHE UNION TERRITORY OF PONDICHERRY.5,l IntroductionBanks constitute an important segment in financial arena of all countrieswhether developed or developing or underdeveloped. Economic development of everycountry depends upon financial sector particularly commercial banks. In fact economicdevelopment and financial infrastructure go hand in hand. From time immemorial, theconventional banker, an indispensable pillar of Indian society, giving and taking ofcredit in one form or another, must have existed as earlier as the Vedic period. Moneylending was one of the recognised occupations under Manus laws .The history of modem Indian banking2 goes back to 1683 when the firstIndian Bank was established on western lines in Madras. The establishment of the Bankof Calcutta in 1806 marked the beginning of the modern banking era in India. Two morePresidential Banks, namely, Bank of Bombay and Bank of Madras were set up in 1840and 1843 respectively. With the launching of Swadeshi movement in 1905, there wereoutbursts of banking activities. Many banks like Bank of Burma (1904), Bank of India(1 906), Canara Bank (1 906), Bank of Rangoon (1 906), Indian Specie Bank (1 906),1N.K. Thingalaya, "Manu, Chanakya and the Rate of Interest", Pigmy EconomicReview, Vol. 36, Aug - Oct, 1994, pp. 1-5..c. Kugumakara Hebbar, "Growth of Banking in India Before Independence",Pigmy Econgmic Review, August 1 9 89, pp .3 -4. Indian Bank (1 9061, Bank of Baroda (1 908) and CentralBank ( 191 1 ) had their operationwith a paid up capital of Rupees Five lakhs and above. But the present Indian bankingsystem had developed considerably since 1935. RBI has started its operation in 1935
  • 3. through an Act. A critical review of the growth of banking in India in the pre-independence period reveals that the banking system had neither a definite shape norpolicy except the creation of RBI in 1935. With the enactment of the BankingCompanies Act in 1949, the Indiaii banking system had undergone substantial changesstructurally, geographically and functionally.Banking in India broadly falls under two categories: (a) Commercialbanks and (b) Co-operative banks. Commercial banks are the major players as far asindustry and trade sectors are concerned whereas co-operative banks cater to the needs ofrural economy particularly agriculture sector. Commercial banks fall under two distinctcategories, namely, Scheduled commercial banks and non-scheduled Commercial banks.Scheduled commercial banks means the banks which are listed in the Second Scheduleof RBI Act, 1934. Under section 42 (1) of the Act, scheduled commercial banks areexpected to maintain cash balance to a minimum of three per cent of their net demandand time liabilities, The cash reserve ratio is subject to upward / downward revision byRBI. The scheduled commercial banks enjoy certain special privileges like availingfinancial assistance under section 17 of the RBI Act. Non-scheduled Commercial banksare not listed and they do not have any large network. As of now only, one non-scheduled bank is functioning in India as compared to 16 nos on the eve of banknationalisation. 5.2 Progress of Banking in IndiaThe progress of Commercial banking in India can be categorised underthe following four distinct phases: Phase I ( 1 860-1 946 ); Phase I1 (1 947-1968 ); Phase111 (1969-1 990); Phase IV (1991- till date).5.2.1 Progress of Banking - Phase I (1860 - 1946)With the advent of British rule in India, the business of the indigenousbankers had declined. The banks on western model have come into existence. Financial
  • 4. transactions were handled by them. It was only in 1850s, the British bank actuallyreached India. The first western type thrift institution introduced in India was theSavings department of the Presidency Bank which, opened in the 1840s and wasfollowed in 1870 by District Savings Bank operated by the treasury and in 1882 by thePostal Saving system. In 1900, the Postal savings system was the only such institutionleft in the field besides the indigenous private institutions like chit funds, nidhis. LifeInsurance was still in the early stage of development at the beginning of World War Iand substantial part of this business was done by the British people rather than by theIndian banks.The Central bank in India came into existence on First April , 1935 Thebank was organised as a Joint Stock Company whose shares were held privately. Thisbank had two major departments, namely, System department and Badsing department.The RBI was the largest financial institution in India with about one-third of the assets ofall financial institutions. The Imperial Bank which came next was privately owned jointstock campany with all its stock owned by the British ancestors living in India. Since theGovernment deposits were transferred to RBI after 1935, the Imperial Bank came to rely increasingly onprivate deposits. About 95 per cent of the total funds of Imperial Bankin 1946 came only through private funds,5.2.2 Progress of Banking - Phase I1 (1947-1968)The structure of the Indian banking till 1947 was not backed by adequatecontrol or directive measures. The Banking Regulation Act. 1949 provided the muchneeded framework for proper supervision under RBI. 011 the Boards of directors of PSB,there was a nominee represented from RBI and Government of India. This periodwitnessed the disappearance of many smaller banks due to tight inspection by RBI.Bigger banks growth was facilitated by winding of business by smaller ones. Thisperiod witnessed consolidation and growth of larger banks. There were attempts at
  • 5. correcting the regional maldistribution in branch network, which was marked by heavyconcentration of branches at larger urban centres. Through effective branch licensingpolicy, many banks were opened in rural unbanked centres. This period witnessed thenationalisation of Imperial Bank, now called as the SBI and its Associate banks in 1955.Between 1955 and 1968, the SBI and its Associates opened many branches. About 80per cent of 1608 branches opened by SBI and its Associates during 1955 - 1968 were atrural and semi-urban centres. The growth of bank branches during this period can beseen in Table 5.1Table 5.1: PROGRESS OF BANKING IN INDIA, 1951 - 1968S1, State Bank of Scheduled Non-ScheduledNo. Year India and its Commercial Commercial TotalAssociates Banks Banks3. 1968 3379 5104 207 8690Source: R. Srinivasan, Priority Sector lend in^ - A Study o f Indian Experience,HimalayaPublishing House, Bombay 1995, p.6. Though there were welcome signs in increasing morenumber of bankbranches and intensive banking network, in the absence of policy compulsion. largeprivate sector banks controlled by a few big industrial business houses failed to meet therequirements of small borrowers in agriculture. activities allied to agriculture, trade.small scale industries, transport operations. Between 196 1-7 1. the number ofborrowal accounts had come down. Flow of credit to industrial sector was greaterwhereas agricultural sector was languishing for want of funds. Official recognition ofthe need to have a closer look at the functioning of the Commercial banking system hasnecessitated the Social Control of banks in 1968 by the NCC. The first meeting of theNCC in March, 1968 discussed and generally agreed on matters like depositmobilisation and deployment of credit to the targeted groups in the form of PSL with
  • 6. special reference to agricultural sector.5.2.3 Progress of Banking - Phase 111 (1969-1990)The nationalisation of 14 Commercial banks in July, 1969 was theculmination of Social control of banks in 1968. The development of Commercialbanking in India after the introduction of social control and nationalisation of majorbanks has certain unique characteristics. The class banking has become mass bankingtrying to realise the socially oriented objectives stipulated for the banking system underthe policy directives of the Government that promote growth with social justice. Thefollowing were the major objectives of bank nationalisation:a) to promote social and economic objectives of State policy by effective execution ofplans and achieve the ideals of socialistic pattern o f society; b) to remove the control by a few soas to make contribution of adequate credit foragricultural and small industries and exports:c) to give professional bent to bank management;d) to encourage new class of entrepreneurs; ande) to provide adequate training and reasonable service to the bank staff.In April 1980, SIX more commercial banks were nationalised mak~ng theTtotal nationalised PSB to 20. Another milestone in the progress of the banking sectorwas the setting up of W s . In July, 1975, the working group under the chairmanship ofNarasimham had recommended the setting up of RRBs as fullfledged scheduled banksfor mobilising savings and deploying credit in rural areas. These RRBs were sponsoredby Commercial banks. At the end of March, 1998 there were 196 IiRBs operating inthe country.The banking sector has been made to serve the national economy as acatalytic agent. It was felt that nationalisation was very essential to mob~lise the deposits
  • 7. on a massive scale and sustain employment and to secure a more equitable distribution ofcredit throughout the country. After the introduction of LBS, nationalised banks havebeen identified in different selected districts of the country to prepare a blueprint for thedevelopment of the respective districts. The designated bank in each district known as"Lead Bank" prepares DCP and ACP. Thus the banking system has been made as ani n s m e n t towards realising the social objectives from its earlier profit orientedapproach. Thrust was made towards PSL afker nationalisation. The PSL known asdirected credit programme has become an active mechanism and instrument intransforming the neglected segments. Agriculture and allied activities, small scale and cottageindustries. small road and water transport operators. retail traders werearticulated under PSL. RBI has stipulated that 40 per cent of net hank credit shouldflow towards priority sector. Weaker sections are taken care of under the PrimeMinisters 20-Point Programme announced first in 1975, revised in 1982 and modifiedin 1986. Thrust was made by Government of India to earmark adequate outlay by banksin implementing the 20-Point Programme after having detailed consultations with RBI.DRI Scheme was introduced to ameliorate the poverty-stricken masses in rural and urbanareas to avail bank credit at four per cent concessional bank interest. Minority welfare isalso taken care by commercial banks after bank nationalisation. Many of bank brancheswere opened in the hitherto neglected rural and semi-urban areas.The norms for opening bank branches in different areas are as follows3:i. Rural group includes all centres with a population of less than 10,000.ii. Semi-urban group includes centres with a population of 10,000 to One I&.iii* Urban group includes centres with population of One lakh to 10 lakhs.iv. Metropolitan group includes centres with population of 10 lakhs and more.NABARD was set up on 12.07.1982 for supporting and promotingagriculture and rural development and to provide short-term, medium term and long
  • 8. term credit to state Co-operative banks, RRBs and commercial banks. Refinancingfacility is made available for n o n - f m projects also by NABARD. The IndustrialDevelopment Bank of India (IDBI) was set up in 1964 to serve as an Apex institution forTerm finance for industries in India. Besides, it also plans, promotes and developsindustries, undertakes market investments and serves as a techno-economic agency for3~eserve Bank of India, Banbin? Statistics 1972-95 - Basic Statistical Returns,Bombay, 1998,ppl-2. the development of industries. To take care of the small industries on asoundfooting a subsidiary organisation of IDBI. namelj.SIDB1 was set up. Other specialisedfinancial institutions with Government patronage have come into existence during thisphase. This phase had witnessed the growth of financial assets in leaps and bounds.More bank branches were opened. There was an abnormal growth of deposits andadvances particularly to the priority sectors. The diversification of financial assets hadalso taken place in the form of diversified portfolio investment in mutual funds, shares,debentures and equities. Stock markets had witnessed many changes and many newinvestors from different strata entered into stock markets.5.2.4 Progress of Banking - Phase IV (1991 - Till Date)The advent of Narasimharn Committee on financial sector reformsintroduced sweeping changes in the financial sector particularly in the functioning ofcornrnercial banks with regard to portfolio management and flow of credit to the targetgroup under PSL. The Narashimham Committee had recommended that directed creditshould be phased out to 10 per cent from the stipulated 40 per cent grad~~ally. This is intune with the World Bank suggestions and also due to the integration of Indian economyinto global network. Thanks to this development in financial sector, non-viable bankbranches mostly in rural areas were either merged with existing viable bank branches orclosed down. This period has been witnessing many irregularities and malpractices in
  • 9. various public sector and private banks thereby warranting the necessary correctiveaction on the part of the RBI. The issue of Non performing assets has assumedimportance due to non-grounding of assets by beneficiaries. The process of financialsector reforms initiated in 1991-92 is pursued with vigour and determination to improvethe competitiveness, operational efficiency and transparency of the financial sector. The financialreforms touched a number of areas - monetary and credit policy issues relatingto reserve requirements. interest rates, refinancing facilities and indirect monetary controlvia the securities market and matters relating to strengthening and consolidation ofbanks, the prescription of prudential norms relating to asset classification and incomerecognition, adequate provisioning for bad and doubtful assets. introduction of a capitalto risk-weighted assets ratio system for banks (including foreign banks) andestablishment of a strong supervisory system. All of these are expected to bring about asignificant improvement in the f~~nctioning of the banking system. One of the problemsfaced by banks is the low rate of loan recoveries. This has a bearing on the accountingstandards as well as on current operations of banks. It is in this context that theRecovery of Debts Due to Banks and Financial Institutions Bill, 1993 was passed inAugust 1993 which facilitated the establishment of Debt Recovery Tribunals forexpeditious adjudication and recovery of debts due to banks and financial institutions.The provisions of this Act shall not apply where the amount of debt due to any bank orfinancial institution or to a consortium of banks or financial institutions is less than Rs,10 lakh or such amount, being not less than Rupees One lakh, as the Central Governmentmay, by notification specify. These tribunals will expeditiously deal with applicationsmade by bankslfinancial institutions and endeavor to dispose of such applications withinsix months from the date of receipt of such applications. This period witnessed thewidening gap between the deposits and credit and thereby gradual reduction in CDReventually affecting the flow of credit towards PSL. The trend and progress of
  • 10. commercial banks on the basis of certain relevant crucial indicators during the tbird andfourth phases are given below: t d teqrunyy ~ 6 6 ~ veyy 92 IOA swwatl IWsQels=lseg~ N Q S ~ ~ w B B PIP xuw arvasatl (31 z I -- dd ~WRN 9661 ww ---- sz jon swwau )w~sqrq~ 3rseg-s3gsqwS wryuag apu, lo yueg ahlasaa [ql E 1 dd IeqtunyJ swn)aH I ~ Q S Q Q S ~ I S W - S ~ - Z L ~ L qn l ~ W W E ~ 6mpul~o wea a~asati [el m n o ~C 92 L LE 0 % 9 8E Z 1P 0 % O K LLC Z L E 6!X 09E LZE 9 16 E 62 ,orleu wsodaa lua~safiul pis ES I ss 985 L S 9 i.s E 9s PSS 909 ~ 0 9 E O ~ 9 ~ 9 ~ 9 9 1 EL s u o~ea11sodaa~par3 EC (VN 8t.E Z81F LEE S 9E P PE 1LE LLE LOP 9ZP 18E 606 b PZ 0 PI (lua syuea )e~~aunuo=l palnpaps101I r l p m iwol UI mumpv lopas huoud 40 aJeus 21VN a 6 9 L6W 6FLCS 8lELP ZLSW L6PIP 99086 EOE91 9G69 1061 POS (a.lOJ3 SU) J O W @OUd 01SaOUeAPV,swag leaawm3 palnpaw c IVN 1 US 9 05 L LS L OI; P 0s S6P 1 % 98P SSP S % FEE I. OZ 9 91.MUJOXU( leUOqEN p afjelUC0 ad SE QlUEglewwurw pa~npaws 40 w s d a ocF ffi 96L 889 OZ9 PZIi 6t4 Z6E trEE 062 SSZ EPC 36 P9 99E9LL 6Zf L M L ELL 6F8S ESLSL6S6 OK6 9806 8998 SPL8 Z9E8OB6CL 99LEL L9SE1 1HXL 068CL 59PLlgL82E QLGZE %61E POOEt GZFSE 68ESE9lZW @%9 9ZOE9 L9CZ9 60819 69119PZEZP0856%I. I.
  • 11. ZSL6S16LWZOZOELEECL688LLEOS6E6EC Z Z E P P96 t 96 1 96 C 961 961 96 1162 162 16Z ZLZ ZLZ ZLZWE 66Z E67. P8Z 9LZ 9LZ(9 b) (GC) (trl (ELI (z1.1 Ibr)8661 166L 966 1 G66 C % 6 C £561"w "wi JW J ert lew en Jew2661(or)9LZZLZ96)PJew156109LZZLZ
  • 12. 961P96P1PLZOLZLPZFPZ191P l3m-n the above figures, we can deduce that the number of commercialbanks have gone up to 300 in March 1998 as against 89 numbers in 1969. The increasein the number of Commercial banks was mainly due to the increase in W s . The factto be observed during 1969 to 1998 is that non-scheduled Commercial banks have comedown from 16 to one during the same period. Number of bank offices in India has goneup from 8262 in 1969 to 64218 in March 98. There was 7.77 time increase in thegrowth of bank offices over the last 29 years. Rural branches have increased to 32878 in1998 from a mere 1833 in 1969 indicating 17.94 times increase. Semi-urban brancheshave gone up to 13980 from 3342 for the same period, indicating an increase of 4.18times. There was 6.06 times increase in urban branches from 1584 in 1969 to 9597 inMarch 1998. An increase of 5.17 times has been noticed in expanding bank branches inmetropolitan areas, from 1503 numbers to 7763 numbers for the same period. Openingof more number of branches in rural areas has facilitated intensive banking network andthereby bringing bank to the door steps of the depositors and the loanee. 64000population had a bank branch in 1969. Due to intensive branch licensing policy of RBI
  • 13. particularly in rural and semi-urban areas, population per bank branch has come down to15000 in 1998. This means that the gap has been narrowed down to the minimum andclose rapport has been established between the banks and the people,Deposits by scheduled commercial banks have grown to a considerableextent from a mere Rs.4646 crores in 1969 to Rs,605410 crores in 1998 denoting, anincrease of 130.31 times. The credit of scheduled commercial banks has gone to theextent of Rs.324079 crores in 1998 from Rs.3599 crores in 1969 indicating an increaseof 90.04 times. The deposits of commercial banks as a percentage to national incomehas increased fiam 15.5 per cent in 1969 to 50.1 per cent in 1997. This shows theimportant role played by commercial banks in determining the national income of the Iiidianeconomy. This also establishes the fact that major part of the development ofIndian economy depends upon the banking sector. Mopping up of large chunk ofdeposits was mainly possible due to large network of branch expansion p~icularly inrural areas.The share of priority sector advances to the total credit portfolio hasmoved from a mere Rs.504 crores in 1969 to Rs.93807 crores in March 1997 indicatingan increase of 186.13 times. The priority sector advances have gone up from 14 per centin 1969 to 34.8 per cent in 1997. The stipulated target of 40 per cent was achieved andeven exceeded in 1989. Since 1991, the share has come down and reached a level of34.8 per cent in March., 1997. The reason for such a deceleration in growth of prioritysector advances may partly be attributed to reduction in number of bank branches in ruralareas from a maximum of 35389 in March, 93 to 3291 8 in March, 97. This might havea direct bearing on the flow of credit to agriculture and allied activities besides non-farmactivities. Per capita deposit of commercial banks has increased from Rs.88 in 1969 toRs.6270 in 1998. Per capita credit has increased from Rs.68 to Rs.3356 for the sameperiod. This period has also witnessed the decline in CDR from 77.5 per cent in 1969 to
  • 14. 53.5 per cent in 1998. The Investment Deposit Ratio (IDR) has gone up moderately from29.3 per cent to 36.1 per cent in 1997. The progress of banking Sector in India was on avery positive trend despite shortcomings in the nineties mainly in the social arena due toimplementation of structural reforms in financial sector.5.3 Lead Bank Scheme - Rationale and MethodologyWhile discussing progress of banks, a prominent place should also begiven for the Lead Bank scheme which is an innovative and development orientedIndian economy based on Area Approach -96 evolved by a study group. This study group constituted by NCC made a detailedanalysis for setting up an appropriate organisational framework for implementing varioussocial objectives set before the country. The Committee report known as GadgilCommittee Report had suggested that banks should adopt area approach andrecommended allotment of districts to different commercial banks to take lead role andact as consortium leader. This was mainly intended to the main task of identifying theterritorial and functional credit gaps and of making recommendations for the extensiveand adequate institutional credit on reasonable terms to neglected sectors and areas.The purpose of nationalisation of 14 Commercial bailks in July, 1969 wasto make available the adequate flow of institutional credit to the economy in general andthe rural areas and the weaker sections in particular, After nationalisastion of banks, theRBI had appointed a Committee of Bankers under the Chairmanship of Nariman toevolve a co-ordinated programme for setting up of adequate banking facilities in theunbanked and underbanked districts on the lines of the Gadgil study group. ThisCommittee had submitted its report on 15 November 1969 recommending that banksshould be allotted specific districts to take care of an integrated area approach relating tothe particular district. The allotted bank for the specified district would act as a Nodal or
  • 15. Lead Bank which would take a lead role in surveying the potentials available in the area.The LBS was endorsed by the Standing Committee of Bankers at the meeting held in theRBI on 12 December 1969. After giving a concrete shape to area approach, the LBScome into operation. Banks were designated as Lead Bank on the basis of :a)the size of the bank;b)the adequacy of its resources for handling the volume of work; c )continuity of districts so that a cluster of each district could emerge;d) regional operation of banks and the desirability for each state to have more thanone Lead Bank operating in the area and to the extent possible for each bank tooperate in more than one State.Though the Lead Bank is treated as the custodian bank as far as aparticular district is concerned, it does not mean that it has a monopoly of bankingbusiness in that district . It is expected to act as a consortium leader rather than as a bigbrother. The major functions of the LBS as spelt out by RBI are:i. surveying the lead districts on resources and potential for banking development,ii. surveying the number of industrial and commercial units and otherestablishments and farms which do not have banking accounts or depend mainlyon money lenders and increasing their own resources by the creation of surplusesfrom the additional production financed by the banking system;iii. examining the facilities for marketing of agricultural and industrial production,storage and warehousing-spare and linking of credit with marketing;iv. surveying the facilities for the stocking of fertilizers and other agricultural inputsand repairing and servicing of equipment;
  • 16. v. recruiting and traning the staff, which would offer advice to small borrowers andfarmers in the priority sectors, covered by the proposed credit insurance schemesand follow-up and inspection of the end use loans;vi. assisting other primary lending agencies; andvii. maintaining contacts and liaison with Government and quasi-Governmentagencies. RBI has designed common formats to elicit information from all thedesignated Lead Banks on some basic statistical information pertaining to the allotteddistrict(s). In order to monitor the implementation of LBS effectively. as per theguidelines and directions of RBI, each Lead Bank constituted district forum. Lead Banksare expected to enter into a meaningful business with the cornnlercial banks, RRBs, co-operative institutions and relevant developmental departments through an establishedforum called as DCC with the following objectives.a)to evolve methods for exchanging information between banks about intendingborrowers and lending to priority sectors in the districts.b)to identify bankable schemes arnong those furnished by the Govt. and on its ownand work-out suitable schemes to finance them andc)to serve as a clearing house for discussing problems arising out of financingpriority sectors.The DCC has the following functions :a)to examine whether the credit supplied by the cormnercial banks and co-operatives is adequate from the point of view of the borrowers.
  • 17. b)to discuss as to how the small loans to the socially and economically weakersections can be efficiently disbursed.c)to find out the measure for avoiding the danger of multiple or double financing.d)to discuss how the State agencies and banks can help the small scale industries toprepare their schemes to increase the production.e)to evolve methods for ensuring better co-ordination between commercial and co-operative banks in exchanging credit information andf)to assess tht: b-g potentials of the district periodically The DCC was formed at the district level coveringall the 338 districts ininitially. The District Collector or the District Magistrate used to preside over thesemeetings by convention built up by the bankers. There was no Government orderdirecting the district authorities to preside over these meetings. In order to discuss theproblems identified focussed at the DCC, a State level forum was constituted in 1976 atthe instance of Government of India. The State Level Bankers Committee thus cameinto existence at the State for bringing about better co-ordination among the banks bymaking all the banks as members of this committee. Banks having large network ofbank branches and handling a fairly large volume of banking business in the State wasdesignated as convenor of this Committee.Besides, Regional Consultative Committee (RCC) was set-up at eachregion grouping all the contiguous States/Union Territories. The States of Tamil Nadu,Kerala, Karnataka, Andhra Pradesh and Union Territories of Pondicherry and
  • 18. Lakshadweep constitute the Southern Regional Consultative Committee. Through thisforum, dialogue and exchange of ideas are established between the Union FinanceMinister, RBI and Chairman of various public sector banks on the one hand and ChiefMinisters / Finance Ministers of various States and Union Territories on the other hand,for better implementation of banking schemes including the LBS for balanced regionaldevelopment.As at the end of December, 1989 lead districts under LBS have increasedto 444 from 338. SBI and its Associates, all Public Sector Banks and one PrivateSector Bank were allotted lead districts. By March 1999 567 districts have been coveredunder the LBS in the country as shown in Table 5.3. Table 5.3: DISTRICTS ALLOCATED TO COMMERCIALRANKS UNDER LEADBANKS SCHEME - ALL INDIA.Sl.Number of Number of Number ofNo. Name of the Lead BankLead Districts Lead Districts Lead Districtsoriginally in 1989 in 1999Public Sector Banks1. State Bank of India and itsAssociates2. Allahabad Bank3. Andhra Bank4. Bank of Baroda5 . Bank of India6. Bank of Maharashtra7. Canara Bank
  • 19. 8. Central Bank of India9. Corporation Bank10. Dena Bank1 1. Indian Bank12. Indian Overseas Bank13. New Bank of India14. Oriental Bank of Commerce1 5. Punj ab National Bank1 6. Punj ab and Sind Bank17. Syndicate Bank1 8. Union Bank of India19, United Bank of India20. United Commerical Bank21. Vijaya BankSub-TotalPrivate Sector Bank1 . Jammu & Kashmir Bank Ltd2. Bank of RajasthanGrand Total*Since merged with Punjab National Bank.Source: [a] Reserve Bank of India Bulletin, Bombay January 1970,[b] Sfivasan, Priority Sector Lending - A study o f Indian Experience,HimaIayrm Publishing House, 1995, Bombay, pp.34-37.[c] Eyed on Reserve Bank of India Sources, Chennai, 1999. It was found that even with theimplementation of various welfareschemes by the Government and also with the large dispensation of credit by the
  • 20. ~ommercial banks under LBS, majority of the rural population could not cross thepoverty line and were still living a hand to mouth existence. To find out the reasons forthis state of affairs, RBI advised the top Executives of PSB in 1987 to conduct on thespot survey of villages in 88 districts of 21 states. Survey was carried out by the topExecutives themselves. The Report submitted by them revealed the followingdefficiencies:I . even though large credits were dispensed by banks, the dispensation was sporadicand many pockets of the rural area were left uncovered by banks,2. the inflow of credit in rural areas did not show a corresponding increase inproductivity,3, the implementation of various Governlent schemes lacked motivation.5.3.1 Service Area Credit Plan (SACP)The RBI organised a seminar in 1988 in which the top Executives of allthe Public Sector Banks participated and was presided over by the Minister of State forFinance. An Action Plan was evolved in the seminar to remove the deficiencies found inthe lending system of the banks and to have a proper flow of credit for the entire ma1population on an objective and realistic basis. It was decided in the seminar, a cluster ofvillages would be allotted to each bank. The villages allotted would be called theService Area of that particular bank branch, wherein it would be lending exclusively andextensively. The needs of each one of the village people would be looked after and avillage credit plan based on the needs of the people, the resources of the bank would beprepared which would have a direct impact on the lives of the rural poor and would also achieve thegoal of the Government of India namely eradication of rural poverty. Thusthe concept of Service Area Credit Plan (SACP) under I.BS has been evolved.Government of India has approved this and the SACP has become operational from01.04. 1989. The service area concept involves the following five major operational
  • 21. aspects:a)identification and allocation of Service Area for each bank branch;b) survey of villages in the Service Area for assessing the potential for lendingactivities and identification of beneficiaries for assistance:c) Preparation of Credit Plan on an annual basis for the Service Area by eachbranch;d) Co-ordination between credit institutions on the one hand and field leveldevelopment agencies on the other hand for effective implementation of CreditPlans and ;e) System of continuous monitoring of progress in the implementation of the plans.The villages have been allocated to all the commercial banks by acommittee comprising of:i) Lead District Officer of the RBI as leader,ii) Lead Bank Officer as Convenor,iii) Officer from NABARD as member.Under Service Area Approach, the methodology of planning itself hasbeen changed from district level to village level. Previously the ACP was prepared at thedistrict level by the Lead Bank and the bank branches operating were to implement thePlan. Now under Service Area Approach, the planning starts at the grassroot level. Thebranch managers themselves prepare the village plan after undertaking a detailed studyof their command area and taking into account the potential available in the villages for variousactivities. Before preparing the Service Area plan by the branch manager. thePotential Linked Credit Plan (PLCP) prepared by NABARD is also taken into account.After which the village level plans are approved by Block Level Bankers Committee(BLBC) and then the DCP is prepared by Lead Bank. This grassroot level planning
  • 22. enables proper allocation of funds to various activities based on the needs of the villages.This will enable a proper and even growth under all sectors particularly under thepriority sector.5.4 Progress of Banking in the Union Territory of PondicherryThe IIiary4 of Anandaranga Pillai provides some clues about the systemof banking in 18" century Pondicherry. During the French regime, sowcars werethe professional money lenders in the Union Territory of Pondicherry, Some moneylenders used to charge 18 to 36 per cent rate of interest. There was also a practice ofcharging around 100 to 120 per cent of interest per annum by some unscrupulous moneylenders. French Government had setup Ment do I Dioto a bank like pawn ofice in 1827to overcome the practice of charging higher rate of interest by money lenders. TheInstitution had provided credit assistance at an eight per cent rate of interest to theneedy population particularly to small scale agriculturists. The point to be observed hereis that even before the introduction of the concept of PSL in Indian Soil on a preferentialscale, the French Government had realised it 142 years back itself for the need toprovide credit assistance to the small scale agriculturist at eight per cent which is wellbelow the priority sector rate of interest of 10 to 12.5 per cent charged now. The firstand the foremost Commercial bank branch on the modem line of today, namely,ranci cis Cynil Antony (Ed), &d., pp.637-647. Indo-China Bank was set up in Pondicherry in 1875 by aPresidential decree which haddealt all kinds of banking operations. Indian based banks had opened their branches in1948. The first Indian based bank to have opened the bank branch in Pondicherry wasUnited Commercial bank and then the Indian Overseas bank had come up. State Bank ofIndia had set up a pay office in 1954 and a full fledged bank branch in 1955, IndianBank had opened its first branch in Pondicherry in 1958. Thus four Commercial bankswere in operation on the eve of defacto merger of Pondicherry with the Union of India.
  • 23. The Union Territory of Pondicherry has been witnessing a phenomenalgrowth of banking activities since bank nationalisation in 1969, thanks to the growingcommercial activities in this important Indo-French centre. In 1961, there were 4 bankbranches with a deposit of Rs.269 lakhs and an advance of Rs.260 lakhs. The CDR wasas high as 96.65 percentage. In 1969, that is, on the eve of nationalisation of banks, ol~ly12 bank branches were in operation with a deposit of Rs. 552 lakhs and an advance ofRs. 480 lakhs. Since nationalisation, phenomenal banking growth has taken place. ByMarch 1998~, 78 bank branches, that is, 58 in Pondicherry, 13 in Karaikal, 5 in Maheand 2 branches in Yanam are fbnctioning.The progress of the banking seen at the all India level was reflected in theUnion Territory of Pondicherry also. The indicators of progress of banking are alsoshown in Table 5.4.lndian- Bank (Lead Bank), Agenda Notes for 59" State Level Bankers~ o d t t e e , Meeting, Pondicherry, August 1999. L d hePQwE z c It may be seen from the Table 5.4 that the Union Territory of Pondichenjhad got 12 branches only in 1969 and this has gone up to 26 in 1974. 44 in 1979, 59 in1983 and 70 in 1989. The seventies and eighties have brought many bank branches to theUnion Territory, thanks to bank nationalisation. 78 bank branches have come intooperation by March 1998. The amount of deposits rnobilised till March 1998 wasRs.967 crores. The credit advanced for the same period was Rs.347 crores which worksout to a CDR of 35.90 per cent as against the all India average of 53.5 per cent.Pondicherry has emerged as one of the top 100 major centres according to size ofdeposits and credit as of March 1999. As per ranking, it occupies 81th place in depositmobilisation and 88" place in credit availment. Despite all these positive developments.
  • 24. a disturbing trend observed is that the CDR has been declining steadily since 199 1 in thisTerritory. This is detrimental to the economic development of the Union Territory ofPondicherry. Though declining CDR is an all India phenomenon, the trend noticed inthe Union Territory of Pondicherry is more alarming which needs immediate correctivemeasures on the part of commercial banks and RBI. This Territory had witnessed morethan the prescribed flow of priority sector credit throughout eighties and the earlier parto f nineties. The advances towards priority sector has been declining since 1994 due topoor deployment of credit to various segments in Pondicherry economy despite theimplementation of LBS in the Union Territory of Pondicherry as can be seen from thesucceeding chapters.The Banking sector in India has always been one of the most preferred destinationsfor employment. In this decade, this sector has emerged as a sunrise sector in theIndian economy. Banking sector index has grown at a compounded annual rate ofover 51 per cent since the year 2001.The Banking Industry is recruiting in a bigway. In the next five years , banks will have to recruit almost 7.5 lakh people .Now, banks have diversified their activities and getting into new products andservices that include opportunities in credit cards, consumer finance, wealthmanagement, life and general insurance, investment banking, mutual funds,pension fund regulation, stock broking services, custodian services and privateequity etc. Further, most of the leading Indian banks are going global, setting upoffices in foreign countries themselves or through their subsidiaries.The expansion of the banking sector and its convergence with the other financialsectors such as insurance,NBFCs and Capital markets,retirement of the existing
  • 25. employees and financial inclusion have created more number of opportunities in thebanking sector.Infrastructure, Risk Management, Banking and Financial Services, ManagementInformation Systems and Customer Relations Management are a few areas wherespecialization is expected.INTRODUCTIONA bank is an institution that deals in money and its substitutes and provides other financialservices. Banks accept deposits and make loans or make an investment to derive a profit fromthe difference in the interest rates paid and charged, respectively.In India the banks are being segregated in different groups. Each group has their own benefitsand limitations in operating in India. Each has their own dedicated target market. Few of themonly work in rural sector while others in both rural as well as urban. Many even are only cateringin cities. Some are of Indian origin and some are foreign players.India’s economy has been one of the stars of global economics in recent years. It has grown bymore than 9% for three years running. The economy of India is as diverse as it is large, with anumber of major sectors including manufacturing industries, agriculture, textiles and handicrafts,and services. Agriculture is a major component of the Indian economy, as over 66% of theIndian population earns its livelihood from this area. Banking sector is considered as a boomingsector in Indian economy recently. Banking is a vital system for developing economy for thenation.However, Indian banking system and economy has been facing various challenges andproblems which have discussed in other parts of project.INDIAN BANKING SYSTEMWithout a sound and effective banking system in India it cannot have a healthy economy. Thebanking system of India should not only be hassle free but it should be able to meet newchallenges posed by the technology and any other external and internal factors. For the past
  • 26. three decades Indias banking system has several outstanding achievements to its credit. Themost striking is its extensive reach. It is no longer confined to only metropolitans orcosmopolitans in India. In fact, Indian banking system has reached even to the remote cornersof the country.