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Banking: Comparative Analysis Essay

The economic reforms in India started in early nineties, but their outcome is visible now. Major changes took place in the functioning of Banks in India only after liberalization, globalisation and privatisation. It has become very mandatory to study and to make a comparative analysis of services of Public sector Banks and Private Sector banks. Increased competition, new information technologies and thereby declining processing costs, the erosion of product and geographic boundaries, and less restrictive governmental regulations have all played a major role for Public Sector Banks in India to forcefully compete with Private and Foreign Banks. this paper an attempt to analyze how efficiently Public and Private sector banks have been managing NPA. The last decade has seen many positive developments in the Indian banking sector.

The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favourably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation.

Banking in India was defined under Section 5(A) as “any company which transacts banking, business” and the purpose of banking business defined under Section 5(B),”accepting deposits of money from public for the purpose of lending or investing, repayable on demand through cheque/draft or otherwise”. In the process of doing the above-mentioned primary functions, they are also permitted to do other types of business referred to as Utility Services for their customers (Banking Regulation Act, 1949). During Bruisers’ time, three Presidencies’ Banks were opened in Bengal (1809), Bombay (1840) and Madras (1843) with powers to isue Notes.

Thus the quality and quantity of services provided by the Private Sector Banks is much better than that provided by Public Sector Banks. In the coming years, the deposit ratio will be 80% in private banks and 20% in public sector banks which is a reverse of a decade before. Banking is and for the time to come, will remain customer oriented business. If one can satisfy the customers effectively, then customer becomes client. Thus to be successful, the banks should satisfy their customers qualitatively as well as quantitatively. They should .put the customers first because .Customer is the king .for the proper functioning of the Indian Banks today.

BANKING SCENARIO IN INDIAN SYSTEM:

The Indian banking system is significantly different from those prevalent in other countries due to its unique geographic, social and economic characteristics. India has a large population, different cultures in different parts of the country and also disparities in income. Also in India the population spread among rural and urban areas is also skewed in the favour of urban areas. All these features reflect in the size and structure of the Indian banking system. Further in order to fulfil the needs to the government policy it has been subjected to various nationalization schemes at different times. RBI Credit policies form the guidelines for banks in India. Since they had to satisfy the domestic obligations, the banks have so far been confined within the Indian borders. Banking in India originated in the last decades of the 18th century.

The first banks were The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India’s independence, became the State Bank of India. The Reserve Bank of India is the central bank of India and controls the monetary policy.

The institution was established on 1 April 1935 .The main functions of RBI are 1. Monetary Authority: The Reserve Bank of India is the main monetary authority of the country and beside that the central bank acts as the bank of the national and state governments. It formulates, implements and monitors the monetary policy as well as it has to ensure an adequate flow of credit to productive sectors. Its objectives are maintaining price stability and ensuring adequate flow of credit to productive sectors 2. Manager of Exchange Control: The central bank manages to reach the goals of the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. 3. Issuer of Currency: The bank issues and exchanges or destroys currency and coins not fit for circulation.

The Objectives are giving the public adequate supply of currency of good quality and to provide loans to commercial banks to maintain or improve the GDP. The basic objectives of RBI are to issue bank notes, to maintain the currency and credit system of the country to utilize it in its best advantage, and to maintain the reserves 4. Regulator: Central Bank is also responsible for making policy to be followed by the banking system of the country. Around 90% of the banking system is under the government control and the rest are with the private and the foreign banks. The public sector banks can be categorized into a) State Bank Group: It comprises of State Bank of India and its 5 associate banks.

Previously there were 7 associate but after the merger of 2 of them with the parent bank only 5 of them remain. The government of India is the majority stakeholder in the largest bank the country. b) Nationalized Banks: There are 19 nationalized banks in the country. The process of nationalization in 1969 resulted in creation of 14 government owned banks which were followed by the nationalization of 6 more banks. However upon a merger the total number of banks in the country stands at 19 as of today. All the banks are majority owned by the government of India. c) Regional Rural Banks: The regional rural banks were setup to provide low cost financing and credit facilities to rural people. The nationalized banks were required to setup RRBs in partnership with the individual states.

The foreign and private banks form a miniscule part of the Indian banking system which is dominated by the government owned banks. However the superior offering of the private sector banks aided by the growth in the IT has resulted in the population of the country being attracted towards these banks. This has made the public sector banks recognize the threat from these banks and improve on their services. They have given the PSBs stiff competition and this augurs well for the future of the Indian banking system.

HISTORY:

Private-sector banks have been functioning in India since the very beginning of the banking system. Initially, during 1921, the private banks like bank of Bengal, bank of Bombay and bank of Madras were in service, which all together formed Imperial Bank of India. Reserve Bank of India(RBI) came in picture in 1935 and became the centre of every other bank taking away all the responsibilities and functions of Imperial bank. Between 1969 and 1980 there was rapid increase in the number of branches of the private banks. In April 1980, they accounted for nearly 17.5 percent of bank branches in India. In 1980, after 6 more banks were nationalised, about 10 percent of the bank branches were those of private-sector banks. The share of the private bank branches stayed nearly same between 1980 and 2000. Then from the early 1990s, RBI’s liberalization policy came in picture and with this the government gave licences to a few private banks, which came to be known as new private-sector banks. There are two categories of the private-sector banks: “old” and “new”.

The old private-sector banks have been operating since a long time and may be referred to those banks, which are in operation from before 1991 and all those banks that have commenced there business after 1991 are called as new private-sector banks. Housing Development Finance Corporation Limited was the first private bank in India to receive license from RBI as a part of the RBI’s liberalization policy of the banking sector, to set up a bank in the private-sector banks in India. The Central Government entered the banking business with the nationalization of the Imperial Bank Of India in 1955. A 60% stake was taken by the Reserve Bank of India and the new bank was named as the State Bank of India. The seven other state banks became the subsidiaries of the new bank when nationalized on 19 July 1960. The next major nationalization of banks took place in 1969 when the government of India, under prime minister Indira Gandhi, nationalised an additional 14 major banks.

The total deposits in the banks nationalised in 1969 amounted to 50 crores. This move increased the presence of nationalised banks in India, with 84% of the total branches coming under government control. The next round of nationalisation took place in April 1980. The government nationalised six banks. The total deposits of these banks amounted to around 200 crores. This move led to a further increase in the number of branches in the market, increasing to 91% of the total branch network of the country. The objectives behind nationalisation where: * To break the ownership and control of banks by a few business families, * To prevent the concentration of wealth and economic power, * To mobilize savings from masses from all parts of the country, * To cater to the needs of the priority sectors.


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