Sector In India
Emerging Risk In Banking Sector And Risk
Management By Banks
A Bank is a financial intermediary that creates credit by lending money to a borrower, thereby
creating a corresponding deposit on the bank's balance sheet. Lending activities can be
performed either directly or indirectly through capital markets. Due to their importance in the
financial system and influence on national economies, banks are highly regulated in most
countries. Most nations have institutionalized a system known as fractional reserve banking
under which banks hold liquid assets equal to only a portion of their current liabilities. In
addition to other regulations intended to ensure liquidity, banks are generally subject to minimum
capital requirements based on an international set of capital standards, known as the Basel
Banking in its modern sense evolved in the 14th century in the rich cities of Renaissance Italy
but in many ways was a continuation of ideas and concepts of credit and lending that had their
roots in the ancient world. In the history of banking, a number of banking dynasties — notably,
the Medicis, the Fuggers, the Welsers, the Berenbergs and the Rothschilds — have played a
central role over many centuries. The oldest existing retail bank is Monte dei Paschi di Siena,
while the oldest existing merchant bank is Berenberg Bank
According to the Reserve Bank of India (RBI), the banking sector in India is sound, adequately
capitalised and well-regulated. Indian financial and economic conditions are much better than in
many other countries of the world. Credit, market and liquidity risk studies show that Indian
banks are generally resilient and have withstood the global downturn well.
With a sense of optimism slowly creeping in, the banking industry expects that 2015 will bring
better growth prospects. This optimism stems from factors such as the Government working hard
to revitalise the industrial growth in the country and the RBI initiating a number of measures that
would go a long way in helping the banks to restructure. The recent announcements of RBI, it is
felt, are a clear pointer to the future of the restructured domestic banking industry.
According to Banking Encyclopedia, Bank is a financial institution which receives deposits from
the public and lends them for investment purpose i.e., deposits of money and advances of the
Main function of banks, but in the era of globalization banks indulges themselves in many
activities like Insurance, Mutual Fund Business and Investment in Stock Exchanges. These
activities of banking are considered as Para Banking Activities.
“An establishment authorized by a government to accept deposits, pay interest, clear checks,
make loans, act as an intermediary in financial transactions, and provide other financial services
to its customers.” In most common law jurisdictions there is a Bills of Exchange Act that
codifies the law in relation to negotiable instruments, including cheques, and this Act contains a
statutory definition of the term banker: banker includes a body of persons, whether incorporated
or not, who carry on the business of banking' (Section 2, Interpretation). Although this definition
seems circular, it is actually functional, because it ensures that the legal basis for bank
transactions such as cheques does not depend on how the bank is structured or regulated.
Banking begins with the first prototype banks of merchants of the ancient world, which made
grain loans to farmers and traders who carried goods between cities. This began around 2000 BC
in Assyria and Babylonia. Later, in ancient Greece and during the Roman Empire, lenders based
in temples made loans and added two important innovations: they accepted deposits and changed
money. Archaeology from this period in ancient China and India also shows evidence of money
The origins of modern banking can be traced to medieval and early Renaissance Italy, to the rich
cities in the north like Florence, Lucca, Siena, Venice and Genoa. The Bardi and Peruzzi families
dominated banking in 14th-century Florence, establishing branches in many other parts of
Europe. One of the most famous Italian banks was the Medici Bank, set up by Giovanni di Bicci
de' Medici in 1397.The earliest known state deposit bank, Banco di San Giorgio (Bank of St.
George), was founded in 1407 at Genoa, Italy.
Modern banking practices, including fractional reserve banking and the issue of banknotes,
emerged in the 17th and 18th centuries. Merchants started to store their gold with the goldsmiths
of London, who possessed private vaults, and charged a fee for that service. In exchange for each
deposit of precious metal, the goldsmiths issued receipts certifying the quantity and purity of the
metal they held as a bailee; these receipts could not be assigned, only the original depositor could
collect the stored goods.
Gradually the goldsmiths began to lend the money out on behalf of the depositor, which led to
the development of modern banking practices; promissory notes (which evolved into banknotes)
were issued for money deposited as a loan to the goldsmith.The goldsmith paid interest on these
deposits. Since the promissory notes were payable on demand, and the advances (loans) to the
goldsmith's customers were repayable over a longer time period, this was an early form of
fractional reserve banking. The promissory notes developed into an assignable instrument which
could circulate as a safe and convenient form of money backed by the goldsmith's promise to
pay,allowing goldsmiths to advance loans with little risk of default.Thus, the goldsmiths of
London became the forerunners of banking by creating new money based on credit.
The Bank of England was the first to begin the permanent issue of banknotes, in 1695. The Royal
Bank of Scotland established the first overdraft facility in 1728. By the beginning of the 19th
century a bankers' clearing house was established in London to allow multiple banks to clear
transactions. The Rothschilds pioneered international finance on a large scale, financing the
purchase of the Suez canal for the British government.
TYPES OF BANKS
Bank’s activities can be divided into:
Retail Banking, dealing directly with individuals and small businesses;
Business Banking, providing services to mid-market business;
Corporate Banking, directed at large business entities;
Private Banking, providing wealth management services to high-net-worth individuals
Investment Banking, relating to activities on the financial markets.
Most banks are profit-making, private enterprises. However, some are owned by government, or
are non-profit organizations.
The term used for a normal bank to distinguish it from an investment bank. After the Great
Depression, the U.S. Congress required that banks only engage in banking activities, whereas
investment banks were limited to capital market activities. Since the two no longer have to be
under separate ownership, some use the term "commercial bank" to refer to a bank or a division
of a bank that mostly deals with deposits and loans from corporations or large businesses.
Locally operated financial institutions that empower employees to make local decisions to serve
their customers and the partners.
Community Development Banks
Regulated banks that provide financial services and credit to under-served markets or
Land Development Banks
The special banks providing long-term loans are called land development banks (LDB). The
history of LDB is quite old. The first LDB was started at Jhang in Punjab in 1920. The main
objective of the LDBs are to promote the development of land, agriculture and increase the
agricultural production. The LDBs provide long-term finance to members directly through their
Credit Unions Or Co-operative Banks
Not-For-Profit cooperatives owned by the depositors and often offering rates more favorable
than for-profit banks. Typically, membership is restricted to employees of a particular company,
residents of a defined area, members of a certain union or religious organizations, and their
Postal Savings Banks
Savings banks associated with national postal systems.
Banks that manage the assets of high-net-worth individuals. Historically a minimum of USD 1
million was required to open an account, however, over the last years many private banks have
lowered their entry hurdles to USD 250,000 for private investors.
Banks located in jurisdictions with low taxation and regulation. Many offshore banks are
essentially private banks.
In Europe, savings banks took their roots in the 19th or sometimes even in the 18th century.
Their original objective was to provide easily accessible savings products to all strata of the
population. In some countries, savings banks were created on public initiative; in others, socially
committed individuals created foundations to put in place the necessary infrastructure.
Nowadays, European savings banks have kept their focus on retail banking: payments, savings
products, credits and insurances for individuals or small and medium-sized enterprises. Apart
from this retail focus, they also differ from commercial banks by their broadly decentralized
distribution network, providing local and regional outreach—and by their socially responsible
approach to business and society.
Building Societies And Landesbanks
Institutions that conduct retail banking.
Banks that prioritize the transparency of all operations and make only what they consider to be
socially responsible investments.
A Direct Or Internet-Only Bank is a banking operation without any physical bank
branches, conceived and implemented wholly with networked computers.
TYPES OF INVESTMENT BANKS
Investment banks "Underwrite" (Guarantee The Sale Of) stock and bond issues, trade for their
own accounts, make markets, provide investment management, and advise corporations on
capital market activities such as mergers and acquisitions.
Merchant banks were traditionally banks which engaged in trade finance. The modern
definition, however, refers to banks which provide capital to firms in the form of shares rather
than loans. Unlike venture caps, they tend not to invest in new companies.
Universal banks, more commonly known as financial services companies, engage in several of
these activities. These big banks are very diversified groups that, among other services, also
distribute insurance— hence the term bancassurance, a portmanteau word combining "banque or
bank" and "assurance", signifying that both banking and insurance are provided by the same
OTHER TYPES OF BANKS
Central Banks are normally government-owned and charged with quasi-regulatory
responsibilities, such as supervising commercial banks, or controlling the cash interest rate. They
generally provide liquidity to the banking system and act as the lender of last resort in event of a
Islamic Banks adhere to the concepts of Islamic law. This form of banking revolves around
several well-established principles based on Islamic canons. All banking activities must avoid
interest, a concept that is forbidden in Islam. Instead, the bank earns profit (markup) and fees on
the financing facilities that it extends to customers.
FUNCTIONS/ROLE OF BANK
These functions of banks are explained in following paragraphs of this article.
PRIMARY FUNCTIONS OF BANKS
The primary functions of a bank are also known as banking functions. They are the main
functions of a bank.
These primary functions of banks are explained below.
1. ACCEPTING DEPOSITS
The Bank collects deposits from the public. These deposits can be of different types, such
as :A. Saving Deposits
B. Fixed Deposits
C. Current Deposits
D. Recurring Deposits
A. Saving Deposits
This type of deposits encourages saving habit among the public. The rate of interest
is low. At present it is about 4% p.a. Withdrawals of deposits are allowed subject to certain
restrictions. This account is suitable to salary and wage earners. This account can be opened
in single name or in joint names.
B. Fixed Deposits
Lump sum amount is deposited at one time for a specific period. Higher rate of interest is
paid, which varies with the period of deposit. Withdrawals are not allowed before the expiry of
the period. Those who have surplus funds go for fixed deposit.
C. Current Deposits
This type of account is operated by businessmen. Withdrawals are freely allowed. No
interest is paid. In fact, there are service charges. The account holders can get the benefit of
D. Recurring Deposits
This type of account is operated by salaried persons and petty traders. A certain sum of
money is periodically deposited into the bank. Withdrawals are permitted only after the expiry of
certain period. A higher rate of interest is paid.
2. GRANTING OF LOANS AND ADVANCES
The bank advances loans to the business community and other members of the public.
The rate charged is higher than what it pays on deposits. The difference in the interest rates
(lending rate and the deposit rate) is its profit.
The types of bank loans and advances are : Overdraft
Discounting of Bill of Exchange
This type of advances are given to current account holders. No separate account is
maintained. All entries are made in the current account. A certain amount is sanctioned as
overdraft which can be withdrawn within a certain period of time say three months or so. Interest
is charged on actual amount withdrawn. An overdraft facility is granted against a collateral
security. It is sanctioned to businessman and firms.
The client is allowed cash credit upto a specific limit fixed in advance. It can be given to
current account holders as well as to others who do not have an account with bank. Separate cash
credit account is maintained. Interest is charged on the amount withdrawn in excess of limit. The
cash credit is given against the security of tangible assets and / or guarantees. The advance is
given for a longer period and a larger amount of loan is sanctioned than that of overdraft.
It is normally for short term say a period of one year or medium term say a period of five
years. Now-a-days, banks do lend money for long term. Repayment of money can be in the form
of installments spread over a period of time or in a lumpsum amount. Interest is charged on the
actual amount sanctioned, whether withdrawn or not. The rate of interest may be slightly lower
than what is charged on overdrafts and cash credits. Loans are normally secured against tangible
assets of the company.
Discounting of Bill of Exchange
The bank can advance money by discounting or by purchasing bills of exchange both
domestic and foreign bills. The bank pays the bill amount to the drawer or the beneficiary of the
bill by deducting usual discount charges. On maturity, the bill is presented to the drawee or
acceptor of the bill and the amount is collected.
SECONDARY FUNCTIONS OF BANKS
The bank performs a number of secondary functions, also called as non-banking
These important secondary functions of banks are explained below.
1. AGENCY FUNCTIONS
The bank acts as an agent of its customers. The bank performs a number of agency functions
which includes :
Transfer of Funds
Collection of Cheques
Other Agency Functions
A. Transfer of Funds
The bank transfer funds from one branch to another or from one place to another.
B. Collection of Cheques
The bank collects the money of the cheques through clearing section of its customers. The
bank also collects money of the bills of exchange.
C. Periodic Payments
On standing instructions of the client, the bank makes periodic payments in respect of
electricity bills, rent, etc.
D. Portfolio Management
The banks also undertakes to purchase and sell the shares and debentures on behalf of the
clients and accordingly debits or credits the account. This facility is called portfolio
E. Periodic Collections
The bank collects salary, pension, dividend and such other periodic collections on behalf
of the client.
F. Other Agency Functions
They act as trustees, executors, advisers and administrators on behalf of its clients. They
act as representatives of clients to deal with other banks and institutions.
2. GENERAL UTILITY FUNCTIONS
The Bank also performs general utility functions, such as :o Issue of Drafts, Letter of Credits, etc.
o Locker Facility
o Underwriting of Shares
o Dealing in Foreign Exchange
o Project Reports
o Social Welfare Programmes
o Other Utility Functions
A. Issue of Drafts and Letter of Credits
Banks issue drafts for transferring money from one place to another. It also issues letter of
credit, especially in case of, import trade. It also issues travellers' cheques.
B. Locker Facility
The bank provides a locker facility for the safe custody of valuable documents, gold
ornaments and other valuables.
C. Underwriting of Shares
The bank underwrites shares and debentures through its merchant banking division.
D. Dealing in Foreign Exchange
The commercial banks are allowed by RBI to deal in foreign exchange.
E. Project Reports
The bank may also undertake to prepare project reports on behalf of its clients.
F. Social Welfare Programmes
It undertakes social welfare programmes, such as adult literacy programmes, public
welfare campaigns, etc.
G. Other Utility Functions
It acts as a referee to financial standing of customers. It collects creditworthiness
information about clients of its customers. It provides market information to its customers, etc. It
provides travellers' cheque facility.
IMPORTANCE OF BANKING SECTOR IN INDIA
ADVANTAGE OF BANKING SECTOR IN INDIA
India is the second largest economy in the world. Development in areas of infrastructure and
resources in recent years has enabled India to become a strong economic force. There is an
increase in the number of candidates who are passing out of different colleges around the world
in search of rewarding career opportunities. More and more skilled candidates may face stiff
competitions with regard to the various career opportunities.
Banking Sector is one among the sectors which offer in ample career opportunities for freshers
all around. The type of career that it offers is that of a secured profession with all kind of
lucrative benefits. With the expansion of banking activities towards the rural and other suburban areas the demand for this career has been on a high.
We can see generally an inclination towards banking jobs. Even the candidates are opting for
higher studies they may still try in for a banking sector job. One predominant factor may be the
security feature which is being associated with it. The demand for government jobs have been
increasing on a large scale even when MNCs and other private firms are also chipping in to the
general employment scenario.
The demand for private job may be high but at the same time, the government jobs are being
more attractive. A situation has come in where in the people who are working in private sectors
are trying in for the various kinds of bank jobs by finding in time for going for training or
coaching classes while working also. The general picture is of people who are opting for
Professional courses too are trying for banking jobs as in more vacancies pop in their specific
AN OVERVIEW OF THE BANKING JOBS IN INDIA
The banking industry is emerging in a big way Nowadays, banking means a lot apart from the
business perspective. It aims at delivering or meeting not only the financial needs of the
customers that too both business and personal. Investment opportunities are tremendous
nowadays with the advent of various ways of investment. Hence banks should help/point out
new and correct methods for investments to the customers which is available in the market.
There are various areas where one can work in banking sector. The candidates can work in as a
Clerk, Probationary Officer, Customer service Executive, managers, Front desk executive,
Specialist Officer , Product marketing area , Sales executive , etc. The key for survival in this
industry is the service quality.
IMPORTANCE OF BANKING AS A CAREER
Banking as career is very challenging in nature. One has the opportunity to move around and
mingle with different people following different culture and traditions. The number of banks
functioning in India is in large number .With more private players coming in to this sector such
as ICICI, HDFC, Axis etc the level and the nature of opportunities in this sector has also be
going up. Every banks are on the look out of more workforce in various sections.
Banks being both in public sector and private sector the number of vacancies have also gone up.
The banks are offering variety of benefits to its employee’s. With the 6th pay commission, the
pay structure has also been revised in all the major public sector banks too. Another aspect is that
one can gain a status in this job as well social reputation. Due to these reasons, many people
view this career as one of the most promising one.
RECRUITMENT ASPECTS IN BANKING JOBS
As already being observed that there are growing opportunities in banking sector .Most of the
banks are nationalized apart from some other private players in the industry. A banking job is just
like any government career because of the steady flow of income along with other retirement
benefits and allowances . Hence the banking career as such is very attractive.
Over the years, the banking scenario it self is booming. The general recruitment criteria’s is
getting tougher day by day. The selection criteria’s especially in case of public sector banks
involves many stages. Every candidate who is aspires to be a bank employee should undergo the
written test conducted by the authority competent to get selection. The test may cover in all
major areas such as Logical reasoning, quantitative aptitude, General awareness, Marketing and
computer aptitude etc. Only those who have the capacity in clearing the preliminary stage of test
are forwarded to the next level. Personal interview is also one area which needs in careful
The general eligibility for appearing in these exams may be a Graduate level. Again for specialist
positions it may require additional qualifications too. The government bank jobs are now also
open to undergraduates too again it depends on the nature of opening
PROMOTION OF INTERNATIONAL TRADE
The global trade finance market historically was considered liquid and well-functioning and
accordingly did not attract much attention from policymakers. More recently, however, the sector
has experienced periods of stress, most notably after the Lehman bankruptcy and also in late
2011, when funding strains at European banks raised concerns about possible disruptions. The
sector also appears to be undergoing incipient structural change – including the entry of new
market participants and efforts to develop new modalities that minimise bank capital and balance
sheet usage. At the same time, recurrent data gaps have made it difficult to assess the extent and
impact of recent dislocations, and to track and evaluate the importance of current market
dynamics. To better gauge these issues, in November 2012 the Committee on the Global
Financial System (CGFS) established a Study Group, chaired by John Clark (Federal Reserve
Bank of New York). The Group was charged to improve central banks’ understanding of the
structure and functioning of the trade finance market, gauge how it has been evolving in recent
years, explore how central banks can cooperate in better tracking trade finance developments,
and assess structural change in trade finance markets and its implications for financial
stability.This report documents the Group’s findings, which are based on information from a
variety of sources, including country-specific data submitted by Group members. Members also
reviewed the relevant literature and undertook their own research, using the data set compiled by
the Group, which has not been previously analysed in the literature. Members coordinated and
exchanged views through conference calls and physical meetings, and conducted outreach to
experts in the private and official trade finance community. The report is organised as follows.
Section 2 discusses the role of banks in international trade, followed by a description of the
available trade finance data and their sources (Section 3). Section 4 uses this information to
estimate the overall size of the trade finance market and assess recent trends, followed by a
discussion in Section 5 of the potential impact of trade finance on the real economy and financial
stability. Section 6, taking a forward-looking perspective, considers attempts to involve non-bank
investors in trade finance markets. The final section discusses policy implications.
THE ROLE OF BANKS IN SUPPORTING INTERNATIONAL TRADE
What is trade finance? Global and local banks support international trade through a wide range
of products that help their customers manage their international payments and associated risks,
and provide needed working capital. The term “trade finance” is generally reserved for bank
products that are specifically linked to underlying international trade transactions (exports or
imports). As such, a working capital loan not specifically tied to trade is generally not included in
this definition. Trade finance products typically carry short-term maturities, though trade in
capital goods may be supported by longer-term credits. The focus of this report is on short-term
trade finance, both because it funds a much larger volume of trade because of its interactions
with bank funding conditions. One of the most common and standardised forms of bankintermediated trade finance is a letter of credit (L/C). L/Cs reduce payment risk by providing a
framework under which a bank makes (or guarantees) the payment to an exporter on behalf of an
importer once delivery of goods is confirmed through the presentation of the appropriate
documents. For the most part, L/Cs represent off-balance sheet commitments, though they may
at times be associated with an extension of credit. This can occur, for example, if an import L/C
is structured to allow the importer a period of time (Known As “Usance”) before repaying the
bank for the payment it made on the importer’s behalf. Banks may also help meet working
capital needs by providing trade finance loans to exporters or importers. In this case, the loan
documentation is linked either to an L/C or to other forms of documentation related to the
underlying trade transaction. Currently, the instrumentation of trade finance is undergoing a
period of innovation. For example, the industry recently launched the “bank payment obligation”
– a payment method that offers a similar level of payment security to that of L/Cs, but without
banks physically handling documentary evidence. “Supply chain finance” is another growing
area of banks’ trade finance activities, where banks automate documentary processing across
entire supply chains, often linked to providing credit (eg through receivables discounting).Trade
finance versus trade credit. The principal alternative to bank trade finance is inter-firm trade
credit between importers and exporters, which is commonly referred to as trade credit. This
includes open account transactions, where goods are shipped in advance of payment, and cashin-advance transactions, where payment is made before shipment. Inter-firm trade credit entails
lower fees and more flexibility than trade finance, but leaves firms bearing more payment risk,
and potentially a greater need for working capital. Hence, the reliance on inter-firm trade credit is
more likely among firms that have well established commercial relations, form part of the same
multinational corporation and/or are in jurisdictions that have reliable legal frameworks for
collection of receivables. Firms’ ability to extend trade credit is supported by possibilities to
discount their receivables, eg via factoring, and the availability of financing from banks and
capital markets not directly tied to trade transactions. Firms can also mitigate payment risk by
purchasing trade credit insurance.details about trade finance, trade credit and the role of trade
1. The annual flow of medium to long term trade finance exposures tracked by Dealogic
2. In the order of US$ 175 billion, in contrast to the flow in short term markets, estimated in this
report to be between US$ 6.5-8 trillion in 2011.
3. The industry sometimes refers to new trade finance methods, such as supply chain finance, as
“open account trade finance”. Traditionally, open account trade credit has been associated with
inter-firm financing of trade (trade credit), and the term is used in this sense throughout this
4.Trade credit insurance is also used by banks to hedge some of their payment risks. Information
on the volume of underwritten trade credit insurance is available from the Berne Union. These
data show that in 2011 and 2012 about $1.7 trillion in new business was covered by guarantees
PRODUCT AND SERVICES OFFERED BY BANKS IN INDI
BROAD CLASSIFICATION OF PRODUCTS OFFERED BY BANKS
The different products in a bank can be broadly classified into:
Retail Banking and Trade finance operations are conducted at the branch level while the
wholesale banking operations, which cover treasury operations, are at the head office or a
Loans, Cash Credit and Overdraft
Negotiating for Loans and advances
Book-Keeping (Maintaining All Accounting Records)
Receiving all kinds of bonds valuable for safe keeping
Issuing and confirming of letter of credit.
Drawing, accepting, discounting, buying, selling, collecting of bills of exchange,
promissory notes, drafts, bill of lading and other securities.
Buying and selling of bullion, Foreign exchange.
Acquiring, holding, underwriting and dealing in shares, debentures, etc.
Purchasing and selling of bonds and securities on behalf of constituents.
The banks can also act as an agent of the Government or local authority. They insure, guarantee,
underwrite, participate in managing and carrying out issue of shares, debentures, etc.
Apart from the above-mentioned functions of the bank, the bank provides a whole lot of other
services like investment counseling for individuals, short-term funds management and portfolio
management for individuals and companies. It undertakes the inward and outward remittances
with reference to foreign exchange and collection of varied types for the Government.
COMMON BANKING PRODUCTS AVAILABLE
Some of common available banking products are explained below:
1. Credit Card
Credit Card is “post paid” or “pay later” card that draws from a credit line-money made
available by the card issuer (bank) and gives one a grace period to pay. If the amount is not paid
full by the end of the period, one is charged interest. A credit card is nothing but a very small
card containing a means of identification, such as a signature and a small photo. It authorizes the
holder to change goods or services to his account, on which he is billed. The bank receives the
bills from the merchants and pays on behalf of the card holder. These bills are assembled in the
bank and the amount is paid to the bank by the card holder totally or by installments. The bank
charges the customer a small amount for these services. The card holder need not have to carry
money/cash with him when he travels or goes for purchasing. Credit cards have found wide
spread acceptance in the ‘metros’ and big cities. Credit cards are joining popularity for online
payments. The major players in the Credit Card market are the foreign banks and some big
public sector banks like SBI and Bank of Baroda. India at present has about 10 million credit
cards in circulation.
2. Debit Cards
Debit Card is a “prepaid” or “pay now” card with some stored value. Debit Cards quickly debit
or subtract money from one’s savings account, or if one were taking out cash. Every time a
person uses the card, the merchant who in turn can get the money transferred to his account from
the bank of the buyers, by debiting an exact amount of purchase from the card. To get a debit
card along with a Personal Identification Number (PIN). When he makes a purchase, he enters
this number on the shop’s PIN pad. When the card is swiped through the electronic terminal, it
dials the acquiring bank system – either Master Card or Visa that validates the PIN and finds out
from the issuing bank whether to accept or decline the transaction. The customer never
overspread because the amount spent is debited immediately from the customers account. So, for
the debit card to work, one must already have the money in the account to cover the transaction.
There is no grace period for a debit card purchase. Some debit cards have monthly or per
transaction fees. Debit Card holder need not carry a bulky checkbook or large sums of cash when
he/she goes at for shopping. This is a fast and easy way of payment one can get debit card
facility as debit cards use one’s own money at the time of sale, so they are often easier than
credit cards to obtain. The major limitation of Debit Card is that currently only some shops in
urban areas accepts it. Also, a person can’t operate it in case the telephone lines are down.
3.Automated Teller Machine
The introduction of ATM’s has given the customers the facility of round the clock banking. The
ATM’s are used by banks for making the customers dealing easier. ATM card is a device that
allows customer who has an ATM card to perform routine banking transaction at any time
without interacting with human teller. It provides exchange services. This service helps the
customer to withdraw money even when the banks ate closed. This can be done by inserting the
card in the ATM and entering the Personal Identification Number and secret Password. ATM’s
are currently becoming popular in India that enables the customer to withdraw their money 24
hours a day and 365 days. It provides the customers with the ability to withdraw or deposit
funds, check account balances, transfer funds and check statement information. The advantages
of ATM’s are many. It increases existing business and generates new business. It allows the
To transfer money to and from accounts.
To view account information.
To order cash.
To receive cash.
Advantages of ATM’s
To the Customers
ATM’s provide 24 hrs., 7 days and 365 days a year service.
Service is quick and efficient
Privacy in transaction
Wider flexibility in place and time of withdrawals.
The transaction is completely secure – you need to key in Personal Identification Number
(Unique number for every customer).
Alternative to extend banking hours.
Crowding at bank counters considerably reduced.
Alternative to new branches and to reduce operating expenses.
Relieves bank employees to focus an more analytical and innovative work.
Increased market penetration.
ATM’s can be installed anywhere like Airports, Railway Stations, Petrol Pumps, Big Business
arcades, markets, etc. Hence, it gives easy access to the customers, for obtaining cash. The ATM
services provided first by the foreign banks like Citibank, Grind lays bank and now by many
private and public sector banks in India like ICICI Bank, HDFC Bank, SBI, UTI Bank etc. The
ICICI has launched ATM Services to its customers in all the Metropolitan Cities in India. By the
end of 1990 Indian Private Banks and public sector banks have come up with their own ATM
Network in the form of “SWADHAN”. Over the past year upto 44 banks in Mumbai, Vashi and
Thane, have became a part of “SWADHAN” a system of shared payments networks, introduced
by the Indian Bank Association (IBA).
The E-cheques consists five primary facts. They are the consumers, the merchant, consumer’s
bank the merchant’s bank and the e-mint and the clearing process. This cheaqing system uses the
network services to issue and process payment that emulates real world chaquing. The payer
issue a digital cheaques to the payee ant the entire transactions are done through internet.
Electronic version of cheaques are issued, received and processed. A typical electronic cheque
transaction takes place in the following manner:
The customer accesses the merchant server and the merchant server presents its goods to
The consumer selects the goods and purchases them by sending an e-cheque to the
The merchant validates the e-cheque with its bank for payment authorization.
The merchant electronically forwards the e-cheque to its bank.
The merchant’s bank forwards the e-cheque to the clearing house for cashing.
The clearing house jointly works with the consumer’s bank clears the cheque and
transfers the money to the merchant’s banks.
The merchant’s bank updates the merchant’s account.
The consumer’s bank updates the consumer’s account with the withdrawal information.
The e-chequing is a great boon to big corporate as well as small retailers. Most major banks
accept e-cheques. Thus this system offers secure means of collecting payments, transferring
value and managing cash flows.
5.Electronic Funds Transfer (EFT)
Many modern banks have computerized their cheque handling process with computer networks
and other electronic equipment’s. These banks are dispensing with the use of paper cheques. The
system called electronic fund transfer (EFT) automatically transfers money from one account to
another. This system facilitates speedier transfer of funds electronically from any branch to any
other branch. In this system the sender and the receiver of funds may be located in different cities
and may even bank with different banks. Funds transfer within the same city is also permitted.
The scheme has been in operation since February 7, 1996, in India. The other important type of
facility in the EFT system is automated clearing houses. These are the computer centers that
handle the bills meant for deposits and the bills meant for payment. In big companies pay is not
disbursed by issued cheques or issuing cash. The payment office directs the computer to credit an
employee’s account with the person’s pay.
Telebanking refers to banking on phone services.. a customer can access information about
his/her account through a telephone call and by giving the coded Personal Identification Number
(PIN) to the bank. Telebanking is extensively user friendly and effective in nature.
To get a particular work done through the bank, the users may leave his instructions in
the form of message with bank.
Facility to stop payment on request. One can easily know about the cheque status.
Information on the current interest rates.
Information with regard to foreign exchange rates.
Request for a DD or pay order.
DeMat Account related services.
And Other Similar Services.
7. Mobile Banking
A new revolution in the realm of e-banking is the emergence of mobile banking. On-line banking
is now moving to the mobile world, giving everybody with a mobile phone access to real-time
banking services, regardless of their location. But there is much more to mobile banking from
just on-lie banking. It provides a new way to pick up information and interact with the banks to
carry out the relevant banking business. The potential of mobile banking is limitless and is
expected to be a big success. Booking and paying for travel and even tickets is also expected to
be a growth area. According to this system, customer can access account details on mobile using
the Short Messaging System (SMS) technology where select data is pushed to the mobile device.
The wireless application protocol (WAP) technology, which will allow user to surf the net on
their mobiles to access anything and everything. This is a very flexible way of transacting
banking business. Already ICICI and HDFC banks have tied up cellular service provides such as
Airtel, Orange, Sky Cell, etc. in Delhi and Mumbai to offer these mobile banking services to
8. Internet Banking
Internet banking involves use of internet for delivery of banking products and services. With
internet banking is now no longer confirmed to the branches where one has to approach the
branch in person, to withdraw cash or deposits a cheque or request a statement of accounts. In
internet banking, any inquiry or transaction is processed online without any reference to the
branch (anywhere banking) at any time. The Internet Banking now is more of a normal rather
than an exception due to the fact that it is the cheapest way of providing banking services. As
indicated by McKinsey Quarterly research, presently traditional banking costs the banks, more
than a dollar per person, ATM banking costs 27 cents and internet banking costs below 4 cents
approximately. ICICI bank was the first one to offer Internet Banking in India.
BENEFITS OF INTERNET BANKING
Reduce the transaction costs of offering several banking services and diminishes the
need for longer numbers of expensive brick and mortar branches and staff.
Increase convenience for customers, since they can conduct many banking
transaction 24 hours a day.
Increase customer loyalty.
Improve customer access.
Attract new customers.
Easy online application for all accounts, including personal loans and mortgages
FINANCIAL TRANSACTION ON THE INTERNET
Companies are developing electronic replicas of all existing payment system: cash, cheque,
credit cards and coins.
Utility companies, loans payments, and other businesses use on automatic payment system with
bills paid through direct withdrawal from a bank account.
Earnings (or Government payments) automatically deposited into bank accounts, saving time,
effort and money.
Stored Value Cards
Prepaid cards for telephone service, transit fares, highway tolls, laundry service, library fees and
Point Of Sale Transactions
Acceptance of ATM/Cheque at retail stores and restaurants for payment of goods and services.
This system has made functioning of the stock Market very smooth and efficient.
It refers to banking through online services. Banks with web site “Cyber” branches allowed
customers to check balances, pay bills, transfer funds, and apply for loans on the Internet.
Demat is short for de-materialisation of shares. In short, Demat is a process where at the
customer’s request the physical stock is converted into electronic entries in the depository
system. In January 1998 SEBI (Securities and Exchange Board of India) initiated DEMAT
ACCOUNT System to regulate and to improve stock investing. As on date, to trade on shares it
has become compulsory to have a share demat account and all trades take place through demat.
TYPES OF LOAN OFFERED BY BANKS IN INDIA
Currently in India we have different types of loans available ranging from personal loans
to marriage loans. But when to use which loan is a smart way of managing your money. Hence
first let us look at different type of loans available.
A secured loan is a loan in which the borrower pledges some asset (e.g. a car or property) as
collateral. A mortgage loan is a very common type of money, used by many individuals to
purchase things. In this arrangement, the money is used to purchase the property. The financial
institution, however, is given security — a lien on the title to the house — until the mortgage is
paid off in full. If the borrower defaults on the loan, the bank would have the legal right to
repossess the house and sell it, to recover sums owing to it. In some instances, a loan taken out to
purchase a new or used car may be secured by the car, in much the same way as a mortgage is
secured by housing. The duration of the loan period is considerably shorter — often
corresponding to the useful life of the car. There are two types of auto loans, direct and indirect.
A direct auto loan is where a bank gives the loan directly to a consumer. An indirect auto loan is
where a car dealership acts as an intermediary between the bank or financial institution and the
Unsecured loans are monetary loans that are not secured against the borrower's assets. These
may be available from financial institutions under many different guises or marketing packages:
Credit Card Debt
Credit Facilities Or Lines Of Credit
Corporate Bonds (May Be Secured Or Unsecured)
The interest rates applicable to these different forms may vary depending on the lender and the
borrower. These may or may not be regulated by law. In the United Kingdom, when applied to
individuals, these may come under the Consumer Credit Act 1974.
Interest rates on unsecured loans are nearly always higher than for secured loans, because an
unsecured lender's options for recourse against the borrower in the event of default are severely
limited. An unsecured lender must sue the borrower, obtain a money judgment for breach of
contract, and then pursue execution of the judgment against the borrower's unencumbered assets
(that is, the ones not already pledged to secured lenders). In insolvency proceedings, secured
lenders traditionally have priority over unsecured lenders when a court divides up the borrower's
assets. Thus, a higher interest rate reflects the additional risk that in the event of insolvency, the
debt may be uncollectible.
Currently in India we have different types of loans available ranging from personal loans to
marriage loans. But when to use which loan is a smart way of managing your money. Hence first
let us look at different type of loans available.
1. Home Loan
Home loan as name suggest is the loan against buying property. Every individual currently have
dreams to have their own home. To make affordable best option is home loan. Again their are
sub-categories of home loans which are as below.
Home Loan For Residents
Loans For Repairs And Extension
Land Purchase Loan
Loan for Earnest Money Deposits (EMD)
Reverse Mortgage Loans
Loan Against Property
You may also find different variant of home loans other than above. But I listed basic type of
2. Personal Loan
It is the loan granted to fulfill your expenses which ranges from buying some expensive
electronic gadgets to booking your air tickets :)Yes people used to use this facility for anything
they can. They forget that usually rate of interest on such loans will be higher than other types of
loans. But still to have something in advance end up them to borrower of such type of loans.
Here we may find two types of loans
Secured Loans-Where you provide some collateral as a safety against loans.
Unsecured Loans-In such type of loans borrower collateral not required.
3. Car Loan or Vehicle Loan
This is usually used to meet your financial requirement when one is planning to have his dream
car or bike. It is usually a secured loan where collateral is your vehicle and in case of default
lender may recover it by taking back your vehicle. But some lenders offer unsecured loans
where your credit score matters more.
4. Education Loan
This is actually a handy tool for parents who not planned well for their kid’s higher education.
For a detailed view on this visit my earlier post “Know all about Education Loan features“.
5. Gold Loan
This was one of the easiest and fastest way of loan when gold rate was at it’s peak. But currently
lot of lenders may not feel it better collateral due to falling in gold price, especially gold loan
companies. Recently RBI banned any gold loans against gold ETFs and gold mutual funds.
Eventhough it forms easiest and fastest way of getting loan but better to look for risks involved
in it, especially when you are dealing with NBFCs.
6. Loan Against Insurance Policies
You can use your insurance investment as either collateral or take loan from insurer itself if that
policy is eligible for loan. Usually loans will be available after 3 years of policy period. You will
get loan easily on your policy from insurer. But other method to take loan is to pledge your
policy document with banks and take loan on that. LIC will offer you loan on your policy with
the interest rate of 10%, which I think competitive pricing compare to other type of loans.
7. Loan Against Bank FDs
This is one form of loan where your collateral is your bank FD itself. Suppose you have bank FD
of around Rs.10,00,000 then you are usually eligible to get loan upto Rs.8,00,000. But interest
rate will 1-2% higher than your FD rate. But still this form of loan is also fastest and best way.
8. Loan From PPF Or EPF
You can avail loan from PPF when one satisfies certain conditions. For detailed view on the
same visit my old post “PPF-Loan and Withdrawal“. You can avail loan from EPF too. But you
can avail loan from EPF only for special purposes like purchase of plot, medical treatment,
education or marriage of children, construction or purchase of house, re-payment of home loan,
renovation of home or pre-retirement. But all are not eligible to take loans. Their are certain
conditions like minimum years of completion, age or proof you need to produce. So it seems bit
9. Loan Against Shares Or Mutual Funds
Few lenders offer loan against your investment value of shares or mutual funds. But you will not
get more value from this. Reason is, both the investments (if mutual fund is of equity oriented)
then fluctuation in values will be high. Hence to protect their loan amount usually lenders offer
10. Loan From Unrecognized Sector
This is one of the easiest but costliest way of fulfilling your financial dream. Usually interest rate
will be in the range of 20%-30% but you can get it immediately. Such type of loans are useful
who are running out of time and not have any source also to fund their financial requirements.
But looking at this option is costly affair. Hence it is highly advisable to avoid such funding.
GROWTH OF BANKINS SECTOR IN LAST DECADE
India is poised to become the worlds fourth largest economy in the span of twodecades.
Economic prosperity is providing many in this populous nation with real purchasing power; it
simply is an opportunity that cannot be overlooked by global banks. Despite its appeal, India
remains a developing economy. Thus, global banksseeking a presence or expansion in India must
craft a business strategy thatconsiders the countrys attendant challenges: longestablished
regulations;and developing country operational risks. These challenges should be weighedagainst
the potential gains from entering the marketplace, as well as the likely costof doing nothing. The
global banks have pinpointed four of the most promising product areas to enter into the Indian
market: housing loans, automobile loans,small and medium enterprise (SME) banking and
personal financial services (PFS).However, recognizing the growth opportunities is only the
beginning. Global banks targeting India as a source of new growth will have to do much more
than just "Show Up" success will lie in the details of execution.
Banking in India originated in the last decades of the 18th century. The oldest bank in
existence in India is theState Bank of India, a government-owned bank thattraces its origins back
to June 1806 and that is the largest commercial bank in thecountry. Central banking is the
responsibility of theReserve Bank of India, whichin 1935 formally took over these
responsibilities from the then Imperial Bank of India, relegating it to commercial banking
functions. After India's independence in1947, the Reserve Bank was nationalized and given
broader powers. In 1969 thegovernment nationalized the 14 largest commercial banks; the
governmentnationalized the six next largest in 1980.Currently, India has 96 scheduled
commercial banks (SCBs) - 27 public sector banks (that is with theGovernment of Indiaholding
a stake), 31 private banks(these do not have government stake; they may be publicly listed and
traded onstock exchanges) and 38 foreign banks. They have a combined network of over 53,000
branches and 17,000ATMs. According to a report by ICRA Limited, arating agency, the public
sector banks hold over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5%respectively
THE FIGURE BELOW SHOWS THAT THE BANKEX AND THE SENSEX
The High CAGR exhibited by India’s Bankex demonstrates the industry’s resilience
recession and economic instability. This resilience primarily stems from two factors. First,
the highly regulated Indian banking sector restricts exposure to high risk assets and
excessive leveraging. Second, Indian economy’s overallgrowth rate has been much higher
than other economies worldwide
However, the recent crisis in the eurozone is likely to affect the Indian economy and in
particular the country’s banking sector. The RBI’s Financial Stability Report estimates the claim
of European Banks on India at approximately 8.6 per cent of the country’s GDP, while some
analysts estimate the figure to have reached 15 per cent of
the GDP Further, the
Basel III guidelines may also force European banks to deleverage
significantly. Data from the International Monetary Fund (IMF) suggests that these banks will
deleverageup to US$ 2.6 trillion by the end of 2013 especially from the sale of securities and
Non-Core assets. This will see the credit supply to businesses shrinking by 1.7 percent, thereby
driving Indian companies to borrow from the Indian banks at a higher cost in times of
inflation and in a period of depreciation in the value of rupee. The non performing assets
(NPAs) of banks were pegged at 2.9 percent in the fourth quarter of 2011, and are expected to
rise to 3.5 per cent by 2012. All these factors might hamper the performance of the Indian
sector. However, amongst positive initiatives taken by the government, the RBI
mandated banks to maintain 70 per cent of the provision coverage ratio of their bad loans as on
September 2010, thereby mitigating the effect of NPAs to a certain extent. The NPAs of
public, private and foreign banks in India are exhibited in Figure 2
The solace for Indian banks, however, lies in the fact that India has shown a
comparatively robust growth in its GDP over past years, which analysts closely correlate
to the performance of the banking industry. The report forecasts that India’s GDP growth
will take the size of the country’s banking sector, to the third largest in the world by 2025.
Figure 3 shows the data from the Ministry of Finance that supports this.
Figure 3 demonstrates that the growth of the banking sector in terms of percentage contribution
to the GDP has remained mostly uniform over FY 06-10. The banking sector is currently
growing at approximately the same rate as the country’s economy.
Another important parameter for assessing the performance of the banking industry is the
domestic credit provided as a percentage of the GDP, as exhibited in Figure 4 below
IMPACT OF MARKETING TO GROWTH OF BANKINS
IMPACT OF LIBERALISATION
The year 1991 marked a decisive changing point in India's economic policy since Independence
in 1947.Following the 1991 balance of payments crisis, structural reforms were initiated that
fundamentally changed the prevailing economic policy in which the state was supposed to take
the "Commanding Heights" of the economy. After decades of far reaching government
involvement in the business world, known as the "Mixed Economy" approach, the private sector
started to play a more prominent role
The enacted reforms not only affected the real sector of the economy, but the banking sector as
well.Characteristics of banking in India before 1991 were a significant degree of state ownership
and farreaching regulations concerning among others the allocation of credit and the setting of
interest rates. The blueprint for banking sector reforms was the 1991 report of the Narasimham
Committee. Reform steps taken since then include a deregulation of interest rates, an easing of
directed credit rules under the priority sector lending arrangements, a reduction of statutory preemptions, and a lowering of entry barriers for both domestic and foreign players
The regulations in India are commonly characterized as "financial repression". The financial
liberalization literature assumes that the removal of repressionist policies will allow the banking
sector to better perform its functions of mobilizing savings and allocating capital what ultimately
results in higher growth rates (Levine, 1997, p. 691). If India wants to achieve its ambitious
growth targets of 7-8% per year as lined out in the Common Minimum Programme of the current
government, a successful management of the systemic changes in the banking sector is a
While the transition process in the banking sector has certainly not yet come to an end, sufficient
time has passed for an interim review. The objective of this paper therefore is to evaluate the
progress made in liberalizing the banking sector so far and to test if the reforms have allowed the
banking sector to better perform its functions.
The paper proceeds as follows: section 2 gives a brief overview over the role of the banking
sector in an economy and possible coordination mechanisms. A discussion of different repressive
policies and theireffect on the functioning of the banking sector follows in section 3. Section 4
gives a short historical overview over developments in the Indian banking sector and over the
reforms since 1991. An evaluation of the status of the reforms and their effects follows in section
5. Section 6 concludes.
STATUS OF REMOVAL OF REPRESSIONIST POLICIES
India used several policies to gain influence over the banking sector. Besides the outright
nationalization of banks, the key policies were the directed credit program, the statutory
preemptions and the interest rate controls.
To evaluate the changes in these policies in India over the last years, the intensity of the policies
over time is captured with the help of dummy variables. The advantage of this method is that the
different variables can be aggregated to a composite index of financial repression.
INTEREST RATE RESTRICTIONS
Interest rate restrictions can take different forms. Based on Demetriades and Luintel (1997) the
focus is on the following interest rate controls: a fixed deposit rate, a ceiling on the deposit rate, a
floor on the deposit rate, a fixed lending rate, a ceiling on the lending rate and a floor on the
lending rate. The existence of controls is measured with dummies that take the value of 1 if a
control is present and 0 in the absence of a control (Demetriades and Luintel, 1997, p. 314). The
six controls are then aggregated to an equally-weighted index that is scaled between 0 and 1.
The aggregated results show that the degree of interest rate regulation almost steadily increased
until reaching a peak in the early 1980s (Figure 1). After the first liberalization efforts in the mid1980, the degree of interest rate controls was somewhat lowered, but then increased again at the
end of the 1980s.Since the beginning of the 1990s, the degree of interest rate controls has
steadily declined which reflects that today most interest rates are determined by the market.
IMPACT OF PRIVATIZATION
Interest Rate is more in private sector banks ascomparative to the public sector banks.
Private Banks are responsible for thisrecession in the world & also in india.
Private banks give loans to the realestate sector and many other similar sectors with the
eyes closednot taking even some proper securities by these companies.
There is less job security in case of private banks.
Interference and manipulation by the politician andindustrialist is in full swing. In some
cases, bankloans were used to garner votes.
Previously the public money was safeguard throughDeposit Insurance corporation but
now thiscorporation is abolished.
Since now in the private banks government hasless control over the bank activities ,
Privatesector use private recovering agencies torecover bad loans.
These agencies uses wrong means and force torecover loans from people .
Some people even commit suicide under thepressure of the recovery agents.
The employees of Private sector banks arenot pretty satisfied with the policies of
theprivate banks. As the working hours aremore and the salaries are less. That’s whymore
than 800,000 PSU bank employeesrecently protest against privatization
SBI enjoys a monopoly of the government business.
SBI was formed under the SBI Act in 1955. Thegovernment hold around 93% of the
equity, leaving7% to private ownership. By this act the equity of RBIcannot be diluted
This act was outdated and needs to be re-addressed.However, efforts were initiated by
SBI to privatize itsnon – banking subsidiaries like SBI Caps, SBI FundsManagement etc,
where SBI’s holding is about 85%of the equity.
Later Indian government announced itsdecision to reduce its stakes in publicsector banks
Are The Banks Really Sick? The answer is No. Public sector banks are making
profits.Even the loss-making banks like UCO bankhave turned the corner in recent years.
Then why this outcry of privatization. Later Indian government announced itsdecision to
reduce its stakes in publicsector banks to 33%.
IMPACT OF GLOBALISATION
The concept of Globalisation infers that the globe is a single unit which functions as one when it
comes to decision-making. In other words, Globalisation implies the free movement of goods,
services and capital throughout the world. Globalisation involves the opening up of national
economies to global markets. This naturally and simultaneously results in the simultaneous
reduction in the role of the State to shape national policies. Many Socialists define Globalisation
as a primarily economic phenomenon, which involves increasing interaction and integration of
national economic systems. This leads in turn to growth in international trade, investment and
capital flows. Moreover, there is a rapid increase in cross-border social, cultural and
technological exchanges because of the phenomenon of globalisation.
The sociologist defines globalisation as a decoupling of space and time. With the advent of
instantaneous communications, knowledge, trade and culture can be shared around the world
simultaneously. This will ultimately result in an increase in international trade, investment and
On the other hand, some critics define Globalisation as ''the worldwide drive towards a
globalised economic system, dominated by supranational corporate trade and banking
institutions that are not accountable to the democratic processes or national governments. Due to
Globalization, all important institutions like the nation, state, family, work, services, trade,
leisure, culture, knowledge etc. are changing. As a result of this, life styles of people throughout
the world are also changing, making the world a single unit when it comes to decision making.
The middle and late 90s witnessed great innovations in financial reforms, restructuring,
convergence globalization etc. These were accompanied by a rapid revolution in communication
technologies. Moreover, a major development was the evolution of the ''convergence'' of
computer and communication technologies, such as the Internet, mobile / cell phones etc. The
arrival of foreign and private banks with their superior, sophisticated technology-based services
forced Indian Banks also to follow the same by going in for the latest technologies so as to meet
the threat of competition and retain their customer base. This also brought in revolutionary
products and services which have been orchestrated by the Indian Software Industry.
Software Packages for Banking Applications in India had their beginnings in the mid 80''s. This
move was spurred on by RBI and the Rangarajan Committee Report which decided to
computerize the Indian Banking branches in a limited manner. This move was aimed at
promoting competition and allows an easy assessment of relative vendor capabilities. Gradually,
even those who opposed computerization in government and banks changed their perspective
and within a few years our country became a superpower in Information technology.
The early 90s saw a fall in hardware prices and the advent of cheap and inexpensive but highpowered PCs and servers. Banks went in for what was called Total Branch Automation (TBA)
We are now at the point when we have accepted the use of computers in every sphere of our
EMERGING RISK IN BANKING SECTOR AND RISK
MANAGEMENT BY BANKS
Risk Management in Indian banks is a relatively newer practice, but has already shown to
increase efficiency in governing of these banks as such procedures tend to increase the corporate
governance of a financial institution. In times of volatility and fluctuations in the market,
financial institutions need to prove their mettle by withstanding the market variations and
achieve sustainability in terms of growth and well as have a stable share value. Hence, an
essential component of risk management framework would be to mitigate all the risks and
rewards of the products and service offered by the bank. Thus the need for an efficient risk
management framework is paramount in order to factor in internal and external risks.
The financial sector in various economies like that of India are undergoing a monumental change
factoring into account world events such as the ongoing Banking Crisis across the globe. The
2007–present recession in the United States has highlighted the need for banks to incorporate the
concept of Risk Management into their regular procedures. The various aspects of increasing
global competition to Indian Banks by Foreign banks, increasing Deregulation, introduction of
innovative products, and financial instruments as well as innovation in delivery channels have
highlighted the need for Indian Banks to be prepared in terms of risk management.
Indian Banks have been making great advancements in terms of technology, quality, as well as
stability such that they have started to expand and diversify at a rapid rate. However, such
expansion brings these banks into the context of risk especially at the onset of increasing
Globalization and Liberalization. In banks and other financial institutions, risk plays a major part
in the earnings of a bank. The higher the risk, the higher the return, hence, it is essential to
maintain a parity between risk and return. Hence, management of Financial risk incorporating a
set systematic and professional methods especially those defined by the Basel II becomes an
essential requirement of banks. The more risk averse a bank is, the safer is their Capital base.
In the course of their operations, banks are invariably faced with different types of risks
that may have a potentially negative effect on their business. Risk management in bank
operations includes risk identification, measurement and assessment, and its objective is to
minimize negative effects risks can have on the financial result and capital of a bank. Banks are
therefore required to form a special organizational unit in charge of risk management. Also, they
are required to prescribe procedures for risk identification, measurement and assessment, as well
as procedures for risk management.
The risks to which a bank is particularly exposed in its operations are: liquidity risk, credit risk,
market risks (interest rate risk, foreign exchange risk and risk from change in market price of
securities, financial derivatives and commodities), exposure risks, investment risks, risks relating
to the country of origin of the entity to which a bank is exposed, operational risk, legal risk,
reputational risk and strategic risk.
Liquidity Risk is the risk of negative effects on the financial result and capital of the bank caused
by the bank’s inability to meet all its due obligations.
Credit Risk is the risk of negative effects on the financial result and capital of the bank caused by
borrower’s default on its obligations to the bank.
Market risk includes interest rate and foreign exchange risk.
Interest rate risk is the risk of negative effects on the financial result and capital of the bank
caused by changes in interest rates.
Foreign exchange risk is the risk of negative effects on the financial result and capital of the bank
caused by changes in exchange rates.
A Special type of market risk is the risk of change in the market price of securities, financial
derivatives or commodities traded or tradable in the market.
Exposure Risk include risks of bank’s exposure to a single entity or a group of related entities,
and risks of banks’ exposure to a single entity related with the bank.
Investment Risk include risks of bank’s investments in entities that are not entities in the
financial sector and in fixed assets.
Risks Relating To The Country Of Origin Of The Entity To Which A Bank Is Exposed
(Country Risk) is the risk of negative effects on the financial result and capital of the bank due to
bank’s inability to collect claims from such entity for reasons arising from political, economic or
social conditions in such entity’s country of origin. Country risk includes political and economic
risk, and transfer risk.
Operational Risk is the risk of negative effects on the financial result and capital of the bank
caused by omissions in the work of employees, inadequate internal procedures and processes,
inadequate management of information and other systems, and unforeseeable external events.
Legal Risk is the risk of loss caused by penalties or sanctions originating from court disputes due
to breach of contractual and legal obligations, and penalties and sanctions pronounced by a
Reputational Risk is the risk of loss caused by a negative impact on the market positioning of the
Strategic Risk is the risk of loss caused by a lack of a long-term development component in the
bank’s managing team.
In the computer security context, a hacker is someone who seeks and exploits weaknesses in a
computer system or computer network. Hackers may be motivated by a multitude of reasons,
such as profit, protest, challenge, enjoyment, or to evaluate those weaknesses to assist in
removing them. The subculture that has evolved around hackers is often referred to as the
computer underground and is now a known community. While other uses of the word hacker
exist that are related to computer security, such as referring to someone with an advanced
understanding of computers and computer networks, they are rarely used in mainstream context.
 They are subject to the longstanding hacker definition controversy about the
term's true meaning. In this controversy, the term hacker is reclaimed by computer programmers
who argue that someone who breaks into computers, whether computer criminal (Black Hats) or
computer security expert (White Hats), is more appropriately called a cracker instead.Some
white hat hackers[who?] claim that they also deserve the title hacker, and that only black hats
should be called "Crackers".
In recent months, cyber terrorists have accessed the records of 21.5 million American public
service employees, infiltrated the German parliament’s network, and blocked a French national
television broadcaster’s 11 television channels for several hours.
A Malware Attack compromised the operations of more than 1,000 energy companies, giving
hackers the ability to cripple wind turbines, gas pipelines, and power plants in 84 countries,
including the United States, Spain, France, Italy, Germany, Turkey, and Poland at the click of a
For many years, the world has benefited from information technology advances that have
improved the productivity of almost every industry – banking, healthcare, technology, retail,
transportation, and energy. But we continue to underestimate the dark side of this equation:
Greater dependence on information technology is resulting in an increasing and unprecedented
number of cyberattacks.
More than 30 countries—Including Germany, Italy, France, the United Kingdom, the U.S.,
Japan, and Canada—have now rolled out cybersecurity strategies. Financial services regulators
in the United Kingdom are working with top banks to improve their cyber-risk management.
Germany is weighing a cybersecurity law that will require companies deemed critical to the
nation’s infrastructure to immediately report cyber incidents to the government. And on June 29,
the Latvian Presidency of the Council of the European Union reached an understanding with the
European Parliament on the main principles of what could become a unified cybersecurity
directive for the European Union designed to protect critical infrastructure.
DETECTING AND PREVENTING FRAUD IN FINANCIAL
Fraud has evolved from being committed by casual fraudsters to being committed by organized
crime and fraud rings that use sophisticated methods to take over control of accounts and commit
fraud. The problem is pronounced in the financial sector where the compromises are more
sophisticated than in other industries.
It is essential to get not only multiple sources of data to understand the entities being
compromised but also apply sophisticated analytical methods to understand the data, extract
optimal information, use high end pattern recognition and text mining to create features, and
advanced modeling techniques to fit the best possible models to the data to reduce false positive
rates. The presentation discusses the challenges faced in fraud detection and how they can be
addressed using sophisticated analytical techniques.
BANK FRAUD IS INCREASING IN VOLUME AND SOPHISTICATION.
“The Credit And Debit Card Fraud Category Of Financial Services Is Among The Fastest
Growing And Best Known Means Of Criminal Profit,” says Rodney Nelsestuen of TowerGroup.
“What makes card fraud of great concern is the fact that international organized crime rings are
often involved, turning card fraud from random, criminal activity into industrial strength
The sophistication of their tactics makes detecting fraud difficult and preventing it nearly
impossible, especially as the volume of bank transactions grows by about 10% a year.
THE FASTEST GROWING CHANNELS ARE ALSO THE ONES MOST AT
ATM and branch office transaction volumes are flat (As A Percent Of Total Transactions), while
call center channels are growing modestly and electronic access (Online And Mobile Access) is
booming. Mobile banking, barely a blip on the radar in 2008, is expected to grow to more than
42 million users in 2012, according to Tower Group research
Unfortunately these fastest growing channels are also the most vulnerable. For example, in a
Gartner survey of 50 banks, more than half reported that their institutions had been the target of a
phishing attack in the previous year.The anonymity of ecommerce makes it more difficult to
uncover bogusWeb communications and hidden relationships.
ENTERPRISEWIDE FRAUD MANAGEMENT
SLOW DETECTION LEADS TO HIGHER LOSSES.
Speed is crucial. According to the 2008 Javelin fraud survey report,victims who detected the
fraud within hours were defrauded for an average of $428. Victims who did not discover the
fraud up to a month later suffered an average loss of $572. Those who took up to five months
lost nearly three times as much ($1,207) as victims who detected the fraud within one day. Of
course, this is no surprise. What can be a surprise is how much that figure escalates when you
add associated costs, such as lost wages, loss of goodwill and legal fees.
Collectively, these realities create a daunting environment for financial services institutions:
They would like to accurately identify the patterns and perpetrators, but they usually lack
the analytical modeling rigor to establish a strong defense.
They would like to identify cross channel fraud, but their operational systems often don’t
cooperate well across organizational boundaries.
They would like to monitor every transaction in real time, but they can’t alienate
customers and merchants with long processing times.
They would like to implement rigorous rules to detect fraud, but they know they would
turn up a lot of false positives that are costly and fruitless to investigate.
They would like to unify the fraud management process, but disparate data sources and
cryptic interfaces make the system inaccessible to all but a few.
The accelerating shift in economic power from the developed to emergingeconomies is
dramatically changing the banking industry across the world. Theinternational banking scene has
in recent years witnessed strong trends towardsglobalization and consolidation of the financial
system. Stability of the financialsystem has become the central challenge to bank regulators and
of international standards and codes and evaluation of adherence thereto representresolute
attempts to address this challenge.The Indian banking scene has witnessed progressive
deregulation, institution of prudential norm and an emulation of international supervisory best
practices. Thesupervisory processes have also concomitantly evolved and have acquired a
certainlevel of robustness and sophistication in the banking industry
In the short-term, most developed economies experienced a significanteconomic slowdown or
recession in 2008-9, reducing significantly the growth of domestic banking assets. Emerging
economies such as India by contrast tended tomaintain relatively high growth rates, although
some temporary economicslowdown was experienced in certain cases. In 2010, however,
emergingeconomies grew strongly in general, while the recovery in Europe in particular
remained relatively weak.
High standard regulatory environment. The policy makers, which comprisethe Reserve
Bank of India (RBI), Ministry of Finance and related overnmentand financial sector
regulatory entities, have made several notable efforts toimprove regulation in the sector.
Bank lending has been a significant driver of GDP growth and employment.
Presence of more number of Smaller banks that would likely to be impactedadversely.
Approximately 53000 networks of branches spread all over the country provides easy
access to entire spectrum of customers.
Diversification in their operations ± Banks offer an entire gamut of servicesincluding
insurance, investment banking, asset management, private equity,foreign exchange,
payment of utility bills to customers, mobile and internet banking.
Large manpower with relevant banking skills to manage the operations.
Technological up gradation changing the way the banking is done. Anywhere banking
and anytime banking has become a reality and thusmaking service faster, error free and
Banks have gained financial strengths in terms of Productivity and Profitability.
Indian commercial banks, particularly PSBs have been witnessing the followingchallenges which
have become bottlenecks in achieving competitive edge over their rivals.
Low operating size
High operating costs
Inadequate deposit mobilization efforts
High level of nonperforming assets
Complex and non-responsive organizational structures
Credit to non-productive sectors like commercial estate
Poor customer service
Underutilized capacity particularly in rural areas
Unsatisfactory work culture
Feudalistic attitude of thee staff
Ethnocentric and action flippant management
Absence of organizational focus on the employees leading to their demotivation
Inadequate access to global financial system
The cost of banking intermediation in India is higher and bank penetration isfar lower
than in other markets
Inadequate risk management skills particularly to cope with market risks and per Basel II
Structural weaknesses such as a fragmented industry structure, restrictionson capital
availability and deployment, lack of institutional supportinfrastructure, restrictive labour
laws, weak corporate governance andineffective regulations beyond Scheduled
Commercial Banks (SCBs)
The inability of bank managements (with some notable exceptions) toimprove capital
allocation, increase the productivity of their service platforms and improve the
performance ethic in their organisations couldseriously affect future performance
Increase the profitability by accessing international financial market for procuring funds
cheaply and deploy funds prudently.
The emerging economies banking sectors are expected to outgrow those inthe developed
As per the PWC projection in Banking 2050 By 2050 the leading emerging economies
could have domestic banking assets and profits thatexceed those in the G7 by around
G7 countries:US, Japan, Germany,UK , France, Italy,Canada
E7 countries:China, India, Brazil, Russia, Mexico, Indonesia, Turkey
Other developed economies:Australia, Republic of Korea, Spain
Newly emerging economies:Argentina, Vietnam, Nigeria, Saudi,Arabia, South Africa
FIGURE 1: PROJECTIONS OF DOMESTIC BANKING ASSETS IN THE
E7 AND G7
India has particularly strong long-term growth potential and PWC projections suggest it
could become the third largest domestic banking sector by 2050 after China and theUS,
but ahead of Japan, the UK and Germany.Brazil could also rise strongly up the global
banking league table over this period.
Competition among banks for highly rated corporates needing lower amountof capital
may exert pressure on already thinning interest spread. Further,huge implementation cost
may also impact profitability for smaller banks.
The biggest challenge is the re-structuring of the assets of some of the banksas it would
be a tedious process, since most of the banks have poor assetquality leading to significant
Proportion of NPA. This also may lead to Mergers & Acquisitions, whichitself would be
loss of capital to entire system
Huge surplus manpower, absence of good work culture, antiquated labour laws, inflexible
and inefficient labour and existence of strong labour union.
High level of Non Performing assets [NPA]. 6 percent of the advances arestill blocked
up which is about 58000 Crore. Therefore problem of nonrecognition of interest income
and loan loss provisioning exists.
The house hold savings comprising financial assets are moving away from bank deposits
to more sophisticated form of financial assets such as mutualfunds, stocks and
Demanding customers are ready to jump from one bank to another whenthey are not
satisfied with the service provided. This causes major threat particularly to PSUs.
The interest income to total income is higher in public sector banks as compared to
private banks which itself says that there are more depositsing FDs in public banks. The
reliability lies with them.
The non interest income tototal income is more in private sector banks, this is because
they provide more feeand fund based services like depository services. The establishment
expenses tototal expenses is more in public sector banks, thus we can say that private
sector banks are much more efficient than public sector.
The ratio of NPA to total assets is lessin private sector banks. This is because of the large
assets with public sector banks.The high assets with them balance out the NPA
The interest on advances to total income is more in public sector banks. This showsthat
the deposits are more with the public sector banks. Other income to totalincome is less in
public sector banks.
In todays context we can see a major shift in the investment portfolio of theinvestors. A
major portion of them has started investing in modern investingschemes rather than the
same old conventional ones. At the onset of the new erathe banking industry has
enmarked a growth. Thus we can suggest the investors togo for investments in banking
The private sector has started giving better services through efficient and efficacious use
of its technical and human resources.As far as the reliability is concerned it still lies in the
hands of the public sector.With the help of this analysis the powered growth of banking
industry as a wholecan be seen. The growing economy favors the investment
India's banking sector will see the onset of a process of churning, mergers,acquisitions and
consolidation. The banking sector has got multifaceteddimensions. The project analyses the
banking industry in a comprehensive manner still the study is able to enumerate only the broad
aspects of the enormousinvestment opportunities available in the overall banking sector. It can
beconcluded that this sector have full of unlimited opportunities for those who areinterested in
safe and regular income on their investments. The deregulation of banking industry and the entry
of private entrants have made this sector anattractive field of investment for the investors. The
sector has performed well evenin times when the sensex was dipping and there was a bearish
sentiment in theoverall stock market. The passage of asset securitisation bill has given more
nailsto the banks enabling them to recover with their NPAs in a more efficient manner and
thereby enhancing their profitability position. With the technology drive large branch networks
customized services and more efficient professional staff, thesector is in no way lagging behind
the other sectors
Moreover, with the manufacturing
boom set to continue, we should be looking at the
beginnings of an investment cycle. Many companies that built capacities in the first half of
the1990s are seeing their surplus capacity squeezed out by growth in demand.To be sure,
productivity improvement can raise output without large increases ininvestment. Nevertheless,
more than 150 listed companies to plan, on an average,something like Rs 250 crore of
investment per firm over the next three quarters - or Rs 37,500 crore of additional funds
requirement. If we add to this the capital needed for infrastructure projects, we could be looking
at a hefty growth ininvestment demand. In such a milieu, I don't expect interest rates to soften.
Indeed,they may even marginally harden by June-July 2007. Still, the balance sheets and profit
and loss accounts of many of our public sector banks are going to look better than before ( E.g
SBI recorded a Net P rofit of Rs.1099.35 cr for the quarter ended 31 st December 2006
compared to Rs.919.44 cr. in quarter ended 31 st December 2005, registering a growth of
19.57%), as they have found new areas of earning.
India's Financial Sector: An Era of Reforms
Author- Vyuptakesh Sharan
Publisher- Sage India [14 October 2009]
Contemporary Issues and Challenges in Banking and Financial Sector in
Author- U. Bhojanna , S.N. Murthy
Publisher- Excel Books [1 May 2010]