CHAPTER 1: OVERVIEW OF BANKING

1.1

INTRODUCTION OF BANK:

Banks are the important component of any financial system. They play an important role in channelizing the savings of surplus sectors to deficit sectors. The efficiency and competitiveness of banking system defines the strength of any economy. That is why the banking is always considered as the backbone of the economy of any country. Indian economy is not an exception to this and banking system in India also plays a vital role in the process of economic growth and development of the country. The primary function of bank is to accept the money from the public in the form of deposit and further lend it out to the needy people in return for an income in the form of interest. Banks also gives returns in the form of interest to the deposit holder which is always less than what bank receives from its money borrowers (Debtors). The secondary functions of bank includes opening of Letters of credit, Issuing Bank guarantees, issuing demand drafts, mail Transfers, telegraphic transfers and collection of instruments, Executor Trustee services, and dealing in Forex related transactions and offering Safe Deposit Locker facilities, accepting Safe custody articles and so on.

In modern days, Banks performs variety of agency functions and provides various other services such as portfolio management, credit cards, ATM cards, venture capital finance, micro finance, insurance, merchant banking, etc. under one roof. This concept is popularly known as Universal banking.

1.2 WHAT IS BANK? The origin of the word bank can be traced back to the German word Bank which translated means heap or mound or joint stock fund. The Italian word Banco was derived from this to mean heap of money. Bank as it largely understood in English today is an institution that accepts money as a deposit for the purpose of lending with a view to earn profit in the form of interest. In simple words, a bank is an institution which deals in money and credit. It acts as intermediary who handles other peoples money for their advantage and profit. In French bancus or banque means a bench .Business was transacted by the Jews in France on benches in the market place. The benches resembled banking counters. If a banker failed, his bench was broken up by the people, lending to the word bankrupt which means one that has lost all his money, wealth or financial resources. Today the word bank is used as a comprehensive term for a number of institutions carrying on certain kinds of financial business. In practice, the word 'Bank' means which borrows money. A bank is now a financial institution which offers various savings as well as cheque accounts, makes loans and provides other financial services, making profits mainly from the difference between interest paid on deposits and those of charged for loans, plus fees for accepting bills and other services.

1.3 HISTORY OF BANK:

The first banks were probably the religious temples of the ancient world, and were probably established in the third millennium B.C. Banks probably predated the invention of money. Deposits initially consisted of grain and later other goods including cattle, agricultural implements, and eventually precious metals such as gold, in the form of easy-to-carry compressed plates. Temples and palaces were the safest places to store gold as they were constantly attended and well built. As sacred places, temples presented an extra deterrent to would-be thieves. 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 The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839,. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. The next was the National Bank established in Lahore in 1895, which is now one of the largest banks in India.

Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Indians had established small banks, most of which served particular ethnic and religious communities. The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swedish movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. And as the time passed on, the Indian economy saw tremendous increase in the number of banks establishing in India with modern technologies and innovative ideas. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process.

1.4

DEFINITIONS OF BANK:

According to professor Crowther, A bank is one that collects money from those who have its spare or who are saving it out of their income and lends the money to those who required it.

Section 5(b) of the BANKING REGULATION ACT, 1949 defines banking as accepting for the purpose of lending or investment of deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, and order or otherwise. Section 49A prohibits any institution other than bank to accept deposit money from public withdrawable by cheque.

In 1899, the United States Supreme define a bank: A bank is an institution, usually incorporated with power to issue its promissory notes intended to circulate as money (known as bank notes); or to receive the money of others on general deposit, to form a joint fund that shall be used by the institution, for its own benefit, for one or more of the purposes of making temporary loans and discounts; of dealing in notes, foreign and domestic bills of exchange, coin, bullion, credits, and the remission of money; or with both these powers, and with the privileges, in addition to these basic powers, of receiving special deposits and making collections for the holders of negotiable paper, if the institution sees fit to engage in such business. 5

1.5

TYPES OF BANK:

Chart 1:- Types of Bank

Central Bank

International Bank

Comercial Bank

Types of Bank
Exhange Bank Development Bank Co-operative Bank

Source: Researcher Methodology. 1) Central Bank: A central bank is the bank for a country. It acts as a lender of banking system. They are bankers to the government, bankers bank and ultimate custodian of nations foreign exchange reserves. A central bank, reserve bank, or monetary authority is a banking institution granted the exclusive privilege to lend a government its currency. It has a monopoly on creating 6

the currency of that nation, which is loaned to the government in the form of legal tender. It is a bank that can lend money to other banks in times of need. There are different central banks such as-Reserve Bank of India in India, Bank of England in U.K., and Federal Reserve System in U.S. 2) Commercial Bank: A bank which undertakes all kinds of ordinary banking business is called as commercial bank. A commercial bank is a type of financial intermediary and a type of bank. Commercial banking is also known as business banking. It is a bank that provides checking accounts, savings accounts, and money market accounts and that accepts time deposits. It provides money and credit for commercial and trade activities it also grants loans and advances. They also perform certain agency services. There are several commercial banks such as Bank of Maharashtra, Punjab National Bank, Bank of India, Canara Bank, and State Bank of India. 3) Co-operative Bank: A co-operative bank is a financial entity which belongs to its members, who are at the same time the owners and the customers of their bank. Cooperative banks are often created by persons belonging to the same local or professional community or sharing a common interest. Co-operative banks generally provide their members with a wide range of banking and financial services like loans, deposits, banking accounts. There are some co-operative banks such as-Thane Bharat Sahakari Bank, Shyamrav Vitthal Sahakari Bank, Thane Janata Sahakari Bank.

4) Development Bank: The banks which look after development in the field of industry, commerce are called as development banks. They are governed by RBI norms. The first development bank In India incorporated immediately after independence in 1948 under the Industrial Finance Corporation Act as a statutory corporation to pioneer institutional credit to medium and large-scale. Then after in regular intervals the government started new and different development financial institutions to attain the different objectives. There are development banks such as Asian Development Bank, Industrial Development Bank of India, Small Industry development Bank. 5) Exchange Bank: The bank which looks after dealing in foreign currencies are exchange banks. They have special authority to deal with foreign currencies. They are governed by rules and regulation of Reserve Bank of India as well as government of India .For example EXIM Bank. 6) International Bank: The banks whose origin is at outside of the country are called as International Bank. They have their branches worldwide. They have to follow the principles of Reserve Bank of India. For example: ICICI Bank, HDFC Bank. International banks offer various financial and legal benefits to accountholders. In fact, individuals and organizations have been benefiting from international banking for many years. Usually, only high net worth clients hold accounts in international banks.

1.7

FUNCTIONS OF BANK:

Chart No: 2:- Functions of bank:

Functions of Bank

Primary Functions

Secondary Functions

Accepting Deposits

Lending Money

Agency Functions

Source: Researchers Methodology.

Deriving from the definitions and viewed solely from the point view of customers, bank essentially performs the following function: 1. PRIMARY FUNCTIONS OF BANK: The primary functions of a bank is usually accepting deposits from the public and lending money to the needy people. Both these functions are explained in detail below: Accepting deposits from the public.The primary functions of bank is accepting money in the form of deposits from the public and further lend that money to the needy people to earn an income in the form of Interest. The money is accepted by bank as a deposit for safe keeping. The people or customers of bank deposits money in the bank to earn interest income instead of keeping that money idle at home. However, Bank also uses this money to earn interest from people who are in need of money. In this case, the interest rate charged to the borrower by the bank is usually higher than from what it gives to its depositor. This is, in true sense, the actual business of the bank. The bank accepts the money from the public in the form of following deposits: a) Savings Deposit: The saving deposit is one of the most popular deposits account among the savers. The main advantage of savings account is that you easily deposit and withdraw money from the bank and one can also earn interest on the money lying in the account. The rate of interest given by the bank on deposit in savings account is usually less than any other bank accounts. One 10

can withdraw money from this account for a fixed number of times.

b) Current Deposit: Current deposit or current A/c are mainly used by the business people who need to frequently deposit and make payments from their accounts. A current holder can withdraw money from his account any number of times during a month. However, such a current holder does not earn any interest income on his deposits. Since the rate of interest provided in the current deposits is zero.

c) Fixed Deposit: The fixed deposit is also known as term deposit. Since, the deposits in case of fixed deposit are accepted by a bank for a fixed term or period. Such an account earns a higher rate of interest than the savings bank account usually between 8 to 10 %. However, the money of the a/c holder gets blocked for a fixed period of time. The fixed deposit a/c holder gets money back only on the date of maturity. And if he wishes to withdraw the money before the end of the fixed period or maturity, he may have to accept a lower rate of interest as a penalty for not having retained the deposit with the bank for the specified period. d) Recurring Deposit: The variation of the fixed deposit is the Recurring deposit account where the holder of this account need to deposit a fixed amount of money at fixed interval (every week/month) for a particular period of time, say a year or two as per his convenience. However, the holder is not allowed to withdraw money from this account before the fixed period. He can do so only at the end of the fixed period. 11

 Lending money to public.-

The bank acts as an intermediary between the people who have money to lend and the people who dont have money to carry business transactions. The bank lends money to the people in the form of loans, advances, overdrafts, etc. There are three types of loans depending upon their tenure of repayment i. ii. iii. Short term loan Medium term loan Long term loan

Short term loans are those which have to be repaid in a very short period of time say 1 or 3 years and the rate of interest charged by the bank in this type of loan is very high since, the repayment period is very less. Medium term loans are those which are for 5 to 10 years. The rate of interest charged by the bank is moderate. Long term loans are those which have to be repaid after a long period of time say 10 years or more and the rate of interest charged by the bank is very less as compared to others since, the repayment period is very high. Nowadays, depending upon the nature there are also other types of loans provided by the banks such as personal loans, housing loans, vehicle loans, educational loans, agricultural loans, etc.

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2. SECONDARY FUNCTIONS OR AGENCY FUNCTIONS: The banks in todays modern world perform variety of functions other than its primary functions. These functions are popularly known or called as Secondary or Agency functions of the bank. Some of the agency functions of bank are listed below:

i.

Transferring money from one place to other.-

Bank transfers the money of both domestic and foreign from one place to another place. This is known as a remittance services. Bank issues demand draft, bankers cheque, money order for transferring the money. ii. Acts as a trustee.-

Bank acts as trustee of bank for various purposes. Whenever a company issues a debenture, it has to appoint intermediary to protect the interest of the debenture holder. iii. Keeping valuable in custody.-

Bankers are in the business providing the security to the money and valuable of the general public. Bank provides locker system.

iv.

Government Business.-

Banks accepts tax and non-tax receipts on behalf of government. Pension payments and tax refund also take place through bank.

v.

Maturity Transformation.-

Bank borrow more on demand debt and short term debt, but provide more long term loan. Thus, the above all were the primary as well as secondary functions of banks. 13

Chapter 2: BANKING IN INDIA BEFORE LPG

2.1

INSIGHTS FROM INDIAN ECONOMIC HISTORY:

From independence till the later part of the 1980s, India economic approach was mainly based on government control and a centrally operated market. The country did not have a proper consumer oriented market and foreign investments were also not coming in. This did not do anything good to the economic condition of the country and as such the standard of living of the people did not go up. Even if the economic liberalization policies were undertaken, it did not find much support and the country remained in its backward economic state. The imports started exceeding the exports and the India suffered huge balance of payment problems. The IMF asked the country for the bailout loan. The fall of the Soviet Union, a main overseas business market of India, also aggravated the problem. The country at this stage was in need of an immediate economic reform. The Indian Banking sector was also one of the victims of this. And the failure of banking sector resulted into the worsening of the fall out situation. Since, Banks are the most important component of any financial system. They play important role of channelizing the savings of surplus sectors to deficit sectors. The efficiency and competitiveness of banking system defines the strength of any economy. Indian economy was not an exception to this and even then the banking system in India also played a vital role in the process of economic growth and development.

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Banking sector is the major sector that contributes substantially to the finance of national economy, efficiency of commercial banks is one of the most interesting and important issues for both the government and private sector. After the series of banking sector reforms in last decade the Indian commercial banks has pass through certain developments and challenges. The Indian banking system has been regulated for most of its subsistence. Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past two decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. And all this is because of the LPG (Liberalization, Privatization and Globalization) which was initiated by the Government of India in the year 1991. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own Money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dialing a number and ordering a pizza. Money has become the order of the day. 15

This is why it becomes quintessential for all of us to look back and understand the pre Liberalization, Privatization and Globalization era of our Indian banking system. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System before LPG can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

To make this journey more explanatory, we can prefix the scenario as Phase I, Phase II and Phase III.

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2.2

PHASE - I (Early Phase of Indian banks):

The General Bank of India was set up in the year 1786. The Next was Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it

the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

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2.3

PHASE - II (Banking in India prior LPG):

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semiurban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore.

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After the nationalization of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jumpby11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. However, during these days the operational functioning of the Indian banks was totally restricted to India and also the foreign investment were totally disallowed.

Also the maximum participation of government in the banking and other sectors created at thick wall which restricted or prevented them from going global and over a period of time, the whole entrepreneurial abilities of a people were tied down to the myriad of all controls with a set of regulations and licenses - so much so that the Indian economy was called a License Raj. So, When you want to produce something, you needs a licence, to increase production you needs a licence, to re-allocate your resources, you needed a licence - every decision was taken by the Babus (Bureaucrats)) rather than the entrepreneurs themselves. And to these myriads of controls and regulations, the entire productive potential was tied down. Later on, in true sense Liberalization was basically initiated for unleashing the productive potential of people in terms of reducing the kind of constraints imposed over a period of time upon the entrepreneurs. This is the true meaning of liberalization. And privatization was meant for the minimizing the participation of the government and instead grant license for private players while globalization was for opening the doors for the foreign investment and private new entrants or players from the outside world.

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2.4 Phase III (Indian Banking after LPG):

This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narashimham, a committee was set up by his name which worked for the liberalization of banking practices.

As a result of these reforms or after these reforms, the country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The approach of Indian banks was transformed from profit oriented to the customer oriented or service oriented. Customer choice and satisfaction gained more importance. Since, there is constant bombarding from the foreign competitors. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

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Chapter 3: LPG A major transformation in Indian Financial System

3.1

PARADIGM SHIFT IN THE INDIAN ECONOMY:

It is a fact that any national story is often a tale of turning points. When a catastrophe takes place, the mindset of a nation changes and it decides the course of its destiny. If August 15, 1947 marked the Indian Independence - from political slavery to colonial power, then definitely August of 1991 could be marked as the beginning of Indian Economic Freedom. Many of us are alive to see the historical realities of the rise and fall of nations. We realize that it is those who had the ability to innovate have always won the day. If you look at the history of human civilization, we see that those who had the ability to innovate, may be a war horse, may be cannon or may be a steam engine have won the day.

In early 1990s the Indian economy had similarly witnessed some dramatic policy changes in the form of LPG. It was in this 1990s period when the first initiation towards globalization and economic liberalization was undertaken by Dr Manmohan Singh, who was the Finance Minister of India under the Congress government headed by P.V. Narashimham Rao. This is perhaps the milestone in the economic growth if India and it aimed towards welcoming globalization. Since, the liberalization plan, the economic condition gradually started improving and today India is one of the fastest growing economies in the world with an average yearly growth rate of around 6-7%.

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The idea behind the new economic model known as Liberalization, Privatization and Globalization in India (LPG), was to make the Indian economy one of the fastest growing economies in the world. An array of reforms was initiated with regard to industrial, trade and social sector to make the economy more competitive. The economic changes initiated have had a dramatic effect on the overall growth of the economy. It also heralded the integration of the Indian economy into the global economy.

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3.2

BUT ESSENTIALLY - WHAT IS LPG?

Since after the post independence period, we had adopted economic strategy of planned growth. This policy continued up to 1991 in which the State had to play a major role. Over a period of time, the whole entrepreneurial abilities of a people were tied down to the myriad of all controls with a set of regulations and licenses - so much so that the Indian economy was called a License Raj. When you want to produce something, you needs a licence, to increase production you needs a licence, to re-allocate your resources, you needed a licence - every decision was taken by the Babus (Bureaucrats)) rather than the entrepreneurs themselves. And to these myriads of controls and regulations, the entire productive potential was tied down. Liberalization basically meant unleashing the productive potential of people in terms of reducing the kind of constraints imposed over a period of time upon the entrepreneurs. This is the true meaning of liberalization.

Over a period of time in the 1950-60s when the private sector was not developed enough, it was only to be expected that the Government would need to come in a big way and take a lead in the industry as a producer. But in the spate of enthusiasm we overdid it so much so that by 1991 we were boasting of PSUs commanding heights in the Indian economy over the private sector. It turned out that, if you looked at the total investment made is above Rs.4, 00,000 crore in the Public Sector Undertakings, Rs.2, 50,000 crores for the State level Public Sector Undertakings and what is the rate of return that the country has given on this, it is really 2.5%. So we had to face a very strange situation in 1991 where the Government was borrowing from the market at the rate of 14 % and was investing 23

where the rate of return was only 2.5 %. But this Just could not go on. This was a sure recipe for disaster and indeed it did strike us. No matter you think how special you are, you are not immune from the basic laws of economics and we were made to realize that in terms of a crisis which started in 1991. And as a result privatization was meant or initiated for the minimizing the participation of the government and instead giving an opportunity or chance to private players by granting license to them while globalization was for opening the doors of Indian economy for the foreign investment and private new entrants from the outside world. And it was from then onwards that we started changing our policies, mindsets and have now come a long way.

In other words, the need for the Liberalization, Privatization and Globalization arised due to the Indian economy which was in deep crisis in July 1991, when foreign currency reserves had plummeted to almost $1 billion; Inflation had roared to an annual rate of 17 percent; fiscal deficit was very high and had become unsustainable; foreign investors and NRIs had lost confidence in Indian Economy. Capital was flying out of the country and we were close to defaulting on loans. Along with these bottlenecks at home, many unforeseeable changes swept the economies of nations in Western and Eastern Europe, South East Asia, Latin America and elsewhere, around the same time. These were the economic compulsions at home and abroad that called for a complete overhauling of the Indias economic policies and programs which ultimately paved the way for economic reforms like LPG (Liberalization, Privatization and Globalization) in India. These economic reforms initiated by government of India in early 1990s later on have brought about a sea change in operational environment, its functioning and outlook of Indian banks and the financial system on a whole. 24

3.3

MEASURES FOR INITIATING LPG IN INDIA:

The Major measures initiated as a part of the liberalization, Privatization and globalization strategy in the early nineties by the government of India included the following: Devaluation: The first step towards globalization was taken with the announcement of the devaluation of Indian currency by 18-19 percent against major currencies in the international foreign exchange market. In fact, this measure was taken in order to resolve the BOP crisis. Disinvestment- In order to make the process of globalization smooth, privatization and liberalization policies are moving along as well. Under the privatization scheme, most of the public sector undertakings have been/ are being sold to private sector. Dismantling of The Industrial Licensing Regime At present, only six industries are under compulsory licensing mainly on accounting of environmental safety and strategic considerations. A significantly amended locational policy in tune with the liberalized licensing policy is in place. No industrial approval is required from the government for locations not falling within 25 kms of the periphery of cities having a population of more than one million. Allowing Foreign Direct Investment (FDI) across a wide spectrum of industries and encouraging non-debt flows. The Department has put in place a liberal and transparent foreign investment regime where most activities are opened to foreign investment on automatic route without any limit on the extent of foreign ownership. Some of the recent 25

initiatives taken to further liberalize the FDI regime, inter alias, include opening up of sectors such as Insurance (upto 26%); development of integrated townships (upto 100%); defence industry (upto 26%); tea plantation (upto 100% subject to divestment of 26% within five years to FDI); enhancement of FDI limits in private sector banking, allowing FDI up to 100% under the automatic route for most manufacturing activities in SEZs; opening up B2B e-commerce; Internet Service Providers (ISPs) without Gateways; electronic mail and voice mail to 100% foreign investment subject to 26% divestment condition; etc. The Department has also strengthened investment facilitation measures through Foreign Investment Implementation Authority (FIIA). Non Resident Indian Scheme the general policy and facilities for foreign direct investment as available to foreign investors/ Companies are fully applicable to NRIs as well. In addition, Government has extended some concessions especially for NRIs and overseas corporate bodies having more than 60% stake by NRIs.

The reduction of the peak customs tariff from over 300 per cent prior to the 30 per cent rate that applies now. Severe restrictions on short-term debt and allowing external commercial borrowings based on external debt sustainability. Wide-ranging financial sector reforms in the banking, capital markets, and insurance sectors, including the deregulation of interest rates, strong regulation and supervisory systems, and the introduction of foreign/private sector competition.

26

Thus, the above were all the measures used by the government of India as a strategy to initiate major reform of LPG (Liberalization, Privatization and Globalization) in India.

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Chapter 4: IMPACT OF GLOBALIZATION ON INDIAN BANKING INDUSTRY

4.1 AFTERMATH EFFECT OF LPG IN INDIA:

The most important thing that happened in 1991 is that the Indian economy started increasingly integrating into the world economy. India certainly will be not left out in the way side in the industrial revolution of our time. Sure enough Indian is already in the forefront of Information Technology which is beginning to change our lives so dramatically.

With the onset of these reforms to liberalize the Indian economy in July of 1991, a new chapter has dawned for India and her billion plus population. This period of economic transition has had a tremendous impact on the overall economic development of almost all major sectors of the economy, and its effects over the last decade can hardly be overlooked. Besides, it also marks the advent of the real integration of the Indian economy into the global economy.

This era of reforms has also ushered in a remarkable change in the Indian mindset, as it deviates from the traditional values held since Independence in 1947, such as self reliance and socialistic policies of economic development, which mainly due to the inward looking restrictive form of governance, resulted in the isolation, overall backwardness and inefficiency of the economy, amongst a host of other problems. This despite the fact, that India had always the potential to be on the fast track to prosperity. 28

Now that India is in the process of restructuring her economy, with aspirations of elevating herself from her present desolate position in the world, the need to speed up her economic development is even more imperative. And having witnessed the positive role that Foreign Direct Investment (FDI) has played in the rapid economic growth of most of the Southeast Asian countries and most notably China, India has embarked on an ambitious plan to emulate the successes of her neighbors to the east and is trying to sell herself as a safe and profitable destination for FDI.

Globalization has many meanings depending on the context and on the person who is talking about. Though the precise definition of globalization is still unavailable a few definitions are worth viewing,

Guy Brainbant, says that the process of globalization not only includes opening up of world trade, development of advanced means of communication, internationalization of financial markets, growing importance of MNCs, population migrations and more generally increased mobility of persons, goods, capital, data and ideas but also infections, diseases and pollution.

The term globalization refers to the integration of economies of the world through uninhibited trade and financial flows, as also through mutual exchange of technology and knowledge. Ideally, it also contains free inter-country movement of labour.

In context to India, this implies opening up the economy to foreign direct investment by providing facilities to foreign companies to invest in

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different fields of economic activity in India, removing constraints and obstacles to the entry of MNCs in India, allowing Indian companies to enter into foreign collaborations and also encouraging them to set up joint ventures abroad; carrying out massive import liberalization programs by switching over from quantitative restrictions to tariffs and Import duties, therefore globalization have been identified with the policy reforms of 1991 in India.

Globalization in India has allowed companies to increase their base of operations, expand their workforce with minimal investments, and provide new services to a broad range of consumers. The process of globalization has been an integral part of the recent economic progress made by India. Globalization has played a major role in export-led growth, leading to the enlargement of the job market in India.

One of the major forces of globalization in India has been in the growth of outsourced IT and business process outsourcing (BPO) services and also banking as well as other financial services. The last few years have seen an increase in the number of skilled professionals in India employed by both local and foreign companies to service customers in the US and Europe in particular. Taking advantage of Indias lower cost but educated and English-speaking work force, and utilizing global communications technologies such as voice-over IP (VOIP), email and the internet, international enterprises have been able to lower their cost base by establishing outsourced knowledge-worker operations in India.

30

Globalization in India has been advantageous for companies that have ventured in the Indian market. By simply increasing their base of operations, expanding their workforce with minimal investments, and providing services to a broad range of consumers,

large companies entering the Indian market have opened up many profitable opportunities.

But Globalization, of course, was as much as an opportunity as it was a challenge. First and foremost, an opportunity of specializing in areas of comparative advantage and thus achieving the benefits of skill especially as there is now increasingly the possibility of gradual access to worlds best technology determined by commercial terms of trade rather than patronizing the terms of aid.

When LPG came in India in 1991 it was a major turning point. When we all recall that for the first time we had a situation where the Indian economy was almost a marginalized one. Our people had forgotten about the glories of the Indian economy, foreign exchange reserves dwindled to a level of less than one billion dollars and the nation was on the verge of bankruptcy. We were very close on the brink of default and that was the time when finally changes started taking place in a positive manner. Economic reforms started taking place in a big way.

31

4.2 EFFECT OF LPG ON INDIAN BANKING SECTOR:

If we look at the Indian economic reforms, we can think of two distinct facets - technically we call them micro economic stabilization and structural adjustments. Micro economic stabilization is basically meant to Stabilize the economy, whereas structural advantage essentially involved re-structuring of the whole economy and that process is divided into three core areas i) ii) iii) Liberalization Privatization Globalization.

These three are popularly known as LPG. Although LPG (Liquid Petroleum Gas) is explosive but this LPG combination has been a welcome sign throughout the world.

As far as banking in India is concerned, there are three distinct spells of development of banking industry in post independent India, the prenationalization era from 1947 to 1969, the post-nationalization cum pre liberalization era from 1969 to 1991 and the neo-liberalization era from 1991 onwards. The first phase was mostly city-centric private Banking marked by frequent failures and liquidation of Banks and consequent pauperization of numerous poor and middle class depositors and loss of jobs for the employees.

The post-nationalization era saw a sea change in the Banking scenario: financial stability of Public Sector Banks (PSBs) controlling more than 84% of Banking business of the country, PSBs commanding trust and confidence of the Banking-public, expansion of Branch net-work of Banks particularly in hitherto unbanked rural and semi-urban centres, 32

opening up the banking services accessible to the rural poor, expansion of credit to agriculture, small scale industries and small entrepreneurs, artisans even to the marginal farmers, small shop owners, vegetable vendors etc. Such expansion of Branch network, coupled with such massbanking, created considerable job opportunities on the one hand, and, on the other, it helped a green revolution on the agricultural sector, obviating dependence of import of food grains, as also a spurt in the development of Small and Medium Scale Industries. It also rescued a vast section of the rural poor from the exploitation by village-money-lenders. By tapping the hitherto untapped huge rural savings, the PSBs could help the growth of large-scale and capital intensive industries too. Even the most ardent critics of Public Sector too have had to recognize and appreciate the laudable role of PSBs towards development of economic self reliance.

During this post nationalization era, Regional Rural Banks (RRBs) were established in 1975 onwards under the auspices of PSBs to cater to the credit needs of rural-India. Till 1990, priority sector lending constituted over 70% of the advance portfolio of RRBs giving further fillip to the rural economy. During the last four decades of their productive existence, the PSBs have taken up the services of employees and the liability of depositors of number of Private Banks going on liquidation due to mismanagement by and the greed of their private owners.

With the onset of World Bank-IMF dictated reforms, euphemistically called liberalization, successive Governments at the centre then were consistently been trying to undo all the good work of the PSBs as also to dismantle and privatize the PSBs altogether.

33

On 14th August 1991, the Government of India (GOI) appointed a Committee headed by Mr. M. Narashimham (called Narashimham Committee I) to suggest the modus operandi for reforms of the Banking Sector. On 16th November 1991, the said Committee submitted its Repost suggesting downsizing of PSBs through closure of Branches, merger of PSBs, reduction of priority sector lending from the then prevailing 40% to 10% of total advance portfolio, abolition of Banking Service Recruitment Board, granting of more autonomy to PSBs in respect of both financial and administrative matters, to reduce the supervisory and regulatory control of Reserve Bank of India (RBI), the Central Bank of the country, and, to top it all, dilution of Government Holding in PSBs through suitable amendment of relevant legislations. Thereafter, a number of committees, such as Narashimham Committee II, Khan Committee, Verma Committee, S.C.Gupta Committee, Raghuram Rajan Committee, Anwarul Hoda Committee, to name a few, have been appointed to assess the progress in implementation of the Recommendations of the Narashimham Committee I as also to suggest measures for carrying forward the reforms of the Banking Sector further as per dictates of the World Bank-IMF.

Following the Recommendations of these Committees, successive Governments have persistently been trying to carry forward the reforms dictated by World Bank-IMF. In the process, law has been amended to pave the way for reduction of Govt. holding of shares in PSBs from 100% to 51% and, in pursuance of such amendment, most of the PSBs (except two major PSBs and two subsidiaries of State Bank of India) have made public issue of shares, thus, reducing Government holding. Instead of filling up more than one-hundred thousand vacant posts through employment, the PSBs have reduced its workforce through Voluntary 34

Retirement Scheme on the one hand, and, on the other outsourcing even the regular and core banking jobs to outside agencies. The role of RBI, as the regulatory and supervisory authority over the banks have been redefined and undermined considerably. RRBs have been directed to give more emphasis on conventional Banking and, consequently, its priority lending stands reduced to around 40% (from 70%) of total advances today.

Still, all is not yet lost altogether, as least, so far our country, India, is concerned. Bank employees in India have been fighting relentlessly against the machinations of the successive Governments to the reform the Banking Sector at the dictates of the World Bank-IMF combine. It is most encouraging that all the nine unions having all-India presence in the Banking Industry five Workmens Unions and four Officers Unions representing almost 100% of the workforce in the Industry have joined hands to form a United Forum of Bank Unions (UFBU). All the Unions are, in the main, united in principle, against the reforms. Since the onset of the reforms regime in 1991, the Bank employees have undertaken, apart from other forms of struggle-programmes, not less than 19 one-day strike and 3 two-day strike programmes (total 25 days of strike); these strikes are apart from the strikes undertaken jointly with other sections of Trade Union movement on popular demands.

Because of all these strike/struggle of Bank Employees and the role played by the left parties, the successive Governments have not been able to push through their much cherished reforms-programme to the fullest extent they wished they could have done, to dismantle the PSBs that they would have liked. The PSBs still retain their Nationalized character, save and except State Bank of Sourastra (a subsidiary of State Bank of India) 35

which has been merged with State Bank of India, no other PSB has so far been merged with any other by way of reform (merger of New Bank of India with Punjab National Bank was actuated by commercial considerations and not by way of reforms; hence no TU opposed the said merger). The top echelons of PSBs, on their part, have not yet been able to introduce outsourcing to the extent they would have liked.

The result is there for all of us to see. Because of the presence of a strong and dominant Public Sector, the financial sector in our country, though affected, has not crushed down with the melt down of the financial sector in the United States of America and other major economies of the capitalist world; not a single copper of public money has to be spent to dole out/save any PSB, none of the depositors in any Bank has lost a single farthing of his/her deposit; when the financial giants all over the world have been happily off-loading their employees in thousands to tide over the crisis, not a single Bank-employee in India has lost his job just to accommodate the financial health of his/her employer. Pension, the only post superannuation succor of employees, still remains assured. It is therefore very much important to understand the changing way or pattern of the Indian banking sector after the reforms.

The financial sector reforms in general and the banking reforms in particular have been a key ingredient of the Indian reforms process. As a result of these reforms, statutory pre-emption of banks (in the form of high cash reserves and statutory liquidity ratio) got reduced to a great extent so was the extent of financial repression. Interestingly the asset quality of the Indian banks has improved to a great extent with a distinct improvement in capital to risk adjusted assets ratio (CRAR) of banks which is much above the stipulated level (9 percent) and drastic reduction 36

in NPA levels, notwithstanding the transition to 90 day delinquency norm in 2004. Table 3: Indicators of Indian banking reforms (Percent)

Quality of Assets

Extent of Competition (Percentage share in total Bank Assets)

Period Gross NPL Assets Net / NPL Assets Foreign / Banks Private Sector Banks Public Sector Banks

1996 - 97

7.0

3.3

7.9

7.7

84.4

2000 - 01

4.9

2.5

7.9

12.6

79.5

2002 - 03

4.0

1.8

6.9

17.5

75.7

2003 - 04

3.3

1.2

6.9

18.6

74.5

2004 - 05

2.5

0.9

6.5

18.2

75.3

2005 - 06

1.9

0.7

7.2

20.4

72.3

Source: Reserve Bank of India Survey, 2005 - 06

37

The major impact of banking sector reforms can also be viewed from the following chart: Chart 4: Indian Banking on the Reforms Path Reforms Initiatives Impact on Banks

1. Deregulation of deposit interest rate 2. Increase in Capital

1. Helped banks to gain control over cost of deposits 2. More stability in the banking system 3. Flexibility to price loan products and competitive pricing 4. Availability of more funds for lending

Adequacy Ratio 3. Deregulation of lending rates 4. Lower CRR & SLR

5. Asset classification and provisioning norms

5. Encourage banks to strengthen their credit and this brought down the NPA generate rate

6. Increase competition

6. Pressure to retain customers, enhance service quality and efficiency

7. Entry into new business lines

7. Emerge

as

financial

super

markets and build the top and bottom line

8. Increased banking

thrust

on

8. Help banks in proper allocation of funds across various business lines and adapt global best practices of risk management to enhance their competitiveness. 38

supervision

and risk management

Source: Researchers methodology The implications of globalization for a national economy are many. Globalization has intensified interdependence and competition between economies in the world market. These economic reforms have yielded the following significant benefits: Globalization in India had a favorable impact on the overall growth rate of the economy. (This is major improvement given that Indias growth rate in the 1970s was very low at 3% and GDP growth in countries like Brazil, Indonesia, Korea, and Mexico was more than twice that of India. Though Indias average annual growth rate almost doubled in the eighties to 5.9%, it was still lower than the growth rate in China, Korea and Indonesia). The pickup in GDP growth has helped improve Indias global position. Consequently Indias position in the global economy has improved from the 8th position in 1991 to 4th place in 2001; when GDP is calculated on a purchasing power parity basis. During 1991-92 the first year of Raos reforms program, the Indian economy grew by 0.9%only. However, the Gross Domestic Product (GDP) growth accelerated to 5.3 % in 1992-93, and 6.2% 1993- 94. A growth rate of above 8% was an achievement by the Indian economy during the year 2003-04. Indias GDP growth rate can be seen from the following graph since independence.

39

Chart 5: India GDP growth rate

Source: Economic survey 2001

Due to globalization not only the GDP has increased but also the direction of growth in the sectors has also been changed. Earlier the maximum part of the GDP in the economy was generated from the primary sector but now the service industry, especially banking industry, is devoting the maximum part of the GDP. The services sector remains the growth driver of the economy with a contribution of more than 57 per cent of GDP. India is ranked 18th among the worlds leading exporters of services (including banking as well as other) with a share of 1.3 per cent in world exports. The services sector is expected to benefit from the ongoing liberalization of the foreign investment regime into the sector. Software, Banking and the ITES-BPO sectors have 40

recorded an exponential growth in recent years. Growth rate in the GDP from major sectors of the economy can be seen from the following Table.

Table-6: Structure of the Economy (Percentage)

(% of GDP)

1984-85

2002-03

2003-04

2004-05

Agriculture

35.2

26.5

21.7

20.5

Industry

26.1

22.1

21.6

21.9

Services

38.7

51.4

56.7

57.6

Source: Economic Survey 2000 & 2005 Not only this, globalization also brought about significant changes in the overall attitude and outlook of Indian financial sector especially in the banking sector. The entry of new banks has resulted in the paradigm shift in the ways of banking in India. The growing competition, growing expectations led to increased awareness amongst banks on the role and importance of technology in banking. The arrival of foreign and private banks with their superior sate of the art technology based services pushed Indian Banks also to follow suit by going in for the latest technologies so as to meet of competition and retain their customer base. The economic reforms initiated by Government of India have brought about a sea change in operational environment, its functioning and outlook of Indian banks. The Indian banking industry has been

41

undergoing a metamorphosis since the commencing of liberalization, Privatization and Globalization in India. Today, post liberalization, privatization and globalization our Indian financial system is rapidly changing. Some of the features of this change are: Increasing sophistication of capital markets Emergence of global investments. Industry consolidation. Heightened focus on customer relations. Proliferation of new players entering the market. In broader economic view, an efficient financial sector is an engine for economic growth. It converts the fuel of savings into the kinetic energy for the machine of the economy. The banking industry which is at the core of the financial sector must take the lead. And exactly same our Indian banking industry is doing right now. This dominant position in the financial sector of banking has come from the reform process started in the 90s which gave the banking an opportunity. In this new environment, old methods of intermediation will not serve the purpose. However, it has been empirically proved that every problem is an opportunity in disguise.

42

Chapter 5: BANK OF MAHARASHTRA Bank Profile

5.1 INTRODUCTION AND HISTORY:

i.

The fledgling First Steps: The bank was founded by a group of visionaries led by the

late

Prof. V.G.Kale and the late Shri. D.K.Sathe and registered as a

banking company on 16th September, 1935 at Pune. The authorized capital was Rs.10 lakhs and issued capital of Rs. 5 lakhs. Their vision was to reach out and serve the comman man and meet all their working needs. Successive leadership of the Bank and the employees has endeavoured to fulfill their vision. Today, Bank of Maharashtra has over 12 million customers across the length and breadth of the country served through a network of 1428 branches in 22 states and2 union territories a truly pan India bank.

43

Milestones in the journey for nation building: The Bank of Maharashtra was registered on 16-09-1935 Commitment as stated in the prospectus issued on 21-10-1935: Steadily to spread its business operations all over Maharashtra and as opportunity allows, outside that area offering varied services to the general public while trying to be useful to trade, commerce and industry consistently with high standards of safety and efficiency 1936 : Commenced operations on 08-02-1936 in Pune 1938 : Second branch of the bank was opened in 1938 at Fort, Bombay. 1940 : Third branch came up at Deccan Gymkhana, Pune 1944 : Status as Scheduled Bank obtained 1946 : Deposits crossed Rs One crore mark

Formed fully owned subsidiary, The Maharashtra Executor & Trustee Company

First branch outside Maharashtra opened in Hubli (Mysore Starte, Now Karnataka) 1949 : Expansion to Andhra Pradesh: Hyderabad branch opened 1963 : Expansion to Goa: Panjim Branch opened 1966 : Expansion to Madhya Pradesh: Indore branch opened

Entered in Gujarat: Baroda branch opened 1969 : Nationalized along with 13 other Banks

Entry in Delhi by opening Karol bagh branch on 19-12-69

44

1974 : Deposit base crossed Rs. 100 Crore mark

1976 : Marathwada Grameena Bank, first RRB established on 26-081976 1978 : New Head Office building inaugurated by Hon'ble Prime Minister of India Shri. Morarji Desai. Deposits crossed the figure of Rs.500 Crores 1979 : Mahabank Agricultural Research and Rural Development Foundation, registered as a public trust, was established for undertaking research and extension work and to provide more extensive services to farmers. 1985 : 500th branch in Maharashtra state was opened at the hands of the then Prime Minister, Mrs. Indira Gandhi at Nariman Point, Mumbai. First Advanced Ledger Posting Machine (ALPM) was installed at the branch.

Golden Jubilee Year Celebrations launched at the hands of Dr. Manmohan Singh, Governor Reserve Bank of India 1986 : Thane Grameena Bank sponsored 1987 : The 1000th branch of the Bank was inaugurated at Indira vasahat, Bibwewadi, Pune at the auspicious hands of Dr.Shankar Dayal Sharma, the Honorable Vice President of India 1991 : "Mahabank Entered Main in Farmer to Frame Credit Domestic Card Credit Computer " was Card launched Business installed

Became member of the SWIFT

45

1995 : Diamond Jubilee Celebrations - Dr C Rangarajan the RBI Governor was the Chief Guest

Deposits crossed Rs 5000 crore mark 1996 : Moved into A category from the earlier C category. Autonomy obtained 2000 : Deposits crossed Rs 10000 crore mark 2004 : Public Issue of Shares 24% owned by Public

Listed in BSE and NSE 2005 : Bancassurance and Mutual Fund distribution business started 2006 : Crossed total business level of Rs.50,000 Crore

Branch CBS Project started 2009 : Entered in to 75th year of dedicated service to the Nation Adopted 75 underdeveloped villages for integrated overall development 2010 : 100% Total CBS Business of crossed Rs branches One lakh achieved crore

Opened 76 branches in the Platinum Year taking the total to 1506

ii.

Mission:

To ensure quick and efficient response to customer expectations. To innovate products and services to cater to diverse sections of society. To adopt latest technology on a continuous basis. To build proactive, professional and involved workforce. To enhance the shareholders wealth through best practices and corporate governance. 46

 To enter international arena through branch network.

iii.

The Birth: The Bank of Maharashtra was registered on 16th Sept 1935

with an authorized capital of Rs 10.00 lakh and commenced business on 8th Feb 1936.

iv.

The Childhood: The Bank of Maharashtra, known as a common man's bank

since inception, its initial help to small units has given birth to many of today's industrial houses. After nationalization in 1969, the bank expanded rapidly. It now has 1428 branches all over India. The Bank has the largest network of branches by any Public sector bank in the state of Maharashtra.

v.

The Adult: The bank has fine tuned its services to cater to the needs of

the common man and incorporated the latest technology in banking offering a variety of services.

vi.

Vision Statement 2010: To be a vibrant, forward looking, techno-savvy, customer

centric bank serving diverse sections of the society, enhancing shareholders and employees value while moving towards global presence. 47

vii.

Logo:

The Deepmal - With its many lights rising to greater heights. The Pillar - Symbolizing strength of organization. The Diyas - Symbolizing service of branches. The 3 M's Symbolizing a. Mobilization of Money b. Modernization of Methods and c. Motivation of Staff.

viii.

Aim:

The bank wishes to cater to all types of needs of the entire family, in the whole country. Its dream is "One Family, One Bank, Bank of Maharashtra ".

ix.

The Autonomy:

48

 The Bank attained autonomous status in 1998. It helps in giving more and more services with simplified procedures without intervention of Government.

x.

Social Aspect:

The bank excels in Social Banking, overlooking the profit aspect; it has a good share of Priority sector lending having 38% of its branches in rural areas.

xi.

Other Attributes:

Bank is the convener of State level Bankers committee. Bank offers Depository services and Demat facilities at 131 branches. Bank has a tie up with LIC of India and United India Insurance Company for sale of Insurance policies. All the branches of the Bank are fully computerized.

49

xii.

Organization Structure and Hierarchy: Organization structure changed from four-tier to a three tier structure since Feb 2008. Three-tier structure consists of three levels: 1. Central Office 2. Regional Offices 3. Branches Organization Hierarchy Chairman Managing Director Executive Director General Manager Deputy general Manager Assistant Manager Chief Manager Senior Manager Manager Deputy Manager Clerk.

50

xiii.

Key Personnel:

Shri Allen C A Pereira (Chairman and Managing Director)

Shri M.G. Sanghvi (Executive Director)

Shri V.P. Bhardwaj (Director (Government nominee)

Shri S.K. Gogia Director (RBI nominee)

Shri T Parameswara Rao (Director)

Shri Anand Kamalnayan Pandit (Shareholder Director)

Dr. Dinesh Shantilal Patel (Shareholder Director)

Dr. S. U. Despande (Officer Director)

Shri S.H. Kocheta (Director)

51

ix.

CORPORATE SOCIAL RESPONSIBILITIES (CSR) ACTIVITIES OF BANK OF MAHARASHTRA:

The Bank of Maharashtra being one of the oldest public sector banks in India has wholeheartedly accepted its responsibility towards the development and upliftment of the society. That is why the bank has so far made and still making several attempts in the upliftment of the poor farmers, destroying unemployment, women empowerment and education. In this context, the bank of Maharashtra has initiated many social programmes and activities. The Bank of Maharashtras Bank Rural Development Centres at Hadapsar and Bhigwan in Pune region are undertaking various developmental activities for the benefit of the famers. Its object is to set up Lab to Land project, reuse / rehabilitation of Saline Soil and advice on scientific use of inputs for optimum results. The Mahabank Agricultural Research and Rural Development

Foundation (MARDEF) is active in socio-economic development of villages by encouraging farmers to take diversified activities like dairy, EMU farming, goat rearing, grape cultivation, horticulture and scientific use of various inputs like fertilizers etc. The foundation assists farmers, especially small and marginal farmers, in receiving timely bank credit.

a) Mahabank Self Employment Training Institute (M-SETI): The Bank has established Five Mahabank Self Employment Training Institutes (MSETI), one each at Pune, Aurangabad, Nagpur, Nasik and Amravati. These provide training to rural youth and women for self

52

employment. A total of 4605 candidates have been trained by the institutes so far. M-SETI was established in December 2001 under the aegis of MARDEF with a view to fostering entrepreneurship skill development for educated unemployed youths, especially from rural areas.

Various Rural Entrepreneurship Development Programmes and Entrepreneurship Development Programmes courses are conducted through 3 M-SETI centres at Pune, Aurangabad and Nagpur. These M-SETI centres have conducted 187 programmes and trained 3905 unemployed youths of which 2696 have successfully started their own livelihood activities.

53

b) Gramin Mahila VA Balak Vikas Mandal (GMBVM)

Gramin Mahila VA Balak Vikas Mandal (GMVBVM), an NGO formed in 1989 by Bank of Maharashtra, is actively involved in formation, nurturing of SHGs and facilitating linkage to Bank Credit. The GMVBVM also helps SHGs to market their products through two sales outlets in Pune City named SAVITRI. GMVBVM assists the SHGs to secure quality raw material and inputs for their products and extends marketing and sales support. Matured SHGs are assisted to upgrade into Small and Medium Enterprises. GMVBVM has been declared as Mother NGO by Govt. of Maharashtra. Gramin Mahila VA Balak Vikas Mandal is a Trust sponsored by the bank in 1989. Its objective is the empowerment of rural women through the medium of Self help groups. Today GMBVM is working in 5 lead districts of Bank of Maharashtra i.e. Pune, Satara, Nasik, Thane and Jalna, nuturing self help groups covering over 1 lakh women.

54

The trust has the following thrust areas of work: 1. It is the only NGO which not only guides SHGs in taking up income generating activities but also markets the products of SHG. Towards this end the bank has made available space at Model Colony, Pune to run an emporium called SAVITREE 2. Educating of SHG members 3. Insurance of SHG members 4. Training in all activities to become a successful SHG 5. Credit linkages with banks Upto 31st March 08 GMBVM has formed 15739 SHG s and credit liked 13175 SHGs. Out of which, 8974 SHGs are credit linked through branches of bank.

55

c) Councelling for farmers in Vidharbha: The Mahabank Vidharbha Shetkari Jagruti Abhiyan, a joint effort of Bank of Maharashtra and Hanuman Vyayam Prasarak Mandal has reached out to more than 5750 Farmers in distress in six districts of Vidharbha through counseling and training sessions

The bank has taken its social responsibility seriously. With the high number of suicides amongst the farmers in Maharashtra, the bank has taken innovative steps to bring the farmers into the formal banking sector and stem the depressive trend. In its endeavor to provide counseling to the farmers in Vidharbha region, Bank of Maharashtra thought of going beyond extending financial assistance to them, and it came out with an idea of providing technical inputs to farmers in the drought-affected Vidharbha region.

56

 The bank, in association with the NGO, conducts these programmes every Saturday and Sunday in various parts of Amaravati and Yavatmal districts. Agriculture experts give technical inputs to these farmers, numbering around 100 to 150 in batch, on various matters. The programme educates farmers not to depend on a single crop but also encourages them to take up some ancillary activities. So far 3736 farmers from Akola, Amravati, Yeotmal and Buldhana Districts have so far been given training under this programme.

d) Women Empowerment: Ever since 2001- the Year of Women, the bank is implementing the 13point action plan in letter and spirit. The total credit extended to women beneficiaries amounted to rs.1469 crores covering 167327 women borrowers as on march 08.

e) Rural Development Centre: The bank has established Mahabank Agricultural research and rural Development Foundation in1980 for supporting farmers by providing credit plus services along with extension services, technical support, operational research and development in the field of agriculture. Considering the need for upgrading the technology adoption in agriculture and allied activities and to educate farmers for improving productivity the bank has established 2 rural development centres one at Hadapsar and another at Bhigwan way back in 1984. The centres are implementing various developmental programmes like soil reclamation, crop production, organic farming and activity specific training programmes through NABARD and other agencies. 57

5.2 BANKING BEFORE LPG IN BANK OFMAHARASHTRA

The Bank of Maharashtra was registered on 16th Sept 1935 with an authorized capital of Rs 10.00 lakh and commenced business on 8th Feb 1936. However, this was the pre independence period and during this period the British rule was still pertaining in India. This was the time when the Indians were more conservative and were less known to banking products and services. It was a major challenge for any bank to perform the banking activities then since, during the early age of Indian banking there were no modern technologies and less were the marketing sources or communication channels. That is why, during the pre independence period all the Indian banks were merely confined to providing traditional banking activities like accepting deposits and lending money to the people.

The Bank of Maharashtra was also not an exception to this. The bank of Maharashtra known as a common man's bank since inception, focused on providing initial help to small units during the pre independence or pre LPG period. This practice of Bank of Maharashtra later on gave birth to many of today's industrial houses.

The traditional banking products or services offered by the bank were very much popular among the common man but were hardly seem enough attractive for the high earning people of India. As they constantly wanted better services within a very less time which was not possible then for a public sector bank like Bank of Maharashtra. After nationalization in 1969, the bank expanded rapidly. It established various branches across the different states of India and as a result today

58

it has 1428 branches all over India. The Bank has the largest network of branches by any Public sector bank in the state of Maharashtra. It would be tough to imagine a bank like Bank of Maharashtra to be a passive mood. Though it was a real fact but this was the outcome of the government restrictive rules and regulations which were in practice before LPG.

The Bank of Maharashtra from the beginning itself believed in providing services at cheaper rates and faster pace especially to the poor and helpless common man of India. And this helped the bank to constantly change and adapt to the changing world. The Bank of Maharashtra always made an attempt to increase its customer base and expand its business without worrying about the governments rules and regulations and also about the competitors. The bank started a tradition of serving the people of India along with the foreigners world class quality financial service or banking products right from the date of its inception. The reforms of LPG in India, however just provided the Bank of Maharashtra the wings to fly in the global market and live like a global giant in the banking industry.

59

5.3

IMPACT OF GLOBALIZATION ON THE PERFORMANCE

OF BANK OF MAHARASHTRA:

Effects of Globalization on Indian banking Industry started when the

government opened the country's markets to foreign investments in the early 1990s. Globalization of the Indian Industry took place in its various sectors such as steel, pharmaceutical, petroleum, chemical, textile, cement, retail, banking and BPO. Globalization means the dismantling of trade barriers between nations and the integration of the nations economies through financial flow, trade in goods and services, and corporate investments between nations. Globalization has increased across the world in recent years due to the fast progress that has been made in the field of technology especially in communications and transport. The government of India made changes in its economic policy in 1991 by which it allowed direct foreign investments in the country. As a result of this, globalization of the Indian banking Industry along with many other such industries took place on a major scale.

However, this impact can be clearly seen from the performance of the Bank of Maharashtra after the globalization period. The various beneficial effects of globalization in Bank of Maharashtra are that it brought in huge amounts of money in the form of deposits from various foreign depositors or investors. And also post globalization many foreign companies set up industries in India in collaborations with the Indian companies, especially in the pharmaceutical, BPO, 60

petroleum, manufacturing, and chemical sectors and this helped the Bank of Maharashtra to provide various counseling, financial, etc. services to them and also provide employment to many people in the country. This helped to reduce a small amount of the level of unemployment and poverty in the country. The major benefit of the Effects or impact of Globalization on Indian Industry that the foreign companies brought in highly advanced technology with them and started providing various new technological and innovative mechanisms. This helped the Bank of Maharashtra to be a customer of such companies and make changes or adapt to the changing world and provide better and cheaper customer services at a faster pace. And also it give a better platform or room for bank of Maharashtra to modify its way of working and also to introduce or provide innovative as well as modern services or banking products to its domestic as well as international customers.

The various negative Effects of Globalization on Bank of Maharashtra, inspite of being a public sector bank, are that it faced severe or increased competition in the Indian market between the foreign banks and domestic banks. With the foreign goods or services being better than the Indian goods or services, the consumer preferred to buy the foreign goods or services. This reduced the amount of profit of the Bank o. This happened mainly in the pharmaceutical, manufacturing, chemical, and steel industries. The negative Effects of Globalization on Indian Industry are that with the coming of technology the number of labor required decreased and this resulted in many people being removed from their jobs. This happened mainly in the pharmaceutical, chemical, manufacturing, 61 and cement industries.

The effects of globalization on Bank of Maharashtra have proved to be positive as well as negative. The government of India must try to make such economic policies with regard to Indian Industry's Globalization that are beneficial and not harmful.

The aftermath effect of globalization in Bank of Maharashtra can be clearly seen with respect to 7 Ps as follows:

1. Product:

A) Huge Range of Products: 1) Retail financing 2) Housing loan to public 3) Model Educational Loan scheme-from learning to earning. 4) Aadhar Scheme for pensioners-no old age blues 5) Mahabank Kisan Credit Card (MKCC) - farmers ease 6) Finance for Non-conventional Sources of Energy-beyond time 7) Micro Finance-never too small for us 8) Swarna jayanti Gram Swarozgar Yojana (SGSY)-Rural focus 9) Swarna Jayanti Shahari Rozgar Yojana (SJSRY)- of towns and cities 10) Assistance to SC/ST Category-finance for everyone 11) Advances to Minority Community-no bars 12) Maha-Entrepreneur-for the spirit of challenge 13) Women Empowerment

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B) Products catering to different segments of population such as students, senior citizens or even NRIs.

C) Products catering to different needs of people such as educational loans, consumer loans, banking needs of women in rural areas, ebanking etc.

2. Price:

a) Attractive Interest rates of fixed term deposits and interest rates of loan. b) Concession of 0.5% to the senior citizens on the same.

3. Place:

a) Bank of Maharashtra has largest number of branches in Maharashtra b) Thick network in semi-urban and rural areas. c) Large network of ATMs.

4. Promotion: a) Promotes its image as One family One bank through various family oriented schemes. b) Uses promotional literature such as brochures and pamphlets to increase awareness about schemes available among customers. c) Promotes its social image by sponsoring events such as Commonwealth Youth Games 2008, SavaiGandharv Mahotsav in Pune, Felicitation of Bhimsen Joshi on his receiving of highest honour of Bharat Ratna. 63

5. People:

a) Highly Qualified Staff. b) Loyal Employees working since many years. c) Relationship building with the customers. d) Special treatment is given to valued customers such as Insta-Debit Cards which are issued and delivered to customers within two days.

6. Process:

a) Use of simple and less complicated technology at all branches to facilitate easy and smooth transactions. b) Implementation of Information Technology, 801 branches are connected through Core Banking Solutions while the rest in semi-urban and rural areas use Bibas software solution. c) Disaster Recovery and Contingency management plans are in place in case of any calamities. d) Process Control Mechanisms implemented in BoM.

There is an Inspection department at Central and all regional offices. a) Concurrent Audits: Their purpose is to check conformance to procedural guidelines. These are held every month in selected branches by external auditors. b) Cash Verification Inspections: These are internal inspections carried out within the organization. One branch cross-checks the other branchs functioning.

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7. Physical Evidence:

a) Large network of 1428 branches in 22 states and2 union territories. b) Large number of ATMs. c) Computerized branches and use of software solutions for banking such as Core Banking Solutions and Bibass. Information Technology centre is established in Kharadi, Pune while its disaster recovery unit is established in Chennai.

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The modern as well as innovative services or products provided by the Bank of Maharashtra can be stated as follows:

SERVICES

ATM Services: Mahabank Visa Debit card gives the customer freedom to access his savings at any Visa accredited Merchant Establishment or ATM. This card allows him to purchase goods at retail outlets and withdraw cash from ATMs in India and abroad. It enables direct on line debit to the customers savings account. It is available round the clock i.e. cash withdrawal is also available facility up to Rs 20000/-. There are no joining fees charged by the bank. It is completely safe and secure.

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CREDIT CARDS: (Bank of Maharashtra's India Card) The Bank of Maharashtras INDIA CARD is affiliated to Master Card International and is acceptable at thousands of member establishments spread all over India and Nepal where Master Card Logo is displayed. It provides safety and convenience while travelling and shopping. It is an ideal companion.

The card is issued for 2 years with nominal membership fees and automatic renewal facility. The CREDIT CARD holder can enroll family members as add on member at concessional fee. A free air travel insurance upto Rs. 2.00 lacs & accident insurance cover (group insurance) upto Rs. 1.00 lac is available. Cash withdrawal facility upto Rs. 5,000/- on two occasions in a month from any of our branches spread all over India. It also entitles you to a concession in insurance premium of mediclaim policy of National Insurance Company limited. It insures you against any fraudulent usage on your lost/ stolen card. One time free credit card has been issued to customers having deposit above one lac & Housing Loan Account holders.

DEMAT SERVICES: Bank of Maharashtra is a Depository Participant (DP) of CDSL since 1999. Services rendered are for holding / transferring / pledging of securities such as shares / Debentures / Bonds / Commercial Papers/ UTI units / etc (known as securities) in electronic form (Dematerialized form).

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BANCASSURANCE: With the commitment to customers convenience, the Bank of Maharashtra has tied up with insurance companies so that customers can avail of insurance service at the branches. The bank is the corporate agent of the Life Insurance Corporation of India for distribution of their life insurance products. In non-life sector, Bank of Maharashtra is the corporate agent of United Insurance Company for the distribution of their non life insurance products. Both its insurance partners offer a wide range of insurance products, which are available at our branches as a result of their Bancassurance tie ups. This is another value addition Bank of Maharashtras customer in their banking relationship with them.

DISTRIBUTION OF MUTUAL FUNDS: Bank of Maharashtra is always looking to add value to the relationship which customers have with us. For the convenience of our customers, we are trying to provide a host of financial services under one roof. The Bank has tied up with Franklin Templeton mutual fund for distribution of their mutual fund products through our branches. We welcome you to our branch, the financial supermarket which offers banking as well as insurance with investment services at one stop.

Mahabill pay: The Bank of Maharashtra have launched an Electronic Bill Presentment and Payment Services presently in Pune and Mumbai known as " MahaBillPay " in association with India Ideas.com Ltd. better known as Bill Desk Company. The Customer, who wishes to make payment utility payments like Electricity, Telephone Bills, etc., should apply through the 68

branch and get registered under the scheme. The Bill Desk Company for easy identification will provide each customer with unique registration number. Bill Desk Company would accordingly obtain the bills details of the registered customers from the Utility providers like MSEB, BSNL etc. The list of customers with bill details, whose bills have fallen due for payment, will be sent to the branch. Branches on receipt of the payment list would debit the account of the customer concerned accordingly.

Mahabank INSTA REMITSCHEME: (funds transfer) Under the scheme services are expanded to the customers for funds transfer from one Bank/Branch to another Bank/Branch. Thus there will be two types of customer related interbank funds transfers as under: 1. When BoM customer wants to transfer funds to another bank/branch. 2. Other bank/branch customer wants to transfer funds to BoM customer.

CAPITAL MARKET APPLICATION (ASBA): The Bank of Maharashtra as a Self Certified Syndicate Bank (SCSB) authorized by SEBI, an additional mode of making payment in IPO/FPOs have been made available by the Bank in the form of Application Supported by Blocked Amount (ASBA) to all the Resident Retail Individual Investors who are our account holders. ASBA process would co-exist with the current process of retail investors using cheque as a mode of payment and submitting applications to sub-syndicate. 69

MAHA e TRADE: Bank of Maharashtra in association with

M/s Religare Securities Ltd., M/s Munoth Capital Market Ltd., M/s Enam Securities Direct Pvt Ltd.,

Brought forward a fast, easy, transparent and hassle-free way for investing / trade in shares in secondary capital market through National Stock Exchange and Bombay Stock Exchange. Investment in shares traded on the NSE and BSE can be made without having to visit the share-broker. All other associated hurdles like tracking of settlement cycles, paying and receiving funds in savings account, paying and receiving shares in Demat accounts can be been removed. Now from a remote location while on tour, picnic, and holiday - through internet and laptop / personal computer the customer can also trade in the stock market. He can have access to world class research reports, absolutely free, on trading and investment from the Brokers sites. Bank of Maharashtra helps the customer to integrate his banking, Demat and trading accounts. He can trade in shares backed by funds and securities available in your bank / Demat account. Trading has been made very easy even for beginners with this service.

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PRODUCTS The following are the innovative and modern products offered by the Bank of Maharashtra: DEPOSITS: Saving Deposit: It is like any other normal saving deposit account. Any individual can open savings bank account singly or jointly. The difference between this saving deposit of Bank of Maharashtra and any other banks saving account is that it facilitates opening of SB Account of minors jointly with natural guardian/legal guardian. The applicant should furnish identity and address proof as given in account opening form (CIF for individuals), two photographs & PAN number/Form No. 60/61 while opening new account as per the rule and guidelines issued by the RBI. In case the customer is unable to give any documentary proof of identity & address, to the satisfaction of the bank, the account can be opened with the introduction from existing account holder who has been subjected to full KYC procedure & having satisfactory operations in the account over six months. Mahabank Yuva Yojana: It is a new Scheme for Students started by the bank of Maharashtra with a view to making children develop the habit of banking and also to make them our future customers, we have introduced suitable scheme for kids / children / students. The Age Limit for this deposit is 10 years and above.

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 Mahabank Lok Bachat Yojana: Any individual who falls in the category of below poverty line (BPL) can singly / jointly open the account. The joint account holder should also belong to BPL category. Minors from BPL family are also eligible to open an account. In case the customer is unable to give any documentary proof of identity & address, to the satisfaction of the bank, the account can be opened with the introduction from existing account holder who has been subjected to full KYC procedure & having satisfactory operations in the account over six months. Subject to condition that balance in all accounts taken together should not exceed Rs. 50000/- & credit summation Rs. 1 lakh during the year. Mahasaraswati Scheme: Usually savings are made for future requirements and or to meet unforeseen eventualities, which mainly involves health and life expectancy. While many individuals cannot afford to deposit large chunk of money at one go, it is quite possible for them to save regularly in small amounts and make it a large deposit over the period. Such continuity needs to be valued and suitably rewarded by way value additions. Hence a new product is designed under the title Mahasaraswati by the Bank of Maharashtra. Anyone who will invest under Mahasaraswati scheme will be a preferred customer for the Bank of Maharashtra Model Educational Loan Scheme to meet any of their future needs of funds for their higher education with concession in the interest rate. Scheme is open for minors who have attained the age of six months and valid till completion of 20 years. Minor can open the account: The

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account can be opened in monthly installment as under Rural and Semi-urban Area Minimum of Rs. 50/and in multiple of Rs.10/Metro and Urban Area Minimum of Rs. 100/- and in multiple of Rs.10/-

The minimum period for which an account can be opened is 36 months. The Maximum Period is 120 months. The scheme shall carry rate of interest as that of regular term deposit scheme.

Benefits offered under Mahasaraswati Scheme:

Education Loan Accident Insurance Cover from Rs. 50,000. Permanent Total Disablement Cover from Rs. 50,000. Yuva Yojana Account with Minimum Balance of Rs.10 only for students.

Free International Visa ATM cum Debit card.

Mahabank Sheetaljama yojana: This is a new deposit scheme under the term deposit category which is for all Individuals, singly or jointly, firms, corporate bodies, Public Sector Undertakings Associates, Trusts, etc. The Minimum amount to be deposited Rs.5000/- (called lot comprising of 5 units of Rs.1000/-) and in multiples of Rs.1000/-. There is No maximum limit. Each lot of the deposit under this scheme may be accepted for minimum period 73

of 15 days and maximum period of 5 years. Interest is payable half yearly. No compounding interest rate of interest is given under this scheme. Rate of interest also will be decided by Bank from time to time. It is a unique scheme which combines the best features of short term deposits and the current account. Automatic renewals on maturity are possible. Withdrawals are freely allowed in multiples of Rs.1000/-. For withdrawals, special slips are provided by the bank. Unwithdrawn portion continues to earn interest at contracted rate. Last in First out (LIFO) method applied for withdrawals. Interest amount is separately paid or credited to the depositors SB account. Facilities Available under this Scheme:

Loan Upto 90% of the accrued amount. Nomination facility is available. Premature closure allowed. Transfer from one branch to another branch allowed.

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 Educational Loans: The bank of Maharashtra has started offering loans to the needy students for completing their education in India as well as abroad. Agricultural Loans: The Agri- finance scheme of Bank of Maharashtra offers or provides loan or finance to the poor farmers of rural India for the purpose of buying agricultural equipments. The rate of interest charged for them by the bank is very low. Vehicle Loans: The purpose of this loan scheme is to help the customer in purchase of New 4 or 2 wheelers / Second hand 4 wheelers. This is scheme is available for the professionals, businessmen, permanent salaried people. A guarantor is required for this scheme or otherwise the acceptance of the vehicle dealer. Mahabank Adhar scheme: This is a new type of personal loan offered by the Bank of Maharashtra especially for the old retired people of India who feeding themselves only from the income earned through their pensioners. The purpose of this scheme is to provide ADHAR or support to the old Indian customer at their late earning stage; however, for this scheme a compulsory guarantor is required from the pensioners family. 75

 Gold Card Scheme for Exporters: The objective of this loan scheme is to provide better terms of credit to all eligible exporters, including those under small and medium sector, compared to those extended to other exporters by the Bank.

Eligibility: All exporters, including those under small and medium sectors, would be covered under the scheme provided:

Their accounts are classified as "STANDARD" continuously for 3 immediately preceding years.

Their names do not figure in RBI's defaulter list / caution list and they have not been blacklisted by ECGC.

There are no overdue in pre-shipment export credit. They have not run up losses continuously for 3 immediately preceding years.

They do not have overdue export bills in excess of 10% of the current year's turnover. Benefits to customers:

Limits will be sanctioned in-principle for 3 years, with a provision for renewal, subject to satisfactory compliance with the terms and conditions of sanction stipulated by the Bank.

A standby limit to the extent of 20% of the assessed limit will be made available to the Gold Card holders for meeting urgent credit needs for executing sudden orders.

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Requests for Packing Credit in Foreign Currency (PCFC) from Gold Card holders will be given priority.

In case of unanticipated export orders, norms for inventory will be relaxed taking into account the size and nature of export order.

Service charges stipulated for Gold Card holders will be 25% lower than the charges recovered from other exporters. Tenure: The Gold Card will be issued for a period of 3 years and will be automatically renewed for a further period of 3 years provided no adverse features, irregularities are noticed in the account. In case of any misuse of the card or observance of any violation of terms and conditions, the Bank shall have the right to recall the Card any time.

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The SWOT Analysis of Bank of Maharashtra

Strengths:

1. Strong customer base in Maharashtra 2. Loyal group of customers since many years 3. Highly qualified staff with doctorates, economists and CAs 4. Strong network in Maharashtra and Gujarat 5. Large number of branches in semi-urban areas in Maharashtra and Madhya Pradesh 6. Large retail customer base (Low cost deposits from retail of BOM were highest upto last year) 7. Efficient internal system 8. Adequate sanctioning powers of authorities internally

Weaknesses:

1. The name of the bank carries a regional image. 2. NPA (Non-performing assets) is high. 3. Forex business is low. 4. No branches abroad. 5. Density of branches in Maharashtra alone is very high. 6. Larger risk involved in retail customer base. 7. Retail customers are more demanding.

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Opportunities: 1. Acquisition of smaller private sector banks. 2. Acquiring more government business such as pension and PPF. 3. More scope into Retail advances and Macro finances.

Threats:

1. Reducing NPI (Net Profit Interest). 2. Reducing Feebased income. 3. Free entry of foreign banks after 2009.

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BIBLIOGRAPHY Books:1) Money and Banking Author: - R. S. Raghunathan 2) Indian Banking Industry in 2020 Author: - R.K. Uppal 3) Financial Markets and Services Author: - R. Swami

Websites:1) www.bankof maharashtra.in 2) www.google.com 3) www.wikipedia.com 4) www.rbi.org.i

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