1. DO NOT COPY Chapter-2 EVOLUTION OF INDIAN BANKING INDUSTRY & BRANCH BANKING

2. DO NOT COPY Introduction In the evolution of this strategic industry spanning over two centuries, immense developments have been made in terms of the regulations governing it, the ownership structure, products and services offered and the technology deployed. The entire evolution can be classified into four distinct phases. 1.Phase I- Pre-Nationalization Phase (prior to 1955) 2.Phase II- Era of Nationalization and Consolidation (1955- 1990) 3.Phase III- Introduction of Indian Financial & Banking Sector Reforms and Partial Liberalization (1990-2004) 4.Phase IV- Period of Increased Liberalization (2004 onwards)

3. DO NOT COPY Current Organizational Structure The entire organized banking system comprises of 1.scheduled Banks 2.Non-scheduled banks Banking needs of the financially excluded population is catered to by other unorganized entities, distinct from banks, such as, 1.Moneylenders 2.Pawnbrokers 3.Indigenous bankers etc

4. DO NOT COPY Scheduled Banks Listed under the second schedule of the RBI Act, 1934 Paid up capital and reserves of at least 0.5 million Scheduled banks are further classified into commercial and cooperative banks. The basic difference between scheduled commercial banks and scheduled cooperative banks is in their holding pattern Scheduled cooperative banks are cooperative credit institutions that are registered under the Cooperative Societies Act.

5. DO NOT COPY Scheduled Commercial Banks (SCBs) Account for a major proportion of the business of the scheduled banks SCBs in India are categorized into the five groups based on their ownership and/or their nature of operations State Bank of India and its six associates Nationalised banks and SBI and associates together form the public sector banks group and control around 70% of the total credit and deposits businesses IDBI ltd. has been included in the nationalized banks group since December 2004. Private sector banks include the old private sector banks and the new generation private sector banks Foreign banks are present in the country either through complete branch/subsidiary route presence or through their representative offices

6. DO NOT COPY Regional Rural Banks Regional Rural Banks (RRBs) were set up in 1975 To develop the rural economy by providing banking services By combining the cooperative specialty of local orientation and the sound resource base which is the characteristic of commercial banks Their equity holding is jointly held by the central government, the concerned state government and the sponsor bank (in the ratio 50:15:35) Despite growing in geographical coverage, the number of RRBs operational in the country has been declining over the past five years due to rapid consolidation among them

7. DO NOT COPY Scheduled Cooperative Banks Scheduled cooperative banks in India can be broadly classified into: 1. urban credit cooperative institutions 2.rural cooperative credit institutions. Rural cooperative banks undertake long term as well as short term lending. Credit cooperatives in most states have a three tier structure: 1.Primary 2.District 3.State level

8. DO NOT COPY Non-Scheduled Banks They are n the form of Local Area Banks (LAB) Local area banks are banks that are set up under the scheme announced by the government of India in 1996, for the establishment of new private banks of a local nature; with jurisdiction over a maximum of three contiguous districts LABs aid in the mobilisation of funds of rural and semi urban districts Six LABs were originally licensed, but the license of one of them was cancelled due to irregularities in operations, and the other was amalgamated with Bank of Baroda in 2004 due to its weak financial position There are only 4 LABs operating in India

9. DO NOT COPY Business Segmentation The entire range of banking operations are segmented into four broad heads- 1.retail banking businesses, 2.wholesale banking businesses, 3.treasury operations and 4.other banking activities. Banks have dedicated business units and branches for retail banking, wholesale banking (divided again into large corporate, mid corporate) etc.

10. DO NOT COPY Retail banking Exposures to individuals or small businesses. Retail banking activities are identified based on four criteria of orientation, granularity, product criterion and low value of individual exposures. Retail banking products on the liability side includes all types of deposit accounts and mortgages and loans (personal, housing, educational etc) on the assets side of banks. It also includes other ancillary products and services like credit cards, demat accounts etc. The major component of the retail portfolio of banks is housing loans, followed by auto loans

11. DO NOT COPY Among the large banks, ICICI bank and State Bank of India has a strong focus on movement towards cheaper channels of distribution, which is vital for the transaction intensive retail business Among the smaller banks, many have a visible presence especially in the auto loans business. Foreign banks have had a somewhat restricted retail portfolio till recently. They are fast expanding in this business segment. The retail banking industry is likely to see a high competition scenario in the near future. The largest players in retail banking in India are ICICI Bank, SBI, PNB, BOI, HDFC and Canara Bank

12. DO NOT COPY Wholesale banking Wholesale banking includes high ticket exposures primarily to corporate. Internal processes of most banks classify wholesale banking into mid corporate and large corporate according to the size of exposure to the clients. Various forms of financing, like project finance, leasing finance, finance for working capital, term finance etc form part of wholesale banking transactions. Syndication services and merchant banking services are also provided to wholesale clients in addition to the variety of products and services offered

13. DO NOT COPY Treasury Operations Treasury operations include investments in…………. 1. Debt market (sovereign and corporate) & Equity market, 2.Mutual funds, 3.Derivatives, Trading and forex operations These functions can be proprietary activities, or can be undertaken on customer’s account Treasury operations are important for managing the funding of the bank treasury income is a significant component of the earnings of banks Treasury involves the: 1. Front office (dealing room), 2.Mid office (risk management including independent reporting to the asset liability committee) and 3.Back office (settlement of deals executed, statutory funds management etc).

14. DO NOT COPY Other Banking Businesses Other banking business consists of residual category which includes all those businesses of banks that do not fall under any of the earlier categories discussed. This category includes Para banking activities like 1.hire purchase activities, 2.leasing business, 3.merchant banking, 4.factoring activities etc.

15. DO NOT COPY Products of the Banking Industry The products of the banking industry broadly include : 1.deposit products, 2.credit products and 3.customized banking services Apart from the generic products like deposits (demand deposits – current, savings and term deposits), loans and advances (short term and long term loans) and services, there have been innovations in terms and products such as the; flexible term deposit, convertible savings deposit (wherein idle cash in savings account can be transferred to a fixed deposit), etc. Other banking products include fee-based services that provide non-interest income to the banks

16. DO NOT COPY Branch Banking Concept One of the most important channel of the bank and is generally the most preferred channel from the customer's point of view Branch also referred to as the face of the bank since the customer can visit personally and meet and interact with the branch officials and avail the various services offered by the bank. Branch is the sales and service channel of a bank and the branch employees are generally responsible for both sales and service of bank's products The most common examples of deposit products of a bank are savings bank account, current accounts, fixed deposit accounts, and recurring deposit accounts.

17. DO NOT COPY The examples of a bank's asset products include; 1. personal loan, 2.home loan, 3.car loan, 4.credit card. When a customer approaches the branch for any of the loan products of the bank, the branch employee takes down the contact details of the customer and the record of the lead generated are kept with the bank for follow up action. The front office activities that involve customer interaction are handled at the branches, for instance, cash receipts and payments, issue of DD or lockers

18. DO NOT COPY The back office activities, such as clearing and account opening may be centralized at a different location away from the branch Activities like clearing centralize payments of drafts and other instruments, which are related to the local area, may be grouped in to one centre. Certain other activities that are common across centres may be performed at another place for the purpose of achieving efficiency of operation and controlling costs.

19. DO NOT COPY Services Provided at Branches Several services are offered to customers by the bank branches such as ; Account opening Cash receipts Cash payments Cheque book issue Stop payment of cheques Closure of fixed deposits and premature withdrawals Issue of DDs and banker's cheque Safe deposit lockers

20. DO NOT COPY Foreign exchange services Gold retail De-Mat services Acceptance of clearing cheques Deliverables, such as cheque books, debit cards, PINs and passwords Acceptance of queries and complaints Investment services Standing instructions Retail loan products

21. DO NOT COPY Despite the emergence of several other delivery channels external to the bank, branch banking still remains its utility. A branch is capable of handling diverse requirements of a customer in addition to projecting the human feeling arising out of the personal relationship with the branch officials.