New year 2014

Wish  all of you a happy and prosperous new year 2014

WOMEN CELL SEMINAR ON "GENERAL AND LEGAL AWARENESS AMONG WOMEN" ON 12/12/2013

Women Cell 2013-14 conducted a seminar on “GENERAL AND LEGAL AWARENESS AMONG WOMEN” that was taken by Smt Usha madam  (Kerala Women Cell, Aluva zone Sub Inspector of Police)  for all girls in the MES College, Marampally under the guidance of Smt Princy Francis and Smt Khadeeja Beevi (Women Cell co-ordinators)  on 12/12/2013.Dr Julie M David  (Asst Professor, Dept of Computer Application) and Adv. Revathy M N (Lecturer, Dept  of Business Administration)  presented a talk on personality development and general law.

Publication of the book on computerised accounting

House construction in Kadukutty, Thrissur

India - FIVE YEAR PLANS

BUSINESS WRITINGS for Students of Department of English

ECONOMIC DEVELOPMENT IN KERALA

Kerala’s Economic Development 

The course of economic development of the state is closely related to its location, climate and topography. In a way, Kerala's unique pattern of development and its population profile are products of its history as much as of its geography. The location of the region on the Arabian Sea coast permitted trading and cultural relations with outside world. 

Musiris situated on the coast and the numerous minor ports attracted traders from around 4 the world.

‘The overwhelming availability of Arab accounts of the Kerala region known  as Malabar do indicate the importance of Arabs in the overseas trade originating from this region. In 10th and 11th centuries, trade from India to West was controlled by Arabs of Morocco, Tripoli and Tunis; who operated from Aidhab on the Red Sea. It is said that half the ships from Aidhab went to Gujarat while the other half went to Malabar. There were several Arab Muslim settlements on the West Coast of India, which might have served to strengthen this trade. Similarly, there are evidences of Chinese trade relations with Kerala. As a result of such trade, use of money and different types of coins increased in this region, leading to minting of coins here itself’. The growth in trade had increased the production of spices and other cash crops which in turn have generated more trade (Ibid). But there was not much growth in manufacturing during this period. ‘Kerala could sustain itself as a trading region without a manufacturing base. This might have led to the fact that the Malabar Coast, though acknowledged for long as an important trading region, never developed a manufacturing hinterland like other trading regions of India’ (Ibid). The large proportion of Christians (19.02 percent) and Muslims (24.70 percent) in the state's population may be partly due to this historic trading and cultural contacts rather than through Muslim conquests, as in rest of the country. The symbiosis of different 

religious groups and cultural streams has led to communal harmony and social stability in the state.

                   The historic and cultural contacts with the Arabs helped Malayalees to easily avail of employment opportunities following the oil boom in the Arab world from the 1970s.

The region was the first centre for European colonization in India following the landing of Vasco da Gama in Calicut in 1498 AD. Portuguese conquest of the region was followed by those of the Dutch and the British. However, except Malabar, the other parts of the present day Kerala viz. Travancore and Cochin

            Almost all the present differences between Kerala and the rest of the country in social development can be traced at least to the last two centuries. It may be noted that the princely states of Travancore and Cochin had established very clear leads in all indicators of social development over other princely states and British India, much before independence. When social development was gathering momentum in the erstwhile Travancore and Cochin states during the 19th century and the first half of the 20th century, there was large scale economic expansion to support it. Both in Travancore and Cochin, area under cultivation especially that of cash crops like coconut, tea, coffee, spices and rubber, was constantly expanding. Many of these important crops were introduced by the Europeans in Kerala from their other colonies in Africa and Latin America.

 The Europeans initiated cultivation of some of these crops under the plantation system in vast tracts of forest and hilly areas. The local population followed suit. As most of the expansion of area under crops, both cash and food crops had taken place in virgin forest land and also in land reclaimed from backwaters, the 

period also saw increase in agricultural productivity. Along with agricultural production, agro-processing industries like coir and cashew also expanded . In Malabar, Basel Mission, a Swiss missionary cum trading 

organization introduced modern factories using the latest available technologies in spinning and weaving and also in manufacturing of roofing tiles . Large chunk of capital invested in modern industries, together with the spurt of investment in plantation companies, enabled Travancore to overtake other major Princely States in total corporate paid-up capital. 

The growth of the banking business in Travancore and Cochin was well ahead, not only of Malabar, a part of Madras Province of British India, but also of other provinces and regions. The economic expansion of Travancore state had helped its revenue raising capacity. Unlike today, revenues of the state then included income tax, excise duties and customs duties (Singh 1944). It was the continuous growth in revenue together with the state’s expenditure priorities in favour of social services and the lower cost of providing education mostly at the school level and health care mostly at the primary level that brought about the phenomenal social development in pre-independence period. Kerala’s position was higher than the national average in 1950-51 and 1955-56.  

               The economy started slowing down during the period 1955-56 to 1965-66, almost coinciding with the first decade of the formation of Kerala. There was slackening of growth in all sectors of the economy during this period.There has been a turnaround in the economy from 1987-88. The turnaround coincided 

almost with the economic reforms in the country characterized by liberalization, privatization and globalization. Growth rate of the state income at constant prices during the period 1987-88 to 2000-01 rose to 6.0 per cent. Growth rate during the period 2000-01 to 2006-07 was higher at 8.1 per cent and was more than that for the country

The production of cereals comprising mostly of rice, the staple diet of Malayalees has been coming down due to the failure to offset the decline in area by increasing productivity. The share of Kerala in the production of coconut is now 43 percent. The share of Kerala in the production of this crop has been coming down. 

During the nineteenth and the twentieth century, industries like coir and coir mattings,cashew nuts and paper products developed in Travancore. In Malabar, the manufacturing of roofing tiles and handloom products developed. There was a large growth of chemical industry during the twentieth century even before independence, taking advantage of the proximity to Cochin port, the availability of waterways to transport bulk raw materials through barges, the availability of cheap hydel power and fresh water (Thomas 2004). 

The industrial units also used rivers for discharge of effluents. But the share of manufacturing sector today is less important in Kerala than in India. In the share of manufacturing in SDP, Kerala lags far behind Gujarat, Haryana, Maharashtra and the neighbouring states of Tamil Nadu and Karnataka. In fact, Kerala’s rank in the share of manufacturing is the thirteenth among the fifteen major states. A feature of Kerala’s industrial structure is the large share of unregistered units. The share of this sub sector in the state income originating from industries11 was 52.4 per cent as against 32.0 per cent for the country in 2006-07. One of the main reasons for the state’s low level of industrialization is the absence of major industrial minerals like metallic ores, coal and crude oil. Agro based industrial raw materials like cotton, jute, sugar cane and oil seeds are also not produced in the state in any large quantity. The only commercially exploitable mineral resources are ilmenite, rutile, zircon and sillimanite found along the beach shores. As for rubber, the major agricultural raw material of Kerala, most of the rubber based industrial units were located outside the state as the principal markets of tyre and other rubber goods lay outside the state. There was also very little value addition in the exports of Kerala. 

 Till the 1990s, prime importance was given to public sector in the industrialization of the country. Most of the public sector industrial units were started by the central government. But Kerala had received only a small share in central government’s investment in industrial units. This is yet another reason cited for the relatively limited development of 12 industries in Kerala. The share of central government investment in fixed capital of public sector industrial units in the state is only 2.4 percent of the total investments as against 17.8 percent in Maharashtra, 7.6 percent in Tamil Nadu and 6.9 percent in Andhra Pradesh. This share has been coming down steadily (GoK 2009). In fact, after independence, the major industries which came up in the central government sector were a pesticide unit, a news print unit and a ship building unit. There are other possible reasons for the industrial backwardness of Kerala during the era of economic planning in India. The emphasis on basic and heavy industries like iron and steel machinery, chemicals and petroleum refining in the early decades of the planning era in India led to the state without raw materials for these industries lagging behind other states in industrial investment both in the public and private sector. The import substitution based economic development strategy followed by the country till the 1990s retarded the industrial development of Kerala situated far away from the major input and the output markets in the country. With the adoption of this strategy, the geographic location of the state which was an advantage for an export oriented state historically turned out to be its disadvantage. The central government’s export import policy 

supporting largely manufactured export through larger subsidies and import entitlements and duty drawback schemes did not benefit Kerala which was exporting mostly agricultural products or agro based industrial products with little or no import content. Even the exchange rate policy of keeping an over valued fixed exchange rate till the 1990s affected the rupee value realization of its exports as well as its non-resident 

Malayalees (NRMs) remittances (Thottathil 1988; George and Remya, 2010). Construction, a sub sector of the secondary sector has been booming in recent periods. The share of this sector in the state income of Kerala was 12.4 percent as against 8.1 percent for India in 2004-05. This sector accounted for 11.8 percent of its employment in the state as against 6.1 per cent for the country. 

              The tertiary sector is the most important sector accounting for 62.5 percent of the state income and 40.4 percent of the employment in 2004-05. There are several reasons adduced for the growth of the tertiary as also the construction sectors. One major factor is the large scale remittances received from Non 

Resident Malayalees (NRMs). These have boosted consumption in the state. The state which ranks only fourth in per capita NSDP ranked first in per capita consumer expenditure in 2004-05. The NRM remittances helped the growth of trade, hotels and restaurants, transport, finance and real estate sectors. This has also led to the growth of education and health sectors. The growth in employment in education and health services is linked to the large-scale expansion of private sector in school and higher education as also in health sector. The expansion of these sectors is a result, partly of the increased demand from NRMs for these services even at higher cost. Tourism is another growth sector of Kerala which contributed to the expansion of service sectors particularly hotel, transport and finance sub sectors. Kerala is emerging as one of the important destinations for tourists coming to India.12 Share of Kerala in the number of foreign tourists arriving in India has been growing steadily to reach 11.2 percent in 2008. 

The foreign exchange earnings from tourists coming to Kerala are estimated to be six percent of the total earnings received by the country. The flow of domestic tourists has also been increasing. The total revenue, both direct and indirect, generated from tourism is estimated at Rs. 13130 crores in 2008 (GoK 2009). 

Weaknesses of Kerala Economy 

 Unemployment 

The chronic unemployment problem has been the bane of the state eclipsing all its other achievements.A major weakness (and potential strength) of Kerala economy is its extreme dependence on outside the state and outside the country, both for employment and for remittances. 

 Deteriorating Fiscal Position 

Deteriorating fiscal position is another major weakness of the state economy . The average Gross Fiscal Deficit of the state during 2005-08 was 3.3 per cent of Kerala’s SDP as against 1.9 per cent for all states. The problem of deficit in Kerala is more in the revenue account.  Under the Constitution of India, the power to tax many of the fast growing services like finance and communication is vested with the federal government and not with the state governments. The weak revenue position of the state has led to its borrowing on a large scale to meet even government’s current consumption. The fiscal crisis has placed a limit to the development in the social sectors. Cracks are already visible in the large edifice of government’s social service infrastructure like education, health care, social security and food security. 

Second Generation Problems 

    It was seen earlier that many of Kerala’s achievements are comparable to those of developed countries. But these successes have also brought in its wake some of the problems of the developed countries. Unlike these countries, the state does not have the financial ability or the economic strength to tackle them all by itself. The federal agencies had added to the financial debility of the state by denying it adequate funds as 

they are still preoccupied with the first generation problems in education, health care and social security in other parts of the country and to meet the country’s international commitment to meet the Millennium Development Goals (MDGs). Kerala’s unique ‘second-generation problems’ resulting from its very success in attaining higher levels of social development, therefore, receive scant attention from the federal agencies. 

Ageing 

The large graying population of the state has several implications in relation to health needs, service pension requirements of the government and social security system. The share of elderly in the age group 60 and above in the population of both Kerala and India showed an increasing trend during 1981-2001. The share of the elderly in the total population was always higher in Kerala than in the country. This share is increasing very fast in Kerala unlike in the country, where it is increasing only marginally. 

The changing demographic profile is also likely to increase the demand for expenditure on health services. The increasing proportion of the aged in the state’s population is changing the disease profile. A new category of diseases comprising degenerative and neo-plastic diseases like hyper-tension, diabetics, cardiovascular diseases, neurological disorders and cancer have emerged in the state. These diseases of the old age call for higher investment in diagnostic equipment, hospitalization, treatment, recovery and rehabilitation. At a time when the expenditure requirements on health are rising, the state is finding it increasingly difficult to meet these requirements partly due to fiscal crisis. As a result, the quality of services in the government health services has been coming down. Consequently, there has been an increase in the demand for private medical care services offered mostly on commercial terms. 

 Changing Profile of Employment Seekers 

              Yet another second generation problem is the change in character of the unemployment in the state. Higher levels of education have changed the character of unemployment in the State to that of educated unemployed, as seen earlier. Eighty four per cent of the unemployed registered on the government’s employment exchanges are matriculates and above. This makes most of the federal government schemes for employment creation, targeted mainly at the unskilled manual workers, inappropriate for the unemployed of the state. 

 Degradation of the Environment 

                 The state is now confronted with major problems on the environmental front. Today, ‘Kerala faces a major environmental crisis from severe deforestation in Western Ghat Mountains, leading to soil erosion there and water logging in low land areas. Polluted rivers and foreign hi-tech offshore fishing operations are reducing the fish catch’ . 

 According to the Comprehensive Environmental Pollution Index (CEPI) for 88 industrial areas in the country, the index for the Greater Cochin Area is 75. It ranks 24 in terms of this index. It is declared as a ‘critically polluted area’ . 

Potential for Growth 

      Kerala has the potential for a much faster economic growth as a number of factors are now turning favourable to its growth. The shifting from the fixed exchange rate system to the floating exchange rate system, though the floating is still being managed by the Reserve Bank of India, has turned out to be its advantage since 1991. The geographical position of Kerala far from the input and output markets which was a disadvantage when Indian economy was a closed economy following an import substitution development 

strategy. But the location of the state is turning to be an advantage for it, with the opening of the Indian economy. Kerala’s geographical location close to the international shipping route has become a great advantage, especially now since two container terminals, one in Cochin (to be commissioned already) and the other in Vizhinjam near Thiruvananthapuram (the work is being initiated) are going to be located in the state’s coast. Cochin today is the only place in India where South Africa Far East (SAFE) submarine optic fibre cables land. South East Asia - Middle East - Western Europe Cable network (SEA) is also landing at Cochin. Cochin is emerging as a gateway which now handles 70 per cent of India’s data traffic. Cochin has a 15 GBPS VSNL International Gateway Exchange (www.infoparkkochi.com). The Kerala circle of BSNL has the second largest basic service network out of the 24 telecom circles in India (http://www.bsnl.co.in) 

Kerala already has the physical, financial and communication infrastructure. In fact, it ranks first in the index of infrastructure among the states in India (GoI 2004). Kerala has the highest tele-density of 15.4 per 100 population (www.itmission.kerala.gov.in). It also 20has relatively well developed social infrastructure for education and health care. All that is now required is investments to upgrade the quality and to modernize the services. 

Another positive factor for Kerala today is that it enjoys comparatively more social stability and absence of communal and caste conflicts due to the cultural synthesis which dates back to its early history and the social reform movements in the last two centuries. The bad reputation of the state as a place of disturbed labour relations is now changing as strikes and lock outs which were quite frequent in Kerala in the 1960s and the 1970s have now come down considerably. There is much scope for value addition to its export of both agricultural and traditional industrial products of Kerala. The rich bio-diversity of state and the traditional knowledge regarding the many uses of Kerala’s flora and fauna offers potential for development of biotechnology provided the research capacity in this area is enhanced considerably. 

As noted earlier, Kerala economy had developed strong linkages with international markets historically. The large scale emigration of people had strengthened these linkages. With the opening up of Indian economy, it is expected that this state with its historic trading and cultural links with the outside world will be able to profit from the new opportunities. The non resident Malayalees had got opportunities for getting exposed to global markets, culture, modern technology and management skills. But this exposure is not yet leading to any significant transfer of such technology and management skills to the Kerala economy. Migration has also led to large scale inflow of funds to the state. But, instead of being invested in the state, they are being increasingly diverted to other states through financial intermediaries. Much of the migrants’ remittances seem to be spent on conspicuous consumption in the absence of other investment outlets. The state has the great potential to convert the NRMs into its most important asset as was done by countries like China and Ireland. 

If Kerala has to convert its above discussed advantages into opportunities, it has got to meet some pre-conditions. Firstly, it has to improve the quality of governance and speed up the government’s decision making process. Secondly, a qualitative change is required in the attitude of the political parties, public, civil society groups and the media. Dreze and Sen, great admirers of Kerala development themselves have pointed out the major short-comings of the state ‘The political economy of incentives is of crucial importance in translating the potential for economic expansion, implicit in human development, into the reality of actual achievement in the economic sphere’ (Dreze and Sen 1996). Again, ‘The political climate has also tended to encourage economic policies that are extremely hostile to the market mechanism, even in areas where this hostility and the excessive reliance on government regulation that goes with it- is quite counter productive’ (Dreze and Sen 1995). Further, they argue that ‘Kerala has suffered from what were until recently fairly anti-market policies, with deep suspicion of market-based economic expansion without control. So its human resources have not been as well used in spreading economic growth as they could have been with a more complementary economic strategy, which is now being attempted in the country’ (Sen 1999). The above 

shortcomings pointed out by Sen and Dreze may explain why Kerala’s social development failed to trigger off economic growth as had happened in most other countries

                                                                       ************

'Great Depression' in India

'Great Depression' in India An economic recession that began on October 29, 1929, following the crash of the U.S. stock market. The Great Depression originated in the United States, but quickly spread to Europe and the rest of the world. Lasting nearly a decade, the Depression caused massive levels of poverty, hunger, unemployment and political unrest. In economics, a depression is a sustained, long-term downturn in economic activity in one or more economies. It is a more severe downturn than a recession, which is seen by some economists as part of the modern business cycle. Considered by some economists to be a rare and extreme form of recession, a depression is characterized by its length; by abnormally large increases in unemployment; falls in the availability of credit, often due to some kind of banking or financial crisis; shrinking output as buyers dry up and suppliers cut back on production and investment; large number of bankruptcies including sovereign debt defaults; significantly reduced amounts of tradeand commerce, especially international; as well as highly volatile relative currency value fluctuations, most often due to devaluations. Price deflation,financial crises and bank failures are also common elements of a depression that are not normally a part of a recession. The Great Depression of 1929 had a very severe impact on India, which was then under the rule of the British Raj. The Government of British Indiaadopted a protective trade policy which, though beneficial to the United Kingdom, caused great damage to the Indian economy. During the period 1929–1937, exports and imports fell drastically crippling seaborne international trade. The railways and the agricultural sector were the most affected. The international financial crisis combined with detrimental policies adopted by the Government of India resulted in the soaring prices of commodities. High prices along with the stringent taxes prevalent in British India had a dreadful impact on the common man. The discontent of farmers manifested itself in rebellions and riots. The Salt Satyagraha of 1930 was one of the measures undertaken as a response to heavy taxation during the Great Depression. The Great Depression and the economic policies of the Government of British India worsened the already deteriorating Indo-British relations. When the first general elections were held according to the Government of India Act 1935, anti-British feelings resulted in the Indian National Congress winning in most provinces with a very high percentage of the vote share.

BANKING SECTOR REFORMS IN INDIA

CHAPTER-2 : BANKING SECTOR REFORMS

Q.1:  Explain the banking structure in India since Independence.                     OR

Discuss the scheduled banking structure in India with reference to public, private and foreign bank.

Ans. A) INTRODUCTION :-

In India, commercial banks are the oldest, largest and fastest growing financial intermediaries. They have been playing a very important role in the process of development. In 1949 RBI was nationalized followed by nationalization of Imperal Bank Of India (New State Bank Of India) in 1995. In July 1969, 14 major commercial banks were nationalized and in April 1980, 6 more were nationalized. Reforms in banking sector have led to the setting up of new private sector banks as well as entry of more foreign banks.  

         B) STRUCTURE OF BANKING IN INDIA :-

Banking system in India is classified in to scheduled and Non-scheduled banks. Scheduled banks consist of State co-operative banks and Commercial banks. Non-scheduled consist of Central Co-operative Banks and primary credit society and Commercial Banks.

STRUCTURE OF BANKING IN INDIA

                                  

 

                 Scheduled                                                                              Non – Scheduled

 

State co-op bank           Commercial bank                     Central Co-op Banks               Commercial

                                                                                          and Primary credit society.         Bank    

        

1.    Scheduled Banks :-

         Under RBI Act of 1934, banks were classified as scheduled and non-scheduled banks. The scheduled banks are those which are entered in second schedule of RBI Act of 1934. They are eligible for certain facilities. All commercial banks (India and foreign, regional rural banks) and state co-operatives are scheduled banks.

A scheduled must have a paid up capital and reserves of not less than Rs. 5 lakhs. It must also satisfy RBI that it affairs are not conducted in a manner detrimental to the interest of its depositors.

2.    Non-Scheduled Banks :-

Non-scheduled Banks are those which have not been included in the second Schedule of RBI Act. The number of non-scheduled banks is declining as many of them are attaining the status of scheduled banks in 2008.

STRUCTURE OF SCHEDULED COMMERCIAL BANKS

           Public Sector                           Private Sector                                  Foreign

              Banks (27)                               Bank (22)                                    Banks (31)

-       State Bank Group (08)      - Old Private Sector Banks (15)

-       Nationalised banks (19)    - New Private Sector Banks (07) 

-       Regional Rural Banks (86)

The scheduled commercial banks consist of public sector banks, private sector Banks and Foreign Banks.

           As on march 2009, there are 27 public sector banks consisting of SBI and its 8 associated banks, 19 nationalised banks and IDBI Ltd. There are 7 new private sector banks, 15 old private sector banks in India. Besides there are 86 RRBs in 2008-09.

              I.        Public Sector Banks :-

Public sector Banks have a dominant position in terms of business. They accounted for 71.9% of assets, 76.6% of deposits, 75.3% of advances and 69.9% of investments of all scheduled commercial banks as at end of March 2009.

            Among the public sector banks, the state Bank of India and associates had 16,294 branches and nationalized banks had 39,703 branches as on June 30, 2009.

a)    State Bank Of India And Its Associate Banks :-

           On 1^st July, 1955, on the recommendation of Rural Credit Survey Committee, the Imperial Bank of India was converted in to State Bank of India. RBI acquired its 92% shares, thus SBI had the distinction of becoming the first state owned commercial bank in the country.

            The State Bank of India (Associate banks) Act was passed in 1959 and this paved the way for creating State Bank Group. Besides functioning as a commercial bank, SBI ushered a new era of mixed banking system in the country. It proved that financing to agriculture and other priority sectors could be a viable commercial activity.

                On 19^th July, 1969, 14 major commercial banks were nationalized and 6 more were nationalized in 1980. Over the years SBI and its associates have expanded their business. On June 30, 2009, they accounted for 20% of total branches of all commercial banks. The share of banking business with them was roughly 30%. In 1993, SBI Act was amended to enable it to have access to capital market.

b)    Other Nationalised Banks :-

The second category of public sector is 19 commercial banks, of which 14 were natioalised on July 19, 1969. This changed the banking structure. Each one of these 14 banks had deposits of Rs. 50 crore or more. The nationalization was justified by government because major banks have a larger social purpose. In December 1969, Lead bank Scheme was formulated which played an important role in transforming these profit maximizing institutions in to catalysts of local development.

            On April 15, 1980 six more private owned commercial were nationalized. The purpose was to promote the welfare of the people in conformity with the policy of the state. With natioalisation, The share of private sector in the entire banking declined to just 9%. In 1993 New Bank of India merged with Punjab National Bank. As a result, the no. of public sector banks (other than state Bank and its associates) declined to 19. As on June 30, 2009, the total number of branches of 19 nationalised banks was 39,661.

c)    Regional Rural Banks (RRBs) :-

The RRBs came to be set up under the act of 1976. They were set up to save the poor rural people from the grip of money lenders and traders. The Working Group on Rural Banks recommended the setting up of RRBs as part of multi-agency approach to rural credit. A RRB is sponsored by a public sector bank which also subscribes to its share capital. As on June 30, 2006, there were 196 RRBs with a network of 14,500 branches.

The RRBs meet the credit requirements of weaker sections, small and marginal farmers , landless labourers, artisians and small entrepreneurs. RRBs have been excellent in meeting the credit needs of rural poor. RRBs 95% of total direct advances goes to weaker sections. RRBs are facting organizational and management problems. In 1995-96 they incurred losses of Rs. 426 crore. As a result of Amalgamation the number of RRBs have come down to 86 and their branches were 15,144 as on June 30, 2009. In 2009-10 their number still declined to 82.

            II.        Private Sector Banks :-

In Private sector small scheduled commercial banks and seven newly established banks with a network of 8,965 branches are operating. To encourage competitive efficiency, the setting up of new private bank is now encouraged. Presently, the total number of banks in private sector is 22 (15 old and 7 new). In 2008-09 new private sector banks accounted for 19.6% of total banking assets.

           III.        Foreign Banks :-

For a long time a majority of foreign banks have been operating in India. On 30^th June 2009, the country had 32 foreign banks with 295 branches located mainly in big cities. Apart from financing of foreign trade, these banks have performed all functions of commercial banks and they have an advantage over Indian banks because of their vast resources and superior management. In 2008-09, foreign banks accounted for 8.5% of total banking assets. At the end of September, 2010, 34 foreign banks were operating in India.

              In India, foreign banks practices have been held in suspicion. The unfair competition with Indian banks, their practice of drawing funds from London Money Market for financing India’s foreign trade and their gross irregularities in  securities scam have been a cause of concern. With growing strength of Indian banks have improved their practices and have stopped discriminatory policies.

Q.2: Explain the measures taken during the first phase of banking sector

  reforms in India.                                                                                                      OR

        Explain the recommendations of Narasimham Committee report of

  1991 and the measures adopted by Government to implement them.            OR

        Write note on first phase of banking sector reforms.

Ans. A) BANKING SECTOR REFORMS :-

Since nationalisation of banks in 1969, the banking sector had been dominated by the public sector. There was financial repression, role of technology was limited, no risk management etc. This resulted in low profitability and poor asset quality. The country was caught in deep economic crises. The Government decided to introduce comprehensive economic reforms. Banking sector reforms were part of this package. In august 1991, the Government appointed a committee on financial system under the chairmanship of M. Narasimhan.

B) FIRST PHASE OF BANKING SECTOR REFORMS / NARASIMHAN COMMITTEE REPORT – 1991 :-

                          To promote healthy development of financial sector, the Narasimhan committee made recommendations.

I)             RECOMMENDATIONS OF NARASIMHAN COMMITTEE :-

1.    Establishment of 4 tier hierarchy for banking structure with 3 to 4 large banks (including SBI) at top and at bottom rural banks engaged in agricultural activities.

2.    The supervisory functions over banks and financial institutions can be assigned to a quasi-autonomous body sponsored by RBI.

3.    Phased reduction in statutory liquidity ratio.

4.    Phased achievement of 8% capital adequacy ratio.

5.    Abolition of branch licensing policy.

6.    Proper classification of assets and full disclosure of accounts of banks and financial institutions.

7.    Deregulation of Interest rates.

8.    Delegation of direct lending activity of IDBI to a separate corporate body.

9.    Competition among financial institutions on participating approach.

10.  Setting up asset Reconstruction fund to take over a portion of loan portfolio of banks whose recovery has become difficult.

II) Banking Reform Measures Of Government :-

On the recommendations of Narasimhan Committee, following measures were undertaken by government since 1991 :-

1.    Lowering SLR And CRR

The high SLR and CRR reduced the profits of the banks. The SLR has been reduced from 38.5% in 1991 to 25% in 1997. This has left more funds with banks for allocation to agriculture, industry, trade etc.

   The Cash Reserve Ratio (CRR) is the cash ratio of a banks total deposits to be maintained with RBI. The CRR has been brought down from 15% in 1991 to 4.1% in June 2003. The purpose is to release the funds locked up with RBI.

2.    Prudential Norms :-

                           Prudential norms have been started by RBI in order to impart professionalism in commercial banks. The purpose of prudential norms include proper disclosure of income, classification of assets and provision for Bad debts so as to ensure hat the books of commercial banks reflect the accurate and correct picture of financial position.

Prudential norms required banks to make 100% provision for all Non-performing Assets (NPAs). Funding for this purpose was placed at Rs. 10,000 crores phased

over 2 years.

3.    Capital Adequacy Norms (CAN) :- 

Capital Adequacy ratio is the ratio of minimum capital to risk asset ratio. In April 1992 RBI fixed CAN at 8%. By March 1996, all public sector banks had attained the ratio of 8%. It was also attained by foreign banks.

4.    Deregulation Of Interest Rates :-

The Narasimhan Committee advocated that interest rates should be allowed to be determined by market forces. Since 1992, interest rates has become much simpler and freer.

a)    Scheduled Commercial banks have now the freedom to set interest rates on their deposits subject to minimum floor rates and maximum ceiling rates.

b)    Interest rate on domestic term deposits has been decontrolled.

c)    The prime lending rate of SBI and other banks on general advances of over Rs. 2 lakhs has been reduced.

d)    Rate of Interest on bank loans above Rs. 2 lakhs has been fully decontrolled.

e)    The interest rates on deposits and advances of all Co-operative banks have been deregulated subject to a minimum lending rate of 13%.

5.    Recovery Of Debts :-

The Government of India passed the “Recovery of debts due to Banks and Financial Institutions Act 1993” in order to facilitate and speed up the recovery of debts due to banks and financial institutions. Six Special Recovery Tribunals have been set up. An Appellate Tribunal has also been set up in Mumbai.

6.    Competition From New Private Sector Banks :-

Now banking is open to private sector. New private sector banks have already started functioning. These new private sector banks are allowed to raise capital contribution from foreign institutional investors up to 20% and from NRIs up to 40%. This has led to increased competition.

7.    Phasing Out Of Directed Credit :-

The committee suggested phasing out of the directed credit programme. It suggested that credit target for priority sector should be reduced to 10% from 40%. It would not be easy for government as farmers, small industrialists and transporters have powerful lobbies.

8.    Access To Capital Market :-

The Banking Companies (Acquisation and Transfer of Undertakings) Act was amended to enable the banks to raise capital through public issues. This is subject to provision that the holding of Central Government would not fall below 51% of paid-up-capital. SBI has already raised substantial amount of funds through equity and bonds.

9.    Freedom Of Operation :-

Scheduled Commercial Banks are given freedom to open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudental accounting norms. The banks are also permitted to close non-viable branches other than in rural areas.

10.  Local Area banks (LABs) :-

In 1996, RBI issued guidelines for setting up of Local Area Banks and it gave Its approval for setting up of 7 LABs in private sector. LABs will help in mobilizing rural savings and in channeling them in to investment in local areas.

11.  Supervision Of Commercial Banks :-

The RBI has set up a Board of financial Supervision with an advisory Council to strengthen the supervision of banks and financial institutions. In 1993, RBI established a new department known as Department of Supervision as an independent unit for supervision of commercial banks.

Q.3 : Discuss the recommendations of Narasimhan Committee Report of

1988 on banking sector reforms.                                                                                  OR

Write note on Narasimhan Committee Report of 1998.                                             OR

Discuss the measures taken during the second phase of banking sector reforms in India.

Ans. A) SECOND PHASE OF REFORMS OF BANKING SECTOR (1998) / NARASIMHAN COMMITTEE REPORT 1988 :-

                  To make banking sector stronger the government appointed Committee on banking sector Reforms under the Chairmanship of M. Narasimhan. It submitted its report in April 1998. The Committee placed greater importance on structural measures and improvement in standards of disclosure and levels of transparency. Following are the recommendations of Narasimhan Committee :-

1)    Committee suggested a strong banking system especially in the context of capital Account Convertibility (CAC). The committee cautioned the merger of strong banks with weak ones as this may have negative effect on stronger banks.

2)    It suggested that 2 or 3 large banks should be given international orientation and global character.

3)    There should be 8 to10 national banks and large number of local banks.

4)    It suggested new and higher norms for capital adequacy.

5)    To take over the baddebts of banks committee suggested setting up of Asset Reconstruction Fund.

6)    A board for Financial Regulation and supervision (BFRS) can be set up to supervise the activities of banks and financial institutions.

7)    There is urgent need to review and amend the provisions of RBI Act, Banking Regulation Act, etc. to bring them in line with current needs of industry.

8)    Net Non-performing Assets for all banks was to be brought down to 3% by 2002.

9)    Rationalization of bank branches and staff was emphasized. Licensing policy for new private banks can be continued.

10) Foreign banks may be allowed to set up subsidiaries and joint ventures.

                    On the recommendations of committee following reforms have been taken  :-

1)    New Areas :-

New areas for bank financing have been opened up, such as :- Insurance, credit cards, asset management, leasing, gold banking, investment banking etc.

2)    New Instruments :-

For greater flexibility and better risk management new instruments have been introduced such as :- Interest rate swaps, cross currency forward contracts, forward rate agreements, liquidity adjustment facility for meeting day-to-day liquidity mismatch.

3)    Risk Management :-

Banks have started specialized committees to measure and monitor various risks. They are regularly upgrading their skills and systems.

4)    Strengthening Technology :-

For payment and settlement system technology infrastructure has been strengthened with electronic funds transfer, centralized fund management system, etc.

5)    Increase Inflow Of Credit :-

Measures are taken to increase the flow of credit to priority sector through focus on Micro Credit and Self Help Groups.

6)    Increase in FDI Limit :-

In private banks the limit for FDI has been increased from 49% to 74%.

7)    Universal banking :-

Universal banking refers to combination of commercial banking and investment banking. For evolution of universal banking guidelines have been given.

8)    Adoption Of Global Standards :-

RBI has introduced Risk Based Supervision of banks. Best international practices in accounting systems, corporate governance, payment and settlement systems etc. are being adopted.

9)    Information Technology :-   

Banks have introduced online banking, E-banking, internet banking, telephone banking etc. Measures have been taken facilitate delivery of banking services through electronic channels.

10) Management Of NPAs:-

RBI and central government have taken measures for management of non-performing assets (NPAs), such as corporate Debt Restructuring (CDR), Debt Recovery Tribunals (DRTs) and Lok Adalts.

11) Mergers And Amalgamation :-

In May 2005, RBI has issued guidelines for merger and Amalgamation of private sector banks.

12) Guidelines For Anti-Money Laundering :-

In recent times, prevention of money laundering has been given importance in international financial relationships. In 2004, RBI revised the guidelines on know your customer (KYC) principles.

13) Managerial Autonomy :-

In February. 2005, the Government of India has issued a managerial autonomy package for public sector banks to provide them a level playing field with private sector banks in India.

14) Customer Service:-

In recent years, to improve customer service, RBI has taken many steps such as :- Credit Card Facilities, banking ombudsman, settlement off claims of deceased depositors etc.

15) Base Rate System Of Interest Rates:-

In 2003 the system of Benchmark Prime Lending Rate (BPLR) was introduced to serve as a benchmark rate for banks pricing of their loan products so as to ensure that it truly reflected the actual cost. However the BPLR system tell short of its objective. RBi introduced the system of Base Rate since 1^st July, 2010. The base rate is the minimum rate for all loans. For banking system as a whole, the base rates were in the range of 5.50% - 9.00% as on 13^th October, 2010.

B) CONCLUSION :- 

To satisfy the growing demands from customers for high quality service, commercial banks will have to find out new ways and method to face new challenges.

Q.4 : Explain the comparative performance of public sector banks, new

private sector banks and foreign banks in India after Introduction of reforms. OR

Write note on performance of commercial banks in India.

Ans. A) PERFORMANCE OF PUBLIC SECTOR BANKS, NEW PRIVATE SECTOR BANKS AND FOREIGN BANKS IN INDIA :-

                           After the introduction of reforms the performance of all banks in India have improved. The comparative performance of public sector banks, new private sector banks and foreign banks is given below :-

1)    Productivity Of commercial Banks :-

Productivity is related to profitability. Productivity is analysed in terms of business per employee, profit per employee and business per branch. Let us Explain :-

A.   Business Per Employee :-

In public sector banks the business per Employee has increased from Rs. 324.1 lakh in 2005-06. The business per employee in the new private sector banks was Rs. 728.9 lakhs in 2005-06 and it   was Rs. 1012.8 lakh in foreign banks in 2005-06.

BUSINESS PER EMPLOYEE (` IN LAKH)

YEAR	PUBLIC SECTOR BANKS	NEW PRIVATE SECTOR BANKS	FOREIGN BANKS
1997-98	88.5	785.9	529.4
2005-06	324.1	728.9	1012.8

                          Source :- New Century Publications, 2008

                            

From above we can see that as compared to new private sector banks and foreign banks the performance of public sector banks is very low.

B.   Profit Per Employee :-

In public sector banks the business per employee has increased from Rs. 88.5 lakh in 1997-98 to 2.9 lakh in 2005-06. In new private sector banks it was rs. 6.3 lakhs and in foreign banks profit was rs. 26.5 lakh in 2005-06. The profits per employee is the highest in foreign banks followed by new private sector banks.

PROFITS PER EMPLOYEE (RS. IN LAKH) 

                 

Year	Public sector banks	New Private Sector banks	Foreign Banks
1997-98 2005-06	0.7 2.9	11.4 6.3	4.5 26.5

Source :- New Century Publications , 2008

C.   Business per Branch :-                                                                                                           

In India, business per branch has been increasing. In 2004-05 per branch business was Rs. 4,242 lakh in nationalized banks, Rs. 7,454 lakh in SBI and its associates, Rs. 21,656 lakh in new private sector banks and Rs.1,14,768 lakh in foreign banks.

BUSINESS PER BRANCH (RS. IN LAKH)

Year	Nationalized banks	SBI and its Associates	New Sector Pvt. Banks	Foreign Banks
1999-2000 2004-05	2,152 4,242	2,860 7,454	14,989 21,656	54,800 1,14,768

                        Source :- New Century Publications, 2008

The per branch business is lower in public sector banks as compared to new private sector banks and foreign banks. After the introduction of reforms the productivity of public sector Banks have started to rise.

2)    Profitability Of Commercial Banks :-

Profitability of commercial Banks has been shown by following indicators:-

a)    Interest Income Ratio :-

Interest Income Ratio (as percentage of total assets) of public sector banks has fallen from 8.8% in 2000-01 to 6.90% in 2009-10 and of foreign banks from 9.3%, in 2000-01 to 6.09% in 2009-10. New private banks has fallen marginally from 8.2% in 2000-01 to 7.07% in 2009-10.

b)    Interest Expanded Ratio :-

Interest expanded Ratio (as percentage of total assets) has fallen for all groups. It has fallen for foreign banks from 5.6% in 2000-01 to 2.06% in 2009-10. For Public sector banks it has fallen from 6% to 4.77% and new private sector banks from 6% to 4.21% during same period.

c)    Intermediation Cost To Asset Ratio (ICAR) :-

The ICAR of public sector banks hs fallen from 2.7% in 2000-01 to 1.49% in 2009-10. For new private sector banks it has risen from 1.7%to 2.04% and for foreign banks again it has fallen from 3% to 2.56% for same period.

d)    Return On Assets :-  

It is rate of net profit to total assets. The ROA of all banks has risen. For public sector banks it has risen from 0.4% in 2000-01 to 0.88 in 2009-10. For new private sector banks it has risen from 0.8% to 1.22%, and foreign banks from 0.9% to 1.09% for the same period.

e)    Net / Spread interest Margin :- 

Spread is an Important indicator of efficiency. In 2000-01 the spread interest margin of public sector banks was 2.9%, New private sector Banks was 2.1% and foreign banks was 3.6%. In the year 2009-10the public sector banks spread is of 2.13%, new private sector banks is 2.86% and the highest spread is of foreign banks 4.035.

3)    Asset Quality :-

Asset quality of banks is shown by the level of non-performing assets (NPAs).

GROSS AND NET NPAS OF COMMERCAIL BANKS

(As at end of March)

Banks	Total NPAs as % to total advances		Net NPAs as % to Net Advances
	2009	2010	2009	2010
Public Sector New private Sector Foreign Banks	1.97	2.19	.94	1.10
	3.05	2.87	1.40	1.09
	3.80	4.29	1.81	1.82

Source: - RBI Website

The gross NPAs as percent of total advances and net NPAs as percent of net advances of public sector banks have declined marginally in 2010 and that of new private banks and foreign banks have increased. In case of public sector banks the gross NPA ratio was 2.19% and net NPA ratio was 1.10% in 2010. For new private sector banks the gross NPA ratio decreased from 3.05% to 2.87% and net NPA ratio decreased from 1.40% to 1.09% during 2009 and 2010. The gross NPA ratio of foreign banks rose to 4.29% in 2010 and net NPAs rose to 1.82% in 2010.

4)    Financial Soundness :-

The Capital Adequacy ratio (CAR) is the most important indicator of financial soundness of banks. As on 31^st March, 2009, all commercial banks in India have become Basel II complaint. Under Basel II Indian Banks have to maintain a stipulated minimum capital to Risk Weighted Assets Ratio (CRAR) of 9%. The CRAR of Indian banks has risen from 14% at end March  2009 to 14.5% at end March 2010.

5)    Customer services :-

Indian banks have began to offer many financial services to clients / customers. Core banking Solutions (CBS) is increasing very fast. Under CBS, a number of services are provided like :- anywhere banking, ‘everywhere access’ and quick transfer of funds in an efficient manner and at reasonable cost. The no. of branches of PSBs that have implemented CBS increased from 79.4% in march 2009 to 90% at the end of March 2010.

Q.5: Explain the important new technologies introduced in banking in India.

                                                    OR

          Write note on: - performance of commercial Banks in India. (Mar.’11)

Ans. A) NEW TECHNOLOGY IN BANKING :-

The IT (Information Technology) has changed the Indian structure of Indian Banking. Technology has been identified by banks as an important element in their strategy to improve productivity and render sufficient customer service. In banking computerization has taken place all over the world. The purpose is to bring technology to the counter and to enable Employees to have information at their fingertips. The New technologies that are being used in banks are :-

1.    Electronic Fund Transfer (EFT) :-

It is easy transfer of funds from one place to another. It enables the beneficiary to receive money on same day or next day. The customer can transfer money instantly from one bank to another, from one bank account to another or from one branch to other or a different bank not only within the country but also anywhere else in t5hre world through electronic message.

2.    Credit Card :-

Credit Card (post Card) is a convenient medium of exchange. With the help of credit card a customer can purchase goods and services from authorized outlets without making immediate cash payments but, within the prescribed limit.

3.    Debit Card :-

Debit Card is a prepaid card and it allows customers anytime anywhere access to his saving or current account. For using debit card a PIN (Personal Identification Number) is issued to customers. Any transaction taking place is directly debited to the customers bank account.

4.    Phone banking :-

In phone banking a customer can do entire non-cash related banking services on telephone, anywhere at any time. He can talk to a phone banking officer for transacting a banking business.

5.    Telebanking :-

Telebanking is a 24 hour banking facility based on the voice processing facility available on bank computers. Here banking services or products are rendered through telephone to its customers.

6.    Internet Banking :-

Internet banking is on-line banking. It is a product of E–commerce. Internet banking enables customers to open accounts, paybills, know account balances, view and print copies of cheques, stop payments etc.

7.    Mobile Banking :-

Everybody with a mobile phone can access banking services, irrespective of their location. It is an extension of Internet banking. It provides services like account balance, mobile alerts about credit card or debit card transactions, mini account statement etc.

8.    Door Step Banking :-

Here, there is no need for customer to visit the branch for getting services or products from the bank. This means banking services and products are made available to a customer at his place of residence or work.

9.    Point Of Sale (POS) :-

In an online environment the POS terminal is a machine that facilities transactions through swipe of a card.

10.  ATMs:-

ATMs are emerging as the most useful tool to ensure ‘any time banking’ and ‘anywhere banking’ or ‘anytime money’. ATMs are self service vendor machines that help the banks to provide round the clock banking services to their customers at convenient places without visiting bank premises. The customers are provided with ATM card.

11.  Virtual Banking:-

It means rendering banking and its related services through use of IT. Some of the most important types of virtual banking are :-ATMs, electronic fund transfer phone – banking, credit card, debit card, internet banking etc.

12.  Electronic Clearing Services (ECS) :-

It is non – paper based movement of funds. It consists of Electronic Credit Clearing and Electronic Debit Clearing.

B) CONCLUSION :-

As banks are expanding in to virtual banking, supervision and audit will have to be strengthened. Banks will have to pay greater attention to fool proof security arrangements and systems to safeguard against frauds.