1.

Introduction
In the 12th Plan (2012-17), we will further accelerate investment in infrastructure. We will pay special attention to the remote areas of our country and to rural areas. Connecting such areas by rail and road will get the top-most priority, Mr. Manmohan Singh, Indian Prime Minister, (Addressing the nation on Independence Day : 15th August, 2011) The basic physical systems of a country's or community's population, including roads, utilities, water, sewage, etc. These systems are considered essential for enabling productivity in the economy. Developing infrastructure often requires large initial investment, but the economies of scale tend to be significant. (Organization for Economic Co-operation and Development) The infrastructure sector covers a wide range of services such as transportation (railways, roads, road transportation, ports, and civil aviation), communications (postal and telecommunications services), and other public goods (water supply and sanitation, solid waste management, urban transport). Each of these segments possesses 'public goods" characteristics of "non-rivalry" and "non-excludability". This implies that a simple reliance on competitive markets will not produce sound outcomes in infrastructure. Demand for infrastructure is set to continue to expand significantly in the decades ahead, driven by major factors of change such as global economic growth, technological progress, climate change, urbanization and growing congestion.

1.1General Definition
1.1.1 Dr. C. Rangarajan Commissions Notion of Infrastructure (2001)
While Infrastructure is recognized as a crucial input for economic development, there is no clear definition of infrastructure according to the current usage of the term in India. For policy formulation, setting of sectoral targets and monitoring projects, a clear understanding of what is covered under the rubric of infrastructure is necessary to ensure consistency and comparability in the data collected and reported by various agencies over time. The National Statistical Commission headed by Dr. C. Rangarajan, attempted to identify infrastructure based on some characteristics. The Rangarajan Commission indicated six characteristics of infrastructure sectors, (a) Natural monopoly, (b) High-sunk costs, (c) Non-tradability of output (d) Non-rivalness (up to congestion limits) in consumption, (e) Possibility of price exclusion and (f) Bestowing externalities on society. Based on these features (except b, d and e), the Commission recommended inclusion of following in infrastructure in the first stage: Railway tracks, signaling system, stations Roads, bridges, runways and other airport facilities T&D of electricity Telephone lines, telecommunications network Pipelines for water, crude oil, slurry, waterways, port facilities Canal networks for irrigation, sanitation or sewerage. The Commission further recommended that considering characteristics (b), (d) and (e) also, the above list may be extended to include the following in the second stage: School of Management Studies Page 1

Rolling stock on railways Vehicles, aircrafts Power generating plants Production of crude oil, purification of water Ships and other vessels.

1.1.2 Reserve Bank of India (RBI) circular on Definition of Infrastructure

As per the RBI, a credit facility is treated as infrastructure lending to a borrower company which is engaged in developing, operating and maintaining, or developing, operating and maintaining any infrastructure facility that is a project in any of the following sectors, or any infrastructure facility of a similar nature; A road, including toll road, a bridge or a rail system; A highway project including other activities being an integral part of the highway project; A port, airport, inland waterway or inland port; A water supply project, irrigation project, water treatment system, sanitation and sewerage system or solid waste management system; Telecommunication services whether basic or cellular, including radio paging, domestic satellite service (i.e. a satellite owned and operated by an Indian company for providing telecommunication service), network of trunking, broadband network and internet services; An industrial park or special economic zone; Generation or generation and distribution of power; Transmission or distribution of power by laying a network of new transmission or distribution lines; Construction relating to projects involving agro-processing and supply of inputs to agriculture; Construction for preservation and storage of processed agroproducts, perishable goods such as fruits, vegetables and flowers including testing facilities for quality; Construction of educational institutions and hospitals; Any other infrastructure facility of similar nature. For raising external commercial borrowings funds, the RBI has defined infrastructure to include (i) power, (ii) telecommunication, (iii) railways, (iv) road including bridges, (v) sea port and airport, (vi) industrial parks and (vii) urban infrastructure (water supply, sanitation and sewage projects)

1.1.3 Income Tax Department

For an infrastructure company, Section 80-IA of the Income Tax allows deduction of 100% profit from its income during initial 5 years of operation and then 30% deduction of profit from income during another 5 years. For this purpose infrastructure covers electricity, water supply, sewerage, telecom, roads & bridges, ports, airports, railways, irrigation, storage (at ports) and industrial parks/SEZ. School of Management Studies Page 2

1.1.4 World Bank

The World Bank treats power, water supply, sewerage, communication, roads & bridges, ports, airports, railways, housing, urban services, oil/gas production and mining sectors as infrastructure.

1.2 Why India is favorite destination?

The government has played a pivotal role in making Indian infrastructure sector an attractive investment destination for both domestic and foreign players. Steps taken by the government such as - opening up the sector to private players, liberalising foreign investment norms and huge spending on projects like National Highway Development Project (NHDP), National Maritime Development Programme (NMDP) et all- have given a stupendous impetus to the sector in the past few years. India's infrastructure sector output grew 5.3 percent in May from a year earlier, slightly higher than an annual growth of 5.2 percent in April, according to government data. During April-May, output rose 4.9 percent from 7.9 percent a year ago. Six core industries comprising crude oil, petroleum refinery, coal, electricity, cement and finished steel - grew by 5.2 per cent in April 2011, according to the recent data released. Petroleum refinery and finished steel output grew by 6.6 per cent and 4.3 per cent respectively. Electricity generation expanded by 6.8 per cent in the reported month. Crude oil production performed quite well, registering 11 per cent growth as against 5.1 per cent expansion in the previous year. Coal output registered a growth of 2.9 per cent in April 2011, a complete turnaround in comparison to the same month last year, when output had contracted by 2.9 per cent. India has seen a systematic transition from being a closed to an open economy since the beginning of economic reforms in the country in 1991. These reforms have had a farreaching impact and have unleashed its enormous growth potential. India has grown to become a trillion dollar economy with a largely self- Sufficient agricultural sector, a diversified industrial base and a stable financial and services sector. Among the growing economies of the world, India is second only to China. The countrys GDP has been growing at an average rate of 8.5% for the last five years. According to the Global Competitiveness Report 2009-10, India occupies the 49th place among 134 countries. The country ranks higher than many advanced countries in key parameters such as domestic market (4th) and innovation (28th). It also has a sound financial market (16th) and a strong banking sector (25th). India ranks third among the most attractive Source : Indian Bank destinations for FDI in the world. Association Survey 2010
Figure 1.1: Line graph Showing GDP growth rate

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Source Indian Bank Association 2010

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Figure 1.2: Bar graph showing FDI inflows in India

1.3 Infrastructure level in developed and developing countries

Given the different level of importance given to infrastructure development in developed and developing countries, overall outcomes are very different today even though in the early fifties and sixties both countries had fairly similar levels of infrastructure assets and services. For example, developed countries electricity output at 7.3 billion kWh in 1952 compares well with developing countries power output of 6.3 billion kWh in 1950-51. The developing countries road network in 1950s was extensive at 400,000 kms compared to about one third that in developed countries. In both countries, about 40% of roads were paved then. Developing countries railway network at 53,000 kms was more than double that of developed countries at 23,000 kms. Table below presents annual compound growth rates for basic infrastructure access for three periods, 1950-1980, 1980-1990, and 1990-2005, indicating the significant growth achieved by developed countries in the last 25 years. Developing countries was not able to continue higher levels of growth achieved in earlier years of planning.
Table 1.1: Table showing level of infrastructure development in Developed and Developing countries

1950-80

Developed Countries 1980-90 1990-2005

1950-80a 14.2 7.2 2.8 6.6 5.2

Developing Countries 1980-90 1990-2005 8.4 1.7 0.8 13.8 9.8 9.5 3.4 1.1 40.9 10.2

Electricity 10.8 9.4 6.5 Generation Road network 4.6 3.4 3.8 length Railway 0.5 0.2 0.1 network Telephone 10.2 8.9 28.7 subscribers Annual GDP 3.7 5.7 6.4 Growth Sources: World Development Indicator (2007) and ADB (2005).

Difference between Developed, Developing and under Develop Countries in terms of Infrastructure
Table 1.2: Table is showing comparison between Developed, Developing and Underdeveloped Countries

Developed Countries

Developing Countries

Underdeveloped Countries

Developed countries have A developing country is An underdeveloped country infrastructure in place- such largely similar, but the has lots of people, but lacks as roads, bridges, water existing infrastructure is some (or all!) basic School of Management Studies Page 4

pipes, fuel lines, electrical wiring, fibre optic wiring, and septic/sewage and runoff drainage or treatment systems, to name a few- and the technical capacity to take care of all their citizens with such infrastructure services as mechanical repair or maintenance facilities, doctors and medical facilities, etc. In short, a developed country has three things: It has all facilities, it has people to take care of that facility (and of other people), and it has people who make money and give up part of that money to pay for facilities. E.g. USA, South Korea

usually either old or poorly maintained (or both), and the people have less money to spend on commodities and so there are either fewer exports or the quality of the products that they make or the services they provide is lower than in a developed country.

infrastructures for some or all of its citizens, and so the people have no facilities and must make money which they are then expected to give to their government, who will then give them required facilities. However this doesn't often happen, because governments in these kinds of countries are invariably inefficient so they always lag behind the other countries.

E.g. India, Thailand

E.g. Cambodia, Burma

1.4 Urban and Rural Infrastructure

1.4.1 Urban Infrastructure
Varying Definitions of Urban United States (Developed Country) : Areas with minimum population density requirements and encompassing a population of at least 2500 inhabitants. India (Developing Country) : All statutory places with a Municipality, Corporation, Cantonment Board, or Notified Town Area Committee, and all places satisfying the following three criteria simultaneously: (i) A minimum population of 5000; (ii) At least 75 per cent of male working population engaged in non-agricultural pursuits; and (iii)A population density of at least 400 per sq. km (1000 per sq. mile). The urban share of the gross domestic product (GDP) for the Indian economy is not available on a regular and consistent basis, and the underlying data base for estimating this share is very weak. Estimates by the Central Statistical Organization (CSO), available for a few years, indicate that this share increased from 37.7 per cent in 1970-71 to 52 per cent in 19992000. The Mid-Term Appraisal of the Eleventh Five Year Plan puts the urban share of GDP

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at 62-63 per cent in 2009-10. The document further projects this share to increase to 75 per cent in 2030. India has been slow to urbanize. As of 2010, 30 per cent of Indias population is conservatively classified as urban. This is much lower than in other major developing countries, e.g. 45 per cent in China, 54 per cent in Indonesia, 78 per cent in Mexico, and 87 per cent in Brazil. All these countries have much higher per capita incomes but differences in the definition of urban also contribute to Indias low level of urbanization. If villages with more than 10,000 persons in India were to be classified as urban, this would imply a level of urbanization in India in 2010 of over 35 per cent, but it would still be much lower than in other countries. At Indias current stage of development, the industry and services sectors are the principal drivers of growth, with strong contribution from the private sector. Assuming that highquality infrastructure for telecommunications, power, transport, etc. can be put in place in Indian cities, the scope for private sector participation in the growth process will further widen. This will create demand for employment skilled as well as unskilled. India has the advantage of being at a stage in its demographic transition where the proportion of workingage population is still growing. By 2035, 69 per cent of Indias population will be between the ages of 15 and 65. If the educational system and vocational training are reoriented to create the skills in demand, and if labour laws are modernized to allow freer flow of labour in and out of firms so that labour use is not discouraged through government policies, rapidly growing sectors in urban areas should be generating rising employment opportunities. As the Indian economy moves up the growth trajectory with greater trade and investment, growth should become relatively more labour absorbing. In the years to come, with the nature of non-agricultural growth a crucial determinant of both the quantum and quality of agricultural growth, the growth in non-agricultural economic activity will entail a decline in the dependence of population on agriculture. This would suggest that migration from rural to urban areas is likely to be an important factor contributing to the process of urbanization of the Indian economy.

1.4.2 Rural Infrastructure

India's economic growth and development is predicated to a large extent upon the development of its 700-million strong rural population. Majority of the population lives in about 600,000 small villages and are engaged primarily in agriculture, directly or indirectly. A substantial portion of India's current agricultural labor force has to move ton onagriculture sectors for incomes in all sectors to go up. The challenge is to manage the transition of 80% of the rural population from a village-centric agricultural-based economy to an industry based economy. Grey areas of India Rural Infrastructure A set of basic facts define the constraints within which the economic growth and development of India's rural population must be addressed. Fundamentally, they relate to resource constraints, the nature of infrastructure, and the future trajectory of the geographical distribution of the population.

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 These services include, at a minimum market access, educational, health, financial, entertainment, transportation, and communications. Further, services depend on the availability of infrastructure. Infrastructure investment is irregular and inadequate to support 600,000 villages and the average cost of providing infrastructure is inversely related to the scale of the operation. Limitations on the financial and other resources available for providing infrastructure made it impossible to provide infrastructure at every village in India. Even if they were provided at every village, it will not be commercially sustainable. The basic geographical structure of population distribution will change once India shifts from being agriculture based country to industry based nation. The Government has launched Bharat Nirman" for the development of rural infrastructure. Plans proposed for the development of India Rural Infrastructure are Irrigation, Roads, Housing, Water Supply, Electrification, Telecommunication Connectivity. The task ahead for the development of India Rural Infrastructure is To connect 66,800 habitations with population over 1000 with all weather roads. To construct 1, 46,000Km of new rural roads. To upgrade and modernize 1, 94,000Km of existing rural roads. Total investment of 1, 74,000 crore envisaged under "Bharat Nirman", investment on rural roads estimated to be at ` 48,000 crore. To provide corpus of ` 8000 crore to Rural Infrastructure Development Fund (RIDF).

1.5 World level Infrastructure Development Organization

1. International Monetary Fund (IMF):-The IMF provides loans to countries that have trouble meeting their international payments and cannot otherwise find sufficient financing on affordable terms. This financial assistance is designed to help School of Management Studies Page 7

countries restore macroeconomic stability by rebuilding their international reserves, stabilizing their currencies, and paying for importsall necessary conditions for relaunching growth. The IMF also provides concessional loans to low-income countries to help them develop their economies and reduce poverty. 2. The World Bank: - The World Bank is a vital source of financial and technical assistance to developing countries around the world. It is made up of two unique development institutions owned by 185 member countriesthe International Bank for Reconstruction and Development (IBRD) and the International Development Association (IDA).

3. African Development Bank Group (AFDB):-The African Development Bank is a regional multilateral development bank, engaged in promoting economic and social development in Africa. Its mission is to help reduce poverty, improve living conditions for Africans and mobilize resources for the continents economic and social development. 4. Agence Franaise de Dveloppement (AFD):-Agence Franaise de Dveloppement is a bi-lateral development finance institution established in 1941 that works on behalf of the French government. Its mission is to finance development according to Frances Overseas Development Assistance policies. 5. Appropriate Infrastructure Development Group (AIDG):-The Appropriate Infrastructure Development Group (AIDG) helps individuals and communities get affordable and environmentally sound access to electricity, sanitation and clean water. 6. Asian Development Bank (ADB):-The Asian Development Bank is an international development finance institution whose mission is to help its developing member countries reduce poverty and improve the quality of life of their people. ADBs main partners are governments, the private sector, nongovernment organizations, development agencies, community-based organizations, and foundations. 7. Centre for Global Development - "Cash on Delivery": Progress-Based Aid for Education:-CGD staff is proposing a "cash on delivery" approach to aid, under which donors would pay for measurable progress on specific outcomes pre-agreed with recipient governments. In education, donors could pilot cash on delivery aid by offering a contract to poor countries for $100 per additional child completing a quality primary education, to be used as the country chooses. The approach is also being explored for application by governments to their own transfers to states or districts. 8. Cities Alliance :-Cities Alliance is a global coalition of cities and their development partners committed to scaling up successful approaches to urban poverty reduction.

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9. Community Development Carbon Fund (CDCF) :-The Community Development Carbon Fund provides carbon finance to projects in the poorer areas of the developing world. The CDCF supports projects that combine community development attributes with emission reductions to create "development plus carbon" credit, and will significantly improve the lives of the poor and their local environment. 10. Education for AllFast Track Initiative (EFA-FTI):- The Education for All - Fasttrack Initiative (FTI) is a global partnership between donor and developing countries to ensure accelerated progress towards the Millennium Development Goal of universal primary education by 2015. 11. Energy Sector Management Assistance Program (ESMAP):-A global technical assistance program which helps build consensus and provides policy advice on sustainable energy development to governments of developing countries and economies in transition. 12. Global Environment Facility (GEF) :-The Global Environment Facility (GEF) is a global partnership among 178 countries, international institutions, non-governmental organizations (NGOs), and the private sector to address global environmental issues while supporting national sustainable development initiatives. 13. Global Facility for Disaster Reduction and Recovery (GFDRR):- The Global Facility for Disaster Reduction and Recovery provides technical and financial assistance to high risk low- and middle-income countries to mainstream disaster reduction in national development strategies and plans to achieve the Millennium Development Goals (MDGs). 14. Inter-American Development Bank (IDB):- The Inter-American Development Bank is an international organization established to support Latin American and Caribbean economic and social development and regional integration. It lends mainly to governments and government agencies, including State corporations. 15. International Finance Corporation (IFC Advisory site):-The International Finance Corporation, a member of the World Bank, provides investments and advisory services to build the private sector in developing countries. IFCs advisory work is organized into five business lines: Business Enabling Environment, Access to Finance, Environmental and Social Sustainability, Infrastructure and Corporate Advice. 16. Marie Stopes International (MSI):-Marie Stopes International (MSI) is a not-forprofit sexual and reproductive health organization providing services in 43 countries. 17. Millennium Challenge Corporation (MCC):- The Millennium Challenge Corporation (MCC) is a United States Government corporation designed to work with some of the poorest countries in the world. Established in January 2004, MCC is School of Management Studies Page 9

based on the principle that aid is most effective when it reinforces good governance, economic freedom and investments in people. 18. Multilateral Investment Guarantee Agency (MIGA):- The Multilateral Investment Guarantee Agency, a member of the World Bank Group, promotes foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty, and improves people's lives. 19. Organisation for Economic Co-operation and Development (OECD Development issues):-The Organisation for Economic Co-operation and Development s work activities in development are carried about by the Development Co-operation Directorate/DAC, the Development Centre, the Sahel & West Africa Club/SWAC and the Centre for Co-operation with Non-Members/CCNM. 20. Partnership Dialogue Facility Energy polices for development (EUEI PDF):The Partnership Dialogue Facility Energy Policy aims to support the development of policies and strategies for the promotion of access to energy at national and regional level. These are based on dialogue within and between partner countries, their regional organizations, EU member states and the European Commission. 21. Public-Private Infrastructure Advisory Facility (PPIAF):-A multi donor technical assistance facility aimed at helping developing countries improves their infrastructure through private sector involvement. 22. Private Infrastructure Development Group (PIDG):- The Private Infrastructure Development Group consists of donors whose mission is to combat poverty and assist developing countries boost their economic development. 23. Results-Based Financing for Health (RBF):-Results-Based Financing (RBF) for Health is a tool used for increasing the quantity and quality of health services. It combines the use of incentives for health-related behaviours with a strong focus on results, and can support efforts to achieve the Millennium Development Goals (MDGs). 24. United States Agency for International Development (USAID):-The United States Agency for International Development is the government agency providing US economic and humanitarian assistance worldwide for more than 40 years. 25. Water Aid :- Water Aid is an international charity that promotes clean, safe water and sanitation in Africa and Asia. Their mission is to overcome poverty by enabling the world's poorest people to gain access to safe water, sanitation and hygiene education. 26. Water and Sanitation Program (WSP):-An international partnership to help the poor gain sustained access to improved water supply and sanitation services School of Management Studies Page 10

1.6 Conclusion
The infrastructure sector has both backward and forward linkages with the agricultural and the industrial sectors and therefore the development of the infrastructure sector is a prerequisite for the overall development of the economy. Infrastructure, in general, and rural infrastructure in particular, contributes to economic development both by increasing productivity and by providing amenities which enhance the quality of life. However, in India the lack or inadequacy of basic infrastructure continues to remain a major constraint to progress in numerous villages and their habitations and consequently in the country as a whole. According to the study findings, the rural populations not covered by basic infrastructure facilities like telecom, power, and roads is as high as 91%, 46% and 44% respectively. As far as drinking water is concerned, while most rural inhabitants have access to some sort of water source, the quality and maintenance of these sources leave a lot to be desired. Even during the last decade of economic reform process, started in 1991, the dismal state of rural infrastructure has hardly improved. This implies that five decades of development planning in India has been unable to ensure a decent living for a large number of people residing in rural areas. Despite many large-scale rural development schemes, the absolute number of people in poverty has not declined substantially; abject poverty still remains pervasive in rural regions. The government of India has adopted the economic reform agenda that included privatization and commercialization of infrastructure sector as a whole. Liberalization is happening but competition has been introduced at the top and the accompanying policy changes to allow the new players to stay on board are not happening. Thus competition has not reached at levels lower than state levels, conducive to small regional providers of infrastructure service. State governments need to promote small-localized providers of the services. Local governments will have to play a more pro-active role in promoting, monitoring and enforcement of these new service providers.

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1.

Literature Review

2.1 Introduction
India continues to grow at a rapid pace, although the government recently reduced its annual GDP growth projection from 9% to 8% for the current fiscal year ending March 2012. The slowdown is marked by a sharp drop in investment growth resulting from political uncertainties, a tightening of macroeconomic policies aimed at addressing a high fiscal deficit and high inflation (going well beyond food and fuel prices), and from renewed concerns about the European and US economies. Although the Government was quite successful in cushioning the impact of the global financial crisis on India, it is now clear that a number of MDG targets will only be met under the Twelfth Five Year Plan (2012-17). World Bank: India Country Overview 2011 Indias rise in recent years is a most prominent development in the world economy. India has re-emerged as one of the fastest growing economies in the world. Indias growth, particularly in manufacturing and services, has boosted the sentiments, both within country and abroad. With an upsurge in investment and robust macroeconomic fundamentals, the future outlook for India is distinctly upbeat. According to many commentators, India could unleash its full potentials, provided it improves the infrastructure facilities, which are at present not sufficient to meet the growing demand of the economy. Failing to improve the countrys infrastructure will slow down Indias growth process. Therefore, Indian governments first priority is rising to the challenge of maintaining and managing high growth through investment in infrastructure sector, among others. The present chapter throws a light on Indian Infrastructure and detailed study of Banking Sector.

2.2 Indian Infrastructure

In the past, development of infrastructure was completely in the hands of the public sector and was plagued by slow progress, poor quality and inefficiency. India's low spending on power, construction, transportation, telecommunications and real estate, at $31 billion or 6% of GDP in 2002 had prevented India from sustaining higher growth rates. This has prompted the government to partially open up infrastructure to the private sector allowing foreign investment, and most public infrastructure, barring railways, is today constructed and maintained by private contractors, in exchange for tax and other concessions from the government.

2.2.1 Power Sector

Power sector has received utmost priority in the successive Five-Year Plans resulting in utility-based installed generation capacity rising from 1362 Mega Watt (MW) at the time of independence to about 1,60,000 MW today. Along with the growth in installed generation capacity, there has also been a phenomenal increase in the transmission and distribution (T&D) capacity. Although much has been achieved, shortage of power and lack of access continues to be a major constraint on the economic growth. The enactment of the Electricity School of Management Studies Page 12

Act in June 2003 was a major milestone which paved the way for development of the power sector within a competitive and liberal framework while protecting the interests of the consumers as well as creating an environment that was conducive for attracting investments in the sector. Subsequently, National Electricity Policy and National Tariff Policy were also formulated to give direction to the power sector within the ambit of the Electricity Act. The Regulatory framework has been established and has been in operation for five to ten years. However, both competition and a robust regulatory regime that supports such competition are still to be realized.

2.2.2 Road A. National Highways

The National Highways (NH) with aggregate length of 70,934 km., constitute about 2 per cent of the entire road network in the country but carry 40 per cent of the total road traffic. The main objective of development of NH is to improve mobility through augmentation of capacity and enhancing the riding quality of existing NHs. Towards this end, expanded NH Development Programme is being implemented under various phases.
Upgradation of National Highw ays by NHAI during 2009-10 and 2010-11 (April - Sept.) 1200 1000 800 Kms. 600 400 200 0 2009-10 Actual 1 2010-11 Target 2010-11 Actual

Source : Indian Infrastructure Report, 2010

B. Rural Roads

Pradhan Mantri Gram Sadak Yojana (PMGSY): Goals & Objectives

Figure 2.1 Bar graph showing upgradation of National Highways by NHAI during 2009-10 and 2010-11 (April-Sept)

The primary objective of the PMGSY (launched in December 2000 as a fully funded Centrally Sponsored Scheme (CSS) was to provide connectivity, by way of an all-weather road (with necessary culverts and cross-drainage structures, which is operable throughout the year), to the eligible unconnected habitations in the rural areas, in such a way that all unconnected habitations with a population of 1,000 persons and above were to be covered in three years (2000-2003) and all unconnected habitations with a population of 500 persons and above by the end of the Tenth Plan Period (2007). In respect of the hill States (NorthEast, Sikkim, Himachal Pradesh, Jammu & Kashmir, Uttarakhand) and the desert areas (as identified in the Desert Development Programme) as well as the tribal (Schedule V) areas, the objective was to connect habitations with a population of 250 persons and above. The original targets set for PMGSY were found to be too ambitious. Subsequently, PMGSY was re-phased to achieve time bound targets for rural connectivity by folding it into the Bharat Nirman programme initiated in 2005-06. It aimed to provide connectivity to all the habitations with a population of more than 1000 in the plain areas and habitation with a population of 500 or more in hilly or tribal areas in a time bound manner by 2009.

2.2.3 Telecom Sector

World-class information and communication infrastructure is a crucial element in the rapid economic and social development of a country. The telecom industry in India, led by the School of Management Studies Page 13

private sector has seen rapid expansion making its vast network second only to China. The industry is now poised to take a further leap towards better technology and service delivery. The introduction of Third Generation (3G) telecom services is expected to open new frontiers in high speed data communications and Mobile Number Portability which is likely to be rolled out soon will make the market more competitive. Internet users will be able to download information in bulk quantity in a short time. Besides, the developments will lead to generation of better revenue.

Achievements during 2009-10

Nearly 14 to 18 million new connections are added each month. By September 2009, the industry had already achieved the Annual Plan 2009-10 targets of 500 million connections. The present teledensity is more than 53 per cent with 621.25 million connections (as on April 2010), which has been propelled by wireless subscribers growing at a compound annual growth rate (CAGR) of 60 per cent per annum since 2004. Provision of Village Public Telephones (VPTs) to cover the not-covered villages has been undertaken under the Universal Service Obligatory Fund (USOF). The performance of the public sector undertakings (PSUs) in the telecom industry during 2009-10 is as follows:

Cell phone connections provided during 2009-10 and 2010 ( April - Septem ber ) 1200 1000 Lakh Nos. 800 600 400 200 0 Cell 2009-10 Actual Phones2010-11 Actual

Source : Indian Infrastructure Report, 2010

Fig 2.2 Bar graph showing No. of cellphone connections provided during 2009-10 and 2010 (April September)

2.2.4 Railways
Indian Railways (IR) with its 64,015 kilometer network is the third largest railway in the world under a single management. The Eleventh five year plan document emphasized that The Indian railway is at threshold of major change. The key challenges before it is to meet the accelerated transport demand and provide high quality service. Thus, capacity enhancement, technological up gradation and service improvement of Indian Railways are the major thrust areas of the Plan It had envisaged 51 per cent increase in freight traffic and 32 per cent increase in passenger traffic during the plan period. The Plan had anticipated an expenditure of Rs.2, 51,000 crore on various capacity enhancements and replacement programmes. A major part of the investment is expected to come from internally generated resources besides feasible budgetary support. Around Rs. 1, 00,000 crore is expected from extra budgetary resources including that from Public Private Partnership (PPP), during the Plan period.

2.2.5 Agriculture
Agriculture in India is a major economic sector and it creates plenty of employment opportunities as well. India agriculture has an extensive background which goes back to 10 thousand years. At present, in terms of agricultural production, the country holds the second School of Management Studies Page 14

position all over the world. In 2007, agriculture and other associated industries such as lumbering and forestry represented around 16.6% of the Gross Domestic Product of the country. In addition, the sector recruited about 52% of the entire manpower. The total arable territory in India is 1,269,219 km 2, which represents about 56.78% of the overall land zone of the country. Arable land in India is diminishing because of continuous strain from an ever-increasing number of inhabitants and growing urbanization. The overall water surface area of the country is 31440 km2 and the country experiences a mean yearly precipitation of 1,100 mm. Irrigation represents 92% of the consumption of water and in 1974, it was 380 km2. By 2025, the capacity will probably increase to 1,050 km2, with the equilibrium justifying both household and industrial usage. India houses the biggest number of livestock in the world and the count is 281 million. In 2008, the country housed the second biggest number of cattle in the world and the count was 175 million livestock. The population of India is increasing at a faster pace than its capacity to produce wheat and rice. India holds the second position in production of wheat, rice, cotton, sugarcane, and groundnuts. It is also the second biggest harvester of vegetables and fruit, representing 8.6% and 10.9% of the overall vegetable and fruit production in the world correspondingly. The country is the top producer of jute, milk, and pulses and holds the second rank in the production of silk and it is the biggest consumer of silk in the world. In 2005, the country produced 77,000 million tons of silk.

Irrigation

During the Annual Plan 2009-10, the target for irrigation potential creation was 1.19 m.ha. under Major and Medium Irrigation and 0.751 m.ha. under the Minor Irrigation sector. The approved outlay for the year 2009-10 was Rs 38346.20 crore for state and central sectors. Keeping in line with the revised Eleventh Plan target, the proposed target for 2010-11, is 2.02 m.ha. Under Bharat Nirman, in the period 2005-09, 7.316 m.ha of new and restored irrigation potential was achieved against a target of 10 m.ha. of The balance is expected to be achieved by 2010-11.

2.2.6 Ports
Ports play a vital role in the overall economic development of the country. There are 12 major ports and about 200 non-major ports along Indias coastline. The 12 major ports are located at Kolkata/Haldia, Mumbai, Jawaharlal Nehru Port at Nhava Sheva, Chennai, Cochin, Visakhapatnam, Kandla, Mormugao, Paradip, New Mangalore, Tuticorin and Ennore. The major ports are under the direct administrative control of the Central Government while the non major ports are under the jurisdiction of the respective maritime State Governments. Traffic at ports had been increasing at a rate of 10-12 per cent in the past. However, in 200809 the growth of traffic at major ports was modest (2.7 per cent). During 2009-10 there was further increase in traffic and major ports handled 560.97 MT, registering an increase of 5.74 per cent over the previous year. School of Management Studies Page 15

The Eleventh Plan envisaged an additional capacity generation of 511.80 MT making total capacity of major ports at 1016.55 MT by the end of the Plan period. However, capacity augmentation in the first three years of the Eleventh Plan was not satisfactory. While in the first two years generation of additional capacity was only 70 MT, in 2009-10 it was 25 MT. The Second Container Terminal at Chennai Port which became operational in 2009-10 added a capacity of 9.6 MT. Thirteen Public-Private Partnership projects at an estimated cost of Rs. 2653.41 crore and capacity of 65.65 Million Metric Tonnes Per Annum (MTPA) were awarded in 2009-10. The progress with regard to improvement in productivity has not been satisfactory. The comparison of average turnaround time for the period April to February 2009 and April to February 2010 indicates that there has been an increase in average turnaround time of vessels from 3.88 to 4.42 days. Only four ports viz Chennai, Cochin, Mumbai and Kandla have shown some improvement. Average turnaround time on port account has also shown deterioration from 2.45 to 2.61 during the same period. Several projects are under underway at various ports. The International Container Transshipment Terminal (ICTT) at Vallarpadam at Cochin Port is one such important project. Significant progress has been made with regard to construction of the Terminal in 2009-10 and the project is expected to be commissioned shortly. Rail connectivity to ICTT at Vallarpadam was taken up at an estimated cost of Rs. 298.17 crore. Construction work of this project has already been completed. The four-lane NH connectivity to ICTT, taken up at an estimated cost of Rs. 871.17 cr., is expected to be commissioned by December 2010. In addition, the implementation of project relating to capital dredging for deepening and widening of the approach channel and berth basin of ICTT to provide draft of 14.5 m at Vallarpadam has been initiated.

2.2.7 Airports
Aviation Sector in India has undergone a sea change in the last five years. The number of passengers at Indian airports increased from 40 million in 2000-01 to 119 million in 2007-08. With a view to create world-class airport infrastructure, up gradation/ modernization of a number of metro and non-metro airports have been undertaken by Airports Authority of India (AAI) as well as through joint venture companies. In addition, AAI has also initiated a project in consultation with Indian Space Research Organization (ISRO). Known as the Global Positioning System (GPS) aided Geo Augmented Navigation (GAGAN) project. It is a Satellite Based Augmentation System (SBAS) aimed at providing augmented GPS
Pass engers carried at m ajor Airports 2009-10 and 2010-11 ( April -Septem ber )

280 Lakh Numbers 210 140 70 0

International 2009-10 Actual

Dom estic 2010-11 Actual

Source : Indian Infrastructure Report, 2010

Fig 2.3 Bar graph showing No. of passengers carried at major airports 2009-10 and 2010-11 (AprilSeptember)

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information to aircrafts, making such information more reliable and accurate. The system is expected to improve navigation facility, enabling more efficient Air Traffic Management. Goals, Programmes, Targets & Achievements 2009-10 The major objectives of the development of airports are to provide (i) World class infrastructure facilities, (ii) Air connectivity to remote and inaccessible areas with special reference to north eastern part of the country. During April - September 2010, the international terminals of the five major International Airports handled 123.35 lakh passengers and registered a growth of 13.5% over the 108.70 lakh passengers handled during April - September 2009. The growth rate was higher than the growth of 1.9% achieved in April - September 2009. The domestic terminals handled 271.96 lakh passengers during this period, which was 16.6% higher than 233.19 lakh passengers handled during the corresponding period of the previous year. The growth rate was higher than the growth of 5.6% achieved in April - September 2009.

2.3 Banking Sector: An Overview

The first bank in India, called The General Bank of India was established in the year 1786. The East India Company established The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840) and Bank of Madras (1843). The next bank was Bank of Hindustan which was established in 1870. These three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras) were called as Presidency Banks. Allahabad Bank which was established in 1865, was for the first time completely run by Indians. Punjab National Bank Ltd. was set up in 1894 with head quarters 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. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India which was run by European Shareholders. After that the Reserve Bank of India was established in April 1935. At the time of first phase the growth of banking sector was very slow. Between 1913 and 1948 there were approximately 1100 small banks in India. 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 a Central Banking Authority. After independence, Government has taken most important steps in regard of Indian Banking Sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the name "State Bank of India", to act as the principal agent of RBI and to handle banking transactions all over the country. It was established under State Bank of India Act, 1955. Seven banks forming subsidiary of State Bank of India was nationalized in 1960. On 19th July, 1969, major process of nationalization was carried out. At the same time 14 major Indian commercial banks of the country were nationalized. In 1980, another six banks were nationalized, and thus raising the number of nationalized banks to 20. Seven more banks were nationalized with deposits over 200 Crores. Till the year 1980 approximately 80% of the banking segment in India was under governments ownership. On the suggestions of School of Management Studies Page 17

Narsimhan Committee, the Banking Regulation Act was amended in 1993 and thus the gates for the new private sector banks were opened. The following are the major 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 Crores

2.4 Policy in banking sector

With the onslaught of the global financial crisis, banking sector policy across the world has received a newer meaning and relevance. There is a growing realisation that regulatory and supervisory policy needs to be strengthened to adopt a system-wide approach to counteract pro-cyclical movements in the banking sector. The perimeter of regulation also needs to be expanded to cover the unregulated segments in order to minimise regulatory arbitrage. India has been lauded as one of the few countries that have followed a vigilant and countercyclical policy approach to banking sector developments. It has also widened the regulatory perimeter steadily to bring nonbanking entities into the ambit of regulation.

2.4.1 Monetary Policy

Monetary Policy Stance and Measures Monetary policy stance in 2010-11 was attuned to the growth-inflation dynamics prevailing in the economy in the broader context of global uncertainties. In the first half of 2010- 11, the thrust of monetary policy was on avoiding policy impediments to the recovery amidst global uncertainties, while also containing inflationary pressures. In the second half of 201011, while growth continued to consolidate, the moderating path of inflation reversed beginning December 2010 due to a series of supply side shocks, both domestic and global. Non-food manufacturing inflation remained much above the trend growth of 4 per cent during the second half of 2010-11. Therefore, policy rates were raised to contain inflation and anchor inflationary expectations. This was warranted to ensure that the long-term growth prospects were not harmed, even if it meant sacrificing some growth in the short-term. As the inflation remained above the comfort level of the Reserve Bank even in 2011- 12, the anti-inflationary stance was continued during this period. Since the exit from its crisis driven expansionary monetary policy stance, the Reserve Bank has raised the policy rate (the repo rate) 13 times by 375 basis points. Till March 2011, the policy rate was raised eight times by 200 bps. In 2011-12 so far (up to October 25, 2011), it was further raised five times by 175 bps. The effective School of Management Studies Page 18

tightening since October 2009 has been of 525 bps as liquidity in the system transited from surplus to deficit. The CRR was also raised by 100 bps. Changes in the Operating Procedure of Monetary Policy Based on the Report of the Working Group on Operating Procedure of Monetary Policy (Chairman: Shri Deepak Mohanty), the Reserve Bank made a number of changes in the operating procedure of monetary policy with effect from May 2011. As per these changes, the weighted average overnight call money rate was made the operating target of monetary policy. Further, the repo rate was made the single policy rate to more accurately signal the monetary policy stance with the reverse repo rate pegged at a fixed 100 basis points below the repo rate. A new Marginal Standing Facility (MSF) was also instituted under which Scheduled Commercial Banks (SCBs) could borrow overnight up to one per cent of their respective Net Demand and Time Liabilities (NDTL), carved out of the required Statutory Liquidity Ratio (SLR) portfolio. The MSF rate is 100 basis points above the repo rate and provides an upper bound to the policy rate corridor with reverse repo rate as the lower bound. These changes were deemed necessary for improved liquidity management and effective monetary transmission. Deregulation of Savings Bank Deposit Rate With the steady process of deregulation since the early 1990s, the only rupee interest rate that continued to remain regulated was the savings deposit interest rate. In order to delineate the advantages and disadvantages of deregulating the savings deposit rate, the Reserve Bank prepared a discussion paper which was placed on the RBI website for suggestions from general public in April 2011. The Discussion Paper evoked wide ranging responses from a cross-section of stakeholders. The Reserve Bank after weighing both pros and cons, decided to deregulate the savings bank deposit rate in its Second Quarter Review of Monetary Policy 2011-12 released on October 25, 2011. Accordingly, banks can freely determine their savings bank deposit interest rates subject to the following two conditions: Each bank will have to offer a uniform interest rate on savings bank deposits up to Rs.1 lakh, irrespective of the amount in the account within this limit. For savings bank deposits over Rs.1 lakh, a bank may provide differential rates of interest, if it so chooses. However, there should not be any discrimination from customer to customer on interest rates for similar amount of deposit.

2.4.2 Credit Delivery

Priority Sector Lending Policy - Loans to NBFCs The Reserve Bank advised all SCBs in February 2011 that loans sanctioned to NBFCs for on-lending to individuals or other entities against gold jewellery will not be eligible for classification under priority sector as agricultural credit. Similarly, investments made by banks in securitized assets originated by NBFCs, where the underlying assets are loans against gold jewellery and purchase/assignment of gold loan portfolio from NBFCs are also not eligible for classification under the agricultural sector. Priority Sector Lending Policy - Loans to Agriculture School of Management Studies Page 19

The scheme of interest subvention has been in existence since 2006-07 with regard to provision of short-term agricultural credit to farmers by public sector banks, RRBs and cooperative banks. In 2009-10, an interest subvention of 2 per cent was provided on short term production credit of up to Rs.3 lakh, which would ensure that credit was made available to farmers at the ground level at 7 per cent per annum. Further, an additional interest subvention of 1 per cent was also provided to public sector banks in respect of those farmers who were prompt in repaying their loans within one year of disbursement of such loans, reducing the effective rate for such farmers further to 6 per cent per annum. In 2010-11, the interest subvention was reduced to 1.5 per cent and the additional interest subvention for prompt-paying farmers has been increased to 2 per cent. Further, in the Union Budget for 2011- 12, the Finance Minister has proposed an enhancement of the additional interest subvention for prompt-paying farmers to 3 per cent making the effective rate for such farmers to be 4 per cent per annum. Loans to Micro, Small and Medium Enterprises (MSME) - Credit Target for MicroEnterprises Pursuant to the recommendations of the High Level Task Force constituted by the Government of India (Chairman: Shri T K A Nair), SCBs have been advised on June 29, 2010 to allocate 60 per cent of the MSE advances to micro-enterprises. This target is to be achieved in three stages viz., 50 per cent in 2010-11, 55 per cent in 2011-12 and 60 per cent in 2012-13 with an annual growth of 10 per cent in the number of micro-enterprises accounts and an annual growth of 20 per cent in lending to micro and small enterprises. A suitable format has also been devised by the Reserve Bank to capture and closely monitor the achievement of these targets by banks on a half-yearly basis (March and September). From the quarter ending June 2011, the monitoring is being done on a quarterly basis. The Reserve Bank has also taken up the matter with banks that have failed to achieve the targets prescribed by the Task Force. Credit Guarantee for Credit to Micro and Small Enterprises Based on the recommendations of the Working Group (Chairman: Shri V.K. Sharma) constituted by the Reserve Bank in March 2010 to review the Credit Guarantee Scheme (CGS) of the Credit Guarantee Fund Trust for Micro and Small Enterprises (CGTMSE), the limit for collateral free loans to the MSE sector has been increased to Rs.10 lakh and has been made mandatory for banks. SCBs are advised to follow the guidelines on collateral free lending, encourage branch level functionaries to avail the credit guarantee cover and making performance in this regard a criterion in their appraisal. The Working Group has also made recommendations regarding an increase in the extent of guarantee cover, absorption of guarantee fees for the collateral free loans up to Rs.10 lakh by CGTMSE, subject to certain conditions, simplification of procedure for filing claims with CGTMSE and increasing awareness about the scheme. The recommendations have been forwarded to CGTMSE for implementation. Housing Loans With the objective of improving affordability of housing for middle and lower income groups, the Union Budget of 2009-10 had announced a scheme of 1 per cent interest subvention in respect of individual housing loans of up to 10 lakh provided that the cost of unit did not exceed 20 lakh. The scheme was applicable initially for a period of one year effective from October 1, 2009 to September 30, 2010. An initial allocation of 1,000 crore was announced for this purpose. The Union Budget for 2010-11 had announced an extension of the scheme and also made a provision of 700 crore under the scheme for 2010-11. As per School of Management Studies Page 20

the Union Budget for 2011-12, the existing scheme has been further liberalised to housing loans of up to 15 lakh, where the cost of the house does not exceed 25 lakh as against the earlier limits of 10 lakh and 20 lakh, respectively. The scheme is being implemented through SCBs and housing finance companies. The Reserve Bank acts as the nodal agency in respect of SCBs. After sanctioning and disbursing the eligible loans, SCBs claim reimbursement of subsidy from the Reserve Bank on a monthly basis. The necessary instructions with regard to the liberalisation of the scheme have been issued to all SCBs by the Reserve Bank on April 21, 2011. Loans to MFIs Following concerns about the micro finance sector in Andhra Pradesh, a need was felt for a more rigorous regulation of NBFCs functioning as Micro-Finance Institutions (MFIs). Accordingly, a sub-Committee of the Central Board of the Reserve Bank (Chairman: Shri Y. H. Malegam) was constituted to study issues and concerns in the MFI sector. The Committee has submitted its report in January 2011, which has been placed in public domain. The Committee, inter alia, has recommended: Creation of a separate category of NBFC-MFIs; A margin cap and an interest rate cap on individual loans; Transparency in interest charges; Lending by not more than two MFIs to individual borrowers; Creation of one or more credit information bureaus; Establishment of a proper system of grievance redressal procedure by MFIs; Creation of one or more social capital funds; Continuation of categorization of bank loans to MFIs complying with the regulation laid down for NBFC-MFIs, under the priority sector. The recommendations of the Committee were discussed with all stakeholders, and in light of the feedback received, it has been decided to accept the broad framework of regulations recommended by the Committee.

2.4.3 Financial Inclusion

Financial inclusion has been made an integral part of the banking sector policy in India. Reserve Bank is furthering financial inclusion in a mission mode through a combination of strategies ranging from relaxation of regulatory guidelines, provision of innovative products, encouraging use of technology and other supportive measures for achieving sustainable and scalable financial inclusion. During 2010-11 too, the Reserve Bank continued with policy initiatives aimed at expanding the outreach of banking services to remote parts of the country. Mandating Opening of Branches in Rural Unbanked Centres To further step up penetration of banking services in the rural areas, there is a need for opening of more brick and mortar branches, besides the use of Business Correspondents (BCs). Accordingly, banks have been mandated to allocate at least 25 per cent of their total number of branches to be opened during a year to unbanked rural centres. Further, in October 2011, to provide enhanced banking services in Tier 2 centres (with population of 50,000 to 99,999 as per Census 2001), it has been proposed to permit domestic SCBs (other than RRBs) to open branches in these centres without the need to take permission from the Reserve Bank in each case, subject to reporting. The opening of branches in Tier 1 centres School of Management Studies Page 21

(centres with population of 1,00,000 and above as per Census 2001) will continue to require prior permission of the Reserve Bank. While issuing such authorisation, the Reserve Bank will continue to factor in, among others, whether at least 25 per cent of the total number of branches to be opened during a year is proposed to be opened in unbanked rural centres. Introduction of Innovative and Simple Products Timely and hassle-free credit being the most important requirement of poor people, banks have been advised to provide in-built overdraft of small amount in no-frill accounts so that customers can avail of credit of small amount without any further documentation, for meeting emergency requirements. Roadmap for Banking Services With an objective to ensure uniform progress in provision of banking services in all parts of the country, banks were advised to draw up a roadmap for opening banking outlets in every unbanked village having a population of more than 2,000, through a brick and mortar branch or any of the various forms of ICT-based models, including through BCs. In alignment with the budget announcements, the timelines for completing the roadmap was extended to March 2012 vide circular dated September 16, 2010. About 72,800 such unbanked villages have been identified and allotted to various banks through State-level Bankers Committee (SLBC). Progress on Financial Inclusion Plans In January 2010, all public and private sector banks were advised to put in place a Board approved three-year Financial Inclusion Plan (FIP) and submit the same to the Reserve Bank by March 2010. These banks prepared and submitted their FIPs containing targets for March 2011, 2012 and 2013. These plans broadly include self-determined targets in respect of rural brick and mortar branches to be opened; BCs to be employed; coverage of unbanked villages with population above 2,000 as also other unbanked villages with population below 2,000 through branches/BCs/other modes; no-frill accounts opened including through BC-ICT; Kisan Credit Cards (KCC) and General Credit Cards (GCC) and other specific products designed by them to cater to the financially excluded segments. Banks were advised to integrate Board-approved FIPs with their business plans and to include the criterion on financial inclusion as a parameter in the performance evaluation of their staff. The implementation of these plans is being closely monitored by the Reserve Bank. In order to review the progress of banks in the implementation of FIPs during the year 201011 and making way for accelerated progress in future, the Reserve Bank has been conducting one-to-one meetings with Chairman and Managing Director (CMD)/Chief Executive Officer (CEO) of banks. Few of the important action points which emanated out of the discussions held during May-June 2011 are as follows: Banks shall review their delivery models so that Financial Inclusion results in a profitable business for them. In addition to providing banking services in villages with more than 2,000 population, they will also focus on providing banking services in peripheral villages with population of less than 2,000. In future, banks need to focus more on opening of brick and mortar branches in unbanked villages. It may be a low cost and simple intermediary structure comprising of minimum infrastructure for operating small customer transactions and supporting School of Management Studies Page 22

upto10 BCs at a reasonable distance of 2-3 km. Such an approach will help banks in having a better customer redressal mechanism and at the same time, help in developing a better BC-monitoring mechanism. This will lead to efficiency in cash management, documentation and redressal of customer grievances. Banks shall expand financial inclusion initiatives in urban and semi-urban areas by targeting pockets of migrant workers and small vendors and leveraging Aadhaar enrolment for opening bank accounts. Banks shall formulate financial inclusion plans for RRBs sponsored by them and develop an effective monitoring mechanism so that targets assigned to the RRBs are also achieved meticulously.

2.4.4 Prudential Regulatory Policy

Licensing of New Banks in Private Sector Pursuant to the announcement made by the Union Finance Minister in his budget speech and the Reserve Bank's Annual Policy Statement for the year 2010-11, a Discussion Paper on "Entry of New Banks in the Private Sector" was placed on RBI website on August 11, 2010. Based on the responses received from various stakeholders and extensive internal discussions and consultations with the Government of India, the Draft Guidelines were prepared and released on August 29, 2011 on the RBI website, again seeking comments from various stakeholders. Suggestions and comments on the draft guidelines were to be sent by October 31, 2011. Key features of the draft guidelines are as follows: (i) Eligible promoters: Entities/groups in the private sector, owned and controlled by residents, with diversified ownership, sound credentials and integrity and having successful track record of at least 10 years will be eligible to promote banks. Entities/groups having significant (10 per cent or more) income or assets or both from real estate construction and/ or broking activities individually or taken together in the last three years will not be eligible. (ii) Corporate structure: New banks will be set up only through a wholly owned NonOperative Holding Company (NOHC) to be registered with the Reserve Bank as NBFC, which will hold the bank as well as all the other financial companies in the promoter group. (iii) Minimum capital requirement: Minimum capital requirement will be `500 crore. Subject to this, actual capital to be brought in will depend on the business plan of the promoters. The NOHC shall hold minimum 40 per cent of the paid-up capital of the bank for a period of five years from the date of licensing of the bank. Shareholding by NOHC in excess of 40 per cent shall be brought down to 20 per cent within 10 years and to 15 per cent within 12 years from the date of licensing of the bank. (iv) Foreign shareholding: The aggregate non-resident shareholding in the new bank shall not exceed 49 per cent for the first 5 years after which it will be as per the extant policy. (v) Corporate governance: At least 50 per cent of the directors of the NOHC should be independent directors. The corporate structure should be such that it does not impede effective supervision of the bank and the NOHC on a consolidated basis by the Reserve Bank. School of Management Studies Page 23

(vi) Business model: The model should be realistic and viable and should address how the bank proposes to achieve financial inclusion. (vii) Other conditions: The exposure of the bank to any entity in the promoter group shall not exceed 10 per cent and the aggregate exposure to all the entities in the group shall not exceed 20 per cent of the paid-up capital and reserves of the bank. The bank shall get its shares listed on the stock exchanges within two years of licensing. The bank shall open at least 25 per cent of its branches in unbanked rural centres. Existing NBFCs, if considered eligible, may be permitted to either promote a new bank or convert themselves into banks. (viii) In respect of promoter groups having 40 per cent or more assets / income from nonfinancial business, certain additional requirements have been stipulated. It is pertinent to mention that certain amendments to the Banking Regulation Act, 1949 are under consideration of the Government of India, a few which, are vital for finalisation and implementation of the policy for licensing of new banks in the private sector. These vital amendments are the removal of restriction of voting rights and concurrently empowering the Reserve Bank to approve acquisition of shares and /or voting rights of 5 per cent or more in a bank to persons who are 'fit and proper', empowering the Reserve Bank to supersede the Board of Directors of a bank so as to protect depositors' interest, and facilitating consolidated supervision. Final guidelines will be issued and the process of inviting applications for setting up of new banks in the private sector will be initiated after receiving feedback/comments on the Draft Guidelines and after the amendments to Banking Regulation Act, 1949 are in place. Presence of Foreign Banks in India The Reserve Bank also released a Discussion Paper on the presence of foreign banks in India in January 2011 seeking feedback and suggestions from stakeholders and general public. After receiving feedback on the Discussion Paper, comprehensive guidelines on the mode of presence of foreign banks in India would be issued. Holding Companies Structure for Indian Banks Pursuant to the announcement made in the Monetary Policy Statement for the year 2010-11, a working group was constituted in June 2010 (Chairperson: Smt. Shyamala Gopinath) to examine the introduction of a holding company structure for banks and other financial entities and the required changes in legislative and regulatory framework. The Group had representatives from the Government of India, the Reserve Bank, Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), Indian Banks Association (IBA) and a few banks. The Report of the Working Group was placed on the RBI website in May 2011 for public comments. The Report has been forwarded to the Government of India for consideration. The Working Group has recommended Financial Holding Company (FHC) model as a preferred model for banks and all large financial groups irrespective of whether they contain a bank or not. The FHC would primarily be a nonoperating entity and would carry out all financial activities through subsidiaries. The FHC would be well diversified and subject to School of Management Studies Page 24

strict ownership and governance norms. The ownership restrictions would be applied either at the level of the FHCs or at the entity level, depending upon whether the promoters intend to maintain majority control in the subsidiaries, wherever it is permissible as per law. The Working Group observed that the FHC model would enable better oversight of financial groups from a systemic perspective and allow better resolution of different entities as compared to Bank Subsidiary Model where liquidation of the parent bank may make the liquidation of subsidiaries inevitable. To address the systemic concerns, the Working Group has envisaged consolidated supervision at FHC level that would be formalised through Memorandum of Understanding between financial sector regulators. The function of FHC regulation would be undertaken by a separate unit within the Reserve Bank with staff drawn from both the Reserve Bank as well as other regulators. To fully operationalise the FHC model, it has been recommended that a separate legislation for regulation of FHC be enacted and amendments be simultaneously made to other statutes governing public sector banks, Companies Act and Banking Regulation Act, 1949, wherever necessary. In addition, suitable amendments to various taxation provisions will have to be made to make the transition from bank subsidiary model to FHC model, tax and stamp duty neutral. However, there are numerous challenges in implementing the FHC model in India due to legacy issues and multiplicity of regulatory and legal provisions that govern various sectors. Some of the major challenges can be identified as follows: Though enactment of a separate law for regulating FHCs has been recommended, it may take a while before this can be achieved. This is because the recommendations need to be accepted by all stakeholders including Government of India and also a simultaneous amendment to various other acts is made. There exist various policy issues in the financial sector including the differential Government ownership in financial entities, differential ownership and governance standards prescribed by various regulators and differential ceilings for foreign ownership prescribed for various sectors. Bringing all financial activities of a group within a single FHC would presuppose harmonisation among different sector policies. The most challenging task would be reorganising public sector banks from bank subsidiary model to FHC model as this involves both strategic and public policy issues for the Government. Irrespective of whether the Government chooses to maintain its control at the FHC level or at the bank level it would have to sort out implementation, administrative and management issues. Compensation Policy Compensation of Board of Directors, including that of the Chief Executive Officer (CEO) of banks in private sector and foreign banks has always been under RBI regulation in terms of the provisions of Banking Regulation Act, 1949, unlike the situation in many other jurisdictions. In terms of provisions of the Act, banking companies in India obtain approval from the Reserve Bank for conferring any benefit, amenity or perquisite in whatever form to their directors/CEOs whether during or after termination of their term of office. Based on the Financial Stability Board (FSB) Principles for Sound Compensation Practices, the Reserve Bank placed draft guidelines on compensation in July 2010 on its website inviting public comments. In October 2010, the Basel Committee on Banking Supervision (BCBS) brought School of Management Studies Page 25

out a consultative paper titled Range of Methodologies for Risk and Performance Alignment of Remuneration and issued the final paper in May 2011. Pursuant to the announcement made in the Monetary Policy Statement of May 2011 and taking into account the feedback received on draft guidelines, the impact analysis carried out with the help of external consultants and methodologies prescribed by BCBS on risk alignment, the Reserve Bank is in the process of finalising its guidelines on compensation. Credit Information Companies In 2010-11, a Certificate of Registration (CoR) was issued by the Reserve Bank to Highmark Credit Information Services Private Limited to commence business of credit information after issuing CoR to Experian Credit Information Company of India Private Limited and Equifax Credit Information Services Private Limited earlier in 2009-10. The Reserve Bank issued a circular in September 2010 to banks/ financial institutions advising them to include the Director Identification Number (DIN) as one of the fields in the data submitted by them to credit information companies and Reserve Bank. This will ensure that names of directors of these credit information companies are correctly identified and in no case, persons whose names appear to be similar to the names of directors appearing in the list of Wilful Defaulters of `25 lakh and above or Defaulting borrowers of `1 crore and above are wrongfully denied credit facilities on such grounds.

2.4.5 Supervisory Policy

Close and Continuous Supervision of Large and Systemically Important Banking Groups For optimising the supervisory resources and also to have a more focused attention on banks, which are systemically important, it was decided to reorganise the supervisory processes and the organisational structure of the Department of Banking Supervision (DBS). The reorganisation of the Department was made effective from April 1, 2011, whereby a new division named Financial Conglomerate Monitoring Division (FCMD) was created to have a system of close and continuous supervision of 12 large and systemically important banking groups, which account for 52.7 per cent of the total assets of the banking system. Under the reorganised set up, the supervisory responsibility of FCMD would include exercising on-site and off-site supervision, and a more meaningful consolidated/conglomerate supervision of banking groups with a focus on group wide capital adequacy assessment, among others. Steering Committee to Review Supervisory Processes for Commercial Banks A High Level Steering Committee (Chairman: Dr. K. C. Chakrabarty) has been constituted to assess the adequacy of Reserve Banks supervisory policies, procedures and processes and suggest enhancements for making the supervisory policies comparable with global standards. Shri B. Mahapatra, Executive Director, RBI, Dr. J. R. Varma, Professor, IIM, Ahmedabad, Shri Diwakar Gupta, MD and CFO, State Bank of India, Smt. Chanda Kochhar, MD and CEO, ICICI Bank Ltd., Shri. Basant Seth, CMD, Syndicate Bank, and Shri M. B. N. Rao, Retired CMD, Canara Bank are the members and Shri G. Jaganmohan Rao, Chief General Manager-in-Charge of the Department of Banking Supervision is the Member Secretary of the Committee. The Committee is mandated to submit its report by July 31, 2012. Review of the Format for Annual Financial Inspection of Banks School of Management Studies Page 26

Keeping in view the changes in the banking system, the way banks do business and the need for supervisors to keep pace with the fast changing business practices, the process of the Annual Financial Inspection (AFI) of banks has been redefined. The revised guidelines pertaining to AFI coverage and method of drafting AFI reports are designed to sharpen the focus and bring out precision in analysis and arrive at clear conclusions for enabling the Reserve Bank to take definitive supervisory actions based on the findings. The guidelines have been put in place in the current AFI cycle 2011-12. Initiatives taken by Board for Financial Supervision The Board for Financial Supervision (BFS), constituted in November 1994, remains the chief guiding force behind Reserve Banks supervisory and regulatory initiatives. During July 2010 to July 2011, the BFS held 13 meetings. It reviewed 98 inspection reports (25 reports of public sector banks, 30 of private sector banks, 31 of foreign banks, 4 of local area banks, and 8 of financial institutions). During the period, the BFS also reviewed 15 summaries of inspection reports and 43 summaries of financial highlights pertaining to scheduled UCBs classified in Grade I/II. Some of the important issues deliberated upon by the BFS during the period are as follows: Continuing to exercise keen interest in fine tuning of supervisory rating, the BFS sought a complete review of the rating methodology. The suggestions included: (i) review of weightages given to sub-parameters; (ii) the adjustment in composite rating to reflect the deterioration or improvement in the banks performance in various parameters. The supervisory rating framework is currently under review. During the period under review, the BFS had observed that in order to take advantage of favorable market conditions and book profits, many banks were resorting to sale of securities held under Held to Maturity (HTM) category on more than one occasion during the year. In response, as directed by BFS, a circular was issued in August 2010 advising banks to disclose market value of investments held in HTM category and indicate the excess of book value over market value for which provision is not made, if the value of sales and transfers of securities to/from HTM category exceeds 5 per cent of the book value of investment in HTM. This disclosure is required to be made in Notes to Accounts in banks audited Annual Financial Statements. In November 2010, it was clarified that one-time transfer of securities to/from HTM category with the approval of Board of Directors permitted at the beginning of the accounting year and sales to the Reserve Bank under preannounced OMO auctions would be excluded from the 5 per cent cap prescribed in August 2010. The BFS approved a proposal to subject only those foreign banks to Annual Financial Inspection, which have a business share of more than 0.1 per cent of the market share (assets plus off-balance sheet business). Those foreign banks which have a market share of less than 0.1 per cent will be inspected once in two years provided their rating is B and above. Those foreign banks with a market share of less than 0.1 per cent and with rating of C and less will be inspected annually. Based on the suggestions of the BFS, it was decided that as supervisors, the Inspecting Officers (IOs) should have access to all the reports/review notes prepared by the Inspection/Audit teams of the bank, some of which may be from overseas and may not be available locally. School of Management Studies Page 27

Whole Firm Liquidity Modification Regime in the UK: Implications for Indian Banks A new liquidity regime through increased international cooperation in financial supervision arrangements was proposed by Financial Services Authority (FSA), UK to make the banking system more robust to withstand shocks. The Whole Firm Liquidity Modification regime which encompasses Indian banks operating through branches/subsidiaries in the UK would enable the UK branch of an Indian bank to place reliance on unlimited liquidity resources from anywhere within the whole firm (bank). Six Indian banks having presence in the UK have applied for Whole Firm Modification after obtaining prior approval of the Reserve Bank. Subsequently, agreements were entered into by the Reserve Bank with FSA in October 2010 to monitor the liquidity of the parent bank on an ongoing basis in respect of the six banks. As per the agreement, the specifications and monitoring of triggers for liquidity insufficiency in respect of UK branches of Indian banks would rest with the parent bank. Reporting of Frauds by Public Sector Banks The Reserve Bank issued a circular in October 2010 advising public sector banks about the increase in the upper limit for reporting of frauds to Central Bureau of Investigation (CBI) from 5 crore to 7.5 crore and accordingly, all fraud cases involving an amount of 1 crore and above going up to 7.5 crore, where staff involvement is prima facie evident must be reported to Anti Corruption Branch of CBI. However, in case where the staff involvement is prima facie not evident, it would be advised to CBIs Economic Offences Wing. Further, all cases involving more than 7.5 crore would have to be reported to respective centres of Banking Security and Fraud Cell, a specialised cell of the Economic Offences Wing for major bank fraud cases. Internal Vigilance in Private Sector/Foreign Banks In order to align the vigilance function in private and foreign banks to that of the public sector banks, the existing vigilance functions of a few private sector and foreign banks were mapped with the existing guidelines in the matter and it was observed that the practices vary widely among the banks. Accordingly, detailed guidelines aimed at bringing about uniformity and rationalisation in the function of internal vigilance were issued for private sector and foreign banks in May 2011 to address all issues arising out of lapses with regard to corruption, malpractices and frauds for timely and appropriate action. Private sector banks and foreign banks operating in India were advised, inter alia: (i) to appoint Chief of Internal Vigilance (CIV) whose role has also been defined in the guidelines; (ii) to identify sensitive positions and have board-approved guidelines regarding rotation of staff and mandatory leave by staff handling sensitive desks.

2.4.6 Regional Rural Banks

Regional Rural Banks (RRBs) are region based and rural-oriented banks, which have been set up to correct the regional imbalances and functional deficiencies in the institutional credit structure vis--vis the weaker sections of the populace. New credit delivery models like business correspondents, business facilitators as well as new technologies are being experimented with, so as to reach the unreached customers. In this regard, RRBs are well placed to carry forward the movement of financial inclusion due to their local character and familiarity with the local clientele. Amalgamation of RRBs School of Management Studies Page 28

On account of the consolidation and amalgamation process which had started in September 2005, the number of RRBs has come down to 82. As on date, out of 82 RRBs, 80 RRBs have been included in the 2nd Schedule of the RBI Act, 1934. At present, two RRBs viz., Paschim-Banga Gramin Bank, West Bengal and Kalinga Gramin Bank, Orissa are ineligible for scheduling. Branch Licensing Policy for RRBs The Reserve Bank has recently liberalized branch authorisation policy considerably for RRBs and allowed them to open branches in Tier 3 to Tier 6 centres (with population of up to 49,999 as per 2001 Census) without prior authorisation from the Reserve Bank, subject to reporting to respective Regional Offices of the Reserve Bank, provided they fulfill certain conditions as specified in the relevant circular. CBS Implementation As on September 30, 2011, 65 out of 82 RRBs have migrated fully to core banking solutions (CBS), and implementation of CBS is in progress in the remaining RRBs. All sponsor banks have committed to implement CBS in RRBs by the prescribed time line i.e., September 2011. Amortisation of Gratuity Owing to enhancement of maximum limit for payment of gratuity from 3.50 lakh to 10.00 lakh, RRBs' liability towards payment of additional premium to LIC has increased considerably. Hence, they have been permitted to amortise the enhanced expenditure over a period of five years beginning with the financial year ending March 31, 2011 subject to a minimum of 1/5th of the total amount involved every year.

2.4.7 Cooperative Banks

2.4.7.1 Urban Cooperative Banks (UCBs) Cooperative banks assume importance in the Indian financial system under the inclusive growth agenda, which has laid emphasis on financial inclusion. During 2010-11, a number of policy initiatives have been taken to strengthen cooperative banking in India, details of which are as follows: Opening of off-site ATMs by UCBs - Liberalisation According to the liberalised policy, Financially Sound and Well-Managed (FSWM) UCBs can open off-site ATMs over and above their annual business plan provided they meet the following criteria: (i) maintenance of a minimum CRAR of 10 per cent; (ii) net NPAs being less than 5 per cent; (iii) no default in the maintenance of CRR/SLR during the preceding financial year; (iv) continuous net profit for the last 3 years; (v) sound internal control system with at least two professional directors on the Board; and (vi) regulatory comfort based on track record of compliance with the provisions of BR Act, 1949 (AACS), RBI Act, 1934 and instructions/directions issued by the Reserve Bank from time to time. In addition, the minimum owned funds of the FSWM UCBs should be commensurate with entry point capital norms for the centre where the offsite ATM is proposed/where the UCB is registered. New Bank Licenses As announced in the Annual Policy Statement 2010-11, the Reserve Bank set up an expert committee (Chairman: Shri Y.H. Malegam) comprising all stakeholders for studying the School of Management Studies Page 29

advisability of granting licenses to set up new UCBs. The expert committee submitted its report on August 18, 2011. The Committee is of the view that, there is need for a greater presence of UCBs, especially in unbanked districts and in centres having population of less than 5 lakh. In this regard, it is necessary to encourage new entrants to open banks and branches in States and districts which are unbanked or inadequately banked. The existing well-managed cooperative credit societies with sound track record should be given priority for granting licenses as UCBs particularly in unbanked or inadequately banked centres. Some of the recommendations by the Expert Committee are as follows: UCBs which want to operate in the Northeast or only in one State would need a minimum capital of 50 lakh. The UCBs which want to operate in other States but keeping majority of branches in C and D category population centres would need minimum capital of 100 lakh. For UCBs which want to operate in other States without any requirement in C and D categories should have a minimum capital of 300 lakh. The UCBs which want to operate in more than one State after five years of successful operations would need a minimum capital of 500 lakh. There should be segregation of the ownership of the UCB as a cooperative society from its functioning as a bank. The new organisation structure shall consist of a Board of Management (BoM) in addition to the Board of Directors (BoD). The BoD will establish a BoM, consisting of persons with professional skills, which shall be entrusted with the responsibility for the control and direction of the affairs of the bank assisted by a CEO who shall have the responsibility of the management of the Bank. The appointment of the CEO shall be subject to the prior approval of the Reserve Bank. Guidelines on Trading of Currency Options by UCBs UCBs licensed as Authorised Dealers (Category I) were allowed to participate in the exchange traded currency option market of a designated exchange, recognised by SEBI as clients only, subject to RBI (Foreign Exchange Department) guidelines only for the purpose of hedging underlying forex exposure arising from customer transactions. Exposure to Housing, Real Estate and Commercial Real Estate Sectors As announced in the Second Quarter Review of Monetary Policy 2010-11, it was decided that UCBs exposures to housing, real estate and commercial real estate loans would be limited to 10 per cent of their total assets, instead of 15 per cent of deposits, which can be exceeded by an additional limit of 5 per cent of assets in case of dwelling units costing upto 10 lakh, subsequently increased to 15 lakh for housing loans granted to individuals. Further, it was also decided that UCBs would not be allowed to exceed the aggregate ceiling for real estate, commercial real estate and housing loans to the extent of refinance availed from higher financing agencies and National Housing Bank (NHB). Prudential Norms on Investment in Zero Coupon Bonds (ZCBs) UCBs were advised not to invest in ZCBs unless the issuer builds up a sinking fund for all accrued interest and keeps it invested in liquid investments/securities (Government Bonds). Limit for Housing Loans under Priority Sector Advances School of Management Studies Page 30

The limit for housing loans considered as a priority sector was increased from 20 lakh to 25 lakh for housing loans sanctioned by UCBs on or after April 1, 2011. Accounting Procedure for Investment: Settlement Date Accounting UCBs were advised that to bring in uniformity in the practice adopted by banks while accounting for investing in Government securities, they should follow "Settlement Date" accounting for recording both outright and ready forward purchase and sale transactions in Government securities. Enhancement of Gratuity Limits Prudential Regulatory Treatment Consequent to the increase in the gratuity payment on account of the Amendment to Payment of Gratuity Act, 1972, UCBs were allowed to defer the expenditure related to enhancement of gratuity, if not fully charged to the Profit and Loss Account during the financial year 2010-11, over a period of five years beginning with the financial year ended March 31, 2011 subject to charging to the Profit and Loss Account a minimum of 1/5th of the total amount involved every year. UCBs have to disclose the expenditure so deferred in their Annual Financial Statements. Financing of Self-Help Groups (SHGs) and Joint Liability Groups (JLGs) With a view to further expanding the outreach of UCBs and opening an additional channel for promoting financial inclusion, which would also help them in achieving the sub-target of lending to weaker sections, UCBs were allowed to lend to SHGs/JLGs. Loans to SHGs/ JLGs for agricultural and allied activities would be considered as priority sector advances. Further, other loans to SHGs/JLGs up to `50,000 would be considered as Micro Credit and hence treated as priority sector advances. Lending to SHGs, which qualify as loans to priority sector, would also be treated as part of lending to weaker sections.

Internet Banking for Customers of UCBs Scheduled UCBs having a minimum net worth of 100 crore, CRAR of at least 10 per cent, net NPAs less than 5 per cent and have earned net profit continuously in the last three years were allowed to provide internet banking facility to their customers subject to obtaining prior approval of the Reserve Bank. 2.4.7.2 Rural Cooperative Banks Status of Licensing of Cooperative Banks There are 31 State Cooperative Banks (SCBs) and 371 District Central Cooperative Banks (DCCBs) in the country. Consequent to the issuance of revised guidelines on licensing of SCBs and DCCBs, ten StCBs and 160 DCCBs were licensed. As on June 30, 2011, seven SCBs and 136 DCCBs were still unlicensed. Limit imposed on Housing Finance for State and Central Cooperative Banks State and Central Cooperative Banks were advised to limit the exposure to housing finance to 5 per cent of their total assets as against 10 per cent of their total loans and advances.

2.4.8 Non-Banking Financial Companies

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Amendment to Definition of Infrastructure Loan The term Infrastructure Loan which had been defined in Para 2(viii) of Non-Banking Financial (Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 and Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007, respectively, were amended. Consequently, NBFCs have been advised to include Telecom Towers under infrastructure. Further NBFCs have been advised that only Credit Rating Agencies (CRAs) approved by the Reserve Bank can give the rating to Infrastructure Finance Companies (IFCs). Regulatory Framework for Core Investment Companies (CICs) Under the extant regulatory framework, Core Investment Companies (CICs) with an asset size of less than 100 crore are exempt from the requirements of registration with the Reserve Bank. However, CICs with an asset size of 100 crore or more and accessing public funds would be considered as Systemically Important Core Investment Companies (CICs-ND-SI) and would be required to obtain Certificate of Registration (CoR) from the Reserve Bank under Section 45- IA of the Reserve Bank of India Act, 1934 even if they have been advised in the past that registration would not be required. Introduction of Provision of 0.25 per cent for Standard Assets of NBFCs In the interest of counter-cyclicality and also to ensure that NBFCs create a financial buffer to protect themselves from the adverse effects of economic downturns, provisioning of 0.25 per cent of the outstanding standard assets has been introduced. Participation in Currency Options NBFCs (excluding RNBCs) have been permitted to participate in the designated currency options exchanges recognised by SEBI, subject to RBI (Foreign Exchange Department) guidelines, only for the purpose of hedging their underlying forex exposures with an appropriate disclosure in their balance sheets. Submission of Data to Credit Information Companies NBFCs are required to become a member of at least one credit information company. They are required to provide the credit information to the credit information companies in the prescribed format. NBFCs are also required to provide historical data in order to enable the new credit information companies to develop a robust database. Balance Sheet and Profit and Loss Account Information NBFCs are advised to prepare their balance sheet and profit and loss account as on March 31 every year. Any extension of date of balance sheet would require prior approval of the Reserve Bank. Further, NBFCs are required to submit a certificate from Statutory Auditor with respect to the position of the company as on March 31 every year within one month from the date of finalisation of the balance sheet and in any case not later than December 30 of that year. NBFCs not to be Partners in Partnership Firms On account of the risks involved in NBFCs associating themselves with partnership firms, NBFCs are prohibited from contributing capital to any partnership firm or to be partners in partnership firms. In cases of existing partnerships, NBFCs have been advised that they may seek early retirement from the partnership firms. School of Management Studies Page 32

Ready Forward Contracts in Corporate Debt Securities NBFCs registered with the Reserve Bank (other than Government companies as defined in Section 617 of the Companies Act, 1956) are eligible to participate in repo transactions in corporate debt securities. NBFCs participating in such repo transactions have been advised to comply with the Directions and accounting guidelines issued by the Reserve Bank. All Systemically Important Non-Deposit taking Non- Banking Financial Companies (NBFCsND-SI) are eligible to participate in the repo transactions. Loan Facilities by NBFCs to the Physically/ Visually Challenged NBFCs have been advised that there shall be no discrimination in extending products and facilities including loan facilities to the physically /visually challenged applicants on grounds of disability. Enhancing CRAR to 15 Per cent It was decided to align the minimum capital ratio of all deposit-taking NBFCs with that of NBFCs-ND-SI at 15 per cent. Accordingly, all deposit taking NBFCs have been advised to maintain a minimum capital ratio consisting of Tier I and Tier II capital, which shall not be less than 15 per cent of its aggregate risk weighted assets on balance sheet and risk adjusted value of off-balance sheet items with effect from March 31, 2012. Setting up of Central Electronic Registry under the SARFAESI Act, 2002 To prevent frauds in loan cases involving multiple lending from different banks on the same immovable property, a central electronic registry has been established under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act. Opening of Branch/Subsidiary/Joint Venture/Representative Office or Undertaking Investment Abroad by NBFCs NBFCs desirous of making any overseas investment must obtain No Objection (NoC) under the terms of Regulation of the Foreign Exchange Management (Transfer or Issue of Any Foreign Security) (Amendment) Regulations, 2004 and the Non-Banking Financial Companies (opening of Branch/Subsidiary/ Joint Venture/Representative Office or Undertaking Investment Abroad by NBFCs) Directions, 2011 issued by the Reserve Bank before making such investment, from the Regional Office of the Reserve Bank in whose jurisdiction the head office of the company is registered. Entry of NBFCs into Insurance Business NBFCs registered with the Reserve Bank would be permitted to set up a joint venture (JV) company for undertaking insurance business with risk participation, subject to certain safeguards: (i) the maximum equity contribution such an NBFC can hold in a JV company is 50 per cent of the paid-up capital of the insurance company; (ii) subsidiary or company in the same group of an NBFC or of another NBFC engaged in the business of a non-banking financial institution or banking business shall not be allowed to join the insurance company on risk participation basis. In this regard, it was clarified that in case, if more than one company in the same group of the NBFC wishes to take a stake in the insurance company, the contribution by all companies in the same group shall be counted for the limit of 50 per cent prescribed for the NBFC in such an insurance JV. School of Management Studies Page 33

2.4.9 Customer Service in Banks

The Reserve Bank focuses on customer empowerment through enhanced dissemination of information. Towards providing more efficient and transparent services to customers, a number of initiatives were taken in 2010-11. Credit Card Services As there have been numerous complaints about credit card operations of banks, the Reserve Bank advised banks to strictly adhere to the guidelines issued in the Master Circular on Credit Card Operations of July 1, 2011, both in letter and spirit. A failure to observe these guidelines could lead to suitable penal action, including levy of monetary penalties under the relevant statutory provisions. Online Alerts for ATM Services The Reserve Bank has advised banks to put in place a system of online alerts latest by June 30, 2011 to cardholders, for all types of transactions, irrespective of the amount involved through various channels due to the increased instances of fraudulent withdrawals at ATMs. Further, banks have been also advised to provide complaint templates at all ATM sites for lodging ATM-related complaints. Real Time Gross Settlement (RTGS) and National Electronic Fund Transfer System (NEFT) Services To ensure prompt redressed of customer complaints regarding RTGS transactions, banks have been advised to use existing Customer Facilitation Centers set up for NEFT and RTGS customer complaints. To facilitate easy reconciliation of RTGS/NEFT return transactions, banks have been advised to provide necessary information to customers on return transactions in the account statement. Further, banks have also been advised to furnish remitter details to customers in their pass book or account statement for credits received through NEFT/National Electronic Clearing Service (NECS) / Electronic Clearing System (ECS).

Cheque Drop-Box Services In view of complaints about refusal by banks to give acknowledgements to customers for cheques tendered at the counter, compelling them to drop them in the drop-box, banks have been advised to ensure stricter compliance with the extant instructions regarding cheque drop box facility. Banks have been further advised that no branch should refuse to accept cheques over the counter and give proper acknowledgement. Loan Services With a view to bring fairness and transparency, banks have been advised to disclose ' all in cost ', inclusive of all charges involved in the processing and sanction of loans to enable the customer to compare the charges with other sources of finance. Banks need to ensure that these charges are nondiscriminatory. Committee on Customer Service in Banks The Reserve Bank has constituted a Committee to study various aspects of customer service in banks. The major observations made by the Committee are given in Box III.2. School of Management Studies Page 34

Customer Satisfaction Survey: ATM Transactions The Reserve Bank commissioned a survey to assess customer satisfaction in the usage of ATMs across the country. The Survey covered 600 ATMs distributed proportionately over metro, urban, semi-urban and rural regions, constituting 1 per cent of the total number of 60,000 ATMs in the country. The interim report was presented to the Board for Payment and Settlement Systems in June 2011. The major findings of the Survey inter alia were as follows: Cards Were Mainly Used For Withdrawing Cash Or Shopping Purposes; The Use Of Debit Cards For Bills Payment/Ticket Purchase Was Still Low; The Use Of Debit Cards For Shopping Was The Highest In Maharashtra And Andhra Pradesh; The Use Of Cards For Shopping Was More Among The Youth; Females Used Cards With Less Frequency. Silver Jubilee Year of Consumer Protection Act The year 2010-11 was the Silver Jubilee Year of the Consumer Protection Act, 1986. The theme for celebration, proposed by the Ministry of Consumer Affairs, was Consumers Discharge Your Responsibilities: Assert Your Rights. To commemorate the occasion, the Department of Consumer Affairs proposes to bring out a book titled Consumer Protection in India containing papers written by experts, which would be released in December 2011. Exclusive Board Meetings on Customer Service To increase Board oversight on customer service-related issues in banks, the Annual Monetary Policy - 2010-11 had announced that banks should devote exclusive time in a Board meeting once every six months to deliberate on these issues. All banks would submit a detailed memorandum regarding customer service to the Board of Directors, once every six months and initiate prompt corrective action, wherever quality and skill gaps were observed

2.4.10 Payment and Settlement System

The Reserve Bank has set up a robust technology-based payment and settlement systems infrastructure with enhanced assurance of uninterrupted and efficient provision of services. Major policy initiatives taken during the year to further strengthen the payment and settlement system were as follows: Paper Clearing: Express Cheque Clearing System To impart more efficiency to clearing process in non-MICR clearing houses, an advanced clearing house automation package Express Cheque Clearing System (ECCS) has been introduced. The ECCS would accept multiuser inputs in a networked environment, core banking integration and graphic interface compatibility. The National Payments Corporation of India (NPCI) has been entrusted with the task of operationalising this package. Electronic Payment Systems To provide near-to-real-time funds transfer facility to retail customers, as also to cater to the stock market timings, 11-hourly settlements on week days and five-hourly settlements on Saturdays in National Electronic Fund Transfer (NEFT) was introduced in March 2010, School of Management Studies Page 35

which has now been extended to over 79,000 branches. This is expected to enhance customers preference for electronic modes of payment. Prepaid Payment Instruments Keeping in view the increasing popularity of prepaid payment instruments, the guidelines issued in April 2009 were revisited in November 2010 and the following amendments inter alia were effected: Extension of the use of semiclosed prepaid payment instruments used for payment of utility bills for the purchase of travel tickets; Permission to banks to issue semiclosed prepaid payment instruments through agents and BCs. Further, the maximum value of prepaid instruments that can be used in the form of mobile-wallets (m-wallets) has been increased from `5,000 to `50,000. Mobile Banking Transactions Recognising the true potential of using mobile phones as a banking tool towards furthering financial inclusion, the bank-led model of mobile banking has been adopted, which would extend all banking facilities, including money transfer facility, through the mobile channel. The Reserve Bank has so far approved proposals of 50 banks to commence mobile banking services. The Bank has also authorised the NPCI to provide a seamless, instant, 24X7, mobile-based inter-bank fund transfer system through mobile phones, called Inter-Bank Mobile Payment Service. Card-based Transactions Given the increasing usage of cards (credit/debit/prepaid) issued by banks, there is a definite need to make both Card Present (CP), where card is swiped at ATMs and Points of Sale (PoS), and Card Not Present (CNP) transactions, safe and secure. An important step taken by the Reserve Bank, which is unique globally, is the mandate given to banks to provide additional authentication for all CNP transactions based on information not available on the card. The banks introduced additional authentication for CNP transactions except the Interactive Voice Response (IVR) transactions in April 2009, and extended the same to all IVR transactions in February 2011. The mandate presently applies to all transactions using cards issued in India for payments on merchant sites where no outflow of foreign exchange is contemplated. This initiative has increased the confidence of customers in this channel leading to a steep fall in the frauds in e-commerce transactions Efficiency in the ATM Delivery Channel To improve the operational efficiency of ATMs for customers, the Reserve Bank in May 2011 has inter alia advised banks: (a) To reduce the time limit for resolution of customer complaints from 12 working days to seven working days from the date of receipt of the customer complaint; (b) The customer is entitled to receive compensation for delay at the rate of `100 per day, provided the complaint is lodged with the issuing bank within 30 days from the date of the transaction; (c) All disputes regarding ATM-failed transactions should to be settled by the issuing bank and acquiring bank only through the ATM system provider leaving no scope of bilateral settlement arrangement outside the dispute resolution mechanism of the system provider. This measure would bring down the instances of disputes in payment of compensation between the issuing and acquiring banks. School of Management Studies Page 36

Oversight of Payment Systems To ensure that the payment systems operate in a safe and efficient manner and in line with extant policy prescriptions, the Reserve Bank has initiated a process of assessment, comprising both off-site surveillance and on-site inspections complimented by market intelligence. As part of the off-site surveillance, a database on the various payment instruments, their volume and value has been created and placed on the RBI website. An assessment template has been devised to aid authorized entities to carry out a self-assessment of their operations, risk management and business continuity arrangement.

2.4.11 Technological Developments

Business Continuity Management and Disaster Recovery During the year, periodical drills were conducted in order to ensure effectiveness of the Business Continuity Management and Disaster Recovery (DR) arrangements for shared infrastructure, and payment and settlement systems. IT Vision Document - 2011-17 A High Level Committee (Chairman: Dr. K. C. Chakrabarty) and members from IIT, IIM, IDRBT, Banks, and the Reserve Bank prepared the IT Vision Document 2011-17, for the Reserve Bank and banks, which provides an indicative road map for enhanced usage of IT in the banking sector.

2.4.12 Banking Sector Legislation

Constitution of the Financial Sector Legislative Reforms Commission (FSLRC) The FSLRC has been constituted under the Chairmanship of Justice B.N. Srikrishna by the Central Government in March 2011, with a view to rewriting, streamlining and harmonizing financial sector laws, rules and regulations with the requirements of Indias growing financial sector. The Terms of Reference of the Commission inter alia include the following: (i) examining the architecture of the legislative and regulatory system governing the Indian financial sector; (ii) examining if public feedback for draft subordinate legislation should be made mandatory, with exception for emergency measures and; (iii) examining the most appropriate means of oversight over regulators and their autonomy from the Government.

The Securities and Insurance Laws (Amendment and Validation) Act, 2010 The Act, effective from June 18, 2010, has amended the Reserve Bank of India Act, 1934, the Insurance Act, 1938, the Securities Contracts (Regulation) Act, 1956 and the Securities and Exchange Board of India Act, 1992. As noted in the RBI Annual Report 2010- 11, a new chapter on Joint Mechanism has been inserted in the Reserve Bank of India Act, 1934. The Act provides for a reference being made to the Joint Committee only by the regulators and not by the Central Government. The decision of the Joint Committee would be binding on the Reserve Bank, SEBI, IRDA and PFRDA.

2.5 Types of Banks

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There are various types of banks which operate in our country to meet the financial requirements of different categories of people engaged in agriculture, business, profession, etc. On the basis of functions, the banking institutions in India may be divided into the following types:

a) Central Bank
A bank which is entrusted with the functions of guiding and regulating the banking system of a country is known as its Central bank. Such a bank does not deal with the general public. It acts essentially as Governments banker; maintain deposit accounts of all other banks and advances money to other banks, when needed. The Central Bank provides guidance to other banks whenever they face any problem. It is therefore known as the bankers bank. The Reserve Bank of India is the central bank of our country. The Central Bank maintains record of Government revenue and expenditure under various heads. It also advises the Government on monetary and credit policies and decides on the interest rates for bank deposits and bank loans. In addition, foreign exchange rates are also determined by the central bank. Another important function of the Central Bank is the issuance of currency notes, regulating their circulation in the country by different methods. No other bank than the Central Bank can issue currency.

Fig 2.4 Pie chart showing distribution percentage of various banks

b) Commercial Banks

Commercial Banks are banking institutions that accept deposits and grant short-term loans and advances to their customers. In addition to giving short-term loans, commercial banks also give medium-term and long-term loan to business enterprises. Now-a-days some of the commercial banks are also providing housing loan on a long-term basis to individuals. There are also many other functions of commercial banks, which are discussed later in this lesson. Types of Commercial banks

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(a) Public Sector Banks: These are banks where majority stake is held by the Government of India or Reserve Bank of India. Examples of public sector banks are: State Bank of India, Corporation Bank, Bank of Boroda and Dena Bank, etc. (b) Private Sectors Banks: In case of private sector banks majority of share capital of the bank is held by private individuals. These banks are registered as companies with limited liability. For example: The Jammu and Kashmir Bank Ltd., Global Trust Bank, Vysya Bank, etc. (c) Foreign Banks: These banks are registered and have their headquarters in a foreign country but operate their branches in our country. Some of the foreign banks operating in our country are Hong Kong and Shanghai Banking Corporation (HSBC), Citibank, American Express Bank, Standard & Chartered Bank, Grindlays Bank, etc. The number of foreign banks operating in our country has increased since the financial sector reforms of 1991.

c) Development Banks

Business often requires medium and long-term capital for purchase of machinery and equipment, for using latest technology, or for expansion and modernization. Such financial assistance is provided by Development Banks. They also undertake other development measures like subscribing to the shares and debentures issued by companies, in case of under subscription of the issue by the public. Industrial Finance Corporation of India (IFCI) and State Financial Corporations (SFCs) are examples of development banks in India.

d) Co-operative Banks

People who come together to jointly serve their common interest often form a co-operative society under the Co-operative Societies Act. When a co-operative society engages itself in banking business it is called a Co-operative Bank. The society has to obtain a license from the Reserve Bank of India before starting banking business. Any co-operative bank as a society is to function under the overall supervision of the Registrar, Co-operative Societies of the State. As regards banking business, the society must follow the guidelines set and issued by the Reserve Bank of India.

Types of Co-operative Banks

(i) Primary Credit Societies: These are formed at the village or town level with borrower and non-borrower members residing in one locality. The operations of each society are restricted to a small area so that the members know each other and are able to watch over the activities of all members to prevent frauds. (ii) Central Co-operative Banks: These banks operate at the district level having some of the primary credit societies belonging to the same district as their members. These banks provide loans to their members (i.e., primary credit societies) and function as a link between the primary credit societies and state co-operative banks. (iii) State Co-operative Banks: These are the apex (highest level) co-operative banks in all the states of the country. They mobilise funds and help in its proper channelisation among various sectors. The money reaches the individual borrowers from the state co-operative banks through the central co-operative banks and the primary credit societies. School of Management Studies Page 39

e) Specialised Banks
There are some banks, which cater to the requirements and provide overall support for setting up business in specific areas of activity. EXIM Bank, SIDBI and NABARD are examples of such banks. They engage themselves in some specific area or activity and thus, are called specialised banks. Let us know about them. i. Export Import Bank of India (EXIM Bank): If you want to set up a business for exporting products abroad or importing products from foreign countries for sale in our country, EXIM bank can provide you the required support and assistance. The bank grants loans to exporters and importers and also provides information about the international market. It gives guidance about the opportunities for export or import, the risks involved in it and the competition to be faced, etc. ii. Small Industries Development Bank of India (SIDBI): If you want to establish a smallscale business unit or industry, loan on easy terms can be available through SIDBI. It also finances modernisation of small-scale industrial units, use of new technology and market activities. The aim and focus of SIDBI is to promote, finance and develop small-scale industries. iii. National Bank for Agricultural and Rural Development (NABARD): It is a central or apex institution for financing agricultural and rural sectors. If a person is engaged in agriculture or other activities like handloom weaving, fishing, etc. NABARD can provide credit, both short-term and long-term, through regional rural banks.

2.6 11th Five Year Plan target for Banking Sector

Table 2.2 Savings and Loan Account

Table 2.1 Growth Rate (Real) of Financial Services (Banking and Insurance)

The financial services sector in the country has been displaying a varying growth rate in the recent past. The financial sector as a whole is estimated to employ between 3.5 million to 4.0 million people, including direct employees and agency forces. To support the GDP growth aspiration of 9%10%, the financial sector would need to grow by 25%30% annually over the next five years. The penetration of the financial sector in India remains low relative to School of Management Studies Page 40

many markets, with bank credit/GDP at under 50.0%, overall insurance premium/GDP at under 5.0%, and general insurance premium/GDP at under 1.0%.The underlying GDP growth and higher penetration potential offer strong growth opportunities for the financial sector. The financial sector also has substantial potential for employment creation.

2.6.1 Financial Inclusion

Financial inclusion can be described as the delivery of banking and other financial services at affordable costs to the vast sections of the disadvantaged and low-income groups. To bring the financially excluded population within the formal financial system, many policy initiatives have been taken, such as making available a basic banking no frills account either with nil or very low minimum balances, issuing of General Credit Cards to eligible beneficiaries without insistence on security, purpose, or end use of credit; introduction of KCCs, allowing banks to utilize the services of NGOs, SHGs, MFIs, and other civil society organizations as intermediaries in providing financial services; credit linking of SHGs, support to MFIs; introduction of Financial Sector (Regulation and Development) Bill 2007 to develop and regulate the MFIs; and constitution of Financial Inclusion Fund and Financial Inclusion Technology Fund of Rs 500 crore each to strengthen the institutional and technological infrastructure for greater financial inclusion. We have to introduce suitable policy interventions and technological innovations to maximize the financial inclusion during the Eleventh Plan period. Lack of access to financial services such as credit, savings, and insurance at an affordable cost not only results in exclusion but also acts as a constraint to growth impetus in the rural and unorganized sectors. Despite years of policies aimed at the financial inclusion, a large number of households do not have access to formal financial services even today. The financial exclusion covers exclusion from any or all of the financial services necessary for participating in a modern market economy. Nevertheless, exclusion from credit provision has been looked at as being more significant than that from other services. There is a rural urban divide and a regional skew to the financial exclusion.

2.6.2 Policy Issues

A number of committees have provided guidance on improving the financial inclusion. The Sub-Group on Financial Services headed by K.V. Kamath (2007) is the most recent one. The C. Rangarajan Committee on Financial Inclusion (2007) has, in its Interim Report, made detailed recommendations on the supply side solutions to improve the delivery of financial services through traditional and non-conventional channels. It has also laid emphasis on the complementary demand side measures that are necessary. The Vaidyanathan Committee on Restructuring of Co-operatives (2004) and the Committee on Moneylender Legislation (2006) have recommended policy measures to improve the financial inclusion. Some of the key policy issues emerging out of these and the other reports for extending the outreach and depth of the financial inclusion are discussed in the succeeding paragraphs. School of Management Studies Page 41

Interest Rate Caps Interest rates on loans made by the banks have been deregulated from 1994, with the exception of export credit and loans up to Rs 2 lakh. In the latter case, the interest rate cannot exceed the banks notified benchmark PLR. Recently, the government has announced a subsidy of 2% to the banks for extending the production credit up to Rs 3 lakh for agriculture at 7%. Revitalization of Co-Operatives Co-operatives have the largest nominal outreach amongst the rural financial institutions including the commercial banks. Presently, they are at a crossroads owing to resource constraints, poor governance, bad management, and inefficiency. On the basis of the recommendations of the Vaidyanathan Committee, the GoI has formulated a revival package for restructuring and strengthening of the rural cooperative credit institutions. A total of 17 States have accepted in-principle the revised revival package as formulated by the GoI. Of the 17 States, 12 States have executed an MoU with the GoI and NABARD. The Vaidyanathan Committee states that, cooperative societies in India, unlike the world over, have not been mutual, but only agencies for credit dispensation. Upper tiers were created to provide refinance for the lower tiers. This resulted in a structure driven by borrowers at all levels. The Committee, therefore, recommended that there should be an aggressive effort to convert pure credit to thrift-cum-credit societies. In this form, it is expected that there would be natural incentives for good governance. This vision has been largely preserved in the reform package that has now been worked out. However, the process of organic growth that this entails is likely to constrain the ability of the co-operatives to quickly scale up their operations Traditional Moneylenders The All-India Debt and Investment Survey (NSS 59th Round) has revealed that the share of institutional agencies in the total cash dues of urban households had increased from 72% in 1991 to 75.1% in 2002 and that of moneylenders had also increased during the period from 10.2% to 14.1%. In the case of rural households on the other hand, the share of institutional agencies had in fact declined from 64% in 1991 to 57.1% in 2002. And more significantly, the share of moneylenders had increased in the same period from 17.5% to 29.6% in the case of rural households. Despite measures to extend institutional credit especially in the rural areas, the dependence on moneylenders has only increased. Thus there is a case to look at the possibility of using moneylenders for providing credit within a regulated framework. Usurious rates of interest and coercive practices are a reality that needs to be appropriately addressed. International experience also suggests that moneylenders perform similar activities all over the world both in developed and developing countries. Internationally, the nature of money lending laws is regulatory. The emphasis of such laws is on protecting the interests of the borrowers by capping the rate of interest and curbing coercive recovery practices. The technical group of the RBI to review the legislations on money lending in its report has also recommended that registration of the moneylenders should be made compulsory and a penalty should be imposed on those conducting business without registration. It has also recommended that the State Governments should stipulate the maximum rate of interest that could be charged by the moneylenders. School of Management Studies Page 42

The group has also recommended a model legislation for adoption by the State Government to regulate the moneylenders. The legislation provides incentives for registration and mainstreaming the activity of money lending. It also provides for penalties for violation of its provisions as well as disincentives to those who circumvent the law in the form of more stringent action against unregistered lenders. Building up the Demand Side Perhaps the greatest benefits of public policy initiatives towards the financial inclusion are in the area of creating systemic infrastructure for provision of credit and other financial services. Specific measures include creating credit registries, national identification numbers, payment systems, electronic commodity and auction markets, and weather measurement systemsall of which are public goods which would help stimulate economic activity. Other measures that would help generate demand for financial services include public investment in rural infrastructure programmes, vocational training programmes, and measures to improve market linkages that help micro entrepreneurs find reliable channels for marketing their products and services. New Initiatives There are certain NGOs, societies, trusts, and co-operative societies operating in the micro financial sector that are engaged in providing credit and other financial services to the economically active low-income people especially women, poor households, and their micro enterprises. However, the financial activities undertaken by such organizations lack a formal statutory framework. It was, therefore, considered expedient to provide a formal statutory framework for the promotion, development, and orderly growth of the micro credit sector. Accordingly, the Micro Financial Sector (Development and Regulation) Bill 2007 was introduced in the Lok Sabha on 20 March 2007. Some of the important features of the Bill are given below: Entrust the function of development and regulation of the micro financial sector to the NABARD. Define various entities engaged in the activity of micro finance such as cooperative societies, mutual benefit societies, or mutually aided societies registered under any State enactments or multi-State co-operative societies registered under the Multi-State Co-operative Societies Act, 2002; societies registered under the Societies Registration Act 1860; or any other State enactments governing such societies and a trust created under the Indian Trust Act, 1882 or public trust registered under any State enactments, that will be governed by the regulatory framework that is proposed to be set up. Define various categories of beneficiaries of micro financial services as eligible clients including SHGs or joint liability groups of such eligible clients. Provide for extending micro financial services to eligible clients by way of financial assistance subject to ceilings to be prescribed and such other financial services as may be specified by NABARD.

2.7 Economic Indicators of Banking Sector

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Cash Reserve Ratio Cash reserve Ratio (CRR) is the amount of funds that the banks have to keep with RBI. If RBI decides to increase the percent of this, the available amount with the banks comes down. RBI is using this method (increase of CRR rate), to drain out the excessive money from the banks. The amount of which shall not be less than three per cent of the total of the Net Demand and Time Liabilities (NDTL) in India, on a fortnightly basis and RBI is empowered to increase the said rate of CRR to such higher rate not exceeding twenty percent of the Net Demand and Time Liabilities (NDTL) under the RBI Act, 1934. Current CRR is 6% Statutory Liquidity Ratio In terms of Section 24 (2-A) of the B.R. Act, 1949 all Scheduled Commercial Banks, in addition to the average daily balance which they are required to maintain in the form of. In cash, or In gold valued at a price not exceeding the current market price, or In unencumbered approved securities valued at a price as specified by the RBI from time to time. Current SLR is 24%. Repo Rate Repo rate, also known as the official bank rate, is the discounted rate at which a central bank repurchases government securities. The central bank makes this transaction with commercial banks to reduce some of the short-term liquidity in the system. The repo rate is dependent on the level of money supply that the bank chooses to fix in the monetary scheme of things. Repo rate is short for repurchase rate. The entity borrowing the security is often referred to as the buyer, while the lender of the securities is referred to as the seller. The central bank has the power to lower the repo rates while expanding the money supply in the country. This enables the banks to exchange their government security holdings for cash. In contrast, when the central bank decides to reduce the money supply, it implements a rise in the repo rates. At times, the central bank of the nation makes a decision regarding the money supply level and the repo rate is determined by the market. The securities that are being evaluated and sold are transacted at the current market price plus any interest that has accrued. When the sale is concluded, the securities are subsequently resold at a predetermined price. This price is comprised of the original market price and interest, and the pre-agreed interest rate, which is the repo rate. Current Repo Rate is 8.50%.

Gross Domestic Product The monetary value of all the finished goods and services produced within a countrys borders in a specific time period, though GDP is usually calculated on an annual basis. It School of Management Studies Page 44

includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory. GDP = C + G + I + NX Where: C is equal to all private consumption, or consumer spending, in a nations economy. G is the sum of government spending. I is the sum of all the countrys businesses spending on capital. NX is the nations total net exports, calculated as total exports minus total imports. (NX = Exports Imports) GDP is commonly used as an indicator of the economic health of a country, as well as to gauge a countrys standard of living. Current GDP growth rate is 7.7%. Inflation Inflation can be defined as a rise in the general price level and therefore a fall in the value of money. Inflation occurs when the amount of buying power is higher than the output of goods and services. Inflation also occurs when the amount of money exceeds the amount of goods and services available. As to whether the fall in the value of money will affect the functions of money depends on the degree of the fall. Basically, refers to an increase in the supply of currency or credit relative to the availability of goods and services, resulting in higher prices. Therefore, inflation can be measured in terms of percentages. The percentage increase in the price index, as a rate per cent per unit of time, which is usually in years. The two basic price indexes are used when measuring inflation, the producer price index (PPI) and the consumer price index (CPI) which is also known as the cost of living index number. Inflation rate of India is 10.1% as on September, 2011. Foreign Institutional Investments Foreign Institutional Investors (FIIs), Non-Resident Indians (NRIs), and Persons of Indian Origin (PIOs) are allowed to invest in the primary and secondary capital markets in India through the portfolio investment scheme (PIS). Under this scheme, FIIs/NRIs can acquire shares/debentures of Indian companies through the stock exchanges in India. The ceiling for overall investment for FIIs is 24 per cent of the paid up capital of the Indian company and 10 per cent for NRIs/PIOs. The limit is 20 per cent of the paid up capital in the case of public sector banks, including the State Bank of India. Foreign Exchange Reserves Foreign exchange reserves (also called Forex reserves) in a strict sense are only the foreign currency deposits held by central banks and monetary authorities. However, the term in popular usage commonly includes foreign exchange and gold, SDRs and IMF reserve positions. This broader figure is more readily available, but it is more accurately termed official reserves or international reserves. These are assets of the central bank held in School of Management Studies Page 45

different reserve currencies, such as the dollar, euroyen, and used to back its liabilities, e.g. the local currency issued, and the various bank reserves deposited with the central bank, by the government or financial institutions and Large reserves of foreign currency allow a government to manipulate exchange rates usually to stabilize the foreign exchange rates to provide a more favourable economic environment. India's foreign exchange reserves fell by $326 million to $314.34 billion for the week ended Nov 11, declining sharply for the second straight week due to a slump in the value of foreign currency assets, official data showed.

2.8 FDI & the regulatory environment

Foreign Direct Investment as seen as an important source of non-debt inflows, and is increasing being sought as a vehicle for technology flows and as a means of attaining competitive efficiency by creating a meaningful network of global interconnections. India has sought to increase inflows of FDI with a much liberal policy since 1991 after decade's cautious attitude. The 1990's have witnessed a sustained rise in annual inflows to India. Basically, opening of the economy after 1991 does not live much choice but to attract the foreign investment, as an engine of dynamic growth especially in view of fast paced movement of the world forward Liberalization, Privatization and Globalization. Limits for FDI FDI in the banking sector has been liberalized by raising FDI limit in private sector banks to 74 per cent under automatic root including investment by foreign investment in India. The aggregate foreign investment in a private bank from all sources will be 74 per cent of paid-up capital of the bank. FDI and Portfolio investment in nationalized banks are subject to overall statutory limit of 20 per cent. The same ceiling also applies in respect of such investment in State Bank of India and its associate banks. FDI in banking sector can solve various problems of the overall banking sector. Such as Innovative Financial Products Technical Developments in the Foreign Markets Problem of Inefficient Management Non-performing Assets Financial Instability Poor Capitalization Changing Financial Market Conditions

If we consider the root cause of these problems, the reason is low-capital base and all the problems is the outcome of the transactions carried over in a bank without a substantial capital base. In a nutshell, we can say that, as the FDI is a non-debt inflow, which will directly solve the problem of capital base. Along with that it entails the following benefits such as Technology Transfer Now a days banks have been prominent and prudent in the rapid expansion of consumer lending in domestic as well as in foreign markets. It needs appropriate tools to assess (how School of Management Studies Page 46

such credit is managed) credit management of the banks and authorities in charge of financial stability. It may need additional information and techniques to monitor for financial vulnerabilities. FDI's tech transfers, information sharing, training programs and other forms of technical assistance may help meet this need. Better Risk Management As the banks are expanding their area of operation, there is a need to change their strategies exert competitive pressures and demonstration effect on local institutions, often including them to reassess business practices, including local lending practices as the whole banking sector is crying for a strategic policy for risk management. Financial Stability and Better Capitalization Host countries may benefit immediately. From foreign entry, if the foreign bank re-capitalize a struggling local institution. In the process also provides needed balance of payment finance. In general; more efficient allocation of credit in the financial sector, better capitalization and wider diversification of foreign banks along with the access of local operations to parent funding, may reduce the sensitivity of the host country banking system and lead towards financial stability.

2.9 Overall Investment of Banking Sector

Table 2.3 Overall investments in various sectors

Sector Name 2007-08 2006-07 2005-06 2004-05 2003-04 2002-03 2001-02 2000-01 1999-00 1998-99

Government Sources 91634 20444 -4978 72591 85940 104865 63453 18188 4192 16297 Uses 15441 49587 2194 21233 31072 5156 11478 90753 Net 76193 29143 -7172 93294

Households Sources Uses 164418 442202 167820 377142 175010 327749 111667 195337 Net -277784 -209322 -152739 -83670

2007

Other Financial Institutions Source Uses s 5443 -8736

54868 57885 184471 -126586 99709 54116 152087 -97971 51975 43354 141331 -97977 110279 25438 84841 72565 67015 103555 29859 73696 62823 60703 101140 21387 79753 44406 Private Corporate Sector Rest of the World Net 6316
Source s

Uses 3182

Net 3715

Source s

Uses 1951

Net 3501 Page 47

4033

3696

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-08 2006 -07 2005 -06 2004 -05 2003 -04 2002 -03 2001 -02 2000 -01 1999 -00 1998 -99

3 2978 5 2696 3 2890 2 3203 5 1898 8 -7217 6549 9675 1790

6021 2 2650 64 3275 4 3042 2 2402 9 1163 7 -1712 2187 3659

9 3042 7 2381 01 -3852 1613 -5041 4420 8261 7488 -1869

83 2957 17 4728 8001 6 8792 8 9411 3 8725 2 4713 9289 5632

9 1245 49 1753 3 5754 6 4097 9 2589 6 3495 8 3100 7 2709 3 2035 4

54 89 1711 1636 68 34 1280 1799 5 5 2247 0 4694 9 6821 7 5339 4 1159 07 1439 93 8203 7 5659 3

6 73 2423 1394 1 03 5319 1724 5 2417 0 2566 7 1570 3 4575 9 9866 2 1198 23 5637 0 4089 0

- 1381 2629 4 4 - 6624 1780 4 - 1375 1472 9 2

3116 1 1734 7 2795 1 2132 7 2321 6 9457

Source : RBI Database

2.10 Comparison between Indian and World Banking Sector

2.10.1 Money Infusion
Assets of the largest 1,000 banks in the world grew by 6.8% in the 2008/2009 financial year to a record $96.4 trillion while profits declined by 85% to $115bn. Growth in assets in adverse market conditions was largely a result of recapitalization. EU banks held the largest share of the total, 56% in 2008/2009, down from 61% in the previous year. Asian banks' share increased from 12% to 14% during the year, while the share of US banks increased from 11% to 13%. Fee revenue generated by global investment banking totalled $66.3bn in 2009, up 12% on the previous year. To increase the share of India in global banking and for betterment of economy the Finance Ministry has approved Rs 14,000 crore as part of capital infusion in banks for the financial year 2011-12, Minister of State for Finance Namo Narain Meena said. Approval to the banks came at a time when they were asked to project their (capital) requirements, for 2011-12. Banks projected Rs 18,000 crore (as capital requirement) for 2011-12 and Rs 19,000 crore for 2012-13, he said. For the year 2010-11, about Rs 20,000 crore money was infused in the banking sector. Rs 14,000 School of Management Studies Page 48

crore as Tier-I capital and Rs 6,000 crore was in the holding, he said on the sidelines of the banking conference Bancon 2011. Indian economy needs to brace up for a difficult year from a macro economic perspective.

2.10.2 Trend Analysis

Figure 2.5: Bar graph shows Share of Countries in total Assets of 100 Global Banks

Taking a look on the Fig 2.5 and 2.6 it is found that share of countries of top 100 Global Banks it is found that India contributes mere 1% which is much below than US, UK and China. But on the other hand it is found that it is one of the leading players in Credit Growth. It overshadows many developed and large developing economies like US, UK, Japan and China. The extent of growth can be understood by the fact that Indias lowest Credit Growth percentage is higher than the highest of US and Japan Credit Growth Percentage.

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Figure 2.6. : Line graph shows Three year moving average Bank credit growth, in per cent

2.11 The Way Forward: Challenges

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2.11.1 Need for further improving the efficiency parameters of the Indian Banks
The Indian banking sector has recorded an impressive improvement in productivity over the last 15 years; many of the productivity/ efficiency indicators have moved closer to the global levels. There has been a particularly discernible improvement in banks operating efficiency in recent years owing to technology up-gradation and staff restructuring. However, to sustain high and inclusive growth, there is a need to raise the level of domestic savings and channel those savings into investment. This implies that banks need to offer attractive interest rates to depositors and reduce the lending rates charged on borrowers - in other words, reduce the net interest margin (NIM). The NIM of the Indian banking system is higher than that in some of the other emerging market economies even after accounting for mandated social sector obligations such as priority sector lending and credit support for the Governments antipoverty initiatives. By far the most important task is to further improve operating efficiency on top of what has already been achieved by optimising operating costs, i.e., non-interest expenses including wages and salaries, transaction costs and provisioning expenses. This will enable banks to lower lending rates while preserving their profitability. If pursued effectively, financial inclusion will provide banks access to sizeable low cost funds as also opportunities for lending in the small volume segment. The latter should be possible since the Reserve Bank has deregulated the interest rate that can be charged on small value loans. To gainfully pursue financial inclusion, banks will need to constantly reinvent their business models and design products and services demanded by a growing economy with rapid structural transformation.

2.11.2 Challenges to further strengthening inclusive growth

The banking sector is a key driver of inclusive growth. There are supply side and demand side factors driving inclusive growth. Banks and other financial services players largely are expected to mitigate the supply side processes that prevent poor and disadvantaged social groups from gaining access to the financial system. Banks were advised to ensure close and continuous monitoring of Business Correspondents (BCs). They were also advised to focus, in future, on opening of some form of low cost brick and mortar branches between the base branch and BC locations. Further, banks were required to make efforts to increase the number of transactions in no-frill accounts. There should be seamless integration of the financial inclusion server with their internal core banking solution (CBS) systems and in the case of end-to-end solution, there should be a clear demarcation of the technology related activities and BC related activities of their service providers. However, banks must bear in mind that apart from the supply side factors, demand side factors, such as lower income and /or asset holdings also have a significant bearing on inclusive growth. School of Management Studies Page 51

Banks also need to take into account various behavioral and motivational attributes of potential consumers for a financial inclusion strategy to succeed. Today, access to financial products is constrained by several factors, which include: lack of awareness about the financial products, unaffordable products, high transaction costs, and products which are not convenient, inflexible, not customised and of low quality. A major challenge of the next decade is financing the millions in the unorganised sector, self-employed in the micro and small business sector, the small and marginal farmers as also rural share-croppers in the agricultural sector. Other challenges include financing affordable housing and education needs of low income households.

2.11.3 Need for effective corporate governance in banks

Banks are different from other corporate in important respects and that makes corporate governance of banks not only different but also more critical. Banks facilitate economic growth, are the conduits of monetary policy transmission and constitute the economys payment and settlement system. By the very nature of their business, banks are highly leveraged. They accept large amounts of uncollateralised public funds as deposits in a fiduciary capacity and further leverage those funds through credit creation. Banks are interconnected in diverse, complex and opaque ways underscoring their contagion potential. If a corporate fails, the fallout can be restricted to the stakeholders. If a bank fails, the impact can spread rapidly through to other banks with potentially serious consequences for the entire financial system and the macro economy. While regulation has a role to play in ensuring robust corporate standards in banks, the point to recognise is that effective regulation is a necessary, but not a sufficient condition for good corporate governance. In this context, the relevant issues pertaining to corporate governance of banks in India are bank ownership, accountability, transparency, ethics, compensation, splitting the posts of chairman and CEO of banks and corporate governance under financial holding company structure, which should engage adequate attention.

2.11.4 Need to review laws governing the Indian banking sector

The extant statutory arrangement is complex with different laws governing different segments of the banking industry. The nationalised banks are governed by the Banking Companies (Acquisition and Transfer of Undertaking) Acts of 1970 and 1980. State Bank of India and its subsidiaries are governed by their respective statutes. Private sector banks come under the purview of the Companies Act, 1956 and the Banking Regulation Act, 1949. Foreign banks which have registered their documents with the registrar under Section 592 of the Companies Act are also banking companies under the Banking Regulation Act. Certain provisions of the Banking Regulation Act have been made applicable to public sector banks. Similarly, some provisions of the RBI Act too are applicable to nationalised banks, SBI and its subsidiaries, private sector banks and foreign banks. Notwithstanding this wide array of legislations of varying vintage, the statutory arrangement has served the system well by helping maintain an orderly banking system. Needless to say, each of the statutes was crafted School of Management Studies Page 52

in a setting reflecting the needs and concerns of the time. Almost all the statutes have had to be amended from time to time to reflect changes in circumstances and context. There is a strong case for reviewing all the various legislations and recasting them for a number of reasons. There is also a need to iron out inconsistencies between the primary laws governing the banking sector and other laws applicable to the banking sector. The decision of the Government to set up a Financial Sector Legislative Reforms Commission to rewrite and clean up the financial sector laws to bring them in line with the requirements of the sector is very timely and very vital. It is important, however, to recognise that changes in policy or in the regulatory architecture cannot be the remit of a Legislative Reforms Commission. Rather, they should be debated and decided upon as a prelude to the work of the Commission so that the Commission has a clear mandate on the policy directions.

2.11.5 Can the Indian banks aim to become global in stature?

Of late, there is a debate on whether the Indian banks should aim to become global? In this context, there is a need to view the related costs and benefits analytically and also view this as an aspiration consistent with Indias growing international profile. Two specific questions that need clarity in this context are: (i) can Indian banks aspire to achieve global size? And (ii) should Indian banks aspire to attain global size? On the first question, it is unlikely that any of the Indian banks will come in the top ten of the global league even after reasonable consolidation. On the next question, those who argue that banks must go global contend that the issue is not so much the size of our banks in global rankings but of Indian banks having a strong enough global presence. The main argument is that the increasing global size and influence of Indian corporate warrant a corresponding increase in the global footprint of Indian banks. The opposing view is that Indian banks should look inwards rather than outwards, focus their efforts on financial deepening at home rather than aspiring to global size. It is possible to take a middle path and argue that looking outwards towards increased global presence and looking inwards towards deeper financial penetration are not mutually exclusive; it should be possible to aim for both. In the wake of the global financial crisis, there has definitely been a pause to the rapid expansion overseas of our banks. Notwithstanding the risks involved, it will be opportune for some of the larger banks to be looking out for opportunities for consolidation. The surmise, therefore, is that Indian banks should increase their global presence. In the rapidly changing global financial landscape, it is imperative for the Indian banks to think global but act local.

2.11.6 Costs and risks in using technology to change the face of banking
Technology adoption has changed the face of banking in India. Wide spread technology deployment in the banking business has also brought to the fore some new issues and challenges. These can be broadly divided into two categories - costs and risks. Costs, in terms of increasing expenditure on IT deployment and risks that are resulting from reliance School of Management Studies Page 53

on IT systems without necessary safeguards. Cost aspects can be addressed by synergising IT deployment objectives with the broader, strategic business objectives to ensure adequate operational and management controls over purchase as well as maintenance of appropriate technology solutions. The second aspect relating to IT risks is a very critical issue. With the increased use of IT, there are attendant risks posed to the banks as well as their customers in terms of monetary loss, data theft, breach of privacy and banks need to be extremely cognizant of such risks. Another significant aspect of banking business is regulatory and supervisory compliance. With the growth and globalisation of markets in general and in the aftermath of recent crisis in particular, number of such compliance requirements is increasing. Basel II and III implementation brings in huge challenges. Banks have adopted technology, but the benefit of technology has not fully percolated in terms of cost, speed and convenience. Empowering customers with technology-driven benefits is a big challenge.

2.11.7 Emerging trends in payment systems and related challenges

The smooth functioning of the market infrastructure for enabling payment and settlement systems is essential for market and financial stability, as also for economic efficiency, and for the smooth functioning of financial markets. The financial sector and the payment and settlement system infrastructure have to be subservient to the real sector. The evolving payment systems scenario offers new challenges and opportunities to all segments of this industry. To leverage on the opportunities provided by new products, the system providers/banks need to ensure that the challenges are adequately addressed. It also has to be ensured that the products cover all segments of the population and provide an incentive to adopt these products. The regulatory process will support all orderly development of new systems and processes, within the legal mandate. The important issues in this context are how banks can provide cost effective, safe, and speedier and hassle free payment and settlement products and solutions.

2.11.8 Some concerns related to financial stability

Despite the fragility of the global macro financial environment, the macroeconomic fundamentals for India have remained robust. Further, since December 2010, the financial markets remained stress-free and the forecast of the values of the Financial Stress Indicator pointed out that they were likely to remain stable in the near term. Some emerging trends that may be of immediate concern in respect of financial stability are, (i) the possibility of spillovers from increasing financialisation of commodities to financial markets, (ii) interest rate differentials vis--vis advanced economies, which could propel foreign funding by Indian corporate leading to currency mismatches, (iii) rollover risks of maturity of Foreign Currency Convertible Bonds (FCCBs) requiring refinancing at higher interest rates, and (iv) disproportionate growth in bank credit to four specific sectors, viz., real estate, infrastructure, NBFCs and retail credit coupled with persistent asset-liability mismatches, reliance on borrowed funds and enhanced requirement of provisioning for NPAs.

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1. Research Design

3.1 Scope of the Study

Banking sector is the backbone for any country and its infrastructure. The Indian Banking sector has been successful in maintaining its growth trajectory due to low defaulter ratio; least complicated financial products, regular intervention by central bank, and proactive adjustment of monetary policy and so called conventional banking culture, which helped the industry survive through global financial turmoil. The scope of the project extends to analyse the overall telecom sector: its growth in the past few years, its contribution to the country, its current scenario as well as the future opportunities. The scope of the project extends to the foreign investments in the sector and its comparison as part of the infrastructure with the world infrastructure. This study mainly covers the Indian Banking Sector as a part of the infrastructure in the Indian economy.

3.2 Research Objectives

A Brief Study of Indian Infrastructure including Power, Roads, Telecom, Railway, Agriculture, Ports , Airports and Banking Sector To understand the role of the banking sector in the infrastructure in Indian economy. To study the economic indicators of the sector. To understand the current market scenario in the banking sector. To analyse growth in the banking sector. To analyse the threats to the banking sector. To study the service providers and their service quality in the banking sector. To analyse the FDI in the sector. To study future growth opportunities. To compare the Banking sector in India with other countries.

3.3 Data collection methodology

Secondary data has been used in this report as it is the most authorized, authentic, exhaustive and proven source of information. Information gathered through secondary data is less costly, more refined, unbiased and can be collected within a short span of time. A variety of secondary information sources are available to the researcher gathering data on an industry, potential growth and development. Secondary data is also used to gain initial insight into the School of Management Studies Page 55

research problem. The two major advantages of using secondary data in market research are time and cost savings. The secondary research process can be completed rapidly generally in 2 to 3 week. Substantial useful secondary data can be collected in a matter of days by a skillful analyst. When secondary data is available, the researcher need only locate the source of the data and extract the required information. Secondary research is generally less expensive than primary research. The bulk of secondary research data gathering does not require the use of expensive, specialized, highly trained personnel. Secondary information will provide a useful background and will identify key questions and issues that will need to be addressed in further research.

3.3.1 Identifying Sources of Information

Provincial/state governments Statistics agencies Trade associations General business publications Magazine and newspaper articles Annual reports Academic publications Library sources Computerized bibliographies Syndicated services.

3.3.2 Gathering Existing Data

World Bank report RBI Infrastructure report Sector Analysis Reports Industry Reviews Investment Records Earlier Research Project

3.4 Evaluation of Secondary Data

For the evaluation of secondary data, the following requirements must be satisfied:1. Availability- It has to be seen that the kind of data desired is available or not. If it is not available then one has to go for primary data. School of Management Studies Page 56

2. Relevance- It should be meeting the requirements of the problem. For this one has two criterion:a. Units of measurement should be the same. b. Concepts used must be same and currency of data should not be outdated.

3. Accuracy- In order to find how accurate the data is, the following points must be considered: a. Specification and methodology used; b. Margin of error should be examined; c. The dependability of the source must be seen. 4. Sufficiency- Adequate data should be available.

3.5 Methodology and tools

Trend analysis: Trend analysis seeks out and examines systematic historical patterns in financial statements or other quantitative data. It usually involves choosing one fiscal period as a base period and then expressing subsequent quantities as a percentage of the data associated with this base period. Trend analysis is valuable when one wants to use historical data to predict future values or to calculate expected values for comparison to actual current values. Trend analysis is also useful for identifying unexpected variances that may indicate strategic or operational changes or entity weaknesses worthy of additional exploration and analysis. Comparative analysis: Comparative research is a research methodology in the social sciences that aims to make comparisons across different countries or cultures. It helps to identify the gap or extent of difference between various parameters used to compare the countries. It also helps in determining the extent of development and its future prospects.

3.6 Limitation of the study

Availability of data was the main limitation of this study. Research on recent changes in sector quite less. Most of the research taken place by using data of pre-recession which not shows the actual condition of present Banking Sector. Fundamental analysis involves lots of tools, but only selected tools were studied. School of Management Studies Page 57

 Study frame is very limited.

1. Study Area & Analysis

An economic indicator (or business indicator) is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance. Economic Indicators are of three types, (i) Leading Indicator, (ii) Lagging Indicator and (iii) Coincidence indicator. Here for the study of Banking Sector trend of following indicators are recorded and analyzed: Inflation Rate GDP growth rate Foreign Exchange Reserves Repo Rate and Reverse Repo Rate Cash Reserve Ratio Statutory Liquid Ratio Foreign Institutional Investment

4.1 Inflation Rate

Figure 4.1 Line graph showing India Inflation Rate

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Graph shows that except July 2009 to July 2010 the Inflation rate is quite reasonable i.e. between 5% to 10% which is helpful for the growth of the economy. Only during period of recession it goes beyond the normal rate and touch the height of 16.4%.

4.2 Gross Domestic Product

Figure 4.2 Line graph showing India GDP Growth Rate

Graph shows the strength of 2nd largest growing Indian economy which is growing at near 8%. Though for a short while GDP growth is near 6% but then too it shows the strength because it was the period when all the large economies are facing the problem of recession.

4.3 Foreign Exchange Reserves

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Figure 4.3 Line graph showing Foreign Exchange Reserves

The graph shows Indian foreign exchange reserve increase at very fast rate after the liberalization of economy and continuously increasing except for a while during recession (2007-08). These reserve shows strength of the economy.

4.4 Repo Rate and Reverse Repo Rate

Figure 4.4 Line graph showing Repo Rate and Reverse Repo Rate

Graph shows that in 2009 that is after recession Repo Rate and Reverse Repo Rate came down and then again increasing with increasing inflation rate to control liquidity in the market.

4.5

Cash Reserve Ratio

Figure 4.5 Line graph showing Cash Reserve Ratio

The graph shows that Cash Reserve Ratio is normally maintained around 6%. In the recession period to ensure higher protection and prevent banks from any downfall RBI purposely increase the CRR to 8.75%.

4.6

Statutory Liquid Ratio

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Figure 4.6 Line graph showing Statutory Liquid Ratio

Graph shows the difference before the second banking reform in 1997and after it. Before the 1997 SLR was continuously maintained near 37% and after it near 24%. It shows that the Banking Sector strengthens after the reform.

4.7

Foreign Institutional Investment

Figure 4.7 Line graph showing Foreign Institutional Investment

The graph shows that an increasing pattern of FIIs in India except in the year 2008 this was because of global recession at that time. FIIs investment again started increasing which will help to make development of economy.

Recommendations & Conclusion

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5.1 Recommendations
A. Operational Efficiency: The most important task is to further improve operating efficiency on top of what has already been achieved by optimising operating costs, i.e., non-interest expenses including wages and salaries, transaction costs and provisioning expenses. This will enable banks to lower lending rates while preserving their profitability. If pursued effectively, financial inclusion will provide banks access to sizeable low cost funds as also opportunities for lending in the small volume segment. The latter should be possible since the Reserve Bank has deregulated the interest rate that can be charged on small value loans. To gainfully pursue financial inclusion, banks will need to constantly reinvent their business models and design products and services demanded by a growing economy with rapid structural transformation. B. Retail banking: The entry of new generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to corporate. Now they need to sell banking. The retail segment, which was earlier ignored, is now the most important of the lot, with the banks jumping over one another to give out loans. The consumer has never been so lucky with so many banks offering so many products to choose. With supply far exceeding demand it has been a race to the bottom, with the banks undercutting one another. Due to this increasing competition from foreign banks Indian banks have to increase their competency in Retail Banking. C. Merger: Currently there has been a lot of talk about Indian Banks lacking in scale and size. The State Bank of India is the only bank from India to make it to the list of Top 100 banks, globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to be picked up by a larger bank. So to get identity on international level and a competitive edge over large international banks Merger is a good solution. D. Financial Inclusion : There should be seamless integration of the financial inclusion server with their internal core banking solution (CBS) systems and in the case of endto-end solution, there should be a clear demarcation of the technology related activities and BC related activities of their service providers. However, banks must bear in mind that apart from the supply side factors, demand side factors, such as lower income and /or asset holdings also have a significant bearing on inclusive growth. E. Effective corporate governance: Regulation has a role to play in ensuring robust corporate standards in banks, the point to recognise is that effective regulation is a necessary, but not a sufficient condition for good corporate governance. In this context, the relevant issues pertaining to corporate governance of banks in India are School of Management Studies Page 62

bank ownership, accountability, transparency, ethics, compensation, splitting the posts of chairman and CEO of banks and corporate governance under financial holding company structure, which should engage adequate attention. F. Payment System: The smooth functioning of the market infrastructure for enabling payment and settlement systems is essential for market and financial stability, as also for economic efficiency, and for the smooth functioning of financial markets. The regulatory process will support all orderly development of new systems and processes, within the legal mandate. The important issues in this context are how banks can provide cost effective, safe, and speedier and hassle free payment and settlement products and solutions. G. Financial Stability: Some emerging trends that may be of immediate concern in respect of financial stability are, (i) the possibility of spillovers from increasing financialisation of commodities to financial markets, (ii) interest rate differentials vis-vis advanced economies, which could propel foreign funding by Indian corporates leading to currency mismatches, (iii) rollover risks of maturity of Foreign Currency Convertible Bonds (FCCBs) requiring refinancing at higher interest rates, and (iv) disproportionate growth in bank credit to four specific sectors, viz., real estate, infrastructure, NBFCs and retail credit coupled with persistent asset-liability mismatches, reliance on borrowed funds and enhanced requirement of provisioning for NPAs. Banking sector should remain fairly well capitalised and resilient to asset quality shocks and other plausible adverse changes in macroeconomic scenario. Issues pertaining to regulatory gaps remaining in the NBFC sector that impinge on financial stability are being addressed by enhancing the scope of the regulatory perimeter while vulnerabilities in the liquidity risk management systems of domestic central counterparties are being weighed in terms of new mechanisms for bail-outs.

5.2 Conclusion
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 Bank of Hindustan, which started in 1790; both 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. And from then two centuries are over and banking sector is continuously flourishing in India. This growth got a pace after nationalisation of bank in 1969. The banking system is central to a nations economy. Banks are special as they not only accept and deploy large amounts of uncollateralised public funds in a fiduciary capacity, but also leverage such funds through credit creation. In India, prior to nationalisation, banking was restricted mainly to the urban areas and neglected in the rural and semi-urban areas. Large industries and big business houses enjoyed major portion of the credit facilities. Agriculture, small-scale industries and exports did not receive the deserved attention. Therefore, inspired by a larger social purpose, 14 major banks were nationalised in 1969 and six more in 1980. Since then the banking system in India has played a pivotal role in the Indian economy, acting as an instrument of social and economic change. School of Management Studies Page 63

The last decade has seen many positive developments in the Indian banking sector. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made several notable efforts to improve regulation in the sector. The sector now compares favourably with banking sectors in the region on metrics like growth, profitability and non-performing assets (NPAs). A few banks have established an outstanding track record of innovation, growth and value creation. This is reflected in their market valuation. However, improved regulations, innovation, growth and value creation in the sector remain limited to a small part of it. The cost of banking intermediation in India is higher and bank penetration is far lower than in other markets. Indias banking industry must strengthen itself significantly if it has to support the modern and vibrant economy which India aspires to be. While the onus for this change lies mainly with bank managements, an enabling policy and regulatory framework will also be critical to their success. The Recession that began in December 2007 impacted the revenues and profitability of businesses worldwide. We are in a globalised world and no more immune to the things happening outside our country. Built on strong financial fundamentals, strict vigil on risk appetite and firm monetary guidelines, Indian banks have proved among the most resilient and sound banking institutions in the world. The Indian banking sector has recorded an impressive improvement in productivity over the last 15 years; many of the productivity/ efficiency indicators have moved closer to the global levels. There has been a particularly discernible improvement in banks operating efficiency in recent years owing to technology up-gradation and staff restructuring. However, to sustain high and inclusive growth, there is a need to raise the level of domestic savings and channel those savings into investment. This implies that banks need to offer attractive interest rates to depositors and reduce the lending rates charged on borrowers - in other words, reduce the net interest margin (NIM). The NIM of the Indian banking system is higher than that in some of the other emerging market economies even after accounting for mandated social sector obligations such as priority sector lending and credit support for the Governments antipoverty initiatives. By far the most important task is to further improve operating efficiency on top of what has already been achieved by optimising operating costs, i.e., non-interest expenses including wages and salaries, transaction costs and provisioning expenses. This will enable banks to lower lending rates while preserving their profitability. If pursued effectively, financial inclusion will provide banks access to sizeable low cost funds as also opportunities for lending in the small volume segment. The latter should be possible since the Reserve Bank has deregulated the interest rate that can be charged on small value loans. To gainfully pursue financial inclusion, banks will need to constantly reinvent their business models and design products and services demanded by a growing economy with rapid structural transformation.

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References
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28. Reserve Bank of India: Report on Trend and Progress of Banking in India, Various issues. 29. Reserve Bank of India (1991): Report of the Committee on the Financial System (Narasimham Committee Report). 30. Seiford, L.M and R.M Thrall (1990): Recent Developments in DEA: The Mathematical Programming Approach to Frontier Analysis, Journal of Econometrics, 46, Pp: 7-38, North Holland. 31. Subhass, C.Ray & Abhiman Das (2010): Distribution of Cost and Profit efficiency: Evidence from Indian Banking, European Journal of Operational Research, 201, Pp: 297-307. 32. Tandon Prakash (1989) Banking Century: A Short History of Banking in India, Viking, New Delhi.

Websites
1. www.rbi.org.in/ , accessed on 25 August,2011 2. www.worldbank.org.in/, accessed on 28 August, 2011 3. www. iba.org.in/, accessed on 24 November, 2011 4. www.timesofindia.indiatimes.com , accessed on 24 November, 2011 5. finance.indiamart.com/, accessed on 25 November, 2011

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