1

Recent Developments in Banking Sector of India

Dr. S.M Jawed Akhtar*, N.P. Abdul Azeez**

1. Introduction:
The banking system is central to a nation’s economy. Banks are special as they not only
accept and deploy large amounts of uncollateralized public funds in a fiduciary capacity, but also
leverage such funds through credit creation. India has a long history of both public and private
banking. 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 from the Bank of Calcutta in June 1806, which almost immediately became the
Bank of Bengal. This was one of the three Presidency Banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were established under Charters from the
British East India Company. For many years the Presidency Banks acted as quasi-central banks,
as did their successors. The three banks merged in 1921 to form the Imperial Bank of India,
which, upon India's independence, became the State Bank of India in 1955.
Following independence, the RBI was given broad regulatory authority over commercial
banks in India. Despite the provisions, control and regulations of Reserve Bank of India, banks in
India except the State Bank of India or SBI, continued to be owned and operated by private
persons. By the 1960s, the Indian banking industry had become an important tool to facilitate the
development of the Indian economy. At the same time, it had emerged as a large employer, and a
debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime
Minister of India, expressed the intention of the Government of India in the annual conference of
the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation."
The meeting received the paper with enthusiasm.
Associate Professor*, Junior Research Fellow**, Department of Economics, Aligarh Muslim
University, Aligarh. abdulazeeznp@gmail.com
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Thereafter, her move was swift and sudden. The Government of India issued an
ordinance and nationalized the 14 largest commercial banks with effect from the midnight of
July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a
"masterstroke of political sagacity." Within two weeks of the issue of the ordinance, the
Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it
received the presidential approval on 9 August 1969. In July 1969, the government nationalized
all banks whose nationwide deposits were greater than Rs. 500 million, resulting in the
nationalization of 54 percent more of the branches in India, and bringing the total number of
branches under government control to 84 percent. Prakesh Tandon, a former chairman of the
Punjab National Bank (nationalized in 1969) describes the rationale for nationalization as
follows:
“Many bank failures and crises over two centuries, and the damage they did under ‘laissez faire’
conditions; the needs of planned growth and equitable distribution of credit, which in privately
owned banks was concentrated mainly on controlling industrial houses and influential
borrowers; the needs of growing small scale industry and farming regarding finance, equipment
and inputs; from all these there emerged an inexorable demand for banking legislation, some
government control and a central banking authority, adding up, in the final analysis, to social
control and nationalization”.
After nationalization, the breadth and scope of the Indian banking sector expanded at a
rate perhaps unmatched by any other country. Indian banking has been remarkably successful at
achieving mass participation. A second dose of nationalization of 6 more commercial banks
followed in 1980. The stated reason for the nationalization was to give the government more
control of credit delivery. With the second dose of nationalization, the Government of India
controlled around 91 percent of the banking business of India. Later on, in the year 1993, the
government merged New Bank of India with Punjab National Bank. It was the only merger
between nationalized banks and resulted in the reduction of the number of nationalized banks
from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4
percent, closer to the average growth rate of the Indian economy.
During post nationalization, the Indian banking system registered tremendous growth in
volume. Despite the undeniable and multifold gains of bank nationalization, it may be noted that
the important financial institutions were all state-owned and were subject to central direction and
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control. Banks enjoyed little autonomy as both lending and deposit rates were controlled until the
end of the 1980s. Although nationalization of banks helped in the spread of banking to the rural
and hitherto uncovered areas, the monopoly granted to the public sector and lack of competition
led to overall inefficiency and low productivity. By 1991, the country’s financial system was
saddled with an inefficient and financially unsound banking sector. Some of the reasons for this
were (i) high reserve requirements, (ii) administered interest rates, (iii) directed credit (iv) lack of
competition, and (v) political interference and corruption. As recommended by the Narasimham
Committee Report (1991) several reform measures were introduced which included reduction of
reserve requirements, de-regulation of interest rates, introduction of prudential norms,
strengthening of bank supervision and improving the competitiveness of the system, particularly
by allowing entry of private sector banks. After liberalization of the economy in 1991, the Indian
banking sector witnessed tremendous growth and it now enjoys a global footprint. Apart from
the growth the sector in the last decade and a half, the regulatory bodies like Reserve Bank of
India also established a vibrant regulatory framework which is at par with the best economies in
the world.
2. Recent Technological and Other Developments in Banking Sector:
India's economic development and financial sector liberalization have led to a
transformation of the Indian banking sector over the past two decades. Asset quality and
profitability have improved significantly and the system has become more commercially
oriented. Indian banks were not much impacted by the financial crisis, helped by their relative
isolation and some counter-cyclical measures implemented by the Reserve Bank of India in the
mid-2000s, but asset quality deterioration led to some proactive loan restructuring. Over the past
years Indian banks have encountered more headwinds as high inflation led to tightening
monetary policy, putting pressure on borrowers, especially in weaker sectors. Funding and
liquidity are relatively strong features of the Indian banking system as the loans/deposits ratio is
under 80 percent and the banks are required to hold large amounts of Indian government bonds.
Their access to off-shore funding is constrained by India's just investment grade sovereign rating.
Capital is also adequate in aggregate but some banks, including large public sector banks, are in
need of core capital.
Developments in the field of information technology (IT) strongly support the growth and
inclusiveness of the banking sector thereby facilitating inclusive economic growth. IT not only
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enhances the competitive efficiency of the banking sector by strengthening back-end

administrative processes, it also improves the front-end operations and helps in bringing down
the transaction costs for the customers. It has the potential of furthering financial inclusion by
making small ticket retail transactions cheaper, easier and faster for the banking sector as well as
for the small customers. The Reserve Bank has thus been actively involved in harnessing
technology for the development of the Indian banking sector over the years. Information
technology revolution in the Indian economy has made steady inroads into the banking
institutions and has brought about a significant change in many aspects in the form of
computerization of transactions and new delivery channels such as Internet Banking, Phone
Banking, ATMs, EFT, ECS and EDI etc.. With migration of traditional paper-based funds
movements to quicker and more efficient electronic mode, funds transfers have become easy and
efficient to perform.
2.1 Bank Computerization:
The most fundamental way in which technology has changed the face of the Indian
banking sector has been through computerization. Entry of new private sector banks and foreign
banks offering most modern technology banking has forced public sector banks (PSBs) to
address computerization problems more seriously in recent years. The pace of computerization
has remained slow even though opposition from staff unions has softened. The Central Vigilance
Commission wants 100 percent computerization in Indian banks to check frauds, delays, etc. The
general perception is that in recent years, the prime focus of bank computerization has been less
on the number of branches computerized but more on better connectivity, say, between the head
office and regional offices of a bank with select branches. These are usually banks that handle
large corporate borrowing accounts on one side and those that are in high deposit zones, on the
other. While the private sector banks have been upgrading technology simultaneously with
branch expansion, many of the top PSBs have completed automating their branches in the urban
areas. The next step to total branch automation is networking of these branches.
PSBs need to frame a strategy to choose the branches that have to be included in their
networking scheme. Since it would be a daunting task for them to connect all the 64,000
branches spread across the country, as a first step, they are following the 80-20 thumb rule. It
assumes that 80 percent of bank’s business is carried out by only 20 percent of its branches. It is
the branches with substantial business, most of which lie in the urban areas, that are initially
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targeted for interconnection. A major problem PSBs have to face, once IT implementation
reaches its optimum level, is staff retention. While the private sector banks have been recruiting
trained and experienced IT professionals, it may not be possible for PSBs to do likewise. They
will have to train their existing staff to function effectively in the new environment. And once
the requisite skills are acquired by employees, they may have trouble retaining staff. PSBs can
only allocate limited capital resources to computerization. They will have to choose between
high cost of computerization at metro and urban centers and low cost computerization at rural,
semi-urban branches. Also, they will have to factor in returns on IT assets, and growth and
productivity improvements.
Newly opened private sector banks, foreign banks, and a few other Indian banks have
started Electronic Money activities, which open up business opportunities but carry risks that
need to be recognized and managed prudently. The Basel Committee on Banking Supervision
has raised issues of critical importance to banking authorities in this regard. There is no evidence
that these aspects are being looked into in India, yet there is a need for auditing firms to be aware
of this issue. Despite recapitalization, the overall performance of PSBs continues to lag behind
those of private sector and foreign banks. Questions of ownership, management, and governance
are central to this issue. Under public ownership, it is almost impossible to draw a distinction
between ownership responsibility and managerial duty. For this reason, Government-owned
banks cannot insulate themselves from interference. Inevitably, some PSBs are overregulated
and over administered. A central concern is that banking operation flexibility, which is essential
for responding to changing conditions, is difficult to implement. Under public control, the
efficiency objective in terms of cost, profitability, and market share is subordinated to the
vaguely defined public interest objective. Moreover, it is not only difficult to inject competition
between PSBs since they have a common ownership, but government-imposed constraints have
also meant that they have not been able to effectively compete with private sector banks. India
still has to find a middle path of balancing divergent expectations of socio-economic benefits
while promoting competitive capitalism. Political sensitivities can make privatization difficult
but the government aims to bring down its holdings to 51 percent. When that happens, a great
stride will be completed. In 1998, announcements have been made on corporatization of IDBI
and reduced government holdings in Bank of Baroda, Bank of India, Corporation Bank, Dena
Bank, IDBI, Oriental Bank of Commerce, and SBI. Of the total number of public sector bank
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branches, 97.8 per cent were fully computerized at end-March 2010. The cumulative expenditure
on ‘computerization and development of communication networks’ by public sector banks from
September 1999 to March 2010 aggregated to `22,052 crore. On an annual basis, the expenditure
on ‘computerization and development of communication networks’ registered a growth of 23.2
per cent in 2009-10.
2.2 Core Banking Solutions (CBS):
A technological development closely related to computerization in bank branches is the
adoption of the Core Banking Solutions. Core banking is a general term used to describe the
services provided by a group of networking bank branches. Core banking consists of a
networking process by which the servers of different branches of a bank are joined to a common
server and henceforth an account holder may access, deposit, and withdraw money from his/her
account from any of the branches of the bank. Bank customers may access their funds and other
simple transactions from any of the member branch offices. Core banking systems are basically
the heart of all systems running in a bank and it forms the core of the bank's IT platform.
Amongst other functionalities, it provides the customer information management, central
accounting and the transaction-processing functions, which by far are the most fundamental
processes in a bank. Core banking solutions are banking applications on a platform enabling a
phased, strategic approach that is intended to allow banks to improve operations, reduce costs,
and be prepared for growth. Implementing a modular, component-based enterprise solution
facilitates integration with a bank's existing technologies. An overall service-oriented-
architecture (SOA) helps banks reduce the risk that can result from manual data entry and out-of-
date information, increases management information and review, and avoids the potential
disruption to business caused by replacing entire systems.
With the advancement in technology and with the passage of time, core systems now-
days tend to cover more and more functionality giving the bank an integrated solution for most
of its operations in different business lines. Alongside, it also provides a central operational
database of customers' assets and liabilities giving facility to generate a 360 degree view of the
customer’s relationship with the bank, which is fundamental for the customer relationship
management (CRM) strategy of the bank. Core banking systems reside either in the heart of a
bank's data center or in other words can also be termed as the heart of the data-centre itself. CBS
enable banks to offer a multitude of customer centric services on a continuous basis from a single
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location, supporting retail as well as corporate banking activities thus making “one stop” shop
for financial services a reality. An important development in 2009-10 was a significant increase
in the percentage of branches of public sector banks implementing CBS. The percentage of such
branches increased from 79.4 per cent at end-March 2009 to 90 per cent at end- March 2010. The
percentage of branches under CBS was much larger for the SBI group as compared to
nationalized banks.
Nowadays, most banks use core banking applications to support their operations where
CORE stands for "centralized online real-time exchange". This basically means that the entire
bank's branches access applications from centralized datacenters. This means that the deposits
made are reflected immediately on the bank's servers and the customer can withdraw the
deposited money from any of the bank's branches throughout the world. These applications now
also have the capability to address the needs of corporate customers, providing a comprehensive
banking solution. A few decades ago it used to take at least a day for a transaction to reflect in
the account because each branch had their local servers, and the data from the server in each
branch was sent in a batch to the servers in the datacenter only at the end of the day (EoD).
2.3 ATM Services:
The third major technological development, which has revolutionized the delivery
channel in the banking sector, has been the Automated Teller Machines (ATMs). It has gained
prominence as a delivery channel for banking transactions in India. ATM means neither “avoids
traveling with money” nor “any time money,” but certainly implies both. Further, introduction of
automated teller machines (ATMs) enabled customers to do banking without visiting the bank
branch. The first bank to introduce the ATM concept in India was the Hong Kong and Shanghai
Banking Corporation (HSBC) in the year 1987. Now, almost every commercial bank gives ATM
facilities to its customers. SBI is following the concept of 'ATMs in Quantity’. The Corporation
Bank has the second largest network of ATMs amongst the public sector banks in India. ATM is
designed to perform the most important function of bank. It is operated by plastic card with its
special features. The plastic card is replacing cheque, personal attendance of the customer,
banking hour’s restrictions and paper based verification. ATMs have made hard cash just
seconds away all throughout the day at every corner of the globe. ATMs allow you to do a
number of banking functions – such as withdrawing cash from one’s account, making balance
inquiries and transferring money from one account to another – using a plastic, magnetic-strip
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card and personal identification number issued by the financial institution. While ATM
facilitates a variety of banking transactions for customers, their main utility has been for cash
withdrawal and balance enquiry.
Today’s all public sector banks are taking the installation of ATMs seriously for Indian
market. They are either setting up their own ATM centers or entering into tie-ups with other
banks. Since April 2009 access in any ATM is free of charge it is the great opportunity to any
ware banking in India. ATMs, particularly off-site ATMs, act as substitute for bank branches in
offering a means of anytime cash withdrawal to customers. Growth in ATMs, which have been
generally on a steady rise in the recent years, was observed to be 37.8 per cent in 2009-10 and in
2010-11 the number of ATMs witnessed a growth of 24 per cent over the
previous year.
Table I: ATMs of Scheduled Commercial Banks
S.No Bank group On-site Off-site Total Off-site ATMs
ATMs ATMs number as percent of
of ATMs total ATMs
I Public sector banks 29,795 19,692 49,487 39.8
1.1 Nationalized banks* 15,691 9,145 24,836 36.8
1.2 SBI group 14,104 10,547 24,651 42.8
II Private sector banks 10,648 13,003 23,651 55.0
2.1 Old private sector banks 2,641 1,485 4,126 36.0
2.2 New private sector banks 8,007 11,518 19,525 59.0
III Foreign banks 286 1,081 1,367 79.1
All SCBs (I+II+III) 40,729 33,776 74,505 45.3
Source: Report on Trend and Progress of Banking in India 2010-11
However, the percentage of off-site ATMs to total ATMs witnessed a
marginal decline to 45.3 per cent in 2010-11 from 45.7 per cent in 2009-10.
More than 65 per cent of the total ATMs belonged to the public sector banks as
at end March 2011. During 2010-11, the number of debit cards grew at the
rate of 25 per cent over the previous year. In sync with the trend observed in
case of ATMs, nearly three-fourths of the total debit cards were issued by PSBs
by the end March 2011. The share of PSBs in outstanding debit cards
witnessed an increase during the recent years, while that of new private sector
banks and foreign banks witnessed a decline over the same period.
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Table 2: Debit Cards Issued by Scheduled Commercial Banks

(As at end-March 2011)
S. No. Bank group Outstanding Number of Debit Cards
2006-07 2007-08 2008-09 2009-10 2010-11
I Public sector banks 44.09 64.33 91.7 129.69 170.34
1.1 Nationalised banks 19.24 28.29 40.71 58.82 80.27
1.2 SBI group 24.85 36.04 50.99 70.87 90.07
II Private sector banks 27.19 34.1 41.34 47.85 53.58
2.1 Old private sector banks 3.94 5.34 7.09 9.81 12.44
2.2 New private sector banks 23.25 28.76 34.25 38.04 41.14
III Foreign banks 3.70 4.02 4.39 4.43 3.92
All SCBs (I+II+III) 74.98 102.44 137.43 181.97 227.84
Source: Report on Trend and Progress of Banking in India 2010-11
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
also been advised to provide complaint templates at all ATM sites for lodging
ATM-related complaints.
2.4 Telephone Banking, Mobile Banking and SMS Banking:
Mobile phones as a medium for extending banking services have off-late been attaining
greater significance. The rapid growth in users and wider coverage of mobile phone networks
have made this medium an important platform for extending banking services to customers. With
the rapid growth in the number of mobile phone subscribers in India (about 261 million as at the
end of March 2008 and growing at about 8 million a month), banks have been exploring the
feasibility of using mobile phones as an alternative channel of delivery of banking services.
Some banks have started offering information based services like balance enquiry, stop payment
instruction of cheques, transactions enquiry, and location of the nearest ATM/branch etc.
Acceptance of transfer of funds instruction for credit to beneficiaries of same/or another bank in
favor of pre-registered beneficiaries have also commenced in a few banks. In order to ensure a
level playing field and considering that the technology is relatively new, Reserve Bank has
brought out a set of operating guidelines for adoption by banks.
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  Telephone banking is specific provision of banking services over the telephone. It is a

term used for performing balance checks, account transactions, payments, credit applications and
other banking transactions through a mobile device such as a mobile phone or Personal Digital
Assistant (PDA). The earliest mobile banking services were offered through SMS. It allows
customers to perform transactions over the telephone. Most telephone banking use an interactive
voice response (IVR). Mobile banking is the hottest area of development in the banking sector
and is expected to replace the credit/debit card system in future. Most of banks are providing
SMS alert facility to their customers. Facility of SMS services in banking becomes very much
safe and useful in recent days. Mobile banking can offer services such as the following:
Account Information:
a. Mini-statements and checking of account history;
b. Alerts on account activity or passing of set thresholds;
c. Monitoring of term deposits;
d. Access to loan statements;
e. Access to card statements;
f. Mutual funds / equity statements;
g. Insurance policy management;
h. Pension plan management;
i. Status on cheque, stop payment on cheque;
j. Ordering cheque books;
k. Balance checking in the account;
l. Recent transactions;
m. Due date of payment (functionality for stop, change and deleting of payments);
n. PIN provision, Change of PIN and reminder over the Internet;
o. Blocking of (lost, stolen) cards.
Payments, Deposits, Withdrawals, and Transfers:
p. Domestic and international fund transfers;
q. Micro-payment handling;
r. Mobile recharging;
s. Commercial payment processing;
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t. Bill payment processing;

u. Peer to Peer payments;
v. Withdrawal at banking agent;
w. Deposit at banking agent;
Investments:
a. Portfolio management services;
b. Real-time stock quotes;
c. Personalized alerts and notifications on security prices;
d. mobile banking.
Support:
a. Status of requests for credit, including mortgage approval, and insurance coverage;
b. Check (cheque) book and card requests;
c. Exchange of data messages and email, including complaint submission and tracking;
d. ATM Location;
Content Services:
e. General information such as weather updates, news;
f. Loyalty-related offers; and
g. Location-based services.
Based on a survey conducted by Forrester, mobile banking will be attractive mainly to
the younger, more "tech-savvy" customer segment. Every third of mobile phone users say that
they may consider performing some kind of financial transaction through their mobile phone.
But most of the users are interested in performing basic transactions such as querying for account
balance and making bill payment.
2.5 Internet Banking or Wireless Banking, Online Banking:
Internet banking, both as a medium of delivery of banking services and as a strategic tool
for business development, has gained wide acceptance internationally and is fast catching up in
India with more and more banks entering the fray. The Internet, by its very nature, reaches across
borders and is, for this reason, engaging the attention of regulatory and supervisory authorities all
over the world. It can be defined as a facility provided by banking and financial institutions that
enable the user to execute bank related transactions through Internet. A major driving force
behind the rapid spread of internet banking all over the world is its acceptance as an extremely
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cost effective delivery channel of banking services as compared to other existing channels. It
occurs when customers access a financial institution's network using cellular phones, pagers, and
personal digital assistants through telecommunication companies’ wireless networks. It uses the
Internet as the delivery channel by which to conduct banking activity, e.g. transferring funds,
paying bills, viewing checking and savings account balances, paying mortgages, and purchasing
financial instruments and certificates of deposit.
The biggest advantage of Internet banking is that people can expend the services sitting at
home, to transact business. Due to which, the account holder does not have to personally visit the
bank. With the help of Internet banking many transactions can be executed by the account
holder. When small transactions like balance inquiry, record of recent transaction, etc. are to be
processed, the Internet banking facility proves to be very handy. The concept of Internet banking
has thus become a revolution in the field of banking and finance. India can be said to be on the
threshold of a major banking revolution with net banking having already been unveiled. The
Internet banking portal of our banking system enables its retail banking customers to operate
their accounts from anywhere anytime, removing the restrictions imposed by geography and
time. It's a platform that enables the customers to carry out their banking activities from their
desktop, aided by the power and convenience of the Internet. Using Internet banking services,
you can do the following normal banking transactions online:
 Funds transfer between own accounts;
 Third party transfers to accounts maintained at any branch of SBI;
 Group transfers to accounts in State Bank Group;
 Interbank transfers to accounts with other banks;
 Online standing instructions for periodical transfer for the above;
 Credit PPF accounts across branches;
 Request for issue of demand draft;
 Request for opening of new accounts;
 Request for closure of loan accounts;
 Request for issue of cheque book.
All bank branches are enabled for Internet Banking. Contact your branch for availing this
service. Banks providing Internet banking services have been entering into agreements with their
customers setting out the terms and conditions of the services. The terms and conditions include
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information on the access through user-id and secret password, minimum balance and charges,
authority to the bank for carrying out transactions performed through the service, liability of the
user and the bank, disclosure of personal information for statistical analysis and credit scoring
also, non-transferability of the facility, notices and termination, etc..
Costs of banking service through the Internet form a fraction of costs through
conventional methods. Rough estimates assume teller cost at Re.1 per transaction, ATM
transaction cost at 45 paise, phone banking at 35 paise, debit cards at 20 paise and Internet
banking at 10 paise per transaction. The cost-conscious banks in the country have therefore
actively considered use of the Internet as a channel for providing services. Fully computerized
banks, with better management of their customer base are in a stronger position to cross-sell their
products through this channel.
2.6 Customer Services:
Making banks more customer-friendly has been high on the agenda of the Reserve Bank.
Accordingly, a number of steps have been taken towards enhancing financial literacy and
strengthening channels of information dissemination relating to banking services to customers. A
full-fledged Customer Service Department was set up in 2006 by the Reserve Bank to enhance
the pace and quality of provision of customer services, while providing customers a forum for
redressal of their grievances.
The forum of redressal of consumers’ grievances about banking, the Banking
Ombudsman (BO), received 79,266 complaints at its 15 offices in 2009-10 contributed largely
by the complaints received at the offices of the three major metropolises of Mumbai, New Delhi
and Chennai. These three offices together accounted for almost half of the total complaints
(34,830 complaints accounting for 43.9 per cent of the total) in 2009-10. It may be highlighted
that the number of complaints at almost all offices in India have been increasing in the recent
years indicating the growing awareness among consumers about grievance redressal, but the
increase was particularly rapid at the offices in these three metropolises.
The share of complaints received against foreign banks and new private sector banks,
which had been on a rapid increase in the recent years, showed signs of slowing down in 2009-
10. In the case of foreign banks, there was a decline in the number of complaints received by the
BOs in 2009-10. In contrast, there was a perceptible increase to the tune of over 26 per cent in
the number of complaints received against public sector banks in 2009-10. On account of a fall
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in the growth of complaints against new private sector banks and foreign banks, the shares of
these bank groups posted a decline between 2008-09 and 2009-10.

3. Financial Inclusion:
Traditionally, we have observed that the poor are not welcomed to the banking fold
with a misconception that they are not bankable and that there is no business opportunity in
offering services to the under-privileged and poor people in the semi-urban rural areas and to
slum-dwellers in the metropolitan cities. Banks and financial institutions had been, till recent
times, financially excluding these people. Today’s initiative by the bank in launching this
ambitious program of financial inclusion is very commendable. Huge participation by women
entrepreneurs in today’s program bodes well for the financial inclusion initiatives being
undertaken by the bank. Like charity, virtues like thrift and discipline begin at home and what
could be a better way than involving women in this ambitious program aimed at inculcating thrift
and including, into the financial fold, the hitherto excluded. It is important to note that that the
bank is not only helping the women by opening accounts and granting loans but has also
undertaken the task of imparting training, educating them in preparing their own accounts,
helping them sell their produce, etc..
Financial Inclusion is the process of ensuring access to appropriate financial products
and services needed by all sections of the society in general, and vulnerable groups such as
weaker sections and low income groups in particular, at an affordable cost and in a fair and
transparent manner by regulated mainstream institutional players.
3.1 Measures undertaken to promote Financial Inclusion:

It has been RBI’s endeavour to remove all hurdles in the way of its regulated entities in
achieving financial inclusion objectives. Some of the salient measures undertaken in this regard
are:

Introduction of New Products:

i. Opening of ‘No-Frill’ accounts: A ‘No Frills’ account is one for which no minimum
balance is insisted upon and for which there are no service charges for not maintaining
the minimum balance, introduced as per RBI directive in 2005. Banks have been advised
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to provide small overdrafts in these ‘no frill’ accounts. As of March 2011, 74.4 million
‘No Frill accounts’ have been opened by domestic commercial banks with outstanding
balance of `6,566 crores. With a view to encourage transactions in No Frill accounts
banks have been advised to provide small overdrafts (ODs) in such accounts. Up to end
March 2011, banks have provided 4.2 million ODs amounting to `199 crores.

ii. General Credit Cards (GCC)/Kisan Credit Cards (KCC): GCCs/KCCs help purvey
credit where the credit facility is in the nature of a revolving credit entitling the holder to
withdraw up to the limit sanctioned., Limits are sanctioned without insistence on security
or purpose, based on the assessment of household cash flows. Interest rate on the facility
is completely deregulated. Banks had been asked to consider introduction of a GCC
facility up to Rs. 25,000 at their rural and semi-urban braches. The objective of the
scheme is to provide hassle free credit to banks’ customers based on the assessment of
cash flow without insistence on security, purpose or end-use of the credit. This is in the
nature of revolving credit entitling the holder to withdraw up to the limit sanctioned. As
of March 2011, banks had 0.95 million GCC accounts with outstanding credit of `1,308
crores. Banks have been advised to speed up opening of accounts, leveraging ICT to
provide benefits to their customers at their door step. As on March 2011, banks had
opened 37.2 million accounts using ICT through BCs.

Relaxed Regulatory Requirements:

i. Relaxed regulatory dispensation on Know Your Customer (KYC) norms: KYC

requirements for small accounts were relaxed in August 2005, by stipulating that
introduction by an account holder, who has been subjected to full KYC drill, would
suffice for opening such accounts, or, that the bank can take any evidence to its
satisfaction as to the identity and address of the customer. During the year, it has been
further relaxed to include job card issued by NREGA duly signed by an officer of the
State Government or the letters issued by the Unique Identification Authority of India
containing details of name; address and AADHAAR number as a valid identity proof.

ii. Simplified branch authorisation: To increase the reach of banking network, domestic
scheduled commercial banks have earlier been permitted to freely open branches in Tier
2 to Tier 6 centres (with population of less than 1,00,000) under general permission,
 16

subject to reporting. Recently, incentives have been provided for opening branches in
Tier 2 centres also. Further, domestic scheduled commercial banks have been permitted
to open branches in rural, semi urban and urban centres in the North-Eastern States and
Sikkim, without the need of taking permission from Reserve Bank in each case, subject to
reporting. In 2010-11, the number of branches of SCBs increased by 4,826 over the
previous year. Importantly, of the new branches opened by SCBs, 22 per cent were in
rural areas and 42 per cent were in semi-urban areas. The Southern region, which is
already well banked, had the highest share of new bank branches in 2010-11.

iii. Business Correspondent/ Business Facilitator: In January 2006, the Reserve Bank
permitted banks to engage Business Facilitator and Business Correspondent (BC) as
intermediaries for providing financial and banking services. The BC model allows banks
to provide door step delivery of services especially ‘cash in - cash out’ transactions at a
location much closer to the rural population, thus addressing the last mile problem. The
list of eligible individuals/entities who can be engaged as BCs is being enlarged from
time to time. For-profit companies have also been allowed to be engaged as BCs. As on
Sept 2011, banks have reported deploying 75316 BCs which covered 97979 villages.
During 2010-11, in order to harness the large and widespread retail network of corporate
for providing financial and banking services, ‘for profit’ companies were also allowed to
be engaged as intermediaries to work as BCs for banks in addition to entities permitted
earlier.

iv. Opening of branches in unbanked rural centres: A need was felt for opening of more
brick and mortar branches, besides the use of BCs, to further improve banking
penetration and, more importantly, financial inclusion. Accordingly, banks have been
mandated in the Monetary Policy Statement – April 2011, to allocate at least 25 per cent
of the total number of branches to be opened during a year in unbanked rural centres.

v. Special Dispensation scheme for opening of branches in NER- To improve banking

penetration in hitherto unbanked North-East region (NER), the Reserve Bank asked the
State Governments and banks to identify centres where there is a need for setting up
either full-fledged branches or those offering forex facilities, handling government
business or for meeting currency requirements. It has also offered to fund the capital and
 17

running costs for five years provided the State Government concerned is willing to make
available the premises and put in place appropriate security arrangements.

vi. Financial Inclusion Plan for Banks: In our effort to achieve a sustained, planned and
structured financial inclusion, all public and private sector banks were advised to put in
place a Board approved three year Financial Inclusion Plan (FIP). These plans broadly
include self-determined targets in respect of rural brick and mortar branches to be
opened; business correspondents (BC) to be employed; coverage of unbanked villages
with population above 2000 as also other unbanked villages with population below 2000
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 criteria 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.

Supportive Measures:
i. Two Funds, namely the Financial Inclusion Fund (FIF) for meeting the cost of
developmental and promotional interventions for ensuring financial inclusion, and the
Financial Inclusion Technology Fund (FITF), to meet the cost of technology adoption has
been set up at NABARD with an overall corpus of Rs. 500 crores each. In the Union
Budget for 2011-12 the corpus of these funds was enhanced by Rs. 100 crores each.
ii. To improve banking penetration in the North- East, the Reserve Bank has offered to fund
the capital and running costs for five years, provided the State Government concerned is
willing to make available the premises and put in place appropriate security
arrangements. During the year, branches were opened at 2 of the agreed centres in
Meghalaya, 2 in Tripura and 4 in Manipur.
iii. With an objective of ensuring uniform progress in provision of banking services in all
parts of the country, banks were advised to draw up a roadmap to provide banking
services through a banking outlet in every unbanked village having a population of over
2,000 by March 2012. The Reserve Bank advised banks that such banking services need
 18

not necessarily be extended through a brick and mortar branch but could be provided also
through any of the various forms of ICT- based models, including BCs. About 72,800
such unbanked villages have been identified and allotted to various banks through State
Level Bankers Committees (SLBCs).
4. Micro Finance:
SHG-Bank Linkage Programme has completed two decades of existence
since the early days of the pilot in 1992. The approach has received wide
acceptance amongst a multiplicity of stakeholders, like the financially excluded
poor households, civil society organisations, bankers and also the international
community. In 2010-11, 1.2 million new SHGs were credit linked with banks,
and bank loans of Rs. 14,547 crores (including repeat loan) was disbursed to
these SHGs. Further, at end-March 2011, 7.46 million SHGs maintained
savings accounts with banks. On an average, the amount of savings per SHG
was Rs. 9,405 as compared to the amount of credit of Rs. 65,180 in 2010-11.
There is a strong belief that the SHG movement has the potential to satisfy the
financial service needs of India’s unbanked people in a sustainable way.
However, the approach has faced a few concerns of being fundamentally
focused on credit without adequate room for intensifying the space for thrift
and savings. Similarly the approach has also shown the need and scope for
allowing greater flexibility to accommodate multiplicity of credit borrowings at
the SHG level. NABARD’s attempt at present has been to better appreciate the
concerns being expressed from different quarters which are aimed at
addressing some of these critical concerns to make the approach more flexible,
client friendly in tune with the changing needs. In 2010-11, 461 MFIs were
provided loans by banks to the tune of Rs. 7,605 crores. The growth under the
MFI-linkage programme in terms of both number and amount of loans was
much higher than the corresponding growth under the SHG-Bank Linkage
Programme in 2010-11.
5. Conclusion:
All these developments in Indian banking show that the Indian banks are moving towards
modern banking changing a face of traditional banking of Indian economy .It is great change of
 19

banking industry. They are a installing an information technology for banking business and are
trying to provide technology based banking products and services to their customers. Indian
banks are also trying to univerlisation of banking products and services to one stop banking shop
for customer delight, but comparatively private and foreign banks existing in Indian economy are
having a higher level of modernization and providing numbers of modern services to their
customers.

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