AHMEDABAD UNIVERSITY H. L.

Institute of Commerce
S. Y. B.Com. Semester -II ECONOMIC DEVELOPMENT AND FINANCIAL SYSTEM OF INDIA I Prof. Sonal Yadav
M.A.(Eco.),M.Phil.(Eco)

UNIT-2 BANKING IN INDIA The Indian Money Market

The term money market refers to the institutional arrangements facilitating borrowing and lending of short-term funds. In a money market, funds may be borrowed for periods varying from a day, a week, 3 to 6 months and against different types of instruments such as bills of exchange, short-term securities, bankers acceptance, etc., called near-money. In any money market, commercial banks are the most important lenders of money. They also create credit. The central banks role is important as a controller of credit. The Indian Money Market is not an integrated unit. It is broadly divided into two parts, viz, the unorganised and the organised. There is compartmentalisation between the two markets and as such the rate of interest differs in the unorganised sector from those in the organised sector.

The unorganised sector:

It contains agencies which have diverse policies, lack of uniformity and consistency in the lending business. It comprises of unregulated non-bank financial intermediaries, the indigenous bankers and the money lenders. There are around 34000 money lenders and indigenous bankers in the country out of which 19000 are urban based. They are known as shroffs, multanis, chettiars, etc. known by different names in different parts of the country. Money lenders and indigenous bankers provide nearly 50% of rural finance. In south India, nidhis and chit funds are the common non-institutional sources of finance. Nidhis are essentially loan societies registered under the Indian Companies Act. There are around 244 nidhis and 8000 chit funds functioning in the country. They pursue banking business on traditional lines.

The organised sector:

It is fairly integrated. Both nationalised and the private sector commercial banks constitute the core of the organised sector. As per the RBI Act, 1934, banks are of two types, (i) scheduled bank (ii) nonscheduled banks. In 1969, fourteen major commercial banks were nationalised. In 1980, six more commercial banks were nationalised. Thus, around 90% of the banking institutions are in the public sector. The foreign bank, co-operative banks and the Reserve Bank of India, the Discount and Finance House of India, development finance institutions like IIBI and IFCI and investment finance companies like the LIC, GIC, and UTI and mutual funds are the other institutions which operate in the organised sector of the Indian Money Market. The RBI is an apex institution in the Indian Money Market. Since it is the leader and controller of the money market, it has great responsibility in respect of smooth functioning of the financial system. In April 1988, the RBI set up the Discount and Finance House of India (DFHI) to perform the function of stabilising the money market.

Indian Money Market

Organised sector Linked RBI Unlinked Unorganised Sector

Co-operative Banks & credit Institutions

Commercial Banks

Indigenous bankers Money Shahu Bankers lenders kars

Public Sector

Private Sector

State Bank of India & 7 subsidiaries

Regional Rural Banks

Scheduled banks

Non-scheduled Banks

20 Nationalised banks

Indian

Foreign

Organised sector

Cooperative banks

Development banks

State

Agriculture Industrial Exim National Housing (NABARD) IFC Bank HUDCO, HDFC, 1982 ICICI 1982 NHB (1988) IDBI,SIDBI SIIC,SFC,SIDC Characteristics of Unorganised sector of the Indian Money Market 1. Blending of Money-lending and trading: The unorganised agencies of the money market such as money lenders and indigenous bankers conduct the mixed business of money lending and trading. 2. Informality: Money lenders and indigenous bankers have informal dealings with their borrowings. 3. Simplicity: Money lenders and indigenous bankers keep their accounts in a very simple and indigenous form in the vernacular language. 4. Flexibility: Their loan operations may be flexible in nature. They may give new loans to the borrowers even before the repayment of the old ones. 5. Personal touch: Their business depends on personal contact with the borrowers. 6. Secrecy of business: The financial transactions of the money lenders and indigenous bankers remain a secret affair. Distinction between Money-lenders and Indigenous Bankers 1. The primary business of money-lenders is money lending. The primary business of indigenous bankers is banking. 2

District

Primary

2. The money-lenders lend money but normally do not undertake any banking business, such as acceptance of deposits or dealing in hundies. Indigenous bankers, on the other hand, are basically concerned with receiving of deposits and dealing in hundies. (i.e., an indigenous bill of exchange) 3. Money lenders usually finance consumption loans. Indigenous bankers finance productive loans. 4. Money lenders do not bother much about the purpose or end use of loans given by them to the borrowers. Indigenous bankers are, however, more careful regarding the purposes of loans. 5. The transactions of money-lenders are conducted in cash or at the most, in terms of promissory notes. Indigenous bankers, on the other hand, conduct their transactions on the basis of shortterm credit instruments like hundies. 6. Accounts of money-lenders are not subject to audit and scrutiny. While, accounts of indigenous bankers are subject to audit and scrutiny. 7. Money lenders function individually and then compete among themselves. While indigenous bankers function in an organised way in harmony, they are more concerned with the development of their profession. 8. Money-lenders operate in a limited area, so their scope of business is limited. While, indigenous bankers have a wider area of operation and they have a large scale of financial operations. 9. Money-lenders function in an isolated manner. Generally, they do not have link with the organised sector of the money market. While, indigenous sector maintain some link with the organised sector because of their hundi business. Nevertheless, both are unique types of rural financial intermediaries and the dividing line between them is rather thin in many cases.

Importance of Money lenders in rural finance

In the absence of an organised money market in the country side, money lenders play an important role in catering to the monetary need of rural population in India. In 1951-52, nearly 70% of the rural credit was provided by the agriculturist and professional money lenders, whereas the contribution of the organised sector was only 7% of the cultivators total borrowing. Over the period of time, with growth of institutional agencies in rural finance, the importance of money lenders has been gradually declining. Still money lenders do form a key figure in rural money market. The government has, therefore, undertaken various legislative steps to regulate the activities of money lenders. With the growth of rural banks, co-operative societies and other institutional financing agencies in the rural area, it is hoped that by the end of this century, the importance of money lenders will be reduced to a greater extent.

Importance of Indigenous Bankers

Owning to the dichotomy of structure of the money market in India, indigenous bankers occupy a unique position in the financial system of the country. The scope of the growth of indigenous banking is widening due to rural development and accelerated overall economic growth in the country. There has been an increase in demand for credit and as the organised sector cannot adequately cope up with the situation, the demand for indigenous credit is likely to increase with the passage of time.

Deficiencies of the Indian Money Market

Money market in India is not only underdeveloped but is also heterogeneous entity. As such, it has a number of drawbacks. 1. Dichotomy: The Indian money market is dichotomised into organised and unorganised sectors. The organised sector consists of modern well organised and scientifically operating financial institutions, with the RBI at the apex, scheduled and non scheduled commercial banks in the private as well as public sectors, foreign banks, post-office saving banks, and cooperative banks. The unorganised sector comprises the widely scattered, indigenous banks, 3

money-lenders, chit funds etc. This unorganised part lacks scientific organisation, being orthodox in approach, stagnant and ill-organised. 2. Lack of co-ordination: There exists no cohesion or co-ordination between these organised and unorganised parts of the Indian money market. Thus, the Indian money market may be characterised as unbalanced and its sub-components having no ties with one another. 3. Divergence of lending rates and polices: Due to lack of homogeneity in the composition of the Indian money market, there is wide divergence not only in the structure of interest rates but also in the lending policies of the different financial institutions. Money-lenders especially charge exorbitant rates of interest and lend mainly for unproductive purposes. 4. Inadequate control by the Reserve Bank: The Reserve has no adequate control over the polices and functioning of the unorganised part of the money market, which is quite large in size which plays significant role in the rural finance. 5. Inelasticity and instability: The Indian money market is inelastic as well as unstable; hence, it becomes a great hindrance to the rapid economic development of the country. 6. Underdeveloped bill market: The bill market, an important constituents of the organised part of the money market, it is also underdeveloped in India. As compared to advanced countries, there is a great paucity of sound and first class commercial bills of exchange in our country. Indian traders resort to hundies, rather than draw bill of exchange. Further, there is lack of standardisation in drawing of bills and hundies in India. In addition to this, the banking habit is not much developed in our country, so cash transactions are more popular than credit transactions. As a consequence of all these conditions, no adequate supply of bills can take place. 7. Improper care of Rural Finance: An important weakness of the Indian banking system is that till recently agricultural finance was divorced from the organised sector of the money market. 8. Blending of lending and trading activities: In the unorganised sector, the financial agencies do not resort to money dealing only. They usually carry on retail trade, agriculture and other business activities, along with lending operations. 9. Banking Gap: Banking facilities are inadequate in the villages of India. There are many villages without any banking facilities. 10. Small working funds: Though indigenous bankers are large in number in our country, most of them have a comparatively small deposit business. They also lack any regularity or coordination with the commercial banks and other organised sectors of the money market. Moreover, indigenous bankers themselves lack sufficient organisation. Thus there is no coordination or team work among them. In Brief the modern banking system has failed to deliver inexpensive credit to India's villages - despite several expensive attempts to do so. Indigenous bankers play a major role in the rural economy. They should be brought within the organised banking sector.

Organised Money Market in India

The word bank is derived from the Greek word banque, or the Italian word banco meaning a bench- referring to a bench at which money lenders and money changes used to display their coins and transact business in the market place. The Oxford Dictionary defines a bank as an establishment for the custody of money, which it pays out on a customers order. This, however, is not a very satisfactory definition, since it ignores the most important function of a bank, i.e. creating money or creating credit. According to Crowther, a bank is an institution that accepts deposits from people by offering them an interest and lends money to them by charging an interest from them. A bank is a financial institution, whose primary activity is to act as a payment agent for customers, and to borrow, lend and in all modern banking systems, create money. In Italy, the first bank called the Bank of Venice was established in 1157, particularly, when the authorities of the state of Vanice were in financial trouble due to war. The first modern bank was founded in Italy in Genoa in 1406, with the name Banco di San Giorgio means Bank of St. George. 4

Evolution of Banking
In England, commercial banking begun after 1640, when goldsmiths started receiving deposits from the public for safe custody and issued receipts for the acknowledgements which were being used as bearer demand notes later on. Return of original gold against showing the deposit receipt and a little fee-but a standard piece of gold can be exchanged for identical standard piece of gold. Similarly paper money can also be exchanged i.e. a specific currency does not belong to a specific person. In short, the evolution of commercial banking is related to the practice of safe-keeping of gold and other valuables by the people with merchants /goldsmiths/ money lenders. Moreover, all depositors do not borrow their entire deposits simultaneously so goldsmiths started lending additional idle deposits to potential borrowers at some interest and also attract more deposits; they started offering interest on the deposits as well. Gradually banks got involved in providing many different financial services. In India, however, modern banking started when the English agency houses in Calcutta and Mumbai began to serve as bankers to the East India Company. The Hindustan bank was the first banking institution of its kind to be established in 1779.

Organised Sector of Indian Money Market (Banks)

1. RBI: Established under the Reserve Bank Act of 1934 and started functioning from April 1, 1935. Nationalized in 1949 Primary Functions of RBI Issue of currency notes Banker to the government Bankers bank and as a lender of the last resort As a controller of credit Custodian of Foreign Exchange Reserve RBI as a clearing house 2. Commercial banks: controls over 90% of the banking business in India 3. Co-operative banks: provide cheap credit to their members (agriculture)

4. Specialized/Development banks
As per the RBI Act, 1934, banks are classified into scheduled and non-scheduled banks. Scheduled Banks : Those which entered in the second schedule of the RBI Act, 1934 and have a paid up capital and reserves of an aggregate value of not less than ` 5 lakhs Non scheduled banks: Those which are not entered in the second schedule of the RBI Act, 1934 and have a paid up capital and reserves of an aggregate value of less than ` 5 lakhs.

Major constituents of organized banks: As on March 31, 2009

State Bank of India & its associates(7)= 16062 branches Nationalized banks(19)=39376 branches Foreign Banks(32) = 293 branches Regional Rural Banks(96) = 15127 branches Private banks(16 old +8 new)=4341+2726 branches Co-operative banks (urban)scheduled +non-scheduled=1813 and Rural (short-term cooperative+ long term co-operative credit institutions=1,07,497

Development banks
Agriculture development banks (NABARD) established in 1982, land development banks, Primary co-operative Agriculture Banks, Rural development Banks Industrial Development Banks IFC, ICICI, IDBI, IIBI, SIDBI, SFC, SIDC, SIIC Exim bank (1982) 5

 Housing Finance Institutions- Housing and Urban Development Corporation of India, HDFC (1977), NHB (1988)

Commercial Banks in India

A commercial bank may be defined as a financial institution that accepts called demand deposits from the public which are chequable, i.e. can be withdrawn by cheque. They form the biggest component in the banking structure of any country. The commercial banks in India are governed by the Indian Banking Regulation Act, 1949. Under the law, commercial banks are not supposed to do any other business, except banking. In India, however, there is a mixed banking system. Prior to July 1969, all the commercial banks, except the State Bank of India and its subsidiaries were under the control of private sector. On July 19, 1969, however, 14 major banks with deposits of over 50 crores were nationalised. In April 1980, another 6 commercial banks of high standing were taken over by the government. At present, there are 20 nationalised banks plus the SBI and its 7 subsidiaries constituting public sector banking which controls 90% of banking business in the country.

Functions of Commercial Banks

Commercial banks perform several crucial functions as follows 1. To accept deposits from the public- demand deposits, fixed/time deposits and saving deposits 2. To make loans and advances. Loans against tangible securities Loans advanced by offering facilities for discounting bills of exchange Loans advanced by granting overdraft facilities Loans are also advanced through credit creation 3. Use of cheque system 4. Provide facilities to remit of funds from one place to another for their customers by issuing bank drafts, mail transfers or telegraphic transfers on nominal commission charges. 5. To make short-term, medium-term and long-term investments 6. To finance the foreign trade of the country by accepting or collecting foreign bills of exchange drawn by the customers and by transacting other foreign exchange business. 7. To facilitate foreign exchange transaction 8. Payment facilities for the customers 9. Sale and purchase of shares and securities through the stock broking facilities 10. Provide safe deposit vaults 11. To guide their customers in matters relating to investments 12. To act as trustee or executer of wills or administrator of family trusts

Growth/Development of Commercial Banking in India

At the time of independence, India inherited an extremely weak banking structure with urban orientation comprising of 544 small non-scheduled banks and 96 scheduled banks, giving bulk finance to the trading sector. After independence and more so since the commencement of economic planning, commercial banking has undergone drastic transformation through several important policy measures initiated by the government. Some of the significant measures are as follows: 1. Liquidation and amalgamation of banks 2. Nationalisation of the RBI in 1949 3. Banking regulation Act, 1949 4. Nationalisation of the Imperial Bank of India in 1955 and the formation of the SBI 5. Evolution of public sector banking through bank nationalisation in 1969 and 1980 6. Structural changes in commercial banking 7. New strategies in banking business 8. Reforms in banking sector initiated since 1991

All these developments have given a new direction and ushered a new era for the Indian Banking Sector. Banks have become important institution in bringing about socio-economic change. The Indian Banking System has imbibed new ethos and new culture to meet the challenges of the 21st century.

Progress of commercial banks after Bank Nationalisation

1. Process of Nationalisation State Bank of India:1955 On July 19, 1969, 14 major banks with deposits of over `50 crores were nationalised. In April 1980, another 6 commercial banks with total deposits of `200 crores were taken over by the government. Amalgamation of New Bank of India with Punjab National Bank in 1993 2. Phenomenal increase in the number of bank branches: After the nationalisation of 14 major commercial banks in July, 1969 and six more banks in April, 1980, there has been phenomenal increase in the number of bank offices, particularly in the rural and semi-urban areas. The number of bank branches increased as shown below Year 1951-52 1969 2008 2009 2011 2012 No. of branches 2689 8262 77773 82408 89622 97111 Source: Reserve Bank of India Thus, there has been around 9 fold increase in the number of bank offices in the postnationalisation period; the share of public sector banks in this increase has been estimated at about 70%. The branch expansion programme of the banks has been highly encouraging, as A result, the population per bank office has progressively declined from 65000 in June 1969 to about 15000 at the end of March 2009. 4. Growth of bank deposits and its composition: There has been a marked increase in bank deposits of the commercial banks during the planning period and more so since bank nationalisation. The main reasons for the rapid growth in deposits are Rise in the money income of the people Increase in the number of bank branches has facilitated savings in the household sector Special efforts for deposit mobilisation by introducing innovative schemes for savings and the offer of various types of incentives to the customers Year 1969 2008 4646 3196940 Total Deposits ` Crores Time Deposits 2542 2672630 Demand Deposits 2104 524310 Thus, the share of time deposits in total bank deposits increased from 54.71% in 1969 to 83.6% in 2008. 3. Phenomenal expansion of Bank credit: There has been phenomenal increase in the bank credit along with the expansion of bank deposits during the planning period. Thus, for example, total scheduled bank credit has increased as follows Year 1951-52 1969 2008 580 3599 2361916 Total Credit (` crores) Apart from quantitative expansion of bank credit, there has been a significant qualitative change in the lending policies of the commercial banks, particularly after nationalisation. Thus, prior to bank nationalisation, a substantial part of the bank credit was given to trade, commerce and industry which according to one estimate formed about 86% of the total bank credit, while the share of agriculture sector was hardly 2%. However, after nationalisation, a fundamental and qualitative change has taken place in the composition of bank credit. The concept of social banking has come to be widely accepted, which refers to that policy under which banks provide credit on a preferential basis to the priority sectors of the economy and to the weaker sections of the society. The concept of social banking makes the banks aware about their social responsibility. 7

4. Priority sector lending: At a meeting of the Union Finance Minister with the Chief Executive Officers of public sector banks held in March 1980, it was agreed that banks should aim at raising the proportion of their advances to priority sector to 40 % by March 1985. All commercial banks were advised to achieve the target of priority sector lending at 40 per cent of aggregate bank advances by 1985. Sub-targets were also specified for lending to agriculture and the weaker sections within the priority sector. The RBI directive suggests that 40% of adjusted net bank credit by domestic commercial banks and 32% of adjusted net bank credit by foreign banks be extended to the priority sector. For instance, domestic banks are required to grant 18% of adjusted net bank credit to agriculture, while foreign banks are required to grant 12% credit to export sector. These guidelines are applicable to all banks, including the nationalised banks, indigenous private banks as well as foreign private banks operating in India. The share of priority sector advances in total credit of scheduled commercial banks has increased as follows: Year 1959 2008 Share of priority sector 14% 32.9% 5. Innovative Banking: Innovative banking implies the application of new techniques, new methods and novel schemes in areas of deposit mobilisation, deployment of credit and bank management. For example To attract more deposits, banks have introduced many attractive saving schemes like the education deposit plan, retirement schemes, perennial pension plans, recurring deposit scheme etc. Many banks have started morning and evening branches, Sunday branches, round the clock branches, mobile bank branches for the benefit of their customers. Innovations are being made on the credit side also e.g. education loan scheme, tractor and pump-set loan scheme, credit card/debit card, housing schemes etc. Mechanisation and computerisation process are being introduced in the day to day working of the banks. 6. Technological up gradation: Revolution in information and communication technology has made considerable headway in the banking system with a view to provide quick and efficient services to the customers. Facilities for Advanced Ledger Posting Machines and computers are being extended to cover more and more branches. Likewise, Megnetic Ink Charter Recognition (MICR) cheque processing centres have been extended to new centres. Similarly, scheme of electronic clearing has been introduced to provide simple, faster and cost effective solution for repetitive payment such as salary, pension, interest, dividend etc. by companies, corporations and government departments. 7. Diversification in Banking Operations: In recent years, there has been a considerable diversification in the functions and business operations of the banks. For example A number of banks have set up merchant banking divisions and are underwriting new issues, especially preference shares and debentures. Many banks have set up their own subsidiary companies to strengthen the organisational and managerial capabilities e.g. Capital market investments and financial services. (SBI Capital Market Ltd., Can Bank Financial Services Ltd., BOB Capital Market Ltd. etc.) Many banks have floated mutual funds e.g. SBI Mutual Fund, India Bank Mutual Fund, Bank of Baroda Mutual Fund , PNB Mutual Fund etc. Retail banking and increasing degree of specialisation by some branches. 8. Staff Training facilities: A number of training centres and institutions have been set up which impart training and professional skill in bank management e.g. the National Institute of Bank Management, Mumbai, Bankers Training College, Mumbai, Reserve Bank Staff College, Chennai, College of Agriculture Banking, Pune, Zonal Training Centres at New Delhi, Kolkata, Mumbai and Chennai etc are providing training facilities to various categories of bank staff. 8

9. Non Performing Assets (NPA) of banks: Advances, loans etc. are the assets of banks. They earn interest on them and make profit. However quite a high percentage (between 11.4% to 14.7%) of their advances are not recovered-neither the interest nor the principal amount. This adversely affects the earnings of nationalised and other banks. Net NPA to Net Advanced ratio was 1% in 2008 Credit Risk Adequacy Ratio has been maintained at 13% in2008 Highest proportion of NPA is in the area of priority sector lending. Regional Rural Banks (RRBs) RRBs were originally allowed to lend only to the Target Group comprising small and marginal farmers, landless labourers, rural artisans and other weaker sections of society. Subsequently, they were allowed to lend up to 60 per cent of their incremental lending during a year to Non-Target Group borrowers. After a review, it was decided that from the financial year beginning April 1, 1997, the advances of RRBs to Priority Sector borrowers were to constitute 40 per cent of their outstanding advances, as in the case of commercial banks. Within the overall target of 40 per cent, the advances granted to weaker sections of society were to constitute 25 per cent of the Priority Sector advances (i.e. 10 per cent of total outstanding advances). The levels of achievements vis--vis the prescribed targets as above for lending to priority sector by RRBs were reviewed in the meeting with the Estimate Committee of Parliament held on August 6, 2002. With a view to providing more credit to the segments under priority sector, it was decided that RRBs should achieve a target of 60 per cent of their outstanding advances for priority sector lending as against 40 per cent. Further, of the total priority sector advances, at least 25 percent (i.e. 15 percent of the total advances) were required to be advanced to weaker sections of the society. The revised targets were made effective from the year 2003-04.

Evaluation of the progress and Working of the Nationalised Banks 1. Banking facilities are still inadequate 2. Problems arising out of Rural Branch Expansion Policy 3. Regional Imbalances in Branch Expansion 4. Insufficient mobilisation of deposits in rural areas 5. Diversion of rural deposits to urban centers 6. Problems arising out of expansion of bank credit to Agriculture 7. Low operational efficiency 8. Frauds and Robbaries/Dacoities in Banks 9. Low profitability of nationalised banks 10.Politicisation of Banking operations Which are the growth drivers of Indian Banking Sector?
1. High growth of Indian Economy: The growth of the banking industry is closely linked with the growth of the overall economy. India is one of the fastest growing economies in the world and is set to remain on that path for many years to come. This will be backed by the stellar growth in infrastructure, industry, services and agriculture. This is expected to boost the corporate credit growth in the economy and provide opportunities to banks to lend to fulfil these requirements in the future. 2. Rising per capita income: The rising per capita income will drive the growth of retail credit. Indians have a conservative outlook towards credit except for housing and other necessities. 9

However, with an increase in disposable income and increased exposure to a range of products, consumers have shown a higher willingness to take credit, particularly, young customers. A study of the customer profiles of different types of banks reveals that foreign and private banks share of younger customers is over 60% whereas public banks have only 32% customers under the age of 40. Private Banks also have a much higher share of the more profitable mass affluent segment. 3. New channel Mobile banking is expected to become the second largest channel for banking after ATMs: New channels used to offer banking services will drive the growth of banking industry exponentially in the future by increasing productivity and acquiring new customers. During the last decade, banking through ATMs and internet has shown a tremendous growth, which is still in the growth phase. After ATMs, mobile banking is expected to give another push to this industry growth in a big way, with the help of new 3G and smart phone technology (mobile usage has grown tremendously over the years). This can be looked at as branchless banking and so will also reduce costs as there is no need for physical infrastructure and human resources. This will help in acquiring new customers, mainly who live in rural areas (though this will take time due to technology and infrastructure issues). The IBA-FICCI-BCG report predicts that mobile banking would become the second largest channel of banking after ATMs. 4. Financial Inclusion Program: Currently, in India, 41% of the adult population dont have bank accounts, which indicate a large untapped market for banking players. Under the Financial Inclusion Program, RBI is trying to tap this untapped market and the growth potential in rural markets by volume growth for banks. Financial inclusion is the delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. The RBI has also taken many initiatives such as Financial Literacy Program, promoting effective use of development communication and using Information and Communication Technology (ICT) to spread general banking concepts to people in the underbanked areas. All these initiatives of promoting rural banking are taken with the help of mobile banking, self help groups, microfinance institutions, etc. Financial Inclusion, on the one side, helps corporate in fulfilling their social responsibilities and on the other side it is fueling growth in other industries and so as a whole economy. 5. Increased use of technology: Economic theory supported by empirical evidence suggests that, in general, increases in technology investment will raise productivity, lower costs, and allow firms to operate more efficiently. Information technologies and the innovations they enable are strategic tools, since they reduce the costs of financial transactions, improve the allocation of financial resources and increase the competitiveness and efficiency of financial institutions. Technological innovation not only enables a broader reach for consumer banking and financial services, but also enhances its capacity for continued and inclusive growth (Subbarao, 2009).

Questions for Discussion

1. Define a Bank. What are the functions of a commercial bank? 2. Distinguish between Money lenders and indigenous bankers. 3. Discuss the structure and composition of Indian Banking System. What are the main functions of central bank? 4. Discuss the achievements of nationalised banks. Comment on the adverse effects of nationalisation of the banking system.

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