Banking is as old as our civilization. The ancient Romans developed an advanced banking system to serve their vast trade network, which extended throughout Europe, Asia and much of Africa in 395 A.D. The Roman Empire split later into eastern and western sections. The west Roman Empire fell in the late 400 A.D. and most of the trade and financial networks were destroyed and banking almost diapered from Western Europe. However the Justinian code, a collection of laws issued in 500 A.D in the east Roman Empire included many banking laws.
Modern banking began to develop between the 1200's and 1600's in Italy. Earlier the bankers conducted their banking business sitting on a bench in the streets, which was known as BANCO or BANCA in Italy. Later large banking firms were established in Florence, Rome, Venice and other Italian cities and banking activities slowly spread through out Europe. Since 1960' s banking has become much more international in
nature because of multinational companies and the spread of their operations worldwide.
Money has passed through a number of phases of change in its physical form. When people crossed over from barter system and began using money as a medium of exchange in trading activities. Initially cowries were used as a medium of exchange in India. With development in technology metals like copper silver and gold were converted into crude forms of oils which led to minting of value defined points with various sizes shapes and denominations. The value of the coins was equated with the intrinsic value of the quantity of metals used in the coin. People had confidence in the value denoted because it flowed from the authority of the ruler who issued the coins.
Gradually the metal coins were over taken by the paper currency bringing down the intrinsic value to nothing. The value of the paper currency was established by the authority of the state, which declared it as legal tender. After a spread hesitant period paper money entrenched it self in the world economic atmosphere. Since then the role of bankers gained importance due to the use and acceptance of money in physical form on a wide spread note.
Crude banking activities were performed and practiced by the village sahukars, seths, and traders who:
- Accepted money for safe keeping
- Lent money to people and sometimes to the state
- Accepted money
- Lent money
- Earned money.
The services of banks later extended to:
- Safe keeping of public money.
- Transfer of money.
- Issue of money in the form of drafts.
- Exploring investment opportunities.
- Helped in creating machinery needed for financing developmental activities throughout the economy.
- Ensuring the available finances flowed in the direction intended.
Commercial Banks were used by business magnets and large industrial houses as their own financial power houses to lubricate their inefficient industries requirement of financial resources and traditional banking was in practice. The banking requirement of financial resources and traditional banking was in practice. The banking customer's personal requirements, rural agriculturists, cottage and home industries, tiny and small scale sectors. Products of the commercial banks were restricted.
It was argued that some big business houses used the commercial banks as their own financial power houses to lubricate their inefficient industries. At this juncture it was advocated that nationalization would lead to better utilization of funds to meet macro and micro economic goals. Banking has undergone evolutionary process and revolutionary changes, the nationalization of fourteen major commercial banks in July, 1969 followed by six more in April, 1980 acted as catalysts in promoting economic growth. Banks shouldered more responsibilities and the traditional concept of ‘class banking’ was shifted to a new concept of 'mass banking'. Thus the Indian banking system has undergone changes since nationalization shifting themselves from:
- Class banking to Mass banking.
- Traditional banking to Innovative banking.
- Asset-nexus lending to Production-nexus lending. .
- Developed Commercial banking to Societal banking.
Objectives of Nationalization:
- Greater mobilization of savings through bank deposits
- Widening of branch network of banks particularly in rural and semi-rural areas.
- Reorientation of credit flows to benefit neglected sectors such as agriculture, small scale industries and small borrowers
- The increase in the savings habit.
- Opening up of market in interior areas.
- Development of rural industries.
- Development orientation to lending with changing destinations of credit flows.
Global economic prospects turned bleak since September 200 1 after the terrorist attack on US. After the attacks, recovery has become uncertain in the global economy. Insurance, airlines, tourism and hotel industries have been hit hard. The nature of Indian economy cannot remain covered from the international developments. The direct effects are expected to be limited. Indirect effects particularly through exports and subdued industries have an impact upon the asset quality of our bank system and also other segments of the financial section
TRENDS IN BANKING
The banking sector supported by financial services industry has virtually become a revolution in the market for financial services. This has been in demand by the need for liquid, readily transferable assets to effect transactions, technological changes world wide including electronic banking and electronic funds transfer necessitating:
· Over dressing of banks around the world with high risk portfolios, looking for ways to boost their capital and incomes from fee-based business.
- Better facilities and services for the customers, extending importance for innovative products and prompt service at low cost because of stiff competition.
- Erasing of linked costs and risks.
- Mergers and alliances at home and across the borders are rising.
- Banks world-wide are making the assets neat and tidy to act in accordance with risk-asset capital ratio requirements because the financial environment has become competitive with focus on profitability and efficiency, even though margins are narrowmg.
· Securitization provides banks the benefits of removing capital hungry assets from banks and trimming balance sheets
· The use of updated technology and communication systems has become mandatory to keep in touch with customers, top management, branches and to provide better customer service.
CHALLENGES FOR INDIAN BANKING INDUSTRY
To affirm and assert their global presence the Indian banks have to prepare for the competition and challenges at home and abroad. The Indian banks should formulate a strategy supported by management and organization supplemented by skilled, committed personnel. To sustain and battle the challenges of foreign banks at home and in their domicile Indian banks have to:
- Be alert and assertive to give directions to their operations.
- Improve work culture and erase rigidities in labour practices that have hindered change.
- Improve their service orientation and update skills to meet customer requirements.
· Innovate new products and services to meet customer requirements in the challenging market.
- Computerize and update their techniques of operations.
· Maintain high quality human resource to cope with and adapt to the new environment.
- Develop a foresight in anticipating changing risk-return relationships.
Prudential Standards:
To match with the international best practices Reserve Bank of India has introduced:
- The ninety days delinquency norm for identification of non performing assets.
- Time frame for classifications of a substandard asset as a doubtful asset from eighteen months to twelve months.
- Doubtful assets backed by collaterals, irrespective of their status of secured or unsecured are classified as loss assets, which are provided only 50% of the outstanding balances irrespective of the number of years in which the accounts remain in this category. Where as in western banking system security assets value is taken as zero.
- Expansion of the scale of risk weights and uses of external credit ratings to be categorized.
· Sound internal procedures to assess the adequacy of capital based on a thorough evaluation of its risk profiles and control environments.
· Minimum capital requirement, processes of supervisory review and market discipline.
- Bolstering market discipline through enhanced disclosure by banks.
- Methods of calculating bank capital adequacy and their risk assessment.
APPLICABILITY OF INTERNATIONAL STANDARDS:
The Standing Committee on International Standards and Codes was formed in December 1999 constituting ten advisory groups consisting of eminent experts to present their objectivity and experience to study the applicability of relevant International Codes and Standards to all the areas of competence. The various advisory groups formed were:
- The Advisory Group on Banking Supervision:
It has assessed the Indian banking system on the principles of the Basel Committee on Banking Supervision. It has found the level of compliance, which is of a high order.
- The Advisory Group on Bankruptcy Laws:
Recommended a comprehensive bankruptcy code incorporating various factors like cross-border insolvency and the repeal of the Sick Industrial Companies Act.
- The Advisory Group on Corporate Governance:
Has made recommendations relating to rules and responsibilities of boards and has advised amendments to the Companies Act.
- The Advisory Group on Data Dissemination:
Has found that India's data dissemination compares favorably with many other countries and has proposed the compilation of forward looking indicators.
- The Advisory Group on Fiscal Transparency:
Viewed that current fiscal practices meet the IMF's Code of Good Practices on Fiscal Transparency. It has recommended amplifying the scope of fiscal responsibility legislation on order to include the essential elements of a budget law.
- The Advisory Group on Insurance Regulations:
This group has recommended flexible minimum capital requirements depending on the class of business. With regard to actuarial and solvency issues, the Group has found the Indian standards to be at par with international norms.
- The Advisory Group on International Accounting and Auditing Standards:
It has set out an agenda for the future for convergence in auditing and accounting practices. It has recommended a single standard setting authority and the need for convergence of corporate and tax laws.
- The Advisory Group on Transparency in Monetary and Financial Policies:
This group has recommended inflation as the single mandated objective for the Central Bank and necessary autonomy to fulfill the mandate. It has also made recommendations on the operating procedure of monetary policy.
- The Advisory Group on Payment and Settlement:
This group has recommended legal reforms to empower the Reserve Bank to supervise the payment and settlement system, application of the Lamfalussy standards to deferred net settlement and introduction of Real Time Gross Settlement. It has also recommended the setting up of the Clearing Corporation and a separate guaranteed fund for foreign exchange clearing.
- The Advisory Group on Securities Market Regulations:
It has compared India against the International Organisation of Securities Commissions principles and emphasised the need to strengthen inter regulator cooperation. Considerable progress has been made by India in the identification of International Standards and Codes in relevant areas, expert assessment and their applicability.
REFORMS:
In the early 1990' s banking became dependent and inefficient and this situation summoned drastic changes in banking and the financial sector to bring the economic situation under control. Sweeping reforms became a source of survival to face internal crises presented by the foreign exchange shortfall and external pressures arising from global compulsion. To face the situation Reserve Bank of India introduced LERMS (Liberalised Exchange Rate Mechanism System) in 1991, which marked an era of freedom to the banks in the history of foreign exchange transactions.
The economic reforms initiated by the Government of India in early 90' shave brought a sea change in operational environment of financial sector, its functioning and outlook of Indian Banks.
In 1991, the Narasimham Committee recommendations were a milestone in the direction of reforms and brought about a total transformation in the banking sector.
The radical measures were:
- Preparation of Balance Sheet of Banks in a more transparent form.
- Introduction of capital adequacy norms.
· Income recognition and asset classification norms and provisioning on loan assets.
- Partial deregulation of interest rates on deposits and advances.
- Freedom of entry for private banks.
- Permission to public sector banks to approach the markets for raising their capital. .
- Upgradation of technology by computerisation.
These reforms have derived at two objectives like:
· Improving the customer services and they by making banking more competitive. .
· Improving bottom lines of Banks by introduction of prudential norms and transparency in balance sheet.
The adoption of the New Basel Capital Adequacy Framework, relating to assigning capital on a consolidated basis, use of external credit assessment as a means for assigning:
- Preferential risk weights.
- Sophisticated techniques for estimating economic capital.
- Tools to evolve an integrated risk management system depending on their size complexity and risk appetite.
- Built in legal provisions that prohibits or strongly limits activities and relationships that diminish the quality of corporate governance in banks.
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