ROLE OF BANKING SERVICES IN INDIAN ECONOMIC GROWTH E.Swathi prashanth
P.Priyanka

Abstract
This paper discusses the role of banking services in Indian economy. Banking is one of the most influential factors on the economies of today’s society. As with everything these days, technology is changing where, when and most of all, how we do things, specifically banking and other related financial transactions and arrangements such as mortgages. Banks act as important players in the financial markets. They play a vital role in the economy of a country. The new business environment mainly driven by globalization and liberalization has provided tremendous opportunity for the Indian banking industry to grow.
Banking industry has traditionally been one of the most regulated ones in India. However, with opening up of the economy in most sectors, 1991 onwards, this industry has been no exception and has experienced a gradual phased deregulation. Several reforms have been initiated in this sector ranging from interest rate liberalization to restructuring of the public sector banks to increased competition and hence efficiency. Banks today are expected to exhibit more discipline. In tune with this, the banking sector in India has undergone structural changes during the last decade.
Key words: – Banking, services, Indian, economic, globalization and liberalization
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* Assistant Professor, Business Management in Vaagdevi degree and PG College, Warangal
** Assistant Professor, Business Management in Vaagdevi degree and PG College, Warangal

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INTRODUCTION
Role of Banks in Indian Economy
Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. The oldest bank in existence in India is the State Bank of India being established as “The Bank of Bengal” in Calcutta in June 1806. A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly due to the trade of the British Empire, and due to which banking activity took roots there and prospered
The first fully Indian owned bank was the Allahabad Bank, which was established in 1865. By the 1900s, the market expanded with the establishment of banks such as Punjab National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai – both of which were founded under private ownership. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India’s independence, became the State Bank of India.The Reserve Bank of India formally took on the responsibility of regulating the Indian banking sector from 1935. After India’s independence in 1947, the Reserve Bank was nationalized and given broader powers.
Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities.
OBJECTIVES OF THE STUDY:
The objectives of this study are:
1. To study the role of banking services in Indian economic growth
2. To study new technology trend in Indian banking sector for economic development.
3. To study key challenges faced by India’s banks.
4. To review the recent developments and future outlook of Indian banking sector
Research methodology:
The present paper is the outcome of the research based on secondary sources. For collecting information a number of books, magazines, journals and Internet sites are used. The study is purely descriptive in nature and qualitative in character.
Why banking:
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India’s banking system has several outstanding achievements to its credit. Indian banking system has reached even to the remote corners of the country. The government’s regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.
Post-independence
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. The Industrial Policy Resolution adopted by the government in 1948 envisaged economy. The major steps to regulate banking included:
• The Reserve Bank of India, India’s central banking authority, was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).Reference www.rbi.org.in
• In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) “to regulate, control, and inspect the banks in India.”
• The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI.
Nationalization:-
Thereafter, her move was swift and sudden. The GOI issued an ordinance and nationalised 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 Bill, and it received the presidential approval on 9 August 1969.
IMPACT OF TECHNOLOGY IN BANKING INDUSTRY
The following include some of the major impacts of technology in banking system:
1. Electronic Payment Services – E Cheques
Nowadays we are hearing about e-governance, e-mail, e-commerce, e-tail etc. In the same manner, a new technology is being developed in US for introduction of e-cheque, which will eventually replace the conventional paper cheque. India, as harbinger to the introduction of e-cheque, the Negotiable Instruments Act has already been amended to include; Truncated cheque and E-cheque instruments.
2. Magnetic Ink Character Recognition (MICR) Clearing
To enhance speed of cheque clearing the RBI has started MICR cheque and MICR clearing system. The system is well stabilized in India with the overall reject rates of around 1% while international reject rates are around 2%. Cheque clearing accounts for over 95% of the retail payment and more than 70% of cheque clearing is based on MICR technology (M V Nair).
According to the available data volume of MICR based clearing has been growing rate of 13.83 percent and value is increased 0.33 percent in 2008-09 to 2015-16. Amount of MICR based clearing rose from Rs. 1, 09, 47,391 Crore to 1, 04, 00,308.7 crore in same period. See the table no. 1
Table no. 1- Magnetic Ink Character Recognition (MICR) Clearing from 2008-2016
Year Total Total MICR Centres Total Non-MICR Centres
Number Amount Number Amount Number Amount
2008-09 9,015.0 1,25,75,254.0 5,377.0 1,09,47,391.0 3,638.0 16,27,863.0
2009-10 10,139.0 1,34,24,313.0 5,980.0 1,09,78,762.0 4,159.0 24,45,551.0
2010-11 10,228.0 1,15,95,960.0 6,241.0 91,78,751.0 3,987.0 24,17,209.0
2011-12 11,668.5 1,04,58,894.9 9,414.6 93,56,252.2 2,253.9 11,02,642.7
2012-13 12,867.6 1,13,29,133.5 10,318.4 94,74,370.8 2,549.2 18,54,762.8
2013-14 13,672.8 1,20,42,425.7 11,441.0 1,04,35,436.1 2,231.8 16,06,989.5
2014-15 14,605.6 1,33,96,065.9 12,229.6 1,15,28,690.2 2,376.0 18,67,375.7
2015¬-16 13,959.1 1,24,61,201.7 11,623.4 1,04,00,308.7 2,335.7 20,60,892.9
CGR 7.21 0.14 13.83 0.33 -8.56 -0.47
Source: – Statistical Tables Relating to Banks in India 2008 to 2016
3. Electronic Clearing Service (ECS)
Electronic Clearing System is a retail payment system which facilitates bulk payments, that facilitate payments from one-to-many and receipts that are from many-to-one. ECS Scheme operated by the RBI since 1996-97, helps to make payment from a single account at a bank branch to any number of accounts maintained with the branches of the same or other banks. Amount of ECS based credit is increased from Rs.10, 228 crore to Rs.7, 82,222.30 crore in 2010-11 to 2014-15 and ECS based Debit transaction has been increased from Rs. 2,253 crore to Rs.66, 975.89 crore in 2010-11to 2015-16. See the table no. – 2
Table no.-2 Electronic Clearing Service from 2008-2016
ECS (Credit) ECS (Debit)
Year Volume Amount Volume Amount
2010-11 203.00 10,228.00 79.00 2,253.58
2011-12 400.51 20,179.81 153.00 2,921.24
2012-13 442.16 32,324.35 359.58 12,986.50
2013-14 690.19 83,273.09 752.02 25,440.79
2014-15 783.65 7,82,222.30 1,271.20 48,937.20
2015 -16 883.94 97,486.58 1,600.55 66,975.89
CGR 32.36 93.98 88.20 110.71
Source: – RBI Annual reports 2010 to 2016
4. Automatic Teller Machine (ATM)
Automatic Teller Machine is the most popular devise in India, which enables the customers to withdraw their money 24 hours a day 7 days a week. It is a device that allows customer who has an ATM card to perform routine banking transactions without interacting with a human teller. In addition to cash withdrawal, ATMs can be used for payment of utility bills, funds transfer between accounts, deposit of cheques and cash into accounts, balance enquiry etc.
5. Real Time Gross Settlement (RTGS)
Real Time Gross Settlement system, introduced in India since March 2004, is a system through which electronics instructions can be given by banks to transfer funds from their account to the account of another bank. As the name suggests, funds transfer between banks takes place on a ‘Real Time’ basis. Therefore, money can reach the beneficiary instantaneously and the beneficiary’s bank has the responsibility to credit the beneficiary’s account within two hours.
6. Electronic Funds Transfer (EFT) ; NEFT
Electronic Funds Transfer (EFT) is a system whereby anyone who wants to make payment to another person/company etc. EFT System hosted and operated by the RBI, permits transfer of funds, up to Rs. 5 lakh. The NEFT was introduced in 2005 It is called Special Electronic Fund Transfer SEFT also. It is covering about 3000 branches in 500 cities. This has facilitated same day transfer of funds across accounts of constituents at all these branches. Overall EFT and NEFT based clearing grow from Rs. 17,124.81 crore to Rs. 2,51,956.38 crore at 60.27 CGR in 2010-11 to 2015-16. See the table no -3
Table no.-3 Electronic Funds Transfer EFT/NEFT
Years Volume (In Lakh) Amount (Rs. Crore)
2010-11 8.19 17,124.81
2011-12 25.49 54,601.38
2012-13 30.67 61,288.22
2013-14 47.76 77,446.31
2014-15 133.15 1,40,326.48
2015 -16 321.61 2,51,956.38
CGR 97.13 60.27
Source: – RBI Annual reports 2010 to 2016
Banking industry has been taking advantage of the following 22 Technology Products:
1) Net Banking 2) Credit Card Online 3) One View 4) Insta Alerts 5) Mobile Banking 6) Net Safe, 7) E-Monies Electronic Fund Transfer, 8) Online Payment of Excise ; Service Tax 9) Phone Banking 10) Bill Payment 11) Shopping 12)Ticket Booking 13) Railway Ticket Booking through SMS 14) Prepaid Mobile Recharge 15) Smart Money Order 16) Card to Card Funds Transfer 17) Funds Transfer (e-Cheques) 18) Anywhere Banking 19) Internet Banking 20) Mobile Banking 21). [email protected], 22) Cash on Tap (i) Express Delivery (ii) Normal Delivery.
OVERVIEW OF ROLE OF BANKS IN THE ECONOMY
1. Capital Formation:
The significance of DFIs lies in their making available the means to utilize savings generated in the economy, thus helping in capital formation. Capital formation implies the diversion of the productive capacity of the economy to the making of capital goods which increases future productive capacity.
2. Support to the Capital Market:
The basic purpose of DFIs particularly in the context of a developing economy, is to accelerate the pace of economic development by increasing capital formation, inducing investors and entrepreneurs, sealing the leakages of material careful allocation thereof, development activities, including promotion of industrial units to fill the gaps in the industrial structure and by ensuring that no healthy projects suffer for want of finance and/or technical services.
3. Assistance to Backward Areas:
Operations of DFI’s in India have been primarily guided by priorities as spelt out in the Five- Year Plans. This is reflected in the lending portfolio and pattern of financial assistance of development financial institutions under different schemes of financing. Institutional finance to projects in backward areas is extended on concessional terms such as lower interest rate.
4. Promotion of New Entrepreneurs:
Development banks in India have also achieved a remarkable success in creating a new class of entrepreneurs and spreading the industrial culture to newer areas and weaker sections of the society. Development banks have been actively involved in the entrepreneurship development programmes and in establishing a set of institutions which identify and train potential entrepreneurs.
5. Impact on Corporate Culture:
The project appraisal and follow-up of assisted projects by institutions through various instruments, such as project monitoring and report of nominee directors on the Boards of directors of assisted units, have been mutually rewarding. It also has been possible for the corporate managements to recognize the fact that interests of the assisted units and those of institutions do not conflict but coincide.

KEY CHALLENGES FACED BY INDIA’S BANKS
The banking industry in India is undergoing a major change due to the advancement in Indian economy and continuous deregulation. These multiple changes happening in series has a ripple effect on banking industry which is trying to be organized completely
1. The payments challenge
One of the key challenges facing banks is the impact of disruptive new technologies on their retail payments business – the so-called “rise of the FinTech”. Such competition from non-banks in retail payments services is of course not new. Western Union and Money gram, for example, are well-established non-bank providers.
2. The markets challenge
Non-banks are not only increasingly entering the retail payments market in the euro area, however; they are also entering the lending business. This brings me to the second challenge for euro area banks: the markets challenge. For some years now, we have been witnessing a trend towards more capital market-based financing in the euro area, driven by both deleveraging among banks and the very low cost of market finance.
3. The regulatory challenge
However, CMU is for the longer-term. For the medium-term, SME financing in the euro area will still mainly come from banks. So we need to make sure that there are no unnecessary obstacles to that process. And this brings me to the third challenge facing banks – the regulatory challenge.
4. Modified new rules:
As a result, the market place has been redefined with new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. New channels squeezed spreads, demanding customers better service, marketing skills heightened competition, defined new rules of the game pressure on efficiency
5. Capital adequacy:
One way a bank tries to ensure it is protected from bad loans is by setting aside money as a ‘provision’. This money cannot be used for any other purposes including lending. As a result, banks have lower capital available to use for its various operations. The Capital Adequacy Ratio measures how much capital a bank has. When this falls, the bank has to borrow money or use depositors’ money to lend.
STRATEGIC OPTIONS TO COPE WITH THE CHALLENGES:
Dominant players in the industry have embarked on a series of strategic and tactical initiatives to sustain leadership. The major initiatives incorporate:
I. Focus on ensuring reliable service delivery through Investing on and implementing right technology.
II. Leveraging the branch networks and sales structure to mobilize low cost current and savings deposits.
III. Making aggressive forays in the retail advances segments of home and personal loans.
IV. Implementing initiatives involving people, process and technology to reduce the fixed costs and the cost per transaction.
V. Focusing on fee based income to compensate foe squeezed spread.
VI. Improving the asset quality as Basel II norms.
VII. Innovating products to capture customer ‘mind share’ to begin with and later the wallet share.
CONCLUSION:
The banking system in India has undergone significant changes during last 16 years. There have been new banks, new instruments, new windows, new opportunities and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment incomes, it has also entailed greater competition and consequently greater risks. India adopted prudential measures aimed at imparting strength to the banking system and ensuring its safety and soundness, through greater transparency, accountability and public credibility. Banking sector reform has been unique in the world in that it combines a comprehensive reorientation of competition, regulation and ownership in a non-disruptive and cost-effective manner. Indeed banking reform is a good illustration of the dynamism of the public sector in managing the overhang problems and the pragmatism of public policy in enabling the domestic and foreign private sectors to compete and expand. The underlying rationale of this approach is to assure that the salutary features of public sector banking were not lost in the transformation process. On account of healthy market value of the banks’ shares, the capital infusion into the banks by the Government has turned out to be profitable for the Government.
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