This document provides an overview of banking services management and banking reforms in India. It discusses key Indian banking legislation like the Banking Regulation Act of 1949 and the roles and powers of the Reserve Bank of India in regulating banks. It also lists the different types of banks in India including public sector banks, private sector banks, foreign banks, regional rural banks, and cooperative banks. Banking reforms since the 1990s aimed to increase efficiency, reduce government control, and bring banks in line with international standards through recommendations from the Narasimham Committee.

1. BANKING SERVICES
MANAGEMENT.
BC5B10 BANKING SERVICES MANAGEMENT.

2. SYLLABUS
 MODULE 1
Banking legislation reforms : Banking Regulation Act 1949 – provision on capital liquidity –
powers of RBI – banking sector reforms in India – classification of assets – Investments evaluation –
Income recognition – management of non-performing assets.
SVKN

3. BANKING LEGISLATION AND
REFORMS.
CHAPTER 1

4. BANKING REGULATION ACT
1949
 According to section 5 (b) of the Act , ‘banking’ means
“ the accepting for the purpose of lending or
investment of deposits of the money from the public
repayable on demand or otherwise , withdrawable by
cheque , draft , order or otherwise.”

5. BANKING REGULATIONS ACT
 The banking regulations act (formerly known as the banking
companies act) was passed to consolidate and amend the
law relating to banking companies act. It came into effect
from 16 march , 1949 and applies to the whole of India.
 Prior to enactment of this act the banking companies were
governed by the provisions contained in XA of Indian
companies act 1913, they were inadequate as it was rapidly
growing.
 This act has been amended several times. Comprehensive
amendment was made in the year 1968 through enactment
of Banking Laws (amendment) Act 1968.

7. RBI – RESERVE BANK OF INDIA

8. RBI
 The Reserve Bank of India, the nation’s central bank, began operations on
April 01, 1935. It was established with the objective of ensuring monetary
stability and operating the currency and credit system of the country to its
advantage. Its functions comprise monetary management, foreign exchange
and reserves management, government debt management, financial
regulation and supervision, apart from currency management and acting as
banker to the banks and to the Government. In addition, from the beginning,
the Reserve Bank has played an active developmental role, particularly for the
agriculture and rural sectors. Over the years, these functions have evolved in
tandem with national and global developments

9. POWERS OF RESERVE BANK OF INDIA
The RBI considerably controls the working of banks in India. The following provisions of
the Banking Regulations Act are important to note :
A. ELECTION OF NEW DIRECTORS (12A)
(1) The Reserve Bank may, by order, require any banking company to call a general
meeting of the shareholders of the company within such time, not less than two
months from the date of the order, as may be specified in the order or within such
further time as the Reserve Bank may allow in this behalf, to elect in accordance with
the voting rights permissible under this Act fresh Directors, and the banking company
shall be bound to comply with the order.
(2) Every Director elected under sub-section (1) shall hold office until the date up to
which his predecessor would have held office, if the election had not been held.

10. B. CASH RESERVE (Sec.18)
according to section of the Banking Regulation Act , every non-scheduled bank
is required to maintain in India by way of cash reserve with itself or in current
account opened with the RBI or the SBI or any other bank notified by the central
bank in this behalf or partly in cash with itself and partly in such account or accounts
a sum equivalent to at least 3% of its total of its time and demand liabilities in in
India.
Under sec 42 of the RBI Act, every scheduled bank has to maintain such percentage
of the total of demand and time liabilities in India as cash reserve with RBI as may be
notified in the gazette of India by the RBI having regard to needs of securing
monetary stability in the country.
C. LICENCING OF BANKING COMPANIES (Sec.22)
no company can carry on business of banking in India unless it holds a license
issued for this purpose by the RBI. Granting any license under this section , will be
after satisfying the following conditions
 That the company is or will be in a position to pay its present or future depositors
in full as their claims accrue;

11. • That the affairs of the company are not being , or are not likely to be , conducted in a
manner detrimental to the interests of its present or future depositors;
• In the case of a company incorporated outside India that the carrying on of banking
business by such company in India will be in the public interest and that the govt. or law of
the country in which it is incorporated does not discriminate in any way against banking
companies registered in India.
D. OPENING OF NEW AND TRANSFER OF EXISTING PLACE OF BUSINESS ( Sec. 23)
Without obtaining the prior permission of the Reserve Bank-
(a) no banking company shall open a new place of business in India or change otherwise
than within the same city, town or village, the location of an existing place of business
situated in India; and
(b) no banking company incorporated in India shall open a new place of business outside
India or change, otherwise than within the same city, town or village in any country or area
outside India, the location of an existing place of business situated in that country or area:

12. E. POWER TO RECALL FOR INFORMATION RELATING TO THE BUSINESS OF ANY BANKING
COMPANY [Sec.27(2)]
The Reserve Bank can at anytime direct a banking company to furnish within the
specified time, with such statements and information relating to the business of the banking
company as the Reserve Bank may consider necessary.
F. POWER TO INSPECTION (Sec. 35)
Reserve Bank at any time may, and on being directed so to do by the Central Government
shall, cause an inspection to a banking company and its books and accounts to find out
whether or not the affairs of the banking company are conducted in the interest of the
depositors. If the report find the affairs of the company are detrimental to the interests of
the depositors then the same may be given in writing :
 Prohibit the banking company receiving fresh deposits
 Direct the RB to apply under section 38 for the winding up of the banking company

13. G. POWER TO GIVE DIRECTONS (Sec 35 A)
The Reserve Bank may from time to time issue directions to banking companies generally
or to any banking company particularly. The Reserve Bank shall do so when it deems it
necessary to issue such directions:
(a) in the [public interest]; or in the interest of banking policy;
(b) to prevent the affairs of any banking company being conducted in a manner
detrimental to the interests of the depositors or in a manner prejudicial to the interests of
the banking company; or
(c) to secure the proper management of any banking company generally.
H. RESERVE BANK’S APPROVAL NECESSARY FOR THE AMENDMENT OF PROVISIONS RELATING
TO APPOINTMENT OF MANAGING DIRECTORS etc. (Sec. 35B)
the appointment or re-appointment or termination of appointment or remuneration of a
Chairman, Managing Director or any other Director, whole-time or otherwise or of a
manager or a chief executive officer by whatever name called, whether that provision be
contained in the company's memorandum or articles of association, or in an agreement
entered into by it, or in any resolution passed by the company in general meeting or by its
Board of Directors shall have effect unless approved by the Reserve Bank.

14. I. POWER OF RESERVE BANK TO REMOVE MANAGERIAL AND OTHER PERSONS FROM
OFFICE (Sec.36AA)
Where the Reserve Bank is satisfied that in the public interest or for preventing the
affairs of a banking company being conducted in a manner detrimental to the interests
of the depositors or for securing the proper management of any banking company it is
necessary so to do, the Reserve Bank may, for reasons to be recorded in writing, by
order, remove from office, with effect from such date as may be specified in the order,
2[any Chairman, Director,] chief executive officer(by whatever name called) or other
officer or employee of the banking company.
J. POWER TO APPOINT ADDITIONAL DIRECTORS (Sec.36AB)
If the Reserve Bank is of [opinion that in the interest of banking policy or in the
public interest or] in the interests of the banking company or its depositors it is
necessary so to do, it may, from time to time by order in writing, appoint, with effect
from such date as may be specified in the order, one or more persons to hold office as
additional Directors of the banking company. A person so appointed as additional
director shall hold office at the pleasure of the Reserve Bank not exceeding three years
at a time.

15. K. FURTHER POWERS AND FUNCTIONS OF THE RESERVE BANK (Sec. 36)
(a) caution or prohibit banking companies or any banking company in particular against
entering into any particular transaction or class of transactions, and generally give advice
to any banking company;
(b) on a request by the companies concerned and subject to the provision of section
1[44A], assist, as intermediary or otherwise, in proposals for the amalgamation of such
banking companies;
(c) give assistance to any banking company by means of the grant of a loan or advance
to it under clause(3) of sub-section (1) of section 18 of the Reserve Bank of India Act,
1934 (2of 1934);
(d) The Reserve Bank shall make an annual report to the Central Government on the
trend and progress of banking in the country, with particular reference to its activities
under clause(2) of section 17 of the Reserve Bank of India Act, 1934 (2 of 1934), including
in such report its suggestions, if any, for the strengthening of banking business throughout
the country.
(e) The Reserve Bank may appoint such staff at such places as it considers necessary for
the scrutiny of the returns, statements and information furnished by banking companies
under this Act, and generally to ensure the efficient performance of its functions under
this Act.

16. Banking Sector In India
Reserve Bank India
Scheduled banks
Commercial
banks
Co-operative
banks
Foreign
banks(40)
Regional
rural
banks(196)
Urban co-
operatives
(52)
State co-
operative(1
6)
Public sector
banks(27)
Private sectors
banks(30)
State bank of
India(8)
Other nationalized
banks(19)
Old(22) New(8)

17. LIST OF PUBLIC SECTOR BANKS
 STATE BANK OF INDIA AND ITS SUBSIDIARIES
1. State Bank of India
2. State Bank of Bikaner & Jaipur
3. State Bank of Hyderabad
4. State Bank of Indore
5. State Bank of Mysore
6. State Bank of Patiala
7. State Bank of Saurashtra
8. State Bank of Travancore

18. OTHER NATIONALIZED BANKS
 Allahabad Bank
 Andhra Bank
 Bank of Baroda
 Bank of India
 Bank of Maharastra
 Canara Bank
 Central Bank of India
 Corporation Bank
 Dena Bank
 Indian Bank
 Indian Overseas Bank
 Oriental Bank of Commerce
 Punjab & Sind Bank
 Punjab National Bank
 Syndicate Bank
 UCO Bank
 Union Bank of India
 United Bank of India
 Vijaya Bank

19. Some of Public Sector banks have issued equity shares for
general public and are listed on various stock exchanges.
The listed public sector banks are;
 State Bank of India
 State Bank of Bikaner and Jaipur
 State Bank of Travancore
 Bank of Baroda
 Bank of India
 Oriental Bank of Commerce
 Dena bank
 Corporation bank

20. LIST OF PRIVATE SECTOR BANKS:
Old private sector banks
 **Bank of Madurai Ltd
 Bank of Rajasthan Ltd
 Bareilly Corporation Bank Ltd
 Bharat Overseas Bank Ltd
 City Union Bank Ltd
 Development Credit Bank Ltd
 Ganesh Bank of Kurundwad Ltd
 Karnataka Bank Ltd
 Lord Krishna Bank Ltd
 Nainital Bank Ltd
 SBI Comm & Int Bank Ltd
 Tamilnad Mercantile Bank Ltd
 The Benares State Bank Ltd
 The Catholic Syrian Bank Ltd
 The Dhanalakshmi Bank Ltd
 The Federal Bank Ltd
 The Jammu & Kashmir Bank Ltd
 The Karur Vysya Bank Ltd
 The Lakshmi Vilas Bank Ltd
 The Nedungadi Bank Ltd
 The Ratnakar Bank Ltd
 The Sangli Bank Ltd
 The South Indian Bank Ltd
 The United Western Bank Ltd
 The Vysya Bank Ltd
*since merged with HDFC Bank
**since merged with ICICI Bank

21. NEW PRIVATE SECTOR BANKS
 Bank of Punjab Ltd
 Centurion Bank Ltd
 Global Trust Bank Ltd
 HDFC Bank Ltd
 ICICI Banking Corporation Ltd
 IDBI Bank Ltd
 IndusInd Bank Ltd
 *Times Bank Ltd
 UTI Bank Ltd

22. LIST OF FOREIGN BANKS:
 ABN-AMRO Bank N.V.
 Abu Dhabi Commercial Bank Ltd.
 American Express Bank Ltd.
 Arab Bangladesh Bank Ltd.
 ANZ Stanchart Bank
 Bank International Indonesia
 Bank of America NT&SA
 Bank of Bahrain and Kuwait BSC
 Bank of Ceylon
 Banque Nationale De Paris
 Barclays Bank PLC
 Chase Manhattan Bank
 Chinatrust Commercial Bank
 Cho Hung Bank
 Citibank N.A.
 Commercial Bank of Korea,
 Commerzbank AG
 Credit Agricole Indosuez
 Credit Lyonnais
 Deutsche Bank AG
 Dresdner Bank AG
 Fuji Bank Ltd.

23.  Hongkong Bank
 ING Barrings Bank N.V.
 Krung Thai Bank
 Mashreq Bank
 Oman International Bank S.A.O.G.
 Overseas Chinese Banking Corp.
Ltd.
 Siam Commercial Bank
 Societe Generale
 Sonali Bank
 State Bank of Mauritius Ltd.
 Sumitomo Bank Ltd.
 Sumitomo Bank Ltd.
 The Bank of Nova Scotia
 The Bank of Tokyo-Mitsubishi Ltd.
 The British Bank of Middle East
 The Development Bank of
Singapore Ltd.
 The Sakura Bank Ltd.
 The Sanwa Bank Ltd.
 Toronto-Domonion Bank
 Bank Muscat International SAOG,
 Morgan Guaranty Trust company of
New York
 KBC Bank, NV

24. Banking reforms and it’s impact.

25. Growth phases in banking sector
In over five decades since dependence, banking
system in India has passed through five distinct
phase,
 Evolutionary Phase (prior to 1950)
 Foundation phase (1950-1968)
 Expansion phase (1968-1984)
 Consolidation phase (1984-1990)
 Reformatory phase (since 1990)

26. Reformatory Phase
(1991 Onwards)
Reasons for the formation of the reforms-
 Continued financial profligacy of the Government coupled
with close monitoring and control
 Decline in productivity and profitability
 Economic crises of 1991
 Economy suffered from serious inflationary pressures,
emerging scarcities of essential commodities and
breakdown of fiscal discipline.

27. REFORMS IN BANKING SECTOR - Phase I
A retrospect of the events clearly indicates that the Indian
banking sector has come far away from the days of nationalization. The
Narasimham Committee laid the foundation for the reformation of the
Indian banking sector. Constituted in 1991, the Committee submitted two
reports, in 1992 and 1998, which laid significant thrust on enhancing the
efficiency and viability of the banking sector. As the international
standards became prevalent, banks had to unlearn their traditional
operational methods of directed credit, directed investments and fixed
interest rates, all of which led to deterioration in the quality of loan
portfolios, inadequacy of capital and the erosion of profitability.

28. The main recommendations of the Committee were:
 Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five
years
 Progressive reduction in Cash Reserve Ratio (CRR)
 Phasing out of directed credit programmes and redefinition of the priority
sector
 Deregulation of interest rates so as to reflect emerging market conditions
 Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted
assets by March 1993, 8 per cent by March 1996, and 8 per cent by those banks
having international operations by March 1994
 Adoption of uniform accounting practices in regard to income recognition, asset
classification and provisioning against bad and doubtful debts

29.  Imparting transparency to bank balance sheets and making more disclosures
 Setting up of special tribunals to speed up the process of recovery of loans
 Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion
of their bad and doubtful advances at a discount
 Restructuring of the banking system, so as to have 3 or 4 large banks, which could
become international in character, 8 to 10 national banks and local banks confined
to specific regions. Rural banks, including RRBs, confined to rural areas
 Abolition of branch licensing
 Liberalizing the policy with regard to allowing foreign banks to open offices in
India
 Rationalization of foreign operations of Indian banks
 Giving freedom to individual banks to recruit officers

30.  Inspection by supervisory authorities based essentially on the internal audit
and inspection reports
 Ending duality of control over banking system by Banking Division and RBI
 A separate authority for supervision of banks and financial institutions which
would be a semi-autonomous body under RBI
 Revised procedure for selection of Chief Executives and Directors of Boards of
public sector banks
 Obtaining resources from the market on competitive terms by DFIs
 Speedy liberalisation of capital market
 Supervision of merchant banks, mutual funds, leasing companies etc., by a
separate agency to be set up by RBI and enactment of a separate legislation
providing appropriate legal framework for mutual funds and laying down
prudential norms for such institutions, etc.

31. REFORMS IN BANKING SECTOR - Phase II
Keeping in view the need of further liberalization the
Narasimham Committee II on Banking Sector reform was set up in 1997.
This committee’s terms of reference included review of progress in
reforms in the banking sector over the past six years, charting of a
program of banking sector reforms required to make the Indian banking
system more robust and internationally competitive and framing of
detailed recommendations in this regard. This committee constituted
submitted its report in April 1998.
The major recommendations are:
 Capital adequacy requirements should take into account market risks
also
 In the next three years, entire portfolio of Govt. securities should be
marked to market
 Risk weight for a Govt. guaranteed account must be 100 percent

32.  CAR to be raised to 10% from the present 8%; 9% by 2000 and 10% by 2002
 An asset should be classified as doubtful if it is in the sub-standard category for
18 months instead of the present 24 months
 Banks should avoid ever greening of their advances
 There should be no further re-capitalization by the Govt.
 NPA level should be brought down to 5% by 2000 and 3% by 2002.
 Banks having high NPA should transfer their doubtful and loss categories to ARCs
which would issue Govt. bonds representing the realisable value of the assets.
 International practice of income recognition by introduction of the 90-day norm
instead of the present 180 days.

33.  A provision of 1% on standard assets is required.
 Govt. guaranteed accounts must also be categorized as NPAs under the usual
norms
 There is need to institute an independent loan review mechanism especially for
large borrowal accounts to identify potential NPAs.
 Recruitment of skilled manpower directly from the market be given urgent
consideration
 To rationalize staff strengths, an appropriate VRS must be introduced.
 A weak bank should be one whose accumulated losses and net NPAs exceed its
net worth or one whose operating profits less its income on recap bonds is
negative for 3 consecutive years.

34. Until recently, the lack of competitiveness vis-à-vis global
standards, low technological level in operations, over staffing, high NPAs
and low levels of motivation had shackled the performance of the banking
industry.
However, the banking sector reforms have provided the necessary
platform for the Indian banks to operate on the basis of operational
flexibility and functional autonomy, thereby enhancing efficiency,
productivity and profitability. The reforms also brought about structural
changes in the financial sector and succeeded in easing external constraints
on its operation, i.e. reduction in CRR and SLR reserves, capital adequacy
norms, restructuring and recapitulating banks and enhancing the
competitive element in the market through the entry of new banks.
The reforms also include increase in the number of banks due to
the entry of new private and foreign banks, increase in the transparency of
the banks’ balance sheets through the introduction of prudential norms and
increase in the role of the market forces due to the deregulated interest
rates. These have significantly affected the operational environment of the
Indian banking sector.

35.  Granting of operational autonomy to public sector banks.
 Introduction and phased implementation of international
best practices and norms.
 Setting up of Credit Information Bureau of India Limited
(CIBIL) for information sharing on defaulters as also other
borrowers.
 Introduction of automated screen-based trading in
government securities through Negotiated Dealing System
(NDS). Setting up of risk-free payments and system in
government securities through Clearing Corporation of India
Limited (CCIL). Phased introduction of Real Time Gross
Settlement (RTGS) System.
Recent banking reforms

36. Reforms on the way
 Strict norms pertaining to bad loans and restructured assets
 Consolidation and mergers and entry of new players
 Continuous bank licensing
 Converting some urban cooperative banks into commercial
banks
 Focus on asset–liability management for banks
 Increased usage of technology in banking
 Focus on financial inclusion
 Transparency, improvement in clearing and settlement
practices

37. INCOME RECOGNITION
The regulation for income recognition states that the
Income on NPAs cannot be booked. Interest income should not be recognized
until it is realized. An NPA is one where interest is overdue for two quarters or
more. In respect of NPAs, interest is not to be recognized on accrual basis, but is
to be treated as income only when actually received. Income in respect of
accounts coming under Health Code 5 to 8 should not be recognized until it is
realized. As regards to accounts classified in Health Code 4, RBI has advised the
banks to evolve a realistic system for income recognition based on the prospect
of realisability of the security. On non-performing accounts the banks should not
charge or take into account the interest.

38. Income-recognition norms have been tightened for consortium banking
too. Member banks have to intimate the lead-bank to arrange for their share of
recovery. They will no more have the privilege of stating that the borrower has
parked funds with the lead-bank or with a member-bank and that their share is
due for receipt. The new notifications emanated after deliberations held
between the RBI and a cross-section of banks after a working group headed by
chartered accountant, PR Khanna, submitted its report. The working group was
set after the RBI’s Board for Financial Supervision (BFS) wanted divergences in
NPA accounting norms by banks from central bank guidelines to be addressed.
The working group had identified three areas of divergence: non-compliance with
RBI norms; subjectivity arising out of the flexibility in norms; and differences in
the valuation of securities by banks, auditors and RBI.

39. ASSET CLASIFICATION
While new private banks are careful about their asset quality and
consequently have low non-performing assets (NPAs), public sector banks have large
NPAs due to wrong lending policies followed earlier and also due to government
regulations that require them to lend to sectors where potential of default is high.
Allaying the fears that bulk of the Non-Performing Assets (NPAs) was from priority
sector, NPA from priority sector constituted was lower at 46 per cent than that of the
corporate sector at 48 per cent.
Loans and advances account for around 40 per cent of the assets
of SCBs. However, delay/default in payment of interest and/or repayment of principal
has rendered a significant proportion of the loan assets non-performing. As per RBI’s
prudential norms, a Non-Performing Asset (NPA) is a credit facility in respect of which
interest/installment has remained unpaid for more than two quarters after it has
become past due. “Past due” denotes grace period of one month after it has become
due for payment by the borrower. The Mid-Term Review of Monetary and Credit Policy
for 2000-01 has proposed to discontinue this concept with effect from March 31, 2001.

40. Regulations for asset classification
Assets should be classified into four classes - Standard, Sub-standard,
Doubtful, and Loss assets. NPAs are loans on which the dues are not received for
two quarters. NPAs consist of assets under three categories: sub-standard, doubtful
and loss. RBI for these classes of assets should evolve clear, uniform, and
consistent definitions. The health code system earlier in use would have to be
replaced. The banks should classify their assets based on weaknesses and
dependency on collateral securities into four categories:
 Standard Assets: It carries not more than the normal risk attached to the
business and is not an NPA. An asset that assures future economic benefit is a
standard asset.
 Sub-standard Asset: a substandard asset is one which has been classified as NPA
for a period not exceeding 12 months. Such an asset will have well defined
credit weaknesses that jeopardize the liquidation of the debt and are
characterized by distinct possibility that the banks will sustain some loss, if
deficiencies are not corrected.

41. `
 Doubtful Assets: An NPA which continued to be so for a period exceeding one
year ( more than 12 months)
 Loss Assets: An asset identified by the bank or internal/ external auditors or RBI
inspection as loss asset, but the amount has not yet been written off wholly or
partly. All those assets which cannot be recovered are called as loss assets.
 The banking industry has significant market inefficiencies caused by the
large amounts of Non Performing Assets (NPAs) in bank portfolios, accumulated
over several years. Discussions on non-performing assets have been going on for
several years now. One of the earliest writings on NPAs defined them as "assets
which cannot be recycled or disposed off immediately, and which do not yield
returns to the bank, examples of which are: Overdue and stagnant accounts,
suit filed accounts, suspense accounts and miscellaneous assets, cash and bank
balances with other banks, and amounts locked up in frauds".

42. Income and Expenses Profile of Banks
Interest Income Interest Expenses
• Interest/discount on advances/bills
• Interest on investments
• Interest on balances with RBI and other
interbank funds
• Others
• Interest on deposits
• Interest on Refinance/interbank borrowings
• Others
Other Income Operating Expenses
• Commission, Exchange and Brokerage
• Profit on sale of investments
• Profit on revaluation of investments
• Profit on sale of land, building and other
assets
• Profit on exchange transactions
• Income earned by way of dividends, etc.
• Miscellaneous
 Payments to and provisions for employees
• Rent, taxes and lighting
• Printing and stationery
• Advertisement and publicity
• Depreciation on Bank’s property
• Director’/Auditor’s fees and expenses
• Law charges, Postage, etc.
• Repairs and Maintenance,
 Insurance.
• Other expenses