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Indian Banking - Introduction


Indian Banking - Introduction


The Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions.The Reserve Bank of India acts a centralized body monitoring any discrepancies and shortcoming in the system. Since the nationalization of banks in 1969, the public sector banks or the nationalized banks have acquired a place of prominence and has since then seen tremendous progress. The need to become highly customer focused has forced the slow-moving public sector banks to adopt a fast track approach. The unleashing of products and services through the net has galvanized players at all levels of the banking and financial institutions market grid to look anew at their existing portfolio offering. Conservative banking practices allowed Indian banks to be insulated partially from the Asian currency crisis.Indian banks are now quoting al higher valuation when compared to banks in other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble footed in approach and armed with efficient branch networks focus primarily on the ‘high revenue’ niche retail segments.

The Indian banking has finally worked up to the competitive dynamics of the ‘new’ Indian market and is addressing the relevant issues to take on the multifarious challenges of globalization. Banks that employ IT solutions are perceived to be ‘futuristic’ and proactive players capable of meeting the multifarious requirements of the large customers base. Private banks have been fast on the uptake and are reorienting their strategies using the internet as a medium The Internet has emerged as the new and challenging frontier of marketing with the conventional physical world tenets being just as applicable like in any other marketing medium.

The Indian banking has come from a long way from being a sleepy business institution to a highly proactive and dynamic entity.  This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending).  The banking in India is highly fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advances.  Indian nationalized banks (banks owned by the government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization.  The Indian banking can be broadly categorized into nationalized, private banks and specialized banking institutions.

The Reserve Bank of India act as a centralized body monitoring any discrepancies and shortcoming in the system.  It is the foremost monitoring body in the Indian financial sector.  The nationalized banks (i.e. government-owned banks) continue to dominate the Indian banking arena.  Industry estimates indicate that out of 274 commercial banks operating in India, 223 banks are in the public sector and 51 are in the private sector.  The private sector bank grid also includes 24 foreign banks that have started their operations here.  Under the ambit of the nationalized banks come the specialized banking institutions.  These co-operatives, rural banks focus on areas of agriculture, rural development etc.,


unlike commercial banks these co-operative banks do not lend on the basis of a prime lending rate.  They also have various tax sops because of their holding pattern and lending structure and hence have lower overheads.  This enables them to give a marginally higher percentage on savings deposits.  Many of these cooperative banks diversified into specialized areas (catering to the vast retail audience) like car finance, housing loans, truck finance etc.  in order to keep pace with their public sector and private counterparts, the co-operative banks too have invested heavily in information technology to offer high-end computerized banking services to its clients.


Types of Banks



State Bank of India and Associates    


Nationalized Banks


Domestic Private Sector Banks


New Domestic Private Sector Banks 


Foreign Banks   


Complementing the roles of the nationalized and private banks are the specialized financial institutions or Non Banking Financial Institutions (NBFCs).  With their focused portfolio of products and services, these Non Banking Financial Institutions act as an important catalyst in contributing to the overall growth of the financial services sector.  NBFCs offer loans for working capital requirements, facilitate mergers and acquisitions, IPO finance, etc. apart from financial consultancy services.  Trends are now changing as banks (both public and private) have now started focussing on NBFC domains like long and medium-term finance, working cap requirements. IPO financing to etc. to meet the multifarious needs of the business community. 



 The commercial financing model in Indian banking can be broadly categorized into project finance and working capital finance.  These two segments form the pivot around which banks operate. 


Project Finance

 Banks offer long term and short terms loans to business houses, corporations to set up their projects.  These loans are disbursed after the approval from the banks’ core credit validating committee.  In India, there are 11 national level land 46 state level financial and investment institutions that cater to long term funding requirements of the industry.  The project finance segment is highly competitive with various players offering innovative schemes to entice corporate. 

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Working capital

In order to meet the diverse needs and requirements of the business community, banks offer working capital funds to corporate. Working capital finance is specialized line of business and is largely dominated by the commercial banks.

 The Indian banking saw dramatic changes in the last decade or so ever since the advent of liberalization and India’s integration with the world economy.  These economic reforms and the entry of private players saw nationalized banks revamp their service and product portfolio to incorporate new, innovative customer-centric schemes.  The Indian banking finally woke up to the surging demands of the ever-discerning Indian consumer.  The need to become highly customer focused (generated by high competitive levels) forced the slow-moving public sector banks to adopt a fast track approach.  Taking a leaf out of the private sector banks, the public sector banks too went for major image changes (including corporate brand building exercises) and customer friendly schemes.  These customer friendly programs included revamping of the product and service portfolio by introducing new product & service schemes (like credit cards, hassle-free housing loan schemes, educational loans and flexi-deposit schemes) integration of the branch network by using advance networking technology and customer personalization programs (through ATMs and anytime banking etc.).  Many banks have started capitalizing on the recent stock market surge by adding (Initial Public Offering) IPO financing options and schemes in their product mix.  IPO finance has received a positive response from the investors and is becoming popular amongst the business community.  The objective of all these strategies was very clear – to bridge the service & product gap that was inherent in the banking system.  To cater to the increasing customer demands and the surge in business volumes, many public sector banks have ploughed back funds to invest heavily in technology upgrades and systems like LANs, WANs, VSATs etc. 

Marketing and brand building programs were also given a new thrust in the new liberalized banking scenario.  Promotional budgets were hiked to cater to the new and large discerning target audience.  Banks were now keen on marketing their products and service though various mediums to reach their core customers.  Direct marketing, Internet marketing, hoarding, press ads, television sponsorships, image makeovers etc. became an integral part of a bank’s marketing mix.  To meet the personalized needs of the customer and in order to differentiate its services, banks repositioned themselves in specialized fields, like housing loans, car finance, educational loans etc. to optimally service the customer.  Permission marketing became the new strategy that banks began to propound i.e. feeding the customer (with his or her consent) with product and service information and thereby enticing him towards the bank’s product – service portfolio.

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The liberalize policy of Government of India permitted entry to private sector in the banking, the industry has witnessed the entry of nine new generation private banks.  The major differentiating parameter that distinguishes these banks from all the other banks in the Indian banking is the level of service that is offered to the customer.   Verify the focus has always been centered around the customer – understanding his needs, preempting him and consequently delighting him with various configuration of benefits and a wide portfolio of products and services.  These banks have generally been established by promoters of repute or by ‘high value’ domestic financial institutions.  The popularity of these banks can be gauged by the fact that in a short span of time, these banks have gained considerable customer confidence and consequently have shown impressive growth rates.  Today, the private banks corner almost four per cent share of the total share of deposits.  Most of the banks in this category are concentrated in the high-growth urban areas in metros (that account for approximately 70% of the total banking business ).  With efficiency being the major focus, these banks have leveraged on their strengths and competencies viz. Management, operational efficiency and flexibility, superior product positioning and higher employee productivity skills. 

The private banks with their focused business and service portfolio have a reputation of being niche players in the industry.  A strategy that has allowed these banks to concentrate on few reliable high net worth companies and individuals rather than cater to the mass market.  These well-chalked out integrates strategy plans have allowed most of these banks to deliver superlative levels of personalized services.  With the Reserve Bank of India allowing these banks to operate 70% of their businesses in urban areas, this statutory requirement has translated into lower deposit mobilization costs and higher margins relative to public sector banks.


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