26-02-2013, 02:24 PM
A Project Report on Working Capital Assessment at Canara Bank, Circle Office, Bangalore
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Introduction
Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and Bank of Hindustan, which started in 1790; both are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India in 1955.
Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.
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.
The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.
The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara (South Kanara) district. Four nationalized banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking".
The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance.
The major steps to regulate banking included:
• The Reserve Bank of India, India's central banking authority, was established in April 1934, but was nationalized on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to Public Ownership) Act, 1948.
• 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, and no two banks could have common directors.
By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the nationalization of the banking industry. Indira Gandhi, then Prime Minister of India, expressed the intention of the Government of India in the annual conference of the All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The meeting received the paper with enthusiasm. Thereafter, her move was swift and sudden. The Government of India issued an ordinance and nationalized the 14 largest commercial banks with effect from the midnight of July 19, 1969.
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit
delivery. With the second dose of nationalization, the Government of India controlled around 91% of the banking business of India.
In the early 1990s, the then Narasimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the bankin g sector in India, which has seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.
In the private banking sector of India, FDI is allowed up to a maximum limit of 74% of the paid up capital of the Bank. On the other bank, FDI and Portfolio investment in the public or nationalized banks in India all subject to a limit of 20% of totality. This ceiling is also applicable to the investment in the SBI and its associates.
Currently, banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true.
With the growth in the Indian economy expected to be strong for quite some time - especially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.
The Rs. 64 trillion (US$ 1.22 trillion) Indian banking industry has made exceptional progress in last few years, even during the times when the rest of the world was struggling with financial meltdown. Even today, financial institutions across the world are facing the repercussions of the turmoil but the Indian ones are standing stiff under the regulator's watchful eye and hence, have emerged stronger.
Ratings agency Moody's believe that strong deposit base of Indian lenders and Government's persistent support to public sector and private banks would act as positive factors for the entire system amidst the negative global scenario.
The sector has undergone significant developments and investments in the recent past. Some of them are discussed hereafter along with the key statistics and Government initiatives pertaining to the same.
Key Statistics
• According to the Reserve Bank of India's Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks', March 2011, Nationalized Banks, as a group, accounted for 53.0 per cent of the aggregate deposits, while State Bank of India (SBI) and its associates accounted for 21.6 per cent. The share of new private sector banks, old private sector banks, foreign banks and regional rural banks in aggregate deposits was 13.4 per cent, 4.6 per cent, 4.4 per cent and 3 per cent respectively.
• With respect to gross bank credit also, nationalized banks hold the highest share of
52.8 per cent in the total bank credit, with SBI and its associates at 22.1 per cent and New Private sector banks at 13.2 per cent. Foreign banks, Old private sector banks and Regional Rural banks held relatively lower shares in the total bank credit with
4.9 per cent, 4.6 per cent and 2.4 per cent respectively. Another statement from RBI
has revealed that bank advances grew 17.08 per cent annually as on December 16,
2011 while bank deposits rose 18.03 per cent.
• RBI data shows that India raised US$ 1.6 billion through External Commercial
Borrowings (ECBs) in November 2011 for new projects. 78 companies raised US$
1.3 billion under automatic route and US$ 253 million was raised under the approval route (it requires case-by-case approval by the regulator).
• India's foreign exchange reserves stood at US$ 297 billion as on Dec 30, 2011.
• In recent years, deposits under Non-Resident Indians (NRI) schemes have witnessed an upsurge. There was an inflow Rs. 14,763 crores (US$ 2.83 billion) under NRI deposits in 2010-11, which was 6.5 per cent higher from 2009-10. In 2011, the total of NRI deposits was Rs. 2,30,812 crores (US$ 44.2 billion), compared to Rs.
2,27,078 crores (US$ 43.5 billion) in 2010.
Recent Developments
• The US Export-Import Bank, with a commitment of US$ 7 billion, is on a way to diversify its portfolio in India by financing projects in education, healthcare and agriculture. After Mexico, India is the second biggest investment destination for the bank as the entity anticipates the country to become the largest market in next 12-18 months.
• India Infrastructure Finance Company Ltd (IIFCL) and IDBI Bank have inked a five-year memorandum of understanding (MoU) to launch Infrastructure Debt Fund (IDF) schemes. The IDF, for which IDBI Bank and IIFCL would play strategic investors, is expected to get launched by the end of February 2012.
• With 'green power' projects getting highly popular in India, especially in the states of Gujarat and Rajasthan, banks are increasingly opening up to projects from non - conventional (solar and wind) energy space. After receiving project proposals that were meant for a particular industry/consumer or group of industries/consumers for their own use, banks are now getting projects that entail commercial viability (25 -
100 mega watts).
Recently, depreciation of partially convertible Indian Rupee against US Dollar has left Indian importer high and dry, more particularly those who have not hedged their dollar exposures. The unexpected depreciation of Rupee against US Dollar this year by over 17 percent has caused a great concern for the Government, RBI and corporate of India. On November 22, 2011 Indian Rupee has touched historic low of 52.73 before recovering little in next sessions.
Since late 2009, sovereign debt crisis brewed in Europe concerning some euro zone states and the situation became tense in early 2010 with the downgrading of Greek debt rating by global credit rating agencies to ‘Junk’ status with hints of default by the Greek Government. The situation became further grave recently in October 2011 with Greek coalition government headed by George Papandreou first announcing and then ditching a plan for a referendum on a euro zone bailout package to limit the damage from the currency bloc’s debt crisis with a deal in which the private sec tor was to agree to voluntarily accept a nominal 50 percent cut in its bond investments to reduce Greece’s debt burden by 100bn Euros, cutting its debts to 120 percent of GDP by
2020, from 160 percent at present. Besides forcing the investing banks to acce pt a haircut of 50 percent on Greek debt the deal, reached after prolonged hard -nosed negotiations between investing bankers, head of states and the IMF, also proposes to enlarge the European Financial Stability Facility (EFSF) war chest from €440bn to €1 trillion and requires European banks to find more capital against their losses on Greek debt.
With cash in its treasury expected to last just over five weeks, Greece has been plunged into a fresh bout of uncertainty with political differences in that coun try, refusal of strong European countries to cough up more for the bailout, and G20 nations demanding more details of the rescue package declared on Oct 27, 2011 before they commit fresh cash to IMF, which could then lend to Europe’s bailout facility.