In this article we will discuss about:- 1. Introduction to the Banking Industry 2. Need of the Banks 3. History 4. Structure 5. Growth 6. Banking and Insurance Sectors after Liberalization 7. Challenges 8. Strategic Options to Cope with the Challenges.


  1. Introduction to the Banking Industry
  2. Need of the Banks
  3. History of Indian Banking System
  4. Structure of Indian Banking Industry
  5. Growth of Banking in India
  6. Banking and Insurance Sectors after Liberalization
  7. Challenges Faced by Banking Industry
  8. Strategic Options to Cope with the Challenges

1. Introduction to the Banking Industry:

The rapid transformation in the banking industry over the last decade has made the industry stronger, cleaner, transparent, efficient, faster, disciplined and a lot more competitive. The banking industry in India has a huge canvass of history, which covers the traditional banking practices from the time of Britishers to the reforms period, nationalization to privatization of banks and now increasing numbers of foreign banks in India. Therefore, banking in India has been through a long journey. Rural banking and micro financing are the two gateways for the Indian banks to grow and compete with international banks.

The use of technology has brought a revolution in the working style of the banks and it has pervaded each and every aspect of human life in a drastic manner. Advent of anytime, anywhere banking has become possible due to technology adoption. Life has changed enormously due to gadgets and appliances becoming easy to use and that too, in affordable prices.


Mobile phones, Digital cameras, I- phones, Dish TV are now common household goods and no more come in category of luxury items. Together with that, the entry of plastic money has opened new avenues for cashless transactions considered safer and more convenient than watching every time whether the wallets are still struck in our hip pockets, vanity bags or not when we move out for shopping or on journeys.

As we know finance is considered as the life blood of all economic activities and has become integral part of modern business. A country’s financial system works in a set of financial markets, financial services and financial institutions.

Broadly, the financial market is categorized into two groups viz.:

(a) Money market which deals only with short term finance, and


(b) Capital market which deals with long- term funds.

Banking industry is the back bone for the growth of any economy. In the recent time, we are witnessed that the World Economy is passing through some small details or parts circumstances as bankruptcy of banking and financial institutions, debt crisis in major economies of the world and euro zone crisis. The banking scenario has become very uncertain causing recession in major economies like US and Europe.

Generally banking in India was fairly mature in terms of supply, product range and reach- even though reach in rural India and to the poor still remains a challenge. The government has developed initiatives to address this through the State Bank of India expanding its branch network and through the National Bank for Agriculture and Rural Development with things like microfinance. This also included the 2014 plan by the then prime minister to bring bank accounts to the estimated 40% of the population that were still unbanked. Banks are a subset of the financial services industry.

A banking system also referred as a system provided by the bank which offers cash management services for customers, reporting the transactions of their accounts and portfolios, throughout day. The banking system India should not only be hassle free but it should be able to meet the new challenges posed by the technology and any other external and internal factors.


For past three decades, India’s banking system has several outstanding achievements to its credit. The banks are the main participants of the financial system in India. The Banking sector offers several facilities and opportunities to their customers. All the banks safeguard the money and valuables and provide loans, credit, and payment services, such as checking accounts, money order, and cashier’s cheques.

2. Need of the Banks:

Before the establishment of banks, the financial activities were handled by money lenders and individuals. At that time the interest rates were very high. Again there were no security of public savings and no uniformity regarding loans. So, as to overcome such problems the organized banking sector was established, which was fully regulated by the government. The organized baking sector works within the financial system to provide loans, accept deposits and provide other services to their customers.

The following functions of the bank explain the need of the bank and its importance:

i. To provide the security to the savings of customers.


ii. To control the supply of money and credit.

iii. To encourage public confidence in the working of the financial system, increase savings speedily and efficiently.

iv. To avoid focus of financial powers in the hands of a few individuals and institutions.

v. To set equal norms and conditions (i.e. rate of interest, period of lending etc.) to all types of customers.


After Liberalization:

In the early 1990s, the then Narashimha 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, UTI Bank (since renamed Axis), ICICI Bank and HDFC Bank.

This move, along with the rapid growth in the economy of India, revitalized the banking 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.

The next stage for the Indian banking has been set up with the proposed relaxation in the norms for foreign direct investment, where all foreign investors in banks may be given voting rights which could exceed the present cap of 10% at present. It has gone up to 74% with some restrictions.


The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (borrow at 4%; lend at 6%; go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People demanded more from their banks and received more.

Currently (2007), 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 as compared to other banks incomparable 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.

3. History of Indian Banking System:

The first banks were Bank of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct. The largest bank, and the oldest still in existence, 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.


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. For many years the presidency banks acted as quasi- central banks, as did their successors, until the Reserve Bank of India was established in 1935. In 1955, RBI acquired control on Imperial Bank of India, which was renamed as State Bank of India. In 1959, SBI took over control of eight private banks floated in the erstwhile princely states and making them as its 100% subsidiaries.

In 1969 the Indian government nationalized all the major banks that it did not already own and these have remained under government ownership. They are run under a structure known as ‘profit-making public sector undertaking’ (PSU) and are allowed to compete and operate as commercial banks. The Indian banking sector is made up of four types of banks, as well as the PSUs and the state banks; they have been joined since the 1990s by new private commercial banks and a number of foreign banks.

4. Structure of Indian Banking Industry:

All banks which are included in the Second Schedule to the Reserve Bank of India Act, 1934 are Scheduled Banks. These banks comprise Scheduled Commercial Banks and Scheduled Co­operative Banks. Scheduled Commercial Banks in India are categorized into five different groups according to their ownership and/or nature of operation.

These bank groups are:

i. State Bank of India and its Associates

ii. Nationalized Banks Private Sector Banks Foreign Banks


iii. Regional Rural Banks.

In the bank group-wise classification, IDBI Bank Ltd. is included in Nationalized Banks. Scheduled Co-operative Banks consist of Scheduled State Co-operative Banks and Scheduled Urban Cooperative Banks.

5. Growth of Banking in India:

By 2010, banking in India was 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.

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. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them.

In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks’ loan recovery efforts have driven defaulting borrowers to suicide.

By 2013 the Indian Banking Industry employed 1,175,149 employees and had a total of 109,811 branches in India and 171 branches abroad and manages an aggregate deposit of Rs. 67504.54 billion (US$1.1 trillion or 840 billion) and bank credit of 52604.59 billion (US$870 billion or 650 billion). The net profit of the banks operating in India was 1027.51 billion (US$17 billion or 13 billion) against a turnover of 9148.59 billion (US$150 billion or 110 billion) for the financial year 2012-13.

6. Banking and Insurance Sectors after Liberalization:


Prior to liberalization these two sectors were controlled and regulated by the government. Nationalized banks and insurance companies had a firm grip over the market. After liberalization the banking sector and insurance domain opened up for private participation.

Banking Sector:

The three major changes in the banking sector after liberalization are:

i. Step to increase the cash outflow through reduction in the statutory liquidity and cash reserve ratio.

ii. Nationalized banks including SBI were allowed to sell stakes to private sector and private investors were allowed to enter the banking domain. Foreign banks were given greater access to the domestic market, both as subsidiaries and branches, provided the foreign banks maintained a minimum assigned capital and would be governed by the same rules and regulations governing domestic banks.

iii. Banks were given greater freedom to leverage the capital markets and determine their asset portfolios. The banks were allowed to provide advances against equity provided as collateral and provide bank guarantees to the broking community.


India’s services sector has always served the Indian economy well, accounting for nearly 57 per cent of the gross domestic product (GDP). Here, the financial services segment has been a significant contributor.

The financial services sector in India is dominated by commercial banks which have more than 60 per cent share of the total assets; other segments include mutual funds, insurance firms, non-banking institutions, cooperatives and pension funds.

The Government of India has introduced reforms to liberalize, regulate and enhance the country’s financial services industry. Presently, the country can claim to be one of the world’s most vibrant capital markets. In spite of the challenges that are still there, the sector’s future looks good.

Market Size:

The size of banking assets in India reached US$ 1.8 trillion in FY 13 and is projected to touch US$ 28.5 trillion by FY 25. Information technology (IT) services, the largest spending segment of India’s insurance industry at Rs 4,000 crore (US$ 665.78 million) in 2014, is anticipated to continue enjoying strong growth at 16 per cent. Category leaders are business process outsourcing (BPO) at 25 per cent and consulting at 21 per cent.



During FY 14, foreign institutional investors (FIIs) invested a net amount of about Rs. 80,000 crore (US$ 13.31 billion) in India’s equity market, according to data by Securities and Exchange Board of India (SEBI).

Insurance companies in India will spend about Rs. 12,100 crore (US$ 2.01 billion) on IT products and services in 2014, a 12 per cent increase over the previous year, according to Gartner Inc. The forecast includes spending by insurers on segments such as internal IT (including personnel), telecommunications, hardware, software, and external IT services. The Rs. 1200 crore (US$ 202.47 million) software segment is predicted to be the fastest growing external segment, with overall growth of 18 per cent in 2014.

The following are some of the key developments and investments in the Indian financial services sector:

i. About 75 per cent of the insurance policies sold by 2020 would be in one way or another influenced by digital channels during the pre-purchase, purchase or renewal stages, according to a report by Boston Consulting Group (BCG) and Google India. This report, Digital(at)Insurance 20X By 2020, predicts that insurance sales from online channels will increase 20 times from present-day sales by 2020, and overall internet influenced sales will reach Rs. 300,000-400,000 crore (US$ 49.9-66.54 billion).

ii. Export-Import Bank of India (Exim Bank) will focus more on supporting project exports from India to South Asia, Africa and Latin America, as per Mr Yaduvendra Mathur, Chairman and MD, Exim Bank. The bank has moved up the value chain by lending support to project exports so that India earns foreign exchange. In 2012- 13, Exim Bank had supported 85 project export contracts valued at Rs 24,255 crore (US$ 4.03 billion) secured by 47 companies in 23 countries.

iii. Private-sector lender Induslnd Bank will soon begin its asset reconstruction business. It plans to partner asset reconstruction companies (ARCs) for this venture. “I think our new initiative, which is going to launch in the next two months, is about asset reconstruction. We will do asset reconstruction within the bank but in tie-ups with ARCs. The business plan is ready. We believe a huge stock of assets is coming into the ARCs as a business area that we need to look at and we will exploit,” said Mr Romesh Sobti, CEO and MD, Induslnd Bank.


iv. Association of Mutual Funds in India (AMFI) has reported that the mutual fund industry’s assets under management (AUM) have gone past the Rs 10 trillion (US$ 166.37 billion) mark in May, 2014. The AUM of the Indian mutual fund industry rose to Rs 10.11 trillion (US$ 168.19 billion) in May from Rs 9.45 trillion (US$ 157.21 billion) in April.

7. Challenges Faced by Banking Industry:

The bank marketing is than an approach to market the services profitability. It is a device to maintain commercial viability. The changing perception of bank marketing has made it a social process. The significant properties of the holistic concept of management and marketing has made bank marketing a device to establish a balance between the commercial and social considerations, often considered to be opposite of each other.

A collaboration of two words banks and marketing thus focuses our attention on the following:

i. Bank marketing is a managerial approach to survive in highly competitive market as well reliable service delivery to target customers.

ii. It is a social process to sub serve social interests.

iii. It is a fair way of making profits.

iv. It is an art to make possible performance-orientation.

v. It is a professionally tested skill to excel competition.

1. Users of Banking Services:

The emerging trends in the level of expectation affect the formulation of marketing mix. Innovative efforts become essential the moment it finds a change in the level of expectations. There are two types of customers using the services of banks, such as general customers and the industrial customers.

General Users:

Persons having an account in the bank and using the banking facilities at the terms and conditions fixed by a bank are known as general users of the banking services. Generally, they are the users having small sized and less frequent transactions or availing very limited services of banks.

Industrial Users:

The industrialists, entrepreneurs having an account in the bank and using credit facilities and other services for their numerous operations like establishments and expansion, mergers, acquisitions etc. of their businesses are known as industrial users. Generally, they are found a few but large sized customers.

2. Bank Marketing in the Indian Perspective:

The formulation of business policies is substantially influenced by the emerging trends in the national and international scenario. The GDP, per capita income, expectation, the rate of literacy, the geographic and demographic considerations, the rural or urban orientation, the margins in economic systems, and the spread of technologies are some of the key factors governing the development plan of an organization, especially banking organization.

In ours developing economy, the formulation of a sound marketing mix is found a difficult task. The nationalization of the Reserve Bank of India (RBI) is a landmark in the development of Indian Banking system that have saved numerous paths for qualitative-cum quantities improvements in true sense.

Subsequently, the RBI and the policy makers of the public sector commercial banks think in favor of conceptualizing modern marketing which would bring a radical change in the process of quality up gradation and village to village commercial viability.

3. Bank Marketing Mix and Strategies:

The first task before the public sector commercial Banks is to formulate that Bank marketing mix which suits the national socio­economic requirements. Some have 4 P’s and some have 7 P’s of marketing mix.

The common four Ps of marketing mix is as follows:

(i) Product:

To be more specific the peripheral services need frequent innovations, since this would be helpful in excelling competition. The product portfolio designing is found significant to maintain the commercial viability of the public sector banks. The banks professionals need to assign due weight age to their physical properties. They are supposed to look smart active and attractive.

(ii) Price:

Price is a critical and important factor of bank marketing mix due numerous players in the industry. Most consumers will only be prepared to invest their money in search of extraordinary or higher returns. They are ready to pay additional value if there is a perception of extra product value. This value maybe improved performance, function, services, reliability, and promptness for problem solving and of course, higher rate of return.

(iii) Promotion:

Bank Marketing is actually is the marketing of reliability and faith of the people. .It is the responsibility of the banking industry to take people in favor through Word of mouth publicity, reliability showing through long years of establishment and other services.

(iv) Place:

This is choice of where and when to make a product available will have significant impact on the customers. Customers often need to avail banking services fast for this they require the bank branches near and convenient to their official area or the place of easy access.

4. Challenges to Indian Banking:

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, regulated sellers of market to completed deregulated customers market.

a. Deregulation:

This continuous deregulation has given rise to extreme competition with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized norms and policies for foreign exchange in banking market. The deregulation of the industry coupled with decontrol in the interest rates has led to entry of a number of players in the banking industry. Thereby reduced corporate credit off which has resulted in large number of competitors battling for the same pie.

b. 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 customer’s better service, marketing skills heightened competition, defined new rules of the game pressure on efficiency. Need for new orientation diffused customer loyalty. Bank has led to a series of innovative product offerings catering to various customer segments, specifically retail credit.

c. Efficiency:

Excellent efficiencies are required at banker’s end to establish a balance between the commercial and social considerations Bank need to access low cost funds and simultaneously improve the efficiency and efficacy. Owing to cutthroat competition in the industry, banks are facing pricing pressure; have to give thrust on retail assets.

d. Diffused Customer Loyalty:

Attractive offers by MNC and other nationalized banks, customers have become more demanding and the loyalties are diffused. Value added offerings bound customers to change their preferences and perspective. These are multiple choices; the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery.

e. Misaligned Mindset:

These changes are creating challenges, as employees are made to adapt to changing conditions. The employees are resisting changing and the seller market mindset is yet to be changed. These problems coupled with fear of uncertainty and control orientation. Moreover banking industry is accepting the latest technology but utilization is far below from satisfactory level.

f. Competency Gap:

The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. Placing the right skill at the right place will determine success. The focus of people will be doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

8. Strategic Options to Cope with the Challenges of Banking Industry:

Dominant players in the industry have embarked on a series of strategic and Tactical initiatives to sustain leadership.

The major initiatives incorporate:

a) Focus on ensuring reliable service delivery through Investing on and implementing right technology.

b) Leveraging the branch networks and sales structure to mobilize low cost current and savings deposits.

c) Making aggressive forays in the retail advances segments of home and personal loans.

d) Implementing initiatives involving people, process and technology to reduce the fixed costs and the cost per transaction.

e) Focusing on fee based income to compensate foe squeezed spread.

f) Innovating products to capture customer ‘mind share’ to begin with and later the wallet share.

The banking environment of today is rapidly changing and the rules of yesterday no longer applicable. The corporate and the legal barriers that separate the various banking, investment and insurance sectors are less well-defined and the cross-over are increasing. As a consequence the marketing function is also changing to better support the bank in this dynamic market environment.

The key marketing challenge today is to support and advice on the focus positioning and marketing resources needed to deliver performance on the banking products and services. Marketing, as an investment advisor, is about defining 4Ps and implementing key strategic initiatives to Market segments, increasingly redefined, relevant micro-segments to survive and flourish in the highly competitive market.

Government Initiatives Regarding Banking Scenario:

In an effort to enable banks to provide greater choice in insurance products through their branches, a proposal could be made which will allow banks to act as corporate agents and tie up with multiple insurers. A committee set up by the Finance Ministry of India is likely to suggest this model as an alternative to the broking model.

The Reserve Bank of India (RBI) has simplified the rules for credit to exporters. Exporters can now receive long-term advance credit from banks for up to 10 years to service their contracts. They have to a satisfactory record of three years to get payments from banks, who can adjust the payments against future exports.

The RBI has enabled foreign investors, including foreign portfolio investors (FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in insurance and related activities via the automatic route. “Effective from February 4, 2014, foreign investment by way of FDI, investment by FIIs/FPIs and NRIs up to 26 per cent under automatic route shall be permitted in insurance sector,” as per the RBI.

Road Ahead:

India is among the world’s top 10 economies, driven by its strong banking and insurance sectors. The country is expected to become the fifth largest banking sector in the world by 2020, as per a joint report by KPMG-CII. The report anticipates bank credit to increase at a compound annual growth rate (CAGR) of 17 per cent in the medium term which will lead to better credit penetration. Life Insurance Council, the industry body of life insurers in India, has also estimated a CAGR of 12-15 per cent over the next few years for the segment.

Exchange Rate Used- INR 1 = US$ 0.0166 as on July 25, 2014. The global slowdown has taken its toll on Indian economy. Besides, the domestic economy too is having its own set of problems. High inflation, subdued growth, slowing investments, undesirable current account deficit levels, high fiscal deficit and battered currency have together made the growth visibility rather muted.

The banking sector, being the barometer of the economy, has succumbed to these challenges. Amidst this challenging scenario, the Indian banking system is continues to deal with improvement in operational efficiency and execution of prudent risk management practices.

Indian banking industry, valued at Rs 77 trillion (Source- IBEF), is growing at a slower pace and plagued by bad loans. In what could be termed as a challenging year, FY 13 witnessed steep increase in bad loans of Indian banks and turning them skeptical to extend loans to companies. As a share of sector loan book, the bad loans have gone up from 1.3% in March 2009 to 3.4% in March 2013. Public sector banks that account for 60% of the total banking assets have been the worst hit vis-a-vis its private and foreign counterparts.

Key Points:

1. Supply – Liquidity is controlled by the Liquidity is controlled by the Reserve Bank of India (RBI).

2. Demand – India is a growing economy and demand for credit is high though it could be cyclical.

3. Barriers to Entry- Licensing requirement, investment in technology and branch network, capital and regulatory requirements.

4. Bargaining Power of Suppliers- High during periods of tight liquidity. Trade unions in public sector banks can be anti-reforms and orchestrate strikes. Depositors may invest elsewhere if interest rates fall.

Financial Year 2013:

i. The central statistical organization (CSO) reported the lowest real GDP growth at 5% during FY13. This growth stands lowest in the decade and even weaker than the recorded during the first year of global financial crisis. Banking sector, being inextricably linked to the economy, stood in a state of limbo for major part of FY13.

ii. During FY 13, the gross bank credit grew at a slower pace recording 15.1% YoY growth as against 17.3% a year ago. The numbers also stood below RBI’s projections for FY13. Sluggish demand conditions, weak monetary policy transmission, poor asset quality and debilitating macro-economic conditions led to lower credit growth during FY13.

iii. Except retail, the slowdown in credit was witnessed across sectors such as agriculture, industry and service segments. The RBI data reveals that retail trade and credit card outstanding were the only buoyant segments during FY13. Mid-sized businesses and loans for professional services were the worst hit.

iv. Against a backdrop of GDP growth deceleration, weak IIP data and persistent inflation during FY13, banks became more risk averse to lending credit. This deceleration also reflected banks’ risk aversion in face of rising NPAs and increased leverage of corporate balance sheets. The deceleration was observed across all bank groups, being high for PSUs and private sector banks, which jointly account for above 90% of the total bank credit.

v. The RBI had administered a 1% repo rate cut and injected liquidity through CRR and SLR cuts as also through open market operations during FY13. However, banks have only cut their base rate by meager 0.25%- 0.30% owing to the liquidity constraints and weak deposit growth.

vi. The aggregate deposits grew marginally to 14.2% at the end of March 2013 as against 13.8% in FY12. The growth differential between deposit and credit continued to hover between 2-3% with deposit growth outpacing the credit growth. The credit-deposit ratio was recorded at 78.1% during the same period. This ensured tight liquidity conditions during the whole of the FY13.

vii. CASA, the cheap source of funds for banks, also remained sluggish for the major part of FY13. The elevated interest rates during FY 13 led to migration of money from CASA deposits to fixed deposits.

viii. Slower loan growth and weak CASA accretion resulted in margin (NIM) pressures for the banking industry. Furthermore, lower NIMs combined with higher credit costs that were earmarked for the bad and restructured loans dampened the earnings performance of Indian banks during FY13.

ix. The sharp industrial slowdown during FY 12 and FY 13 took a toll on the asset quality of the banks. Gross NPAs of 40 listed banks went up by 43.1% from levels a year ago. The restructured book also spiked up dramatically with recast assets under CDR standing around 50% more than the previous year. The repercussions were largely felt by public sector banks as they were the ones to support the productive sectors of the economy.

As per the census of 2011, 58.7% of households are availing banking services in the country. There are 102,343 branches of Scheduled Commercial Banks (SCBs) in the country, out of which 37,953 (37%) bank branches are in the rural areas and 27,219 (26%) in semi-urban areas, constituting 63% of the total numbers of branches in semi-urban and rural areas of the country.

However, a significant proportion of the households, especially in rural areas, are still outside the formal fold of the banking system. To extend the reach of banking to those outside the formal banking system, Government and Reserve Bank of India (RBI) are taking various initiatives from time to time some of which are enumerated below:

x. Opening of bank branches – Government had issued detailed strategy and guidelines on Financial Inclusion in October 2011, advising banks to open branches in all habitations of 5,000 or more population in under-banked districts and 10,000 or more population in other districts. Out of 3,925 such identified villages/habitations, branches have been opened in 3,402 villages/habitations (including 2,121 Ultra Small Branches) by end of April, 2013.

xi. Business Correspondent model – With the objective of ensuring greater financial inclusion and increasing the outreach of the banking sector, banks were permitted by RBI in 2006 to use the services of intermediaries in providing financial and banking services through the use of Business Facilitators (BFs) and Business Correspondents (BCs). Business correspondents are retail agents engaged by banks for providing banking services at locations other than a bank branch/ATM.

BCs and the BC agents (BCAs) represent the bank concerned and enable a bank to expand its outreach and offer limited range of banking services at low cost, particularly where setting up a brick and mortar branch is not viable. BCs as agents of the banks, thus, are an integral part of the business strategy for achieving greater financial inclusion. Banks had been permitted to engage individuals/entities as BC like retired bank employees, retired teachers, retired government employees, ex- servicemen, individual owners of kirana/medical/fair price shops, individual Public Call Office (PCO) operators, agents of Small Savings Schemes of Government of India, insurance companies, etc.

Further, since September 2010, RBI had permitted banks to engage “for profit” companies registered under the Indian Companies Act, 1956, excluding Non-Banking Financial Companies (NBFCs), as BCs in addition to individuals/ entities permitted earlier. According to the data maintained by RBI, as in December, 2012, there were over 152,000 BCs deployed by Banks. During 2012-13, over 183.8 million transactions valued at 165 billion (US$2.7 billion) had been undertaken by BCs till December 2012.

xii. Swabhimaan Campaign – Under “Swabhimaan” — the Financial Inclusion Campaign launched in February 2011, banks had provided banking facilities by March, 2012 to over 74,000 habitations having population in excess of 2000 using various models and technologies including branchless banking through Business Correspondents Agents (BCAs).

Further, in terms of Finance Minister’s Budget Speech 2012-13, the “Swabhimaan” campaign has been extended to habitations with population of more than 1,000 in North and to habitations which have crossed population of 1,600 as per census 2001. About 40,000 such habitations have been identified to be covered under the extended “Swabhimaan” campaign.

xiii. Setting up of ultra-small branches (USBs) – Considering the need for close supervision and mentoring of the Business Correspondent Agents (BCAs) by the respective banks and to ensure that a range of banking services are available to the residents of such villages, Ultra Small Branches (USBs) are being set up in all villages covered through BCAs under Financial Inclusion.

A USB would comprise a small area of 100 sq ft (9.3 m2) – 200 sq ft (19 m2) where the officer designated by the bank would be available with a laptop on pre-determined days. While the cash services would be offered by the BCAs, the bank officer would offer other services, undertake field verification and follow up on the banking transactions. The periodicity and duration of visits can be progressively enhanced depending upon business potential in the area. A total of over 50,000 USBs have been set up in the country by March 2013.

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