| This
article is not just confined to the innovations, which the
Indian banks have undertaken. It is a remarkable tale of countless
diversifications and innovations introduced by banks in all
their functional areas with a view to upgrading their performance.
PARTICIPATION
CERTIFICATES & INTER-BANK PARTICIPATIONS
The
RBI introduced Participation Certificates (PCs) in April 1970,
with the objectives of greater mobilization of funds, reducing
options for the RBI, and diversifying the availability of
financial instruments. The PC is an instrument; whereby a
bank can sell to a third party a part or all of a loan made
by the bank to a client. These certificates had become very
popular in 1978 and 1979 after which the RBI advised banks
to achieve a significant and lasting reduction in their options
to PCs. As a result, the use of PCs went down drastically
after 1980. The PCs scheme was replaced by two types of Inter-Bank
Participations (IBPs), one on risk-sharing basis and the other
without it. These were strictly inter-bank instruments confined
to scheduled commercial banks excluding Regional Rural Banks
(RRBs). Their purpose was to even out short-term liquidity
within the banking system. The IBPs with risk sharing could
be issued for 91-180 days, and the rate of interest on them
was fixed by participating banks subject to a minimum of 14
percent per annum. The IBPs without risk sharing was a money
market instrument with a maturity not exceeding 90 days and
the rate of interest on them was fixed by banks subject to
a ceiling of 12.5 percent per annum. This ceiling was removed
with effect from 1 May 1989. The IBPs without risk were treated
as part of the net demand and time liabilities of the borrowing
banks and were subject to CRR and SLR requirements. Only a
few banks issued IBPs with risk sharing for small amounts.
IBPs with a maturity of 3 months were preferred by the investors.
The interest rates ranged between 14 to 17 percent per annum.
CONSORTIUM
APPROACH
This
approach to lending was introduced by the RBI in 1974. It
required that more than one bank would finance a single borrower
requiring large credit limit. It (a) enabled banks to spread
risk of lending, (b) broke the monopoly of big banks to have
large accounts, (c) enabled banks to share experience and
expertise, (d) introduced uniformity in approaches to lending,
(e) enabled banks to pool resources, and (f) checked multiple
financing of the same account.
Each consortium had a lead bank, which had the largest share
in the loan, which processed the loan proposal, which called
the meetings of the consortium for sanction of limits and
review of accounts, which obtained RBI permission for credit
limits, and which conducted joint inspection of the borrower’s
activities. The borrower executed a single set of documents
with the lead bank. It obtained the letter of authority from
member banks and released the initial requirements of the
borrower. Thereafter it obtained reimbursements from the member
banks to the extent of their shares in advance. If the member
banks delayed the reimbursement beyond a week, the lead bank
was entitled to charge a penal interest at the rate of 7 percent
per annum for the period of delay. This arrangement was also
called a “Single Window Lending”. When the consortium
approach was introduced in 1974, banks were required not to
invest more than 1.5 percent of their deposits, or Rs. 100
crores in one account, whichever was lower. Since March 1989,
banks were required not to lend more than 25 percent of their
capital to an individual borrower, and not more than 50 percent
to a group of borrowers.
The working of this scheme showed that banks did not adhere
to the RBI guidelines, that large banks tended to use their
weight unfairly in the consortium, that they often shielded
the borrower sidetracking the queries of participating banks,
and that there was no uniform approach to evaluate credit
proposals. It appears that banks had not really moved towards
the consortium spirit. As an alternative to the sole and multiple
banking consortium arrangement, banks are now free to adopt
syndication route, irrespective of the quantum of credit involved,
if such an arrangement suits the borrower and the financing
banks.
CREDIT
CARDS
Commercial
banks introduced a new facility, namely the credit card, at
the beginning of the 1980s. Since then, it has rapidly expanded
in terms of the number of banks offering it, the number of
member-establishments using it. The credit card is a convenient
medium of exchange, which enables its holder to buy goods
and services from member-establishments without using money.
The credit cards are issued to people having a certain minimum
income. The cardholder is required to pay neither an interest
to the bank nor a higher price for goods purchased; he pays
only a fee to the bank for the facility. The cost of arrangement
is met from the increased sales, which result from the use
of credit cards. The card-issuing bank pays to the seller
as soon as goods are sold but charges the buyer after 30 or
40 days. The bank also bears the risk that the cardholder
might default. For all this, the bank gets commission from
the seller, which is about 2.5 to 5 percent of the value of
goods sold. The gain of the bank is the extent of commission
from the seller minus the risk factor, interest factor, and
administrative-cum-advertising expenses. The cards are usually
used by elite corporate executives, businesspersons, persons
belonging to middle income groups and so on. They are used
to buy consumer durables and certain services at establishments
such as shops, hospitals, nursing homes, departmental stores,
hotels, railways, and so on.
The credit card enables its holder to minimize the use of
hard cash in some of his transactions. It extends to him a
charge privilege on flourishing a signature. It is a document
of his creditworthiness, enabling him to obtain credit at
designated establishments. By the end of 1997, more than 11
banks were issuing credit cards and the total number of cards
in use was estimated to be about 19 lakhs. The credit card
business covered about 68,000 establishments in the country,
and accounted for a turnover of Rs. 3,000 crores in 1997.
The latest generation cards available in India at present
include ATM cards, Change cards, Prepaid Mobile SIM cards,
and Smart cards. The next development about to take place
in this line of business is the introduction of electronic
“Smart Point”.
NEW
TECHNOLOGY IN BANKING
The
importance of sophisticated or high technology for improving
customer service, productivity, and operational efficiency
of banks is well recognized. As a part of their action plans,
banks in India have introduced many new techniques and a considerable
degree of mechanization and computerization in their operations.
By the end of June 1996, they had installed 13,522 Advance
Ledger Posting Machines (ALPM) at 4,238 branches, and 895
mini computers at their regional and zonal offices at 441
branches. Three banks had installed mainframe computers and
others were at various stages of doing so. They are developing
and standardizing suitable computer software in a big way.
They have introduced mechanized cheque clearance, using magnetic
ink character recognition (MICR) technology. The computerization
of clearing house settlement has been completed at a number
of centers. They are in the process of setting up exclusive
data communication network for banks known as BANKNET.
STOCK-INVEST
It
is a new financial instrument, which was introduced by banks
in 1992 to facilitate investment in industrial securities
in the primary market. It helps to replace the present cumbersome
process of refunding application money if securities are not
allotted. The stock-invest is a kind of guaranteed cheque
issued by a bank against the deposits maintained by the investor,
in lieu of cash, personal cheque, or draft. It ensures that
the investors’ application money remains in the deposit
account under lien to the bank. When it is used, money is
not withdrawn by the bankers till the time of allotment. In
the case of a normal cheque, it is encashed by them within
a week. It blocks the money in the bank account, fetching
interest to the account holder till the time of allotment
at the fixed deposit rate. The stock-invest is issued against
the special account to be opened with the bank, and it is
as liquid as a savings bank account. The banks can issue stock-invest
against savings or current account of the investor.
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