Introduction to Indian banking industry

In India originated In the last decades of the 1 8th century. The first banks were The General Bank of India, which started In 1786, and Bank of Hindustan, which started in 1770: 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 tieback 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.

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For any years the Presidency banks acted as equals-central banks, as did their successors. The three banks merged In 1921 to form telegraph Bank of India, which. Upon Indian’s independence, became the State Bank of India in 1955. Role of Banks: Banks play a positive role in economic development of a country as repositories of community’s savings and as purveyors of credit. Indian Banking has aided the economic development during the last fifty years in an effective way. The banking sector has shown a remarkable responsiveness to the needs of planned economy.

It has brought about a considerable progress In Its efforts at deposit manipulation and as taken a number of measures In the recent past for accelerating the rate of growth of deposits. As recourse to this, the commercial banks opened branches in urban, semi-urban and rural areas and have introduced a number of attractive schemes to foster economic development. The activities of commercial banking have growth in multi-directional ways as well as multi-dimensional manner.

Banks have been playing a catalytic role In area development, backward area development, extended assistance to rural development all along helping agriculture, Industry, international trade in a significant manner. In a way, commercial banks have emerged as key financial agencies for rapid economic development. By pooling the savings together, banks can make available funds to specialized institutions which finance different sectors of the economy, needing capital for various purposes, risks and durations.

By contributing to government securities, bonds and debentures of term-lending institutions In the fields of agriculture, Industries and now housing, banks are also providing these Institutions with an access to the common pool of savings embroiled by them, to that extent relieving them of the responsibility of erectly approaching the saver. This intermediation role of banks is particularly important in the early stages of economic development and financial specification.

A country like India, with different regions at different stages of development, presents an interesting spectrum of the evolving role of banks, in the matter of Inter-mediation and beyond. Manipulation of resources forms an Integral part of the development process In India. In this process of manipulation, banks are at a great advantage, chiefly because of their network of branches in the country. And banks have to place inconsiderable reliance on the manipulation of deposits from the public to finance development programmers.

Further, deposit manipulation by banks in India acquired greater significance in their new role in economic development. Commercial banks provide short-term and medium-term financial assistance. The short-term credit for the acquisition of land, construction of factory premises and purchase of machinery and equipment. These loans are generally granted for periods ranging from five to seven years. They also establish letters of credit on behalf of their clients favoring suppliers of raw materials/machinery (both Indian and foreign) which extend the banker’s assurance for payment and thus help their delivery.

Certain transaction, particularly those in contracts of sale of Government Departments, may require guarantees being issued in lieu of security earnest money deposits for release of advance money, supply of raw materials for processing, full payment of bills on the assurance of the performance etc. Commercial banks issue such guarantees also. History Merchants in Calcutta established the Union Bank in 1839, but it failed in 1840 as a ensconce of the economic crisis of 1848-49.

The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. Mint Stock Bank: A company that issues stock and requires shareholders to be held liable for the company’s debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Similar. Foreign banks too started to app, particularly in Calcutta, in the asses.

The Competitor ‘Compete De Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Benedictory, then a French colony, followed. HASH 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. The first entirely Indian Joint stock bank was the Duh Commercial Bank, established in 1881 in Buzzard. It failed in 1958. The next was the Punjab National Bank, established inhaler in 1895, which has survived to the present and is now one of the largest banks in India.

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 presidency banks dominated banking in India but there were also some exchange banks and a number of Indian Joint stock banks. All these banks operated in different segments of the economy.

The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian Joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. This segmentation let Lord Curran to observe, “In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship, divided by solid wooden bulkheads into separate and cumbersome compartments. ” The period between 1906 and 1911, saw the establishment of banks inspired by the Swedish movement.

The Shades’ 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 Bank and Central Bank of India. The fervor of Swedish movement lead to establishing of many private banks in Dashing Kananga and UDP district which were unified earlier and known by the name South Canard ( South Kanata ) district. Four nationalized banks started in this district and also a leading private sector bank. Hence undivided Dashing Kananga district is known as “Cradle of Indian Banking”.

During the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were Hellenizing for Indian banking. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table Years Number of banks that failed Authorized capital (RSI. Lash) Paid-up Capital (RSI.

Lash) 1913 12274 35 1914 42710 109 1915 11565 1916 13 231 4 1917 9 7625 19187 209 1 OBJECTIVES OF STUDY To study the various development banks operating in India To give glance at the irking of development banks To find out the role of development banks in Indian financial system To check the contribution of development banks in economic growth The researcher can gather primary data, secondary data or both. Secondary data are data that were collected for another purpose and already exist somewhere. Primary data are data specially gathered for a specific purpose or for a specific research project.

Since the study is based on already existing facts and figures, so all the sources of data are secondary SECONDARY DATA The main source of information for he study was Weakly magazines RIB bulletin Information available in form of articles Information available on internet CONCLUSION Development bank plays a very important role in economic development of our country There basic objective is to assist the development in country which perform by proving every kind of help possible I. E. Financial, advisory, technological etc.

It also helps in showing the various schemes that banks have and their whole procedure to provide the assistance to people In this study four major development banks in India are taken into research work I. E. DIB, FOCI, SIDE, and INBOARD. All the schemes, assistances and programs are studied and highlighted. Every bank differs from his objective with each other so as the assistance provided by the Every bank has separate guidelines and management to take care of activities which are performing and work areas are also different, although their main motive is same which the development of country through balanced economic growth.

LIMITATIONS OF STUDY Although lots of care and efforts are made to ensure the fault free study but still there remains certain limitations which possibly may occur such as Lack of time acted as constraint in study Lack of development banks in near by areas also acts as constraint as it’s not possible to get the real exposure. Researcher limitations in knowledge are also the limitations of study. The study is based on secondary data so any kind of discrepancy in that will cause same in the study Research methodology is a way to solve the research problem systematically.

It includes the methods required for systematic analysis and logical interpretation of empirical evidence. So, it covers the scope/population of the study, sample size, selection of sample, source of data collection, tools and techniques used for the analysis, interpretation and presentation of data and limitations of study. 3. 1 Objectives of the Study are: – 1 . To examine the role of merchant banking in promoting capital market in India. 2. To study the rules and regulations of SIB for merchant bankers as issue managers. 3.

To evaluate the performance of the merchant bankers. 4. To study the marketing aspects of the merchant bankers relating to the issue. 5. To study the effectiveness of pricing of the ‘issues’ (as determined by issuing company and the merchant banker). 6. To make appropriate recommendations to merchant bankers for improving their reference 3. 2 Scope/Population of the Study In order to examine the role of merchant bankers in the management of public issues in India, a period of twelve years from 1997-98 to 2008-09 has been taken.

During this period, a total of 685 public issues (618 equity issues and 67 debt issues) and 330 rights issues have been floated. All these have been considered for evaluation of performance of merchant bankers. Similarly, a number of merchant bankers stood registered with SIB at different points of time during the period under review. All these merchant bankers form the universe of the present study. Major thrust of the study has been on the performance evaluation of merchant bankers in the management of public issues. . 3 Sample Size All the SIB registered merchant bankers were not involved in the issue management activities during the period under review. So the sample of merchant 64 bankers consists of those, who were associated with public issue management activities in any capacity during the period. Similarly, for the analysis of pricing of public issues, 234 initial public offerings (Ipso) of equity shares listed with National Stock Exchange (NOSE) during the period from 997-98 to 2006-07 have been taken into consideration.

Further public offerings (Fops) of equity shares have been excluded for measuring the return to the investors as the shares are already listed on the stock exchange and the determination of issue price of Fops by merchant bankers is largely influenced by the market prices prevailing at the time of issue. Majority of previous studies on pricing performance of Ipso have been based on the BASE prices. In the present study, NOSE has been selected for the measurement of return to the investors from Ipso as it has emerged as the dominant stock exchange n the country. 3. 4 Collection of Data The present study is based on secondary data.

Data have been collected from the offer documents/ Red Herring Prospectuses of the issuer companies, BASE official Securities Market of SIB, Annual Reports of RIB, Reports on Currency & Finance, RIB Handbook of Statistics on Indian economy, Prime Directories, Economic Survey and One’s Indian Securities markets- A Review etc. A good amount of data has also been collected from different Journals like Capital Market Review, SIB Bulletin, Dalai Street, Chartered Financial Analyst, Portfolio Organizer, Economic & Political Weekly, Economic Survey, Chartered Accountant and Finance India etc.

Various financial newspapers, press notes, publications of various merchant bankers have also been consulted. Besides this, the websites of SIB, NOSE, BASE, RIB and a number of other agencies has been searched for getting the latest data and information related to the study. 3. 5 Tools and Techniques used for Analysis and Presentation In the present study, statistical tools such as average, percentage, rate of return, standard deviation, coefficient of variation and simple regression analysis have been employed for the analysis of data and to draw meaningful conclusion therefore.

A number of analytical tables and charts have been constructed for the effective 65 presentation of the results of analysis. Various tools and techniques used in the study have been discussed below: 3. 5. 1 Performance Evaluation in Management of Public Issues The performance of individual Indian and foreign based merchant bankers, who acted as lead managers to the public and rights issues have been analyses with respect to number of issues handled, amount raised, percentage of total amount raised during the period under review. Generally a single merchant banker has been appointed as lead manager to the issue.

However, multiple lead managers/ book runners lead managers having equal role in the issue management activities have also been appointed in a number of large issues. In order to avoid duplication in such cases, the amount raised has been apportioned equally to all lead managers and the number of that particular issue has been assigned to the first lead manager in the list of such lead managers. 3. 5. 2 Performance of Merchant Bankers in Underwriting of Public Issues Under this part of the study, pattern of underwriting of public issues has been analyses.

The offer documents of companies stated the actual amount underwritten by different merchant bankers in a particular issue. Year wise total amount and percentage of this amount to total amount underwritten has been found for individual merchant bankers in the category of Indian and foreign based merchant bankers. The merchant bankers have been ranked on the basis of total amount and proportion of total amount underwritten during the period under review. Rights issues have not been considered for this purpose as only a few of the rights issues have been found to have underwritten during the period of study. . 5. Rate of Return Analysis Performance of individual lead managers on the basis of average return obtained by investors (difference of issue price and market price) from NOSE listed Ipso at six points of time, that is, return on first trading day (listing day), after one week, one month, three months, six months and twelve months from the first trading day has been measured with the help of following steps: (a) Number of Ipso managed by individual merchant bankers period under review has been assigned to that merchant bankers, whether 66 they have managed it individually or Jointly with other merchant bankers.

Merchant bankers acting as lead managers(s)/Book runner lead manager(s) only have been considered for this analysis. (b) Return from individual PIP The simple return from individual PIP of equity share has been found out at six intervals of time as stated above with the help of the following formula: Simple return = (closing market price on return date – issue price) x 100 Issue Price Share prices of NOSE at the return date have been taken for this purpose.

When a return date happens to be a holiday or no trading day at NOSE, then share prices of the next available date have been taken for finding out the return. Closing market price on the stated day has been taken for this purpose. (c) Average return of Ipso managed by individual merchant bankers Separate positive and negative average returns of Ipso managed by individual merchant bankers have been calculated at different intervals of time. This average has been measured with the following formula: Sum of (+eve)/ (-eve) annual return * No. F Ipso showing (+eve)/ (-eve) return Further, average annual return has been calculated at each point of time for the respective lead manager (merchant banker). Then total average annual return from Ipso managed by individual merchant banker has been measured by dividing the total of average returns for the period under review at each time interval by the number of years, individual merchant banker participated as lead manager in sample Ipso. D) Average Market Return from NOSE Ipso For this purpose, first of all annual average return from total NOSE listed Ipso have been calculated for each time intervals, that is, return on first trading day (listing day), after one week, one month, three months, six months and twelve months from the first trading day. Then total average return is calculated by aggregating the average annual return at each point of time and dividing it by the number of years of study I. E. Ten. This has been shown in the annexed. 7 (e) Average annual index return (based on NIFTY) Average annual index return for each financial year during the period under review (based on NIFTY) for the purpose of comparative analysis has been calculated as follows: (Index at the close of the year – Index in the opening of the year) Oslo Opening Index (f) Simple linear regression Analysis Regression is the determination of a statistical relationship between two or more variables. A simple linear regression is confined to two variables only. In this type of regression analysis, the value of one variable is estimated on the basis of the value of another variable.

In the present study, this analysis is used to measure the impact of average annual index return and average annual market return of Ipso on the average annual returns of Ipso managed by individual merchant bankers. The regression equation takes the form of:- Y = boo + big merchant bankers (dependent variable), ‘X’ the average annual index return and annual market return of Ipso (independent variable), ‘boo’ is the intercept and ‘b” is he regression co-efficient of independent variable in the regression model. . 5. 4 Analysis of Investors’ response to the Public Issue Year wise and lead manager wise subscription ratio (number of times issue subscribed) have been analyses separately by retail investors and by all categories of investors with the help of following statistical tools: (a) Arithmetic Mean It is the most common measure of central tendency and may be defined as the value which is obtained by dividing the sum of the values of various given items in a series by the total number of items.

X (Arithmetic Mean) XSL +XX+XX+ …….. Oxen N Where .. Oxen = Value of items N = total number of items 68 This method has been used to measure the year wise and merchant banker wise subscription ratio of public issues of equity by retail investors and by all categories of investors. Subscription ratio has been calculated as follows: Annual Subscription Ratio = Sum of number of times oversubscribing of all + Number of Public Issues in a year. Public issues in a year Subscription ratio of public issues managed by individual merchant banker has been calculated as: Sum of times of subscription of all public issues managed by individual merchant banker + No. F public issues managed by particular merchant banker. (b) Standard Deviation Standard deviation is the commonly used measure of dispersion. It is defined as the square root of the average of squares of deviations, when such deviations for the values of individual items in a series are obtained from the arithmetic mean.

It is calculated as under: = the standard deviation 0 = each value in the population 0 = the mean of the values N = the number of values (the population) This method has been used to measure the dispersion in the subscription (scatterings in the level) of public issues. It has been calculated on yearly basis parallel for subscription level of retail investors and for all categories of investors. Similarly standard deviation and co-efficient of variation of subscription level of public issues managed by individual merchant bankers during the period under review has also been calculated for retail investors and for all categories of investors. 9 (c) Co-efficient of Variation Coefficient of variation is a relative measure of dispersion and is often used for comparing the similar measures of other series. It is calculated as follows: Arithmetic Mean The standard deviation alongside relative measure like co-efficient f variation is regarded as a very satisfactory measure of the scatterbrained of a series. It has been used to measure the year wise and merchant wise scatterings in the subscription of public issues during the period under review.

A high degree of standard deviation and coefficient of variation in the subscription ratio of public issues indicates that wide variation in the subscription of different public issues in a year and also by different public issues managed by individual merchant bankers. 3. 6 Presentation of Data In the present study, the data has been presented in the following ways: (a) Tabular Form Simple as well as two way frequency tables along with percentage and average have been prepared to analyses the data relating to the primary market and performance of merchant bankers in the management of public issues. B) Bar Charts Bar charts have been constructed to present the number of issues floated, amount raised through public issues and the average return obtained by investors through different merchant bankers( lead managers) at different points of time covered by the study (c) Pie Chart Pie charts have been prepared to show the amount of public issues underwritten by arioso categories of underwriters and by Indian and foreign based merchant bankers, percentage of amount of equity issues managed by Indian and foreign based merchant bankers etc. . 7 Chapter Scheme The present study is an endeavourer to evaluate the role of merchant banks as ‘Issue manager’ in India. The analysis and evaluation is based on secondary data. The present study has been divided into eight chapters. 70 Chapter one is introductory in nature and discusses the origin and growth of merchant banking in India especially after 1997. It further provides the overview of remarry market in India with special reference to the period from 1997-98 to 2008-09.

The reviews of the selected studies in India and abroad covering various aspects of primary market and the role of merchant bankers in primary market has been covered in the second chapter. Chapter three entitled ‘Research Methodology explains the scope of the study, data collection and statistical tools for analysis and limitations of study. Chapter four evaluates the performance of merchant bankers with respect to management of public and rights issues.

Performance of merchant bankers with respect to underwriting activities of Indian ND foreign based merchant banker has been covered in the fifth chapter. Chapter six examines the pricing mechanism of public issues by merchant bankers. It evaluates the performance of different lead managers with respect to determination of issue price of Ipso listed at National Stock Exchange. Average return from Ipso earned by investors from Ipso managed by Individual merchant bankers have also been analyses at different points of time in the chapter.

Management aspect of merchant bankers relating to marketing aspects of public issues and investors’ Chapter eight entitled ‘Findings and Suggestions’ summarizes the findings of the duty. An attempt has been made to draw the conclusions from the present study and suggest measures to improve the working of merchant bankers with respect to issue management activities. 3. 8 Limitations of the Study The followings are the limitations of the present study: 1. The study is based on secondary data.

So, the limitations of secondary data may also creep in and have an impact on the present study also. 2. Merchant bankers perform a variety of functions. The present study is limited to the role of merchant bankers in the management of public issue only. 3. The study covers the public issues of equity and debt in India. Private Placement and Euro issues have not been covered by the study. 4. All the figures have been taken at current prices. The impact of price level accounting has not been taken care of. INTRODUCTION The banking system is an integral part of any economy.

It is one of the many institutions that impinges on the economy and affect its performance. Economists have expressed a variety of opinions on the effectiveness of the banking systems in promoting or facilitating economic development. As an economic institution, the bank is expected to be more directly and more positively related to the performance of the economy than most non-economic institutions. Banks are considered to be the mart of the world, the nerve centre of economies and finance of a nation and the barometer of its economic perspective.