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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.


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.


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.


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”.


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.


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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