PRIVATE SECTOR BANKS by RAJI

ANALYSIS OF PRIVATE SECTOR BANKS






SUBMITTED BY:
RAJI.S
1ST SEMESTER MBA
ICM
TRIVANDRUM



ABSTRACT
PRIVATE SECTOR BANKS
The financial reforms launched during the early 1990s have dramatically changed the banking scenario in the country. New prudential norms, such as capital adequacy prescriptions, identification of bad debts, provision requirements, etc., were enforced; and interest rates were deregulated. . RBI permitted new banks to be started in the private sector as per the recommendation of Narashiman committee. The Indian banking industry was dominated by public sector banks. But now the situations have changed new generation banks with used of technology and professional management has gained a reasonable position in the banking industry.

























1. INTRODUCTION
Banks are institutions that deal with money, their business is finance, and their stock in trade is currency and credit. Banking is called the “LIFE BLOOD” of trade and commerce. It acts as a vehicle for socio-economic transformation and also as a catalyst to economic growth. It plays an important role in mobilizing the nation’s savings and in channelising them into high investment priorities and better utilization of available resources.The Indian banking has registered rapid expansion during the post nationalization period in terms of branch network, deposit metabolism and credit deployment.
INDIAN BANKING SYSTEM




2. PRIVATE SECTOR BANKS
Private Banks are banks that are not incorporated. A private bank is owned by either an individual or a general partner(s) with limited partner(s).
Indian private sector banks are incorporated in India and their shares and ownerships is held by business houses individuals. Majority of these banks are old generation private sector banks which have a small balance sheet size, limited regional operation and traditional style of management and business activities.
New generation private sector banks, incorporated post 1994 are technology driven and have a modern style of functioning, thus achieving a level of parity with that of foreign banks operating in India. Some of these have expanded to enable country wide operations, on account of mergers and acquisitions.
The first private bank in India to be set up in Private Sector Banks in India was IndusInd.The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited, to set up a bank in the private sector banks in India as part of the RBI's liberalisation of the Indian Banking Industry. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled Commercial Bank in January 1995.The largest private sector bank is ICICI.
List of Private Banks in India
• Bank of Punjab
• Bank of Rajasthan
• Catholic Syrian Bank
• Centurion Bank
• City Union Bank
• Dhanalakshmi Bank
• Development Credit Bank
• Federal Bank
• HDFC Bank
• ICICI Bank
• IDBI Bank
• IndusInd Bank
• ING Vysya Bank
• Jammu & Kashmir Bank
• Karnataka Bank
• Karur Vysya Bank
• Laxmi Vilas Bank
• South Indian Bank
• United Western Bank
• Axis Bank
FUNCTIONS
In modern times banks performs a number of functions. The functions of private banks are divided into two categories:
i) Primary functions, and
ii) Secondary functions including agency functions.
i) Primary functions:
The primary functions of a bank include:
a) Accepting deposits; and
b) granting loans and advances;
a) Accepting deposits
The most important activity of a bank is to mobilize deposits from the public. People who have surplus income and savings find it convenient to deposit the amounts with banks. Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more funds with the bank. There is also safety of funds deposited with the bank.
b) Grant of loans and advances
The second important function of a bank is to grant loans and advances. Such loans and advances are given to members of the public and to the business community at a higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans and advances varies depending upon the purpose, period and the mode of repayment. The difference between the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a bank’s income.
i) Loans
A loan is granted for a specific time period. Generally, banks grant short-term loans. But long term loans, that is, loan for more than a year, may also be granted.
The borrower may withdraw the entire amount in lump sum or in instalments.However, interest is charged on the full amount of loan. Loans are generally granted against the security of certain assets. A loan may be repaid either in lump sum or in instalments.
ii) Advances
An advance is a credit facility provided by the bank to its customers. It differs from loan in the sense that loans may be granted for longer period, but advances are normally granted for a short period of time. Further the purpose of granting advances is to meet the day to day requirements of business. The rate of interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not on the sanctioned amount.
Modes of short-term financial assistance
Banks grant short-term financial assistance by way of cash credit, overdraft and bill discounting.
a) Cash Credit
Cash credit is an arrangement whereby the bank allows the borrower to draw amounts upto a specified limit. The amount is credited to the account of the customer. The customer can withdraw this amount as and when he requires. Interest is charged on the amount actually withdrawn. Cash Credit is granted as per agreed terms and conditions with the customers.
b) Overdraft
Overdraft is also a credit facility granted by bank. A customer who has a current account with the bank is allowed to withdraw more than the amount of credit balance in his account. It is a temporary arrangement. Overdraft facility with a specified limit is allowed either on the security of assets, or on personal security, or both.
c) Discounting of Bills
Banks provide short-term finance by discounting bills, that is, making payment of the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds without waiting for the date of maturity of the bills. In case any bill is dishonored on the due date, the bank can recover the amount from the customers.

ii) Secondary functions
Besides the primary functions of accepting deposits and lending money, banks perform a number of other functions which are called secondary functions. These are as follows -
a) Issuing letters of credit, traveller’s cheques, circular notes etc.
b) Undertaking safe custody of valuables, important documents, and
Securities by providing safe deposit vaults or lockers;
c) Providing customers with facilities of foreign exchange.
d) Transferring money from one place to another; and from one
branch to another branch of the bank.
e) Standing guarantee on behalf of its customers, for making
Payments for purchase of goods, machinery, vehicles etc.
f) Collecting and supplying business information;
g) Issuing demand drafts and pay orders; and,
h) Providing reports on the credit worthiness of customers.
ECONOMIC FUNCTIONS
The economic functions of banks include:
1. Issue of money, in the form of banknotes and current accounts subject to cheque or payment at the customer's order. These claims on banks can act as money because they are negotiable and/or repayable on demand, and hence valued at par. They are effectively transferable by mere delivery, in the case of banknotes, or by drawing a cheque that the payee may bank or cash.
2. Netting and settlement of payments – banks act as both collection and paying agents for customers, participating in interbank clearing and settlement systems to collect, present, be presented with, and pay payment instruments. This enables banks to economise on reserves held for settlement of payments, since inward and outward payments offset each other. It also enables the offsetting of payment flows between geographical areas, reducing the cost of settlement between them.
3. Credit intermediation – banks borrow and lend back-to-back on their own account as middle men
4. Credit quality improvement – banks lend money to ordinary commercial and personal borrowers (ordinary credit quality), but are high quality borrowers. The improvement comes from diversification of the bank's assets and capital which provides a buffer to absorb losses without defaulting on its obligations. However, banknotes and deposits are generally unsecured; if the bank gets into difficulty and pledges assets as security, to raise the funding it needs to continue to operate, this puts the note holders and depositors in an economically subordinated position.
5. Maturity transformation – banks borrow more on demand debt and short term debt, but provide more long term loans. In other words, they borrow short and lend long. With a stronger credit quality than most other borrowers, banks can do this by aggregating issues (e.g. accepting deposits and issuing banknotes) and redemptions (e.g. withdrawals and redemptions of banknotes), maintaining reserves of cash, investing in marketable securities that can be readily converted to cash if needed, and raising replacement funding as needed from various sources (e.g. wholesale cash markets and securities markets).




3. FOREIGN BANKS
Foreign banks are banks incorporated abroad but granted license by RBI to conduct banking business in India through their Indian branches. While the foreign banks in India outnumber the private sector banks, the branch network of the former is smaller and confined mostly to the metropolis and big commercial centres.Their operations are technology driven and a good part of their business comprises foreign exchange,trade finance and merchant banking, which augments their income and income per branch and per worker.
Foreign banks have brought latest technology and latest banking practices in India. They have made Indian Banking system more competitive and efficient. Government has come up with a road map for expansion of foreign banks in India
the road map has two phases. During the first phase between March 2005 and March 2009, foreign banks may establish a presence by way of setting up a wholly owned subsidiary (WOS) or conversion of existing branches into a WOS. The second phase will commence in April 2009 after a review of the experience gained after due consultation with all the stake holders in the banking sector. The review would examine issues concerning extension of national treatment to WOS, dilution of stake and permitting mergers/acquisitions of any private sector banks in India by a foreign bank.
List of Foreign Banks in India
• ABN-AMRO Bank
• Abu Dhabi Commercial Bank
• Bank of Ceylon
• BNP Paribas Bank
• City Bank
• China Trust Commercial Bank
• Deutsche Bank
• HSBC
• JPMorgan Chase Bank
• Standard Chartered Bank
• Scotia Bank
• Taib Bank

By the year 2009, the list of foreign banks in India is going to become more quantitative as number of foreign banks is still waiting with baggage to start business in India.











4. GENERAL FEATURES
This is the time when banks are offering new and innovative services, frequently in the market. The content of promotional tools should help the customer in making most valuable decision. This can be firmly said that well-designed promotional strategies are very important to promote banking services effectively. In marketing any product or service, customer satisfaction has been given the prime importance. The most frustrating aspect of bank marketing are lack of management support, lack of inter-departmental cooperation, crisis management, government intrusion and advertising & media problems
Winning new customers costs 10 times more than simply holding onto existing ones. The case should be taken in the marketing of financial services very seriously. While formulating marketing strategy, a bank should focus attention on (i) consumer sovereignty, (ii) attitude, (iii) responsiveness and personal skills of bank staff, (iv) revitalizing the marketing department, (v) top management support to the marketing department, (vi) participation of marketing personnel in key bank decisions .
ENTRY REGULATION
The requirements for the issue of a bank license vary between jurisdictions but typically include:
1. Minimum capital
2. Minimum capital ratio
3. 'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or senior officers
4. Approval of the bank's business plan as being sufficiently prudent and plausible.
5. INDUSTRIAL ATTRACTIVENESS
• e-banking and mobile banking provides easy access of money
• Branch openings have been at a higher rate during 2000-2010 than 1990- 2000.Opening of large number of new branches provides many job opportunities.
• ATM, zero balance account, credit card and debit card facilities also attracts the consumers.
BANKING CHANNELS
Banks offer many different channels to access their banking and other services:
• A branch, banking centre or financial centre is a retail location where a bank or financial institution offers a wide array of face-to-face service to its customers.
• ATM is a computerised telecommunications device that provides a financial institution's customers a method of financial transactions in a public space without the need for a human clerk or bank teller. Most banks now have more ATMs than branches, and ATMs are providing a wider range of services to a wider range of users. For example in Hong Kong, most ATMs enable anyone to deposit cash to any customer of the bank's account by feeding in the notes and entering the account number to be credited. Also, most ATMs enable card holders from other banks to get their account balance and withdraw cash, even if the card is issued by a foreign bank.
• Mail is part of the postal system which itself is a system wherein written documents typically enclosed in envelopes, and also small packages containing other matter, are delivered to destinations around the world. This can be used to deposit cheques and to send orders to the bank to pay money to third parties. Banks also normally use mail to deliver periodic account statements to customers.
• Telephone banking is a service provided by a financial institution which allows its customers to perform transactions over the telephone. This normally includes bill payments for bills from major billers (e.g. for electricity).
• Online banking is a term used for performing transactions, payments etc. over the Internet through a bank, credit union or building society's secure website.
• Mobile banking is a method of using one's mobile phone to conduct simple banking transactions by remotely linking into a banking network.
• Video banking is a term used for performing banking transactions or professional banking consultations via a remote video and audio connection. Video banking can be performed via purpose built banking transaction machines (similar to an Automated teller machine), or via a videoconference enabled bank branch.












6. CONCLUSION
Since the early 1990s, banking system worldwide have been going through a rapid transformation.TheRBI has given licenses to new private sector banks as part of the liberalisation process. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to industrial finance, retail trade, small business and agricultural finance.In India considerable growth has taken place in the private banking sector in last two decades. They are successful in rendering a wide range of services. The private banking sector has to play a vital role in the development of our economy.