PUBLIC SECTOR BANKING by SARANYA SASIKUMAR

A CONCISE STUDY ON
PUBLIC SECTOR BANKING IN INDIA






ASSIGNMENT - 1






Submitted to

Prof. JAYAMOHAN NAIR





Prepared and Submitted
By
SARANYA SASIKUMAR







INSTITUTE OF CO-OPERATIVE MANAGEMENT
UNIVERSITY OF KERALA
THIRUVANANTHAPURAM
CONTENTS
Page No.
Chapter 1 Introduction 03
Chapter 2 History of Banking in India 07
a) Nationalisation of Banks in India 12
b) Liberalisation 16
Chapter 3 Public Sector Banks in Iindia 19
a) Role of Banking 19
Chapter 4 An Overview of Public Sector Banks in India 24
a) An Overview 24
b) Communication Strategies with Customers 26
c) Banking Services for NRIs 27
Chapter 5 The Impact of Global Financial Crisis in India 28
Chapter 6 Strengths and Opportunities 29
Chapter 7 Threats and Constraints 30
Chapter 8 Conclusion 34




Chapter 1
INTRODUCTION
Origin of the word ‘Bank’ is attributed to the German word ‘Back’ meaning a joint stock fund. Banking system occupies an important place in any nation’s economy. It plays a pivotal role in the economic development of a country. From the time immemorial, the banker has been an integral part of Indian society. In India the money market is still characterized by the existence of both the organised and the unorganised segments. The institutions in the organised money market have grown significantly and are playing an important role for the development of the economy. The unorganised sector comprised the money lenders and the indigenous bankers.
Financial system in India has been going through a tumultuous period during the past decade. The Indian financial system consists of various institutions, instruments, markets and services. The major player in the Indian Financial System, the banking industry also underwent significant changes during this period. Nationalisation of 14 major commercial banks in 1969 and another 6 in 1980 was an important landmark in the history of Indian Banking. There came about a perceptible change in the orientation of the banking industry in India with nationalization. Banking was brought closer to the common people. The concept of class banking was replaced by mass banking. Banks which were hitherto concentrated in urban centers spread their activities to rural areas in order to make the banking facilities available to the rural population as well.
Along with the geographical expansion into rural and semi urban areas, nationalisation brought about functional diversification in the banking industry, from the erstwhile purely commercial banking to the social banking arena. This was enabled by the various policies of the Government of India and Reserve bank of India such as branch licensing policies, fixing up of qualitative targets and confessional rates of interest of various economic activities in hitherto neglected, yet socially desirable sectors such as agriculture, small scale industry, small business and exports which came to be popularly known as Priority Sectors in banking parlance. A part from the provision of directed credit to priority sectors, a major portion of the resources mobilised by banks through deposit were channelised into selected public investment through mechanism of Statutory Liquidity Ratio (S.L.R) and Cash Reserve Ratio (C.R.R).
Since nationalisation, bank industry has recorded unparalleled growth geographically and functionally throughout the country, with the task of mobilising savings of the country extending credit, with more emphasis to weaker sections. More than 70% of the branches are now situated in rural/semi urban areas catering to the banking needs of people in those hitherto unbanked area. Indian banking system came to be considered as the only banking system which could contribute much to the objectives set forth by the nation.
The opening up of the Indian economy during the late 1980s and the liberalization that followed in the 1990s put considerable strain on the Indian banking industry. Banks faced increased competition in the area of deposit mobilisation as well as profitable deployment of funds with the disintermediation that followed liberation. Interventionist policies like the administered interest rate started squeezing the profit margin of banks. In this context arose the question as to how long this performance with low profit could continue.
The situation was further aggravated with the introduction of the new norms for income recognition, asset classification and provisioning, prescribed by the Reserve Bank of India based on the recommendations of the Narasimham Committee on Financial Sector Reforms. The new accounting and prudential norms related to income recognition, assets classification and provisioning for non-performing assets implemented to make the bank balance sheets more transparent added to the strain on the profitability of banks. Many of the public sector banks viz. Bank of India, Central Bank of India, Indian bank, Uco Bank, Syndicate Bank and Punjab and Sind Bank recorded losses, consequent to the adoption of the new accounting standards.
In the case of some of the banks the entire equity was wiped and recapitalisation fund was made available by the Government of India through Union Budget. This led even to the thought of merger of public sector banks. New Bank of India which found it difficult to survive was merged with Punjab National Bank. This situation woke up the banks in India to the necessity of continuously earning profit to be commercially viable and be eligible to survive.
















Chapter 2
HISTORY OF BANKING IN INDIA




Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors.
For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reason of India's growth process.
Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980Currently, India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake), 31 private banks (these do not have government stake; they may be publicly listed and traded on stock exchanges) and 38 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively
Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money have become the order of the day.
The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below:
• Early phase from 1786 to 1969 of Indian Banks
• Nationalisation of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
• New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase III.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in india as the Central Banking Authority.
During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale specially in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country.
Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalised.
Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership.
The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:
• 1949 : Enactment of Banking Regulation Act.
• 1955 : Nationalisation of State Bank of India.
• 1959 : Nationalisation of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 : Nationalisation of 14 major banks.
• 1971 : Creation of credit guarantee corporation.
• 1975 : Creation of regional rural banks.
• 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%.
Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure.

a. Nationalisation of Banks in India

One of the main objectives of Bank nationalization was chanalising bank credits to various sectors of the economy in accordance with the socio-economic policies of the nation. The concept of social banking envisaged increased lending to sectors like agriculture, small scale industries and services with emphasis or borrowers of small mean. Borrowers in these sectors had traditionally not been assisted through institutional credit and in order to achieve the objectives of nationalization, these groups were classified as priority sector.
Over the last two decades the commercial Banks in India have expanded and diversified their lending activities with a view to establish closer report with the society. Banks are making every effort to provide financial and other types of support to the weaker sections of the community. They are thus coming nearer to the common man and their involvement in the community development has further increased. Reserve Bank of India has laid down specific guidelines, for implementation by banks in the matter of financing various sector of priority sector. The services provided by banks in this regard are designated as community banking. Reserve Bank of India has laid down targets for lending to those deserving priority sectors, which lay emphasis on increasing their participation in financing the weakest among the weaker sections of the community.
The involvement of banks in priority sector lending has grown considerably since the early seventies with the extension of the branch network of banks in the rural areas with specific emphasis on opening branches in unbanked areas.
The large volume of credit being extended to the priority sector over a wide geographic area, the considerable variety of activities being financed, the large number of schemes for specific targets groups, the number of agencies involved in drawing up programmes to facilitate absorption of credit by priority sector. The numerous increase in the number of loan accounts, are notable features of priority sector landing which have made the Indian Banking experience in this regard quite unique.
The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. It nationalised 14 banks then. These banks were mostly owned by businessmen and even managed by them.
• Central Bank of India
• Bank of Maharashtra
• Dena Bank
• Punjab National Bank
• Syndicate Bank
• Canara Bank
• Indian Bank
• Indian Overseas Bank
• Bank of Baroda
• Union Bank
• Allahabad Bank
• United Bank of India
• UCO Bank
• Bank of India

Befor the steps of nationalisation of Indian banks, only State Bank of India (SBI) was nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State Banks of India (formed subsidiary) took place on 19th July, 1960.
The State Bank of India is India's largest commercial bank and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches and it offers -- either directly or through subsidiaries -- a wide range of banking services.
The main difference between the State Bank of India and the other nationalized banks is that the State Bank of India is preponderantly owned by the Reserve Bannk of India and the nationalized banks are wholly owned by the Government of India. Among the associate banks The State Bank of Hyderabad, State Bank of Paliala and State Bank of Saurashtra are wholly owned by the State Bank while in the four associate banks the State Bank holds the majority shares.
The nationalized banks have now been called upon to play a developmental role and assist the Government in the effective implementation of socio-economic programmes aimed at mitigating the economic sufferings of the downtrodden in the country. In India the shares of the public sector banks account for over 77 per cent of offices, 86 per cent of aggregate deposits and 87 per cent of credit. In respect of advances to priority sectors the share of the public sector banks stood at 90 per cent of the total.
The second phase of nationalisation of Indian banks took place in the year 1980. Seven more banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of the banking segment in India were under Government ownership.
After the nationalisation of banks in India, the branches of the public sector banks rose to approximately 800% in deposits and advances took a huge jump by 11,000%.
• 1955 : Nationalisation of State Bank of India.
• 1959 : Nationalisation of SBI subsidiaries.
• 1969 : Nationalisation of 14 major banks.
• 1980 : Nationalisation of seven banks with deposits over 200 crores.

b. Liberalisation
In the early 1990s, the then Narsimha 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, Axis Bank(earlier as UTI Bank), 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 setup 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 49% 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 not just demanded more from their banks but also 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 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. 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. One may also expect M&As, takeovers, and asset sales.
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.














Chapter 3
PUBLIC SECTOR BANKS IN INDIA

a) Role of Banking
The role of banking in growth of the economy is sizeable and significant. Economic history indicates that banks have played a stellar role in supporting economic growth across a broad spectrum of countries. Countries such as the United States and Japan have enormously benefited from strong banking systems which not only helped the domestic economic systems to grow and prosper but also pursue international ambitions and business expansion. Among the mature economies such Germany and France, even today, banks are majorly responsible for financing growth. The recent evidence of dramatic growth of south East Asia that now enjoys the distinction of rapidly growing economic region is also on the back of massive role played by the respective banking system. There are several indicators that show the importance of banking system in the world of finance. Bank assets account anywhere upto to 50 percent of the total size of the world capital markets. Banks and Bonds account anywhere upto 85 percent of the total activity in the capital markets worldwide today The size of activity of banks is more than the size of the economy in several countries experiencing rapid economic growth. For instance, for the world as whole, bank assets to the gross domestic product is as high as 132 percent. In some regions such as the EU, it is as high as 212 percent. Several mature countries have very high bank assets/GDP ratio and these include; United Kingdom (262 percent), France (255 percent), Japan (168 percent), and Canada (152 percent) For the emerging markets, the bank/GDP ratio is subdued at about 95 perent, though, Asia has a very high ratio of 144 percent, followed by Middle East and Africa. The imperative is that banks do play a very important role in financing growth. The issue is how India could take advantage of its banking systems to pursue the desired growth of the economy.

List of Banks in India



Banking in India


Central bank
Reserve Bank of India


Nationalised banks
Allahabad Bank • Andhra Bank • Bank of Baroda • Bank of India • Bank of Maharashtra • Canara Bank • Central Bank of India • Corporation Bank • Dena Bank • IDBI Bank • Indian Bank • Indian Overseas Bank • Oriental Bank of Commerce • Punjab & Sind Bank • Punjab National Bank • Syndicate Bank • UCO Bank • Union Bank of India • United Bank of India • Vijaya Bank


State Bank Group
State Bank of India • State Bank of Bikaner & Jaipur • State Bank of Hyderabad • State Bank of Indore • State Bank of Mysore • State Bank of Patiala • State Bank of Travancore


Private banks
Axis Bank • Bank of Rajasthan • Bharat Overseas Bank • Catholic Syrian Bank • City Union Bank • Development Credit Bank • Dhanalakshmi Bank • Federal Bank • Ganesh Bank of Kurundwad • HDFC Bank • ICICI Bank • IndusInd Bank • ING Vysya Bank • Jammu & Kashmir Bank • Karnataka Bank Limited • Karur Vysya Bank • Kotak Mahindra Bank • Lakshmi Vilas Bank • Nainital Bank • Ratnakar Bank • Rupee Bank • Saraswat Bank • SBI Commercial and International Bank • South Indian Bank • Tamil Nadu Mercantile Bank • YES Bank


Foreign banks ABN AMRO • Abu Dhabi Commercial Bank • Antwerp Diamond Bank • Arab Bangladesh Bank • Bank International Indonesia • Bank of America • Bank of Bahrain & Kuwait • Bank of Ceylon • Bank of Nova Scotia • Bank of Tokyo Mitsubishi UFJ • Barclays Bank • Citibank India • HSBC • Standard Chartered • Deutsche Bank • Royal Bank of Scotland


Regional Rural banks
South Malabar Gramin Bank • North Malabar Gramin Bank • Pragathi Gramin Bank • Shreyas Gramin Bank


Financial Services Real Time Gross Settlement(RTGS) • National Electronic Fund Transfer (NEFT) • Structured Financial Messaging System (SFMS) • CashTree • Cashnet • Automated Teller Machine (ATM)



Banking in Asia

Sovereign
states
Afghanistan • Armenia1 • Azerbaijan1 • Bahrain • Bangladesh • Bhutan • Brunei • Burma2 • Cambodia • People's Republic of China • Cyprus1 • East Timor3 • Egypt4 • Georgia4 • India • Indonesia • Iran • Iraq • Israel • Japan • Jordan • Kazakhstan4 • North Korea • South Korea • Kuwait • Kyrgyzstan • Laos • Lebanon • Malaysia • Maldives • Mongolia • Nepal • Oman • Pakistan • Philippines • Qatar • Russia4 • Saudi Arabia • Singapore • Sri Lanka • Syria • Tajikistan • Republic of China5 • Thailand • Turkey4 • Turkmenistan • United Arab Emirates • Uzbekistan • Vietnam • Yemen


Dependencies,
autonomies,
other territories
Aceh • Adjara1 • Abkhazia1 • Akrotiri and Dhekelia • Altai • British Indian Ocean Territory • Buryatia • Christmas Island • Cocos (Keeling) Islands • Guangxi • Hong Kong • Inner Mongolia • Iraqi Kurdistan • Jakarta • Khakassia • Macau • Nagorno-Karabakh • Nakhchivan • Ningxia • Northern Cyprus • Palestine (Gaza Strip • West Bank) • Papua • Sakha • South Ossetia1 • Tibet • Tuva • West Papua • Xinjiang • Yogyakarta




Institutional credit support plays a catalytic role in accelerating the pace of economic development of a country. In the context of developing economy of India, bank finance plays a crucial role in pushing the agricultural economy on to the progressive pathway and helping develop rural India. Indian banking, appreciably, over the years, has emerged from being a purveyor of credit to be an engine of economic development. A historic review of the State Bank of India, a giant among the public sector commercial banks, and the subsequently in n ationalized commercial banks, reveals the emerging promising trends in the deposit mobilization, deployment of credit with developmental dimension added to it, prioritization of sectoral financing and social responsibility assumed by the banks. Along with promising trends in the progressive march of the public sector banks, certain disturbing trends are notice. Hence, the vital importance of making an in-depth study of the changing trends in the Indian public sector commercial banks so that policy sector commercial banks so that policy corrections can be made for enabling them play a more effective developmental role in the context of resurgent national economy of India.
The following are the list of Public Sector Banks in India
At present, there are 28 public sector banks in India.

• Allahabad Bank
• Andhra Bank
• Bank of Baroda
• Bank of India
• Bank of Maharastra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Oriental Bank of Commerce
• Punjab & Sind Bank
• Punjab National Bank
• Syndicate Bank
• UCO Bank
• Union Bank of India
• United Bank of India
• Vijaya Bank

List of State Bank of India and its subsidiary, a Public Sector Banks

• State Bank of India
o State Bank of Bikaner & Jaipur
o State Bank of Hyderabad
o State Bank of Indore
o State Bank of Mysore
o State Bank of Saurastra
o State Bank of Travancore


Chapter 4
AN OVERVIEW OF
PUBLIC SECTOR BANKS IN INDIA

a. An Overview
Banking sector in India has undergone remarkable changes during the last decade. From a purely profit-oriented private own and urban based sector, it has now grown into a development-oriented and social justice based public sector banking industry. The basic objective was to convert the banking of classes into the banking of masses. Such transformation is sought to be achieved by;
1. vigorous branch expansion programme, specially in the un banked and neglected areas, so that the inter-regional and inter-state widening disparities in terms of the per capita availability of banking services could be minimized and finance could not no more be the basic hurdle in their balanced development

2. the provision of adequate liberal finance to “Priority Sector” which include most neglected areas such as agriculture, small industries, professional and self – employed persons, education and water and transport operators.

Since public sector banks includes nationalized banks, State Bank of India with its subsidiaries and regional rural banks control over 85 per cent of the banking transaction in India, they have stupendous potentiality to heal or aggravate the economic malaise.
This study is an attempt to examine how far the growth of banking industry since 1969 has helped to rectify the economic malaise in form of inter-regional and inter-state disparities of banking facilities, unbalanced distribution of credit, and social injustice.
Banks where not being utilized in the interest of the nation as a whole, in mobilizing and utilizing the resources banks were lacking a sense of “Social Justice”, the interest in the development priorities and the need for financing the economically weaker sections of the society whose credit worthiness is no doubt poor, but there need for development is very strong. Actually banking services specially for the poor, were more a burden rather than a lever four their economic upliftment. More over, it was also realized that banking industry in general is supporting anti-social and undesirable activities such as hording and speculation and is mobilizing public savings in certain areas and invest them elsewhere, thus aggravating inter-regional and inter-state Imbalances. Banks misuse their power which goes against the welfare of general masses and thus caused serious imbalances in the economy.
The real benefits of banking industry depend up on its lending policy. To whom banks sanction the loans and how much and on what conditions they lend the money are such questions on which the scale of economic benefits rest. Through the nationalization of major commercial banks and attempt is made to reform their credit policies in such a way that could make a significant impact on the problems on the poverty and unemployment and on progressive reduction of disparities between relatively advanced and backward areas of our country. After nationalization it is hopped that banks loans would no more be a burden instead, they would become a lever of over-all development of the economically weaker section of the society.

b. Communication strategies with customers
In the competitive environment, today, communication plays a greater role in the business. Be it a Government, or political party or commercial establishment, everybody needs to communicate to their stakeholders. Till the liberalization in 1990s, Public Sectors were holding the near total market share of business in India. The Foreign Banks and New Generation banks which entered the fray later are highly aggressive in the past ten years. The present market share of Public Sector Banks has come down to around 72% and is estimated to touch 60% within five years. Have the Public Sector Banks understood the paradigm shift that is happening around them to retain their leadership position and market share? Or are they still living in the dream of past glories? Now the Banking industry has become “Anywhere, Anytime and Anyhow’ Banking. From my own personal observations and discussions with senior bankers both in public sector and new generation banks, I feel that Public Sector Banks, the shares of which being held by the Government and the general public, need to double up their strategies to retain their lead position. One of the important strategies in the business development is ‘the communication’ with stakeholders. Important stakeholders for the banks are customers, media, general public, statutory authorities and share holders. Whether Public or Private Sector, their communication with statutory authorities like RBI, Government, IBA, etc. are quite immediate and transparent. Media is the carrier of information to the general public and share holders.

c. Banking service for NRIs:

Non Resident Indians or NRIs can open accounts in almost all Indian banks. The three types of accounts that NRIs can open are:
o Non-Resident (Ordinary) Account - NRO A/c
o Non-Resident (External) Rupee Account - NRE A/c
Non-Resident (Foreign Currency) Account - FCNR A/c

















Chapter 5
THE IMPACT OF GLOBAL
FINANCIAL CRISIS IN INDIA

The direct effect of the global financial crisis on the Indian banking and financial system was almost negligible, thanks to the limited exposure to riskier assets and derivatives. The relatively low presence of foreign banks also minimised the impact on the domestic economy. However, the crisis did have knock on effects on the country, broadly, in three ways. First, the reduction in foreign equity flows - especially FII flows - impacted the capital and forex markets and the availability of funds from these markets to domestic businesses; second, the shrinking of credit markets overseas had the impact of tightening access to overseas lines of credit including trade credit for banks and corporates. Both these factors led to pressure on credit and liquidity in the domestic markets with the knock on effects, and third, the fall in global trade and output had impact on consumption and investment demand. The cumulative impact of all this was a slowing down of output and employment. Despite the slowing down, India is still the second fastest growing economy in the world.











Chapter 6
STRENGTHS AND OPPORTUNITIES

Tap the Domestic Potentials
The country’s domestic savings today amount to approx. Rs. 4,00,000 Crores per year. This is expected to increase to over Rs. 10,00,000 Crores per year over the next 10 years, as our GDP increases from $ 400 billion to over a trillion dollars. The penetration of banking channels will have to increase in geometrical progression, to help fulfill India’s aspirations of becoming an economic superpower in the 21st century.
Improve Productivity through Updating Technology
Technology is actually the enabler, which can help the public sector banks overcome their natural limitations, improve productivity and efficiency, reduce transaction, processing and other costs, enhance the quality of service, and lead to increased access to their customers.
Convert ATMs to Service Centers
ATMs at present are just cash dispensing machines. They can be used to deliver a whole range of services – from banking services, ticketing services, and retailing services. ATMs can be made into smart ATMs - using biometrics, to recognise customers by their voice, face, fingerprints or iris. In short, the new generation ATMs may be made into service retailing ports. This will change the very face of banking as well as retailing. Similar innovations can be introduced in various aspects like tele-banking, homebanking etc. If our banks acquire the global competency they now have opportunities expand their business on a quid pro quo basis in other countries.
Chapter 7
THREATS AND CONSTRAINTS
Cost Management.
Cost containment is a key to sustainability of bank profits and their long-term viability as well. To highlight this point, let me, take recourse to some figures. In 2003, operating costs of banks as per cent of total average asset [i.e., total asset at the beginning of the year plus total asset at the beginning of the subsequent year)/2] in UK were 2.12, for those in Switzerland they were 2.03 per cent, and less than 2 per cent in major European economies like Sweden, Austria, Germany and France. In India, in 2003, operating costs as per cent of total asset of scheduled commercial banks were 2.24 per cent. The tasks ahead are thus clear and within reach.

Recovery Management.
This is a key to the stability of the banking sector. There should be no hesitation in stating that Indian banks have done a remarkable job in containment of non-performing loans (NPL) considering the overhang issues and overall difficult environment. The process would, however, need to be pursued in right earnest, while persisting with changes in legal, institutional and procedural aspects to bring about a conducive environment for banks’ operations. In 2003, non-performing loans to total loans of banks were 1.2 per cent in US, 1.4 per cent in Canada and in the range of 2-5 per cent in major European economies; France was an exception at 4.9 per cent. In contrast, the same for Indian banks was 8.8 per cent and that for Chinese state-owned banks was 22.0 per cent. Let me add that the 2004 gross NPL ratio for Indian scheduled commercial banks at 7.3 per cent is ample testimony to the impressive efforts being made by our banking system. In fact, recovery management is also linked to banks’ interest margins. Net interest margins of scheduled commercial banks in India was 2.8 per cent in 2003, whereas it stood far lower in the range of 0.6-2.4 per cent at major European and Japanese banks. Clearly, cost and recovery management supported by enabling legal framework holds the key to future competitiveness of Indian banks.

Technological Intensity of Banking.
This is one area where perhaps India needs to do significant ‘catching up’, notwithstanding the rapid strides made over the last few years, though data on this score are difficult to come by. Some available figures indicate that in late 1999, the percentage of customers using online banking was less than 1 per cent in India, compared with anywhere between 6-30 per cent in developed economies like US, UK, Germany, Finland and Sweden. Even in Latin America, these figures are much higher than India’s. While admittedly the numbers for India are likely to be much higher at present than these figures suggest, so would be the case for these other economies as well. The issue, therefore, remains what has been the extent of ‘catching up’ by India on this score? In fact, this seems somewhat intriguing: India happens to be a world leader in information technology, but its usage by our banking system is somewhat muted. It is wise for Indian banks to exploit this globally state-of-art expertise domestically available to their fullest advantage.

Risk Management.
Banking in modern economies is all about risk management. The successful negotiation and implementation of Basel II is likely to lead to an even closer focus on risk measurement and risk management at the institutional level. Thankfully, Basel II has, through their various publications, provided useful guidelines on managing the various facets of risk. The institution of sound risk management practices would be an important pillar for remaining ahead of the increasing competition. Banks can, on their part, formulate ‘early warning indicators’ suited to their own requirements, business profile and risk appetite in order to better monitor and manage risks.

Governance.
The recent irregularities involving accounting firms in the US have amply demonstrated the importance of good corporate governance practices. The quality of corporate governance in the banks becomes critical as competition intensifies, banks strive to retain their client base, and regulators move out of controls and micro-regulation. No doubt, there is nothing like an ‘optimal’ level of governance for one to be satisfied with. The objective should be to continuously strive for excellence. The RBI has, on its part, made significant efforts to improve governance practices in banks, drawing upon international best practices. It is heartening to note that corporate governance presently finds explicit mention in the annual reports of several banks. The improved corporate governance practice would also provide an opportunity to accord greater freedom to banks’ boards and move away from micro regulation to macro management.






























Chapter 8
CONCLUSION

The study has identified various aspects of the IRAC norms affecting the profitability of the bank and has involved some suggestions for overcoming the adverse effects and for improving the profitability .
1. As all banks in India are operating more or less in the same socio-economic-political environment the findings and recommendations of the study will be useful to banking industry.
2. The introductions of these prudential norms are basically intended to improve the soundness of the working of banks. To avoid any serious set backs to the functioning of banks, the prudential norms have been introduced in India in a phased manner. They have compelled banks to pay greater attention to the quality of lending.
3. Some critics have even sought to establish a relationship between write off of bad loan and recapitalisation of public sector banks by Government of India. It is necessary to recognise that these two are independent processes, as write off of bad loans is part of cleaning the balance sheet of banks while recapitalisation is necessitated by the weakened financial position.
4. To improve the efficiency and competitiveness of the banking set up, bank should be given more freedom for diversification into areas such as leasing, hire-purchase, term lending, investment banking etc. This will help banks to make better and more efficient use of their funds and match the maturities of their assets and liabilities. Bank should be allowed for making investments in corporate shares and debentures to make profits in this area.
5. Bank must be allowed to be more active in capital market to enable them to raise capital to increase their levels of activity while adhering to capital adequacy norms. Merger of banks would help in cutting down cost and avoiding duplication of activity in the same area. Public sector banks must be given autonomy to decide on their recruitment policies as well as compensation packages to draw and retain the best talent. This is all the more essential, as in future banks will have to depend more and more on cutting cost and increasing efficiency.
6. The reforms in the banking sector have made it look far more resilient than what was in 1991-92. The chief merits of the reform process has been the cautious sequencing of the reforms and the consistent and mutually reinforcing character of the various measures taken. Introduction of prudential norms, widening of capital base and strengthening of organisational infrastructure have all gone hand in hand. In the years to come, the Indian financial system will grow in size and complexity as the financial markets acquire greater depth and width. While the policy environment should remain supportive of healthy growth and development with accent on greater operational flexibility as well as greater prudential regulation and supervision, the thrust should be on improvement in organisational effectiveness.

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