INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

INDIAN BANKING SECTOR:CHALLENGE AHEAD

1.History of banking sector in India

Origination of banking in India dates to the last decades of the 18th century with the
General Bank of India, which started in 1786, and the Bank of Hindustan (both of which
are now defunct.) The oldest bank in existence in India is the State Bank of India (SBI), the
largest commercial bank in the country that traces its origins back to June 1806. The
history of the banking sector can be better understood by dividing it into.
1. History of SBI and Associates
2. History of other banks in India (includes Nationalised Banks, Private Banks and
Foreign Banks)
1.1 History of SBI and Associates
The oldest bank in existence in India is the SBI, which originated as the Bank of
Calcutta in June 1806, which almost immediately became the Bank of Bengal in 1809.
Bank of Bengal was one of the three presidency banks, the other two being the Bank of
Bombay (established in 1840) and the Bank of Madras (established in 1843), all three of
which were established under charters from the British East India Company. For many
years, the Presidency banks acted as quasi-central banks, as did their successors. The three
banks merged in 1925 to form the Imperial Bank of India which started as private
shareholders banks, mostly Europeans shareholders.
tate Bank of India Act was established in 1955. Pursuant to the provisions of the
State Bank of India Act (1955), the Reserve Bank of India (RBI), which is India's central
bank, acquired a controlling interest (60%) in the Imperial Bank of India. On April 30,
1955 the Imperial Bank of India was renamed as the State Bank of India. In 2008, the
Government took over the stake held by RBI.
In 1959, the Government passed the State Bank of India (Subsidiary Banks) Act,
enabling the SBI to take over eight former State-associated banks as its subsidiaries.

1. State Bank of Indore

2. State Bank of Bikaner & Jaipur
3. State Bank of Hyderabad
4. State Bank of Mysore
5. State Bank of Patiala
6. State Bank of Travancore
7. State Bank of Saurashtra
Later on in September 2008, State Bank of Saurashtra was merged with the parent bank -
SBI.

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

1.2 History of other banks in India (includes Nationalised Banks,

Private Banks and Foreign Banks)
No Year Period Characterized by
1 1840 to 1947 Pre Independence Small size, less regulated and bank
failures
2 1947 to 1969 Post Independence to Slower growth, private sector
Nationalisation dominance
and start of regulation
3 1969 to1991 Nationalisation to Nationalised of banks by
Liberalisation government, high
regulation, secular growth in
business and
expansion & rising inefficiencies
4 1991 to 2010 Liberalisation to De-regulation, entry of private and
current foreign banks and technological
date advancement

1.2.1 Pre Independence (1840 to 1947)

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in
1848 as a consequence 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.
The second entirely Indian joint stock bank was the Oudh Commercial Bank,
established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank,
established in Lahore in 1895, which has survived to the present and is now one of the
largest banks in India.
The period between 1906 and 1911, saw the establishment of banks inspired by the
Swadeshi movement. The Swadeshi movement inspired local businessmen and political
figures to form banks of and for the Indian community. A number of banks established
then have survived to the present such as Bank of India, Corporation Bank, Indian Bank,
Bank of Baroda, Canara Bank and Central Bank of India.
The period 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
challenging for the Indian banking industry. 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:

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

Year No. of banks failed

1913 12
1914 42
1915 11
1916 7
1917 13
1918 9

1.2.2 Post Independence to Nationalisation (1947 to 1969)

The Government of India (GOI) initiated measures to play an active role in the
economic life of the nation, and the Industrial Policy Resolution adopted by the government
in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in
different segments of the economy including banking and finance. The major steps taken to
regulate banking include:
In 1948, the RBI, India's central banking authority, was nationalised, and it became
an institution owned by the Government of India.
In 1949, the Banking Regulation Act was enacted which empowered the RBI "to
regulate, control, and inspect the banks in India." The Banking Regulation Act also provided
that no new bank or branch of an existing bank could be opened without a license from the
RBI, and no two banks could have common directors.
1.2.3Nationalisation to liberalisation (1969 to 1991)
By the 1960s, the Indian banking industry had become an important tool to facilitate
the development of the Indian economy. At the same time, it had emerged as a large
employer, and a debate had been ensued about the possibility to nationalise the banking
industry. On July 19, 1969, major process of nationalisation was carried out. It was the
effort of the then Prime Minister of India, Mrs. Indira Gandhi by whom 14 major
commercial banks in the country were nationalised. The second phase of nationalisation of
the Indian Banking Sector was carried out in 1980 with seven more banks being
nationalised. With the second dose of nationalisation, the GOI controlled around 91% of the
banking business of India. Later on, in the year 1993, the government merged New Bank of
India with Punjab National Bank. It was the only merger between nationalised banks and
resulted in the reduction of the number of nationalised banks from 20 to 19. A number of
questions were raised regarding the procedure adopted by the then government in
suddenly going for the nationalisation of banks. There was no official report, which had
gathered expert opinions and evidence on the need either for social control or for
nationalisation of banks. The chiefs of private banks had not been consulted as to the need
and implications of the proposed measure.

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

Arguments of government for nationalisation were as follows

Before the nationalisation, the privately-owned banks were operating on the
criteria of profit maximisation and lesser emphasis was placed on the development of rural
areas. Credit and deposits base was confined to large corporates and wealthy depositors.
The nationalised banking set-up would vigorously pursue expansion progrmmes to
cover rural areas, smaller towns and lower income groups.
To pay special attention to inter-sectoral balances and balanced regional
development.
To take away the stranglehold of the few industrial houses on credit and reduce
their control over the community's resources. Ensure stability in the functioning of the
credit institutions and inspire more confidence among the depositors.
Encourage healthy competition between large and small industrial houses. In
summary, the following are the steps taken by the Government of India to regulate the
banking institutions in the country:
􀂾 1949: Enactment of Banking Regulation Act.
􀂾 1955: Nationalization of SBI.
􀂾 1959: Nationalization of SBI subsidiaries.
􀂾 1961: Insurance cover extended to deposits.
􀂾 1969: Nationalization of 14 major banks.
􀂾 1971: Creation of credit guarantee corporation.
􀂾 1975: Creation of regional rural banks.
􀂾 1980: Nationalization of seven banks with deposits over Rs.200 crores.
1.2.4 Liberalization to current date (1991 to 2010)
The policies of nationalization and social reforms that were supposed to promote a
more equal distribution of funds, also led to inefficiencies in the Indian banking system. To
alleviate the negative effects, some reforms were enacted in the second half of the 1980s.
The main policy changes were the introduction of Treasury Bills, the creation of money
markets, and a partial deregulation of interest rates. Despite the reform attempts, the
Indian banking sector had like the overall economy severe structural problems by the end
of the 1980s. By international standards, the Indian banks were extremely unprofitable
despite a rapid growth in deposits. In 1991, GOI liberalised the economy. The objective of
banking sector reforms was in line with the overall goals of the 1991 economic reforms of
opening the economy. Narsimhan Rao government embarked on a policy of liberalisation
by licensing a small number of private banks. These new banks 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,
UTI Bank (now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with
the rapid growth in the economy of India, revitalised 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.
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Privatisation
1. In the year 1994, Private sector banks were permitted to commence operations in India.
Banks were allowed to raise the capital to meet the capital adequacy norms through capital
market route, provided the government holding does not fall below 51%.
2. FDI/FII limits on investments in shares of private sector banks were raised to 51% in
2001.
3. In 2004, FDI/FII limits on investments in shares of private sector banks was further
relaxed and increased to 74%, with no one FII holding more than 5% stake without the
consent of RBI and FII limit in PSBs was capped at 20%. 4. Foreign banks with restriction
on branch opening and operation were allowed to enter on selective basis in 2004. More
liberal entry for foreign banks was proposed after April 2009.
Entry of foreign banks
RBI announced its policy decision on March 2004 for gradual entry of foreign banks in
India in synchronised manner in two phases. In order to allow the Indian Banks sufficient
time to prepare for global competition, initially the entry of foreign banks in first phase was
more restrictive.
Phase 1 (March 2005 to March 2009)
1. Foreign banks were allowed to establish presence in India and were given an option to
operate through branch presence or set up a 100% Wholly Owned Subsidiary (WOS).
2. Foreign banks were allowed to open 12 branches a year (the limit was in line with World
Trade Organisation (WTO) commitment). Branch licensing procedure was kept same as
applicable for private banks. More liberal branch opening policy was adopted in under-
banked areas.
3. The limit of 12 branches a year was raised to 20 branches for foreign banks in March
2006.
4. Acquisition of shares in Indian banks by foreign banks was permitted for banks which
are identified by RBI for restructuring.

Phase 2 (April 2009 onwards)

1. Branch expansion: - After reviewing the experience of the first phase, RBI has proposed
to remove the restriction on branch expansion and limited excess to Indian market and
treating them on par with domestic banks to the extent appropriate.
2. Listing of foreign banks: - After completion of the proposed year of operation in India,
WOS of foreign banks will be allowed to list and dilute the stake in the manner that at least
of 26% of the paid-up capital remains with the resident Indian.
3. Mergers and acquisitions: - After a review is made with regard to the extent of
penetration of foreign investment in Indian banks and functioning of foreign banks, foreign
banks may be permitted, subject to regulatory approvals and such conditions as may be

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

prescribed, to enter into merger and acquisition transactions with any private sector bank
in India, subject to the overall investment limit of 74 per cent.

2 Various Banking Groups

Banks in India

Scheduled Commercial Banks Unscheduled Commercial

Banks

Public Sector Private Sector Foreign Regional

Banks Banks Banks Rural Banks

State Bank of India Nationalised Banks

and Associates

2.1The commercial banking structure in India consists of:

􀂾 Scheduled Commercial Banks in India
􀂾 Unscheduled Banks in India
Scheduled Banks in India constitute those banks which have been included in the Second
Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in
this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. The
scheduled commercial banks in India comprise of SBI and its associates, nationalised
banks, foreign banks, private sector banks, co-operative banks and regional rural banks.
Non-scheduled bank in India means a banking company as defined in clause (c) of
section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank.
SCBs in India can be divided into five groups.

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

1. SBI and its associates

2. Nationalised banks
3. Private sector banks
4. Foreign banks.
5. Regional Rural Banks (RRBs)
We have done the analysis of first four banking groups and excluded RRBs in our report.

2.2 List of banks under various banking groups

2.2.1 SBI and Associates
1. SBI
2. State Bank of Bikaner and Jaipur
3. State Bank of Hyderabad
4. State Bank of Indore
5. State Bank of Mysore
6. State Bank of Patiala
7. State Bank of Travancore

2.2.2 Nationalised Banks

1. Allahabad Bank 11. Indian Bank
2. Andhra Bank 12. Indian Overseas Bank
3. Bank of Baroda 13. Oriental Bank of Commerce
4. Bank of India 14. Punjab National Bank
5. Bank of Maharashtra 15. Punjab & Sind Bank
6. Canara Bank 16. Syndicate Bank
7. Central Bank of India 17. Union Bank of India
8. Corporation Bank 18. United Bank of India
9. Dena Bank 19. UCO Bank
10. IDBI Bank Ltd. 20. Vijaya Bank

2.2.3 Private Sector Banks

1. Axis Bank 12. Jammu & Kashmir Ban
2. Bank Of Rajasthan 13. Karnataka Bank
3. Catholic Syrian Bank 14. Karur Vysya Bank
4. City Union Bank 15. Kotak Mahindra Bank
5. Development Credit Bank 16. Lakshmi Vilas Bank

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

6. Dhanalakshmi Bank 17. Nainital Bank

7. Federal Bank 18. Ratnakar Bank
8. HDFC Bank Bank 19. SBI Commercial & International
9. ICICI Bank 20. South Indian Bank 20. South Indian Bank
10. IndusInd Bank 21. Tamilnad Mercantile 21. Tamilnad Mercantile Bank
Bank
11. ING Vysya Bank 22. Yes Bank 22. Yes Bank

2.2.4 Foreign Banks

1. ABN AMRO Bank 15. DBS Bank
2. Abu Dhabi Commercial Bank 16. Deutsche Bank
3. Antwerp Diamond Bank 17. HSBC
4. Arab Bangladesh Bank 18. JP Morgan Chase Bank
5. Bank Of America 19. Krung Thai Bank
6. Bank Of Bahrain & Kuwait 20. Mashreq Bank\
7. Bank Of Ceylon 21. Mizuho Corporate Bank
8. Bank Of Nova Scotia 22. Oman International Bank
9. Bank Of Tokyo-Mitsubishi- UFI 23. Shinhan Bank
10. Barclays Bank 24. Societe Generale
11. BNP Paribas 25. Sonali Bank
12. Calyon Bank 26. Standard Chartered Bank
13. Chinatrust Commercial Bank 27. State Bank of Mauri
14. Citibank

2.3 Regional Distribution of Branches

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

The number of offices (branches plus administrative offices) for all SCBs increased rom
64,184 in FY1995 to 77,773 in FY2008. The number of offices for SCBs increased at a
higher pace between FY06 and FY08. The branch network increased by 10% between FY06
to FY08 in three years as compared to 10.6% from FY1995 to FY2005 (i.e. 10 years). On an
overall basis, the branches of the SCBs in India are fairly distributed. The state-owned
banks have to adhere to social objective set by the government. Since nationalisation, PSBs
have increased their presence in rural and semi-urban areas. Private and foreign banks
started operating post 1994. Since the main driver for these banks was profit maximisation
and due to restriction on opening of branches, their branch network is being concentrated
in metro and urban regions.

2.4 Distribution of branches among regions for various bank groups

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

As depicted in above graphs, there is a noticeable difference between rural and semi-urban
presence of PSBs, private & foreign banks. SBI and associates and aJ tionalized banks have
around 34% of the branches situated in rural area as compared to 12.5% and 0% for
private and foreign banks.
3.Role of Reserve Bank of India
Established in 1935, under the Reserve bank of India Act, 1934, RBI is the central bank of
the country. RBI was nationalised in the year 1949. Functions of the RBI can be divided into
two. Monetary functions also known as the central banking functions of the RBI are
related to control and regulation of money and credit, i.e., issue of currency, control of bank
credit, control of foreign exchange operations, banker to the Government and to the money
market. Monetary functions of the RBI are significant as they control and regulate the
volume of money and credit in the country.
Non-monetary functions includes supervision of banks operating India, promotion of
sound banking

3.1 RBI monetary and credit policy

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

GOI uses various tools for development of economy. Two important tools of a croeconomic
policy are Monetary Policy and Fiscal Policy. Fiscal policy is decided by the GOI through
annual budget by the Finance Ministry. Monetary policy is a subject matter of RBI.
Monetary Policy
The RBI is responsible for formulating and implementing Monetary Policy which is
ssentially a stabilisation policy. It is not intended to influence the long-term growth
potential of the economy, but aims at ironing out the fluctuations in the economy also
referred to as business cycles. This is done to minimise fluctuations and ensure a
sustainable mix of growth and inflation in the economy. The RBI regulates the supply of
money and the cost and availability of credit in the economy. It can increase or decrease the
supply of currency as well as interest rate, carry out open market operations, control credit
and vary the reserve requirements. The Monetary Policy aims to maintain price stability,
full employment and economic growth. Historically, the Monetary Policy is announced
twice a year - a slack season policy (April-September) and a busy season policy (October-
March) in accordance with the agricultural cycles. These cycles also coincide with the
halves of the financial year. The RBI as per the world-wide practice has shifted to market-
based instruments for monetary management from non-market-based instruments like
interest rate control. he RBI can influence the cost of funds and availability of credit in the
economy by altering the repo/reverse repo rates, changing the reserve requirements and
engaging in open market operations.
3.2 Developments in FY09 and Role of RBI
The RBI’s role in monetary development and price stability can be well understood by the
developments which happened in FY09. We divide the developments in financial arkets in
FY09 into two.
From April 2008 to September 2008
Up to the mid of FY09, India continued its dream run of high economic growth. Due to
sustained inflow of foreign capital in India and high commodities and oil prices, inflation
rate touched record highs of 12.91% in August 2008. The RBI reacted to this by increasing
the Cash Reserve Ratio (CRR) by 150 bps from 7.5% to 9.0% and increase in repo rate by
125 bps from 7.75% to 9.0% up to the end of September 2008. This enabled the bank to
suck out excess liquidity in the system, thereby containing inflation.
From September 2008 to March 2009
Near collapse of the world’s financial system and global recession made its impact
felt on the domestic economy in last two quarters of FY09. The domestic economy slowed
down considerably in later half of the FY09. Movement in inflation was southward due to
world-wide slowdown and correction in commodities prices. In order to check the
domestic slowdown RBI, aided by declining inflation, slashed the CRR, SLR and repo rates
sharply by 400 bps, 100 bps and 400 bps, respectively over a period of 6 months from
Aug’08 to Jan’09.

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3.3 Liquidity Adjustment Facility (LAF)

LAF is used by RBI for managing the day-to-day liquidity in the banking system. LAF
operations are carried out twice in a day. LAF is carried out with the help of two key rates
viz Repo rate and Reverse repo rate. The term repo stands for repurchase agreement. Repo
rate is the rate that RBI charges the banks when they borrow from it or the rate at which
RBI lends to the banks. Repo operations increase liquidity in the system. Reverse repo rate
is the rate that RBI offers the banks for parking their funds with it or the rate at which RBI
borrows from the banks. Reverse repo operations suck out liquidity from the system. RBI
uses the LAF to inject or absorb the liquidity into the banking system. Increasing repo rate
from 7.75% in May 2008 to 9.0% in September 2008 was done to increase the cost of credit
and to tighten the liquidity in the system due to increasing inflation. However, falling
inflation and fear of economic slowdown prompted RBI to reduce the repo and reverse
repo rates to bring down the cost of the credit. Yearly trend since FY01 shows that, repo
and reverse repo rates are either increasing or decreasing in the given financial year, with
the exception of FY09. High inflation due to over-heating of the economy in the first half
resulted in RBI increasing the rates. Global financial crisis in mid FY09 and fear of
slowdown supported the rate reduction. The spread between the repo and reverse repo
also signals RBI’s intention of cheaper/costlier credit. Deceasing spread from July 2003 till
September 2006 suggests the cheaper credit policy from RBI to push economic growth. The
spread was at it lowest level of 1.0% from April 2005 to September 2006. The increasing
spread from May 2008 to September 2008 suggests the tightening of credit due to higher
inflation and overheating of the economy. However from September 2008 onwards, the RBI
has adopted cheaper credit policy and thereby has reduced the spread between the repo
and reverse repo from 3.0% in September 2008 to 1.5% in February 2009. The
bankruptcy/sell out/ restructuring of some of the world’s largest financial institutions
brought pressures on the domestic money and foreign exchange markets, in conjunction
with temporary local factors such as advance tax outflows. In order to alleviate these
pressures, the RBI initiated a series of measures. The average daily net outstanding
liquidity injection under LAF was Rs.42,591 crore during September 2008 as compared
with Rs.22,560 crore in the previous month. Liquidity conditions eased from November
2008. The LAF shifted from net injection mode to net absorption mode. The average daily
net outstanding liquidity absorption under LAF was Rs.22,294 crore during December
2008. Lesser avenues of lending due to economic downturn had made banks to park excess
funds with RBI under reverse repo. Daily abruption under reverse repo crossed Rs.
1,00,000 crore in April 2009. RBI has been discouraging reverse repo in order to compel
the banks to lend more. RBI has cancelled the secondary liquidity adjustment facility
(evening reverse repo auctions) effective from May 2009 and reduced thereverse repo rate
to 3.75%.
3.4 Cash Reserve Ratio (CRR)

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

All commercial banks are required to keep a certain amount of its deposits in cash with
RBI. This percentage is called the CRR which can also be effectively used to manage
liquidity, inflation and cost of credit in the banking system by RBI. Higher CRR will increase
the cost of the fund with the bank and in turn will make the credit costlier for borrower and
vice-versa.

4. CHALLENGES IN BANKING
The enhanced role of the banking sector in the Indian economy, the increasing levels of
deregulation along with the increasing levels of competition have facilitated globalisation
of the India banking system and placed numerous demands on banks. Operating in this
demanding environment has exposed banks to various challenges. The last decade has
witnessed major changes in the financial sector - new banks, new financial institutions,
new instruments, new windows, and new opportunities - and, along with all this, new
challenges. While deregulation has opened up new vistas for banks to augment revenues, it
has entailed greater competition and consequently greater risks. Demand for new
products, particularly derivatives, has required banks to diversify their product mix and
also effect rapid changes in their processes and operations in order to remain competitive
in the globalised environment

4.1 Globalisation – a challenge as well as an opportunity

The benefits of globalisation have been well documented and are being increasingly
recognised. Globalisation of domestic banks has also been facilitated by tremendous
advancement in information and communications technology. Globalisation has thrown up
lot of opportunities but accompanied by concomitant risks. There is a growing realisation
that the ability of countries to conduct business across national borders and the ability to
cope with the possible downside risks would depend, inter-alia, on the soundness of the
financial system and the strength of the individual participants. Adoption of appropriate
prudential, regulatory, supervisory, and technological framework on par with international
best practices enables strengthening of the domestic banking system, which would help in
fortifying it against the risks that might arise out of globalisation. In India, we had
strengthened the banking sector to face the pressures that may arise out of globalisation by
adopting the banking sector reforms in a calibrated manner, which followed the twin
governing principles of non-disruptive progress and consultative process.

An online banking facility enables you to handle your finances efficiently. Online
banking uses modern computer technologies to offer the users convenient banking
facilities. If you have access to such a facility, there is absolutely no need for you to
personally visit your bank’s branch for any sort of transaction. You can simply login with

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the internet-banking password that your banker has given you, and carry all the necessary
work online. It also eliminates the necessity of doing any paper-based work and saves
considerable time for the users. Private sector and foreign banks were using technology
and computerized system since its beginning while PSBs were not. So they found difficulty
in managing all these things. Many of Indian PSBs ignored technological change and had
lost market share to foreign banks and new private banks. Technology helps in having a
huge branch network easily and also it reduces the operational cost this may b clarified by
an example as:- Operational cost per transaction of an account via different type is-
 Via computers on counter- 40 Rs.
 Via ATM - 16-17 Rs.
 Via online - 46 paise
So it is cleared that manually/direct transaction cost comes very high and electronically
and online it is very low. So that’s why public sector banks should
improve their working system and should make it totally online but challenge is before
PSBs The users can do variety of work using your online banking pin code. The bankers
benefit equally from the online banking facilities. Besides offering their users the
convenience of banking, the online banking system means significant cost savings for the
bankers themselves. With such an automatic system in place, the bankers need not to hire
employees specialized in handling paper work and teller interactions. This reduces the
bankers’ operating costs considerably, translating into significant cost savings over the
long-term.
4.2 Non performing asset ( NPA)
Definition
A loan or lease that is not meeting its stated principal and interest payments. Banks
usually classify as nonperforming assets any commercial loans which are more than 90
days overdue and any consumer loans which are more than 180 days overdue. More
generally, an asset which is not producing income. Non Performing Asset means an asset or
account of borrower, which has been classified by a bank or financial institution as sub-
standard, doubtful or loss asset, in accordance with the directions or guidelines relating to
asset classification issued by RBI. An amount due under any credit facility is treated as
"past due" when it has not been paid within 30 days from the due date. Due to the
improvement in the payment and settlement systems, recovery climate, upgradation of
technology in the banking system, etc., it was decided to dispense with 'past due' concept,
with effect from March 31, 2001. Financial sector reform in India has progressed rapidly on
aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry,
prudential norms and risk-based supervision. But progress on the structural-institutional
aspects has been much slower and is a cause for concern. The sheltering of weak
institutions while liberalizing operational rules of the game is making implementation of
operational changes difficult and ineffective. Changes required to tackle the NPA problem

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would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly
effective. This paper deals with the experiences of other Asian countries in handling of
NPAs. The chart below shows data for NPA going back to 2.3-1.0. The two lines plotted are
non-performing assets gross non-performing assets. Loan loss allowance is not growing
nearly as fast as the non-performing assets. I can say that this is a problem, but that we
don’t have a solution. In the course of discussing disposition of assets with various banks, it
sometimes becomes apparent that the reason that the bank cannot dispose of the property
at market prices, is because the bank does not have enough capital to do so. It is suspected
that the slow growth of loan loss allowance is related to
the same problem. While this chart shows that NPA is decreasing overall in banking system
but even then in PSBs NPA are higher with comparison to private sector banks.

4.3TALENT MANAGEMENT
 Such personnel need to be identified, nurtured and motivated through a systematic
organizational plan to enable them to accept challenging roles early in the career. Suitable

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

changes in the promotion policies should take care of aspirations of such extra ordinary
and talented manpower.
 Banks will also have to pay increasing attention to education and training including
sponsorship of identified persons to MBA programmes, Phd programmes and other long
duration programmes in technology and financial management to develop a wider
managerial pool of competent people who can be developed fast to play the role of modern
banker in ever difficult and turbulent times.

Population in Mio
1160
1012
846
683
548
361 439

-51 -61 -71 -81 -91 -00 -10

941 951 961 971 981 991 001
1 1 1 1 1 1 2

Banks will have to introduce innovative mechanism and process to respond to the
aspirations of such talented people by providing them sabbatical leave for professional
growth by sponsorship in seminars and conferences, both nationally and internationally, to
present papers and encouraging them to join professional organisations to develop
appropriate competencies and network with fellow professionals.
There is also need to develop organisation-wide awareness about banks keybusiness
problems including stagnant business units, strain on profitability, cost of operations,
unexplored business opportunities, manpower costs, NPAS etc.
 The preconditions for an effective talent management is clarity of where the organisation
is, i.e., the starting point and where it wishes to reach in a given time horizon, i.e., the
destination

4.4 GROWTH IN BUSINESS

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

 Public Sector Banks should now go global in search of new markets, customers and
profits.
 Some of the Public Sector Banks have their presence in overseas to a limited extent.
 The London based magazine ‘The Banker” has now listed only twenty Indian banks
including private sector banks in the list of “Top 1000 World Banks”.
 The State Bank of India, the largest bank in India, ranks only 82nd amongst the top global
banks. It is not even a 10th in size of the 9th largest bank, Sumitomo Mitsui, which has
assets of $950 billion as against SBI’s assets of $91 billion.
 Therefore, our banks are not equipped enough to compete in the international arena.
 Realising the need to grow in size, the Indian banking system today is moving from a
regime of “large number of small banks” to “small number of large banks.”
 As per the Narasimhan Committee (II) recommendations, consolidations around
identified core competencies are taking place.
 Mergers and acquisitions in the banking sector are the order of the day.
 This trend may lead logically to promote the concept of financial super market chain,
making available all types of credit and non-fund facilities under one roof which is
challenge for public sectors bank and demand of time.
Population Pyramid

Share of aggregate consumption

Conclusion

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 INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

Indian Public Banks are facing innumerable challenges such as worrying level of
NPAs, deteriorating asset quality, increasing pressures on profitability, asset-liability
management, liquidity risk management, market risk management and ever tightening
prudential norms. Operating in this demanding environment has exposed banks to various
challenges. The post-reform period witnessed the following major challenges for public
sector banks in India –
Enhancement of customer service; application of technology; implementation of
Basel II; improvement of risk management systems; implementation of new accounting
standards; enhancement of transparency & disclosures. The boom in the field of retail
banking and the intense competition among the banks to increase the customer base has
resulted in the large disbursement of consumer loans, home loans, loans on credit cards,
auto loans, educational loans etc. on easy terms without much scrutiny. This has brought
with it an increase in the no. of cases of default in loan repayment thus increasing the
bank’s NPAs. Managing customers is one of the main issues faced by banks. The demands
and expectations of the customers grow at a much faster rate than the banks can equip
themselves to be with them. If the service levels of the product levels are not up to the
customer satisfaction, there is always a danger that the customer might shift his
transactions elsewhere. So always give customers more than they expect to get.
Multiple regulations are the main weakness for PSBs. It has not the single
controlling system while private banks have. PSBs are also guided by govt. and controlled
by RBI and it has also their union. So there is trice controlling system that’s why any policy
takes time in being implemented. This is the main reason of delayed progress of PSBS. The
annual report 2007-08 of RBI shows that position of public sector banks is on steady
progress.
· Demand deposits, borrowings and other liabilities are increasing.
· Assets as current assets and other loan cash credit is increasing which shows a sign of
growing network.
· Balance with banks and money at call and short notice decreased last year. · Other
approved securities also decreased in comparison to previous year.
· Consolidated balance sheet of banks shows that banks are on progress. Liabilities and
assets have been increased in comparison to last year but even then public sector banks are
not progressing equally as private sector banks because of being regulated and controlled
system. Last year kisan loan was forgiven worth Rs. 60,000 crores and mostly major no frill
A/cs has been open in public sector banks. So NPA has been increased because operational
cost has been increasing due to more A/cs and transaction and PSBs are liable to open
branches in rural areas.

BILOGRAPHY

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INDIAN BANKING SECTOR : CHALLENGE AHEAD 2010

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