CHAPTER: 1

INTRODUCTION

1. INTRODUCTION

2. RATIONALE OF THE STUDY

3. PRESENT SCENARIO OF BANKING SECTOR IN INDIA

4. RECENT TRENDS IN THE GLOBAL BANKING INDUSTRY

5. ROLE OF BANKS IN ECONOMIC DEVELOPMENT

6. INDIAN BANKING SECTOR IN GLOBAL PERSPECTIVE

7. INDIAN BANKING PRODUCTIVITY SCENARIO

8. INTERNATIONAL BANKING PRODUCTIVITY SCENARIO

9. WHY CHOOSE THIS TOPIC

10. EXPECTED CONTRIBUTION FROM THE STUDY

11. ORGANIZATION OF THE STUDY

12. CONCLUSION

REFERENCES

1
 CHAPTER: 1

INTRODUCTION

1.1 INTRODUCTION:
The world has become a global market. The impact of globalization,
privatization and liberalization has totally changed the style of banking sector in
India. Banks are essential instruments of accelerated growth in a developing
economy. Banking system plays a very important role in the economic life of the
nation. The health of the economy is closely related to the soundness of its
banking is now an essential part of our economic system. Although banks create
no new wealth but their borrowing, lending and related activities facilitate the
process of production, distribution, exchange and consumption of wealth. Modern
trade and commerce would almost be impossible without the availability of
suitable banking services. The banks are mobilizing the savings of the people for
the investment purposes. The savings are encouraged and saving rate
increases. If there would be no banks then a great portion of a capital of the
country would remain idle. Indian banking industry, the backbone of the country
economy, has always played a key role in prevention the economic catastrophe
from reaching terrible volume in the country. The Indian banking system is
among the healthier performers in the world.

Indian banking sector was well developed even prior to its political
independence in 1947. After independence, the development of banking sector
picked up momentum. Since 1991, public and private sector banks are co-exiting
and providing banking service to the customers. They are playing very important
role for overall economy development. Indian banking system has transformed in
recent years due to globalization in the world market, which has resulted in fierce
competition. The new economic policy of globalization has opened the financial
markets of India to outside world and infused competitiveness there in. Indian

2
banking is operating in highly deregulated, liberalized and competitive
environment. Competitive pressure is building up for Indian banks both from
within and outside. The financial sector plays a crucial role in mobilizing
community‟s saving and channeling them into effective investment avenues in
the country. The process of globalization, privatization, liberalization and financial
sector reforms adopted in 1991 has resulted into the setting up of the new private
sector banks in India. For last many decades, the banking sector has faced many
difficulties and the first phase of reforms laid the basis for as sound banking
system to remove these difficulties an make the banks more strong. Banks are
essential instruments of accelerated growth in a developing economy.

The present banking system in India was evolved to meet the financial
needs of trade and industry and also to satisfy the institutions of the country. The
banking sector in India comprises the Public Sector Banks, Commercial Banks,
Private Sector Banks, Co-operative Banks and Regional Rural Banks now a day,
the bankers have to deal with a large number of matters. They do all the
activities, which can assist customers. The goal of every bank in this modern era
should be the customer‟s satisfactions. Even as it strives to increase its reach
and penetration, our banking system has also become financially healthy; the net
income spread is on the rise, profitability ratios are improving and in respect of
provisioning and prudential norms, it is on par with the international norms.
Commercial Banks can further be divided into scheduled and non-scheduled
commercial Banks.

Productivity is one of the factors affecting the profitability among others

like expansion of banks‟ operation in the areas characterized by deployment of
funds is non-profitable coupled with higher overhead expenses, increase in
sickness in industrial units, mounting of NPAs over the years etc. 1 Higher the
productivity results in proportionately lower in the establishment cost. The

1
R. K. Raul-Jaynal Uddin,”Public Sector Banks in India”, Kalpaz Publications Delhi-2005, pp179.

3
experience of Indian banking systems since nationalization has brought to the
fore front the immense potential of banking as a level of economic development.
Since banking development and economic development are closely associated
with each other. It would be pertinent to have an analytical study of the activities
of the Public Sector Banks and Private Sector Banks in the field of economic
development in India. It is necessary to examine the extent to which the banks
have moved towards their goal. The present study analyses in detail the
productivity and profitability of Public Sector Banks and Private Sector Banks
comparatively for the period of 5 years (2005-„06 to 2009-„10).

1.2 RATIONALE OF THE STUDY:

The banking system plays on important role in the economy by channeling

funds from those who have excess funds to those who have productive needs for
those funds. Banking sector is reckoned as a hub and barometer of the financial
system. As a pillar of the economy, this sector plays a predominant role in the
economic development of the country. The banking sector can play a significant
role as growth facilitator. The face of banking is changing rapidly. For a strong
and resilient banking and financial system, therefore, banks need to go beyond
peripheral issues and tackle significant issues like improvement in productivity,
profitability, efficiency and technology, while achieving economies of scale
through consolidation and exploring available cost-effective solutions.

India‟s banking system has several outstanding achievements to its credit,

the most striking of which is its reach. An extensive banking network has been
established in the last thirty years, and India‟s banking system is no longer
confined to metropolitan cities and large towns in fact. Indian banks are now
spread out into the remote corner of our country. In terms of the number
branches, India‟s banking system is one of the largest, if not the largest in the
world today. An even more significant achievement is the close association of
India‟s banking system with India‟s development efforts. The diversification and
development of our economy, and the acceleration of the growth process, are in

4
no small measure due to the active role that banks have played in financing
economic activities in different sectors.2

Since the nationalization of banks till first banking sector reforms (1991) the
main thrust of the bank was on social banking where profitability was not
considered as an important factor or their performance. At that time, bundle of
deficiencies were prevailing in Indian banking system such as increasing
branches but the most of them witnessed continuous losses, deteriorating
productivity and profitability, functioning under highly regulated environment etc.
that resulted in deterioration in performance of Indian banks. The banks since
nationalization have diverted their attention from “class banking” to “mass
banking” with little emphasis on profit element. But many problems cropped up
such as inter-region inequality in bank‟s operations, non-recovery of loans, willful
default, political interference, deterioration of customer services, redtapism,
neglect in the supervision of end use of credit, declining efficiency and
profitability.
The computerization of all the banks of Indian banking industry and
mergers and acquisitions of banks strengthen their efficiency. Technology has
become a strategic and integral part of banking, driving bank to acquire and
implement world class systems that enable them to provide products and
services in large volumes at a competitive cost with better risk management
practices customers have become very demanding and banks have to deliver
customized products through multiple channels, allowing customers access to
the bank round the clock. By the very nature of ownership, having large network
of branches, public sector banks are facing many problems such as overstaffing,
resistance to adopt new technology etc. because they do not have the type of
flexibility that is processed by Indian private sector banks and foreign banks
operating in India hence, they are facing serious challenges from new private

2 nd
Dr. Bimal Jalan, Governor RBI in a speech at the 22 Bank Economists‟ Conference, New
th
Delhi, 15 Feb. 2001.

5
sector banks and foreign banks. In present situation, banking sector tough
competition is being faced and need for higher productivity is felt. The banking
industry that does the things better and before others can avail the opportunity.
That will become the leader in the market. To provide the products and services
better to customers and serve then in better way, the skill and commitment of
employees is needed. High quality and better performance of every individual is
needed to contribute in attaining the objectives of the organization. Therefore,
output per employee, per branch and per capital etc. is required and that is called
productivity. “The erosion of productivity is in a sense the critical issue and
epitomizes the constraints under which the system has been operating. The
problems faced by the banking and financial system which have affected its
productivity, efficiency and profitability are thus the combination of factors, both
internal to themselves, using out of organizational and managerial weaknesses
and external in the form of policy directions and political and administrative
interferences.”3

The public sector and the existing private sector banks faced challenges of
competitive pressures and changing customer demands both from foreign banks
and new private sector banks. Indian banking industry is exploiting to face
competition especially public sector banks. Most of the public sector and old
private sector banks had their existence for more than a century with a number of
legacy issues to tackle. While the new private sector banks could adopt the best
practices and implement latest technology in their operations, the foreign banks
acquired the practices and technology akin to their host countries within the
regulatory framework of India faced with the threat of competition from the
foreign and new private sector banks, the traditional banks employed a number
of measures to improve the operational efficiency, meeting customer
expectations and reduction of operating costs. In this situation, for survival and
growth management in banks is adopting different strategies to improve

3
Vasant Desai, “Bank Management”, Himalaya Publishing House Pvt. Ltd., Mumbai, 2009,
pp149.

6
productivity. It provides one shot solution in the competitive situation. These
include going for fully automated systems preceded with business process
reengineering, offering VRS to its employees, training and retraining of staff,
lateral recruitment of specialists, emphasis on marketing, advertising, customer
relationship management and improving brand image, diversification of activities,
introduction of electronic based multiple service delivery channels, setting up of
back offices and data centers, business process outsourcing.

Banking sector reforms have increased the productivity profitability, and

efficiency of banks. Introduction of prudential norms relating to asset
classification, income recognition and provisioning along with legal and
institutional reforms, has led to visible improvement in assets quality in banks.
Despite intensification of competition and introduction of prudential norms, all
major bank groups in India have remained profitable. The most direct result of
changes is increasing competition and narrowing of spreads and its impact on
the profitability of banks. The challenges for banks is how to manage with training
margins while at the same time working to improve productivity which remains
low in relation to global standards. The deregulated environment brings in its
wake risks along with profitable opportunities, and technology plays a crucial role
in managing these risks. The far reaching changes in the banking and financial
sector entail a fundamental shift in the set of skills required in banking.
Globalization is going on at a fast pace. This rapid move towards greater
integration is fuelled by various factors like spreading political decision to move
towards liberalization and adoption of markets economies for free flow of capital
etc. These forces are creating new challenges. The phenomenon of globalization
has many aspects and implications. The globalization has exposed the global
competition. This is a great challenges as well as an opportunity.4
India‟s experiences with financial sector reforms perhaps far from happy.
The financial sector reforms in India are an integral part of the overall program of

4
R. K. Uppal, “Indian Banking in the Globalised World”, New Century Publications, New Delhi,
June-2008, pp 53.

7
economic reforms aimed at improving productivity and efficiency. After a decade
of reforms, the Indian banking sector is slowly emerging stronger regulations are
forcing the banks to adopt better operational strategies and upgrade their skills.
In Indian banking sector public, private, foreign, development and cooperative
banks are performing banking service very well under competitive situation. The
happening in the international markets are having their implications on the
markets and the players. “The Indian banking system faces several difficult
challenges; therefore, the banks have to re-orient their strategies in the light of
their own strengths and the kind of market in which they likely to operate. Some
of the challenges are home-grown, e. g. high cost of doing business; level of non-
performing assets; and low levels of customer satisfaction. Some of the
challenges are external e. g. phenomenal growth in the volume of capital inflows;
integration of financial markets across the globe.”5 All these are making the
operational environment more volatile and hence challenging for the Indian
banks. The Indian banks have nevertheless, withstood all these challenges and
are becoming more adaptive to the changing environment.

The present analytical study is an attempt to study the productivity and

profitability measurement for selected unit of Public Sector Banks and Private
Sector Banks for particular period. There is a competition between Public Sector
Banks and Private Sector Banks regarding the productivity. The importance of
productivity concept has been felt everywhere. So it is a keen need to study this
matter. That is why this topic has selected for study purpose by the researcher.
The purpose of this analytical study is, thus to make an in-depth study of what
the Public Sector Banks and Private Sector Banks in India have done during the
study period.

5
Ramashish Purvey, “Indian Banking: Past, Present and Future”, New Dimensions of Indian
Banking, Serial Publications, New Delhi, 2010, pp 35.

8
1.3 PRESENT SCENARIO OF BANKING SECTOR IN INDIA:

Today, Indian banks can confidently compete with modern banks of the
world. Today‟s Indian banking system is supposed to be fundamentally very
strong. The Indian Banks are the backbone of Indian financial sector and Indian
economy. The asset quality and soundness parameters of the Indian banking
sector, on the whole, are now comparable with global level. Indian banking
sector has witnessed drastic changes in recent years as a result of worldwide
move towards deregulation, globalization of finance and technological
innovations. The changing operating environment, consolidation and
convergence of financial activities require a thorough examination of the special
character of banks, the associated regulatory burden and the resultant impact on
their performance in terms of higher efficiency and productivity. Universal
banking is emerging as a viable business model for banks in India which ensures
functional diversification and generates efficiency and productivity gains. It
seems the economies of scale and scope assume more importance in corporate
business strategy of banks in recent years. Banking today has transformed into a
technology intensive and customer friendly model with a focus on convenience.
Technology, customer focus, quality of service, etc, which aware the
distinguishing features of private sector banks, during their early years, have now
become part and parcel of the public sector banks as well.

The significant properties of the holistic concept of management and

marketing has made bank marketing a device to establish a balance between the
commercial and social considerations, often considered to the opposite of each
other. The banking industry in India is undergoing a major change due to the
advancement in Indian economy and continuous deregulation. The deregulation
of the industry coupled with decontrol in the interest rates has led to entry of a
number of players in the banking industry. New channels squeezed spreads,
demanding customers‟ better service, marketing skills heightened competition,
defined new rules of the game pressure on efficiency. Need for new orientation
diffused customer loyalty. Excellent efficiencies are required at banker's end to

9
establish a balance between the commercial and social considerations Bank
need to access low cost funds and simultaneously improve the efficiency and
efficacy. Value added offerings bound customers to change their preferences
and perspective. The employees are resisting changing and the seller market
mindset is yet to be changed. These problems coupled with fear of uncertainty
and control orientation. Moreover banking industry is accepting the latest
technology but utilization is far below from satisfactory level. Placing the right skill
at the right place will determine success. The focus of people will be doing work
but not providing solutions, on escalating problems rather than solving them and
on disposing customers instead of using the opportunity to cross sell. “Banking
becomes an even greater driver of GDP growth and employment changes
reduce intermediation costs which in turn lead to increased growth, productivity
and innovation. Higher returns to shareholders increase the capital flow enabling
increased investment and a focus on developing people, processes and systems.
Industry consolidation takes place within public sector banks, thus resulting in
creation of a few large and efficient banks.”6

The competitive environment in the banking sector is likely to result in

individual players working out differentiated strategies based on their strengths
and market niches. Globalization would provide opportunities for Indian corporate
entities to expand their business in other countries. Banks in India wanting to
increase their international presence could naturally be expected to follow these
corporate and other trade flows in and out of India. The competition has forced
the institutions to reposition themselves in order to survive and grow.
Computerization of banking has received high importance in recent years due to
technological advancement that are taking place in the financial systems world
over. Banking sector reforms in India are grounded in the belief that competitive
efficiency in the real sectors of the economy will not realize its full potential

6
Vasant Desai, “Bank Management”, Himalaya Publishing House Pvt. Ltd., Mumbai, 2009, pp
422.

10
unless the banking sector was reformed as well. Thus, the principal objective of
banking sector reforms was to improve the allocation efficiency of resources and
accelerate the growth process of the real sector by removing structural
deficiencies affecting the performance of banks. In India, while the banking
system continues to play a predominant role, it is significant to note that, as a
result of various reform measures, the relative significance of financial markets
has increased. This augurs well for the overall stability of the financial system.
The East Asian crisis has also underlined the need for a balanced financial
system wherein financial markets also play an important role in providing
necessary liquidity, especially during times of crisis. Banking system also
requires liquidity in times of stress, which only deep and liquid financial markets
can provide.

Due to market competition in Indian banking industry, the pattern of

banking business is changing phenomenally. Continuous exploration of scope in
market would demand a brilliant focus on emerging opportunities and convert
that opportunities into competitive strength that calls for the competitive strategy.
Moreover banks have to provide a world class services to the customer to their
door. Due to this type of quality services and facilities, income is increasing day
to day. The major income of the bank is interest income. But now-a-days bank
are also offering wide range services like, Shopping. Ticket booking, Fund
transfer and also entered into mutual fund, insurance, financing export services.
In present age banking sector provide a world class non-fund based facilities to
the customer. “In the last few yeas, it is no wonder that the banking has seen a
virtual cornucopia of new products: credit cards, tele-banking, ATMs, quick
collection facilities for outstation cheques, retail EFT, Electronic clearing
services-ECS- Debit and Credit for respective payments like dividend, interest,
utility bills, Internet banking, etc. Now there are indications of moving towards the
introduction of smart cards, debit cards, on –line banking for e-commerce and
financial EDI for straight through processing”.7

7
Speech of Mr. S. P. Talwar, Dy. Governor, RBI at IDRBT, Hyderabad.

11
1.4 RECENT TRENDS IN THE GLOBAL BANKING INDUSTRY:

The global banking industry, one of the most important and profitable
industries of the world economy, has witnessed innumerable trends. The global
banking industry has been undergoing deep transformation. The world of
commercial banking is undergoing a deep transformation as a result of
marketable instruments competing with loans and demand deposits. Because of
this strong competition, commercial banks are struggling to make acceptable
margins from their traditional business entering into investment banking. Among
them, few are significant and worth mentioning. The first one has been
competition. As a result of deregulation and technological evolution across the
banking industries in prominent nations, competition increased manifold. In the
retail banking industry, large department stores in the United Kingdom have
entered the market for personal and mortgage loans, primarily to retain their
customers. Increasing competition has forced banks to search for more income
at the expense of more risk. Banks that lent heavily to Asia in search of better
returns than those available in Western markets are now being blamed for bad
credit decisions.

The Asian crisis has renewed interest on credit risk management casting
doubts on the effectiveness of current credit regulations. To increase top line
growth, many banks had to shift gears. They began focusing on businesses like
pensions, insurance, asset management and investment banking. In the United
States many banks even began referring to themselves as financial service
companies. Since Western governments need to cut expenditures for old-age
benefits to keep deficits under control, there will be an increase in the importance
of private pensions, mutual funds, and private banking operations. In the new
scenario, profits along with risks have multiplied. As capital markets play an all
important role, banks generate a major chunk of their income from fees for
investment services and derivatives. Apart from that, private banking and
investment banking have emerged as the most profitable segments. Through
private banking, banks have been offering services including asset management

12
to aristocrats. The technological breakthrough caused by the eruption of e-
banking and e-finance. Banks, especially commercial banks, will be obliged to
rethink their strategic positioning. While some banks are opting to offer a vast
variety of products/services on a global scale, others are focusing on some
specific market segment or specific geographic area. Unlike such banks, others
who desired to be global players reinvented themselves many times. The long-
term success of the banking industry depends on being in the right place at the
right time. A part from economies of scale, consolidation provided access to
distribution channels, broader range of products, wider customer base and
opportunities to enter new geographical markets.

Technology can be the key differentiator between two banks and a major
factor to attain competitive edge. Though slow in the beginning, Indian banks
seem to have paced up in adoption of advanced technology, as is evident from
our survey results. Technological systems of Indian banks have rated more
advanced than China and Russia; at par with Japan, but less advanced than
Singapore, UK and USA. Most of the banks have already started to feel the
impact of the operations of the new banks in the country. The single biggest
advantage of these banks is the large scale deployment of IT in their business
endeavors. Their business processes have necessitated that IT should provide
solutions to various bottlenecks and problems and the result has been that IT has
transcended well as an integral part of their regular operations. In the case of the
older banks, however, it is paradoxical to note that even now IT drives the way
the organization functions and not vice versa. The changes staring at the face of
bankers all relate to the fundamental way of banking--which is undergoing a rapid
transformation in the world of today. It is widely recognized that the core banking
functions alone do not add to the bottom line of banks--value added services are
slowly but steadily emerging as a substantial opportunity for banks to exploit and

13
customers would not hesitate to use such services in view of the convenience
they offer.8

1.5 ROLE OF BANKS IN ECONOMIC DEVELOPMENT:

Banks are essential instruments of accelerated growth in a developing

economy. Banking system plays a very important role in the economic life of the
nation. The health of the economy is closely related to the soundness of its
banking is now an essential part of our economic system. Banks have control
over a major part of the supply of money in circulation. It is a fact that in order to
judge the financial maturity, the size of bank assets of the economy plays an
active role. The size of bank assets in relation to GDP has important implications
for the financial development of any economy. In this way, they can influence the
nature and character of production in the country. Banking system occupies an
important position in an economy. The contributions of the banking sector in the
process of economic development are as under:

 The banks cater to the financial needs of industrial and agriculture

development these sectors which result in the economic development of the
country.
 Organized and unorganized sectors are required to be linked for economic
development of the country and this function is performed by banks.
 Banks mobilize the idle and dormant capital of a community and make it
available for productive purposes.
 Banks have designed a number of schemes to attract the prospective
customers to encourage the habit of savings among the people.
 The effective implementation of monetary policy can be done only through
properly organized banking system of the country.

8
Verma Amitabh, The Impact of Technology on Productivity and Profitability of Indian Banks in
post Liberalization period, Article Published by Abhigyan, July 2009.

14
 Banks have the power to create money and it helps in the economic
development of the country.
 Banks are able to achieve the desired change through it sectoral priorities
and other social development programmers.
 Banks also help in promoting import and maintaining the balance of trade at
favorable position.
 The effective banking system can help the government in controlling the
circulation of money. It helps in mitigating the effects of trade cycles in a
country.
 Banks have special drives and specific schemes for the development of
entrepreneurship. Banks help in boosting their strength and health.
 Banks regulate the flow of national savings. They ensure the diversion of
national savings into productive purposes.
 A country with an effective banking system has a secure foundation of
economic development.
 Banking sector being the heart line of the financial market, their up gradation
and financial strength is more vital for an efficient financial system.
Thus, Indian banking industry, the backbone of the country economy, has
always played a key role in prevention the economic catastrophe from reaching
terrible volume in the country. Banking is really the mirror of economic growth of
the country. Further, regulations aimed at enhancing the transparency and
accountability in the operations of the banks is to support the economic growth
while the productivity and the profitability do not take back seat in that set up.

1.6 INDIAN BANKING SECTOR IN GLOBAL PERSPECTIVE:

Today‟s Indian banking system is supposed to be fundamentally very

strong. The opportunity areas for the Indian banks, if pursued with caution and
confidence, can take us a step ahead in global competitiveness. The
globalization has exposed the global competition. This is a great challenges as
well as an opportunity. The banks in India should prepare themselves to face

15
these challenges so that they become more competitive and to act as global
players. The banking industry in India, through a measured, gradual, cautious
and steady process, has undergone substantial transformation. As the economy
transcends a higher growth path, and as it is subjected to greater opening and
financial integration with the rest of the world, the banking sector will need
considerable development, along with corresponding measures to continue
regulatory modernization and strengthening. “In the ear of globalization and
interdependence no economy remains isolated. Indian economy in general and
banking in particular may not be the exception to it. Indian banking system
operating within and out of the boundaries of the nation is also getting shocks of
the present recession. But as compared to US, UK, West European and
Japanese banking system, these shocks are not unbearable to Indian banking.”9

Information Technology innovations in the last few years have changed

the landscape of banks in India. Today, IT seems to be the prime mover of all
banking transactions. Electronic and Information Technology together are
bringing a swift change in the way banks operate, especially offering better
delivery channels and customers' friendly services. Anywhere banking,
telebanking, mobile banking, net banking, automated teller machine (ATMs),
credit cards, debit cards, smart cards, call centers, CRM, data warehousing have
totally transformed the banking industry. Today almost all the major banks are
offering online services to their customers. ATMs have emerged as the most
favored channel for offering banking services to the customers in the world. In
India, currently, there are two types of customers--one who is a multi-channel
user and the other who still relies on the branch as the main channel. The
primary challenge for banks is to provide consistent service to customers
irrespective of the kind of channel they use. The channels broadly cover the
primary channels of branch i.e. teller and ATM, phone i.e. call centre, interactive

9
Prof. Prakash Singh, “Global Competitiveness of Indian Banks: A study of Select Banking
Indicators, issues of Concern and Opportunities” IIM, Lucknow

16
voice response unit, and internet channel i.e. personal computer, browser,
wireless banking. Banks in India have all set for transformed branches, enhanced
telephone services, and internet banking functions. Even for Public Sector
Banks, the ongoing and future investments are massive. Electronic banking has
created many new challenges for banks management and regulatory and
supervisory authorities.

As the Indian economy continues on such a growth path and attempts to

accelerate it, new demands are being placed on the Banking sector. Higher
sustained growth is contributing to the movement of large number of households
into higher income categories, and hence, higher consumption categories, along
with enhanced demand for financial savings opportunities. On the production
side, industrial expansion has accelerated; merchandise trade growth is high;
and there are vast demands for infrastructure investment, from the public sector,
private sector and through public private partnerships. Indian banks have to be
encouraged to expand fast, both through organic growth and through
consolidation, in order to fuel the growth of large firms and to strengthen their risk
assessment systems, for catering to the requirements of smaller firms. Indian
banking industry juxtaposed with other countries, recognizing the differences
between the developed and the emerging economies. Indian markets provide
growth opportunities, which are unlikely to be matched by the mature banking
markets around the world. It is practically and fundamentally impossible for any
nation to exclude itself from world economy. Therefore, for sustainable
development, one has to adopt integration process in the form of liberalization
and globalization as India spread the red carpet for foreign firms in 1991. The
impact of globalization becomes challenges for the domestic enterprises as they
are bound to compete with global players. Although the number of banks
reported in the Top 500 from Asia has decreased, many banks in the region tend
to be well capitalized and in countries such as India, banks have become far
more competitive.” In order to face the competition and attract more customers,
banks have to maintain the international standards; they have to render high
quality services to their customers and implement new technology. The biggest

17
challenge for the banking sector lies in reaching out to rural masses through
shared technological platforms and brings down the cost of services. In order to
face various challenges posed by the competitive world, banks have to
concentrate on the new technology, customer relations, retail banking,
competition, mergers and acquisitions and Basel-II norms. With the increasing
effect of globalization, liberalization, privatization and now reforms of the Indian
banking sector, competition will intensify further.”10

The economic development of any country to the large extend depend

upon healthy and wealthy banking system. They are the driving engine for the
development. They play an important role in economy like the role of blood
vessels. Actually banks are like backbone for industries. With the ever increasing
pace and extent of globalization of the Indian economy and the systematic
opening up of the Indian banking system to global competition, banks need to
equip themselves to operate in the increasingly competitive Environment. This
will make it imperative for Banks to enhance their systems and procedures to
international standards and also simultaneously fortify their financial positions. It
is useful to note some telling facts about the status of Indian banking industry
when compared with other countries, recognizing differences between developed
and emerging economies. The main objective of the Indian Banking sector
reforms of the 1990s was to promote a diversified, efficient and competitive
financial system with the ultimate goal of improving the allocate efficiency of
resources through operational flexibility, improved financial viability and
institutional strengthening, to bring it at par with global benchmarks.

“The share of Indian banks is very little in the global market but foreign
banks are entering in India with a cut throat competition. Indian banks should
make effective and need based strategies for competing in the WTO regime. In

10
Saikrishna, K. “Commercial Banks in India: Challenges Ahead”, Professional Banker,
September-2006, pp.48-53.

18
the global age, it is not an option for Indian banks, but a compulsion to compete
and survive in the global market.”11

1.7 INDIAN BANKING PRODUCTIVITY SCENARIO:

The basic theory of productivity usually concentrates on the range of

output over which the marginal product of factors although positive, decrease or
over the range of diminishing productivity of the factors of production. The
measurement is directly based on quantities. Productivity is an operational ratio
which can be easily calculated and compared. Its strong relatedness to the
production process and the consideration of specific input and output qualities
allows for a measurement of the “success” of transforming input into output. Both
output and input may be expressed in terms of physical units or interims of
money. Alternatively, productivity theory concentrates on levels of employment of
the factors over which their marginal products are positive but decreasing.
Productivity is a vital indicator of economic performance. Productivity as a
concept involves the transformation of resources into final goods and services.
Productivity ratio is ratio of output of wealth produced to input of resources used
in the process. The relationship between inputs and output is a technological
relationship which economists summarize in a production function. In simple
words, it is output-input ratio. It is a relationship between given output and the
means used to produce it. Production is the creation of wealth which adds to
welfare. It is a vital link in the process of satisfying unlimited wants subject to
available resources. It is measured by comparing the amount produced with the
time taken or resources used to produce it. Banking is primarily a service
industry. There are number of indicators to measure the productivity of banking
sector. Measures of productivity at bank or industry level may differ from the

11
R. K. Uppal, “Indian Banking in the Globalised World”, New Century Publications, New Delhi,
June-2008, pp 72.

19
indicators of productivity at branch level. Productivity is affected by man power,
mechanization, system and the procedures, costing of operations, customer
services and various external aspects. The key to profitability for the public sector
banks is increased productivity. Those public sector banks that have been able to
increase the productivity found themselves at par with the private sector banks.
“One aspect of productivity is the measurement of business (deposit + advances)
per branch and per employee and the other aspect is cost responsiveness and
return on working fund.”12

Studies on productivity in Indian banking have only begun to emanate of

late. The process of globalization and liberalization has strongly influenced the
Indian banking sector. The ongoing reforms in the banking sector, with their
thrust on transparency, efficiency and profitability, have forced the Indian banking
sector to adopt suitable strategies with focus on productivity, profitability,
competitiveness, and sustainability. A recent study found that total factor
productivity growth has improved marginally in the post deregulation period, but
there was little evidence of narrowing of productivity differentials across
ownership categories following deregulation13. In today's world of banking,
technology is considered as the basic tool of the "process engineers" of the
organization. It is crucial for the design, control, and execution of service delivery
in banks. Therefore, a key driver of efficiency and productivity in the banking
industry today is the effective use of technology. This is a crucial pre-requisite for
capitalizing on future opportunities for the banking sector. Not much evidence,
however, has been forthcoming for the Indian banking sector on the interlink age
among non-performing loans, capital and productivity. It is widely recognized that

12
Angadi, V. B., Some Issues of Productivity of Indian Scheduled Commercial Banks. The
Journal of the Indian Institute of Bankers, 58(4):184.
13
Kumbhakar, S. C., & Sarkar, S., “Deregulation, Ownership and Productivity Growth in the
Banking Industry: Evidence from India”. Journal of Money, Credit, and Banking, 2003, pp 403–
414.

20
India is one of the fastest growing economies in the present decade, with the
growth engine propelled to a large extent, by a vibrant banking sector.

Liberalization and financial sector reforms during the last one decade have
brought the issue of productivity and profitability of banks into the limelight.
Profitability of banks has been under strain on account of declining net interest
margin and increasing competition. Public sector banks have not been as
profitable as the other banks primarily because of two reasons--Low Productivity
and High Burden ratio. Since the process of liberalization and reform of the
financial in the financial sector were introduced in 1991, banking sector has
undergone major transformation. As per the IBA report "Banking Industry Vision
2010" there would be greater presence of international players in the Indian. The
key to success in the competitive environment is increased productivity and
profitability. Indian banks especially the public sector banks and the old private
sector banks are lagging far behind their competitors in terms of both productivity
and profitability with the exception of the State bank of India and its associates.
The other public sector banks and old private sector banks need to go for the
major transformation program for increase their productivity and profitability. To
overcome these drawbacks private banks should chalk out a program to increase
productivity. The underlying objectives of the reform will make the banking
system more competitive, productive and profitable. Indian public sector banks
have a unique advantage over their competition in terms of their branch network
and the large customer base, but it is the use of technology that will enable public
sector banks to build on their strengths. Foreign banks and the new private
sector banks have embraced technology right from their inception and they have
better adapted themselves to the changes in technology. Where as the public
sector banks and old private banks have been slow in keeping pace with the
changing technology, which is regarded as one of the major reason affecting
their profitability and productivity.

21
1.8 INTERNATIONAL BANKING PRODUCTIVITY SCENARIO:

At a time when the financial sector has been significantly liberalized, it is

important to examine as to whether the productivity of banks has concomitantly
improved as well. Such insights can serve as useful guide to policy makers
towards understanding the efficacy of the reform process, particularly on the
banking sector. Differences among countries in average labor productivity, a
measure of economic performance, and income per capita, a measure of living
standards, are determined by differences in the number of annual working hours
per person and the share of the population that works. Thus, any study of
international variations in these measures must be accomplished using a range
of labor market indicators-working hours, unemployment, and labor force
participation rates.

Productivity is only one of the factors determining living standards. Living

standards also depend on “how many mouths need to be fed” from what is
produced. In this respect, important differences are observed between countries.
For example, the level of productivity in France is above that of the United
States. But, this productivity advantage is eroded by the effects of fewer working
hours and lower labor force participation rates, particularly among the working
age population. As a final note, one needs to be cautious in applying such
information directly for policy purposes. If, for example, the United States has
lower productivity due to greater use of low-skilled labor than has France, efforts
by France to increase labor force participation might reduce that country‟s
productivity while increasing per capita income. Moreover, relatively high wage
costs in European countries may have induced rapid substitution of capital for
labor in these countries relative to the United States, explaining their high
productivity levels.14 High “real” productivity rates of banks serve as an essential
starting point for the expected consolidation in the European financial market and
the harmonization of margins. Banks that are currently benefiting from high

14
The Conference Board, “The Euro‟s Impact on European Labor Markets.”

22
interest margins have to direct their attention to making the necessary
improvements in their own service capabilities so that they are able to
compensate for the decreasing income.

Globalization of trade, commerce, deregulation and free movement of

capital across borders has speeded up the growth of international banking in the
last three decades.15 International banking is key component of the global
economy it is central to the flow of capital around the world through provision of
loans, supply of financial advice and involvement in securities market. Today
market is no longer synonymous with geographical co-ordinates, Countries do
not produce at home but the world is perceived as a global village where
resources are best utilized a source and value additions done there. Instead, a
modern analysis of productivity should rather focus on banking processes.

Entry into more complex and more costly modes of internationalization

requires higher productivity, estimated cut-off values in our ordered profit model
are significantly increasing, and the correction term incorporating this pecking
order is highly significant on the intensive margin. Hence, more productive banks
are more likely to engage internationally than less productive banks, and they
hold more international assets. Second, gravity-type variables affect foreign
activities. Larger distances discourage international banking, while larger and
more developed markets promote international banking. Third, while international
banking shares similarities with the internationalization of nonfinancial firms in
terms of the importance of productivity and gravity, it is also shaped by country-
level regulatory factors and by risk considerations. Activity restrictions deter
entry, and foreign activities of banks are affected by macroeconomic volatility and

15
Shri B. S. Seshadri, “International Banking”, Macmillan Publishers India Ltd., Chennai, 2010,
pp 7.

23
growth correlations. There is evidence that banks with a lower revealed degree of
risk aversion are more active internationally.16

1.9 WHY CHOOSE THIS TOPIC:

The impact of globalization, privatization and liberalization has totally

changed the style of banking sector in India. Banks are essential instruments of
accelerated growth in a developing economy. It would be pertinent to have an
analytical study of the activities of the Public Sector Banks and Private Sector
Banks in the field of economic development in India. An investigation into the
performance of Public Sector Banks and Private Sector Banks is likely to
generate necessary data in desired from and quantity that may not only be useful
to policy-makers and bank managements alike, but may also help in developing
an integrated system of performance evaluation itself. It is necessary to examine
the extent to which the banks have moved towards their goal. Now-a-days in
India, banking sector plays a very important role in the growth of Indian economy.
Indian banking industry have been running and working successfully and
providing a world class services to the customer at their door. The banking
system in India has undergone significant changes during last 20 years. There
have been new banks, new instruments, new windows, new opportunities and,
along with all this, new challenges. While deregulation has opened up new vistas
for banks to augment revenues, it has also entailed greater competition and
consequently greater risks. The traditional face of banks as mere financial
intermediaries has since altered and risk management has emerged as the
defining attribute. In a market driven banking sector, competition is the most
dynamic elements. Increasing competition is going to be the major problem for
the banking sector will have to face.

16
Claudia Buch, Cathérine Tahmee Koch, Michael Kötter, “Is There a Productivity Pecking Order
in Banking, Too?” Margins of International Banking May 2009.

24
 Banking sector plays a very important role in the growth of Indian
economy. Banking sector is one of largest contributing forces to the growth of
economy. Banking industry is a part of the changing business paradigms across
the globe. The financial sector reforms in India are an integral part of the overall
program of economic reforms aimed at improving productivity and efficiency. The
financial sector reforms in India are now about seventeen years old an
appropriate time to make a medium term appraisal. Moreover having initiated
fundamental changes, the financial sector, particularly the banking sector is now
under an obligation to demonstrate the efficiency of the reforms undertaken so
far. Especially banking sector gives a new vision to Indian economy.

The bank management of India faced two important challenges one of

which was to improve their profitability and productivity by employee and branch
level the other was to achieve the social objective in an efficient manner. The
evaluation of performance is an integral art of the planning and control system.
During the post reform period, because of liberalization, privatization and
globalization, Indian banking sector is facing some problems and challenges.
Every organization is utilizing resources like men, machine, money, materials
and information to carry out their business effectively and efficiently. This study is
relating to labour, branches, capital and its productivity in banking sector in India.
Banking performance is the mirror reflection of an economy. In the current days,
public sector banks are facing much competition from new private sector banks
and foreign banks to retain their share in the market. In this highly competition
environment, there is a need to evaluate the productivity of Indian banking to
examine their strengths and weaknesses so that appropriate strategies must be
made to remove the weakness and make them competitive globally. The
importance of productivity concept has been felt everywhere. There is a
competition between Public Sector Banks and Private Sector Banks regarding
the productivity and profitability. Due to the magnificent contribution of
productivity on progress I have been attracted by this topic and selected for the
research study. Therefore, it is a keen need to study this matter. That is why the
researcher has selected this topic.

25
1.10 EXPECTED CONTRIBUTION FROM THE STUDY:

It has become very mandatory to study and to make a comparative

analysis of productivity of Public Sector Banks and Private Sector banks.
Increased competition, new information technologies and thereby declining
processing costs, the erosion of product and geographic boundaries, and less
restrictive governmental regulations have all played a major role for Public Sector
Banks in India to forcefully compete with Private and Foreign Banks. This study
makes a clear picture of Public Sector and Private Sector Banks related to the
productivity. It is expected the study of this topic would contribute in clarifying the
all concepts of labour productivity, branch productivity and capital productivity
very well. It is necessary to examine the extent to which the banks have moved
towards their goal. The beneficiary from the study of this topic would be first of all
self-researcher, academicians, practicing managers, prospects researchers and
the banks. If these parties refer this research study in future may take advantage
of the finding and suggestions. Academician, practicing managers and research
students may take benefits for academic purpose and on the jobs. The banks if
feel may implement the suggestions for improvement of performance and
productivity of manpower, branch and capital level. It can be said the benefits
would be multidimensional for above mentioned parties. The analysis of
individual banks will further be of assistance to the management of the banks for
planning financial strategies for attaining financial performance and exploring
further opportunities. The productivity is considered as an important parameter to
judge the performance and financial health of banks.

1.11 ORGANIZATION OF THE STUDY:

The entire research work has been divided into six chapters. The first
chapter titled “Introduction”. The second chapter titled “Review of the Literature”
deals with survey of some studies relating to financial analysis of Indian banking
sector conducted in the past. The third chapter titled “Research Methodology”

26
describes brief Introduction of Research Study. It includes Problem of the Study,
Significance of the Study, Objectives of the Study, Period of the Study, Universe
of the Study, Selection of Sample Units, Scope of the Study, Types of the Study,
Data Collection, Hypotheses for the Study, Tools & Techniques for Analysis,
Limitations of the Study and Chapterisation of the Study. The fourth chapter
“Indian Banking Industry” deals with Introduction of Banking Industry, The History
of Indian Banking, Institutional Structure of the Indian Banking System,
Nationalization of Major Commercial Banks, Banking System Reforms,
Narasinmham Committee Reports-1991, New Private Banks, Role of Indian
Banks in the new Millennium, Function of Commercial Banks and Performance
Assessment of Selected Banks. The fifth chapter “Productivity of Indian Banking
Industry” deals with an Analytical Study of Labour Productivity, Branch
Productivity, Capital Productivity and Profitability of Public Sector Banks and
Private Sector Banks, with the help of accounting techniques and Statistical
Tools. Finally, the sixth and last chapter has been presented with “Finding,
Suggestions and Conclusion”.

1.12 CONCLUSION:

Now a day, there is a paradigm shift in banking sector in India due to WTO
agreement, electronic age, Liberalization, Privatization, Globalization and
corporate governance. After liberalization, various new private sector banks and
foreign banks have joined the banking industry in India. Since the process of
liberalization and reform of the financial in the financial sector were introduced in
1991, banking sector has undergone major transformation. The underlying
objectives of the reform were to make the banking system more competitive,
productive and profitable. As per the IBA report “Banking Industry Vision 2010”
there would be greater presence of international players in the Indian Financial
system and some of the Indian banks would become international players in the
coming years. Bank is one of the most significant financial institutions which
command large financial resources and play a vital role in shaping the economy

27
of any country by judiciously deploying their funds for activities as would lead to
an overall economic growth.

The purpose of the present study has been to understand the productivity
of Public Sector Banks and Private Sector Banks. The key to success in the
competitive environment is increased productivity and profitability. This study
makes a clear picture of Public Sector and Private Sector Banks related to the
productivity. The bank management of India faced two important challenges one
of which was to improve their profitability and productivity by employee and
branch level the other was to achieve the social objective in an efficient manner.
After the submission of Narshimhan committee recommendations in 1991, the
whole banking scenario changed in India. The committee proposed reforms in
the financial sector. These reforms permit operational flexibility efficiency,
productivity and profitability. The present analytical study related to critical
evaluation of Public Sector and Private Sector banking. It also includes analysis
of capital productivity and labour productivity. The present study analyses in
detail the financial performance of Private Sector Banks and Public Sector Banks
comparatively for the period of 5 years (2005-„06 to 2009-„10).

28
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