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PERFORMANCE OF INDIAN BANKING SYSTEM

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 Performance of Indian Banking System
Dr. Manisha
Assistant Professor, Akal University, Talwandi Sabo

Abstract: Before we look into the performance of banking sector of India, we must have a proper
perspective of what is the history of a banking system in India and also understand the rationale of why
reform is necessary and which reforms are essential. What is the impact of new technology on Indian
banking system? Is performance better than the pre-reform period with the adoption of new technology?
The main focus of the study is on the performance of Indian banks.

Introduction

India has a long tradition of banking. Evidence regarding the existence of money-lending operations in
India is found in the literature of the Vedic times, i.e., 2000 to 1400 BC. The literature of the Buddhist
period, for e.g., the Jatakas and recent archaeological discoveries supply evidence of the existence
of sresthis, or bankers. From the laws of Manu, it appears that money-lending and allied problems had
assumed considerable importance in ancient India. Basically the functions of banks are to accept the
deposits from the people and advance the money to the people provide loans to the people when they are
in great need. The concept of bank is very old only difference is that today we are using modern
techniques in the banks and in traditional time only money lenders gives loans to the poor people. The
banking system is central to a nation’s economy. A banking institution is essential for economic growth
and development of nations.

Banks are special as they accept and deploy large amount of uncollateralized public funds in a fiduciary
capacity, but also leverage such funds through credit creation. Indian banking system divided into four
phases i.e. these are early phase era: 1770-1905, pre-independence era 1906-1946, post-independence
regulated era: 1947-1993, post-independence deregulated from 1993 onwards. The first bank in India,
called The General Bank of India was established in the year 1786.The east company established three
main banks, Bank of Bengal in 1809, Bank of Mumbai in 1840 and Bank of Madras in 1843 later on these
three banks merged and known as presidency banks. At the time of first phase (1913 to 1948) the growth
of banking sector was very slow. The functioning and activities of commercial banks were very slow due
to the effect of British rule in India to increase the growth of Indian banks government of India came up
with the banking companies’ act, 1949 which was changed to banking regulation Act 1949 as per
amending Act of 1965.After independence, government has taken most important steps in regard of
Indian banking sector reforms. In 1955, the Imperial Bank of India was nationalized and was given the
name "State Bank of India", which act as the principal agent of RBI and to handle banking transactions all
over the country. It was established under State Bank of India Act, 1955. On 19th July, 1969, major
process of nationalization was carried out. At the same time 14 major Indian commercial banks of the
country were nationalized. In 1980, another six banks were nationalized, and thus raising the number of
nationalized banks to twenty. Seven more banks were nationalized with deposits over Rs 200 Crores. Till
the year 1980 approximately 80% of the banking segment in India was under government’s ownership. In
India, prior to nationalization, banking was restricted mainly to the urban areas and neglected in the rural
and semi-urban areas. Large industries and big business houses enjoyed major portion of the credit
facilities. Agriculture, small scale industries and experts did not receive the deserved attention.

The need for the nationalization was felt mainly because private commercial banks were not fulfilling the
social developmental goals of banking, which are so essential for any industrializing country. The
developmental goals of financial intermediation were not achieved. Although the Indian banking system
had made considerable progress in the 1950s and the 1960s, but the benefits of this did not flow down to
the general public in terms of access to credit. In fact, till 1968 commercial banks were not involved to
any significant extent in providing direct finance to agriculture. During 1969-96, the number of bank
branches increased from 8262 to 62849, registering an annual rate of growth of 7.80 percent .During the
same period, the bank deposits and advances increased from Rs.4,26,073crore and Rs.2,63,533 crore in
1996 from Rs 4646 crore and Rs.3599 crore respectively in 1969. Growth rate was 18.22 percent and
17.24 percentage. In 1991, under the chairmanship of M. Narasimham; a committee was set up by his
name which worked for the liberalization of banking practices. As a result of the reforms, the number of
banks increased rapidly. The committee submitted its report in November 1991 and made wide-ranging
recommendations like reduction in liquidity ratio, phasing out of direct credit programme, redefinition of
priority sector, determination of rate of interest without the intervention of RBI, abolition of branch
licensing and ending the dual control of Finance ministry and reserve bank over the banking system. On
the suggestions of Narasimham Committee, the Banking Regulation Act was amended in 1993 and thus
the gates for the new private sector banks were opened. Increase in the branches of Indian banks as we see
in the table no 1, public sector banks have 45293 branches, private sector banks have 4665 branches and
foreign banks 182 branches which is high as compared to pre nationalized periods.

Objective of the study

1. To analyze the performance of Indian banking system during pre and post reform period.
2. To highlight the impact of technological development on Indian banking system.
3. Effective use of technology has a multiplier effects on growth and development.
4. Technology increases the efficiency of Indian banks.
5. To analyze the performance of non-performing assets on the profitability of banks.

Rationale of the study

The reforms were aimed at making the Indian banking sector more competitive, versatile, efficient,
and productive, to follow international accounting standard and to free from the government’s
control. The reforms in the banking industry started in the early 1990s have been continued till now.
The study makes an effort to examine the performance of banking sector in India during the last
eighteen years. Secondly, the attempt would also be made to study the major impacts of those
techniques upon the banking sector. From the above study we can say that performance of Indian
banking system is far better as compared to the pre nationalization period. The condition of banks are
improving as all the banks provide ATM facilities to their customer through debit card, credit cards
etc. there is no doubt that with the coming of foreign banks, we received the fruits of new technology
which is boon for any developing country. With the contact of foreign banks our Indian banks
efficiency increases and profits also increased.

Table 1 shows that Total Indian banks are 2, 17,452 in 2000-01which increased 8,74,046 in
2008-09 total number of foreign banks are 5,531in 2000-01 increased from 5531 to 26921.
Table 1: Indian bank Association Analysis of Banks, 2003
Year Indian banks Foreign banks Total banks
2000-2001 217452 5531 222983
2001-2002 272119 6988 279107
2002-2003 320816 8748 311565
2003-2004 373137 12232 385369
2004-2005 443537 15045 458618
2005-2006 556303 18827 575130
2006-2007 649586 21839 671425
2007-2008 747189 25093 772282
2008-2009 874046 26921 900967

Source: Reserve bank of India, Handbook of monetary statistics of India, 2006, p.40, Table 13; reserve
bank of India, Handbook of monetary statistics of India, 2006, p.105, Table 50

Structure of Indian banking system:

Indian banks divided into two categories one is scheduled commercial banks which is further divided into
four categories one is public sector which has 27 branches, private sector total number of branches are
31,foreign banks have 42 branches, regional rural banks with 196 branches. Second division of scheduled
bank of India is co-operative banks which are also divided into two categories one is urban co-operative
banks with 51 branches and state co-operative banks with 16 branches

Scheduled banks in India

Scheduled Commercial banks Scheduled Co-operative banks

Scheduled urban Scheduled

Public Private Foreign Regional
co-operative banks state co-
Sector Sector Banks in Rural banks
(51) operative
banks (27) Banks India (42) (196)
banks (16)
(31)

BPUBLIC SECTOR BANKS

Public sector banks are those which are under the control of government. They are divided into two
groups i.e. Nationalized Banks and State Bank of India and its associates. Among them, there are 19
nationalized banks and 8 State Bank of India associates. Public Sector Banks dominate 75% of deposits
and 71% of advances in the banking industry. Public Sector Banks dominate commercial banking in
India. These can be further classified into :( 1)
1) State Bank of India
2) Nationalized banks
3) Regional Rural Banks

TABLE 2: Total number of Indian Bank Branches (as on March, 2002)

Items Number Branches
Public sector banks 27 45293
Private sector banks 34 4664
Foreign sector banks 42 182
Source: Indian Bank’s Association, Performance Analysis of Banks, 1997–19981

1
International Journal of Innovation, Management and Technology, Vol. 2, No. 3, June 2011
Table 3: Operations of Public sector Indian banks (Actually operational)
Name of bank Branch Subsidiary Representative Joint venture Total
office bank
2010 2011 2010 2011 2010 2011 2010 2011 2010 2011
Public sector 137 144 20 21 3 39 7 7 203 211
bank
1.Allahabad 1 1 - - 1 1 - - 2 2
Bank
2.Andhra bank - - - - 2 2 - - 2 2
3.Bank of 46 47 9 9 3 3 1 1 59 60
Baroda
4.Bank of 24 24 3 3 5 5 1 1 33 33
India
5.Canara bank 4 4 - - 1 1 - - 5 5
6.Corporation - - - - 2 2 - 2 2
Bank -

7.Indian bank 3 4 - - - - - - 3 4
8.Indian 6 6 1 1 4 4 1 1 11 12
overseas bank
9.IDBI bank 1 1 - - - - - - 1 1
Ltd.
10.Punjab 4 4 2 3 4 4 - -- 11 12
National Bank

11.State Bank 42 47 5 5 8 8 - - 59 64
of India
12.Syndicate 1 1 - - - - - - 1 1
Bank
13.UCO Bank 4 4 - 2 2 2 - - 6 6

14.Union Bank 1 1 - 5 5 5 - - 6 6

15.Oriented - - - 1 1 - - - 1 1
Bank of India
16.Oriental - - - - 1 1 - - 1 1
Bank of
Commerce
Note:1)Data for 2010 relate to end –September
2)Data for 2011 relate to end-August
Source: http://www.rbi.org.in

Table 4: Operations of Private sector Indian banks (Actually operational)

Name of bank Branch Subsidiary Representativ Joint venture Total
e office bank
New Private 11 13 3 16 17 - - - 30 33
Sector Bank
Axis Bank 3 3 - 2 3 - - - 5 6
HDFC Bank 1 2 - 2 2 - - - 3 4
Ltd.
ICICI 7 8 3 3 8 8 - - 18 19
Indusind bank - - - - 2 2 - - 2 2
Ltd.
Federal bank - - - - 1 1 - - 1 1
Ltd.
22.Kotak - - - - 1 1 - - 1 1
Mahindra bank
Ltd.
Total 148 157 23 24 55 56 7 7 233 244
Note:1)Data for 2010 relate to end –September
2)Data for 2011 relate to end-August
Source: http://www.rbi.org.in

Between 2010 and August 2011, Indian banks opened nine more branches in abroad. Thus the, foreign
operations’ of Indian banks expanded in 2010-11 with a wide network of 244 offices as compared with
233 offices in the previous year.

Progress of Banking in India

Technological Development in Banks:
Developments in the field of information technology (IT) strongly supports the growth and inclusiveness
of the banking sector by facilitating inclusive economic growth .IT improves the front end operations with
back end and helps in bringing down the transaction costs for the customers. Important Events in India:
Arrival of card-based payments- Debit, Credit card in late 1980s and 1990s .During the recent years, the
pace and quality of banking was changed by the technological advancement in this area. The new private
sector banks and most of the foreign banks, which started their operations in the mid nineties followed by
liberalization, were the front runners in adopting technology. For old private sector banks and public
sector banks adoption of technology was an arduous job because of the historical records and practices.
However, it is important to note that presently almost 98 per cent of the branches of public sector

Banks are fully computerized, and within which almost 90 per cent of the branches are on Core banking
platform. Further, introduction of automated teller machines (ATMs) enabled customers
to do banking without visiting the bank branch. In 2010-11 the number of ATMs witnessed a growth of
24 per cent over the previous year. However, the percentage of off-site ATMs to total ATMs witnessed a
Marginal decline to 45.3 per cent in 2010-11 from 45.7 per cent in 2009-10. More than 65 per cent of the
total ATMs belonged to the public sector banks as at end March 2011.

Benefits of Automatic Teller Machines

ATM was introduced to the Indian banks industry in the early initiated by foreign bank. Due to lack of a
strong branch network most foreign banks and some private sector players suffered from a serious
handicap. ATM technology was used as a means to partially overcome this handicap by reaching out to
the customers at a lower initial and transaction costs and offering hassle free services. Since then,
innovations in ATM technology have come a long way and customer receptiveness has also increased
manifold. Public sector banks have also now entered the race for expansion of ATM networks.
Development of ATM networks is not only leveraged for lowering the transaction costs, but also as an
effective marketing channel resource.
 Table 5: ATMs of Scheduled Commercial Banks (As at end- March 2011)
Sr.no Bank group On site ATM Off site Total Off site
ATM number ATM as
of ATMs percent of
total
ATMs
I Public sector 29,795 19,692 49,487 39.8
banks
II Private sector 10,648 13,003 23,651 55.0
banks
III Foreign banks 286 1,081 1,367 79.1
ALL SCBs 40,729 33,776 74,505 45.3
SOURCE: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13938

During 2011-12, 21,000 ATM were deployed by the banks.public sector banks accounted for more than
60 Per cent of the total number of ATM as at end-March, while close to one-third of the total ATMs.

Outstanding Number of Credit Cards

The issuance of credit cards facilitates transactions without having to carry paper money. Despite the
decline in the number of outstanding number of credit cards, the volume and value of transactions with
credit card recorded a growth of 13 per cent and 22 per cent, respectively in 2010-11. New private sector
banks and foreign banks accounted for more than 80 per cent of the total outstanding credit cards as at
end March 2011.

TABLE6: Outstanding Number Debit cards issued by scheduled commercial banks (As at End-
March 2011) (in millions)
Bank group 2006-07 2007-08 2008-09 2009-10 2010-11
Public sector 44.09 64.33 91.7 129.69 170.34
banks
Private sector 27.19 34.1 41.34 47.85 53.58
banks
Foreign banks 3.71 4.02 4.39 4.43 3.92
Total 74.98 102.44 137.43 181.97 227.84
SOURCE: http://www.rbi.org.in

Table 7: Credit Cards issued by Scheduled Commercial Banks (As at end-March 2011) (in millions)
Bank group 2006-07 2007-08 2009-10 2010-11
Public sector 4.14 3.93 3.44 3.26 3.08
banks
Private sector 10.68 13.29 12.18 9.5 9.32
banks
Foreign banks 8.31 10.33 9.08 5.57 5.64
SOURCE: http://www.rbi.org.in
Computerization in Banks:
Technology has charged the face of the Indian banking sector through computation while new private
sector banks and foreign banks have an edge in this regard. Among the total number of public sector bank
branches, 97.8 percent are fully computerized at end – March 2010 whereas all branches of SBI are fully
computerized.
Table 8: Computerization in Public Sector banks
Category 2007 2008 2010
Fully computerized 85.6 93.7 97.8
branches (%)
Source: RBI,Annual Report 2009-10

Financial Performance of Scheduled Commercial Banks

Financial performance of banks came under pressure during 2011-12, mainly due to the increased cost of
deposits in the backdrop of an elevated interest rate environment. However, on a positive note, the
efficiency of banks improved. The two main indicators of profitability, i.e., RoE(rate of equity) and
RoA(rate of asset) declined marginally during 2011-12, reflecting deceleration in the net profit of banks.

Profitability

Despite accelerated growth in total income, the consolidated net profit of the banking sector increased at a
slower rate compared with the previous year, mainly due to the steep increase in interest expended.
Interest expended on deposits accounted for more than three-fourths of the total interest expenditure of
banks. This, along with an increase in the proportion of relatively high-cost term deposits, led to
acceleration in the interest cost of banks. In addition, retail deposits became more costly in the backdrop
of a high interest rate environment.

Table 8: Trends in income and expenditure of scheduled commercial banks (Amount in ‘billion’ )
2010-2011 2011-2012
Amount Percentage Amount Percentage
variation variation

1.Income 5,712 15.5 7,408 29.7

2.Expenditure 5,009 14.5 6,591 31.6
3.Operating profit 1,231 23.1 1,731 16.1

4.Net profit 703 23.2 817 16.1

Source: Annual accounts of respective banks

Table 9: Return on Assets and Return on Equity of SCBs (per cent)

Bank group/year Return on Assets Return on Equity
2010-11 2011-12 2010-11 2011-12
Public sector 0.96 0.88 16.90 15.33
banks
Private sector 1.43 1.53 13.70 15.25
banks
Foreign banks 1.75 1.76 10.28 10.79
All SCBs 1.10 1.08 14.96 14.60
Source: Annual report of RBI

Performance indicators:

Non performing advances: NPA is defined as an advance for which interest or repayment of principal or
both remain outstanding for a period of 90 days. It affects the earning capacity and profitability of the
banks. Credit is one of the most important assets of the banks. Increasing credit means improving
financial soundness of banks but that is only if it is accompanied by the willingness of the of the
borrowers to pay. Indian banking system has very serious problem of mounting NPA. This problem is
more critical in case of priority sector. The position of commercial banks regarding NPAs has been
shown:
Table 10: Component-wise Percentage of Non-Performing Advances of Public and Private Sector
Banks to Total Priority Sector
YEAR PUBLIC SECTOR BANKS PRIVATE SECTOR BANKS
AGR SSI OPS TPS AGR SSI OPS TPS
2000-01 13.87 19.44 12.11 45.42 5.03 15.61 7.98 28.62
2001-02 13.84 18.73 11.92 44.49 3.76 12.73 5.33 21.82
2002-03 14.60 19.24 13.39 47.23 4.52 10.63 5.45 20.60
2003-04 14.44 17.62 15.48 47.54 4.43 12.19 7.35 23.97
2004-05 15.21 16.43 17.42 49.06 5.29 10.96 8.62 24.87
2005-06 14.99 16.72 22.36 54.07 6.57 10.31 12.29 29.17
2006-07 16.86 15.14 27.47 59.47 9.31 6.98 14.93 31.22
2007-08 20.80 14.60 28.21 63.61 11.31 5.02 10.02 26.35
SOURCE: Compiled from Trend and Progress of banking in India from 2000-01 to 2007-08
It can be seen from Table 6 that percentage of total priority sector NPAs of public sector banks was more
than that of private sector banks during 2000-01 to 2007-08. Percentage of total priority sector NPAs of
public sector banks increased from 45.42 per cent to 63.61 per cent and that of private sector banks
decreased from 28.62 per cent to 26.35 per cent during the same time period. Agriculture NPAs of public
and private sector banks increased tremendously from 13.87 per cent to 20.80 per cent and 5.03 per cent
to 11.31 per cent respectively, during the study period. Small scale industrial NPAs of public sector banks
decreased from 19.44 per cent to 14.60 per cent and that of private sector banks decreased marvelously
from 15.61 per cent to 5.02 per cent. Other priority sector NPAs of public sector banks increased sharply
from 12.11 per Cent to 28.21 per cent and that of private sector banks increased from 7.98 per cent to
10.02 per cent during the same time period. Hence, it can be concluded that during the post reforms,
priority sector advances of private sector banks grew faster than that of public sector banks. The above
analysis shows that public sector banks concentrated more on agriculture sector than other sectors of the
economy, in the initial years of the study. But after 2002-03, both public and private sector banks started
concentrating on the service sector, recognizing the need of this sector for the economic development of
the economy. Both the public and private sector banks achieved the national target of priority sector but,
not for agriculture sector during the study period. It can also be inferred that total priority sector NPAs of
public sector banks increased and that of private sector banks decreased. This might be because of risk-
aversion approach followed by the private sector banks. Sector-wise analysis shows that in agriculture
and other priority sector NPAs of public and private sector banks increased and small scale industries
sector NPAs of both the banks decreased during the study period. Thus, it has been found that on the
whole, private sector banks in India were giving higher attention to priority sector of the economy than
public sector banks during the study period.
Table 11: Trends in Non Performing Assets (amount ‘billion’)
Items Public banks Private sector Foreign banks Scheduled
banks commercial banks
Gross NPA
2010-11 2.4 2.5 2.5 2.5
2011-12 3.3 2.1 2.6 3.1
Source: Balance sheet of respective banks

Nonperforming assets:
The asset quality of the banking sector improved in 2010-11 over the previous year. The gross NPAs to
gross advances ratio declined to 2.25 per cent in 2010-11 from 2.39 per cent in the previous year. The
GNPAs, however, increased in absolute terms in 2010-11 over the previous year, though at a lower rate.
The improvement in asset quality was visible in both private sector banks and foreign banks. Public sector
banks, however, witnessed deterioration in asset quality in 2010-11 over the previous year. This was
mainly due to deterioration in asset quality of the SBI group. Among the bank groups, SBI group reported
decline in gross non-performing loans in 2010-11 over the previous year the highest GNPA ratio followed
by foreign banks in 2010-11.

Conclusion:
Indian banking system performed better as compared to the pre-reform period. The IT revolution had a
great impact in the Indian banking system. The use of computers had led to introduction of online banking
in India. The use of the modern innovation and computerization of the banking sector of India has
increased many folds after the economic liberalization of 1991 as the country's banking sector has been
exposed to the world's market. The Indian banks were finding it difficult to compete with the international
banks in terms of the customer service without the use of the information technology and computers. Use
of technology in expanding banking is one of the significant focus areas of banks. The banks in India are
using Information Technology (IT) not only to improve their own internal processes but also to increase
facilities and services to their customers. Efficient use of technology has facilitated accurate and timely
management of the increased transaction volume of banks. By offering simple, safe and secure
technology, banks reach at doorstep of customer with delight customer satisfaction.

Suggestions:
1. There should be increase in the number of branches in rural areas.
2. The facility of ATMs should also be available in far flung areas.
3. Need for greater use of technology to propagate financial inclusion
4. Need for greater use of technology to propagate financial inclusion

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