CHAPTER 1

INTRODUCTiaN
 C)
f^ CHAPTER 1

mraoDucnoN
The content of this chapter is divided into the following sections.
1.1 Introduction
1.2 Indian Banking Sector
1.3 Global Scenario
1.4 Indian Banking Structure
1.5 Progress of Commercial Banks at a Glance
1.6 Problems of Banking Sector
1.1 Introduction:-
In world economy GDP of US S 70.2 trillion* in 2011. the share of services
was 78.40 percent, more or less the same as in 2001. In 2011 GDP of India was US $
1897.6 bilhon**, the share of services was 58.2 percent approximately. The share of
services in GDP was 50.1 percent in 2001, which has increased to 58,2 percent of
GDP in 2011. A comparison among BRICKS countries in 2011 (share of services in
GDP) is the highest in Brazil with 66.5 percent and at world level France with 79.2
percent. But a comparison of the services performance of the top 15 countries in the
eleven year period from 2001 to 2011 shows that the increase in share of services in
GDP is the highest for India 8.1 percentage points.'
Graph No: - 1.1.1
Role of Banks in the Economic Growth

^ BANKING

ECONOMIC
GROWTl

One trillion is 1 million of million (10)'^.

A billion is a thousand million.

ye J of 14
 The share of services in India GDP increased from 33.3 percent in 1950-51 to
55.70 percent in 2011-12. Banking and insurance with marginal improvement in its
share to 5.7 percent but was the most dynamic sector in 2011-12 with a growth of
13.2 percent.^
A sound financial system is indispensable for the growth of a healthy and
vibrant economy. Performance of the banking sector is an effective measure and
indicator to check the performance of any economy to a large extent. A number of
steps were taken in close succession, enabling the nationalized banks to play an active
role in the economic development. The stage of development of the banking industry
is a good reflection of the development of the economy. Evaluation of the financial
performance of the banking sector is an effective measure and indicator to check the
soundness of economic activities of the country.
"Financial statement analysis provides important information about a
company's financial health". Properly comparing a balance sheet with the
corresponding profit and loss accounting to determine the strength and weakness of a
business describes financial statement analysis.
Financial analysis determines a company's health and stability. The data gives
information to the stakeholders about how the company conducts business.
Stockholders can find out how management employs resources and whether they use
them properly. Governments and regulatory authorities use financial statements to
determine the legality of a company's fiscal decisions and whether the firm is
following correct accounting procedures, and also use financial statement analysis to
decide the correct taxation for the company.
1.2 Indian Banking Sector:-
L2.1 Meaning of Bank
A Bank is an institution which accepts deposits fi-om the general public and
extends loans to the households, the firms and the government. Banks are those
insfitutions which operate with money, thus, they are money traders. With the process
of development functions, banks are also increasing and diversifying. The banks are
not mearly the traders of money, they also create credit. Their activities are increasing
and diversifying. Hence it is very difficult to give a universally acceptable definition
of bank.

(Page 2 of 14
 1.2.2 Definitions of Bank
Indian Banking Regulation act 1949 section 5 (1) (b) of the banking Regulation Act
1949 Banking is defined as.
"The acceptance for the purpose of the landing or investment, of deposits of
money from the public repayable on demand or otherwise, and withdrawal by cheque,
draft, order or otherwise."'^
"Bank means a bench or table for changing money."^
- Greek History
1.2.3 Meaning of Banking Sector
"Banking sector means banks collectively"
"The people or companies engaged in a particular kind of commercial
enterprise, each industry has its own trade publications make sector or industry."
1.2.4 Importance of Banking Service
Our economy couldn't function without banks. By attracting savings and granting
credit, banks are the oil for the wheels that keep the economy running.
They have three main iunctions:
I. Banks are where people can safely deposit their savings, on which banks then
pay interest on. If there were no banks, people would have to store and protect
their savings themselves, which would involve major risks.
Graph No:- 1.2.4.1
Primary Functions of Bank

INVESTMENT

II. Banks are largely responsible for the payments system. Electronic payments
are becoming more important as people use less cash. This means that banks
are processing more card payments, transfers, direct debits, etc. every day.
III. Banks issue loans to both people and companies. Without banks, it would be
very hard for people to buy a home or start a business, or for companies to
make investments.
IV. Without banks as a go-between, savers and borrowers would have to find each
other personally, and a single transaction between a saver and a borrower
would be very costly: just think of the fees you'd have to pay a solicitor to
draw up a contract. Plus, the saver would be assuming a big risk—if the
<Page 3 of 14
 borrower can't repay, the saver would lose all their savings. A bank lends
money to a lot of people and companies. If some are unable to repay their
loans, the bank can absorb these losses and savers won't be affected.
V. Banks also help to solve the issue that, customers generally want ready access
to the money which they deposit, while many loans require long-term
commitments, such as a 30-year mortgage for financing a house. So banks
borrow (i.e. hold customers' deposits) short-term but lend long-term. By doing
this they transform debts with short maturities (deposits) into credits with very
long maturities, managing the risks associated and collecting the difference in
the interest rate as profit. This is known as "term transformation" and is a vital
part of banking.
VI. Very basically, banks earn money by charging more interest on loans than that
they pay on savings.

VII. Besides interest income, banks also make money from other transactions and
services, such as providing financial advice and products to large
corporations.^
1.3 Global Scenario:-
When we see at the world level there were no Indian banks in top 10 by total
assets and market capitalization. When we compare the largest and biggest bank of
India State bank of India the total assets of its was 244 US$ billion which was not
comparable with the 10^^ rank bank Credit Agricore Group which was assets 2449.60
US $ billion.
Table No:-1.3.1
Number of Banks in the Top 10 by Total Assets at the World Level
Rank Bank Name Total Assets (US$ biillion)
1 Industrial and Commercial bank of China 3,616.39
2 China Construction Bank Corporation 2939.15
3 Agricultural Bank of China 2,816.60
4 HSBC Holdings 2,670
5 Bank of China 2629.31
6 JPMorgan Chase & Co 2,449.60
7 BNP Paribas 2,400.04
8 Mitsubishi UFJ Financial Group (MUFG) 2,323.24
9 Bank of America 2,149.03
10 Credit Agricore Group 2,449.60
Source: - https://en.wikipedia.org/wiki/List_of_largest_banks {accessed on Date: - 9/7/2016)

(page 4 of 14
 Among the top 10 banks in the world, four of them are Chinese. With this
first three were from China. When the Chinese economy grew, the banks had to grow
in order to provide credit. The top four Chinese banks are world's most profitable
banks. Combined profits from all Chinese banks in the ranking are almost double
those of US rivals and 10 times bigger than those of UK banks. In 2008, both UK and
US banks were more profitable than their Chinese counterparts.
Table No:- 1.3.2
Number of Banks by Country in the top 10 by Total Assets at the World Level
Rank Country Number of banks in the top 50
by total assets (2015)
1 China 11

2 USA 6

3 France 5

4 Japan 5

5 United Kingdom 5

6 Australia 4

7 Canada 3

8 Germany, Italy, Netherlands, Spain, Switzerland 2

Source: -
https://en.wikipedia.org/wiki/List o f ] argest_banks (accessed on Date: - 9/7/2016)
Table No:- 1.3.2 have been showed that China with 11 number banks was first
in number of banks in the top 50 by total assets in 2015 followed by USA with 6
banks and third were France, Japan and U.K. with 5 banks have each country.
Similar, thing will happen in India if the Indian economy grows. India will
need bigger banks. To build bigger banks organically is difficult. So, to do it in an
inorganic way by clubbing some of the banks will be the best route. To that extent this
will be a logical progression.

^age 5 of 14
1.4 Indian B a n k i n g Structure:-
C h a r t N o - 1.4.1
Indian Banking Structure

! BANKING STRUaURE IN INDIA UNSCHEDULED

BANK
SCHEDULED BANKS IN INDIA

Schcdulftd CommtrcM Sinkt AU tnilia Financial (nitHuliora

Sdi«dul«d Co-op»rHtvt Binki

1 1
' 1
1 R«(iOtWl
KMIiofMl Fe<l«ut»on of Mjle Co-
op* rativ«B«Ai LimitMl
NatiorMliiFd NABAflD
Rur*l (NArsco«|
1 1 Banki
SIDBI

EXIM
Rural
Co-opcratrv*
Co-optratlvt IDBI
Panht
Inititirtion

Short - t t r m lonf-Mrm
Structura Structura

1 1
DMfkt iUlt Pitiwry
Ca-ivciJlhc Co-op«ralJw Co-opMatwe
CIMtt
B«nb
Rural Ruul
Drvctopinrnt DrvrtopiDMil
Bwki BMtki

Source: - www.google.com/images. (Accessed on Date: - 28/07/2015)

The organizational structure of Indian banking sector consists with scheduled
commercial banks, scheduled co-operative banks and other financial institutions. The
present structure of Indian Banking sector has been analyzed below.
• Reserve Bank of India:-
The Reserve Bank of India is the central bank of India and the controller of all the
monetary policy of India. The Reserve Bank of India has established in 1st April of
1935. As The Reserve Bank of India is the main monetary authority of India, it
monitors monetary policy and hereby maintaining price stability and ensuring
adequate flow of credit to productive sectors. The Reserve Bank of India is the
regulator and supervisor of the financial system in the country and also manages the
foreign exchange of the country.

^age 6 of 14
 • Scheduled Commercial Banks:-
Scheduled commercial banks in India are regulated under Banking Regulation
Act, 1949. Scheduled banks in India constitute those banks which have been included
in the Second schedule of Reserve Bank of India (RBI) Act, 1934. The State Bank of
India and its associates. Bank of Baroda, Allahabad Bank, and Vijaya Bank are the
example of Schedule Commercial Banks.
• Scheduled Co-operative Banks:-
Primary (urban) credit societies that meet certain specified criteria can apply to
RBI for a banking license to operate as urban co-operative banks. Primary (urban) co-
operative banks are registered and governed by state govenmients under the
respective co-operative societies acts of the concerned states. These banks are also
included in the second schedule of the RBI Act 1934. Some of the scheduled co-
operative banks are Ahmedabad Mercantile Co-operative Bank Ltd., Surat Peoples
Co-operative Bank Ltd., and Indian Mercantile Co-operative Bank Ltd, etc.
• Other Financial Institutions:-
AU India Financial Institutions (AIFI) is a group composed of Development
Finance Institutions (DFI) and Investment Institutions that play an important role in
the financial markets. All India Financial Institutions also known as "financial
instruments". The financial institutions assist in the proper allocation of resources,
sourcing from businesses that have a surplus and distributing to others who have
deficits. Export-Import Bank (EXIM), National Bank for Agriculture and Rural
Development (NABARD), Small Industry Development Bank of India (SIDBI) and
National Housing Bank (NHB) comes under this category.
1.5 Progress of Commercial B a n k s at a Glance:-
The Indian banking system consists of 26 public sector banks, 25 private
sector banks, 43 foreign banks, 56 regional rural banks, 1,589 urban cooperative
banks and 93,550 rural cooperative banks, in addition to cooperative credit
institutions. Public-sector banks control nearly 80 percent of the market, thereby
leaving comparatively much smaller shares for its private peers.
Standard & Poor's estimates that credit growth in India's banking sector
would improve to 12-13 per cent in FY 2016 as compared to 10 per cent in the second
half of CY 2014.^

(Page 7 of 14
 Table No-.- 1.5.1
Progress of Commercial Banks of Indian Banking Sector at a Glance
(Period from 2005-06 to 2014-15) (Amoum in Rs. Crore)
No 1 2 3 4 5 A\LKA(iF

05-06 to 05-06 to
Year 05-06 06-07 07-08 08-09 09-10
09-10 14-15
Scheduled 85 83 80 80 83 82 84
i_
RRB 133 96 91 86 82 97 82
Non Scheduled 4 4 4 4 4 4 4

No 6 7 8 9 10
10-11 to
Year 10-11 11-12 12-13 13-14 14-15 Growth
14-15

Scheduled 83 87 87 89 92 87 5 6.10

RRB 82 82 64 57 56 68 -29 -29.9fl

Noil Scheduled 4 4 4 5 4 4 0 0.00

.Source:- lit(p:"rbidoci .rbi.ore.iii''rdocs'! ubiicalioiis DOCs 10IT8H-i-:i.l I-1EF(.4832AIFB 86BD8BI6556 3.XLS (accessed on 2(1/08/15)

Chart No:- 1.5.2

Progress of Commercial Banks of Indian Banking Sector at a Glance

140

• Scheduled
• RRB
• Non Scheduled
J" ,P^ ^P* ^^ ^."^ J> >> ..-^ ^N^ ^^ V^. ^.V ..V*'
^

>
^ o^ ^

In the period of 05-06 to 09-10 average scheduled commercial banks were 82 which
were increased to average 87 in the period 10-11 to 14-15, whereas the growth rate was
positive about 6.10 pc.
In the period of 05-06 to 09-10 average RRBs were 97 which were decreased to
average 68 in the period 10-11 to 14-15, whereas the growth rate was negative about
29.90 pc. The number of non scheduled banks was 4 in research period except 5 in 13-14.

<Fage 8 of 14
 Table No:- 1.5.3
Progress of Number of Branches of Indian Banking Sector at a Glance
(Period from 2005-06 to 2014-15) {Amount in Rs. Crore)
No 1 2 3 4 5 AVERAGI-:

05-06 l o 05-06 t o
•V'ear 05-0(1 06-(l7 (17-08 08-09 09-10
09-]0 14-15
Rural 3(157« 3055 1 3IU76 3 1667 32624 31299 35940
Scini l.'rban 1 55 Sf, 16361 1767S 18969 20740 17860 23125 e
S-
Urtian 12032 12970 14391 15733 17003 14425 17274
X
Metro Politan 11304 11957 12908 14178 15026 13074 15687
Total 69471 71839 76050 80547 85393 76660 92028

No 6 7 8 9 10

10-11 t o
Year HMI 11-12 12-13 13-14 14-15 Growth
14-15

Rural 336X3 36356 39195 45177 48498 40581 9282 29.66

Seini Urban 22843 25797 28165 31442 33703 28390 10530 58.96

Urban 17490 18781 19902 21448 22997 20123 5698 39.50

Metro Poll Ian 16247 17396 18175 19213 20474 18301 5227 39.98

Total 90263 98330 105437 117280 125672 107396 30736 40,09

Somre>liitp:rbidocs.itorore.iri'rdocsTublieaHotisDOrs 101 T8FFEI3CKltF64S.i: AI FB86BD8B16556D.XLS (accessed on 26/0815)

Chart No: - 1.5.4

Progress of Number of Branches of Indian Banking Sector at a Glance

140000 -

120000 -

100000 -
• Rural
80000 -

60000 - • Semi Urban

40000 - 1

20000 - 1 ll 1 1 1 1 L L L L L 1 L
» Urban

0 - ri'i^i'i'i 1 1 1 1 1 I'l • Metro Politan

• Total
O O O O ' H i - t i - f l - t i - H i - H * - ' - ^ - ^
u S ( X i r ^ c b c T i O r H r s i r o 4 S ^ I ^
O O O O O ' - l ' H T H r - l i H V . V
m u-l O
O O --H

In the period of 05-06 to 09-10 average rural branches were 31299 which were
increased to average 40581 in the period of 10-11 to 14-15, whereas the growth rate
was about 29.66 pc. In semi urban areas it was 17860 increased to 28390, whereas the
growth rate was about 58.96 pc.
The number of bank branches in urban and metro-politan was respectively
14425 and 13074 in 05-06 to 09-10, which was increased to average 20123 and 18301
in the period of 10-11 to 14-15, whereas the growth rate was about 39.50 pc and 39.98
pc respectively. The total number of bank branches was increased by about 40.09 pc.

(Page 9 of 14
 Table No:- 1.5.5
Progress of Deposits of Indian Banking Sector at a Glance
(Period from 2005-06 lo 2014-15) (Amount in Rs. Crore)
No 1 2 3 4 5 WI.KACil-

05-06 lo 05-06 to
Year 05-06 1)6-07 n7-0H 08-01 OiJ-lO
09-10 14-15

Deposits

No
21f)46X2

6
2696937

7
3320062

8
4063201

9
4746919

10
3398360

10-11 lo
5445902

i
Year 10-11 11-12 12-13 13-14 14-15 Growth
14-15

Deposits 5AI5S74 6453548 742^532 8533173 9435101 7493445 4095085 120.50

Source:-http://rbtdocs.rbi,org,iii/rdocs/PublicationS''DOrs/IOIT8PFE13rFlEF64832AIFB86BD8BI6556D.XLS (accessed on 26/08/15)

Chart No:- 1.5.6

Progress of Deposits of Indian Banking Sector at a Glance

Deposits
10000000
8000000
6000000
4000000
2000000
0
05-06 06-07 07-08 08-09 09-1010-1111-12 12-13 13-1414-15 05-06 05-06 10-11
to to to
14-15 09-1014-15

The primary and first work of bank is accepting deposit from the public. In
the period of 05-06 to 09-10 averaged deposits were Rs. 3398360 crore which were
increased to averaged Rs. 7493445 crore in the period of 10-11 to 14-15, whereas the
growth rate was about 120.50 pc.
Table No:- 1.5.7
Progress of Advances of Indian Banking Sector at a Glance
(Period from 2005-06 to 2014-15) (Amount in Rs. Crore)
No 1 2 3 4 5 AVER ACS E

05-06 to 05-06 10
Year 05-06 06-07 07-08 08-09 09-10
09-10 14-15

Deposils 1516811 1981236 2476936 2999923 3496719 2494325 4184576

No 6 7 8 9 10 i
10-11 to
Year 10-11 11-12 12-13 13-14 14-15 Growth
14-15

Deposits 4297487 5073559 5879702 6735213 7388179 5874827 3380502 135.53

Source-.-htlir,//rbidocs,d)i.org.in/rdocs/PubUcaUons/DOCs/l0lT8FFEl3CFlEF64832A[FB86BD8Bt6556D.XLS
(Accessed on Date 26/08/15)

(Page 10 of 14
 Chart No: - 1.5.8
Progress of Advances of Indian Banking Sector at a Glance

Total Advances
8000000
7000000
6000000
5000000
4000000
3000000
2000000
1000000
0
05-06 06-07 07-08 08-09 09-10 10-11 11-12 12-13 13-14 14-15 05-06 05-06 1011
to to to
14-15 09-10 14-15

Bank cannot just accept deposits and sit quite. Because for the deposits
mobilized, they are required to pay interest. The primary and second work of bank is
advances to the needy persons at a rate of interest more than what the banks pays for
its deposit. The deposits can be deployed in two ways Land as loans and advances. In
the period of 05-06 to 09-10 average advances were Rs. 2494325 crore which were
increased to averaged Rs. 5874827 crore in the period of 10-11 to 14-15, whereas the
growth rate was about 135.53 pc.
Table No:- 1.5.9
Progress of Total Assets of Indian Banking Sector at a Glance
(Period from 2005-06 to 2014-15) (Amount in Rs. Crore)
No 1 2 3 4 5 AVHR.-\(iH

05-06 lo 05-0(' in
^'eai 05-06 06-07 07-08 08-09 09-10
09-K) 14-15

Deposits

No
2785863

6
3459Q62

7
4326166

8
5238642

9
6026925

10
()994I9()

10-11 Vo
f.994190

i
Year 10-11 11-12 12-13 13-14 14-15 Growth
14-15

Deposits 7IS3398 8320890 9589952 10975929 12034182 9620870 5253359 120.28

Source;-
http://rt)idocs.rbi.org,in/nlocs/Publications/DOCs/IOIT8FFE13CFlEF64832AlFB86BD8BI6556D,XLS
t Accessed on Dale 26/0S/15)

(Page 11 of 14
 Chart No:- 1.5.10
Progress of Total Assets of Indian Banking Sector at a Glance

Total Assets
14000000
12000000
10000000
8000000
6000000
4000000
2000000
0

N^ .:^

f^
<S' r^
<S' ^Q
V"

Total assets show total worth of banks. Total assets make simple comparison
with one bank to another bank and among different countries baiJis also. In the period
of 05-06 to 09-10 averaged total assets were Rs. 6994190 crore which were increased
to averaged Rs. 9620870 crore in the period of 10-11 to 14-15. whereas the growth
rate was about 120.28 pc.
1.6 Problems of Banking Sector:-
I. Asset Quality: - The biggest risk to India's banks is the rise in bad loans. The
slowdown in the economy in the last few years led to a raise in bad loans or
non-performing assets (NPAs). These are loans which are not repaid back by
the borrower. They are, thus a loss for the bank. Net NPAs amount to only
2.36% of the total loans in the banking system. 36.9% of the total debt in
India is at risk according to an IMF report. Yet, banks have capacity to absorb
only 7.9% loss. So, if these debts turn bad too, banks will face major losses.
II. Capital Adequacy: - One way a bank tries to ensure it is protected from bad
loans is by setting aside money as a 'provision'. This money cannot be used
for any other purposes including lending. As a result, banks have lower capital
available to use for its various operations. The capital adequacy ratios
measures how much capital a bank has. When this falls the bank has to borrow
money or use depositors" money to lend. This money however is riskier and
costlier than the bank's own capital.

p 12 of 14
III. Employee and Technology: - Public sectors banks are facing problem
because of many employees are retiring these days. So, younger employees
are reporting the elder, more-experienced employees. As a result, there would
be a virtual vacuum at the middle and senior level. "The absence of middle
management could lead to adverse impact on banks''.^
IV. Revolution of Information Technology: - Banks in India are subject to great
pressures to perform or else their survival would be in jeopardy. The
application of information technology & e-banking is becoming the order of
the day with the banking system directing towards virtual banking.
V. Timely Technological Up gradation: - In order to face competition, it is
indispensable for Indian banks to soak up the technology & upgrade their
services.
VI. Intense Competition: - Many new players have entered the market such as
foreign banks, private banks, non-banking finance companies, etc. For growth
and survival in the environment of cut throat competition banks have to follow
the prompt and resourceful customer service, which calls for suitable customer
centric pohcies & customer friendly procedures.^

<Page 13 of 14
REFERENCES:-
1. http://indiabudget.nic,in. Page no - 210. (Accessed on Date:- 10/10/2014)
2. http://indiabudget.nic.in, Page no - 211. (Accessed on Date:-10/10/2014)
3. Neeta M, Neha, A, (2013). '^Evaluating Financial Performance of SBI
Through Financial Ratios", Indian Journal of Finance, Vol. 7, Issue.lO, Page
no. 34.
4. Rao Ramchandra, "Present Day Banking in India" 1st Edition, Page no - 88.
5. Kaptan S.S, "Indian Banking in the Electronic Era" Published by SAROP &
SONS, New Delhi -2003 Page -2.
6. http://www.ing.com/About-us/Profile-Fast-facts/The-role-of-banks.htm
(Accessed on date: - 9/7/2016)
7. http://www.isesec.coni/Admin/Research/I659808644_Indian%20Banking%20
Industry.pdf (accessed on date:- 7/7/2016)
8. http;//www.jagranjosh.coni/general-knowledge/indian-banking-industry-
challenges-and-opportunities-1414662532-1 (Accessed on date: - 9-7/2016)
9. https://www.quora.com/What-are-the-major-challengeS'faced-by-public-and-
private-sector-banks-in-India (Accessed on date: - 9-7/2016)

<Page 14 of 14
CHAPTER 2
LITERATURE
REVIEW