New ARP Amit

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CH.1 Indian Banking: Introduction

CH.1 INDIAN BANKING: INTRODUCTION


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1.History of Banking:

For the past three decades India's banking system has several outstanding achievements to its

credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or

cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of

the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the

nationalization of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or

for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient

bank transferred money from one branch to other in two days. Now it is simple as instant

messaging or dials a pizza. Money has become the order of the day. The first bank in India,

though conservative, was established in 1786. From 1786 till today, the journey of Indian

Banking System can be segregated into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.

New phase of Indian Banking System with the advent of Indian Financial & Banking

Sector Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan andBengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay


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(1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. Thesethree banks were amalgamated in 1920 and Imperial Bank of India was established which startedas private shareholders banks, mostly Europeans shareholders.

In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab NationalBank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank ofIndia, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysorewere set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failuresbetween 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline thefunctioning and activities of commercial banks, the Government of India came up with TheBanking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as peramending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensivepowers for the supervision of banking in india as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an aftermath deposit

mobilization was slow. Abreast of it the savings bank facility provided by the Postal departmentwas comparatively safer. Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after independence. In 1955,

it nationalised Imperial Bank of India with extensive banking facilities on a large scale especially

in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI

and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July,

1969, major process of nationalisation was carried out. It was the effort of the then PrimeMinister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was

nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with

seven more banks. This step brought 80% of the banking segment in India under Government

ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in

the Country:


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1949 : Enactment of Banking Regulation Act.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalisation of 14 major banks.

1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalisation of seven banks with deposits over 200 core.

After the nationalisation of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and immense

confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking sector in its reforms

measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his

name which worked for the liberalisation of banking practices.


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The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a

satisfactory service to customers. Phone banking and net banking is introduced. The entire

system became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis

triggered by any external macroeconomics shock as other East Asian Countries suffered. This isall due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not

yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Nationalization of Banks in India

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime

minister. It nationalized 14 banks then. These banks were mostly owned by businessmen and

even managed by them.

Central Bank of India

Bank of Maharashtra

Dena Bank

Punjab National Bank

Syndicate Bank

Canara Bank

Indian Bank

Indian Overseas Bank

Bank of Baroda

Union Bank

Allahabad Bank

United Bank of India

Befor the steps of nationalisation of Indian banks, only State Bank of India (SBI) was

nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State

Banks of India (formed subsidiary) took place on 19th July, 1960.


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The State Bank of India is India's largest commercial bank and is ranked one of the top five

banks worldwide. It serves 90 million customers through a network of 9,000 branches and it

offers -- either directly or through subsidiaries -- a wide range of banking services.

The second phase of nationalisation of Indian banks took place in the year 1980. Seven more

banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of thebanking segment in India were under Government ownership.

After the nationalisation of banks in India, the branches of the public sector banks rose to

approximately 800% in deposits and advances took a huge jump by 11,000%.

1955 : Nationalisation of State Bank of India.

1959 : Nationalisation of SBI subsidiaries.

1969 : Nationalisation of 14 major banks.

1980 : Nationalisation of seven banks with deposits over 200 crores.

Scheduled Commercial Banks in India:

The commercial banking structure in India consists of:

Scheduled Commercial Banks in India

Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second

Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this

schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918

branches.The scheduled commercial banks in India comprise of State bank of India and its

associates, nationalised banks (19), foreign banks (45), private sector banks (32), co-operative

banks and regional rural banks.

"Scheduled banks in India" means the State Bank of India constituted under the State Bank of

India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary

Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the

Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under

section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40


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of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank

of India Act, 1934 (2 of 1934), but does not include a co-operative bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of

the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

1.2 ROLE OF BANKS IN A DEVELOPING ECONOMY

Banks play a very useful and dynamic role in the economic life of every modern state. A study ofthe economic history of western country shows that without the evolution of commercial banksin the 18th and 19th centuries, the industrial revolution would not have taken place in Europe.The economic importance of commercial banks to the developing countries may be viewed thus:

1. Promoting capital formation2. Encouraging innovation3. Monetsation4. Influence economic activity5. Facilitator of monetary policyAbove all view we can see in briefly, which are given below:

PROMOTING CAPITAL FORMATION:-A developing economy needs a high rate of capital formation to accelerate the tempo ofeconomic development, but the rate of capital formation depends upon the rate of saving.Unfortunately, in underdeveloped countries, saving is very low. Banks afford facilities for savingand, thus encourage the habits of thrift and industry in the community. They mobilize the idealand dormant capital of the country and make it available for productive purposes.

ENCOURAGING INNOVATION:-Innovation is another factor responsible for economic development. The entrepreneur ininnovation is largely dependent on the manner in which bank credit is allocated and utilized inthe process of economic growth. Bank credit enables entrepreneurs to innovate and invest, andthus uplift economic activity and progress.

MONETSATION:-Banks are the manufactures of money and they allow many to play its role freely in the economy.Banks monetize debts and also assist the backward subsistence sector of the rural economy byextending their branches in to the rural areas. They must be replaced by the modern commercialbanks branches.

INFLUENCE ECONOMIC ACTIVITY:-


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Banks are in a position to influence economic activity in a country by their influence on the rateinterest. They can influence the rate of interest in the money market through its supply of funds.Banks may follow a cheap money policy with low interest rates which will tend to stimulateeconomic activity.

FACILITATOR OF MONETARY POLICY:-Thus monetary policy of a country should be conductive to economic development. But a well-developed banking system is on essential pre-condition to the effective implementation ofmonetary policy. Under-developed countries cannot afford to ignore this fact. A fine, an efficientand comprehensive banking system is a crucial factor of the developmental process.

LOW INTEREST RATES

Reserve Bank of India controls the Interest rate, which is based on several monetary policies.

Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry.


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As on September 11, 2009 Bank Rate was 6.00 per cent, the same as on the corresponding date

of last year. Call money rates (borrowing & lending) were in the range of 1.50/3.47 per cent as

compared with 5.25/11.00 per cent on the corresponding date of last year.

INFLATION RATES

Inflation represents a rise in general level of prices of goods and services over a period of time. It

leads to an erosion in the purchasing power of money. Resultantly, each unit of currency buysfewer goods and services

Different fiscal and monetary policies have curbed the Inflation rate from the high of 12.63 per

cent to 3.92 per cent.

To fight against the slowdown of the Economy, Government of India & Reserve Bank of India

took many fiscal as well as monetary actions. Clubbed with fiscal & monetary actions,

decreasing commodity prices, decreasing crude prices and lowering interest rate, we expect that


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Indian Economy could again register a robust growth rate in the year 2009-10. Inflation stands at

3.92 per cent on 7th February 2009 against a high of 12.63 per cent on 9th August 2008.


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1

CH.2 Market Potential

CH.2 MARKET POTENTIAL

1 Sours, Union budget 2010-11.population survey in india .


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The following are the Scheduled Banks in India (Public Sector):

Banks in India (Private Sector) Foreign Banks in India

Vysya Bank Ltd American Express Bank Ltd.Axis Bank Ltd ANZ Gridlays Bank Plc.Indusind Bank Ltd Bank of America NT & SAICICI Banking Corporation Bank Ltd Bank of Tokyo Ltd.Global Trust Bank Ltd Banquc Nationale de ParisHDFC Bank Ltd Barclays Bank PlcCenturion Bank Ltd Citi Bank N.C.Bank of Punjab Ltd Deutsche Bank A.G.IDBI Bank Ltd Hongkong and Shanghai Banking Corporation

Standard Chartered Bank.The Chase Manhattan Bank Ltd.Dresdner Bank AG.

State Bank of India Andhra Bank

State Bank of Bikaner and Jaipur Allahabad Bank

State Bank of Hyderabad Bank of Baroda

State Bank of Indore Bank of India

State Bank of Mysore Bank of Maharashtra

State Bank of Patiala Canara Bank

State Bank of Saurashtra (Now merged with

SBI)

Central Bank of India

State Bank of Travancore Corporation Bank

Dena Bank Punjab and Sind Bank

Indian Overseas Bank Syndicate Bank

Indian Bank Union Bank of India

Oriental Bank of Commerce United Bank of India

Punjab National Bank Vijaya Bank

UCO Bank


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2

2.1 BANKING SERVICES IN INDIA:-

With years, banks are also adding services to their customers. The Indian banking industry ispassing through a phase of customers market. The customers have more choices in choosingtheir banks. A competition has been established within the banks operating in India. With stiff

competition and advancement of technology, the service provided by banks has become moreeasy and convenient. The past days are witness to an hour wait before withdrawing cash fromaccounts or a cheque from north of the country being cleared in one month in the south. Thissection of banking deals with the latest discovery in the banking instruments along with thepolished version of their old systems.

2.2 RESERVE BANK OF INDIA (RBI):

The central bank of the country is the Reserve Bank of India (RBI). It was established in April1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the HiltonYoung Commission. The share capital was divided into shares of Rs. 100 each fully paid which

was entirely owned by private shareholders in the beginning. The Government held shares ofnominal value of Rs. 2, 20,000. Reserve Bank of India was nationalized in the year 1949. Thegeneral superintendence and direction of the Bank is entrusted to Central Board of Directors of20 members, the Governor and four Deputy Governors, one Government official from theMinistry of Finance, ten nominated Directors by the Government to give representation toimportant elements in the economic life of the country, and four nominated Directors by theCentral Government to represent the four local Boards with the headquarters at Mumbai,Kolkata, Chennai and New Delhi. Local Boards consist of five members each CentralGovernment appointed for a term of four years to represent territorial and economic interests andthe interests of co-operative and indigenous banks. The Reserve Bank of India Act, 1934 wascommenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of thefunctioning of the Bank.

The Bank was constituted for the need of following:

To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and

2 RBI report on banking sector reforms.


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To operate the credit and currency system of the country to its advantage.

Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of a central bank theReserve Bank of India.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue banknotes of all denominations. The distribution of one rupee notes and coins and small coins all overthe country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bankhas a separate Issue Department which is entrusted with the issue of currency notes. The assetsand liabilities of the Issue Department are kept separate from those of the Banking Department.Originally, the assets of the Issue Department were to consist of not less than two-fifths of goldcoin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40crores in value. The remaining three-fifths of the assets might be held in rupee coins,Government of India rupee securities, eligible bills of exchange and promissory notes payable inIndia. Due to the exigencies of the Second World War and the post-was period, these provisionswere considerably modified. Since 1957, the Reserve Bank of India is required to maintain goldand foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be ingold. The system as it exists today is known as the minimum reserve system.

Banker to GovernmentThe second important function of the Reserve Bank of India is to act as Government banker,agent and adviser. The Reserve Bank is agent of Central Government and of all State

Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has theobligation to transact Government business, via. to keep the cash balances as deposits free ofinterest, to receive and to make payments on behalf of the Government and to carry out theirexchange remittances and other banking operations. The Reserve Bank of India helps theGovernment - both the Union and the States to float new loans and to manage public debt. TheBank makes ways and means advances to the Governments for 90 days. It makes loans andadvances to the States and local authorities. It acts as adviser to the Government on all monetaryand banking matters.


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Bankers' Bank and Lender of the Last ResortThe Reserve Bank of India acts as the bankers' bank. According to the provisions of the BankingCompanies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a

cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities inIndia. By an amendment of 1962, the distinction between demand and time liabilities wasabolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregatedeposit liabilities. The minimum cash requirements can be changed by the Reserve Bank ofIndia. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligiblesecurities or get financial accommodation in times of need or stringency by rediscounting bills ofexchange. Since commercial banks can always expect the Reserve Bank of India to come to theirhelp in times of banking crisis the Reserve Bank becomes not only the banker's bank but also thelender of the last resort.

Controller of CreditThe Reserve Bank of India is the controller of credit i.e. it has the power to influence the volumeof credit created by banks in India. It can do so through changing the Bank rate or through openmarket operations. According to the Banking Regulation Act of 1949, the Reserve Bank of Indiacan ask any particular bank or the whole banking system not to lend to particular groups orpersons on the basis of certain types of securities. Since 1956, selective controls of credit areincreasingly being used by the Reserve Bank. The Reserve Bank of India is armed with manymore powers to control the Indian money market. The Reserve Bank of India, therefore, has thefollowing powers:

(a) It holds the cash reserves of all the scheduled banks.(b) It controls the credit operations of banks through quantitative and qualitative controls.(c) It controls the banking system through the system of licensing, inspection and calling for

information.(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign ReservesThe Reserve Bank of India has the responsibility to maintain the official rate of exchange.

According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell atfixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixedwas Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d.Though there were periods of extreme pressure in favor of or against the rupee. After Indiabecame a member of the International Monetary Fund in 1946, the Reserve Bank has theresponsibility of maintaining fixed exchange rates with all other member countries of the I.M.F.Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as thecustodian of India's reserve of international currencies.


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Supervisory functions:

In addition to its traditional central banking functions, the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking inIndia. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBIwide powers of supervision and control over commercial and co-operative banks, relating tolicensing and establishments, branch expansion, liquidity of their assets, management andmethods of working, amalgamation, reconstruction, and liquidation.

Promotional functionsWith economic growth assuming a new urgency since Independence, the range of the ReserveBank's functions has steadily widened. The Bank now performs varietyof developmental andpromotional functions, which, at one time, were regarded as outside the normal scope of centralbanking. The Reserve Bank was asked to promote banking habit, extend banking facilities torural and semi-urban areas, and establish and promote new specialized financing agencies.Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up theDeposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the IndustrialDevelopment Bank of India also in 1964, the Agricultural Refinance Corporation of India in1963 and the Industrial Reconstruction Corporation of India in 1972.

Classification of RBIs functionsThe monetary functions also known as the central banking functions of the RBI are related tocontrol and regulation of money and credit, i.e., issue of currency, control of bank credit, controlof foreign exchange operations, banker to the Government and to the money market. Monetaryfunctions of the RBI are significant as they control and regulate the volume of money and creditin the country. Equally important, however, are the non-monetary functions of the RBI in thecontext of India's economic backwardness. The supervisory function of the RBI may be regardedas a non-monetary function (though many consider this a monetary function). The promotion ofsound banking in India is an important goal of the RBI, the RBI has been given wide and drasticpowers, under the Banking Regulation Act of 1949 these powers relate to licensing of banks,branch expansion, liquidity of their assets, management and methods of working, inspection,amalgamation, reconstruction and liquidation.

KINDS OF BANKS:Financial requirements in a modern economy are of a diverse nature, distinctive variety and largemagnitude. Hence, different types of banks have been instituted to cater to the varying needs of


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the community. Banks in the organized sector may, however, be classified in to the followingmajor forms:

1. Commercial banks2. Co-operative banks3. Specialized banks4. Central bank

COMMERCIAL BANKS:Commercial banks are joint stock companies dealing in money and credit. In India, howeverthere is a mixed banking system, prior to July 1969, all the commercial banks-73 scheduled and26 non-scheduled banks, except the state bank of India and its subsidiaries-were under thecontrol of private sector. On July 19, 1969, however, 14mejor commercial banks with deposits ofover 50 Corers were nationalized. In April 1980, another six commercial banks of high standingwere taken over by the government. At present, there are 20 nationalized banks plus the statebank of India and its 7 subsidiaries constituting public sector banking which controls over 90 percent of the banking business in the country.

CO-OPERATIVE BANKS:Co-operative banks are a group of financial institutions organized under the provisions of the Co-operative societies Act of the states. The main objective of co-operative banks is to providecheap credits to their members. They are based on the principle of self-reliance and mutual co-operation. Co-operative banking system in India has the shape of a pyramid a three tier structure,constituted by:

SPECIALIZED BANKS:There are specialized forms of banks catering to some special needs with this unique nature ofactivities. There are thus,

1. Foreign exchange banks,2. Industrial banks,3. Development banks,4. Land development banks,5. Exim bank.

CENTRAL BANK:A central bank is the apex financial institution in the banking and financial system of a country.It is regarded as the highest monetary authority in the country. It acts as the leader of the moneymarket. It supervises, control and regulates the activities of the commercial banks. It is a serviceoriented financial institution. Indias central bank is the reserve bank of India established in

1935.a central bank is usually state owned but it may also be a private organization. For instance,the reserve bank of India (RBI), was started as a shareholders organization in 1935, however,it was nationalized after independence, in 1949.it is free from parliamentary control.


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2.3 RETAIL BANKING-THE NEW FLAVOR

The Concept of Retail Banking:The retail banking encompasses deposit and assets linked products as well as other financialservices offered to individual for personal consumption. Generally, the pure retail banking isconceived to be the provision of mass banking products and services to private individuals asopposed to wholesale banking which focuses on corporate clients. Over the years, the concept ofretail banking has been expanded to include in many cases the services provided to small andmedium sized businesses. Some banks in Europe even include their private banking business i.e.services to high net worth net worth individuals in their retail Banking portfolio. The concept of

Retail banking is not new to banks. it is only now that it is being viewed as an attractive marketsegment, which offers opportunities for growth with profits. The diversified portfoliocharacteristic of retail banking gives better comfort and spreads the essence of retail banking liesin individual customers. Though the term Retail Banking and retail lending are often usedsynonymously, yet the later is lust one side of Retail Banking. In retail banking, all the bankingneeds of individual customers are taken care of in an integrated manner.

Retail Lending Products:Major retail lending products offered by banks are the following:

I. Housing LoansII. Loan for Consumer goodsIII. Personal Loans for marriage, honeymoon, medical treatment and holding etc.IV. Education LoansV. Auto LoansVI. Gold LoansVII. Event LoansVIII. Festival LoansIX. Insurance ProductsX. Loan against Rent receivablesXI. Loan against Pension receivables to senior citizens

XII. Debit and Credit CardsXIII. Global and International CardsXIV. Loan to Doctors to set up their own Clinics or for purchase of medical equipmentsXV. Loan for Woman Empowerment for the Setting up of boutiques


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2.4 Retail Banking Products for Depositors

Retail banking products for depositors in various segments of customers like; children, salariedpersons. Senior citizens, professionals, technocrats business men, retail traders and farmers etc.include:

a. Flexi deposit Accountsb. Savings Bank Accountsc. Recurring Deposit Accountsd. Short Term Depositse. Deferred pension Linked Deposit Schemes

Today pure deposit type products are giving way to multi-benefit, multi-access genres of bankingproducts. Most of the innovation is taking place in saving bank accounts to make the meagerreturn of 3.5% p.a. that they earn, more attractive. Most of the banks now offer Sweep in andsweep out account, called 2-in-1 accounts or value added savings bank accounts. This account isa combination of savings bank and term deposit accounts and offers twin benefit of liquidity of asavings bank account and higher interest earning of term deposit accounts.

Add-ons and Freebies:

To make their products and services more service more attractive so as to maximum number ofcustomers, the banks are vying with each other with whole lot off rills, goodies, freebies are asunder:1. Free collection of specified number of outstation instruments2. Instant credit of outstanding cheques up to Rs.15000/-3. Concession in exchange on demand drafts and pay-orders and commission on bills ofexchange4. Issuance of free personalized cheques books5. Free issuance of ATM, Debit, Credit and add-on Cards6. Free investment advisory services

7. Grant of redeemable reward points on use of credit cards8. Free internet banking, phone banking and any where banking facilities9. Issuance of discount coupons for purchase of various products like computer accessories,

Music CDs, cassettes, books, toys, garments etc.etc.10. Last but not the least, issuance of free PVR, Trade Fair tickets etc. etc.11. Concession in rate of interest on Group advances12. Exemption in upfront fees These concessions, freebies and add-ons are based on the True

Relationship Value of customers and is calculated by the return on various products and


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Services of the banks availed by them. These concessions and freebies are usually offeredfor purchase of consumer goods but now they have become an integral part of retail Bankingproducts and services also.

New delivery channels for Retail Banking Products and Services:The advent of new delivery channels viz. ATM, Interest and Telebanking have revolutionalisedthe retail banking activities. These channels enable Banks to deliver retail Banking products andservices in an efficient and cost effective manner. Now-adays the banks are under great pressureto attract new and retain old customers, as margins are turning wafer thin. In these circumstancesreducing administrative a transaction cost has become crucial. Banks are making specialofferings to customers through these channels. Retail banking has been immensely benefitedwith the revolution in IT. Andcommunication technology. The automation of the Bankingprocesses is facilitating extension of their reach and rationalization of their costs as well. Theyare the engine for growth of retail banking business of Banks. The networking of branches hasextended the scope of banking to anywhere and anytime 24 * 7 days week banking. It hasenabled customer to be the customer of a bank rather then the customers of a particular branch

only. Customers can transact retail Banking transactions at any of the networked brancheswithout any extra cost. As a matter of fact the Retail Banking per se has taken off because of theadvent of multiple banking channels. These channels have enabled banks to go on a massivecustomer acquisition mode since transaction volumes spread over multiple channels lessen theload on the brick and mortar bank branches.

The impact of Retail Banking:1. The major impact of Retail Banking is that, the customers have become the emperors

the fulcrum of all banking activities, both on the asset side and the liabilities front. The

hitherto sellers market has transformed into buyers market. The customers have multipleof choices before them now for cherry picking products and services, which suit their lifestyles and tastes and financial requirements as well. Banks now go to their customersmore often than the customers go to their banks.

2. The non-banking finance Companies which have hitherto been thriving on retail businessdue to high risk and high returns thereon have been dislodged from their profit munchingcitadel.

3. Retail banking is transforming banks in to one stop financial super markets.4. The share of retail loans is fast increasing in the loan books of banks.5. Banks can foster lasting business relationship with customers and retain the existing

customers and attract new ones. There is a rise in their service levels as well.6. Banks can cut costs and achieve economies of scale and improve their revenues and

profit by robust growth in retail business. Reduction in costs offers a win win situationboth for banks and the customers.


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7. It has affected the interface of banking system through different delivery mechanism.8. It is not that banks are sharing the same pie of retail business. The pie itself is growing

exponentially; retail banking has fueled a considerable quantum of purchasing powerthrough a slew of retail products.

9. Banks can diversify risks in their credit portfolio and contain the menace of NPAs.10. Re-engineering of business with sophisticated technology based products will lead to

business creation, reduction in transaction cost and enhancement in efficiency ofoperations.


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CH.3 Research Methodology

CH.3 RESEARCH METHODOLOGY


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1) RESEARCH OBJECTIVE:

To knowbanking practices and system. To understand banking importance in Indian economy

To know factors affected to Indian banking industry.

1) RESEARCH DESIGN:

Here both types of research techniques are used.

Exploratory research

1) EXPLORATORY RESEARCH:

a. Secondary data:

i. Internet

ii.Brochure

2) TARGET POPULATION DEFINITION:

a. Target population : Indian banking industry

b. Sampling element : Indian banking industry

c. Extent : India

d. Time : 2010

e. Sampling frame : Not available


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CH.4 Strategic Analysis

CH.4 STRATEGIC ANALYSIS

4.1 PEST Analysis:


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PEST analysis of any industry investigates the important factors that affect the industry andinfluence the companies operating in the sector. PEST stands for Political, Economic, Social andTechnological analysis. The PEST Analysis is a tool to analyze the forces that drive the industryand how those factors can influence the industry.

3

POLITICAL FACTORSGovernment and RBI policies affect the banking sector. Sometime looking into the politicaladvantage of a particular party, the Government declares some measures to their benefits like

3 1Global financial stability Report, 20092 RBI Annual report 2009-10*Scib.com

ECONOMICAL1

GDP MONSOON INFLATION SAVINGS &

ACCOUNTS AGRICULTURE

CREDIT

SOCIOCULTURAL CHANGES IN

LIFE STYLE LITERACY

RATE DEMOGRAPHIC

OF LARGEPOPULATION

SHIFTTOWARDS THE

POLITICAL

GOVT. POLICY

& BUDGET

MONETORY

POLICY

FDI

TECHNICAL

TECHNOLOGYIN

BANKS CORE BANKINGSOLUTIONS(CBS

) ATM

BANKING

SECTOR


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waiver of short-term agricultural loans, to attract the farmers votes. By doing so the profits ofthe bank get affected. Various banks in the cooperative sector are open and run by the politicians.They exploit these banks for their benefits. Sometimes the government appoints variouschairmen of the banks. Various policies are framed by the RBI looking at the present situation ofthe country for better control over the banks.

FOCUS ON REGULATIONS OF GOVERNMENTIndian Banking is least affected as compare to other developed economy which is attributed toReserve Bank of India for its robust policy framework, stricter prudential regulations withrespect to capital and liquidity. This gives India an advantage in terms of credibility over othercountries. Government affects the performance of banking sector most by legislature andframing policy .government through its budget affects the banking activities securitization acthas given more power to banking sector against defaulting borrowers.

OTHER PROVISIONS OF POLITICAL FACTORThe threshold for non-promoter public shareholding for all listed companies to be raised in aphased manner. To allow scheduled commercial banks setting up off-site ATMs without prior

approval subject to reporting. To provide banking facilities in under-banked/un-banked areas inthe next three years. A sub-committee of State level Bankers Committee (SLBC) would identifyand formulate an action plan for the same The Ministry has also granted Rs 100 crore of grants inaid to ensure provision of at least one Centre/Point of Sales (POS) for banking services in eachof the un-banked blocks.

BUDGET IMPACT: INDUSTRY1. Long-term refinancing from IIFCL for infrastructure projects will ensure better

asset-liability match for banks.2. Debt waiver and interest subvention schemes will not have much impact on

banks.

3. Recapitalization will ensure adequate capital for the growth of the publicsector banks and insurance companies.

4. Rural Housing fund will boost the resource base of NHB for their refinanceoperation in rural housing sector.

5. Tax break for NPS trust will have positive impact on the same.

ECONOMIC FACTORSBanking is as old as authentic history and the modern commercial banking are traceable toancient times. In India, banking has existed in one form or the other from time to time. Thepresent era in banking may be taken to have commenced with establishment of bank of Bengal in1809 under the government charter and with government participation in share capital.Allahabad bank was started in the year 1865 and Punjab national bank in 1895, and thus, othersfollowed. Every year RBI declares its 6 monthly policy and accordingly the various measuresand rates are implemented which has an impact on the banking sector. Also the Union budget


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affects the banking sector to boost the economy by giving certain concessions or facilities. If inthe Budget savings are encouraged,then more deposits will be attracted towards the banks and in turn they can lend more money tothe agricultural sector and industrial sector, therefore, booming the economy. If the FDI limitsare relaxed, then more FDI are brought in India through banking channels

MONSOONThe cumulative seasonal rainfall (1st June -30th September 2009) for the country as a whole is23 per cent below the Long Period Average (LPA). The year 2009 is the most deficient year after1972.

SAVINGS AND ACCOUNTSAs stated earlier, India continues to remain one of the high savings economies among theemerging market economies. Gross Domestic Savings (GDS) of the Indian economy constitutessavings of public, private corporate and household sectors. In the recent period the high growthperformance of the Indian economy is driven by rise in savings

DEBT RELIEF FOR FARMERSThe one-time bank loan waiver of nearly Rs 71,000 crore to cover an estimated 40 millionfarmers was one of the major highlights of the last Budget. Under the Agricultural Debt Waiverand Debt Relief Scheme (2008), farmers having more than two hectares of land were given timeupto 30th June, 2009 to pay 75% of their overdues. Due to the late arrival of monsoon, I proposeto extend this period by six months upto 31st December, 2009 .

MONETARY POLICY

Monetary Policy 2009-2010

Bank Rate: The Bank Rate has been retained unchanged at 6.0%.

Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis points

from 5.0% to 4.75% with immediate effect.

Reverse Repo Rate : It has been reduced under LAF by 25 basis points from 3.5% to 3.25% with

immediate effect. RBI has retained the option to conduct overnight or longer term repo/reverse

repo under the LAF depending on market conditions and other relevant factors.

Cash Reserve Ratio: CRR has been retained unchanged at 5.0% of NDTL.


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FDI LIMIT

The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during

the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get

a foot hold in the Indian Markets by investing in willing Indian partners who are starved of net

worth to meet CAR norms. Ceiling for FII investment in companies was also increased from

24.0 percent to 49.0 percent and have been included within the ambit of FDI investment

BUDGET MEASURES

BUDGET PROVISIONS

Increase Farm Credit: The FM has further increase the farm credit target for 2009-10 at Rs

325000 crore compared to Rs 287000 crore targeted in 2008-09.

Subvention of 1% to be paid as incentive to farmers: The Budget continued the Interest

subvention scheme for short-term crop loans up to Rs 300000 per farmer at the interest rate of

7% per annum. Also additional subvention of 1% to be paid from this year, as incentive to those

farmers who repay short-term crop loans on schedule. Also additional allocation of Rs 411 crore

over Interim Budget 2009-10 was made for the same.

Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by six

more months for farmers owing more than 2 hectare of land. The Union Budget 2008-09 allowed

these farmers 25% rebate on loan if they repay 75% of their overdue within stipulated period of

30th June 2009. Currently this facility has been extended from 30th June, 2009 to 31st

December, 2009.

Setting up of separate task force for those not covered under the debt waiver scheme: The

government also announced that it will set up a task force to examine the issue of debt taken by a

large number of farmers in some regions of Maharashtra from private money lenders who were

not covered by the loan waiver scheme announced last year.

OTHER PROVISIONS
http://4.bp.blogspot.com/_5i6xumi12nY/SucoRuoE_fI/AAAAAAAAADQ/ErItBQqG8cU/s1600-h/pol.bmp


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The threshold for non-promoter public shareholding for all listed companies to be raised

in a phased manner.

To allow scheduled commercial banks setting up off-site ATMs without prior approval

subject to reporting.

To provide banking facilities in under-banked/un-banked areas in the next three years. Asub-committee of State level Bankers Committee (SLBC) would identify and formulate

an action plan for the same.

The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at least

one Centre/Point of Sales (POS) for banking services in each of the un-banked blocks.

BUDGET PROPOSALS

1. IIFCL to refinance 60% of loans given by commercial banks for PPP-based projects in critical

sectors. IIFCL and banks together will be able to support infrastructure projects involving total

investment of Rs 1,000 bn.

2. Target for agriculture credit flow set at Rs.3250 bn for the year 2009-10. Interest subvention

scheme at the interest rate of 7% will be continued. Additional subvention of 1% for the farmers

who repay their debt on time.

3. Farm debt waiver scheme extended to 31st December 2009 from 30th June 2009.

4. Interest subvention scheme to exporters extended to 31st March 2010.

5. Special fund of Rs.40 bn out of Rural Infrastructure Development Fund (RIDF) to provide

refinance to banks and State Finance Corporation for incremental lending to Micro and Small

Enterprises (MSEs).

6. Rs.1 bn to ensure provision of at least one centre/Point of Sales (POS) for banking services in

each of the unbanked blocks.

7. Interest subsidy to poor households for loans up to Rs.1,00,000 from banks.

8. Rs.20 bn earmarked for Rural Housing Fund in National Housing Bank (NHB)

9. Recapitalization of public sector banks and insurance companies.

10. Exemption of income of New Pension System (NPS) trust from income tax and dividend

paid to NPS trust from dividend distribution tax. Sale and purchase of equity shares and

derivatives by NPS trust will be exempt from the securities transaction tax.

SOCIO CULTUREAL FACTORSSocio culture factors also affect the business. They show in which people behave in country.Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and


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consumption habit of people, their language, beliefs and values affect the business. Bankingindustry is also operates under this social environment and it is also affect by this factor. Thesefactor are changing continuously peoples life style, their behavior, consumption pattern etc. ischanging and also creating opportunities and threat for banking industry. There are some socio-culture factors that affect banking inIndia have been analyzed below.

CHANGE IN LIFE STYLELife style of India is changing rapidly. They are demanding high class products. They havebecome more advanced. People want everything car, mobile, etc.. what their fore father haddreamed for. Now teenagers also have mobile and vehicle. Even middle class people also want tohave well furnished home, television, mobile, vehicle and this has opened opportunities forbanking secter to tap this change. Every thing is available so it has become easy to purchaseanything if you do not have lump sum.

POPULATIONIncrease in population is one of he important factor, which affect the private sector banks. Banks

would open their branches after looking into the population demographics of the area. Percentageof deposit in any branches of banks depends upon the population demographic of that area. Thepopulation of India is about 102.90 is expected to reach about 119.70 cores in 2011. About 70%of population is below 35years of age. They are in the prime earning stage and this increase theearning of the banks. Total Deposits mobilized by the Private Sector Banks increased from Rs,2,52,335 crore as on 31st March 2004 to Rs. 3,12,645 crore as on 31st March 2005. Depositsshowed a subdued growth during 2004-05.Income distributions also affects the operations andoverall business of private sector banks.

LITERACY RATE

Literacy rate in India is very low compared to developed countries. Illiterate people hesitate to

transact with banks. So, this impacts negatively on banks. But there is positive side of this as

well i.e. illiterate people trust more on banks to deposit their money, they do not have market

information. Opportunities in stocks or mutual funds. So, they look bank as their sole and safe

alternative. Literacy rate of India is around 65%

LITERACY RATE IN INDIA

Year persons Male Female

1951 18.3 27.2 8.9

1961 28.3 40.4 15.3

1971 34.5 46.0 22.0

1981 41.4 53.4 28.5


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1991 52.2 64.1 39.3

2001 65.4 75.8 52.1

TECHNOLOGICAL FACTORS

TECHNOLOGY IN BANKSTechnology plays a very important role in banks internal control mechanisms as well as servicesoffered by them. It has in fact given new dimensions to the banks as well as services that theycater to and the banks are enthusiastically adopting new technological innovations for devisingnew products and services.

ATMThe latest developments in terms of technology in computer and telecommunication have

encouraged the bankers to change the concept of branch banking to anywhere banking. The useof ATM and Internet banking has allowed anytime, anywhere banking facilities. Automaticvoice recorders now answer simple queries, currency accounting machines makes the job easierand self-service counters are now encouraged.

IT SERVICES & MOBILE BANKING

Today banks are also using SMS and Internet as major tool of promotions and giving great utilityto its customers. For example SMS functions through simple text messages sent from yourmobile. The messages are then recognized by the bank to provide you with the requiredinformation. All these technological changes have forced the bankers to adopt customer-based

approach instead of product-based approach Technology advancement has changed the face oftraditional banking systems. Technology advancement has offer 24X7 banking even giving fasterand secured service.

4.2 SWOT analysis

STRENGTH Indian banks have compared favourably on growth, asset quality and profitability with

other regional banks over the last few years. The banking index has grown at acompounded annual rate of over 51 per cent since April 2001 as compared to a 27 percent growth in the market index for the same period.


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Policy makers have made some notable changes in policy and regulation to helpstrengthen the sector. These changes include strengthening prudential norms, enhancingthe payments system and integrating regulations between commercial and co-operativebanks.

Bank lending has been a significant driver of GDP growth and employment.Extensivereach: the vast networking & growing number of branches & ATMs. Indian bankingsystem has reached even to the remote corners of the country.

The government's regular policy for Indian bank since 1969 has paid rich dividends withthe nationalisation of 14 major private banks of India.

In terms of quality of assets and capital adequacy, Indian banks are considered to haveclean, strong and transparent balance sheets relative to other banks in comparableeconomies in its region.

India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is withthe Government of India holding a stake)after merger of New Bank of India in PunjabNational Bank in 1993, 29 private banks (these do not have government stake; they maybe publicly listed and traded on stock exchanges) and 31 foreign banks. They have acombined network of over 53,000 branches and 17,000 ATMs. According to a report by

ICRA Limited, a rating agency, the public sector banks hold over 75 percent of totalassets of the banking industry, with the private and foreign banks holding 18.2% and6.5% respectively.

Foreign banks will have the opportunity to own up to 74 per cent of Indian private sectorbanks and 20 per cent of government owned banks.

WEAKNESS PSBs need to fundamentally strengthen institutional skill levels especially in sales and

marketing, service operations, risk management and the overall organizationalperformance ethic & strengthen human capital.

Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a fewcustomer segments and geographies.

4

Structural weaknesses such as a fragmented industry structure, restrictions on capitalavailability and deployment, lack of institutional support infrastructure, restrictive labourlaws, weak corporate governance and ineffective regulations beyond Scheduled

Commercial Banks (SCBs), unless industry utilities and service bureaus.

4 The Economics Times, Monday 29, 2010Response business association info.

BS reporter Ahmedabad 22 Nov. ET 23 Oct. Corporate http//www.scib.com/strategicmooves


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OPPORTUNITY The market is seeing discontinuous growth driven by new products and services that

include opportunities in credit cards, consumer finance and wealth management on theretail side, and in fee-based income and investment banking on the wholesale bankingside. These require new skills in sales & marketing, credit and operations

Banks will no longer enjoy windfall treasury gains that the decade-long secular decline ininterest rates provided. This will expose the weaker banks.

With increased interest in India, competition from foreign banks will only intensify. Given the demographic shifts resulting from changes in age profile and household

income, consumers will increasingly demand enhanced institutional capabilities andservice levels from banks.

New private banks could reach the next level of their growth in the Indian banking sectorby continuing to innovate and develop differentiated business models to profitably servesegments like the rural/low income and affluent/HNI segments; actively adopting

acquisitions as a means to grow and reaching the next level of performance in theirservice platforms. Attracting, developing and retaining more leadership capacity

Foreign banks committed to making a play in India will need to adopt alternativeapproaches to win the race for the customer and build a value-creating customerfranchise in advance of regulations potentially opening up post 2009. At the same time,they should stay in the game for potential acquisition opportunities as and when theyappear in the near term. Maintaining a fundamentally long-term value-creation mindset.

With the growth in the Indian economy expected to be strong for quite sometimeespecially in its services sector-the demand for banking services, especially retailbanking, mortgages and investment services are expected to be strong.

The Reserve Bank of India (RBI) has approved a proposal from the government to amend

the Banking Regulation Act to permit banks to trade in commodities and commodityderivatives. Liberalisation of ECB norms: The government also liberalised the ECB norms to permit

financial sector entities engaged in infrastructure funding to raise ECBs. This enabledbanks and financial institutions, which were earlier not permitted to raise such funds,explore this route for raising cheaper funds in the overseas markets.

Hybrid capital:In an attempt to relieve banks of their capital crunch, the RBI has allowedthem to raise perpetual bonds and other hybrid capital securities to shore up their capital.

THREATS Threat of stability of the system: failure of some weak banks has often threatened the

stability of the system. Rise in inflation figures which would lead to increase in interest rates. Increase in the number of foreign players would pose a threat to the PSB as well as the

private player.


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4.3Rationale of the Porters Five Forces Model in the Banking Industry

The model attempts to address key strategic issues in a wider scope. Many of the issuesmentioned in the model, including the forces and the management of those forces, are relevant tothe banking sector as well as any other service-oriented business. The results, which will beobtained by the application of this model, should be given the value of the time of the analysis

and that a continuous review is necessary in order to avoid to be myopic or obsolete with theresults. Michael Porter provided a framework that models an industry as being influenced by fiveforces (Porter, 1980). Figure 1 provides details of the framework.

THREAT OF

NEW

ENTRANTS

-Absolute

coadvantages

-


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SUPPLIERS

POWER

-Supplier

concentration -

Inputs

differentiation

BUYERS

POWER

-Bargaining

leverage.

Bu ers

THREAT OF

SUBSTITUTES-Switching costs

-Buyer

inclination to

DEGREE OF

RIVALRY-Exit

barriers


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How this porters five force model is concerned with banking sector?

Threat of new entrant:

Indian banking industry has various types of banks which engaged with the different

activities and practices. New entrants may be the most valuable private business entity orforeign bank and business. It can only by the government of india as well as RBI. RBI makesthe foreign banks to invest the fund or can open the branches or do the partnership at 74%

part. That can create high competition and this is threat for Indian banking.

Threat of substitute:As far as the substitute is concern there are huge number of products and services available inthe market. All the banks provide same retail banking, internet banking, wealth and riskmanagement activities. Not only this but insurance, post office savings, mutual funds, stockmarkets etc are the substitute is there in the market. This is emerging scenario for those

mentioned substitutes so it can create stiff competition for the banking sector.

Bargaining power of suppliers:In the banking sector no perfect suppliers is there but following can considerd as suppliersRBI, state and central government, high net worth people, other business entities, foreign

banks and politics, there can effect of builders, stationers, technology providers andconsulting peoples.if the strong bargaing is there then cause drastic effect on the bankingactivities.

Bargaining power of customers:Customers including individuals, groups, associations or any person who demand the productor services of the bank. The banks has to keep upto date methods of practice and technologyfor the betterment of the particular banks. Now a days customers demand internet facilitiesand mobile banking rather then visit to the bank building. This need change in policy, interestrates, system and huge investment is required.

Degree of revelry:

As we know in introduction there are so many banks engaged in same category and sameproduct so to survive in the market they have to make product differentiation or service

change. Strategic management and policies can beneficial for the particular bank.

Challenges facing Banking industry in India


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The banking industry in India is undergoing a major transformation due to changes ineconomic conditions and continuous deregulation. These multiple changes happening oneafter other has a ripple effect on a bank (Refer fig. 2.1) trying to graduate from completelyregulated seller market to completed deregulated customers market.

Deregulation: This continuous deregulation has made the Banking market extremelycompetitive with greater autonomy, operational flexibility and decontrolled interestrate and liberalized norms for foreign exchange. The deregulation of the industrycoupled with decontrol in interest rates has led to entry of a number of players in the

banking industry. At the same time reduced corporate credit off take thanks tosluggish economy has resulted in large number of competitors batting for the same

pie. New rules: As a result, the market place has been redefined with new rules of the

game. Banks are transforming to universal banking, adding new channels withlucrative pricing and freebees to offer. Natural fall out of this has led to a series ofinnovative product offerings catering to various customer segments, specifically retail

credit.


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CH.5 Financial Analysis

CH.5 FINANCIAL ANALYSIS 1

5.1Net Profit/ Total Funds


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Interpretation:

The further deduction of taxes & duties from profit leads to net profit banking has more

contribution of Indian GDP. This enables to increase PAT. With liberalized RBI policy FLLs

investment.FDI and project implementation & good tax planning of banking manager makes

increase in PAT from 0.9 in 2004 to 1.03 in 2009 and ranging between 0.95 to 0.99.

5.2RONW

Interpretation:

This ratio is most important for all the stockholders. Higher the ratio higher dividend, internal

efficiency, terms, loyalty of customer. Quality product etc. so the banking with IT, SAP,

ERP, token system and agricultural development policy, credit granting etc. increase the

interest income which causes banks more working toward this sectors and enhance the profitfor stakeholders. As the year 2009 after financial crisis the ratio shows 17.37 which is highest

among last five years. Then reduction due to market circumstances and RBI policy @

14.87% only. But it has increasing trend.


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5.3PBT/ Total Fund

Interpretation:

This ration is concerned with the profit before provisions to total fund. If banking has

efficient use of assets both tangible & intangible, manpower planning and policies of banking

services most privet banks has good infrastructure of IT . which make whole industry to

expand the PBT ration from 0.99 in 2004 to 1.05 in 2009. Then it further 0.99 that shows

during good monsoon & economic condition the profit is increase.

5.4Operating Expenses/ Total Fund


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Interpretation:

Expenses which banks have to compensate with the profit or revenue. The expenses can be

technical updating, interbank charges, SLR, CLR, As ratios define it is going to decrease

from 2.22 in 2006 to 1.61 in 2009 but not at notable point because it further increase by

2.12% in 2010. So industry trend shows reduction in operating expenses.

5.5 Non Interest Income/ Total Fund

Interpretation:

Noninterest income to total fund the ratio shows how efficiently banking the working which

generate income by way of deposit, demate account charges, OD, DD, etc charges taken from

the customers 2006 has 1.26% which is ranging in between 1.23-1.24 from the year 2008 to

2010 which shows banking maintain the ratio rather than expanding.


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5.6Net Interest Income/ Total Fund

Interpretation:

What is interest income is part of total fund invested. Suppose bank has 1000 fund and in

which 720 is from interest than it find this ratio. As banking industry 9.82% in 2001 and

7.25% in 2006. Which increase throughout three year and 2010 it was 7.48%.

5.7 Other Income/ Total Income


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Interpretation:

Banking industries has various types of income like fixed deposits, interest charges,

saving and current account charges, ATM charges etc. which provide short term and long

term income from those sources. This ratio is defined how much total income is divided in

other sources of income means apart from interest charges. Ratio was 11.76% in 2001 which

is quite more in 2004 at 20.19% and then after continuously appearing at 14.1% round about.

5.8 Operating Expenses/Total Income

Interpretation:

This Ratio shows that what is the level of expenses to the total income generated throughout

the year. Expenses like RBI charges SLR, CRR and other repose etc. Ratio 24.97% in 2001

which getting fluctuation by 2.3% year by year. In financial year 2010 24.3% which was veryhigh from 2009.


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FINDINGS:

.

NewMaching skill

Better New

Squeezeds reads

Demandingcustomers

RETAIL

ALIGNED

MINDSET

VALUEADDED SERVICE

ALIGNED

CONT.SKILL

DEREGULATI

BANKS


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Efficiency: This in turn has made it necessary to look for efficiencies in the business.Banks need to access low cost funds and simultaneously improve the efficiency. The

banks are facing pricing pressure, squeeze on spread and have to give thrust on retailassets.

Diffused Customer loyalty: This will definitely impact Customer preferences, as

they are bound to react to the value added offerings. Customers have becomedemanding and the loyalties are diffused. There are multiple choices, the wallet shareis reduced per bank with demand on flexibility and customization. Given therelatively low switching costs; customer retention calls for customized service andhassle free, flawless service delivery.

Misaligned mindset: These changes are creating challenges, as employees are madeto adapt to changing conditions. There is resistance to change from employees and theSeller market mindset is yet to be changed coupled with Fear of uncertainty andControl orientation. Acceptance of technology is slowly creeping in but the utilizationis not maximized.

Competency Gap: Placing the right skill at the right place will determine success.

The competency gap needs to be addressed simultaneously otherwise there will bemissed opportunities. The focus of people will be on doing work but not providingsolutions, on escalating problems rather than solving them and on disposingcustomers instead of using the opportunity to cross sell.

Strategic options with banks to cope with the challenges

Leading players in the industry have embarked on a series of strategic and tactical initiativesto sustain leadership. The major initiatives include:

Investing in state of the art technology as the back bone to ensure reliable service

delivery Leveraging the branch network and sales structure to mobilize low cost current and

savings deposits Making aggressive forays in the retail advances segment of home and personal loans Implementing organization wide initiatives involving people, process and technology

to reduce the fixed costs and cost per transaction Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade

services) Innovating Products to capture customer mind share to begin with and later the

wallet share Improving the asset quality as per Base II norms


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Conclusion


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Conclusion:

From the various analysis and evaluation of Indian banking sector at glance we come to

conclude that it is the sector responsible for the development and growth of Indian economy

and other industries. Currently many privet, cooperatives, public and international banks

appearing to the India. The entrepreneur in innovation is largely dependent on the manner inwhich bank credit is allocated and utilized in the process of economic growth. Customers

have become demanding and the loyalties are diffused. There are multiple choices, the wallet

share is reduced per bank with demand on flexibility and customization.

IT make whole industry to expand the PBT ration from 0.99 in 2004 to 1.05 in 2009.Which

leads to expand the function and stability of the industry. Now more and more private banks

try to define themselves as RRBs because management find potential for growth at the rural

India, But still there is boundaries exist which are berries to the reach.


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Bibliography


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BIBLIOGRAPHY

http://www.rbi.com/policy http://www.sbi.com/accounts http://www.capitaline.com http://www.moneycontrol.com/budget/gdp/intrestrete http://www.unionbudget.in/development

Books and magazines:

Financial sector reforms An Indian perspectiveBy Tamal Datta Chaudhary.

Capital Market in India Revitalizing the economyBy Asis Kumar Pain

The Economic Times The Economics Times, Monday 29, 2010Response business association info.

ET 23 Oct. Corporate

Business standard BS reporter Ahmedabad 22 Nov.


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Annexure1

[Rs. in Cr.]

Year 2010 2009 2008 2007 2006

No. of Companies 27 29 30 30 30 SOURCES OFFUNDS :

Capital 13,543.6716,936.0

816,164.6

5 15,416.30 15,279.79

Reserves Total227,456.2

0229,861.

70193,345.

56149,739.5

8127,442.7

5

Equity Share Warrants 0 0 0 0 0Equity Application

Money 1.58 1.73 0 0.8 0

Deposits3,691,801.

763,167,69

3.312,487,24

0.622,014,506.

691,636,578

.22

Borrowings313,814.0

2320,085.

90213,689.

37175,427.5

9158,218.7

8Other Liabilities &

Provisions197,243.3

1196,272.

25250,156.

33194,156.6

5166,427.2

1

TOTAL LIABILITIES4,443,860.

543,930,85

0.973,160,59

6.532,549,247.

612,103,946

.75 APPLICATION OFFUNDS : Cash & Balances with

RBI270,858.4

6224,496.

65233,700.

97142,469.7

1112,984.1

2Balances with Banks &

money at Call124,215.5

8149,538.

9473,287.3

9102,043.6

7 78,973.42

Investments1,205,782.

611,017,82

1.43804,593.

01668,219.5

4637,755.4

1

Advances

2,701,299.

88

2,392,22

0.87

1,909,04

9.84

1,532,540.

62

1,181,968

.75

Fixed Assets 34,466.0034,078.9

129,129.4

9 20,515.08 14,951.69

Other Assets107,238.0

1112,694.

17110,835.

83 83,458.99 77,313.36Miscellaneous

Expenditure not writtenoff 0 0 0 0 0

TOTAL ASSETS4,443,860.

543,930,85

0.973,160,59

6.532,549,247.

612,103,946

.75

Contingent Liability1,760,731.

831,909,37

9.791,873,31

2.061,277,234.

09849,439.9

4

Bills for collection167,097.3

5133,937.

3593,236.0

8 88,676.35 74,496.08


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BALANCE SHEET :

CASH FLOW


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INCOME : 2010 2009 2008 2007 2006

Interest Earned318,173.

11306,488.

31283,215.

14220,981.

58170,478.

17

Other Income52,407.6

051,827.5

044,091.2

535,147.0

727,287.4

1

Total370,580.

71358,315.

81327,306.

39256,128.

65197,765.

58

II. Expenditure

Interest expended219,803.

90211,940.

05200,116.

40154,058.

78106,092.

29Payments to/Provisions for

Employees41,797.5

741,031.5

535,049.6

329,026.6

128,285.9

7Operating Expenses &

Administrative Expenses12,771.0

612,589.1

911,031.9

0 9,204.53 7,786.65

Depreciation 3,212.01 3,144.00 2,855.93 2,756.66 2,561.70Other Expenses, Provisions &

Contingencies

34,513.0

2

33,809.0

1

26,118.2

7

21,574.6

7

23,092.2

8

Provision for Tax18,476.9

617,568.8

016,795.4

711,697.3

2 8,310.83

Fringe Benefit tax 4.84 0.68 257.96 229.71 216.08

Deferred Tax-

1,175.12-

1,024.42-

1,159.28 -396.72 211.76

Total329,404.

24319,058.

86291,066.

28228,151.

56176,557.

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III. Profit & Loss

Reported Net Profit41,176.4

739,256.9

536,240.1

127,977.0

921,208.0

2

Extraordinary Items 93.92 93.98 124.85 -193.71 -93.48

Adjusted Net Profit41,082.5

539,162.9

736,115.2

628,170.8

021,301.5

0

Prior Year Adjustments 0 0 0 -4.76 -13.27

Profit brought forward 2,799.29 2,698.52 2,395.75 3,514.56 2,924.58

IV. Appropriations

Transfer to Statutory Reserve14,241.5

514,241.5

511,882.9

110,366.7

3 7,585.57

Transfer to Other Reserves17,071.0

415,267.2

216,835.9

712,977.4

3 8,421.00Trans. to Government /Proposed

Dividend 8,291.44 8,190.67 7,102.76 5,746.98 4,598.20Balance carried forward to Balance

Sheet 4,371.73 4,256.03 2,814.22 2,395.75 3,514.56


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RATIOS

Industry - Banks-Pub Sector

Year Late

st

200

9

200

8

200

7

200

6

Other Income / Total Income

(%)

14.1 13.3

7

13.7

2

13.8 14.8

5

Operating Expenses / Total

Income (%)

24.3 17.3

4

18.9

4

23.6

2

26.0

4

Interest Income / Total

Funds (%)

7.48 8.03 7.77 7.35 7.25

Net Interest Income / Total

Funds (%)

2.93 2.36 2.35 2.77 3.01

Non Interest Income / Total

Funds (%)

1.23 1.24 1.24 1.18 1.26

Operating Expenses / Total

Funds (%)

2.12 1.61 1.71 2.01 2.22

Profit before Provisions /

Total Funds (%)

0.99 1.05 1.01 0.95 0.95

Net Profit / Total funds (%) 0.94 1.03 0.98 0.91 0.9

RONW (%) 14.8

7

17.3

7

16 14.4

1

13.5

9


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