BFM Project Report in Finance

K.C.
COLLEGE
CHALLENGES BEFORE INDIAN BANKING SYSTEM
Index Sr No. 1 2 3 4 5 Topic Summary History Of Indian Banks Introduction Banking System of India Pre-Globalized scenario & challenges 6 7 8 9 10 Present scenario & its Challenges Future scenario & its challenges Overall Assessment Conclusion Bibliography 15-42 43-49 50 51 52 Pg No. 2 3-5 6 7-13 14
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CHALLENGES BEFORE INDIAN BANKING SYSTEM Summary:

A spell of severe credit crunch, salary cuts, rehiring and a lot of news on loans going bad lead this paper to test the hypothesis that the Indian Banking Industry has been performing badly in contemporary times and was adversely impacted due to the continuing Global Financial Crisis. The methodology adapted to analyse the performance of all the Scheduled Commercial Banks of the Indian Banking Industry was to study the trend of the three most significant parameters/ratios applicable for Banking Industry. Among the parameters of performance, the most significant ones comprise Net Non Performing Assets as a percentage of Net Advances, Capital Adequacy Ratio and Return on Assets. A single composite weighted average of all Nationalized banks, Private sector banks and Foreign banks in India has been considered to View the trend in the period 2005-06 to 2007-08. The analysis shows that the Indian Banking Industry is stable and still growing albeit at a slow pace.
The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges. The last decade has witnessed major changes in the financial sector - new banks, new financial institutions, new instruments, new windows, and new opportunities - and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment revenues, it has entailed greater competition and consequently greater risks. Demand for new products, particularly derivatives, has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalised environment.
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HISTORY:
NEW PHASE OF INDIAN BANKING SYSTEM WITH THE ADVENT OF INDIAN FINANCIAL & BANKING SECTOR REFORMS AFTER 1991.
The Bank of Bengal which later became the State Bank of India Phase-I
the General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans shareholders
In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in 1935.
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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 department was comparatively safer. Moreover, funds were largely given to traders.
Phase II
Nationalization of Imperial Bank of India with extensive banking facilities on a large scale specially 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 nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. 14 major commercial banks in the country was nationalized . Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized 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. Second phase of nationalization 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: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over 200 crore. After the nationalization 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%.
Phase-III
III
This phase has introduced many more products and facilities in the banking sector in its
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reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices. This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimhama, a committee was set up by his name which worked for the liberalization of banking practices. Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. 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 divedend With the nationalization of 14 major private banks of India.
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INTRODUCTION:
In recent time, we has witnessed that the World Economy is passing through some intricate circumstances as bankruptcy of banking & financial institutions, debt crisis in major economies of the world and euro zone crisis. The scenario has become very uncertain causing recession in major economies like US and Europe. This poses some serious questions about the survival, growth and maintaining the sustainable development. However, amidst all this turmoil Indias Banking Industry has been amongst the few to maintain resilience. The tempo of development for the Indian banking industry has been remarkable over the past decade. It is evident from the higher pace of credit expansion, expanding profitability and productivity similar to banks in developed markets, lower incidence of non- performing assets and focus on financial inclusion have contributed to making Indian banking vibrant and strong. Indian banks have begun to revise their growth approach and re-evaluate the prospects on hand to keep the economy rolling.
THE MEANING OF BANK

From the Italian banca meaning 'bench', the table at which a dealer in money worked. A bank is now a financial institution which offers savings and cheque accounts, makes loans and provides other financial services, making profits mainly from the difference between interest paid on deposits and charged for loans, plus fees for accepting bills and other services. Other relevant legislation includes the Banks (Shareholdings) Act and the Reserve Bank Act. The Reserve Bank Act gives the Reserve Bank of Australia (the central bank) a wide range of powers over the banking sector. Bank is an institution which trades in money, an establishment for the deposits, custody and issue of money, as also for making loans and discounts and facilitating the transmission of remittances from one place to another.
Savings Bank: Running account for saving with restriction in number of withdrawal Current Account: Running account without restriction on number of withdrawals Term Deposit: Deposit of an amount for a fixed period where interest is paid
monthly/Quarterly.
Special Term Deposit: Deposit of an amount for a fixed period where interest is compounded (Capitalized) and paid on maturity. Recurring Deposit : Regular (Monthly) deposit of a fixed amount for a fixed period
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BANKING SYSTEM OF INDIA

Modern banking in India is said to be developed during the British era. In the first half of the 19th century, the British East India Company established three banks the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. But in the course of time these three banks were amalgamated to a new bank called Imperial Bank and later it was taken over by the State Bank of India in 1955. Allahabad Bank was the first fully Indian owned bank. The Reserve Bank of India was established in 1935 followed by other banks like Punjab National Bank, Bank of India, Canara Bank and Indian Bank. In 1969, 14 major banks were nationalized and in 1980, 6 major private sector banks were taken over by the government. Today, commercial banking system in India is divided into following categories.
Types of Banks Central Bank

The Reserve Bank of India is the central Bank that is fully owned by the Government. It is governed by a central board (headed by a Governor) appointed by the Central Government. It issues guidelines for the functioning of all banks operating within the country.
Public Sector Banks

Among the Public Sector Banks in India, United Bank of India is one of the 14 major banks which were nationalized on July 19, 1969. Its predecessor, in the Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914), Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and Hooghly Bank Ltd. (1932). State Bank of India and its associate banks called the State Bank Group 20 nationalized banks Regional rural banks mainly sponsored by public sector banks
Private Sector Banks

Private banking in India was practiced since the beginning of banking system in India. The first private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. It is one of the fastest growing Bank Private Sector Banks in India. ING Vysya, yet another Private Bank of India was incorporated in the year 1930.
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Old generation private banks New generation private banks Foreign banks operating in India Scheduled co-operative banks Non-scheduled banks
Co-operative Sector
The co-operative sector is very much useful for rural people. The co-operative banking sector is divided into the following categories.
State co-operative Banks

Central co-operative banks Primary Agriculture Credit Societies Development Banks/Financial Institutions IFCI IDBI ICICI North Eastern Development Finance Corporation Small Industries Development Bank of India IDBISCICI National Housing Bank IIBI Export-Import Bank of India NABARD
LOCAL AREA BANKS

The Local Area Bank Scheme was introduced in August 1996 aimed at bridging the gaps in credit availability and enhancing the institutional credit framework in the rural and semi urban areas and providing efficient and competitive services. Since then, five LABs have been established.
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The review group, which was appointed by RBI in July 2002 to study and make recommendations on the LABs scheme, has in its report, drawn attention to the structural infirmities in the concept of the LABs and recommended that there, should be no licensing of new LABs. It has pointed out several weaknesses in the concept of the Local Area Bank model, particularly in regards to size, capital base and inherent inability to absorb the losses in the course of business etc.Four LABS were functional at endmarch 2005. They were Coastal area bank ltd, Vijayawada, Andhra Pradesh,Capital local area bank ltd,phagwara,Navsari,Gujrat, Krishna bhima samrudhdhi local area bank limited , Mehboob Nagar,Subhadra local area bank limited, Kolhapur.
CO- OPERATIVE BANKS

The Co-operative banks have a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfill, their number, and the number of offices they operate. The co-operative movement originated in the West, but the importance that such banks have assumed in India is rarely paralleled anywhere else in the world. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of primary co-operative banks. While the co-operative banks in rural areas mainly finance agricultural based activities including farming, cattle, milk, hatchery, personal finance etc. along with some small scale industries and self-employment driven activities, the co-operative banks in urban areas mainly finance various categories of people for self-employment, industries, small scale units, home finance, consumer finance, personal finance, etc. Some of the co-operative banks are quite forward looking and have developed sufficient core competencies to challenge state and private sector banks. Though registered under the Co-operative Societies Act of the Respective States (where formed originally) the banking related activities of the co-operative banks are also regulated by the Reserve Bank of India. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
REGIONAL RURAL BANKS IN INDIA

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Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas.
INDIAN BANKS OPERATIONS ABROAD

As on October 20,2005,fourteen Indian banks-nine from the public sector and five from the private sector had operation overseas spread across 42 countries with a network of 101 branches,6 joint ventures,17 subsidiaries and representative offices. HDFC Bank ICICI Bank SBI Bank AXIS Bank Yes Bank Indian Overseas Bank Kotak Mahindra Bank Punjab National Bank Andhra Bank Corporation Bank Allahabad Bank Karur Vysya Bank Canara Bank
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RESERVE BANK OF INDIA

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of the Reserve Bank Of India Act, 1934.The Central Office of the Reserve Bank was initially established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is where the Governors its and where policies are formulated. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by government of India. The Preamble of the Reserve Bank of India describes the basic functions of the Reserve Bank as: "...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage.
Organisation & Functions

Reserve Bank of India (RBI) is the Central Bank and all Banks in India are required to follow the guidelines issued by RBI. Financial Supervision The Reserve Bank of India performs this function under the guidance of the Board for Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of Directors of the Reserve Bank of India. ConstitutionThe Board is constituted by co-opting four Directors from the Central Board as membersfor a term of two years and is chaired by the Governor. The Deputy Governors of theReserve Bank are ex-officio members. One Deputy Governor, usually, the Deputy Governor in charge of banking regulation and supervision, is nominated as the Vice-Chairman of the Board.
Current Focus

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supervision of financial institutions consolidated accounting legal issues in bank frauds divergence in assessments of non-performing assets and supervisory rating model for banks.
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Main FunctionsMonetary Authority: Formulates, implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate flow of credit toproductive sectors. Regulator and supervisor of the financial system: Prescribes broad parameters of banking operations within which the country's banking and financial system functions. maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public. Manager of Foreign Exchange Manages the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India. Issuer of currency: Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes andcoins and in good quality. Developmental role Performs a wide range of promotional functions to support national objectives. Related Functions Banker to the Government: performs merchant banki ng function for the centraland the state governments; also acts as their banker..
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Date 10/7/2013
Cash Reserve Ratios and Rates (Per cent) Item/Week Ended Ratios Cash Reserve Ratio (%) Bank Rate Base Rate Term Deposit Rate Call Money Rate (Weighted Average) 2012 Sep. 21 1 Aug. 23 2 Aug. 30 3 2013 Sep. 6 4 Sep. 13 5 Sep. 20 6
4.75 4.00 4.00 4.00 4.00 4.00 9.00 10.25 10.25 10.25 10.25 9.50 9.75/10.50 9.70/10.25 9.70/10.25 9.70/10.25 9.70/10.25 9.80/10.25 8.50/9.25 8.00/9.00 8.00/9.00 8.00/9.00 8.00/9.00 8.00/9.00 8.02 10.21 10.23 10.10 10.38 10.29
(1) Cash Reserve Ratio relates to Scheduled Commercial Banks (excluding Regional Rural (2) Base Rate relates to five major banks since July 1, 2010. Earlier figures relate to Benchmark Prime Lending Rate (BPLR) (3) Deposit Rate relates to major banks for term deposits of more than one year maturity. (4) Data cover 90-95 per cent of total transactions reported by participants. Call Money Rate (Weighted Average) is volumeweighted average of daily call money rates for the week (Saturday to Friday).
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PRE-GLOBALIZED SCENARIO OF BANKING IN INDIA

BANKS SERVICE CULTURE WAS EXTREMELY DEMOTIVATED: the services offered by banks were not so good and it was demotivated because there was no competition and no improvement in banking services previous to globalization DISINTERESTED EMPLOYER & EMPLOYEE:. During pre-globalized period the employee were totally disinterested they dont have any target to achieve and there main motive is just to earn livelihood for them no feeling of competition was there and even there senior executive dont motivate them to achieve some target. NON COMPETETIVE ATTITUDE.: pre-globalization there were only government banks who were major players in the field of banking so there is no way for competition so even staff attitude was completely non competitive so no innovative service take place and even no innovation in product line. PRODUCT FOCUSED & NOT CUSTOMER SERVICE FOCUSED: The main focus of banks were selling of product not customers. like today bank scenario customers are treated as lifeline of banking sector during pre-globalized time it was nothing so customers were given last priority.
CHALLENGES FACED BY BANK IN PRE-GLOBALIZED SCENARIO

HARD TO RETAIN CUSTOMER: INNOVATION IN PRODUCT LINE NEW TECHNOLOGIES DEFFERED LOYALTY FROM CUSTOMERS EMERGING OF NEW BANKS POOR SKILLS OF EMPLOYEES HARD TO ESTABLISHING MARKET FRIENDLY IMAGE INFRASTRUCTURE
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THE PRESENT SCENARIO OF INDIAN BANKING SYSTEM

The current banking sector of India is Countrywide coverage even we can found bank at small village level, district level and sate level also and current Indian banking system involves Large number of players because not only government banks take active participate in banking sector whereas there are private banks also, This sector is going through major changes as a consequence of economic reforms. The changes affect the ownership pattern of banks, availability of funds, the cost of funds as well as opportunities to earn, range of services (fee-based and fund-based), and management of priority sector lending. As a consequence of liberalization in interest rates, banks are operating on reduced spread. Development financial institutions would have a lesser impact on the Indian economy. Consumerism is here to stay..
SOME FOLLOWING FEATURES OF CURRENT INDIAN BANKING SYSTEM

Increasing use of technology in operations Poised to expand and deepen technology usage Diversification Emergence of integrated players Diversifying capital deployment Leveraging synergies Robust regulatory system aligned to international standards Efficient monetary management The landscape of the banking industry underwent considerable changes during the last decade. The industry witnessed: Deregulation of lending and deposit rates. Entry of new private sector banks. Extensive use of technology for product innovation Emergence of retail banking and new derivative products. Stricter provisioning and asset classification norms. Raising capital adequacy requirements. .The freedom from administered policies and government regulation in matters of day-to-day functioning has opened a new era of selfgovernance and need for self-initiative
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CURRENT CHALLENGES BEFORE INDIAN BANKING SYSTEM Problems of Public Sector Banks (PSBs) in India
The Indian Public Sector Banks occupy the pivotal position in the countrys banking topography but its market share has declined to some extent in recent years due to the emergence of private sector and foreign banks. The major problems which Indian public sector banks facing today are as follows: Problem of Pressure on Profitability The problem of pressure on productivity was experienced during 1993-95 as revealed from the losses caused to banking sector . With continuous expansion in number of branches and manpower, thrust on social and rural banking, directed sector lending, maintenance of higher reserve ratios, waiver of loans under concessions, repayment default by large industrial corporate and other borrowers, etc. had their telling impact on the profitability of the banks. Further, with the introduction of prudential norms, made effective from March end 1993, balance sheet of a majority of the commercial banks had reflected huge losses. In order to improve financial health of these banks, the Government provided a dose of hybrid capital and in return these banks were made to sign a memorandum of understanding with RBI. Problem of Low Productivity Another problem which Indian public sector banks are confronting is low productivity. The low productivity has been due to huge surplus manpower, poor work culture and absence of employees commitment to the organisation. Problem of Non-Performing Assets (NPAs) A serious threat to survival and success of Indian PSBs is the emergence of uncomfortably high level of non-performing assets. In its report on Trends and Progress of Banking in India, 1997-98, the Reserve Bank of India (RBI) reported the gross NPAs as percentage of advances of PSBs, which was 16 per cent as on March 31,2000 blocking about Rs. 52,000 crore in non-performing loans. The spiralling nonperforming assets were hurting banks profitability and even the basic inability of the banking system by way of both non-recognition of interest income and loan loss provisioning. In view of the further tightening of norms of income recognition and provisioning norms in times to come, viz., overdue PSU accounts partly or fully guaranteed by Government accounts to be classified as NPA based on one quarter default. Size of NPA is likely to be surged unless strategic measures are taken by thebanking sector. Problem of Unionism Another major problem of PSBs is the absence of aggressive marketing programme, offering prompt service and new products. However, the PSBs are trying to computerise
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their operations, the pace of progress in this direction has been decidedly slow. The18 rather tardy progress in the area has been due to the initial reservation of the staff unions against computerisation for the lurking fear of employment cut, as also the existence of a huge number of branches in the rural areas, where suitable logistics are not available. As a result, market share of the PSBs, both in deposits and lending has declined. This has already become a serious cause of concern for the PSBs regulating strategic efforts for thwarting the challenges from the new players. Challenge of Competition from New Banks The present era of competition has witnessed various large multinational banks like American Bank, Hong Kong Bank, Swiss Bank, Citi Bank, etc. and other multinational banks coming very aggressively. The new banks have set the tone and to an extent also the standard for technological improvements with product innovations, which dominated the traditional PSBs. So, these banks have to run in a market which has no geographical barriers and will have to develop abilities of product innovation as well as delivery comparable to the best in the world. Challenge of Cross-Industry Competition The internet provides people from other industry segments opportunities to succeed in business where they have had little or no such resources before. The new non-financial entrants such as Microsoft, AOL, Time Warner and Amazon.com are more threatening to traditional financial service companies and banks than the new virtual entrants, because these non-financial companies have established credibility, loyal consumers and deep pockets. In fact, PSBs lacks the greatest threat to banking system. Threat of Competition from Global Players Globalisation and integration of Indian financial market with world and the consequent entry of foreign players in domestic market has infused, in its wake, brutal competitive pressures on the Indian commercial banks. Foreign players endowed with robust capital adequacy, high quality assets, world-wide connectivity, benefits of economies of scale and stupendous risk management skills are posing serious threats to the existing business of the Indian banks. In order to compete successfully with the new entrants, Indian banks need to possess matching financial muscle, as fair competition is possible only among the equals. Average size of an Indian bank is niggardly low in comparison to any foreign bank. The major question before the Indian commercial banks, therefore, is to acquire competitive size. Problem of Managing Dual Ownership Managing duality of ownership is a peculiar problem which the PSBs have to encounter because of participation of private shareholders in their share capital. A PSBs to survive
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and grow successfully is expected to operate according to the expectations of one of its principal shareholders. In the changed scenario, there would be two major groups of shareholders, viz., the Government of India (GOI) and Reserve Bank of India (RBI) on one hand and private shareholders on the other. Since the expectations of these two categories of owners are not necessarily identical, the bankers will have to manage conflicting interests. 19 Problem of IT Infrastructure In the age of computerisation, although the banks have started computerisation process, this has provided little comforts to the customers. Still the customer has to wait for some time in long queues. Further, the operation by computer is delayed by the fact that some operating staff are not very skilled and thus it takes more time. The problem of breakdowns of electricity and even of the computers is so usual that the whole work comes to a halt and no work is performed. It takes hours to get it rectified i.e., even the smaller problems take time as most of the branches do not have system specialist who can look after the system and other operational problems. An inexperienced person means more time and more delays in providing services to the customers. Bureaucratic Interference Another very important reason for the plight of the customers of PSBs is the bureaucratic set-up within the banks whereby it takes months together to get the loan sanctioned. By the time loan gets sanctioned, the project cost gets escalated giving rise to defaults in the payments by the organisation and ultimately bank is forced to have larger NPAs in their hands. Being Government owned, these banks are politically led. Political agenda tops at the cost of banks profitability and stability. Delays in forma tion of legislature that to full of pitfalls with easy escape route to defaulters are common. Political interference in delaying credit instalments to bank and channeling of bank funds are common features giving rise to NPAs. Political motives have led to the problem of overstaffing in the banks. All those and much more have paralysed Indian public sector banks and means to come out of this glut is not very easy. Poor Environment The dirty and poor environment is another problem of PSBs in India. The moment one enters a bank it looks like a dirty dilapidated warehouse with broken and torn seats, which discourages a customer to venture into and avail the services. It looks like butchery where the customer is mentally tarnished such that he feels like taking a medicine.
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Problem of Consumer Unfriendly Another reason is that the people working in the banks have a very strong feeling that they are Government demands. Thus nobody can shunt them out and therefore they do not work. The productivity, output in banks is so low that one will find most of the staff in the banks busy gossiping and the so-called bechara customer standing helpless cursing his fate. Further, the union politics with strikes every seventh day makes the life of the customer more miserable. It can be well imagined that one-day closure of banks hits the economy with around Rs. 2000 crore loss, but who cared about it. Further, the absence of implementation of relationship of performance rewards and punishment has made the whole affair unmanageable, which leads to obstruction of services to the customers. Welfare Motivation Another very specific reason is that banks being governmental organisation and in20 their objective towards a social state they have neglected the profitable customers at the cost of loss accounts, their strategies do not exist at all. The same treatment to all customer, whether one deposits Rs. 1 lakh or Rs. 500 may lead to poor bankercustomer relationship. The dissatisfaction of the higher-end customer forces him to look for other options. Foreign banks and private banks are there to serve customers beyond expectations and provide the customers the dignity and pride of being associated with them. Lack of Knowledge Though, Indian public sector banks have created a vast network of branches, having huge customer base, they are not able to extract any knowledge, from the vast amount of overload data that they have on these customers. To build strategies to attract and retain customers some knowledge is in implicit form with the employees about the customer, which is there because of informal contacts. But private sector banks are putting-up aggressive and technology savvy competition to public sector banks in the form of innovative products and services such as round the clock banking facility, netbanking, free home service to open a bank account and to withdraw/deposit money by cheque/draft (home banking), free auto sweep facility in the saving account with options to sweep excess funds in savings account to high interest fixed deposit, ATM and 365 days service, providing an automatic terminal in a corporate office for company to access its account from its office, offering attractive consumer durable loans, educational loans, credit cards, etc. Problem of Customer Adoption Issue Nowadays the public sector banks are presenting various products and services to their customers online, but its scope is limited. The problem of banks is that they must work
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hard to attract more number of customers. This is possible only when they assure security of online transactions. Moreover, banks that have created a distinctive online offering could attract more number of customers when compared to those banks which are using almost similar products and services. The future of online banking transactions depends on their ability to convince their customers to use their online portals. Problem of Choice of Banking Technology Undoubtedly, online banking saves a lot of time. Two types of banking models like integrated banking and stand-alone Internet banking are coming into existence. But banks may encounter problems due to wrong choice of technology, insufficient control processes and inappropriate system design. This wrong selection of technology may lead to a loss in terms of financial losses well as loss of brand image and goodwill. Due to this reason, many banks rely on third party service provider for banking technology. Challenges of the Survival of Public Sector Banks (PSBs) in India The improvement of operational and distribution efficiency of commercial banks has always been an issue for Government of India (GOI) in consultation with RBI. Over the years, like Banking Commission (1972) under the Chairmanship of R.G. Saraiya and 21 1976 under the Chairmanship of Manubhai Shah and the Committee for the functioning of PSBs (1978) under the Chairmanship of James S. Raj have suggested structural changes towards this objective. However, the economic rise of 1990s gave birth to the new economic macro level thinking to improve the economic health of the Indian economy. Financial sector reforms, particularly banking sector, gave new sound and healthy direction to the Indian economy. Under the regime of Liberalisation, Privatisation and Globalisation (LPG), some public sector banks are still facing very serious problems as their survival has become very difficult in the competitive world. Various challenges have taken place to tackle the problem. Competitive Environment The Foreign Banks and New Private Sector Banks have witnessed a significant growth but on the other side, PSBs are at the edge of survival among them with huge capital base, latest technology, innovative and globally tested products/services are fetching the consumers attention. However, to make Indian PSBs competitively strong, they should follow the strategies of New Private Sector Banks and Foreign Banks as benchmark with an introduction of latest technology, innovative and globally accepted products/services followed by appointment of experienced, skilled and tech-friendly professionals.
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Consumer Focus Consumer is a king in todays market. The PSBs never try to focus on their needs and hence lose their market share. The first and foremost thing that banks require to do is to treat the consumer as a consumer of the bank and not as a consumer of any other branch. The banks require improving on providing services and profitability efficiencyof services. The banks have to explore out fastest and efficient means of providing services with the use of IT applications, telebanking, internet banking and improving delivery system by improving the attitude and behaviour of the staff also. Marketing Strategies The PSBs are required to devise suitable market strategies to augment the volume of business level. So, the PSBs should research on the vast knowledge they have about the consumer, devise about specific products for specific segments, differentiate according to consumer potentials and its expectations, and focus on few potential customers with customized products and services rather than serving all customers with universal products. Using CRM, appointment of young employees with fresh and creative minds with expertise in latest technology, as a matter of choice is desirable to survive in the globalised market. Image building The PSBs should start on massive scale the image-building exercise. The banks should focus their attention on creation of such an outward look that it feels like anything entering the bank. The regent of the bank should be user-friendly with good quality furniture and other attractive infrastructure. Transformation of human capital22 Another important challenge is the transformation of human capital. But the PSBs are overloaded with much experienced senior old staff who are never ready to accept the change. Now-a-days, it is the need of the hour to develop and manage the human resources to make them adaptable to the changing environment. It is a challenge for PSBs that how to manage their human capital to make it productive. However, PSBs should provide on-the-job training to the efficient staff to make them capable to understand and work with latest technology and its application. The performance of staff should be evaluated on quarterly basis and it is also required to introduce Voluntary Retirement Scheme (VRS) in a proper way. Reorganisation, Restructuring and Reengineering (RRR) The time is the most precious thing; banks should understand the value of consumers time. The unnecessary paper work and lengthy process need to be cut short in PSBs. However, reorganisation, restructuring and reengineering (RRR) are the need of the
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hour. In order to lead, capture and retain the customer, banks have to utilise their knowledge about consumer to determine about product configuration, promotion, pricing and service level, channel mix all that suit the consumer better. The CRM (Customer Relationship Management) system helps to make more accurate commitment to customer based on informed judgment adding value to customer relationship at every stage regardless of the interaction point, branch, call centre or the internet and that full details of each interaction are always captured for analysis anddecision-making Continuous Strikes Another important challenge is that the growth of trade unionism in banks resulting in frequent strikes, lockouts, conflict amongst the management and employees leading to loss of both the consumer as well as the banks. These strikes have the roots in dissatisfaction of workers on the basis of non-fulfilment of promises, faulty appraisal system and absence of accountability in the system. This leads to the rise of total NPAs of the scheduled commercial banks. This requires the improved credit skills for appraisal of credit proposal and monitoring the loss. Decline in interest rates: The decline of interest rates is due to reluctance to take loans. It is so lengthy and complex that by the time it is approved, the project get delayed, which results in less return and thus larger NPAs. The interest income as percentage of average working funds of PSBs has fallen considerably from 10.3 in 1997-98 to 9.92 in 2000-01. While the private banks interest income as percentage to average working funds is 10.41 in 2000-01 as against 10.35 in 1997-98 and that of foreign banks 9.43 as against 8.83 in 1997-98. This shows that private banks and foreign banks are able to increase interest income as compared to PSBs. It is a clear indication of shift of consumers. This is a big challenge before the PSBs to tackle with private sector banks and foreign banks. Challenges of Governance, Risk and Compliance (GRC) GRC is a recognised and a integrated approach. Without a focussed approach to GRC Challenges Before Indian Banking System K.C.College 23 framework, a bank would be more vulnerable to risks, as complexities and interdependencies of risks increase with increase in international business. Further, the implementation of GRC in the Indian banking sector will require serious commitment of resources and management focus. It will also entail hiring and training employees in India to develop expertise in handling specific overseas regulations.
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Profit Accountability Another challenge is profit accountability that the PSBs give more stress on profitability not on the accountability. If the required profit target is achieved, nobody is accountable to reward and similarly, in case it is not achieved, then also nobody is accountable for punishment. To cope up with the problem, PSBs should make proper policies for profit accountability. Therefore, the PSBs should fix accountability with targets on each unit and employee of the banks and award to those people who have achieved the target. Consolidation (Merger and Acquisitions) Competition, Convergence and Consolidation will be the key challenges of the banking industry in the future. The Indian banking sector is moving from a regime of large number of small banks to small number of large banks. Thus, the key motivations behind mergers and acquisitions in India are to have enhanced size toenjoy economies of scale and scope, access to large amount of funds, wider penetration and global presence. The consolidation and merger can have a number of positive impacts on the Indian banking sector, which are competitive in international markets, participate in a range of financial activities, avail the tax relief, maximising the shareholder value, etc. The Table 1 depicts the bank mergers in India during the pre-nationalisation (1961-1968), nationalisation (1969-1992) and post-reform period (1993-2008). Autonomy The PSBs are in need of operational freedom and autonomy in their development. On the other hand, foreign banks and new private sector banks have the full autonomy in day-to-day operations and that is why their performance is significantly better than PSBs. It can be said that, to compete in the global market, PSBs should be given full autonomy. RBI should provide full autonomy in the areas like insurance sector, free merger and acquisitions, allowing the opening of rural branches, fix quota on private sector, etc. Challenges regarding Retention of Skilled Manpower It is expected that from April 2009 onwards, there will be rapid changes in the Indian banking sector. The regulatory guidelines for starting foreign banks and acquisition of Indian private banks by foreign banks will become more liberal. As a consequence, retention of skilled manpower will be a challenge to the nationalised banks, since foreign and private banks will try to lure them with attractive pay packages. Challenges of Technology
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Another important challenge is that Indian public sector banks should have used24 innovative technology to facilitate financial inclusion of the unbanked population ofIndia through use of biometric techniques and burgeoning mobile network. However, this customer experience and tailored offerings are increasingly becoming key to bank profitability. Challenges of Online Banking Online banking has changed the face of the entire banking system. It opens a new channel for banks to reach their customers and serve them better. Online banking has several advantages when compared to the traditional banking systems, such as, access irrespective of time and place, manage all his bank accounts from one secure site, and using account aggregation, stock quotations and portfolio management programmes for effective management of assets. But authentication, security trust, non-repudiation and privacy issues are some of the challenges that online banks have to cope with. Challenges of Mobile Banking Mobile banking is enjoying a rapid growth. Mobile banking is different from Internet banking and ATMs in many ways. The banks get valuable data about the customers through mobile banking, which helps them in effective customer relationship management practices. Through mobile banking, all mandatory alters are to be sent to the customers in time, and the complete system should be very much disciplined and robust. There should not be any change for any information leakage. If a wrong transaction is done by mistake, there should be options to undo it. But if the customer once loss his confidence, it is very difficult to convince them again regarding the same. Hence, Indians living in villages and semi-urban areas need to be educated about mobile banking. There is a biggest challenge for banks that mobile banking education should become a part of the promotional campaigns. The PSBs should meet the above challenges, which will enable them to acquire, retain and enhance the customer and will be able to fight the menace of competition with private sector banks and foreign banks. But in the mean time, still banks have to strive hard to come out of the deadly thaws of bureaucratic control to implement their will fully.
Globalisation a challenge as well as an opportunity. Theory:

The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalization of the India banking system and placed numerous demands on banks. Operating in this
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demanding environment has exposed banks to various challenges. The last decade has witnessed major changes in the financial sector - new banks, new financial institutions, new instruments, new windows, and new opportunities - and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment revenues, it has entailed greater competition and consequently greater risks. Demand for new products, particularly derivatives, has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalised environment. Globalization a challenge as well as an opportunity The benefits of globalization have been well documented and are being increasingly recognized. Globalization of domestic banks has also been facilitated by tremendous advancement in information and communications technology. Globalization has thrown up lot of opportunities but accompanied by concomitant risks. There is a growing realization that the ability of countries to conduct business across national borders and the ability to cope with the possible downside risks would depend, inter-alia, on the soundness of the financial system and the strength of the individual participants
Basel & Capital Adequacy:

Amidst globalization Banking System in India has attained vital importance. Day by day there has been increasing banking complexities in banking transactions, capital requirements, liquidity, credit and risks associated with them. The World Trade Organisation (WTO), of which India is a member nation, requires the countries like India to get their banking systems at par with the global standards in terms of financial health, safety and transparency, by implementing the Basel II Norms by 2009. BASEL COMMITTEE: The Basel Committee on Banking Supervision provides a forum for regular cooperation on banking supervisory matters. Its objective is to enhance understanding of key supervisory issues and improve the quality of banking supervision worldwide. It seeks to do so by exchanging information on national supervisory issues, approaches and techniques, with a view to promoting common understanding. The Committee's Secretariat is located at the Bank for International Settlements (BIS) in Basel, Switzerland.
NEED FOR SUCH NORMS:

The first accord by the name .Basel Accord I. was established in 1988 and was implemented by 1992. It was the very first attempt to introduce the concept of minimum standards of capital adequacy. Then the second accord by the name Basel Accord II was established in 1999 with a final directive in 2003 for implementation by 2006 as
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Basel II Norms. Basel II Norms have been introduced to overcome the drawbacks of Basel I Accord. For Indian Banks, its the need of the hour to buckle-up and practice banking business at par with global standards and make the banking system in India more reliable, transparent and safe. These Norms are necessary since India is and will witness increased capital flows from foreign countries and there is increasing crossborder economic & financial transactions. Table 1: Analysis of Capital Adequacy Ratio for the period year 2011 to 12 Capital Adequacy Ratio (As on March 31, In Per cent) 2009-10 2010-11 2011-12 I Nationalised Banks (28,29,29) 12.2 12.27 12.05 II Private Sector Banks (27,21,19) 11.71 12.98 15.37 III Foreign Banks in India (29,29,32) 41.84 39.25 44.1 Weighted Average of I, II and III 22.27 22.03 24.38 Source: Derived from data of Indian Bankers Association and Reserve Bank of India Capital adequacy ratios ("CAR") are a measure of the amount of a bank's core capital expressed as a percentage of its assets weightedcredit exposures. Capital adequacy ratio is defined as S.No. Category of Indian Banks (No of Banks in 10,'11,'12)
TIER 1 CAPITAL -A) Equity Capital, B) Disclosed Reserves TIER 2 CAPITAL -A) Undisclosed Reserves, B) General Loss reserves, Subordinate Term Debts C)
where Risk can either be weighted assets ( ) or the respective national regulator's minimum total capital requirement. If using risk weighted assets,
10% The percent threshold varies from bank to bank (10% in this case, a common requirement for regulators conforming to the Basel Accords) is set by the national banking regulator of different countries. Two types of capital are measured: tier one capital (T1 above), which can absorb losses without a bank being required to cease trading, andtier two capital (T2 above), which
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can absorb losses in the event of a winding-up and so provides a lesser degree of protection to depositors.
Capital adequacy ratio is the ratio which determines the bank's capacity to meet the time liabilities and other risks such as credit risk, operational risk, etc. In the most simple formulation, a bank's capital is the "cushion" for potential losses, and protects the bank's depositors and other lenders. Banking regulators in most countries define and monitor CAR to protect depositors, thereby maintaining confidence in the banking system. CAR is similar to leverage; in the most basic formulation, it is comparable to the inverse of debt-to-equity leverage formulations (although CAR uses equity over assets instead of debt-to-equity; since assets are by definition equal to debt plus equity, a transformation is required). Unlike traditional leverage, however, CAR recognizes that assets can have different levels of risk. Since different types of assets have different risk profiles, CAR primarily adjusts for assets that are less risky by allowing banks to "discount" lower-risk assets. The specifics of CAR calculation vary from country to country, but general approaches tend to be similar for countries that apply the Basel Accords. In the most basic application, government debt is allowed a 0% "risk weighting" - that is, they are subtracted from total assets for purposes of calculating the CAR. Tier 1 capital is the core measure of a bank's financial strength from a regulator's point of view. It is composed of core capital, which consists primarily of common stock and disclosed reserves (or retained earnings) but may also include non-redeemable noncumulative preferred stock. The Basel Committee also observed that banks have used innovative instruments over the years to generate Tier 1 capital; these are subject to stringent conditions and are limited to a maximum of 15% of total Tier 1 capital. Capital in this sense is related to, but different from, the accounting concept of shareholders' equity. Both Tier 1 and Tier 2 capital were first defined in the Basel I capital accord and remained substantially the same in the replacement Basel II accord. Tier 2 capital represents "supplementary capital" such as undisclosed reserves, revaluation reserves, general loan-loss reserves, hybrid (debt/equity) capital instruments, and subordinated debt. Each country's banking regulator, however, has some discretion over how differing financial instruments may count in a capital calculation. This is appropriate, as the legal framework varies in different legal systems.
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The theoretical reason for holding capital is that it should provide protection against unexpected losses. Note that this is not the same as expected losses, which are covered by provisions, reserves and current year profits. In Basel I agreement, Tier 1 capital is a minimum of 4%ownership equity but investors generally require a ratio of 10%. Tier 1 capital should be greater than 50% of the minimum requirement.
1.2) OPERATIONAL RISK

An operational risk is, as the name suggests, a risk arising from execution of a company's business functions. It is a very broad concept which focuses on the risks arising from the people, systems and processes through which a company operates. It also includes other categories such as fraud risks, legal risks, physical or environmental risks. A widely used definition of operational risk is the one contained in the Basel II regulations. This definition states that operational risk is the risk of loss resulting from inadequate or failed internal processes, people and systems, or from external events. The approach to managing operational risk differs from that applied to other types of risk, because it is not used to generate profit. In contrast, credit risk is exploited by lending institutions to create profit, market risk is exploited by traders and fund managers, and insurance risk is exploited by insurers. They all however manage operational risk to keep losses within their risk appetite - the amount of risk they are prepared to accept in pursuit of their objectives. What this means in practical terms is that organisations accept that their people, processes and systems are imperfect, and that losses will arise from errors and ineffective operations. The size of the loss they are prepared to accept, because the cost of correcting the errors or improving the systems is disproportionate to the benefit they will receive, determines their appetite for operational risk. Determining appetite for operational risk is a discipline which is still in its infancy. Some of the issues and considerations around this process are outlined in this Sound Practice paper published by the Institute for Operational Risk in December 2009.
Background
Since the mid-1990s, the topics of market risk and credit risk have been the subject of much debate and research, with the result that financial institutions have made significant progress in the identification, measurement and management of both these
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forms of risk. However, it is worth mentioning that the near collapse of the U.S. financial system in September 2008 is a clear indication that our ability to measure market and credit risk is far from perfect. Globalization and deregulation in financial markets, combined with increased sophistication in financial technology, have introduced more complexities into the activities of banks and therefore their risk profiles. These reasons underscore banks' and supervisors' growing focus upon the identification and measurement of operational risk. Events such as the September 11 terrorist attacks, rogue trading losses at Socit Gnrale, Barings, AIB and National Australia Bank serve to highlight the fact that the merely market and credit risk. scope of risk management extends beyond
The list of risks (and, more importantly, the scale of these risks) faced by banks today includes fraud, system failures, terrorism and employee compensation claims. These types of risk are generally classified under the term 'operational risk'.
Definition
The Basel Committee defines operational risk as: "The risk of loss resulting from inadequate or failed internal processes, people and systems or from external events." However, the Basel Committee recognizes that operational risk is a term that has a variety of meanings and therefore, for internal purposes, banks are permitted to adopt their own definitions of operational risk, provided that the minimum elements in the Committee's definition are included.
Scope exclusions
The Basel II definition of operational risk excludes, for example, strategic risk - the risk of a loss arising from a poor strategic business decision. Other risk terms are seen as potential consequences of operational risk events. For example, reputational risk (damage to an organization through loss of its reputation or standing) can arise as a consequence (or impact) of operational failures - as well as from other events.
Basel II event type categories
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The following lists the official Basel II defined event types with some examples for each category: Internal Fraud - misappropriation of assets, tax evasion, intentional mismarking of positions, bribery External Fraud- theft of information, hacking damage, third-party theft and forgery Employment Practices and Workplace compensation, employee health and safety Safety discrimination, workers
Clients, Products, & Business Practice- market manipulation, antitrust, improper trade, product defects, fiduciary breaches, account churning Damage to Physical Assets - natural disasters, terrorism, vandalism Business Disruption & Systems Failures - utility disruptions, software failures, hardware failures Execution, Delivery, & Process Management - data entry errors, accounting errors, failed mandatory reporting, negligent loss of client assets
Difficulties;It is relatively straightforward for an organization to set and observe

specific, measurable levels of market risk and credit risk because models exist which attempt to predict the potential impact of market movements, or changes in the cost of credit. It should be noted however that these models are only as good as the underlying assumptions, and a large part of the recent financial crisis arose because the valuations generated by these models for particular types of investments were based on incorrect assumptions. By contrast it is relatively difficult to identify or assess levels of operational risk and its many sources. Historically organizations have accepted operational risk as an unavoidable cost of doing business. Many now though collect data on operational losses - for example through system failure or fraud - and are using this data to model operational risk and to calculate a capital reserve against future operational losses. In addition to the Basel II requirement for banks, this is now a requirement for European insurance firms who are in the process of implementing Solvency II ,the equivalent of Basel II for the banking sector
Methods of operational risk management

Basel II and various Supervisory bodies of the countries have prescribed various soundness standards for Operational Risk Management for Banks and similar Financial
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Institutions. To complement these standards, Basel II has given guidance to 3 broad methods of Capital calculation for Operational Risk Basic Indicator Approach - based on annual revenue of the Financial Institution Standardized Approach - based on annual revenue of each of the broad business lines of the Financial Institution Advanced Measurement Approaches - based on the internally developed risk measurement framework of the bank adhering to the standards prescribed (methods include IMA, LDA, Scenario-based, Scorecard etc.) The Operational Risk Management framework should include identification, measurement, monitoring, reporting, control and mitigation frameworks for Operational Risk.
1.3) Recapitalisation of Public Sector Banks

Public sector banks performance is important. Public banks still dominate the banking systems serving the majority of people in developing countries, despite the rash of privatizations of the last 10 years. In 2002, public sector banks represented 60 percent or more of the banking systems assets in Algeria, Bangladesh, China, Egypt, Ethiopia, India, Iran, and Vietnam. In Indonesia, public banks, including those under control of the Indonesian Bank Restructuring Agency, held over 60 percent of the banking systems assets, up from about 45 percent before the East Asian crisis. In Brazil, despite closure, conversion into agencies or privatization of most provincial banks, including the massive State Bank of Sao Paulo in 2001, federal banks, including the federal development bank (BNDES), held about 1/3 of bank assets and dominate lending for agriculture, housing and longer term projects
1.4) Fresh Capital for Private Banks

The standardized requirements in place for banks and other depository institutions, which determines how much capital is required to be held for a certain level of assets through regulatory agencies such as the Bank for International Settlements,Federal Deposit Insurance Corporation or Federal Reserve Board. These requirements are put into place to ensure that these institutions are not participating or holding investments that increase the risk of default and that they have enough capital to sustain operating losses while still honoring withdrawals. Also known as "regulatory capital". The Basel Accords, published by the Basel Committee on Banking Supervision housed at the Bank for International Settlements, sets a framework on
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how banks and depository institutions must calculate their capital. In 1988, the Committee decided to introduce a capital measurement system commonly referred to as Basel I. This framework has been replaced by a significantly more complex capital adequacy framework commonly known as Basel II. After 2012 it will be replaced by Basel III Another term commonly used in the context of the frameworks is Economic Capital, which can be thought of as the capital level bank shareholders would choose in absence of capital regulation. For a detailed study on the differences between these two definitions of capital, refer to The capital ratio is the percentage of a bank's capital to its risk-weighted assets. Weights are defined by risk-sensitivity ratios whose calculation is dictated under the relevant Accord. Basel II requires that the total capital ratio must be no lower than 8%. The 5 Cs of Credit - Character, Cash Flow, Collateral, Conditions and Capital- have been replaced by one single criterion. While the international standards of bank capital were laid down in the 1988 Basel I accord, Basel II makes significant alterations to the interpretation, if not the calculation, of the capital requirement. Examples of national regulators implementing Basel II include UK, BaFin in Germany, OSFI in Canada, Banca d'Italia in Italy. the FSA in the
perceived credit risk associated with balance sheet assets, as well as certain offbalance sheet exposures such as unfunded loan commitments, letters of credit, andderivatives and foreign exchange contracts. The risk-based capital guidelines are supplemented by a leverage ratio requirement. To be adequately capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 4%, a combined Tier 1 and Tier 2 capital ratio of at least 8%, and a leverage ratio of at least 4%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels. To be well-capitalized under federal bank regulatory agency definitions, a bank holding company must have a Tier 1 capital ratio of at least 6%, a combined Tier 1 and Tier 2 capital ratio of at least 10%, and a leverage ratio of at least 5%, and not be subject to a directive, order, or written agreement to meet and maintain specific capital levels.
Tier 1 capital
Tier 1 capital, the more important of the two, consists largely of shareholders' equity and disclosed reserves. This is the amount paid up to originally purchase the stock (or shares) of the Bank (not the amount those shares are currently trading for on the stock exchange), retained profits subtracting accumulated losses, and other qualifiable Tier 1 capital securities (see below). In simple terms, if the original stockholders contributed $100 to buy their stock and the Bank has made $10 in retained earnings each year since, paid out no dividends, had no other forms of capital and made no losses, after 10
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years the Bank's tier one capital would be $200. Shareholders equity and retained earnings are now commonly referred to as "Core" Tier 1 capital, whereas Tier 1 is core Tier 1 together with other qualifying Tier 1 capital securities.
Tier 2 (supplementary) capital

Tier 2 capital, or supplementary capital, comprises undisclosed reserves, revaluation reserves, general provisions, hybrid instruments and subordinated term debt. Undisclosed reserves are not common, but are accepted by some regulators where a Bank has made a profit but this has not appeared in normal retained profits or in general reserves. Most of the regulators do not allow this type of reserve because it does not reflect a true and fair picture of the results. Revaluation reserves A revaluation reserve is a reserve created when a company has an asset revalued and an increase in value is brought to account. A simple example may be where a bank owns the land and building of its headquarters and bought them for $100 a century ago. A current revaluation is very likely to show a large increase in value. The increase would be added to a revaluation reserve. General provisions A general provision is created when a company is aware that a loss may have occurred but is not sure of the exact nature of that loss. Under pre-IFRS accounting standards, general provisions were commonly created to provide for losses that were expected in the future. As these did not represent incurred losses, regulators tended to allow them to be counted as capital. Hybrid debt capital instruments They consist of instruments which combine certain characteristics of equity as well as debt. They can be included in supplementary capital if they are able to support losses on an on-going basis without triggering liquidation. Subordinated-term debt Subordinated debt is classed as Lower Tier 2 debt, usually has a maturity of a minimum of 10 years and ranks senior to Tier 1 debt, but subordinate to senior debt. To ensure that the amount of capital outstanding doesn't fall sharply once a Lower Tier 2 issue matures and, for example, not be replaced, the regulator demands that the amount that is qualifiable as Tier 2 capital amortises (i.e. reduces) on a straight line basis from maturity minus 5 years (e.g. a 1bn issue would only count as worth 800m in capital
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4years before maturity). The remainder qualifies as senior issuance. For this reason many Lower Tier 2 instruments were issued as 10yr non-call 5 year issues (i.e. final maturity after 10yrs but callable after 5yrs). If not called, issue has a large step - similar to Tier 1 - thereby making the call more likely. Different International Implementations Regulators in each country have some discretion on how they implement capital requirements in their jurisdiction. For example, it has been reported[6] that Australia's Commonwealth Bank is measured as having 7.6% Tier 1 capital under the rules of theAustralian Prudential Regulation Authority, but this would be measured as 10.1% if the bank was under the jurisdiction of the UK's Financial Services Authority. This demonstrates that international differences in implementation of the rule can vary considerably in their level of strictness.
1.5 CREDIT RISK

Credit risk is an investor's risk of loss arising from a borrower who does not make payments as promisedSuch an event is called a default. Other terms for credit risk are default risk and counterparty risk. Investor losses include lost principal and interest, decreased cash increased collection costs, which arise in a number of circumstances flow, and
A consumer does not make a payment due on a mortgage loan, credit card, line of credit, or other loan A business does not make a payment due on a mortgage, credit card, line of credit, or other loan A business or consumer does not pay a trade invoice when due A business does not pay an employee's earned wages when due A business or government bond issuer does not make a payment on a coupon or principal payment when due Types of credit risk There are three primary types of credit riskDefault risk - when the borrower fails to make contractual payments
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Credit spread risk - risk due to volatility in the difference between interest rates on investments and the risk-free rate of return Credit analysis and consumer credit risk Significant resources and sophisticated programs are used to analyze and manage riskSome companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advise on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like Standard & Poor's, Moody's Analytics, Fitch Ratings, and Dun and Bradstreet provide such information for a fee. Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property. Credit scoring models also form part of the framework used by banks or lending institutions grant credit to clients. For corporate and commercial borrowers, these models generally have qualitative and quantitative sections outlining various aspects of the risk including, but not limited to, operating experience, management expertise, asset quality, and leverage and liquidity ratios, respectively. Once this information has been fully reviewed by credit officers and credit committees, the lender provides the funds subject to the terms and conditions presented within the contract (as outlined above). Credit risk has been shown to be particularly large and particularly damaging for very large investment projects, so-called megaprojects. This is because such projects are especially prone to end up in what has been called the "debt trap," i.e., a situation where due to cost overruns, schedule delays, etc. the costs of servicing debt becomes larger than the revenues available to pay interest on and bring down the debt.
Sovereign risk
Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees.[9] The existence of sovereign risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality.[10] Five macroeconomic variables that affect the probability of sovereign debt rescheduling are: Debt service ratio
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Import ratio Investment ratio Variance of export revenue Domestic money supply growth
The probability of rescheduling is an increasing function of debt service ratio, import ratio, variance of export revenue and domestic money supply growth. Frenkel, Karman and Scholtens also argue that the likelihood of rescheduling is a decreasing function of investment ratio due to future economic productivity gains. Saunders argues that rescheduling can become more likely if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.
Counterparty risk
Counterparty risk, known as default risk, is the risk that an organization does not pay out on a bond, credit derivative, credit insurance contract, or other trade or transaction when it is supposed to. Even organizations who think that they have hedged their bets by buying credit insurance of some sort still face the risk that the insurer will be unable to pay, either due to temporary liquidity issues or longer term systemic issues. Large insurers are counterparties to many transactions, and thus this is the kind of risk that prompts financial regulators to act, e.g., the bailout of insurer AIG. On the methodological side, counterparty risk can be affected by wrong way risk, namely the risk that different risk factors be correlated in the most harmful direction. Including correlation between the portfolio risk factors and the counterparty default into the methodology is not trivial, see for example Brigo and Pallavicini
Mitigating credit risk

Lenders mitigate credit risk using several methods: Risk-based pricing: Lenders generally charge a higher interest rate to borrowers who are more likely to default, a practice called risk-based pricing. Lenders consider factors relating to the loan such as loan purpose, credit rating, and loan-to-value ratio and estimates the effect on yield (credit spread).
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Covenants: Lenders may write stipulations on the borrower, called covenants, into loan agreements: Periodically report its financial condition Refrain from paying dividends, repurchasing shares, borrowing further, or other specific, voluntary actions that negatively affect the company's financial position Repay the loan in full, at the lender's request, in certain events such as changes in the borrower's debt-to-equity ratio or interest coverage ratio .Tightening: Lenders can reduce credit risk by reducing the amount of credit extended, either in total or to certain borrowers. For example, a distributor selling its products to a troubled retailer may attempt to lessen credit risk by reducing payment terms from net 30to net 15. Diversification: Lenders to a small number of borrowers (or kinds of borrower) face a high degree of unsystematic credit risk, called concentration risk. Lenders reduce this risk by diversifying the borrower pool. Deposit insurance: Many governments establish deposit insurance to guarantee bank deposits of insolvent banks. Such protection discourages consumers from withdrawing money when a bank is becoming insolvent, to avoid a bank run, and encourages consumers to hold their savings in the banking system instead of in cash.
Credit risk related acronyms

ACPM Active credit portfolio management EAD Exposure at default EL Expected loss ERM Enterprise risk management LGD Loss given default PD Probability of default
INCREASING ROLE OF INSURANCE COMPANIES

The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related
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Acts. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the countrys GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India. It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation Malhotra Committee was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was Participation of overseas insurance companies with 26% capital. Since then the insurance industry has gone through many sea changes .The competition LIC started facing from these companies were threatening to the existence of LIC .since the liberalization of the industry the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India.
3.1) RISE OF INSURANCE SECTOR

The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are given in the table
Table 1: milestones in the life insurance business in India

Year Milestones in the life insurance business in India
1912
The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 245 Indian and foreign insurers and provident societies taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.
1928
1938
1956
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5 crore from the Government of India. 3.3 insurance sector growt The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. Some of the important milestones in the general insurance business in India are given in the table 2. Table 2: milestones in the general insurance business in India Year Milestones in the general insurance business in India
1907
The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.
1957
1968
1972
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4.Training the HR
Human resource training and development (HR T&D) in manufacturing firms is a critical aspect of the development of a knowledge-workforce in Malaysia. The objective of this study is to examine challenges to the effective management of HR T&D activities in manufacturing firms in Malaysia. In order to achieve this objective, in-depth interviews were conducted with 58 HR managers managing employees training and development, employing a purposive or judgmental sampling technique. The study revealed three major challenges to the effective management of HR T&D. These include a shortage of intellectual HRD professionals to manage HR T&D ctivities, coping with the demand for knowledge workers and fostering learning and development in the workplace. It is hoped that the findings of this study will provide HR professionals with a clear understanding and awareness of the various challenges in managing effective HR training and development. Hence, relevant and appropriate policies and procedures can be developed and implemented for an effective management of HR T&D.
4.1Technology Alien HR:

Acquiring the technical expertise should be the focus of future human resource management given the changing paradigm of banking sector regulations. For instance, the implementation of the new Capital Accord (Basel II) whereby capital adequacy requirements have been made more risk-oriented by linking capital to operational risk and changing the risk measurement approaches for credit and market risks. However, its implementation is not going to be an easy task especially in countries (including Pakistan) where risk management systems are at nascent stage. This is because of one of the prerequisite for Basel II implementation which requires that the banking institutions should have a robust risk management setup which is capable of effectively managing all major risks that an institution is exposed to. Similarly, the banking institutions are also required to carry out stress testing, a technique used around the globe by financial institutions to assess risk exposures across the institution and to estimate the changes in the value of the portfolio, if exposed to various risk factors. Initially, although, SBP has advised banks to carry out the simple sensitivity analysis keeping in the view the varying levels of skill and available resources among banks; however, going forward more sophisticated techniques will be adopted. Certainly, this process would require technical expertise at least in three areas: identifying, analyzing and proper recording of the assumptions used for stress testing; adjusting the situation or shocks applied to the data and interpreting the results; and an effective management information system that ensures flow of information to the senior management to take proper measures to avoid certain
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extreme conditions. Therefore, going forward, the focus of human resource management should be to acquire technical expertise if the institutions intend to go along with the changing regulatory environment.
EMERGING CHALLENGES BEFORE INDIAN BANKING SYSTEM

CONSUMER:The biggest challenge for the Indian banking system today is the Indian consumer. Demographic shifts in terms of income levels and cultural shifts in terms of lifestyle aspirations are changing the profile of the Indian consumer CHANGES IN BEHAVIOR:In the post-VRS scenario, banks have been able to bring down their operating costs without upsetting their business .However, the average age profile andt he skill sets of employees continue to remain unfavourable to meet the challenges of change. The next five years would see the average profile of staff worsening particularly with banks going slow on fresh recruitment. Manpower planning would be a major challenge before banks Target market place: The challenge before the Indian retail banking industry is twofold: focus and execution. Each bank must sharply focus on its target marketplace and rapidly execute its services Application of advanced technology:Technology is a key driver in the banking industry, which creates new business models and processes, and also revolutionises distribution channels. Banks which have made inadequate investment in technology have consequently faced an erosion of their market shares. The beneficiaries are those banks which have invested in technology. Adoption of technology also enhances the quality of risk management systems in banks. A further challenge which banks face in this regard is to ensure that they derive maximum advantage from their investments in technology and avoid wasteful expenditure which might arise on account of uncoordinated and piecemeal adoption of technology; adoption of inappropriate/ inconsistent technology and adoption of obsolete technology. CUSTOMER ORIENTED SERVICES :In India, currently, there are two types of customers one who is a multi-channel user and the other who still relies on a branch as the anchor channel. The primary challenge is to give consistent service to customers irrespective of the kind of channel they choose to use. The channels broadly cover the primary channels of branch (i.e., teller, platform, ATM) phone banking, (i.e., call centre, interactive voice response unit), and internet channel (i.e., personal computer, browser,
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wireless). A retail customer selects a bank based on two criteria convenience and relationship and would continue with a bank if it provides good service.
Regulatory and Supervisory Challenges in Banking

As the financial landscape in the last few years has changed significantly, there has been rethinking on several aspects of regulatory and supervisory practices/ framework/structure among the regulators and supervisors all over the world. In some countries such as UK, supervision has been hived off from the central bank to avoid perceived conflict of interest with monetary policy. In response to blurring of distinctions among providers of financial services and emergence of financial conglomerates, a single regulator approach has been adopted in some countries. The fast evolving financial sector and the ever expanding rule books of the regulatory bodies have made some countries such as UK to adopt principles-based supervision. The Indian banking sector is faced with multiple and concurrent challenges such as increased competition, rising customer expectations, and diminishing customer loyalty. The banking industry is also changing at a phenomenal speed. While at the one end, we have millions of savers and investors who still do not use a bank, another segment continues to bank with a physical branch and at the other end of the spectrum,
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FUTURE SCENARIO OF INDIAN BANKING SYSTEM

Liberalization and de-regulation process started in 1991-92 has made a sea change in the banking system. From a totally regulated environment, we have gradually moved into a market driven competitive system. Our move towards global benchmarks has been, by and large, calibrated and regulator driven. The pace of changes gained momentum in the last few years. Globalization would gain greater speed in the coming years particularly on account of expected opening up of financial services under WTO. Four trends change the banking industry world over, viz Consolidation of players through mergers and acquisitions, Globalisation of operations, Development of new technology and Universalisation of banking. With technology acting as a catalyst, we expect to see great changes in the banking scene in the coming years. The Committee has attempted to visualize the financial world 5-10 years from now. The picture that emerged is somewhat as discussed below. It entails emergence of an integrated and diversified financial system. The move towards universal banking has already begun. This will gather further momentum bringing non-banking financial institutions also, into an integrated financial system. The competitive environment in the banking sector is likely to result in individual players working out differentiated strategies based on their strengths and market niches. For example, some players might emerge as specialists in mortgage products, credit cards etc. whereas some could choose to concentrate on particular segments of business system, while outsourcing all other functions. Some other banks may concentrate on SME segments or high net worth individuals by providing specially tailored services beyond traditional banking offerings to satisfy the needs of customers they understand better than a more generalist competitor. Retail lending will receive greater focus. Banks would compete with one another to provide full range of financial services to this segment. Banks would use multiple delivery channels to suit the requirements and tastes of customers. While some customers might value relationship banking (conventional branch banking), others might prefer convenience banking (e-banking). One of the concerns is quality of bank lending. Most significant challenge before banks is the maintenance of rigorous credit standards, especially in an environment of increased competition for new and existing clients. Experience has shown us that the worst loans are often made in the best of times. Compensation through trading gains is not going to support the banks forever. Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling and monitoring as also revamp operating procedures. Credit evaluation may have to shift from cash flow based analysis to borrower account behaviour, so that the state of readiness of Indian banks for Basle II regime improves.
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FUTURE CHALLENGES : THE FOLLOWING ARE MAJOR CHALLENGES THAT ARE LIKELY TO BE FACED BY INDIAN BANKING INDUSTRY IN COMING FEW YEARS:Managing Resource Mobilization :
Growth of Deposits Till now: The deposit growth of SCBs in the post-nationalization period could be analysed broadly in four phases. In the first phase (1969-84) beginning immediately after nationalization of banks in July 1969, deposit growth accelerated sharply as the rapid branch expansion. enabled banks to tap savings from the rural areas. In the second phase (1985-95), deposit growth decelerated as banks faced increased competition from alternative savings instruments, especially capital market instruments (shares/debentures/units of mutual funds) and non-banking financial companies. This was the phase of disintermediation as savings instead of being deployed in bank deposits, were increasingly deployed in alternative financial instruments. Deposit growth decelerated further during the third phase (1995-2004) in the wake of competition from post office deposits and other small saving instruments, which carried significantly higher tax-adjusted returns than bank deposits. efforts by banks to meet the increased demand for credit. As a result, the share of bank deposits in the financial savings of the household sector increased sharply. Future challenges for resource mobilization : Banks have a major role to play in meeting the resource requirements of Indias fast growing economy. Although bank deposits have all along been the mainstay of the saving process in the Indian economy and banks have played an increasingly important role in stepping up the financial savings rate, physical savings, nevertheless, have tended to grow in tandem with the financial savings. A major challenge, thus, is to convert unproductive physical savings into financial savings. Also, in view of the shrinking share of household sector deposits in total deposits, banks need to explore ways of broadening the depositor base, especially in rural and semi-urban areas by offering customised products and features suitable to individual risk-return requirements. Thus, we can sum up saying that despite India having a reasonably high and growing savings rate, there is a need to increase financial savings. The substitution of unproductive physical savings in favour of financial savings can generate large resources for investment. There is an enormous untapped saving potential in rural and semi-urban areas. For this purpose banks are in a better position to develop innovative
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and cost effective products due to their outreach as also special features of deposits, viz, safety and liquidity.
Managing Capital and Risk / Implementation of Basel II norms :

Why there is need for Managing Capital and Risk: The importance of maintaining bank capital in line with the risks involved in the banking business has assumed greater significance in view of the need for maintaining the safety and soundness of the financial system. The Basel I framework was adopted in over 100 countries. However, over the years, several deficiencies of Basel I surfaced partly due to its inherent features and partly due to rapid financial innovations. The major limitation of BaselI was its 'one-size-fits-all' approach. The inadequacies of Basel I also became evident following the recent financial turmoil as it failed to capture off-balance sheet exposures. The Basel II framework, finalized in July 2006, attempts to align regulatory capital more closely with the inherent risks in banking by using enhanced risk measurement techniques and a more disciplined approach to risk management. In addition, Basel II has in place a variety of safeguards, which also have the benefit of reinforcing supervisors' objective of strengthening risk management and market discipline. Challenges in Implementation of Basel II / Managing Capital and Risk : In keeping with the international best practices, India also decided to implement Basel II. Foreign banks operating in India and Indian banks having operational presence outside India have already adopted the standardised approach (SA) for credit risk and the basic indicator approach (BIA) for operational risk for computing their capital requirements with effect from March 31, 2008. All other commercial banks (excluding local area banks and regional rural banks) are expected to adopt Basel II not later than March 31, 2009. The parallel runs for these banks are in progress. A significant improvement in risk management practices, asset-liability management and corporate governance in Indian banks under regulatory pressure to adopt Basel II framework has been observed. . While the Basel II framework, by making the capital requirements risk sensitive, would enhance the stability of the financial system, its implementation also raises several issues/challenges. India follows a three track approach with commercial banks, cooperative banks and regional rural banks having been placed at different levels of capital adequacy norms.
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Lending and Investment Operations of Banks

GROWTH OF CREDIT TILL NOW: Credit extended by scheduled commercial banks from the early 1990s witnessed three distinct phases. Bank credit growth was erratic in the first phase (from 1990-91 to 1995-96). In the second phase (from 1996-97 to 200102), credit growth decelerated sharply and remained range bound due to the industrial slowdown, high level of NPAs and introduction of prudential norms, which made banks risk averse. The third phase (from 2002-03 to 2006-07) was generally marked by high credit growth attributable to several factors, including pick-up in economic growth, sharp improvement in asset quality, moderation in inflation and inflation expectations, decline in real interest rates, increase in the income levels of households and increased competition with the entry of new private sector banks. Although the share of credit to industry in total bank credit declined in the current decade, the credit intensity of industry increased sharply. A cross country survey suggests that the reliance of industry on the banking sector in India was far greater than that in many other countries. Credit growth to the SME sector, which slowed down significantly between 1996-97 and 2003-04, picked up sharply from 2004-05. However, the share of the SME sector in the total non-food bank credit declined almost consistently from 15.1 per cent in 1990-91 to 6.5 per cent in 2006-07. This suggests that it is the large corporates that have increased their dependence on the banking sector. The share of retail credit comprising housing loans, credit to individuals, credit cards receivables and lending for consumer durables, in total bank credit increased sharply from 6.4 per cent in 1990 to 25.4 per cent in 2007. CHALLENGES FOR INCREASING CREDIT: Notwithstanding some pick-up in credit growth to the agriculture and SME sectors in recent years, there is need for more concerted efforts to increase the flow of credit to these sectors given their significance to the economy. Creating enabling conditions, i.e., providing irrigation facilities, rural roads and other infrastructure in rural areas, is necessary to augment the credit absorptive capacity. Devising products to suit the specific needs of the farmers is critical. There is also a need for comprehensive public policy on risk management in agriculture. Computerisation of land records can go a long way in smoothening the flow of credit to agriculture. Similarly the credit assessment capabilities of banks need improvement to ensure flow of credit to SMEs. There is need to increase the use of cluster based lending and credit scoring, which has proved quite effective in many countries as also in India. In view of the increased exposure of banks to infrastructure and retail credit segments, banks need to guard against exposures to attendant risks. The corporate sector needs to gradually reduce its dependence on the banking sector and move towards tapping the capital market so as to enable the banking sector
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to meet the growing requirements of agriculture, SMEs and other small and tiny enterprises, which are unable to tap funds from other sources CHALLENGES FOR FINANCIAL INCLUSION: While there has been a significant improvement in financial inclusion in recent years, moving ahead several challenges remain to be addressed. A proper assessment of the problem of financial exclusion is necessary. There is, therefore, a need to conduct specific survey for gathering information relating to financial inclusion/exclusion. There is need to reduce the transaction cost for which technology can be very helpful. RRBs and co-operative banks, are expected to play a greater role in financial inclusion in future. There would be need to design appropriate products tailor made to suit the requirements of the people with low income supported by financial literacy and credit counselling. There is also a need to improve the absorptive capacity of financial services by providing the basic infrastructure. Investment in human development such as health, water sanitation, and education, in particular, would be very helpful. Competition and Consolidation in Recent Years : There has been a significant increase in the number of bank amalgamations in India in the post-reform period. While amalgamations of banks in the pre-1999 period were primarily triggered by the weak financials of the bank being merged, in the post-1999 period, mergers occurred between healthy banks, driven by the business strategy and commercial considerations. Significantly, despite increase in the number of bank mergers and acquisitions, the Indian banking system has become less concentrated during the post-reform period. In fact, the degree of concentration in the Indian banking system, based on the concentration ratio and Hirschman-Herfindhal Index, was one of the lowest among the select countries studied for the year 2006. The level of competition declined somewhat in the initial years of reforms, but improved significantly thereafter. Based on the empirical evidence, the Indian banking industry could be characterised as a monopolistic competitive structure, as is the case with most other advanced countries and EMEs The empirical analysis also suggests that mergers andamalgamation had a positive impact on efficiency both in terms of increase in return on assets and reduction in cost, when the transferees were public sector banks CHALLENGES OF COMPETITION AND CONSOLIDATION: The ownership of public sector banks is not an issue from the efficiency viewpoint as public sector banks in India now are as efficient as new private and foreign banks, as revealed by the various measures. However, the operating environment for banks has been changing rapidly and banks in the changed operating environment need flexibility to respond to the evolving situation. Another issue that needs to be considered is the funding of capital
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requirements of public sector banks given the present floor of minimum 51 per cent on Government equity in public sector banks. In the medium term, this can become an issue hampering the growth of public sector banks if Government is not able to provide adequate capital for their expansion. The roadmap of foreign banks is due for review in 2009. This would involve several issues. The increased presence of foreign banks, by intensifying competition, may accelerate the consolidation process that is underway. However, at the same time, this may also raise the risk of concentration if mergers/amalgamations involve large banks. The experience of some other countries also suggests that the emergence of large banks due to consolidation has resulted in reduced lending to small enterprises significantly. All these issues would need to be carefully weighed at the time of review. The policy relating to ownership of banks by commercial interests may have to take full account of international practices, given the issues relating to potential conflict of interests, increased potential of contagion effects and increased concentration. EFFICIENCY, PRODUCTIVITY AND SOUNDNESS OF THE BANKING SECTOR IN INDIA:8.1 PAST TRENDS : The efficiency and productivity of scheduled commercial banks (SCBs) in India was analysed empirically, using both the accounting and economic measures.. The most significant improvement has occurred in the performance of public sector banks and has converged with those of the foreign banks and new private sector banks. Intermediation cost as also the net interest margin declined across the bank groups. Despite this, however, profitability of the banking sector improved. Business per employee and per branch also increased significantly across the bank groups. The improvement of various accounting measures, however, varied across the bank groups. In terms of cost ratios (operating cost to income) foreign banks, and with regard to labour productivity, foreign and new private banks were ahead of their peer groups. In terms of net interest margins and intermediation cost, new private sector banks and public sector banks, respectively, were more efficient than the other bank groups. The cost of deposits of foreign banks was the lowest in the industry. However, this was not passed on to the borrowers, leading to higher net interest spread. The empirical exercise suggested that the operating cost was the main factor affecting the net interest margin. Non-interest income and the asset quality were the other determinants of net interest margin.
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CHALLENGES: . Similarly, there is a need for increased absorption of enhanced technological capability (innovation) by several banks to further augment productivity of the banking sector through changes in processes and improvement in human resource skills. The recent events in global financial markets in the aftermath of US subprime crisis have evoked rethinking on several regulatory and supervisory aspects of the banking industry, viz., how to cope with liquidity stresses under unusual circumstances; whether pro-cyclicality of capital requirements is one of the factors with inherent tendency that escalate the impact of booms and busts. Regulation of complex products and monitoring of derivatives is becoming an important issue. Further, a question has been raised whether institutions should be allowed to become so big and so complex that their problems can have system-wide repercussions.
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OVERALL ASSESSMENT :
The Report has attempted an in-depth analysis of various aspects of the banking sector in India against the backdrop of the evolution of the Indian banking sector beginning the 18th century with a focus on the post-independence period. The analysis suggests that the Indian banking sector has witnessed several structural changes from time to time. India now has a well-developed banking infrastructure, conducive regulatory environment and sound supervisory system. Banks have become efficient and sound and compare well with banks around the world. Banks in India have benefitted from the robust growth in the last few years, which enabled them to produce strong financial performance An important lesson emerging from the recent financial market developments is that the focus should not be on how the turmoil should be managed, but on what policies could be put in place to strengthen the financial system on a longer-term basis regardless of specific sources of disturbances. These issues point towards the challenges that lie ahead to preserve the safety and soundness of the financial
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CONCLUSION
A robust banking and financial sector is critical for facilitating higher economic growth Kainth (2008). The analysis of the Indian Banking Industry shows stability and growth. The Government of India and the RBI have attempted to implement a proactive and responsive monetary policy and fiscal policy with timely, targeted, and temporary measures. While the RBI has reversed its earlier stance of a tight monetary policy, the government recently announced a fiscal stimulus package to push overall economic activity. Indian Banks have put in place a constellation of measures both on interest rates and liquidity to ward off the impending crisis. As a result Indian Banks have been able to perform well globally. Certain aspects and learnings from the Indian Banking Industry can be adopted as best practices by other financial crisis affected countries. The global challenges which banks face are not confined only to the global banks. These aspects are also highly relevant for banks which are part of a globalised banking system. Further, overcoming these challenges by the other banks is expected to not only stand them in good stead during difficult times but also augurs well for the banking system to which they belong and will also equip them to launch themselves.
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BIBLIOGRAPHY
Basel II norms for Indian Banks, accessed [available at http://www.stockmarketsreview.com/news/ basel_II_norms_for_indian_banks_20090312/] Data from the official website of Indian Bankers Association, accessed [available at http://www.iba.org.in] Definition of financial terms, accessed, [available a http://www.investopedia.com/terms/c/ capitaladequacyratio.asp] Financial Newspapers/Websites, accessed April-May , 2010.available at EconomicTimes.com,BusinessStandard.com,Reuters.com,Samachar.co Kainth, G S Financial Performance of Non-Banking Financial Institutions in India ICFAI Journal of Financial Economics Vol. 6, No. 1, pp. 56-76. Nayak, S. S. . Managing US financial crisis, need for adequate supervisory framework. The Indian Banker Vol.III No.12, P30-32. Nishank, D. S. (2008). Subprime crisis, a primer. The Indian Banker Vol.III No.2, P46-49 Report on Trend and Progress of Banking in India, RBI, 2007 -08 Sharma, A Incomplete reform or opportunity: the role of the banking sector in the credit transmission mechanism in India. Journal of Economic Policy Reform 11(4). of RBI governor, Dr Damage and Response delivered at Tokyo, Japan, Duvvuri Subbarao on Impact of the Global Financial Crisis on India-Collateral
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K.C.

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM Summary:

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

THE MEANING OF BANK

CHALLENGES BEFORE INDIAN BANKING SYSTEM

BANKING SYSTEM OF INDIA

Types of Banks Central Bank

Public Sector Banks

Private Sector Banks

CHALLENGES BEFORE INDIAN BANKING SYSTEM

State co-operative Banks

LOCAL AREA BANKS

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CO- OPERATIVE BANKS

REGIONAL RURAL BANKS IN INDIA

CHALLENGES BEFORE INDIAN BANKING SYSTEM

INDIAN BANKS OPERATIONS ABROAD

CHALLENGES BEFORE INDIAN BANKING SYSTEM

RESERVE BANK OF INDIA

Organisation & Functions

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

PRE-GLOBALIZED SCENARIO OF BANKING IN INDIA

CHALLENGES FACED BY BANK IN PRE-GLOBALIZED SCENARIO

CHALLENGES BEFORE INDIAN BANKING SYSTEM

THE PRESENT SCENARIO OF INDIAN BANKING SYSTEM

SOME FOLLOWING FEATURES OF CURRENT INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

Globalisation a challenge as well as an opportunity. Theory:

CHALLENGES BEFORE INDIAN BANKING SYSTEM

Basel & Capital Adequacy:

NEED FOR SUCH NORMS:

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

1.2) OPERATIONAL RISK

CHALLENGES BEFORE INDIAN BANKING SYSTEM

Basel II event type categories

CHALLENGES BEFORE INDIAN BANKING SYSTEM

Difficulties;It is relatively straightforward for an organization to set and observe

Methods of operational risk management

CHALLENGES BEFORE INDIAN BANKING SYSTEM

1.3) Recapitalisation of Public Sector Banks

1.4) Fresh Capital for Private Banks

CHALLENGES BEFORE INDIAN BANKING SYSTEM

CHALLENGES BEFORE INDIAN BANKING SYSTEM

Tier 2 (supplementary) capital

CHALLENGES BEFORE INDIAN BANKING SYSTEM

1.5 CREDIT RISK