CHAPTER 1

INTRODUCTION
1.1 Overview
The bank as an institution is changing; the industry is changing.
Advances in information and financial technologies are
transforming banking practices at the same time as regulatory
changes have transformed banking markets. Over the last
couple of years, the banking industry has seen a dynamic shift
from its traditional ways of operations which were limited and
narrow to modern and multi faceted one-stop shop kind of a
scenario. Enter the Universal Bank.
A Universal Bank is a one-stop supplier for all financial
products and activities, like deposits, short-term and long-term
loans, insurance, investment banking etc. Universal Banking
includes not only services related to savings and loans but also
investments. However in practice the term 'universal banks'
refers to those banks that offer a wide range of financial
services, beyond commercial banking and investment banking,
insurance etc. Universal banking is a combination of
commercial banking, investment banking and various other
activities including insurance.

The report starts with a brief introduction to the banking system

in India after which we take a look at the Indian Banking
Regulation Act, 1949. We then take a look at the RBI norms
governing banks followed by a brief look at the chronic
problem of NPAs.

1.2 Universal Banking

What is a Universal Bank?
A universal bank is a multi-purpose and multi-functional
financial supermarket providing both banking and financial
services through a single window. As per the website of World
Bank (www.worldbank.org), the concept is explained as
followsIn universal banking, large banks operate extensive networks
of branches, provide many different services, hold several
claims on firms (including equity and debt), and participate
directly in the corporate governance of firms that rely on the
banks for funding or as insurance underwriters.
Simply put, a universal bank is a superstore for financial
products. Under one roof, corporates can get loans and avail of
other handy services, while individuals can bank and borrow. To
convert itself into a universal bank, an entity has to negotiate
several regulatory requirements. Therefore, universal banks in a
nutshell have been in the form of a group-concerns offering a
variety of financial services like deposits, short term and long
term loans, insurance, investment banking etc., under an
2

umbrella brand. The concept is prevalent in developed countries

like France, Germany and USA.

1.3 Need for Universal Banking in India

Research on the effects of universal banking has been
inconclusive as there is no clear-cut evidence in favor of or
against it anywhere. Nevertheless, the United States has once
again started moving cautiously towards universal banking
through the Gramm-Leach-Bliley Act of 1999 which rolled
back many of the earlier restrictions imposed by the GlassSteagall Act of 1933. Some recent phenomenon, like the merger
between Citicorp (banking group) and Travelers (insurance
group) confirmed the fact that universal banking is here to stay.
Hence it becomes all the more imperative to know whether we
need universal banks in India. And whether it is a more efficient
concept than the traditional narrow banking.
What are the benefits to banks from universal banking?
The standard argument given everywhere also by the various
Reserve Bank committees and reports in favour of universal
banking is that it enables banks to exploit economies of scale
and scope. What it means is that a bank can reduce average
costs and thereby improve spreads if it expands its scale of
operations and diversifies its activities.

By diversifying, the bank can use its existing expertise in one

type of financial service in providing the other types. So, it
entails less cost in performing all the functions by one entity
instead of separate specialized bodies. A bank possesses
information on the risk characteristics of its clients, which it can
use to pursue other activities with the same clients. This again
saves cost compared to the case of different entities catering to
the different needs of the same clients.
In spite of the associated problems, there seems to be a lot of
interest expressed by banks and financial institutions in
universal banking. In India, too, a lot of opportunities are there
to be exploited. Banks, especially the financial institutions, are
aware of it.

1.4 Emergence of Universal Banking in India

Indian Banks pursuant to the nationalization and state
ownership of the main players took upon themselves the role of
development bankers and diversified their credit dispensations.
Term Lending and credit delivery against hypothecation of
assets, which were unheard of earlier, came to be accepted as a
common measure of credit policy. All sectors of Indian
economy were brought under purview of banks' financial
support. A group of banks joined together as a consortium and
diversified risk in financing bulk ventures sharing portions both

amongst themselves and also along with the Term Lending

Institutions
The phenomenon of universal banking as a distinct concept, as
different from narrow banking, came to the fore-front in the
Indian context with the second Narasimham Committee (1998)
and later the Khan Committee (1998) reports recommending
consolidation of the banking industry through mergers and
integration of financial activities.
A universal bank can be a single company, a holding company
with wholly owned subsidiaries, a group of entities with crossholdings or even a flagship company which may or may not
have independent shareholders. The panel has argued that the
regulator should not impose the appropriate corporate structure.
Calling for an enabling regulatory framework to ensure the
transition towards universal banking, the panel said a functionspecific and institution-neutral regulatory framework must be
developed. "This concept of neutrality should be applicable to
both foreign and local entities," it said.

CHAPTER 2
BANKING SYSTEM IN INDIA
2.1 Banking System
The Banking system is an integral sub-system of the financial
system. It represents an important channel of collecting small
savings from the households and lending it lo the corporate
sector.
The Indian Banking system has The Reserve Bank of India
(RBI) as the apex body for all matters relating to the banking
system. It is the Central Bank of India. It is the banker to all
other banks.
Functions of RBI:

Currency issuing authority

Banker to the Government

Banker to other banks

Framing of Monetary Policy

Exchange control

Custodian to foreign Exchange and Gold Reserves.

Developmental activities

Research and Development in the banking sector.

2.2 Classification of banks

Classification of Banks is as follows:-

Reserve Bank of India

Scheduled Banks

State Co-operative Banks

Non Scheduled Banks

Commercial Banks

Indian

Public Sector

SBI & its

Subsidiarie
s

Foreign

Private Sector

Nationalized
Banks

Private Sector

Regional
Rural Banks

1. Non Scheduled Banks: These are banks which are not

included in the Second Schedule of the Banking Regulation Act.
1965. It means they do not satisfy the conditions laid down by
that schedule. They are further classified as follows:

Central Co-operative Banks and primary Credit Societies.

Commercial Banks.
7

2. Scheduled Banks: Scheduled Banks are which are included

in the Second Schedule of the Banking Regulation Act, 1965.
According to this schedule a scheduled bank:
a. Must have paid-up capital and reserve of not less than
Rs.500, 000;
b. Must also satisfy the RBI that its affairs are not conducted in
a manner detrimental to the interests of its depositors.
Scheduled banks are sub-divided as:

State Co-operative Banks: These are Co-operatives owned

and managed by the state.

Commercial Banks: These are business entities whose main

business is accepting deposits and extending loans. Their main
objective is profit maximization and adding shareholder value.
These are further sub-divided as:
A. Indian Banks: These banks are companies registered in
India under the Companies Act. Their place of origin is in India.
These are also sub-divided as:

(i)

State Bank of India and its Subsidiaries: This group

comprises of the State Bank of India (SBI) and its seven

(ii)

subsidiaries viz. State Bank of Patiala. Slate Bank of

Hyderabad, Stale Bank of Travancore, State Bank of Bikaner
and Jaipur, State Bank of Mysore. State Bank of Saurastra, State
Bank of Indore.

(iii)

Other Nationalized Banks: This group consists of private

8

sector banks that were nationalized. The Government of India

Nationalized 14 private banks in 1969 and another 6 in the year
1980.
(iv)

Regional Rural Banks: These were established by the RBI in

the year 1975 of Banking Commission. It was established to
operate exclusively in rural areas to provide credit and other
facilities to small and marginal farmer, agricultural laborers,
artisans and small entrepreneurs.

(v)

Old Private Sector Banks This group consists of banks that

were established by the privy states, community organizations
or by a group of professionals for the cause of economic
betterment in their area of operations. Initially their operations
were concentrated in a few regional areas. However, their
branches slowly spread throughout the nation as they grew.

(vi)

New Private Sector bank: These banks were started as profit

oriented companies after the RBl opened the banking sector to
the Private sector. These banks are mostly technology driven
and better managed than others.
B. Foreign Banks
These are banks that were registered outside India and had
originated in a foreign country.

CHAPTER 3
BANKING REGULATION ACT, 1949
3.1 Banking Regulation Act
The banking sector in India is primarily regulated by the
provisions of the Banking Regulation Act, 1949 (BR Act) and
The Reserve Bank of India Act, 1934 (RBI Act).
Banking Regulation Act, 1949 (BR Act)
Banking business:
No company can carry on banking business in India unless it
holds a license issued in that behalf by the Reserve Bank of
India. Banks must be duly registered as a banking company
under Section 22 of the BR Act. Section 6 of the BR Act
permits banks to engage in the following activities, apart from
banking, namely:

Borrowing, raising, or taking up of money; the lending or

advancing of money either upon or without security; and draw

Carrying on and transacting every kind of guarantee and

indemnity business;

Managing, selling and realizing any property which may come

into the possession of the company in satisfaction or part
satisfaction of any of its claims;

Acquisition, construction, maintenance and alteration of any

building or works necessary or convenient for the purpose of
10

3.1.1 Paid-up capital and reserves:

Pursuant to Section 11 of the BR Act, banking companies are
required to maintain a certain aggregate value of its paid up
capital and reserves. Since we a banking company having place
of business in more than one State and have places of business
in Mumbai and Kolkata, we are required to maintain paid up
capital and reserves not less than Rs. 0.10 crores.
3.1.2 Reserve Fund:
Every banking company is required to create a reserve fund and
shall, out of the balance of profit of each year, and before any
dividend is declared, transfers to such reserve fund a sum
equivalent to not less than 20% of such profit. Any withdrawal
from this reserve fund shall be reported to the RBI within 21
days, explaining the circumstances relating to such withdrawal.
3.1.3 Penalties:
The RBI may impose penalties on banks and their employees in
case of infringement of regulations under the Banking
Regulation Act. The penalty may be a fixed amount or may be
related to the amount involved in any contravention of the
regulations. The penalty may also include imprisonment.
Pursuant to a circular issued by the RBI on March 20, 2002,
RBI approval would not be required for rights issues by both
listed and unlisted private sector banks.

11

3.2 RBI Norms

RBI Norms to be followed by banks
3.2.1 Capital Adequacy Ratio (CAR).
3.2.2 Cash Reserve Ratio (CRR).
3.2.3 Statutory Liquidity Ratio (SLR)
3.2.4 Bank Rate.
3.2.5 Exposure Norms.
3.2.1 Capital Adequacy Ratio (CAR)
In India banks are institutions where depositors place their hardearned savings on the assumptions that the risk shall be borne
by the bank. In such a scenario, the banks must have enough
capital to meet unforeseen contingencies to that the confidence
of the depositors is not shaken. To fulfill this need the RBI has
laid down the norms of Capital-Adequacy that need to be
fulfilled by banks. The banks have to maintain the Capital
Adequacy Ratio (CAR) specified by RBI from time to time.
3.2.2 Cash Reserve Ratio (CRR)
CRR is the minimum reserve deposits which banks have 'to
compulsorily keep with the RBI. These are calculated as
specific percentage to Reservable Liabilities arrived at in the
basis of Net Demand and Time Liabilities (NDTL).

12

 Net Demand and Time Liabilities (NDTL):

NDTL constitutes liabilities of banks which it owes to the
banking system and others.
Thus NDTL = Liabilities to others + Net Inter Bank Liabilities
(NIBL).Where
NIBL = Liabilities to Banking system - Assets with Banking
System.

Calculation of CRR:

CRR rate is prescribed from time to time by the RBl. At

present it is at 5%.
Maintenance period: The CRR so computed shall be required to
be maintained for a fortnight. The minimum daily CRR to be
maintained is 50 % for the first seven days of the reporting
week and 65% for the remaining period. However on the 14th
day or the reporting Friday entire reserve requirement has to be
met on a product basis.
Yields and Penalties: RBI gives bank an interest of 6 % on the
reserves kept above 3% of NDTL with it. This means that at
current CRR rate of 5% RBI pays interest only on the 4.5% of
the deposits. It has the goal of aligning this yield with the Bank
Rate.
3.2.3 Statutory Liquidity Ratio (SLR):
According to section 24(2A) of Amended Banking Regulation
Act, 1949 a scheduled bank and every other banking company,
shall, in addition to the cash reserves maintained by them under
Section 42 of RBI Act, maintain reserves in cash or gold valued
13

at price not exceeding tlie current market price or in

unencumbered approved securities valued at price determined.
The banks should maintain such reserves not exceeding 40%
and not less than 25% as the RBI may from time to time
specify, of the total of it's demand and time liabilities (NDTL),
as on last Friday of the second preceding fortnight. At present,
SLR is at 25%.

Calculation of SLR: A bank has to maintain;

a) 25% of NDTL or
b) 25% (current rate) of RL whichever is higher.

Maintenance period: All statutory reserves are to be

maintained for a period of a fortnight. An important difference

from CRR is that that the SLR reserves for the fortnight will be
accessed base on the NDTL of the reporting Friday of the
preceding fortnight. Since NTDL is known in advance SLR
figures can be calculated based on actual figures. Also unlike
CRR, there is no flexibility of maintaining these reserves on
average basis. They have to be maintained on a daily basis.
2.2.4 Bank Rate
The rate at which RBI lends to commercial banks by
rediscounting bills or eligible paper is called tlie bank rate. It is
basically the refinancing rate. The banks decide interest rates
based on the bank rate. It is also of the tools used by RBI to
control inflation. At present, bank rate is at 6%.

14

3.2.5 Exposure Norms

The RBI has stipulated certain ceiling relating to advances and
interest rates which banks have to adhere to which carrying out
their lending operations. Some of them are as follows:
a. Exposure to a single borrower should not exceed 15 % of
advances.
b.Exposure to a business group should not exceed 40 %.
c. Exposure to stock market should not exceed 5 % of total
advances as at the end of previous year.

15

CHAPTER 4
UNIVERSAL BANKING GUIDELINES
4.1 Guidelines
1. Reserve requirements: Compliance with the cash reserve
ratio and statutory liquidity ratio requirements (under Section
42 of RBI Act, 1934, and Section 24 of the Banking Regulation
Act, 1949, respectively) would be mandatory for an FI after its
conversion into a universal bank.
2. Disposal of non-banking assets: Any immovable property,
howsoever acquired by an FI, would, after its conversion into a
universal bank, be required to be disposed of within the
maximum period of 7 years from the date of acquisition, in
terms of Section 9 of the B. R. Act.
3. Composition of the Board: Changing the composition of the
Board of Directors might become necessary for some of the FIs
after their conversion into a universal bank, to ensure
compliance with the provisions of Section 10(A) of the B. R.
Act, which requires at least 51% of the total number of directors
to have special knowledge and experience
4. Prohibition on floating charge of assets: The floating
charge, if created by an FI, over its assets, would require, after
its conversion into a universal bank, ratification by the Reserve
Bank of India under Section 14(A) of the B. R. Act, since a
banking company is not allowed to create a floating charge on

16

the undertaking or any property of the company unless duly

certified by RBI as required under the Section.
5. Restriction on investments: An FI with equity investment in
companies in excess of 30 per cent of the paid up share capital
of that company or 30 per cent of its own paid-up share capital
and reserves, whichever is less, on its conversion into a
universal bank, would need to divest such excess holdings to
secure compliance with the provisions of Section 19(2) of the
B. R. Act, which prohibits a bank from holding shares in a
company in excess of these limits.
6. Connected lending: Section 20 of the B. R. Act prohibits
grant of loans and advances by a bank on security of its own
shares or grant of loans or advances on behalf of any of its
directors or to any firm in which its director/manager or
employee or guarantor is interested. The compliance with these
provisions would be mandatory after conversion of an FI to a
universal bank
7. Licensing: An FI converting into a universal bank would be
required to obtain a banking license from RBI under Section 22
of the B. R. Act, for carrying on banking business in India, after
complying with the applicable conditions.
8. Branch network: An FI, after its conversion into a bank,
would also be required to comply with extant branch licensing
policy of RBI under which the new banks are required to allot at
east 25 per cent of their total number of branches in semi-urban
and rural areas.
17

9. Assets in India: An FI after its conversion into a universal

bank, will be required to ensure that at the close of business on
the last Friday of every quarter, its total assets held in India are
not less than 75 per cent of its total demand and time liabilities
in India, as required of a bank under Section 25 of the B R Act.
10. Format of annual reports : After converting into a
universal bank, an FI will be required to publish its annual
balance sheet and profit and loss account in the in the forms set
out in the Third Schedule to the B R Act, as prescribed for a
banking company under Section 29 and Section 30 of the B. R.
Act .
4.2 Universal Banking: Issues in the Indian Context
In a country like ours, where the universal bank proper is yet to
emerge on the banking horizon, it has to encounter many more
important issues, on migration to universal banking framework,
which are as under :
1. Universal banking need not result in economies of scope and
scale especially if the banks were not of appropriate size. On
contrary, it might even lead to be more expensive, if the
sufficient number of transactions in each of the specialized
financial activity were not even up to breakeven level.
Therefore possibilities are that without realizing the potential
for a particular type of business activity, even the smaller banks
might venture into universal banking, out of expediency. Such
18

an adventure might even lead to failures, which will have

impact on the system.
2. Internationally, studies on universal banking have established
that size of the banks play a key role, the natural corollary of
this, there would be a number of attempts for mergers and
acquisitions among the banks/NBFCs leading to emergence of
financial conglomerates in India. Such developments need
encouragement, provided they are healthier, genuine, and
transparent and do not impede the system from competition and
stability. Besides, India being a vast country it requires various
types of institutions to cater varied needs of different sets of
people which even universal banks would hardly be in a
position to deliver, such as functions of rural cooperatives,
urban cooperative banks, RRBs, etc. Therefore, this needs due
consideration, while moving towards universal banking
framework.
3. The financial conglomerates, generally manage their risks on a
consolidated basis on business lines even cutting across the
legal entities. However, the supervisory and regulatory
authorities have a special obligation to protect the depositors,
and the banking system. Unless the supervisor is in a position to
distinguish between risks arising out of banking and non
banking activities, their own task would become extremely
challenging.
4. Investment banking, especially that relating to derivatives, forms
a very important part of the universal banking, conducted either
in the form of agency type or principal type would be more
19

risky than the traditional banking. Moreover as they are new

areas in India, it would be all the more complex for the
domestic banks. Therefore they require high professional
standards

supported

by

sophisticated

risk

management

techniques at the bank level. As banking system in India had

been tradition bound and functioned in a closed environment for
several decades, exposures to universal banking scenario might
give banks tendency to behave reckless and indulge in
irresponsible speculation in the investment activities due to
demonstration effect..
5.

Universal banking portrayed with not only wide range of

functions/ products/ services innovated as an outcome of
financial reforms and globalization process, but have also
become more and more intricate. For, the new type of products,
services or combination of them as a result of innovations, as
also the intricate relationship within the financial conglomerate
have become more complex. In the process it might even
impede transparency in many intra-institutional transactions.
The direct corollary of these developments is that the job of
regulators and supervisors has become much more complex and
demanding. This would be more so, in India where we have the
system of multiple regulators for different activities.

6.

The upshot of all the above developments point to the

requirement of thorough understanding of such innovative
hybrid products/services as also their implications principally
on the systems safety and stability with appropriate policy
guidelines, by the regulator/ supervisor.
20

CHAPTER 5
COMPARISON OF A PUBLIC SECTOR AND A
PRIVATE SECTOR BANK
5.1 State Bank of India
The origin of the State Bank of India goes back to the first
decade of the nineteenth century with the establishment of the
Bank of Calcutta in Calcutta on 2 June
1806. Three years later the bank received its charter and was redesigned as the Bank of Bengal (2 January 1809). A unique
institution, it was the first joint-stock bank of British India
sponsored by the Government of Bengal. The Bank of Bombay
(15 April 1840) and the Bank of Madras (1 July 1843) followed
the Bank of Bengal. These three banks remained at the apex of
modern banking in India till their amalgamation as the Imperial
Bank of India on 27 January 1921.
The Bank is actively involved since 1973 in non-profit activity
called Community Services Banking. All our branches and
administrative offices throughout the country sponsor and
participate in large number of welfare activities and social
causes. Our business is more than banking because we touch the
lives of people anywhere in many ways.
1. Exposure to Exports:
Spreading its arms around the world, the SBIs International
Banking Group delivers the full range of cross-border finance.

21

The Domestic wing provides services like merchant banking,

shipping finance and project export finance. The Foreign
Offices wing offers the entire range of international trade and
industrial finance products, while the Kolkata-based Foreign
Department undertakes treasury and currency operations.
The International Services division renders specialized services
like correspondent banking, global link services and country
and bank risk exposure monitoring. Being Indias largest and
most trusted commercial bank, the SBI offers you a network of
relationships unmatched in strength and span by any other
Indian financial entity.
The bank has a network of 67 offices/branches in 29 countries
spanning all time zones. The SBIs international presence is
supplemented by a group of Overseas and NRI branches in
India and correspondent links with over 522 leading banks of
the world. SBIs offshore joint ventures and subsidiaries enhance
its global stature.
The bank has carved a niche for itself in Euro land with
branches strategically located in Paris, Frankfurt and Antwerp.
Indian banks and corporates are able to avail single-window
Euro services from SBI Frankfurt.
2. Exposure to Agriculture:

State Bank of India caters to the needs of agriculturists and

landless agricultural labourers through a network of 6600 rural
and semi-urban branches. There are 972 specialized branches
which have been set up in different parts of the country
22

exclusively for the development of agriculture through credit

deployment.
Our branches have covered a whole gamut of agricultural
activities like crop production , horticulture , plantation crops,
farm mechanization, land development and reclamation,
digging of wells, tube wells and irrigation projects, forestry,
construction of cold storages and godowns, processing of agriproducts, finance to agri-input dealers, allied activities like
dairy , fisheries, poultry, sheep-goat, piggery and rearing of silk
worms.
SBI are the leaders in agri finance in the country with a
portfolio of Rs. 30,516 crs in agri advances to around 50 lac
farmers. Agricultural Advances grew to Rs. 19,015 Cr as at the
end of March 2008 from Rs.13, 927 Cr as at the end of March
2004 i.e. a growth of Rs. 5,088 Cr (36.53%) on year-on-year
basis. The disbursements to agriculture were to the order of Rs.
9,814 Cr and were higher by 61% over last year.

5.2 ICICI Bank

ICICI Bank was originally promoted in 1994 by ICICI Limited,
an Indian financial institution, and was its wholly-owned
subsidiary. ICICI's shareholding in ICICI Bank was reduced to
46% through a public offering of shares in India in fiscal 1998,
an equity offering in the form of ADRs listed on the NYSE in
fiscal 2000, ICICI Bank's acquisition of Bank of Madura
Limited in an all-stock amalgamation in fiscal 2001, and
23

secondary market sales by ICICI to institutional investors in

fiscal 2001 and fiscal 2002. ICICI was formed in 1955 at the
initiative of the World Bank, the Government of India and
representatives of Indian industry. The principal objective was
to create a development financial institution for providing
medium-term and long-term project financing to Indian
businesses. In the 1990s, ICICI transformed its business from a
development financial institution offering only project finance
to a diversified financial services group offering a wide variety
of products and services, both directly and through a number of
subsidiaries and affiliates like ICICI Bank. In 1999, ICICI
become the first Indian company and the first bank or financial
institution from non-Japan Asia to be listed on the NYSE.
1. Exposure to Exports:
ICICI Banks international operations have formed strategic tieups with some global banks to expand its reach. Its partners
include Emirates Bank in Dubai, DBS in Singapore, Lloyds
Bank in the UK, Wells Fargo in the US, and Bank of Montreal
in Canada.
The bank went international few years back. It now has eight
offices in Europe, West Asia and Southeast Asia. Its
international business contributes 78 per cent to its overall
revenues. ICICI Bank continued to build on its existing
presence in various geographies as well as enter new markets...
The Bank's subsidiaries have two branches in the United
Kingdom and four branches in Canada. In addition to providing
credit and trade finance solutions to Indian companies, the Bank
24

is

expanding

its

international

retail

franchise

through

technology-based banking services.

2. Exposure to Agriculture:
Dairy Sector:
ICICI Bank has been working with various co-operatives as
well as private players in this sector.
Product suite:
1) Working Capital:
Working Capital is designed to take care of the day to day
business requirements of the organization. Looking at
players, your domestic and international businesses, we can
provide export packing credit, cash credit and bill
purchasing/discounting

facility

customized

to

the

requirements of the clients. The peak seasonal requirement

due to distinctive seasonal production cycle of flush and lean
months with a relatively stable consumption cycle can also
be addressed.
2) Long term fund requirement for expansion/ new project:
The bank provides medium term and long term funds for
new project, expansion and up gradation of existing plants.
3) Cattle Financing:
ICICI Bank can finance the dairy farmers for purchase of
milch animals and other related dairy equipment for farmers
supplying milk to the dairy.

25

5.3 COMPARISON OF ICICI BANK AND SBI

PARTICULARS
Car
SLR
Provision
Made For
NPA To Net

ICICI
12.53%
36,348.94 cr
282.82 cr

SBI
12.64%
42,978.21 cr
2706.15 cr

Advances
Percentage In

5.82%

2.51%

Retail Banking
Percentage In

61%

52%

Corporate

35%

Banking

42%

CHAPTER 6
FUTURE OF INDIAN BANKING

26

6.1 The Way Forward for the Indian Banking Industry

The banking sector in India is entering another exciting phase.
In the last couple of years, Indian banks have cleaned up their
balance sheets. The next phase will involve a significant
reconstructing of their earnings statements. The next phase of
Indian Banking is going to revolve around the % Cs
1. Cost:
The next big earnings driver, ROE enhancer a valuation trigger
for Indian banks will be a sustainable process of cost efficiency
via significant reduction in workforce through natural attrition.
2. Credit:
Loan growth will lead to further improvement in the core
earnings of Indian Banks. While the interest margins are
unlikely to improve from the current levels, margins adjusted
for NPA provisions will improve, leading to higher RoEs and
valuations.
3. Capital:
Equity dilutions from banks will be at significant premiums to
the book value. This will boost the books of banks and make
them well capitalized. This will enable them to grow their loan
books.
4. Commissions:
As observed in an earlier section of this project, fees are
emerging as important sources of income for income for Indian
27

Banks. Private sector banks are already strong in this area. We

could now see the state-owned banks also exploiting their
distribution and customer base to increase their incomes, grab
market share and raise their ROEs.
Indian state owned banks have a large distribution network of
nearly 69000 branches. They also enjoy the trust of the
customers they serve. Thus, they are ideally placed to tap this
emerging opportunity. Commissions (fee incomes) for banks are
likely to rise rapidly over the next few years, led by deepening
of the market and wider product offering \s by the banks. A
strong growth in fee income is also expected to boost banks
RoEs (as very low capital is required to generate fee income).
New sources of revenues are opening up:
1.

Credit/debit cards
The use of plastic money is on an uptrend in India. The credit
card growth in FY08 (as against 25% growth in FY 07). The
total number of credit cards sold in India at the end of FY04
was about 10m, which is expected to reach 15m by FY05.

India: Credit Card Growth

No. of Credit Cards (m) LHS
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Growth (%) RHS

Source: Venture Infotech

Credit Cards: How the pie is shared ( FY O7)

Source: Venture Infotech

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The usage of debit cards is more pronounced in India, an

indicator of a loan-averse society. The number of debit cards in
circulation is more than double the credit cards. Hence, the
Indian banks have a clear lead over the foreign banks. As debit
cards have direct relations with the account, Indian banks will
continue to grow, because of large customer base. SBI, on the
back of its sheer size, has become the leader in debit cards,
followed by ICICI bank. The growth in this segment is also
likely to be driven by increased technology usage by the state
owned banks. ATM cards are likely to be phased out and all
savings accounts will have debit cards usually free of cost.
The increased usage of plastic money offers large opportunities
for Indian banks. In cash transactions the banks involvement is
limited to cash dispensing or receipt. However, in plastic money
transactions, it can capture the entire payment cycle of its
customers. Apart from fees, credit card loans also earn higher
spreads than other assets. Debit cards are even more lucrative as
they generate at virtually no risk.

CONCLUSION

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Banking scenario has changed rapidly since 1990s. The decade

of 90s has witnessed a sea change in the way banking is done in
India. Technology has made tremendous impact in
banking. Anywhere banking and Anytime banking have
become a reality. The financial sector now operates in a more
competitive environment than before and intermediates
relatively large volume of international financial flows. We are
slowly but surely moving from a regime of large number of
small banks to small number of large banks. The new era is
going to be one of consolidation around identified core
competencies. Mergers and acquisitions in the banking sector
are going to be the order of the day. Successful merger of
HDFC Bank and Times Bank has demonstrated that trend
towards consolidation is almost an accepted fact. We are also
looking for such signs in respect of a number of old private
sector banks, many of which are not able to cushion their NPAs,
expand their business and induct technology due to limited
capital base.
Coming times may usher in large banking institutions. In India,
one of the largest financial institutions, ICICI, took the lead
towards universal banking with its reverse merger with ICICI
Bank coming through a couple of years ago with IDBI
following suit. This trend may lead logically to promoting the
concept of financial super market chain, making available all
types of credit and non-fund facilities under one roof or
specialized subsidiaries under one umbrella organization.
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The big question we have to ponder is whether these stable

conditions marked by all round improvement in banks
performance can continue into 2008 onward in the light of
potentially dramatic changes that include, among others, a
sliding dollar, rising interest rates, introduction of Basel II
accord and international accounting standards, and the possible
flattening of consumer lending boom. Hopefully, the banking
industry in tandem with the regulatory authorities will rise to
the occasion, and collectively face the challenges and
opportunities that lie ahead.

BIBLIOGRAPHY

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Books and Magazines

RBI Report on Currency and Finance
The Journal of Indian Institute of Bankers
Banking The New Imperative
By Subramaniam
Business Today

Websites

www.rbi.org.in

www.icicibank.com

www.sbi.in

www.equitymaster.com

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