CH.

1 Indian Banking: Introduction

CH.1 INDIAN BANKING: INTRODUCTION

 ➢ 1.History of Banking:
For the past three decades India's banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or
cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of
the country. This is one of the main reasons of India's growth process.

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

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or
for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient
bank transferred money from one branch to other in two days. Now it is simple as instant
messaging or dials a pizza. Money has become the order of the day. The first bank in India,
though conservative, was established in 1786. From 1786 till today, the journey of Indian
Banking System can be segregated into three distinct phases. They are as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms.
• New phase of Indian Banking System with the advent of Indian Financial & Banking
Sector Reforms after 1991.

Phase I

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan 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.

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

During those day’s 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
Government took major steps in this Indian Banking Sector Reform after independence. In 1955,
it nationalised Imperial Bank of India with extensive banking facilities on a large scale especially
in rural and semi-urban areas. It formed State Bank of india to act as the principal agent of RBI
and to handle banking transactions of the Union and State Governments all over the country.

Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July,
1969, major process of nationalisation was carried out. It was the effort of the then Prime
Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was
nationalised.

Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80% of the banking segment in India under Government
ownership.

The following are the steps taken by the Government of India to Regulate Banking Institutions in
the Country:
• 1949 : Enactment of Banking Regulation Act.

• 1955 : Nationalisation of State Bank of India.

• 1959 : Nationalisation of SBI subsidiaries.

• 1961 : Insurance cover extended to deposits.

• 1969 : Nationalisation of 14 major banks.

• 1971 : Creation of credit guarantee corporation.

• 1975 : Creation of regional rural banks.

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

After the nationalisation of banks, the branches of the public sector bank India rose to
approximately 800% in deposits and advances took a huge jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.

Phase III
This phase has introduced many more products and facilities in the banking sector in its reforms
measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his
name which worked for the liberalisation of banking practices.
The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a
satisfactory service to customers. Phone banking and net banking is introduced. The entire
system became more convenient and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is sheltered from any crisis
triggered by any external macroeconomics shock as other East Asian Countries suffered. This is
all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not
yet fully convertible, and banks and their customers have limited foreign exchange exposure.

Nationalization of Banks in India

The nationalization of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime
minister. It nationalized 14 banks then. These banks were mostly owned by businessmen and
even managed by them.

• Central Bank of India

• Bank of Maharashtra

• Dena Bank

• Punjab National Bank

• Syndicate Bank

• Canara Bank

• Indian Bank

• Indian Overseas Bank

• Bank of Baroda

• Union Bank

• Allahabad Bank

• United Bank of India

Befor the steps of nationalisation of Indian banks, only State Bank of India (SBI) was
nationalised. It took place in July 1955 under the SBI Act of 1955. Nationalisation of Seven State
Banks of India (formed subsidiary) took place on 19th July, 1960.
The State Bank of India is India's largest commercial bank and is ranked one of the top five
banks worldwide. It serves 90 million customers through a network of 9,000 branches and it
offers -- either directly or through subsidiaries -- a wide range of banking services.

The second phase of nationalisation of Indian banks took place in the year 1980. Seven more
banks were nationalised with deposits over 200 crores. Till this year, approximately 80% of the
banking segment in India were under Government ownership.

After the nationalisation of banks in India, the branches of the public sector banks rose to
approximately 800% in deposits and advances took a huge jump by 11,000%.

• 1955 : Nationalisation of State Bank of India.

• 1959 : Nationalisation of SBI subsidiaries.

• 1969 : Nationalisation of 14 major banks.

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

Scheduled Commercial Banks in India:

The commercial banking structure in India consists of:

• Scheduled Commercial Banks in India

• Unscheduled Banks in India

Scheduled Banks in India constitute those banks which have been included in the Second
Schedule of Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this
schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act.

As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918
branches.The scheduled commercial banks in India comprise of State bank of India and its
associates, nationalised banks (19), foreign banks (45), private sector banks (32), co-operative
banks and regional rural banks.

"Scheduled banks in India" means the State Bank of India constituted under the State Bank of
India Act, 1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary
Banks) Act, 1959 (38 of 1959), a corresponding new bank constituted under section 3 of the
Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under
section 3 of the Banking Companies (Acquisition and Transfer of Undertakings) Act, 1980 (40
of 1980), or any other bank being a bank included in the Second Schedule to the Reserve Bank
of India Act, 1934 (2 of 1934), but does not include a co-operative bank".

"Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of
the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".

1.2 ROLE OF BANKS IN A DEVELOPING ECONOMY

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

1. Promoting capital formation

2. Encouraging innovation
3. Monetsation
4. Influence economic activity
5. Facilitator of monetary policy
Above all view we can see in briefly, which are given below:

➢ PROMOTING CAPITAL FORMATION:-

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

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

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

➢ INFLUENCE ECONOMIC ACTIVITY:-

Banks are in a position to influence economic activity in a country by their influence on the rate
interest. They can influence the rate of interest in the money market through its supply of funds.
Banks may follow a cheap money policy with low interest rates which will tend to stimulate
economic activity.
➢ FACILITATOR OF MONETARY POLICY:-
Thus monetary policy of a country should be conductive to economic development. But a well-
developed banking system is on essential pre-condition to the effective implementation of
monetary policy. Under-developed countries cannot afford to ignore this fact. A fine, an efficient
and comprehensive banking system is a crucial factor of the developmental process.

LOW INTEREST RATES

Reserve Bank of India controls the Interest rate, which is based on several monetary policies.
Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry.
As on September 11, 2009 Bank Rate was 6.00 per cent, the same as on the corresponding date
of last year. Call money rates (borrowing & lending) were in the range of 1.50/3.47 per cent as
compared with 5.25/11.00 per cent on the corresponding date of last year.

INFLATION RATES

Inflation represents a rise in general level of prices of goods and services over a period of time. It
leads to an erosion in the purchasing power of money. Resultantly, each unit of currency buys
fewer goods and services

Different fiscal and monetary policies have curbed the Inflation rate from the high of 12.63 per
cent to 3.92 per cent.

To fight against the slowdown of the Economy, Government of India & Reserve Bank of India
took many fiscal as well as monetary actions. Clubbed with fiscal & monetary actions,
decreasing commodity prices, decreasing crude prices and lowering interest rate, we expect that
Indian Economy could again register a robust growth rate in the year 2009-10. Inflation stands at
3.92 per cent on 7th February 2009 against a high of 12.63 per cent on 9th August 2008.
1

CH.2 Market Potential

CH.2 MARKET POTENTIAL

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

State Bank of India • Andhra Bank
• State Bank of Bikaner and Jaipur • Allahabad Bank
• State Bank of Hyderabad • Bank of Baroda
• State Bank of Indore • Bank of India
• State Bank of Mysore • Bank of Maharashtra
• State Bank of Patiala • Canara Bank
• State Bank of Saurashtra (Now merged with • Central Bank of India
SBI)
• State Bank of Travancore • Corporation Bank
• Dena Bank • Punjab and Sind Bank
• Indian Overseas Bank • Syndicate Bank
• Indian Bank • Union Bank of India
• Oriental Bank of Commerce • United Bank of India
• Punjab National Bank • Vijaya Bank
• UCO Bank

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

Banks in India (Private Sector) Foreign Banks in India

Vysya Bank Ltd American Express Bank Ltd.
Axis Bank Ltd ANZ Gridlays Bank Plc.
Indusind Bank Ltd Bank of America NT & SA
ICICI Banking Corporation Bank Ltd Bank of Tokyo Ltd.
Global Trust Bank Ltd Banquc Nationale de Paris
HDFC Bank Ltd Barclays Bank Plc
Centurion Bank Ltd Citi Bank N.C.
Bank of Punjab Ltd Deutsche Bank A.G.
IDBI Bank Ltd Hongkong and Shanghai Banking Corporation
Standard Chartered Bank.
The Chase Manhattan Bank Ltd.
Dresdner Bank AG.
2

2.1 BANKING SERVICES IN INDIA:-

With years, banks are also adding services to their customers. The Indian banking industry is
passing through a phase of customers market. The customers have more choices in choosing
their banks. A competition has been established within the banks operating in India. With stiff
competition and advancement of technology, the service provided by banks has become more
easy and convenient. The past days are witness to an hour wait before withdrawing cash from
accounts or a cheque from north of the country being cleared in one month in the south. This
section of banking deals with the latest discovery in the banking instruments along with the
polished version of their old systems.

2.2 RESERVE BANK OF INDIA (RBI):

The central bank of the country is the Reserve Bank of India (RBI). It was established in April
1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton
Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which
was entirely owned by private shareholders in the beginning. The Government held shares of
nominal value of Rs. 2, 20,000. Reserve Bank of India was nationalized in the year 1949. The
general superintendence and direction of the Bank is entrusted to Central Board of Directors of
20 members, the Governor and four Deputy Governors, one Government official from the
Ministry of Finance, ten nominated Directors by the Government to give representation to
important elements in the economic life of the country, and four nominated Directors by the
Central Government to represent the four local Boards with the headquarters at Mumbai,
Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central
Government appointed for a term of four years to represent territorial and economic interests and
the interests of co-operative and indigenous banks. The Reserve Bank of India Act, 1934 was
commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the
functioning of the Bank.

The Bank was constituted for the need of following:

➢ To regulate the issue of banknotes

➢ To maintain reserves with a view to securing monetary stability and

2 RBI report on banking sector reforms.

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

Functions of Reserve Bank of India

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

➢ Bank of Issue

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

➢ Banker to Government
The second important function of the Reserve Bank of India is to act as Government banker,
agent and adviser. The Reserve Bank is agent of Central Government and of all State
Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the
obligation to transact Government business, via. to keep the cash balances as deposits free of
interest, to receive and to make payments on behalf of the Government and to carry out their
exchange remittances and other banking operations. The Reserve Bank of India helps the
Government - both the Union and the States to float new loans and to manage public debt. The
Bank makes ways and means advances to the Governments for 90 days. It makes loans and
advances to the States and local authorities. It acts as adviser to the Government on all monetary
and banking matters.
 ➢ Bankers' Bank and Lender of the Last Resort
The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking
Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a
cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in
India. By an amendment of 1962, the distinction between demand and time liabilities was
abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate
deposit liabilities. The minimum cash requirements can be changed by the Reserve Bank of
India. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible
securities or get financial accommodation in times of need or stringency by rediscounting bills of
exchange. Since commercial banks can always expect the Reserve Bank of India to come to their
help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the
lender of the last resort.

➢ Controller of Credit
The Reserve Bank of India is the controller of credit i.e. it has the power to influence the volume
of credit created by banks in India. It can do so through changing the Bank rate or through open
market operations. According to the Banking Regulation Act of 1949, the Reserve Bank of India
can ask any particular bank or the whole banking system not to lend to particular groups or
persons on the basis of certain types of securities. Since 1956, selective controls of credit are
increasingly being used by the Reserve Bank. The Reserve Bank of India is armed with many
more powers to control the Indian money market. The Reserve Bank of India, therefore, has the
following powers:

(a) It holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative controls.
(c) It controls the banking system through the system of licensing, inspection and calling for
information.
(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

➢ Custodian of Foreign Reserves

The Reserve Bank of India has the responsibility to maintain the official rate of exchange.
According to the Reserve Bank of India Act of 1934, the Bank was required to buy and sell at
fixed rates any amount of sterling in lots of not less than Rs. 10,000. The rate of exchange fixed
was Re. 1 = sh. 6d. Since 1935 the Bank was able to maintain the exchange rate fixed at lsh.6d.
Though there were periods of extreme pressure in favor of or against the rupee. After India
became a member of the International Monetary Fund in 1946, the Reserve Bank has the
responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F.
Besides maintaining the rate of exchange of the rupee, the Reserve Bank has to act as the
custodian of India's reserve of international currencies.
 ➢ Supervisory functions:
In addition to its traditional central banking functions, the Reserve bank has certain non-
monetary functions of the nature of supervision of banks and promotion of sound banking in
India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI
wide powers of supervision and control over commercial and co-operative banks, relating to
licensing and establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction, and liquidation.

➢ Promotional functions
With economic growth assuming a new urgency since Independence, the range of the Reserve
Bank's functions has steadily widened. The Bank now performs varietyof developmental and
promotional functions, which, at one time, were regarded as outside the normal scope of central
banking. The Reserve Bank was asked to promote banking habit, extend banking facilities to
rural and semi-urban areas, and establish and promote new specialized financing agencies.
Accordingly, the Reserve Bank has helped in the setting up of the IFCI and the SFC; it set up the
Deposit Insurance Corporation in 1962, the Unit Trust of India in 1964, the Industrial
Development Bank of India also in 1964, the Agricultural Refinance Corporation of India in
1963 and the Industrial Reconstruction Corporation of India in 1972.

➢ Classification of RBIs functions

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

➢ KINDS OF BANKS:
Financial requirements in a modern economy are of a diverse nature, distinctive variety and large
magnitude. Hence, different types of banks have been instituted to cater to the varying needs of
the community. Banks in the organized sector may, however, be classified in to the following
major forms:

1. Commercial banks
2. Co-operative banks
3. Specialized banks
4. Central bank

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

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

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

1. Foreign exchange banks,

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

➢ CENTRAL BANK:
A central bank is the apex financial institution in the banking and financial system of a country.
It is regarded as the highest monetary authority in the country. It acts as the leader of the money
market. It supervises, control and regulates the activities of the commercial banks. It is a service
oriented financial institution. India’s central bank is the reserve bank of India established in
1935.a central bank is usually state owned but it may also be a private organization. For instance,
the reserve bank of India (RBI), was started as a shareholders’ organization in 1935, however,
it was nationalized after independence, in 1949.it is free from parliamentary control.
2.3 RETAIL BANKING-THE NEW FLAVOR

➢ The Concept of Retail Banking:

The retail banking encompasses deposit and assets linked products as well as other financial
services offered to individual for personal consumption. Generally, the pure retail banking is
conceived to be the provision of mass banking products and services to private individuals as
opposed to wholesale banking which focuses on corporate clients. Over the years, the concept of
retail banking has been expanded to include in many cases the services provided to small and
medium sized businesses. Some banks in Europe even include their private banking business i.e.
services to high net worth net worth individuals in their retail Banking portfolio. The concept of
Retail banking is not new to banks. it is only now that it is being viewed as an attractive market
segment, which offers opportunities for growth with profits. The diversified portfolio
characteristic of retail banking gives better comfort and spreads the essence of retail banking lies
in individual customers. Though the term Retail Banking and retail lending are often used
synonymously, yet the later is lust one side of Retail Banking. In retail banking, all the banking
needs of individual customers are taken care of in an integrated manner.

➢ Retail Lending Products:

Major retail lending products offered by banks are the following:

I. Housing Loans
II. Loan for Consumer goods
III. Personal Loans for marriage, honeymoon, medical treatment and holding etc.
IV. Education Loans
V. Auto Loans
VI. Gold Loans
VII. Event Loans
VIII. Festival Loans
IX. Insurance Products
X. Loan against Rent receivables
XI. Loan against Pension receivables to senior citizens
XII. Debit and Credit Cards
XIII. Global and International Cards
XIV. Loan to Doctors to set up their own Clinics or for purchase of medical equipments
XV. Loan for Woman Empowerment for the Setting up of boutiques
2.4 Retail Banking Products for Depositors
Retail banking products for depositors in various segments of customers like; children, salaried
persons. Senior citizens, professionals, technocrats’ business men, retail traders and farmers etc.
include:

a. Flexi deposit Accounts

b. Savings Bank Accounts
c. Recurring Deposit Accounts
d. Short Term Deposits
e. Deferred pension Linked Deposit Schemes

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

➢ Add-ons and Freebies:

To make their products and services more service more attractive so as to maximum number of
customers, the banks are vying with each other with whole lot off rills, goodies, freebies are as
under:
1. Free collection of specified number of outstation instruments
2. Instant credit of outstanding cheques up to Rs.15000/-
3. Concession in exchange on demand drafts and pay-orders and commission on bills of
exchange
4. Issuance of free personalized cheques books
5. Free issuance of ATM, Debit, Credit and add-on Cards
6. Free investment advisory services
7. Grant of redeemable reward points on use of credit cards
8. Free internet banking, phone banking and any where banking facilities
9. Issuance of discount coupons for purchase of various products like computer accessories,
Music CDs, cassettes, books, toys, garments etc.etc.
10. Last but not the least, issuance of free PVR, Trade Fair tickets etc. etc.
11. Concession in rate of interest on Group advances
12. Exemption in upfront fees These concessions, freebies and add-ons are based on the True
Relationship Value of customers and is calculated by the return on various products and
 Services of the banks availed by them. These concessions and freebies are usually offered
for purchase of consumer goods but now they have become an integral part of retail Banking
products and services also.

➢ New delivery channels for Retail Banking Products and Services:

The advent of new delivery channels viz. ATM, Interest and Telebanking have revolutionalised
the retail banking activities. These channels enable Banks to deliver retail Banking products and
services in an efficient and cost effective manner. Now-adays the banks are under great pressure
to attract new and retain old customers, as margins are turning wafer thin. In these circumstances
reducing administrative a transaction cost has become crucial. Banks are making special
offerings to customers through these channels. Retail banking has been immensely benefited
with the revolution in IT. Andcommunication technology. The automation of the Banking
processes is facilitating extension of their reach and rationalization of their costs as well. They
are the engine for growth of retail banking business of Banks. The networking of branches has
extended the scope of banking to anywhere and anytime 24 * 7 days week banking. It has
enabled customer to be the customer of a bank rather then the customers of a particular branch
only. Customers can transact retail Banking transactions at any of the networked branches
without any extra cost. As a matter of fact the Retail Banking per se has taken off because of the
advent of multiple banking channels. These channels have enabled banks to go on a massive
customer acquisition mode since transaction volumes spread over multiple channels lessen the
load on the brick and mortar bank branches.

➢ The impact of Retail Banking:

1. The major impact of Retail Banking is that, the customers have become the emperors –
the fulcrum of all banking activities, both on the asset side and the liabilities front. The
hitherto sellers market has transformed into buyers market. The customers have multiple
of choices before them now for cherry picking products and services, which suit their life
styles and tastes and financial requirements as well. Banks now go to their customers
more often than the customers go to their banks.
2. The non-banking finance Companies which have hitherto been thriving on retail business
due to high risk and high returns thereon have been dislodged from their profit munching
citadel.
3. Retail banking is transforming banks in to one stop financial super markets.
4. The share of retail loans is fast increasing in the loan books of banks.
5. Banks can foster lasting business relationship with customers and retain the existing
customers and attract new ones. There is a rise in their service levels as well.
6. Banks can cut costs and achieve economies of scale and improve their revenues and
profit by robust growth in retail business. Reduction in costs offers a win win situation
both for banks and the customers.
7. It has affected the interface of banking system through different delivery mechanism.
8. It is not that banks are sharing the same pie of retail business. The pie itself is growing
exponentially; retail banking has fueled a considerable quantum of purchasing power
through a slew of retail products.
9. Banks can diversify risks in their credit portfolio and contain the menace of NPAs.
10. Re-engineering of business with sophisticated technology based products will lead to
business creation, reduction in transaction cost and enhancement in efficiency of
operations.
 CH.3 Research Methodology

CH.3 RESEARCH METHODOLOGY

1) RESEARCH OBJECTIVE:
➢ To know banking practices and system.
➢ To understand banking importance in Indian economy
➢ To know factors affected to Indian banking industry.

1) RESEARCH DESIGN:

Here both types of research techniques are used.

➢ Exploratory research

1) EXPLORATORY RESEARCH:
a. Secondary data:
i. Internet
ii.Brochure

2) TARGET POPULATION DEFINITION:

a. Target population : Indian banking industry

b. Sampling element : Indian banking industry

c. Extent : India
d. Time : 2010
e. Sampling frame : Not available
 CH.4 Strategic Analysis

CH.4 STRATEGIC ANALYSIS

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

• POLITICAL
• GOVT. POLICY
& BUDGET
• MONETORY
POLICY
• FDI

TECHNICAL
• TECHNOLOGY SOCIOCULTURAL
IN • CHANGES IN
BANKS LIFE STYLE
• CORE BANKING BANKING • LITERACY
SOLUTIONS(CBS SECTOR RATE
) • DEMOGRAPHIC
• ATM OF LARGE
• INTERNATE POPULATION
• SHIFT
TOWARDS THE
ECONOMICAL1
• GDP
• MONSOON
• INFLATION
• SAVINGS &
ACCOUNTS
• AGRICULTURE
CREDIT

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

3 1Global financial stability Report, 2009

2 RBI Annual report 2009-10
*Scib.com
waiver of short-term agricultural loans, to attract the farmer’s votes. By doing so the profits of
the bank get affected. Various banks in the cooperative sector are open and run by the politicians.
They exploit these banks for their benefits. Sometimes the government appoints various
chairmen of the banks. Various policies are framed by the RBI looking at the present situation of
the country for better control over the banks.

• FOCUS ON REGULATIONS OF GOVERNMENT

Indian Banking is least affected as compare to other developed economy which is attributed to
Reserve Bank of India for its robust policy framework, stricter prudential regulations with
respect to capital and liquidity. This gives India an advantage in terms of credibility over other
countries. Government affects the performance of banking sector most by legislature and
framing policy .government through its budget affects the banking activities securitization act
has given more power to banking sector against defaulting borrowers.

• OTHER PROVISIONS OF POLITICAL FACTOR

The threshold for non-promoter public shareholding for all listed companies to be raised in a
phased manner. To allow scheduled commercial banks setting up off-site ATMs without prior
approval subject to reporting. To provide banking facilities in under-banked/un-banked areas in
the next three years. A sub-committee of State level Bankers Committee (SLBC) would identify
and formulate an action plan for the same The Ministry has also granted Rs 100 crore of grants in
aid to ensure provision of at least one Centre/Point of Sales (POS) for banking services in each
of the un-banked blocks.

• BUDGET IMPACT: INDUSTRY

1. Long-term refinancing from IIFCL for infrastructure projects will ensure better
asset-liability match for banks.
2. Debt waiver and interest subvention schemes will not have much impact on
banks.
3. Recapitalization will ensure adequate capital for the growth of the public
sector banks and insurance companies.
4. Rural Housing fund will boost the resource base of NHB for their refinance
operation in rural housing sector.
5. Tax break for NPS trust will have positive impact on the same.

➢ ECONOMIC FACTORS
Banking is as old as authentic history and the modern commercial banking are traceable to
ancient times. In India, banking has existed in one form or the other from time to time. The
present era in banking may be taken to have commenced with establishment of bank of Bengal in
1809 under the government charter and with government participation in share capital.
Allahabad bank was started in the year 1865 and Punjab national bank in 1895, and thus, others
followed. Every year RBI declares its 6 monthly policy and accordingly the various measures
and rates are implemented which has an impact on the banking sector. Also the Union budget
affects the banking sector to boost the economy by giving certain concessions or facilities. If in
the Budget savings are encouraged,
then more deposits will be attracted towards the banks and in turn they can lend more money to
the agricultural sector and industrial sector, therefore, booming the economy. If the FDI limits
are relaxed, then more FDI are brought in India through banking channels

• MONSOON
The cumulative seasonal rainfall (1st June -30th September 2009) for the country as a whole is
23 per cent below the Long Period Average (LPA). The year 2009 is the most deficient year after
1972.

• SAVINGS AND ACCOUNTS

As stated earlier, India continues to remain one of the high savings economies among the
emerging market economies. Gross Domestic Savings (GDS) of the Indian economy constitutes
savings of public, private corporate and household sectors. In the recent period the high growth
performance of the Indian economy is driven by rise in savings

• DEBT RELIEF FOR FARMERS

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

MONETARY POLICY
Monetary Policy 2009-2010

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

Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis points
from 5.0% to 4.75% with immediate effect.

Reverse Repo Rate : It has been reduced under LAF by 25 basis points from 3.5% to 3.25% with
immediate effect. RBI has retained the option to conduct overnight or longer term repo/reverse
repo under the LAF depending on market conditions and other relevant factors.

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

The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during
the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get
a foot hold in the Indian Markets by investing in willing Indian partners who are starved of net
worth to meet CAR norms. Ceiling for FII investment in companies was also increased from
24.0 percent to 49.0 percent and have been included within the ambit of FDI investment

BUDGET MEASURES

BUDGET PROVISIONS

Increase Farm Credit: The FM has further increase the farm credit target for 2009-10 at Rs
325000 crore compared to Rs 287000 crore targeted in 2008-09.
Subvention of 1% to be paid as incentive to farmers: The Budget continued the Interest
subvention scheme for short-term crop loans up to Rs 300000 per farmer at the interest rate of
7% per annum. Also additional subvention of 1% to be paid from this year, as incentive to those
farmers who repay short-term crop loans on schedule. Also additional allocation of Rs 411 crore
over Interim Budget 2009-10 was made for the same.
Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by six
more months for farmers owing more than 2 hectare of land. The Union Budget 2008-09 allowed
these farmers 25% rebate on loan if they repay 75% of their overdue within stipulated period of
30th June 2009. Currently this facility has been extended from 30th June, 2009 to 31st
December, 2009.
Setting up of separate task force for those not covered under the debt waiver scheme: The
government also announced that it will set up a task force to examine the issue of debt taken by a
large number of farmers in some regions of Maharashtra from private money lenders who were
not covered by the loan waiver scheme announced last year.
OTHER PROVISIONS
 • The threshold for non-promoter public shareholding for all listed companies to be raised
in a phased manner.
• To allow scheduled commercial banks setting up off-site ATMs without prior approval
subject to reporting.
• To provide banking facilities in under-banked/un-banked areas in the next three years. A
sub-committee of State level Bankers Committee (SLBC) would identify and formulate
an action plan for the same.
• The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at least
one Centre/Point of Sales (POS) for banking services in each of the un-banked blocks.
BUDGET PROPOSALS
1. IIFCL to refinance 60% of loans given by commercial banks for PPP-based projects in critical
sectors. IIFCL and banks together will be able to support infrastructure projects involving total
investment of Rs 1,000 bn.
2. Target for agriculture credit flow set at Rs.3250 bn for the year 2009-10. Interest subvention
scheme at the interest rate of 7% will be continued. Additional subvention of 1% for the farmers
who repay their debt on time.
3. Farm debt waiver scheme extended to 31st December 2009 from 30th June 2009.
4. Interest subvention scheme to exporters extended to 31st March 2010.
5. Special fund of Rs.40 bn out of Rural Infrastructure Development Fund (RIDF) to provide
refinance to banks and State Finance Corporation for incremental lending to Micro and Small
Enterprises (MSEs).
6. Rs.1 bn to ensure provision of at least one centre/Point of Sales (POS) for banking services in
each of the unbanked blocks.
7. Interest subsidy to poor households for loans up to Rs.1,00,000 from banks.
8. Rs.20 bn earmarked for Rural Housing Fund in National Housing Bank (NHB)
9. Recapitalization of public sector banks and insurance companies.
10. Exemption of income of New Pension System (NPS) trust from income tax and dividend
paid to NPS trust from dividend distribution tax. Sale and purchase of equity shares and
derivatives by NPS trust will be exempt from the securities transaction tax.

➢ SOCIO CULTUREAL FACTORS

Socio culture factors also affect the business. They show in which people behave in country.
Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and
consumption habit of people, their language, beliefs and values affect the business. Banking
industry is also operates under this social environment and it is also affect by this factor. These
factor are changing continuously people’s life style, their behavior, consumption pattern etc. is
changing and also creating opportunities and threat for banking industry. There are some socio-
culture factors that affect banking in
India have been analyzed below.

• CHANGE IN LIFE STYLE

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

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

LITERACY RATE

Literacy rate in India is very low compared to developed countries. Illiterate people hesitate to
transact with banks. So, this impacts negatively on banks. But there is positive side of this as
well i.e. illiterate people trust more on banks to deposit their money, they do not have market
information. Opportunities in stocks or mutual funds. So, they look bank as their sole and safe
alternative. Literacy rate of India is around 65%

LITERACY RATE IN INDIA

Year persons Male Female

1951 18.3 27.2 8.9

1961 28.3 40.4 15.3
1971 34.5 46.0 22.0
1981 41.4 53.4 28.5
1991 52.2 64.1 39.3
2001 65.4 75.8 52.1

➢ TECHNOLOGICAL FACTORS

• TECHNOLOGY IN BANKS
Technology plays a very important role in bank’s internal control mechanisms as well as services
offered by them. It has in fact given new dimensions to the banks as well as services that they
cater to and the banks are enthusiastically adopting new technological innovations for devising
new products and services.

• ATM
The latest developments in terms of technology in computer and telecommunication have
encouraged the bankers to change the concept of branch banking to anywhere banking. The use
of ATM and Internet banking has allowed ‘anytime, anywhere banking’ facilities. Automatic
voice recorders now answer simple queries, currency accounting machines makes the job easier
and self-service counters are now encouraged.

• IT SERVICES & MOBILE BANKING

Today banks are also using SMS and Internet as major tool of promotions and giving great utility
to its customers. For example SMS functions through simple text messages sent from your
mobile. The messages are then recognized by the bank to provide you with the required
information. All these technological changes have forced the bankers to adopt customer-based
approach instead of product-based approach Technology advancement has changed the face of
traditional banking systems. Technology advancement has offer 24X7 banking even giving faster
and secured service.

4.2 SWOT analysis

 STRENGTH
➢ Indian banks have compared favourably on growth, asset quality and profitability with
other regional banks over the last few years. The banking index has grown at a
compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per
cent growth in the market index for the same period.
 ➢ Policy makers have made some notable changes in policy and regulation to help
strengthen the sector. These changes include strengthening prudential norms, enhancing
the payments system and integrating regulations between commercial and co-operative
banks.
➢ Bank lending has been a significant driver of GDP growth and employment.Extensive
reach: the vast networking & growing number of branches & ATMs. Indian banking
system has reached even to the remote corners of the country.
➢ The government's regular policy for Indian bank since 1969 has paid rich dividends with
the nationalisation of 14 major private banks of India.
➢ In terms of quality of assets and capital adequacy, Indian banks are considered to have
clean, strong and transparent balance sheets relative to other banks in comparable
economies in its region.
➢ India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with
the Government of India holding a stake)after merger of New Bank of India in Punjab
National Bank in 1993, 29 private banks (these do not have government stake; they may
be publicly listed and traded on stock exchanges) and 31 foreign banks. They have a
combined network of over 53,000 branches and 17,000 ATMs. According to a report by
ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total
assets of the banking industry, with the private and foreign banks holding 18.2% and
6.5% respectively.
➢ Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector
banks and 20 per cent of government owned banks.

 WEAKNESS
➢ PSBs need to fundamentally strengthen institutional skill levels especially in sales and
marketing, service operations, risk management and the overall organizational
performance ethic & strengthen human capital.
➢ Old private sector banks also have the need to fundamentally strengthen skill levels.
➢ The cost of intermediation remains high and bank penetration is limited to only a few
customer segments and geographies.

➢ Structural weaknesses such as a fragmented industry structure, restrictions on capital

availability and deployment, lack of institutional support infrastructure, restrictive labour
laws, weak corporate governance and ineffective regulations beyond Scheduled
Commercial Banks (SCBs), unless industry utilities and service bureaus.

4 The Economics Times, Monday 29, 2010

“Response business association info.”
• BS reporter Ahmedabad 22 Nov.
• ET 23 Oct. “Corporate”
• http//www.scib.com/strategicmooves
 OPPORTUNITY
➢ The market is seeing discontinuous growth driven by new products and services that
include opportunities in credit cards, consumer finance and wealth management on the
retail side, and in fee-based income and investment banking on the wholesale banking
side. These require new skills in sales & marketing, credit and operations
➢ Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in
interest rates provided. This will expose the weaker banks.
➢ With increased interest in India, competition from foreign banks will only intensify.
➢ Given the demographic shifts resulting from changes in age profile and household
income, consumers will increasingly demand enhanced institutional capabilities and
service levels from banks.
➢ New private banks could reach the next level of their growth in the Indian banking sector
by continuing to innovate and develop differentiated business models to profitably serve
segments like the rural/low income and affluent/HNI segments; actively adopting
acquisitions as a means to grow and reaching the next level of performance in their
service platforms. Attracting, developing and retaining more leadership capacity
➢ Foreign banks committed to making a play in India will need to adopt alternative
approaches to win the “race for the customer” and build a value-creating customer
franchise in advance of regulations potentially opening up post 2009. At the same time,
they should stay in the game for potential acquisition opportunities as and when they
appear in the near term. Maintaining a fundamentally long-term value-creation mindset.
➢ With the growth in the Indian economy expected to be strong for quite some
timeespecially in its services sector-the demand for banking services, especially retail
banking, mortgages and investment services are expected to be strong.
➢ The Reserve Bank of India (RBI) has approved a proposal from the government to amend
the Banking Regulation Act to permit banks to trade in commodities and commodity
derivatives.
➢ Liberalisation of ECB norms: The government also liberalised the ECB norms to permit
financial sector entities engaged in infrastructure funding to raise ECBs. This enabled
banks and financial institutions, which were earlier not permitted to raise such funds,
explore this route for raising cheaper funds in the overseas markets.
➢ Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed
them to raise perpetual bonds and other hybrid capital securities to shore up their capital.

➢ THREATS
➢ Threat of stability of the system: failure of some weak banks has often threatened the
stability of the system.
➢ Rise in inflation figures which would lead to increase in interest rates.
➢ Increase in the number of foreign players would pose a threat to the PSB as well as the
private player.
4.3Rationale of the Porter’s Five Forces Model in the Banking Industry
The model attempts to address key strategic issues in a wider scope. Many of the issues
mentioned in the model, including the forces and the management of those forces, are relevant to
the banking sector as well as any other service-oriented business. The results, which will be
obtained by the application of this model, should be given the value of the time of the analysis
and that a continuous review is necessary in order to avoid to be myopic or obsolete with the
results. Michael Porter provided a framework that models an industry as being influenced by five
forces (Porter, 1980). Figure 1 provides details of the framework.

THREAT OF
NEW
ENTRANTS

-Absolute
coadvantages
-Learnin st g
SUPPLIERS’
POWER
BUYERS’
-Supplier
POWER
concentration -
-Bargaining
Inputs DEGREE OF
leverage. –
differentiation RIVALRY -Exit
Buyers’
barriers
-Products

THREAT OF
SUBSTITUTES
-Switching costs
-Buyer
inclination to
substitute
How this porters five force model is concerned with banking sector?

 Threat of new entrant:

Indian banking industry has various types of banks which engaged with the different
activities and practices. New entrants may be the most valuable private business entity or
foreign bank and business. It can only by the government of india as well as RBI. RBI makes
the foreign banks to invest the fund or can open the branches or do the partnership at 74%
part. That can create high competition and this is threat for Indian banking.

 Threat of substitute:

As far as the substitute is concern there are huge number of products and services available in
the market. All the banks provide same retail banking, internet banking, wealth and risk
management activities. Not only this but insurance, post office savings, mutual funds, stock
markets etc are the substitute is there in the market. This is emerging scenario for those
mentioned substitutes so it can create stiff competition for the banking sector.

 Bargaining power of suppliers:

In the banking sector no perfect suppliers is there but following can considerd as suppliers
RBI, state and central government, high net worth people, other business entities, foreign
banks and politics, there can effect of builders, stationers, technology providers and
consulting peoples.if the strong bargaing is there then cause drastic effect on the banking
activities.

 Bargaining power of customers:

Customers including individuals, groups, associations or any person who demand the product
or services of the bank. The banks has to keep upto date methods of practice and technology
for the betterment of the particular banks. Now a days customers demand internet facilities
and mobile banking rather then visit to the bank building. This need change in policy, interest
rates, system and huge investment is required.

 Degree of revelry:

As we know in introduction there are so many banks engaged in same category and same
product so to survive in the market they have to make product differentiation or service
change. Strategic management and policies can beneficial for the particular bank.

➢ Challenges facing Banking industry in India

The banking industry in India is undergoing a major transformation due to changes in
economic conditions and continuous deregulation. These multiple changes happening one
after other has a ripple effect on a bank (Refer fig. 2.1) trying to graduate from completely
regulated seller market to completed deregulated customers market.
• Deregulation: This continuous deregulation has made the Banking market extremely
competitive with greater autonomy, operational flexibility and decontrolled interest
rate and liberalized norms for foreign exchange. The deregulation of the industry
coupled with decontrol in interest rates has led to entry of a number of players in the
banking industry. At the same time reduced corporate credit off take thanks to
sluggish economy has resulted in large number of competitors batting for the same
pie.
• New rules: As a result, the market place has been redefined with new rules of the
game. Banks are transforming to universal banking, adding new channels with
lucrative pricing and freebees to offer. Natural fall out of this has led to a series of
innovative product offerings catering to various customer segments, specifically retail
credit.
 CH.5 Financial Analysis

CH.5 FINANCIAL ANALYSIS 1

5.1Net Profit/ Total Funds
Interpretation:

The further deduction of taxes & duties from profit leads to net profit banking has more
contribution of Indian GDP. This enables to increase PAT. With liberalized RBI policy FLLs
investment.FDI and project implementation & good tax planning of banking manager makes
increase in PAT from 0.9 in 2004 to 1.03 in 2009 and ranging between 0.95 to 0.99.

5.2RONW

Interpretation:

This ratio is most important for all the stockholders. Higher the ratio higher dividend, internal
efficiency, terms, loyalty of customer. Quality product etc. so the banking with IT, SAP,
ERP, token system and agricultural development policy, credit granting etc. increase the
interest income which causes banks more working toward this sectors and enhance the profit
for stakeholders. As the year 2009 after financial crisis the ratio shows 17.37 which is highest
among last five years. Then reduction due to market circumstances and RBI policy @
14.87% only. But it has increasing trend.
5.3PBT/ Total Fund

Interpretation:

This ration is concerned with the profit before provisions to total fund. If banking has
efficient use of assets both tangible & intangible, manpower planning and policies of banking
services most privet banks has good infrastructure of IT . which make whole industry to
expand the PBT ration from 0.99 in 2004 to 1.05 in 2009. Then it further 0.99 that shows
during good monsoon & economic condition the profit is increase.

5.4 Operating Expenses/ Total Fund

Interpretation:

Expenses which banks have to compensate with the profit or revenue. The expenses can be
technical updating, interbank charges, SLR, CLR, As ratios define it is going to decrease
from 2.22 in 2006 to 1.61 in 2009 but not at notable point because it further increase by
2.12% in 2010. So industry trend shows reduction in operating expenses.

5.5 Non Interest Income/ Total Fund

Interpretation:

Noninterest income to total fund the ratio shows how efficiently banking the working which
generate income by way of deposit, demate account charges, OD, DD, etc charges taken from
the customers 2006 has 1.26% which is ranging in between 1.23-1.24 from the year 2008 to
2010 which shows banking maintain the ratio rather than expanding.
5.6Net Interest Income/ Total Fund

Interpretation:

What is interest income is part of total fund invested. Suppose bank has 1000 fund and in
which 720 is from interest than it find this ratio. As banking industry 9.82% in 2001 and
7.25% in 2006. Which increase throughout three year and 2010 it was 7.48%.

5.7 Other Income/ Total Income

Interpretation:

Banking industries has various types of income like fixed deposits, interest charges,
saving and current account charges, ATM charges etc. which provide short term and long
term income from those sources. This ratio is defined how much total income is divided in
other sources of income means apart from interest charges. Ratio was 11.76% in 2001 which
is quite more in 2004 at 20.19% and then after continuously appearing at 14.1% round about.

5.8 Operating Expenses/Total Income

Interpretation:

This Ratio shows that what is the level of expenses to the total income generated throughout
the year. Expenses like RBI charges SLR, CRR and other repose etc. Ratio 24.97% in 2001
which getting fluctuation by 2.3% year by year. In financial year 2010 24.3% which was very
high from 2009.
 FINDINGS:

DEREGULATI
ON
Maching skill New

CONT.SKILL RETAIL
BUILDING THRUST

Better BANKS New

channels

ALIGNED ALIGNED
MINDSET

Demanding
Squeezed
customers VALUEADDED SERVICE spreads
.
 • Efficiency: This in turn has made it necessary to look for efficiencies in the business.
Banks need to access low cost funds and simultaneously improve the efficiency. The
banks are facing pricing pressure, squeeze on spread and have to give thrust on retail
assets.
• Diffused Customer loyalty: This will definitely impact Customer preferences, as
they are bound to react to the value added offerings. Customers have become
demanding and the loyalties are diffused. There are multiple choices, the wallet share
is reduced per bank with demand on flexibility and customization. Given the
relatively low switching costs; customer retention calls for customized service and
hassle free, flawless service delivery.
• Misaligned mindset: These changes are creating challenges, as employees are made
to adapt to changing conditions. There is resistance to change from employees and the
Seller market mindset is yet to be changed coupled with Fear of uncertainty and
Control orientation. Acceptance of technology is slowly creeping in but the utilization
is not maximized.
• Competency Gap: Placing the right skill at the right place will determine success.
The competency gap needs to be addressed simultaneously otherwise there will be
missed opportunities. The focus of people will be on doing work but not providing
solutions, on escalating problems rather than solving them and on disposing
customers instead of using the opportunity to cross sell.

Strategic options with banks to cope with the challenges

Leading players in the industry have embarked on a series of strategic and tactical initiatives
to sustain leadership. The major initiatives include:
• Investing in state of the art technology as the back bone to ensure reliable service
delivery
• Leveraging the branch network and sales structure to mobilize low cost current and
savings deposits
• Making aggressive forays in the retail advances segment of home and personal loans
• Implementing organization wide initiatives involving people, process and technology
to reduce the fixed costs and cost per transaction
• Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade
services)
• Innovating Products to capture customer ‘mind share’ to begin with and later the
wallet share
• Improving the asset quality as per Base II norms
Conclusion
Conclusion:
From the various analysis and evaluation of Indian banking sector at glance we come to
conclude that it is the sector responsible for the development and growth of Indian economy
and other industries. Currently many privet, cooperatives, public and international banks
appearing to the India. The entrepreneur in innovation is largely dependent on the manner in
which bank credit is allocated and utilized in the process of economic growth. Customers
have become demanding and the loyalties are diffused. There are multiple choices, the wallet
share is reduced per bank with demand on flexibility and customization.

IT make whole industry to expand the PBT ration from 0.99 in 2004 to 1.05 in 2009.Which
leads to expand the function and stability of the industry. Now more and more private banks
try to define themselves as RRBs because management find potential for growth at the rural
India, But still there is boundaries exist which are berries to the reach.
Bibliography
 BIBLIOGRAPHY

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

Books and magazines:

➢ “Financial sector reforms” An Indian perspective
By Tamal Datta Chaudhary.
➢ “Capital Market in India” Revitalizing the economy
By Asis Kumar Pain
The Economic Times” The Economics Times, Monday 29, 2010
“Response business association info.”
ET 23 Oct. “Corporate”

➢ Business standard” BS reporter Ahmedabad 22 Nov.

 ➢ Annexure1

[Rs. in Cr.]
Year 2010 2009 2008 2007 2006
No. of Companies 27 29 30 30 30
SOURCES OF
FUNDS :
16,936.0 16,164.6
Capital 13,543.67 8 5 15,416.30 15,279.79
227,456.2 229,861. 193,345. 149,739.5 127,442.7
Reserves Total 0 70 56 8 5
Equity Share Warrants 0 0 0 0 0
Equity Application
Money 1.58 1.73 0 0.8 0
3,691,801. 3,167,69 2,487,24 2,014,506. 1,636,578
Deposits 76 3.31 0.62 69 .22
313,814.0 320,085. 213,689. 175,427.5 158,218.7
Borrowings 2 90 37 9 8
Other Liabilities & 197,243.3 196,272. 250,156. 194,156.6 166,427.2
Provisions 1 25 33 5 1
4,443,860. 3,930,85 3,160,59 2,549,247. 2,103,946
TOTAL LIABILITIES 54 0.97 6.53 61 .75
APPLICATION OF
FUNDS :
Cash & Balances with 270,858.4 224,496. 233,700. 142,469.7 112,984.1
RBI 6 65 97 1 2
Balances with Banks & 124,215.5 149,538. 73,287.3 102,043.6
money at Call 8 94 9 7 78,973.42
1,205,782. 1,017,82 804,593. 668,219.5 637,755.4
Investments 61 1.43 01 4 1
2,701,299. 2,392,22 1,909,04 1,532,540. 1,181,968
Advances 88 0.87 9.84 62 .75
34,078.9 29,129.4
Fixed Assets 34,466.00 1 9 20,515.08 14,951.69
107,238.0 112,694. 110,835.
Other Assets 1 17 83 83,458.99 77,313.36
Miscellaneous
Expenditure not written
off 0 0 0 0 0
4,443,860. 3,930,85 3,160,59 2,549,247. 2,103,946
TOTAL ASSETS 54 0.97 6.53 61 .75
1,760,731. 1,909,37 1,873,31 1,277,234. 849,439.9
Contingent Liability 83 9.79 2.06 09 4
167,097.3 133,937. 93,236.0
Bills for collection 5 35 8 88,676.35 74,496.08
BALANCE SHEET :

• CASH FLOW
 INCOME : 2010 2009 2008 2007 2006
318,173. 306,488. 283,215. 220,981. 170,478.
Interest Earned 11 31 14 58 17
52,407.6 51,827.5 44,091.2 35,147.0 27,287.4
Other Income 0 0 5 7 1
370,580. 358,315. 327,306. 256,128. 197,765.
Total 71 81 39 65 58
II. Expenditure
219,803. 211,940. 200,116. 154,058. 106,092.
Interest expended 90 05 40 78 29
Payments to/Provisions for 41,797.5 41,031.5 35,049.6 29,026.6 28,285.9
Employees 7 5 3 1 7
Operating Expenses & 12,771.0 12,589.1 11,031.9
Administrative Expenses 6 9 0 9,204.53 7,786.65
Depreciation 3,212.01 3,144.00 2,855.93 2,756.66 2,561.70
Other Expenses, Provisions & 34,513.0 33,809.0 26,118.2 21,574.6 23,092.2
Contingencies 2 1 7 7 8
18,476.9 17,568.8 16,795.4 11,697.3
Provision for Tax 6 0 7 2 8,310.83
Fringe Benefit tax 4.84 0.68 257.96 229.71 216.08
- - -
Deferred Tax 1,175.12 1,024.42 1,159.28 -396.72 211.76
329,404. 319,058. 291,066. 228,151. 176,557.
Total 24 86 28 56 56
III. Profit & Loss
41,176.4 39,256.9 36,240.1 27,977.0 21,208.0
Reported Net Profit 7 5 1 9 2
Extraordinary Items 93.92 93.98 124.85 -193.71 -93.48
41,082.5 39,162.9 36,115.2 28,170.8 21,301.5
Adjusted Net Profit 5 7 6 0 0
Prior Year Adjustments 0 0 0 -4.76 -13.27
Profit brought forward 2,799.29 2,698.52 2,395.75 3,514.56 2,924.58
IV. Appropriations
14,241.5 14,241.5 11,882.9 10,366.7
Transfer to Statutory Reserve 5 5 1 3 7,585.57
17,071.0 15,267.2 16,835.9 12,977.4
Transfer to Other Reserves 4 2 7 3 8,421.00
Trans. to Government /Proposed
Dividend 8,291.44 8,190.67 7,102.76 5,746.98 4,598.20
Balance carried forward to Balance
Sheet 4,371.73 4,256.03 2,814.22 2,395.75 3,514.56
 • RATIOS
Industry - Banks-Pub Sector

Year Late 200 200 200 200

st 9 8 7 6

Other Income / Total Income 14.1 13.3 13.7 13.8 14.8

(%) 7 2 5

Operating Expenses / Total 24.3 17.3 18.9 23.6 26.0

Income (%) 4 4 2 4

Interest Income / Total 7.48 8.03 7.77 7.35 7.25

Funds (%)

Net Interest Income / Total 2.93 2.36 2.35 2.77 3.01

Funds (%)

Non Interest Income / Total 1.23 1.24 1.24 1.18 1.26

Funds (%)

Operating Expenses / Total 2.12 1.61 1.71 2.01 2.22

Funds (%)

Profit before Provisions / 0.99 1.05 1.01 0.95 0.95

Total Funds (%)

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

RONW (%) 14.8 17.3 16 14.4 13.5

7 7 1 9
5

5 http//www.capitaline.com