PRIYANKA

CHALLENGES BEFORE INDIAN BANKING SYSTEM
INTRODUCTION
The history of human civilization in the millennium that has just ended, it is
surprising to recall just how recent is the story of economic growth. As Paul
Krugman has noted in a recent book, "economic growth, at least economic
growth that raises living standards, is a modern invention. From the dawn of
history to the Eighteenth century, the world was essentially Malthusian.
Improvements in technology and capital investments were always overtaken by
population growth; the number of people slowly increased, but their average
standards of living did not."2 Up to about the end of the Nineteenth century, the
only countries where per capita incomes were increasing on a sustained basis for
any length of time were the Western countries, particularly, England, Germany,
France and the United States. During this entire period, the then so-called under-
developed or Third World countries continued to be exporters of primary products
and importers of industrial products with stagnant, and in some cases, declining
per capita incomes. A large number of them were also colonies of the Western
powers, and the connection between these two situations- the colonial state and
income stagnation – was not missed by their leaders and intellectuals.
The development strategies of the newly independent and developing

countries, including India, in mid-Twentieth century were framed against this
background. The central and the leading role for breaking away from the colonial
legacy and for speeding up the process of industrialisation was assigned to the
State. The need for the Government to occupy the commanding heights and to
lead from the top received further support from the astounding success of the
Soviet Union in emerging as a rival centre of political and industrial power within
a very short period. India, at that time, played a pioneering role in giving
expression to the aspirations of the newly independent Third World countries in
the economic field. Thus, in 1956, India’s Second Five Year Plan outlined the
goals of development strategy in the following terms:
-1-
III. India in the New Global Economy
A most remarkable feature of the so-called "New Economy" is the role

of the services sector (of which the IT or Information Technology sector is a part)
in generating growth of income and employment. It will be recalled that the focus
of attention in conventional economics, including development economics, was
on production of goods –manufactured products and agricultural commodities. It
was, of course, recognised that the services sector (which includes transport,
communication, trade, banking, construction and public administration, etc.) was
an important source of income and employment in most economies. However,
overall, the growth of services was perceived at best as a byproduct of
developments in the primary and secondary sectors, and at worst as a drag on
the prospects for long-term economic growth. Services were believed to be
mainly non-tradable activities with slow productivity growth and low employment
potential. In developing countries, the conventional v iew of the growth of the
services sector was even worse. It was seen to divert scarce resources away
from production of goods, and contribute to accentuation of income inequalities.
In the last few years, there has been a phenomenal change in the
conventional view of services and their role in the economy. The development of
certain services is now regarded as one of the preconditions of economic growth,
and not as one of its consequences. The boundary between goods and services
is also disappearing, as services of various kinds are delinked from the
manufacturing process and become essential elements of the productive
structure. Many industrial products are not only manufactured – they are also
designed, marketed, advertised, distributed, leased and serviced. A significant
and rising part of the value added by manufacturers now consists of services.
-2-
The change in the image and role of services has been brought about by
unprecedented and unforeseen advances in computer and communication
technology in the last two decades. An important aspect of the "services
revolution" is that geography and levels of industrialisation are no longer the
primary determinants of the location of facilities for production of services. As a
result, the traditional role of developing countries is also changing – from mere
recipients to important providers of long-distance services.
From India’s point of view, some of the recent global developments,

which provide opportunities for substantial growth, are the following:
• The fastest growing segment of services is the rapid expansion of

knowledge-based services, such as, professional and technical services.
India has a tremendous advantage of the supply of such services because
of a developed structure of technological and educational institutions, and
lower labour costs.
• Progress in information technology is making it increasingly possible to

unbundle the production and consumption of information-intensive service
activities. These activities – research and development, computing,
inventory management, quality control, accounting, personnel
administration, secretarial, marketing, advertising, distribution, and legal
services – are performed in all economic sectors.
• Unlike most other prices, world prices of transport and communication

services have fallen dramatically. By 1960, sea transport costs were less
than a third of their 1920 level, and they have continued to fall. The cost of
a telephone call fell more than ten-fold between 1970 and 2000.
Moreover, the cost of communication is also becoming independent of
distance. The most dramatic example in this area is, of course, provided
by the ‘Internet’. India’s geographical distance from several important
-3-
industrial markets (for instance, North America) is no longer an important

element in the cost structure of skill-based services.
• Further, India does not necessarily have to be a low-cost producer of

certain types of goods (e.g., computers or discs) before it can become an
efficient supplier of services embodied in them (e.g., software or music). It
is possible now to provide value added services without waiting to ‘catch
up’ in technology for production of sophisticated equipment or products.
• The decline in the share of manufacturing in the output of rich countries

implies a relative decline in their demand for industrial raw materials and
fuels. This means that growth in exports of developing countries in the
future will depend less on natural resource endowments and more on
efficiency in providing services and service-intensive goods.
As a result of the above developments, the sources of comparative

advantage of nations are vastly different today from what they were 50 or even
20 years ago. And, there are very few developing countries which are as well
placed as India to take advantage of the phenomenal changes that have
occurred in production technologies, international trade, capital movement, and
deployment of skilled manpower. India today has the knowledge and the skills to
produce and process a wide variety of industrial and consumer products and
services. Another important factor in India’s favour is international capital mobility
and integration of global financial markets. Domestic savings continue to be
important for development. However, scarcity of domestic capital is no longer a
binding constraint. Increased mobility of capital has ensured that global
resources would flow to countries which can show high growth and high returns.
It is possible now for India to take advantage of a virtuous circle of hig her
growth, higher external capital inflows, and higher domestic incomes and
savings, which in turn can lead to further growth.
-4-
At the same time, it must be recognised that the "death of distance" and
the growing integration of global product, services and financial markets in recent
years has also presented new challenges for management of the national
economy – not only in India but all over the world. The trend towards integration
of markets, particularly financial markets, is by no means an unmixed blessing.
Unlike the old days, a heavy price may have to be paid by national economies for
somnolence, sloth and non-conformity to generally accepted international norms
and standards of macro-economic management, disclosure, transparency and
financial accountability. If a country does not put its financial house in order, fresh
investments, trade and technology are likely to pass it by. Faced with this
situation, only a few countries, with certain special advantages and resource
endowments, may still manage to grow at an acceptable rate. Other countries
which need capital and external flows to meet t heir trade or current account
deficits, are likely to find it increasingly difficult to meet their import requirements
of essential commodities (such as, oil), raw materials and machines.
-5-
CHALLENGES BEFORE INDIAN PRIVATE SECTOR BANKS–
Indian banking industry, started on January 1938, about three years after
the Reserve Bank was established. It was then incorporated as a private limited
company under the Indian Companies’ Act on 26 May 1938. In a span of twenty
five years, the bank grew in size and stature to rank amongst the top 14 banks in
India and was converted into a public limited company and renamed as Dena
Bank Limited in December 1966. It was nationalized in July 1969 along with 13
other banks in the first phase of bank nationalization in India. Today, as the bank
is gearing itself to enter the fast changing, turbulent and uncertain environment
that characterizes the banking terrain, we trust it will pick up the momentum of its
first twenty five years.
The emotive content, team building, the ownership in work, how to

inspire, how to draw out from the staff the very best, are perhaps new issues in
the boardroom agenda in the world of Indian banking. Strategy sessions are
increasingly focusing on the ways of unleashing the tremendous power of
emotions that has been hidden in organizations and using it in a constructive
manner to energise people and to maximise motivation. The desired outcome is
to get individuals cognitively, physically, affectively and personally engaged in
their work in the pursuit of institutional excellence. The common theme
underlying these perspectives is that leaders may persuade with logic but they
motivate through emotion and that a strong motivation and psychological
involvement is not possible without an emotional attachment to the work or the
work context. What has brought about this change? For a few decades preceding
the onset of banking and financial sector reforms in India, banking operated in an
environment that was heavily regulated and had a certain security of
expectations built into it. Banks, the institutions which evoked notions of ‘fortune,
probity and prudence’, charted their way slowly but surely, secure in the belief
-6-
that the regulatory environment protected their margins, their territories and their
branch network. This also posed sufficient barriers to entry and protected them
against too much competition and a relationship based on the loyalty contract
bound their customers irrevocably to them. This environment of complacent
certainties has now changed bringing with it profound implications for the manner
in which banks operate, their responses to customer needs, their agility, the
never-ending quest towards efficiency and the continuous search for ever newer
pastures – ‘hunting for cheese’ and the more serious concern for the need to
continuously reassess and reposition themselves in their business plans.
The last decade has witnessed major changes in the financial sector: New
banks, new financial institutions, new instruments, new windows, and new
opportunities and, along with all this, new challenges. While deregulation has
opened up new vistas for banks to augment revenues, it has entailed greater
competition and consequently greater risks. Cross-border flows and entry of new
products, particularly derivative instruments, have impacted significantly on the
domestic banking sector, forcing banks to adjust the product mix, as also to
effect rapid changes in their processes and operations in order to remain
competitive in the globalised environment. These developments have facilitated
greater choice for consumers, who have become more discerning and
demanding compelling banks to offer a broader range of products through
diverse distribution channels. The traditional face of banks as mere financial
intermediaries has since altered and risk management has emerged as their
defining attribute.
It is clear that we are at the beginning of this new phase in the Indian
banking. The recent measures announced by the Government and the Reserve
Bank of India for opening up India’s banking sector to international investors will
further increase the pressure of competition. At the same time there is renewed
emphasis by the Government on the social sector together with thrust on rural
-7-
and agricultural lending. Caught between the competitive pressure, both

domestic and external, and the politics of development, banks will have to be
ontheir toes, become even more efficient in managing funds and in meeting the
needs and demands of customers
Economic outlook and banking sector’s performance

During the last couple of years, global growth has been above the
forecast in almost every region stimulated by strong monetary and fiscal
measures. The domestic economic outlook is also bright with the real GDP
growth rate surpassing 8% last year and estimated to be around 7% in the
current year. Industrial performance also improved considerably with a strong
manufacturing growth for the second consecutive year. Inflation rate has been
under control, barring some hiccup for a short period.
Aided by a good macro economic environment, banks’ bottom line

has improved significantly over the last three years. However, let us not forget
that a major contributor to the windfall gains has been treasury profits fuelled by
a secular decline in interest rates during the three years period from 2001 to
2004 and consequent profit booking on sale of government securities. From the
current year, with the hardening of interest rates, this trading component of
profits is no longer going to shore up banks’ profitability. On the contrary, most
banks have been required to provide for the decline in the market value of their
investments portfolio. Thankfully, one offsetting factor has been the strong pick
up in the credit off-take due to buoyant demand in the economy and revival of
industrial activity, which have resulted in substantial increase in banks’ core
interest income.
-8-
Globalisation – a challenge as well as an opportunity
Currently, the most important factor shaping the world is globalisation. The
benefits of globalisation have been well documented and are being increasingly
recognised. Integration of domestic markets with international financial markets
has been facilitated by tremendous advancement in information and
communications technology. But, such an environment has also meant that a
problem in one country can sometimes adversely impact one or more countries
instantaneously, even if they are fundamentally strong.
There is a growing realisation that the ability of countries to conduct

business across national borders and the ability to cope with the possible
downside risks would depend, inter alia, on the soundness of the financial
system. This has consequently meant the adoption of a strong and transparent,
prudential, regulatory, supervisory, technological and institutional framework in
the financial sector on par with international best practices. All this necessitates a
transformation: a transformation in the mindset, a transformation in the business
processes and finally, a transformation in knowledge management. This process
is not a one shot affair; it needs to be appropriately phased in the least disruptive
manner.
High capital inflows: not an unmixed blessing

Liquidity position in the financial sector has been quite comfortable in the
recent times. The buoyant capital market coupled with an appreciating rupee vis-
à-vis US dollar has been attracting large foreign institutional inflows during the
last two years. While we have an all time high foreign exchange reserves of more
than $140 billion, high capital inflows pose a big challenge to monetary and
exchange rate management. In this context, operationalisation of Market
Stabilisation Scheme (MSS) has given an additional instrument for liquidity and
-9-
monetary management.Special defences need to be put in place for ensuring

financial stability in the case of countries like India that are faced with the
prospect of volatile capital flows. The issues relating to cross-border supervision
of financial intermediaries in the context of greater capital flows are just emerging
and need to be addressed.”
Interest Rate Risk for Indian Banks – Profits under Pressure
The rapid and relatively substantial rise in rupee interest rates in recent
months has brought into focus the market risk faced by Indian banks. Bank’s
current years profits have been badly affected due to increased provisioning
requirement on the investment portfolio. The results have shown massive losses
due to Mark to Market (MTM) losses on the G-Sec portfolio. The story is not
much different for most of the public sector banks. The benchmark 10-year yield
on government securities has risen from 5.2% in May last year to around 7.2% at
this point. The spike in interest rates has affected the trading profits of banks.
Reserve Bank have been regularly carrying out quantitative impact studies of
rising yields on banks’ economic value. While, financial media, and some
academic circles have been portraying an overly alarming and pessimistic picture
regarding banks’ potential interest rate risk, our analyses reveal that gradually
increasing interest rate regime is unlike to erode banks’ equity, given the likely
increase in net interest income (NII), some residual unrealized gain on the
portfolio (though, most of it has evaporated), and the recent forbearance by RBI
permitting banks to hold a larger proportion of securities under the ‘held to
maturity’ (HTM) category that need not be marked to market. Of course, cited the
bank’s example, banks had to take a one time hit before shifting the securities
from trading to banking book.
- 10 -
Different banks, however, vary in their levels of vulnerability, with some

new private banks being less susceptible to market risk compared with most old
private banks and some government banks. In the medium term, however, most
banks are likely to need to increase their equity to meet growing regulatory
capital allocation for market risk.
Technology is the key
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. This has thrown
new challenges in the banking sector and new issues have started cropping up
which is going to pose certain problems in the near future. The new entrants in
the banking are with computer background. However, over a period of time they
would acquire banking experience. Whereas the middle and senior level people
have rich banking experience but their computer literacy is at a low level.
Therefore, they feel the handicap in this regard since technology has become an
indispensable tool in banking.
Foreign banks and the new private sector banks have embraced
technology right from the inception of their operations and therefore, they have
adapted themselves to the changes in the technology easily. Whereas the Public
Sector Banks (PSBs) and the old private sector banks (barring a very few of
them) have not been able to keep pace with these developments. In this regard,
one can cite historical, political and other factors like work culture and working
relations (which are mainly governed by bipartite settlements between the
managements and the staff members) as the main constraints. Added to these
woes, the PSBs were also saddled with some nonviable and loss making
- 11 -
branches, thanks to the social banking concept thrust upon them by the
regulatory authorities in 1960s.
Basel II Accord, Capital and Market Discipline

The most prominent on our minds in the context of banking these days,
perhaps, are the implications arising out of the Basel II accord. Two deserve
special mention – one relates to capital and the other to market discipline. Where
capital is concerned, the prescriptions have ushered in a transition from the
traditional regulatory and market measures of capital adequacy to an evaluation

of whether a bank has found the most efficient use of its capital to support its
new business mix, i.e., from capital adequacy to capital efficiency. In this
transition, how effectively capital is used will determine returns on equity and a
consequent enhancement of shareholder value. In effect, future plans may,
therefore, include the fluid use of capital, an approach that has been called the
"just-in-time balance sheet" management, in which capital flows quickly to its
most efficient use. This transition in how capital is used and how much capital is
needed will become a significant factor in return-on-equity strategy for years
ahead and banks’ strategic plans may be required to execute this kind of
approach.
The accord also has, as an underlying principle, the reliance on the

market to assess the riskiness of banks. This translates into an increased focus
on transparency and market disclosure, critical information describing the risk
profile, capital structure and capital adequacy. Besides making banks more
accountable and responsive to better-informed investors, these processes
enable banks to strike the right balance between risks and rewards and to
improve the access to markets. Improvements in market discipline also call for
greater coordination between banks and regulators.
- 12 -
India has been a participant in the international initiatives to ensure

improved processes of market discipline that are being worked out in several
fora, such as, the multilateral organisations, the BIS, the Financial Stability
Forum, and the Core Principles Liaison Group. Concurrent efforts are underway
to refine and upgrade financial information monitoring and flow, data
dissemination and data warehousing. Banks are currently required to disclose in
their balance sheets information on maturity profiles of assets and liabilities,
lending to sensitive sectors, movements in NPAs, besides providing information
on capital, provisions, shareholdings of the government, value of investments in
India and abroad, and other operating and profitability indicators.
Financialinstitutions are also required to meet these disclosure norms. Banks
also have to disclose their total investments made in equity shares, units of
mutual funds, bonds and debentures, and aggregate advances against shares in
their notes to balance sheets.
The critical regulatory initiatives taken by the Reserve Bank of India to

prepare the banking sector for these changes are :
(i) the Reserve Bank’s endeavor to ensure that the banks have suitable
risk management framework oriented towards their requirements
dictated by the size and complexity of business, risk philosophy,
market perceptions and the expected level of capital;
(ii) The introduction of Risk Based Supervision (RBS) in 23 banks on a

pilot basis;
(iii) the drive to encourage banks to formalize their capital adequacy

assessment process (CAAP) in alignment with their business plan and
performance budgeting system
- 13 -
(iv) Ensuring better disclosure so as to have greater transparency in the

financial position and risk profile of banks and
(v) finally, the Reserve Bank at its end is in the process of building
capacity to ensure it can vet models for banks who will be adopting the
IRB / Advanced Measurement approaches.
As banks have two years lead-time to prepare themselves for Basel II,
they are encouraged to focus on capacity building and undertake impact
analyses. On the basis of the impact studies, banks would be required to put in
place appropriate strategies and plans for raising fresh capital or augment capital
through internal resources. Banks may also need to redefine their business
strategy with a view to altering their profile of risk exposures or adopt a
combination of both these approaches to meet the capital requirement.
Organizations all over are rushing to implement the latest ideas on

management, sometimes to the point of overuse. Most of these ideas are about
doing things better, about improving operational effectiveness. If everybody
however is competing on the same set of variables, then the standard gets
higher but no one gets ahead. And getting ahead – then staying ahead - is the
basis of strategy and creating a competitive advantage. Strategy is about setting
yourself apart from the competition. Its therefore not just a matter of being better
at what you do, its rather a matter of being different at what you do. The major
challenge now for banks as well as any other organisation is therefore how to
develop their social architecture that generates intellectual capital as the
quintessential driver of change. Developing the individual or human capacity is
an integral element of building capacity and, in fact, capacity building initiatives
are now increasingly becoming almost an index of institutional quality. Capacity
building would in the days to come not only influence the structure of institutions,
it would also determine how they are run.
- 14 -
Taking the banking industry to the heights of excellence, especially in the

face of the afore-detailed emerging realities, will require a combination of new
technologies, better processes of credit and risk appraisal, treasury
management, product diversification, internal control and external regulations
and, not the least, human resources.
- 15 -
CHANLLENGES AND STRATEGIES OF RURAL BANKING
With the implementation of financial sector reforms

banking system seems to have shifted its attention from financing farm and rural
sector to more lucrative area including retail and personal banking and treasury
operations for increasing its profit and profitability as much as it can. It is in this
context an attempt is made in this paper to appreciate the challenges Rural
Banking System has to necessarily accept for enabling India to achieve her nine
percent growth rate in GDP and the kind of strategic actions need to be initiated
by the RBI and government of India. There is no doubt that while large-scale
NPAs are built-up in the total advances of banks, agricultural advances are no
exception. Private sector and foreign banks have to finance farm sector by
mandate as a part of level playing field, the reality is otherwise, as their board of
Directors having no RBI representative does not prevail upon banks to discharge
the mandated responsibility.
Challenges:
In the light if pivotal role that agriculture can play in the areas
such as, providing food security, minimizing the incidence of rural poverty and
earning foreign exchange through export of farm and animal products, Rural
Banking System has to accept difficult challenges provision of adequate and
timely credit facilities in as much as simplified procedure to each and every
eligible rural households is a must, besides Rural Banking System’s playing a
development banker’s role rather than traditional and conservative role of a
money lender.
National Bank has estimated the production as well as
investment credit requirements in the context of doubling the food production for
the period 1998-99 to 2007-08. Accordingly, average annual disbursements of
- 16 -
RS. 1281.76 billion and Rs. 328.66 billion respectively would have to be made as
against disbursements of Rs.107.45 billion and Rs. 62.6 8 billion per annum
respectively made on the basis of average value of the past 14 years’ period.
Share of commercial banks and RRBs together would be 55 percent as against
44.4 percent in the past. Thus, banking system may have to be geared up to plan
for mobilization and development of financial resources as estimated by
NABARD leave alone to play the role of a development banker.
Strategic Actions:
Despite the fact that now the lendable resources for
supporting farm and rural sector development are increasing, Rural Banking
System has been found shy to respond to the demand of this sector. Some of the
attributes responsible for this are related to high cost of servicing farm sector
lending, high level of over dues and Non-performing assets and natural
calamities making agriculture a risky lending. In order to reduce the operational
cost, cover a large number of rural households, provide full package of credit and
other services to farmers, explore and exploit new areas of investment in farm
sector and reducing over dues drastically, Rural Banking System Calls for
restructuring on one hand and devise cost effective and efficient methods of
financing on the other. For this purpose, a few of the worthy recommendations of
expert Committees need to be seriously considered by the government of India
and RBI and given effect for their implementation under the overall supervision
and guidance of National Bank. These are briefly mentioned as under:
The Narasimham Committee at the time of framing its recommendations on

financial sectors Reforms in 1992 itself had been quite conscious of the issue of
rural Banking. Accordingly, the committee came out with the best possible
recommendation in the then context, which is still relevant. The committee has
- 17 -
been of the view that the move should be market driven and based on profitability
considerations and brought about through a process of mergers and acquisitions.
The committee felt that the structure of rural credit have to combine the local
character of the RRBs and the resources, skills and organizational / managerial
abilities of the commercial banks. With this end in view the committee
recommended that each public sector bank should set up one or more
subsidiaries, depending on the size, business and administrative convenience of
each sponsor bank to take over all its rural branches and where appropriate
swap its rural branches with those of other banks. Such rural banking
subsidiaries should be treated on par with RRBs in regard to CRR and SLR
requirements and refinance facilities from Nabard and sponsor bank. There is
therefore immediate need to conduct a feasibility study of this well conceived
recommendation and given fair trial in some area rather than making it uniform
throughout India.
The committee also proposed that RRBs should be

allowed to engage in all types of banking business. With a view to improving the
viability of RRBs, the committee proposed that the interest rate structure should
be in line with those of commercial banks. The committee left the option to the
RRBs and their sponsor banks as to whether the RRBs should retain their
identity so that their focus on – lending to the target groups is not diffused. Where
both RRBs and sponsor banks wish to do so, they could be merged with the
sponsor banks and in such cases, the sponsor banks should take them over as
100 percent subsidiaries by buying out shares from other agencies at a token
price and eventually merging them with the rural banking subsidiaries proposed
by there committee. This recommendation also needs feasibility study and given
effect in specific districts in the northern and eastern States.
- 18 -
Natural Calamities:
Government of India may have to consider appointing a “
Commission on Natural Calamities” to study in detail all aspects connected with
loss of crops, livestock, property of rural households and evolve package of
measures which can reduce / mitigage impact of calamities both to affected
families and financing banks rather than ad-hoc reliefs and concessions as also
crop / livestock insurance schemes.
Social Infrastructure:
In order to motivate rural households increase farm and
livestock productivity as well as undertake poverty alleviation activities,
Government must formulate policy in a time bound program for providing social
infrastructure / basic minimum needs in all villages which have been hitherto
deprived so far.
- 19 -
CHALLENGES BEFORE URBAN CO-OPERATIVE BANKS
Urban co-operative Banks (UCBs) are founded by social

workers and being local based are closely connected to the socio-economic
development of the region. Some are constituted by community-initiated efforts of
local area and are working with commitments for socio-economic upliftment
mostly of their community. The board members are easily accessible, informal
and resultancy matters move faster and decisions are taken speedily. Staff is
mostly local, known to promoters, devoted and personal relationship dose
dominate and count. These are the reasons why all these years UCBs have
operated prospered and enjoyed patronage of large section of customers in the
local area. Basically, UCBs clientele is represented by small and medium sized
industrialists, traders and professionals and people mostly belonging to middle
class. Now with increased credit exposure and emerging higher middle class,
sum of corporate and elite people have also been added to its fold. Good
numbers of schedule of cooperative banks are showing strong presence, some
also multi-state status. A co-operative enterprise has indeed proved a viable and
sustainable strong alternative to other banking sectors.
Co-operative sector so far, has made commendable

achievements in nation building programme, occupying a place of pride in the
economic life of nation, endorsing the statement – ‘Small is Beautiful’. Over the
period of functioning, barring few banks now faces with structural weakness
mainly due to democratic character, non-professional management, community/
ideological commitments and political interference. Unfortunately, with the fast
increasing instances of sick / weak banks, boards of UCBs have to be more
cautions and vigilant in policy –framing and decision-making, as they have to
now operate in the market economy.
- 20 -
In market economy, ‘key performance areas’ (KPA) of all

banks are now widely compared and market rates them on qualitative and
quantitative growth parameters periodically and market sentiments do react
instantly. Ultimately, the financial outcomes are the indicators and are construed
as a direct result of corporate strategies adopted by any organization. In a
deregulated regime, the financial implications may prove costly, if strategies fail
on any count. Boards of UCBs being ‘local in character’ largely are driven by
local ambitions and are seen sometimes to be used as ladders for political gains.
However, with prudential culture in place, managements of UCBs have to be
alert and watchful about the ‘quality of Balance Sheet’ as they have to operate in
market economy.
In the first phase of Banking Reforms, it was aimed at
making the banking institution efficient and viable. Disappointing factor was that
Narsimham Committee. Nonetheless, UCBs have absorbed changes well. After
consolidating its gains, Indian Banking system now is digesting the second
banking revolutionary reforms concentrating mainly at improvement in
organizational effectiveness. A number of policy initiatives have been initiated in
recent years to improve the financial strength of co-operative sector and these
fundamental changes are expected to strengthen ‘ co-operative Movement’. To
bring it further on sound footing it is very much essential that ‘Self-reliant Co-
operative Bill’ is also adopted simultaneously by state Governments.
Co-operative sector, not being registered under Indian

Companies Act, are not allowed and hence its ‘ intrinsic value’ although may be
very strong, is not reflecting even at notional value anywhere in financial
disclosure. However, presently, with rates of interest on deposits of banks not
being very much attractive, dividends on shares constitutes a lucrative
- 21 -
investment proposition especially in co-operative sector, who generally offers

definitely a good return indirectly creating a ‘ long term value’ for its members.
Boards of UCBs must appreciate these far-reaching and

fundamental changes, current economic developments and emerging
competitive market environment. Boards of UCBs with ‘political will’ should
rework on the ‘Organizational Vision’ useful in the present times, revitalize
processes, reorient systems, revamp structure and rejuvenate strategies, so that
organization can stay focused and should and should not wander off into any
unrelated areas that arise as a result of opportunities or apparent synergies.
‘Vision Theme’ always drives and binds the entire organization and inspires to
strive hard to accomplish mission set on the path of success. The forward-
looking UCBs should therefore, reposition themselves in earliest timeframe by
adopting effective and sustainable policies, utilizing organistional resources at
the command most efficiently and effectively, bringing qualitative improvement in
its functioning, developing personnel with requisite skills making them resourceful
in the process to withstand any competition and compete strongly to sustain,
succeed and excel.
Urban co-operative banks must also accept that the new
generation banks and foreign banks are challenging their market dominance so
far enjoyed in ‘ Retail Banking’ and have to further compete now with commercial
banks (public sector banks) that have also become very active and aggressive in
retail segment.
There is a paradigm shift from the sole “deposit
orientation” “to profit orientation” and hence local area war of offering higher rate
of interest on deposit should be given rethinking while decision-making on ‘
pricing’ as even spreads/ margin are becoming thinner and thinner day by day.
UCBs although are “ mass banking” enterprises run on “co-operative principals”
must also accept the customer or business relooking at whether it is profitable or
- 22 -
not. Otherwise consciously should do so as a business compulsion with “a social

cost” and to subside it at the cost of sum other income. In the changing context,
when there is a pressure on spreads / margins, there is a dire need to conduct “
costing exercise” and concentrate on substantially reducing the cost of funds and
transaction cost, which are the highest compared to banking industry figures.
In the increasingly competitive world, in the near future,
those UCBs who do not respond positively with the changing time, there financial
strength is going to weaken at a faster pace and fate is certain, whether one likes
it or not , to end up with a ‘forced exit’. The ability to access, contain and manage
the risks and more particularly vulnerability of market, liquidity and interest rate
risks have become very crucial and critical especially for UCBs. ‘Asset Liability
Management and Risk Management’ are the areas UCBs must also deeply
understand, adopt and master it . ‘Capital Adequacy (CAR)’ stipulations will
also be made in totality applicable t UCBs in months to come and thus
‘Management of Balance Sheet’ will be of great importance. It is feared that
some of the special benefits enjoyed over the years by cooperative sector would
not last long viz., income tax, SLR, CRR etc.
The market driven culture, adoption of the industry best
practices, transparency, financial disclosures followed by the system of corporate
governance on the basis of which investors will judge the ‘bank of future’, are
some of the major factors which are not yet listed on the agenda of UCBs. These
are not still matters of great concern for the majority of Managements of UCBs
basically because they are not necessarily professionals in the banking field but
get democratically elected as representive on the Boards b members (owners) of
the cooperative society.
Knowing ever changing and growing needs of customers
and market dynamics, UCBs should now primarily refocus on continuously
improving on efficiency, quality, speed and pricing by offerings a ‘unique
experience’ to customers coherently and consistently. Continuous improvement
- 23 -
in ‘ customer delight’ is critical to achieve success and can be done by periodical

market survey. With competitive pressures hotting up, UCBs should also conduct
‘market research’ and carve a niche for themselves in the changing market
conditions and environment. UCBs with the strong advantage of homely
atmosphere and homogenous group should also endeavour to set their own
‘benchmarks’ of organizational standards of behaviour and service excellence to
brand its cultural difference in the industry. In the new millennium, although the
market indicates the reliance on use of technology, still not the “ machines” alone
but “ Human Face” in trustworthy environment always predominantly will be
decisive factor while choosing a bank, which UCBs have always long cherished.
Opportunities will therefore exist for all sectors of banks who posses
and ‘ever burning desire’ to excel and ‘out perform’ their competitors. It’s upon
Managements of UCBs to afresh carve a market niche and create “ a bank with a
future” in the new millennium of ‘Information age’ and in the ‘new economy’ of
whose enabling force will be driven by ‘knowledge industry’. The progressive and
forward looking Management’s of UCBs in the coming future without much loss
of time should ensure that the organization is put at the right place and at the
right time, with the right characteristics- the right way. Boards of UCBs should
seriously address to the new risks who have now emerged due to policy of
Deregulation, Liberalisation, and Globalisation.
- 24 -
CHALLENGES FOR CASH MANAGEMENT
The Indian economy is poised for growth with the banking and
financial services domain being looked as a key enabler to fuel the north bound
climb. Vertical and horizontal growth across the transaction banking space will
definitely be a catalyst to the above.
One of the core products from the transaction-banking
stable would be cash management service. This includes basic offerings such as
‘ collections and payments’, value added services such as ‘receivables and
payables management’ and finally the hybrids such as ‘channel finance’. Cash
management offerings in India have moved with the time and some of the
models offered currently are at par with the best in any of the developed markets.
Business dynamics have forced to move into and ‘integrated solution’ approach
from the traditional ‘portfolio or product’ driven one. The key differentiator to the
same being technology and the innovation with which the same is effectively
implemented across the length and breadth of the business.
With a focus on being locally and in certain cases globally

most banks see technology and automation as essential ‘tools’ to combat market
challenges. As proven historically the power of the sword lies in the hands of the
person who yields the same, hence the true challenge is for the banks being able
to identify, size and scope the true value of the potential (both present and future)
benefits the technology solutions bring to the table.
The choice of any technology solution for cash

management would need to be driven by following care criteria.
- 25 -
1.Scalability:
For most banks in this line o0f business, stiff competition and
market forces are leading to a severe pressure on operating margins and
product profitability. Apart from being cost effective, one of the other whole
variable which the banks can and do attempt to manage is their respective
market share. Attempts are made to manage the cash flows for the entire
value chain leading to higher numbers both in volume and value terms. While
the same is true to the economies of a scale principle, however, from a
technology perspective, care needs to be taken to benchmark and provide for
a ‘scalable model’ both vertically and horizontally. Many a time the cost of
replacing technology is often prohibitive and can have a direct impact on
future competitiveness of any bank.
2.Flexibility:
Gone are the days when banks could offer standard products
to the market. A complete cash management solution today encompasses an
offering structured for the top, middle and the lower end of the market. The
ability of banks being able to offer such a solution is a direct function of the
flexibility its backend systems provide. Flexibility from an implementation
perspective is also equally important, with ease to deployment both internal
(branch) and external (client front-ends).
3.Security:
In the computer era, data management and security are of
utmost concern for any bank. Security in terms of the correct and authorized
staff being able to access only the relevant approved data is important.
Similarly from an external view point, access for clients on the web for
- 26 -
reporting and transacting in a controlled and secure environment is equally

important.
4.Open architecture:
Many a time ‘open systems / architecture’ is often
construed as a lack of security. However, the same more denotes the design
and capability aspects of the system to be able to ‘ hook on’ to other multiple
periphery processing solutions. The need of the hour is being able to forward
integrate with the client legacy / ERP systems, backward integrate within the
bank with its multiple processing and core GL systems and support lateral
integration with other agencies like courier / correspondent banks systems.
External payment interfaces (EPI) and end-to-end straight through processing
(STP) are the current trends.
To put it in a nutshell, technology plays and will

continue to play a pivotal ole in offering effective cash management solutions.
Banks need to be aware of the market requirements to be able to conjure up
the requisite solutions tailor made for each segment / client. While investment
in technology would be governed by the above factors, however, the bank’s
operations and product strength would need to leverage on the same to be
maximize the advantage available. A planned and phased approach with
each of the milestones strategically timed to give a ‘ product edge ‘ is equally
essential for any bank to position itself as a serious player in the cash
management market.
- 27 -
CREDIT RISK MANAGEMENT
Banks as intermediaries between ‘savers’ and ‘investors’

accept deposits from public and lend them to entrepreneurs to earn profits. Once
moneys are lent, the borrowers are supposed to return the so lent money and the
interest thereon as per the repayment schedule agreed upon. This, every credit
decision implies that the borrower’s financial position will remain steady and
improve throughout. This however, need not necessary be true always as the
projected cash flows are always as the projected cash flows are always
impacted by market variables like interest rate hikes and the accompanying
liquidity strains, increased competition, business cycles, economic and fiscal
policies of government and unit-cntric problems like production dislocations,
financial or managerial inadequacies, etc. hence, repayments are not always
certain. There is ample scope for a borrower to default from his commitments
resulting in credit risk to a bank.
Credit risk is the potential loss that a bank may be
subjected to because of inability of a counter party (borrower) to meet its (his)
obligations. It is defined by the losses in case of default of a borrower or in the
event of a deterioration of the borrower’s credit quality.
Credit risk of a bank has two distinct facets viz. risk
inherent to the individual business unit/loan account i.e. risk emanating from
individual loan transactions and risk from a macro credit portfolio perspective i.e.
the aggregation and the result concentration risk.
- 28 -
How to Quantify Credit Risk

Credit Risk has got two components: ‘ quantity of risk’
which is nothing but ht outstanding loan balance as on the date of default and the
‘quality of risk’ i.e. “ severity of losses” which is defined by both default probability
and the recoveries that could be effected in the event of default. Credit risk is
therefore, a combined outcome of.
Default Risk:
It is the probability of the event of default i.e. missing a
payment obligation. In today’s parlance, payment default is declared when a
scheduled payment has not been made within 180 days from the due date.
Recovery Risk:
The loss in case of default is the amount outstanding at
default time less recovery. Normally, once a borrower defaults, Banks resort to
enforcement of securities. But recoveries are not predictable as they depend
upon the type of default, availability of risk-mitigaters like guarantors, collaterals
etc. and their nature / worth besides the prevailing legal system. It thus involves
great amount of uncertainities. These uncertainties can be traced to:
Collateral’s value:
Recovery risk depends on the nature of charged assets
their location and possession, marketability / appeal, legal status etc. at times the
economic value of assets charged may erode over a period and may even go
below the value of outstanding debt. Contrarily, where collaterals are of high
value and are capable of generating buyer’s interest may even cancel the loss.
- 29 -
Guarantor’s value:
The net worth of the guarantors and in tuern their ability to
discharge liabilities upon invocation of guarantee may undergo changes affecting
the ultimate releasable amount.
Enforceability of Securities:
The very ability of a bank to access the securities /
collaterals charged to bank in order to dispose them off may itself be doubtful.
Secondly, enforcement of securities / contracts is also defined by the prevailing
legal system.
Identify of Unit Level Credit Risk:

Firm- level risks or stand-alone risks are unique to each
borrower / loan emanating from the ability and propensity of a borrower to repay
the loans. It rests on credit standing of each borrower and is thus intrinsic to a
transaction. Primarily, unit level credit risk is impacted by-
Business risk:
The inability of the business or project chosen by an
entrepreneur and financed by a bank, to service the debt in time and
Borrower Risk:
The propensity and ability of the owner borrowers to repay
the debt.
- 30 -
IT ENVIRONMENT RISKS
This category represents the inherent risks that arise due to the
commercial and business environment within which the computer and
telecommunication systems are operating. They are described as briefly below.
Regulatory Risk:
Banks must operate within a set regulatory framework.
The design and operation of a banks computer systems must reflect and
comply with the regulatory framework in place. The greater the extent of
computerization at a bank, the greater the possibility that changes in the
banking regulation will affect computer system. Regulatory breaches can
result in diminished reputation, increased cost of capital, limited business
opportunities and ultimately loss of a banking license. The lack of a legal
framework covering electronic transactions can increase the likelihood of
disputed arising relating to such transactions.
Strategic Risk:
Strategic planning in a bank sets out corporate or
departmental objectives, which help to ensure an effective and efficient
organization now and in the future. The IT department particularly requires
strategic objectives, for without them, IT management may not be able to
produce an effective IT strategy and deliver IT to meet the business’ needs. If a
bank is without an IT strategy, the user management’s requirement may not be
adequately communicated to IT management. As a result the bank’s IT
resources may be deployed appropriately to meet its overall business strategy.
- 31 -
When a bank adopts inappropriate IT strategies, this may

place undue pressure on the bank’s IT resources and systems to adapt to new
business environments as new products to adapt to new business environments
as new products and services come on line. A risk exists that short term fixes
may be made to the detriment of longer-term objectives and projects.
Organisation Risk:
The organization structure of a bank can determine the
effectiveness of the bank’s use of it. Where the e organizational structure fails to
provide and define reporting lines and responsibilities for the IT functions, this
can lead to misunderstandings of responsibility and a poor distribution of human
and financial resources. In addition poor segregation of duties can increase the
risk of error and fraud within a computer and telecommunication environment.
Location Risk:
As banks become computerized, they depend increasingly
upon their technology resources to achieve the business’ objective. The
technology resources are susceptible to the risks of unforeseen and sometimes
naturally occurring events. Depending on the location of a bank’s data
processing equipment it can be susceptible to natural events such as floods and
earthquakes or storms and other events such as riots ar sabotage.
Outsourcing Risk:
It is increasingly common for banks to outsource some or all
of their data processing and IT while all the other type of risk still need to be
addressed, when outsourcing takes place, there are some additional risks, which
need to be considered. Without proper management control and documentation,
the responsibilities and liabilities of supplier and customer may not be clear. Over
- 32 -
reliance on a single supplier increases the risks from supplier failure and may
lead to unacceptably high costs.
IT OPERATIONS RISK
Operations risk relates to those risks arising from day to day
transaction processing on computer systems. The various components of IT
operations risk can be classified under the following headings:
Error Risk:
Errors in a computerized environment may arise from a
number of sources including errors made during the development and
amendment of computer programs, simple errors in data entry by terminal
operators, and misuse of system housekeeping tools and sensitive facilities.
These errors may affect the completeness and accuracy of transactions,
balances and management information.
Bank computer programs are often highly complex,
containing typically thousands of lines of computer coding any number of which
may contain errors. Whilst these programs may have been well tested, a risk still
exists that errors can remain inactive and dormant for a number of years, only to
appear when a certain set of circumstances occurs. Standard software packages
are also not immune from the introduction of errors. These may occur when the
packages are “customized” by the vendor and adapted to the particular bank.
Computer fraud risk:

A computerized environment provides a number of new
opportunities for fraudsters. This is primarily due to the ease with which the
fraudsters can hide their actions on computer system and the speed with which
fraudulent activities can take place. Most banking system contain control facilities
and produce reports design to assist in the prevention or detection of fraud.
- 33 -
These too however may be highly vulnerable to personal with powerful privileges
that can manipulate access to compute terminals of files.
It is imperative that a bank is aware of the vulnerable point

within its system and guards against new opportunities for fraud, which may
materialized, especially during times of business and system change. Particular
risks are also associated with the implementation of new systems and the entire
security requirement of anew system should be considered prior to a system
being specified or designed. If this exercised does not take place, the bank is at
risk of the new systems being unreliable and difficult to secure against
unauthorised accessed or activity.
Disclosure Risk :
Information held on a banks computer and passed around
its computer network includes very sensitive financial and other data
about the banks customer. Accidental or intentional disclosure of this
information can have a negative reputational impact on a bank,
increasing the risk of fraud against its customers of leaving the bank
open to legal charges.
- 34 -
CORPORATE GOVERNANCE IN BANKS
The good governance is critical to the success of an organization has

been emphasized umpteen times. Volumes have been written on the subject,
and plethora of reports has been published. As is often said – corporate
governance has come to be a growth industry by itself.
However, for the banking industry, the subject assumes
special significance. Banks occupy a central place in the payment and
settlement system of a country, and play a major role in the allocation of
resources. As depository institutions, they are the custodians of public money.
Due to linkage with real sectors, banking is considered as a barometer of
economic health of a nation and statesmen take pride in projecting a banking
system that symbolizes strength and stability.
At the same time, banking sector is characterized by

inherent instability and a wide array of risks. Fragility of banks and
interconnection between them, through a complex chain of inter-bank
relationships, make the system vulnerable to failure, which through contagion
effect, erodes public confidence and prompts the spectre of massive ‘Runs’.
High gearing ratio and asset liability mismatch act as catalysts to precipitate the
crisis. The costs of such systemic shocks are manifold and the entire nation has
to pay delay for it.
It is for their pivotal role in the society, and the damage that
can be caused by sudden and unexpected collapse of banks, the subject attracts
overwhelming public concern. Good governance is of interest not only to an
individual bank but also the society in which it operates – the basic objectives
- 35 -
being protection of depositors and safeguarding the integrity and soundness of

the system.
Corporate governance has been defined by the Cadbury Committee as the

manner in which companies are directed and controlled. However, the term is a
slippery one and eludes a simple definition. It has quickly come to mean many
things to different people.
But what is the core of Corporate Governance in banking

institution? Dr. Jalan asserts: “In the banking sector, it seems that it is risk
containment, and early warning systems and prompt corrective action to avoid
failure. It is not risk aversion, but risk assessment and providing adequately to
cover risks. It is also clear that earlier the detection, the lesser the cost.”
The central role of risk management in good governance in banks

has also been epitomized by Walter Wriston, ex-CEO of Citibank, who
pronounced that “the business of banking is the business of risk management,
plain and simple, that is the business of banking.”
As it was know from long and painful experience that the root
cause of banking crisis has been the breakdown in risk management system
within the banks, and poor risk management , ultimately, is the failure of
corporate governance. Effectiveness of a bank’s internal governance system
has a very salubrious effect on its ability to identify, monitor and control risks.
The regulation of banking institutions, therefore, has to be complemented by, and
reinforced with, good corporate governance, especially in view of the proposed
new Basel Capital Accord.
- 36 -
Emerging Challenges
Having successfully sailed through the turbulence of financial sector
reforms, the banking industry may again run into rough weather due to the
brewing challenges.
i. Product innovations: rapid changes in technology and advent of ‘rocket

scientists’ are leading to the introduction of hitherto unimaginable product
and process innovations. Complex and versatile financial derivatives such
as swaps, options, caps, collars, floors etc., have thrown tough challenges
to the bankers and supervisors. They often lack the technical expertise
and sophistication to properly comprehend the typical character of the
instruments, let alone assessing the underlying risks.
ii. Market integration: Liberalization has necessitated dismantling of

barriers between money, capital and forex markets paving the way for
closer market integration. Fusion of different market segments would
trigger spread of systemic risk from one segment to the other – imposing
additional strain on the regulators. For example, in January 1998, volatility
in forex market caused ripples in money market and RBI had to intervene
with emergency control measures to curb speculation.
iii. Universal banking: Combination of multifarious activities (banking,

insurance, securities, stock-broking, portfolio management, etc.) under the
universal banking umbrella resulted in the creation of financial
conglomerates. In India, with opening up of the insurance sector, many of
the institutions are offering both banking and insurance products. Since
- 37 -
banking and insurance come under different regulatory jurisdictions, the

authority to be ultimately responsible for ensuring stability and solvency of
the institution is a question yet to be satisfactorily resolved.
iv. Globalization: With globalization, no country can claim to be immune

from cross-border developments. For example, the South East Asian
currency crisis had its repercussion in Indian forex market too. The
aftermath of September 11, 2001 events in the US continues to haunt the
global economic outlook including India. Another aspect of globalization is
that, a significant proportion of a global bank’s business is carried on
outside the borders of the home country. This makes them vulnerable to
contagious effects of cross-border disturbances. Moreover, in spite of the
pioneering efforts of the Basle Committee in that direction, problems of
standardization of supervisory responsibilities and harmonization of
national accounting standards still persist.
v. Technology: Of all issues the industry faces in the years ahead, one
stands far from the rest, how to deal with technology? Technology has
become the key driver of banking business and is redefining its
boundaries. At the same time, widespread use of computer and Internet
technology has increased the risk of technology-related frauds and
malpractice. Current trend for transition from distributed banking to ‘core
banking’ will pose additional challenges.
vi. Over-regulation: Bank supervisors generally respond to major banking

crisis by enacting new regulation, while rules of free market demand the
opposite. Therefore, the current supervisory challenge creating conducive
environment to encourage banks to grow-yet address directly the risks
implicit in carrying on banking business.
- 38 -
Critical Issue
Apart from the emerging challenges, a few issues having policy

implications continue to remain shrouded . Primarily, they related to the following
areas:
a. Government ownership: Government ownership of the banking sector

creates a number of problems for RBI as the regulator. The problems are
particularly complex because the Government often acts as quasi-
regulator. Therefore, it is to be decided whether good governance is
compatible with government ownership.
b. Checks and balances: In India, in most banks, the Chairman and CEO
positions are combined. This may create concentration of power in single
individual. It has been suggested that the roles of Chairman and the CEO
be separated.
c. RBI and Government nominee directors: Whether RBI can effectively

perform its role as supervisor, when it is also represented on the Board
through its nominee director, which may lead to conflict of interest with its
regulatory function. More so, since the nominees of RBI and Government
are treated as superior to other directors.
d. Sectoral representation: Considering the current trend of liberalization,

the representation given to various interest groups in the Board for
protection of their sectional economic interests, may have to be reviewed.
- 39 -
e. Quality and proportion of non-executive director: Only individuals of

proven professional competence and experience and with special insight
into specific economic activities may be appointed as non-executive

directors. The optimum proportion of executive and non-executive
directors continues to be a matter of debate.
f. Delay in filling up vacancies in the board: In many cases, there is long

delay in filing up the vacancies in the board, which cripples its efficient
functioning.
g. Ceiling on number of members in board: The size of the board should

not be too unwieldy so as to hamper its cohesiveness.
h. Disparities in remuneration of wholetime directors: Normally, the

wholetime directors of PSU Banks are remunerated very poorly compared
to their private sector counterparts. This anomaly is required to be
addressed. Proper framework should also be developed for remuneration
of non-executive directors.
Already a number of committees and groups studied these issues and given their
suggestions/recommendations (latest being the Consultative Group of Directors
of Banks/Financial Institutions under the Chairmanship of Dr. A.S. Ganguly).
Considering the critical nature of the issues, these cannot be resolved overnight.
They need to be extensively debated upon and a consensus developed over
time. But it should not delay the reorientation process in other areas of the
governance framework, where action can start immediately.
We are in the middle of a major metamorphosis in the Indian banking
sector. Thus far, the industry has successfully encountered the challenges of
liberalization, as is evident from the remarkable turnaround of the PSU Banks –
- 40 -
most dominant players in the industry. This could not have been achieved if the
governance system in these banks had been deeply flawed.
However, the paradigm shift that is taking place within and around the
industry calls for considering the ongoing issues in newer perspectives. Banks no
longer can afford to continue to be managed in the old fashioned way – that was
relevant for government controlled and RBI directed regime.
Since corporate governance is an evolving concept, there is an ever-
growing need for continuous upgradation of skills, systems and procedures in
banking institutions that are supportive of a proactive stance to prevent
‘unexpected surprises’. No doubt, banking crisis will continue to occur, but
corporate good governance would ensure that they are not allowed to attain vast
and overwhelming dimensions.
It is heartening to note that most of the banks have awakened to the
concern and responded positively to the changed order by building in
international best practices in their corporate governance framework. Therefore,
The wake up call given by the RBI governor with the pledge to overcome the
challenges of ongoing transformation with firm conviction. Take the opportunity
times like this present and make the Indian banking system even stronger.
- 41 -
RESKILLING IN BANKS
The Indian Banking has undergone many transformations

since independence. But, LPG (Liberalization, Privatization & Globalization) and
IT (Information Technology) are currently transforming the Indian Banking
radically. The metamorphosis in the Indian banking is taking place significantly in
the areas of ownership, structure, system, process, market place, delivery
channel, products, technology, etc. If there is one single lesson to be learnt from
the entire process of transformation the world over, it is that the “people” are real
strength of the organization, which will give it the competitive advantage in
managing the transformation. Being a service industry, the success of banking
depends upon its human resource. Far from being considered one of the factors
of production i.e., labour, the employee has earned a pride place as a
’Capital’/Resource’ in this knowledge era. Human capital refers to the knowledge,
skills and expertise possessed by an employee. In fast changing world, the
human capital erodes rapidly unless it is re-capitalized with new skills.
Re-skilling focuses on the basic competencies needed in a new or

redesigned job and addresses advance-level technical skills. It helps banks in
redirecting their human resources to address skill imbalances or projected skill
shortages resulting from internal and external factors. It helps banks to expand
knowledge and skills of the employees through multi-skilling and helps stabilize
the work environment. It can also build employee morale; which was adversely
affected by the exodus of several skilled personnel due to VRS.
- 42 -
The basic prerequisite of any re-skilling program is proper inventory of the

manpower of the organization. By maintaining proper control over the
quantitative and qualitative stocks of manpower, the organization should function

smoothly by placing the right kind of people, at the right place and at the right
time and cost. The re-skilling planning should also address several important
issues like:
• Induction of new skills to avoid unexpected shortage;

• Identification of skill gap;
• Skill mapping of the human resource;
• Identification of training needs to avoid skill shortage; and
• Policy changes, if any, to attract, develop and retain the human resources
in the organization.
• The new challenges before the banks are:
• Re-skilling the vast number of existing employees;
• Retaining the existing knowledge workers by stopping brain drain;
• Creating an environment for individual as well as organizational learning.
Problems in Re-skilling
Banks are facing problems in re-skilling their employees with the required
knowledge and skills due to some intrinsic factors. These are as follows:
• The training programs have hitherto been somewhat routine and

stereotyped. The training system is lacking capabilities and capacities to
undertake such reskilling program.
• It is observed that majority of employees in public sector banks are in 46

+age group and only about 12% in the 25-35 year age group. Even after
- 43 -
the VRS there is no much improvement in this pattern. This pattern has
serious implications for the banks with reference to mobility, training,
development of skills and succession plans for high-level positions.
• Many banks do not have a centralized database of their skill profile and
they do not undertake skill mapping. This isa major handicap for
undertaking effective re-skilling program.
• The existing HRM policies of the banks give preference to seniority over
the skills in the promotion process and also there is no placement policy
for skilled personnel. These policies create hindrance for effective skill
development in banks.
Self-learning:
Self-learning means self-development on the required skills and

knowledge without going through formal training system of the organization. It is
the self-study to acquire knowledge/to be educated on the required subjects. This
method of reskilling helps the employees to learn/acquire skills in a short period
and the banks in making their workforce become more flexible and
interchangeable. The employee takes responsibility for learning and acquiring
the necessary knowledge and skills at his or her own pace and chooses his or
her own area of interest. The banks should function as facilitators by encouraging
the employees to broad-base their knowledge and upgrade their skills by
granting them financial aid to purchase study materials, by providing proper
placement as per their acquired skills and knowledge and/or by giving proper
weightage for promotion.
- 44 -
In future, baking will be ‘knowledge-based and knowledge driven’.

In this age of increasing specialization, skill development has certainly moved to
the center stage of development priorities The knowledge based economy
needs to recognize the value of human capital and the knowledge workers need
to be continually ‘reskilled’ and ‘re-tooled’. Equipping bank personnel with
requisite knowledge and skills for coping with the new millennium baking is one
other biggest challenges for the banking system.
- 45 -
CUSTOMER RELATIONSHIP MANAGEMENT:
Customer satisfaction is the degree of happiness a customer

realizes with a product or service and is the most important driving force for
retention of an existing customer which in turn results in growth of any business
organization including banks, since it determines size of cash flows into the
business. The satisfied customers always help in improving the toplines (i,e.
business turn-over) through referrals and positive publicity which lead to
improvement in bottom lines . In order to maintain their have to retain their
existing customers, future fresh customers are also required to be added.
It needs to be borne in mind that to attract new customers
involves huge cost in terms of set up costs, promotion costs, advertising costs,
follow-up costs etc. Due to these costs the operating costs for new customer is
generally higher for new customers. As a result, the longer relationship of a
customer brings better returns to the business. The defection by the customer is
a major factor for loss of revenue to the business and it should be appreciated
that higher the rate of defection causing lower average length of relationship
higher would be the rate of reduction in profits.
Customer relationship management refers to the ability to
understand, anticipate and manage the needs of the customer , interaction and
relationship resulting in increased profitability through revenue and margin
growth and operational efficiencies. E-CRM can address other factors like
personalization, customization, one to many and many to many transactions. It
permits business speed, agility and real time response to customers or markets
- 46 -
through the new tools such as e-mail, internet, telephony, chat facility etc. It
reduces the cost of customer contract.
There was a bank that offered call centre potion to there

best customers considering it a premium service and not to those who banked to
their crowded city branch office. They found that those customers had actually
enjoyed the walk down to the bank and the interaction, it brought. So what was
seen as a value service by the bank was not valued by the customers. The call
centre was then used for worst customers.
The major challenges in customer relationship
management are integrating customers, products and services and channels.
There are problems of channel conflict, dis-intermediation and cannibalization.
The most preferred products and services are the most profitable, with the most
sales potential, that prove cost effective and the channel that is effective in the
long run is the preferred channel.
An E-CRM model makes use of e-mails, chat facility, call-
centre, computer telephony integration. These are very effective tools in present
day context where internet helps us to provide updates on the products and
services and communicate with the business customer both the existing and
prospective. The customers are allowed to have dialogue with the operating staff
relating to product, product features, distribution channels etc through chat facility
provided on the web site of the business organization. Further the call centre
makes the reach easier besides the computer telephony integration to reach far-
flung customers at low cost and dress customer grievances.
- 47 -
HUMAN RESOURCES MANAGEMENT
In the period ahead, our financial system will also have to prepare for
a tightening of the prudential norms as the new Basel Accord becomes effective
and a fuller response to the current financial environment emerges. Our financial
institutions continue to be susceptible to financial market turbulence, especially in
the equity market. Upgrading technical skills, technology, research and human
capital, developing effective ‘front-office’ strategies and fortifying internal rules of
governance and responsibility assumes a renewed priority in the fast changing
scenario.
The key to the success of any organization lies in how efficiently the
organization manages its’ human resource. The principle applies equally and
perhaps more aptly to service institutions like banks. The issue is all the more
relevant to the public sector banks, which are striving hard to keep pace with the
technological changes and in meeting the challenges of globalization.
In order to meet the global standards and to remain competitive,

banks will have to recruit specialists in various fields such as Treasury
Management, Credit Management, Risk Management, IT related services, HRM,
etc. in keeping with the market segmentation and product innovation. As a
complementary measure, fast track merit-cum-performance based promotions
from one lower positions to the higher positions within would have to be
institutionalized to inject dynamism and youthfulness in the workforce.
Human resources to cope with the rapidly changing scenario. The

core function of HRD in the banking industry is to facilitate performance
improvement, measured not only in terms of financial indicators of operational
- 48 -
efficiency but also in terms of the quality of financial services provided. Factors
such as skills, attitudes and knowledge of personnel play a critical role in
determining the competitiveness of the financial sector. The quality of human
resources indicates the ability of banks to deliver value to customers. Capital and
technology are replicable, but not human capital which needs to be viewed as a
valuable resource for the achievement of competitive advantage. The primary
emphasis needs to be on integrating human resource management (HRM)
strategies with the business strategy. HRM strategies include managing change,
creating commitment, achieving flexibility and improving teamwork. These
processes underlie the complementary processes that represent the overt
aspects of HRM, such as recruitment, placement, performance management,
reward management, and employee relations. A forward looking approach would
involve moving towards self-assessment of competency and developmental
needs as a part of a continuous learning cycle.
To institutionalize talent management, the first priority for the

banking industry would be to spot, recognize and nurture the talent from within.
Secondly, the industry has to attract the best talent from the market to maintain
the required competitive edge vis-a-vis global players. However, the issue of
critical importance is how talent is integrated and sustained in the banks.
Therefore, a proper system of talent management, reward and compensation,
which at present do not have any linkage to skills and performance is an urgent
need of the industry. An equally important issue relevant to HRM is to create a
conducive working environment in which the bankers can take commercial
decisions judiciously and, at the same time, without fear. This calls for a re-look
into the vigilance system as it exists today.
The Indian banking industry has been an important driving

force behind the nation’s economic development. The emerging environment
- 49 -
poses both opportunities and threats, in particular, to the public sector banks.
How well these are met will mainly depend on the extent to which the banks
leverage their primary assets i.e., human resources in the context of the
changing economic and business environment. It is obvious that the public sector
banks’ hierarchical structure, which gives preference to seniority over
performance, is not the best environment for attracting the best talent from
among the young in a competitive environment. A radical transformation of the
existing personnel structure in public sector banks is unlikely to be practical, at
least in the foreseeable future. However, certain improvements can be made in
the recruitment practices as well as in on-the-job training and redeployment of
those who are already employed. There are several institutions in the country
which cater exclusively to the needs of human resource development in the
banking industry. It is worthwhile to consider broad-basing the courses
conducted in these institutions among other higher-level educational institutions
so that specialisation in the area of banking and financial services becomes an
option in higher education curriculums. In the area of information technology,
Indian professionals are world leaders and building synergies between the IT and
banking industries will sharpen the competitive edge of our banks.
The changing environment, the forces of globalisation and

liberalisation and the advances in information and communication technology
have major HR implications for the Reserve Bank as well. Financial products are
becoming increasingly complex and diverse, while the markets in which they
trade get progressively deregulated. The need to adopt global best practices in
financial sector regulation and supervision, and adapt them to the domestic
environment, places a premium on the skills and expertise of the Bank’s human
resources. Again, the functioning and policies of public institutions, such as the
Reserve Bank, are increasingly subject to public discussion and debate. This
- 50 -
calls for greater transparency, more effective communication, and a high degree
of professionalism in the Bank’s staff. This warrants continuous upgradation of
human resource management strategies with a view to enhancing the level of
knowledge, sharpening skills and also to instill the necessary attitudes and work
culture. The Reserve Bank is now devoting considerable attention to these areas
at the entry level as well as at different levels of career development of its staff.
There is greater awareness now of the need to prepare the

banking system for the technical and capital requirements of the emerging
prudential regime and a greater focus on core strengths and niche strategies.
Several contemplated changes in the surrounding legal and institutional
environment have been proposed for legislation.
The banks should strive to move towards realising our vision of an efficient and
sound banking system of international standards with redoubled vigour. The
greatest asset in this endeavor is the fund of technical and scientific human
capital formation available in the country.
- 51 -
SERVICE MARKETING
Over the years, there has been a discernible shift in

customer preference pattern marked by preference for unique selling proposition
pattern marked by preference for unique selling proposition (USP) and greater
propensity to abandon brand loyalty. Customer’ command has also been fuelled
by the entry of new hi-tech-based banks from within and abroad, providing virtual
banking right from the initial stage. However, PSBs have not been able to focus
adequately on R & D and marketing activities.
The new banking order will warrant banks to lay greater focus
on product innovation backed by IT advancements and thrust on customization
process of such products. As such, product life cycles are getting shorter day by
day requiring an exclusive R & D outfit, especially in the advances segment.
Such efforts will also need to be supplemented by an effective marketing
mechanism and market intelligence functions. Historically, banking products
broadly confirmed to the traits of an oligopolistic market, featuring minimum
product differentiation. As competitive forces take over, marketing efforts will
need to be completely overhauled involving simulative analyses for clients,
products and marker segments with the aid of sophisticated quantitative tools.
Expectations
These are beliefs about a product or service’s attributes or
preference at some time in future. We should have full knowledge of the needs,
expectations and attitudes of customers.
- 52 -
Pre consumption beliefs about the overall performance of the product / service
are created by,
• Previous experience
• The organization’s claims
• Product information
• Word of mouth
It is observed that as prior experience becomes more and more satisfying,
expectations for future performance are adjusted ever higher. This is referred as
“raising the hurdle” and is why satisfying customers never becomes easier.
CUSTOMER SERVICES
Since banking is a service industry where no tangible product is
produced, the quality of the service provided to the customers will be
determined by (1) Timeliness; (2) Courtesy; (3) Responsiveness; and (4)
Assurance for discharge of obligations in letter and spirit.
In banking, the product itself is the service rendered by people. The human
element and the psychological aspects of handling a customer are an
important aspect of service quality. It is very important to provide personal
attention to the needs of the customer. Communication with the customers in
the language they understand and listening to the customer is a service
quality characteristic.
The possession of the required skills and knowledge to perform the service
are highly necessary. Very often, one finds people manning the from desks,
with little knowledge of how to guide the customers. Their very first contact
with the customer leads to frustrating experience.
For any query from the customer, what is important is how
quickly the customer gets the answer rather than from what level it comes. A
late reply from a general manager is of less value to the customer than a
quick one from a person manning the front desk. Towards this end,
- 53 -
empowering people and flattening the hierarchies in an organization becomes

very important for providing superior customer service. Ultimately, the quality
of product or service is produced by the front line operator.
With the increase in number of banks operating in India and with the increase
in number of braches, the competition among banks has increased. In
today’s market, nothing is constant. There are significant shifts in customers
demand, the rate of technological change and the nature of competition.

Therefore, in order to compete successfully in today’s market place, there is
and urgent need for restructuring the present organization structure is
designed by placing the customer at the center of the organization, those
banks who adopt this type of an organizational structure are likely to compete
better in today’s dynamic market environment.
The Demanding Customer

Now a days every bank comes out with a statement that their bank
is customer focused.
Banks have spent huge money on introduction of new technology,
ATMs, and introduced several customer friendly new products, telebanking etc.
Posh interiors have replaced the shabby premises of the past,

long queues in the bank have vanished and heated arguments with customers by
militant staff which was a common sigh in the eighties is now a thing of the past.
The branch premises are renovated and computerized and now

they sport a better look with posh interiors with air conditioners in most in most of
the branches. The employees are sent to specialized training programmes for
improving customer service and trained to be courteous and taught about the
importance of body language. Bankers think that their service levels have gone
up very high. But what does the customer think of the bank? Despite so many
- 54 -
measures initiated at various levels to improve standards of customer service,

the level of satisfaction perceived by customers has deteriorated. Let us look
into the main reasons for this paradox.
Expectation – Perception Gap

The law of customer service is, satisfaction equals perception minus
expectation. If a customer expects a certain level of service and perceives the
service received is higher, he will be a satisfied customer. On the contrary, if he
perceives the same level of service as before but expects a higher level, he will
be a disappointed customer. The expectations of customers from the bank have
been steadily rising. Hence the quality of service should keep pace with the
rising expectations of the customer.
Antecedents
Prior experience is the most important antecedent of
satisfaction. It serves as a memory bank of all the previous experiences with a
product or service. We can identify a number of mediators hat may tamper or
enhance prior experience and they can be divided into personal mediators and
situational mediators.
The personal mediators have to do with characteristics of customers, most

notably demographics (age, income, education and so on) and with personal
experience.
Reinforcement or contradiction from peers (word of mouth) is also personal

mediator, capable of modifying prior experience.
- 55 -
Situational mediators include the evolution of technology in the category, the

intensity and nature of competition in the category and advertising and public
relation activity. Advertisements should not promise some thing which we cannot
deliver. Publicity overkill may actually harm the bank by unnecessarily raising
the customer expectations and make them unhappy. However, keeping
expectations too low may not attract any customers. Each of these mediators
will similarly enhance or diminish a customer’s prior experience.
RESTRUCTURING OF BANKS
In order to meet the challenges of new economic environment and exploit the
emerging opportunities, an organization has to constantly re-set its structure to
make it compatible and adaptable. In the backdrop of the transformed phase of
financial sector reforms, banks in India spread across the country with cultural
diversity and demographic variations, need to have a fresh look at their
organizational structures.
In the new competitive climate of financial sector reforms,
there is an emerging need for Indian banks to learn new lessons of proper
organization restructuring. Competent management style matching with
ownership structures, use of modern technology, managing the volatility of
capital flow and interest rates, management of recoveries and alarming level of
Non Performing Assets (NPAs), credit assessment skills and asset-liability
management (ALM), operational risk awareness, corporate governance, cost
control, competitiveness, staff commitment, customer service orientation etc., are
the crucial areas where Indian banks will have to acquire an edge over their
competitors to achieve higher degree of profitability, productivity and efficiency
for their survival and success.
The Reserve Bank of India’s Report on Trend and Progress of
Banking in India 2000-01 states that public sector banks, barring three weak
banks would need fresh capital infusion of over Rs. 10,000 crores over the next
- 56 -
five years to support the asset growth. For the three weak banks, Rs. 2,550
crores will be provided as a bail-out package. India banks should realize that
fiscal support and recapitalization have their own limitations that cannot be made
as a permanent prescription of recurring feature.
Non performing loans have been increasing in India and bad debt provisions are
up sharply. The most critical area in improvement of profits is the reduction in
non performing assets. However, NPAs are too difficult to reduce in the light of
given performance of Debt Recovery Tribunals and proceedings going in the
courts in India. Lacunae and loopholes in our legal system further bleed the
profitability of banks due to inordinate delay in the recovery of dues and
deterioration in quality of assets. Comprehensive legislative and legal changes
sincerely have to be attempted instead of piece-meal approach to give a loud
and clear message to willful defaulters for creating an atmosphere of compulsion
for repayment of their dues.
Banks are susceptible to certain events. Risks cannot be eliminated,
but banks with e advanced risk management tools can identify credit
deterioration at and early stage. They can help borrowers in restructuring their
loans and take more security to reduce the chances of default.
Globalization, technological advancements, deregulation and intense competition
have opened up the new opportunities for banks but at the same time, they have
been led to complexity, consolidation and restructuring.
Banking failure was observed in 1980s word over. The massive bank losses in
industrial and developing countries during this period could be attributed to a
plethora of reasons, such as- poor asset quality, bad debt, sloppy management,
speculation, economic scenario, inefficiency, fraud, shocks from other markets,
excessive overheads, asset- liability and treasury mismatches, excess taxes and
regulation.
In today’s globalised world, weakness in the financial system of
any country will have an impact on other countries also. East-Asian crises had
- 57 -
led banking systems of others countries to a vulnerable position for some time.
Across the world, banks are monitored and supervised closely.
Indian banks have to concentrate on asset quality and earnings
which are determinant of internal capital generation. Profitability and risk
management are two key aspects to assess financial performance of a bank will
obviously be better with higher profitability and lower risk. The deregulated
market demands restructuring to avoid individual as well as system failures and

to foster operational efficiency and growth with profit.
General Turnaround strategies of Loss Making Branches

Branch Rationalisation policy should look into the aspect of
bringing down the number of loss making braches along with the objective of
improving the overall efficiency of the branch. In this regard the general
turnaround strategies for loss making braches are as mentioned below:
• The loss making branches should mainly focus their attention on recovery
of Non-performing assets (NPA), as the major cause for loss is lower
spread due to high NPA position.
• Manpower redeployment wherever feasible.
• Continued stress on reducing deposit cost by altering the deposit mix in
favour of low cost deposits.
• Special emphasis on reducing the burden of the braches.
• Detailed study of the branch performance taking into consideration the
location, potential of the area, branch infrastructure will throw up certain
branch specific turnaround strategies.
Merger, relocation, conversion into satellite branch, etc., may also be explored as
per the RBI guidelines.
Suggestions
- 58 -
Restructuring should not be a one-time affair but it should be an on

going process.
• There is a suggestion that where a branch of RRB exists, sponsoring
commercial bank should be allowed to close its rural branches and the
RBI should relax existing norms to that diluted.
• Universal banking for Development Financial Institution is necessary for
their survival. However, regulatory norms should not be diluted.
• Mergers of Indian Banks resulting in three big Banks (a) SBI and
subsidiaries (b) IDBI with two or three other Banks and (c) ICICI with a few
Banks.
Corporate Debt Restructuring (CDR)
Consequent to the withdrawal of the mandatory

requirement of consortium in the Monetary and Credit Policy for the first half of
1997-98, multiple banking arrangement became a common practice in the
financial system in our country. Banks, in their anxiety to increase their credit
portfolio and outperform in the competition, went all-out to lend under multiple
banking arrangement, even by relaxing the norms. Even where there were
consortium arrangements, some banks extended credit outside the arrangement
in order to get a foothold in the financing of some big corporate accounts. What
was considered a boon at that time became the bane of the banking industry
when recessionary trends set in a couple of years ago. Banks could not evolve a
common approach to recover the dues or create security not they could embark
upon a meaningful restructuring exercise in the absence of a forum where the
lenders could sort out their conflicts/contradictions. On the other
hand, corporate started reeling under the impact of recession and a huge debt to
service. They found the going tough and were driven to a crunch situation when
creditors of all hues started pressurizing them for payments.
- 59 -
Realizing the need to revive viable cooperates and simultaneously ensuring

safety of money lent to them by banks / FIs, RBI has come out with Corporate
Debt Restructuring (CDR) mechanism, wherein all the secured lenders are
brought on a common table to deliberate and decide on timely and transparent
restructuring exercise. The CDR system has been evolved on the lines of similar
mechanism prevalent in UK, Korea, Thailand, Malaysia, etc.
While it is a welcome move to have such a mechanism which avoids delay in

embarking upon a restructuring exercise, there are certain teething problems
which have to be sorted out to make it more effective. Some of them are:
o Foreign banks have not jointed the CDR system. Unless they join, the
system may not be full-fledged. It is indeed heartening that
Shri G.P. Munippan, Deputy Governor, RBI has exhorted them to join the
main stream.
o The CDR papers are forwarded in the eleventh hour and banks find it
tough to take a view especially where decisions have to be taken at the
level of Management Committee or Board of the bank.
o In order to keep the effective rate of return at 10per cent or 11 per cent,
the interest charges are kept at a very low rate of 2 per cent in the initial
year and gradually ballooned over the period of repayment to touch a
maximum of even 50 per cent. The efficacy of such rates are yet to be
studied.
o While in case of BIFR accounts 30 per cent margin from the promoters is
required, in CDR no such contribution is envisaged.
o The CDR mechanism addresses only the secured debt. No answer is
provided for the unsecured debt. The package is likely to derail if any
unsecured creditor chooses to precipitate the matter.
Apart from the above, CDR mechanism should provide for a demonstration of
the sincere commitment of the promoters to the restructuring effort by offering
- 60 -
their personal guarantee, pledge of their shareholding , etc., which would

instill a greater degree of confidence in the minds of the lenders.
The CDR mechanism should go beyond the contours of mere restructuring

and take initiatives such as change of management, sale of assets in the
event of failure of the package. The DCA should provide for such powers to
the CDR.
MARKETING CHALLENGES
This is a major challenge for the Indian banks over the coming
decade. At the more strategic level, Indian customers and their behaviours are
not well understood. At the branch level, their needs are not being adequately
identified. This lack of customer focus permeates through out the industry and is
characterized by generally poor service.
That, this situation exist in a consequence of the highly-
regulated market. The Indian bank customer is, by and large, not aware of there
market power, but all this is rapidly changing. A note of caution! Banks risk a
customer backlash once they realize there power, and this can have a serious
affect on the viability of a banks business model. Good examples of this are to be
found in the Canadian and Australian markets, where “banks bashing” has
become a favorite pastime.
MARKETING FUNCTION
Banks firstly need to understand the difference between
marketing and selling, and to establish the marketing function within their
organization structures. However, there is little real expertise in this field
available within the banking industry in India. It may therefore be timely for the
- 61 -
banks to consider recruiting from the FMCG field, as the likely source of people
to properly establish this function.
Within the banks there needs to be clear accountability for
both customer and product, and the two needs to be analyzed and understood in
minute detail.
IMAGE
The image of banks in India is not a positive one , nor is it
an overtly negative one. The media is not negative towards banks and the
moment, but this situation could change .Strict adherence to a customer banking
code at the corporate level, and personal adherence to a professional code of
ethics, is mandatory. Banks can not afford to accept anything less. The IBA has
an important role to play in this regard.
Some individual banks have done some work on creating an image
for themselves, and those banks that have not, need to be doing something soon
if they wish to differentiate themselves and to continue to compete in an
increasingly competitive market.
DISTRIBUTION
The Indian banking industry is characterized by a large number fo
banks and a large number of bank branches. Often, because bank A has
established a branch, bank B feels it also needs to for competitive reasons.
Neither bank A or B have probably done sufficient analysis of the local market.
There also appears to be a perception that creditability, (safety) is somehow
linked to the number of branches, not to quality of assets, (including human
assets).
There needs to be further rationalization of both banks and
branches in India. Before a bank can thinks about closing a branch, or opening a
new one, it has to better understand the dynamics of its branches. The obvious
- 62 -
target of any rationalization would be rural branches, but so little is really known
about the dynamics or future potential of that segments. Leaving aside the
viability issue, great care will need to be given to the impact of any closure on
customers, and to the image of the bank.
PRODUCT
Due to lack of historical data, and the previous highly regulated
market, little is really known of the profitability of individual products. Overall,
products tend to be customer-friendly, meaning that the terms and conditions are
very favorable to the customer. The fixed deposit product, which is more like a
call deposit in practice, is an example of this. Allied to this, is a saving account
“sweep” product. These products are definitely not bank-friendly. To some extent,
suitable interest margin and fees compensate for generous terms and conditions.
However, increased competition tends to erode these margins and fees over
time. This leaves generous terms and conditions, which, when clawed back, can
cause a major customer back lash. To avoid this, now is the time to start to better
understand the true profitability and trade offs built into each product, and to plan
ahead for the future competitive environment. To this end, a product
management function needs to be established, which, amongst other
accountabilities, launches and occasionally exist/withdraws products.
RELATIONSHIP SELLING
Indian banks are yet to embrace the concept of relationship
selling. Because banks do not know their customers well, nor their needs, they
are not able to establish a deep relationship with them; one that depends on the
value not price. IT can provide the tools that are means by which customers can
be given the type of financial solutions and recognition that they need.
- 63 -
The over all objective of relationship selling should not be

just to sell more products, but to sell more products to each customer, according
to their needs. This leads to improved customer profitability, and lower
acquisition/ servicing costs. There also is a positive correlation between
increased product penetration and reduced attrition rate.
NEW PRODUCTS
To give a customer a full basket of avenues ,the public sector
banks will also have to implement new hassle free delivery channels such as a
chain of ATMs, electronic delivery channels e.g. Tele-banking, mobile-Banking,
internet-Banking , e-commerce related products in B2c category and so on . We

will have to re-engineer our works procedures and system to avoid overlapping
and duplication efforts at various levels . The business processes will have to be
re-written to provide flexibility and convenience to the costumer for using their
money and to avail themselves of banking services at the time, place and mode
convenient to them. The Reserve Bank of India has been announcing several
monetary policy related measure from time to time . In this context, we have
observed that CRR is being gradually reduced which pumps in more liquidity in
the reduced system. If the trend continues in the times to come the liquidity in the
system will further go up and large avenues will be available to the banking in
increasing the lendable and investible resources. However, the banks will have to
be careful in increasing their investments in Government Bonds and leading to
Govt. Sector because the Reserve Bank of India has already announced that
these investments will also be call for provisions wherever defaults occurs.
Accordingly we will have to look for alternative lending avenues such as by
increasing the retail customer base through specialized branches by offering
specially designed schemes housing finance, vehicle finance, corporate finance,
retail banking, personal banking, etc. It should be endeavored that our customers
- 64 -
are catered with all the services they look for. These may be mopping up there
savings or to meet their credit or remittances requirements. The analyses of
balance sheet over the previous years shows a large out go towards traveling,
conveyance, boarding and lodging charges, etc. it is high time that the public
sector banks start using contemporary technology such as video conferencing
amongst the head office executives and field functionaries which shall cut down
travel related expenses besides resulting in optimum utilization of time once the
connectivity amongst different office is in place, the banks may use the other
technological by-products e.g. bulletin boards, where directives from top
management travels to field functionaries at regional offices and branches

through Net. Another feature to be made use of is, corporate E-mail where inter
offices managers, assignments etc. , flow over the Enterprises Wide Area
Network . these kinds of initiatives will also enhance response time and decision-
making, besides inculcating a compete IT-savvy culture in the banks.
- 65 -
THE LEADERSHIP CHALLENGES.
The world around is in a state of flux, thanks to the changes taking place all the
time. What is more, environmental changes are not just transforming our world,
but tend to upset the apple-cart of organizations. Little wonder, since the
changes have led to a hotting up of competition threatens to eat into market
shares, triggered off customers aspirations, multiplied in manifold men made
machines and technology outdated unless they are updated.
With their carefully made out plans going haywire, organization have
found themselves in a state of subjected continually to a variety of crushing
waves from the future-waves of complex interacting cycles, uncertainties,
instabilities and technological
and competitive surprises that turn the corporate world into a distant fantasy.
- 66 -
It may sound surprising but many a times, organizational fortunes and

set-backs arise out of organizations failing to rise up to the challenge of the
mission. After all, all that is needed for this is to find out answers to the following
three vital
questions:
- Why does any organization exist?
- What are its purposes?
- What is it that the organization is in the business for at all?
Answers to these questions should enable organizations to define their mission.
But ,in the present milieu solving the tangle of mission alone wont-do While
mission is the first-challenges, it is no less necessary to reckon with three
challenges as well, viz…. competition, performance and change. In fact,
organizational leadership, in essence is about finding the wisdom and courage to
make the choices that are entailed in answering these four great question:
I. Mission : what are trying to accomplish?
II. Competition :How do we get a competitive edge?

III. Performance: How do we deliver the results?
IV. Change: How do we cope with the change?
Here indeed is the need for ‘Grand Strategy’. Grand Strategy agenda for
leadership, not a recipe for management .It is an agenda with four components
but only one aim; and that is to find and keep vital the ultimate competitive
advantage , namely, a superior way of running the organization that ensures
mutually supporting solutions to the four challenges, all the time ,so that
everything is done, and every operating decision is made in a pre-eminently
strategic frame of mind. This strategy ensures that we not only win today by
beating our current competitors, but also that we go on winning tomorrow by
beating evolution itself. It finally brings to the world of organizations what man
has long struggled to bring to nature – the ability to manage change instead of
- 67 -
change managing us. So much so, organizations today are bothered with two
crucial questions, viz.
-What is the impact of the environmental changes in the operating environment

of the business?
-How to deal with these changes?

To deal with the changes, organizations need to be proactive. To be
proactive, we need to have a snap-shot of the future. This is what is called
‘VISION’.
How to make a snap-shot of the future?It is not bad to, have a dream for
the future .Then the doubt arises as to what is the difference between a dream
and vision? Dream is building up castles in the air, while vision is making the
castles real by putting up foundations under it. That is why some define vision as
the art of making the impossible possible.
Insight is a vital prerequisite to have a vision for the future. Where there is
insight, there is vision, when there is hind-sight, there is only revision.
Insight is something that everyone is born with. So what prevents us from
having a vision of the future is that we have clouded and crowded this insight
with many veils and screens, thus imposing an artificial blindness over our
insight. As an individual with eye-sight. Choosing to go around, with his eyes
closed or covered. This has been beautifully brought out by Ajanta. E.
Chakravaty in her book ‘The Geeta and the Art of Successful Management’ –
“the complexities of life often obscure simple fundamental truths. Events,
occurrences, the interplay and conflicts of emotions, motives, desires and need
create a screen, a painted veil that masquerades for reality, in the consciousness
of the superficial, the inherently lazy and the mentally bankrupt. Too often,
managers spend a life time counting trees but without even getting a holistic view
- 68 -
of the forest of life. For that, it is necessary to step back, keep emotions not only
in the rigid, hide \bound, commonly established ways but in manners new, free
and flowing, juxtaposing ideas and thoughts, till suddenly all the pieces fall into
places and the pattern is there, clear, lucid and beautiful in its stark simplicity.
This ability, so rare, is the ethereal quality called vision that sets leaders apart
from men and managers.”
The same thought has been expressed in a different way by Amitabha

Mukherjee in an article titled ‘Tomorrow’ organization – Letting go of the past to
grasp the future’, viz.. “ The complex question of understanding the nature of
tomorrow’s successful of the intellectual, conceptual, behavioral, psychological,
scientific and social cocktail required, for organizations to prosper in turbulent
conditions, - conditions which have gone well beyond the operating limits of
traditional functional organizations and their old paradigms.’
What is the importance if vision to a banker in the current context? Indian

customer has grown in stature. In consonance with the global customer, he too is
on the look out for newer, better and innovative services. hence in involving a
vision for the future, what a banker needs to do first is to identify his customers.
The subsequent task is to focus and identify what services the customers would
be needing in future viz.. in the year 2000 and beyond
The next task is to identify the competencies we already have, as well the
competencies we need to create for serving the identified niche-market
segments. This task of establishing effective linkage between people
competencies and external opportunities lie within the realm of the HRM
dimension of the visioning process.
Next comes the question of strategy, its relevance and importance. If
vision reflects the state of organization at a point of time in future, strategy is the
means by which this gap gets bridged and the organization is enable to become
that which has been visualized.
- 69 -
The team strategy has its origin in military parlance though it has come to
acquire a prominent place in corporate planning. The true aim of strategy is not
so much to battle it out, but to achieve a position so advantageous that this in it-
self would make the enemy to surrender or with eventuality of a battle, would
bring in sure victory.
Tomorrows organization will have to be able to continuously transform what
they do, how they do it, and at a rate determined by the environment
PROBLEMS IN STRATEGIC ACTIONS IN BANKING IN INDIA
Today banks are co-desining the services with their counterparts and striving to
provide customers with global solutions. Convenience of the customers life is
being priced by the banking market. The following are the major problems in
strategic actions in banking in India:
1) ENTRY OF FOREGIN BANKS

The entry of foregin banks into Indian banking Industry has resulted a
cutthroat competition across the banking operations and the pressure to perform
by the stakeholders has made the competition fiercer than ever before.
2) REDUCTION OF GOVT'S STAKE

The government of India is slowly getting out from the major stake
holding in commercial nad Industrial banks in India. For example, the Govt. was
holding 58% equity in IDBI, which has been reduced to 51%.
Therefore, this sort of action necessitated the banks to go for equity IPOs and
Bonds in order to make adequate capital base for improving the borrowing
powers.
- 70 -
3) LOW C-D RATIO

The low C-D ratio, which prevails in the banking in India, is another
problem. This is due to demand for credit and advances.
4) INCREASED NPAs
The levels of NPAs, through in decreasing trend in the recent
years, continue to be higher than the international standard of 3%.
Despite the committees, viz., narasimham committee, etc., suggested a wide

measures to reduce the NPAs , still there are NPAs. Which are due to the default
of bulk borrowers .
5) POLITICAL VENDETTA OF WRITING OFF THE LOAN

The repayment of loans has been postponed /delayed by the
borrowers because of the political tricks that it may waived/written off, specially
the loan to agriculture and for allied activities.
6) PRIORITY SECTOR LENDING

There was a substantial increase in the share of priority sector
lending to total lending, recording 36.6% in march 2000 from the level of 14
person in June 1969. Besides, in order to fullfil the requirements the RBI/govt. of
India there are special credit schemes exclusively designed for individual women
and group of women under various plans differential rate of interest to uplift the
standard of living of the people, which results in doubtful/bad debts, ultimately
leads to NPAs
- 71 -
7) REQUIREMENT OF CRR AND SLR PROVISIONS

The banks in India are not free to deploy there total lendable funds
according to principals of lending, repayment capacity, security ,etc. though the
requirement of SLR and CRR have been drastically reduced by the RBI but still
the requirement of SLR and CRR make banks loss earning capacity.
8) COMPETITION IN DEBIT CARD AND CREDIT CARD ADVANCES

The novel method of creating credits through issues of credit cards
with distinguished characteristics also cause the banking industry to explore the
possibilities of providing novel/additional services to the customer
9) CHANGING NATURE OF BANKING SERVICE/BUSINESS

Banks conducted banking: Insurance companies covered risks;
and security companies offered investment opportunities have become the
footnotes of the finance literature. But, today, insurance companies are exploring
values in the banking and investment products and vice versa .
10) COMPETITIVENESS AT BANK LEVEL

In the globalised banking business environment, change is inevitable
and is stable. It offers both, the opportunities and challenges to the banking
sector. Therefore the banks are left in an environment where the competition is
stiff with lots of challenges.
11) FOREIGN CURRENCY DEALINGS

Following the RBIs relaxation permitting the residence to maintain
foreign currency accounts in India with effects from November 2002 ,the
commercial banks started offering the RFC Domestic Accounts (resident foreign
currency domestic accounts ) while a host of foreign banks are already offering
such services in India .This also cost excess inflow of deposit at higher rate .
- 72 -
SURVEY OF UNION BANK OF INDIA
More than fifty years ago, on December 18, 1950, United bank
of India Ltd., the predecessor of the present united bank of India was formed
by the amalgamation of four banks, viz. Comilla banking corporation Ltd.
(established in the year 1914),Bengal central bank Ltd.(1918), Comilla union
bank Ltd.(1922) and hooglhy bank Ltd.(1932) at a very critical phase of post-
independence banking in the country, particularly in eastern states. The bank
become one of the fourteen major banks which were nationalized in the
month of July 1969. Before nationalization, cuttack bank Ltd. And Tezpur
industrial bank Ltd. in the year1961. After nationalization, Hindusthan
Mercantile Bank and Narang Bank of India Ltd were the amalgamated with
UBI in the years 1973 and 1976 respectively.
In the first post-reform year, i.e. 1992-93, the profitability of the
banking industry in general was affected and made the profit of public sector
banks as a group turned negative. In fact as many as12 public sector banks
including UBI showed net loss in working results. For reasons mentioned
earlier, the bank has to sustain net loss for five years. The stipulation of
- 73 -
capital adequacy ratio i.e. the ratio of capital to risk weighted assets could not
be met by the bank for several years.
The challenges which were faced by the bank in the past years were
mostly in the following inter-related areas;
Maintenance of the capital adequacy norms adopted by the
Government of India and the reserve bank of India from time to time,
Reduction in the huge volume of non-performing assets more
particularly because of its regional effect on its operation,
Withstanding competition from the foreign banks and new public
sector banks equipped with the updated technology, more particularly in the
urban and metropolitan area,
Challenges in the human resource management area for catering to

the growing needs of banking technology and customer relationship,
Challenges in the area of technology up-gradation in view of the
competitiveness and strengthening the information system.
Strategies to face those challenges and the results achieved:

The meaningful turnaround strategy by the bank was designed to
directly address and devise means to facilitate the following :
* Substantial growth in fund based business
* Prudential fund management
* Sharp reduction in incremental NPA generation
* Substantial reduction in the outstanding stock of NPAs
* Tempering the relentless rise in establishment expenses
* Technological up-gradation programme
* Manifold rise in income from fee-based business
* Training and human resource development
- 74 -
Few years back Government provided the bank

recapitalization support for maintaining capital adequacy requirement and
augmenting its income. This support was provided on entering into certain
performance obligations and commitments with reserve bank of India on an
annual basis, laying special emphasis on reduction of NPA, particularly through
debt recovery tribunals as also settlement through acceptable compromise,
improvement of staff productivity, increase in volume of business, overall cost
reduction, and ban on
(a) fresh recruitment except in certain specialized categories like information

technology international banking, merchant banking etc.,
(b) opening of new branches and
(c) fresh capital expenditure other than for technology up-gradation.
CONCLUSION:
The vision of banking industry in India, like the software industry in India,
should be to become the best in the world or at least having a banking
community at large. the vision of Indian banking " The long term vision for India’s
banking system to transform itself from being a domestic one to the global level
may sound far-fetched at present. However, it is not beyond our capacity
provided we have the will and the determination."
The above vision is not difficult to realize. This is possible if we follow the
twin strategy of
(1) reducing transaction cost,
(2) having sound financial system.
Customers want more quality with less cost. It is an absolute global truth.
Lower cost and soundness of system are two sides of the same coin as one
reinforces the other. To achieve this overall goal, there is a need to focus in the
following major areas of concern.
- 75 -
PROMOTION OF BANKING RESEARCH :

As the pace of change is going to be faster than what was witnessed in
the last decade, there is a need for a system of continuous research, better
understanding the change process and its implication on banks .
It is suggested that we must institutionalize banking research, say by way of
having an institute of banking research to meet the above challenges . Modalities
are to be worked out in these direction. Similarly, each bank should have a set-
up where bank-specific research takes place in terms of emerging areas and
there possible solution.
TECHNOLOGY CHANGES
Use of technology has improved considerably, but not to the acceptable level of
technology around the world. Transaction cost and time have to be reduced
dramatically to 1/10 or 1/20 immediately and ultimately to say 1 to 2 percent of
present level .
Each bank and the banking industry has to review it's technological development
plan in the context of emerging new technology. Stand-alone
computerisation of branches may not be a right path and like ALPMs,it may result
in waste and misdirected efforts. Success of Indian banking in coping up with
technological changes around the world will determine the degree of our success
in integration with the global banking system.
HUMAN RESOURCE DEVELOPMENT

Human resource development has to be consistent with the new millennium
requirements. With the increased globalisation, technological changes, keen
competition and post-VRS scenario, human resources development assumes
great significance .It has been a neglected area in the industry.
Banking industry and each bank will have to develop a HRD plan taking into
account issues of the next millennium and issues of training ,transfer,
compensation package, specialization ,skill information,etc.,have to be re-
- 76 -
examined.India has the comparative advantage in our labour, as land and capital
have become irrelevant factors and HRD policies have to be geared to take
advantage of this factor.
CORPORATE GOVERNANCE
Corporate governance has to be improved through
(a) Reconstitution of board of directors and redefining functions of the board,
accountability of directors, selection of directors, etc.
(b) As a consequence, the process of selection of CMDs and EDs should

undergo change. The RBI is already seized of the problem.
(c) RBI is soon coming out with a set of guidelines on corporate governance
and this will change the style of working of banks.
(d) Greater the autonomy has to be the mantra and the decision-making
process should change from present layer or tier based system to more of
participative decision-making.
(e) To manage changes CMDs have to change themselves first. CDMs should
give more time to customers and HRD policies.
FINANCIAL SOUNDNESS
(A) Financial soundness is a must promoting stable banking system.
(b) The present system of assessment of Risk Weighted Assets have
weakness and is likely to be replaced by a new system of basel norms and our
banking system must be ready for a rigorous or stricter approach.
(c) The present system will be replaced by more comprehensive system of risk
management –credit risk , market risk , exchange risk etc..
- 77 -
(d) recapitalization of public sector banks is unlikely in future ,except may be for
weak banks at present and hence there has to be continous awareness of capital
adequacy ratio .capital requirements will increase in future .
(e) Banks have to realign its bussinerss strategiers to risk weight ,risk
exposure ,risk based disclosure .
(f) rating of banks may become mandatory and hence along with this ,system of
internal rating of banks by themselves may have to be evolved .
(g ) high level of NPA reflects poor corporate governance .revised guidelines of
RBI should be perceived on war footing to clear wastage of old stock of NPAs
(h) Banks to have plans for reducing overhead expenditure as it seems to have
led to bad practices of extravagant spending.
(i) system of prevention of slippage of assets and NPAs has to be vigourously
introduced and perceived to make banks sound .
REFORMS IN THE LEGAL SYSTEM

The process of legal reforms has began with establishment of Debt Recovery
Tribunal , lok adalat etc . several ammendements are already being planned .the
reforms in the legal system have to be carried in a manner that facilitates early
settlements and recovery of dues .
In future, banks will not be recognized by ownership but by technology and

products they offer and profits made . present distinction such as PSBs , old
private sector banks ,new private sector banks will disappear . consolidation is
likely to take place through privatization ,bank mergers , strategic equity
participation etc ,and it will be market driven or policy orientation
The process has already begin .their will be friction and controversies on this
sensitive issues of survival of individual units .But a positive frame of mind
without ego problem and preconceived notion would make the system becoming
- 78 -
stronger .besides ,rationalization of banks their a question of branch

rationalization ,whatever form it takes .The process of rarionalization of branches
has also started some banks
E-BANKING
• The world economy is moving towards Global Digital System and Indian
banking system has to integrate with the same.
• E-commerce, U-commerce, etc., will rule the economic system and
Indian banking will have to transaction itself to these new requirements.
• There will be erosion in fee based income of banks as paper based

transaction ,invoices ,documents of LV, gurantees etc will be digitally
transmitted and quickly settled . banks in India will be required to
reorientation strategies and look for new avenues of fee based income .
• Auction of deposit and credits may take place through internet
The above SWOT analyses shows the area in which Indian banking industry
can build on its strength ,the area where the weaknesses have to be overcome
,the opportunities that arise and also the threats against whom the banks will
have to guard themselves against. Ultimately, therefore the solution lies in
combination of vision and action .As the last shloka of Bhagwat gita says :
Yatra yogeshwara krishno yatra partho

dhanurdharaha
Tatra shreervijayo bhutir dhruvo nithir mathir
mamaha .
- 79 -
Mere vision alone is day dreaming .mere action is waste of time .when both are
combined ,all success is possible .yogeshwara Krishna represents the divine
vision . Arjuna represents the man of action when both are combined their is
wealth ,success and justice . This is what we should aim at in resolving the
problems of the challenges faced by the Indian banking .
- 80 -

PRIYANKA

Hochgeladen von

Dokumentinformationen

Originalbeschreibung:

Copyright

Verfügbare Formate

Dieses Dokument teilen

Dokument teilen oder einbetten

Freigabeoptionen

Stufen Sie dieses Dokument als nützlich ein?

Sind diese Inhalte unangemessen?

Copyright:

Verfügbare Formate

PRIYANKA

Hochgeladen von

Copyright:

Verfügbare Formate

CHALLENGES BEFORE INDIAN BANKING SYSTEM

The development strategies of the newly independent and developing

III. India in the New Global Economy

A most remarkable feature of the so-called "New Economy" is the role

From India’s point of view, some of the recent global developments,

• The fastest growing segment of services is the rapid expansion of

• Progress in information technology is making it increasingly possible to

• Unlike most other prices, world prices of transport and communication

industrial markets (for instance, North America) is no longer an important

• Further, India does not necessarily have to be a low-cost producer of

• The decline in the share of manufacturing in the output of rich countries

As a result of the above developments, the sources of comparative

CHALLENGES BEFORE INDIAN PRIVATE SECTOR BANKS–

The emotive content, team building, the ownership in work, how to

and agricultural lending. Caught between the competitive pressure, both

Economic outlook and banking sector’s performance

Aided by a good macro economic environment, banks’ bottom line

Globalisation – a challenge as well as an opportunity

There is a growing realisation that the ability of countries to conduct

High capital inflows: not an unmixed blessing

monetary management.Special defences need to be put in place for ensuring

Interest Rate Risk for Indian Banks – Profits under Pressure

Different banks, however, vary in their levels of vulnerability, with some

Technology is the key

The decade of 90s has witnessed a sea change in the way

Basel II Accord, Capital and Market Discipline

traditional regulatory and market measures of capital adequacy to an evaluation

The accord also has, as an underlying principle, the reliance on the

India has been a participant in the international initiatives to ensure

The critical regulatory initiatives taken by the Reserve Bank of India to

(ii) The introduction of Risk Based Supervision (RBS) in 23 banks on a

(iii) the drive to encourage banks to formalize their capital adequacy

(iv) Ensuring better disclosure so as to have greater transparency in the

Organizations all over are rushing to implement the latest ideas on

Taking the banking industry to the heights of excellence, especially in the

CHANLLENGES AND STRATEGIES OF RURAL BANKING

With the implementation of financial sector reforms

The Narasimham Committee at the time of framing its recommendations on

The committee also proposed that RRBs should be

CHALLENGES BEFORE URBAN CO-OPERATIVE BANKS

Urban co-operative Banks (UCBs) are founded by social

Co-operative sector so far, has made commendable

In market economy, ‘key performance areas’ (KPA) of all

Co-operative sector, not being registered under Indian

investment proposition especially in co-operative sector, who generally offers

Boards of UCBs must appreciate these far-reaching and

not. Otherwise consciously should do so as a business compulsion with “a social

in ‘ customer delight’ is critical to achieve success and can be done by periodical

CHALLENGES FOR CASH MANAGEMENT

With a focus on being locally and in certain cases globally

The choice of any technology solution for cash

reporting and transacting in a controlled and secure environment is equally

To put it in a nutshell, technology plays and will

CREDIT RISK MANAGEMENT

Banks as intermediaries between ‘savers’ and ‘investors’

How to Quantify Credit Risk

Identify of Unit Level Credit Risk:

When a bank adopts inappropriate IT strategies, this may

Computer fraud risk:

It is imperative that a bank is aware of the vulnerable point

CORPORATE GOVERNANCE IN BANKS

The good governance is critical to the success of an organization has

At the same time, banking sector is characterized by