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In recent years, the banking industry around the world has been undergoing a rapid transformation. In India also, the wave of deregulation of early 1990s has created heightened competition and greater risk for banks and other financial intermediaries. The cross-border flows and entry of new players and products have forced banks to adjust the product-mix and undertake rapid changes in their processes and operations to remain competitive. The deepening of technology has facilitated better tracking and fulfillment of commitments, multiple delivery channels for customers and faster resolution of miscoordinations. Unlike in the past, the banks today are market driven and market responsive. The top concern in the mind of every bank's CEO is increasing or at least maintaining the market share in every line of business against the backdrop of heightened competition. With the entry of new players and multiple channels, customers (both corporate and retail) have become more discerning and less "loyal" to banks. This makes it imperative that banks provide best possible products and services to ensure customer satisfaction. To address the challenge of retention of customers, there have been active efforts in the banking circles to switch over to customer-centric business model. The success of such a model depends upon the approach adopted by banks with respect to customer data management and customer relationship management. Over the years, Indian banks have expanded to cover a large geographic & functional area to meet the developmental needs. They have been managing a world of information about customers - their profiles, location, etc. They have a close relationship with their customers and a good knowledge of their needs, requirements and cash positions. Though this offers them a unique advantage, they face a fundamental problem. During the period of planned economic development, the bank products were bought in India and not sold. What our banks, especially those in the public sector lack are the marketing attitude. Marketing is a customer-oriented operation. What is needed is the effort on their part to improve their service image and exploit their large customer information base effectively to

communicate product availability. Achieving customer focus requires leveraging existing customer information to gain a deeper insight into the relationship a customer has with the institution, and improving customer service-related processes so that the services are quick, error free and convenient for the customers. Furthermore, banks need to have very strong in-house research and market intelligence units in order to face the future challenges of competition, especially customer retention. Marketing is a question of demand (customers) and supply (financial products & services, customer services through various delivery channels). Both demand and supply have to be understood in the context of geographic locations and competitor analysis to undertake focused marketing (advertising) efforts. Focusing on region-specific campaigns rather than national media campaigns would be a better strategy for a diverse country like India. Customer-centricity also implies increasing investment in technology. Throughout much of the last decade, banks world-over have re-engineered their organizations to improve efficiency and move customers to lower cost, automated channels, such as ATMs and online banking. As is proved by the experience, banks are now realizing that one of their best assets for building profitable customer relationships especially in a developing country like India is the branch-branches are in fact a key channel for customer retention and profit growth in rural and semi-urban set up. However, to maximize the value of this resource, our banks need to transform their branches from transaction processing centers into customer-centric service centers. This transformation would help them achieve bottom line business benefits by retaining the most profitable customers. Branches could also be used to inform and educate customers about other, more efficient channels, to advise on and sell new financial instruments like consumer loans, insurance products, mutual fund products, etc. There is a growing realization among Indian banks that it no longer pays to have a "transactionbased" operating model. There are active efforts to develop a relationship-oriented model of operations focusing on customer-centric services. The biggest challenge our banks face today is to establish customer intimacy without which all other efforts towards operational excellence are meaningless. The banks need to ensure through their services that the customers come back to them. This is because a major chunk of income for most of the banks comes from existing customers, rather than from new customers. Customer relationship management (CRM) solutions, if implemented and integrated correctly, can help significantly in improving customer satisfaction levels. Data warehousing can help in

providing better transaction experiences for customers over different transaction channels. This is because data warehousing helps bring all the transactions coming from different channels under the same roof. Data mining helps banks analyse and measure customer transaction patterns and behaviour. This can help a lot in improving service levels. It must be noted, however, that customer-centric banking also involves many risks. The banking industry world over is being thrust into a wild new world of privacy controversy. The banks need to set up serious governance systems for privacy risk management. It must be remembered that customer privacy issues threaten to compromise the use of information technology which is at the very center of e-commerce and customer relationship management two areas which are crucial for banks' future.

The critical issue for banks is that they will not be able to safeguard customer privacy completely without undermining the most exciting innovations in banking. These innovations promise huge benefits, both for customers and providers. But to capture them, financial services companies and their customers will have to make some critical tradeoffs. When the stakes are so high, nothing can be left to chance, which is why banks must immediately begin developing comprehensive approaches to the privacy issue.

The customer centric business models based on the applications of information technology are sustainable only if the banks protect client confidentiality in the process - which is the basic foundation of banking business.


Banking in India has its origin as early as the Vedic period. It is believed that the transition from money lending to banking must have occurred even before Manu, the great Hindu Jurist, who has devoted a section of his work to deposits and advances and laid down rules relating to rates of interest. During the Mogul period, the indigenous bankers played a very important role in lending money and financing foreign trade and commerce. During the days of the East India Company, it was the turn of the agency houses to carry on the banking business. The General Bank of India was the first Joint Stock Bank to be established in the year 1786. The others which followed were the Bank of Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have continued till 1906 while the other two failed in the meantime. In the first half of the 19th century the East India Company established three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank of Madras in 1843. These three banks also known as Presidency Banks were independent units and functioned well. These three banks were amalgamated in 1920 and a new bank, the Imperial Bank of India was established on 27th January 1921. With the passing of the State Bank of India Act in 1955 the undertaking of the Imperial Bank of India was taken over by the newly constituted State Bank of India. The Reserve Bank which is the Central Bank was created in 1935 by passing Reserve Bank of India Act 1934. In the wake of the Swadeshi Movement, a number of banks with Indian management were established in the country namely, Punjab National Bank Ltd, Bank of India Ltd, Canara Bank Ltd, Indian Bank Ltd, the Bank of Baroda Ltd, the Central Bank of India Ltd. On July 19, 1969, 14 major banks of the country were nationalized and in 15 th April 1980 six more commercial private sector banks were also taken over by the government. The Indian banking can be broadly categorized into nationalized (government owned), private banks and specialized banking institutions. The Reserve Bank of India acts a centralized body monitoring any discrepancies and shortcoming in the system. Since the nationalization of banks in 1969, the public sector banks or the nationalized banks have acquired a place of prominence and has since then seen tremendous progress. The need to become highly customer focused has forced the slow-moving public sector banks to adopt a fast track approach. The unleashing of products and services through the net has galvanized players at all levels of the banking and financial institutions market grid to look anew at their existing portfolio offering.

Conservative banking practices allowed Indian banks to be insulated partially from the Asian currency crisis. Indian banks are now quoting a higher valuation when compared to banks in other Asian countries (viz. Hong Kong, Singapore, Philippines etc.) that have major problems linked to huge Non Performing Assets (NPAs) and payment defaults. Co-operative banks are nimble footed in approach and armed with efficient branch networks focus primarily on the high revenue niche retail segments. The Indian banking has finally worked up to the competitive dynamics of the new Indian market and is addressing the relevant issues to take on the multifarious challenges of globalization. It has come a long way from being a sleepy business institution to a highly proactive and dynamic entity. Banks that employ IT solutions are perceived to be futuristic and proactive players capable of meeting the multifarious requirements of the large customers base. Private banks have been fast on the uptake and are reorienting their strategies using the internet as a medium The Internet has emerged as the new and challenging frontier of marketing with the conventional physical world tenets being just as applicable like in any other marketing medium. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advances. Indian nationalized banks (banks owned by the government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization. The Indian banking can be broadly categorized into nationalized, private banks and specialized banking institutions. The Reserve Bank of India acts as a centralized body monitoring any discrepancies and shortcoming in the system. It is the foremost monitoring body in the Indian financial sector. The nationalized banks (i.e. government-owned banks) continue to dominate the Indian banking arena. Industry estimates indicate that out of 274 commercial banks operating in India, 223 banks are in the public sector and 51 are in the private sector. The private sector bank grid also includes 24 foreign banks that have started their operations here. Under the ambit of the

nationalized banks come the specialized banking institutions. These co-operatives, rural banks focus on areas of agriculture, rural development etc., unlike commercial banks these cooperative banks do not lend on the basis of a prime lending rate. They also have various tax sops because of their holding pattern and lending structure and hence have lower overheads. This enables them to give a marginally higher percentage on savings deposits. Many of these cooperative banks diversified into specialized areas (catering to the vast retail audience) like car finance, housing loans, truck finance etc. in order to keep pace with their public sector and private counterparts, the co-operative banks too have invested heavily in information technology to offer high-end computerized banking services to its clients. Complementing the roles of the nationalized and private banks are the specialized financial institutions or Non Banking Financial Institutions (NBFCs). With their focused portfolio of products and services, these Non Banking Financial Institutions act as an important catalyst in contributing to the overall growth of the financial services sector. NBFCs offer loans for working capital requirements, facilitate mergers and acquisitions, IPO finance, etc. apart from financial consultancy services. Trends are now changing as banks (both public and private) have now started focusing on NBFC domains like long and medium-term finance, working cap requirements, IPO financing etc. to meet the multifarious needs of the business community.


Banking system plays an important role in a countrys economy. It promotes growth and development of the country. Indian money market comprises organized and the unorganized institutions. The organized and unorganized institutions in the Indian banking system serve a source of short term credit to agriculture, industry, trade and commerce.

In the Indian banking structure the Reserve Bank of India is the central bank. It regulates, direct and controls the banking and financial institutions in the country. There are three high banking institutions, namely, RBI, NABARD and EXIM Bank. There are separate financial institutions catering to the needs of different sectors of the economy. Development Banks, Investment Banks, Co-operative Banks, Land Development Banks, Commercial Banks in public and private sectors, NABARD, RRBs, EXIM Bank, etc. The indigenous bankers and moneylenders dominate unorganized sector. The Indian banking structure can be seen from the chart shown under:

Apex Banking Institution







Banking Institutions

Commercial Development Banks

Regional Rural Banks

Co- operative Banks

Land Development Banks Bank

Public Private Foreign PACs Sector Sector exchange Banks Bank Banks





All India State Level Level

SBI and Subsidiaries

Nationalised Banks IDBI ICICI SIDBI SFCs


Foreign Bank

Indian Scheduled Bank

Non Schedule Bank

The chart reveals that there are several apex banking institutions working at the national level. RBI is the highest banking authority regulating, directing and controlling all the banking and financial institutions in the country. There are development banks, namely IDBI, SIDBI, ICICI at the national level and State Financial Corporations and State Industrial Development Corporations which have been set-up.

There are 29 public sector banks. Co-operative banks have three tier system. At the village level there is Primary Agriculture Co-operative Society(PACs), at the district level there is Central Co-operative Bank and at the state level there is State Co-operative Bank. Co-operative banks provide short term and medium loans to the agriculture sector. Land Development Banks provide long term agriculture credit. It comprises Primary Land Development Bank(PLDB) at ht district level and State Land Development Bank(SLDB) at the state level. RRBs provide loans and advances to the rural poor and NABARD is an apex body regulating, directing and controlling the financial and banking institutions providing finance for the agriculture and rural development. TYPES OF BANKS Modern age is the age of specialization with the changing situation worldwide, bank functions have also undergone a major change. Economic conditions and financial needs of a country are different than those of other countries throughout the world. Some financial institutions deal in accepting deposits and making loans and advances to different sectors of the economy. Some institution makes loans and advances for medium and short term, while others are meant for long term advances. Some are financing industrial sector and foreign trade while others are advancing loans to agriculture sector. In broader sense of the term banks may be classified into following categories: Central Bank Commercial Banks Development Banks Investment Banks Co-operative Banks Foreign Exchange Banks Savings Banks Export-Import Bank Specialized National Banks Indigenous Bankers International Financial Institutions


(DECADE WISE) Pre-Liberalization: The growth of the Banking Sector in the pre liberalization period can be analyzed as under. 1971-80:

This was the decade immediately following the Nationalization of 14 commercial banks. Also the banking sector grew at the fastest pace in this decade. 1. Assets: The assets of the sector grew at 21.58 % CAGR1. They increased from RS.82.52bn to Rs.582.33bn. This kind of growth was achieved due to massive increase in the number of branches resulting in a spurt in deposit mobilization. 2. Deposits: The deposits grew from Rs.64.79bn to Rs.439.87bn. at a CAGR 21.11 %. The growth was higher in later part of the decade. This growth rate would have been higher had the current accounts grown at a rate higher than 18 %. This indicates peoples preference for using bank as place to keep their savings. The bank was not used as a place to keep money to be used for transaction motive. This is further clarified by the poor ratio of average current deposits to total deposits at 23.45 %. 3. Advances: The advances grew at 19.26 % CAGR from Rs.46.85bn to Rs.272.67bn. Also the growth was higher in the later part of the decade. Thus the advances grew at a pace slower than the deposits due to decreasing credit deposit ratio, which reduced from 72.30 % in 1970 to 61.99 % in 1980.

4. Net worth: The Net worth increased from Rs.1.16bn to Rs.5.33bn at a CAGR of 16.48 %. The Capital of the banks remained flat throughout the decade growing at just 8.54 % and also the growth came in the later part of the decade. The capital increased form Rs.470.2mn to Rs.1.07bn. However, the Reserves grew at a healthy pace of 20 % CAGR from Rs.690mn to Rs.4.27bn. Thus the banks in this decade did not raise capital and funded their growth from internal


accruals. This resulted in a wide gap between Reserves and Capital indicating the banks hunger for Capital. 1981-90: 1. Assets: The growth of the sector was significantly subdued since the last decade. The assets grew at just 16.30 % CAGR compared to 21.58 % in the previous decade. The total assets increased from Rs.582.33bn to Rs.2636.93bn. 2. Deposits: Deposits increased from Rs.439.86bn to Rs.1820.46bn at a CAGR of 15.26 %. The current accounts remained the usual laggards in terms of growth growing at just 12.67 % CAGR. The term and saving deposits grew at a slightly faster pace of 16.17 % and 15.5 % CAGR. 3. Advances: Advances grew at a CAGR of 16.79 % from Rs.272.67bn to Rs.1287.85bn. This is due to the fact that the banks have stepped up their credit-deposit ratio from 62 % to 70.74 %. This indicates higher investment than saving in the economy. 4. Net worth: The Net worth increased from Rs.5.33bn to Rs.47.1bn. Thus the net worth grew at a whopping 24.33 % CAGR. The capital hungry banks went on capital raising spree in the latter half of the decade. Thus the capital grew at a CAGR of 34.53 %. In absolute terms, the capital soared from Rs.1.06bn at the beginning of the decade to Rs.20.73bn at the end of the decade. The Reserves however grew at more or less constant pace of 19.97 % CAGR throughout the decade. At the end of the decade the Capital had kept pace with the Reserves and the gap between them had significantly narrowed down. Post-Liberalization: The growth of this sector after 1991 can be represented as under. 1991-2000:

1. Assets: The rate of the sector further slowed down during this decade. The assets grew at a CAGR of 15.24 % from Rs.2636.93bn to Rs.11103.68bn. The growth rate however, was greater in the later part of the decade indicating future prospects of increase in growth. 2. Deposits: The deposits grew from Rs.1820.47bn to Rs.9003.06bn at a CAGR of 16.69 %. There was a spurt in the last 3-4 years of the decade indicating improving trend. In this decade however, the savings accounts were the laggards in terms of growth at 13.34 % CAGR. The term deposits grew at 18.38 % and current deposits grew at 15.23 %. This reversal of trend in growth rates shows that the people are increasingly using banks to deposit money to be used for transaction motive. 3. Advances: The advances increased from Rs.1287.85bn to Rs.4434.69bn at a CAGR of 12.46 %. The lower growth in advances is due to the decline in credit-deposit ratio from 70.74 % in 1990 to 49.26 %. This shows there was a marked decline in investment in this decade with savings exceeding investment. 4. Net worth: The Net worth grew at a feverish pace of 36.60 % CAGR, the highest in last three decades. This was mainly because the RBI opened the Banking sector to Private sector. As many as 9 New Private Sector Banks started their operations in this period. They brought a lot of capital in the period 1993-95. However in the later half of the decade, capital growth was virtually nil. The Reserves grew at 37.54 % CAGR from Rs.26.36bn Rs.438.34bn. However, contrary to Capital the Reserves recorded exceptional growth in the later half of the decade due to improving profits of private as well as public sector banks. However the gap between reserves and capital is once again widening.



Liberalization and de-regulation process started in 1991-92 has made a sea change in the banking system. From a totally regulated environment, we have gradually moved into a market driven competitive system. Our move towards global benchmarks has been, by and large, calibrated and regulator driven. The pace of changes gained momentum in the last few years. Globalization would gain greater speed in the coming years particularly on account of expected opening up of financial services under WTO. Four trends change the banking industry world over, viz. 1) Consolidation of players through mergers and acquisitions, 2) Globalisation of operations, 3) Development of new technology and 4) Universalisation of banking. With

technology acting as a catalyst, we expect to see great changes in the banking scene in the coming years. The Committee has attempted to visualize the financial world 5-10 years from now. The picture that emerged is somewhat as discussed below. It entails emergence of an integrated and diversified financial system. The move towards universal banking has already begun. This will gather further momentum bringing non-banking financial institutions also, into an integrated financial system. The traditional banking functions would give way to a system geared to meet all the financial needs of the customer. We could see emergence of highly varied financial products, which are tailored to meet specific needs of the customers in the retail as well as corporate segments. The advent of new technologies could see the emergence of new financial players doing financial intermediation. For example, we could see utility service providers offering say, bill payment services or supermarkets or retailers doing basic lending operations. The conventional definition of banking might undergo changes. The competitive environment in the banking sector is likely to result in individual players working out differentiated strategies based on their strengths and market niches. For example, some players might emerge as specialists in mortgage products, credit cards etc. whereas some could choose to concentrate on particular segments of business system, while outsourcing all other functions. Some other banks may concentrate on SME segments or high net worth individuals by providing specially tailored services beyond traditional banking offerings to satisfy the needs of customers they understand better than a more generalist competitor. International trade is an area where Indias presence is expected to show appreciable increase. With the growth in IT sector and other IT Enabled Services, there is tremendous potential for business opportunities. Keeping in view the GDP growth forecast under India Vision 2020, Indian exports can be expected to grow at a sustainable rate of 15% per annum in the period ending with 2010. This again will offer enormous scope to Banks in India to increase their forex business and international presence. Globalization would provide opportunities for Indian corporate entities to expand their business in other countries. Banks in India wanting to increase their international presence could naturally be expected to follow these corporates and other trade flows in and out of India.


Retail lending will receive greater focus. Banks would compete with one another to provide full range of financial services to this segment. Banks would use multiple delivery channels to suit the requirements and tastes of customers. While some customers might value relationship banking (conventional branch banking), others might prefer convenience banking (e-banking).

One of the concerns is quality of bank lending. Most significant challenge before banks is the maintenance of rigorous credit standards, especially in an environment of increased competition for new and existing clients. Experience has shown us that the worst loans are often made in the best of times. Compensation through trading gains is not going to support the banks forever. Large-scale efforts are needed to upgrade skills in credit risk measuring, controlling and monitoring as also revamp operating procedures. Credit evaluation may have to shift from cash flow based analysis to borrower account behaviour, so that the state of readiness of Indian banks for Basle II regime improves. Corporate lending is already undergoing changes. The emphasis in future would be towards more of fee based services rather than lending operations. Banks will compete with each other to provide value added services to their customers. Structure and ownership pattern would undergo changes. There would be greater presence of international players in the Indian financial system. Similarly, some of the Indian banks would become global players. Government is taking steps to reduce its holdings in Public sector banks to 33%. However the indications are that their PSB character may still be retained. Mergers and acquisitions would gather momentum as managements will strive to meet the expectations of stakeholders. This could see the emergence of 4-5 world class Indian Banks. As Banks seek niche areas, we could see emergence of some national banks of global scale and a number of regional players. Corporate governance in banks and financial institutions would assume greater importance in the coming years and this will be reflected in the composition of the Boards of Banks. Concept of social lending would undergo a change. Rather than being seen as directed lending such lending would be business driven. With SME sector expected to play a greater role in the economy, Banks will give greater overall focus in this area. Changes could be expected in the

delivery channels used for lending to small borrowers and agriculturalists and unorganized sectors (micro credit). Use of intermediaries or franchise agents could emerge as means to reduce transaction costs. Technology as an enabler is separately discussed in the report. It would not be out of place, however, to state that most of the changes in the landscape of financial sector discussed above would be technology driven. In the ultimate analysis, successful institutions will be those which continue to leverage the advancements in technology in re-engineering processes and delivery modes and offering state-of-the-art products and services providing complete financial solutions for different types of customers. Human Resources Development would be another key factor defining the characteristics of a successful banking institution. Employing and retaining skilled workers and specialists, retraining the existing workforce and promoting a culture of continuous learning would be a challenge for the banking institutions.


A vision is not a project report or a plan target. It is an articulation of the desired end results in broader terms - A.P.J.Abdul Kalam


Vision is of an integrated banking and finance system catering to all financial intermediation requirements of customers. Strong market players will strive to uncover markets and provide all services, combining innovation, quality, personal touch and flexibility in delivery. The growing expectations of the customers are the catalyst for our vision. The customer would continue to be the centre-point of our business strategy. In short, you lose touch with the customer, and you lose everything. It is expected that the Indian banking and finance system will be globally competitive. For this the market players will have to be financially strong and operationally efficient. Capital would be a key factor in building a successful institution. The banking and finance system will improve competitiveness through a process of consolidation, either through mergers and acquisitions through strategic alliances. Technology would be the key to the competitiveness of banking and finance system. Indian players will keep pace with global leaders in the use of banking technology. In such a scenario, on-line accessibility will be available to the customers from any part of the globe; Anywhere and Anytime banking will be realized truly and fully. At the same time brick and mortar banking will co-exist with on-line banking to cater to the specific needs of different customers.

Indian Banking system has played a crucial role in the socio-economic development of the country. The system is expected to continue to be sensitive to the growth and development needs of all the segments of the society. The banking system that will evolve will be transparent in its dealings and adopt global best practices in accounting and disclosures driven by the motto of value enhancement for all stakeholders. Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking. The banking industry has moved gradually from a regulated environment to a deregulated market economy. The market developments kindled by liberalization and globalization have resulted in changes in the intermediation role of banks. The pace of transformation has been more significant in recent times with technology acting as a catalyst. While the banking system has done fairly well in adjusting to the new market dynamics, greater challenges lie ahead. Financial sector would be opened up for greater international competition under WTO. Banks will have to gear up to meet stringent prudential capital adequacy norms

under Basel II. In addition to WTO and Basel II, the Free Trade Agreements (FTAs) such as with Singapore, may have an impact on the shape of the banking industry. Banks will also have to cope with challenges posed by technological innovations in banking. Banks need to prepare for the changes. In this context the need for drawing up a Road Map to the future assumes relevance. The idea of setting up a Committee to prepare a Vision for the Indian Banking industry came up in IBA, in this background. Managing Committee of Indian Banks Association constituted a Committee under the Chairmanship of Shri S C Gupta, Chairman & Managing Director, Indian Overseas Bank to prepare a Vision Report for the Indian Banking Industry. The composition of the Committee is given at the end of the report. The Committee held its first meeting on 23rd June 2003 at Mumbai. Prior to the meeting the members were requested to give their thoughts on the future landscape of the banking industry. A discussion paper based on the responses received from members was circulated along with a questionnaire eliciting views of members on some of the specific issues concerning anticipated changes in the banking environment. In the meeting, which served as a brainstorming session, members gave their Vision of the future. A second meeting of the Committee was held at Chennai on 7th August 2003 to have further discussions on the common views, which emerged in the first meeting, and also to examine fresh areas to be covered in the study.


The Vision Statement prepared by the Committee is based on common thinking that crystallized at the meetings. In the Chennai meeting it was decided to form a smaller group from among the members to draft the report of the Committee. The group met thrice to finalize the draft report. The report was adopted in the final meeting of the Committee held at Mumbai. When we talk about the future, it is necessary to have a time horizon in mind. The Committee felt, it would be rather difficult to visualize the landscape of banking industry say, 20 years hence due to the dynamic environment. While Government of India brought out India Vision 2020, the Committee is of the view that the pace of changes taking place in the banking industry and in the field of Information Technology would render any attempt to visualize the banking scenario in 2020, inconceivable. The entire financial services sector may undergo a dramatic transformation. It was, therefore, felt that we should set our goals for the near future say, for 5-10 years hence and appropriately call this exercise Banking Industry Vision 2010. The three main aspects focused in the banking vision includes product innovation, process re-engineering and technology.


With increased competition in the banking Industry, the net interest margin of banks has come down over the last one decade. Liberalization with Globalization will see the spreads narrowing further to 1-1.5% as in the case of banks operating in developed countries. Banks will look for fee-based income to fill the gap in interest income. Product innovations and process re-engineering will be the order of the day. The changes will be motivated by the desire to meet the customer requirements and to reduce the cost and improve the efficiency of service. All banks will therefore go for rejuvenating their costing and pricing to segregate profitable and non-profitable business. Service charges will be decided taking into account the costing and what the traffic can bear. From the earlier revenue = cost + profit equation i.e., customers are charged to cover the costs incurred and the profits


expected, most banks have already moved into the profit =revenue - cost equation. This has been reflected in the fact that with cost of services staying nearly equal across banks, the banks with better cost control are able to achieve higher profits whereas the banks with high overheads due to under-utilisation of resources, un-remunerative branch network etc., either incurred losses or made profits not commensurate with the capital employed. The new paradigm in the coming years will be cost = revenue - profit. As banks strive to provide value added services to customers, the market will see the emergence of strong investment and merchant banking entities. Product innovation and creating brand equity for specialized products will decide the market share and volumes. New products on the liabilities side such as forex linked deposits, investment-linked deposits, etc. are likely to be introduced, as investors with varied risk profiles will look for better yields. There will be more and more of tie-ups between banks, corporate clients and their retail outlets to share a common platform to shore up revenue through increased volumes. Banks will increasingly act as risk managers to corporate and other entities by offering a variety of risk management products like options, swaps and other aspects of financial management in a multi currency scenario. Banks will play an active role in the development of derivative products and will offer a variety of hedge products to the corporate sector and other investors. For example, Derivatives in emerging futures market for commodities would be an area offering opportunities for banks. As the integration of markets takes place internationally, sophistication in trading and specialized exchanges for commodities will expand. As these changes take place, banking will play a major role in providing financial support to such exchanges, facilitating settlement systems and enabling wider participation.

Bancassurance is catching up and Banks / Financial Institutions have started entering insurance business. From mere offering of insurance products through network of bank branches, the business is likely to expand through self-designed insurance products after necessary legislative changes. This could lead to a spurt in fee-based income of the banks.

Similarly, Banks will look analytically into various processes and practices as these exist today and may make appropriate changes therein to cut costs and delays. Outsourcing and adoption of BPOs will become more and more relevant, especially when Banks go in for larger volumes of retail business. these providers. However, by increasing outsourcing of operations through service providers, banks are making themselves vulnerable to problems faced by Banks should therefore outsource only those functions that are not strategic to banks business. For instance, in the wake of implementation of 90 days delinquency norms for classification of assets, some banks may think of engaging external agencies for recovery of their dues and in NPA management.

Banks will take on competition in the front end and seek co-operation in the back end, as in the case of networking of ATMs. This type of co-opetition will become the order of the day as Banks seek to enlarge their customer base and at the same time to realize cost reduction and greater efficiency.

Technology will bring fundamental shift in the functioning of banks. It would not only help them bring improvements in their internal functioning but also enable them to provide better customer service. Technology will break all boundaries and encourage cross border banking business. Banks would have to undertake extensive Business Process ReEngineering and tackle issues like a) how best to deliver products and services to customers b) designing an appropriate organizational model to fully capture the benefits of technology and business process changes brought about. c) how to exploit technology for deriving economies of scale and how to create cost efficiencies, and d) how to create a customer centric operation model.


Entry of ATMs has changed the profile of front offices in bank branches. Customers no longer need to visit branches for their day to day banking transactions like cash deposits, withdrawals, cheque collection, balance enquiry etc. E-banking and Internet banking have opened new avenues in convenience banking. Internet banking has also led to reduction in transaction costs for banks to about a tenth of branch banking.

Technology solutions would make flow of information much faster, more accurate and enable quicker analysis of data received. This would make the decision making process faster and more efficient. For the Banks, this would also enable development of appraisal and monitoring tools which would make credit management much more effective. The result would be a definite reduction in transaction costs, the benefits of which would be shared between banks and customers. While application of technology would help banks reduce their operating costs in the long run, the initial investments would be sizeable. With greater use of technology solutions, we expect IT spending of Indian banking system to go up significantly. One area where the banking system can reduce the investment costs in technology applications is by sharing of facilities. We are already seeing banks coming together to share ATM Networks. Similarly, in the coming years, we expect to see banks and FIs coming together to share facilities in the area of payment and settlement, back office processing, data warehousing, etc. While dealing with technology, banks will have to deal with attendant operational risks. This would be a critical area the Bank management will have to deal with in future.

Payment and Settlement system is the backbone of any financial market place. The present Payment and Settlement systems such as Structured Financial Messaging System (SFMS), Centralised Funds Management System (CFMS), Centralized Funds Transfer System (CFTS) and Real Time Gross Settlement System (RTGS) will undergo


further fine-tuning to meet international standards. Needless to add, necessary security checks and controls will have to be in place. In this regard, Institutions such as IDRBT will have a greater role to play.

STRENGTHS 1. Greater securities of Funds Compared to other investment options banks since its inception has been a better avenue in terms of securities. Due to satisfactory implementation of RBIs prudential norms banks have won public confidence over several years. 2. Banking network After nationalization, banks have expanded their branches in the country, which has helped banks build large networks in the rural and urban areas. Private banks allowed to operate but they mainly concentrate in metropolis. 3. Large Customer Base This is mainly attributed to the large network of the banking system. Depositors in rural areas prefer banks because of the failure of the NBFCs . 4. Low Cost of Capital Corporate prefers borrowing money from banks because of low cost of capital. Middle income people who want money for personal financing can look to banks as they offer at very low rates of interests. Consumer credit forms the major source of financing by banks WEAKNESSES 1. Basel Committee


The banks need to comply with the norms of Basel committee but before that it is challenge for banks to implement the Basel committee standard, which are of international standard. 2. Powerful Unions Nationalization of Banks had a positive outcome in helping the Indian Economy as a whole. But this has also proved detrimental in the form of strong unions, which have a major influence in decision making. They are against automation. 3. Priority Sector Lending To uplift the society, priority sector lending was brought in during nationalization. This is good for the economy but banks have failed to manage the asset quality and their intensions were more towards fulfilling government norms. As a result lending was done for nonproductive purposes. 4. High Non-Performing Assets Non-Performing Assets (NPAs) have become a matter of concern in the banking industry. This is because of change in the Accounting Standards (Prudential Norms). Net NPAs increased to large extent of the total advances, which has to be reduced to meet the international standards.

OPPORTUNITIES 1. Universal Banking Banks have moved along the value chain to provide their customers more products and services. For example: - SBI is into SBI home finance, SBI Capital Markets, SBI Bonds etc. 2. Differential Interest Rates As RBI control over bank reduces, they will have greater flexibility to fix their own interest rates which depends on the profitability of the banks.


3. High Household Savings Household savings have been increasing drastically. Investment in financial assets has also increased. Banks should use this opportunity for raising funds. 4. Overseas Markets Banks should tap the overseas market, as the cost of capital is very low. 5. Internet Banking The advances in information technology have made banking easier. Business transactions can effectively carried out through internet banking. THREATS 1. NBFCs, Capital Markets and Mutual funds

There is a huge investment of household savings. The investments in NBFCs deposits, Capital Market Instruments and Mutual Funds are increasing. Normally these instruments offer better returns to investors.


Change in the Government Policy

The change in the government policy has proved to be a threat to the banking sector. 3. Inflation

The interest rates go down with a fall in inflation. Thus, the investors will shift his investments to other profitable sectors. 4. Recession

Due to the recession in the business cycle the economy functions poorly and this has proved to be a threat to the banking sector. The market oriented economy and globalization has resulted into competition for market share. The spread in the banking sector is very


narrow. To meet the competition the banks have to grow at a faster rate and reduce the overheads. They can introduce new products and develop the existing services.


According to American author and humorist Mark Twain: A banker is a fellow who lends his umbrella when the sun is shining and wants it back the minute it begins to rain. Many troubled businesses seeding credit in recent years might agree with Mr. Twain. Indeed securing the large amounts of credit that many businesses require can be a complicated and challenging task loan requests. Moreover, business loans, often called commercial and industrial loans, rank among the most important assets that commercial banks and their closest competitors hold. Corporate finance is an area of finance dealing with financial decisions business enterprises make and the tools and analysis used to make these decisions. The primary goal of corporate finance is to maximize corporate value

while managing the firm's financial

risks. Although it is in principle different from managerial finance which studies the financial decisions of all firms, rather than corporations alone, the main concepts in the study of corporate finance are applicable to the financial problems of all kinds of firms. The discipline can be divided into long-term and short-term decisions and techniques. Capital investment decisions are long-term choices about which projects receive investment, whether to finance that investment with equity or debt, and when or whether to pay dividends to shareholders. On the other hand, the short term decisions can be grouped under the heading "Working capital management". This subject deals with the short-term balance of current assets and current liabilities; the focus here is on managing cash, inventories, and short-term borrowing and lending (such as the terms on credit extended to customers).


The terms corporate finance and corporate financier are also associated with investment banking. The typical role of an investment bank is to evaluate the company's financial needs and raise the appropriate type of capital that best fits those needs. Corporate banking is a part of commercial banking but the part that average depositor with deposits account never sees. It is a division of commercial banking which extends the financial support to the corporate for helping them achieve their organizational goals and objectives. While banks hold money and mortgages, lend money, extend or open up a line of credit for the average depositors, it is business that needs major financial services to build plant, erect buildings, make structural improvements on old ones and start new business ventures. This is one of the most competitive, risky and financially lucrative areas of doing business in todays world. Commercial loans were the earliest form of lending banks did in their move than 2000 year old history. Later in the 20th century finance companies, insurance firms, and thrift institutions entered the business lending field. Today loan officers skilled in evaluating the credit of businesses are usually among the most experienced and highest paid people in the financial services field, along with security underwriters. As a part of commercial banking, corporate banking is focused on analyzing and assessing the risk of the business, establishing the creditworthiness of the business and trying to predict the likelihood of success or failure of business endeavour. These are the professionals who help decide what business initiatives will be taken and when, whether or not to expand the existing businesses, help develop new markets so that new clients can be found and help develop new products for e-commerce, the internet and the international markets. Corporate Banking represents the wide range of banking and financial services provided to domestic and international operations of large local corporate and local operations of multinationals corporations. Services include access to commercial banking products, including working capital facilities such as domestic and international trade operations and


funding, channel financing, and overdrafts, as well as domestic and international payments, INR term loans (including external commercial borrowings in foreign currency), letters of guarantee etc. The Investment Banking and Markets division of various bank brings together the advisory and financing, equity securities, asset management, treasury and capital markets, and private equity activities to complete the CIBM structure and provide a complete range of financial products to our clients. Increasingly, ECA financing is being considered by customers and we work closely with our project export finance teams, both onshore and offshore, to provide structured solutions. The Corporate Bank in India was ranked 2nd overall in the 2004 Greenwich Survey. This portfolio is largely spread within 9 sector teams divided as under :

Consumer Brands Industrials Energy and Utilities Telecommunications Automotive Healthcare Transport and Logistics Metals and Mining Media