22239151 Challenges for Public Sector Banks in India

8/6/2019 22239151 Challenges for Public Sector Banks in India

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RESERVE BANK OF INDIA

LUCKNOW

PROJECT REPORTPROJECT REPORT

CHALLENGES FOR PUBLIC SECTOR BANKS IN

INDIA-A BRIEF SKETCH

PREPARED BY-

KAHKASHAN ANJUM

YOUNG SCHOLAR (YOUNG SCHOLARS AWARD SCHEME-2009)



Our preamble

"...to regulate the issue of Bank Notes and keeping of reserves with

a view to securing monetary stability in India and generally tooperate the currency and credit system of the country to its

advantage."

-Reserve Bank of India

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PREFACE

Without a sound and effective banking system in India it cannot have ahealthy economy. The banking system of India should not only be hassle free butit should be able to meet new challenges posed by the technology and any other external and internal factors.

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

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

Not long ago, an account holder had to wait for hours at the bank counters

for getting a draft or for withdrawing his own money. Today, he has a choice.Gone are days when the most efficient bank transferred money from one branchto other in two days. Now it is simple as instant messaging or dials a pizza.Money has become the order of the day.

Banking in India originated in the last decades of the 18th century. Theoldest bank in existence in India is the State Bank of India, a government-owned

bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of

India, which in 1935 formally took over these responsibilities from the thenImperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given

broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980.

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http://wiki/State_Bank_of_India



KAHKASHAN ANJUM

ACKNOWLEDGEMENT

First of all I would like to thank to Reserve Bank of India to allow me to be a part of such a reputed institution, the Central Bank of India, who gave me the chance towork on the project titled "CHALLENGES FOR PUBLIC SECTOR BANKS IN

INDIA" in Lucknow city. I sincerely thank the Governor, Reserve Bank of India andShri D.P.S. Rathore Regional Director Lucknow office for facilitating and providing anopportunity to learn in the form of a training programme. I further thank Shri Jai kish

sir, General Manager department of banking supervision for helping me in the projectalong with RBI.

A special acknowledgement goes to Shri G.R.kotian, Assistant GeneralManager, DBS for helping me to understand the various aspects related to banking andguiding me to undertake the project in the right direction.

A special thanks to Mr. Vishwa Mohan, Assistant General Manager, DBS for helping me to understand all important vital aspects relating to banking system and providing data & structure.

As a part of DBS, I owe my thanks to all other persons working in DBS for providing me information, support and understanding related to different aspects of banking system.

Lastly and significantly I am grateful to Mr. Purendra Kumar sir Assistant

general manager of DAPM, (personnel) for providing great support and also for making me feel comfortable with the homely interaction with all other staffs and theentire staffs of R.B.I

I am also thankful to Mr. B.D.Yadav, Assistant manager, DAPM,HRDD for providing me support and solving my problems during my tenure in RBILucknow office. Without who’s friendly and loving attitude, the project would nothave been such a joyful learning and a memorable experience forever.

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KAHKASHAN ANJUM

CONTENTS

Subject……………………………………………………page no.

1-Introduction of ………………………………………… RBI………………………………. DBS……………………………….

3-Banking sectors in India

Public sector………………………………. Private sector………………………………. Co-operative, RRBs………………………..

4-Narasimham committee……………………………… Requirement……………………………………. Recommendations………………………………..

5-Globalisation………………………6-Challenges……………………………………

Implementation of Basel II……………………… Implementation of latest technology……………. How to reduce NPA……………………………... Man power planning…………………………….. Loan waiver: A new challenge………………….. Risk management……………………………….. Transparency and disclosures…………………… Challenges in banking security………………….. Competition with private sector banks………….. Growth in business………………………………

8-Recommendations…………………………………...9-Conclusion……………………………………….…...

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10- Summery of the project……………………………11- Bibliography………………………………………………..

RBI

RBI does the currency management

that's not only the talent,

it also regulate and supervise the monetary system

which is done by banks and other institution.

On the establishment of RBI was the main object

credit control and currency management,

RBI issue the notes on the basis of Minimum reserve system

there is Gandhiji's portrait on the note as an emblem.

Notes are printed by RBI

and coins are minted by GOI,

but distribution is done by RBI of both

so why the monetary system growth.

Notes are printed at its presses

and then sent to RBI offices,

RBI gives it direct to the public and by currency chest(cc)

and the cc also gives it to other bank branches.

The consignment of notes is recd.

by two joint custodians from press representative,and then kept in vault after weighting

where security with cc camera is performing.

Notes and coins on counters are exchanged

by the public and bank claim,

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in banking hall working two coin vending machine

from which coins can be taken in working time.

If the excess money goes into circulation

It causes the inflation,To control this situation RBI takes action

and suck out the money by banking & other transaction

INTRODUCTION OF RBI

(THE CENTRAL BANK OF INDIA)

The central bank of the country is the Reserve Bank of India

(RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The sharecapital was divided into shares of Rs. 100 each fully paid which was entirelyowned by private shareholders in the beginning. The Government held shares of nominal value of Rs. 2,20,000. Before the establishment of RBI notes wereissued by three-presidency banks-Bank of Bengal, Bank of Madras & Bank of Bombay. After some time these banks were merged into one 1920 and namedImperial bank of India. Till the establishment of RBI this bank was acting as thecentral bank. In 1935 the rights and duties of Imperial bank were delegated to

RBI. By that time RBI is issuing and controlling the currency.

The Reserve Bank of India was established on April 1, 1935 in accordancewith the provisions of THE RESERVE BANK OF INDIA ACT, 1934. Thoughoriginally privately owned, since nationalization in 1949, the Reserve Bank isfully owned by the Government of India The Central Office of the Reserve Bank has been in Mumbai since inception. The Central Office is where the Governor sits and is where policies are formulated. Now it has 22 regional offices, most of them in state capitals. The general superintendence and direction of the Bank is

entrusted to Central Board of Directors of 20 members, the Governor and four Deputy Governors, one Government official from the Ministry of Finance, tennominated Directors by the Government to give representation to importantelements in the economic life of the country, and four nominated Directors bythe Central Government to represent the four local Boards with the headquartersat Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of fivemembers each Central Government appointed for a term of four years to

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represent territorial and economic interests and the interests of co-operativeand indigenous banks.

The Reserve Bank of India Act 1934 was commenced on April 1, 1935. TheAct, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

• To regulate the issue of banknotes• To maintain reserves with a view to securing monetary stability and• To operate the credit and currency system of the country to its advantage.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right toissue bank notes of all denominations. The distribution of one rupee notes andcoins and small coins all over the country is undertaken by the Reserve Bank asagent of the Government. The Reserve Bank has a separate Issue Department,which is entrusted with the issue of currency notes. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department.Originally, the assets of the Issue Department were to consist of not less than

two-fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of theassets might be held in rupee coins, Government of India rupee securities,eligible bills of exchange and promissory notes payable in India. Due to theexigencies of the Second World War and the post-was period, these provisionswere considerably modified. Since 1957, the Reserve Bank of India is required tomaintain gold and foreign exchange reserves of Ra. 200 crores, of which at leastRs. 115 crores should be in gold. The system as it exists today is known as theminimum reserve system.

BANKER TO GOVERNMENT

The second important function of the Reserve Bank of India is to act asGovernment banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting

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that of Jammu and Kashmir. The Reserve Bank has the obligation totransact Government business, via. to keep the cash balances asdeposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other

banking operations. The Reserve Bank of India helps the Government- both the Union and the States to float new loans and to manage

public debt. The Bank makes ways and means advances to theGovernments for 90 days. It makes loans and advances to the Statesand local authorities. It acts as adviser to the Government on allmonetary and banking matters.

Banker's bank and the Lender of the last resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank wasrequired to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. By anamendment of 1962, the distinction between demand and time liabilities was

abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The Reserve Bank of India can change theminimum cash requirements. The scheduled banks can borrow from the ReserveBank of India on the basis of eligible securities or get financial accommodationin times of need or stringency by rediscounting bills of exchange. Sincecommercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's

bank but also the lender of the last resort.

Controller of Credit

As supreme-banking authority in the country, the Reserve Bank of India,therefore, has the following powers:(a) it holds the cash reserves of all the scheduled banks.

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(b) It controls the credit operations of banks through quantitative and qualitativecontrols.

(c) It controls the banking system through the system of licensing, inspection andcalling for information.

(d) It acts as the lender of the last resort by providing rediscount facilities toscheduled banks.

Custodian of Foreign Reserves

Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the

rupee; the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed

by the Bank. Further, the RBI has the responsibility of administering theexchange controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank hascertain non-monetary functions of the nature of supervision of banks and

promotion of sound banking in India. The Reserve Bank Act, 1934, and theBanking Regulation Act, 1949 have given the RBI wide powers of supervisionand control over commercial and co-operative banks, relating to licensing andestablishments, branch expansion, liquidity of their assets, management andmethods of working, amalgamation, reconstruction, and liquidation. The RBI isauthorised to carry out periodical inspections of the banks and to call for returnsand necessary information from them.

Legal Framework

Acts governing specific functions

• Indian Coinage Act, 1906:Governs currency and coins

• Bankers' Books Evidence Act

• Banking Secrecy Act

• Negotiable Instruments Act, 1881

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Functions of RBI

Monetary Authority:

The RBI is responsible for implementing, formulating and monitoring themonetary policy of India.Objective: Keeping this authority in mind the RBI is required to maintain pricestability and ensure adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

The Supreme financial body sets down broad parameters of banking operationswithin which the country's banking and financial system operates.Objective: This reasonably helps in maintaining public confidence in the system.It in turn protects depositors' interest and provides lucrative banking services to

the public.

Manager of Exchange Control: The RBI is responsible for managing the Foreign Exchange Management Act,1999.Objective: It is the nodal agency, which facilitates external trade and paymentand promotes orderly development and maintenance of foreign exchange market

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FUNCTIONS OF RBI

MONETARYAUTHORITY

REGULATOR &SUPERVISOR

MANAGER OFFOREIGNEXCHANGE

ISSUER OFCURRENCYY

RELATEDFUNCTION

S

BANKER TO BANKS

BANKER TOGOVERNMENT



in India.

Issuer of currency:

It is the only supreme body, which issues and exchanges or destroys currency

and coins not fit for circulation.Objective: This facilitates in giving the public adequate quantity of currencynotes and coins and in good quality.

Developmental role

The RBI since its inception performs a wide range of promotional functions tosupport national objectives and generate goodwill among the citizens of thecountry.

Related Functions

Banker to the Government: The RBI performs merchant banking function for the central and the state governments and also acts as their banker. The RBI oftenadvises the Government of the current monetary condition in the state.

Banker to banks: maintains banking accounts of all scheduled banks. The RBIlooks after the functioning of the state banks and grants them license and evencancels the same on account of fraud practice.

Subsidiaries of RBI

Fully owned:= National Housing Bank (NHB), National Bank for Agricultureand Rural Development (NABARD), Deposit Insurance and Credit GuaranteeCorporation of India (DICGC), Bharatiya Reserve Bank Note Mudran PrivateLimited (BRBNMPL)

Majority stake: = National Bank for Agriculture and Rural Development(NABARD). The Reserve Bank of India has recently divested

its Stake in State Bank of India to the Government of India.

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Department of banking supervision

The Department of Banking Supervision has its Central Office in Mumbai and16 regional offices at various centres in the country. I worked in DBS, Regional Officeat Lucknow. Prior to 1993, the supervision and regulation of commercial banks washandled by the Department of Banking Operations and Development (DBOD).InDecember 1993 the Department of Supervision was carved out of the DBOD with theobjective of segregating the supervisory role from the regulatory function of R.B. I.

The Department of Banking Supervision at present exercises the supervisory rolerelating to commercial banks in the following forms:

Preparing of independent inspection programmes for different institutions.Inspection evaluates financial condition and performance of the bank which includes judging asset quality, solvency and capital adequacy earning performance and liquidityof the bank. Then seeing management and perating condition and compliance of the bank which includes Regulatory compliance and Guidance compliance and finallydoing summary assessment of the bank i.e. identification of concerns and areas for

corrective actions. Undertaking scheduled and special on-site inspections, off-sitesurveillance, ensuring follow-up and compliance. Determining the criteria for theappointment of statutory auditors and special auditors and assessing audit performanceand disclosure standards.

Exercising supervisory intervention in the implementation of regulations whichincludes-recommendation for removal of managerial and other persons, suspension of business, amalgamation, merger/winding up, issuance of directives and imposition of penalties.The Department of Banking Supervision follow CAMELS approach duringits inspection of commercial banks. It judges banks on the basis of the following six

parameters :

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C- CAPITAL ADEQUACY

A-ASSET OR CREDIT QUALITY

M-MANAGEMENT

E-EARNINGS

L-LQUIDITY

S-SOLVENCY



Banking sectors in india

PUBLIC SECTOR BANKS-The public sector is the one whose working is in the handsof the government. the government holds a majority stake in public sector industries.Their activities are mostly influenced by the government. But due to privatization of public sector industries, their nimbler has reduced to a significant extent. Indianrailways, nuclear power industry, electricity board, etc.are still in cluded in the public

sector. it may be defined as "an enterprise where there is no private ownership but itsactivities are not mainly confined to the maximization of profits and private interests of the enterprise but it is influenced by social.

PRIVATE BANKS- are banks that are not incorporated. A private bank is owned byeither an individual or a general partner(s) with limited partner(s). In any such case, thecreditors can look to both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-partners' assets.

FOREIGN SECTOR BANKS- Foreign sector banks are those banks which have their

head office in other countries outside India and branch is working in India.

CO-OPERATIVE SECTOR

The co-operative sector is very much useful for rural people. The co-operative bankingsector is divided into the following categories.

a. State co-operative Banks b. Central co-operative banksc. Primary Agriculture Credit Societies

RRBsA rural bank is a financial institution that helps rationalize the developing regions or developing country to finance their needs specially the projects regarding agricultural progress.

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Structure of Banking in India

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Scheduled

Banks

Non-Scheduled

Banks

Reserve Bank of India

ScheduledCommercial Banks

ScheduledCooperative Banks

Publicsector

banks

PrivateSector Banks

ForeignBanks

RegionalRuralBanks

ScheduledUrbanCooperativeBanks

ScheduledStateCooperativeBanks

Old PrivateSector Banks

New PrivateSector Banks

NationalizedBanks

SBI & itsAssociates

Source-Banking &Finance Magazine



INTRODUCTION

A public space refers to an area or place that is open and accessible to all citizens,regardless of gender , race, ethnicity, age or socio-economic level. One of the earliest

examples of public spaces are commons. For example, no fees or paid tickets arerequired for entry, nor are the entrants discriminated based on background. Non-government-owned malls are examples of 'private space' with the appearance of being'public space'.

Public Space has also become something of a touchstone for critical theory inrelation to philosophy, (urban) geography, visual art, cultural studies, social studies andurban design. Its relevance seems to become more pressing as capital encloses moreand more of what were thought of as 'commons'. The term 'Public Space' is also oftenmisconstrued to mean other things such as 'gathering place', this is an element of thelarger concept.

Under Indian banking regulation Act, 1949 sec. 5 (b)-

“ Banking means acceptingmoney for the purpose of lending and investment or deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.”

The enhanced role of the banking sector in the Indian economy, the increasing

levels of deregulation along with the increasing levels of competition have facilitatedglobalisation of the India banking system and placed numerous demands on banks.Operating in this demanding environment has exposed banks to various challenges.The last decade has witnessed major changes in the financial sector - new banks, newfinancial 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 consequentlygreater risks. Demand for new products, particularly derivatives, has required banks todiversify their product mix and also effect rapid changes in their processes andoperations in order to remain competitive in the globalised environment.

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HISTORY O BANKING

Indian banking system, over the years has gone

through various phases after establishment of Reserve Bank of India in 1935 during theBritish rule, to function as Central Bank of the country. Earlier to creation of RBI, thecentral bank functions were being looked after by the Imperial Bank of India. With the5-year plan having acquired an important place after the independence, the Govt. feltthat the private banks may not extend the kind of cooperation in providing creditsupport, the economy may need. In 1954 the All India Rural Credit Survey Committeesubmitted its report recommending creation of a strong, integrated, State-sponsored,State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led toestablishment of first Public Sector Bank in the name of State Bank of India on July 01,

1955 by acquiring the substantial part of share capital by RBI, of the then ImperialBank of India. Similarly during 1956-59, as a result of re-organisation of princelyStates, the associate banks came in to fold of public sector banking.

Another evaluation of the banking in India was undertaken during 1966 asthe private banks were still not extending the required support in the form of creditdisbursal, more particularly to the unorganised sector. Each leading industrial house inthe country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed inorganised sectors of industry and trade, while the farmers, small entrepreneurs,

transporters , professionals and self-employed had to depend on money lenders whoused to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demandfor bank credit from various sectors of the economy to determine the priorities for grantof loans and advances so as to ensure optimum and efficient utilisation of resources.The scheme however, did not provide any remedy. Though a no. of branches wereopened in rural area but the lending activities of the private banks were not orientedtowards meeting the credit requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies(Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced theLead Bank Scheme on the recommendations of FK Nariman Committee.

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In the post-nationalisation period, there was substantial increase in the no. of branches opened in rural/semi-urban centres bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendationsof M. Narasimham Committee report) under the sponsorship and support of publicsector banks as the 3rd component of multi-agency credit system for agriculture and

rural development. While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularlyduring early 90s, with the submission of report by the Narasimham Committee onReforms in Financial Services Sector during 1991.

In these five decades since independence, bankingin India has evolved through four distinct phases:

Foundation phase can be considered to cover 1950s and 1960s till thenationalisation of banks in 1969. The focus during this period was to lay the foundationfor a sound banking system in the country. As a result the phase witnessed the

development of necessary legislative framework for facilitating re-organisation andconsolidation of the banking system, for meeting the requirement of Indian economy.A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969.

Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilitiesavailable to the masses. Branch network of the banks was widened at a very fast pacecovering the rural and semi-urban population, which had no access to banking hitherto.Most importantly, credit flows were guided towards the priority sectors. However this

weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system.

Consolidation phase: The phase started in 1985 when a series of policyinitiatives were taken by RBI which saw marked slowdown in the branch expansion.Attention was paid to improving house-keeping, customer service, credit management,staff productivity and profitability of banks. Measures were also taken to reduce thestructural constraints that obstructed the growth of money market.

Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on assetclassification and income recognition, capital adequacy, autonomy packages etc.

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BANK NATIONALISATION & PUBLIC SECTOR BANKING

Organized banking in India is more than two centuries old. Till 1935 all the bankswere in private sector and were set up by individuals and/or industrial houses whichcollected deposits from individuals and used them for their own purposes. In theabsence of any regulatory framework, these private owners of banks were at liberty touse the funds in any manner, they deemed appropriate and resultantly, the bank failureswere frequent.

Statistics bear testimony to the fact that the genesis of theeconomic crisis in India, which surfaced in 1991, lies in the large and persistentmacroeconomic imbalances that developed over the 1980s. Move towards Stateownership of banks started with the nationalisation of RBI and passing of BankingCompanies Act 1949. On the recommendations of All India Rural Credit SurveyCommittee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to

SBI. keeping in view the objectives of nationalisation, PSBs undertook expansion of reach and services. Resultantly the number of branches increased 7 fold (from 8321 tomore than 60000 out of which 58% in rural areas) and no. of people served per branchoffice came down from 65000 in 1969 to 10000. Much of this expansion has taken place in rural and semi-urban areas. The expansion is significant in terms of geographical distribution. States neglected by private banks before 1969 have a vastnetwork of public sector banks. The PSBs including RRBs, account for 93% of bank offices and 87% of banking system deposits.

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

Hindustan and Bengal Bank. The East India Company established Bank of Bengal(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units andcalled it Presidency Banks. These three banks were amalgamated in 1920 and ImperialBank of India was established which started as private shareholders banks, mostlyEuropeans. In 1865 Allahabad Bank was established and first time exclusively byIndians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, CanaraBank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in1935.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks,mostly small. Reserve Bank of India was vested with extensive powers for thesupervision of banking in India as the Central Banking Authority. During those day’s public has lesser confidence in the banks. As an aftermath deposit mobilisation wasslow. Abreast of it the savings bank facility provided by the Postal department wascomparatively safer. Moreover, funds were largely given to traders.

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The following steps are taken by the government of India to regulate bankinginstitutions in the country.

•

1949 : Enactment of Banking Regulation Act.• 1955 : Nationalisation of State Bank of India.

• 1959 : Nationalisation of SBI subsidiaries.

• 1961 : Insurance cover extended to deposits.

• 1969 : Nationalisation of 14 major banks.

• 1971 : Creation of credit guarantee corporation.

• 1975 : Creation of regional rural banks.

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

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

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

Nationalised Banks in India

Banking System in India is dominated by nationalised banks. Thenationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. The major objective behind nationalisation was to spread bankinginfrastructure in rural areas and make available cheap finance to Indian farmers.Fourteen banks were nationalised in 1969. Before 1969, State Bank of India (SBI) wasthe only public sector bank in India. SBI was nationalised in 1955 under the SBI Act of 1955.

The second phase of nationalisation of Indian banks took place in the year 1980. Seven more banks were nationalised with deposits over 200 crores. Nationalised banks dominate the banking system in India. The history of nationalised banks in Indiadates back to mid-20th century, when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Thenon 19th July 1960, its seven subsidiaries were also nationalised with deposits over 200crores.

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However, the major nationalisation of banks happened in 1969 by the then-PrimeMinister Indira Gandhi. The major objective behind nationalisation was to spread

banking infrastructure in rural areas and make cheap finance available to Indianfarmers. In the year 1980, the second phase of nationalisation of Indian banks took place, in which 7 more banks were nationalised with deposits over 200 crores. Withthis, the Government of India held a control over 91% of the banking industry in India.After the nationalisation of banks there was a huge jump in the deposits and advanceswith the banks. At present, the State Bank of India is the largest commercial bank of India and is ranked one of the top five banks worldwide. It serves 90 million customersthrough a network of 9,000 branches.

After the 1991 economic crisis, the central government launched economic

liberalization. India has progressed towards a modern market-based system and has agrowing middle class.

SIGNIFICANCE OF BANKS

The importance of a bank to modern economy, so as to enable them to develop, can bestated as follow:

(i) The banks collect the savings of those people who can save and allocate them tothose who need it. These savings would have remained idle due to ignorance of the people and due to the fact that they were in scattered and oddly small quantities. But banks collect them and divide them in the portions as required by the differentinvestors.

(ii) Banks preserve the financial resources of the country and it is expected of them thatthey allocate them appropriately in the suitable and desirable manner. (iii) They make available the means for sending funds from one place to another and dothis in cheap, safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and uncrossed,which is the easiest and most convenient, besides they also care for making such payments as safe as possible.

(v) Banks also help their customers, in the task of preserving their precious possess-ions intact and safe.

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(vi) To advance money, the basis of modern industry and economy and essential for financing the developmental process, is governed by banks. (Vii) It makes the monetary system elastic. Such elasticity is greatly desired in the

present economy, where the phase of economy goes on changing and with suchchanges, demand for money is required. It is quite proper and convenient for thegovernment and R.B.I. to change its currency and credit policy frequently, this is done by RBI, by changing the supply of money with the changing the supply of money withthe changing needs of the public.

Although traditionally, the main business of banks is acceptance of deposits andlending, the banks have now spread their wings far and wide into many allied and evenunrelated activities.

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

• State Bank of India• State Bank of Bikaner and Jaipur • State Bank of Hyderabad• State Bank of Indore• State Bank of Mysore• Andhra Bank • Allahabad Bank • Bank of Baroda•

Bank of India• Bank of Maharashtra• Canara Bank • Central Bank of India• Corporation Bank • Dena Bank • Indian Overseas Bank • Indian Bank • Oriental Bank of Commerce• Punjab National Bank • Punjab and Sind Bank • Syndicate Bank • Union Bank of India• United Bank of India• Vijaya Bank

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http://finance.indiamart.com/investment_in_india/bank_of_baroda.html

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http://finance.indiamart.com/investment_in_india/bank_of_maharastra.html

http://finance.indiamart.com/investment_in_india/canara_bank.html

http://finance.indiamart.com/investment_in_india/central_bank_india.html

http://finance.indiamart.com/investment_in_india/corporation_bank.html

http://finance.indiamart.com/investment_in_india/dena_bank.html

http://finance.indiamart.com/investment_in_india/indian_overseas_bank.html

http://finance.indiamart.com/investment_in_india/indian_bank.html

http://finance.indiamart.com/investment_in_india/oriental_bank_commerce.html

http://finance.indiamart.com/investment_in_india/punjab_national_bank.html

http://finance.indiamart.com/investment_in_india/punjab_sind_bank.html

http://finance.indiamart.com/investment_in_india/syndicate_bank.html

http://finance.indiamart.com/investment_in_india/union_bank_india.html

http://finance.indiamart.com/investment_in_india/united_bank_of_india.html

http://finance.indiamart.com/investment_in_india/vijaya_bank.html

http://finance.indiamart.com/investment_in_india/state_bank_of_hyderabad.html

http://finance.indiamart.com/investment_in_india/state_bank_of_indore.html

http://finance.indiamart.com/investment_in_india/state_bank_of_mysore.html

http://finance.indiamart.com/investment_in_india/andhra_bank.html

http://finance.indiamart.com/investment_in_india/allahabad_bank.html

http://finance.indiamart.com/investment_in_india/bank_of_baroda.html

http://finance.indiamart.com/investment_in_india/bank_of_india.html

http://finance.indiamart.com/investment_in_india/bank_of_maharastra.html

http://finance.indiamart.com/investment_in_india/canara_bank.html

http://finance.indiamart.com/investment_in_india/central_bank_india.html

http://finance.indiamart.com/investment_in_india/corporation_bank.html

http://finance.indiamart.com/investment_in_india/dena_bank.html

http://finance.indiamart.com/investment_in_india/indian_overseas_bank.html

http://finance.indiamart.com/investment_in_india/indian_bank.html

http://finance.indiamart.com/investment_in_india/oriental_bank_commerce.html

http://finance.indiamart.com/investment_in_india/punjab_national_bank.html

http://finance.indiamart.com/investment_in_india/punjab_sind_bank.html

http://finance.indiamart.com/investment_in_india/syndicate_bank.html

http://finance.indiamart.com/investment_in_india/union_bank_india.html

http://finance.indiamart.com/investment_in_india/united_bank_of_india.html

http://finance.indiamart.com/investment_in_india/vijaya_bank.html



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

• ING Vysya Bank Ltd• Axis Bank Ltd• Indusind Bank Ltd• ICICI Bank Ltd• HDFC Bank Ltd• IDBI Bank Ltd

The financial sector assessment report, prepared by the Reserve Bank of India (RBI)and the Central Government, has favoured the merger of public sector banks (PSBs)having a government holding bordering on 51 per cent with those having a muchhigher state-holding to ensure that their business growth does not suffer due to capital

constraints.

The report indicated that PSBs would need additional capital to meet Basel II normsand maintain an asset growth for the overall projected growth of the economy at 8 per cent and consequent growth of risk-weighted assets (RWAs).

This has the potential to further aggravate a growing apprehension that public sector banks’ growth could be constrained in relation to other players.

The extent of additional capital required from the government is expected to bemanageable, provided the RWAs grow by within 25 per cent annually and total cost of recapitalisation would be lower than in most other countries.

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http://finance.indiamart.com/investment_in_india/icici_bank.html

http://finance.indiamart.com/investment_in_india/hdfc_bank.html

http://finance.indiamart.com/investment_in_india/idbi.html

http://finance.indiamart.com/investment_in_india/ing_vysya_bank.html

http://finance.indiamart.com/investment_in_india/uti_bank.html

http://finance.indiamart.com/investment_in_india/indusind_bank.html

http://finance.indiamart.com/investment_in_india/icici_bank.html

http://finance.indiamart.com/investment_in_india/hdfc_bank.html

http://finance.indiamart.com/investment_in_india/idbi.html



Public banks deposit growth rise, private, foreign banks

see drop

The public sector banks have shown growth in their credits in comparison to their

private and foreign competitors. According to latest data released by the Reserve Bank of India (RBI) in due course the depositors have withdrawn funds from private andforeign banks and are investing their money with public sector banks which hasresulted in a significant decline in growth of deposits with private and foreign banks.

In recent months big companies such as Infosys moved their deposits from private andforeign banks to public sector banks, largely because the state-owned players wereoffering higher interest rates. While in December, the public sector players had takendecision to reduce bulk deposit and focus more on current account and saving account balances.

Public sector banks score over private ones

Public sector banks have long been chastised as the black sheep of the financialsector. But while a lot of experts might deride these institutions for their non- performing assets and lower productivity, at the end of the day, public sector bankshave far happier customers compared to their counterparts in the private sector.

According to Reserve Bank of India’s (RBI's) latest report, Trend and Progressof Banking in India, public sector banks rule the roost in customer satisfaction.

The report should make those singing hosannas for private sector banks sit up. Itshows that the State Bank of India (SBI) recorded 0.1 “complaints per branch” whilethe corresponding figure for icici was 1.39—more than 10 times that of sbi.Citibank fared far worse: it recorded a whopping 8.59 complaints per branch. Thesecomplaints were made to RBI grievance cell.

One, however, needs to look at another aspect before delivering the final verdict: profits per branch. Here, private banks fare better. For example, on an average, aCitibank branch earns a net profit of Rs 18 crore annually. An average icici bank branch earns Rs 4.5 crore, while an average sbi branch earns just Rs 50 lakh, annually.The standard response to such figures is that private sector banks are more efficient

than their public sector counterparts with foreign banks taking efficiency toastronomical levels.

But their rich rake-offs notwithstanding, the profit-complaint ratio of private sector banks is much lower than their much maligned public sector counterparts sbi’s profit-complaint ratio of 4.1 for example is much higher than cici and Citibank

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TimeismoneyRBI’s data indicates that private and foreign banks are biting off more than they canchew: customer acquisition is shooting through the roof but the servicing mechanism isGiven short shrift.

Banks, like all other businesses, believe that “time is money”. The privatesector interpretation of this adage seems to be: spending as little time on the customer as possible. In most private banks, the time spent on the phone with a customer istracked and executives found to be spending an inordinate amount are ticked off. Thezeal to be efficient means that the private sector has all but forgotten another businessaphorism: time spent with a customer is an investment which may yield futuredividends in the form of customer loyalty and referrals. And their surveys, other thanthose conducted by rbi, testify to such omission. For example, according to a survey by

Consumer Voice (http://www.consumer-voice.org), a consumer awareness magazine, people were more likely to recommend public sector banks to their friends or relatives.Of the top five banks in this category, three belong to the public sector. The highest-ranking foreign bank is Standard Chartered at number eight. icici Bank is at number 15(fifth from the bottom), with Citibank bringing up the rear.

DarksideRecent advertising campaigns, especially by private banks, have increasingly startedusing the emotional platform to attract customers. With tag lines such as “ Hum hain

naa” and “ Just like borrowing from a friend ”, these banks attempt to bring home the

fact that the bond between a customer and his bank goes beyond the purelycommercial.

However, customers don’t necessarily share that warm feeling.

Public sector banks score over private ones

According to the rbi report, private and foreign banksactually score pretty high on customer complaints of the nasty variety: namely,“harassment in recovery of loans”. Foreign banks record 0.134 such complaints per

branch—more than 30 times the overall average. The corresponding numbers for new private Indian banks is 0.021 and 0.003 for public sector banks.

The Consumer Voice survey also has private sector banks faring poorly in this respect.Only one public sector bank figures amongst the top five in the list of banks withhighest number of disgruntled customers. Not surprisingly, Citibank tops the list.

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Citibank also tops another dubious list: that of people fed up with tele-marketingexecutives pestering them. The bank accounts for 40 per cent of all such complaints.

WHY WORRY?

At Citibank’s website, one finds a complaint form along with a detailed noteelaborating the grievance redressal system. The icici Bank home page also has a similar link, prominently displayed.

The sbi home page does not have a link relating to complaints. What they do have is acustomer care web page that declares, “Customers of the bank can meet senior executives of the bank on the 15 th of every month (between 3.00 pm and 5.00 pm)without any prior appointment and discuss issues relating to their accounts/bankingtransactions. In case the 15th is a holiday, customers can meet the next working day.”

It is a fundamentally different approach. For the new breed of private banks, humancontact is anathema. The overarching desire is to resolve grievances on the phone or through the Internet. The customer is preferred to remain a faceless entity with anumber to identify him. But at a public sector bank, a harried customer, running from pillar to post would often find that a kind word, a cup of tea and a patient hearingsolves half the problem.

TheHolyGrail

One reason for disgruntled customers is the fact that that the service executives areoften not authorised to solve problems and refers them to another party. This oftenleads to a chain reaction and such vacillation irks customers, leaving them with nochoice but to approach rbi. According to P Shimrah, secretary to the bankingombudsman, rbi “Public sector banks are decentralised. The branch manager of a public sector bank is more empowered than his private sector counterpart to solve problems at his level. In private sector banks, it’s the opposite. With a centraliseddecision making authority, they feel that technology can be used to overcome these problems.”

But technology, like atm machines, though useful, cannot provide complete solution.For two important reasons. Firstly, technology is not infallible: it solves old problems but creates its own new ones. Secondly, technology needs to find favour with the public. Inappropriate technology or innovations that are too far ahead of their time willnot work. Instead of living with the vision of a future utopia with perfect bankingsystems, it would be wiser to accept the problems that are cropping up now and addressthem in a sensible and humane manner.

26



The fact that public sector banks need to shape up has been repeated ad nauseam, butthe solution does not lie in swinging to the other extreme typified by foreign banks. Asatisfying middle ground needs to be found where the cutting edge efficiency of western banking is tempered with respect and empathy for the customer.

Based on Loan loss provisioningThe net NPAs4 have continually declined from 14.46% in 1993-94 to 6.74% in 2000-01. RBI regulations require that banks build provisions upto at least a level of 50% of

their gross NPAs. The current provisioning is 35% of gross NPAs.

The problem India faces is not lack of strict prudential norms but1. The legal impediments and time consuming nature of asset disposal process.2. ‘Postponement’ of the problem in order to report higher earnings3. Manipulation by the debtors using political influence

27



CHALLENGES IN BANKING

The enhanced role of the banking sector in the Indian economy, the increasing levels of

deregulation along with the increasing levels of competition have facilitated

globalisation of the India banking system and placed numerous demands on banks.

Operating in this demanding environment has exposed banks to various challenges.

The last decade has witnessed major changes in the financial sector - new banks, new

financial institutions, new instruments, new windows, and new opportunities - and,

along with all this, new challenges. While deregulation has opened up new vistas for

banks to augment revenues, it has entailed greater competition and consequently

greater risks. Demand for new products, particularly derivatives, has required banks to

diversify their product mix and also effect rapid changes in their processes and

operations in order to remain competitive in the globalised environment.

Globalisation – a challenge as well as an opportunity

The benefits of globalisation have been well documented and are being increasingly

recognised. Globalisation of domestic banks has also been facilitated by tremendous

advancement in information and communications technology. Globalisation has thrown

up lot of opportunities but accompanied by concomitant risks. 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 and the strength of the individual participants.

Adoption of appropriate prudential, regulatory, supervisory, and technological

framework on par with international best practices enables strengthening of the

domestic banking system, which would help in fortifying it against the risks that might

arise out of globalisation. In India, we had strengthened the banking sector to face the

28



pressures that may arise out of globalisation by adopting the banking sector reforms in

a calibrated manner, which followed the twin governing principles of non-disruptive

progress and consultative process.

Global challenges in bankingA new broad challenges faced by the Indian banks in the following areas, viz.,

enhancement of customer service; application of technology; implementation of Basel

II; improvement of risk management systems; implementation of new accounting

standards; enhancement of transparency & disclosures; and compliance with KYC

aspects.

29



CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA

1. Implementation of Basel II2. Implementation of latest technology

3. How to reduce NPA4. Corporate governance5. Man power planning6. Talent management7. Loan waiver: A new challenge8. Risk management9. Transparency and disclosures10.Challenges in banking security11.Competition with private sector banks12.Growth in business13.Enhancing customer service

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Implementation of Basel II

Basel II implementation is widely acknowledged as a significant challengefaced by both banks and the regulators internationally. It is true that Basel IIimplementation may be seen as a compliance challenge. While it may be so for some banks, I would venture to mention that Basel II implementation has another dimensionwhich offers considerable opportunities to banks. I would like to highlight twoopportunities that are offered to banks, viz., refinement of risk management systems;and improvement in capital efficiency. Basel 2 requires more capital for public sector banks in India due to the fact that operational risk is not captured under Basel I.

Basel II is the revised capital accord of Basel I. Basel II accord defines theminimum regulatory capital which is to be allocated by each bank based on its risk profile of assets. Banks have to maintain the capital adequacy ratio (CAR) of minimum9 %. As per RBI, banks which are getting more than 20% of their businesses fromabroad have to Implement Basel II. But most of the banks are now interested toimplement Basel II.

Implementation of Basel II is seen as one of the significant challenges for Public Sector Banks. Implementation of Basel II will require more capital for Public

Sector Banks in India due to the fact that operational risk is not captured under Basel I

• In ICRA's estimates, Public Sector Banks would need additional capital to theextent of Rs. 90 billion to meet the capital charge requirement for operationalrisk under Basel II.

• The challenge for the banks would be to quantify risks(credit concentration risk,interest rate risk in the banking book, business and strategic risk, liquidity risk,and other residual risks such as reputation risk and business cycle risk) and then,to translate those consistently into an appropriate amount of capital needed,commensurate with the bank’s risk profile and control environment.

• Needless to say, this would call for instituting sophisticated risk managementsystems, including a robust stress-testing and economic capital al Public Sector Banks would be required to use fully scalable state of the art technology, ensureenhanced information system security and develop capability to use the centraldatabase to generate any data required for risk management as well asreporting.location framework.

31



• The most important Pillar 2 challenge relates to acquiring and upgrading thehuman and technical resources necessary for the review of banks responsibilitiesunder Pillar 1.

• Public Sector Banks would be required to use fully scalable state of the arttechnology, ensure enhanced information system security and develop capability

to use the central database to generate any data required for risk management aswell as reporting.

• The costs associated with Basel II implementation, particularly costs related toinformation technology and human resources, are expected to be quitesignificant for Public Sector Banks.

Minimum Capital Allocation for credit risk

To allocate the capital for any of the above risk, it should be quantitatively measured.

CAPITAL ADEQUECY PLANNING

32



IMPLEMENTATION OF LATEST TECHNOLOGY

An online banking facility enables you to handle your finances efficiently.

Online banking uses modern computer technologies to offer the users convenient banking facilities. If you have access to such a facility, there is absolutely no need for you to personally visit your bank’s branch for any sort of transaction. You can simply

login with the internet-banking password that your banker has given you, and carry allthe necessary work online. It also eliminates the necessity of doing any paper-basedwork and saves considerable time for the users.

Private sector and foreign banks were using technology and computerized system sinceits beginning while PSBs were not. So they found difficulty in managing all thesethings. Many of Indian PSBs ignored technological change and had lost market share toforeign banks and new private banks. Technology helps in having a huge branchnetwork easily and also it reduces the operational cost this may b clarified by anexample as:-

Operational cost per transaction of an account via different type is- Via computers on counter- 40 Rs.

Via ATM - 16-17 Rs.

Via online - 46 paiseSo it is cleared that manually/direct transaction cost comes very high and

electronically and online it is very low. So that’s why public sector banks shouldimprove their working system and should make it totally online but challenge is beforePSBs

The users can do variety of work using your online banking pin code. The bankers

benefit equally from the online banking facilities. Besides offering their users theconvenience of banking, the online banking system means significant cost savings for the bankers themselves. With such an automatic system in place, the bankers need notto hire employees specialized in handling paper work and teller interactions. Thisreduces the bankers’ operating costs considerably, translating into significant costsavings over the long-term.

Various Advantages of Banking Online:

33



The biggest advantage of online banking is its convenience. Unlike a bank’s branches,online banking facilities are open 24/7. This offers you banking from the comfort of your home with just a click. You can access such a facility from anywhere in the world.This could be great advantage if you need to address urgent monetary concerns whileaway from home. Transactions online are fast and mostly quicker than ATM

transactions. Moreover, online banking systems have sophisticated tools that provideeffective management of the users’ assets.

Initially the online banking security system was quiet simple, a id and a password andyou are done. It was quiet risky then anyone who gets access to these two can emptyyour account. Many people at that time will do setting with the courier people and gotaccess to this details. But now even the card and the id password as sent thru separatecourier. So its now more secure.

Most banks now has sms verification, you are sent a code that you need to add when

you are adding a new account for transfer, its simple and logical. Thou sometimes thesms takes too much time to be received. Stanchart is fast the minute you press add thesms is in your inbox, may be because of lesser traffic. Icici has also an extra transaction password plus you need to have a debit card and have to use the grid at the back of cardto validate it. This three way verification is quiet robust and thus you dont get phisingemails these days. Because phisers know that having an id and password is not enough.

Technological leap

The banks realised that if they have to survive, they will have to adopt modern

technology. State Bank of India was amongst the first to focus on technology and ateam is constantly at work to innovate in an attempt to lower costs. So, the bank hasnow introduced two-faced ATMs, which will increase efficiency.

Technology will not just help them reach out to young customers better but also helpthem cut costs and improve efficiency. Here’s how the economics work. While atransaction at a branch costs around Rs 50, one at an ATM works out to Rs 18, a senior State Bank of India executive said. Transactions through the Internet are even cheaper at around Rs 10 each.

As a result, banks like State Bank of India want 50 per cent of the transactions from

non-branch channels such as ATMs, net banking and mobile phones.

34



HOW TO REDUCE NPA

Non performing asset

Definition

A loan or lease that is not meeting its stated principal and interest payments. Banksusually classify as nonperforming assets any commercial loans which are more than 90days overdue and any consumer loans which are more than 180 days overdue. Moregenerally, an asset which is not producing income.

Non Performing Asset means an asset or account of borrower, which has beenclassified by a bank or financial institution as sub-standard, doubtful or loss asset, inaccordance with the directions or guidelines relating to asset classification issued byRBI.An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment andsettlement systems, recovery climate, upgradation of technology in the banking system,etc., it was decided to dispense with 'past due' concept, with effect from March 31,

2001.

Financial sector reform in India has progressed rapidly on aspects like interest ratederegulation, reduction in reserve requirements, barriers to entry, prudential norms andrisk-based supervision. But progress on the structural-institutional aspects has beenmuch slower and is a cause for concern. The sheltering of weak institutions whileliberalizing operational rules of the game is making implementation of operationalchanges difficult and ineffective. Changes required to tackle the NPA problem wouldhave to span the entire gamut of judiciary, polity and the bureaucracy to be truly

effective. This paper deals with the experiences of other Asian countries in handling of NPAs.

The chart below shows data for NPA going back to 2.3-1.0. The two lines plotted arenon-performing assets gross non-performing assets. Loan loss allowance is notgrowing nearly as fast as the non-performing assets. I can say that this is a problem, but that we don’t have a solution. In the course of discussing disposition of assets withvarious banks, it sometimes becomes apparent that the reason that the bank cannot

35



dispose of the property at market prices, is because the bank does not have enoughcapital to do so. It is suspected that the slow growth of loan loss allowance is related tothe same problem. While this chart shows that NPA is decreasing overall in bankingsystem but even then in PSBs NPA are higher with comparison to private sector banks.

Something needs to happen, but I’m certainly not smart enough to know what it is.

The position of classification of NPA is summarized below:Standard assets : not NPASub-standard assets : Twelve months period after becoming NPA.Doubtful assets : Substandard for 12 months or more.Loss assets : Assets becomes uncollectible/ unrealizable.

Gross and net NPA of different sector of bank

Table 1 (end of March 31)(in %)

category Gross NPA/ Gross Advance

2001 2002 2003 2004

36



Public sector bank 12.37 11.09 9.36 7.79

Private sector 8.37 9.64 8.07 5.84

Foreign bank 6.84 5.38 5.25 4.62

Table 2 (end of March 31) (in %)

category Net NPA / Net Advance

2001 2002 2003 2004

Public sector bank 6.74 5.82 4.53 2.98

Private sector 2.27 2.49 2.32 1.32

Foreign bank 1.82 1.89 1.76 1.49

Management of NPAThe table I&II shows that during initial sage the percentage of NPA was higher. This

was due to show ineffective recovery of bank credit, lacuna in credit recovery system,inadequate legal provision etc. Various steps have been taken by the government torecover and reduce NPAs. Some of them are.

1. One time settlement / compromise scheme2. Lok adalats3. Debt Recovery Tribunals4. Securitization and reconstruction of financial assets and enforcement of SecurityInterest Act 2002.5. Corporate Reconstruction Companies

6. credit information on defaulters and role of credit information bureaus

CONCLUSION

The Indian banking sector is facing a serious problem of NPA. The extent of NPA iscomparatively higher in public sectors banks. (Table II&III). To improve the efficiencyand profitability, the NPA has to be scheduled. Various steps have been taken bygovernment to reduce the NPA. It is highly impossible to have zero percentage NPA.But at least Indian banks can try competing with foreign banks to maintaininternational standard.

A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets areone of the major concerns for banks in India.

NPAs reflect the performance of banks. A high level of NPAs suggests high probabilityof a large number of credit defaults that affect the profitability and net-worth of banksand also erodes the value of the asset. The NPA growth involves the necessity of

37



provisions, which reduces the over all profits and shareholders value.

The issue of Non Performing Assets has been discussed at length for financial systemall over the world. The problem of NPAs is not only affecting the banks but also thewhole economy. In fact high level of NPAs in Indian banks is nothing but a reflection

of the state of health of the industry and trade.

CAUSES FOR NON-PERFORMING ASSETS IN PUBLIC SECTOR BANKS

Introduction

Granting of credit for economic activities is the prime duty of banking. Apart fromraising resources through fresh deposits, borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity.Lending is generally encouraged because it has the effect of funds being transferred

from the system to productive purposes, which results into economic growth. However lending also carries a risk called credit risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a major hurdle in the process of creditcycle. Thus, these loan losses affect the banks profitability on a large scale. Thoughcomplete elimination of such losses is not possible, but banks can always aim to keepthe losses at a low level.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat tothe banking industry in our country sending distressing signals on the sustainability andendurability of the affected banks. The positive results of the chain of measures

affected under banking reforms by the Government of India and RBI in terms of thetwo Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. Despite various correctional steps administeredto solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. Theseverity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.

Magnitude of NPAs

In India, the NPAs that are considered to be at higher levels than those in other countries have of late, attracted the attention of public. The Indian banking system hadacquired a large quantum of NPAs, which can be termed as legacy NPAs.

NPAs seem to be growing in public sector banks over the years.

38



• Categories of NPAs

Sub-standard Assets - which has remained NPA for a period of 90 days to lessthan or equal to 12 months

Doubtful Assets - has remained in the sub-standard category for a period of 12months

Loss Assets - loss has been identified by the bank or internal or external auditorsor the RBI inspection but the amount has not been written off wholly.

After classifying assets into above categories, banks are required to make provision against these in terms of extant prudential regulations, the provisioning norms are as under:

• AssetClassification

Provisionrequirements

• Substandardassets

10%

• Doubtful assets Up to 1 year 20%

1 to 3 year 30%

More than 3 year 100% • Loss assets It may be either written off or fully

provided by the bank

Gross NPAs are the sum total of all loans assets that are classified as NPAs.

Net NPAs are those type of NAPs in which the bank deducted the provisionregarding NPAs.

While gross NPAs reflects the quality of the loans made by banks net whereas NPAs shows the actual burden of bank.

39



DEPOSIT AND CREDIT GROWTH

DEPOSITAs on

Jan 4, 2008As on

Jan 2, 2009

Public sector banks 24.2 24.2

Foreign banks 34.1 12.1

Private sector banks 26.9 13.4

Scheduled commercial banks* 25.1 21.2

CREDIT

Public sector banks 19.8 28.6

Foreign banks 30.7 16.9

Private sector banks 24.2 11.8

Scheduled commercial banks* 21.4 24.0

*Includes regional rural banks

TABLE 7.1 : BANK GROUP-WISE CLASSIFICATION OF LOAN ASSETS

OF PUBLIC SECTOR BANKS - 2003 TO 2008

(Amount in Rs. crore)

As on March 31

Bank

group /

Years

Standard Assets Sub-standard Assets Doubtful Assets

Amount Per cent Amount Per cent Amount Per cent

-1 -2 -3 -4 -5 -6

PublicSector

Banks

2003 523724 90.6 14909 2.6 32340 5.6

2004 610435 92.2 16909 2.6 28756 4.3

2005 824253 94.6 10838 1.2 29988 3.4

2006 1029493 96.1 11394 1.1 24804 2.3

2007 1335175 97.2 14147 1 19945 1.5

2008 1656585 97.7 16870 1 19167 1.1

TABLE 7.1 : CLASSIFICATION OF LOAN ASSETS

OF PUBLIC SECTOR BANKS - 2003 TO 2008 (Concld.)

(Amount in Rs. crore)

As on March 31

Bank

group

/

Years

Loss Assets Total NPAs

Amount Per cent Amount Per cent Total Advances

40



-7 -8 -9 -10 -11

{=(3)+(5)+(7)} {=(4)+(6)+(8)} {=(1)+(3)+(5)+(7)}

Public

Sector

Banks

2003 6840 1.2 54089 9.4 577813

2004 5876 0.9 51541 7.8 661976

2005 5771 0.7 46597 5.4 870850

2006 5181 0.5 41379 3.9 1070872

2007 4510 0.3 38602 2.8 1373777

2008 3712 0.2 39749 2.3 1696334

From above table it may be observed that though the total NPAs amount of Publicsector Banks decreased from Rs. 54089 (crore) in year 2003 to Rs. 39749 ( crore) as atthe end of 31 March 2008 still a colossal amount is locked up in these impaired loans.An important aspect of strengthening the assets portfolio of Public Sector Banks is tofurther reduce the level of NPAs. The earning capacity and profitability of the bank arehighly affected due to this as NPAs do not generate interest income for banks while atthe same time banks are required to make provisions for NPAs from their current profits. So the NPAs have deleterious impact on the return on assets.

Due to inadequacy of legal systems, recoveries of NPA are not likely to be quick through legal recourse. In view of the inadequacy of legal infrastructure in prompt

reduction of NPA, the only feasible alternative is to encourage non-legal recourse.While banks require non-legal time bound surgical solutions to meet the statutoryrequirements in reducing the level of net NPA, the internal legal machinery in banksshould obviously be so strengthened as to ensure speedy disposal of suit-filed cases andexecution of decreed cases. This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrenceof this problem by ensuring addition of fresh NPA to bare minimum.

Corporate Governance

It is a system of structuring, operating and controlling a company with a view toachieve long term strategic goals to satisfy shareholders, creditors, employees,

41

SOURCE: RBI ANNUAL REPORT 2007-08



customers and suppliers, and complying with the legal and regulatory requirements,apart from meeting environmental and local community needs.

The issues related to corporate governance have continued to attract considerable

national and international attention in light of a number of high-profile breakdowns incorporate governance.

Currently in India, about four-fifths of the banking business is under thecontrol of public sector banks (PSBs), comprising the SBI and itssubsidiaries and the nationalised banks.

In view of the importance of the banking system for financial stability, soundcorporate governance is not only relevant at the level of the individual bank, but is also a critical ingredient at the system level.

Corporate governance in PSBs is complicated by the fact that effective

management of these banks vests with the government and the topmanagements and the boards of banks operate merely as functionaries.

Unless the issues connected with these multiple, and sometimes conflicting,functions are resolved and the boards of banks are given the desired level of autonomy it would be difficult to improve the quality of corporategovernance in PSBs.

One of the major factors that impinge directly on the quality of corporategovernance is the government ownership.

Although some ownership structures might have the potential to alter thestrategies and objectives of a bank, these banks will also face many of the

same risks associated with weak corporate governance. Consequently, the general principles of sound corporate governance should

also be applied to all Public sector Banks.• Weak corporate governance translates into higher cost of capital

• Better corporate governance translates into somewhat higher returns on assets

• But much better higher returns on investment relative to cost of capital

So corporate governance is a key challenge for Public SectorBanks in the era of globalization.

Man-power Planning

Manpower is the biggest challenge for the public sector banks. While domestic private sector banks are expanding their manpower to match the business

42



growth, public sector banks were faced with a large attrition rate of over 30 %and are experiencing an overall deceleration in the number of employees.Because It takes as long as 18 months for the recruitment process of a typicalstate-owned bank to be concluded and of the candidates shortlisted, many dropout on their own, and Incentivisation of government bank employees too have

failed as the fear of probe by various regulators and government agencies deter the top management from doling out huge sums as rewards to performingstaffers. In spite of many changes that the industry has faced over the years,essentially the role of this category of staff has remained unchanged.

In the last seven years, public sector banks have lost 10% market share to theaggressive private banks. By 2011, the population of youth aged between 20 and29 years is expected to cross the 27-crore mark in India, and this segment ismore likely to be attracted to the state-of-the-art banks that would have a similar age bracket generation across the counter. Public sector banks were more likelyto be seen as an older generation organisation where the average age group

would be 50 years. High average age of staff is also a cause of concern for the Public Sector Banks.

Public sector banks therefore need to implement right strategies to woo youngtechno-savvy customers that prefer alternative channels to traditional bankingmethod. The financial sector services are undergoing a rapid change in terms of the demographics, regulatory requirements and technology because of the highrevenues generated.

Public sector banks were more likely to be seen as an older generationorganisation where the average age group would be 50 years.

High average age of staff is also a cause of concern for the Public Sector Banks.

Going forward, it would be tough to manage business as there is highcompetition for high-skilled jobs.

The banks also need to develop existing staff in newer competencies through asystematic and rigorous training and also recruit, if necessary super specialistand specialist in areas like technology, treasury management, marketing,FOREX operations and project management.

So it is a challenge for Public sector Banks not only to recruitmore employees but also to recruit quality professional.

TALENT MANAGEMENT

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Such personnel need to be identified, nurtured and motivated through asystematic organizational plan to enable them to accept challenging roles earlyin the career. Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower.

Banks will also have to pay increasing attention to education and trainingincluding sponsorship of identified persons to MBA programmes, Phd programmes and other long duration programmes in technology and financialmanagement to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult andturbulent times.

Banks will have to introduce innovative mechanism and process to respond tothe aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences, both nationallyand internationally, to present papers and encouraging them to join professionalorganisations to develop appropriate competencies and network with fellow

professionals.

There is also need to develop organisation-wide awareness about banks key- business problems including stagnant business units, strain on profitability, costof operations, unexplored business opportunities, manpower costs, NPAS etc.

The preconditions for an effective talent management is clarity of where the organisation is, i.e., the starting point and where it wishesto reach in a given time horizon, i.e., the destination

LOAN WAIVER: A NEW CHALLENGE

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The massive Farm loan waiver scheme 2007 of the Union Government is disaster for Public Sector Banks “as it will spoil the credit culture in the country.”

FARM LOAN WAIVER SCHEME 2007

In budget speech of 2007 year, the Finance Minister P. Chidambaram announced themost ambitious farm loan waiver scheme with an estimated write off of Rs. 60,000crores covering more than 4 crore farmers. The loan waiver scheme was amend tomake it more inclusive. It offers a total waiver of Rs. 72,000 crores.

Its highlights are as follows :

Full loan waiver for small farmers and marginal farmers.Waiver will cover short term crop loans as well as all the overdue instalments onthe investment credit.

For short-term production loans, the amounts disbursed up to March 31st, 2007and overdue as on December 31st, 2007 and remaining unpaid until February

28th, 2008 are eligible for loan waiver. For investment loans, the instalments of such loans that are overdue, together

with the interest are eligible for all loans disbursed up to March 31, 2007 andoverdue as on December 31st, 2007 and remaining unpaid till February 28th2008.

Marginal farmer is defined as cultivating agricultural land up to 1 hectare or 2.5acres.

Small farmer is defined as cultivating between 1 hectare and 2 hectares i.e. lessthan 5 acres. Small and marginal farmers account for between 70 to 94 percentof all farmers in most states.

Other farmers, i.e. owning more than 5 acres or more than 2 hectares, will getone-time settlement (OTS) relief.

Bulk of all dry and unirrigated lands fall in districts covered by the drought prone area programme popularly known as DPAP and the desert development programme (DDP).

The total number of such districts is 237.Special package for other farmers in these 237 districts.For other farmers in these 237 districts, the OTS relief will be 25% or Rs.20,000, whichever is higher and not 25 percent as announced in the budget.·

On the positive side, it will help them clean up their balance sheets because withthe government reimbursing the money, they will not be required to provide for their non-performing assets in agriculture loans.

But the biggest drawback of the scheme is its impact on the credit culture in the banking system.

It will serve as a great disincentive for those borrowers who repay bank loans ontime.

45



Borrowers too now feel proud in availing the loan and then not repaying thesame and prefer waiting for waiver by some government or the other

Those who repay the loan regularly will feel frustrated and deceived by suchwaiver of loan scheme which will benefit to only those who did not repay theloan wilfully

Obviously such step gives award to wrong doers and punishes to those who ishonest and who keeps his word of repayment by making labour hard andshowing good performance.

The real risk of this ill-advised political move to write-off farm loans is that itopens up a very convenient option for future governments.

There will be nothing to prevent governments from writing off farm loans everyfive years, just ahead of general elections.

Moreover Government has waived the loan of farmers and not that of smalltraders and small scale manufacturers whose position is more pathetic than thatof a farmer

Banks will have to sacrifice the existing loan and provide for fresh disbursal of loan to maintain the minimum ratio and achieve the target of financing for agriculture

What is the remedy if good borrowers of other sectors too stop repayment of their loans ?

One way of doing this could be to introduce a differential loan rate for farmloans.

Now, all farm loans up to Rs 3 lakhs are priced at 7% and the banks get a 2%subsidy from the government on such loans.

Based on the credit history, the loan rate for the good borrowers can be broughtdown to, say, 6% or even 5%, with the government increasing the subsidy onsuch loans.

This will increase the subsidy burden on the government marginally, but isn’t ita small price to pay to protect the credit culture?.

The challenge before the Public Sector Banks now is to preventthese borrowers from turning into defaulters in future. So Loanwaiver scheme is emerging as new challenge for Public SectorBanks. Moreover public sector banks suffered loss due to thisand their NPA increased in comparison to others.

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RISK MANAGEMENT

Risk is inherent in any walk of life in general and in financial sectors in particular. Tillrecently, due to regulated environment, banks could not afford to take risks. But of late, banks are exposed to same competition and hence are compelled to encounter various

types of financial and non-financial risks. Risks and uncertainties form an integral partof banking which by nature entails taking risks. There are three main categories of risks;

Credit Risk,

Market Risk

Operational Risk.

All businesses take risks based on two factors: the probability an adverse circumstancewill come about and the cost of such adverse circumstance.

Risk management is the growing challenge for Indian public sector banks because

competitive environment is increasing in public sector banks.

RISK IN BANKING BUSINESS

The banking industry has a wide array of business lines. A fair idea may be available from thefollowing table:

Business lines Sub groups Activities

Corporate finance

Trading and sales

Retail banking

Corporate finance,Municipal/Governmentfinance, Merchant banking,Advisory services

Sales, market making, proprietary positions,treasury

Retail banking

Private banking

Mergers and acquisitions,underwriting, privatizetions,securitizations, research,government debts, debt andequity syndications, IPO,secondary private placements.Fixed income, equity, foreignexchanges, commodities, credit,funding, own position securities,lending and repos, brokerage,debt, prime brokerage.

Retail lending and deposits, banking services, trust and sales.

Private lending and deposits, banking services, trust andestates, investment advice.

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Commercial Banking

Payment and settlement

Agency services

Asset management

Retail brokerage

Card services

Commercial Banking

External clients

custody

corporate agency corporate

trustdiscretionary and non-discretionary fundmanagementretail brokerage

Merchant/Commercial/Corporatecards, private labels and retail.

Project finance, real estate,

export finance, trade finance,factoring, leasing, lending,guarantees, bill finance.

Payments and collections, fundstransfer, clearing and settlement.

Escrow, depository receipts,securities lending, corporateactions.Issuer and paying agents.

Pooled, segregated, retail,institutional,Closed, open.Execution and full services.

Credit riskCredit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both)The management of credit risk includes

a) Measurement through credit rating/ scoring, b) Quantification through estimate of expected loan losses,c) Pricing on a scientific basis andd) Controlling through effective Loan Review Mechanism and Portfolio Management.

Faced by lenders to consumers

Most lenders employ their own models (credit scorecards) to rank potential andexisting customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such ascredit cards and overdrafts, risk is controlled through the setting of credit limits.Some products also require security, most commonly in the form of property.

Consumers may face credit risk in a direct form as depositors at banks or asinvestors/lenders. They may also face credit risk when entering into standardcommercial transactions by providing a deposit to their counterparty, e.g., for alarge purchase or a real estate rental. Employees of any firm also depend on thefirm's ability to pay wages, and are exposed to the credit risk of their employer.

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Public Sector Banks are operating in an increasingly deregulated andcompetitive environment.

Increased deregulation is reflected in several key developments over the lastdecade including a market-determined interest rate environment, freedom to fix both lending and deposit rates and increased competition from new private

sector banks which have an aggressive business posture. Assessing credit risk in lending to service sectors, Public Sector Banks needs a

methodology different from assessing risks while lending to manufacturing.

Integrated Risk Management Solution

In order to control risk, one must first measure it. Measurement is critical to validatingmanagement process and improving internal discipline. As more and more business

processes become electronic, identifying are responding to risk must become faster. Inview of the potential impact and service requirements, risk management has become areal-time concern. without an enterprise wide approach that includes standard datadefinitions and integrated reporting, institutions cannot develop the consistent andtimely view of risk exposures necessary for management decision-making. To complywith wide ranging regulatory demands, financial institutions must understand, controland report risk across the enterprise. Management is being held legally responsible for identifying and managing risks. At some point, rating agencies will likely establish arisk management rating for companies in addition to existing financial ratings.

BUSINESS CHALLENGE IN BANKS

Evolution of the real time business environment

The developing global marketplace

Concern about business continuity and operational reliability

Continuous and accelerating technological change

The need to limit earnings’ volatility and enhance shareholder value.

But banks find compliance to Basel II norms in the above areas difficult, due toncreasing number of customer base of the banks, absence of effective risk anagement solution and absence of system interfaces between the existing stand

alone applications of the banks.

49



TRANSPARENCY AND DISCLOSURES

In pursuance of the Financial Sector Reforms introduced since 1991 and in order to bring about meaningful disclosure of the true financial position of banks to enable

the users of financial statements to study and have a meaningful comparison of their positions, a series of measures were initiated. Transparency and disclosure norms are assuming greater importance in the

emerging environment. Banks are now required to be more responsive andaccountable to the investors.

Banks move to disclose in their balance sheets information on maturity profilesof assets and liabilities, lending to sensitive sectors, movements in NPAs, besides providing information on capital, provisions, shareholdings of thegovernment, value of investment in India and abroad, and other operating and profitability indicators.

The disclosure requirements broadly covered the following aspects: Capital adequacy

Asset quality

Maturity distribution of select items of assets and liabilities

Profitability

Country risk exposure

Risk exposures in derivatives

Segment reporting

Related Party disclosures

Transparency and disclosure standards are also recognised as important constituentsof a sound corporate governance mechanism.

Banks are required to formulate a formal disclosure policy approved by the Boardof directors that addresses the bank’s approach for determining what disclosures itwill make and the internal controls over the disclosure process.

It is a huge challenge for Public Sector Banks to implement a process for assessingthe appropriateness of their disclosures, including validation and frequency.

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Challenges in Banking Security

Banking as a business involves the management of risks. While much has been said

about the financial risks, the risks arising out of the large scale implementation of technology is of recent origin, with banks having taken to large scale use of technology for their normal day-to-day business.

Security in banks has thus assumed significant proportions, comprising both physical aspects in addition to those relating to Information, Information Systemsand Information Technology, all of which have an impact on the reputational risk of a financial organisation.

In a world where geographical barriers are losing significance and the death of distances is already a reality, it is but essential that security be given prime

importance in a transnational scenario where large sums of money are at stake. While the challenges related to physical security are those which can be

confronted with relative ease, the position is much more complicated in respectof IT security.

It is widely accepted that security is as effective as the weakest link in a chain.

And, in the case of banking, the weakest link, does not relate to the componentsof technology (which do have an implication although), but on the person who is part of the information supply chain, and is typically the insider in the bank itself.

This is supported by studies carried out by international organisations.

These studies have indicated that a substantial portion of the breach of securityin financial institutions have occurred on account of, or have been triggered withthe aid of internal exposures or internal controls being compromised.

Against this backdrop, the security requirements of the banking sector need to be assigned high levels of priority.

Information Security is something which is best experienced than explained.

All of us have at some point of time experienced the flow of information to persons others than to the intended users – even in a non-electronic traditionalenvironment

With networking and access to information being available at rates much larger than before, Information Security is an activity which provides some comfort to both the policy makers and the users of data.

The largest set of functions in the banking sector which has benefited from theadvances in IT relate to payment systems since quick, safe and efficient transfer of funds across the length and breadth of the country is the requirement of theday.

Security in Payment Systems cannot be addressed in isolation.

51



It requires the integration of work processes, communication linkages andintegrated delivery systems and should focus on stability, efficiency and risk control.

Yet another prime aspect of concern in a good security policy is the role that thehuman beings have in a secure computerised environment.

It would be advisable to build security features at the application level in respectof banking oriented products, because of the critical nature of financial datatransfer.

The financial messages should have the under noted features:

The receipt of the message at the intended destination

The content of the message should be the same as the transmitted one

The Sender of information should be able to verify its receipt by the recipient

The Recipient of the message could verify that the sender is indeed the person

Information in transit should not be observed, altered or extracted

Any attempt to tamper with the data in transit will need to be revealed Non-repudiation These features boil down essentially to authentication (to verify the identity of

the sender of the message to the intended recipient to prevent spoofing or impersonation), authorisation (to control the access to specific resources for unauthorised persons), confidentiality (to maintain the secrecy of the content of transmission between the authorised parties), integrity (to ensure that nochanges/errors are introduced in the messages during transmission) and non-

repudiation (to ensure that an entity cannot later deny the origin and receipt andcontents of the communication).

I must add here that in a recent case of a co-operative bank, the entireoperations, maintenance and management of the computer systems were totallyin the hands of the firm which supplied the computer software and this led to afraud and loss for the bank.

Such cases cause reason for substantial concern.

While the aspects relating to physical security leave a lot to be desired with eventhe most basic security requirements not being in place (like access for unauthorised personnel even to sensitive Cash holding areas), the securityfeatures in the computer systems are not fully fool proof in some banks.

International standards should be examined and adopted keeping in view the

requirements of the Indian banking industry. Banks need to put in place measures which conform to there is policies and

ensure the regular, periodical audit.

An important issue is relating to the security levels of use within the variousoperating departments in the banks.

52



The common level of entry is the use of validation of authorised access (in theform of authorised User-Ids) to be further authenticated by correctness of passwords keyed in by the authorised users.

Passwords often become ‘passed’ words in our context with no change at all inthe passwords since passwords tend to be rather fixed for long periods of time

It is absolutely essential that passwords lapse after certain periods of time – generally not exceeding a month at the latest.

Authorisation of users is another activity that needs to be closely regulated andmonitored.

One of the basic requirements for implementation of security and monitoringthereof at the various departments is the need for system administrators.

. The proliferation of networks within an office also acts as a negative factor inimplementation of strict security features.

Further, rights assigned need to be changed upon change of functions assignedto the operative staff and that updation, including those related to staff whoretire have to be looked into.

There is an imperative need to imbibe a culture of security among all operativefunctionaries – whether officers or other staff and cutting across administrativegrading.

Access to databases in computer systems and to the data contained therein haveto be strictly restricted and not available to any but those authorised to make anychanges in case of an eventuality for resolving a software lock / malfunctionwhich is a conscious decision by the authorised personnel taken in conjunctionwith the head of the office concerned.

Change Management is another aspect that needs to be viewed from the securityangle.

Software (and at times hardware too), undergoes frequent updation and versioncontrol and levels of software in use across offices is an issue which needs to beexamined in its totality for practicable implementation at all offices /departments.

53



GROWTH IN BUSINESS

Public Sector Banks should now go global in search of new markets, customersand profits.

Some of the Public Sector Banks have their presence in overseas to a limitedextent.

The London based magazine ‘The Banker” has now listed only twenty Indian

banks including private sector banks in the list of “Top 1000 World Banks”. The State Bank of India, the largest bank in India, ranks only 82nd amongst the

top global banks. It is not even a 10th in size of the 9th largest bank, SumitomoMitsui, which has assets of $950 billion as against SBI’s assets of $91 billion.

Therefore, our banks are not equipped enough to compete in the internationalarena.

Realising the need to grow in size, the Indian banking system today is movingfrom a regime of “large number of small banks” to “small number of large banks.”

As per the Narasimhan Committee (II) recommendations, consolidations around

identified core competencies are taking place. Mergers and acquisitions in the banking sector are the order of the day.

This trend may lead logically to promote the concept of financial super marketchain, making available all types of credit and non-fund facilities under one roof which is challenge for public sectors bank and demand of time.

54



ENHANNCING CUSTOMER SRVICE

Mahatma Gandhi’s perception of a customer was as follows:

“He is not dependent on us. We are dependent on him. He is not an interruptionon our work. He is the purpose of it. He is not an outsider on our premises. He is

part of it. We are not doing him a favor by serving him. He is doing us a favor by

giving us an opportunity to do so.”

As far as the customer I concerned, he is the pivot of all activities in the era of consumerism. Customer is god in the UK and USA. Customer is the king in Japan.But, the customer is the ‘Boss’ in India and the ‘Boss’ is always right.

The Public Sector Banks may need to include customer oriented approach or

customer focus in their five areas of businesses such as cash accessibility, assetsecurity, money transfer, deferred payment and financial advices.

There are four strategies available to customer relations' managers:

To win back or save customers

To attract new and potential customers

To create loyalty among existing customers and

To up sell or offer cross services.

In order to develop close relationship with the customers the Public Sector Banks have to focus on the technology oriented innovations that offer convenience to the customers.

Today customers are offered ATM services, access to internet banking and phone banking facilities and credit cards. These have elevated banking beyondthe barriers of time and space.

So providing better services than Private Sector Banks to customer is a challenge

for Public Sector Banks. Because a satisfied customer brings in more customers and

he is the best advertisement for the bank.

55



Recommendations

FOR NPA

For strengthening the legal system, the banks may have to considerproviding services of trained legal officers at controlling/branchlevels, depending upon the quantum of NPA. Banks are to engageservices of dynamic young lawyers to have desired momentum infollow-up of suit-filed cases for timely disposal and subsequentexecution of decrees.

This would require managerial efficiency on the part of PSBs to notonly reduce the average level of net NPA but also to prevent therecurrence of this problem by ensuring addition of fresh NPA to bareminimum. There is need for continuous improvement in asset quality

by strengthening skill at the grass root level, adopting regular inter-face with borrowers, ascertaining periodical operating performanceof the firm etc.

To minimize erosion of asset quality in banking, there is immediateneed for implementation of rigorous systems to eliminate diversionof funds by the borrowers towards less viable activities such asinvestments, loans to subsidiaries facing financial woes etc.

Banks should have framework for acceptable compromise proposalsand supportive recovery policy directed towards out-of-courtsettlements.

Appointment of recovery agents, utilizing services of private security

agencies of ascertaining means of NPA borrowers etc. are the otherareas, which require fresh review.

Quality asset building will also require up-to-date market informationon various industries, a deeper and penetrating insight about thefinancial transactions of large borrowal groups, economic trends in aglobalised environment and industry knowledge about new areas forfinancing like software, infrastructure, service sector and other ITbased industries etc.

56



FOR CORPORATE GOVERNANCE

• It is desirable that all the banks are brought under a single Act sothat the corporate governance regimes do not have to be different just because the entities are covered under multiple Acts of the

Parliament . • Although the Reserve Bank maintains a tight vigil and inspects these

entities thoroughly at regular time intervals, the quality of corporatelevel governance mechanism does not appear to be satisfactory.

• Oversight by the board of directors or supervisory board;• Oversight by individuals not involved in the day-to-day running of the

various business areas; • Direct line supervision of different business areas; and• Independent risk management, compliance and audit functions.• Banks need to develop mechanisms, which can help them ensure

percolation of their strategic objectives and corporate values

throughout the organisation. • Boards need to set and enforce clear lines of responsibility and

accountability for themselves as well as the senior management andthroughout the organisation.

• In order to attract quality professionals, the level of remunerationpayable to the directors should be commensurate with the timerequired to be devoted to the bank’s work as well as to signal theappropriateness of remuneration to the quality of inputs expectedfrom a member.

• The directors could be made more responsible to their organisationby exposing them to an induction briefing need-based training

programme/seminars/workshops to acquaint them with emergingdevelopments/challenges facing the banking sector.

FOR MAN POWER PLANNING

They would need to hire people in large numbers over next five years tomaintain growth and stay competitive. The entire HR framework needs to berevamped and the skill sets of existing staff needs to be strengthened. The banks

have to suitably realign their existing human resources from surplus to deficit pockets and readjust staffing pattern in a computerised environment.

Surplus staffs from very large branches which are now computerised, need to berelocated or assigned newer jobs such as marketing etc. Mobility of staff has to be negotiated with employees' organizations as a measure to improveorganizational efficiency and improve productivity.

About 70% staff in each bank constitutes clerical and subordinate staff

57



There is the need to re-define the clerical roles in the bank.

There is also a need to enrich clerical roles by introducing discretionaryelements in front-line clerical roles and giving them responsibility of higher nature such as initiating correspondence, working in marketing teams,operational roles, public relation roles etc.

The banks also need to develop existing staff in newer competencies through asystematic and rigorous training.

Needless to say that succession planning in managerial cadre must occupycentral concern for bank management.

FOR TALENT MANAGEMENT

Public Sector Banks should not only take care of the sum total of its individualhuman capital, but also how effectively it draws out the best from its talent personnel at any point of time .

Banks have an excellent pool of competent personnel in all the cadres. Such personnel need to be identified, nurtured and motivated through a systematicorganizational plan to enable them to accept challenging roles early in the

career. Suitable changes in the promotion policies should take care of aspirations of

such extra ordinary and talented manpower.

Banks will also have to pay increasing attention to education and trainingincluding sponsorship of identified persons to MBA programmes, Phd programmes and other long duration programmes in technology and financialmanagement to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult andturbulent times.

Banks will have to introduce innovative mechanism and process to respond to

the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences, both nationallyand internationally, to present papers and encouraging them to join professionalorganisations to develop appropriate competencies and network with fellow professionals.

Loops in customer services

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Facts about customers

Ninety five percents of customers do not complain even if they are dissatisfied bcoz of indifferent attitude of not to bother unnecessarily and accept such bad service as part of human nature.

Because do customers want

1-Customers want control over their decisions2- Customers want to achieve their goals3- Customers want to preserve their self respect.4- Customers want to be treated fairly5- Customers want friendly welcome and reception6- Customers want to know what’s going on7- Customers want a feeling of security and safety8- Customers want to feel like VIPs

9- Customers want honesty

1- The “may I help you counter” could not come up to the level of expectation asthere is a lack of spirit in implementing it. This can be a vital customer carecapsule in the panacea kit of the bank to heal al wounds.

2- The cheques for collection handed over the counter are rarely acknowledged inspite of the RBI’s insistence. Recently the RBI advised all SCBs to implementthe recommendations of the committee on procedures and performance Audit on public service. It has suggested that cheques either be dropped in a box or

tendered at counter when they should be acknowledged.3- Many times the complaints could relate to discourteous behavior of counter staff-this should be handled carefully. If the customer is correct and has toomany such complaints against the staff, a stern action is called for and clientmust be advised.

In sum and substance a good customer service means a broad smile on customer’s

face as they leave the bank after finishing their business.

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Conclusion

Indian Public Sector Banks are facing innumerable challenges such asworrying level of NPAs, deteriorating asset quality, increasing pressures on profitability, asset-liability management, liquidity risk management, market risk

management and ever tightening prudential norms. Operating in this demandingenvironment has exposed banks to various challenges. The post-reform periodwitnessed the following major challenges for public sector banks in India –

Enhancement of customer service; application of technology; implementation of BaselII; improvement of risk management systems; implementation of new accountingstandards; enhancement of transparency & disclosures.

The boom in the field of retail banking and the intense competition among the banks toincrease the customer base has resulted in the large disbursement of consumer loans,home loans, loans on credit cards, auto loans, educational loans etc. on easy terms

without much scrutiny. This has brought with it an increase in the no. of cases of default in loan repayment thus increasing the bank’s NPAs.

Managing customers is one of the main issues faced by banks. The demands andexpectations of the customers grow at a much faster rate than the banks can equipthemselves to be with them. If the service levels of the product levels are not up to the

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customer satisfaction, there is always a danger that the customer might shift histransactions elsewhere. So always give customers more than they expect to get.

Multiple regulations are the main weakness for PSBs. It has not the single controllingsystem while private banks have. PSBs are also guided by govt. and controlled by RBI

and it has also their union. So there is trice controlling system that’s why any policytakes time in being implemented. This is the main reason of delayed progress of PSBS.

The annual report 2007-08 of RBI shows that position of public sector banks is onsteady progress.

• Demand deposits, borrowings and other liabilities are increasing.

• Assets as current assets and other loan cash credit is increasing which shows asign of growing network.

• Balance with banks and money at call and short notice decreased last year.

• Other approved securities also decreased in comparison to previous year.

• Consolidated balance sheet of banks shows that banks are on progress.Liabilities and assets have been increased in comparison to last year but eventhen public sector banks are not progressing equally as private sector banks because of being regulated and controlled system. Last year kisan loan wasforgiven worth Rs. 60,000 crores and mostly major no frill A/cs has been openin public sector banks. So NPA has been increased because operational cost has been increasing due to more A/cs and transaction and PSBs are liable to open branches in rural areas.

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Executive summery

The world of banking and finance is changing very fast and banks aretransforming themselves with the focus on knowledge. Therefore there is a need for today’s bank employees to keep themselves updated with a new set of skills andknowledge. Banks and technology are evolving so rapidly that bank staff mustcontinually seek new skills that enable them not only to respond to change, but also to build competence in handling various queries raised by customers as well.

Indian banks are facing innumerable challenges such as worrying level of NPAs,deteriorating asset quality, increasing pressures on profitability, asset-liabilitymanagement, liquidity risk management, market risk management and ever tightening prudential norms. Besides this, the disclosure requirements are also increasing.

The primary challenge for banks is to provide consistent service to customers

irrespective of the kind of channel they use. Banks in India have been working towardsa vision that includes transformed branches, enhanced telephone services, and leadingedge internet, banking functions that provide a consistently positive multi-channelexperience for customers. Even for PSBs, the ongoing and future investments intechnology are massive. It is expected that the provision of financial services through aversatile technology platform will enable these banks to acquire more customers, cutcosts, and improve service delivery. Though many positive signs are already visible in

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India, including a higher acceptance of technology by banks and customers, it is areality that most projects have not yet been deployed on a large scale.

However, challenges before public sector banks are plenty and of a different

kind. While they have to handle volumes which are mind boggling, there are alsoissues of legacy, old habits and political pressures. Systems of accounting, control anddelegation were set up decades ago and adoption of technology in terms of ‘real time’ banking and its compatibility with all phases of banking is not yet adequately perceived. Further more the security risk involved in computerization is directly relatedto the size of the network. For PSBs, the major problems are in the form of securityrisks, network downtime, scarcity of trained personnel, expensive system upgrades andrecurring costs given the massive scale of their current operations.

Banks rely on innovative ideas to increase their earnings. Naturally, idea

generators (human capital) become an even more important resource than the physicaland financial ones. The entry of new generation private sector banks and evolvingtechnology has been changing the face of the Indian banking industry. It is necessary for PSBsto adopt a standardized customer services code to remain competitive and profitable.

BIBLIOGRAPHY

• www.rbi.org.in

• RBI newsletter

• Google search engine

• en.wikipedia.org

• Annual report 2007-2008

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22239151 Challenges for Public Sector Banks in India

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