Performance of Indian Banking System

IntroductionEfficiency and profitability of the banking sector in India

has assumed primal importance due to intense competition, greater customer demands and changing banking reforms. This study attempts to measure the relative performance of Indian banks.

For this study, we have used public sector banks, old private sector banks, new private sector banks and foreign sector banks. We know that in the service sector, it is difficult to quantify the output because it is intangible. Hence different proxy indicators are used for measuring productivity of banking sector. Segmentation of the banking sector in India was done along the following basis: number of banks, offices, number of employees, business per employees, deposits per employee, advances per employee, bank assets size, non-performing assets etc.

Indian Financial SectorThe Indian financial sector comprises a large

network of commercial banks, financial institutions, stock exchanges and a wide range of financial instruments. It has undergone a significant structural transformation since the initiation of financial liberalization in 1990s. Before financial liberalization, since mid 1960’s till the early 1990’, the Indian financial system was considered as an instrument of public finance. The evolution of Indian financial sector in the post independent period can be divided in to three distinct periods. During the first period (1947-68), the Reserve Bank of India (RBI) consolidated its role as the agency in charge of supervision and banking control.

Banking System of IndiaThe present banking system can be classified

into the following categories:(i) Public Sector Banks (ii) Private Sector Banks (iii) Foreign Banks(iv) Regional Rural Banks(v) Co-operative Sector Banks (vi) Development Banks.

Phases of Indian Banking

The Indian banking system and its regulations can be better understood when divided into the following two phases:

Post-NationalisationPost-Liberalization

Liberalization

The Government of India framed its policies in the year 1991-92, keeping in view the benefits of liberalization

Some of the root causes that were behind the dull performance of the banks prompted the initiation of the banking sector reforms. Some of these causes were:

Greater emphasis on directed credit programmes Regulated interest rate structure Excessive regulations on organization's structure and

managerial resources; Lack of focus on profitability Lack of competition Lack of proper Accounting and Risk Management

System Lack of operational transparency Excessive support from government

Financial Liberalization Measures Some of the important financial liberalization measures

are: Reduction in pre-emption of funds through reduction of

CRR and SLR Introduction of prudential provisioning and Capital

Adequacy norms. Phasing out the directed credit programmes Deregulation of interest rates Infusion of competition (Entry of Private Sector Banks) Imparting transparency Introduction of universal banking Mergers and Acquisitions Development of technology Emphasis on corporate governance

Performance of Banking Sector

Indian banks have compared favorably on growth, asset quality and profitability with other regional banks over the last few years. The banking index has grown at a compounded annual rate of over 51 per cent since April 2001 as compared to a 27 per cent growth in the market index for the same period.

Information Technology and Bank Transformation

E-BankingAutomated Teller Machines EFTPoSRemote Banking Services Services Not Available Through Remote

BankingSmart Cards Internet Banking

Commercial Bank Expansion

Branch Expansion

Employee’s Position

Labour Productivity

Branch Productivity

Profitability Ratio

Non-Interest Income as Percentage of Total Income

Net NPA as Percentage of Net Advances

Areas of Future Research

Disinvestments of PSBsRaising capital from the marketForeign direct investment (FDI)An appropriate banking model for India:Universal banking Vs. Narrow bankingAdopting international best practices i.e.

Basel – II

Re-engineering OperationsMarketing of financial services: Product,

Process and PricingRetail BankingRisk Management including regulatory and

environmental risks Legal challenges

Harnessing FacilitatorsTechnologyIssues in identification and cost-benefit

analysis of appropriate technology – Case Studies

Disaster Recovery Management

Human Resource DevelopmentPreparing for the cultural transformationKnowledge management