chapter - iii overview of banking industry and performance of public ...

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CHAPTER - III

OVERVIEW OF BANKING INDUSTRY AND

PERFORMANCE OF PUBLIC SECTOR BANKS

3.1. INTRODUCTION

A banking institution is indispensable in a modern society. It plays a pivotal

role in the economic development of a country and forms the core of the money

market. Banking in India originated in the last decades of 18th century and was highly

regulated by the Government particularly in the pre-reform period. Among the

banking institutions in India, the commercial banks are the oldest institutions having a

wide network of branches, commanding utmost public confidence and having the

lion’s share in the total banking operations. Scheduled Commercial banks comprise

pubic sector banks, (PSBs) i.e. the State Bank of India and its seven subsidiaries and

the 19 nationalised banks, private banks with Indian ownership and branches of

foreign banks operating in India. Till 1999, there was an artifice separating the

commercial banks from the all India Development Financial Institutions (DFI), where

the latter did term lending for financing new productive capacity, the commercial

banks engaged in working capital financing. Further, the DFIs had access to low cost

government guaranteed bonds (SLR bonds) subscribed to by the banking system. In

the intervening decade, this has changed and banks have got into term-lending and the

DFIs into short term working capital finance.

In emerging economies, banks are special for three important reasons. First,

they take a leading role in developing other financial intermediaries and markets.

Second, the corporate sector depends heavily on banks to meet its financing needs,

due to the absence of well-developed equity and bond markets. Finally, in emerging

markets such as India, banks cater to the needs of a vast number of customers from

the household sector, who prefer assured income, liquidity and safety of funds,

because of their inadequate capacity to manage financial risks. The following table

vividly depicts the financial savings of the household sector,

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TABLE-3.1

FINANCIAL SAVINGS OF THE HOUSEHOLD SECTOR (GROSS)

Percent to Total Financial Savings of Household Sector

2006-07 2007-08 2008-09 Financial Savings 100 100 100 a) Currency 10.2 11.4 12.5 b) Deposits 49.1 52.2 58.5 i) With Banks 47.8 50.4 54.9 ii) Non-banking Companies 0.2 0.5 1.8 iii) Co-operative Banks / Societies 0.0 0.0 0.0 c) Shares and Debentures 9.0 12.4 2.6 d) Claims on Government 3.0 -4.0 -3.1 e) Insurance Funds 17.7 18.0 20.1 f) Provident and Pension Funds 11.1 9.9 9.5 Source : RBI Annual Report, 2008-09

During the First World War (1914-1918), through the end of the Second

World War (1939-1945) and two years thereafter, until the independence of India

were challenging for Indian banking. The years of the First World War were turbulent

and it took its toll with banks simply collapsing despite the Indian economy gaining

indirect boost due to war-related economic activities. At least, 94 banks in India failed

between 1913 and 1918 as indicated in table 3.2.

TABLE-3.2

FAILURE OF BANKS IN INDIA DURING 1913-1918

Years Number of banks that failed

Authorised capital (Rs. in Lakhs)

Paid-up Capital (Rs. in Lakhs)

1913 12 274 35 1914 42 710 109 1915 11 561 5 1916 13 231 4 1917 9 76 25 1918 7 209 1 Source : http://en.wikipedia.org/wiki/Banking_in_India


http://en.wikipedia.org/wiki/Banking_in_India



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Table 3.2 clearly showed that the period before independence faced a series of

bank failures, especially of small banks. At the time of independence, there were 640

banks out of which only 96 were scheduled banks and the rest were non-scheduled

banks. Banking was concentrated in metros, cities and port towns, with a large

proportion of total advances going to trade. At this juncture, strengthening of the

banking system was one of the major challenges of the post-independence era.

3.2. BANKING - POST - INDEPENDENCE

The partition of India in 1947 adversely impacted the economies of Punjab

and West Bengal, paralyzing banking activities for months. India's independence

marked the end of a regime of the Laissez-faire for the Indian banking. The

Government of India initiated measures to play an active role in the economic life of

the nation and the Industrial Policy Resolution adopted by the government in 1948

envisaged a mixed economy. This resulted into greater involvement of the state in

different segments of the economy including banking and finance. The major steps to

regulate banking included:

The Reserve Bank of India, India's central banking authority, was nationalized

on January 1, 1949 under the terms of the Reserve Bank of India (Transfer to

Public Ownership) Act, 19481.

In 1949, the Banking Regulation Act was enacted which empowered the

Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in

India".

The Banking Regulation Act also provided that no new bank or branch of an

existing bank could be opened without a license from the RBI and no two

banks could have common directors.

Following independence, the development of rural India was given a high

priority. An official committee was created which recommended that the Imperial

Bank which was the functioning bank in India should be taken over by a state-

partnered and state-sponsored bank so as to cater to the needs of rural India. By an

Act of Parliament, the State Bank of India was constituted on 1st July 1955. Thus,

with its creation, more than a quarter of resources of the Indian banking system thus

1 (RBI, 2005b).[www.rbi.org.in].


http://www.rbi.org.in



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passed to the direct control of the state. Subsequently, in 1959, the State Bank of India

(Subsidiary Bank) Act was passed, enabling the SBI to take over eight former state-

associate banks as its subsidiaries (later named associates). This marked a significant

step in the launch of a state controlled banking system in India.

Simultaneously, as stated above, the Agricultural Refinance Act of 1955

allowed the setting up of a specialized bank for agriculture, the National Bank for

Agriculture and Rural Development (NABARD) catering exclusively to the needs of

agriculture. Subsequent to these developments, the state felt the need for a wider

diffusion of banking facilities including bank lending. The problem was apparent with

the proportion of credit for industry and trade moving up from 83 percent to 90

percent between 1951 and 1968. The rise was clearly at the expense of crucial

segments of the economy like agriculture and small scale industry. More critically,

bank failures and mergers were rather rampant with the number of banks dropping

from 648 (97 SCBs and 551 Non-SCBs) in 1947 to 89 (73 SCBs and 16 Non-SCBs )

in 1969.

3.3. BANK NATIONALISATION – ACCENT ON SOCIAL CONTROL OF

CREDIT (1969-1991)

‘Social control’ of bank credit flows was an important objective of bank

nationalization with priority sector lending as a major aspect. It introduced restrictions

on advances by banking companies to ensure that bank advances were confined not

only to large scale industries and big business houses, but also directed to important

sectors such as agriculture, small scale industries and exports in due proportion.

Since 1969, there has been a significant spread of the banking habit in the

economy with banks ready to mobilize a large amount of savings. However, by the

1980s, there was a general perception that the operational efficiency of banks in India

was on the downturn with low profitability, growing non-performing assets (NPAs)

which were already high and a low capital base. Poor internal controls and the lack of

proper disclosure norms led to many problems which were kept undercovered. The

quality of customer service did not keep pace with the increasing expectations. All

these factors led to the next phase of nationalization in 1980 which raised the public

sector banks share of deposit from 86 percent (1969) to 92 percent (1980). However, a




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reversal of the process started with the introduction of large-scale banking

de-regulation and reforms in the banking sector as part of the overall economic

liberalization in India in 1991.

With the nationalisation of banks, a large number of regulatory measures were

adopted by the RBI to achieve a desired sectoral allocation of credit, e g, subsidised

lending rates to priority sectors, provision of refinance facilities, setting up of credit

guarantee schemes, rural and semi-urban branches, ceiling on deposit rates and

differential lending rates depending on borrower's level of income and type of loan.

These measures led to a phenomenal growth of the banking system, especially that of

the PSBs. In fact, during the early 1990s, PSBs owned nearly 90 per cent of total

business in the banking industry.

3.4. LIBERALISATION

In the early 1990s, the then Narasimha Rao government embarked on a policy

of liberalization, licensing a small number of private banks. These banks came to be

known as New Generation tech-savvy banks and included Global Trust Bank which

later amalgamated with Oriental Bank of Commerce, Axis bank (Earlier as UTI Bank)

ICICI Bank and HDFC Bank. This move along with the rapid growth in the Indian

economy revitalised the banking sector in India which has seen rapid growth with

strong contribution from all the three sectors (Public sector banks, private sector

banks and foreign banks). The Liberalisation programme includes de-controlled

interest rates, reduced reserve ratios and slowly reduced government control of

banking operations while establishing a market regulatory framework (Lawrence and

Longjam, 2003).

The liberalization of the Indian banking system dates back to the 1990s when

the government began to implement the recommendations of the Narasimham

Committee (1992, 1997). The principal features of the steps taken to liberalize and

reform the system include,

1. Increase in competition via more liberal rules for the entry of new domestic

and foreign banks, raising the number of banks from 7 to over 90 by March

2004. Recent consolidation in the industry has reduced the total number of

banks to 80 with a number of foreign banks declining from a peak of 40 to 29




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and private banks shrinking to 27 by the end of March 2007. Since 1993,

twelve new private sector banks were set up but some of them have already

merged either with other PSBs or private banks or have gone out of business.

Foreign direct investment in private sector banks is allowed upto 74 percent.

2. Infusion of Government capital in PSBs followed by injection of private

equity. PSBs are allowed to increase the share of private capital upto

49 percent of which 20 percent can be foreign equity. As a result, the share of

wholly Government-owned public sector banks in total system assets fell from

90 percent in 1991 to 10 percent in 20042.

3. Deregulation on interest rates except for certain specific classes such as

savings deposit accounts, NRI deposits, small loans up to Rs. two Lakhs and

exports credits.

4. Cuts in Statutory Liquidity Requirements (SLR) and Cash Reserve

Requirements (CRR) to reduce pre-emption of bank lending and lower

financial repression.

5. Reduction in credit controls to 40 percent from 80 percent of total credit.

6. Introduction of a broader definition of priority sector lending.

7. Incentives to increase consumer loans including long term home mortgages.

8. Implementation of micro-prudential measures including Basel-based capital

adequacy requirements, income recognition, asset classification and

provisioning norms for loans, exposure norms and accounting norms.

9. Emphasis on performance, transparency and accountability.

The Indian banking sector’s characteristics have changed and its health has

improved partly in response to the above stated measures and partly as a result of the

economy’s improved performance. Old and new private banks have increased their

market share in terms of number of branches and ATMs as well as share in deposits

and loans at the expense of state-owned and nationalized banks as shown in table 3.3.

2 Address by Dr.Y.V.Reddy, Governor of the Reserve Bank of India, at the Institute of Bankers of

Pakistan, Karachi, Pakistan, May 18, 2005.




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TABLE-3.3

NUMBER OF BRANCHES, ATMS, DEPOSITS AND ADVANCES

Branches (%Total) ATMS (%Total) Deposits (%Total) Advances(%Total)

Banks 1997 2004 2007 2007** 1997 2004 2007 1997 2004 2007

State-owned 26.9 25.7 24.6 23.8 28.2 27.6 23.5 31.7 25.7 24.3

Nationalized 65.0 62.9 62.4 36.5 58.6 50.7 50.4 52.5 48 48.4

Private-Old 7.7 8.3 8.1 5.9 6.4 7.0 5.1 7.2 6.8 4.7

Private-New 6.2 2.7 4.4 30.2 2.0 10.1 15.3 2.7 13.1 16.2

Foreign 0.1 0.3 0.5 3.5 4.8 4.5 5.6 6.0 6.5 6.4 Source: RBI data

* End March

** Data for earlier years not available.

3.5. AN OVERVIEW OF THE DEVELOPMENTS IN THE INDIAN BANKING

SECTOR

At the end of the 1980’s, operational and allocative inefficiencies caused by

the distorted market mechanism led to a deterioration of public sector bank’s

profitability. Enhancing the profitability of PSBs became necessary to ensure the

stability of the financial system. The restructuring measures for PSBs were threefold

and included recapitalization, debt recovery and partial privatization. Despite the

suggestion of the Narasimham Committee to rationalize PSBs, the Government of

India decided against liquidation which would have involved significant losses

accruing to either the Government or depositors. Instead, it opted to maintain and

improve operations to allow banks to create a good starting basis before possible

privatization.

Due to directed lending practices and poor risk management skills, a

significant level of NPAs have accrued in Indian banks. Prior to any privatization, the

balance sheets of PSBs had to be cleaned up through capital injections. In the fiscal

years 1991/92 and 1992/93 alone, the Government of India (GOI) provided almost

Rs.40 billion to clean up the balance sheets of PSBs. Between 1993 and 1999, another




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Rs.120 billion were injected into the nationalised banks. In total, the recapitalization

amounted to two percent of GDP.

In 1993, the SBI Act of 1955 was amended to promote partial private

shareholding. The SBI became the first PSB to raise equity in the capital markets.

After the 1994 amendment of the Banking Regulation Act, PSBs were allowed to

offer upto 49 percent of their equity to the public. This led to the further partial

privatization of eleven PSBs. Despite those partial privatization, the Government is

committed to keep their public character by maintaining strong administrative control

such as the ability to appoint key personnel and influence corporate strategy.

3.6. COMPOSITION OF THE INDIAN BANKING SYSTEM

The organized banking system in India can broadly be divided into three

categories, namely, the Central Bank of the country known as the Reserve Bank of

India, Commercial banks and the Co-operative banks. Commercial banks have been

in existence in India for many decades. They mobilize savings in urban areas and

make them available to large and small industrial and trading units mainly for

working capital requirements. After 1969, commercial banks are broadly classified

into nationalized or public sector banks and private sector banks. The State Bank of

India and its associate banks along with another 19 banks are the public sector banks.

The private sector banks include a small number of Indian scheduled banks which

have not been nationalized and branches of foreign banks operating in India –

commonly known as foreign exchange banks.

The Regional Rural Banks (RRBs) came into existence in the middle of 1970s

with the specific objective of providing credit and deposit facilities particularly to the

small and marginal farmers, agricultural labourers and artisans and small

entrepreneurs. RRBs have the responsibility to develop agriculture, trade, commerce

and industry in the rural areas. RRBs are essentially commercial banks but their area

of operation is generally limited to a district.

Primary Co-operative Credit Societies (which are really banks) were originally

set-up in villages to promote thrift and savings of the farmers and to meet their credit

needs in cultivation. To support these banks, central or district co-operative banks and

above them state co-operative banks were established. Originally based in the rural




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sector, the co-operative credit movement has now spread to urban areas also and there

are urban co-operative banks coming under state co-operative banks.

Today, 26 banks constitute the strong public sector in Indian Commercial

banking. Indian Banking has undergone major transformation during the past three

decades and has been made more socially relevant and development oriented.

Nationalisation of fourteen major banks in 1969 and of another six banks in 1980

marked a significant step towards this transformation. Financial sector reforms

following the Narasimham Committee Report further transformed our banking

system.

The Composition of Indian Banking System is depicted in the following chart :

CHART-3.1

COMPOSITION OF INDIAN BANKING INDUSTRY AS ON YEAR 2011

Source : http://en.wikipedia.org/wiki/Banking_in_India


http://en.wikipedia.org/wiki/Banking_in_India



69

Interestingly, Indian banks are fragmented in terms of number of banks and

total business size. As can be seen in the charts below, although the RRBs and

co-operative banks constitute 65% of the total number, they only cater to 5.6% of the

total business. As against this, SCBs (excluding RRBs i.e. SBI and its Associates,

nationalised banks, private banks and foreign banks) form only 35% of the total

number but cater to around 94% of the total business of banks. This implies the

domination and pivotal role of SCBs excluding RRBs in the Indian banking sector.

CHART-3.2

BANK GROUP-WSIE SHARE BY NUMBER AND BUSINESS (MARCH 2010)

Source : RBI and D & B research




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While the Indian banking sector features a large number of players competing

against each other, only 10 top key players accounted for a significant 57 percent

share of the total credit as on March 31, 2011 are shown in table 3.4.

TABLE-3.4

KEY PLAYERS IN INDIAN BANKING SECTOR

Name of Bank

Credit Portfolio as in March 2011 (Rs. Billion)

Market Share (%)

NIMs (2010-11)

Tier 1 Capital % as in March 2011

Return on Net Worth (2010-11)

Gross NPA % as in March

2011

State Bank of India 7,567 18% 2.9% 7.8% 13% 3.3% Punjab National Bank 2,421 6% 3.5% 8.4% 24% 1.8% Bank of Baroda 2,287 5% 2.8% 10.0% 24% 1.4% ICICI Bank 2,164 5% 2.3% 13.2% 10% 4.5% Bank of India 2,131 5% 2.5% 8.3% 17% 2.2% Canara Bank 2,125 5% 2.6% 10.9% 26% 1.5% HDFC Bank 1,600 4% 4.2% 12.2% 17% 1.1% IDBI Bank 1,571 4% 1.8% 8.1% 16% 1.8% Axis Bank 1,424 3% 3.1% 9.4% 19% 1.1% Central Bank of India 1,297 3% 2.7% 6.4% 18% 2.2% Total banking sector 42,874 100% 2.9% 9.7% 17% 2.3%

NIM : net interest margin

Source : Annual Reports, Results of banks, ICRA Research

3.7. NARASIMHAM COMMITTEE ON BANKING SECTOR REFORMS (1998)

The Narasimham Committee on the banking sector reforms submitted its

report to the Government in 1998. This report covers the entire gamut of issues

ranging from capital adequacy, bank mergers, the creation of global-sized banks,

recasting bank boards and revamping bank legislation. Important findings and

recommendations of the committee are as follows :

Need for a stronger banking system

In the context of Capital Account Convertibility which would involve large

inflows and outflows of capital and consequent complications for exchange rate

management and domestic liquidity, India would need a strong and resilient banking




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and financial system. For this purpose, the Narasimham Committee (1998) has

recommended the merger of strong banks and cautioned the merger of strong with

weaker banks as it will have a negative impact on the asset quality of the stronger

bank. The Committee has also suggested that two or three large Indian banks be given

international or global character.

Experiment with the Concept of Narrow Banking

The Narasimham Committee on Banking Sector Reforms (1988) is seriously

concerned with the rehabilitation of weak public sector banks which have

accumulated a high percentage of non-paying assets (NPAs) i.e., as high as 20 per

cent of their total assets. As such, the Committee suggested the adoption of the

concept of narrow banking to rehabilitate such weak banks.

Small Local Banks

The Committee has suggested the setting up of small, local banks which

should be confined to states or cluster of districts to serve local trade, small industry

and agriculture Also, these banks should have strong correspondent relationships with

larger national and international banks.

Capital Adequacy Ratio

The Committee has also suggested that the Government should consider

raising the prescribed capital adequacy ratio to improve the inherent strength of banks

and to improve their risk absorption capacity. Accordingly, higher capital adequacy

requirement for banks and the setting up of an Asset Reconstruction Fund (ARF) to

take over the bad debts of the banks has been suggested by the Committee.

Public Ownership and Real Autonomy

The Narasimham Committee has argued that Government ownership and

management of banks do not enhance autonomy and flexibility in the working of

public sector banks. Accordingly, the Committee has recommended a review of the

functions of bank’s boards so as to make them responsible for enhancing shareholder

value through formulation of corporate strategy.

Review and Update Banking Laws

The Narasimham Committee has suggested the urgent need to review and

amend the provisions of RBI Act, Banking Regulation Act, State Bank of India Act,




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Bank Nationalisation Act etc., so as to bring them in line with the current needs of the

banking industry.

Other Recommendations

They relate to the need for computerization process in public sector banks,

professionalizing and depoliticizing bank boards, review of recruitment procedures,

training and remuneration policies.

3.8. POST REFORM POSITION

Consequent upon the introduction of banking sector reforms, the following

developments have taken place in Indian banking;

i. Weak public sector banks were recapitalised through budgetary support.

ii. Some banks have strengthened their capital base through public issue of

shares.

iii. Legal amendments have been made to induct private participation in the Board

of Directors.

iv. Private sector banks have been established.

v. Local Area Banks have been licensed to install a greater element of

competition in the financial system.

vi. More liberal policy of permitting branches of foreign banks in India is being

followed.

vii. Interest rates both on deposit and lending side have been deregulated,

dismantling the administered interest rate structures.

viii. Prudential norms for income recognition, asset classification, provisioning and

capital adequacy have been strictly enforced to achieve international

standards.

ix. To relieve the banks from the high level of reserve requirements which was in

force for a long time, the SLR has been progressively reduced from 37.5 per

cent to 25 per cent on an incremental basis and the CRR has been reduced

from 15 per cent to 10 per cent.

x. The determination of foreign exchange rate is left to market condition.

xi. The tax deduction at source on Government securities has been removed.




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xii. New debt instruments like Capital Index Bonds were launched. Government

debt is also available at market rates.

xiii. A Board for Financial Supervision has been set up for exercising integrated

supervision, both on-site and off-site over banks and other financial

institutions.

xiv. The Credit Information Bureau (India) Ltd., has been set up in August 2000

for collecting, processing and sharing credit information from the borrowers of

credit institution.

xv. Recovery of Debts due to Banks and the Financial Institution Act 1993 was

passed and special tribunals were set up to facilitate quick recovery of loan

arrears.

Though banks suffered heavy losses in the initial periods of the introduction of

various prudential norms, their position has been considerably improved. Many

external constraints bearing on the profitability of banks have been removed. Their

financial health has been vastly improved and their profitability is on the increasing

trend. Thus, the reforms introduced have started yielding fruits.

3.9. MAJOR ISSUES BEING FACED BY THE INDIAN BANKING INDUSTRY

Though banking sector reforms have created high competitive and dynamic

environment for commercial banks but also these reforms have created glaring issues

that should be tackled very carefully in the era of IT and WTO. The following are the

major issues.

1. A widening gap in the productivity of various bank groups which serves both

as a threat and motivation for many banks.

2. Widening profitability gap among bank groups under study.

3. High rate of NPAs.

4. Fast shifting of potential customers from public sector banks to new private

sector banks and foreign banks and hence created an issue of customer

retention for public sector banks.

5. Penetration of new private sector banks and foreign banks in semi–urban and

rural areas have become survival factor for public sector banks.




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6. Poor quality of many public sector banks created and issue of survival in such

a competitive environment.

7. Lack of autonomy in HRM policies, especially for public sector banks.

8. Lack of accountability.

9. Loss making branches.

10. Technology gap among private and public sector banks.

11. Merger and acquisition.

12. Privatization of public sector banks.

13. Increasing customer expectations and demands.

14. Threat of non-banking institutions and non-financial companies.

15. Intensified competition within the banking sector, competition from global

banking giants.

3.10. KEY TRENDS

Improved Risk Management Practices: Net NPAs, as a percentage of advances,

reduced to I. I per cent in 2009-2010 from nearly 8.1 per cent in 1996-97.

More Emphasis on Fee-Based Services: Banks have started laying more

emphasis on fee-based services, such as distributing mutual funds and insurance

policies, credit cards, wealth management and equity trading services.

Development of Newer Modes of Banking: India has now entered the era of

online banking, e-commerce and m-commerce, which makes banking simple.

Also, the use of ATMs and credit cards have increased tremendously in the last

few years.

Product Innovation: There has been a major change in the products offered by

banks, from a few standard credit and deposit products to a number of customised

offerings to suit the requirements of various categories of customers.

Alliances With Non-Traditional Players: Banks are now looking for acquisition

targets among other categories of financial institutions, such as non-banking

financial companies (NBFCs), development financial institutions (DFIs),

brokerage firms, etc., to provide the entire gamut of financial services.

Improved Information Systems: Banks are aiming to have an improved credit

infrastructure, with the formation of Credit Information Bureau (India) Limited




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(CIBIL). Other credit information bureaus are expected to further boost the credit

infrastructure.

Improving Performance Of PSU Banks: Higher growth, improved productivity

for branches, better customer profiles, implementation of technology and

improved products coupled with significant positive structural changes, have led

to the improvement of PSUs on almost all financial and operational parameters.

Increased Scrutiny: Due to the global financial crisis in 2008-09, tighter

regulations for non-banking entities are being implemented. Main focus of the

regulations has been to provide a level playing field between bank-sponsored

NBFCs and non-bank associated NBFCs besides other issues of regulatory

convergence and regulatory arbitrage.

3.11. PROFILE OF THE PUBLIC SECTOR BANKS IN INDIA

3.11.1. Nationalised Banks

Allahabad Bank

Allahabad Bank is an India-based bank. The Bank’s products include deposit

products, which include Flexi-Fix Deposit, Allbank Tax Benefit Term Deposit

Scheme, Allbank Premium SB Account, Allbank Mahila Sanchay Account, Allbank

Vikash SB Account, Allbank Premium Current Account, Current Plus Deposit

Scheme and Sishu Mangal Deposit Scheme; Retail credit products, which include

housing loan, education loan, car loan, saral loan, personal loan for pensioners,

personal loan for doctors, Loan against NSC/KVP, Allbank rent loan, Allbank

property scheme, Allbank furnishing loan, gold loan scheme, Allbank Mobile

Scheme, Allbank Abhushan Scheme and Allbank Trade Scheme, and other credit

products, including Kisan Credit Card, Kisan Shakti Yojana and Allbank-Expo. The

Company’s other services include Allbank Ayushman Bima Yojana, Cash

Management Services, Depository Services, real time gross settlement (RTGS),

National Electronic Funds Transfer (NEFT) and online payments.

Andhra Bank

Andhra Bank is an Indian bank based in Hyderabad. The bank was established

in the year 1923, and its founder was Dr. Bhogaraju Pattabhi Sitaramayya, a well

known freedom fighter. The initial authorized capital of the bank was Rs. 10.00 lakhs,




76

while the paid up capital was Rs. 1.00 lakh at the time of its registration. Total

Business volume of the bank in the third quarter of the 2008-09 financial year stood at

Rs. 95,822 crores, while the Total Deposit volume during the same tenure was Rs.

53,795 crores. As of 31st of December, 2008, Andhra Bank had a client base of more

than 18.5 Million customers with 2194 Business Delivery Channels. Till the same

date, the bank had 1,410 branches spread across 22 states and two Union Territories,

out of which 1,067 branches have been enabled with Centralized Core Banking

Solution (CBS). While the total number of ATMs summed up to 685, the bank had a

Per Employee Productivity of Rs. 6.92 crores.

Apart from regular banking services and solutions, Andhra Bank has

introduced some attractive services such as AB Premium Current Account and AB

Privilege Corporate Salary Savings Bank Account with extra benefits to the

customers. Also, the bank has launched AB Saral Housing Loan scheme featuring

housing loans upto Rs. 20 Lakhs. Andhra Bank has also partnered with various

financial institutions like Kotak Mahindra, Reliance, Birla Sun Life Mutual Fund and

Fidelity Mutual Fund, assisting them in sales of their Mutual Fund products. The bank

has also signed a Memorandum of Understanding (MoU) with Maruti Suzuki Ltd. for

financing four wheeler vehicles.

Andhra Bank is the first bank in India to have launched mobile biometric

ATMs. These ATMs stop at predestinated sites, and instead of entering the personal

identification number (PIN), the customers have to match their finger prints with their

recorded finger prints in the bank database. This has enabled even the illiterate or

uneducated customers of the bank to enjoy the ATM facility being offered by the

bank. As an initiative to empower the society, the bank has established 10 Rural

Training Institutes, which have provided training to 76,300 candidates for becoming

successfully self employed. The institutes offer free training, lodging, boarding

facilities coupled with to and fro travel expenditure to the candidates undergoing the

training programmes.

Bank of Baroda

Bank of Baroda is a provider of banking services. The Company operates in

four segments: Treasury, Corporate/Wholesale Banking, Retail Banking and Other

Banking Operations. The Company’s E-business department provides a range of




77

alternate delivery channels (ADCs), such as automated teller machines (ATMs),

Internet Banking (Baroda Connect), real-time gross settlement/ national electronic

funds transfer (RTGS/NEFT), phone banking and Internet payment gateway (IPG). In

addition, it also provides services, such as depository services, cash management

services, non-resident Indian (NRI) Services and sale of gold coins. During the fiscal

year ended March 31, 2011, the Company opened seven branches/ offices (including

the ones for its overseas subsidiaries).

Bank of India

Bank of India was founded on 7th September, 1906 by a group of eminent

businessmen from Mumbai. The Bank was under private ownership and control till

July 1969 when it was nationalised along with 13 other banks. Beginning with one

office in Mumbai, with a paid-up capital of Rs.50 lakh and 50 employees, the Bank

has made a rapid growth over the years and blossomed into a mighty institution with a

strong national presence and sizable international operations. In business volume, the

Bank occupies a premier position among the nationalised banks.

The Bank has 3752 branches in India spread over all states/ union territories

including specialized branches. These branches are controlled through 50 Zonal

Offices. There are 29 branches/offices (including five representative offices) and

3 Subsidaries and 1 joint venture abroad. The Bank came out with its maiden public

issue in 1997 and follow on Qualified Institutions Placement in February 2008. Total

number of shareholders as on 30/09/2009 is 2,15,790. While firmly adhering to a

policy of prudence and caution, the Bank has been in the forefront of introducing

various innovative services and systems. Business has been conducted with the

successful blend of traditional values and ethics and the most modern infrastructure.

The Bank has been the first among the nationalised banks to establish a fully

computerised branch and ATM facility at the Mahalaxmi Branch at Mumbai way

back in 1989. The Bank is also a Founder Member of SWIFT in India. It pioneered

the introduction of the Health Code System in 1982, for evaluating/ rating its credit

portfolio.

Bank of India was the first Indian Bank to open a branch outside the country,

at London, in 1946, and also the first to open a branch in Europe, Paris in 1974. The

Bank has sizable presence abroad, with a network of 29 branches (including five




78

representative office) at key banking and financial centres viz. London, Newyork,

Paris, Tokyo, Hong-Kong and Singapore. The international business accounts for

around 17.82% of Bank's total business.

Bank of Maharashtra

Bank of Maharashtra is an Indian bank based in the city of Pune. The bank

was established in the year 1935 with an initial authorized capital worth Rs.10.00

lakhs, although it became operational in the early phase of the next year. The bank got

nationalized by the Government of India in the year 1969. With a total number of

1421 branches located all over India as of April 2009, the bank claims to have the

largest number of branches within the state of Maharashtra, among all the Public

Sector banks. Commonly known as a common man's bank, Bank of Maharashtra

adopts a philosophy of "Technology with personal touch", and follows its motto

stating "One Family, One Bank, Bank of Maharashtra". All the branches of Bank of

Maharashtra have been fully computerized, with Depository services and Demat

facilities being offered at 131 branches as of April 2009. The bank aims at increasing

its ATM network from 345 to 500 soon, apart from planning to install Biometric

ATMs at some selected branches. Apart from it, introduction of Phone Banking,

Internet Banking and Mobile Banking is also on the cards.

Apart from providing regular banking services to the customers, Bank of

Maharashtra has established two Joint Ventures to fulfill its other commitments

towards the general public and society. These Joint Ventures are M-SETI and

Mahabank Info Centre. Mahabank Self-Employment Training Institute (M-SETI) is

an effort initiated by Mahabank Agricultural Research and Rural Development Fund

(MARDEF), a trust run by Bank of Maharashtra receiving help from National Bank

for Rural Development (NABARD). The institute runs various self-employment

oriented training courses for the rural unemployed youth from the districts of Pune,

Kolhapur, Satara, Sangli, Nashik, Ahmednagar, Jalgaon, Dhule and Nandurbar.

Mahabank Info Centre is a yet another initiative by Bank of Maharashtra aimed at

providing various retail banking related information to the customers, and enabling

smoother operations for them.




79

Canara Bank

Canara Bank was founded by Shri Ammembal Subba Rao Pai, a great

visionary and philanthropist, in July 1906, at Mangalore, at a small port town in

Karnataka. The Bank has gone through the various phases of its growth trajectory

over hundred years of its existence. The growth of Canara Bank was phenomenal,

especially after nationalization in the year 1969, attaining the status of a national level

player in terms of geographical reach and clientele segments. Eighties was

characterized by business diversification for the Bank. In June 2006, the Bank

completed a century of operation in the Indian banking industry. Today, Canara Bank

occupies a premier position in the committee of Indian banks. Since its inception,

Canara Bank has several firsts to its credit. Such as,

Launching of Inter-City ATM Network

Obtaining ISO Certification for a Branch

Articulation of ‘Good Banking’ – Bank’s Citizen Charter

Commissioning of Exclusive Mahila Banking Branch

Launching of Exclusive Subsidiary for IT Consultancy

Issuing credit card for farmers

Providing Agricultural Consultancy Services

Over the years, the Bank has been scaling up its market position to emerge as

a major 'Financial Conglomerate' with as many as nine subsidiaries/sponsored

institutions/joint ventures in India and abroad. As on December 2011, the Bank has

further expanded its domestic presence, with 3564 branches spread across all

geographical segments. Keeping customer convenience at the forefront, the Bank

provides a wide array of alternative delivery channels that include 2665 ATMs,

covering 977 centres. With 100% CBS, the Bank offers technology banking, such as,

Internet Banking, Mobile Banking and Funds Transfer through NEFT and RTGS

across all branches. The Bank has further enhanced its basket of new tech-products

for customer convenience like Canara Gift Cards, Canara Campus Card, Canara

Platinum Card, Bills Desk for utility bills payment, Cash withdrawal at Point of Sale

(PoS) machines at Merchant Establishments, VISA money transfer and the ASBA

(Application Supported by Blocked Amount) facility during FY11.




80

We strongly believe that the next century is going to be equally rewarding and

eventful not only in service of the nation but also in helping the Bank emerge as

a "Global Bank with Best Practices". This justifiable belief is founded on strong

fundamentals, customer centricity, enlightened leadership and a family like work

culture.

Central Bank of India

Central Bank of India (the Bank) is a public sector bank based in India. As on

March 31, 2011, the Bank operated 3,720 branches and 138 extension counters. The

Bank’s segments include treasury operations, retail banking operations, wholesale

banking operations and other businesses. Treasury operations include dealing in

government and other securities, money market operations and forex operations. The

retail banking consists of funs-based and non fund- based fund exposures.

Corporate/wholesale banking consists of advances to trusts/partnership firms

companies and statutory bodies. Other banking includes all other banking operations.

It provides a range of services, which include direct housing finance, debit card, cent

prepaid cards, mutual funds and central card.

Corporation Bank

Corporation Bank (the Bank) is an India-based banking company. The

Company has four segments: Treasury, Wholesale Banking, Retail Banking and Other

Banking Business. The Bank provides personal, non-residential Indian (NRI) services

and Internet banking. The depository services offered by the Bank include opening of

account, de-materialisation, re-materialisation, settlement of transactions, pledge and

hypothecation, and stock lending and borrowing. The cards provided by the Bank

include debit card, credit card, CorpBank Prepaid Gift cards and Corp Travel Card.

The Bank provides loans for trade and business, housing purposes, purchase of

housing site and to pursue education. The Company also provides loan for senior

citizens against residential property, loans for purchase of consumer durables and

loans for medical practitioners. During the fiscal year ended March 31, 2011, the

Bank opened 206 branches, 105 automated teller machines (ATMs) and 1300

branchless banking units.




81

Dena Bank

Dena Bank was founded on 26th May, 1938 by the family of Devkaran

Nanjeeunder under the name Devkaran Nanjee Banking Company Ltd. It became a

Public Limited Company in December 1939 and later the name was changed to Dena

Bank Ltd., in July 1969 Dena Bank Ltd., along with 13 other major banks was

nationalized and is now a Public Sector Bank constituted under the Banking

Companies (Acquisition and Transfer of Undertakings) Act, 1970. Under the

provisions of the Banking Regulations Act 1949, in addition to the business of

banking, the Bank can undertake other business as specified in Section 6 of the

Banking Regulations Act, 1949.

The other mile stones of the bank are;

One among six Public Sector Banks selected by the World Bank for

sanctioning a loan of Rs.72.3 crores for augmentation of Tier-II Capital under

Financial Sector Developmental project in the year 1995.

One among the few Banks to receive the World Bank loan for technological

upgradation and training.

Launched a Bond Issue of Rs.92.13 crores in November 1996.

Maiden Public Issue of Rs.180 Crores in November 1996.

Introduced Tele banking facility of selected metropolitan centers.

Dena Bank has been the first Bank to introduce the following

Minor Savings Scheme.

Credit card in rural India known as "DENA KRISHI SAKH PATRA"

(DKSP).

Drive-in ATM counter of Juhu, Mumbai.

Smart card at selected branches in Mumbai.

Customer rating system for rating the Bank Services.

Indian Bank

Indian Bank was established in 1907 on 15th August. This bank is owned by

the government of India. Indian bank is a premier bank serving the nation with more

than 19000 staff. They are one of the nationalized banks in India that has good

presence here and internationally. The total business is more than Rs.167980 Crores,

while the operating profit has reached Rs.2747.35 Crores and Rs.1554.99 Crores is




82

the increase of Net Profit. However, Core Banking Solutions is now in all the 1817

branches. Indian bank has its overseas branches in Colombo and Singapore. This also

includes foreign currency banking at Colombo. The three subsidiary companies are

IndBank Housing Ltd, IndBand Merchant Banking and IndFund Management Ltd.

Indian bank is the pioneer nationalized banks in India that is the front runner in

offering specialized facilities. There are 97 authorized branches for Forex and

1 specialized overseas branch to exclusively handle Forex transaction at Chennai.

They handle the import, export, NRI business and remittances, besides extending

finance to SSI units as well.

Indian Bank began its international expansion in 1932 when it opened a

branch in Colombo. A branch in Jaffna followed three years later, but this was not

successful and was closed in 1939. Just before World War II reached the region,

Indian Bank opened a branch in 1940, in Rangoon (Yangon). The next year it closed

the Rangoon branch, but opened branches in Singapore (where future branch

manager KB Pisharody (1915-1998) started his career in the same year), and in Kuala

Lumpur, Ipoh, and Penang. The rapid advance of the Japanese Army forced IB to

close all its branches in Malaya and Singapore. Although the Japanese forces did not

reach Ceylon, IB closed the Colombo branch in 1942.

Indian Overseas Bank

Indian Overseas Bank (IOB) (BSE:532388) is a major bank based

in Chennai (Madras), with 2555 domestic branches and six branches overseas. Indian

Overseas Bank has an ISO certified in house Information Technology department,

which has developed the software that 2555 branches use to provide online banking to

customers; the bank has achieved 100% networking status as well as 100% CBS

status of branches with a total number of 2555 CBS branches and 6 Extension

Counters. IOB also has a network of about 1300 ATMs all over India and IOB's

International VISA Debit Card is accepted at all ATMs belonging to the Cash Tree

and NFS networks. IOB offers internet Banking (E-See Banking) and is one of the

banks that the Govt. of India has approved for online payment of taxes. The bank's

business more than doubled in the last four years. According to "A profile of banks

(2009-10)" published by RBI, the bank's deposits increased from Rs.50529 crores as




83

on 31.03.06 to Rs.110795 crores as on 31.03.10 and advances from Rs.34756 crores

to Rs.79004 crores.

Oriental Bank of Commerce

Oriental Bank of Commerce made a beginning under its Founding Father,

Late Rai Bahadur Lala Sohan Lal, the first Chairman of the Bank. Within four years

of coming into existence, the Bank had to face partition. Branches in the newly

formed Pakistan had to be closed down and the Registered Office had to be shifted

from Lahore to Amritsar. Late Lala Karam Chand Thapar, the then Chairman of the

Bank, in a unique gesture honoured the commitments made to the depositors from

Pakistan and paid every rupee to its departing customers.

The bank was nationalized on 15th April, 1980. At that time total working of

the bank was Rs.483 crores having 19th position among the 20 nationalised banks.

Within a decade the bank turned into one of the most efficient and best performing

banks of India. The bank has progressed on several fronts crossing the Business Mix

mark of Rs. two lakhs crores as on 31st March 2010 making it the seventh largest

Public Sector Bank in India, with achievement of 100 percent CBS, reorienting of

lending strategy through Large and Mid Corporates and establishment of new wings

viz., Rural Development and Retail and Priority Sector. The Bank has to its utmost

credit, lowest staff cost with highest productivity in the Indian banking industry.

Punjab and Sind Bank

Punjab and Sind Bank offers locker facilities, credit card and online funds

transfer facility. It has a vast network of 813 branches and 76 extension counters

spread all over India. As a part of International banking, it offers NRI services, swift

branches, IBDs and gold card scheme. The bank has launched the facility of online

request for education loan to make it easier for the customers. It has tied up with

ICICI bank for a co-branded credit card. It also has a tie-up with Aviva Life Insurance

Company and Bajaj Allianz General Insurance Company. It has attained ISO 9002

certification for its selected branches.

Punjab and Sind Bank (P&SB) is a major Public Sector bank in Northern

India. Of its almost 1000 branches and offices spread throughout India, almost

400 are in Punjab state, though the bank's corporate headquarters is in New Delhi. On

15 April 1980 Punjab and Sind Bank was among six banks that the Government of




84

India nationalized in the second wave of nationalization. After nationalization bank

lost its focus and was left behind in the race. At some point in the 1960s’ Punjab and

Sind Bank established a branch in London. In 1991 Bank of Baroda acquired Punjab

and Sind Bank's London branch at the behest of the Reserve Bank of India following

Punjab and Sind's involvement in the Sethia fraud in 1987. Since 2004 Punjab and

Sind Bank has again shown growth of more than 40 percent year on year. Recently

it’s IPO received tremendous response from the public and the issue was

oversubscribed by more than 50 times. Recently the bank crossed a mark of Rs one

lakh crores in business.

Syndicate Bank

Syndicate Bank was established in 1925 in Udupi, the abode of Lord Krishna

in coastal Karnataka with a capital of Rs.8000/- by three visionaries - Sri Upendra

Ananth Pai, a businessman, Sri Vaman Kudva, an engineer and Dr.T M A Pai, a

physician - who shared a strong commitment to social welfare. Their objective was

primarily to extend financial assistance to the local weavers who were crippled by a

crisis in the handloom industry through mobilising small savings from the

community. The bank collected as low as 2 annas daily at the doorsteps of the

depositors through its Agents under its Pigmy Deposit Scheme started in 1928. This

scheme is the Bank's brand equity today and the Bank collects around Rs. 2 crores

per day under the scheme.

Being firmly rooted in rural India and understanding the grassroot realities,

the Bank's perception had the vision of future India. It has been propagating

innovations in Banking and also has been receptive to new ideas, without however

getting uprooted from its distinctive socio-economic and cultural ethos.

The Bank is well equipped to meet the challenges of the 21st century in the

areas of information technology, knowledge and competition. A comprehensive IT

plan is being put in place and the skills and knowledge of the Bank's personnel are

being upgraded through a variety of training programmes to promote customer

delight in every sphere of its activity. The Bank has launched an ambitious

technology plan called Centralised Banking Solution (CBS) whereby 500 of our

strategic branches with their ATMs are being networked nationwide over a 4 year

period. The Bank is pioneer among Public Sector Banks on launching CBS. This




85

bank has already achieved CBS implementation among all its branches. Thus, the

bank is 100 percent CBS enabled.

UCO Bank

The idea of a truly Indian bank was first conceived of by Mr.G.D Birla, the

doyen of Indian Industrial renaissance, after the historic "Quit India" movement in

1942. Soon this nascent idea came into reality and, on the 6th of January 1943, The

United Commercial Bank Ltd. was born with its Registered and Head Office at

Kolkata. The very first Board of Directors was represented by eminent personalities

of the country drawn from all walks of life, and this all-India character of the Bank

has been assiduously maintained till this day not only in the composition of its Board

but also in the geographical spread of its 1700 odd branches in the country as well as

in its overseas centres in Singapore and Hong Kong.

Having traversed periods of expansion and consolidation, the Bank

was nationalized by the Government of India on the 19th July 1969 whereupon

100 per cent ownership was taken over by the government in United Commercial

Bank. This historic event brought about a sea-change in the entire fabric of the bank's

thinking and activities, commensurate with the government's socio-political approach

of mass banking as against class banking hitherto practised. Branch expansion started

at a fast pace, particularly in rural areas, and the bank achieved several unique

distinctions in Priority Sector lending and other social upliftment activities.

To keep pace with the developing scenario and expansion of business, the

Bank undertook an exercise in organizational restructuring in the year 1972. This

resulted into more functional specialization, decentralization of administration and

emphasis on development of personnel skill and attitude. Side by side, whole hearted

commitment into the government's poverty alleviation programmes continued and the

convenorship of State Level Bankers' Committee (SLBC) was entrusted with the

Bank for Orissa and Himachal Pradesh in 1983.

Union bank of India

Union Bank of India is an India-based public sector bank. The Bank’s

business segments include Treasury Operations, Retail Banking Operations,

Corporate/Wholesale Banking and Other Banking Operations. The various types of

deposits offered by the Bank include demand deposits, savings bank deposits and




86

term deposits. Its advances portfolio includes micro, small and medium enterprises

advances, agriculture advances and retail advances. Its investments portfolio includes

Government securities, other approved securities, shares, debentures and bonds and

subsidiaries and joint ventures. The Bank opened 211 branches during the fiscal year

ended March 31, 2011, taking the total number of domestic branches to 3,015 as on

31.03.2011. The Bank has its presence in different parts of the country with a network

of 3,016 (including one Branch at Overseas) Branches as on March 31, 2011. The

Bank has added 307 automated teller machines to its network and issued more than

1.65 million debit cards.

United Bank of India

United Bank of India Ltd is a public sector banking institution with branches

in 28 States and in 4 Union Territories in India. The Bank is currently wholly-owned

by the Government of India. Their business is principally divided into retail banking,

corporate/wholesale banking, priority sector banking, treasury operations and other

banking services such as agency functions for insurance and mutual fund distribution,

pension and tax collection services. The Bank's retail banking business provides

financial products and services to their retail customers. They provide loans and

advances for housing, trade, automobiles, consumer durables, education, personal

loans and other retail products. They have various deposit products, such as current,

savings and term deposits for their customers.

The Bank provides commercial banking products and services to corporate

customers, including mid-sized and small businesses and government entities. Their

loan products include term loans to finance capital expenditure of assets across

various industries as well as short-term loans, cash and export credit and other

working capital financing and bill discounting facilities. They also provide credit

substitutes, such as letter of credit and letter of guarantee. The Bank offers direct

financing to farmers for production and investment, as well as indirect financing for

infrastructure development and credit to suppliers of agricultural inputs. They also

offer a wide range of general banking services to their customers including debit

cards, cash management, remittance services and collection services. They distribute

third party products such as life and non-life insurance policies and mutual funds on

an agency basis. Also, they act as agent for various state governments and the




87

Government of India on numerous matters including the collection of taxes and

payment of salary and pension.

Vijaya Bank

Vijaya Bank is an India-based bank. The bank operates in four segments:

treasury, corporate/wholesale banking, retail banking and other banking operations.

Treasury includes all investment portfolio, profit/loss on sale of investments,

profit/loss on foreign exchange transactions, equities, income from derivatives and

money market operations. Corporate/Wholesale banking include lending and deposits

from corporate customers. Retail banking includes lending and deposits from retail

customers. Other banking operations include all other operations not covered under

other segments. As of March 31, 2011, the Bank had 1,200 networks of branches, and

51 extension counters (EC) and satellite offices. During the fiscal year ended

March 31, 2011, the Bank launched V-Platinum Current Account Deposit scheme for

high-net-worth individuals. On January 12, 2011, the Bank completed the

restructuring of JV Companies by the Bank in association with Principal Financial

Group and Punjab National Bank.

3.11.2. The State Bank of India and its Associate Banks’

The State Bank of India has seven associate banks with controlling interest,

ranging from 75-100 percent.

The State Bank of India

The State Bank of India has an authorized capital of Rs.20crores and an issued

capital of Rs.5.6 crores. The shares of the State Bank of India are held by the Reserve

Bank of India, Insurance Companies and the general public who were formerly

shareholders of the Imperial Bank of India. The State Bank is managed by the Central

Board of Directors consisting of 20 members, including a Chairman and Vice-

Chairman partly appointed by the Union Government and the Reserve Bank of India

and partly elected by the shareholders (six of them) other than the Reserve Bank of

India. The Central Board supervises and directs the affairs and business of the State

Bank of India and for this purpose it is guided by the business principles as well as

public interest, Besides the Central Board, The State Bank of India has Local Boards

wherever it has a local head office.




88

The State Bank of India performs all the Commercial banking functions which

the Imperial Bank of India performed before, viz., receiving deposits, advancing and

lending, making investments, and so on. Besides, it also acts as the agent of the

Reserve Bank of India at all places in India where it has a branch. Moreover it has

been required to play a special role in rural credit, namely, promoting banking habit in

the rural areas and catering to their credit need, where the State Bank of India has

“inherited” from the Imperial Bank of India.

When the State Bank of India took over the assets of the Imperial Bank, it had

Rs.225crores worth of deposits and Rs.106 crores of advances. After 1955, there has

been a steady increase in the assets and liabilities of the State Bank of India which

exceeds Rs.10,000 crores and its loans advances exceed Rs.8,000 crores.

State Bank of Hyderabad (SBH)

Hyderabad State Bank, the central bank of the erstwhile state of Hyderabad,

covering present-day Telengana, parts of Karnataka and the Marathwada region of

Maharastra, was founded in 1941. It took over the Hyderabad Mercantile Bank in

1953, when its name was changed to the State Bank of Hyderabad. Its aggregated

deposits and advances now exceed Rs.45,000crores.

State Bank of Indore (SBI)

The Indore Bank, founded by the Maharaja of the Malwa Region, became a

subsidiary of the State Bank of India in 1960, and was renamed as State Bank of

Indore. It acquired the business of the bank of Dewas in 1962 and the Dewas Senior

Bank in 1965. The State Bank of Indore was a government owned Indian bank and the

smallest of State Bank of India’s associate bank subsidiaries. In October 2009, the

Govt. of India gave its in-principle approval to a merger between SBI and the State

Bank of Indore.

On 15th July 2010, the cabinet cleared the merger. On 26th August 2010 the

State Bank of Indore officially merged into State Bank of India. At the time of

merger, the bank has over 470 branches in more than 300 cities and towns. In March

2009, the business turnover of the State Bank of Indore crossed Rs.50,000 crores.

State bank of Mysore (SBM)

The State bank of Mysore was established in the year 1913 as Bank of

Mysore Ltd., under the patronage of the erstwhile Government of Mysore, at the




89

instance of the banking committee headed by the great Engineer Statesman,

Late Dr. Sir. M. Visvesvaraya. It became an associate of the State Bank of India in

1960. Aggregate deposits and advances now exceeds Rs.22,000 crores.

State Bank of Patiala (SBP)

The rich heritage of the State Bank of Patiala dates back to the year 1917, when

it was founded by His Highness Late Bhupinder Singh, Maharaja of erstwhile. Patiala

State, with one branch by the name of ‘Chowk Fort, Patiala’ to begin with. It became

the State Bank of India’s Subsidiary in 1960. Aggregate deposits and advances now

exceed Rs.42,000 crores.

State Bank of Saurashtra (SBS)

The region of Saurashtra in Gujarat comprised many small, medium and large

princely states, each of which had its own ‘Darbar Bank’. After these states were

integrated to form Saurashtra in 1950, the banks were amalgamated into the State

Bank of Saurashtra. It has an impeccable track record of steady growth in turnover

and profitability and it is the pioneer in introducing ATM to the Saurashtra Region.

The bank expanded its sphere of operations after the establishment of the State of

Gujarat in 1960, and became a fully owned subsidiary of the State Bank of India.

Total deposits and advances now stand at Rs.19,000 crores.

State Bank of Saurashtra was a government owned bank in India. It was one of

the seven associate banks of the SBI, with which it merged on 13th August 2008. At

the time of the merger, the bank had a network of 423 branches spread over 15 states

and the union territory of Daman and Diu.

State Bank of Travancore (SBT)

The State Bank of Travancore, an associate of the State Bank of India since

1960, was originally established as the Travancore Bank in 1945, by the Princely

State Bank of Travancore. It’s deposits and advances now exceed Rs.38,000 crores.

State Bank of Bikaner and Jaipur (SBBandJ)

The State Bank of Bikaner and Jaipur is a professionally managed Public Sector

Bank with a track record of uninterrupted profitability and dividend payment. It took

over the business of ‘The Govind Bank’ in 1966. Though, like other associates, it has

a presence in all major banking centres and Rajasthan is its main area of operation. Its

total business now exceeds Rs.26,000 crores.




90

3.12. GROWTH AND PERFORMANCE

Among all commercial banks in India, public sector banks are having a wide

network of branches, inter-connectivity of banks and social responsibility. The

following table depicts the number of offices of commercial banks in India from 2006

to 2011, in which the public sector banks have more number of offices in large

numbers compared to other bank groups.

TABLE-3.5

OFFICES OF COMMERCIAL BANKS IN INDIA – 2006 TO 2011

Bank Group

As on March 31

2006 2007 2008 2009 2010 2011

(1) (2) (3) (4) (5) (6)

State Bank of India and its Associates 14310 14673 15846 16878 18114 18823

Nationalised Banks 35858 37431 39234 40854 43187 45850

Public Sector Banks 50168 52104 55080 57732 61301 64679

Old Private Sector Banks 4819 4826 4690 4908 5174 5028

New Private Sector Banks 2016 2598 3632 4328 5213 6973

Private Sector Banks 6835 7424 8322 9236 10387 12001

Foreign Banks 259 272 279 295 310 319

Regional Rural Banks 14807 14843 15070 15485 15723 16034

Non-Scheduled Commercial Banks 41 46 46 46 47 53

All Commercial Banks 72110 74689 78797 82794 87768 93080

Source : Master Office File (latest updated) on Commercial Banks, Department of

Statistics and Information Management, RBI.

Further, it is interesting to note that the public sector banks have taken the lead

role in branch expansion particularly in the rural areas as shown in the following table :




91

TABLE-3.6

BREAK-UP OF BANK BRANCHES (AS ON JUNE 30, 2009)

Type of Bank 1969 2004 2009

Rural Branches as on June 30,

2009

Rural Branches as % of all

branches on June 30, 2009

SBI and Associates 2462 13621 16294 5619 34.48 Nationalised Banks 4553 33359 39703 13425 33.81 Regional Rural Banks - 14486 15199 11644 76.61 Total PSBs 7015 61466 71196 30688 43.10 Other SCBs 900 5807 8979 1126 12.54 Foreign Banks 130 218 295 4 1.4 Non- SCBs 217 32 44 11 25.0 Total (All Commercial Banks) 8262 67523 80514 31829 39.5

Source : Economic Survey 2009-10, Government of India.

The above table shows that the public sector banks account for most of the

branches in India (88 percent in 2009). Moreover, the presence of the PSBs is

overwhelming in the rural areas and 96 percent of the rural bank branches belonged to

the public sector during the year 2009. The commercial banks are also having offices

in foreign countries in addition to their offices in India. It is shown in Appendix - A.

3.12.1. Market Overview

Globalisation and liberalisation of the Indian economy and the interest of

foreign banks to expand their presence in India through the inorganic route, have

fuelled the growth of the banking industry. The growth of the banking sector through

key parameters such as total business, assets and NPAs (US$ billion) is evident from

the following chart. The banking penetration calculated on the basis of total number

of credit accounts to total population was 9.4 per thousand in 2007-08.




92

CHART-3.3

GROWTH THROUGH KEY PARAMETERS

Source : "Report on trend and progress of banking in India 2008-09", RBI website,

www.rbi.org.in, accessed on January 12, 2010.

3.12.2. Market Analysis

The banking system in India is dominated by Scheduled Commercial Banks

(SCBs) with a pan-India presence. As of March 2009, SCBs controlled most of the

assets, with the rest being controlled by a large number of small co-operative credit

institutions with a very limited geographic reach. Within SCBs, public sector banks

accounted for 71.9 per cent of the assets and the rest 19.6 percent and 8.5 percent of

the assets were held by foreign banks and private sector banks respectively during the

year 2008-09, as against, 76 percent of the assets held by the Public sector banks,

(PSBs), 17 percent held by the private sector banks (PBs) and 7 percent held by the

foreign banks (FBs) respectively during the year 2002-03.

Thus, there has been a gradual shift in business from public to private and

foreign banks as depicted in the following chart.


http://www.rbi.org.in,



93

CHART-3.4

SHIFT IN BUSINESS FROM PUBLIC TO PRIVATE AND FOREIGN BANKS

Market Share By Assets (2002-03)

Market Share By Assets (2008-09)

Source : "Report on trend and progress of banking in India 2008-09", RBI website,

www.rbi.org.in. accessed on January 12, 2010.

Gradual Shift

Public Banks 76%

Private Banks 17%

Foreign Banks 7%

Public Banks 71.9%

Private Banks 19.6%

Foreign Banks 8.5%


http://www.rbi.org.in.



94

3.12.3. Credit and Deposit Growth

Credit demand from corporate organisations has helped to maintain credit

growth in recent years. Upside risks to inflation and liquidity might call for interest

rate environment to remain at current levels in the near future, thus, impacting the

credit growth further.

There has been a sharp growth in term deposits during 2006-07 as banks rely

more on these deposits than finance advances. Growth in savings deposit is expected

to increase by an increase in the amount per account and a steady increase in the

number of savings accounts as banks reach out to new markets. This is vividly shown

in chart 3.5.

CHART-3.5

CREDIT AND DEPOSIT GROWTH




95

Deposits and Advances as a Percentage of GDP Bank deposits are a significant driver of GDP growth and as a percentage of

GDP, has grown significantly over the years. Bank deposits grew from 44928.3 bn in

FY10 to 52079.8 bn in FY11. During FY11, time deposits constituted 87.7 percent

and demand deposits constituted 12.3 percent of aggregate bank deposits. Demand

deposits after witnessing a growth of 23.4 percent in FY10 declined 0.6 percent in

FY11 whereas time deposits grew 18.7 percent in FY11 over 16.2 percent in FY10.

Savings deposits with SCBs grew 21.2 percent in FY11 versus 26.2 percent in FY10.

Aggregate deposits of SCBs, as a percentage of GDP, were as high as 71.3 percent in

FY11, highlighting the contribution of the banking sector to the economy. The share

has seen a constant rise since FY05 when total deposits of the SCBs as a percentage

of GDP stood at 57.2 percent.

Bank credit of SCBs as a percentage of GDP also grew considerably since

FY05, with a contribution change from 37.0 percent in FY05 to 53.9 percent in

FY11. This reflects the increased lending of SCBs to various industries, which has

accelerated trade and economic development. During FY11, bank credit had risen by

21.5 percent, sectoral deployment of bank credit showed significant increase in credit

flow to industry and services. Within industry, credit growth to infrastructure was

robust. Credit flows improved in respect of metals, textiles, engineering, food

processing, and gems and jewellery, among others. Within services, credit growth

accelerated to commercial real estate and non-banking financial companies. Housing

and vehicle loans recovered in FY11. This is evident from Chart 3.6.

CHART-3.6

DEPOSITS AND ADVANCES AS A % OF GDP




96

The three main retail bank deposits of SCBs in India for the period from

2000-01 to 2007-08 are provided in the following table

TABLE-3.7

DIFFERENT TYPES OF RETAIL BANK DEPOSIT OF SCHEDULED

COMMERCIAL BANKS IN INDIA

(Rs. in Crores)

Year Current Deposits Saving Deposits Term Deposits Total Deposits

Total % Total % Total % Total % 2000-01 15283 21 86603 76 166686 52 268573 53 2001-02 17838 22 101043 73 195390 51 314271 52 2002-03 23140 23 130654 77 249707 53 403501 55 2003-04 27020 24 160004 79 299152 55 486175 57 2004-05 31772 26 179947 78 335805 54 547525 56 2005-06 32597 25 213368 79 385861 53 631826 56 2006-07 40465 27 248512 75 402317 48 691294 53 2007-08 51421 25 273513 72 383804 39 708737 45

Source : Special Statistics on Banking, EPW, March 2008.

Note : % indicates percentage of total respective deposits. 3.12.4. CASA Deposits

From a bank’s viewpoint, CASA deposits (Current Account and Savings

Account deposits) are low-cost deposits, as compared to other types of deposits.

Current account is non-interest bearing, while interest payable on savings accounts is

very low (currently 3.5 percent). To be competitive, it is important for banks to garner

much low-cost deposits as possible, so as to control the cost of raising deposits and

hence to lend at more competitive rates. The methods used by the banks to mobilize

CASA deposits include offering salary accounts to companies and encouraging

merchants to open current accounts and use their cash-management facilities.

Banks with low CASA ratios (CASA deposits as % of total deposits) are more

dependent on term deposits for their funding and are vulnerable to interest rate shocks

in the economy, besides the lower spread they earn. The following table shows the

share of current account and savings account (CASA) deposits in total deposits for a

period of four years (i.e., from 2006 to 2009).




97

TABLE-3.8

BANK-WISE SHARE OF CASA DEPOSITS IN TOTAL DEPOSITS (in Percent)

Bank Group March End 2006 2007 2008 2009

State Bank Group 43.4 42.9 42.0 38.6 Nationalised Banks 38.2 35.4 33.0 29.9 Private Banks 30.4 29.8 32.8 32.9 Foreign Banks 50.5 45.1 44.7 41.7 Total SCBs 38.6 36.6 35.7 33.2

Source : Report on Trend and Progress of Banking 2008-09, RBI. The table given above shows that the share of current account and savings

account (CASA) deposits in total deposits is the highest for foreign banks followed by

the State Bank Group. It can also be observed that the share of CASA deposits in total

deposits of the scheduled commercial banks as a whole has been declining. This

means that the cost of deposit mobilization of the commercial banks is rising, which

may pose a challenge for the banking sector in the coming years.

3.12.5. Investments

Banks' investments in Central and State Government dated securities including

treasury bills are governed by the RBI guidelines regarding maintenance of minimum

level of SLR securities as well as their own approved policy. Accordingly, the RBI

prescribes the minimum SLR level for Scheduled Commercial Banks (SCBs) in India

in specified assets as a percentage of the bank's NDTL. (Banking Regulation Act

1949). The actual percentage (that is, the value of such assets of a SCB as a

percentage of it’s NDTL) must not be less than such stipulated percentage. The RBI

may change the stipulated percentage from time to time.

Over the years, SLR ratio has changed a lot, but has broadly moved on a

downward trajectory, from 38.5 percent of NDTL in the early 90's (September 1990)

to 25 percent by October 1997, with the financial sector reforms giving banks greater

flexibility to determine their respective asset mix. The SLR was further reduced to 24

percent of NDTL in November 2008, but has been raised back to 25 percent level

since October 2009. Currently, it is at 25 percent level. Banks can and do invest more

than the legally prescribed minimum in SLR, as can be seen from the following table.




98

TABLE-3.9

SLR INVESTMENT OF SCBS : ACTUAL VS. STATUTORY REQUIREMENT

End-March Actual SLR Investment as % of NDTL

Statutory SLR requirement as % of NDTL

2006 31.3 25 2007 27.9 25 2008 27.8 24 2009 28.1 25

Source : Report on Trend and Progress of Banking in India, RBI, 2008-09

The SLR investment of SCBs as a percentage of NTDL for all the four years

as shown in the above table shows that the actual SLR investment was more than the

statutory SLR requirement, which means that the banks are interested to invest in such

securities apart from investment in non-government securities. The composition of

investment by commercial banks is given in table 3.10.

TABLE-3.10

INVESTMENTS BY COMMERCIAL BANKS

(Rs. in Crores)

End-March

SLR Investments Non-SLR

Investments Total

Investments Government Securities

Other Approved Securities

Total SLR

2006 700,742 (82)

16,712 (2)

717,454 (84)

135,340 (16)

852,794 (100)

2007 776,058 (83)

15,458 (2)

791,516 (85)

140,455 (15)

931,971 (100)

2008 958,661 (84)

13,053 (1)

971,714 (85)

170,609 (15)

1,142,323 (100)

2009 1,155,786 (84)

10,624 (1)

1,166,410 (85)

207,517 (15)

1,373,927 (100)

Source: Handbook of Statistics on Indian Economy, RBI 2008-09.

Note: The figures in bracket show the investments as a percent to the total investment.

From the above table, it could be seen that SLR investments, particularly

government securities, form the bulk of total securities. Non-SLR investments form a

relatively small part of banks' total investment.




99

3.12.6. Computerization in Banking Industry

Information Technology (IT) innovations in the last few years have changed

the landscape of banks in India. Today, IT seems to be the prime mover of all banking

transactions. Electronic and Information Technology together are bringing a swift

change in the way banks operate, especially offering better delivery channels and

customers friendly services. Anywhere banking, telebanking, mobile banking, net

banking, automated teller machine(ATMs), credit cards, debit cards, smart cards, call

centres, CRM, data warehousing have totally transformed the banking industry.

Today, almost all the major banks in India like ICICI Bank, UTI Bank, Citibank,

Standard Chartered Bank, ABN Amro, SBI and PNB are offering online services to

their customers. ATMs have emerged as the most favoured channel for offering

banking services to the customers in the world.

In India, currently there are two types of customers- one who is a multi-

channel user and the other who still relies on the branch as the main channel. The

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

of the kind of channel they use. The channels broadly cover the primary channels of

branch (i.e. teller and ATM), phone (i.e. call centre, interactive voice response unit),

and internet channel (i.e. personal computer, browser, wireless) banking. Banks in

India have all set for transformed branches, enhanced telephone services and internet

banking functions. Even for PSBs, the ongoing and future investments are massive.

“The available data about the investment plans in PSBs in IT in the year 2003-04

indicate that all major PSBs have earnmarked the hefty amount of Rs.2200 crores”3.

Computerisation in Public Sector Banks as at the end of March 2010 is

depicted in table 3.11.

3 The Financial Express Oct. 17, 2003.




100

TABLE-3.11

COMPUTERISATION IN PUBLIC SECTOR BANKS

(At the end of March 2010) (in per cent)

Sl. No. Name of the Bank

Branches under Core

Banking Solutions

Branches Fully

Computerised

Fully Computerised

Branches (2+3)

Branches Partially

Computerised

I Public Sector Banks 90.0 7.7 97.8 2.2 A Nationalised Banks 85.9 10.9 96.8 3.2 1. Allahabad Bank 39.9 59.9 99.8 0.2 2. Andhra Bank 100.0 - 100.0 - 3. Bank of Baroda 100.0 - 100.0 - 4. Bank of India 100.0 - 100.0 - 5. Bank of Maharashtra 100.0 - 100.0 - 6. Canara Bank 59.4 40.6 100.0 - 7. Central Bank of India 34.2 51.6 85.7 14.3 8. Corporation Bank 100.0 - 100.0 - 9. Dena Bank 100.0 - 100.0 - 10. Indian Bank 100.0 - 100.0 - 11. Indian Overseas Bank 100.0 - 100.0 - 12. Oriental Bank of Commerce 100.0 - 100.0 - 13. Punjab National Bank 100.0 100.0 100.0 - 14. Punjab and Sind Bank - 13.3 13.3 86.7 15. Synidcate Bank 100.0 - 100.0 - 16. UCO Bank 100.0 - 100.0 - 17. Union Bank of India 100.0 - 100.0 - 18. United Bank of India 100.0 - 100.0 - 19. Vijaya Bank 100.0 - 100.0 - B SBI and it’s Associates 100.0 - 100.00 -

Thus, it is evident from the above table that the PSBs are tech-savvy as more

than 80% of the banks are fully computerized.

Automatic Teller Machine (ATM)

Introduction of automated teller machines (ATMs) enabled customers to do

banking without visiting the bank branch. In 2010-11 the number of ATMs witnessed




101

a growth of 24 per cent over the previous year. However, the percentage of off-site

ATMs to total ATMs witnessed a marginal decline to 45.3 per cent in 2010-11 from

45.7 per cent in 2009-10. More than 65 per cent of the total ATMs belonged to the

public sector banks as at the end of March 2011. This is evident from the table 3.12.

TABLE-3.12

ATMS OF SCHEDULED COMMERCIAL BANKS (March 2011)

Sr. No. Bank group On-site

ATMs Off-site ATMs

Total number of

ATMs

Off-site ATMs as

per cent of total ATMs

I Public sector banks

Nationalised banks*

SBI group

29,795

15,691

14,104

19,692

9,145

10,547

49,487

24,836

24,651

39.8

36.8

42.8

II Private sector banks

Old private sector banks

New private sector banks

10,648

2,641

8,007

13,003

1,485

11,518

23,651

4,126

19,525

55

36

59

III Foreign banks 286 1,081 1,367 79.1

All SCBs (I+II+III) 40,729 33,776 74,505 45.3

*: Include IDBI Bank Ltd.

Source: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13938 Debit Cards

During 2010-11, the number of debit cards grew at the rate of 25 per cent

over the previous year. In sync with the trend observed in case of ATMs, nearly three

fourths of the total debit cards were issued by PSBs as at the end of March 2011. The

share of PSBs in outstanding debit cards witnessed an increase during the recent

years, while that of new private sector banks and foreign banks witnessed a decline

over the same period. However, in absolute terms, the number of outstanding debit

cards witnessed an increase for new private sector banks during the recent years as

shown in table 3.13.


http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13938



102

TABLE-3.13

DEBIT CARDS ISSUED BY SCHEDULED COMMERCIAL BANKS

(March 2011) (In Millions)

Sr. No. Bank group Outstanding Number of Debit Cards

2006-07 2007-08 2008-09 2009-10 2010-11

I Public sector banks 44.09 64.33 91.7 129.69 170.34 Nationalised banks 19.24 28.29 40.71 58.82 80.27 SBI group 24.85 36.04 50.99 70.87 90.07

II Private sector banks 27.19 34.1 41.34 47.85 53.58 Old private sector banks 3.94 5.34 7.09 9.81 12.44 New private sector banks 23.25 28.76 34.25 38.04 41.14

III Foreign banks 3.7 4.02 4.39 4.43 3.92 All SCBs (I+II+III) 74.98 102.44 137.43 181.97 227.84

Source: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13938

CREDIT CARDS

The issuance of credit cards facilitates transactions without having to carry

paper money. Despite the decline in the number of outstanding number of credit

cards, the volume and value of transactions with credit card recorded a growth of

13 per cent and 22 per cent, respectively in 2010-11. New private sector banks and

foreign banks accounted for more than 80 per cent of the total outstanding credit

cards as at the end of March 2011. Table 3.14 presents the number of credit cards

issued by the commercial banks.

TABLE-3.14

CREDIT CARDS ISSUED BY SCHEDULED COMMERCIAL BANKS

(March 2011) (In Millions) Sr. No. Bank group

Outstanding Number of Credit Cards 2006-07 2007-08 2008-09 2009-10 2010- 11

I Public sector banks 4.14 3.93 3.44 3.26 3.08 Nationalised banks 0.75 0.72 0.72 0.73 0.78 SBI group 3.39 3.21 2.72 2.53 2.3

II Private sector banks 10.68 13.29 12.18 9.5 9.32 Old private sector banks 0.03 0.04 0.06 0.06 0.04 New private sector banks 10.65 13.25 12.12 9.44 9.28

III Foreign banks 8.31 10.33 9.08 5.57 5.64 Source: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13938






103

Electronic Banking Transactions

The electronic payment systems such as Electronic Clearing Service (ECS)

credit and debit, National Electronic Fund Transfer (NEFT) for retail transactions and

Real Time Gross Settlement (RTGS) for large value, improved the speed of financial

transactions, across the country. Further, both retail and large value systems of

electronic payment transactions registered a growth out of which NEFT registered a

steep growth in 2010-11 over the previous year and shown in Table 3.15.

TABLE-3.15

VOLUME AND VALUE OF ELECTRONIC TRANSACTIONS* BY

SCHEDULED COMMERCIAL BANKS (MARCH 2011)

(Volume in million, Value in Crores)

Year

2009-10 2010-11 2009-10 2010-11 2009-10 2010-11 2009-10 2010-11

Volume Percentage Variation Value Percentage

Variation ECS Credit 98.1 117.3 11 19.5 1,17,613 1,81,686 20.6 54.5

ECS Debit 149.3 156.7 -6.7 5 69,524 73,646 3.8 5.9

NEFT 66.3 132.3 106.3 99.5 4,09,507 9,39,149 62.5 129.3

RTGS 33.2 49.3 148.5 48.2 3,94,53,359 4,84,87,234 22.2 22.9

*: Excluding transactions carried out through cards Source: http://www.rbi.org.in/scripts/PublicationsView.aspx?id=13938

3.12.7. Management of Non Performing Assets

The best measure of a country’s financial health and robustness is the extent of

non-performing assets in its banking system. NPAs form a substantial drag for

individual banks as well as the banking system of a country. They represent the poor

quality of the assets of the bank and have to be provisioned for using capital.

Obviously, they have a huge negative impact on a bank’s profitability and can lead to

complete erosion of its asset base. An asset of a bank (such as a loan given by the

bank) turns into a non-performing asset (NPA) when it ceases to generate regular

income such as interest etc., for the bank. In other words, when a bank which lends a

loan does not get back its principal and interest on time, the loan is said to have turned

into a NPA. While NPAs are a natural fall-out of undertaking banking business and

hence cannot be completely avoided, high levels of NPAs can severely erode the





104

bank’s profits, its capital and ultimately its ability to lend further funds to potential

borrowers. Similarly, at the macro level, a high level of non-performing assets means

choking off credit to potential borrowers, thus lowering capital formation and

economic activity. So, the challenge is to keep the growth of NPAs under control, for

which the banks have to emulate robust appraisal of loans, which can reduce the

chances of loan turning into an NPA. Also, once a loan starts facing difficulties, it is

important for the bank to take remedial action.

Level of Non-Performing Assets

“The gross non-performing assets of the banking segment were Rs.68,973

crores at the end of March 2009 and the level of net NPAs (after provisioning) was

Rs.31,424 crores. Although they appear to be very large amounts in absolute terms,

they are actually quite small in comparison to total loans disbured by the banks. The

ratio of gross non-performing loans to gross total loans has fallen sharply over the last

decade and is at 2.3 percent as at the end-March 2009. This ratio, which is an

indicator of soundness of banks, is comparable with most of the developed countries

such as France, Germany and Japan. The low level of gross NPAs as a percent of

gross loans in India is a positive indicator of the Indian banking system”4.

GNPAs to Gross Advances

The asset quality of the banking sector improved in 2010-11 over the previous

year. The gross NPAs to gross advances ratio declined to 2.25 per cent in 2010-11

from 2.39 per cent in the previous year. The GNPAs, however, increased in absolute

terms in 2010-11 over the previous year, though at a lower rate. The improvement in

asset quality was visible in both private sector banks and foreign banks. Public sector

banks, however, witnessed deterioration in asset quality in 2010-11 over the previous

year. This was mainly due to deterioration in asset quality of the SBI group. Among

the bank groups, SBI group reported the highest GNPA ratio followed by foreign

banks in 2010-11. Foreign banks, however, registered a decline in gross

non-performing loans in 2010-11 over the previous year. Chart 3.7 vividly presents

the trend of gross NPA as at the end of March 2011.4 Report on Trend and Progress of

Banking in India 2008-09, RBI and Report on Currency and Finance 2006-08.

4 Report on Trend and Progress of Banking in India 2008-09, RBI and Report on Currency and Finance

2006-08.




105

CHART-3.7

TREND OF GROSS NPA

Source : Report on Trends and Progress of Banking 2010-2011.

NPAs Written Off

During the year 2010-11, the banking sector has written off almost ten per

cent of the outstanding gross non-performing loans (as at end-March 2010), which

helped in limiting the growth of gross non-performing loans. The extent of write off

was lower in 2010-11 as compared with the previous year, however, in comparison

with 2008 and 2009, the ratio was on the higher side. This indicated that during the

last two years, writing off of NPAs was an important factor in maintaining the asset

quality of the banking sector at tolerable levels. The percentage of outstanding

GNPAs written off to total outstanding GNPAs (as at the end of March 2010) was

particularly high for SBI group and new private sector banks as is evident from the

chart 3.8.




106

CHART-3.8

GNPAs WRITTEN OFF

Source : Report on Trends and progress of Banking 2010-2011. NPAs Recovery

Recovery of GNPAs is another important component of asset quality

management in the banking sector. During the year 2010-11, the banking sector

recovered 57 per cent of the outstanding GNPAs (as at end-March 2010) through

various recovery channels. Foreign banks reported the highest recovery percentage

followed by nationalised banks as is evident from the chart 3.9.




107

CHART-3.9

RECOVERY OF GNPAs

Source : Report on Trends and Progress of Banking 2010-2011.

The level of non-performing assets (Gross and Net) of the public sector banks

during the period from 2009-2011 are shown in the following table. Further, the

non-performing assets of public sector banks sector-wise and assets classification of

public sector and private sector banks are given in Appendix B and C respectively.




108

TABLE-3.16

PUBLIC SECTOR BANKS: ASSETS / GROSS AND NET NON-PERFORMING ASSETS

(Rs. in crores)

S. No Banks

Total Assets Gross NPA Net NPA

2009 2010 2011 2009 2010 2011 2009 2010 2011

I NATIONALISED BANKS 2,313,299 2,795,001 3,442,756 25,108 34,265 40,304 9,337 15,407 19,605

II STATE BANK OF INDIA (SBI) 964,432 1,053,414 1,223,736 15,714 19,535 25,326 9,677 10,870 12,347

III ASSOCIATES OF SBI 315,623 358,886 373,948 2,733 3,998 5,066 1,192 1,960 2,444

IV Other Public Sector Bank IDBI Ltd. 172,402 233,572 253,377 1,436 2,129 2,785 949 1,406 1,678

TOTAL OF PUBLIC SECTOR BANKS [I+II+III+IV]

3,765,757 4,440,872 5,293,817 44,991 59,927 73,481 21,155 29,644 36,074

Source : www.rbi.org.in

From the above table it is understood that the non-performing assets gross and net show an increasing trend over the three years

period (i.e.,) from 2009 to 2011. This trend invites attention on the part of the bankers to emulate best practices towards appraisal of loans

and advances.


http://www.rbi.org.in



109

3.12.8. Profitability

Banks are considered as private companies with a public purpose, given the

significance of banking in economic growth. They seek to create value for all the

stakeholders and maximize shareholder’s wealth subject to the constraints of risks,

market competition, social and the legal/regulatory framework. The private nature of

banks requires them to be viable through profitability and the public nature of banks

emphasizes safety and soundness of the banks’ operations. Profitability is very much

important for the viability of a bank, but safety and security is also critical for the

survival of the financial system. Banks make a trade-off between the profitability

level they strive to achieve and the risks they are willing to take. Therefore, when

evaluating the performance of the banks, we should consider both their profitability

and financial condition to avoid misleading conclusions.

RBI’s annual report on Trend and Progress of Banking in India gives the

profitability of the different types of commercial banks in the country. Table 3.17

indicates the net profit of scheduled public sector commercial banks in India in recent

years.




TABLE-3.17

PUBLIC SECTOR BANKS : PROFIT (2009 - 2011)

(Rs. in crores)

S. No Banks

Operating profit Provisions and Contingencies Net Profit

2009 2010 2011 2009 2010 2011 2009 2010 2011

I NATIONALISED BANKS 41,816 49,298 63,003 20,198 23,506 31,616 21,618 25,793 31,388

II STATE BANK OF INDIA (SBI) 17,915 18,321 25,336 8,794 9,155 17,071 9,121 9,166 8,265

III ASSOCIATES OF SBI 5,495 6,515 7,569 2,721 3,248 3,970 2,774 3,267 3,598

IV Other Public Sector Bank IDBI Ltd. 1,378 2,726 4,158 519 1,695 2,508 859 1,031 1,650

TOTAL OF PUBLIC SECTOR BANKS [I+II+III+IV]

66,604 76,861 1,00,065 32,321 37,604 55,165 34,373 39,257 44,901

Source: www.iba.org.in


http://www.iba.org.in



111

Table 3.17 presents the operating profit and net profit together with the

provisions and contingencies provided for the three year period (i.e., from 2009-

2011). Among the bank groups, Nationalised bank and other PSBs and (IDBI Ltd),

there is a steady increase in the profit as against the profit of the SBI and SBI

Associates. In case of SBI, there is a decline in the amount of net profit (Rs.8265) for

the year 2011 when compared with the previous year 2010 (Rs.9166).

3.12.9. Employee Productivity

“The average business per employee of public sector banks (PSBs) stood at

Rs.8.7 crores for the year 2009-2010 led by the Central Bank of India, Punjab and

Sind Bank and the United Bank, outdoing private banks (Rs 7.9 crores) for the first

time”.5 Private sector productivity tends to be slightly overstated owing to the use of

direct selling agents, who do not figure in the payrolls. A cutback in the deployment

of these agents could have pulled down the employee productivity to a certain extent.

Nevertheless, the gap has been narrowing over the last five years. In 2008-09, both

public and private banks had an average business per employee of Rs.7.4 crores.

This rise in business/employee for PSBs during the year 2009-2010 is, no

doubt, a function of the increase in total business (deposits and advances); For

instance, IDBI Bank and Punjab and Sind Bank have seen over 200 percent growth in

total business during this period. Close on their heels are Corporation Bank and Bank

of Baroda. In fact, the total business of the PSBs together has grown by 134 per cent,

while that of private banks rose only by 96 per cent.

Further, the profile of banks reveals that a shrinking employee base has also

helped in the increase in productivity. The three banks that witnessed the highest

growth in business/employee are also the ones that saw maximum employee exits.

The employee strength of Central Bank and United Bank for example, has been

reduced by 20 per cent and 12 per cent respectively during this period. Moreover, due

to the superannuation and rationalisation efforts (VRS), the workforce has thinned for

half the banks in the public sector.

Even as private sector banks still generate higher profits per employee, a look

at the growth rates suggest that profit/employee of PSBs has grown at a faster pace

5 ‘'Profile of Banks” released by the RBI in September 2010 (covering the period 2005 -06 to 2009-10).




112

than their private sector counterparts (140 per cent against 60 per cent). Improvement

in efficiencies notwithstanding, private sector bank’s profits per se have grown faster

than PSBs (164 per cent vs. 137 per cent). This, perhaps, indicates that PSBs’ strong

show on the profits/employee parameter is also partly because of falling manpower.

Employee productivity in public sector banks and private sector banks for the

period 2005-06 and 2009-10 is depicted in the following table.

TABLE-3.18

EMPLOYEE PRODUCTIVITY

Public Sector Banks Private Sector Banks

2005-06 2009-10 Growth (%) 2005-06 2009-10 Growth

(%) No. of Employees 744333 734594 -1.30 110505 182284 65.0

Business / Employee (Rs. Lakh)

366.6 870.3 137.32 670.9 798.4 19.0

Profit / Employee (Rs. Lakh)

2.2 5.3 140.90 4.5 7.2 59

Source : RBI Data

Overall, the total employee base for PSBs has, in the last five years, shrunk by

1.3 per cent. On the other hand, the employee strength of private banks has gone up

by a robust 65 per cent during the same period.

3.13. CONCLUSION

The present chapter vividly presents the composition of Indian banks, post-

independence position of banks, nationalisation, liberalisation, Narasimham

Committee on banking sector reforms, key trends and the overview of developments

that have occurred in the Indian Banking Industry since the reforms. Further, the

chapter also focuses on the growth and performance of the commercial banks in India

in general and the public sector banks in particular, wherein the branch expansion,

growth of deposits, advances, NPA management, profitability, productivity and

computerization have been discussed.




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