Banking Structure in India

Banking Regulator

The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks.

Scheduled Banks in India:-Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks.Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than three-fourths of all financial institutions' assets. SCBs are present throughout India, and their branches, having grown more than four-fold in the last 40 years now number more than 80,500 across the country ,Our focus in this module will be only on the scheduled commercial banks. A pictorial representation of the structure of SCBs in India.

Scheduled Banking Structure in India

The banking system, largely, comprises of scheduled banks (banks that are listed under the Second Schedule of the RBI Act, 1934). Unscheduled banks form a very small component (function in the form of Local Area Bank). Scheduled banks are further classified into commercial and cooperative banks, with the basic difference in their holding pattern. Cooperative banks are cooperative credit institutions that are registered under the Cooperative Societies Act and work according to the cooperative principles of mutual assistance

MAJOR PLAYERS IN THE INDIAN BANKING INDUSTRY:-

Public Sector Banks (SBI and associates + Nationalised banks) control more than 74-75% of the total credit and deposits businesses in India whereas Private Sector Banks around 17-18%.

Public Sector BanksPublic sector banks are those in which the majority stake is held by the Government of India (GoI). Public sector banks together make up the largest category in the Indian banking system.There are currently 27 public sector banks in India. They include the SBI and its 6 associate banks (such as State Bank of Indore, State Bank of

Bikaner and Jaipur etc), 19 nationalised banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd.Public sector banks have taken the lead role in branch expansion, particularly in the rural areas. From Table 2.1, it can also be seen that:• Public sector banks account for bulk of the branches in India (88 percent in 2009).• In the rural areas, the presence of the public sector banks is overwhelming; in 2009,96 percent of the rural bank branches belonged to the public sector. The private sector banks and foreign banks have limited presence in the rural areas.

ROLE OF PUBLIC SECTOR BANKSPublic Sector Banks have been playing a vital role in the economic development of the nation. The flow of credit to agriculture and allied sectors during the 1st two decade of nationalization paved the way for industrial growth because of the robust growth in the rural economy. The contribution of credit to SMEs also heralded entry of Indian economy in the global scene. Never the less the Public Sector Banks have been subjected to continuous criticism by various Govt. agencies and entrepreneurs /borrowers alike in different forum and in different periods. From parliamentary committees to the block level review meetings, the Banks have been facing the flack for the slow and tardy growth of credit and being branded an institution insensitive to the credit needs of the clients. The gap between the expectation and delivery has never been appreciated leaving the Banks to take cover. Banks have been defending themselves quoting the ever-increasing NPA as the prime reason for strictness in credit disposition. This is despite a plethora of laws, like State Public Demand Recovery Act, Agriculture & Misc. Recovery Act, Debt Recovery Tribunal and the SARFESAI Act. These acts cover almost all types of defaulters i.e. from small farmers to top industrial/ business houses. Therefore, it is but natural that eyebrows are raised as to what prevent the Bank officials taking quick, prompt and pro-active decision! Why is that a applicant has to answer a heap of questions and has to run for days and

months to get a credit limit sanctioned or even face silent rejection. And why is that Private Sector Banks encash this delay and dillema of the Public Sector counterpart, by delivering a fast decision and thereby  increasing their business Is it that Private Sector officials are better qualified and better trained  or having better knowledge in comparison to Public Sector Officials.  

Fear Psychosis

The reasons are not difficult to find. The officials of Public Sector Banks are constantly under the fear of being prosecuted by the State for any decision going wrong or any credit portfolio turning NPA. The bane of PSBs is that the Govt. imposes too much accountability on the employees. Of course, another view is that the reason for poor performance is the total lack of accountability due to the Govt. policy. Both the views are diametrically opposite, it is strange but true. The truth is that there is harsh accountability if the decision goes wrong and there is no accountability on those who really do not take any decision. There is oppressive    level of accountability and punishing the employees for genuine decision taken, which later results in loss and the second is the widely held perception that any PSB official who is totally negative and refuses to take any decisions is never taken to task for his non-performance. Whenever a decision leads to a loss, the concerned official is taken to task, not only by the Bank, but also the agencies of the Govt. like CBI and CVC who step in to examine the decision taken by the officials that too 5 to 7 years back and decide whether he or she should be arrested, or prosecuted. The officials indeed are treated like criminals, till they are acquitted by the courts.

The Govt. should realise that Banking is a commercial transaction and losses are bound to happen even when the decisions are taken by the best of official in the best of circumstance. Every such case, if taken up for investigation, naturally creates fear psychosis among the officials. On the other hand, majority of the officials avoid postings, involving credit decisions, and if at all, they are posted, their attitude is to find out reasons, how to reject the credit proposals. Once a proposal is rejected no other official dares to touch it even

if, it warrants a favorable consideration. This fear psychosis exists even though, the commission (CVC) is fully alive to the need for dynamism and bold action on the part of Banks Executives in today's “competitive world” and inspite of CVC instruction to inidual banks, such to ensure proper distinction between commercial decisions and mala-fide action. The commission even held meeting of the Chief Executives of Banks with the Director, CBI to clear misunderstanding entertained by Banks concerning the role and attitude of the CBI. They also assure the Chief Executive that it would not hesitate to take lenient view, contrary to the serious view taken by concerned banks.

FINANCIAL HEALTH

Over a period of time, the financial health of PSBs continually to deteriorate resulting in decline in their efficiency. Since so many obligations, economic and social, are imposed on PSBs, it was thought, that their performance should not be judged merely in terms of profits. Since 1969, PSBs began to playa large and dominant supplementary role to the government programmes in alleviating poverty, employment creation and generation of fresh resources for development.

They have been highly successful in achieving their principal objective of deposit and loan expansion. Their participation in priority sector lending is highly commendable: In June 1969, on the eve of nationalization the share of priority sector in total credit of SCBs was mere 14 per cent (Rs. 504 crore). By March 2002, with the massive involvement of PSBs their outstanding lending to priority sector had climbed up to Rs. 1,71,185.26 crore. As a per cent of net bank credit the same was 43.1 per cent as against the mandated 40 per cent In terms of profitability, the SBI group has recorded a steady rise in net profits from Rs. 244 crore in 1991-92 to Rs. 2,222 crore in 200001 and Rs. 4,512 crore in 200203. In the case of 19 nationalized banks, profitability has always been low.

During 1992-93 and 1993-94 these banks actually posted huge losses to the tune of Rs. 3,513 crore and Rs. 4,705 crore :respectively. It is possible to defend the low profitability by 'referring to their commitment to social obligations imposed by the Government: as for instance opening rural

branches in large numbers, financing poverty alleviation programmes at concessional rates of interest, priority sector lending to the extent of 40 per cent huge NPAs, etc. As a result of their involvement in social~ banking and other factors such as directed investment, the state of health of these banks left much to be desired. The net profit as a per cent of Total assets became 0.99 per cent in 1992-93 and 1.1 per cent in 1993-94. Similarly, the net profit as a per cent of Total assets of 19 nationalized banks was 1.71 per cent in 1992-93 and 9.8 per cent in 1993- 94. Prior to reform period, profitability was not considered as the million objectives of PSBs. The return on assets of PSBs does not compare unfavorably with that of banks elsewhere. As per data provided by the Bank for International Settlements (BIS) 1999, return on assets, defined as profit before tax moved from 0.08 to 1.07 in Euro area in 1998 with most countries covering around the 0.5 mark even on free tax basis.

PRIVATE SECTOR BANKS:-

All those banks where greater parts of stake or equity are held by the private shareholders and not by government are called "private sector banks". These are the major players in the banking sector as well as in expansion of the business activities India. The present private-sector banks equipped with all kinds of contemporary innovations, monetary tools and techniques to handle the complexities are a result of the evolutionary process over two centuries. They have a highly developed organisational structure and are professionally managed. Thus they have grown faster and stronger since past few years

Role of private banks

The private sector banks play a vital role in the Indian economy. They indirectly motivate the public sector banks by offering a healthy competition to them. The following are their importance:

(i) Offering high degree of Professional Management:

The private sector banks help in introducing a high degree of professional management and marketing concept into banking. It helps the public sector banks as well to develop similar skill and technology.

(ii) Creates healthy competition:

The private sector banks provide a healthy competition on general efficiency levels in the banking system.

(iii) Encourages Foreign Investment:

The private sector banks especially the foreign banks have much influence on the foreign investment in the country.

(iv) Helps to access foreign capital markets:

The foreign banks in the private sector help the Indian companies and the government agencies to meet out their financial requirements from

international capital markets. This service becomes easier for them because of the presence of their head offices/other branches in important foreign centres. In this way they help a large extent in the promotion of trade and industry in the country.

(v) Helps to develop innovation and achieve expertise:

The private sector banks are always trying to innovate new products avenues (new schemes, services, etc.) and make the industries to achieve expertise in their respective fields by offering quality service and guidance.

They introduce new technology in the banking service. Thus, they lead the other banks in various new fields. For example, introduction of computerised operations, credit card business, ATM service, etc.

PERFORMANCE OF PRIVATE BANKS:-

The performance of the banking sector is more closely linked to the economy than perhaps that of any other sector. The growth of the Indian economy is estimated to have slowed down significantly from 8.39 percent in FY11 to 6.88 percent in FY12. This slowdown could be attributed to a number of factors:

• Continuing problems in Europe and economic slowdown in the United States affecting foreign investments coming into India

• Policy paralysis in view of the government’s inertia on various policy issues and reforms

• Fiscal indiscipline leading to fiscal deficit

• High inflation leading to high interest rate

• Rupee devaluation which further deteriorates the current account deficitBesides these factors, rising inflation forced the RBI to tighten the monetary policy during the last two years, increasing the benchmark repo rate 13 times successively. While the high interest rates impacted the

economic growth significantly, they had little impact on inflation. Persistent high inflation has led to a slowdown in credit growth and increase in cost of funds, hence adversely affecting the profitability of banks. During FY12, deposits and advances of the banking system grew 17.40 percent and 19.30 percent, respectively, compared with 15.90 percent and 21.50 percent in FY11. High deposit growth rate led to increased cost offunds which coupled with slowdown in credit added pressure on the profitability.

A number of changes in the policy and regulatory domain also affected the performance of Indian banks. These included migration to the system tracking of non- performing assets (NPAs) of the entire loan book, increasing the provisioning percentages for NPAs and restructured loans and the mandate to expand in relatively less profitable under-banked and unbanked areas. Amid these regulatory mandates and difficult macroeconomic environment during the year, the Indian banks witnessed worsening asset quality, declining NIMs and low growth rate of bottom line. Banks have started focusing on lending to more profitable segments such as retail and small and medium enterprises (SMEs), improving risk management policies and effective monitoring of loan and collection to improve their performance.