BankingFINAL Bibliography (1)

8/12/2019 BankingFINAL Bibliography (1)

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OBJECTIVES AND SCOPE OF THE PROJECT

The banking industry is one of the fastest growing industry in

India. It is a mirror image of the economy of the country. With the liberalization

of the economy, India has become the playground of major global banking

majors.

The major objectives of the study are as below:

To analyse how political, economical, socio-cultural, technological factors

affect this industry by PEST analysis.

To find out level of competition in Indian banking industry through using

porters five force model.

To find out driving forces and key success factors of the industry

To analyze various threats and opportunities for the industry

To focus on current trends and future of the industry.


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RESEARCH METHODOLOGY

We have done exploratory research and for that purpose we had

used secondary data.

We had collected this secondary data from various published

materials like newspapers, magazines, books etc and from Internet web sites.

From these various information and data we had done qualitative and

quantitative analysis to find out impact of various forces, effect of macro

environmental factors, major trends and future of the industry.

1.1: History of Indian banking


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A bankis a financial institution that provides banking and other

financial services. By the term bank is generally understood an institution that

holds a Banking Licenses. Banking licenses are granted by financial supervision

authorities and provide rights to conduct the most fundamental banking services

such as accepting deposits and making loans. There are also financial institutions

that provide certain banking services without meeting the legal definition of a

bank, a so-called Non-bank. Banks are a subset of the financial services industry.

The word bank is derived from the Italian banca, which is

derived from German and means bench. The terms bankrupt and "broke" are

similarly derived from banca rotta, which refers to an out of business bank,

having its bench physically broken. Moneylenders in Northern Italy originally

did business in open areas, or big open rooms, with each lender working from

his own bench or table.

Typically, a bank generates profits from transaction fees on

financial services or the interest spread on resources it holds in trust for clients

while paying them interest on the asset. Development of banking industry in

India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed

that the transistion from money lending to banking must have occurred

even before Manu, the great Hindu Jurist, who has devoted a section of his

work to deposits and advances and laid down rules relating to rates of

interest.

Banking in India has an early origin where the indigenous bankers played a

very important role in lending money and financing foreign trade and

commerce. During the days of the East India Company, was the turn of the

agency houses to carry on the banking business. The General Bank of India

was first Joint Stock Bank to be established in the year 1786. The others

which followed were the Bank Hindustan and the Bengal Bank.


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In the first half of the 19th century the East India Company established

three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and

the Bank of Madras in 1843. These three banks also known as Presidency

banks were amalgamated in 1920 and a new bank, the Imperial Bank of

India was established in 1921. With the passing of the State Bank of India

Act in 1955 the undertaking of the Imperial Bank of India was taken by the

newly constituted State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935

by passing Reserve Bank of India Act, 1934 which was followed up with

the Banking Regulations in 1949. These acts bestowed Reserve Bank of

India (RBI) with wide ranging powers for licensing, supervision and

control of banks. Considering the proliferation of weak banks, RBI

compulsorily merged many of them with stronger banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the

geographical coverage and financial spread of the banking system in the

country. As certain rigidities and weaknesses were found to have developed

in the system, during the late eighties the Government of India felt that

these had to be addressed to enable the financial system to play its role in

ushering in a more efficient and competitive economy. Accordingly, a high-

level committee was set up on 14 August 1991 to examine all aspects

relating to the structure, organization, functions and procedures of the

financial system. Based on the recommendations of the Committee

(Chairman: Shri M. Narasimham), a comprehensive reform of the banking

system was introduced in 1992-93. The objective of the reform measures

was to ensure that the balance sheets of banks reflected their actual

financial health. One of the important measures related to income

recognition, asset classification and provisioning by banks, on the basis of


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objective criteria was laid down by the Reserve Bank. The introduction of

capital adequacy norms in line with international standards has been

another important measure of the reforms process.

1.Comprises balance of expired loans, compensation and other bonds such

as National Rural Development Bonds and Capital Investment Bonds.

Annuity certificates are excluded.

2.These represent mainly non- negotiable non- interest bearing securities

issued to International Financial Institutions like International Monetary

Fund, International Bank for Reconstruction and Development and Asian

Development Bank.

3. At book value.

4.Comprises accruals under Small Savings Scheme, Provident Funds,

Special Deposits of Non- Government

In the post-nationalization era, no new private sector banks were allowed

to be set up. However, in 1993, in recognition of the need to introduce

greater competition which could lead to higher productivity and efficiency

of the banking system, new private sector banks wereallowed to be set up

in the Indian banking system. These new banks had to satisfy among

others, the following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;

(iii) The shares should be listed on the stock exchange;

(iv) The headquarters of the bank should be preferably located in a

centre which does not have the headquarters of any other bank; and


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(v) The bank will be subject to prudential norms in respect of banking

operations, accounting and other policies as laid down by the RBI. It

will have to achieve capital adequacy of eight per cent from the very

beginning.

A high level Committee, under the Chairmanship of Shri M. Narasimham,

was constituted by the Government of India in December 1997 to review

the record of implementation of financial system reforms recommended by

the CFS in 1991 and chart the reforms necessary in the years ahead to make

the banking system stronger and better equipped to compete effectively in

international economic environment. The Committee has submitted its

report to the Government in April 1998. Some of the recommendations of

the Committee, on prudential accounting norms, particularly in the areas of

Capital Adequacy Ratio, Classification of Government guaranteed

advances, provisioning requirements on standard advances and more

disclosures in the Balance Sheets of banks have been accepted and

implemented. The other recommendations are under consideration.

The banking industry in India is in a midst of transformation, thanks to the

economic liberalization of the country, which has changed business

environment in the country. During the pre-liberalization period, the

industry was merely focusing on deposit mobilization and branch

expansion. But with liberalization, it found many of its advances under the

non-performing assets (NPA) list. More importantly, the sector has become

very competitive with the entry of many foreign and private sector banks.

The face of banking is changing rapidly. There is no doubt that banking

sector reforms have improved the profitability, productivity and efficiency

of banks, but in the days ahead banks will have to prepare themselves to

face new challenges.


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Indian Banking: Key Developments

1969 Government acquires ownership in major banks

Almost all banking operations in manual mode

Some banks had Unit record Machines of IBM for IBR &

Pay roll

1970- 1980 Unprecedented expansion in geographical coverage, staff,

business & transaction volumes and directed lending to

agriculture, SSI & SB sector

Manual systems struggle to handle exponential rise in

transaction volumes -- Outsourcing of data processing to service bureaux begins

Back office systems only in Multinational (MNC) banks'

offices

1981- 1990 Regulator (read RBI) led IT introduction in Banks

Product level automation on stand alone PCs at branches


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(ALPMs)

In-house EDP infrastructure with Unix boxes, batch

processing in Cobol for MIS.

Mainframes in corporate office

1991-1995 Expansion slows down

Banking sector reforms resulting in progressive de-

regulation of banking, introduction of prudential banking

norms entry of new private sector banks

Total Branch Automation (TBA) in Govt. owned and old

private banks begins

New private banks are set up with CBS/TBA form the start

1996-2000 New delivery channels like ATM, Phone banking and

Internet banking and convenience of any branch banking and

auto sweep products introduced by new private and MNC

banks

Retail banking in focus, proliferation of credit cards

Communication infrastructure improves and becomes cheap.

IDRBT sets up VSAT network for Banks

Govt. owned banks feel the heat and attempt to respond

using intermediary technology, TBA implementation surges

ahead under fiat from Central Vigilance

Commission (CVC), Y2K threat consumes last two years

2000-2003

Alternate delivery channels find wide consumer acceptance IT Bill passed lending legal validity to electronic

transactions

Govt. owned banks and old private banks start implementing

CBSs, but initial attempts face problems

Banks enter insurance business launch debit cards


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1.2: CURRENT SCENARIO

The banking industry in India is in a midst of transformation,

thanks to the economic liberalization of the country, which has changed business

environment in the country. During the pre-liberalization period, the industry

was merely focusing on deposit mobilization and branch expansion. But with

liberalization, it found many of its advances under the non-performing assets

(NPA) list. More importantly, the sector has become very competitive with the

entry of many foreign and private sector banks. The face of banking is changing

rapidly. There is no doubt that banking sector reforms have improved the

profitability, productivity and efficiency of banks, but in the days ahead banks

will have to prepare themselves to face new challenges.

For the first quarter ended June 2004, the banking sector recorded a bottom

line growth of 18% to Rs 4852.50 crore. Higher net interest income and

lower provisioning were the main reasons for the profit growth during the

quarter. However, the above results were achieved despite higher operating

expenses and a lower rise in non-interest income.

Among banks, public sector banks outperformed private sector banks by

registering a 20% rise in the net profit compared to an 11% growth reported

by private sector banks. This was mainly due to a higher rise in other

income (OI) and a lower increase in operating expenses by public sector

banks compared to a fall in OI and higher operating expenses by private

sector banks. However, at the net interest level, private sector banks

outperformed public sector banks by registering a growth of 36% compared

to a 14% rise reported by public sector banks. .

The net interest income of the overall banking sector during the quarter rose

17% to Rs 11962.53 crore, mainly due to low cost of funds. The interest


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earned rose 4% to Rs 29747.88 crore, contributed mainly by interest

income from core operations (i.e., lending). The interest expenses decreased

by 4% to Rs 17785.35 crore. The interest spread of most banks witnessed

an increase over the corresponding previous quarter, as the decline of yield

on lending was lower than the cost of funds. In the falling interest rate

scenario, the rate on deposits for most banks fell faster than advances.

Thus, interest expenses came down faster to protect profit.

The sound economic growth, soft interest rate regime, upward migration of

incomes and wider distribution to cover a larger proportion of the

population are expected to increase the demand for retail loans in a

significant manner. The retail credit as a percentage of GDP in India is only

around 5% as compared to levels of 30 - 50% in other Asian economies

and, therefore, offers significant growth opportunities. Also, favourable

demographic profile like 69% of the population estimated to be under 35

years and an increase in upper middle/high income households are to be the

main drivers for retail credit. In the medium term, stronger demand for

credit from the corporate sector is also expected consequent to the

resurgence of this sector. Earlier, banks were seeing lower credit offtake

from corporates because of weak business sentiments and lower credit

requirement due to improved operational efficiency

Also, most banks are aggressively augmenting their fee incomes and have

embarked upon cross selling of products. They are also focusing on fuller

utilization of their IT investments such as ATMs by entering into sharing

arrangement with other banks to earn extra OI. Many banks are hopeful of

effecting significant NPA recoveries due to the Securitisation Act.

Recoveries from NPAs, which have been provided for, add to OI.


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RBI's soft interest rate policy has helped increase the liquidity in the

market, however credit offtake has not exactly been robust. Going

forward, the scenario is set to change in favour of higher credit offtake

due to expected improvement in agricultural output on the back of

good monsoons as well as revival in the Indian industry. However the

same cannot be said for the interest rate regime. Higher inflation and

the prospect of the US raising interest rates may necessitate a hike in

interest rates in the domestic markets also. This may in turn curb the

growth of the credit in the economy. Hence while the growth in credit

may still be robust, a higher interest rate scenario may however limit

the potential.

While the new law regarding securitisation and foreclosure of assets

may take a while to bear any large benefits, currently the benefits of

increased power in the hands of the lender are making the borrowers to

come to the negotiating table. FY04 saw a scenario where the

borrowers were forced to negotiate with the lenders, which

consequently led to the borrowers returning some of the dues to the

lenders. Going forward the new law will bring about greater

accountability within the system and ensure that borrowers do not take

undue advantage of the system. Already an asset reconstruction

company has been set up by SBI in partnership with other institutions

like ICICI Bank and IDBI. If properly implemented, this new law may

lead to significant benefits for the banking sector as a whole.

Currently the banking sector in the country is strongly fragmented and

hence with further policy changes taking place in the sector,

consolidation is likely to take place at a faster rate. However this is

subject to the removal of the ceiling on voting rights will ensure that

private sector and foreign banks will be in a much better position to

carry out acquisitions in the banking sector. A hike in FDI capital


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limits in the sector would further go a long way in the process of

consolidation.

In terms of credit growth, going forward. India's core sector is

witnessing a revival of sorts. The manufacturing sector especially led

by steel and cement industries has shown significant improvement inFY04. We expect the trend to continue. Hence as corporate growth

picks up lending too is likely to see an up tick. Retail credit off-take is

expected to remain strong going forward with the housing finance

industry, the main contributor to credit off-take from this segment,

expected to grow between 20%-25% in the next 3-4 years.

2: STRUCTURE OF INDIAN BANKING INDUSTRY

Organized banking was active in India since the

establishment of the General Bank of India in 1786. After independence, the

Reserve Bank of India (RBI) was established as the central bank and in 1955, the

Imperial Bank of India, the biggest bank at the time, was taken over by the

government to form state-owned State Bank of India (SBI). RBI had undertakenan exercise to merge weak banks to strong banks and the total number of banks

thus reduced from 566 in 1951 to 85 in 1969.

With the objective of reaching out to masses and meeting

the credit needs of all sections of people, the government nationalized 14 large

banks in 1969 followed by another 6 banks in 1980. This period saw enormous


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growth in the number of branches and the banks branch network became wide

enough to reach the weakest sections of the society in a vast country like India.

Sibs network of 9033 domestic branches and 48 overseas offices is considered

to be one of the largest for any bank in the world.

The economic reforms unleashed by the government in earlynineties included banking sector too, to a significant extent. Entry of new private

sector banks was permitted under specific guidelines issued by RBI. A number

of liberalisation and de-regulation measures aimed at consolidation, efficiency,

productivity, asset quality, capital adequacy and profitability have been

introduced by the RBI to bring Indian banks in line with International best

practices. With a view to giving the state-owned banks operational flexibility

and functional autonomy, partial privatisation has been authorised as a first step,

enabling them to dilute the stake of the government to 51 per cent. The

government further proposed, in the Union Budget for the financial year 2000-

01, to reduce its holding in nationalised banks to a minimum of 33 per cent on a

case by case basis.

The banking system can be broadly classified as organized and

unorganized banking system. The unorganised banking system comprises ofmoneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc.

Whereas the organised banking system comprises of Scheduled Banks and Non-

Scheduled Banks that are permitted by RBI to undertake banking business.

Types of Banks

A. Scheduled Banks


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Scheduled commercial banks are those that come under the purview of the

Second Schedule of Reserve Bank of India (RBI) Act, 1934. The banks that are

included under this schedule are those that satisfy the criteria laid down vide

section 42 (6 of the Act).

1. The bank is dealing in banking business in India only.

2. The paid up capital and total funds of the bank should not be less than five

lakhs rupees.

3. It should convince RBI that its activities would not be against the interest of

investors.

4. The bank must be:

(a)State cooperative bank, or

(b)A company according to the definition of the companies Act1956, or

(c) An institution notified by the central government, or

(d)A corporation or a company incorporated by or under any law in

force in any place outside India.

Thus,

(I) Indian Commercial Banks

(II) Foreign Commercial Banks, and

(iii) State Cooperative Banks fulfilling the above condition are

considered as scheduled banks.

Moreover under the RBI Act section 42, the Central Government

has declared the following banks as scheduled banks.

(i) State Bank of India and its seven subsidiary banks,

(ii) Twenty nationalized banks, and

(iii) Urban Banks.

In June 1980 there were 149 scheduled banks which included


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(i) Public Sector Banks

(ii) Private sector Banks,

(iii) Foreign Exchange Banks and

(iv) State Cooperative Banks.

A bank which wants to register its name as scheduled bank has to

apply to the Central Government. On receiving such application, the central

government orders RBI to investigate the banks accounts. If RBI gives

favorable reports, the central government sanctions its proposal, and the bank is

listed under schedule annexure II and is considered as a scheduled bank.

Some co-operative banks come under the category of scheduled

commercial banks though not all co-operative banks.

PUBLIC SECTOR BANKS

Public sector banks are those in which the Government of India or the RBI

is a majority shareholder. These banks include the State Bank of India

(SBI) and its subsidiaries, other nationalized banks, and Regional Rural

Banks (RRBs). Over 70% of the aggregate branches in India are those of

the public sector banks. Some of the leading banks in this segment include

Allahabad Bank, Canara Bank, Bank of Maharashtra, Central Bank of

India, Indian Overseas Bank, State Bank of India, State Bank of Patiala,

State Bank of Bikaner and Jaipur, State Bank of Travancore, Bank of

Baroda, Bank of India, Oriental Bank of Commerce, UCO Bank, Union

Bank of India, Dena Bank and Corporation Bank.

PRIVATE SECTOR BANKS


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Private Banks are essentially comprised of two types: OLD AND THE

NEW.

The OLD PRIVATE sector banks comprise those, which were operating

before Banking Nationalization Act was passed in 1969. On account of

their small size, and regional operations, these banks were not nationalized.

These banks face intense rivalry from the new private banks and the foreign

banks. The banks that are included in this segment include: Bank of

Madura Ltd. (now a part of ICICI Bank), Bharat Overseas Bank Ltd., Bank

of Rajasthan, Karnataka Bank Ltd., Lord Krishna Bank Ltd., The Catholic

Syrian Bank Ltd., The Dhanalakshmi Bank Ltd., The Federal Bank Ltd.,

The Jammu & Kashmir Bank Ltd., The Karur Vysya Bank Ltd., The

Lakshmi Vilas Bank Ltd., The Nedungadi Bank Ltd. and Vysya Bank.

The new private sector banks were established when the Banking

Regulation Act was amended in 1993. Financial institutions promoted

several of these banks. After the initial licenses, the RBI has granted no

more licenses. These banks are gearing up to face the foreign banks by

focusing on service and technology. Currently, these banks are on an

expansion spree, spreading into semi-urban areas and satellite towns. The

leading banks that are included in this segment include Bank of Punjab

Ltd., Centurion Bank Ltd., Global Trust Bank Ltd., HDFC Bank Ltd.,

ICICI Banking Corporation Ltd., IDBI Bank Ltd., IndusInd Bank Ltd. and

UTI Bank Ltd.

CO-OPERATIVE BANKS

Co-operative banks act as substitutes for moneylenders, and offer timely

and adequate short-term and long-term institutional credit at reasonable

rates of interest. Co-operative banks are relatively similar in terms of

functions to the other banks except for the following:


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(a)They are organized and managed on the principal of co-operation, self-

help, and mutual help.

(b)They operate under the rule of "one member, one vote".

(c) Operate on "no profit, no loss" basis.

(d) Co-operative bank conducts all the main banking functions of deposit

mobilization, supply of credit and provision of remittance facilities. Co-

operative banks offer limited banking products and are functionally

specialists in agriculture-related products, and even in providing

housing loans of late. Urban Co-operative Banks offer working capital

loans and term loans as well.

(e) Co-operative banks primarily operate in the agriculture and rural sector.

However, UCBs, SCBs, and CCBs function in semi urban, urban, and

metropolitan areas too

.

(f) Co-operative banks are probably the first government sponsored,

government-supported, and government-subsidized financial

agency in India. They get financial and other aid from the

Reserve Bank of India NABARD, central government and state

governments. They are the "most favored" banking sector with

risk of nationalization.

(g) Co-operative banks normally concentrate on "high revenue" niche retail

segments.

DEVELOPMENT BANKS

Development banks are primarily intended to encourage industrial

development by providing adequate flow of funds to industrial projects. In


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other words, these institutions undertake the responsibility of aiding all-

round development in the countrys economy by promoting new industrial

projects, and providing financial assistance for the expansion,

diversification, and up gradation of the existing units. Development Banks

may be classified as All India development banks and Regional

development banks. While All India development banks include Industrial

Development Bank of India and Industrial Finance Corporation of India,

examples of Regional development banks include State Financial

Corporation and State Industrial Development Corporation.

B. NON-SCHEDULED BANKS:The banks, which are not included in the second schedule of RBI Act,

1934, are known as non-scheduled banks. Such banks total share capital is

less than five lakhs. These banks are not governed according to the RBI Act

and they receive no benefits from the RBI. These banks have no place in

the list of recognized banks of the RBI. These banks are not much trusted

by the people and they do not get handsome deposits. Since 1951 the

numbers of such banks have been gradually decreasing. In 1979 there were

only five non-scheduled banks.

Generally now days we found many cooperative banks which are

belongs to the non-schedule co-operative banks. Following are the types of

non-schedule banks they are work like the schedule banks but here

difference in its status and it not having the status of the schedule banks.

a. Deposits Banks

b. Cooperative Banks

c. Central Banks

d. Exchange Banks

e. Investment or Industrial Banks


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f. Land Development Banks

g. Savings Banks

(a) Deposits Banks:

Generally, banks which provide short-term loans to business and industrial

units and which mobilize savings of people as deposits are called deposit

banks. Deposit banks accept deposits from people, and provide short-term

advances. They provide overdraft and cash credit facilities to merchants. To

meet the long-term requirement of industrial units is not possible for these

banks. They accept three types of deposits- saving bank deposits, fixed

deposits and current account deposits. They accept these deposits which are

payable on demand or on short notice, and provide funds to trading and

commercial units for short durations.

(b) Cooperative Banks

Cooperative banks meet the short-term financial needs of farmers.

Agriculturists, petty farmers and artisans organize themselves on cooperative

principles and form cooperative societies and banks. Cooperative banks raise

funds through various means, besides receiving all kinds of deposits to make

them available as lendable funds to its members. In India developed

cooperative banks supply finance for agriculture and non-agriculture activities.

(c) Central Banks

A central bank is a special institution which controls and regulates the entire

banking structure of country. It also strives to maintain monetary stability of

the country. Central bank is also known as the apex bank of a country. Since it

functions in the best interest of the country and making profits is unknown to

it, it is entrusted the right it issue currency notes. No other bank is allowed this

right. It operates in close cooperation with the government of implementing

economic policies, thereby promoting economic development.


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(d) Exchange Banks:

There is a difference in financing of foreign trade and financing of internal

trade. Generally a person carrying on international trade requires foreign

currencies to meet his obligation. It is here that exchange banks play the role of

financing the dealer for setting transactions involved in foreign trade, there are

specialized banks for exchange business. In India, there is an Export-Import

Bank (EXIM).

(e) Investment or Industrial Banks:

Investment banks provide long-term credit to industries. They raise their funds

by way of share capital, debentures, and long-term deposits from the public.

They also raise funds by the issue of bonds for business operations and

government agencies. Usually they underwrite fresh issue of shares and

debentures of companies. Such banks also buy the entire issue of new

securities of public limited companies and try to get them subscribed at a

higher price by the public.

(f) Land Development Banks:

Land development banks were earlier known as land mortgage banks. In India,

there is limited number of such banks. There are special institutions providing

long-term loans to agricultures and farmers. They provide loans on security of

land and other immovable properties. They supply long-term funds for periods

exceeding six years. Agriculturists and farmers need such funds for making

permanent improvements to land and for buying farming machinery and

equipment.

(g) Savings Banks:

Savings Banks are specialized institutions, which encourage general public to

save something from their earnings. In other words such banks pool the small


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savings of middle and lower income sections of society. They are the banks in

the true sense of the term and their main aim is to promote and collect of the

public. Not only the depositors are given interest, but also they are allowed to

withdraw in times of need. The numbers of withdrawal are, however,

restricted. Separate savings banks are organized in various nations. The

government can also run a savings bank. In India the postal department runs

the postal saving bank all over the country. It is very popular in rural areas

where no branches where no branches of established commercial bank operate.

In urban areas, commercial bank handles savings business


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Table-1:

Structure of the Indian banking industry, March 31, 2004

Sr.

No.

Bank Group No. Of

Banks

Deposits Loans &

Advances

Net Profit

1. Public Sector Banks

Share Percentage

27

7.6 %

10796

76.8 %

5493

72.1 %

123

69.8 %

1. a State Bank Group

Share (per cent)

8

2.2 %

3910

27.8 %

1892

24.8 %

45

25.6 %

1. b Nationalised Banks

Share (per cent)

19

5.3 %

6886

49 %

3604

47.2 %

78

44.2 %

2. Private Sector Banks

Share (per cent)

30

8.4 %

2072

14.8 %

1389

18.2 %

30

16.8 %

2.a Old Private Sector Banks

Share (per cent)

21

5.9 %

914

6.5 %

494

5.3 %

12

7 %

2.b New Private Sector Banks

Share (per cent)

9

2.5 %

1158

8.3 %

895

11.9 %

17

9.8 %

3. Foreign Banks

Share (per cent)

36

10 %

693

4.3 %

522

6.8 %

18

10.4 %

4. Total Pvt Sector BanksShare (per cent) {2+3}

6618.5 %

276519.7 %

191125.1 %

4827.2 %

5. Total Comm. Banks

Share (per cent) {1+4}

93

26 %

13559

96.6 %

7405

97.1 %

171

97 %

6. Regional Rural Banks

Share (per cent)

264

74 %

483

3.4 %

218

2.9 %

5

3 %

7. Total of Banks

Share (per cent)

357

100 %

14042

100 %

7623

100 %

76

100 %


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DIFFERENT SERVICES PROVIDED BY BANKS IN INDIA

Account types & other Services

Personal Banking: Other Different Services

Deposit Scheme Gold Banking

__ Current Account NRI Banking

__ Saving Account International banking

__ Term Deposit Corporate Banking

(Other Deposit Scheme as per the cust. convince) SSI Banking

Personal Finance Small Business Finance

__ Housing Loan Development Banking

__ Car Loan Other Services

__ Educational Loan

__ Personal Loan

__ Festival Loan

__ Property Loan

__ Other Loans

(As per banks and its customer base)

Services

ATM Services

Credit Card Services

Internet Banking Services

Phone Banking ServicesLocker Services

PPF Services


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finance on following different ways to satisfy the financial needs of the

customers.

Following are the different ways through the bank give finance to its customers:

-Housing Loan, Car Loan, Personal Loan, Educational Loan, Festival Loan,

Property Loan and etc,

SERVICES:

In the globally competition time service is quite important for the any sector and

having in nature of service sector the services of the banking sector is also most

important part following are the services that providing by the banking sectors

various banks but it differ from the bank to banks.

ATM Services

Credit Card Services

Internet Banking Services

Phone Banking Services

Locker Services

PPF Services

OTHER DIFFERENT SERVICES (CORPORATE)

Large foreign banks, Public and Private sector banks provide

different services to their corporate customers. For carrying out their business

activity and through that services they provide financial support and facility also.

3: CUSTOMER RELATIONSHIP IN BANKING INDUSTRY

(Through new technology and product development)


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Liberalisation and de-regulation process initiated by the Indian

Government in early nineties has completely changed the face of the Indian

banking industry. The entry of new private sector banks with the state-of-the-art

technology and lean structures has forced the old private-sector and public

sector banks to respond to the new challenges with aggressive restructuring

measures. The past five years have seen the public sector banks rapidly

introducing new products and services, computerising and networking key

branches, rationalising manpower and launch a number of initiatives to improve

operating efficiencies. Are they on the right track? Are these strategies to

become leaner and meaner sufficient to gain a competitive advantage to survive

and grow in the long run? This article argues that while all the above measures

are no doubt necessary to survive, they are by no means sufficient. To survive

and thrive in the long run, banks need to pursue strategies that enable them to

develop resources that are inimitable, rare, durable and superior to competitors.

Current development in the banking industry which make it more

attractive and it push this Industry in the market place

Introduction of new products and services:

Many of the public sector banks launched an array of products and services,

especially on the retail front, to match the competition. Some of the new

products include debit cards, credit cards, international cards, special deposits,

sweep-in accounts, and demat accounts and any-where-banking. Some of the

new services include round-the-clock phone banking, Automated Teller

Machines (ATMs), inter-city, inter-branch banking, net-banking and bill

payment services. Many public sector banks have even launched their own asset

management companies to offer mutual fund services to their customers.

Computerisation and networking of branches:


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Banks invested aggressively in computerisation and networking of branches.

The oldest and the biggest bank, SBI, had computerised 3701 branches by

March 2004, constituting nearly 41 per cent of its total branches. Many of these

branches were also networked so that their customers could be offered any-

time, any-where banking services. The other public sector banks too embarked

on a similar computerisation drive.

Installation of ATM networks

All banks have made heavy investments in the installation of large networks of

ATMs. As of March 2004, SBI had a network of 1305 ATMs, Canara Bank had

282 ATMs, Corporation Bank had 475 ATMs to match the ATM network of

private sector banks such as HDFC Bank and ICICI Bank. ATMs proved a

tremendous success by reducing the load on branches significantly as, apart

from carrying out routine transactions such as cash withdrawal etc, customers

can avail such services as transfer of funds and payment of utility bills by

visiting any of the ATMs located conveniently.

4: OUTLOOK MONEY SURVEY

CUSTOMER FRIENDLY BANKS WITH DIFFERENT PARAMETER

Service with a smile: todays finicky banking customer will settle for

nothing less. Hes come to realize, somewhat belatedly, that he is king: he

demands that banks roll out not just world-class products and services, but a red

carpet as well. His choice of one entity over another as his principal bank is

determined by considerations of service quality rather than any other factor. He

wants competitive loan rates, yes, but he also wants his loan or credit card

application processed in double-quick time. He cherishes the convenience of


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impersonal Net banking, yes, but during his occasional visits to the branch, he

also wants the comfort of personalised, human interactions and facilities that

make his banking experience pleasurable. In short, he wants a financial house

that will more than just clear his cheques and update his passbook: he wants a

bank that caresand for more than just his custom. He wants a customer-friendly

bank.

So, do banks meet these heightened expectations? And

which are Indias most customer-friendly banks?

To find answers to these questions, Outlook Money commissioned

market research agency C fore to carry out a survey of bank customers in five

citiesDelhi, Mumbai, Chennai, Kolkata and Bangalore. The exhaustive survey,

carried out in early August, covered 5,127 customers of 24 short listed banks:

the 10 biggest nationalised banks and the 10 biggest Indian private banks (in

terms of deposit base) and the only four multinational banks that offer retail

banking services. For all the differences in their ownership, these 24 banks are

all competing in the metros for your custom, so its only fair to compare them

within a unified cluster; yet, when comparisons within their respective peer sets

throw up interesting patterns, well take note of them.

These, then, are the significant findings of the survey:

Indias most customer-friendly bank is ICICI Bank, which outperforms

even multinational banks on this count (Overall Rankings)

Ranking a close second is Citibank, which also tops the ranking of MNC

banks on the overall score

For an entity thats not highly visible, seventh-ranked UTI Bank fares

surprisingly well, breaking into the top 10 in all the six parameters on

which the banks were rated

Strikingly, but not surprisingly, no nationalised bank figures in the top 10

banks, ranked on the overall score; the most customer-friendly PSU bank,


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Bank of Baroda, kicks in at No. 12; even the two banks (ING Vysya Bank

and The South Indian Bank) that rank a joint 6th in the smaller universe of

private banks score more overall than the top-ranked PSU bank

State Bank of India, by far Indias largest bank, comes in a lowly 16th in

the overall rankings; even among the smaller universe of PSU banks, it

ranks only 5th, despite the fact that the survey methodology assigns some

weightage to size to acknowledge big banks problems in servicing a large

customer base.

It isnt as if the entire universe of PSU banks is uniformly insensitive to

customers expectations on service quality. Bank of Baroda aside, Indian

Overseas Bank, Syndicate Bank and, to a lesser extent, Canara Bank give

some of the pretentious private sector banks a run for their money.

Likewise, all MNCs are not all there in keeping their customers happy:

Standard Chartered not only lags its MNC peers on most counts, it ranks

16th on service quality in the overall rankings.

A more rigorous analysis of the banks ratings on some of these

parameters throws up interesting findings about how customer-friendly these

banks are.

Service Quality

This is an index of the core of what makes a bank customer-friendly: its overall

service standards, rated for ease of opening an account; how courteous,

accessible and knowledgeable its staff are; transaction time for services; how

innovative the bank is in introducing products and services; how proactively the

bank informs customers of changes in deposit rates or service charges; how

quickly it redresses grievances; how likely it is to retain customers; and how

probable it is that its customers will recommend the bank to others.

On this count, HSBC tops the 24-bank ranking, followed closely

by ABN Amro. In third place here is a dark horse, The South Indian Bank.


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HSBC scores fairly well on most of the sub-parametersexcept product and

service innovation. ABN Amro tops the MNC banks cluster on such customer-

friendly features as ease of opening account, transaction time for services,

product and service innovation (such as its attractive home loan product All

Smiles, which comes at 6.5 per cent fixed rate for the first two years, after which

the then-prevailing floating rate applies), promptness in keeping customers

informed, and its banking hours (10 am to 7 pm; no weekly holiday). The South

Indian Banks good showing here is a reflection of its capacity to own up to its

customers, small though that base is, and service them well. Much the same can

be said of Federal Bank, IndusInd Bank, Karur Vysya Bank and ING Vysya

Bank, all of which break into the Top 10.

Strikingly, ICICI Bank fares poorly on service quality, coming in

joint 12th (along with Bank of Rajasthan). Within its peer set of private banks, it

falters on such sub-parameters as ease of opening account, transaction time for

cash withdrawal, and promptness in keeping customers informed.

No nationalised bank makes it to the Top 10 on service quality,

but given the wide variance within this grouping, it seems unfair to hang all PSU

banks together. IOB and Syndicate Bank, for instance, fare well among peerPSUs on all the sub-parameters. On the other hand, Union Bank of India, Bank

of India, UCO Bank and SBI run each other close for the bottom rank. SBI is

last in line in respect of customer retention and customer recommendation. In

fact, SBIs abysmal scores on all service standard sub-parameters weigh down

its overall customer-friendliness ranking.

Branch facilities

Walk into any branch of a multinational or leading Indian private bank, and

youll believe youre in a plush country club. Many other banks, of course, have

miles to go in this sphere, but theres a growing realisation among them that

offering a pleasant banking ambiencewith comfortable seating, air-


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conditioning, restroom and drinking water facilitiesand easy, uncluttered access

to bank stationery makes for good business.

The rankings here hold no surprise: MNCs HSBC, Citibank, and

ABN Amro take the top three slots, and IndusInd Bank, the first Indian

commercial bank to secure ISO 9002 certification for all its branches, comes inat No. 4. House-proud PSU banks IOB and Syndicate Bank top the rankings

within their peer set, but fail to make it to the Top 10 overall. SBI scrapes the

bottom at rank 23.

ATM service

By automating the most common day-to-day banking transactionscash

withdrawal, cheque deposits and statement generationATMs have, in a sense,

liberated customers from time-wasting branch visits and surly staff. But how

often have you faced automated chaos: an ATM that whimsically rejects your

card or runs out of cash? How often have you felt an overwhelming urge to cut

up your ATM card into tiny slivers and post it along with a cheery letter that

says no, thank you.

Increasingly, however, banks are waking up to the merits of an

expansive, glitch-free ATM network. Theyre investing in technology (read

newer machines), so theyll be fewer card rejects. And theyre entering into tie -

ups with one another to share their ATM network (for a nominal fee, to be paid

by customers); which means you no longer have to bear the agony of having to

stand in overlong queues at your banks ATMs and gape at a state-of-the-art SBI

ATM nearby that forever seems empty.

ICICI Banks wide network of ATMs (1,790) gives it top

ranking among all 24 banks; likewise, SBIs ATM penetration (including many

in some of the remotest corners of Indiaand Indias first floating ATM, on a

Kerala backwater ferry!) gives it second rank on this parameter. And MNC

banks, which have far fewer ATMs, targeted sharply at their metropolitan


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customers, slip to the bottom. But remove the surveys weightage for ATM

reach, and judge banks only on how glitch-free their ATM service is, and a

vastly different picture emerges.

Cards Grievance redress

A lost credit card, a debit card billing for a transaction you never made: on

occasions like these, youre hurriedly working your banks helpline numbers

and want a sympathetic hearing, and a prompt response. These are also the times

when a banks grievance redress mechanism is tested. How quickly and well abank responds, and whether youre subject to an elaborate runaround and

paperwork are critical determinants of how customer-friendly it is.

Here too, the methodology assigns weightage to card

penetration. Consequently, ICICI Bank (2.4 million credit cards; 6 million debit

cards) is No. 1, followed by SBI and HDFC Bankeven though within the

universe of private banks HDFC Bank scores rather dismally on grievance

redress. Next in line are Bank of Baroda and Canara Bank, their high rankings

(even higher than Citibank, for instance) a testimony to the mass popularity of

Bobcards and Cancards. But when the weightage is removed, the rankings

change dramatically.

Loans Speed of disbursal

When youve identified your dream home and cant wait to move in, or when

youre eager to cash in on an early bird discount on new bookings, you want a

lender who cuts through the paperwork and processes your home loan in a trice.

This sub-parameter is a measure of how quickly a bank processes loan


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applications and disburses funds.

Here too, assigning weightage for the number of loan accounts,

the rankings hold few surprises: SBI tops, followed by Bank of Baroda, ICICI

Bank and HDFC Bank. Among MNC banks, ABN Amro emerges on top,

matching product innovation in this space with speedy disbursal; among privateIndian banks, HDFC Bank is No. 2, perhaps having learnt a thing or two from

HDFC, Indias largest home loan provider.

Phone/Net banking

Its somewhat ironic that a technology-driven service that has made banking farmore impersonal should now be seen as a pillar of customer-friendliness. But

with phone/Net banking, geography is well and truly history. True, it hasnt

acquired a critical mass of adherents: only 4 per cent of our survey respondents

avail of phone/Net banking services, against 80 per cent who avail of over-the-

counter banking services, and 63 per cent who use ATMs. Even so, 21 banks in

our surveyall but Karur Vysya Bank, Bank of Rajasthan and Karnataka Bank

offer these services: its a symptom of the fact that these are no longer

considered premium services, but are percolating down and becominga must-

have, pretty much like what happened to ATMs some years ago.

Predictably, new-age MNC and Indian private banks, whose

young, upwardly mobile customers are typical users of phone/Net banking,

claim this service space for themselves. Among private banks, HDFC Bank

leads its bigger rival ICICI Bank in this space. And among PSU banks, IOB,Syndicate Bank and Bank of Baroda are streets ahead of the others. IOB even

breaks into the Top 10 across all 24 banks on this parameter, ahead of new-age

banks like ING Vysya Bank and IndusInd Bank.


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5: NEW MARKETING CHANNEL

New marketing channel is creating strong base for the banking

industry and it will help banks to push their products in the market places. New

private sector banks are used DSA level for pushing their products in the market

place so they appoint different team for different territory and those teams are

works for that area and make strong position in marketing of that banks.

Here, in this channel the cost of employee is variable because

generally appointment of team is based on their works. This team is work for

only marketing so it will help the bank in creating the strong position in the

market place also.

Banks are also involved in inventing new marketing and

distribution channels like E-banking, net banking and tele-banking. The next era

would be of all these. Now customers want services to be delivered at their

convenience. The first mover advantages will surely going to work. About 25%

of transactions are projected to be carried on through E-Banking by 2008

6: BANKING INDUSTRTY DOMINANT ECONOMIC FEATURES


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Market size: Banking industry market size is around Rs.14, 04,341 crore

deposits by 357 commercial banks.

Scope of competitive

rivalry:

There are 357 commercial banks in banking sector, which

includes domestic and foreign banks, and finance sector

also provides strong fight to the banking sector companies.

Market life cycle: In India it is in secondary stage and more and more chance

for growth

Market growth rate: The Indian government adopted the policy of liberalization

and it is since then that this sector has shown high annual

growth through various in various services like ATM, Net

Banking, Phone Banking and its growth rate is also

increasing from heavily from last 4-5year.

Number of companies

in industry:

Now a day around 357 commercial banks; among them 27

public sector banks, 30 private sector banks then 36 foreignbanks and remaining are co-operative banks, they

providing their service in this industry.

Customers: Entrepreneurs those who willing to invest in businesses

especially young and mature people and layman, those use

different banking services, are customers of banks.

Ease of entry/exit: Entry in Indian banking sector has become easy. Now

foreign banks are also allowed to carry on their business.

But exit is difficult due to large investment and government

rules & regulation. All players fight desperately to survive.


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Technology/innovation: Technology is main issue in global era and changes are

fast; biggest changes are occurring in products innovation

and new era technology like net-banking mobile banking or

ATM banking. Now a days all banks are concentrating on

technology related innovative products.

Degree of vertical

integration:

Here no question of degree of vertical integration but some

large banks provides different services so in those case the

degree of integration come in to light but it not effect so

much in this industrys basic service.

Product Characteristics: Homogeneous services by all banks little difference in

services offered.

Economies of scale: Moderate all companies have virtually equal

service cost due to rules and regulation of RBI but scale of

economies exists in new era services and marketing and

other integration work.

Learning and

experience effects:

Quite important factor because it decides various skills and

operational works also.

Capacity Utilization: Service efficiency is highest in private and in foreign banks

its around 70 to 80 percent but in public sector it is quite

low.

7: Porter's Five Forces Model of Competition

The nature of competition in an industry in large part determines

the content of strategy, especially business-level strategy. Based as it is on the

fundamental economics of the industry, the very profit potential of an industry is

determined by competitive interactions. Where these interactions are intense,

profits tend to be whittled away by the activities of competing. Where they are

mild and competitors appear docile, profit potential tends to be high. Yet a full


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understanding of the elements of competition within an industry is easy to

overlook and often difficult to comprehend.

Porter has identified five basic forces that collectively describe

the state of competition in an industry:

1. The intensity of rivalry among competitors

2. The threat of new entrants to the market

3. The amount of bargaining power possessed by the firm's/industry's

suppliers

4. The amount of bargaining power possessed by the firm's/industry's

customers

5. The extent that substitute products present a threat to a

firm's/industry's products

These forces assist in identifying the presence or absence of

potential high returns. The weaker are Porter's five forces, the greater is the

opportunity for firms in an industry to experience superior profitability. More

generally, understanding how these forces affect competition within an industry

allows the strategist to identify the most advantageous strategic position.

The actors within an industry on whom these forces exert

pressure are, respectively, the industry's competing firms themselves, potential

new entrants to the industry's markets, suppliers (vendors), customers, and

makers of substitute products.

Obviously, the starting point for conducting an analysis of the

five forces of competition is to identify all the competitors, potential new

entrants, major suppliers, the demographics of customers, and makers of and

nature of substitute products. Competitors would not only have to be identified,

but various distinguishing data about the industry would also have to be


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specified. For each competitor this data would include market share, product line

differences/similarities, market segments served, price/quality relationships

represented by products, growth/decline trends, financial strength differences,

and any other information that will help describe the industry.

Porters FIVE-FORCE analysis for Indian banking industry

BARGAINING POWER OF

SUPPLIERS-Low supplier bargaining power

-Few alternatives available

-Subject to RBI Rules and Regulations

-Not concentrated

-Forward integration-Nature of suppliers

THREAT OF NEWENTRANT

-Low barriers to entry

-Government policies are

supportive

-Globalization and

liberalisation policy

-High exit barriers

INDUSTRY RIVARLY

Intense competition

Many private, public,

Co-operative, foreignbanks

THREAT OF

SUBSTITUTES

High threat from substitutes

Like

Mutual funds,

T-bills,

Government securities


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RIVALRY AMONG THE INDUSTRY

Rivalry in banking industry is very high. There are so many

private, public, co-operative and non-financial institutions operating in the

industry. They are fighting for same customers. Due to government liberalisation

and globalization policy, banking sector became open for everybody. So, newer

and newer private and foreign firms are opening their branches in India. This has

intensified the competition. The no. of factors have contributed to increase

rivalry those are:

1.A large no. Of banks

There are so many banks and non-financial institutions fighting for same pie,which has intensified competition.

2.High market growth rate

India is seen as one of the biggest market place and growth rate in Indian

banking industry is also very high. This has ignited the competition.

BARGAINING POWER OF

CUSTOMERS

-High bargaining power

-Low switching cost

-Large no. of alternatives-Homogeneous service by banks

-Full information available with customers


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3.low switching cost

Customer switching cost is very low. They can easily switch from one bank to

another bank and very little loyalty exists.

4.indifferentiate services

Almost every bank provides similar services. No differentiation exists. Every

bank tries to copy each other services and technology, which increases the level

of competition.

5.high fixed cost

6.High exit barrier

High exist barriers humiliate banks to earn profit and retain customers by

providing world-class services.

7. Low government regulations:

There are low regulation exist to start a new business due LPG policy adopted

by India. So, sector is open for everybody.

BARGAINING POWER OF SUPPLIERS

Suppliers of banks are depositors. These are those people who

have excess money and prefer regular income and safety. In banking industry

Suppliers have low bargaining power. Following are the reasons for low

bargaining power of suppliers.


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1.Nature of suppliers

Suppliers of banks are generally those people who prefer low risk and those who

need regular income and safety as well. Bank is best place for them to deposit

their surplus money. They believe that banks are very safe than other investment

alternatives. So, they do not consider other alternatives very seriously, which

lower their bargaining power.

2.few alternatives

Suppliers are risk averters and want regular income. So, they have few

alternatives available with them to invest like Treasury bills, government bonds.

So, few alternatives lower their bargaining power.

3.RBI Rules and Regulations

Banks are subject to RBI rules and regulations. Banks have to behave in the way

that RBI wants. So, RBI takes all decisions relating to interest rates. This reduces

suppliers bargaining power.

4. Suppliers are not concentrated

Banking industrys suppliers are not concentrated. There are numerous suppliers

with negligible portion to offer. So, this reduces their bargaining power. If they

were concentrated then they can bargain with banks or can collectively invest in

other no-risky projects.

5.Forward integration

Forward integration is possible like mutual funds, but only few people now

about this. Only educated people can forwardly integrate where as large no. Of

suppliers are unaware about these alternatives.

BARGAINING POWER OF CUSTOMERS


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Customers of the banks are those who take loans, advances and

use services of banks. Customers have high bargaining power. Following are the

reasons for high bargaining power of customers.

1. Large no. Of alternatives

Customers have very large no. of alternatives. There are so many banks, which

fight for same pie. There are many non-financial institutions like ICICI, HDFC,

IFCI etc., which has also jumped into these business. There are foreign banks,

private banks, cooperative banks and development banks together with the

specialized financial companies that provide finance to customers. These all

increase preferences for customers.

2.low switching cost

Cost of switching from one bank to another is low. Banks are also providing zero

balance account and other types of facilities. They are free to select any banks

service. Switching costs are becoming lower with Internet Banking gaining

momentum and as a result consumers loyalties are harder to retain.

3.undiffernciated service

Banks provide merely similar services. There is no much difference in services

provided by different banks. So, bargaining power of customers increases. They

cannot be charged for differentiation.

4.Full information about the market

Customers have full information about the market due to globalization and

digitization consumers have become advance and sophisticated. They are aware

with each market conditions. So, banks have to be more competitive and

customer friendly to serve them.


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THREAT OF NEW ENTRANT

Barriers to an entry in banking industry no longer exist. So, lots

of private and foreign banks are entering in the market. Competitors can come

from any industry to disintermediate banks. Product differentiation is very

difficult for banks and exit is difficult. So, every bank strives to survive in highly

competitive market. So, we see intense competition and mergers and acquisition.

Government policies are supportive to start a new bank. There

are less statutory requirements needed to start a new venture. Every bank tries to

achieve economies of scale through use of technology and selecting and training

manpower.

THREAT OF SUBSTITUTES

Competition from the non-banking financial sector is increasing

rapidly. Sony and Software giants such as Microsoft are attempting to replace

the banks as intermediaries. The threat of substitute products is very high. These

new products include credit unions and investment houses. One feature of using

an investment house is that the fees that the investment house charges are tax

deductible,where as a bank it is considered a personal expense, which are not

tax deductible. The rate of return with using investment houses is greater than a

bank. There are other substitutes as well for banks like mutual funds, stocks

(shares), government securities, debentures, gold, real estate etc. so, there is a

high threat fro substitute.

Conclusion:

Indian banking sector is one of the highly competitive sectors where high growth

rate and high degree of competition exist. Low entry barriers and high exit


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barriers ignites competition in this industry. Every bank strives to survive in the

shadow of these barriers. There are so many substitutes available with customers

and they have high bargaining power where as suppliers i.e. depositors have low

power in their hands.

8: KEY SUCCESS FACTORS

An industrys key success factors are those things that most

affect industry members ability to prosper, competencies, competitive

capabilities and business outcomes that spell the difference between profit and

loss and ultimately, between competitive success or failure.

With increasing number of players in the banking industry, the

following are some of the key success factors. .

1. Access to technology

2. Computerization

3. Low employee cost

4. Management of NPAs

5. Transparency of public disclosure and best practices

6. Diversified products

1. COMPUTERISATION AND ACCESS TO NEW TECHNOLOGYA sound and effective banking system is the backbone of an economy. The

economy of a country can function smoothly and without many hassles if the

banking system backing it is not only flexible but also capable of meeting the

new challenges posed by the technology and other external as well as internal

factors. The importance and role of information technology for achieving this

benign objective cannot be undermined. There is an urgent need for not only


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technology up gradation but also its integration with the general way of

functioning of banks to give them an rim in respect of services provided to

the customers, better housekeeping, optimizing the use of funds and building

up of management information system for decision making. The technology

has the potential to change methods of marketing, advertising, designing,

pricing and distributing financial products and services and cost savings in

the form of an electronic, self-service product-delivery channel. The

technology holds the key to the future success of Indian Banks. Thus,

Internet Banking is the need of the hour, which cannot be lost sight of

except at the cost of elimination from the competition. The existence of

Internet banking also becomes inevitable due to the standards required to be

matched at the international level. Thus, the domestic as well as the

international standards mandates the adoption of Internet banking at the

earliest possible moment

Within the banks, their IT strategy has taken different forms.

While quite a few banks have moved towards core banking, other banks have

adopted different models. However, there seems to convergence on the type

of services which are offered - like internet banking, anytime, anywhere

banking, telebanking, remote access, multi city chequing facilities etc. Some

of the banks have scaled up further by setting up call center facilities. Banks

have also gone for sharing of their technological infrastructure, as in the case

of ATM networks. With gradual scaling up, public sector banks are expected

to gain competitive advantages arising out of their vast branch network and

large customer base.

2. GREATEST ASSETS HUMAN RESOURCE (low cost per employee)

To achieve the service excellence and in order to succeed in a market place

where competition is fierce, banks need to focus on yet another area - People.

Bank is harnessing its human resources to keep up the efficiency levels by

adopting people-centric policies. It is well realized that human assets are

hidden assets and we are nurturing this capital to maximize the competency


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levels. The Bank has created enabling environment to bring out the best from

its people through a process of strong training system to hone the skills in the

areas of marketing and technology.

Strategies to make the employee more productive

Reward, recognition and incentives to employee who perform will send the

right signal, ensuring job satisfaction, boosting and employee morale and

building employee commitment.

Identify and outsource non-strategic work, leaving employees free to

concentrate on core banking activities especially high value added

activities.

To keep employee skills updated the training systems of banks need to be

revamped to train employees at every level as well as location of branch.

Raising the skill bar at entry level to ensure that people with requisite skills

get into banks.

Actively encourage physical fitness in employees banks can organize on-

going basis stress management programmes, yoga etc.

To make people grow and realize their productivity, therefore a

big push is needed to unleash their potential. Past efforts to measure

employee productivity have focused on business narrowly defined as deposits

plus advances. However, the parameters need to be expanded to reflect the

contribution of non-fund based activities also. But ultimately, employee

motivation is critical because a committed employee is a productive

employee

3. MANAGEMENT OF NPAS


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Non Performing Assets are disease for Indian banks. The size of the NPA

portfolio in the Indian Banking industry is around Rs.1,00,000 crore which is

nearly 6% of Indias GDP. However due to the active steps taken by the

regulatory authorities and the banks, the gross NPA level has been reduced.

To ensure long-term profitability, banks have to manage NPAs effectively by

adopting the many techniques.

4. TRANSPARENCY OF PUBLIC DISCLOSURE AND BEST PRACTICES

There is an increasing movement worldwide towards building a safe and

sound banking system backed by a strong supervisory/regulatory regime in

accordance with the core principles for effective banking supervision. The

banking industry in the new millennium will also have to ensure greater

transparency and disclosure in their financial statements for the information

of market players, investors, depositors and rating agencies. Such disclosures

would enable the users of that information to accurately assess the bank's

financial condition, performance, and business activities, risk profile and

management practices. Processes of transparency and market disclosure of

critical information describing the risk profile, capital structure and capital

adequacy are assuming increasing importance in the emerging environment.

Besides making banks more accountable and responsive to better-informed

investors, these processes enable banks to strike the right balance between

risks and rewards and to improve the access to market. Improvements in

market discipline also call for greater coordination between banks and

regulators. Efforts have also been made to set up a Credit Information Bureau

to collect and share information on borrowers and improve the creditappraisal of banks and financial institutions within the ambit of the existing

legislation.

5. DIVERSIFIED PRODUCTS(The innovation imperative)


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Successful innovation is crucial to the competitive edge of all businesses. But

it is particularly important for banking and finance companies. Innovation,

which transcends invention, represents the point of convergence of invention

and insight. Strategic factors to devise effective responses to innovation

challenges include quick response to identified customer needs, product

quality, short cycle times for product development, developing marketing and

technical capabilities, extensive training, rewards and recognition of

performance.

Innovation is a key driver of growth that surprises and delights

the customer with new, differentiated and relevant benefits. This is not a

clich but a defining characteristic of the modern corporate saga.

This can be substantiated by innovation within a global

framework. Indian banks will be able to weather the competition provided

they are relevant to consumers in terms of technology, quality, reliability,

pricing, performance and support. As the convergence of the ICE

(information, communication) technologies, "technological evangelization"

and narrowing of the "digital gap" are significant instruments of the growth

escalation process; integration of technology and business is required.


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PEST ANALYSIS

9: PEST ANALYSIS

The PEST analysis considers the broad external environment

facing the business organization. It is an outward looking analysis. The PEST

analysis attempts to answer the question: What broad determinants are going to


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affect the macro environment in which the firm will be competing, over the next

five (or more) years? The PEST analysis is so-called, because it is an acronym

for the four categories into which the analyst will try and include all of the

relevant factors and trends: Political, Economic, Social, and Technological.

Like any model, the PEST model is a simplification; the choiceof Political, Economic, Social, and Technological factors may strike you as

arbitrary. You may be right. However, these categories are as adequate as any in

attempting to put a form to the myriad trends, developments, events and

causations that will assist or hinder the firm as it attempts to breach the Gap

between where its is now, and where it ultimately wants to be.

.

9.1 : Political-legal factors

1.Government policy and budget:

Government affects the performance of banking sector most by legislature and

framing policies. Government through its budget affects the banking activities.

The much-needed reforms in the banking sector have transformed the sector

drastically in the last few years. Falling interest rates as well as strengthening of

the hands of banks (Securitisation Act) have changed the dynamics of the Indian


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continued.

BUDGET IMPACT:

1. As per the common minimum program (CMP), the budget has focused a

lot on the need to improve credit to the agriculture sector and banks will

be at the forefront of disbursing credit. Vagaries of monsoons impact the

agriculture sector heavily and banks are vulnerable if monsoon fails. Also,

the RBI has released new guidelines for banks with regards to agricultural

lending. However, it is too early to ascertain the impact. The impact of

these initiatives by the government will only be apparent over the long-term.

2. Banks are likely to benefit from increased lending to the infrastructure

sector. This will come about in two ways i.e. direct equity participation

and indirectly (corporates borrowing for expanding capacity). While this

would provide an impetus to core advances of banks, the quality of such

advances is likely to be better. In this light, there is relatively less NPA

risk.

3. Reforms in the banking sector in the form of amendments to the

Securitisation Act may strengthen the backbone of the financial sector.

4. A hike in the FDI in the insurance sector is likely to significantly raise

investments in the nascent insurance sector. Domestic banks like ICICI

Bank, ING Vysya, Kotak Bank and SBI who have joint ventures with

international insurance majors will be able to infuse more capital into their

insurance business. In the future, there may be an opportunity for these

domestic banks to unlock value from such investments as well.

BUDGET OVER THE YEARS:


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BUDGET 2001-02:

Reduction in dividend tax to 10% from 20%.

Cut in small savings rates 1-1.5%

Limit for TDS on deposits reduced to Rs 2,500 from the current Rs

10,000.

Abolishment of banking service recruitment board

BUDGET 2002-03:

Cut in most administered interest rates by 0.5% (by 50 basis points)

from March 1, 2002.

Setting up of Asset Reconstruction Company by June 2002.

Banks are now allowed to deduct 7.5% of their total income against

provisions made by them for bad and doubtful debts.

Banks are given option to deduct up to 10% of their non-performing

assets (NPAs) falling in the category of loss or doubtful assets from

total income.

Bill on the banking sector reforms is to be introduced in Parliament.

Foreign banks permitted to operate in India with fully owned branches

after the specific permission of RBI.

BUDGET 2004-05: The FDI limit in private sector banks has been raised to 74% from the

existing 49%.

The SBI will have to lend at lower rates to the agricultural sector as

well as SSIs. SBI will now offer loans in the range 2% above its Prime

Lending Rate (PLR) or 2% below its PLR.

Tax exemption on interest on housing loans maintained at Rs 150,000

per year.

The government has agreed to buy back older government borrowing

with high interest rates from banks.


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Reduction in the interest rates on all small savings schemes by 1%.

POSITIVE IMPACT OF BUDGET ON BANKING INDUSTRY:

1. Securitisation Act fillip - Improved asset quality

2. VRS push - PSU banks like SBI, BOB and BOI after having successfully

implementing VRS schemes, have become much more streamlined and

efficient. This is likely to result not only in higher cash flow in the future, but

also long term benefits like improvement in efficiency levels.

3. Retail segment driver - Low interest rates have led to a dramatic growth in

credit off take from the retail segment. And this has helped banks to weather a

weak industrial credit offtake scenario. Going forward, with the revival in the

industrial sector ands robust volumes in the retail segment, banks are in a good

position to tap this expected demand.

4. Government proactive ness - The government may take a second look at the

issue of FDI limits and voting right limits in the private sector banks. If the

policy is further amended in the form of higher FSDI limits and a removal of

voting right ceiling of 10%, then we may see further consolidation among

private sector banks.

5. Improved asset quality - Most of the public sector banks that have been ridden

by huge NPAs in the past have been able to restructure and provides

aggressively for their NPAs in the last 2-3 years. This has helped these banks

to significantly improve their asset quality and they are now in a much better

position to tap the emerging opportunities in the domestic market.

NEGATIVE IMPACT OF BUDGET ON BANKING INDUSTRY:

1. Agri lending concerns - The government has announced measures to boost

lending to the agricultural sector and banks will have to be at the forefront of


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this scheme and this means that they will have to significantly increase their

exposure to this segment. With the unpredictability of the monsoons a reality

in the country and lack of proper irrigation facilities, lending to the agri sector

is fraught with risks and going forwards banks may witness a higher rate of

defaults in this sector.

2. Lack of policy clarity - Although the government has increased the FDI limit

to 49%, it is not yet clear that whether FDI limit includes FII limit also. Also

the limit for state run banks still stands at 20%. This will limit the scope of

consolidation in this sector and consequently the benefits of scale to the

various participants. Also the new government has indicated that there will be

no sell off of stake in public sector banks in the country. Thus further limiting

the scope of consolidation in the sector.

3. Interest rate dampener - The Indian economy is witnessing rising inflationary

pressure and this has the potential to curtail the credit growth in the economy.

As inflation inches close to the 6% mark, the Reserve Bank of India (RBI)

may be forced to hike interest rates and this may prohibit potential borrowers

from borrowing. A hike in interest rates may have a bigger impact on the high

growth retail segment, which has a higher sensitivity to rising interest rates.

Thus to that extent banks may witness a slowdown in credit offtake.

2.GOVERNMENT LAWS AND REGULATIONS:

There are so many laws enacted by government of India to regulate banking

activity. The RBI was established under Reserve Bank Of India Act 1934. RBI

regulates the banking activities in India. Other than this there are other laws like

Reserve Bank of India Act, 1934.

National Bank for Agriculture and Rural Development (NABARD) Act

1981


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Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest (SARFAESI) Act 2002 (for management of NPA).

Banking Regulation Act, 1949

The Recovery of Debts Due to Banks and Financial Institutions Act was

enacted in 1993 to provide for the establishment of Tribunals for

expeditious adjudication and recovery of debts due to banks and Fis

Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961

Draft Bill on Credit Information Bureau Regulation.

Bank Deposit Insurance Corporation Bill.

Draft Bill on Government Securities.

Bills under Consideration of the Parliament

Financial Companies Regulations Bill, 2000.

Banking Regulation (Amendment) Bill, 2003.

Banking Regulation (Amendment) and Miscellaneous Provisions Bill,

2003.

3.MONETARY POLICY

Another policy that impact most is RBIs monetary policy. This policy is meant

to regulate activities of banking in India. It controls the flow of money in the

country. In its recent policy RBI has retained its stance regard

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