Chalenges for Public Sector Bank in India

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PREFACE

Without a sound and effective banking system in India it cannot have a healthy economy.

The banking system of India should not only be hassle free but it should be able to meet new

challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding

achievements to its credit. The most striking is its extensive reach. It is no longer confined to

only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even

to the remote corners of the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with

the nationalisation of 14 major private banks of India.

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

draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most

efficient bank transferred money from one branch to other in two days. Now it is simple as

instant messaging or dials a pizza. Money has become the order of the day.

Banking in India originated in the last decades of the 18th century. The oldest bank in

existence in India is theState Bank of India,a government-owned bank that traces its origins

back to June 1806 and that is the largest commercial bank in the country. Central banking is

the responsibility of theReserve Bank of India,which in 1935 formally took over these
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responsibilities from the then Imperial Bank of India, relegating it to commercial banking

functions. After India's independence in 1947, the Reserve Bank was nationalized and given

broader powers. In 1969 the government nationalized the 14 largest commercial banks; the

government nationalized the six next largest in 1980.

KAHKASHAN ANJUM

ACKNOWLEDGEMENT

First of all I would like to thank to Reserve Bank of India to allow me to be a part of

such a reputed institution, the Central Bank of India, who gave me the chance to work on the

project titled "CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA" in Lucknow

city.I sincerely thank the Governor, Reserve Bank of India and Shri D.P.S. Rathore Regional

Director Lucknow office for facilitating and providing an opportunity to learn in the form of a

training programme. I further thank Shri Jai kish sir, General Manager department of banking

supervision for helping me in the project along with RBI.


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A special acknowledgement goes to Shri G.R.kotian, Assistant General Manager,

DBS for helping me to understand the various aspects related to banking and guiding me to

undertake the project in the right direction.

A special thanks to Mr. Vishwa Mohan, Assistant General Manager, DBS for helping

me to understand all important vital aspects relating to banking system and providing data &

structure.

As a part of DBS, I owe my thanks to all other persons working in DBS for providing

me information, support and understanding related to different aspects of banking system.

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

manager of DAPM, (personnel) for providing great support and also for making me feel

comfortable with the homely interaction with all other staffs and the entire staffs of R.B.I

I am also thankful to Mr. B.D.Yadav, Assistant manager, DAPM, HRDD for

providing me support and solving my problems during my tenure in RBI Lucknow office.

Without whos friendly and loving attitude, the project would not have been such a joyful

learning and a memorable experience forever.

KAHKASHAN ANJUM


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CONTENTS

Subjectpage no.

1-Introduction of

RBI.

DBS.

3-Banking sectors in India

Public sector.

Private sector.

Co-operative, RRBs..

4-Narasimham committee

Requirement.

Recommendations..

5-Globalisation

6-Challenges

Implementation of Basel II

Implementation of latest technology.

How to reduce NPA...

Man power planning..

Loan waiver: A new challenge..

Risk management..

Transparency and disclosures


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Challenges in banking security..

Competition with private sector banks..

Growth in business

8-Recommendations...

9-Conclusion....

10- Summery of the project

11- Bibliography..


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INTRODUCTION OF RBI

(THE CENTRAL BANK OF INDIA)

The central bank of the country is the Reserve Bank of India (RBI). It was

established in April 1935 with a share capital of Rs. 5 crores on the basis of the

recommendations of the Hilton Young Commission. The share capital was divided into shares

of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning.

The Government held shares of nominal value of Rs. 2,20,000. Before the establishment of

RBI notes were issued by three-presidency banks-Bank of Bengal, Bank of Madras & Bank of

Bombay. After some time these banks were merged into one 1920 and named Imperial bank of

India. Till the establishment of RBI this bank was acting as the central bank. In 1935 the rights

and duties of Imperial bank were delegated to RBI. By that time RBI is issuing and controlling

the currency.

The Reserve Bank of India was established on April 1, 1935 in accordance with the

provisions of THE RESERVE BANK OF INDIA ACT, 1934. Though originally privately

owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of

India The Central Office of the Reserve Bank has been in Mumbai since inception.The Central

Office is where the Governor sits and is where policies are formulated. Now it has 22 regional

offices, most of them in state capitals. The general superintendence and direction of the Bank is

entrusted to Central Board of Directors of 20 members, the Governor and four Deputy


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Governors, one Government official from the Ministry of Finance, ten nominated Directors by

the Government to give representation to important elements in the economic life of the

country, and four nominated Directors by the Central Government to represent the four local

Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards

consist of five members each Central Government appointed for a term of four years to

represent territorial and economic interests and the interests of co-operative

and indigenous banks.

The Reserve Bank of India Act 1934 was commenced on April 1, 1935. The Act, 1934 (II

of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

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

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank

notes of all denominations. The distribution of one rupee notes and coins and small coins all

over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve

Bank has a separate Issue Department, which is entrusted with the issue of currency notes. The


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assets and liabilities of the Issue Department are kept separate from those of the Banking

Department. Originally, the assets of the Issue Department were to consist of not less than two-

fifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less

than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee

coins, Government of India rupee securities, eligible bills of exchange and promissory notes

payable in India. Due to the exigencies of the Second World War and the post-was period,

these provisions were considerably modified. Since 1957, the Reserve Bank of India is

required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least

Rs. 115 crores should be in gold. The system as it exists today is known as the minimum

reserve system.

BANKER TO GOVERNMENT

The second important function of the Reserve Bank of India is to act as Government banker,

agent and adviser. The Reserve Bank is agent of Central Government and of all State

Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the

obligation to transact Government business, via. to keep the cash balances as deposits free of

interest, to receive and to make payments on behalf of the Government and to carry out their

exchange remittances and other banking operations. The Reserve Bank of India helps the

Government - both the Union and the States to float new loans and to manage public debt. The

Bank makes ways and means advances to the Governments for 90 days. It makes loans and


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advances to the States and local authorities. It acts as adviser to the Government on all

monetary and banking matters.

Banker's bank and the Lender of the last resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the

Banking Companies Act of 1949, every scheduled bank was required to maintain with the

Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its

time liabilities in India. By an amendment of 1962, the distinction between demand and time

liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of

their aggregate deposit liabilities. The Reserve Bank of India can change the minimum cash

requirements. The scheduled banks can borrow from the Reserve Bank of India on the basis of

eligible securities or get financial accommodation in times of need or stringency by

rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank

of India to come to their help in times of banking crisis the Reserve Bank becomes not only the

banker's bank but also the lender of the last resort.

Controller of Credit

As supreme-banking authority in the country, the Reserve Bank of India, therefore, has the


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following powers:

(a) it holds the cash reserves of all the scheduled banks.

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

(c) It controls the banking system through the system of licensing, inspection and calling for

information.

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

Custodian of Foreign Reserves

Bank has the responsibility of maintaining fixed exchange rates with all other member

countries of the I.M.F. Besides maintaining the rate of exchange of the rupee; the Reserve

Bank has to act as the custodian of India's reserve of international currencies. The vast sterling

balances were acquired and managed by the Bank. Further, the RBI has the responsibility of

administering the exchange controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain non-

monetary functions of the nature of supervision of banks and promotion of sound banking in

India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI

wide powers of supervision and control over commercial and co-operative banks, relating to


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licensing and establishments, branch expansion, liquidity of their assets, management and

methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to

carry out periodical inspections of the banks and to call for returns and necessary information

from them.

Legal Framework

Acts governing specific functions

Indian Coinage Act, 1906:Governs currency and coins Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881

FUNCTIONS OF RBI

MONETARY

AUTHORITY

REGULATOR &

SUPERVISOR

MANAGER OF

FOREIGN

EXCHANGE

ISSUER OF

CURRENCY

RELATED

FUNCTION

BANKER

TO BANKS

BANKER TO

GOVERNMENT


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Functions of RBI

Monetary Authority:

The RBI is responsible for implementing, formulating and monitoring the monetary policy of

India.

Objective: Keeping this authority in mind the RBI is required to maintain price stability and

ensure adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

The Supreme financial body sets down broad parameters of banking operations within which

the country's banking and financial system operates.

Objective:This reasonably helps in maintaining public confidence in the system. It in turn

protects depositors' interest and provides lucrative banking services to the public.

Manager of Exchange Control:

The RBI is responsible for managing the Foreign Exchange Management Act, 1999.

Objective:It is the nodal agency, which facilitates external trade and payment and promotes

orderly development and maintenance of foreign exchange market in India.

Issuer of currency:

It is the only supreme body, which issues and exchanges or destroys currency and coins not fit

for circulation.

Objective:This facilitates in giving the public adequate quantity of currency notes and coins


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and in good quality.

Developmental role

The RBI since its inception performs a wide range of promotional functions to support national

objectives and generate goodwill among the citizens of the country.

Related Functions

Banker to the Government:The RBI performs merchant banking function for the central and

the state governments and also acts as their banker. The RBI often advises the Government of

the current monetary condition in the state.

Banker to banks:maintains banking accounts of all scheduled banks. The RBI looks after the

functioning of the state banks and grants them license and even cancels the same on account of

fraud practice.

Subsidiaries of RBI

Fully owned:= National Housing Bank (NHB), National Bank for Agriculture and Rural

Development (NABARD), Deposit Insurance and Credit Guarantee Corporation of India

(DICGC), Bharatiya Reserve Bank Note Mudran PrivateLimited (BRBNMPL)


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Majority stake: =National Bank for Agriculture and Rural Development (NABARD). The

Reserve Bank of India has recently divested its Stake in State Bank of India to the

Government of India.

Department of banking supervision

The Department of Banking Supervisionhas its Central Office in Mumbai and 16

regional offices at various centres in the country. I worked in DBS, Regional Office at

Lucknow. Prior to 1993, the supervision and regulation of commercial banks was handled by

the Department of Banking Operations and Development (DBOD).In December 1993 the

Department of Supervision was carved out of the DBOD with the objective of segregating the

supervisory role from the regulatory function of R.B. I.

The Department of Banking Supervision at present exercises the supervisory role

relating to commercial banks in the following forms:

Preparing of independent inspection programmes for different institutions. Inspection

evaluates financial condition and performance of the bank which includes judging asset

quality, solvency and capital adequacy earning performance and liquidity of the bank. Then

seeing management and perating condition and compliance of the bank which includes

Regulatory compliance and Guidance compliance and finally doing summary assessment of the

bank i.e. identification of concerns and areas for corrective actions. Undertaking scheduled and

special on-site inspections, off-site surveillance, ensuring follow-up and compliance.


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Determining the criteria for the appointment of statutory auditors and special auditors and

assessing audit performance and disclosure standards.

Exercising supervisory intervention in the implementation of regulations which

includes-recommendation for removal of managerial and other persons, suspension of

business, amalgamation, merger/winding up, issuance of directives and imposition of

penalties.The Department of Banking Supervision follow CAMELS approach during its

inspection of commercial banks. It judges banks on the basis of the following six parameters :

Banking sectors in india

PUBLIC SECTOR BANKS-The public sector is the one whose working is in the hands of the

government. the government holds a majority stake in public sector industries. Their activities

are mostly influenced by the government. But due to privatization of public sector industries,

their nimbler has reduced to a significant extent. Indian railways, nuclear power industry,

C- CAPITAL ADEQUACY

A-ASSET OR CREDIT QUALITY

M-MANAGEMENT

E-EARNINGS

L-LQUIDITY

S-SOLVENCY


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electricity board, etc.are still in cluded in the public sector. it may be defined as "an enterprise

where there is no private ownership but its activities are not mainly confined to the

maximization of profits and private interests of the enterprise but it is influenced by social.

PRIVATE BANKS-are banks that are not incorporated. A private bank is owned by either an

individual or a general partner(s) with limited partner(s). In any such case, the creditors can

look to both the "entirety of the bank's assets" as well as the entirety of the sole-

proprietor's/general-partners' assets.

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

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

CO-OPERATIVE SECTOR

The co-operative sector is very much useful for rural people. The co-operative banking sector

is divided into the following categories.

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

RRBs

A rural bank is a financial institution that helps rationalize the developing regions or

developing country to finance their needs specially the projects regarding agricultural progress.


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Structure of Banking in India

ScheduledBanks

Non-ScheduledBanks

Reserve Bank ofIndia

Scheduled

Commercial Banks

Scheduled

Cooperative Banks

Public

sector

banks

Private

Sector

Banks

Foreign

Banks

Regional

Rural

Banks

Scheduled

Urban

Cooperative

Banks

Scheduled

State

Cooperative

Banks

Old Private

Sector Banks

New Private

Sector Banks

Nationalized

Banks

SBI & its

Associates

Sourc e-Bankin g &Finance Magazine


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INTRODUCTION

A public spacerefers to an area or place that is open and accessible to all citizens,

regardless ofgender,race,ethnicity,age orsocio-economic level.One of the earliest examples

of public spaces arecommons.For example, no fees or paidtickets are required for entry, nor

are the entrantsdiscriminatedbased on background. Non-government-owned malls are

examples of 'private space' with the appearance of being 'public space'.

Public Space has also become something of a touchstone for critical theory in relation to

philosophy,(urban)geography,visual art,cultural studies,social studies andurban design.Its

relevance seems to become more pressing ascapital encloses more and more of what were

thought of as 'commons'. The term 'Public Space' is also often misconstrued to mean other

things such as 'gathering place', this is an element of the larger concept.

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

Banking means accepting money for the

purpose of lending and investment or deposits of money from the public, repayable on demand

or otherwise and withdrawable by cheque, draft, order or otherwise.

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

deregulation along with the increasing levels of competition have facilitated globalisation of

the India banking system and placed numerous demands on banks. Operating in this

demanding environment has exposed banks to various challenges. The last decade has
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witnessed major changes in the financial sector - new banks, new financial institutions, new

instruments, new windows, and new opportunities - and, along with all this, new challenges.

While deregulation has opened up new vistas for banks to augment revenues, it has entailed

greater competition and consequently greater risks. Demand for new products, particularly

derivatives, has required banks to diversify their product mix and also effect rapid changes in

their processes and operations in order to remain competitive in the globalised environment.

HISTORY OF BANKING

Indian banking system, over the years has gone through

various phases after establishment of Reserve Bank of India in 1935 during the British rule, to

function as Central Bank of the country. Earlier to creation of RBI, the central bank functions

were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an

important place after the independence, the Govt. felt that the private banks may not extend the

kind of cooperation in providing credit support, the economy may need. In 1954 the All India

Rural Credit Survey Committee submitted its report recommending creation of a strong,

integrated, State-sponsored, State-partnered commercial banking institution with an effective

machinery of branches spread all over the country. The recommendations of this committee led

to establishment of first Public Sector Bank in the name of State Bank of India on July 01,

1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of

India. Similarly during 1956-59, as a result of re-organisation of princely States, the associate

banks came in to fold of public sector banking.


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Another evaluation of the banking in India was undertaken during 1966 as the

private banks were still not extending the required support in the form of credit disbursal, more

particularly to the unorganised sector. Each leading industrial house in the country at that time

was closely associated with the promotion and control of one or more banking companies. The

bulk of the deposits collected, were being deployed in organised sectors of industry and trade,

while the farmers, small entrepreneurs, transporters , professionals and self-employed had to

depend on money lenders who used to exploit them by charging higher interest rates. In

February 1966, a Scheme of Social Control was set-up whose main function was to

periodically assess the demand for bank credit from various sectors of the economy to

determine the priorities for grant of loans and advances so as to ensure optimum and efficient

utilisation of resources. The scheme however, did not provide any remedy. Though a no. of

branches were opened in rural area but the lending activities of the private banks were not

oriented towards meeting the credit requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and

Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up

capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches

accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which

brought 91% of the deposits and 84% of the advances in Public Sector Banking. During

December 1969, RBI introduced the Lead Bank Scheme on the recommendations of FK

Nariman Committee.


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In the post-nationalisation period, there was substantial increase in the no. of branches

opened in rural/semi-urban centres bringing down the population per bank branch to 12000

appx. During 1976, RRBs were established (on the recommendations of M. Narasimham

Committee report) under the sponsorship and support of public sector banks as the 3rd

component of multi-agency credit system for agriculture and rural development. While the

1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase

started in late 80s and more particularly during early 90s, with the submission of report by the

Narasimham Committee on Reforms in Financial Services Sector during 1991.

In these five decades since independence, banking in India has evolved through four distinct

phases:

Foundation phasecan be considered to cover 1950s and 1960s till the nationalisation

of banks in 1969. The focus during this period was to lay the foundation for a sound banking

system in the country. As a result the phase witnessed the development of necessary legislative

framework for facilitating re-organisation and consolidation of the banking system, for meeting

the requirement of Indian economy. A major development was transformation of Imperial

Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks

during 1969.

Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks

and continued till 1984. A determined effort was made to make banking facilities available to

the masses. Branch network of the banks was widened at a very fast pace covering the rural

and semi-urban population, which had no access to banking hitherto. Most importantly, credit


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flows were guided towards the priority sectors. However this weakened the lines of supervision

and affected the quality of assets of banks and pressurized their profitability and brought

competitive efficiency of the system.

Consolidation phase: The phase started in 1985 when a series of policy initiatives

were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid

to improving house-keeping, customer service, credit management, staff productivity and

profitability of banks. Measures were also taken to reduce the structural constraints that

obstructed the growth of money market.

Reforms phaseThe macro-economic crisis faced by the country in 1991 paved the

way for extensive financial sector reforms which brought deregulation of interest rates, more

competition, technological changes, prudential guidelines on asset classification and income

recognition, capital adequacy, autonomy packages etc.

BANK NATIONALISATION & PUBLIC SECTOR BANKING

Organized banking in India is more than two centuries old. Till 1935 all the banks were in

private sector and were set up by individuals and/or industrial houses which collected deposits

from individuals and used them for their own purposes. In the absence of any regulatory

framework, these private owners of banks were at liberty to use the funds in any manner, they

deemed appropriate and resultantly, the bank failures were frequent.


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Statistics bear testimony to the fact that the genesis of the economic crisis

in India, which surfaced in 1991, lies in the large and persistent macroeconomic imbalances

that developed over the 1980s. Move towards State ownership of banks started with the

nationalisation of RBI and passing of Banking Companies Act 1949. On the recommendations

of All India Rural Credit Survey Committee, SBI Act was enacted in 1955 and Imperial Bank

of India was transferred to SBI. keeping in view the objectives of nationalisation, PSBs

undertook expansion of reach and services. Resultantly the number of branches increased 7

fold (from 8321 to more than 60000 out of which 58% in rural areas) and no. of people served

per branch office came down from 65000 in 1969 to 10000. Much of this expansion has taken

place in rural and semi-urban areas. The expansion is significant in terms of geographical

distribution. States neglected by private banks before 1969 have a vast network of public sector

banks. The PSBs including RRBs, account for 93% of bank offices and 87% of banking system

deposits.

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

Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809),

Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it

Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India

was established which started as private shareholders banks, mostly Europeans. In 1865

Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank

Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India,

Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were


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set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic

failures between 1913 and 1948. There were approximately 1100 banks, mostly small. Reserve

Bank of India was vested with extensive powers for the supervision of banking in India as the

Central Banking Authority. During those dayspublic has lesser confidence in the banks. As an

aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the

Postal department was comparatively safer. Moreover, funds were largely given to traders.

The following steps are taken by the government of India to regulate banking institutions in the

country.

1949 : Enactment of Banking Regulation Act. 1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI subsidiaries. 1961 : Insurance cover extended to deposits. 1969 : Nationalisation of 14 major banks. 1971 : Creation of credit guarantee corporation. 1975 : Creation of regional rural banks. 1980 : Nationalisation of seven banks with deposits over 200 crore.

After the nationalisation of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a hugejump by 11,000%.


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Banking in the sunshine of Government ownership gave the public implicit faith and

immense confidence about the sustainability of these institutions.

Nationalised Banks in India

Banking System in India is dominated by nationalised banks. The nationalisation of

banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. The major

objective behind nationalisation was to spread banking infrastructure in rural areas and make

available cheap finance to Indian farmers. Fourteen banks were nationalised in 1969. Before

1969, State Bank of India (SBI) was the only public sector bank in India. SBI was nationalised

in 1955 under the SBI Act of 1955.

The second phase of nationalisation of Indian banks took place in the year 1980.

Seven more banks were nationalised with deposits over 200 crores. Nationalised banks

dominate the banking system in India. The history of nationalised banks in India dates back to

mid-20th century, when Imperial Bank of India was nationalised (under the SBI Act of 1955)

and re-christened as State Bank of India (SBI) in July 1955. Then on 19th July 1960, its seven

subsidiaries were also nationalised with deposits over 200 crores.

However, the major nationalisation of banks happened in 1969 by the then-Prime Minister

Indira Gandhi. The major objective behind nationalisation was to spread banking infrastructure

in rural areas and make cheap finance available to Indian farmers. In the year 1980, the second


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phase of nationalisation of Indian banks took place, in which 7 more banks were nationalised

with deposits over 200 crores. With this, the Government of India held a control over 91% of

the banking industry in India. After the nationalisation of banks there was a huge jump in the

deposits and advances with the banks. At present, the State Bank of India is the largest

commercial bank of India and is ranked one of the top five banks worldwide. It serves 90

million customers through a network of 9,000 branches.

After the 1991 economic crisis, the central government launched economic liberalization. India

has progressed towards a modern market-based system and has a growing middle class.

SIGNIFICANCE OF BANKS

The importance of a bank to modern economy, so as to enable them to develop, can be stated

as follow:

(i) The banks collect the savings of those people who can save and allocate them to those who

need it. These savings would have remained idle due to ignorance of the people and due to the

fact that they were in scattered and oddly small quantities. But banks collect them and divide

them in the portions as required by the different investors.

(ii) Banks preserve the financial resources of the country and it is expected of them that they

allocate them appropriately in the suitable and desirable manner.


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(iii) They make available the means for sending funds from one place to another and do this in

cheap, safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and uncrossed, which is

the easiest and most convenient, besides they also care for making such payments as safe as

possible.

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

and safe.

(vi) To advance money, the basis of modern industry and economy and essential for financing

the developmental process, is governed by banks.

(Vii) It makes the monetary system elastic. Such elasticity is greatly desired in the present

economy, where the phase of economy goes on changing and with such changes, demand for

money is required. It is quite proper and convenient for the government and R.B.I. to change

its currency and credit policy frequently, this is done by RBI, by changing the supply of money

with the changing the supply of money with the changing needs of the public.

Although traditionally, the main business of banks is acceptance of deposits and lending, the

banks have now spread their wings far and wide into many allied and even unrelated activities.


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

State Bank of India

State Bank of Bikaner and Jaipur

State Bank of Hyderabad State Bank of Indore State Bank of Mysore Andhra Bank Allahabad Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Punjab and Sind Bank Syndicate Bank Union Bank of India United Bank of India
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Vijaya Bank

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

ING Vysya Bank Ltd Axis Bank Ltd Indusind Bank Ltd ICICI Bank Ltd

HDFC Bank Ltd

IDBI Bank Ltd

The financial sector assessment report, prepared by the Reserve Bank of India (RBI) and the

Central Government, has favoured the merger of public sector banks (PSBs) having a

government holding bordering on 51 per cent with those having a much higher state-holding to

ensure that their business growth does not suffer due to capital constraints.

The report indicated that PSBs would need additional capital to meet Basel II norms and

maintain an asset growth for the overall projected growth of the economy at 8 per cent and

consequent growth of risk-weighted assets (RWAs).

This has the potential to further aggravate a growing apprehension that public sector banks

growth could be constrained in relation to other players.
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The extent of additional capital required from the government is expected to be manageable,

provided the RWAs grow by within 25 per cent annually and total cost of recapitalisation

would be lower than in most other countries.

Public banks deposit growth rise, private, foreign banks see drop

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

foreign competitors. According to latest data released by the Reserve Bank of India (RBI) in

due course the depositors have withdrawn funds from private and foreign banks and are

investing their money with public sector banks which has resulted in a significant decline in

growth of deposits with private and foreign banks.

In recent months big companies such as Infosys moved their deposits from private and foreign

banks to public sector banks, largely because the state-owned players were offering higher

interest rates. While in December, the public sector players had taken decision to reduce bulk

deposit and focus more on current account and saving account balances.

Public sector banks score over private ones

Public sector banks have long been chastised as the black sheep of the financial sector.

But while a lot of experts might deride these institutions for their non-performing assets and

lower productivity, at the end of the day, public sector banks have far happier customers

compared to their counterparts in the private sector.

According to Reserve Bank of Indias (RBI's) latest report, Trend and Progress of

Banking in India, public sector banks rule the roost in customer satisfaction.
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The report should make those singing hosannas for private sector banks sit up. It shows

that the State Bank of India (SBI) recorded 0.1 complaints per branch while the

corresponding figure for icici was 1.39more than 10 times that of sbi.

Citibank fared far worse: it recorded a whopping 8.59 complaints per branch. These

complaints were made to RBI grievance cell.

One, however, needs to look at another aspect before delivering the final verdict: profits

per branch. Here, private banks fare better. For example, on an average, a Citibank branch

earns a net profit of Rs 18 crore annually. An average icici bank branch earns Rs 4.5 crore,

while an average sbi branch earns just Rs 50 lakh, annually. The standard response to such

figures is that private sector banks are more efficient than their public sector counterparts with

foreign banks taking efficiency to astronomical levels.

But their rich rake-offs notwithstanding, the profit-complaint ratio of private sector banks is

much lower than their much maligned public sector counterparts sbis profit-complaint ratio of

4.1 for example is much higher than cici and Citibank

Timeismoney

RBIs data indicates that private and foreign banks are biting off more than they can chew:

customer acquisition is shooting through the roof but the servicing mechanism is

Given short shrift.


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Banks, like all other businesses, believe that time is money. The private sector

interpretation of this adage seems to be: spending as little time on the customer as possible. In

most private banks, the time spent on the phone with a customer is tracked and executives

found to be spending an inordinate amount are ticked off. The zeal to be efficient means that

the private sector has all but forgotten another business aphorism: time spent with a customer is

an investment which may yield future dividends in the form of customer loyalty and referrals.

And their surveys, other than those conducted by rbi, testify to such omission. For example,

according to a survey by Consumer Voice(http://www.consumer-voice.org), a consumer

awareness magazine, people were more likely to recommend public sector banks to their

friends or relatives. Of the top five banks in this category, three belong to the public sector.

The highest-ranking foreign bank is Standard Chartered at number eight. icici Bank is at

number 15 (fifth from the bottom), with Citibank bringing up the rear.

Darkside

Recent advertising campaigns, especially by private banks, have increasingly started using the

emotional platform to attract customers. With tag lines such as Hum hain naa and Just like

borrowing from a friend, these banks attempt to bring home the fact that the bond between a

customer and his bank goes beyond the purely commercial.

However, customers dont necessarily share that warm feeling.


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Public sector banks score over private ones

According to the rbi report, private and foreign banks actually

score pretty high on customer complaints of the nasty variety: namely, harassment in recovery

of loans. Foreign banks record 0.134 such complaints per branchmore than 30 times the

overall average. The corresponding numbers for new private Indian banks is 0.021 and 0.003

for public sector banks.

The Consumer Voice survey also has private sector banks faring poorly in this respect. Only

one public sector bank figures amongst the top five in the list of banks with highest number of

disgruntled customers. Not surprisingly, Citibank tops the list.

Citibank also tops another dubious list: that of people fed up with tele-marketing executives

pestering them. The bank accounts for 40 per cent of all such complaints.

WHY WORRY?

At Citibanks website, one finds a complaint form along with a detailed note elaborating the

grievance redressal system. The icici Bank home page also has a similar link, prominently

displayed.

The sbi home page does not have a link relating to complaints. What they do have is a

customer care web page that declares, Customers of the bank can meet senior executives of


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the bank on the 15th

of every month (between 3.00 pm and 5.00 pm) without any prior

appointment and discuss issues relating to their accounts/banking transactions. In case the 15th

is a holiday, customers can meet the next working day.

It is a fundamentally different approach. For the new breed of private banks, human contact is

anathema. The overarching desire is to resolve grievances on the phone or through the Internet.

The customer is preferred to remain a faceless entity with a number to identify him. But at a

public sector bank, a harried customer, running from pillar to post would often find that a kind

word, a cup of tea and a patient hearing solves half the problem.

TheHolyGrail

One reason for disgruntled customers is the fact that that the service executives are often not

authorised to solve problems and refers them to another party. This often leads to a chain

reaction and such vacillation irks customers, leaving them with no choice but to approach rbi.

According to P Shimrah, secretary to the banking ombudsman, rbi Public sector banks are

decentralised. The branch manager of a public sector bank is more empowered than his private

sector counterpart to solve problems at his level. In private sector banks, its the opposite. With

a centralised decision making authority, they feel that technology can be used to overcome

these problems.

But technology, like atm machines, though useful, cannot provide complete solution. For two

important reasons. Firstly, technology is not infallible: it solves old problems but creates its


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own new ones. Secondly, technology needs to find favour with the public. Inappropriate

technology or innovations that are too far ahead of their time will not work. Instead of living

with the vision of a future utopia with perfect banking systems, it would be wiser to accept the

problems that are cropping up now and address them in a sensible and humane manner.

The fact that public sector banks need to shape up has been repeated ad nauseam, but the

solution does not lie in swinging to the other extreme typified by foreign banks. A satisfying

middle ground needs to be found where the cutting edge efficiency of western banking is

tempered with respect and empathy for the customer.

Based on Loan loss provisioning

The net NPAs4 have continually declined from 14.46% in 1993-94 to 6.74% in 2000-01. RBI

regulations require that banks build provisions upto at least a level of 50% of their gross NPAs.

The current provisioning is 35% of gross NPAs.

The problem India faces is not lack of strict prudential norms but

1. The legal impediments and time consuming nature of asset disposal process.

2. Postponement of the problem in order to report higher earnings

3. Manipulation by the debtors using political influence

CHALLENGES IN BANKING

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

deregulation along with the increasing levels of competition have facilitated globalisation of


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the India banking system and placed numerous demands on banks. Operating in this

demanding environment has exposed banks to various challenges. The last decade has

witnessed major changes in the financial sector - new banks, new financial institutions, new

instruments, new windows, and new opportunities - and, along with all this, new challenges.

While deregulation has opened up new vistas for banks to augment revenues, it has entailed

greater competition and consequently greater risks. Demand for new products, particularly

derivatives, has required banks to diversify their product mix and also effect rapid changes in

their processes and operations in order to remain competitive in the globalised environment.

Globalisationa challenge as well as an opportunity

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

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

advancement in information and communications technology. Globalisation has thrown up lot

of opportunities but accompanied by concomitant risks. There is a growing realisation that the

ability of countries to conduct business across national borders and the ability to cope with the

possible downside risks would depend, inter-alia, on the soundness of the financial system and

the strength of the individual participants. Adoption of appropriate prudential, regulatory,

supervisory, and technological framework on par with international best practices enables

strengthening of the domestic banking system, which would help in fortifying it against the

risks that might arise out of globalisation. In India, we had strengthened the banking sector to

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

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

and consultative process.


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Global challenges in banking

A new broad challenges faced by the Indian banks in the following areas, viz., enhancement of

customer service; application of technology; implementation of Basel II; improvement of risk

management systems; implementation of new accounting standards; enhancement of

transparency & disclosures; and compliance with KYC aspects.

CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA

1.


2. Implementation of latest technology3. How to reduce NPA4. Corporate governance5. Man power planning6. Talent management7. Loan waiver: A new challenge8. Risk management9. Transparency and disclosures10.Challenges in banking security11.Competition with private sector banks12.Growth in business13.Enhancing customer service


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Basel II implementation is widely acknowledged as a significant challenge faced by

both banks and the regulators internationally. It is true that Basel II implementation may be

seen as a compliance challenge. While it may be so for some banks, I would venture to

mention that Basel II implementation has another dimension which offers considerable

opportunities to banks. I would like to highlight two opportunities that are offered to banks,

viz., refinement of risk management systems; and improvement in capital efficiency. Basel 2

requires more capital for public sector banks in India due to the fact that operational risk is not

captured under Basel I.

Basel II is the revised capital accord of Basel I. Basel II accord defines the minimum

regulatory capital which is to be allocated by each bank based on its risk profile of assets.

Banks have to maintain the capital adequacy ratio (CAR) of minimum 9 %. As per RBI, banks

which are getting more than 20% of their businesses from abroad have to Implement Basel II.

But most of the banks are now interested to implement Basel II.

Implementation of Basel II is seen as one of the significant challenges for Public

Sector Banks. Implementation of Basel II will require more capital for Public Sector Banks in

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

In ICRA's estimates, Public Sector Banks would need additional capital to the extent ofRs. 90 billion to meet the capital charge requirement for operational risk under Basel II.


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The challenge for the banks would be to quantify risks(credit concentration risk,interest rate risk in the banking book, business and strategic risk, liquidity risk, and

other residual risks such as reputation risk and business cycle risk) and then, to translate

those consistently into an appropriate amount of capital needed, commensurate with the

banks risk profile and control environment.

Needless to say, this would call for instituting sophisticated risk management systems,including a robust stress-testing and economic capital al Public Sector Banks would be

required to use fully scalable state of the art technology, ensure enhanced information

system security and develop capability to use the central database to generate any data

required for risk management as well as reporting.location framework.

The most important Pillar 2 challenge relates to acquiring and upgrading the human andtechnical resources necessary for the review of banks responsibilities under Pillar 1.

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

database to generate any data required for risk management as well as reporting.

The costs associated with Basel II implementation, particularly costs related toinformation technology and human resources, are expected to be quite significant for

Public Sector Banks.

Minimum Capital Allocation for credit risk

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


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CAPITAL ADEQUECY PLANNING

IMPLEMENTATION OF LATEST TECHNOLOGY

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

Online banking uses modern computer technologies to offer the users convenient banking

facilities. If you have access to such a facility, there is absolutely no need for you to personally

visit your banks branch for any sort of transaction. You can simply login with the internet-

banking password that your banker has given you, and carry all the necessary work online. It

also eliminates the necessity of doing any paper-based work and saves considerable time for

the users.

Private sector and foreign banks were using technology and computerized system since its

beginning while PSBs were not. So they found difficulty in managing all these things. Many of

Indian PSBs ignored technological change and had lost market share to foreign banks and new


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private banks. Technology helps in having a huge branch network easily and also it reduces the

operational cost this may b clarified by an example as:-

Operational cost per transaction of an account via different type is-

Via computers on counter- 40 Rs. Via ATM - 16-17 Rs. Via online - 46 paise

So it is cleared that manually/direct transaction cost comes very high and electronically

and online it is very low. So thats why public sector banks shouldimprove their working system

and should make it totally online but challenge is before PSBs

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

equally from the online banking facilities. Besides offering their users the convenience of

banking, the online banking system means significant cost savings for the bankers themselves.

With such an automatic system in place, the bankers need not to hire employees specialized in

handling paper work and teller interactions. This reduces the bankers operating costs

considerably, translating into significant cost savings over the long-term.

Various Advantages of Banking Online:

The biggest advantage of online banking is its convenience. Unlike a banks branches, online

banking facilities are open 24/7. This offers you banking from the comfort of your home with

just a click. You can access such a facility from anywhere in the world. This could be great

advantage if you need to address urgent monetary concerns while away from home.

Transactions online are fast and mostly quicker than ATM transactions. Moreover, online


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banking systems have sophisticated tools that provide effective management of the users

assets.

Initially the online banking security system was quiet simple, a id and a password and you are

done. It was quiet risky then anyone who gets access to these two can empty your account.

Many people at that time will do setting with the courier people and got access to this details.

But now even the card and the id password as sent thru separate courier. So its now more

secure.

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

adding a new account for transfer, its simple and logical. Thou sometimes the smstakes too

much time to be received. Stanchartis fast the minute you press add the smsis in your inbox,

may be because of lesser traffic. Icicihas also an extra transaction password plus you need to

have a debit card and have to use the grid at the back of card to validate it. This three way

verification is quiet robust and thus you dontgetphisingemails these days. Becausephisers

know that having an id andpasswordis not enough.

Technological leap

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

State Bank of India was amongst the first to focus on technology and a team is constantly at

work to innovate in an attempt to lower costs. So, the bank has now introduced two-faced

ATMs, which will increase efficiency.

Technology will not just help them reach out to young customers better but also help them cut

costs and improve efficiency. Heres how the economics work. While a transaction at a branch


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costs around Rs 50, one at an ATM works out to Rs 18, a senior State Bank of India executive

said. Transactions through the Internet are even cheaper at around Rs 10 each.

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

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

HOW TO REDUCE NPA

Non performing asset

Definition

A loan or lease that is not meeting its stated principal and interest payments. Banks usually

classify as nonperforming assets any commercial loans which are more than 90 days overdue

and any consumer loans which are more than 180 days overdue. More generally, an asset

which is not producing income.

Non Performing Asset means an asset or account of borrower, which has been classified by a

bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the

directions or guidelines relating to asset classification issued by RBI.

An amount due under any credit facility is treated as "past due" when it has not been paid

within 30 days from the due date. Due to the improvement in the payment and settlement

systems, recovery climate, upgradation of technology in the banking system, etc., it was

decided to dispense with 'past due' concept, with effect from March 31, 2001.


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Financial sector reform in India has progressed rapidly on aspects like interest rate

deregulation, reduction in reserve requirements, barriers to entry, prudential norms and risk-

based supervision. But progress on the structural-institutional aspects has been much slower

and is a cause for concern. The sheltering of weak institutions while liberalizing operational

rules of the game is making implementation of operational changes difficult and ineffective.

Changes required to tackle the NPA problem would have to span the entire gamut of judiciary,

polity and the bureaucracy to be truly effective. This paper deals with the experiences of other

Asian countries in handling of NPAs.

The chart below shows data for NPA going back to 2.3-1.0. The two lines plotted are non-

performing assets gross non-performing assets. Loan loss allowance is not growing nearly as

fast as the non-performing assets. I can say that this is a problem, but that we dont have a

solution. In the course of discussing disposition of assets with various banks, it sometimes

becomes apparent that the reason that the bank cannot dispose of the property at market prices,

is because the bank does not have enough capital to do so. It is suspected that the slow growth

of loan loss allowance is related to the same problem. While this chart shows that NPA is

decreasing overall in banking system but even then in PSBs NPA are higher with comparison

to private sector banks.


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Something needs to happen, but Im certainly not smart enough to know what it is.

The position of classification of NPA is summarized below:

Standard assets : not NPA

Sub-standard assets : Twelve months period after becoming NPA.

Doubtful assets : Substandard for 12 months or more.

Loss assets : Assets becomes uncollectible/ unrealizable.


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Gross and net NPA of different sector of bank

Table 1 (end of March 31)

(in %)

category Gross NPA/ Gross Advance

2001 2002 2003 2004

Public sector bank 12.37 11.09 9.36 7.79

Private sector 8.37 9.64 8.07 5.84

Foreign bank 6.84 5.38 5.25 4.62

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

category Net NPA / Net Advance

2001 2002 2003 2004

Public sector bank 6.74 5.82 4.53 2.98

Private sector 2.27 2.49 2.32 1.32

Foreign bank 1.82 1.89 1.76 1.49

Management of NPA


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

to show ineffective recovery of bank credit, lacuna in credit recovery system, inadequate legal

provision etc. Various steps have been taken by the government to recover and reduce NPAs.

Some of them are.

1. One time settlement / compromise scheme

2. Lok adalats

3. Debt Recovery Tribunals

4. Securitization and reconstruction of financial assets and enforcement of Security Interest Act

2002.

5. Corporate Reconstruction Companies

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

CONCLUSION

The Indian banking sector is facing a serious problem of NPA. The extent of NPA is

comparatively higher in public sectors banks. (Table II&III). To improve the efficiency and

profitability, the NPA has to be scheduled. Various steps have been taken by government to

reduce the NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks

can try competing with foreign banks to maintain international standard.

A strong banking sector is important for flourishing economy. The failure of the banking

sector may have an adverse impact on other sectors. Non-performing assets are one of the


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major concerns for banks in India.

NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a

large number of credit defaults that affect the profitability and net-worth of banks and also

erodes the value of the asset. The NPA growth involves the necessity of provisions, which

reduces the over all profits and shareholders value.

The issue of Non Performing Assets has been discussed at length for financial system all over

the world. The problem of NPAs is not only affecting the banks but also the whole economy.

In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of

the industry and trade.

CAUSES FOR NON-PERFORMING ASSETS IN PUBLIC SECTOR BANKS

Introduction

Granting of credit for economic activities is the prime duty of banking. Apart from raising

resources through fresh deposits, borrowings and recycling of funds received back from

borrowers constitute a major part of funding credit dispensation activity. Lending is generally

encouraged because it has the effect of funds being transferred from the system to productive

purposes, which results into economic growth. However lending also carries a risk called credit

risk, which arises from the failure of borrower. Non-recovery of loans along with interest

forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the banks


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profitability on a large scale. Though complete elimination of such losses is not possible, but

banks can always aim to keep the losses at a low level.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the

banking industry in our country sending distressing signals on the sustainability and

endurability of the affected banks. The positive results of the chain of measures affected under

banking reforms by the Government of India and RBI in terms of the two Narasimhan

Committee Reports in this contemporary period have been neutralized by the ill effects of this

surging threat. Despite various correctional steps administered to solve and end this problem,

concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on

banking and financial institutions. The severity of the problem is however acutely suffered by

Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.

Magnitude of NPAs

In India, the NPAs that are considered to be at higher levels than those in other countries have

of late, attracted the attention of public. The Indian banking system had acquired a large

quantum of NPAs, which can be termed as legacy NPAs.

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

Categories of NPAs

Sub-standard Assets - which has remained NPA for a period of 90 days to less than orequal to 12 months


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Doubtful Assets - has remained in the sub-standard category for a period of 12 months Loss Assets - loss has been identified by the bank or internal or external auditors or the

RBI inspection but the amount has not been written off wholly.

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

under:

Asset Classification Provision requirements

Substandard assets 10%

Doubtful assets Up to 1 year 20%

1 to 3 year 30%

More than 3 year 100%

Loss assets It may be either written off or fullyprovided by the bank

Gross NPAs are the sum total of all loans assets that are classified as NPAs. Net NPAs are those type of NAPs in which the bank deducted the provision regarding

NPAs.


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

DEPOSIT AND CREDIT GROWTH

DEPOSIT

As on

Jan 4, 2008

As on

Jan 2, 2009

Public sector banks 24.2 24.2

Foreign banks 34.1 12.1

Private sector banks 26.9 13.4

Scheduled commercial banks* 25.1 21.2

CREDIT

Public sector banks 19.8 28.6

Foreign banks 30.7 16.9

Private sector banks 24.2 11.8

Scheduled commercial banks* 21.4 24.0

*Includes regional rural banks


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TABLE 7.1 : BANK GROUP-WISE CLASSIFICATION OF LOAN ASSETS

OF PUBLIC SECTOR BANKS - 2003 TO 2008

(Amount in Rs. crore)

As on March 31

Bank

group /

Years

Standard Assets Sub-standard Assets Doubtful

Assets

Amount Per cent Amount Per cent AmountPer

cent

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

Public

Sector

Banks

2003 523724 90.6 14909 2.6 32340 5.6

2004 610435 92.2 16909 2.6 28756 4.3

2005 824253 94.6 10838 1.2 29988 3.4

2006 1029493 96.1 11394 1.1 24804 2.3

2007 1335175 97.2 14147 1 19945 1.5

2008 1656585 97.7 16870 1 19167 1.1

TABLE 7.1 : CLASSIFICATION OF LOAN ASSETS

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


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(Amount in Rs. crore)

As on March 31

Bank

group

/

Years

Loss Assets Total NPAs

AmountPer

cent

Amount Per cent Total Advances

-7 -8 -9 -10 -11

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

Public

Sector

Banks

2003 6840 1.2 54089 9.4 577813

2004 5876 0.9 51541 7.8 661976

2005 5771 0.7 46597 5.4 870850

2006 5181 0.5 41379 3.9 1070872

2007 4510 0.3 38602 2.8 1373777

2008 3712 0.2 39749 2.3 1696334

SOURCE: RBI ANNUAL REPORT 2007-08


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From above table it may be observed that though the total NPAs amount of Public sector

Banks decreased from Rs. 54089 (crore) in year 2003 to Rs. 39749 ( crore) as at the end of 31

March 2008 still a colossal amount is locked up in these impaired loans. An important aspect

of strengthening the assets portfolio of Public Sector Banks is to further reduce the level of

NPAs. The earning capacity and profitability of the bank are highly affected due to this as

NPAs do not generate interest income for banks while at the same time banks are required to

make provisions for NPAs from their current profits. So the NPAs have deleterious impact on

the return on assets.

Due to inadequacy of legal systems, recoveries of NPA are not likely to be quick through

legal recourse. In view of the inadequacy of legal infrastructure in prompt reduction of NPA,

the only feasible alternative is to encourage non-legal recourse. While banks require non-legal

time bound surgical solutions to meet the statutory requirements in reducing the level of net

NPA, the internal legal machinery in banks should obviously be so strengthened as to ensure

speedy disposal of suit-filed cases and execution of decreed cases. This would require

managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but

also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare

minimum.

Corporate Governance

It is a system of structuring, operating and controlling a company with a view to achieve long

term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and

complying with the legal and regulatory requirements, apart from meeting environmental and

local community needs.


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The issues related to corporate governance have continued to attract considerable national and

international attention in light of a number of high-profile breakdowns in corporate

governance.

Currently in India, about four-fifths of the banking business is under the control ofpublic sector banks (PSBs), comprising the SBI and its subsidiaries and the

nationalised banks.

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

also a critical ingredient at the system level.

Corporate governance in PSBs is complicated by the fact that effective managementof these banks vests with the government and the top managements and the boards

of banks operate merely as functionaries.

Unless the issues connected with these multiple, and sometimes conflicting,functions are resolved and the boards of banks are given the desired level of

autonomy it would be difficult to improve the quality of corporate governance in

PSBs.

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

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

associated with weak corporate governance.


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Consequently, the general principles of sound corporate governance should also beapplied to all Public sector Banks.

Weak corporate governance translates into higher cost of capitalBetter corporate governance translates into somewhat higher returns on assetsBut much better higher returns on investment relative to cost of capital

So corporate governance is a key challenge for Public Sector Banks in the era of

globalization.

Man-power Planning

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

banks were faced with a large attrition rate of over 30 % and are experiencing an

overall deceleration in the number of employees. Because It takes as long as 18 months

for the recruitment process of a typical state-owned bank to be concluded and of the

candidates shortlisted, many drop out on their own, and Incentivisation of government

bank employees too have failed as the fear of probe by various regulators and

government agencies deter the top management from doling out huge sums as rewards

to performing staffers. In spite of many changes that the industry has faced over the

years, essentially the role of this category of staff has remained unchanged.

In the last seven years, public sector banks have lost 10% market share to theaggressive private banks. By 2011, the population of youth aged between 20 and 29

years is expected to cross the 27-crore mark in India, and this segment is more likely to


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be attracted to the state-of-the-art banks that would have a similar age bracket

generation across the counter. Public sector banks were more likely to be seen as an

older generation organisation where the average age group would be 50 years.

High average age of staff is also a cause of concern for the Public Sector Banks. Publicsector banks therefore need to implement right strategies to woo young techno-savvy

customers that prefer alternative channels to traditional banking method. The financial

sector services are undergoing a rapid change in terms of the demographics, regulatory

requirements and technology because of the high revenues generated.

Public sector banks were more likely to be seen as an older generation organisation

where the average age group would be 50 years.

High average age of staff is also a cause of concern for the Public Sector Banks. Going forward, it would be tough to manage business as there is high competition for

high-skilled jobs.

The banks also need to develop existing staff in newer competencies through asystematic and rigorous training and also recruit, if necessary super specialist and

specialist in areas like technology, treasury management, marketing, FOREX

operations and project management.

So it is a challenge for Public sector Banks not only to recruit more employees but

also to recruit quality professional.

TALENT MANAGEMENT


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Such personnel need to be identified, nurtured and motivated through a systematicorganizational plan to enable them to accept challenging roles early in the career.

Suitable changes in the promotion policies should take care of aspirations of such extra

ordinary and talented manpower.

Banks will also have to pay increasing attention to education and training includingsponsorship of identified persons to MBA programmes, Phd programmes and other

long duration programmes in technology and financial management to develop a wider

managerial pool of competent people who can be developed fast to play the role of

modern banker in ever difficult and turbulent times.

Banks will have to introduce innovative mechanism and process to respond to theaspirations of such talented people by providing them sabbatical leave for professional

growth by sponsorship in seminars and conferences, both nationally and internationally,

to present papers and encouraging them to join professional organisations to develop

appropriate competencies and network with fellow professionals.

There is also need to develop organisation-wide awareness about banks key-business

problems including stagnant business units, strain on profitability, cost of operations,

unexplored business opportunities, manpower costs, NPAS etc.

The preconditions for an effective talent management is clarity of where theorganisation is, i.e., the starting point and where it wishes to reach in a given time

horizon, i.e., the destination

LOAN WAIVER: A NEW CHALLENGE


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The massive Farm loan waiver scheme 2007 of the Union Government is disaster for Public

Sector Banks as it will spoil the credit culture in the country.

FARM LOAN WAIVER SCHEME 2007

In budget speech of 2007 year, the Finance Minister P. Chidambaram announced the most

ambitious farm loan waiver scheme with an estimated write off of Rs. 60,000 crores covering

more than 4 crore farmers. The loan waiver scheme was amend to make it more inclusive. It

offers a total waiver of Rs. 72,000 crores.

Its highlights are as follows :

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

investment credit.

For short-term production loans, the amounts disbursed up to March 31st, 2007 andoverdue as on December 31st, 2007 and remaining unpaid until February 28th, 2008 are

eligible for loan waiver.

For investment loans, the instalments of such loans that are overdue, together with theinterest are eligible for all loans disbursed up to March 31, 2007 and overdue as on

December 31st, 2007 and remaining unpaid till February 28th 2008.

Marginal farmer is defined as cultivating agricultural land up to 1 hectare or 2.5 acres. Small farmer is defined as cultivating between 1 hectare and 2 hectares i.e. less than 5

acres. Small and marginal farmers account for between 70 to 94 percent of all farmers

in most states.


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Other farmers, i.e. owning more than 5 acres or more than 2 hectares, will get one-timesettlement (OTS) relief.

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

The total number of such districts is 237.Special package for other farmers in these 237 districts.

For othe

Documents

Chalenges for Public Sector Bank in India