53764249 d-impact-of-financial-sector-reforms-on-public-sector-banks-in-india

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  • 1. A RESEARCH REPORT ON “IMPACT OF REFORMS ON PUBLIC SECTOR BANKS IN INDIA” SUBMITTED TO: SRM UNIVERSITY, MODINAGAR(UP) IN THE PARTIAL FULFILLMENT FOR THE DEGREE OF Masters in Business Administration (Session 2010 – 2012) – M.B.A. 4th SemesterUnder supervision of: Submitted by:Ms. Nidhi Arora Kumar Pawan Kumar PandeyFaculty Regn.No. – 3511030060SRM UNIVERSITY MBA(2010-12) batch SRM UNIVERSITY
  • 2. INTRODUCTION
  • 3. OBJECTIVES OF THE STUDY
  • 4. LITRATURE REVIEW
  • 5. RESEARCHMETHODOLOGY
  • 6. LIMITATIONS OF THE STUDYCONCLUSION
  • 7. BIBLIOGRAPHY
  • 8. ANNEXURES
  • 9. //DECLARATION//I hereby certify that the work which is presented in this project report entitled“IMPACT OF REFORMS ON PUBLIC SECTOR BANKS IN INDIA” inpartial fulfillment of the requirement for the award of the degree of Mastersin Business Administration (MBA), SRM Uni.versity, SRM, is an authenticrecord of my original work carried out during the 4th semester.I have not submitted the matter embodied in the project report for the awardof any other degree.
  • 10. Place: Modinagar Name: Pawan Kumar PandeyDate: / / Reg. No. 3511030060
  • 11. ACKNOWLEDGEMENT“Gratitude is not a thing of expression; it is more a matter of feeling.”There is always a sense of gratitude which one express for others for their help andsupervision in achieving the goals. I too express my deep gratitude to each and everyonewho has been helpful to me in completing the project report successfully.I would also like to thank almighty God for blessing showered on me during thecompletion of Dissertation Report.First of all, I am highly thankful to for allowing me to pursue my Dissertation Report on”Impact Reforms On Public sector Banks in India”..I give my regards and sincere thanks to Ms. Nidhi Arora Kumar (Project guide)whohas devoted her precious time in guiding me & helping me complete it within time.I feel self-short of words to thanks my parents and friends who had directly orindirectly instrumental in the completion of the project. I am indebted to all respondentsfor their time passion during the long conversations. (Pawan Kumar Pandey) EXECUTIVE SUMMARY
  • 12. The core processes of a company may change over time in accordance with the shiftingrequirements of business competitiveness. The financial development was given impetus with the adoption of social control overbanks in 1967 and subsequently nationalization of 14major scheduled banks in July in 1969.Since then the banking system has formed the core of the Indian financial system. In the threedecades following the first round of nationalization, aggregate deposits of scheduled banks haveincreased at a compound annual growth rate of 17.8%durin the period of (1969-99) while bankcredit expanded at the rate of 16.3% PA. with the branches of more than 67000 of which 48.7%being rural, touching the lives of millions of people everyday, the Indian banking sectorconstitutes the most significant segment of the financial system of India. It is against the background of these circumstances, that the development of a soundbanking system was considered essential for the future growth of the financial system. Financialsector reforms were initiated in the country in 1992 with a view to improving the efficiency inthe process of financial intermediation, enhancing the effectiveness in the conduct of monetarypolicy and creating conductive environment for the integration of domestic financial sector withthe global system. The banking system is, by far, the most dominant segment of the financial sector,accounting as it does, for over 80 per cent of the funds flowing through the financial sector. Theaggregate deposits of the scheduled commercial banks (SCBs) rose from Rs.5,05,599 crore inMarch 1997 to Rs.11,03,360 crore in March 2002 representing a rise of 17 per cent. During thesame period, the credit portfolio (food and non-food) of SCBs grew from Rs.2,78,401 crore toRs. 5,89,723 crore, i.e. by 16 per cent. The net profits of SCBs witnessed a noticeable upturnfrom Rs.6,403 crore in 2000-01 to Rs.11, 572 crore in 2001- 02. The extent and coverage of thebanking system can be gauged from the fact that the number of branches of SCBs grew from8045 in 1969 to 66,186 in June 2002. While rural branches constituted 49 per cent of the total in2002, semi-urban branches accounted for 22 per cent, urban branches accounted for 16 per centand metropolitan branches accounted for 13 per cent. Financial sector reforms introduced in the early 1990s as a part of the structural reformshave touched upon almost all aspects of banking operations. For a few decades preceding theonset of banking and financial sector reforms in India, banks operated in an environment that
  • 13. was heavily regulated and characterised by sufficient barriers to entry, which protected themagainst too much competition. This regulated environment set in complacency in the manner inwhich banks operated and responded to the customer needs. The administered interest ratestructure, both on the liability and the assets sides, allowed banks to earn reasonable spreadwithout much efforts. Despite this, however, banks’ profitability was low and NPLs level washigh, reflecting lack of efficiency. Although banks operated under regulatory constraints in theform of statutory holding of Government securities (statutory liquidity ratio or SLR) and the cashreserve ratio (CRR) and lacked functional autonomy and operational efficiency, the fact was thatmost banks did not operate efficiently. While the broad objectives of the financial sector reforms, thus, were to enhanceefficiency and productivity, the process of reforms were initiated in a gradual and properlysequenced manner so as to have a reinforcing effect. The approach has been to consistentlyupgrade the financial sector by adopting the international best practices through a consultativeprocess. Financial sector reforms were carried out in two phases. The first phase of reforms wasaimed at creating productive and profitable financial institutions operating within theenvironment of operational flexibility and functional autonomy. The focus of the second phase offinancial sector reforms starting from the second-half of 1990s has been on strengthening of thefinancial system consistent with the movement towards global integration of financial services.
  • 14. CONTENTS INTRODUCTION  PROFILE OF STUDY  RATIONAL OF STUDY LITERATURE REVIEW OBJECTIVE OF THE STUDY RESEARCH METHODOLOGY • SAMPLING AND SAMPLING DESIGN • ANALYTICAL TOOLS • STATISTICAL TOOLS DATA COLLECTION  HYPOTHESIS TESTING CONCLUSION AND RECOMMENDATION LIMITATIONS OF THE STUD BIBLIOGRAPHY ANNEXURES
  • 15. INTRODUCTION Financial sector reforms introduced in the early 1990s as a part of the structuralreforms have touched upon almost all aspects of banking operations. For a few decadespreceding the onset of banking and financial sector reforms in India, banks operated in anenvironment that was heavily regulated and characterised by sufficient barriers to entry,which protected them against too much competition. This regulated environment set incomplacency in the manner in which banks operated and responded to the customerneeds. The administered interest rate structure, both on the liability and the assets sides,allowed banks to earn reasonable spread without much efforts. Despite this, however,banks’ profitability was low and NPLs level was high, reflecting lack of efficiency.Although banks operated under regulatory constraints in the form of statutory holding ofGovernment securities (statutory liquidity ratio or SLR) and the cash reserve ratio (CRR)and lacked functional autonomy and operational efficiency, the fact was that most banksdid not operate efficiently. Indian banking system operated for a long time with high reserve requirementsboth in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). Thiswas mainly to accommodate the high fiscal deficit and its monetisation. The efforts in therecent period have been to lower both the CRR and SLR. The SLR has been graduallyreduced from a peak of 38.5 per cent to 25 per cent. The CRR was reduced from its peaklevel of 15.0 per cent maintained during 1989 to 1992 to 4.5 per cent of NDTL in June2003. Although the Reserve Bank continues to pursue its medium-term objective ofreducing the CRR, in recent years, on a review of macroeconomic and monetaryconditions, the CRR has been revised upwards to 6.0 per cent (to be effective from March3, 2007).
  • 16. IMPACT OF REFORMS ON THE BANKING SECTOR These reform measures have had major impact on the overall efficiency andstability of the banking system in India. The present capital adequacy of Indian banks iscomparable to those at international level. There has been a marked improvement in theasset quality with the percentage of gross non-performing assets (NPAs) to grossadvances for the banking system reduced from 14.4 per cent in 1998 to 7.2 per cent in2004. With the commencement of the New Economic Policy, a few new generationtechno-savvy banks such as ICICI bank and HDFC bank came into operation andchanged the whole banking concept in India was considered fairly mature in terms ofvariety of services provided assets quality.. We can measure the performance of Indianpublic sector banks by using the some significant indicators such as Non-performingassets, profitability, capital position and assets quality.It is difficult to obtain permissions to start a bank. Foreign banks are practically bannedfrom opening new branches. Even domestic banks have to take permission from the RBI,to open one branch at a time. Many rules have been designed to favour public sectorbanks. These weaknesses in policy have led to poor competition in banking. Table 6compares the biggest 10 banks in the country in 2004-05 against the situation 13 yearsearlier, in 1991-92. The 10-firm concentration ratio did drop significantly, from 92.86%to 62.99%. This suggests high growth on the part of smaller banks. However, the namesof the biggest banks are remarkably alike. The new names of 2004-05 are shown inboldface. Of these, ICICI was always a big bank, and is not in the list for 1991-92 purelyon account of not being classified as a bank. Apart from this, there are only two newnames in 2004-05. The domination of the public sector is also highly visible. There areno private or foreign banks in the 2004-05 list, other than ICICI Bank
  • 17. PUBLIC SECTORE REFORMS Commercial banking constitutes the largest segment of the Indian financialsystem. Despite the general approach of the financial sector reform process to establishregulatory convergence among institutions involved in broadly similar activities,given the large systemic implications of the commercial banks, many of theregulatory and supervisory norms were initiated first for commercial banks and were laterextended to other types of financial intermediaries. After the nationalisation of majorbanks in two waves, starting in 1969, the Indian banking system becamepredominantly government owned by the early 1990s. Banking sector reformessentially consisted of a two pronged approach. While nudging the Indian bankingsystem to better health through the introduction of international best practices inprudential regulation and supervision early in the reform cycle, the idea was to increasecompetition in the system gradually. The implementation periods for such normswere, however, chosen to suit the Indian situation. Special emphasis was placed onbuilding up the risk management capabilities of the Indian banks. Measures were alsoinitiated to ensure flexibility, operational autonomy and competition in the bankingsector. Active steps have been taken to improve the institutional arrangementsincluding the legal framework and technological system within which the financialinstitutions and markets operate. Keeping in view the crucial role of effective supervisionin the creation of an efficient and stable banking system, the supervisory system has beenrevamped. Further Reform Areas  Extension of Risk management practices: Banks use statistical models to measure and manage the financial risks to which they are exposed. Since models cannot incorporate all possible risk outcomes and generally are not capable of capturing event risks and sudden/dramatic changes, banks need to supplement models with stress test.
  • 18.  Basel II implementation: The RBI intended to implement Basel II recommendations with effect from march31, 2008. All SCBs are encouraged to adopt it not later than March 31, 2009. The Basel committee on Banking Supervision had undertaken the fifth quantitative impact study to assess the impact of adoption of the revised framework. Mortgage Guarantee Companies: As amounted in the budget, the RBI has now placed in public domain draft guidelines on mortgage guarantee companies. This will be a new category under the NBFC sector and the activities will ne in thenature of mortgage guarantees and not mortgage insurance. Mortgage insurance falls with in the jurisdiction of the insurance regulator. FSAP-Self Assesment: a commitment on financial sector assessment to undertake a self-assesment of financial sector stability and development has been constituted. For the purpose of carrying out the task under the terms of reference, the committee has decided to set up four advisory panels which will be assisting the committee in its assessment exercise and will be drawn from non official experts relevant areas related to financial stability assessment and stress testing transparency standards, financial regulation and supervision and institutions and market structure respectively. Draft Guidelines on Accounting Aspects: Recognizing the importance of a robust accounting framework in the banking sector, the RBI had undertaken an exercise a few years back to assess the gaps in compliance by banks with the accounting standards issued by the Institute of Chartered Accountants Of India.
  • 19. PERFORMANCE OF THE PUBLIC SECTOR UNDER THE REFORM PROCESSBANKING SECTOR Banking sector reform has established a competitive system driven by marketforces. The process, however, has not resulted in disregard of social objectives such asmaintenance of the wide reach of the banking system or channelisation of credit towardsdisadvantaged but socially important sectors. At the same time, the reform periodexperienced strong balance sheet growth of the banks in an environment of operationalflexibility. A key achievement of the banking sector reform has been the sharpimprovement in the financial health of banks, reflected in significant improvement incapital adequacy and improved asset quality. This has been achieved despiteconvergence of the prudential norms with the international best practices. 2 There havealso been substantial improvements in the competitiveness of the Indian bankingsector reflected in the changing composition of assets and liabilities of the banking sectoracross bank groups. In line with increased competitiveness, there has been improvementin efficiency of the banking system reflected inter alias in the reduction in interestspread, operating expenditure and cost of intermediation in general .Contemporaneously there have been improvements in other areas as wellincluding technological deepening and flexible human resource management . Amore detailed discussion on the performance analysis of the banking sector underthe reform process is given below.
  • 20. Special features of the reforms in the financial sector  The reforms were not driven by any banking crisis nor were they an outcome of any external support package. They were undertaken much before the importance of the financial sector to prevent crisis was recognized by international agencies and other countries in early 1990s before the Asian financial crisis.  The reforms were carefully sequenced in terms of instruments and objectives. Thus, prudential norms and supervisory strengthening were introduced early in the reform cycle, followed by interest rate deregulation and gradually lowering of statutory preemptions. The more complex aspects of legal and accounting measures were ushered in subsequently when the basic tenets of the reforms were already in place. More recently, the regulatory framework has also focused on ensuring good governance through “fit and proper” owners, directors and senior managers of the banks. The preference has been for diversified ownership.  While the focus of the first generation of reforms was to create an efficient, productive and profitable financial services industry, the second phase of financial sector reforms, beginning from the second-half of the 1990s, was aimed at strengthening of the financial system and introduction of structural improvements.  The need to prepare the financial system in a more globalised environment and to promote financial stability in the face of domestic and external shocks was on top of agenda of reforms. With increasing globalisation of the Indian economy, the reform process witnessed a significant move towards adoption of international best practices in several crucial areas of importance such as prudential norms, banking supervision, data dissemination and corporate governance.  With a view to increasing competition in the banking sector new private sector banks were licensed. A prerequisite for grant of the licence was that these banks had to be fully automated from day one. The results are self-evident as these banks have become high-tech banks. This has had a “demonstration” effect on the entire system. The Government ownership in nationalized and State Bank of India
  • 21. was brought down by allowing them to raise capital from the equity market up to 49/45 per cent of paid-up capital. A unique feature of the reform of public sector banks, which dominated the Indian banking sector, was the process of financial restructuring. Banks were recapitalised by the government to meet prudential norms through recapitalisation bonds. The mechanism of hiving off bad loans to a separate government asset management company was not considered appropriate in view of the moral hazard. The overhang of non-performing loans had to be managed by the banks themselves. The subsequent divestment of equity and offer to private shareholders was undertaken through a public offer and not by sale to strategic investors. Consequently, all the public sector banks, which issued shares to private shareholders, have been listed on the exchanges and are subject to the same disclosure and market discipline standards as other listed entities. The cost of recapitalization to GDP has been low relative to experience in other countries. On a cumulative basis it worked out to about one percent of the GDP. Furthermore, the market value of equity held by Government now far exceeds the recapitalization cost. With a view to carry the reform process further, as announced in the Budget last year the Government decided to convert the recap bonds issued as special securities (basically non-negotiable) to marketable securities indistinguishable from other Government securities . The process has already started and in 2006-07 the Government converted nearly Rs 80 billion to SLR securities. The balance special securities will be phased out over a period. Banks were also allowed to diversify into various financial services and are now offering a whole range of financial products like universal banks.
  • 22. RATIONAL OF THE STUDY The Reforms in the Indian Banking system have assumed large proportions andare a continuing deterrent to the smooth flow of credit to the productive sector of industryand agriculture. The high level committee on financial system constituted by RBI to makerecommendation on financial sector reforms also observed that serious problem areplaguing the financial sector which is reflected in decline in productivity and efficiencyand erosion of profitability due to deterioration in the quality of loan portfolio restrictingincome generation and enhancement of capital funds, accompanied by inadequate loanloss provisions. A high figure of loan defaults put question marks on the credit appraisal. Alongwith other causes, improper evaluation of the credit requirements or repaying capacity ofthe borrowers results in under financing or over financing and affects the cost andrevenue structure of the activity and may render the activity unviable. Non-recoveryaffect the profitability of banks.
  • 23. LITERATURE REVIEW Literature Review is the way to express background of ideas that come to mindduring the research formulation. I asked various employees of the bank about the newtechnological initiative taken by the banks.The research being conducted was "to evaluate the impact of reforms on public sector& commercial banks."Once the problem is formulated, the researcher undertakes an extensive literature reviewconnected with the problem.BOOKS 1) “C.R Kothari 4: The information regarding the basics of research and research methodology, what are the different types of research designs, problem statement, sources of data collection and methods of data collection are given in this section.6 2) “S.P Gupta 6: The information regarding the statistical tools and their limitations in different fields the research is given in this section. This section explains, why to use correlation and the situations in which correlation can be used, and meaning of correlation . This section also explains the Trend Analysis Technique.. 3) S.C. Gupta3: Information regarding various statistical & analytical tools is given in this section. 4) Wilkinson & Bhandarkar5: In this section various parts of research and research methodology is given which tells about the techniques of doing research. 5) Tripathi P.C1: this book helped me in knowing about the change. 6) Gupta C.B.-7, "Management theory and practice”: this book helped me in finding the factors affecting the organization’s change.
  • 24. OBJECTIVES OF THE STUDY• The major objective of the study is to assess the impact of reform measures on the efficiency, profitability and overall performance of banks vis-à-vis bank groups in public and private sector.• To make a comparative analysis of the performance of public and private sector commercial banks during the course of implementation of banking sector reforms.
  • 25. RESEARCH METHODOLOGYSECONDARY DATAThe secondary data on the other hand, are those which have already been collected bysomeone else and which have already been passed through the statistical processes. Whenthe researcher utilizes secondary data then he has to look into various sources from wherehe can obtain them. For e.g. Books, magazine, newspaper, Internet, publications andreports. In the present study I have made use of secondary data collected from variouswebsites, Journals & Various RBI’s Bulletins etc... STATISTICAL TOOLS Introduction:- An educated citizen needs an understanding of basic statistical tool to function in a world that is becoming increasingly dependant on quantitative information. Statistics means numerical description to most people. In fact the term statistics is generally used to mean numerical facts and figures such as agriculture production during a year, rate of inflation and so on. However as a subject of study, statistics refers to the body of principles and procedures developed for the collection, classification, summarization and interpretation of numerical data and for the use of such data. MEANING:- Broadly speaking, the term statistics has been generally used in two senses:-  Plural Sense  Singular Sense
  • 26. Plural sense refers to the numerical data. Singular Sense refers to a Science in which we deals with the techniques of collecting, classifying, presenting, analyzing and interpreting the data, the concept in its singular sense, refers to Statistical Method. PURPOSE:- Without the assistance of Statistical Method, an organization would find it impossible to make sense of the huge data. The purpose of statistics is to:- • Manipulate • Summarize • investigate the data so that useful decision making information results could be found out. In fact, every business manager needs a sound background of statistics. Statistics is a set of Decision Making techniques which aids businessman in drawing inferences from the available data.STATISTICAL TOOLS:- Statistical tools are the basic measures, which helps in defining the relation between different items, present, past and future trend of the future trend of the particular business etc. A wide variety of statistical tools are available and any of them can be used by any businessman depending upon the nature of his trade. Various statistical tools are:- 1. Correlation 2. Regression 3. Index Numbers 4. Probability Distribution 5. Hypothesis Testing
  • 27. DATA COLLECTION Performance Analysis –Banking (a) Reach & Deepening  Wide reach of banking system maintained after reforms,  Despite slight decline share of direct flow towards disadvantaged sectors continued  Considerable increase in per branch business since the initiation of reforms  Substantial deepening of financial sector 14,000 12,253 12,000 10,000(Rupees) 8,542 8,000 7,275 6,000 4,242 4,555 4,000 2,368 2,320 2,000 1,434 738457 88 68 0 1969 1980 1991 1995 2000 2003 Per capita Deposit Per capita Credit 70 64 60 53.5 51.8 50 48.1 48 (Rupees) 39.2 40 37 36 35.4 33.7 33.7 30 20 16 16 15.5 15 15 15 14 10 0 1969 1980 1991 1995 2000 2003 Populat ion per Offic e (‘000s) Priorit y Sec t or Advanc es (per c ent ) Deposit s (per c ent of NI)
  • 28. Performance Analysis –Banking – (b) Balance Sheet(per cent of assets) 90 81.5 80.5 79.8 80 77.7 76.4 70 60 50 46.8 43.6 45 42.1 40.6 40 30 1991-92 1995-96 2000-01 2002-03 2003-04 Deposits Loans and advances(per cent of assets) 45 40.8 41.7 40 38 35 31 30 28.9 25 20 15 10 8.9 8.1 5 3.5 0 1991-92 1995-96 2000-01 2002-03 2003-04 Total Investments Non-SLR Investment • Deposits remained stable and predominant source of funds. • Share of loans in total liabilities declined in mid-1990s, but revived in recent years • Strong increase in investment activities • Despite sharp decline in SLR large Gilt holdings • Despite some increase non-SLR investment remains low
  • 29. Performance Analysis –Banking – (c) Capital Structure (1) 100 90 87 84 81 RESEARCH 80 70 60 (per cent) METHODOLOGY 50 40 30 33 42 20 12 8 9 7 10 4 3 2 1 2 2 0 1995-96 1999-00 2001-02 2002-03 CRAR below 4 CRAR 4-9 CRAR 9-10 CRAR above 10 • Distinct improvement in CRAR of banks • In public sector banks recapitalisation by government initially (about 1% of GDP) Capital Structure (2) Vijaya Bank 46.1 Corporation Bank 42.8 State Bank of India 40.3 Union Bank of India 39.2 Indian Overseas Bank 38.8 Andhra Bank 37.5 Oriental Bank of Commerce 33.5 Bank of Baroda 33.2 Bank of India 30.5 Dena Bank 29 Allahabad Bank 28.8 Canara Bank 26.8 Syndicate Bank 26.5 State Bank of Travancore 25State Bank of Bikaner & Jaipur 25 UCO Bank 25 Bank of Maharashtra 23.2 Punjab National Bank 20 State Bank of Mysore 7.7 State Bank of Indore 2 0 10 20 30 40 50 Share of Private Sector (per cent)
  • 30. (d) Asset Quality 18 15.7 16 14 (per cent) 12 11.4 10 8.8 8 7 7.3 6 4.9 4 4 2 0 1996-97 2000-01 2002-03 2003-04 Gross NPL/Advances Gross NPL/Assets • Marked improvements in asset quality • Public sector banks showed more credible performance in NPL management than private sector banks (e) Competition Share in Assets 100.0 82.5 78.4 74.5 80.0 60.0Per cent 40.0 18.5 20.0 9.4 8.2 9.1 12.6 7.0 0.0 1995-96 2000-01 2002-03 Foreign Banks Private Sector Banks Public Sector Banks
  • 31. (f) Efficiency Net Profits as % of Total Assets 2.00 1.70 1.60 1.50 1.20 1.201.30 1.00 1.10 0.90 0.90 1.00 0.70 0.60 0.40 0.50 0.00 Pub. Sec. Banks Old Pvt. Banks New Pvt. Banks Foreign Banks 1996-97 2001-02 2002-03• Clear improvement in profitability in the post-reform period• Reduction in spread and operating expenditure• Improvement in efficiency across the bank groups
  • 32. RegressionLinear regression is without doubt the most frequently used statistical method. Adistinction is usually made between simple regression (with only one explanatoryvariable) and multiple regression (several explanatory variables) although the overallconcept and calculation methods are identical.The principle of linear regression is to model a quantitative dependent variable Y thougha linear combination of p quantitative explanatory variables, X1, X2, …, Xp. Thedeterminist model (not taking randomness into account) is written for observation i asfollows: Non-SLR Loans and Deposits TotalINVESTMENT INVESTMENT ADVANCES 1991-92 77.7 28.9 .. 46.8 1992-93 78.4 30.5 .. 45 1993-94 80.3 35.4 5 38.7 1994-95 78.9 33.6 4.6 40.5 1995-96 76.4 31 3.5 42.1 1996-97 79.9 33.3 5 41 1997-98 81 34.2 7.1 40.8 1998-99 81.1 35.7 8.6 38.8
  • 33. 1999-00 81.1 37.3 9.1 40.2 2000-01 81.5 38 8.9 40.6 2001-02 78.5 38.2 8.7 42 2002-03 79.8 40.8 8.1 43.6 2003-04 * 80.5 41.7 7.2 45Here in this table deposits are independent variables and Investment and Loans andadvances are dependant on deposits therefore we can use Regression analysis for this datawith the help of XLSTAT. TotalINVESTMENT Deposits 1991-92 28.9 77.7 1992-93 30.5 78.4 1993-94 35.4 80.3 1994-95 33.6 78.9 1995-96 31 76.4 1996-97 33.3 79.9 1997-98 34.2 81 1998-99 35.7 81.1 1999-00 37.3 81.1 2000-01 38 81.5 2001-02 38.2 78.5 2002-03 40.8 79.8 2003-04 * 41.7 80.5 Evaluating the information brought by the variables (H0 = Y=Moy(Y)) : Sum of Mean Fishers Source DF squares square F Pr > F Model 1 65.542 65.542 6.209 0.030 Residuals 11 116.121 10.556 Total 12 181.663
  • 34. Data and regression line Standardized residuals 50 O bs 13 45 O bs 12 40 O b s 11 O bs 10 35 O bs 9 30 O bs 8 25 O bs 7 20 O bs 6 15 O bs 5 10 O bs 4 5 O bs 3 0 O bs 2 76 77 78 79 80 81 82 O bs 1 D e po s it s -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 O b s e rvatio ns P re d ic tio ns C o nf. o n p re d (95.00% ) C o nf. o n m e an (95.00% ) S ta nda rdize d re s idua ls Loans and ADVANCES Deposits1991-92 46.8 77.71992-93 45 78.41993-94 38.7 80.31994-95 40.5 78.91995-96 42.1 76.41996-97 41 79.91997-98 40.8 811998-99 38.8 81.11999-00 40.2 81.12000-01 40.6 81.52001-02 42 78.52002-03 43.6 79.82003-04* 45 80.5Evaluatingtheinformationbrought bythe variables(H0 = Data and regression lineY=Moy(Y)) Standardized residuals: 60 O b s 13 50 O b s 12 Sum of Mean Fishers O b s 11 40Source DF squares square Fb s 10 O Pr > FModel 1 19.223 19.223 3.821 O bs 9 0.077 30Residuals 11 55.345 5.031 O bs 8 O bs 7Total 20 12 74.568 O bs 6 O bs 5 10 O bs 4 O bs 3 0 76 77 78 79 80 81 82 O bs 2 D e po s it s O bs 1 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2 O b s e rvatio n s P re d ic tio ns C o nf. o n p re d (95.00% ) C o nf. o n m e an (95.00% ) S t a nda rdize d re s idua ls
  • 35. Trend Analysis Of NPA’s in Public Sector Banks During Period (1992-02)1:Gross NPAs to Gross Advances: Year Gross NPAs / Gross Advances Trend Line 1. 1992-93 23.2 - 2. 1993-94 24.8 22.5 3. 1994-95 19.5 20.8 4. 1995-96 18.0 18.43 5. 1996-97 17.8 17.26 6. 1997-98 16.0 16.56 7. 1998-99 15.9 15.33 8. 1999-00 14.0 14.1 9. 2000-01 12.4 12.5 10. 2001-02 11.1 - Note: Series – 1: Gross NPAs to Gross Advances Series – 2: Trend LineANALYSISDuring the year 1992-93 to 2001-02, there has been a sharp decline in Gross NPAs toGross Advances. The Trend Line also shows a continues decreasing trend. From this, itcan be concluded that over the next three years (i.e 2002-03 to 2004-05), Gross NPAs toGross Advances of public sector banks would decrease. 2. Gross NPAs to Total Advances:
  • 36. Year Gross NPAs / Total Advances Trend Line 1. 1992-93 11.8 - 2. 1993-94 10.8 10.43 3. 1994-95 8.7 9.23 4. 1995-96 8.2 8.23 5. 1996-97 7.8 7.66 6. 1997-98 7.0 7.16 7. 1998-99 6.7 6.56 8. 1999-00 6.0 6.00 9. 2000-01 5.3 5.4 10. 2001-02 4.9 - FINDI Note: Series – 1: Gross NPAs to Total Advances Series – 2: Trend LineANALYSISDuring the year 1992-93 to 2001-02 , there has been considerable decline in GNPAs toTotal Assets. The Trend Line too says the same story. Therefore the GNPAs to TotalAssets of public sector banks will decline in the next three years to come (i.e 2002-03 to2004-05). 3. Net NPAs to Net Advances: Year Net NPAs / Net Trend Line Advances 1. 1992-93 11.3 -
  • 37. 2. 1993-94 12.87 11.62 3. 1994-95 10.7 10.82 4. 1995-96 8.9 9.6 5. 1996-97 9.2 8.76 6. 1997-98 8.2 8.5 7. 1998-99 8.1 7.9 8. 1999-00 7.4 7.4 9. 2000-01 6.7 6.63 10. 2001-02 5.8 - Note: Series - 1: Net NPAs to Net Advances Series – 2: Trend LineANALYSISDuring the year 1992-93 to 2001-02, there has been a steady and considerable decrease inpercentage of Net NPAs to Net Advances. The Trend Line also shows that there is adecreasing trend and Net NPAs over next three years (i.e 2002-03 to 2004-05) woulddecrease considerably. 4. Net NPAs to Total Assets: Year Net NPAs / Total Assets Trend Line 1. 1992-93 4.6 - 2. 1993-94 5.1 4.56 3. 1994-95 4 4.23 4. 1995-96 3.6 3.76 5. 1996-97 3.7 3.53
  • 38. 6. 1997-98 3.3 3.36 7. 1998-99 3.1 3.1 8. 1999-00 2.9 2.9 9. 2000-01 2.7 2.66 10. 2001-02 2.4 - Note: Series -1: Net NPAs to Total Assets Series – 2: Trend LineAnalysisDuring the year 1992-93 to 2001-02, there has been a marginal decline in Net NPAs toTotal Assets. The Trend Line shows that there has been a steady decline and it can beinferred that over next three years (i.e 2002-03 to 2004-05), Net NPAs to Total Assets ofpublic sector banks would decrease but at a marginal rate.FINAL ANALYSISThe future picture of Commercial banks more so the public sector banks seem to be rosy.As the Trend Line suggests that the NPAs of public sector banks will decline marginallyboth in terms of Gross and Net figures over next three years. This may be due to higherprovisions, which the public sector banks have been providing. The real issue to beidentified is though the NPAs, as a percentage seems to be declining over the years butthe absolute figures seems to be increasing. In this vein it would be interesting to see theNPAs both in terms of absolute figures and in terms of percentage of public sector banksin the coming three years.ANCOVAANCOVA (ANalysis of COVAriance) can be seen as a mix of ANOVA and linearregression as the dependent variable is of the same type, the model is linear and the
  • 39. hypotheses are identical. In reality it is more correct to consider ANOVA and linearregression as special cases of ANCOVA.Interactions between quantitative variables and factorsOne of the features of ANCOVA is to enable interactions between quantitative variablesand factors to be taken into account. The main application is to test if the level of a factor(a qualitative variable) has an influence on the coefficient (often called slope in thiscontext) of a quantitative variable. Comparison tests are used to test if the slopescorresponding to the various levels of a factor differ significantly or not. Loans and ADVANCES Deposits 1991-92 46.8 77.7 1992-93 45 78.4 1993-94 38.7 80.3 1994-95 40.5 78.9 1995-96 42.1 76.4 1996-97 41 79.9 1997-98 40.8 81 1998-99 38.8 81.1 1999-00 40.2 81.1 2000-01 40.6 81.5 2001-02 42 78.5 2002-03 43.6 79.8 2003-04 * 45 80.5 Summary for the dependent variable: Total no. of No. of No. of values Sum of Standard Variable values values used ignored weights Mean deviation Loans and 41.93 ADVANCES 13 13 0 13 1 2.493 Evaluating the information brought by the variables (H0 = Y=Moy(Y)): Fishers Pr > Source DF Sum of squares Mean square F F Model 11 73.588 6.690 6.826 0.291 Residuals 1 0.980 0.980 Total 12 74.568
  • 40. Loans and ADVANCES / Standardized residuals Factor Deposits 0.847 0.64645 0.44443 0.242 041 38 40 42 44 4640 -0.23938 -0.4 -0.6 D e po s its -0.8 L o ans and A D VA N C E S
  • 41. CORRELATIONThree correlation coefficients are proposed to compute the correlation between a set ofquantitative variables, whether continuous, discrete or ordinal (in the latter case, theclasses must be represented by values that respect the order):Pearson correlation coefficient: this coefficient corresponds to the classical linearcorrelation coefficient. This coefficient is well suited for continuous data. Its value rangesfrom -1 to 1, and it measure the degree of linear correlation between two variables. Note:the squared Pearson correlation coefficient gives an idea of how much of the variabilityof a variable is explained by the other variable. The p-values that are computed for eachcoefficient allow testing the null hypothesis that the coefficients are not significantlydifferent from 0. However, one needs to be cautions when interpreting these results, as iftwo variables are independent, their correlation coefficient is zero, but the reciprocal isnot true.Spearman correlation coefficient (rho): this coefficient is based on the ranks of theobservations and not on their value. This coefficient is adapted to ordinal data. As for thePearson correlation, one can interpret this coefficient in terms of variability explained,but here we mean the variability of the ranks.Kendall correlation coefficient (tau): as for the Spearman coefficient, it is well suited forordinal variables as it is also based on ranks. However, this coefficient is conceptuallyvery different. It can be interpreted in terms of probability: it is the difference betweenthe probabilities that the variables vary in the same direction and the probabilities that thevariables vary in the opposite direction.
  • 42. Correlation between Earnings & Expenses of Public Sector Banks Year Total Scattergram of the data Earnings Total Expenses 2000 1800 1955 1 1600 0 1400 1975 4 4 1200 1990 42 42 1000 1995 304 800 297 2000 1,149 600 1077 400 2002 1,510 1395 200 2003 1,724 1553 0 2004 2,345 0 500 1000 1500 2000 2500 1895 T o ta l E a rningsPearsons correlation coefficient test (parametric test):Observed value 0.996Two-tailed p-value < 0.0001Alpha 0.05Decision:At the level of significance Alpha=0.050 the decision is to reject the null hypothesis ofabsence of correlation. Result of correlation is high Degree Positive CorrelationIn other words, the correlation is significant. CONCLUSION AND RECOMMENDATION
  • 43.  Since the financial reforms of 1991, there have been significant favourable changes in India’s highly regulated banking sector. This study has assessed the impact of the reforms by examining seven hypotheses. It concludes that the financial reforms have had a moderately positive impact on reducing the concentration of the banking sector (at the lower end) and improving performance. The empirical estimation showed that regulation lowered the profitability and cost efficiency of public-sector banks at the initial stage of the reforms, but such a negative impact disappeared once they adjusted to the new environment. Moreover, allowing banks to engage in non-traditional activities has contributed to improved profitability and cost and earnings efficiency of the whole banking sector, including public-sector banks. Lending to priority sectors and the public-sector has not had a negative effect on profitability and cost efficiency, contrary to our expectations. Further, foreign banks (and private domestic banks in some cases) have generally performed better than other banks in terms of profitability and income efficiency. This suggests that ownership matters and foreign entry has a positive impact on banking sector restructuring. A further reduction of SLR and more encouragement for non-traditional activities (under the bank subsidiary form) may also make the banking sector more resilient to various adverse shocks. For the continuous growth of the Indian economy, continuation of the banking and financial reforms will always be a critical issue. It boosts investment and growth throughout the economy. The response of the banks to the reforms has been impressive. The banks have been adjusting very well to the new environment. The level of NPA of public sector banks remained high; a noteworthy development has been their significant reduction in relation to net advances in recent years.
  • 44. LIMITATIONS OF THE STUDYAs we all know that every work that has to be performed by someone includes somehurdles or says limitation. There are always some problems in each and every work. Ifthere were no problems the performing each task is so easy that everyone that does nothave any knowledge about the can also performs that work without and hurdle.So the following are the some limitations or problems that are faced during thedissertation report. 1. Lack of knowledge:- about conducting the research makes it very difficult for us to perform out task. As it was our first time that we indulge in dissertation report. The lack of experience made the task difficult. 2. Shortage of time:-As the time period that is given to us for doing dissertation study was also too less. In a short time period that is very difficult that we can get the knowledge about each and everything related to our project. 3. Secondary data:-I used secondary data in my study that is not a reliable source of information for doing research work. 4. Limited Area:- The study is restricted to the limited areas of search. 5. Nature:- The study is suggestive in nature and not much conclusive. 6. Unavailability of information:- Some of the information in banks is not to be disclosed to any resource of information. Even I was unable to access that information.
  • 45. BIBLIOGRAPHYBOOKS  “C.R Kothari 4: The information regarding the basics of research and research methodology, what are the different types of research designs, problem statement, sources of data collection and methods of data collection are given in this section.6  “S.P Gupta 6: The information regarding the statistical tools and their limitations in different fields the research is given in this section. This section explains, why to use correlation and the situations in which correlation can be used, and meaning of correlation . This section also explains the Trend Analysis Technique..  S.C. Gupta3: Information regarding various statistical & analytical tools is given in this section.  Wilkinson & Bhandarkar5: In this section various parts of research and research methodology is given which tells about the techniques of doing research.  Tripathi P.C1: this book helped me in knowing about the change.  Gupta C.B.-7, "Management theory and practice”: this book helped me in finding the factors affecting the organization’s change.
  • 46. JOURNALS  Finance India15, September 2005 pp-957-961:- Impact of NPAs on strategic banking variables i.e. impact on profitability, Productivity, Capital Adequacy, Credit Deployment and Mobilisation.  Chartered Financial Analysis17, December 2005 pp-52:- Concept of SARFAESI Act.  Southern Economist20, February 2006 pp-15:- Details of Corporate Debt Restructuring Scheme.  Management Accountant24, May 2006 pp- 359:- Early Warning System  Chartered Financial Analysis29, October 2005 pp-64 :-Types of banking risk  Chartered Financial Analysis32, October 2007 pp-31-31:-Growth and structural change in banking sector  Chartered Financial Analysis34, November 2007 pp-8-9:-Concept of Borrower’s Special Investigation Audits  Economic and political weekly30, October 16, 2004 pp-10:-Meaning and concept of financial reforms.  Chartered Secretary24, Feburary 2003, V.S.Datey pp-22-24 :- Importance of credit rating  Treasury Management , December 2004, MPM Vinay Kumar pp-14-1610 :- Adverse effect of Financial norms.  Chartered Financial Analysis, August 2004, B.P.Dhaka pp-47-5211 :- Reason behind huge level of NPAs in the Indian Banking System  Paradigm, July 2005 pp-12-1412 :- Indian economy and Banking  Management Accountant, September 2007 pp-48-5013 :- Accounts which need not be classified as NPAs  Business Today, May 2006 pp-3414 :- Measures in case of non payment of NPAs  Chartered Financial Analysis-29, December 2005 pp-25-28 :- Norms for treating various advances as NPAs
  • 47.  Financial Risk Management, February 2006 pp-50-55:- Narsimhan Committee’s recommendation Data quest35 , April 2005 pp-19 Gross NPAs expressed as % of gross advances RBI Bulletin, July 1999 pp-34-36 :- RBI guidelines on income generation IBA Bulletin, January 2004 pp-17-19:- Magnitude of gross NPAs post and prior to the reforms. Chartered Financial Analysis, February 2004 pp-12-140 :-Qualitative aspects of the micro level impact of reforms.