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    • LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT“A Comparative analysis of Profitability and Productivity in Indian Banks with special reference to Public, Private & Foreign Banks.” Submitted to Lovely Professional University In partial fulfillment of the requirements for the award of degree of MASTER OF BUSINESS ADMINISTRATION Submitted by: Supervisor: Vinay Kumar Mrs. Ashima Thaper 2020070272 Lecturer (Lovely School of Business) DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY PHAGWARA 1
    • (2009) LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT TO WHOMSOEVER IT MAY CONCERNThis is to certify that the project report titled, "A Comparative analysis of Profitabilityand Productivity in Indian Banks with special reference to Public, Private &Foreign Banks” carried out by Mr. Vinay Kumar, S/o Sh. Harjinder Singh has beenaccomplished under my guidance & supervision as a duly registered MBA student of theLovely Professional University, Phagwara. This project is being submitted by him/her inthe partial fulfillment of the requirements for the award of the Master of BusinessAdministration from Lovely Professional University.His dissertation represents his original work and is worthy of consideration for the awardof the degree of Master of Business Administration.Mrs. Ashima Thaper(Name & Signature of the Faculty Advisor)Title: “A Comparative analysis of Profitability and Productivity in Indian Bankswith special reference to Public, Private & Foreign Banks.”Date: ______________________________ 2
    • Date: LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT DECLARATIONI, "Vinay Kumar”, hereby declare that the work presented herein is genuine work doneoriginally by me and has not been published or submitted elsewhere for the requirementof a degree programme. Any literature, data or works done by others and cited within thisdissertation has been given due acknowledgement and listed in the reference section.Vinay Kumar(Students name & Signature)2020070272(Registration No.)Date: __________________ 3
    • LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT Suggestive ChaS.No Chapter Page No.1 1.1 Introduction to Subject • Productivity 2 • Aspects of productivity 2-4 5 • Profitability 5-8 • How banks uses the profitability analysis 9-13 1.2 Objective, Need, Scope & Methodology2. 2.1 Introduction to Indian Banking 15-16 16-19 2.2 History 20 2.3 Banking system in India 21-26 2.4 Banks in India 26-28 2.5 The status of the banks in India as on December 2008 4
    • 3 Survey of Literature 30-334 Analysis of the profitability and productivity of Public sector 35-71 banks vis-à-vis with Private sector banks and Foreign banks5 Findings, Conclusion, Limitations & Recommendations 73-816 Bibliography7 Appendix 5
    • Executive summary:The new millennium has brought along challenges and opportunities in the various fieldsof economic activities including banking. The entry of various private sector and foreignbanks exposed the inefficiencies in the public sector banks. . Indian banking, which wasoperating in a highly comfortable environment till the beginning of the 1990s, has beenpushed into the choppy water of intense competition. The modern banking activity ismarked by itineraries into un-chartered horizons mingled with risks and heavycompetition. Immediately after nationalization, the Public Sector Banks spread theirbranches to remote areas at a rapid pace Their main objective was to act on behalf of thegovernment to fulfill economic obligations towards the common man. They acted overenthusiastically in penetrating into far-flung and remote corners of the country. Thesocial responsibility that was entrusted upon the Public sector Banks digresses them fromthe profit motive. On the other hand private and foreign banks did not make such moves.Instead, they pursued profit making as the objective for their operations.In 1992 the RBI launched banking sector reforms, as per the recommendations made bythe Narasimhan Committee on financial reforms to create a more profitable, efficient andsound banking system. The reforms opened the banking sector for private players.Domestic private sector banks are divided into two categories old banks which existedwith the public sector banks before the entry deregulation and the new banks that cameinto existence after the reforms of 1992. The old banks are smaller in size and areregional. In contrast the new private sector banks are much larger in size, operateprimarily in metros and are technologically superior. Interestingly, unlike manydeveloping countries, where the government owned financial institutions own majorequity of the private banks, the equity share holders of the old private sector banks weremainly non government bodies. However, most of the new private sector banks, in Indiaare promoted by the government owned financial Institutions. These banks, too, are in the 6
    • process of reducing promoter’s stake by raising funds through the capital marketrepresents the banking system in India.The emergence of New Private Sector Banks in 1995 exposed the inefficiencies of thepublic sector banks. New Private Sector Banks have set a blistering pace of growth,easily beating the growth rate of Public Sector Banks. The business share for PrivateSector Banks is very small but their share in the total net profit of the banking system isdisproportionately high. Just like in any other business, profit in banking acts as astimulant factor for management to expand and improve their services. Though Profitmaximization is secondary for Public Sector Banks, adequate profit is necessary for theirsurvival and healthy operations because even socio-economic obligations, like branchexpansion in rural areas and priority sector advances cannot be fulfilled without adequateprofit.Objectives of the study 1. To compare the profitability and productivity of the public sector banks vis-à-vis with the private sector banks and foreign banks for the past 5 years i.e. from 2003-2004 to 2007-2008. 2. To study the market performance of the various sector banks i.e. Public, Private & Foreign Banks. 3. To analyze the impact of recent slowdown on the various sector Banks in India. 4. To study the recent developments in the Indian banking sector.Need of the study:The new millennium has brought along challenges and opportunities in the various fieldsof economic activities including banking. The entry of various private sector and foreignbanks exposed the inefficiencies in the public sector banks. This paper focuses on theachievement and performance of Public Sector Banks vis-à-vis Private Sector Banks andForeign Banks. The parameters selected for evaluation of performance of various 7
    • categories of banks are profitability and productivity. The time period for theperformance analysis has been chosen as 2003-04 to 2007-08.This paper comparesvarious categories of banks on their productivity and profitability and also measures theimpact of the recent slowdown on the Indian banking sector.Methodology used:A five years period (2003-2004 to 2007-2008) has been selected for evaluating theperformance. The logic of selection of this period is to find out the impact ofgovernment’s decontrolled and liberalized policies on public sector banks as compared toother categories of banks like private sector banks and foreign banks.The other reason is that the new private sector banks, which are having major share inasset holding, started their business commercially from the year 1996 onwards; tosegregate the overall result of the new private sector banks it is more appropriate to selectthis period. The study uses Ratio analysis to compare profitability and business peremployees and profit per employees to compare the productivity of different categories ofbanks. Ratio analysis is a powerful tool of financial analysis. In financial analysis ratiosare generally used as benchmarks for evaluating a firm’s position or performance. Theabsolute values may not provide us meaningful values until and unless they are related tosome other relevant information. Ratios represent the relationship between two or morevariables. Ratios help to summarize large data to draw qualitative judgments about thefirm’s performance.Ratio used for the measuring the profitability: • Net Profit Ratios: Net Profit/Total Income*100 • Return On Net Worth: Net Profit/Net Worth*100 • Capital adequacy ratio: Capital/Risk*100 • Net profit, total income.Formula used for measuring the productivity: 8
    • • Business Per Employees: Business/Number Of Employees • Profit Per Employees: Profit/ Number Of EmployeesScope of the study:The scope of the study is limited to the Indian Banking Sector only. For the purpose ofthis study only those banks which are operating in India are taken into consideration.Study period is limited between the time frame of 2004-2008.Limitation of the study: • Time constraint is one of the limiting factors to conduct this study properly. • Non availability of the data on productivity of the banks as well as the capital adequacy ratio data for the period 2004 and 2005. • Finding of the study is made on the basis of the analysis of the banks taken for the study and it can vary from person to person. • The samples of the banks are taken on the convenience basis so as to meet the objectives of the study. 9
    • Chapter-11.1: Introduction to the subjectProductivityAspects of productivityProfitabilityHow banks uses the profitabilityanalysis1.2: Objective, Need, Scope & Methodology 10
    • 1.1:Introduction to the subject:1.1.1:ProductivityDefinitionThe amount of output per unit of input (labor, equipment, and capital). There are manydifferent ways of measuring productivity. For example, in a factory productivity might bemeasured based on the number of hours it takes to produce a good, while in the servicesector productivity might be measured based on the revenue generated by an employeedivided by his/her salary.The formula of total productivity is normally written as follows:Total productivity = Output quantity / Input quantityAccording to this formula, changes in input and output have to be measured inclusive ofboth quantitative and qualitative changes. In practice, quantitative and qualitative changestake place when relative quantities and relative prices of different input and output factorsalter. In order to accentuate qualitative changes in output and input, the formula of totalproductivity shall be written as follows:Total productivity = Output quality and quantity / Input quality and quantity1.1.2: Aspects of productivity:Productivity studies 11
    • Productivity studies analyze technical processes and engineering relationships such ashow much of an output can be produced in a specified period of time. It is related to theconcept of efficiency. While productivity is the amount of output produced relative to theamount of resources (time and money) that go into the production, efficiency is the valueof output relative to the cost of inputs used. Productivity improves when the quantity ofoutput increases relative to the quantity of input. Efficiency improves, when the cost ofinputs used is reduced relative the value of output. A change in the price of inputs mightlead a firm to change the mix of inputs used, in order to reduce the cost of inputs used,and improve efficiency, without actually increasing the quantity of output relative thequantity of inputs. A change in technology, however, might allow a firm to increaseoutput with a given quantity of inputs; such an increase in productivity would be moretechnically efficient, but might not reflect any change in allocative efficiency.Increases in productivityCompanies can increase productivity in a variety of ways. The most obvious methodsinvolve automation and computerization which minimize the tasks that must beperformed by employees. Recently, less obvious techniques are being employed thatinvolve ergonomic design and worker comfort. A comfortable employee, the theorymaintains, can produce more than a counterpart who struggles through the day. In fact,some studies claim that measures such as raising workplace temperature can have adrastic effect on office productivity. Experiments done by the Japanese Shiseidocorporation also suggested that productivity could be increased by means of perfuming ordeodorizing the air conditioning system of workplaces. Increases in productivity also caninfluence society more broadly, by improving living standards, and creating income.They are central to the process generating economic growth and capital accumulation. Anew theory suggests that the increased contribution that productivity has on economicgrowth is largely due to the relatively high price of technology and its exportation viatrade, as well as domestic use due to high demand, rather than attributing it to microeconomic efficiency theories which tend to downsize economic growth and reduce laborproductivity for the most part. Many economists see the economic expansion of the later1990s in the United States as being allowed by the massive increase in worker 12
    • productivity that occurred during that period. The growth in aggregate supply allowedincreases in aggregate demand and decreases in unemployment at the same time thatinflation remained stable. Others emphasize drastic changes in patterns of social behaviorresulting from new communication technologies and changed male-female relationships.Labor productivityLabour productivity is generally speaking held to be the same as the "average product oflabor" (average output per worker or per worker-hour, an output which could bemeasured in physical terms or in price terms). It is not the same as the marginal productof labor, which refers to the increase in output that results from a corresponding increasein labor input. The qualitative aspects of labor productivity such as creativity, innovation,teamwork, improved quality of work and the effects on other areas in a company aremore difficult to measure.Productivity paradoxDespite the proliferation of computers, there have not been any observable increases inproductivity as a result. One hypothesis to explain this is that computers are productive,yet their productive gains are realized only after a lag period, during whichcomplementary capital investments must be developed to allow for the use of computersto their full potential. Another hypothesis states that computers are simply not veryproductivity enhancing because they require time, a scarce complementary human input.This theory holds that although computers perform a variety of tasks, these tasks are notdone in any particularly new or efficient manner, but rather they are only done faster. Ithas also been argued that computer automation just facilitates ever more complexbureaucracies and regulation, and therefore produces a net reduction in real productivity.Another explanation is that knowledge work productivity and IT productivity are linked,and that without improving knowledge work productivity, IT productivity does not havea governing mechanism 13
    • 1.1.3: Profitability:Ability of a firm to generate net income on a consistent basis. It is often measured byprice to earnings ratio.1.1.4: How banks uses the profitability analysis:Banks have come a long way towards Customer Relationship Management in the pastfive years. In the 1980’s most banks had not yet created a consolidated MarketingCustomer Information File (MCIF). Their credit card accounts were kept on onecomputer, checking accounts on another, and home mortgages on a third. By 1990, mostbanks had figured out how to group all customer accounts together on an MCIF, even ifthey were maintained separately.The next step was determining the profitability of each customer. This is not easy.Modern profitability software adds up the revenues from each account, and subtracts thebank’s costs on a monthly basis. The costs include the cost of the funds, provision forlosses, overhead, deposit insurance, and customer’s usage of bank services. Profitabilitysoftware is still in its infancy. It offers a real challenge for software providers to deliveran outstanding product. It will be particularly useful for advanced data applications.Once the software has determined the profitability of each account each month, eachcustomer’s total profitability has to be computed by adding together the profits or lossesfrom each of his accounts. When banks first do this calculation, it often comes as quite ashock. Some, like the Fleet Bank, have found that as many as half of their total customersare unprofitable. Many will never be profitable. Their marketing staffs are busy workingto acquire and retain people who destroy value for the bank! 14
    • With knowledge of profitability, banks begin to classify their customers into profitabilitysegments so that they can understand and modify customer and employee behavior. Hereis the way one bank classified its customers in a recent month: (Chart 1.1)The top two segments, representing 16% of the bank’s customers, were responsible for105% of the bank’s total profit. The bottom 28% represented a loss of 22% of the profit.This picture is typical of many banks.What are banks doing about this situation? In the first place, few banks have reached thethis stage yet, and most of those have not developed any conscious strategies to deal withthe problem. Those that have developed a plan, however, have come up with someinnovative ideas.Most are working very hard to retain the customers in the top two groups. These aredesignated as Gold customers. Banks try to extend special services to them. Goldcustomers call in on special toll free lines. Branch managers are furnished with the namesof their top customers, and are instructed to meet and greet them when they visit abranch. They are assigned personal bankers, who call and introduce themselves. 15
    • The customer access screens used by bank personnel include a profitability code, soemployees can know whether they are dealing with a 5, 4, 3, 2, or 1. When the loans forthe 1s come up for renewal, they are renewed at a higher rate, to try to nudge them intoprofitability, or possibly to get them to take their business elsewhere. The software doessomething else which is quite sophisticated. The software determines which bankproducts should be suggested to the customer during customer contacts on the phone or inperson. These products are selected by formulas that determine what bank products thecustomer currently uses, and what his current balances would indicate that he might beeligible for and want to use next. The software also suggests the appropriate rates forloans or CDs based both on the current market, and the customer’s profitability level. Thebank software is often tied to the customer service call director, which routes Goldcustomer calls to special Gold Service teams, and provides only minimal service forunprofitable customers.Customers who visit branch offices cost the bank considerable money. It is much moreeconomical for customers to use an ATM, mail, or PC banking. For this reason, somebanks have tried to discourage branch visits by charging a fee. Profitability analysisshows that such policies may be a serious mistake. As the above chart indicates, branchesare visited most by two groups: the most profitable and the least profitable. Policies thatturn away unprofitable customers may also turn off Gold customers.Beyond ProfitabilityProfitability only measures the past. Lifetime value projects this into the future, and looksat what each customer can do for the bank in the coming years. Fleet Bank, for example,determines customer profitability and lifetime value each month, and also computespotential lifetime value if the customer can be talked into purchasing the most likely nextproducts. In this way, Fleet manages its customer relationships in a highly professionalmanner. We will be covering lifetime value in a future article.What are marketer’s roles in this revolution in banking customer management? Databasemarketing analysts should:Have profitability computation software available 16
    • Assist banks in creating marketing customer profitability customer segmentsHelp to create “Next best product” softwareHave the results of this program appear on customer contact screens throughout the bankAssist banks in moving their customers towards profitability, using these new techniques. 17
    • 1.2.1: Need of the study:The new millennium has brought along challenges and opportunities in the various fieldsof economic activities including banking. The entry of various private sector and foreignbanks exposed the inefficiencies in the public sector banks. This paper focuses on theachievement and performance of Public Sector Banks vis-à-vis Private Sector Banks andForeign Banks. The parameters selected for evaluation of performance of variouscategories of banks are profitability and productivity. The time period for theperformance analysis has been chosen as 2003-04 to 2007-08.This paper comparesvarious categories of banks on their productivity and profitability and also measures theimpact of the recent slowdown on the Indian banking sector.1.2.2: Objectives of the study 5. To compare the profitability and productivity of the public sector banks vis-à-vis with the private sector banks and foreign banks for the past 5 years i.e. from 2003-2004 to 2007-2008. 6. To study the market performance of the various sector banks i.e. Public, Private & Foreign Banks. 7. To analyze the impact of recent slowdown on the various sector Banks in India. 8. To study the recent developments in the Indian banking sector. 18
    • 1.2.3: Scope of the study:The scope of the study is limited to the Indian Banking Sector only. For the purpose ofthis study only those banks which are operating in India are taken into consideration.Study period is limited between the time frame of 2004-2008.1.2.4: Research Methodology:Research methodology is a way to systematically solve the research problem. Theresearch methodology includes the various methods and techniques for conducting aresearch. “Marketing Research is the systematic design, collection analysis and reportingof data and finding relevant solution to a specific marketing situation or problem.” D.Slesinger and M. Stephenson in the encyclopedia of social sciences define Research as“the manipulation of things, concept or symbols for the purpose of generalizing toextend, correct or verify knowledge, whether that knowledge aid n construction of theoryand practice of an art.Research is thus an original contribution to the existing stock of knowledge making forits advancement. The purpose of research is to discover the answers to the questionsthrough the application of scientific procedures.1.2.4.1 Defining the Research Problem and Objectives: It is said, “A problem welldefined is half solved”. The first step in research methodology is to define the problemand deciding the research objective. The objective of this study is to know about the“Investors Perception towards Credit Rating”1.2.4.2 Research Design: Research Design is a blueprint or framework for conductingthe research project. It specifies the details of the procedures necessary for obtaining the 19
    • information needed to structure and solve marketing research problem. The researchdesign of the study is diagnostic research.1.2.4.3 Sampling design: sampling can be defined as the section of some part of anaggregate or totality on the basis of which judgment or an inference about aggregate ortotality is made. The steps involved in sampling design are as follows:1.2.4.3(1) Universe: Universe refers to the total of the units in field of inquiry. This studyis restricted to Indian Banking Sector only.1.2.4.3(2) Sampling unit: Sampling frame is the representation of the elements of thetarget population. Sampling unit of this study is the Public, Private and foreign sectorbanks in India.1.2.4.3(3) Sampling size: sampling size is the total no. of units which we covered in thestudy.The sample used for the study is as follows:1. 10 public sector banks,2. 08 Private sector banks consisting of old private sector and new private sector banks.3. 10 Foreign Banks in India.PUBLIC SECTOR FOREIGN BANKS PRIVATE BANKSBANKS ABN Amro BankAndhra Bank N.V. ICICI BANKBank of Baroda Bank of America NA AXIS BANKCanara Bank Barclays Bank PLC YES BANKIndian Overseas Bank Citibank N.A. LAKSHMI VILAS BANKOriental Bank of HSBC KARUR VYSYA BANK 20
    • Commerce DEVELOPMENT CREDITPunjab National Bank Deutsche Bank AG BANK JPMorgan ChaseState Bank of India Bank KOTAK MAHINDRA BANKUCO Bank Societe Generale CITY UNION BANKUnited Bank of India BNP Paribas The Bank of NovaVijaya Bank Scotia (Table 1.4)1.2.4.3(4) Sampling Techniques: Sampling Technique used in this study is ConvenientSampling.Convenient sampling: it is that type of sampling where the researcher selects the sampleaccording to his or her convenience.1.2.4.4 Data Collection and Analysis: Data can be collected in two ways1.2.4.4 (a) Primary data: Primary data are those, which are collected a fresh and for thefirst time and thus happen to be original in character. It is the backbone of any study.1.2.4.4 (b) Secondary data: Secondary data are those which have already been collectedby someone else and which have already been passed through the statistical process. Inthis case one is not confronted with the problems that are usually associated with thecollection of original data. Secondary data either is published data or unpublished data.1.2.4.5 Source of data: The study is based on secondary data collected from the variousvolumes of banking statistics published by Reserve Bank of India and Indian BankingAssociation (IBA). The variables studied are interest paid; interest earned, total depositsand advances, non operating income and expenses.1.2.4.6 Data Analysis Tools: A five years period (2003-2004 to 2007-2008) has beenselected for evaluating the performance. The logic of selection of this period is to find out 21
    • the impact of government’s decontrolled and liberalized policies on public sector banksas compared to other categories of banks like private sector banks and foreign banks.The other reason is that the new private sector banks, which are having major share inasset holding, started their business commercially from the year 1996 onwards; tosegregate the overall result of the new private sector banks it is more appropriate to selectthis period. The study uses Ratio analysis to compare profitability and business peremployees and profit per employees to compare the productivity of different categories ofbanks. Ratio analysis is a powerful tool of financial analysis. In financial analysis ratiosare generally used as benchmarks for evaluating a firm’s position or performance. Theabsolute values may not provide us meaningful values until and unless they are related tosome other relevant information. Ratios represent the relationship between two or morevariables. Ratios help to summarize large data to draw qualitative judgments about thefirm’s performance.Ratio used for the measuring the profitability:Net Profit Ratios: Net Profit/Total Income*100Return On Net Worth: Net Profit/Net Worth*100Capital adequacy ratio: Capital/Risk*100net profit, total income.Formula used for measuring the productivity:Business per Employees: Business/Number of EmployeesProfit Per Employees: Profit/ Number Of Employees 22
    • Chapter-2Introduction to Indian BankingHistoryBanking system in IndiaBanks in IndiaThe status of the banks in Indiaas on December 2008 23
    • 2.1: Introduction:The new millennium has brought along challenges and opportunities in the various fieldsof economic activities including banking. The entry of various private sector and foreignbanks exposed the inefficiencies in the public sector banks. . Indian banking, which wasoperating in a highly comfortable environment till the beginning of the 1990s, has beenpushed into the choppy water of intense competition. The modern banking activity ismarked by itineraries into un-chartered horizons mingled with risks and heavycompetition. Immediately after nationalization, the Public Sector Banks spread theirbranches to remote areas at a rapid pace Their main objective was to act on behalf of thegovernment to fulfill economic obligations towards the common man. They acted overenthusiastically in penetrating into far-flung and remote corners of the country. Thesocial responsibility that was entrusted upon the Public sector Banks digresses them fromthe profit motive. On the other hand private and foreign banks did not make such moves.Instead, they pursued profit making as the objective for their operations.In 1992 the RBI launched banking sector reforms, as per the recommendations made bythe Narasimhan Committee on financial reforms to create a more profitable, efficient andsound banking system. The reforms opened the banking sector for private players.Domestic private sector banks are divided into two categories old banks which existedwith the public sector banks before the entry deregulation and the new banks that cameinto existence after the reforms of 1992. The old banks are smaller in size and are 24
    • regional. In contrast the new private sector banks are much larger in size, operateprimarily in metros and are technologically superior. Interestingly, unlike manydeveloping countries, where the government owned financial institutions own majorequity of the private banks, the equity share holders of the old private sector banks weremainly non government bodies. However, most of the new private sector banks, in Indiaare promoted by the government owned financial Institutions. These banks, too, are in theprocess of reducing promoter’s stake by raising funds through the capital marketrepresents the banking system in India.The emergence of New Private Sector Banks in 1995 exposed the inefficiencies of thepublic sector banks. New Private Sector Banks have set a blistering pace of growth,easily beating the growth rate of Public Sector Banks. The business share for PrivateSector Banks is very small but their share in the total net profit of the banking system isdisproportionately high. Just like in any other business, profit in banking acts as astimulant factor for management to expand and improve their services. Though Profitmaximization is secondary for Public Sector Banks, adequate profit is necessary for theirsurvival and healthy operations because even socio-economic obligations, like branchexpansion in rural areas and priority sector advances cannot be fulfilled without adequateprofit.2.2: History of Banking in IndiaWithout 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 meetnew challenges posed by the technology and any other external and internal factors.For the past three decades Indias banking system has several outstanding achievementsto its credit. The most striking is its extensive reach. It is no longer confined to onlymetropolitans or cosmopolitans in India. In fact, Indian banking system has reached evento the remote corners of the country. This is one of the main reasons of Indias growthprocess.The governments regular policy for Indian bank since 1969 has paid rich dividends with 25
    • the nationalization of 14 major private banks of India.Not long ago, an account holder had to wait for hours at the bank counters for getting adraft or for withdrawing his own money. Today, he has a choice. Gone are days when themost efficient bank transferred money from one branch to other in two days. Now it issimple as instant messaging or dial a pizza. Money have become the order of the day.The first bank in India, though conservative, was established in 1786. From 1786 tilltoday, the journey of Indian Banking System can be segregated into three distinct phases.They are as mentioned below: • Early phase from 1786 to 1969 of Indian Banks • Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. • New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991.To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II andPhase III.Phase IThe General Bank of India was set up in the year 1786. Next came Bank of Hindustanand Bengal Bank. The East India Company established Bank of Bengal (1809), Bank ofBombay (1840) and Bank of Madras (1843) as independent units and called it PresidencyBanks. These three banks were amalgamated in 1920 and Imperial Bank of India wasestablished which started as private shareholders banks, mostly Europeans shareholders.In 1865 Allahabad Bank was established and first time exclusively by Indians, PunjabNational Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, 26
    • and Bank of Mysore were set up. Reserve Bank of India came in 1935.During the first phase the growth was very slow and banks also experienced periodicfailures between 1913 and 1948. There were approximately 1100 banks, mostly small. Tostreamline the functioning and activities of commercial banks, the Government of Indiacame up with The Banking Companies Act, 1949 which was later changed to BankingRegulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank ofIndia was vested with extensive powers for the supervision of banking in India as theCentral Banking Authority.During those day’s public has lesser confidence in the banks. As an aftermath depositmobilization was slow. Abreast of it the savings bank facility provided by the Postaldepartment was comparatively safer. Moreover, funds were largely given to traders.Phase IIGovernment took major steps in this Indian Banking Sector Reform after independence.In 1955, it nationalised Imperial Bank of India with extensive banking facilities on alarge scale specially in rural and semi-urban areas. It formed State Bank of India to act asthe principal agent of RBI and to handle banking transactions of the Union and StateGovernments all over the country.Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19thJuly, 1969, major process of nationalization was carried out. It was the effort of the thenPrime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the countrywere nationalised.Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980with seven more banks. This step brought 80% of the banking segment in India underGovernment ownership. 27
    • The following are the steps taken by the Government of India to Regulate BankingInstitutions 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 toapproximately 800% in deposits and advances took a huge jump by 11,000%.Banking in the sunshine of Government ownership gave the public implicit faith andimmense confidence about the sustainability of these institutions.Phase IIIThis phase has introduced many more products and facilities in the banking sector in itsreforms measure. In 1991, under the chairmanship of M Narasimham, a committee wasset up by his name which worked for the liberalisation of banking practices.The country is flooded with foreign banks and their ATM stations. Efforts are being putto give a satisfactory service to customers. Phone banking and net banking is introduced.The entire system became more convenient and swift. Time is given more importance 28
    • than money.The financial system of India has shown a great deal of resilience. It is sheltered from anycrisis triggered by any external macroeconomics shock as other East Asian Countriessuffered. This is all due to a flexible exchange rate regime, the foreign reserves are high,the capital account is not yet fully convertible, and banks and their customers havelimited foreign exchange exposure.2.3: The banking system in IndiaAlmost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBsare still dominating the commercial banking system. Shares of the leading PSBs arealready listed on the stock exchanges.The RBI has given licenses to new private sector banks as part of the liberalisationprocess. The RBI has also been granting licensees to industrial houses. Many banks aresuccessfully running in the retail and consumer segments but are yet to deliver services toindustrial finance, retail trade, small business and agricultural finance.The PSBs will play an important role in the industry due to its number of branches andforeign banks facing the constraint of limited number of branches. Hence, in order toachieve an efficient banking system, the onus is on the Government to encourage thePSBs to be run on professional lines.Banks in IndiaIn India the banks are being segregated in different groups. Each group has their ownbenefits and limitations in operating in India. Each has their own dedicated target market.Few of them only work in rural sector while others in both rural as well as urban. Manyeven are only catering in cities. Some are of Indian origin and some are foreign players. 29
    • All these details and many more is discussed over here. The banks and its relation withthe customers, their mode of operation, the names of banks under different groups andother such useful informations are talked about.One more section has been taken note of is the upcoming foreign banks in India. The RBIhas shown certain interest to involve more of foreign banks than the existing onerecently. This step has paved a way for few more foreign banks to start business in India.Major Banks in India • ABN-AMRO Bank • Indian Bank • Abu Dhabi Commercial • Indian Overseas Bank Bank • IndusInd Bank • American Express Bank • ING Vysya Bank • Andhra Bank • Jammu & Kashmir Bank • Allahabad Bank • JPMorgan Chase Bank • Axis Bank (Earlier UTI • Karnataka Bank Bank) • Karur Vysya Bank • Bank of Baroda • Laxmi Vilas Bank • Bank of India • Oriental Bank of • Bank of Maharastra Commerce • Bank of Punjab • Punjab National Bank • Bank of Rajasthan • Punjab & Sind Bank 30
    • • Bank of Ceylon • Scotia Bank• BNP Paribas Bank • South Indian Bank• Canara Bank • Standard Chartered Bank• Catholic Syrian Bank • State Bank of India (SBI)• Central Bank of India • State Bank of Bikaner & Jaipur• Centurion Bank • State Bank of Hyderabad• China Trust Commercial Bank • State Bank of Indore• Citi Bank • State Bank of Mysore• City Union Bank • State Bank of Saurastra• Corporation Bank • State Bank of Travancore• Dena Bank • Syndicate Bank• Deutsche Bank • Taib Bank• Development Credit Bank • UCO Bank• Dhanalakshmi Bank • Union Bank of India• Federal Bank • United Bank of India• HDFC Bank • United Western Bank• HSBC • Vijaya Bank• ICICI Bank• IDBI Bank (Table 1.i) 31
    • Banking in IndiaCentral bank Reserve Bank of India Allahabad Bank · Andhra Bank · Bank of Baroda · Bank of India · Bank of Maharashtra · Canara Bank · Central Bank of India · Corporation Bank · Dena Bank · Indian Bank · Indian OverseasNationalized banks Bank · Oriental Bank of Commerce · Punjab & Sind Bank · Punjab National Bank · Syndicate Bank · Union Bank of India · United Bank of India · UCO Bank · Vijaya Bank · IDBI Bank State Bank of India · State Bank of Bikaner & Jaipur · State Bank of Hyderabad · State Bank of Indore · State Bank of Mysore ·State Bank Group State Bank of Patiala · State Bank of Saurashtra · State Bank of TravancorePrivate banks Axis Bank · Bank of Rajasthan · Bharat Overseas Bank · Catholic 32
    • Syrian Bank · Centurion Bank of Punjab · City Union Bank · Development Credit Bank · Dhanalakshmi Bank · Federal Bank · Ganesh Bank of Kurundwad · HDFC Bank · ICICI Bank · IndusInd Bank · ING Vysya Bank · Jammu & Kashmir Bank · Karnataka Bank Limited · Karur Vysya Bank · Kotak Mahindra Bank · Lakshmi Vilas Bank · Nainital Bank · Ratnakar Bank · SBI Commercial and International Bank · South Indian Bank · Tamil Nadu Mercantile Bank · Amazing Mercantile Bank · YES Bank ABN AMRO · Barclays Bank · Citibank India · HSBC · StandardForeign banks Chartered · Deutsche Bank · Royal Bank of Scotland South Malabar Gramin Bank · North Malabar Gramin Bank ·Regional Rural banks Pragathi Gramin Bank · Shreyas Gramin Bank Real Time Gross Settlement(RTGS) · National Electronic FundFinancial Services Transfer (NEFT) · Structured Financial Messaging System (SFMS) · CashTree · Cashnet · Automated Teller Machine (ATM) (Table 1.2) 33
    • ss(Chart 1.2) 34
    • Fact Files of Banks in IndiaThe first, the oldest, the largest, the biggest, get all such types of informations aboutBanking in India in this section.The first bank in India to be given an ISO Certification Canara BankThe first bank in Northern India to get ISO 9002 certification for Punjab and Sindtheir selected branches Bank Punjab NationalThe first Indian bank to have been started solely with Indian capital BankThe first among the private sector banks in Kerala to become a South Indian Bankscheduled bank in 1946 under the RBI ActIndias oldest, largest and most successful commercial bank,offering the widest possible range of domestic, international and State Bank of IndiaNRI products and services, through its vast network in India andoverseasIndias second largest private sector bank and is now the largest The Federal Bankscheduled commercial bank in India LimitedBank which started as private shareholders banks, mostly Europeans Imperial Bank ofshareholders IndiaThe first Indian bank to open a branch outside India in London in Bank of India,1946 and the first to open a branch in continental Europe at Paris in founded in 1906 in1974 MumbaiThe oldest Public Sector Bank in India having branches all over Allahabad Bank 35
    • India and serving the customers for the last 132 yearsThe first Indian commercial bank which was wholly owned and Central Bank ofmanaged by Indians India (Table 1.3)Bank of India was founded in 1906 in Mumbai. It became the first Indian bank to open abranch outside India in London in 1946 and the first to open a branch in continentalEurope at Paris in 1974.2.4: Status of the Indian Banking Sector as On December 2008:ASSETS: Rs.42, 76,328cr (in 2008) Foreign Banks, 8.53% Private Sector Public Sector Bank Bank, 21.29% Private Sector Bank Public Sector Foreign Banks Bank, 70.17% (Chart 1.3) 36
    • ADVANCES: Rs.24, 47,944 cr (in 2008) Foreign Banks, 6.61% Private Sector Public Sector Bank Bank, 20.46% Private Sector Bank Foreign Banks Public Sector Bank, 72.93% (Chart 1.4)NET PROFITS: Rs 42,506 cr (in 2008) Foreign Banks, 15.53% Public Sector Bank Private Sector Private Sector Bank Bank, 22.03% Public Sector Bank, Foreign Banks 62.44% (Chart 1.5) 37
    • Chapter-3Literature Review 38
    • Literature ReviewPerhaps because profitability was not the objective of Indian banks, there have not beenmany attempts to compare the profitability amongst the various categories of banks.Verma and Verma attempted to determine the determinants of profitability of SBIgroup, other nationalized and foreign banks in India.The study by Parsons, Gotlieb, and Denny (1993), is one of the studies that deal withthe impact of IT in banking productivity per se. They conclude from their estimation ofdata from five Canadian banks using transom production function that, while there is a17-23 percent increase in productivity with the use of computers, the returns are verymodest compared to the levels of IT investments.The other study to examine the effect of IT investment on both productivity andprofitability in the US retail banking sector is conducted by Prasad and Harker (1997).They conclude that additional investment in IT capital may have no real benefits and maybe more of strategic necessity to stay within the competition. However, the resultsindicate that there are substantially high returns to increase in investment in IT labor.A study by Das(1998), compares performance of Public Sector Banks for 3 years in thepost reform period, 1992, 95, 98. He notes that while there is a welcome increase inemphasis on non-interest income, Banks have tended to show risk averse behavior byopting for relatively risk free investments over risky loans.Shanmugam and Das(1999) reported that, in general, State bank group and private-foreign group banks have performed better than their counterparts during 1992-1999.Sarkar & Das (1999), compared performance of Public Sector Banks, Private Banks,and Foreign Banks for the year- 1994-95 on their profitability, productivity & financialmanagement. They found that Public Sector Banks compare poorly with the other twocategories of banks. 39
    • Another study by Ram Mohan (2000) covers a recent period, 1996-97 to 1999-2000. Hefound that over these years the profitability of the Public sector Banks did improve incomparison to the Private and Foreign Banks, but they have lagged behind in their abilityto attract deposits at favorable interest rates and have been slow in technology upgradation and improving staffing and employment practices, which may have negativeimplications on their longer–term profitability.Researchers have earlier opined that the major reason for declining bank profitability areincreasing pre-emption for CRR, SLR, rigorously structured interest rate, the burden ofsocial banking and enormous increase in the establishment cost. Recently, there has beenan increased amount of stress on soundness of the Balance Sheet as well as on theprofitability. It is recognized that Public Sector Banks must have a strong balance sheetand should be profitable. It also implies that bank interest and other earnings should besufficient to cover its financial & administrative expenses. Stronger balance sheet alsomeans that the banks have sufficient surplus for provisions of bad debts, tax liabilities &depreciation of financial assets, to pay dividends and to augment reserves. A bank’sstrong balance sheet also implies that it has sufficient capital & reserve to protect itsdepositors and other creditors from the risks it bears on its assets. The major reasonsidentified for the declining levels of profitability of Public Sector Banks aremismanagement, liquidity, credit polices, increased lending to priority & preferred sector,mounting agricultural over dues & incidences of sickness of industrial units, rise inoperation cost, lack of efforts in manpower planning according to Bist, Mishra &Balwal (2000).Ganeshan (2001), reveals by an empirical establishment of profit function that interestcost, interest income, deposits per branch, credit to total assets, proportion of prioritysector advances & interest income loss are significant determinants of the profits &profitability of Indian public sector banks. Sarkar found that the foreign banks weremore profitable and efficient than Indian banks and amongst the Indian Banks privatebanks were superior to the public sector banks. They also conclude that the non-tradedprivate sector banks are not significantly different from the public sector banks with 40
    • respect to profitability and efficiency, a result consistent with the property righthypothesis.Kaveri (2001) considered nine efficiency parameters; capital adequacy ratio, Net NPA aspercentage of Net advances, Net profit to total assets, Gross profit to working funds, netinterest income to total assets, interest expended to total assets, intermediation cost tototal assets and provisions and contingencies to total assets. It concludes no bank can beweak or potential weak all of a sudden. There is a gradual deterioration in the position ofdefault and profitability.Sathye (2002) studied the impact of privatization on banks performance and efficiencyfor the period 1998-2002 and found that partially privatized banks have performed betterthan fully public sector banks and they are catching up with the banks in the privatesector.Another important study undertaken by offsite monitoring and surveillance division ofdepartment of Banking Supervision (2002) used financial indicators to derive indirectlinkages by assuming computerization as one of the factor in the improvement inefficiency. They concluded that higher performance levels have been achieved withoutcorresponding increase in the number of employees. Also, it has been possible for PublicSector Banks and Old Private Banks to improve their productivity and efficiency over aperiod of five years.Sayuri, Shrai (2002) assessed the impact of reforms by examining the changes inperformance of banking sector. It found that the performance of public sector banksimproved in the second half of the 1990’s.B. Janki (2002) analyzed the effect of technology on labour productivity; he concludedefficiency can be enhanced by using technology to develop new products and motivationof work force. To conclude efficiency is a function of input efficiency and outputefficiency. Both input and output efficiency are function of many factors that arelocatives and technical in nature. 41
    • The other study conducted by Launardi, Becker and Macada (2003), foundcompetition, products and services, and customers, the main strategic variables affectingthe IT and there is no difference of opinion between IT executives and other functionalexecutives, regarding their perception of the impact of IT on strategic variables.According to the Business Standard banking annual Survey 2003, Indian Banksshowed a 52.3% growth in the net profit in the year 2002-2003. Public sector banksoutperformed the other category of banks bagging six of the top 10 slots. Only oneforeign Bank could make it to the top. The remaining three slots were occupied by theprivate banks.Choudhari and Tripathy (2004) applied DEA to measure the relative performance ofpublic sector banks and conclude that the Corporation Bank is the efficient in allindicators i.e. profitability, financial management, growth, productivity, and liquidity,while Oriental Bank of Commerce is next mostefficientSharad Kumar and M. Sreeramulu, 2007 the study compares the employeeproductivity and employee cost ratios between the traditional banks and modern banksfrom 1997 to 2008. The study concludes that the performance of the modern banks(foreign and new private sector banks) was much superior to the traditional banks (publicsector and old private sector banks). However, the gap between the performance ofmodern and traditional banks on all the five variables has shown a decreasing trend,which has significantly reduced during the period of 12 years under study, on account ofthe measures taken by the traditional banks during the period.R.K. Mittal and Sanjay Dhin 2007 studies show the impact of computerization onproductivity and profitability of Indian banks. This study founds that IT initiative werefound to be more efficient in productivity and profitability parameters than public sectorbanks.Deepak Tandon 2008, research on Performance variances & efficiency parameters of theIndian Public Sector Banks shows that the public sector banks (PSBs) continue to be a 42
    • dominant part of the banking system. As on March 31, 2008, the PSBs accounted for 69.9 per cent of the aggregate assets and 72.7 per cent of the aggregate advances of the Scheduled commercial banking system. This paper empirically defines and an attempt has been made by the authors to analyze technical efficiency of Public Sector Banks operating in India. Chapter-4Analysis of the profitability andproductivity of Public sectorbanks vis-à-vis with Privatesector banks and Foreign banks 43
    • Data Analysis & Interpretation:OBJECTIVE 1: To compare the profitability and productivity of the publicsector banks vis-à-vis with the private sector banks and foreign banks for the past 5years i.e. from 2003-2004 to 2007-2008.Productivity of Indian banks: Business per employee Profit per employee PUBLIC SECTOR BANKS (Rs. In Lakhs) (Rs. In Lakhs) 2006- 2007- 2005-06 2006-07 2007-08 2005-06 07 08Andhra Bank 427 536 627 3.69 4.14 4.30Bank of Baroda 396 555 710 2.13 2.73 3.94Canara Bank 442 549 609 3.02 3.24 3.65Indian Overseas Bank 355 467 583 3.22 4.04 4.82Oriental Bank of Commerce 570 743 924 5.37 5.61 5.84Punjab National Bank 331 407 505 2.48 2.68 3.66State Bank of India 299 357 456 2.17 2.37 3.73UCO Bank 387 464 580 0.82 1.30 1.76United Bank of India 254 350 463 1.18 1.59 1.99Vijaya Bank 369 455 613 1.16 3.04 3.32 (Table 2.1) 44
    • Interpretation:By analyzing the data of the public sector banks for the past 3 years i.e. from 2006 to2008 on the productivity of public sector banks, I found that during this period the publicsector bank shows a gradual increase in their business per employees as well as the profitper employees. During the year 2008 the public sector bank are rated as the best bankingsector in India. Business per employee Profit per employee FOREIGN BANKS (Rs. in Lakhs) (Rs. in Lakhs) 2006- 2007- 2005-06 2006-07 2007-08 2005-06 07 08 1,011.8 1,070.2ABN Amro Bank N.V. 905.82 8 6 8.15 11.36 7.66 1,924.8 1,920.8 2,483.5Bank of America NA 1 9 4 51.82 69.09 102.08Barclays Bank PLC 148.51 280.54 942.33 271.00 36.28 0.50 1,607.9 1,360.4 1,763.7Citibank N.A. 2 8 8 21.71 17.33 37.73 1,012.3HSBC 975.65 979.68 4 12.07 14.32 16.69 1,016.8 1,143.5 1,616.7Deutsche Bank AG 3 3 4 18.57 20.98 27.54 1,252.0 1,121.8 1,438.9JPMorgan Chase Bank 9 8 5 88.94 82.15 153.77 1,467.2 1,316.0 1,459.1Societe Generale 0 0 0 20.80 19.20 33.90BNP Paribas 1,206.0 1,353.0 1,950.0 6.29 19.00 36.00 45
    • 5 0 0 2,040.2 2,311.1 3,082.8The Bank of Nova Scotia 5 2 8 16.50 39.10 49.89 (Table 2.2)Interpretation:By analyzing the data of the foreign banks for the past 3 years i.e. from 2006 to 2008 onthe productivity of public sector banks, I found that during this period most of the foreignbanks which are taken for the study shows an increasing trend except ABN Amro Bankand Barclays Bank for the year ending 2008 in case of profit per employees.In case of the business per employees all the foreign banks shows that business peremployees is increasing y-o-y basis. Business per employee Profit per employee PRIVATE BANKS (Rs. in Lakhs) (Rs. in Lakhs) 2005- 2006- 2007- 2005- 2006- 2007- 06 07 08 06 07 08ICICI BANK 1017 1027 1008 8.7 9 10AXIS BANK 1020 1024 1174 8.69 7.59 8.39YES BANK 373.69 400.54 518.85 2.78 2.83 2.93LAKSHMI VILAS BANK 371 430 462.07 2.69 2.88 3.05KARUR VYSYA BANK 390 489 604 4.30 4.87 5.82DEVELOPMENT CREDITBANK 432 451 542 3.92 4.76 5.31KOTAK MAHINDRA BANK 634 648 755 6.43 7.79 13.82CITY UNION BANK 413 497 587 3.97 4.46 5.98 (Table 2.3) 46
    • Interpretation:By analyzing the data of the private sector banks for the past 3 years i.e. from 2006 toPrivate Sector March2008 March2007 March2006 bankICICI BANK 13.97 11.69 13.35AXIS BANK 13.75 11.57 11.08YES BANK 13.60 13.60 16.40LAKSHMI 12.73 12.43 10.79VILAS BANKKARUR VYSYA 12.58 14.51 14.79BANKDEVELOPMENT 13.38 11.34 9.66CREDIT BANKKOTAKMAHINDRA 18.65 13.46 11.27BANKCITY UNION 12.48 12.58 12.33BANK2008 on the productivity of public sector banks, I found that during this period the privatesector bank shows a gradual increase in their profit per employees.In case of the business per employees all banks excepts ICICI bank reported decrease inthe year 2008. The main reason for this was the world wide financial turmoil as well asthe rumors about the ICICI Bank in the market regarding their investment in the LehmanBrothers.ANALYSIS OF THE PROFITABILTY OF THE INDIAN BANKS:CAPITAL ADEQUACY RATIOS: (Figures in %age) 47
    • (Table 3.1)Interpretation:By analyzing the data of the private sector banks for the past 3 years i.e. from 2006 to2008 on the capital adequacy ratios, I found that during this period most of the privatesector banks have maintained their CAR above 12 % mark.As in the year 2008 RBI has prescribed that the Public sector banks have to maintainminimum 12% CAR in order to cope with the world over financial turmoil and its impacton the Indian economy. 48
    • Public Sector March2008 March2007 March2006 bankAndhra Bank 11.61 11.33 14.00Bank of 12.91 11.80 13.65BarodaCanara Bank 13.25 13.50 11.22Indian 11.96 13.27 13.04Overseas BankOriental Bank 12.12 12.51 11.04of CommercePunjab 12.96 12.29 11.95National BankState Bank of 12.64 12.34 11.88IndiaUCO Bank 10.09 11.56 11.12United Bank 11.88 12.02 13.12of IndiaVijaya Bank 11.22 11.21 11.94 (Table 3.2)Interpretation: 49
    • March2008 March2007 March2006Foreign bankABN Amro 12.92 11.34 10.44Bank N.V.Bank of 12.14 13.33 23.40America NABarclays Bank 21.11 13.68 22.92PLCCitibank N.A. 12.00 11.06 11.33HSBC 10.59 11.06 10.61Deutsche Bank 13.58 10.62 12.74AGJP Morgan 17.72 16.14 11.76Chase BankSociete 26.62 31.82 37.40GeneraleBNP Paribas 11.79 10.76 11.61The Bank of 20.15 23.26 13.17Nova ScotiaBy analyzing the data of the public sector banks for the past 3 years i.e. from 2006 to2008 on the capital adequacy ratios, I found that during this period most of the publicsector banks have maintained their CAR above 10 % mark. As in the year 2008 RBI hasprescribed that the Public sector banks have to maintain minimum 12% CAR in order tocope with the world over financial turmoil and its impact on the Indian economy.During the year 2008 RBI infuses the extra stimulus package to the public sector banks toimprove their CAR to 12% mark, so as the can meets the financial requirements of theIndian economy during the recessionary period. 50
    • (Table 3.3)Interpretation:By analyzing the data of the foreign banks for the past 3 years i.e. from 2006 to 2008 onthe capital adequacy ratios, I found that during this period most of the foreign banks havemaintained their CAR above 10 % mark. There are some of the foreign banks who hasmaintained their CAR at very high level e.g. Societe Generale, the bank of Nova Scotiaetc.In order to cope with the financial meltdown it is advisable to every banks to maintain atleast 10% to 12% CAR. 51
    • NET PROFIT RATIOS: (Figures in %age)PUBLIC March2008 March2007 March2006 March2005 March2004SECTORBANKSAndhra Bank 11.84 14.53 15.83 18.18 15.96Bank of 10.38 10.22 10.76 9.77 12.13BarodaCanara Bank 9.61 11.60 13.82 12.81 14.73IndianOverseas 13.94 16.18 16.44 14.27 11.40BankOriental Bank 11.38 15.35 12.54 19.44 17.03of CommercePunjab 12.68 12.53 14.50 13.84 11.45National BankState Bank of 11.67 10.12 11.21 11.56 9.79IndiaUCO Bank 5.75 5.68 4.29 8.97 11.69United Bank 8.07 8.81 7.96 4.90 0.91of IndiaVijaya Bank 8.65 11.12 5.23 17.87 16.75 (Table 4.1)Interpretation:By analyzing the data of the public sector banks for the past 5 years i.e. from 2004 to2008 on the net profit ratios (NPR), I found that during this period net profit ratios of themost of the public sector banks decrease in the year 2007-2008.The main reason for this decrease in the NPR is the financial turmoil in world overeconomy as well as the slowdown in the Indian economy. 52
    • Private Banks March2008 March2007 March2006 March2005 March2004ICICI BANK 10.51 10.81 14.12 16.32 13.67AXIS BANK 12.22 12.01 13.47 14.33 13.14YES BANK 12.01 12.06 19.08 -7.80LAKSHMI 4.37 3.76 6.02 1.21 11.03VILAS BANKKARUR VYSYA 16.12 16.47 17.67 16.28 22.12BANKDEVELOPMENT 5.29 1.75 -23.95 -46.62 3.93CREDIT BANKKOTAKMAHINDRA 10.37 8.84 12.97 15.35 20.57BANKCITY UNION 14.96 15.98 15.25 14.42 16.76BANK (Table 4.2)Interpretation:By analyzing the data of the public sector banks for the past 5 years i.e. from 2004 to2008 on the net profit ratios (NPR), I found that during this period net profit ratios of themost of the newly established private sector banks shows an increase in NPR, while themajor private sector banks reports slight decrease in their NPR in the year 2007-2008. Asper the study Kotak Mahindra Bank reported the highest NPR during 2008.The main reason for this decrease in the NPR is the financial turmoil in world overeconomy as well as the slowdown in the Indian economy. 53
    • March2008 March2007 March2006 March 05 March 04Foreign bankABN AmroBank N.V. 7.62253165 12.6471978 11.1584246 6.386141 8.228854Bank ofAmerica NA 35.4226627 29.4985518 35.1931551 39.99008 43.31145BarclaysBank PLC 0.51622543 25.6715997 15.6866841 14.05015 8.133511Citibank N.A. 21.4534649 15.7082318 21.4503972 20.35234 17.7084HSBC 16.80268 17.91448 24.13343 18.604 17.66209DeutscheBank AG 15.68463 13.42587 10.97491 12.39389 8.799836JPMorganChase Bank 30.00638 23.66957 22.53605 32.7424 39.14053SocieteGenerale 15.29787 10.61005 13.08971 13.77465 13.54177BNP Paribas 18.33869 14.45356 18.72151 60.46247 29.50082The Bank ofNova Scotia 21.6356528 22.3752913 20.699172 18.71046 19.73448 (Table 4.3)Interpretation:By analyzing the data of the foreign banks for the past 5 years i.e. from 2004 to 2008 onthe net profit ratios (NPR), I found that during this period net profit ratios of the most ofthe foreign banks shows an increase in NPR, excepts ABN Amro Bank, Barclays Bankand the Bank of Nova Scotia. 54
    • Return on Net worth: (Figures in %age)PUBLIC March2008 March2007 March2006 March2005 March2004SECTORBANKSAndhra Bank 17.71 17.04 16.77 28.31 31.90Bank of 12.99 11.86 10.54 12.02 18.84BarodaCanara Bank 18.86 17.51 19.13 18.51 26.07IndianOverseas 25.35 26.04 25.64 26.76 26.56BankOriental Bank 14.55 14.76 10.77 22.86 25.63of CommercePunjab 19.00 15.18 15.86 17.96 23.63National BankState Bank of 13.72 14.50 15.94 17.88 18.19IndiaUCO Bank 16.58 14.29 9.89 19.54 29.12United Bank 11.98 11.06 11.18 6.06 0.97of IndiaVijaya Bank 17.15 17.89 7.83 24.77 32.18 (Table 5.1)Interpretation:By analyzing the data of the public sector banks for the past 5 years i.e. from 2004 to2008 on the return on net worth (RONW), I found that during this period most of thepublic sector banks show an increase in RONW, except IOB, OBC, SBI & Vijaya Bank.The main reason for the falls in their RONW is that they are employing their funds eitherfor the branch expansion or diversifying their business. 55
    • Banks March2008 March2007 March2006 March2005 March2004ICICI BANK 8.94 12.79 11.43 15.97 20.43AXIS BANK 12.21 19.42 16.88 13.89 24.49YES BANK 15.16 11.98 9.66 -1.73LAKSHMI 6.04 4.43 7.72 1.45 18.11VILAS BANKKARUR VYSYA 17.50 15.05 15.52 13.84 22.61BANKDEVELOPMENT 6.04 2.23 -51.92 -82.06 6.56CREDIT BANKKOTAKMAHINDRA 8.17 8.50 13.67 11.21 12.98BANKCITY UNION 17.94 19.63 19.70 19.24 28.11BANK (Table 5.2)Interpretation:By analyzing the data of the public sector banks for the past 5 years i.e. from 2004 to2008 on the return on net worth (RONW), I found that during this period most of theleading private sector banks results a decrease in their RONW in the year 2008. Thereason for this can be financial meltdown in the world over economy.While the newly established private sector banks reported an increase in their RONW.The reason can be that they are meeting the needs of local people by way of providingloans and other benefits to SMEs and serving to rural areas. 56
    • March2008 March2007 March2006 March 05 March 04Foreign bankABN Amro 12.93 21.63 16.47Bank N.V. 14.25 13.25Bank of 14.61 11.69 9.63America NA 8.75 7.23Barclays Bank 0.20 6.57 11.75PLC 8.25 5.23Citibank N.A. 23.74 17.31 19.19 12.13 9.85HSBC 28.18 31.35 27.45 25.23 24.25Deutsche 12.39 13.42 9.90Bank AG 7.25 6.25JPMorgan 15.19 12.16 17.99Chase Bank 18.29 15.26Societe 11.19 6.44 5.14Generale 6.29 9.58BNP Paribas 13.62 10.24 4.38 8.53 5.24The Bank of 15.39 16.69 11.30Nova Scotia 14.25 12.34 (Table 5.3)Interpretation:By analyzing the data of the foreign banks for the past 5 years i.e. from 2004 to 2008 onthe return on net worth (RONW), I found that during this period there is a mixedresponse on the decrease & increase in RONW for the year 2007-2008. The banks whichresults an decrease in the year 2007 in RONW shows an increase in the year 2008 andvice versa. The main reason for the increase in the RONW can be that Govt. is nowproviding the bailed out packages to save their financial structure. While the other foreignbanks still waiting for the package. 57
    • PUBLIC March2008 March2007 March2006 March2005 March2004SECTORBANKAndhra Bank 4,567.63 3,453.62 2,885.75 2,669.88 2,778.12Bank of 3,916.75 3,332.32 13,133.81 9,548.59 7,293.92BarodaCanara Bank 18,306.70 15,524.19 11,571.85 9,099.08 8,299.02IndianOverseas 8,358.75 6,082.13 4,693.54 4,494.53 4,455.73BankOriental Bank 7,312.89 5,292.95 4,371.72 3,873.84 3,978.68of CommercePunjab 15,925.65 12,104.24 9,791.12 9,712.63 9,617.34National BankState Bank of 56,732.87 43,860.57 37,869.52 36,470.27 37,005.81IndiaUCO Bank 6,872.76 5,337.03 4,401.31 3,723.33 3,616.73United Bank 3,816.37 2,855.89 2,419.99 2,387.59 2,059.52of IndiaVijaya Bank 3,982.08 2,813.97 2,287.27 2,008.28 2,347.31Total Income:(Rs. In Crores) (Table 6.1)Interpretation:By analyzing the total income data of the public Sector Banks, I found that all the publicsector banks show an increase in their total income y-o-y. The main reason of theincrease in the total income is that they are opening new branches to expand theirbusiness in the rural and urban areas, in order to meet the requirement of the generalpublic. 58
    • Banks March2008 March2007 March2006 March2005 March2004ICICI BANK 39,467.92 28,457.13 17,517.83 11,838.10 10540.20AXIS BANK 8,750.68 5,461.60 3,594.46 2,299.23 2,115.52YES BANK 1,590.84 736.75 283.81 47.39LAKSHMI 561.51 454.27 352.82 267.17 365.48VILAS BANKKARUR VYSYA 1,276.81 958.28 758.13 630.56 718.77BANKDEVELOPMENT 680.57 406.31 343.61 328.16 430.41CREDIT BANKKOTAKMAHINDRA 2,834.38 1,597.99 911.43 552.87 382.58BANKCITY UNION 624.07 411.16 351.07 300.32 328.03BANK (Table 6.2)Interpretation:By analyzing the total income data of the private Sector Banks, I found that all the privatesector banks show an increase in their total income y-o-y. The main reason of theincrease in their total income is that they are opening new branches to expand theirbusiness in the rural and urban areas, in order to meet the requirement of the generalpublic. 59
    • Foreign bank March2008 March2007 March2006 March 05 March 04ABN Amro 2415.23 1523.42 3682.11 3046.92 2825.13Bank N.V.Bank of 423.23 312.25 861.68 662.88 583.21America NABarclays Bank 249.25 187.25 1191.34 354.75 287.25PLCCitibank N.A. 8410.11 5729.48 4123.56 3214.52 2514.23HSBC 7095.89 4720.26 3125.25 2829.23 2125.23Deutsche 1325.25 1025.36 2461.71 1625.37 1423.52Bank AGJPMorgan 312.5 215.25 830.19 451.17 418.13Chase BankSociete 125.23 105.23 263.37 208.67 185.26GeneraleBNP Paribas 712.81 440.03 289.56 123.25 153.25The Bank of 289.25 178.52 468.07 338.99 315.23Nova Scotia (Table 6.3)Interpretation:By analyzing the total income data of the foreign Banks, I found that all the foreign banksshow an increase in their total income y-o-y. The main reason of the increase in their totalincome is that they are opening new branches to expand their business in the urban areas,in order to meet to expand their operation. 60
    • PUBLIC March2008 March2007 March2006 March2005 March2004SECTORBANKAndhra Bank 575.57 537.90 485.50 520.10 463.50Bank of 204.27 175.55 1,435.52 1,026.46 826.96BarodaCanara Bank 1752.52 1,565.01 1,420.81 1,343.22 1,109.50IndianOverseas 1,202.34 1,008.43 783.34 651.36 512.76BankOriental Bank 353.22 580.81 537.32 726.07 686.07of CommercePunjab 2,048.76 1,540.08 1,439.31 1,410.12 1,108.69National BankState Bank of 6,729.12 4,541.31 4,406.67 4,304.52 3,681.00IndiaUCO Bank 412.16 316.10 196.65 345.65 435.42United Bank 318.95 267.28 -73.87 119.04 19.14of IndiaVijaya Bank 361.28 331.34 126.88 380.57 411.31NET PROFIT:(Rs. In crores) (Table 7.1)Interpretation:By analyzing the net profit data of the public Sector Banks, I found that all the publicsector banks show an increase in their net profit y-o-y. The main reason of the increase inthe total income is that they are opening new branches to expand their business in therural and urban areas, in order to meet the requirement of the general public. 61
    • Private Banks March2008 March2007 March2006 March2005 March2004ICICI BANK 4,157.73 3,110.22 2,540.07 2,005.20 1758.12AXIS BANK 1,071.03 627.23 485.08 334.58 278.31YES BANK 200.02 94.37 55.32 -3.76LAKSHMI 25.27 17.58 22.47 3.34 41.05VILAS BANKKARUR VYSYA 208.33 160.01 135.35 105.34 161.05BANKDEVELOPMENT 33.49 7.37 -85.26 -162.91 -0.38CREDIT BANKKOTAKMAHINDRA 293.93 141.37 118.23 84.89 78.73BANKCITY UNION 101.73 71.81 56.37 46.32 57.04BANK (Table 7.2)Interpretation:By analyzing the net profit data of the private Sector Banks, I found that all the privatesector banks show an increase in their net profit y-o-y. The main reason of the increase intheir total income is that they are opening new branches to expand their business in therural and urban areas, in order to meet the requirement of the general public. 62
    • Foreign bank March2008 March2007 March2006 March 05 March 04ABN Amro 154.24 125.36 280.67 385.35 315.24Bank N.V.Bank of 169.25 135.24 305.23 195.54 205.25America NABarclays Bank 35.02 15.23 6.15 91.07 45.06PLCCitibank N.A. 1804.26 900.00 884.52 654.23 445.23HSBC 1192.30 845.61 754.23 526.35 375.36Deutsche 164.25 90.23 386.11 218.22 156.23Bank AGJPMorgan 102.32 84.25 249.11 106.79 94.23Chase BankSociete 17.25 14.25 40.29 22.14 24.25GeneraleBNP Paribas 130.72 63.60 54.21 74.52 45.21The Bank of 54.12 35.23 101.27 75.85 65.25Nova Scotia (Table 7.3)Interpretation:By analyzing the net profit data of the foreign Banks, I found that all the foreign banksshow an increase in their net profit y-o-y. The main reason of the increase in their totalincome is that they are opening new branches to expand their business in the urban areas,in order to meet to expand their operation. 63
    • OBJECTIVE 2: To study the market performance of the various sectorbanks i.e. Public, Private & Foreign Banks. ICICI Bank Market performance of Private Sector AXIS Bank Banks Market Prices of the shares 1500 Yes Bank 1000 Lakshmi Vilas 500 Bank Karur 0 Vysya Bank Developm 1( 8) 3( 8) 3( 9) 1( 7) 3( 7) 1( 6) 3( 6) 1( 5) 3( 5) 1( 4) ) ent Credit 04 Q 00 Q 00 Q 00 Q 00 Q 00 Q 00 Q 00 Q 00 Q 00 Q 00 Bank 20 Kotak 2 2 2 2 2 2 2 2 2 2 1( Mahindra Q Bank Quaters City Union Bank (Chart 2.1) 64
    • Market Performance of Public Sector BanksMarket prices Andhra Bank 2500 Bank of Baroda 2000 Canara Bank 1500 IOB 1000 OBC 500 PNB 0 ) SBI ) ) ) ) ) ) 6 5 9 8 7 6 4 Q 00 Q 00 0 0 0 0 0 UCO Bank 0 0 0 0 0 (2 (2 (2 (2 (2 (2 (2 1 2 3 4 1 2 3 United Bank of Q Q Q Q Q India Vijaya Bank Quaters (Chart 2.2) Market Perform ance of Foreign Banks Bank of America Market Prices Barclays Bank 160 BNP Paribas 140 120 CITI Bank 100 80 Deutsche Bank 60 AG 40 JP Morgan 20 Chase Bank 0 The Bank of ) ) ) ) ) ) ) 7 6 4 9 8 6 5 Nova Scotia 0 0 0 0 0 0 0 HSBC 0 0 0 0 0 0 0 (2 (2 (2 (2 (2 (2 (2 1 3 4 1 3 2 2 ABN Amro BankQ Q Q Q Q Q Q Societe Quaters Generale (Chart 2.3) 65
    • INTERPRETATION:By analyzing the market performance of the Indian banking sector banks, I found thatduring the year 2008 all the banks market performance shows a decline at the market. Inthe beginning of the first quarter of the 2009 still the banks are unable to recover. Thereason can be that during this period the stock market shows a huge decline due to thewithdrawal made by the FIIs. In the beginning of the 2007 the most of the banks attainstheir peak levels as the market also attain the 21000 mark. Govt. taking all the necessarysteps to improve the performances of the banks but the condition of the market is soworse that it’s having no impact on the performance of the banks.Moreover, the RBIs use of reserve ratios, statutory liquidity ratio and cash reserve ratioas monetary policy tools affected banks profitability: No interest is paid on CRRbalances, and the interest yield on SLR securities is far lower than the yields on advances.By the time the RBI relaxed reserve requirements in October 2008, reducing CRR andSLR to 5 per cent and 24 per cent respectively -- from 9 per cent and 25 per cent -- theeffect on banks profitability was already apparent.For these reasons, after 2004-05, when banks net profitability margin peaked at 1.63 percent, their core profitability has been on a declining trend; by 2007-08, it had reached1.40 per cent. 66
    • OBJECTIVE 3: Impact of the recent slowdown on the Indian banking sectorThe Indian banking industry, which till now was considered to be insulated from theglobal crisis, may see the staggering impact of the slowdown. As per the considerationsof Associated Chambers of Commerce and Industry (Assoc ham), the sector has shownnegative trends in the results of the second quarter.Analyzing the quarterly results of 25 Indian banks on Bombay Stock Exchange (BSE),Indias apex chamber of commerce saw that while there is a 24 percent rise in the net nonperforming assets, there is a slip in the capital adequacy ratio (CAR) from 13.41 percentin FY08 to 12.68 percent in Q2 FY09. The non-performing assets (NPA) increased from 67
    • Rs.15, 462.84 FY 08 to Rs.17, 522.82 crore, with Karur Vysya Bank recording thehighest rise of 275.36 percent, from Rs.13.33 crore in Q2-07 to Rs.50.03 crore in Q2-FY09. However, 16 banks of those analyzed saw a fall in their CAR from the previousfiscal, with Axis bank registered the maximum decline in CAR from 17.59 percent in Q2FY 08 to 12.2 percent in Q2 FY 09. But there were banks like Yes Bank, City UnionBank, Karnataka Bank and Dena Bank who recorded a high CAR.The 25 banks analyzed include 15 public sector banks (PSBs) and 10 private sector banksand among them seven major PSBs recorded a significant decrease in net NPAs,including Central Bank of India (-87.39 percent), Oriental bank of Commerce (-82.18percent), Union Bank of India (-73.38 percent), Dena Bank (-17.24 percent), Bank ofIndia (-14.80 crore), Bank of Maharashtra (-7.75 crore) and Indian Bank (-1.54 percent)have shown improvement in net NPA levels. Whereas, among the private sector banksonly South Indian Bank registered an improvement in net NPAs by -29.82 percent.At a time when banks across countries have witnessed a sharp setback as a result of theglobal financial crisis, the Indian banking system has demonstrated much resilience. Ithad no direct exposures to any global toxic assets and has so far handled the financialcrisis relatively better, thanks to prudential measures taken by the Reserve Bank of India.In the last five years, demand for credit (bank credit in the last five years grew at around30 per cent annually) has grown in the same proportion as the growth in Indian economy(measured as GDP). However, the RBI’s cautious stance helped rein in the otherwiserapid-fire growth witnessed by the sector. The RBI used a variety of instruments such asMarket Stabilisation Scheme bonds, Liquid Adjustment Facility, Cash Reserve Ratio andStatutory Liquidity Ratio levers to ensure banks functioned in a well-regulatedenvironment.The first three quarters of this fiscal were eventful for the banking system, starting withfarmer debt waiver, derivative controversy, successive repo and CRR rate hikes, peakingyield followed by huge liquidity infusion post-Lehman Brothers’ failure (which furtherdeepened global liquidity crunch). 68
    • Advances GrowthWith the economy witnessing a slowdown, it may be logical to ask how the bankingcredit is yet to slow down. According to the RBI, the advances of all scheduledcommercial banks grew at a healthy 24 per cent till end of December 2008 compared tothe year-ago numbers. In the same period, deposits grew by 21 per cent. The majorcontributor to the credit growth was corporate credit just as term deposits aided depositgrowth.The primary reason for this growth is that with all other sources of income almost driedup, bank credit is one of the few sources of funding which most of the industries are ableto access. With corporate bonds’ spreads currently being very high, bank credit remains arelatively cheap source of credit. Higher pricing power, at a time of fund crunch, hashelped banks post higher advances growth and higher yield on advances which, in turn,helped sustain margins over the last few quarters. Further, the stimulus packages are alsolikely to support the credit growth. Higher margins in turn led to steady profit growth.Steady profit growthConsider the nine months of FY09 – net profit of 37 listed banks grew at 24 per cent. Therobust net profit growth can be attributed to a 30 per cent growth in net interest incomeand a 17 per cent growth in other income. Profit of the banks would have been higher butfor higher provisions and contingencies mainly on account of mark-to-market and assetquality provisions.The current economic slowdown may yet pose a challenge in sustaining this high netprofit growth. However, some banks such as Punjab National Bank, HDFC Bank andAxis Bank, aided by a higher proportion of low-cost deposits and higher net interestmargin, may be in a better position to sustain similar growth. 69
    • Asset Quality concernsAsset quality is a cause for concern for most of the banks, with banks such as ICICIBank, HDFC Bank, Kotak Mahindra Bank witnessing an increase in the proportion ofNPAs. Unsecured retail loan delinquencies contributed to higher slippages. In somecases, advances to SMEs have also seen some delinquencies. Could the marginallydeteriorating asset quality pose a systemic risk? Not necessarily.Most banks have capital adequacy ratio of more than 12 per cent and to further strengthenthe banking sector, the government has come up with re-capitalisation package worth Rs20,000 crore.This apart, restructuring of loans and interest rate cuts beginning to be resorted to, inrecent times, can also partially help maintain asset quality. This said, sound fundamentalsof the ‘real sector’ would be the key determinant of asset quality over the long term.The current slowdown in the real sector can hurt the financial sector in terms of assetquality as well as lower demand.To tackle this, some banks have resorted to lowering lending rates, especially in thehousing space, making home loans cheaper.Facts and figures:Performance of foreign Banks in terms of profitability:Foreign bank Mar-08 Mar-07 %age changeABN Amro Bank 280.67 385.35 -27.16491501N.V.Bank of America 305.23 195.54 56.09593945NABarclays Bank 6.15 91.07 -93.24695289PLC 70
    • Citibank N.A. 1804.26 900 100.4733333HSBC 1192.3 845.61 40.9988056Deutsche Bank AG 386.11 218.22 76.93611951JPMorgan Chase 249.11 106.79 133.2709055BankSociete Generale 40.29 22.14 81.97831978BNP Paribas 130.72 63.6 105.5345912The Bank of Nova 101.27 75.85 33.51351351Scotia (Table 8.1)Performance of public Sector Banks in terms of profitability:PUBLIC SECTOR Mar-08 Mar-07 %age change BANKSAndhra Bank 575.57 537.9 7.003160439Bank of Baroda 204.27 175.55 16.36001139Canara Bank 252.52 1,565.01 -83.86463984 71
    • Indian Overseas 1,202.34 1,008.43 19.22890037BankOriental Bank of 353.22 580.81 -39.18493139CommercePunjab National 2,048.76 1,540.08 33.02945302BankState Bank of India 6,729.12 4,541.31 48.17574665UCO Bank 412.16 316.1 30.38911737United Bank of 318.95 267.28 19.33178689IndiaVijaya Bank 361.28 331.34 9.036035492 (Table 8.2)Performance of private Sector Banks in terms of profitability: PRIVATE Mar-08 Mar-07 %age changeSECTOR BANKSICICI BANK 4,157.73 3,110.22 33.67961109AXIS BANK 1,071.03 627.23 70.75554422YES BANK 200.02 94.37 111.9529511LAKSHMI VILAS 25.27 17.58 43.74288965 72
    • BANKKARUR VYSYA 208.33 160.01 30.19811262BANKDEVELOPMENT 33.49 7.37 354.4097693CREDIT BANKKOTAK 293.93 141.37 107.9153993MAHINDRABANKCITY UNION 101.73 71.81 41.6655062BANK (Table 8.3)OBJECTIVE 4: Recent banking developments in IndiaThe Indian banking sector has witnessed wide-ranging changes under the influence of thefinancial sector reforms initiated during the early 1990s. The approach to such reforms inIndia has been one of gradual and non-disruptive progress through a consultative process.The emphasis has been on deregulation and opening up the banking sector to marketforces. The Reserve Bank has been consistently working towards the establishment of anenabling regulatory framework with prompt and effective supervision as well as thedevelopment of technological and institutional infrastructure. 73
    • Persistent efforts have been made towards adoption of international benchmarks asappropriate to Indian conditions. While certain changes in the legal infrastructure are yetto be effected, the developments so far have brought the Indian financial system closer toglobal standards.Statutory Pre-emptionIn the pre-reforms phase, the Indian banking system operated with a high level ofstatutory pre-emption, in the form of both the Cash Reserve Ratio (CRR) and theStatutory Liquidity Ratio (SLR), reflecting the high level of the country’s fiscal deficitand its high degree of magnetization. Efforts in the recent period have been focused onlowering both the CRR and SLR. The statutory minimum of25 per cent for the SLR was reached as early as 1997, and while the Reserve Bankcontinues to pursue its medium-term objective of reducing the CRR to the statutoryminimum level of 3.0 per cent, the CRR of the Scheduled Commercial Banks (SCBs) iscurrently placed at 5.0 per cent of NDTL (net demand and time liabilities). Thelegislative changes proposed by the Government in the UnionBudget, 2005-06 to remove the limits on the SLR and CRR are expected to providefreedom to the Reserve Bank in the conduct of monetary policy and also lend furtherflexibility to the banking system in the deployment of resources.Interest Rate StructureDeregulation of interest rates has been one of the key features of financial sector reforms.In recent years, it has improved the competitiveness of the financial environment andstrengthened the transmission mechanism of monetary policy. Sequencing of interest ratederegulation has also enabled better price discovery and imparted greater efficiency to theresource allocation process. The process has been gradual and predicated upon theinstitution of prudential regulation of the banking system, market behavior, financialopening and, above all, the underlying macroeconomic conditions. 74
    • Interest rates have now been largely deregulated except in the case of:(i) Savings deposit accounts;(ii) Non-resident Indian (NRI) deposits;(iii) Small loans up to Rs.2 lakh; and(iv) Export credit.After the interest rate deregulation, banks became free to determine their own lendinginterest rates.As advised by the Indian Banks’ Association (a self-regulatory organization for banks),commercial banks determine their respective BPLRs (benchmark prime lending rates)taking into consideration: (i) Actual cost of funds; (ii) Operating expenses; and (iii) A minimum margin to cover regulatory requirements of provisioning and capital charge and profit margin. These factors differ from bank to bank and feed into the determination of BPLR and spreads of banks. The BPLRs of public sector banks declined to 10.25-11.25 per cent in March 2005 from 10.25-11.50 per cent in March 2004.With a view to granting operational autonomy to public sector banks, public ownership inthese banks were reduced by allowing them to raise capital from the equity market of upto 49 per cent of paid-up capital. Permitting new private sector banks and more liberalentry of branches of foreign banks, joint-venture banks and insurance companies isfostering competition. Recently, a roadmap for the presence of foreign banks in India wasreleased which sets out the process of the gradual opening-up of the banking sector in atransparent manner. Foreign investments in the financial sector in the form of ForeignDirect Investment (FDI) as well as portfolio investment have been permitted.Furthermore, banks have been allowed to diversify product portfolio and business 75
    • activities. The share of public sector banks in the banking business is going down,particularly in metropolitan areas. Some diversification of ownership in select publicsector banks has helped further the move towards autonomy and thus provided someresponse to competitive pressures. Transparency and disclosure standards have beenenhanced to meet international standards in an ongoing manner.Prudential RegulationPrudential norms related to risk-weighted capital adequacy requirements, accounting,income recognition, provisioning and exposure were introduced in 1992 and graduallythese norms have been brought up to international standards. Other initiatives in the areaof strengthening prudential norms include measures to strengthen risk managementthrough recognition of different components of risk, assignment of risk-weights tovarious asset classes, norms on connected lending and risk concentration, application ofthe mark-to-market principle for investment portfolios and limits on deployment of fundsin sensitive activities.Keeping in view the Reserve Bank’s goal to achieve consistency and harmony withinternational standards and our approach to adopt these standards at a pace appropriate toour context, it has been decided to migrate to Basel II. Banks are required to maintain aminimum CRAR (capital to risk weighted assets ratio) of 9 per cent on an ongoing basis.The capital requirements are uniformly applied to all banks, including foreign banksoperating in India, by way of prudential guidelines on capital adequacy. Commercialbanks in India will start implementing Basel II with effect from March 31,2007. They will initially adopt the Standardized Approach for credit risk and the BasicIndicator • Approach for operational risk. After adequate skills have been developed, at both bank and supervisory level, some banks may be allowed to migrate to the Internal Ratings-Based (IRB) • Approach. Banks have also been advised to formulate and operational the Capital Adequacy 76
    • • Assessment Process (CAAP) as required under Pillar II of the New Framework.Some of the other regulatory initiatives relevant to Basel II that have been implementedby the Reserve Bank are:  Ensuring that banks have a suitable risk management framework oriented towards their requirements and dictated by the size and complexity of their business, risk philosophy, market perceptions and expected level of capital.  Introducing Risk-Based Supervision (RBS) in select banks on a pilot basis.  Encouraging banks to formalize their CAAP in alignment with their business plan and performance budgeting system. This, together with the adoption of RBS, should aid in fulfilling the Pillar II requirements under Basel II.  Expanding the area of disclosures (Pillar III) so as to achieve greater transparency regarding the financial position and risk profile of banks.  Building capacity to ensure the regulator’s ability to identify eligible banks and permit them to adopt IRB/Advanced Measurement approaches.  With a view to ensuring migration to Basel II in a non-disruptive manner, a consultative and participative approach has been adopted for both designing and implementing the New Framework. ASteering Committee comprising senior officials from 14 banks (public, private andforeign) with representation from the Indian Banks’ Association and the Reserve Bankhas been constituted. On the basis of recommendations of the Steering Committee, draftguidelines on implementation of the New Capital Adequacy Framework have been issuedto banks.In order to assess the impact of Basel II adoption in various jurisdictions and re-calibratethe proposals, the BCBS is currently undertaking the Fifth Quantitative Impact Study(QIS 5). India will be participating in the study, and has selected 11 banks, which form arepresentative sample for this purpose. These banks account for 51.20 per cent of marketshare in terms of assets. They have been advised to familiarize themselves with the QIS 5requirements to enable them to participate in the exercise effectively. The Reserve Bank 77
    • is currently focusing on the issue of recognition of the external rating agencies for use inthe Standardized Approach for credit risk.As a well-established risk management system is a pre-requisite for implementation ofadvanced approaches under the New Capital Adequacy Framework, banks were requiredto examine the various options available under the Framework and draw up a roadmapfor migration to Basel II. The feedback received from banks suggests that a few may bekeen on implementing the advanced approaches.However, not all are fully equipped to do so straightaway and are, therefore, looking tomigrate to the advanced approaches at a later date. Basel II provides that banks should beallowed to adopt/migrate to advanced approaches only with the specific approval of thesupervisor, after ensuring that they satisfy the minimum requirements specified in theFramework, not only at the time of adoption/migration, but on a continuing basis. Hence,banks desirous of adopting the advanced approaches must perform a stringent assessmentof their compliance with the minimum requirements before they shift gears to migrate tothese approaches. In this context, current non-availability of acceptable and qualitativehistorical data relevant to internal credit risk ratings and operational risk losses, alongwith the related costs involved in building up and maintaining the requisite database, isexpected to influence the pace of migration to the advanced approaches available underBasel II.Exposure NormsThe Reserve Bank has prescribed regulatory limits on banks’ exposure to individual andgroup borrowers to avoid concentration of credit, and has advised banks to fix limits ontheir exposure to specific industries or sectors (real estate) to ensure better riskmanagement. In addition, banks are also required to observe certain statutory andregulatory limits in respect of their exposures to capital markets.Asset-Liability ManagementIn view of the growing need for banks to be able to identify, measure, monitor andcontrol risks, appropriate risk management guidelines have been issued from time to timeby the Reserve Bank, including guidelines on Asset-Liability Management (ALM). These 78
    • guidelines are intended to serve as a benchmark for banks to establish an integrated riskmanagement system. However, banks can also develop their own systems compatiblewith type and size of operations as well as risk perception and put in place a propersystem for covering the existing deficiencies and the requisite upgrading.Detailed guidelines on the management of credit risk, market risk, operational risk, etc.have also been issued to banks by the Reserve Bank.The progress made by the banks is monitored on a quarterly basis. With regard to riskmanagement techniques, banks are at different stages of drawing up a comprehensivecredit rating system, undertaking a credit risk assessment on a half yearly basis, pricingloans on the basis of risk rating, adopting the Risk-Adjusted Return on Capital (RAROC)framework of pricing, etc. Some banks stipulate a quantitative ceiling on aggregateexposures in specified risk categories; analyze rating-wise distribution of borrowers invarious industries, etc.In respect of market risk, almost all banks have an Asset-Liability ManagementCommittee. They have articulated market risk management policies and procedures, andhave undertaken studies of Behavioral maturity patterns of various components ofon-/off-balance sheet items.NPL ManagementBanks have been provided with a menu of options for disposal/recovery of NPLs (non-performing loans). Banks resolve/recover their NPLs through compromise/one timesettlement, filing of suits, DebtRecovery Tribunals, the Lok Adalat (people’s court) forum, Corporate DebtRestructuring (CDR), sale to securitisation/reconstruction companies and other banks orto non-banking finance companies(NBFCs). The promulgation of the Securitisation and Reconstruction of Financial Assetsand Enforcement of Security Interest (SARFAESI) Act, 2002 and its subsequentamendment have strengthened the position of creditors. Another significant measure hasbeen the setting-up of the Credit Information Bureau for information sharing on 79
    • defaulters and other borrowers. The role of Credit Information Bureau of India Ltd.(CIBIL) in improving the quality of credit analysis by financial institutions and banksneed hardly be overemphasized. With the enactment of the Credit InformationCompanies (Regulation) Act, 2005, the legal framework has been put in place to facilitatethe full-fledged operationalisation of CIBIL and the introduction of other credit bureaus.Board for Financial Supervision (BFS)An independent Board for Financial Supervision (BFS) under the aegis of the ReserveBank has been established as the apex supervisory authority for commercial banks,financial institutions, urban banks and NBFCs. Consistent with international practice; theBoard’s focus is on offsite and on-site inspections and on banks’ internal control systems.Offsite surveillance has been strengthened through control returns. The role of statutoryauditors has been emphasized with increased internal control through strengthening of theinternal audit function. Significant progress has been made in implementation of the CorePrinciples for Effective Banking Supervision. The supervisory rating system underCAMELS has been established, coupled with a move towards risk-based supervision.Consolidated supervision of financial conglomerates has since been introduced with bi-annual discussions with the financial conglomerates. There have also been initiativesaimed at strengthening corporate governance through enhanced due diligence onimportant shareholders, and fit and proper tests for directors.A scheme of Prompt Corrective Action (PCA) is in place for attending to banks showingsteady deterioration in financial health. Three financial indicators, viz. capital to risk-weighted assets ratio(CRAR), net non-performing assets (net NPA) and Return on Assets (RoA) have beenidentified with specific threshold limits. When the indicators fall below the threshold 80
    • level (CRAR, RoA) or go above it (net Naps), the PCA scheme envisages certainstructured/discretionary actions to be taken by the regulator.The structured actions in the case of CRAR falling below the trigger point may include,among other things, submission and implementation of a capital restoration plan,restriction on expansion of risk weighted assets, restriction on entering into new lines ofbusiness, reducing/skipping dividend payments, and requirement for recapitalisation.The structured actions in the case of RoA falling below the trigger level may include,among other things, restriction on accessing/renewing costly deposits and CDs, arequirement to take steps to increase fee-based income and to contain administrativeexpenses, not to enter new lines of business, imposition of restrictions on borrowingsfrom the inter bank market, etc.In the case of increasing net Naps, structured actions will include, among other things,undertaking a special drive to reduce the stock of Naps and containing the generation offresh Naps, reviewing the loan policy of the bank, taking steps to upgrade credit appraisalskills and systems and to strengthen follow-up of advances, including a loan reviewmechanism for large loans, following up suit-filed/decreed debts effectively, putting inplace proper credit risk management policies/processes/procedures/prudential limits,reducing loan concentration, etc.Discretionary action may include restrictions on capital expenditure, expansion in staff,and increase of stake in subsidiaries. The Reserve Bank/Government may take steps tochange promoters/ ownership and may even take steps to merge/amalgamate/liquidate thebank or impose a moratorium on it if its position does not improve within an agreedperiod.Technological InfrastructureIn recent years, the Reserve Bank has endeavored to improve the efficiency of thefinancial system by ensuring the presence of a safe, secure and effective payment andsettlement system. In the process, apart from performing regulatory and oversightfunctions the Reserve Bank has also played an important role in promoting the system’s 81
    • functionality and modernization on an ongoing basis. The consolidation of the existingpayment systems revolves around strengthening computerized cheque clearing, andexpanding the reach of Electronic Clearing Services (ECS) and Electronic FundsTransfer (EFT). The critical elements of the developmental strategy are the opening ofnew clearinghouses, interconnection of clearinghouses through the Indian FinancialNetwork (INFINET) and the development of a Real-Time Gross Settlement (RTGS)System, Centralized Funds ManagementSystem (CFMS), a Negotiated Dealing System (NDS) and the Structured FinancialMessaging System(SFMS). Similarly, integration of the various payment products with the systems ofindividual banks has been another thrust area.An AssessmentThese reform measures have had a major impact on the overall efficiency and stability ofthe banking system in India. The dependence of the Indian banking system on volatileliabilities to finance its assets is quite limited, with the funding volatility ratio at -0.17 percent as compared with a global range of -0.17 to 0.11 per cent. The overall capitaladequacy ratio of banks at end-March 2005 was12.8 per cent as against the regulatory requirement of 9 per cent which itself is higherthan the Basel norm of 8 per cent. The capital adequacy ratio was broadly comparablewith the global range. There has been a marked improvement in asset quality with thepercentage of gross Naps to gross advances for the banking system declining from 14.4per cent in 1998 to 5.2 per cent in 2005.Globally, the NPL ratio varies widely from a low of 0.3 per cent to 3.0 per cent indeveloped economies, to over 10.0 per cent in several Latin American economies. Thereform measures have also resulted in an improvement in the profitability of banks. RoArose from 0.4 per cent in the year 82
    • 1991-92 to 0.9 percent in 2004-05. Considering that, globally, RoA was in the range -1.2 to 6.2 per cent for 2004, Indian banks are well placed. The banking sector reforms have also emphasized the need to review manpower resources and rationalize requirements by drawing up a realistic plan so as to reduce operating cost and improve profitability. The cost to income ratio of 0.5 per cent for Indian banks compares favorably with the global range of 0.46 per cent to 0.68 per cent and vis-à-vis 0.48 per cent to 1.16 per cent for the world’s largest banks. In recent years, the Indian economy has been undergoing a phase of high growth coupled with internal and external stability characterized by price stability, fiscal consolidation, overall balance of payments alignment, improvement in the performance of financial institutions and stable financial market conditions and the service sector taking an increasing share, enhanced competitiveness, increased emphasis on infrastructure, improved market microstructure, an enabling legislative environment and significant capital inflows. This has provided the backdrop for a more sustained development of Chapter-5 financial markets and reform.Findings of the studyConclusionsLimitationsRecommendations andSuggestions 83
    • Findings of the study:The private sector banks have made tremendous strides in the last few years. It was inmid 1990s when Indian banking scenario witnessed the entry of some new private sectorbanks and in the period between 2002 -2007 these banks have grown by leaps andbounds. They have increased their incomes, asset sizes and outperformed their publicsector counterparts in many areas.Macroeconomic headwinds in 2006-07 and 2007-08 have resulted in substantialfluctuations in banks profitability. Rising interest rates in 2006-07 and the first half of 84
    • 2008-09 raised banks overall cost of borrowings; as yields on advances and investmentsdid not keep pace, banks profitability suffered.Moreover, the RBIs use of reserve ratios, statutory liquidity ratio?and cash reserve ratioas monetary policy tools affected banks profitability: No interest is paid on CRRbalances, and the interest yield on SLR securities is far lower than the yields on advances.By the time the RBI relaxed reserve requirements in October 2008, reducing CRR andSLR to 5 per cent and 24 per cent respectively -- from 9 per cent and 25 per cent -- theeffect on banks profitability was already apparent.For these reasons, after 2004-05, when banks net profitability margin peaked at 1.63 percent, their core profitability has been on a declining trend; by 2007-08, it had reached1.40 per cent.This growth was accompanied by a rapid branch expansion. The network of privatesector bank grew at almost three times of all scheduled commercial banks and more thanfour times that of public sector banks. The star performers among these banks were theHDFC Bank, ICICI Bank, and the Axis Bank. These big four expanded their branchnetwork at a rapid rate of 14-16 percent per annum in terms of compound growth rates.Another trend in the banking sector during this period was the increase in staff strengthby private sector banks, while the public sector banks and foreign banks witnessed adecline in the number of employees. The private sector banks recorded a compoundedgrowth of 24% in their staff strength. The decline in public sector bank staff can beattributed to restructuring and adoption of IT infrastructure.Rising Cost Of Deposits For Banks:The hardening of interest rates, acting in combination with a steady increase in CRRbetween 2004-05 and 2007-08 resulted in an across-the-board increase in banks overallcost of resources. 85
    • Further, strong credit growth, and a shift in the deposit-mix towards expensive term-deposits, added to the pressure on banks CoB. The Indian banking system experiencedcredit growth averaging 28 per cent annually between 2002-03 and 2006-07.To fund credit growth, banks started vying for big-ticket term-deposits. In addition, thetenure of term deposits started shrinking. Because interest rates were increasing, bankswere forced to re-price deposits at renewal. Pricing pressure and a paucity of retaildeposits compelled banks to offer higher interest rates on retail term-deposits.The double impact of business-led upward pressure on cost of deposits, and tightermonetary policies, saw banks cost of deposits rise to 6.1 per cent in 2007-08, from 5.1per cent in 2006-07.Yields Fail to Play Catch-UpRBIs liquidity tightening measures, especially the increase in CRR, left no option forbanks but to increase prime lending rates. Between 2005-06 and 2007-08, banksincreased their PLRs by 150 to 200 bps, causing yields on advances to increase to 8.56per cent in 2007-08 from 7.92 per cent in 2006-07.Although yields did increase to some extent, they did not keep pace with the sharpincrease in CoB. Banks also suffered because of the negative carry on SLR portfolios, asterm-deposit rates rose faster than yields on incremental SLR portfolios (yield on 10-yeargovernment securities moved in the range of 7.48-8.32 per cent during 2007-08).The combined effect of increasing CoB, negative carry on SLR portfolios, and zerointerest on CRR, was to severely constrain banks spreads. The system average interestspread declined by 32 bps, to 2.31 per cent in 2007-08, from 2.63 per cent in 2006-07.Fee-Income Growth to ModerateSince 2003-04, banks have reported strong growth in fee revenues, a trend primarily ledby private banks focus on retail credit, distribution of third-party products such asinsurance and mutual funds, and provision of wealth management services. 86
    • After 2004-05, public sector banks also focused increasingly on fee-income generation asthe contribution from treasury operations declined.Sustained growth in retail credit (where banks charge up-front processing fees), andbuoyant capital markets, enabled the banking sector to increase the proportion of fee-based income (as a percentage of average funds deployed) to 1.14 per cent in 2007-08,from 1 per cent in 2005-06. CRISIL expects the contribution of fee-based income tobanks total income to reduce to around 1.09 per cent in 2008-09, and further to 1.05 percent in 2009-10, on account of the slowdown in retail credit growth, and weakerdistribution income because of sluggish capital market conditions.Opex Unlikely to ReduceMost public sector banks have sought to rein in their operating expenditure (Opex) byinvesting substantially in the implementation of core banking solutions, which will allowbanks to reduce their operating expenses over the medium-term - because of greateroperational integration and real-time processing of transactions.However, public sector banks operating expenses may increase over the next 18 months,on account of wage revisions due from November 2007.Core profitability to declineEquities: Between 2005-06 and 2007-08, banks recorded a significant growth in profitson sale of investments on account of buoyant equity markets. However, equity priceshave declined sharply since January 2008.Debt: In the past, banks also booked huge gains on their large bond portfolios whenyields were falling. However, banks had to provide for mark-to-market losses in 2007-08and the first quarter of 2008-09 as yields increased.A sharp fall in yields on government securities during the third quarter of 2008-09, afterthe repo rate cuts by RBI, helped Indian banks register a high level of income from POSIon debt. 87
    • The subsequent increase in the interest rates during the fourth quarter of 2008-09 couldnegate the benefit of treasury gains booked in the previous quarter, and significantlyaffect profits for 2008-09.The economic slowdown, declining spreads, and lower fee-income, are expected to resultin weakening profitability for Indian banks over the next two years.Private sector recorded a growth ranging from 30% to 68% in terms of capital, reservesand surplus. The deposits increased in the range of 32% to 51%, while the advancesshowed a growth trend between 39% to 71%. The net profits by private sector banksrecorded a compound annual growth of 27% to 36%. The table used for the study showsthe progress of private sector banks.But if we talk about the performance of the Indian banking sector in the year 2008, publicsector banks were reported as the best bank in terms of profitability, incomes anddeposits. The data of the performance of the Indian banking sector are shown belowwhich is published by the banking annual report of the business standard:ASSETS: Rs.42, 76,328cr (in 2008) Foreign Banks, 8.53% Private Sector Public Sector Bank Bank, 21.29% Private Sector Bank Public Sector Foreign Banks Bank, 70.17%ADVANCES: Rs.24, 47,944 cr (in 2008) 88
    • Foreign Banks, 6.61% Private Sector Public Sector Bank Bank, 20.46% Private Sector Bank Foreign Banks Public Sector Bank, 72.93%NET PROFITS: Rs 42,506 cr (in 2008) Foreign Banks, 15.53% Public Sector Bank Private Sector Private Sector Bank Bank, 22.03% Public Sector Bank, Foreign Banks 62.44%ConclusionsSince the process of liberalization and reform of the financial in the financial sector wereintroduced in 1991, banking sector has undergone major transformation. The underlyingobjectives of the reform were to make the banking system more competitive, productiveand profitable. As per the IBA report “Banking Industry Vision 2010” there would begreater presence of international players in the Indian Financial system and some of theIndian banks would become international players in the coming years. The key to successin the competitive environment is increased productivity and profitability. Indian banksespecially the public sector banks and the old private sector banks are lagging far behindtheir competitors in terms of both productivity and profitability with the exception of the 89
    • State bank of India and its associates. The other public sector banks and old private sectorbanks need to go for the major transformation program for increase their productivity andprofitability. I suggests three point program – reduce overstaffing, forge strategic alliancewith the rural regional banks to open up rural branches and increased use of technologyfor improved products and services for the same. In order to compete with the economicslowdown the bank should follows the RBI measures. Between 2005-06 and 2007-08,banks recorded a significant growth in profits on sale of investments on account ofbuoyant equity markets. However, equity prices have declined sharply since January2008. In the past, banks also booked huge gains on their large bond portfolios whenyields were falling. However, banks had to provide for mark-to-market losses in 2007-08and the first quarter of 2008-09 as yields increased. A sharp fall in yields on governmentsecurities during the third quarter of 2008-09, after the repo rate cuts by RBI, helpedIndian banks register a high level of income from POSI on debt. The subsequent increasein the interest rates during the fourth quarter of 2008-09 could negate the benefit oftreasury gains booked in the previous quarter, and significantly affect profits for 2008-09.The economic slowdown, declining spreads, and lower fee-income, are expected to resultin weakening profitability for Indian banks over the next two years. The subsequentincrease in the interest rates during the fourth quarter of 2008-09 could negate the benefitof treasury gains booked in the previous quarter, and significantly affect profits for 2008-09. RBI is taking steps time to time in order to cope with the economic slowdown. Inorder to this they have reduced many key rates. So in future it is expected that the indianbanks definitely recover from this financial turmoil.Limitation of the study: • Time constraint is one of the limiting factors to conduct this study properly. • Non availability of the data on productivity of the banks as well as the capital adequacy ratio data for the period 2004 and 2005. • Finding of the study is made on the basis of the analysis of the banks taken for the study and it can vary from person to person. 90
    • • The samples of the banks are taken on the convenience basis so as to meet the objectives of the study.Recommendations and Suggestions:Productivity and profitability are interrelated. Though productivity is not the sole factor,it is an important factor influencing profitability. The key to increase profitability isincreased productivity. Public sector banks have not been as profitable as the other banksup to 2007 primarily because of two reasons – Low Productivity and High Burden ratio.To overcome these drawbacks Public sector banks should chalk out a program to increaseproductivity. We have the following suggestions for the private sector banks. • They should reduce overstaffing – Though public sector banks have been trying to reduce the number of staff employed and has been successful in reducing the 91
    • number from 8.73 lakhs to 7.52 lakhs, but they need to improve further. They should go for a second round of VRS to reduce the staff further.• They should have a strategic tie up with the rural regional banks- for reaching the far-fetched areas instead of opening branches themselves in the areas which cannot provide them the break even business’s they should embrace latest technology• Indian public sector banks have a unique advantage over their competition in terms of their branch network and the large customer base, but it is the use of technology that will enable PSBs to build on their strengths. Foreign banks and the new private sector banks have embraced technology right from their inception and they have better adapted themselves to the changes in technology. Where as the public sector banks and old private banks have been slow in keeping pace with the changing technology, which is regarded as one of the major reason affecting their profitability and productivity• As in the year 2008 RBI has prescribed that the Public sector banks have to maintain minimum 12% CAR in order to cope with the world over financial turmoil and its impact on the Indian economy. During the year 2008 RBI infuses the extra stimulus package to the public sector banks to improve their CAR to 12% mark, so as the can meets the financial requirements of the Indian economy during the recessionary period.• As the RBI is taking the steps time to time to cope with the financial meltdown, for this they have reduced many rates e.g. CRR (9%-5%), Repo rate (9%-4.75%), Reverse repo rate (6%-3.25%), SLR (25%-24%). So the banks should also tries to reduce their PLR in order to compensate the rate cut made by the RBI. 92
    • Bibliography: • Gupta, S.K., Aggarwal, N. & Gupta, N. (2008), “Financial Institution & Markets”, Kalyani Publishers, New Delhi-110002 • Iyengar, V. (2007), “Introduction to Banking”, Excel Book Publishers, New Delhi-110028 • Juneja, C.M. & Bagga, R. (2007), “Accounting for Management”, Kalyani Publishers, New Delhi-110002. 93
    • • Pandey, I.M. (2007), “Financial Management”, Vikas Publishing House Pvt. Ltd., New Delhi-110014Reference: • Choudhari, S. & Tripathy, A. (2003-04) “Measuring Bank Performance: An Application of DEA”, Prajnan, Vol.32, No.4, pp. 287-304. • Dhin, S. & Mittal. R.K. (2007), “Assessing the Impact of Computerization on Productivity and Profitability of Indian Banks”, Delhi Business Review, Vol. 8, No.1, pp. 63-73. • Janki, B. (2002), “Unleashing Employee Productivity: Need for a Paradigm Shift”, Indian Banking Association Bulletin, Vol. 24, March, pp. 7-9 • http://www.iilm.edu/files/performance%20of%20indian%20public%20sector %20banks%20.pdf • Mittal, M. & Dhade A. (2007), “Profitability and Productivity in Indian Banks: A Comparative Study”, AIMS International, Vol.1,No. 2, pp.137-152. • Mohan, R. (2002), “Deregulation and Performance of Public Sector Bank”, Economic and Political Weekly, vol.50, No.12, pp. 1198- 1200. • Rudra, S. (2005), “Cost and Profit Efficiency of Indian Banks During 1986-2003”, Economic and Political Weekly, Vol. 50, pp. 1198-1200 • Sarkar, J., Sarkar, S. & Bhaumik, S. K. (1998), “Does Ownership Always Matter? Evidence from the Indian Banking Industry”, Journal of Comparative Economics, Vol. 26, pp.262-79 • Sathye, M. “Privatization, Performance, and Efficiency: A study of Indian Banks”, Vikalpa, Vol. 30, No. 1, pp. 7-16. • Shanmugam, K.R. & Das, A. “Efficiency of Indian commercial Banks during the reform period”, Applied Financial Economics, 2004, Vol. 14, pp. 681-686. 94
    • • http://www.aims-international.org/AIJM/1-2-4.pdf.• http://www.delhibusinessreview.com/v8n1/6.pdf.• http://www.bis.org/review/r060308e.pdf.• http://www.business-standard.com/special/bankannual/2003/overview.htm• http://www.blonnet.com/2003/09/03/stories/2003090300090900.htm• http://www.rbidocs.rbi.org.in/rdocs/Content/PDFs/Art_2.pdf• http://www.thehindubusinessline.com/2006/04/24/stories/2006042400170800.htm• http://finance.indiamart.com/investment_in_india/banking_in_india.html• http://finance.indiamart.com/investment_in_india/banks_in_india.html• http://finance.indiamart.com/investment_in_india/fact_files_india.html• http://en.wikipedia.org/wiki/Banking_in_India• http://en.wikipedia.org/wiki/Banking_in_India• http://www.bis.org/publ/bppdf/bispap28n.pdf.• http://www.blonnet.com/2009/02/27/stories/2009022751001900.htm• http://www.siliconindia.com/shownews/Indian_banking_sector_to_feel_the_pinc h_of_slowdown__Assocham__-nid-48560.html• http://en.wikipedia.org/wiki/Productivity• http://www.businessdictionary.com/definition/profitability.html• http://www.dbmarketing.com/articles/Art195.htm• http://money.rediff.com/companies/indian-overseas-bank/14030015• http://money.rediff.com/companies/state-bank-of-india/14030001• http://money.rediff.com/companies/punjab-national-bank/14030016• http://money.rediff.com/companies/uco-bank/14030017• http://money.rediff.com/companies/united-bank-of-india/14030059• http://finance.yahoo.com/q?s=BAC• http://finance.yahoo.com/q?s=ABN-PF• http://finance.yahoo.com/q?s=C• http://www.hsbc.co.in/1/2/homepage 95
    • • http://www.iba.org.in/ibacode.asp• http://www.iba.org.in/kbp/pubsecbanks3806.xls• http://www.iba.org.in/kbp/privatesecbanks3806.xls• http://www.iba.org.in/kbp/Foreignsecbanks3806.xls• http://finance.yahoo.com/q?s=GLE• http://economictimes.indiatimes.com/pricehistory.cms? companyID=11585&fromdate=&todate=&frequency=&numberofdmw=0&excha ngeid=0&pagesize=0&pagenumber=0&arc=0• http://economictimes.indiatimes.com/pricehistory.cms? companyID=11984&fromdate=&todate=&frequency=&numberofdmw=0&excha ngeid=0&pagesize=0&pagenumber=0&arc=0• http://economictimes.indiatimes.com/pricehistory.cms? companyID=9194&fromdate=&todate=&frequency=&numberofdmw=0&exchan geid=0&pagesize=0&pagenumber=0&arc=0• http://economictimes.indiatimes.com/pricehistory.cms? companyID=9175&fromdate=&todate=&frequency=&numberofdmw=0&exchan geid=0&pagesize=0&pagenumber=0&arc=0• http://economictimes.indiatimes.com/pricehistory.cms? companyID=12247&fromdate=&todate=&frequency=&numberofdmw=0&excha ngeid=0&pagesize=0&pagenumber=0&arc=0• http://economictimes.indiatimes.com/pricehistory.cms? companyID=4940&fromdate=&todate=&frequency=&numberofdmw=0&exchan geid=0&pagesize=0&pagenumber=0&arc=0• http://economictimes.indiatimes.com/pricehistory.cms? companyID=12258&fromdate=&todate=&frequency=&numberofdmw=0&excha ngeid=0&pagesize=0&pagenumber=0&arc=0• http://economictimes.indiatimes.com/pricehistory.cms? companyID=11713&fromdate=&todate=&frequency=&numberofdmw=0&excha ngeid=0&pagesize=0&pagenumber=0&arc=0 96
    • • http://economictimes.indiatimes.com/pricehistory.cms? companyID=9180&fromdate=&todate=&frequency=&numberofdmw=0&exchan geid=0&pagesize=0&pagenumber=0&arc=0 • http://economictimes.indiatimes.com/pricehistory.cms? companyID=12034&fromdate=&todate=&frequency=&numberofdmw=0&excha ngeid=0&pagesize=0&pagenumber=0&arc=0 • http://economictimes.indiatimes.com/currentquote.cms? ticker=Kotak+Mahindra+Bank+Ltd.&pagenumber=0&pagesize=30&matchcomp anyname=false&Submit=Go • http://money.rediff.com/companies/vijaya-bank/14030026 • http://money.rediff.com/companies/icici-bank-ltd-/14030056 • http://money.rediff.com/companies/axis-bank-ltd/14030047 • http://money.rediff.com/companies/kotak-mahindra-bank-ltd/14060005 • http://money.rediff.com/companies/karur-vysya-bank-ltd/14030037 • http://money.rediff.com/companies/development-credit-bank-ltd/14030104 • http://money.rediff.com/companies/andhra-bank/14030021Public sector banks market performance data: 97
    • DATE Andhra Bank of Canara IOB OBC PNB SBI Bank Baroda Bank31/03/2009 44.95 234.55 165.90 45.50 109.90 410.90 1,066.5531/12/2008 55.10 280.45 187.80 71.75 153.55 526.20 1,288.2530/09/2008 55.00 297.55 188.75 91.70 148.25 475.35 1,465.6530/06/2008 54.95 203.25 178.00 79.80 128.90 377.25 1,111.4531/03/2008 74.10 283.90 225.20 135.20 176.65 508.15 1,598.8531/12/2007 105.80 459.60 332.05 178.70 278.75 664.35 2,371.0028/09/2007 104.55 326.60 278.20 144.30 242.20 542.70 1,950.7029/06/2007 85.95 270.25 269.65 117.65 225.65 539.80 1,525.3030/03/2007 76.05 215.40 194.70 103.00 187.55 471.65 992.9029/12/2006 86.60 239.90 276.20 110.70 226.50 506.95 1,245.9029/09/2006 95.25 288.25 284.15 110.70 271.65 526.20 1,245.9030/06/2006 62.50 198.80 200.80 84.10 170.40 325.55 727.4031/03/2006 80.80 230.30 266.90 96.95 235.85 471.20 968.0530/12/2005 92.30 240.85 266.90 92.75 271.10 466.35 907.4530/09/2005 103.80 248.95 240.55 93.75 272.40 450.55 938.6030/06/2005 94.30 196.30 231.95 74.05 250.70 379.90 681.5531/03/2005 108.00 218.05 200.40 76.05 310.85 393.30 656.9531/12/2004 89.35 240.25 212.60 77.90 335.30 405.20 652.4530/09/2004 49.65 169.00 154.95 51.85 240.95 245.05 468.2030/06/2004 42.60 150.10 120.85 42.70 240.35 281.95 430.65 9831/03/2004 50.60 242.70 144.60 42.70 240.35 333.90 605.70
    • DATE UCO United Vijaya Bank Bank Of Bank India31/03/2009 24.00 147.25 26.2031/12/2008 28.50 163.00 33.5030/09/2008 34.10 143.50 36.1030/06/2008 32.00 109.40 34.2531/03/2008 36.95 141.00 49.6531/12/2007 59.25 206.35 85.3528/09/2007 47.95 163.30 70.1029/06/2007 23.75 132.30 49.8030/03/2007 21.40 103.90 42.5029/12/2006 21.20 122.65 47.1029/09/2006 22.70 136.35 56.7030/06/2006 16.85 90.40 39.5031/03/2006 26.55 121.85 52.5530/12/2005 25.20 122.10 60.8530/09/2005 30.00 134.70 63.1530/06/2005 26.90 108.00 58.5531/03/2005 30.30 113.05 64.3031/12/2004 37.30 108.85 72.8530/09/2004 18.90 73.45 46.0030/06/2004 19.70 57.80 40.7531/03/2004 22.25 52.70 61.45 99
    • Private sector banks market performance data: 100
    • Foreign banks market performance data:DATE ICICI AXIS Yes Lakshm Karur Develop Kotak City Bank Bank Bank i Vilas Vysya ment Mahindr Union Bank Bank Credit a Bank Bank Bank31/03/2009 332.60 414.50 49.90 63.15 200.50 18.90 282.95 12.2331/12/2008 448.35 504.65 75.15 68.55 221.05 21.60 357.30 14.5530/09/2008 534.85 720.50 120.65 92.05 298.80 35.70 554.80 22.9030/06/2008 630.20 603.65 114.25 73.15 295.20 46.40 461.20 23.4531/03/2008 770.10 781.15 168.75 98.80 335.85 85.40 628.55 27.9031/12/2007 1,232.40 967.10 249.05 147.75 420.40 145.10 1,296.20 400.5028/09/2007 1,063.15 764.40 206.80 115.80 333.85 123.25 921.65 220.3029/06/2007 955.30 605.00 179.90 76.50 313.00 105.10 672.50 211.5030/03/2007 853.10 490.15 140.70 78.05 256.95 69.95 479.65 161.4529/12/2006 890.40 469.05 134.85 82.95 267.50 56.55 399.40 163.2529/09/2006 699.05 379.20 92.30 572.55 331.80 121.2030/06/2006 487.40 266.75 78.10 491.50 242.70 92.9031/03/2006 589.25 356.35 100.40 538.30 278.00 112.0030/12/2005 584.70 286.35 68.55 573.10 223.80 92.9530/09/2005 600.35 265.50 66.50 433.90 199.35 102.2530/06/2005 421.55 247.15 62.30 407.65 391.65 88.6531/03/2005 393.00 242.05 481.10 340.50 84.0031/12/2004 370.75 185.20 319.85 284.30 95.3030/09/2004 286.05 129.95 303.10 182.30 66.2030/06/2004 244.40 129.60 315.15 347.65 79.00 10131/03/2004 295.90 146.75 357.15 404.10 68.55
    • DATE Bank of Barclays BNP CITI Deutsche JP Morgan America Bank Pariba Bank AG Chase Bank BANK Corporat PLC s ion31/03/2009 6.82 6.15 31.12 9.44 40.65 26.5831/12/2008 14.08 6.51 30.25 9.65 40.69 31.5330/09/2008 35.00 15.15 66.08 10.04 72.79 46.7030/06/2008 23.87 14.40 57.54 9.86 85.35 34.3131/03/2008 37.91 18.70 63.89 10.24 113.05 42.9531/12/2007 41.26 23.55 74.22 10.72 129.41 43.6528/09/2007 50.27 25.55 76.74 10.92 128.39 45.8229/06/2007 48.89 28.80 88.36 10.82 144.74 48.4530/03/2007 51.02 30.70 78.19 10.50 134.54 48.3829/12/2006 53.39 29.65 82.65 10.10 133.24 48.3029/09/2006 53.57 26.30 84.85 9.80 120.70 46.9630/06/2006 48.10 22.85 74.85 9.90 112.50 42.0031/03/2006 45.54 23.10 76.65 114.24 41.6430/12/2005 46.15 19.10 68.35 96.87 39.6930/09/2005 42.10 19.65 63.25 93.52 33.9330/06/2005 45.61 18.25 56.70 77.90 35.3231/03/2005 44.10 19.75 54.65 86.20 34.6031/12/2004 46.99 22.70 53.30 89.01 39.0130/09/2004 43.33 19.55 52.00 71.94 39.7330/06/2004 84.62 17.65 50.55 79.11 38.77 10231/03/2004 80.98 19.05 49.73 83.48 41.95
    • 103
    • DATE The Bank HSBC ABN Societe Of Nova AMRO Generale Scotia BANK31/03/2009 24.52 17.20 6.60 7.8231/12/2008 27.20 20.56 10.56 10.4030/09/2008 46.04 20.03 8.96 17.7930/06/2008 45.82 22.76 16.92 17.2531/03/2008 45.21 24.11 19.87 19.6031/12/2007 50.50 23.47 18.15 29.0528/09/2007 52.50 24.80 21.44 33.6029/06/2007 48.83 25.18 23.16 36.8030/03/2007 46.11 25.49 24.48 34.7829/12/2006 44.80 25.69 24.25 34.0529/09/2006 43.07 25.65 23.80 31.9030/06/2006 39.75 24.86 21.76 29.4531/03/2006 40.14 25.45 23.19 30.2030/12/2005 39.62 25.98 23.69 24.5030/09/2005 37.40 26.17 24.44 23.0030/06/2005 33.25 26.35 24.38 20.3831/03/2005 32.66 26.12 23.68 20.9031/12/2004 33.85 27.17 24.50 20.4530/09/2004 29.25 26.30 23.60 17.6530/06/2004 26.95 25.00 21.38 17.1031/03/2004 53.97 27.30 24.85 17.05 104
    • Abbreviations Used:CRR: Cash reserve ratioIBA: Indian Banking AssociationSLR: Statutory liquid ratiosCAR: Capital Adequacy ratiosRONW: Return on net worthNPR: Net Profit RatiosRBI: Reserve Bank of IndiaRs. RupeesRRBs: Regional rural banksPSBs: Public sector banks 105