Presented by, 8308 8310 8316 8329 8338
Agenda Performance of banking sector
New management challenges
Evolutionary Phase (prior to 1950) Foundation Phase (50s to 70s) Expansion Phase ( 70s to Mid 80s) Consolidation Phase ( Mid 80 – to 90s)
Reformatory Phase ( Since Liberalization)
Evolutionary Phase (prior to 1950) Enactment of the RBI Act in 1935 - new category of banks - Scheduled Banks some of these already been in existence since 1881. Prominent Scheduled banks: Allahabad bank 1865, Oudh Commercial bank 1881, Ajodhya Bank 1884, PNB 1894, Nedungaddi bank 1899 1901-1914: 12 more banks established: BOB 1906, Canara Bank 1906, Indian Bank in 1907, BOI in 1908, Central Bank of India 1911 In War period no development , heavy rush on banks and serious crisis… many banks perished. Post War and Independence as many as 20 scheduled banks came into existence. UBI in 1950 by the merger of 4 existing commercial banks,
In a span of 5-7 years figure rose to 81 but by 1968, 23 either liquidated or amalgamated into new banks leaving 58 scheduled banks in operation.
Focus on Class banking and security rather than on purpose. Emphasis on foundation of sound banking system in the country Consequently the phase witnessed the development of necessary legislative framework and as a result the ‘BANKING REGULATION ACT’ was passed in 1949 to conduct and control operations of the commercial banks in India. Foundation Phase (50s to 70s)
During the period number of Commercial banks declined remarkably.. From 566 banks in 1951 to 281 in 1961.
Expansion Phase ( 70s to Mid 80s) Socialization of banking in 1968. Commercial banks viewed as ‘ Agents of change’. Social control on banks. Since inadequacy was felt in this front, 14 banks were nationalized in 1969 and another 6 in 1980. Focus of activity- Priority sector. Although number of commercial banks declined from 281 in 1968 to 268 in 1984 As many as 50,000 bank branches were set up of which 3/4 th were in rural and semi urban areas.
Rapid growth - hardly any time to consider other issues - inefficiency and loss of control. As a result profitability came under strain.
Backdrop: In the early decades the banking system in India came to suffer from the following weaknesses: The banking system was localized in a few metropolitan and urban cities , neglecting the vast and potential rural areas as unbanked Enormous concentration of economic power existed in the certain sectors. In view of the above weaknesses it was necessary to align bank credit flows into broader areas. Need of Priority Sector Lending became the principle focus. (Agri, SMEs)
Poor customer service and staff productivity
Objectives of Nationalization of Banks To extend banking facilities to unbanked and under banked centers, specially in rural areas To ensure an increased flow of assistance to the neglected sectors To foster the growth of new and progressive entrepreneurs To give a professional bent to bank management with a view to removing the control of a few.
The other focus was to make the banks vibrant and potent instrument of development and making them a mass institution.
Consolidation Phase ( Mid 80 – to 90s) This was a phase of realization and consolidation of losses. The phase began in 1985 : consolidating the gains of branch expansion of banks and the relaxation of the tight regulation. Although number of scheduled banks increased from 264 in 1984 to 276 in 1980 branch expansion of the banks slowed down.
For the first time serious attention was paid to improving housekeeping, customer services, credit management, staff productivity and profitability.
However, this phase had to witness the worst days in the Agriculture and Rural debt portfolio. By this time 90% of the commercial banks were in the public sector and closely regulated in all its facets: Like prices of assets and liabilities were regulated by RBI, Prices of services were fixed uniformly by the IBA Composition of assets were also somewhat fixed in as much 63.5% of the bank funds were mopped up by the CRR & the SLR and the remaining was to be directed towards the priority sector. Salary structure was negotiated by the IBA
Thus there was no autonomy in vital decisions, and drive towards efficiency was almost non existent.
Reformatory Phase ( Since Liberalization) Continued financial profligacy (decadence) of the Government coupled with close monitoring and heavy control rendered the banking system on the verge of bankruptcy, and thus drastic reforms were inevitable. India, for the first time faced the problem in the International Market Defaulting on its international commitments External commercial credit markets was completely denied International credit ratings downgraded
Confidence in India eroded.
Some extraneous inefficiencies are: Over regulations led to weakening of the management functions Social control came to be synonymous with political control Trade unionism and muscle power making and internal management and poor work culture. Customer Service was yet another area of concern Huge expansion leads to no control Thus the Govt. had to initiate swift action to restore international confidence.
Various macro economic structural reformatory measures were undertaken in the field of Foreign trade, tax system, industrial policy and financial and other sectors……..
Recommendations of Narsimham Committee Phasing of reduction of Reserve Requirements SLR: 25% on the basis of incremental NDTL CRR reduced to 14% & then to 13% and so on Interest Rate on CRR Balances : (4%) Interest rate deregulation (PLR) Asset Classification : Income based, Loan assets Transparency : Banks were directed to disclose 7 critical ratios relating to productivity and profitability. Like break up of capital adequacy ratio, provisions made for the year, NPA %
Restructuring of the Banks
Performance of Indian Banking sector
Performance 56,640 branches or offices Public sector banks made up a large chunk of the infrastructure, with 87.7 per cent of all offices, 82% of staff and 60.3 % of all automated teller machines (ATMs). Foreign and new private banks grow at rates of 50 %, while PSBs improve their growth rate to 15 %. The share of the private sector banks (including through mergers with PSBs) increases to 35% of total sector assets.
The shares of banking sector value add in GDP over 7.7 per cent.
Total assets Rs corers Source : Indian banking association Public Sector Bank Private Sector Bank
Net Profit Rs corers Source : Indian banking association Public Sector Bank Private Sector Bank
Net NPA Rs corers Source : Indian banking association Public Sector Bank Private Sector Bank
Business Per Employee Rs in corers Source : Indian banking association Public Sector Bank Private Sector Bank
Return on Assets Source : Indian banking association Public Sector Bank Private Sector Bank
CREDIT SCENARIO Bank credit touched 24 per cent (y-o-y) on January 2, 2009 as against 21.4 per cent on January 4, 2008. The incremental credit-deposit ratio rose to 81.4 per cent as on January 2, 2009, as against 63.1 per cent as on January 4, 2008. The range for deposit rates for - Public sector Banks- 5.25 to 8.5 per cent, - Foreign Banks - 5.25 to 7.75 per cent - Private sector banks 4 to 8.75 per cent. The prime lending rates of public sector banks stood at 12 to 12.5 per cent, private sector banks at 14.75 to 16.75 per cent and foreign banks 14.25 to 15.50 per cent as on January 2009. Source:RBI Weekly Statistical Supplement released March 27, 2009
Bank loans rose 18.1 per cent on y-o-y basis as on March 13, the.
STRENGTHS Indian banks have f avorably on growth, asset quality and profitability . The banking index has grown at a compounded annual rate of over 51 per cent. Notable changes in policy and regulation to help strengthen the sector. Bank lending has been a significant driver of GDP growth and employment . Quality of assets and capital adequacy Overall high capital adequacy ratio of Indian banks Inherent strength of banks lie in the regulatory mandate of 24 per cent statutory liquidity ratio and 5.0 per cent cash reserve ratio
Indian banks have no direct exposure to the US sub-prime assets and the mark-to-market losses suffered by their foreign subsidiaries and branches have been modest.
changes in profile , Income, user
Challenges few customer segments and geographies
Customer oriented services
Challenges Compliances with RBI and others institutes
Scheduled Commercial Banks (SCBs)
Challenges Securitization of consumer-related loans: the initial source of increased leverage Structured finance vehicles (CDOs, SPVs, etc.): were a black box! Credit derivatives (CDSs): did not protect from counterparty risks Hedge funds: Investment strategies based on strong leverage Private equity funds: Business cases based on high gearing Asset Liability Management (ALM)
Asset distribution based on volumes, mixes, maturities, yields and costs
Strategic options with banks to cope with the challenges Management success will be determined on three fronts: fundamentally upgrading organizational capability to stay in tune with the changing market; adopting value-creating M&A as an avenue for growth;
continually innovating to develop new business models to access untapped opportunities.
Investing in state of the art technology as the back bone to ensure reliable service delivery Leveraging the branch network and sales structure to mobilize low cost current and savings deposits Making aggressive forays in the retail advances segment of home and personal loans Implementing organization wide initiatives involving people, process and Technology to reduce the fixed costs and the cost per transaction Focusing on fee based income to compensate for squeezed spread, (e.g. CMS, trade services) Innovating Products to capture customer 'mind share' to begin with and later the wallet share
Improving the asset quality as per Basel II norms
Transformation initiatives needed for banks Right sizing and Flexible structure. Change management and New mindset New rules of the game - Heightened competition
Diffused Customer loyalty
Current Key Ratios Source : Reserve Bank of India
References Commercial Banking by Benton ,Willey publications,3 rd edition
Introduction to Banking by Iyengar