about banking industry
TRANSCRIPT
7/30/2019 About Banking Industry
http://slidepdf.com/reader/full/about-banking-industry 1/6
About banking industry
Banking in India originated in the last decades first banks were The General Bank of India,
which started in 1786, and Bank of Hindustan, which started in 1770; both are now defunct.
The oldest bank in existence in India is the State Bank of India, which originated in the Bank
of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was
one of the three presidency banks, the other two being the Bank of Bombay and the Bank of
Madras, all three of which were established under charters from the British East India
Company. For many years the Presidency banks acted as quasi-central banks, as did their
successors. The three banks merged in 1921 to form the Imperial Bank of India, which, upon
India's independence, became the State Bank of India in 1955.
History:
Merchants in Calcutta established the Union Bank in 1839, but it failed in 1840 as a
consequence of the economic crisis of 1848-49. TheAllahabad Bank , established in 1865 and
still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank: A company
that issues stock and requires shareholders to be held liable for the company's debt) It was not
the first though. That honor belongs to the Bank of Upper India, which was established in
1863, and which survived until 1913, when it failed, with some of its assets and liabilities
being transferred to the Alliance Bank of Simla.
Foreign banks too started to app, particularly in Calcutta, in the 1860s. The Comptoird'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862;
7/30/2019 About Banking Industry
http://slidepdf.com/reader/full/about-banking-industry 2/6
branches inMadras and Pondicherry, then a French colony, followed. HSBC established itself
in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade
of the British Empire, and so became a banking center.
The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in
1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank , establishedin Lahore in 1895, which has survived to the present and is now one of the largest banks in
India.
Post independence :
The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal,
paralyzing banking activities for months. India's independence marked the end of a regime of
theLaissez-faire for the Indian banking. The Government of India initiated measures to play
an active role in the economic life of the nation, and the Industrial Policy Resolution adopted
by the government in 1948 envisaged a mixed economy. This resulted into greaterinvolvement of the state in different segments of the economy including banking and finance.
The major steps to regulate banking included:
The Reserve Bank of India, India's central banking authority, was established in April
1935, but was nationalized on January 1, 1949 under the terms of the Reserve Bank of
India (Transfer to Public Ownership) Act, 1948 (RBI, 2005b).[1]
In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of
India (RBI) "to regulate, control, and inspect the banks in India".
The Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could havecommon directors.
Nationalization:
Despite the provisions, control and regulations of Reserve Bank of India, banks in India
except the State Bank of India or SBI, continued to be owned and operated by private
persons. By the 1960s, the Indian banking industry had become an important tool to facilitate
the development of the Indian economy. At the same time, it had emerged as a large
employer, and a debate had ensued about the nationalization of the banking industry. Indira
Gandhi, thenPrime Minister of India, expressed the intention of the Government of India in
the annual conference of the All India Congress Meeting in a paper entitled"Stray thoughts
on Bank Nationalisation." [2] The meeting received the paper with enthusiasm.
Thereafter, her move was swift and sudden. The Government of India issued an ordinance
('Banking Companies (Acquisition and Transfer of Undertakings) Ordinance, 1969'))
and nationalised the 14 largest commercial banks with effect from the midnight of July 19,
1969. These banks contained 85 percent of bank deposits in the country.[2] Jayaprakash
Narayan, a national leader of India, described the step as a "masterstroke of political
sagacity." Within two weeks of the issue of the ordinance, the Parliament passed the Banking
Companies (Acquisition and Transfer of Undertaking) Bill, and it receivedthepresidential approval on 9 August 1969.
7/30/2019 About Banking Industry
http://slidepdf.com/reader/full/about-banking-industry 3/6
A second dose of nationalization of 6 more commercial banks followed in 1980. The stated
reason for the nationalization was to give the government more control of credit delivery.
With the second dose of nationalization, the Government of India controlled around 91% of
the banking business of India. Later on, in the year 1993, the government merged New Bank
of India with Punjab National Bank . It was the only merger between nationalized banks and
resulted in the reduction of the number of nationalised banks from 20 to 19. After this, untilthe 1990s, the nationalised banks grew at a pace of around 4%, closer to the average growth
rate of the Indian economy.
Adopting of banking technology:
The IT revolution had a great impact in the Indian banking system. The use of computers had
led to introduction of online banking in India. The use of the modern innovation and
computerisation of the banking sector of India has increased many fold after the economic
liberalisation of 1991 as the country's banking sector has been exposed to the world's market.The Indian banks were finding it difficult to compete with the international banks in terms of
the customer service without the use of the information technology and computers.
The RBI in 1984 formed Committee on Mechanisation in the Banking Industry
(1984)[6] whose chairman was Dr C Rangarajan, Deputy Governor, Reserve Bank of India.
The major recommendations of this committee was introducing MICR[7] Technology in all
the banks in the metropolis in India.This provided use of standardized cheque forms and
encoders.
In 1988, the RBI set up Committee on Computerisation in Banks (1988)[8] headed by Dr.
C.R. Rangarajan which emphasized that settlement operation must be computerized in the
clearing houses of RBI in Bhubaneshwar, Guwahati, Jaipur, Patna andThiruvananthapuram.It further stated that there should be National Clearing of inter-city
cheques at Kolkata,Mumbai,Delhi,Chennai and MICR should be made Operational.It also
focused on computerisation of branches and increasing connectivity among branches through
computers.It also suggested modalities for implementing on-line banking.The committee
submitted its reports in 1989 and computerisation began form 1993 with the settlement
between IBA and bank employees' association.[9]
In 1994, Committee on Technology Issues relating to Payments System, Cheque Clearing and
Securities Settlement in the Banking Industry (1994)[10]was set up with chairman Shri WS
Saraf, Executive Director, Reserve Bank of India. It emphasized on Electronic Funds
Transfer (EFT) system, with the BANKNET communications network as its carrier. It alsosaid that MICR clearing should be set up in all branches of all banks with more than 100
branches.
Committee for proposing Legislation On Electronic Funds Transfer and other Electronic
Payments (1995)[11] emphasized on EFT system. Electronic banking refers to DOING
BANKING by using technologies like computers, internet and networking,MICR,EFT so as
to increase efficiency, quick service,productivity and transparency in the transaction.
Apart from the above mentioned innovations the banks have been selling the third party
products like Mutual Funds, insurances to its clients.Total numbers of ATMs installed in
India by various banks as on end March 2005 is 17,642.[12] The New Private Sector Banks in
India is having the largest numbers of ATMs which is fol off site ATM is highest for the SBI
7/30/2019 About Banking Industry
http://slidepdf.com/reader/full/about-banking-industry 4/6
and its subsidiaries and then it is followed by New Private Banks, Nationalised banks and
Foreign banks. While on site is highest for the Nationalised banks of India.[9]
BANK GROUPNUMBER OF
BRANCHES
ON SITE
ATM
OFF SITE
ATM
TOTAL
ATM
NATIONALISED BANKS 33627 3205 1567 4772
STATE BANK OF INDIA 13661 1548 3672 5220
OLD PRIVATE SECTOR
BANKS4511 800 441 1241
NEW PRIVATE SECTOR
BANKS1685 1883 3729 5612
FOREIGN BANKS 242 218 582 800
Banking outlook 2012-13
However, the combined injection of capital will not exceed the 150 billion rupees ($2.73
billion) provided in the budget for the fiscal year ending in March 2013, Chidambaram
added. Banking shares rose on Monday after TV channels reported the government will take
a decision on capital infusion this week. The banking index was up 0.13 percent on Tuesday,
roughly in line with the broader market. "If needed, Moody's believes that the governmentwould provide extraordinary support in the form of unsecured loans and/or capital injections
to both the public and the rated private banks," it said in the report.
Outlook for India's banking system remains negative: Moody's
(PTI)
Global rating agency Moody's today said its outlook on Indian banks remains negative as
asset quality could further deteriorate, leading to decline in profitability due to slow economic
growth and high interest rates.
Moody's Investors Service in a statement said, "its outlook on the Indian banking system for
the next 12-18 months remains negative - as it has been since November 2011 - reflecting the
continued challenging nature of its domestic operating environment".
Moody's rates a total of 15 public sector and private sector banks, which together accounted
for about 66 per cent of the banking system's estimated total assets on March 2012.
The gross gross NPAs or bad loans of all public sector banks taken together has increased to
4.01 per cent in the second quarter of the fiscal from 3.06 per cent in the year ago period.
7/30/2019 About Banking Industry
http://slidepdf.com/reader/full/about-banking-industry 5/6
As per the agency, banks' average standalone credit strength is D+, or ba1 on the long-term
rating scale, whereas their average foreign currency long-term deposit rating is Baa3, which
is investment grade.
Major challenges
The banking industry in India is undergoing a major transformation due to changes in
economic condition and continuous deregulation. These multiple changes happening one
after other has a ripple effect on a bank trying to graduate from completely regulated sellers
market to completed deregulated customers market.
Deregulation:
This continuous deregulation has made the banking market extremely competitive
with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized
norms for foreign exchange. The deregulation of the industry coupled with decontrol in
interest rates has led to entry of a number of players in the banking industry. At the same
time reduced corporate credit off thanks to sluggish economy has resulted in large number
of competitors battling for the same pie.
New rules:
As a result, the market place has been redefined with new rules of the game. Banks
are transforming to universal banking, adding new channels with lucrative pricing and
freebees to offer. Natural fall out of this new players, new channels squeezed spreads,
demanding customers better service, marketing skills heightened competition, new rules of
the game pressure on efficiency missed opportunities. Need for new orientation diffused
customer loyalty. Bank has led to a series of innovative product offerings catering to various
customer segments, specifically retail credit.
Efficiency:
This in turn has made it necessary to look for efficiencies in the business. Bank need
to access low cost funds and simultaneously improve the efficiency. The banks are facing
pricing pressure, squeeze on spread and have to give thrust on retail assets.
Diffused customer loyalty:
This will definitely impact customer preferences, as they are bound to react to the
value added offerings. Customers have become demanding and the loyalties are diffused.
These are multiple choices; the wallet share is reduced per bank with demand on flexibility
and customization. Given the relatively low switching costs; customer retention calls forcustomized service and hassle free, flawless service delivery.
7/30/2019 About Banking Industry
http://slidepdf.com/reader/full/about-banking-industry 6/6
Misaligned mindset:
These changes are creating challenges, as employees are made to adapt to changing
conditions. There is resistance to change from employees and the seller market mindset is
yet to be changed coupled with fear of uncertainty and control orientation. Acceptance of
technology in but the utilization is not maximized.
Competency gap:
Placing the right skill at the right place will determine success. The competency gap
needs to be addressed simultaneously otherwise there will be missed opportunities. The
focus of people will be doing work but not providing solutions, on escalating problems
rather than solving them and on disposing customers instead of using the opportunity to
cross sell.
STRATEGIC OPTIONS WITH BANKS TO COPE WITH THE CHALLENGES:
Leading players in the industry have embarked on a series of strategic and tactical
initiatives to sustain leadership. The major initiatives include:
a) Investing in state of the start of the art technology as the back bone of to ensure
reliable service delivery.
b) Leveraging the branch network and sales structure to mobilize low cost current and
savings deposits.
c) Making aggressive forays in the retail advances segments of home and personal loans.
d) Implementing organization wide initiatives involving people, process and technology to
reduce the fixed costs and the cost per transaction.
e) Focusing on fee based income to compensate foe squeezed spread.
f) Innovating products to capture customer ‘mind share’ to begin with and later the
wallet share.
g) Improving the asset quality as Basel II norms.