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RESERVE BANK OF INDIA
PATNA
PROJECT REPORT
CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA:
A BRIEF SKETCH
PREPARED BY-ABHISHEK KUMAR SINGH (YOUNG SCHOLAR)
RBI YOUNG SCHOLARSHIP SCHEME 2011
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PREFACE
Without a sound and effective banking system in India it cannot have a healthy
economy. The banking system of India should not only be hassle free but it should beable to meet new challenges posed by the technology and any other external and
internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no longer
confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system
has reached even to the remote corners of the country. This is one of the main reasons
of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich
Dividends with the 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 a draft or for withdrawing his own money. Today, he has a choice. Gone are
days when the most efficient bank transferred money from one branch to other in two
days. Now it is simple as instant messaging or dials a pizza. Money has become the
order of the day.
Banking in India originated in the last decades of the 18th century. The oldestbank in existence in India is the state bank of India, a government-owned bank that
traces its origins back to June 1806 and that is the largest commercial bank in the
country. Central banking is the responsibility of the Reserve bank of India, which in
1935 formally took over these responsibilities from the then Imperial Bank of India,
relegating it to commercial banking functions. After India's independence in 1947, the
Reserve Bank was nationalized and given broader powers. In 1969 the government
nationalized the 14 largest commercial banks; the government nationalized the six next
largest in 1980.
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ACKNOWLEDGEMENT
First of all I would like to thank to Reserve bank of India to allow me to be a part of
such a reputed institution, the Central Bank of India, who gave me the chance to workon the project titled CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA in Patna city. I
sincerely thank the Governor, Reserve Bank of India and Shri Mohit kumar Singh
Regional Director Patna office for facilitating and providing an opportunity to learn in
the form of a training programme. I further thank Shri S.Maurya,D.G.M for helping me
in the project along with RBI.
A special thanks to Mr. Kshitiz Raj singh Manager (D.A.D) for helping me to
understand all important vital aspect relating to banking system and providing data and
& structure.
As a part of DBS , I owe my thanks to all other persons working in DBS for
providing me information, support and understanding related to different aspects of
banking system.
Lastly and significantly I am grateful to Mr K.S.Gauri Assistant Manager of DAPM
for providing great support and also for making me feel comfortable with the homely
interaction with all the other staff and the entire staff of RBI.
I am also thankful to Mr Pravin kumar Manager, DAPM, (personnel) for providing me
support and solving my problem during my tenure in RBI Patna office. He stood
besides us whenever we needed him in the whole course. Without whos friendly and
loving attitude, the project would not have been such a joyful learning and a memorable
experience forever
ABHISHEK KUMAR SINGH
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C0NTENTS
Subject. Page no
1. Synopsis..... 5
2. Introduction of .. 6-8
y RBI
y DBS
3. Banking sectors in India . 9-11
y Public sector
y Private sector
y Co-operative, RRBs
4. Challenges.. 12-33
01. How to reduce NPA
02. Implementation of Basel II
03. Risk management
04. Corporate governance
05. Customer service
06. Latest Technology
07. Human Resource Management
08. Talent Management
09. Interest rate risk
10. Transparency and disclosure
11. Competition
12. Challenges in banking security
13. Know your customer guidelines (Anti money laundering)
14. Grow in size
5. Recommendations.. 34-35
6. Conclusion 36-37
7. Bibliography.. 38
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SYNOPSIS
The enhanced role of the banking sector in the Indian economy, the increasing levels
of deregulation along with the increasing levels of competition have facilitatedglobalisation of the India banking system and placed numerous demands on banks. The
last decade has witnessed major changes in the financial sector - new banks, new
financial institutions, new instruments, new windows, and new opportunities - and, along
with all this, new challenges.
Indian banks are facing innumerable challenges such as worrying level of NPAs,
deteriorating asset quality, increasing pressures on profitability, asset-liability
management, liquidity risk management, market risk management and ever tightening
prudential norms. Besides this, the disclosure requirements are also increasing.
However, it must be recognized that there is little to celebrate, as the banking
system in India has to remain on toes to face myriad changes and to deliver banking of
international standards and quality. The greatest challenge that the PSBs are today
facing is the Asset Management, both financial and human.
Global challenges in banking
A new broad challenges faced by the Indian banks in the following areas, viz.,enhancement of customer service; application of technology; implementation of
Basel II&III; improvement of risk management systems; implementation of new
accounting standards; enhancement of transparency & disclosures.
Over the last few years, the falling interest rates, gave banks very little
incentive to lend to projects, as the return did not compensate them for the risk
involved. This led to the banks getting into the retail segment big time. It also led to
a lot of banks playing it safe and putting in most of the deposits they collected into
government bonds. Now with the bond party over and the bond yields starting to goup, the banks will have to concentrate on their core function of lending.
Furthermore, the interference of the central government with the functioning of
PSBs should stop. A fresh autonomy package for public sector banks is in
offing. The package seeks to provide a high degree of freedom to PSBs on
operational matters. This seems to be the right way to go for PSBs.
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INTRODUCTIONOFRBI
(THE CENTRAL BANK OF INDIA)
The central bank of the country is the Reserve Bank of India (RBI). The Reserve
Bank of India was established on April 1, 1935 in accordance with the provisions of THE
RESERVE BANK OF INDIA ACT, 1934. Though originally privately owned, since
nationalization in 1949, the Reserve Bank is fully owned by the Government of India.
The Central Office of the Reserve Bank has been in Mumbai since inception. The
Central Office is where the Governor sits and is where policies are formulated. Now it
has 22 regional offices, most of them in state capitals. The Act, 1934 (II of 1934)
provides the statutory basis of the functioning of the Bank. The Bank was constituted forthe need of following:
y To regulate the issue of banknotes
y To maintain reserves with a view to securing monetary stability and
y To operate the credit and currency system of the country to its advantage.
FUNCTIONSOF RBI
Monetary Authority:
y Formulates, implements and monitors the monetary policy.
y Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors.
Regulator and supervisor of the financial system:
y Prescribes broad parameters of banking operations within which the country's
banking and financial system functions.
y Objective: maintain public confidence in the system, protect depositors' interest
and provide cost-effective banking services to the public.
Manager of Foreign Exchange
y Manages the Foreign Exchange Management Act, 1999.
y Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.
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Issuer of currency:
y Issues and exchanges or destroys currency and coins not fit for circulation.
y Objective: to give the public adequate quantity of supplies of currency notes and
coins and in good quality.
Developmental role
y Performs a wide range of promotional functions to support national objectives.
Related Functions
y Banker to the Government: performs merchant banking function for the central
and the state governments; also acts as their banker.
y Banker to banks: maintains banking accounts of all scheduled banks.
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DEPARTMENT OF BANKING SUPERVISION
The Department of Banking Supervision has its Central Office in Mumbai and 16regional offices at various centers in the country. In December 1993 the Department of
Supervision was carved out of the DBOD with the objective of segregating the
supervisory role from the regulatory function of RBI.
The Department of Banking Supervision at present exercises the supervisory role
relating to commercial banks in the following forms: Preparing of independent inspection
programmes for different institutions. Inspection evaluates financial condition and
performance of the bank which includes judging asset quality, solvency and capital
adequacy earning performance and liquidity of the bank. Then seeing management and
operating condition and compliance of the bank which includes Regulatory complianceand Guidance compliance and finally doing summary assessment of the bank
.Undertaking scheduled and special on-site inspections, off-site surveillance, ensuring
follow-up and compliance. Determining the criteria for the appointment of statutory
auditors and special auditors and assessing audit performance and disclosure
standards.
Exercising supervisory intervention in the implementation of regulations which
includes-recommendation for removal of managerial and other persons, suspension of
business, amalgamation, merger/winding up, issuance of directives and imposition of
penalties. The Department of Banking Supervision follow CAMELS approach during its
inspection of commercial banks. It judges banks on the basis of the following six
parameters :
C- CREDIT ADEQUACY
A- ASSET OR CREDIT QUALITY
M- MANAGEMENT
E- EARNINGS
L-LIQUIDITY
S-SOLVENCY
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BANKING SECTOR IN INDIA
PUBLIC SECTOR BANKS (25)-The public sector is the one whose working is in
the hands of the government. The government holds a majority stake in public sector
industries. Their activities are mostly influenced by the government. It may be defined
as "an enterprise where there is no private ownership but its activities are not mainly
confined to the maximization of profits and private interests of the enterprise but it is
influenced by social. (Including SBI &its associate)
PRIVATE BANK (30)- A private bank is owned by either an individual or a general
partner(s) with limited partner(s). In any such case, the creditors can look to both the"entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-
partners' assets.
FOREIGN SECTOR BANK(40)- Foreign sector bank are those bank which have
their head office in other countries outside India and branch is working in India.
CO-OPERATIVE BANK(68)-The co-operative bank is very much useful for rural
people. The co-operative banking sector is divided into the following categories.
a. State co-operative bank
b. Central co-operative bank.
c. Primary Agriculture Credit Societies
RRBs(196)
A rural bank is a financial institution that helps rationalize the developing regions or
developing country to finance their needs specially the projects regarding agricultural
progress.
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HISTORYOFBANKING
Indian banking system, over the years has gone through various phases after
establishment of Reserve Bank of India in 1935 during the British rule, to function asCentral Bank of the country. Earlier to creation of RBI, the central bank functions were
being looked after by the Imperial Bank of India. With the 5-year plan having acquired
an important place after the independence, the Govt. felt that the private bank may not
extend the kind of cooperation in providing credit support, the economy may need. In
1954 the All India Rural Credit Survey Committee submitted its report recommending
creation of a strong, integrated, State-sponsored, State-partnered commercial banking
institution with an effective machinery of branches spread all over the country. The
recommendations of this committee led to establishment of first public sector Bank in
the name of State Bank of India on July 01, 1955 by acquiring the substantial part ofshare capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a
result of re-organisation of princely States, the associate bank came in to fold of public
sector banking.
In these five decades since independence, banking in India has evolved through
four distinct phases:
FOUNDATION PHASE:- can be considered to cover 1950s and 1960s till the
nationalisation of banks in 1969. The focus during this period was to lay the foundation
for a sound banking system in the country. As a result the phase witnessed the
development of necessary legislative framework for facilitating re-organisation andconsolidation of the banking system, for meeting the requirement of Indian economy. A
major development was transformation of Imperial Bank of India into State Bank of India
in 1955 and nationalisation of 14 major private banks during 1969.
EXPANSION PHASE:- had begun in mid-60s but gained momentum after
nationalisation of banks and continued till 1984. A determined effort was made to make
banking facilities available to the masses. Branch network of the banks was widened at
a very fast pace covering the rural and semi-urban population, which had no access to
banking hitherto. Most importantly, credit flows were guided towards the priority sectors.
However this weakened the lines of supervision and affected the quality of assets of
banks and pressurized their profitability and brought competitive efficiency of the
system.
CONSOLIDATION PHASE:- The phase started in 1985 when a series of policy
initiatives were taken by RBI which saw marked slowdown in the branch expansion.
Attention was paid to improving house-keeping, customer service, credit management,
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staff productivity and profitability of banks . Measures were also taken to reduce the
structural constraints that obstructed the growth of money market.
REFORMS PHASE:-The macro-economic crisis faced by the country in 1991 paved
the way for extensive financial sector reforms which brought deregulation of interest
rates, more competition, technological changes, prudential guidelines on assetclassification and income recognition, capital adequacy, autonomy packages etc.
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Challenges Facing BankingIndustryInIndia
The banking industry in India has undergone a major transformation due to changes ineconomic conditions and continuous deregulation. These multiple changes happening
one after other has a ripple effect on a bank to graduate from completely regulated
seller market to completed deregulated customers market.
Figure: Challenges Facing BankingIndustryInIndia
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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 take (thanks to sluggish
economy) has resulted in large number of competitors batting for the same pie.
New rules: Changed environment has redefined 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 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.
Banks 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 retailassets.
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. There 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 for customized service and hassle free, flawless service
delivery.
Misaligned mindset: These changes are creating challenges, as employees are madeto 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 is slowly creeping 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 on 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.
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Challenges ForPublic SectorBanks InIndia
01. How to reduce NPA
02. Implementation of Basel II
03. Risk management
04. Corporate governance
05. Customer service
06. Latest Technology
07. Human Resource Management
08. Talent Management
09. Financial Inclusion10. Transparency and disclosure11. Competition
12. Challenges in banking security
13. Know your customer guidelines(Anti money laundering)
14. Grow in size
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1.HOW TO REDUCE NPA
Non Performing Asset means an asset or account of borrower, which has been
classified by a bank or financial institution as sub-standard, doubtful or loss asset, in
accordance with the directions or guidelines relating to asset classification issued by
The Reserve Bank of India.
1.1Categories of NPAs
Sub-standard Assets - which has remained NPA for a period of 90 days to less
than or equal to 12 months.
Doubtful Assets - has remained in the sub-standard category for a period of 12
months up to 3 years depending upon availability of security.
Loss Assets - loss has been identified by the bank or internal or external auditors
or the RBI inspection but the amount has not been written off wholly.
The problem India Faces is not lack of strict prudential norms but
i. The legal impediments and time consuming nature of asset disposal proposal.
ii. Postponement of problem in order to show higher earnings.
iii. Manipulation of debtors using political influence.
(Amount in Rs crore)
Years
As on March 31 2011
Standard
Assets
Sub-standard
Assets
Doubtful
Assets
Amount %
share
Amount %
share
Amount %
share
(1) (2) (3) (4) (5) (6)Public SectorBanks
2005 770431 94.27 11084 1.35 30218 3.69
2006 1029493 96.14 11394 1.06 24804 2.32
2007 1335175 97.19 14147 1.03 19944 1.45
2008 1656585 97.66 16870 0.99 19167 1.13
2009 2059725 97.91 19521 0.93 20715 0.98
2010 2462030 97.73 27688 1.10 24685 0.98
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1.2 Several Reasons an Account Becoming NPA
Internal factors:
1. Funds borrowed for a particular purpose but not use for the said purpose.2. Project not completed in time.
3. Poor recovery of receivables.
4. Excess capacities created on non-economic costs.
5. In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6. Business failures.
7. Diversion of funds for expansion \ modernization \setting up new projects \
heeling or promoting sister concerns.
8. Willful defaults, siphoning of funds, fraud, disputes, management disputes,
misappropriation etc.9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and
follow-ups, delay unsettlement of payments\ subsidiaries by government bodies
etc.
External factors:
1. Sluggish legal system long legal tangles Changes that had taken place in labour
laws, Lack of sincere effort.
2. Scarcity of raw material, power and other resources.
3. Industrial recession.
4. Shortage of raw material, raw material\input price escalation, power shortage,
industrial recession, excess capacity, natural calamities like floods, accidents.
5. Failures, nonpayment over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.
6. Government policies like excise duty changes, Import duty changes etc.
1.3 Suggestions
Through RBI has introduced number of measures to reduce the problem of
increasing NPAs of the banks such as CDR mechanism. One time settlement schemes,enactment of SRFAESI act, etc. A lot of measures are desired in terms of effectiveness
of these measures. What I would like to suggest for reducing the evolutions of the NPAs
of Public Sector Banks are as under.
(1) Each bank should have its own independent credit rating agency which should
evaluate the financial capacity of the borrower before than credit facility.
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(2) The credit rating agency should regularly evaluate the financial condition of the
clients.
(3) Special accounts should be made of the clients where monthly loan concentration
reports should be made.
(4) It is also wise for the banks to carryout special investigative audit of all financial and
business transactions and books of accounts of the borrower company when there is
possibility of the diversion of the funds and mismanagement.
(5) The banks before providing the credit facilities to the borrower company should
analyze the major heads of the income and expenditure based on the financial
performance of the comparable companies in the industry to identify significant
variances and seek explanation for the same from the company management. They
should also analyze the current financial position of the major assets and liabilities.
(6) Banks should evaluate the SWOT analysis of the borrowing companies i.e. how theywould face the environmental threats and opportunities with the use of their strength
and weakness, and what will be their possible future growth in concerned to financial
and operational performance.
(7) Independent settlement procedure should be more strict and faster and the decision
made by the settlement committee should be binding both borrowers and lenders and
any one of them failing to follow the decision of the settlement committee should be
punished severely.
(8) There should be proper monitoring of the restructured accounts because
there is every possibility of the loans slipping into NPAs category again.
(9) Proper training is important to the staff of the banks at the appropriate level with
ongoing process. That how they should deal the problem of NPAs, and what continues
steps they should take to reduce the NPAs.
(10) Willful Default of Bank loans should be made a Criminal Offence.
(11) No loan is to be given to a Group whose one or the other undertaking has
become a Defaulter.
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2.0IMPLEMENTATION OF BASEL II
Implementation of Basel II is seen as one of the significant challenges for PublicSector Banks.
WHAT IS BASEL II?
Basel II is the second of the Basel Accords which are recommendations on banking
laws and regulations issued by the Basel Committee on Banking Supervision.
Ithas following 3 pillars --
The first pillar
The first pillar deals with maintenance of regulatory capital calculated for three major
components of risk that a bank faces: credit risk, operational risk and market risk. Other
risks are not considered fully quantifiable at this stage.
The Second Pillar- Supervisory Review Process
Supervisory review process has been introduced to ensure not only that bank have
adequate capital to support all the risks, but also to encourage them to develop and use
better risk management techniques in monitoring and managing their risks.
The third pillar
The third pillar greatly increases the disclosures that the bank must make. This is
designed to allow the market to have a better picture of the overall risk position of the
bank and to allow the counterparties of the bank to price and deal appropriately.
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Basel II aims to encourage the use of modern risk management techniques; and to
encourage banks to ensure that their risk management capabilities are commensurate
with the risks of their business. Previously, regulators' main focus was on credit risk and
market risk. Basel II takes a more sophisticated approach to credit risk, in that it allows
banks to make use of internal ratings based Approach - or "IRB Approach" as they have
become known - to calculate their capital requirement for credit risk. It also introduces,
in addition to the market risk capital charge, an explicit capital charge for operational
risk. Together, these three risks - credit, market, and operational risk - are the so-called
"Pillar 1" risks.
Banks' risk management functions need to look at a much wider range of risks than this
- interest rate risk in the banking book, foreign exchange risk, liquidity risk, business
cycle risk, reputation risk, strategic risk. The risk management role of helping identify,
evaluate, monitor, manage and control or mitigate these risks has become a crucial role
in modern-day banking. Indeed, it is probably not exaggerating the importance of this to
say that the quality of a bank's risk management has become one of the keydeterminants of a success of a bank it was decided that banks in India will initially adopt
the Standardised Approach (SA) for credit risk and the Basic Indicator Approach (BIA)
for operational risk. The prime considerations while deciding on the likely approach
included the cost of implementation and the cost of compliance.
The minimum requirements to be met by banks relate to (a) internal rating system
design, (b) risk rating system operations, (c) corporate governance and oversight, (d)
use of internal ratings, (e) risk quantification, (f) validation of internal estimates, (g)
requirements for recognition of leasing, (h) calculation of capital charges for equity
exposures and (i) disclosure requirements. The earliest dates of making application bybanks and likely approval by the regulator for implementing the standardized approach
for operational risk are April 1, 2010 and September 30, 2010 respectively. The earliest
dates of making application by banks and likely approval by the regulator for
implementing advanced measurement approach for operational risk are April 1, 2012
and March 31, 2014 respectively.
3.0Risk management
Risk management is relatively new and emerging practice as far as Indian banks
are concerned and has been proved that its a mirror of efficient corporate governance
of a financial institution. Globalisation and significant competition between foreign and
domestic banks, survival and optimizing returns are very crucial for banks and financial
institutions. In a volatile and dynamic market place for achieving sustainable business
growth and shareholders value, it is essential to develop a link between risks and
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rewards of all products and services of the bank. Hence, the banks should have efficient
risk management framework to mitigate all internal and external risks.
The Risk Has IncreasedSubstantially Due To Various Factors As Below
Globalization: Despite opposition to it, globalization has come to stay. Trade
barriers have reduced considerably. Capital movement has also been liberalized
to a large extent.
Deregulation: Interest rates have been deregulated. Exchange rate of rupee is
market determined though RBI often intervenes to keep its value low.
Competition: Competition has multiplied. The new generation private sectorbanks are giving a stiff competition to public sector banks. Moreover, the process
of disintermediation has also affected the public sector banks adversely.
Technology: Rapid growth of technology has many benefits. Unfortunately, public
sector banks are yet to leverage their recently acquired strength in this area. In
the meanwhile, risk relating to technology has increased substantially.
Manpower: Public sector banks are handicapped by age profile and low technical
skills of their employees.
There are three main categories of Risks
Credit Risks: The Risk that the borrower will not able to repay the debt (loan) under the
terms of the original agreement . Credit risk includes new dimensions with cross-
border transactions. Sometimes, transfer risk will arise when currency of obligation
becomes unavailable to borrowers.
It is most critical risk in public sector banks.
It required most subjective judgment.
It must be managed carefully.
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The Base Rate System-
With effect from 1st July 2010, Base rate shall include all those elements of thelending rates that are common across all categories of borrowers. Banks may
choose any benchmark to arrive at the base rate for a specific tenor that may bedisclosed transparently. Banks will determine their actual lending rates on loans
with reference to the base rate and by including such other customer specific
charges as considered appropriate. With the introduction of the base rate system, all categories of loans will be
priced only with reference to the base rate with a few exceptions. The base rate
can also serve as the reference benchmark rate for floating rate loan products,
apart from other external market benchmark rates. The floating interest rate
based on external benchmarks should, however, be equal to or above the base
rate at the time of sanction or renewal.
Since the base rate will be the minimum rate for all loans, the current stipulation
of BPLR as the ceiling rate for loans up to Rs.200,000 is withdrawn. It is
expected that this will increase the credit flow to small borrowers at reasonable
rates and direct bank finance will provide effective competition to other forms of
high cost credit.
In wholesale fund- based banking systems, the London Interbank Offered Rate
(LIBOR) is widely used as a benchmark which is essentially an interbank deposit
rate.
4.0 Corporate governance
For strengthening financial sector and to maintain financial stability, various
measures were taken by the Reserve Bank of India. First, the Board for Financial
Supervision stressed the importance of good corporate governance in financial
institutions. In the year 2005-2006, Reserve Banks Board for Financial Supervision
suggested to the Government to extend the fit and proper status guidelines prescribed
for private sector banks to the public sector banks, with a view to attaining higher
standards of corporate governance.
I would like to quote an Economist and Noble laureate Milton Friedman. According to
him Corporate Governance is to conduct the business in accordance with owner or
shareholders desires, which generally will be to make as much money as possible,
while conforming to the basic rules of the society embodied in law and local
customs
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The Reserve Banks policy objective is to ensure high-quality corporate governance
in banks. It has issued guidelines stipulating fit and proper criteria for directors of
banks. In terms of the guidelines, a majority of the directors of banks are required to
have special knowledge or practical experience in various relevant areas. The Reserve
Bank also has powers to appoint additional directors on the board of a banking
company.
Currently in India, about four-fifths of the banking business is under the control of
public sector banks (PSBs), comprising the SBI and its subsidiaries and the nationalised
banks. Corporate governance in PSBs is complicated by the fact that effective
management of these banks vests with the government and the top managements and
the boards of banks operate merely as functionaries. The ground reality is such that the
Government performs simultaneously multiple functions vis--vis the PSBs, such as the
owner, manager, quasi-regulator, and sometimes even as the super-regulator. Unless
the issues connected with these multiple, and sometimes conflicting, functions areresolved and the boards of banks are given the desired level of autonomy it would be
difficult to improve the quality of corporate governance in PSBs. It is desirable that all
the banks are brought under a single Act so that the corporate governance regimes do
not have to be different just because the entities are covered under multiple Acts of the
Parliament or that their ownership is in the private or public sector.
The underlying theme is accountability at all levels including the Boards From the
perspective of banking industry, corporate governance also includes in its ambit the
manner in which their boards of directors govern the business and affairs of individual
institutions and their functional relationship with senior management. This is determinedby how banks:
y set corporate objectives (including generating economic returns to owners);
y run the day-to-day operations of the business and;
y consider the interests of recognized stakeholders i.e., employees, customers,
suppliers, supervisors, governments and the community and
y align corporate activities and behaviours with the expectation that banks will
operate in a safe and sound manner, and in compliance with applicable laws
and regulations; and ofcourse protect the interests of depositors, which is
supreme.
For ensuring good corporate governance, the importance of overseeing the various
aspects of the corporate functioning needs to be properly understood, appreciated and
implemented. There are four important aspects of oversight that should be included in
the organizational structure of any bank in order to ensure the appropriate checks and
balances:
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(1) oversight by the board of directors or supervisory board;
(2) oversight by individuals not involved in the day-to-day running of the various
business areas;
(3) direct line supervision of different business areas; and
(4) independent risk management and audit functions.
The supervisory experience of Regulators in general, in banks consider the following as
critical elements in the governance process:
Establishing strategic objectives and a set of corporate values that are
communicated throughout the banking organization.
Setting and enforcing clear lines of responsibility and accountability throughout the
organization.
Ensuring that board members are qualified for their positions, have a clear
understanding of their role in corporate governance and are not subject to undue
influence from management or outside concerns. Ensuring that there is appropriate oversight by senior management
Effectively utilizing the work conducted by internal and external auditors, in
recognition of the important control functions they provide
Ensuring that compensation approaches are consistent with the banks ethical
values, objectives, strategy and control environment.
Conducting corporate governance in a transparent manner
Ensuring an environment supportive of sound corporate governance
5.0 Customerservice
Banking being service industry, customer service is backbone. Customer service in
Public Sector Banks is very complex issue because customers of Public sector banks
come from all walks of life.
1. From poorest to richest.
2. Youngest to oldest.
3. Illiterate to highly educated.
4. Sweeper to Chief Executive.
5. Individuals to Corporate.
6. People from all regions, religion, caste, age, service, profession etc.
7. People from different backgrounds, culture, temperament and ego levels.
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.Mahatma Gandhis perception of a customer was as follows:
He is not dependent on us. We are dependent on him. He is not an interruption on our
work. He is the purpose of it. He is not an outsider on our premises. He is part of it. We
are not doing him a favor by serving him. He is doing us a favor by giving us an
opportunity to do so.
As far as the customer I concerned, he is the pivot of all activities in the era of
consumerism. Customer is god in the UK and USA. Customer is the king in Japan. But,
the customer is the Boss in India and the Boss is always right.
The Public Sector Banks may need to include customer oriented approach or
customer focus in their five areas of businesses such as cash accessibility, asset
security, money transfer, deferred payment and financial advices.
There are four strategies available to customer relations' managers:
To win back or save customers.
To attract new and potential customers.
To create loyalty among existing customers and.
To up sell or offer cross services.
In order to develop close relationship with the customers the Public SectorBanks have
to focus on the technology oriented innovations that offer convenience to the customers.
Today customers are offered ATM services, access to internet banking and phonebanking facilities and credit cards. These have elevated banking beyond the barriers of
time and space.
So providing better services than Private Sector Banks to customer is a challenge
for Public Sector Banks. Because a satisfied customer brings in more customers and
he is the best advertisement for the bank.
6.0 Latesttechnology
An online banking facility enables you to handle your finances efficiently.
Online banking uses modern computer technologies to offer the users
convenient banking facilities. If you have access to such a facility, there is absolutely no
need for you to personally visit your banks branch for any sort of transaction. You can
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simply login with the internet-banking password that your banker has given you, and
carry all the necessary work online. It also eliminates the necessity of doing any paper-
based work and saves considerable time for the users.
Private sector and foreign banks were using technology and computerized system
since its beginning while PSBs were not. So they found difficulty in managing all these
things. Many of Indian PSBs ignored technological change and had lost market share to
foreign banks and new private banks. Technology helps in having a huge branch
network easily and also it reduces the operational cost this may b clarified by an
example as:-
Operational cost per transaction of an account via different type is-
y Via computers on counter- 40 Rs
y Via ATM -16-17 Rs
y Via online -46 Paise
So it is cleared that manually/direct transaction cost comes very high and
electronically and online it is very low. So thats why public sector banks should improvetheir working system and should make it totally online but challenge is before PSBs.
The users can do variety of work using your online banking pin code. The bankers
benefit equally from the online banking facilities. Besides offering their users the
convenience of banking, the online banking system means significant cost savings for
the bankers themselves. With such an automatic system in place, the bankers need not
to hire employees specialized in handling paper work and teller interactions. This
reduces the bankers operating costs considerably, translating into significant cost
savings over the long-term.
6.1 VARIOUS ADVANTAGES OF BANKING ONLINE:
The biggest advantage of online banking is its convenience. Unlike a banks
branches, online banking facilities are open 24/7. This offers you banking from the
comfort of your home with just a click. You can access such a facility from anywhere in
the world. This could be great advantage if you need to address urgent monetary
concerns while away from home. Transactions online are fast and mostly quicker than ATM transactions. Moreover, online banking systems have sophisticated tools that
provide effective management of the users assets.
Initially the online banking security system was quiet simple, a id and a password
and you are done. It was quiet risky then anyone who gets access to these two can
empty your account. Many people at that time will do setting with the courier people and
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got access to this details. But now even the card and the id password as sent thru
separate courier. So its now more secure.
Most banks now hassms verification, you are sent a code that you need to add
when you are adding a new account for transfer, its simple and logical. Thou sometimes
the sms takes too much time to be received. Stanchart is fast the minute you press add
the sms is in your inbox, may be because of lesser traffic. Icici has also an extra
transactionpassword plus you need to have a debit card and have to use the grid at the
back of card to validate it. This three way verification is quiet robust and thus you dont
getphis ing emails these days. Becausephis e rs know that having an id andpas s word
is notenough.
INTERNET BANKING
The Internet banking portal of the bank enables its retail banking customers to
operate their accounts from anywhere anytime, removing the restrictions imposed bygeography and time. It's a platform that enables the customers to carry out their
banking activities from their desktop, aided by the power and convenience of the
Internet.
Using Internet banking services, customer can do the following normal banking
transactions
online:
Funds transfer between own accounts.
Third party transfers to accounts maintained at any branch of SBI
Group Transfers to accounts in State Bank Group Inter Bank Transfers to accounts with other Banks
Online standing instructions for periodical transfer for the above
Credit PPF accounts across branches
Request for Issue of Demand Draft
Request for opening of new accounts
Request for closure of Loan Accounts
Request for Issue of Cheque Book
TECHNOLOGICAL LEAP
The banks realised that if they have to survive, they will have to adopt
moderntechnology. State Bank of India was amongst the first to focus on technology
and a team is constantly at work to innovate in an attempt to lower costs. So, the bank
has now introduced two-faced ATMs, which will increase efficiency.
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Technology will not just help them reach out to young customers better but also
help them cut costs and improve efficiency. Heres how the economics work. While a
transaction at a branch costs around Rs 50, one at an ATM works out to Rs 18, a senior
State Bank of India executive said. Transactions through the Internet are even cheaper
at around Rs 10 each.
As a result, banks like State Bank of India want 50 per cent of the transactions from
non-branch channels such as ATMs, net banking and mobile phones.
These are some initiatives all bank wants to take in future though few banks have madeprogress in this regard:
y Set up a data warehouse and a data mart soon. IDRBT may be involved as aconsultant. It may need to set up a NAS and SAN to consolidate its storage.
y Disaster Recovery site may be built at a secured location to create a replica of itsdata center. A call center will be set up as a CRM initiative, which usesinformation from the data warehouse with the help of the Base24 switch.
Satellite Banking
As you might be aware, having regard to much greater reliability of a satellite-basedcommunication link for interconnecting the branches of the banks,particularly in the hillyareas and difficult terrain where terrestrial communication link is difficult to provide, theReserve Bank had constituted a Technical Group to examine the proposal for providingsatellite connectivity to the bank branches in such areas. The objective is to enablegreater penetration of the electronic payment products in the hinterland areas also, byfacilitating the integration of the rural and remote branches with the core bankingsolution platform of the banks and help them providing efficient banking services to theircustomers.
7.0 Human Resource ManagementManpower Planning which is also called as Human Resource Planning consists
of putting right number of people, right kind of people at the right place, right time,doing the right things for which they are suited for the achievement of goals of theorganization. Human Resource Planning has got an important place in the arena ofindustrialization. Human Resource Planning has to be a systems approach and iscarried out in a set procedure.
The procedure is as follows:
1. Analysing the current manpower inventory2. Making future manpower forecasts3. Developing employment programmes4. Design training programmes
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Importance of ManpowerPlanning
1. Key to managerial functions- The four managerial functions, i.e., planning,organizing, directing and controlling are based upon the manpower. Human
resources help in the implementation of all these managerial activities. Therefore,staffing becomes a key to all managerial functions.2. Efficient utilization- Efficient management of personnels becomes an important
function in the industrialization world of today. Seting of large scale enterprisesrequire management of large scale manpower. It can be effectively done throughstaffing function.
3. Motivation- Staffing function not only includes putting right men on right job, butit also comprises of motivational programmes, i.e., incentive plans to be framedfor further participation and employment of employees in a concern. Therefore,all types of incentive plans becomes an integral part of staffing function.
4. Betterhumanrelations- A concern can stabilize itself if human relations
develop and are strong. Human relations become strong trough effective control,clear communication, effective supervision and leadership in a concern. Staffingfunction also looks after training and development of the work force which leadsto co-operation and better human relations.
5. Higherproductivity- Productivity level increases when resources are utilized inbest possible manner. higher productivity is a result of minimum wastage of time,money, efforts and energies.This is possible through the staffing and it's relatedactivities ( Performance appraisal, training and development, remuneration)
Need of ManpowerPlanningManpower Planning is a two-phased process because manpower planning not only
analyses the current human resources but also makes manpower forecasts and therebydraw employment programmes. Manpower Planning is advantageous to firm infollowing manner:
1. Shortages and surpluses can be identified so that quick action can be takenwherever required.
2. All the recruitment and selection programmes are based on manpower planning.3. It also helps to reduce the labour cost as excess staff can be identified and
thereby overstaffing can be avoided.4. It also helps to identify the available talents in a concern and accordingly training
programmes can be chalked out to develop those talents.5. It helps in growth and diversification of business. Through manpower planning,
human resources can be readily available and they can be utilized in bestmanner.
SWOT ANALYSIS OF PUBLIC SECTOR BANKS (IN HR CONTEXT)
Strengths
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High skilled personnel in middle and low levels in the banks. Aggression towards the development of the existing standards Strong regulatory impact by central bank to all banks for implementation Presence of intellectual capital to face the change in implementation with good
quality.
Weaknesses Poor technology infrastructure Presence of more number of smaller banks that would likely to be impacted
adversely. Poor compensation system Poor talent management.
Opportunities
Availability of fresh talent to strengthen thebank operations. Increasing risk manage expertise.
Need significant connection among business, credit & risk management andinformation technologyThreats Inability to meet additional capital requirements. Huge investment in technologies. Entrance of foreign banks to capture talent HR. Increasing the cost of human capital
8.0 Talent Management
Such personnel need to be identified, nurtured and motivated through a
systematic organizational plan to enable them to accept challenging roles early in
the career. Suitable changes in the promotion policies should take care of
aspirations of such extra ordinary and talented manpower.
Banks will also have to pay increasing attention to education and training
including sponsorship of identified persons to MBA programmes, Phd
programmes and other long duration programmes in technology and financial
management to develop a wider managerial pool of competent people who can
be developed fast to play the role of modern banker in ever difficult and turbulenttimes.
Banks will have to introduce innovative mechanism and process to respond to
the aspirations of such talented people by providing them sabbatical leave for
professional growth by sponsorship in seminars and conferences, both nationally
and internationally, to present papers and encouraging them to join professional
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organisations to develop appropriate competencies and network with fellow
professionals.
There is also need to develop organisation-wide awareness about banks key-
business problems including stagnant business units, strain on profitability, cost
of operations, unexplored business opportunities, manpower costs, NPAS etc.
The preconditions for an effective talent management is clarity of where the
organisation is, i.e., the starting point and where it wishes to reach in a given time
horizon, i.e., the destination
Otherinitiatives that can be included are
1. Deputation of Officers for Training in India and Abroad
2. Developments in the Short-term Secondment Scheme
3. International Seminar
4. Deputation of Class III and IV Staff to External Institutions in India5. 360-Degree Appraisal for Officers in all grades in the Bank.
6. Human Resources Audit.
7. Knowledge Sharing Series
8. Visits/Attachments/Industrial relations
9. Grants to various Institutions
10. Complaints Redressal Mechanism
11. Financial Education and Literacy
9.0 Financial Inclusion
Financial inclusion is the delivery of financial services at affordable costs to
sections of disadvantaged and low income segments of society. Unrestrained access to
public goods and services is the sine qua non of an open and efficient society. It is
argued that as banking services are in the nature of public good, it is essential that
availability of banking and payment services to the entire population without
discrimination is the prime objective of public policy. The term "financial inclusion" has
gained importance since the early 2000s, and is a result of findings about financialexclusion and its direct correlation to poverty. Financial inclusion is now a common
objective for many central banks among the developing nations.
The Reserve Bank of India has set up a commission (Khan Commission) in 2004
to look into financial inclusion and the recommendations of the commission were
incorporated into the mid-term review of the policy (200506). In the report RBI
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exhorted the banks with a view of achieving greater financial inclusion to make available
a basic "no-frills" banking account. In India, Financial Inclusion first featured in 2005,
when it was introduced, that, too, from a pilot project in UT of Pondicherry, by K C
Chakraborthy, the chairman of Indian Bank. Mangalam Village became the first village
in India where all households were provided banking facilities. In addition to this KYC
(Know your Customer) norms were relaxed for people intending to open accounts with
annual deposits of less than Rs. 50,000. General Credit Cards (GCC) were issued to
the poor and the disadvantaged with a view to help them access easy credit. In January
2006, the Reserve Bank permitted commercial banks to make use of the services of
non-governmental organizations (NGOs/SHGs), micro-finance institutions and other civil
society organizations as intermediaries for providing financial and banking services.
These intermediaries could be used as business facilitators (BF) or business
correspondents (BC) by commercial banks. The bank asked the commercial banks in
different regions to start a 100% financial inclusion campaign on a pilot basis. As a
result of the campaign states or U.T.s like Puducherry, Himachal Pradesh and Keralahave announced 100% financial inclusion in all their districts while it is quite low at 33
percent for Bihar. Reserve Bank of Indias vision for 2020 is to open nearly 600 million
new customers' accounts and service them through a variety of channels by leveraging
on IT. However, illiteracy and the low income savings and lack of bank branches in rural
areas continue to be a road block to financial inclusion in many states. Apart from this
there are certain in Current model which is followed. There is inadequate legal and
financial structure.
Financially Excluded People The financially excluded sections largely comprise :
y Marginal farmers
y Landless labourers
y Oral lessees
y Self employed and unorganised sector enterprises
y Urban slum dwellers
y Migrants
y Ethnic minorities and socially excluded groups
y Senior citizens
y Women
y The North East, Eastern and Central regions contain most of the financially
excluded population.
Factors affecting access to financial services
y Legal identity : Lack of legal identity like voter id , driving license , birth
certificates ,employment identity card etc
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y Limited literacy : Particularly financial literacy and lack of basic education
prevent people to have access from financial services .
y Level ofincome : Level of income decides to have financial access . Low
income people generally have the attitude of thinking that banks are only for rich.
y 'Terms and conditions : While getting loans or at the time of opening accounts
banks places many conditions , so the uneducated and poor people find it very
difficult to access financial services .
y Complicated procedures : Due to lack of financial literacy and basic education ,
it is very difficult for those people who lack both to read terms and conditions and
account filling forms .
y Psychological and cultural barriers : Many people voluntarily excluded
themselves due to psychological barriers and they think that they are excluded
from accessing financial services .
y Place of living : As the name suggests that commercial banks operate only in
commercially profitable areas and they set up branches and main offices only inthat areas .People who lived in under developed areas find it very difficult to go to
areas in which banks are generally reside .
y Lack of awareness : Finally , people who lack basic education do not know the
importance of the financial products like Insurance , Finance , Bank Accounts ,
cheque facility ,etc.
Benefits OfInclusive Financial Growth
y Growth with equity : In the path of super power we the Indians will need to
achieve the growth of our country with equality . It is provided by inclusive
finance.
y Getrid of poverty : To remove poverty from the Indian context all everybody will
be given access to formal financial services . Because if they borrow loans for
business or education or any other purpose they get the loan will pave way for
their development .
y Financial Transactions Made Easy : Inclusive finance will provide banking
related financial transactions in an easy and speedy way .
y Safe savings along with financial services : People will have safe savingsalong with other allied services like insurance cover , entrepreneurial loans ,
payment and settlement facility etc,
y Inflating National Income : Boosting up business opportunities will definitely
increase GDP and which will be reflected in our national income growth .
y Becoming Global Player: Financial access will attract global market players to
our country that will result in increasing employment and business opportunities.
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Expectations of poorpeople from financial system Taking into account their
y Seasonal Inflow Of Income from agricultural operations,
y Migration from one place to another,
y Seasonal And Irregular Work Availability And Income; the existing financial
system needs to be designed to suit their requirements.y Security and safety of deposits
y Low transaction cost
y Convenient operating time
y Minimum paper work
y Frequent deposits
y Quick and easy access
y Product suitable to income and consumption
10.0 Transparency and disclosure
In pursuance of the Financial Sector Reforms introduced since 1991 and in order to
bring about meaningful disclosure of the true financial position of banks to enable the
users of financial statements to study and have a meaningful comparison of their
positions, a series of measures were initiated.
Transparency and disclosure norms are assuming greater importance in the
emerging environment. Banks are now required to be more responsive and
accountable to the investors.
Banks move to disclose in their balance sheets information on maturity profiles of
assets and liabilities, lending to sensitive sectors, movements in NPAs, besides
providing information on capital, provisions, shareholdings of the government, value
of investment in India and abroad, and other operating and profitability indicators.
The disclosure requirements broadly covered the following aspects:
y Capital adequacy
y Asset quality
y Maturity distribution of select items of assets and liabilities
y Profitability
y Country risk exposure
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y Risk exposures in derivatives
y Segment reporting
y Related Party disclosures
Transparency and disclosure standards are also recognised as important constituents
of a sound corporate governance mechanism.
Banks are required to formulate a formal disclosure policy approved by the Board of
directors that addresses the banks approach for determining what disclosures it will
make and the internal controls over the disclosure process.
Disclosure and transparency are not a panacea, but they can reduce the costs of
banking problems. Financial markets are quick to react to problems in institutions with
large exposures to troubled sectors. This provides an incentive to limit exposure in any
one area, and to quickly reduce exposure as problems emerge. Disclosure of problems
can force banking consolidation, transfer of problem assets, and closure of insolventinstitutions -- necessary conditions for quick recovery of a troubled banking sector. The
lessons from the United States and Japan indicate that other Asian economies may be
better off following the U.S. rather than the Japanese model. While the resolution of
banking problems in the United States was controversial and unpopular, it resulted in a
rapid resolution. In contrast, Japanese banks, by failing to disclose problems and not
being transparent, have delayed their recovery and exacerbated their difficulties.
It is a huge challenge for Public Sector Banks to implement a process for
assessing the appropriateness of their disclosures, including validation andfrequency.
11.0 Competition
Beginning from 1992, Indian banks were gradually exposed to the rigours of
domestic and international competition. Newly opened banks from the private sector
and entry and expansion of several foreign banks resulted in greater competition in both
deposit and credit markets. Consequent to these developments, there has been aconsistent decline in the share of public sector banks in total assets of commercial
banks. From the position of net loss in the mid-1990s, in recent years the share of
public sector banks in the profit of the commercial banking system has become broadly
commensurate with their share in assets, indicating a broad convergence of profitability
across various bank groups. This suggests that, with operational flexibility, public sector
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banks are competing relatively effectively with private sector and foreign banks. Public
sector bank managements are now probably more attuned to the market consequences
of their activities.
12.0 Challenges in banking security
Banks are the cornerstone of Indian economy and are continuously increasing its reach
and striving to excel in their services through extensive use of Information technology.
Technology, with its innovative solutions and tools, creates immense possibilities for
banking industry to grow and bring the customers under the fold of technology driventransformation. However, the technology transformation, characterized by wide spread
use of the Internet, with the new impetus for mobile, for financial transactions and
gradual evolution of underlying and backend infrastructure, becomes a reason for
concern also. It exposes a banking organization to a newer set of security threats; some
of them are heavily concentrated towards the industry, aiming for financial gain. The
security threats are becoming more organized and sophisticated in their intent, tactics
and style of execution, posing serious threats to the banking industry.
Managing security in banking industry is a complex challenge requiring in-depth
analysis of how security impacts the banking operations, identification of security threat
vector pertaining to banking industry and the evolution of it, review of the security
initiatives undertaken by the industry and evaluation of different approaches, trends and
technologies that have been emerging to address the specific challenges. Banking as a
business involves the management of risks. While much has been said about the
financial risks, the risks arising out of the large scale implementation of technology is of
recent origin, with banks having taken to large scale use of technology for their normal
day-to-day business. Security in banks has thus assumed significant proportions,
comprising both physical aspects in addition to those relating to Information, Information
Systems and Information Technology, all of which have an impact on the reputationalrisk of a financial organisation.
The largest set of functions in the banking sector which has benefited from the
advances in IT relate to payment systems since quick, safe and efficient transfer of
funds across the length and breadth of the country is the requirement of the day.
Security in Payment Systems cannot be addressed in isolation. It requires the
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integration of work processes, communication linkages and integrated delivery systems
and should focus on stability, efficiency and risk control. Yet another prime aspect of
concern in a good security policy is the role that the human beings have in a secure
computerised environment.
It would be advisable to build security features at the application level in respect of
banking oriented products, because of the critical nature of financial data transfer. The
financial messages should have the under noted features:
The receipt of the message at the intended destination
The content of the message should be the same as the transmitted one
The Sender of information should be able to verify its receipt by the recipient
The Recipient of the message could verify that the sender is indeed the person
Information in transit should not be observed, altered or extracted
Any attempt to tamper with the data in transit will need to be revealedNon-repudiation
These features boil down essentially to authentication (to verify the identity of
the sender of the message to the intended recipient to prevent spoofing or
impersonation), authorisation (to control the access to specific resources for
unauthorised persons), confidentiality (to maintain the secrecy of the content of
transmission between the authorised parties), integrity (to ensure that no
changes/errors are introduced in the messages during transmission) and
nonrepudiation (to ensure that an entity cannot later deny the origin and receipt and
contents of the communication
13.0 KNOW YOUR CUSTOMER GUIDELINES(ANTI MONEY
LAUNDERING)
Know your customer (KYC) is the due diligence and bank regulation that financial
institutions and other regulated companies must perform to identify their clients and
ascertain relevant information pertinent to doing financial business with them. Know
your customer policies are becoming increasingly important globally to prevent identity
theft fraud, money laundering and terrorist financing.
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One aspect of KYC checking is to verify that the customer is not on any list of
known fraudsters, terrorists or money launderers, such as the Office of Foreign Assets
Controls Specially Designated Nationals list. As well as sanctions lists, there are lists of
third party vendors that track links between persons regarded as high-risk owing to
negative reports in the media about them or in public records.
Banks doing KYC monitoring for anti-money laundering (AML) and checks relating
to combating the financing of terrorism (CFT) increasingly use specialized transaction
monitoring software, particularly names analysis software and trend monitoring
software.
The RBI had come up with more specific guidelines regarding KYC. These were divided
into four parts:
y CustomerAcceptance Policy:All banks shall develop criteria for accepting any
person as their customer to restrict any anonymous accounts and ensuredocumentation mentioned in KYC.
y Customer Identification Procedures: Customer to be identified not only while
opening the account, but also at the time when the bank has a doubt about his
transactions.
y Monitoring of Transactions: KYC can be effective by regular monitoring of
transactions. Identifying an abnormal or unusual transaction and keeping a watch
on higher risk group of the account is essential in monitoring transactions.
y Risk management: This is about managing internal work to reduce the risk of
any unwanted activity. Managing responsibilities, duties and various audits plus
regular employee training for KYC procedures.
Otheraspects of KYC
To prevent the possible misuse of banking activities for anti-national or illegal
activities, the RBI has given various directives to banks:
Strengthening the banks' 'Internal Control System' by allocating duties and
responsibilities clearly, and periodically monitoring them.
Before giving any finance at branch level, making sure that the person has no
links with notified terrorist entities and reporting any such 'suspect;' accounts to
the government.
Regular 'Internal Audit' by internal and concurrent auditors to check if the KYC
guidelines are being properly adhered to or not by banks.
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Most important, banks must keep an eye out for all banking transactions and
identify suspicious ones. Such transactions will be immediately reported to the
bank's head office and authorities and norms shall also be laid down for freezing
of such accounts.
14.0 Grow in size Public Sector Banks should now go global in search of new markets, customers
and profits.
Some of the Public Sector Banks have their presence in overseas to a limited
extent.
The State Bank of India, the largest bank in India, ranks only 57 th amongst the
top global banks.It is 10th largest in size , SBIs assets base of $352 billion and
$285 deposits.
Therefore, our banks are not equipped enough to compete in the international
arena.
Realising the need to grow in size, the Indian banking system today is moving
from a regime of large number of small banks to small number of large banks.
Mergers and acquisitions in the banking sector are the order of the day.
This trend may lead logically to promote the concept of financial super market
chain, making available all types of credit and non-fund facilities under one roof
which is challenge for public sectors bank and demand of time.
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Recommendations
FOR NPA
y This would require managerial efficiency on the part of PSBs to not only reduce the
average level of net NPA but also to prevent the recurrence of this problem by
ensuring addition of fresh NPA to bare minimum.
y Banks should have framework for acceptable compromise proposals and
supportive recovery policy directed towards out-of-court settlements. Appointmentof recovery agents, utilizing services of private security agencies of ascertaining
means of NPA borrowers etc. are the other areas, which require fresh review.
y Quality asset building will also require up-to-date market information on various
industries, a deeper and penetrating insight about the financial transactions of large
borrowal groups, economic trends in a globalised environment and industry
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knowledge about new areas for financing like software, infrastructure, service
sector and other IT based industries etc.
FOR CORPORATE GOVERNANCE
y It is desirable that all the banks are brought under a single Act so that the
corporate governance regimes do not have to be different just because the
entities are covered under multiple Acts of the Parliament .
y Although the Reserve Bank maintains a tight vigil and inspects these entities
thoroughly at regular time intervals, the quality of corporate level governance
mechanism does not appear to be satisfactory.
y Oversight by the board of directors or supervisory board; Oversight by individuals
not involved in the day-to-day running of the various business areas; Direct line
supervision of different business areas; and Independent risk management,
compliance and audit functions. Banks need to develop mechanisms, which can
help them ensure percolation of their strategic objectives and corporate valuesthroughout the organisation.
FOR MAN POWER PLANNING
y would need to hire people in large numbers over next few years to maintain
growth and stay competitive.
y The entire HR framework needs to be revamped and the skill sets of existing
staff needs to be strengthened. The banks have to suitably realign their existing
human resources from surplus to deficit pockets Surplus staffs and readjust
staffing pattern in a computerised environment.
FOR TALENT MANAGEMENT
y Public Sector Banks should not only take care of the sum total of its individual
human capital, but also how effectively it draws out the best from its talent
Banks have an excellent pool of competent personnel at any point of time .
y Personnel in all the cadres. Such personnel need to be identified, nurtured andmotivated through a systematic organizational plan to enable them to accept
Suitable changes in the promotion, challenging roles early in the career. Loops in customerservices Facts about customers Ninety five percents of customers do not complain even if
they are dissatisfied bcoz of indifferent attitude of not to bother unnecessarily and
accept such bad service as part of human nature.
Because do customers want
1-Customers want control over their decisions
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2- Customers want to achieve their goals
3- Customers want to preserve their self respect.
4- Customers want to be treated fairly
5- Customers want friendly welcome and reception
6- Customers want to know whats going on
7- Customers want a feeling of security and safety
8- Customers want to feel like VIPs
9- Customers want honesty
y The may I help you counter could not come up to the level of expectation as
there is a lack of spirit in implementing it. This can be a vital customer care
capsule in the panacea kit of the bank to heal al wounds.
y Many times the complaints could relate to discourteous behavior of counter staff-
this should be handled carefully. If the customer is correct and has too many such
complaints against the staff, a stern action is called for and client must be
advised. In sum and substance a good customer service means a broad smile oncustomers face as they leave the bank after finishing their business.
For PSBs, the major problems are in the form of security risks, network downtime,
scarcity of trained personnel, expensive system upgrades and recurring costs given
the massive scale of their current operations. Banks rely on innovative ideas to
increase their earnings.
Naturally, idea generators (human capital) become an even more important
resource than the physical and financial ones. The entry of new generation private
sector banks and evolving technology has been changing the face of the Indian
banking industry. It is necessary for PSBs to adopt a standardized customer
services code to remain competitive and profitable.
Conclusion
The growth of the banking sector will be one of the most important inputs that shall
go into making sure that India progresses and becomes a global economic super
power.
With the collapse of Lehman Brothers and other Wall Street icons, there was
growing recession which affected the US, the European Union (EU) and Japan. Thiswas the result of large scale defaults in the US housing market as the banks went on
providing risky loans without adequate security and the repaying capacity of the
borrower. The industries most affected by weakening demand were airlines, hotels, real
estate. Besides this, Indian exports suffered a setback and there was a setback in the
production of export-oriented sectors.
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The boom in the field of retail banking and the intense competition among the
banks to increase the customer base has resulted in the large disbursement of
consumer loans, home loans, loans on credit cards, auto loans, educational loans etc.
on easy terms without much scrutiny. This has brought with it an increase in the no. of
cases of default in loan repayment thus increasing the banks NPAs. Managing
customers is one of the main issues faced by banks. The demands and expectations of
the customers grow at a much faster rate than the banks can equip themselves to be
with them. If the service levels of the product levels are not up to the 60 customer
satisfaction, there is always a danger that the customer might shift his transactions
elsewhere. So always give customers more than they expect to get. Multiple regulations
are the main weakness for PSBs. It has not the single controlling system while private
banks have. PSBs are also guided by govt. and controlled by RBI and it has also their
union. So there is trice controlling system thats why any policy takes time in being
implemented. This is the main reason of delayed progress of PSBS.
But in this critical situation the Indian public sector banks handled that problem.
Banks act as important players in the financial markets. They play a vital role in the
economy of a country. Indian public sector banks have not only been able to weather
the storm of global recession but have been able to moderate its impact on the Indian
economy as well, compared to its peers among the foreign and private banks. The
banking sector faces profitability pressures due to higher funding costs, mark-to-market
requirements on investment portfolios, and asset quality pressures due to a slowing
economy. But Indian banks global exposure is relatively small, with international assets
at about 6 per cent of the total assets. The strong economic growth in the past, lowdefaulter ratio, absence of complex financial products, regular intervention by central
bank, proactive adjustment of monetary policy and so called close banking culture has
favored the banking industry in India in recent global financial turmoil.
There is need for continuous improvement in asset quality by strengthening skill
at the grass root level, adopting regular inter-face with borrowers, ascertaining
periodical operating performance of the firm etc.
Assessment of technology to choose the most appropriate model should be
taken up.
Technology strengthening should be done to provide a reliable backbone fordelivery of products and services and to get business intelligence data. Public
sector banks were more likely to be seen as an older generation organisation
wherethe average age group would be 50 years, somebody said, Public sector
banks thereforeneed to implement right strategies to woo young techno-savvy
customers that prefer alternative channels to traditional banking methods. the
financial sector services is undergoing a rapid change in terms of the
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demographics, regulatory requirements and technology because of the high
revenues generated.
Training of identified staff in these services should be done in the right earnest. The requirements of the customers should be recorded and the existing product
modified and enhanced.
Teams of experts should be organized to develop models of asset allocation tosuit the requirements of customers belonging to different life-stages, risktolerances etc.
Systems and procedures are being toned up to ensure standardization ofproducts and services so that the customer has a uniformly good experiencethroughout the bank.
Customers are being made aware of the enhanced offerings through multi-mediaadvertisements.
Above all, large-scale and concerted efforts are on to bring about the mind set inthe frontline staff desirable for delivery of the Financial Planning service.Furthermore, the interference of the central government with the functioning of
PSBs should stop. Public Sector Banks in India needs to tackle these challenges successfully to
keep growing and strengthen the Indian financial system.
With all these steps the success of PSBs should be assured.
BIBLIOGRAPHY
1. A Profile of Banks : 2010-11, by Reserve bank of India2. Economic & Political Weekly.3. Principles of Banking (MC Million).4. RBIs Annual Report for the year 2010-11.5. The Financial Express Trend and Progress of Banking in India 2008-2009,
published by R.B.I.6. www.rbi.org.in7. www.theeconomictimes.com8. www.thehindubusinessline.com
9. www.wikipedia.com
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