banking final bibliography

144
OBJECTIVES AND SCOPE OF THE PROJECT The banking industry is one of the fastest growing industry in India. It is a mirror image of the economy of the country. With the liberalization of the economy, India has become the playground of major global banking majors. The major objectives of the study are as below: To analyse how political, economical, socio- cultural, technological factors affect this industry by PEST analysis. To find out level of competition in Indian banking industry through using porter’s five force model. To find out driving forces and key success factors of the industry To analyze various threats and opportunities for the industry To focus on current trends and future of the industry. 1

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Page 1: Banking Final Bibliography

OBJECTIVES AND SCOPE OF THE PROJECT

The banking industry is one of the fastest growing industry in

India. It is a mirror image of the economy of the country. With the liberalization

of the economy, India has become the playground of major global banking

majors.

The major objectives of the study are as below:

To analyse how political, economical, socio-cultural, technological factors

affect this industry by PEST analysis.

To find out level of competition in Indian banking industry through using

porter’s five force model.

To find out driving forces and key success factors of the industry

To analyze various threats and opportunities for the industry

To focus on current trends and future of the industry.

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RESEARCH METHODOLOGY

We have done exploratory research and for that purpose we had

used secondary data.

We had collected this secondary data from various published

materials like newspapers, magazines, books etc and from Internet web sites.

From these various information and data we had done qualitative and

quantitative analysis to find out impact of various forces, effect of macro

environmental factors, major trends and future of the industry.

1.1: History of Indian banking

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A bank is a financial institution that provides banking and other

financial services. By the term bank is generally understood an institution that

holds a Banking Licenses. Banking licenses are granted by financial supervision

authorities and provide rights to conduct the most fundamental banking services

such as accepting deposits and making loans. There are also financial institutions

that provide certain banking services without meeting the legal definition of a

bank, a so-called Non-bank. Banks are a subset of the financial services industry.

The word bank is derived from the Italian banca, which is

derived from German and means bench. The terms bankrupt and "broke" are

similarly derived from banca rotta, which refers to an out of business bank,

having its bench physically broken. Moneylenders in Northern Italy originally

did business in open areas, or big open rooms, with each lender working from

his own bench or table.

Typically, a bank generates profits from transaction fees on

financial services or the interest spread on resources it holds in trust for clients

while paying them interest on the asset. Development of banking industry in

India followed below stated steps.

Banking in India has its origin as early as the Vedic period. It is believed

that the transistion from money lending to banking must have occurred

even before Manu, the great Hindu Jurist, who has devoted a section of his

work to deposits and advances and laid down rules relating to rates of

interest.

Banking in India has an early origin where the indigenous bankers played a

very important role in lending money and financing foreign trade and

commerce. During the days of the East India Company, was the turn of the

agency houses to carry on the banking business. The General Bank of India

was first Joint Stock Bank to be established in the year 1786. The others

which followed were the Bank Hindustan and the Bengal Bank.

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In the first half of the 19th century the East India Company established

three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and

the Bank of Madras in 1843. These three banks also known as Presidency

banks were amalgamated in 1920 and a new bank, the Imperial Bank of

India was established in 1921. With the passing of the State Bank of India

Act in 1955 the undertaking of the Imperial Bank of India was taken by the

newly constituted State Bank of India.

The Reserve Bank of India which is the Central Bank was created in 1935

by passing Reserve Bank of India Act, 1934 which was followed up with

the Banking Regulations in 1949. These acts bestowed Reserve Bank of

India (RBI) with wide ranging powers for licensing, supervision and control

of banks. Considering the proliferation of weak banks, RBI compulsorily

merged many of them with stronger banks in 1969.

The three decades after nationalization saw a phenomenal expansion in the

geographical coverage and financial spread of the banking system in the

country. As certain rigidities and weaknesses were found to have developed

in the system, during the late eighties the Government of India felt that

these had to be addressed to enable the financial system to play its role in

ushering in a more efficient and competitive economy. Accordingly, a high-

level committee was set up on 14 August 1991 to examine all aspects

relating to the structure, organization, functions and procedures of the

financial system. Based on the recommendations of the Committee

(Chairman: Shri M. Narasimham), a comprehensive reform of the banking

system was introduced in 1992-93. The objective of the reform measures

was to ensure that the balance sheets of banks reflected their actual

financial health. One of the important measures related to income

recognition, asset classification and provisioning by banks, on the basis of

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objective criteria was laid down by the Reserve Bank. The introduction of

capital adequacy norms in line with international standards has been

another important measure of the reforms process.

1.Comprises balance of expired loans, compensation and other bonds such

as National Rural Development Bonds and Capital Investment Bonds.

Annuity certificates are excluded.

2. These represent mainly non- negotiable non- interest bearing securities

issued to International Financial Institutions like International Monetary

Fund, International Bank for Reconstruction and Development and Asian

Development Bank.

3. At book value.

4.Comprises accruals under Small Savings Scheme, Provident Funds,

Special Deposits of Non- Government

In the post-nationalization era, no new private sector banks were allowed

to be set up. However, in 1993, in recognition of the need to introduce

greater competition which could lead to higher productivity and efficiency

of the banking system, new private sector banks were allowed to be set up

in the Indian banking system. These new banks had to satisfy among

others, the following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;

(iii) The shares should be listed on the stock exchange;

(iv) The headquarters of the bank should be preferably located in a

centre which does not have the headquarters of any other bank; and

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(v) The bank will be subject to prudential norms in respect of banking

operations, accounting and other policies as laid down by the RBI. It

will have to achieve capital adequacy of eight per cent from the very

beginning.

A high level Committee, under the Chairmanship of Shri M. Narasimham,

was constituted by the Government of India in December 1997 to review

the record of implementation of financial system reforms recommended by

the CFS in 1991 and chart the reforms necessary in the years ahead to make

the banking system stronger and better equipped to compete effectively in

international economic environment. The Committee has submitted its

report to the Government in April 1998. Some of the recommendations of

the Committee, on prudential accounting norms, particularly in the areas of

Capital Adequacy Ratio, Classification of Government guaranteed

advances, provisioning requirements on standard advances and more

disclosures in the Balance Sheets of banks have been accepted and

implemented. The other recommendations are under consideration.

The banking industry in India is in a midst of transformation, thanks to the

economic liberalization of the country, which has changed business

environment in the country. During the pre-liberalization period, the

industry was merely focusing on deposit mobilization and branch

expansion. But with liberalization, it found many of its advances under the

non-performing assets (NPA) list. More importantly, the sector has become

very competitive with the entry of many foreign and private sector banks.

The face of banking is changing rapidly. There is no doubt that banking

sector reforms have improved the profitability, productivity and efficiency

of banks, but in the days ahead banks will have to prepare themselves to

face new challenges.

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Indian Banking: Key Developments

1969 Government acquires ownership in major banks

Almost all banking operations in manual mode

Some banks had Unit record Machines of IBM for IBR &

Pay roll

1970- 1980 Unprecedented expansion in geographical coverage, staff,

business & transaction volumes and directed lending to

agriculture, SSI & SB sector

Manual systems struggle to handle exponential rise in

transaction volumes --

Outsourcing of data processing to service bureaux begins

Back office systems only in Multinational (MNC) banks'

offices

1981- 1990 Regulator (read RBI) led IT introduction in Banks

Product level automation on stand alone PCs at branches

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(ALPMs)

In-house EDP infrastructure with Unix boxes, batch

processing in Cobol for MIS.

Mainframes in corporate office

1991-1995 Expansion slows down

Banking sector reforms resulting in progressive de-

regulation of banking, introduction of prudential banking

norms entry of new private sector banks

Total Branch Automation (TBA) in Govt. owned and old

private banks begins

New private banks are set up with CBS/TBA form the start

1996-2000 New delivery channels like ATM, Phone banking and

Internet banking and convenience of any branch banking and

auto sweep products introduced by new private and MNC

banks

Retail banking in focus, proliferation of credit cards

Communication infrastructure improves and becomes cheap.

IDRBT sets up VSAT network for Banks

Govt. owned banks feel the heat and attempt to respond

using intermediary technology, TBA implementation surges

ahead under fiat from Central Vigilance

Commission (CVC), Y2K threat consumes last two years

2000-2003 Alternate delivery channels find wide consumer acceptance

IT Bill passed lending legal validity to electronic

transactions

Govt. owned banks and old private banks start implementing

CBSs, but initial attempts face problems

Banks enter insurance business launch debit cards

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1.2: CURRENT SCENARIO

The banking industry in India is in a midst of transformation,

thanks to the economic liberalization of the country, which has changed business

environment in the country. During the pre-liberalization period, the industry

was merely focusing on deposit mobilization and branch expansion. But with

liberalization, it found many of its advances under the non-performing assets

(NPA) list. More importantly, the sector has become very competitive with the

entry of many foreign and private sector banks. The face of banking is changing

rapidly. There is no doubt that banking sector reforms have improved the

profitability, productivity and efficiency of banks, but in the days ahead banks

will have to prepare themselves to face new challenges.

For the first quarter ended June 2004, the banking sector recorded a bottom

line growth of 18% to Rs 4852.50 crore. Higher net interest income and

lower provisioning were the main reasons for the profit growth during the

quarter. However, the above results were achieved despite higher operating

expenses and a lower rise in non-interest income.

Among banks, public sector banks outperformed private sector banks by

registering a 20% rise in the net profit compared to an 11% growth reported

by private sector banks. This was mainly due to a higher rise in other

income (OI) and a lower increase in operating expenses by public sector

banks compared to a fall in OI and higher operating expenses by private

sector banks. However, at the net interest level, private sector banks

outperformed public sector banks by registering a growth of 36% compared

to a 14% rise reported by public sector banks. .

The net interest income of the overall banking sector during the quarter rose

17% to Rs 11962.53 crore, mainly due to low cost of funds. The interest

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earned rose 4% to Rs 29747.88 crore, contributed mainly by interest

income from core operations (i.e., lending). The interest expenses decreased

by 4% to Rs 17785.35 crore. The interest spread of most banks witnessed

an increase over the corresponding previous quarter, as the decline of yield

on lending was lower than the cost of funds. In the falling interest rate

scenario, the rate on deposits for most banks fell faster than advances. Thus,

interest expenses came down faster to protect profit.

The sound economic growth, soft interest rate regime, upward migration of

incomes and wider distribution to cover a larger proportion of the

population are expected to increase the demand for retail loans in a

significant manner. The retail credit as a percentage of GDP in India is only

around 5% as compared to levels of 30 - 50% in other Asian economies

and, therefore, offers significant growth opportunities. Also, favourable

demographic profile like 69% of the population estimated to be under 35

years and an increase in upper middle/high income households are to be the

main drivers for retail credit. In the medium term, stronger demand for

credit from the corporate sector is also expected consequent to the

resurgence of this sector. Earlier, banks were seeing lower credit offtake

from corporates because of weak business sentiments and lower credit

requirement due to improved operational efficiency

Also, most banks are aggressively augmenting their fee incomes and have

embarked upon cross selling of products. They are also focusing on fuller

utilization of their IT investments such as ATMs by entering into sharing

arrangement with other banks to earn extra OI. Many banks are hopeful of

effecting significant NPA recoveries due to the Securitisation Act.

Recoveries from NPAs, which have been provided for, add to OI.

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The banking sector is poised to grow in line with the growth of the

economy. However, there are concerns that directed focus on lending to

agriculture and SSI sector may increase NPAs of banks. Further, volatility

and a sharp fall in g-sec prices may lead to trading losses or even

depreciation provision for some banks, going forward.

1.3: PROSPECTS

The prospect of Indian banking sector is very good. It is going to

be flourished in years to come. As India is going to become outsourcing hub for

foreign companies. Some of the factors which has contributed to good prospects

of banks are as under:

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RBI's soft interest rate policy has helped increase the liquidity in the

market, however credit offtake has not exactly been robust. Going

forward, the scenario is set to change in favour of higher credit offtake

due to expected improvement in agricultural output on the back of

good monsoons as well as revival in the Indian industry. However the

same cannot be said for the interest rate regime. Higher inflation and

the prospect of the US raising interest rates may necessitate a hike in

interest rates in the domestic markets also. This may in turn curb the

growth of the credit in the economy. Hence while the growth in credit

may still be robust, a higher interest rate scenario may however limit

the potential.

While the new law regarding securitisation and foreclosure of assets

may take a while to bear any large benefits, currently the benefits of

increased power in the hands of the lender are making the borrowers

to come to the negotiating table. FY04 saw a scenario where the

borrowers were forced to negotiate with the lenders, which

consequently led to the borrowers returning some of the dues to the

lenders. Going forward the new law will bring about greater

accountability within the system and ensure that borrowers do not take

undue advantage of the system. Already an asset reconstruction

company has been set up by SBI in partnership with other institutions

like ICICI Bank and IDBI. If properly implemented, this new law may

lead to significant benefits for the banking sector as a whole.

  Currently the banking sector in the country is strongly fragmented and

hence with further policy changes taking place in the sector,

consolidation is likely to take place at a faster rate. However this is

subject to the removal of the ceiling on voting rights will ensure that

private sector and foreign banks will be in a much better position to

carry out acquisitions in the banking sector. A hike in FDI capital

limits in the sector would further go a long way in the process of

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consolidation.

  In terms of credit growth, going forward. India's core sector is

witnessing a revival of sorts. The manufacturing sector especially led

by steel and cement industries has shown significant improvement in

FY04. We expect the trend to continue. Hence as corporate growth

picks up lending too is likely to see an up tick. Retail credit off-take is

expected to remain strong going forward with the housing finance

industry, the main contributor to credit off-take from this segment,

expected to grow between 20%-25% in the next 3-4 years.

2: STRUCTURE OF INDIAN BANKING INDUSTRY

Organized banking was active in India since the

establishment of the General Bank of India in 1786. After independence, the

Reserve Bank of India (RBI) was established as the central bank and in 1955, the

Imperial Bank of India, the biggest bank at the time, was taken over by the

government to form state-owned State Bank of India (SBI). RBI had undertaken

an exercise to merge weak banks to strong banks and the total number of banks

thus reduced from 566 in 1951 to 85 in 1969.

With the objective of reaching out to masses and meeting

the credit needs of all sections of people, the government nationalized 14 large

banks in 1969 followed by another 6 banks in 1980. This period saw enormous

growth in the number of branches and the banks’ branch network became wide

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enough to reach the weakest sections of the society in a vast country like India.

Sib’s network of 9033 domestic branches and 48 overseas offices is considered

to be one of the largest for any bank in the world.

The economic reforms unleashed by the government in early

nineties included banking sector too, to a significant extent. Entry of new private

sector banks was permitted under specific guidelines issued by RBI. A number

of liberalisation and de-regulation measures aimed at consolidation, efficiency,

productivity, asset quality, capital adequacy and profitability have been

introduced by the RBI to bring Indian banks in line with International best

practices. With a view to giving the state-owned banks operational flexibility and

functional autonomy, partial privatisation has been authorised as a first step,

enabling them to dilute the stake of the government to 51 per cent. The

government further proposed, in the Union Budget for the financial year 2000-

01, to reduce its holding in nationalised banks to a minimum of 33 per cent on a

case by case basis.

The banking system can be broadly classified as organized and

unorganized banking system. The unorganised banking system comprises of

moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc.

Whereas the organised banking system comprises of Scheduled Banks and Non-

Scheduled Banks that are permitted by RBI to undertake banking business.

Types of Banks

A. Scheduled Banks

Scheduled commercial banks are those that come under the purview of the

Second Schedule of Reserve Bank of India (RBI) Act, 1934. The banks that are

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included under this schedule are those that satisfy the criteria laid down vide

section 42 (6 of the Act).

1. The bank is dealing in banking business in India only.

2. The paid up capital and total funds of the bank should not be less than five

lakhs rupees.

3. It should convince RBI that its activities would not be against the interest of

investors.

4. The bank must be:

(a) State cooperative bank, or

(b) A company according to the definition of the companies Act1956, or

(c) An institution notified by the central government, or

(d) A corporation or a company incorporated by or under any law in

force in any place outside India.

Thus,

(I) Indian Commercial Banks

(II) Foreign Commercial Banks, and

(iii) State Cooperative Banks fulfilling the above condition are

considered as scheduled banks.

Moreover under the RBI Act section 42, the Central Government

has declared the following banks as scheduled banks.

(i) State Bank of India and its seven subsidiary banks,

(ii) Twenty nationalized banks, and

(iii) Urban Banks.

In June 1980 there were 149 scheduled banks which included

(i) Public Sector Banks

(ii) Private sector Banks,

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(iii) Foreign Exchange Banks and

(iv) State Cooperative Banks.

A bank which wants to register its name as scheduled bank has to

apply to the Central Government. On receiving such application, the central

government orders RBI to investigate the banks’ accounts. If RBI gives

favorable reports, the central government sanctions its proposal, and the bank is

listed under schedule annexure II and is considered as a scheduled bank.

Some co-operative banks come under the category of scheduled

commercial banks though not all co-operative banks.  

PUBLIC SECTOR BANKS  

Public sector banks are those in which the Government of India or the RBI

is a majority shareholder. These banks include the State Bank of India

(SBI) and its subsidiaries, other nationalized banks, and Regional Rural

Banks (RRBs). Over 70% of the aggregate branches in India are those of

the public sector banks. Some of the leading banks in this segment include

Allahabad Bank, Canara Bank, Bank of Maharashtra, Central Bank of

India, Indian Overseas Bank, State Bank of India, State Bank of Patiala,

State Bank of Bikaner and Jaipur, State Bank of Travancore, Bank of

Baroda, Bank of India, Oriental Bank of Commerce, UCO Bank, Union

Bank of India, Dena Bank and Corporation Bank. 

PRIVATE SECTOR BANKS  

Private Banks are essentially comprised of two types: OLD AND THE

NEW.

The OLD PRIVATE sector banks comprise those, which were operating

before Banking Nationalization Act was passed in 1969. On account of 16

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their small size, and regional operations, these banks were not nationalized.

These banks face intense rivalry from the new private banks and the foreign

banks. The banks that are included in this segment include: Bank of Madura

Ltd. (now a part of ICICI Bank), Bharat Overseas Bank Ltd., Bank of

Rajasthan, Karnataka Bank Ltd., Lord Krishna Bank Ltd., The Catholic

Syrian Bank Ltd., The Dhanalakshmi Bank Ltd., The Federal Bank Ltd.,

The Jammu & Kashmir Bank Ltd., The Karur Vysya Bank Ltd., The

Lakshmi Vilas Bank Ltd., The Nedungadi Bank Ltd. and Vysya Bank.

The new private sector banks were established when the Banking

Regulation Act was amended in 1993. Financial institutions promoted

several of these banks. After the initial licenses, the RBI has granted no

more licenses. These banks are gearing up to face the foreign banks by

focusing on service and technology. Currently, these banks are on an

expansion spree, spreading into semi-urban areas and satellite towns. The

leading banks that are included in this segment include Bank of Punjab

Ltd., Centurion Bank Ltd., Global Trust Bank Ltd., HDFC Bank Ltd.,

ICICI Banking Corporation Ltd., IDBI Bank Ltd., IndusInd Bank Ltd. and

UTI Bank Ltd.  

CO-OPERATIVE BANKS  

Co-operative banks act as substitutes for moneylenders, and offer timely

and adequate short-term and long-term institutional credit at reasonable

rates of interest. Co-operative banks are relatively similar in terms of

functions to the other banks except for the following: 

(a)They are organized and managed on the principal of co-operation, self-

help, and mutual help.

(b)They operate under the rule of "one member, one vote".

(c) Operate on "no profit, no loss" basis.

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(d) Co-operative bank conducts all the main banking functions of deposit

mobilization, supply of credit and provision of remittance facilities. Co-

operative banks offer limited banking products and are functionally

specialists in agriculture-related products, and even in providing

housing loans of late. Urban Co-operative Banks offer working capital

loans and term loans as well.

(e) Co-operative banks primarily operate in the agriculture and rural sector.

However, UCBs, SCBs, and CCBs function in semi urban, urban, and

metropolitan areas too

.

(f) Co-operative banks are probably the first government sponsored,

government-supported, and government-subsidized financial

agency in India. They get financial and other aid from the

Reserve Bank of India NABARD, central government and state

governments. They are the "most favored" banking sector with

risk of nationalization.

(g) Co-operative banks normally concentrate on "high revenue" niche retail

segments.

DEVELOPMENT BANKS  

Development banks are primarily intended to encourage industrial

development by providing adequate flow of funds to industrial projects. In

other words, these institutions undertake the responsibility of aiding all-

round development in the country’s economy by promoting new industrial

projects, and providing financial assistance for the expansion,

diversification, and up gradation of the existing units. Development Banks

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may be classified as All India development banks and Regional

development banks. While All India development banks include Industrial

Development Bank of India and Industrial Finance Corporation of India,

examples of Regional development banks include State Financial

Corporation and State Industrial Development Corporation. 

B. NON-SCHEDULED BANKS:

The banks, which are not included in the second schedule of RBI Act,

1934, are known as non-scheduled banks. Such banks total share capital is

less than five lakhs. These banks are not governed according to the RBI Act

and they receive no benefits from the RBI. These banks have no place in

the list of recognized banks of the RBI. These banks are not much trusted

by the people and they do not get handsome deposits. Since 1951 the

numbers of such banks have been gradually decreasing. In 1979 there were

only five non-scheduled banks.

Generally now days we found many cooperative banks which are

belongs to the non-schedule co-operative banks. Following are the types of

non-schedule banks they are work like the schedule banks but here

difference in its status and it not having the status of the schedule banks.

a. Deposits Banks

b. Cooperative Banks

c. Central Banks

d. Exchange Banks

e. Investment or Industrial Banks

f. Land Development Banks

g. Savings Banks

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(a) Deposits Banks:

Generally, banks which provide short-term loans to business and industrial

units and which mobilize savings of people as deposits are called deposit

banks. Deposit banks accept deposits from people, and provide short-term

advances. They provide overdraft and cash credit facilities to merchants. To

meet the long-term requirement of industrial units is not possible for these

banks. They accept three types of deposits- saving bank deposits, fixed

deposits and current account deposits. They accept these deposits which are

payable on demand or on short notice, and provide funds to trading and

commercial units for short durations.

(b) Cooperative Banks

Cooperative banks meet the short-term financial needs of farmers.

Agriculturists, petty farmers and artisans organize themselves on cooperative

principles and form cooperative societies and banks. Cooperative banks raise

funds through various means, besides receiving all kinds of deposits to make

them available as lendable funds to its members. In India developed

cooperative banks supply finance for agriculture and non-agriculture activities.

(c) Central Banks

A central bank is a special institution which controls and regulates the entire

banking structure of country. It also strives to maintain monetary stability of

the country. Central bank is also known as the apex bank of a country. Since it

functions in the best interest of the country and making profits is unknown to

it, it is entrusted the right it issue currency notes. No other bank is allowed this

right. It operates in close cooperation with the government of implementing

economic policies, thereby promoting economic development.

(d) Exchange Banks:

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There is a difference in financing of foreign trade and financing of internal

trade. Generally a person carrying on international trade requires foreign

currencies to meet his obligation. It is here that exchange banks play the role of

financing the dealer for setting transactions involved in foreign trade, there are

specialized banks for exchange business. In India, there is an Export-Import

Bank (EXIM).

(e) Investment or Industrial Banks:

Investment banks provide long-term credit to industries. They raise their funds

by way of share capital, debentures, and long-term deposits from the public.

They also raise funds by the issue of bonds for business operations and

government agencies. Usually they underwrite fresh issue of shares and

debentures of companies. Such banks also buy the entire issue of new

securities of public limited companies and try to get them subscribed at a

higher price by the public.

(f) Land Development Banks:

Land development banks were earlier known as land mortgage banks. In India,

there is limited number of such banks. There are special institutions providing

long-term loans to agricultures and farmers. They provide loans on security of

land and other immovable properties. They supply long-term funds for periods

exceeding six years. Agriculturists and farmers need such funds for making

permanent improvements to land and for buying farming machinery and

equipment.

(g) Savings Banks:

Savings Banks are specialized institutions, which encourage general public to

save something from their earnings. In other words such banks pool the small

savings of middle and lower income sections of society. They are the banks in

the true sense of the term and their main aim is to promote and collect of the

public. Not only the depositors are given interest, but also they are allowed to

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withdraw in times of need. The numbers of withdrawal are, however,

restricted. Separate savings banks are organized in various nations. The

government can also run a savings bank. In India the postal department runs

the postal saving bank all over the country. It is very popular in rural areas

where no branches where no branches of established commercial bank operate.

In urban areas, commercial bank handles savings business

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Table-1:

Structure of the Indian banking industry, March 31, 2004

Sr.

No.

Bank Group No. Of

Banks

Deposits Loans &

Advances

Net Profit

1. Public Sector Banks

Share Percentage

27

7.6 %

10796

76.8 %

5493

72.1 %

123

69.8 %

1. a State Bank Group

Share (per cent)

8

2.2 %

3910

27.8 %

1892

24.8 %

45

25.6 %

1. b Nationalised Banks

Share (per cent)

19

5.3 %

6886

49 %

3604

47.2 %

78

44.2 %

2. Private Sector Banks

Share (per cent)

30

8.4 %

2072

14.8 %

1389

18.2 %

30

16.8 %

2.a Old Private Sector Banks

Share (per cent)

21

5.9 %

914

6.5 %

494

5.3 %

12

7 %

2.b New Private Sector Banks

Share (per cent)

9

2.5 %

1158

8.3 %

895

11.9 %

17

9.8 %

3. Foreign Banks

Share (per cent)

36

10 %

693

4.3 %

522

6.8 %

18

10.4 %

4. Total Pvt Sector Banks

Share (per cent) {2+3}

66

18.5 %

2765

19.7 %

1911

25.1 %

48

27.2 %

5. Total Comm. Banks

Share (per cent) {1+4}

93

26 %

13559

96.6 %

7405

97.1 %

171

97 %

6. Regional Rural Banks

Share (per cent)

264

74 %

483

3.4 %

218

2.9 %

5

3 %

7. Total of Banks

Share (per cent)

357

100 %

14042

100 %

7623

100 %

76

100 %

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DIFFERENT SERVICES PROVIDED BY BANKS IN INDIA

Account types & other Services

Personal Banking: Other Different Services

Deposit Scheme Gold Banking

___ Current Account NRI Banking

___ Saving Account International banking

___ Term Deposit Corporate Banking

(Other Deposit Scheme as per the cust. convince) SSI Banking

Personal Finance Small Business Finance

___ Housing Loan Development Banking

___ Car Loan Other Services

___ Educational Loan

___ Personal Loan

___ Festival Loan

___ Property Loan

___ Other Loans

(As per banks and its customer base)

Services

ATM Services

Credit Card Services

Internet Banking Services

Phone Banking Services

Locker Services

PPF Services

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Deposit Scheme:

Current Account

Current Account is the accounts which useful to business, a transparent and

efficient banking services support to meet its day-to-day financial requirements.

It offers to serve businesses financial requirements and giving maximum

financial leverage and save time and cost.

Saving Accounts:

Saving bank accounts is for the people who want to save for something in the

future. So its necessity characteristics are safe and accessible anytime, anyplace

to help meet their needs. So banks are those who help them in planning and

saving their future financial requirements. Here, savings are completely liquid,

and earn competitive interest in our safety.

Term Deposit Accounts:

With the help of the term deposit one can earn a higher income on their surplus

cash by investing this money in this type of accounts. Scheduled bank gives

promise of security and trust and help you to earn extra income with your hard

earned money.

Wide Choice in Period of Deposit

Flexibility in period of term deposit from 15 days to 10 years

It gives the benefits of Safety, Liquidity, Transferability and Flexible and

Timely payment of Interest

Personal Finance:

Banks second function is to give finance and through it banks can earn hand

some return and generate the profits for from it. Now day’s banks are giving

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finance on following different ways to satisfy the financial needs of the

customers.

Following are the different ways through the bank give finance to its customers:

-Housing Loan, Car Loan, Personal Loan, Educational Loan, Festival Loan,

Property Loan and etc,

SERVICES:

In the globally competition time service is quite important for the any sector and

having in nature of service sector the services of the banking sector is also most

important part following are the services that providing by the banking sectors

various banks but it differ from the bank to banks.

ATM Services

Credit Card Services

Internet Banking Services

Phone Banking Services

Locker Services

PPF Services

OTHER DIFFERENT SERVICES (CORPORATE)

Large foreign banks, Public and Private sector banks provide

different services to their corporate customers. For carrying out their business

activity and through that services they provide financial support and facility also.

3: CUSTOMER RELATIONSHIP IN BANKING INDUSTRY

(Through new technology and product development)

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Liberalisation and de-regulation process initiated by the Indian

Government in early nineties has completely changed the face of the Indian

banking industry. The entry of new private sector banks with the state-of-the-art

technology and lean structures has forced the old private-sector and public

sector banks to respond to the new challenges with aggressive restructuring

measures. The past five years have seen the public sector banks rapidly

introducing new products and services, computerising and networking key

branches, rationalising manpower and launch a number of initiatives to improve

operating efficiencies. Are they on the right track? Are these strategies to

become leaner and meaner sufficient to gain a competitive advantage to survive

and grow in the long run? This article argues that while all the above measures

are no doubt necessary to survive, they are by no means sufficient. To survive

and thrive in the long run, banks need to pursue strategies that enable them to

develop resources that are inimitable, rare, durable and superior to competitors.

Current development in the banking industry which make it more

attractive and it push this Industry in the market place

Introduction of new products and services:

Many of the public sector banks launched an array of products and services,

especially on the retail front, to match the competition. Some of the new

products include debit cards, credit cards, international cards, special deposits,

sweep-in accounts, and demat accounts and any-where-banking. Some of the

new services include round-the-clock phone banking, Automated Teller

Machines (ATMs), inter-city, inter-branch banking, net-banking and bill

payment services. Many public sector banks have even launched their own asset

management companies to offer mutual fund services to their customers.

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Banks invested aggressively in computerisation and networking of branches.

The oldest and the biggest bank, SBI, had computerised 3701 branches by

March 2004, constituting nearly 41 per cent of its total branches. Many of these

branches were also networked so that their customers could be offered ‘any-

time, any-where’ banking services. The other public sector banks too embarked

on a similar computerisation drive.

Installation of ATM networks

All banks have made heavy investments in the installation of large networks of

ATMs. As of March 2004, SBI had a network of 1305 ATMs, Canara Bank had

282 ATMs, Corporation Bank had 475 ATMs to match the ATM network of

private sector banks such as HDFC Bank and ICICI Bank. ATMs proved a

tremendous success by reducing the load on branches significantly as, apart

from carrying out routine transactions such as cash withdrawal etc, customers

can avail such services as transfer of funds and payment of utility bills by

visiting any of the ATMs located conveniently.

4: OUTLOOK MONEY SURVEY

CUSTOMER FRIENDLY BANKS WITH DIFFERENT PARAMETER

Service with a smile: today’s finicky banking customer will settle for nothing less. He’s come to realize, somewhat belatedly, that he is king: he demands that banks roll out not just world-class products and services, but a red carpet as well. His choice of one entity over another as his principal bank is determined by considerations of service quality rather than any other factor. He wants competitive loan rates, yes, but he also wants his loan or credit card application processed in double-quick time. He cherishes the convenience of impersonal Net banking, yes, but during his occasional visits to the branch, he also wants the comfort of personalised, human interactions and facilities that make his banking experience pleasurable. In short, he wants a financial house that will more than just clear his cheques and update his passbook: he wants a bank that cares–and for more than just his custom. He wants a customer-friendly bank.

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So, do banks meet these heightened expectations? And

which are India’s most customer-friendly banks?

To find answers to these questions, Outlook Money commissioned

market research agency C fore to carry out a survey of bank customers in five

cities–Delhi, Mumbai, Chennai, Kolkata and Bangalore. The exhaustive survey,

carried out in early August, covered 5,127 customers of 24 short listed banks:

the 10 biggest nationalised banks and the 10 biggest Indian private banks (in

terms of deposit base) and the only four multinational banks that offer retail

banking services. For all the differences in their ownership, these 24 banks are

all competing in the metros for your custom, so it’s only fair to compare them

within a unified cluster; yet, when comparisons within their respective peer sets

throw up interesting patterns, we’ll take note of them.

These, then, are the significant findings of the survey:

India’s most customer-friendly bank is ICICI Bank, which outperforms

even multinational banks on this count (‘Overall Rankings’)

Ranking a close second is Citibank, which also tops the ranking of MNC

banks on the overall score

For an entity that’s not highly visible, seventh-ranked UTI Bank fares

surprisingly well, breaking into the top 10 in all the six parameters on

which the banks were rated

Strikingly, but not surprisingly, no nationalised bank figures in the top 10

banks, ranked on the overall score; the most customer-friendly PSU bank,

Bank of Baroda, kicks in at No. 12; even the two banks (ING Vysya Bank

and The South Indian Bank) that rank a joint 6th in the smaller universe

of private banks score more overall than the top-ranked PSU bank

State Bank of India, by far India’s largest bank, comes in a lowly 16th in

the overall rankings; even among the smaller universe of PSU banks, it

ranks only 5th, despite the fact that the survey methodology assigns some

weightage to size to acknowledge big banks’ problems in servicing a large

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customer base.

It isn’t as if the entire universe of PSU banks is uniformly insensitive to

customers’ expectations on service quality. Bank of Baroda aside, Indian

Overseas Bank, Syndicate Bank and, to a lesser extent, Canara Bank

give some of the pretentious private sector banks a run for their money.

Likewise, all MNCs are not all there in keeping their customers happy:

Standard Chartered not only lags its MNC peers on most counts, it ranks

16th on ‘service quality’ in the overall rankings.

A more rigorous analysis of the banks’ ratings on some of these

parameters throws up interesting findings about how customer-friendly these

banks are.

Service Quality

This is an index of the core of what makes a bank customer-friendly: its overall

service standards, rated for ease of opening an account; how courteous,

accessible and knowledgeable its staff are; transaction time for services; how

innovative the bank is in introducing products and services; how proactively the

bank informs customers of changes in deposit rates or service charges; how

quickly it redresses grievances; how likely it is to retain customers; and how

probable it is that its customers will recommend the bank to others.

On this count, HSBC tops the 24-bank ranking, followed closely

by ABN Amro. In third place here is a dark horse, The South Indian Bank.

HSBC scores fairly well on most of the sub-parameters–except product and

service innovation. ABN Amro tops the MNC banks’ cluster on such customer-

friendly features as ease of opening account, transaction time for services,

product and service innovation (such as its attractive home loan product All

Smiles, which comes at 6.5 per cent fixed rate for the first two years, after which

the then-prevailing floating rate applies), promptness in keeping customers

informed, and its banking hours (10 am to 7 pm; no weekly holiday). The South

Indian Bank’s good showing here is a reflection of its capacity to own up to its

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customers, small though that base is, and service them well. Much the same can

be said of Federal Bank, IndusInd Bank, Karur Vysya Bank and ING Vysya

Bank, all of which break into the Top 10.

Strikingly, ICICI Bank fares poorly on service quality, coming in

joint 12th (along with Bank of Rajasthan). Within its peer set of private banks, it

falters on such sub-parameters as ease of opening account, transaction time for

cash withdrawal, and promptness in keeping customers informed.

No nationalised bank makes it to the Top 10 on service quality,

but given the wide variance within this grouping, it seems unfair to hang all PSU

banks together. IOB and Syndicate Bank, for instance, fare well among peer

PSUs on all the sub-parameters. On the other hand, Union Bank of India, Bank

of India, UCO Bank and SBI run each other close for the bottom rank. SBI is

last in line in respect of customer retention and customer recommendation. In

fact, SBI’s abysmal scores on all service standard sub-parameters weigh down

its overall customer-friendliness ranking.

Branch facilities

Walk into any branch of a multinational or leading Indian private bank, and

you’ll believe you’re in a plush country club. Many other banks, of course, have

miles to go in this sphere, but there’s a growing realisation among them that

offering a pleasant banking ambience–with comfortable seating, air-

conditioning, restroom and drinking water facilities–and easy, uncluttered access

to bank stationery makes for good business.

The rankings here hold no surprise: MNCs HSBC, Citibank, and

ABN Amro take the top three slots, and IndusInd Bank, the first Indian

commercial bank to secure ISO 9002 certification for all its branches, comes in

at No. 4. House-proud PSU banks IOB and Syndicate Bank top the rankings

within their peer set, but fail to make it to the Top 10 overall. SBI scrapes the

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bottom at rank 23.

ATM service

By automating the most common day-to-day banking transactions–cash

withdrawal, cheque deposits and statement generation–ATMs have, in a sense,

liberated customers from time-wasting branch visits and surly staff. But how

often have you faced automated chaos: an ATM that whimsically rejects your

card or runs out of cash? How often have you felt an overwhelming urge to cut

up your ATM card into tiny slivers and post it along with a cheery letter that

says ‘no, thank you’.

Increasingly, however, banks are waking up to the merits of an

expansive, glitch-free ATM network. They’re investing in technology (read

newer machines), so they’ll be fewer card rejects. And they’re entering into tie-

ups with one another to share their ATM network (for a nominal fee, to be paid

by customers); which means you no longer have to bear the agony of having to

stand in overlong queues at your bank’s ATMs and gape at a state-of-the-art SBI

ATM nearby that forever seems empty.

ICICI Bank’s wide network of ATMs (1,790) gives it top

ranking among all 24 banks; likewise, SBI’s ATM penetration (including many

in some of the remotest corners of India–and India’s first ‘floating ATM’, on a

Kerala backwater ferry!) gives it second rank on this parameter. And MNC

banks, which have far fewer ATMs, targeted sharply at their metropolitan

customers, slip to the bottom. But remove the survey’s weightage for ATM

reach, and judge banks only on how glitch-free their ATM service is, and a

vastly different picture emerges.

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Cards Grievance redress

A lost credit card, a debit card billing for a transaction you never made: on

occasions like these, you’re hurriedly working your bank’s helpline numbers–

and want a sympathetic hearing, and a prompt response. These are also the times

when a bank’s grievance redress mechanism is tested. How quickly and well a

bank responds, and whether you’re subject to an elaborate runaround and

paperwork are critical determinants of how customer-friendly it is.

Here too, the methodology assigns weightage to card

penetration. Consequently, ICICI Bank (2.4 million credit cards; 6 million debit

cards) is No. 1, followed by SBI and HDFC Bank–even though within the

universe of private banks HDFC Bank scores rather dismally on grievance

redress. Next in line are Bank of Baroda and Canara Bank, their high rankings

(even higher than Citibank, for instance) a testimony to the mass popularity of

Bobcards and Cancards. But when the weightage is removed, the rankings

change dramatically.

Loans Speed of disbursal

When you’ve identified your dream home and can’t wait to move in, or when

you’re eager to cash in on an early bird discount on new bookings, you want a

lender who cuts through the paperwork and processes your home loan in a trice.

This sub-parameter is a measure of how quickly a bank processes loan

applications and disburses funds.

Here too, assigning weightage for the number of loan accounts,

the rankings hold few surprises: SBI tops, followed by Bank of Baroda, ICICI

Bank and HDFC Bank. Among MNC banks, ABN Amro emerges on top,

matching product innovation in this space with speedy disbursal; among private

Indian banks, HDFC Bank is No. 2, perhaps having learnt a thing or two from

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HDFC, India’s largest home loan provider.

Phone/Net banking

It’s somewhat ironic that a technology-driven service that has made banking far

more ‘impersonal’ should now be seen as a pillar of customer-friendliness. But

with phone/Net banking, geography is well and truly history. True, it hasn’t

acquired a critical mass of adherents: only 4 per cent of our survey respondents

avail of phone/Net banking services, against 80 per cent who avail of over-the-

counter banking services, and 63 per cent who use ATMs. Even so, 21 banks in

our survey–all but Karur Vysya Bank, Bank of Rajasthan and Karnataka Bank–

offer these services: it’s a symptom of the fact that these are no longer

considered ‘premium’ services, but are percolating down and becoming a must-

have, pretty much like what happened to ATMs some years ago.

Predictably, new-age MNC and Indian private banks, whose

young, upwardly mobile customers are typical users of phone/Net banking,

claim this service space for themselves. Among private banks, HDFC Bank

leads its bigger rival ICICI Bank in this space. And among PSU banks, IOB,

Syndicate Bank and Bank of Baroda are streets ahead of the others. IOB even

breaks into the Top 10 across all 24 banks on this parameter, ahead of new-age

banks like ING Vysya Bank and IndusInd Bank.

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5: NEW MARKETING CHANNEL

New marketing channel is creating strong base for the banking

industry and it will help banks to push their products in the market places. New

private sector banks are used DSA level for pushing their products in the market

place so they appoint different team for different territory and those teams are

works for that area and make strong position in marketing of that banks.

Here, in this channel the cost of employee is variable because

generally appointment of team is based on their works. This team is work for

only marketing so it will help the bank in creating the strong position in the

market place also.

Banks are also involved in inventing new marketing and

distribution channels like E-banking, net banking and tele-banking. The next era

would be of all these. Now customers want services to be delivered at their

convenience. The first mover advantages will surely going to work. About 25%

of transactions are projected to be carried on through E-Banking by 2008

6: BANKING INDUSTRTY DOMINANT ECONOMIC FEATURES

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Market size: Banking industry market size is around Rs.14, 04,341 crore

deposits by 357 commercial banks.

Scope of competitive

rivalry:

There are 357 commercial banks in banking sector, which

includes domestic and foreign banks, and finance sector

also provides strong fight to the banking sector companies.

Market life cycle: In India it is in secondary stage and more and more chance

for growth

Market growth rate: The Indian government adopted the policy of liberalization

and it is since then that this sector has shown high annual

growth through various in various services like ATM, Net

Banking, Phone Banking and its growth rate is also

increasing from heavily from last 4-5year.

Number of companies

in industry:

Now a day around 357 commercial banks; among them 27

public sector banks, 30 private sector banks then 36 foreign

banks and remaining are co-operative banks, they

providing their service in this industry.

Customers: Entrepreneurs those who willing to invest in businesses

especially young and mature people and layman, those use

different banking services, are customers of banks.

Ease of entry/exit: Entry in Indian banking sector has become easy. Now

foreign banks are also allowed to carry on their business.

But exit is difficult due to large investment and government

rules & regulation. All players fight desperately to survive.

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Technology/innovation: Technology is main issue in global era and changes are

fast; biggest changes are occurring in products innovation

and new era technology like net-banking mobile banking or

ATM banking. Now a days all banks are concentrating on

technology related innovative products.

Degree of vertical

integration:

Here no question of degree of vertical integration but some

large banks provides different services so in those case the

degree of integration come in to light but it not effect so

much in this industry’s basic service.

Product Characteristics: Homogeneous services by all banks little difference in

services offered.

Economies of scale: Moderate all companies have virtually equal

service cost due to rules and regulation of RBI but scale of

economies exists in new era services and marketing and

other integration work.

Learning and

experience effects:

Quite important factor because it decides various skills and

operational works also.

Capacity Utilization: Service efficiency is highest in private and in foreign banks

its around 70 to 80 percent but in public sector it is quite

low.

7: Porter's Five Forces Model of Competition

The nature of competition in an industry in large part determines

the content of strategy, especially business-level strategy. Based as it is on the

fundamental economics of the industry, the very profit potential of an industry is

determined by competitive interactions. Where these interactions are intense,

profits tend to be whittled away by the activities of competing. Where they are

mild and competitors appear docile, profit potential tends to be high. Yet a full

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understanding of the elements of competition within an industry is easy to

overlook and often difficult to comprehend.

Porter has identified five basic forces that collectively describe

the state of competition in an industry:

1. The intensity of rivalry among competitors

2. The threat of new entrants to the market

3. The amount of bargaining power possessed by the firm's/industry's

suppliers

4. The amount of bargaining power possessed by the firm's/industry's

customers

5. The extent that substitute products present a threat to a

firm's/industry's products

These forces assist in identifying the presence or absence of

potential high returns. The weaker are Porter's five forces, the greater is the

opportunity for firms in an industry to experience superior profitability. More

generally, understanding how these forces affect competition within an industry

allows the strategist to identify the most advantageous strategic position.

The actors within an industry on whom these forces exert

pressure are, respectively, the industry's competing firms themselves, potential

new entrants to the industry's markets, suppliers (vendors), customers, and

makers of substitute products.

Obviously, the starting point for conducting an analysis of the

five forces of competition is to identify all the competitors, potential new

entrants, major suppliers, the demographics of customers, and makers of and

nature of substitute products. Competitors would not only have to be identified,

but various distinguishing data about the industry would also have to be 38

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specified. For each competitor this data would include market share, product line

differences/similarities, market segments served, price/quality relationships

represented by products, growth/decline trends, financial strength differences,

and any other information that will help describe the industry.

Porter’s FIVE-FORCE analysis for Indian banking industry

39

BARGAINING POWER OF SUPPLIERS

-Low supplier bargaining power-Few alternatives available

-Subject to RBI Rules and Regulations

-Not concentrated-Forward integration-Nature of suppliers

THREAT OF NEW ENTRANT

-Low barriers to entry-Government policies are

supportive-Globalization and liberalisation policy-High exit barriers

INDUSTRY RIVARLYIntense competition

Many private, public,

Co-operative, foreign banks

THREAT OF

SUBSTITUTES

High threat from substitutesLike

Mutual funds,T-bills,

Government securities.

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RIVALRY AMONG THE INDUSTRY

Rivalry in banking industry is very high. There are so many

private, public, co-operative and non-financial institutions operating in the

industry. They are fighting for same customers. Due to government liberalisation

and globalization policy, banking sector became open for everybody. So, newer

and newer private and foreign firms are opening their branches in India. This has

intensified the competition. The no. of factors have contributed to increase

rivalry those are:

1.A large no. Of banks

There are so many banks and non-financial institutions fighting for same pie,

which has intensified competition.

2.High market growth rate

India is seen as one of the biggest market place and growth rate in Indian

banking industry is also very high. This has ignited the competition.

40

BARGAINING POWER OF

CUSTOMERS

-High bargaining power-Low switching cost

-Large no. of alternatives-Homogeneous service by banks

-Full information available with customers

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3.low switching cost

Customer switching cost is very low. They can easily switch from one bank to

another bank and very little loyalty exists.

4.indifferentiate services

Almost every bank provides similar services. No differentiation exists. Every

bank tries to copy each other services and technology, which increases the level

of competition.

5.high fixed cost

6.High exit barrier

High exist barriers humiliate banks to earn profit and retain customers by

providing world-class services.

7. Low government regulations:

There are low regulation exist to start a new business due LPG policy adopted

by India. So, sector is open for everybody.

BARGAINING POWER OF SUPPLIERS

Suppliers of banks are depositors. These are those people who

have excess money and prefer regular income and safety. In banking industry

Suppliers have low bargaining power. Following are the reasons for low

bargaining power of suppliers.

1.Nature of suppliers

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Suppliers of banks are generally those people who prefer low risk and those who

need regular income and safety as well. Bank is best place for them to deposit

their surplus money. They believe that banks are very safe than other investment

alternatives. So, they do not consider other alternatives very seriously, which

lower their bargaining power.

2.few alternatives

Suppliers are risk averters and want regular income. So, they have few

alternatives available with them to invest like Treasury bills, government bonds.

So, few alternatives lower their bargaining power.

3.RBI Rules and Regulations

Banks are subject to RBI rules and regulations. Banks have to behave in the way

that RBI wants. So, RBI takes all decisions relating to interest rates. This reduces

suppliers bargaining power.

4. Suppliers are not concentrated

Banking industry’s suppliers are not concentrated. There are numerous suppliers

with negligible portion to offer. So, this reduces their bargaining power. If they

were concentrated then they can bargain with banks or can collectively invest in

other no-risky projects.

5.Forward integration

Forward integration is possible like mutual funds, but only few people now

about this. Only educated people can forwardly integrate where as large no. Of

suppliers are unaware about these alternatives.

BARGAINING POWER OF CUSTOMERS

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Customers of the banks are those who take loans, advances and

use services of banks. Customers have high bargaining power. Following are the

reasons for high bargaining power of customers.

1. Large no. Of alternatives

Customers have very large no. of alternatives. There are so many banks, which

fight for same pie. There are many non-financial institutions like ICICI, HDFC,

IFCI etc., which has also jumped into these business. There are foreign banks,

private banks, cooperative banks and development banks together with the

specialized financial companies that provide finance to customers. These all

increase preferences for customers.

2.low switching cost

Cost of switching from one bank to another is low. Banks are also providing zero

balance account and other types of facilities. They are free to select any bank‘s

service. Switching costs are becoming lower with Internet Banking gaining

momentum and as a result consumers’ loyalties are harder to retain.

3.undiffernciated service

Banks provide merely similar services. There is no much difference in services

provided by different banks. So, bargaining power of customers increases. They

cannot be charged for differentiation.

4.Full information about the market

Customers have full information about the market due to globalization and

digitization consumers have become advance and sophisticated. They are aware

with each market conditions. So, banks have to be more competitive and

customer friendly to serve them.

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THREAT OF NEW ENTRANT

Barriers to an entry in banking industry no longer exist. So, lots

of private and foreign banks are entering in the market. Competitors can come

from any industry to “ disintermediate” banks. Product differentiation is very

difficult for banks and exit is difficult. So, every bank strives to survive in highly

competitive market. So, we see intense competition and mergers and acquisition.

Government policies are supportive to start a new bank. There

are less statutory requirements needed to start a new venture. Every bank tries to

achieve economies of scale through use of technology and selecting and training

manpower.

THREAT OF SUBSTITUTES

Competition from the non-banking financial sector is increasing

rapidly. Sony and Software giants such as Microsoft are attempting to replace

the banks as intermediaries. The threat of substitute products is very high. These

new products include credit unions and investment houses. One feature of using

an investment house is that the fees that the investment house charges are tax

deductible, where as a bank it is considered a personal expense, which are not

tax deductible. The rate of return with using investment houses is greater than a

bank. There are other substitutes as well for banks like mutual funds, stocks

(shares), government securities, debentures, gold, real estate etc. so, there is a

high threat fro substitute.

Conclusion:

Indian banking sector is one of the highly competitive sectors where high growth

rate and high degree of competition exist. Low entry barriers and high exit

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barriers ignites competition in this industry. Every bank strives to survive in the

shadow of these barriers. There are so many substitutes available with customers

and they have high bargaining power where as suppliers i.e. depositors have low

power in their hands.

8: KEY SUCCESS FACTORS

An industry’s key success factors are those things that most

affect industry members ability to prosper, competencies, competitive

capabilities and business outcomes that spell the difference between profit and

loss and ultimately, between competitive success or failure.

With increasing number of players in the banking industry, the

following are some of the key success factors. .

1. Access to technology

2. Computerization

3. Low employee cost

4. Management of NPAs

5. Transparency of public disclosure and best practices

6. Diversified products

1. COMPUTERISATION AND ACCESS TO NEW TECHNOLOGY

A sound and effective banking system is the backbone of an economy. The

economy of a country can function smoothly and without many hassles if the

banking system backing it is not only flexible but also capable of meeting the

new challenges posed by the technology and other external as well as internal

factors. The importance and role of information technology for achieving this

benign objective cannot be undermined. There is an urgent need for not only

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technology up gradation but also its integration with the general way of

functioning of banks to give them an rim in respect of services provided to

the customers, better housekeeping, optimizing the use of funds and building

up of management information system for decision making. The technology

has the potential to change methods of marketing, advertising, designing,

pricing and distributing financial products and services and cost savings in

the form of an electronic, self-service product-delivery channel. The

technology holds the key to the future success of Indian Banks. Thus,

“Internet Banking” is the need of the hour, which cannot be lost sight of

except at the cost of elimination from the competition. The existence of

Internet banking also becomes inevitable due to the standards required to be

matched at the international level. Thus, the domestic as well as the

international standards mandates the adoption of Internet banking at the

earliest possible moment

Within the banks, their IT strategy has taken different forms.

While quite a few banks have moved towards core banking, other banks have

adopted different models. However, there seems to convergence on the type

of services which are offered - like internet banking, anytime, anywhere

banking, telebanking, remote access, multi city chequing facilities etc. Some

of the banks have scaled up further by setting up call center facilities. Banks

have also gone for sharing of their technological infrastructure, as in the case

of ATM networks. With gradual scaling up, public sector banks are expected

to gain competitive advantages arising out of their vast branch network and

large customer base.

2. GREATEST ASSETS HUMAN RESOURCE (low cost per employee)

To achieve the service excellence and in order to succeed in a market place

where competition is fierce, banks need to focus on yet another area - People.

Bank is harnessing its human resources to keep up the efficiency levels by

adopting people-centric policies. It is well realized that human assets are

hidden assets and we are nurturing this capital to maximize the competency

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levels. The Bank has created enabling environment to bring out the best from

its people through a process of strong training system to hone the skills in the

areas of marketing and technology.

Strategies to make the employee more productive

Reward, recognition and incentives to employee who perform will send the

right signal, ensuring job satisfaction, boosting and employee morale and

building employee commitment.

Identify and outsource non-strategic work, leaving employees free to

concentrate on core banking activities especially high value added

activities.

To keep employee skills updated the training systems of banks need to be

revamped to train employees at every level as well as location of branch.

Raising the skill bar at entry level to ensure that people with requisite skills

get into banks.

Actively encourage physical fitness in employees banks can organize on-

going basis stress management programmes, yoga etc.

To make people grow and realize their productivity, therefore a

big push is needed to unleash their potential. Past efforts to measure

employee productivity have focused on business narrowly defined as deposits

plus advances. However, the parameters need to be expanded to reflect the

contribution of non-fund based activities also. But ultimately, employee

motivation is critical because a committed employee is a productive

employee

3. MANAGEMENT OF NPAS

Non Performing Assets are disease for Indian banks. The size of the NPA

portfolio in the Indian Banking industry is around Rs.1,00,000 crore which is

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nearly 6% of India’s GDP. However due to the active steps taken by the

regulatory authorities and the banks, the gross NPA level has been reduced.

To ensure long-term profitability, banks have to manage NPAs effectively by

adopting the many techniques.

4. TRANSPARENCY OF PUBLIC DISCLOSURE AND BEST PRACTICES

There is an increasing movement worldwide towards building a safe and

sound banking system backed by a strong supervisory/regulatory regime in

accordance with the core principles for effective banking supervision. The

banking industry in the new millennium will also have to ensure greater

transparency and disclosure in their financial statements for the information

of market players, investors, depositors and rating agencies. Such disclosures

would enable the users of that information to accurately assess the bank's

financial condition, performance, and business activities, risk profile and

management practices. Processes of transparency and market disclosure of

critical information describing the risk profile, capital structure and capital

adequacy are assuming increasing importance in the emerging environment.

Besides making banks more accountable and responsive to better-informed

investors, these processes enable banks to strike the right balance between

risks and rewards and to improve the access to market. Improvements in

market discipline also call for greater coordination between banks and

regulators. Efforts have also been made to set up a Credit Information Bureau

to collect and share information on borrowers and improve the credit

appraisal of banks and financial institutions within the ambit of the existing

legislation.

5. DIVERSIFIED PRODUCTS (The innovation imperative)

Successful innovation is crucial to the competitive edge of all businesses. But

it is particularly important for banking and finance companies. Innovation,

which transcends invention, represents the point of convergence of invention

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and insight. Strategic factors to devise effective responses to innovation

challenges include quick response to identified customer needs, product

quality, short cycle times for product development, developing marketing and

technical capabilities, extensive training, rewards and recognition of

performance.

Innovation is a key driver of growth that surprises and delights

the customer with new, differentiated and relevant benefits. This is not a

cliché but a defining characteristic of the modern corporate saga.

This can be substantiated by innovation within a global

framework. Indian banks will be able to weather the competition provided

they are relevant to consumers in terms of technology, quality, reliability,

pricing, performance and support. As the convergence of the ICE

(information, communication) technologies, "technological evangelization"

and narrowing of the "digital gap" are significant instruments of the growth

escalation process; integration of technology and business is required.

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PEST ANALYSIS

9: PEST ANALYSIS

The PEST analysis considers the broad external environment

facing the business organization. It is an outward looking analysis. The PEST

analysis attempts to answer the question: What broad determinants are going to

affect the macro environment in which the firm will be competing, over the next

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five (or more) years? The PEST analysis is so-called, because it is an acronym

for the four categories into which the analyst will try and include all of the

relevant factors and trends: Political, Economic, Social, and Technological.

Like any model, the PEST model is a simplification; the choice

of Political, Economic, Social, and Technological factors may strike you as

arbitrary. You may be right. However, these categories are as adequate as any in

attempting to put a form to the myriad trends, developments, events and

causations that will assist or hinder the firm as it attempts to breach the Gap

between where its is now, and where it ultimately wants to be.

.

 

9.1 : Political-legal factors

1.Government policy and budget:

Government affects the performance of banking sector most by legislature and

framing policies. Government through its budget affects the banking activities.

The much-needed reforms in the banking sector have transformed the sector

drastically in the last few years. Falling interest rates as well as strengthening of

the hands of banks (Securitisation Act) have changed the dynamics of the Indian

banking sector itself. The new Securitisation Act has given more power to the 51

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banking sector against defaulting borrowers. Further, changes to be implemented

on the issue of voting rights among private sector banks is likely to speed up the

consolidation process. The impact that budget 2004-05 will have on banking has

been analysed below:

Budget measures:

1. The government has proposed to double credit to the agriculture sector in

the next three years.

2. There has been a significant emphasis on making credit available towards

infrastructure development.

3. Inter-institutional group comprising select banks and financial institutions

incorporated to ensure speedy conclusion of loan agreements for

infrastructure projects. Nearly Rs 400 bn will be kept aside by this

consortium for infrastructure support.

4. Task force to be set up to explore reforms in the cooperative banking

sector.

5. Securitisation Act to be amended.

6. FDI in the insurance sector to be hiked from 26% to 49%.

7. Abolition of tax deducted at source on bank fixed deposits.

8. Increase in the foreign investment limit in Private sector banks to 74%

and state run banks to 49%.

9. The Indian Banking Association (IBA) has suggested the relaxation for

listed banks and financial institutions from adhering to accounting

standards not synchronous with banking operations. (Globally there is

separate set of accounting standards for banks under IAS - 42).

10.

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Tax benefits allowed to individuals in respect of housing loans may be

continued.

BUDGET IMPACT:

1. As per the common minimum program (CMP), the budget has focused a

lot on the need to improve credit to the agriculture sector and banks will

be at the forefront of disbursing credit. Vagaries of monsoons impact the

agriculture sector heavily and banks are vulnerable if monsoon fails. Also,

the RBI has released new guidelines for banks with regards to agricultural

lending. However, it is too early to ascertain the impact. The impact of

these initiatives by the government will only be apparent over the long-

term.

2. Banks are likely to benefit from increased lending to the infrastructure

sector. This will come about in two ways i.e. direct equity participation

and indirectly (corporates borrowing for expanding capacity). While this

would provide an impetus to core advances of banks, the quality of such

advances is likely to be better. In this light, there is relatively less NPA

risk.

3. Reforms in the banking sector in the form of amendments to the

Securitisation Act may strengthen the backbone of the financial sector.

4. A hike in the FDI in the insurance sector is likely to significantly raise

investments in the nascent insurance sector. Domestic banks like ICICI

Bank, ING Vysya, Kotak Bank and SBI who have joint ventures with

international insurance majors will be able to infuse more capital into

their insurance business. In the future, there may be an opportunity for

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these domestic banks to unlock value from such investments as well.

BUDGET OVER THE YEARS:

Budget 2001-02:

Reduction in dividend tax to 10% from 20%.

Cut in small savings rates 1-1.5%

Limit for TDS on deposits reduced to Rs 2,500 from the current Rs

10,000.

Abolishment of banking service recruitment board

BUDGET 2002-03:

Cut in most administered interest rates by 0.5% (by 50 basis points)

from March 1, 2002.

Setting up of Asset Reconstruction Company by June 2002.

Banks are now allowed to deduct 7.5% of their total income against

provisions made by them for bad and doubtful debts.

Banks are given option to deduct up to 10% of their non-performing

assets (NPAs) falling in the category of loss or doubtful assets from

total income.

Bill on the banking sector reforms is to be introduced in Parliament.

Foreign banks permitted to operate in India with fully owned branches

after the specific permission of RBI.

BUDGET 2004-05:

The FDI limit in private sector banks has been raised to 74% from the

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existing 49%.

The SBI will have to lend at lower rates to the agricultural sector as

well as SSIs. SBI will now offer loans in the range 2% above its Prime

Lending Rate (PLR) or 2% below its PLR.

Tax exemption on interest on housing loans maintained at Rs 150,000

per year.

The government has agreed to buy back older government borrowing

with high interest rates from banks.

Reduction in the interest rates on all small savings schemes by 1%.

POSITIVE IMPACT OF BUDGET ON BANKING INDUSTRY:

1. Securitisation Act fillip - Improved asset quality

2. VRS push - PSU banks like SBI, BOB and BOI after having successfully

implementing VRS schemes, have become much more streamlined and

efficient. This is likely to result not only in higher cash flow in the future, but

also long term benefits like improvement in efficiency levels.

3. Retail segment driver - Low interest rates have led to a dramatic growth in

credit off take from the retail segment. And this has helped banks to weather

a weak industrial credit offtake scenario. Going forward, with the revival in

the industrial sector ands robust volumes in the retail segment, banks are in a

good position to tap this expected demand.

4. Government proactive ness - The government may take a second look at the

issue of FDI limits and voting right limits in the private sector banks. If the

policy is further amended in the form of higher FSDI limits and a removal of

voting right ceiling of 10%, then we may see further consolidation among

private sector banks.

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5. Improved asset quality - Most of the public sector banks that have been

ridden by huge NPAs in the past have been able to restructure and provides

aggressively for their NPAs in the last 2-3 years. This has helped these banks

to significantly improve their asset quality and they are now in a much better

position to tap the emerging opportunities in the domestic market.

NEGATIVE IMPACT OF BUDGET ON BANKING INDUSTRY:

1. Agri lending concerns - The government has announced measures to boost

lending to the agricultural sector and banks will have to be at the forefront of

this scheme and this means that they will have to significantly increase their

exposure to this segment. With the unpredictability of the monsoons a reality

in the country and lack of proper irrigation facilities, lending to the agri sector

is fraught with risks and going forwards banks may witness a higher rate of

defaults in this sector.

2. Lack of policy clarity - Although the government has increased the FDI limit

to 49%, it is not yet clear that whether FDI limit includes FII limit also. Also

the limit for state run banks still stands at 20%. This will limit the scope of

consolidation in this sector and consequently the benefits of scale to the

various participants. Also the new government has indicated that there will be

no sell off of stake in public sector banks in the country. Thus further limiting

the scope of consolidation in the sector.

3. Interest rate dampener - The Indian economy is witnessing rising inflationary

pressure and this has the potential to curtail the credit growth in the economy.

As inflation inches close to the 6% mark, the Reserve Bank of India (RBI)

may be forced to hike interest rates and this may prohibit potential borrowers

from borrowing. A hike in interest rates may have a bigger impact on the high

growth retail segment, which has a higher sensitivity to rising interest rates.

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Thus to that extent banks may witness a slowdown in credit offtake.

2.GOVERNMENT LAWS AND REGULATIONS:

There are so many laws enacted by government of India to regulate banking

activity. The RBI was established under Reserve Bank Of India Act 1934. RBI

regulates the banking activities in India. Other than this there are other laws like

Reserve Bank of India Act, 1934.

National Bank for Agriculture and Rural Development (NABARD) Act

1981

Securitisation and Reconstruction of Financial Assets and Enforcement of

Security Interest (SARFAESI) Act 2002 (for management of NPA).

Banking Regulation Act, 1949

The Recovery of Debts Due to Banks and Financial Institutions Act was

enacted in 1993 to provide for the establishment of Tribunals for

expeditious adjudication and recovery of debts due to banks and Fis

Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961

Draft Bill on Credit Information Bureau Regulation.

Bank Deposit Insurance Corporation Bill.

Draft Bill on Government Securities.

Bills under Consideration of the Parliament

Financial Companies Regulations Bill, 2000.

Banking Regulation (Amendment) Bill, 2003.

Banking Regulation (Amendment) and Miscellaneous Provisions Bill,

2003.

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3.MONETARY POLICY

Another policy that impact most is RBI’s monetary policy. This policy is meant

to regulate activities of banking in India. It controls the flow of money in the

country. In its recent policy RBI has retained its stance regarding interest rates

and the broader economy in its monetary policy for 2004-05. The central bank

has left the bank rate and the repo rate untouched at 6% and 4.5% respectively.

The overall stance of the monetary policy 2004-05 as stated by the RBI is as

follows:

Provision of adequate liquidity to meet credit growth and support

investment demand in the economy while continuing a vigil on

movements in the price level.

In line with the above, to continue with the present stance of preference

for a soft and flexible interest rate environment within the framework of

macroeconomic stability.

As expected, while the monetary policy did not have any major

announcements, the key highlights include:

1. Bank Rate kept stable at 6.0 per cent.

2. Repo Rate unchanged at 4.5 per cent.

3. Banks are encouraged to align the pricing of credit to assessment of

credit risk to improve credit delivery and credit culture.

4. As far as the outlook for the Indian economy in 2004-2005 is concerned,

the RBI has stated that India’s GDP is expected to grow between 6.5%

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to 7.0% in FY05. The RBI’s forecast is based on sustained growth in

industrial sector, normal monsoons and good performance of exports.

5. In FY04, the RBI’s inflation target was 4.0% to 4.5%. However, firm

crude prices resulted in average inflation hovering at around 5.4%. RBI

expects inflation at 5% levels for 2004-05.

6. The RBI has also forecasted an increase in non-food credit in the range

between 16.0%-16.5% in FY05.

7. Expansion in money supply in FY05 has been pegged at 14% indicating

that the central bank is forecasting a scenario of ample liquidity in the

market. Fiscal deficit as indicated by the Union Budget is pegged at

4.4% of GDP in FY05.

8. The RTGS (Real Time Gross Settlement) system is expected to be

implemented by June 2004, thus paving way for the stock markets

migrating into the T+1 system.

9. The RBI has also proposed the reintroduction of the Capital Indexed

bonds (CIBs), wherein the returns will be linked to the inflation in the

economy. Instruments like CIBs are very popular in the global markets

and offer an option for investors to mitigate risk of higher inflation and

the consequent impact of the same on returns.

10. Revised LAF scheme operationalised.

11. Almost all banks have adopted the new system of BPLR and the rates

are lower from their earlier PLRs.

A lot of emphasis has been placed on the agricultural sector,

considering the high dependence of the country on the same. RBI has provided

further sops in the form of concessions in credit delivery. Banks may waive

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margin/security requirements for agricultural loans up to Rs 50,000. Apart from

this, concessions have been made towards NPA recognition for the agricultural

sector.

The RBI has also proposed to expand the scope of the

infrastructure sector to include sectors like (i) construction relating to projects

involving agro-processing and supply of inputs to agriculture; (ii) construction

for preservation and storage of processed agro-products and (iii) construction of

educational institutions and hospitals. Measures to increase credit availability to

the infrastructure sector have also been proposed. Overall, these measures could

enable better access of credit for these sectors in the long-term.

4. FDI LIMIT

Government has decided to increase the foreign investment limit in Private

sector banks to 74% and state run banks to 49%. This will affect the banking

sector performance. Newer and newer foreign banks will come to India with

their advanced technology and there will be intense competition in the market.

Every bank will try to survive by building competitive advantages in different

areas and will introduce new technology and distribution channel. This step also

presents opportunity for Indian banks to become globally competitive and

compete better in foreign markets.

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9.2: ECONOMIC FACTORS

Economic factors show the way in which economy is moving.

How these all affect the industry should be analyzed. Economic factors such as

Interest rates, inflation rates, unemployment rates, gross national product,

sectoral growth rate of agriculture, industry infrastructure, level of disposable

income, availability of credits affect each industry.

1.GDP:

Gross domestic product (GDP) is the measure of national income. Its trend

shows the actual picture of country’s economy. It is a measure of wealth and

health of economy. India is one of the fastest growing economies in world today.

Everybody is looking at India. It’s GDP is higher than most countries in the

world.

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Source: CMIE In the FY 2004 GDP grew at 8%. This affect positively on

banking sector. Overall economy boosted. There was increase in transactions and

increase in investment. Demand for money increased and good sign for

economy. GDP is expected to grow at 7% in FY2005. Which is good sign for

economy.

There is consistent increase in growth rate of GDP. The

Goldman Sachs has projected long term trend in GDP, which is expected to be

higher than other developing countries like china and Brazil.

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Above is the long term forecast of GDP we can see that GDP

of India is expected to grow at a consistent rate where as mighty Chinese GDP is

expected to fall in coming years and will remain around 2%.

2.MONSOON:

India is an agriculturist country. More than 70% of population of India depends

on agriculture for their livelihood. And Indian agriculture depends mainly on

monsoon because there is no proper irrigation infrastructure. If monsoon is

below average it can negatively affect Indian economy at large. So, monsoon has

direct impact on performance of any industry, too with banking sector. The trend

of monsoon over the years and it’s relationship with GDP has been given below:

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There is also a direct correlation between monsoon and the

overall GDP.A good monsoon has always preceded a year of good GDP growth.

This is accentuated by the GDP growth data for the last 10 years. If one

compares the percentage of areas receiving normal or excess rainfall in a

calendar year with the overall GDP growth rate of that financial year one can

find that whenever the monsoon has been good, the GDP growth for that year

has been good.

This year monsoon is below average. And in FY 2004-05

monsoon is estimated to remain below average.

TABLE: Monsoon Versus GDP growth

Year % Of area receiving normal/excess rainfall GDP growth

1998-99 81 6.5

1999-00 67 6.1

2000-01 66 4.4

2001-02 68 5.6

2002-03 44 4.3

2003-04 76 8.0

2004-05 80 7.0

Source: IMD, CMIE estimates

So, there will be decrease in GDP. It directly affects the

agricultural production. Purchasing power of farmers has reduced which in turn

affected the performance of banks in India. Due to poor monsoon, the housing 64

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segment (most booming sector in the banking) can take a hit. Reduction in

housing loans may adversely affect margins. Due to poor monsoon other sectors

like auto, FMCG etc. would also be hurt, leading to more chances of defaults.

3.INFLATON

High inflation can adversely affect Indian economy. It is a high inflation period

in India due to increase in crude oil prices in international market and below

average monsoon in India this year.

Exhibit: inflation during July-August 2004

Source: RBI

Inflation, measured in movement in wholesale price index (WPI),

has increased from 7.61% during week ended 31 July to 8.17% during week

ended 21. August 2004.rising crude oil price in the international market is the

min reason behind the recent spurt in inflation. In the mean time government has

shown its sincerity in containing inflation within manageable limit.

It is the joint responsibility of RBI and Government to bring

down inflation. RBI through some measures like change in interest rate cut in

CRR and SLR and open market operations control the inflation. This will

directly have a impact on banking sector if there is rise in CRR ratio, the banks

will left with less amount to offer to public and can affect their profitability.

Interest rate changes can affect banks as well.

High inflation discourages deposits especially long term.

Because the real increase in deposit will be negligible if there is high inflation.

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So, people invest their money in mutual funds and stock market to earn higher

return.

4.SAVINGS AND INVESTMENT

The main activity of banking sector is to provide link between those who have

surplus money and those who have deficit. It takes money from savers and

distribute to investors. The amount of savings can affect the performance of

banking sector. There can be positive and negative impact of savings on banking

sector as well on economy also. If there are enough savings, then entrepreneurs

will get loans at cheaper rates and encourage them to take risk and start new

venture and this will boost overall economy. It has negative side also. High

savings shows that people are not spending money. There expenditure is less and

not making demand. So, if there is less demand which in turn affect the

investment, employment and economy negatively.

Exhibit: Sector wise saving Rates

Source: RBI

The rate of financial savings of the household sector, as per the

annual report 2003-04 of the Reserve Bank of India, has increased in 2003-04 to

11.8 per cent of the gross domestic product (GDP) at current market prices

compared with the revised estimate of 10.7 per cent in 2002-03. The household

sector reflected its keenness for saving in the form of deposits, claims on

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government, currency and contractual schemes (life insurance, provident and

pension funds)

5.AGRICULTURE CREDIT:

As per the agenda of its Common Minimum Program (CMP), the UPA

government plans to double agricultural credit by 2007. This means a CAGR of

25% over the next three years. The agricultural credit has been growing at a

healthy 17-18% in the last three years. At a more realistic 20% CAGR too, the

agricultural credit would touch around Rs1500bn by 2007. This means a

bonanza for farmers, as it will put more money in their hands.

Exhibit: Expected growth in agricultural credit

Source: RBI, IIL Estimates

A look at the composition of total agricultural credit shows some

interesting details. The exposure of commercial banks in total agricultural credit

has declined over the last few years from 53% in 2001 to 50% in 2004, while on

the other hand the share of Co-op banks have shown a corresponding increase.

Banks will be asked to directly lend to the farmers instead of following the usual

indirect lending practice of subscribing to NABARD bonds.

EXHIBIT: Flow of Agricultural Credit

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Source: Economic Survey, IIL Estimates

6.STOCK MARKET

Recently there is a bullish trend in stock market. Sensex is going to touch 6000

points. Most of the shares are at their historic high positions. Investors’

confidence in stock market has increased. They expect this trend to persist for a

long time. This has affected negatively on banking industry. People has attracted

toward direct investment in shares as they are giving higher return than banks.

Mutual funds are performing best, so all these factors have contributed toward

fall in deposits. But on the other economy flourishes, demand for money for

investment is increasing.

7.INTEREST RATE

By monetary policy 2004-05 RBI kept interest rate unchanged at 6%. Before that

Interest rate was decreasing. This will lead to increase in demand for loans

because if the loans are available at cheaper rate then people will ask for more

loans to make investments.

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9.3: SOCIO-CULTURAL FACTORS

Socio-cultural factors also affect the business. They show way in

which people behave in country. Socio-cultural factors like taboos, customs,

traditions, tastes, preferences, buying and consumption habit of the people, their

language, beliefs and values affect the business. Banking industry is also

operates under these social environment and it is also affected by this factors.

These factors are changing continuously. People’s life style, their behaviour,

consumption pattern etc. is changing and also creating opportunities and threat

for banking industry. There are some socio-cultural factors that affect banking in

India have been analyzed below:

1.TRADITIONAL MAHAJAN PRATHA

Before the birth of the banks, people of India were used to borrow money from

local moneylenders, shahukars, mahajan and shroffs. They were used to charge

higher interest and also mortgage land and house. Farmers were exploited by

these shahukars. But farmers need money. So, they did not have any choice other

than going to shahukars and borrow money from them in spite of exploitation by

these people. But after emergence of banks attitude of people was changed.

Traditional mahajan pratha still exist in India especially in rural

areas. This affects the banking sector. Rural people afraid to go to banks to

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borrow money instead they prefer to borrow from shahukars with whom they

have relationships from the time of their fore fathers. Banking infrastructure is

also week in some interior areas of India. So, this is reason it still exist.

2.SHIFT TOWARDS NUCLEAR FAMILY

Attitude of people of India is changing. Now, younger generation wants to

remain separate from their parents after they get married. Joint families are

breaking-up. There are many reasons behind that. But banking sector is

positively affected by this trend. A family need home, consumer durables like

freeze, washing machine, television, bike, car etc. so, they demand for these

products and borrow from banks. Recently there is a boost in housing finance

and vehicle loans. As they do not have money they go for installments. So, banks

satisfy nuclear families wants.

3.CHANGE IN LIFE STYLE

Life style of people of India is changing rapidly. They are demanding high-class

products. They have become more advanced. People want everything car, mobile

etc. what their forefather had dreamed of. Now teenagers also have mobile and

vehicle. Even middle class people also want to have well furnished home,

television, mobile, vehicle and this has opened opportunities for banking sector

to tap this change. Every thing is available on installment so it has become easy

to purchase anything even if you do not have lump sum.

4.LITERACY RATE

Literacy rate in India is very low compared to developed countries. Illiterate

people hesitate to transact with banks. So, this impacts negatively on banks. But

there is positive side of this as well i.e. illiterate people trust more on banks to

deposit their money, they do not have market information. Opportunities in

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stocks or mutual funds. So, they look bank as their sole and safe alternative.

Literacy rate of India is around 65%.

TABLE: literacy rate in India

Year Persons Male Female

1951 18.3 27.2 8.9

1961 28.3 40.4 15.3

1971 34.5 46.0 22.0

1981 41.4 53.4 28.5

1991 52.2 64.1 39.3

2001 65.4 75.8 52.1

Source: census of India 2001, series 1 India, paper 1 of 2001.

5.DEMOGRAPHIC OF LARGE POPULATION:

About 60% of Indian population composed of youth. And these people do not

have enough savings, as their expenditure is large because they have to settle in

life. Even if they have savings, they do not prefer to deposit in banks rather they

prefer to invest in share market and mutual funds.

TABLE: Percentage distribution of India’s population by age

group

Year 0-14

(Age)

15-60 age 60 and

above age

1931 38.3 60.2 1.5

1961 41.0 53.3 5.7

1971 41.4 53.4 5.2

1981 39.7 54.1 6.2

1991 36.5 57.1 6.4

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2001 35.7 57.6 6.7

Source: census of India 2001, series 1 India, paper 1 of 2001.

Young people take high risk expecting high return. Bank’s

interest rate does not attract them. But it has positive side also. These people use

different facilities of banks maximum. And are of entrepreneur nature so, take

loans to start new business.

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Technology in Banks:

Both public and private banks are spending large amounts of

money on technology to provide innovative products and services to their

customers with more convenience and satisfaction. Technology is reducing the

cost of transaction and helping to increase customer base and enable wider reach.

These innovations are happening not only in the retail-banking segment but also

in the corporate segment.

Today, banks are able to provide products, which were a distant

dream in the past. For example, RBI declared that it is going to start an

innovative payment and settlement system named Real Time Gross Settlement,

which will make the banking, services faster and more efficient for the

customers. Funds transfer between banks under the system will be on real time

basis.

Technology is changing the way banks interface with their

customers, resulting in increased customer base for the banks. The customer

need not go to a branch for a transaction; he can do it via Internet, mobile phone

or even the landline.

Core Banking Solution

Core banking solution is the buzzword today and every bank is trying to

adopt it. It is a centralized banking platform through which a bank can

control its entire operation. The adoption of core banking solution will help

banks to roll out new products and services.

ATMs

China has around 65,000 installed ATMs and the global average is of two

or three ATMs per branch. Compared to these figures, India is far behind

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with an installed ATMs base of around 10,000. Though banks plan to invest

heavily in new ATMs in the coming two to three years, it is expected that

there will be only around 17,000 ATMs by the end of 2004.

Cost per transaction at an ATM is much less than a transaction at the

branch and it can be reduced by as much as 50% of the cost at a branch.

Internet

While Internet banking is in place for the last four years in India, it has just

started showing signs of picking up. Today, banks in India are in the

process of Web-enabling their services in order to offer Internet banking to

their customers. Through Internet, banks can provide their services in a

cost-effective manner. Internet Banking has numerous benefits like greater

reach to customers, quicker time to market, ability to introduce new

products and services quickly and successfully, ability to understand its

customer’s needs, greater customer loyalty etc.

10: CHALLENGES BEFORE THE INDIAN BANKING INDUSTRY

The second phase of financial sector reforms has provided the

necessary architecture for strengthening the Indian banking system and the banks

have a vital role to play as the repository of liquidity, as an important channel for

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flow of funds from the surplus sectors to the deficit sectors and as the backbone

of the payment and settlement systems. Increasing deregulation and

globalization, greater competition from within the country and cross-border

dealings has exposed banks to greater risk. Diversification into non-traditional

products like insurance, derivatives etc., has added to the complexity of banking

business.

Further, Internet banking, e-commerce, e-money and other

information technology related innovations are adding new dimensions to risks

faced by the banking sector. Mergers and acquisitions as well as outsourcing of

some non-core activities are undertaken by the banks with some strategic

objectives – they also enhance the risks in banking. Considering the speed with

which banking is changing, it is recognized that there is a need to enlarge the

focus and thrust of Risk-Based Supervision (RBS) so as to be able to improve

the risk sensitivity of the supervisory approach Following are the recent

developments and challenges before the banking sector and the strategies and

initiatives undertaken to meet them.

1.Competition and Consolidation

The deregulation in interest rates, grant of functional autonomy to banks in the

area of credit, entry of foreign banks and emergence of new private banks has

made the banking environment more competitive. While the total share in bank

credit continues to be dominated by public sector banks, the share of foreign

banks is showing an increasing trend. As announced in the Union Budget for

2002-2003, it has been decided to give an option to foreign banks to either

operate as branches of their parent banks or to set up subsidiaries. As per the

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recent RBI guidelines, the overall ceiling for foreign direct investment in private

sector banks has also been enhanced. In the changed scenario, it has now become

extremely important for Indian banks to remain competitive for surviving.

Universally there is a move towards consolidation and

convergence. It has been our contention that the Government and supervisory

authorities should only provide a conducive environment for consolidation and

convergence through appropriate fiscal and monetary policies supported by a

sound regulatory and supervisory framework. Hence, bank consolidation/ merger

process should be primarily market driven and such proposals should come

voluntarily from the banks themselves depending on the organizational synergy

and the market share.

2.MANAGEMENT OF NPAS

Management of NPAs continues to be the foremost challenge of the Indian

banking System. In the recent past there has been a conscious and persistent

effort through the prescription of strict objective norms for the identification and

classification of NPAs. This was also supplemented by the sustained efforts both

by the Government and the RBI for setting up the requisite infrastructure as also

systems/ procedures for effecting recoveries/ reduction of NPAs. The result has

been encouraging. However, realizing the rigidities in the legal system, Govt. of

India/ RBI have taken several special steps to ensure that legal inadequacies do

not thwart the resolve to reduce the NPAs of banks. In addition, banks have been

advised to strengthen their credit administration machinery and put in place

effective credit risk management systems to reduce the fresh incidence of NPAs.

The less strong banks, which suffered capital erosion due to

rising levels of non-performing assets were recapitalised. Secondly, capital to

risk-weighted assets ratio of 8 percent was introduced. This is now at 9 percent.

Thirdly, prudential norms for income recognition, classification of assets and

provisioning for bad debts were introduced. The management of NPAs has been

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fortified by the enactment of the Securitisation & Reconstruction of Financial

Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 which

provides statutory support for the enforcement of creditors’ rights and inter alia,

paved the way for the establishment of Asset Reconstruction Companies.

Fourthly, Debt Recovery Tribunals were set up to assist the banks in the

recovery of loans. Fifthly, the Scheme of Ombudsman was introduced in 1995,

to look into and resolve customer grievances. Sixthly, the State Bank of India

Act, 1955 and the Bank Nationalisation Act of 1970 were amended to enable the

banks to access the capital market for debt and equity.

3.TIGHTENING OF PRUDENTIAL STANDARDS

The prudential standards need to be enhanced to fall in line with the international

best practices. In this direction, Reserve Bank of India has introduced the 90

days delinquency norm for identification of NPAs with effect from the year

ending March 2004 and reduced the timeframe for classification of a sub-

standard asset as a doubtful asset from 18 months to 12 months with effect from

the year ending March 2005. In some countries, doubtful assets, irrespective of

their status i.e. secured or unsecured, are required to be classified as loss assets

and fully provided for. However, in India, doubtful assets backed by collateral,

are provided for only up to 50% of the outstanding balances, irrespective of the

number of years in which the accounts remain in this category. Given the delay

in recovery of dues through the legal process, the current provisioning norms

followed in India do not entirely cover the latent losses inherent in such

advances. The existing provisioning requirements would have to be enhanced in

line with the international best practices.

4.THE PROPOSED BASEL CAPITAL ACCORD

The Basel Committee recognises that the New Accord is more extensive and

complex than the 1988 Accord. The New Accord is more risk sensitive and it

contains a range of new options for measuring both credit and operational risks.

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The New Accord is likely to be finalised next year and would be implemented in

member jurisdictions in 2006. The adoption of the New Basel Capital Adequacy

Framework, relating to assigning capital on a consolidated basis, use of external

credit assessments as a means for assigning preferential risk weights,

sophisticated techniques for estimating economic capital, etc., may need suitable

modifications to adequately reflect the institutional realities and macro-economic

factors specific to emerging market economies including India. Recognising

these implications, RBI has been impressing on the Basel Committee that some

of these proposals may require modification / flexibility to fully reflect the

concerns of the emerging market economies. Notwithstanding the above, it is

imperative that the banks in India study the proposed Capital adequacy

framework, identify their Transition path and initiate steps to be fully prepared

for adoption of the new standards when introduced.

5.RISK MANAGEMENT SYSTEMS

In view of the diverse financial and non financial risks confronted by banks in

the wake of the financial sector deregulation, the risk management practices of

banks have to be upgraded by adopting sophisticated techniques like VaR,

Duration and Simulation and adopting internal model-based approaches as also

credit risk modeling techniques, at least by top banks. Banks need to evolve an

integrated risk management system depending on their size, complexity and the

risk appetite. As a step towards enhancing and fine-tuning the existing risk

management practices in banks RBI has recently issued the draft guidance notes

on credit and market risks.

6.RISK BASED SUPERVISION

Financial sector supervision is expected to become increasingly risk oriented and

Concerned more with validation of systems. Bank managements will have to

develop internal capital assessment processes in accordance with their risk

profile and control environment. These internal processes would then be

subjected to review and supervisory intervention if necessary. The emphasis will

be on evaluating the quality of risk management and the adequacy of risk

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containment. The transaction based internal /external audit would have to give

way to risk based audit system. As banks are computerizing more areas of their

operations, they would be required to introduce information system audit also.

7.Corporate GovernanceAn adequate institutional and legal framework is in place in India for effectively

implementing a code of sound corporate governance in banks. The statutes have

built-in legal provisions that prohibit or strongly limit activities and relationships

that diminish the quality of corporate governance in banks. As a major step

towards strengthening corporate governance in banks, they have been advised to

place before their Board of Directors the Report of the Consultative Group of

Directors of banks and FIs (Dr Ganguly Group) set up to review the supervisory

role of Boards of banks. The recommendations include the responsibility of the

Board of Directors, role and responsibility of independent and non-executive

directors, fit and proper norms for nomination of directors in private sector

banks, etc. The banks were advised to adopt and implement the

recommendations on the basis of the decision taken by their Board.

Transparency and disclosure standards are also important

constituents of a sound corporate governance mechanism. Transparency and

accounting standards in India have been enhanced to align with international best

practices. However, there are many gaps in the disclosures in India vis-à-vis the

international standards, particularly in the areas of risk management strategies

and practices, risk parameters, risk concentrations, performance measures,

components of capital structure, etc. Hence, the disclosure standards need to be

further broad-based in consonance with improvements in the capability of

market players to analyse the information objectively.

8.Technology Issues

The delivery of products and services need extensive use of information

technology necessitating high magnitude of investment. However, with a view to

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enhance the quality of customer service as also to enhance the quality of control,

one of the prime thrust areas for the future would be completion of branch

computerization and networking of banks. This would also necessitate putting in

place of appropriate legal and security systems.

Nobel Laureate Robert Solow had once remarked that computers

are seen everywhere excepting in productivity statistics. More recent

developments have shown how far this state of affairs has changed. Innovation

in technology and worldwide revolution in information and communication

technology (ICT) have emerged as dynamic sources of productivity growth. The

relationship between IT and banking is fundamentally symbiotic. In the banking

sector, IT can reduce costs, increase volumes, and facilitate customised products;

similarly, IT requires banking and financial services to facilitate its growth.

As far as the banking system is concerned, the payment system is

perhaps the most important mechanism through which such interactive dynamics

gets manifested. Recognising the importance of payments and settlement

systems in the economy, banks have embarked on technology-based solutions

for the improvement of the payment and settlement system infrastructure,

coupled with the introduction of new payment products such as the computerized

settlement of clearing transactions, use of Magnetic Ink Character Recognition

(MICR) technology for cheques clearing which currently accounts for 65 per

cent of the value of cheques processed in the country, the computerisation of

Government Accounts and Currency Chest transactions, operationalisation of

Delivery versus Payment (DvP) for Government securities transactions. Two-

way inter-city cheques collection and imaging have been operationalisation at

the four metros. The coverage of Electronic Clearing Service (Debit and Credit)

has been significantly expanded to encourage non-paper based funds movement

and develop the provision of a centralised facility for effecting e-payments. The

scheme for Electronic Funds Transfer operated by the Reserve Bank has been

significantly augmented and is now available across major cities. The scheme,

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which was originally intended for small value transactions, is processing high

value.

The Centralised Funds Management System (CFMS), which

would enable banks to obtain consolidated account-wise and centre-wise

positions of their balances with all offices of the Deposits Accounts Departments

of the Reserve Bank has begun to be implemented in a phased manner. A holistic

approach has been adopted towards designing and development of a modern,

robust, efficient, secure and integrated payment and settlement system taking

into account certain aspects relating to potential risks, legal framework and the

impact on the operational framework of monetary policy.

The approach to the modernization of the payment and settlement

system in India has been three-pronged:

(a) Consolidation,

(b) Development,

(c) Integration.

The consolidation of the existing payment systems revolves

around strengthening Computerised Cheque clearing, expanding the reach of

Electronic Clearing Services and Electronic Funds Transfer by providing for

systems with the latest levels of technology. The critical elements in the

developmental strategy are the opening of new clearinghouses, interconnection

of clearing houses through the INFINET; optimizing the deployment of

resources by banks through Real Time Gross Settlement System, Centralised

Funds Management System (CFMS); Negotiated Dealing System (NDS) and the

Structured Financial Messaging Solution (SFMS). While integration of the

various payment products with the systems of individual banks is the thrust area,

it requires a high degree of standardisation within a bank and seamless interfaces

across banks.

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.

The setting up of the apex-level National Payments Council in

May 1999 and the operationalisation of the INFINET by the Institute for

Development and Research in Banking Technology (IDRBT), Hyderabad have

been some important developments in the direction of providing a

communication network for the exclusive use of banks and financial institutions.

Membership in the INFINET has been opened up to all banks in addition to

those in the public sector. At the base of all inter-bank message transfers using

the INFINET is the Structured Financial Messaging System (SFMS). It would

serve as a secure communication carrier with templates for intra- and inter-bank

messages in fixed message formats that will facilitate ‘straight through

processing’. All inter-bank transactions would be stored and switched at the

central hub at Hyderabad while intra-bank messages will be switched and stored

by the bank gateway. Security features of the SFMS would match international

standards.

In order to maximise the benefits of such efforts, banks have to

take pro-active measures to:

Further strengthen their infrastructure in respect of standardisation, high

levels of security and communication and networking;

Achieve inter-branch connectivity early;

Popularize the usage of the scheme of electronic funds transfer (EFT); and

Institute arrangements for an RTGS environment online with a view to

integrating into a secure and consolidated payment system.

Information technology has immense untapped potential in

banking. Strengthening of information technology in banks could improve the

effectiveness of asset-liability management in banks. Building up of a related

database on a real time basis would enhance the forecasting of liquidity greatly

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even at the branch level. This could contribute to enhancing the risk management

capabilities of banks.

9.Cross-border Supervision

Due to globalization many Indian banks are now operating in many countries.

Because they should render services where their customers want. Indians have

reached everywhere and banks too. So, This would involve a greater focus on

overseas operations of Indian banks and in having information sharing

arrangements with overseas supervisors on a firmer and more formal footing. In

the context of money laundering concerns raised by some of the supervisors, it

needs to be ensured that some of the branches, especially those which are not

compliant with the anti-money laundering principles of the Financial Action

Task Force (FATF), are not causes of serious operational and reputational risks

to their parent banks in India.

10.Money Laundering

Post September 11, the issue that bank supervisors the world over is grappling

with is "How to root out the menace of money laundering?" Until recently, the

governments talked tough about the problem, but did little about it. All that

changed three years ago. The FATF was conceived by G-7 countries as a helpful

mechanism to persuade governments to combat money laundering and offer

them technical assistance to do so. The laws being enacted typically require a

bank to "know the customer" to be confident that his money is obtained by

legitimate means, and to report any suspicious activity. This involves a

Herculean effort, thanks in part, to the growth of "Correspondent banking

relationships." In effect, this means banks must know their customers’ customers

as well.

Banking supervision all over the world has to achieve the

delicate balance between respect for customer privacy and making banks report

suspicious transactions. This raised the toughest question: What exactly are

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efforts against money laundering trying to achieve? So far, countries have been

free to define what they regard as illegal sources of money. Some include drugs,

racketeering and other dark crimes in their definition of illegal money. Some,

such as France, consider tax evasion to be money laundering. Others like

Switzerland have more flexible laws. However, as recently as last week,

Switzerland has agreed in principle to dismantle the veil of secrecy governing its

banking activity in order to comply with anti-money laundering requirements.

This is a landmark development.

It is fair to say that despite many challenges, Indian banks have

made some progress towards their goals. There has been progressive

intensification of financial sector reforms, and the financial sector as a whole is

more sensitized than before to the need for internal strength and effective

Management as well as to the overall concerns for financial stability. At the

same time, in view of greater disclosure and tougher prudential norms, the

weaknesses in our financial system are more apparent than before. There is

greater awareness now of the need to prepare the banking system for the

technical and capital requirements of the emerging prudential regime and a

greater focus on core strengths and niche strategies. Banks have also made some

progress in assessing financial system against international best practices and in

benchmarking the future directions of progress. Several contemplated changes in

the surrounding legal and institutional environment have been proposed for

legislation.

Nevertheless, several sources of vulnerability persist. The NPA

levels remain too large by international standards and concerns relating to

management and supervision within the ambit of corporate governance are being

tested during the period of downturn of economic activity. There is also a sense

Those banks have a lot to acquire and adapt in terms of the technical expertise

necessary to measure and manage risks better. The structure of the financial

system is changing and supervisory and regulatory regimes are experiencing the

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strains of accommodating these changes. Certain weak links in the decentralized

banking and non-bank financial sectors have also come to notice. In a

fundamental sense, regulators and supervisors are under the greatest pressures of

change and bear the larger responsibility for the future. For both the regulators

and the regulated, eternal vigilance is the price of growth with financial stability.

11.1: OPPORTUNITIES

1.UNIVERSAL BANKING:

Universal Banking includes not only services related to savings and loans but

also investments. However in practice the term 'universal banks' refers to those

banks that offer a wide range of financial services, beyond commercial banking

and investment banking, insurance etc. Universal banking is a combination of

commercial banking, investment banking and various other activities including

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insurance. If specialized banking is the one end universal banking is the other.

This is most common in European countries. .

Universal banking has some advantages as well as

disadvantages. The main advantage of universal banking is that it results in

greater economic efficiency in the form of lower cost, higher output and better

products. However larger the banks, the greater the effects of their failure on the

system. Also there is the fear that such institutions, by virtue of their sheer size,

would gain monopoly power in the market, which can have significant

undesirable consequences for economic efficiency. Also combining commercial

and investment banking can gives rise to conflict of interests. Conflict of

interests was one of the major reasons for introduction of Glass-Steagall Act in

US.

Universal banking in India

In India Development financial institutions (DFIs) and refinancing institutions

(RFIs) were meeting specific sectoral needs and also providing long-term

resources at confessional terms, while the commercial banks in general, by and

large, confined themselves to the core banking functions of accepting deposits

and providing working capital finance to industry, trade and agriculture.

Consequent to the liberalisation and deregulation of financial sector, there has

been blurring of distinction between the commercial banking and investment

banking.

Reserve Bank of India constituted on December 8, 1997, a

Working Group under the Chairmanship of Shri S.H. Khan to bring about

greater clarity in the respective roles of banks and financial institutions for

greater harmonisation of facilities and obligations. Also report of the Committee

on Banking Sector Reforms or Narasimham Committee (NC) has major bearing

on the issues considered by the Khan Working Group. .

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The issue of universal banking resurfaced in Year 2000, when

ICICI gave a presentation to RBI to discuss the time frame and possible options

for transforming itself into an universal bank. Reserve Bank of India also spelt

out to Parliamentary Standing Committee on Finance, its proposed policy for

universal banking, including a case-by-case approach towards allowing domestic

financial institutions to become universal banks. .

Now RBI has asked FIs, which are interested to convert itself into

a universal bank, to submit their plans for transition to a universal bank for

consideration and further discussions. FIs need to formulate a road map for the

transition path and strategy for smooth conversion into an universal bank over a

specified time frame.

2. E- BANKING

Competition and the constant changes in technology and lifestyles have changed

the face of banking. Nowadays, banks are seeking alternative ways to provide

and differentiate amongst their varied services. Customers, both corporate as

well as retail, are no longer willing to queue in banks, or wait on the phone, for

the most basic of services. They demand and expect to be able to transact their

financial dealings where and when they wish to. With the number of computers

increase in every year, the electronic delivery of banking services is becoming

the ideal way for banks to meet their clients’ expectations.

Online banking or e-banking can be defined as online systems

which allow customers to plug into a host of banking services from a personal

computer by connecting with the bank’s computer over the telephone wires.

Technology continues to make online banking easier for the average consumer.

Banks are using a variety of names for online banking services, such as PC

banking, home banking, electronic banking or Internet banking. Regardless of

the given name, these systems certainly offer specific advantages over the

traditional banking methods.

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Why banks adopt E-banking?

COMPETITION: there is intense competition in the market. Every bank

strives hard to survive in this highly competitive market. Exit is not easy

and due to low entry barriers newer and newer private and foreign banks

are entering in the market. Banks feel the need to offer e-banking services

today just to keep up with the competitors and to be able to retain their

existing customers.

EXPLORING NEW MARKETS: The Internet is not only a low cost

approach to determine new distribution channels but also to establish a

presence in new and up coming markets.

COST REDUCTION: E-banking is an opportunity for banks to reduce

their overhead costs as the need for physical branches is drastically cut

down. The running cost of an ordinary bank account for 50-60 per cent of

their revenues, whereas the running cost of Internet banking are a mere 15-

20 per cent of revenues. For example, in India, Net banking is estimated to

cost just INR 2 per transaction compared to the INR 43 incurred while

banking at the branch.

CUSTOMER SERVICE: E-banking offers banks an opportunity to

improve on their customer service by collecting and managing information

pertaining to their customers and their individualistic preferences.

REVENUE POTENTIAL: E-banking also provides an opportunity to build

on their relationships with their existing customers. For Example, bank

Web portals could offer purchasing services for business travel or

insurance to generate more revenue.

CUSTOMER BENEFITS FROM E-BANKING88

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Check Account’s Information,

Receive airlines mileage for banking with certain banks – co

promotion

Receive and pay e-bills online

Download account information to the personal finance management

software viz., Quicken or MS-Money

Deposit Products online including Checking Savings, Money

Market and Certificate of Deposits

Access financial planning tools to calculate loan payments/ tax

burden

View time-trend of various financial indicators, including interest

rates

Transfer funds between accounts

Interactive tools to help customers find an account that best suits

their needs

Single login provides access to multiple accounts held at a Bank

Internal transfers from deposit A/c to loan A/c, Including Credit

Cards

Online mortgaging

View a/c balances and transfer money through Web-enabled Cell

Phones or PDA’s.

E-banking in India

In India, the Internet banking market is in the earliest stages of

development. Only 51 banks are currently offering any kind of Internet banking

services. Out of which 55% are “Entry Level” sites, offering little more than

company information and basic marketing materials. Only 8% offer “advanced”

transactional services, such as online fund transfer, transactions and cash

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management services. In general, the foreign and private banks are far ahead of

the Public Sector or Cooperative Banks in terms of the number of sites and their

level of development.

3.M-Banking

The revolution in banking sector through M-banking is coming. There is

burgeoning growth in mobile phone users in India and this opens gate for m-

banking. Customers can transact with their banks through mobile, no need to go

to bank. They can deposit, pay bills, check balances by their cell phones. The

scene is set for an eruption of m-Banking services during the years to come. The

time is right and the only remaining question is, which banks and financial will

place itself in a position to benefit from this revolutionary new distribution

channel. There are several reasons dictating why the time is right to enter this

market, including:

Mobile penetration is rising quickly and approaching what surely must be

the peak of its growth curve;

The penetration of m-Banking-enabled phones is also paving the way for a

revolution in the way consumers access their finances;

Internet banking is well on its way to becoming a mainstream banking

service;

Regulatory structures are evolving to reduce uncertainty surrounding issues

such as transaction security;

The infrastructure required for the development of m-Banking services is in

place: it could even be argued that content providers are struggling to keep

pace with technological advancement in the mobile communications

industry;

The high level of commitment from powerful industry players, both in the

financial service industry and the mobile communications industry.

4.Plastic Money

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With the help of plastic money instruments like credit card, debit card, ATM

cards etc. banks reduces the risk of carrying high value of money. It is more

convenient instrument, which is getting popularity day by day and is capturing

major part of the market. It is a deemed opportunity to expand business of banks.

5.Bank Assurance

It is a new concept according to which the banks and insurance companies join

hands. The insurance companies use banks’ established network of branches to

distribute and market their products. By using this concept banks can attract

more customers and can add one more facility

6.RETAIL BANKING

Now a days bank are focusing more on retail banking. Retail Banking is the new

mantra in the banking sector. The home loans alone account for nearly two-third

of the total retail portfolio of the bank. According to one estimate, the retail

segment is expected to grow at 30-40% in the coming years. Banks have become

more customers centric and are providing more and more facilities to individual

customer. Retail banking, which is designed to meet the requirements of

individual customers and encourage their savings, includes payment of utility

bills, consumer loans, credit cards, checking account balances, ATMs,

transferring funds between accounts and the like. With spreads shrinking, Indian

banks are following their global counterparts and focusing on increasing the

share of their fee- based income. ``Fee-based income'' may increase marginally

in future. The ratio of non-interest income to total funds has increased for some

banks. A rising ratio is expected in the future.

The main advantage of getting into retail banking is that the risks

involved are lesser in this segment. There are lower Non Performing Assets

(NPAs) in retail banking. This is one of the reasons why loans such as those for

housing, automotive, etc are being touted by banks like never before. Credit

cards and debit cards is another focus area for banks.

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6. Differentiation

The customer is interested in how he/she can benefit from the bank and its

products. That's why it becomes necessary for a bank to differentiate its products

from the others. Some of the ways in which differentiation can be introduced are

through specialization, new products, and increasing the added value.

Specialization basically means that the bank gets involved only

in selected areas. For example, the bank might be getting involved only in

housing finance. Or, it could be limiting its services just for corporate banking

clients. Another way to specialize could be by handling just specific sets of

portfolios.

Banks can differentiate themselves by adding new products to

their range of services. This will provide the bank with better yields per contact.

Increasing the added value of products is another way of differentiation for

banks. Operational excellence is also a key factor in effective differentiation

from the competition.

7.Non-bank activities

These include underwriting stocks and providing insurance. Also Banks can

merger or buy smaller investment houses to become an investing bank as well as

a commercial bank.

11.2: THREATS

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1.FOREIGN BANKS

The biggest threats against Indian banks are foreign banks. The government is

planning to remove barriers in FDI flow in banking sector. It means 100% FDI

will be allowed in banks. Foreign banks are much more ahead in technology than

Indian banks and they have experience, economies of scale and are more

customer friendliness than Indian banks. This will produce greatest threat against

domestic banks. But this also brings an opportunity i.e. Indian banks will

become more tougher and will adopt advanced technology, focus more on

efficiencies and this will help them to compete in global market also.

2. INTEREST RATE

The interest rates are decreasing day by day. Because of it the group of

customers who want fixed income are dissatisfied and so, they will look for new

sources of income like mutual fund, insurance policies government securities

that give them higher return and this is the reason deposits with banks are

decreasing.

3.FAILURE OF CO-OPERATIVE BANKS

Failure of co-operative banks also produces threat for banking sector. Co-

operative banks have significance proportion in total banking activities and their

contribution in overall contribution of banking sector cannot be denied. But due

to bankruptcy of some of co-operative banks, people’s trust has been lost. Now

they are attracted towards other sources of investment.

4.SUBSTITUTE BANKING

These include credit unions and other companies that provide banking services,

for example Merrill Lynch.

BIBLIOGRAPHY

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BOOKS

Jha, Bank Marketing, New Delhi: HPH Publications,2002 120 pp

Prasad, Banking Finance System, New Delhi:HPH Publications,2003

Reddy, Theory & Practice of Banking, New Delhi : HPH Publications,2002

Gordon, Banking Theory & Practices, New Delhi: HPH Publications, 2004

Singh, Indian Banking Industry, Deep Publications, 2004

Chawla, Indian Banking Towards, Deep Publications,2003

Khan,M.Y Indian Financial System, PHI Publications,2004

WEBSITES

1. www.banknetindia.com 2. www.capitalmarket.com 3. www.equitymaster.com 4. www.ficci.com 5. www.financianexpress.com 6. www.hindu.com 7. www.imf.org 8. www.ibspublishung.com 9. www.indiainfoline.com 10. www.indianbanksassociation.org 11. www.rbi.org 12. www.sify.com 13. www.moneycontro.com 14. www.worldbank.org 15. www.valuenotes.com

NEWSPAPERS

1. Economic Times2. Times of India3. Financial Express4. Business Standard

MEGAZINES:

1. Capitamarket2. Business today3. Charted Secretary: Banking Special Edition

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