report 2 - indian banking system & evolution

INDIAN BANKING SYSTEM: EVOLUTION AND REFORMS

2014

2014

SUDIKSHA JOSHI

SANSKRITI SCHOOL

5th August 2014



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INDEX

S.NO Topic Page Number

1. Background 3

2. Indian Banking System 4

3. Structure of Banking in India 5 - 10

4. Evolution of Indian Banking 11 -15

5. First Phase of reforms of Banking Sector (1991) 16 -19

6. Second Phase of reforms of Banking Sector (1998) 20 -22

7. Future road map & conclusion 23 -24


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BACKGROUND:

Banks are institutions which accept deposits from cash surplus entities and lend it to cash deficient entities in

the economy. Evolved on the traditions of moneylenders, gold smiths and merchants, modern banking system

has undergone many changes. Today, banks are reckoned to be the pillars of development as:

1. Banks promote thrift and savings in an economy by paying attractive interest rate on

deposits and investments that promote capital formation.

2. The scattered small savings are optimally used by granting loans to industrial houses

and the government, funds to entrepreneurs. Bank help in increasing

productivity of capital.

3. Remit money from one place to another by cheque, bank draft, letter of credit, bills,

hundies.

4. Pump in money supply in the economy by credit creation which have enabled banks to place at nations's disposal a large amount of

money.

5. Banks provide a safe deposit for precious items and valueables.

6. Growth in employent opporunities with the increasing banking activities.


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2014 INDIAN BANKING SYSTEM : Banking structure of a country is influenced by its socio - economic and political environment and by the overall objectives of economic development of the country. It, therefore, varies from country to country. Since independence, the banking system in India has worked under the constraints that go with " social control" and "public ownership". To achieve ''socialistic pattern of society" as the overall objective of economic development, following major structural reforms were brought in banking system:

In the initial stages of planned development - "Nationalization of banks" to serve the needs of the priority segments such as agricultural and secondary sectors (i.e. to promote industrial productivity). Hence, focus was on development in conformity with the national policies rather than profitability.

Banking sector reforms in 1990s - Reduction of government stake to 51 percent in public sector banks and enabled new private and foreign sector banks to widen their network of branches.


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STRUCTURE OF BANKING IN INDIA : Banks are classified as Scheduled and Non-Scheduled banks under RBI Act of 1935 which are further subdivided.

Scheduled Banks

Banks which have paid up capital reserves of at least Rs. 5 lakh and satisfy the conditions that bank's policies aren't detrimental to its customer's interests, fall under the category of scheduled banks. These banks were introduced in second schedule of RBI Act of 1934.

Scheduled commercial

banks

Public (27)

State Bank Groups (08)

National Banks (19)

Foreign (43) Private (22)

Old Private (15) New Private (7)

Regional Rural Banks(86)


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2014 Non-Scheduled Banks

Non-scheduled Banks are those which have not been included in the second Schedule of RBI Act. The number

of non-scheduled banks is declining as many of them are attaining the status of scheduled banks. Non-scheduled banks are also functioning in the form of Local Area Banks (LABs) which were set up under the scheme announced by the government of India in 1996. LABs are private banks of local nature with jurisdiction over a maximum of three contagious districts. At the end of March 2009, only three LABs are operating in India.

Scheduled Banks includes Commercial Bank, Regional Rural bank ,Co-operative Bank, Developmental Bank and certain Specialized Banks. Brief description as follows:

Commercial Bank: These banks main aim is to make profit and primarily deal with deposits and loans, issue bank cheques and

drafts. They operate varieties of deposit accounts such as current, savings , fixed deposit etc. Based on the ownership, commercial banks are categorized as follows:

I. Public Sector Banks - The majority stake in these banks are held by Government of India. Public Sector Banks have a dominant

position in terms of business. They accounted for 71.9% of assets, 76.6% of deposits, 75.3% of advances and 69.9% of investments of all scheduled commercial banks as at end of March 2009. Among the public sector banks, the State Bank of India and associates had 16,294 branches and other nationalized banks had 39,703 branches as on June 30, 2009.


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Timelines of State Bank Of India, its associate banks and other nationalized banks:

BANKS WHEN WHAT

State Bank And its Associates

1st July, 1959 Conversion of Imperial Bank into State Bank of India after the recommendation of Rural Credit Survey Committee. RBI acquired its 92% shares, and SBI became the first state owned commercial bank in the country.

Total 8 banks in State Bank Group The State Bank of India (Associate banks) Act passed: State Bank Group was created.

Mixed Banking system ushered: financing to agriculture and other priority sectors could be a viable commercial activity.

30th June, 2009 SBI expanded its bank branches, accounting for 20% of all commercial banks

19th July, 1969- 15th April,1980 20 major commercial banks nationalized

other Nationalized Banks December, 1969 Lead bank Scheme was formulated which transformed these profit maximizing institutions into catalysts of local development.

1993 - Nationalized Banks 19 Merging of New Bank of India with Punjab National Bank: Public Sector banks - 19

30th June, 2009 Total Nationalized Banks branches: 39,661


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6. Regional Rural Banks :

BANKS WHEN WHAT

Regional Rural Banks (RRBs)

Year 1996 The Working Group on Rural Banks recommended to set up RRBs as part of multi-agency approach to provide credits to weaker sections, small and marginal farmers, landless labourers, artisans and small entrepreneurs, thus to save the destitute from the grip of money lenders.

Year 2006 196 RRBs with a network of 14,500 branches.

Year 2010 82 RRBs as a result of amalgamation with 15,475 branches.

2. PRIVATE SECTOR BANK:

Total 22 private sector banks are operating which include 15 old and 7 newly established banks with a network of 8,965 branches.

Private sector banks accounted for 19.6% of total banking assets.

3. FOREIGN BANK :

32 foreign banks with 295 branches located mainly in big cities. They finance foreign trade and are advantageous over Indian banks due to their vast resources and superior management.

Foreign banks accounted for 8.5% of total banking assets.

4. CO-OPERATIVE BANK :

Cooperative bank finances agriculture and develop credit system. There are three wings of cooperative credit system:

(i) Short term (ii) Medium-term

(iii) Long term credit.

5. DEVELOPMENT BANK:

Development bank is a hybrid institution which combines the functions of a finance corporation and a development corporation. They promote balanced and viable development by providing technical, financial and managerial assistance for the implementation of project.For eg: Industrial Development Bank on India (IDBI).

OTHER SCHEDULED BANKS


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7. Specialized Banks These banks also called Apex banks, are established and controlled under the Sspecial act of Parliament and have got a special status.

APEX BANKING INSTITUTIONS These institutions provide refinance facilities and banking services to commercial banks. They are:

Reserve Bank of India (RBI): It was set up as a private shareholder bank under the Reserve Bank of India Act,1934 and it started functioning as the central bank since 1st April 1935.It was nationalised in 1948.

National Bank of Agriculture and Rural Development (NABARD) : It provides short term and long

term credit to agriculture and non agriculture activities namely hand weaving, artisans etc. and coordinate with various governmental agencies. It also provides refinancing facilities on the loan given by commercial banks and cooperative banks for agriculture and rural development.

Export-Import Bank of India (EXIM) : (international trade) Founded in 1982, it performs the normal

banking functions connected with import and export of goods, and several other functions.

National Housing Bank (NHB): (housing construction) Set up in 1988 under the National Housing Bank Act, 198, it functions as the principal agency to promote Housing Finance Institutions and to provide financial and other support to such institutions.

Small Scale Industrial Development Bank of India (SIDBI): Was instituted by an Act of Parliament; it

promotes, finances, develops small scale industries and coordinates the functioning of other complementary institutions. It is a subsidiary of the IDBI.


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2014 EVOLUTION OF INDIAN BANKING : The banking industry in India has grown in a specific kind of environment and with some pre-defined objectives which has had a strong bearing on its operations and management. The evolution of Indian Banking System can be divided into the following phases: i. Phase 1 - (1786-1947) Pre Independence / Evolutionary ii. Phase 2 - (1947-1969) Pre Nationalization / Foundation iii. Phase 3 - (1969-1985) Post Nationalization / Expansion iv. Phase 4 - (1985- 1991) Post Nationalization / Consolidation v. Phase 5 - (1991 onwards) Liberalization / Reformatory PHASE 1 (1786-1947)

YEAR BANKS FORMED

1786 General Bank of India, Bank of Hindustan 1809 Bank of Bengal 1840 Bank of Bombay 1843 Bank of Madras 1865 Allahabad Bank 1906-35 Bank of India, Central Bank of India, Bank of Mysore,

Bank of Baroda 1935 Reserve Bank of India

During this period the growth was very slow and banks experienced periodic failures. The public confidence in banks was low and the deposit mobilization was slow. Thus, the role of commercial banks in India remained confined to mobilize the community’s savings and attending to the credit needs of only certain selected and limited segments of the economy. Bank’s operations were influenced primarily by commercial principle and not by developmental factor. PHASE 2 (1947-1969) Reorganization and consolidation of the prevailing banking network: Banking Companies Act, 1949 was enacted. Banks started playing a paramount role in small and heavy scale industrial development. Loans were extended towards primary sector after social control was adopted.


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2014 1955: Government nationalized the Imperial Bank of India (the State Bank of India Act) which had extensive banking facilities on a large scale, especially in rural and semi-urban areas. It formed the State Bank of India (SBI) to act as the principal agent of RBI and to handle banking transactions of the Union and the State Governments of the country. 1969: Seven subsidiary banks of the State Bank of India were nationalized to bolster credit to all economic segments and also to mitigate regional imbalances. PHASE 3 (1969-1985) First-Banking Revolution: It composed of 3 vital agendas:

Bank branches penetrating in rural areas for geographical expansion at a path breaking pace Deposit mobilization Credit creation

Therefore, this period witnessed the growth of "direct lending" whereby commercial banks were capable of implementing government sponsored programmes in the "social banking" atmosphere, thus, decelerating private banking.

As many as 50,000 bank branches were set up, three-fourths of these branches were opened in rural and semi-urban areas

The deposit growth spiraled to approximately 800% The advances skyrocketed by 11,000% The government ownership gave the public implicit faith and immense confidence in the sustainability

of public sector banks BRANCH EXPANSION SINCE 1969 TO 1991 Year Total Number Of Branches Rural Branches Semi Urban Branches

1969 8,262 1,833 3,342

1980 32,419 15,105 8,122

1991 60,220 35,206 11,344 Source: RBI (1998): Banking Statistics, 1992.95. The burgeoning network and the direct impact of growth was to bring down the population per branch from 60,000 in 1969 to about 14,000. The banking system assumed a broad mass-base and emerged as an important instrument of social-economic changes. Thus, distinct transformation revolutionized the Indian banking system. However, not all was well as the following problems emerged:


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2014 Large expansion of branches led to deterioration in controlling the working of the system. Supervisory

mechanism and control was below the optimum level which led to inefficiency in banking operations Therefore, retail lending to more risk-prone areas at concessional interest rates raised costs and

adversely affected the quality of banks assets The profitability of the banks was under strain Competitive efficiency of the banks was very low Customer service, advances and quality were of least priority. Performance of a bank/banker began to

be measured merely in terms of growth of deposits 63.5% of bank funds were used by CRR and the rest was used in priority sectors therefore banks were

not left with adequate resources for expansion of their business There was no autonomy in vital decisions. Commercial banks weren't autonomous to make their own

decision. Thus, their operations were inefficient By this time about 90% of commercial banks were in the public sector and were regulated in all areas

of its working. Managerial decisions were controlled by government PHASE 4 (1985- 1991) A realization of the above weaknesses led the banking sector into the phase of consolidation. This phase began in 1985 when a series of policy initiatives were taken with the objectives of consolidating the gains of branch expansion undertaken by the banks, and relaxing though marginally, the very tight regulation under which the system was operating. Although the number of scheduled banks increased from 264 in 1984 to 276 in 1990, branch expansion of the banks slowed down. Hardly 7000 branches were set up during this period. Hence, serious attention was paid to improving housekeeping, customer services, credit management, staff productivity and profitability of the banks and concrete steps were taken during this period to rationalize the rates of bank deposits and lending. PROGRESS OF COMMERCIAL BANKING IN INDIA: 1951 - 1991 S.No. Indicator/Year 1951 1969 1987 1991

1 Number of Commercial Banks Scheduled Banks, Non Scheduled Banks

566 92 474

89 73 16

279 275 4

276 272 4

2 Total Deposits of Scheduled Banks.(Rs. Crore)

908 4,646 107,345 201,199

3 Total Credit of Scheduled Banks. (Rs. in Crore)

547 3599 64,213 121,886

Source: ABI (1998)-Banking Statistics, 1972.95.


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2014 New policy enunciated to consolidate the profits of branch expansion and to relax very tight regulation under which the system was operating .

PHASE 5 (1991 onwards) NET PROFITS OF SCHEDULED COMMERCIAL BANKS (Rs. Crore) S.No. Reporting Banks Year (1991-92) Year (1992-93)

1 State Bank Group 244 280 2 Other nationalized Banks 559 -3684 3 Private Sector Banks 77 60 4 Foreign Banks 320 -842

Source: Govt. of India, Economic Survey, 2002-03 Following is observed from above :

In the case of nationalized banks, other than State Bank Group, profitability was quite low The net profit declined for private banks The foreign banks also sustained losses The average "Return on Assets" was about 0.15 % in contrast with the international standards

reflecting low capitalization of Indian banks "Return on Equity" hovered around 9.5% and capital and reserves averaged about 1.05% of assets in

juxtaposition to 4 to 6 % in other Asian countries Thereupon, by 1991, the country was facing a calamitous setback: unhealthy and inefficient financial sector with virtually unsound and unprofitable banking segment. Furthermore, the customer service was poor, the work technology was outdated and the banks were unable to meet the challenges of a competitive environment. DECLINING PRODUCTIVITY & PROFITABILITY To restore the financial health of commercial banks and to make their functioning efficient and profitable, the Government of India appointed a committee called 'The Committee on Financial System' under the chairmanship of Sri M. Narasimham, ex-Governor of Reserve Bank of India which submitted its recommendations in November 1991.


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2014 The Narasimham Committee-I identified the following factors as responsible for decline in income earnings:

The minimum Statutory Liquidity Ratios (SLR) and Cash Reserve Ratio (CRR) was over half of the total resources mobilized by banks, thereby, preempted the investment potential of the banks.

Directed credit programme of deploying 40 per cent of bank credit to the priority sectors at low interest rates.

Low capital base and technology

Excessive branch expansion.

Political interference in loan disbursal and poverty eradication programmes.

The above factors deteriorated the quality of loans granted in both priority and traditional sectors and in some cases the borrowers didn't repay the principal and interest money which impeded the smooth functioning of the banks.

Perhaps the single most important cause for the further

increase in expenditure has been the impact of the

phenomenal expansion of branch banking. Growing

diversification of functions, particularly with respect to

extending the coverage of bank credit to agriculture and

small industries, where the unit cost of administering the

loan tend to be high in proportionate terms, have also

contributed to a faster growth of expenditure".

As observed by the 'The Narasimham Committee on

Financial System'


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2014 FIRST PHASE OF REFORMS OF BANKING SECTOR (1991) The Narasimham Committee delineated the exigent reforms to suit and brought in a competitive financial stable structure. Ensuring a bank's operational flexibility and functional autonomy, in order to enhance efficiency, productivity and profitability, the Committee recommended a series of measures which turned out be a breakthrough in the history of Indian banking system. RECOMMENDATIONS OF NARASIMHAM COMMITTEE – I

Reduction of SLR to 25 percent over a period of five years

Progressive reduction in CRR

Phasing out of directed credit programmes and redefinition of the priority sector

Deregulation of interest rates so as to reflect emerging market conditions

Adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts

Imparting transparency to bank balance sheets and making more disclosures

Setting up of special tribunals to speed up the process of recovery of loans

Setting up of Asset Reconstruction Funds (ARFs) to recuperate banks from the thriving bad debts and

non-repaid money

Restructuring of the banking system to create 3-4 large global oriented banks, 8-10 national and indigenous banks such as RRBs

Setting up one or more rural banking subsidiaries by Public Sector Banks

Permitting RRBs to engage in all types of banking business

Abolition of branch licensing

Liberalizing the policy with regard to allowing foreign banks to open offices in India

Rationalization of foreign operations of Indian banks


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Giving freedom to individual banks to recruit officers

Inspection by supervisory authorities and submitting internal audit reports on the progress/losses incurred

Ending duality of control over banking system by Banking Division and RBI

A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI

Revise procedure for selection of Chief Executives and Directors of Boards of public sector banks

Obtaining resources from the market on competitive terms by FDIs

Speedy liberalization of capital market

Supervision of merchant banks, mutual funds, leasing companies etc., by a separate agency to be set

up by RBI

Enactment of a separate legislation to provide appropriate legal framework for mutual funds and lay down prudential norms for these institutions, etc

BANKING REFORM MEASURES IMPLEMENTED BY GOVERNMENT: On the recommendations of Narasimhan Committee, following measures have been undertaken by government since 1991:

Lowering SLR and CRR The high SLR and CRR reduced the profits of the banks. The SLR was reduced from 38.5% in 1991 to 25% in

1997. This left more funds with banks for allocation to agriculture, industry, trade etc. The CRR was reduced from 15% in 1991 to 4.1% in June 2003 and now less funds are accumulated with RBI.


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2014 Prudential Norms

To impart professionalism in commercial banks, the following rules were included:

proper disclosure of income

classification of assets

provision for Bad debts, to match the authenticity of a commercial's bank's image and its financial position

required to make 100% provision for all Non-Performing Assets (NPAs)

Capital Adequacy Ratio (CAR) Capital Adequacy Ratio is the ratio of minimum capital to risk asset ratio. In April 1992 RBI fixed CAR at 8%. By

March 1996, all public sector banks had attained the ratio of 8%. This was also attained by foreign banks.

Deregulation Of Interest Rates The Narasimhan Committee advocated that market forces should determine the interest rates . Since 1992,

interest rates have become much simpler and freer. Following specific measure have been taken :

Scheduled Commercial Banks have now the freedom to set interest rates on their deposits subject to minimum floor rates and maximum ceiling rates;

Interest rate on domestic term deposits has been decontrolled;

The prime lending rate of SBI and other banks on general advances of over Rs. 2 lakh has been reduced;

Rate of Interest on bank loans above Rs. 2 lakh has been fully decontrolled;

The interest rates on deposits and advances of all Co-operative banks have been deregulated subject to a minimum lending rate of 13%.

Recovery Of Debts The Government of India passed the “Recovery of debts due to Banks and Financial Institutions Act 1993” in order to quickly recover debts pending in banks and financial institutions. Six Special Recovery Tribunals and Appellate Tribunals have been set up.

Competition From New Private Sector Banks Private sector banks can raise capital from foreign institutional investors up to 20% and from NRIs up to 40%,

which has increased competition.


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2014 Phasing Out Of Directed Credit

The committee suggested phasing out of the directed credit programme in which the credit on targeted

sectors would be curbed from 40% to 10%. However, imposing this policy would enrage peasants, small industrialists and transporters.

Access To Capital Market The Banking Companies (Acquisition and Transfer of Undertakings) Act was amended to enable the banks to

raise capital through public issues. This is subject to provision that the holding of Central Government would not fall below 51% of paid-up-capital. SBI has already raised substantial amount of funds through equity and

bonds.

Freedom Of Operation Scheduled Commercial Banks can open new branches and upgrade extension counters, after attaining capital adequacy ratio and prudential accounting norms. They can shut down non-viable branches other than in rural areas. Local Area banks (LABs)

In 1996, RBI issued guidelines for setting up of Local Area Banks and 7 LABs in private sector. LABs would help in mobilizing rural savings and in channeling them in to investment in local areas. Supervision Of Commercial Banks

The RBI has set up a Board of financial Supervision with an advisory Council to strengthen the supervision of banks and financial institutions. In 1993, RBI established a new department known as Department of Supervision as an independent unit for supervision of commercial banks.


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SECOND PHASE OF REFORMS OF BANKING SECTOR (1998) : The recommendations of Narasimham Committee-I (1991) provided blueprint for first generation reforms of the financial sector. The period 1992-97 witnessed laying of the foundations for reforms of the banking system. It also saw the implementation of prudential norms relating to capital adequacy, asset classification and income recognition etc. The difficult task of the structural changes accomplished during this period provided the basis for future reforms. Against such a background, the Report of the Narasimham Committee-II in 1998 provided the road map for the second-generation reform process. NARASIMHAM COMMITTEE REPORT - II To make banking sector stronger, the government again appointed a committee on banking sector reforms under the Chairmanship of M. Narasimham. The Committee placed greater importance on structural measures and improvement in standards of disclosure and levels of transparency. Following are the recommendations of the second Narasimham Committee:

A Board for Financial Regulation and supervision (BFRS) should be set up to supervise the activities of banks and financial institutions;

There was an urgent need to review and amend the provisions of RBI Act, Banking Regulation Act, etc. to bring them in line with current needs of industry;

Net Non-performing Assets for all banks was to be brought down to 3% by 2002;

Emphasis on rationalization of bank branches and staff and continuation of licensing policy for new private banks;

10 Foreign banks may be allowed to set up subsidiaries and joint ventures. On the recommendations of committee following measures were taken by the government to further reform the banking system:

NEW AREAS AND INSTRUMENTS New areas for bank financing include insurance, credit cards, asset management, leasing, gold

banking, investment banking, interest rate swaps, forward rate agreements, and liquidity adjustment

facility for meeting day-to-day liquidity.


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RISK MANAGEMENT AND STRENGTHNING TECHNOLOGY

Banks had started specialized committees to measure and monitor various risks. They are regularly

upgrading their skills and systems. Payment technology is strengthened with electronic funds transfer,

centralized fund management system, etc.

INCREASE INFLOW OF CREDIT AND ADOPTION OF GLOBAL STANDARDS Measures are taken to increase the flow of credit to priority sector through focus on Micro Credit and

Self Help Groups. RBI has introduced Risk Based Supervision of banks. Best international practices in

accounting systems, corporate governance, payment and settlement systems etc. are being adopted.

INFORMATION TECHNOLOGY AND MANAGEMENT OF NPAs

Banks have introduced online banking, E-banking, internet banking, telephone banking etc. Measures

have been taken facilitate delivery of banking services through electronic channels. RBI and central

government have taken measures to manage non-performing assets (NPAs), such as corporate Debt

Restructuring (CDR), Debt Recovery Tribunals (DRTs).

ANTI-MONEY LAUNDERING AND CUSTOMER SERVICE

To strengthen international financial relationships, money laundering has to be prevented. In 2004, RBI

revised the guidelines on ''Know Your Customer'' (KYC) principles. To improve customer service, RBI

has taken many steps such as credit card facilities, banking ombudsman, settlement off claims of

deceased depositors etc.

MANAGERIAL AUTONOMY AND AMALGAMATION

In February 2005, the Government of India had issued a managerial autonomy package for public

sector banks to provide them a level playing field with private sector banks in India. RBI has issued

guidelines for merger and amalgamation of private sector banks.

COMMENTS ON REFORMS The banking sector reforms, which were implemented as a part of overall economic reforms, facilitated the most drastic changes that improved the worn out sector within a short span. The distinctive features of the reform process may be stated thus:

PRE-DESIGNED WITH A LONGTERM VISION: The two Committees on financial sector reforms (Narasimham Committee-I and II) outlined a clear long-term vision for the banking segment particularly in terms of ownership of PSBs, level of competition, etc.


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PERVASIVE IN NATURE: Reform measures have been all pervasive covering almost all areas of concern

DELIBERATION : Most of the reform measures were passed through a process of extensive consultation and discussion with the concerned parties before finalization or implementation

INTERNATIONALIZATION: Most of the reform measures have targeted and achieved international best

practices and standards in a systematic and phased manner

TRANSPARENCY AND RECORDS: All the reform measures and changes have been systematically

recorded and are found in the annual reports and in the annual publications of RBI on "Trend and Progress of Banking in India"

IN A NUTSHELL… From over-regulation and over administration to autonomous and self sufficiency, Indian banks have reached the threshold of global financial competition. Metamorphosing primarily due to prudential structural changes, the banks' assets have performed well and the profits have gone up. The profitability of the Indian banking system is reasonably in line with international experience. No banking crisis has occurred in Indian financial sector after 1992 reforms. Some expressed the fear that the reforms would sound a blow to social banking , however, the banks continue to lend at least 18% of their total bank credit to social banking , hence not affecting it adversely.


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2014 FUTURE ROAD MAP & CONCLUSIONS : The buck doesn't stop here. As global financial sector crosses new dimensions, acquiring durable and flexible services, Indian banks are challenged with demands from customers. Indian banking needs to underscore the following aspects and build required capabilities to cope up with the challenges of the dynamic banking environment. The following suggestions need to occur:

• STRATERIZE: with no impediment to the quality of services, plan out to control costs.

• INDEPENDENCE: Earn more of ‘other income ‘and reduce dependence of interest income.

• KNOW HOW: Adopt latest and cost-effective technology, because technology has emerged as a strategic tool in the operations of banks.

• SERVICE SECTOR: Banks should explore the possibilities of tapping this sector for it contributes 50% to the GDP.

• PUBLIC OPINION: Monitor customers' perceptions and trend about the ongoing support/criticism on the quality of services ad identify the crossroads and pitfalls that need to be avoided.

• MINIMIZE NPAs: Sound credit appraisal, credit risk evaluation and credit monitoring through periodic interaction with borrower to find out the end use of credit are some of the measures to prevent the growth of Non Performing Assets.

• INNOVATION: Organizational and entrepreneur skills should be effectively channelized towards delineating new ideas, products, strategies for winning over and retaining the customer.

• STAFF PRODUCTIVITY: In public sector, transfer labour intensive into capital intensive technology as with capital intensive one mitigates staff expenses. Redistribute staff to strengthen the neglected areas of marketing.


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It is said that India’s banking sector has the potential to become the fifth largest banking sector globally by 2020 and the third largest by 2025. The banking industry has witnessed discernible development, with deposits growing at 21.2 % per cent (in terms of INR) in the period 2006–13. Today, banks are turning their focus to servicing clients. Banks in the country, including those in the public sector, are emphasizing on enhancing their technology infrastructure, in order to improve customer experience and gain a competitive edge. The popularity of internet and mobile banking is higher than ever before, with Customer Relationship Management (CRM) and data warehousing expected to drive the next wave of technology in banks. Indian banks are also progressively adopting an integrated approach to risk management. Most banks already have in place the framework for asset–liability match, credit and derivatives risk management thereby adopting the methods to improve productivity and efficiency .


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report 2 - indian banking system & evolution

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