Professional Documents
Culture Documents
A retrospect of the events clearly indicates that the Indian banking sector
has come far away from the days of nationalization. The Narasimham
Committee laid the foundation for the reformation of the Indian banking
sector. Constituted in 1991, the Committee submitted two reports, in
1992 and 1998, which laid significant thrust on enhancing the efficiency
and viability of the banking sector. As the international standards became
prevalent, banks had to unlearn their traditional operational methods of
directed credit, directed investments and fixed interest rates, all of which
led to deterioration in the quality of loan portfolios, inadequacy of capital
and the erosion of profitability.
1
The reforms also include increase in the number of banks due to the entry
of new private and foreign banks, increase in the transparency of the
banks’ balance sheets through the introduction of prudential norms and
increase in the role of the market forces due to the deregulated interest
rates. These have significantly affected the operational environment of
the Indian banking sector.
2
The deregulation process has resulted in delivery of innovative financial
products at competitive rates; this has been proved by the increasing
divergence of banks in retail banking for their development and survival.
TABLE OF CONTENTS
CH.NO. TITLE
PAGE NO
1.1 Introduction 01
1.2 Reduction of SLR and CRR 04
1.3 Minimum Capital Adequacy Ratio 07
1.4 Prudential Norms 11
1.5 Disclosure Norms 17
1.6 Rationalisation of Foreign Operations in India
19
3
1.7 Special Tribunals and Asset Reconstruction Fund
23
1.8 Restructuring of Weak Banks 26
1.9 Asset Liability Management System
29
1.10 Reduction of Government Stake in PSBs
32
1.11 Deregulation of Interest Rate 39
2.1 Introduction 42
2.2 Voluntary Retirement Scheme 43
2.3 Universal Banking 52
2.4 Mergers and Acquisition 56
2.5 Banking and Insurance 62
2.6 Rural Banking 65
2.7 Virtual Banking 71
2.8 Retail Banking 73
CH.NO. TITLE
PAGE NO
CHAPTER – 3
3.1 The SCAM Story 74
3.2 Public Sector OR Private Sector – Point of
Views 76 3.3 And today... the
news say. . . 83
3.4 Future … what’s ahead 86
3.5 Conclusion 88
4
List of Illustrations and Visual Aids
List of Annexures
5
1.1 Introduction
As the real sector reforms began in 1992, the need was felt to restructure
the Indian banking industry. The reform measures necessitated the
deregulation of the financial sector, particularly the banking sector. The
initiation of the financial sector reforms brought about a paradigm shift in
the banking industry. In 1991, the RBI had proposed to from the
committee chaired by M. Narasimham, former RBI Governor in order to
review the Financial System viz. aspects relating to the Structure,
Organisations and Functioning of the financial system. The Narasimham
Committee report, submitted to the then finance minister, Manmohan
Singh, on the banking sector reforms highlighted the weaknesses in the
Indian banking system and suggested reform measures based on the
Basle norms. The guidelines that were issued subsequently laid the
foundation for the reformation of Indian banking sector.
6
vi. Adoption of uniform accounting practices in regard to income
recognition, asset classification and provisioning against bad and
doubtful debts
vii. Imparting transparency to bank balance sheets and making more
disclosures
viii. Setting up of special tribunals to speed up the process of recovery
of loans
ix. Setting up of Asset Reconstruction Funds (ARFs) to take over from
banks a portion of their bad and doubtful advances at a discount
x. Restructuring of the banking system, so as to have 3 or 4 large
banks, which could become international in character, 8 to 10
national banks and local banks confined to specific regions. Rural
banks, including RRBs, confined to rural areas
xi. Abolition of branch licensing
xii. Liberalising the policy with regard to allowing foreign banks to open
offices in India
xiii. Rationalisation of foreign operations of Indian banks
7
xxi. Supervision of merchant banks, mutual funds, leasing companies
etc., by a separate agency to be set up by RBI and enactment of a
separate legislation providing appropriate legal framework for
mutual funds and laying down prudential norms for such
institutions, etc.
This committee constituted submitted its report in April 1998. The major
recommendations are :
8
iv. CAR to be raised to 10% from the present 8%; 9% by 2000 and 10%
by 2002
v. An asset should be classified as doubtful if it is in the sub-standard
category for 18 months instead of the present 24 months
vi. Banks should avoid ever greening of their advances
vii.There should be no further re-capitalization by the Govt.
viii.NPA level should be brought down to 5% by 2000 and 3% by 2002.
ix. Banks having high NPA should transfer their doubtful and loss
categories to ARCs which would issue Govt. bonds representing the
realisable value of the assets.
x. International practice of income recognition by introduction of the
90-day norm instead of the present 180 days.
xi. A provision of 1% on standard assets is required.
xii.Govt. guaranteed accounts must also be categorized as NPAs under
the usual norms
xiii.There is need to institute an independent loan review mechanism
especially for large borrowal accounts to identify potential NPAs.
xiv.Recruitment of skilled manpower directly from the market be given
urgent consideration
xv.To rationalize staff strengths, an appropriate VRS must be
introduced.
xvi.A weak bank should be one whose accumulated losses and net
NPAs exceed its net worth or one whose operating profits less its
income on recap bonds is negative for 3 consecutive years.
9
100 per cent risk weightage on foreign exchange (March 31, 1999) and a
minimum capital adequacy ratio of 9 per cent as on March 31, 2000.
Only a few of these mainly constitute to the reforms in the banking sector.
REFORMS
10
1.2 Reduction of SLR and
CRR
The South East Asian countries introduced banking reforms wherein bank
CRR and SLR was reduced, this increased the lending capacity of banks.
The markets fell precipitously because banks and corporates did not
accurately measure the risk spread that should have been reflected in
their lending activities. Nor did they manage such risks or provide for
them in their balance sheets. And followed the South East Asian Crisis.
11
Liquidity Ratio (SLR) being brought down to 25 per cent by 1996-97 in a
period of 5 years.
The arguments for higher or lower SLR and CRR ratios stem from two
different perspectives one which favours the banks, and the other which
favours the bank reserves as a monetary policy instrument. The bank
perspective seeks to maximise "lendable" resources, the banks' control
over resource deployment, and returns to the banks from the
"preempted" funds. It is also claimed that the low returns from the forced
investments in government securities adversely affect the bank
profitability - the cost of deposits for banks, which averages at 15-16 per
cent, was much greater than the (earlier) returns on the government
securities. This argument is sometimes carried further to state that RBI
makes profits on impounded money, at the cost of bank profitability. To
some extent, this argument has been weakened by the increase in
interest on government securities to 13.5 per cent.
Some problems with the stated aim of reducing SLR and CRR are:
12
3. A commitment to a unidirectional movement of these vital
controls irrespective of the effects on, and the response of, other
This scenario thus indicates that despite the stated aim of reductions in
SLR and CRR, RBI may be forced to revert to higher reserve levels, if the
economic indicators become unfavourable, and RBI has already indicated
as much. Bank investment are, therefore, not likely to stabilize in the
near future.
13
Trends in CRR and SLR 1993 – 2001
40
35
30
Percentage of DTL
25
20
15
10
0
May- Nov- May- Nov- May- Nov- May- Nov- May- Nov- May- Nov- May- Nov- May- Nov- May-
93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01
SLR CRR
14
1.3 Minimum Capital
Illustration 1 Adequacy
Ratio
Capital Adequacy
15
Revaluation Reserves
General Provisions and Loss Reserves
Inadequacy?
The banking sector specialists have traditionally claimed that capital plays
several roles in all "depository institutions", such as banks. However,
these roles can vary significantly between the public sector banks and
those in the private sector. The justification for capital adequacy norms
16
for banks is brought out by the following arguments:
17
respond to positive as well as negative changes in the economic
environment. New opportunities can be quickly made use of by
lending appropriately. If the bank is not constrained by capital, it
can give valuable time to customers with temporary repayment
problems. It can thereby recover more from the loans, which
would otherwise have to be called in.
The Dilemma
The foregoing discussion clearly brings out two conclusions: (a) increasing
the capital base of the nationalised banks is necessary, especially in view
of the large quantities of non-performing assets; and (b) however,
increase in capital owned directly by the government has several
attendant problems' The situation is complicated by the fact that " private
management" does not provide an answer in India, because of the size of
the institutions involved. Also, talent and expertise in bank management
is available mainly in the existing nationalised banks.
One short-term fallout of the capital adequacy norms has been the
massive increases in investments by the banks in government securities.
Since the risk-weight of government securities is zero, investments in
them do not add to the capital requirements. The banks are therefore
choosing to deploy funds mobilised through deposits in these long-term
gilts.
18
per cent, credit grew by only 6.65 per cent, while investments surged by
18.8 per cent. The problem with this practice of the banks is that it can
upset the balance of maturity patterns between deposits (many of ' which
are short-term) and investments (which have 10 year maturities). Now,
banks would have to develop much better investment management skills,
especially when interest rates are deregulated, and significant open
market operations are started.
The Narasimham Committee II, 1998, suggested further revision i.e. CAR
to be raised to 10% from the present 8%(1998); 9% by 2000 and 10% by
2002
19
Illustration 2
20
1.4 Prudential Norms
To get a true picture of the profitability and efficiency of the Indian Banks,
a code stating adoption of uniform accounting practices in regard to
income recognition, asset classification and provisioning against bad and
doubtful debts has been laid down by the Central Bank. Close to 16 per
cent of loans made by Indian banks were NPAs - very high compared to
say 5 per cent in banking systems in advanced countries.
21
nationalization agenda and the directed credit, most of the public sector
banks were burdened with huge NPAs. While the government did
contribute to write-off these bad loans, the problem still remains. NPAs
expose the banks to not just credit risk but also to liquidity risk.
Considering the implications of the NPAs and also for imparting greater
transparency and accountability in banks operations and restoring the
credibility of confidence in the Indian financial system, the RBI introduced
prudential norms and regulations. The prudential norms which relate to
income recognition, asset classification and provisioning for bad and
doubtful debts serve two primary purposes – firstly, they bring out the
true position of a Bank’s loan portfolio, and secondly, they help
in arresting its deterioration.
The asset quality of the bank and its capital are closely associated. If the
assets of the bank go bad it is the capital that comes to its rescue. Implies
that the bank should have adequate capital to face the likely losses that
may arise from its risky assets. In the changed business environment,
where banks are exposed to greater and different types of risk, it
becomes essential to have a good capital base, which can help it sustain
unforeseen losses. As stated earlier, the one major move in this direction
was brought about by the Basle Committee, which laid the capital
standards that banks have to maintain. This became imperative, as banks
began to cross over their national boundaries and begin to operate in
international markets. Following the Basle Committee measures, RBI also
issued the Capital Adequacy Norms for the Indian banks also.
INCOME RECOGNITION
The regulation for income recognition states that the Income on NPAs
cannot be booked.
22
Interest income should not be recognized until it is realized. An NPA is
one where interest is overdue for two quarters or more. In
respect of NPAs, interest is not to be recognized on accrual basis, but is to
be treated as income only when actually received. Income in respect of
accounts coming under Health Code 5 to 8 should not be recognized until
it is realized. As regards to accounts classified in Health Code 4, RBI has
advised the banks to evolve a realistic system for income recognition
based on the prospect of realisability of the security. On non-performing
accounts the banks should not charge or take into account the interest.
As of now, for income recognition norms, the RBI has suggested that the
international norm of 90 days be implemented in a phased manner by
2002. The current norm is 180 days.
ASSET CLASSIFICATION
23
While new private banks are careful about their asset quality and
consequently have low non-performing assets (NPAs), public sector banks
have large NPAs due to wrong lending policies followed earlier and also
due to government regulations that require them to lend to sectors where
potential of default is high. Allaying the fears that bulk of the Non-
Performing Assets (NPAs) was from priority sector, NPA from priority sector
constituted was lower at 46 per cent than that of the corporate sector at
48 per cent.
Loans and advances account for around 40 per cent of the assets of SCBs.
However, delay/default in payment of interest and/or repayment of
principal has rendered a significant proportion of the loan assets non-
performing. As per RBI’s prudential norms, a Non-Performing Asset (NPA)
is a credit facility in respect of which interest/installment has remained
unpaid for more than two quarters after it has become past due. “Past
due” denotes grace period of one month after it has become due for
payment by the borrower. The Mid-Term Review of Monetary and Credit
Policy for 2000-01 has proposed to discontinue this concept with effect
from March 31, 2001.
24
Standard Assets: It carries not more than the normal risk attached to
the business and is not an NPA.
The following Table shows the distribution of total loan assets of banks in
the public private sectors and foreign banks for 1997-98 through 1999-
2000. It is worth noting that the ratio of incremental standard assets of
SCBs to their total loan assets increased from 83.1 per cent in 1998-99 to
97.2 percent in 1999-2000. In other words, the ratio of incremental NPAs
25
of SCBs to their total loan assets declined significantly from 16.9 per cent
in 1998-99 to 2.8 percent in 1999-2000.
26
1999-2000 380077 58249 37432 475758
Note: Addition of percentages for B to D may not add up to 100 minus the
percentage share of standard assets (A) due to rounding.
Illustration 3
The asset classification norms have resulted in a huge quantity of assets
being classified into the sub-standard, doubtful, and loss assets. As at 31
March 1993, the total of Non-Performing Assets (NPAs) for the public
sector banks (SBI, its seven associates, and 20 nationalised banks) stood
at Rs 36,588 crores. Of these, the sub-standard assets account for Rs
12,552 crores, doubtful assets Rs 20,106 crores, and loss assets Rs 3,930
crores (RBI Bulletin, 1994). For the future, the banks will have to tighten
their credit evaluation process to prevent this scale of sub-standard and
loss assets. The present evaluation process in several banks is burdened
with a bureaucratic exercise, sometimes involving up to 18 different
officials, most of whom do not add any value (information or judgment) to
the evaluation.
PROVISIONING NORMS
Banks will be required to make provisions for bad and doubtful debts on a
uniform and consistent basis so that the balance sheets reflect a true
picture of the financial status of the bank. The Narasimham Committee
has recommended the following provisioning norms
(i) 100 per cent of loss assets or 100 per cent of out standings for loss
assets;
(ii) 100 per cent of security shortfall for doubtful assets and 20 per cent to
50 per cent of the secured portion; and
(iii) 10 per cent of the total out standings for substandard assets.
27
A provision of 1% on standard assets is required as suggested by
Narasimham Committee II 1998. Banks need to have better credit
appraisal systems so as to prevent NPAs from occurring. The most
important relaxation is that the banks have been allowed to make
provisions for only 30 per cent of the "provisioning requirements" as
calculated using the Narasimham Committee recommendations on
provisioning (but with the diluted asset classification). The nationalised
banks have been asked to provide for the remaining 70 per cent of the
"provisioning requirements" by 31 March 1994. The encouraging profits
recently declared by several banks have to be seen in the light of
provisions made by them - Rs 10,390 crores pertaining to 1992-93, and
the additional provisions for 1993-94. To the extent that provisions have
1.5 would
not been made, the profits Disclosure
be fictitious. Norms
In fact, the banks must be forced to make public the nature of NPAs being
written off. This should be done to ensure that the taxpayer’s money
given to the banks as capital is not used to write off private loans without
adequate efforts and punishment of defaulters.
28
# A Close look: For the future, the banks will have to tighten their credit
evaluation process to prevent this scale of sub-standard and loss assets.
The present evaluation process in several banks is burdened with a
bureaucratic exercise, sometimes involving up to 18 different officials,
most of whom do not add any value (information or judgment) to the
evaluation. But whether this government and its successors will continue
to play with bank funds remains to be seen. Perhaps even the loan
waivers and loan "melas" which are often decried by bankers form only a
small portion of the total NPAs. As mentioned above, much more
stringent disclosure norms are the only way to increase the
accountability of bank management to the taxpayers . A lot
therefore depends upon the seriousness with which a new regime of
regulation is pursued by RBI and the newly formed Board for Financial
Supervision.
The Reserve Bank of India (RBI) has moved to get public sector banks to
consolidate their accounts with those of their subsidiaries and other
outfits where they hold substantial stakes.
Towards this end, RBI has set up a working group recently under its
Department of Banking Operations and Development to come out with
necessary guidelines on consolidated accounts for banks. The move is
aimed at providing the investor with a better insight into viewing a bank's
performance in totality, including all its branches and subsidiaries, and
not as isolated entities. According to a banker, earlier subsidiaries were
floated as external independent entities wherein the accounting details
were not incorporated in the parent bank's balance sheet, but at the same
time it was assumed that the problems will be dealt with by the parent.
This will be a path-breaking change to the existing norms wherein each
bank conducts its accounts without taking into consideration the
disclosures of its subsidiaries and other divisions for disclosure. As per the
29
proposed new policy guidelines, the banks will be required to consolidate
their accounts including all its subsidiaries and other holding companies
for better transparency.
# Result: This will require the banks to have a stricter monitoring system
of not only their own bank, but also the other subsidiaries in other sectors
like mutual funds, merchant banking, housing finance and others. This is
all the more important in the context of the recent announcements made
by some major public sector banks where they have said they would hive
off or close down some of their under performing subsidiaries.
These new norms will necessitate not only that the problems are handled
by the parent, but investors are also aware of what exactly the problems
are and how they affect the bottomlines of the parent banks. Now, under
the new guidelines, this will no longer be an external disclosure to the
parent banks' books of accounts.
Rather, point out bankers, this will very much form an integral part of the
parent's balance sheet.
30
For instance, if a subsidiary is not performing well or making losses, this
will reflect in the parent's balance sheet.
As per the guidelines for licensing of new banks in the private sector
issued in January 1993, RBI had granted licenses to 10 banks. Based on a
review of experience gained on the functioning of new private sector
banks, revised guidelines were issued in January 2001. The main
provisions/requirements are listed below : -
• Initial minimum paid-up capital shall be Rs. 200 crore; this will be
raised to Rs. 300 crore within three years of commencement of
business.
• Promoters’ contribution shall be a minimum of 40 per cent of the paid-
up capital of the bank at any point of time; their contribution of 40 per
cent shall be locked in for 5 years from the date of licensing of the
bank and excess stake above 40 per cent shall be diluted after one
year of bank’s operations.
• Initial capital other than promoters’ contribution could be raised
through public issue or private placement.
• While augmenting capital to Rs. 300 crore within three years,
promoters need to bring in at least 40 percent of the fresh capital,
31
which will also be locked in for 5 years. The remaining portion of fresh
capital could be raised through public issue or private placement.
• NRI participation in the primary equity of the new bank shall be to the
maximum extent of 40 per cent. In the case of a foreign banking
company or finance company (including multilateral institutions) as a
technical collaborator or a co-promoter, equity participation shall be
limited to 20 per cent within the 40 per cent ceiling. Shortfall in NRI
contribution to foreign equity can be met through contribution by
designated multilateral institutions.
• No large industrial house can promote a new bank. Individual
companies connected with large industrial houses can, however,
contribute up to 10 per cent of the equity of a new bank, which will
maintain an arms length relationship with companies in the promoter
group and the individual company/ies investing in equity. No credit
facilities shall be extended to them.
• NBFCs with good track record can become banks, subject to specified
criteria
• A minimum capital adequacy ratio of 10 per cent shall be maintained
on a continuous basis from commencement of operations.
• Priority sector lending target is 40 per cent of net bank credit, as in the
case of other domestic banks; it is also necessary to open 25 per cent
of the branches in rural/semi-urban areas.
"Our industry did not oppose the entry of private bankers because we
knew they will not be able to reach out to the rural markets” states, G.M.
Bhakey, president of the State Bank of India Officers Association. "Even
after privatisation not more than 10 per cent of the Indian population can
afford to open accounts in private banks."
Can the keenly supported private and foreign banks cater to the banking
needs of the people in India fairly? Takeover and merger dramas are in
progress in the world of private sector banks now and time only can tell
32
how many will live to render safe banking services in the days to come.
The bad debt figures even in the two to three year old new private sector
banks have crossed over 6% to the total advances, while the trends in the
old private banks are still higher, despite the fact that they have no social
commitment lendings in their portfolios.
In any case, the private banks, in the Indian context, cannot be the
alternative to our well-developed public sector banks. They are there in
the country to fill the private pockets with their typical selectivity of
business and costly operations. All those who beat their drums for the
privatisation parade, which is much on the move after globalisation, to
denationalise our public sector banks, do so with vested interests.
ICICI bank, HDFC bank, GTB, IndusInd, BOP and UTI Bank have come out
with IPOs as per licensing requirement. Their technological edge and
product innovation has seen them gaining market share from the slower,
less efficient older banks. These banks have targeted non-fund based
income as major source of revenue, with their level of contingent liabilities
being much higher then their other counterparts viz. PSU and old private
sector banks. The new private banks have been consistently gaining
market shares from the public sector banks. The major beneficiary of this
has been corporate clients who are most sought after now.
The new generation private sector banks have made a strong presence in
the most lucrative business areas in the country because of technology
upgradation. While, their operating expenses have been falling as
compared to the PSU banks, their efficiency ratios (employee’s
productivity and profitability ratios) have also improved significantly.
The new private sector banks have performed very well in the FY2000.
Most of these banks have registered an increase in net profits of over
50%. They have been able to make significant inroads in the retail market
33
of the public sector and the old private sector banks. During the year, the
two leading banks in this sector had set a new trend in the Indian banking
sector. HDFC Bank, as a part of its expansion plans had taken over Times
Bank. ICICI Bank became the first bank in the country to list its shares on
NYSE.
The Reserve Bank of India had advised the promoters of these banks to
bring their stake to 40% over a time period. As a result, most of these
banks had a foreign capital infusion and some of the other banks have
already initiated talks about a strategic alliance with a foreign partner.
The main problems concerning the nationalized / state sector banks are
as follows:
34
manage the maturity mix. PSU Banks by and large take relatively
long-term deposits at fixed rates to lend for working capital purposes
at variable rates. It therefore is negatively affected when interest
rates decline as it takes time to reduce interest rates on deposits
when lending has to be done at lower interest rates due to
competitive pressures.
NPAs- The new banks are growing faster, are more profitable and
have cleaner loans. Reforms among public sector banks are slow, as
politicians are reluctant to surrender their grip over the deployment
of huge amounts of public money.
35
Illustration 4
Annexure 1
1.7
List of Banks Special
operating Tribunals and Asset
in India.
Reconstruction Fund
DRTs, a compulsion!
One of the main factors responsible for mounting non-performing assets
(NPAs) in the financial sector has been the inability of banks/FIs to enforce
the security held by them on loans gone sour. Prior to the passage of the
DRT Act, the only recourse available to banks/FIs to cover their dues from
recalcitrant borrowers, when all else failed, was to file a suit in a civil
court. The result was that by the late ’80s, banks had a huge portfolio of
accounts where cases were pending in civil courts. It was quite common
for cases to drag on interminably. In the interim, borrowers, more often
than not, stripped their premises of all assets so that that by the time the
final verdict came, there was nothing left of the security that had been
pledged to the bank.
36
The Advantage
DRTs, it was felt, would do away with the costly, time-consuming civil
court procedures that stymied recovery procedures since they follow a
summary procedure that expedites disposal of suits filed by banks/FIs.
Following the passage of the Act in August 1993, DRTs were set up at
Calcutta, Delhi, Bangalore, Jaipur and Ahmedabad along with an Appellate
Tribunal at Mumbai.
However, DRTs soon ran into rough weather. The constitutional validity of
the Act itself was questioned. It was only in March 1996, that the Supreme
court modified its earlier order — staying the operation of the Delhi High
Court order quashing the constitution of the DRT for Delhi — to allow the
setting up of three more DRTs in Chennai, Guwahati and Patna.
Subsequently, many more DRTs and ADRTs have been set up.
37
stuck with net NPAs worth Rs 25,000 crore. Even that is an under estimate
as it does not include advances covered by government guarantees,
which have turned sticky. Nor does it include allowances for "ever
greening"--the practice of extending fresh advances to defaulting
corporates so that the prospective defaulter can make interest payments,
thus enabling the asset to escape the non-performing loan tag. Warns K.R.
Maheshwari, 60, Managing Director, IndusInd Bank: "NPA levels are going
to go up for all the banks." And so too will provisions.
Recent Developments
The recent amendment (Jan 2000) to the DRT Act addresses many of the
lacunae in the original act. It empowers DRTs to attach the property on the
borrower filing a complaint of default. It also empowers the presiding
officer to execute the decree of the official receiver based on the
certificate issued by the DRT. Transfer of cases from one DRT to another
has also been made easier. More recently, the Supreme Court has ruled
that the DRT Act will take precedence over the Companies Act in the
recovery of debt, putting to rest all doubts on that score.
38
The amendments would ensure speedy recovery of dues, iron out delays
at the DRT end, as well as ensure that promoters do not have the time
and opportunity to bleed their companies before they go into winding up.
Yet the number of cases pending before DRTs and courts make a telling
commentary on the inability of lenders to make good their threat. They
also reflect the ability of borrowers to dodge the lenders.
The main culprit for all this is the law. Existing recovery processes in the
country are aimed at recovering lenders' dues after a company has gone
sick and not nipping sickness in the bud. Since sickness is defined in law
as the erosion of capital of a company for three consecutive years, there
is little to recover from a sick company after it has been referred to the
Board of Industrial and Financial Revival (BIFR).
What's hurting banks now is the fact that these new issues have cropped
up even as they have been (unsuccessfully) wrestling with their NPAs
which, together, tot up to a staggering Rs 60,000 crore. The stratagem of
using Debt Recovery Tribunals has failed. Now these banks have to
explore the option of liquidating the assets of defaulting companies (a
litigitinous route), or writing off these debts altogether (which may not
find favour with shareholders). The solution could lie in better risk
management
39
1.8 Restructuring of Weak
Banks
How to deal with the weak Public Sector Banks is a major problem for the
next stage of banking sector reforms. It is particularly difficult because the
poor financial position of many of these banks is often blamed on the fact
that the regulatory regime in earlier years did not place sufficient
emphasis on sound banking, and the weak Banks are, therefore, not
responsible for their current predicament. This perception often leads to
an expectation that all weak Banks must be helped to restructure after
which they would be able to survive in the new environment.
Keeping in view the urgent need to revive the weak banks, the Reserve
Bank of India set up a Working Group in February, 1999 under the
Chairmanship of Shri M.S. Verma to suggest measures for the revival of
weak public sector banks in India.
40
THE VERMA PRESCRIPTION…a brief
Identification of weak banks by using benchmarks for 7
critical ratios
41
working funds, ratio of cost to income and ratio of staff cost to
net interest + income all other income).
To begin with, ARF may restrict itself to the NPAs of the three
identified weak banks; the fund needed for ARF is to be provided
by the Government; ARF should focus on relatively larger NPAs
(Rs. 50 lakh and above).
42
In order to control staff cost, the three identified weak banks
should adopt a VRS covering at least 25 percent of the staff
strength; for the three banks taken together, the estimated cost
of VRS ranges from Rs. 1100 to Rs. 1200 crore.
In August 2001, the government of India directed UCO Bank to shut down
800 branches and also 4 international operations in line with the Verma
committee recommendation on sick banks. Three more PSBs declared sick
are Dena Bank, Allahabad Bank and Punjab and Sindh Bank. UCO bank
had been posting losses for the past eleven years.
43
1.9 Asset Liability Management
System
The critical role of managing risks has now come into the open, especially
against the experience of the recent East Asian crisis, where markets fell
precipitously because banks and corporates did not accurately measure
the risk spread that should have been reflected in their lending activities.
Nor did they manage such risks or provide for them in their balance
sheets. In India, the Reserve Bank has recently issued comprehensive
guidelines to banks for putting in place an asset-liability management
system. The emergence of this concept can be traced to the mid 1970s in
the US when deregulation of the interest rates compelled the banks to
undertake active planning for the structure of the balance sheet. The
uncertainty of interest rate movements gave rise to interest rate risk
thereby causing banks to look for processes to manage their risk. In the
wake of interest rate risk came liquidity risk and credit risk as inherent
components of risk for banks. The recognition of these risks brought Asset
Liability Management to the centre-stage of financial intermediation.
The necessity
The asset-liability management in the Indian banks is still in its nascent
stage. With the freedom obtained through reform process, the Indian
banks have reached greater horizons by exploring new avenues. The
government ownership of most banks resulted in a carefree attitude
towards risk management. This complacent behavior of banks forced the
Reserve Bank to use regulatory tactics to ensure the implementation of
the ALM. Also, the post-reform banking scenario is marked by interest rate
deregulation, entry of new private banks, gamut of new products and
greater use of information technology. To cope with these pressures banks
were required to evolve strategies rather than ad hoc fire fighting
solutions. Imprudent liquidity management can put banks' earnings and
reputation at great risk. These pressures call for structured and
44
comprehensive measures and not just ad hoc action. The Management of
banks has to base their business decisions on a dynamic and integrated
risk management system and process, driven by corporate strategy.
Banks are exposed to several major risks in the course of their business -
credit risk, interest rate risk, foreign exchange risk, equity / commodity
price risk, liquidity risk and operational risk. It is, therefore, important that
banks introduce effective risk management systems that address the
issues related to interest rate, currency and liquidity risks.
45
is charged certain rate of interest to cover the credit risk. For example, a
client with credit appraisal AAA will be charged PLR. While somebody with
BBB rating will be charged PLR + 2.5 %, say. Naturally, there will be
certain cut-off for credit appraisal, below which the bank will not lend e.g.
Bank will not like to lend to D rated client even at a higher rate of interest.
The guidelines for the loan sanctioning procedure are decided in the ALCO
meetings with targets set and goals established
ALM Information System
ALM Information System for the collection of information accurately,
adequately and expeditiously. Information is the key to the ALM process. A
good information system gives the bank management a complete picture
of the bank's balance sheet.
ALM Process
The basic ALM process involves identification, measurement and
management of risk parameters. The RBI in its guidelines has asked
Indian banks to use traditional techniques like Gap Analysis for monitoring
interest rate and liquidity risk. However RBI is expecting Indian banks to
move towards sophisticated techniques like Duration, Simulation, VaR in
the future.
Is it possible ?
Keeping in view the level of computerisation and the current MIS in banks,
adoption of a uniform ALM System for all banks may not be feasible. The
final guidelines have been formulated to serve as a benchmark for those
banks which lack a formal ALM System. Banks that have already adopted
more sophisticated systems may continue their existing systems but they
should ensure to fine-tune their current information and reporting system
so as to be in line with the ALM System suggested in the Guidelines. Other
banks should examine their existing MIS and arrange to have an
information system to meet the prescriptions of the new ALM System. In
the normal course, banks are exposed to credit and market risks in view
46
of the asset-liability transformation. Banks need to address these risks in
a structured manner by upgrading their risk management and adopting
more comprehensive Asset-Liability Management (ALM) practices than
has been done hitherto
47
1.10 Reduction of Government Stake
in PSBs
This is what the finance minister said in his budget speech on February
29, 2000;
"In recent years, RBI has been prescribing prudential norms for
banks broadly consistent with international practice. To meet
the minimum capital adequacy norms set by the RBI and to
enable the banks to expand their operations, public-sector
banks will need more capital. With the Government budget
under severe strain, such capital has to be raised from the
public which will result in reduction in government
shareholding. To facilitate this process, the Government has
decided to accept the recommendations of the Narasimham
Committee on Banking Sector Reforms for reducing the
requirement of minimum shareholding by government in
nationalised banks to 33 per cent. This will be done without
changing the public-sector character of banks and while
ensuring that fresh issue of shares is widely held by the
public."
48
equity to 33 per cent
Government’s action programme has expressed clearly its programme for
the dilution of its stake in bank equity. The Cabinet had taken this
decision, immediately on the next day after the bank employees went on
strike, is a clear indication of Government of India’s determination to
amend the concerned Acts, to pave the way for the reduction in its stake.
The proposal had been to reduce the minimum shareholding from 51 per
cent to 33 per cent, with adequate safeguards for ensuring its control on
the operations of the banks. However, it is not willing to give away the
management control in the nationalised banks. As a result public sector
banks may find it very difficult to attract strategic investors.
49
nominate its representative in the boards and strangely a
nominee of the government can be in more than one bank
after the amendment.
The number of whole time directors would be raised to four
as against the present position of two, the chairman and
managing director and the executive director. While
conceptually it is desirable to decentralise power, operationally it
may be difficult to share power at peer level. In quite a few cases,
it was observed that inter personal relations were not cordial
among the two at the top. It has to be seen as to how the four full
time directors would function in unison.
It is proposed to amend the provisions in the Banking Companies
(Acquisition and Transfer of Undertakings) Act to enable the bank
shareholders to discuss, adopt and approve the annual
accounts and adopt the same at the annual general
meetings.
Paid-up capital of nationalised banks can now fall below 25 per
cent of the authorised capital.
Amendment will also enable the setting up of bank-specific
Financial Restructuring Authority (FRA). Authority will be
empowered to take over the management of the weak banks.
Members of FRA will comprise of experts from various fields & will
be appointed by the government, on the advice of Reserve Bank of
India.
The government has been maintaining that the nationalised
banks would continue to retain public sector character even
after the reduction in equity.
This is the reason why the banks would continue to be statutory bodies
even after the reduction in government equity below 51 per cent and the
50
banks would not become companies. This implies that they would
continue to be subject to parliamentary and other scrutiny despite
proposed relaxations.
Reserve Bank’s perception; the Reserve Bank has been emphatic in its
views on lowering the stake of the government in the equity of
nationalized banks:
Official sources explained that this has been done to enable banks to
clean up their balance sheets so that they can access the capital market
51
easily. In terms of transferring equity, the government is arming itself with
powers to sell its stake if it so desires at a later date.
A LOOK AT PAST
Till now, banks could reduce equity only up to 25 per cent of the paid up
capital on the date of nationalisation. Some banks like the Bank of Baroda
have returned equity to the government in the past, but that has been
within the prescribed 25 per cent cap.
The Nationalisation Act provides that the PSU banks cannot sell a single
share. This is the reason why banks have been tapping the market to fund
their expansion plans. Also the Act originally provided that the
government must mandatorily hold 100 per cent stake in banks. The 1994
amendments brought it down to 51 per cent, to help induction of public as
shareholders.
At this stage, the government provided that all shares, excluding
government shares could be transferred. This was necessary to permit the
transfer of shares when public shareholders sold their stake in banks. The
52
amendments remove restrictions on the transfer of government
shareholding.
53
As for current status, Union bank will issue an IPO next year, in order to
reduce the 100 percent government stake to 70 percent and then
gradually to 33 percent.
54
From 1992-93 to 1998-99, the government has injected into the 19 public
sector banks, an amount of Rs.20,446 crore as additional capital. Of this,
three banks-UCO Bank, Indian Bank and United Bank of India, have
received Rs.5729 crore
The demand for funds by the SBI is even more acute than even the
Corporation Bank since the SBI Act provides for a minimum 55 per cent
55
RBI holding in SBI, and the bank is already close to breaching this
threshold. The immediate beneficiary of this move would be Corporation
Bank where government equity is down to 66 per cent. The bank would be
able to access funds from the market without being hampered by the 51
per cent minimum government holding threshold, which currently limits
the ability of banks to expand beyond a certain level. Since a decision on
the new threshold has been taken in the case of the nationalised banks,
the government is expected to follow suit by moving an ordinance to
reduce the RBI stake in the SBI to 33 %
Both the Banking Regulation Act and the SBI Act provide that government
shares cannot be divested and since the government has decided that it
would no longer support banks through budgetary support, they have no
option but to go to the market to meet their fund requirements.
Though there is no special significance attached to the 33 per cent
threshold in the Company Law — which recognised only 26 per cent and
74 per cent as two major thresholds for management and ownership
control — the government has opted for 33 per cent on the basis of the
recommendations of the Narasimham Committee. The committee had felt
that this threshold would provide comfort to the employees. The banks,
like insurance companies, have strong unions and, hence, a phased
reduction in government equity was recommended.
56
The government is also proposing to move an ordinance for demerger of
four subsidiaries of GIC. The law ministry has already cleared both
proposals of the finance ministry. In the case of GIC, the ordinance would
amend the GIC Act, 1972, and demerge its four subsidiaries - National
Insurance Corp, Oriental Insurance, United Insurance and New India
1.11 Deregulation on Interest
Assurance. Rates
The interest rate regime has also undergone a significant change. For
long, an administered structure of interest rate has been in vogue in India.
The 1998 Narasimham Reforms suggested deregulation of interest rates
on term deposits beyond a period of 15 days. At present, the Reserve
Bank prescribes only two lending rates for small borrowers. Banks are free
to determine the interest rate on deposits and lending rates on all
lendings above Rs. 200,000.
In the last couple of years there has been a clear downward trend in
interest rates. Initially lending rates came down, leading to a decline in
yields on advances and investments.
With effect from October 97 interest rates on all time deposits, including
15-day deposits, have been freed. Only the rate on savings deposits
remains controlled by RBI. Lending rates were similarly freed in a series of
57
steps. The Reserve Bank now directly controls only the interest rate
charged for export credit, which accounts for about 10% of commercial
advances. Interest rates on time deposits were decontrolled in a sequence
of steps beginning with longer-term deposits and the liberalisation was
progressively extended to deposits of shorter maturity.
Interest rates on loans upto Rs 2,00,000, which account for 25% of total
advances, is not fixed at a level set by the RBI, but is now aligned with the
Prime Lending Rate (PLR) which is determined by the boards of individual
Banks.
Cooperative Banks were freed from all controls on lending rates in 1996
and this freedom was extended to Regional Rural Banks and private local
area banks in 1997. RBI also considers removal of existing controls on
lending rates in other Commercial Banks as the Indian economy gets used
to higher interest rate regime on shorter loan duration.
The line to control is the cost of funds, since the markets determine asset
yields. The opportunity to improve yields on the corporate side tends to
be limited if banks don’t want to increase the risk profile of the portfolio.
Banks’ income will depend on the interest rate structure and the pricing
policy for the deposits and the credit. With the deregulation of the interest
rates banks are given the freedom to price their assets and liabilities
effectively and also plan for a proper maturity pattern to avoid asset-
liability mismatches. Nevertheless, with the increase in the number of
players, competition for the funds and the other banking services rose.
The consequential impact is being felt on the income profile of the banks
58
especially due to the fact that the interest income component of the total
income is significantly larger than the non-interest income component. As
far as the interest costs are concerned, the prevailing interest rate
structure will be a major deciding factor for the rates. But what influence
both the interest costs and the intermediation costs is the time factor as it
is directly related to costs. The solution for these two influencing factors
lies predominantly on technology. In this regard, the new private banks
and the foreign banks, which are equipped with the latest technology,
have a better edge over the nationalized banks, which are yet to be
automated at the branch level.
59
Income and Expenses Profile of Banks
60
Illustration 6
61
2.1 Introduction
The reform has lead to new trends of being ahead and being with, by and
for the customer. While the private sector banks are on the threshold of
improvement, the Public Sector Banks (PSBs) are slowly contemplating
automation to accelerate and cover the lost ground. VRS introduced to
bring up the productivity, the concept of universal competition set in just
to ensure customer convenience all the time.
Also, the strength factor has lead to mergers and Indian banks will explore
this opportunity.
DEVELOPMENTS
62
The following will state the development in Indian banking sector.
Public Sector Banks which together (there are 27 of them) account for
77.34 per cent of the bank deposits in India. The most ambitious
downsizing exercise undertaken by the PSBs has set them back by close
to Rs 7,490 crore.
Government had cleared a uniform VRS for the banking sector, giving
public sector banks a seven-month time frame. The IBA has been allowed
to circulate the scheme among the public sector banks for adoption. The
scheme was to remain open till March 31, 2001. It would become
operational after adoption by the respective bank board of directors. No
concession had been made to weak banks under the scheme. The scheme
is envisaged to assist banks in their efforts to optimise use of human
resource and achieve a balanced age and skills profile in tune with their
business
strategies.
63
As per estimates the average outgo per employee under the banking VRS
scheme would range between Rs. 3 lakhs and Rs. 4
lakhs. However, the aggregate burden on the banking
industry is difficult to work out. To minimise the
immediate impact on banks, the scheme has allowed
them the stagger the payments in two installments,
with a minimum of 50 per cent of the amount to be
paid in cash immediately. The remaining payment can
be paid within six months either in cash or in the form
of bonds. The total burden of the VRS on the banking
industry is about Rs 8,000 crore, and union activists
feel that it will adversely affect the profitability and capital adequacy of
the banks. In fact, out of this Rs 8,000 crore, nearly Rs 2,200 crore will be
borne by State Bank of India, the largest public sector bank.
64
Salient Features of Voluntary Retirement Scheme of
Banks
Eligibility – All permanent employees with 15 years of service or 40
years of age are eligible. Employees not eligible for this scheme
include:
• Specialists officers/employees, who have executed service
bonds and have not completed it, employees/officers serving
abroad under special arrangements/bonds, will not be eligible for
VRS. The Directors may however waive this, subject to fulfillment
of the bond & other requirements.
• Employees against whom Disciplinary Proceedings are
contemplated/pending or are under suspension.
• Employees appointed on contract basis.
• Any other category of employees as may be specified by the
Board.
Other Benefits
• Gratuity as per Gratuity Act/Service Gratuity, as the case
maybe.
• Pensions (including commuted value of pension)/bank’s
contribution towards PF, as the case may be.
• Leave encashment as per rules.
Other Features
• It will be the prerogative of the bank’s management either to
accept a request for VRS or to reject the same depending upon
the requirement of the bank.
• Care will have to be taken to ensure that highly skilled and
qualified workers and staff are not given the option.
65
• There will be no recruitment against vacancies arising due to
VRS.
• Before introducing VRS banks must complete their manpower
planning and identify the number of officers/employees who can
be considered under the scheme.
• Sanction of VRS and any new recruitment should only be in
accordance with the manpower plan.
66
Banks have been allowed to amortise half the retirement benefits
provided to those opting for VRS over a period of five years.
67
"It is because opportunities outside the banking sector are more in the
western zone," says a union activist. Apart from the lure of money, bad
working conditions also contributed to this deluge," says Bhakey. "They
are transferred anywhere, are held accountable in case of problems in
rural areas and don't get residential accommodation. "Apart from all the
VRS benefits, they will be entitled to pension as well. So they have a
continuous source of income even if they don't work," said a director of
Bank of Maharashtra.
On Sabbatical.......S.Balachandran
Sabbatical as a measure for reducing surplus staff will not be cost
effective in the long run for the following reasons: Even though the banks
can save on the salaries & allowances during the leave period, but once
the employee returns, he will have to be absorbed and as such
redundancy or surplus cannot be cut totally. Retraining cost for the
returning staff that are 45 plus, in a totally changed banking environment
will be much higher than the cost bank saves during their leave. Hence it
would be better to offer the sabbatical to junior level employees for whom
the retraining cost will be much lower.
R. Krishnamurthy
An employee should be free to exercise Sabbatical option at any point of
time in his career, rather than a specific period. It should be an open
option and should normally be granted by the Bank Management provided
the employee does not have any disciplinary proceedings against him.
68
The option may also be a one-time option during his/her (employees)
service. Banks should not insist that the employees should close the loan
accounts, but can take an undertaking that the employees should service
their loans during the sabbatical period. This will help employees to
search for a suitable job and then exercise the Sabbatical option. He can
service the loans from his new employment.
They are in the fools' paradise. The policy-makers, RBI, IBA and the
bankers, who schemed unilaterally the VRS, think that by removing
massively thousands of able and experienced bankmen from services in
their middle age, they could boost profits in the nationalised banks.
69
THE EFFECTS
Negatives
Banks had approached the government and warned that only efficient
people will leave by way of VRS. It will take away most of the staff from
more than 22,000 rural branches of public sector banks. "They will have
to be merged or closed down in favour of a satellite branch which will
operate just once a week", says G.M. Bhakey, president of the State Bank
of India Officers Association. If these fears come true, rural India may be
the biggest victim of VRS. In fact the United Federation of Bank Unions
has decided to oppose the whimsical closure of branches in the post-VRS
scenario. "The management will have to discuss the post VRS merger of
branches with the unions first," says P Jayaraman, the general secretary
of the State Bank's union. "It is true that more than 90,000 employees will
be relieved, but what about the remaining 8.1 lakh?" asks a union activist.
The unions will still have to fight for them. The way the VRS contagion is
spreading at the instance of the government, it is imminent that a chaotic
situation with grave consequences will emerge soon, causing irreparable
losses to the clients of all types and great hardships to the remaining
work force. Also, large number of staff might be transferred and more and
more branches might be closed.
Positives
As part of the banking sector reforms, public sector banks are trimming
the staff strength by launching VRS. This is likely to bring not only higher
cash flows to banks in future but also long term benefits like improvement
in efficiency level.
Bank of Maharashtra will be accepting applications of 2,000 VRS optees
800 officers and 1,200 class III and IV employees. Reduce the annual
wage bill by about Rs 56 crore.
Andhra Bank Substantial reduction in overheads and significant
improvement in per employee productivity.
70
Bank of India (BoI) has embarked on a major organisational recast
exercise. After the launch of the voluntary retirement scheme (VRS) which
was opted by 7,780 employees , the bank is set to abolish one tier (zonal
offices) from its four-tier organisational structure. The bank will now have
three tiers -- branch offices, regional offices and head office.
Newly-formed association of VRS optees of Punjab National Bank (PNB) --
the PNB Voluntarily Retired Staff Association (PNBVRSA) -- has filed
a case against the bank for settling outstanding issues arising out of the
T h e h u m a n s i d e…
He still went by the same train, he sat on the same place, he admired the
same table, that’s all he did there and came back home in the evening.
VRS has disturbed the comfort zone of many, when he is back at home,
children are to be disciplined the whole day, as they come back home,
they are told to be studying, not playing much, etc; wife cant visit her
neighbour at the afternoon, her TV serials alls is gone; clashes and
arguments arise, families breaking, the comfort zone is shaken up. A
dissatisfied issue arises out of VRS, a person working for 15 to 20 years, is
now to do nothing? All are seeking physiatrists’ help now. What about
this? Social activities for these people, some kind of work, tie up with
service organisation, keeping them busy may be the only way out!
71
much sensible to invest and divert these funds in Tech banking and
installation of new systems. These firstly, retain the existing functions,
also in the long run there would be a good payback, after this if the VRS
was declared then may be it would have been a wise decision”.
72
Gone for GOOD !
Illustration 7
73
VRS – The SBI Way
State Bank of India's VRS, which closed on January 31, has attracted
35,380 applications. I.e.15 per cent of the bank's employee base of
233,000. Of the 35,380 applications, 54 per cent are from officers, 36 per
cent from clerical staffs, and 3,137 are from the sub-staff category.
The unions had earlier expressed the view that the bank management
should not merge loss making branches but should shift them to other
areas with profit potential, in order to retain branch license.
For example, in the Gujarat circle, SBI has four regional offices in
Gandhinagar and three each in Ahmedabad and Baroda. Plans are to shut
all these down and have a single regional office in Ahmedabad. The
excess administrative manpower will be utilised at branch level. Post VRS,
in some branches of the bank, important posts are lying vacant and at
74
some places shortage of staff is also being felt. SBI has appointed
National Institute of Bank Management as consultant for manpower
planning. The final decisions on redeployment of administrative staff and
reduction in regional offices will be taken only after NIBM report.
75
2.3 Universal Banking … just one
stop ahead !
In recent times, ICICI group has expressed their aim to function on the
concept of the Universal Bank and was willing to go for a reverse merger
of ICICI ltd. with ICICI Bank. But due to some regulatory constraints, the
matter seems to have been delayed. Sooner or later, the group would be
working towards its aim. Even some of the other groups in the financial
sector like HDFC, IDBI have started functioning on the same concept.
An Overview
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
76
various other activities including insurance. If specialised banking is the
one end universal banking is the other. This is most common in European
countries.
77
accounting policies that are practiced and personnel management. The
banks, on the other hand, have a competitive edge in resource
mobilisation through the route of retail deposits. The RBI has identified
certain regulatory issues that need to be addressed to make
harmonisation of the needs of commercial banking with institutional
banking successful.
In India
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.
78
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. The plan should specifically
provide for full compliance with prudential norms as applicable to banks
over the proposed period.
79
ICICI gearing to become a universal bank
ICICI envisages a timeframe of 12 to 18 months in converting itself into an
universal bank. ICICI has received favourable response from Indian
investors and FIIs on its move to merge with ICICI Bank and become a
universal bank. ICICI was the first one to propagate universal banking as
an ideal concept for the DFIs to support industries with low cost funds.
In August, ICICI executive director Kalpana Morparia said that ICICI has to
obtain a separate banking licence from RBI for becoming a universal bank.
It can avoid the stamp duty burden by first converting ICICI into bank,
instead of going for a direct merger of ICICI into ICICI Bank.
Crisil has reaffirmed its triple A rating for ICICI and FIIs also expects its
profit margins to improve after the merger due to the access to low cost
deposits & the scope to increase income from fee-based activities.
She said ICICI has started increasing its international presence and
associating closely with NRI community in various countries. ICICI InfoTech
is based in US & has an office in Singapore. ICICI Securities has been
registered as a broking firm in the US.
80
India. Besides, the Visa card helps them to withdraw cash through the ATM
network.
Morparia said NPA of banks in India are < 10 per cent of GDP when
compared to emerging economies like China, Korea & Thailand. It should
not be compared with developed countries like Europe and US. ICICI’s
gross NPA comes to Rs 6,000 crore. Asked about a approach to resolve the
problem, she said if the units are viable, it supported financial
Because of law,mergers.
restructuring, once theIf units
these are referred
options arenttopossible
BIFR, the
andlenders were
the units are
unable to enforce
not viable, it will securities, shetime
go in for one pointed out
settlement.
81
For the irresistible compulsions of competitiveness have created a
situation where the only route for survival for many a bank in India may
be to merger with another. With the Union Finance Ministry thinking along
the same lines, it may not be long before mega-mergers between banks
materialise. World over banks have been merging at a furious pace,
driven by an urge to gain synergies in their operation, derive economies
of scale and offer one stop facilities to a more aware and demanding
consumer. In the eighties and nineties mergers were used as means to
strengthen the banking sector. Small, weak and inefficient non-scheduled
banks were merged with scheduled banks when the running of such banks
becomes non-viable. However, mergers in the current era will be driven
by the motive of establishing a bigger market share in the industry and to
improve the profitability. Mergers may prove to be an effective remedial
measure in a competitive environment where margins/spreads are under
pressure for the banking sector. Though Indian systems were not keen on
the mergers and acquisitions in the banking sector, of late the systems
have started encouraging the global trends of M&A's.
The big question is why is there a sudden urge to merge? The answer is
simple as it is obvious. To beat competition for which suddenly size has
become an important matter. Mergers will help banks with added money
power, extended geographical reach with diversified branch networks,
improved product-mix, and economies of scale of operations. Mergers will
also help the banks to reduce their borrowing cost and to spread total risk
associated with the individual banks over the combined entity. Revenues
of the combined entity are likely to shoot up due to more effective
allocation of bank funds. One such big merger between banks globally
82
was that of Industrial Bank of Japan, Fuji and Dai-Ichi-Kangyo bank, all of
which were merged to be nicknamed as Godzilla Bank, implying the size
of the post merged entity. Another instance that comes to mind is that of
Bank of America's merger with that of Nation's Bank. Financial
consolidation was becoming necessary for the growth of the bank.
Do you consider the reasons why one does not need banks in
large numbers any more ?
Of course, one would still need a bank to open letters of credit, offer
guarantees, handle documentation, and maintain current account
facilities etc. So banks will not suddenly become superfluous. But nobody
needs so many of them any more !
Customer
83
Capital A/c
Rigid Distinction Globalisatio
Disintermediati Volatabilit
That’s Convertibility
n
CUSTOMER may also want from a bank efficient cash management,
advisory services and market research on his product. Thus the
importance of fee based is increasing in comparison with the fund-based
income.
84
growth. Mutual funds, in particular, are a potent long-term threat because
they appropriate what was once the USP of bank deposits.
It began with HDFC Bank and Times Bank last year, which took
everyone by surprise. However, the latest merger of ICICI Bank with
Bank of Madura is even more astonishing as well as surprising,
though a welcome change. ICICI Bank had also initiated merger
talks with Centurion Bank, but due to differences arising over swap
ratio the merger didn't materialized.
And INTERNATIONALLY
The merger of the Citibank with Travelers Group and the merger of Bank
of America with NationsBank have triggered the mergers and acquisition
market in the banking sector worldwide. Europe and Japan are also on
their way to restructure their financial sector through M&A's.
The merger of Malaysia's 58 domestic banks into six anchor groups is part
of a global trend that will strengthen the financial sector and enable it to
compete internationally, Second Finance Minister Mustapa Mohamed says.
In a seminar on Malaysia's recovery efforts, organized by the World Bank
in Washington, Mustapa said it was important for the government to
85
''move aggressively'' in strengthening the banking system because ''the
WTO (World Trade Organization) is knocking on our doors and asking us to
liberalize our financial sector.
When asked why the government intervened in bank mergers rather then
letting the markets decide for themselves, Mustapa said the banks were
urged to merge in the 1980s, ''but our advice fell on deaf ears. We spent
no less than RM60 billion ($15.78 billion) in those days to bail them out
and frankly we're fed up and tired of bailing them out.'' After the mergers,
he added, the government hoped to divert those resources to building
schools and hospitals.
At the height of the crisis, depositors of the ''smaller banks'' themselves
felt unsafe and moved their savings to the bigger banks.
Witness the alliance between Chase Manhattan and Chemical Bank in the
US, the fusion of two Japanese monoliths, Bank of Tokyo and Mitsubishi
Bank, and, more recently, the mega-merger of the Swiss giants, United
Bank of Switzerland and Switzerland Banking Corporation.
Take a look at what happens post merger to ICICI Bank. The bank will have
shot up to the number one position among new private sector banks.
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Customers 1700 4300 152.94
Employees 197 crores 220 crores 10.5
Equity Rs 7.10 / Rs 8.70 / 23
EPS
share share
Illustration 8
Will mergers be the norm in the industry?
87
Particulars PSU Banks Pvt. Banks Pvt.
(Old) Banks(New)
Cost of funds Low Moderate High
Branch network Wide Regional Low
Spread
Level of Automation Low Moderate High
NPAs High Low Low
Capital Adequacy Moderate Low High
Employee Productivity Low Moderate High
Focus on Non- interest Low High High
Income
Illustration 9
Mergers for private banks will be much smoother and easier as against
that of PSBs. To survive, banks need to diversify into non-fund-based
activities (investment banking) and new fund-based activities (mutual
funds, leasing, housing finance, infrastructure finance, or, maybe, even
insurance). M&As offer a cheaper and, certainly, quicker diversification
option than organic growth. Indeed, for activities like infrastructure
finance, which require a huge critical mass, mergers may well be the only
option. Only a large, strong entity with deep reservoirs of capital will be
able to provide funds without bumping against prudential exposure limits,
and have the
requisite skills to evaluate mega-projects
The Liabilities
Saddles the stronger bank with huge NPAs
Erodes the profitability of the stronger bank
88
89
2.5 Banking and Insurance … much more to
service !
What will the future of Indian banking and insurance look like? Will the
reform in these sectors face the same fate as in power? It is increasingly
evident that the economy offers opportunities but no security. The future
will belong to those who develop good internal controls, checks and
balances and a sound market strategy.
Reform of the insurance sector began with the decision to open up this
sector for private participation with foreign insurance companies being
allowed entry with a maximum of 26 per cent capital investment? The
Insurance Regulatory and Development Authority (IRDA), in its guidelines
for the new private sector insurance companies, has stipulated that at
least 20 per cent of the total premium revenue of these companies should
come from rural India. The government permits banks to distribute
or market insurance products. It is amending the Banking Regulation
Act to this effect. Only banks with a three-year track record of positive
growth as well as with a strong financial background will be entitled to do
insurance business. In anticipation of the government move, some banks
have begun talking of alliances with foreign insurance players.
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Keeping in view the limited actuarial and technical expertise of Indian
banks in undertaking insurance business. RBI has found it necessary to
restrict entry into insurance to financially sound banks. Permission to
undertake insurance business through joint ventures on risk participation
basis will therefore be restricted to those banks which
(I) have a minimum net worth of Rs. 500 crore and
(ii) satisfy other criteria in regard to capital adequacy, profitability, etc.
Banks which do not satisfy these criteria will be allowed as strategic
investors (without risk participation) up to 10 per cent of their net worth
or Rs. 50 crore, whichever is lower. However, any bank or its subsidiary
can take up distribution of insurance products on fee basis as an agent of
insurance company. In all cases, banks need prior approval of RBI for
undertaking insurance business.
State Bank of India (SBI) has identified Cardif, a wholly owned subsidiary
of BNP Paribas, to enter into a joint venture for life insurance with an
equity stake of 26 per cent. SBI has incorporated a wholly owned
subsidiary SBI Life Insurance Company Ltd with an authorised capital of
Rs 250 crore.
Cardif SA and its sister company Natio-Vie together rank as the third-
largest French insurers with a premium income of $9 billion and assets
under management of over $59 billion. Although Cardif is a lesser known
name in the life insurance business, compared to some of the global
giants present in India, the French insurer has expertise in bancassurance.
The company has pioneered the concept of bancassurance in France by
selling insurance products through branches of commercial banks and
non-banking finance companies. The joint venture plans to bring into India
a number of products, which would suit different segments of the market.
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SBI intends to fully integrate the insurance business into its banking
activities with appropriate sales support and marketing.
All this is being done to cater to the IRDA norms. As per norms, two per
cent of insurance premia of the new age insurance companies have to
come from rural areas. In addition, the insurance watchdog has put in
some policy stipulation on insurance companies to cover life in the social
sector for the under-privileged.
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Dabur CGU Life Insurance - in which Dabur holds the majority 74 percent
stake while the remaining 26 percent is owned by CGU - has recently
forged a marketing alliance with the Lakshmi Vilas Bank. Lakshmi Vilas
Bank -- with 208 branches and 800,000 customers -- has a strong regional
presence in the southern part of the country.
93
despite several expensive attempts to do so. Do we need to rethink the
appropriate institutional structure for rural banking in India? The problems
of widespread poverty, growing inequality, rapid population growth and
rising unemployment all find their origins in the stagnation of economic
life in rural areas.
Since the days of the Rural Credit Survey Committee (1954), India has
come a long way in its search for an appropriate rural banking set-up.
Though there has been some improvement, the problem remains. There
has been tremendous progress in quantitative terms but quality has
suffered, progress has been slow and halting and significant regional
disparities persist. Stagnation in rural banking is noticed in the north and
northeastern regions. The focus should be on assisting and guiding small
farmers. It is in this context that the role of rural banking institutions has
to be reconsidered.
94
improved working conditions in rural areas should help to meet
this problem.”
95
WORKING OF RRBs and Rural Cadre
It is the view that rural banking is simple that has landed the RRBs in a
mess. The poor performance of the RRB personnel is largely due to the
fact that the personnel hurriedly recruited and trained in a routine way
have been given the difficult task of dealing with a large number of small-
term/composite loans advanced to small farmers and other poor rural
families who, not knowing how to deal with banks, require assistance and
guidance at each stage – from loan application to loan recovery.
Neither the cooperative channel nor public sector one is able to meet
local needs in regard to savings and loans due to a rigid all-India approach
and lack of flexibility in their operations. This in fact is one of the reasons
for informal banking surviving and for the emergence of non-banking
financial companies (NBFCs) in rural districts. Though there is a multi-
agency set-up for rural banking, nearly 45 per cent of rural credit is from
cooperatives. But the commercial banks are a more important source of
credit as can be seen from Table 1.
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was established. Even then, banking progress in the rural sector was not
able to take care of the growing credit needs of agriculture.
Think about it !
Since the merger of the RRBs in their respective sponsor banks has
been ruled out, the RRBs should atleast be made fully owned
subsidiaries of the sponsor banks so that the banks can develop
for both their rural branches and their RRBs in a unified way.
Besides placing all the RRB employees in the rural banking cadre,
the sponsor bank should throw this cadre open and give its own
staff, including those not working in the rural branches, the option
of joining the cadre. The best option seems to be to have
managerial cadre at the district level and at the same time, each
primary should have the choice to choose its manager from the
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panel of managers given by the district union district central
cooperation bank (DCCB). At the district and state levels,
managerial cadres can be created as a collaborative effort of
DCCBs, state cooperative banks (SCBs) and state and all-India
cooperative Unions.
Recent Developments
98
The makers of banking policy are now focusing on technology-led banking
in the rural sector. This requires a restructuring of cooperatives to enable
them to meet the challenges of competition. It also requires a change in
mindset. While the government should promote the restructuring and
modernisation of cooperatives through an incentive/disincentive package
and by providing adequate infrastructure in the rural areas, the actual
task should be left to the cooperative leadership and the apex bodies of
cooperatives.
If and when rural banking becomes a separate entity in each bank, that
would ensure full attention for the rural sector and motivate personnel
who opt for this cadre, besides providing them with career prospects. The
staff requirement of the rural banking cadre (RBC) will be on a big scale.
99
According to bank unions the aim of local area banks will be to snatch a
share of the savings and divert them into profitable investment in cities.
The weaker sections of society living in rural areas will be starved of bank
credit in consequence” Another argument against LABs is that “any small-
time trader can come into banking”.
If this were true, the Reserve Bank would by now have been flooded with
applications for starting LABs. The fact is that the mobilisation of even Rs
5 crore by way of promoters’ contribution is very difficult for a small
trader or even for large farmers. The bank employees’ unions refuse to
appreciate the logic behind the establishment of LABs. The logical follow-
up of the new economic policy is to encourage private enterprise in all
fields, including banking. In the rural sector, such private banking really
means self-help efforts.
Yet another point raised is that as there are already a large number of
branches of banks and RRBs, and cooperative credit institutions too, there
is no need for LABs. The trade unions did not object when the public
sector banks started competing with the cooperative credit institutions,
including urban banks. They do not even mind the banks competing with
the RRBs, which they have sponsored. They only fear that when the LABs
come up they will compete with the public sector banks and take away
their deposit business.
100
achievement of banks in India. The banks’ achievement in respect of
mobilisation of rural deposits and advancement of loans to rural families
is equally commendable.
Lendings in Rural India, 1999 2000
Source Direct Indirect Total
Amount Percen Amount Percen Amount
(Rs Crore) t (Rs Crore) t (Rs
Crore)
Primary co- 8,218 15.9 NA 12.9 8,218
operative credit
society
Land development 12,940 25.2 NA 20.3 12,940
banks
Commercial banks 26,327 51.1 4,986 49.2 31,313
RRBs 4,044 7.8 NA 8.3 4,044
Total 51,529 100.0 12,137 100.0 63,666
Illustration 10
The new context compels us to think on new lines and, instead of
approaching the issue in a routine way, to work out the restructuring of
selected branches to suit the needs of specialised banking for agriculture,
bank managements being left free to work out programmes for this task.
As regards co-operative rural banking, the primary credit societies hold
the key to success. Banking policy should aim at encouraging the viable
ones through incentives, including direct access to NABARD finance, and
letting them function 2.7 Virtual Banking
without government interference. … the
transformation !
101
gained currency is virtual banking. Increase in the functional and
geographical spread of banks has necessitated the switchover from hard
cash to paper based instruments and now to electronic instruments.
Broadly speaking, virtual banking denotes the provision of banking and
related services through extensive use of information technology without
direct recourse to the bank by the customer. The origin of virtual banking
in the developed countries can be traced back to the seventies with the
installation of Automated Teller Machines (ATMs). It is possible to
delineate the principal types of virtual banking services. These include
Shared ATM networks, Electronic Funds Transfer at Point of Sale (EFTPoS),
Smart Cards, Stored-Value Cards, phone banking, and more recently,
internet and intranet banking. The salient features of these services are
the overwhelming reliance on information technology and the absence of
physical bank branches to deliver these services to the customers.
102
after the viability and feasibility of the technology and its associated
applications have been thoroughly examined.
Virtual banking has made some beginning in the Indian banking system.
ATMs have been installed by almost all the major banks in major
metropolitan cities, the Shared Payment Network System (SPNS) has
already been installed in Mumbai and the Electronic Funds Transfer (EFT)
mechanism by major banks has also been initiated. The operationalisation
of the Very Small Aperture Terminal (VSAT) is expected to provide a
significant thrust to the development of INdian FInancial NETwork
(INFINET) which will further facilitate connectivity within the financial
sector.
# The INFINET is a Closed User Group (CUG) Network for the exclusive use
of Member Banks and Financial Institutions. It uses a blend of
communication technologies such as VSATs and Terrestrial Leased Lines.
Presently, the network consists of over 689 VSATs located in 127 cities of
the country and utilises one full transponder on INSAT 3B. Inaugurated
on June 19, 1999, various inter-bank and intra-bank applications ranging
from simple messaging, MIS, EFT (Retail, RTGS), ECS, Electronic Debit,
online processing and trading in Government securities, dematerialisation,
103
centralized funds querying for Banks and FIs, Anywhere/Anytime Banking,
Inter-Branch Reconciliation are being implemented using the INFINET. The
INFINET will be the communication backbone for the National Payments
System, which will cater mainly to inter-bank applications like RTGS,
Delivery Vs Payment (DVP), Government Transactions, Automatic Clearing
House (ACH) etc.
The product offerings include home loans, car loans, credit cards, personal
loans and also customized loans like equipment loan for doctors.
In India, out of 100 houses sold, 30 are bought by housing loans and out
of 100 cars sold, 28 are brought by car loans.
In India today …
104
Among PSBs, SBI, Bank of Baroda, Union Bank of India and Bank of India
have diverged into the retail segment, whereas in the private sector,
opportunity seekers like ICICI and HDFC have focused on retail lendings.
“In retail banking, you need a higher physical presence, in the form of
ATMs as well as branches. State-of-art technology has to be used to
enable convenient customer transactions.” States, Mr.Swaroop of HDFC
Bank.
105
3.1 The SCAM Story … !
The bank received a scheduled bank status from the RBI just a couple of
years ago, which allowed the bank to expand its banking operations and
start lending to stock brokers. The scheduled bank status also allowed the
bank to invest 10% of its net worth in the capital markets.
Until recently, the bank had managed to resist the allure and glamour of
investing heavily in the capital market. But, the relation between the
bank's chairman Ramesh Parikh and big bull Ketan Parekh did the trick
and the bank is reported to have made huge advances in the last couple
of months. The advance made by the bank to Ketan Parekh are pegged at
around Rs2bn.
However, the bank faced its worst crisis on the 8th of March when
depositors panicked and started withdrawing money from the bank. This
was following reports that the bank had given a huge bank guarantee to
Ketan Parekh. The result, the bank was left with very little cash. The
problems of the bank were further compounded when it had to down its
shutters in Ahmedabad and Mumbai. Many cooperative banks also faced
payment problems. Those who resorted to the call money market found
no lenders as commercial banks kept away from them.
The crisis forced the RBI to step in and take some action to limit the
damage. A preliminary inquiry by the central bank showed that the bank
had a very bad liquidity position after it issued pay-orders worth Rs650mn
to the depositors. The RBI was left with no other option but to recommend
106
the Central Registrar of Co-operative Banks to supercede the board of the
bank.
Several public sector banks have been hit very hard by the Madhavpura
Bank's misdemeanor. The banks include such big names as the State
Bank of India, Bank of India and the Punjab National Bank, all of which
have lost hefty sum of money in the Madhavpura scam. Bank of India lost
about Rs1.2bn as pay orders issued by Madhavpura Bank to Ketan Parekh
bounced. This was because the bank was unable to honor its
commitment. Ketan Parekh reportedly used his seven Bank of India
accounts to discount 248 payorders worth about Rs24bn in nine weeks
between January 3 and March 9. Out of this, Rs11.95bn were routed to
three of his shell companies, namely, Nakshatra Software, Chitrakoot
Computer and Goldfish Computer.
However, the central bank seems to have learnt its lessons, albeit a little
too late, and has decided to plug the loopholes that allowed Madhavpura
Bank and stock brokers to play havoc with the market. The RBI has
reportedly drawn plans to revise payorder and demand draft discounting
norms; stock lending norms; banks capital market exposure norms and
107
gold lending norms. Taking into consideration the enormity of the crisis,
calls have increased for a greater role for the RBI as a regulator of the
cooperative banking sector. At present, cooperative societies are under
the dual control of the RBI and the Registrar of Cooperative Societies.
Under this system, the RBI only has jurisdiction over the banking
operations of the cooperative society while the registrar looks after the
managerial and administrative functions.
With big banks and small banks caught in a trap, who can the customer
bank on?
3.2 Public sector OR Private Sector – the point of
views
About REFORMS in the Indian banking sector
The legal infrastructure for the recovery of non-performing loans still
does not exist. The functioning of debt recovery tribunals has been
hampered considerably by litigation in various high courts. This ultimately
leads to one solution i.e. ruthless provisioning, any better ways; it is a
major drawback of this ruling.
# What is the procedure being a private player (ICICI) in this industry, is it
different and more effective as far as recoveries are concerned?
108
At ICICI
Considering the effect of high level of NPAs on the efficiency of banks,
ICICI follows a certain procedure as far as loan advancements are
concerned. Unlike most of the PSBs, the root cause for a high NPA level is
considered; being solvency of the borrower.
The procedure differs as per the amount of loan; for loan amount of Rs
500000/- and below, the customer profile is scrutanised at the branch
level. The Branch Manager and the Assistant Branch Manager evaluate
the solvency of the borrower, individually and then approval for the same
is forwarded to the concerned department. In cases where the loan
amount exceeds Rs 500000/-, the customer profile is further forwarded to
the corporate level. After evaluation at this level a confirmation is sent to
the respective branch, and then the borrowers offer is confirmed. This
system has ensured the low level of NPAs in this private sector bank.
At PSBs
Today, PSBs need to be given more power to enforce their security rights;
the banks cannot sell any collateral of a borrower without the court
intervention. Even as far as DRT working is concerned, an issue is
resolved in a year and a half inspite of stipulated norms of 6 months.
109
At PSBs
Frankly, ARFs seem to be like pointless transfers, its just another
committee with more heads made by GOI.
At ICICI
The government imposes a lot of restrictions on the private players. A PSB
anyway needs to open a branch in rural areas; but for private banks need
to have branches in certain areas like Amravati or Ratnagiri, the cost of
these is not really feasible to these banks but they have no alternative.
At PSBs
Government does co-operate; the GOI is good, this is no form of defence,
please note the following:
- Consider the number of customers in private as compared to public
sector banks
- PSBs have a definite priority sector lending
- Maintenance of PPF accounts, taxes, etc
- Minimum deposit for credit cards and FD
Take the case of UTI returns when all others were down, that’s a
government cost.
At ICICI
110
As far as an effect of reducing government stake is concerned, the
competition to private players will increase. The ownership pattern and
capital structure will change and this will lead to better efficiencies and
customer service level; the management approach will be by
professionalism. However, being a government rule, it will be gradually
implemented so no immediate impact on private players.
111
diversified portfolio will stand in the market. Ultimately, a branch that
gives all in ‘one-stop’ will survive. For ICICI and BoM merger, BoM has 277
branches in South India, thus ICICI now stands to create regional balance
of branches and high connectivity throughout the country.
At PSBs
A merger should consider the human aspect, initially Balance Sheets will
look good, but then working of two different human cultures, one may
look down upon the other. Such trivial issues hamper the working.
The 1992 reforms gave scope for diversified product profile. New
products and new operating styles exposed the banks to newer and
greater risks.
# ICICI, as a company holds a diversified portfolio, is the main aim to
increase the non-fund based revenue due the trend of falling interest
rates?
At ICICI
The basic aim is to retain customers. A bank needs to push its products in
the market and establish a strong presence for survival. The measure to
increase revenues is by increasing customer base by increasing portfolio
aided with aggressive marketing. For each and every sector, ICICI has ‘n’
112
number of brokers and agents appointed which are well connected
throughout a majority of the country.
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.
# Can you please state the benefits of universal banking, may be in
terms of revenue or utilisation of resources or others?
At PSBs
Anyways PSBs have multifunction, its old wine in a new bottle.
113
Due to increasing competition all banks are now heading towards
developing areas or rather towns in the country. Especially ICICI, it is
known for its network in rural areas, please comment on the potentials in
the rural area.
At ICICI
RBI norms state that for every 5 urban branches, 1 rural branch needs to
be introduced. Considering the increasing importance of education in rural
market and their literacy w.r.t banking, rural India has a considerable
scope. There is a section of people which wants to know what are the
services banks can offer, this itself proves that banks need to come up
with better schemes in customized to rural requirements.
At PSBs
Private players have been operating at in urban areas, adjusting with rural
India will take time.
How do you see the scope of Internet banking in India, well / bad and
why? How much revenue do you see from this business as a percentage
of the total business, in the future 5 years down the line? What is the
current revenue from this business?
At ICICI
The trend today is to ape the West. People look forward and inquire for
new technologies because they offer convenience. At ICICI, they have a
Demo service with a personnel explaining what are the e-banking services
available how are they used etc. In 5 years, the usage of e-banking
technology is expected to double.
At PSBs
Internet has a future in India, people adjust to technology very fast; take
the case when STD booths were introduced in India. Anyways, the Internet
is not a form of direct revenue, it’s just an additional service of
convenience given to customers.
114
Canara Bank – Interview of Mr. Sanghavi – Senior
Manager – Andheri (W)
On VRS
In the long run, it will be fruitful, salary expenditure will drop, and also
cost of related perks would reduce. But they lay an immediate
disadvantage; the VRS was introduced in a very disorganized manner,
there was no provision made for the payment of VRS dues earlier. The
cost at Canara Bank is around Rs 139 Crores; if these funds were used to
make public sector banks technology savvy then VRS could have been
introduced after a period of 5 years. The banks would also have the power
to retain clients, currently, the clients who can pay more for better
services are moving away.
On diversifying portfolio
The private players have limited clients to cater; hence they can manage
a varied portfolio easily. Canara Bank had introduced single window
system for their clients; when you have a large database of customers,
service quality deproves.
115
Debt Recovery Tribunals
Interview of Mrs Rama Pendharkar - Advocate
Mr R S Chehel – Advocate
CHURCHGATE
The procedure
Banks send a notice to their client and if they don’t give a reply; the bank
i.e. applicant files a suit in the DRT. Section 19 of DRT Act states the banks
permitted to be an applicant, only scheduled banks and nationalised
banks are permitted. DRTs have their own procedure distinct from the civil
courts; and are headed by the Presiding Officer who is said to be
equivalent to the District Judge.
Within a month of filing a suit, the defaulted borrower i.e. the defendant
requires to reply back. No oral evidence is permitted, the defendant has to
file an affidavit. The issue is resolved only by affidavits. Within 6 month,
the presiding officer resolves to the issue.
Issues Resolved
The number of issues resolved is not disclosed on account of disclosure
regulations with respect to the same.
116
3.3 And today…the news says …
117
banking and will greatly reduce time to market the new products," he
said.
A sharp rise
A study of the performance of banking sector stocks over the past one
year has shown that while several public sector banks have shown a
sharp rise in prices, many of their private counterparts are high on the
losers list. Leading the gainers list is Corporation bank whose scrip has
nearly doubled in the last one year. It is followed by Bank of India with a
gain of 75 per cent, and Jammu & Kashmir Bank which, despite a majority
holding by the J&K government, is classified as a private bank.
"Corporation bank takes only select clients and a lot of effort goes into
this selection," says a merchant banker explaining the low NPA levels in
the bank.
So it didn’t come as a surprise when bankers were visibly upset and later
voiced their protest last week after the committee on fraud made a final
presentation before submitting its report to the government. In its final
recommendations the panel headed by Prof N L Mitra has said that when
a fraud over Rs 10 crore is committed, the onus will be on banks and FIs
to prove themselves innocent, failing which the law will take its own
course. Understandably, it didn’t go down well among the bankers who
fear that the proposed law could terrorise bank officials to such an extent
that business would suffer.
118
The central bank, which took the initiative to form the committee, is
understood to be supportive of the different changes that the panel has
prescribed. For instance, the committee has asked for changes in the
Indian Penal Code to enable the legal system handle `financial fraud’.
Currently, Indian laws with provisions for crimes like cheating, forgery and
criminal breach of trust, are vague about financial frauds. The committee
aims to make it more difficult for scamsters to take refuge in legal
loopholes by making financial frauds a crime.
119
the government did not promise capital, it complimented the bank for its
improved performance in recent months.
On sabbatical
The scheme launched by PSBs along with VRS, sabbatical has got around
200 optees as of August 2001, comparing this to the VRS response of 11%
of the employees in the industry; an observation was that only highly
qualified employees opted for this scheme.
ATMs in India
The BoI is planning to install 225 ATMs in nine major cities. The growth of
ATMs in India has been exponential; currently there are over one lakh
ATMs in India and the growth rate is 40 %. As far as cost are concerned,
Mr. Loney Antony, NCR Corporation India, Country Manager, states that
cost of branch transaction is Rs 50 to Rs 100 whereas cost on an ATM is
not more than Rs 25.
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3.4 THE FUTURE . . . what’s ahead !
The Indian Banks even after a decade full of reforms for the sector have a
long way to go. Product innovations, better information technology and
operating mechanisms not only enhance the income and reduce expenses
but also act as a catalyst to retain customers. The question is will this
suffice for the future? With the continued integration of the Indian
markets with the global markets, the volatility is rising. To survive this
dynamism and the risks arising from the same, banks need to have
resources in place to understand and manage them on a regular basis.
Markets, which have so far witnessed a deluge in the number of banks,
will now witness consolidation.
With the onset of globalisation in each and every sector, Indian Banks
need to be much more sustainable, efficient, transparent in working and
also competitive. Now the bank mergers will not be a new phenomenon
since synergies are derived from the alliances in the recent mergers. The
following seem to be what the Indian Banking sector is heading for:
As the economy revives fee based activities and asset quality of banks
could improve.
After adjusting for Non Performing Loans some public sector banks may
have to go in for fresh capital infusion.
Banks will have to compete with mutual funds as an alternative to bank
deposits.
As public sector banks find their margins squeezed, they may become
more active in trading to make up for the margin squeeze. The risk profile
of these public sector banks may increase as their trading in money and
forex markets increase. Thus, a sound risk management i.e. the ALMs
need to be in place.
As competition compress spreads earned on lending business, banks
121
will have to focus on fee income. Private banks are likely to generate
better fee income due to their focus on having adequate technology and
having skilled personnel to generate such business.
RBI is examining the feasibility of introduction of half yearly audit of
accounts by external auditors towards improving the quality of auditing
standards further.
New arenas for advancing may be surveyed, the housing loan sector has
gained a considerable boosts as per the recent budgetary measures;
banks are allowed to lend 3 per cent of their advances to this sector, also
infrastructure and film financing remain untapped.
With the opening of the insurance sector and recent relaxation of
regulation by RBI for entry of banks in this area of business, some of the
big banks are expected to enter this business in a big way. Public sector
banks with their wide reach and higher confidence levels can take the
lead.
All banks will have to adapt to new emerging technologies in order to
exploit the new business opportunities it offers. It will be a new challenge
and will require investment in technology and new systems. Some value-
added services may also need to be provided, which will call for
innovation standardisation. Virtual Banking will set in as a trend
successfully.
Today, the banks have to compete with their peers as well as with other
financial companies. But tomorrow, competitors might zoom in from
completely unexpected industries, as deregulation and new technology
blur old boundaries, these rewrites the conventional definition of a bank.
Those forces offer as many opportunities as threats.
The reduction in SLR and CRR has been effective in the sense that the
lendable resources of banks have increased. The anticlimax is about the
current recession in the economy and decreasing need of investments by
the corporate sector. The CRAR requirements are necessary for financial
soundness of Indian banks; also; a need to assign risk weightage to
government securities seems to be coming up due to increasing
investments of banks portfolios.
The NPA trend has been fortunately declining in the recent years, initially
the NPAs were amounting to total of 16 %, and however banks should
note that ever greening of loans would deprove the circumstances in the
long run; the asset quality is the determinance of banks profitability today.
The present evaluation process of banks states requires around 18
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officials for quality inspection, the bureaucracy involved can reduced only
by way of better bank supervision. The Disclosure norms shall avoid
situations like in case of South East Asian Crisis; with this respect, RBI
proves to be a quite proactive institution.
The DRT Act supersedes all acts but the SICA which clearly states that
companies can very easily stall recovery procedures. It’s a fact in our
country that for every law made there is one more to escape from it.
However, the conceptualization of this structure needs to be
acknowledged.
The corporates can now have a good deal with loans and advances; the
interest rate deregulation has been in line with the international
standards. The current trend of falling rates shall indeed give the
corporate customers fair access with better services.
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improve efficiency of the Indian PSBs. I think a better plan would have
been of investments in technology partially and then a VRS. Currently,
lots of banks are facing problems of inadequate staffing; a good
manpower planning in advance would not have lead to the current
problem.
The opening of insurance has given banks a new opportunity to make the
best out of their resources; how much advantage do our PSBs make is yet
to see.
As far as rural banks are concerned, GOI has to give personnel better
career prospects in order to get them working, better products and
convenience and safety has to be guaranteed by the bank. Personalized
service in a crude form will help.
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Annexure 1
LIST OF PUBLIC SECTOR BANKS
• Allahabad Bank
• Andhra Bank
• Bank of Baroda
• Bank of India
• Bank of Maharastra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
• Indian Bank
• Indian Overseas Bank
• Oriental Bank of Commerce
• Punjab & Sind Bank
• Punjab National Bank
• Syndicate Bank
• UCO Bank
• Union Bank of India
• United Bank of India
• Vijaya Bank
Some of Public Sector banks have issued equity shares for general public
and are listed on various stock exchanges. The listed public sector banks
are
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• Oriental Bank of Commerce
• Dena bank
• Corporation bank
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*since merged with HDFC Bank
**since merged with ICICI Bank
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• The Sanwa Bank Ltd.
• Toronto-Domonion Bank
• Bank Muscat International SAOG,
• Morgan Guaranty Trust company of New York
• KBC Bank, NV
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Reforms among public sector banks are slow, as politicians are
reluctant to surrender their grip over the deployment of huge amounts of
public money.
# As a private player what are the problems that you face while
communicating with the government?
The 1992 reforms gave scope for diversified product profile. New
products and new operating styles exposed the banks to newer and
greater risks.
# ICICI, as a company holds a diversified portfolio, is the main aim to
increase the non-fund based revenue due the trend of falling interest
rates?
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.
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# Can you please state the benefits of universal banking, may be in terms
of revenue or utilisation of resources or others?
How do you see the scope of Internet banking in India, well / bad and
why? How much revenue do you see from this business as a percentage
of the total business, in the future 5 years down the line? What is the
current revenue from this business?
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