Banking Sector in India

By Vasudha Lalit (Roll # 09) Mandar Lalit (Roll # 10)

Agenda
History
Business Environment

Reserve Bank of India

Nationalization, Pros & Cons NCR and Reforms SWOT Analysis Challenges Future Prospects

What are the top most banks of India?

Top Most Banks in India

HISTORY

History of Indian Banking Sector

Banking in India originated way back in 1786
First banks were General bank of India and Bank of Hindustan

Oldest bank into existence in India is State Bank of India

Pre-Independence Era

RBI took over central banking responsibilities from IBI (1935)

State Bank of India (1947) & Nationalization of RBI

- Bank of Bengal - Bank of Bombay - Bank of Madras

Imperial Bank of India (1925)

Bank of Calcutta (June 1806)

BUSINESS ENVIRONMENT

External Factors
Rules and Regulations of RBI

Legal Framework

Banks

Consumer Behavior

Indian Banking Structure

Reserve Bank Of India (RBI)

The Reserve Bank of India performs the function of financial supervision under the guidance of the Board for

Financial Supervision (BFS). The Board was constituted in November 1994 as a committee of the Central Board of
Directors of the Reserve Bank of India.

Objective
Primary objective of BFS is to undertake consolidated supervision of the financial sector comprising
commercial banks, financial institutions and non-banking finance companies.

Current Focus
Supervision of financial institutions Consolidated accounting Legal issues in bank frauds Divergence in assessments of non-performing assets and Supervisory rating model for banks.

RBI - Functions
Monetary Authority:
Formulates, implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange :

Manages the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

Issuer of currency:
Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Related Functions :
Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks: maintains banking accounts of all scheduled banks.

Legal Framework
Umbrella Acts : Reserve Bank of India Act, 1934: governs the Reserve Bank functions Banking Regulation Act, 1949: governs the financial sector

Acts governing specific functions:

Public Debt Act, 1944/Government Securities Act (Proposed): Governs government debt market Securities Contract (Regulation) Act, 1956: Regulates government securities market Indian Coinage Act, 1906:Governs currency and coins Foreign Exchange Regulation Act, 1973/Foreign Exchange Management Act, 1999: Governs trade and foreign exchange market

Acts governing Banking Operations:

Companies Act, 1956:Governs banks as companies Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980: Relates to nationalisation of banks Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881

Acts governing Individual Institutions: State Bank of India Act, 1954 The Industrial Development Bank (Transfer of Undertaking and Repeal) Act, 2003 The Industrial Finance Corporation (Transfer of Undertaking and Repeal) Act, 1993 National Bank for Agriculture and Rural Development Act National Housing Bank Act Deposit Insurance and Credit Guarantee Corporation Act

REFORMS

What is Nationalisation?

Nationalization is the act of taking an industry or assets into the public ownership of a national government or state.

Nationalisation !!!
Government nationalised 14 largest commercial banks in 1969 Another 6 next largest in 1980

Rationale Behind Nationalisation

Commercial banks had facilitated the concentration of economic power in the hands of few Monopoly
Banks did not pay attention to priority sector credit needs of farmers, small industries Resources of bank were misused for benefits of directors and their private sector companies Bank credit was not made according to five year plan

In short, Banks were not working for development of nation

Nationalization Pros
Branch Expansion
Banks started opening branches in rural areas Post nationalization, 800% increase in no. of branches

Deposit Mobilization
Banks contributed to the development of banking habit among common people through sustained publicity, extensive branch banking and relatively prompt service

Expansion of Bank Credit

Banks started mobilising deposites to facilitate increasing demand for credit from agricultural and industrial sector

Diversification
Merchant Banking and underwriting Mutual Funds and Retail Banking

Nationalization Cons
Despite impressive quantitative achievements, productivity and efficiency of systems suffered
Portfolio quality badly deteriorated Profitability eroded

PSBs and FIs became weak, some were making losses YoY

Narasimham Committee Report 1991

SLR which was initially at 25% was raised to 30% and then to 38.5%
Rate of interest received on govt. securities was much less than market rates Known as Tax on the banking system At the same time CRR was hiked up to 15% All in all 53.5% cash was with RBI

Govt. used this liquidity to fund its own expenditure mainly for paying govt
employee salaries

Banking Regulation Act 1949

Maintenance of adequate liquid assets in the form of
Cash Gold Government securities Government guaranteed securities

Equal to not less than 25% of their total demand and time deposit liabilities
Primarily known as SLR

Reforms based on NCR

SLR reduced from 38.5% to 25%

CRR reduced from 15% to 5.75% as of today Decontrolled interest slabs Prudential norms on NPAs Capital adequacy norms Access to capital markets

Freedom of operations to increase competitive edge

New private sector banks allowed Local area banks encouraged Supervision of commercial banks Recovery of debts

SWOT Analysis -Strengths

Strong growth , good asset quality , higher profitability as compared to other banks in the region
Bank lending playing significant role in GDP growth Reach to corner of the country through vast networking, no. of branches and ATMs Policy makers made favourable changes to strengthen this sector Indian banks are considered to have clean, strong and transparent balance sheets as compared to other banks in the regions

SWOT Analysis -Weakness

PSBs need to focus more on sales and marketing, service operations and risk management
Old private sector banks also need to strengthen their skill level and operational levels Government has refused to dilute its 51% stake in PSBs Bank penetration is limited to few customer segments and geographies Poor infrastructure Restrictive labour laws

SWOT Analysis - Opportunities

Rapid growth in Indian economy is fuelling demand
Growth driven by new products and services focusing different segments Enhanced service levels to the consumer Liberalization of ECB norms Expansion through mergers and amalgamations

Reach out to Bharat

SWOT Analysis -Threats

Failure of some weak banks
Rise in inflation rates; in turn increase in interest rates Increase in foreign players pose threat to PSBs and private banks

Challenges
Interest rate risk
NPAs Competition in retail banking Customer retention Urge to merge

Shrinking margins

Future Prospects
Overseas expansion
Technology integration with general functioning of banks Consolidation Development of effective risk management systems

Thank You