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Our preamble

" regulate the issue of Bank Notes and keeping of reserves with
a view to securing monetary stability in India and generally to
operate the currency and credit system of the country to its

-Reserve Bank of India


Without a sound and effective banking system in India it cannot have a

healthy economy. The banking system of India should not only be hassle free but
it should be able to meet new challenges posed by the technology and any other
external and internal factors.

For the past three decades India's banking system has several
outstanding achievements to its credit. The most striking is its extensive reach. It
is no longer confined to only metropolitans or cosmopolitans in India. In fact,
Indian banking system has reached even to the remote corners of the country.
This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters
for getting a draft or for withdrawing his own money. Today, he has a choice.
Gone are days when the most efficient bank transferred money from one branch
to other in two days. Now it is simple as instant messaging or dials a pizza.
Money has become the order of the day.

Banking in India originated in the last decades of the 18th century. The
oldest bank in existence in India is the State Bank of India, a government-owned
bank that traces its origins back to June 1806 and that is the largest commercial
bank in the country. Central banking is the responsibility of the Reserve Bank of
India, which in 1935 formally took over these responsibilities from the then
Imperial Bank of India, relegating it to commercial banking functions. After
India's independence in 1947, the Reserve Bank was nationalized and given
broader powers. In 1969 the government nationalized the 14 largest commercial
banks; the government nationalized the six next largest in 1980.


First of all I would like to thank to Reserve Bank of India to allow me to be a
part of such a reputed institution, the Central Bank of India, who gave me the chance to
work on the project titled "CHALLENGES FOR PUBLIC SECTOR BANKS IN
INDIA" in Lucknow city. I sincerely thank the Governor, Reserve Bank of India and
Shri D.P.S. Rathore Regional Director Lucknow office for facilitating and providing an
opportunity to learn in the form of a training programme. I further thank Shri Jai kish
sir, General Manager department of banking supervision for helping me in the project
along with RBI.

A special acknowledgement goes to Shri G.R.kotian, Assistant General

Manager, DBS for helping me to understand the various aspects related to banking and
guiding me to undertake the project in the right direction.

A special thanks to Mr. Vishwa Mohan, Assistant General Manager, DBS for
helping me to understand all important vital aspects relating to banking system and
providing data & structure.

As a part of DBS, I owe my thanks to all other persons working in DBS for
providing me information, support and understanding related to different aspects of
banking system.

Lastly and significantly I am grateful to Mr. Purendra Kumar sir Assistant

general manager of DAPM, (personnel) for providing great support and also for
making me feel comfortable with the homely interaction with all other staffs and the
entire staffs of R.B.I

I am also thankful to Mr. B.D.Yadav, Assistant manager, DAPM,

HRDD for providing me support and solving my problems during my tenure in RBI
Lucknow office. Without who’s friendly and loving attitude, the project would not
have been such a joyful learning and a memorable experience forever.



Subject……………………………………………………page no.

1-Introduction of …………………………………………
 RBI……………………………….

 DBS……………………………….

3-Banking sectors in India

 Public sector……………………………….

 Private sector……………………………….

 Co-operative, RRBs………………………..

4-Narasimham committee………………………………
 Requirement…………………………………….

 Recommendations………………………………..

 Implementation of Basel II………………………

 Implementation of latest technology…………….

 How to reduce NPA……………………………...

 Man power planning……………………………..

 Loan waiver: A new challenge…………………..

 Risk management………………………………..

 Transparency and disclosures……………………

 Challenges in banking security…………………..

 Competition with private sector banks…………..

 Growth in business………………………………


10- Summery of the project……………………………
11- Bibliography………………………………………………..


RBI does the currency management

that's not only the talent,
it also regulate and supervise the monetary system
which is done by banks and other institution.

On the establishment of RBI was the main object

credit control and currency management,
RBI issue the notes on the basis of Minimum reserve system
there is Gandhiji's portrait on the note as an emblem.

Notes are printed by RBI

and coins are minted by GOI,
but distribution is done by RBI of both
so why the monetary system growth.

Notes are printed at its presses

and then sent to RBI offices,
RBI gives it direct to the public and by currency chest(cc)
and the cc also gives it to other bank branches.

The consignment of notes is recd.

by two joint custodians from press representative,
and then kept in vault after weighting
where security with cc camera is performing.

Notes and coins on counters are exchanged

by the public and bank claim,

in banking hall working two coin vending machine
from which coins can be taken in working time.

If the excess money goes into circulation

It causes the inflation,
To control this situation RBI takes action
and suck out the money by banking & other transaction


The central bank of the country is the Reserve Bank of India

(RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the
basis of the recommendations of the Hilton Young Commission. The share
capital was divided into shares of Rs. 100 each fully paid which was entirely
owned by private shareholders in the beginning. The Government held shares of
nominal value of Rs. 2,20,000. Before the establishment of RBI notes were
issued by three-presidency banks-Bank of Bengal, Bank of Madras & Bank of
Bombay. After some time these banks were merged into one 1920 and named
Imperial bank of India. Till the establishment of RBI this bank was acting as the
central bank. In 1935 the rights and duties of Imperial bank were delegated to
RBI. By that time RBI is issuing and controlling the currency.

The Reserve Bank of India was established on April 1, 1935 in accordance

with the provisions of THE RESERVE BANK OF INDIA ACT, 1934. Though
originally privately owned, since nationalization in 1949, the Reserve Bank is
fully owned by the Government of India The Central Office of the Reserve Bank
has been in Mumbai since inception. The Central Office is where the Governor
sits and is where policies are formulated. Now it has 22 regional offices, most of
them in state capitals. The general superintendence and direction of the Bank is
entrusted to Central Board of Directors of 20 members, the Governor and four
Deputy Governors, one Government official from the Ministry of Finance, ten
nominated Directors by the Government to give representation to important
elements in the economic life of the country, and four nominated Directors by
the Central Government to represent the four local Boards with the headquarters
at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five
members each Central Government appointed for a term of four years to

represent territorial and economic interests and the interests of co-operative
and indigenous banks.

The Reserve Bank of India Act 1934 was commenced on April 1, 1935. The
Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

• To regulate the issue of banknotes

• To maintain reserves with a view to securing monetary stability and
• To operate the credit and currency system of the country to its advantage.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to
issue bank notes of all denominations. The distribution of one rupee notes and
coins and small coins all over the country is undertaken by the Reserve Bank as
agent of the Government. The Reserve Bank has a separate Issue Department,
which is entrusted with the issue of currency notes. The assets and liabilities of
the Issue Department are kept separate from those of the Banking Department.
Originally, the assets of the Issue Department were to consist of not less than
two-fifths of gold coin, gold bullion or sterling securities provided the amount of
gold was not less than Rs. 40 crores in value. The remaining three-fifths of the
assets might be held in rupee coins, Government of India rupee securities,
eligible bills of exchange and promissory notes payable in India. Due to the
exigencies of the Second World War and the post-was period, these provisions
were considerably modified. Since 1957, the Reserve Bank of India is required to
maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least
Rs. 115 crores should be in gold. The system as it exists today is known as the
minimum reserve system.


The second important function of the Reserve Bank of India is to act as

Government banker, agent and adviser. The Reserve Bank is agent of
Central Government and of all State Governments in India excepting

that of Jammu and Kashmir. The Reserve Bank has the obligation to
transact Government business, via. to keep the cash balances as
deposits free of interest, to receive and to make payments on behalf of
the Government and to carry out their exchange remittances and other
banking operations. The Reserve Bank of India helps the Government
- both the Union and the States to float new loans and to manage
public debt. The Bank makes ways and means advances to the
Governments for 90 days. It makes loans and advances to the States
and local authorities. It acts as adviser to the Government on all
monetary and banking matters.

Banker's bank and the Lender of the last resort

The Reserve Bank of India acts as the bankers' bank. According to the
provisions of the Banking Companies Act of 1949, every scheduled bank was
required to maintain with the Reserve Bank a cash balance equivalent to 5% of
its demand liabilities and 2 per cent of its time liabilities in India. By an
amendment of 1962, the distinction between demand and time liabilities was
abolished and banks have been asked to keep cash reserves equal to 3 per cent of
their aggregate deposit liabilities. The Reserve Bank of India can change the
minimum cash requirements. The scheduled banks can borrow from the Reserve
Bank of India on the basis of eligible securities or get financial accommodation
in times of need or stringency by rediscounting bills of exchange. Since
commercial banks can always expect the Reserve Bank of India to come to their
help in times of banking crisis the Reserve Bank becomes not only the banker's
bank but also the lender of the last resort.

Controller of Credit

As supreme-banking authority in the country, the Reserve Bank of India,

therefore, has the following powers:
(a) it holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative

(c) It controls the banking system through the system of licensing, inspection and
calling for information.

(d) It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.

Custodian of Foreign Reserves

Bank has the responsibility of maintaining fixed exchange rates with all other
member countries of the I.M.F. Besides maintaining the rate of exchange of the
rupee; the Reserve Bank has to act as the custodian of India's reserve of
international currencies. The vast sterling balances were acquired and managed
by the Bank. Further, the RBI has the responsibility of administering the
exchange controls of the country.

Supervisory functions
In addition to its traditional central banking functions, the Reserve bank has
certain non-monetary functions of the nature of supervision of banks and
promotion of sound banking in India. The Reserve Bank Act, 1934, and the
Banking Regulation Act, 1949 have given the RBI wide powers of supervision
and control over commercial and co-operative banks, relating to licensing and
establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction, and liquidation. The RBI is
authorised to carry out periodical inspections of the banks and to call for returns
and necessary information from them.

Legal Framework
Acts governing specific functions

• Indian Coinage Act, 1906:Governs currency and coins

• Bankers' Books Evidence Act
• Banking Secrecy Act
• Negotiable Instruments Act, 1881




Functions of RBI

Monetary Authority:
The RBI is responsible for implementing, formulating and monitoring the
monetary policy of India.
Objective: Keeping this authority in mind the RBI is required to maintain price
stability and ensure adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

The Supreme financial body sets down broad parameters of banking operations
within which the country's banking and financial system operates.
Objective: This reasonably helps in maintaining public confidence in the system.
It in turn protects depositors' interest and provides lucrative banking services to
the public.

Manager of Exchange Control:

The RBI is responsible for managing the Foreign Exchange Management Act,
Objective: It is the nodal agency, which facilitates external trade and payment
and promotes orderly development and maintenance of foreign exchange market

in India.

Issuer of currency:
It is the only supreme body, which issues and exchanges or destroys currency
and coins not fit for circulation.
Objective: This facilitates in giving the public adequate quantity of currency
notes and coins and in good quality.
Developmental role
The RBI since its inception performs a wide range of promotional functions to
support national objectives and generate goodwill among the citizens of the

Related Functions
Banker to the Government: The RBI performs merchant banking function for
the central and the state governments and also acts as their banker. The RBI often
advises the Government of the current monetary condition in the state.

Banker to banks: maintains banking accounts of all scheduled banks. The RBI
looks after the functioning of the state banks and grants them license and even
cancels the same on account of fraud practice.

Subsidiaries of RBI
Fully owned:= National Housing Bank (NHB), National Bank for Agriculture
and Rural Development (NABARD), Deposit Insurance and Credit Guarantee
Corporation of India (DICGC), Bharatiya Reserve Bank Note Mudran Private
Limited (BRBNMPL)

Majority stake: = National Bank for Agriculture and Rural Development

(NABARD). The Reserve Bank of India has recently divested
its Stake in State Bank of India to the Government of India.

Department of banking supervision
The Department of Banking Supervision has its Central Office in Mumbai and
16 regional offices at various centres in the country. I worked in DBS, Regional Office
at Lucknow. Prior to 1993, the supervision and regulation of commercial banks was
handled by the Department of Banking Operations and Development (DBOD).In
December 1993 the Department of Supervision was carved out of the DBOD with the
objective of segregating the supervisory role from the regulatory function of R.B. I.

The Department of Banking Supervision at present exercises the supervisory role

relating to commercial banks in the following forms:

Preparing of independent inspection programmes for different institutions.

Inspection evaluates financial condition and performance of the bank which includes
judging asset quality, solvency and capital adequacy earning performance and liquidity
of the bank. Then seeing management and perating condition and compliance of the
bank which includes Regulatory compliance and Guidance compliance and finally
doing summary assessment of the bank i.e. identification of concerns and areas for
corrective actions. Undertaking scheduled and special on-site inspections, off-site
surveillance, ensuring follow-up and compliance. Determining the criteria for the
appointment of statutory auditors and special auditors and assessing audit performance
and disclosure standards.

Exercising supervisory intervention in the implementation of regulations which

includes-recommendation for removal of managerial and other persons, suspension of
business, amalgamation, merger/winding
C- CAPITALup, issuance of directives and imposition of
penalties.The Department of Banking Supervision follow CAMELS approach during
its inspection of commercial banks. It judges banks on the basis of the following six
parameters :





Banking sectors in india

PUBLIC SECTOR BANKS-The public sector is the one whose working is in the hands
of the government. the government holds a majority stake in public sector industries.
Their activities are mostly influenced by the government. But due to privatization of
public sector industries, their nimbler has reduced to a significant extent. Indian
railways, nuclear power industry, electricity board, etc.are still in cluded in the public
sector. it may be defined as "an enterprise where there is no private ownership but its
activities are not mainly confined to the maximization of profits and private interests of
the enterprise but it is influenced by social.

PRIVATE BANKS- are banks that are not incorporated. A private bank is owned by
either an individual or a general partner(s) with limited partner(s). In any such case, the
creditors can look to both the "entirety of the bank's assets" as well as the entirety of
the sole-proprietor's/general-partners' assets.

FOREIGN SECTOR BANKS- Foreign sector banks are those banks which have their
head office in other countries outside India and branch is working in India.


The co-operative sector is very much useful for rural people. The co-operative banking
sector is divided into the following categories.

a. State co-operative Banks

b. Central co-operative banks
c. Primary Agriculture Credit Societies

A rural bank is a financial institution that helps rationalize the developing regions or
developing country to finance their needs specially the projects regarding agricultural

Structure of Banking in India

Reserve Bank of India

Scheduled Non-Scheduled
Banks Banks

Scheduled Scheduled
Commercial Banks Cooperative Banks

Public Private Regional Scheduled Scheduled

sector Sector Rural Urban State
banks Banks Banks Cooperative Cooperative
Banks Banks

Nationalized SBI & its Old Private New Private

Banks Associates Sector Banks Sector Banks

Source-Banking &Finance
15 Magazine
A public space refers to an area or place that is open and accessible to all citizens,
regardless of gender, race, ethnicity, age or socio-economic level. One of the earliest
examples of public spaces are commons. For example, no fees or paid tickets are
required for entry, nor are the entrants discriminated based on background. Non-
government-owned malls are examples of 'private space' with the appearance of being
'public space'.
Public Space has also become something of a touchstone for critical theory in
relation to philosophy, (urban) geography, visual art, cultural studies, social studies and
urban design. Its relevance seems to become more pressing as capital encloses more
and more of what were thought of as 'commons'. The term 'Public Space' is also often
misconstrued to mean other things such as 'gathering place', this is an element of the
larger concept.

Under Indian banking regulation Act, 1949 sec. 5 (b)-

“ Banking means accepting
money for the purpose of lending and investment or deposits of money from the
public, repayable on demand or otherwise and withdrawable by cheque, draft, order or

The enhanced role of the banking sector in the Indian economy, the increasing
levels of deregulation along with the increasing levels of competition have facilitated
globalisation of the India banking system and placed numerous demands on banks.
Operating in this demanding environment has exposed banks to various challenges.
The last decade has witnessed major changes in the financial sector - new banks, new
financial institutions, new instruments, new windows, and new opportunities - and,
along with all this, new challenges. While deregulation has opened up new vistas for
banks to augment revenues, it has entailed greater competition and consequently
greater risks. Demand for new products, particularly derivatives, has required banks to
diversify their product mix and also effect rapid changes in their processes and
operations in order to remain competitive in the globalised environment.

Indian banking system, over the years has gone
through various phases after establishment of Reserve Bank of India in 1935 during the
British rule, to function as Central Bank of the country. Earlier to creation of RBI, the
central bank functions were being looked after by the Imperial Bank of India. With the
5-year plan having acquired an important place after the independence, the Govt. felt
that the private banks may not extend the kind of cooperation in providing credit
support, the economy may need. In 1954 the All India Rural Credit Survey Committee
submitted its report recommending creation of a strong, integrated, State-sponsored,
State-partnered commercial banking institution with an effective machinery of
branches spread all over the country. The recommendations of this committee led to
establishment of first Public Sector Bank in the name of State Bank of India on July 01,
1955 by acquiring the substantial part of share capital by RBI, of the then Imperial
Bank of India. Similarly during 1956-59, as a result of re-organisation of princely
States, the associate banks came in to fold of public sector banking.

Another evaluation of the banking in India was undertaken during 1966 as

the private banks were still not extending the required support in the form of credit
disbursal, more particularly to the unorganised sector. Each leading industrial house in
the country at that time was closely associated with the promotion and control of one or
more banking companies. The bulk of the deposits collected, were being deployed in
organised sectors of industry and trade, while the farmers, small entrepreneurs,
transporters , professionals and self-employed had to depend on money lenders who
used to exploit them by charging higher interest rates. In February 1966, a Scheme of
Social Control was set-up whose main function was to periodically assess the demand
for bank credit from various sectors of the economy to determine the priorities for grant
of loans and advances so as to ensure optimum and efficient utilisation of resources.
The scheme however, did not provide any remedy. Though a no. of branches were
opened in rural area but the lending activities of the private banks were not oriented
towards meeting the credit requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies

(Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger
commercial bank with paid up capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of
Rs.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in
1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of
the advances in Public Sector Banking. During December 1969, RBI introduced the
Lead Bank Scheme on the recommendations of FK Nariman Committee.

In the post-nationalisation period, there was substantial increase in the no. of
branches opened in rural/semi-urban centres bringing down the population per bank
branch to 12000 appx. During 1976, RRBs were established (on the recommendations
of M. Narasimham Committee report) under the sponsorship and support of public
sector banks as the 3rd component of multi-agency credit system for agriculture and
rural development. While the 1970s and 1980s saw the high growth rate of branch
banking net-work, the consolidation phase started in late 80s and more particularly
during early 90s, with the submission of report by the Narasimham Committee on
Reforms in Financial Services Sector during 1991.
In these five decades since independence, banking
in India has evolved through four distinct phases:

Foundation phase can be considered to cover 1950s and 1960s till the
nationalisation of banks in 1969. The focus during this period was to lay the foundation
for a sound banking system in the country. As a result the phase witnessed the
development of necessary legislative framework for facilitating re-organisation and
consolidation of the banking system, for meeting the requirement of Indian economy.
A major development was transformation of Imperial Bank of India into State Bank of
India in 1955 and nationalisation of 14 major private banks during 1969.

Expansion phase had begun in mid-60s but gained momentum after nationalisation of
banks and continued till 1984. A determined effort was made to make banking facilities
available to the masses. Branch network of the banks was widened at a very fast pace
covering the rural and semi-urban population, which had no access to banking hitherto.
Most importantly, credit flows were guided towards the priority sectors. However this
weakened the lines of supervision and affected the quality of assets of banks and
pressurized their profitability and brought competitive efficiency of the system.

Consolidation phase: The phase started in 1985 when a series of policy

initiatives were taken by RBI which saw marked slowdown in the branch expansion.
Attention was paid to improving house-keeping, customer service, credit management,
staff productivity and profitability of banks. Measures were also taken to reduce the
structural constraints that obstructed the growth of money market.

Reforms phase The macro-economic crisis faced by the country in 1991

paved the way for extensive financial sector reforms which brought deregulation of
interest rates, more competition, technological changes, prudential guidelines on asset
classification and income recognition, capital adequacy, autonomy packages etc.

Organized banking in India is more than two centuries old. Till 1935 all the banks
were in private sector and were set up by individuals and/or industrial houses which
collected deposits from individuals and used them for their own purposes. In the
absence of any regulatory framework, these private owners of banks were at liberty to
use the funds in any manner, they deemed appropriate and resultantly, the bank failures
were frequent.

Statistics bear testimony to the fact that the genesis of the

economic crisis in India, which surfaced in 1991, lies in the large and persistent
macroeconomic imbalances that developed over the 1980s. Move towards State
ownership of banks started with the nationalisation of RBI and passing of Banking
Companies Act 1949. On the recommendations of All India Rural Credit Survey
Committee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to
SBI. keeping in view the objectives of nationalisation, PSBs undertook expansion of
reach and services. Resultantly the number of branches increased 7 fold (from 8321 to
more than 60000 out of which 58% in rural areas) and no. of people served per branch
office came down from 65000 in 1969 to 10000. Much of this expansion has taken
place in rural and semi-urban areas. The expansion is significant in terms of
geographical distribution. States neglected by private banks before 1969 have a vast
network of public sector banks. The PSBs including RRBs, account for 93% of bank
offices and 87% of banking system deposits.

The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of Bengal
(1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and
called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial
Bank of India was established which started as private shareholders banks, mostly
Europeans. In 1865 Allahabad Bank was established and first time exclusively by
Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore.
Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara
Bank, Indian Bank, and Bank of Mysore were set up. Reserve Bank of India came in

During the first phase the growth was very slow and banks also experienced
periodic failures between 1913 and 1948. There were approximately 1100 banks,
mostly small. Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as the Central Banking Authority. During those day’s
public has lesser confidence in the banks. As an aftermath deposit mobilisation was
slow. Abreast of it the savings bank facility provided by the Postal department was
comparatively safer. Moreover, funds were largely given to traders.

The following steps are taken by the government of India to regulate banking
institutions in the country.

• 1949 : Enactment of Banking Regulation Act.

• 1955 : Nationalisation of State Bank of India.
• 1959 : Nationalisation of SBI subsidiaries.
• 1961 : Insurance cover extended to deposits.
• 1969 : Nationalisation of 14 major banks.
• 1971 : Creation of credit guarantee corporation.
• 1975 : Creation of regional rural banks.
• 1980 : Nationalisation of seven banks with deposits over 200 crore.
After the nationalisation of banks, the branches of the public sector bank India
rose to approximately 800% in deposits and advances took a hugejump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit faith
and immense confidence about the sustainability of these institutions.

Nationalised Banks in India

Banking System in India is dominated by nationalised banks. The
nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then
prime minister. The major objective behind nationalisation was to spread banking
infrastructure in rural areas and make available cheap finance to Indian farmers.
Fourteen banks were nationalised in 1969. Before 1969, State Bank of India (SBI) was
the only public sector bank in India. SBI was nationalised in 1955 under the SBI Act of

The second phase of nationalisation of Indian banks took place in the year
1980. Seven more banks were nationalised with deposits over 200 crores. Nationalised
banks dominate the banking system in India. The history of nationalised banks in India
dates back to mid-20th century, when Imperial Bank of India was nationalised (under
the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Then
on 19th July 1960, its seven subsidiaries were also nationalised with deposits over 200

However, the major nationalisation of banks happened in 1969 by the then-Prime
Minister Indira Gandhi. The major objective behind nationalisation was to spread
banking infrastructure in rural areas and make cheap finance available to Indian
farmers. In the year 1980, the second phase of nationalisation of Indian banks took
place, in which 7 more banks were nationalised with deposits over 200 crores. With
this, the Government of India held a control over 91% of the banking industry in India.
After the nationalisation of banks there was a huge jump in the deposits and advances
with the banks. At present, the State Bank of India is the largest commercial bank of
India and is ranked one of the top five banks worldwide. It serves 90 million customers
through a network of 9,000 branches.

After the 1991 economic crisis, the central government launched economic
liberalization. India has progressed towards a modern market-based system and has a
growing middle class.


The importance of a bank to modern economy, so as to enable them to develop, can be

stated as follow:

(i) The banks collect the savings of those people who can save and allocate them to
those who need it. These savings would have remained idle due to ignorance of the
people and due to the fact that they were in scattered and oddly small quantities. But
banks collect them and divide them in the portions as required by the different

(ii) Banks preserve the financial resources of the country and it is expected of them that
they allocate them appropriately in the suitable and desirable manner.

(iii) They make available the means for sending funds from one place to another and do
this in cheap, safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and uncrossed,
which is the easiest and most convenient, besides they also care for making such
payments as safe as possible.

(v) Banks also help their customers, in the task of preserving their precious possess-
ions intact and safe.

(vi) To advance money, the basis of modern industry and economy and essential for
financing the developmental process, is governed by banks.

(Vii) It makes the monetary system elastic. Such elasticity is greatly desired in the
present economy, where the phase of economy goes on changing and with such
changes, demand for money is required. It is quite proper and convenient for the
government and R.B.I. to change its currency and credit policy frequently, this is done
by RBI, by changing the supply of money with the changing the supply of money with
the changing needs of the public.

Although traditionally, the main business of banks is acceptance of deposits and

lending, the banks have now spread their wings far and wide into many allied and even
unrelated activities.

The following are the Scheduled Banks in India (Public Sector):

• State Bank of India

• State Bank of Bikaner and Jaipur
• State Bank of Hyderabad
• State Bank of Indore
• State Bank of Mysore
• Andhra Bank
• Allahabad Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
• Indian Overseas Bank
• Indian Bank
• Oriental Bank of Commerce
• Punjab National Bank
• Punjab and Sind Bank
• Syndicate Bank
• Union Bank of India
• United Bank of India
• Vijaya Bank

The following are the Scheduled Banks in India (Private Sector):

• ING Vysya Bank Ltd

• Axis Bank Ltd
• Indusind Bank Ltd
• ICICI Bank Ltd
• HDFC Bank Ltd
• IDBI Bank Ltd

The financial sector assessment report, prepared by the Reserve Bank of India (RBI)
and the Central Government, has favoured the merger of public sector banks (PSBs)
having a government holding bordering on 51 per cent with those having a much
higher state-holding to ensure that their business growth does not suffer due to capital

The report indicated that PSBs would need additional capital to meet Basel II norms
and maintain an asset growth for the overall projected growth of the economy at 8 per
cent and consequent growth of risk-weighted assets (RWAs).

This has the potential to further aggravate a growing apprehension that public sector
banks’ growth could be constrained in relation to other players.

The extent of additional capital required from the government is expected to be

manageable, provided the RWAs grow by within 25 per cent annually and total cost of
recapitalisation would be lower than in most other countries.

Public banks deposit growth rise, private, foreign banks
see drop
The public sector banks have shown growth in their credits in comparison to their
private and foreign competitors. According to latest data released by the Reserve Bank
of India (RBI) in due course the depositors have withdrawn funds from private and
foreign banks and are investing their money with public sector banks which has
resulted in a significant decline in growth of deposits with private and foreign banks.

In recent months big companies such as Infosys moved their deposits from private and
foreign banks to public sector banks, largely because the state-owned players were
offering higher interest rates. While in December, the public sector players had taken
decision to reduce bulk deposit and focus more on current account and saving account

Public sector banks score over private ones

Public sector banks have long been chastised as the black sheep of the financial
sector. But while a lot of experts might deride these institutions for their non-
performing assets and lower productivity, at the end of the day, public sector banks
have far happier customers compared to their counterparts in the private sector.
According to Reserve Bank of India’s (RBI's) latest report, Trend and Progress
of Banking in India, public sector banks rule the roost in customer satisfaction.

The report should make those singing hosannas for private sector banks sit up. It
shows that the State Bank of India (SBI) recorded 0.1 “complaints per branch” while
the corresponding figure for icici was 1.39—more than 10 times that of sbi.
Citibank fared far worse: it recorded a whopping 8.59 complaints per branch. These
complaints were made to RBI grievance cell.

One, however, needs to look at another aspect before delivering the final verdict:
profits per branch. Here, private banks fare better. For example, on an average, a
Citibank branch earns a net profit of Rs 18 crore annually. An average icici bank
branch earns Rs 4.5 crore, while an average sbi branch earns just Rs 50 lakh, annually.
The standard response to such figures is that private sector banks are more efficient
than their public sector counterparts with foreign banks taking efficiency to
astronomical levels.

But their rich rake-offs notwithstanding, the profit-complaint ratio of private sector
banks is much lower than their much maligned public sector counterparts sbi’s profit-
complaint ratio of 4.1 for example is much higher than cici and Citibank

RBI’s data indicates that private and foreign banks are biting off more than they can
chew: customer acquisition is shooting through the roof but the servicing mechanism is
Given short shrift.

Banks, like all other businesses, believe that “time is money”. The private
sector interpretation of this adage seems to be: spending as little time on the customer
as possible. In most private banks, the time spent on the phone with a customer is
tracked and executives found to be spending an inordinate amount are ticked off. The
zeal to be efficient means that the private sector has all but forgotten another business
aphorism: time spent with a customer is an investment which may yield future
dividends in the form of customer loyalty and referrals. And their surveys, other than
those conducted by rbi, testify to such omission. For example, according to a survey by
Consumer Voice (, a consumer awareness magazine,
people were more likely to recommend public sector banks to their friends or relatives.
Of the top five banks in this category, three belong to the public sector. The highest-
ranking foreign bank is Standard Chartered at number eight. icici Bank is at number 15
(fifth from the bottom), with Citibank bringing up the rear.

Recent advertising campaigns, especially by private banks, have increasingly started
using the emotional platform to attract customers. With tag lines such as “Hum hain
naa” and “Just like borrowing from a friend”, these banks attempt to bring home the
fact that the bond between a customer and his bank goes beyond the purely

However, customers don’t necessarily share that warm feeling.

Public sector banks score over private ones

According to the rbi report, private and foreign banks

actually score pretty high on customer complaints of the nasty variety: namely,
“harassment in recovery of loans”. Foreign banks record 0.134 such complaints per
branch—more than 30 times the overall average. The corresponding numbers for new
private Indian banks is 0.021 and 0.003 for public sector banks.

The Consumer Voice survey also has private sector banks faring poorly in this respect.
Only one public sector bank figures amongst the top five in the list of banks with
highest number of disgruntled customers. Not surprisingly, Citibank tops the list.

Citibank also tops another dubious list: that of people fed up with tele-marketing
executives pestering them. The bank accounts for 40 per cent of all such complaints.


At Citibank’s website, one finds a complaint form along with a detailed note
elaborating the grievance redressal system. The icici Bank home page also has a similar
link, prominently displayed.

The sbi home page does not have a link relating to complaints. What they do have is a
customer care web page that declares, “Customers of the bank can meet senior
executives of the bank on the 15th of every month (between 3.00 pm and 5.00 pm)
without any prior appointment and discuss issues relating to their accounts/banking
transactions. In case the 15th is a holiday, customers can meet the next working day.”

It is a fundamentally different approach. For the new breed of private banks, human
contact is anathema. The overarching desire is to resolve grievances on the phone or
through the Internet. The customer is preferred to remain a faceless entity with a
number to identify him. But at a public sector bank, a harried customer, running from
pillar to post would often find that a kind word, a cup of tea and a patient hearing
solves half the problem.

One reason for disgruntled customers is the fact that that the service executives are
often not authorised to solve problems and refers them to another party. This often
leads to a chain reaction and such vacillation irks customers, leaving them with no
choice but to approach rbi. According to P Shimrah, secretary to the banking
ombudsman, rbi “Public sector banks are decentralised. The branch manager of a
public sector bank is more empowered than his private sector counterpart to solve
problems at his level. In private sector banks, it’s the opposite. With a centralised
decision making authority, they feel that technology can be used to overcome these

But technology, like atm machines, though useful, cannot provide complete solution.
For two important reasons. Firstly, technology is not infallible: it solves old problems
but creates its own new ones. Secondly, technology needs to find favour with the
public. Inappropriate technology or innovations that are too far ahead of their time will
not work. Instead of living with the vision of a future utopia with perfect banking
systems, it would be wiser to accept the problems that are cropping up now and address
them in a sensible and humane manner.

The fact that public sector banks need to shape up has been repeated ad nauseam, but
the solution does not lie in swinging to the other extreme typified by foreign banks. A
satisfying middle ground needs to be found where the cutting edge efficiency of
western banking is tempered with respect and empathy for the customer.

Based on Loan loss provisioning

The net NPAs4 have continually declined from 14.46% in 1993-94 to 6.74% in 2000-
01. RBI regulations require that banks build provisions upto at least a level of 50% of
their gross NPAs. The current provisioning is 35% of gross NPAs.

The problem India faces is not lack of strict prudential norms but
1. The legal impediments and time consuming nature of asset disposal process.
2. ‘Postponement’ of the problem in order to report higher earnings
3. Manipulation by the debtors using political influence


The enhanced role of the banking sector in the Indian economy, the increasing levels of
deregulation along with the increasing levels of competition have facilitated
globalisation of the India banking system and placed numerous demands on banks.
Operating in this demanding environment has exposed banks to various challenges.
The last decade has witnessed major changes in the financial sector - new banks, new
financial institutions, new instruments, new windows, and new opportunities - and,
along with all this, new challenges. While deregulation has opened up new vistas for
banks to augment revenues, it has entailed greater competition and consequently
greater risks. Demand for new products, particularly derivatives, has required banks to
diversify their product mix and also effect rapid changes in their processes and
operations in order to remain competitive in the globalised environment.

Globalisation – a challenge as well as an opportunity

The benefits of globalisation have been well documented and are being increasingly
recognised. Globalisation of domestic banks has also been facilitated by tremendous
advancement in information and communications technology. Globalisation has thrown
up lot of opportunities but accompanied by concomitant risks. There is a growing
realisation that the ability of countries to conduct business across national borders and
the ability to cope with the possible downside risks would depend, inter-alia, on the
soundness of the financial system and the strength of the individual participants.
Adoption of appropriate prudential, regulatory, supervisory, and technological
framework on par with international best practices enables strengthening of the
domestic banking system, which would help in fortifying it against the risks that might
arise out of globalisation. In India, we had strengthened the banking sector to face the

pressures that may arise out of globalisation by adopting the banking sector reforms in
a calibrated manner, which followed the twin governing principles of non-disruptive
progress and consultative process.
Global challenges in banking
A new broad challenges faced by the Indian banks in the following areas, viz.,
enhancement of customer service; application of technology; implementation of Basel
II; improvement of risk management systems; implementation of new accounting
standards; enhancement of transparency & disclosures; and compliance with KYC


1. Implementation of Basel II
2. Implementation of latest technology
3. How to reduce NPA
4. Corporate governance
5. Man power planning
6. Talent management
7. Loan waiver: A new challenge
8. Risk management
9. Transparency and disclosures
10.Challenges in banking security
11.Competition with private sector banks
12.Growth in business
13.Enhancing customer service

Implementation of Basel II
Basel II implementation is widely acknowledged as a significant challenge
faced by both banks and the regulators internationally. It is true that Basel II
implementation may be seen as a compliance challenge. While it may be so for some
banks, I would venture to mention that Basel II implementation has another dimension
which offers considerable opportunities to banks. I would like to highlight two
opportunities that are offered to banks, viz., refinement of risk management systems;
and improvement in capital efficiency. Basel 2 requires more capital for public sector
banks in India due to the fact that operational risk is not captured under Basel I.

Basel II is the revised capital accord of Basel I. Basel II accord defines the
minimum regulatory capital which is to be allocated by each bank based on its risk
profile of assets. Banks have to maintain the capital adequacy ratio (CAR) of minimum
9 %. As per RBI, banks which are getting more than 20% of their businesses from
abroad have to Implement Basel II. But most of the banks are now interested to
implement Basel II.

Implementation of Basel II is seen as one of the significant challenges for

Public Sector Banks. Implementation of Basel II will require more capital for Public
Sector Banks in India due to the fact that operational risk is not captured under Basel I

• In ICRA's estimates, Public Sector Banks would need additional capital to the
extent of Rs. 90 billion to meet the capital charge requirement for operational
risk under Basel II.
• The challenge for the banks would be to quantify risks(credit concentration risk,
interest rate risk in the banking book, business and strategic risk, liquidity risk,
and other residual risks such as reputation risk and business cycle risk) and then,
to translate those consistently into an appropriate amount of capital needed,
commensurate with the bank’s risk profile and control environment.
• Needless to say, this would call for instituting sophisticated risk management
systems, including a robust stress-testing and economic capital al Public Sector
Banks would be required to use fully scalable state of the art technology, ensure
enhanced information system security and develop capability to use the central
database to generate any data required for risk management as well as
reporting.location framework.

• The most important Pillar 2 challenge relates to acquiring and upgrading the
human and technical resources necessary for the review of banks responsibilities
under Pillar 1.
• Public Sector Banks would be required to use fully scalable state of the art
technology, ensure enhanced information system security and develop capability
to use the central database to generate any data required for risk management as
well as reporting.
• The costs associated with Basel II implementation, particularly costs related to
information technology and human resources, are expected to be quite
significant for Public Sector Banks.

Minimum Capital Allocation for credit risk

To allocate the capital for any of the above risk, it should be quantitatively measured.



An online banking facility enables you to handle your finances efficiently.

Online banking uses modern computer technologies to offer the users convenient
banking facilities. If you have access to such a facility, there is absolutely no need for
you to personally visit your bank’s branch for any sort of transaction. You can simply
login with the internet-banking password that your banker has given you, and carry all
the necessary work online. It also eliminates the necessity of doing any paper-based
work and saves considerable time for the users.

Private sector and foreign banks were using technology and computerized system since
its beginning while PSBs were not. So they found difficulty in managing all these
things. Many of Indian PSBs ignored technological change and had lost market share to
foreign banks and new private banks. Technology helps in having a huge branch
network easily and also it reduces the operational cost this may b clarified by an
example as:-
Operational cost per transaction of an account via different type is-
 Via computers on counter- 40 Rs.
 Via ATM - 16-17 Rs.
 Via online - 46 paise
So it is cleared that manually/direct transaction cost comes very high and
electronically and online it is very low. So that’s why public sector banks should
improve their working system and should make it totally online but challenge is before

The users can do variety of work using your online banking pin code. The bankers
benefit equally from the online banking facilities. Besides offering their users the
convenience of banking, the online banking system means significant cost savings for
the bankers themselves. With such an automatic system in place, the bankers need not
to hire employees specialized in handling paper work and teller interactions. This
reduces the bankers’ operating costs considerably, translating into significant cost
savings over the long-term.

Various Advantages of Banking Online:

The biggest advantage of online banking is its convenience. Unlike a bank’s branches,
online banking facilities are open 24/7. This offers you banking from the comfort of
your home with just a click. You can access such a facility from anywhere in the world.
This could be great advantage if you need to address urgent monetary concerns while
away from home. Transactions online are fast and mostly quicker than ATM
transactions. Moreover, online banking systems have sophisticated tools that provide
effective management of the users’ assets.

Initially the online banking security system was quiet simple, a id and a password and
you are done. It was quiet risky then anyone who gets access to these two can empty
your account. Many people at that time will do setting with the courier people and got
access to this details. But now even the card and the id password as sent thru separate
courier. So its now more secure.

Most banks now has sms verification, you are sent a code that you need to add when
you are adding a new account for transfer, its simple and logical. Thou sometimes the
sms takes too much time to be received. Stanchart is fast the minute you press add the
sms is in your inbox, may be because of lesser traffic. Icici has also an extra transaction
password plus you need to have a debit card and have to use the grid at the back of card
to validate it. This three way verification is quiet robust and thus you dont get phising
emails these days. Because phisers know that having an id and password is not enough.

Technological leap
The banks realised that if they have to survive, they will have to adopt modern
technology. State Bank of India was amongst the first to focus on technology and a
team is constantly at work to innovate in an attempt to lower costs. So, the bank has
now introduced two-faced ATMs, which will increase efficiency.

Technology will not just help them reach out to young customers better but also help
them cut costs and improve efficiency. Here’s how the economics work. While a
transaction at a branch costs around Rs 50, one at an ATM works out to Rs 18, a senior
State Bank of India executive said. Transactions through the Internet are even cheaper
at around Rs 10 each.

As a result, banks like State Bank of India want 50 per cent of the transactions from
non-branch channels such as ATMs, net banking and mobile phones.


Non performing asset

A loan or lease that is not meeting its stated principal and interest payments. Banks
usually classify as nonperforming assets any commercial loans which are more than 90
days overdue and any consumer loans which are more than 180 days overdue. More
generally, an asset which is not producing income.

Non Performing Asset means an asset or account of borrower, which has been
classified by a bank or financial institution as sub-standard, doubtful or loss asset, in
accordance with the directions or guidelines relating to asset classification issued by
An amount due under any credit facility is treated as "past due" when it has not been
paid within 30 days from the due date. Due to the improvement in the payment and
settlement systems, recovery climate, upgradation of technology in the banking system,
etc., it was decided to dispense with 'past due' concept, with effect from March 31,

Financial sector reform in India has progressed rapidly on aspects like interest rate
deregulation, reduction in reserve requirements, barriers to entry, prudential norms and
risk-based supervision. But progress on the structural-institutional aspects has been
much slower and is a cause for concern. The sheltering of weak institutions while
liberalizing operational rules of the game is making implementation of operational
changes difficult and ineffective. Changes required to tackle the NPA problem would
have to span the entire gamut of judiciary, polity and the bureaucracy to be truly
effective. This paper deals with the experiences of other Asian countries in handling of

The chart below shows data for NPA going back to 2.3-1.0. The two lines plotted are
non-performing assets gross non-performing assets. Loan loss allowance is not
growing nearly as fast as the non-performing assets. I can say that this is a problem,
but that we don’t have a solution. In the course of discussing disposition of assets with
various banks, it sometimes becomes apparent that the reason that the bank cannot

dispose of the property at market prices, is because the bank does not have enough
capital to do so. It is suspected that the slow growth of loan loss allowance is related to
the same problem. While this chart shows that NPA is decreasing overall in banking
system but even then in PSBs NPA are higher with comparison to private sector banks.

Something needs to happen, but I’m certainly not smart enough to know what it is.

The position of classification of NPA is summarized below:

Standard assets : not NPA
Sub-standard assets : Twelve months period after becoming NPA.
Doubtful assets : Substandard for 12 months or more.
Loss assets : Assets becomes uncollectible/ unrealizable.

Gross and net NPA of different sector of bank

Table 1 (end of March 31)

(in %)

category Gross NPA/ Gross Advance

2001 2002 2003 2004

Public sector bank 12.37 11.09 9.36 7.79
Private sector 8.37 9.64 8.07 5.84
Foreign bank 6.84 5.38 5.25 4.62

Table 2 (end of March 31) (in %)

category Net NPA / Net Advance

2001 2002 2003 2004
Public sector bank 6.74 5.82 4.53 2.98
Private sector 2.27 2.49 2.32 1.32
Foreign bank 1.82 1.89 1.76 1.49

Management of NPA
The table I&II shows that during initial sage the percentage of NPA was higher. This
was due to show ineffective recovery of bank credit, lacuna in credit recovery system,
inadequate legal provision etc. Various steps have been taken by the government to
recover and reduce NPAs. Some of them are.

1. One time settlement / compromise scheme

2. Lok adalats
3. Debt Recovery Tribunals
4. Securitization and reconstruction of financial assets and enforcement of Security
Interest Act 2002.
5. Corporate Reconstruction Companies
6. credit information on defaulters and role of credit information bureaus


The Indian banking sector is facing a serious problem of NPA. The extent of NPA is
comparatively higher in public sectors banks. (Table II&III). To improve the efficiency
and profitability, the NPA has to be scheduled. Various steps have been taken by
government to reduce the NPA. It is highly impossible to have zero percentage NPA.
But at least Indian banks can try competing with foreign banks to maintain
international standard.
A strong banking sector is important for flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. Non-performing assets are
one of the major concerns for banks in India.

NPAs reflect the performance of banks. A high level of NPAs suggests high probability
of a large number of credit defaults that affect the profitability and net-worth of banks
and also erodes the value of the asset. The NPA growth involves the necessity of

provisions, which reduces the over all profits and shareholders value.

The issue of Non Performing Assets has been discussed at length for financial system
all over the world. The problem of NPAs is not only affecting the banks but also the
whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection
of the state of health of the industry and trade.



Granting of credit for economic activities is the prime duty of banking. Apart from
raising resources through fresh deposits, borrowings and recycling of funds received
back from borrowers constitute a major part of funding credit dispensation activity.
Lending is generally encouraged because it has the effect of funds being transferred
from the system to productive purposes, which results into economic growth. However
lending also carries a risk called credit risk, which arises from the failure of borrower.
Non-recovery of loans along with interest forms a major hurdle in the process of credit
cycle. Thus, these loan losses affect the banks profitability on a large scale. Though
complete elimination of such losses is not possible, but banks can always aim to keep
the losses at a low level.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to
the banking industry in our country sending distressing signals on the sustainability and
endurability of the affected banks. The positive results of the chain of measures
affected under banking reforms by the Government of India and RBI in terms of the
two Narasimhan Committee Reports in this contemporary period have been neutralized
by the ill effects of this surging threat. Despite various correctional steps administered
to solve and end this problem, concrete results are eluding. It is a sweeping and all
pervasive virus confronted universally on banking and financial institutions. The
severity of the problem is however acutely suffered by Nationalised Banks, followed
by the SBI group, and the all India Financial Institutions.

Magnitude of NPAs
In India, the NPAs that are considered to be at higher levels than those in other
countries have of late, attracted the attention of public. The Indian banking system had
acquired a large quantum of NPAs, which can be termed as legacy NPAs.

NPAs seem to be growing in public sector banks over the years.

• Categories of NPAs
 Sub-standard Assets - which has remained NPA for a period of 90 days to less
than or equal to 12 months
 Doubtful Assets - has remained in the sub-standard category for a period of 12
 Loss Assets - loss has been identified by the bank or internal or external auditors
or the RBI inspection but the amount has not been written off wholly.
 After classifying assets into above categories, banks are required to make
provision against these in terms of extant prudential regulations, the
provisioning norms are as under:

• Asset Provision
Classification requirements

• Substandard 10%
• Doubtful assets Up to 1 year 20%

1 to 3 year 30%

More than 3 year 100%

• Loss assets It may be either written off or fully
provided by the bank

 Gross NPAs are the sum total of all loans assets that are classified as NPAs.
 Net NPAs are those type of NAPs in which the bank deducted the provision
regarding NPAs.
 While gross NPAs reflects the quality of the loans made by banks net whereas
NPAs shows the actual burden of bank.

As on As on
Jan 4, 2008 Jan 2, 2009
Public sector banks 24.2 24.2
Foreign banks 34.1 12.1
Private sector banks 26.9 13.4
Scheduled commercial banks* 25.1 21.2
Public sector banks 19.8 28.6
Foreign banks 30.7 16.9
Private sector banks 24.2 11.8
Scheduled commercial banks* 21.4 24.0
*Includes regional rural banks


(Amount in Rs. crore)
As on March 31
Bank Standard Assets Sub-standard Assets Doubtful Assets
group /
Amount Per cent Amount Per cent Amount Per cent
-1 -2 -3 -4 -5 -6
2003 523724 90.6 14909 2.6 32340 5.6
2004 610435 92.2 16909 2.6 28756 4.3
2005 824253 94.6 10838 1.2 29988 3.4
2006 1029493 96.1 11394 1.1 24804 2.3
2007 1335175 97.2 14147 1 19945 1.5
2008 1656585 97.7 16870 1 19167 1.1
OF PUBLIC SECTOR BANKS - 2003 TO 2008 (Concld.)
(Amount in Rs. crore)
As on March 31
Bank Loss Assets Total NPAs
Amount Per cent Amount Per cent Total Advances

-7 -8 -9 -10 -11

{=(3)+(5)+(7)} {=(4)+(6)+(8)} {=(1)+(3)+(5)+(7)}

2003 6840 1.2 54089 9.4 577813
2004 5876 0.9 51541 7.8 661976
2005 5771 0.7 46597 5.4 870850
2006 5181 0.5 41379 3.9 1070872
2007 4510 0.3 38602 2.8 1373777
2008 3712 0.2 39749 2.3 1696334


From above table it may be observed that though the total NPAs amount of Public
sector Banks decreased from Rs. 54089 (crore) in year 2003 to Rs. 39749 ( crore) as at
the end of 31 March 2008 still a colossal amount is locked up in these impaired loans.
An important aspect of strengthening the assets portfolio of Public Sector Banks is to
further reduce the level of NPAs. The earning capacity and profitability of the bank are
highly affected due to this as NPAs do not generate interest income for banks while at
the same time banks are required to make provisions for NPAs from their current
profits. So the NPAs have deleterious impact on the return on assets.
Due to inadequacy of legal systems, recoveries of NPA are not likely to be quick
through legal recourse. In view of the inadequacy of legal infrastructure in prompt
reduction of NPA, the only feasible alternative is to encourage non-legal recourse.
While banks require non-legal time bound surgical solutions to meet the statutory
requirements in reducing the level of net NPA, the internal legal machinery in banks
should obviously be so strengthened as to ensure speedy disposal of suit-filed cases and
execution of decreed cases. This would require managerial efficiency on the part of
PSBs to not only reduce the average level of net NPA but also to prevent the recurrence
of this problem by ensuring addition of fresh NPA to bare minimum.

Corporate Governance

It is a system of structuring, operating and controlling a company with a view to

achieve long term strategic goals to satisfy shareholders, creditors, employees,

customers and suppliers, and complying with the legal and regulatory requirements,
apart from meeting environmental and local community needs.

The issues related to corporate governance have continued to attract considerable

national and international attention in light of a number of high-profile breakdowns in
corporate governance.

 Currently in India, about four-fifths of the banking business is under the

control of public sector banks (PSBs), comprising the SBI and its
subsidiaries and the nationalised banks.
 In view of the importance of the banking system for financial stability, sound
corporate governance is not only relevant at the level of the individual bank,
but is also a critical ingredient at the system level.
 Corporate governance in PSBs is complicated by the fact that effective
management of these banks vests with the government and the top
managements and the boards of banks operate merely as functionaries.
 Unless the issues connected with these multiple, and sometimes conflicting,
functions are resolved and the boards of banks are given the desired level of
autonomy it would be difficult to improve the quality of corporate
governance in PSBs.
 One of the major factors that impinge directly on the quality of corporate
governance is the government ownership.
 Although some ownership structures might have the potential to alter the
strategies and objectives of a bank, these banks will also face many of the
same risks associated with weak corporate governance.
 Consequently, the general principles of sound corporate governance should
also be applied to all Public sector Banks.
• Weak corporate governance translates into higher cost of capital
• Better corporate governance translates into somewhat higher returns on assets
• But much better higher returns on investment relative to cost of capital

So corporate governance is a key challenge for Public Sector

Banks in the era of globalization.

Man-power Planning

 Manpower is the biggest challenge for the public sector banks. While domestic
private sector banks are expanding their manpower to match the business

growth, public sector banks were faced with a large attrition rate of over 30 %
and are experiencing an overall deceleration in the number of employees.
Because It takes as long as 18 months for the recruitment process of a typical
state-owned bank to be concluded and of the candidates shortlisted, many drop
out on their own, and Incentivisation of government bank employees too have
failed as the fear of probe by various regulators and government agencies deter
the top management from doling out huge sums as rewards to performing
staffers. In spite of many changes that the industry has faced over the years,
essentially the role of this category of staff has remained unchanged.
 In the last seven years, public sector banks have lost 10% market share to the
aggressive private banks. By 2011, the population of youth aged between 20 and
29 years is expected to cross the 27-crore mark in India, and this segment is
more likely to be attracted to the state-of-the-art banks that would have a similar
age bracket generation across the counter. Public sector banks were more likely
to be seen as an older generation organisation where the average age group
would be 50 years.
 High average age of staff is also a cause of concern for the Public Sector Banks.
Public sector banks therefore need to implement right strategies to woo young
techno-savvy customers that prefer alternative channels to traditional banking
method. The financial sector services are undergoing a rapid change in terms of
the demographics, regulatory requirements and technology because of the high
revenues generated.
 Public sector banks were more likely to be seen as an older generation
organisation where the average age group would be 50 years.
 High average age of staff is also a cause of concern for the Public Sector Banks.
 Going forward, it would be tough to manage business as there is high
competition for high-skilled jobs.
 The banks also need to develop existing staff in newer competencies through a
systematic and rigorous training and also recruit, if necessary super specialist
and specialist in areas like technology, treasury management, marketing,
FOREX operations and project management.

So it is a challenge for Public sector Banks not only to recruit

more employees but also to recruit quality professional.


 Such personnel need to be identified, nurtured and motivated through a
systematic organizational plan to enable them to accept challenging roles early
in the career. Suitable changes in the promotion policies should take care of
aspirations of such extra ordinary and talented manpower.
 Banks will also have to pay increasing attention to education and training
including sponsorship of identified persons to MBA programmes, Phd
programmes and other long duration programmes in technology and financial
management to develop a wider managerial pool of competent people who can
be developed fast to play the role of modern banker in ever difficult and
turbulent times.
 Banks will have to introduce innovative mechanism and process to respond to
the aspirations of such talented people by providing them sabbatical leave for
professional growth by sponsorship in seminars and conferences, both nationally
and internationally, to present papers and encouraging them to join professional
organisations to develop appropriate competencies and network with fellow

There is also need to develop organisation-wide awareness about banks key-
business problems including stagnant business units, strain on profitability, cost
of operations, unexplored business opportunities, manpower costs, NPAS etc.

 The preconditions for an effective talent management is clarity of

where the organisation is, i.e., the starting point and where it wishes
to reach in a given time horizon, i.e., the destination


The massive Farm loan waiver scheme 2007 of the Union Government is disaster for
Public Sector Banks “as it will spoil the credit culture in the country.”


In budget speech of 2007 year, the Finance Minister P. Chidambaram announced the
most ambitious farm loan waiver scheme with an estimated write off of Rs. 60,000
crores covering more than 4 crore farmers. The loan waiver scheme was amend to
make it more inclusive. It offers a total waiver of Rs. 72,000 crores.
 Its highlights are as follows :
 Full loan waiver for small farmers and marginal farmers.
Waiver will cover short term crop loans as well as all the overdue instalments on
the investment credit.
 For short-term production loans, the amounts disbursed up to March 31st, 2007
and overdue as on December 31st, 2007 and remaining unpaid until February
28th, 2008 are eligible for loan waiver.
 For investment loans, the instalments of such loans that are overdue, together
with the interest are eligible for all loans disbursed up to March 31, 2007 and
overdue as on December 31st, 2007 and remaining unpaid till February 28th
 Marginal farmer is defined as cultivating agricultural land up to 1 hectare or 2.5
 Small farmer is defined as cultivating between 1 hectare and 2 hectares i.e. less
than 5 acres. Small and marginal farmers account for between 70 to 94 percent
of all farmers in most states.
 Other farmers, i.e. owning more than 5 acres or more than 2 hectares, will get
one-time settlement (OTS) relief.
 Bulk of all dry and unirrigated lands fall in districts covered by the drought
prone area programme popularly known as DPAP and the desert development
programme (DDP).
 The total number of such districts is 237.
Special package for other farmers in these 237 districts.
For other farmers in these 237 districts, the OTS relief will be 25% or Rs.
20,000, whichever is higher and not 25 percent as announced in the budget.
 On the positive side, it will help them clean up their balance sheets because with
the government reimbursing the money, they will not be required to provide for
their non-performing assets in agriculture loans.
 But the biggest drawback of the scheme is its impact on the credit culture in the
banking system.
 It will serve as a great disincentive for those borrowers who repay bank loans on

 Borrowers too now feel proud in availing the loan and then not repaying the
same and prefer waiting for waiver by some government or the other
 Those who repay the loan regularly will feel frustrated and deceived by such
waiver of loan scheme which will benefit to only those who did not repay the
loan wilfully
 Obviously such step gives award to wrong doers and punishes to those who is
honest and who keeps his word of repayment by making labour hard and
showing good performance.
 The real risk of this ill-advised political move to write-off farm loans is that it
opens up a very convenient option for future governments.
 There will be nothing to prevent governments from writing off farm loans every
five years, just ahead of general elections.
 Moreover Government has waived the loan of farmers and not that of small
traders and small scale manufacturers whose position is more pathetic than that
of a farmer
 Banks will have to sacrifice the existing loan and provide for fresh disbursal of
loan to maintain the minimum ratio and achieve the target of financing for
 What is the remedy if good borrowers of other sectors too stop repayment of
their loans ?
 One way of doing this could be to introduce a differential loan rate for farm
 Now, all farm loans up to Rs 3 lakhs are priced at 7% and the banks get a 2%
subsidy from the government on such loans.
 Based on the credit history, the loan rate for the good borrowers can be brought
down to, say, 6% or even 5%, with the government increasing the subsidy on
such loans.
 This will increase the subsidy burden on the government marginally, but isn’t it
a small price to pay to protect the credit culture?.

The challenge before the Public Sector Banks now is to prevent

these borrowers from turning into defaulters in future. So Loan
waiver scheme is emerging as new challenge for Public Sector
Banks. Moreover public sector banks suffered loss due to this
and their NPA increased in comparison to others.


Risk is inherent in any walk of life in general and in financial sectors in particular. Till
recently, due to regulated environment, banks could not afford to take risks. But of late,
banks are exposed to same competition and hence are compelled to encounter various
types of financial and non-financial risks. Risks and uncertainties form an integral part
of banking which by nature entails taking risks. There are three main categories of
 Credit Risk,
 Market Risk
 Operational Risk.

All businesses take risks based on two factors: the probability an adverse circumstance
will come about and the cost of such adverse circumstance.

Risk management is the growing challenge for Indian public sector banks because
competitive environment is increasing in public sector banks.


The banking industry has a wide array of business lines. A fair idea may be available from the
following table:

Business lines Sub groups Activities

Corporate finance Corporate finance, Mergers and acquisitions,
Municipal/Government underwriting, privatizetions,
finance, Merchant banking, securitizations, research,
Advisory services government debts, debt and
equity syndications, IPO,
secondary private placements.
Fixed income, equity, foreign
exchanges, commodities, credit,
Trading and sales Sales, market making, funding, own position securities,
proprietary positions, lending and repos, brokerage,
treasury debt, prime brokerage.

Retail banking Retail banking Retail lending and deposits,

banking services, trust and sales.

Private banking Private lending and deposits,

banking services, trust and
estates, investment advice.

Card services Merchant/Commercial/Corporate
cards, private labels and retail.

Commercial Banking Commercial Banking Project finance, real estate,

export finance, trade finance,
factoring, leasing, lending,
guarantees, bill finance.
Payment and settlement
External clients Payments and collections, funds
Agency services transfer, clearing and settlement.

custody Escrow, depository receipts,

securities lending, corporate
corporate agency corporate Issuer and paying agents.
Asset management discretionary and non- Pooled, segregated, retail,
discretionary fund institutional,
management Closed, open.
Retail brokerage retail brokerage Execution and full services.

Credit risk
Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of
credit (either the principal or interest (coupon) or both)
The management of credit risk includes
a) Measurement through credit rating/ scoring,
b) Quantification through estimate of expected loan losses,
c) Pricing on a scientific basis and
d) Controlling through effective Loan Review Mechanism and Portfolio Management.

Faced by lenders to consumers

Most lenders employ their own models (credit scorecards) to rank potential and
existing customers according to risk, and then apply appropriate strategies. With
products such as unsecured personal loans or mortgages, lenders charge a higher
price for higher risk customers and vice versa. With revolving products such as
credit cards and overdrafts, risk is controlled through the setting of credit limits.
Some products also require security, most commonly in the form of property.
 Consumers may face credit risk in a direct form as depositors at banks or as
investors/lenders. They may also face credit risk when entering into standard
commercial transactions by providing a deposit to their counterparty, e.g., for a
large purchase or a real estate rental. Employees of any firm also depend on the
firm's ability to pay wages, and are exposed to the credit risk of their employer.

 Public Sector Banks are operating in an increasingly deregulated and
competitive environment.
 Increased deregulation is reflected in several key developments over the last
decade including a market-determined interest rate environment, freedom to fix
both lending and deposit rates and increased competition from new private
sector banks which have an aggressive business posture.
 Assessing credit risk in lending to service sectors, Public Sector Banks needs a
methodology different from assessing risks while lending to manufacturing.

Integrated Risk Management Solution

In order to control risk, one must first measure it. Measurement is critical to validating
management process and improving internal discipline. As more and more business
processes become electronic, identifying are responding to risk must become faster. In
view of the potential impact and service requirements, risk management has become a
real-time concern. without an enterprise wide approach that includes standard data
definitions and integrated reporting, institutions cannot develop the consistent and
timely view of risk exposures necessary for management decision-making. To comply
with wide ranging regulatory demands, financial institutions must understand, control
and report risk across the enterprise. Management is being held legally responsible for
identifying and managing risks. At some point, rating agencies will likely establish a
risk management rating for companies in addition to existing financial ratings.


 Evolution of the real time business environment
 The developing global marketplace
 Concern about business continuity and operational reliability
 Continuous and accelerating technological change
 The need to limit earnings’ volatility and enhance shareholder value.

 But banks find compliance to Basel II norms in the above areas difficult, due to
ncreasing number of customer base of the banks, absence of effective risk
anagement solution and absence of system interfaces between the existing stand
alone applications of the banks.


In pursuance of the Financial Sector Reforms introduced since 1991 and in order to
bring about meaningful disclosure of the true financial position of banks to enable
the users of financial statements to study and have a meaningful comparison of their
positions, a series of measures were initiated.
 Transparency and disclosure norms are assuming greater importance in the
emerging environment. Banks are now required to be more responsive and
accountable to the investors.
 Banks move to disclose in their balance sheets information on maturity profiles
of assets and liabilities, lending to sensitive sectors, movements in NPAs,
besides providing information on capital, provisions, shareholdings of the
government, value of investment in India and abroad, and other operating and
profitability indicators.
 The disclosure requirements broadly covered the following aspects:
 Capital adequacy
 Asset quality
 Maturity distribution of select items of assets and liabilities
 Profitability
 Country risk exposure
 Risk exposures in derivatives
 Segment reporting
 Related Party disclosures

Transparency and disclosure standards are also recognised as important constituents

of a sound corporate governance mechanism.

Banks are required to formulate a formal disclosure policy approved by the Board
of directors that addresses the bank’s approach for determining what disclosures it
will make and the internal controls over the disclosure process.

It is a huge challenge for Public Sector Banks to implement a process for assessing
the appropriateness of their disclosures, including validation and frequency.

Challenges in Banking Security

Banking as a business involves the management of risks. While much has been said
about the financial risks, the risks arising out of the large scale implementation of
technology is of recent origin, with banks having taken to large scale use of
technology for their normal day-to-day business.

Security in banks has thus assumed significant proportions, comprising both

physical aspects in addition to those relating to Information, Information Systems
and Information Technology, all of which have an impact on the reputational risk of
a financial organisation.
 In a world where geographical barriers are losing significance and the death of
distances is already a reality, it is but essential that security be given prime
importance in a transnational scenario where large sums of money are at stake.
 While the challenges related to physical security are those which can be
confronted with relative ease, the position is much more complicated in respect
of IT security.
 It is widely accepted that security is as effective as the weakest link in a chain.
 And, in the case of banking, the weakest link, does not relate to the components
of technology (which do have an implication although), but on the person who is
part of the information supply chain, and is typically the insider in the bank
 This is supported by studies carried out by international organisations.
 These studies have indicated that a substantial portion of the breach of security
in financial institutions have occurred on account of, or have been triggered with
the aid of internal exposures or internal controls being compromised.
 Against this backdrop, the security requirements of the banking sector need to
be assigned high levels of priority.
 Information Security is something which is best experienced than explained.
 All of us have at some point of time experienced the flow of information to
persons others than to the intended users – even in a non-electronic traditional
 With networking and access to information being available at rates much larger
than before, Information Security is an activity which provides some comfort to
both the policy makers and the users of data.
 The largest set of functions in the banking sector which has benefited from the
advances in IT relate to payment systems since quick, safe and efficient transfer
of funds across the length and breadth of the country is the requirement of the
 Security in Payment Systems cannot be addressed in isolation.

 It requires the integration of work processes, communication linkages and
integrated delivery systems and should focus on stability, efficiency and risk
 Yet another prime aspect of concern in a good security policy is the role that the
human beings have in a secure computerised environment.
 It would be advisable to build security features at the application level in respect
of banking oriented products, because of the critical nature of financial data
 The financial messages should have the under noted features:
 The receipt of the message at the intended destination
 The content of the message should be the same as the transmitted one
 The Sender of information should be able to verify its receipt by the recipient
 The Recipient of the message could verify that the sender is indeed the person
 Information in transit should not be observed, altered or extracted
 Any attempt to tamper with the data in transit will need to be revealed
 Non-repudiation
 These features boil down essentially to authentication (to verify the identity of
the sender of the message to the intended recipient to prevent spoofing or
impersonation), authorisation (to control the access to specific resources for
unauthorised persons), confidentiality (to maintain the secrecy of the content of
transmission between the authorised parties), integrity (to ensure that no
changes/errors are introduced in the messages during transmission) and non-
repudiation (to ensure that an entity cannot later deny the origin and receipt and
contents of the communication).
 I must add here that in a recent case of a co-operative bank, the entire
operations, maintenance and management of the computer systems were totally
in the hands of the firm which supplied the computer software and this led to a
fraud and loss for the bank.
 Such cases cause reason for substantial concern.
 While the aspects relating to physical security leave a lot to be desired with even
the most basic security requirements not being in place (like access for
unauthorised personnel even to sensitive Cash holding areas), the security
features in the computer systems are not fully fool proof in some banks.
 International standards should be examined and adopted keeping in view the
requirements of the Indian banking industry.
 Banks need to put in place measures which conform to there is policies and
ensure the regular, periodical audit.
 An important issue is relating to the security levels of use within the various
operating departments in the banks.

 The common level of entry is the use of validation of authorised access (in the
form of authorised User-Ids) to be further authenticated by correctness of
passwords keyed in by the authorised users.
 Passwords often become ‘passed’ words in our context with no change at all in
the passwords since passwords tend to be rather fixed for long periods of time
 It is absolutely essential that passwords lapse after certain periods of time –
generally not exceeding a month at the latest.
 Authorisation of users is another activity that needs to be closely regulated and
 One of the basic requirements for implementation of security and monitoring
thereof at the various departments is the need for system administrators.
 . The proliferation of networks within an office also acts as a negative factor in
implementation of strict security features.
 Further, rights assigned need to be changed upon change of functions assigned
to the operative staff and that updation, including those related to staff who
retire have to be looked into.
 There is an imperative need to imbibe a culture of security among all operative
functionaries – whether officers or other staff and cutting across administrative
 Access to databases in computer systems and to the data contained therein have
to be strictly restricted and not available to any but those authorised to make any
changes in case of an eventuality for resolving a software lock / malfunction
which is a conscious decision by the authorised personnel taken in conjunction
with the head of the office concerned.
 Change Management is another aspect that needs to be viewed from the security
 Software (and at times hardware too), undergoes frequent updation and version
control and levels of software in use across offices is an issue which needs to be
examined in its totality for practicable implementation at all offices /


 Public Sector Banks should now go global in search of new markets, customers
and profits.
 Some of the Public Sector Banks have their presence in overseas to a limited
 The London based magazine ‘The Banker” has now listed only twenty Indian
banks including private sector banks in the list of “Top 1000 World Banks”.
 The State Bank of India, the largest bank in India, ranks only 82nd amongst the
top global banks. It is not even a 10th in size of the 9th largest bank, Sumitomo
Mitsui, which has assets of $950 billion as against SBI’s assets of $91 billion.
 Therefore, our banks are not equipped enough to compete in the international
 Realising the need to grow in size, the Indian banking system today is moving
from a regime of “large number of small banks” to “small number of large
 As per the Narasimhan Committee (II) recommendations, consolidations around
identified core competencies are taking place.
 Mergers and acquisitions in the banking sector are the order of the day.
 This trend may lead logically to promote the concept of financial super market
chain, making available all types of credit and non-fund facilities under one roof
which is challenge for public sectors bank and demand of time.

Mahatma Gandhi’s perception of a customer was as follows:

“He is not dependent on us. We are dependent on him. He is not an interruption

on our work. He is the purpose of it. He is not an outsider on our premises. He is
part of it. We are not doing him a favor by serving him. He is doing us a favor by
giving us an opportunity to do so.”

As far as the customer I concerned, he is the pivot of all activities in the era of
consumerism. Customer is god in the UK and USA. Customer is the king in Japan.
But, the customer is the ‘Boss’ in India and the ‘Boss’ is always right.

 The Public Sector Banks may need to include customer oriented approach or
customer focus in their five areas of businesses such as cash accessibility, asset
security, money transfer, deferred payment and financial advices.
 There are four strategies available to customer relations' managers:
 To win back or save customers
 To attract new and potential customers
 To create loyalty among existing customers and
 To up sell or offer cross services.
 In order to develop close relationship with the customers the Public Sector
Banks have to focus on the technology oriented innovations that offer
convenience to the customers.
 Today customers are offered ATM services, access to internet banking and
phone banking facilities and credit cards. These have elevated banking beyond
the barriers of time and space.
So providing better services than Private Sector Banks to customer is a challenge
for Public Sector Banks. Because a satisfied customer brings in more customers and
he is the best advertisement for the bank.


 For strengthening the legal system, the banks may have to consider
providing services of trained legal officers at controlling/branch
levels, depending upon the quantum of NPA. Banks are to engage
services of dynamic young lawyers to have desired momentum in
follow-up of suit-filed cases for timely disposal and subsequent
execution of decrees.
 This would require managerial efficiency on the part of PSBs to not
only reduce the average level of net NPA but also to prevent the
recurrence of this problem by ensuring addition of fresh NPA to bare
minimum. There is need for continuous improvement in asset quality
by strengthening skill at the grass root level, adopting regular inter-
face with borrowers, ascertaining periodical operating performance
of the firm etc.
 To minimize erosion of asset quality in banking, there is immediate
need for implementation of rigorous systems to eliminate diversion
of funds by the borrowers towards less viable activities such as
investments, loans to subsidiaries facing financial woes etc.
 Banks should have framework for acceptable compromise proposals
and supportive recovery policy directed towards out-of-court
 Appointment of recovery agents, utilizing services of private security
agencies of ascertaining means of NPA borrowers etc. are the other
areas, which require fresh review.
 Quality asset building will also require up-to-date market information
on various industries, a deeper and penetrating insight about the
financial transactions of large borrowal groups, economic trends in a
globalised environment and industry knowledge about new areas for
financing like software, infrastructure, service sector and other IT
based industries etc.

• It is desirable that all the banks are brought under a single Act so
that the corporate governance regimes do not have to be different
just because the entities are covered under multiple Acts of the
Parliament .
• Although the Reserve Bank maintains a tight vigil and inspects these
entities thoroughly at regular time intervals, the quality of corporate
level governance mechanism does not appear to be satisfactory.
• Oversight by the board of directors or supervisory board;
• Oversight by individuals not involved in the day-to-day running of the
various business areas;
• Direct line supervision of different business areas; and
• Independent risk management, compliance and audit functions.
• Banks need to develop mechanisms, which can help them ensure
percolation of their strategic objectives and corporate values
throughout the organisation.
• Boards need to set and enforce clear lines of responsibility and
accountability for themselves as well as the senior management and
throughout the organisation.
• In order to attract quality professionals, the level of remuneration
payable to the directors should be commensurate with the time
required to be devoted to the bank’s work as well as to signal the
appropriateness of remuneration to the quality of inputs expected
from a member.
• The directors could be made more responsible to their organisation
by exposing them to an induction briefing need-based training
programme/seminars/workshops to acquaint them with emerging
developments/challenges facing the banking sector.


 They would need to hire people in large numbers over next five years to
maintain growth and stay competitive. The entire HR framework needs to be
revamped and the skill sets of existing staff needs to be strengthened. The banks
have to suitably realign their existing human resources from surplus to deficit
pockets and readjust staffing pattern in a computerised environment.
 Surplus staffs from very large branches which are now computerised, need to be
relocated or assigned newer jobs such as marketing etc. Mobility of staff has to
be negotiated with employees' organizations as a measure to improve
organizational efficiency and improve productivity.
 About 70% staff in each bank constitutes clerical and subordinate staff

 There is the need to re-define the clerical roles in the bank.
 There is also a need to enrich clerical roles by introducing discretionary
elements in front-line clerical roles and giving them responsibility of higher
nature such as initiating correspondence, working in marketing teams,
operational roles, public relation roles etc.
 The banks also need to develop existing staff in newer competencies through a
systematic and rigorous training.
 Needless to say that succession planning in managerial cadre must occupy
central concern for bank management.


 Public Sector Banks should not only take care of the sum total of its individual
human capital, but also how effectively it draws out the best from its talent
personnel at any point of time .
 Banks have an excellent pool of competent personnel in all the cadres. Such
personnel need to be identified, nurtured and motivated through a systematic
organizational plan to enable them to accept challenging roles early in the
 Suitable changes in the promotion policies should take care of aspirations of
such extra ordinary and talented manpower.
 Banks will also have to pay increasing attention to education and training
including sponsorship of identified persons to MBA programmes, Phd
programmes and other long duration programmes in technology and financial
management to develop a wider managerial pool of competent people who can
be developed fast to play the role of modern banker in ever difficult and
turbulent times.
 Banks will have to introduce innovative mechanism and process to respond to
the aspirations of such talented people by providing them sabbatical leave for
professional growth by sponsorship in seminars and conferences, both nationally
and internationally, to present papers and encouraging them to join professional
organisations to develop appropriate competencies and network with fellow
Loops in customer services

Facts about customers

Ninety five percents of customers do not complain even if they are dissatisfied bcoz of
indifferent attitude of not to bother unnecessarily and accept such bad service as part of
human nature.
Because do customers want

1-Customers want control over their decisions

2- Customers want to achieve their goals
3- Customers want to preserve their self respect.
4- Customers want to be treated fairly
5- Customers want friendly welcome and reception
6- Customers want to know what’s going on
7- Customers want a feeling of security and safety
8- Customers want to feel like VIPs
9- Customers want honesty

1- The “may I help you counter” could not come up to the level of expectation as
there is a lack of spirit in implementing it. This can be a vital customer care
capsule in the panacea kit of the bank to heal al wounds.
2- The cheques for collection handed over the counter are rarely acknowledged in
spite of the RBI’s insistence. Recently the RBI advised all SCBs to implement
the recommendations of the committee on procedures and performance Audit on
public service. It has suggested that cheques either be dropped in a box or
tendered at counter when they should be acknowledged.
3- Many times the complaints could relate to discourteous behavior of counter
staff-this should be handled carefully. If the customer is correct and has too
many such complaints against the staff, a stern action is called for and client
must be advised.
In sum and substance a good customer service means a broad smile on customer’s
face as they leave the bank after finishing their business.


Indian Public Sector Banks are facing innumerable challenges such as

worrying level of NPAs, deteriorating asset quality, increasing pressures on
profitability, asset-liability management, liquidity risk management, market risk
management and ever tightening prudential norms. Operating in this demanding
environment has exposed banks to various challenges. The post-reform period
witnessed the following major challenges for public sector banks in India –

Enhancement of customer service; application of technology; implementation of Basel

II; improvement of risk management systems; implementation of new accounting
standards; enhancement of transparency & disclosures.

The boom in the field of retail banking and the intense competition among the banks to
increase the customer base has resulted in the large disbursement of consumer loans,
home loans, loans on credit cards, auto loans, educational loans etc. on easy terms
without much scrutiny. This has brought with it an increase in the no. of cases of
default in loan repayment thus increasing the bank’s NPAs.

Managing customers is one of the main issues faced by banks. The demands and
expectations of the customers grow at a much faster rate than the banks can equip
themselves to be with them. If the service levels of the product levels are not up to the

customer satisfaction, there is always a danger that the customer might shift his
transactions elsewhere. So always give customers more than they expect to get.

Multiple regulations are the main weakness for PSBs. It has not the single controlling
system while private banks have. PSBs are also guided by govt. and controlled by RBI
and it has also their union. So there is trice controlling system that’s why any policy
takes time in being implemented. This is the main reason of delayed progress of PSBS.

The annual report 2007-08 of RBI shows that position of public sector banks is on
steady progress.
• Demand deposits, borrowings and other liabilities are increasing.
• Assets as current assets and other loan cash credit is increasing which shows a
sign of growing network.
• Balance with banks and money at call and short notice decreased last year.
• Other approved securities also decreased in comparison to previous year.
• Consolidated balance sheet of banks shows that banks are on progress.
Liabilities and assets have been increased in comparison to last year but even
then public sector banks are not progressing equally as private sector banks
because of being regulated and controlled system. Last year kisan loan was
forgiven worth Rs. 60,000 crores and mostly major no frill A/cs has been open
in public sector banks. So NPA has been increased because operational cost has
been increasing due to more A/cs and transaction and PSBs are liable to open
branches in rural areas.

Executive summery

The world of banking and finance is changing very fast and banks are
transforming themselves with the focus on knowledge. Therefore there is a need for
today’s bank employees to keep themselves updated with a new set of skills and
knowledge. Banks and technology are evolving so rapidly that bank staff must
continually seek new skills that enable them not only to respond to change, but also to
build competence in handling various queries raised by customers as well.

Indian banks are facing innumerable challenges such as worrying level of NPAs,
deteriorating asset quality, increasing pressures on profitability, asset-liability
management, liquidity risk management, market risk management and ever tightening
prudential norms. Besides this, the disclosure requirements are also increasing.

The primary challenge for banks is to provide consistent service to customers

irrespective of the kind of channel they use. Banks in India have been working towards
a vision that includes transformed branches, enhanced telephone services, and leading
edge internet, banking functions that provide a consistently positive multi-channel
experience for customers. Even for PSBs, the ongoing and future investments in
technology are massive. It is expected that the provision of financial services through a
versatile technology platform will enable these banks to acquire more customers, cut
costs, and improve service delivery. Though many positive signs are already visible in

India, including a higher acceptance of technology by banks and customers, it is a
reality that most projects have not yet been deployed on a large scale.

However, challenges before public sector banks are plenty and of a different
kind. While they have to handle volumes which are mind boggling, there are also
issues of legacy, old habits and political pressures. Systems of accounting, control and
delegation were set up decades ago and adoption of technology in terms of ‘real time’
banking and its compatibility with all phases of banking is not yet adequately
perceived. Further more the security risk involved in computerization is directly related
to the size of the network. For PSBs, the major problems are in the form of security
risks, network downtime, scarcity of trained personnel, expensive system upgrades and
recurring costs given the massive scale of their current operations.

Banks rely on innovative ideas to increase their earnings. Naturally, idea

generators (human capital) become an even more important resource than the physical
and financial ones. The entry of new generation private sector banks and evolving
technology has been changing the face of the Indian banking industry. It is necessary for PSBs
to adopt a standardized customer services code to remain competitive and profitable.


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