Chapter -1 INDUSTRY PROFILE

1.1

INDIAN BANKING

The Reserve Bank of India is the central bank of the country. Central banks are a relatively recent innovation and most central banks, as we know them today, were established around the early twentieth century. The Reserve Bank of India was set up on the basis of the recommendations of the Hilton Young Commission. The Reserve Bank of India Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank, which commenced operations on April 1, 1935. The Bank was constituted to * Regulate the issue of banknotes * Maintain reserves with a view to securing monetary stability and * To operate the credit and currency system of the country to its advantage. The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India, the management of Government accounts and public debt. The existing currency offices at Calcutta, Bombay, Madras, Rangoon, Karachi, Lahore and Cawnpore (Kanpur) became branches of the Issue Department. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon. Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma till Japanese Occupation of Burma and later upto April, 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan up to June 1948 when the State Bank of Pakistan commenced operations. The Bank, which was originally set up as a shareholder's bank, was nationalised in 1949. An interesting feature of the Reserve Bank of India was that at its very inception, the Bank was seen as playing a special role in the context of development, especially Agriculture. When India commenced its plan endeavours, the development role of the Bank came into focus, especially in the sixties when the Reserve Bank, in many ways, pioneered the concept and practise of using finance to catalyse development. The Bank was also instrumental in institutional development and helped set up insitutions like the Deposit Insurance and Credit Guarantee Corporation of India, the Unit Trust of India, the Industrial Development Bank of India, the National Bank of Agriculture and Rural

Development, the Discount and Finance House of India etc. to build the financial infrastructure of the country. With liberalisation, the Bank's focus has shifted back to core central banking functions like Monetary Policy, Bank Supervision and Regulation, and Overseeing the Payments System and onto developing the financial markets. 1.2 COMMERCIAL BANK

Amongst the banking institutions in the organized sector, the commercial banks are the oldest institutions having a wide network of branches, commanding utmost public confidence and having the lion shares in the total banking operations. Initially they were established as corporate bodies with share holdings by private individuals, but subsequently there has been a drift towards central ownership and control. Upto late sixties commercial banks were mainly engaged in financing organized trade, commerce and industry, but since then they are actively participating in financing agriculture, small business and small borrowers also. 1.3 PROGRESS OF COMMERCIAL BANKING IN INDIA

Banking in India on western lines had started from the beginning of 19th century. The first joint stock was established at Calcutta by the name of Hindustan and was under European management. But this bank failed at that time, the bank of Bengal (1806), bank of Bombay (1840) and bank of madras (1843) were started with the financial participation of the government. These banks were called as the presidency banks and were given the right of note issue in their respective regions. The first purely Indian joint stock bank was the Oudh commercial bank which came into existence in 1889. The swadeshi movement of 1905 gave great stipules to the starting of the Indian Banks. The Indian banking system had gone through a series of crisis and consequent bank failures. Its growth was quite slow during the first half of this century. But after independence, the Indian banking system recorded rapid progress. This was due to planned economic growth, increase in money supply, growth of banking habit, control and guidance by the

Reserve Bank and the nationalization of top banks etc. The nationalization of 10 top Banks in July 1969 gave banking a sense of direction and purpose. In 1980, there was another nationalization of six smaller banks. 1.4 FUNCTIONS OF COMMERCIAL BANKS

The business of a commercial Bank is primarily to hold deposits and make loans and investments with the object of securing profit for its shareholders. It performs the following functions: Receiving deposits from the Public Making loans and advances Use of the cheque system Transfer of funds Other functions: 1. Issuing and operating credit cards (Visa, Master) etc., 2. Keep the valuable articles of customers in safe custody. 3. Making and receiving payments on behalf of its depositors. 1.5 LENDING OPERATIONS OF COMMERCIAL BANKS

Lending of funds to the constituents, mainly traders, business and industrial enterprises, constitutes the main business of the banking company. The major portion of the banks funds employed by way of loans and advances which is the most profitable employment of its funds. The major part of the banks income is not without certain inherent risks largely depending on the borrowed funds a banker cannot afford to take undue risks in lending. While lending his funds, a banker therefore, follows a very cautious policy in order to minimize the risks. There are three cardinal principles of banks lending that have been followed by the commercial banks since long. These are the principles of safety-liquidity, and

profitability. The central Government and the Reserve bank have issued a number of directions in this regard, highlighting the social purpose which they have to sub serve. The traditional principles of bank lending have, therefore, been followed with certain modifications. 1.6 RETAIL LENDING

Banking, as defined in banking regulation act, is acceptance of deposits for the purpose of lending and investment and not repayable otherwise than on demand. With the limited network of commercial banks, and monopolies of few presidency banks, the business flow was spontaneous and bankers had nothing more to do than banking defined in the statute book. The nationalization of major commercial banks in the late 1960’s and early 1980’s and the introduction of lead bank scheme resulted in large scale expansion of bank network in the country. Added to this, the financial sector reforms have brought in the entry of new private sector and foreign banks into the country. The conventional banking as outlined above has given way for professional and hi-tech banking. There has been a paradigm shift from the monopolies of public sector banks to competitive banking. Public sector banks can no longer remain complacent with their conventional products and services. There where times, when the corporate clientele occupied the centre stage and retail ones where pushed to the back seats. The slow down of the economy, sluggish industrial growth, slump in agricultural activities etc. have pushed the commercial banks to look to the retail sector. Retail banking has both pros and cons. In a situation like today, the bankers have very little option, but to chant the ‘retail mantra’.

What is Retail Banking? Retail banking can be crudely defined as the antonym of wholesale or bulk banking. It is nothing, but shade business. A deposit of Rs. 1 lakh from single customer vs small deposits of Rs. 10000 from ten different customers. The corporate and retail divide is nothing but internal segmentations and the customers remains always a customer. Advantages of retail banking: Retail banking has inherent advantages out weighing certain disadvantages. Advantages are analyzed both from the resource angle and asset angle. Resource: Stable and constitute core deposits. Less bargaining for additional interest. Low cost funds. Builds customer base. Increases subsidiary business. A safe and convenient saving avenue. Assets side: Better yield and improved bottom line. Good avenue for funds deployment. Lower risk and NPA perception. Helps economic revival of the nation through increased production activity. Improves lifestyle and fulfills aspirations of the people through affordable credit. Innovative product development. Minimum marketing efforts in a demand driven economy. Risk weight in certain segments like housing loans.

Disadvantages of retail banking: Retail banking, though by and large, is very handy in times of slow credit off take, is not without certain disadvantages. A major disadvantage is monitoring and follows up of huge volume of loan accounts. Housing loan by virtue of its long repayment term in the absence of proper follow-up, they can become NPA’s (Net Performing Assets). From Credit Rationing to Credit Marketing: Banks are awash with liquidity. Prime corporates do not borrow from banks except at sub – PLR rates. Other corporates are not favored by banks. Suddenly there is a great change in attitude of the banks. The name of the game is no longer ‘Lending to big corporates, huge amounts to create loan assets’. Retail credit is now welcome even from RBI’s perspective. Consumer credit is no longer considered as unproductive, as it triggers demand for consumer products, which in turn helps manufacturers in a period of economic showdown while the rates of interest on consumer credit have fallen, there is still scope for further deduction. Fixed interest rates on housing loans have fallen sharply, but not the floating rates, which are linked to medium and long term PLR’s. Banks refuse to reduce these rates, which appears rather unfair. Credit card business is growing and even Public Sector banks have started marketing these cards. The interest rate on credit card however is over 2.5% for with drawl cash. Bank is reluctant to reduce its interest rate as it hits their bottom. The personal banking segment customers have become the centre of attraction. It is their deposits and savings acc. That are actively sought after, and not mega deposits at a slightly higher rate of interest. Banks are truly spreading their deposits net rather widely.

Does Retail Credit help the Economy? “What matters is what for you is fiancé and not what against”, says the RBI quite often. Its implication is obvious: bank fiancé being scarce and as there are competing claimants, it has to be rationed in the best interests of national economic prosperity, by ensuring that loan funds flow to productive sectors. That is why the RBI rightly stresses that purpose orientation and end use principle are important in lending. Infact, RBI has no0t encouraged consumer finance till very recently. However, things have radically changed. Banks are awash with excess liquidity, interest rates and inflation southwards. Corporates do not borrow from banks in a big way due to variety of reasons like economic slow down, infrastructural constraints, etc. Prime corporates manage to secure sub-PLR rates. Under these circumstances banks are forced to look into the retail segment for lending and RBI no longer applies the brakes. Retail credit is not unproductive from the natio0nal economy prospective. The spurt in retail credit like consumer finance, automobiles, two wheelers, financial services and home loans sector indirectly help the economy by pushing up the sales of the products and services involved. That is why central bankers now view with favor retail segment lending. Interest rates are still high on consumer finance part of the retail credit which includes personal loans, clean loans, share loans, equipment finance loans, etc. Perhaps, interest rates while fall further in course of time. Banks need to avoid scattered lending and concentrate on contiguous arrears and institutional employees for financing. Government banks have to understand that rigorous marketing is essential to face competition and they have to device ways to train and deploy a percentage of the surplus staff in marketing efforts. Innovations like gratuated payment mortgages, adjustable rate mortgages etc. have to be introduced to suit the convenience of the borrowers, in place of the present stand alone EMI structures.

The Retail Mantra Indian Banking till recently, was not known for its aggressiveness in retail banking, even though there is tremendous scope to build up high volumes. Retail loans account for a mere 2-6% of GDP in India, in comparison to around 40-60% in Korea and Taiwan and 75% in USA. Thanks to the radical change in the perception, banks in India are now extending retail finance very significantly to the sectors like housing, consumer durables, share loans and other personal loans. With the onset of superior technology, retail products have become cost effective with new channels of distribution like ATM’S, credit cards, Internet, mobile phones, etc. technology is also literally forcing banks to design more innovative products. Credit products have to possess pricing efficiency with provision of integrated services. Insurance pricing will become more rational. Investing will become automated, enabling consumers to develop portfolios that meet their personal needs and risk preferences. Towards a more Profitable Banking Banks are chasing retail deposits, which have vast potential to reduce cost of funds. In this endeavor, they are helped with the modern banking devices like Tele banking, Internet banking, Mobile, banking, Credit cards, etc. On the assets side, in a scenario of economic slowdown and rising defaults, corporates are no longer the preferred borrowers. Personal segment advances have therefore come to the limelight. There is the fierce competition in the form of balance takeovers for credit cards and housing loan out standings, on finer terms. While retail banking results in wide distribution of credit risk, the transaction costs could be higher, except in an automated environment.

Retailing : A safe bet Economic slowdown could be fought through retail banking. Competition, rising NPA’s, low employee productivity, high operation costs, low quality corporate credit are the reasons that pushed banks into the retail way. Banks need to adopt strategies like product innovation, high quality service, speed of delivery, etc. Retail banking: gaining momentum Retail banking has made massive strides from the beginning of this millennium. Almost all banks and leading lending agencies are now vying with each other to park their funds to the maximum extend in retail banking sector, since it is a safe and secured advance with better income earning. Leading finance companies and commercial banks ion the public and private sectors including all the nationalized banks and new and old generation private banks, are launching innovative loan products / schemes tailor made to suit all sections of the society / different sectors of the public.

1.7 STRUCTURE OF THE ORGANISED BANKING SECTOR IN INDIA.

1.8 THE MAJOR PLAYERS (INCLUDING PUBLIC, PRIVATE, AND FOREIGN SECTOR) IN THE INDIAN BANKING INDUSTRY

Public Sector Banks Bank of Baroda, State Bank of India, Canara Bank, Punjab National Bank, Allahabad Bank

Private Sector Banks HDFC Bank, ICICI bank, Kotak Mahindra Bank, UTI Bank

Foreign Sector Banks Citi Bank, Standard Chartered PLC, HSBC Bank, ABN AMRO Bank, American Express

1.9 MARKET SHARE COMPARISON The market share is defined as a bank’s total business in a particular segment (say, deposits or advances) divided by the overall industry size for the year under review. Obviously, the total banking business, that is, the business of all banks, keeps growing year after year. It is reasonable to expect that the actual business mobilised by each bank will also grow but its market share may remain the same or even decline. The term public sector banks (PSBs) is too vast and heterogeneous in scope to be useful in any analysis. It is, therefore, customary to adopt the following classification: SBI, associates of SBI, nationalised banks, old private banks, new private banks and foreign banks. The first three categories are government owned. Nationalised banks are those taken over by the Government in two phases beginning 1969. New private banks were set up in the reform era of the 1990s with adequate capital and a modern technology platform. With no constraint imposed by government ownership or trade unions, these banks were expected to do well. But it is only a few of them with the advantage of strong promoters that have done well. New private banks gain Even so, the performance of the relatively small number of new private banks has been good enough to redraw the contours of the banking space and make a big dent in the market share of SBI as also in those of the old private banks and nationalised banks. According to the RBI report, between 2001-02 and 2006-07, the banking industry, on an average, grew by roughly 20 per cent a year to Rs. 46,19,373 crore from Rs. 18,51,367 crore in March 2002. (The RBI defines banking business as deposits minus advances minus inter-bank liabilities). The new private banks led by ICICI Bank grew by 35 per cent per annum. Their market share has gone up from 9 per cent (2002) to 16 per cent (2007). Old private banks lost two percentage points from 7 per cent to 5 per cent and foreign banks have retained their 6 per cent share over the five year period. Nationalised banks have seen their market share drop by one percentage point to 49 per cent. SBI and its associate banks put together have lost four percentage points to 24 per cent.

Clubbing SBI and its associates may be unfair to the latter. In fact, associates of SBI — seven including State Bank of Saurashtra — have not fared badly at all when compared to the industry average and in fact have done very well compared to SBI. In fact, if one analyses over a longer, say, seven year period beginning 2000, there will be more startling conclusions. An interesting study made by Janmejaya K Sinha, India head of leading consultancy firm Boston Consulting, and published in a financial daily, has some startling conclusions. Between 2000 and 2007, the nationalised banks’ share in deposits fell by five points. SBI’s share fell from 22 per cent to 16 per cent, a six point drop over seven years. To put it differently in percentage terms, SBI has lost 27 per cent. Equally significant, SBI’s associates more or less retained their share. The practice of clubbing SBI and its associates is probably meant to play down SBI’s loss of market share. Obviously, this has added significance in the context of the almost certain merger of SBI and its associates. Will SBI’s slide be checked after the merger or will it drag the associates too downhill? Nationalised banks have been losing their market shares by far less than SBI. The other big category of losers has been the old private banks. The market share is but one of the several yardsticks to measure a bank’s performance. There are a number of related questions that need to be asked and can be answered only by looking at the totality of circumstances. For instance, SBI’s loss in market share has translated into ICICI Bank’s gain. Again, while the performance of individual new private banks has been commendable, there were many licensed in the 1990s that have disappointed. So, is it possible to base these important developments _ such as loss of market share _ on ownership patterns? Here again, SBI has always been less of a government bank than other nationalised banks of 1969. Yet it has lost significant market shares to its competitors. There are obviously a number of other factors at play here. These include HR policies, the speed of decision making and the ability to scale up financial

technology, to name just a few. For now, the relative alignments in the market shares of banks may be the best indicator of things to come. The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 67,000 branches spread across the country. The first phase of financial reforms resulted in the nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn resulted in a significant growth in the geographical coverage of banks. Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as “priority sectors”. The manufacturing sector also grew during the 1970s in protected environs and the banking sector was a critical source. The next wave of reforms saw the nationalization of 6 more commercial banks in 1980. Since then the number of scheduled commercial banks increased four-fold and the number of bank branches increased eight-fold. After the second phase of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the foreign banks. The new private sector banks first made their appearance after the guidelines permitting them were issued in January 1993. Eight new private sector banks are presently in operation. These banks due to their late start have access to state-of-the-art technology, which in turn helps them to save on manpower costs and provide better services. During the year 2000, the State Bank of India (SBI) and its 7 associates accounted for a 25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same period. The share of foreign banks (numbering 42), regional rural banks and other scheduled commercial banks accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41 percent, 3.14 percent and 12.85 percent respectively in credit during the year 2000.

At the all India level, the credit-deposit (C-D) ratio of commercial banks stood at 71.5% as of September 2007. Among states and union territories, Tamil Nadu (TN) reported the highest C-D ratio at 109.8%. TN was followed by Chandigarh with a ratio of 100.2%. Foreign banks had the highest C-D ratio of 79.9%. For SBI and associates and other scheduled commercial banks, the C-D ratio was 72.5%. The ratio was lower for nationalised banks (70.2%), and lowest for RRBs (61.5%). The C-D ratio of all commercial banks in metros was the highest at 83.2%, followed distantly by rural centres (60.5%) and urban centres (56.9%). Semi-urban centres recorded the lowest C-D ratio at 52%. The Current Scenario The industry is currently in a transition phase. On the one hand, the PSBs, which are the mainstay of the Indian Banking system are in the process of shedding their flab in terms of excessive manpower, excessive non Performing Assets (NPAs) and excessive governmental equity, while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. PSBs, which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling revenues from traditional sources, lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes. The private players however cannot match the PSB’s great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several such instances. For instance, HDFC Bank’s merger with Times Bank ICICI Bank’s acquisition of ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger however opened a pandora’s box

and brought about the realization that all was not well in the functioning of many of the private sector banks. Private sector Banks have pioneered internet banking, phone banking, anywhere banking, mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other services and integrated them into the mainstream banking arena, while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Also, following India’s commitment to the W To agreement in respect of the services sector, foreign banks, including both new and the existing ones, have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches. Talks of government diluting their equity from 51 percent to 33 percent in November 2000 have also opened up a new opportunity for the takeover of even the PSBs. The FDI rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners. Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation. Aggregate performance of the Banking Industry: Aggregate deposits of scheduled commercial banks increased at a compounded annual average growth rate (Cagr) of 17.8 percent during 1969-99, while bank credit expanded at a Cagr of 16.3 percent per annum. Banks’ investments in government and other approved securities recorded a Cagr of 18.8 percent per annum during the same period. In FY01 the economic slowdown resulted in a Gross Domestic Product (GDP) growth of only 6.0 percent as against the previous year’s 6.4 percent. The WPI Index (a measure of inflation) increased by 7.1 percent as against 3.3 percent in FY00. Similarly, money supply (M3) grew by around 16.2 percent as against 14.6 percent a year ago. The growth in aggregate deposits of the scheduled commercial banks at 15.4 percent in FY01 percent was lower than that of 19.3 percent in

the previous year, while the growth in credit by SCBs slowed down to 15.6 percent in FY01 against 23 percent a year ago. The industrial slowdown also affected the earnings of listed banks. The net profits of 20 listed banks dropped by 34.43 percent in the quarter ended March 2001. Net profits grew by 40.75 percent in the first quarter of 2000-2001, but dropped to 4.56 percent in the fourth quarter of 2000-2001. On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the norms, it was a feat achieved with its own share of difficulties. The CAR, which at present is 9.0 percent, is likely to be hiked to 12.0 percent by the year 2004 based on the Basle Committee recommendations. Any bank that wishes to grow its assets needs to also shore up its capital at the same time so that its capital as a percentage of the riskweighted assets is maintained at the stipulated rate. While the IPO route was a muchfancied one in the early ‘90s, the current scenario doesn’t look too attractive for bank majors. Consequently, banks have been forced to explore other avenues to shore up their capital base. While some are wooing foreign partners to add to the capital others are employing the M& A route. Many are also going in for right issues at prices considerably lower than the market prices to woo the investors.

Interest Rate Scene: The two years, post the East Asian crises in 1997-98 saw a climb in the global interest rates. It was only in the later half of FY01 that the US Fed cut interest rates. India has however remained more or less insulated. The past 2 years in our country was characterized by a mounting intention of the Reserve Bank of India (RBI) to steadily reduce interest rates resulting in a narrowing differential between global and domestic rates. The RBI has been affecting bank rate and CRR cuts at regular intervals to improve liquidity and reduce rates. The only exception was in July 2000 when the RBI increased the Cash Reserve Ratio (CRR) to stem the fall in the rupee against the dollar. The steady fall in the interest rates resulted in squeezed margins for the banks in general. After the first phase and second phase of financial reforms, in the 1980s commercial banks began to function in a highly regulated environment, with administered interest rate structure, quantitative restrictions on credit flows, high reserve

requirements and reservation of a significant proportion of lendable resources for the priority and the government sectors. The restrictive regulatory norms led to the credit rationing for the private sector and the interest rate controls led to the unproductive use of credit and low levels of investment and growth. The resultant ‘financial repression’ led to decline in productivity and efficiency and erosion of profitability of the banking sector in general. This was when the need to develop a sound commercial banking system was felt. This was worked out mainly with the help of the recommendations of the Committee on the Financial System (Chairman: Shri M. Narasimham), 1991. The resultant financial sector reforms called for interest rate flexibility for banks, reduction in reserve requirements, and a number of structural measures. Interest rates have thus been steadily deregulated in the past few years with banks being free to fix their Prime Lending Rates (PLRs) and deposit rates for most banking products. Credit market reforms included introduction of new instruments of credit, changes in the credit delivery system and integration of functional roles of diverse players, such as, banks, financial institutions and non-banking financial companies (NBFCs). Domestic Private Sector Banks were allowed to be set up, PSBs were allowed to access the markets to shore up their Cars. An analysis of Indian Banking sector including Growth in advances and deposits, Market share, NPAs, CAR, Exposure norms, Retail Banking Initiatives and Major Players: - The Reserve Bank of India (RBI), as the central bank of the country, closely monitors developments in the whole financial sector. - The banking sector is dominated by Scheduled Commercial Banks (SCBs). As at endMarch 2002, there were 296 Commercial banks operating in India. This included 27 Public Sector Banks (PSBs), 31 Private, 42 Foreign and 196 Regional Rural Banks. Also, there were 67 scheduled co-operative banks consisting of 51 scheduled urban cooperative banks and 16 scheduled state co-operative banks. - Scheduled commercial banks touched, on the deposit front, a growth of 14% as against 18% registered in the previous year. And on advances, the growth was 14.5%against 17.3

%

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earlier

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- State Bank of India is still the largest bank in India with the market share of 20%. ICICI and its two subsidiaries merged with ICICI Bank, leading creating the second largest bank in India with a balance sheet size of Rs1040bn. - Higher provisioning norms, tighter asset classification norms, dispensing with the concept of ‘past due’ for recognition of NPAs, lowering of ceiling on exposure to a single borrower and group exposure etc., are among the important measures in order to improve the banking sector. - A minimum stipulated Capital Adequacy Ratio (CAR) was introduced to strengthen the ability of banks to absorb losses and the ratio has subsequently been raised from 8% to 9%. It is proposed to hike the CAR to 12% by 2004 based on the Basle Committee recommendations. - Retail Banking is the new mantra in the banking sector. The home loans alone account for nearly two-third of the total retail portfolio of the bank. According to one estimate, the retail segment is expected to grow at 30-40% in the coming years. - Net banking, phone banking, mobile banking, ATMs and bill payments are the new buzz words that banks are using to lure customers. - With a view to provide an institutional mechanism for sharing of information on borrowers/ potential borrowers by banks and Financial Institutions, the Credit Information Bureau (India) Ltd. (CIBIL) was set up in August 2000. The Bureau provides a framework for collecting, processing and sharing credit information on borrowers of credit institutions. SBI and HDFC are the promoters of the CIBIL. - The RBI is now planning to transfer of its stakes in the SBI, NHB and National Bank for Agricultural and Rural Development to the private players. Also, the Government has sought to lower its holding in PSBs to a minimum of 33 per cent of total capital by allowing them to raise capital from the market. - Banks are free to acquire shares, convertible debentures of corporates and units of equity-oriented mutual funds, subject to a ceiling of 5% of the total outstanding advances (including Commercial Paper) as on March 31 of the previous year. - The finance ministry spelt out structure of the government-sponsored ARC called the Asset Reconstruction Company (India) Limited (ARCIL), this pilot project of the

ministry would pave way for smoother functioning of the credit market in the country. The Government will hold 49% stake and private players will hold the rest 51% - the majority being held by ICICI Bank (24.5%).

FY08 (Rs bn) SBI ICICI Bank Canara Bank PNB Bank of India Bank of Baroda HDFC Bank Total

Advances Market share 1,955 631 476 472 458 356 177 4,687 22.7% 7.3% 5.5% 5.5% 5.3% 4.1% 2.1% 1.9% 54.4%

Standard Chartered 162

The fact that the top 8 banks account for barely 54 per cent of the market share suggests that several smaller players occupy the remaining 46 per cent. It is here that the foreign players see the 'opportunity'. Although the smaller players together account for a reasonable share, most of them are undercapitalized, on a standalone basis. The need to cater to the burgeoning credit demand also calls for additional capital requirement, for which their foreign counterparts can come to the rescue of the smaller Indian banks. Also, since the new foreign players will not be allowed to expand freely, the ones taking the subsidiary route for expansion will not be subjected to rural branch norms (25 per cent of branches to be set up in rural areas) as well as priority sector lending requirement (35 per cent). They can thus concentrate their focus on the lucrative urban markets.

Chapter –2 PROFILE OF THE BANK

2.1 ORIGIN OF KARNATAKA BANK The success story of any organization are shown by visionary entrepreneurs perceiving a potential opportunity and relating to their common aspiration and growing concern through collective efforts, shared vision and with a definite purpose. They are guided by their own philosophy that gets reflected in the various initiatives and activities of their organization. Through an effective percolation of such a philosophy to all levels, they transform excellence into a way of life in their functioning. The success story of the Karnataka bank limited is no exception. The South Kanara district of Karnataka State well known as the cradle of banking has witnessed the birth of 22 banks since 1906. There was a patriotic zeal and fervour in the district after swadeshi movement. Several merchants, landlords, doctors and lawyer with an indomitable zeal began to conceptualize modern banking concepts. 5 banks have been originated out of it. One is private banks - Canara Bank, Syndicate Bank, Vijaya Bank, Corporation Bank and Karnataka Bank. In which first four are public sector banks and Karnataka bank is private sector bank. Setting up of service industries has been a hallmark of the entrepreneurial skill of the people of Dakshina Kannada. Karnataka state occupies a unique place in the nation’s banking history. The people of this district have always exhibited an innovative and adventurous spirit, which coupled with their inherent entrepreneurial abilities, served as one of the pillars of the progress of the district. The lawyers and agriculturists of Dakshina Kannada joined together and established the bank on 18 Feb 1924. Its incorporation was obtained from the District Asst. Registrar of Joint Stock Company. The founder of the bank named it as Karnataka bank much before the old Mysore state was officially renamed as the Karnataka state. The founder directors are: B.R.Vyasraya Achar, Mangalore Nellikai Venkat Rao,Mangalore Pejavar Narayana Charaya, Kenjar village Pangal Subba Roa, Mangalore Udupi Venkat Rao, Udupi

Narikombu Rama Rao, Mangalore Kalmadi Laxminaraya Rao, Mangalore Vaderahobli Narasimhakaranth Vaderahobli Badakkala Venkatramana Bhat, Mangalore The bank commenced business at Mangalore, Dongerkery. On May 23 rd 1924, Sri B.R. Vyasaray Achar selected the first chairman of the Karnataka bank.The initial paid up capital was Rs.54 lakhs. By the end of the first year, deposits were Rs 68,449 with a Net Profit of Rs 3,591. It declared its maiden dividend at 6.25%. In 1930 the second branch of the bank was opened at George Town, Madras, the third branch of the bank was opened at carstreet Udupi. The bank ended its first decade of existence with deposits of Rs 14.8 lakhs with three branches. It was able to withstand the impediments of time and celebrate its silver jubilee in 1949, with total deposits of Rs 56 lakhs and advances of Rs 41 lakhs. In the stride towards progress and expansion, the bank got reinforced by the take over of three banks namely, Sri Sringeri Sharada Bank Limited on April 1 st 1960, which had four branches. The Bank took over Chitradurga Bank Limited on December 30th 1964 in Mysore state, which had deposits of Rs.56000 and advances of Rs.96000 and Bank of Karnataka Limited on December 29th 1966, which had thirteen branches. In 1970, the Paid up share capital of the bank was increased to Rs.20 lakhs . The year 1971 was a year of pride for the bank, as it opened its 100 th branch. In 1972 bank witnessed two milestones in the history of the bank. The banks own multi-stored head office building built at a cost of Rs 20 lakhs was inaugurated in that year. During the golden jubilee year of the bank in 1974, the bank had deposits of Rs.33.14 crores and advances of Rs.22.09 crores with 156 branches and 1314 employees. In 1975, 150th branch was opened at bagalkot and in 1977 authorized share capital was increased to Rs One crore and its 200th branch was opened in Narve. In 1979 Shri K.S.N Adiga, Chairman retired from the services of the bank was succeeded by Shri K.N Basri and the deposits crossed rupees 100 crores. In 1980 Shri K.N Basri chairman retired from the services of the bank and was succeeded by Shri P.Raghuram. In 1984, Abhyudata house Magazine was introduced for the first time in the

history of Karnataka. In 1985, Shri P.Sunder Rao became the chairman. In 1986, the bank installed an In house computer at the head office. Several activities at the head office are intensively computerized. The installation at the HO is managed by computer engineers with appropriate exposure to an OLT and 4 GL working environment. Besides all departments at the Head Office is equipped with PC’S. Specialized branches have been established to cater customer segment in core areas such as agriculture, industry and foreign exchange. It has also entered merchant banking lease financing, krishi card, stock invest and NRI customer cell. The krishi card has been introduced for agriculturists. Karnataka bank is deeply committed to its social obligation of extending credit and other banking services to its rural customers. It has also contributed a lot in irrigating the dry lands in the state through lending for the purchase of sprinklers sets, pumpsets, oil engines etc. The bank has also assisted the villagers for establishing cottage and small scale industries. The farmers are also assisted for the purchase of tractors and other agricultural implements. The bank apart from rendering financial assistance has being issuing health care pamphlets periodically to its customer as well as to the public through its branches in Karnataka through its objectives of education and social maladies like drinking, smoking etc. to help them lead happy and healthy life. Improving irrigation facility, mainly sprinkler irrigation is one of the contributing factors for the improvement in agricultural productivity in the country. The bank has undertaken projects with a view to irrigate in the drought stricken Bagalkot Taluk ,similar schemes are launched in the district of Tumkur, Shimoga, Dharwad, Chickamagalur and Bijapur. This policy of the bank has been oriented towards helping the citizens to increase production and to improve their financial status. The bank has invested its funds in various securities/bonds of the state government, Karnataka State Co-operative Land Development Bank, Karnataka State Housing Board, Bangalore Water Supply Board, Karnataka Power Corporation, Karnataka Electricity Board, Karnataka State Industrial Corporation etc. in order to extend support to all the developmental departmental activities of Karnataka state. With over 81 years of experience at the forefront of providing professional banking services to customers, Karnataka bank today has a national presence with a

network of 433 branches, 8 regional offices, an internal division, one data centre, 3 service branches, 2 currency chests and 10 extension counters, spread across 18 states and 2 union territories. The banks head office is functioning near Mahaveer circle,Mangalore. Managed by a dedicated and professional Management team, bank has 4679 employees, 97000 shareholders and 2.67 million clientele base. Karnataka bank has emerged as a leading financial service institution in India under the leadership of present chairman and CEO, Shri Ananthakrishna. With 93 branches in rural areas, the bank has acquired the reputation of being approachable. Amongst other banks, it was Karnataks bank Ltd, which first realized the important of having a centralized banking system and was among the first to deploy the core banking system in the year 2000. Adoption of core banking Anytime/Anywhere banking and networking have enabled the bank in offering customer centric value added product and services like multi branch banking(MBB), flexi term deposits, ATM card linked credit facility(K-Power), etc. The bank is offering free ATM cards, Ordinary card and Privilege cards. Ordinary cards are those cards, which are offered to the regular customers for their convenience. Those who have this card should maintain a balance in their account and can withdraw the cash up to minimum balance of Rs.100. Privilege cards are given to some important customers to whom it is allowed to withdraw cash for a certain fixed amount, even when there is no balance in their account for a fixed charge of interest. Karnataka bank has deployed the state of art technology from the best players in the industries like Infosys and Wipro. These systems provide the highest reliability thus enabling the bank to offer non stop services of the highest order.
BACKGROUND OF THE LOGO

Every institution has its own logo; it is the prestige, proudness. The sytem of banking is to have a good relationship with customers. To have a close relationship with customers the logo should be simple and beautiful. By this customer should be able to see the interior system of the bank.

The year 1977 was an important one in the history of the bank. During the year bank adopted the logo (star) as its symbol. It symbolizes stability, discipline, harmony and confidence. Bank logo is indicative of creation and potency, which is also a manifestation of human soul, which has the external existence with infinitive. Logo also represents growth with safety, security and enduring success for all the beings. The sign also signifies with family concept of father, mother and their progeny, symbolizing their security which is reflected in the bank motto – “Your family bank across India”. The Bank has adopted a new brand colour, which signifies brightness, cheerfulness and forward looking nature. At Karnataka bank they understand that customer are different in unique ways, which is why regardless of the size of your business or your aspiration, we treat every one as individual and special among other things, this means offering you choice, not only in relation to our products and services but also in the way you interact with us. We understand the changes in your lifestyle recognize these changes and support you with a high standard of professionalism and services. Values We at Karnataka bank offer a total value package, a one stop shop for all your banking needs. We thoroughly research these needs and create the right solution with speed and efficiency, for your maximum benefit. There are various departments in the Head Office to assist in the smooth functioning of the banking activities namely Advance Department Credit Department Treasury and Accounts Department Risk Management Department Inspection and Audit Department Human Resource and Industrial relations Department Recovery Department Investment Department Advances Department

Planning and Development Department Vigilance cell Management Information System Department Legal Department IT Department Company Secretariat Credit Department The main function of this department is lending of loans and advances to the borrowers, recovery of non performing assets, settling of dues, providing various loan schemes like housing loan scheme etc. Treasury and account Department Treasury operations mainly comprises of surplus statutory liquidity ratios, the nonstatutory liquidity ratios investment. Risk Management Department Effective risk management is essential for the success of the bank. The bank has already formed committees of executives for identification, measurement, monitoring and management of risks. Inspection and Audit Department The audit committee of Board of Directors is supervising the internal audit and compliances functions. The system of regular inspection, short term inspection and credit inspection of branches forms part of system of internal control. Human Resource and Industrial Relation Department The quality of Human resource in any organization will have an important effect on quality of services rendered by the organization. HR department provides necessary and adequate training to the staff members to upgrade their skill and knowledge. The HR and IR Department of Karnataka Bank Ltd. has the authority to monitor all sort of HR functions of the bank. It is leaded by the DGM who is supported by 30 staff numbers including 2 chief managers. List of activities being carried out by the HR department: Salaries across bank branches/offices

Recruitment, promotions, transfers Staff provident Fund Pension and gratuity Staff quarters Leave position/man power Travelling allowance sanctioning Hospitalization and medical facilities. Activities being carried out by the IR department Enquiries Matters related to complaints Legal Matters Recovery Department Main function of this department is to recover all dues. They make a list of all the Non performing assets and take follow up measures thereafter. Investment Department This department deals with how the surplus amount has to be invested in particular sectors or areas with regard to RBI regulations. Advance Department The activities undertaken by the advance department are general advance, specialized advance, large advance, forex division, lease finance. Planning and Development Department Main function is to plan the development of the organization which includes launching of new products, offering ATM services, deposits, insurance, mutual funds etc. Vigilance Cell The functioning of this department is similar to that of the inspection department. Inspection department looks into the general aspect while the Vigilance department concentrates on the specific problem area.

Management Information System Department The important function of this department is to collect information from various branches for onward functioning of the bank. Legal Department In the organization if there are any legal complications like filing a suit etc., any advice required in relation to these matters can be obtained from the legal section headed by the legal specialists. IT Department Information technology follows the core banking systems. Management of information technology is the main function of this department. Company Secretariat The Secretarial department heads the general meeting. The main function of this department is issuing of shares, transfer of shares and conducting annual meetings.

Area of Operation/ Distribution Network The bank has 433 branches, 148 ATM outlets, 7 extention counters, 8 regional offices, 1 international division, 1 data centre, 4 service branches, 2 currency chests spread over 19 states and 2 union territories. Credit Rating The credit rating agency, ICRA ltd. (ICRA), one of the leading credit rating agencies of the country has accorded ‘A1+’ rating to the banks certificate of deposit programme. The rating symbol,’A1+’ indicates highest degree of safety for timely payment of principal and interest. CRISIL, India’s top credit rating agency awarded the top ‘P+’ to the Bank’s certificate of deposit programme. The economic survey of Indian banks has accorded the top rank to the bank among all time-tested Indian private banks. 2.3 CORPORATE MISSION

To be a technology savvy, customer centric progressive bank with a national presence, driven by the highest standard of corporate governance and guided by sound ethical values. VISION We believe in total quality at all levels. We are aiming at a total value package, a one-stop shop for all your banking needs. Our motto is to serve you with high standard professionalism with a personal touch built on trust. After all, this is your bank…. your family bank…. Across INDIA

2.4 PRODUCTS AND SERVICE PROFILE Deposit Products:
Karnataka bank ltd aims to help customers build on a strong foundation by maximizing returns on investments and increasing their assets. Customer can make use of their customized product to take care of their specific banking needs. Abhyudaya Cash Certificate A growth oriented scheme with maximum returns. Money invested multiplies after the specified period. The minimum period of deposit is 6 months and the maximum period is 120 months. Fixed Deposit A deposit scheme for specified periods ranging from 15 days to 10 years with interest payments made monthly, quarterly, half-yearly or yearly as required by the depositors. Ready Money Deposit A unique term deposit cum overdraft account, where by a minimum deposit of Rs 10000/- enables the customers withdraw up to 75% of the amount by cheque without presentation of the deposit receipt. Soulabhaya Deposit A flexible ‘twin gain’ deposit scheme that allows withdrawal of deposit in unit of Rs 1000 each in case of need, without affecting the interest payable on the remaining units. Minimum amount of deposit is Rs 5000 and in multiples of Rs 1000 thereto.

Cumulative Deposit A monthly deposit scheme whereby a fixed amount is to be contributed monthly for a minimum period of 6 months and a maximum period of 10 years. This is an ideal scheme to save a fixed amount for future plans such as education, buying a home etc. Insurance Linked Saving Bank Deposit By maintaining a stipulated minimum balance in SB account, customers become entitled to free accident insurance coverage of up to Rs 2 lakhs and Rs 10000 towards reimbursement of hospitalization expenses arising out of accidents. K- Flexi Deposit A facility for all existing account holders that maximizes the return on surplus funds in the account. The stipulated level at present is Rs.10000. Whenever the balance in the SB a/c surpasses this amount the excess amount gets transferred to a term deposit in multiples of Rs 5000 for a specified period and earns interest applicable to a term deposit of that period. Resident Foreign Currency (domestic) Account This account can be opened by current account only. Foreign currency in USD, GBP and euros may be deposited. The account carries no interest with it and there is no minimum amount for opening the account. Foreign exchange acquired in the form of currency notes, travelers cheques, gifts, honorarium received outside India, gifts received from relatives and earnings through the export of goods and services can be credited to this account. NRI Service There are a wide range of deposit schemes for non- resident Indians. It includes non resident rupee account (NRE), foreign currency non-resident (bank) scheme (FCNR [B]) and Non resident (ordinary) account (NRO) with very attractive and competitive rates. Resident foreign currency (RFC)(domestic) account for returning Indians is also available.

Loans Schemes:
Karnataka bank ltd provides their customer with all the conveniences of modern Banking through their network 433 branches. Offering personal financial solutions relevant to them as an individual, they value the opportunity of building a relationship

with them, developing an understanding of the customers changing financial needs at different stages of their lives. Their customer centric focus over the years has enabled them to change with time, offering them quality products through means that are convenient to the customers. KBL Apna Ghar Fulfills customer’s dreams of buying or constructing their own home or renovation, remodeling, repairs of existing house with the housing loan scheme. The maximum quantum of loans is 50 lakhs. KBL Niveshan Scheme For the purchase of house site(converted land only), a loan amount of Rs.15 lakhs or 75% of the registration value of the site, whichever is less, is sanctioned. KBL Varthak Loan Traders, commission agents, distributors, dealers and stockiest with business licenses are eligible to avail finance for working capital to keep things running smoothly. The maximum quantum of loan under this scheme is Rs 9 lakh. KBL Udyog Mithra If you are a doctor, lawyer, engineer, chartered accountant or tax consultant with 2 year of experience and are a customer of the bank, you are eligible for finance to purchase medical equipment, machinery, computers, books, furniture and furnishings for the setting up of customers own office or work place. KBL Car Finance Finance is available for the purchase of a new car of customers choice up to 85% of the invoice value excluding vehicle tax and insurance. Car finance scheme also finances the purchases of second hand cars up to Rs 1.50 lakhs. Any individual who is an income tax assessee or a company or its ED/MD or a managing partner of a firm is eligible for the loan. Vidyanidhi Education Loan Scheme The education loan helps customers to finance their child’s studies in India and abroad. The loan covers expenses for tuition fees, books, study material, hostel boarding, and air travel. KBL Vahana Mithra

Finance is also available for the purchase of new as well as old auto rickshaw, jeep, car, maxi, cab, tempo, traveler, TATA sumo, TOYOTA quails, bus, lorry etc. and also for purchase of new tractor, JCB , crane etc to be registered as public transport vehicle for hire. KBL Easy Ride KBL loan scheme for 2 wheelers is a versatile loan available for individuals, professionals and companies. The quantum of loan will be 100% of the invoice value of the vehicle. The loan is repayable in 5 years in easy equated monthly installments. KBL Lease and Encash This scheme is made available to meet the credit requirement of property owners (building, flat, godowns etc) who have rented their premises against future rent receivables. KBL Insta Cash This is for consumption purpose. Under this scheme, the loan amount ranges from Rs.5000 to 5 lakhs with necessary margin and securities there under. The scheme enables credit while keeping the borrowers investment intact. The facility covers persons in the age group of 18-70. KBL Swarna Nidhi This is an innovative scheme to facilitate working and non- working/ selfemployed/ professional women to purchase gold coins/ bars or gold ornaments from reputed established jewellers. K-power Personal Loans Scheme Linked to ATM Card Special facility to withdraw cash from any money plant ATM, and from corporation bank ATMs, even if there is no balance in customer account. Customer can withdraw up to Rs 15000 as a personal loan. Scheme for Financing Salaried Persons As customers and their families grow, their needs will keep changing and so will priorities. This scheme for permanent employees of reputed companies or institutions is for the purchase of consumer durables, religious ceremonies, educational or medical expenses, home repairs and obsequies. Krishi Card

This is an innovation credit card extending finance for various activities under agriculture. The krishi card covers crops loans, crops insurance, agri-inputs like fertilizers etc. and personal accident insurance.

SERVICES:
Multi-branch Banking A special facility that provides connectivity and flexibility, allowing customers to operate their account in branches other then the branch where they have their account. An ideal facility if customers are on the move between cities, it’s like having their own account away from home. This multi-point, multi-branch facility is available in over 222 branches across India. Insurance Cover Bank has taken up the corporate agency of MetLife India, an affiliate of MetLife, and the largest Life insurance Company in USA to provide customized life insurance solutions to customers. Bank also entered into the field of General (asset) insurance as corporate agents of Bajaj Allianz Gen. Insurance Co. Ltd., a joint venture of Bajaj Auto, the country’s leading two and three wheeler manufacturer and Allianz AG of Germany, the world’s largest general insurer. Money Plant ATM’s As an account holder, customers can use their ATM card to withdraw cash, make balance enquiries and request statements, cheque books etc. Money Plant ATM’s give customer “round the clock” access to their account through ATM counters across the country, as well as those ATM’s under arrangement with Corporation Bank. Utility Bill Payment made Easy At Karnataka bank, customers can now make telephone bill payments through the bank itself. To provide customers with more convenience, the bank has tied-up with cell one and the Telecoms of Goa and Bangalore. Now customers need not wait for long hours in a queue to pay their phone bills. They can do it at Karnataka bank and save their precious time.

Western Union Money Transfer A strategic arrangement with Western Union Financial Services Inc. of USA facilitates quick, reliable and convenient transfer of funds anywhere in the world. Speedy Money Transfers Worldwide The bank is also a member of the Society for Worldwide Interbank Financial Telecommunication (swift) for expeditious two way transfer of funds and has a wide network of correspondent banks in 43 countries around the globe. Instant Credit of Outstation Cheques The facility of immediate credit of Rs. 15,000/- is available at all branches of the bank. (Subject to terms and conditions). Internet Banking service Under this service, Karnatka Bank LTD will help the customers by transferring funds between the account of some customer and third party accounts within the bank and across other bank.

2.5

HR POLICIES The bank’s HRD policy has been guided by the Chinese proverb, “If you are

planning for one year, grow rice. If you are planning for 20 years, plant trees. If you’re planning for centuries, invest in human development.” Adequate training has been improved for up gradation of skills to operate improved technology. Recruitment is done followed by 2 methods namely Internal Method & External Method. As far as filling up of vacancies of officers is concerned the management goes for recruitment from outside only upto 20% and remaining 80% is filled up by internal promotion. Performance appraisal report in the bank is prepared every year. Performance evaluations are done by the chief manager. The report is finally submitted to DGM of HR and IR department. The bank has maintained cordial and healthy industrial relations with the employees of the bank. Karnataka bank staffs are divided in 3 levels: Officer Level, Clerk level and Sub-staff level.

The bank gives prominence not only to academic performance, but also on the total contribution of the staff to the organization. They also contribute for the total customer value. The bank believes in the view of constant staff enrichment and work improvement. Regular and intensive training for the staff in area of new product development, program communication and customer care will make the bank staff wellequipped to take on the competition .Training officer is a person who is in charge of selecting a staff for a particular training program and finally evaluate the knowledge of the staff obtained through training. The bank possesses employee force with various skills. The organization encourages and provides for development of skills of employees @ different levels. The bank is proposed to conduct training program for the potential entrepreneurs in 3 stages: Entrepreneur awareness program(EAP) Entrepreneur Development program(EDP) Skill development program(SDP) Priority area in today’s agenda are leadership training, technical training and customer designed training. It enables the employees become more effective on the job and also regarding various skills necessary to do the actual job. The bank provides training on the areas like role efficiency, creativity and self development, computer skills, customer service committee recommendation, job enrichment training, interpersonal skills practical problems on banking case studies, product awareness and customer complaints. Practical exercises are done to enhance the skills of the employees.

2.6 FINANCIAL INFORMATION Net Profit: Years 2003.2004 2004.2005 2005.2006 2006.2007 2007-2008 Dividend paid: Years 2003.2004 2004.2005 2004.2006 2006.2007 2007-2008 Dividend (in %) 40 20 30 35 50 N/P (in crores) 133.16 147.14 176.03 177.03 241.74

Capital and Reserves: Years 2003.2004 2004.2005 2005.2006 2006-2007 2007-2008 Capital and Reserves (in lakhs) 69815.23 97804.06 111113.06 123862.77 137960.33

Deposits: Years 2003.2004 2004.2005 2005.2006 2006-2007 2007-2008 Advances: Years 2003.2004 2004.2005 2005.2006 2006-2007 2007-2008 Advances (in lakhs) 466791.50 628749.06 779156.78 955267.99 1084197.46 Deposits (in lakhs) 940693.68 1083705.81 1324316.04 1403743.54 1701619.23

2.6 SOCIAL RESPONSIBILITY The bank contributes old computers to schools in rural areas and other institutions that may be in need of it. It joins hands with Corporation bank and other banks to conduct social and cultural programmes for the old age homes, orphanages, special schools for the mentally retarded etc. and also renders some financial help to such institutions. 2.7 OPERATIONAL DEFINITION OF THE CONCEPTS Banking: - the term banking is defined as “accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdraw able by cheque, draft, and order or otherwise”.

Customer: - A person who has a bank account in his name and for whom the banker undertakes to provide the facilities as a banker is considered to be a customer. Loan: - under the loan system, credit is given for a definite purpose and for a predetermined period Interest: - payments made y a borrower for the use of money, calculated as percentages of the capital borrowed. Moratorium period: - temporary stop of repayments of interest on loan or capital owned. Repayment period: - It is a period in which the loan amount should be repaid. 2.8 LITERATURE REVIEW:

Chapter -3 PROJECT DESIGN AND STUDY

Lending of funds to the constituents, mainly traders, business and industrial enterprises constitutes the main business of the banking company. The major portion of the banks funds is employed by way of loans and advances which is the most profitable employment of its funds. There were times when the corporate clientele occupied the centre stage and retail ones where pushed to the back seats but the slow down of the economy, sluggish industrial growth, slump in agricultural activities etc. have pushed the commercial banks to look to the retail sector. Suddenly there is a great change in attitude of the banks. The name of the game is no longer ‘Lending to big corporates, huge amounts to create loan assets’. Retail credit is now welcome even from RBI’s perspective. Consumer credit is no longer considered as unproductive, as it triggers demand for consumer products, which in turn helps manufacturers in a period of economic showdown while the rates of interest on consumer credit have fallen, there is still scope for further deduction. As retail lending involves providing the various retail loan schemes to the individual customers, customer satisfaction plays a very important role. Customers will estimate which product offers the most value. They form an expectation of value and act on it. Whether or not the product lives up to the value expectation affects both satisfaction and repurchase probability. Therefore the bank must offer innovative products to its customers and offer them at reasonable interest rates so as to enhance their level of satisfaction. 3.1 TITLE OF THE STUDY – “Customer satisfaction regarding Consumer Financing/Retail Lending with reference to Karnataka Bank Ltd., Mangalore. 3.2 STATEMENT OF THE PROBLEM – Lending money to the people is one of the main areas of a bank’s business. So the bank would like to know about the problems and

perception of its customers. Hence this study is undertaken to find out the extent of satisfaction of customers with regard to retail loan schemes provided by Karnataka Bank Ltd.

3.3 SCOPE OF THE STUDY – The study is conducted with Karnataka Bank Ltd, Mangalore. The city of Mangalore is chosen for two main reasons 1. It has a lot of people working as in different occupations. 2. The income disparities among the residents are very high. The study will also be limited to people who have an account with the KBL and who have availed off the various retail loan schemes provided by the bank. 3.4 OBJECTIVES OF THE STUDY – • • • To analyze the level of satisfaction of customers regarding the various Retail Lending Schemes provided by Karnataka Bank. To analyze the various retail lending schemes of KBL. To find out the efficiency and viability of the various retail loan schemes.

3.5 METHODOLOGY AND DATA COLLECTION Data Collection Methods – The data has been collected mainly through two sources: a) Primary Data b) Secondary Data Primary Data – • • • Information has been obtained through general discussion with the Company Guide and other concerned employees of the Bank. Data has also been collected through personal interaction with the customers. Information has been collected through questionnaire.

Secondary Data – The secondary data for the study is mainly collected through: a) Annual Reports b) Circulars & c) Internet 3.6 SAMPLING AND SAMPLING TECHNIQUES Since the population of the customers of Karnataka Bank Ltd. is very vast in the city of Mangalore, it will be very difficult to carry out 100 percent coverage study within a limited period; hence the sampling survey method is adopted for this study. a) Sampling Frame: All those people who are customers of KBL and who have availed off any of the retail loan schemes provided by the Bank. b) Sampling methods: A pre requisite for doing probability sampling is that there should be complete knowledge about all the sampling units in the universe. Since this is not so, non probability sampling is used. Sample size: Sampling size is 60 respondents who are using various retail loan schemes.

3.7 LIMITATIONS OF THE STUDY – a) The study will be limited to one or two branches of Karnataka Bank in Mangalore. b) The study will be constrained only to the innovations in retail lending/consumer financing. c) The study does not include competition from the various other lending institutions with regards to Consumer Financing. d) The study is not an extensive one due to the time constraint.

Chapter – 4 DATA ANALYSIS AND INTERPRETATION

Table number 4.1: Number of Male and Female Respondents Male Female Total Number 33 27 60 Percent 55.0 45.0 100.0

Figure number 4.1: Number of Male and Female Respondents

Gender

40

30

Frequency

20
33 Male 55.0%

27 Female 45.0%

10

0 Male Female

Gender

Inference:
From the above table, it is seen that out of the 50 respondents 55% are males and 45% are females. This indicates that it is the male population that avails loans more frequently compared to female population. Table number 4.2: Nature of employment Number 10 12 27 11 60 Percent 16.7 20.0 45.0 18.3 100.0

Self-employed Business Salaried Others Total

Figure number 4.2: Nature of employment

Nature of employment

Self-employed Business Salaried Others
11 Others 18.33% 10 Self-employed 16.67%

12 Business 20.0%

27 Salaried 45.0%

Inference:
Table number 4.2 states that salaried people take loans more frequently e.i., 45% followed by business people by 20% and self employed by 16.67% and others comprises of 18.33%. Table number 4.3: Monthly income Below 10000 10000-20000 20000-30000 30000 & above No Response Total Number 9 12 17 11 11 60 Percent 15.0 20.0 28.3 18.3 18.3 100.0

Figure number 4.3: Monthly income

Monthly income

20

15

Frequency

10
17 20000-30000 28.33% 12 10000-20000 20.0% 11 30000 & above 18.33% 11 No Response 18.33%

5

9 Below 10000 15.0%

0 Below 10000 10000-20000 20000-30000 30000 & above No Response

Monthly income

Inference:
From the above table, it is seen that 15% of the respondents have a monthly income of below Rs.10000, 20% of them between 10000 to 20000, 28.33% of them between 20000 to 30000 and 18.33% above Rs.30000.(18.33% of the respondents have not replied to the above question). Table number 4.4: Kind of account the customers have with KBL. Current Account FD Account Savings Account Total Number 14 13 33 60 Percent 23.3 21.7 55.0 100.0

Figure number 4.4: Kind of account the customers have with KBL.

If yes, what kind of an account do you have?

Current Account FD Account Savings Account

14 Current Account 23.33%

33 Savings Account 55.0% 13 FD Account 21.67%

Inference:
23.33% of the respondents have a Current account with Karnataka Bank, followed by 21.67% who have a Fixed Deposit account and 55% having a Savings Bank account in KBL. This implies that most customers have an SB account with KBL. Table number 4.5: Customers possible avenues for loans Banks Financial Institutions Total Number 58 2 60 Percent 96.7 3.3 100.0

Figure number 4.5: Customers possible avenues for loans

What are your possible avenues for loans?

Banks Financial Institutions
2 Financial Institutions 3.33%

58 Banks 96.67%

Inference:
The above table states that 96.67% of the respondents prefer Banks to avail loans from while Financial Institutions came second with just 3.33% of the respondents. This indicates that people generally prefer to avail loans from banks. Table number 4.6: Customers preference of banks from which to avail the loan from Private banks Nationalized banks Foreign banks Total Number 20 35 5 60 Percent 33.3 58.3 8.3 100.0

Figure number 4.6: Customers preference of banks from which to avail the loan from
Among the various banks, which bank would you prefer to avail the loan from?
Private banks Nationalized banks Foreign banks
5 Foreign banks 8.33%

20 Private banks 33.33%

35 Nationalized banks 58.33%

Inference:
The above chart indicates that 58.33% of the respondents prefer to take loan from nationalised banks while 33.33% preferred to avail loan from Private Sector Banks and only 8.33% of the respondents preferred to take loan from Foreign Banks. This indicates that people usually prefer to take loans from nationalized banks rather than the private sector or foreign sector banks. Table number 4.7: The kind of loan schemes that people have availed off from KBL. Housing Loan Education loan Vehicle loan others Total Number 19 15 15 11 60 Percent 31.7 25.0 25.0 18.3 100.0

Figure number 4.7: The kind of loan schemes that people have availed off from KBL.

Which of the following mentioned loan schemes have you availed of?

Housing Loan Education loan Vehicle loan others
11 others 18.33% 19 Housing Loan 31.67%

15 Vehicle loan 25.0%

15 Education loan 25.0%

Inference:
From the above table, we can see that 31.67% of the respondents have availed Housing loan from the bank while 25% of them have availed Vehicle Loan, 25% of them education loan and 18.33% of them have availed various other types of loan such as Overdraft, Personal loan etc.
Table number 4.8: People’s opinion about the interest charged on the loans that they have availed off.

Very high High Reasonable Low Total

Number 1 19 37 3 60

Percent 1.7 31.7 61.7 5.0 100.0

Figure number 4.8: People’s opinion about the interest charged on the loans that they have
availed off.

What do you think of the interest charged on the said loan?

Very high High
1 3 Low Very high 5.0%1.67%

Reasonable Low

19 High 31.67%

37 Reasonable 61.67%

Inference:
Table number 4.8 indicates that 61.67% of the respondents think that the rate of interest charged on the various loans is reasonable while 31.67% think that it is high, 5% think that it is low and 1.67% of them think that it is very high. This implies that the rate of interest charged by KBL on various retail loan schemes is reasonable. Table number 4.9: The various sources of loan awareness Print media Bank officials Colleagues Friends and others Total Number 25 13 6 16 60 Percent 41.7 21.7 10.0 26.7 100.0

Figure number 4.9: The various sources of loan awareness

Which among these have been the sources of loan awareness?

Print media Bank officials Colleagues Friends and others

16 Friends and others 26.67% 25 Print media 41.67%

6 Colleagues 10.0%

13 Bank officials 21.67%

Inference:
While 41.67% of the respondents have got to know about the various loan schemes offered by Karnataka Bank through Print Media, 26.67% of them have got to know through friends and others. For 21.67% of the respondents the Bank officials have been the source of loan awareness while 10% of them got to know through their colleagues. Table number 4.10: Reason why people approached KBL for loans. Friendliness of Manager/staff Quality of service Quick processing Others Total Number 23 24 11 2 60 Percent 38.3 40.0 18.3 3.3 100.0

Figure number 4.10: Reason why people approached KBL for loans.

What made you approach this bank?

Friendliness of Manager/staff Quality of service
2 Others 3.33% 11 Quick processing 18.33% 23 Friendliness of Manager/staff 38.33%

Quick processing Others

24 Quality of service 40.0%

Inference:
From the above table, it is evident that 40% of the respondents approached the bank because of the quality of service while 38.33% of them approached the bank because of the friendliness of the Manager/staff, 18.33% of them because of quick processing 3.33% due to other reasons. This implies that the quality of service that KBL provides is good. Table number 4.11: Whether customers are satisfied with KBL's retail finance. No Yes Total Number 19 41 60 Percent 31.7 68.3 100.0

Figure number 4.11: Whether customers are satisfied with KBL's retail finance.

Are you satisfied with KBL's retail finance?

No Yes

19 No 31.67%

41 Yes 68.33%

Inference:
In the above table, it is clearly stated that 68.33% of the respondents are satisfied with KBL’s Retail finance while 31.67% of them are not satisfied. This indicates that most of the retail customers of KBL are satisfied with KBL’s retail finance. Table number 4.12: Features that people look for while availing a loan. Affordable EMI Availability options Flexible installments Maximum loan amount Total Number 24 10 18 8 60 Percent 40.0 16.7 30.0 13.3 100.0

Figure number 4.12: Features that people look for while availing a loan.

What are the features you look for while availing a loan?

Affordable EMI Availability options Flexible installments
8 Maximum loan amount 13.33%

Maximum loan amount

24 Affordable EMI 40.0% 18 Flexible installments 30.0%

10 Availability options 16.67%

Inference:
Table number 4.12 shows that 40% of the respondents look for an affordable EMI while taking a loan, while 30% of them look for flexible instalments, 16.67% for availability options and 13.33% of the respondents look for maximum loan amount. Table number 4.13: Effectiveness of KBL in post-loan servicing. Excellent good Average Total Number 9 37 14 60 Percent 15.0 61.7 23.3 100.0

Table number 4.13: Effectiveness of KBL in post-loan servicing.

How effective has Karnataka Bank been in post-loan servicing?

Excellent good Average
9 Excellent 15.0%

14 Average 23.33%

37 good 61.67%

Inference:
While 15% of the respondents are very much satisfied with KBL’s post loan services, 61.67% of them said that it was good, 23.33% of them said it was average. This implies that KBL has been effective in post loan servicing. Table number 4.14: People’s opinion of the processing charges of KBL compared other private sector banks and national banks. High Reasonable Total Number 8 52 60 Percent 13.33 86.67 100.0

Figure number 4.14: People’s opinion of the processing charges of KBL compared other private sector banks and national banks.

What do you think of the processing charges of Karnataka Bank in comparison to other private sector banks and national banks?
High Reasonable

8 High 13.33%

52 Reasonable 86.67%

Inference:
The above table states that 86.67% of the respondents think that the processing charges of KBL are reasonable compared to other private sector banks and Nationlised banks while 13.33% of them think that it is high. This implies that the processing charges charged by KBL are pretty reasonable. Table number 4.15: Customers’ willingness to avail of loans from KBL in future. No Yes Total Number 14 46 60 Percent 23.3 76.7 100.0

Figure number 4.15: Customers’ willingness to avail of loans from KBL in future.

Would you be willing to avail of loans from Karnataka Bank in the future?

no Yes

14 no 23.33%

46 Yes 76.67%

Inference:
Table number 4.15 shows that 76.67% of the respondents are willing to avail loans from KBL in future while 23.33% of them said they are not willing to take loan from KBL in future.

Chapter – 5 FINDINGS

SUMMARY OF FINDINGS:
• From the survey conducted, it is found that it is the male population that avails off retail loans more frequently than the female population.

It is the salaried people who avail retail loans more often than the business people or other self employed people.

• •

Majority of the respondents have a Savings Bank account with KBL. Majority of the respondents said that they would prefer to avail loans from Nationalised banks in the current scenario.

Out of the various retail loan schemes offered by the KBL, Housing loan is in more demand compared to vehicle loan, education loan and other retail loan products.

Majority of the respondents feel that the interest rates on the various loans and the processing charges of the bank are reasonable.

24 out of the 60 respondents approached KBL because of the quality of service provided by the bank which implies that most people are satisfied with the service provided by KBL.

• •

68% of the respondents said that they are satisfied with KBL’s retail finance. 40% of the respondents said that they look for an affordable EMI while taking a loan, while 30% of them look for flexible instalments, 16.7% for availability options and 13.3% of the respondents look for maximum loan amount.

Majority of the respondents felt that KBL has been effective in post-loan servicing.

77% of them would be willing to avail loan from KBL in future.

Chapter – 6 SUGGETIONS AND CONCLUSION

6.1 SUGGESTIONS
• As part of the marketing strategy, banks could organize special exhibitions, trade shows in strategic locations at times of festival celebrations/events, etc. to create awareness among people about the various loan schemes provided because there are a number of retail loan schemes provided by KBL which people are not aware of. • Small pamphlets (containing specific retail loan products, features, EMI structure both on floating and fixed interest basis, repayment periods, required documentations, etc.) can be distributed while customers visit to the branches to avoid delay in the processing of loans as well as to educate them on the importance of retail loan schemes. • Depending up on the quantum of loan and credit rating of customer, softer repayment terms/schedule, specially for availing various schemes, could be thought of which would result in more satisfaction among the retail customers. • Interest should be attractive so that more and more people can avail loans easily.

Quick payment and easy recovery should be there making it more customer friendly.

KBL should make efforts to further improve the quality of service so as to yield more customer satisfaction.

Banks should take advantage of the present low interest rate scenario and try to build up lending volumes through effective marketing and various delivery channels.

6.2 CONCLUSION
• The Indian retail banking industry is still at a nascent stage, but it is undergoing tremendous changes, though not-in-line with global proportions. As the players in the market adapt to retail banking, they need to alter their product mix, delivery channels and corporate structure to better equip themselves to face the stiff competition ahead. • To increase their foothold in the retail finance market, banks will have to learn that change should not be only limited to the product profile and competitive pricing. • Retail banking has changed the relationship between banks and customers. Service and speed of delivery are equally important. Moreover, the credit is no longer a scarce commodity and bankers are operating in the buyer market. Now almost all the banks are laying the thrust in terms of retail lending and this is mainly attributed to the fact that the customer is the key in the industry. • Innovative methods should be brought so that the customers are satisfied with the bank’s service.

BIBLIOGRAPHY

Websites:
• • • • www.ktkbankltd.com "Major Challenges and Issues Facing the Indian Banking Industry". Business Wire. Sept 7, 2007. FindArticles.com. 25 Jul. 2008. http://rbi.org.in http://en.wikipedia.org/wiki/Banking_in_India

Journals:
• • Karnataka Bank Annual Reports Karnataka Bank manuals and Circulars

Books:
• • Banking Theory and Practice – Bedi and Hardikar, 10th edition, 2001, United Book Sellers, Publishers and Distributors, New Delhi. Banking Theory and Practice – B.S.Raman, 1st edition, 1998, United Publishers, Mangalore.

Annexure

Questionnaire I am Susheetha S. Anchan, MBA student of Aloysius Institute of Business
Administration, conducting a survey titled “An analysis on customer satisfaction regarding retail lending” with reference to Karnataka Bank Ltd. as a part of my project of the MBA programme. I would be grateful if you could spare some time in filling this questionnaire. I further declare that whatever information would be given by you will be kept strictly confidential and will be used for academic purpose only. 1) Name…………………………………. 2) Gender a) Male b) Female b) Business (owned) d) Others, please specify……………………….. b) 10000-20000 d) Above Rs. 30000 3) Nature of employment a) Self employed c) Salaried 4) Monthly Income a) Below Rs. 10000 c) 20000-30000

5) Are you an Account Holder in Karnataka Bank? a) Yes a) Current Account c) Savings Account a) Banks c) Money lenders a) Private banks c) Foreign banks b) No b) Fixed Deposit Account d) Others, please specify……………………… b) Financial Institutions d) Others, please specify……………………… b) Nationalized banks d) others, please specify………………………. 6) If yes, what kind of an account do you have?

7) What are your possible avenues for loans?

8) Among the various banks, which bank would you prefer to avail the loan from?

9) Which of the following mentioned loan schemes have you availed of? a) Housing loan c) Vehicle loan a)Very High c) Reasonable a) Print media c) Colleagues a) Friendliness of Manager/staff c) Quick processing a) Yes a) Affordable EMI c) Flexible installments e) Others, please specify 15) How effective has Karnataka Bank been in post-loan servicing? a) Excellent c) Average b) good d) Poor b) Education loan d) others, please specify……………………… b) High d) Low b) Bank officials d) Friends and others b) Quality of service d) Any other (please specify)…………………. b) No b) Availability options d) Maximum loan amount

10) What do you think of the interest charged on the said loan?

11) Which among these have been the sources of loan awareness?

12) What made you approach this bank?

13) Are you satisfied with KBL’s retail finance? 14) What are the features you look for while availing a loan?

16) What do you think of the processing charges of Karnataka Bank in comparison to other private sector banks and national banks? a) Very high c) Reasonable a) Yes b) High d) low b) No

17) Would you be willing to avail off loans from Karnataka Bank in the future?

18) Do you suggest any improvement to the retail finance of the bank?

…………………………………………………………………………………………… …………………………………………………………………………………………… …… ‘THANK YOU’

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