Fundamental Analysis of Public Sector Banks

International Journal of Management and Social Sciences Research (IJMSSR)
Volume 2, No. 6, June 2013
ISSN: 2319-4421
Fundamental Analysis of Public Sector Banks

Deepika Dhingra, Research Scholar, Faculty of Management Studies-University of Delhi
ABSTRACT
INTRODUCTION OF BANKING SECTOR
The study represents the brief idea about Indian banking

sector and fundamental analysis of public sector banks. In
fundamental analysis an attempt is made to analyze
various fundamental or basic factors that affect the riskreturn of the securities. The analysis of economy, industry
and company fundamental is the main ingredient of the
fundamental approach. The analyst should take into
account the entire three constituent that form different but
special steps in making various decisions. Fundamental
analysis helps to analyze the strength of basics of Indian
banking sector. It provides the information on the long
term stability of banking sector and future growth
prospects in banking sector. Fundamental analysis can
help the various interested parties by providing relevant
information to them, which can help them to take informed
decision. Investors can find out the past performance of
the banking sector, recent changes and their impact on
this sector, and future prospects of higher return and
stability in this sector. Banks can find out the
opportunities available in the market, perception of
customers, weaknesses and ways to improve in future, It
focuses on the emergence of Indian banking sector, its
reform over the period, its connection with the world
economic
conditions,
banking
sector
analysis,
environmental analysis and the analysis of performance of
the top public sector banks. Economic analysis covers the
recent changes in the world economy and its impact on
Indian banking sector. It includes macro economic
analysis and micro economic analysis (fiscal and
monetary policy changes).
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 reason of
India's growth process. The government's regular policy
for Indian bank since 1969 has paid rich dividends with
the nationalization of 14 major private banks of India.
Banking sector analysis involves the stage of banking

sector life cycle, banking sector performance.
Environmental analysis includes attitude of government
towards public banks, competitors and technology
progress and SWOT analysis of public sector banks
Performance of the top public sector banks is analyzed on
the basis of ratio analysis, non performing assets, profits
and capital adequacy ratio etc. The performance of public
sector banks is also compared with the private sector
banks to understand the perception of customers and to
measure the competitiveness of public sector banks. It can
help to understand the shortcomings of public sector
banks and find out the ways to improve performance.
i-Xplore International Research Journal Consortium
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 dial a pizza. Money has become the order of
the day.
The first bank in India, though conservative, was
established in 1786. From 1786 till today, the journey of
Indian Banking System can be segregated into three
distinct phases. They are as mentioned below:
Early phase from 1786 to 1969 of Indian Banks
Nationalization of Indian Banks and up to 1991
prior to Indian banking sector Reforms.
New phase of Indian Banking System with the
advent of Indian Financial & Banking Sector
Reforms after 1991.
To make this write-up more explanatory, I prefix the
scenario as Phase I, Phase II and Phase-in.
Phase I
Banking in India originated in the last decades of the 18th
century. The first banks were The General Bank of India,
which started in 1786, and the Bank of Hindustan, both of
which are now defunct. The oldest bank in existence in
India is the State Bank of India, which originated in the
Bank of Calcutta in June 1806, which almost immediately
became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of
Bombay and the Bank of Madras, all three of which were
established under charters from the British East India
Company. For many years the Presidency banks acted as
www.irjcjournals.org
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ISSN: 2319-4421
quasi-central banks, as did their successors. The three

banks merged in 1925 to form the Imperial Bank of India,
which, upon India's independence, became the State Bank
of India.
process of nationalisation was carried out. It was the effort

of the then Prime Minister of India, Mrs. Indira Gandhi.
14 major commercial banks in the country was
nationalized.
Indian merchants in Calcutta established the Union Bank

in 1839, but it failed in 1848 as a consequence of the
economic crisis of 1848-49. The Allahabad Bank,
established in 1865 and still functioning today, is the
oldest Joint Stock bank in India. When the American Civil
War stopped the supply of cotton to Lancashire from the
Confederate States, promoters opened banks to finance
trading in Indian cotton. With large exposure to
speculative ventures, most of the banks opened in India
during that period failed. The depositors lost money and
lost interest in keeping deposits with banks. Subsequently,
banking in India remained the exclusive domain of
Europeans for next several decades until the beginning of
the 20th century.
Second phase of nationalization Indian Banking Sector

Reform was carried out in 1980 with seven more banks.
This step brought 80% of the banking segment in India
under Government ownership.
Foreign banks too started to arrive, particularly in

Calcutta, in the 1860s. The Comptoire d'Escompte de
Paris opened a branch in Calcutta in 1860, and another in
Bombay in 1862; branches in Madras and Pondicherry,
then a French colony, followed. Calcutta was the most
active trading port in India, mainly due to the trade of the
British Empire, and so became a banking center.
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. To
streamline the functioning and activities of commercial
banks, the Government of India came up with The
Banking Companies Act, 1949 which was later changed to
Banking Regulation Act 1949 as per amending Act of
1965 (Act No. 23 of 1965). Reserve Bank of India was
vested with extensive powers for the supervision of
banking in India as the Central Banking Authority.
During those days public has lesser confidence in the
banks. As an aftermath deposit mobilization was slow.
Abreast of it the savings bank facility provided by the
Postal department was comparatively safer. Moreover,
funds were largely given to traders.
Phase II
Government took major steps in this Indian Banking
Sector Reform after independence. In 1955, it nationalized
Imperial Bank of India with extensive banking facilities
on a large scale especially in rural and semi-urban areas. It
formed State Bank of india to act as the principal agent of
RBI and to handle banking transactions of the Union and
State Governments all over the country.
Seven banks forming subsidiary of State Bank of India
was nationalised in 1960 on 19th July, 1969, major
The following are the steps taken by the Government of

India to Regulate Banking Institutions in the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization 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 huge jump by 11,000%.
Banking in the sunshine of Government ownership gave
the public implicit faith and immense confidence about
the sustainability of these institutions.
Phase III
This phase has introduced many more products and
facilities in the banking sector in its reforms measure. In
1991, under the chairmanship of M Narasimham, a
committee was set up by his name which worked for the
liberalisation of banking practices.
The country is flooded with foreign banks and their ATM
stations. Efforts are being put to give a satisfactory service
to customers. Phone banking and net banking is
introduced. The entire system became more convenient
and swift. Time is given more importance than money.
The financial system of India has shown a great deal of
resilience. It is sheltered from any crisis triggered by any
external macroeconomics shock as other East Asian
Countries suffered. This is all due to a flexible exchange
rate regime, the foreign reserves are high, the capital
account is not yet fully convertible, and banks and their
customers have limited foreign exchange exposure. The
Bank of Bengal, which later became the State Bank of
India.
The amendment of Banking Regulation Act in 1993 saw
the entry of new private sector banks.Banking Segment in
India functions under the umbrella of Reserve Bank of
India - the regulatory, central bank. This segment broadly
consists of:
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Regulatory framework for banks was one area which has

seen a sea-change after the financial sector reforms and
economic liberalisation and globalisation measures were
introduced in 1992-93. Most of the recommendations
made by the two Expert Committees which continued to
be subject matter of close monitoring by the Government
of India as well as RBI have been implemented.
Governments of India and RBI have taken several steps
to:
(a) Strengthen the banking sector.
(b) Provide more operational flexibility to banks.
(c) Enhance the competitive efficiency of banks, and
(d) Strengthen the legal framework governing
operations of banks.
CONSOLIDATION OF INDIAN BANKING

SECTOR
As mentioned by Governor Jalan in his address to this
forum in 2002, "In financial systems worldwide, todays
buzzwords are competition, consolidation and stability".
There has been impressive stability and considerable
competition in India but the process of consolidation in
banking industry has just commenced. The issue of
consolidation has been addressed by the Narasimham
Committee Report on Banking Sector Reforms (1998) but
the issue in regard to policy is yet to be pursued
vigorously.
There are three aspects to consolidation viz.
clear cut legal and regulatory regime governing
consolidation,
enabling policy framework especially where
several banks are owned by Government,
and market conditions that facilitate such
consolidation,
Recognizing that all mergers and acquisitions may not
necessarily be in the interests of either the parties
concerned or the system as a whole. RBI's stated policy
currently would permit acquisitions of any Indian private
sector bank after 2009. As per the policy in 2009, a
determined foreign player could acquire any Indian
private sector bank, the best assets in the market place.
Current banking sector can be divided in the following
categories
ISSN: 2319-4421
Development banks
a) Industrial finance corporation of India
b) Industrial development bank of India(
c) Industrial credit and investment corporation of
India(ICICI)
d) Industrial investment bank of India(IIBI)
e) Small industries development bank of India(SIDBI)
f) SCICI ltd.
g) National bank for agriculture and rural
development
h) Export import bank of India
i) National housing bank
ECONOMIC ANALYSIS
Economic analysis will help to understand the relationship
between the economic conditions and banking sector.
Economic analysis is done to analyze the impact of
various economic changes on the performance of the
banking sector.
Economic analysis can be further subdivided into two
main categories:
Macro economic analysis
Micro economic analysis
These two categories can explain the impact of global
economic changes and the changes in national economic
environment more effectively and clearly.
Macro economic analysis

Macro economic analysis is done to find out the
correlation between global economic scenario and its
impact on Indian banking sector. Banking sector reforms
in India are aimed at induction of best international
practices and technological changes for competing
globally. The reserve bank of India has time and again
emphasized transparency, diversification of ownership
and strong corporate governance to mitigate the prospects
of systematic risk in the banking sector. Banking sector
reforms have supported the transition of the Indian
economy to a higher growth path, while significantly
improving the stability of the financial system. In
comparison with the pre-reform period, the Indian
banking system today is more stable and efficient.
However the gains of the past decade need to be
consolidated, so that these could be translated to derive
the institutions, market and practices into a mature
financial system that can meet the challenges of
globalisation. The banking system would, therefore, not
only need to be stable, but also supportive of still higher
levels of planned investments by channeling financial
resources more efficiently from surplus to deficit sectors.
Basel II and India
RBIs association with the Basel Committee on Banking
Supervision dates back to 1997 as India was among the 16
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non-member countries that were consulted in the drafting

of the Basel Core Principles. Reserve Bank of India
became a member of the Core Principles Liaison Group in
1998 and subsequently became a member of the Core
Principles Working Group on Capital. Within the
Working Group, RBI has been actively participating in the
deliberations on the New Accord and had the privilege to
lead a group of six major non-G-10 supervisors which
presented a proposal on a simplified approach for Basel II
to the Committee.
Commercial banks in India started implementing Basel II
with effect from March 31, 2007. They adopted
Standardized Approach for credit risk and Basic Indicator
Approach for operational risk, initially. After adequate
skills are developed, both at the banks and also at
supervisory levels, some banks may be allowed to migrate
to the Internal Rating Based (IRB) Approach.
The steps were taken for implementation of Basel II and
the emerging issues. The RBI had announced in its annual
policy statement in May 2004 that banks in India should
examine in depth the options available under Basel II and
draw a road-map by end-December 2004 for migration to
Basel II and review the progress made at quarterly
intervals. The Reserve Bank organized a two-day seminar
in July 2004 mainly to sensitize the Chief Executive
Officers of banks to the opportunities and challenges
emerging from the Basel II norms. Soon thereafter all
banks were advised in August 2004 to undertake a selfassessment of the various risk management systems in
place, with specific reference to the three major risks
covered under the Basel II and initiate necessary remedial
measures to update the systems to match up to the
minimum standards prescribed under the New
Framework. Banks have also been advised to formulate
and operationalise the Capital Adequacy Assessment
Process (CAAP) within the banks as required under Pillar
II of the New Framework.
It is appropriate to list some of the other regulatory
initiatives taken by the Reserve Bank of India, relevant for
Basel II. First, RBI has tried to ensure that the banks have
suitable risk management framework oriented towards
their requirements dictated by the size and complexity of
business, risk philosophy, market perceptions and the
expected level of capital. Second, Risk Based Supervision
(RBS) in 23 banks has been introduced on a pilot basis.
Third, RBI has been encouraging banks to formalize their
capital adequacy assessment process (CAAP) in alignment
with their business plan and performance budgeting
system. This, together with the adoption of RBS would
aid in factoring the Pillar II requirements under Basel II.
Fourth, RBI has been expanding the area of disclosures
(Pillar III), so as to have greater transparency in the
financial position and risk profile of banks. Finally, RBI
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has tried to build capacity for ensuring the regulators

ability for identifying and permitting eligible banks to
adopt IRB / Advanced Measurement approaches.
As per normal practice, and with a view to ensuring
migration to Basel II in a non-disruptive manner, a
consultative and participative approach has been adopted
for both designing and implementing Basel II. A Steering
Committee comprising senior officials from 14 banks
(public, private and foreign) has been constituted wherein
representation from the Indian Banks Association and the
RBI has also been ensured. The Steering Committee had
formed sub-groups to address specific issues. On the basis
of recommendations of the Steering Committee, draft
guidelines to the banks on implementation of the New
Capital Adequacy Framework have been issued.
Implementation of Basel II will require more capital for
banks in India due to the fact that operational risk is not
captured under Basel I, and the capital charge for market
risk was not prescribed until recently. Though last year
has not been a very good year for banks, they are
exploring all avenues for meeting the capital requirements
under Basel II. The cushion available in the system, which
has a CRAR of over 12 per cent now, is, however,
comforting.
Basel II provides some scope to extend the rating of issues
to issuers, this would only be an approximation and it
would be necessary for the system to move to rating of
issuers. Encouraging rating of issuers would be essential
in this regard. In this context, current non-availability of
acceptable and qualitative historical data relevant to
ratings, along with the related costs involved in building
up and maintaining the requisite database, does influence
the pace of migration to the advanced approaches
available under Basel II.
Above all, capacity building, both in banks and the
regulatory bodies is a serious challenge, especially with
regard to adoption of the advanced approaches. RBI in
India has initiated supervisory capacity-building measures
to identify the gaps and to assess as well as quantify the
extent of additional capital which may be required to be
maintained by such banks.
Current global economic conditions
In the current scenario, banks are constantly pushing the
frontiers of risk management. Compulsions arising out of
increasing competition, as well as agency problems
between management, owners and other stakeholders are
inducing banks to look at newer avenues to augment
revenues, while trimming costs. Consolidation,
competition and risk management are no doubt critical to
the future of banking but it is believed that governance
and financial inclusion would also emerge as the key
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issues for a country like India, at this stage of socioeconomic development.

The global economic outlook deteriorated sharply over the
last one year. In a sign of the ferocity of the down turn,
the IMF made a marked downward revision of its
estimate:
In market exchange rate terms, the downturn is
sharper global GDP is projected to actually
shrink by 0.6 per cent.
With all the advanced economies the United

States, Europe and Japan - having firmly gone into
recession, the contagion of the crisis from the
financial sector to the real sector has been
unforgiving and total.
Due to the slump in demand the output growth in
the whole world has reduced especially in
developed countries. The output growth in the
world has reduced from 5.1 to 3 percent over the
last four years (2006 to 2009).
Impact on Indian financial market
India's financial markets - equity markets, money markets,
forex markets and credit markets - had all come under
pressure from a number of directions.
As a consequence of the global liquidity squeeze,
Indian banks and corporates found their overseas
financing drying up, forcing corporates to shift
their credit demand to the domestic banking sector.
Also, in their frantic search for substitute financing,
corporates withdrew their investments from
domestic money market mutual funds putting
redemption pressure on the mutual funds and down
the line on non-banking financial companies
(NBFCs) where the MFs had invested a significant
portion of their funds. This substitution of overseas
financing by domestic financing brought both
money markets and credit markets under pressure.
The forex market came under pressure because of
reversal of capital flows as part of the global
deleveraging process. Simultaneously, corporates
were converting the funds raised locally into
foreign currency to meet their external obligations.
Both these factors put downward pressure on the
rupee.
The Reserve Bank's intervention in the forex
market to manage the volatility in the rupee further
added to liquidity tightening.
India's integration into the world economy over the
last decade has been remarkably rapid. Integration
into the world implies more than just exports.
Going by the common measure of globalization,
India's two-way trade (merchandize exports plus
imports), as a proportion of GDP, grew from 21.2
per cent in 1997-98, the year of the Asian crisis, to
34.7 per cent in 2008-09.
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India's financial integration with the world has been

as deep as India's trade globalization, if not deeper.
If we take an expanded measure of globalization,
that is the ratio of total external transactions (gross
current account flows plus gross capital flows) to
GDP, this ratio has more than doubled from 46.8
per cent in 1997-98 to 117.4 per cent in 2008-09.
Micro economic analysis

Micro economic analysis reflects the changes in the
national economic policies and role of public sector banks
in the implementation of those changes effectively. Major
micro economic policies are:
Monetary policy
Fiscal policy
a)
Monetary policy
The Reserve Bank's policy response is aimed at

containing the contagion from the outside - to keep the
domestic money and credit markets functioning normally
and see that the liquidity stress did not trigger solvency
cascades. In particular, RBI targeted three objectives:
1. To maintain a comfortable rupee liquidity position;
2. To augment foreign exchange liquidity; and
3. To maintain a policy framework that would keep
credit delivery on track so as to arrest the
moderation in growth.
This marked a reversal of Reserve Bank's policy stance
from monetary tightening in response to heightened
inflationary pressures of the previous period to monetary
easing in response to easing inflationary pressures and
moderation in growth in the current cycle. RBIs measures
to meet the above objectives came in several policy
packages starting mid-September 2009, on occasion in
response to unanticipated global developments and at
other times in anticipation of the impact of potential
global developments on the Indian markets.
RBIs policy packages included, like in the case of other
central banks, both conventional and unconventional
measures.
On the conventional side, RBI reduced the policy interest
rates aggressively and rapidly, reduced the quantum of
bank reserves impounded by the central bank and
expanded and liberalized the refinance facilities for export
credit. Measures aimed at managing forex liquidity
included an upward adjustment of the interest rate ceiling
on the foreign currency deposits by non-resident Indians,
substantially relaxing the external commercial borrowings
(ECB) regime for corporates, and allowing non-banking
financial companies and housing finance companies
access to foreign borrowing.
23

The important among the many unconventional

measures taken by the Reserve Bank of India are a rupeedollar swap facility for Indian banks to give them comfort
in managing their short-term foreign funding
requirements, an exclusive refinance window as also a
special purpose vehicle for supporting non-banking
financial companies, and expanding the lendable
resources available to apex finance institutions for
refinancing credit extended to small industries, housing
and exports.
The Union government, in its recent decision, has
announced capital infusion in three public sector banks
namely UCO Bank, Central Bank of India and Vijaya
Bank. The Kolkata based UCO bank would get capital
worth Rs 1,200 crore, through UCO's non-convertible
preference shares, from center government in two
installments, Rs 450 crore immediately and the balance Rs
750 crore in 2009-10.
It may be noted that almost all bank loans are linked to the
PLR, and every rate fall would really affect the interest
rate, which consumer is paying However, at present,
prime lending rates (PLR) of most of the banks are in the
range of 11.5% and 12.5% while the same was between
10.25%
and
11.50%
as
on
April
1,
2006.
It be noted that Last fiscal in September, the rate of
interest on home loans was in the range of 9.25% to 12%,
but due to RBI's smart move for rate reduction and lower
demand has caused the rate to drop to 8-11%.
Impact of monetary measures
Taken together, the measures put in place since midSeptember 2008 have ensured that the Indian financial
markets continue to function in an orderly manner. The
cumulative amount of primary liquidity potentially
available to the financial system through these measures is
over US$ 75 billion or 7 per cent of GDP. This sizeable
easing has ensured a comfortable liquidity position
starting mid-November 2009 as evidenced by a number of
indicators including the weighted-average call money rate,
the overnight money market rate and the yield on the 10year benchmark government security. Taking the signal
from the policy rate cut, many of the big banks have
reduced their benchmark prime lending rates. Bank credit
has expanded too, faster than it did last year. However,
Reserve Banks rough calculations show that the overall
flow of resources to the commercial sector is less than
what it was last year. This is because, even though bank
credit has expanded, it has not fully offset the decline in
non-bank flow of resources to the commercial sector.
b)
Fiscal policy
Fiscal policy measures can be defined as the use of tax
and expenditure powers by a government. Government all
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over the world, are vested with the task of creating

infrastructure (e.g., roads, ports, power plants, etc.) and
are also required to ensure internal and external security.
These responsibilities entail government expenditures on
various fronts capital outlays, the defense forces, police,
the administrative services and others. Taxes are a major
source of revenue to meet these outflows. Thus, the Union
Government collects income tax, excise duty, customs
duty, etc., through its different arms.
An increase in government spending without a matching
increase in inflows may cause or exacerbate a DEFICIT.
But, government spending also contributes to aggregate
demand for goods and services directly, and indirectly
by increasing private incomes which stimulates private
demand.
Over the last five years, both the central and state
governments in India have made a serious effort to reverse
the fiscal excesses of the past. At the heart of these efforts
was the Fiscal Responsibility and Budget Management
(FRBM) Act which mandated a calibrated road map to
fiscal sustainability. However, recognizing the depth and
extraordinary impact of this crisis, the central government
invoked the emergency provisions of the FRBM Act to
seek relaxation from the fiscal targets and launched two
fiscal stimulus packages in December 2008 and January
2009. These fiscal stimulus packages, together amounting
to about 3 per cent of GDP, included additional public
spending,
particularly
capital
expenditure,
government guaranteed funds for infrastructure
spending, cuts in indirect taxes, expanded guarantee
cover for credit to micro and small enterprises, and
additional support to exporters. These stimulus
packages came on top of an already announced expanded
safety-net for rural poor, a farm loan waiver package and
salary increases for government staff, all of which too
should stimulate demand.
The Interim Budget did not have any proposal for revision
in tax rates, direct or indirect. The revised estimate for tax
collections forecast a Rs 60,000 crore (Rs 600 billion)
shortfall in the estimated tax collection targets, primarily
on account of the government's pro-active fiscal measures
initiated to counter the impact of the global slowdown on
the Indian economy.
A substantial relief of about Rs 40,000 crore (Rs 400
billion) has been extended through tax cuts, including a
fairly steep, across-the-board reduction in central excise
rates in December, 2009.
Public sector banks help government to channelize the
expenditure of the government for the development and
maintenance of the equilibrium in the economy.
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PERFORMANCE OF PUBLIC SECTOR

BANKS
OTHER ENVIRONMENTAL FACTORS
Brand Finance PLC, UK based brand Valuation

Company has released the BrandFinance Global
Ranking 500. This list gives a comprehensive list of all
the banks across the world with the rankings based on
their methodology. The methodology is more toward
brand related and is not based on market valuations alone.
Only HSBC and American Express received a

AAA credit rating. The AAA (triple A) credit rating is the
highest rating any bank or a company can receive. It
indicates the companys credit worthiness which is almost
synonymous to doing business with that company or
predicting the future business. Very few companies
achieve that rating. The highest rating an Indian bank got
in the list is AA for State Bank of India.
HSBC, Bank of America and Wells Fargo

topped the list. The top Indian bank in the list is State
Bank of India ranked at 69. It is ranked at 60 in 2008
because the valuation was done for the group of all the
State Banks. Valuation for 2009 is done for SBI alone.
The next bank in the list is ICICI Bank which is

the largest private sector lender. ICICI bank has witnessed
a steep decline in its rankings. It was ranked 64 in 2008
and now it is ranked 104. HDFC bank is the 3rd Indian
bank in the list.
Canara Bank and Oriental bank of Commerce

made their first entry into the list indicating the growing
presence of Indian banks in the global scenario.
Legal environment
As regards the legal framework, the Reserve Bank is not
very comfortable with lack of clear statutory provision
regarding takeover of management of banks. In 1970, the
Reserve Bank had issued directions to the banks requiring
them to seek the Reserve Banks permission or
acknowledgement before effecting any transfer of shares
in favour of any person which would take the holding of
shares to more than one per cent (subsequently raised to
five per cent) of the total paid up capital of such banking
company. Since shares are acquired first and then lodged
for registration, the Reserve Banks directions create a
somewhat piquant situation. To plug the gap, a Bill has
now been introduced in the Parliament relating to banking
regulation. The RBIs proposals in this regard should
reasonably take care of takeover of the management by
one from another and Reserve Bank will have appropriate
regulatory power to satisfy itself that persons proposing to
acquire such shares are fit and proper persons. The State
Bank of India Act, 1955, empowers the State Bank of
India with the consent of the management of any banking
institution (which would also include a banking company)
to acquire the business, including the assets and liabilities
of any bank. Under this provision, what is required is the
consent of the concerned bank and the approval of the
Reserve Bank and the sanction of such acquisition by the
Central Government. Several banks were acquired by the
State Bank of India by invoking this section.
List of 17 Indian banks in the global 500:

1. State Bank of India
2. ICICI Bank
3. HDFC Bank
4. Punjab National Bank
5. Bank of India
6. Canara Bank
7. Bank of Baroda
8. Axis Bank
9. Kotak Bank
10. Union Bank of India
11. Indian Overseas Bank
12. IDBI Bank Limited
13. State Bank of Patiala
14. Indian Bank
15. Power Finance Corp
16. Oriental Bank of Commerce
17. Syndicate Bank
The list is dominated by the public sector banks

punctuated by a few known private sector banks. IT
majors and other companies have made it clear that they
trust the PSUs over private banks for their savings.
Section 23A of the Regional Rural Banks Act, 1976

(RRBs Act), empowers the Central Government, in
consultation with the NABARD, concerned State
Government and sponsored bank, to amalgamate two
RRBs, by issue of notification in the official gazette, with
such liabilities, duties and obligations as may be specified
in the notification. As in the case of amalgamation of a
nationalised bank under Section 9(2) of the
Nationalisation Act, every notification under this section
is also required to be laid before both the Houses of
Parliament.
Political environment
The government has told public sector banks (PSBs) to
extend credit to fund-starved Indian industry, especially
exporters and small and medium sector enterprises to
address their credit needs. SIDBI would be lending US$
1.33 billion out of US$ 1.47 billion credit from RBI to
public sector banks. This is being provided to the PSBs at
6.5 per cent (SIDBI is getting the credit at 5.5 per cent)
under the condition that the banks will have to lend this
credit to the medium and small-scale industry units at an
interest rate of 10 per cent before March 31, 2010.
25

Technical environment
Technological upgradation in working of rural regional
banks (RRBs) is being implemented. As a first step, RRBs
which have either 100 per cent computerization or are
being opened from September 2009 need to be CBS
compliant.
The number of automated teller machines (ATMs) has
risen and the usage of ATMs has gone up substantially
during the last few years. Use of other banks ATMs
would also not attract any fee except when used for cash
withdrawal for which the maximum charge levied was
brought down to US$ .409 per withdrawal by March 31,
2008. Further, all cash withdrawals from all ATMs would
be free with effect from April 1, 2009.
Porters Five Force Model
Threat of New Entrants. The average person

can't come along and start up a bank, but there are
services, such as internet bill payment, on which
entrepreneurs can capitalize. Banks are fearful of being
squeezed out of the payments business, because it is a
good source of fee-based revenue. Another trend that
poses a threat is companies offering other financial
services. What would it take for an insurance company to
start offering mortgage and loan services? Not much.
Also, when analyzing a regional bank, remember that
the possibility of a mega bank entering into the market
poses a real threat.
Power of Suppliers. The suppliers of capital

might not pose a big threat, but the threat of suppliers
luring away human capital does. If a talented individual is
working in a smaller regional bank, there is the chance
that person will be enticed away by bigger banks,
investment firms, etc.
Power of Buyers. The individual doesn't pose

much of a threat to the banking industry, but one major
factor affecting the power of buyers is relatively high
switching costs. If a person has a mortgage, car loan,
credit card, checking account and mutual funds with one
particular bank, it can be extremely tough for that
person to switch to another bank. In an attempt to lure in
customers, banks try to lower the price of switching, but
many people would still rather stick with their current
ISSN: 2319-4421
bank. On the other hand, large corporate clients have

banks wrapped around their little fingers. Financial
institutions - by offering better exchange rates, more
services, and exposure to foreign capital markets - work
extremely hard to get high-margin corporate clients.
Availability of Substitutes. As you can

probably imagine, there are plenty of substitutes in the
banking industry. Banks offer a suite of services over and
above taking deposits and lending money, but whether it
is insurance, mutual funds or fixed income securities,
chances are there is a non-banking financial services
company that can offer similar services. On the lending
side of the business, banks are seeing competition rise
from unconventional companies. Sony (NYSE: SNE),
General
Motors
(NYSE:GM) and
Microsoft
(NASDAQ:MSFT) all offer preferred financing to
customers who buy big ticket items. If car companies are
offering 0% financing, why would anyone want to get a
car loan from the bank and pay 5-10% interest?
Competitive Rivalry. The banking industry is

highly competitive. The financial services industry has
been around for hundreds of years, and just about
everyone who needs banking services already has them.
Because of this, banks must attempt to lure clients away
from competitor banks. They do this by offering lower
financing, preferred rates and investment services. The
banking sector is in a race to see who can offer both the
best and fastest services, but this also causes banks to
experience a lower ROA. They then have an incentive to
take on high-risk projects. In the long run, we're likely to
see more consolidation in the banking industry. Larger
banks would prefer to take over or merge with another
bank rather than spend the money to market and advertise
to people.
CONCLUSION
The Indian banking sector is connected to the

world economy but the Indian banking system has had no
direct exposure to the sub-prime mortgage assets or to the
failed institutions. It has very limited off-balance sheet
activities or securitized assets. In fact, our banks continue
to remain safe and healthy. The Indian banking sector has
been well shielded by the central bank and has managed to
sail through most of the crisis with relative ease.
Improvements in the regulatory and supervisory

framework encompassed a greater degree of compliance
with Basel Core Principles. Some recent initiatives in this
regard include consolidated accounting for banks along
with a system of Risk-Based Supervision (RBS) for
intensified monitoring of vulnerabilities.
With most private sector banks and the PSU ones

that have complied with Basel II having sufficient capital
in their books; it will be a challenge to deploy the same
safely and profitably in the event of economic slowdown.
26

Banks are likely to concentrate more on non funded

income in this scenario.
Public sector banks help the government to

implement monetary and fiscal policies by modifying
their policies and priorities.
Public sector banks have been very proactive in

their restructuring initiatives be it in technology
implementation or pruning their loss assets. While the
likes of SBI have made already attempts towards
consolidation, others are keen to take off in that direction.
RBIs roadmap for the entry of foreign banks and

the acquisition of stake by the foreign entities in Indian
private banks seems to be a step towards facilitating entry
of foreign banks into India. However, the same is set to
aggravate the tussle for market share in the already
fragmented sector.
The private sector banks have made tremendous

strides in the last few years. It was in mid 1990's when
Indian banking scenario witnessed the entry of some new
private sector banks and in the period between 2002 -2009
these banks have grown by leaps and bounds. They have
increased their incomes, asset sizes and outperformed
their public sector counterparts in many areas. This
growth was accompanied by a rapid branch expansion.
The network of private sector bank grew at almost three
times of all scheduled commercial banks and more than
four times that of public sector banks.
In the current scenario, banks are constantly

pushing the frontiers of risk management. Compulsions
arising out of increasing competition, as well as agency
problems between management, owners and other
stakeholders are inducing banks to look at newer avenues
to augment revenues, while trimming costs.
Consolidation, competition and risk management are no
doubt critical to the future of banking but I believe that
governance and financial inclusion would also emerge as
the key issues for a country like India, at this stage of
socio-economic development.
The NPA growth involves the necessity of

provisions, which reduces the overall 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.
ISSN: 2319-4421
conglomerates that are engaged in cross-border

transactions.
The banks which are diversified into areas other

than conventional banking, are parts of a large
group/conglomerate, undertake significant cross-border
transactions, act as market makers, and are counter-parties
to complex transactions. Since these banks would be
exposed to the complexities of various risks. The RBI may
consider prescribing a higher minimum capital ratio for
these banks.
It has also stressed the need to raise corporate

governance standard in public sector banks with the aim
of ensuring operational autonomy and equipping them to
compete with other banks as equals.
BIBLIOGRAPHY
Economic times
Competition refresher
Webliography
http://pnbindia.in/financial_results_sep_08.pdf
http://crpd.sbi.co.in/uploads/forms/Consolidated_Account
_20080610.pdf
http://www.sbi.co.in/result/SBI2007-Annexures.pdf
http://www.sbi.co.in/result/SBI2007-StateBankofIndia.pdf
http://www.sbi.co.in/result/SBI2007StateBankGroup(Consolidated).pdf
RECOMMENDATIONS
Recommending a change in capital adequacy

framework, it has suggested that the banking system
should move towards differential capital regime for
complex banks from the current practice of having a 9%
CAR
requirement
for
all
banks.
The banks like State Bank of India, ICICI Bank, HDFC
Bank among others to maintain higher CAR as they are
27

Fundamental Analysis of Public Sector Banks

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Fundamental Analysis of Public Sector Banks

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International Journal of Management and Social Sciences Research (IJMSSR)

Volume 2, No. 6, June 2013