INDIAN BANKING SECTOR : CHALLENGE AHEAD

2010

INDIAN BANKING SECTOR:CHALLENGE AHEAD
1.History of banking sector in India
Origination of banking in India dates to the last decades of the 18th century with 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 (SBI), the largest commercial bank in the country that traces its origins back to June 1806. The history of the banking sector can be better understood by dividing it into. 1. History of SBI and Associates 2. History of other banks in India (includes Nationalised Banks, Private Banks and Foreign Banks)

1.1 History of SBI and Associates
The oldest bank in existence in India is the SBI, which originated as the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal in 1809. Bank of Bengal was one of the three presidency banks, the other two being the Bank of Bombay (established in 1840) and the Bank of Madras (established in 1843), all three of which were established under charters from the British East India Company. For many years, the Presidency banks acted as quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India which started as private shareholders banks, mostly Europeans shareholders. tate Bank of India Act was established in 1955. Pursuant to the provisions of the State Bank of India Act (1955), the Reserve Bank of India (RBI), which is India's central bank, acquired a controlling interest (60%) in the Imperial Bank of India. On April 30, 1955 the Imperial Bank of India was renamed as the State Bank of India. In 2008, the Government took over the stake held by RBI. In 1959, the Government passed the State Bank of India (Subsidiary Banks) Act, enabling the SBI to take over eight former State-associated banks as its subsidiaries. 1. State Bank of Indore 2. State Bank of Bikaner & Jaipur 3. State Bank of Hyderabad 4. State Bank of Mysore 5. State Bank of Patiala 6. State Bank of Travancore 7. State Bank of Saurashtra Later on in September 2008, State Bank of Saurashtra was merged with the parent bank SBI.

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1.2 History of other banks in India (includes Nationalised Banks, Private Banks and Foreign Banks)
No 1 2 Year 1840 to 1947 1947 to 1969 Period Pre Independence Post Independence to Nationalisation Nationalisation to Liberalisation Characterized by Small size, less regulated and bank failures Slower growth, private sector dominance and start of regulation Nationalised of banks by government, high regulation, secular growth in business and expansion & rising inefficiencies to De-regulation, entry of private and foreign banks and technological advancement

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1969 to1991

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1991 to 2010

Liberalisation current date

1.2.1 Pre Independence (1840 to 1947)
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. The second entirely Indian joint stock bank was the Oudh Commercial Bank, established in 1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. The period between 1906 and 1911, saw the establishment of banks inspired by the Swadeshi movement. The Swadeshi movement inspired local businessmen and political figures to form banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India. The period during the First World War (1914-1918) through the end of the Second World War (1939-1945), and two years thereafter until the independence of India were challenging for the Indian banking industry. The years of the First World War were turbulent, and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table:
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Year 1913 1914 1915 1916 1917 1918

No. of banks failed 12 42 11 7 13 9

1.2.2 Post Independence to Nationalisation (1947 to 1969)
The Government of India (GOI) initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. The major steps taken to regulate banking include: In 1948, the RBI, India's central banking authority, was nationalised, and it became an institution owned by the Government of India. In 1949, the Banking Regulation Act was enacted which empowered the RBI "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors.

1.2.3Nationalisation to liberalisation (1969 to 1991)
By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had been ensued about the possibility to nationalise the banking industry. On July 19, 1969, major process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi by whom 14 major commercial banks in the country were nationalised. The second phase of nationalisation of the Indian Banking Sector was carried out in 1980 with seven more banks being nationalised. With the second dose of nationalisation, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalised banks and resulted in the reduction of the number of nationalised banks from 20 to 19. A number of questions were raised regarding the procedure adopted by the then government in suddenly going for the nationalisation of banks. There was no official report, which had gathered expert opinions and evidence on the need either for social control or for nationalisation of banks. The chiefs of private banks had not been consulted as to the need and implications of the proposed measure.
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Arguments of government for nationalisation were as follows Before the nationalisation, the privately-owned banks were operating on the criteria of profit maximisation and lesser emphasis was placed on the development of rural areas. Credit and deposits base was confined to large corporates and wealthy depositors. The nationalised banking set-up would vigorously pursue expansion progrmmes to cover rural areas, smaller towns and lower income groups. To pay special attention to inter-sectoral balances and balanced regional development. To take away the stranglehold of the few industrial houses on credit and reduce their control over the community's resources. Ensure stability in the functioning of the credit institutions and inspire more confidence among the depositors. Encourage healthy competition between large and small industrial houses. In summary, the following are the steps taken by the Government of India to regulate the banking institutions in the country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of SBI. 1959: Nationalization of SBI subsidiaries. 1961: Insurance cover extended to deposits. 1969: Nationalization of 14 major banks. 1971: Creation of credit guarantee corporation. 1975: Creation of regional rural banks. 1980: Nationalization of seven banks with deposits over Rs.200 crores.

1.2.4 Liberalization to current date (1991 to 2010)
The policies of nationalization and social reforms that were supposed to promote a more equal distribution of funds, also led to inefficiencies in the Indian banking system. To alleviate the negative effects, some reforms were enacted in the second half of the 1980s. The main policy changes were the introduction of Treasury Bills, the creation of money markets, and a partial deregulation of interest rates. Despite the reform attempts, the Indian banking sector had like the overall economy severe structural problems by the end of the 1980s. By international standards, the Indian banks were extremely unprofitable despite a rapid growth in deposits. In 1991, GOI liberalised the economy. The objective of banking sector reforms was in line with the overall goals of the 1991 economic reforms of opening the economy. Narsimhan Rao government embarked on a policy of liberalisation by licensing a small number of private banks. These new banks came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, UTI Bank (now re-named as Axis Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalised the banking sector in India, which has
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seen rapid growth with strong contribution from all the three sectors of banks, namely, government banks, private banks and foreign banks.

Privatisation
1. In the year 1994, Private sector banks were permitted to commence operations in India. Banks were allowed to raise the capital to meet the capital adequacy norms through capital market route, provided the government holding does not fall below 51%. 2. FDI/FII limits on investments in shares of private sector banks were raised to 51% in 2001. 3. In 2004, FDI/FII limits on investments in shares of private sector banks was further relaxed and increased to 74%, with no one FII holding more than 5% stake without the consent of RBI and FII limit in PSBs was capped at 20%. 4. Foreign banks with restriction on branch opening and operation were allowed to enter on selective basis in 2004. More liberal entry for foreign banks was proposed after April 2009.

Entry of foreign banks
RBI announced its policy decision on March 2004 for gradual entry of foreign banks in India in synchronised manner in two phases. In order to allow the Indian Banks sufficient time to prepare for global competition, initially the entry of foreign banks in first phase was more restrictive. Phase 1 (March 2005 to March 2009) 1. Foreign banks were allowed to establish presence in India and were given an option to operate through branch presence or set up a 100% Wholly Owned Subsidiary (WOS). 2. Foreign banks were allowed to open 12 branches a year (the limit was in line with World Trade Organisation (WTO) commitment). Branch licensing procedure was kept same as applicable for private banks. More liberal branch opening policy was adopted in underbanked areas. 3. The limit of 12 branches a year was raised to 20 branches for foreign banks in March 2006. 4. Acquisition of shares in Indian banks by foreign banks was permitted for banks which are identified by RBI for restructuring. Phase 2 (April 2009 onwards) 1. Branch expansion: - After reviewing the experience of the first phase, RBI has proposed to remove the restriction on branch expansion and limited excess to Indian market and treating them on par with domestic banks to the extent appropriate. 2. Listing of foreign banks: - After completion of the proposed year of operation in India, WOS of foreign banks will be allowed to list and dilute the stake in the manner that at least of 26% of the paid-up capital remains with the resident Indian. 3. Mergers and acquisitions: - After a review is made with regard to the extent of penetration of foreign investment in Indian banks and functioning of foreign banks, foreign
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banks may be permitted, subject to regulatory approvals and such conditions as may be prescribed, to enter into merger and acquisition transactions with any private sector bank in India, subject to the overall investment limit of 74 per cent.

2 Various Banking Groups

Banks in India

Scheduled Commercial Banks

Unscheduled Commercial Banks

Public Sector Banks

Private Sector Banks

Foreign Banks

Regional Rural Banks

State Bank of India and Associates

Nationalised Banks

2.1The commercial banking structure in India consists of:
Scheduled Commercial Banks in India Unscheduled Banks in India Scheduled Banks in India constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (6) (a) of the Act. The scheduled commercial banks in India comprise of SBI and its associates, nationalised banks, foreign banks, private sector banks, co-operative banks and regional rural banks.

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Non-scheduled bank in India means a banking company as defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank. SCBs in India can be divided into five groups. 1. SBI and its associates 2. Nationalised banks 3. Private sector banks 4. Foreign banks. 5. Regional Rural Banks (RRBs) We have done the analysis of first four banking groups and excluded RRBs in our report.

2.2 List of banks under various banking groups
2.2.1 SBI and Associates 1. SBI 2. State Bank of Bikaner and Jaipur 3. State Bank of Hyderabad 4. State Bank of Indore 2.2.2 Nationalised Banks 1. Allahabad Bank 2. Andhra Bank 3. Bank of Baroda 4. Bank of India 5. Bank of Maharashtra 6. Canara Bank 7. Central Bank of India 8. Corporation Bank 9. Dena Bank 10. IDBI Bank Ltd. 5. State Bank of Mysore 6. State Bank of Patiala 7. State Bank of Travancore

11. Indian Bank 12. Indian Overseas Bank 13. Oriental Bank of Commerce 14. Punjab National Bank 15. Punjab & Sind Bank 16. Syndicate Bank 17. Union Bank of India 18. United Bank of India 19. UCO Bank 20. Vijaya Bank

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2.2.3 Private Sector Banks 1. Axis Bank 2. Bank Of Rajasthan 3. Catholic Syrian Bank 4. City Union Bank 5. Development Credit Bank 6. Dhanalakshmi Bank 7. Federal Bank 8. HDFC Bank Bank 9. ICICI Bank 20. South Indian Bank 10. IndusInd Bank 21. Tamilnad Mercantile Bank 11. ING Vysya Bank 22. Yes Bank 2.2.4 Foreign Banks 1. ABN AMRO Bank 2. Abu Dhabi Commercial Bank 3. Antwerp Diamond Bank 4. Arab Bangladesh Bank 5. Bank Of America 6. Bank Of Bahrain & Kuwait 7. Bank Of Ceylon 8. Bank Of Nova Scotia 9. Bank Of Tokyo-Mitsubishi- UFI 10. Barclays Bank 11. BNP Paribas 12. Calyon Bank 13. Chinatrust Commercial Bank 14. Citibank

12. Jammu & Kashmir Ban 13. Karnataka Bank 14. Karur Vysya Bank 15. Kotak Mahindra Bank 16. Lakshmi Vilas Bank 17. Nainital Bank 18. Ratnakar Bank 19. SBI Commercial & International 20. South Indian Bank 21. Tamilnad Mercantile Bank 22. Yes Bank

15. DBS Bank 16. Deutsche Bank 17. HSBC 18. JP Morgan Chase Bank 19. Krung Thai Bank 20. Mashreq Bank\ 21. Mizuho Corporate Bank 22. Oman International Bank 23. Shinhan Bank 24. Societe Generale 25. Sonali Bank 26. Standard Chartered Bank 27. State Bank of Mauri

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2.3 Regional Distribution of Branches

The number of offices (branches plus administrative offices) for all SCBs increased rom 64,184 in FY1995 to 77,773 in FY2008. The number of offices for SCBs increased at a higher pace between FY06 and FY08. The branch network increased by 10% between FY06 to FY08 in three years as compared to 10.6% from FY1995 to FY2005 (i.e. 10 years). On an overall basis, the branches of the SCBs in India are fairly distributed. The state-owned banks have to adhere to social objective set by the government. Since nationalisation, PSBs have increased their presence in rural and semi-urban areas. Private and foreign banks started operating post 1994. Since the main driver for these banks was profit maximisation and due to restriction on opening of branches, their branch network is being concentrated in metro and urban regions.

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2.4 Distribution of branches among regions for various bank groups

As depicted in above graphs, there is a noticeable difference between rural and semi-urban presence of PSBs, private & foreign banks. SBI and associates and 10ationalized banks have around 34% of the branches situated in rural area as compared to 12.5% and 0% for private and foreign banks.

3.Role of Reserve Bank of India
Established in 1935, under the Reserve bank of India Act, 1934, RBI is the central bank of the country. RBI was nationalised in the year 1949. Functions of the RBI can be divided into two. Monetary functions also known as the central banking functions of the RBI are related to control and regulation of money and credit, i.e., issue of currency, control of bank credit, control of foreign exchange operations, banker to the Government and to the money market. Monetary functions of the RBI are significant as they control and regulate the volume of money and credit in the country. Non-monetary functions includes supervision of banks operating India, promotion of sound banking

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3.1 RBI monetary and credit policy
GOI uses various tools for development of economy. Two important tools of a croeconomic policy are Monetary Policy and Fiscal Policy. Fiscal policy is decided by the GOI through annual budget by the Finance Ministry. Monetary policy is a subject matter of RBI. Monetary Policy The RBI is responsible for formulating and implementing Monetary Policy which is ssentially a stabilisation policy. It is not intended to influence the long-term growth potential of the economy, but aims at ironing out the fluctuations in the economy also referred to as business cycles. This is done to minimise fluctuations and ensure a sustainable mix of growth and inflation in the economy. The RBI regulates the supply of money and the cost and availability of credit in the economy. It can increase or decrease the supply of currency as well as interest rate, carry out open market operations, control credit and vary the reserve requirements. The Monetary Policy aims to maintain price stability, full employment and economic growth. Historically, the Monetary Policy is announced twice a year - a slack season policy (April-September) and a busy season policy (OctoberMarch) in accordance with the agricultural cycles. These cycles also coincide with the halves of the financial year. The RBI as per the world-wide practice has shifted to marketbased instruments for monetary management from non-market-based instruments like interest rate control. he RBI can influence the cost of funds and availability of credit in the economy by altering the repo/reverse repo rates, changing the reserve requirements and engaging in open market operations.

3.2 Developments in FY09 and Role of RBI
The RBI s role in monetary development and price stability can be well understood by the developments which happened in FY09. We divide the developments in financial arkets in FY09 into two. From April 2008 to September 2008 Up to the mid of FY09, India continued its dream run of high economic growth. Due to sustained inflow of foreign capital in India and high commodities and oil prices, inflation rate touched record highs of 12.91% in August 2008. The RBI reacted to this by increasing the Cash Reserve Ratio (CRR) by 150 bps from 7.5% to 9.0% and increase in repo rate by 125 bps from 7.75% to 9.0% up to the end of September 2008. This enabled the bank to suck out excess liquidity in the system, thereby containing inflation. From September 2008 to March 2009 Near collapse of the world s financial system and global recession made its impact felt on the domestic economy in last two quarters of FY09. The domestic economy slowed down considerably in later half of the FY09. Movement in inflation was southward due to world-wide slowdown and correction in commodities prices. In order to check the domestic slowdown RBI, aided by declining inflation, slashed the CRR, SLR and repo rates

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sharply by 400 bps, 100 bps and 400 bps, respectively over a period of 6 months from Aug 08 to Jan 09.

3.3 Liquidity Adjustment Facility (LAF)
LAF is used by RBI for managing the day-to-day liquidity in the banking system. LAF operations are carried out twice in a day. LAF is carried out with the help of two key rates viz Repo rate and Reverse repo rate. The term repo stands for repurchase agreement. Repo rate is the rate that RBI charges the banks when they borrow from it or the rate at which RBI lends to the banks. Repo operations increase liquidity in the system. Reverse repo rate is the rate that RBI offers the banks for parking their funds with it or the rate at which RBI borrows from the banks. Reverse repo operations suck out liquidity from the system. RBI uses the LAF to inject or absorb the liquidity into the banking system. Increasing repo rate from 7.75% in May 2008 to 9.0% in September 2008 was done to increase the cost of credit and to tighten the liquidity in the system due to increasing inflation. However, falling inflation and fear of economic slowdown prompted RBI to reduce the repo and reverse repo rates to bring down the cost of the credit. Yearly trend since FY01 shows that, repo and reverse repo rates are either increasing or decreasing in the given financial year, with the exception of FY09. High inflation due to over-heating of the economy in the first half resulted in RBI increasing the rates. Global financial crisis in mid FY09 and fear of slowdown supported the rate reduction. The spread between the repo and reverse repo also signals RBI s intention of cheaper/costlier credit. Deceasing spread from July 2003 till September 2006 suggests the cheaper credit policy from RBI to push economic growth. The spread was at it lowest level of 1.0% from April 2005 to September 2006. The increasing spread from May 2008 to September 2008 suggests the tightening of credit due to higher inflation and overheating of the economy. However from September 2008 onwards, the RBI has adopted cheaper credit policy and thereby has reduced the spread between the repo and reverse repo from 3.0% in September 2008 to 1.5% in February 2009. The bankruptcy/sell out/ restructuring of some of the world s largest financial institutions brought pressures on the domestic money and foreign exchange markets, in conjunction with temporary local factors such as advance tax outflows. In order to alleviate these pressures, the RBI initiated a series of measures. The average daily net outstanding liquidity injection under LAF was Rs.42,591 crore during September 2008 as compared with Rs.22,560 crore in the previous month. Liquidity conditions eased from November 2008. The LAF shifted from net injection mode to net absorption mode. The average daily net outstanding liquidity absorption under LAF was Rs.22,294 crore during December 2008. Lesser avenues of lending due to economic downturn had made banks to park excess funds with RBI under reverse repo. Daily abruption under reverse repo crossed Rs. 1,00,000 crore in April 2009. RBI has been discouraging reverse repo in order to compel the banks to lend more. RBI has cancelled the secondary liquidity adjustment facility

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(evening reverse repo auctions) effective from May 2009 and reduced thereverse repo rate to 3.75%.

3.4 Cash Reserve Ratio (CRR)
All commercial banks are required to keep a certain amount of its deposits in cash with RBI. This percentage is called the CRR which can also be effectively used to manage liquidity, inflation and cost of credit in the banking system by RBI. Higher CRR will increase the cost of the fund with the bank and in turn will make the credit costlier for borrower and vice-versa.

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

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

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An online banking facility enables you to handle your finances efficiently. Online banking uses modern computer technologies to offer the users convenient banking facilities. If you have access to such a facility, there is absolutely no need for you to personally visit your bank s branch for any sort of transaction. You can simply login with the internet-banking password that your banker has given you, and carry all the necessary work online. It also eliminates the necessity of doing any paper-based work and saves considerable time for the users. Private sector and foreign banks were using technology and computerized system since its beginning while PSBs were not. So they found difficulty in managing all these things. Many of Indian PSBs ignored technological change and had lost market share to foreign banks and new private banks. Technology helps in having a huge branch network easily and also it reduces the operational cost this may b clarified by an example as:- Operational cost per transaction of an account via different type is Via computers on counter- 40 Rs.  Via ATM - 16-17 Rs.  Via online - 46 paise So it is cleared that manually/direct transaction cost comes very high and electronically and online it is very low. So that s why public sector banks should improve their working system and should make it totally online but challenge is before PSBs The users can do variety of work using your online banking pin code. The bankers benefit equally from the online banking facilities. Besides offering their users the convenience of banking, the online banking system means significant cost savings for the bankers themselves. With such an automatic system in place, the bankers need not to hire employees specialized in handling paper work and teller interactions. This reduces the bankers operating costs considerably, translating into significant cost savings over the long-term.

4.2 Non performing asset ( NPA) Definition
A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is not producing income. Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as substandard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001. Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry,
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prudential norms and risk-based supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences of other Asian countries in handling of NPAs. The chart below shows data for NPA going back to 2.3-1.0. The two lines plotted are non-performing assets gross non-performing assets. Loan loss allowance is not growing nearly as fast as the non-performing assets. I can say that this is a problem, but that we don t have a solution. In the course of discussing disposition of assets with various banks, it sometimes becomes apparent that the reason that the bank cannot dispose of the property at market prices, is because the bank does not have enough capital to do so. It is suspected that the slow growth of loan loss allowance is related to the same problem. While this chart shows that NPA is decreasing overall in banking system but even then in PSBs NPA are higher with comparison to private sector banks.

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4.3TALENT MANAGEMENT 
Such personnel need to be identified, nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career. Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower.  Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes, Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times.

Population in Mio
1160 1012 846 683 361 439 548

1941-511951-611961-711971-811981-911991-002001-10 
Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences, both nationally and internationally, to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals. There is also need to develop organisation-wide awareness about banks keybusiness problems including stagnant business units, strain on profitability, cost of operations, unexplored business opportunities, manpower costs, NPAS etc.  The preconditions for an effective talent management is clarity of where the organisation is, i.e., the starting point and where it wishes to reach in a given time horizon, i.e., the destination

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

Population Pyramid

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Conclusion
Indian Public Banks are facing innumerable challenges such as worrying level of NPAs, deteriorating asset quality, increasing pressures on profitability, asset-liability management, liquidity risk management, market risk management and ever tightening prudential norms. Operating in this demanding environment has exposed banks to various challenges. The post-reform period witnessed the following major challenges for public sector banks in India Enhancement of customer service; application of technology; implementation of Basel II; improvement of risk management systems; implementation of new accounting standards; enhancement of transparency & disclosures. The boom in the field of retail banking and the intense competition among the banks to increase the customer base has resulted in the large disbursement of consumer loans, home loans, loans on credit cards, auto loans, educational loans etc. on easy terms without much scrutiny. This has brought with it an increase in the no. of cases of default in loan repayment thus increasing the bank s NPAs. Managing customers is one of the main issues faced by banks. The demands and expectations of the customers grow at a much faster rate than the banks can equip themselves to be with them. If the service levels of the product levels are not up to the customer satisfaction, there is always a danger that the customer might shift his transactions elsewhere. So always give customers more than they expect to get. Multiple regulations are the main weakness for PSBs. It has not the single controlling system while private banks have. PSBs are also guided by govt. and controlled by RBI and it has also their union. So there is trice controlling system that s why any policy takes time in being implemented. This is the main reason of delayed progress of PSBS. The annual report 2007-08 of RBI shows that position of public sector banks is on steady progress. · Demand deposits, borrowings and other liabilities are increasing.
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· Assets as current assets and other loan cash credit is increasing which shows a sign of growing network. · Balance with banks and money at call and short notice decreased last year. · Other approved securities also decreased in comparison to previous year. · Consolidated balance sheet of banks shows that banks are on progress. Liabilities and assets have been increased in comparison to last year but even then public sector banks are not progressing equally as private sector banks because of being regulated and controlled system. Last year kisan loan was forgiven worth Rs. 60,000 crores and mostly major no frill A/cs has been open in public sector banks. So NPA has been increased because operational cost has been increasing due to more A/cs and transaction and PSBs are liable to open branches in rural areas.

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