EXECUTIVE SUMMARY

A retrospect of the events clearly indicates that the Indian banking sector has come far away from the days of nationalization. The Narasimham Committee laid the foundation for the reformation of the Indian banking sector. Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector. As the international standards became prevalent, banks had to unlearn their traditional operational methods of directed credit, directed investments and fixed interest rates, all of which led to deterioration in the quality of loan portfolios, inadequacy of capital and the erosion of profitability. The recent international consensus on preserving the soundness of the banking system has veered around certain core themes. These are: effective risk management systems, adequate capital provision, sound practices of supervision and regulation, transparency of operation, conducive public policy intervention and maintenance of macroeconomic stability in the economy. Until recently, the lack of competitiveness vis-à-vis global standards, low technological level in operations, over staffing, high NPAs and low levels of motivation had shackled the performance of the banking industry. However, the banking sector reforms have provided the necessary platform for the Indian banks to operate on the basis of operational flexibility and functional autonomy, thereby enhancing efficiency, productivity and profitability. The reforms also brought about structural changes in the financial sector and succeeded in easing external constraints on its operation, i.e. reduction in CRR and SLR reserves, capital adequacy norms, restructuring and recapitulating banks and enhancing the competitive element in the market through the entry of new banks.

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The reforms also include increase in the number of banks due to the entry of new private and foreign banks, increase in the transparency of the banks’ balance sheets through the introduction of prudential norms and increase in the role of the market forces due to the deregulated interest rates. These have significantly affected the operational environment of the Indian banking sector. To encourage speedy recovery of Non-performing assets, the Narasimham committee laid directions to introduce Special Tribunals and also lead to the creation of an Asset Reconstruction Fund. For revival of weak banks, the Verma Committee recommendations have laid the foundation. Lastly, to maintain macroeconomic stability, RBI has introduced the Asset Liability Management System. The East-Asian crisis has demonstrated the vital importance of financial institutions in sustaining the momentum of growth and development. It is no longer possible for developing countries like India to delay the introduction of these reforms of strong prudential and supervisory norms, in order to make the financial system more competitive, more transparent and more accountable. The competitive environment created by financial sector reforms has nonetheless compelled the banks to gradually adopt modern technology to maintain their market share. Thus, the declaration of the Voluntary Retirement Scheme accounts for a positive development reducing the administrative costs of Public Sector banks. The developments, in general, have an emphasis on service and technology; for the first time that Indian public sector banks are being challenged by the foreign banks and private sector banks. Branch size has been reduced considerably by using technology thus saving manpower.

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The deregulation process has resulted in delivery of innovative financial products at competitive rates; this has been proved by the increasing divergence of banks in retail banking for their development and survival. In order to survive and maintain strong presence, mergers and acquisitions has been the most common development all around the world. In order to ensure healthy competition, giving customer the best of the services, the banking sector reforms have lead to the development of a diversifying portfolio in retail banking, and insurance, trend of mergers for better stability and also the concept of virtual banking. The Narasimham Committee has presented a detailed analysis of various problems and challenges facing the Indian banking system and made wide-ranging recommendations for improving and strengthening its functions.

TABLE OF CONTENTS
CH.NO. PAGE NO CHAPTER - 1 REFORMS IN THE INDIAN BANKING SECTOR TITLE

1.1 Introduction 1.2 Reduction of SLR and CRR 1.3 Minimum Capital Adequacy Ratio 1.4 Prudential Norms 1.5 Disclosure Norms 1.6 Rationalisation of Foreign Operations in India 19

01 04 07 11 17

3

.4 76 83 The SCAM Story TITLE 74 3.9 Asset Liability Management System 29 1.2 Voluntary Retirement Scheme 2.3 And today.7 Special Tribunals and Asset Reconstruction Fund 23 1.8 Restructuring of Weak Banks 1.2 Views news say.5 Banking and Insurance 2.NO.10 1.2 DEVELOPMENTS IN THE INDIAN BANKING SECTOR 42 43 52 56 62 65 71 73 2.6 Rural Banking 2. PAGE NO CHAPTER – 3 3.1.4 Mergers and Acquisition 2.1 3. the 86 Public Sector OR Private Sector – Point of Future … what’s ahead 4 .7 Virtual Banking 2. .3 Universal Banking 2.. 3. .1 Introduction 2.8 Retail Banking CH.11 Reduction of Government Stake in PSBs 32 Deregulation of Interest Rate 39 26 CHAPTER .

3. List of Annexures Annexure 1: List of banks Annexure 2: Questionnaire 90 93 5 .5 Conclusion 88 List of Illustrations and Visual Aids Illustration No. 1 2 3 4 5 6 7 8 9 10 Trends in CRR and SLR Growth In Investments In Government Securities by Banks Classification of Loan Assets of SCBs Indian Banks: Trend in ROE Capital Contributed by Government Income and Expenses Profile of banks VRS trends in Banks ICICI pre merger and post merger scenario Comparison of classes of banks Lendings in Rural India 6 10 15 22 37 41 50 60 61 70 Title Page no.

The initiation of the financial sector reforms brought about a paradigm shift in the banking industry. v. The main recommendations of the Committee were: - i. The Narasimham Committee report. The reform measures necessitated the deregulation of the financial sector.1 Introduction As the real sector reforms began in 1992. The guidelines that were issued subsequently laid the foundation for the reformation of Indian banking sector. Organisations and Functioning of the financial system. aspects relating to the Structure. and 8 per cent by those banks having international operations by March 1994 6 . ii. iv. Manmohan Singh.1. the RBI had proposed to from the committee chaired by M. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) iii. submitted to the then finance minister. 8 per cent by March 1996. Narasimham. former RBI Governor in order to review the Financial System viz. the need was felt to restructure the Indian banking industry. Phasing out of directed credit programmes and redefinition of the priority sector Deregulation of interest rates so as to reflect emerging market conditions Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993. on the banking sector reforms highlighted the weaknesses in the Indian banking system and suggested reform measures based on the Basle norms. particularly the banking sector. In 1991.

xvi. Imparting transparency to bank balance sheets and making more disclosures Setting up of special tribunals to speed up the process of recovery of loans Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount Restructuring of the banking system. x. xviii. 8 to 10 national banks and local banks confined to specific regions. Abolition of branch licensing Liberalising the policy with regard to allowing foreign banks to open offices in India Rationalisation of foreign operations of Indian banks Giving freedom to individual banks to recruit officers Inspection by supervisory authorities based essentially on the internal audit and inspection reports Ending duality of control over banking system by Banking Division and RBI A separate authority for supervision of banks and financial institutions which would be a semi-autonomous body under RBI Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Obtaining resources from the market on competitive terms by DFIs Speedy liberalisation of capital market 7 . xvii. which could become international in character.vi. asset classification and provisioning against bad and doubtful debts vii. ix. confined to rural areas xi. xii. xiii. xix. so as to have 3 or 4 large banks. Rural banks. viii. xv. xiv. Adoption of uniform accounting practices in regard to income recognition. including RRBs. xx.

Risk weight for a Govt. Among these are the reductions in SLR/CRR. etc. Supervision of merchant banks. leasing companies etc. guaranteed account must be 100 percent 8 . Several recommendations have been accepted and are being implemented in a phased manner. Keeping in view the need of further liberalisation the Narasimham Committee II on Banking Sector reform was set up in 1997. securities should be marked to market iii. by a separate agency to be set up by RBI and enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions. The major recommendations are : i.xxi. entire portfolio of Govt. This committee’s terms of reference included review of progress in reforms in the banking sector over the past six years. This committee constituted submitted its report in April 1998. mutual funds. introduction of capital adequacy norms.. and deregulation of most of the interest rates. allowing entry to new entrants in private sector banking sector. In the next three years. charting of a programme of banking sector reforms required to make the Indian banking system more robust and internationally competitive and framing of detailed recommendations in regard to make the Indian banking system more robust and internationally competitive. etc. Capital adequacy requirements should take into account market risks also ii. adoption of prudential norms for asset classification and provisions.

xii. it has assigned a 2. viii. xvi. 2000 and laid down rules for provisioning.5 per cent risk-weightage on gilts by March 31. guaranteed accounts must also be categorized as NPAs under the usual norms xiii.There should be no further re-capitalization by the Govt. 9 . shortened the life of sub-standard assets from 24 months to 18 months (by March 31. ix. NPAs exceed its net worth or one whose operating profits less its income on recap bonds is negative for 3 consecutive years. To start with. An asset should be classified as doubtful if it is in the sub-standard category for 18 months instead of the present 24 months vi. 2001). International practice of income recognition by introduction of the 90-day norm instead of the present 180 days. A provision of 1% on standard assets is required. Govt. There is need to institute an independent loan review mechanism especially for large borrowal accounts to identify potential NPAs. CAR to be raised to 10% from the present 8%. 9% by 2000 and 10% by 2002 v. x. Banks should avoid ever greening of their advances vii. xiv. Banks having high NPA should transfer their doubtful and loss categories to ARCs which would issue Govt. Recruitment of skilled manpower directly from the market be given urgent consideration xv. bonds representing the realisable value of the assets. xi.iv. NPA level should be brought down to 5% by 2000 and 3% by 2002. an appropriate VRS must be A weak bank should be one whose accumulated losses and net introduced. To rationalize staff strengths.

2000. Only a few of these mainly constitute to the reforms in the banking sector. REFORMS 10 . 100 per cent risk weightage on foreign exchange (March 31. 1999) and a minimum capital adequacy ratio of 9 per cent as on March 31.25 per cent provisioning on standard assets (from fiscal 2000).called for 0.

with the Statutory 11 . The SLR is used to impose financial discipline on the banks. allocate bank credit between the government and the private sectors. The committee offered the route of Open Market Operations (OMO) to the Reserve Bank of India for further monetary control beyond that provided by the (lowered) SLR and CRR reserves.1. Nor did they manage such risks or provide for them in their balance sheets. With an effective return of a mere 2. and also help in monetary regulation. However bankers strongly feel that these along with high non-performing assets (on which banks do not earn any return) 10 percent CRR and 25 percent SLR (most banks have SLR investments way above the stipulation) are affecting banks' bottomlines. The Narasimham Committee had argued for reductions in SLR on the grounds that the stated government objective of reducing the fiscal deficits will obviate the need for a large portion of the current SLR.2 Reduction of SLR and CRR The South East Asian countries introduced banking reforms wherein bank CRR and SLR was reduced. the need for the use of CRR to control secondary expansion of credit would be lesser in a regime of smaller fiscal deficits. CRR is a major drag on banks' profitability. The monetary policy perspective essentially looks at SLR and CRR requirements (especially CRR) in the light of several other roles they play in the economy. Ultimately. Similarly. And followed the South East Asian Crisis. this increased the lending capacity of banks. provide protection to deposit-holders. the rule was Reduction in the reserve requirements of banks.8 per cent. The CRR is considered an effective instrument for monetary regulation and inflation control. The markets fell precipitously because banks and corporates did not accurately measure the risk spread that should have been reflected in their lending activities.

was much greater than the (earlier) returns on the government securities. at the cost of bank profitability.the cost of deposits for banks.5 per cent. Switzerland. The recent trend in several developed countries (US. Some problems with the stated aim of reducing SLR and CRR are: 1. The arguments for higher or lower SLR and CRR ratios stem from two different perspectives one which favours the banks. Open market operations have not been used to any significant extent in India for monetary control. To some extent. It is also claimed that the low returns from the forced investments securities adversely profitability . and the other which favours the bank reserves as a monetary policy instrument. this argument has been weakened by the increase in interest on government securities to 13. the banks' control over resource in deployment. much more than 5-6 years. Australia.Liquidity Ratio (SLR) being brought down to 25 per cent by 1996-97 in a period of 5 years. Canada. The supporting condition of smaller fiscal deficits is not happening in reality 2. government and returns to the banks affect from the the bank "preempted" funds. This argument is sometimes carried further to state that RBI makes profits on impounded money. The bank perspective seeks to maximise "lendable" resources. which averages at 15-16 per cent. and Germany) towards drastic lowering of reserve requirements is often used to support the argument for reduced reserve levels in India. The time required for gaining experience with the use of such operations would be 12 .

The RBI had announced an increase in interest rate on CRR balance to 6% from the present 4%. not likely to stabilize in the near future. if the economic indicators become unfavourable. Bank investment are. and RBI has already indicated as much. therefore. A commitment to a unidirectional movement of these vital controls irrespective of the effects on. and the response of. other economic factors (such as inflation). 13 . RBI may be forced to revert to higher reserve levels.3. This scenario thus indicates that despite the stated aim of reductions in SLR and CRR. would be unwise. This will certainly boost the profits of banks. as they have to maintain a minimum balance of 8% with the RBI.

Trends in CRR and SLR 1993 – 2001 40 35 30 Percentage of DTL 25 20 15 10 5 0 May.Nov.May.May.Nov.Nov.May.May.May.Nov.Nov.May.May.May93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 SLR CRR 14 .Nov.Nov.Nov.

comprising of Undisclosed Reserves and Cumulative Perpetual Preference Shares 15 . • Tier-I Capital.3 Minimum Capital Adequacy Illustration 1 Ratio The committee recommended a Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993. as per the Basle Committee Recommendations. the RBI also issued similar capital adequacy norms for the Indian banks. Later. and 8 per cent by those banks having international operations by March 1994. The minimum CAR that the Indian banks are required to meet is set at 9 percent.1. by March 31. all banks required attaining the capital adequacy norm of 8 per cent. 8 per cent by March 1996. Based on the Basle norms. comprising of Paid-up capital Statutory Reserves Disclosed free reserves Capital reserves representing surplus arising out of sale proceeds of assets • Tier-II Capital. the banks will have to identify their Tier-I and Tier-II capital and assign risk weights to the assets. to be achieved by year-end 1992. According to these guidelines. Capital Adequacy The growing concern of commercial banks regarding international competitiveness and capital ratios led to the Basle Capital Accord 1988. Having done this they will have to assess the Capital to Risk Weighted Assets Ratio (CRAR). 1996. The accord sets down the agreement to apply common minimum capital standards to their banking industries.

The justification for capital adequacy norms 16 . a short-term danger of the new provisioning and capital adequacy norms arises from the inefficiency of the Asset Reconstruction Fund (ARF). Inadequacy? The structural inadequacy that is said to be responsible for the stock scam was the compartmentalisation of the capital and money markets.Revaluation Reserves General Provisions and Loss Reserves The Narasimham Committee had recommended that the capital adequacy norms set by the Bank of International Settlements (BIS) be followed by the Indian banks also. The BIS norm for capital adequacy is 8 per cent of risk-weighted assets. In this situation. such as banks. these roles can vary significantly between the public sector banks and those in the private sector. costly money to refurbish the capital base. the banks are being forced to accept the minimum possible amounts from sub-standard and bad loans. errant loanees are now getting away with token payments which the funds starved banks are only too willing to accept. The need to make massive provisions obviously results in a depletion of capital. or some alternative arrangement. and the availability of "illegal" arbitrage opportunities. However. Also. Such interconnections between various parts of the financial system will continue to develop as the demands made by the rest of the economy on the financial system increase in the next two decades. Thus. The banking sector specialists have traditionally claimed that capital plays several roles in all "depository institutions". the need for ARF is now paramount. Where time and legal efforts might have forced them to pay more. But the capital adequacy norm means the banks have to find additional.

However. In an economic downturn. and more time for the bank to work through potentially fatal problems. and non-performing assets. the government-owned capital in the public sector banks is itself taxpayer money. but the recent stock scam showed that the banks are perhaps being forced to take excessive risks to improve the profitability. the Indian public sector banks may attract more "punishments" in the form of politically motivated "loan waivers". the government's ability to play such a role effectively is suspect. This may remain true for the public sector banks only if the government acts as a vigilant shareholder. At the same time.  Capital helps avoid "credit crunches": a well-capitalized bank can continue to lend in the face of losses. Since management control will remain with bureaucrats .banking or government . "loan melas". the equity-owners have a powerful incentive to control the amount of risk the bank incurs.the source of capital would not make much difference in the Indian scenario.  Capital increases the disincentive for the bank management to take excessive risk: If significant amount of their own funds are at stake. well-capitalized banks may provide a vital source of continuing credit. and 17 .  Capital acts as a buffer between the bank and the deposit guarantee corporation (funded by the tax-payer): while this is true for the private banks. The Indian banks have traditionally shown risk-aversion.for banks is brought out by the following arguments:  Capital lowers the probability of bank failure more capital means added ability to withstand unexpected losses. Similar losses might force a poorly capitalized bank to restrict credit (to increase capital ratios).  Capital increases the long-term competitiveness: more capital allows a bank to build long-term customer relationships.

It can thereby recover more from the loans. it can give valuable time to customers with temporary repayment problems. talent and expertise in bank management is available mainly in the existing nationalised banks. investments in them do not add to the capital requirements. the investments in government securities shot up by 18. Also. Since the risk-weight of government securities is zero. New opportunities can be quickly made use of by lending appropriately.8 18 . One short-term fallout of the capital adequacy norms has been the massive increases in investments by the banks in government securities.respond to positive as well as negative changes in the economic environment. for example. If the bank is not constrained by capital. In the first ten months of 1993-94. which would otherwise have to be called in.6 per cent. increase in capital owned directly by the government has several attendant problems' The situation is complicated by the fact that " private management" does not provide an answer in India. because of the size of the institutions involved.8 per cent while bank credit grew at only 6. The Dilemma The foregoing discussion clearly brings out two conclusions: (a) increasing the capital base of the nationalised banks is necessary. especially in view of the large quantities of non-performing assets. Despite a strong growth in aggregate deposits of 13. The banks are therefore choosing to deploy funds mobilised through deposits in these long-term gilts. and (b) however.

suggested further revision i.0 %] Investments 15131 15460 Source: Reserve Bank of India Bulletin [1994] Supplement .65 per cent.6 %] 19857 [18. especially when interest rates are deregulated.e. Now.6 %] 26390 [21.199292 93 36441 Aggregate deposits growth [19.2 %] 1993-94 [Up to Jan 94] 37187 [13. while investments surged by 18. credit grew by only 6. CAR to be raised to 10% from the present 8%(1998).8 %] 9999 [6.0 %] 20966 [16.Report on Trends and Progress of Banking in India 1991-92 [July . 9% by 2000 and 10% by 2002 19 . banks would have to develop much better investment management skills.0 %] 1992-93 [Up to Jan 93] 32364 [14.8 %] Bank credit growth 9291 [8.8 per cent.per cent. The Narasimham Committee II. Growth In Investments In Government Securities by Banks 1991.June].7 %] 11042 [12. Jan 1993. 1998. The problem with this practice of the banks is that it can upset the balance of maturity patterns between deposits (many of ' which are short-term) and investments (which have 10 year maturities). and significant open market operations are started.

Illustration 2 20 .

a code stating adoption of uniform accounting practices in regard to income recognition. Magnitude of the problem According to the latest RBI figures. to avoid classifying problem assets as NPAs. Close to 16 per cent of loans made by Indian banks were NPAs . signifying that while new NPAs are being added to banks' operations every year. banks give another loan to the company with the help of which it can pay the due interest on the original loan.1. asset classification and provisioning against bad and doubtful debts has been laid down by the Central Bank. The net NPAs (gross NPAs minus provisioning) stands at Rs 21. Though in percentage terms. recovery of older dues is also taking too long. What is ever greening or rescheduling of loans? Sometimes.Increased Transparency Apart from the interest rate structure.4 Prudential Norms To get a true picture of the profitability and efficiency of the Indian Banks.very high compared to say 5 per cent in banking systems in advanced countries.563 crore which is about 16 per cent of the total loan assets of the banks. RBI discourages such practices. While this allows the bank to project a healthy image. it actually makes the problems worse. Asset Quality . in absolute terms they have grown. gross NPAs in the banking sector stands at Rs 45. Asset quality is reflected by the quantum of non-performing assets (NPAs) – the higher the level of NPAs. and creates more NPAs in the long run. Courtesy the 21 . the NPAs have come down over the last 5-6 years.232 crore which is about 7 per cent of loans advanced by the banking sector. the net interest income is also affected by the asset quality of the bank. the lower will be the asset quality and vice versa.

the one major move in this direction was brought about by the Basle Committee. the problem still remains. This became imperative. asset classification and provisioning for bad and doubtful debts serve two primary purposes – firstly. As stated earlier. 22 . which can help it sustain unforeseen losses. which laid the capital standards that banks have to maintain. and secondly. Implies that the bank should have adequate capital to face the likely losses that may arise from its risky assets. While the government did contribute to write-off these bad loans. In the changed business environment. the RBI introduced prudential norms and regulations. The prudential norms which relate to income recognition. as banks began to cross over their national boundaries and begin to operate in international markets. most of the public sector banks were burdened with huge NPAs. Considering the implications of the NPAs and also for imparting greater transparency and accountability in banks operations and restoring the credibility of confidence in the Indian financial system. INCOME RECOGNITION  The regulation for income recognition states that the Income on NPAs cannot be booked.nationalization agenda and the directed credit. Following the Basle Committee measures. they bring out the true position of a Bank’s loan portfolio. NPAs expose the banks to not just credit risk but also to liquidity risk. where banks are exposed to greater and different types of risk. RBI also issued the Capital Adequacy Norms for the Indian banks also. they help in arresting its deterioration. The asset quality of the bank and its capital are closely associated. it becomes essential to have a good capital base. If the assets of the bank go bad it is the capital that comes to its rescue.

An NPA is one where interest is overdue for two quarters or more. The working group had identified three areas of divergence: non-compliance with RBI norms. submitted its report. On non-performing accounts the banks should not charge or take into account the interest. auditors and RBI. The current norm is 180 days. As regards to accounts classified in Health Code 4. Income in respect of accounts coming under Health Code 5 to 8 should not be recognized until it is realized. and differences in the valuation of securities by banks. The working group was set after the RBI’s Board for Financial Supervision (BFS) wanted divergences in NPA accounting norms by banks from central bank guidelines to be addressed. They will no more have the privilege of stating that the borrower has parked funds with the lead-bank or with a member-bank and that their share is due for receipt. Income-recognition norms have been tightened for consortium banking too.Interest income should not be recognized until it is realized. RBI has advised the banks to evolve a realistic system for income recognition based on the prospect of realisability of the security. As of now. The new notifications emanated after deliberations held between the RBI and a cross-section of banks after a working group headed by chartered accountant. Member banks have to intimate the lead-bank to arrange for their share of recovery. subjectivity arising out of the flexibility in norms. the RBI has suggested that the international norm of 90 days be implemented in a phased manner by 2002. PR Khanna. for income recognition norms. interest is not to be recognized on accrual basis. ASSET CLASSIFICATION 23 . In respect of NPAs. but is to be treated as income only when actually received.

NPAs are loans on which the dues are not received for two quarters. NPA from priority sector constituted was lower at 46 per cent than that of the corporate sector at 48 per cent. delay/default in payment of interest and/or repayment of principal has rendered a significant proportion of the loan assets nonperforming. doubtful and loss. Allaying the fears that bulk of the NonPerforming Assets (NPAs) was from priority sector.Standard. However. NPAs consist of assets under three categories: sub-standard. Regulations for asset classification Assets should be classified into four classes . a Non-Performing Asset (NPA) is a credit facility in respect of which interest/installment has remained unpaid for more than two quarters after it has become past due. and Loss assets. “Past due” denotes grace period of one month after it has become due for payment by the borrower. RBI for these classes of assets should evolve clear. The Mid-Term Review of Monetary and Credit Policy for 2000-01 has proposed to discontinue this concept with effect from March 31. uniform. Sub-standard. public sector banks have large NPAs due to wrong lending policies followed earlier and also due to government regulations that require them to lend to sectors where potential of default is high. and consistent definitions. Loans and advances account for around 40 per cent of the assets of SCBs.While new private banks are careful about their asset quality and consequently have low non-performing assets (NPAs). Doubtful. As per RBI’s prudential norms. 2001. The health code system earlier in use would have to be replaced. The banks should classify their assets based on weaknesses and dependency on collateral securities into four categories: 24 .

Sub-standard Asset: An asset which remains as NPA for a period exceeding 24 months. 1998). cash and bank balances with other banks.2 percent in 1999-2000. The banking industry has significant market inefficiencies caused by the large amounts of Non Performing Assets (NPAs) in bank portfolios. It is worth noting that the ratio of incremental standard assets of SCBs to their total loan assets increased from 83. Doubtful Assets: An NPA which continued to be so for a period exceeding two years (18 months. but the amount has not yet been written off wholly or partly. and amounts locked up in frauds".1 per cent in 1998-99 to 97. suit filed accounts. Loss Assets: An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset. with effect from March. as recommended by Narasimham Committee II. accumulated over several years. 2001. In other words. The following Table shows the distribution of total loan assets of banks in the public private sectors and foreign banks for 1997-98 through 19992000. examples of which are: Overdue and stagnant accounts. and which do not yield returns to the bank. Discussions on non-performing assets have been going on for several years now. suspense accounts and miscellaneous assets. One of the earliest writings on NPAs defined them as "assets which cannot be recycled or disposed off immediately. where the current net worth of the borrower. the ratio of incremental NPAs 25 .Standard Assets: It carries not more than the normal risk attached to the business and is not an NPA. guarantor or the current market value of the security charged to the bank is not enough to ensure recovery of the debt due to the bank in full.

4 93.8 1.9 30972 31059 1.of SCBs to their total loan assets declined significantly from 16.9 2.6 84.9 0.0 3.6 85.7 2.5 5.8 percent in 1999-2000. Classification of Loan Assets of SCBs (Percentage distribution of total loan assets) Assets A.7 93.9 4.6 92. Doubtful 1997-98 1998-99 1999-2000 D.0 1.0 5.0 1.8 36753 43049 1.2 2.3 91.0 1.9 1.1 4.0 2.0 5.2 91.2 4. Loss 1997-98 1998-99 1999-2000 1997-98 1998-99 1.7 0.0 4.1 Public Private Foreign SCBs B.9 4.9 0.3 87.9 1.9 per cent in 1998-99 to 2.3 91.9 0. Total Assets (Rs.8 1. Crore) 26 .8 1. Standard 1997-98 1998-99 1999-2000 1997-98 1998-99 1999-2000 C.9 5.6 352696 399436 9.9 1.8 6. Sub-standard E.2 3.9 0.9 85.1 86.0 1.0 86.7 284971 325328 0.

For the future. and loss assets. the total of Non-Performing Assets (NPAs) for the public sector banks (SBI. Illustration 3 The asset classification norms have resulted in a huge quantity of assets being classified into the sub-standard.930 crores (RBI Bulletin. 1994).552 crores. most of whom do not add any value (information or judgment) to the evaluation. 27 .1999-2000 380077 58249 37432 475758 Note: Addition of percentages for B to D may not add up to 100 minus the percentage share of standard assets (A) due to rounding. and (iii) 10 per cent of the total out standings for substandard assets.106 crores. sometimes involving up to 18 different officials. As at 31 March 1993. and loss assets Rs 3. The present evaluation process in several banks is burdened with a bureaucratic exercise. PROVISIONING NORMS Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent basis so that the balance sheets reflect a true picture of the financial status of the bank. doubtful assets Rs 20. its seven associates. and 20 nationalised banks) stood at Rs 36. the banks will have to tighten their credit evaluation process to prevent this scale of sub-standard and loss assets. Of these. The Narasimham Committee has recommended the following provisioning norms (i) 100 per cent of loss assets or 100 per cent of out standings for loss assets. the sub-standard assets account for Rs 12. doubtful.588 crores. (ii) 100 per cent of security shortfall for doubtful assets and 20 per cent to 50 per cent of the secured portion.

the banks must be forced to make public the nature of NPAs being written off. The encouraging profits recently declared by several banks have to be seen in the light of provisions made by them . To the extent that provisions have 1. and the additional provisions for 1993-94. Banks need to have better credit appraisal systems so as to prevent NPAs from occurring. deposits.A provision of 1% on standard assets is required as suggested by Narasimham Committee II 1998. the profits would be fictitious. Norms Banks should disclose in balance sheets maturity pattern of advances. 28 . banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. investments and borrowings. Apart from this.Rs 10.390 crores pertaining to 1992-93. The nationalised banks have been asked to provide for the remaining 70 per cent of the "provisioning requirements" by 31 March 1994.5 Disclosure not been made. These disclosures were to be made for the year ending March 2000 In fact. The most important relaxation is that the banks have been allowed to make provisions for only 30 per cent of the "provisioning requirements" as calculated using the Narasimham Committee recommendations on provisioning (but with the diluted asset classification). This should be done to ensure that the taxpayer’s money given to the banks as capital is not used to write off private loans without adequate efforts and punishment of defaulters.

sometimes involving up to 18 different officials. RBI has set up a working group recently under its Department of Banking Operations and Development to come out with necessary guidelines on consolidated accounts for banks. and not as isolated entities. but at the same time it was assumed that the problems will be dealt with by the parent. As mentioned above. including all its branches and subsidiaries. the banks will have to tighten their credit evaluation process to prevent this scale of sub-standard and loss assets. Towards this end. The move is aimed at providing the investor with a better insight into viewing a bank's performance in totality. As per the 29 . According to a banker. Perhaps even the loan waivers and loan "melas" which are often decried by bankers form only a small portion of the total NPAs. much more stringent disclosure norms are the only way to increase the accountability of bank management to the taxpayers. This will be a path-breaking change to the existing norms wherein each bank conducts its accounts without taking into consideration the disclosures of its subsidiaries and other divisions for disclosure.# A Close look: For the future. earlier subsidiaries were floated as external independent entities wherein the accounting details were not incorporated in the parent bank's balance sheet. A lot therefore depends upon the seriousness with which a new regime of regulation is pursued by RBI and the newly formed Board for Financial Supervision. RBI norms for consolidated PSU bank accounts The Reserve Bank of India (RBI) has moved to get public sector banks to consolidate their accounts with those of their subsidiaries and other outfits where they hold substantial stakes. most of whom do not add any value (information or judgment) to the evaluation. The present evaluation process in several banks is burdened with a bureaucratic exercise. But whether this government and its successors will continue to play with bank funds remains to be seen.

since a number of public sector banks are now listed entities whose stocks are traded on the stock exchanges. point out bankers. this will very much form an integral part of the parent's balance sheet. under the new guidelines. # Result: This will require the banks to have a stricter monitoring system of not only their own bank. but also the other subsidiaries in other sectors like mutual funds. The working group was set up following the need to bring about transparency on the lines of international norms through better disclosures. Some public sector banks are even preparing their accounts in line with US GAAP norms in anticipation of a US listing. These new norms will necessitate not only that the problems are handled by the parent. Now.proposed new policy guidelines. but investors are also aware of what exactly the problems are and how they affect the bottomlines of the parent banks. 30 . housing finance and others. These norms will therefore be in line with the future plans of these banks as well. More so. this will no longer be an external disclosure to the parent banks' books of accounts. This is all the more important in the context of the recent announcements made by some major public sector banks where they have said they would hive off or close down some of their under performing subsidiaries. merchant banking. Rather. the banks will be required to consolidate their accounts including all its subsidiaries and other holding companies for better transparency. The Investors Advantage Getting all these accounts consolidated with that of the parent bank will provide the investor a better understanding of the banks' performances while deciding on their exposures.

RBI had granted licenses to 10 banks.6 Rationalisation of Foreign Operations in India Liberalising the policy with regard to allowing foreign banks to open offices in India or rather Deregulation of the entry norms for private sector banks and foreign sector. Based on a review of experience gained on the functioning of new private sector banks. if a subsidiary is not performing well or making losses. 300 crore within three years. this will reflect in the parent's balance sheet. this will be raised to Rs. revised guidelines were issued in January 2001. through public issue or private placement. 31 . 300 crore within three years of commencement of business. • Initial capital other than promoters’ contribution could be raised While augmenting capital to Rs. • promoters need to bring in at least 40 percent of the fresh capital.For instance. their contribution of 40 per cent shall be locked in for 5 years from the date of licensing of the bank and excess stake above 40 per cent shall be diluted after one year of bank’s operations. Entry of New Banks in the Private Sector As per the guidelines for licensing of new banks in the private sector issued in January 1993. 1. 200 crore. • Promoters’ contribution shall be a minimum of 40 per cent of the paid-up capital of the bank at any point of time. The main provisions/requirements are listed below : • Initial minimum paid-up capital shall be Rs.

• the case of other domestic banks. it is also necessary to open 25 per cent of the branches in rural/semi-urban areas. contribute up to 10 per cent of the equity of a new bank. • NRI participation in the primary equity of the new bank shall be to the maximum extent of 40 per cent. G. as in specified criteria • maintained on a continuous basis from commencement of operations.which will also be locked in for 5 years. however. No credit facilities shall be extended to them. subject to A minimum capital adequacy ratio of 10 per cent shall be Priority sector lending target is 40 per cent of net bank credit. Individual companies connected with large industrial houses can. In the case of a foreign banking company or finance company (including multilateral institutions) as a technical collaborator or a co-promoter. • No large industrial house can promote a new bank.M. "Even after privatisation not more than 10 per cent of the Indian population can afford to open accounts in private banks. president of the State Bank of India Officers Association. Shortfall in NRI contribution to foreign equity can be met through contribution by designated multilateral institutions. "Our industry did not oppose the entry of private bankers because we knew they will not be able to reach out to the rural markets” states. • NBFCs with good track record can become banks. equity participation shall be limited to 20 per cent within the 40 per cent ceiling. Bhakey. which will maintain an arms length relationship with companies in the promoter group and the individual company/ies investing in equity." Can the keenly supported private and foreign banks cater to the banking needs of the people in India fairly? Takeover and merger dramas are in progress in the world of private sector banks now and time only can tell 32 . The remaining portion of fresh capital could be raised through public issue or private placement.

They are there in the country to fill the private pockets with their typical selectivity of business and costly operations. Their technological edge and product innovation has seen them gaining market share from the slower. with their level of contingent liabilities being much higher then their other counterparts viz. while the trends in the old private banks are still higher. in the Indian context. In any case. The bad debt figures even in the two to three year old new private sector banks have crossed over 6% to the total advances. These banks have targeted non-fund based income as major source of revenue.how many will live to render safe banking services in the days to come. The new private sector banks have performed very well in the FY2000. which is much on the move after globalisation. The new private banks have been consistently gaining market shares from the public sector banks. to denationalise our public sector banks. despite the fact that they have no social commitment lendings in their portfolios. While. their operating expenses have been falling as compared to the PSU banks. ICICI bank. PSU and old private sector banks. Most of these banks have registered an increase in net profits of over 33 . cannot be the alternative to our well-developed public sector banks. All those who beat their drums for the privatisation parade. The new generation private sector banks have made a strong presence in the most lucrative business areas in the country because of technology upgradation. IndusInd. BOP and UTI Bank have come out with IPOs as per licensing requirement. less efficient older banks. the private banks. HDFC bank. do so with vested interests. GTB. The major beneficiary of this has been corporate clients who are most sought after now. their efficiency ratios (employee’s productivity and profitability ratios) have also improved significantly.

as a part of its expansion plans had taken over Times Bank.50%. Large number of unprofitable branches B. Inability to introduce profitable new consumer oriented products like credit cards. inability to control. As a result. Non Performing Assets on account of politically directed lending and industrial recession in last few years D. most of these banks had a foreign capital infusion and some of the other banks have already initiated talks about a strategic alliance with a foreign partner. misuse and fraud etc E. They have been able to make significant inroads in the retail market of the public sector and the old private sector banks. ATMs etc The private’ edge  Technology. Lack of computerization leading to low service delivery levels. the two leading banks in this sector had set a new trend in the Indian banking sector. ICICI Bank became the first bank in the country to list its shares on NYSE. During the year. 34 . The main problems concerning the nationalized / state sector banks are as follows: A. HDFC Bank. nonreconciliation of accounts. Excess staffing of serious magnitude C. while PSU banks are lagging behind in the race.The private banks have used technology to provide quality service through lower cost delivery mechanisms. The implementation of new technology has been going on at very rapid pace in the private sector. The Reserve Bank of India had advised the promoters of these banks to bring their stake to 40% over a time period.

Convergence. are more profitable  and have cleaner loans. Reforms among public sector banks are slow. PSU Banks by and large take relatively long-term deposits at fixed rates to lend for working capital purposes at variable rates. some of the new private banks are better able to manage the maturity mix. Declining interest rates.The new private banks are able to provide a  range of financial services under one roof. 35 . NPAs. It therefore is negatively affected when interest rates decline as it takes time to reduce interest rates on deposits when lending has to be done at lower interest rates due to competitive pressures.The new banks are growing faster. as politicians are reluctant to surrender their grip over the deployment of huge amounts of public money.in the present scenario of declining interest rates. thus increasing their fee based revenues.

appointed by the Reserve Bank of India (RBI). more often than not. Tribunals and Asset Reconstruction Fund Setting up of special tribunals to speed up the process of recovery of loans and setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount was one of the crucial recommendations of the Narasimham Committee. The act was amended in January 2000 to tackle some problems with the old act.7 Special List of Banks operating in India. a compulsion! One of the main factors responsible for mounting non-performing assets (NPAs) in the financial sector has been the inability of banks/FIs to enforce the security held by them on loans gone sour. To expedite adjudication and recovery of debts due to banks and financial institutions (FIs) at the instance of the Tiwari Committee (1984). borrowers. stripped their premises of all assets so that that by the time the final verdict came. 1993 (DRT). the only recourse available to banks/FIs to cover their dues from recalcitrant borrowers. was to file a suit in a civil court. DRTs. The result was that by the late ’80s. It was quite common for cases to drag on interminably. Prior to the passage of the DRT Act. DRTs and Appellate DRTs have been established at different places in the country. banks had a huge portfolio of accounts where cases were pending in civil courts. the government enacted the Debt Recovery Tribunal Act. In the interim.Illustration 4 Annexure 1 1. Accordingly. there was nothing left of the security that had been 36 . when all else failed.

Complains Bank of Baroda's Kannan: "Of the Rs 45. many more DRTs and ADRTs have been set up. that the Supreme court modified its earlier order — staying the operation of the Delhi High Court order quashing the constitution of the DRT for Delhi — to allow the setting up of three more DRTs in Chennai. However.000 crore is locked up in the courts. DRTs failed to make a significant dent." So. Following the passage of the Act in August 1993. Thus. for appointment of receivers or for ordering preservation of property. The functioning of debt recovery tribunals has been hampered considerably by litigation in various high courts. Bangalore. The constitutional validity of the Act itself was questioned. as a consequence of the numerous lacunae in the act and the huge backlog of past cases where suits had been filed. Jaipur and Ahmedabad along with an Appellate Tribunal at Mumbai. It was only in March 1996. The truth undiscovered. over Rs 12. the tribunals did not have powers of attachment before judgment. time-consuming civil court procedures that stymied recovery procedures since they follow a summary procedure that expedites disposal of suits filed by banks/FIs. CURRENT STATUS AND BANKERS COMPLAINS ! Unfortunately. DRTs were set up at Calcutta. Subsequently. DRTs. would do away with the costly. legal infrastructure for the recovery of non-performing loans still does not exist.pledged to the The Advantage bank. Guwahati and Patna. For instance.000-crore worth of gross NPAs. the only solution to 37 . Delhi. DRTs soon ran into rough weather. it was felt.

the Supreme Court has ruled that the DRT Act will take precedence over the Companies Act in the recovery of debt. It empowers DRTs to attach the property on the borrower filing a complaint of default. Transfer of cases from one DRT to another has also been made easier. SOME MORE ISSUES As things stand. Once the fact of their sickness has prima facie been accepted by the Board for Industrial and Financial Reconstruction (BIFR). thus enabling the asset to escape the non-performing loan tag.R. 60. More recently. there is nothing a DRT can 38 . This means that recovery procedures can still be stalled by companies declaring themselves sick under SICA. Managing Director. which means it is still stuck with net NPAs worth Rs 25. Recent Developments The recent amendment (Jan 2000) to the DRT Act addresses many of the lacunae in the original act. putting to rest all doubts on that score. Maheshwari. Till date. Warns K. the DRT Act supersedes all acts other than The Sick Industrial Companies Act (SICA).000 crore. the banking system has provided for about Rs 20. which have turned sticky.000 crore. Even that is an under estimate as it does not include advances covered by government guarantees. Nor does it include allowances for "ever greening"--the practice of extending fresh advances to defaulting corporates so that the prospective defaulter can make interest payments. IndusInd Bank: "NPA levels are going to go up for all the banks. It also empowers the presiding officer to execute the decree of the official receiver based on the certificate issued by the DRT.the problem of high NPAs is ruthless provisioning." And so too will provisions.

iron out delays at the DRT end. Existing recovery processes in the country are aimed at recovering lenders' dues after a company has gone sick and not nipping sickness in the bud. Since sickness is defined in law as the erosion of capital of a company for three consecutive years. The amendments would ensure speedy recovery of dues. The solution could lie in better risk management 39 . Yet the number of cases pending before DRTs and courts make a telling commentary on the inability of lenders to make good their threat. as well as ensure that promoters do not have the time and opportunity to bleed their companies before they go into winding up.000 crore. or writing off these debts altogether (which may not find favour with shareholders). The main culprit for all this is the law. The stratagem of using Debt Recovery Tribunals has failed. there is little to recover from a sick company after it has been referred to the Board of Industrial and Financial Revival (BIFR). tot up to a staggering Rs 60. together. What's hurting banks now is the fact that these new issues have cropped up even as they have been (unsuccessfully) wrestling with their NPAs which. They also reflect the ability of borrowers to dodge the lenders. This lacuna too must be addressed if DRTs are to live up to their promise.do till such time as the case is disposed of by the BIFR. Now these banks have to explore the option of liquidating the assets of defaulting companies (a litigitinous route).

not responsible for their current predicament. 1999 under the Chairmanship of Shri M.8 Restructuring of Weak Banks How to deal with the weak Public Sector Banks is a major problem for the next stage of banking sector reforms. the Reserve Bank of India set up a Working Group in February.S. 40 . This perception often leads to an expectation that all weak Banks must be helped to restructure after which they would be able to survive in the new environment. and the weak Banks are. Keeping in view the urgent need to revive the weak banks. It is particularly difficult because the poor financial position of many of these banks is often blamed on the fact that the regulatory regime in earlier years did not place sufficient emphasis on sound banking. therefore.1. Verma to suggest measures for the revival of weak public sector banks in India.

which submitted its Report in October.25% increase negotiated by the IBA A 25% reduction in staff-strength. either through VRSs or through wage-cuts Branch rationalisation. including the closure of loss-making foreign branches Transfer of non-performing assets to an Asset Reconstruction Fund Reconstitution of bank boards to include professionals. 1999. (ii) Earning Capacity (return on assets and net interest margin) and (iii) Profitability (ratio of operating profit to average 41 . these are (i) Solvency (capital adequacy ratio and coverage ratio).THE VERMA PRESCRIPTION…a brief  Identification of weak banks by using benchmarks for 7 critical ratios Recapitalisation of 3 weak banks conditional on their achieving specified milestones Five-year freeze on all wage-increases. industrialists and financial experts Independent Financial Restructuring Authority to monitor implementation of revival package        The major recommendations/points of the Working Group. are listed below: Seven parameters covering three areas have been identified. including the 12.

ARF should focus on relatively larger NPAs (Rs. attract new customers.  The action programme for handling of NPAs should cover honouring of Government guarantees. better use of compromises for reduction of NPAs based on recommendations of the Settlement Advisory Committees.etc. improve credit culture. secure higher fee-based earnings.  Operational restructuring essentially involves building up capabilities to launch new products. transfer of NPAs to ARF managed by an independent AMC. organisational and financial restructuring aimed at restoring competitive efficiency.  Restructuring of weak banks should be a two-stage operation. 42 . stage two covers options of privatisation and/or merger.working funds.  To begin with. etc. establish a common networking and processing facility in the field of technology. ratio of cost to income and ratio of staff cost to net interest + income all other income). sell foreign branches (Indian Bank and UCO Bank) to prospective buyers including other public sector banks. the fund needed for ARF is to be provided by the Government. 50 lakh and above). ARF may restrict itself to the NPAs of the three identified weak banks. and pull out from the subsidiaries (Indian Bank).  A 30-35 percent reduction in staff cost required in the three identified weak banks to enable them to reach the median level of ratio of staff cost to operating income. stage one involves operational.

the government of India directed UCO Bank to shut down 800 branches and also 4 international operations in line with the Verma committee recommendation on sick banks. the three identified weak banks should adopt a VRS covering at least 25 percent of the staff strength. In order to control staff cost. UCO bank had been posting losses for the past eleven years. 43 . etc. United Bank of India and Indian Bank.  The organisational restructuring includes delayering of the decision making process relating to credit. In August 2001. Allahabad Bank and Punjab and Sindh Bank. Three more PSBs declared sick are Dena Bank. 1100 to Rs. rationalisation of branch network.  Experts have also suggested the concept of narrow banking. the estimated cost of VRS ranges from Rs. The three identified banks on committee recommendations were UCO bank. 1200 crore. while the weak banks will take positions in less risky assets such as government securities and inter-bank lending. for the three banks taken together. where only strong and efficient banks will be allowed to give commercial loans.

The government ownership of most banks resulted in a carefree attitude towards risk management. Nor did they manage such risks or provide for them in their balance sheets. This complacent behavior of banks forced the Reserve Bank to use regulatory tactics to ensure the implementation of the ALM.9 Asset Liability Management System The critical role of managing risks has now come into the open. gamut of new products and greater use of information technology. To cope with these pressures banks were required to evolve strategies rather than ad hoc fire fighting solutions. The emergence of this concept can be traced to the mid 1970s in the US when deregulation of the interest rates compelled the banks to undertake active planning for the structure of the balance sheet. entry of new private banks. In India.1. the post-reform banking scenario is marked by interest rate deregulation. In the wake of interest rate risk came liquidity risk and credit risk as inherent components of risk for banks. Imprudent liquidity management can put banks' earnings and reputation at great risk. the Reserve Bank has recently issued comprehensive guidelines to banks for putting in place an asset-liability management system. The uncertainty of interest rate movements gave rise to interest rate risk thereby causing banks to look for processes to manage their risk. where markets fell precipitously because banks and corporates did not accurately measure the risk spread that should have been reflected in their lending activities. These pressures call for structured and 44 . The recognition of these risks brought Asset Liability Management to the centre-stage of financial intermediation. Also. especially against the experience of the recent East Asian crisis. With the freedom obtained through reform process. The necessity The asset-liability management in the Indian banks is still in its nascent stage. the Indian banks have reached greater horizons by exploring new avenues.

It is. Implementation of asset liability management (ALM) system RBI has issued guidelines regarding ALM by which the banks have to ensure coverage of at least 60% of their assets and liabilities by Apr ’99.comprehensive measures and not just ad hoc action. On the basis of this appraisal the borrower 45 . therefore. ALCO is a decisionmaking unit responsible for balance sheet planning from a risk return perspective including strategic management of interest and liquidity risk. Banks are exposed to several major risks in the course of their business credit risk. currency and liquidity risks. management evaluation and others which influence the working of the client company. operational efficiency. equity / commodity price risk. Consider the procedure for sanctioning a loan. The Management of banks has to base their business decisions on a dynamic and integrated risk management system and process. ALM framework rests on three pillars ALM Organisation: The ALCO consisting of the banks senior management including CEO should be responsible for adhering to the limits set by the board as well as for deciding the business strategy of the bank in line with the banks budget and decided risk management objectives. financial efficiency. This will provide information on bank’s position as to whether the bank is long or short. important that banks introduce effective risk management systems that address the issues related to interest rate. is appraised by the credit department on various parameters like industry prospects. interest rate risk. liquidity risk and operational risk. foreign exchange risk. driven by corporate strategy. The banks are expected to cover fully their assets and liabilities by April 2000. The borrower who approaches the bank.

ALM Process The basic ALM process involves identification. The final guidelines have been formulated to serve as a benchmark for those banks which lack a formal ALM System. Information is the key to the ALM process. However RBI is expecting Indian banks to move towards sophisticated techniques like Duration. say. The RBI in its guidelines has asked Indian banks to use traditional techniques like Gap Analysis for monitoring interest rate and liquidity risk. Banks that have already adopted more sophisticated systems may continue their existing systems but they should ensure to fine-tune their current information and reporting system so as to be in line with the ALM System suggested in the Guidelines. Bank will not like to lend to D rated client even at a higher rate of interest. In the normal course. Other banks should examine their existing MIS and arrange to have an information system to meet the prescriptions of the new ALM System. While somebody with BBB rating will be charged PLR + 2. a client with credit appraisal AAA will be charged PLR. banks are exposed to credit and market risks in view 46 . Is it possible ? Keeping in view the level of computerisation and the current MIS in banks. below which the bank will not lend e.g. The guidelines for the loan sanctioning procedure are decided in the ALCO meetings with targets set and goals established ALM Information System ALM Information System for the collection of information accurately. VaR in the future. measurement and management of risk parameters. Simulation. there will be certain cut-off for credit appraisal.5 %. A good information system gives the bank management a complete picture of the bank's balance sheet. adequately and expeditiously. Naturally. adoption of a uniform ALM System for all banks may not be feasible. For example.is charged certain rate of interest to cover the credit risk.

of the asset-liability transformation. ultimately risk management is a culture that has to develop from within the internal management systems of the banks. Its critical importance will come into sharp focus once current restrictions on banks’ portfolios are further liberalised and are subjected to the pressure of macro economic fluctuations. Banks need to address these risks in a structured manner by upgrading their risk management and adopting more comprehensive Asset-Liability Management (ALM) practices than has been done hitherto But. 47 .

With the Government budget under severe strain. During the winter session of the Parliament. a good starting point for us is to restrict government stake to 33 per cent. Banks must be self-reliant. If "privatisation" is a still a dirty word. RBI has been prescribing prudential norms for banks broadly consistent with international practice. "In recent years. the Union Cabinet has taken certain decisions. public-sector banks will need more capital. To meet the minimum capital adequacy norms set by the RBI and to enable the banks to expand their operations. the Government has decided to accept the recommendations of the Narasimham Committee on Banking Sector Reforms for reducing the requirement of minimum shareholding by government in nationalised banks to 33 per cent." Banking is a business and not an extension of government.1. such capital has to be raised from the public which will result in reduction in government shareholding. The best way to achieve this is to privatise the banks and make the managements accountable to real shareholders. lean and competitive. This will be done without changing the public-sector character of banks and while ensuring that fresh issue of shares is widely held by the public. on 16 November 2000. To facilitate this process.10 Reduction of Government Stake in PSBs This is what the finance minister said in his budget speech on February 29. 2000. which have far reaching consequences for the future of the Indian banking sector cleared amendment of the Banking Companies (Acquisitions and Transfer of Undertakings) Act 1970/1980 for facilitating the dilution of government’s 48 .

SALIENT FEATURES of the proposed amendments Government would retain its control over the banks by stipulating  that the voting rights of any investor would be restricted to one per cent. There has been considerable delay in the past in filling up the posts of the chairman and executive director of some banks. The Cabinet had taken this decision. It is not clear as to how this aspect would be taken care of in future. is a clear indication of Government of India’s determination to amend the concerned Acts. irrespective of the equity holdings. it is not willing to give away the management control in the nationalised banks.  It has been decided to discontinue the mandatory practice of nominating the representatives of the government of India and the Reserve Bank in the boards of nationalised banks. immediately on the next day after the bank employees went on strike. The proposal had been to reduce the minimum shareholding from 51 per cent to 33 per cent. to pave the way for the reduction in its stake. It is said that the proposed amendment to the Act would also give the board of banks greater autonomy and flexibility. This decision is in tune with the recommendation of Narasimham committee. As a result public sector banks may find it very difficult to attract strategic investors. However. the government would retain the right to nominate its representative in 49 . with adequate safeguards for ensuring its control on the operations of the banks.equity to 33 per cent Government’s action programme has expressed clearly its programme for the dilution of its stake in bank equity. However.  The government would continue to have the prerogative of the appointment of the chief executives and the directors of the nationalised banks.

The measures seen in totality are clearly aimed at enabling banks to 50 . it was observed that inter personal relations were not cordial among the two at the top. In quite a few cases. Authority will be empowered to take over the management of the weak banks. operationally it may be difficult to share power at peer level. on the advice of Reserve Bank of India. While conceptually it is desirable to decentralise power. This implies proposed that they would continue to be subject to parliamentary and other scrutiny despite relaxations. This is the reason why the banks would continue to be statutory bodies even after the reduction in government equity below 51 per cent and the banks would not become companies. Paid-up capital of nationalised banks can now fall below 25 per cent of the authorised capital.  The number of whole time directors would be raised to four as against the present position of two. The government has been maintaining that the nationalised banks would continue to retain public sector character even after the reduction in equity.the boards and strangely a nominee of the government can be in more than one bank after the amendment. Members of FRA will comprise of experts from various fields & will be appointed by the government. adopt and approve the annual accounts and adopt the same at the annual general meetings.  Amendment will also enable the setting up of bank-specific Financial Restructuring Authority (FRA). It has to be seen as to how the four full time directors would function in unison. the chairman and managing director and the executive director.  It is proposed to amend the provisions in the Banking Companies (Acquisition and Transfer of Undertakings) Act to enable the bank shareholders to discuss.

Reserve Bank’s perception.access the capital markets and raise funds for their operations. the Reserve Bank has been emphatic in its views on lowering the stake of the government in the equity of nationalized banks: The panel wants government stake to be diluted to less than 50 per cent in order to make banks' decision-making more autonomous. which leads to a reduction in government shareholding. The Act will also permit it to transfer its stake if the need arises.” The process of the transition from public sector to the joint sector has already been initiated with 7 of the public sector banks accessing the capital market for expanding their capital base. It has said. the idea behind a reduction in government stake is to free bank employees from being treated as "public servants. In terms of transferring equity. Official sources explained that this has been done to enable banks to clean up their balance sheets so that they can access the capital market easily." Instead. by directly reducing the government stake below 50 per cent. the government is arming itself with powers to sell its stake if it so desires at a later date. the banks will be free from the shackles of the central vigilance commission. apart from granting banks the freedom to restructure their equity. Since total privatization is not contemplated. In the domestic context. the banks in the joint sector are expected to control the commanding heights of the banking business in the years to come. “in view of the severe budgetary strain of the government. the capital has to be raised from the public. The Government seems to have no plans to reduce its control over these banks. 51 .

but that has been within the prescribed 25 per cent cap. Also the Act originally provided that the government must mandatorily hold 100 per cent stake in banks.A LOOK AT PAST The Indira Gandhi government had nationalised 14 commercial banks through the Banking Companies (Acquisitions and Transfer of Undertakings) Ordinance in 1969. This was necessary to permit the transfer of shares when public shareholders sold their stake in banks. excluding government shares could be transferred. to help induction of public as shareholders. This is the reason why banks have been tapping the market to fund their expansion plans. At this stage. The 1970 and 1980 Acts brought about after the nationalisation of 14 and 6 banks respectively were first amended in 1994 to allow government to reduce its equity in them to up to 49 per cent. The 20 nationalised banks became 19 subsequently after New Bank of India merged with Punjab National Bank. The amendments remove restrictions on the transfer of government shareholding. the government provided that all shares. banks could reduce equity only up to 25 per cent of the paid up capital on the date of nationalisation. The 1994 amendments brought it down to 51 per cent. The Nationalisation Act provides that the PSU banks cannot sell a single share. The government holds majority or entire equity of 19 nationalised banks currently. Only six of these 19 banks have so far accessed the market and to gone for public issues meet its additional capital needs. Some banks like the Bank of Baroda have returned equity to the government in the past. What did they have to say ? 52 . Till now.

” privatisation? Why should the taxpayers’ money be used repeatedly for improving the capital base of the public sector banks? The Indian Banks' Association had. in its memo to the committee. 53 . “Banks should be allowed to access 100 per cent capital from public.. in order to reduce the 100 percent government stake to 70 percent and then gradually to 33 percent. called for 100 per cent divestment of the government stake. This will increase the accountability of banks to shareholders”. reported that the strike was total and successful. who could not articulate their views properly. As for current status. Employees of the public sector banks went on a token strike on 15 November.Union parliamentary affairs minister Pramod Mahajan said: “The amendment is an enabling provision. This is an expedient decision contributing to the process of liberalisation of the economy. It was as usual. Union bank will issue an IPO next year. either from the domestic or international capital markets. protesting against the government’s policy of privatisation of public sector banks. went unnoticed. We are only making it easier for banks to access funds from the market.It is not the intention of the government to privatise these banks or enter Who is afraid of into strategic alliances with private sector.. The inconveniences caused to millions of customers. unconnected with the issues involved. though one or two TV channels interviewed a couple of people.

three banks-UCO Bank.5729 crore Capital Contributed by Government Capital Added [Rs in Crores] 90 150 400 635 150 365 490 45 130 220 705 50 415 160 680 535 200 215 65 5700 Bank Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab National Bank Punjab & Sind Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Total Source: Reserve Bank of India Bulletin [1994]. Of this. Illustration 5 THE STATE BANK STORY The demand for funds by the SBI is even more acute than even the Corporation Bank since the SBI Act provides for a minimum 55 per cent 54 . the government has injected into the 19 public sector banks. an amount of Rs.20. Indian Bank and United Bank of India. have received Rs.From 1992-93 to 1998-99.446 crore as additional capital.

like insurance companies. The bank would be able to access funds from the market without being hampered by the 51 per cent minimum government holding threshold. and the bank is already close to breaching this threshold. Both the Banking Regulation Act and the SBI Act provide that government shares cannot be divested and since the government has decided that it would no longer support banks through budgetary support. Since a decision on the new threshold has been taken in the case of the nationalised banks.RBI holding in SBI. The committee had felt that this threshold would provide comfort to the employees. hence. the government is expected to follow suit by moving an ordinance to reduce the RBI stake in the SBI to 33 % The issue of reducing government stake in the nationalised banks has come about on account of demand from the SBI which had demanded that either RBI as the stakeholder pump in funds for the SBI’s massive expansion plans or permit it to issue shares to the public to raise the necessary funds. The immediate beneficiary of this move would be Corporation Bank where government equity is down to 66 per cent. which currently limits the ability of banks to expand beyond a certain level. have strong unions and. 55 . The banks. they have no option but to go to the market to meet their fund requirements. a phased reduction in government equity was recommended. The State would continue to be the single largest shareholder in banks even after its stake had been brought down to 33 per cent. Though there is no special significance attached to the 33 per cent threshold in the Company Law — which recognised only 26 per cent and 74 per cent as two major thresholds for management and ownership control — the government has opted for 33 per cent on the basis of the recommendations of the Narasimham Committee.

In the last couple of years there has been a clear downward trend in interest rates.National Insurance Corp. an administered structure of interest rate has been in vogue in India. In the case of GIC. 1.000.The government is also proposing to move an ordinance for demerger of four subsidiaries of GIC. The law ministry has already cleared both proposals of the finance ministry. Lending rates were similarly freed in a series of 56 . Initially lending rates came down. including 15-day deposits. The 1998 Narasimham Reforms suggested deregulation of interest rates on term deposits beyond a period of 15 days. Oriental Insurance. The rationale for liberalising interest rates in the banking system was to allow banks greater flexibility and encourage competition.11 Deregulation on Interest Rates The interest rate regime has also undergone a significant change. the Reserve Bank prescribes only two lending rates for small borrowers. For long. when the Reserve Bank of India controlled the rates payable on deposits of different maturities. Only the rate on savings deposits remains controlled by RBI. Banks are free to determine the interest rate on deposits and lending rates on all lendings above Rs. Interest rates in the banking system have been liberalised very substantially compared to the situation prevailing before 1991. leading to a decline in yields on advances and investments. At present. United Insurance and New India Assurance. 1972. With effect from October 97 interest rates on all time deposits. and demerge its four subsidiaries . the ordinance would amend the GIC Act. 200. Banks were able to vary rates charged to borrowers according to their cost of funds and also to reflect the credit worthiness of different borrowers. have been freed.

Interest rates on time deposits were decontrolled in a sequence of steps beginning with longer-term deposits and the liberalisation was progressively extended to deposits of shorter maturity. The line to control is the cost of funds.00. With the deregulation of the interest rates banks are given the freedom to price their assets and liabilities effectively and also plan for a proper maturity pattern to avoid assetliability mismatches. since the markets determine asset yields.000. The Reserve Bank now directly controls only the interest rate charged for export credit. Interest rates on loans upto Rs 2. The opportunity to improve yields on the corporate side tends to be limited if banks don’t want to increase the risk profile of the portfolio. is not fixed at a level set by the RBI.steps. The new arrangement sets a ceiling on these rates at the PLR. competition for the funds and the other banking services rose. RBI also considers removal of existing controls on lending rates in other Commercial Banks as the Indian economy gets used to higher interest rate regime on shorter loan duration. Cooperative Banks were freed from all controls on lending rates in 1996 and this freedom was extended to Regional Rural Banks and private local area banks in 1997. Nevertheless. which accounts for about 10% of commercial advances. but is now aligned with the Prime Lending Rate (PLR) which is determined by the boards of individual Banks. which account for 25% of total advances.000 were fixed at a highly concessional level. Earlier interest rates on loans below Rs 2. with the increase in the number of players. Banks’ income will depend on the interest rate structure and the pricing policy for the deposits and the credit. which reduces the degree of concessionality but does not eliminate it.00. The consequential impact is being felt on the income profile of the banks 57 .

which are equipped with the latest technology. As far as the interest costs are concerned. which are yet to be automated at the branch level. the new private banks and the foreign banks. The solution for these two influencing factors lies predominantly on technology. have a better edge over the nationalized banks. In this regard. the prevailing interest rate structure will be a major deciding factor for the rates. But what influence both the interest costs and the intermediation costs is the time factor as it is directly related to costs.especially due to the fact that the interest income component of the total income is significantly larger than the non-interest income component. 58 .

 Insurance. • Other expenses 59 . taxes and lighting • Printing and stationery • Advertisement and publicity • Depreciation on Bank’s property • Director’/Auditor’s fees and expenses • Law charges. • Miscellaneous Interest Expenses • Interest on deposits • Interest on Refinance/interbank borrowings • Others Operating Expenses  Payments to and provisions for employees • Rent. Exchange and Brokerage • Profit on sale of investments • Profit on revaluation of investments • Profit on sale of land.Income and Expenses Profile of Banks Interest Income • Interest/discount on advances/bills • Interest on investments • Interest on balances with RBI and other interbank funds • Others Other Income • Commission. • Repairs and Maintenance. etc. etc. building and other assets • Profit on exchange transactions • Income earned by way of dividends. Postage.

Illustration 6 60 .

and sharpen response times. The efforts on the part of the Reserve Bank of India to adopt and refine regulatory and supervisory standards on a par with international best practices. the Public Sector Banks (PSBs) are slowly contemplating automation to accelerate and cover the lost ground. The reform has lead to new trends of being ahead and being with. While the private sector banks are on the threshold of improvement. new customers. Also. etc are expected to serve as the major forces for change.2. adoption of modern technology. the banks need to optimise their networks. VRS introduced to bring up the productivity. competition from new players. New businesses. and new products beckon. by and for the customer. How might that change banks? To attract and retain customers. gradual disinvestments of government equity in state banks coupled with functional autonomy. cut down on bureaucratic layers. the concept of universal competition set in just to ensure customer convenience all the time.1 Introduction The financial sector reforms have brought about significant improvements in the financial strength and the competitiveness of the Indian banking system. but bring increased risks and competition. DEVELOPMENTS 61 . the strength factor has lead to mergers and Indian banks will explore this opportunity. speed up decision-making.

The scheme was to remain open till March 31.2 Voluntary Retirement Schemes … Please leave ? Public Sector Banks which together (there are 27 of them) account for 77.405.The following will state the development in Indian banking sector. It would become operational after adoption by the respective bank board of directors. 62 . Voluntary Retirement Scheme in Banks was formally taken up by the Government in November 1999. According to Finance Ministry on the basis of business per employee (BPE) of Rs. giving public sector banks a seven-month time frame.77. the number shot up to 1. The most ambitious downsizing exercise undertaken by the PSBs has set them back by close to Rs 7. No concession had been made to weak banks under the scheme. Government had cleared a uniform VRS for the banking sector. 2. 2001. The IBA has been allowed to circulate the scheme among the public sector banks for adoption. The scheme is envisaged to assist banks in their efforts to optimise use of human resource and achieve a balanced age and skills profile in tune with their business strategies. while based on a BPE of Rs. there were 59.338 excess employees in 12 nationalised banks.34 per cent of the bank deposits in India. 125 lakhs. 100 lakhs.490 crore.

To minimise the immediate impact on banks. the aggregate burden on the banking industry is difficult to work out.As per estimates the average outgo per employee under the banking VRS scheme would range between Rs.000 crore. the scheme has allowed them the stagger the payments in two installments. The remaining payment can be paid within six months either in cash or in the form of bonds. with a minimum of 50 per cent of the amount to be paid in cash immediately.000 crore.200 crore will be borne by State Bank of India. 4 lakhs. nearly Rs 2. the largest public sector bank. 3 lakhs and Rs. The total burden of the VRS on the banking industry is about Rs 8. In fact. out of this Rs 8. and union activists feel that it will adversely affect the profitability and capital adequacy of the banks. However. 63 .

• Leave encashment as per rules. • Employees appointed on contract basis. • Pensions (including commuted value of pension)/bank’s contribution towards PF. • Any other category of employees as may be specified by the Board. Amount of Ex-gratia – 60 days salary (pay plus stagnation increments plus special allowance plus dearness relief) for each completed year of service or the salary for the number of months service is left. employees/officers serving abroad under special arrangements/bonds. • Care will have to be taken to ensure that highly skilled and qualified workers and staff are not given the option. The Directors may however waive this. Other Benefits • Gratuity as per Gratuity Act/Service Gratuity. Employees not eligible for this scheme include: • Specialists officers/employees. • Employees against whom Disciplinary Proceedings are contemplated/pending or are under suspension. Other Features • It will be the prerogative of the bank’s management either to accept a request for VRS or to reject the same depending upon the requirement of the bank.Salient Features of Voluntary Retirement Scheme of Banks Eligibility – All permanent employees with 15 years of service or 40 years of age are eligible. as the case may be. 64 . whichever is less. who have executed service bonds and have not completed it. will not be eligible for VRS. subject to fulfillment of the bond & other requirements. as the case maybe.

While the right of refusal to give voluntary retirement has been granted to the bank management.2001 Sabbatical – An employee/officer who may not be interested to take voluntary retirement immediately can avail the facility of sabbatical for five years. recruitment against vacancies arising through the VRS route has been disallowed. Funding of the Scheme • Coinciding with their financial position and cash flow. leave. After the period of sabbatical is over he may re-join the bank on the same post and at the same stage of pay where he was at the time of taking sabbatical. 65 .3. etc. • Funding of the scheme will be made by the banks themselves either from their own funds or by taking loans from other banks/financial institutions or any other source. Nearly half the VRS benefits are by way of an ex-gratia ‘golden handshake’ payment to the employees to encourage them to leave. but minimum 50 percent of the cash instantly and in remaining 50 percent after a stipulated period. The period of sabbatical will not be considered for increments or qualifying service for person. • Before introducing VRS banks must complete their manpower planning and identify the number of officers/employees who can be considered under the scheme. which can be further extended by another term of five year.• There will be no recruitment against vacancies arising due to VRS. Periodicity – The scheme may be kept open up to 31. banks may decide payment partly in cash and partly in bonds or in installments. • Sanction of VRS and any new recruitment should only be in accordance with the manpower plan.

. The obvious way out is to tap the capital market. at least. the privatisation of banks at any cost.'' The Finance Ministry. Why did he opt for VRS? 66 . with one VRS bullet. a Consultant with the Planning Commission. primarily because of the huge outflow of funds for the VRS. ''Recruiting the right kind of people will be difficult for these banks. for instance. bailing out of the favoured willful defaulters. Rs 292 crore. is not certain. Rs 150 crore. These are the measures what exactly the IMF and World Bank have been urging upon the government. ''. UCO Bank. and United Bank. The result? ''If these banks cannot meet the capital adequacy norms. A mid-level treasury manager. but PSBs are constrained as they cannot reduce their stake below 50 per cent.. irrespective of their deposits. comes with a tag of between Rs 15 lakh and Rs 20 lakh. few PSBs can pay that kind of money. for instance. ended up with a bill for Rs 360 crore. three objectives immediately viz. Union Bank.'' says Ravi Trivedy.S. VRS and its effect on Capital Adequacy norms There are immediate concerns for PSBs. their ability to do incremental business will be curtailed. aims to achieve. leaving most PSBs short of the very people they'll need to implement any services-initiative. a Partner at Pricewaterhouse Coopers. without which the support of U.'' explains Rohit Sarkar.Banks have been allowed to amortise half the retirement benefits provided to those opting for VRS over a period of five years. The weaker among them may not be able to maintain the Reserve Bank of India stipulated capital adequacy ratio of 9 per cent. VRS now best walk out too! There's the issue of the VRS weeding out non-targets like investment bankers and treasury managers. and shielding of the corrupt bureaucrats. given the poor work culture and uncompetitive salaries.

Balachandran Sabbatical as a measure for reducing surplus staff will not be cost effective in the long run for the following reasons: Even though the banks can save on the salaries & allowances during the leave period. Retraining cost for the returning staff that are 45 plus. 55. rather than a specific period.. Hence it would be better to offer the sabbatical to junior level employees for whom the retraining cost will be much lower. "Apart from all the VRS benefits. he will have to be absorbed and as such redundancy or surplus cannot be cut totally.. On Sabbatical. Krishnamurthy An employee should be free to exercise Sabbatical option at any point of time in his career.S."It is because opportunities outside the banking sector are more in the western zone. they will be entitled to pension as well. "They are transferred anywhere.. V." says Bhakey. With the Rs 16 lakh severance package that he received." said a director of Bank of Maharashtra. Apart from the lure of money. He has spent all his earnings on a flat in Vile Parle. R. Phatak." says a union activist. It should be an open option and should normally be granted by the Bank Management provided 67 . in a totally changed banking environment will be much higher than the cost bank saves during their leave. he sees deliverance from the dreary chawl-life in Mumbai.. is special assistant in Punjab National Bank who opted for VRS after 32 years' service.. bad working conditions also contributed to this deluge. but once the employee returns. So they have a continuous source of income even if they don't work.. What did they say last ! V. are held accountable in case of problems in rural areas and don't get residential accommodation.

mainly because of the strength and stability of our public sector banks. Then what is the truth? At least the apex bank in the country has all the latest figures of the banks and as such. the Indian economy survived. when large numbers of employees of all stages are shunted away. 68 . RBI. IBA and the bankers.100000 crore of the bad debts. piled up in the PSBs with the blessings of the new regime. This will help employees to search for a suitable job and then exercise the Sabbatical option. who schemed unilaterally the VRS. ARE EMPLOYEES A PROBLEM OR NPAs ? They are in the fools' paradise. Is it the 10 to 12 percent wage factor that affects adversely the profitability in the nationalised banks? Certainly not. The policy-makers. a number of branches of these banks will come to a grinding halt. He can service the loans from his new employment. think that by removing massively thousands of able and experienced bankmen from services in their middle age. would agree honestly that it is the unrecovered and unchecked cancerous growth of over Rs. they could boost profits in the nationalised banks. Banks should not insist that the employees should close the loan accounts. Added to this. that eroded profits and made one or two banks less profitable. said a member of IBA. The correct remedial measure is not demolishing them by sending home several thousand employees enmass. but change the policy to preserve and develop them. The option may also be a one-time option during his/her (employees) service. called as NPA in the international terms. Amidst the disastrous Asian contagion.the employee does not have any disciplinary proceedings against him. but can take an undertaking that the employees should service their loans during the sabbatical period.

but what about the remaining 8. In fact the United Federation of Bank Unions has decided to oppose the whimsical closure of branches in the post-VRS scenario. large number of staff might be transferred and more and more branches might be closed. "The management will have to discuss the post VRS merger of branches with the unions first. causing irreparable losses to the clients of all types and great hardships to the remaining work force. This is likely to bring not only higher cash flows to banks in future but also long term benefits like improvement in efficiency level. president of the State Bank of India Officers Association. It will take away most of the staff from more than 22. "They will have to be merged or closed down in favour of a satellite branch which will operate just once a week". it is imminent that a chaotic situation with grave consequences will emerge soon." says P Jayaraman. The way the VRS contagion is spreading at the instance of the government. Bank of Maharashtra will be accepting applications of 2.M. If these fears come true.1 lakh?" asks a union activist.000 VRS optees 800 officers and 1. Reduce the annual wage bill by about Rs 56 crore.200 class III and IV employees. "It is true that more than 90. the general secretary of the State Bank's union. Bhakey. Positives As part of the banking sector reforms.THE EFFECTS Negatives Banks had approached the government and warned that only efficient people will leave by way of VRS. The unions will still have to fight for them. 69 . Also. rural India may be the biggest victim of VRS.000 employees will be relieved. says G. public sector banks are trimming the staff strength by launching VRS.000 rural branches of public sector banks.

the comfort zone is shaken up. they are told to be studying. he admired the same table. etc. that’s all he did there and came back home in the evening. keeping them busy may be the only way out! Close on the heels of public sector banks implementing Voluntary Retirement Scheme. as they come back home. regional offices and head office. a person working for 15 to 20 years.Andhra Bank Substantial reduction in overheads and significant improvement in per employee productivity.000 over the next 3 years. not playing much. VRS has disturbed the comfort zone of many. SAIL has launched VRS. Bank of India (BoI) has embarked on a major organisational recast exercise. some kind of work. After the launch of the voluntary retirement scheme (VRS) which was opted by 7. A dissatisfied issue arises out of VRS. children are to be disciplined the whole day. he sat on the same place. families breaking. her TV serials alls is gone. the bank is set to abolish one tier (zonal offices) from its four-tier organisational structure. What about this? Social activities for these people. is now to do nothing? All are seeking physiatrists’ help now. The bank will now have three tiers -.780 employees . SAIL aims to cut down its personnel by 60. tie up with service organisation. Newly-formed association of VRS optees of Punjab National Bank (PNB) -the PNB Voluntarily Retired Staff Association (PNBVRSA) -. clashes and arguments arise.has filed a case against the bank for settling outstanding issues arising out of the T h e h u m a n s i d e… He still went by the same train.branch offices. wife cant visit her neighbour at the afternoon. public sector giant. when he is back at home. ANOTHER OPTION could have been!!! 70 .

“They could have developed business by expanding into sectors like insurance which relies heavily on the expertise of the banking industry. .116 crore in the previous year.” Mr. also in the long run there would be a good payback.000 crore. after this if the VRS was declared then may be it would have been a wise decision”. These firstly. 71 .26. And the numbers say . “It would have been much sensible to invest and divert these funds in Tech banking and installation of new systems. retain the existing functions.315. which bankers rushed to grab. senior manager of Canara Bank states. from Rs 5.  Heavy provisioning made towards VRS has pushed the combined net profit of PSU banks down 16 per cent to Rs 4. . Sanghavi. as on July 2001.  The total benefits received by these employees has been close to Rs 15. The VRS.  In the banking sector close to 1.70 crore in 2000-01. has become a drag on the bottomline of the State-owned banking segment.000 employees opted for the VRS in ‘00-01.

Gone for GOOD ! Illustration 7 72 .

380 applications. in some branches of the bank. has attracted 35. in order to retain branch license. Post VRS.15 per cent of the bank's employee base of 233. in the Gujarat circle. I.e. which closed on January 31. One of the major tasks for SBI in its restructuring programme is merger of loss making branches. This is in line with practices followed by private sector banks and is meant to enhance the overall productivity. The bank is also working to redeploy additional administrative manpower to frontline banking jobs. For example. SBI has four regional offices in Gandhinagar and three each in Ahmedabad and Baroda. The bank management has asked all its 13 circle offices to initiate the process and start merger of loss making branches in their respective areas.137 are from the sub-staff category.380 applications. The excess administrative manpower will be utilised at branch level.VRS – The SBI Way State Bank of India's VRS. Of the 35. important posts are lying vacant and at 73 . with plans to merge 440 loss making branches and virtually eliminate its network of regional offices across the country. STATE Bank of India has kick started its post-VRS restructuring programme. The bank is planning to reduce its regional offices from 10 to 1/2 in each circle. 54 per cent are from officers.000 as weak branches. SBI has identified 440 branches out of 8. 36 per cent from clerical staffs.000. SBI has also decided to reduce its regional office network as a part of its downsizing programme. and 3. The unions had earlier expressed the view that the bank management should not merge loss making branches but should shift them to other areas with profit potential. Plans are to shut all these down and have a single regional office in Ahmedabad.

SBI has appointed National Institute of Bank Management as consultant for manpower planning. The final decisions on redeployment of administrative staff and reduction in regional offices will be taken only after NIBM report.some places shortage of staff is also being felt. 74 .

ICICI group has expressed their aim to function on the concept of the Universal Bank and was willing to go for a reverse merger of ICICI ltd. The motive of universal banking is to fulfill all the financial needs of the customer under one roof. However in practice the term 'universal banks' refers to those banks that offer a wide range of financial services. At the same time it will throw challenges in the form of increased competition and place strain on the profit margins of banks" The evolving scenario in the Indian banking system points to the emergence of universal banking. IDBI have started functioning on the same concept. Universal banking is a combination of commercial banking. mortgage financing. The leaders in the financial sector will be aiming to become a one-stop financial shop.2. beyond commercial banking and investment banking. Even some of the other groups in the financial sector like HDFC. infrastructure lending.3 Universal Banking … just one stop ahead ! RBI states: "The emerging scenario in the Indian banking system points to the likelihood of the provision of multifarious financial services under one roof. the group would be working towards its aim. An Overview Universal Banking includes not only services related to savings and loans but also investments. with ICICI Bank. This will present opportunities to banks to explore territories in the field of credit/debit cards. Sooner or later. the matter seems to have been delayed. insurance etc. asset securitisation. The traditional working capital financing is no longer the banks major lending area while FIs are no longer dominant in term lending. investment banking and 75 . leasing and factoring. In recent times. But due to some regulatory constraints.

the greater the effects of their failure on the system.various other activities including insurance. Also there is the fear that such institutions. Consequent to the liberalisation and deregulation of financial sector. confined themselves to the core banking functions of accepting deposits and providing working capital finance to industry. Also combining commercial and investment banking can gives rise to conflict of interests. If specialised banking is the one end universal banking is the other. by virtue of their sheer size. This is most common in European countries. The main advantage of universal banking is that it results in greater economic efficiency in the form of lower cost. trade and agriculture. Universal banks may be comparatively better placed to overcome such problems of asset-liability mismatches (for banks). there has been blurring of distinction between the commercial banking and investment banking. larger the banks. Banks v/s DFIs India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sectoral needs and also providing long-term resources at concessional terms. the 76 . higher output and better products. However. capital adequacy and risk management of banks. by and large. The spread of universal banking ideas will bring to the fore issues such as mergers. which can have significant undesirable consequences for economic efficiency. while the commercial banks in general. would gain monopoly power in the market. The comparative advantage or disadvantage of DFIs vis-a-vis banks in this regard depends to a large extent on the quality of their portfolios.

DFIs face no such pre-emptions on their funds. This. the DFIs would need to extend loans with longer maturities. have a competitive edge in resource mobilisation through the route of retail deposits.. Due to their past borrowings of long-term nature. due to interest rate uncertainties. First. including a case-by-case approach towards allowing domestic financial institutions to become universal banks. In India The issue of universal banking resurfaced in Year 2000. etc.accounting policies that are practiced and personnel management. its proposed policy for universal banking. 77 . the mismatch is still in their favour. banks are subject to CRR stipulations on their liabilities. Thirdly. Secondly. however. This in effect curtails DFIs' ability to raise lowcost deposits. telecom. on the other hand. when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank. DFIs are finding it attractive to raise more of short-term resources. The RBI has identified certain regulatory issues that need to be addressed to make harmonisation of the needs of commercial banking with institutional banking successful. The banks. with the larger part of new loans going to capital-intensive projects like power. DFIs do not enjoy the advantage of branch network for resource mobilisation. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance. On the other hand. raises a challenge for the DFIs to manage the maturity match of their assets and liabilities on an ongoing basis.

78 . there is need for caution in moving towards such a system. to submit their plans for transition to a universal bank for consideration and further discussions. The Khan Working Group held the view that DFIs should be allowed to become banks at the earliest. The RBI released a 'Discussion Paper' (DP) in January 1999 for wider public debate. Major areas requiring attention are the status of financial sector reforms.Now RBI has asked FIs. the state of preparedness of the concerned institutions. The feedback indicated that while the universal banking is desirable from the point of view of efficiency of resource use. FIs need to formulate a road map for the transition path and strategy for smooth conversion into an universal bank over a specified time frame. which are interested to convert itself into a universal bank. The Narsimham Committee II suggested that DFIs should convert ultimately into either commercial banks or non-bank finance companies. the evolution of the regulatory regime and above all a viable transition path for institutions which are desirous of moving in the direction of universal banking. The plan should specifically provide for full compliance with prudential norms as applicable to banks over the proposed period.

She said ICICI has started increasing its international presence and associating closely with NRI community in various countries. ICICI was the first one to propagate universal banking as an ideal concept for the DFIs to support industries with low cost funds. In August.ICICI gearing to become a universal bank ICICI envisages a timeframe of 12 to 18 months in converting itself into an universal bank.” she noted. ICICI Securities has been registered as a broking firm in the US. The bank takes care of liabilities of less than one year by offering short-term loans to corporates and personal loans. ICICI has received favourable response from Indian investors and FIIs on its move to merge with ICICI Bank and become a universal bank. Medium to long-term products like home loans. ICICI InfoTech is based in US & has an office in Singapore. It can avoid the stamp duty burden by first converting ICICI into bank. There is clear demarcation in the operation of ICICI and the bank. The payment will be made 79 . instead of going for a direct merger of ICICI into ICICI Bank. “We have created fire walls and functioning as separate legal entities only for complying with statutory obligations. Crisil has reaffirmed its triple A rating for ICICI and FIIs also expects its profit margins to improve after the merger due to the access to low cost deposits & the scope to increase income from fee-based activities. auto loans are handled by the parent. ICICI Bank is leveraging on strong network of 400 branches and extension counters & 600 ATMs for offering products to NRIs. absolute coordination between them while marketing the products exist. NRIs can transfer their money to 200 locations in India by internet. ICICI executive director Kalpana Morparia said that ICICI has to obtain a separate banking licence from RBI for becoming a universal bank.

within 72 hours. It also offers loan products for helping their relatives in India. Besides, the Visa card helps them to withdraw cash through the ATM network. Morparia said NPA of banks in India are < 10 per cent of GDP when compared to emerging economies like China, Korea & Thailand. It should not be compared with developed countries like Europe and US. ICICI’s gross NPA comes to Rs 6,000 crore. Asked about a approach to resolve the problem, she said if the units are viable, it supported financial Because of law, once the units are referred topossible and the units are restructuring, mergers. If these options arent BIFR, the lenders were unable to enforce securities, she pointed out not viable, it will go in for one time settlement.

2.4

Mergers & Acquisitions…

Divided they fall, united they may strive !

80

For the irresistible compulsions of competitiveness have created a situation where the only route for survival for many a bank in India may be to merger with another. With the Union Finance Ministry thinking along the same lines, it may not be long before mega-mergers between banks materialise. World over banks have been merging at a furious pace, driven by an urge to gain synergies in their operation, derive economies of scale and offer one stop facilities to a more aware and demanding consumer. In the eighties and nineties mergers were used as means to strengthen the banking sector. Small, weak and inefficient non-scheduled banks were merged with scheduled banks when the running of such banks becomes non-viable. However, mergers in the current era will be driven by the motive of establishing a bigger market share in the industry and to improve the profitability. Mergers may prove to be an effective remedial measure in a competitive environment where margins/spreads are under pressure for the banking sector. Though Indian systems were not keen on the mergers and acquisitions in the banking sector, of late the systems have started encouraging the global trends of M&A's.

Why the urge to merge? The big question is why is there a sudden urge to merge? The answer is simple as it is obvious. To beat competition for which suddenly size has become an important matter. Mergers will help banks with added money power, extended geographical reach with diversified branch networks, improved product-mix, and economies of scale of operations. Mergers will also help the banks to reduce their borrowing cost and to spread total risk associated with the individual banks over the combined entity. Revenues of the combined entity are likely to shoot up due to more effective allocation of bank funds. One such big merger between banks globally

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was that of Industrial Bank of Japan, Fuji and Dai-Ichi-Kangyo bank, all of which were merged to be nicknamed as Godzilla Bank, implying the size of the post merged entity. Another instance that comes to mind is that of Bank of America's merger with that of Nation's Bank. Financial consolidation was becoming necessary for the growth of the bank.

Do you consider the reasons why one does not need banks in large numbers any more ? ? A depositor today can open an account with a money market mutual fund and obtain both higher returns and greater flexibility. Indian MF is queuing up to offer this facility. ? A draft can be drawn or a telephone bill paid easily through credit cards. ? Even if a bank is just a safe place to put away your savings, you need not go to it. There is always an ATM you can do business with. ? If you are solvent and want to borrow money, you can do so on your credit card- with far fewer hassles. ? An 'AAA' corporate can directly borrow from the market through commercial papers and get better rates in the bargain. Infact the banks may indeed be left with bad credit risk or those that cannot access the capital market. This once again makes a shift to non-fund based activities all the more important. Of course, one would still need a bank to open letters of credit, offer guarantees, handle documentation, and maintain current account facilities etc. So banks will not suddenly become superfluous. But nobody needs so many of them any more !

Customer Rigid Distinction Disintermediati Volatabilit That’s

82 Capital A/c Globalisatio Convertibility n

under the Financial Services Agreement. Thus the importance of fee based is increasing in comparison with the fund-based income. DISINTERMEDIATION As capital markets deepen and widen. but also in the growing fee-income business. leading to an increasing convergence in the asset-liability structure of the banks and the FIs. limiting bank deposits 83 . the core banking functions--deposit taking and lending--come under attack. The once RIGID DISTINCTION between the providers of term-finance and the providers of working-capital finance is blurring. by India. And that would be in consonance with the global trend towards universal banking. Restrictions on branch expansion of the foreign banks are being relaxed in line with the commitments made to the World Trade Organisation. advisory services and market research on his product.CUSTOMER may also want from a bank efficient cash management. Mergers would position the combined entity for rapid growth not only in the working capital and term-lending segments. Given their undoubted financial muscle and technical expertise. GLOBALISATION. CAPITAL ACCOUNT CONVERTABILTY will grant Indian corporates access to capital markets abroad as well as provide foreign banks access to Indian firms and investors. And the number of alternative savings vehicles multiply. The foreign banks are looking to expand beyond their narrow niches to acquire retail reach. the foreign banks are likely to dominate the new markets. Already. and 28 more have set up representative offices. Competition from abroad is also set to intensify. the number of foreign banks operating in the country has jumped to 41. The archaic restriction on the number of Automated Teller Machines has gone.

which took everyone by surprise. Second Finance Minister Mustapa Mohamed says. in particular.20 billion were enough to topple a 233-year-old British institution. But while losses of $1. Mutual funds. though a welcome change. Europe and Japan are also on their way to restructure their financial sector through M&A's. but due to differences arising over swap ratio the merger didn't materialized. The merger of Malaysia's 58 domestic banks into six anchor groups is part of a global trend that will strengthen the financial sector and enable it to compete internationally. However. The classic illustration of the absorptive capacity of capital is.growth. the latest merger of ICICI Bank with Bank of Madura is even more astonishing as well as surprising. Both banks chalked up huge derivatives-trading losses. organized by the World Bank in Washington. In a seminar on Malaysia's recovery efforts. Mustapa said it was important for the government to 84 . VOLATILITY A large capital-base provides the necessary cushion to withstand nasty shocks. are a potent long-term threat because they appropriate what was once the USP of bank deposits. THE SCENARIO TODAY It began with HDFC Bank and Times Bank last year. of course. ICICI Bank had also initiated merger talks with Centurion Bank. And INTERNATIONALLY The merger of the Citibank with Travelers Group and the merger of Bank of America with NationsBank have triggered the mergers and acquisition market in the banking sector worldwide. the deeply divergent fates of Barings Bank and Daiwa Bank. Daiwa Bank managed to survive losses of a similar magnitude simply because of its abundant capital reserves.

United Bank of Switzerland and Switzerland Banking Corporation. and. the prospect of a single currency system has sparked off a merger mania among banks. In Europe. the government hoped to divert those resources to building schools and hospitals.06 239.78 billion) in those days to bail them out and frankly we're fed up and tired of bailing them out. depositors of the ''smaller banks'' themselves felt unsafe and moved their savings to the bigger banks. he added. Mustapa said the banks were urged to merge in the 1980s. The post merger scenario at ICICI Take a look at what happens post merger to ICICI Bank. more recently.'' After the mergers. Bank of Tokyo and Mitsubishi Bank. the fusion of two Japanese monoliths.''move aggressively'' in strengthening the banking system because ''the WTO (World Trade Organization) is knocking on our doors and asking us to liberalize our financial sector. the mega-merger of the Swiss giants. Elements Assets No of Pre-merger 12063 crores Postmerger 16051 crores % Change 33. When asked why the government intervened in bank mergers rather then letting the markets decide for themselves. ''but our advice fell on deaf ears. We spent no less than RM60 billion ($15. Witness the alliance between Chase Manhattan and Chemical Bank in the US. At the height of the crisis. The bank will have shot up to the number one position among new private sector banks.62 85 .

80 crore.94 10.90 80 152. For example. What will acquiring banks look for while choosing their targets? One. financial viability and two strong geographical reach and large asset base.10 / 360 13123 27 lakhs 4300 220 crores Rs 8.200 and business per employee of just Rs 1. Karnataka Bank has employee strength of over 4. Centurion Bank Rs 6. The following table shows a general comparison of three main classes of banks. However staffing/employee costs and technological infrastructure will also play an important role in acquiring target banks.branches Deposits Customers Employees Equity EPS 106 9728 15 lakhs 1700 197 crores Rs 7.60 crore. It is a fact that through mergers The Liabilities growth Increases risks of mismatch between assets acquisitions and and liabilities Multiple focus could lead to conflicts of is cheaper and interest quicker in comparison to setting up new units. 86 . with only 510 employees commands a business per employee of Rs 20 crore.10 crore. which. Compare this with Indusind Bank.90 crore and Global Trust Bank Rs 8.5 23 share share Illustration 8 Will mergers be the norm in the industry? What about the future? Will THE STRATEGY MERGER UNIVERSAL BANKS mergers stop here or will The Assets they speed up? Analysts and Enables rapid growth in new markets and bank observers feel that new products Combats the trend towards merger acquisition activity disintermediation will speed up in times ahead. Banks which boast of high business per employee include names such as Bank of Punjab Rs 7.70 / 34.

Banks (Old) Moderate Regional Moderate Low Low Moderate High Pvt. certainly. maybe. To survive. even insurance). and have the requisite skills to evaluate mega-projects THE RESCUE MERGER BANK BAILOUTS The Assets Provides the stronger bank with a relatively cheap deposit network Minimises the likelihood of systemic failure The Liabilities Saddles the stronger bank with huge NPAs Erodes the profitability of the stronger bank 87 .interest Low Income Illustration 9 Mergers for private banks will be much smoother and easier as against that of PSBs. mergers may well be the only option. banks need to diversify into non-fund-based activities (investment banking) and new fund-based activities (mutual funds. quicker diversification option than organic growth.Particulars Cost of funds Branch network PSU Banks Low Wide Pvt. housing finance. leasing. Only a large. for activities like infrastructure finance. M&As offer a cheaper and. Banks(New) High Low High Low High High High Spread Level of Automation Low NPAs High Capital Adequacy Moderate Employee Productivity Low Focus on Non. or. which require a huge critical mass. infrastructure finance. strong entity with deep reservoirs of capital will be able to provide funds without bumping against prudential exposure limits. Indeed.

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in its guidelines for the new private sector insurance companies. On a rough reckoning. In anticipation of the government move. It is amending the Banking Regulation Act to this effect. some banks have begun talking of alliances with foreign insurance players. is the insurance sector.5 Banking and Insurance … much more to service ! What will the future of Indian banking and insurance look like? Will the reform in these sectors face the same fate as in power? It is increasingly evident that the economy offers opportunities but no security. Reform of the insurance sector began with the decision to open up this sector for private participation with foreign insurance companies being allowed entry with a maximum of 26 per cent capital investment? The Insurance Regulatory and Development Authority (IRDA). Some of them are looking at niche markets such as corporate insurance. has stipulated that at least 20 per cent of the total premium revenue of these companies should come from rural India. commercial bank deposits account for 25 per cent of GDP and credit extended by banks may be 15 per cent of GDP. The future will belong to those who develop good internal controls. The government permits banks to distribute or market insurance products.2. including foreign direct investment. checks and balances and a sound market strategy. Several major banks are floating subsidiaries to enter both life and non-life insurance businesses. A gradual convergence is taking place in the banking and insurance sectors. 89 . regular bank credit transactions alone account for a substantial percentage of GDP by way of servicing economic activities. Only banks with a three-year track record of positive growth as well as with a strong financial background will be entitled to do insurance business. Thus. The latest to be opened up for private investment.

50 crore. company pioneered bancassurance in France by selling insurance products through branches of commercial banks and non-banking finance companies. 500 crore and (ii) satisfy other criteria in regard to capital adequacy. SBI has incorporated a wholly owned subsidiary SBI Life Insurance Company Ltd with an authorised capital of Rs 250 crore. Banks which do not satisfy these criteria will be allowed as strategic investors (without risk participation) up to 10 per cent of their net worth or Rs. However. banks need prior approval of RBI for undertaking insurance business. Permission to undertake insurance business through joint ventures on risk participation basis will therefore be restricted to those banks which (I) have a minimum net worth of Rs. compared to some of the global giants present in The India. the French has insurer has the expertise concept in of bancassurance. a wholly owned subsidiary of BNP Paribas. In all cases. which would suit 90 . Although Cardif is a lesser known name in the life insurance business.Keeping in view the limited actuarial and technical expertise of Indian banks in undertaking insurance business. whichever is lower. RBI has found it necessary to restrict entry into insurance to financially sound banks. etc. any bank or its subsidiary can take up distribution of insurance products on fee basis as an agent of insurance company. The joint venture plans to bring into India a number of products. Insuring the SBI way ! State Bank of India (SBI) has identified Cardif. Cardif SA and its sister company Natio-Vie together rank as the thirdlargest French insurers with a premium income of $9 billion and assets under management of over $59 billion. profitability. to enter into a joint venture for life insurance with an equity stake of 26 per cent.

Madras Cements Ltd and Lucas TVS. The life insurance company has tied up with NGOs and self help groups. vice-president-marketing. two per cent of insurance premia of the new age insurance companies have to come from rural areas. Additionally. In addition. These field staffs are linked to the city offices and keep on visiting the rural areas.different segments of the market. One such NGO is LEAD (League for Education and Development) and the insurance company covers the members of the SHGs associated with the NGO. insurance outfit in terms of distribution with its network of around 13. which is aimed at the economically weaker sections. SBI intends to fully integrate the insurance business into its banking activities with appropriate sales support SBI will become and the largest marketing. ICICI Prudential has also come out with its social sector policy. Insuring it the Private way ! Explains Sugata Gupta. the company has tied up with NGOs to sell social sector policies. ICICI Prudential: "We have unit managers and agents to cater to the rural market. also." ICICI Prudential keeps on sending regular vans with doctors to underwrite the policies. Salam Zindagi. All this is being done to cater to the IRDA norms. insurance product line of the Joint Venture Company & network of branches. has tied up with two Chennai-based corporate houses. ICICI Prudential Life Insurance.000 branches. As per norms. to serve underprivileged children. like SEWA in Gujarat. HDFC Standard Life is customising its approach to cater to the rural markets so as to address the special needs of these areas. The key to success will be the ability to integrate the savings products of the bank. the insurance watchdog has put in 91 .

Also a few industrialbusiness in Bombay Dyeing. customers share a strong and long-term relationship with banking institutions.with 208 branches and 800. access to inexpensive credit and other micro-finance services. State Bank of India. Oriental Bank of Commerce. "Typically we are looking to tie up with banks with strong regional presence and knowledge of both rural and urban segments of their markets. Lakshmi Vilas Bank -.000 customers -. Convenient Credit ? ECONOMICALLY empowering." he added. Godrej Group are in the picture. i. Global Trust Bank.e. Bank of Baroda. Dabur CGU Life Insurance . We feel that banks have got the expertise to give financial advice to its customers. Rural Banking … Indigenous Route to 2." he said.some policy stipulation on insurance companies to cover life in the social sector for the under-privileged. helping them make right decision. Aditya Birla. Bank of India. ICICI Bank and HDFC Bank have or are intending to enter insurance business after various procedural formalities have been clearly defined in Insurance Regulatory Authority Bill.has a strong regional presence in the southern part of the country. From the NBFC sector Alphic Finance and Kotak Mahindra will be entering this sector.6 Group. "For selling specialised financial products such as life insurance policies a lot depends on the distributor's relationship with its customer and in India. India's rural 92 . including savings and insurance.has recently forged a marketing alliance with the Lakshmi Vilas Bank.in which Dabur holds the majority 74 percent stake while the remaining 26 percent is owned by CGU . Centurion Bank. Vysya Bank. Tata It is felt that volume of new house like the insurance sector could touch $25 billion. Quite a few banks are desirous of undertaking life insurance or general insurance business.

oilseeds. There has been tremendous progress in quantitative terms but quality has suffered. Since the days of the Rural Credit Survey Committee (1954). the problem remains. rapid population growth and rising unemployment all find their origins in the stagnation of economic life in rural areas. etc. Credit for the poorer households is the real problem.000 villages despite several expensive attempts to do so. Stagnation in rural banking is noticed in the north and northeastern regions. sericulture etc are being taken up on commercial lines. The modern banking system has failed to deliver inexpensive credit to India’s 600. The focus should be on assisting and guiding small farmers. It is in this context that the role of rural banking institutions has to be reconsidered. Do we need to rethink the appropriate institutional structure for rural banking in India? The problems of widespread poverty. The Narasimham Committee observed that the manning of rural branches “has posed problems for banks owing to the 93 . India has come a long way in its search for an appropriate rural banking set-up. Activities allied to agriculture – livestock breeding. Though there has been some improvement. growing inequality. Economic empowerment is defined here as. Further.population will have a significant impact on India's economic growth. progress has been slow and halting and significant regional disparities persist. dairy farming. hi-tech agriculture with an export orientation has brought about higher productivity in cotton. Progressive and not-so-small farmers have no difficulty in obtaining credit from the commercial banks. The development strategy adopted and the increasing diversification and commercialisation of agriculture underline the need for the rapid development of rural infrastructure and a larger flow of credit.

the agricultural sector is beset with considerable uncertainties – the weather and rainfall problem. a rural banker is required to handle credit extension work. Another reason for such a state of affairs is that the apex bodies have expanded and prospered at the cost of primary bodies by taking over functions like deposit mobilisation even at the rural level.reluctance of urban-oriented staff to work in the rural branches and the lack of motivation to do so. Government interference that leaves no scope for these apex bodies to show initiative and work out action plans for development on their own is partly responsible for this situation. Also. scheme appraisal work in connection with farm and non-farm investments and the production of different crops. the employees are unhappy in view of the lack of adequate career prospects. Apart from having a basic knowledge of agriculture and rural development. By way of liberalisation of the federal structure’s 94 . the monitoring/supervision and recovery of loans spread over villages which are not even connected by all-weather roads and in an environment in which vested interests are quite powerful. the pest problem and the market and price problem. A person who says he has been in bank service for more than 25 years writes: “That rural credit has become unfashionable is evident from the fact that the subject is accorded only residual focus in the various congregations of our bankers. More local recruitment and improved working conditions in rural areas should help to meet this problem. Unfortunately a uniform standardized approach to lending has led to rigidities as a result of which a farmer-borrower becomes a defaulter for no fault of his.” Experience of RRBs that have locally-recruited employees. The placement policy in vogue in our banks is such that exposures in rural credit or agro-financing rarely count for promotions.

This in fact is one of the reasons for informal banking surviving and for the emergence of non-banking financial companies (NBFCs) in rural districts. not knowing how to deal with banks. did not perform as expected. The poor performance of the RRB personnel is largely due to the fact that the personnel hurriedly recruited and trained in a routine way have been given the difficult task of dealing with a large number of smallterm/composite loans advanced to small farmers and other poor rural families who. But the commercial banks are a more important source of credit as can be seen from Table 1. Neither the cooperative channel nor public sector one is able to meet local needs in regard to savings and loans due to a rigid all-India approach and lack of flexibility in their operations. nearly 45 per cent of rural credit is from cooperatives.working. societies that want to work independently of the federal system should be allowed to exit. It is along such lines that the rural credit co-operatives came up followed by the commercial banks’ diversification into rural banking after the nationalisation of 14 big banks. and bureaucratic regimentation was the result. The committee was asked to identify the constraints faced by banks in augmenting the flow of credit and simplifying the procedures for agricultural credit. too. What did the RBI do? Reserve Bank appointed the R V Gupta Committee in 1997. Though there is a multiagency set-up for rural banking. require assistance and guidance at each stage – from loan application to loan recovery. WORKING OF RRBs and Rural Cadre It is the view that rural banking is simple that has landed the RRBs in a mess. Since the commercial banks. the 95 . New institutions were over-administered.

the sponsor bank should throw this cadre open and give its own staff. the RRBs should atleast be made fully owned subsidiaries of the sponsor banks so that the banks can develop for both their rural branches and their RRBs in a unified way. Think about it !  There should be credit societies at the village level. the option of joining the cadre. including those not working in the rural branches. A strong society at the tehsil level would serve the farmers in a better. Such societies. banking progress in the rural sector was not able to take care of the growing credit needs of agriculture. however. he can go up to the tehsil headquarters for the purpose.  Since the merger of the RRBs in their respective sponsor banks has been ruled out.  Advance a tailor-made package of credit with a consumption component and closely supervise its disbursement to a large number of farmers in far-flung villages and provide technical guidance and marketing links. more effective and efficient manner. After all. Even then. tend to become weak. Besides placing all the RRB employees in the rural banking cadre. a farmer has to deal with a credit society only a few times in a year.regional rural banks (RRBs) were formed. each 96 . The best option seems to be to have managerial cadre at the district level and at the same time. At the national level NABARD was established. Such an approach would ensure that scarce resources have properly utilised and that small producers can reach a higher plane of technology and earn enough extra income to improve their standard of living after repaying the loan.

though desirable in itself. recommendation that at least 90 per cent of loan applications “should be decided at the branch level”. self-help groups (SHGs) broadly on the model of the ‘grameen banks’ of Bangladesh. does not go far enough. The creditworthiness of an SHG is linked to the amount of saving brought about by the group. The SHG promotes thrift and savings. It does not take care of the need for giving the branch manager the power to reschedule loan installments on the merits of each case. howsoever temporary and small they are. managerial cadres can be created as a collaborative effort of DCCBs. Without such empowerment the spectre of non-performing assets (NPAs) would harass the farmers. At the district and state levels. Recent Developments The second Narasimham Committee (Committee on Banking Sector Reforms) has suggested de-layering of the cooperative credit system with a view to reducing the costs of intermediation and making NABARD credit cheaper for ultimate borrowers [Government of India 1998:61]. state cooperative banks (SCBs) and state and all-India cooperative Unions. 97 . One recent development under the leadership of NABARD and nongovernment organisations (NGOs) is the formation of informal.primary should have the choice to choose its manager from the panel of managers given by the district union district central cooperation bank (DCCB).  Decentralised sufficient banking are a and giving The branch Gupta managers Committee’s powers must. The mutual trust reflected in the SHGs working is in tune with the true spirit of cooperation.

thereby to a great extent weaning the poor away from moneylenders. The number of SHGs linked to banks is now around 33,000. The makers of banking policy are now focusing on technology-led banking in the rural sector. This requires a restructuring of cooperatives to enable them to meet the challenges of competition. It also requires a change in mindset. While the government should promote the restructuring and modernisation of cooperatives through an incentive/disincentive package and by providing adequate infrastructure in the rural areas, the actual task should be left to the cooperative leadership and the apex bodies of cooperatives. If and when rural banking becomes a separate entity in each bank, that would ensure full attention for the rural sector and motivate personnel who opt for this cadre, besides providing them with career prospects. The staff requirement of the rural banking cadre (RBC) will be on a big scale. One objective of policy-makers is to subject the banking system to greater competition and for this purpose introduce new players in the market. This objective is expected to be achieved by permitting the establishment of large private banks and by encouraging the setting up of small private local area banks (LABs) in the rural areas. LABs are envisaged as private enterprises in rural localities for mobilizing rural savings and making them available for investment locally. The LAB policy gives agriculturists an opportunity to form self-help groups in the form of LABs for their banking needs and to look after the development of their respective areas. This is in line with the multi-agency approach to rural credit. Each banking channel has to meet competition, and together they are to meet the growing banking needs of rural India.

What did they have to say?

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According to bank unions the aim of local area banks will be to snatch a share of the savings and divert them into profitable investment in cities. The weaker sections of society living in rural areas will be starved of bank credit in consequence” Another argument against LABs is that “any smalltime trader can come into banking”. If this were true, the Reserve Bank would by now have been flooded with applications for starting LABs. The fact is that the mobilisation of even Rs 5 crore by way of promoters’ contribution is very difficult for a small trader or even for large farmers. The bank employees’ unions refuse to appreciate the logic behind the establishment of LABs. The logical followup of the new economic policy is to encourage private enterprise in all fields, including banking. In the rural sector, such private banking really means self-help efforts. Yet another point raised is that as there are already a large number of branches of banks and RRBs, and cooperative credit institutions too, there is no need for LABs. The trade unions did not object when the public sector banks started competing with the cooperative credit institutions, including urban banks. They do not even mind the banks competing with the RRBs, which they have sponsored. They only fear that when the LABs come up they will compete with the public sector banks and take away their deposit business.

Commercial Bank v/s RRB There are 28 PSB with 19423 branches and 196 RRBs with 12311 branches. This means that there is a public sector bank branch for every 20 villages. In addition, there are 12,357 semi urban branches (10,535 of public sector banks and 1,822 of RRBs), which also mainly serve the rural hinterland. This spectacular spread in the villages is a significant

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achievement of banks in India. The banks’ achievement in respect of mobilisation of rural deposits and advancement of loans to rural families is equally commendable. Lendings in Rural India, 1999 2000 Source Direct Amount Percen Indirect Amount (Rs Crore) NA Percen t 12.9 Total Amount (Rs Crore) 8,218

(Rs Crore) t Primary cooperative credit society Land development banks Commercial banks RRBs Total 12,940 25.2 8,218 15.9

NA

20.3 49.2 8.3 100.0

12,940 31,313 4,044 63,666

26,327 51.1 4,986 4,044 7.8 NA 51,529 100.0 12,137 Illustration 10

The new context compels us to think on new lines and, instead of approaching the issue in a routine way, to work out the restructuring of selected branches to suit the needs of specialised banking for agriculture, bank managements being left free to work out programmes for this task. As regards co-operative rural banking, the primary credit societies hold the key to success. Banking policy should aim at encouraging the viable ones through incentives, including direct access to NABARD finance, and

Virtual interference. letting them function 2.7 without governmentBanking … the
transformation !

The practice of banking has undergone a significant transformation in the nineties. While banks are striving to strengthen customer relationship and move towards 'relationship banking', customers are increasingly moving away from the confines of traditional branch-banking and are seeking the convenience of remote electronic banking services. And even within the broad spectrum of electronic banking, the aspect of banking that has

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 The increased speed of response to customer requirements. Electronic Funds Transfer at Point of Sale (EFTPoS). Stored-Value Cards. virtual banking denotes the provision of banking and related services through extensive use of information technology without direct recourse to the bank by the customer. ceteris paribus. it needs to be recognized that such high-cost technological initiatives need to be undertaken only 101 . internet and intranet banking. It is possible to delineate the principal types of virtual banking services. frauds relating to local clearing operations will be prevented if computerisation in banks takes place.  It also implies the possibility of access to a greater number of potential customers  Manipulation of books by unscrupulous staff. however. and more recently. These include Shared ATM networks. The salient features of these services are the overwhelming reliance on information technology and the absence of physical bank branches to deliver these services to the customers. enhance customer satisfaction and. Broadly speaking.gained currency is virtual banking.  Lower cost of handling a transaction and of operating branch network along with reduced staff costs via the virtual resource compared to the cost of handling the transaction via the branch. The financial benefits of virtual banking services are manifold. Increase in the functional and geographical spread of banks has necessitated the switchover from hard cash to paper based instruments and now to electronic instruments. Smart Cards. On the flip side of the coin. can lead to higher profits via handling a larger number of customer accounts. phone banking. The origin of virtual banking in the developed countries can be traced back to the seventies with the installation of Automated Teller Machines (ATMs).

The popularity which virtual banking services have won among customers. EFT (Retail. is likely to increase in the future. 102 . the network consists of over 689 VSATs located in 127 cities of the country and utilises one full transponder on INSAT 3B. owing to the speed. MIS. issues like authentication of payments instructions. On the large issue of electronically initiated funds transfer. Virtual banking has made some beginning in the Indian banking system. Prescriptions of maximum monetary limits and authorizations. However. RTGS). It uses a blend of communication technologies such as VSATs and Terrestrial Leased Lines. the system operators have to be extremely vigilant and provide clear-cut guidelines for operations. online processing and trading in Government securities. ECS. While most of electronic banking have built-in security features such as encryption. the responsibility of the customer for secrecy of the security procedure would also need to be addressed. The operationalisation of the Very Small Aperture Terminal (VSAT) is expected to provide a significant thrust to the development of INdian FInancial NETwork (INFINET) which will further facilitate connectivity within the financial sector. the Shared Payment Network System (SPNS) has already been installed in Mumbai and the Electronic Funds Transfer (EFT) mechanism by major banks has also been initiated.after the viability and feasibility of the technology and its associated applications have been thoroughly examined. Electronic Debit. Inaugurated on June 19. ATMs have been installed by almost all the major banks in major metropolitan cities. various inter-bank and intra-bank applications ranging from simple messaging. several issues of concern would need to be pro-actively attended. Presently. 1999. # The INFINET is a Closed User Group (CUG) Network for the exclusive use of Member Banks and Financial Institutions. convenience and round-the clock access they offer.

funds querying for Banks and are FIs. Banks are thus moving into the retail mode to tide over the global slowdown and boost the bottomline. The main advantages of retail banking are assured spread. credit cards. 30 are bought by housing loans and out of 100 cars sold. being Inter-Branch Reconciliation implemented using the INFINET. Major issues plaguing the banking industry are the lack of standardisation of operating systems. The target clientele is consumers and mid size companies. Government Transactions. customers stand 2. car loans. Anywhere/Anytime centralized Banking.5 percent of all banks loans of India. 28 are brought by car loans. which will cater mainly to inter-bank applications like RTGS. out of 100 houses sold. transactions cost are higher as compared to of corporate lendings. In a tight competitive environment where banks are making a thrust towards technology to provide superior services to its customers. Thus. In India today … 103 . personal loans and also customized loans like equipment loan for doctors. The INFINET will be the communication backbone for the National Payments System. Retail banking had been a neglected segment accounting to 10. Delivery Vs Payment (DVP). Automatic Clearing House (ACH) etc.8 to gain the most. spreads competitivelending have decreased superior services at in corporate prices.dematerialisation. significantly. Retail Banking …the ‘in’ thing ! The Customer is now in an enviable position where he can demand With increased competition. In India. widely distributed risks and lower NPAs due to limited risk associated with the salaried class. systems software and application software throughout the banking industry. However. The product offerings include home loans.

in the form of ATMs as well as branches. Even though retail loans account for 18 percent of total loans. you need a higher physical presence. these account for 40 percent of bank revenues. Mr. “In retail banking. Bank of Baroda.Swaroop of HDFC Bank. 104 . State-of-art technology has to be used to enable convenient customer transactions. whereas in the private sector. Banks have a stronger influence on profits due to individual customers. opportunity seekers like ICICI and HDFC have focused on retail lendings. Union Bank of India and Bank of India have diverged into the retail segment. SBI.” States. This is best proved by the success of HDFC which has achieved breakeven on its operations in the fiscal year 2001.Among PSBs.

Ramesh Parikh and its CEO and MD Devendra Pandya. Those who resorted to the call money market found no lenders as commercial banks kept away from them. Many cooperative banks also faced payment problems. Until recently. The scheduled bank status also allowed the bank to invest 10% of its net worth in the capital markets. A preliminary inquiry by the central bank showed that the bank had a very bad liquidity position after it issued pay-orders worth Rs650mn to the depositors. The advance made by the bank to Ketan Parekh are pegged at around Rs2bn. The problems of the bank were further compounded when it had to down its shutters in Ahmedabad and Mumbai. This was following reports that the bank had given a huge bank guarantee to Ketan Parekh. It had 12 directors on its board that included its chairman. The result. The bank received a scheduled bank status from the RBI just a couple of years ago. However. The crisis forced the RBI to step in and take some action to limit the damage. the bank was left with very little cash. the bank faced its worst crisis on the 8th of March when depositors panicked and started withdrawing money from the bank.3. The RBI was left with no other option but to recommend 105 . the bank had managed to resist the allure and glamour of investing heavily in the capital market. 1968 to cater to the varied financial needs of wholesale grocery traders in the Madhavpura. the relation between the bank's chairman Ramesh Parikh and big bull Ketan Parekh did the trick and the bank is reported to have made huge advances in the last couple of months. which allowed the bank to expand its banking operations and start lending to stock brokers. But.1 Ahmedabad-based The SCAM Story … ! Mercantile Cooperative Bank was Madhavpura established on October 10.

Rs11. stock lending norms. This was because the bank was unable to honor its commitment. UTI Bank and GTB. Standard Chartered Bank and Global Trust Bank. Punjab National Bank and Standard Chartered Bank. namely. Ketan Parekh's pay orders. all of which have lost hefty sum of money in the Madhavpura scam. The RBI has reportedly drawn plans to revise payorder and demand draft discounting norms. Bank of India and the Punjab National Bank. which were drawn on Madhavpura and discounted by various banks.95bn were routed to three of his shell companies. Bank of India. Out of this. The banks include such big names as the State Bank of India.the Central Registrar of Co-operative Banks to supercede the board of the bank. However. Fort branch of Standard Chartered Bank. and has decided to plug the loopholes that allowed Madhavpura Bank and stock brokers to play havoc with the market. the scam has also brought to light the fact that loopholes within the banking system exist and the RBI as a banking regulator failed to respond quickly to the challenge posed by the recent scam. including Bank of India. Parekh had several accounts in all these branches. Bank of India lost about Rs1. Nakshatra Software. banks capital market exposure norms and 106 . These payorders were reportedly issued by the Mandvi branch of Madhavpura Bank. The banks in question were. RBI said their exposure was to the tune of Rs696mn. Punjab National Bank. Chitrakoot Computer and Goldfish Computer. the SBI. Several public sector banks have been hit very hard by the Madhavpura Bank's misdemeanor. albeit a little too late. bounced. Meanwhile.2bn as pay orders issued by Madhavpura Bank to Ketan Parekh bounced. Ketan Parekh reportedly used his seven Bank of India accounts to discount 248 payorders worth about Rs24bn in nine weeks between January 3 and March 9. the central bank seems to have learnt its lessons.

gold lending norms. both of which enjoy a tremendous amount of influence on the cooperative banks. A high power committee of the RBI set up in 1999 and headed by K Madhav Rao. is it different and more effective as far as recoveries are concerned? 107 . With big banks and small banks caught in a trap." The committee also added that it was "convinced that the dual control must end. said it was "absolutely necessary that the RBI should be the sole regulator of the banking business carried on by the Urban Cooperative Banks. # What is the procedure being a private player (ICICI) in this industry.2 Public sector OR Private Sector – the point of views About REFORMS in the Indian banking sector The legal infrastructure for the recovery of non-performing loans still does not exist. the RBI only has jurisdiction over the banking operations of the cooperative society while the registrar looks after the managerial and administrative functions. This ultimately leads to one solution i. The functioning of debt recovery tribunals has been hampered considerably by litigation in various high courts. calls have increased for a greater role for the RBI as a regulator of the cooperative banking sector. it is a major drawback of this ruling. who can the customer bank on? 3. any better ways. and end soon. ruthless provisioning. Under this system."However. cooperative societies are under the dual control of the RBI and the Registrar of Cooperative Societies. At present.e. The High Power Committee on Urban Cooperative Banks noted RBI's attempts to get even model bye-laws adopted by state governments had drawn blank. Taking into consideration the enormity of the crisis. the greatest challenge in cleansing the system would be the state governments and the domestic industries.

the customer profile is further forwarded to the corporate level. Thus. individually and then approval for the same is forwarded to the concerned department. just about shifting the responsibility to the ARF? What’s the whole point of having something like that. the banks cannot sell any collateral of a borrower without the court intervention. The need to make massive provisions obviously results in a depletion of capital. the need for ARF is now paramount. the customer profile is scrutanised at the branch level. After evaluation at this level a confirmation is sent to the respective branch. # Is the transfers on NPAs to state owned ARF. But the capital adequacy norm means the banks have to find additional. The Branch Manager and the Assistant Branch Manager evaluate the solvency of the borrower. ICICI follows a certain procedure as far as loan advancements are concerned. and then the borrowers offer is confirmed. the root cause for a high NPA level is considered. This system has ensured the low level of NPAs in this private sector bank. In this situation. for loan amount of Rs 500000/. Unlike most of the PSBs. an issue is resolved in a year and a half inspite of stipulated norms of 6 months. the banks are being forced to accept the minimum possible amounts from sub-standard and bad loans. being solvency of the borrower. PSBs need to be given more power to enforce their security rights. costly money to refurbish the capital base. In cases where the loan amount exceeds Rs 500000/-.and below. it’s like a better way of declaring losses and turning away from efficiencies? At ICICI Banks should be able to account for it independently. At PSBs Today.At ICICI Considering the effect of high level of NPAs on the efficiency of banks. 108 . The procedure differs as per the amount of loan. Even as far as DRT working is concerned.

Reforms among public sector banks are slow. the GOI is good. its just another committee with more heads made by GOI. as politicians are reluctant to surrender their grip over the deployment of huge amounts of public money. but for private banks need to have branches in certain areas like Amravati or Ratnagiri. Government intends to reduce its stake to 33% in nationalized banks. this is no form of defence. etc Minimum deposit for credit cards and FD sector banks Take the case of UTI returns when all others were down. its positive and negative effects on private players. ARFs seem to be like pointless transfers. please note the following: Consider the number of customers in private as compared to public PSBs have a definite priority sector lending Maintenance of PPF accounts. At PSBs Government does co-operate. At ICICI 109 . that’s a government cost.At PSBs Frankly. # As a private player what are the problems that you face while communicating with the government? At ICICI The government imposes a lot of restrictions on the private players. please comment on this reform. the cost of these is not really feasible to these banks but they have no alternative. A PSB anyway needs to open a branch in rural areas. taxes.

Income Recognition. banking regulation norms. i. ANZ and Stanchart. not just traditional ‘Banking’ functions 110 .e. the competition to private players will increase. The ownership pattern and capital structure will change and this will lead to better efficiencies and customer service level. being a government rule. This could be: At PSBs Any PSB is answerable at the Parliament level to the GOI. etc. Please state your views on the overall development of India with this major development in the financial system. disclosure should be higher in PSBs. Any other recommendations as a private bank. Asset Classification and compulsory disclosure of accounts has lead to transparency in the working of banks. the government needs to make a certain service level mandatory. Introduction of prudential norms. this has been implemented in PSBs Diversified portfolio. However. thus. ICICI has had a recent merger with BoM. Consolidation of the Banking industry by merging strong banks is the latest development in the Indian Banking Sector. At ICICI Besides. the management approach will be by professionalism. it will be gradually implemented so no immediate impact on private players.As far as an effect of reducing government stake is concerned. basic training to employees Decrease NPA level by better evaluation of customer profile Technological upgradation. Customer service increase.

One issue is. as a company holds a diversified portfolio. a bank with large network of branches and diversified portfolio will stand in the market. Such trivial issues hamper the working. after 1985. ICICI. The 1992 reforms gave scope for diversified product profile. About DEVELOPMENTS in the Indian Banking Sector About VRS …At PSBs The good people are out. the recruitment in the banking sector has been negligible. a branch that gives all in ‘one-stop’ will survive. banks need to increase their emphasis on customer service. As per Relationship Manager. initially Balance Sheets will look good. At PSBs A merger should consider the human aspect. # ICICI. For ICICI and BoM merger. so the existing people work like good soldiers without any increase in pay. Ultimately. many employees would retire in a few years. may be after that VRS could have been introduced. New products and new operating styles exposed the banks to newer and greater risks.At ICICI In a competitive scenario. the customers have a lot of choices to make. thus ICICI now stands to create regional balance of branches and high connectivity throughout the country. BoM has 277 branches in South India. but then working of two different human cultures. one may look down upon the other. is the main aim to increase the non-fund based revenue due the trend of falling interest rates? At ICICI 111 .

with the existing workload and VRS. how would you rate the success of ICICI Prudential – Joy Hope Freedom Life. The enthusiasm and efficiency level differs and so does the productivity. The concept of PSBs and insurance may not work unless supported by better employee productivity. # Can you please state the benefits of universal banking. it will be very difficult for PSBs to work. The issue of universal banking resurfaced in Year 2000. Your comments on distinguishing factor from a public sector bank which has a low reputation as compared to private sector. A bank needs to push its products in the market and establish a strong presence for survival. when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank. on a scale of 1 to 10 (10 being highest). ICICI has ‘n’ number of brokers and agents appointed which are well connected throughout a majority of the country. The average employee age at private sector is 24 to 29 years as compared to 35+ at PSBs. # What is the viability of “Insurance & Banking” in India. 112 . Thus. The measure to increase revenues is by increasing customer base by increasing portfolio aided with aggressive marketing. may be in terms of revenue or utilisation of resources or others? At PSBs Anyways PSBs have multifunction. For each and every sector. SBI Insurance – just confusing customers by lot of Insurance companies.The basic aim is to retain customers. Banks and Insurance. its old wine in a new bottle. do you think PSBs should also go for insurance and why? At ICICI The general attitude of employees in PSBs is laid back.

adjusting with rural India will take time. At ICICI RBI norms state that for every 5 urban branches. At PSBs Private players have been operating at in urban areas. the usage of e-banking technology is expected to double. they have a Demo service with a personnel explaining what are the e-banking services available how are they used etc. well / bad and why? How much revenue do you see from this business as a percentage of the total business. rural India has a considerable scope. this itself proves that banks need to come up with better schemes in customized to rural requirements. Also. Due to increasing competition all banks are now heading towards developing areas or rather towns in the country. In 5 years. Considering the increasing importance of education in rural market and their literacy w. There is a section of people which wants to know what are the services banks can offer. At ICICI. The viability may term at 6 as of now mainly due to long paybacks.t banking.r. SBI has 13000 branches. 1 rural branch needs to be introduced.g.At PSBs Insurance would be better utilisation of existing resources e. please comment on the potentials in the rural area. How do you see the scope of Internet banking in India. Especially ICICI. People look forward and inquire for new technologies because they offer convenience. At PSBs 113 . it is known for its network in rural areas. in the future 5 years down the line? What is the current revenue from this business? At ICICI The trend today is to ape the West. for PSBs you can exploit the strength of reputation of trust and safety.

Sanghavi – Senior Manager – Andheri (W) On VRS In the long run. it will be fruitful. On ECS – tech banking UTI is the largest user of ECS credit. if these funds were used to make public sector banks technology savvy then VRS could have been introduced after a period of 5 years. The cost at Canara Bank is around Rs 139 Crores. hence they can manage a varied portfolio easily. people adjust to technology very fast. there was no provision made for the payment of VRS dues earlier. the VRS was introduced in a very disorganized manner. take the case when STD booths were introduced in India. Anyways. On diversifying portfolio The private players have limited clients to cater. currently. and BSES and MTNL are one of the greatest beneficiaries. a problem here is when a cheque is bounced on 114 . The banks would also have the power to retain clients. the clients who can pay more for better services are moving away. salary expenditure will drop. Canara Bank had introduced single window system for their clients. it’s just an additional service of convenience given to customers. Canara Bank – Interview of Mr. service quality deproves. when you have a large database of customers. the Internet is not a form of direct revenue.Internet has a future in India. But they lay an immediate disadvantage. and also cost of related perks would reduce.

Issues Resolved The number of issues resolved is not disclosed on account of disclosure regulations with respect to the same.e. DRT are authorised to handle DRT.account of inadequate cash. and are headed by the Presiding Officer who is said to be equivalent to the District Judge. only scheduled banks and nationalised banks are permitted. The procedure Banks send a notice to their client and if they don’t give a reply. there are around 5 DRT. the defendant requires to reply back. the defendant has to file an affidavit. Debt Recovery Tribunals Interview of Mrs Rama Pendharkar . the bank i. Section 19 of DRT Act states the banks permitted to be an applicant. No oral evidence is permitted. all below Rs 10 crores need to approach the civil courts. The government needs to make clear laws on use of ECS. 3 in Mumbai. the presiding officer resolves to the issue. applicant files a suit in the DRT. Within a month of filing a suit. DRTs have their own procedure distinct from the civil courts. the defaulted borrower i. 115 . the profile amount exceeding Rs 10 Crores. These have a specific area of jurisdiction.Advocate Mr R S Chehel – Advocate CHURCHGATE In Maharashtra. The issue is resolved only by affidavits.e. Within 6 month.

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IDBI to focus more on retail banking IDBI is to focus more on retail banking as part of its revised functional strategy for future growth. bank's managing director Gunit Chadha said. But this is not proving to be a catch-all-solution either. leaner. But what many of these nationalised banks did not consider was acute shortage of manpower (read officers) for supervisory banking functions. will have to be outsourced in the long run. of course. daily operations that are being affected. shortage of right man for the right job started surfacing. “Reducing workforce is fine. The RPU has armed the bank with the necessary systems and structure to roll out new products in retail 117 . But post-VRS manning structures had obviously not been clearly forecast.3 And today…the news says … The following states recent status of the Indian Banking sector. Life after VRS: Nationalised banks facing shortage of staff Shedding flab was fine till. As per earlier norms.” the sources said. Outsourcing administrative services has arrived in the banks. lower overheads may all have been relevant reasons to get onto best business practices. and manageable workforce. smarter. As a fall-out. He said the rolling out of the bank's RPU underlined the increased focus the bank had placed on retail banking. Foreign allies can hold up to 49% in private banks The RBI-SEBI panel has decided that a foreign collaborator can hold up to 49 per cent in a private bank as against 20 per cent allowed earlier.3. A voluntary retirement scheme. a foreign bank or financial institution stepping in as a technical collaborator can pick up a maximum 20 per cent stake directly. while another 20 per cent can come as direct investments by NRIs. Most banks are rushing in officers to branches where senior officers have left.

and Jammu & Kashmir Bank which. A sharp rise A study of the performance of banking sector stocks over the past one year has shown that while several public sector banks have shown a sharp rise in prices. 118 . bankers are now jittery that new laws could push them further towards the edge. "Corporation bank takes only select clients and a lot of effort goes into this selection." says a merchant banker explaining the low NPA levels in the bank. Leading the gainers list is Corporation bank whose scrip has nearly doubled in the last one year. the onus will be on banks and FIs to prove themselves innocent. failing which the law will take its own course. Understandably. It is followed by Bank of India with a gain of 75 per cent. many of their private counterparts are high on the losers list. Bankers jittery over proposed laws Rattled by scams. In its final recommendations the panel headed by Prof N L Mitra has said that when a fraud over Rs 10 crore is committed. despite a majority holding by the J&K government. it didn’t go down well among the bankers who fear that the proposed law could terrorise bank officials to such an extent that business would suffer." he said.banking and will greatly reduce time to market the new products. The financial regulators are now pitching for a change in the statutes that would put the responsibility on banks. So it didn’t come as a surprise when bankers were visibly upset and later voiced their protest last week after the committee on fraud made a final presentation before submitting its report to the government. financial institutions and other intermediaries to first prove themselves innocent when a `serious fraud’ hits the system. is classified as a private bank.

The central bank, which took the initiative to form the committee, is understood to be supportive of the different changes that the panel has prescribed. For instance, the committee has asked for changes in the Indian Penal Code to enable the legal system handle `financial fraud’. Currently, Indian laws with provisions for crimes like cheating, forgery and criminal breach of trust, are vague about financial frauds. The committee aims to make it more difficult for scamsters to take refuge in legal loopholes by making financial frauds a crime.

The recommendations, which assume a special significance after the string of scams that have rocked the Indian markets and institutions, will be submitted to the finance ministry in the first week of September. The committee on fraud has further recommended a special investigative agency for the purpose. This will require professionals from different fields and could be in line with the Serious Fraud Office, UK, which has teams comprising lawyers, accountants, bankers, software experts etc — all of whom give their inputs so that the case can be presented in a comprehensive way before the court of law. Allahabad Bank gets a sock for hiking CAR The Governement on Wednesday pulled up the CMD of Allahabad Bank, B Samal, and his management team for falsely reporting the bank’s capital adequacy at 11.51 per cent against the actual 8.61 per cent. At a review presided by finance secretary Ajit Kumar here, the bank was asked to turn around or close down 136 loss-making branches. The ministry team also criticised the management for letting standard assets turn NPAs again. On Tuesday, the government had asked UCO Bank to shut down 800 of its loss-making domestic branches besides four international ones. The government is meeting all the weak banks to take stock of their operations, indicating a change in the mindset and a resolve to chide shoddy performers. Indian Bank, however, was the odd man out. Although

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the government did not promise capital, it complimented the bank for its improved performance in recent months.

On sabbatical The scheme launched by PSBs along with VRS, sabbatical has got around 200 optees as of August 2001, comparing this to the VRS response of 11% of the employees in the industry; an observation was that only highly qualified employees opted for this scheme. ATMs in India The BoI is planning to install 225 ATMs in nine major cities. The growth of ATMs in India has been exponential; currently there are over one lakh ATMs in India and the growth rate is 40 %. As far as cost are concerned, Mr. Loney Antony, NCR Corporation India, Country Manager, states that cost of branch transaction is Rs 50 to Rs 100 whereas cost on an ATM is not more than Rs 25.

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3.4

THE FUTURE . . . what’s ahead !

The Indian Banks even after a decade full of reforms for the sector have a long way to go. Product innovations, better information technology and operating mechanisms not only enhance the income and reduce expenses but also act as a catalyst to retain customers. The question is will this suffice for the future? With the continued integration of the Indian markets with the global markets, the volatility is rising. To survive this dynamism and the risks arising from the same, banks need to have resources in place to understand and manage them on a regular basis. Markets, which have so far witnessed a deluge in the number of banks, will now witness consolidation. With the onset of globalisation in each and every sector, Indian Banks need to be much more sustainable, efficient, transparent in working and also competitive. Now the bank mergers will not be a new phenomenon since synergies are derived from the alliances in the recent mergers. The following seem to be what the Indian Banking sector is heading for: As the economy revives fee based activities and asset quality of banks could improve. After adjusting for Non Performing Loans some public sector banks may have to go in for fresh capital infusion. Banks will have to compete with mutual funds as an alternative to bank deposits. As public sector banks find their margins squeezed, they may become more active in trading to make up for the margin squeeze. The risk profile of these public sector banks may increase as their trading in money and forex markets increase. Thus, a sound risk management i.e. the ALMs need to be in place. As competition compress spreads earned on lending business, banks

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All banks will have to adapt to new emerging technologies in order to exploit the new business opportunities it offers.will have to focus on fee income. some of the big banks are expected to enter this business in a big way. Private banks are likely to generate better fee income due to their focus on having adequate technology and having skilled personnel to generate such business. Virtual Banking will set in as a trend successfully. these rewrites the conventional definition of a bank. 122 . as deregulation and new technology blur old boundaries. RBI is examining the feasibility of introduction of half yearly audit of accounts by external auditors towards improving the quality of auditing standards further. shall root the structural changes in the Indian Banking Sector. the housing loan sector has gained a considerable boosts as per the recent budgetary measures. But tomorrow. New arenas for advancing may be surveyed. Those forces offer as many opportunities as threats. the way you term it. It will be a new challenge and will require investment in technology and new systems. also infrastructure and film financing remain untapped. the banks have to compete with their peers as well as with other financial companies. With the opening of the insurance sector and recent relaxation of regulation by RBI for entry of banks in this area of business. Some valueadded services may also need to be provided. banks are allowed to lend 3 per cent of their advances to this sector. A reinvention or a renewal or a rediscovery. competitors might zoom in from completely unexpected industries. which will call for innovation standardisation. Public sector banks with their wide reach and higher confidence levels can take the lead. Today.

the asset quality is the determinance of banks profitability today. The reduction in SLR and CRR has been effective in the sense that the lendable resources of banks have increased. also. and however banks should note that ever greening of loans would deprove the circumstances in the long run.5 CONCLUSION A personal view on reforms and developments in the Indian Banking Sector is stated below. The present evaluation process of banks states requires around 18 123 . The anticlimax is about the current recession in the economy and decreasing need of investments by the corporate sector. The CRAR requirements are necessary for financial soundness of Indian banks. The NPA trend has been fortunately declining in the recent years. a need to assign risk weightage to government securities seems to be coming up due to increasing investments of banks portfolios.3. initially the NPAs were amounting to total of 16 %.

the interest rate deregulation has been in line with the international standards. the control strongly remains with the government and it is a truth that bureaucracy has become a side business. It’s a fact in our country that for every law made there is one more to escape from it. the Indian banks need to learn much more from competition. today. Increasing risks and imprudent liability management constitute to asset liability mismatch. Globalisation has but lead to the liberalisation of the Indian Banking sector. It was no form of a structural change but is a very effective tool to 124 . We still need to see what happens next ! The corporates can now have a good deal with loans and advances. This shall positively improve and get bankers alert. the bureaucracy involved can reduced only by way of better bank supervision. but on deeper analysis. with this respect. The current trend of falling rates shall indeed give the corporate customers fair access with better services. VRS was a government decision and about 11 % of the employees retired. Complacent behaviour of Indian banks with this context has lead to ALM reforms. The ALM framework if correctly implemented shall prove useful. like the other sectors opened up. Reduction of government stake seems to be a good decision of RBI. The Disclosure norms shall avoid situations like in case of South East Asian Crisis. the conceptualization of this structure needs to be acknowledged. The DRT Act supersedes all acts but the SICA which clearly states that companies can very easily stall recovery procedures.officials for quality inspection. RBI proves to be a quite proactive institution. However. customers and not advances and customer service is the call for the day.

has given a rise to the trend of mergers globally. a good manpower planning in advance would not have lead to the current problem. Mergers constitute as a cheaper and a quicker form of expansion and Indian banks should explore such an opportunity. retail banking is required. A merger to improve the overall health. Lastly. Currently. public sector needs to have a pace in this arena. how much advantage do our PSBs make is yet to see. About universal banking. better products and convenience and safety has to be guaranteed by the bank. lots of banks are facing problems of inadequate staffing. The recent merger of ICICI and BoM proves that customer base has to develop for sustainability. reach and customer base. I think a better plan would have been of investments in technology partially and then a VRS. The opening of insurance has given banks a new opportunity to make the best out of their resources. thus. due to increasing competition banks need to strive for customers. Personalized service in a crude form will help.improve efficiency of the Indian PSBs.e. 125 . As far as rural banks are concerned. GOI has to give personnel better career prospects in order to get them working. technological upgradation will be what will lead to customer retention on the grounds of accessibility and convenience. offering all at the same desks for corporates as well as individuals i.

The listed public sector banks are • • • • • • State Bank of India State Bank of Bikaner and Jaipur State Bank of Travancore Bank of Baroda Bank of India Oriental Bank of Commerce 126 .Annexure 1 LIST OF PUBLIC SECTOR BANKS State Bank of India and its subsidiaries are : • • • • • • • • State State State State State State State State Bank Bank Bank Bank Bank Bank Bank Bank of of of of of of of of India Bikaner & Jaipur Hyderabad Indore Mysore Patiala Saurashtra Travancore Other nationalized banks are: • • • • • • • • • • • • • • • • • • • Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Some of Public Sector banks have issued equity shares for general public and are listed on various stock exchanges.

• • Dena bank Corporation bank LIST OF PRIVATE SECTOR BANKS: Old private sector banks • • • • • • • • • • • • • • • • • • • • • • • • • **Bank of Madurai Ltd Bank of Rajasthan Ltd Bareilly Corporation Bank Ltd Bharat Overseas Bank Ltd City Union Bank Ltd Development Credit Bank Ltd Ganesh Bank of Kurundwad Ltd Karnataka Bank Ltd Lord Krishna Bank Ltd Nainital Bank Ltd SBI Comm & Int Bank Ltd Tamilnad Mercantile Bank Ltd The Benares State Bank Ltd The Catholic Syrian Bank Ltd The Dhanalakshmi Bank Ltd The Federal Bank Ltd The Jammu & Kashmir Bank Ltd The Karur Vysya Bank Ltd The Lakshmi Vilas Bank Ltd The Nedungadi Bank Ltd The Ratnakar Bank Ltd The Sangli Bank Ltd The South Indian Bank Ltd The United Western Bank Ltd The Vysya Bank Ltd New private sector banks • • • • • • • • • Bank of Punjab Ltd Centurion Bank Ltd Global Trust Bank Ltd HDFC Bank Ltd ICICI Banking Corporation Ltd IDBI Bank Ltd IndusInd Bank Ltd *Times Bank Ltd UTI Bank Ltd 127 .

*since merged with HDFC Bank **since merged with ICICI Bank LIST OF FOREIGN BANKS: • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • • ABN-AMRO Bank N. ANZ Stanchart Bank Bank International Indonesia Bank of America NT&SA Bank of Bahrain and Kuwait BSC Bank of Ceylon Banque Nationale De Paris Barclays Bank PLC Chase Manhattan Bank Chinatrust Commercial Bank Cho Hung Bank Citibank N. The Bank of Nova Scotia The Bank of Tokyo-Mitsubishi Ltd. Overseas Chinese Banking Corp.G.V. Arab Bangladesh Bank Ltd. Abu Dhabi Commercial Bank Ltd.A. Krung Thai Bank Mashreq Bank Oman International Bank S. ** Commerzbank AG Credit Agricole Indosuez Credit Lyonnais Deutsche Bank AG Dresdner Bank AG Fuji Bank Ltd. 128 . Siam Commercial Bank Societe Generale Sonali Bank State Bank of Mauritius Ltd.O.A. The British Bank of Middle East The Development Bank of Singapore Ltd. The Sakura Bank Ltd. Hanil Bank ** Hongkong Bank ING Barrings Bank N. Commercial Bank of Korea. American Express Bank Ltd.V. Sumitomo Bank Ltd. Ltd.

the need for ARF is now paramount. just about shifting the responsibility to the ARF? What’s the whole point of having something like that. the banks are being forced to accept the minimum possible amounts from sub-standard and bad loans. Toronto-Domonion Bank Bank Muscat International SAOG. # What is the procedure being a private player (ICICI) in this industry. The functioning of debt recovery tribunals has been hampered considerably by litigation in various high courts. Morgan Guaranty Trust company of New York KBC Bank. Thus. any better ways. is it different and more effective as far as recoveries are concerned? The need to make massive provisions obviously results in a depletion of capital. NV ** CLOSED INDIAN OPERATION Annexure 2 The personnel in public sector and the private sector bank were interviewed on basis of the following questionnaire (this is customized for ICICI Bank): About REFORMS in the Indian banking sector The legal infrastructure for the recovery of non-performing loans still does not exist.• • • • • The Sanwa Bank Ltd. This ultimately leads to one solution i. ruthless provisioning.e. # Is the transfers on NPAs to state owned ARF. In this situation. But the capital adequacy norm means the banks have to find additional. it’s like a better way of declaring losses and turning away from efficiencies? 129 . it is a major drawback of this ruling. costly money to refurbish the capital base.

is the main aim to increase the non-fund based revenue due the trend of falling interest rates? The issue of universal banking resurfaced in Year 2000. Introduction of prudential norms. its positive and negative effects on private players. Please state your views on the overall development of India with this major development in the financial system. 130 . as a company holds a diversified portfolio. ANZ and Stanchart. please comment on this reform. Any other recommendations as a private bank.Reforms among public sector banks are slow. New products and new operating styles exposed the banks to newer and greater risks. etc. About DEVELOPMENTS in the Indian Banking Sector The 1992 reforms gave scope for diversified product profile. Consolidation of the Banking industry by merging strong banks is the latest development in the Indian Banking Sector. Income Recognition & Asset Classification and compulsory disclosure of accounts has lead to transparency in the working of banks. ICICI has had a recent merger with BoM. # As a private player what are the problems that you face while communicating with the government? Government intends to reduce its stake to 33% in nationalized banks. # ICICI. as politicians are reluctant to surrender their grip over the deployment of huge amounts of public money. when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank.

# What is the viability of “Insurance & Banking” in India. please comment on the potentials in the rural area. do you think PSBs should also go for insurance and why? Due to increasing competition all banks are now heading towards developing areas or rather towns in the country. How do you see the scope of Internet banking in India. on a scale of 1 to 10 (10 being highest). in the future 5 years down the line? What is the current revenue from this business? 131 . how would you rate the success of ICICI Prudential – Joy Hope Freedom Life. well / bad and why? How much revenue do you see from this business as a percentage of the total business. Your comments on distinguishing factor from a public sector bank which has a low reputation as compared to private sector. it is known for its network in rural areas. may be in terms of revenue or utilisation of resources or others? SBI Insurance – just confusing customers by lot of Insurance companies. Especially ICICI.# Can you please state the benefits of universal banking.