International Referred Research Journal

ISSN- 0975-3486

VOL,I *ISSUE-9

RNI: RAJBIL /2009/30097

Research PaperCommerce

PRESENT SCENARIO OF BANKING SECTOR IN INDIA

June, 2010

* Dr. S.P. Jadhao

* Assot. Prof.& HOD Commerce, RA Arts, Shir M.K.Commerce & Shri S.R. Rathi Sc. College, Washim
Referred By GlobalEconomy: The global economy after a sustained period of expansion is now entering into a phase ofdownturn on account ofthe global financial crises. The Global GDP rose on an average by5 percent per annum during 2004 to2007, which isthe highest sustained ratesince 1970s. On the other hand international financial market witnesseda turbulence beginning June2007, triggered by the US sub-prime mortgage market, which then spread in subsequent months. Losses were recorded worldwide by financial institutions, which consequently undertook huge write offs, with some largest international banks recording considerable decline in profit. The global turmoil has accentuated significantlyduring 2008 so far and its adverse impact on the real sector is clearlyin evidence. Manyadvanced economies are experiencing recessionary conditions. The financial crises seems to have entered a new turbulent phase since September 2008, which has severely impaired confidence in global financial institutions and markets. Indian Economy: As per the RBI report, The Indian economy continued to record strong growth during 2007-08, albett with some moderation. With adverse effect of global recessions on Indian industry and service sector, the Real GDPgrowth rate of India, has declined from 9.6 % in 2006-07 to9 %in 2007-08. But theoverall growth ofreal GDP rateoftheIndia economy during 2007-08 was noteworthyin the global context. Indian Financial System and Financial Institutions: Indian financial system is standing on the four pillars namely financial institutions, financial markets, financial instruments and regulatorybodies. Banking and Insurance are the important constituents of Indian Financial System. Both plays veryimportant role in the socio economic development of the country. As far as the present scenario is concerned the banking industry is in a transition phase. On the other hand the Private Sector Banks in India are witnessing immense progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public Sector Banks are still facing the problem of unhappy employees. There has been a decrease of 20 percent in the employee strength ofthe private sector in the wake ofthe VoluntaryRetirement Schemes (VRS). As far as foreign banks are concerned they are likelyto succeed in India. Indusland Bank was the first private bank to be set up in India. IDBI, ING Vyasa Bank, SBI Commercial andInternational BankLtd, Dhanalakshmi Bank Ltd, KarurVysya Bank Ltd, Bank ofRajasthan Ltd etc are some Private Sector Banks. Banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank, Andhra Bank etc. ANZ Grindlays Bank,ABN-AMRO Bank, American Express Bank Ltd, Citibank etc are some foreign banks operating in India. Banking Institutions Banks are the most significant players in the India financial market. They are the biggest purveyors of credit, and they also attract most of the savings from the population. Dominated bythe public sector, the banking industry has so far acted as an efficient partner in the growth and development of the country. Driven by the socialist ideologies and the welfare state concept, public sector banks have long been the supporters of agriculture and other priority sectors. Theyact as crucial channels ofthe governments in itsefforts toensure equitableeconomic development.

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International Referred Research Journal ISSN- 0975-3486 VOL,I *ISSUE-9 RNI: RAJBIL /2009/30097 The Indian Banks are the backbone of Indian critical areas. Technology, customer focus, quality of financial sector and Indian economy.Presently, the service, etc, which aware the distinguishing features Indian financial system is in a process of rapid of private sector banks, during their early years, have transformation. There are about 67,000 branches of now become part and parcel of the public sector banks Scheduled banks spread across India. During the first as well. By adopting the voluntary retirement scheme phase offinancial reforms, there was a nationalization and streamlining their recruitment process, public of14 major banks in 1969. Thiscrucial stepled toa shift sector banks have not only eliminated the excess from Class banking to Mass banking. Since then the workforce, but also tuned themselves up to compete growth of the banking industry in India has been a better. In the arena of product innovations too, public continuous process. The classification of banking sector banks are not far behind. From an era when sector is depicted in the following chart. banking products remained the same for decades, we Banks in India can be categorized into non-scheduled have come to an age where new product innovations, banks and scheduled banks. Scheduled banks particularly those targeted at specific groups, have constituteofcommercial banks andco-operative banks. become the norm of the day. The winds of change are There are about 67,000 branches of Scheduled banks refreshing and the private sector banks also making spread across India. During the first phase of financial more innovative value added and beyond banking reforms, there was a nationalization of 14 major banks products to attract their customers. in 1969. This crucial step led to a shift from Class Cooperative Banking: The cooperative banking toMass banking. Since then the growth of the banking sector is one of the small partner of Indian banking industry in India has been a continuous banking structure in terms of volume of business, but process. Banking today has transformed into a it has morereach than anypublic sector bank or private technologyintensive andcustomer friendlymodel with sector bank. In our country, the cooperative banks a focus on convenience. The sector is set to witness have more reach to the rural India, through their huge the emergence offinancial supermarkets in the form of network of credit societies in the institutional credit universal banks providing a suite of services from structure. There are 31 State Cooperative Banks with retail to corporate banking and industrial lending to 450 branches working for the development of cooperative sector in our country. A wide network of 361District Central Cooperative Banks(DCCBs) with over 7000 branches and 112000 Primary Agriculture Cooperative Credit Societies are serving the rural population and particularly farmers of our country. Apart from the DCCBs. There are more than 350 AgricultureCooperativeand RuralDevelopment Banks (formerlyknown as Land Development Banks). If we include theUrban CooperativeBanks andUrban Credit Societies, then the numbers of cooperative credit institutions cross the figure of 150000. The overall investment banking. Whilecorporate bankingis clearly market share ofcooperative credit system in the Indian the largest segment, personal financial services is the banking system, in terms of volume of business maybe highest growth segment. Banking in Post Liberalized lessthan 10%, but it is35% interms ofagriculture credit Era: In theinitial post liberalization years, when private (65%intermsof financingtosmallandmarginalfarmers). sector participation was allowed in the banking sector It is more significant to note that; the cooperative , there was general contemplation that public sector credit system has the onlysystem, which has coverage banks abilityto sustain the competitive pressure. But of more than 90 % of populace in rural India. The public sector banks proved such critics wrong and cooperative credit structure is serving the Indian they not only have withstood the pressure, but have society since 1889 and since then it has seen several improved for the better in the light of the tough ups and downs. Despite of several limitations such as competition. After 17 years of liberalization, public restriction ofarea of operations, limited clients, small sector and private sector banks compete head on in all volume of business, political interference, this

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International Referred Research Journal ISSN- 0975-3486 VOL,I *ISSUE-9 RNI: RAJBIL /2009/30097 movement is standing since last 104 years and serving their becoming bad loans are further reduced. the societies. The general perception of the public Ample CapitalAdequacy Bankinghad been about the cooperative banks is not much encouraging, one of the hottest stocks during the bull markets in because of the frequent failures of cooperative banks Indian stock markets till 2007-08. Almost all banking andcredit societies. But,thetruthisthat,the cooperative stocks had performed well and investors bought them credit system is the most important Critical Evaluation like hot cakes. Some of the banks had sensed that this of Banking Sector was the right time to tap the markets and went ahead Though all the banks including public sector with their equityofferings. This led toan improvement banks, private banks, foreign banks and cooperative in their Capital AdequacyRatio (CAR). The minimum banks have their significant role in the development of CARas per RBI normsis 9% at present. It is noteworthy Indian economy and they all work in support of to mention that just one of the banks in our survey, Government policyof socio economic development of almost all the banks have more CAR than the the masses, theycan be differentiated bytheir business requirement. In fact, most bankshave a healthymargin objectives, customer segmentation and management ofover 15 %. The banks which had less CARtheyalso perspectives.Several supporters of free market shown a healthy improvement over last years CAR. economy have always upheld that the private sector The booming stock markets in thesecond halfof 2007banks are better managed vis--vis their public sector 08 and the disinvestment target had encouraged the brethren. But we have seen several examples of failure government to disinvest the stakes in several public of private sector banks.Several unfortunate turn of sector companies including banks have also tapped events of failure of private sector banks like Global the equitymarkets for fresh capital infusion.Deposits Trust Bank, (acquired byOriental BankofCommerce), form a major chunk of liabilities for banks and are Sangli Bank and others, have shown that alike included in the debt component of the debt equity cooperative banks and public sector banks, the private ratio. Internationally, a debt equity ratio of 50 times is sector banks are no paragons of professionalism, considered healthyfor the banking sector. Ratios of all efficiency and profitability.The moot point is that the Indian banks except Centurion Bank are below 50. irrespective of the owner, banks face similar risks and Similarly the non-interest income of banks has also it is the managements dutytohandlethem responsibly. registered asmall downfall of1to1.25% in their interest Mergers, in the banking industryhave become rescue income. On the other hand, the non-interest income in vehicles for weak banks and more often than not RBI the case of public sector banks, has registered an holds the key to these deals.Several private sector increase of10 %. Private sector banks have had a more banks and cooperative banks have been acquired by balanced growth. Their interest income increased at other banking institutions. Overall Growth The period the rate of 7.52 % while non interest income increased from 2000 to2007 were remarkable for banking sector by 13.03 %. Foreign banks followed the footsteps of for more than one reason. Healthy monsoon boosted public sector banks with a fall of2.67 % in their interest agricultural growth, which in turn spearheaded the incomeand an accompanied raiseof19.08% in the noneconomic recovery in the country.The industry interest income. During the financial year 2007-08, including cement, steel sectors, consumer durables deposits of banks have been increased by 15 to 25 % and infrastructure sector saw a turnaround in their across the sector. The growth in aggressive marketing fortunes due tothe economic recovery. Manufacturing and customer acquisition techniques adopted by the toowitnessed a good growth. All this led toan increase banks. The advances of public sector banks, Private in credit off-take for banks, which were wash with sector banks, andalsotheforeign banks have increased liquidity for the last few years. In the financial year by 15 to 20 % in the last financial year. The share of 2006-07, retail loanswere 51%ofthe total loan portfolio private sector banks in advances is higher than their whereas industrial loans and other loans were 15.6 % share in deposits. Most private sector banks use the and 24.4 % respectively. The trend towards retail services of marketing organizations to attract banking continued to be on the rise till the end of the customers. Aggressive marketing particularly in the year 2007-08. This was a healthysign as the extent of home loan market, which has been increasing at a NPAs were less in the retail segment and given the fact compounded annual growth rate of 20 % over the last that these loans were backed by assets, the chances of two years, has led to an increase in their share of

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International Referred Research Journal ISSN- 0975-3486 VOL,I *ISSUE-9 RNI: RAJBIL /2009/30097 advances. The revenues and profit of the banks have been hit bytheInternational subprimemortgage crisis. shown annual increase of 5 to 8 percent. Operating ICICI Bank has lost nearly US$ 264, till the end of profit and Profit after tax recorded a robust growth of January2008. But as per the banks statement, the loss more than 25 % in the case of both public and private ofbank was not due to investments in the US subprime sector banks. Economic Depression and Banking loan market, but due to the fall in the value of securities Sector: The financialyear 2008-09was littleintricatefor in theglobal market.Therisein theinternational interest Indian banking sector because of the colossal economic rates due to the subprime mortgage crisis was the main depression in the world and especially US, EU and cause for the fall in the value of securities in the global other developed countries. Due to the recession the market, which forced ICICI bank to make up the world, several export oriented industries like, textile, difference from its turnover. The loss, though, is diamond, rubber, steel,leather, cement etc. arein trouble. speculative, as the bank has not sold out these Consequently, the banks having credit exposure in securities. The bank holds securities worth face value these industries facing default risk.Thus Indian of US$ 1.6 billion and one of its divisions holds Banking Sector also could not keep away from heat of securities worth US$ 0.5 billion. ICICI bank is the first recession and resulted in to decline in the business Indian Bank toreport such kind of loss. However, other performance indicators. Barring the fewincidents, the publicsector banks are expectedtoreport similar losses hugeIndian financial sector having82 lakh crores assets in the near future. The bank expects that the loss due and 60 lakh crores deposit base has grown at around tothe subprime crisis would take awaynearly9% ofthe 12 to 15 per cent per annum and has displayed stability yearlyturnover. The main cause of the subprime crisis for the last several years, even when other markets in is expected to be the huge amount of loans given to the theentire worldand inAsian region were facinga crisis. domestic borrowers in United States with bad credit This stability was ensured through the resilience that history, i.e. low repayment power called subprime has been built intothe system over time. The financial borrowers in United States. These borrowers were sector has kept pace with the growing needs of unable to repay the loans due to the slowdown of the corporate and other borrowers. Banks, capital market US economy, which affected the accounts of these participants and insurers have developed a wide range banks, therebystarting the chain reaction of the fall in of products and services to suit varied customer the value of the securities in the international market. requirements. The Reserve Bank of India has As per the estimated losses, banks like the Merrill successfully introduced interest rate regime where Lynch, Citibank andDeutsche Bankhave lost out nearly interest rates are dependent on the market forces. US$ 180 billion due to the subprime mortgage crisis. financial institutions have combated the reduction in As mentioned earlier, Indian Banks are not interest rates and pressure on their margins by engaged in sub-prime mortgage crises, becauseof their constantly innovating and targeting attractive high securityand asset back mortgages and collateral. consumer segments. Effects of Economic Recession Moreover, the Indian public in general is not having on Indian Banking Sector: Since the entire world in the habits of investment or spending by way of passing through the economic depression, India is borrowing. However, some private banks and foreign also feeling the heat and the industrial sectors banks operating in India are facing problems, but not particularly those who are dependent on export are because of their loans, advances or investments in the facing lots ofproblems. The developed economies and US subprimeloan market, but due tothefall in the value particularly US is facing severe crises in all fronts of ofsecurities in the global market. Therefore, it is certain economy. The financial sector is the worst affected in that the sub prime mortgage problems of the indian US due to sub prime mortgage lending. One of very banks will not makeanysignificant effect onthebanking renownedprivate sector bank, TheICICI Bankalsohad sector.
to 2007) R E F E R E N C E 1. RBI Bulletins (2005 of Banking2.inBanking Trends in India),(V.B.Jugale), 2006 3. Problems and Prospects India (Dr M M Tapkir 2007 4. Sinha, Tapen and Sinha, Dipendra. A Comparison of Development Prospects in India 5. and China. Asian Economies, Vol. 27(2), June 1997, 5-31. U.S. Department of State FY 2001 Country Commercial Guide: India. Commercial Guide for India was prepared by U.S. Embassy New Delhi and released by the 6. Bureau of Economic and Business in July 2000 for Fiscal Year 2001 Websites: 7. http:/www.rbi.org.in 8.http:www.nabard.org 9.http://www.lic.wwindia.com/ 10. http://www.asiainsurancereview.com/edsynopsis.asp11.www.hc.wharton.upenn.edu/impactconference/presentations.html

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