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Public sector banks have done remarkably well in the sphere of consumer satisfaction but they have to face challenges everyday and a stiff competition with technologically sound foreign and private banks. Public Sector Indian banks are facing innumerable challenges such as worrying level of NPAs, deteriorating asset quality, increasing pressures on profitability, asset-liability management, liquidity risk management, market risk management and ever tightening prudential norms. Besides this, the disclosure requirements are also increasing.
Non-performing assets contribute to the low efficiency in the banking sector. NPA irregularities are higher in the PSBs as compared to the private banks ignored the technology and its use in the banking sector for a long period. ATMs, net banking and tele-banking were used extensively by the private and foreign banks to ensure quality service and make banking easy and fast. Increase in the percentage of Non Performing Assets Non-performing assets contribute to the low efficiency in the public sector banks. NPA irregularities are higher in the Nonperforming assets contribute to the low efficiency in the banking sector. NPA irregularities are higher in the PSBs as compared to the private banks as compared to the private banks Issues related to corporate governance. Corporate governance is a system which includes constituting, controlling and operating a particular enterprise or company. The major banking business in India is under PSBs. Corporate governance is complicated because the effectual management and decisions of the public banks are taken by the government while the management and boards of bank work purely as functionaries A surprising trend in manpower has been noticed in the public sector bank in india. Private sector banks are constantly increasing their manpower to enhance their growth. The public banks, on the other hand, have witnessed an overall sharp decline in the number of employees. Also issues like acts as threats to public sector banks in India • Training and Competence skills also acts as a challenge of Employees and their non matching with the required
• Change of Mindset of employees also acts as a challenge for the public sector banks • Shortage of Professionals of required / Matching Skills also acts as a challenge for public sector banks
With respect to marketing environment the public sector banks faces the following challenges • Identification of Customers & Placing them in the Right Segments – Sometimes the officials of Public sector banks are not able to identify the consumers and are not able to segregate them according to the target market or as per some predefined criteria due to their incompetency or some complexities on behalf of consumers.with respect to product development the public sector bank faces following challenges • Innovation and Customization if not initiated properly then this issues also creates and cast a negative impact on the composition and opportunities of the public sector banks Information Technology .With respect to the use of information technology the public sector banks faces the following challenges • Scarcity of user Friendly Technology • Customer Service Support software Problems of Non. which finally pose a challenge for public sector banks • Competition – Sometimes a stiff competition also acts as a challenge as well the an ill directed competition may add to the intensity of challenged • Regulation – Sometimes the legal regulations formulated by the authorities and government may pose a challenge to the existing makeup of the public sector banks.Marketing Environment . sub-standard or doubtful . Non-performing assets simply mean an account of an individual borrower which is termed by a bank as a loss. Product Development . NPA irregularities are higher in the PSBs as compared to the private banks.Performing Assets in India Non-performing assets contribute to the low efficiency in the banking sector.
Funds borrowed for a particular purpose but not use for the said purpose. There are several reasons for an account becoming NPA and further these reasons are classified under two headings * Internal factors * External factors Internal factors: 1. . concrete results are eluding.asset. Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in the country sending distressing signals on the sustainability and endurability of the affected banks. Apart from raising resources through fresh deposits. Thus. 2. it is considered past due. but banks can always aim to keep the losses at a low level. Though complete elimination of such losses is not possible. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. under any credit facility. Project not completed in time. If an amount is not paid in 30 days from its due date. Causes For Non-Performing Assets In Public Sector Banks Granting of credit for economic activities is the prime duty of banking. which arises from the failure of borrower. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. these loan losses affect the banks profitability on a large scale. which results into economic growth. Despite various correctional steps administered to solve and end this problem. However lending also carries a risk called credit risk.
This is insufficient to solve the problem all over the country (India). Willful defaults. External factors: 1. Business failures. externalization problems. natural calamities like floods. . 3. Failures.. power shortage. Shortage of raw material. monitoring and follow-ups. accidents. Government policies like excise duty changes. There are 22 DRTs and 5 Debt Recovery Appellate Tribunals. management disputes. Sluggish legal system . 8. 7. 5. Scarcity of raw material. 6. non payment\ over dues in other countries. recession in other countries. 2. power and other resources. disputes. Debt Recovery Tribunals (DRTs) were established. Industrial recession. Debt Recovery Tribunals (DRTs) Narasimham Committee Report I (1991) recommended the setting up of Special Tribunals to reduce the time required for settling cases. Deficiencies on the part of the banks viz. Poor recovery of receivables. adverse exchange rates etc. 5. Import duty changes etc.Long legal tangles and Changes that had taken place in labour laws as well as due to Lack of sincere effort. in credit appraisal. fraud. excess capacity. mis-appropriation etc. raw material\input price escalation.. industrial recession. In-ability of the corporate to raise capital through the issue of equity or other debt instrument from capital markets. Diversion of funds for expansion\modernization\setting up new projects\ helping or promoting sister concerns. 6. Major steps taken to solve the problems of Non-Performing Assets in India:- 1. Accepting the recommendations. 4. delay in settlement of payments\ subsidiaries by government bodies etc. 4. siphoning of funds. Excess capacities created on non-economic costs.3. 9.
SBI. Credit Information Bureau . 5 lakhs. The lenders can recover the dues by selling the assets or changing the management of the firm. Securitisation Act 2002 Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act 2002 is popularly known as Securitisation Act. It covers suit filed cases and cases pending with courts and DRTs (Debt Recovery Tribunals). Cases of Willful default and fraud were excluded. 40 Crores by September 2001. ICICI. 10 crores has been set up.2. This act enables the banks to issue notices to defaulters who have to pay the debts within 60 days. HDFC Bank. 10 Crores. IDBI. 3. IDBI Bank. Compromise Settlement Compromise Settlement Scheme provides a simple mechanism for recovery of NPA. 5. Once the notice is issued the borrower cannot sell or dispose the assets without the consent of the lender. The Public Sector Banks had recovered Rs. Lok Adalats Lok Adalats have been found suitable for the recovery of small loans. Lok Adalats avoid the legal process. According to RBI guidelines issued in 2001 they cover NPA up to Rs. Asset Reconstruction Company of India Ltd. According to the provisions of the Act. The Act also enables the establishment of Asset Reconstruction Companies for acquiring NPA. Compromise Settlement Scheme is applied to advances below Rs. with eight shareholders and an initial capital of Rs. The eight shareholders are HDFC. The Securitisation Act further empowers the banks to take over the possession of the assets and management of the company. 4. both suit filed and non-suit filed are covered. Federal Bank and South Indian Bank.
and market brokering. There has been significant increase in such companies since 1990s. Examples of these include insurance firms. The banking sector is financing only 40 per cent to the trading sector and rest is coming from the NBFC and private money lenders. Now they are also financing second hand vehicles. At the same line 50 per cent of the credit requirement of the manufacturing is provided by NBFCs. cashier's check issuers. A Credit Information Bureau can help by maintaining a data bank which can be assessed by all lending institutions. They are playing a vital role in the development financial system of our country. check cashing locations. currency exchanges.A good information system is required to prevent loans from turning into a NPA. NBFIs facilitate bank-related financial services. pawn shops. . such as investment. NBFCs can play a significant role in channelizing the remittance from abroad to states such as Gujarat and Kerala. and microloan organizations Growth of Non Banking Financial Institutions NBFCs are gaining momentum in last few decades with wide variety of products and services. risk pooling. 65 per cent of the private construction activities was also financed by NBFCs. If a borrower is a defaulter to one bank. this information should be available to all banks so that they may avoid lending to him. NBFCs collect public funds and provide loan able funds.contractual savings. Non-Bank Financial Institution (NBFI) A non-bank financial institution (NBFI) is a financial institution that does not have a full banking license or is not supervised by a national or international banking regulatory agency. NBFCs in India have become prominent in a wide range of activities like hire purchase finance.
In desperate times. and so on. Thus to conclude in the view of above NBFCs play a important role in economic development. The NBFCs are taking initiatives to establish a self-regulatory organization (SRO). Federation of India Hire Purchase Association (FIHPA) and Equipment Leasing Association of India (ELA). and marketing of insurance. The Reserve Bank has emphasis on formation of different authorized bidy like SRO Particularly for the benefit of smaller NBFCs. personal loans. (a) It provides funds to small businesses for which it is difficult to sell stocks and bonds because of high transaction costs. At present. Financial Intermediation: The most important function of the non-bank financial intermediaries is the transfer of funds from the savers to the investors. Major functions of the NBFIs are as follows: 1. NBFCs are represented by the Association of Leasing and Financial Services (ALFS).equipment lease finance. The Reserve Bank wants these three industry bodies to come together under one roof. (b) It also benefits the small savers by pooling their funds and diversifying their investments. NBFCs have greater reach and flexibility in tapping resources. . investments. loans. NBFCs are doing more fee-based business than fund based. NBFCs could survive owing to their aggressive character and customized services. They are focusing now on retailing sector-housing finance. Financial intermediation is economical and less expensive to both small businesses and small savers. Many of the NBFCs have ventured into the domain of mutual funds and insurance. Role and Importance of Non-Bank Financial Institutions The role and importance of non-bank financial institutions is clear from the various functions performed by these institutions. NBFCs undertake both life and general insurance business as joint venture participants in insurance companies. The strong NBFCs have successfully emerged as „Financial Institutions‟ in short span of time and are in the process of converting themselves into „Financial Super Market‟.
These institutions provide a wide range of financial assets as store of value and make available expert financial services to the savers. (i) Law of Large Numbers: Financial intermediaries operate on the basis of the statistical law of large numbers. and (c) low administrative cost of large loans and (d) low costs of establishment. All these factors enable the financial intermediaries to keep in cash only a small fraction of the funds provided by the creditors and lend or invest the rest. information and transactions. Economic Basis of Financial Intermediation: Handling of funds by financial intermediaries is more economical and more efficient than that by the individual wealth owners because of the fact that financial intermediation is based on (a) the law of large numbers. 3. According to this law not all the creditors will withdraw their funds from these institutions. The main economies are: (a) reduction of risk through portfolio diversification: (b)employment of efficient and professional managers. As . Inducement to Save: Non-bank financial intermediaries play an important role in promoting savings in the country. some others may be depositing cash. the financial intermediaries also receive regular interest payments on loans or investments made by them. Savers need stores of value to hold their savings in. Again.2. and (b) economies of scale in portfolio management. Moreover. if some creditors are withdrawing cash. (ii) Economies of Scale: Large size of the asset portfolios enables the financial intermediaries to reap various economies of scale in portfolio management.
These institutions enter into contract with savers and provide them various types of benefits over the long periods. financial progress . saving. mutual saving banks invest in mortgages. etc. There are two types of NBFTs involved in the mobilization of savings. bills. bank deposits. these institutions follow different investment policies. . etc. For this purpose. such as savings and loan associations. savings and loan associations. post office savings deposits. more easily divisible. pension funds. physical capital. etc. Investment of Funds: The main objective of NBFIs is to earn profits by investing the mobilised savings. life insurance policies. For example.income ratio is positively related to both financial institutions and financial assets. such as life insurance companies. NBFI provides highly efficient mechanism for mobilizing savings. inventories of goods. 4. more liquid. They are easily storable. the financial assets have certain special advantages over the tangible assets (such as. Mobilization of Saving: Mobilization of savings takes place when the savers hold savings in the form of currency. These institutions mobilize small savings and provide high liquidity of funds. and less risky. (a) Depository Intermediaries. bond's equity shares. while insurance companies invest in bonds and securities.). 5. credit unions. induces larger savings out of the same level of real income. public provident funds. mutual saving banks etc.stores of value. In fact. (b) Contractual Intermediaries.
agriculture and international trade. To take up rural development To finance projects which are of great importance to the economy. Undertaking marketing.Development banking finance for the corporate sector A Development Bank can be defined: “A Development bank is that bank which gives priority to development objectives” . Development of Entrepreneurial skill. particularly in the private sector so as to provide additional employment opportunities as well as the higher production. viz. industry.William Diamond It differs from the commercial banks in the following ways: o o o They do not seek or accept deposits They provide long term and medium term finance They provide development services Objectives of Developmental Banks Following are the important objectives of Developmental Banks To serve as an agent of development in various sectors.. to finance the banking and small scale industries To finance the banking and small scale industries. To accelerate the growth of economy Rapid industrialization. . and administrative assistance. Providing the technical. and investment research and surveys.
Characteristics of developmental Banks o o o o o o o A development bank is a multi-purpose financial institution it strives to promote economic development it provides refinance to other financial institutions A development bank provides a package of services from identification to management A development bank arranges for package of incentives to entrepreneurs. It is not concerned only with the past or the present but also takes into consideration the future o A development bank is a link that spurt all round development Need of development banks Following are the important points which highlights the need of developmental banks o o o o o o o o o o Necessity of medium and long term capital To channelize savings Industrial Finance Modernization of Small Scale Industries Transformation of Agriculture Trade oriented Growth Underdeveloped Capital Market Regional Imbalances Privatization Globalization . it brings in institutional innovations related to development a development bank is a visionary institution.
Advance upto 20% of the total loans to the individual industrial units. and investment research & survey. Undertaking market. . o Functions: Loan extended up to 20 years. Objectives: Acts as an apex institution for term finance. Industrial Development Bank of India o o Establishment: July 1. 1948 Objective: to give short term and medium term loans to industrial concerns. Providing technical and administrative assistance. refinance for the small scale industries.Different Development Banks \ Industrial Finance Corporation of India Limited o o Establishment: July 1. Acts as an apex institution for term finance for the industry. started functioning in 1990. Lender of the last resort and financing projects that are of national priority. o Objectives: To provide long period loans to small and medium sized industries at state level. State Financial Corporation o Establishment: State Finance corporation Act was passed in 1951. promoting and developing industries to fill the vital gaps in industrial structure. Objectives: Planning. Small Industries Development Bank of India o o Establishment: 1989. at present there are 26 such corporations. 1964. Also provide loan to the service industry.
National Housing Bank o o Establishment : July 1988 Objectives: To promote construction of new houses To advance loans for extension and renovation of old houses. To co-ordinate the functions of the institutions engaged in promoting. financing and development of the small scale and ancillary industries. It was mainly regarded as an investment institution. It offers technical as well as managerial facilities also. Industrial Investment Bank of India Ltd. Industrial Credit and Investment Corporation of India o Establishment : 1955. o Objective: Providing assistance in the creation. o Objective : To give financial assistance for the reconstruction of sick or closed industrial units. expansion and modernization of the industrial enterprises. It turned into a full fledged all purpose development bank in 1997. financing and/or developing the small scale sector. To finance development of slum areas To refinance the loan given to the poor and weaker sections of the society. . Encouraging and motivating participation of private capital. Encouraging and promoting industrial investment. o Establishment: earlier known as Industrial Reconstruction Bank of India. set up with an initiative of World Bank. To serve as the principal financial institution for promotion.
. Less interest in Under-writing Ignores the Small scale industries. Acting as a lender of the last resort Limitations of development Banks o o o o o o o Loans to established Entrepreneurs. as they lack proper security to offer for the loans. 1982 Objective : planning. Training. Coordinating with other institutions engaged in similar work. Unbalanced regional grants. lack of funds forThe capital resources of these Institutions is limited development.National Bank for Agriculture and Rural Development. promoting and operational matters relating to agriculture and rural development. o o Establishment : July. research and consultancy relating to agriculture and rural development. Contribute towards concentration of economic power. Ignores the problem of Industrial Sickness .
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