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ACKNOWLEDGEMENT [Type text] Page 3 .
EXECUTIVE SUMMARY [Type text] Page 4 .
INDEX [Type text] Page 5 .
INTRODUCTION [Type text] Page 6 .CHAPTER 01.
31 private banks (these do not have government stake.27 public sector banks (that is with the Government of India holding a stake). which in 1935 formally took over these responsibilities from the then Imperial Bank of India. After India's independence in 1947. the government nationalized the six next largest in 1980.BANKING INDUSTRY OVERVIEW INTRODUCTION: Banking in India originated in the last decades of the 18th century. with the private and foreign banks holding 18. a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. They have a combined network of over 53. According to a report by ICRA Limited. In 1969 the government nationalized the 14 largest commercial banks.5% respectively [Type text] Page 7 . relegating it to commercial banking functions. The oldest bank in existence in India is the State Bank of India. Central banking is the responsibility of the Reserve Bank of India. the Reserve Bank was nationalized and given broader powers.000 branches and 17. Currently.000 ATMs.2% and 6. a rating agency. they may be publicly listed and traded on stock exchanges) and 38 foreign banks. the public sector banks hold over 75 percent of total assets of the banking industry. India has 96 scheduled commercial banks (SCBs) .
both of which are now defunct. became the State Bank of India.HISTORY OF INDIAN BANKING EARLY HISTORY: Banking in India originated in the last decades of the 18th century. and the Bank of Hindustan. That honor belongs to the Bank of Upper India. is the oldest Joint Stock bank in India. The first banks were The General Bank of India which started in 1786. The oldest bank in existence in India is the State Bank of India. The three banks merged in 1921 to form the Imperial Bank of India. upon India's independence. which was established in 1863. which almost immediately became the Bank of Bengal. Indian merchants in Calcutta established the Union Bank in 1839. established in 1865 and still functioning today. When the American Civil War stopped the supply of cotton to Lancashire from [Type text] Page 8 . This was one of the three presidency banks. as did their successors. It was not the first though. when it failed. which. For many years the Presidency banks acted as quasi-central banks. with some of its assets and liabilities being transferred to the Alliance Bank of Simla. but it failed in 1848 as a consequence of the economic crisis of 1848-49. which originated in the Bank of Calcutta in June 1806. and which survived until 1913. The Allahabad Bank. the other two being the Bank of Bombay and the Bank of Madras. all three of which were established under charters from the British East India Company.
particularly in Calcutta. "In respect of banking it seems we are behind the times. We are like some old fashioned sailing ship. most of the banks opened in India during that period failed. All these banks operated in different segments of the economy. The depositors lost money and lost interest in keeping deposits with banks. established in Lahore in 1895. The Comptoired'Escompte de Paris opened a branch in Calcutta in 1860. banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. in the 1860s. the Indian economy was passing through a relative period of stability. established in 1881 in Faizabad. HSBC established itself in Bengal in 1869. then a French colony. which later became the State Bank of India. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. Around the turn of the 20th Century. promoters opened banks to finance trading in Indian cotton. This segmentation let Lord Curzon to observe. Calcutta was the most active trading port in India. and another in Bombay in 1862. It failed in 1958. Indian joint stock banks were generally undercapitalized and lacked the experience and maturity to compete with the presidency and exchange banks. The first entirely Indian joint stock bank was the Oudh Commercial Bank. The next was the Punjab National Bank. Subsequently. mainly due to the trade of the British Empire. which has survived to the present and is now one of the largest banks in India. divided by solid wooden bulkheads into separate and cumbersome [Type text] Page 9 .the Confederate States. The Bank of Bengal. With large exposure to speculative ventures. followed. branches in Madras and Pondichery. and so became a banking center. Foreign banks too started to arrive.
The years of the First World War were turbulent. and two years thereafter until the independence of India were challenging for Indian banking. Four nationalized banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". Lakh) 35 109 5 4 25 1 1913 1914 1915 1916 1917 1918 12 42 11 13 9 7 [Type text] Page 10 . FROM WORLD WAR I TO INDEPENDENCE: The period during the First World War (1914-1918) through the end of the Second World War (1939-1945). The fervor of Swedish movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara ( South Kanara ) district." The period between 1906 and 1911. At least 94 banks in India failed between 1913 and 1918 as indicated in the following table: years Number of banks that failed Authorized capital (Rs. Corporation Bank. Bank of Baroda. Canara Bank and Central Bank of India. Lakh) 274 710 56 231 76 209 Paid up capital (Rs. saw the establishment of banks inspired by the Swedish movement. A number of banks established then have survived to the present such as Bank of India. Indian Bank. and it took its toll with banks simply collapsing despite the Indian economy gaining indirect boost due to war-related economic activities.compartments. The Swedish movement inspired local businessmen and political figures to found banks of and for the Indian community.
banks in India except the State Bank of India. the Indian banking industry had become an important tool to facilitate the development of the Indian economy. This changed with the nationalization of major banks in India on 19 July 1969. despite these provisions.POST INDEPENDENCE: The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal. However. and inspect the banks in India. the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate. In 1949. was nationalized. The Government of India initiated measures to play an active role in the economic life of the nation. and it became an institution owned by the Government of India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI. it had emerged as a large employer. At the same time. control and regulations. India's central banking authority. and a debate had ensued about the possibility to nationalise the banking industry. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. control. thethen Prime Minister of India expressed the intention of the GOI in the annual conference of the [Type text] Page 11 . and the Industrial Policy Resolution adopted by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy including banking and finance. and no two banks could have common directors. The major steps to regulate banking included: In 1948. NATIONALIZATION: By the 1960s. paralyzing banking activities for months. the Reserve Bank of India. continued to be owned and operated by private persons. Indira Gandhi.
to have helped the Indian economy withstand the global financial crisis of 2007-2009.All India Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation. her move was swift and sudden. and included Global Trust Bank (the first of such new generation banks to be set up). the government merged New Bank of India with Punjab National Bank. the Parliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill. till [Type text] Page 12 . The new policy shook the Banking sector in India completely. Bankers. Later on. licensing a small number of private banks. A second dose of nationalization of 6 more commercial banks followed in 1980. in the year 1993. including Home minister P. revitalized the banking sector in India. Thereafter." The paper was received with positive enthusiasm. and it received the presidential approval on 9 August 1969. where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%. 1969. The nationalized banks were credited by some. ICICI Bank and HDFC Bank. Axis Bank(earlier as UTI Bank). the GOI controlled around 91% of the banking business of India. After this. private banks and foreign banks. described the step as a "masterstroke of political sagacity. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. which later amalgamated with Oriental Bank of Commerce." Within two weeks of the issue of the ordinance. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment.at present it has gone up to 74% with some restrictions. Jayaprakash Narayan. until the 1990s. Chidambaram. the nationalized banks grew at a pace of around 4%. a national leader of India. the then NarsimhaRao government embarked on a policy of liberalization. This move. along with the rapid growth in the economy of India. These came to be known as New Generation techsavvy banks. which has seen rapid growth with strong contribution from all the three sectors of banks. and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19. With the second dose of nationalization. government banks. LIBERALIZATION: In the early 1990s. namely. The stated reason for the nationalization was to give the government more control of credit delivery. closer to the average growth rate of the Indian economy.
the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing. RECENT HISTORY OF INDIAN BANKING: Indian banking system. In terms of quality of assets and capital adequacy.Go home at 4) of functioning. to function as Central Bank of the country. vehicle and personal loans. Lend at 6%. All this led to the retail boom in India. Indian banks are considered to have clean. With the growth in the Indian economy expected to be strong for quite some time-especially in its services sector-the demand for banking services. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. strong and transparent balance sheets relative to other banks in comparable economies in its region. mortgages and investment services are expected to be strong. product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. Currently (2007).this time. People not just demanded more from their banks but also received more. were used to the 4-6-4 method (Borrow at 4%. banking in India is generally fairly mature in terms of supply. In March 2006. especially retail banking. [Type text] Page 13 .
On July 19. Similarly during 1956-59. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. the economy may need. Subsequently in 1980. the Govt. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01. during 1962 Deposit Insurance Corporation was established to provide insurance cover to the depositors. of the then Imperial Bank of India. RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee. During December 1969. The Service Area Approach was introduced during 1989. the associate banks came into fold of public sector banking.2629 cr. the central bank functions were being looked after by the Imperial Bank of India. Meanwhile.Earlier to creation of RBI. there was substantial increase in the no.1813 cr and with 4134 branches accounting for 80% of advances. RRBs were established (on the recommendations of M. State-sponsored.50 cr.28. In February 1966. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs. 1955 by acquiring the substantial part of share capital by RBI. 6 more banks were nationalized which brought 91% of the deposits and 84% of the advances in Public Sector Banking. With the 5-year plan having acquired an important place after the independence. integrated. State-partnered commercial banking institution with an effective machinery of branches spread all over the country. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal. deposits of Rs. loans of Rs. the Govt. more particularly to the unorganized sector. During 1976. 1969. In the post-nationalization period. of branches opened in rural/semi-urban centre bringing down the population per bank branch to 12000 apex. felt that the private banks may not extend the kind of cooperation in providing credit support. as a result of reorganization of princely States. While the 1970s and 1980s saw the high growth [Type text] Page 14 . a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilization of resources.
falling revenues from traditional sources.rate of branch banking net-work. excessive non Performing Assets (Npas) and excessive governmental equity. Bank of Punjab. lack of modern technology and a massive workforce while the new private sector banks are forging ahead and rewriting the traditional banking business model by way of their sheer innovation and service. The PSBs are of course currently working out challenging strategies even as 20 percent of their massive employee strength has dwindled in the wake of the successful Voluntary Retirement Schemes (VRS) schemes. PSBs. which are the mainstay of the Indian Banking system are in the process of shedding their flab in terms of excessive manpower. great size and access to low cost deposits. Over the last two years. which currently account for more than 78 percent of total banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000).Global Trust Bank merger however opened a pandora’s box and brought about the realization that all was not well in the functioning of many of the private sector banks. debit cards. Automatic Teller Machines (ATMs) and combined various other services [Type text] Page 15 . anywhere banking. Current Scenario: The industry is currently in a transition phase. the industry has witnessed several such instances. Vysya Bank are said to be on the lookout. Private sector Banks have pioneered internet banking. The private players however cannot match the PSB’s great reach. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition (M& A) route. the consolidation phase started in late 80s and more particularly during early 90s. On the one hand. Centurion Bank. Hdfc Bank’s merger with Times Bank Icici Bank’s acquisition of ITC Classic. For instance. the PSBs. Indusind Bank. Anagram Finance and Bank of Madura. while on the other hand the private sector banks are consolidating themselves through mergers and acquisitions. mobile banking. with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. The UTI bank. phone banking.
[Type text] Page 16 . Banks in India have been allowed to provide fee-based insurance services without risk participation. invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation. foreign banks. Banks with their phenomenal reach and a regular interface with the retail investor are the best placed to enter into the insurance sector.and integrated them into the mainstream banking arena. while the PSBs are still grappling with disgruntled employees in the aftermath of successful VRS schemes. Talks of government diluting their equity from 51 percent to 33 percent in November 2000 has also opened up a new opportunity for the takeover of even the PSBs. Meanwhile the economic and corporate sector slowdown has led to an increasing number of banks focusing on the retail segment. Many of them are also entering the new vistas of Insurance. have been permitted to open up to 12 branches a year with effect from 1998-99 as against the earlier stipulation of 8 branches. The FDI rules being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A route to acquire willing Indian partners. following India’s commitment to the W To agreement in respect of the services sector. including both new and the existing ones. Also.
INTRODUCTION OF THE TOPIC [Type text] Page 17 .
which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. and market risk. Generally speaking. Other risks are not considered fully quantifiable at this stage. Basel II. [Type text] Page 18 . Basel II uses a "three pillars" concept – (1) minimum capital requirements (addressing risk). mortgage-backed security markets and similar derivatives. operational risk. Basel II attempted to accomplish this by setting up risk and capital management requirements designed to ensure that a bank has adequate capital for the risk the bank exposes itself to through its lending and investment practices. this was top of mind. these rules mean that the greater risk to which the bank is exposed. was intended to create an international standard for banking regulators to control how much capital banks need to put aside to guard against the types of financial and operational risks banks (and the whole economy) face. (now extended and effectively superseded by Basel III). Politically. and accordingly much more stringent standards were contemplated. it was difficult to implement Basel II in the regulatory environment prior to 2008. The first pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk. (2) supervisory review and (3) market discipline. One focus was to maintain sufficient consistency of regulations so that this does not become a source of competitive inequality amongst internationally active banks. Advocates of Basel II believed that such an international standard could help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. initially published in June 2004. In theory. As Basel III was negotiated. and quickly adopted in some key countries including the USA.BASEL II :Basel II is the second of the Basel Accords. the greater the amount of capital the bank needs to hold to safeguard its solvency and overall economic stability. and progress was generally slow until that year's major banking crisis caused mostly by credit default swaps.
strategic risk. giving regulators much improved 'tools' over those available to them under Basel I. [Type text] Page 19 . pension risk. such as systemic risk.The second pillar The second pillar deals with the regulatory response to the first pillar. The third pillar This pillar aims to complement the minimum capital requirements and supervisory review process by developing a set of disclosure requirements which will allow the market participants to gauge the capital adequacy of an institution. reputational risk. It also provides a framework for dealing with all the other risks a bank may face. It gives banks a power to review their risk management system. concentration risk. liquidity risk and legal risk. which the accord combines under the title of residual risk.
033T3 + 0. an Assistant Professor of Finance at New York University. weighted by coefficients.006T4 + 0. and small firms with assets of < $1 million were eliminated. Z-scores are used to predict corporate defaults and an easy-to-calculate control measure for the financial distress status of companies in academic studies. The Z-score is a linear combination of four or five common business ratios. All businesses in the database were manufacturers.999T5 [Type text] Page 20 . who was. but has since been re-estimated based on other datasets for private manufacturing. The Z-score uses multiple corporate income and balance sheet values to measure the financial health of a company. with matching by industry and approximate size (assets). The formula may be used to predict the probability that a firm will go into bankruptcy within two years.014T2 + 0. Altman. non-manufacturing and service companies.012T1 + 0. The estimation was originally based on data from publicly held manufacturers. The original Z-score formula was as follows: . The coefficients were estimated by identifying a set of firms which had declared bankruptcy and then collecting a matched sample of firms which had survived. at the time.Z – Score Model : The Z-score formula for predicting bankruptcy was published in 1968 by Edward I. Altman applied the statistical method of discriminant analysis to a dataset of publicly held manufacturers. Z = 0.
Standard measure for total asset turnover (varies greatly from industry to industry). T4 = Market Value of Equity / Book Value of Total Liabilities.T1 = Working Capital / Total Assets. Measures operating efficiency apart from tax and leveraging factors. It recognizes operating earnings as being important to long-term viability. Measures profitability that reflects the company's age and earning power. Adds market dimension that can show up security price fluctuation as a possible red flag.25 avg. T5 = Sales/ Total Assets. and for the nonbankrupt group at +4. [Type text] Page 21 . Measures liquid assets in relation to the size of the company. T2 = Retained Earnings / Total Assets. T3 = Earnings Before Interest and Taxes / Total Assets. Altman found that the ratio profile for the bankrupt group fell at -0.48 avg.
1998). use financial ratios to help evaluate a bank’s performance as part of the CAMEL system”.CAMEL Model:In the early 1970s. As a whole. federal regulators in USA developed the CAMEL rating system to help structure the bank examination process.S describes the five composite rating levels as follows (Siems and Barr. CAMEL = 1 an institution that is basically sound in every respect - CAMEL = 2 an institution that is fundamentally sound but has modest Weaknesses. C = Capital adequacy A = Asset quality M = Management quality E = Earnings ability L = Liquidity. Each of the five factors is scored from one to five. Bank regulators. is then developed from this evaluation. The evaluation factors are as follows. and management. the CAMEL rating. with one being the strongest rating. 1998). also ranging from one to five. the use of the CAMEL factors in evaluating a bank’s financial health has become widespread among regulators. financial ratios are often used to measure the overall financial soundness of a bank and the quality of it management. An overall composite CAMEL rating. provides a means to categorize banks based on their overall health. financial status. In 1979. Piyu (1992) notes “currently. Since then. [Type text] Page 22 . the Uniform Financial Institutions Rating Systemwas adopted to provide federal bank regulatory agencies with a framework for rating financial condition and performance of individual banks (Siems and Barr. which is determined after an on-site examination. The Commercial Bank Examination Manual produced by the Board of Governors of the Federal Reserve System in U. for example.
[Type text] Page 23 . or compliance weaknesses that give cause for supervisory concern. operational. - CAMEL = 5 an institution with critical financial weaknesses that render the probability of failure extremely high in the near term. - CAMEL = 4 an institution with serious financial weaknesses that could impair future viability.- CAMEL = 3 an institution with financial. In Nigeria. commercial banks are examined annually for safety and soundness by the Banking Supervision Department of the Central Bank of Nigeria (CBN).
Therefore the liquidity position of both banks was sound and did not differ much. His report analyzed the financial health of joint ventures banks in the CAMEL parameters. His findings of the study revealed that the financial health of joint ventures is more effective than that of commercial banks. His study was mainly based on secondary data drawn from the annual reports published by joint venture banks. Moreover. it concluded that SBI has an advantage over ICICI.LITERATURE REVIEW Baral (2005) study the performance of joint ventures banks in Nepal by applying the CAMEL Model. With the reference to the Capital Adequacy. Bodla & Verma (2006) examined the performance of SBI and ICICI through CAMEL model. the components of CAMEL showed that the financial health of joint venture banks was not difficult to manage the possible impact to their balance sheet on a large scale basis without any constraints inflicted to the financial health. earning quality and management quality. Data set for the period of 2000-01 to 2004-05 were used for the purpose of the study. Gupta and Kaur (2008) conducted a research on the sole aim of examining the performance of [Type text] Page 24 . it can be said that ICICI has an edge upon SBI. Regarding to assets quality.
The discriminant model derived from the CAMEL parameters is tested among data for 2006. high efficiency community banks in conjunction with the logistical regression analysis. The research as determined by CAMEL Model revealed that HDFC was at its higher position of all private sectors banks in India succeeded by the Karur Vyasa and the Tamilnad Mercantile Bank. They rated 20 old and 10 new private sector banks based on CAMEL framework. Hays. The study covered financial data for the period of 5 years i. Agarwal & Sihna (2010) have analyzed the financial performance and thereby the sustainability of micro finance institutions (MFIs) in India by employing the CAMEL model. 2008. Its results concluded that the model accuracy floats from approximately 88% to 96% for both original and cross-validations data sets. aggressive marketing strategies and high level of technology. To attain perfection banks should always concentrate on new financial assets. 2007. from 2003-07. The analysis used data which are based on quarterly reports by commercial banks. However the Gobal Trust Bank and the Nedungradi Banks was considered as bad management The findings summarized that new private sector of banks have attained the higher position due to core banking. [Type text] Page 25 .e. excellent service and customer loyalty. Lurgio & Arthur (2009) have utilized CAMEL model to examine the performance of low efficiency vs.Indian private Sector banks by using CAMEL model and by assigning rating to the top five and bottom five banks.
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