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India's Growing Banking Sector

India's banking sector is booming at a great pace in spite of its relatively small size in comparison of its counterparts in other leading economies. Indian banking sector has been found lucrative by eminent players from the international world. For e.g., In India, Citibank and Standard Chartered Bank has more than half of all credit card receivables and personal loans, which has generated more than Rs. 200 crore of profit for both banks. In 2003, Oriental Bank of Commerce was listed by Forbes magazine in its 'Global 200 Best Companies' list. In 1990s, after a long gap of more than 20 years, the apex bank, Reserve Bank of India (RBI) has issued licenses to 9 new private banks. In this, Times Bank got merged with the HDFC Bank. The RBI also allowed Kotak Mahindra Finance Company to become a bank. These banks have shown their edge over each others with the introduction of new products and technologies. Most of the banks paid their focus on the retail sector and provide internet banking, phone banking and mobile banking services to their customers and have cornered one of the largest segments of the India's banking sector by targeting the India's growing middle income class. The Indian banking sector has seen a proliferation of new services which has shown an improvement in customer service.

What is a Bank?
A banker or bank is a financial institution whose primary activity is to act as a payment agent for customers and to borrow and lend money. In other words, an institution where one can place and borrow money and take care of financial affairs.

Function of Banks
· · · · · Lending money to public (loans) Transferring money from one place to another (Remittances) Acting as trustees Keeping valuables in safe custody Government business

Types of Banks
· · · · Public sector Banks Private sector Banks Co-operative Bank Development Bank/Financial institutions


Reserve Bank of India
RBI is the banker to banks—whether commercial, cooperative, or rural. The relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act, 1934. Such bank, called a scheduled bank, is entitled to facilities of refinance from RBI, subject to fulfillment of the following conditions laid down in Section 42 (6) of the Act, as follows: It must have paid-up capital and reserves of an aggregate value of not less than an amount specified from time to time. It must satisfy RBI that its affairs are not being conducted in a manner detrimental to the interests of its depositors.

Services Provided By a Bank
· · · · · · · · Demat Account Lockers Cash Management Insurance Product Mutual Fund Product Loans ECS (Electronic clearance system) Taxes

An Overview

The country’s middle class accounts for over 320 million people. In correlation with the growth of the economy, rising income levels, increased standard of living, and affordability of banking products are promising factors for continued expansion.


an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. It is no longer confined to only metropolitans or cosmopolitans in India. Gone are days when the most efficient bank transferred money from one branch to other in two days. From 1786 till today. Players are becoming increasingly customer-centric in their approach. The first bank in India. They are as mentioned below: · · · Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. though conservative. Indian banking system has reached even to the remote corners of the country. dividends with the Not long ago. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. In fact. For the past three decades India's banking system has several outstanding achievements to its credit. he has a choice. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991." History of Indian Banking Sector Without a sound and effective banking system in India it cannot have a healthy economy. focusing on the expansion of retail and rural banking. The banking industry should focus on having a small number of large players that can compete globally rather than having a large number of fragmented players. the journey of Indian Banking System can be segregated into three distinct phases. Banks are now realizing the importance of being a big player and are beginning to focus their attention on mergers and acquisitions to take advantage of economies of scale and/or comply with Basel II regulation. which has resulted in innovative methods of offering new banking products and services. This is one of the main reasons of India's growth process. Money has become the order of the day. was established in 1786. Now it is simple as instant messaging or dial a pizza. Today. "Indian banking industry assets are expected to reach US$1 trillion by 2010 and are poised to receive a greater infusion of foreign capital. 3 . The government's regular policy for Indian bank since 1969 has paid rich nationalization of 14 major private banks of India.The Indian banking Industry is in the middle of an IT revolution. The most striking is its extensive reach.

4 . Next were Bank of Hindustan and Bengal Bank. Reserve Bank of India came in 1935. Central Bank of India. In 1865 Allahabad Bank was established and first time exclusively by Indians. the Government of India came up with The Banking Companies Act. As an aftermath deposit mobilizatio n was slow. it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. Bank of Baroda. 23 of 1965). Canara Bank. Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. Between 1906 and 1913. During those day’s public has lesser confidence in the banks. I prefix the scenario as Phase I. Punjab National Bank Ltd.To make this write-up more explanatory. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July. The East India Company established Bank of Bengal (1809). Phase II and Phase III. To streamline the functioning and activities of commercial banks. Moreover. Indian Bank. It was the effort of the then Prime Minister of India. Foundation Phase The General Bank of India was set up in the year 1786. Bank of India. mostly small. 14 major commercial banks in the country was nationalized. 1969. Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. mostly Europeans shareholders. was set up in 1894 with headquarters at Lahore. major process of nationalization was carried out. funds were largely given to traders. Expansion Phase Government took major steps in this Indian Banking Sector Reform after independence. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. In 1955. Mrs. Indira Gandhi. and Bank of Mysore were set up. There were approximately 1100 banks.

The country is flooded with foreign banks and their ATM stations. staff productivity and profitability of banks. the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11. This step brought 80% of the banking segment in India under Government ownership. In 1991. credit management.Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This is 5 . 1969: Nationalization of 14 major banks. Time is given more importance than money. Attention was paid to improving house-keeping. The entire system became more convenient and swift. customer service. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: · · · · · · · · 1949: Enactment of Banking Regulation Act. 1975: Creation of regional rural banks. 1955: Nationalization of State Bank of India. 1961: Insurance cover extended to deposits. The financial system of India has shown a great deal of resilience. Reforms Phase This phase has introduced many more products and facilities in the banking sector in its reforms measure.000%. Consolidation Phase The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Efforts are being put to give a satisfactory service to customers. After the nationalization of banks. under the chairmanship of M Narasimham. 1980: Nationalization of seven banks with deposits over 200 crore. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. 1959: Nationalization of SBI subsidiaries. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. 1971: Creation of credit guarantee corporation. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. a committee was set up by his name which worked for the liberalization of banking practices. Phone banking and net banking is introduced.

22% in semi-urban areas. All Scheduled Banks comprise Schedule Commercial and Scheduled Co-operative Banks. commercial banks which conduct the business of banking in India and which (a) have paid up capital and reserves of an aggregate real and exchangeable value of not less than Rs 0. 19 6 . (iv) Foreign Banks and (v) Other Indian Scheduled Commercial Banks (in the private sector). 18% in urban areas and the rest (17 %) in the metropolitan areas. the capital account is not yet fully convertible. Scheduled Cooperative banks consist of Scheduled State Co-operative Banks and Scheduled Urban Cooperative Banks There are 71. (ii) Nationalised Banks.177 bank offices spread across the country. the foreign reserves are high. (iii) Regional Rural Banks. STRUCTURE OF THE BANKING INDUSTRY According to the RBI definition. are eligible for inclusion in the Second Schedule to the Reserve Bank of India Act. and when included are known as ‘Scheduled Commercial Banks’. Scheduled Commercial Banks in India are categorized in five different groups according to their ownership and/or nature of operation. of which 43 % are located in rural areas. The major bank groups (as defined by RBI) functioning are State Bank of India and its seven associate banks. 1934.all due to a flexible exchange rate regime. These bank groups are (i) State Bank of India and its associates.5 mn and (b) satisfy the RBI that their affairs are not being conducted in a manner detrimental to the interest of their depositors. and banks and their customers have limited foreign exchange exposure.

United Bank of India is one of the 14 major banks which were nationalized on July 19. This Public Sector Bank India has implemented 14 point action plan for strengthening of credit delivery to women and has designated 5 branches as specialized branches for women entrepreneurs. Comilla Banking Corporation Ltd. (1914). 1969. a Government of India Undertaking offers Domestic. in the Public Sector Banks.nationalised banks and the IDBI Ltd. (1918). Comilla Union Bank Ltd. Oriental Bank of Commerce (OBC). Public Sector Banks in India Among the Public Sector Banks in India. Bengal Central Bank Ltd. 8 New Private Sector Banks and 29 Foreign Banks. NRI and Commercial banking services. (1932). Its predecessor. 19 Old Private Sector Banks. The following are the list of Public Sector Banks in India · · · · · · · · · · · · · · · · · · · 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 & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank 7 . OBC is implementing a GRAMEEN PROJECT in Dehradun District (UP) and Hanumangarh District (Rajasthan) disbursing small loans.. the United Bank of India Ltd. (1922) and Hooghly Bank Ltd. was formed in 1950 with the amalgamation of four banks viz.

ING Vysya Bank has many credits to its account. With successive years of patronage and constantly setting new standards in banking. It is one of the fastest growing Private Sector Bank in India. yet another Private Bank of India was incorporated in the year 1930. It was incorporated in August 1994 as HDFC Bank Limited with registered office in Mumbai and commenced operations as Scheduled Commercial Bank in January 1995. The first private bank in India to be set up in Private Sector Banks in India was IndusInd Bank. The first Private Bank in India to receive an in principle approval from the Reserve Bank of India was Housing Development Finance Corporation Limited.Private Sector Banks Private banking in India was practiced since the beginning of banking system in India. IDBI ranks the tenth largest development bank in the world as Private Banks in India and has promoted a world class institution in India. List of Private Banks in India · · · · · · · · · · · · · · · · · · · Bank of Punjab Bank of Rajasthan Catholic Syrian Bank Centurion Bank City Union Bank Dhanalakshmi Bank Development Credit Bank Federal Bank HDFC Bank ICICI Bank IDBI Bank IndusInd Bank ING Vysya Bank Jammu & Kashmir Bank Karnataka Bank Karur Vysya Bank Laxmi Vilas Bank South Indian Bank United Western Bank UTI Bank 8 . ING Vysya. Bangalore has a pride of place for having the first branch inception in the year 1934. to set up a bank in the private sector banks in India as part of the RBI's liberalization of the Indian Banking Industry.

Table 3: Group Wise: Comparative Average Source: Reserve Bank of India. Group Wise Source: Indian Banks’ Association/ Reserve Bank of India. * Includes Industrial Development Bank of India Ltd. 9 .Banking Industry at a Glance Table 1: Indian Banking at a Glance Source: Reserve Bank of India Table 2: Number of Banks.

Table 4: Bank Groups: Key Indicators Source: Reserve Bank of India. 10 .

insurance. credit cards. Effect of New Technologies on Banks The Indian banking sector has seen an acceleration with the introduction of technological transformation like ATMs. The last half of the nineties has witnessed the massive growth of the new private banking players. leasing. call centers etc. Government equity in banks has been reduced and strong banks have been allowed to access the capital market for raising additional capital. web based products. online banking. debit cards has touched the sky of popularity. Banks have specialized committees to measure and monitor various risks and have been upgrading their risk management skills and systems. e-cheques. New private sector banks have been set up and foreign banks permitted to expand their operations in India including through subsidiaries. telephone banking. which would ensure high level of service to customers and ensure unprecedented growth of the India. which has grown by approximately 50% per year and by 2001. · · Emergence of New Competitive Spirit in context of the customers Different economic reforms in the early 1990s have injected competition in the banking sector with the entrant of many new private and foreign players. Like State Bank of India (SBI) has set aside more than Rs 500 crore during its 3 years of time span for the up gradation of its IT systems along with the computerization and networking of branches. exposure limits. factoring. The RBI issued new bank licenses with the motive of forming a new cohort of private players. gold banking. SBI has more than 3000 computerized branches and over 1000 new ATMs. Even the old public sector banks are keeping themselves tune with the new technological changes. infrastructure financing. etc. Similarly. asset classification. New areas have been opened up for bank financing like. investment fluctuation reserve. Presently. provisioning. etc.Major reforms initiatives Some of the major reform initiatives in the last decade that have changed the face of the Indian banking are:· · · · Interest Rate Deregulation-Interest rates on deposits and lending have been deregulated with banks enjoying greater freedom to determine their rates. income recognition. Adoption of prudential norms in terms of capital adequacy. besides of course investment banking. they hold more than 6% of assets and nearly 10% of profits. United Bank of India (UTI) has started its computerization process in 1986 and so far it has completed its 11 . asset management. Use of credit cards.

Retail Sector Growth Earlier the Indian mortgage market was minuscule. As per an estimate. Opening of a fixed deposit. Many banks like HDFC. getting an impetus from the declination of the interest rates. Which could heightened to the 20%. HDFC Bank is quick enough in providing new products like car loans. The focal point of interest is about the size of the banking firm. 24x7 internet banking has proved to be an attractive service for the customers. This argument implies that Indian banks are not in 12 . Notable features of the internet banking are · · · · · · · Transfer of money to your account at the same bank's branch in another city. personal loans. debit cards etc. The undercurrent of thinking is that the larger the bank the higher its competitiveness and better its prospects of survival. Banks and the Internet World Due to the advantages of inherent conveniences. The bank is also engage in loan pricing in various innovative ways for building healthy customer relationship.less than 1% of GDP. it has already started doing tele-banking and mobile banking. SBI and ICICI has put the housing finance on their priority list. Like Punjab National Bank has come up with their new online payment service. In some of its branches. Personal loan is another area which is growing rapidly. India's mortgage assets have reached to nearly 2% of the India's GDP. Stopping the clearance of cheque. But after the introduction of economic reforms by the government. facilitating the online railway reservation. Transactions done through the internet cost relatively less as compare to visit bank branch. tremendous development has been seen in the mortgage market. Credit card has emerged out as another important product of the personal finance which is growing rapidly. Issuing of a banker's cheque or a demand draft.computerization work of more than 774 branches. Some banks also offer unique features of internet banking to their customers. It has also set up 25 ATMs in throughout the India and has signed agreement with other banks of the public sector for ATM sharing. Request for the cheque book. Mergers & Acquisitions There has been in recent months a renewed interest in mergers and acquisitions in the banking sector in view of the growing openness of the Indian financial system. Checking of bank balance.

This process was accelerated when two scheduled banks failed in 1960. and to 85 (14 non-scheduled) by the end of 1969. In the early 1990s when the then National Bank of India was merged with Punjab National Bank. The branch offices of scheduled commercial banks increased over this period while those of non-scheduled commercial banks declined. There were also mergers of private banks with public sector banks. the prominent among them being the mergers of Benares State Bank with Bank of Baroda in 2002. On the other hand. mooted by the merging banks in the first instance and approved by the authorities. credit disbursal. Much of the general literature on mergers in banking relates to private banking. But the decisions about mergers would require that a view be taken of the optimal number of banks in the country in the context of the opening up of the financial sector for foreign banks to acquire. that too if consolidated with some mergers. It is said that the only Indian bank that could compete internationally would be the State Bank of India. public sector bank mergers were not contemplated. as well as HDFC Bank and Times Bank are important examples. Nedungadi Bank with 13 . After this experiment. and amalgamate with banks in the foreign bank category as well as with Indian banks. Mergers of banks took place in India in the 1960s under the direction of the Reserve Bank of India. to 6593 in 1966 and to 9005 in 1969. relatively strong banks. there were private banks mergers since about the late 1990s for diverse reasons including building up financial strength. The complexities involved in mergers of public sector banking are rarely discussed. let us have a bit of contemporary history of mergers in India. Unviable banks were weeded out. The number of bank offices increased sharply during this period: From 4151 in 1951 to 5012 in 1961. capturing larger portion of the growing retail business and securing better regional presence. to 100 (27 non-scheduled) at the end of 1966.a position to compete for business internationally — in terms of funds mobilization. the number came down to 292 (of which 210 were non-scheduled) at end 1961. From 566 reporting commercial banks (of which non-scheduled banks were 474) at the end of 1951. The 1960 episode was essentially an exercise for preserving banking stability. as recommended by the Travancore-Cochin Banking Inquiry Commission (1956). were not entirely for reasons of banking stability as such. one needs to know the why mergers and their impact. investments and rendering of financial services — essentially because of their relatively small size. These mergers. This meant either closure or amalgamation with other. problems of personnel integration cropped up. In this background. Before dealing with these issues. Mergers of ICICI Bank and Bank of Madura.

But these mergers were at the initiative of the authorities. Unfortunately. The general literature on the subject views the impact from two angles: One based on accounting data and the other based on stock price reaction. however. they have opened the possibilities of actively promoting universal banking. On the other hand. Till almost the mid-1990s. They. mergers could lead to charging of higher fees for the services rendered. First. Finally. Implied is the argument that efficiency and profits would be assured once the economies of scale operate. the institutions were strengthened financially. Global Trust Bank with Oriental Bank of Commerce. and. especially if there is no `effective' competition or if smaller banks exhibit `herd behaviour' in imitating the bigger entities. Studies that use stock market data did not show gains from consolidation. there is little of published empirical literature on the impact of mergers in banking in India. to an extent the advances in information technology have given banks the incentive to consolidate to scale up operations. However. they are not meant. What is also important is that it should not lower the number of banks to levels that 14 . empirical data supported the view that banks significantly improve their profit and operational efficiency following mergers. Banking stability is much more important. Indian banks seeking international presence by exploiting the economies of scale and if possible of scope is an appealing argument. The merger of ICICI with ICICI Bank and the reverse merger of IDBI Bank with IDBI served multiple objectives. they helped to avoid the complex processes of restructuring the weaker of the units and to foster financial stability. But this alone cannot be a good ground for consolidation. especially of female labour. undertaken for preserving banking stability. in fact. The above examples of mergers have been facilitated to a large extent by banking sector reforms that helped relax some of the restrictions on asset portfolio distribution. Also. studies in the US suggested that mergers based on former did not lead to significant gains either in efficiency or cost-saving. be as serious as when mergers lead to loss of availability of or access to credit or to lower employment. however.Punjab National Bank in 2003.In the present context of global financial market integration. improve efficiency or raise profits. at least in the short term. More recently. This negative aspect of mergers may not. Second. suggested that bidders often suffer negative returns partly because of high offer prices and partly because markets revise downward their expectations from the merger. more recently. to cut costs.

credit cards and insurance. But there is need for intense research on the issue. factoring services. State Bank of India Company Profile of SBI: State Bank of India (SBI) is India's largest commercial bank. The RBI has done well to be transparent by going in for public views on ownership and governance. each specializing in developing services in a broad region.destroy competition. that by itself would not be enough. before one takes a judgmental view about the number of Indian banks that could have international presence and could compete for international banking business. Instead they should allow banks to grow into international entities on their own internal dynamic impulses. Good internal governance mechanisms and transparency practices need to be also in place. fund management. Besides the authorities should resist the temptation of taking a proactive stance in determining which Indian bank should have international presence. One only hopes that political considerations do not influence the final view on the matter. The question about the optimal number of banks in the country. While such a view would obviously be based on their financial strength. The eight banking subsidiaries are: · · · · · · · · State Bank of Bikaner and Jaipur (SBBJ) State Bank of Hyderabad (SBH) State Bank of India (SBI) State Bank of Indore (SBIR) State Bank of Mysore (SBM) State Bank of Patiala (SBP) State Bank of Saurashtra (SBS) State Bank of Travancore (SBT) 15 . SBI has a vast domestic network of over 9000 branches (approximately 14% of all bank branches) and commands one-fifth of deposits and loans of all scheduled commercial banks in India. and the associated issues of their capital adequacy and their capacity to help universalisation of banking are matters to be yet settled. The issue however could become complex if foreign banks are allowed to buy out Indian banks. This was not pursued. The proposition that banks would be `too large to fail' is passé as the 1990s financial crises experience shows. The State Bank Group includes a network of eight banking subsidiaries and several non-banking subsidiaries offering merchant banking services.There is no official view about the optimal number of banks in a country. The Banking Commission recommended in 1972 that national banks be reorganized into two or three all-India banks and six other entities. primary dealership in government securities.

47 5168.35 23747.000 day scheme.52 29.5 per cent interest in October.55 Source: SBI 68.40 21.28 2009 24641.70 17524.Exceeds Expectations: (Rs crore) April-June 2008 Interest income Other income Total income Interest paid Total expenses Operating profit Non-tax provisions 20224. The scheme had resulted in a mop up of around Rs 1.48 2.71 51.84 141.99 (5.18 4894.08 3523. under which the bank was paying 10.96 2640.42 1.53 15318.81 6298.59 33132.31) (85.01 39.44 2.41 The bank’s net interest income was affected due to a rise in interest payments that went up 38.79 1.92 10827.000 crore on a daily basis for a few months.43 13509.06) % Change Net profit Gross NPA Net NPA Gross NPA % of advances Net NPA % of advances NPA data is for SBI standalone 1640.5 per cent due the deposit mobilization under the 1.15 28238.11 41.96 18578.11 8491.42 2758.47 33.52 394.29 8402. 16 .

Agency and Utility Services A bank provides various banking facilities to its customers. drafts.e. 2. This money is in the form of cheques. 6. Payment and Withdrawal A bank provides easy payment and withdrawal facility to its customers in the form of cheques and drafts. etc. money given by depositors. A banking company means a company which is in the business of banking.Feature of banking sector development 1. 3. Acceptance of Deposit A bank accepts money from the people in the form of deposits which are usually repayable on demand or after the expiry of a fixed period. Giving Advances A bank lends out money in the form of loans to those who require it for different purposes. They include general utility services and agency services. 7. Profit and Service Orientation A bank is a profit seeking institution having service oriented approach. It also acts as a custodian of funds of its customers. 17 . It also brings bank money in circulation. firm or a company. Individual / Firm / Company A bank may be a person. 4. 5. It gives safety to the deposits of its customers. Dealing in Money Bank is a financial institution which deals with other people's money i.

Connecting Link A bank acts as a connecting link between borrowers and lenders of money. 10. 18 . Name Identity A bank should always add the word "bank" to its name to enable people to know that it is a bank and that it is dealing in money. 9. Ever increasing Functions Banking is an evolutionary concept. Banks collect money from those who have surplus money and give the same to those who are in need of money. Banking Business A bank's main activity should be to do business of banking which should not be subsidiary to any other business. 11. There is continuous expansion and diversification as regards the functions.8. services and activities of a bank.

they can use the same financial experts to provide different financial services. If the client has a high risk taking capacity then the universal bank will advise him to make risky investments and not safe investments. These companies can easily get other investors to invest in their business. This is because other investors have full confidence and faith in the Universal banks. 19 .e. etc. In India.  Easy Marketing : The universal banks can easily market (sell) all their financial products and services through their many branches. they can also manage their client's portfolios (different investments) profitably. higher output and better products and services.  Resource Utilisation : Universal banks use their client's resources as per the client's ability to take a risk. So. This saves cost for the universal bank. Even the day-to-day expenses will be saved because all financial services are provided under one roof. insurance. universal banks invest their client's money in different types of Mutual funds and also directly into the share market. to buy their Mutual funds. in the same office. For e. They also do equity research. They know that the Universal banks will closely watch all the activities of the companies in which they hold a stake  Economics of Scale : Universal banking results in economic efficiency.Advantages of Banking sector growth The benefits or advantages of universal banking are: Investors' Trust : Universal banks hold stakes (equity shares) of many companies. So. This is done very easily because they use one brand name (ICICI) for all their financial products and services. Today. ICICI may ask their existing bank account holders in all their branches. They can ask their existing clients to buy their other products and services. Similarly. RBI is in favour of universal banking because it results in economies of scale.  Profitable Diversification : Universal banks diversify their activities. This requires less marketing efforts because of their well-established brand name. That is. i.g. it results in lower costs. to take house loans. clients with a low risk taking capacity are advised to make safe investments.

Insurance. One-stop shopping saves a lot of time and transaction costs. It had very bad effects in the USA. For e. etc. but they are provided by the same bank. So. Home Loans. If these huge banks fail. So. Effect of failure on Banking System : Universal banking is done by very large banks. Some banks may give more importance to one type of banking and give less importance to the other type of banking. 3. However. That is. Lehman Brothers a very large universal bank failed.g. Conflict of Interest: Combining commercial and investment banking can result in conflict of interest. Disadvantages of Banking sector growth 1. However. This will have many harmful effects on the other banks and the public. 5. have to follow different sets of rules and regulation 2. Recently. this does not make commercial sense. Monopoly : Universal banks are very large. 20 . they can easily get monopoly power in the market. Commercial banking versus Investment banking. This creates many problems. This is also harmful to economic development of the country. 4. Mutual Funds. It also increases the speed or flow of work. ne-stop Shopping : Universal banking offers all financial products and services under one roof. all these products and services have to follow different rules and regulations. For e. Different Rules and Regulations : Universal banking offers all financial products and services under one roof.g. s. one-stop shopping gives benefits to both banks and their clients. then it will have a very big and bad effect on the banking system and the confidence of the public. Europe and even in India.

in 2002. had computerized its branches in the 1990s. · To remain competitive with its private-sector counterparts. but it was losing market share to private-sector banks that had implemented more modern centralized core processing systems. implement the new core system. · The State Bank of India has achieved its goal of offering its full range of products and services to all its branches and customers. · Although SBI initially planned to convert only 3. the largest and oldest bank in India. World's Largest Centralized Core Processing Implementation Analyst Author: Robert Hunt Senior Research Director. spreading economic growth to rural areas and providing financial inclusion for all of India's citizens. and provide ongoing operational support for its centralized information technology.Case Study: State Bank of India. · The State Bank of India selected Tata Consultancy Services to customize the software.300 of its branches. it was so successful that it expanded the project to include all of the more than 14. Retail Banking Feb 2009 Reference # V58:06R TowerGroup Take-Aways · The State Bank of India (SBI). SBI began the largest implementation of a centralized core system ever undertaken in the banking industry. Report Coverage 21 .600 SBI and affiliate bank branches.

The bank was renamed the Bank of Bengal in 1809 and operated as one of the three premier "presidency" banks (the presidency banks had the exclusive rights to manage and circulate currency and were provided capital to establish branch networks). SBI traces its heritage to the 1806 formation of the Bank of Calcutta.2009 The Tower Group. when India's © 2002 . It also identifies the drivers to modernization. Background The State Bank of India is the oldest and largest bank in India. statements. Additionally.500 ATMs.600 branches and nearly 10.600 domestic branches of SBI and its affiliate banks.000th branch in 2008. May not be reproduced by any means without express permission. resulting in the availability of banking services at more than 14. the Reserve Bank of India. The overall effort included the conversion of approximately 140 million accounts held at 14. 1 c central bank. This TowerGroup Research Note is a case study that overviews the history of the State Bank of India and details the effort to modernize the bank's core processing systems. All rights reserved.000 ATMs. with more than $250 billion (USD) in assets. or other content presented by TowerGroup. MasterCard Worldwide is not responsible for and does not necessarily endorse any opinions.The implementation of the Tata Consultancy Services (TCS) BaNCS Core Banking at the State Bank of India (SBI) and its affiliate banks represents the largest centralized core system implementaion ever undertaken. see TowerGroup Research Note V47:13R. For a broader overview of the Indian core systems market. the government consolidated the three presidency banks into the Imperial Bank of India. The bank has 84 international branches located in 32 countries and approximately 8. TowerGroup is a wholly owned subsidiary of MasterCard Worldwide and operates as a separate business entity with complete editorial independence. It is the second-largest bank in the world in number of branches. The Imperial Bank of India continued until 1955. it opened its 10. and the conversion methodology. the critical success factors. In 1921. Looking for State-of-the-Art Core Banking? Try India. Inc. acquired the majority interest in the bank and 22 . SBI has controlling or complete interest in a number of affiliate banks.

hanged its name to the State Bank of India (SBI). resulting in the acquisition (majority shareholding) of eight state-affiliated banks and the creation of the State Bank of India Group (SBI Group). 5 23 . the Indian government passed the State Bank of India Act. In 1959. The SBI itself is now majority owned by the Indian government. The State Bank of India and its affiliate banks are profiled in Exhibit 1. which purchased the shares held by the Reserve Bank of India.

Additionally. 24 . and deposit processing was completed in 2 hours and 27 minutes. TCS and the bank would have to demonstrate the capability to process 100 million accounts in a single processing environment. These benchmarks were audited by Ernst & Young. using two 32-CPU HP 9000 Superdome application servers and two 32-processor Itanium Core HP Integrity servers for the database. TCS and HP then conducted another scalability test in September 2006 to determine if the system could process SBI's entire base of 100 million accounts (excluding the affiliate banks. The test achieved a sustained peak real-time transaction rate of more than 1. They conducted the test at HP Labs in Cupertino. California. a new IT plan was created that would encompass all branches.Given the success of the initial project and SBI's desire to offer new products to all of its customers. meeting the projected processing demands of SBI. The month-end batch process for loans required 1 hour and 5 minutes.575 transactions per second. batch tests were run for both deposits and loan account processing. which use a separate processing environment) with sustained peak online throughput of 1.500 transactions per second. and the test results are highlighted in Exhibit 3.

the bank converted 1. The conversion of the remaining branches began in June 2006. All rights reserved.400 of these branches by March 2007. © 2002 .700 remaining SBI branches to the BaNCS system. SBI decided to convert the approximately 6. May not be reproduced by any means without express permission. Utilizing the assembly line conversion approach established in the initial phase. Inc. 7 25 .2009 The Tower Group. with the stated goal of completing the conversion by year-end 2008.Exhibit 3 State Bank of India Scalability Test of TCS BaNCS System for Full Branch Conversion Source: Tata Consultancy Services (TCS) Based on the successful scalability test.

It established 400 regional processing centers for all metro and urban branches that have assumed functions previously performed in the individual branches.Because the conversion methodology and BaNCS system were thoroughly proven and stable. · Staffing and empowerment of project team. Thus. TCS personnel first educated approximately 100 SBI professional trainers. This team reported to the SBI chairman and was empowered with all decision-making authority. TCS also staffed the project with approximately 300 IT professionals trained on the BaNCS system. TCS senior managers were thoroughly committed to the project as well and periodically met with the SBI chairman to review the project status. failed projects lead other banks to delay needed core systems replacements because they measure the risk of failure against the potential benefits of a new system. the business heads' objectives were aligned with those of the project team. Failures of core systems projects are not uncommon at large banks and result in both financial impact and lost business opportunities. The project was driven by the chairman of SBI. Importantly. The remaining branches were converted between April and July 2008. Further. · Ownership by business heads. · Focus on training. the SBI business people were viewed not just as contributors to a key project but as future bank leaders. SBI used its network of 58 training centers across India to train employees on the new system. The core banking team consisted of the bank's managing director of IT acting as team head and 75 business and IT people selected by the bank.600 branches to the new system. For example. who then trained 100. TowerGroup believes that several critical factors contributed to the success of the SBI core implementation effort: · Senior management commitment. The regional business line heads were responsible for the success of conversion of their respective branches and reported the status to the chairman. the assembly line conversion approach allowed the bank to complete the conversion ahead of schedule. The chairman monitored the overall status and ensured that sufficient resources were allocated to the project. Benefits of New Core Systems Implementation The new core system has resulted in benefits throughout the bank for both the customers and the employees of SBI. the new core banking system has allowed the bank to redesign processes. who met every month with the information technology (IT) and the business sector heads. 26 . SBI converted 4. The bank recently reported that business per employee increased by 250% over the last five years. the remaining employees trained at their respective job sites. Between April 2007 and March 2008 (the bank's fiscal year end). Critical Success Factors Large-scale core systems implementations are typically the most costly and risky IT projects undertaken by banks.000 SBI employees at the centers.

establishment of a call center. 8 27 . redesign of over 2.200 branches in the last fiscal year. May not be reproduced by any means without express permission. Implementation of the TCS BaNCS system has provided the bank with the ability to consolidate the affiliate banks into SBI.000 new branches. It delivers economic growth to the rural areas and offers financial inclusion for all of India's citizens.2009 The Tower Group. Inc. Completion of the core conversion project has also allowed the bank to undertake several new initiatives to further improve service and support future growth.The bank has achieved its goal of offering its full range of products and services to its rural branches.000 rural sales staff. opening of more than 1. All rights reserved. and an active plan © 2002 . The bank has reversed the trend of customer attrition and is now gaining new market share. In fact. These initiatives include the deployment of more than 3. the bank recently completed the consolidation of State Bank of Saurashtra into SBI.

Core systems modernization has allowed the State Bank of India to centralize computer processing and operations functions. Management also recognized the need for a proven systems integrator that possessed in-depth expertise in both business and technology. Exhibit 4 Selected Business Results for State Bank of India Group (2002–07) Source: State Bank of India Group conclusion The implementation of the Tata Consultancy Services (TCS) BaNCS system at the State Bank of India (SBI) represents the largest core systems project ever undertaken. and extensive employee training were all key contributors to the success of the project. the bank can now further expand its product offerings and improve customer service. offer new banking products to all the citizens of India. The bank's senior management commitment. Additionally. Although TowerGroup expects that the majority of these banks will continue to rely on the IBM mainframe for core processing. business line involvement. The use of a UNIX-based platform to process more than 100 million accounts daily demonstrates that tier 1 banks can use a mainframe alternative for their core processing. The success of this project should encourage other large banks to begin projects to modernize their core systems. SBI's achievement demonstrates that attention to critical factors is crucial in implementing new core systems. they can fully consider the benefits of utilizing a UNIX-based platform. and consolidate its affiliate banks. The improvement in productivity and growth of business for the SBI Group is reflected in Exhibit 4. reverse a trend of customer attrition. 28 .to migrate customers to electronic delivery channels. project team staffing and empowerment.

2.wikipedia. 27. 29 . Prentice Hall of India Private Ltd 2. Research methodology. Malhotra http://en. C. Shaw http://www. New age publication.K. Economics times.An applied orientation. second edition 2009. Websites & Search Engine: 1.financialexpress. 3. Kothari. Times of India. Financial Times/Prentice Hall Books. 2. New Delhi..2013) The Business world (april 2013) News paper: 1. Economics and Business Facts for you (aug 2013) bank http://www.R. 3.slideshare. Marketing Payback. Merrick David (2005). http://www. (2005). times/bank news. Magazines & Publications: 1. 3. Marketing Research.BIBLIOGRAPHY Books: 1. India page of HT paper (june.