Without a sound and effective banking system in India it cannot have a healthy economy. 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.

For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day.

Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these

responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980.



First of all I would like to thank to Reserve Bank of India to allow me to be a part of such a reputed institution, the Central Bank of India, who gave me the chance to work on the project titled "CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA" in Lucknow city. I sincerely thank the Governor, Reserve Bank of India and Shri D.P.S. Rathore Regional Director Lucknow office for facilitating and providing an opportunity to learn in the form of a training programme. I further thank Shri Jai kish sir, General Manager department of banking supervision for helping me in the project along with RBI.


A special acknowledgement goes to Shri G.R.kotian, Assistant General Manager, DBS for helping me to understand the various aspects related to banking and guiding me to undertake the project in the right direction.

A special thanks to Mr. Vishwa Mohan, Assistant General Manager, DBS for helping me to understand all important vital aspects relating to banking system and providing data & structure.

As a part of DBS, I owe my thanks to all other persons working in DBS for providing me information, support and understanding related to different aspects of banking system.

Lastly and significantly I am grateful to Mr. Purendra Kumar sir Assistant general manager of DAPM, (personnel) for providing great support and also for making me feel comfortable with the homely interaction with all other staffs and the entire staffs of R.B.I

I am also thankful to Mr. B.D.Yadav, Assistant manager, DAPM, HRDD for providing me support and solving my problems during my tenure in RBI Lucknow office. Without who‘s friendly and loving attitude, the project would not have been such a joyful learning and a memorable experience forever.




Subject……………………………………………………page no.

1-Introduction of …………………………………………
 

RBI………………………………. DBS……………………………….

3-Banking sectors in India
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Public sector………………………………. Private sector………………………………. Co-operative, RRBs………………………..

4-Narasimham committee………………………………
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Requirement……………………………………. Recommendations………………………………..

5-Globalisation……………………… 6-Challenges……………………………………
      

Implementation of Basel II……………………… Implementation of latest technology……………. How to reduce NPA……………………………... Man power planning…………………………….. Loan waiver: A new challenge………………….. Risk management……………………………….. Transparency and disclosures……………………


Growth in business……………………………… 8-Recommendations…………………………………. 9-Conclusion………………………………………... Competition with private sector banks…………. 5 .   Challenges in banking security…………………..…. 10..Bibliography……………………………………………….Summery of the project…………………………… 11....

1935 in accordance with the provisions of THE RESERVE BANK OF INDIA ACT. Till the establishment of RBI this bank was acting as the central bank. Though originally privately owned.20. The share capital was divided into shares of Rs. By that time RBI is issuing and controlling the currency. Bank of Madras & Bank of Bombay. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members.000. The Reserve Bank of India was established on April 1. 5 crores on the basis of the recommendations of the Hilton Young Commission. It was established in April 1935 with a share capital of Rs. the Governor and four Deputy 6 . Now it has 22 regional offices. The Central Office is where the Governor sits and is where policies are formulated. the Reserve Bank is fully owned by the Government of India The Central Office of the Reserve Bank has been in Mumbai since inception. most of them in state capitals. After some time these banks were merged into one 1920 and named Imperial bank of India.INTRODUCTION OF RBI (THE CENTRAL BANK OF INDIA) The central bank of the country is the Reserve Bank of India (RBI). 1934. In 1935 the rights and duties of Imperial bank were delegated to RBI. The Government held shares of nominal value of Rs. 2. Before the establishment of RBI notes were issued by three-presidency banks-Bank of Bengal. since nationalization in 1949. 100 each fully paid which was entirely owned by private shareholders in the beginning.

1935. The 7 . and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai. which is entrusted with the issue of currency notes. The Act. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank of India Act 1934 was commenced on April 1. The Bank was constituted for the need of following:    To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage. Chennai and New Delhi. the Bank has the sole right to issue bank notes of all denominations. 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. Kolkata. one Government official from the Ministry of Finance. Bank of Issue Under Section 22 of the Reserve Bank of India Act. ten nominated Directors by the Government to give representation to important elements in the economic life of the country. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks.Governors. The Reserve Bank has a separate Issue Department.

agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. 40 crores in value. Originally. via.both the Union and the States to float new loans and to manage public debt. The Reserve Bank has the obligation to transact Government business. the assets of the Issue Department were to consist of not less than twofifths of gold coin. The system as it exists today is known as the minimum reserve system. BANKER TO GOVERNMENT The second important function of the Reserve Bank of India is to act as Government banker. It makes loans and 8 . to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. these provisions were considerably modified. to keep the cash balances as deposits free of interest. Government of India rupee securities. 200 crores. Due to the exigencies of the Second World War and the post-was period. The Reserve Bank of India helps the Government . gold bullion or sterling securities provided the amount of gold was not less than Rs. The remaining three-fifths of the assets might be held in rupee coins. 115 crores should be in gold. Since 1957.assets and liabilities of the Issue Department are kept separate from those of the Banking Department. of which at least Rs. eligible bills of exchange and promissory notes payable in India. the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. The Bank makes ways and means advances to the Governments for 90 days.

therefore.advances to the States and local authorities. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. the Reserve Bank of India. According to the provisions of the Banking Companies Act of 1949. every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. Banker's bank and the Lender of the last resort The Reserve Bank of India acts as the bankers' bank. By an amendment of 1962. The Reserve Bank of India can change the minimum cash requirements. Controller of Credit As supreme-banking authority in the country. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. It acts as adviser to the Government on all monetary and banking matters. has the 9 .

Supervisory functions In addition to its traditional central banking functions. The vast sterling balances were acquired and managed by the Bank. 1934. the RBI has the responsibility of administering the exchange controls of the country. inspection and calling for information. 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks. Besides maintaining the rate of exchange of the rupee. (b) It controls the credit operations of banks through quantitative and qualitative controls. Custodian of Foreign Reserves Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I. The Reserve Bank Act.F. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. the Reserve bank has certain nonmonetary functions of the nature of supervision of banks and promotion of sound banking in India.M. the Reserve Bank has to act as the custodian of India's reserve of international currencies.following powers: (a) it holds the cash reserves of all the scheduled banks. Further. relating to 10 . and the Banking Regulation Act. (c) It controls the banking system through the system of licensing.

reconstruction. and liquidation. 1906:Governs currency and coins Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act. amalgamation. 1881 FUNCTIONS OF RBI MONETARY AUTHORITY REGULATOR & SUPERVISOR MANAGER OF FOREIGN EXCHANGE ISSUER OF CURRENCY Y RELATED FUNCTION S BANKER TO BANKS BANKER TO GOVERNMENT 11 .licensing and establishments. branch expansion. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. liquidity of their assets. Legal Framework Acts governing specific functions     Indian Coinage Act. management and methods of working.

Issuer of currency: It is the only supreme body. which issues and exchanges or destroys currency and coins not fit for circulation. Objective: Keeping this authority in mind the RBI is required to maintain price stability and ensure adequate flow of credit to productive sectors. Objective: This facilitates in giving the public adequate quantity of currency notes and coins 12 . Objective: This reasonably helps in maintaining public confidence in the system. which facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India. Manager of Exchange Control: The RBI is responsible for managing the Foreign Exchange Management Act. 1999. formulating and monitoring the monetary policy of India. It in turn protects depositors' interest and provides lucrative banking services to the public.Functions of RBI Monetary Authority: The RBI is responsible for implementing. Objective: It is the nodal agency. Regulator and supervisor of the financial system: The Supreme financial body sets down broad parameters of banking operations within which the country's banking and financial system operates.

Subsidiaries of RBI Fully owned:= National Housing Bank (NHB).and in good quality. Deposit Insurance and Credit Guarantee Corporation of India (DICGC). National Bank for Agriculture and Rural Development (NABARD). The RBI looks after the functioning of the state banks and grants them license and even cancels the same on account of fraud practice. Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) 13 . Developmental role The RBI since its inception performs a wide range of promotional functions to support national objectives and generate goodwill among the citizens of the country. The RBI often advises the Government of the current monetary condition in the state. Related Functions Banker to the Government: The RBI performs merchant banking function for the central and the state governments and also acts as their banker. Banker to banks: maintains banking accounts of all scheduled banks.

Regional Office at Lucknow. off-site surveillance.Majority stake: = National Bank for Agriculture and Rural Development (NABARD). ensuring follow-up and compliance.B.e. Then seeing management and perating condition and compliance of the bank which includes Regulatory compliance and Guidance compliance and finally doing summary assessment of the bank i. Department of banking supervision The Department of Banking Supervision has its Central Office in Mumbai and 16 regional offices at various centres in the country. The Department of Banking Supervision at present exercises the supervisory role relating to commercial banks in the following forms: Preparing of independent inspection programmes for different institutions. Prior to 1993. I. 14 . Inspection evaluates financial condition and performance of the bank which includes judging asset quality. identification of concerns and areas for corrective actions. The Reserve Bank of India has recently divested its Stake in State Bank of India to the Government of India. solvency and capital adequacy earning performance and liquidity of the bank. the supervision and regulation of commercial banks was handled by the Department of Banking Operations and Development (DBOD). I worked in DBS. Undertaking scheduled and special on-site inspections.In December 1993 the Department of Supervision was carved out of the DBOD with the objective of segregating the supervisory role from the regulatory function of R.

amalgamation. suspension of business. It judges banks on the basis of the following six parameters : C. Their activities are mostly influenced by the government. 15 .The Department of Banking Supervision follow CAMELS approach during its inspection of commercial banks.Determining the criteria for the appointment of statutory auditors and special auditors and assessing audit performance and disclosure standards.CAPITAL ADEQUACY A-ASSET OR CREDIT QUALITY M-MANAGEMENT E-EARNINGS L-LQUIDITY S-SOLVENCY Banking sectors in india PUBLIC SECTOR BANKS-The public sector is the one whose working is in the hands of the government. merger/winding up. their nimbler has reduced to a significant extent. issuance of directives and imposition of penalties. Indian railways. But due to privatization of public sector industries. Exercising supervisory intervention in the implementation of regulations which includes-recommendation for removal of managerial and other persons. nuclear power industry. the government holds a majority stake in public sector industries.

The co-operative banking sector is divided into the following categories. Primary Agriculture Credit Societies RRBs A rural bank is a financial institution that helps rationalize the developing regions or developing country to finance their needs specially the projects regarding agricultural progress. CO-OPERATIVE SECTOR The co-operative sector is very much useful for rural people. A private bank is owned by either an individual or a general partner(s) with limited partner(s). FOREIGN SECTOR BANKS.are banks that are not incorporated.electricity board. In any such case.are still in cluded in the public sector.Foreign sector banks are those banks which have their head office in other countries outside India and branch is working in India. Central co-operative banks c. State co-operative Banks b. a. PRIVATE BANKS. etc. 16 . it may be defined as "an enterprise where there is no private ownership but its activities are not mainly confined to the maximization of profits and private interests of the enterprise but it is influenced by social. the creditors can look to both the "entirety of the bank's assets" as well as the entirety of the soleproprietor's/general-partners' assets.

Structure of Banking in India Reserve Bank of India Scheduled Banks Non-Scheduled Banks Scheduled Commercial Banks Scheduled Cooperative Banks Public sector banks Private Sector Banks Foreign Banks Regional Rural Banks Scheduled Urban Cooperative Banks Scheduled State Cooperative Banks Nationalized Banks SBI & its Associates Old Private Sector Banks New Private Sector Banks Source-Banking &Finance Magazine 17 .

Non-government-owned malls are examples of 'private space' with the appearance of being 'public space'. (urban) geography. visual art. race. 5 (b)―Banking means accepting money for the purpose of lending and investment or deposits of money from the public. order or otherwise. nor are the entrants discriminated based on background. draft. the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. Under Indian banking regulation Act. ethnicity. Its relevance seems to become more pressing as capital encloses more and more of what were thought of as 'commons'. One of the earliest examples of public spaces are commons. repayable on demand or otherwise and withdrawable by cheque. The term 'Public Space' is also often misconstrued to mean other things such as 'gathering place'.INTRODUCTION A public space refers to an area or place that is open and accessible to all citizens. The last decade has 18 .‖ The enhanced role of the banking sector in the Indian economy. For example. cultural studies. this is an element of the larger concept. Operating in this demanding environment has exposed banks to various challenges. social studies and urban design. regardless of gender. 1949 sec. age or socio-economic level. no fees or paid tickets are required for entry. Public Space has also become something of a touchstone for critical theory in relation to philosophy.

new instruments. of the then Imperial Bank of India. the economy may need. the associate banks came in to fold of public sector banking.and. With the 5-year plan having acquired an important place after the independence. has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalised environment. HISTORY OF BANKING Indian banking system. While deregulation has opened up new vistas for banks to augment revenues. the Govt. State-partnered commercial banking institution with an effective machinery of branches spread all over the country. along with all this. and new opportunities .witnessed major changes in the financial sector . 1955 by acquiring the substantial part of share capital by RBI. over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule. to function as Central Bank of the country. 19 . integrated. new windows. new financial institutions. as a result of re-organisation of princely banks. Demand for new products. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong. the central bank functions were being looked after by the Imperial Bank of India. Similarly during 1956-59. State-sponsored. it has entailed greater competition and consequently greater risks. Earlier to creation of RBI. particularly derivatives. new challenges. felt that the private banks may not extend the kind of cooperation in providing credit support.

more particularly to the unorganised sector. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors. did not provide any remedy.1813 cr and with 4134 branches accounting for 80% of advances.50 cr. During December 1969. professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates.28. the Govt. loans of Rs. 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 utilisation of resources.2629 cr. were being deployed in organised sectors of industry and trade. The bulk of the deposits collected. 20 . 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. On July 19. transporters . RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee. 1969. The scheme however. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs. Subsequently in 1980. deposits of Rs. while the farmers.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. Though a no. small entrepreneurs. In February 1966. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies.

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. A determined effort was made to make banking facilities available to the masses. credit 21 . A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991.In the post-nationalisation period. In these five decades since independence. Most importantly. of branches opened in rural/semi-urban centres bringing down the population per bank branch to 12000 appx. which had no access to banking hitherto. During 1976. RRBs were established (on the recommendations of M. for meeting the requirement of Indian economy. the consolidation phase started in late 80s and more particularly during early 90s. While the 1970s and 1980s saw the high growth rate of branch banking net-work. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organisation and consolidation of the banking system. there was substantial increase in the no. The focus during this period was to lay the foundation for a sound banking system in the country. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population.

these private owners of banks were at liberty to use the funds in any manner. BANK NATIONALISATION & PUBLIC SECTOR BANKING Organized banking in India is more than two centuries old. technological changes. autonomy packages etc. Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. they deemed appropriate and resultantly. 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. credit management. customer service. staff productivity and profitability of banks. 22 . Measures were also taken to reduce the structural constraints that obstructed the growth of money market. more competition. prudential guidelines on asset classification and income recognition. the bank failures were frequent.flows were guided towards the priority sectors. In the absence of any regulatory framework. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system. capital adequacy. Attention was paid to improving house-keeping.

was set up in 1894 with headquarters at Lahore. lies in the large and persistent macroeconomic imbalances that developed over the 1980s. Bank of India. Much of this expansion has taken place in rural and semi-urban areas. PSBs undertook expansion of reach and services. Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. Bank of Baroda. States neglected by private banks before 1969 have a vast network of public sector banks. On the recommendations of All India Rural Credit Survey Committee. Between 1906 and 1913.Statistics bear testimony to the fact that the genesis of the economic crisis in India. Indian Bank. The General Bank of India was set up in the year 1786. mostly Europeans. Move towards State ownership of banks started with the nationalisation of RBI and passing of Banking Companies Act 1949. The expansion is significant in terms of geographical distribution. Central Bank of India. In 1865 Allahabad Bank was established and first time exclusively by Indians. The East India Company established Bank of Bengal (1809). of people served per branch office came down from 65000 in 1969 to 10000. account for 93% of bank offices and 87% of banking system deposits. SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI. Punjab National Bank Ltd. The PSBs including RRBs. Canara Bank. which surfaced in 1991. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks. keeping in view the objectives of nationalisation. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out of which 58% in rural areas) and no. Next came Bank of Hindustan and Bengal Bank. and Bank of Mysore were 23 .

The following steps are taken by the government of India to regulate banking institutions in the country. 1969 : Nationalisation of 14 major banks. funds were largely given to traders. 1959 : Nationalisation of SBI subsidiaries. 1971 : Creation of credit guarantee corporation.         1949 : Enactment of Banking Regulation Act. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Reserve Bank of India came in 1935. mostly small. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. 1961 : Insurance cover extended to deposits. During those day‘s public has lesser confidence in the banks. There were approximately 1100 banks. 1975 : Creation of regional rural banks. After the nationalisation of banks. As an aftermath deposit mobilisation was slow. the branches of the public sector bank India rose to approximately 800% in deposits and advances took a hugejump by 11. 1955 : Nationalisation of State Bank of India.set up. Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. 1980 : Nationalisation of seven banks with deposits over 200 crore.000%. Moreover. 24 .

The history of nationalised banks in India dates back to mid-20th century. Before 1969. SBI was nationalised in 1955 under the SBI Act of 1955. In the year 1980. Indira Gandhi the then prime minister.Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions. the major nationalisation of banks happened in 1969 by the then-Prime Minister Indira Gandhi. its seven subsidiaries were also nationalised with deposits over 200 crores. when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. The major objective behind nationalisation was to spread banking infrastructure in rural areas and make available cheap finance to Indian farmers. State Bank of India (SBI) was the only public sector bank in India. Fourteen banks were nationalised in 1969. Then on 19th July 1960. The second phase of nationalisation of Indian banks took place in the year 1980. Nationalised Banks in India Banking System in India is dominated by nationalised banks. The nationalisation of banks in India took place in 1969 by Mrs. However. the second 25 . The major objective behind nationalisation was to spread banking infrastructure in rural areas and make cheap finance available to Indian farmers. Nationalised banks dominate the banking system in India. Seven more banks were nationalised with deposits over 200 crores.

But banks collect them and divide them in the portions as required by the different investors. After the nationalisation of banks there was a huge jump in the deposits and advances with the banks. in which 7 more banks were nationalised with deposits over 200 crores. can be stated as follow: (i) The banks collect the savings of those people who can save and allocate them to those who need it. India has progressed towards a modern market-based system and has a growing middle class. After the 1991 economic crisis. At present.000 branches. With this. It serves 90 million customers through a network of 9. These savings would have remained idle due to ignorance of the people and due to the fact that they were in scattered and oddly small quantities. the central government launched economic liberalization. the State Bank of India is the largest commercial bank of India and is ranked one of the top five banks worldwide. (ii) Banks preserve the financial resources of the country and it is expected of them that they allocate them appropriately in the suitable and desirable manner. SIGNIFICANCE OF BANKS The importance of a bank to modern economy. 26 . so as to enable them to develop. the Government of India held a control over 91% of the banking industry in India.phase of nationalisation of Indian banks took place.

by changing the supply of money with the changing the supply of money with the changing needs of the public. Although traditionally. (vi) To advance money. order or bearer. which is the easiest and most convenient. It is quite proper and convenient for the government and R. is governed by banks.B. crossed and uncrossed. in the task of preserving their precious possess-ions intact and safe. this is done by RBI. demand for money is required. the banks have now spread their wings far and wide into many allied and even unrelated activities. besides they also care for making such payments as safe as possible. (Vii) It makes the monetary system elastic. (iv) Banks arrange for payments by changes. Such elasticity is greatly desired in the present economy. 27 . the basis of modern industry and economy and essential for financing the developmental process. to change its currency and credit policy frequently.(iii) They make available the means for sending funds from one place to another and do this in cheap. safe and convenient manner. the main business of banks is acceptance of deposits and lending. where the phase of economy goes on changing and with such changes. (v) Banks also help their customers.I.

The following are the Scheduled Banks in India (Public Sector):                       State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore Andhra Bank Allahabad Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Punjab and Sind Bank Syndicate Bank Union Bank of India United Bank of India 28 .

 Vijaya Bank The following are the Scheduled Banks in India (Private Sector):       ING Vysya Bank Ltd Axis Bank Ltd Indusind Bank Ltd ICICI Bank Ltd HDFC Bank Ltd IDBI Bank Ltd The financial sector assessment report. This has the potential to further aggravate a growing apprehension that public sector banks‘ growth could be constrained in relation to other players. The report indicated that PSBs would need additional capital to meet Basel II norms and maintain an asset growth for the overall projected growth of the economy at 8 per cent and consequent growth of risk-weighted assets (RWAs). prepared by the Reserve Bank of India (RBI) and the Central Government. 29 . has favoured the merger of public sector banks (PSBs) having a government holding bordering on 51 per cent with those having a much higher state-holding to ensure that their business growth does not suffer due to capital constraints.

provided the RWAs grow by within 25 per cent annually and total cost of recapitalisation would be lower than in most other countries. Public sector banks score over private ones Public sector banks have long been chastised as the black sheep of the financial sector. foreign banks see drop The public sector banks have shown growth in their credits in comparison to their private and foreign competitors. private. In recent months big companies such as Infosys moved their deposits from private and foreign banks to public sector banks. the public sector players had taken decision to reduce bulk deposit and focus more on current account and saving account balances. public sector banks have far happier customers compared to their counterparts in the private sector. According to Reserve Bank of India‘s (RBI's) latest report.The extent of additional capital required from the government is expected to be manageable. According to latest data released by the Reserve Bank of India (RBI) in due course the depositors have withdrawn funds from private and foreign banks and are investing their money with public sector banks which has resulted in a significant decline in growth of deposits with private and foreign banks. at the end of the day. largely because the state-owned players were offering higher interest rates. But while a lot of experts might deride these institutions for their non-performing assets and lower productivity. 30 . Public banks deposit growth rise. Trend and Progress of Banking in India. public sector banks rule the roost in customer satisfaction. While in December.

however. needs to look at another aspect before delivering the final verdict: profits per branch.1 for example is much higher than cici and Citibank Timeismoney RBI‘s data indicates that private and foreign banks are biting off more than they can chew: customer acquisition is shooting through the roof but the servicing mechanism is Given short shrift. The standard response to such figures is that private sector banks are more efficient than their public sector counterparts with foreign banks taking efficiency to astronomical levels. For example.1 ―complaints per branch‖ while the corresponding figure for icici was 1. These complaints were made to RBI grievance cell. on an average.39—more than 10 times that of sbi. 31 . Citibank fared far worse: it recorded a whopping 8.5 crore. It shows that the State Bank of India (SBI) recorded 0.59 complaints per branch. while an average sbi branch earns just Rs 50 lakh. annually. a Citibank branch earns a net profit of Rs 18 crore annually.The report should make those singing hosannas for private sector banks sit up. private banks fare better. the profit-complaint ratio of private sector banks is much lower than their much maligned public sector counterparts sbi‘s profit-complaint ratio of 4. But their rich rake-offs notwithstanding. An average icici bank branch earns Rs 4. One. Here.

consumer-voice. The highest-ranking foreign bank is Standard Chartered at number eight. have increasingly started using the emotional platform to attract customers. three belong to the public sector. like all other businesses. icici Bank is at number 15 (fifth from the bottom). Darkside Recent advertising campaigns. with Citibank bringing up the rear. 32 . The private sector interpretation of this adage seems to be: spending as little time on the customer as possible. especially by private banks. a consumer awareness magazine. testify to such omission. The zeal to be efficient means that the private sector has all but forgotten another business aphorism: time spent with a customer is an investment which may yield future dividends in the form of customer loyalty and referrals. In most private banks. And their surveys. For example. believe that ―time is money‖. However. these banks attempt to bring home the fact that the bond between a customer and his bank goes beyond the purely customers don‘t necessarily share that warm feeling. people were more likely to recommend public sector banks to their friends or relatives. according to a survey by Consumer Voice (http://www. the time spent on the phone with a customer is tracked and executives found to be spending an inordinate amount are ticked off. other than those conducted by rbi. Of the top five banks in this category. With tag lines such as ―Hum hain naa‖ and ―Just like borrowing from a friend‖.

―harassment in recovery of loans‖. private and foreign banks actually score pretty high on customer complaints of the nasty variety: namely. Only one public sector bank figures amongst the top five in the list of banks with highest number of disgruntled customers.003 for public sector banks. WHY WORRY? At Citibank‘s website. one finds a complaint form along with a detailed note elaborating the grievance redressal system. Citibank tops the list. What they do have is a customer care web page that declares. The bank accounts for 40 per cent of all such complaints. Foreign banks record 0.Public sector banks score over private ones According to the rbi report.021 and 0.134 such complaints per branch—more than 30 times the overall average. Citibank also tops another dubious list: that of people fed up with tele-marketing executives pestering them. The icici Bank home page also has a similar link. The corresponding numbers for new private Indian banks is 0. Not surprisingly. prominently displayed. ―Customers of the bank can meet senior executives of 33 . The Consumer Voice survey also has private sector banks faring poorly in this respect. The sbi home page does not have a link relating to complaints.

With a centralised decision making authority.00 pm) without any prior appointment and discuss issues relating to their accounts/banking transactions. though useful. According to P Shimrah. technology is not infallible: it solves old problems but creates its 34 . The customer is preferred to remain a faceless entity with a number to identify him. leaving them with no choice but to approach rbi. But at a public sector bank. For two important reasons.‖ It is a fundamentally different approach. The branch manager of a public sector bank is more empowered than his private sector counterpart to solve problems at his level. running from pillar to post would often find that a kind word. The overarching desire is to resolve grievances on the phone or through the Internet.‖ But technology. like atm machines. TheHolyGrail One reason for disgruntled customers is the fact that that the service executives are often not authorised to solve problems and refers them to another party.00 pm and 5. In case the 15th is a holiday. This often leads to a chain reaction and such vacillation irks customers. they feel that technology can be used to overcome these problems.the bank on the 15th of every month (between 3. rbi ―Public sector banks are decentralised. For the new breed of private banks. In private sector banks. secretary to the banking ombudsman. Firstly. cannot provide complete solution. a harried customer. a cup of tea and a patient hearing solves half the problem. human contact is anathema. it‘s the opposite. customers can meet the next working day.

46% in 1993-94 to 6. it would be wiser to accept the problems that are cropping up now and address them in a sensible and humane manner. RBI regulations require that banks build provisions upto at least a level of 50% of their gross NPAs. The problem India faces is not lack of strict prudential norms but 1. The current provisioning is 35% of gross NPAs. A satisfying middle ground needs to be found where the cutting edge efficiency of western banking is tempered with respect and empathy for the customer. The legal impediments and time consuming nature of asset disposal process. Based on Loan loss provisioning The net NPAs4 have continually declined from 14. but the solution does not lie in swinging to the other extreme typified by foreign banks. Secondly. 2.own new ones. Inappropriate technology or innovations that are too far ahead of their time will not work. Manipulation by the debtors using political influence CHALLENGES IN BANKING The enhanced role of the banking sector in the Indian economy. the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of 35 . „Postponement‟ of the problem in order to report higher earnings 3.74% in 2000-01. Instead of living with the vision of a future utopia with perfect banking systems. technology needs to find favour with the public. The fact that public sector banks need to shape up has been repeated ad nauseam.

Adoption of appropriate prudential. In India. particularly derivatives. Operating in this demanding environment has exposed banks to various challenges. While deregulation has opened up new vistas for banks to augment revenues. Demand for new products. new financial institutions. The last decade has witnessed major changes in the financial sector . on the soundness of the financial system and the strength of the individual participants. banks. There is a growing realisation that the ability of countries to conduct business across national borders and the ability to cope with the possible downside risks would depend. which would help in fortifying it against the risks that might arise out of globalisation. we had strengthened the banking sector to face the pressures that may arise out of globalisation by adopting the banking sector reforms in a calibrated manner. supervisory.and.the India banking system and placed numerous demands on banks. and technological framework on par with international best practices enables strengthening of the domestic banking system. along with all this. which followed the twin governing principles of non-disruptive progress and consultative process. has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalised environment. Globalisation – a challenge as well as an opportunity The benefits of globalisation have been well documented and are being increasingly recognised. regulatory. Globalisation of domestic banks has also been facilitated by tremendous advancement in information and communications technology. new windows. Globalisation has thrown up lot of opportunities but accompanied by concomitant risks. new instruments. new challenges. 36 . it has entailed greater competition and consequently greater risks. and new opportunities .

Global challenges in banking A new broad challenges faced by the Indian banks in the following areas, viz., enhancement of customer service; application of technology; implementation of Basel II; improvement of risk management systems; implementation of new accounting standards; enhancement of transparency & disclosures; and compliance with KYC aspects.


1. Implementation of Basel II 2. Implementation of latest technology 3. How to reduce NPA 4. Corporate governance 5. Man power planning 6. Talent management 7. Loan waiver: A new challenge 8. Risk management 9. Transparency and disclosures 10. Challenges in banking security 11. Competition with private sector banks 12. Growth in business 13. Enhancing customer service


Implementation of Basel II Basel II implementation is widely acknowledged as a significant challenge faced by both banks and the regulators internationally. It is true that Basel II implementation may be seen as a compliance challenge. While it may be so for some banks, I would venture to mention that Basel II implementation has another dimension which offers considerable opportunities to banks. I would like to highlight two opportunities that are offered to banks, viz., refinement of risk management systems; and improvement in capital efficiency. Basel 2 requires more capital for public sector banks in India due to the fact that operational risk is not captured under Basel I.

Basel II is the revised capital accord of Basel I. Basel II accord defines the minimum regulatory capital which is to be allocated by each bank based on its risk profile of assets. Banks have to maintain the capital adequacy ratio (CAR) of minimum 9 %. As per RBI, banks which are getting more than 20% of their businesses from abroad have to Implement Basel II. But most of the banks are now interested to implement Basel II.

Implementation of Basel II is seen as one of the significant challenges for Public Sector Banks. Implementation of Basel II will require more capital for Public Sector Banks in India due to the fact that operational risk is not captured under Basel I

In ICRA's estimates, Public Sector Banks would need additional capital to the extent of Rs. 90 billion to meet the capital charge requirement for operational risk under Basel II.


The challenge for the banks would be to quantify risks(credit concentration risk, interest rate risk in the banking book, business and strategic risk, liquidity risk, and other residual risks such as reputation risk and business cycle risk) and then, to translate those consistently into an appropriate amount of capital needed, commensurate with the bank‘s risk profile and control environment.

Needless to say, this would call for instituting sophisticated risk management systems, including a robust stress-testing and economic capital al Public Sector Banks would be required to use fully scalable state of the art technology, ensure enhanced information system security and develop capability to use the central database to generate any data required for risk management as well as reporting.location framework.

The most important Pillar 2 challenge relates to acquiring and upgrading the human and technical resources necessary for the review of banks responsibilities under Pillar 1.

Public Sector Banks would be required to use fully scalable state of the art technology, ensure enhanced information system security and develop capability to use the central database to generate any data required for risk management as well as reporting.

The costs associated with Basel II implementation, particularly costs related to information technology and human resources, are expected to be quite significant for Public Sector Banks.

Minimum Capital Allocation for credit risk To allocate the capital for any of the above risk, it should be quantitatively measured.




An online banking facility enables you to handle your finances efficiently.

Online banking uses modern computer technologies to offer the users convenient banking facilities. If you have access to such a facility, there is absolutely no need for you to personally visit your bank‘s branch for any sort of transaction. You can simply login with the internetbanking password that your banker has given you, and carry all the necessary work online. It also eliminates the necessity of doing any paper-based work and saves considerable time for the users.

Private sector and foreign banks were using technology and computerized system since its beginning while PSBs were not. So they found difficulty in managing all these things. Many of Indian PSBs ignored technological change and had lost market share to foreign banks and new


the online banking system means significant cost savings for the bankers themselves.private banks. translating into significant cost savings over the long-term. So that‘s why public sector banks should improve their working system and should make it totally online but challenge is before PSBs The users can do variety of work using your online banking pin code. This offers you banking from the comfort of your home with just a click. online banking facilities are open 24/7. . Technology helps in having a huge branch network easily and also it reduces the operational cost this may b clarified by an example as:Operational cost per transaction of an account via different type is   Via computers on counter. Via ATM Via online .40 Rs. This could be great advantage if you need to address urgent monetary concerns while away from home.46 paise So it is cleared that manually/direct transaction cost comes very high and electronically and online it is very low. the bankers need not to hire employees specialized in handling paper work and teller interactions. Besides offering their users the convenience of banking. Unlike a bank‘s branches. With such an automatic system in place. The bankers benefit equally from the online banking facilities. Transactions online are fast and mostly quicker than ATM transactions. online 41 .16-17 Rs. Various Advantages of Banking Online: The biggest advantage of online banking is its convenience. This reduces the bankers‘ operating costs considerably. Moreover. You can access such a facility from anywhere in the world.

It was quiet risky then anyone who gets access to these two can empty your account. Technology will not just help them reach out to young customers better but also help them cut costs and improve efficiency. Many people at that time will do setting with the courier people and got access to this details. you are sent a code that you need to add when you are adding a new account for transfer. which will increase efficiency. So its now more secure. Most banks now has sms verification. Initially the online banking security system was quiet simple. Icici has also an extra transaction password plus you need to have a debit card and have to use the grid at the back of card to validate it. This three way verification is quiet robust and thus you dont get phising emails these days. Stanchart is fast the minute you press add the sms is in your inbox. its simple and logical. But now even the card and the id password as sent thru separate courier. So. Because phisers know that having an id and password is not enough.banking systems have sophisticated tools that provide effective management of the users‘ assets. While a transaction at a branch 42 . they will have to adopt modern technology. the bank has now introduced two-faced ATMs. State Bank of India was amongst the first to focus on technology and a team is constantly at work to innovate in an attempt to lower costs. a id and a password and you are done. Here‘s how the economics work. Thou sometimes the sms takes too much time to be received. may be because of lesser traffic. Technological leap The banks realised that if they have to survive.

a senior State Bank of India executive said. with effect from March 31. net banking and mobile phones.. Non Performing Asset means an asset or account of borrower. recovery climate. 2001. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. 43 . which has been classified by a bank or financial institution as sub-standard. HOW TO REDUCE NPA Non performing asset Definition A loan or lease that is not meeting its stated principal and interest payments. As a result. banks like State Bank of India want 50 per cent of the transactions from nonbranch channels such as ATMs. it was decided to dispense with 'past due' concept. Due to the improvement in the payment and settlement systems. in accordance with the directions or guidelines relating to asset classification issued by RBI. an asset which is not producing income. upgradation of technology in the banking system. More generally. one at an ATM works out to Rs 18.costs around Rs 50. etc. Transactions through the Internet are even cheaper at around Rs 10 each. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. doubtful or loss asset.

While this chart shows that NPA is decreasing overall in banking system but even then in PSBs NPA are higher with comparison to private sector banks. Loan loss allowance is not growing nearly as fast as the non-performing assets. reduction in reserve requirements.0. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary. It is suspected that the slow growth of loan loss allowance is related to the same problem. The two lines plotted are nonperforming assets gross non-performing assets. is because the bank does not have enough capital to do so. it sometimes becomes apparent that the reason that the bank cannot dispose of the property at market prices.Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation. 44 . In the course of discussing disposition of assets with various banks. barriers to entry. The chart below shows data for NPA going back to 2. polity and the bureaucracy to be truly effective. prudential norms and riskbased supervision. This paper deals with the experiences of other Asian countries in handling of NPAs. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. But progress on the structural-institutional aspects has been much slower and is a cause for concern. but that we don‘t have a solution.3-1. I can say that this is a problem.

: Substandard for 12 months or more. but I‘m certainly not smart enough to know what it is.Something needs to happen. : Assets becomes uncollectible/ unrealizable. The position of classification of NPA is summarized below: Standard assets Sub-standard assets Doubtful assets Loss assets : not NPA : Twelve months period after becoming NPA. 45 .

37 6.32 1.62 Public sector bank 12.84 Table 2 (end of March 31) (in %) category Net NPA / Net Advance 2001 2002 5.74 Private sector Foreign bank 2.89 2003 4.Gross and net NPA of different sector of bank Table 1 (in %) (end of March 31) category Gross NPA/ Gross Advance 2001 2002 11.36 8.49 Public sector bank 6.76 2004 2.64 5.82 2.53 2.07 5.09 9.98 1.82 Management of NPA 46 .49 1.32 1.27 1.37 Private sector Foreign bank 8.84 4.25 2004 7.79 5.38 2003 9.

One time settlement / compromise scheme 2. Corporate Reconstruction Companies 6. Various steps have been taken by the government to recover and reduce NPAs. Debt Recovery Tribunals 4. 5. Lok adalats 3. inadequate legal provision etc. To improve the efficiency and profitability. This was due to show ineffective recovery of bank credit. Various steps have been taken by government to reduce the NPA. It is highly impossible to have zero percentage NPA. The extent of NPA is comparatively higher in public sectors banks. Some of them are. But at least Indian banks can try competing with foreign banks to maintain international standard. the NPA has to be scheduled. Securitization and reconstruction of financial assets and enforcement of Security Interest Act 2002. 1. Non-performing assets are one of the 47 . lacuna in credit recovery system. credit information on defaulters and role of credit information bureaus CONCLUSION The Indian banking sector is facing a serious problem of NPA. (Table II&III). The failure of the banking sector may have an adverse impact on other sectors.The table I&II shows that during initial sage the percentage of NPA was higher. A strong banking sector is important for flourishing economy.

Thus. which reduces the over all profits and shareholders value. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. The problem of NPAs is not only affecting the banks but also the whole economy. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. CAUSES FOR NON-PERFORMING ASSETS IN PUBLIC SECTOR BANKS Introduction Granting of credit for economic activities is the prime duty of banking. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. which arises from the failure of borrower. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. However lending also carries a risk called credit risk. these loan losses affect the banks 48 . borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. NPAs reflect the performance of banks.major concerns for banks in India. The NPA growth involves the necessity of provisions. The issue of Non Performing Assets has been discussed at length for financial system all over the world. which results into economic growth. Apart from raising resources through fresh deposits.

Though complete elimination of such losses is not possible. The severity of the problem is however acutely suffered by Nationalised Banks.which has remained NPA for a period of 90 days to less than or equal to 12 months 49 . The Indian banking system had acquired a large quantum of NPAs. NPAs seem to be growing in public sector banks over the years.profitability on a large scale. Magnitude of NPAs In India. Categories of NPAs  Sub-standard Assets . 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. Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. the NPAs that are considered to be at higher levels than those in other countries have of late. concrete results are eluding. which can be termed as legacy NPAs. and the all India Financial Institutions. Despite various correctional steps administered to solve and end this problem. attracted the attention of public. followed by the SBI group. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. but banks can always aim to keep the losses at a low level.

 Doubtful Assets .  After classifying assets into above categories.has remained in the sub-standard category for a period of 12 months  Loss Assets . banks are required to make provision against these in terms of extant prudential regulations.loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.  Net NPAs are those type of NAPs in which the bank deducted the provision regarding NPAs. 50 . the provisioning norms are as under:  Asset Classification Provision requirements  Substandard assets 10%  Doubtful assets Up to 1 year 20% 1 to 3 year 30% More than 3 year  100% Loss assets It may be either written off or fully provided by the bank  Gross NPAs are the sum total of all loans assets that are classified as NPAs.

1 26.7 24.8 30. DEPOSIT AND CREDIT GROWTH As on DEPOSIT Jan 4. 2008 Public sector banks Foreign banks Private sector banks Scheduled commercial banks* CREDIT Public sector banks Foreign banks Private sector banks Scheduled commercial banks* *Includes regional rural banks 19.1 13.2 34.1 Jan 2. 2009 24.2 12.2 As on 51 .6 16.2 21.4 21.9 11.9 25.4 28.8 24.0 24. While gross NPAs reflects the quality of the loans made by banks net whereas NPAs shows the actual burden of bank.

6 96.6 4.1 : CLASSIFICATION OF LOAN ASSETS OF PUBLIC SECTOR BANKS .TABLE 7.6 92.4 2.1 1 1 32340 28756 29988 24804 19945 19167 5.5 1.2003 TO 2008 (Concld.1 : BANK GROUP-WISE CLASSIFICATION OF LOAN ASSETS OF PUBLIC SECTOR BANKS .3 1.2 1. crore) As on March 31 Bank group / Years Amount Per cent Amount Per cent Amount Per cent -1 Public Sector Banks 2003 2004 2005 2006 2007 2008 523724 610435 824253 1029493 1335175 1656585 90.6 1.2 94.6 2.1 97.2 97.) 52 .1 -2 -3 -4 -5 -6 Standard Assets Sub-standard Assets Doubtful Assets TABLE 7.2003 TO 2008 (Amount in Rs.7 14909 16909 10838 11394 14147 16870 2.3 3.

(Amount in Rs.3 0.8 2.8 5.4 3.4 7.2 54089 51541 46597 41379 38602 39749 9.9 0. crore) As on March 31 Bank Loss Assets group / Years Amount Per cent -7 -8 -9 -10 -11 Amount Per cent Total Advances Total NPAs {=(3)+(5)+(7)} {=(4)+(6)+(8)} {=(1)+(3)+(5)+(7)} Public Sector Banks 2003 6840 2004 5876 2005 5771 2006 5181 2007 4510 2008 3712 1.2 0.5 0.7 0.3 577813 661976 870850 1070872 1373777 1696334 SOURCE: RBI ANNUAL REPORT 2007-08 53 .9 2.

An important aspect of strengthening the assets portfolio of Public Sector Banks is to further reduce the level of NPAs. 39749 ( crore) as at the end of 31 March 2008 still a colossal amount is locked up in these impaired loans. the only feasible alternative is to encourage non-legal recourse. 54 . apart from meeting environmental and local community needs. operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders. Corporate Governance It is a system of structuring. In view of the inadequacy of legal infrastructure in prompt reduction of NPA. the internal legal machinery in banks should obviously be so strengthened as to ensure speedy disposal of suit-filed cases and execution of decreed cases. recoveries of NPA are not likely to be quick through legal recourse. and complying with the legal and regulatory requirements. creditors. This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare minimum. The earning capacity and profitability of the bank are highly affected due to this as NPAs do not generate interest income for banks while at the same time banks are required to make provisions for NPAs from their current profits. So the NPAs have deleterious impact on the return on assets. 54089 (crore) in year 2003 to Rs.From above table it may be observed that though the total NPAs amount of Public sector Banks decreased from Rs. customers and suppliers. employees. Due to inadequacy of legal systems. While banks require non-legal time bound surgical solutions to meet the statutory requirements in reducing the level of net NPA.

 Although some ownership structures might have the potential to alter the strategies and objectives of a bank.  Corporate governance in PSBs is complicated by the fact that effective management of these banks vests with the government and the top managements and the boards of banks operate merely as functionaries. these banks will also face many of the same risks associated with weak corporate governance.  Currently in India.  One of the major factors that impinge directly on the quality of corporate governance is the government ownership.The issues related to corporate governance have continued to attract considerable national and international attention in light of a number of high-profile breakdowns in corporate governance. and sometimes conflicting.  Unless the issues connected with these multiple.  In view of the importance of the banking system for financial stability. functions are resolved and the boards of banks are given the desired level of autonomy it would be difficult to improve the quality of corporate governance in PSBs. but is also a critical ingredient at the system level. 55 . comprising the SBI and its subsidiaries and the nationalised banks. sound corporate governance is not only relevant at the level of the individual bank. about four-fifths of the banking business is under the control of public sector banks (PSBs).

the general principles of sound corporate governance should also be applied to all Public sector Banks. While domestic private sector banks are expanding their manpower to match the business growth. public sector banks were faced with a large attrition rate of over 30 % and are experiencing an overall deceleration in the number of employees. Because It takes as long as 18 months for the recruitment process of a typical state-owned bank to be concluded and of the candidates shortlisted. By 2011. In spite of many changes that the industry has faced over the years. essentially the role of this category of staff has remained unchanged. public sector banks have lost 10% market share to the aggressive private banks.  Weak corporate governance translates into higher cost of capital  Better corporate governance translates into somewhat higher returns on assets  But much better higher returns on investment relative to cost of capital So corporate governance is a key challenge for Public Sector Banks in the era of globalization. Man-power Planning  Manpower is the biggest challenge for the public sector banks. and Incentivisation of government bank employees too have failed as the fear of probe by various regulators and government agencies deter the top management from doling out huge sums as rewards to performing staffers. the population of youth aged between 20 and 29 years is expected to cross the 27-crore mark in India. Consequently.  In the last seven years. and this segment is more likely to 56 . many drop out on their own.

regulatory requirements and technology because of the high revenues generated. if necessary super specialist and specialist in areas like technology. The financial sector services are undergoing a rapid change in terms of the attracted to the state-of-the-art banks that would have a similar age bracket generation across the counter.  Going forward. Public sector banks were more likely to be seen as an older generation organisation where the average age group would be 50 years. marketing. TALENT MANAGEMENT 57 .  The banks also need to develop existing staff in newer competencies through a systematic and rigorous training and also recruit.  High average age of staff is also a cause of concern for the Public Sector Banks. treasury management. it would be tough to manage business as there is high competition for high-skilled jobs. FOREX operations and project management. Public sector banks therefore need to implement right strategies to woo young techno-savvy customers that prefer alternative channels to traditional banking method.  Public sector banks were more likely to be seen as an older generation organisation where the average age group would be 50 years. So it is a challenge for Public sector Banks not only to recruit more employees but also to recruit quality professional.  High average age of staff is also a cause of concern for the Public Sector Banks.

cost of operations. nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career. the starting point and where it wishes to reach in a given time horizon.. the destination LOAN WAIVER: A NEW CHALLENGE 58 . i. Such personnel need to be identified. manpower costs. Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower. to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals.  Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes. i.  There is also need to develop organisation-wide awareness about banks key-business problems including stagnant business units.  The preconditions for an effective talent management is clarity of where the organisation is.  Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences. NPAS etc. Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times.. strain on profitability. both nationally and internationally.e. unexplored business opportunities.e.

5 acres. 59 . the amounts disbursed up to March 31st. the Finance Minister P. 2008 are eligible for loan waiver.000 crores covering more than 4 crore farmers. the instalments of such loans that are overdue.  Its highlights are as follows :  Full loan waiver for small farmers and marginal farmers.  For investment loans. 2007 and overdue as on December 31st.‖ FARM LOAN WAIVER SCHEME 2007 In budget speech of 2007 year. together with the interest are eligible for all loans disbursed up to March 31. less than 5 acres. Small and marginal farmers account for between 70 to 94 percent of all farmers in most states. Waiver will cover short term crop loans as well as all the overdue instalments on the investment credit. 2007 and remaining unpaid until February 28th. Chidambaram announced the most ambitious farm loan waiver scheme with an estimated write off of Rs. 60.000 crores. 2007 and remaining unpaid till February 28th 2008. The loan waiver scheme was amend to make it more inclusive.  Small farmer is defined as cultivating between 1 hectare and 2 hectares i.  For short-term production loans. 2007 and overdue as on December 31st. It offers a total waiver of Rs. 72.  Marginal farmer is defined as cultivating agricultural land up to 1 hectare or 2.The massive Farm loan waiver scheme 2007 of the Union Government is disaster for Public Sector Banks ―as it will spoil the credit culture in the country.e.

owning more than 5 acres or more than 2 hectares. will get one-time settlement (OTS) relief.  Bulk of all dry and unirrigated lands fall in districts covered by the drought prone area programme popularly known as DPAP and the desert development programme (DDP).000.e. i. the OTS relief will be 25% or Rs. 60 . it will help them clean up their balance sheets because with the government reimbursing the money.  Borrowers too now feel proud in availing the loan and then not repaying the same and prefer waiting for waiver by some government or the other  Those who repay the loan regularly will feel frustrated and deceived by such waiver of loan scheme which will benefit to only those who did not repay the loan wilfully  Obviously such step gives award to wrong doers and punishes to those who is honest and who keeps his word of repayment by making labour hard and showing good performance. they will not be required to provide for their nonperforming assets in agriculture loans. Special package for other farmers in these 237 districts.  The total number of such districts is 237.  It will serve as a great disincentive for those borrowers who repay bank loans on time. For other farmers in these 237 districts.  But the biggest drawback of the scheme is its impact on the credit culture in the banking system. ·  On the positive side. whichever is higher and not 25 percent as announced in the budget. Other farmers. 20.

 There will be nothing to prevent governments from writing off farm loans every five years. with the government increasing the subsidy on such loans. So Loan waiver scheme is emerging as new challenge for Public Sector Banks. 6% or even 5%. say. the loan rate for the good borrowers can be brought down to. but isn‘t it a small price to pay to protect the credit culture?. 61 .  This will increase the subsidy burden on the government marginally. all farm loans up to Rs 3 lakhs are priced at 7% and the banks get a 2% subsidy from the government on such loans.  Moreover Government has waived the loan of farmers and not that of small traders and small scale manufacturers whose position is more pathetic than that of a farmer  Banks will have to sacrifice the existing loan and provide for fresh disbursal of loan to maintain the minimum ratio and achieve the target of financing for agriculture  What is the remedy if good borrowers of other sectors too stop repayment of their loans ?  One way of doing this could be to introduce a differential loan rate for farm loans. just ahead of general elections. The real risk of this ill-advised political move to write-off farm loans is that it opens up a very convenient option for future governments.  Now.  Based on the credit history. The challenge before the Public Sector Banks now is to prevent these borrowers from turning into defaulters in future. Moreover public sector banks suffered loss due to this and their NPA increased in comparison to others.

But of late. Risks and uncertainties form an integral part of banking which by nature entails taking risks. due to regulated environment.RISK MANAGEMENT Risk is inherent in any walk of life in general and in financial sectors in particular. banks could not afford to take risks. Till recently. RISK IN BANKING BUSINESS The banking industry has a wide array of business lines. banks are exposed to same competition and hence are compelled to encounter various types of financial and non-financial risks. There are three main categories of risks. Risk management is the growing challenge for Indian public sector banks because competitive environment is increasing in public sector banks. All businesses take risks based on two factors: the probability an adverse circumstance will come about and the cost of such adverse circumstance.  Credit Risk. A fair idea may be available from the following table: Business lines Sub groups Activities 62 .  Market Risk  Operational Risk.

debt. secondary private placements. trust and sales. equity. research. securitizations. Fixed income. market making. proprietary positions. credit. banking services. treasury funding. government debts. investment advice. prime brokerage. brokerage. commodities. Trading and sales Sales. banking services. underwriting. lending and repos. Merchant banking. debt and equity syndications. IPO. foreign exchanges. Private banking Private lending and deposits. Advisory services Mergers and acquisitions. own position securities. Municipal/Government finance.Corporate finance Corporate finance. Card services Merchant/Commercial/Corporate 63 . Retail banking Retail banking Retail lending and deposits. trust and estates. privatizetions.

Commercial Banking Commercial Banking Project finance. institutional. segregated. funds transfer. leasing. bill private labels and retail. securities lending. open. trade finance. clearing and settlement. lending. guarantees. corporate actions. Closed. custody Escrow. Execution and full services. Pooled. depository receipts. factoring. export finance. Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both) The management of credit risk includes 64 . real estate. retail. corporate agency corporate trust Asset management discretionary and nondiscretionary fund management Retail brokerage Credit risk retail brokerage Issuer and paying agents. Payment and settlement External clients Agency services Payments and collections.

freedom to fix both lending and deposit rates and increased competition from new private sector banks which have an aggressive business posture. Faced by lenders to consumers Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk. With revolving products such as credit cards and overdrafts. most commonly in the form of property.  Consumers may face credit risk in a direct form as depositors at banks or as investors/lenders.. They may also face credit risk when entering into standard commercial transactions by providing a deposit to their counterparty. With products such as unsecured personal loans or mortgages. Employees of any firm also depend on the firm's ability to pay wages. for a large purchase or a real estate rental. b) Quantification through estimate of expected loan losses. lenders charge a higher price for higher risk customers and vice versa. Some products also require security. risk is controlled through the setting of credit limits.  Public Sector Banks are operating in an increasingly deregulated and competitive environment. and then apply appropriate strategies. and are exposed to the credit risk of their employer.g.a) Measurement through credit rating/ scoring.  Increased deregulation is reflected in several key developments over the last decade including a market-determined interest rate environment. 65 . c) Pricing on a scientific basis and d) Controlling through effective Loan Review Mechanism and Portfolio Management. e.

66 . institutions cannot develop the consistent and timely view of risk exposures necessary for management decision-making. At some point. one must first measure it. Measurement is critical to validating management process and improving internal discipline. identifying are responding to risk must become faster. control and report risk across the enterprise. rating agencies will likely establish a risk management rating for companies in addition to existing financial ratings. Public Sector Banks needs a methodology different from assessing risks while lending to manufacturing. Management is being held legally responsible for identifying and managing risks. risk management has become a real-time concern. To comply with wide ranging regulatory demands. In view of the potential impact and service requirements. without an enterprise wide approach that includes standard data definitions and integrated reporting. BUSINESS CHALLENGE IN BANKS  Evolution of the real time business environment  The developing global marketplace  Concern about business continuity and operational reliability  Continuous and accelerating technological change  The need to limit earnings‟ volatility and enhance shareholder value. financial institutions must understand. Assessing credit risk in lending to service sectors. Integrated Risk Management Solution In order to control risk. As more and more business processes become electronic.

a series of measures were initiated. value of investment in India and abroad.  Banks move to disclose in their balance sheets information on maturity profiles of assets and liabilities. due to ncreasing number of customer base of the banks. lending to sensitive sectors.  The disclosure requirements broadly covered the following aspects:  Capital adequacy  Asset quality  Maturity distribution of select items of assets and liabilities 67 . shareholdings of the government. movements in NPAs. and other operating and profitability indicators. provisions. Banks are now required to be more responsive and accountable to the investors.  Transparency and disclosure norms are assuming greater importance in the emerging environment. besides providing information on capital. absence of effective risk anagement solution and absence of system interfaces between the existing stand alone applications of the banks. TRANSPARENCY AND DISCLOSURES In pursuance of the Financial Sector Reforms introduced since 1991 and in order to bring about meaningful disclosure of the true financial position of banks to enable the users of financial statements to study and have a meaningful comparison of their positions. But banks find compliance to Basel II norms in the above areas difficult.

Challenges in Banking Security Banking as a business involves the management of risks. the risks arising out of the large scale implementation of technology is of recent origin. 68 . with banks having taken to large scale use of technology for their normal day-to-day business. It is a huge challenge for Public Sector Banks to implement a process for assessing the appropriateness of their disclosures. including validation and frequency. Profitability  Country risk exposure  Risk exposures in derivatives  Segment reporting  Related Party disclosures Transparency and disclosure standards are also recognised as important constituents of a sound corporate governance mechanism. While much has been said about the financial risks. Banks are required to formulate a formal disclosure policy approved by the Board of directors that addresses the bank‘s approach for determining what disclosures it will make and the internal controls over the disclosure process.

 This is supported by studies carried out by international organisations.  These studies have indicated that a substantial portion of the breach of security in financial institutions have occurred on account of. does not relate to the components of technology (which do have an implication although). and is typically the insider in the bank itself.Security in banks has thus assumed significant proportions.  Against this backdrop. all of which have an impact on the reputational risk of a financial organisation. but on the person who is part of the information supply chain. Information Systems and Information Technology.  While the challenges related to physical security are those which can be confronted with relative ease.  In a world where geographical barriers are losing significance and the death of distances is already a reality. it is but essential that security be given prime importance in a transnational scenario where large sums of money are at stake.  All of us have at some point of time experienced the flow of information to persons others than to the intended users – even in a non-electronic traditional environment 69 . the weakest link.  Information Security is something which is best experienced than explained. the position is much more complicated in respect of IT security. the security requirements of the banking sector need to be assigned high levels of priority. in the case of banking.  And. comprising both physical aspects in addition to those relating to Information. or have been triggered with the aid of internal exposures or internal controls being compromised.  It is widely accepted that security is as effective as the weakest link in a chain.

efficiency and risk control.  The financial messages should have the under noted features:  The receipt of the message at the intended destination  The content of the message should be the same as the transmitted one  The Sender of information should be able to verify its receipt by the recipient  The Recipient of the message could verify that the sender is indeed the person  Information in transit should not be observed. Information Security is an activity which provides some comfort to both the policy makers and the users of data.  Security in Payment Systems cannot be addressed in isolation. 70 . because of the critical nature of financial data transfer.  The largest set of functions in the banking sector which has benefited from the advances in IT relate to payment systems since quick. altered or extracted  Any attempt to tamper with the data in transit will need to be revealed  Non-repudiation  These features boil down essentially to authentication (to verify the identity of the sender of the message to the intended recipient to prevent spoofing or impersonation).  It would be advisable to build security features at the application level in respect of banking oriented products.  It requires the integration of work processes. With networking and access to information being available at rates much larger than before. safe and efficient transfer of funds across the length and breadth of the country is the requirement of the day.  Yet another prime aspect of concern in a good security policy is the role that the human beings have in a secure computerised environment. communication linkages and integrated delivery systems and should focus on stability.

maintenance and management of the computer systems were totally in the hands of the firm which supplied the computer software and this led to a fraud and loss for the bank. integrity (to ensure that no changes/errors are introduced in the messages during transmission) and non-repudiation (to ensure that an entity cannot later deny the origin and receipt and contents of the communication). 71 . the entire operations.  I must add here that in a recent case of a co-operative bank.  International standards should be examined and adopted keeping in view the requirements of the Indian banking industry. the security features in the computer systems are not fully fool proof in some banks.  While the aspects relating to physical security leave a lot to be desired with even the most basic security requirements not being in place (like access for unauthorised personnel even to sensitive Cash holding areas). confidentiality (to maintain the secrecy of the content of transmission between the authorised parties).  Such cases cause reason for substantial concern.authorisation (to control the access to specific resources for unauthorised persons).  The common level of entry is the use of validation of authorised access (in the form of authorised User-Ids) to be further authenticated by correctness of passwords keyed in by the authorised users. periodical audit.  An important issue is relating to the security levels of use within the various operating departments in the banks.  Banks need to put in place measures which conform to there is policies and ensure the regular.

rights assigned need to be changed upon change of functions assigned to the operative staff and that updation.  Authorisation of users is another activity that needs to be closely regulated and monitored.  There is an imperative need to imbibe a culture of security among all operative functionaries – whether officers or other staff and cutting across administrative grading. 72 .  Further.  .  Change Management is another aspect that needs to be viewed from the security angle. Passwords often become ‗passed‘ words in our context with no change at all in the passwords since passwords tend to be rather fixed for long periods of time  It is absolutely essential that passwords lapse after certain periods of time – generally not exceeding a month at the latest. The proliferation of networks within an office also acts as a negative factor in implementation of strict security features.  Access to databases in computer systems and to the data contained therein have to be strictly restricted and not available to any but those authorised to make any changes in case of an eventuality for resolving a software lock / malfunction which is a conscious decision by the authorised personnel taken in conjunction with the head of the office concerned. including those related to staff who retire have to be looked into.  One of the basic requirements for implementation of security and monitoring thereof at the various departments is the need for system administrators.

consolidations around identified core competencies are taking place.  Therefore. ranks only 82nd amongst the top global banks. making available all types of credit and non-fund facilities under one roof which is challenge for public sectors bank and demand of time.  This trend may lead logically to promote the concept of financial super market chain.  The State Bank of India. 73 .  Some of the Public Sector Banks have their presence in overseas to a limited extent.  Mergers and acquisitions in the banking sector are the order of the day. the largest bank in India.  Realising the need to grow in size.‖  As per the Narasimhan Committee (II) recommendations. which has assets of $950 billion as against SBI‘s assets of $91 billion. undergoes frequent updation and version control and levels of software in use across offices is an issue which needs to be examined in its totality for practicable implementation at all offices / departments. customers and profits. Sumitomo Mitsui. GROWTH IN BUSINESS  Public Sector Banks should now go global in search of new markets.  The London based magazine ‗The Banker‖ has now listed only twenty Indian banks including private sector banks in the list of ―Top 1000 World Banks‖. Software (and at times hardware too). It is not even a 10th in size of the 9th largest bank. our banks are not equipped enough to compete in the international arena. the Indian banking system today is moving from a regime of ―large number of small banks‖ to ―small number of large banks.

Customer is the king in Japan.ENHANNCING CUSTOMER SRVICE Mahatma Gandhi‘s perception of a customer was as follows: “He is not dependent on us. He is not an interruption on our work. He is not an outsider on our premises. But.” As far as the customer I concerned. Customer is god in the UK and USA. deferred payment and financial advices. 74 . He is the purpose of it. asset security. We are not doing him a favor by serving him. money transfer. He is part of it.  In order to develop close relationship with the customers the Public Sector Banks have to focus on the technology oriented innovations that offer convenience to the customers. We are dependent on him. he is the pivot of all activities in the era of consumerism.  There are four strategies available to customer relations' managers:  To win back or save customers  To attract new and potential customers  To create loyalty among existing customers and  To up sell or offer cross services. the customer is the ‗Boss‘ in India and the ‗Boss‘ is always right. He is doing us a favor by giving us an opportunity to do so.  The Public Sector Banks may need to include customer oriented approach or customer focus in their five areas of businesses such as cash accessibility.

ascertaining periodical operating performance of the firm etc. depending upon the quantum of NPA. adopting regular inter-face with borrowers. These have elevated banking beyond the barriers of time and space. access to internet banking and phone banking facilities and credit cards. There is need for continuous improvement in asset quality by strengthening skill at the grass root level. the banks may have to consider providing services of trained legal officers at controlling/branch levels. there is immediate need for implementation of rigorous systems to eliminate diversion of funds by the borrowers 75 . Recommendations FOR NPA  For strengthening the legal system.  To minimize erosion of asset quality in banking. Banks are to engage services of dynamic young lawyers to have desired momentum in follow-up of suit-filed cases for timely disposal and subsequent execution of decrees. Because a satisfied customer brings in more customers and he is the best advertisement for the bank. Today customers are offered ATM services. So providing better services than Private Sector Banks to customer is a challenge for Public Sector Banks.  This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare minimum.

utilizing services of private security agencies of ascertaining means of NPA borrowers etc.  Banks should have framework for acceptable compromise proposals and supportive recovery policy directed towards out-of-court settlements. infrastructure. Oversight by individuals not involved in the day-to-day running of the various business areas.  Appointment of recovery agents. FOR CORPORATE GOVERNANCE  It is desirable that all the banks are brought under a single Act so that the corporate governance regimes do not have to be different just because the entities are covered under multiple Acts of the Parliament . 76 .towards less viable activities such as investments. are the other areas. loans to subsidiaries facing financial woes etc. economic trends in a globalised environment and industry knowledge about new areas for financing like software. the quality of corporate level governance mechanism does not appear to be satisfactory.  Quality asset building will also require up-to-date market information on various industries.  Although the Reserve Bank maintains a tight vigil and inspects these entities thoroughly at regular time intervals. which require fresh review. a deeper and penetrating insight about the financial transactions of large borrowal groups.   Oversight by the board of directors or supervisory board. service sector and other IT based industries etc.

and Independent risk management. FOR MAN POWER PLANNING  They would need to hire people in large numbers over next five years to maintain growth and stay competitive. compliance and audit functions.  The directors could be made more responsible to their organisation by exposing them to an induction briefing need-based training programme/seminars/workshops to acquaint them with emerging developments/challenges facing the banking sector. the level of remuneration payable to the directors should be commensurate with the time required to be devoted to the bank‘s work as well as to signal the appropriateness of remuneration to the quality of inputs expected from a member.  Surplus staffs from very large branches which are now computerised. Banks need to develop mechanisms. Mobility of staff has to be 77 .   Direct line supervision of different business areas. The entire HR framework needs to be revamped and the skill sets of existing staff needs to be strengthened. The banks have to suitably realign their existing human resources from surplus to deficit pockets and readjust staffing pattern in a computerised environment. need to be relocated or assigned newer jobs such as marketing etc. which can help them ensure percolation of their strategic objectives and corporate values throughout the organisation.  In order to attract quality professionals.  Boards need to set and enforce clear lines of responsibility and accountability for themselves as well as the senior management and throughout the organisation.

but also how effectively it draws out the best from its talent personnel at any point of time . public relation roles etc. 78 .negotiated with employees' organizations as a measure to improve organizational efficiency and improve productivity. working in marketing teams. Such personnel need to be identified.  The banks also need to develop existing staff in newer competencies through a systematic and rigorous training.  There is also a need to enrich clerical roles by introducing discretionary elements in front-line clerical roles and giving them responsibility of higher nature such as initiating correspondence.  About 70% staff in each bank constitutes clerical and subordinate staff  There is the need to re-define the clerical roles in the bank.  Banks have an excellent pool of competent personnel in all the cadres. operational roles. FOR TALENT MANAGEMENT  Public Sector Banks should not only take care of the sum total of its individual human capital.  Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower.  Needless to say that succession planning in managerial cadre must occupy central concern for bank management. nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career.

 Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes.Customers want to achieve their goals 3. both nationally and internationally. to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals. Loops in customer services Facts about customers Ninety five percents of customers do not complain even if they are dissatisfied bcoz of indifferent attitude of not to bother unnecessarily and accept such bad service as part of human nature. Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times.Customers want to be treated fairly 79 . Because do customers want 1-Customers want control over their decisions 2.  Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences. 4.Customers want to preserve their self respect.

Recently the RBI advised all SCBs to implement the recommendations of the committee on procedures and performance Audit on public service.5. If the customer is correct and has too many such complaints against the staff.Customers want a feeling of security and safety 8. This can be a vital customer care capsule in the panacea kit of the bank to heal al wounds. It has suggested that cheques either be dropped in a box or tendered at counter when they should be acknowledged. 3.The ―may I help you counter‖ could not come up to the level of expectation as there is a lack of spirit in implementing it. In sum and substance a good customer service means a broad smile on customer‟s face as they leave the bank after finishing their business. 2.The cheques for collection handed over the counter are rarely acknowledged in spite of the RBI‘s insistence.Customers want honesty 1.Many times the complaints could relate to discourteous behavior of counter staff-this should be handled carefully.Customers want to know what‘s going on 7. a stern action is called for and client must be advised.Customers want friendly welcome and reception 6. 80 .Customers want to feel like VIPs 9.

asset-liability management. So always give customers more than they expect to get. there is always a danger that the customer might shift his transactions elsewhere. improvement of risk management systems. liquidity risk management. 81 . home loans. enhancement of transparency & disclosures. deteriorating asset quality. If the service levels of the product levels are not up to the customer satisfaction. market risk management and ever tightening prudential norms. implementation of new accounting standards. loans on credit cards. on easy terms without much scrutiny. educational loans etc. The demands and expectations of the customers grow at a much faster rate than the banks can equip themselves to be with them. The boom in the field of retail banking and the intense competition among the banks to increase the customer base has resulted in the large disbursement of consumer loans. Operating in this demanding environment has exposed banks to various challenges. application of technology.Conclusion Indian Public Sector Banks are facing innumerable challenges such as worrying level of NPAs. of cases of default in loan repayment thus increasing the bank‘s NPAs. implementation of Basel II. The post-reform period witnessed the following major challenges for public sector banks in India – Enhancement of customer service. increasing pressures on profitability. Managing customers is one of the main issues faced by banks. auto loans. This has brought with it an increase in the no.

The annual report 2007-08 of RBI shows that position of public sector banks is on steady progress. and controlled by RBI and it has also their union. So NPA has been increased because operational cost has been increasing due to more A/cs and transaction and PSBs are liable to open branches in rural areas. Other approved securities also decreased in comparison to previous year. Assets as current assets and other loan cash credit is increasing which shows a sign of growing network. This is the main reason of delayed progress of PSBS. It has not the single controlling system while private banks have. So there is trice controlling system that‘s why any policy takes time in being implemented. PSBs are also guided by govt.000 crores and mostly major no frill A/cs has been open in public sector banks. Last year kisan loan was forgiven worth Rs. 60. Consolidated balance sheet of banks shows that banks are on progress.Multiple regulations are the main weakness for PSBs.   Demand deposits. borrowings and other liabilities are increasing. Liabilities and assets have been increased in comparison to last year but even then public sector banks are not progressing equally as private sector banks because of being regulated and controlled system.    Balance with banks and money at call and short notice decreased last year. 82 .

deteriorating asset quality. liquidity risk management. asset-liability management. increasing pressures on profitability. The primary challenge for banks is to provide consistent service to customers irrespective of the kind of channel they use. but also to build competence in handling various queries raised by customers as well. enhanced telephone services. Besides this. cut costs. Therefore there is a need for today‘s bank employees to keep themselves updated with a new set of skills and knowledge. Though many positive signs are already visible in India. the ongoing and future investments in technology are massive. Even for PSBs. Banks and technology are evolving so rapidly that bank staff must continually seek new skills that enable them not only to respond to change. Indian banks are facing innumerable challenges such as worrying level of NPAs. It is expected that the provision of financial services through a versatile technology platform will enable these banks to acquire more customers.Executive summery The world of banking and finance is changing very fast and banks are transforming themselves with the focus on knowledge. banking functions that provide a consistently positive multi-channel experience for customers. Banks in India have been working towards a vision that includes transformed branches. and leading edge internet. and improve service delivery. market risk management and ever tightening prudential norms. including a higher acceptance of technology by 83 . the disclosure requirements are also increasing.

However. Further more the security risk involved in computerization is directly related to the size of the network. 84 . Naturally. For PSBs. expensive system upgrades and recurring costs given the massive scale of their current operations. While they have to handle volumes which are mind boggling. idea generators (human capital) become an even more important resource than the physical and financial ones. scarcity of trained personnel. network downtime. control and delegation were set up decades ago and adoption of technology in terms of ‗real time‘ banking and its compatibilit y with all phases of banking is not yet adequately perceived. it is a reality that most projects have not yet been deployed on a large scale. It is necessary for PSBs to adopt a standardized customer services code to remain competitive and profitable. old habits and political pressures. challenges before public sector banks are plenty and of a different kind. The entry of new generation private sector banks and evolving technology has been changing the face of the Indian banking industry.banks and customers. Systems of accounting. the major problems are in the form of security risks. Banks rely on innovative ideas to increase their earnings. there are also issues of legacy. Annual report 2007-2008 85 .BIBLIOGRAPHY RBI newsletter Google search engine en.rbi.wikipedia.