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Financial Sector Reforms set in motion in 1991 have greatly changed the face
of Indian Banking.

The banking industry has moved gradually from a

regulated environment to a deregulated market economy.

The market

developments kindled by liberalization and globalization have resulted in

changes in the intermediation role of banks. The pace of transformation has
been more significant in recent times with technology acting as a catalyst.
While the banking system has done fairly well in adjusting to the new market
dynamics, greater challenges lie ahead. Financial sector would be opened up
for greater international competition under WTO. Banks will have to gear up to
meet stringent prudential capital adequacy norms under Basel II. In addition
to WTO and Basel II, the Free Trade Agreements (FTAs) such as with
Singapore, may have an impact on the shape of the banking industry. Banks
will also have to cope with challenges posed by technological innovations in
banking. Banks need to prepare for the changes. In this context the need for
drawing up a Road Map to the future assumes relevance. The idea of setting
up a Committee to prepare a Vision for the Indian Banking industry came up
in IBA, in this background.


Managing Committee of Indian Banks Association constituted a Committee

under the Chairmanship of Shri S C Gupta, Chairman & Managing Director,
Indian Overseas Bank to prepare a Vision Report for the Indian Banking
Industry. The composition of the Committee is given at the end of the report.


The Committee held its first meeting on 23rd June 2003 at Mumbai. Prior to
the meeting the members were requested to give their thoughts on the future
landscape of the banking industry.

A discussion paper based on the

responses received from members was circulated along with a questionnaire

eliciting views of members on some of the specific issues concerning
anticipated changes in the banking environment.

In the meeting, which

served as a brainstorming session, members gave their Vision of the future. A

second meeting of the Committee was held at Chennai on 7 th August 2003 to
have further discussions on the common views, which emerged in the first
meeting, and also to examine fresh areas to be covered in the study.


The Vision Statement prepared by the Committee is based on common thinking

that crystallized at the meetings. In the Chennai meeting it was decided to form a
smaller group from among the members to draft the report of the Committee. The
group met thrice to finalize the draft report. The report was adopted in the final
meeting of the Committee held at Mumbai.


When we talk about the future, it is necessary to have a time horizon in mind.
The Committee felt, it would be rather difficult to visualize the landscape of
banking industry say, 20 years hence due to the dynamic environment. While
Government of India brought out India Vision 2020, the Committee is of the view
that the pace of changes taking place in the banking industry and in the field of
Information Technology would render any attempt to visualize the banking
scenario in 2020, inconceivable.

The entire financial services sector may

undergo a dramatic transformation. It was, therefore, felt that we should set our
goals for the near future say, for 5-10 years hence and appropriately call this
exercise Banking Industry Vision 2020.


2.1 The financial system is the lifeline of the economy. The changes in the economy get
mirrored in the performance of the financial system, more so of the banking industry.
The Committee, therefore felt, it would be desirable to look at the direction of growth of
the economy while drawing the emerging contours of the financial system. The India
Vision 2020" prepared by the Planning Commission, Government of India, is an
important document, which is likely to guide the policy makers, in the years to come.
The Committee has taken into consideration the economic profile drawn in India Vision
2020 document while attempting to visualise the future landscape of banking Industry.
2.2 India Vision 2020 envisages improving the ranking of India from the present 11 th to
4th among 207 countries given in the World Development Report in terms of the Gross
Domestic Product (GDP). It also envisages moving the country from a low-income
nation to an upper middle-income country. To achieve this objective, the India Vision
aims to have an annual growth in the GDP of 8.5 per cent to 9 per cent over the next 20
years. Economic development of this magnitude would see quadrupling of real per
capita income. When compared with the average growth in GDP of 4-6% in the recent
past, this is an ambitious target. This would call for considerable investments in the
infrastructure and meeting the funding requirements of a high magnitude would be a
challenge to the banking and financial system.
2.3 India Vision 2020 sees a nation of 1.3 billion people who are better educated,
healthier, and more prosperous. Urban India would encompass 40% of the population
as against 28 % now. With more urban conglomerations coming up, only 40% of
population would be engaged in agricultural sector as against nearly two thirds of
people depending on this sector for livelihood. Share of agriculture in the GDP will come
down to 6% (down from 28%). Services sector would assume greater prominence in our
economy. The shift in demographic profile and composition of GDP are significant for

strategy planners in the banking sector.

2.4 Small and Medium Enterprises (SME) sector would emerge as a major contributor
to employment generation in the country. Small Scale sector had received policy
support from the Government in the past considering the employment generation and
favourable capital-output ratio. This segment had, however, remained vulnerable in
many ways. Globalization and opening up of the economy to international competition
has added to the woes of this sector making bankers wary of supporting the sector. It is
expected that the SME sector will emerge as a vibrant sector, contributing significantly
to the GDP growth and exports.
2.5 Indias share in International trade has remained well below 1%. Being not an export
led economy (exports remaining below 15% of the GDP), we have remained rather
insulated from global economic shocks. This profile will undergo a change, as we plan
for 8-9% growth in GDP. Planning Commission report visualizes a more globalised
economy. Our international trade is expected to constitute 35% of the GDP.

2.6 In short, the Vision of India in 2020 is of a nation bustling with energy,
entrepreneurship and innovation. In other words, we hope to see a market-driven,
productive and highly competitive economy. To realize the above objective, we need a
financial system, which is inherently strong, functionally diverse and displays efficiency
and flexibility. The banking system is, by far, the most dominant segment of the financial
sector, accounting for as it does, over 80% of the funds flowing through the financial
sector. It should, therefore, be our endeavor to develop a more resilient, competitive
and dynamic financial system with best practices that supports and contributes
positively to the growth of the economy.
2.7 The ability of the financial system in its present structure to make available
investible resources to the potential investors in the forms and tenors that will be
required by them in the coming years, that is, as equity, long term debt and medium and

short-term debt would be critical to the achievement of plan objectives. The gap in
demand and supply of resources in different segments of the financial markets has to
be met and for this, smooth flow of funds between various types of financial institutions
and instruments would need to be facilitated.

2.8 Governments policy documents list investment in infrastructure as a major area

which needs to be focused. Financing of infrastructure projects is a specialized activity
and would continue to be of critical importance in the future. After all, a sound and
efficient infrastructure is a sine qua non for sustainable economic development.
Infrastructure services have generally been provided by the public sector all over the
world in the past as these services have an element of public good in them. In the
recent past, this picture has changed and private financing of infrastructure has made
substantial progress. This shift towards greater role of commercial funding in
infrastructure projects is expected to become more prominent in coming years. The role
of the Government would become more and more of that of a facilitator and the
development of infrastructure would really become an exercise in public-private
partnership. India Infrastructure Report (Rakesh Mohan Committee - 1996) placed
financing of infrastructure as a major responsibility of banks and financial institutions in
the years to come. The report estimated the funding requirements of various sectors in
the infrastructure area at Rs 12,00,000 crore by the year 2005-06. Since the estimated
availability of financing from Indian financial institutions and banks was expected at only
Rs 1,20,000 crore, a large gap is left which needs to be filled through
bilateral/multilateral/government funding.
2.9 It has been observed globally that project finance to developing economies flows in
where there is relatively stable macro-economic environment. These include regulatory
reforms and opening of market to competition and private investment. Liberalized
financial markets, promoting and deepening of domestic markets, wider use of risk
management tools and other financial derivative products, improved legal framework,

accounting and disclosure standards etc are some of the other aspects which would
impact commercial funding of infrastructure projects.
2.10 The India Vision document of Planning Commission envisages Foreign Direct
Investments (FDI) to contribute 35% (21% now) to gross capital formation of the country
by 2020. Government has announced a policy to encourage greater flow of FDI into the
banking sector. The recent amendment bill introduced in Parliament to remove the 10%
ceiling on the voting rights of shareholders of banking companies is a move in this
direction. The working group expects this to have an impact on the capital structure of
the banks in India in the coming years.

2.11 Consequent to opening up of the economy for greater trade and investment
relations with the outside world, which is imperative if the growth projections of India
Vision 2020 were to materialize, we expect the banking Industrys business also to be
driven by forces of globalization. This may be further accentuated with the realisation of
full convertibility of the rupee on capital account and consequent free flow of capital
across the borders. An increase in the income levels of the people would naturally lead
to changes in the spending pattern also. This could result in larger investments in the
areas like entertainment and leisure, education, healthcare etc and naturally, these
would attract greater participation of the banking system.


On the basis of the projection made by the Draft 10 th Five Year Plan on relevant

macro indicators such as GDP and extending the trend for a further period of three
years, it is estimated that GDP at current market prices during 2009-10 would be
Rs.61,40,000 crore. Taking into account the on-going reform measures, expected
Basel II needs, and financial dis-intermediation, the pace of expansion in the balance
sheets of banks is likely to decelerate. Thus total assets of all scheduled commercial
banks by end March 2010 may be taken as Rs.40,90,000 crore as a working estimate.
At that level, the annual composite rate of growth in total assets of Scheduled
Commercial Banks would be about 13.4 per cent to be over 2002-03 as compared to

16.7 per cent between 1994-95 and 2002-03. It will form about 65 per cent of GDP at
current market prices as compared to 67 per cent in 2002-03.
On the liability side, there may be large augmentation to capital base. Reserves are
likely to increase substantially. Banks will relay more on borrowed funds. Hence, the
pace of accretion to deposits may slow down.
On the asset side, the pace of growth in both advances and investment may slacken.
However, under advances, the share of bills may increase. Similarly, under investment,
the share of others may increase. The Macro-magnitude of Indian banking sector
visualized for the year 2010 is given in Annexure I.


3.1 Liberalization and de-regulation process started in 1991-92 has made a sea change
in the banking system. From a totally regulated environment, we have gradually moved
into a market driven competitive system. Our move towards global benchmarks has
been, by and large, calibrated and regulator driven. The pace of changes gained
momentum in the last few years. Globalization would gain greater speed in the coming
years particularly on account of expected opening up of financial services under WTO.
Four trends change the banking industry world over, viz. 1) Consolidation of players
through mergers and acquisitions, 2) Globalisation of operations, 3) Development of
new technology and 4) Universalisation

of banking.

With technology acting as a

catalyst, we expect to see great changes in the banking scene in the coming years. The
Committee has attempted to visualize the financial world 5-10 years from now. The
picture that emerged is somewhat as discussed below. It entails emergence of an
integrated and diversified financial system. The move towards universal banking has
already begun. This will gather further momentum bringing non-banking financial
institutions also, into an integrated financial system.

3.2 The traditional banking functions would give way to a system geared to meet all the
financial needs of the customer. We could see emergence of highly varied financial
products, which are tailored to meet specific needs of the customers in the retail as well
as corporate segments. The advent of new technologies could see the emergence of
new financial players doing financial intermediation. For example, we could see utility
service providers offering say, bill payment services or supermarkets or retailers doing
basic lending operations. The conventional definition of banking might undergo


3.3 The competitive environment in the banking sector is likely to result in individual
players working out differentiated strategies based on their strengths and market
niches. For example, some players might emerge as specialists in mortgage products,
credit cards etc. whereas some could choose to concentrate on particular segments of
business system, while outsourcing all other functions.

Some other banks may

concentrate on SME segments or high net worth individuals by providing specially

tailored services beyond traditional banking offerings to satisfy the needs of customers
they understand better than a more generalist competitor.


International trade is

an area where Indias presence is expected to show

appreciable increase. Presently, Indian share in the global trade is just about 0.8%.
The long term projections for growth in international trade is placed at an average of
6% per annum. With the growth in IT sector and other IT Enabled Services, there is
tremendous potential for business opportunities.

Keeping in view the GDP growth

forecast under India Vision 2020, Indian exports can be expected to grow at a
sustainable rate of 15% per annum in the period ending with 2010. This again will offer
enormous scope to Banks in India to increase their forex business and international

Globalization would provide opportunities for Indian corporate entities to

expand their business in other countries.

Banks in India wanting to increase their

international presence could naturally be expected to follow these corporates and other
trade flows in and out of India.
3.5 Retail lending will receive greater focus. Banks would compete with one another to
provide full range of financial services to this segment. Banks would use multiple
delivery channels to suit the requirements and tastes of customers. While some
customers might value relationship banking (conventional branch banking), others might
prefer convenience banking (e-banking).


3.6 One of the concerns is quality of bank lending. Most significant challenge before
banks is the maintenance of rigorous credit standards, especially in an environment of
increased competition for new and existing clients. Experience has shown us that the
worst loans are often made in the best of times. Compensation through trading
gains is not going to support the banks forever. Large-scale efforts are needed to
upgrade skills in credit risk measuring, controlling and monitoring as also revamp
operating procedures.

Credit evaluation may have to shift from cash flow based

analysis to borrower account behaviour, so that the state of readiness of Indian banks
for Basle II regime improves. Corporate lending is already undergoing changes. The
emphasis in future would be towards more of fee based services rather than lending
operations. Banks will compete with each other to provide value added services to their

3.7 Structure and ownership pattern would undergo changes. There would be greater
presence of international players in the Indian financial system. Similarly, some of the
Indian banks would become global players. Government is taking steps to reduce its
holdings in Public sector banks to 33%. However the indications are that their PSB
character may still be retained.

3.8 Mergers and acquisitions would gather momentum as managements will strive to
meet the expectations of stakeholders. This could see the emergence of 4-5 world class
Indian Banks. As Banks seek niche areas, we could see emergence of some national
banks of global scale and a number of regional players.

3.9 Corporate governance in banks and financial institutions would assume greater
importance in the coming years and this will be reflected in the composition of the
Boards of Banks.


3.10 Concept of social lending would undergo a change. Rather than being seen as
directed lending such lending would be business driven. With SME sector expected to
play a greater role in the economy, Banks will give greater overall focus in this area.
Changes could be expected in the delivery channels used for lending to small borrowers
and agriculturalists and unorganized sectors (micro credit). Use of intermediaries or
franchise agents could emerge as means to reduce transaction costs.

3.11 Technology as an enabler is separately discussed in the report. It would not be out
of place, however, to state that most of the changes in the landscape of financial sector
discussed above would be technology driven. In the ultimate analysis, successful
institutions will be those which continue to leverage the advancements in technology in
re-engineering processes and delivery modes and offering state-of-the-art products and
services providing complete financial solutions for different types of customers.

3.12 Human Resources Development would be another key factor defining the
characteristics of a successful banking institution. Employing and retaining skilled
workers and specialists, re-training the existing workforce and promoting a culture of
continuous learning would be a challenge for the banking institutions.


4.1 The financial sector reforms ushered in the year 1991 have been well calibrated and
timed to ensure a smooth transition of the system from a highly regulated regime to a
market economy. The first phase of reforms focused on modification in the policy
framework, improvement in financial health through introduction of various prudential
norms and creation of a competitive environment. The second phase of reforms started
in the latter half of 90s, targeted strengthening the foundation of banking system,
streamlining procedures, upgrading technology and human resources development and
further structural changes. The financial sector reforms carried out so far have made
the balance sheets of banks look healthier and helped them move towards achieving
global benchmarks in terms of prudential norms and best practices.

Under the existing Basel Capital Accord, allocation of capital follows a

one-size-fit-all approach. This would be replaced by a risk based approach to capital

allocation. While regulatory minimum capital requirements would still continue to be
relevant and an integral part of the three pillar approach under Basel II, the emphasis is
on risk based approach relying on external ratings as well as internal rating of each
asset and capital charge accordingly. The internal risk based approach would need
substantial investments in technology and development of MIS tools. For a rating tool
for internal assessment to be effective, past data for 3 to 5 years would be required and
as such, Indian banking system will have to build up the capabilities for a smooth
migration to the new method.
Another aspect which is included in Basel II accord is a provision for capital allocation
for operational risk. This is a new parameter and even internationally evaluation tools
are not yet fully developed. This would be another area where banking system will
have to reckon additional capital needs and functioning of its processes.


4.3 The financial sector reforms have brought in the much needed competition in the
market place. The competition to the existing banks came mainly from the technosavvy private sector banks. In the coming years, we expect to see greater flow of
foreign capital to come into the Indian banking sector. Opening up of banking sector to
global players would see banks facing global competition.

4.4 Technology is expected to be the main facilitator of change in the financial sector.
Implementation of technology solutions involves huge capital outlay.

Besides the

heavy investment costs, technology applications also have a high degree of


Banks will need to look for ways to optimize resources for technology
In this regard, global partnerships on technology and skills sharing may


4.5 The pressure on capital structure is expected to trigger a phase of consolidation in

the banking industry.

Banks could achieve consolidation through different ways.

Mergers and acquisitions could be one way to achieve this. In the past, mergers were
initiated by regulators to protect the interests of depositors of weak banks. In recent
years, market led mergers between private banks have taken place. It is expected that
this process would gain momentum in the coming years.

Mergers between public

sector banks or public sector banks and private banks could be the next logical thing /
development to happen as market players tend to consolidate their position to remain
in competition.

4.6 Consolidation could take place through strategic alliances / partnerships. Besides
helping banks to achieve economy of scale in operations and augment capital base,
consolidation could help market players in other ways also to strengthen their

The advantage could be in achieving better segmentation in the

market. Strategic alliances and collaborative approach, as an alternative to mergers


and acquisitions, could be attempted to reduce transaction costs through outsourcing,

leverage synergies in operations and avoid problems related to cultural integration. If
consolidation is taken too far, it could lead to misuse of dominant market positions.
Rapid expansion in foreign markets without sufficient knowledge of local economic
conditions could increase vulnerability of individual banks.

4.7 Public Sector Banks had, in the past, relied on Government support for capital
augmentation. However, with the Government making a conscious decision to reduce
its holding in Banks, most Banks have approached the capital market for raising
resources. This process could gain further momentum when the government holding
gets reduced to 33% or below.

It is expected that pressures of market forces would be

the determining factor for the consolidation in the structure of these banks.

If the

process of consolidation through mergers and acquisitions gains momentum, we could

see the emergence of a few large Indian banks with international character. There
could be some large national banks and several local level banks.

4.8 Opening up of the financial sector from 2005, under WTO, would see a number of
Global banks taking large stakes and control over banking entities in the country. They
would bring with them capital, technology and management skills. This will increase the
competitive spirit in the system leading to greater efficiencies. Government policy to
allow greater FDI in banking and the move to amend Banking Regulation Act to remove
the existing 10% cap on voting rights of shareholders are pointers to these

4.9 The cooperative banks have played a crucial part in the development of the
economy. The primary agricultural societies which concentrate on short-term credit and
rural investment credit institutions supported by District / State level cooperative banks
have played a crucial role in the credit delivery in rural areas. The Urban Cooperative


Banks have found their own niche in urban centres.

These institutions in the

cooperative sector need urgent capital infusion to remain as sound financial entities.
Cooperative sector comes under State jurisdiction while commercial banking operations
are regulated by the Reserve Bank of India. The duality in control had weakened the
supervisory set up for these institutions. It is expected that certain amendments to the
Banking Regulation Act introduced recently in the Parliament with the objective of
strengthening the regulatory powers of the Reserve Bank of India would pave the way
for strengthening of cooperative / financial institutions. It is expected that these banks
would upgrade skills of their staff and improve the systems and procedures to compete
with commercial bank entities.

4.10 Consolidation would take place not only in the structure of the banks, but also in
the case of services.

For instance, some banks would like to shed their non-core

business portfolios to others. This could see the emergence of niche players in different
functional areas and business segments such as housing, cards, mutual funds,
insurance, sharing of their infrastructure including ATM Network, etc.

4.11 Rationalization of a very large network of branches, which at present has rendered
the system cost ineffective and deficient in service would take place. Most of the banks
would have adopted core-banking solutions in a fully networked environment. Back
office functions would be taken away from branches to a centralized place. While brick
and mortar branches would continue to be relevant in the Indian scenario, the real
growth driver for cost cutting would be virtual branches viz., ATMs, Internet Banking,
mobile banking, kiosks etc., which can be manned by a few persons and run on 24 x 7
basis to harness the real potential of these technological utilities, there will be strategic
alliances / partnership amongst banks and this phenomenon has already set in.
4.12 As we move along, the concept of branch banking will undergo changes. Banks
will find that many of the functions could be outsourced more profitably without
compromising on the quality of service. Specialized agencies could come forward to

undertake Marketing and delivery functions on behalf of banks. This could see banking
products being sold outside the four walls of a branch. Banks would then concentrate on
developing new products and earning fee based income.

4.13 The composition of bank staff will change. As total computerization will render a
part of the workforce surplus, banks will go for a rightsizing exercise. Some may resort
to another round of VRS to shed excess flab while some other may go for redeployment to strengthen marketing arms.

With greater use of technology and

outsourcing of services in different areas, the manpower recruitment will mostly be in

specialized areas and technology applications. With commitment shifting from the
organization to the profession, we could see greater lateral movement of banking
personnel. Training and skill development will, however, continue to be key HR
functions. With the age profile of staff undergoing changes, banks will have to focus on
leadership development and succession planning.

Knowledge management will

become a critical issue.

4.14 Management structure of banks will also undergo drastic changes in the coming
years. Instead of the present pyramid structure, the banks will move towards reduction
in tiers to ultimately settle for a flat structure. Product-wise segmentation will facilitate
speedier decision-making.

(The existing structure of banks in India, their balance sheet composition and working
results as on 31st March, 2003 are given in Annexures II, III and IV.)




5.1 With increased competition in the banking Industry, the net interest margin of banks
has come down over the last one decade. Liberalization with Globalization will see the
spreads narrowing further to 1-1.5% as in the case of banks operating in developed
countries. Banks will look for fee-based income to fill the gap in interest income. Product
innovations and process re-engineering will be the order of the day. The changes will be
motivated by the desire to meet the customer requirements and to reduce the cost and
improve the efficiency of service. All banks will therefore go for rejuvenating their costing
and pricing to segregate profitable and non-profitable business. Service charges will be
decided taking into account the costing and what the traffic can bear. From the earlier
revenue = cost + profit equation i.e., customers are charged to cover the costs
incurred and the profits expected, most banks have already moved into the profit
=revenue - cost equation. This has been reflected in the fact that with cost of services
staying nearly equal across banks, the banks with better cost control are able to achieve
higher profits whereas the banks with high overheads due to under-utilisation of
resources, un-remunerative branch network etc., either incurred losses or made profits
not commensurate with the capital employed. The new paradigm in the coming years
will be cost = revenue - profit.

5.2 As banks strive to provide value added services to customers, the market will see
the emergence of strong investment and merchant banking entities. Product innovation
and creating brand equity for specialized products will decide the market share and
volumes. New products on the liabilities side such as forex linked deposits, investmentlinked deposits, etc. are likely to be introduced, as investors with varied risk profiles will
look for better yields. There will be more and more of tie-ups between banks, corporate


clients and their retail outlets to share a common platform to shore up revenue through
increased volumes.


5.3 Banks will increasingly act as risk managers to corporate and other entities by
offering a variety of risk management products like options, swaps and other aspects of
financial management in a multi currency scenario. Banks will play an active role in the
development of derivative products and will offer a variety of hedge products to the
corporate sector and other investors.

For example, Derivatives in emerging futures

market for commodities would be an area offering opportunities for banks. As the
integration of markets takes place internationally, sophistication in trading and
specialized exchanges for commodities will expand. As these changes take place,
banking will play a major role in providing financial support to such exchanges,
facilitating settlement systems and enabling wider participation.

5.4 Bancassurance is catching up and Banks / Financial Institutions have started

entering insurance business.

From mere offering of insurance products through

network of bank branches, the business is likely to expand through self-designed

insurance products after necessary legislative changes. This could lead to a spurt in
fee-based income of the banks.
5.5 Similarly, Banks will look analytically into various processes and practices as these
exist today and may make appropriate changes therein to cut costs and delays.
Outsourcing and adoption of BPOs will become more and more relevant, especially
when Banks go in for larger volumes of retail business.

However, by increasing

outsourcing of operations through service providers, banks are making themselves

vulnerable to problems faced by these providers. Banks should therefore outsource
only those functions that are not strategic to banks business. For instance, in the wake
of implementation of 90 days delinquency norms for classification of assets, some
banks may think of engaging external agencies for recovery of their dues and in NPA
5.6 Banks will take on competition in the front end and seek co-operation in the back
end, as in the case of networking of ATMs. This type of co-opetition will become the
order of the day as Banks seek to enlarge their customer base and at the same time to


realize cost reduction and greater efficiency.


6.1 Technology will bring fundamental shift in the functioning of banks. It would not only
help them bring improvements in their internal functioning but also enable them to
provide better customer service. Technology will break all boundaries and encourage
cross border banking business. Banks would have to undertake extensive Business
Process Re-Engineering and tackle issues like a) how best to deliver products and
services to customers b) designing an appropriate organizational model to fully capture
the benefits of technology and business process changes brought about. c) how to
exploit technology for deriving economies of scale and how to create cost efficiencies,
and d) how to create a customer - centric operation model.
6.2 Entry of ATMs has changed the profile of front offices in bank branches. Customers
no longer need to visit branches for their day to day banking transactions like cash
deposits, withdrawals, cheque collection, balance enquiry etc.

E-banking and Internet

banking have opened new avenues in convenience banking. Internet banking has
also led to reduction in transaction costs for banks to about a tenth of branch banking.

6.3 Technology solutions would make flow of information much faster, more accurate
and enable quicker analysis of data received. This would make the decision making
process faster and more efficient. For the Banks, this would also enable development of
appraisal and monitoring tools which would make credit management much more
effective. The result would be a definite reduction in transaction costs, the benefits of
which would be shared between banks and customers.

6.4 While application of technology would help banks reduce their operating costs in the
long run, the initial investments would be sizeable. IT spent by banking and financial

services industry in USA is approximately 7% of the revenue as against around 1% by

Indian Banks.

With greater use of technology solutions, we expect IT spending of

Indian banking system to go up significantly.

6.5 One area where the banking system can reduce the investment costs in technology
applications is by sharing of facilities. We are already seeing banks coming together to
share ATM Networks. Similarly, in the coming years, we expect to see banks and FIs
coming together to share facilities in the area of payment and settlement, back office
processing, data warehousing, etc. While dealing with technology, banks will have to
deal with attendant operational risks.

This would be a critical area the Bank

management will have to deal with in future.

6.6 Payment and Settlement system is the backbone of any financial market place.
The present Payment and Settlement systems such as Structured Financial Messaging
System (SFMS), Centralised Funds Management System (CFMS), Centralised Funds
Transfer System (CFTS) and Real Time Gross Settlement System (RTGS) will undergo
further fine-tuning to meet international standards. Needless to add, necessary security
checks and controls will have to be in place. In this regard, Institutions such as IDRBT
will have a greater role to play.



7.1 Risk is inherent in any commercial activity and banking is no exception to this rule.
Rising global competition, increasing deregulation, introduction of innovative products
and delivery channels have pushed risk management to the forefront of todays financial
landscape. Ability to gauge the risks and take appropriate position will be the key
to success. It can be said that risk takers will survive, effective risk managers
will prosper and risk averse are likely to perish.

In the regulated banking

environment, banks had to primarily deal with credit or default risk. As we move into a
perfect market economy, we have to deal with a whole range of market related risks like
exchange risks, interest rate risk, etc. Operational risk, which had always existed in the
system, would become more pronounced in the coming days as we have technology as
a new factor in todays banking.

Traditional risk management techniques become

obsolete with the growth of derivatives and off-balance sheet operations, coupled with

The expansion in E-banking will lead to continuous vigilance and

revisions of regulations.

7.2 Building up a proper risk management structure would be crucial for the banks in the
future. Banks would find the need to develop technology based risk management tools.
The complex mathematical models programmed into risk engines would provide the
foundation of limit management, risk analysis, computation of risk-adjusted return on
capital and active management of banks risk portfolio. Measurement of risk exposure
is essential for implementing hedging strategies.

7.3 Under Basel II accord, capital allocation will be based on the risk inherent in the
asset. The implementation of Basel II accord will also strengthen the regulatory review
process and, with passage of time, the review process will be more and more



Besides regulatory requirements, capital allocation would also be

determined by the market forces.

External users of financial information will demand

better inputs to make investment decisions. More detailed and more frequent reporting
of risk positions to banks shareholders will be the order of the day. There will be an
increase in the growth of consulting services such as data providers, risk advisory
bureaus and risk reviewers. These reviews will be intended to provide comfort to the
bank managements and regulators as to the soundness of internal risk management

7.4 Risk management functions will be fully centralized and independent from the
business profit centres. The risk management process will be fully integrated into the
business process. Risk return will be assessed for new business opportunities and
incorporated into the designs of the new products.

All risks credit, market and

operational and so on will be combined, reported and managed on an integrated basis.

The demand for Risk Adjusted Returns on Capital (RAROC) based performance
measures will increase.

RAROC will be used to drive pricing, performance

measurement, portfolio management and capital management.

7.5 Risk management has to trickle down from the Corporate Office to branches or
operating units. As the audit and supervision shifts to a risk based approach rather than
transaction orientation, the risk awareness levels of line functionaries also will have to
increase. Technology related risks will be another area where the operating staff will
have to be more vigilant in the coming days.

7.6 Banks will also have to deal with issues relating to Reputational Risk as they will
need to maintain a high degree of public confidence for raising capital and other
resources. Risks to reputation could arise on account of operational lapses,


opaqueness in operations and shortcomings in services. Systems and internal controls

would be crucial to ensure that this risk is managed well.

7.7 The legal environment is likely to be more complex in the years to come. Innovative
financial products implemented on computers, new risk management software, user
interfaces etc., may become patentable. For some banks, this could offer the potential
for realizing commercial gains through licensing.


7.8 Advances in risk management (risk measurement) will lead to transformation in

capital and balance sheet management. Dynamic economic capital management will
be a powerful competitive weapon. The challenge will be to put all these capabilities
together to create, sustain and maximise shareholders wealth. The bank of the future
has to be a total-risk-enabled enterprise, which addresses the concerns of various
stakeholders effectively.

7.9 Risk management is an area the banks can gain by cooperation and sharing of
experience among themselves. Common facilities could be considered for development
of risk measurement and mitigation tools and also for training of staff at various levels.
Needless to add, with the establishment of best risk management systems and
implementation of prudential norms of accounting and asset classification, the quality of
assets in commercial banks will improve on the one hand and at the same time, there
will be adequate cover through provisioning for impaired loans. As a result, the NPA
levels are expected to come down significantly.


8.1 The advent of liberalization and globalization has seen a lot of changes in the focus
of Reserve Bank of India as a regulator of the banking industry.

De-regulation of

interest rates and moving away from issuing operational prescriptions have been
important changes.

The focus has clearly shifted from micro monitoring to macro

management. Supervisory role is also shifting more towards off-site surveillance rather
than on-site inspections. The focus of inspection is also shifting from transaction-based
exercise to risk-based supervision.

In a totally de-regulated and globalised banking

scenario, a strong regulatory framework would be needed. The role of regulator would
be critical for:

ensuring soundness of the system by fixing benchmark standards for capital

adequacy and prudential norms for key performance parameters.


adoption of best practices especially in areas like risk-management,

provisioning, disclosures, credit delivery, etc.


adoption of good corporate governance practices.


creation of an institutional framework to protect the interest of depositors.


regulating the entry and exit of banks including cross-border institutions.

Further, the expected integration of various intermediaries in the financial system would
add a new dimension to the role of regulators. Also as the co-operative banks are
expected to come under the direct regulatory control of RBI as against the dual control
system in vogue, regulation and supervision of these institutions will get a new direction.
Some of these issues are addressed in the recent amendment Bill to the Banking
Regulation Act introduced in the Parliament.

8.2 The integration of various financial services would need a number of legislative
changes to be brought about for the system to remain contemporary and competitive.


The need for changes in the legislative framework has been felt in several areas and
steps have been taken in respect of many of these issues, such as,

i) abolition of SICA / BIFR setup and formation of a National Company Law

Tribunal to take up industrial re-construction.
Ii) enabling legislation for sharing of credit information about borrowers among
lending institutions.

Integration of the financial system would change the way we look at banking
functions. The present definition of banking under Banking Regulation Act would
require changes, if banking institutions and non-banking entities are to merge into a
unified financial system

8.3 While the recent enactments like amendments to Debt Recovery Tribunal (DRT)
procedures and passage of Securitisation and Reconstruction of Financial Assets
and Enforcement of Security Interest Act, 2002 (SARFAESI Act) have helped to
improve the climate for recovery of bank dues, their impact is yet to be felt at the
ground level.

It would be necessary to give further teeth to the legislations, to

ensure that recovery of dues by creditors is possible within a reasonable time. The
procedure for winding up of companies and sale of assets will also have to be

8.4 In the recent past, Corporate Debt Restructuring has evolved as an effective
voluntary mechanism. This has helped the banking system to take timely corrective
actions when borrowing corporates face difficulties.

With the borrowers gaining

confidence in the mechanism, it is expected that CDR setup would gain more
prominence making NPA management somewhat easier. It is expected that the


issue of giving statutory backing for CDR system will be debated in times to come.

8.5 In the emerging banking and financial environment there would be an increased
need for self-regulation. This is all the more relevant in the context of the stated
policy of RBI to move away from micro-management issues. Development of best
practices in various areas of banks working would evolve through self-regulation
rather than based on regulatory prescriptions.

8.6 Role of Indian Banks Association would become more pronounced as a self
regulatory body. Development of benchmarks on risk management, corporate
governance, disclosures, accounting practices, valuation of assets, customer
charter, Lenders Liability, etc. would be areas where IBA would be required to play a
more proactive role. The Association would also be required to act as a lobbyist for
getting necessary legislative enactments and changes in regulatory guidelines.

8.7 HR practices and training needs of the banking personnel would assume greater
importance in the coming days. Here again, common benchmarks could be evolved.

Talking about shared services, creation of common database and conducting

research on contemporary issues to assess anticipated changes in the business
profile and market conditions would be areas where organizations like Indian Banks
Association are expected to play a greater role.

8.8 Evolution of Corporate Governance being adopted by banks, particularly those

who have gone public, will have to meet global standards over a period of time. In
future, Corporate Governance will guide the way Banks are to be run. Good
Corporate Governance is not a straight jacketed formula or process; there are many


ways of achieving it as international comparisons demonstrate, provided the

following three basic principles are followed:a) Management should be free to drive the enterprise forward with the minimum
interference and maximum motivation.
b) Management should be accountable for the effective and efficient use of this
freedom. There are two levels of accountability of management to the Board
and of the Board to the Shareholders. The main task is to ensure the continued
competence of management, for without adequate and effective drive, any
business is doomed to decline. As stated by J.Wolfensohn, President, World
Bank Corporate governance is about promoting corporate fairness,
transparency and accountability.

c) In order to enlist the confidence of the global investors and international market
players, the banks will have to adopt the best global practices of financial
accounting and reporting. This would essentially involve adoption of judgmental
factors in the classification of assets, based on Banks estimation of the future
cash flows and existing environmental factors, besides strengthening the capital
base accordingly.


When we talk about adoption of International accounting practices and reporting

formats it is relevant to look at where we stand and the way ahead.


practices being followed in India are as per Accounting Standards set by the Institute of
Chartered Accountants of India (ICAI). Companies are required to follow disclosure
norms set under the Companies Act and SEBI guidelines relating to listed entities. Both
in respect of Accounting Practices and disclosures, banks in India are guided by the
Reserve bank of India guidelines issued from time to time. Now these are, by and large,
in line with the Accounting Standards of ICAI and other regulatory bodies. It is pertinent
to note that Accounting Standards of ICAI are based on International Accounting


Standards (IAS) being followed in a large number of countries. Considering that US

forms 40% of the financial markets in the world compliance with USGAAP has assumed
greater importance in recent times. Many Indian banks desirous of raising resources in
the US market have adopted accounting practices under USGAAP and we expect more
and more Indian Financial entities to move in this direction in the coming years.

There are certain areas of differences in the approach under the two main international
accounting standards being followed globally. Of late, there have been moves for
convergence of accounting standards under IAS and USGAAP and this requires the
standard setters to agree

on a single, high-quality answer.

Discussions in the

accounting circles indicate that convergence of various international accounting

standards into a single global standard would take place by 2007.

In the Indian context, one issue which is likely to be discussed in the coming years is
the need for a common accounting standard for financial entities. While a separate
standard is available for financial entities under IAS, ICAI has not so far come out with
an Indian version in view of the fact that banks, etc. are governed by RBI guidelines. It
is understood that ICAI is seized of the matter. It is expected that banks would migrate
to global accounting standards smoothly in the light of these developments, although it
would mean greater disclosure and tighter norms.



9.1 Since the second half of 1960s, commercial banks have been playing an important
role in the socio-economic transformation of rural India. Besides actively implementing
Government sponsored lending schemes, Banks have been providing direct and
indirect finance to support economic activities. Mandatory lending to the priority sectors
has been an important feature of Indian banking. The Narasimham committee had
recommended for doing away with the present system of directed lending to priority
sectors in line with liberalization in the financial system. The recommendations were,
however, not accepted by the Government. In the prevailing political climate in the
country any drastic change in the policy in this regard appears unlikely.
9.2 The banking system is expected to reorient its approach to rural lending. Going
Rural could be the new market mantra. Rural market comprises 74% of the population,
41% of Middle class and 58% of disposable income. Consumer growth is taking place at
a fast pace in 17113 villages with a population of more than 5000. Of these, 9989
villages are in 7 States, namely Andhra Pradesh, Bihar, Kerala, Maharashtra,
Tamilnadu, Uttar Pradesh and West Bengal. Banks approach to the rural lending will
be guided mainly by commercial considerations in future.
9.3 Commercial Banks, Co-operatives and Regional Rural Banks are the three major
segments of rural financial sector in India.

Rural financial system, in future has a

challenging task of facing the drastic changes taking place in the banking sector,
especially in the wake of economic liberalization. There is an urgent need for rural
financial system to enlarge their role functions and range of services offered so as to
emerge as "one stop destination for all types of credit requirements of people in
rural/semi-urban centres.


9.4 Barring commercial banks, the other rural financial institutions have a weak
structural base and the issue of their strengthening requires to be taken up on priority.
Co-operatives will have to be made viable by infusion of capital. Bringing all cooperative
institutions under the regulatory control of RBI would help in better control and
supervision over the functioning of these institutions. Similarly Regional Rural banks
(RRBs) as a group need to be made structurally stronger. It would be desirable if
NABARD takes the initiative to consolidate all the RRBs into a strong rural development
9.5 Small Scale Industries have,

over the last five decades, emerged as a major

contributor to the economy, both in terms of employment generation and share in

manufactured output and exports. SSIs account for 95% of the industrial units and
contribute about 40% of the value addition in the manufacturing sector. There are more
than 32 lac units spread all over the country producing over 7500 items and providing
employment to more than 178 lac persons. The employment generation potential and
favourable capital-output ratio would make small scale sector remain important for
policy planners.
9.6 Removal of quantitative restrictions on a large number of items under the WTO and
opening up of Indian market to greater international competition have thrown both
challenges and opportunities for the SSI sector. Low capital base and weak
management structure make these units vulnerable to external shocks, more easily.
However the units which can adopt to the changing environment and show imagination
in their business strategy will thrive in the new environment.
9.7 Instead of following the narrow definition of SSI, based on the investment in fixed
assets, there is a move to look at Small and Medium Enterprises (SME) as a group for
policy thrust and encouragement. For SMEs, banks should explore the option of Ebanking channels to develop web-based relationship banking models, which are
customer-driven and more cost-effective.

Government is already considering a

legislation for the development of SME sector to facilitate its orderly growth.


9.8 In the next ten years, SME sector will emerge more competitive and efficient and
knowledge-based industries are likely to acquire greater prominence. SMEs will be
dominating in industry segments such as Pharmaceuticals, Information Technology and
Biotechnology. With SME sector emerging as a vibrant sector of the Indian economy,
flow of credit to this sector would go up significantly. Banks will have to sharpen their
skills for meeting the financial needs of this segment. Some of the Banks may emerge
as niche players in handling SME finance. Flow of credit to this Sector will be guided
purely by commercial considerations as Banks will find SMEs as an attractive business




The key to the success of any organization lies in how efficiently the organization
manages its human resources. The principle applies equally and perhaps more
aptly to service institutions like banks. The issue is all the more relevant to the
public sector banks who are striving hard to keep pace with the technological
changes and meet the challenges of globalization.


In order to meet the global standards and to remain competitive, banks will have
to recruit specialists in various fields such as Treasury Management, Credit, Risk
Management, IT related services, HRM, etc. in keeping with the segmentation
and product innovation. As a complementary measure, fast track merit and
performance based promotion from within would have to be institutionalized to
inject dynamism and youthfulness in the workforce.


To institutionalize talent management, the first priority for the banking industry
would be to spot, recognize and nurture the talent from within. Secondly, the
industry has to attract the best talent from the market to maintain the required
competitive edge vis-a-vis global players. However, the issue of critical
importance is how talent is integrated and sustained in the banks. Therefore, a
proper system of talent management has to be put in place by all the banks.


As the entire Indian banking industry is witnessing a paradigm shift in systems,

processes, strategies, it would warrant creation of new competencies and
capabilities on an on-going basis for which an environment of continuous
learning would have to be created so as to enhance knowledge and skills.


Another important ingredient of HR management is reward and compensation

which at present do not have any linkage to skills and performance. A system of


reward and compensation that attracts, recognizes and retains the talent, and
which is commensurate with performance is an urgent need of the industry.

An equally important issue relevant to HRM is to create a conducive working

environment in which the bankers can take commercial decisions judiciously and,
at the same time, without fear. This calls for a re-look into the vigilance system
as it exists today, and perhaps there is a need to keep the banking industry out of
the CVC.

The Banks Boards may be allowed to have their own system of

appropriate checks and balances as well as accountability.





A bank is a financial institution that provides banking and other financial services to
their customers. A bank is generally understood as an institution which provides
fundamental banking services such as accepting deposits and providing loans.
There are also nonbanking institutions that provide certain banking services without
meeting the legal definition of a bank. Banks are a subset of the financial services
industry. A banking system also referred as a system provided by the bank which
offers cash management services for customers, reporting the transactions of their
accounts and portfolios, through out the day. The banking system in India, should
not only be hasslefree but it should be able to meet the new challenges posed by
the technology and any other external and internal factors. For the past three
decades, Indias banking system has several outstanding achievements to its credit.
The Banks are the main participants of the financial system in India. The Banking
sector offers several facilities and opportunities to their customers. All the banks
safeguards the money and valuables and provide loans, credit, and payment
services, such as checking accounts, money orders, and cashiers cheques. The
banks also offer investment and insurance products. As a variety of models for
cooperation and integration among finance industries have emerged, some of the
traditional distinctions between banks, insurance companies, and securities firms
have diminished. In spite of these changes, banks continue to maintain and perform
their primary roleaccepting deposits and lending funds from these deposits.
1.2 Need of the Banks


Before the establishment of banks, the financial activities were handled by money
lenders and individuals. At that time the interest rates were very high. Again there
were no security of public savings and no uniformity regarding loans. So as to
overcome such problems the organized banking sector was established, which was
fully regulated by the government. The organized banking sector works within the
financial system to provide loans, accept deposits and provide other services to
their customers. The following functions of the bank explain the need of the bank
and its importance:
To provide the security to the savings of customers.
To control the supply of money and credit
To encourage public confidence in the working of the financial system, increase
savings speedily and efficiently.
To avoid focus of financial powers in the hands of a few individuals and
To set equal norms and conditions (i.e. rate of interest, period of lending etc) to all
types of customers
1.3 History of Indian Banking System The first bank in India, called The General
Bank of India was established in the year 1786. The East India Company established
The Bank of Bengal/Calcutta (1809), Bank of Bombay (1840) and Bank of Madras
(1843). The next bank was Bank of Hindustan which was established in 1870. These
three individual units (Bank of Calcutta, Bank of Bombay, and Bank of Madras) were
called as Presidency Banks. Allahabad Bank which was established in 1865, was for
the first time completely run by Indians. Punjab National Bank Ltd. was set up in


1894 with head quarters at Lahore. Between 1906 and 1913, Bank of India, Central
Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were
set up. In 1921, all presidency banks were amalgamated to form the Imperial Bank
of India which was run by European Shareholders. After that the Reserve Bank of
India was established in April 1935. At the time of first phase the growth of banking
sector was very slow. Between 1913 and 1948 there were approximately 1100 small
banks in India. To streamline the functioning and activities of commercial banks, the
Government of India came up with the Banking Companies Act, 1949 which was
later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act
No.23 of 1965). Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as a Central Banking Authority. After independence,
Government has taken most important steps in regard of Indian Banking Sector
reforms. In 1955, the Imperial Bank of India was nationalized and was given the
name "State Bank of India", to act as the principal agent of RBI and to handle
banking transactions all over the country. It was established under State Bank of
India Act, 1955. Seven banks forming subsidiary of State Bank of India was
nationalized in 1960. On 19th July, 1969, major process of nationalization was
carried out. At the same time 14 major Indian commercial banks of the country were
nationalized. In 1980, another six banks were nationalized, and thus raising the
number of nationalized banks to 20. Seven more banks were nationalized with
deposits over 200 Crores. Till the year 1980 approximately 80% of the banking
segment in India was under governments ownership. On the suggestions of
Narsimhan Committee, the Banking Regulation Act was amended in 1993 and thus
the gates for the new private sector banks were opened.


The following are the major steps taken by the

Government of India to Regulate Banking
institutions in the country:1949 : Enactment of Banking Regulation Act.

1955 : Nationalization of State Bank of India.

1959 : Nationalization of SBI subsidiaries.

1961 : Insurance cover extended to deposits.

1969 : Nationalization of 14 major Banks.


1971 : Creation of credit guarantee corporation.

1975 : Creation of regional rural banks.

1980 : Nationalization of seven banks with deposits over 200 Crores.

By the 1960s, the Indian banking industry has become an important tool to facilitate
the development of the Indian economy. At the same time, it has emerged as a
large employer, and a debate has ensured about the possibility to nationalise the
banking industry. Indira Gandhi, the-then Prime Minister of India expressed the
intention of the Government of India (GOI) in the annual conference of the All India
Congress Meeting in a paper entitled "Stray thoughts on Bank Nationalisation". The
paper was received with positive enthusiasm. Thereafter, her move was swift and
sudden, and the GOI issued an ordinance and nationalised the 14 largest
commercial banks with effect from the midnight of July 19, 1969. Jayaprakash
Narayan, a national leader of India, described the step as a "Masterstroke of political
sagacity" Within two weeks of the issue of the ordinance, the Parliament passed the
Banking Companies (Acquisition and Transfer of Undertaking) Bill, and it received
the presidential approval on 9 August, 1969.A second step of nationalisation of 6


more commercial banks followed in 1980. Thestated reason for the nationalisation
was to give the government more control of credit delivery. With the second step of
nationalisation, the GOI controlled around 91% of the banking business in India.
Later on, in the year 1993, the government merged New Bank of India with Punjab
National Bank. It was the only merger between nationalised banks and resulted in
the reduction of the number of nationalised banks from 20 to 19. After this, until the
1990s, the nationalised banks grew at a pace of around 4%, closer to the average
growth rate of the Indian economy. The nationalised banks were credited by some;
including Home minister P. Chidambaram, to have helped the Indian economy
withstand the global financial crisis of 2007-2009.
In the early 1990s, the then Narsimha Rao government embarked on a policy of
liberalisation, licensing a small number of private banks. These came to be known
as New Generation tech-savvy banks, and included Global Trust Bank (the first of
such new generation banks to be set up), which later amalgamated with Oriental
Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This
move along with the rapid growth in the economy of India revolutionized the
banking sector in India which has seen rapid growth with strong contribution from
all the three sectors of banks, namely, government banks, private banks and foreign
banks. The next stage for the Indian banking has been setup with the proposed
relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in
banks may be given voting rights which could exceed the present cap of 10%, at
present it has gone up to 49% with some restrictions.


The new policy shook the banking sector in India completely. Bankers, till this time,
were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of
functioning. The new wave ushered in a modern outlook and tech-savvy methods of
working for the traditional banks. All this led to the retail boom in India. People not
just demanded more from their banks but also received more. Currently (2007),
banking in India is generally fairly mature in terms of supply, product range and
reach-even though reach in rural India still remains a challenge for the private
sector and foreign banks. In terms of quality of assets and capital adequacy, Indian
banks are considered to have clean, strong and transparent balance sheets as
compared to other banks in comparable economies in its region. The Reserve Bank
of India is an autonomous body, with minimal pressure from the government. The
stated policy of the Bank on the Indian Rupee is to manage volatility but without
any fixed exchange rate-and this has mostly been true. With the growth in the
Indian economy expected to be strong for quite some time-especially in its services
sector-the demand for banking services, especially retail banking, mortgages and
investment services are expected to be strong.
In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its
stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time
an investor has been allowed to hold more than 5% in a private sector bank since
the RBI announced norms in 2005 that any stake exceeding 5% in the private sector
banks would need to be voted by them. In recent years critics have charged that
the non-government owned banks are too aggressive in their loan recovery efforts
in connection with housing, vehicle and personal loans. There are press reports that
the banks' loan recovery efforts have driven defaulting borrowers to suicide.


Government policy on banking industry (Source:-The federal Reserve Act 1913 and
The Banking Act 1933) Banks operating in most of the countries must contend with
heavy regulations, rules enforced by Federal and State agencies to govern their
operations, service offerings, and the manner in which they grow and expand their
facilities to better serve the public. A banker works within the financial system to
provide loans, accept deposits, and provide other services to their customers. They
must do so within a climate of extensive regulation, designed primarily to protect
the public interests.
The main reasons why the banks are heavily regulated are as follows:
To protect the safety of the publics savings.
To control the supply of money and credit in order to achieve a nations broad
economic goal.
To ensure equal opportunity and fairness in the publics access to credit and other
vital financial services.
To promote public confidence in the financial system, so that savings are made
speedily and efficiently.
To avoid concentrations of financial power in the hands of a few individuals and
Provide the Government with credit, tax revenues and other services.
To help sectors of the economy that they have special credit needs for eg.
Housing, small business and agricultural loans etc.
Law of banking


Banking law is based on a contractual analysis of the relationship between the bank
and customerdefined as any entity for which the bank agrees to conduct an
account. The law implies rights and obligations into this relationship as follows:
The bank account balance is the financial position between the bank and the
customer: when the account is in credit, the bank owes the balance to the
customer; when the account is overdrawn, the customer owes the balance to the
The bank agrees to pay the customer's cheques up to the amount standing to the
credit of the customer's account, plus any agreed overdraft limit.
The bank may not pay from the customer's account without a mandate from the
customer, e.g. cheques drawn by the customer.
The bank agrees to promptly collect the cheques deposited to the customer's
account as the customer's agent, and to credit the proceeds to the customer's
The bank has a right to combine the customer's accounts, since each account is
just an aspect of the same credit relationship.
The bank has a lien on cheques deposited to the customer's account, to the
extent that the customer is indebted to the bank.
The bank must not disclose details of transactions through the customer's account
unless the customer consents, there is a public duty to disclose, the bank's
interests require it, or the law demands it.


The bank must not close a customer's account without reasonable notice, since
cheques are outstanding in the ordinary course of business for several days. These
implied contractual terms may be modified by express agreement between the
customer and the bank. The statutes and regulations in force within a particular
jurisdiction may also modify the above terms and/or create new rights, obligations
or limitations relevant to the bank-customer relationship.
Regulations for Indian banks
Currently in most jurisdictions commercial banks are regulated by government
entities and require a special bank license to operate. Usually the definition of the
business of banking for the purposes of regulation is extended to include
acceptance of deposits, even if they are not repayable to the customer's order
although money lending, by itself, is generally not included in the definition. Unlike
most other regulated industries, the regulator is typically also a participant in the
market, i.e. a government-owned (central) bank. Central banks also typically have a
monopoly on the business of issuing banknotes. However, in some countries this is
not the case. In UK, for example, the Financial Services Authority licenses banks,
and some commercial banks (such as the Bank of Scotland) issue their own
banknotes in addition to those issued by the Bank of England, the UK government's
central bank. Some types of financial institutions, such as building societies and
credit unions, may be partly or wholly exempted from bank license requirements,
and therefore regulated under separate rules. The requirements for the issue of a
bank license vary between jurisdictions but typically include:
Minimum capital
Minimum capital ratio


'Fit and Proper' requirements for the bank's controllers, owners, directors, and/or
senior officers
Approval of the bank's business plan as being sufficiently prudent and plausible.
Classification of Banking Industry in India
Indian banking industry has been divided into two parts, organized and unorganized
sectors. The organized sector consists of Reserve Bank of India, Commercial Banks
and Co-operative Banks, and Specialized Financial Institutions (IDBI, ICICI, IFC etc).
The unorganized sector, which is not homogeneous, is largely made up of money
lenders and indigenous bankers.
An outline of the Indian Banking structure may be presented as follows:1. Reserve banks of India.
2. Indian Scheduled Commercial Banks.
a) State Bank of India and its associate banks.
b) Twenty nationalized banks.
c) Regional rural banks.
d) Other scheduled commercial banks.
3. Foreign Banks
4. Non-scheduled banks.
5. Co-operative banks.
Reserve bank of India


The reserve bank of India is a central bank and was established in April 1, 1935 in
accordance with the provisions of reserve bank of India act 1934. The central office
of RBI is located at Mumbai since inception. Though originally the reserve bank of
India was privately owned, since nationalization in 1949, RBI is fully owned by the
Government of India. It was inaugurated with share capital of Rs. 5 Crores divided
into shares of Rs. 100 each fully paid up. RBI is governed by a central board
(headed by a governor) appointed by the central government of India. RBI has 22
regional offices across India. The reserve bank of India was nationalized in the year
1949. The general superintendence and direction of the bank is entrusted to central
board of directors of 20 members, the Governor and four deputy Governors, one
Governmental official from the ministry of Finance, ten nominated directors by the
government to give representation to important elements in the economic life of the
country, and the four nominated director by the Central Government to represent
the four local boards with the headquarters at Mumbai, Kolkata, Chennai and New
Delhi. Local Board consists of five members each central government appointed for
a term of four years to represent territorial and economic interests and the interests
of cooperative and indigenous banks.
The RBI Act 1934 was commenced on April 1, 1935. The Act, 1934 provides the
statutory basis of the functioning of the bank. The bank was constituted for the
need of
- To regulate the issues of banknotes.
- To maintain reserves with a view to securing monetary stability


- To operate the credit and currency system of the country to its advantage.
Functions of RBI as a central bank of India are explained briefly as follows: Bank of
Issue: The RBI formulates, implements, and monitors the monitory policy. Its main
objective is maintaining price stability and ensuring adequate flow of credit to
productive sector.
Regulator-Supervisor of the financial system: RBI prescribes broad parameters of
banking operations within which the countrys banking and financial system
functions. Their main objective is to maintain public confidence in the system,
protect depositors interest and provide cost effective banking services to the
Manager of exchange control: The manager of exchange control department
manages the foreign exchange, according to the foreign exchange management
act, 1999. The managers main objective is to facilitate external trade and payment
and promote orderly development and maintenance of foreign exchange market in
India. Issuer of currency: A person who works as an issuer, issues and exchanges or
destroys the currency and coins that are not fit for circulation. His main objective is
to give the public adequate quantity of supplies of currency notes and coins and in
good quality.
Developmental role: The RBI performs the wide range of promotional functions to
support national objectives such as contests, coupons maintaining good public
relations and many more. Related functions: There are also some of the related
functions to the above mentioned main functions. They are such as, banker to the
government, banker to banks etc.


Banker to government performs merchant banking function for the central and the
state governments; also acts as their banker.
Banker to banks maintains banking accounts to all scheduled banks. Controller of
Credit: RBI performs the following tasks:
It holds the cash reserves of all the scheduled banks.
It controls the credit operations of banks through quantitative and qualitative
It controls the banking system through the system of licensing, inspection and
calling for information.
It acts as the lender of the last resort by providing rediscount facilities to
scheduled banks.
Supervisory Functions: In addition to its traditional central banking functions, the
Reserve Bank performs certain non-monetary functions of the nature of supervision
of banks and promotion of sound banking in India. The Reserve Bank Act 1934 and
the banking regulation act 1949 have given the RBI wide powers of supervision and
control over commercial and co-operative banks, relating to licensing and
establishments, branch expansion, liquidity of their assets, management and
methods of working, amalgamation, reconstruction and liquidation. The RBI is
authorized to carry out periodical inspections of the banks and to call for returns
and necessary information from them. The nationalisation of 14 major Indian
scheduled banks in July 1969 has imposed new responsibilities on the RBI for
directing the growth of banking and credit policies towards more rapid development
of the economy and realisation of certain desired social objectives. The supervisory


functions of the RBI have helped a great deal in improving the standard of banking
in India to develop on sound lines and to improve the methods of their operation.
Promotional Functions: With economic growth assuming a new urgency since
independence, the range of the Reserve Banks functions has steadily widened. The
bank now performs a variety of developmental and promotional functions, which, at
one time, were regarded as outside the normal scope of central banking. The
Reserve bank was asked to promote banking habit, extend banking facilities to rural
and semi-urban areas, and establish and promote new specialized financing
Indian Scheduled Commercial Banks
The commercial banking structure in India consists of scheduled commercial banks,
and unscheduled banks.
Scheduled Banks: Scheduled Banks in India constitute those banks which have been
included in the second schedule of RBI act 1934. RBI in turn includes only those
banks in this schedule which satisfy the criteria laid down vide section 42(6a) of the
Act. Scheduled banks in India means the State Bank of India constituted under the
State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the s
State Bank of India (subsidiary banks) Act, 1959 (38 of 1959), a corresponding new
bank constituted under section 3 of the Banking companies (Acquisition and
Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank
included in the Second Schedule to the Reserve bank of India Act, 1934 (2 of 1934),
but does not include a co-operative bank. For the purpose of assessment of
performance of banks, the Reserve Bank of India categories those banks as public


sector banks, old private sector banks, new private sector banks and foreign banks,
i.e. private sector, public sector, and foreign banks come under the umbrella of
scheduled commercial banks.
Regional Rural Bank: The government of India set up Regional Rural Banks (RRBs)
on October 2, 1975 The banks provide credit to the weaker sections of the rural
areas, particularly the small and marginal farmers, agricultural labourers, and small
enterpreneurs. Initially, five RRBs were set up on October 2, 1975 which was
sponsored by Syndicate Bank, State Bank of India, Punjab National Bank, United
Commercial Bank and United Bank of India. The total authorized capital was fixed at
Rs. 1 Crore which has since been raised to Rs. 5 Crores. There are several
concessions enjoyed by the RRBs by Reserve Bank of India such as lower interest
rates and refinancing facilities from NABARD like lower cash ratio, lower statutory
liquidity ratio, lower rate of interest on loans taken from sponsoring banks,
managerial and staff assistance from the sponsoring bank and reimbursement of
the expenses on staff training. The RRBs are under the control of NABARD. NABARD
has the responsibility of laying down the policies for the RRBs, to oversee their
operations, provide refinance facilities, to monitor their performance and to attend
their problems.
Unscheduled Banks: Unscheduled Bank in India means a banking company as
defined in clause (c) of section 5 of the Banking Regulation Act, 1949 (10 of 1949),
which is not a scheduled bank.
NABARD is an apex development bank with an authorization for facilitating credit
flow for promotion and development of agriculture, small-scale industries, cottage


and village industries, handicrafts and other rural crafts. It also has the mandate to
support all other allied economic activities in rural areas, promote integrated and
sustainable rural development and secure prosperity of rural areas. In discharging
its role as a facilitator for rural prosperity, NABARD is entrusted with:
1. Providing refinance to lending institutions in rural areas
2. Bringing about or promoting institutions development and
3. Evaluating, monitoring and inspecting the client banks
Besides this fundamental role, NABARD also:
Act as a coordinator in the operations of rural credit institutions
To help sectors of the economy that they have special credit needs for eg.
Housing, small business and agricultural loans etc.
Co-operative Banks
Co-operative banks are explained in detail in Section II of this chapter
Services provided by banking organizations
Banking Regulation Act in India, 1949 defines banking as Accepting for the
purpose of lending or investment of deposits of money from the public, repayable
on demand and withdrawable by cheques, drafts, orders etc. as per the above
definition a bank essentially performs the following functions: Accepting Deposits or savings functions from customers or public by providing
bank account, current account, fixed deposit account, recurring accounts etc.


The payment transactions like lending money to the public. Bank provides an
effective credit delivery system for loanable transactions.
Provide the facility of transferring of money from one place to another place. For
performing this operation, bank issues demand drafts, bankers cheques, money
orders etc. for transferring the money. Bank also provides the facility of Telegraphic
transfer or tele- cash orders for quick transfer of money.
A bank performs a trustworthy business for various purposes.
A bank also provides the safe custody facility to the money and valuables of the
general public. Bank offers various types of deposit schemes for security of money.
For keeping valuables bank provides locker facility. The lockers are small
compartments with dual locking system built into strong cupboards. These are
stored in the banks strong room and are fully secured.
Banks act on behalf of the Govt. to accept its tax and non-tax receipt. Most of the
government disbursements like pension payments and tax refunds also take place
through banks.
There are several types of banks, which differ in the number of services they
provide and the clientele (Customers) they serve. Although some of the differences
between these types of banks have lessened as they have begun to expand the
range of products and services they offer, there are still key distinguishing traits.
These banks are as follows: Commercial banks, which dominate this industry, offer a
full range of services for individuals, businesses, and governments. These banks
come in a wide range of sizes, from large global banks to regional and community


Global banks are involved in international lending and foreign currency trading, in
addition to the more typical banking services. Regional banks have numerous
branches and automated teller machine (ATM) locations throughout a multi-state
area that provide banking services to individuals. Banks have become more
oriented toward marketing and sales. As a result, employees need to know about all
types of products and services offered by banks. Community banks are based
locally and offer more personal attention, which many individuals and small
businesses prefer. In recent years, online bankswhich provide all services entirely
over the Internethave entered the market, with some success. However, many
traditional banks have also expanded to offer online banking, and some formerly
Internet-only banks are opting to open branches. Savings banks and savings and
loan associations, sometimes called thrift institutions, are the second largest group
of depository institutions. They were first established as community-based
institutions to finance mortgages for people to buy homes and still cater mostly to
the savings and lending needs of individuals. Credit unions are another kind of
depository institution. Most credit unions are formed by people with a common
bond, such as those who work for the same company or belong to the same labour
union or church. Members pool their savings and, when they need money, they may
borrow from the credit union, often at a lower interest rate than that demanded by
other financial institutions. Federal Reserve banks are Government agencies that
perform many financial services for the Government. Their chief responsibilities are
to regulate the banking industry and to help implement our Nations monetary
policy so our economy can run more efficiently
by controlling the Nations money supplythe total quantity of money in the
country, including cash and bank deposits. For example, during slower periods of


economic activity, the Federal Reserve may purchase government securities from
commercial banks, giving them more money to lend, thus expanding the economy.
Federal Reserve banks also perform a variety of services for other banks. For
example, they may make emergency loans to banks that are short of cash, and
clear checks that are drawn and paid out by different banks.
The money banks lend, comes primarily from deposits in checking and savings
accounts, certificates of deposit, money market accounts, and other deposit
accounts that consumers and businesses set up with the bank. These deposits often
earn interest for their owners, and accounts that offer checking, provide owners
with an easy method for making payments safely without using cash. Deposits in
many banks are insured by the Federal Deposit Insurance Corporation, which
guarantees that depositors will get their money back, up to a stated limit, if a bank
should fail.





The evolution of State Bank of India can be traced back to the first decade of the
19th century. It began with the establishment of the Bank of Calcutta in Calcutta, on
2 June 1806. The bank was redesigned as the Bank of Bengal, three years later, on
2 January 1809. It was the first ever joint-stock bank of the British India, established
under the sponsorship of the Government of Bengal. Subsequently, the Bank of
Bombay (established on 15 April 1840) and the Bank of Madras (established on 1
July 1843) followed the Bank of Bengal. These three banks dominated the modern
banking scenario in India, until when they were amalgamated to form the Imperial
Bank of India, on 27 January1921. An important turning point in the history of State
Bank of India is the launch of the first Five Year Plan of independent India, in 1951.
The Plan aimed at serving the Indian economy in general and the rural sector of the
country, in particular. Until the Plan, the commercial banks of the country, including
the Imperial Bank of India, confined their services to the urban sector. Moreover,
they were not equipped to respond to the growing needs of the economic revival
taking shape in the rural areas of the country. Therefore, in order to serve the
economy as a whole and rural sector in particular, the All India Rural Credit Survey
Committee recommended the formation of a state-partnered and state-sponsored
bank. The All India Rural Credit Survey Committee proposed the takeover of the
Imperial Bank of India, and integrating with it, the former state-owned or stateassociate banks. Subsequently, an Act was passed in the Parliament of India in May


1955. As a result, the State Bank of India (SBI) was established on 1July 1955. This
resulted in making the State Bank of India more powerful, because as much as a
quarter of the resources of the Indian banking system were controlled directly by
the State. Later on, the State Bank of India (Subsidiary Banks) Act was passed in
1959. The Act enabled the State Bank of India to make the eight former Stateassociated banks as its subsidiaries. The State Bank of India emerged as a
pacesetter, with its operations carried out by the 480 offices comprising branches,
sub offices and three Local Head Offices, inherited from the Imperial Bank.Instead of
serving as mere repositories of the community s savings and lending to
creditworthy parties, the State Bank of India catered to the needs of the customers,
by banking purposefully. The bank served the heterogeneous financial needs of the
planned economic development. The roots of the State Bank of India rest in the first
decade of 19th century, when the Bank of Calcutta, later renamed the Bank of
Bengal, was established on 2 June 1806. The Bank of Bengal and two other
Presidency banks, namely, the Bank of Bombay (incorporated on 15 April 1840) and
the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were
incorporated as joint stock companies, and were the result of the royal charters.
These three banks received the exclusive right to issue paper currency in 1861 with
the Paper Currency Act, a right they retained until the formation of the Reserve
Bank of India. The Presidency banks amalgamated on 27 January 1921, and there
organized banking entity took as its name Imperial Bank of India. The Imperial Bank
of India continued to remain a joint stock company. Pursuant to the provisions of the
State Bank of India Act (1955), the Reserve Bank of India, which is Indias central
bank, acquired a controlling interest in the Imperial Bank of India. On 30 April
1955the Imperial Bank of India became the State Bank of India.


The State Bank of India is the oldest and largest bank in India, with more than $250
billion (USD) in assets. It is the second-largest bank in the world in number of
branches; it opened its 10,000 th branch in 2008. The bank has 84 international
branches located in 32 countries and approximately 8,500 ATMs. Additionally, SBI
has controlling or complete interest in a number of affiliate banks, resulting in the
availability of banking services at more than 14,600 branches and nearly 10,000
SBI traces its heritage to the 1806 formation of the Bank of Calcutta. The bank was
renamed the Bank of Bengal in 1809 and operated as one of the three premier
"presidency" banks (the presidency banks had the exclusive rights to manage and
circulate currency and were provided capital to establish branch networks). In 1921,
the government consolidated the three presidency banks into the Imperial Bank of
India. The Imperial Bank of India continued until 1955, when India's

The State Bank of India (SBI), the largest and oldest bank in India, had computerized
its branches in the 1990s, but it was losing market share to private-sector banks
that had implemented more modern centralized core processing systems.


To remain competitive with its private-sector counterparts, in 2002, SBI began the
largest implementation of a centralized core system ever undertaken in the banking

The State Bank of India selected Tata Consultancy Services to customize the
software, implement the new core system, and provide ongoing operational support
for its centralized information technology.

Although SBI initially planned to convert only 3,300 of its branches, it was so
successful that it expanded the project to include all of the more than 14,600 SBI
and affiliate bank branches.

The State Bank of India has achieved its goal of offering its full range of products
and services to all its branches and customers, spreading economic growth to rural
areas and providing financial inclusion for all of India's citizens.
central bank, the Reserve Bank of India, acquired the majority interest in the bank
and changed its name to the State Bank of India (SBI). In 1959, the Indian
government passed the State Bank of India Act, resulting in the acquisition (majority
shareholding) of eight state-affiliated banks and the creation of the State Bank of
India Group (SBI Group). The SBI itself is now majority owned by the Indian
government, which purchased the shares held by the Reserve Bank of India.
Profile of the State Bank of India and Associate Banks (May 2008)


Unlike private-sector banks, SBI has a dual role of earning a profit and expanding
banking services to the population throughout India. Therefore, the bank built an
extensive branch network in India that included many branches in low-income rural
areas that were unprofitable to the bank. Nonetheless, the branches in these rural
areas bought banking services to tens of millions of Indians who otherwise would
have lacked access to financial services. This tradition of "banking inclusion"
recently led India's Finance Minister P. Chidambaram to comment, "The State Bank
of India is owned by the people of India."
A lack of reliable communications and power (particularly in rural areas) hindered
the implementation of computerization at Indian banks throughout the 1970s and
1980s. During this period, account information was typically maintained at the local
branches with either semi- automated or manual ledger card processing. During the
1990s, the Indian economy began a period of rapid growth as the country's low
labor costs, intellectual capital, and improving telecommunications technology
allowed India to offer its commercial services on a global basis.


This growth was also aided by the government's decision to allow the creation of
private-sector banks (they had been nationalized in the 1960s). The private-sector
banks, such as ICICI Bank and HDFC Bank, altered the banking landscape in India.
They implemented modern centralized core banking systems and electronic delivery
channels that allowed them to introduce new products and provide greater
convenience to customers. As a result, the private-sector banks attracted middleand upper-class customers at the expense of the public-sector banks. Additionally,
foreign banks such as Standard Chartered Bank and Citigroup used their advanced
automation capabilities to gain market share in the corporate and high-net-worth
markets. State Bank of India Core Systems Modernization

Drivers for a New Core System

SBI had undertaken a massive computerization effort in the 1990s to automate all
of its branches, implementing a highly customized version of Kindle Banking
Systems' Bankmaster core banking system (now owned by Misys). However,
because of the bank's historic use of local processing and the lack of reliable
telecommunications in some areas, it deployed a distributed system with operations
located at each branch. Although the computerization improved the efficiency and
accuracy of the branches, the local implementation restricted customers' use to
their local branches and inhibited the introduction of new banking products and
centralization of operations functions. The local implementation prevented the bank
from easily gaining a single view of corporate accounts, and management lacked
readily available information needed for decision making and strategic planning.


The advantages in products and efficiency of the private-sector banks became

increasing evident in the late 1990s as SBI (and India's other public-sector banks)
lost existing customers and could not attract the rapidly growing middle market in
India. In fact, this technology-savvy market segment viewed the public-sector banks
as technology laggards that could not meet their banking needs. As a result, the
Indian government sought to have the public-sector banks modernize their core
banking systems. In response to the competitive threats and entreaties from the
government, SBI engaged KPMG Peat Marwick (KPMG) in 2000 to develop a
technology strategy and a modernization road map for the bank.
In 2002, bank management approved the KPMG-recommended strategy for a new IT
environment that included the implementation of a new centralized core banking
system. This effort would encompass the largest 3,300 branches of the bank that
were located in city and suburban areas. The State Bank of India's objectives for its
project to modernize core systems included:

The delivery of new product capabilities to all customers, including those in rural


The unification of processes across the bank to realize operational efficiencies

and improve customer service

Provision of a single customer view of all accounts
The ability to merge the affiliate banks into SBI
Support for all SBI existing products
Reduced customer wait times in branches


Reversal of the customer attrition trend

Challenges for the Bank

The bank faced several extraordinary challenges in implementing a centralized core
processing system. These challenges included finding a new core system that could
process approximately 7 million accounts daily a number greater than any bank
in the world was processing on a centralized basis. Moreover, the bank lacked
experience in implementing centralized systems, and its large employee base took
great pride in executing complex transactions on local in-branch
systems. This practice led some people to doubt that the employees would
effectively use the new system.

Another challenge was meeting SBI's unique

product requirements that would require the bank to make extensive modifications
to a new core banking system. The products include gold deposits (by weight),


savings accounts with overdraft privileges, and an extraordinary number of

passbook savings accounts.
Vendor Consortium Selection
Recognizing the need for large-scale centralized systems expertise, SBI sought
proposals from a number of vendor consortiums that were headed by the leading
systems integrators. From these proposals, the bank narrowed down the potential
solutions to vendor consortiums led by IBM and
Although SBI favored the real-time processing architecture of FNS's BaNCS system
over that of the IBM consortium's memo post/batch update architecture, the bank
had several concerns about the TCS consortium proposal. They included the small
size and relatively weak financial strength of FNS (TCS would eventually purchase
FNS in 2005) and the ability of the UNIX-based system to meet the scalability
requirements of the bank. Therefore, it was agreed that TCS would be responsible
for the required systems modifications and ongoing software maintenance for SBI.
Additionally, scalability tests were performed at HP's lab in Germany to verify that
the system was capable of meeting the bank's scalability requirements. These tests
demonstrated the capability of TCS BaNCS to support the processing requirements
of 75 million accounts and 19 million daily transactions.
The company has more than 130,000 employees located in 42 countries and
achieved revenues of $5.7 billion in fiscal 2008. Although TCS has long been a
leader in core systems integration services for banks, after it purchased FNS in
2005, the company also became a leading global provider of core banking software
for large banks. The BaNCS system is based on service-oriented architecture (SOA)
and is platform and database independent. In addition to SBI, TCS BaNCS clients


include the Bank of China (installation in process), China Trust, Bank Negara
Indonesia, India's Bank Maharashtra , National Commercial Bank (Saudi Arabia), and
Koram Bank (Korea). TCS has also expanded its US footprint with the opening of its
largest resource delivery center in North America (near Cincinnati, Ohio) that can
house 20,000 personnel. The company is seeking to license and implement the
BaNCS system in North America and recently completed a major part of an effort to
ensure that the BaNCS system meets US regulatory and compliance requirements.
Initial SBI Core Systems Modernization Project
The contract for the initial project was completed in May 2002; 3,300 branches were
to be converted by mid-2007. TCS immediately began a six-month gap analysis
effort to determine the required software changes to the BaNCS system. The
changes included installing required interfaces with more than 50 other systems as
well as making enhancements to support the bank's product requirements. These
product requirements were separated by customer segment to allow the vendor and
bank to begin conversions before all the needed modifications were implemented.
They placed a priority on the needed changes that would allow branches with highnet-worth individuals and then corporate accounts to be converted as soon as
possible. Before the first conversion in August 2003, TCS and HP created the data
processing environment for SBI. The primary data center was established on the
outskirts of Mumbai and a backup center
was established approximately 1,000 miles to the east in Chennai. The centers
were equipped with HP Superdome servers and XP storage systems in a failover
configuration utilizing HP's UNIX operating platform.
Initial Conversion Project


The conversion effort began in August 2003, when SBI converted three pilot
branches to the BaNCS system. The successful conversion and operation of the pilot
branches was followed by the conversion of 350 retail branches with high-net-worth
customers between August 2003 and September 2004. At this point, the bank
intentionally halted the conversions to analyze and resolve reported problems. They
analyzed, categorized, and prioritized these problems by type of resolution (e.g.,
software, procedural, training) and severity. TCS managed software revisions for the
critical software changes while the branch personnel managed the needed training
and procedural changes.

After the software and procedural changes were

implemented, SBI converted an additional 800 branches between December 2004

and March 2005. Unlike in the previous conversions, this group of branches included
predominantly commercially oriented offices. The conversion effort then refocused
on retail branches until November 2005, when the bank paused again to resolve
problems that came up during this second group of conversions.
After the second round of changes, the system and processes were functioning
smoothly, and management believed the branch conversion could be accelerated.
An assembly line approach was then employed in April 2006 to speed the branch
conversion process:

Branch personnel were responsible for data scrubbing and cleaning of their

customer information
on the existing system.

Branches were notified three months prior to their conversion date to begin

"mock," or test,


conversions using a specially created test version of the BaNCS system.

Branches performed several test conversions to ensure the actual conversion

went smoothly.

As the new core banking system was rolled out across the SBI

branches nationwide, a special process was introduced in the nightly batch window
to add










approximately 20 minutes and typically included adding branches in groups of 50.

This additional process, of course, was unnecessary upon completion of the rollout
and has since been removed from the nightly batch window. TCS and local area
branch managers oversaw the conversions, and the bank's circle (regional) heads
formally reported the status to the chairman's office.
By employing the assembly line approach for branch conversions, SBI was able to
convert 1,200 branches in April and May 2006, completing the initial 3,300-branch
conversion two months ahead of the original schedule. The milestones for the initial
core systems implementation project are included in the SBI and affiliate banks core
systems modernization time line in Exhibit 2.
Time Line of State Bank of India and Affiliate Banks' Core Systems Modernization
Source: Tata Consultancy Services (TCS)
Affiliate Banks' Conversion
As the rollout plans for State Bank of India were being finalized, the bank decided to
extend the scope of the core banking implementation to include its (then) eight
affiliate banks. TCS created a separate processing environment within the Mumbai
data center used to support SBI. The conversion effort for each of the affiliate banks


spanned 18 to 24 months; the first six months were used for planning, training, and
establishing the processing environment for the banks. The branch conversions
overlapped among the banks, allowing all the affiliate banks to be converted in 30
months. The project was begun in July 2003 for the State Bank of Patiala and in
2004 for the other affiliate banks. All of the affiliate bank branches were converted
to the BaNCS system by the end of 2005, as reflected in Exhibit 2.
State Bank of India Full Branch Conversion
The success of the initial 3,300-branch conversion for SBI demonstrated that:

TCS had the technical capabilities to support the bank's IT initiative and scale of


Bank personnel had the skills to adopt new processes and support the


The Indian customer base would react to new technology by adopting new

electronic services and

demanding new, more sophisticated banking products.

An assembly line approach could be used effectively to support large-scale

branch conversions.

Given the success of the initial project and SBI's desire to offer new products to all
of its customers, a new IT plan was created that would encompass all branches. TCS
and the bank would have to


demonstrate the capability to process 100 million accounts in a single processing


TCS and HP then conducted another scalability test in September

2006 to determine if the system could process SBI's entire base of 100 million







a separate


environment) with sustained peak online throughput of 1,500 transactions per

second. They conducted the test at HP Labs in Cupertino, California, using two 32CPU HP 9000 Superdome application servers and two 32-processor Itanium Core HP
Integrity servers for the database. The test achieved a sustained peak real-time
transaction rate of more than 1,575 transactions per second, meeting the projected
processing demands of SBI. Additionally, batch tests were run for both deposits and
loan account processing. The month-end batch process for loans required 1 hour
and 5 minutes, and deposit processing was completed in 2 hours and 27 minutes.
These benchmarks were audited by Ernst & Young, and the test results are
highlighted in
Based on the successful scalability test, SBI decided to convert the approximately
6,700 remaining SBI branches to the BaNCS system. The conversion of the
remaining branches began in June 2006, with the stated goal of completing the
conversion by year-end 2008. Utilizing the assembly line conversion approach
established in the initial phase, the bank converted 1,400 of these branches by
March 2007 Because the conversion methodology and BaNCS system were
thoroughly proven and stable, the assembly line conversion approach allowed the
bank to complete the conversion ahead of schedule. Between April 2007 and March
2008 (the bank's fiscal year end), SBI converted 4,600 branches to the new system.
The remaining branches were converted between April and July 2008.
Critical Success Factors

Large-scale core systems implementations are typically the most costly and risky IT
projects undertaken by banks. Failures of core systems projects are not uncommon
at large banks and result in both financial impact and lost business opportunities.











replacements because they measure the risk of failure against the potential benefits
of a new system.
TowerGroup believes that several critical factors contributed to the success of the
SBI core
implementation effort:
Senior management commitment.
The project was driven by the chairman of SBI, who met every
month with the information technology (IT) and the business sector heads. The
monitored the overall status and ensured that sufficient resources were allocated
to the
project. TCS senior managers were thoroughly committed to the project as well
and periodically
met with the SBI chairman to review the project status.
Staffing and empowerment of project team.
The core banking team consisted of the bank's


managing director of IT acting as team head and 75 business and IT people

selected by the bank.
TCS also staffed the project with approximately 300 IT professionals trained on
the BaNCS system. Importantly, the SBI business people were viewed not just as
contributors to a key project but as future bank leaders. This team reported to the
SBI chairman and was empowere with all decision-making authority.
Ownership by business heads.
The regional business line heads were responsible for the success of conversion of
their respective branches and reported the status to the chairman.
Thus, the business heads' objectives were aligned with those of the project team.
Focus on training.
SBI used its network of 58 training centers across India to train
employees on the new system. TCS personnel first educated approximately 100 SBI
trainers, who then trained 100,000 SBI employees at the centers; the remaining
trained at their respective job sites.
Benefits of New Core Systems Implementation
The new core system has resulted in benefits throughout the bank for both the
customers and the employees of SBI. For example, the new core banking system
has allowed the bank to redesign processes. It established 400 regional processing


centers for all metro and urban branches that have assumed functions previously
performed in the individual branches. The bank recently reported that business per
employee increased by 250% over the last five years. The bank has achieved its
goal of offering its full range of products and services to its rural branches. It
delivers economic growth to the rural areas and offers financial inclusion for all of
India's citizens.
Implementation of the TCS BaNCS system has provided the bank with the ability to
consolidate the affiliate banks into SBI. In fact, the bank recently completed the
consolidation of State Bank of Saurashtra into SBI.
The bank has reversed the trend of customer attrition and is now gaining new
market share. Completion of the core conversion project has also allowed the bank
to undertake several new initiatives to further improve service and support future
growth. These initiatives include the deployment of more than 3,000 rural sales
staff, redesign of over 2,200 branches in the last fiscal
year, opening of more than 1,000 new branches, establishment of a call center, and
an active plan
to migrate customers to electronic delivery channels. The improvement in
productivity and growth
of business for the SBI Group is reflected in Exhibit 4.
The implementation of the Tata Consultancy Services (TCS) BaNCS system at the
State Bank of India (SBI) represents the largest core systems project ever


undertaken. The success of this project should encourage other large banks to begin
projects to modernize their core systems. The use of a UNIX-based platform to
process more than 100 million accounts daily demonstrates that tier 1 banks can
use a mainframe alternative for their core processing. Although TowerGroup expects
that the majority of these banks will continue to rely on the IBM mainframe for core
processing, they can fully consider the benefits of utilizing a UNIX-based platform.
SBI's achievement demonstrates that attention to critical factors is crucial in
implementing new core systems. The bank's senior management commitment,
business line involvement, project team staffing and empowerment, and extensive
employee training were all key contributors to the success of the project.
Management also recognized the need for a proven systems integrator that
possessed in-depth expertise in both business and technology.
Core systems modernization has allowed the State Bank of India to centralize
computer processing and operations functions, offer new banking products to all the
citizens of India, reverse a trend of customer attrition, and consolidate its affiliate
banks. Additionally, the bank can now further expand its product offerings and
improve customer service.



State Bank of India

The State Bank of India, is India's largest and the oldest Bank and a premier in
terms of balance sheet size, number of branches, market capitalization and profits.
Apart from banking, SBI has also entered into new ventures strategic tie ups
Pension Funds, General Insurance, Custodial Services, Private Equity, Mobile
Banking, Point of Sale Merchant Acquisition, Advisory Services, structured products
etc each one of these initiatives having a huge potential for growth. With its
cutting edge technology and new banking models, it is expanding its Rural Banking


base, looking at the vast untapped potential in the hinterland and proposes to cover
100,000 villages in the next two years.
State Bank of India is also concentrating at the top end of the market, on whole sale
banking capabilities to provide Indias growing mid / large Corporate with a
complete array of products and services. It is consolidating its global treasury
operations and entering into structured products and derivative instruments. State
Bank of India is the only Bank of India that has been included in the list of fortune
500. It is the largest provider of infrastructure debt and the largest arranger of
external commercial borrowings in the country.

Survey of SBI
Branches 850
Branches of Associated Banks- 5100
ATM'S- 8500 ATMs,
Other value added services - Internet banking, debit cards, mobile banking, etc.










Learning Centres - 54 (For skill enhancement)
Forign Offices - 82 (in 32 countries)
Subsidiaries in India- SBI Capital Markets, SBICAP Securities, SBI DFHI, SBI Factors,
SBI Life and SBI Cards


Subsidiary of State Bank of India

State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of Indore
State Bank of Mysore
State Bank of Saurastra
State Bank of Travancore

The services of SBI Bank

Personal Banking
Gold Banking
NRI Banking
International Banking
Corporate Banking
Small Scale Industries
Small Business Finance
Rural Banking


Government Business
Home Loans



SBI has its roots since 1806 which was later transformed under various names,
finally SBI Was established after the act in parliament on May 1955. In the year
1959 SBI took over 8 state owned banks and since then it started to grow up
carrying its heritage of servicing people at various economic levels.



SBI is the largest bank in India in terms of market share, revenue and assets.
As per recent data the bank has more than 13,000 outlets and 25,000 ATM centres
The bank has its presence in 32 countries engaging currency trade all over the
The bank has a merged with State Bank of Saurashtra, State bank of Indore and the
bank is planning to go further acquisition in the current FY2012.
SBI has the first mover advantage in commercial banking service
SBI has recently changed its vision and mission statements showing a sign of
inclination towards new age banking services.
-SBI is the largest bank in India in terms of market share, revenue and assets
and branch network also.
-First public sector Bank move to CBS.
-Strong Capital Position .

Lack of proper technology driven services when compared to private banks
Employees show reluctance to solve issues quickly due to higher job security and
customers waiting period is long when compared to private banks The banks
spends a huge amount on its rented buildings


SBI has the largest number of employees in banking sector, hence the bank spends
a considerable amount of its income in employees salary compensation
In spite of modernization, the bank still carries the perception of traditional bank to
new age customers
SBI fails to attract salary accounts of corporate and many government sector
employees salary accounts are also shifted to private bank for ease of operations
unlike before.

-Lack of proper technology driven services.

-Huge staff
-Still image of Old Govt.Bank
-Reduction in asset Quality.
-Political intervention

SBIs merger with five more banks namely State Bank of Hyderebad, State bank of
Patiala, State bank of Bikaber and Jaipur, State of bank of Travancore and State
bank of Mysore are in approval stage
Mergers will result in expansion of market share to defend its number one position


SBI is planning to expand and invest in international operations due to good inflow
of money from Asian Market
Since the bank is yet to modernize few of its banking operations, there is a better
scope of using advanced technologies and software to improve customer relations
Young and talented pool of graduates and B schools are in rise to open new horizon
to so called old government bank


SBIs merger with five more banks .Its good for it's awareness.
-Expantion to Rural Areas.
-SBI is expanding their business to Asian Market.
-MOdernization of some banking operation


Net profit of the year has decline from 9166.05 in the year FY 2010 to 7,370.35 in
the year FY2011
This shows the reduce in market share to its close competitor ICICI


Other private banks like HDFC, AXIS bank etc

FDIs allowed in banking sector is increased to 49% , this is a major threat to SBI as
people tend to switch to foreign banks for better facilities and technologies in
banking service
Other government banks like PNB, Andhra, Allahabad bank and Indian bank are
Customer prefer to switch to private banks and financial service providers for loans
and mortgages, as SBI involves stringent verification procedures and take long time
for processing.
Close Competition with Private sector Banks.
-New licence of banks given to others also.
-Global economic slowdown.

1)Banking Management: Introduction to Indian banking system





4) News Papers:

Financial Express &Economic Times

5) Websites: