A bank is a financial institution that accepts deposits from the

public and creates credit.[1] Lending activities can be performed

either directly or indirectly through capital markets. Due to their
importance in the financial system and influence on
national economies, banks are highly regulated in most
countries. Most nations have institutionalized a system known
as fractional reserve banking under which banks hold liquid
assets equal to only a portion of their current liabilities. In
addition to other regulations intended to ensure liquidity, banks
are generally subject to minimum capital requirements based
on an international set of capital standards, known as the Basel
Accords.
Banking in its modern sense evolved in the 14th century in the
rich cities of Renaissance Italy but in many ways was a
continuation of ideas and concepts of credit and lending that
had their roots in the ancient world. In the history of banking,
a number of banking dynasties — notably, the Medicis,
the Fuggers, the Welsers, the Berenbergs and
theRothschilds — have played a central role over many
centuries. Banks act as payment agents by
conducting checking or current accounts for customers,
paying cheques drawn by customers on the bank, and
collecting cheques deposited to customers' current accounts.
Banks also enable customer payments via other payment
methods such as Automated Clearing House (ACH), Wire
transfers or telegraphic transfer,EFTPOS, and automated teller
machines (ATMs).
Banks borrow money by accepting funds deposited on current
accounts, by accepting term deposits, and by issuing debt
securities such as banknotes and bonds. Banks lend money by
making advances to customers on current accounts, by
making installment loans, and by investing in marketable debt
securities and other forms of money lending.
Banks provide different payment services, and a bank account
is considered indispensable by most businesses and
individuals. Non-banks that provide payment services such as
remittance companies are normally not considered as an
adequate substitute for a bank account.
Banks can create new money when they make a loan. New
loans throughout the banking system generate new deposits
elsewhere in the system. The money supply is usually
increased by the act of lending, and reduced when loans are
repaid faster than new ones are generated. In the United
Kingdom between 1997 and 2007, there was an increase in the
money supply, largely caused by much more bank lending,
which served to push up property prices and increase private
debt. The amount of money in the economy as measured by
M4 in the UK went from £750 billion to £1700 billion between
1997 and 2007, much of the increase caused by bank
lending.[16] If all the banks increase their lending together, then
they can expect new deposits to return to them and the amount
of money in the economy will increase. Excessive or risky
lending can cause borrowers to default, the banks then become
more cautious, so there is less lending and therefore less
money so that the economy can go from boom to bust as
happened in the UK and many other Western economies after
2007.
Range of activities
Activities undertaken by banks include personal
banking, corporate banking, investment banking, private
banking, insurance, consumer finance, foreign exchange
trading, commodity trading, trading in equities, futures and
options trading and money market trading.
Channels

An American bank in Maryland.

Banks offer many different channels to access their banking
and other services:

 Automated teller machines

 A branch in a retail location
 Call center
 Mail: most banks accept cheque deposits via mail and use
mail to communicate to their customers, e.g. by sending out
statements
 Mobile banking is a method of using one's mobile phone to
conduct banking transactions
 Online banking is a term used for performing multiple
transactions, payments etc. over the Internet
 Relationship managers, mostly for private banking or
business banking, often visiting customers at their homes or
businesses
 Telephone banking is a service which allows its customers to
conduct transactions over the telephone with automated
attendant, or when requested, withtelephone operator
 Video banking is a term used for performing banking
transactions or professional banking consultations via a
remote video and audio connection. Video banking can be
performed via purpose built banking transaction machines
(similar to an Automated teller machine), or via a video
conference enabled bank branch clarification
 DSA is a Direct Selling Agent, who works for the bank based
on a contract. Its main job is to increase the customer base
for the bank.
Business models
A bank can generate revenue in a variety of different ways
including interest, transaction fees and financial advice. The
traditionally most significant method is via charging interest on
the capital it lends out to customer.The bank profits from the
difference between the level of interest it pays for deposits and
other sources of funds, and the level of interest it charges in its
lending activities.
This difference is referred to as the spread between highly the
cost of funds and the loan interest rate. Historically, profitability
from lending activities has been cyclical and dependent on the
needs and strengths of loan customers and the stage of
the economic cycle. Fees and financial advice constitute a
more stable revenue stream and banks have therefore placed
more emphasis on these revenue lines to smooth their financial
performance.
In the past 20 years American banks have taken many
measures to ensure that they remain profitable while
responding to increasingly changing market conditions.

 First, this includes the Gramm–Leach–Bliley Act, which

allows banks again to merge with investment and insurance
houses. Merging banking, investment, and insurance
functions allows traditional banks to respond to increasing
consumer demands for "one-stop shopping" by enabling
cross-selling of products (which, the banks hope, will also
increase profitability).
 Second, they have expanded the use of risk-based
pricing from business lending to consumer lending, which
means charging higher interest rates to those customers that
are considered to be a higher credit risk and thus increased
chance of default on loans. This helps to offset the losses
from bad loans, lowers the price of loans to those who have
better credit histories, and offers credit products to high risk
customers who would otherwise be denied credit.
 Third, they have sought to increase the methods of payment
processing available to the general public and business
clients. These products include debit cards, prepaid
cards, smart cards, and credit cards. They make it easier for
consumers to conveniently make transactions and smooth
their consumption over time (in some countries with
underdeveloped financial systems, it is still common to deal
strictly in cash, including carrying suitcases filled with cash to
purchase a home).
 However, with convenience of easy credit, there is also
increased risk that consumers will mismanage their
financial resources and accumulate excessive debt. Banks
make money from card products through interest charges
and fees charged to cardholders, and transaction fees to
retailers who accept the bank's credit and/or debit cards
for payments.
This helps in making profit and facilitates economic
development as a whole.[17]
Capital and risk
Banks face a number of risks in order to conduct their
business, and how well these risks are managed and
understood is a key driver behind profitability, and how
much capital a bank is required to hold. Bank capital
consists principally of equity, retained
earnings and subordinated debt.
Some of the main risks faced by banks include:

 Credit risk: risk of loss arising from a borrower who does

not make payments as promised.[18]
 Liquidity risk: risk that a given security or asset cannot be
traded quickly enough in the market to prevent a loss (or
make the required profit).
 Market risk: risk that the value of a portfolio, either an
investment portfolio or a trading portfolio, will decrease
due to the change in value of the market risk factors.
 Operational risk: risk arising from execution of a
company's business functions.
 Reputational risk: a type of risk related to the
trustworthiness of business.
 Macroeconomic risk: risks related to the aggregate
economy the bank is operating in.[19]
The capital requirement is a bank regulation, which sets a
framework within which a bank or depository institution must
manage its balance sheet. The categorization of assets and
capital is highly standardized so that it can be risk weighted.
Functions of Bank
The functions of banks include:

1. Issue of money, in the form of banknotes and current

accounts subject to cheque or payment at the
customer's order. These claims on banks can act as
money because they are negotiable or repayable on
demand, and hence valued at par. They are effectively
transferable by mere delivery, in the case of banknotes,
or by drawing a cheque that the payee may bank or
cash.
2. Netting and settlement of payments – banks act as
both collection and paying agents for customers,
participating in interbank clearing and settlement
systems to collect, present, be presented with, and pay
payment instruments. This enables banks to
economize on reserves held for settlement of
payments, since inward and outward payments offset
each other. It also enables the offsetting of payment
flows between geographical areas, reducing the cost of
settlement between them.
3. Credit intermediation – banks borrow and lend back-to-
back on their own account as middle men.
4. Credit quality improvement – banks lend money to
ordinary commercial and personal borrowers (ordinary
credit quality), but are high quality borrowers. The
improvement comes from diversification of the bank's
assets and capital which provides a buffer to absorb
losses without defaulting on its obligations. However,
banknotes and deposits are generally unsecured; if the
bank gets into difficulty and pledges assets as security,
to raise the funding it needs to continue to operate, this
puts the note holders and depositors in an
economically subordinated position.
 5. Asset liability mismatch/Maturity transformation –
banks borrow more on demand debt and short term
debt, but provide more long term loans. In other words,
they borrow short and lend long. With a stronger credit
quality than most other borrowers, banks can do this by
aggregating issues (e.g. accepting deposits and issuing
banknotes) and redemptions (e.g. withdrawals and
redemption of banknotes), maintaining reserves of
cash, investing in marketable securities that can be
readily converted to cash if needed, and raising
replacement funding as needed from various sources
(e.g. wholesale cash markets and securities markets).
6. Money creation – whenever a bank gives out a loan in
a fractional-reserve banking system, a new sum of
virtual money is created.

Size of global banking industry

Assets of the largest 1,000 banks in the world grew by 6.8%
in the 2008/2009 financial year to a record US$96.4 trillion
while profits declined by 85% to US$115 billion. Growth in
assets in adverse market Banks are susceptible to many
forms of risk which have triggered occasional systemic
crises. These include liquidity risk (where many depositors
may request withdrawals in excess of available funds), credit
risk (the chance that those who owe money to the bank will
not repay it), and interest rate risk (the possibility that the
bank will become unprofitable, if rising interest rates force it
to pay relatively more on its deposits than it receives on its
loans).
Banking crises have developed many times throughout
history, when one or more risks have emerged for a banking
sector as a whole. Prominent examples include the bank
run that occurred during the Great Depression, the
U.S. Savings and Loan crisis in the 1980s and early 1990s,
the Japanese banking crisis during the 1990s, and the sub-
prime mortgage crisis in the 2000s.
conditions was largely a result of recapitalization. EU banks
held the largest share of the total, 56% in 2008/2009, down
from 61% in the previous year. Asian banks' share increased
from 12% to 14% during the year, while the share of US
banks increased from 11% to 13%. Fee revenue generated
by global investment banking totaled US$66.3 billion in
2009, up 12% on the previous year.
The United States has the most banks in the world in terms
of institutions (7,085 at the end of 2008) and possibly
branches (82,000).This is an indicator of the geography and
regulatory structure of the USA, resulting in a large number
of small to medium-sized institutions in its banking system.
As of Nov 2009, China's top 4 banks have in excess of
67,000 branches
The Banks have to follow the following banking standards
Bank regulation and standards

 Bank for International Settlements

 Basel Accords
 Basel I
 Basel II
 Basel III

Background
 Banking (Regulation)
 Monetary policy
 Central bank
 Risk
 Risk management
 Regulatory capital
 Tier 1
 Tier 2
STRUCTURE OF INDIAN BANKING INDUSTRY
The banking system, largely, comprises of scheduled banks
(banks that are listed under the Second Schedule of the RBI
Act, 1934). Unscheduled banks form a very small component
(function in the form of Local Area Bank). Scheduled banks are
further classified into commercial and cooperative banks, with
the basic difference in their holding pattern.Societies Act and
work according to the cooperative principles of mutual
assistance.
 LAWS AND RIGHTS OF BANKS :

1. 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 bank.
2. The bank agrees to pay the customer's checks up to
the amount standing to the credit of the customer's
account, plus any agreed overdraft limit.
3. The bank may not pay from the customer's account
without a mandate from the customer, e.g. a cheque
drawn by the customer.
4. 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
account.
5. The bank has a right to combine the customer's
accounts, since each account is just an aspect of the
same credit relationship.
6. The bank has a lien on cheques deposited to the
customer's account, to the extent that the customer is
indebted to the bank.
7. 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.
8. 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.
HISTORY OF PRIVATE SECTOR BANKS IN INDIA

The private-sector banks in India represent part of the indian

banking sector that is made up of both private and public sector
banks. The "private-sector banks" are banks where greater
parts of state or equity are held by the private shareholders and
not by government.
Banking in India has been dominated by public sector
banks since the 1969 when all major banks were nationalised
by the Indian government. However, since liberalisation in
government banking policy in the 1990s, old and new private
sector banks have re-emerged. They have grown faster &
bigger over the two decades since liberalisation using the latest
technology, providing contemporary innovations and monetary
tools and techniques.
The private sector banks are split into two groups by financial
regulators in India, old and new. The old private sector banks
existed prior to the nationalisation in 1969 and kept their
independence because they were either too small or specialist
to be included in nationalisation. The new private sector banks
are those that have gained their banking license since the
liberalisation in the 1990s.
Major Private banks in India are

Bank of Rajasthan A leading private sector bank, the Bank of Rajasthan was
founded on the auspicious day of Akshya Tritiya on May 8, 1943, at Udaipur.
Shri Rai Bahadur P.C. Chatterji, then the finance minister of the erstwhile
Mewar Government, extensively contributed towards the establishment of the
Bank.

Catholic Syrian Bank With the Swadeshi Movement of early 20th century as
its base, Catholic Syrian Bank was incorporated on 26th November 1920, in the
Thrissur district of Kerala. The bank commenced its operations on 1st January
1921, with an authorized capital of ` 5 lakhs and a paid up capital of ` 45270.

Dhanalakshmi Bank The foundation of Dhanalakshmi Bank Limited was laid

down on 14th November 1927, in the Thrissur district of Kerala. A group of
innovative entrepreneurs had started the bank with a capital of `11, 000 and
only 7 employees.

Federal Bank Federal Bank Limited was founded as Travancore Federal Bank
Limited in the year 1931, with an authorized capital of ` 5000. It was
established at Nedumpuram, a place near Tiruvalla, in Central Travancore (a
princely state later merged into Kerala), under Travancore Company's Act.

HDFC Bank Housing Development Finance Corporation Limited, more

popularly known as HDFC Bank Ltd, was established in the year 1994, as a part
of the liberalization of the Indian Banking Industry by Reserve Bank of India
(RBI). It was one of the first banks to receive an 'in principle' approval from
RBI, for setting up a bank in the private sector.

ICICI Bank ICICI Bank started as a wholly owned subsidiary of ICICI

Limited, an Indian financial institution, in 1994. Four years later, when the
company offered ICICI Bank's shares to the public, ICICI's shareholding was
reduced to 46%. In the year 2000, ICICI Bank offered made an equity offering
in the form of ADRs on the New York Stock Exchange (NYSE)

ING Vysya Bank ING Vysya Bank Ltd came into being in October 2002, when
erstwhile Vysya Bank Ltd was merged with ING, a global financial powerhouse
boasting of Dutch origin. Vysya Bank Ltd, one of initial banks to be set up in
the private sector of India.

Jammu & Kashmir Bank The origin of Jammu and Kashmir Bank Limited,
more commonly referred to as J&K Bank, can be traced back to the year 1938,
when it was established as the first state-owned bank in India. The bank was
incorporated on 1st October 1938 and it was in the following year (more
precisely on 4th July 1939) that it commenced its business, in Kashmir (India).

Karnataka Bank Karnataka Bank Limited is a leading private sector bank in

India. It was incorporated on 18th February 1924 at Mangalore, a town located
in the Kannada district of Karnataka. The bank emerged as a major player
during the freedom movement of 20th Century India.

Karur Vysya Bank The Karur Vysya Bank Limited commonly known as KVB was
set up by Late Shri M.A. Venkatarama Chettiar and the Late Shri Athi Krishna
Chettiar, the two great visionaries in 1916 in Karur, a textile town in the Tamil
Nadu state of India.

Kotak Mahindra Bank Kotak Mahindra Bank is one of India's leading financial
private banking institutions. It offers banking solutions that covers almost
every sphere of life. Some of its financial services include commercial banking,
stock broking, mutual funds, life insurance and investment banking.

UTI Bank Axis Bank was formed as UTI when it was incorporated in 1994
when Government of India allowed private players in the banking sector. The
bank was sponsored together by the administrator of the specified undertaking
of the Unit Trust of India, Life Insurance Corporation of India (LIC) and
General Insurance Corporation ltd.

YES Bank Yes Bank is one of the top most private Indian banks. Awarded by
the only Greenfield license award by RBI in last 14 years, this bank is
established and run by Rana Kapoor and Ashok Kapoor with the financial
support of Rabo bank Netherland, the world's single AAA rated private Bank.
For the purpose of assessment of performance of banks, the Reserve Bank of
India categories them as follows.
IMPORTANCE OF PRIVATE SECTOR IN INDIAN
ECONOMY
The importance of private sector in Indian economy over the last 15 years has
been tremendous. The opening up of Indian economy has led to free inflow of
foreign direct investment (FDI) along with modern cutting edge technology,
which increased the importance of private sector in Indian economy
considerably. Previously, the Indian markets were ruled by the government
enterprises but the scene in Indian market has changed as soon as the markets
were opened for investments. This saw the rise of the Indian private sector
companies, which prioritized customer's need and speedy service. This further
fueled competition amongst same industry players and even in government
organizations. The post 1990 era witnessed total investment in favor of Indian
private sector. The investment quantum grew from 56% in the first half of
1990 to 71 % in the second half of 1990. This trend of investment continued
for over a considerable period of time. These investments were especially
made in sector like financial services, transport and social services. The late
1990‟s and the period thereafter witnessed investments in sector like
manufacturing, infrastructure, agriculture products and most importantly in
Information technology and telecommunication. The present trend shows a
marked increase in investment in areas covering pharmaceutical,
biotechnology, semiconductor, contract research and product research and
development. The importance of private sector in Indian economy has been
very commendable in generating employment and thus eliminating poverty.
Further, it also effected the following: Increased quality of life Increased
access to essential items Increased production opportunities Lowered
prices of essential items Increased value of human capital Improved social
life of the middle class Indian Decreased the percentage of people living
below the poverty line in India Changed the age old perception of poor
agriculture based country to a rising manufacturing based country Effected
increased research and development activity and spending Effected better
higher education facilities especially in technical fields
Ensured fair competition amongst market players 61
 Dissolved the concept of monopoly and thus neutralized market
manipulation practices. The importance of private sector in Indian economy
can be witnessed from the tremendous growth of Indian BPOs, Indian software
companies, Indian private banks and financial service companies. The
manufacturing industry of India is flooded with private Indian companies and
in fact they dominate the said industry. Manufacturing companies covering
sectors like automobile, chemicals, textiles, agro-foods, computer hardware,
telecommunication equipment, and petrochemical products were the main
drive of growth. The Indian BPO sector is more concentrated with rendering
services to overseas clients. The KPO sector is engaged in delivering knowledge
based high-end services to clients. It is estimated, that out of the total US $ 15
billion KPO service business around US $ 12 billion of business would be
outsourced to India by the end of 2010.
DEVELOPMENTS AND REASONS FOR THE GROWTH OF THE PRIVATE
BANKS

Everyone knows public sector banks are less profitable, more prone to political
influence and have higher ratios of non-performing assets (NPAs) than their
private sector counterparts. In contrast, new private sector banks, set up post
1991, are media and stock market darlings. Most analysts tend not to mention
that public sector banks carry the main burden of the government’s
developmental policies — from rural lending to infrastructural development
and now the Jan Dhan Yojana. Rather, the private sector’s better profits are
taken as a sign of superior management.

Government banks are rightly criticised for their poor credit management and
corruption. But who remembers the private banks that faltered and were
merged with other banks? Global Trust Bank, established in 1994, was involved
in the 2001 Ketan Parikh-managed stock scam that resulted in losses of Rs
1,000 crores. These were finally borne by the majority government-owned
Oriental Bank of Commerce in 2004. Other banks like Times Bank, Centurion
Bank and Bank of Punjab were ultimately merged with HDFC Bank as their
promoters lost interest or ran into difficulties.

Glimpse behind the veil

The new private sector banks pride themselves on their low reported NPAs and
attribute this to their superior credit skills. As in the normal course of business,
banking secrecy laws do not permit the disclosure of clients, the reported NPAs
are the only public indicator of the bank’s credit risk management. However in
2013, Deccan Chronicle Holdings became a celebrity fraud case and the
banking industry’s exposure was made public. Interestingly, in this high risk
company, as compared to Canara Bank’s Rs Rs 347 crores and IDBI Bank’s Rs
263 crores exposure, ICICI Bank had Rs490 crores, Axis Bank Rs400 crores, Yes
Bank Rs194 crores and Indusind Bank and Kotak Bank Rs100 crores each. In
this particular case, not only did new private sector banks have exposures but
two of them had lent the highest to the company.

Private banks appear to enjoy a charmed regulatory environment. In May

2013, an investigation by the online media firm, Cobrapost, showed officials of
both private and government banks soliciting clients for laundering black
money and offering bank lockers to store the black money. The sting videos
revealed these practices to be so widespread, even systemic, and not the work
of rogue employees. Rajiv Takru, the then Union banking secretary, remarked
in an interview with CNBC-TV on 14 March 2013, “What worries me about the
whole thing, everybody in these sting operations is coming out with a same
kind of response, although it is carried out at a number of places. If these are
actually bank employees, this would mean a remarkable coincidence that
these people are doing it individually and coming out with the same reaction.”

Nevertheless, the Reserve Bank of India merely fined 25 banks on the lesser
charge of not complying with Know Your Client (KYC) norms: Axis Bank and
HDFC Bank were fined the most, at Rs 5 crores and Rs 4.5 crores respectively,
while government banks like State Bank of India, Canara Bank, Bank of Baroda,
Indian Overseas Bank and Bank of India were each fined Rs3 crores. The
quantum of fines suggests the problem was more severe in Axis and HDFC
Banks as compared with the government banks, most of whom have a much
larger branch network than the private sector banks. The banks happily paid
the trivial fines, while the senior management of the implicated banks were
not held responsible by the regulator despite the online videos revealing that
the problem was systemic and not the work of rogue employees.

DLF’s accomplices

Let alone journalistic exposes, even findings of other regulatory bodies do not
seem to carry weight with the RBI. The Securities and Exchange Board of India
(SEBI) order of October 2014 found the real estate giant DLF to have engaged
in “sham transactions” to “camouflage the association of DLF with its three
subsidiaries.” SEBI found the company guilty of “active and material
suppression of material information to defraud and mislead investors.” DLF
appealed the order; but what is of interest here is what SEBI said of Kotak
Bank. Kotak Bank gave personal unsecured loans to the key management
personnel (KMP) of DLF, who in turn gave loans to their spouses; they in turn
bought out the shareholdings of DLF in its subsidiaries. As a result of these
sham transactions, the three subsidiaries of DLF were no longer reported as
subsidiaries — the ownership had changed hands, to the wives of the KMP of
DLF.

The SEBI order revealed a similar pattern for 355 DLF subsidiaries, although it
did not say who financed the transactions. While Kotak Bank provided the
personal loans, its subsidiary, Kotak Mahindra Capital Company, was a part of a
consortium of eight lead investment bankers for the DLF initial public offering.
The offer certified that these 355 entities owned by wives of KMP of DLF were
not DLF subsidiaries. Strangely, since the SEBI order, the RBI and SEBI do not
appear to be concerned that a commercial bank is facilitating financial
transactions to disguise the ownership of subsidiaries; nor that the bank’s
investment banking subsidiary is introducing such companies to the capital
market. Since the SEBI order, there has been no news that the regulators have
penalised Kotak Bank or Kotak Capital, or that Kotak Bank employees involved
in the sham transactions have been disciplined.

The new private sector banks report significantly higher fee income than
government banks. A part of it can be explained by their selling of third party
products like insurance. However, the Cobrapost expose and the SEBI order on
DLF provide a possible insight on the business model of these banks and the
drivers of their profitability. The normal banking customer, being cost
conscious, would be reluctant to pay fees, but those engaging in questionable
activities would pay handsomely to disguise their activity. The media and the
vast tribe of analysts appear disinterested in probing the sources of the high
fee income of new private sector banks. While banks publicly claim to maintain
the “highest standards of integrity” the Cobrapost online videos and the SEBI
order on DLF depict otherwise, and the onus is on the regulator to crack down
on such practices.

Never a rainy day

The divergent performance of the Indian banking sector was reflected in the
fourth quarter (Q4 FY2015) earnings: 11 private sector banks posted a robust
35 per cent rise in net profits while 10 government banks declared a 59 per
cent fall in net profits. (Business Standard, May 14, 2015) No doubt private
banks are more profitable but exactly how are private banks doing so well,
when the economy is not?

Strangely, despite corporate sales growth decelerating, industrial growth

remaining anemic (2.8 per cent for 2014-2015) and a general squeeze on
corporate cash flows, the private sector banks with significant exposure to
Indian companies appear to be immune to the general economic slowdown.
Private sector banks attribute their performance to better credit appraisal and
monitoring and stringent asset recovery procedures, resulting in superior asset
quality. For example, in 4QFY2015, ICICI Bank, the largest new private sector
bank by assets, reported gross and net impaired (non-performing plus
restructured standard) loans of 6.5 per cent and 4.4 per cent of total loans
respectively, while Punjab National Bank, the largest of the nationalised banks,
reported gross and net impaired loans of 16.3 per cent and 14.2 per cent
respectively.

If the business media and analysts were to probe deeper, they would detect
some highly questionable practices adopted by some private sector banks in
reporting low poor quality loans.

In the current industrial slowdown, many corporate projects (the setting up of

new capacities) financed by bank term loans are stuck for diverse reasons and
companies have been unable to commence commercial production. As cash
flows for the project will commence once commercial production starts, the
date of commercial production is extremely important. As the projects are
unable to achieve completion, some of the private sector banks go so far as to
extend the date of commercial production by backdating credit committee
meeting minutes. This is, to put it very mildly, highly irregular. By extending the
date of these projects in this manner the banks are able to classify the loans as
standard and not non-performing even after the original date of commercial
production has past.

Ever-greening loans

The practice of lending a defaulting borrower more money, so that the loan
does not have to be classified as non-performing, is called ‘ever-greening’.
However, such practices could be noticed by the regulator during onsite
inspection, so certain private sector banks adopt another innovative practice:
when a promoter-controlled company is about to default on a loan, the bank
provides a loan to another company managed by the same promoter which in
turn lends the funds to the company which was about to default. The company
is able to service its loan, and the bank can continue to claim the debt is not
bad.

Private sector banks having foreign branches have used dubious methods to
keep loans standard. In the case of a prominent infrastructure company which
was awarded a large foreign contract, the loan was financed by a private sector
bank’s Singapore branch. When the company was about to default on its loan,
the bank extended a further loan from its Dubai branch, the proceeds of which
were used to service the Singapore branch loan. Since different foreign
destinations and regulators were involved it escaped the notice of regulators.
However, the problem has become so extensive that the Monetary Authority
of Singapore reportedly instructed Indian banks operating in Singapore to
desist from financing Indian companies.
While even government banks resort to “ever greening” to report lower non-
performing loans, it is undertaken by select individuals and done on a much
lower scale. In certain private sector banks, however, it appears to be systemic.
The absence of the Central Vigilance Commission, a compliant board of
directors and the existence of lucrative performance incentives in private
sector banks (in the form of increments, bonuses and disproportionate stock
options granted to senior management) encourage such practices.

RBI must regulate

The RBI also lends a helping hand in allowing banks to report higher profits.
ICICI Bank in 4QFY2015 reported a net profit growth of 10 per cent to Rs 2,922
crores but a note to accounts stated that with the regulator’s permission the
bank had reversed Rs 929 crores of interest income till FY2008 as a direct
deduction from reserves (in a single quarter as against RBI allowing it over
three quarters) instead of reducing the profit in 4QFY2015. If the RBI had not
given this largesse, ICICI Bank’s 4QFY2015 net profits would have declined
instead of the rise it reported. The regulator apparently did not seem to mind
that the bank had inflated its income, yield on credit, net interest margin
(interest income less interest expenditure/average interest earnings assets)
and profits till FY2008 and that it is disclosed to shareholders and the public
after six long years.

Indian companies are confronted with major issues: a demand slowdown

impacting sales, unfinished projects set up at inflated costs, lengthening
working capital cycle squeezing cash flows, and rising debt. Corporate India
banks with both government and private sector banks, and hence problems in
the corporate sector should impact the entire banking sector, as corporate
loans form a significant component of total bank loans. Yet it is only
government banks which report high non-performing loans and lower net
profits, while private sector banks report low bad loans and higher profits.

The media may be excused for their softness towards private banks; not only
are the latter big advertisers, but some media houses have stakes in themwhile
promoters of banks have also stakes in media houses. More puzzling is the
regulator’s feather-touch approach which permits these banks to continue to
do business as usual.
GEOGRAPHICAL DISTRIBUTION
The private banks started from the metropolitan cities. After growth in metros,
the private sector banks are expanding their network into urban, semi urban,
and rural areas. Table shows the network spread of private banks in different
types of population group. Private Banks are not just concentrated in metros
but they have started making inroads into the rural market as well. The semi
urban areas have benefitted significantly from the presence of private sector
banks. 30% of the branches of private banks are in semi urban areas.