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BANKING SECTOR - A STORY TO BANK

ON«.
BANKING SO FAR-

Banking in India originated in the last decades of the 18th century. The first banks
were The General Bank of India which started in 1786, and the Bank of Hindustan,
both of which are now defunct. The oldest bank in existence in India is the State
Bank of India, which originated as the Bank of Calcutta in June 1806, which
almost immediately became the Bank of Bengal. This was one of the three
presidency banks, the other two being the Bank of Bombay and the Bank of
Madras, all three of which were established under charters from the British East
India Company. For many years the Presidency banks acted as quasi-central banks,
as did their successors. The three banks merged in 1921 to form the Imperial Bank
of India, which, upon India's independence, became the State Bank of India.

The period between 1906 and 1911, saw the establishment of banks inspired by the
Swadeshi movement. The Swadeshi movement inspired local businessmen and
political figures to found banks of and for the Indian community. A number of
banks established then have survived to the present such as Bank of India,
Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank
of India. The fervor of Swadeshi movement lead to establishing of many private
banks in Dakshina Kannada and Udupi district which were unified earlier and
known by the name South Canara ( South Kanara ) district. Four nationalised
banks started in this district and also a leading private sector bank. Hence
undivided Dakshina Kannada district is known as "Cradle of Indian Banking".

The period during the First World War (1914-1918) through the end of the Second
World War (1939-1945), and two years thereafter until the independence of India
were challenging for Indian banking. The years of the First World War were
turbulent, and it took its toll with banks simply collapsing despite the Indian
economy gaining indirect boost due to war-related economic activities. At least 94
banks in India failed between 1913 and 1918.Post Independence in 1947, The
Government of India initiated measures to play an active role in the economic life
of the nation, and the Industrial Policy Resolution adopted by the government in
1948 envisaged a mixed economy. This resulted into greater involvement of the
state in different segments of the economy including banking and finance. The
major steps to regulate banking included the nationalization of the Reserve Bank of
India (RBI), India¶s central banking authority. RBI became an institution owned by
the Government of India. In 1949, the Banking Regulation Act was enacted which
empowered the RBI "to regulate, control, and inspect the banks in India." The
Banking Regulation Act also provided that no new bank or branch of an existing
bank could be opened without a license from the RBI, and no two banks could
have common directors. However, despite these provisions, control and
regulations, banks in India except the State Bank of India, continued to be owned
and operated by private persons.

By the 1960s, the Indian banking industry had become an important tool to
facilitate the development of the Indian economy. At the same time, it had emerged
as a large employer, and a debate had ensued about the possibility to nationalize
the banking industry. Indira Gandhi, the- then Prime Minister of India expressed
the intention of the GOI in the annual conference of the All India Congress
Meeting in a paper entitled "Stray thoughts on Bank Nationalization." The paper
was received with positive enthusiasm. Thereafter, her move was swift and sudden,
and the GOI issued an ordinance and nationalized the 14 largest commercial banks
with effect from the midnight of July 19, 1969. 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 dose of nationalization of 6 more commercial banks followed in 1980.


The stated reason for the nationalization was to give the government more control
of credit delivery. With the second dose of nationalization, the GOI controlled
around 91% of the banking business of India. Later on, the government merged
New Bank of India with Punjab National Bank. It was the only merger

between nationalized 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. In the early 1990s, the then Narsimha Rao government embarked on a
policy of liberalization, 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,
revitalized 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.

KEY TRENDS IN THE SECTOR-


DEMAND SUPPLY ANALYSIS-The banking industry is the driver force for the
economy

of any country. The main function of banks constitutes of taking deposits from
various sources of savings in an economy and lending it to the various entities
which are experiencing a demand for funds. The demand supply scenario needs to
be viewed in two different aspects policy environment & general demand for
credit. We try to look at these issues in a brief way.

Policy environment- India is on a contrary path to the rest of the world in terms of
growth. The focus of the policy makers are not only on growth, but on sustained
growth. This requires a growth rate which is accompanied by moderate levels of
inflation and a manageable fiscal deficit. At present, the growth in Domestic GDP
for Q4FY10 came at 8.6% vs 6% YoY. This has come by a contribution from all
sectors of the economy, as per the eleventh survey of the Professional forecasters
conducted by RBI, the real GDP is expected to grow at 8.2 % in FY11, driven
mainly by increased private final consumption expenditure growth, stronger
industrial activity in the first half and further pick up in services in the second half.
The sectoral growth rate forecast for 2010-11 suggests upward revision for
agriculture and industry. For the year 2010-11, the forecast for agriculture has been
revised slightly upwards from 3.5 per cent to 4.0 per cent. For industry, the
forecasts have been revised upwards from 8.1 per cent to 9.0 per cent, whereas for
the services sector, the forecast value is 9.0 per cent, which is same as expected in
the last survey. The main concern however comes from rising inflationary
pressures. The WPI inflation for May-10 stood at 10.16% vs 1.38%, a year ago.
This is clearly a concern for the policy makers and they need to react fast. This
calls for the case of rate hikes in the coming times ahead. The key here is really
that of maintaining the balance between growth and monetary tightening. The
baseline projection of WPI for FY11 stands at 5.5%. This would require significant
monetary tightening. However, factors that could ease up the scenario are good
monsoons-causing an ease to the supply side problems and softening crude oil
prices. The injection of fiscal stimulus and increased governmen

The last decade has seen many positive developments in the Indian banking sector.
The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of
Finance and related government and financial sector regulatory entities, have made
several notable efforts to improve regulation in the sector. A few banks have
established an outstanding track record of innovation, growth and value creation.
This is reflected in their market valuation. However, improved regulations,
innovation, growth and value creation in the sector remain limited to a small part
of it. The cost of banking intermediation in India is higher and bank penetration is
far lower than in other markets. India¶s banking industry must strengthen itself
significantly if it has to support the modern and vibrant economy which India
aspires to be. While the onus for this change lies mainly with bank managements,
an enabling policy and regulatory framework will also be critical to their success.
The failure to respond to changing market realities has stunted the development of
the financial sector in many developing countries. A weak banking structure has
been unable to fuel continued growth, which has harmed the long-term health of
their economies. The future performance for the industry will come at the back of
reforms such as deeper penetration, better norms for financial inclusion,
technology initiatives, improving financial literacy etc. The policy makers,
Company managements and other participants have to work hand in hand to make
the banking sector realize its full potentiality.

spending throughout the last year has had a substantial impact by the way of
widening fiscal deficits, the fiscal deficit for FY10 stood at 6.9% of GDP. It is
expected that good collections from the 3G and BWA auctions could help the
cause of narrowing the fiscal deficit. As per the eleventh survey of the Professional
forecasters conducted by RBI, the deficit for FY11 is expected to be at 5.6% of
GDP.

Mean probability pattern of real GDP growth forecasts-

Apart from the above discussed macroeconomic policies, structural reforms also do
affect the banking industry significantly, there were a number of key policy
developments in the banking sector during fiscal 2010. In continuation of the
liberalization of the banking sector, in June 2009, banks were allowed to open
offsite ATMs without prior approval from RBI. The branch authorization policy
was also liberalized in December 2009 and banks were allowed to open branches
in Tier III-VI cities without prior RBI approval. In August 2009, RBI also issued
guidelines relating to the issuance and operation of mobile phone based pre-paid
payment instruments. In July 2009, RBI issued a time schedule for the introduction
of advanced approaches of the Basel II framework in India whereby banks are
required to apply to RBI for migration to internal models approach for market risk
band the standardized approach for operational risk earliest by April 1, 2010 and
for advanced measurement approach for operational risk and internal ratings based
approaches for credit risk earliest by April 1, 2012. RBI also initiated several
measures to increase systemic transparency and customer convenience. In April
2010, RBI issued guidelines directing banks to replace the benchmark prime
lending rate system with a base rate system effective July 2010. The guidelines
recommend calculating the base rate taking into consideration cost elements that
can be clearly identified and are common across borrowers. RBI also issued
guidelines revising the method of payment of interest on savings accounts to a
daily average basis effective April 1, 2010. During fiscal 2010, with an
improvement in market conditions, RBI also initiated several measures to maintain
systemic stability. In November 2009, the provisioning requirement for advances
to commercial real estate classified as standard assets was increased from 0.4% to
1.0%. In December 2009, RBI directed banks to achieve a total provisioning
coverage ratio of 70% by September 2010. In February 2010, in its master circular
on capital adequacy, RBI increased the capital requirements relating to
securitization exposures and provided enhanced guidance on valuation adjustments
for illiquid investments and derivatives. The guidelines also increased disclosure
requirements for credit risk mitigations and securitized exposures.

All this measures are a key to the efficient and vibrant functioning of the banking
system. We believe that the banking measures as far as structural policies are
concerned will boost customer transaction cost reductions, give banks a better de-
risking in their business model and increase the efficiency of the system. These
steps are in line with the longer term objective of making Indian banking industry
comply with the highest global standards and thereby improving the demand
supply economics through structural reforms. However there is a need for the
managements to work on different lines like-

PSBs need to fundamentally strengthen institutional skill levels especially in sales


and marketing, service operations, risk management and the overall organizational
performance ethic. The last, i.e., strengthening human capital will be the single
biggest challenge, Old private sector banks also have the need to fundamentally
strengthen skill levels. However, even more imperative is their need to examine
their participation in the Indian banking sector and their ability to remain
independent in the light of the discontinuities in the sector.

New private banks could reach the next level of their growth in the Indian banking
sector by continuing to innovate and develop differentiated business models to
profitably serve segments like the rural/low income and affluent/ HNI segments;
actively adopting acquisitions as a means to grow and reaching the next level of
performance in their service platforms. Attracting, developing and retaining more
leadership capacity would be key to achieving this and would pose the biggest
challenge.

exposures and provided enhanced guidance on valuation adjustments for illiquid


investments and derivatives. The guidelines also increased disclosure requirements
for credit risk mitigations and securitized exposures.

Foreign banks committed to making a play in India will need to adopt alternative
approaches to win the ³race for the customer´ and build a value-creating customer
franchise in advance of regulations potentially opening up post 2009. At the same
time, they should stay in the game for potential acquisition opportunities as and
when they appear in the near term. Maintaining a fundamentally long-term value-
creation mindset will be their greatest challenge.

The policy makers are also required to make coordinated efforts on the following
fronts-
‡

Help shape a superior industry structure in a phased manner through ³managed


consolidation´ and by enabling capital availability. This would create 3-4 global
sized banks controlling 35-45 per cent of the market in India; 6-8 national banks
controlling 20-25 per cent of the market; 4- 6 foreign banks with 15-20 percent
share in the market, and the rest being specialist players (geographical or product/
segment focused).

Focus strongly on ³social development´ by moving away from universal directed


norms to an explicit incentive-driven framework by introducing credit guarantees
and market subsidies to encourage leading public sector, private and foreign
players to leverage technology to innovate and profitably provide banking services
to lower income and rural markets.

‡
Improve corporate governance primarily by increasing board independence and
accountability.
‡
Accelerate the creation of world class supporting infrastructure (e.g., payments,
asset reconstruction companies (ARCs), credit bureaus, back-office utilities) to
help the banking sector focus on core activities.

‡
Enable labour reforms, focusing on enriching human capital, to help public sector
and old
private banks become competitive.
General Demand and supply for credit- The general demand for credit is the most

important parameter that shapes the destiny of any banking system. The banking
credit in India has been steadily growing at a steady pace, registering a CAGR
growth of 20.79% over the last decade. The growth rate in credit was hit from the
Q3FY09 and it declined steadily till Q2FY10. For the last two quarters of FY10,
the growth in credit has been rising again. This is clearly a signal of recovery in
demand. This is also supported by the fact that the IIP numbers are steadily
growing from March-09 and this has boosted the demand for credit. Going
forward, the growth in credit is likely to continue as there is a renewed demand
from corporate sectors. As per the eleventh survey of the Professional forecasters
conducted by RBI, the growth rate in corporate profits in FY11 have been revised
from the earlier 18% and pegged at 20%. This will ensure a healthy demand for
credit and a good year ahead for the banks.

On the supply side, the fundamental force driving the supply of credit is the
savings rate for the economy. India has traditionally been a country exhibiting high
savings to GDP ratio. As per the eleventh survey of the Professional forecasters
conducted by RBI, the savings to GDP ratio for FY11 is estimated at 35.30%. This
could be further boosted, if we get better than expected monsoons this year. Thus
the supply of credit-capital will be robust to meet the rising demand. Although the
high inflation numbers are bound to increase pressure on the interest rates, but the
inflation numbers should cool off with good monsoons this year as the inflation is
more of a supply side problem.

Savings to GDP ratio


Bank Deposit in absolute terms and growth rate-ASSET A
ASSET QUALITY-

The asset qualities of the banks are judged based on the Non-performing asset
portfolio of the banking system as a whole. We look at the average of NPA as a
percentage of net advances over the last ten years to get a sense of the ensuing
trend in the industry. The ratio has been steadily declining over the period under
consideration, especially from FY02. The ratio as at FY10 stands at 0.92, which is
a very healthy one. The risk management focuses for the banking system and strict
monitoring by the apex bank has translated into such a performance. This is clearly
a very good trend as far as the health of the banking system is concerned.

CAPITAL ADEQUACY-

Capital adequacy determines the capacity of the bank in terms of meeting the time
liabilities and other risks such as credit risk, operational risk, etc. In the simplest
formulation, a bank's capital is the "cushion" for potential losses, which protects
the bank's depositors or other lenders. We look at the average of capital adequacy
ratio over the last ten years to get a sense of the ensuing trend in the industry. The
ratio have been rising from 2001-2003, steadied between 2004-2008, for the last
two years it has come down, taking a toll from the Global economic crisis. This has
been well addressed by RBI as they have made the provision coverage to be 70%
from September-2010, which will increase the Teir-II capital and enhance the
capital adequacy ratio.

CAR GRAPH-
COST EFFICIENCY-

The main business of the banks is to take deposits from various sources of savings
and then deploy it to lend to those entities of the society who are in need of funds.
In such a business, the cost at which deposits are obtained really matters. The
cheaper, the better. The current and savings accounts are the least costly funds for
the banking system, hence the ratio of these funds to total deposits would indicate
how cheap the funds intake by the system has been. The ratio has been varying
between 30-40% over the long term. The ratio was on a steady climb from 2003-
2006 but from then onwards, there has been a steady decline. This shows the
overall trend of rising funding costs. The declining share of CASA deposit in total
deposits and the deceleration in their growth may pose a challenge for the banking
sector. This is because as mentioned above, the CASA deposits constitute the
cheapest source of funds for the banking sector. In case of drying up of this source,
alternate sources may be not only difficult but also prove expensive. In the context
of impending revival of economic growth, with commensurate increase in the
credit needs of the economy, the banking industry may require to take initiatives to
attract more CASA deposits.

CASA GRAPH
PROFITABILITY-

Profitability of the banking sector has been on a sound track. The banking sector
has been one of the most profitable sectors in the last ten years. The average
growth rate for the past decade has been at 25% on YoY basis. The financial
reforms from the apex bank, increasing decontrol in the private sector, allowing
FDI in various sectors, increased thrust on infrastructure and a lot other factors has
contributed to such a performance. As shown by the trend line, the sector has been
on a stable growth phase in its life cycle, the other characteristics supporting the
trend are the

Savings to GDP ratio


Bank Deposit in absolute terms and growth rate-ASSET A
ASSET QUALITY-

The asset qualities of the banks are judged based on the Non-performing asset
portfolio of the banking system as a whole. We look at the average of NPA as a
percentage of net advances over the last ten years to get a sense of the ensuing
trend in the industry. The ratio has been steadily declining over the period under
consideration, especially from FY02. The ratio as at FY10 stands at 0.92, which is
a very healthy one. The risk management focuses for the banking system and strict
monitoring by the apex bank has translated into such a performance. This is clearly
a very good trend as far as the health of the banking system is concerned.

CAPITAL ADEQUACY-

Capital adequacy determines the capacity of the bank in terms of meeting the time
liabilities and other risks such as credit risk, operational risk, etc. In the simplest
formulation, a bank's capital is the "cushion" for potential losses, which protects
the bank's depositors or other lenders. We look at the average of capital adequacy
ratio over the last ten years to get a sense of the ensuing trend in the industry. The
ratio have been rising from 2001-2003, steadied between 2004-2008, for the last
two years it has come down, taking a toll from the Global economic crisis. This has
been well addressed by RBI as they have made the provision coverage to be 70%
from September-2010, which will increase the Teir-II capital and enhance the
capital adequacy ratio.

CAR GRAPH-
COST EFFICIENCY-
The main business of the banks is to take deposits from various sources of savings
and then deploy it to lend to those entities of the society who are in need of funds.
In such a business, the cost at which deposits are obtained really matters. The
cheaper, the better. The current and savings accounts are the least costly funds for
the banking system, hence the ratio of these funds to total deposits would indicate
how cheap the funds intake by the system has been. The ratio has been varying
between 30-40% over the long term. The ratio was on a steady climb from 2003-
2006 but from then onwards, there has been a steady decline. This shows the
overall trend of rising funding costs. The declining share of CASA deposit in total
deposits and the deceleration in their growth may pose a challenge for the banking
sector. This is because as mentioned above, the CASA deposits constitute the
cheapest source of funds for the banking sector. In case of drying up of this source,
alternate sources may be not only difficult but also prove expensive. In the context
of impending revival of economic growth, with commensurate increase in the
credit needs of the economy, the banking industry may require to take initiatives to
attract more CASA deposits.

probable signs of increasing competition as the policies are also directed towards
increasing competition (for details see the topic on Competition discussed later in
the report), steady growth in actual profits prior to the financial crisis which halted
the trend. We expect the steady growth phase to continue and the growth for the
sector is expected to come between 25-30% in the next few years. In FY10, the
overall growth in profits for the sector stood at 15%.

SOCIO-ECONOMIC ISSUES-

One of the most important socio economic issues that need to be addressed is that
of financial inclusion. Financial inclusion is the availability of banking services at
an affordable cost to disadvantaged and low-income groups. Unfortunately, In
India, the banking services has been restricted amongst fewer sections of the
society thereby causing a large scale of financial exclusion. Though financial
inclusion initiatives doesn¶t present hugely profitable business for the banking
systems at large however they have a far reaching consequences in shaping up the
future of the economy and its banking system. Some of the possible causes of
financial exclusion are:

Societal factors
‡
Demographic changes causing technological gap: the ageing population has
difficulty in staying
up-to-date with all the new ways of dealing with money
‡
Labor market changes: more flexible meaning less stable incomes
‡
Income inequalities: bring difficulties of access to financial services Supply factors
‡
Risk assessment procedures: More and more tight risk assessment procedures
create financial
exclusion
‡
Marketing methods: they can be unclear and lead potential clients to abandon the
request or to
mistrust financial institutions and look for other alternatives
‡
Geographical access: location of financial services providers are too far away from
potential
clients
‡
Product design: the terms and conditions are not clear and target public is not
defined.
‡
Service delivery: the financial service is delivered by inadequate means for the
target public,
e.g. Internet for older people
‡
Complexity of choice: can be an education issue, too many products proposed,
target public has
trouble to choose.
Demand factors
‡
Belief that bank accounts are not for poor people or low self esteem
‡
Concern about costs: potential clients fear costs might be too high or lack
information
‡
Fear of loss of financial control: bank account feels intangible compared to cold
cash, also some
means are seen as ³unsure´ i.e. Internet hacking
‡
Mistrust of providers: fear of bankruptcy or lack of confidence with financial
institutions.
Clearly these problems need to be addressed to make financial inclusion a reality.
The
consequences of financial exclusion are-
Two main dimensions of financial exclusion consequences under the umbrella of
socioeconomic
consequences on affected people can be determined.

First, financial exclusion can generate financial consequences by affecting directly


or indirectly the way in which the individuals can raise, allocate, and use their
monetary resources. Secondly, social consequences can be generated by financial
exclusion.

We look at the consequences in the context of Banking. Credit, Savings and asset
building.
BANKING-
Financial consequences

People with no bank account at all face difficulties dealing with cheques made out
in their name by a third party. Often they have to pay to have the cheque cashed.
Lacking a transaction bank account with payment facilities can make payment of
bills. Moreover, the cost of banking services bought separately is generally higher
than those accessed within a stable relationship with the bank. Consequently,
occasional payments of utility bills, payment of taxes, bank transfers to third
persons, cashing cheques and money orders at the banking counter are more
expensive for those

who are not customers of the bank. Therefore there are relevant negative economic
consequences of dealing occasionally with banks, not only of using alternative
commercial profit-oriented financial services providers.

Many utility companies offer discounted rates for people paying their bills
electronically each month, People lacking a payment card (debit or credit card) are
also unable to take advantage of the lower prices of goods and services bought in
this way. It is also difficult to take employment in countries where payment of
wages is by electronic transfer into a bank account.

Social consequences
Not having access or not knowing how to use properly bank services can,
depending on history, status and life experience of people facing it, have an impact
on self-esteem and lead to (self)- isolation and depravation of social connections
and social relationships with friends or family. In some places, having to pay in
cash generates the feeling that the money is not clean or has been stolen. People
concerned by this situation can feel humiliated by it and lose their self-esteem.

CREDIT-
Financial consequences

People unable to get credit from banks or other mainstream financial providers
often have to use intermediaries or sub-prime lenders where the charges are higher
and the terms and conditions may be inferior. Customers can fall into greater
financial difficulties and over-indebtedness as a result of terms and conditions
applied to some sub-prime products.

Social consequences

Evidently, the most negative consequences are experienced by those lending from
illegal financial service providers. One of the major risks associated with
borrowing from illegal lenders arises when borrowers find themselves in financial
difficulties with lenders likely to use violence and intimidation.

SAVINGS AND ASSET BUILDING-


Financial & social consequences

Without savings, people have no means of coping with even small financial shocks
or unexpected expenses and those who keep savings in cash do not benefit from
interest payments and are also vulnerable to theft.

Thus Financial inclusion is as much a financial as social agenda. It is an absolute


necessity in the context of inclusive growth, increased per capita GDP, efficient
capital allocation and overall a much improved society.

With a view to increase banking penetration and promoting financial inclusion,


domestic commercial banks, both in the public and private sectors, were advised
by RBI to take some specific actions. First, banks were required to put in place a
Board-approved Financial Inclusion Plan (FIP) in order to roll them out over the
next three years and submit the same to the Reserve Bank by March 2010. Banks
were advised to devise FIPs congruent with their business strategy and to make it
an integral part of their corporate plans. The Reserve Bank has deliberately not
imposed a uniform model so that each bank is able to build its own strategy in line
with its business model and comparative advantage. Second, banks were required
to include criteria on financial inclusion in the performance evaluation of their
field staff. Third, banks were advised to draw up a roadmap by March 2010 to
provide banking services in every village having a population of over 2,000. The
Reserve Bank will discuss FIPs with individual banks and monitor their
implementation.

These are the first round of steps taken by RBI and these steps would get more
thrust once the
banks enter into the implementation phase of the FIP

As is true for every growth sector, the huge potentiality in the banking space has been attracting newer players to foray into the
space. The reformative actions are also causing competition to rise. In December 2009, RBI allowed domestic scheduled
commercial banks (other than regional rural banks) to open branches in Tier-III to Tier-VI centres (with population up to 49,999)
without prior permission. The impact acme in the form of Banks planning to open almost double the number of branches this
year, compared to last year.

Punjab National Bank plans to open close to 550 branches. It does not require a license for about 440, as they are in areas with a
population of less than 50,000, according to Chairman and Managing Director KR Kamath. Similarly, UCO Bank plans to open
140 branches this year, but needs licences for only 89. The bank was hoping this would raise its market share to at least 3 per cent
from the existing 2.6 per cent, as per Chairman and Managing Director SK Goel.

The country¶s largest lender, State Bank of India (SBI), spent about Rs 100 crore to open 286 branches and 2,521 automated
teller machines in the fourth quarter of the last financial year. IDBI Bank was planning to open about 300 branches this year,
"substantially" higher than what it had done over the past few years, said an executive.

Clearly, a liberalised policy has led banks to opt for branch expansion in a bid to gain market share.

Another important development came from the last Union Budget where the Finance Minister, in his budget speech on February
26, 2010 announced that the Reserve Bank was considering giving some additional banking licenses to private sector players.
NBFCs could also be considered, if they meet the Reserve Bank¶s eligibility criteria. In line with the above announcement, it was
proposed by RBI in its annual policy 2010-11 to prepare a discussion paper marshalling the international practices, the Indian
experience as also the extant ownership and governance (O&G) guidelines and place it on the Reserve Bank¶s website by end-
July 2010 for wider comments and feedback. Thereafter, detailed discussions will be held with all stakeholders on the discussion
paper and guidelines will be finalized based on the feedback. All applications received in this regard would be referred to an
external expert group for examination and recommendations to the Reserve Bank for granting licenses.

All this measures are driving the competition higher and going forward, margin sustainability will be a direct function of greater
penetration, excellent customer services, and sound strategy combined with leadership. NSSO data reveal that 45.9 million
farmer households in the country (51.4%), out of a total of 89.3 million households do not access credit, either from institutional
or noninstitutional sources. Further, despite the vast network of bank branches, only 27% of total farm households are indebted to
formal sources (of which one-third also borrow from informal sources). Farm households not accessing credit from formal
sources as a proportion to total farm households is especially high at 95.91%, 81.26% and 77.59% in the North Eastern, Eastern
and Central Regions respectively. The present situation depicts that the industry is clearly going to grow in the years to come at a
very fast pace but amidst increasing competition.

As is true for every growth sector, the huge potentiality in the banking space has been attracting newer players to foray into the
space. The reformative actions are also causing competition to rise. In December 2009, RBI allowed domestic scheduled
commercial banks (other than regional rural banks) to open branches in Tier-III to Tier-VI centres (with population up to 49,999)
without prior permission. The impact acme in the form of Banks planning to open almost double the number of branches this
year, compared to last year.

Punjab National Bank plans to open close to 550 branches. It does not require a license for about 440, as they are in areas with a
population of less than 50,000, according to Chairman and Managing Director KR Kamath. Similarly, UCO Bank plans to open
140 branches this year, but needs licences for only 89. The bank was hoping this would raise its market share to at least 3 per cent
from the existing 2.6 per cent, as per Chairman and Managing Director SK Goel.

The country¶s largest lender, State Bank of India (SBI), spent about Rs 100 crore to open 286 branches and 2,521 automated
teller machines in the fourth quarter of the last financial year. IDBI Bank was planning to open about 300 branches this year,
"substantially" higher than what it had done over the past few years, said an executive.

Clearly, a liberalised policy has led banks to opt for branch expansion in a bid to gain market share.

Another important development came from the last Union Budget where the Finance Minister, in his budget speech on February
26, 2010 announced that the Reserve Bank was considering giving some additional banking licenses to private sector players.
NBFCs could also be considered, if they meet the Reserve Bank¶s eligibility criteria. In line with the above announcement, it was
proposed by RBI in its annual policy 2010-11 to prepare a discussion paper marshalling the international practices, the Indian
experience as also the extant ownership and governance (O&G) guidelines and place it on the Reserve Bank¶s website by end-
July 2010 for wider comments and feedback. Thereafter, detailed discussions will be held with all stakeholders on the discussion
paper and guidelines will be finalized based on the feedback. All applications received in this regard would be referred to an
external expert group for examination and recommendations to the Reserve Bank for granting licenses.

All this measures are driving the competition higher and going forward, margin sustainability will be a direct function of greater
penetration, excellent customer services, and sound strategy combined with leadership. NSSO data reveal that 45.9 million
farmer households in the country (51.4%), out of a total of 89.3 million households do not access credit, either from institutional
or noninstitutional sources. Further, despite the vast network of bank branches, only 27% of total farm households are indebted to
formal sources (of which one-third also borrow from informal sources). Farm households not accessing credit from formal
sources as a proportion to total farm households is especially high at 95.91%, 81.26% and 77.59% in the North Eastern, Eastern
and Central Regions respectively. The present situation depicts that the industry is clearly going to grow in the years to come at a
very fast pace but amidst increasing competition.

CONCLUSION-

The banking sector of the Indian economy has been one of the brightest sectors. The sector has gone through a lot of reforms and
has changed both in its structure and function over the years. The RBI has been instrumental in shaping the destiny for the sector.
It has now positioned itself to grow steadily in the next decade. The penetration of the banking system has been low so far,
however the Government and RBI are focused towards an inclusive growth which will not only make the banking system grow
steadily but also will prove vital to make India a global driver in Growth in the next decade. For the short term, the challenges for
the sector are, increasing sales and marketing efforts to grow business per branch, increase the CASA base to become cost
efficient, reduce NPA¶s. In the longer term, the goals are to improve on corporate governance, increase financial inclusion and
improving the banking infrastructure.