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Name Roll No
Santosh Gore 25
Shailesh Kamble 36
Salil Mulgund 59
Nutan Sasonkar 89
Trupti Satam 90
Table of Contents

Sr No Topic

1 Indian Banking: A Promising Future

2 Progress of Banks in India: At A Glance

3 Opportunities Ahead

4 Banking Sector & Social Development

5 Global Banking: 20 Years View


By Mr. M V Nair, Chairman & Managing Director, Union Bank of India

In India there is a well diversified financial system which is dominated by

banking industry. Commercial Banks are the dominant players in this space.
As of December 2009, there were 169 ‘scheduled commercial banks’ (SCBs)
in the country, with a network of 82,511 branches. This includes 27 public
sector banks, 31 private sector banks and 34 foreign banks operating
through branch route. 45 foreign banks are also operating in India through
representative offices. Deposit of SCBs as of March 26, 2010 was
Rs.4492825 crores while Bank Credit stood at Rs.3244788 crores.

It is interesting to note that when financial crisis hit the developed in the USA
world in 2008 and the shock waves spread to most other countries, Indian
banking system could withstand the shocks and remain stable. Indian banks
have remained resilient even during the height of the subprime crisis and the
consequent financial turmoil. The financial reforms process undertaken since

1991 has made the banking sector healthy, sound, well capitalized
and competitive.

The counter-cyclical macro prudential regulations have been in place even

before the crisis started, like risk weights, exposure & provisioning norms.
However, the global financial crisis was a testing time for the banking sector
in India. The direct effect of the crisis on Indian banks was almost negligible
because of limited exposure to complex derivatives. The fundamental
characteristics of Indian economy and also banking sector in India helped in
weathering the severe impact of world crisis.

The government and Reserve Bank have been taking counter-cyclical

measures even prior to the crisis, which proved beneficial. The government
announced the farm loan waiver in its budget of February 2008 and
implemented sixth pay commission award for central government employees
before crisis hit India. Also, its flagship schemes like Mahatma Gandhi
National Rural Employment Guarantee Scheme (MNREGS) and Jawaharlal
Nehru Urban Renewal Mission (JNNURM), which were started much prior to
the onset of crisis, helped generate demand during the period of crisis.
Besides, several fiscal measures were taken during the crisis to ameliorate
the demand deficiency. These measures, which formed around 3.3% & 3.9%
of GDP in 2008-08 and 2009-10 respectively, included cut in taxes, increased
public expenditure on subsidies and sector-specific stimulus measures.
Similarly, RBI, besides being ahead of curve in taking counter-cyclic
measures, also announced monetary steps for ensuring the availability of
credit to needy sectors at affordable rates in a comfortable liquidity
environment. Thus, pre-crisis counter-cyclical measures and co-ordinated
steps by the fiscal and monetary authorities during the period of crisis
helped India withstood the global crisis.

Progress of Banks in India: At A Glance

The total assets size of Indian banking industry has increased more than five
folds between March 2000 and March 2010, from US $ 250 billion to more
than $ 1.3 trillion, registering a CAGR growth of 18% compared to average
GDP growth of 7.2% during the same period. Consequently, the ratio of
commercial banking assets to GDP increased to nearly 100 per cent. The
business of banks to GDP ratio has almost doubled – from 68% to 135%. The
growth has been profitable with improvement in efficiency and productivity.

The return on assets of scheduled commercial banks (SCBs) was 0.6% in

2000-01 and increased to 1.1% by 2009-10. Gross non-performing assets to
gross advances declined to 2.5% from 11.4%, reflecting improved asset
quality. The capital strength, as measured by the capital adequacy ratio, has
also improved from 11.4% in 2000-01 to 14.6% in 2009-10. Banks have
added more than 14000 branches and 41000 ATMs to their network in the
last decade, besides broadening the scope of delivery channels to internet
banking, mobile banking and call centre. Banks have rolled out technology to
the advantage of the customers. The growth of Indian banks in the last
decade was much higher than its preceding decade and there is no doubt
that the present decade would offer even more exciting opportunities.

Opportunities Ahead

The Indian Banking story is still unfolding along with India’s growth story.
Economic growth of India is likely to average at double-digit for the current
decade. The factors supporting this growth would also be the catalysts for
the banking sector – be it retail, corporate or rural banking. The biggest
advantage for Retail Banking will be India’s demographic profile with a
declining dependency ratio. There is a sizeable growth in urban middle class
and expected to continue at an accelerated pace in this decade. Around 70-
75 million new middle income household may emerge by 2020. A McKinsey
study reports that by 2017, the average consumption in rural India will equal
that of urban India in 2005. Consequently, India’s labor force will grow at a
higher rate than population growth and hence the ratio of working age
population to total population will be on the upswing. The population will be
more urban, rich and educated. This will lead to increased flow of savings to
the banking system and a demand for retail and personal banking services
like housing loans, wealth management, insurance, asset management etc.
According to estimates put forth by Boston Consulting Group (BCG), India’s
mortgage loan and wealth management business will grow 10 times from
now till 2020.

Micro, small and medium enterprises (MSME) have played a very significant
role in India achieving its current robust overall economic growth. These
enterprises are future of any economy. SMEs also enhance inclusive growth
by the manner in which they evolve, leverage local resources and innovate
to create products and services. This sector accounts for 45 per cent of the
manufactured output, 8 per cent of the GDP, 40 per cent of all exports from
the country and employs nearly 65.9 million people which is next only to the
agriculture sector. The opportunity for banks lie in the fact that only 4-5% of
MSMEs are covered by institutional funding given that approximately 95% of
villages are not covered by banks.

Another significant opportunity for Indian banks is to partake in the

infrastructure investment. About US $ 1 trillion of investment in social and
economic infrastructure is estimated in the country over next 5-7 years. In
today’s scenario, 50% of funding to infrastructure sector is through banks.

There is yet another opportunity in largely unexplored but bankable

population of India. The report of National Sample Survey Organization of
India revealed that more than half of farmer households in the country do
not have access to credit, either from institutional or non-institutional
sources. Only 27% of total farm households are indebted to formal sources.
Out of the 6,00,000 habitations in the country, only 30,000 have a
commercial bank branch. This requires deepening of banking markets.
Financial inclusion is a crucial driver for such growth. Thus, banks will have
new class of customers to serve over the next decade.

The coordinated efforts between the various entities viz RBI & Ministry of
finance are required to enable positive action. This will spur on the
performance of the sector. The policy makers need to make coordinated
efforts on six fronts:

1. Help shape a superior industry structure in a phased manner through

“managed 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 per cent share in the market, and
the rest being specialist players (geographical or product/ segment

2. Focus strongly on “social 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.

3. Create a unified regulator, distinct from the central bank of the

country, in a phased manner to overcome supervisory difficulties and
reduce compliance costs.

4. Improve corporate governance primarily by increasing board

independence and accountability.

5. 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.

6. Enable labor reforms, focusing on enriching human capital, to help

public sector and old private banks become competitive.

Today, we are having a fairly well developed banking system with different
classes of banks – public sector banks, foreign banks, private sector banks –
both old and new generation, regional rural banks and co-operative banks
with the Reserve Bank of India as the fountain Head of the system.
In the banking field, there has been an unprecedented growth and
diversification of banking industry has been so stupendous that it has no
parallel in the annals of banking anywhere in the world.

During the last 41 years since 1969, tremendous changes have taken place
in the banking industry. The banks have shed their traditional functions and
have been innovating, improving and coming out with new types of the
services to cater to the emerging needs of their customers.

Massive branch expansion in the rural and underdeveloped areas,

mobilization of savings and diversification of credit facilities to the either to
neglected areas like small scale industrial sector, agricultural and other
preferred areas like export sector etc. have resulted in the widening and
deepening of the financial infrastructure and transferred the fundamental
character of class banking into mass banking.

There has been considerable innovation and diversification in the business of

major commercial banks. Some of them have engaged in the areas of
consumer credit, credit cards, merchant banking, leasing, mutual funds etc.
A few banks have already set up subsidiaries for merchant banking, leasing
and mutual funds and many more are in the process of doing so. Some
banks have commenced factoring business.

The major challenges faced by banks today are as to how to cope with
competitive forces and strengthen their balance sheet. Today, banks are
groaning with burden of NPA’s. It is rightly felt that these contaminated
debts, if not recovered, will eat into the very vitals of the banks. Another
major anxiety before the banking industry is the high transaction cost of
carrying Non Performing Assets in their books. The resolution of the NPA
problem requires greater accountability on the part of the corporate, greater
disclosure in the case of defaults, an efficient credit information sharing
system and an appropriate legal framework pertaining to the banking system
so that court procedures can be streamlined and actual recoveries made
within an acceptable time frame. The banking industry cannot afford to
sustain itself with such high levels of NPA’s thus, “lend, but lent for a purpose
and with a purpose ought to be the slogan for salvation.”

The Indian banks are subject to tremendous pressures to perform as

otherwise their very survival would be at stake. Information technology (IT)
plays an important role in the banking sector as it would not only ensure
smooth passage of interrelated transactions over the electric medium but
will also facilitate complex financial product innovation and product
development. The application of IT and e-banking is becoming the order of
the day with the banking system heading towards virtual banking.

As an extreme case of e-banking World Wide Banking (WWB) on the pattern

of World Wide Web (WWW) can be visualized. That means all banks would be
interlinked and individual bank identity, as far as the customer is concerned,
does not exist. There is no need to have large number of physical bank
branches, extension counters. There is no need of person-to-person physical
interaction or dealings. Customers would be able to do all their banking
operations sitting in their offices or homes and operating through internet.
This would be the case of banking reaching the customers.

Banking landscape is changing very fast. Many new players with different
muscle powers will enter the market. The Reserve Bank in its bid to move
towards the best international banking practices will further sharpen the
prudential norms and strengthen its supervisor mechanism. There will be
more transparency and disclosures.

In the days to come, banks are expected to play a very useful role in the
economic development and the emerging market will provide ample
business opportunities to harness. Human Resources Management is
assuming to be of greater importance. As banking in India will become more
and more knowledge supported, human capital will emerge as the finest
assets of the banking system. Ultimately banking is people and not just

While different banks have shifted from international banking strategy

towards global banking strategies at different paces, the overall trend was
already evident by at least the mid-1980s. Cross borders business, in a
particular lending to developing countries funded with euro currency
deposits, had propelled the expansion of banks foreign assets during the
1960s and 1970s. By contrast, during the 1980s and 1990s, locally funded
business tended to expand more rapidly than cross borders positions. Data
covering banks incorporated in United States illustrate the growth of foreign
banks locally funded business. Whereas US banks cross borders claims
increased by 55%(percent) to $548 bn between 1982 and 2001, there local
claims rose yearly 400% to $385 bn, reaching a ratio of 0.7.Although it
spears that cross borders claim significantly outgrew local claims in 1997,this
reflects a series brake that year from the inclusion of derivative position.
Since this brake, the ratio has narrowed the more broadly measured local
claims have continued to grow faster than the cross border claims.

Globalization by Nationality of Banks:

The growth of locally funded business has by no means been confined to US

banks. Banks incorporated in other countries have expanded their local
presence in foreign banking markets as quickly as US banks, if not faster.
The expansion of non-US banks is less well documented, however.

The newly complied data show that the US banking system has not become
extraordinarily global when juxtaposed with its international peers indeed a
handful of banking system are more global than that of the united states.
The most recent consolidated banking statistics indicate that Canadian
banks have a ratio of local claims in local currencies to international claims
of 1.2. To a large extent, this reflects the large funding base of their branch
and subsidiary operations in the United States. So it might be said that
Canadian banks are as much regionalized as globalize. Spanish banks are
also very global, funding much of their foreign claims locally, particularly in
Latin America. The UK, Swiz, and Irish banks local claims are nearly
equivalent to their international claims. The UK-headquarter banks are well
represented in local markets not only in the western hemisphere but also in
East Asia.
Globalization of the banking industry

Turning from the banks behind the expansion of locally funded claims to the
markets into which they have expanded, the balance between international
and global banking varies across different regions. Bank of international
settlement (BIS) reporting banks local claims on Latin American countries
rose sharply in the late 1990s and are now as large as international claims.
In the Asia-Pacific region local claims are quickly approaching the level of
international claims, and in North America the gap is not very wide. Local
claims are half as large as international claims on countries in Eastern
Europe, the Middle East and America, but are rising rapidly. Only reporting
banks claims on Western Europe still predominantly take the form of cross
border claims.

Explaining the Shift:

The shift from international from global banking reflect changes both in
banks strategies and in the constraints they face. An interesting question is
why international banking seem to have yielded so little to global banking in
the European market.

Bank Strategies:

Over the last generation, many banks altered their business strategies. The
new strategies have trended to lead to a balanced increase in local asset and
liabilities. While international department major banks spend much on
renegotiating the loan made in 1980s’ bankers who have made their name-
developing consumer and securities business rose to leadership positions.
And emphasis on consumer banking means trying to turn depositor into
credit cards users and mortgage customer and vice-versa. This naturally
tends to lead to balanced growth of asset and liabilities in foreign market.
Similarly, the development of securities business within the country ten to
lead a balance of asset and liabilities, for instant government bonds financed
with repurchase transaction.

Similarly, banks strategic shift from holding to originating and selling

international claims has standard to reduce their cross border footing the
renegotiation of the 1980s’ ended up creating new asset class for institution
investors.. Originally Brady bonds and then more generally emerging market
bonds issued by government and companies. While international banks as
holders as well as underwriter such obligations, the widening of the investors
base to include institutional investor has substituted for cross border banks
loans to some extent.

Specific lesson drawn from the experiences of the debt cases of the 1980s’
also led banks to favor global over international banking, particular in riskier
markets. In the early 1980s’ foreign exchange crises lead governments to
impose payment moratoriums on cross border loans locally funded assets,
while subject to credit risk at such time, did not involve of foreign exchange
drain and so were not necessaries affect by payment moratoriums.

Bank have pursued their altered strategies by de novo entry into new market
by organic expansion of existing operations and through cross border
acquisition. In acquiring banks across borders, they have being part of larger
wave of cross border mergers and acquisitions. Cross border mergers and
acquisition reached a record level of eight percent of world GDP in the let

While in the part, have elected to follow their customers explores in order to
have a balance sheet of sufficient size to serve their peak needs, bank
expansions has also drawn on the same conviction that relatively large
global players will dominate each business.

Altered Constraints:

Circumstances as well as strategies lay behind the shift to global banking.

Among the most important factor determining the pace of foreign banks
expansion into local financial system is financial sector liberalization. Over
the past two decades, many countries have moved from relatively closed
and administrated financial system to more open ones. This has typically
included the relaxation of restrictions on foreign ownership of local banks.
For e.g.: – In Canada restrictions on foreign branch banking on the market
share of foreign subsidiaries effectively led foreign banks to serves
customers from outside the country rather than through local affiliates.

Liberalization has at times been precipitated by financial crisis. Bank with

global ambitions have found it attractive to buy local banks put up for sale
following crisis related nationalizations owing to loan losses. In addition after,
the weakness of local banks after a crisis offer competitive opportunities of
multinational banks to expand their extent operations. In countries with state
dominated financial system, liberalization and the aftermath of crisis were
often accompanied by privatization, in which foreign banks could participate.

Another factor working to domesticate foreign banks operation is the decline

of unremunerated reserve requirements as a part of monitory control.
For.e.g: – A foreign bank landing to a US corporation and funding the loan
offshore could previously avoid the federal reserves requirement. In 1990,
however the fed lowered this reserve requirement to 0% (zero percent),
removing much of the incentive to book loans offshore
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