BANKING LAW

AND PRACTICE

PREPARED BY
Shanthosh.S
19bco048
content synopsis

1 INTRODUCTION

2 BANKING IN INDIA

BUSINESS PERFORMANCE OF
3 BANKS IN INDIA

PERFORMANCE OF PUBLIC VS
4 PRIVATE SECTOR BANKS IN INDIA

5 CONCLUSIONS

6 REFERENCES
 PAGE 03

INTRODUCTION
As per the Reserve Bank of India (RBI), India’s banking sector is sufficiently capitalised and well-
regulated. The financial and economic conditions in the country are far superior to any other country
in the world. Credit, market and liquidity risk studies suggest that Indian banks are generally resilient
and have withstood the global downturn well.
Indian banking industry has recently witnessed the roll out of innovative banking models like payments
and small finance banks. RBI’s new measures may go a long way in helping the restructuring of the
domestic banking industry.
The digital payments system in India has evolved the most among 25 countries with India’s Immediate Payment
Service (IMPS) being the only system at level five in the Faster Payments Innovation Index (FPII). *

Market Size
The Indian banking system consists of 12 public sector banks, 22 private sector banks, 46 foreign
banks, 56 regional rural banks, 1485 urban cooperative banks and 96,000 rural cooperative banks in
addition to cooperative credit institutions As of November 2020, the total number of ATMs in India
increased to 209,282.
Asset of public sector banks stood at Rs. 107.83 lakh crore (US$ 1.52 trillion) in FY20.
During FY16-FY20, bank credit grew at a CAGR of 3.57%. As of FY20, total credit extended surged to
US$ 1,698.97 billion. During FY16-FY20, deposits grew at a CAGR of 13.93% and reached US$ 1.93
trillion by FY20.
According to the RBI, bank credit stood at Rs. 108.41 trillion (US$ 1.45 trillion) and bank deposits stood
at Rs. 152.98 trillion (US$ 2.05 trillion), as of June 25, 2021.
Credit to non-food industries stood at Rs. 107.54 trillion (US$ 1.47 trillion), as of June 25, 2021.

Government Initiatives
As per Union Budget 2021-22, the government will disinvest IDBI Bank and privatise two public
sector banks.
As per Union Budget 2019-20, the Government proposed fully automated GST refund module and
an electronic invoice system that will eliminate the need for a separate e-way bill.
Government smoothly carried out consolidation, reducing the number of Public Sector Banks by
eight.
As of September 2018, the Government of India made Pradhan Mantri Jan Dhan Yojana (PMJDY)
scheme an open-ended scheme and added more incentives.
The Government of India planned to inject Rs. 42,000 crore (US$ 5.99 billion) in public sector
banks by March.

Achievements
Following are the achievements of the Government:
In May 2021, Unified Payments Interface (UPI) recorded 2.80 billion transactions worth Rs. 5.57
lakh crore (US$ 73.44 billion).
According to the RBI, India’s foreign exchange reserves reached US$ 582.41 billion, as of April 16,
2021
To improve infrastructure in villages, 204,000 point of sale (PoS) terminals have been sanctioned
from the Financial Inclusion Fund by National Bank for Agriculture & Rural Development (NABARD).
The number of transactions through immediate payment service (IMPS) reached 303.76 million (by
volume) and amounted to Rs. 2.84 trillion (US$ 38.07 billion) in June 2021.
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Investments/Developments

Key investments and developments in India’s banking industry include:

In July 2021, Google Pay for Business has enabled small merchants to access credit through tie-up
with the digital lending platform for MSMEs—FlexiLoans.
In December 2020, in response to the RBI’s cautionary message, the Digital Lenders’ Association
issued a revised code of conduct for digital lending.
As of June 23, 2021, the number of bank accounts—opened under the government’s flagship
financial inclusion drive ‘Pradhan Mantri Jan Dhan Yojana (PMJDY)’—reached 42.55 crore and
deposits in Jan Dhan bank accounts totalled >Rs. 1.44 lakh crore (US$ 19.31 billion).
On November 6, 2020, WhatsApp started UPI payments service in India on receiving the National
Payments Corporation of India (NPCI) approval to ‘Go Live’ on UPI in a graded manner.
In October 2020, HDFC Bank and Apollo Hospitals partnered to launch the ‘HealthyLife
Programme’, a holistic healthcare solution that makes healthy living accessible and affordable on
Apollo’s digital platform.
In 2019, banking and financial services witnessed 32 M&A (merger and acquisition) activities worth
US$ 1.72 billion.
In March 2020, State Bank of India (SBI), India’s largest lender, raised US$ 100 million in green
bonds through private placement.
In February 2020, the Cabinet Committee on Economic Affairs gave its approval for continuation of
the process of recapitalization of Regional Rural Banks (RRBs) by providing minimum regulatory
capital to RRBs for another year beyond 2019-20 - till 2020-21 to those RRBs which are unable to
maintain minimum Capital to Risk weighted Assets Ratio (CRAR) of 9% as per the regulatory norms
prescribed by RBI.
The NPAs (Non-Performing Assets) of commercial banks recorded a recovery of Rs. 400,000 crore
(US$ 57.23 billion) in the last four years including record recovery of Rs. 156,746 crore (US$ 22.42
billion) in FY19.

Road Ahead

Enhanced spending on infrastructure, speedy implementation of projects and continuation of reforms

are expected to provide further impetus to growth in the banking sector. All these factors suggest that
India’s banking sector is poised for a robust growth as rapidly growing businesses will turn to banks
for their credit needs.
Also, the advancement in technology has brought mobile and internet banking services to the fore.
The banking sector is laying greater emphasis on providing improved services to their clients and
upgrading their technology infrastructure to enhance customer’s overall experience as well as give
banks a competitive edge.
India’s digital lending stood at US$ 75 billion in FY18 and is estimated to reach US$ 1 trillion by FY23
driven by the five-fold increase in the digital disbursements.
 PAGE 05

BANKING IN INDIA

BACKGROUND

The banking sector is the lifeline of any modern economy. It is one of the important financial pillars of
the financial sector, which plays a vital role in the functioning of an economy. It is very important for
economic development of a country that its financing requirements of trade, industry and agriculture
are met with higher degree of commitment and responsibility. Thus, the development of a country is
integrally linked with the development of banking. In a modern economy, banks are to be considered
not as dealers in money but as the leaders of development. They play an important role in the
mobilization of deposits and disbursement of credit to various sectors of the economy. The banking
system reflects the economic health of the country. The strength of an economy depends on the
strength and efficiency of the financial system, which in turn depends on a sound and solvent banking
system. A sound banking system efficiently mobilized savings in productive sectors and a solvent
banking system ensures that the bank is capable of meeting its obligation to the depositors.

In India, banks are playing a crucial role in socio-economic progress of the country after independence.
The banking sector is dominant in India as it accounts for more than half the assets of the financial
sector. Indian banks have been going through a fascinating phase through rapid changes brought
about by financial sector reforms, which are being implemented in a phased manner.

The current process of transformation should be viewed as an opportunity to convert Indian banking
into a sound, strong and vibrant system capable of playing its role efficiently and effectively on their
own without imposing any burden on government. After the liberalization of the Indian economy, the
Government has announced a number of reform measures on the basis of the recommendation of the
Narasimhan Committee to make the banking sector economically viable and competitively strong.

The current global crisis that hit every country raised various issue regarding efficiency and solvency of
banking system in front of policy makers. Now, crisis has been almost over, Government of India (GOI)
and Reserve Bank of India (RBI) are trying to draw some lessons. RBI is making necessary changes in his
policy to ensure price stability in the economy. The main objective of these changes is to increase the
efficiency of banking system as a whole as well as of individual institutions. So, it is necessary to
measure the efficiency of Indian Banks so that corrective steps can be taken to improve the health of
banking system.
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Business performance of banks in india

The Indian banking system consists of 12 public sector banks, 22 private sector
banks, 44 foreign banks, 43 regional rural banks, 1,484 urban cooperative banks
and 96,000 rural cooperative banks in addition to cooperative credit institutions.
As of March 2021, the total number of ATMs in India increased to 213,575.
According to the RBI, India’s foreign exchange reserves reached US$ 582.41
billion, as of April 16, 2021. According to the RBI, bank credit and deposits stood
at Rs. 108.34 trillion (US$ 1.48 trillion) and Rs. 151.67 trillion (US$ 2.08 trillion),
respectively, as of June 04, 2021.
Credit to non-food industries stood at Rs. 108.02 trillion (US$ 1.47 trillion), as of
June 04, 2021.
Asset of public sector banks stood at Rs. 107.83 lakh crore (US$ 1.52 trillion) in
FY20.
Total assets across the banking sector (including public, private sector and
foreign banks) increased to US$ 2.52 trillion in FY20.
Indian banks are increasingly focusing on adopting integrated approach to risk
management. The NPAs (Non-Performing Assets) of commercial banks has
recorded a recovery of Rs. 400,000 crore (US$ 57.23 billion) in FY19, which is
highest in the last four years.
RBI has decided to set up Public Credit Registry (PCR), an extensive database of
credit information, accessible to all stakeholders. The Insolvency and Bankruptcy
Code (Amendment) Ordinance, 2017 Bill has been passed and is expected to
strengthen the banking sector. Total equity funding of microfinance sector grew
42% y-o-y to Rs. 14,206 crore (US$ 2.03 billion) in 2018-19.
As of June 2, 2021, the number of bank accounts opened under the
government’s flagship financial inclusion drive ‘Pradhan Mantri Jan Dhan Yojana
(PMJDY)’ reached 42.44 crore and deposits in Jan Dhan bank accounts totalled
>Rs. 1.45 lakh crore (US$ 19.81 billion).
Rising income is expected to enhance the need for banking services in rural
areas, and therefore, drive the growth of the sector.
The digital payments revolution will trigger massive changes in the way credit is
disbursed in India. Debit cards have radically replaced credit cards as the
preferred payment mode in India after demonetisation. In May 2021, Unified
Payments Interface (UPI) recorded 2.54 billion transactions worth Rs. 4.91 lakh
crore (US$ 67.32 billion)
 PAGE 08

PUBLIC SECTOR BANKS

Performance of Private Banks in India

These are the nationalised banks and account for more than 75 per cent of the total banking
business in the country. Majority of stakes in these banks are held by the government. In
terms of volume, SBI is the largest public sector bank in India and after its merger with its 5
associate banks (as on 1st April 2017) it has got a position among the top 50 banks of the
world.

There are a total of 12 nationalised banks in the country

Public sector banks have been merged by the government in the last few years. This is the
rationale behind conducting this study. The purpose of this article is to determine the factors
affecting the performance of public sector banks in India and the interrelationship between
bank-specific determinants and performance of public sector banks. In this article, we shall
analyse the financial data of all the public sector commercial banks for a period spread
across 11 years (2009–2019); Capital adequacy, Assets quality, Management efficiency,
Earning, and Liquidity (CAMEL) has been used as a performance determinant; system
generalised method of moments (GMM) analysis has been used to find the effect of
determinants on the performance measurement of public sector banks; and CCA (canonical
correlation analysis) has been used to find the interrelationship between the bank-specific
determinants and the performance of public sector banks.

The finding has important implications in terms of performance in the banking sector.
Certain limitations of this study are: It is based on secondary data. The study only covers the
financial aspects and not the non-financial aspects. It is found that the asset quality is
negatively related with performance of public sector banks. Liquidity and inflation are
inversely related to performance of public sector banks in India. Capital adequacy is
positively related with banks’ performance, but inversely related with banks’ interest margin.
GDP growth has a significant positive impact on banks’ performance, but inversely related
with banks’ interest income. Inflation rate is inversely related with banks’ performance.
Banking sector reforms are insignificantly related with banks’ performance.
 PAGE 09

PRIVATE SECTOR BANKS

Performance of Private Banks in India

These include banks in which major stake or equity is held by private shareholders. All the banking rules
and regulations laid down by the RBI will be applicable on private sector banks as well. Given below is
the list of private-sector banks in India-

The internal based performance is studied by ROA as it is known as profitability or productivity ratio.
ROA can provide banks with a valuable tool to measure their progress against predetermined internal
goals. The ROA ratio illustrates how well management or Bank is employing the company's or Bank’s
total assets or resources to generate more income (profit). The higher the return, the more efficient
management or bank is in utilizing its asset base. ROA measurements include all of a business's assets
including those which arise out of liabilities to creditors as well as those which arise out of contributions
by investors.

The inclusion of liabilities makes ROA even more valuable as an internal measurement tool. Another
common internal use for ROA involves evaluating the benefits of investing in a new system versus
expanding a current system. The best choice will ideally increase productivity and income as well as
reduce asset costs, resulting in an improved ROA ratio. It is evident from the above results that the
credit risk, operational efficiency and asset management have significant impact on ROA. There is a
positive correlation of ROA with asset management and bank size whereas, negative correlation with
the credit risk, operational efficiency and debt ratio. This indicates that with increase in asset
management and bank size, there has been increase in ROA or Bank’s performance.

Asset management has very strong positive correlation with ROA, as it is logical that with increase in
efficient asset management, the return on assets will be higher. To an investor, the over value of stock
implies that the market value is higher than the bank's stated book value. i.e., the market is selling the
banks’ assets higher than its stated book value. So, its stock is more expensive than the costs of its
assets and the under value of stock implies that the market value is lower than the bank's stated book
value. In other words, the market is selling the bank’s assets less than its stated book value.

Return on equity (ROE) is one of the key profitability ratios which indicate the amount of net income
returned as a percentage of shareholders’ equity. It measures a bank's profitability by revealing how
much profit a bank generates with the money shareholders have invested. In other words, it can be
used for evaluating how effectively a bank’s management team is managing the capital that
shareholders entrust to it. A higher ROE is expected for high growth banks. Also, the average of ROEs of
past years gives a better idea of the historical growth of the bank.
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Public vs Private sector banks

The banking sector is slowly turning around on the back of improvement in asset quality,
strengthening capital base, and a return to profitability. At this cusp, however, the evolving
macroeconomic scenario, and particularly, the ongoing loss of pace in domestic economic activity,
presents daunting challenges as widespread risk aversion has turned credit demand anaemic even as
corporations deleverage their own stressed balance sheets. Notwithstanding the improvement in 2018-
19, the overhang of NPAs remains high. Further reduction in NPAs through recoveries hinges around a
reversal of the downturn in the economy.

While banks have oriented their lending towards the relatively stress-free retail, the slowdown in private
consumption spending has imposed limits to this growth strategy even as the possibility of defaults
among retail segments rises as growth slows down.The recapitalisation of PSBs remains an unfinished
agenda. Apart from meeting the regulatory minimum, commercial banks need to augment their capital
base to guard against future balance sheet stress. Moreover, they also need to improve their valuation
methodologies, credit monitoring and risk management strategies in order to build resilience.

Over the last couple of years, the space vacated by risk-averse PSBs was taken up by PVBs; more
recently, however, fault lines are becoming evident in the latter’s corporate governance. This is
occurring at a time when the balance sheets of PSBs have not yet regained their strength.
Banks’ lending to NBFCs has remained strong, reflecting the policy initiatives to alleviate liquidity stress
in that sector. Nonetheless, appropriate risk pricing is warranted so that excessive risk-build up does
not occur.Going forward, optimal bank capital, stringent corporate governance practices, and effective
risk management strategies will help in strengthening the robustness of the banking system in an
increasingly dynamic economic environment. Emergence of niche players is expected to augment
innovation in financial technology and provide further impetus to the agenda of financial inclusion.
CONCLUSION

The researchers focused at the financial performance of India's banking sector over the last five years,
from 2016 to 2020. The study also aimed to identify the main factors influencing bank success, as well
as the best banks based on their financial results over a set period of time. The net profit, total assets,
total net income, total expenses, net-profit margin ratio, return on net-worth ratio, EPS ratio, CASA
ratio, capital adequacy ratio, and P/E ratio were used to analyse the data. Based on the data review, it
is possible to conclude that private banks outperformed public sector banks. In the private sector,
HDFC Bank outperformed ICICI Bank. Among public sector banks, SBI was observed to be very stable
and to offer consistent returns to investors, while BoB was observed to be very volatile and to offer
fluctuating returns to investors over a five-year period. In the year 2018, all four banks saw significant
changes.

REFERNCES

https://www.paisabazaar.com/banking/#private_sector_banks
https://m.rbi.org.in/scripts/PublicationsView.aspx?id=20270
https://m.rbi.org.in/scripts/PublicationsView.aspx?id=20273