A PROJECT REPORT

ON
“INDIAN BANKING SYSTEM”
For The Course
“CIM”
SUBMITTED BY:
RIYANSHA RATHORE (2103573 SEC G)
POOJA KOTHARI (2103135 SEC G)
TANMAY SOLANKI (212496 SEC G)
VIVEK SINGH (2100807 SEC G)
VIPIN SINGH BAGHEL (2102402 SEC G)
VAIBHAV HOLKAR (2103080 SEC G)
GROUP NO. : “H”
GUIDED BY:
MEGHA BHANDARI MAM
MEDI-CAPS UNIVERSITY, INDORE
For Academic Year
2021-2023
 CERTIFICATE
Certified that this project report “INDIAN BANKING SYSTEM” is the bonafide work
of “Riyansha Rathore (2103573 SECG), Pooja Kothari (2103135 SEC G), Tanmay
Solanki (212496 SEC G), Vivek Singh (2100807 SEC G), Vipin Singh Baghel (2102402
SEC G), Vaibhav Holkar (2103080 SEC G)” who carried out the project work under
my supervision.
Submitted To: Prof. Megha Bhandari
Medi-Caps University (M.P.)
 ACKNOWLEDGEMENT
I would like to express my special thanks of gratitude to my project guided me Prof. Megha
Bhandari Mam gave me the golden opportunity to do this wonderful project on the topic
“INDIAN BANKING SYSTEM”.

Date: <Riyansha
Rathore>
<2103573 Sec G>
<Pooja Kothari>
<2103135 SEC G >
<Vaibhav Holkar>
<2103080 SEC G >
<Vivek Singh>
<2100807 SEC G >
<Vipin Baghel>
<2102402 SEC G >
<Tanmay Solanki>
<212496 SEC G >
 3.6.

Table of contents

Particulars

DECLARATION

ACKNOWLEDGEMENT
1. INTRODUCTION:

1.1. INTRODUCTION OF INDIAN BANKING SYSTEM

1.2. SIGNIFICANCE OF THE STUDY

CONCEPTULIZATION
1.3.
FOCUS OF THE PROBLEM
1.4.
INDIAN BANKING INDUSTRY
1.5.
STRUCTURE OF BANKING SECTOR

1.6. MICRO FACTORS AFFECTING INDIAN BANKING

1.7. INDUSTRY
1.8. INDIAN ECONOMY: MACRO FACTORS AFFECTING
INDIAN BANKING

2. LITERATURE REVIEW

3. RESEARCH METHODOLOGY:

3.1. PROBLEM DFINITION

3.2. OBJECTIVES
3.3.
VALUATION
3.4.

3.5. RESULT
 Page
No.
4.DATA ANALAYSIS AND INTERPRETATION OF QUESTIONARIES 43-51

5.MAJOR FINDINGS 51-53

6.LIMITATIONS 52

CONCLUSION 53
SUGGETIONS 54
QUESTIONARIE 55-57
BIBLIOGRAPHY 58
1.1. INTRODUCTION OF INDIAN BANKING SYSTEM:

In the modern sense originated in the last decades of the 18th century. The first banks were Bank
of Hindustan (1770-1829) and The General Bank of India, established 1786 and since defunct.
The largest bank, and the oldest still in existence, is the State Bank of India, which originated in
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.
The three banks merged in 1921 to form the Imperial Bank of India, which, upon India's
independence, became the State Bank of India in 1955. For many years the presidency banks
acted as quasi-central banks, as did their successors, until the Reserve Bank of India was
established in 1935.
In 1969 the Indian government nationalized all the major banks that it did not already own and
these have remained under government ownership. They are run under a structure know as
'profit-making public sector undertaking' (PSU) and are allowed to compete and operate as
commercial banks. The Indian banking sector is made up of four types of banks, as well as the
PSUs and the state banks, they have been joined since the 1990s by new private commercial
banks and a number of foreign banks.
Banking in India was generally fairly mature in terms of supply, product range and reach-even
though reach in rural India and to the poor still remains a challenge. The government has
developed initiatives to address this through the State Bank of India expanding its branch
network and through the National Bank for Agriculture and Rural Development with things like
microfinance.
Indian Banking Industry currently employees 1,175,149 employees and has a total of 109,811
branches in India and 171 branches abroad and manages an aggregate deposit of 67504.54
billion (US$1.1 trillion or €820 billion) and bank credit of 52604.59 billion (US$880 billion or
€640 billion). The net profit of the banks operating in India was 1027.51 billion (US$17 billion
or €12 billion) against a turnover of 9148.59 billion (US$150 billion or €110 billion) for the
fiscal year 2012-13.

In India, given the relatively underdeveloped capital market and with little internal resources,
firms and economic entities depend, largely, on financial intermediaries to meet their fund
requirements. In terms of supply of credit, financial intermediaries can broadly be categorized as
institutional and non-institutional. The major institutional suppliers of credit in India are banks
and non-bank financial institutions (that is, development financial institutions or DFIs), other
financial institutions (FIs), and non-banking finance companies (NBFCs). The non-institutional
or unorganized sources of credit include indigenous bankers and money-lenders. Information
about the unorganized sector is limited and not readily available.
An important feature of the credit market is its term structure:
 Short-term credit
 Medium-term credit
 Long-term credit.
While banks and NBFCs predominantly cater for short-term needs, FIs provide mostly medium
and long-term funds.
1.2. SIGNIFICANCE OF THE STUDY
 To make a detailed study of various financial services provide by the different banks.
To analyze customers view point regarding their banks.
 To study effective and most popular bank among the customers regarding its services.
To find out the rate of interest of banks and reaction of customers on it.
 To make analysis on the economic benefits provided by various banks.

Suggest the investors whether to invest in shares of Banking Companies.

1.3. CONCEPTUALIZATION
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. The sector now compares favorably with banking sectors in the region
on metrics like growth, profitability and non-performing assets (NPAs). 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. In this “white paper”, we
emphasize the need to act both decisively and quickly to build an enabling, rather than a limiting,
banking sector in India
1.4. FOCUS OF THE PROBLEM
The research report concentrates on macro and micro factors affecting Banking Industry,
Evolution of Banking Industry and its current status. Various regulatory and reform processes
also affect banking industry. The report also throws a light on them.
The report finally ends with valuation of major players in banking Industry and the major
challenges faced by this industry.

Banking Challenges
It is expected that the Indian banking and finance system will be globally competitive. For this
the market players will have to be financially strong and operationally efficient. Capital would be
a key factor in building a successful institution. The banking and finance system will improve
competitiveness through a process of consolidation, either through mergers and acquisitions
through strategic alliances. Technology would be the key to the competitiveness of banking and
finance system. Indian players will keep pace with global leaders in the use of banking
technology.
In such a scenario, on-line accessibility will be available to the customers from any part of the
globe; ‘Anywhere’ and ‘Anytime’ banking will be realized truly and fully. In this context, the
research paper approached “Indian Banking System” as the shape of the banking sector will be
the result of a strong interplay between the decisions taken by policy makers and actions of bank
managements.
Banking Evolution & Regulatory Framework
Financial Sector Reforms set in motion in 1991 have greatly changed the face of Indian Banking.
The banking industry has moved gradually from a regulated environment to a deregulated market
economy. The market developments kindled by liberalization and globalization have resulted in
changes in the intermediation role of banks. The pace of transformation has been more
significant in recent times with technology acting as a catalyst.
While the banking system has done fairly well in adjusting to the new market dynamics, greater
challenges lie ahead. Financial sector would be opened up for greater international competition
under WTO. Banks will have to gear up to meet stringent prudential capital adequacy norms
under Basel II. In addition to WTO and Basel II, the Free Trade Agreements (FTAs) such as with
Singapore, may have an impact on the shape of the banking industry. Banks will also have to
cope with challenges posed by technological innovations in banking. Banks need to prepare for
the changes. In this context the need for drawing up a Road Map to the future assumes relevance.
The 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.
The sector now compares favorably with banking sectors in the region on metrics like growth,
profitability and non-performing assets (NPAs). 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, and enabling policy and
regulatory framework will also be critical to their success.
Internal Hindrances to Banking Industry

The research focuses on emphasizing the need of decisively and quickly to build and enabling,
rather than a limiting, banking sector in India. The major challenges ahead for bank management
are as follows:

 First, cost management, a key to sustainability of bank profits as well as their long-term
viability.

 Second, recovery management, which is a key to the stability of the banking sector.

 Third, technological intensity of banking, an area where India happens to be a world leader
in information technology, but its usage by our banking system is somewhat muted. It is
wise for Indian banks to exploit this globally state-of-art expertise, domestically available, to
their fullest advantage.

 Fourth, risk management, Banks can, on their part, formulate ‘early warning indicators’
suited to their own requirements, business profile and risk appetite in order to better monitor
and manage risks.

 Fifth, governance because the quality of corporate governance in the banks becomes critical
as competition intensifies, banks strive to retain their client base, and regulators move out of
controls and micro-regulation.
1.5. INDIAN BANKING INDUSTRY:
In India, given the relatively underdeveloped capital market and with little internal resources,
firms and economic entities depend, largely, on financial intermediaries to meet their fund
requirements. In terms of supply of credit, financial intermediaries can broadly be categorized as
institutional and non-institutional. The major institutional suppliers of credit in India are banks
and non-bank financial institutions (that is, development financial institutions or DFIs), other
financial institutions (FIs), and non-banking finance companies (NBFCs). The non-institutional
or unorganized sources of credit include indigenous bankers and money-lenders. Information
about the unorganized sector is limited and not readily available.
An important feature of the credit market is its term structure:
 Short-term credit
 Medium-term credit
 Long-term credit.
While banks and NBFCs predominantly cater for short-term needs, FIs provide mostly medium
and long-term funds.
Need for Banks
Role of Bank
 Channel household savings

 Risk transformation
 Service provider
Indian Banking Sector Experience

India inherited a weak financial system after Independence in 1947. At end-1947, there were 625
commercial banks in India, with an asset base of Rs. 11.51 billion. Commercial banks mobilized
household savings through demand and term deposits, and disbursed credit primarily to large
corporations. Following Independence, the development of rural India was given the highest
priority. The commercial banks of the country including the IBI had till then confined their
operations to the urban sector and were not equipped to respond to the emergent needs of
economic regeneration of the rural areas. In order to serve the economy in general and the rural
sector in particular, the All India Rural Credit Survey Committee recommended the creation of a
state-partnered and state-sponsored bank by taking over the IBI, and integrating with it, the
former state-owned or state-associate banks. Accordingly, an act was passed in Parliament in
May 1955, and the State Bank of India (SBI) was constituted on July 1, 1955. More than a
quarter of the resources of the Indian banking system thus passed under the direct control of the
State. Subsequently in 1959, the State Bank of India (Subsidiary Bank) Act was passed (SBI
Act), enabling the SBI to take over 8 former State-associate banks as its subsidiaries (later named
Associates).
The GoI also felt the need to bring about wider diffusion of banking facilities and to change the
uneven distribution of bank lending. The proportion of credit going to industry and trade
increased from a high 83% in 1951 to 90% in 1968. This increase was at the expense of some
crucial segment of the economy like agriculture and the small-scale industrial sector. Bank
failures and mergers resulted in a decline in number of banks from 648 (including 97 scheduled
commercial banks or SCBs and 551 non-SCBs) in 1947 to 89 in 1969 (comprising 73 SCBs and
16 non-SCBs). The lop-sided pattern of credit disbursal, and perhaps the spate of bank failures
during the sixties, forced the government to resort to nationalization of banks. In July 1969, the
GoI nationalized 14 scheduled commercial banks (SCBs), each having minimum aggregate
deposits of Rs. 500 million. State-control was considered as a necessary catalyst for economic
growth and ensuring an even distribution of banking facilities. Subsequently, in 1980, the GoI
nationalized another 6 banks2, each having deposits of Rs. 2,000 million and above.
The nationalization of banks was the culmination of pressures to use the banks as public
instruments of development. The GoI imposed `social control’ on banks. However, by the 1980s,
it was generally perceived that the operational efficiency of banks was declining. Banks were
characterized by low profitability, high and growing non-performing assets (NPAs), and low
capital base. Average returns on assets were only around 0.15% in the second half of the 1980s,
and capital aggregated an estimated 1.5% of assets. Poor internal controls and the lack of proper
disclosure norms led to many problems being kept under cover. The quality of customer service
did not keep pace with the increasing expectations. In 1991, a fresh era in Indian banking began,
with the introduction of banking sector reforms as part of the overall economic liberalization in
India.
 INDIAN FINANCIAL SERVICES SECTOR SWOT ANALYSIS

Strengths:
 Proven asset quality resilience in past downturns
Proven management teams, track record
 Stable industry dynamics
 Well-established regulatory framework
Stable/low NPL formation rates
Weaknesses:

 Continued crowding out effect from govt budget deficit, combined with accelerating
private sector credit demands
 Ownership restrictions
 Constraints on state-owned banks' micro reforms, including HR, staff cut, branch cut
constraints.
Opportunities:
Improving secular GDP growth prospects
 Establishment of special economic zones likely to promote further industrialization
Years, if not decades, of catch-up economics— low per capita income, educated
 workforce
 Rapid financial deepening, i.e. loan growth as multiple of nominal GDP growth
Rising consumer spending, consumer credit business
 Rising corporate capex, investments
M&A optionally
Threats:
 "Running on empty" in terms of liquidity
 Tightening in global liquidity may trickle down to India
 Potentially hawkish RBI stance on inflation/monetary policy

Potential rise in long bond \ yields, MTM risk for banks

 Potential for valuation pullback, should earnings delivery disappoint expectations
1.6. Structure of Banking Sector
The banking sector in India functions under the umbrella of the RBI—the regulatory, central
bank. The Reserve Bank of India Act was passed in 1934 and the RBI was constituted in 1935 as
the apex bank. The Banking Regulations Act was passed in 1949. This Act brought the RBI
under government control. Under the Act, the RBI received wide-ranging powers in regards to
establishment of new banks, mergers and amalgamations of banks, opening and closing of
branches of banks, maintaining certain standards of banking business, inspection of banks, etc.
The Act also vested licensing powers and the authority to conduct inspections with the RBI.
Banks in India can broadly be classified as regional rural banks or RRBs, scheduled commercial
banks or SCBs, and co-operative banks. The scope of the report includes the SCBs only3.
The SCBs for the purpose of this comment can be classified into the following three categories:
 Public sector banks or PSBs (SBI & its associates, and nationalized banks);
Private sector banks (old and new); and
 Foreign banks
In terms of asset size, among foreign banks – Citibank, HSBC and Standard Chartered bank are
leaders with asset base of Rs.45437 cr, Rs.37473 cr and Rs.48412 cr. Resp. in FY 05-06. Among
private sector banks, ICICI Bank is the leader with asset base of Rs.251389 cr followed by
HDFC Bank of size Rs.73506 cr and UTI Bank of size Rs.49731 cr. In terms of asset size, public
sector banks have highest base compared to private and foreign banks. SBI & Associated have
asset base of Rs.691872 cr while other banks such as BOB, BOI, Canara Bank and PNB Bank
have each more than Rs.100000 cr.
Credit Growth:-
The bank lending has expanded in a number of emerging market economies, especially in Asia
and Latin America, in recent years. Bank credit to the private sector, in real terms, was rising at a
rate between 10 and 40 per cent in a number of countries by 2005 (BIS, 2006). Several factors
have contributed to the significant rise in bank lending in emerging economies such as strong
growth, excess liquidity in banking systems reflecting easier global and domestic monetary
conditions, and substantial bank restructuring.
The recent surge in bank lending has been associated with important changes on the asset side of
banks balance sheet. First, credit to the business sector - historically the most important
component of banks assets – has been weak, while the share of the household sector has
increased sharply in several countries. Second, banks investments in Government securities
increased sharply until 2004-05. As a result, commercial banks continue to hold a very large part
of their domestic assets in the form of Government securities - a process that seems to have
begun in the mid-1990s
 1.7. MICRO FACTORS AFFECTING INDIAN BANKING INDUSTRY
Loan Demand:
Over the past three years, Indian Banking Industry has seen sustained strength in credit growth,
which is not just a function of economic buoyancy but also the broad-basing of loan demand.
This has recently been articulated by the central bank too:
“A contextual analysis of the co-movement between macroeconomic performance and bank
credit in the current phase of the business cycle suggests that factors other than demand may
also be at work: financial deepening from a low base; structural shifts in supply elasticity’s;
rising efficiency of credit markets; and competitive pressures augmenting the overall supply of
credit.” (Reserve Bank of India, Monetary Policy Review, October 2006).
The slowdown of the mid-1990s hit the banks very hard because corporate, which accounted for
a lion’s share of bank credit, went into a less profitable and hence a financial restructuring mode.
There was no retail credit then, banks did not focus on Small and Medium Enterprises and farm
lending was done grudgingly, under compulsion. Along with the diversification of the pie that
keeps the tempo of demand intact, after a long time industry has also started demanding higher
levels of credit. In the five years prior to FY05, growth in industrial credit was almost wholly
driven by infrastructure. There is a perceptibly wider participation from other segments during
FY05 and FY06.
If a substantial portion of loan growth gets driven by the banking system taking away market
shares from informal sectors – this is clearly happening to farm credit, SMEs and to a limited
extent non-mortgage retail – interest rate considerations influencing demand will be relatively
low. SMEs and the rural folk have accessed credit from other sources at exorbitant interest rates,
and hence banks’ rates going by 200-300bps is not so meaningful. That explains the apparent
lack of correlation between rates that have been rising and loan demand.
Rising funding costs with soft lending rates irrational:
Plenty of historical evidence of return of pricing power to banks:
Concerns are often expressed about banks’ ability to increase lending rates in the face of
competition and government pressure. The reality is that banks, which led the mortgage price
war, have increased mortgage rate by 200-300bps from the bottom, and is yet to see significant
resistance. That PSU banks raised prime lending rates twice in. Competition from overseas
borrowings is a serious factor only with AAA companies, and banks have reduced exposure to
them considerably during the last 3-4 years. Government stand is understandably against higher
interest rates. However, it is unlikely that the government will be able to influence the course of
interest rates single-handedly.
Inflexibility of deposit growth a myth:
With 100-200bps increase in the card rates of deposits, banks have managed to move the deposit
growth rate from 15-16% to 19- 20%, on a larger base. In the last five years, household financial
savings have moved out of equities and long-term products to bank deposits in percentage terms.
The point to note here is that component of cash (currency) has marginally risen – that’s the real,
incremental opportunity as more cash from chests moves into bank deposits first before
potentially going to other avenues.
The Q4FY07 is expected to be a period of margin pressure. This is because as the last interest-
rate cycle showed, deposit costs increase first, and followed by lending rates. Q4 is also usually a
period of tight liquidity, and the RBI could be increasing CRR or SLR requirements to further
tighten the liquidity. Also, banks will be cautious about the actual implementation of the lending
rate increases and may do it in a graduated fashion so as not to invite outright resistance or overt
attention from the government. HDFC Bank, PNB, SBI and a few others have nevertheless
already made a beginning by increasing their prime lending rates after the cash reserve ratio hike
by the RBI. However, the fight for deposits has intensified and it is possible that in Q4FY07
banks could be increasing their exposure to high-cost wholesale deposits, taken at higher than
card rates.
Banks’ increased risk appetite good for loan yields:
The banks’ lending risk appetite has increased significantly over the last five years – banks
veering more towards lending at increasing spreads rather than investing in risk-free bonds.
Accordingly, banks are willing to take higher risks, which is good for overall asset yields.
Investment spreads may increase in future:
As long-duration bonds at high interest rates have been coming up for maturity and getting re-
priced at lower interest rates, yields on investments have been continuously falling over the last
few years.
Non – Performing Loans (NPLs): concerns overstated:
Loan growth-NPL
The asset price deflation (read real estate prices) may hurting banks’ asset quality has been
blown out of proportion.
Residential mortgages:
It is very unlikely in near term that there can be a large-scale increase in delinquencies on loans
taken for the first house (typically self-occupied); unless there is a household income problem, it
does not matter to the borrower whether the price of the house he is staying in is rising or falling.
Even then, with an average loan-to-value of 75%, a 25% fall is theoretically not possible. LTV
ratios had gone up to more risky levels at the peak of the mortgage boom.Problems can arise
more frequently for loans taken for the second house, typically for investment/speculation.
Banks have been reluctant to disclose the exact volume of second houses financed. Most banks
claim that it is in the range of 2-5% of incremental mortgage lending. There is a possibility that
some individuals have been hiding from banks the fact that theyalready have one more loan, but
this is becoming increasingly difficult with a credit bureau now in full swing. Even if the
assumption that 10% of the outstanding mortgages are for the second house and all of that goes
bad, it will mean 1% of the banking system’s loans go bad. Commercial real estate: According to
figures disclosed by the RBI itself, real estate loans constituted 2.0% of gross non-food credit of
banks as of end-June 2006. Even if it has been growing at high percentage rates is not material as
the base was very low. In any case, by increasing standard assets provisioning on these loans to
100bps from 25bps, risk weights from 100% to 150% and instructing banks not to lend unless
the developer has “all the permissions.One stark example of this is the largest bank SBI itself. In
the mid 1990s, SBI’s portfolio was distributed between large corporate, farm credit and trade,
with little coming from others. The Sep’06 portfolio looks dramatically different.
Cost of borrowing has risen, but so have incomes:
The apparent disconnect between interest rates rising now for two years and lending not losing
steam can be explained by i) rising incomes in case of individuals, thereby imparting increased
thrust to retail lending, and ii) improved corporate profitability through better pricing power.
While there are several studies illustrating the household income growth in India, according to
National Council for Applied Economic Research, an explosive growth is underway in the
percentage of households earning Rs91, 000-1,000,000 pa, the most prominent individual
borrowers for banks.
The corporate pricing power story is less known because of the media harping on high
competition and margin compression. While these issues cannot be summarily dismissed, it is a
fact that manufactured product inflation has been rising. Even the RBI has recently commented
on the increased ability of manufacturers to pass on cost increases. And with a considerably de-
leveraged corporate India compared with the early/mid 1990s, these levels of increases in interest
costs have been easily absorbed by companies.

Technology:
The trend in banking is changing from computerization of branches to laying a common platform
by having a core banking solution in all the branches. At the same time, Indian banks are looking
at internet banking which promises to grow into an alternate self-service channel. As the mindset
of the Indian customer undergoes a change, Indian banks need to encompass the extension of all
the services that are required and dictated by customers. In future, banks will need to focus on
value-differentiating services by keeping in-Houser their competitive advantages while
partnering with others who complement its services. The emergence of peer-to-peer money
transmission mechanisms (such as Western Union Money Transfer) poses a challenge to current
role of bankers and emphasizes the role of robust payment systems like RTGS in maintaining
and promoting financial stability.
Areas of Improvement:
Few challenges associated with technology adoption by banks are:
Indian banks still don’t have the robust systems required for efficient functioning of online
banking. RBI has provided guidelines relating to security and other issues and hopefully, online
banking will see a surge in the usage from current 1% to at least 10% in the next couple of years.
Banks need to explore newer channels such as SMS, WAP and 3G mobile telephony
applications to facilitate online access to customers.Banks, in a drive to carry on with
tremendous expansion in terms of customer base, needs to have employees who are well
informed about products and services and are comfortable with technology which requires
extensive training.

Potential Pitfalls:
Banks should not get overwhelmed by the concept of automation and online banking. The banks
need to realize that they need to maintain different delivery for different generations. Banks still
need to maintain brick-and-mortar locations that people feel comfortable with.
1.8. INDIAN ECONOMY-MACRO FACTORS AFFECTING INDIAN BANKING

Major Changes in FY 2006-07

 Robust economic growth in FY07. GDP is increased by over 8% in FY07; Agriculture,

 industry and services to grow at 1.7%, 10.5% and 10.7% respectively
Rabi season experiences normal monsoon
 IIP (Index of Industrial Production) growth dips in October 2006. The poor performance of
the manufacturing sector, which forms 80% of the IIP index lead to a blip in its robust
growth trend for the past 9 months. Both mining and electricity grew faster than last year
 at 4% and 9.7% Vs – 0.1% and 7.7% respectively
 WPI (Wholesale Price Index) rose to 5.43% for the week ending December 16; higher
inflation in primary commodities remains. The inflation in the coming weeks may remain
 high due to lower base effect.
 CRR (Cash Reserve Ratio) hike of 50 bps to absorb Rs.135bn from the system. The CRR
rate hike of 50bps came as a surprise but it reflects that RBI’s intention of controlling credit
off-take and liquidity management by raising repo and reverse repo rate could not achieve
the desired results due to which RBI used CRR rate hike – a new instrument to
 control liquidity
 Exports growth back on track in November 2006. On the basis of the BoP, in H1FY06
exports grew at 23%, imports at 25.3% resulting in the trade balance of US$35bn. Net
invisibles grew by 17.6% to US$23.5bn and capital inflows (in the form of FDI, NRI
deposits and ECB) at US$20.3bn (a yoy growth of 49%) brought the balance of payment
 to US$8.6bn, (a yoy growth of 33%).
 Rupee appreciates further against dollar and yen but continues to depreciate against Euro
and pound on an YTD basis as on December 2006. In real terms, from April 2006 to October
2006, the rupee appreciated by 1.8% vis-à-vis a basket of six currencies.
The Indian Economy has seen major Macro changes in:

1. Gross Domestic Product:

The Indian Economy is driven by the strong fundamentals and uptrend in industrial cycle.
The Indian economy maintained a strong growth momentum for the third successive year in
2005-06 with real GDP growth accelerating to 8.4% 2005-06. The services sector recorded
double digit growth to contribute nearly three-fourths of incremental GDP. A consistent
increase in domestic investment rate from 23.0% of GDP in 2001-02 to 30.1% in 2004-05
supported a high credit growth witnessed during the past few years. The manufacturing
sector – the key growth driver for banking credit, clocked a healthy growth of 9.0% during
FY06.
In FY 06-07, services sector account for major 55% of India GDP followed by 25% in
Industrial sector and 20% in agriculture sector.Sectoral Composition of India GDP As per the
figures available for 2011 fiscal, almost 52 percent of India’s GDP comes from the
agricultural sector and the services sector is the second biggest contributor with 34 percent.
The industrial sector contributes almost 14 percent of India’s GDP.HSBC, a leading global
bank has stated that in 2012-13 fiscal India’s chronological and yearly growth will be a
moderate one. It had previously stated that in the same period India’s GDP will grow by 7.5
percent but has now brought down the forecast to 6.2%. HSBC opines that in 2014 India will
see a better growth rate of almost 7.4 percent – previously it had forecast 8.2 percent forthe
period. - See more at: http://business.mapsofindia.com/india-gdp/#sthash.C9t3Umh1.dpuf
FY07 Vs Q2FY06, the growth rate in GDP components are as follows:
 Agriculture: 1.7%
 Industry: 10.5%
 Service: 10.7
FDI Confidence Index:
Relaxation of foreign direct investment rules has expanded the mountain of capital in every
sector of Indian economy. The government is making efforts in liberalizing the guidelines
and norms for investment through FDI, making them more NRI friendly. Mainly due to
efforts taken by Indian Government, Indian rank 2nd among all countries in the world on FDI
Confidence Index.

2. Inflation:
Inflation remained largely benevolent due to investment driven nature of growth and
subsidized nature of oil prices as pass-on of international crude price rise remained
incomplete in India. WPI Inflation has risen to 5.45% for the week ended November 18,
2006 after remaining in the range of 4.0-5.0% earlier. RBI has repeatedly cautioned that
maintaining inflation in the target range may call for substantial monetary tightening should
crude prices persist at high level. The money supply has grown by 18.7% yoy till November
10, 2006 during the current fiscal, which poses a significant threat to RBI’s efforts of
containing inflation in the desired range of 5.0-5.5%.

3. Gross Fiscal Deficit:

The gross fiscal deficit (GFD) to GDP ratio for 2005-06 was at 4.1 per cent as against the
budget estimate of 4.3 per cent. Fiscal and revenue deficit for April-November 2006 widened
to 72.8% of BE and 99.7% of BE Vs 74.7% of BE and 91.5% of BE respectively in April-
November 2005. The current levels are much higher than the last month’s fiscal deficit of
58.6% of BE and revenue deficit of79.4% of BE. The improvement in the GFD was
facilitated by a decline in capital outlay and the availability of disinvestment proceeds. The
revenue deficit, though lower in absolute terms, remained at budgeted level of 2.7 per cent of
GDP in 2005-06.

4. Interest Rate:
The yield on dated government securities (G-Sec) has been moving up since the beginning of
FY05. The yield on 10 year paper began during Q1 to close the quarter at 8.12%. During July
06, it continue to move up to 8.42% but reacted sharply thereafter to once again come down
to 7.4% at present as the market participants believed that US Fed and other central banks
worldwide would not only pause rate hikes but soon get into rate the current fiscal at 7.50%
 but moved up quite sharply cut mode. Real interest rate indicated by spread between inflation
and 10 year benchmark yield has trended in the range of 2-4%. The real interest rate in
developed economies is normally in the range of 2-3%. However, the marginal productivity
of capital being much higher in the developing economy like India. Due to this, real interest
should be higher than those prevailing in more matured economies.

5. Rising Oil prices and Exchange Rate:

World over, the central bankers led by US Federal Reserves embarked on withdrawal of
monetary accommodation through a series of rate hikes as the rising oil and asset prices
threatened the global economies with inflationary pressures. The US Fed, which embarked
on an aggressive rate hike campaign through 17 consecutive rate hikes of the magnitude of
25 bps, several economies including Euro-zone and Japan hiked their key policy rates. In
response to the same, RBI has hiked the key policy Repo and Reverse Repo rates five times
over the past two years. This has led to a significant hardening of interest rates over the past
4-5 quarters, which has adversely impacted the cost of funds for banks.

6. Capital Market:

Financial markets in India and globally have seen little volatility over the last few Years.
There have been only two spikes in India – in April 2004 when the UPA government came to
power and in May 2006. In India, stock markets will be the most impacted by negative news
flows as other areas where shocks can be absorbed such as the currency, interest rate and
corporate bond markets are not free or well developed. The Capital Market has seen balance
sheet value being unlocked through monetization of embedded assets, demergers, IPOs, etc.
Indian companies continue to build value in the balance sheet as newer opportunities emerge
through smart capex, inorganic growth and extracting value thru the revenue statement.
Chapter No. 2
LITERATURE REVIEW

INRODUCTION OF LITERATURE REVIEW:

Review of literature has vital relevance with any research work due to literature review the
possibility of repetition of study can be eliminated and another dimension can be selected for the
study. The literature review helps researcher to remove limitations of existing work or may assist
to extend prevailing study.
Review related to policy framework and regulatory measures:-

Anantha Swami made an attempt in his paper, ‘in the context of financial sector reforms, to
identify the factors which could have led to changes in the position of four bank groups, i.e.
Public Sector Banks, Old Private Sector Banks, New Private Sector Banks and Foreign
Banks in term of their share in the overall banking industry during the period 1995-96 to
1999-2000. For analytical examination of the impact of reforms on the banks' performance, the
very performance of a bank has to be evaluated as per appropriate criteria by choosing selected
parameters like share of different bank-groups in total assets, share of rural branches, Average
branch size, trends in banks' profitability, share of priority sector advances, share of wages in
expenditure, provision and contingencies as percentage to total assets, ratio of NPAs to Net
advances, ratio of contingent liabilities to total liabilities, spread as a percentage to total assets,
Intermediation costs, etc.
By using these parameters, Swami made an in-depth analysis and came out with interesting
conclusion like:
The setting up of a new competitive environment has resulted in new challenges for the PSBs
and the share of PSBs in the total assets of the banking sector has shown a steady decline while
new private sector banks have succeeded in enhancing their position,
He further observed that foreign banks too have been facing stiff competition from the new
private banks,
The profit performance has been quite varied among different bank groups and within each
group in respect of individual banks as well,
In the face of new competition and recognizing the need to undertake cost reduction, PSBs have
brought about reduction in the wage bill component while this has shown an increase in the case
of foreign banks and ne\v private sector banks during the period of study,
Foreign banks as well as the new private banks had the advantage of large-sized branches when
compared to public sector and old private banks,
Level of NPAs of PSBs remain high, a noteworthy development has been their significant
reduction in relation to net advances in recent years.
Nair KNC (2006) in his paper ‘Banking and Technology to meet 21st Century challenges’,
published in Bank net India, has discusses the future challenges of technology in banking. The
author also point out how IT posses a bright future in rural banking, but is neglected as it is
traditionally considered unviable in the rural segment. A successful bank has to be nimble and
agile enough to respond to the new market paradigm and ineffectively controlling risks.
Innovation will be the key extending the banking services to the untapped vast potential at the
bottom of the pyramid.

Shroff FT (2007) in his paper, Modern Banking Technology, - Bank net Publications has
given a summary of how Indian banking system has evolved over the year. The paper discusses
some issues face by these systems. The author also gives examples of comparable banking
system for other countries and the lesson learnt. Indian banking is at the threshold of the
paradigm shift. The application of technology and product innovations is bringing about
structure change in the Indian banking system.
ICRA (2003),In a the paper titled “comparative study on Indian banking”, tried to analyze
the fast-changing environment, the Indian Bank's Association (IBA) has Commissioned ICRA
Advisory Services (ICRA) to carry out a study to benchmark the strengths and weaknesses of
Indian Banks against those of select international banks. The scope of work for the study is to
benchmark the performance of Indian Banks vis-à-vis select global banks along three
dimensions-structural factors, operational factors and efficiency factors. As suggested by IBA,
21 Indian Banks (those with asset over Rs. 20,000 Crore as on 31st March, 2003) and Seven
International Banks have been selected for the study. The parameters, which have been used for
benchmarking, are Risk weighted capital norms, Income Recognition norms, asset classification
norms, provisioning norms, which come under "Structural Parameters". Return on Assets, Return
on Equity, Net interest margin, Operating expense ratio and Asset quality are concerned with
"Operational Parameters". Business per employee, Business per branch, Operating expenses per
Branch, Establishment expenses per employee, profitability per employee, profitability per
Branch are 'Efficient Parameters'.

ICRA Limited, in this study, found that the profitability of Indian Banks in recent years
compares well with that of the global benchmark banks primarily because of the higher share of
profit on the sale of investments, higher leverage and higher net interest margins. However,
many of these drivers of higher profits of Indian Banks may not be sustainable. To ensure Long-
term profitability, ICRA Ltd. suggest that Indian Banks should diversify their loans across
several customer segments; they should introduce robust risk scoring techniques to ensure better
quality of loans; they should reduce their operating expenses by upgrading banking technology
and they should improve the management of market risk.
Patel has highlighted the problem of bad loans and growing level of Non-Performing Assets
in commercial banks in the post-reform period. It was observed that it is important for the
banks and' supervisory authorities to adopt more effective lending practices. At the same time, it
was also emphasized that corporate entities should be made more accountable through following
more stringent disclosure and transparency practices and corporate governance principles.
Efficient legal machinery, the larger number of Debt Recovery Tribunals and Settlement
Advisory Committees and Credit Information Bureau in banks can prove effective in quick
recovers of dues.
Mathur's paper examines the arguments usually extended to build a case for privatization of
public sector banks in India. An examination of the main arguments usually extended to build a
case for privatization of Public Sector Banks (PSBs) in India reveals that the arguments are
based on

 Perceptions, rather than factual analysis,

 The use of partial information,

 Evidence on international experience which is not unambiguous.

 Broadly, four main arguments are made by the proponents of privatization of PSBs in India:

 Frequent recapitalization of state owned banks is a huge burden on the government budget;

 State ownership of banks reduces competition and thus breeds inefficiency,

 There is no evidence that state Ownership lowers the profitability of banking crisis; and

 Private and foreign banks stimulate efficiency, innovation and economic growth.

Examination of these arguments reveals that the case for privatization of PSBs in India is not
strong enough at least on the grounds usually proposed by the advocates of privatization. Private
Sector Banking would have a larger probability of crisis if the' supporting legal and regulatory
framework were not sound enough to insulate the systems from extraneous pressures. It may,
therefore, be safe to maintain the public sector characters of the banks for privatization are
conducive enough.
Nagarajan and Khannan made an attempt to identify the factors influencing spread of SCBs in
India. The study is carried out for the period 1995-96 to 1999-2000 by covering 27 PSBs, 31 PBs
and 28 FBs. Pooled data lode and Generalized Least Square approach was used for carrying the
analysis. The researchers in this study found that size of the bank does not necessarily imply
higher spreads. Further, they found that non-interest income as a share of total assets enable
banks to tolerate low spread. With regard to regulatory requirements variables, it was found that
capital plays an important role in affecting spreads of PSBs.
Mukhopadhyay, K.K.threw light on the challenges that the public Sector bank has to face
on the initiation of reform measures. The author expressed that Indian Banking system is
passing through a metamorphosis due to the impact of the revolutionary reform process initiated
since 1992. The author felt that PSBs today have already started feeling the pinch and are
definitely going to confront for stiffer challenges in the next millennium. Challenges like
competition especially from the new private sector banks and foreign banks, low staff
productivity, changing life styles of the customers; technological progress, non-performing
assets, etc. definitely put the PSBs in a very tight position. So, it is up to the PSBs to welcome
them or choose for extinction.
Shroff (2007) gives a summary of how Indian banking system has evolved over the year. The
paper discusses some issues face by these systems. The author also gives examples of
comparable banking system for other countries and the lesson learnt. Indian banking is at the
threshold of the paradigm shift. The application of technology and product innovations is
bringing about structure change in the Indian banking system.
Kumar (2006) studied the bank nationalization in India marked a paradigm shift in the
focus of banking as it was intended to shift the focus from class banking to mass banking.
Internationally also efforts are being made to study causes of financial inclusion and designing
strategies to ensure financial inclusion of the poor disadvantaged. The banks also need to
redesign their business strategies to incorporate specific plans to promote financial inclusion of
low income group treating it both a business opportunity as well as a corporate social
responsibilities. Financial inclusion can emerge as commercial profitable business.

Madhavankutty (2007) concludes the banking system in India has attained enough maturity and
is ready to address prudential management practices as comprehensively as possible, which an
integral part of policy is making. Banking in India is poised to enter yet another phase of
reforms once the door opens further to foreign players in 2009. This requires further
improvement in technology management, human resource management and the ability to foresee
rapid changes in the financial landscape and adopt quickly. At present, there is a huge hiatus
between the top management earnings of state owned banks and private, as well as foreign
banks. Banks have to lay down sound risk management strategies and internal capital adequacy
assessment committees to ensure that they do not diverge from the prudential requirements.
Review related to impact of reforms:-

Singh, Sultan (2001) made an attempt in his Ph.D. Thesis titled “An appraisal of banking
sector reforms in India” in Guru Jambeshwar University Haryana, to Access the impact of the
reforms on the operational performance and efficiency of the Commercial Banks in India. Ratio
analysis has been used as a major tool for assessing the performance of the selected Commercial
Banks. The study revealed that total income as a percentage of working funds and/or total Assets
and Spread as a percentage of total Income/Working fund/total advances/ total deposits have
improved in the reform period against the pre-reform period in most of the banks. Total Income,
interest earned other income, spread, total expenses, interest expended, operating expenses and
establishment expenses are comparatively more consistent in the reform period. The hypothesis
that the profitability position has improved in reform period may be accepted to some extent. It
was observed that in the PSBs the size of NPAs has also been reduced to some extent and quality
of service has improved in reform period. The priority sector lending has registered a decline in
the deregulation era.

The focal point of the study made by RadhaT. (2002), in her Ph D Thesis, titled, “Impact of
banking sector reforms on the performance of commercial banks in India, in Andhra
University, Visakhapattanam, was to critically evaluate the impact of Banking Sector Reforms
on the performance of Commercial Banks in India. In this Study, Radha analysis the magnitude
of deposits and borrowings, and trends in branch expansion, advances and investments, trends
income and expenditure and also studied the magnitude of achievements in priority sector
advances, capital adequacy, CD ratio, staff position in different bank groups and individual
banks within the group. This study covered the period 1989-90 to 1998-99. Simple statistical
techniques like percentages and growth rates were used in this study. Major findings of the study
are..: (i) Total Deposits of all Commercial Banks put together may be divided as SBI (21.5 per
cent), Associate Banks (6.6 per cent), Nationalized Banks (58.6 per cent), Private Banks (6.9 per
cent) and Foreign Banks (6.3 per cent) respectively, (ii) In the total borrowings of SCBs,
Nationalized banks, on an average, accounted for 39.42 per cent followed with 22.77 per cent by
Foreign Banks, 23.54 per cent by SBI, 7.76 per cent by Private Banks and 3.47 percent by
associate banks, (iii) In Branch expansion, Indian Private Sector Banks, registered 21.36 per cent
growth rate which is highest amongst SCBs, during the study period, followed by Foreign Banks

with 16.96 per cent, Associate Banks with 12.77 per cent, Nationalized Banks with 11.36 per
cent, SBI with 6.23 per cent, (iv) Total investments of Commercial Banks in India increased to
Rs. 346271 Crore in 1998-99 from Rs. 97,199 Crore in 1989-90, (v) Priority Sector advances as
proportion of net bank credit after exceeding the target of 40 percent in 1991 has been
continuously falling short of target up to 1999, (vi) Foreign Banks in India as a group achieved
highest capital adequacy ratio among all groups of SCBs, (vii) Among all Indian banking groups,
Indian private sector banks recorded highest CD ratio with 67.06 'per cent.
Padwal S.M. in his paper made an attempt to assess the impact of liberalization on Indian
Banking. Padwal came to a conclusion that high cost of branch expansion, growing percentage
of credit portfolio to low yielding assets; increasing operating and establishment expenses have
adversely affected banks' profitability. The scholar in this paper strongly felt that deregulation in
the banking sector is expected to help to widen credit market, enhance saving mobilization and
stimulate competition but there is a need to prepare the banking industry to face the consequence
of liberalization.

Muniappan (2002) studied paradigm shift in banks from a regulator point of view in Indian
Banking: Paradigm Shift, IBA Bulletin, and No 24 3. He concluded the positive effect of
banking sector reforms on the performance of banks. He suggested many effective measures to
strengthen the Indian banking system. The reduction of NPAs, more provisions for standards of
the banks, IT, sound capital bare are the positive measures for a paradigm shift. A regulatory
change is required in the Indian banking system. Madhavankutty (2007) concludes the banking
system in India has attained enough maturity and is ready to address prudential management
practices as comprehensively as possible, which an integral part of policy is making. Banking in
India is poised to enter yet another phase of reforms once the door opens further to foreign
players in 2009. This requires further improvement in technology management, human resource
management and the ability to foresee rapid changes in the financial landscape and adopt
quickly. At present, there is a huge hiatus between the top management earnings of state owned
banks and private, as well as foreign banks. Banks have to lay down sound risk management
strategies and internal capital adequacy assessment committees to ensure that they do not diverge
from the prudential requirements.
Subbaroo PS (2007), in his paper Changing Paradigm in Indian Banking- Gyan
Management, has concluded that the Indian banking system has undergone transformation itself
from domestic banking to international banking. However, the system requires a combination of
new technologies, well regulated risk and credit appraisal, treasury management, product
diversification, internal control, external regulations and professional as well as skilled human
resource to achieve the heights of the international excellence to play its role critically in meeting
the global challenge. This paper mainly concentrates on the major trends that change the banking
industry world over, viz. consolidation of players through mergers and acquisitions globalization
of players, development of new technology, universal banking and human resource in banking,
profitability, rural banking and risk management. Banks will have to gear up to meet stringent
prudential capital adequacy norms under Basel I and II, the free trade agreements. Banks will
also have to cope with challenges posed by technological innovations in banking.
Tiwari S (2005) in his paper “ Development of Financial Institutions in Indian Banking- A
paradigm Shift, Punjab Journal of Business Studies, has proposed a view that among the
financial intermediaries banks and financial institutions are vital players in running the funding
activities of the industries. In the bank based system the financial institutions dominate in the
aggregate assets of the financial system while in market based system, equity market has largest
share of assets in the aggregate assets of the financial system.
Uppal and Kaur (2007), in their paper titled, “Analysis of the efficiency of all the bank
groups in the post banking sector reforms era”. Their time period of study was related to
second post banking sector reforms (1999-2000 to 2004-05). The paper concludes that the
efficiency of all the bank groups has increased in the second post banking sector reforms period
but these banking sector reforms are more beneficial for new private sector banks and foreign
banks. This paper also suggests some measures for the improvement of efficiency of Indian
nationalized banks. The sample of the study in Indian banking industry which comprises five
different ownership groups and the ratio method is used to calculate the efficiency of different
bank groups. New private sector banks are compelling with foreign banks for continuous
improvement in their performance.

Vashisht A K (2004), studied commercial banking in the globalize environment, published in

Political Economy Journal of India, has presented the recent global developments, which has
transformed the environment in which commercial banks operate. Globalization has expanded
economic interdependence and interaction of countries greatly. Under the regime of globalize
environment, the financial performance of the commercial banks has changed and the
commercial banks will face new challenge and also new opportunities in the coming years.
Wahab A (2001)in his book “Commercial Banks under reforms-performance and issues”,
book edited by Deep and Deep Publications New Delhi, has tried to analyze the performance of
the commercial banks under reforms. He also highlighted the major issues need to be considered
for further improvement. He concluded that reforms have produced favorable effects on
performance of commercial banks in general but still there are some distortions like low priority
sector advances, low profitability etc. that needs to be reformed again.
The RBI (1999) through its study Report on Currency and Finance, provides the Central Bank's
perspective on how deregulation had impacted on bank performance. The RBI's review covers all
categories of banks, not just PSBs. The principal findings of this review are worth highlighting:
I. There has been a decline in spreads, a widely used measure of efficiency in banking, and a
tendency towards their convergence across all bank-groups, except foreign banks.
Intermediation costs as a percentage of total assets had also declined, especially for PSBs and
new private sector banks, largely to a decline in their wage costs.
Capital adequacy and asset quality (measured by the net NPAs as a percentage of net advances)
have both improved over the period 1995-96 to 1999-2000.
IV. Median Profit per employee of PSBs witnessed a significant rise between 1996-97 and 1999-
2000, due largely to a rise in the same in the case of the SBI Group.
V. Non-Interest income to working funds rose moderately for the median PSBs.

VI. The ratio of wage bill to total expenses remained at a high level of PSBs.

VII. The cost to income ratio declined both at the SBI Group and the Nationalized Banks.

Joshi, P.N. has made an attempt to analyze the 'impact of financial sector reforms on the weaker
sections of society. Joshi in this article felt that Financial Sector reforms may have encouraged
banks to go in for innovative measures, develop business, earn profit and benefit the
shareholders; however, the social content of banking has suffered continuous neglect. The social
objectives before banks were side tracked and the emphasis today in a financial strength, capital
adequacy and profitability. The banking philosophy in the country changed mercilessly against
the poor. Today, 60 per cent of India's population including the weaker sections of society is
without banking facilities. At one stage, Josh (emphasized that rural branches accounted for 576
per cent of the total branch network but at present, it forms only 50 per cent of total branch
network. Between 1992 and 1999, the number of borrower accounts declined by exactly 13
million. Credit-Deposit ratio which was 47.32 per cent in March 1996 declined to 39.35 per cent
in March, 2000 and in Semi-urban areas it was 40 per cent in 1996 declined to 34.38 per cent in
March, 2000.
Joshi Vijaya and Little observed that on the eve of banking reforms Indian Banking Sector was
financially unsound, unprofitable and inefficient. They made a critical examination of the
changes that have taken place in the banking sector after reforms. Further, what remains to be
done with respect of pre-emption of bank resources, directed credit, deregulation of interest rates,
etc. in the field of banking sector were also elaborately discussed.
CONCLUSION:
In all the above review of literature various review of made by various researchers, authors have
made evaluation of the performance of commercial banks the earlier studies differed from one
another in the selection of period, selection of banks, selection of indicators and selection of
statistical tools and techniques. In contrast, the present study focuses its attention on the impact
of reforms on Indian banking system in post liberlisation era. The period therefore starts from the
year 1991-92 i.e. the year from which reform measures were initiated up to 2010-11 twenty year
period for which data are available. The study, instead of taking a large number of parameters, of
which some are alternative specifications, took six parameters to evaluate the efficiency of
banks, five to assess profitability and health parameters, i.e. Non-performing assets and capital
adequacy. Apart from quantitative aspects, this study has taken qualitative aspect, i.e., customer
perceptions on service quality of selected public and private banks as an ancillary to the main
study.
 This chapter has exhibited the studies conducted and review of literature available on the subject
of research. It has been divided into four major parts according to the subject area. After this
review of literature it is found that, though there are several studies conducted on the subject,
most of the studies are conducted on performance appraisal studies or impact studies of financial
reforms and its impact on individual banks. There are very few studies have been conducted on
the financial reforms and its impact on Indian public sector and private sector banks. Thus there
was a gap of the study on the subject. Therefore after finding the gap of research, the study has
been undertaken on the above mentioned subject. After the review of literature, we will study the
development and reforms taken place in the post liberalization period in both public and private
sector banks.
Chapter No. 3
RESEARCH METHODOLOGY
3.1. Problem Definition:
To determine and analyze the hidden potential in Banking sector in India so as to suggest the
investors whether to invest in shares of Banking Companies.

3.2. Objectives:
 To discover insights into and develop an understanding of the various Macro and Micro
Economic Factors those have bearing on the functioning of the Banking sector.

 To evaluate the performance of some of the banks based on the past data and forecast the
future prospects.

 To study the growth and performance of banking industry.

3.3. Valuation:
The project involves valuation of major Indian Banks including ICICI Bank, SBI and HDFC
Bank. The methodology followed is Target Pricing, which includes estimating growth rate by
regression on historical sales to forecast next year sales, earning and Profit and Loss account.
Then EPS is calculated which is multiplied to Historical P/E to forecast intrinsic value of share.

3.4. Result:
All shares are undervalued and expected to give positive risk adjusted returns to investors. Since
the intrinsic value is more than current market price for all the companies, the share can be
recommended to conservative investors.
3.5. RESEARCH DESIGN
Exploratory Research Design because the problem required an in-depth study of all the
related variables.

Past information and forecasts:

Collected the past information in the form of details of the various accounting statements
(Income Statement, Balance Sheet etc.), including the sales for the past 10 years (1997-2006).
Forecasts are done in relation to the future performance in terms of sales for HDFC Bank, ICICI
Bank, and SBI. Other forecasts include the EPS calculation and comparison of forecasted Future
Target Price with the Current Market Price.
Once the information was collected, the next step was to search for resources and
constraints with respect to the area of research.
Resources and Constraints:
Resources:
Various Publications like
 AT Kearney Report, 2005
 FICCI Survey on status of Indian Banking Industry – Progress and Agenda Ahead
 Indian Banks Association, Various Years, Performance Highlights of Banks (Mumbai).
Reserve Bank of India, 2005, “Annual Policy Statement for the year 2005-06” (Mumbai).
Company Reports
Constraints:
 Lack of time availability with the people involved in any manner with the research
especially when decisions were to be made quickly.
 Difficulty in application of Statistical Tools.
 Difficulty in making accurate forecasts because of presence of Economic impediments like
inflation, RBI policies etc.
3.6. SAMPLING: DESIGN AND PROCEDURE:
Sampling Technique:
“Convenience Sampling” as a part of Non-Probability sampling by taking the three banks as the

major performers in the Indian Banking Sector and highlighters of sector’s overall performance.

Sample Size:
Sample Size was restricted to 3, including ICICI Bank, HDFC Bank and State Bank of India.
Executing the Sampling Process:
Through making a comparison among the various key figures of sales, profits and accounting
ratios deduced from accounting statements.
Method of Data Collection:
Secondary Data is collected to carry out the study. To review the literature available regarding
the subject; various journals, magazines, related research papers and Internet would be used
Chapter No. 4
Data Analysis and Interpretation of Questionnaires

The following chart shows that respondents having what type of account in HDFC bank

INTERPRETATION
Above graphical representation shows that 37% of them are having saving account.
Least of them are having current account.
The following chart shows that the numbers of customers having account for many long
time.

INTERPRETATION
Above graphical representation shows that 46% of them are possessing account in HDFC Bank
since last 1-2 years.
The following chart shows that respondents having what total numbers of account in
HDFC bank

INTERPRETATION
Above graphical representation shows that 42% customers are having single accounts.
The following chart shows that customer holding total numbers of Products with them of HDFC
bank.

INTERPRETATION
Above graphical representation shows that 42% of customer holding more than two products
5 .This charts shows the percent of customer making investments in HDFC Bank and where
they have invested their money.

INTERPRETATION
In this chart, it is shown that 36% don’t make any type of investments and 64% of customers
make investments in HDFC Bank and out of 64% of customers 40 % do fixed deposits, 37%
makes life insurance and 23% invest in mutual funds.
6. Chart shows the percent of customer using credit card of HDFC Bank.

INTERPRETATION
Above graphical representation shows that 37% of customers having Credit cards of HDFC
Bank and 63% have not taken any type of Credit card.
7. This chart shows the percent of customer taken loan from HDFC Bank.

INTERPRETATION
Above graphical representation shows that 39% of customers have taken loan form HDFC Bank
and 61% have not taken any type of loan.
This Question shows that the numbers customers currently using services of HDFC Bank
and option where given of multiple choice.

INTERPRETATION
Above graphical representation shows that majority of customer’s using debit card i.e.81, while
the numbers of credit card customers are 37, 48 and 69 of customer’s avails the benefit of net
banking and Insta alert provided to them and 19 of them are using National Electronic Fund
Transfer (NEFT) mainly this type of services current account users are using and 24 number of
customer using phone/mobile banking.
Chapter No. 5
MAJOR FINDINGS
Major Macro – Economic Factors include Gross Domestic Product – which has grown by over
8% in 2005-06, FDI Confidence Index – where India stands II in the world, Inflation – which has
slow down due to falling crude prices, Gross Fiscal Deficit Interest Rate – the UPA government
is confident to achieve the budgeted targets, Rising Oil prices & Exchange Rate – Indian
government and oil companies are relax as oil prices have fallen beside Indian Rupee has
strengthen against USD, EURO and Yen and Capital Market – the year is booming for market
with FII and mutual fund are pumping money increasing BSE Sensex returns over 50%.
In June 2006, Indian Banking System is spread through 66000 branches with an asset base of
about $270 billion. There are 87 Scheduled Commercial Banks operating in India including 8
Bank of SBI & Associates, 20 Nationalized Banks, 29 Private Banks and 30 Foreign Banks. In
terms of asset size, public sector banks have highest base compared to private and foreign banks.
SBI & Associated have asset base of Rs.691872 cr. Bank group-wise, new private sector banks
grew at the highest rate during 2005-06 (43.2 per cent), followed by foreign banks (31.2 per
cent), public sector banks (13.6 per cent) and old private sector banks (12.2 per cent).
As a result, the relative significance of PSBs declined significantly with their share in total assets
of SCBs declining to 72.3 per cent at end-March 2006 from 75.3 per cent at end-March 2005,
while that of new private sector banks increasing to 15.1 per cent from 12.5 per cent.
Credit to the priority sector increased by 33.7 per cent in 2005-06 as against 40.3 per cent in the
previous year. The agriculture and housing sectors were the major beneficiaries, which together
accounted for more than two-third of incremental priority sector lending in 2005-06. Credit to
small scale industries also accelerated. Retail loans, which witnessed a growth of over 40.0 per
cent in 2004-05 and again in 2005-06, have been the prime driver of the credit growth in recent
years. Retail loans as a percentage of gross advances increased from 22.0 per cent in March 2004
to 25.5 per cent in March 2006.
ICICI Bank is the leading market player with change in loans market share in FY02-06 of over
5% and change in deposits market share in FY 02-06 is nearby 2.5%. HDFC Bank and UTI Bank
are also in high growth phase. The laggards are SBI Bank, Bank of Baroda Bank, Bank of India
and Punjab National Bank.
Bank stocks declined after a committee set up by the Reserve Bank of India (RBI) on credit
pricing framework submitted a draft report on Thursday, 10 April 2014. ICICI Bank (down
1.06%), Axis Bank (down 0.38%), HDFC Bank (down 0.12%) and State Bank of India (SBI)
(down 0.34%) declined. Kotak Mahindra Bank rose 0.26%.
Micro-Economic Factors affecting Banking Industry: Some of Micro-Economic factors
identified in the report are:

 Loan Demand in which the Indian Banking Industry has seen sustained strength in credit
growth (a 30% increase in Oct 2006, of which 58% growth has seen in service sector and
100% in real estate sector).

 Rising funding costs with soft lending rates – Deposits has seen a growth of 22% of which
household savings contribute to 43%, credit spread increase to 3.3% and Yield on
government bonds reduced to 7.75% due to rising interest cost

 Non – Performing Loans (NPLs) - The Total bank loans stood at Rs 15,231.7bn, of which
housing loans are Rs. 1719.2bn. However, the Industry’s share of total credit has dropped to
40%

 Technology - Indian banks still don’t have the robust systems required for efficient
functioning of online banking and Banks need to explore newer channels such as SMS,
WAP and 3G mobile telephony applications to facilitate online access to customers.

GROWTH OF INDIAN BANKING SECTOR:

The Indian economy’s liberalization in the early 1990s has resulted in the conception of various
private sector banks. This has sparked a boom in the country’s banking sector in the past two
decades4. The revenue of Indian banks grew four-fold from US$ 11.8 billion to US$ 46.9 billion,
whereas the profit after tax rose nearly nine-fold from US$ 1.4 billion to US$ 12 billion over
2001-105. This growth was driven primarily by factors. First, the influx of Foreign Direct
Investment (FDI) of up to 74 per cent with certain restrictions4. Second, the conservative
policies of the Reserve Bank of India (RBI), which have shielded Indian banks from recession
and global economic turmoil.
Banking in India is moderately consolidated, with the top 10 players accounting for
approximately 60 per cent of the total industry. The Indian banking sector is major dominated by
public sector banks.
The State Bank of India (SBI), Punjab National Bank (PNB) and Bank of Baroda (BoB) had the
first, second and third largest credit portfolios, respectively. HDFC emerged as among the best
performers with a strong NIM ratio and the lowest NPA ratio, whereas, ICICI (with the fourth
largest credit portfolio) reported a high NPA ratio.
Chapter No. 6
LIMITATIONS

The scope of the study will be restricted to selected Banks.

Many of the respondents did not think hard enough while choosing the specific point. This could
have led to a biased view and thus affected the analysis.
There may be other events during the Clean and Window Period which may distort the results
.
Chapter No. 7
CONCLUSION
The methodology followed is Target Pricing, which including estimating growth rate by
regression on historical sales to forecast next year sales, earning and Profit and Loss account.
Then EPS is calculated which is multiplied to Historical P/E to forecast intrinsic value of share.
All shares are undervalued and expected to give positive risk adjusted returns to investors. Since
the intrinsic value is more than current market price for all the companies, the share can be
recommended to conservation.
Chapter No. 8:
Suggestions

Indian banking needs to focus on the following aspects and build required capabilities to cope up
with the challenges of the dynamic banking environment.
 Without adversely affecting the quality of services, the banks should device the strategies to
cut down and control the costs.
 The future strategies of banks should be to earn more of ‘other income ‘and reduce
dependence of interest income.
 To fulfill the expectations of customers, to improve the profitability and efficiency, banks
should adopt latest and cost-effective technology, because technology has emerged as a
strategic tool in the operations of banks.
 In the coming years, the key word is marketing would be innovation. It would become
impossible to survive and prosper unless organizational skills are effectively canalized
towards innovating new ideas, new products, and new strategies for winning over and
retaining the customer.

 Since the service sector in India started contributing around 50 per cent to the Gross
Domestic Product; banks should explore the possibilities to tap this sector.
 Another area, which requires urgent attention, is improving staff productivity particularly in
public sector banks. There is need to downsize staff to cut high cost of staff expenses. It is
also necessary to redistribute staff to strengthen the neglected areas of marketing.
 Since customers’ perception of banks products are influenced more by the quality of services
associated with it than by the physical product itself, banks have to undertake a continuous
process of monitoring customers’ perceptions of service quality, identifying the causes for
service quality shortfalls and taking appropriate remedial action to improve quality
.
QUESTIONNAIRE

Dear Sir/Madam,

I am a student of RAYAT INSTITUTE OF MANAGEMENT, RAILMAJRA. As part of the

requirements for my Post Graduation Diploma in Business Management I am required to do a
research based project. Kindly spend a few minutes of your valuable time and fill in this
questionnaire.

Your Age: ____________________

Education Qualification

Undergraduate □
Graduate □
Post graduate □
3. Marital Status.

Married □

Single □
No. of Children: __________

4. Occupation.
Business □

Profession □
Service □
(Please mention below the type of business/profession you are in incase of service please

mention your organization name and designation)

5. Your annual household income.

<than 2 lack □
Between 2 to 5 lack □
Between 5 to 8 lack □
>than 8 lack □

6. Faced saving problems?

Yes □
No □

7. Do you have Credit Card?

Yes □
No □

If yes, which Bank?

Kind of services Banks you are enjoying

Do you have loans requirement?

Yes □
No □

10. From where do you like to save money?

Private bank □
Nationalize banks □

11. Which Banks facility you like more?

Private bank □
Nationalize banks □

And why?
While saving in a Bank, what is your priority?

Is Central Banking System beneficial for you?

Yes □
No □

14. Does you use Internet Banking?

Yes □
No □
And how it will help you?
BIBLIOGRAPHY

 Company Reports

 Government of India, 1998, Report of the Committee on Banking Sector Reforms

 Government of India, 1991, Report of the Committee on the Financial System

 IMF Working Paper - Competition in Indian Banking by A. Prasad and Saibal Ghosh

 Indian Banks Association, Various Years, Performance Highlights of Banks (Mumbai).

 Indian Banking Association

 Ministry of commerce and Industry

 Reserve Bank of India, 2008, “Annual Policy Statement for the year 2007-08” (Mumbai).

 Reserve Bank of India (a), Various Years, Report on Trend and Progress of Banking in
India (Mumbai).

 Reserve Bank of India (b), Various Years, Statistical Tables Relating to Banks in India

(Mumbai).