RESERVE BANK OF INDIA LUCKNOW

PROJECT REPORT

CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA-A BRIEF SKETCH

PREPARED BY-

KAHKASHAN ANJUM YOUNG SCHOLAR
(YOUNG SCHOLARS AWARD SCHEME-2009)

Our preamble

"...to regulate the issue of Bank Notes and keeping of reserves with a view to securing monetary stability in India and generally to operate the currency and credit system of the country to its advantage."

-Reserve Bank of India

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PREFACE
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980.

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I owe my thanks to all other persons working in DBS for providing me information. As a part of DBS. 4 . DAPM. Assistant manager.kotian. B. Rathore Regional Director Lucknow office for facilitating and providing an opportunity to learn in the form of a training programme.D.B. DBS for helping me to understand all important vital aspects relating to banking system and providing data & structure. Without who’s friendly and loving attitude. I sincerely thank the Governor. support and understanding related to different aspects of banking system. General Manager department of banking supervision for helping me in the project along with RBI. the Central Bank of India. DBS for helping me to understand the various aspects related to banking and guiding me to undertake the project in the right direction. Lastly and significantly I am grateful to Mr.P. Vishwa Mohan. HRDD for providing me support and solving my problems during my tenure in RBI Lucknow office. the project would not have been such a joyful learning and a memorable experience forever.S. who gave me the chance to work on the project titled "CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA" in Lucknow city.R. Assistant General Manager. A special thanks to Mr.Yadav.KAHKASHAN ANJUM ACKNOWLEDGEMENT First of all I would like to thank to Reserve Bank of India to allow me to be a part of such a reputed institution. Assistant General Manager. (personnel) for providing great support and also for making me feel comfortable with the homely interaction with all other staffs and the entire staffs of R. A special acknowledgement goes to Shri G.I I am also thankful to Mr. Purendra Kumar sir Assistant general manager of DAPM. Reserve Bank of India and Shri D. I further thank Shri Jai kish sir.

 Transparency and disclosures……………………  Challenges in banking security…………………. 3-Banking sectors in India  Public sector………………………………... 1-Introduction of …………………………………………  RBI……………………………….  Risk management……………………………….. 4-Narasimham committee………………………………  Requirement…………………………………….  Recommendations………………………………...  Competition with private sector banks…………. RRBs………………………..  How to reduce NPA……………………………....  Loan waiver: A new challenge………………….  Growth in business……………………………… 8-Recommendations………………………………….…. 9-Conclusion………………………………………..KAHKASHAN ANJUM CONTENTS Subject……………………………………………………page no. 5 ..  Man power planning……………………………..  DBS……………………………….  Private sector……………………………….. 5-Globalisation……………………… 6-Challenges……………………………………  Implementation of Basel II………………………  Implementation of latest technology…………….  Co-operative.

RBI gives it direct to the public and by currency chest(cc) and the cc also gives it to other bank branches. RBI RBI does the currency management that's not only the talent. Notes and coins on counters are exchanged by the public and bank claim.. by two joint custodians from press representative.10. On the establishment of RBI was the main object credit control and currency management. Notes are printed at its presses and then sent to RBI offices. Notes are printed by RBI and coins are minted by GOI. it also regulate and supervise the monetary system which is done by banks and other institution. but distribution is done by RBI of both so why the monetary system growth. RBI issue the notes on the basis of Minimum reserve system there is Gandhiji's portrait on the note as an emblem. 6 . The consignment of notes is recd.Bibliography………………………………………………. and then kept in vault after weighting where security with cc camera is performing.Summery of the project…………………………… 11.

Though originally privately owned. the Reserve Bank is fully owned by the Government of India The Central Office of the Reserve Bank has been in Mumbai since inception. The Central Office is where the Governor sits and is where policies are formulated. 1934. 100 each fully paid which was entirely owned by private shareholders in the beginning.000. Bank of Madras & Bank of Bombay. ten nominated Directors by the Government to give representation to important elements in the economic life of the country. the Governor and four Deputy Governors. If the excess money goes into circulation It causes the inflation. Before the establishment of RBI notes were issued by three-presidency banks-Bank of Bengal. After some time these banks were merged into one 1920 and named Imperial bank of India. Now it has 22 regional offices. one Government official from the Ministry of Finance. Kolkata. The Reserve Bank of India was established on April 1. In 1935 the rights and duties of Imperial bank were delegated to RBI. Local Boards consist of five members each Central Government appointed for a term of four years to 7 . 1935 in accordance with the provisions of THE RESERVE BANK OF INDIA ACT. Chennai and New Delhi. 5 crores on the basis of the recommendations of the Hilton Young Commission. Till the establishment of RBI this bank was acting as the central bank. since nationalization in 1949. The Government held shares of nominal value of Rs. It was established in April 1935 with a share capital of Rs. To control this situation RBI takes action and suck out the money by banking & other transaction INTRODUCTION OF RBI (THE CENTRAL BANK OF INDIA) The central bank of the country is the Reserve Bank of India (RBI). most of them in state capitals.20. 2. By that time RBI is issuing and controlling the currency. and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai. The share capital was divided into shares of Rs. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members.in banking hall working two coin vending machine from which coins can be taken in working time.

Originally. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. gold bullion or sterling securities provided the amount of gold was not less than Rs. The system as it exists today is known as the minimum reserve system. of which at least Rs. 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.represent territorial and economic interests and the interests of co-operative and indigenous banks. these provisions were considerably modified. the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. The Bank was constituted for the need of following: • • • To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage. agent and adviser. 40 crores in value. 200 crores. BANKER TO GOVERNMENT The second important function of the Reserve Bank of India is to act as Government banker. 115 crores should be in gold. Due to the exigencies of the Second World War and the post-was period. The assets and liabilities of the Issue Department are kept separate from those of the Banking Department. the Bank has the sole right to issue bank notes of all denominations. Bank of Issue Under Section 22 of the Reserve Bank of India Act. Government of India rupee securities. The Reserve Bank has a separate Issue Department. The Reserve Bank of India Act 1934 was commenced on April 1. eligible bills of exchange and promissory notes payable in India. The remaining three-fifths of the assets might be held in rupee coins. The Reserve Bank is agent of Central Government and of all State Governments in India excepting 8 . 1935. which is entrusted with the issue of currency notes. Since 1957. The Act. the assets of the Issue Department were to consist of not less than two-fifths of gold coin.

By an amendment of 1962. Controller of Credit As supreme-banking authority in the country. The Reserve Bank of India helps the Government .both the Union and the States to float new loans and to manage public debt. every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. Banker's bank and the Lender of the last resort The Reserve Bank of India acts as the bankers' bank. It acts as adviser to the Government on all monetary and banking matters. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. The Reserve Bank of India can change the minimum cash requirements. to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. has the following powers: (a) it holds the cash reserves of all the scheduled banks. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort. to keep the cash balances as deposits free of interest. According to the provisions of the Banking Companies Act of 1949. The Bank makes ways and means advances to the Governments for 90 days. the Reserve Bank of India. 9 . It makes loans and advances to the States and local authorities.that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business. via. therefore.

inspection and calling for information. Besides maintaining the rate of exchange of the rupee. liquidity of their assets. Legal Framework Acts governing specific functions • • • • Indian Coinage Act. reconstruction.(b) It controls the credit operations of banks through quantitative and qualitative controls. 1881 10 . Further. 1934. Supervisory functions In addition to its traditional central banking functions. and liquidation. 1906:Governs currency and coins Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act.F. branch expansion. Custodian of Foreign Reserves Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I. management and methods of working. The vast sterling balances were acquired and managed by the Bank. 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks. relating to licensing and establishments. the RBI has the responsibility of administering the exchange controls of the country. The Reserve Bank Act. amalgamation. the Reserve Bank has to act as the custodian of India's reserve of international currencies. and the Banking Regulation Act.M. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them. (d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks. (c) It controls the banking system through the system of licensing. the Reserve bank has certain non-monetary functions of the nature of supervision of banks and promotion of sound banking in India.

which facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market 11 . Objective: It is the nodal agency. 1999. It in turn protects depositors' interest and provides lucrative banking services to the public. Manager of Exchange Control: The RBI is responsible for managing the Foreign Exchange Management Act. formulating and monitoring the monetary policy of India. Objective: This reasonably helps in maintaining public confidence in the system. Regulator and supervisor of the financial system: The Supreme financial body sets down broad parameters of banking operations within which the country's banking and financial system operates. Objective: Keeping this authority in mind the RBI is required to maintain price stability and ensure adequate flow of credit to productive sectors.FUNCTIONS OF RBI MONETARY AUTHORITY REGULATOR & SUPERVISOR MANAGER OF FOREIGN EXCHANGE ISSUER OF CURRENCY Y RELATED FUNCTION S BANKER TO BANKS BANKER TO GOVERNMENT Functions of RBI Monetary Authority: The RBI is responsible for implementing.

Deposit Insurance and Credit Guarantee Corporation of India (DICGC). The RBI looks after the functioning of the state banks and grants them license and even cancels the same on account of fraud practice. Banker to banks: maintains banking accounts of all scheduled banks. Subsidiaries of RBI Fully owned:= National Housing Bank (NHB). Objective: This facilitates in giving the public adequate quantity of currency notes and coins and in good quality. Issuer of currency: It is the only supreme body. The Reserve Bank of India has recently divested its Stake in State Bank of India to the Government of India. 12 . Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL) Majority stake: = National Bank for Agriculture and Rural Development (NABARD). The RBI often advises the Government of the current monetary condition in the state.in India. National Bank for Agriculture and Rural Development (NABARD). Developmental role The RBI since its inception performs a wide range of promotional functions to support national objectives and generate goodwill among the citizens of the country. Related Functions Banker to the Government: The RBI performs merchant banking function for the central and the state governments and also acts as their banker. which issues and exchanges or destroys currency and coins not fit for circulation.

suspension of business. the supervision and regulation of commercial banks was handled by the Department of Banking Operations and Development (DBOD). The Department of Banking Supervision at present exercises the supervisory role relating to commercial banks in the following forms: Preparing of independent inspection programmes for different institutions. amalgamation. Inspection evaluates financial condition and performance of the bank which includes judging asset quality.B.CAPITAL ADEQUACY penalties.The Department of Banking Supervision follow CAMELS approach during its inspection of commercial banks. I. solvency and capital adequacy earning performance and liquidity of the bank.Department of banking supervision The Department of Banking Supervision has its Central Office in Mumbai and 16 regional offices at various centres in the country. Then seeing management and perating condition and compliance of the bank which includes Regulatory compliance and Guidance compliance and finally doing summary assessment of the bank i. identification of concerns and areas for corrective actions. I worked in DBS. Regional Office at Lucknow. Determining the criteria for the appointment of statutory auditors and special auditors and assessing audit performance and disclosure standards. ensuring follow-up and compliance. merger/winding up. It judges banks on the basis of the following six parameters : A-ASSET OR CREDIT QUALITY M-MANAGEMENT E-EARNINGS 13 L-LQUIDITY S-SOLVENCY . off-site surveillance. issuance of directives and imposition of C.In December 1993 the Department of Supervision was carved out of the DBOD with the objective of segregating the supervisory role from the regulatory function of R. Prior to 1993. Undertaking scheduled and special on-site inspections.e. Exercising supervisory intervention in the implementation of regulations which includes-recommendation for removal of managerial and other persons.

etc. FOREIGN SECTOR BANKS. But due to privatization of public sector industries. Primary Agriculture Credit Societies RRBs A rural bank is a financial institution that helps rationalize the developing regions or developing country to finance their needs specially the projects regarding agricultural progress.Banking sectors in india PUBLIC SECTOR BANKS-The public sector is the one whose working is in the hands of the government.Foreign sector banks are those banks which have their head office in other countries outside India and branch is working in India. a. The co-operative banking sector is divided into the following categories. nuclear power industry.are banks that are not incorporated. 14 . electricity board. Central co-operative banks c. CO-OPERATIVE SECTOR The co-operative sector is very much useful for rural people. In any such case. the creditors can look to both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-partners' assets. PRIVATE BANKS. it may be defined as "an enterprise where there is no private ownership but its activities are not mainly confined to the maximization of profits and private interests of the enterprise but it is influenced by social. Their activities are mostly influenced by the government. their nimbler has reduced to a significant extent. State co-operative Banks b.are still in cluded in the public sector. Indian railways. A private bank is owned by either an individual or a general partner(s) with limited partner(s). the government holds a majority stake in public sector industries.

Structure of Banking in India Reserve Bank of India Scheduled Banks Non-Scheduled Banks Scheduled Commercial Banks Scheduled Cooperative Banks Public sector banks Private Sector Banks Foreign Banks Regional Rural Banks Scheduled Urban Cooperative Banks Scheduled State Cooperative Banks Nationalized Banks SBI & its Associates Old Private Sector Banks New Private Sector Banks Source-Banking &Finance Magazine 15 .

Demand for new products. social studies and urban design. 5 (b)“ Banking means accepting money for the purpose of lending and investment or deposits of money from the public.INTRODUCTION A public space refers to an area or place that is open and accessible to all citizens. One of the earliest examples of public spaces are commons. along with all this. race. ethnicity. age or socio-economic level.new banks. 16 . regardless of gender. repayable on demand or otherwise and withdrawable by cheque. new financial institutions. nor are the entrants discriminated based on background. has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalised environment. the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. (urban) geography. cultural studies. this is an element of the larger concept.” The enhanced role of the banking sector in the Indian economy. The term 'Public Space' is also often misconstrued to mean other things such as 'gathering place'. and new opportunities . order or otherwise. it has entailed greater competition and consequently greater risks. no fees or paid tickets are required for entry. visual art. Public Space has also become something of a touchstone for critical theory in relation to philosophy. new instruments. For example. While deregulation has opened up new vistas for banks to augment revenues. new challenges. new windows. draft. Its relevance seems to become more pressing as capital encloses more and more of what were thought of as 'commons'. Under Indian banking regulation Act. The last decade has witnessed major changes in the financial sector . Operating in this demanding environment has exposed banks to various challenges.and. particularly derivatives. 1949 sec. Nongovernment-owned malls are examples of 'private space' with the appearance of being 'public space'.

50 cr.2629 cr. were being deployed in organised sectors of industry and trade.28. 17 . small entrepreneurs. RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee. State-sponsored. the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence. professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal. a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilisation of resources. more particularly to the unorganised sector. State-partnered commercial banking institution with an effective machinery of branches spread all over the country. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. Earlier to creation of RBI. 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. 1955 by acquiring the substantial part of share capital by RBI. the associate banks came in to fold of public sector banking. Though a no. to function as Central Bank of the country. Similarly during 1956-59. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong. On July 19. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01. 1969. Subsequently in 1980. The scheme however. while the farmers. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs. transporters . deposits of Rs. the Govt. The bulk of the deposits collected. over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule. felt that the private banks may not extend the kind of cooperation in providing credit support.HISTORY O BANKING Indian banking system. the economy may need. loans of Rs. In February 1966. the Govt. of the then Imperial Bank of India. integrated. as a result of re-organisation of princely States. did not provide any remedy. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors.1813 cr and with 4134 branches accounting for 80% of advances. During December 1969.

However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system. credit management. Attention was paid to improving house-keeping. Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. for meeting the requirement of Indian economy. with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. more competition. of branches opened in rural/semi-urban centres bringing down the population per bank branch to 12000 appx. which had no access to banking hitherto. Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates. staff productivity and profitability of banks. The focus during this period was to lay the foundation for a sound banking system in the country. autonomy packages etc. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. Most importantly. In these five decades since independence. Measures were also taken to reduce the structural constraints that obstructed the growth of money market. During 1976. Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. RRBs were established (on the recommendations of M. A determined effort was made to make banking facilities available to the masses. capital adequacy. 18 . banking in India has evolved through four distinct phases: Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. While the 1970s and 1980s saw the high growth rate of branch banking net-work. customer service. prudential guidelines on asset classification and income recognition. technological changes. there was substantial increase in the no.In the post-nationalisation period. credit flows were guided towards the priority sectors. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population. the consolidation phase started in late 80s and more particularly during early 90s. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organisation and consolidation of the banking system.

funds were largely given to traders. Bank of Baroda. mostly small. The expansion is significant in terms of geographical distribution. Bank of India. Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. Statistics bear testimony to the fact that the genesis of the economic crisis in India. In 1865 Allahabad Bank was established and first time exclusively by Indians. Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. 19 . On the recommendations of All India Rural Credit Survey Committee. these private owners of banks were at liberty to use the funds in any manner. Reserve Bank of India came in 1935. Next came Bank of Hindustan and Bengal Bank. Punjab National Bank Ltd. lies in the large and persistent macroeconomic imbalances that developed over the 1980s. the bank failures were frequent. which surfaced in 1991. Abreast of it the savings bank facility provided by the Postal department was comparatively safer.BANK NATIONALISATION & PUBLIC SECTOR BANKING Organized banking in India is more than two centuries old. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. There were approximately 1100 banks. Between 1906 and 1913. Indian Bank. Canara Bank. keeping in view the objectives of nationalisation. The General Bank of India was set up in the year 1786. The PSBs including RRBs. they deemed appropriate and resultantly. was set up in 1894 with headquarters at Lahore. Move towards State ownership of banks started with the nationalisation of RBI and passing of Banking Companies Act 1949. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks. PSBs undertook expansion of reach and services. account for 93% of bank offices and 87% of banking system deposits. SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI. As an aftermath deposit mobilisation was slow. of people served per branch office came down from 65000 in 1969 to 10000. The East India Company established Bank of Bengal (1809). Much of this expansion has taken place in rural and semi-urban areas. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out of which 58% in rural areas) and no. and Bank of Mysore were set up. In the absence of any regulatory framework. mostly Europeans. States neglected by private banks before 1969 have a vast network of public sector banks. During those day’s public has lesser confidence in the banks. Moreover. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. Central Bank of India.

Then on 19th July 1960.The following steps are taken by the government of India to regulate banking institutions in the country. Before 1969. • 1959 : Nationalisation of SBI subsidiaries. • 1949 : Enactment of Banking Regulation Act. Fourteen banks were nationalised in 1969. Indira Gandhi the then prime minister. when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Nationalised banks dominate the banking system in India. • 1975 : Creation of regional rural banks. State Bank of India (SBI) was the only public sector bank in India. • 1955 : Nationalisation of State Bank of India. • 1969 : Nationalisation of 14 major banks. The second phase of nationalisation of Indian banks took place in the year 1980. • 1980 : Nationalisation of seven banks with deposits over 200 crore. and Nationalised Banks in India Banking System in India is dominated by nationalised banks. After the nationalisation of banks. • 1961 : Insurance cover extended to deposits. SBI was nationalised in 1955 under the SBI Act of 1955. its seven subsidiaries were also nationalised with deposits over 200 crores. Seven more banks were nationalised with deposits over 200 crores. The major objective behind nationalisation was to spread banking infrastructure in rural areas and make available cheap finance to Indian farmers. the branches of the public sector bank India rose to approximately 800% in deposits and advances took a hugejump by 11. The history of nationalised banks in India dates back to mid-20th century. 20 . Banking in the sunshine of Government ownership gave the public implicit faith immense confidence about the sustainability of these institutions. • 1971 : Creation of credit guarantee corporation.000%. The nationalisation of banks in India took place in 1969 by Mrs.

The major objective behind nationalisation was to spread banking infrastructure in rural areas and make cheap finance available to Indian farmers. the State Bank of India is the largest commercial bank of India and is ranked one of the top five banks worldwide. (iii) They make available the means for sending funds from one place to another and do this in cheap. After the nationalisation of banks there was a huge jump in the deposits and advances with the banks. the second phase of nationalisation of Indian banks took place. India has progressed towards a modern market-based system and has a growing middle class. (v) Banks also help their customers. can be stated as follow: (i) The banks collect the savings of those people who can save and allocate them to those who need it. so as to enable them to develop. in which 7 more banks were nationalised with deposits over 200 crores. in the task of preserving their precious possessions intact and safe. At present. besides they also care for making such payments as safe as possible.However. These savings would have remained idle due to ignorance of the people and due to the fact that they were in scattered and oddly small quantities. safe and convenient manner. With this. (ii) Banks preserve the financial resources of the country and it is expected of them that they allocate them appropriately in the suitable and desirable manner. (iv) Banks arrange for payments by changes. SIGNIFICANCE OF BANKS The importance of a bank to modern economy. the major nationalisation of banks happened in 1969 by the then-Prime Minister Indira Gandhi. 21 . the central government launched economic liberalization. the Government of India held a control over 91% of the banking industry in India. After the 1991 economic crisis. which is the easiest and most convenient. order or bearer. It serves 90 million customers through a network of 9. crossed and uncrossed. In the year 1980. But banks collect them and divide them in the portions as required by the different investors.000 branches.

(Vii) It makes the monetary system elastic. is governed by banks. Such elasticity is greatly desired in the present economy. this is done by RBI. Although traditionally. by changing the supply of money with the changing the supply of money with the changing needs of the public. It is quite proper and convenient for the government and R. where the phase of economy goes on changing and with such changes. The following are the Scheduled Banks in India (Public Sector): • • • • • • • • • • • • • • • • • • • • • • • State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore Andhra Bank Allahabad Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Punjab and Sind Bank Syndicate Bank Union Bank of India United Bank of India Vijaya Bank 22 . demand for money is required. to change its currency and credit policy frequently.B. the banks have now spread their wings far and wide into many allied and even unrelated activities. the main business of banks is acceptance of deposits and lending. the basis of modern industry and economy and essential for financing the developmental process.(vi) To advance money.I.

This has the potential to further aggravate a growing apprehension that public sector banks’ growth could be constrained in relation to other players. prepared by the Reserve Bank of India (RBI) and the Central Government. The report indicated that PSBs would need additional capital to meet Basel II norms and maintain an asset growth for the overall projected growth of the economy at 8 per cent and consequent growth of risk-weighted assets (RWAs). 23 . provided the RWAs grow by within 25 per cent annually and total cost of recapitalisation would be lower than in most other countries. has favoured the merger of public sector banks (PSBs) having a government holding bordering on 51 per cent with those having a much higher state-holding to ensure that their business growth does not suffer due to capital constraints.The following are the Scheduled Banks in India (Private Sector): • • • • • • ING Vysya Bank Ltd Axis Bank Ltd Indusind Bank Ltd ICICI Bank Ltd HDFC Bank Ltd IDBI Bank Ltd The financial sector assessment report. The extent of additional capital required from the government is expected to be manageable.

The standard response to such figures is that private sector banks are more efficient than their public sector counterparts with foreign banks taking efficiency to astronomical levels.39—more than 10 times that of sbi. Citibank fared far worse: it recorded a whopping 8. the profit-complaint ratio of private sector banks is much lower than their much maligned public sector counterparts sbi’s profitcomplaint ratio of 4. For example. at the end of the day. An average icici bank branch earns Rs 4. Trend and Progress of Banking in India. Here. needs to look at another aspect before delivering the final verdict: profits per branch. It shows that the State Bank of India (SBI) recorded 0.1 for example is much higher than cici and Citibank 24 . According to latest data released by the Reserve Bank of India (RBI) in due course the depositors have withdrawn funds from private and foreign banks and are investing their money with public sector banks which has resulted in a significant decline in growth of deposits with private and foreign banks. largely because the state-owned players were offering higher interest rates. on an average. The report should make those singing hosannas for private sector banks sit up. But their rich rake-offs notwithstanding.Public banks deposit growth rise. foreign banks see drop The public sector banks have shown growth in their credits in comparison to their private and foreign competitors. private. public sector banks rule the roost in customer satisfaction. But while a lot of experts might deride these institutions for their nonperforming assets and lower productivity.5 crore. According to Reserve Bank of India’s (RBI's) latest report. while an average sbi branch earns just Rs 50 lakh. public sector banks have far happier customers compared to their counterparts in the private sector.1 “complaints per branch” while the corresponding figure for icici was 1. annually.59 complaints per branch. While in December. Public sector banks score over private ones Public sector banks have long been chastised as the black sheep of the financial sector. One. In recent months big companies such as Infosys moved their deposits from private and foreign banks to public sector banks. the public sector players had taken decision to reduce bulk deposit and focus more on current account and saving account balances. a Citibank branch earns a net profit of Rs 18 crore annually. These complaints were made to RBI grievance cell. private banks fare better. however.

The private sector interpretation of this adage seems to be: spending as little time on the customer as possible. the time spent on the phone with a customer is tracked and executives found to be spending an inordinate amount are ticked off. with Citibank bringing up the rear.Timeismoney RBI’s data indicates that private and foreign banks are biting off more than they can chew: customer acquisition is shooting through the roof but the servicing mechanism is Given short shrift. have increasingly started using the emotional platform to attract customers. three belong to the public sector. However. Darkside Recent advertising campaigns. Citibank tops the list. testify to such omission. these banks attempt to bring home the fact that the bond between a customer and his bank goes beyond the purely commercial. Banks. And their surveys. like all other businesses.consumer-voice.021 and 0. The zeal to be efficient means that the private sector has all but forgotten another business aphorism: time spent with a customer is an investment which may yield future dividends in the form of customer loyalty and referrals. In most private banks. especially by private banks. The Consumer Voice survey also has private sector banks faring poorly in this respect. The highestranking foreign bank is Standard Chartered at number eight. according to a survey by Consumer Voice (http://www. Not surprisingly. icici Bank is at number 15 (fifth from the bottom). For example. other than those conducted by rbi. The corresponding numbers for new private Indian banks is 0. private and foreign banks actually score pretty high on customer complaints of the nasty variety: namely.org). “harassment in recovery of loans”. Only one public sector bank figures amongst the top five in the list of banks with highest number of disgruntled customers.003 for public sector banks. people were more likely to recommend public sector banks to their friends or relatives. customers don’t necessarily share that warm feeling. Public sector banks score over private ones According to the rbi report. Of the top five banks in this category. believe that “time is money”. With tag lines such as “Hum hain naa” and “Just like borrowing from a friend”. a consumer awareness magazine. 25 .134 such complaints per branch—more than 30 times the overall average. Foreign banks record 0.

customers can meet the next working day. it would be wiser to accept the problems that are cropping up now and address them in a sensible and humane manner. Firstly.00 pm and 5. secretary to the banking ombudsman. This often leads to a chain reaction and such vacillation irks customers. The customer is preferred to remain a faceless entity with a number to identify him.” But technology. one finds a complaint form along with a detailed note elaborating the grievance redressal system. The sbi home page does not have a link relating to complaints. technology needs to find favour with the public. leaving them with no choice but to approach rbi. “Customers of the bank can meet senior executives of the bank on the 15th of every month (between 3. a cup of tea and a patient hearing solves half the problem. it’s the opposite. In private sector banks. running from pillar to post would often find that a kind word. The overarching desire is to resolve grievances on the phone or through the Internet.00 pm) without any prior appointment and discuss issues relating to their accounts/banking transactions. technology is not infallible: it solves old problems but creates its own new ones.Citibank also tops another dubious list: that of people fed up with tele-marketing executives pestering them. like atm machines. a harried customer. The bank accounts for 40 per cent of all such complaints. though useful. 26 . prominently displayed. cannot provide complete solution. WHY WORRY? At Citibank’s website. What they do have is a customer care web page that declares. they feel that technology can be used to overcome these problems. human contact is anathema. TheHolyGrail One reason for disgruntled customers is the fact that that the service executives are often not authorised to solve problems and refers them to another party. The icici Bank home page also has a similar link. In case the 15th is a holiday.” It is a fundamentally different approach. For two important reasons. With a centralised decision making authority. But at a public sector bank. Secondly. rbi “Public sector banks are decentralised. According to P Shimrah. For the new breed of private banks. Instead of living with the vision of a future utopia with perfect banking systems. The branch manager of a public sector bank is more empowered than his private sector counterpart to solve problems at his level. Inappropriate technology or innovations that are too far ahead of their time will not work.

46% in 1993-94 to 6. ‘Postponement’ of the problem in order to report higher earnings 3. The legal impediments and time consuming nature of asset disposal process. RBI regulations require that banks build provisions upto at least a level of 50% of their gross NPAs. but the solution does not lie in swinging to the other extreme typified by foreign banks. A satisfying middle ground needs to be found where the cutting edge efficiency of western banking is tempered with respect and empathy for the customer. 2.74% in 200001. Based on Loan loss provisioning The net NPAs4 have continually declined from 14.The fact that public sector banks need to shape up has been repeated ad nauseam. The current provisioning is 35% of gross NPAs. The problem India faces is not lack of strict prudential norms but 1. Manipulation by the debtors using political influence 27 .

Adoption of appropriate prudential. regulatory. along with all this. inter-alia. The last decade has witnessed major changes in the financial sector . has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalised environment. new windows. and technological framework on par with international best practices enables strengthening of the domestic banking system. supervisory. new financial institutions. new instruments.new banks. new challenges.CHALLENGES IN BANKING The enhanced role of the banking sector in the Indian economy. Globalisation of domestic banks has also been facilitated by tremendous advancement in information and communications technology. we had strengthened the banking sector to face the 28 . the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. In India. Globalisation – a challenge as well as an opportunity The benefits of globalisation have been well documented and are being increasingly recognised. Globalisation has thrown up lot of opportunities but accompanied by concomitant risks. which would help in fortifying it against the risks that might arise out of globalisation. on the soundness of the financial system and the strength of the individual participants. it has entailed greater competition and consequently greater risks. While deregulation has opened up new vistas for banks to augment revenues. Operating in this demanding environment has exposed banks to various challenges. and new opportunities . particularly derivatives.and. There is a growing realisation that the ability of countries to conduct business across national borders and the ability to cope with the possible downside risks would depend. Demand for new products.

enhancement of transparency & disclosures. viz.. 29 . application of technology. Global challenges in banking A new broad challenges faced by the Indian banks in the following areas.pressures that may arise out of globalisation by adopting the banking sector reforms in a calibrated manner. implementation of new accounting standards. and compliance with KYC aspects. enhancement of customer service. improvement of risk management systems. implementation of Basel II. which followed the twin governing principles of non-disruptive progress and consultative process.

Transparency and disclosures 10.Growth in business 13. Risk management 9. Man power planning 6.Challenges in banking security 11. How to reduce NPA 4.Enhancing customer service 30 . Corporate governance 5. Talent management 7.CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA 1. Implementation of latest technology 3.Competition with private sector banks 12. Loan waiver: A new challenge 8. Implementation of Basel II 2.

Basel II accord defines the minimum regulatory capital which is to be allocated by each bank based on its risk profile of assets. Implementation of Basel II is seen as one of the significant challenges for Public Sector Banks. I would venture to mention that Basel II implementation has another dimension which offers considerable opportunities to banks. and other residual risks such as reputation risk and business cycle risk) and then.location framework. viz. banks which are getting more than 20% of their businesses from abroad have to Implement Basel II. While it may be so for some banks.. Banks have to maintain the capital adequacy ratio (CAR) of minimum 9 %. The challenge for the banks would be to quantify risks(credit concentration risk. liquidity risk. It is true that Basel II implementation may be seen as a compliance challenge. and improvement in capital efficiency.Implementation of Basel II Basel II implementation is widely acknowledged as a significant challenge faced by both banks and the regulators internationally. business and strategic risk. Public Sector Banks would need additional capital to the extent of Rs. Basel 2 requires more capital for public sector banks in India due to the fact that operational risk is not captured under Basel I. 31 . refinement of risk management systems. I would like to highlight two opportunities that are offered to banks. including a robust stress-testing and economic capital al Public Sector Banks would be required to use fully scalable state of the art technology. Basel II is the revised capital accord of Basel I. 90 billion to meet the capital charge requirement for operational risk under Basel II. Needless to say. As per RBI. ensure enhanced information system security and develop capability to use the central database to generate any data required for risk management as well as reporting. Implementation of Basel II will require more capital for Public Sector Banks in India due to the fact that operational risk is not captured under Basel I • • • In ICRA's estimates. this would call for instituting sophisticated risk management systems. to translate those consistently into an appropriate amount of capital needed. interest rate risk in the banking book. commensurate with the bank’s risk profile and control environment. But most of the banks are now interested to implement Basel II.

The costs associated with Basel II implementation. are expected to be quite significant for Public Sector Banks. it should be quantitatively measured. particularly costs related to information technology and human resources. Minimum Capital Allocation for credit risk To allocate the capital for any of the above risk. ensure enhanced information system security and develop capability to use the central database to generate any data required for risk management as well as reporting. CAPITAL ADEQUECY PLANNING 32 .• • • The most important Pillar 2 challenge relates to acquiring and upgrading the human and technical resources necessary for the review of banks responsibilities under Pillar 1. Public Sector Banks would be required to use fully scalable state of the art technology.

the bankers need not to hire employees specialized in handling paper work and teller interactions. Besides offering their users the convenience of banking. Various Advantages of Banking Online: 33 . Private sector and foreign banks were using technology and computerized system since its beginning while PSBs were not. You can simply login with the internet-banking password that your banker has given you. If you have access to such a facility. Technology helps in having a huge branch network easily and also it reduces the operational cost this may b clarified by an example as:Operational cost per transaction of an account via different type is Via computers on counter.  Via ATM . the online banking system means significant cost savings for the bankers themselves.46 paise So it is cleared that manually/direct transaction cost comes very high and electronically and online it is very low. So they found difficulty in managing all these things.IMPLEMENTATION OF LATEST TECHNOLOGY An online banking facility enables you to handle your finances efficiently.40 Rs. It also eliminates the necessity of doing any paper-based work and saves considerable time for the users. The bankers benefit equally from the online banking facilities. and carry all the necessary work online. This reduces the bankers’ operating costs considerably. With such an automatic system in place.16-17 Rs. Online banking uses modern computer technologies to offer the users convenient banking facilities. So that’s why public sector banks should improve their working system and should make it totally online but challenge is before PSBs The users can do variety of work using your online banking pin code. translating into significant cost savings over the long-term. Many of Indian PSBs ignored technological change and had lost market share to foreign banks and new private banks. there is absolutely no need for you to personally visit your bank’s branch for any sort of transaction.  Via online .

they will have to adopt modern technology. online banking facilities are open 24/7. Icici has also an extra transaction password plus you need to have a debit card and have to use the grid at the back of card to validate it.The biggest advantage of online banking is its convenience. its simple and logical. you are sent a code that you need to add when you are adding a new account for transfer. This three way verification is quiet robust and thus you dont get phising emails these days. Transactions online are fast and mostly quicker than ATM transactions. So its now more secure. Because phisers know that having an id and password is not enough. 34 . But now even the card and the id password as sent thru separate courier. So. may be because of lesser traffic. Moreover. This offers you banking from the comfort of your home with just a click. the bank has now introduced two-faced ATMs. While a transaction at a branch costs around Rs 50. Technology will not just help them reach out to young customers better but also help them cut costs and improve efficiency. This could be great advantage if you need to address urgent monetary concerns while away from home. net banking and mobile phones. a senior State Bank of India executive said. Here’s how the economics work. Unlike a bank’s branches. Stanchart is fast the minute you press add the sms is in your inbox. Technological leap The banks realised that if they have to survive. State Bank of India was amongst the first to focus on technology and a team is constantly at work to innovate in an attempt to lower costs. online banking systems have sophisticated tools that provide effective management of the users’ assets. a id and a password and you are done. Most banks now has sms verification. It was quiet risky then anyone who gets access to these two can empty your account. You can access such a facility from anywhere in the world. As a result. Many people at that time will do setting with the courier people and got access to this details. one at an ATM works out to Rs 18. Initially the online banking security system was quiet simple. Thou sometimes the sms takes too much time to be received. Transactions through the Internet are even cheaper at around Rs 10 each. which will increase efficiency. banks like State Bank of India want 50 per cent of the transactions from non-branch channels such as ATMs.

In the course of discussing disposition of assets with various banks. but that we don’t have a solution. an asset which is not producing income. with effect from March 31. But progress on the structural-institutional aspects has been much slower and is a cause for concern.. This paper deals with the experiences of other Asian countries in handling of NPAs. in accordance with the directions or guidelines relating to asset classification issued by RBI. upgradation of technology in the banking system. The two lines plotted are non-performing assets gross non-performing assets. Due to the improvement in the payment and settlement systems. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. recovery climate. doubtful or loss asset. prudential norms and risk-based supervision.HOW TO REDUCE NPA Non performing asset Definition A loan or lease that is not meeting its stated principal and interest payments. polity and the bureaucracy to be truly effective. Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation. More generally. I can say that this is a problem. Non Performing Asset means an asset or account of borrower. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary. etc.0. reduction in reserve requirements. Loan loss allowance is not growing nearly as fast as the non-performing assets. barriers to entry.3-1. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. it was decided to dispense with 'past due' concept. which has been classified by a bank or financial institution as sub-standard. The chart below shows data for NPA going back to 2. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. 2001. it sometimes becomes apparent that the reason that the bank cannot 35 .

Gross and net NPA of different sector of bank Table 1 (in %) category 2001 2002 (end of March 31) Gross NPA/ Gross Advance 2003 2004 36 . Loss assets : Assets becomes uncollectible/ unrealizable. but I’m certainly not smart enough to know what it is. is because the bank does not have enough capital to do so. Something needs to happen. While this chart shows that NPA is decreasing overall in banking system but even then in PSBs NPA are higher with comparison to private sector banks. It is suspected that the slow growth of loan loss allowance is related to the same problem.dispose of the property at market prices. The position of classification of NPA is summarized below: Standard assets : not NPA Sub-standard assets : Twelve months period after becoming NPA. Doubtful assets : Substandard for 12 months or more.

53 2.36 8. A strong banking sector is important for flourishing economy.84 11.27 1. Some of them are.89 (end of March 31) (in %) 2003 4.64 5. The failure of the banking sector may have an adverse impact on other sectors.Public sector bank Private sector Foreign bank 12.84 4. To improve the efficiency and profitability.49 1. 1. This was due to show ineffective recovery of bank credit. Corporate Reconstruction Companies 6.38 9. Various steps have been taken by government to reduce the NPA. The NPA growth involves the necessity of 37 . The extent of NPA is comparatively higher in public sectors banks. credit information on defaulters and role of credit information bureaus CONCLUSION The Indian banking sector is facing a serious problem of NPA.49 Management of NPA The table I&II shows that during initial sage the percentage of NPA was higher. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. It is highly impossible to have zero percentage NPA.32 1.07 5. lacuna in credit recovery system. Lok adalats 3.32 1.09 9.37 6. NPAs reflect the performance of banks. Various steps have been taken by the government to recover and reduce NPAs. (Table II&III).62 Table 2 category 2001 Public sector bank Private sector Foreign bank 6. 5.25 7.74 2. inadequate legal provision etc. But at least Indian banks can try competing with foreign banks to maintain international standard. the NPA has to be scheduled.37 8.82 2.76 2004 2.79 5.82 Net NPA / Net Advance 2002 5. Debt Recovery Tribunals 4.98 1. Securitization and reconstruction of financial assets and enforcement of Security Interest Act 2002. Non-performing assets are one of the major concerns for banks in India. One time settlement / compromise scheme 2.

In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade. NPAs seem to be growing in public sector banks over the years. The issue of Non Performing Assets has been discussed at length for financial system all over the world. these loan losses affect the banks profitability on a large scale. The severity of the problem is however acutely suffered by Nationalised Banks. the NPAs that are considered to be at higher levels than those in other countries have of late. which arises from the failure of borrower. Magnitude of NPAs In India. concrete results are eluding. 38 . Though complete elimination of such losses is not possible. The Indian banking system had acquired a large quantum of NPAs.provisions. which can be termed as legacy NPAs. However lending also carries a risk called credit risk. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes. which results into economic growth. which reduces the over all profits and shareholders value. Apart from raising resources through fresh deposits. followed by the SBI group. but banks can always aim to keep the losses at a low level. borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. CAUSES FOR NON-PERFORMING ASSETS IN PUBLIC SECTOR BANKS Introduction Granting of credit for economic activities is the prime duty of banking. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. Thus. Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. Despite various correctional steps administered to solve and end this problem. and the all India Financial Institutions. attracted the attention of public. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. The problem of NPAs is not only affecting the banks but also the whole economy.

banks are required to make provision against these in terms of extant prudential regulations.  Net NPAs are those type of NAPs in which the bank deducted the provision regarding NPAs.has remained in the sub-standard category for a period of 12 months  Loss Assets .loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.  After classifying assets into above categories. 39 . the provisioning norms are as under: • Asset Classification Provision requirements • • Substandard assets Doubtful assets 10% Up to 1 year 1 to 3 year 20% 30% • Loss assets More than 3 year 100% It may be either written off or fully provided by the bank  Gross NPAs are the sum total of all loans assets that are classified as NPAs.• Categories of NPAs  Sub-standard Assets .  While gross NPAs reflects the quality of the loans made by banks net whereas NPAs shows the actual burden of bank.which has remained NPA for a period of 90 days to less than or equal to 12 months  Doubtful Assets .

1 13.1 : BANK GROUP-WISE CLASSIFICATION OF LOAN ASSETS OF PUBLIC SECTOR BANKS .2 97.2003 TO 2008 (Concld.6 16.2 94.1 TABLE 7.6 1.2 34.4 2.1 26.6 96.1 : CLASSIFICATION OF LOAN ASSETS OF PUBLIC SECTOR BANKS .6 2.2 1.6 4.1 19.7 14909 16909 10838 11394 14147 16870 2.6 92.4 21. 2008 24. crore) As on March 31 Bank Loss Assets group / Years Total NPAs Amount Per cent Amount Per cent Total Advances 40 .4 As on Jan 2.DEPOSIT AND CREDIT GROWTH DEPOSIT Public sector banks Foreign banks Private sector banks Scheduled commercial banks* CREDIT Public sector banks Foreign banks Private sector banks Scheduled commercial banks* *Includes regional rural banks As on Jan 4.9 25.2 28.) (Amount in Rs. crore) As on March 31 Bank group / Years Standard Assets Sub-standard Assets Doubtful Assets Amount -1 Public Sector Banks 2003 2004 2005 2006 2007 2008 523724 610435 824253 1029493 1335175 1656585 Per cent -2 Amount -3 Per cent -4 Amount Per cent -5 -6 90.3 3.7 24.3 1.1 97.2 21.8 24.8 30.2 12.2003 TO 2008 (Amount in Rs.9 11. 2009 24.5 1.1 1 1 32340 28756 29988 24804 19945 19167 5.0 TABLE 7.

creditors.5 0. In view of the inadequacy of legal infrastructure in prompt reduction of NPA. The earning capacity and profitability of the bank are highly affected due to this as NPAs do not generate interest income for banks while at the same time banks are required to make provisions for NPAs from their current profits.4 7. While banks require non-legal time bound surgical solutions to meet the statutory requirements in reducing the level of net NPA.8 5.3 577813 661976 870850 1070872 1373777 1696334 SOURCE: RBI ANNUAL REPORT 2007-08 From above table it may be observed that though the total NPAs amount of Public sector Banks decreased from Rs.7 0. Corporate Governance It is a system of structuring. the only feasible alternative is to encourage non-legal recourse. 41 .2 54089 51541 46597 41379 38602 39749 9.3 0.9 2. So the NPAs have deleterious impact on the return on assets. This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare minimum. the internal legal machinery in banks should obviously be so strengthened as to ensure speedy disposal of suit-filed cases and execution of decreed cases.4 3. Due to inadequacy of legal systems.-7 -8 -9 -10 -11 {=(3)+(5)+(7)} {=(4)+(6)+(8)} {=(1)+(3)+(5)+(7)} Public Sector Banks 2003 2004 2005 2006 2007 2008 6840 5876 5771 5181 4510 3712 1. 39749 ( crore) as at the end of 31 March 2008 still a colossal amount is locked up in these impaired loans. recoveries of NPA are not likely to be quick through legal recourse.2 0.8 2. 54089 (crore) in year 2003 to Rs. operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders. employees. An important aspect of strengthening the assets portfolio of Public Sector Banks is to further reduce the level of NPAs.9 0.

comprising the SBI and its subsidiaries and the nationalised banks. • • • Weak corporate governance translates into higher cost of capital Better corporate governance translates into somewhat higher returns on assets But much better higher returns on investment relative to cost of capital So corporate governance is a key challenge for Public Sector Banks in the era of globalization. Man-power Planning  Manpower is the biggest challenge for the public sector banks.  Consequently. the general principles of sound corporate governance should also be applied to all Public sector Banks.  Currently in India. but is also a critical ingredient at the system level. these banks will also face many of the same risks associated with weak corporate governance.  Unless the issues connected with these multiple.customers and suppliers. and sometimes conflicting.  One of the major factors that impinge directly on the quality of corporate governance is the government ownership.  In view of the importance of the banking system for financial stability.  Although some ownership structures might have the potential to alter the strategies and objectives of a bank. While domestic private sector banks are expanding their manpower to match the business 42 . apart from meeting environmental and local community needs. functions are resolved and the boards of banks are given the desired level of autonomy it would be difficult to improve the quality of corporate governance in PSBs.  Corporate governance in PSBs is complicated by the fact that effective management of these banks vests with the government and the top managements and the boards of banks operate merely as functionaries. The issues related to corporate governance have continued to attract considerable national and international attention in light of a number of high-profile breakdowns in corporate governance. and complying with the legal and regulatory requirements. about four-fifths of the banking business is under the control of public sector banks (PSBs). sound corporate governance is not only relevant at the level of the individual bank.

 The banks also need to develop existing staff in newer competencies through a systematic and rigorous training and also recruit. the population of youth aged between 20 and 29 years is expected to cross the 27-crore mark in India. treasury management. So it is a challenge for Public sector Banks not only to recruit more employees but also to recruit quality professional. Public sector banks therefore need to implement right strategies to woo young techno-savvy customers that prefer alternative channels to traditional banking method. public sector banks have lost 10% market share to the aggressive private banks. By 2011. regulatory requirements and technology because of the high revenues generated. TALENT MANAGEMENT 43 . if necessary super specialist and specialist in areas like technology. The financial sector services are undergoing a rapid change in terms of the demographics. Because It takes as long as 18 months for the recruitment process of a typical state-owned bank to be concluded and of the candidates shortlisted. marketing. In the last seven years. essentially the role of this category of staff has remained unchanged. High average age of staff is also a cause of concern for the Public Sector Banks. Public sector banks were more likely to be seen as an older generation organisation where the average age group would be 50 years. public sector banks were faced with a large attrition rate of over 30 % and are experiencing an overall deceleration in the number of employees. High average age of staff is also a cause of concern for the Public Sector Banks. many drop out on their own. it would be tough to manage business as there is high competition for high-skilled jobs. FOREX operations and project management. growth. and Incentivisation of government bank employees too have failed as the fear of probe by various regulators and government agencies deter the top management from doling out huge sums as rewards to performing staffers. In spite of many changes that the industry has faced over the years. Public sector banks were more likely to be seen as an older generation organisation where the average age group would be 50 years. and this segment is more likely to be attracted to the state-of-the-art banks that would have a similar age bracket generation across the counter.     Going forward.

 Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes. the destination LOAN WAIVER: A NEW CHALLENGE 44 .  Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences. NPAS etc. manpower costs. cost of operations. i. nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career. strain on profitability. Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times. to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals. i. the starting point and where it wishes to reach in a given time horizon.  The preconditions for an effective talent management is clarity of where the organisation is. Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower.  There is also need to develop organisation-wide awareness about banks keybusiness problems including stagnant business units. unexplored business opportunities. both nationally and internationally.e.. Such personnel need to be identified..e.

e. Chidambaram announced the most ambitious farm loan waiver scheme with an estimated write off of Rs.The massive Farm loan waiver scheme 2007 of the Union Government is disaster for Public Sector Banks “as it will spoil the credit culture in the country. 2007 and remaining unpaid until February 28th.  Small farmer is defined as cultivating between 1 hectare and 2 hectares i.000.  Its highlights are as follows :  Full loan waiver for small farmers and marginal farmers. Waiver will cover short term crop loans as well as all the overdue instalments on the investment credit. 2007 and overdue as on December 31st. 45 .  For short-term production loans. they will not be required to provide for their non-performing assets in agriculture loans. 2007 and remaining unpaid till February 28th 2008.  Bulk of all dry and unirrigated lands fall in districts covered by the drought prone area programme popularly known as DPAP and the desert development programme (DDP). whichever is higher and not 25 percent as announced in the budget.  The total number of such districts is 237. together with the interest are eligible for all loans disbursed up to March 31. 2007 and overdue as on December 31st. the amounts disbursed up to March 31st. 60. Small and marginal farmers account for between 70 to 94 percent of all farmers in most states. Special package for other farmers in these 237 districts. i.  Marginal farmer is defined as cultivating agricultural land up to 1 hectare or 2.” FARM LOAN WAIVER SCHEME 2007 In budget speech of 2007 year. the instalments of such loans that are overdue. 2008 are eligible for loan waiver. less than 5 acres.  For investment loans. 72. For other farmers in these 237 districts. the OTS relief will be 25% or Rs. it will help them clean up their balance sheets because with the government reimbursing the money.000 crores.  But the biggest drawback of the scheme is its impact on the credit culture in the banking system. owning more than 5 acres or more than 2 hectares. will get one-time settlement (OTS) relief. The loan waiver scheme was amend to make it more inclusive.e. It offers a total waiver of Rs.000 crores covering more than 4 crore farmers.5 acres. the Finance Minister P. ·  On the positive side.  Other farmers. 20.  It will serve as a great disincentive for those borrowers who repay bank loans on time.

46 . Borrowers too now feel proud in availing the loan and then not repaying the same and prefer waiting for waiver by some government or the other  Those who repay the loan regularly will feel frustrated and deceived by such waiver of loan scheme which will benefit to only those who did not repay the loan wilfully  Obviously such step gives award to wrong doers and punishes to those who is honest and who keeps his word of repayment by making labour hard and showing good performance.  There will be nothing to prevent governments from writing off farm loans every five years. say. So Loan waiver scheme is emerging as new challenge for Public Sector Banks. Moreover public sector banks suffered loss due to this and their NPA increased in comparison to others.  Moreover Government has waived the loan of farmers and not that of small traders and small scale manufacturers whose position is more pathetic than that of a farmer  Banks will have to sacrifice the existing loan and provide for fresh disbursal of loan to maintain the minimum ratio and achieve the target of financing for agriculture  What is the remedy if good borrowers of other sectors too stop repayment of their loans ?  One way of doing this could be to introduce a differential loan rate for farm loans. 6% or even 5%. all farm loans up to Rs 3 lakhs are priced at 7% and the banks get a 2% subsidy from the government on such loans.  Now.  This will increase the subsidy burden on the government marginally. with the government increasing the subsidy on such loans.  The real risk of this ill-advised political move to write-off farm loans is that it opens up a very convenient option for future governments. The challenge before the Public Sector Banks now is to prevent these borrowers from turning into defaulters in future.  Based on the credit history. the loan rate for the good borrowers can be brought down to. just ahead of general elections. but isn’t it a small price to pay to protect the credit culture?.

treasury Retail banking Retail banking Private banking Retail lending and deposits. investment advice. secondary private placements. brokerage. But of late.  Credit Risk. trust and estates. foreign exchanges. banks are exposed to same competition and hence are compelled to encounter various types of financial and non-financial risks. securitizations. government debts. research. credit. Trading and sales Sales. RISK IN BANKING BUSINESS The banking industry has a wide array of business lines. due to regulated environment. 47 . privatizetions. banks could not afford to take risks. proprietary positions. debt. Advisory services Activities Mergers and acquisitions. banking services. underwriting. market making. Till recently. prime brokerage. commodities. Private lending and deposits. Municipal/Government finance.  Market Risk  Operational Risk. own position securities. debt and equity syndications. trust and sales. IPO. funding.RISK MANAGEMENT Risk is inherent in any walk of life in general and in financial sectors in particular. banking services. A fair idea may be available from the following table: Business lines Corporate finance Sub groups Corporate finance. lending and repos. Fixed income. There are three main categories of risks. All businesses take risks based on two factors: the probability an adverse circumstance will come about and the cost of such adverse circumstance. Risks and uncertainties form an integral part of banking which by nature entails taking risks. equity. Risk management is the growing challenge for Indian public sector banks because competitive environment is increasing in public sector banks. Merchant banking.

Card services Commercial Banking Commercial Banking

Merchant/Commercial/Corporate cards, private labels and retail. Project finance, real estate, export finance, trade finance, factoring, leasing, lending, guarantees, bill finance. Payments and collections, funds transfer, clearing and settlement. Escrow, depository receipts, securities lending, corporate actions. Issuer and paying agents. Pooled, segregated, retail, institutional, Closed, open. Execution and full services.

Payment and settlement External clients Agency services custody corporate agency corporate trust discretionary and nondiscretionary fund management retail brokerage

Asset management Retail brokerage

Credit risk
Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both) The management of credit risk includes a) Measurement through credit rating/ scoring, b) Quantification through estimate of expected loan losses, c) Pricing on a scientific basis and d) Controlling through effective Loan Review Mechanism and Portfolio Management.

Faced by lenders to consumers
Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property.  Consumers may face credit risk in a direct form as depositors at banks or as investors/lenders. They may also face credit risk when entering into standard commercial transactions by providing a deposit to their counterparty, e.g., for a large purchase or a real estate rental. Employees of any firm also depend on the firm's ability to pay wages, and are exposed to the credit risk of their employer.
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 Public Sector Banks are operating in an increasingly deregulated and

competitive environment.  Increased deregulation is reflected in several key developments over the last decade including a market-determined interest rate environment, freedom to fix both lending and deposit rates and increased competition from new private sector banks which have an aggressive business posture.  Assessing credit risk in lending to service sectors, Public Sector Banks needs a methodology different from assessing risks while lending to manufacturing.

Integrated Risk Management Solution
In order to control risk, one must first measure it. Measurement is critical to validating management process and improving internal discipline. As more and more business processes become electronic, identifying are responding to risk must become faster. In view of the potential impact and service requirements, risk management has become a real-time concern. without an enterprise wide approach that includes standard data definitions and integrated reporting, institutions cannot develop the consistent and timely view of risk exposures necessary for management decision-making. To comply with wide ranging regulatory demands, financial institutions must understand, control and report risk across the enterprise. Management is being held legally responsible for identifying and managing risks. At some point, rating agencies will likely establish a risk management rating for companies in addition to existing financial ratings. BUSINESS CHALLENGE IN BANKS
     Evolution of the real time business environment The developing global marketplace Concern about business continuity and operational reliability Continuous and accelerating technological change The need to limit earnings’ volatility and enhance shareholder value.

 But banks find compliance to Basel II norms in the above areas difficult, due to

ncreasing number of customer base of the banks, absence of effective risk anagement solution and absence of system interfaces between the existing stand alone applications of the banks.

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TRANSPARENCY AND DISCLOSURES

In pursuance of the Financial Sector Reforms introduced since 1991 and in order to bring about meaningful disclosure of the true financial position of banks to enable the users of financial statements to study and have a meaningful comparison of their positions, a series of measures were initiated.  Transparency and disclosure norms are assuming greater importance in the emerging environment. Banks are now required to be more responsive and accountable to the investors.  Banks move to disclose in their balance sheets information on maturity profiles of assets and liabilities, lending to sensitive sectors, movements in NPAs, besides providing information on capital, provisions, shareholdings of the government, value of investment in India and abroad, and other operating and profitability indicators.  The disclosure requirements broadly covered the following aspects:  Capital adequacy  Asset quality  Maturity distribution of select items of assets and liabilities  Profitability  Country risk exposure  Risk exposures in derivatives  Segment reporting  Related Party disclosures Transparency and disclosure standards are also recognised as important constituents of a sound corporate governance mechanism. Banks are required to formulate a formal disclosure policy approved by the Board of directors that addresses the bank’s approach for determining what disclosures it will make and the internal controls over the disclosure process. It is a huge challenge for Public Sector Banks to implement a process for assessing the appropriateness of their disclosures, including validation and frequency.

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 The largest set of functions in the banking sector which has benefited from the advances in IT relate to payment systems since quick.Challenges in Banking Security Banking as a business involves the management of risks.  These studies have indicated that a substantial portion of the breach of security in financial institutions have occurred on account of. in the case of banking.  Information Security is something which is best experienced than explained. but on the person who is part of the information supply chain. While much has been said about the financial risks. 51 . the position is much more complicated in respect of IT security. the weakest link. safe and efficient transfer of funds across the length and breadth of the country is the requirement of the day. Information Systems and Information Technology.  In a world where geographical barriers are losing significance and the death of distances is already a reality. with banks having taken to large scale use of technology for their normal day-to-day business.  This is supported by studies carried out by international organisations. it is but essential that security be given prime importance in a transnational scenario where large sums of money are at stake. the security requirements of the banking sector need to be assigned high levels of priority. or have been triggered with the aid of internal exposures or internal controls being compromised.  It is widely accepted that security is as effective as the weakest link in a chain. the risks arising out of the large scale implementation of technology is of recent origin.  And. Information Security is an activity which provides some comfort to both the policy makers and the users of data. does not relate to the components of technology (which do have an implication although).  Against this backdrop.  While the challenges related to physical security are those which can be confronted with relative ease. and is typically the insider in the bank itself.  All of us have at some point of time experienced the flow of information to persons others than to the intended users – even in a non-electronic traditional environment  With networking and access to information being available at rates much larger than before. comprising both physical aspects in addition to those relating to Information.  Security in Payment Systems cannot be addressed in isolation. all of which have an impact on the reputational risk of a financial organisation. Security in banks has thus assumed significant proportions.

 International standards should be examined and adopted keeping in view the requirements of the Indian banking industry. because of the critical nature of financial data transfer.  While the aspects relating to physical security leave a lot to be desired with even the most basic security requirements not being in place (like access for unauthorised personnel even to sensitive Cash holding areas).  The financial messages should have the under noted features:  The receipt of the message at the intended destination  The content of the message should be the same as the transmitted one  The Sender of information should be able to verify its receipt by the recipient  The Recipient of the message could verify that the sender is indeed the person  Information in transit should not be observed. It requires the integration of work processes. the entire operations.  I must add here that in a recent case of a co-operative bank. authorisation (to control the access to specific resources for unauthorised persons). altered or extracted  Any attempt to tamper with the data in transit will need to be revealed  Non-repudiation  These features boil down essentially to authentication (to verify the identity of the sender of the message to the intended recipient to prevent spoofing or impersonation). maintenance and management of the computer systems were totally in the hands of the firm which supplied the computer software and this led to a fraud and loss for the bank. periodical audit. confidentiality (to maintain the secrecy of the content of transmission between the authorised parties).  Banks need to put in place measures which conform to there is policies and ensure the regular. communication linkages and integrated delivery systems and should focus on stability. integrity (to ensure that no changes/errors are introduced in the messages during transmission) and nonrepudiation (to ensure that an entity cannot later deny the origin and receipt and contents of the communication). efficiency and risk control.  It would be advisable to build security features at the application level in respect of banking oriented products.  Yet another prime aspect of concern in a good security policy is the role that the human beings have in a secure computerised environment.  An important issue is relating to the security levels of use within the various operating departments in the banks.  Such cases cause reason for substantial concern. the security features in the computer systems are not fully fool proof in some banks. 52 .

undergoes frequent updation and version control and levels of software in use across offices is an issue which needs to be examined in its totality for practicable implementation at all offices / departments.  .  Passwords often become ‘passed’ words in our context with no change at all in the passwords since passwords tend to be rather fixed for long periods of time  It is absolutely essential that passwords lapse after certain periods of time – generally not exceeding a month at the latest.  Further. including those related to staff who retire have to be looked into. rights assigned need to be changed upon change of functions assigned to the operative staff and that updation.  Access to databases in computer systems and to the data contained therein have to be strictly restricted and not available to any but those authorised to make any changes in case of an eventuality for resolving a software lock / malfunction which is a conscious decision by the authorised personnel taken in conjunction with the head of the office concerned.  Change Management is another aspect that needs to be viewed from the security angle.  Software (and at times hardware too).  There is an imperative need to imbibe a culture of security among all operative functionaries – whether officers or other staff and cutting across administrative grading. The common level of entry is the use of validation of authorised access (in the form of authorised User-Ids) to be further authenticated by correctness of passwords keyed in by the authorised users.  Authorisation of users is another activity that needs to be closely regulated and monitored. The proliferation of networks within an office also acts as a negative factor in implementation of strict security features. 53 .  One of the basic requirements for implementation of security and monitoring thereof at the various departments is the need for system administrators.

 The State Bank of India. Sumitomo Mitsui. It is not even a 10th in size of the 9th largest bank. our banks are not equipped enough to compete in the international arena. which has assets of $950 billion as against SBI’s assets of $91 billion. the largest bank in India.  Some of the Public Sector Banks have their presence in overseas to a limited extent.  Realising the need to grow in size.”  As per the Narasimhan Committee (II) recommendations. ranks only 82nd amongst the top global banks.  Mergers and acquisitions in the banking sector are the order of the day. 54 . customers and profits.  This trend may lead logically to promote the concept of financial super market chain. the Indian banking system today is moving from a regime of “large number of small banks” to “small number of large banks. consolidations around identified core competencies are taking place. making available all types of credit and non-fund facilities under one roof which is challenge for public sectors bank and demand of time.  Therefore.  The London based magazine ‘The Banker” has now listed only twenty Indian banks including private sector banks in the list of “Top 1000 World Banks”.GROWTH IN BUSINESS  Public Sector Banks should now go global in search of new markets.

We are dependent on him. He is not an interruption on our work.  In order to develop close relationship with the customers the Public Sector Banks have to focus on the technology oriented innovations that offer convenience to the customers. We are not doing him a favor by serving him. He is the purpose of it. So providing better services than Private Sector Banks to customer is a challenge for Public Sector Banks. Customer is the king in Japan.  The Public Sector Banks may need to include customer oriented approach or customer focus in their five areas of businesses such as cash accessibility.ENHANNCING CUSTOMER SRVICE Mahatma Gandhi’s perception of a customer was as follows: “He is not dependent on us. asset security. deferred payment and financial advices. Customer is god in the UK and USA. money transfer.  There are four strategies available to customer relations' managers:  To win back or save customers  To attract new and potential customers  To create loyalty among existing customers and  To up sell or offer cross services. 55 .” As far as the customer I concerned. access to internet banking and phone banking facilities and credit cards. But. He is part of it. He is not an outsider on our premises. He is doing us a favor by giving us an opportunity to do so. Because a satisfied customer brings in more customers and he is the best advertisement for the bank.  Today customers are offered ATM services. These have elevated banking beyond the barriers of time and space. he is the pivot of all activities in the era of consumerism. the customer is the ‘Boss’ in India and the ‘Boss’ is always right.

a deeper and penetrating insight about the financial transactions of large borrowal groups. which require fresh review. This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare minimum. Banks are to engage services of dynamic young lawyers to have desired momentum in follow-up of suit-filed cases for timely disposal and subsequent execution of decrees. To minimize erosion of asset quality in banking.Recommendations FOR NPA       For strengthening the legal system. the banks may have to consider providing services of trained legal officers at controlling/branch levels. Quality asset building will also require up-to-date market information on various industries. service sector and other IT based industries etc. Banks should have framework for acceptable compromise proposals and supportive recovery policy directed towards out-of-court settlements. adopting regular interface with borrowers. Appointment of recovery agents. are the other areas. economic trends in a globalised environment and industry knowledge about new areas for financing like software. 56 . There is need for continuous improvement in asset quality by strengthening skill at the grass root level. infrastructure. ascertaining periodical operating performance of the firm etc. loans to subsidiaries facing financial woes etc. utilizing services of private security agencies of ascertaining means of NPA borrowers etc. there is immediate need for implementation of rigorous systems to eliminate diversion of funds by the borrowers towards less viable activities such as investments. depending upon the quantum of NPA.

Mobility of staff has to be negotiated with employees' organizations as a measure to improve organizational efficiency and improve productivity. need to be relocated or assigned newer jobs such as marketing etc. The banks have to suitably realign their existing human resources from surplus to deficit pockets and readjust staffing pattern in a computerised environment. Although the Reserve Bank maintains a tight vigil and inspects these entities thoroughly at regular time intervals. Boards need to set and enforce clear lines of responsibility and accountability for themselves as well as the senior management and throughout the organisation.  About 70% staff in each bank constitutes clerical and subordinate staff 57 . the level of remuneration payable to the directors should be commensurate with the time required to be devoted to the bank’s work as well as to signal the appropriateness of remuneration to the quality of inputs expected from a member. Oversight by individuals not involved in the day-to-day running of the various business areas. and Independent risk management. the quality of corporate level governance mechanism does not appear to be satisfactory. In order to attract quality professionals. compliance and audit functions. The entire HR framework needs to be revamped and the skill sets of existing staff needs to be strengthened. Banks need to develop mechanisms. FOR MAN POWER PLANNING  They would need to hire people in large numbers over next five years to maintain growth and stay competitive.  Surplus staffs from very large branches which are now computerised.FOR CORPORATE GOVERNANCE • • • • • • • • • • It is desirable that all the banks are brought under a single Act so that the corporate governance regimes do not have to be different just because the entities are covered under multiple Acts of the Parliament . which can help them ensure percolation of their strategic objectives and corporate values throughout the organisation. The directors could be made more responsible to their organisation by exposing them to an induction briefing need-based training programme/seminars/workshops to acquaint them with emerging developments/challenges facing the banking sector. Direct line supervision of different business areas. Oversight by the board of directors or supervisory board.

 Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes. Such personnel need to be identified. Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times. operational roles. public relation roles etc.  There is also a need to enrich clerical roles by introducing discretionary elements in front-line clerical roles and giving them responsibility of higher nature such as initiating correspondence. both nationally and internationally. to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals. but also how effectively it draws out the best from its talent personnel at any point of time . FOR TALENT MANAGEMENT  Public Sector Banks should not only take care of the sum total of its individual human capital. nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career.  Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences.  Needless to say that succession planning in managerial cadre must occupy central concern for bank management. There is the need to re-define the clerical roles in the bank.  Banks have an excellent pool of competent personnel in all the cadres.  Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower. Loops in customer services 58 . working in marketing teams.  The banks also need to develop existing staff in newer competencies through a systematic and rigorous training.

a stern action is called for and client must be advised.Customers want honesty 1. Recently the RBI advised all SCBs to implement the recommendations of the committee on procedures and performance Audit on public service. If the customer is correct and has too many such complaints against the staff.Customers want to know what’s going on 7.The cheques for collection handed over the counter are rarely acknowledged in spite of the RBI’s insistence.Many times the complaints could relate to discourteous behavior of counter staff-this should be handled carefully.Customers want to preserve their self respect.Facts about customers Ninety five percents of customers do not complain even if they are dissatisfied bcoz of indifferent attitude of not to bother unnecessarily and accept such bad service as part of human nature.Customers want a feeling of security and safety 8.Customers want to be treated fairly 5.The “may I help you counter” could not come up to the level of expectation as there is a lack of spirit in implementing it. Because do customers want 1-Customers want control over their decisions 2. 59 .Customers want friendly welcome and reception 6. It has suggested that cheques either be dropped in a box or tendered at counter when they should be acknowledged. This can be a vital customer care capsule in the panacea kit of the bank to heal al wounds. 3. 2. 4.Customers want to achieve their goals 3. In sum and substance a good customer service means a broad smile on customer’s face as they leave the bank after finishing their business.Customers want to feel like VIPs 9.

home loans. If the service levels of the product levels are not up to the 60 . liquidity risk management. increasing pressures on profitability. loans on credit cards. Operating in this demanding environment has exposed banks to various challenges. Managing customers is one of the main issues faced by banks. implementation of new accounting standards. of cases of default in loan repayment thus increasing the bank’s NPAs. implementation of Basel II. This has brought with it an increase in the no. on easy terms without much scrutiny. enhancement of transparency & disclosures. market risk management and ever tightening prudential norms.Conclusion Indian Public Sector Banks are facing innumerable challenges such as worrying level of NPAs. application of technology. educational loans etc. deteriorating asset quality. The boom in the field of retail banking and the intense competition among the banks to increase the customer base has resulted in the large disbursement of consumer loans. The demands and expectations of the customers grow at a much faster rate than the banks can equip themselves to be with them. improvement of risk management systems. auto loans. The post-reform period witnessed the following major challenges for public sector banks in India – Enhancement of customer service. asset-liability management.

61 . and controlled by RBI and it has also their union.000 crores and mostly major no frill A/cs has been open in public sector banks.customer satisfaction. The annual report 2007-08 of RBI shows that position of public sector banks is on steady progress. This is the main reason of delayed progress of PSBS. PSBs are also guided by govt. • Consolidated balance sheet of banks shows that banks are on progress. Liabilities and assets have been increased in comparison to last year but even then public sector banks are not progressing equally as private sector banks because of being regulated and controlled system. It has not the single controlling system while private banks have. there is always a danger that the customer might shift his transactions elsewhere. • Demand deposits. So there is trice controlling system that’s why any policy takes time in being implemented. • Balance with banks and money at call and short notice decreased last year. • Assets as current assets and other loan cash credit is increasing which shows a sign of growing network. 60. borrowings and other liabilities are increasing. Last year kisan loan was forgiven worth Rs. • Other approved securities also decreased in comparison to previous year. So NPA has been increased because operational cost has been increasing due to more A/cs and transaction and PSBs are liable to open branches in rural areas. So always give customers more than they expect to get. Multiple regulations are the main weakness for PSBs.

Banks in India have been working towards a vision that includes transformed branches. Besides this. and improve service delivery. Even for PSBs. It is expected that the provision of financial services through a versatile technology platform will enable these banks to acquire more customers. enhanced telephone services. liquidity risk management. the ongoing and future investments in technology are massive. Indian banks are facing innumerable challenges such as worrying level of NPAs. market risk management and ever tightening prudential norms. increasing pressures on profitability. asset-liability management. and leading edge internet. but also to build competence in handling various queries raised by customers as well. Therefore there is a need for today’s bank employees to keep themselves updated with a new set of skills and knowledge. the disclosure requirements are also increasing. banking functions that provide a consistently positive multi-channel experience for customers.Executive summery The world of banking and finance is changing very fast and banks are transforming themselves with the focus on knowledge. deteriorating asset quality. The primary challenge for banks is to provide consistent service to customers irrespective of the kind of channel they use. Though many positive signs are already visible in 62 . cut costs. Banks and technology are evolving so rapidly that bank staff must continually seek new skills that enable them not only to respond to change.

scarcity of trained personnel. However.rbi. While they have to handle volumes which are mind boggling. including a higher acceptance of technology by banks and customers.in RBI newsletter Google search engine en. BIBLIOGRAPHY • • • • • www. Banks rely on innovative ideas to increase their earnings. For PSBs. Further more the security risk involved in computerization is directly related to the size of the network.India. network downtime. The entry of new generation private sector banks and evolving technology has been changing the face of the Indian banking industry. expensive system upgrades and recurring costs given the massive scale of their current operations. challenges before public sector banks are plenty and of a different kind. Naturally.org. it is a reality that most projects have not yet been deployed on a large scale. Systems of accounting.org Annual report 2007-2008 63 .wikipedia. there are also issues of legacy. idea generators (human capital) become an even more important resource than the physical and financial ones. It is necessary for PSBs to adopt a standardized customer services code to remain competitive and profitable. old habits and political pressures. the major problems are in the form of security risks. control and delegation were set up decades ago and adoption of technology in terms of ‘real time’ banking and its compatibility with all phases of banking is not yet adequately perceived.

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