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away from the days of nationalization. The Narasimham Committee laid the foundation for the reformation of the Indian banking sector. Constituted in 1991, the Committee submitted two reports, in 1992 and 1998, which laid significant thrust on enhancing the efficiency and viability of the banking sector. As the international standards became prevalent, operational deterioration banks had to of unlearn directed of their credit, loan traditional directed portfolios, methods in the
investments and fixed interest rates, all of which led to quality inadequacy of capital and the erosion of profitability. The recent international consensus on preserving the soundness of the banking system has veered around certain sound core themes. systems, of of and These are: effective and risk management transparency intervention adequate supervision of capital provision, regulation, policy
stability in the economy. Until recently, the lack of competitiveness vis-à-vis global standards, low technological level in operations, 1
over staffing, high NPAs and low levels of motivation had shackled the performance of the banking industry. However, the banking sector reforms have provided the necessary platform for the Indian banks to operate on the and basis of operational The flexibility also and functional about autonomy, thereby enhancing efficiency, productivity profitability. reforms brought structural changes in the financial sector and succeeded in easing external constraints on its operation, i.e. reduction in CRR and SLR reserves, capital adequacy norms, restructuring the and recapitulating element in banks the and enhancing competitive market
through the entry of new banks. The reforms also include increase in the number of banks due to the entry of new private and foreign banks, increase in the transparency of the banks’ balance sheets through the introduction of prudential norms and increase in the role of the market forces due to the deregulated interest rates. These have significantly affected the operational environment of the Indian banking sector. To encourage speedy recovery of Non-performing
assets, the Narasimham committee laid directions to introduce Special Tribunals and also lead to the creation 2
of an Asset Reconstruction Fund. For revival of weak banks, the Verma Committee recommendations have laid the foundation. Lastly, to maintain macroeconomic stability, RBI has introduced the Asset Liability Management System. The East-Asian crisis has demonstrated the vital
importance of financial institutions in sustaining the momentum of growth and development. It is no longer possible for developing countries like India to delay the introduction of these reforms of strong prudential and supervisory norms, in order to make the financial system more competitive, more transparent and more accountable. The competitive environment created by financial sector reforms has nonetheless compelled the banks to gradually adopt modern technology to maintain their market share. Thus, the declaration of the Voluntary Retirement Scheme accounts for a positive development reducing the administrative costs of Public Sector banks. The developments, in general, have an emphasis on service and technology; for the first time that Indian public sector banks are being challenged by the foreign banks and private sector banks. Branch size has been reduced considerably by using technology thus saving manpower. 3
TABLE OF CONTENTS CH.The deregulation process has resulted in delivery of innovative financial products at competitive rates. mergers and acquisitions has been the most common development all around the world. trend of mergers for better stability and also the concept of virtual banking. PAGE NO TITLE 4 . this has been proved by the increasing divergence of banks in retail banking for their development and survival. In order to survive and maintain strong presence.NO. The Narasimham Committee has presented a detailed analysis of various problems and challenges facing the Indian banking system and made wide-ranging recommendations for improving and strengthening its functions. and insurance. In order to ensure healthy competition. the banking sector reforms have lead to the development of a diversifying portfolio in retail banking. giving customer the best of the services.
10 REFORMS IN THE INDIAN BANKING Introduction 01 Reduction of SLR and CRR 04 Minimum Capital Adequacy Ratio 07 Prudential Norms 11 Disclosure Norms 17 Rationalisation of Foreign 19 23 Special Tribunals and Asset Restructuring of Weak Banks 26 Asset Liability Management System 29 Reduction of Government Stake in 32 Deregulation of Interest Rate 39 Operations in India Reconstruction Fund PSBs 1.11 5 .CHAPTER .2 1.9 1.5 1.1 SECTOR 1.7 1.8 1.3 1.6 1.1 1.4 1.
2 2.NO.8 DEVELOPMENTS IN THE INDIAN BANKING Introduction 42 Voluntary Retirement Scheme 43 Universal Banking 52 Mergers and Acquisition 56 Banking and Insurance 62 Rural Banking 65 Virtual Banking 71 Retail Banking 73 CH.3 2.4 2. PAGE NO TITLE CHAPTER – 3 3.1 74 6 The SCAM Story .7 2.2 SECTOR 2.6 2.5 2.1 2.CHAPTER .
3.4 86 3..3.3 83 Future … what’s ahead Conclusion And today.. . List of Illustrations and Visual Aids Illustratio n No.5 88 Public Sector OR Private Sector – Point 3. 6 10 15 22 37 41 50 60 61 70 7 . . 1 2 3 4 5 6 7 8 9 10 Title Trends in CRR and SLR Growth In Investments In Government Securities by Banks Classification of Loan Assets of SCBs Indian Banks: Trend in ROE Capital Contributed by Government Income and Expenses Profile of banks VRS trends in Banks ICICI pre merger and post merger scenario Comparison of classes of banks Lendings in Rural India Page no.2 of Views 76 the news say.
List of Annexures Annexure 1: List of banks Annexure 2: Questionnaire 90 93 8 .
submitted to the then finance minister. Narasimham. The initiation of the financial sector reforms brought about a paradigm shift in the banking industry. Organisations and Functioning of the financial system. Manmohan Singh. former RBI Governor in order to review the Financial System viz. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a period of five years Progressive reduction in Cash Reserve Ratio (CRR) iii. Phasing out of directed credit programmes and redefinition of the priority sector 9 . In 1991. The reform measures necessitated the deregulation of the financial sector. on the banking sector reforms highlighted the weaknesses in the Indian banking system and suggested reform measures based on the Basle norms. The guidelines that were issued subsequently laid the foundation for the reformation of Indian banking sector.1 Introduction As the real sector reforms began in 1992. ii. aspects relating to the Structure. particularly the banking sector. The main recommendations of the Committee were: i. The Narasimham Committee report.1. the RBI had proposed to from the committee chaired by M. the need was felt to restructure the Indian banking industry.
ix. asset classification and provisioning against bad and doubtful debts vii. viii. Deregulation of interest rates so as to reflect emerging market conditions Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993. Rural banks. xiii.iv. including RRBs. Adoption of uniform accounting practices in regard to income recognition. Imparting transparency to bank balance sheets and making more disclosures Setting up of special tribunals to speed up the process of recovery of loans Setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount x. v. Abolition of branch licensing Liberalising the policy with regard to allowing foreign banks to open offices in India Rationalisation banks 10 of foreign operations of Indian . Restructuring of the banking system. confined to rural areas xi. xii. 8 per cent by March 1996. 8 to 10 national banks and local banks confined to specific regions. and 8 per cent by those banks having international operations by March 1994 vi. which could become international in character. so as to have 3 or 4 large banks.
norms. xvii. xix. by a separate agency to be set up by RBI and enactment of a separate legislation providing appropriate legal framework for mutual funds and laying down prudential norms for such institutions. Giving officers freedom by to individual banks to recruit based Inspection reports supervisory authorities essentially on the internal audit and inspection xvi. xxi. adoption of prudential norms for asset of classification capital and provisions. etc. Revised procedure for selection of Chief Executives and Directors of Boards of public sector banks Obtaining resources from the market on competitive terms by DFIs Speedy liberalisation of capital market Supervision of merchant banks.xiv. leasing companies etc. xv. Among these are the reductions in SLR/CRR. xx. Several recommendations have been accepted and are being implemented in a phased manner.. mutual funds. and 11 introduction adequacy . Ending duality of control over banking system by Banking Division and RBI A separate authority for supervision of banks and financial institutions which would be a semiautonomous body under RBI xviii.
etc. entire portfolio of Govt. Capital adequacy requirements should take into account market risks also ii. Keeping in view the need of further liberalisation the Narasimham Committee II on Banking Sector reform was set up in 1997. Risk weight for a Govt. charting of a programme of banking sector reforms required to make the Indian banking system more robust and internationally competitive and framing of detailed recommendations in regard to make the Indian banking system more robust and internationally competitive. This committee constituted submitted its report in April 1998. 9% by 2000 and 10% by 2002 12 . securities should be marked to market iii. guaranteed account must be 100 percent iv.CAR to be raised to 10% from the present 8%. This committee’s terms of reference included review of progress in reforms in the banking sector over the past six years. In the next three years.deregulation of most of the interest rates. The major recommendations are : i. allowing entry to new entrants in private sector banking sector.
Banks having high NPA should transfer their doubtful and loss categories to ARCs which would issue Govt. xvi. viii. xii. There should be no further re-capitalization by the Govt. Govt. An asset should be classified as doubtful if it is in the sub-standard category for 18 months instead of the present 24 months vi. International practice of income recognition by introduction of the 90-day norm instead of the present 180 days. NPA level should be brought down to 5% by 2000 and 3% by 2002.v. guaranteed accounts must also be categorized as NPAs under the usual norms xiii. xiv. x. an appropriate VRS must be introduced. Recruitment of skilled manpower directly from the market be given urgent consideration xv. To rationalize staff strengths. A provision of 1% on standard assets is required.Banks should avoid ever greening of their advances vii. There is need to institute an independent loan review mechanism especially for large borrowal accounts to identify potential NPAs. A weak bank should be one whose accumulated losses and net NPAs exceed its net worth or one 13 . xi. ix. bonds representing the realisable value of the assets.
REFORMS 14 .5 per cent riskweightage on gilts by March 31.whose operating profits less its income on recap bonds is negative for 3 consecutive years. called for 0. To start with.25 per cent provisioning on standard assets (from fiscal 2000). 2000. shortened the life of substandard assets from 24 months to 18 months (by March 31. 2000 and laid down rules for provisioning. 2001). it has assigned a 2. 1999) and a minimum capital adequacy ratio of 9 per cent as on March 31. 100 per cent risk weightage on foreign exchange (March 31. Only a few of these mainly constitute to the reforms in the banking sector.
Reduction of SLR and CRR
The South East Asian countries introduced banking reforms wherein bank CRR and SLR was reduced, this increased the lending capacity of banks. The markets fell precipitously because banks and corporates did not accurately measure the risk spread that should have been reflected in their lending activities. Nor did they manage such risks or provide for them in their balance sheets. And followed the South East Asian Crisis. The monetary policy perspective essentially looks at SLR and CRR requirements (especially CRR) in the light of several other roles they play in the economy. The CRR is considered an effective instrument for monetary regulation and inflation control. impose financial to discipline on protection deposit-holders, The SLR is used to the banks, bank provide credit allocate
between the government and the private sectors, and also help in monetary regulation. However bankers strongly feel that these along with high non-performing assets (on which banks do not earn any return) 10 percent CRR and 25 percent SLR (most banks have SLR investments way above the stipulation) are affecting banks' bottomlines. With an effective return of a mere 2.8 per cent, CRR is a major drag on banks' profitability.
reductions in SLR on the grounds that the stated government objective of reducing the fiscal deficits will obviate the need for a large portion of the current SLR. Similarly, the need for the use of CRR to control secondary expansion of credit would be lesser in a regime of smaller fiscal deficits. The committee offered the route of Open Market Operations (OMO) to the Reserve Bank of India for further monetary control beyond that provided by the (lowered) SLR and CRR reserves. Ultimately, the rule was Reduction in the reserve requirements of banks, with the Statutory Liquidity Ratio (SLR) being brought down to 25 per cent by 1996-97 in a period of 5 years. The recent trend in several developed countries (US, Switzerland, Australia, Canada, and Germany) towards drastic lowering of reserve requirements is often used to support the argument for reduced reserve levels in India. The arguments for higher or lower SLR and CRR ratios stem from two different perspectives one which favours the banks, and the other which favours the bank reserves as a monetary policy instrument. The bank perspective seeks to maximise "lendable" resources, the banks' control over resource deployment, and returns to the banks from the "preempted" funds. It is also 16
investments in government securities adversely affect the bank profitability - the cost of deposits for banks, which averages at 15-16 per cent, was much greater than the (earlier) returns on the government securities. This argument is sometimes carried further to state that RBI makes profits on impounded money, at the cost of bank profitability. To some extent, this argument has been weakened by the increase in interest on government securities to 13.5 per cent. Some problems with the stated aim of reducing SLR and CRR are: 1. The supporting condition of smaller fiscal deficits is not happening in reality 2. Open market operations have not been used to any significant extent in India for monetary control. The time required for gaining experience with the use of such operations would be much more than 5-6 years. 3. A commitment to a unidirectional movement of these vital controls irrespective of the effects on, and the response of, other economic factors (such as inflation), would be unwise. This scenario thus indicates that despite the stated aim of reductions in SLR and CRR, RBI may be forced to 17
not likely to stabilize in the near future. This will certainly boost the profits of banks. as they have to maintain a minimum balance of 8% with the RBI. therefore. 18 . if the economic indicators become unfavourable. and RBI has already indicated as much.revert to higher reserve levels. Bank investment are. The RBI had announced an increase in interest rate on CRR balance to 6% from the present 4%.
May.Nov.Nov.Nov.Nov.May.Nov.Trends in CRR and SLR 1993 – 2001 40 35 30 Percentage of DTL 25 20 15 10 5 0 May.May.Nov.May.May.Nov.May.May.Nov.May93 93 94 94 95 95 96 96 97 97 98 98 99 99 00 00 01 SLR CRR 19 .
1. Capital Adequacy The growing concern of commercial banks regarding international competitiveness and capital ratios led to the Basle Capital Accord 1988. According to these guidelines. the banks will have to identify their Tier-I and Tier-II capital and assign risk weights to the assets. Later. the RBI also issued similar capital adequacy norms for the Indian banks. by March 31. as per the Basle Committee Recommendations.3 Illustration 1 Minimum Capital Adequacy Ratio The committee recommended a Stipulation of minimum capital adequacy ratio of 4 per cent to risk weighted assets by March 1993. 8 per cent by March 1996. 1996. and 8 per cent by those banks having international operations by March 1994. 20 . The minimum CAR that the Indian banks are required to meet is set at 9 percent. all banks required attaining the capital adequacy norm of 8 per cent. Having done this they will have to assess the Capital to Risk Weighted Assets Ratio (CRAR). Based on the Basle norms. to be achieved by year-end 1992. The accord sets down the agreement to apply common minimum capital standards to their banking industries.
comprising of Undisclosed Reserves and Cumulative Perpetual Preference Shares Revaluation Reserves General Provisions and Loss Reserves The Narasimham Committee had recommended that the capital adequacy norms set by the Bank of International Settlements (BIS) be followed by the Indian banks also.• Tier-I Capital. Inadequacy? The structural inadequacy that is said to be responsible for the stock scam was the compartmentalisation of the capital and money markets. Such interconnections between various parts of the financial system will continue to develop as the demands made by the rest of the economy on the financial system increase in the 21 . comprising of Paid-up capital Statutory Reserves Disclosed free reserves Capital reserves representing surplus arising out of sale proceeds of assets • Tier-II Capital. The BIS norm for capital adequacy is 8 per cent of riskweighted assets. and the availability of "illegal" arbitrage opportunities.
At the 22 . and more time for the bank to work through potentially fatal problems. such as banks. the banks are being Where time and legal forced to accept the minimum possible amounts from sub-standard and bad loans. costly money to refurbish the capital base. justification for capital adequacy norms for banks is brought out by the following arguments: Capital lowers the probability of bank failure more capital means added ability to withstand unexpected losses. the need for ARF is now paramount. efforts might have forced them to pay more. Also. The claimed several "depository institutions". The banking that sector capital specialists plays have traditionally roles in all However. a short-term danger of the new provisioning and capital adequacy norms arises from the inefficiency of the Asset Reconstruction Fund (ARF).next two decades. The need to make massive provisions obviously results in a depletion of capital. or some alternative arrangement. Thus. these roles can vary significantly between the public sector banks and those in the private sector. In this situation. But the capital adequacy norm means the banks have to find additional. errant loanees are now getting away with token payments which the funds starved banks are only too willing to accept.
This may remain true for the public sector banks only if the government acts as a vigilant shareholder. the equity-owners have a powerful incentive to control the amount of risk the bank incurs. the government's ability to play such a role effectively is suspect. Capital helps avoid "credit crunches": a wellcapitalized bank can continue to lend in the face 23 .banking or government . the Indian public sector banks may attract more "punishments" "loan in the form of politically motivated waivers". the government-owned capital in the public sector banks is itself taxpayer money. "loan melas". However. The Indian banks have traditionally shown risk-aversion. but the recent stock scam showed that the banks are perhaps being forced to take excessive risks to improve the profitability. Since management control will remain with bureaucrats . Capital increases the disincentive for the bank management to take excessive risk: If significant amount of their own funds are at stake. and non-performing assets.same time. Capital acts as a buffer between the bank and the deposit guarantee corporation (funded by the tax-payer): while this is true for the private banks.the source of capital would not make much difference in the Indian scenario.
24 It can thereby recover more from the loans. New opportunities can be quickly made use of by lending appropriately. and respond to positive as well as negative changes in the economic environment. which would otherwise have . wellcapitalized banks may provide a vital source of continuing credit. because of the size of the institutions involved. In an economic downturn. especially in view of the large quantities of non-performing assets. Similar losses might force a poorly capitalized bank to restrict credit (to increase capital ratios). and (b) however. it can give temporary repayment problems. increase in capital owned directly by the government has several attendant problems' The situation is complicated by the fact that " private management" does not provide an answer in India. to be called in. The Dilemma The foregoing discussion clearly brings out two conclusions: (a) increasing the capital base of the nationalised banks is necessary. Also. Capital increases the long-term competitiveness: more capital allows a bank to build long-term customer relationships. valuable time to customers with If the bank is not constrained by capital.of losses.
65 per cent.8 per cent. Despite a strong growth in aggregate deposits of 13. One short-term fallout of the capital adequacy norms has been the massive increases in investments by the banks in government securities. the investments in government securities shot up by 18. The banks are therefore choosing to deploy funds mobilised through deposits in these long-term gilts. Since the risk-weight of government securities is zero. especially 25 .8 per cent while bank credit grew at only 6. banks would have to develop much better investment management skills. The problem with this practice of the banks is that it can upset the balance of maturity patterns between deposits (many of ' which are short-term) and investments (which have 10 year maturities). investments in them do not add to the capital requirements.talent and expertise in bank management is available mainly in the existing nationalised banks.8 per cent. credit grew by only 6. Now. In the first ten months of 1993-94. for example.6 per cent. while investments surged by 18.
when interest rates are deregulated, and significant open market operations are started.
Growth In Investments In Government Securities by Banks 1991- 199292 93 36441 Aggregate deposits growth [19.6 %] 26390 20966 [21.0 %] 11042 19857 [18.8 %] [16.7 %] 9999 [6.6 %] 32364 [14.0 %] 37187 [13.8 %] 1992-93 93] 1993-94 94]
[Up to Jan [Up to Jan
9291 Bank credit growth [8.0 %] Investments
[12.2 %] Source: Reserve Bank of India Bulletin  in India 1991-92 [July - June]; Jan 1993.
Supplement - Report on Trends and Progress of Banking
The Narasimham Committee II, 1998, suggested further revision i.e. CAR to be raised to 10% from the present 8%(1998); 9% by 2000 and 10% by 2002
To get a true picture of the profitability and efficiency of the Indian Banks, a code stating adoption of uniform accounting practices in regard to income recognition, asset classification and provisioning against bad and doubtful debts has been laid down by the Central Bank. Close to 16 per cent of loans made by Indian banks were NPAs - very high compared to say 5 per cent in banking systems in advanced countries. Magnitude of the problem According to the latest RBI figures, gross NPAs in the banking sector stands at Rs 45,563 crore which is about 16 per cent of the total loan assets of the banks. The net NPAs (gross NPAs minus provisioning) stands at Rs 21,232 crore which is about 7 per cent of loans advanced by the banking sector. Though in percentage terms, the NPAs have come down over the last 5-6 years, in absolute terms they have grown, signifying that while new NPAs are being added to banks' operations every year, recovery of older dues is also taking too long. What is ever greening or rescheduling of loans? Sometimes, to avoid classifying problem assets as NPAs, banks give another loan to the company with the 28
the problem still remains.help of which it can pay the due interest on the original loan. the net interest income is also affected by the asset quality of the bank. While this allows the bank to project a healthy image. Asset Quality . Asset quality is reflected by the quantum of nonperforming assets (NPAs) – the higher the level of NPAs. most of the public sector banks were burdened with huge NPAs. Courtesy the nationalization agenda and the directed credit.Increased Transparency Apart from the interest rate structure. the lower will be the asset quality and vice versa. asset classification and provisioning for bad and doubtful debts serve two primary purposes – firstly. they bring out the true position of a 29 . NPAs expose the banks to not just credit risk but also to liquidity risk. the RBI introduced prudential norms and regulations. While the government did contribute to write-off these bad loans. The prudential norms which relate to income recognition. it actually makes the problems worse. and creates more NPAs in the long run. RBI discourages such practices. Considering the implications of the NPAs and also for imparting greater transparency and accountability in banks operations and restoring the credibility of confidence in the Indian financial system.
the one major move in this direction was brought about by the Basle Committee. The asset quality of the bank and its capital are closely associated. and secondly. INCOME RECOGNITION The regulation for income recognition states that the Income on NPAs cannot be booked. they help in arresting its deterioration. it becomes essential to have a good capital base. RBI also issued the Capital Adequacy Norms for the Indian banks also. This became imperative. Implies that the bank should have adequate capital to face the likely losses that may arise from its risky assets. If the assets of the bank go bad it is the capital that comes to its rescue. which can help it sustain unforeseen losses. An NPA is one where interest is overdue 30 . Following the Basle Committee measures. As stated earlier. as banks began to cross over their national boundaries and begin to operate in international markets.Bank’s loan portfolio. Interest income should not be recognized until it is realized. In the changed business environment. where banks are exposed to greater and different types of risk. which laid the capital standards that banks have to maintain.
for two quarters or more. The working group had identified three areas of divergence: non-compliance with RBI norms. but is to be treated as income only when actually received. interest is not to be recognized on accrual basis. The working group was set after the RBI’s Board for Financial Supervision (BFS) wanted divergences in NPA accounting norms by banks from central bank guidelines to be addressed. On non-performing accounts the banks should not charge or take into account the interest. The new notifications emanated after deliberations held between the RBI and a cross-section of banks after a working group headed by chartered accountant. They will no more have the privilege of stating that the borrower has parked funds with the lead-bank or with a member-bank and that their share is due for receipt. In respect of NPAs. PR Khanna. Income in respect of accounts coming under Health Code 5 to 8 should not be recognized until it is realized. As regards to accounts classified in Health Code 4. submitted its report. subjectivity arising out of the flexibility 31 . Income-recognition consortium norms too. RBI has advised the banks to evolve a realistic system for income recognition based on the prospect of realisability of the security. have been tightened have for to banking Member banks intimate the lead-bank to arrange for their share of recovery.
As per RBI’s prudential norms.in norms. Loans and advances account for around 40 per cent of the assets of SCBs. As of now. a NonPerforming Asset (NPA) is a credit facility in respect of 32 . However. for income recognition norms. Allaying the fears that bulk of the Non-Performing Assets (NPAs) was from priority sector. and differences in the valuation of securities by banks. the RBI has suggested that the international norm of 90 days be implemented in a phased manner by 2002. The current norm is 180 days. delay/default in payment of interest and/or repayment of principal has rendered a significant proportion of the loan assets nonperforming. NPA from priority sector constituted was lower at 46 per cent than that of the corporate sector at 48 per cent. auditors and RBI. ASSET CLASSIFICATION While new private banks are careful about their asset quality and consequently have low non-performing assets (NPAs). public sector banks have large NPAs due to wrong lending policies followed earlier and also due to government regulations that require them to lend to sectors where potential of default is high.
which interest/installment has remained unpaid for more than two quarters after it has become past due. “Past due” denotes grace period of one month after it has become due for payment by the borrower. The MidTerm Review of Monetary and Credit Policy for 2000-01 has proposed to discontinue this concept with effect from March 31, 2001. Regulations for asset classification Assets should be classified into four classes - Standard, Sub-standard, Doubtful, and Loss assets. NPAs are loans on which the dues are not received for two quarters. NPAs consist of assets under three categories: sub-standard, doubtful and loss. RBI for these classes of assets should evolve clear, uniform, and consistent definitions. The health code system earlier in use would have to be replaced. The banks should classify their assets based on weaknesses and dependency on collateral securities into four categories: Standard Assets: It carries not more than the normal risk attached to the business and is not an NPA. Sub-standard Asset: An asset which remains as NPA for a period exceeding 24 months, where the current net worth of the borrower, guarantor or the current market
value of the security charged to the bank is not enough to ensure recovery of the debt due to the bank in full. Doubtful Assets: An NPA which continued to be so for a period exceeding two years (18 months, with effect from March, 2001, as recommended by Narasimham Committee II, 1998). Loss Assets: An asset identified by the bank or internal/ external auditors or RBI inspection as loss asset, but the amount has not yet been written off wholly or partly. The banking industry has in significant bank market
inefficiencies caused by the large amounts of Non Performing Assets (NPAs) portfolios, accumulated over several years. Discussions on non-
performing assets have been going on for several years now. One of the earliest writings on NPAs defined them as "assets which cannot be recycled or disposed off immediately, and which do not yield returns to the bank, examples of which are: Overdue and stagnant accounts, suit filed accounts, suspense accounts and miscellaneous assets, cash and bank balances with other banks, and amounts locked up in frauds". The following Table shows the distribution of total loan assets of banks in the public private sectors and foreign 34
banks for 1997-98 through 1999-2000. It is worth noting that the ratio of incremental standard assets of SCBs to their total loan assets increased from 83.1 per cent in 1998-99 to 97.2 percent in 1999-2000. In other words, the ratio of incremental NPAs of SCBs to their total loan assets declined significantly from 16.9 per cent in 199899 to 2.8 percent in 1999-2000.
Classification of Loan Assets of SCBs (Percentage distribution of total loan assets) Assets A. Standard 1997-98 1998-99 1999-2000 1997-98 1998-99 1999-2000 C. Doubtful 1997-98 1998-99 9.1 4.0 0.9 0.9 1.7 2.0 1.8 1.9 35 84.0 86.1 86.0 5.0 4.9 4.3 91.3 91.2 91.5 5.8 6.2 3.7 93.6 92.4 93.0 3.9 4.0 2.9 85.6 85.3 87.2 4.9 5.0 5.1 Public Private Foreign SCBs
2 2.930 crores (RBI Bulletin. doubtful assets Rs 20. and loss assets Rs 3.0 1.9 0.7 1.9 1.9 30972 31059 37432 1. The asset classification norms have resulted in a huge quantity of assets being classified into the substandard. The present evaluation process in several banks is burdened with a bureaucratic exercise.8 1.9 1.6 1.6 352696 399436 475758 E. Loss 1997-98 1998-99 1999-2000 1997-98 1998-99 1999-2000 1. Total Assets (Rs. most of whom do 36 . its seven associates.7 284971 325328 380077 0. Of these. As at 31 March 1993. and 20 nationalised banks) stood at Rs 36.588 crores. the total of Non-Performing Assets (NPAs) for the public sector banks (SBI. For the future. sometimes involving up to 18 different officials. the banks will have to tighten their credit evaluation process to prevent this scale of sub-standard and loss assets. doubtful. the sub-standard assets account for Rs 12.8 0.9 2.8 36753 43049 58249 1.0 1.1999-2000 D. 1994).106 crores.552 crores. and loss assets. Crore) Note: Addition of percentages for B to D may not add up to 100 minus the percentage share of standard assets Illustration 3 (A) due to rounding.9 0.
A provision of 1% on standard assets is required as suggested by Narasimham Committee II 1998. Banks need to have better credit appraisal systems so as to prevent NPAs from occurring. PROVISIONING NORMS Banks will be required to make provisions for bad and doubtful debts on a uniform and consistent basis so that the balance sheets reflect a true picture of the financial status of the bank. (ii) 100 per cent of security shortfall for doubtful assets and 20 per cent to 50 per cent of the secured portion. The Narasimham Committee has recommended the following provisioning norms (i) 100 per cent of loss assets or 100 per cent of out standings for loss assets. The most important relaxation is that the banks have been allowed to make provisions for only 30 per cent of the "provisioning requirements" as calculated using the Narasimham Committee recommendations on provisioning (but with 37 . and (iii) 10 per cent of the total out standings for substandard assets.not add any value (information or judgment) to the evaluation.
The nationalised banks have been asked to provide for the remaining 70 per cent of the "provisioning requirements" by 31 March 1994.Rs 10. Apart from this. These disclosures were to be made for the year ending March 2000 In fact. This should be done to ensure that the taxpayer’s money given to the banks as capital is not used to write off private loans without adequate efforts and punishment of defaulters.390 crores pertaining to 1992-93.5 Disclosure Norms Banks pattern should of disclose in balance sheets maturity and advances. 38 . 1. To the extent that provisions have not been made. investments borrowings.the diluted asset classification). and the additional provisions for 1993-94. The encouraging profits recently declared by several banks have to be seen in the light of provisions made by them . the profits would be fictitious. deposits. banks are also required to give details of their exposure to foreign currency assets and liabilities and movement of bad loans. the banks must be forced to make public the nature of NPAs being written off.
mentioned above. most of whom do not add any value (information or judgment) to the evaluation. 39 . The present evaluation process in several banks is burdened with a bureaucratic exercise. much more As stringent disclosure norms are the only way to increase the accountability of bank management to the taxpayers. the banks will have to tighten their credit evaluation process to prevent this scale of sub-standard and loss assets. sometimes involving up to 18 different officials. Perhaps even the loan waivers and loan "melas" which are often decried by bankers form only a small portion of the total NPAs. RBI norms for consolidated PSU bank accounts The Reserve Bank of India (RBI) has moved to get public sector banks to consolidate their accounts with those of their subsidiaries and other outfits where they hold substantial stakes. But whether this government and its successors will continue to play with bank funds remains to be seen.# A Close look: For the future. A lot therefore depends upon the seriousness with which a new regime of regulation is pursued by RBI and the newly formed Board for Financial Supervision.
earlier subsidiaries were floated as external independent entities wherein the accounting details were not incorporated in the parent bank's balance sheet. This is all the more important in the context of the 40 . According to a banker. housing finance and others. # Result: This will require the banks to have a stricter monitoring system of not only their own bank. but at the same time it was assumed that the problems will be dealt with by the parent. merchant banking. RBI has set up a working group recently under its Department of Banking Operations and Development to come out with necessary guidelines on consolidated accounts for banks. but also the other subsidiaries in other sectors like mutual funds. As per the proposed new policy guidelines. The move is aimed at providing the investor with a better insight into viewing a bank's performance in totality.Towards this end. and not as isolated entities. including all its branches and subsidiaries. the banks will be required to consolidate their accounts including all its subsidiaries and other holding companies for better transparency. This will be a path-breaking change to the existing norms wherein each bank conducts its accounts without taking into consideration the disclosures of its subsidiaries and other divisions for disclosure.
These norms will therefore be in line with the future plans of these banks as well. but investors are also aware of what exactly the problems are and how they affect the bottomlines of the parent banks. this will no longer be an 41 . The working group was set up following the need to bring about transparency on the lines of international norms through better disclosures. since a number of public sector banks are now listed entities whose stocks are traded on the stock exchanges. under the new guidelines. The Investors Advantage Getting all these accounts consolidated with that of the parent bank will of provide the the investor a better while understanding banks' performances deciding on their exposures. Some public sector banks are even preparing their accounts in line with US GAAP norms in anticipation of a US listing. More so.recent announcements made by some major public sector banks where they have said they would hive off or close down some of their under performing subsidiaries. Now. These new norms will necessitate not only that the problems are handled by the parent.
RBI had granted licenses to 10 banks. 1. The main provisions/requirements are listed below : - 42 . Rather. Based on a review of experience gained on the functioning of new private sector banks. revised guidelines were issued in January 2001. For instance. point out bankers. Entry of New Banks in the Private Sector As per the guidelines for licensing of new banks in the private sector issued in January 1993. this will very much form an integral part of the parent's balance sheet. this will reflect in the parent's balance sheet.6 Rationalisation of Foreign Operations in India Liberalising the policy with regard to allowing foreign banks to open offices in India or rather Deregulation of the entry norms for private sector banks and foreign sector.external disclosure to the parent banks' books of accounts. if a subsidiary is not performing well or making losses.
The remaining portion of fresh capital could be raised through public issue or private placement. Shortfall in NRI contribution to foreign equity can be met through contribution by designated multilateral institutions. • Initial capital other than promoters’ contribution could be raised through public issue or private placement.• Initial minimum paid-up capital shall be Rs. 200 crore. equity participation shall be limited to 20 per cent within the 40 per cent ceiling. 300 crore within three years. promoters need to bring in at least 40 percent of the fresh capital. which will also be locked in for 5 years. In the case of a foreign banking company or finance company (including multilateral institutions) as a technical collaborator or a co-promoter. 300 crore within three years of commencement of business. • NRI participation in the primary equity of the new bank shall be to the maximum extent of 40 per cent. their contribution of 40 per cent shall be locked in for 5 years from the date of licensing of the bank and excess stake above 40 per cent shall be diluted after one year of bank’s operations. this will be raised to Rs. • Promoters’ contribution shall be a minimum of 40 per cent of the paid-up capital of the bank at any point of time. • While augmenting capital to Rs. 43 .
A minimum capital adequacy ratio of 10 per cent subject to specified criteria • shall be maintained on a continuous basis from commencement of operations." Can the keenly supported private and foreign banks cater to the banking needs of the people in India fairly? Takeover and merger dramas are in progress in the 44 . "Even after privatisation not more than 10 per cent of the Indian population can afford to open accounts in private banks.• No large industrial house can promote a new bank. it is also necessary to open 25 per cent of the branches in rural/semi-urban areas. • NBFCs with good track record can become banks.M. "Our industry did not oppose the entry of private bankers because we knew they will not be able to reach out to the rural markets” states. No credit facilities shall be extended to them. president of the State Bank of India Officers Association. G. which will maintain an arms length relationship with companies in the promoter group and the individual company/ies investing in equity. as in the case of other domestic banks. • Priority sector lending target is 40 per cent of net bank credit. Individual companies connected with large industrial houses can. however. contribute up to 10 per cent of the equity of a new bank. Bhakey.
GTB. which is much on the move after globalisation. to denationalise our public sector banks. ICICI bank. In any case. They are there in the country to fill the private pockets with their typical selectivity of business and costly operations. do so with vested interests. in the Indian context. IndusInd. These banks have targeted non-fund based income as major source of revenue. with their level of contingent liabilities being much higher then their other counterparts viz. The bad debt figures even in the two to three year old new private sector banks have crossed over 6% to the total advances. the private banks. BOP and UTI Bank have come out with IPOs as edge per licensing requirement. cannot be the alternative to our well-developed public sector banks.world of private sector banks now and time only can tell how many will live to render safe banking services in the days to come. PSU and old private sector banks. while the trends in the old private banks are still higher. less efficient older banks. HDFC bank. despite the fact that they have no social commitment lendings in their portfolios. All those who beat their drums for the privatisation parade. The new private banks have been consistently gaining market shares from the public 45 . Their technological and product innovation has seen them gaining market share from the slower.
They have been able to make significant inroads in the retail market of the public sector and the old private sector banks. their efficiency ratios (employee’s productivity and profitability ratios) have also improved significantly. as a part of its expansion plans had taken over Times Bank. their operating expenses have been falling as compared to the PSU banks. ICICI Bank became the first bank in the country to list its shares on NYSE. The new private sector banks have performed very well in the FY2000. The Reserve Bank of India had advised the promoters of these banks to bring their stake to 40% over a time period. Most of these banks have registered an increase in net profits of over 50%. most of these banks had a foreign capital infusion and some of the other banks have already initiated talks about a strategic alliance with a foreign partner. The major beneficiary of this has been corporate clients who are most sought after now. the two leading banks in this sector had set a new trend in the Indian banking sector. HDFC Bank.sector banks. While. As a result. During the year. 46 . The new generation private sector banks have made a strong presence in the most lucrative business areas in the country because of technology upgradation.
non-reconciliation of accounts. Large number of unprofitable branches B.in the present scenario of declining interest rates. Excess staffing of serious magnitude C.Lack of computerization leading to low service delivery levels. while PSU banks are lagging behind in the race. ATMs etc The private’ edge Technology- The private banks have used technology to provide quality service through lower cost delivery mechanisms. Declining interest rates. misuse and fraud etc E. Inability to introduce profitable new consumer oriented products like credit cards.The main problems concerning the nationalized / state sector banks are as follows: A. some of the new private banks are better able to manage the maturity mix. The implementation of new technology has been going on at very rapid pace in the private sector. Non Performing Assets on account of politically directed lending and industrial recession in last few years D. inability to control. PSU Banks by and large take relatively long-term deposits at fixed rates to lend for working capital 47 .
thus increasing their fee based revenues.The new private banks are able to provide a range of financial services under one roof. are more profitable and have cleaner loans.purposes at variable rates. NPAs. It therefore is negatively affected when interest rates decline as it takes time to reduce interest rates on deposits when lending has to be done at lower interest rates due to competitive pressures. as politicians are reluctant to surrender their grip over the deployment of huge amounts of public money. Reforms among public sector banks are slow. Convergence. 48 .The new banks are growing faster.
7 Special Tribunals and Asset List of Banks operating in India. DRTs. 1993 (DRT). the government enacted the Debt Recovery Tribunal Act. a compulsion! 49 .Illustration 4 Annexure 1 1. The act was amended in January 2000 to tackle some problems with the old act. Reconstruction Fund Setting up of special tribunals to speed up the process of recovery of loans and setting up of Asset Reconstruction Funds (ARFs) to take over from banks a portion of their bad and doubtful advances at a discount was one of the crucial recommendations of the Narasimham Committee. To expedite adjudication and recovery of debts due to banks and financial institutions (FIs) at the instance of the Tiwari Committee (1984). DRTs and Appellate DRTs have been established at different places in the country. appointed by the Reserve Bank of India (RBI). Accordingly.
was to file a suit in a civil court. when all else failed. Jaipur and Ahmedabad along with an Appellate Tribunal at Mumbai. there was nothing left of the security that had been pledged to the bank. It was only in March 1996.One of the main factors responsible for mounting nonperforming assets (NPAs) in the financial sector has been the inability of banks/FIs to enforce the security held by them on loans gone sour. DRTs soon ran into rough weather. DRTs were set up at Calcutta. Following the passage of the Act in August 1993. stripped their premises of all assets so that that by the time the final verdict came. It was quite common for cases to drag on interminably. In the interim. timeconsuming civil court procedures that stymied recovery procedures since they follow a summary procedure that expedites disposal of suits filed by banks/FIs. more often than not. The Advantage DRTs. banks had a huge portfolio of accounts where cases were pending in civil courts. Bangalore. would do away with the costly. that the Supreme court 50 . The constitutional validity of the Act itself was questioned. The result was that by the late ’80s. the only recourse available to banks/FIs to cover their dues from recalcitrant borrowers. borrowers. Prior to the passage of the DRT Act. it was felt. However. Delhi.
as a consequence of the numerous lacunae in the act and the huge backlog of past cases where suits had been filed. CURRENT STATUS AND BANKERS COMPLAINS ! Unfortunately. the banking system has provided for about Rs 20. considerably various high Complains Bank of Baroda's Kannan: "Of the Rs 45. DRTs failed to make a significant dent. legal infrastructure for the recovery of nonperforming loans still does not exist. Till date." So. for appointment of receivers or for ordering preservation of property. Thus. Guwahati and Patna. The truth undiscovered. Subsequently. the tribunals did not have powers of attachment before judgment. The functioning of debt recovery by tribunals litigation has in been hampered courts. the only solution to the problem of high NPAs is ruthless provisioning. many more DRTs and ADRTs have been set up.000 crore is locked up in the courts. over Rs 12.modified its earlier order — staying the operation of the Delhi High Court order quashing the constitution of the DRT for Delhi — to allow the setting up of three more DRTs in Chennai.000crore worth of gross NPAs. For instance.000 crore. which means it is still stuck with net NPAs worth 51 .
Nor does it include allowances for "ever greening"--the practice of extending fresh advances to defaulting corporates so that the prospective loan tag.000 crore. payments. Recent Developments The recent amendment (Jan 2000) to the DRT Act addresses many of the lacunae in the original act. Transfer of cases from one DRT to another has also been made easier. thus enabling the asset to escape the nonperforming K. defaulter Warns can make interest 60. IndusInd Bank: "NPA levels are going to go up for all the banks. Even that is an under estimate as it does not include advances covered by government guarantees. the Supreme Court has ruled that the DRT Act will take precedence over the Companies Act in the recovery of debt. putting to rest all doubts on that score.R. It empowers DRTs to attach the property on the borrower filing a complaint of default. Managing Director. More recently. It also empowers the presiding officer to execute the decree of the official receiver based on the certificate issued by the DRT." And so too will provisions. Maheshwari.Rs 25. which have turned sticky. 52 .
Once the fact of their sickness has prima facie been accepted by the Board for Industrial and Financial Reconstruction (BIFR). there is nothing a DRT can do till such time as the case is disposed of by the BIFR. This lacuna too must be addressed if DRTs are to live up to their promise. the DRT Act supersedes all acts other than The Sick Industrial Companies Act (SICA). iron out delays at the DRT end. They also reflect the ability of borrowers to dodge the lenders. The main culprit for all this is the law. as well as ensure that promoters do not have the time and opportunity to bleed their companies before they go into winding up. Yet the number of cases pending before DRTs and courts make a telling commentary on the inability of lenders to make good their threat.SOME MORE ISSUES As things stand. Existing recovery processes in the country are aimed at recovering 53 . The amendments would ensure speedy recovery of dues. This means that recovery procedures can still be stalled by companies declaring themselves sick under SICA.
The stratagem of using Debt Recovery Tribunals has failed. Since sickness is defined in law as the erosion of capital of a company for three consecutive years.lenders' dues after a company has gone sick and not nipping sickness in the bud. or writing off these debts altogether (which may not find favour with shareholders). What's hurting banks now is the fact that these new issues have cropped up even as they have been (unsuccessfully) wrestling with their NPAs which. tot up to a staggering Rs 60.000 crore. together. The solution could lie in better risk management 54 . Now these banks the have to explore the option of (a liquidating assets of defaulting companies litigitinous route). there is little to recover from a sick company after it has been referred to the Board of Industrial and Financial Revival (BIFR).
Verma to suggest measures for the revival of weak public sector banks in India. Keeping in view the urgent need to revive the weak banks. therefore.8 Restructuring of Weak Banks How to deal with the weak Public Sector Banks is a major problem for the next stage of banking sector reforms. not This responsible for predicament. the Reserve Bank of India set up a Working Group in February. It is particularly difficult because the poor financial position of many of these banks is often blamed on the fact that the regulatory regime in earlier years did not place sufficient emphasis on sound banking. perception often leads to an expectation that all weak Banks must be helped to restructure after which they would be able to survive in the new environment. 55 .S. and the weak their Banks current are.1. 1999 under the Chairmanship of Shri M.
25% increase negotiated by the IBA A 25% reduction in staff-strength. these are (i) Solvency (capital 56 . including the closure of loss-making foreign branches Transfer of non-performing assets to an Asset Reconstruction Fund Reconstitution of bank boards to include professionals. are listed below: Seven parameters covering three areas have been identified. which submitted its Report in October. either through VRSs or through wage-cuts Branch rationalisation.THE VERMA PRESCRIPTION…a brief Identification of weak banks by using benchmarks for 7 critical ratios Recapitalisation of 3 weak banks conditional on their achieving specified milestones Five-year freeze on all wage-increases. industrialists and financial experts Independent Financial Restructuring Authority to monitor implementation of revival package The major recommendations/points of the Working Group. 1999. including the 12.
(ii) Earning Capacity (return on assets and net interest margin) and (iii) Profitability (ratio of operating profit to average working funds. stage one involves operational. and pull out from the subsidiaries (Indian Bank). organisational and financial restructuring aimed at restoring competitive efficiency. Restructuring of weak banks should be a twostage operation. The action programme for handling of NPAs should cover honouring use of of Government for 57 guarantees. secure higher fee-based earnings. improve credit culture. ratio of cost to income and ratio of staff cost to net interest + income all other income). Operational restructuring essentially involves building up capabilities to launch new products. sell foreign branches (Indian Bank and UCO Bank) to prospective buyers including other public sector banks.adequacy ratio and coverage ratio). attract new customers. etc. stage two covers options of privatisation and/or merger. better compromises establish a common networking and processing facility in the field of technology. .
the three identified weak banks should adopt a VRS covering at least 25 percent of the staff strength. 1100 to Rs. 1200 crore. In order to control staff cost. for the three banks taken together. the estimated cost of VRS ranges from Rs. The organisational of the to credit. ARF may restrict itself to the NPAs of the three identified weak banks. the fund needed for ARF ARF is to be provided on by the Government. 50 lakh and above). To begin with. transfer of NPAs to ARF managed by an independent AMC. A 30-35 percent reduction in staff cost required in the three identified weak banks to enable them to reach the median level of ratio of staff cost to operating income.reduction of NPAs based on recommendations of the Settlement Advisory Committees. 58 . restructuring decision making of rationalisation includes process branch delayering relating network. should focus relatively larger NPAs (Rs.etc. etc.
Experts have also suggested the concept of narrow banking. Allahabad Bank and Punjab and Sindh Bank. where only strong and efficient banks will be allowed to give commercial loans. UCO bank had been posting losses for the past eleven years. United Bank of India and Indian Bank. while the weak banks will take positions in less risky assets such as government securities and inter-bank lending. Three more PSBs declared sick are Dena Bank. the government of India directed UCO Bank to shut down 800 in branches line with and the also 4 international operations Verma committee recommendation on sick banks. 59 . In August 2001. The three identified banks on committee recommendations were UCO bank.
The necessity The asset-liability management in the Indian banks is still in its nascent stage. The emergence of this concept can be traced to the mid 1970s in the US when deregulation of the interest rates compelled the banks to undertake active planning for the structure of the balance sheet. the Reserve Bank has recently issued comprehensive guidelines to banks for putting in place an asset-liability management system.1. In the wake of interest rate risk came liquidity risk and credit risk as inherent components of risk for banks. Nor did they manage such risks or provide for them in their balance sheets. the Indian banks have reached 60 . With the freedom obtained through reform process. The uncertainty of interest rate movements gave rise to interest rate risk thereby causing banks to look for processes to manage their risk. where markets fell precipitously because banks and corporates did not accurately measure the risk spread that should have been reflected in their lending activities. In India. especially against the experience of the recent East Asian crisis. The recognition of these risks brought Asset Liability Management to the centre-stage of financial intermediation.9 Asset Liability Management System The critical role of managing risks has now come into the open.
gamut of new products and greater use of information technology. The Management of banks has to base their business decisions on a dynamic and integrated risk management system and process. 61 . These pressures call for structured and comprehensive measures and not just ad hoc action. The This government ownership of most banks resulted in a towards management. equity / commodity price risk. Also. driven by corporate strategy.greater carefree horizons attitude by exploring risk new avenues. important that banks introduce effective risk management systems that address the issues related to interest rate. interest rate risk. complacent behavior of banks forced the Reserve Bank to use regulatory tactics to ensure the implementation of the ALM. foreign exchange risk. It is. Imprudent liquidity management can put banks' earnings and reputation at great risk. To cope with these pressures banks were required to evolve strategies rather than ad hoc fire fighting solutions. therefore. the post-reform banking scenario is marked by interest rate deregulation. liquidity risk and operational risk. currency and liquidity risks. entry of new private banks.credit risk. Banks are exposed to several major risks in the course of their business .
a client 62 . The banks are expected to cover fully their assets and liabilities by April 2000. This will provide information on bank’s position as to whether the bank is long or short. management evaluation and others which influence the working of the client company. Consider the procedure for sanctioning a loan. ALCO is a decision-making unit responsible for balance sheet planning from a risk return perspective including strategic management of interest and liquidity risk. is appraised by the credit department on various parameters like industry prospects. On the basis of this appraisal the borrower is charged certain rate of interest to cover the credit risk.Implementation of asset liability management (ALM) system RBI has issued guidelines regarding ALM by which the banks have to ensure coverage of at least 60% of their assets and liabilities by Apr ’99. operational efficiency. The borrower who approaches the bank. financial efficiency. ALM framework rests on three pillars ALM Organisation: The ALCO consisting of the banks senior management including CEO should be responsible for adhering to the limits set by the board as well as for deciding the business strategy of the bank in line with the banks budget and decided risk management objectives. For example.
Information is the key to the ALM process. A good information system gives the bank management a complete picture of the bank's balance sheet. below which the bank will not lend e. Naturally. Simulation. While somebody with BBB rating will be charged PLR + 2. Is it possible ? Keeping in view the level of computerisation and the current MIS in banks. VaR in the future. The final guidelines 63 . ALM Process The basic ALM process involves identification. The RBI in its guidelines has asked Indian banks to use traditional techniques like Gap Analysis for monitoring interest rate and liquidity risk. However RBI is expecting Indian banks to move towards sophisticated techniques like Duration. there will be certain cut-off for credit appraisal. adequately and expeditiously.g. Bank will not like to lend to D rated client even at a higher rate of interest. measurement and management of risk parameters. say.with credit appraisal AAA will be charged PLR. The guidelines for the loan sanctioning procedure are decided in the ALCO meetings with targets set and goals established ALM Information System ALM Information System for the collection of information accurately.5 %. adoption of a uniform ALM System for all banks may not be feasible.
Other banks should examine their existing MIS and arrange to have an information system to meet the prescriptions of the new ALM System. Its critical importance will come into sharp focus once current restrictions on banks’ portfolios are further liberalised and are subjected to the pressure of macro economic fluctuations. banks are exposed to credit and market risks in view of the asset-liability transformation.have been formulated to serve as a benchmark for those banks which lack a formal ALM System. ultimately risk management is a culture that has to develop from within the internal management systems of the banks. 64 . Banks that have already adopted more sophisticated systems may continue their existing systems but they should ensure to fine-tune their current information and reporting system so as to be in line with the ALM System suggested in the Guidelines. In the normal course. Banks need to address these risks in a structured manner by upgrading their risk management and adopting more comprehensive than Asset-Liability been done Management hitherto (ALM) practices has But.
RBI has been prescribing prudential norms for banks broadly consistent with international practice.1. such capital has to be raised from the public which will result in reduction in government shareholding." Banking is a business must and be not an extension lean of and government. To facilitate this process.10 Reduction of Government Stake in PSBs This is what the finance minister said in his budget speech on February 29. competitive. 2000. Banks self-reliant. The best way to achieve this is to privatise 65 . the Government has decided to accept the recommendations of the Narasimham Committee on Banking Sector Reforms for reducing the requirement of minimum shareholding by government in nationalised banks to 33 per cent. To meet the minimum capital adequacy norms set by the RBI and to enable the banks to expand their operations. "In recent years. This will be done without changing the public-sector character of banks and while ensuring that fresh issue of shares is widely held by the public. With the Government budget under severe strain. public-sector banks will need more capital.
During the winter session of the Parliament. which have far reaching consequences for the future of the Indian banking sector cleared amendment of the Banking Companies (Acquisitions and Transfer of Undertakings) Act 1970/1980 for facilitating the dilution of government’s equity to 33 per cent Government’s action programme has expressed clearly its programme for the dilution of its stake in bank equity. on 16 November 2000. the Union Cabinet has taken certain decisions. with adequate safeguards for ensuring its control on the operations of the banks. If "privatisation" is a still a dirty word. is a clear indication of Government of India’s determination to amend the concerned Acts. The proposal had been to reduce the minimum shareholding from 51 per cent to 33 per cent. As a result public sector banks may find it very difficult to attract strategic investors. 66 . it is not willing to give away the management control in the nationalised banks. a good starting point for us is to restrict government stake to 33 per cent. The Cabinet had taken this decision.the banks and make the managements accountable to real shareholders. However. immediately on the next day after the bank employees went on strike. to pave the way for the reduction in its stake.
SALIENT FEATURES of the proposed amendments Government would retain its control over the would be restricted to one per cent. the government would retain the right to nominate its representative in the boards and strangely a nominee of the government can be in more than one bank after the amendment. There has been considerable delay in the past in filling up the posts of the chairman and executive director of some banks. This decision is in tune with the recommendation of Narasimham committee. The number of whole time directors would be raised to four as against the present position of two. It is said that the proposed amendment to the Act would also give the board of banks greater autonomy and flexibility. the chairman and managing director and the executive 67 . government would continue to have the prerogative of the appointment of the chief executives and the directors of the nationalised banks. It is not clear as to how this aspect would be taken care of in future. banks by stipulating that the voting rights of any investor The irrespective of the equity holdings. However. It has been decided to discontinue the mandatory of nominating the representatives of the practice government of India and the Reserve Bank in the boards of nationalised banks.
director. While conceptually it is desirable to decentralise power. Amendment will also enable the setting up of bank-specific Financial Restructuring Authority (FRA). In quite a few cases. it was observed that inter personal relations were not cordial among the two at the top. Paid-up capital of nationalised banks can now fall below 25 per cent of the authorised capital. continue to retain public sector character even after the reduction This is the reason why the banks would continue to be statutory bodies even after the reduction in government 68 . Members of FRA will comprise of experts from various fields & will be appointed by the government. It is proposed to amend the provisions in the Companies (Acquisition and Transfer of Banking Undertakings) Act to enable the bank shareholders to discuss. Authority will be empowered to take over the management of the weak banks. It has to be seen as to how the four full time directors would function in unison. on the advice of Reserve Bank of India. operationally it may be difficult to share power at peer level. The government has been maintaining that the nationalised in banks would equity. adopt and approve the annual accounts and adopt the same at the annual general meetings.
It has said. apart from granting banks the freedom to restructure their equity. which leads to a reduction in government shareholding. Reserve Bank’s perception. that they would parliamentary and other The measures seen in totality are clearly aimed at enabling banks to access the capital markets and raise funds for their operations. This implies continue to be subject to scrutiny despite proposed relaxations. The Government seems to have no plans to reduce its control over these banks. the Reserve Bank has been emphatic in its views on lowering the stake of the government in the equity of nationalized banks: The panel wants government stake to be diluted to less than 50 per cent in order to make banks' decisionmaking more autonomous.equity below 51 per cent and the banks would not become companies. The Act will also permit it to transfer its stake if the need arises.” The process of the transition from public sector to the joint sector has already been initiated with 7 of the public sector banks accessing the capital market for expanding their capital 69 . “in view of the severe budgetary strain of the government. the capital has to be raised from the public.
" Instead. In terms of transferring equity. A LOOK AT PAST The Indira Gandhi government had nationalised 14 commercial banks through the Banking Companies (Acquisitions and Transfer of Undertakings) Ordinance in 1969. the government is arming itself with powers to sell its stake if it so desires at a later date. The 1970 and 1980 Acts brought about after the nationalisation of 14 and 6 banks respectively were 70 . Since total privatization is not contemplated. the idea behind a reduction in government stake is to free bank employees from being treated as "public servants. In the domestic context. the banks in the joint sector are expected to control the commanding heights of the banking business in the years to come. Official sources explained that this has been done to enable banks to clean up their balance sheets so that they can access the capital market easily.base. the banks will be free from the shackles of the central vigilance commission. by directly reducing the government stake below 50 per cent.
Also the Act originally provided that the government must mandatorily hold 100 per cent stake in banks. excluding government shares could be transferred. but that has been within the prescribed 25 per cent cap. The government holds majority or entire equity of 19 nationalised banks currently. This is the reason why banks have been tapping the market to fund their expansion plans. to help induction of public as shareholders. The 71 . the government provided that all shares. The 20 nationalised banks became 19 subsequently after New Bank of India merged with Punjab National Bank. At this stage. banks could reduce equity only up to 25 per cent of the paid up capital on the date of nationalisation. The 1994 amendments brought it down to 51 per cent. Only six of these 19 banks have so far accessed the market and to gone for public issues meet its additional capital needs. The Nationalisation Act provides that the PSU banks cannot sell a single share. Till now. Some banks like the Bank of Baroda have returned equity to the government in the past.first amended in 1994 to allow government to reduce its equity in them to up to 49 per cent. This was necessary to permit the transfer of shares when public shareholders sold their stake in banks.
What did they have to say ? Union parliamentary affairs minister Pramod Mahajan said: “The amendment is an enabling provision.” Why should the taxpayers’ money be used repeatedly for improving the capital base of the public sector banks? The Indian Banks' Association had. either from the domestic or international capital markets. in its memo to the committee. “Banks should be allowed to access 100 per cent capital from public.It is not the intention of the government to Who is afraid of privatise these banks or enter into strategic alliances privatisation? with private sector.. We are only making it easier for banks to access funds from the market. protesting against the government’s policy of privatisation of public sector banks. reported that the strike was 72 . It was as usual. Employees of the public sector banks went on a token strike on 15 November. This will increase the accountability of banks to shareholders”.amendments remove restrictions on the transfer of government shareholding. called for 100 per cent divestment of the government stake..
in order to reduce the 100 percent government stake to 70 percent and then gradually to 33 percent. Union bank will issue an IPO next year. though one or two TV channels interviewed a couple of people. This is an expedient decision contributing to the process of liberalisation of the economy. As for current status. went unnoticed. unconnected with the issues involved. who could not articulate their views properly.total and successful. The inconveniences caused to millions of customers. 73 .
Indian Bank and United Bank of India. three banks-UCO Bank. the government has injected into the 19 public sector banks. Of this. an amount of Rs.446 crore as additional capital.From 1992-93 to 1998-99.5729 crore Capital Contributed by Government Capital Added [Rs in Crores] 90 150 400 635 150 365 490 45 130 220 705 50 415 160 680 535 74 Bank Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab National Bank Punjab & Sind Bank Syndicate Bank UCO Bank .20. have received Rs.
and the bank is already close to breaching this threshold.Union Bank of India United Bank of India Vijaya Bank Total 200 215 65 5700 Source: Reserve Bank of India Bulletin . The bank would be able to access funds from the market without being hampered by the 51 per cent minimum government holding threshold. The immediate beneficiary of this move would be Corporation Bank where government equity is down to 66 per cent. which currently limits the ability of banks to expand beyond a certain level. Illustration 5 THE STATE BANK STORY The demand for funds by the SBI is even more acute than even the Corporation Bank since the SBI Act provides for a minimum 55 per cent RBI holding in SBI. Since a decision on the new threshold has been taken in the case of the nationalised banks. the government is expected to follow suit by moving an ordinance to reduce the RBI stake in the SBI to 33 % 75 .
The committee had felt that this threshold would provide comfort to the employees. have strong unions and. a phased reduction in government equity was recommended. 76 . hence. they have no option but to go to the market to meet their fund requirements. like insurance companies. Though there is no special significance attached to the 33 per cent threshold in the Company Law — which recognised only 26 per cent and 74 per cent as two major thresholds for management and ownership control — the government has opted for 33 per cent on the basis of the recommendations of the Narasimham Committee.The issue of reducing government stake in the nationalised banks has come about on account of demand from the SBI which had demanded that either RBI as the stakeholder pump in funds for the SBI’s massive expansion plans or permit it to issue shares to the public to raise the necessary funds. Both the Banking Regulation Act and the SBI Act provide that government shares cannot be divested and since the government has decided that it would no longer support banks through budgetary support. The banks.
Oriental Insurance. In the last couple of years there has been a clear downward trend in interest rates. leading to a decline in yields on advances and investments. an administered structure of interest rate has been in vogue in India. the ordinance would amend the GIC Act.11 Deregulation on Interest significant change. United Insurance and New India Assurance. 200.000. At present. The government is also proposing to move an ordinance for demerger of four subsidiaries of GIC. Initially lending rates came down. For long. the Reserve Bank prescribes only two lending rates for small borrowers.National Insurance Corp. 1972. The 1998 Narasimham Reforms suggested deregulation of interest rates on term deposits beyond a period of 15 days. The law ministry has already cleared both proposals of the finance ministry. and demerge its four subsidiaries . 77 . Rates The interest rate regime has also undergone a 1. Banks are free to determine the interest rate on deposits and lending rates on all lendings above Rs. In the case of GIC.The State would continue to be the single largest shareholder in banks even after its stake had been brought down to 33 per cent.
when the Reserve Bank of India controlled the rates payable on deposits of different maturities. which account for 25% of total advances. Only the rate on savings deposits remains controlled by RBI. Banks were able to vary rates charged to borrowers according to their cost of funds and also to reflect the credit worthiness of different borrowers. but is now aligned with the Prime Lending Rate 78 . which accounts for about 10% of commercial advances.00.000. is not fixed at a level set by the RBI. have been freed. Interest rates on loans upto Rs 2. With effect from October 97 interest rates on all time deposits. Lending rates were similarly freed in a series of steps. Interest rates on time deposits were decontrolled in a sequence of steps beginning with longer-term deposits and the liberalisation was progressively extended to deposits of shorter maturity. The rationale for liberalising interest rates in the banking system was to allow banks greater flexibility and encourage competition.Interest rates in the banking system have been liberalised very substantially compared to the situation prevailing before 1991. including 15-day deposits. The Reserve Bank now directly controls only the interest rate charged for export credit.
Earlier interest rates on loans below Rs 2. with the increase in the number of 79 . The opportunity to improve yields on the corporate side tends to be limited if banks don’t want to increase the risk profile of the portfolio. The new arrangement sets a ceiling on these rates at the PLR.00. The line to control is the cost of funds. which reduces the degree of concessionality but does not eliminate it. RBI also considers removal of existing controls on lending rates in other Commercial Banks as the Indian economy gets used to higher interest rate regime on shorter loan duration.000 were fixed at a highly concessional level. since the markets determine asset yields. With the deregulation of the interest rates banks are given the to freedom avoid to price their assets and liabilities effectively and also plan for a proper maturity pattern asset-liability mismatches. Banks’ income will depend on the interest rate structure and the pricing policy for the deposits and the credit.(PLR) which is determined by the boards of individual Banks. Cooperative Banks were freed from all controls on lending rates in 1996 and this freedom was extended to Regional Rural Banks and private local area banks in 1997. Nevertheless.
The consequential impact is being felt on the income profile of the banks especially due to the fact that the interest income component of the total income is significantly larger than the noninterest income component. 80 . competition for the funds and the other banking services rose.players. which are yet to be automated at the branch level. the prevailing interest rate structure will be a major deciding factor for the rates. which are equipped with the latest technology. As far as the interest costs are concerned. the new private banks and the foreign banks. In this regard. have a better edge over the nationalized banks. But what influence both the interest costs and the intermediation costs is the time factor as it is directly related to costs. The solution for these two influencing factors lies predominantly on technology.
Postage. taxes and lighting • Printing and stationery • Advertisement and publicity • Depreciation on Bank’s property • Director’/Auditor’s fees and expenses • Law charges. Exchange and Brokerage • Profit on sale of investments • Profit on revaluation of investments • Profit on sale of land. building and other assets • Profit on exchange transactions • Income earned by way of dividends. etc. Insurance. • Repairs and Maintenance. • Other expenses 81 .Income and Expenses Profile of Banks Interest Income • Interest/discount on advances/bills • Interest on investments • Interest on balances with RBI and other interbank funds • Others Other Income • Commission. etc. • Miscellaneous Interest Expenses • Interest on deposits • Interest on Refinance/interbank borrowings • Others Operating Expenses Payments to and provisions for employees • Rent.
Illustration 6 82 .
While the private sector banks are on the threshold of improvement. the banks need to optimise their networks. and sharpen response times.2. gradual disinvestments of government equity in state banks coupled with functional autonomy. The efforts on the part of the Reserve Bank of India to adopt and refine regulatory and supervisory standards on a par with international best practices. adoption of modern technology. competition from new players. etc are expected to serve as the major forces for change. the Public Sector Banks (PSBs) are slowly contemplating automation to accelerate and cover the lost ground.1 The financial sector Introduction reforms have brought about significant improvements in the financial strength and the competitiveness of the Indian banking system. new customers. cut down on bureaucratic layers. by and for the customer. and new products beckon. but bring increased risks and competition. VRS introduced to bring up the productivity. speed up decision-making. New businesses. the concept of universal competition set in just to ensure customer convenience all the time. How might that change banks? To attract and retain customers. The reform has lead to new trends of being ahead and being with. 83 .
DEVELOPMENTS The following will state the development in Indian banking sector. 84 .Also. Voluntary Retirement Scheme in Banks was formally taken up by the Government in November 1999.2 Voluntary Retirement Schemes … Please leave ? Public Sector Banks which together (there are 27 of them) account for 77. The most ambitious downsizing exercise undertaken by the PSBs has set them back by close to Rs 7.490 crore.34 per cent of the bank deposits in India. 2. the strength factor has lead to mergers and Indian banks will explore this opportunity.
The scheme is envisaged to assist banks in their efforts to optimise use of human resource and achieve a balanced age and skills profile in tune with their business strategies. 2001. the aggregate burden on the banking industry is difficult to work out. 100 lakhs. the number shot up to 1. 3 lakhs and Rs.405. there were 59.338 excess employees in 12 nationalised banks. The scheme was to remain open till March 31. To minimise the immediate impact on banks. As per estimates the average outgo per employee under the banking VRS scheme would range between Rs. while based on a BPE of Rs. 125 lakhs. No concession had been made to weak banks under the scheme. The IBA has been allowed to circulate the scheme among the public sector banks for adoption. the scheme has allowed them the stagger the payments in two installments. Government had cleared a uniform VRS for the banking sector. 4 lakhs. However. It would become operational after adoption by the respective bank board of directors. giving public sector banks a seven-month time frame.77.According to Finance Ministry on the basis of business per employee (BPE) of Rs. 85 .
and union activists feel that it will adversely affect the profitability and capital adequacy of the banks. out of this Rs 8.with a minimum of 50 per cent of the amount to be paid in cash immediately. The total burden of the VRS on the banking industry is about Rs 8.000 crore.200 crore will be borne by State Bank of India. In fact. The remaining payment can be paid within six months either in cash or in the form of bonds. the largest public sector bank. 86 . nearly Rs 2.000 crore.
Amount of Ex-gratia – 60 days salary (pay plus stagnation increments plus special allowance plus dearness relief) for each completed year of service or the salary for the number of months service is left. will not be eligible for VRS. • Employees against whom Disciplinary Proceedings are contemplated/pending or are under suspension. whichever is less.Salient Features of Voluntary Retirement Scheme of Banks Eligibility – All permanent employees with 15 years of service or 40 years of age are eligible. Any other category of employees as may be specified by the Board. • • Employees appointed on contract basis. Employees not eligible for this scheme include: • Specialists officers/employees. The Directors may however waive this. Other Benefits • Gratuity as per Gratuity Act/Service Gratuity. subject to fulfillment of the bond & other requirements. who have executed service bonds and have not completed it. 87 . employees/officers serving abroad under special arrangements/bonds.
• Leave encashment as per rules. as the case may be.as the case maybe. Funding of the Scheme • Coinciding with their financial position and cash flow. • There will be no recruitment against vacancies arising due to VRS. • Care will have to be taken to ensure that highly skilled and qualified workers and staff are not given the option. but 88 . • Pensions (including commuted value of pension)/bank’s contribution towards PF. • Sanction of VRS and any new recruitment should only be in accordance with the manpower plan. • Before introducing VRS banks must complete their manpower planning and identify the number of officers/employees who can be considered under the scheme. Other Features • It will be the prerogative of the bank’s management either to accept a request for VRS or to reject the same depending upon the requirement of the bank. banks may decide payment partly in cash and partly in bonds or in installments.
minimum 50 percent of the cash instantly and in remaining 50 percent after a stipulated period. Periodicity – The scheme may be kept open up to 31. After the period of sabbatical is over he may re-join the bank on the same post and at the same stage of pay where he was at the time of taking sabbatical. Nearly half the VRS benefits are by way of an ex-gratia ‘golden handshake’ payment to the employees to encourage them to leave. While the right of refusal to give voluntary retirement has been granted to the bank management. recruitment against vacancies arising through the VRS route has been disallowed. etc.2001 Sabbatical – An employee/officer who may not be interested to take voluntary retirement immediately can avail the facility of sabbatical for five years. Banks have been allowed to 89 . The period of sabbatical will not be considered for increments or qualifying service for person.3. • Funding of the scheme will be made by the banks themselves either from their own funds or by taking loans from other banks/financial institutions or any other source. which can be further extended by another term of five year. leave.
S. Union Bank.. ended up with a bill for Rs 360 crore. The result? ''If these banks cannot meet the capital adequacy norms. bailing out of the favoured willful defaulters. is not certain. their ability to do incremental ''. business will of be curtailed. and shielding of the corrupt bureaucrats. Rs 292 crore. the privatisation of banks at any cost. aims to achieve. but PSBs are constrained as they cannot reduce their stake below 50 per cent. a Consultant with the Planning Commission. with one VRS bullet.. primarily because of the huge outflow of funds for the VRS. The obvious way out is to tap the capital market. and United Bank. for instance.amortise half the retirement benefits provided to those opting for VRS over a period of five years. three objectives immediately viz. Rs 150 crore.'' The Finance Ministry. UCO Bank. These are the measures what exactly the IMF and World Bank have been urging upon the government. The weaker among them may not be able to maintain the Reserve Bank of India stipulated capital adequacy ratio of 9 per cent.'' explains Rohit Sarkar. VRS and its effect on Capital Adequacy norms There are immediate concerns for PSBs. irrespective their deposits. VRS now best walk out too! 90 . without which the support of U. at least.
So they have a continuous source of income even if they don't work. "They are transferred anywhere. 91 . "Apart from all the VRS benefits. Why did he opt for VRS? "It is because opportunities outside the banking sector are more in the western zone. comes with a tag of between Rs 15 lakh and Rs 20 lakh. given the poor work culture and uncompetitive salaries. ''Recruiting the right kind of people will be difficult for these banks. bad working conditions also contributed to this deluge." says Bhakey.There's the issue of the VRS weeding out non-targets like investment bankers and treasury managers. are held accountable in case of problems in rural areas and don't get residential accommodation." said a director of Bank of Maharashtra. few PSBs can pay that kind of money. a Partner at Pricewaterhouse Coopers.'' says Ravi Trivedy. Apart from the lure of money." says a union activist. for instance. they will be entitled to pension as well. leaving most PSBs short of the very people they'll need to implement any services-initiative. A mid-level treasury manager.
Retraining cost for the returning staff that are 45 plus... is special assistant in Punjab National Bank who opted for VRS after 32 years' service. in a totally changed banking environment will be much higher than the cost bank saves during their leave. He has spent all his earnings on a flat in Vile Parle. 55. It should be an open option and should 92 .Balachandran Sabbatical as a measure for reducing surplus staff will not be cost effective in the long run for the following reasons: Even though the banks can save on the salaries & allowances during the leave period. Phatak.What did they say last ! V. but once the employee returns.. Krishnamurthy An employee should be free to exercise Sabbatical option at any point of time in his career. he sees deliverance from the dreary chawl-life in Mumbai. he will have to be absorbed and as such redundancy or surplus cannot be cut totally... With the Rs 16 lakh severance package that he received. V. Hence it would be better to offer the sabbatical to junior level employees for whom the retraining cost will be much lower. On Sabbatical. rather than a specific period.. R.S.
He can service the loans from his new employment. This will help employees to search for a suitable job and then exercise the Sabbatical option.100000 crore of the bad debts. think that by removing massively thousands of able and experienced bankmen from services in their middle age. would agree honestly that it is the unrecovered and unchecked cancerous growth of over Rs. RBI.normally be granted by the Bank Management provided the employee does not have any disciplinary proceedings against him. but can take an undertaking that the employees should service their loans during the sabbatical period. who schemed unilaterally the VRS. Banks should not insist that the employees should close the loan accounts. they could boost profits in the nationalised banks. piled up in the PSBs with the 93 . IBA and the bankers. The option may also be a onetime option during his/her (employees) service. called as NPA in the international terms. Then what is the truth? At least the apex bank in the country has all the latest figures of the banks and as such. ARE EMPLOYEES A PROBLEM OR NPAs ? They are in the fools' paradise. Is it the 10 to 12 percent wage factor that affects adversely the profitability in the nationalised banks? Certainly not. The policy-makers.
that eroded profits and made one or two banks less profitable. president of the State Bank of India Officers Association. Bhakey. the Indian banks. If these fears come true. "They will have to be merged or closed down in favour of a satellite branch which will operate just once a week".blessings of the new regime. Amidst stability the disastrous Asian of our public contagion. rural India may be the biggest victim of VRS. It will take away most of the staff from more than 22. Added to this.M. In fact the United Federation of Bank Unions has decided to oppose the whimsical 94 . but change the policy to preserve and develop them. says G. said a member of IBA. The correct economy survived. mainly because of the strength and sector remedial measure is not demolishing them by sending home several thousand employees enmass. a number of branches of these banks will come to a grinding halt. THE EFFECTS Negatives Banks had approached the government and warned that only efficient people will leave by way of VRS.000 rural branches of public sector banks. when large numbers of employees of all stages are shunted away.
closure of branches in the post-VRS scenario. Bank of Maharashtra will be accepting applications of 2. This is likely to bring not only higher cash flows to banks in future but also long term benefits like improvement in efficiency level. The way the VRS contagion is spreading at the instance of the government. "It is true that more than 90." says P Jayaraman. 95 . large number of staff might be transferred and more and more branches might be closed. "The management will have to discuss the post VRS merger of branches with the unions first. causing irreparable losses to the clients of all types and great hardships to the remaining work force. public sector banks are trimming the staff strength by launching VRS.1 lakh?" asks a union activist.200 class III and IV employees. but what about the remaining 8.000 employees will be relieved.000 VRS optees 800 officers and 1. the general secretary of the State Bank's union. Reduce the annual wage bill by about Rs 56 crore. Positives As part of the banking sector reforms. it is imminent that a chaotic situation with grave consequences will emerge soon. The unions will still have to fight for them. Also. Andhra Bank Substantial reduction in overheads and significant improvement in per employee productivity.
is now to do nothing? All are seeking physiatrists’ help now. A dissatisfied issue arises out of VRS. when he is back at home. he admired the same table.has filed T h e h u m a n s i d e… He still went by the same train. clashes and arguments arise.780 employees . the comfort zone is shaken up. the bank is set to abolish one tier (zonal offices) from its four-tier organisational offices. that’s all he did there and came back home in the evening. as they come back home. some kind of work.branch the PNB Voluntarily Retired Staff Association (PNBVRSA) -.Bank of India (BoI) has embarked on a major organisational recast exercise. tie 96 . her TV serials alls is gone. What about this? Social activities for these people. they are told to be studying. wife cant visit her neighbour at the afternoon. VRS has disturbed the comfort zone of many. he sat on the same place. regional offices and head office. not playing much. children are to be disciplined the whole day. The bank will now have three tiers -. etc. families breaking. After the launch of the voluntary retirement scheme (VRS) which was opted by 7. Newly-formed association of VRS optees of Punjab National Bank (PNB) -a case against the bank for settling outstanding issues arising out of the structure. a person working for 15 to 20 years.
And the numbers say . These firstly. . SAIL aims to cut down its personnel by 60. Heavy provisioning made towards VRS has pushed the combined net profit of PSU banks down 16 per 97 . “It would have been much sensible to invest and divert these funds in Tech banking and installation of new systems. .” Mr. which bankers rushed to grab. retain the existing functions. senior manager of Canara Bank states. keeping them busy may be the only way out! Close on the heels of public sector banks implementing Voluntary Retirement Scheme.up with service organisation. after this if the VRS was declared then may be it would have been a wise decision”. has become a drag on the bottomline of the Stateowned banking segment. SAIL has launched VRS. public sector giant. also in the long run there would be a good payback. as on July 2001. The VRS. ANOTHER OPTION could have been!!! “They could have developed business by expanding into sectors like insurance which relies heavily on the expertise of the banking industry.000 over the next 3 years. Sanghavi.
cent to Rs 4. from Rs 5. In the banking sector close to 1.116 crore in the previous year.70 crore in 2000-01. The total benefits received by these employees has been close to Rs 15.000 crore. 98 .26.315.000 employees opted for the VRS in ‘00-01.
Gone for GOOD ! Illustration 7 99 .
Of the 35.VRS – The SBI Way State Bank of India's VRS. The bank is planning to reduce its regional offices from 10 to 1/2 in each circle.000.137 are from the sub-staff category. and 3. The bank management has asked all its 13 circle offices to initiate the process and start merger of loss making branches in their respective areas. has attracted 35. which closed on January 31.e.380 applications.000 as weak branches. STATE Bank of India has kick started its post-VRS restructuring programme. with plans to merge 440 loss making branches and virtually eliminate its network of regional offices across the country. I.15 per cent of the bank's employee base of 233. SBI has identified 440 branches out of 8. The bank is also working to redeploy additional administrative manpower to frontline banking jobs. SBI has also decided to reduce its regional office network as a part of its downsizing programme.380 applications. 54 per cent are from officers. 100 . One of the major tasks for SBI in its restructuring programme is merger of loss making branches. This is in line with practices followed by private sector banks and is meant to enhance the overall productivity. 36 per cent from clerical staffs.
important posts are lying vacant and at some places shortage of staff is also being felt. in the Gujarat circle. SBI has appointed National Institute of Bank Management as consultant for manpower planning. 101 . order license. branches of The the excess bank. The final decisions on redeployment of administrative staff and reduction in regional offices will be taken only after NIBM report. Plans are to shut all these down and have a single level. For example.The unions had earlier expressed the view that the bank management should not merge loss making branches but should shift in them to to other retain areas branch with profit potential. administrative manpower will be utilised at branch VRS. SBI has four regional offices in Gandhinagar and three each in Ahmedabad and Baroda. regional Post office in in some Ahmedabad.
ICICI group has expressed their aim to function on the concept of the Universal Bank and was willing to go for a reverse merger of ICICI ltd. leasing and factoring. The motive of universal banking is to fulfill all the financial needs of the customer under one roof. the matter seems to have been delayed. with ICICI Bank. Sooner or later. The leaders in the financial sector will be aiming to become a one-stop financial shop.3 Universal Banking … just one stop ahead ! RBI states: "The emerging scenario in the Indian banking system points to the likelihood of the provision of multifarious financial services under one roof. asset securitisation. This will present opportunities to banks to explore territories in the field of credit/debit cards. infrastructure lending. 102 . The traditional working capital financing is no longer the banks major lending area while FIs are no longer dominant in term lending. But due to some regulatory constraints. In recent times.2. At the same time it will throw challenges in the form of increased competition and place strain on the profit margins of banks" The evolving scenario in the Indian banking system points to the emergence of universal banking. mortgage financing.
beyond commercial banking and investment banking. The spread of universal banking ideas will bring to the fore issues such as mergers. insurance etc. larger the banks. IDBI have started functioning on the same concept. investment banking and various other activities including insurance. An Overview Universal Banking includes not only services related to savings and loans but also investments. However in practice the term 'universal banks' refers to those banks that offer a wide range of financial services. If specialised banking is the one end universal banking is the other. the greater the effects of 103 . Universal banks may be comparatively better placed to overcome such problems of asset-liability mismatches (for banks). capital adequacy and risk management of banks. Universal banking is a combination of commercial banking. The main advantage of universal banking is that it results in greater economic efficiency in the form of lower cost.the group would be working towards its aim. This is most common in European countries. Even some of the other groups in the financial sector like HDFC. However. higher output and better products.
by and large. Consequent liberalisation deregulation of financial sector. the trade and and agriculture. which can have significant undesirable consequences for economic efficiency. while the commercial banks in general. there has been blurring of distinction between the commercial banking and investment banking.their failure on the system. The banks. Also there is the fear that such institutions. Banks v/s DFIs India Development financial institutions (DFIs) and refinancing institutions (RFIs) were meeting specific sectoral needs and also providing long-term resources at concessional terms. on the other hand. have a competitive edge in 104 . confined themselves to the core banking functions of accepting deposits and providing working capital finance to to industry. The comparative advantage or disadvantage of DFIs visa-vis banks in this regard depends to a large extent on the quality of their portfolios. Also combining commercial and investment banking can gives rise to conflict of interests. would gain monopoly power in the market. the accounting policies that are practiced and personnel management. by virtue of their sheer size.
due to interest rate uncertainties. In India 105 .resource issues mobilisation that need through to be the route of to retail make deposits. with the larger part of new loans going to capital-intensive projects like power.. the DFIs would need to extend loans with longer maturities. DFIs are finding it attractive to raise more of short-term resources. the mismatch is still in their favour. The RBI has identified certain regulatory addressed harmonisation of the needs of commercial banking with institutional banking successful. DFIs face no such pre-emptions on their funds. banks are subject to CRR stipulations on their liabilities. etc. First. raises a challenge for the DFIs to manage the maturity match of their assets and liabilities on an ongoing basis. however. Thirdly. Due to their past borrowings of long-term nature. telecom. This. DFIs do not enjoy the advantage of branch network for resource mobilisation. Secondly. This in effect curtails DFIs' ability to raise low-cost deposits. On the other hand.
that DFIs Narsimham suggested should convert ultimately into either commercial banks or non-bank finance companies. institutions Now RBI has asked FIs. including a case-by-case financial approach to towards become allowing universal domestic banks. The Khan Working Group held the view that DFIs should be allowed to become banks at the earliest. Reserve Bank of India also spelt out to Parliamentary Standing Committee on Finance. which are interested to convert itself into a universal bank. to submit their plans for transition to a universal bank for consideration and further discussions. The plan should specifically provide for full compliance with prudential norms as applicable to banks The over the Committee proposed II period. The feedback indicated that while the universal banking is desirable from the point of view of efficiency 106 .The issue of universal banking resurfaced in Year 2000. FIs need to formulate a road map for the transition path and strategy for smooth conversion into an universal bank over a specified time frame. The RBI released a 'Discussion Paper' (DP) in January 1999 for wider public debate. when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank. its proposed policy for universal banking.
the evolution of the regulatory regime and above all a viable transition path for institutions which are desirous of moving in the direction of universal banking. the state of preparedness of the concerned institutions. 107 . there is need for caution in moving towards such a system. Major areas requiring attention are the status of financial sector reforms.of resource use.
auto loans are handled by the parent. absolute coordination between them exist. There is clear demarcation in the operation of ICICI and the bank. In August. The bank takes care of liabilities of less than one year by offering short-term loans to corporates and personal loans. “We have created fire walls and functioning as separate legal entities only for complying with statutory obligations.” she noted.ICICI gearing to become a universal bank ICICI envisages a timeframe of 12 to 18 months in converting itself into an universal bank. Medium to long-term products like home loans. ICICI executive director Kalpana Morparia said that ICICI has to obtain a separate banking licence from RBI for becoming a universal bank. instead of going for a direct merger of ICICI into ICICI Bank. ICICI has received favourable response from Indian investors and FIIs on its move to merge with ICICI Bank and become a universal bank. It can avoid the stamp duty burden by first converting ICICI into bank. ICICI was the first one to propagate universal banking as an ideal concept for the DFIs to support industries with low cost funds. while marketing the products 108 .
she said if supported financial restructuring. to Rsthe unitscrore. it 109 . If these options arent possible and the units are not viable. ICICI InfoTech is based in US & has an office in Singapore. Besides. The payment will be made within 72 hours. Asked about a approach to unable to enforce problem. It also offers loan products for helping their relatives in India.000 are referred to BIFR. the Visa card helps them to withdraw cash through the ATM network. ICICI’s gross NPA comes once 6.Crisil has reaffirmed its triple A rating for ICICI and FIIs also expects its profit margins to improve after the merger due to the access to low cost deposits & the scope to increase income from fee-based activities. Morparia said NPA of banks in India are < 10 per cent of GDP when compared to emerging economies like China. It should not be compared with developed countries like Europe and US. Korea & Thailand. it resolve the securities. NRIs can transfer their money to 200 locations in India by internet. the lenders were Because of law. She said ICICI has started increasing its international presence and associating closely with NRI community in various countries. mergers.she pointed out the units are viable. ICICI Bank is leveraging on strong network of 400 branches and extension counters & 600 ATMs for offering products to NRIs. ICICI Securities has been registered as a broking firm in the US.
united they may strive ! 110 .4 Mergers & Acquisitions… Divided they fall.will go in for one time settlement. 2.
of late the systems have started encouraging the global trends of M&A's. mergers in the current era will be driven by the motive of establishing a bigger market share in the industry and to improve the profitability. derive economies of scale and offer one stop facilities to a more aware and demanding consumer. World over banks have been merging at a furious pace. With the Union Finance Ministry thinking along the same lines. driven by an urge to gain synergies in their operation. In the eighties and nineties mergers were used as means to strengthen the banking sector.For the irresistible compulsions of competitiveness have created a situation where the only route for survival for many a bank in India may be to merger with another. weak and inefficient non-scheduled banks were merged with scheduled banks when the running of such banks becomes non-viable. However. Mergers may prove to be an effective remedial measure in a competitive environment where margins/spreads are under pressure for the banking sector. it may not be long before mega-mergers between banks materialise. Small. Why the urge to merge? 111 . Though Indian systems were not keen on the mergers and acquisitions in the banking sector.
Revenues of the combined entity are likely to shoot up due to more effective allocation of bank funds. and economies of scale of operations. Do you consider the reasons why one does not need banks in large numbers any more ? 112 . Financial consolidation was becoming necessary for the growth of the bank. One such big merger between banks globally was that of Industrial Bank of Japan. Another instance that comes to mind is that of Bank of America's merger with that of Nation's Bank. Fuji and Dai-Ichi-Kangyo bank. all of which were merged to be nicknamed as Godzilla Bank. Mergers will also help the banks to reduce their borrowing cost and to spread total risk associated with the individual banks over the combined entity. To beat competition for which suddenly size has become an important matter. Mergers will help banks with added money power. extended geographical reach with diversified branch networks. improved product-mix. implying the size of the post merged entity.The big question is why is there a sudden urge to merge? The answer is simple as it is obvious.
one would still need a bank to open letters of credit. ? Even if a bank is just a safe place to put away your savings. Indian MF is queuing up to offer this facility. you need not go to it. There is always an ATM you can do business with. Of course. But nobody needs so many of them any more ! Customer Rigid Distinction Disintermediati Volatabilit That’s Globalisatio n 113 Capital A/c Convertibility . This once again makes a shift to non-fund based activities all the more important. So banks will not suddenly become superfluous. ? If you are solvent and want to borrow money. and maintain current account facilities etc.? A depositor today can open an account with a money market mutual fund and obtain both higher returns and greater flexibility. ? An 'AAA' corporate can directly borrow from the market through commercial papers and get better rates in the bargain. you can do so on your credit card. ? A draft can be drawn or a telephone bill paid easily through credit cards. handle documentation. Infact the banks may indeed be left with bad credit risk or those that cannot access the capital market.with far fewer hassles. offer guarantees.
And that would be in consonance with the global trend towards universal banking. convergence in the asset-liability structure of the banks and the FIs. Mergers would position the combined entity for rapid growth not only in the working capital and term-lending segments. GLOBALISATION. under the Financial Services Agreement. the number of foreign banks operating in the country has jumped to 41.CUSTOMER may also want from a bank efficient cash management. The once RIGID DISTINCTION between the providers of term-finance finance is and the providers leading of to working-capital an increasing blurring. by India. Already. advisory services and market research on his product. 114 . and 28 more have set up representative offices. Restrictions on branch expansion of the foreign banks are being relaxed in line with the commitments made to the World Trade Organisation. but also in the growing feeincome business. Thus the importance of fee based is increasing in comparison with the fund-based income. The archaic restriction on the number of Automated Teller Machines has gone. Competition from abroad is also set to intensify. The foreign banks are looking to expand beyond their narrow niches to acquire retail reach.
But while losses of $1. Mutual funds. VOLATILITY A large capital-base provides the necessary cushion to withstand nasty shocks. are a potent long-term threat because they appropriate what was once the USP of bank deposits. THE SCENARIO TODAY 115 simply because of its abundant capital . DISINTERMEDIATION As capital markets deepen and widen. And the number of savings vehicles multiply. of course. Both banks chalked up huge derivativestrading losses.20 billion were enough to topple a 233-year-old British institution. the core banking functions--deposit taking and lending--come alternative under attack.CAPITAL ACCOUNT CONVERTABILTY will grant Indian corporates access to capital markets abroad as well as provide foreign banks access to Indian firms and investors. limiting bank deposits growth. in particular. the foreign banks are likely to dominate the new markets. Daiwa Bank managed to survive losses of a similar magnitude reserves. Given their undoubted financial muscle and technical expertise. The classic illustration of the absorptive capacity of capital is. the deeply divergent fates of Barings Bank and Daiwa Bank.
However. though a welcome change. Europe and Japan are also on their way to restructure their financial sector through M&A's. which took everyone by surprise.It began with HDFC Bank and Times Bank last year. but due to differences arising over swap ratio the merger didn't materialized. ICICI Bank had also initiated merger talks with Centurion Bank. Mustapa said it was important for the government to ''move aggressively'' in strengthening the banking system because ''the WTO (World Trade Organization) is 116 . organized by the World Bank in Washington. The merger of Malaysia's 58 domestic banks into six anchor groups is part of a global trend that will strengthen the financial sector and enable it to compete internationally. In a seminar on Malaysia's recovery efforts. And INTERNATIONALLY The merger of the Citibank with Travelers Group and the merger of Bank of America with NationsBank have triggered the mergers and acquisition market in the banking sector worldwide. Second Finance Minister Mustapa Mohamed says. the latest merger of ICICI Bank with Bank of Madura is even more astonishing as well as surprising.
the fusion of two Japanese monoliths. 117 . the mega-merger of the Swiss giants. and. ''but our advice fell on deaf ears. depositors of the ''smaller banks'' themselves felt unsafe and moved their savings to the bigger banks. he added. the government hoped to divert those resources to building schools and hospitals. the prospect of a single currency system has sparked off a merger mania among banks. At the height of the crisis. In Europe. When asked why the government intervened in bank mergers rather then letting the markets decide for themselves.'' After the mergers.knocking on our doors and asking us to liberalize our financial sector. Bank of Tokyo and Mitsubishi Bank.78 billion) in those days to bail them out and frankly we're fed up and tired of bailing them out. more recently. Witness the alliance between Chase Manhattan and Chemical Bank in the US. United Bank of Switzerland and Switzerland Banking Corporation. Mustapa said the banks were urged to merge in the 1980s. We spent no less than RM60 billion ($15.
62 34.10 / Postmerger 16051 crores 360 13123 27 lakhs 4300 220 crores Rs 8.06 239.94 10. The bank will have shot up to the number one position among new private sector banks.The post merger scenario at ICICI Take a look at what happens post merger to ICICI Bank.90 80 152. Elements Assets No of branches Deposits Customer s Employee s Equity EPS Premerger 12063 crores 106 9728 15 lakhs 1700 197 crores Rs 7.70 / % Change 33.5 23 share share Illustration 8 Will mergers be the norm in the industry? the THE STRATEGY MERGER UNIVERSAL BANKS future? Will mergers The Assets stop here or will they Enables rapid growth in new speed up? Analysts markets and new products Combats the trend towards and bank observers disintermediation What about feel The Liabilities acquisition activity Increases risks of mismatch between assets and liabilities will speed up in times Multiple focus could lead to conflicts of interest 118 that merger .
For example. The following table shows a general comparison of three main classes of banks. Particulars Cost of funds Branch network Level Automation 119 PSU Banks Low Wide Spread ofLow Pvt.200 and business per employee of just Rs 1. in However staffing/employee also technological role infrastructure play important acquiring target banks. which. It is a fact that growth through acquisitions and mergers is cheaper and quicker in comparison to setting up new units. financial viability and two strong geographical will reach and costs an large and asset base.10 crore. Karnataka Bank has employee strength of over 4.90 crore and Global Trust Bank Rs 8.60 crore.ahead. Centurion Bank Rs 6.80 crore. with only 510 employees commands a business per employee of Rs 20 crore. What will acquiring banks look for while choosing their targets? One. Banks(New) High Low High . Banks which boast of high business per employee include names such as Bank of Punjab Rs 7. Banks (Old) Moderate Regional Moderate Pvt. Compare this with Indusind Bank.
To survive. infrastructure finance. leasing. for activities like infrastructure finance. and have the requisite skills to evaluate mega-projects 120 . or. certainly. maybe. mergers may well be the only option. Only a large.NPAs Capital Adequacy Employee Productivity Focus on interest Income High Low Moderate Low Low Moderate High Low High High High Non-Low Illustration 9 Mergers for private banks will be much smoother and easier as against that of PSBs. Indeed. banks need to diversify into non-fund-based activities (investment banking) and new fund-based activities (mutual funds. which require a huge critical mass. strong entity with deep reservoirs of capital will be able to provide funds without bumping against prudential exposure limits. quicker diversification option than organic growth. even insurance). housing finance. M&As offer a cheaper and.
THE RESCUE MERGER BANK BAILOUTS The Assets Provides the stronger bank with a relatively cheap deposit network Minimises the likelihood of systemic failure The Liabilities Saddles the stronger bank with huge NPAs Erodes the profitability of the stronger bank 121 .
A gradual convergence is taking place in the banking and insurance sectors. commercial bank deposits account for 25 per cent of GDP and credit extended by banks may be 15 per cent of GDP. is the insurance sector. Thus.5 service ! Banking and Insurance … much more to What will the future of Indian banking and insurance look like? Will the reform in these sectors face the same fate as in power? It is increasingly evident that the economy offers opportunities but no security. The latest to be opened up for private investment. regular bank credit transactions alone account for a substantial percentage of GDP by way of servicing economic activities. checks and balances and a sound market strategy. On a rough reckoning. Reform of the insurance sector began with the decision to open up this sector for private participation with foreign insurance companies being allowed entry with a maximum of 26 per cent capital investment? The 122 .2. Some of them are looking at niche markets such as corporate insurance. including foreign direct investment. Several major banks are floating subsidiaries to enter both life and non-life insurance businesses. The future will belong to those who develop good internal controls.
whichever is lower. However. In anticipation of the government move.Insurance Regulatory and Development Authority (IRDA). The government permits banks to distribute or market insurance products. RBI has found it necessary to restrict entry into insurance to financially sound banks. Banks which do not satisfy these criteria will be allowed as strategic investors (without risk participation) up to 10 per cent of their net worth or Rs. Only banks with a three-year track record of positive growth as well as with a strong financial background will be entitled to do insurance business. 50 crore. has stipulated that at least 20 per cent of the total premium revenue of these companies should come from rural India. Keeping in view the limited actuarial and technical expertise of Indian banks in undertaking insurance business. some banks have begun talking of alliances with foreign insurance players. 500 crore and (ii) satisfy other criteria in regard to capital adequacy. Permission to undertake insurance business through joint ventures on risk participation basis will therefore be restricted to those banks which (I) have a minimum net worth of Rs. etc. profitability. any bank or its subsidiary can take up distribution of insurance 123 . It is amending the Banking Regulation Act to this effect. in its guidelines for the new private sector insurance companies.
compared to some of the global giants present in India. banks need prior approval of RBI for undertaking insurance business. SBI has incorporated a wholly owned subsidiary SBI Life Insurance Company Ltd with an authorised capital of Rs 250 crore. to enter into a joint venture for life insurance with an equity stake of 26 per cent. Although Cardif is a lesser known name in the life insurance business. a wholly owned subsidiary of BNP Paribas.products on fee basis as an agent of insurance company. In all cases. The company has pioneered the concept of bancassurance in France by selling insurance products through branches of commercial of banks and which non-banking would suit finance different companies. SBI intends to fully integrate the insurance business into its banking activities with 124 . The joint venture plans to bring into India a number products. segments of the market. Insuring the SBI way ! State Bank of India (SBI) has identified Cardif. the French insurer has expertise in bancassurance. Cardif SA and its sister company Natio-Vie together rank as the third-largest of $9 French billion insurers assets with a premium income and under management of over $59 billion.
has tied up with two Chennai-based corporate houses. Madras Cements Ltd and Lucas TVS. SBI will become the largest insurance outfit in terms of distribution with its network of around 13.appropriate sales support and marketing. Insuring it the Private way ! Explains Sugata Gupta. These field staffs are linked to the city offices and keep on visiting the rural areas. ICICI Prudential Life Insurance. The key to success will be the ability to integrate the savings products of the bank. also. which is aimed at the economically weaker sections. the company has tied up with NGOs to sell social sector policies. Salam Zindagi." ICICI Prudential keeps on sending regular vans with doctors to underwrite the policies.000 branches. vice-president-marketing. ICICI Prudential has also come out with its social sector policy. like SEWA in Gujarat. HDFC Standard Life is customising its approach to cater to the rural markets so as to address the special needs 125 . ICICI Prudential: "We have unit managers and agents to cater to the rural market. insurance product line of the Joint Venture Company & network of branches. Additionally. to serve underprivileged children.
the insurance watchdog has put in some policy stipulation on insurance companies to cover life in the social sector for the under-privileged. We feel that banks have got the expertise to give financial advice to its customers.in which Dabur holds the majority 74 percent stake while the remaining 26 percent is owned by CGU . All this is being done to cater to the IRDA norms. In addition.of these areas.with 208 branches and 800. The life insurance company has tied up with NGOs and self help groups.has a strong regional presence in the southern part of the country. "Typically we are looking to tie up with banks with strong regional presence and knowledge of both rural and urban segments of their markets. One such NGO is LEAD (League for Education and Development) and the insurance company covers the members of the SHGs associated with the NGO.000 customers -. Lakshmi Vilas Bank -. Dabur CGU Life Insurance . two per cent of insurance premia of the new age insurance companies have to come from rural areas. helping them make right decision.has recently forged a marketing alliance with the Lakshmi Vilas Bank. As per norms." he said. 126 .
customers share a strong and long-term relationship with banking institutions. From the NBFC sector Alphic Finance and Kotak Mahindra will be entering this sector. Insurance Regulatory Authority Bill. State Bank of India. Bank of India. Vysya Bank. economic including growth.000 villages .e. Tata Group. The modern banking system has failed to deliver inexpensive credit to India’s 600. Bank of Baroda. Oriental Bank of Commerce." he added. Quite a few banks are desirous of undertaking life insurance or general insurance business.6 Rural Banking … Indigenous Route to are in the picture.despite several expensive 127 . savings and insurance. Also a few industrial house like Bombay Dyeing. India's rural population will have significant impact Economic empowerment is defined here as."For selling specialised financial products such as life insurance policies a lot depends on the distributor's relationship with its customer and in India. Global Trust Bank. Aditya Birla. Centurion Bank. ICICI Bank and HDFC Bank have or are intending to enter insurance business after various procedural formalities have the insurance sectordefined in It is felt that volume of new business in been clearly could touch $25 billion. Convenient Credit ? ECONOMICALLY empowering. i. access to inexpensive credit a and other micro-finance on India's services. Godrej Group 2.
The development strategy adopted and the increasing diversification and commercialisation of agriculture underline the need for the rapid development of rural infrastructure and a larger flow of credit. India has come a long way in its search for an appropriate rural banking set-up. sericulture etc are being taken up on commercial lines. the problem remains. progress has been slow and halting and significant regional disparities persist. rapid population growth and rising unemployment all find their origins in the stagnation of economic life in rural areas. Do we need to rethink the appropriate institutional structure for rural banking in India? The problems of widespread poverty. hi-tech agriculture with an export orientation 128 . Though there has been some improvement. The focus should be on assisting and guiding small farmers. growing inequality. Further. There has been tremendous progress in quantitative terms but quality has suffered. Stagnation in rural banking is noticed in the north and northeastern regions.attempts to do so. Activities allied to agriculture – livestock breeding. It is in this context that the role of rural banking institutions has to be reconsidered. Since the days of the Rural Credit Survey Committee (1954). dairy farming.
the employees are unhappy in view of the lack of adequate career prospects. scheme appraisal work in connection with farm and non-farm investments the by and the production of and in an different even crops. Progressive and not-so-small farmers have no difficulty in obtaining credit from the commercial banks. Apart from having a basic knowledge of agriculture and rural development. Credit for the poorer households is the real problem.” Experience of RRBs that have locally-recruited employees. etc. a rural banker is required to handle credit extension work. A person who says he has been in bank 129 .has brought about higher productivity in cotton. monitoring/supervision roads interests and are recovery of loans spread over villages which are not connected in all-weather vested environment which quite powerful. oilseeds. More local recruitment and improved working conditions in rural areas should help to meet this problem. The Narasimham Committee observed that the manning of rural branches “has posed problems for banks owing to the reluctance of urbanoriented staff to work in the rural branches and the lack of motivation to do so.
Unfortunately a uniform standardized approach to lending has led to rigidities as a result of which a farmer-borrower becomes a defaulter for no fault of his.service for more than 25 years writes: “That rural credit has become unfashionable is evident from the fact that the subject is accorded only residual focus in the various congregations of our bankers. 130 . By way of liberalisation of the federal structure’s working. the pest problem and the market and price problem. Government interference that leaves no scope for these apex bodies to show initiative and work out action plans for development on their own is partly responsible for this situation. Another reason for such a state of affairs is that the apex bodies have expanded and prospered at the cost of primary bodies by taking over functions like deposit mobilisation even at the rural level. societies that want to work independently of the federal system should be allowed to exit. Also. the agricultural sector is beset with considerable uncertainties – the weather and rainfall problem. The placement policy in vogue in our banks is such that exposures in rural credit or agro-financing rarely count for promotions.
But the commercial banks are a more important source of credit as can be seen from Table 1. Neither the cooperative channel nor public sector one is able to meet local needs in regard to savings and loans due to a rigid all-India approach and lack of flexibility in their operations. not knowing how to deal with banks. The poor performance of the RRB personnel is largely due to the fact that the personnel hurriedly recruited and trained in a routine way have been given the difficult task of dealing with a large number of small-term/composite loans advanced to small farmers and other poor rural families who. This in fact is one of the reasons for informal banking surviving and for the emergence of non-banking financial companies (NBFCs) in rural districts. nearly 45 per cent of rural credit is from cooperatives.WORKING OF RRBs and Rural Cadre It is the view that rural banking is simple that has landed the RRBs in a mess. Though there is a multi-agency set-up for rural banking. What did the RBI do? 131 . require assistance and guidance at each stage – from loan application to loan recovery.
Think about it ! There should be credit societies at the village level. he can go up to the tehsil headquarters for the purpose. 132 . Even then. too. New institutions were over-administered. and bureaucratic regimentation was the result.Reserve Bank appointed the R V Gupta Committee in 1997. however. more effective and efficient manner. did not perform as expected. At the national level NABARD was established. the regional rural banks (RRBs) were formed. Such societies. a farmer has to deal with a credit society only a few times in a year. It is along such lines that the rural credit co-operatives came up followed by the commercial banks’ diversification into rural banking after the nationalisation of 14 big banks. The committee was asked to identify the constraints faced by banks in augmenting the flow of credit and simplifying the procedures for agricultural credit. Since the commercial banks. tend to become weak. banking progress in the rural sector was not able to take care of the growing credit needs of agriculture. After all. A strong society at the tehsil level would serve the farmers in a better.
the sponsor bank should throw this cadre open and give its own staff. the RRBs should atleast be made fully owned subsidiaries of the sponsor banks so that the banks can develop for both their rural branches and their RRBs in a unified way. Advance a tailor-made package of credit with a consumption component and closely supervise its disbursement to a large number of farmers in farflung villages and provide technical guidance and marketing links. including those not working in the rural branches. Such an approach would ensure that scarce resources have properly utilised and that small producers can reach a higher plane of technology loan. Besides placing all the RRB employees in the rural banking cadre. At the district and state levels. each primary should have the choice to choose its manager from the panel of managers given by the district union district central cooperation bank (DCCB). managerial cadres can be 133 and earn enough extra income to improve their standard of living after repaying the . Since the merger of the RRBs in their respective sponsor banks has been ruled out. the option of joining the cadre. The best option seems to be to have managerial cadre at the district level and at the same time.
It does not take care of the need for giving the branch manager the power to reschedule loan installments on the merits of each case. assets (NPAs) would harass the Recent Developments The second Narasimham Committee (Committee on Banking Sector Reforms) has suggested de-layering of the cooperative credit system with a view to reducing the costs of intermediation and making NABARD credit cheaper for ultimate borrowers [Government of India 1998:61]. Without such empowerment the spectre of nonperforming farmers. 134 . though desirable in itself. Decentralised banking and giving branch managers sufficient powers are a must. state cooperative banks (SCBs) and state and all-India cooperative Unions.created as a collaborative effort of DCCBs. does not go far enough. The Gupta Committee’s recommendation that at least 90 per cent of loan applications “should be decided at the branch level”.
The number of SHGs linked to banks is now around 33. that would ensure full attention for the rural sector and motivate personnel who opt for this cadre. If and when rural banking becomes a separate entity in each bank. the actual task should be left to the cooperative leadership and the apex bodies of cooperatives. The makers of banking policy are now focusing on technology-led banking in the rural sector.000. While the government should promote the restructuring through an and modernisation of cooperatives and by incentive/disincentive package providing adequate infrastructure in the rural areas. It also requires a change in mindset. The SHG promotes thrift and savings. This requires a restructuring of cooperatives to enable them to meet the challenges of competition. self-help groups (SHGs) broadly on the model of the ‘grameen banks’ of Bangladesh.One recent development under the leadership of NABARD and non-government organisations (NGOs) is the formation of informal. The mutual trust reflected in the SHGs working is in tune with the true spirit of cooperation. 135 . thereby to a great extent weaning the poor away from moneylenders. howsoever temporary and small they are. The creditworthiness of an SHG is linked to the amount of saving brought about by the group.
for The LAB policy needs gives and to agriculturists look after an the opportunity to form self-help groups in the form of LABs their banking development of their respective areas. Each banking channel has to meet competition. LABs are envisaged as private enterprises in rural localities for mobilizing rural savings and making them available for investment locally. What did they have to say? According to bank unions the aim of local area banks will be to snatch a share of the savings and divert them 136 . This objective is expected to be of achieved large by permitting banks and the by establishment private encouraging the setting up of small private local area banks (LABs) in the rural areas. The staff requirement of the rural banking cadre (RBC) will be on a big scale.besides providing them with career prospects. One objective of policy-makers is to subject the banking system to greater competition and for this purpose introduce new players in the market. This is in line with the multi-agency approach to rural credit. and together they are to meet the growing banking needs of rural India.
into profitable investment in cities. The weaker sections of society living in rural areas will be starved of bank credit in consequence” Another argument against LABs is that “any small-time trader can come into banking”. If this were true, the Reserve Bank would by now have been flooded with applications for starting LABs. The fact is that the mobilisation of even Rs 5 crore by way of promoters’ contribution is very difficult for a small trader or even for large farmers. The bank employees’ unions refuse to appreciate the logic behind the establishment of LABs. The logical follow-up of the new economic policy is to encourage private enterprise in all fields, including banking. In the rural sector, such private banking really means self-help efforts. Yet another point raised is that as there are already a large number of branches of banks and RRBs, and cooperative credit institutions too, there is no need for LABs. The trade unions did not object when the public sector banks started competing with the cooperative credit institutions, including urban banks. They do not even mind the banks competing with the RRBs, which they have sponsored. They only fear that when the LABs come up they will compete with the public sector banks and take away their deposit business.
Commercial Bank v/s RRB There are 28 PSB with 19423 branches and 196 RRBs with 12311 branches. This means that there is a public sector bank branch for every 20 villages. In addition, there are 12,357 semi urban branches (10,535 of public sector banks and 1,822 of RRBs), which also mainly serve the rural hinterland. This spectacular spread in the villages is a significant achievement of banks in India. The banks’ achievement in respect of mobilisation of rural deposits and advancement of loans to rural families is equally commendable. Lendings in Rural India, 1999 2000 Source Direct Amoun t (Rs Primary cooperative credit society Land development banks Commercial banks RRBs Total 26,327 4,044 51,529 51.1 7.8 100. 0 4,986 NA 12,137 49.2 8.3 100. 0 12,940 25.2 NA 20.3 12,94 0 31,31 3 4,044 63,66 6 138 Crore) 8,218 15.9 Perc ent Indirect Amount (Rs Crore) NA 12.9 Perc ent Total Amou nt (Rs Crore) 8,218
Illustration 10 The new context compels us to think on new lines and, instead of approaching the issue in a routine way, to work out the restructuring of selected branches to suit the needs of specialised banking for agriculture, bank managements being left free to work out programmes for this task. As regards co-operative rural banking, the primary credit societies hold the key to success. Banking policy should aim at encouraging the viable ones through incentives, including direct access to NABARD finance, and letting them function without
2.7 Virtual Banking … the government interference.
The practice of banking has undergone a significant transformation in the nineties. While banks are striving to strengthen customer relationship and move towards 'relationship banking', customers are increasingly moving away from the confines of traditional branchbanking and are seeking the convenience of remote electronic banking services. And even within the broad spectrum of electronic banking, the aspect of banking that has gained currency is virtual banking. Increase in the functional and geographical spread of banks has necessitated the switchover from hard cash to paper based instruments and now to electronic instruments. Broadly speaking, virtual banking denotes the provision 139
enhance customer satisfaction and. Smart Cards. phone banking. Lower cost of handling a transaction and of operating branch network along with reduced staff costs via the virtual resource compared to the cost of handling the transaction via the branch. The salient features of these services are the overwhelming reliance on information technology and the absence of physical bank branches to deliver these services to the customers. The origin of virtual banking in the developed countries can be traced back to the seventies with the installation of Automated Teller Machines principal (ATMs). These include Shared ATM networks. The increased speed of response to customer requirements. internet and intranet banking.of banking and related services through extensive use of information technology without direct recourse to the bank by the customer. ceteris paribus. The financial benefits of virtual banking services are manifold. types of It is possible to delineate the virtual banking services. It also implies the possibility of access to a greater number of potential customers 140 . and more recently. can lead to higher profits via handling a larger number of customer accounts. Stored-Value Cards. Electronic Funds Transfer at Point of Sale (EFTPoS).
On the flip side of the coin. convenience and round-the clock access they offer. The operationalisation of the Very Small Aperture Terminal (VSAT) is expected to provide a significant thrust to the development of INdian FInancial NETwork (INFINET) which will further facilitate connectivity within the financial sector. However. The popularity which virtual banking services have won among customers. Manipulation of books by unscrupulous staff. ATMs have been installed by almost all the major banks in major metropolitan cities. is likely to increase in the future. several issues of concern would need to be pro-actively attended. frauds relating to local clearing operations will be prevented if computerisation in banks takes place. While most of 141 applications have been thoroughly . it needs to be recognized that such high-cost technological initiatives need to be undertaken only after the viability and feasibility of the technology and its associated examined. the Shared Payment Network System (SPNS) has already been installed in Mumbai and the Electronic Funds Transfer (EFT) mechanism by major banks has also been initiated. however. owing to the speed. Virtual banking has made some beginning in the Indian banking system.
MIS. ECS. Prescriptions of maximum monetary limits and authorizations. the system operators have to be extremely vigilant and provide clear-cut guidelines for operations. online processing and trading in Government securities. EFT (Retail. various inter-bank and intra-bank applications ranging from simple messaging. Delivery Vs Payment (DVP). # The INFINET is a Closed User Group (CUG) Network for the exclusive use of Member Banks and Financial Institutions.electronic banking have built-in security features such as encryption. centralized funds querying for Banks and FIs. issues like authentication of payments instructions. dematerialisation. It uses a blend of communication technologies such as VSATs and Terrestrial Leased Lines. RTGS). On the large issue of electronically initiated funds transfer. Electronic Debit. Inter-Branch Reconciliation are being implemented using the INFINET. Anywhere/Anytime Banking. The INFINET will be the communication backbone for the National Payments System. Presently. Inaugurated on June 19. the network consists of over 689 VSATs located in 127 cities of the country and utilises one full transponder on INSAT 3B. 142 . 1999. the responsibility of the customer for secrecy of the security procedure would also need to be addressed. which will cater mainly to inter-bank applications like RTGS.
2.Government Transactions. transactions corporate cost are higher The as compared to of is lendings. However. Banks are thus moving into the retail mode to tide over the global slowdown and boost the bottomline. Automatic Clearing House (ACH) etc. The main advantages of retail banking are assured spread.8 The Customer is now in an enviable position where he can demand superior services at competitive prices. 143 . spreads in corporate thing ! lending have decreased significantly. Major issues plaguing the banking industry are the lack of standardisation and of operating systems. Thus. With increased competition.5 percent of all banks loans of India. widely distributed risks and lower NPAs due to limited risk associated with the salaried class. Retail banking had been a neglected segment accounting to 10. customers stand to gain the Retail Banking …the ‘in’ most. target clientele consumers and mid size companies. systems the software application software throughout banking industry. In a tight competitive environment where banks are making a thrust towards technology to provide superior services to its customers.
In India. SBI. Mr. 30 are bought by housing loans and out of 100 cars sold. 28 are brought by car loans. Bank of Baroda. In India today … Among PSBs.Swaroop of HDFC 144 . Union Bank of India and Bank of India have diverged into the retail segment. personal loans and also customized loans like equipment loan for doctors. Even though retail loans account for 18 percent of total loans. opportunity seekers like ICICI and HDFC have focused on retail lendings. This is best proved by the success of HDFC which has achieved breakeven on its operations in the fiscal year 2001. in the form of ATMs as well as branches.The product offerings include home loans. you need a higher physical presence. these account for 40 percent of bank revenues. State-of-art technology Bank. out of 100 houses sold. “In retail banking. whereas in the private sector. credit cards. car loans. Banks have a stronger influence on profits due to individual customers.” States. has to be used to enable convenient customer transactions.
But. The advance made by the bank to Ketan Parekh are pegged at around Rs2bn. Ramesh Parikh and its CEO and MD Devendra Pandya. which allowed the bank to expand its banking operations and start lending to stock brokers. It had 12 directors on its board that included its chairman.1 The SCAM Story … ! Ahmedabad-based Madhavpura Mercantile Cooperative Bank was established on October 10. However. the relation between the bank's chairman Ramesh Parikh and big bull Ketan Parekh did the trick and the bank is reported to have made huge advances in the last couple of months. The bank received a scheduled bank status from the RBI just a couple of years ago. This was following 145 .3. 1968 to cater to the varied financial needs of wholesale grocery traders in the Madhavpura. the bank faced its worst crisis on the 8th of March when depositors panicked and started withdrawing money from the bank. Until recently. the bank had managed to resist the allure and glamour of investing heavily in the capital market. The scheduled bank status also allowed the bank to invest 10% of its net worth in the capital markets.
the bank was left with very little cash. all of which have lost hefty sum of money in the Madhavpura scam. Several public sector banks have been hit very hard by the Madhavpura Bank's misdemeanor. Many cooperative banks also faced payment problems.reports that the bank had given a huge bank guarantee to Ketan Parekh. Those who resorted to the call money market found no lenders as commercial banks kept away from them. Bank of India and the Punjab National Bank. Bank of India lost about Rs1. Ketan Parekh reportedly used his seven Bank of India accounts to discount 248 payorders worth about Rs24bn 146 . This was because the bank was unable to honor its commitment. The banks include such big names as the State Bank of India. The RBI was left with no other option but to recommend the Central Registrar of Co-operative Banks to supercede the board of the bank. The problems of the bank were further compounded when it had to down its shutters in Ahmedabad and Mumbai.2bn as pay orders issued by Madhavpura Bank to Ketan Parekh bounced. The crisis forced the RBI to step in and take some action to limit the damage. A preliminary inquiry by the central bank showed that the bank had a very bad liquidity position after it issued pay-orders worth Rs650mn to the depositors. The result.
Punjab National Bank. the central bank seems to have learnt its lessons. Bank of India. Punjab National Bank and Standard Chartered Bank. However. including Bank of India. Meanwhile. The banks in question were. The RBI has reportedly drawn plans to revise payorder and demand draft discounting norms. stock lending norms. and has decided to plug the loopholes that allowed Madhavpura Bank and stock brokers to play havoc with the market. Fort branch of Standard Chartered Bank. RBI said their exposure was to the tune of Rs696mn. Standard Chartered Bank and Global Trust Bank. the SBI. UTI Bank and GTB.in nine weeks between January 3 and March 9. which were drawn on Madhavpura and discounted by various banks. Parekh had several accounts in all these branches. banks 147 . the scam has also brought to light the fact that loopholes within the banking system exist and the RBI as a banking regulator failed to respond quickly to the challenge posed by the recent scam. Chitrakoot Computer and Goldfish Computer. Out of this. Ketan Parekh's pay orders. bounced. Rs11. namely. Nakshatra Software. These payorders were reportedly issued by the Mandvi branch of Madhavpura Bank. albeit a little too late.95bn were routed to three of his shell companies.
said it was "absolutely necessary that the RBI should be the sole regulator of the banking business carried on by the Urban Cooperative Banks. both of which enjoy a tremendous amount of influence on the cooperative banks.capital market exposure norms and gold lending norms. A high power committee of the RBI set up in 1999 and headed by K Madhav Rao. The High Power Committee on Urban Cooperative Banks noted RBI's attempts to get even model bye-laws adopted by state governments had drawn blank. who can the customer bank on? 148 ." The committee also added that it was "convinced that the dual control must end. With big banks and small banks caught in a trap. At present. cooperative societies are under the dual control of the RBI and the Registrar of Cooperative Societies. Under this system. and end soon."However. the RBI only has jurisdiction over the banking operations of the cooperative society while the registrar looks after the managerial and administrative functions. Taking into consideration the enormity of the crisis. calls have increased for a greater role for the RBI as a regulator of the cooperative banking sector. the greatest challenge in cleansing the system would be the state governments and the domestic industries.
it is a major drawback of . # What is the procedure being a private player (ICICI) in this industry. This ultimately this ruling.e. hampered ruthless considerably by litigation in various high courts. considered.and below. the customer profile is scrutanised at the branch level. The functioning of debt recovery leads tribunals to one has been i. The Branch Manager and the Assistant Branch Manager evaluate the solvency of the borrower. The procedure differs as per the amount of loan.2 Public sector OR Private Sector – the point of views About REFORMS in the Indian banking sector The legal infrastructure for the recovery of nonperforming loans still does not exist. ICICI follows a certain procedure as far as loan advancements are concerned. being solvency of the borrower. the root cause for a high NPA level is solution provisioning. individually and then approval for the same is forwarded to the concerned 149 Unlike most of the PSBs. for loan amount of Rs 500000/. is it different and more effective as far as recoveries are concerned? At ICICI Considering the effect of high level of NPAs on the efficiency of banks. any better ways.3.
At PSBs Today. the customer profile is further forwarded to the corporate level. Thus.department. it’s like a 150 . This system has ensured the low level of NPAs in this private sector bank. adequacy norm means the banks But the capital have to find additional. the need for ARF is now paramount. the banks cannot sell any collateral of a borrower without the court intervention. the banks are being forced to accept the minimum possible amounts from sub-standard and bad loans. an issue is resolved in a year and a half inspite of stipulated norms of 6 months. costly money to refurbish the capital base. In this situation. After evaluation at this level a confirmation is sent to the respective branch. Even as far as DRT working is concerned. and then the borrowers offer is confirmed. In cases where the loan amount exceeds Rs 500000/-. # Is the transfers on NPAs to state owned ARF. The need to make massive provisions obviously results in a depletion of capital. PSBs need to be given more power to enforce their security rights. just about shifting the responsibility to the ARF? What’s the whole point of having something like that.
PSBs have a definite priority sector lending 151 .Consider the number of customers in private as compared to public sector banks . this is no form of defence. # As a private player what are the problems that you face while communicating with the government? At ICICI The government imposes a lot of restrictions on the private players. its just another committee with more heads made by GOI. At PSBs Government does co-operate. A PSB anyway needs to open a branch in rural areas. ARFs seem to be like pointless transfers. the cost of these is not really feasible to these banks but they have no alternative. the GOI is good. as politicians are reluctant to surrender their grip over the deployment of huge amounts of public money. please note the following: . but for private banks need to have branches in certain areas like Amravati or Ratnagiri. At PSBs Frankly.better way of declaring losses and turning away from efficiencies? At ICICI Banks should be able to account for it independently. Reforms among public sector banks are slow.
Introduction of prudential norms. it will be gradually implemented so no immediate impact on private players. please comment on this reform. its positive and negative effects on private players. However. banking regulation norms. the government needs to make a certain service level mandatory. At ICICI Besides. Government intends to reduce its stake to 33% in nationalized banks. At ICICI As far as an effect of reducing government stake is concerned. taxes. Any other recommendations as a private bank. Income Recognition. This could be: 152 .Minimum deposit for credit cards and FD Take the case of UTI returns when all others were down. being a government rule. the management approach will be by professionalism. the competition to private players will increase. that’s a government cost. The ownership pattern and capital structure will change and this will lead to better efficiencies and customer service level.Maintenance of PPF accounts. Asset Classification and compulsory disclosure of accounts has lead to transparency in the working of banks. etc ..
the customers have a lot of choices to make. thus 153 development of India with this major development in the financial system.Customer service increase. ICICI has had a recent merger with BoM. Consolidation of the Banking industry by merging strong banks is the latest development in the Indian Banking Sector. BoM has 277 branches in South India. a bank with large network of branches and diversified portfolio will stand in the market.Technological upgradation.Decrease NPA level by better evaluation of customer profile . thus. Please state your views on the overall At ICICI In a competitive scenario. . not just traditional ‘Banking’ functions At PSBs Any PSB is answerable at the Parliament level to the GOI. As per Relationship Manager. this has been implemented in PSBs . For ICICI and BoM merger.. basic training to employees .Diversified portfolio.e. a branch that gives all in ‘one-stop’ will survive. ICICI. etc. banks need to increase their emphasis on customer service. disclosure should be higher in PSBs. i. Ultimately. ANZ and Stanchart.
About DEVELOPMENTS in the Indian Banking Sector About VRS …At PSBs The good people are out. One issue is. but then working of two different human cultures. Such trivial issues hamper the working. many employees would retire in a few years. is the main aim to increase the non-fund based revenue due the trend of falling interest rates? At ICICI 154 . one may look down upon the other. At PSBs A merger should consider the human aspect. initially Balance Sheets will look good.ICICI now stands to create regional balance of branches and high connectivity throughout the country. as a company holds a diversified portfolio. # ICICI. may be after that VRS could have been introduced. The 1992 reforms gave scope for diversified product profile. New products and new operating styles exposed the banks to newer and greater risks. so the existing people work like good soldiers without any increase in pay. the recruitment in the banking sector has been negligible. after 1985.
The basic aim is to retain customers. ICICI has ‘n’ number of brokers and agents appointed which are well connected throughout a majority of the country. its old wine in a new bottle. Banks and Insurance. The issue of universal banking resurfaced in Year 2000. The measure to increase revenues is by increasing customer base by increasing portfolio aided with aggressive marketing. # Can you please state the benefits of universal banking. A bank needs to push its products in the market and establish a strong presence for survival. how would you rate the success of ICICI 155 . SBI Insurance – just confusing customers by lot of Insurance companies. For each and every sector. may be in terms of revenue or utilisation of resources or others? At PSBs Anyways PSBs have multifunction. # What is the viability of “Insurance & Banking” in India. Your comments on distinguishing factor from a public sector bank which has a low reputation as compared to private sector. when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank.
Due to increasing competition all banks are now heading towards developing areas or rather towns in the country.Prudential – Joy Hope Freedom Life. for PSBs you can exploit the strength of reputation of trust and safety. with the existing workload and VRS. At ICICI 156 . please comment on the potentials in the rural area. The concept of PSBs and insurance may not work unless supported by better employee productivity. Also. it will be very difficult for PSBs to work. The viability may term at 6 as of now mainly due to long paybacks. it is known for its network in rural areas. The average employee age at private sector is 24 to 29 years as compared to 35+ at PSBs. do you think PSBs should also go for insurance and why? At ICICI The general attitude of employees in PSBs is laid back.g. At PSBs Insurance would be better utilisation of existing resources e. Especially ICICI. The enthusiasm and efficiency level differs and so does the productivity. SBI has 13000 branches. Thus. on a scale of 1 to 10 (10 being highest).
At PSBs Internet has a future in India. this itself proves that banks need to come up with better schemes in customized to rural requirements. the usage of e-banking technology is expected to double. There is a section of people which wants to know what are the services banks can offer. people adjust to technology very fast. banking. Considering India has the a increasing importance of education in rural market and w. At PSBs Private players have been operating at in urban areas.RBI norms state that for every 5 urban branches.t rural considerable scope. In 5 years. they have a Demo service with a personnel explaining what are the e-banking services available how are they used etc. adjusting with rural India will take time. 1 rural branch their needs literacy to be introduced. People look forward and inquire for new technologies because they offer convenience. in the future 5 years down the line? What is the current revenue from this business? At ICICI The trend today is to ape the West.r. take the case when STD booths 157 . well / bad and why? How much revenue do you see from this business as a percentage of the total business. How do you see the scope of Internet banking in India. At ICICI.
if these funds were used to make public sector banks technology savvy then VRS could have been introduced after a period of 5 years. hence they can manage a varied portfolio easily. Sanghavi – Senior Manager – Andheri (W) On VRS In the long run. Canara Bank had introduced single window system for their clients. the clients who can pay more for better services are moving away.were introduced in India. Canara Bank – Interview of Mr. salary expenditure will drop. On diversifying portfolio The private players have limited clients to cater. 158 . the VRS was introduced in a very disorganized manner. it will be fruitful. and also cost of related perks would reduce. the Internet is not a form of direct revenue. But they lay an immediate disadvantage. Anyways. currently. The banks would also have the power to retain clients. The cost at Canara Bank is around Rs 139 Crores. it’s just an additional service of convenience given to customers. there was no provision made for the payment of VRS dues earlier.
when you have a large database of customers. The procedure 159 . 3 in Mumbai. there are around 5 DRT. DRT are authorised to handle DRT. Debt Recovery Tribunals Interview of Mrs Rama Pendharkar . a problem here is when a cheque is bounced on account of inadequate cash. and BSES and MTNL are one of the greatest beneficiaries. On ECS – tech banking UTI is the largest user of ECS credit. These have a specific area of jurisdiction. the profile amount exceeding Rs 10 Crores. The government needs to make clear laws on use of ECS. service quality deproves. all below Rs 10 crores need to approach the civil courts.Advocate Mr R S Chehel – Advocate CHURCHGATE In Maharashtra.
and are headed by the Presiding Officer who is said to be equivalent to the District Judge. the defendant has to file an affidavit.Banks send a notice to their client and if they don’t give a reply. No oral evidence is permitted. Section 19 of DRT Act states the banks permitted to be an applicant. the presiding officer resolves to the issue. the defaulted borrower i. only scheduled banks and nationalised banks are permitted. Issues Resolved The number of issues resolved is not disclosed on account of disclosure regulations with respect to the same.e.e. 160 . applicant files a suit in the DRT. Within 6 month. Within a month of filing a suit. The issue is resolved only by affidavits. the bank i. the defendant requires to reply back. DRTs have their own procedure distinct from the civil courts.
As per earlier norms. shortage of right man for the right job started surfacing. But post161 . and manageable workforce. while another 20 per cent can come as direct investments by NRIs. Foreign allies can hold up to 49% in private banks The RBI-SEBI panel has decided that a foreign collaborator can hold up to 49 per cent in a private bank as against 20 per cent allowed earlier. leaner.3. smarter. But this is not proving to be a catch-all-solution either. lower overheads may all have been relevant reasons to get onto best business practices.3 And today…the news says … The following states recent status of the Indian Banking sector. Outsourcing administrative services has arrived in the banks. Life after VRS: Nationalised banks facing shortage of staff Shedding flab was fine till. A voluntary retirement scheme. Most banks are rushing in officers to branches where senior officers have left. But what many of these nationalised banks did not consider was acute shortage of manpower (read officers) for supervisory banking functions. a foreign bank or financial institution stepping in as a technical collaborator can pick up a maximum 20 per cent stake directly. of course. “Reducing workforce is fine.
” the sources said. "Corporation bank takes only select clients and a 162 said." he A sharp rise A study of the performance of banking sector stocks over the past one year has shown that while several public sector banks have shown a sharp rise in prices. will have to be outsourced in the long run. He said the rolling out of the bank's RPU underlined the increased focus the bank had placed on retail banking. As a fall-out. It is followed by Bank of India with a gain of 75 per cent. The RPU has armed the bank with the necessary systems and structure to roll out new products in retail banking and will greatly reduce time to market the new products. is classified as a private bank. many of their private counterparts are high on the losers list. despite a majority holding by the J&K government. IDBI to focus more on retail banking IDBI is to focus more on retail banking as part of its revised functional strategy for future growth.VRS manning structures had obviously not been clearly forecast. . Leading the gainers list is Corporation bank whose scrip has nearly doubled in the last one year. daily operations that are being affected. and Jammu & Kashmir Bank which. bank's managing director Gunit Chadha said.
is understood to be supportive of the 163 . which took the initiative to form the committee. So it didn’t come as a surprise when bankers were visibly upset and later voiced their protest last week after the committee on fraud made a final presentation before submitting its report to the government. bankers are now jittery that new laws could push them further towards the edge.lot of effort goes into this selection. failing which the law will take its own course. the onus will be on banks and FIs to prove themselves innocent. Understandably. it didn’t go down well among the bankers who fear that the proposed law could terrorise bank officials to such an extent that business would suffer. Bankers jittery over proposed laws Rattled by scams. financial institutions and other intermediaries to first prove themselves innocent when a `serious fraud’ hits the system. The central bank. In its final recommendations the panel headed by Prof N L Mitra has said that when a fraud over Rs 10 crore is committed." says a merchant banker explaining the low NPA levels in the bank. The financial regulators are now pitching for a change in the statutes that would put the responsibility on banks.
51 per cent against the actual 8. software experts etc — all of whom give their inputs so that the case can be presented in a comprehensive way before the court of law.61 per cent. Allahabad Bank gets a sock for hiking CAR The Governement on Wednesday pulled up the CMD of Allahabad Bank. The committee aims to make it more difficult for scamsters to take refuge in legal loopholes by making financial frauds a crime. This will require professionals from different fields and could be in line with the Serious Fraud Office. which has teams comprising lawyers.different changes that the panel has prescribed. At a review 164 . accountants. forgery and criminal breach of trust. For instance. the committee has asked for changes in the Indian Penal Code to enable the legal system handle `financial fraud’. will be submitted to the finance ministry in the first week of September. are vague about financial frauds. Indian laws with provisions for crimes like cheating. which assume a special significance after the string of scams that have rocked the Indian markets and institutions. The recommendations. Currently. and his management team for falsely reporting the bank’s capital adequacy at 11. bankers. The committee on fraud has further recommended a special investigative agency for the purpose. B Samal. UK.
comparing this to the VRS response of 11% of the employees in the industry. The growth of ATMs in India has been exponential. Indian Bank. ATMs in India The BoI is planning to install 225 ATMs in nine major cities. currently there are over one lakh ATMs in India and the growth rate is 40 %. On Tuesday. indicating a change in the mindset and a resolve to chide shoddy performers.presided by finance secretary Ajit Kumar here. Although in the government did not promise capital. the bank was for the its odd man out. the bank was asked to turn around or close down 136 lossmaking branches. The ministry team also criticised the management for letting standard assets turn NPAs again. sabbatical has got around 200 optees as of August 2001. the government had asked UCO Bank to shut down 800 of its loss-making domestic branches besides four international ones. it complimented improved performance recent months. As far as cost are 165 . an observation was that only highly qualified employees opted for this scheme. The government is meeting all the weak banks to take stock of their operations. however. On sabbatical The scheme launched by PSBs along with VRS.
NCR Corporation India. Mr.concerned. Loney Antony. Country Manager. 166 . states that cost of branch transaction is Rs 50 to Rs 100 whereas cost on an ATM is not more than Rs 25.
Indian Banks need to be much more sustainable. . The following seem to be what the Indian Banking sector is heading for: As the economy revives fee based activities and asset quality of banks could improve. efficient. To survive this dynamism and the risks arising from the same. Markets. banks need to have resources in place to understand and manage them on a regular basis. . Product innovations. Now the bank mergers will not be a new phenomenon since synergies are derived from the alliances in the recent mergers. The question is will this suffice for the future? With the continued integration of the Indian markets with the global markets. what’s ahead ! The Indian Banks even after a decade full of reforms for the sector have a long way to go.3. which have so far witnessed a deluge in the number of banks. With the onset of globalisation in each and every sector. transparent in working and also competitive. will now witness consolidation.4 THE FUTURE . After adjusting for Non Performing Loans some public 167 . the volatility is rising. better information technology and operating mechanisms not only enhance the income and reduce expenses but also act as a catalyst to retain customers.
Public sector banks 168 . they may become more active in trading to make up for the margin squeeze. the ALMs need to be in place. The risk profile of these public sector banks may increase as their trading in money and forex markets increase. As public sector banks find their margins squeezed. the housing loan sector has gained a considerable boosts as per the recent budgetary measures. Banks will have to compete with mutual funds as an alternative to bank deposits. also infrastructure and film financing remain untapped. As competition compress spreads earned on lending business.e. banks will have to focus on fee income. banks are allowed to lend 3 per cent of their advances to this sector. Private banks are likely to generate better fee income due to their focus on having adequate technology and having skilled personnel to generate such business. With the opening of the insurance sector and recent relaxation of regulation by RBI for entry of banks in this area of business. Thus. a sound risk management i. RBI is examining the feasibility of introduction of half yearly audit of accounts by external auditors towards improving the quality of auditing standards further.sector banks may have to go in for fresh capital infusion. some of the big banks are expected to enter this business in a big way. New arenas for advancing may be surveyed.
the banks have to compete with their peers as well as with other financial companies. as deregulation and new technology blur old boundaries. But tomorrow.with their wide reach and higher confidence levels can take the lead. Virtual Banking will set in as a trend successfully. All banks will have to adapt to new emerging technologies in order to exploit the new business opportunities it offers. Those forces offer as many opportunities as threats. these rewrites the conventional definition of a bank. competitors might zoom in from completely unexpected industries. the way you term it. Today. which will call for innovation standardisation. It will be a new challenge and will require investment in technology and new systems. A reinvention or a renewal or a rediscovery. 169 . Some value-added services may also need to be provided. shall root the structural changes in the Indian Banking Sector.
The present evaluation process of banks states requires around 18 officials for 170 . The reduction in SLR and CRR has been effective in the sense that the lendable resources of banks have increased. initially the NPAs were amounting to total of 16 %.3. The CRAR requirements to are necessary for financial soundness of Indian banks. need assign risk weightage government securities seems to be coming up due to increasing investments of banks portfolios. The anticlimax is about the current recession in the economy and decreasing need of investments by the a corporate to sector. the asset quality is the determinance of banks profitability today. also. and however banks should note that ever greening of loans would deprove the circumstances in the long run.5 CONCLUSION A personal view on reforms and developments in the Indian Banking Sector is stated below. The NPA trend has been fortunately declining in the recent years.
The Disclosure norms shall avoid situations like in case of South East Asian Crisis. like the other sectors opened up. the Indian banks need to learn much more from competition. the conceptualization of this structure needs to be acknowledged. The DRT Act supersedes all acts but the SICA which clearly states that companies can very easily stall recovery procedures. RBI proves to be a quite proactive institution. today. the bureaucracy involved can reduced only by way of better bank supervision. customers and not advances and customer service is the call for the day.quality inspection. Increasing risks and imprudent liability management constitute to asset liability mismatch. 171 . Complacent behaviour of Indian banks with this context has lead to ALM reforms. with this respect. It’s a fact in our country that for every law made there is one more to escape from it. The ALM framework if correctly implemented shall prove useful. This shall positively improve and get bankers alert. Globalisation has but lead to the liberalisation of the Indian Banking sector. However.
We still need to see what happens next ! The corporates can now have a good deal with loans and advances. has given a rise to the 172 . About universal banking. VRS was a government decision and about 11 % of the employees retired. offering all at the same desks for corporates as well as individuals i. but on deeper analysis. A merger to improve the overall health.e. retail banking is required. Currently. It was no form of a structural change but is a very effective tool to improve efficiency of the Indian PSBs. a good manpower planning in advance would not have lead to the current problem. thus. reach and customer base. The current trend of falling rates shall indeed give the corporate customers fair access with better services. the control strongly remains with the government and it is a truth that bureaucracy has become a side business. due to increasing competition banks need to strive for customers. the interest rate deregulation has been in line with the international standards. public sector needs to have a pace in this arena.Reduction of government stake seems to be a good decision of RBI. lots of banks are facing problems of inadequate staffing. I think a better plan would have been of investments in technology partially and then a VRS.
better products and convenience and safety has to be guaranteed by the bank. Annexure 1 LIST OF PUBLIC SECTOR BANKS 173 . Personalized service in a crude form will help.trend of mergers globally. GOI has to give personnel better career prospects in order to get them working. The recent merger of ICICI and BoM proves that customer base has to develop for sustainability. technological upgradation will be what will lead to customer retention on the grounds of accessibility and convenience. The opening of insurance has given banks a new opportunity to make the best out of their resources. Mergers constitute as a cheaper and a quicker form of expansion and Indian banks should explore such an opportunity. how much advantage do our PSBs make is yet to see. Lastly. As far as rural banks are concerned.
State Bank of India and its subsidiaries are : • • • • • • • • State State State State State State State State Bank Bank Bank Bank Bank Bank Bank Bank of of of of of of of of India Bikaner & Jaipur Hyderabad Indore Mysore Patiala Saurashtra Travancore Other nationalized banks are: • • • • • • • • • • • • • • • • • • • Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank Some of Public Sector banks have issued equity shares for general public and are listed on various stock exchanges. The listed public sector banks are • • • • State Bank of India State Bank of Bikaner and Jaipur State Bank of Travancore Bank of Baroda 174 .
• • • • Bank of India Oriental Bank of Commerce Dena bank Corporation bank LIST OF PRIVATE SECTOR BANKS: Old private sector banks • • • • • • • • • • • • • • • • • • • • • • • • • **Bank of Madurai Ltd Bank of Rajasthan Ltd Bareilly Corporation Bank Ltd Bharat Overseas Bank Ltd City Union Bank Ltd Development Credit Bank Ltd Ganesh Bank of Kurundwad Ltd Karnataka Bank Ltd Lord Krishna Bank Ltd Nainital Bank Ltd SBI Comm & Int Bank Ltd Tamilnad Mercantile Bank Ltd The Benares State Bank Ltd The Catholic Syrian Bank Ltd The Dhanalakshmi Bank Ltd The Federal Bank Ltd The Jammu & Kashmir Bank Ltd The Karur Vysya Bank Ltd The Lakshmi Vilas Bank Ltd The Nedungadi Bank Ltd The Ratnakar Bank Ltd The Sangli Bank Ltd The South Indian Bank Ltd The United Western Bank Ltd The Vysya Bank Ltd New private sector banks • • • Bank of Punjab Ltd Centurion Bank Ltd Global Trust Bank Ltd 175 .
ANZ Stanchart Bank Bank International Indonesia Bank of America NT&SA Bank of Bahrain and Kuwait BSC Bank of Ceylon Banque Nationale De Paris Barclays Bank PLC Chase Manhattan Bank Chinatrust Commercial Bank Cho Hung Bank Citibank N.V. Hanil Bank ** Hongkong Bank ING Barrings Bank N.• • • • • • HDFC Bank Ltd ICICI Banking Corporation Ltd IDBI Bank Ltd IndusInd Bank Ltd *Times Bank Ltd UTI Bank Ltd *since merged with HDFC Bank **since merged with ICICI Bank LIST OF FOREIGN BANKS: • • • • • • • • • • • • • • • • • • • • • • • • • • ABN-AMRO Bank N. Krung Thai Bank 176 . Abu Dhabi Commercial Bank Ltd.A. American Express Bank Ltd. Commercial Bank of Korea.V. Arab Bangladesh Bank Ltd. ** Commerzbank AG Credit Agricole Indosuez Credit Lyonnais Deutsche Bank AG Dresdner Bank AG Fuji Bank Ltd.
The Bank of Nova Scotia The Bank of Tokyo-Mitsubishi Ltd. NV • ** CLOSED INDIAN OPERATION Annexure 2 The personnel in public sector and the private sector bank were interviewed on basis of the following questionnaire (this is customized for ICICI Bank): About REFORMS in the Indian banking sector The legal infrastructure for the recovery of nonperforming loans still does not exist. Ltd.• • • • • • • • • • • • Mashreq Bank Oman International Bank S. Overseas Chinese Banking Corp.G. • The Sanwa Bank Ltd. This ultimately solution .A.O. The British Bank of Middle East The Development Bank of Singapore Ltd. The functioning of debt recovery leads tribunals to one has been i. Sumitomo Bank Ltd. Siam Commercial Bank Societe Generale Sonali Bank State Bank of Mauritius Ltd. • Morgan Guaranty Trust company of New York • KBC Bank. • Toronto-Domonion Bank • Bank Muscat International SAOG. The Sakura Bank Ltd.e. hampered ruthless 177 considerably by litigation in various high courts.
the banks are being forced to accept the minimum possible amounts from sub-standard and bad loans. is it different and more effective as far as recoveries are concerned? The need to make massive provisions obviously results in a depletion of capital. it is a major drawback of this ruling. as politicians are reluctant to surrender their grip over the deployment of huge amounts of public money. it’s like a better way of declaring losses and turning away from efficiencies? Reforms among public sector banks are slow. # Is the transfers on NPAs to state owned ARF. adequacy norm means the banks But the capital have to find additional. just about shifting the responsibility to the ARF? What’s the whole point of having something like that. In this situation. # As a private player what are the problems that you face while communicating with the government? 178 . # What is the procedure being a private player (ICICI) in this industry. the need for ARF is now paramount. any better ways. costly money to refurbish the capital base.provisioning. Thus.
About DEVELOPMENTS in the Indian Banking Sector The 1992 reforms gave scope for diversified product profile. 179 . its positive and negative effects on private players. please comment on this reform. # ICICI. ICICI has had a recent merger with BoM.Government intends to reduce its stake to 33% in nationalized banks. Income Recognition & Asset Classification and compulsory disclosure of accounts has lead to transparency in the working of banks. etc. as a company holds a diversified portfolio. ANZ and Stanchart. New products and new operating styles exposed the banks to newer and greater risks. Please state your views on the overall development of India with this major development in the financial system. is the main aim to increase the non-fund based revenue due the trend of falling interest rates? The issue of universal banking resurfaced in Year 2000. Consolidation of the Banking industry by merging strong banks is the latest development in the Indian Banking Sector. Any other recommendations as a private bank. Introduction of prudential norms. when ICICI gave a presentation to RBI to discuss the time frame and possible options for transforming itself into an universal bank.
Your comments on distinguishing factor from a public sector bank which has a low reputation as compared to private sector. how would you rate the success of ICICI Prudential – Joy Hope Freedom Life. it is known for its network in rural areas. well / bad and why? How much revenue do you see from this business as a percentage of the total business. How do you see the scope of Internet banking in India. Especially ICICI. on a scale of 1 to 10 (10 being highest). do you think PSBs should also go for insurance and why? Due to increasing competition all banks are now heading towards developing areas or rather towns in the country. in the future 5 years down the line? What is the current revenue from this business? 180 . # What is the viability of “Insurance & Banking” in India. may be in terms of revenue or utilisation of resources or others? SBI Insurance – just confusing customers by lot of Insurance companies. please comment on the potentials in the rural area.# Can you please state the benefits of universal banking.
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