GlobalEconomy: The global economy after a sustained period of expansion isnowenteringintoa phase ofdownturn on account ofthe global financial

crises. TheGlobalGDP roseon an average by5 percentper annumduring 2004 to2007,which isthehighestsustainedratesince1970s. On the other hand international financial market witnesseda turbulencebeginningJune2007, triggered by the US sub-prime mortgage market, which then spread in subsequent months. Losses were recorded worldwide by financial institutions, which consequently undertook huge write offs, with some largest international banks recording considerable decline in profit. The global turmoil has accentuated significantlyduring 2008sofar and its adverse impact ontherealsector is clearlyin evidence. Manyadvanced economies are experiencing recessionary conditions. The financial crises seems to have entered a new turbulent phase since September 2008, which has severely impaired confidence in global financial institutions and markets. Indian Economy: As per the RBI report, The Indian economy continued to record strong growth during 2007-08, albett with some moderation. With adverse effect of global recessions on Indian industry and service sector, theRealGDPgrowth rate of India, has declinedfrom9.6%in 2006-07 to9%in 2007-08. But theoverallgrowthofrealGDPrateoftheIndia economy during 2007-08was noteworthyin theglobal context. Indian Financial SystemandFinancial Institutions: Indian financial systemis standing on the four pillars namely financial institutions, financial markets, financial instruments andregulatorybodies. Banking and Insuranceare theimportant constituentsof Indian

Research Paper²Commerce
June, 2010

PRESENT SCENARIOOFBANKING SECTORININDIA
* Dr. S.P. Jadhao
* Assot. Prof.& HOD Commerce, RA Arts, Shir M.K.Commerce & Shri S.R. Rathi Sc. College, Washim
Referred By² Financial System. Both plays veryimportant rolein the socio economic development of the country.As far as the present scenariois concerned thebanking industry is in a transition phase. On the other hand thePrivateSectorBanks in India are witnessing immense progress. They are leaders in Internet banking, mobile banking, phone banking, ATMs. On the other hand the Public Sector Banks are still facing the problem of unhappy employees. There has been a decrease of20 percent in the employeestrength ofthe privatesector in thewake oftheVoluntaryRetirement Schemes (VRS).As far as

foreign banks are concerned theyare likelyto succeed in India. InduslandBankwas the first private bank to be set up in India. IDBI, ING Vyasa Bank, SBI Commercial andInternationalBankLtd,Dhanalakshmi BankLtd,KarurVysyaBankLtd,BankofRajasthanLtd etc are some Private Sector Banks. Banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank, AndhraBanketc. ANZGrindlaysBank,ABN-AMRO Bank, American Express Bank Ltd, Citibank etc are some foreign banks operating in India. Banking Institutions Banks are the most significant players in the India financial market. They are the biggest purveyors of credit, and they also attract most of the savings fromthe population.Dominated bythe public sector, the banking industry has so far acted as an efficient partner in the growth and development of the country. Driven by the socialist ideologies and the welfare state concept, public sector banks have long been the supporters of agriculture and other priority sectors.Theyactas crucialchannelsofthegovernments in itsefforts toensure equitableeconomic development.

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InternationalReferredResearchJournal ISSN- 0975-3486 VOL,I *ISSUE-9 RNI: RAJBIL /2009/30097 f j l p Z , u k f y f l l , . M b o SY ; q, ¶ k u 38 The IndianBanks arethe backboneof Indian financial sector and Indian economy.Presently, the Indian financial system is in a process of rapid transformation. There are about 67,000 branches of Scheduled banks spread across India.During the first phase offinancial reforms,therewas a nationalization of14majorbanks in1969.Thiscrucial stepledtoa shift from Class banking toMass banking. Since then the growth of the banking industry in India has been a continuous process. The classification of banking sector is depicted in the following chart. Banks in India can be categorizedintonon-scheduled banks and scheduled banks. Scheduled banks constituteofcommercialbanks andco-operativebanks. There are about 67,000 branches of Scheduled banks spreadacross India.During thefirst phaseof financial reforms, therewas a nationalization of14major banks in 1969. This crucial step led to a shift from Class banking toMass banking.Since then the growth of the banking industry in India has been a continuous process. Banking today has transformed into a technologyintensive andcustomer friendlymodelwith a focus on convenience. The sector is set to witness theemergence offinancial supermarkets in theformof universal banks providing a suite of services from retail to corporate banking and industrial lending to critical areas. Technology, customer focus, quality of service, etc, which aware the distinguishing features of private sector banks, during their early years, have nowbecome part and parcel of thepublic sector banks

aswell. Byadopting the voluntary retirement scheme and streamlining their recruitment process, public sector banks have not only eliminated the excess workforce, but also tuned themselves up to compete better. In the arena of product innovations too, public sector banks are not far behind. From an era when banking products remained the same for decades, we have come to an agewhere newproduct innovations, particularly those targeted at specific groups, have become the norm of the day. Thewinds of change are refreshing and the private sector banks also making more innovative value added and beyond banking products to attract their customers. Cooperative Banking: The cooperative banking sector is one of the small partner of Indian banking structure in terms of volume of business, but it hasmorereach than anypublicsector bankor private sector bank. In our country, the cooperative banks havemore reach tothe rural India, through their huge network of credit societies in the institutional credit structure. There are 31 StateCooperativeBankswith 450 branches working for the development of cooperative sector in our country. Awide network of 361DistrictCentralCooperativeBanks(DCCBs)with over 7000 branches and 112000 PrimaryAgriculture Cooperative Credit Societies are serving the rural population and particularly farmers of our country. Apart from the DCCBs. There are more than 350 AgricultureCooperativeandRuralDevelopmentBanks (formerlyknown as LandDevelopmentBanks). Ifwe include theUrbanCooperativeBanks andUrbanCredit Societies, then the numbers of cooperative credit institutions cross the figure of 150000. The overall marketshare ofcooperativecredit systemin theIndian banking system, in termsofvolumeofbusinessmaybe lessthan 10%, butitis35%intermsofagriculturecredit (65%intermsof financingtosmallandmarginalfarmers). It is more significant to note that; the cooperative credit systemhas the onlysystem,which has coverage of more than 90 % of populace in rural India. The cooperative credit structure is serving the Indian society since 1889 and since then it has seen several ups and downs. Despite of several limitations such as restriction ofarea ofoperations, limitedclients, small volume of business, political interference, this investmentbanking.Whilecorporatebankingis clearly the largest segment, personal financial services is the highest growth segment.Banking in PostLiberalized Era: In theinitial postliberalization years,when private sector participationwas allowed in the banking sector , there was general contemplation that public sector banks¶ abilityto sustain the competitive pressure. But public sector banks proved such critics wrong and they not only have withstood the pressure, but have improved for the better in the light of the tough competition. After 17 years of liberalization, public

sector and private sector banks compete head on in all

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InternationalReferredResearchJournal ISSN- 0975-3486 VOL,I *ISSUE-9 RNI: RAJBIL /2009/30097

R E S E A R C H A 39 N A L Y S I S A N D E V A L U A T I O N
movement is standingsince last 104 years and serving the societies. The general perception of the public about the cooperative banks is notmuch encouraging, because of the frequent failures of cooperative banks andcredit societies. But,thetruthisthat,thecooperative credit systemis themost importantCriticalEvaluation of Banking Sector Though all thebanks includingpublic sector banks, private banks, foreign banks and cooperative bankshave their significant rolein thedevelopment of Indian economy and they all work in support of Government policyof socioeconomicdevelopment of themasses, theycan bedifferentiated bytheir business objectives, customer segmentation and management perspectives.Several supporters of free market economy have always upheld that the private sector banks are bettermanaged vis-à-vis their public sector brethren.Butwehave seen several examplesof failure of private sector banks.Several unfortunate turn of events of failure of private sector banks like Global TrustBank, (acquiredbyOrientalBankofCommerce), Sangli Bank and others, have shown that alike cooperative banks and publicsector banks, the private sector banks are no paragons of professionalism, efficiency and profitability.The moot point is that irrespective of the owner, banks face similar risks and itis themanagement¶s dutytohandlethemresponsibly. Mergers, in the banking industryhave become rescue vehicles for weak banks andmore often than not RBI holds the key to these deals.Several private sector banks and cooperative banks have been acquired by other bankinginstitutions. OverallGrowth Theperiod from2000 to2007wereremarkable for banking sector for more than one reason. Healthymonsoon boosted agricultural growth, which in turn spearheaded the economic recovery in the country.The industry including cement, steel sectors, consumer durables and infrastructure sector saw a turnaround in their fortunesdue tothe economicrecovery.Manufacturing toowitnessed a good growth.All this led toan increase in credit off-take for banks, which were wash with liquidity for the last few years. In the financial year 2006-07,retailloanswere51%ofthetotalloanportfolio whereas industrial loans and other loans were 15.6% and 24.4 % respectively. The trend towards retail banking continued to be on the rise till the end of the year 2007-08. Thiswas a healthysign as the extent of NPAswere less in the retail segment and given the fact that these loans were backed by assets, the chances of their becoming bad loans are further reduced. AmpleCapitalAdequacyBankinghadbeen

one of the hottest stocks during the bull markets in Indian stockmarkets till 2007-08.Almost all banking stocks had performedwell and investors bought them like hot cakes. Some of the banks had sensed that this was the right time to tap themarkets and went ahead withtheir equityofferings. This led toan improvement in theirCapitalAdequacyRatio(CAR).Theminimum CARasperRBInormsis9%atpresent. Itisnoteworthy to mention that just one of the banks in our survey, almost all the banks have more CAR than the requirement. In fact,most bankshavea healthymargin ofover 15%. The bankswhich hadlessCARtheyalso shown a healthy improvement over last year¶s CAR. The boomingstockmarkets in thesecond halfof200708 and the disinvestment target had encouraged the government to disinvest the stakes in several public sector companies including banks have also tapped the equitymarkets for fresh capital infusion.Deposits form a major chunk of liabilities for banks and are included in the debt component of the debt equity ratio. Internationally, a debt equityratioof 50 times is considered healthyfor the bankingsector.Ratiosof all theIndian banks exceptCenturionBank arebelow50. Similarly the non-interest income of banks has also registeredasmall downfallof1to1.25%intheir interest income.On theother hand, the non-interest income in the case of public sector banks, has registered an increaseof10%. Privatesector bankshavehadamore balanced growth. Their interest income increased at the rateof 7.52%whilenon interest income increased by 13.03 %. Foreign banks followed the footsteps of publicsector bankswitha fall of2.67%in their interest incomeandanaccompaniedraiseof19.08%inthenoninterest income. During the financial year 2007-08, deposits of banks have been increased by 15 to 25 % across thesector.Thegrowth in aggressivemarketing and customer acquisition techniques adopted by the banks. The advances of public sector banks, Private sector banks, andalsotheforeign bankshave increased by 15 to 20 % in the last financial year. The share of private sector banks in advances is higher than their share in deposits. Most private sector banks use the services of marketing organizations to attract customers. Aggressive marketing particularly in the home loan market, which has been increasing at a compounded annual growth rate of 20%over the last two years, has led to an increase in their share of

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InternationalReferredResearchJournal ISSN- 0975-3486 VOL,I *ISSUE-9 RNI: RAJBIL /2009/30097 f j l p Z , u k f y f l l , . M b o SY ; q, ¶ k u 40 advances. The revenues and profit of the banks have shown annual increase of 5 to 8 percent. Operating profit and Profit after tax recorded a robust growth of more than 25 %in the case of both public and private sector banks. Economic Depression and Banking

Sector:Thefinancialyear 2008-09was littleintricatefor Indian bankingsector becauseof thecolossal economic depression in the world and especially US, EU and other developed countries. Due to the recession the world, several export oriented industries like, textile, diamond,rubber,steel,leather, cementetc. arein trouble. Consequently, the banks having credit exposure in these industries facing default risk.Thus Indian Banking Sector also could not keep away fromheat of recession and resulted in to decline in the business performanceindicators.Barringthe fewincidents, the hugeIndianfinancialsectorhaving82lakhcrores assets and 60 lakh crores deposit base has grown at around 12to15per cent per annumand hasdisplayed stability for the last several years, even when othermarkets in theentireworldandinAsian regionwerefacinga crisis. This stabilitywas ensured through the resilience that has been built intothe systemover time. The financial sector has kept pace with the growing needs of corporate and other borrowers. Banks, capitalmarket participants andinsurers havedeveloped awide range of products and services to suit varied customer requirements. The Reserve Bank of India has successfully introduced interest rate regime where interest rates are dependent on the market forces. financial institutions have combated the reduction in interest rates and pressure on their margins by constantly innovating and targeting attractive consumer segments. Effects of Economic Recession on Indian Banking Sector: Since the entire world in passing through the economic depression, India is also feeling the heat and the industrial sectors particularly those who are dependent on export are facinglots ofproblems. The developedeconomies and particularly US is facing severe crises in all fronts of economy. The financial sector is theworst affected in US due to sub prime mortgage lending. One of very renownedprivatesectorbank,TheICICIBankalsohad been hitbytheInternational subprimemortgage crisis. ICICI Bank has lost nearly US$ 264, till the end of January2008. But asper the banks statement, the loss ofbankwasnot due toinvestments in theUSsubprime loanmarket, but duetothefall in the valueof securities in theglobalmarket.Theriseintheinternationalinterest rates duetothesubprimemortgagecrisiswas themain cause for the fall in the value of securities in the global market, which forced ICICI bank to make up the difference from its turnover. The loss, though, is speculative, as the bank has not sold out these securities. The bank holds securities worth face value of US$ 1.6 billion and one of its divisions holds securitiesworthUS$ 0.5billion. ICICIbank is the first Indian Banktoreportsuch kindof loss.However, other publicsector banks are expectedtoreportsimilar losses in the near future. The bank expects that the loss due tothe subprimecrisiswouldtake awaynearly9%ofthe

yearlyturnover. Themain causeof thesubprime crisis is expectedtobe the hugeamount of loans given to the domestic borrowers in United States with bad credit history, i.e. low repayment power called subprime borrowers in United States. These borrowers were unable to repay the loans due to the slowdown of the US economy, which affected the accounts of these banks, therebystarting thechain reaction of the fall in the value of the securities in the internationalmarket. As per the estimated losses, banks like the Merrill Lynch,CitibankandDeutscheBankhavelostout nearly US$ 180 billion due to the subprimemortgage crisis. As mentioned earlier, Indian Banks are not engagedin sub-primemortgagecrises, becauseof their high securityand asset backmortgages and collateral. Moreover, the Indian public in general is not having the habits of investment or spending by way of borrowing. However, some private banks and foreign banks operating in India are facing problems, but not because of their loans, advances or investments in the USsubprimeloanmarket, but duetothefall inthevalue ofsecurities intheglobalmarket. Therefore, itis certain that the sub prime mortgage problems of the indian bankswillnotmakeanysignificanteffect onthebanking sector.
1. RBI Bulletins (2005 to 2007) 2. Banking Trends in India (V.B.Jugale), 2006 3. Problems and Prospects of Banking in India (Dr M M Tapkir ), 2007 4. Sinha, Tapen and Sinha, Dipendra. ³A Comparison of Development Prospects in India 5. and China.´ Asian Economies, Vol. 27(2), June 1997, 5-31. U.S. Department of State FY 2001 Country Commercial Guide: India. Commercial Guide for India was prepared by U.S. Embassy New Delhi and released by the 6. Bureau of Economic and Business in July 2000 for Fiscal Year 2001 Websites: 7. http:/www.rbi.org.in 8.http:www.nabard.org 9.http://www.lic.wwindia.com/ 10. http://www.asiainsurancereview.com/edsynopsis.asp11.www.hc.wharton.upenn.edu/impactconference/presentations.html

REFERENCE

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