CHAPTER-2 –REVIEW OF LITERATURE

CHAPTER-2

REVIEW OF LITERATURE

2.1 THE CONCEPTUAL FRAMEWORK OF BANKING

2.2 REVIEWS ABOUT OPPORTUNITIES AND CHALLENGES

2.3 REVIEWS ABOUT RISKS CONFRONTED BY BANKS

2.4 REVIEWS ABOUT THE REGULATORY SYSTEM

2.5 REVIEWS ABOUT THE RESEARCH PERSPECTIVES

2.6 RESEARCH GAP

2.7 CONCLUSION

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2.1 THE CONCEPTUAL FRAMEWORK OF BANKING

In the light of worldwide experience of broadening taken by the Banking area

and additionally the rise of the Universal Banking idea, an endeavor has been made
through the survey of writing to follow the degree of expansion made by banks in the
Indian Banking skyline and their inevitable change to Universal Banking framework,
openings and difficulties before household banks, the dangers went up against in
course of this progress and the administrative and supervisory issues that are probably
going to emerge in the Indian setting on depending on Universal Banking framework.

The Indian Banking framework has increased much quality and union after
the first round of nationalization of banks in 1969. The nationalization has enhanced
the earth in regard of definition and execution of the financial and banking
arrangements (Dhar, 2004)1. Post nationalization period has seen quick branch
extension, increment in credit offices to the need areas, and increment in the volume
of store activation and presentation of different plans like Lead Bank Scheme,
Integrated Rural Development Program and so forth.

Be that as it may, since mid 1980s, in India, there has been dangerous
development of monetary markets. As per Rajadhyaksha (2004)2, these
improvements in the Indian Financial part has enabled Companies and once in a
while even clients to sidestep banks and get cash straightforwardly from the
individuals who spare it – a procedure called disintermediation.

This has constrained banks to enter new business with a specific end goal to
hold tight to their valuable clients. Besides, item limits have obscured which is
likewise another striking explanation behind banks to go into new zones to address
client issues. And most importantly, new system innovation has enabled banks to
abuse economies of scale and offer more extensive scope of money related items. All
these made banks to offer an assortment of creative administrations in foresight of
materials increases, following money saving advantage examination (Ho, 2006)3.
Truth is told, the concentration of banks while offering enhanced administrations is
on clients' demand and fulfilling their requirements in a most ideal manner and
likewise on decreasing exchange costs and to return higher profits. In addition, as
clients demand for assortment, accommodation, and new administrations, banks need

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to give items that can meet their exact, singular needs. Altogether, the market moved
from being 'merchant driven' to 'purchaser driven' and clients were overflowed with
offers of an assortment of tailor-influenced items to like protection, common store,
stock exchanging, lodging money and so forth under 'one-rooftop' alongside their
conventional items (Darshan, 2006)4.

Along these lines, expansion of banking exercises of Commercial banks has in

the long run prompted the rise of Universal Banks in the Indian Financial System.

Rao (2004)5 has noticed that deregulation and globalization of the budgetary
market in India since mid 1990s, set apart by interest rate rivalry, unwinding of trade
control and advancement of I.T. have to a great extent encouraged universal pooling
of money related assets over the world markets. In the midst of every one of these
improvements, banks began putting more accentuation on new wellsprings of non-
interest incomes. This has prompt expansion of banking exercises even in India.

Kannan (2002)6 notices that the primary motivations of a more broadened

monetary intermediation was seen in the late 1980s and mid 1990s, when banks were
permitted to attempt renting, venture banking, common assets, considering, enlist buy
exercises through separate auxiliaries. By the mid 1990s, all confinements on venture
back were evacuated and banks were permitted to attempt a few exercises in-house.
As indicated by the creator, changes in the Insurance part in the late 1990s and
opening up of this field to private and remote players, additionally brought about
allowing banks to attempt offer of protection items. All these have brought about
progressive transformation of Indian business banks into Universal banks, offering an
assortment of money related administrations.

Another critical certainty called attention to by Karunagaran (2005)7 is that

in India, however there is no authoritative qualification between Commercial banking
and Investment banking or any express administrative confinement for the banks to
operate in speculation banking exercises, the banks have customarily been keeping up
the 'a safe distance' separate from venture banking. Be that as it may, with the money
related segment changes starting in 1990s, banks were given bounteous flexibility to
go much past their customary preservationist business banking and these encouraged
banks in giving a large group of monetary items to address client issues.

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In any case, the more substantial energy for the rise of Universal banking idea
in India appears to have set in simply after the second Narasimham Committee
Report (1998)8 suggesting Development Financial Institutions, over some stretch of
time to change over themselves into banks (verifiably Universal banks) and that there
ought to in the long run be just two types of intermediation - Banking organizations
and Non Banking Financial Companies. Also, this was trailed by a Working Group
led by S.H.Khan(1998)9, on 'Blending the Roles and Operations of Development
Financial Institutions and Banks' (1998), which made it more express by prescribing
for a dynamic development towards Universal banking for the DFIs. Fundamentally,
at that point Commercial banks were at that point allowed to enter expanded regions
of budgetary organizations.

The other main thrust behind banks deciding on enhancement is the

advancement in the field of Information Technology. Actually, it has been IT that has
empowered banks to offer an assortment of administrations under one-rooftop and
that too in financially savvy and expedient way. Many respect computerization in the
managing an account industry as a key element of the money related area change
process and it intends to enhance client benefit, house-keeping, basic leadership and
efficiency and productivity (Suneja, 1994)10.

The RBI, in perspective of the need of I.T in managing an account, had

framed two abnormal state boards – one out of 1983 under Dr. C Rangarajan and
another in the year 1988. Besides, the order of Information Technology Act 2000 by
the Government had encouraged its utilization in the Banking area. The I.T Act as
gave by Section 93 in the Fourth Schedule influences correction to the Reserve To
bank of India Act, 1934 and another provision relating to building a fundamental
legitimate structure for internet business has been joined in Section 58 in sub segment
(2), after statement (p). Indeed, I.T has made ready to accelerate the way toward
keeping money operations and lessen the drudgery and the time taken in ordinary
saving money operations (Vittal, 2001)11. The presentation of I.T in managing an
account exercises has encouraged banks in broadening their business exercises and
thusly made the progress way less demanding for business banks toward Universal
keeping money.

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In addition, rivalry in changed markets requires adaptability and solid data and
the Financial System being data serious, needs an all around composed Management
Information System (MIS) to fill in as an apparatus for chance administration as well
as for powerful operational administration (Murty, 2001)12.

Truth to be told, for successful business choices, banks need to do prescient

examination with 'consider the possibility that' recreations. With deregulation, huge
numbers of the boundaries to globalization have vanished and the saving money
operations are not any more confined to local market however have turned out to be
more worldwide and completed 24 hours × 7 days seven days (Ramaswamy,
2005)13.

With huge practical and topographical spread of banks, there has been a sharp
development in the quantity of records in the zones of operation of banks (Talwar,
2000)14. In this way, expanded client base, complex items and round the clock
administrations to the clients require the need of present day innovation in the
managing an account division.

So, one might say that broadening in the managing an account segment has
been conceivable because of money related part changes started by the Government
and Information Technology insurgency that cleared the nation in mid 1980s. Be that
as it may, in obvious terms, expansion in the Banking segment and the
acknowledgment of Universal Banking idea, as unique in relation to limit managing
an account, really went to the front line in the Indian setting with the second
Narasimham Committee (1998) and later the Khan Committee (1998) reports.

Fundamentally, the proposals of Narasimham Committee and Khan

Committee for solidification of managing an account through mergers and
amalgamations have achieved an adjustment in the working of business banks and
step by step they are walking towards Universal saving money structure (Bhaskar,
2005)15

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2.2 REVIEWS ABOUT OPPORTUNITIES AND CHALLENGES BEFORE

INDIAN BANKS

The storms of budgetary division changes, which began in mid 1990s, have
evacuated a considerable lot of the obsolete administrative fences inside which banks
were required to work. This gave more freedom to banks (Rajadhyaksha, 2004)16
and they began to expand their business territories according to authorization
conceded to the banks by the Government under area 6 of the Banking Regulation
Act, 1949 (Dhar, 2004)17. All the while, in the worldwide managing an account
framework, there were auxiliary and monetary changes, which brought about vast
scale mergers, amalgamations and acquisitions among banks and budgetary
foundations.

This prompted broadening of business territories of banks, even in India, to

augment economies of scale and degree by 'packaging' the creation of budgetary
administration (Kannan, 2002; Karunagaran, 2005)18 on the grounds that the
collaborations in joint generation of monetary and non-money related administrations
increment financial proficiency, lessen cost and increment income (Bhole, 2004)19. In
addition, the pattern towards Universal saving money will bring about cost funds in
sharing Technology, Information Systems, Accounting Services and Fixed costs
(Bhaskar, 2005)20.

It empowers strategically pitching and expands client base, decreases

exchange costs (in a joint effort with Strategic Alliances) and creates more business.
Aside from diminishing exchange costs and expanding the speed of financial
movement, it guarantees congruity of gaining income with less hazard. Another
preferred standpoint of expansion as pointed out by Ajit (1997)21 is that in the event
of low benefit/misfortune in one business, it can be counterbalanced by great business
in the other territory/units.

Bhalla (2002)22 attests that the deregulation of the Indian Financial segment
has hurled various business openings. As per him, late improvements both in the
administrative front and in addition from a statistic viewpoint, would offer ascent to
developing interest for specific classifications of money related administrations

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including protection and benefits stores administration, outsourcing, resource

administration and riches administration and so forth.

Patnaik (2003)23 opines that the expense based salary can be expanded
significantly if just banks utilize their imagination in discovering probability of inter
mediation, in spite of the fact that disintermediation of managing an account has
occurred if there should be an occurrence of loaning to vast corporate. In this manner,
budgetary segment changes have given adequate chances to banks to broaden and
offer a large group of monetary administrations under one rooftop, as it is basic for
sustenance and to stay aggressive.

The creator likewise says that, for this, banks need to go for item
development, go into vital collusion with specialist organizations of different sorts,
get transformation the circulation channels of their items and open backups with
various core interest. Mukherjee, Nath and Pal, (2002)24 feel that the concentration
of keeping money organizations ought to be on understanding the drivers of progress,
similar to better usage of its assets (like innovation, foundation and workers),
procedure of conveying quality support of its clients and execution benchmarking or
else it would be troublesome for them to survive and adjust to the evolving condition.

Leeladhar (2005)25 brings up that globalization has hurled parcel of chances

before Indian banks however it is joined by challenges. As per the creator, banks
today confront difficulties of upgrade of client benefit, utilization of innovation,
usage of BASEL II standards, change of hazard administration frameworks, execution
of bookkeeping measures, improvement of straightforwardness and divulgences and
consistence with Know Your Customer (KYC) perspectives in the household
showcase while the worldwide difficulties incorporate improving corporate
administration, arrangement of administrative and bookkeeping necessities,
outsourcing dangers and use of cutting edge innovation.

Sarkar (1999)26 notices that with the dynamic disassembling of trade control
under the capital record convertibility of rupee, holding demographic base would be a
test to Indian banks. This is on the grounds that there would be an expansion in the
stream of both portfolio and remote direct venture, subsequently putting a descending
weight on loaning rates. A bank's capacity to react to supply weights would rely upon

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its cost of assets and operations and inability to stay focused would prompt loss of
customer base, with Corporate and people getting to budgetary markets abroad.

Khan (2004)27 additionally says that in this period of worldwide rivalry, one
of the greatest difficulties any administration association like a bank would confront
is to meet rising client desires. In this specific situation, Lavender (2004)28 feels that
data about clients is the way to expanding deals and initiating productive connections,
so banks need to arrange these information to effectively separate their key clients
and prospects and to develop connections by offering significant administrations.

In the interim the choice of the Government of India to open the keeping
money segment to remote members after 2009, has tossed an open test to Indian
banks to achieve operational productivity (Rajadhyaksha, 2005). With this,
opposition in the keeping money segment was required to run up further and with the
development of Private Sector Banks and Foreign Banks in the nation, Indian Non
Banking Financial Companies and Financial Institutions have likewise gotten up to
speed with changing into Universal Banks for sustenance. Again with the bringing
down of passage hindrances and obscuring product offerings of banks and non-banks,
since the money related segment changes, banks are working progressive under
aggressive weights. Henceforth, it is basic that banks keep up a dedicated client base
(Choudhury, 2007)29.

To accomplish this and enhance their market and benefit positions, many
retail banks need to coordinate their systems towards expanding consumer loyalty and
dependability through enhanced administration quality. Besides, with the coming of
universal saving money, incline towards bigger bank holding organizations, and
developments in the commercial center, clients are going up against more prominent
and more noteworthy trouble in choosing one managing an account foundation from
another.

Hence, the present issue or rather a test for the Indian managing an account
industry is to decide the dimensionality of client saw benefit quality. This is on
account of if benefit quality measurements can be recognized, benefit directors ought
to have the capacity to enhance the conveyance of client saw quality amid the
administration procedure and have more noteworthy control over the general result.

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Therefore, the Banking business in India is presently a much developed one

and banks are being compelled to change quickly because of open market powers, for
example, the danger of rivalry, client request, and mechanical advancements like the
development of Internet. On the off chance that banks are to hold their
aggressiveness, they should concentrate on client maintenance and relationship
administration, redesign and offer incorporated and esteem included administrations,
shape solid partnership and joint endeavors with other Non-Banking substances. To
put it plainly, banks need to receive creative managing an account (Mithani, 1992)30
for store activation and sending of credit and that as well, through tweaked items.

2.3. REVIEWS ABOUT RISKS CONFRONTED BY BANKS

Deregulation and globalization of Indian Banking division has given plentiful

chances to development of banks. Over the span of money related intermediation,
banks are stood up to with different sorts of monetary and non-budgetary dangers
viz., credit, loan cost, remote swapping scale, liquidity, value, ware cost, legitimate,
administrative, notoriety, operational and so on. The dangers alluded to above are
interconnected and associated and these dangers looked by banks emerge because of
various variables like the arrangements sought after by the Government, expanded
rivalry, diminished spreads, an ever increasing number of modern customers and last
yet not the slightest, the improvements in data innovation and broadcast
communications (Joshi and Joshi, 2002)31.

With enhancement of managing an account operations, banks began having

considerable premiums in a wide range of money related organizations. Steadily,
these banks started moving towards the Universal managing an account system. Such
an element at that point happens to be an overwhelming player in the economy and its
disappointment brings about development of foundational hazard (Herring and
Litan, 2003; Rajadhyaksha, 2004)32. Be that as it may, compelling administrative
activity to distinguish the framework shortcomings and see early flags can add to
significant decrease in framework chance and in that capacity banks must be overseen
and managed with incredible care. Also, when an element offers differentiated
budgetary administrations under one-rooftop, it raises extra supervisory worries
because of the rise of extra dangers. The main extra dangers emerge in light of

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disease, irreconcilable situations, absence of straightforwardness and administrative

arbitrage (Sundararajan and Baldwin, 2005)33.

Infection emerges when budgetary issues are transmitted among the gathering
elements and between gatherings. Again banks inside the combination are at a danger
of lost certainty emerging from negative reputation about the exercises of a subsidiary
or they might be drawn into the issues of a member if aggregate administration
weights the bank to help the grieved offshoot. Such irreconcilable situations are
regularly looked by the administration of money related gatherings and the choices
that advantage the gathering all in all may not be to the greatest advantage of a
specific gathering substance. In such occasions, there is a likelihood that banks may
experience the ill effects of notoriety chance or from extra dangers that emerges not
on account of its own business operations but rather to be a piece of a money related
gathering.

As banks are being permitted to go for expansion of organizations, banks

world over, are proceeding with their endeavors to enhance their wage source and
wandering into new zones of exercises.

Another vital reality which investors can't overlook is that 'sheltered and
productive installments frameworks' are basic to the viable working of any budgetary
framework (Clacher, Doriye, Mohamed and Satta, 2006)34. On the off chance that
they are ineffectively composed at that point stuns can be transmitted amongst
business sectors and foundations. Where default happens in exchanges, at that point
the impact is enhanced and may spread because of basic wasteful aspects in the
framework.

The impact is that establishments may encounter liquidity and credit issues,
which could jeopardize the soundness of the installments frameworks and more
extensive money related markets. Once more, in many developing markets like India,
the dominant part of exchanges is through paper, checks, and drafts and subsequently,
the wastefulness is self-evident. This in the long run can prompt money related
emergency.

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With expanded rivalry in the Indian Banking segment, saving money is never
again viewed as a business managing cash exchanges alone, but at the same time is
viewed as a business identified with data on budgetary exchanges. It is trusted that
I.T. assumes a critical part in giving better client benefit, probably at a lower cost. A
few creative I.T-empowered administrations, for example, ATM, Electronic reserve
exchange, Anywhere-Anytime keeping money, Smart cards, Net Banking and so
forth are received by banks (Sureshchandar et al., 2003)35. This opens banks to
innovation chance and operation hazard.

Also, advertise unpredictability, corporate anomalies and pained capital

markets have shaken the keeping money industry and featured the threats of poor
hazard administration. Customary hazard frameworks can't catch the interrelationship
between different dangers composes crosswise over geologies, divisions, and lines of
business. Also, the new BASEL Capital Accord is driving banks to embrace more
complete hazard administration frameworks to survive and succeed. In the angle, Fell
and Devine (2003)36 say that as banks have considerable premiums in different
budgetary organizations, they stand up to credit, advertise, operational, protection,
liquidity, and gathering dangers, which are additionally brought under the domain of
the FSA Integrated Prudential Sourcebook for guaranteeing solidness of the
framework.

Endeavors are made by the Bank Management and also Regulators crosswise
over globe to oversee danger of the saving money division adequately. In India, the
RBI utilizes the CAMEL Model to survey the hazard introduction of banks in order
to guarantee dependability of the Indian Financial System. C.A.M.E.L.S is an
acronym and stands for Capital Adequacy, Asset Quality, Management Quality,
Earnings, Liquidity and Sensitivity to Market Risk. The C.A.M.E.L.S demonstrate is
utilized to evaluate the strength of a money related organization. Nonetheless, in
numerous nations the CAMEL Model is utilized rather than the CAMELS Model.
The rating of a budgetary establishment under CAMEL(S) Model is very private. A
bank's C.A.M.E.L(S) rating is specifically known just by the bank's senior
administration and the proper supervisory staff. C.A.M.E.L.S appraisals are never
discharged by supervisory offices, even on a slacked premise (Hirtle and Lopez,
1999)37. While aftereffects of bank assessment by utilizing C.A.M.E.L.S. display are

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secret, people in general may deduce such supervisory data on bank conditions in
light of consequent bank activities or particular divulgences. Generally, the private
supervisory data accumulated amid a bank examination isn't uncovered to people in
general by administrators, in spite of the fact that reviews demonstrate that it filters
into the money related markets. Additionally, CAMELS appraisals, doled out by
analysts toward the finish of an on location examination, are 'preview' assessments of
a bank at a given point in time, and are along these lines perishable amounts (Cole
and Gunther, 1995)38. This is a direct result of the dynamic idea of the monetary
business and the basic factors on which the evaluations are based start to change in
some courses instantly after the rating is given. Because of these realities, examine
including CAMELS rating is constrained because of the limited idea of the
evaluations. (Barr, 2002)39

2.4 REVIEWS ABOUT THE REGULATORY SYSTEM FOR MONITORING

BANKS OFFERING DIVERSIFIED FINANCIAL SERVICES

Banks, not at all like different associations, are distinctive because of pliancy
of benefits and high obligation/value proportions (Hickson and Turner, 1996)40.
What's more, it is a recognized reality worldwide that banks are exceptionally delicate
organizations, which are based on trust, notoriety and perilous use. Stuck in an
unfortunate situation, banks can fall like a pack of cards and disappointment of one
bank can send stun waves directly through the economy. Accordingly, banks are
subjected to statutory controls in order to guarantee that keeping money and monetary
exercises don't prompt 'good peril'. As a large portion of the banks are regularly 'too
huge to fall flat', it is likely that they may go out on a limb under the supposition that
the Government will venture in with a safeguard on the off chance that something
turns out badly . Such broad idleness, as indicated by Karunagaran (2005)41, would
just empower the banks particularly those of Universal Banking structure to enjoy
high-hazard exercises.

In addition, the hypothesis 'too enormous to come up short' has lost its
importance (Karunagaran, 2005). It is a direct result of this reason Financial System,
world over, has been stringently controlled, even if there should arise an occurrence
of open economy, where showcase plays a main part. The method of reasoning
behind such prerequisite was that direction and supervision was required to revise
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'showcase disappointment' as banks tend to go for broke than as far as possible, which
will thusly adversy affect the framework. Also, India is no exemption to this.

Herring and Litan (2003)42 states that to the extent direction is worried, there
is no settled model: a few countries will seek after solidified supervision, with
specialist over whole aggregates vested in a solitary expert like the Financial Services
Authority of the U.K., while others will at present manage the bits of differentiated
monetary ventures along basic lines like in India, where such an element is required
to answer to various specialists like Reserve Bank India (RBI), Securities Exchange
Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA),
National Housing Bank (NHB) and Pension Fund Regulatory and Development
Authority (PFRDA). While the particular goal of these controllers may differ from
contributor security and speculator assurance to advertise direction, their normal
concern is keeping up budgetary soundness (Reddy, 2001)43.

The Financial Service Authority is the single controller in the United

Kingdom‟s for banks and budgetary administrations organizations following the
merger of 10 previous bodies. It is a statutory body represented by Financial Services
and Markets Act, 2000 and is an autonomous and non government body worried
about keeping up trust in the monetary framework, advancing open comprehension of
the framework, securing the proper level of insurance for customers and lessening
budgetary wrongdoing (Slattery and Nellis, 2005)44. Indeed, even in the USA, the
Gramm Leach Bliley Act (GLBA) had additionally proposed for an incorporated
supervisory model called the Federal Reserve, which goes about as an umbrella
controller – particularly went for directing the money related framework or
combinations. In this way, it is felt that in India, administrative arbitrage could be
limited if a bound together Regulatory Authority, as against the present arrangement
of numerous controllers, directs the System. Actually, the contentions for unification
of administrative organizations depend on the way that a bound together controller
would guarantee focused lack of bias in the light of the obscuring qualifications
between the different classes of money related establishments (Sundararajan and
Baldwin, 2005)45.

Be that as it may, as per Sundararajan and Baldwin (2005), there are sure
contentions against unification. This premise being that unification will bring about
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vague destinations for the administrative organization and even diseconomies of scale
may emerge in light of the fact that a bound together office is viably an administrative
imposing business model and may offer ascent to the kind of wasteful aspects
ordinarily connected with restraining infrastructures. Most importantly, it might
broaden moral risk worries over the entire money related administrations division as
people in general will have a tendency to accept that all lenders of organizations
administered by a given administrative office will get equivalent insurance.
Disregarding these contentions against unification, in India, the selection of standards
of solidified supervision is in effect logically crossed over.

As indicated by Sharma and Vashishtha (2007)46, the current advancements

in the money related area, specifically, the rise of monetary aggregates, have
prompted a valuation for the confinements of the present segmental way to deal with
budgetary direction. The requirement for tending to the dangers related with mixture
is as a rule generally valued. An open deliberation is going around as respects the
ways and methods for guaranteeing a powerful administrative framework, which has
the characteristics of impartiality, cost-viability, straightforwardness and
responsibility, or more all which suits the political and social structures and duties
and in addition the administration, business and societal between relations.

Along these lines, as indicated by the creators, in this on-going civil argument,
there is an agreement on embracing a solidified, all encompassing supervisory way to
deal with money related direction and supervision, independent of its basic plan. The
RBI, perceiving the significance and adequacy of administrative issues postured by
the development and development of budgetary aggregates, ventured out merged
supervision of managing an account substances by issuing rules to the Banks in
February 2003 based on Working Group Report (RBI, 2004)47. In the light of
these, the creators have recommended a model. The model is named as all
encompassing one might say that it endeavors to take a gander at budgetary markets
as persistently developing elements, regardless of customary sectoral qualifications
and likewise conveys supervision which is more compelling in taking care of the
difficulties of administrative arbitrage, monetary combinations and cross fringe
joining of household money related part.

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2.5 REVIEWS ABOUT THE RESEARCH PERSPECTIVES

Amandeep (1990)48 has taken nationalized banks to evaluate the profit and
profitability of them and concluded that they have to focus on the establishment
expenses, income and deposit composition. The researcher has also taken private
sector lending and rural banking and suggested that they have not any adverse effect
on the profitability to have considerable effect.

Zachariah Thomas (1995)49 has studied the performance effectiveness of

nationalized banks with a case study of Syndicate Bank for the period of ten years
using EMEE model. He studied growth and development of banking industry in
relation to capital adequacy, asset quality, profitability ,growth, productivity, social
banking and made a comparative analysis between Syndicate Bank and nationalized
banks. He concluded that nationalized banks had low health and efficiency
performance in comparison with Syndicate Bank.

Padmanabhan Working Group (1995)50 in its report suggested for

supervisory intervention and introduction of new rating model for banks on the lines
of CAMELS Model with appropriate modifications. The Acronym CAMELS denotes
Capital adequacy, Asset quality, management quality, earnings quality, liquidity and
systems and CAMELS should be used for Indian banks.

Das Abhiman (1997)51 has studied 65 commercial banks to examine the

efficiency using the data of year 1995 and found that the banks in India were efficient
and there were no significant difference in efficiency measures between public and
private sector banks.

Bhattacharyya A (1997)52 examined the impact of partial liberalization on

the productive efficiency having taken 70 commercial banks for the period 19986-
1991 and found out that public sector banks had the highest efficiency followed by
foreign banks while private sector banks were found the least efficient.

Pradeep K Das (1997)53 evaluated the competitive advantage of different

bank groups using Matrix analysis based on eight twin parameters. Foreign banks,
SBI and its Associates, and private banks were found to have considerable advantages

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over the other groups and on account of competition banks have undergone vast
restructuring plans.

Rao and Dutta (1998)54 studied all the nationalized banks for the year 1998
to derive rating based on CAMEL with 21 parameters. And concluded that the
Corporation Bank has the best rating followed by the Oriental Bank of Commerce
while the Indian bank showed the weakest rating.

The Verma Committee (1999)55 was given a job of identifying and

restructuring weak public sector banks using various financial indicators such as
CRAR. Coverage ratio, ROA, net interest margin, operating profit to average working
fund, cost to income and staff cost to net interest income plus other income. The
committee concluded that the United Commercial bank, the United Bank of India and
the Indian bank were weak performers.

Prashanta Athma (2000)56 here researcher took only one public sector bank,
State bank of Hydrabad from 1980 to 1994. He analyzed the trend of deposits, and
various components of profit. He used Ratios and compound annual growth rate for
meaningful comparison and analysis. He found out that since nationalization the
progress of banking in India has been very impressive.

Ram Mohan TT (2002)57 evaluated the performance of all groups of banks in

absolute and real terms and observed that the efficiency of the banking system as a
whole has been declined while the spread has been improved.

Singh.R (2003)58 The researcher wanted to analyze profitability management

banks under Deregulate environment with some financial parameters of the public
sector banks, old private sector banks, new private sector banks and foreign banks. He
stated that profitability has declined in the deregulated environment. He suggested to
make the banking sector more competitive and to prefer non-interest income source.

Bharathi Patak (2003)59 with a title “ A Comparison of the Financial

Performance of Private Sector Banks” studied five new private sector banks namely,
IndusInd Bank, HDFC Bank Ltd, ICICI Bank Ltd ,UTI Bank Ltd for the study period
of five years from 1996 to 2001 in accordance Financial, Operational, profitability

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and Productivity. And concluded that working of all the banks was satisfactory and
with the HDFC Bank Ltd Remained on the top and ICICI Bank Ltd on second place.

Ruchi Trehan and Niti Soni (2003)60, in their study entitled „Efficiency and
Profitability in Indian Public Sector Banks‟ attempt to analyze the operating
efficiency and its relationship with profitability, in the public sector banking industry
in India. The analysis of the relationship between the group status and technical
efficiency shows that the banks affiliated to the SBI group were the more efficient
than other.

Veni P (2004)61 studied the capital adequacy requirement of banks and the
measures adopted to strengthen their capital ratios. The study points out that while
rating banks, agencies usually adopt CAMEL model and Capital Adequacy has been
the pivot for analysis of them.

Prof.Nirmal Nathwani (2004)62 found a significant difference in labor

productivity among all five groups-SBI group, nationalized banks, Old Private Sector
banks, New Private Sector banks and foreign banks. He studied Business per
Employee and Profit per Employee and concluded that BPE was showing
improvement during the study period for SBI group

Milind Sathye (2005)63 studied the impact of privatization on bank

performance and efficiency for the study period of 1998 to2002 with conclusion that
private sector banks have performed better than public sector bank in respect of
financial performance parameters.

Satish, Juture Sharath and V Surendar (2005)64 studied the performance of

55 Indian commercial banks for the year 2004-05 with help of CAMEL model. They
found out that the Indian banking system looks sound and information technology
will help the banking system to grow in strength in the future.

Joy S (2005)65 in his study „Performance Evaluation of Private Sector

Commercial Banks in Kerala‟ tried to evaluate the performance of different bank
groups in India with special reference to productivity, fund management, profitability
growth, and social commitment. He took 10 years‟ data from 1992-93 to 2001-02.

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Based on the available absolute data, all the variables under study were found to favor
the public sector banks, followed by private banks and foreign banks. But on the basis
of relative data, the performance of public sector banks was to be unsatisfactory. The
new generation banks were strong in respect of growth rates. On the basis of
comparative performance, foreign banks stood on the top. Nationalized banks were
very strong in respect of growth, productivity and profitability.

Uppal R K and Rimpi Kaur (2005)66, in the paper with title „Indian
Banking Sector-Efficiency in the Post-Banking Sector Reform Era–New Challenges
and Future Opportunities‟ analyzed the efficiency of all bank groups for the study
period for1999-00 to 2004-05. The paper concluded that the efficiency of all bank
groups increased in the second post- bank reforms era in terms of some parameters of
efficiency, such as profit per employee, profit per branch, business per employee,
business per branch and expense per branch and the performance of PSB was poor.

Bodla B.S and Richa Verma (2006)67 took a study as „Evaluation of the
Performance of Banks through the CAMEL model: A case study of the SBI and the
ICICI Bank Ltd... For the study period of 2000-01 to 2004-05 and found out that the
SBI had an edge over the ICICI Bank Ltd. in terms of Capital Adequacy. But
regarding asset quality, earnings quality and management quality ICICI was good.
The liquidity position of both the banks was sound.

Janaki P Ramudu and S Durga Rao (2006)68, through their paper „A

Fundamental Analysis of Indian Banking Industry‟ attempt to analyze the profitability
of three major banks in India: SBI, ICICI Bank Ltd, and HDFC Bank Ltd. The
variables taken for the study are Operating Profit Margin (OPM), Net Profit Margin
(NPM), Return on Equity (ROE), Earnings per Share (EPS), Price Earnings Ratio
(PER), Dividends per Share (DPS), and Dividend Payout Ratio (DPR) and bring out
the comparative efficiency of the selected banks.

Varghese K John (2006)69 made an attempt to study the NPA of Indian

Commercial Banks comprising the State Bank of India and its Associates, 19
nationalized Banks, 21 old private banks and 9 new generation banks, for the study
period for 1996 to 2005, and used time series and panel data regression analysis. The
prudential norms implemented in the banking sector. The introduction of competition

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had a positive impact in controlling the rate of Gross NPA. The new private banks
were more cautious about productivity, and improved their financial performance and
consequently the Gross NPA had been reduced during the period under study. The old
generation banks were overstaffed and their productivity could be improved only by
reducing the staff strength. There was a direct relationship between the priority sector
lending and NPA in the case of all banks except the new generation banks.

Dr.Sanjay Bhayani(2006)70 studied four leading new private sector banks

ICICI,HDFC,UTI and IDBI .he compared the performance of all the banks and
concluded that the all over performance of IDBI was the best followed by UTI.

Narinder Kaur and Reetu Kapoor (2007)71 evaluated the profitability and
relative efficiency of PSB s in India in the post-liberalized era from 2001-05. The
results showed that the overall profitability of PSBs had been increased. The relative
efficiency of nationalized banks was higher than that of State Bank group. The best
performers were Oriental Bank of Commerce and United bank of India from the NB
group, and State Bank of Hyderabad and State Bank of patiala from SB group.

Usha Arora and Richa Verma (2007)72 studied the Relative efficiency of
PSBs from 1991-92 to 2003-04, using the average compounding growth rate method.
Operational and productivity parameters were of major concern and the performance
of public sector banks was found to have improved. They have become more
innovative and have larger market share in the competitive world and the Corporation
banks stood on the first.

Chotaliya Parul (2007)73 took SBI and its associate banks for the study
regarding income, expenditure, advances of each bank, per branch and per employee.
She concluded that income per employee and income per branch of the selected
samples under study with this expenditure were also gone up while advances per
employee have also showed upward movement during the study.

Ved Pal and N S Malik (2007)74 examined the differences in the financial
characteristics of PSB, Private banks and FB in India for the period of 2000-2005,
based on factors such as profitability, risk and efficiency. The foreign banks were
found to be better performers as compared with the other two categories of banks in

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general and in terms of utilization of resources during the study period.28 Single H.K
(2008) studied 16 banks for the period of six years to examine the profitability and
revealed that the profitability was reasonable during the study period when compared
with the previous years. strong capital position and balance sheet put the banks in
better stage.

Bodla B S and Richa Verma(2009)75 studied the earnings quality ratios of

scheduled commercial banks in India – bank -wise and sector wise analysis as worked
out in line with the CAMEL model for the period from 1991-92 to 2005-06. Banks
operating in India have shown appreciable improvement in their fee -based income.
Foreign banks rank at the top on all ratios except net profit to average assets ratio.

Mihir Dash and Annyesha Das (2009)76, studied with the title A CAMELS
Analysis of the Indian Banking Industry, compares the performance of public sector
banks with private/foreign banks under the CAMELS framework. They used data for
the study from the audited financial statements of a sample of Indian banks over the
five preceding financial years. The results of the study showed that private/foreign
banks fared better than public sector banks under most of the CAMELS factors in the
study period. The two contributing factors for the better performance of
private/foreign banks were management.

Jagdish Raiyani (2010)77 has taken BOB, PNB, OBC, HDFC, and ICICI
which were merged with other banks. He wanted to study pre merger and post merger
periodical analysis with hypothesis that there was no significant difference between
pre and post merger financial performance of selected banks. He concluded that
private sector merged banks were dominating over the public sector banks in the
factors of profit and liquidity position while public sector banks performed better
regarding capital adequacy and NPA.

DR.Moh-ud-din Sangmi (2010)78 here two banks were taken for study
namely Punjab National Bank and Jammu and Kashmir Bank for the study period
from 2001 to 2005 with their Annual reports. The conclusion was that both of the
Banks were maintaining CAR at 10% as per RBI Norms. Asset Quality of both banks
has shown significant performance. While Jammu and Kashmir bank was better in
terms of management and Liquidity efficiency.

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Bansal Disha (2010)79 the researcher wanted to study the impact of

Liberalization measures introduced by Government of India on the profitability and
productivity of Public sectors banks. And it has seen that profitability has been
declined to a large extent. The researcher found that PSBs will have to be successful
in market driven, extremely competitive, build loyal customer, attract and retain high
quality staff with better management informative system, credit management and
cash management can result in productivity of public sector banks. The researchers
suggested that PSBs should adopt scientific product-pricing methods, effective asset-
liability management and risk management methods in order to raise their efficiency
and profitability.

Harsh Vineet Kaur (2010)80 has made analysis of the performance of the
performance of the public sector bank, private sector and foreign banks in India
through CAMEL model for the study period of 2000-01 to20065-07.and the result
showed that Andhra Bank and State Bank of Patiala banks stood at the first among
public sector banks while in private sector banks Jammu and Kashmir bank stood on
the first rank along with Antwerp bank among the foreign banks.

Dr D Maheshwara Reddy, K.V.N Prasad (2011)81 they have selected

Andhra Pragathi Grameena Bank and Sapthagiri Grameena Bank for the study period
2006 to 2010. They have used Mean and Standard Deviation as statistical tools and T-
Test for testing the results. In their conclusion they showed that Andhra Pragathi
Grameena Bank performed better in terms of Capital Adequacy, Management Level
and Earning Capacity while Asset Quality was Better of Sapthagiri Grameena Bank.
But there was not much difference in the Liquidity Position of both Banks. And so
Andhra Pragathi Grameena Bank has the better performance according to CAMEL
model.

Prasad, K.V.N and Ravinder G. (2012)82they have selected 20 Nationalized

Banks for their study. They have studied from 2005-06 to 2009-10 on the secondary
data. They used MS Excel software for preparing and analyzing database. They have
given rank to the top five Banks and the bottom five banks on the basis of various
factor of CAMEL Model. As per their conclusion on Capital Adequacy norms
Andhra Bank was the first, on Asset Quality Bank of Baroda and Andhra Bank. From
Management point of view Punjab and Sind Bank stood the first. While Earning
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Capacity of Indian bank is the highest but the Liquidity position was the most sound
of Bank of Baroda. During the study period Andhra Bank remained on the top
position considering all over performance.

Suva Nitin (2015)83 has

submitted thesis on “Financial Performance of
selected Public and Private Sector Banks; A Study through CAMEL Model” tried to
conclude with some suggestion to making efficient and effective managerial steps for
better financial postion of the banks under study

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2.6. RESEARCH GAP

From the various types of the reviews of the literature, the accompanying
actualities became known - To start with, Indian business banks have been putting
forth a scope of keeping money and monetary administrations under 'one rooftop' and
steadily they are very nearly getting to be noticeably Universal banks
Notwithstanding, the specialist doesn't know about any investigation done in India or
somewhere else to put them on a scale, which would mirror their relative position as
for a Universal bank

Besides, a few investigations have been directed to assess the CAMEL score
of banks, yet no such exertion has been made to position test depends on a network
based on their CAMEL score and their scores on the situating scale.

The Indian banking sector has been undergoing a complex but comprehensive
restructuring since 1991, with a view to making it sound, efficient and at the same
time forgoing its link firmly with the real sector for promotion of saving, investment
and growth. Although a complete turnaround in banking sector performance is not
expected till the completion of reforms and sign of improvement are visible under the
CAMEL model. Under this bank is required to enhance capital adequacy, strengthen
asset quality, improve management, increase earning and maintain liquidity. And so
the researcher would like to study here with the title

“A COMPARATIVE ANALYSIS OF FINANCIAL

PERFORMANCE OF SELECTED PUBLIC AND PRIVATE
SECTOR BANKS; THROUGH CAMEL MODEL”

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2.7. CONCLUSION

Monetary parts changes in mid 1990s have given the Indian managing an
account segment the much need force for development and expansion into various
territories of business. Banks selected enhancement in order to boost 'economies of
scale and extension‟ on the grounds that the cooperative energies in joint creation of
money related and non-monetary administrations increment financial proficiency,
decrease cost and increment income.

In addition, globalization, deregulation and advances in Information

Technology as of late have achieved a noteworthy change in the working condition
for banks. Indeed, even Government of India had been worrying for business banks
and budgetary establishments to change over into 'all inclusive banks'.

This has encouraged a significant number of Indian banks to have considerable

premiums in various money related organizations in order to expand economies of
scale and degree. Hence, as such, one might say that deregulation of Indian Financial
System has prepared for expansion and ascent of monetary combinations. What's
more, the marvel of budgetary aggregates has required genuine thought of a move in
administrative worldview.

In spite of the fact that there are a few advantages of Universal managing an
account, these advantages must be weighed out against the issues. The undeniable
disadvantage, as indicated by Sensarma (2001)84, is that Universal managing a.
Indeed, broadening of managing an account exercises require not generally bring
about economies of scale and degree particularly if banks were not of suitable size
(Herring and Litan, 2003; Karunagaran, 2005)85.

Actually, it may even prompt be more costly, if adequate number of

exchangesin each of the particular money related movement isn't up to the 'breakeven'
level. Additionally, Harissis, Merikas, Mutenga and Staikouras, (2009)86 brings up
that banks and back up plans crosswise over Europe and worldwide have hurried into
mergers with each other, planning to procure economies of scale and lift incomes by
strategically pitching. However, sadly the wonder has not been invited in every single

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geographic area, and strategically pitching has ended up being more troublesome than
anticipated.

In addition, as per Costanzo and Ashton (2006)87 bank clients are regularly
new to, and need certainty when, purchasing investment funds items. What's more, as
the money related market is overwhelmed with undifferentiated items, customers may
think that it‟s much more hard to make a direct correlation between items. In this
way, offering expanded items may not bring about expande1d income for banks.
Again there is a plausibility that the multi-item banks would dismiss their center
capability and would confront more serious hazard by taking an interest in untested
exercises.

Bhole (2004)88 has called attention to that enhancement of managing an account

exercises and their inevitable progress towards Universal Banking structure would
exasperate the issue of grouping of monetary and financial power, production of
money related and mechanical oligopolies and combinations. This may boost private
business picks up yet not social advantages, as substantial mixes and their unlimited
development don't prompt socially best assignment of assets.

Besides, as the nation's saving money framework is presented to auxiliary

changes, execution and effectiveness issues are bit by bit rising as the touchstone of
achievement.

In the interim, RBI's second period of the guide for nearness of remote banks
which should begin from April 2009 was ended because of worldwide monetary
market turmoil however once the second period of the guide takes off, rivalry in the
Indian Banking area will undoubtedly build complex. This is on account of in the
second stage, with the evacuation of confinements on the operations of the entirely
possessed auxiliary of remote banks and treating them keeping pace with residential
banks, and in addition allowing outside banks to go into merger and procurement
exchanges with any private part bank in India, Indian business banks will
undoubtedly confront an intense rivalry from their outside partners.

In this way, Indian Commercial banks should be proactive in technique

detailing with concentrate on the best way to hold their piece of the overall industry.

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This may prompt vast scale mergers and amalgamation among little Indian banks (as
found in the universal field) in order to gain the much-expected size to coordinate
with the outside contenders. Aside from union in the Indian managing an account
part, different zones which would be the point of convergence of all saving money
techniques is item development and client maintenance and improving their level of
fulfillment.

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