Performance Evaluation

Parameters for Banks

Evolution of the Indian Banking
industry
• Early phase from 1786 to 1989 of Indian Banks

• Nationalisation of Indian Banks and up to 1991 prior to Indian

Banking Sector Reforms

• New phase of Indian Banking System with the advent of Indian

Financial and Banking Sector Reforms after 1991
Phase I
• First Bank of India was set up in the year 1786 after that Bank of Hindustan
and Bengal Bank
• The East India Company established Bank of Bengal (1806), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called them
Presidency banks
• In 1865 Allahabad Bank was established and first time exclusively by Indians,
PNB Ld. Was set up in 1894 with headquarters at Lahore.
• Between 1885 and 1913, BOI, CBI, BoB, Canara Bank, Indian Bank and bank
of Mysore were set up
• Between 1913 and 1948, the banks also experienced periodic failures and the
growth during this phase was very slow
• In 1935, Reserve Bank of India came in existence and vested with extensive
power for the supervision of banking in India as he Central Banking Authority
• During these days public has lesser confidence in the banks and they prefer
postal department for safer mode of saving
Phase II
• After Independence Government has taken major steps, In 1955 it
nationalised Imperial Bank of India with extensive banking facilities on a
large scale especially in rural and urban areas.
• It forms SBI to act as principal agent of RBI and to handle banking
transactions of Union and state Government all over the country
• Following steps are taken by the Government of India:
 1949 Enactment of Banking Regulation Act
 1955 Nationalisation of SBI
 1959 Nationalisation of SBI Subsidiaries
 1961 Insurance cover extended to deposits
 1969 Nationalisation of 14 major banks
 1971 Creation of Credit guarantee corporation
 1975 Creation of Regional Rural Banks
 1980 Nationalisation of 6 banks with deposits over 200 crore
After the nationalisation the branches of the public sector banks in India rose to
approximately 800% and deposits and advances took a jump by 11,000%
Phase III
• In 1991, under the chairmanship of M. Narasimham, a committee
was setup by his name which worked for the liberalisation of
banking practices
• Foreign banks and ATM was increased with large no.s
• Phone banking and net banking were introduced to make system
more convenient and swift.
• The financial system has shown a great deal of resilience
• It is sheltered from any crisis triggered by any external
macroeconomic shock as other East Asian Countries suffered
because of flexible exchange rate regime, the foreign reserves are
high, the capital account is not yet fully convertible and banks and
their customers have limited foreign exchange exposure.
Current Organizational Structure of
Banks
Scheduled Banks
• Bank which is listed under the second schedule of RBI Act 1934
• Banks have to fulfill certain conditions such as having a paid up
capital; and reserves of at least 0.5 million and satisfying RBI that
their affairs will not hamper interests of depositors
• Schedule banks are classified into commercial and cooperative
banks
• The basic difference between schedule commercial banks and
scheduled cooperative banks
• Scheduled cooperative banks are cooperative credit institutions that
are registered under the Cooperative Societies Act.
• These banks work according to the cooperative principles of mutual
assistance
Scheduled Commercial banks
• These are major proportion of the business of the scheduled banks
• As at end of march 2009 there were 15 old And 7 new generation private
sector banks operating in India
• At the end of 2009, 32 foreign banks were operating in India with 293
branches. Besides , 43 foreign banks were also operating in India through
representative offices
• SBI and its associates are recognized as a separate category of SCBs
because of distinct statutes (SBI Act 1955 and SBI Subsidiary Act,1959)
• Nationalized bank and SBI and its associates together form the public
sector group and control around 70% of the total credit and deposits
business in India
• IDBI Ltd. has been included in nationalized banks group since December
2004.
Schedule Cooperative banks
• These banks can be broadly classified into urban credit
cooperative institutions and rural cooperative credit institutions
• Rural cooperative banks undertake long term as well as short
term lending
• Credit cooperatives in most states have a three-tier structure
(Primary, district and state level)
Non-scheduled Cooperative banks
• Non-scheduled banks function in the Indian Banking Space in
the form of Local Area Banks
• Local area banks are banks that are set up under Government
of India in 1996 for establishment of new private banks of a
local nature with jurisdiction over a maximum of three
contiguous districts
• LABS aid in mobilization of funds of rural and urban districts
• Six LABs were originally licensed but the license of one has
been cancelled due to irregularity in operations and one was
amalgamated with BoB due to their weak financial position.
Business Segmentation
Other
Treasury Banking
Business

Retail Wholesale
Banking Banking
Busines
s
Retail Banking
• Includes exposures to individuals or small business (whose annual
turnover is limited to Rs. 0.50 billion) and could take any form of
credit like cash credit, overdrafts etc.
• Based on four criteria: Orientation, Granularity, product criterion
and low value of individual exposures
• Major components of the retail portfolio of bank is housing loans
followed by auto loans.
• Retail banking products on the liability side includes all types of
deposit accounts and mortgages and loans on assets side of banks.
• Largest players in retail banking in India are ICICI Bank, PNB,
PNB, BOI, HDFC and Canara Bank
Wholesale Banking
• It includes high ticket exposures primarily to corporates
• Various types of financing like project finance, leasing finance,
finance for working capital, term finance etc. form part of
wholesale banking transactions
• Internal processes of most banks classify wholesale banking
into mid corporates and large corporates according to size of
exposure to the clients
• A large portion of the business of foreign banks comes from
wholesale banking, their market share is still smaller than
larger Indian Banks
Treasury Operations
• Treasury Operations includes investments in debt market, equity
market, mutual funds, derivatives and trading and forex
operations.
• Treasury operations are important for managing the funding of the
bank
• Apart from core banking activities, which comprises primarily of
lending, deposit taking functions and services; treasury income is a
significant component of the earnings of banks.
• Treasury deals with the entire investment portfolio of banks and
provides a range of products and services that deal primarily with
foreign exchange, derivatives and securities.
• Treasury involves the front office, mid office and back office.
Other Banking Businesses
• This is considered as a residual category which includes all
those businesses of bank that do not fall under any of the
aforesaid categories.

• This category includes Para banking activities like hire

purchase activities, leasing business, merchant banking,
factoring activities etc.
Products and Services

Deposits Credit Other customized

services and products

•Term Deposits •Bill purchased

•Guarantee and
•Demand advisory services
and •Insurance and
deposits Investments
•Current
discounted •Derivative and other
•Cash credit, treasury products
deposits
•Saving overdrafts and •Para banking
services
deposits loan •Other services
Important Terms of Banking
• Bank rate means the interest rate at which a nation’s central bank lends money to
domestic banks. The bank rate can also refer to the interest rate which bank charge
customers on loans.
• Cash Reserve Ratio is specified minimum fraction of the total deposits customers, which
commercial banks have to hold as reserves either in cash or as deposits with RBI.
• Statutory Liquidity Ratio is the Indian government term for reserve requirement that the
commercial banks in India require to maintain in the form of gold, government approved
securities before providing credit to their customers. It is determined and maintained by
RBI in order to control the expansion of bank credit.
• Repo Rate: is the rate at which central bank of a country lends money to commercial
banks in the event of any shortfall of funds. In the event of Inflation RBI increase repo
rate to reduce the supply of money in the market to support in arresting inflation.
• Reverse Repo Rate : is the rate at which the central bank of a country borrows money
from commercial banks within the country. it is a monetary policy instrument which can
be used to control the money supply in the country.
• Call Money Rate is a type of interests rate charged on short
term loan that banks gives to brokers who in turn lend the
money to investors to fund margin accounts. This is also
known as Broker loan rate which is generally not applicable to
individuals.
• Prime Lending Rate means the interest rate that commercial
banks charge their creditworthy customers on short term loans.
This rate is largely determined by the federal funds rate, which
is the overnight rate which banks lend to one another. It is also
known as Prime rate.
• Non –Performing Assets is defined as a Credit Facility in
which the interest or installment of Bond Finance Principal
has remained ‘past due’ for a specified period of time. Once the
borrower has failed to make interest or principal payment for
90 days the loan is considered as NPA.
• Capital Adequacy Ratio is a specialized ratio used by banks to
determine the adequacy of their capital keeping in view their
risk exposures. Basel Committee on banking supervision of the
Bank of International Settlements develops related to capital
adequacy which member countries are expected to follow.
CAR = Tier One capital =Tier two capital/Risk weighted assets
• Assets Liability Management is the administration of policies
and procedures that address financial risk associated with
changing interest rates, foreign exchange rates and other
factors which can influence a company’s liability.
• Priority Sector Lending is an important role given by RBI to
banks for providing a specified portion of the bank lending to
few specific sectors like agriculture or small scale industries.
Categories of Priority Sector
• Agriculture
• Small scale Industries
• Small Business/ Service Enterprises
• Micro Credit
• Education Loans
• Housing Loans
Performance Evaluation Parameters for
Banks
• Customer base
• NPA
• Deposits
• ROI
• Financial Inclusion
• Spread
• Credit Appraisal
• Investments
 Customer Base
• Customer base is the group of customers who repeatedly purchase
the goods or services of a business.
• To maintain the customer base, Innovative business thinking
requires which involves a constantly shifting perception of both the
customer’s needs and the business goals and the knowledge to
adapt the business course to meet these ends.
• Ways to build Customer base:
• Get personal
• Be smart about reaching out
• Partner with a noncompeting business
• Expand specialized content
Non-Performing Assets
• Non Performing Assets is defined as a credit facility in respect
of which the interest or installment of principal has remained
PAST DUE for a specified period of time.
• Classification of NPA
• Standard Assets – Interest and installment of principal is paid regularly
• Substandard Assets – Classified as NPA for a period not exceeding 12
months
• Doubtful Assets - NPA for a period exceeding 12 months
• Loss Assets – where loss has been identified by the bank internal or
external auditor or central bank inspectors, But the amount has not been
written off, wholly or partly.
Reasons for Occurrence of NPA
• Usual banking Operations/ Bad lending agencies
• A banking crisis
• Overhang component
• Incremental component
Problems caused by NPA
Bank shareholders are adversely affected
Liquidity problems may arise due to non payments on loan and interest
amount
Depositors don’t get rightful returns and many times may lose
uninsured deposits.
Bad loans imply redirecting of funds from good projects to bad ones
which led to damage to economy due to loss of good projects and
failure of bad investments
A NPA is a loan or an advance where:
• Interest/Installment of principal remain overdue for a period of more than
90 days in respect of a term loan
• Accounts remains “out of order” for a period of more than 90 days in
respect of Overdraft/ Cash Credit
• Bill remains overdue for a period of more than 90 days in case of bill
discounted and purchased
• Interest/Installment of principal remains overdue for two harvest seasons
but for a period not exceeding two half years in the case of an advance
granted for agricultural purposes
• Any amount to be received remains overdue for a period of more than 90
days in respect of other accounts
• Non submission of stock statements for 3 Continuous Quarters in case of
Cash Credit facility
Results of NPA on an Organisation
• They decrease profitability
• They reduce capital assets and lending limits
• They increase loan loss reserves
• They bring unwanted attention from government regulators
• It may affect goodwill
• They bring unwanted attention from government regulators
• NPA changes the credit ratings of the organisation
Deposits
• A deposit account is a saving account or any other type of bank account
that allows money to be deposited and withdrawn by the account holder.
• There are two general types of bank accounts: Demand deposits and Time
Deposits
• Demand deposits are the placements of funds into an account that allows
the depositor to withdraw funds from the account without warning or
with less than seven days’ notice.
• Time deposits is an interest-bearing deposit held by a bank for a fixed
term whereby the depositor can withdraw the funds only after giving
notice. Time deposits may pay higher interest rates than demand deposits.
• Major Types of Accounts:
• Transactional account/Current Account
• Money market account
• Savings Account
• Time deposit
• Call Deposit
Financial Inclusion
• Banking services are in the nature of public good; the
availability of banking and payment services to the entire
population without discrimination is the prime objective of
financial inclusion public policy.
• It is delivery of banking services at an affordable cost, to the
vast sections of disadvantaged and low income group for three
most important needs:
• Creating a platform for inculcating the habit to save money.
• Providing formal credit avenues
• Plug gaps and leaks in public subsidies and welfare
programmes
Return on Investment
• ROI is used to evaluate the efficiency of an investment or to
compare the efficiency of a number of different investments.
• To calculate it takes into account both investment centre profit
and the capital invested in that business unit.
• Four pointers for a Profitable Multi-Channel Distribution and
Service System
• Cohesive Multi-channel Strategy (Connected and collaborative strategy)
• A Balanced Channel Strategy (Right transactions into Right Channels)
• Agile Channel System
• Collaborative Technology Backbone
Spread
• Difference between the bid price and the ask price of a security
or assets
• It is also considered as difference between Interest rate charged
to borrower and interest rate paid to depositors
Credit Appraisal
• Credit appraisal is the process to ascertain the risks associated
with the extension of the credit facility.
• It means an investigation done by bank prior before providing
any loans and advances to project finance and also checks the
commercial, financial and technical viability of the project
proposed its funding pattern and further check the primary and
collateral security cover available for recovery of such funds.
• Four Broad areas of Appraisal by banks:
• Market Appraisal
• Management Appraisal
• Technical Appraisal
• Financial Appraisal
Credit Appraisal Process
Receipt of
application from
Receipt of Pre-sanction visit
documents by bank officers
applicant

Title clearance
Check for RBI
reports of the
properties
defaulters list

Valuation reports Preparation of Proposal

of the properties financial data preparation

Sanction of Assessment
proposal of proposal

Documentations,
agreements and
Disburseme
mortgages nt of Loan
Investment
• Investment is the application of money for earning more
money.
An investment is the purchase of goods that are not consumed
today but are used in the future to create wealth.