Banking - Evolution

Financial Sector Reforms

Challenges for Coop. Banks

BIRD, Lucknow
Banking and Bank

 Accepting,
• for the purpose of lending or investment,
• of deposit of money from the public, repayable on demand or otherwise,
and
• withdrawable by cheque, draft and order or otherwise (Sec. 5b)

A banking company is a company which transacts the business of

banking in India (Sec. 5c)
Basic Principles

 Principle of Intermediation
mediate between the depositors and borrowers and earn interest spread as a
reward for the risk taking, for the administrative expenses and for loan loss
that is likely to occur if some of the borrowers default

 Principle of Liquidity 
maintain a minimal reserve ratio that it fixes in accordance with
regulations and its liabilities 
Basic Principles

 Principle of Profitability
Interest income along with fee based income (commission on
remittance of fund, bank drafts etc.) contribute to the profits of the bank.

 Principle of Solvency
long term financial soundness of a bank - financial performance for a
period of 3 to 5 years and comparing the relevant ratios with those
of other banks
Basic Principles

 Principle of Trust
Trustworthiness is a function of a bank with good track record over a long
period of time, in terms of profitability, financial soundness, liquidity, fair
practices and its record in meeting its commitments to all stake holders .

It also reflects on the governance quality of the bank.

Types ofBanking Groups

 Scheduled Banks – 2nd schedule of RBI Act

 Non-Scheduled Banks
 Public Sector Banks
 Private Sector and Foreign Banks
 
 

 Cooperative Banks
Functions of banks

 Traditional functions
 Modern banking functions

 Cross Border Banking – banking between individual or business entity

residing in two different countries involving conversion of at least two foreign
currencies of the countries where the transacting parties reside

   Merchant Banking – dealing with securities on fee basis. Involves offering

financial services and advice to corporations and to wealthy individuals 
Modern banking functions (contd.)

 Bancassurance

Banks that effectively cross-sell financial products can leverage their

distribution and processing capabilities for higher profits + the sale
of insurance products provides fee income for the banks
LANDMARKS – Banking in India
 1906 – Coop. Credit Structure comes into existence
 1921 – Imperial Bank of India comes into existence
 1935 – Setting up of RBI
 1949 – B.R.Act enacted
 1950 – Planned Economic development starts
 1955 – State Bank of India Comes into existence
 1966 – Coop. come under RBI regulation
 1969 – Nationalisation of 14 major banks
 1974 – P.S. lending introduced
 1975 – RRBs set up
 1980 – Nationalisation of 6 more banks
 1982 – NABARD set up
 1990 – Financial sector reforms begin- Robust Growth of Credit and Massive expansion of
Banking Sector
Evolution of Indian banking

Three phases

 (i) 1947 to 1967;

 
 (ii) 1967 to 1991-92;
 
 (iii) 1991-92 and beyond
1947 to 1967

 bank failures had raised the concerns regarding the soundness and
stability of the banking system;
 
 there was large concentration of resources from deposits mobilisation in
a few hands of business families or groups. Banks raised funds and on-lent
them largely to their controlling entities;
 
 agriculture was neglected in so far as bank credit was concerned
1967 to 1991-92

 Characterised by several social controls over

the banking sector
 
 lThe focus in this phase was to improve the flow of credit to agriculture. The
main instruments used for this purpose were nationalisation of major banks in
the country and priority sector lending
Financial System – Till 1990s

 High Reserve Requirements

 Administered Interest Rates

 Directed Credit

 Lack of Competition

 Political Interference and Corruption

Viability was a general concern

 Indian Banking : Changes
Old World New World
Confined marketplace Unlimited market space  

Competition between banks

 
 

Competition from brands

Limited product line Extensive product breadth

One-size-fits-all
 
 

product Customisation and innovation

e-Enabled, multi-channel players

 
 

Branch-focused

Focus on business growth Focus on revenue growth as well as cost-

reduction
Revenues through margin Revenue generated through fees and value-
added services
1991-92 and beyond
 Prudential Measures

 CRAR – 8% - Increased to 9% w.e.f. March 31,2000

 Income Recognition & Asset Classification
 Exposure Norms
 Asset Liability Management & Risk Management
 Transparency and Disclosure Norms
Competition Enhancing Measures

 Reduction of Public Ownership

 Entry of Private Banks
 Universal Banking
 Merger and Acquisition Norms simplified
Role of Market Forces

 SLR and CRR brought down in phased manner

 Deregulation of Interest Rates

 Pure Inter-bank Call Money Market

 Greater Operational Autonomy to Banks

Institutional and Legal Measures

 Lok Adalats, Debt Recovery Tribunals, ARCs

 SARFAESI(Securitisation and Reconstruction of Financial Assets and

Enforcement of Security Interest) Act

 Prevention of Money Laundering Act, 2002

 Credit Information Bureau for sharing defaulter lists

 Setting up Clearing Corporation of India

Credit Cooperatives
in India
The Co-operative Movement

 introduced into India by the Government as a method by which the

farmers could overcome their burden of debt and keep them away from the
clutches of the money-lenders.

The first Agricultural Credit Society was ……

Problems faced by Cooperatives
Financial Impairment
 
 Mounting NPAs
 Accumulated Losses
 Non-compliance with Section 11 of BR Act
 Erosion of deposits
 Dwindling market share
 
Human Resources
 
 No regular recruitments – ageing staff ?
 Absence of professionalism
 Inadequate qualification as compared to their peers
 Lack of capacity building of staff
Problems faced by Cooperatives (Contd..)
Governance Impairments
 Non conduct of elections for long time
 Frequent supersession of boards
 Delay in audit
 Intrusion of the state in to the Financial and managerial matters of STCCS
 

Managerial impairments
 Deputation of Govt. officials in managerial positions
 Common cadre
 No relation between staffing pattern and business
 Interference in operational decision making
 Poor housekeeping
 Weak MIS
Challenges before Cooperatives
 Outreach and market share;
 Competition in traditional agricultural finance; 
 Business volumes and diversification;
 Professionalism; 
 Quality of assets;
 Technology adoption;
 Human Resource issues;
 Governance structure and practices;
 Accounting and audit standards and practices
 Solution

Strategic Planning ?
Strategic Planning

 Officials of banks need to planto attain

outcomes consistent withorganisation's mission and goals – also called
strategy.
 
 Hence strategic Management involves strategy formulation,
implementation and control in addition to determining the mission
& goals of the organisation
Why Strategic Planning?

 If you fail to plan, then you plan to fail – be proactive about the future

 Strategic planning improves performance

 
 Counter excessive inward and short- term thinking
 
 Solve major issues at a macro level

  Communicate to everyone what is most important

What is Strategic Planning?

 Process to establish priorities on what you will accomplish in the future

  
 Forces you to make choices on what you will do and what you will not do
  
 • Pulls the entire organization together around a single game plan for
execution

 • Broad outline on where resources will get allocated

Fundamental Questions toAsk

 Where are we now? (Assessment)

 Where do we need to be? (Gap / Future End State) 

 
 How will we close the gap (Strategic Plan)

 How will we monitor our progress

 Good Strategic Plan should

 Address critical performance issues

 Create the right balance between what the organization
is capable of
doing vs. what the organization would like to do
   Cover a sufficient time period to close the performance
gap
   Visionary – convey a desired future end state
   Flexible – allow and accommodate change