Overview of Banking Industry in India Book

Overview of Banking Industry in India Book
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    1 Chapter - 1 Overview of Banking Industry in India  Introduction:  Industry scenario of Indian Banking Industry  Current Scenario  Aggregate Performance of the Banking Industry o Interest Rate Scene: o Governmental Policy  Implications of Some Recent Policy Measures  Challenge...

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    2  Banking Industry Vision 2010 o Emerging Economic Scene o Future Landscape of Indian Banking o Changes in the Structure of Banks o Product Innovation and Process Re-Engineering o Technology In Banking o Risk Management o Regulatory and legal environment o Rural and Social Banking Issues o...

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    3 Introduction: Indian banking is the lifeline of the nation and its people. Banking has helped in developing the vital sectors of the economy and usher in a new dawn of progress on the Indian horizon. The sector has translated the hopes and aspirations of millions of people into reality. But t...

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    4 Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. After this, the Indian government established three presidency banks in India. The first of th...

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    5 customers. Banks have been given greater freedom to frame their own policies. Rapid advancement of technology has contributed to significant reduction in transaction costs, facilitated greater diversification of portfolio and improvements in credit delivery of banks. Prudential norms, in line ...

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    6 become enriched and diversified with focus spread to the wholesale as well as retail banking. The existing banks have wide branch network and geographic spread, whereas the new private banks have the clout of massive capital, lean personnel component, the expertise in developing sophisticated ...

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    7 Industry scenario of Indian Banking Industry: The growth in the Indian Banking Industry has been more qualitative than quantitative and it is expected to remain the same in the coming years. Based on the projections made in the "India Vision 2020" prepared by the Planning Commissi...

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    8 In the Indian Banking Industry some of the Private Sector Banks operating are actionURI(http://business.mapsofindia.com/banks-in-india/idbi-bank-ltd.html):IDBI actionURI(http://business.mapsofindia.com/banks-in-india/idbi-bank-ltd.html):Bank, actionURI(http://business.mapsofindia.com/banks-...

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    9 During the year 2000, the State Bank Of India (SBI) and its 7 associates accounted for a 25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same period. The share of foreign b...

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    10 The private players however cannot match the PSB‟s great reach, great size and access to low cost deposits. Therefore one of the means for them to combat the PSBs has been through the merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several such ...

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    11 the insurance sector. Banks in India have been allowed to provide fee-based insurance services without risk participation, invest in an insurance company for providing infrastructure and services support and set up of a separate joint-venture insurance company with risk participation. Aggreg...

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    12 On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the norms, it was a feat achieved with its own share of difficulties. The CAR, which at present is 9.0 percent, is likely to be hiked to 12.0 percent by the year 2004 based on the Basle Committee recommendations. A...

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    13 Governmental Policy: After the first phase and second phase of financial reforms, in the 1980s commercial banks began to function in a highly regulated environment, with administered interest rate structure, quantitative restrictions on credit flows, high reserve requirements and reservatio...

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    14 Implications of Some Recent Policy Measures: The allowing of PSBs to shed manpower and dilution of equity are moves that will lend greater autonomy to the industry. In order to lend more depth to the capital markets the RBI had in November 2000 also changed the capital market exposure norms ...

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    15 Some of the not so good measures however like reducing the limit for tax deducted at source (TDS) on interest income from deposits to Rs 2,500 from the earlier level of Rs 10,000, in Budget 2001-02, had met with disapproval from the banking fraternity who feared that the move would prove cou...

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    16 asset-liability management procedures. Consequently, only banks that strive hard to increase their share of fee-based revenues are likely to do better in the future. Challenges Facing by Banking Industry: The bank marketing is than an approach to market the services profitability. It is a de...

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    17 General Users: Persons having an account in the bank and using the banking facilities at the terms and conditions fixed by a bank are known as general users of the banking services. Generally, they are the users having small sized and less frequent transactions or availing very limited servic...

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    18 Bank Marketing Mix and Strategies: The first task before the public sector commercial Banks is to formulate that Bank marketing mix which suits the national socio-economic requirements. Some have 4 P's and some have 7 P's of marketing mix. The common four Ps of Marketing mix are as follows:- ...

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    19 Place: The choice of where and when to make a product available will have significant impact on the customers. Customers often need to avail banking services fast for this they require the bank braches near to their official area or the place of easy access. Bank Marketing Strategies: The ma...

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    20 1. Deregulation: This continuous deregulation has given rise to extreme competition with greater autonomy, operational flexibility, and decontrolled interest rate and liberalized norms and policies for foreign exchange in banking market. The deregulation of the industry coupled with decontr...

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    21 choices; the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery. 5. Misaligned mindset: These changes are creating challenges, as ...

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    22 c) Making aggressive forays in the retail advances segments of home and personal loans. d) Implementing initiatives involving people, process and technology to reduce the fixed costs and the cost per transaction. e) Focusing on fee based income to compensate foe squeezed spread. f) Innovat...

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    23 Banking Industry Vision 2010:  Emerging Economic Scene:  The financial system is the lifeline of the economy. The changes in the economy get mirrored in the performance of the financial system, more so of the banking industry. The Committee, therefore felt, it would be desirable to loo...

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    24  India Vision 2020 sees a nation of 1.3 billion people who are better educated, healthier, and more prosperous. Urban India would encompass 40% of the population as against 28 % now. With more urban conglomerations coming up, only 40% of population would be engaged in agricultural sector a...

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    25  In short, the Vision of India in 2020 is of a nation bustling with energy, entrepreneurship and innovation. In other words, we hope to see a market-driven, productive and highly competitive economy. To realize the above objective, we need a financial system, which is inherently strong, fu...

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    26  Infrastructure services have generally been provided by the public sector all over the world in the past as these services have an element of public good in them. In the recent past, this picture has changed and private financing of infrastructure has made substantial progress. This shift...

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    27  The India Vision document of Planning Commission envisages Foreign Direct Investments (FDI) to contribute 35% (21% now) to gross capital formation of the country by 2020. Government has announced a policy to encourage greater flow of FDI into the banking sector. The recent amendment bill ...

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    28 of Scheduled Commercial Banks would be about 13.4 per cent to be over 2002-03 as compared to 16.7 per cent between 1994-95 and 2002-03. It will form about 65 per cent of GDP at current market prices as compared to 67 per cent in 2002-03.  On the liability side, there may be large augme...

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    29 now. The picture that emerged is somewhat as discussed below. It entails emergence of an integrated and diversified financial system. The move towards universal banking has already begun. This will gather further momentum bringing non-banking financial institutions also, into an integrated...

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    30 other IT Enabled Services, there is tremendous potential for business opportunities. Keeping in view the GDP growth forecast under India Vision 2020, Indian exports can be expected to grow at a sustainable rate of 15% per annum in the period ending with 2010. This again will offer enormou...

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    31 operations. Banks will compete with each other to provide value added services to their customers.  Structure and ownership pattern would undergo changes. There would be greater presence of international players in the Indian financial system. Similarly, some of the Indian banks would bec...

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    32 landscape of financial sector discussed above would be technology driven. In the ultimate analysis, successful institutions will be those which continue to leverage the advancements in technology in re-engineering processes and delivery modes and offering state-of-the-art products and service...

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    33  Under the existing Basel Capital Accord, allocation of capital follows a one-size-fit-all approach. This would be replaced by a risk based approach to capital allocation. While regulatory minimum capital requirements would still continue to be relevant and an integral part of...

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    34 look for ways to optimize resources for technology applications. In this regard, global partnerships on technology and skills sharing may help.  The pressure on capital structure is expected to trigger a phase of consolidation in the banking industry. Banks could achieve consolidation ...

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    35 capital market for raising resources. This process could gain further momentum when the government holding gets reduced to 33% or below. It is expected that pressures of market forces would be the determining factor for the consolidation in the structure of these banks. If the process o...

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    36 strengthening the regulatory powers of the Reserve Bank of India would pave the way for strengthening of cooperative / financial institutions. It is expected that these banks would upgrade skills of their staff and improve the systems and procedures to compete with commercial bank entities. ...

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    37 outside the four walls of a branch. Banks would then concentrate on developing new products and earning fee based income.  The composition of bank staff will change. As total computerization will render a part of the workforce surplus, banks will go for a rightsizing exercise. Some may r...

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    38 and process re-engineering will be the order of the day. The changes will be motivated by the desire to meet the customer requirements and to reduce the cost and improve the efficiency of service. All banks will therefore go for rejuvenating their costing and pricing to segregate profitable a...

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    39  Banks will increasingly act as risk managers to corporate and other entities by offering a variety of risk management products like options, swaps and other aspects of financial management in a multi currency scenario. Banks will play an active role in the development of derivative produ...

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    40 for classification of assets, some banks may think of engaging external agencies for recovery of their dues and in NPA management.  Banks will take on competition in the front end and seek co-operation in the back end, as in the case of networking of ATMs. This type of co-opetition wi...

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    41  Technology solutions would make flow of information much faster, more accurate and enable quicker analysis of data received. This would make the decision making process faster and more efficient. For the Banks, this would also enable development of appraisal and monitoring tools which wo...

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    42 Gross Settlement System (RTGS) will undergo further fine-tuning to meet international standards. Needless to add, necessary security checks and controls will have to be in place. In this regard, Institutions such as IDRBT will have a greater role to play.  Risk Management:  Risk is ...

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    43 and active management of banks‟ risk portfolio. Measurement of risk exposure is essential for implementing hedging strategies.  Under Basel II accord, capital allocation will be based on the risk inherent in the asset. The implementation of Basel II accord will also strengthen the re...

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    44 risks will be another area where the operating staff will have to be more vigilant in the coming days.  Banks will also have to deal with issues relating to Reputational Risk as they will need to maintain a high degree of public confidence for raising capital and other resources. Risks ...

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    45 assets in commercial banks will improve on the one hand and at the same time, there will be adequate cover through provisioning for impaired loans. As a result, the NPA levels are expected to come down significantly.  Regulatory and legal environment  The advent of liberalization and ...

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    46  Some of these issues are addressed in the recent amendment Bill to the Banking Regulation Act introduced in the Parliament.  The integration of various financial services would need a number of legislative changes to be brought about for the system to remain contemporary and competiti...

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    47  In the recent past, Corporate Debt Restructuring has evolved as an effective voluntary mechanism. This has helped the banking system to take timely corrective actions when borrowing corporates face difficulties. With the borrowers gaining confidence in the mechanism, it is expected tha...

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    48 organizations like Indian Banks‟ Association are expected to play a greater role.  Evolution of Corporate Governance being adopted by banks, particularly those who have gone public, will have to meet global standards over a period of time. In future, Corporate Governance will guide th...

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    49  When we talk about adoption of International accounting practices and reporting formats it is relevant to look at where we stand and the way ahead. Accounting practices being followed in India are as per Accounting Standards set by the Institute of Chartered Accountants of India (ICAI). ...

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    50 entities. While a separate standard is available for financial entities under IAS, ICAI has not so far come out with an Indian version in view of the fact that banks, etc. are governed by RBI guidelines. It is understood that ICAI is seized of the matter. It is expected that banks would mi...

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    51  Commercial Banks, Co-operatives and Regional Rural Banks are the three major segments of rural financial sector in India. Rural financial system, in future has a challenging task of facing the drastic changes taking place in the banking sector, especially in the wake of economic liberali...

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    52 competition have thrown both challenges and opportunities for the SSI sector. Low capital base and weak management structure make these units vulnerable to external shocks, more easily. However the units which can adopt to the changing environment and show imagination in their business strat...

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    53 pace with the technological changes and meet the challenges of globalization.  In order to meet the global standards and to remain competitive, banks will have to recruit specialists in various fields such as Treasury Management, Credit, Risk Management, IT related services, HRM, etc. i...

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    54  An equally important issue relevant to HRM is to create a conducive working environment in which the bankers can take commercial decisions judiciously and, at the same time, without fear. This calls for a re-look into the vigilance system as it exists today, and perhaps there is a need...

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    55 REFERENCES  Basel Committee on Banking Supervision, (1999), Enhancing Corporate Governance for Banking Organisations, September BIS.  Bhide, M.G. (2002), Address at NIBM Annual Day on the theme of Corporate Governance in Banks and Financial Institutions, January.  Jalan, Bimal, (...

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    56  Reddy, Y.V. (1999), "Corporate Governance in Financial Sector", RBI Bulletin, August, Vol. LIII No.8.  Reddy, Y.V. (2001), "Reviving Confidence in the Indian Economy", BIS Review, No. 78, Bank for International Settlements, Basel.  Reddy, Y.V. (2002), "In...

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    57  Reserve Bank of India (2002), Report of the Consultative Group of Directors of Banks/ Financial Institutions, April, (Chairman : Dr. A.S. Ganguly).  Talwar, S.P. (1999), "Banking Regulation and Corporate Governance", RBI Bulletin, July, Vol. LIII No.7