PREFACE

Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors.

For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India.

Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day.

Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the State Bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve Bank of India, which in 1935 formally took over these

responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980.

KAHKASHAN ANJUM

ACKNOWLEDGEMENT

First of all I would like to thank to Reserve Bank of India to allow me to be a part of such a reputed institution, the Central Bank of India, who gave me the chance to work on the project titled "CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA" in Lucknow city. I sincerely thank the Governor, Reserve Bank of India and Shri D.P.S. Rathore Regional Director Lucknow office for facilitating and providing an opportunity to learn in the form of a training programme. I further thank Shri Jai kish sir, General Manager department of banking supervision for helping me in the project along with RBI.

A special acknowledgement goes to Shri G.R.kotian, Assistant General Manager, DBS for helping me to understand the various aspects related to banking and guiding me to undertake the project in the right direction.

A special thanks to Mr. Vishwa Mohan, Assistant General Manager, DBS for helping me to understand all important vital aspects relating to banking system and providing data & structure.

As a part of DBS, I owe my thanks to all other persons working in DBS for providing me information, support and understanding related to different aspects of banking system.

Lastly and significantly I am grateful to Mr. Purendra Kumar sir Assistant general manager of DAPM, (personnel) for providing great support and also for making me feel comfortable with the homely interaction with all other staffs and the entire staffs of R.B.I

I am also thankful to Mr. B.D.Yadav, Assistant manager, DAPM, HRDD for providing me support and solving my problems during my tenure in RBI Lucknow office. Without whos friendly and loving attitude, the project would not have been such a joyful learning and a memorable experience forever.

KAHKASHAN ANJUM

CONTENTS

Subjectpage no.

1-Introduction of

RBI. DBS.

3-Banking sectors in India

Public sector. Private sector. Co-operative, RRBs..

4-Narasimham committee

Requirement. Recommendations..

5-Globalisation 6-Challenges

Implementation of Basel II Implementation of latest technology. How to reduce NPA... Man power planning.. Loan waiver: A new challenge.. Risk management.. Transparency and disclosures

Challenges in banking security.. Competition with private sector banks.. Growth in business

8-Recommendations... 9-Conclusion.... 10- Summery of the project 11- Bibliography..

INTRODUCTION OF RBI

(THE CENTRAL BANK OF INDIA)

The central bank of the country is the Reserve Bank of India (RBI). It was established in April 1935 with a share capital of Rs. 5 crores on the basis of the recommendations of the Hilton Young Commission. The share capital was divided into shares of Rs. 100 each fully paid which was entirely owned by private shareholders in the beginning. The Government held shares of nominal value of Rs. 2,20,000. Before the establishment of RBI notes were issued by three-presidency banks-Bank of Bengal, Bank of Madras & Bank of Bombay. After some time these banks were merged into one 1920 and named Imperial bank of India. Till the establishment of RBI this bank was acting as the central bank. In 1935 the rights and duties of Imperial bank were delegated to RBI. By that time RBI is issuing and controlling the currency.

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of THE RESERVE BANK OF INDIA ACT, 1934. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India The Central Office of the Reserve Bank has been in Mumbai since inception. The Central Office is where the Governor sits and is where policies are formulated. Now it has 22 regional offices, most of them in state capitals. The general superintendence and direction of the Bank is entrusted to Central Board of Directors of 20 members, the Governor and four Deputy

Governors, one Government official from the Ministry of Finance, ten nominated Directors by the Government to give representation to important elements in the economic life of the country, and four nominated Directors by the Central Government to represent the four local Boards with the headquarters at Mumbai, Kolkata, Chennai and New Delhi. Local Boards consist of five members each Central Government appointed for a term of four years to represent territorial and economic interests and the interests of co-operative and indigenous banks.

The Reserve Bank of India Act 1934 was commenced on April 1, 1935. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank.

The Bank was constituted for the need of following:

To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

Bank of Issue

Under Section 22 of the Reserve Bank of India Act, the Bank has the sole right to issue bank notes of all denominations. The distribution of one rupee notes and coins and small coins all over the country is undertaken by the Reserve Bank as agent of the Government. The Reserve Bank has a separate Issue Department, which is entrusted with the issue of currency notes. The

assets and liabilities of the Issue Department are kept separate from those of the Banking Department. Originally, the assets of the Issue Department were to consist of not less than twofifths of gold coin, gold bullion or sterling securities provided the amount of gold was not less than Rs. 40 crores in value. The remaining three-fifths of the assets might be held in rupee coins, Government of India rupee securities, eligible bills of exchange and promissory notes payable in India. Due to the exigencies of the Second World War and the post-was period, these provisions were considerably modified. Since 1957, the Reserve Bank of India is required to maintain gold and foreign exchange reserves of Ra. 200 crores, of which at least Rs. 115 crores should be in gold. The system as it exists today is known as the minimum reserve system.

BANKER TO GOVERNMENT

The second important function of the Reserve Bank of India is to act as Government banker, agent and adviser. The Reserve Bank is agent of Central Government and of all State Governments in India excepting that of Jammu and Kashmir. The Reserve Bank has the obligation to transact Government business, via. to keep the cash balances as deposits free of interest, to receive and to make payments on behalf of the Government and to carry out their exchange remittances and other banking operations. The Reserve Bank of India helps the Government - both the Union and the States to float new loans and to manage public debt. The Bank makes ways and means advances to the Governments for 90 days. It makes loans and

advances to the States and local authorities. It acts as adviser to the Government on all monetary and banking matters.

Banker's bank and the Lender of the last resort

The Reserve Bank of India acts as the bankers' bank. According to the provisions of the Banking Companies Act of 1949, every scheduled bank was required to maintain with the Reserve Bank a cash balance equivalent to 5% of its demand liabilities and 2 per cent of its time liabilities in India. By an amendment of 1962, the distinction between demand and time liabilities was abolished and banks have been asked to keep cash reserves equal to 3 per cent of their aggregate deposit liabilities. The Reserve Bank of India can change the minimum cash requirements. The scheduled banks can borrow from the Reserve Bank of India on the basis of eligible securities or get financial accommodation in times of need or stringency by rediscounting bills of exchange. Since commercial banks can always expect the Reserve Bank of India to come to their help in times of banking crisis the Reserve Bank becomes not only the banker's bank but also the lender of the last resort.

Controller of Credit

As supreme-banking authority in the country, the Reserve Bank of India, therefore, has the

following powers: (a) it holds the cash reserves of all the scheduled banks.

(b) It controls the credit operations of banks through quantitative and qualitative controls.

(c) It controls the banking system through the system of licensing, inspection and calling for information.

(d) It acts as the lender of the last resort by providing rediscount facilities to scheduled banks.

Custodian of Foreign Reserves

Bank has the responsibility of maintaining fixed exchange rates with all other member countries of the I.M.F. Besides maintaining the rate of exchange of the rupee; the Reserve Bank has to act as the custodian of India's reserve of international currencies. The vast sterling balances were acquired and managed by the Bank. Further, the RBI has the responsibility of administering the exchange controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has certain nonmonetary functions of the nature of supervision of banks and promotion of sound banking in India. The Reserve Bank Act, 1934, and the Banking Regulation Act, 1949 have given the RBI wide powers of supervision and control over commercial and co-operative banks, relating to

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licensing and establishments, branch expansion, liquidity of their assets, management and methods of working, amalgamation, reconstruction, and liquidation. The RBI is authorised to carry out periodical inspections of the banks and to call for returns and necessary information from them.

Legal Framework

Acts governing specific functions

Indian Coinage Act, 1906:Governs currency and coins Bankers' Books Evidence Act Banking Secrecy Act Negotiable Instruments Act, 1881

FUNCTIONS OF RBI

MONETARY AUTHORITY

REGULATOR & SUPERVISOR

MANAGER OF FOREIGN EXCHANGE

ISSUER OF CURRENCY Y

RELATED FUNCTION S

BANKER TO BANKS

BANKER TO GOVERNMENT

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Functions of RBI

Monetary Authority: The RBI is responsible for implementing, formulating and monitoring the monetary policy of India. Objective: Keeping this authority in mind the RBI is required to maintain price stability and ensure adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system: The Supreme financial body sets down broad parameters of banking operations within which the country's banking and financial system operates. Objective: This reasonably helps in maintaining public confidence in the system. It in turn protects depositors' interest and provides lucrative banking services to the public.

Manager of Exchange Control: The RBI is responsible for managing the Foreign Exchange Management Act, 1999. Objective: It is the nodal agency, which facilitates external trade and payment and promotes orderly development and maintenance of foreign exchange market in India.

Issuer of currency: It is the only supreme body, which issues and exchanges or destroys currency and coins not fit for circulation. Objective: This facilitates in giving the public adequate quantity of currency notes and coins

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and in good quality. Developmental role The RBI since its inception performs a wide range of promotional functions to support national objectives and generate goodwill among the citizens of the country.

Related Functions

Banker to the Government: The RBI performs merchant banking function for the central and the state governments and also acts as their banker. The RBI often advises the Government of the current monetary condition in the state.

Banker to banks: maintains banking accounts of all scheduled banks. The RBI looks after the functioning of the state banks and grants them license and even cancels the same on account of fraud practice.

Subsidiaries of RBI

Fully owned:= National Housing Bank (NHB), National Bank for Agriculture and Rural Development (NABARD), Deposit Insurance and Credit Guarantee Corporation of India (DICGC), Bharatiya Reserve Bank Note Mudran Private Limited (BRBNMPL)

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Majority stake: = National Bank for Agriculture and Rural Development (NABARD). The Reserve Bank of India has recently divested its Stake in State Bank of India to the Government of India.

Department of banking supervision

The Department of Banking Supervision has its Central Office in Mumbai and 16 regional offices at various centres in the country. I worked in DBS, Regional Office at Lucknow. Prior to 1993, the supervision and regulation of commercial banks was handled by the Department of Banking Operations and Development (DBOD).In December 1993 the Department of Supervision was carved out of the DBOD with the objective of segregating the supervisory role from the regulatory function of R.B. I.

The Department of Banking Supervision at present exercises the supervisory role relating to commercial banks in the following forms:

Preparing of independent inspection programmes for different institutions. Inspection evaluates financial condition and performance of the bank which includes judging asset quality, solvency and capital adequacy earning performance and liquidity of the bank. Then seeing management and perating condition and compliance of the bank which includes Regulatory compliance and Guidance compliance and finally doing summary assessment of the bank i.e. identification of concerns and areas for corrective actions. Undertaking scheduled and special on-site inspections, off-site surveillance, ensuring follow-up and compliance.

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Determining the criteria for the appointment of statutory auditors and special auditors and assessing audit performance and disclosure standards.

Exercising supervisory intervention in the implementation of regulations which includes-recommendation for removal of managerial and other persons, suspension of business, amalgamation, merger/winding up, issuance of directives and imposition of penalties.The Department of Banking Supervision follow CAMELS approach during its inspection of commercial banks. It judges banks on the basis of the following six parameters :

C- CAPITAL ADEQUACY A-ASSET OR CREDIT QUALITY M-MANAGEMENT E-EARNINGS L-LQUIDITY S-SOLVENCY

Banking sectors in india

PUBLIC SECTOR BANKS-The public sector is the one whose working is in the hands of the government. the government holds a majority stake in public sector industries. Their activities are mostly influenced by the government. But due to privatization of public sector industries, their nimbler has reduced to a significant extent. Indian railways, nuclear power industry,

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electricity board, etc.are still in cluded in the public sector. it may be defined as "an enterprise where there is no private ownership but its activities are not mainly confined to the maximization of profits and private interests of the enterprise but it is influenced by social.

PRIVATE BANKS- are banks that are not incorporated. A private bank is owned by either an individual or a general partner(s) with limited partner(s). In any such case, the creditors can look to both the "entirety of the bank's assets" as well as the entirety of the soleproprietor's/general-partners' assets.

FOREIGN SECTOR BANKS- Foreign sector banks are those banks which have their head office in other countries outside India and branch is working in India.

CO-OPERATIVE SECTOR

The co-operative sector is very much useful for rural people. The co-operative banking sector is divided into the following categories.

a. State co-operative Banks b. Central co-operative banks c. Primary Agriculture Credit Societies

RRBs A rural bank is a financial institution that helps rationalize the developing regions or developing country to finance their needs specially the projects regarding agricultural progress.

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Structure of Banking in India

Reserve Bank of India

Scheduled
Banks

Non-Scheduled
Banks

Scheduled Commercial Banks

Scheduled Cooperative Banks

Public sector banks

Private Sector Banks

Foreign Banks

Regional Rural Banks

Scheduled Urban Cooperative Banks

Scheduled State Cooperative Banks

Nationalized Banks

SBI & its Associates

Old Private Sector Banks

New Private Sector Banks

Source-Banking &Finance Magazine

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INTRODUCTION

A public space refers to an area or place that is open and accessible to all citizens, regardless of gender, race, ethnicity, age or socio-economic level. One of the earliest examples of public spaces are commons. For example, no fees or paid tickets are required for entry, nor are the entrants discriminated based on background. Non-government-owned malls are examples of 'private space' with the appearance of being 'public space'. Public Space has also become something of a touchstone for critical theory in relation to philosophy, (urban) geography, visual art, cultural studies, social studies and urban design. Its relevance seems to become more pressing as capital encloses more and more of what were thought of as 'commons'. The term 'Public Space' is also often misconstrued to mean other things such as 'gathering place', this is an element of the larger concept.

Under Indian banking regulation Act, 1949 sec. 5 (b)Banking means accepting money for the purpose of lending and investment or deposits of money from the public, repayable on demand or otherwise and withdrawable by cheque, draft, order or otherwise.

The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges. The last decade has

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witnessed major changes in the financial sector - new banks, new financial institutions, new instruments, new windows, and new opportunities - and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment revenues, it has entailed greater competition and consequently greater risks. Demand for new products, particularly derivatives, has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalised environment.

HISTORY OF BANKING

Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private banks may not extend the kind of cooperation in providing credit support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first Public Sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of re-organisation of princely States, the associate banks came in to fold of public sector banking.

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Another evaluation of the banking in India was undertaken during 1966 as the private banks were still not extending the required support in the form of credit disbursal, more particularly to the unorganised sector. Each leading industrial house in the country at that time was closely associated with the promotion and control of one or more banking companies. The bulk of the deposits collected, were being deployed in organised sectors of industry and trade, while the farmers, small entrepreneurs, transporters , professionals and self-employed had to depend on money lenders who used to exploit them by charging higher interest rates. In February 1966, a Scheme of Social Control was set-up whose main function was to periodically assess the demand for bank credit from various sectors of the economy to determine the priorities for grant of loans and advances so as to ensure optimum and efficient utilisation of resources. The scheme however, did not provide any remedy. Though a no. of branches were opened in rural area but the lending activities of the private banks were not oriented towards meeting the credit requirements of the priority/weaker sectors.

On July 19, 1969, the Govt. promulgated Banking Companies (Acquisition and Transfer of Undertakings) Ordinance 1969 to acquire 14 bigger commercial bank with paid up capital of Rs.28.50 cr, deposits of Rs.2629 cr, loans of Rs.1813 cr and with 4134 branches accounting for 80% of advances. Subsequently in 1980, 6 more banks were nationalised which brought 91% of the deposits and 84% of the advances in Public Sector Banking. During December 1969, RBI introduced the Lead Bank Scheme on the recommendations of FK Nariman Committee.

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In the post-nationalisation period, there was substantial increase in the no. of branches opened in rural/semi-urban centres bringing down the population per bank branch to 12000 appx. During 1976, RRBs were established (on the recommendations of M. Narasimham Committee report) under the sponsorship and support of public sector banks as the 3rd component of multi-agency credit system for agriculture and rural development. While the 1970s and 1980s saw the high growth rate of branch banking net-work, the consolidation phase started in late 80s and more particularly during early 90s, with the submission of report by the Narasimham Committee on Reforms in Financial Services Sector during 1991. In these five decades since independence, banking in India has evolved through four distinct phases:

Foundation phase can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organisation and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969.

Expansion phase had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit

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flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system.

Consolidation phase: The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management, staff productivity and profitability of banks. Measures were also taken to reduce the structural constraints that obstructed the growth of money market.

Reforms phase The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc.

BANK NATIONALISATION & PUBLIC SECTOR BANKING

Organized banking in India is more than two centuries old. Till 1935 all the banks were in private sector and were set up by individuals and/or industrial houses which collected deposits from individuals and used them for their own purposes. In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent.

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Statistics bear testimony to the fact that the genesis of the economic crisis in India, which surfaced in 1991, lies in the large and persistent macroeconomic imbalances that developed over the 1980s. Move towards State ownership of banks started with the nationalisation of RBI and passing of Banking Companies Act 1949. On the recommendations of All India Rural Credit Survey Committee, SBI Act was enacted in 1955 and Imperial Bank of India was transferred to SBI. keeping in view the objectives of nationalisation, PSBs undertook expansion of reach and services. Resultantly the number of branches increased 7 fold (from 8321 to more than 60000 out of which 58% in rural areas) and no. of people served per branch office came down from 65000 in 1969 to 10000. Much of this expansion has taken place in rural and semi-urban areas. The expansion is significant in terms of geographical distribution. States neglected by private banks before 1969 have a vast network of public sector banks. The PSBs including RRBs, account for 93% of bank offices and 87% of banking system deposits.

The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as independent units and called it Presidency Banks. These three banks were amalgamated in 1920 and Imperial Bank of India was established which started as private shareholders banks, mostly Europeans. In 1865 Allahabad Bank was established and first time exclusively by Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were

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set up. Reserve Bank of India came in 1935.

During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilisation was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

The following steps are taken by the government of India to regulate banking institutions in the country.

1949 : Enactment of Banking Regulation Act. 1955 : Nationalisation of State Bank of India. 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 seven banks with deposits over 200 crore. After the nationalisation of banks, the branches of the public sector bank India rose to

approximately 800% in deposits and advances took a hugejump by 11,000%. 24

Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

Nationalised Banks in India

Banking System in India is dominated by nationalised banks. The nationalisation of banks in India took place in 1969 by Mrs. Indira Gandhi the then prime minister. The major objective behind nationalisation was to spread banking infrastructure in rural areas and make available cheap finance to Indian farmers. Fourteen banks were nationalised in 1969. Before 1969, State Bank of India (SBI) was the only public sector bank in India. SBI was nationalised in 1955 under the SBI Act of 1955.

The second phase of nationalisation of Indian banks took place in the year 1980. Seven more banks were nationalised with deposits over 200 crores. Nationalised banks dominate the banking system in India. The history of nationalised banks in India dates back to mid-20th century, when Imperial Bank of India was nationalised (under the SBI Act of 1955) and re-christened as State Bank of India (SBI) in July 1955. Then on 19th July 1960, its seven subsidiaries were also nationalised with deposits over 200 crores.

However, the major nationalisation of banks happened in 1969 by the then-Prime Minister Indira Gandhi. The major objective behind nationalisation was to spread banking infrastructure in rural areas and make cheap finance available to Indian farmers. In the year 1980, the second

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phase of nationalisation of Indian banks took place, in which 7 more banks were nationalised with deposits over 200 crores. With this, the Government of India held a control over 91% of the banking industry in India. After the nationalisation of banks there was a huge jump in the deposits and advances with the banks. At present, the State Bank of India is the largest commercial bank of India and is ranked one of the top five banks worldwide. It serves 90 million customers through a network of 9,000 branches.

After the 1991 economic crisis, the central government launched economic liberalization. India has progressed towards a modern market-based system and has a growing middle class.

SIGNIFICANCE OF BANKS

The importance of a bank to modern economy, so as to enable them to develop, can be stated as follow:

(i) The banks collect the savings of those people who can save and allocate them to those who need it. These savings would have remained idle due to ignorance of the people and due to the fact that they were in scattered and oddly small quantities. But banks collect them and divide them in the portions as required by the different investors.

(ii) Banks preserve the financial resources of the country and it is expected of them that they allocate them appropriately in the suitable and desirable manner.

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(iii) They make available the means for sending funds from one place to another and do this in cheap, safe and convenient manner.

(iv) Banks arrange for payments by changes, order or bearer, crossed and uncrossed, which is the easiest and most convenient, besides they also care for making such payments as safe as possible.

(v) Banks also help their customers, in the task of preserving their precious possess-ions intact and safe.

(vi) To advance money, the basis of modern industry and economy and essential for financing the developmental process, is governed by banks.

(Vii) It makes the monetary system elastic. Such elasticity is greatly desired in the present economy, where the phase of economy goes on changing and with such changes, demand for money is required. It is quite proper and convenient for the government and R.B.I. to change its currency and credit policy frequently, this is done by RBI, by changing the supply of money with the changing the supply of money with the changing needs of the public.

Although traditionally, the main business of banks is acceptance of deposits and lending, the banks have now spread their wings far and wide into many allied and even unrelated activities.

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The following are the Scheduled Banks in India (Public Sector):

State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore Andhra Bank Allahabad Bank Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Punjab and Sind Bank Syndicate Bank Union Bank of India United Bank of India

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Vijaya Bank

The following are the Scheduled Banks in India (Private Sector):

ING Vysya Bank Ltd Axis Bank Ltd Indusind Bank Ltd ICICI Bank Ltd HDFC Bank Ltd IDBI Bank Ltd

The financial sector assessment report, prepared by the Reserve Bank of India (RBI) and the Central Government, has favoured the merger of public sector banks (PSBs) having a government holding bordering on 51 per cent with those having a much higher state-holding to ensure that their business growth does not suffer due to capital constraints.

The report indicated that PSBs would need additional capital to meet Basel II norms and maintain an asset growth for the overall projected growth of the economy at 8 per cent and consequent growth of risk-weighted assets (RWAs). This has the potential to further aggravate a growing apprehension that public sector banks growth could be constrained in relation to other players.

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The extent of additional capital required from the government is expected to be manageable, provided the RWAs grow by within 25 per cent annually and total cost of recapitalisation would be lower than in most other countries. Public banks deposit growth rise, private, foreign banks see drop

The public sector banks have shown growth in their credits in comparison to their private and foreign competitors. According to latest data released by the Reserve Bank of India (RBI) in due course the depositors have withdrawn funds from private and foreign banks and are investing their money with public sector banks which has resulted in a significant decline in growth of deposits with private and foreign banks.

In recent months big companies such as Infosys moved their deposits from private and foreign banks to public sector banks, largely because the state-owned players were offering higher interest rates. While in December, the public sector players had taken decision to reduce bulk deposit and focus more on current account and saving account balances.

Public sector banks score over private ones

Public sector banks have long been chastised as the black sheep of the financial sector. But while a lot of experts might deride these institutions for their non-performing assets and lower productivity, at the end of the day, public sector banks have far happier customers compared to their counterparts in the private sector. According to Reserve Bank of Indias (RBI's) latest report, Trend and Progress of Banking in India, public sector banks rule the roost in customer satisfaction.

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The report should make those singing hosannas for private sector banks sit up. It shows that the State Bank of India (SBI) recorded 0.1 complaints per branch while the corresponding figure for icici was 1.39more than 10 times that of sbi. Citibank fared far worse: it recorded a whopping 8.59 complaints per branch. These complaints were made to RBI grievance cell.

One, however, needs to look at another aspect before delivering the final verdict: profits per branch. Here, private banks fare better. For example, on an average, a Citibank branch earns a net profit of Rs 18 crore annually. An average icici bank branch earns Rs 4.5 crore, while an average sbi branch earns just Rs 50 lakh, annually. The standard response to such figures is that private sector banks are more efficient than their public sector counterparts with foreign banks taking efficiency to astronomical levels.

But their rich rake-offs notwithstanding, the profit-complaint ratio of private sector banks is much lower than their much maligned public sector counterparts sbis profit-complaint ratio of 4.1 for example is much higher than cici and Citibank

Timeismoney RBIs data indicates that private and foreign banks are biting off more than they can chew: customer acquisition is shooting through the roof but the servicing mechanism is Given short shrift.

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Banks, like all other businesses, believe that time is money. The private sector interpretation of this adage seems to be: spending as little time on the customer as possible. In most private banks, the time spent on the phone with a customer is tracked and executives found to be spending an inordinate amount are ticked off. The zeal to be efficient means that the private sector has all but forgotten another business aphorism: time spent with a customer is an investment which may yield future dividends in the form of customer loyalty and referrals. And their surveys, other than those conducted by rbi, testify to such omission. For example, according to a survey by Consumer Voice (http://www.consumer-voice.org), a consumer awareness magazine, people were more likely to recommend public sector banks to their friends or relatives. Of the top five banks in this category, three belong to the public sector. The highest-ranking foreign bank is Standard Chartered at number eight. icici Bank is at number 15 (fifth from the bottom), with Citibank bringing up the rear.

Darkside Recent advertising campaigns, especially by private banks, have increasingly started using the emotional platform to attract customers. With tag lines such as Hum hain naa and Just like borrowing from a friend, these banks attempt to bring home the fact that the bond between a customer and his bank goes beyond the purely commercial.

However, customers dont necessarily share that warm feeling.

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Public sector banks score over private ones

According to the rbi report, private and foreign banks actually score pretty high on customer complaints of the nasty variety: namely, harassment in recovery of loans. Foreign banks record 0.134 such complaints per branchmore than 30 times the overall average. The corresponding numbers for new private Indian banks is 0.021 and 0.003 for public sector banks.

The Consumer Voice survey also has private sector banks faring poorly in this respect. Only one public sector bank figures amongst the top five in the list of banks with highest number of disgruntled customers. Not surprisingly, Citibank tops the list.

Citibank also tops another dubious list: that of people fed up with tele-marketing executives pestering them. The bank accounts for 40 per cent of all such complaints.

WHY WORRY?

At Citibanks website, one finds a complaint form along with a detailed note elaborating the grievance redressal system. The icici Bank home page also has a similar link, prominently displayed.

The sbi home page does not have a link relating to complaints. What they do have is a customer care web page that declares, Customers of the bank can meet senior executives of

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the bank on the 15th of every month (between 3.00 pm and 5.00 pm) without any prior appointment and discuss issues relating to their accounts/banking transactions. In case the 15th is a holiday, customers can meet the next working day.

It is a fundamentally different approach. For the new breed of private banks, human contact is anathema. The overarching desire is to resolve grievances on the phone or through the Internet. The customer is preferred to remain a faceless entity with a number to identify him. But at a public sector bank, a harried customer, running from pillar to post would often find that a kind word, a cup of tea and a patient hearing solves half the problem.

TheHolyGrail One reason for disgruntled customers is the fact that that the service executives are often not authorised to solve problems and refers them to another party. This often leads to a chain reaction and such vacillation irks customers, leaving them with no choice but to approach rbi. According to P Shimrah, secretary to the banking ombudsman, rbi Public sector banks are decentralised. The branch manager of a public sector bank is more empowered than his private sector counterpart to solve problems at his level. In private sector banks, its the opposite. With a centralised decision making authority, they feel that technology can be used to overcome these problems.

But technology, like atm machines, though useful, cannot provide complete solution. For two important reasons. Firstly, technology is not infallible: it solves old problems but creates its

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own new ones. Secondly, technology needs to find favour with the public. Inappropriate technology or innovations that are too far ahead of their time will not work. Instead of living with the vision of a future utopia with perfect banking systems, it would be wiser to accept the problems that are cropping up now and address them in a sensible and humane manner.

The fact that public sector banks need to shape up has been repeated ad nauseam, but the solution does not lie in swinging to the other extreme typified by foreign banks. A satisfying middle ground needs to be found where the cutting edge efficiency of western banking is tempered with respect and empathy for the customer.

Based on Loan loss provisioning The net NPAs4 have continually declined from 14.46% in 1993-94 to 6.74% in 2000-01. RBI regulations require that banks build provisions upto at least a level of 50% of their gross NPAs. The current provisioning is 35% of gross NPAs.

The problem India faces is not lack of strict prudential norms but 1. The legal impediments and time consuming nature of asset disposal process. 2. Postponement of the problem in order to report higher earnings 3. Manipulation by the debtors using political influence

CHALLENGES IN BANKING

The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of

35

the India banking system and placed numerous demands on banks. Operating in this demanding environment has exposed banks to various challenges. The last decade has witnessed major changes in the financial sector - new banks, new financial institutions, new instruments, new windows, and new opportunities - and, along with all this, new challenges. While deregulation has opened up new vistas for banks to augment revenues, it has entailed greater competition and consequently greater risks. Demand for new products, particularly derivatives, has required banks to diversify their product mix and also effect rapid changes in their processes and operations in order to remain competitive in the globalised environment.

Globalisation a challenge as well as an opportunity The benefits of globalisation have been well documented and are being increasingly recognised. Globalisation of domestic banks has also been facilitated by tremendous advancement in information and communications technology. Globalisation has thrown up lot of opportunities but accompanied by concomitant risks. There is a growing realisation that the ability of countries to conduct business across national borders and the ability to cope with the possible downside risks would depend, inter-alia, on the soundness of the financial system and the strength of the individual participants. Adoption of appropriate prudential, regulatory, supervisory, and technological framework on par with international best practices enables strengthening of the domestic banking system, which would help in fortifying it against the risks that might arise out of globalisation. In India, we had strengthened the banking sector to face the pressures that may arise out of globalisation by adopting the banking sector reforms in a calibrated manner, which followed the twin governing principles of non-disruptive progress and consultative process.

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Global challenges in banking A new broad challenges faced by the Indian banks in the following areas, viz., enhancement of customer service; application of technology; implementation of Basel II; improvement of risk management systems; implementation of new accounting standards; enhancement of transparency & disclosures; and compliance with KYC aspects.

CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA

1. Implementation of Basel II 2. Implementation of latest technology 3. How to reduce NPA 4. Corporate governance 5. Man power planning 6. Talent management 7. Loan waiver: A new challenge 8. Risk management 9. Transparency and disclosures 10. Challenges in banking security 11. Competition with private sector banks 12. Growth in business 13. Enhancing customer service

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Implementation of Basel II Basel II implementation is widely acknowledged as a significant challenge faced by both banks and the regulators internationally. It is true that Basel II implementation may be seen as a compliance challenge. While it may be so for some banks, I would venture to mention that Basel II implementation has another dimension which offers considerable opportunities to banks. I would like to highlight two opportunities that are offered to banks, viz., refinement of risk management systems; and improvement in capital efficiency. Basel 2 requires more capital for public sector banks in India due to the fact that operational risk is not captured under Basel I.

Basel II is the revised capital accord of Basel I. Basel II accord defines the minimum regulatory capital which is to be allocated by each bank based on its risk profile of assets. Banks have to maintain the capital adequacy ratio (CAR) of minimum 9 %. As per RBI, banks which are getting more than 20% of their businesses from abroad have to Implement Basel II. But most of the banks are now interested to implement Basel II.

Implementation of Basel II is seen as one of the significant challenges for Public Sector Banks. Implementation of Basel II will require more capital for Public Sector Banks in India due to the fact that operational risk is not captured under Basel I

In ICRA's estimates, Public Sector Banks would need additional capital to the extent of Rs. 90 billion to meet the capital charge requirement for operational risk under Basel II.

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The challenge for the banks would be to quantify risks(credit concentration risk, interest rate risk in the banking book, business and strategic risk, liquidity risk, and other residual risks such as reputation risk and business cycle risk) and then, to translate those consistently into an appropriate amount of capital needed, commensurate with the banks risk profile and control environment.

Needless to say, this would call for instituting sophisticated risk management systems, including a robust stress-testing and economic capital al Public Sector Banks would be required to use fully scalable state of the art technology, ensure enhanced information system security and develop capability to use the central database to generate any data required for risk management as well as reporting.location framework.

The most important Pillar 2 challenge relates to acquiring and upgrading the human and technical resources necessary for the review of banks responsibilities under Pillar 1.

Public Sector Banks would be required to use fully scalable state of the art technology, ensure enhanced information system security and develop capability to use the central database to generate any data required for risk management as well as reporting.

The costs associated with Basel II implementation, particularly costs related to information technology and human resources, are expected to be quite significant for Public Sector Banks.

Minimum Capital Allocation for credit risk To allocate the capital for any of the above risk, it should be quantitatively measured.

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CAPITAL ADEQUECY PLANNING

IMPLEMENTATION OF LATEST TECHNOLOGY

An online banking facility enables you to handle your finances efficiently.

Online banking uses modern computer technologies to offer the users convenient banking facilities. If you have access to such a facility, there is absolutely no need for you to personally visit your banks branch for any sort of transaction. You can simply login with the internetbanking password that your banker has given you, and carry all the necessary work online. It also eliminates the necessity of doing any paper-based work and saves considerable time for the users.

Private sector and foreign banks were using technology and computerized system since its beginning while PSBs were not. So they found difficulty in managing all these things. Many of Indian PSBs ignored technological change and had lost market share to foreign banks and new

40

private banks. Technology helps in having a huge branch network easily and also it reduces the operational cost this may b clarified by an example as:Operational cost per transaction of an account via different type is Via computers on counter- 40 Rs. Via ATM Via online - 16-17 Rs. - 46 paise

So it is cleared that manually/direct transaction cost comes very high and electronically and online it is very low. So thats why public sector banks should improve their working system and should make it totally online but challenge is before PSBs

The users can do variety of work using your online banking pin code. The bankers benefit equally from the online banking facilities. Besides offering their users the convenience of banking, the online banking system means significant cost savings for the bankers themselves. With such an automatic system in place, the bankers need not to hire employees specialized in handling paper work and teller interactions. This reduces the bankers operating costs considerably, translating into significant cost savings over the long-term.

Various Advantages of Banking Online: The biggest advantage of online banking is its convenience. Unlike a banks branches, online banking facilities are open 24/7. This offers you banking from the comfort of your home with just a click. You can access such a facility from anywhere in the world. This could be great advantage if you need to address urgent monetary concerns while away from home. Transactions online are fast and mostly quicker than ATM transactions. Moreover, online

41

banking systems have sophisticated tools that provide effective management of the users assets.

Initially the online banking security system was quiet simple, a id and a password and you are done. It was quiet risky then anyone who gets access to these two can empty your account. Many people at that time will do setting with the courier people and got access to this details. But now even the card and the id password as sent thru separate courier. So its now more secure.

Most banks now has sms verification, you are sent a code that you need to add when you are adding a new account for transfer, its simple and logical. Thou sometimes the sms takes too much time to be received. Stanchart is fast the minute you press add the sms is in your inbox, may be because of lesser traffic. Icici has also an extra transaction password plus you need to have a debit card and have to use the grid at the back of card to validate it. This three way verification is quiet robust and thus you dont get phising emails these days. Because phisers know that having an id and password is not enough.

Technological leap

The banks realised that if they have to survive, they will have to adopt modern technology. State Bank of India was amongst the first to focus on technology and a team is constantly at work to innovate in an attempt to lower costs. So, the bank has now introduced two-faced ATMs, which will increase efficiency.

Technology will not just help them reach out to young customers better but also help them cut costs and improve efficiency. Heres how the economics work. While a transaction at a branch

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costs around Rs 50, one at an ATM works out to Rs 18, a senior State Bank of India executive said. Transactions through the Internet are even cheaper at around Rs 10 each.

As a result, banks like State Bank of India want 50 per cent of the transactions from nonbranch channels such as ATMs, net banking and mobile phones.

HOW TO REDUCE NPA

Non performing asset Definition A loan or lease that is not meeting its stated principal and interest payments. Banks usually classify as nonperforming assets any commercial loans which are more than 90 days overdue and any consumer loans which are more than 180 days overdue. More generally, an asset which is not producing income.

Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by RBI. An amount due under any credit facility is treated as "past due" when it has not been paid within 30 days from the due date. Due to the improvement in the payment and settlement systems, recovery climate, upgradation of technology in the banking system, etc., it was decided to dispense with 'past due' concept, with effect from March 31, 2001.

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Financial sector reform in India has progressed rapidly on aspects like interest rate deregulation, reduction in reserve requirements, barriers to entry, prudential norms and riskbased supervision. But progress on the structural-institutional aspects has been much slower and is a cause for concern. The sheltering of weak institutions while liberalizing operational rules of the game is making implementation of operational changes difficult and ineffective. Changes required to tackle the NPA problem would have to span the entire gamut of judiciary, polity and the bureaucracy to be truly effective. This paper deals with the experiences of other Asian countries in handling of NPAs.

The chart below shows data for NPA going back to 2.3-1.0. The two lines plotted are nonperforming assets gross non-performing assets. Loan loss allowance is not growing nearly as fast as the non-performing assets. I can say that this is a problem, but that we dont have a solution. In the course of discussing disposition of assets with various banks, it sometimes becomes apparent that the reason that the bank cannot dispose of the property at market prices, is because the bank does not have enough capital to do so. It is suspected that the slow growth of loan loss allowance is related to the same problem. While this chart shows that NPA is decreasing overall in banking system but even then in PSBs NPA are higher with comparison to private sector banks.

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Something needs to happen, but Im certainly not smart enough to know what it is.

The position of classification of NPA is summarized below: Standard assets Sub-standard assets Doubtful assets Loss assets : not NPA : Twelve months period after becoming NPA. : Substandard for 12 months or more. : Assets becomes uncollectible/ unrealizable.

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Gross and net NPA of different sector of bank

Table 1 (in %)

(end of March 31)

category

Gross NPA/ Gross Advance 2001 2002 11.09 9.64 5.38 2003 9.36 8.07 5.25 2004 7.79 5.84 4.62

Public sector bank 12.37 Private sector Foreign bank 8.37 6.84

Table 2

(end of March 31) (in %)

category

Net NPA / Net Advance 2001 2002 5.82 2.49 1.89 2003 4.53 2.32 1.76 2004 2.98 1.32 1.49

Public sector bank 6.74 Private sector Foreign bank 2.27 1.82

Management of NPA

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The table I&II shows that during initial sage the percentage of NPA was higher. This was due to show ineffective recovery of bank credit, lacuna in credit recovery system, inadequate legal provision etc. Various steps have been taken by the government to recover and reduce NPAs. Some of them are.

1. One time settlement / compromise scheme 2. Lok adalats 3. Debt Recovery Tribunals 4. Securitization and reconstruction of financial assets and enforcement of Security Interest Act 2002. 5. Corporate Reconstruction Companies 6. credit information on defaulters and role of credit information bureaus

CONCLUSION

The Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively higher in public sectors banks. (Table II&III). To improve the efficiency and profitability, the NPA has to be scheduled. Various steps have been taken by government to reduce the NPA. It is highly impossible to have zero percentage NPA. But at least Indian banks can try competing with foreign banks to maintain international standard. A strong banking sector is important for flourishing economy. The failure of the banking sector may have an adverse impact on other sectors. Non-performing assets are one of the

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major concerns for banks in India.

NPAs reflect the performance of banks. A high level of NPAs suggests high probability of a large number of credit defaults that affect the profitability and net-worth of banks and also erodes the value of the asset. The NPA growth involves the necessity of provisions, which reduces the over all profits and shareholders value.

The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade.

CAUSES FOR NON-PERFORMING ASSETS IN PUBLIC SECTOR BANKS

Introduction

Granting of credit for economic activities is the prime duty of banking. Apart from raising resources through fresh deposits, borrowings and recycling of funds received back from borrowers constitute a major part of funding credit dispensation activity. Lending is generally encouraged because it has the effect of funds being transferred from the system to productive purposes, which results into economic growth. However lending also carries a risk called credit risk, which arises from the failure of borrower. Non-recovery of loans along with interest forms a major hurdle in the process of credit cycle. Thus, these loan losses affect the banks

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profitability on a large scale. Though complete elimination of such losses is not possible, but banks can always aim to keep the losses at a low level.

Non-performing Asset (NPA) has emerged since over a decade as an alarming threat to the banking industry in our country sending distressing signals on the sustainability and endurability of the affected banks. The positive results of the chain of measures affected under banking reforms by the Government of India and RBI in terms of the two Narasimhan Committee Reports in this contemporary period have been neutralized by the ill effects of this surging threat. Despite various correctional steps administered to solve and end this problem, concrete results are eluding. It is a sweeping and all pervasive virus confronted universally on banking and financial institutions. The severity of the problem is however acutely suffered by Nationalised Banks, followed by the SBI group, and the all India Financial Institutions.

Magnitude of NPAs

In India, the NPAs that are considered to be at higher levels than those in other countries have of late, attracted the attention of public. The Indian banking system had acquired a large quantum of NPAs, which can be termed as legacy NPAs.

NPAs seem to be growing in public sector banks over the years. Categories of NPAs Sub-standard Assets - which has remained NPA for a period of 90 days to less than or equal to 12 months

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 Doubtful Assets - has remained in the sub-standard category for a period of 12 months Loss Assets - loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly. After classifying assets into above categories, banks are required to make provision against these in terms of extant prudential regulations, the provisioning norms are as under:

Asset Classification

Provision requirements

Substandard assets

10%

Doubtful assets

Up to 1 year

20%

1 to 3 year

30%

More than 3 year

100%

Loss assets

It may be either written off or fully provided by the bank

Gross NPAs are the sum total of all loans assets that are classified as NPAs. Net NPAs are those type of NAPs in which the bank deducted the provision regarding NPAs.

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 While gross NPAs reflects the quality of the loans made by banks net whereas NPAs shows the actual burden of bank.

DEPOSIT AND CREDIT GROWTH As on DEPOSIT Jan 4, 2008 Public sector banks Foreign banks Private sector banks Scheduled commercial banks* CREDIT Public sector banks Foreign banks Private sector banks Scheduled commercial banks* *Includes regional rural banks 19.8 30.7 24.2 21.4 28.6 16.9 11.8 24.0 24.2 34.1 26.9 25.1 Jan 2, 2009 24.2 12.1 13.4 21.2 As on

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TABLE 7.1 : BANK GROUP-WISE CLASSIFICATION OF LOAN ASSETS OF PUBLIC SECTOR BANKS - 2003 TO 2008 (Amount in Rs. crore) As on March 31 Bank group / Years Amount Per cent Amount Per cent Amount Per cent -1 Public Sector Banks 2003 2004 2005 2006 2007 2008 523724 610435 824253 1029493 1335175 1656585 90.6 92.2 94.6 96.1 97.2 97.7 14909 16909 10838 11394 14147 16870 2.6 2.6 1.2 1.1 1 1 32340 28756 29988 24804 19945 19167 5.6 4.3 3.4 2.3 1.5 1.1 -2 -3 -4 -5 -6 Standard Assets Sub-standard Assets Doubtful Assets

TABLE 7.1 : CLASSIFICATION OF LOAN ASSETS OF PUBLIC SECTOR BANKS - 2003 TO 2008 (Concld.)

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(Amount in Rs. crore) As on March 31 Bank Loss Assets group / Years Amount Per cent -7 -8 -9 -10 -11 Amount Per cent Total Advances Total NPAs

{=(3)+(5)+(7)} {=(4)+(6)+(8)} {=(1)+(3)+(5)+(7)} Public Sector Banks 2003 6840 2004 5876 2005 5771 2006 5181 2007 4510 2008 3712 1.2 0.9 0.7 0.5 0.3 0.2 54089 51541 46597 41379 38602 39749 9.4 7.8 5.4 3.9 2.8 2.3 577813 661976 870850 1070872 1373777 1696334

SOURCE: RBI ANNUAL REPORT 2007-08

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From above table it may be observed that though the total NPAs amount of Public sector Banks decreased from Rs. 54089 (crore) in year 2003 to Rs. 39749 ( crore) as at the end of 31 March 2008 still a colossal amount is locked up in these impaired loans. An important aspect of strengthening the assets portfolio of Public Sector Banks is to further reduce the level of NPAs. The earning capacity and profitability of the bank are highly affected due to this as NPAs do not generate interest income for banks while at the same time banks are required to make provisions for NPAs from their current profits. So the NPAs have deleterious impact on the return on assets. Due to inadequacy of legal systems, recoveries of NPA are not likely to be quick through legal recourse. In view of the inadequacy of legal infrastructure in prompt reduction of NPA, the only feasible alternative is to encourage non-legal recourse. While banks require non-legal time bound surgical solutions to meet the statutory requirements in reducing the level of net NPA, the internal legal machinery in banks should obviously be so strengthened as to ensure speedy disposal of suit-filed cases and execution of decreed cases. This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare minimum.

Corporate Governance

It is a system of structuring, operating and controlling a company with a view to achieve long term strategic goals to satisfy shareholders, creditors, employees, customers and suppliers, and complying with the legal and regulatory requirements, apart from meeting environmental and local community needs.

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The issues related to corporate governance have continued to attract considerable national and international attention in light of a number of high-profile breakdowns in corporate governance. Currently in India, about four-fifths of the banking business is under the control of public sector banks (PSBs), comprising the SBI and its subsidiaries and the nationalised banks. In view of the importance of the banking system for financial stability, sound corporate governance is not only relevant at the level of the individual bank, but is also a critical ingredient at the system level. Corporate governance in PSBs is complicated by the fact that effective management of these banks vests with the government and the top managements and the boards of banks operate merely as functionaries. Unless the issues connected with these multiple, and sometimes conflicting, functions are resolved and the boards of banks are given the desired level of autonomy it would be difficult to improve the quality of corporate governance in PSBs. One of the major factors that impinge directly on the quality of corporate governance is the government ownership. Although some ownership structures might have the potential to alter the strategies and objectives of a bank, these banks will also face many of the same risks associated with weak corporate governance.

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 Consequently, the general principles of sound corporate governance should also be applied to all Public sector Banks. Weak corporate governance translates into higher cost of capital Better corporate governance translates into somewhat higher returns on assets But much better higher returns on investment relative to cost of capital

So corporate governance is a key challenge for Public Sector Banks in the era of globalization.

Man-power Planning Manpower is the biggest challenge for the public sector banks. While domestic private sector banks are expanding their manpower to match the business growth, public sector banks were faced with a large attrition rate of over 30 % and are experiencing an overall deceleration in the number of employees. Because It takes as long as 18 months for the recruitment process of a typical state-owned bank to be concluded and of the candidates shortlisted, many drop out on their own, and Incentivisation of government bank employees too have failed as the fear of probe by various regulators and government agencies deter the top management from doling out huge sums as rewards to performing staffers. In spite of many changes that the industry has faced over the years, essentially the role of this category of staff has remained unchanged. In the last seven years, public sector banks have lost 10% market share to the aggressive private banks. By 2011, the population of youth aged between 20 and 29 years is expected to cross the 27-crore mark in India, and this segment is more likely to

56

be attracted to the state-of-the-art banks that would have a similar age bracket generation across the counter. Public sector banks were more likely to be seen as an older generation organisation where the average age group would be 50 years. High average age of staff is also a cause of concern for the Public Sector Banks. Public sector banks therefore need to implement right strategies to woo young techno-savvy customers that prefer alternative channels to traditional banking method. The financial sector services are undergoing a rapid change in terms of the demographics, regulatory requirements and technology because of the high revenues generated. Public sector banks were more likely to be seen as an older generation organisation where the average age group would be 50 years. High average age of staff is also a cause of concern for the Public Sector Banks. Going forward, it would be tough to manage business as there is high competition for high-skilled jobs. The banks also need to develop existing staff in newer competencies through a systematic and rigorous training and also recruit, if necessary super specialist and specialist in areas like technology, treasury management, marketing, FOREX operations and project management.

So it is a challenge for Public sector Banks not only to recruit more employees but also to recruit quality professional.

TALENT MANAGEMENT

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 Such personnel need to be identified, nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career. Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower. Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes, Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times. Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences, both nationally and internationally, to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals. There is also need to develop organisation-wide awareness about banks key-business problems including stagnant business units, strain on profitability, cost of operations, unexplored business opportunities, manpower costs, NPAS etc. The preconditions for an effective talent management is clarity of where the organisation is, i.e., the starting point and where it wishes to reach in a given time horizon, i.e., the destination

LOAN WAIVER: A NEW CHALLENGE

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The massive Farm loan waiver scheme 2007 of the Union Government is disaster for Public Sector Banks as it will spoil the credit culture in the country.

FARM LOAN WAIVER SCHEME 2007

In budget speech of 2007 year, the Finance Minister P. Chidambaram announced the most ambitious farm loan waiver scheme with an estimated write off of Rs. 60,000 crores covering more than 4 crore farmers. The loan waiver scheme was amend to make it more inclusive. It offers a total waiver of Rs. 72,000 crores. Its highlights are as follows : Full loan waiver for small farmers and marginal farmers. Waiver will cover short term crop loans as well as all the overdue instalments on the investment credit. For short-term production loans, the amounts disbursed up to March 31st, 2007 and overdue as on December 31st, 2007 and remaining unpaid until February 28th, 2008 are eligible for loan waiver. For investment loans, the instalments of such loans that are overdue, together with the interest are eligible for all loans disbursed up to March 31, 2007 and overdue as on December 31st, 2007 and remaining unpaid till February 28th 2008. Marginal farmer is defined as cultivating agricultural land up to 1 hectare or 2.5 acres. Small farmer is defined as cultivating between 1 hectare and 2 hectares i.e. less than 5 acres. Small and marginal farmers account for between 70 to 94 percent of all farmers in most states.

59

 Other farmers, i.e. owning more than 5 acres or more than 2 hectares, will get one-time settlement (OTS) relief. Bulk of all dry and unirrigated lands fall in districts covered by the drought prone area programme popularly known as DPAP and the desert development programme (DDP). The total number of such districts is 237. Special package for other farmers in these 237 districts. For other farmers in these 237 districts, the OTS relief will be 25% or Rs. 20,000, whichever is higher and not 25 percent as announced in the budget. On the positive side, it will help them clean up their balance sheets because with the government reimbursing the money, they will not be required to provide for their nonperforming assets in agriculture loans. But the biggest drawback of the scheme is its impact on the credit culture in the banking system. It will serve as a great disincentive for those borrowers who repay bank loans on time. Borrowers too now feel proud in availing the loan and then not repaying the same and prefer waiting for waiver by some government or the other Those who repay the loan regularly will feel frustrated and deceived by such waiver of loan scheme which will benefit to only those who did not repay the loan wilfully Obviously such step gives award to wrong doers and punishes to those who is honest and who keeps his word of repayment by making labour hard and showing good performance.

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 The real risk of this ill-advised political move to write-off farm loans is that it opens up a very convenient option for future governments. There will be nothing to prevent governments from writing off farm loans every five years, just ahead of general elections. Moreover Government has waived the loan of farmers and not that of small traders and small scale manufacturers whose position is more pathetic than that of a farmer Banks will have to sacrifice the existing loan and provide for fresh disbursal of loan to maintain the minimum ratio and achieve the target of financing for agriculture What is the remedy if good borrowers of other sectors too stop repayment of their loans ? One way of doing this could be to introduce a differential loan rate for farm loans. Now, all farm loans up to Rs 3 lakhs are priced at 7% and the banks get a 2% subsidy from the government on such loans. Based on the credit history, the loan rate for the good borrowers can be brought down to, say, 6% or even 5%, with the government increasing the subsidy on such loans. This will increase the subsidy burden on the government marginally, but isnt it a small price to pay to protect the credit culture?.

The challenge before the Public Sector Banks now is to prevent these borrowers from turning into defaulters in future. So Loan waiver scheme is emerging as new challenge for Public Sector Banks. Moreover public sector banks suffered loss due to this and their NPA increased in comparison to others.

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RISK MANAGEMENT

Risk is inherent in any walk of life in general and in financial sectors in particular. Till recently, due to regulated environment, banks could not afford to take risks. But of late, banks are exposed to same competition and hence are compelled to encounter various types of financial and non-financial risks. Risks and uncertainties form an integral part of banking which by nature entails taking risks. There are three main categories of risks; Credit Risk, Market Risk Operational Risk.

All businesses take risks based on two factors: the probability an adverse circumstance will come about and the cost of such adverse circumstance.

Risk management is the growing challenge for Indian public sector banks because competitive environment is increasing in public sector banks.

RISK IN BANKING BUSINESS

The banking industry has a wide array of business lines. A fair idea may be available from the following table:

Business lines

Sub groups

Activities

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Corporate finance

Corporate finance, Municipal/Government finance, Merchant banking, Advisory services

Mergers and acquisitions, underwriting, privatizetions, securitizations, research, government debts, debt and equity syndications, IPO, secondary private placements. Fixed income, equity, foreign exchanges, commodities, credit,

Trading and sales

Sales, market making, proprietary positions, treasury

funding, own position securities, lending and repos, brokerage, debt, prime brokerage.

Retail banking

Retail banking

Retail lending and deposits, banking services, trust and sales.

Private banking

Private lending and deposits, banking services, trust and estates, investment advice.

Card services

Merchant/Commercial/Corporate

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cards, private labels and retail.

Commercial Banking

Commercial Banking

Project finance, real estate, export finance, trade finance, factoring, leasing, lending, guarantees, bill finance.

Payment and settlement External clients Agency services Payments and collections, funds transfer, clearing and settlement.

custody

Escrow, depository receipts, securities lending, corporate actions.

corporate agency corporate trust Asset management discretionary and nondiscretionary fund management Retail brokerage Credit risk retail brokerage

Issuer and paying agents.

Pooled, segregated, retail, institutional, Closed, open. Execution and full services.

Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both) The management of credit risk includes

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a) Measurement through credit rating/ scoring, b) Quantification through estimate of expected loan losses, c) Pricing on a scientific basis and d) Controlling through effective Loan Review Mechanism and Portfolio Management.

Faced by lenders to consumers

Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through the setting of credit limits. Some products also require security, most commonly in the form of property. Consumers may face credit risk in a direct form as depositors at banks or as investors/lenders. They may also face credit risk when entering into standard commercial transactions by providing a deposit to their counterparty, e.g., for a large purchase or a real estate rental. Employees of any firm also depend on the firm's ability to pay wages, and are exposed to the credit risk of their employer. Public Sector Banks are operating in an increasingly deregulated and competitive environment. Increased deregulation is reflected in several key developments over the last decade including a market-determined interest rate environment, freedom to fix both lending and deposit rates and increased competition from new private sector banks which have an aggressive business posture.

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 Assessing credit risk in lending to service sectors, Public Sector Banks needs a methodology different from assessing risks while lending to manufacturing.

Integrated Risk Management Solution In order to control risk, one must first measure it. Measurement is critical to validating management process and improving internal discipline. As more and more business processes become electronic, identifying are responding to risk must become faster. In view of the potential impact and service requirements, risk management has become a real-time concern. without an enterprise wide approach that includes standard data definitions and integrated reporting, institutions cannot develop the consistent and timely view of risk exposures necessary for management decision-making. To comply with wide ranging regulatory demands, financial institutions must understand, control and report risk across the enterprise. Management is being held legally responsible for identifying and managing risks. At some point, rating agencies will likely establish a risk management rating for companies in addition to existing financial ratings.

BUSINESS CHALLENGE IN BANKS Evolution of the real time business environment The developing global marketplace Concern about business continuity and operational reliability Continuous and accelerating technological change The need to limit earnings volatility and enhance shareholder value.

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 But banks find compliance to Basel II norms in the above areas difficult, due to ncreasing number of customer base of the banks, absence of effective risk anagement solution and absence of system interfaces between the existing stand alone applications of the banks.

TRANSPARENCY AND DISCLOSURES

In pursuance of the Financial Sector Reforms introduced since 1991 and in order to bring about meaningful disclosure of the true financial position of banks to enable the users of financial statements to study and have a meaningful comparison of their positions, a series of measures were initiated. Transparency and disclosure norms are assuming greater importance in the emerging environment. Banks are now required to be more responsive and accountable to the investors. Banks move to disclose in their balance sheets information on maturity profiles of assets and liabilities, lending to sensitive sectors, movements in NPAs, besides providing information on capital, provisions, shareholdings of the government, value of investment in India and abroad, and other operating and profitability indicators. The disclosure requirements broadly covered the following aspects: Capital adequacy Asset quality Maturity distribution of select items of assets and liabilities

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 Profitability Country risk exposure Risk exposures in derivatives Segment reporting Related Party disclosures

Transparency and disclosure standards are also recognised as important constituents of a sound corporate governance mechanism.

Banks are required to formulate a formal disclosure policy approved by the Board of directors that addresses the banks approach for determining what disclosures it will make and the internal controls over the disclosure process.

It is a huge challenge for Public Sector Banks to implement a process for assessing the appropriateness of their disclosures, including validation and frequency.

Challenges in Banking Security

Banking as a business involves the management of risks. While much has been said about the financial risks, the risks arising out of the large scale implementation of technology is of recent origin, with banks having taken to large scale use of technology for their normal day-to-day business.

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Security in banks has thus assumed significant proportions, comprising both physical aspects in addition to those relating to Information, Information Systems and Information Technology, all of which have an impact on the reputational risk of a financial organisation. In a world where geographical barriers are losing significance and the death of distances is already a reality, it is but essential that security be given prime importance in a transnational scenario where large sums of money are at stake. While the challenges related to physical security are those which can be confronted with relative ease, the position is much more complicated in respect of IT security. It is widely accepted that security is as effective as the weakest link in a chain. And, in the case of banking, the weakest link, does not relate to the components of technology (which do have an implication although), but on the person who is part of the information supply chain, and is typically the insider in the bank itself. This is supported by studies carried out by international organisations. These studies have indicated that a substantial portion of the breach of security in financial institutions have occurred on account of, or have been triggered with the aid of internal exposures or internal controls being compromised. Against this backdrop, the security requirements of the banking sector need to be assigned high levels of priority. Information Security is something which is best experienced than explained. All of us have at some point of time experienced the flow of information to persons others than to the intended users even in a non-electronic traditional environment

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 With networking and access to information being available at rates much larger than before, Information Security is an activity which provides some comfort to both the policy makers and the users of data. The largest set of functions in the banking sector which has benefited from the advances in IT relate to payment systems since quick, safe and efficient transfer of funds across the length and breadth of the country is the requirement of the day. Security in Payment Systems cannot be addressed in isolation. It requires the integration of work processes, communication linkages and integrated delivery systems and should focus on stability, efficiency and risk control. Yet another prime aspect of concern in a good security policy is the role that the human beings have in a secure computerised environment. It would be advisable to build security features at the application level in respect of banking oriented products, because of the critical nature of financial data transfer. The financial messages should have the under noted features: The receipt of the message at the intended destination The content of the message should be the same as the transmitted one The Sender of information should be able to verify its receipt by the recipient The Recipient of the message could verify that the sender is indeed the person Information in transit should not be observed, altered or extracted Any attempt to tamper with the data in transit will need to be revealed Non-repudiation These features boil down essentially to authentication (to verify the identity of the sender of the message to the intended recipient to prevent spoofing or impersonation),

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authorisation (to control the access to specific resources for unauthorised persons), confidentiality (to maintain the secrecy of the content of transmission between the authorised parties), integrity (to ensure that no changes/errors are introduced in the messages during transmission) and non-repudiation (to ensure that an entity cannot later deny the origin and receipt and contents of the communication). I must add here that in a recent case of a co-operative bank, the entire operations, maintenance and management of the computer systems were totally in the hands of the firm which supplied the computer software and this led to a fraud and loss for the bank. Such cases cause reason for substantial concern. While the aspects relating to physical security leave a lot to be desired with even the most basic security requirements not being in place (like access for unauthorised personnel even to sensitive Cash holding areas), the security features in the computer systems are not fully fool proof in some banks. International standards should be examined and adopted keeping in view the requirements of the Indian banking industry. Banks need to put in place measures which conform to there is policies and ensure the regular, periodical audit. An important issue is relating to the security levels of use within the various operating departments in the banks. The common level of entry is the use of validation of authorised access (in the form of authorised User-Ids) to be further authenticated by correctness of passwords keyed in by the authorised users.

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 Passwords often become passed words in our context with no change at all in the passwords since passwords tend to be rather fixed for long periods of time It is absolutely essential that passwords lapse after certain periods of time generally not exceeding a month at the latest. Authorisation of users is another activity that needs to be closely regulated and monitored. One of the basic requirements for implementation of security and monitoring thereof at the various departments is the need for system administrators. . The proliferation of networks within an office also acts as a negative factor in implementation of strict security features. Further, rights assigned need to be changed upon change of functions assigned to the operative staff and that updation, including those related to staff who retire have to be looked into. There is an imperative need to imbibe a culture of security among all operative functionaries whether officers or other staff and cutting across administrative grading. Access to databases in computer systems and to the data contained therein have to be strictly restricted and not available to any but those authorised to make any changes in case of an eventuality for resolving a software lock / malfunction which is a conscious decision by the authorised personnel taken in conjunction with the head of the office concerned. Change Management is another aspect that needs to be viewed from the security angle.

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 Software (and at times hardware too), undergoes frequent updation and version control and levels of software in use across offices is an issue which needs to be examined in its totality for practicable implementation at all offices / departments.

GROWTH IN BUSINESS

Public Sector Banks should now go global in search of new markets, customers and profits. Some of the Public Sector Banks have their presence in overseas to a limited extent. The London based magazine The Banker has now listed only twenty Indian banks including private sector banks in the list of Top 1000 World Banks. The State Bank of India, the largest bank in India, ranks only 82nd amongst the top global banks. It is not even a 10th in size of the 9th largest bank, Sumitomo Mitsui, which has assets of $950 billion as against SBIs assets of $91 billion. Therefore, our banks are not equipped enough to compete in the international arena. Realising the need to grow in size, the Indian banking system today is moving from a regime of large number of small banks to small number of large banks. As per the Narasimhan Committee (II) recommendations, consolidations around identified core competencies are taking place. Mergers and acquisitions in the banking sector are the order of the day. This trend may lead logically to promote the concept of financial super market chain, making available all types of credit and non-fund facilities under one roof which is challenge for public sectors bank and demand of time.

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ENHANNCING CUSTOMER SRVICE Mahatma Gandhis perception of a customer was as follows:

He is not dependent on us. We are dependent on him. He is not an interruption on our work. He is the purpose of it. He is not an outsider on our premises. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so.

As far as the customer I concerned, he is the pivot of all activities in the era of consumerism. Customer is god in the UK and USA. Customer is the king in Japan. But, the customer is the Boss in India and the Boss is always right.

The Public Sector Banks may need to include customer oriented approach or customer focus in their five areas of businesses such as cash accessibility, asset security, money transfer, deferred payment and financial advices. There are four strategies available to customer relations' managers: To win back or save customers To attract new and potential customers To create loyalty among existing customers and To up sell or offer cross services. In order to develop close relationship with the customers the Public Sector Banks have to focus on the technology oriented innovations that offer convenience to the customers.

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 Today customers are offered ATM services, access to internet banking and phone banking facilities and credit cards. These have elevated banking beyond the barriers of time and space. So providing better services than Private Sector Banks to customer is a challenge for Public Sector Banks. Because a satisfied customer brings in more customers and he is the best advertisement for the bank.

Recommendations

FOR NPA

For strengthening the legal system, the banks may have to consider providing services of trained legal officers at controlling/branch levels, depending upon the quantum of NPA. Banks are to engage services of dynamic young lawyers to have desired momentum in follow-up of suit-filed cases for timely disposal and subsequent execution of decrees.

This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare minimum. There is need for continuous improvement in asset quality by strengthening skill at the grass root level, adopting regular inter-face with borrowers, ascertaining periodical operating performance of the firm etc.

To minimize erosion of asset quality in banking, there is immediate need for implementation of rigorous systems to eliminate diversion of funds by the borrowers

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towards less viable activities such as investments, loans to subsidiaries facing financial woes etc.

Banks should have framework for acceptable compromise proposals and supportive recovery policy directed towards out-of-court settlements.

Appointment of recovery agents, utilizing services of private security agencies of ascertaining means of NPA borrowers etc. are the other areas, which require fresh review.

Quality asset building will also require up-to-date market information on various industries, a deeper and penetrating insight about the financial transactions of large borrowal groups, economic trends in a globalised environment and industry knowledge about new areas for financing like software, infrastructure, service sector and other IT based industries etc.

FOR CORPORATE GOVERNANCE

It is desirable that all the banks are brought under a single Act so that the corporate governance regimes do not have to be different just because the entities are covered under multiple Acts of the Parliament .

Although the Reserve Bank maintains a tight vigil and inspects these entities thoroughly at regular time intervals, the quality of corporate level governance mechanism does not appear to be satisfactory.

Oversight by the board of directors or supervisory board; Oversight by individuals not involved in the day-to-day running of the various business areas;

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Direct line supervision of different business areas; and Independent risk management, compliance and audit functions. Banks need to develop mechanisms, which can help them ensure percolation of their strategic objectives and corporate values throughout the organisation.

Boards need to set and enforce clear lines of responsibility and accountability for themselves as well as the senior management and throughout the organisation.

In order to attract quality professionals, the level of remuneration payable to the directors should be commensurate with the time required to be devoted to the banks work as well as to signal the appropriateness of remuneration to the quality of inputs expected from a member.

The directors could be made more responsible to their organisation by exposing them to an induction briefing need-based training programme/seminars/workshops to acquaint them with emerging developments/challenges facing the banking sector.

FOR MAN POWER PLANNING

They would need to hire people in large numbers over next five years to maintain growth and stay competitive. The entire HR framework needs to be revamped and the skill sets of existing staff needs to be strengthened. The banks have to suitably realign their existing human resources from surplus to deficit pockets and readjust staffing pattern in a computerised environment. Surplus staffs from very large branches which are now computerised, need to be relocated or assigned newer jobs such as marketing etc. Mobility of staff has to be

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negotiated with employees' organizations as a measure to improve organizational efficiency and improve productivity. About 70% staff in each bank constitutes clerical and subordinate staff There is the need to re-define the clerical roles in the bank. There is also a need to enrich clerical roles by introducing discretionary elements in front-line clerical roles and giving them responsibility of higher nature such as initiating correspondence, working in marketing teams, operational roles, public relation roles etc. The banks also need to develop existing staff in newer competencies through a systematic and rigorous training. Needless to say that succession planning in managerial cadre must occupy central concern for bank management.

FOR TALENT MANAGEMENT

Public Sector Banks should not only take care of the sum total of its individual human capital, but also how effectively it draws out the best from its talent personnel at any point of time . Banks have an excellent pool of competent personnel in all the cadres. Such personnel need to be identified, nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career. Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower.

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 Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes, Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times. Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences, both nationally and internationally, to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals. Loops in customer services

Facts about customers

Ninety five percents of customers do not complain even if they are dissatisfied bcoz of indifferent attitude of not to bother unnecessarily and accept such bad service as part of human nature. Because do customers want

1-Customers want control over their decisions 2- Customers want to achieve their goals 3- Customers want to preserve their self respect. 4- Customers want to be treated fairly

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5- Customers want friendly welcome and reception 6- Customers want to know whats going on 7- Customers want a feeling of security and safety 8- Customers want to feel like VIPs 9- Customers want honesty

1- The may I help you counter could not come up to the level of expectation as there is a lack of spirit in implementing it. This can be a vital customer care capsule in the panacea kit of the bank to heal al wounds. 2- The cheques for collection handed over the counter are rarely acknowledged in spite of the RBIs insistence. Recently the RBI advised all SCBs to implement the recommendations of the committee on procedures and performance Audit on public service. It has suggested that cheques either be dropped in a box or tendered at counter when they should be acknowledged. 3- Many times the complaints could relate to discourteous behavior of counter staff-this should be handled carefully. If the customer is correct and has too many such complaints against the staff, a stern action is called for and client must be advised. In sum and substance a good customer service means a broad smile on customers face as they leave the bank after finishing their business.

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Conclusion

Indian Public Sector Banks are facing innumerable challenges such as worrying level of NPAs, deteriorating asset quality, increasing pressures on profitability, asset-liability management, liquidity risk management, market risk management and ever tightening prudential norms. Operating in this demanding environment has exposed banks to various challenges. The post-reform period witnessed the following major challenges for public sector banks in India

Enhancement of customer service; application of technology; implementation of Basel II; improvement of risk management systems; implementation of new accounting standards; enhancement of transparency & disclosures.

The boom in the field of retail banking and the intense competition among the banks to increase the customer base has resulted in the large disbursement of consumer loans, home loans, loans on credit cards, auto loans, educational loans etc. on easy terms without much scrutiny. This has brought with it an increase in the no. of cases of default in loan repayment thus increasing the banks NPAs.

Managing customers is one of the main issues faced by banks. The demands and expectations of the customers grow at a much faster rate than the banks can equip themselves to be with them. If the service levels of the product levels are not up to the customer satisfaction, there is always a danger that the customer might shift his transactions elsewhere. So always give customers more than they expect to get.

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Multiple regulations are the main weakness for PSBs. It has not the single controlling system while private banks have. PSBs are also guided by govt. and controlled by RBI and it has also their union. So there is trice controlling system thats why any policy takes time in being implemented. This is the main reason of delayed progress of PSBS.

The annual report 2007-08 of RBI shows that position of public sector banks is on steady progress. Demand deposits, borrowings and other liabilities are increasing. Assets as current assets and other loan cash credit is increasing which shows a sign of growing network. Balance with banks and money at call and short notice decreased last year. Other approved securities also decreased in comparison to previous year. Consolidated balance sheet of banks shows that banks are on progress. Liabilities and assets have been increased in comparison to last year but even then public sector banks are not progressing equally as private sector banks because of being regulated and controlled system. Last year kisan loan was forgiven worth Rs. 60,000 crores and mostly major no frill A/cs has been open in public sector banks. So NPA has been increased because operational cost has been increasing due to more A/cs and transaction and PSBs are liable to open branches in rural areas.

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Executive summery

The world of banking and finance is changing very fast and banks are transforming themselves with the focus on knowledge. Therefore there is a need for todays bank employees to keep themselves updated with a new set of skills and knowledge. Banks and technology are evolving so rapidly that bank staff must continually seek new skills that enable them not only to respond to change, but also to build competence in handling various queries raised by customers as well.

Indian banks are facing innumerable challenges such as worrying level of NPAs, deteriorating asset quality, increasing pressures on profitability, asset-liability management, liquidity risk management, market risk management and ever tightening prudential norms. Besides this, the disclosure requirements are also increasing.

The primary challenge for banks is to provide consistent service to customers irrespective of the kind of channel they use. Banks in India have been working towards a vision that includes transformed branches, enhanced telephone services, and leading edge internet, banking functions that provide a consistently positive multi-channel experience for customers. Even for PSBs, the ongoing and future investments in technology are massive. It is expected that the provision of financial services through a versatile technology platform will enable these banks to acquire more customers, cut costs, and improve service delivery. Though many positive signs are already visible in India, including a higher acceptance of technology by

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banks and customers, it is a reality that most projects have not yet been deployed on a large scale.

However, challenges before public sector banks are plenty and of a different kind. While they have to handle volumes which are mind boggling, there are also issues of legacy, old habits and political pressures. Systems of accounting, control and delegation were set up decades ago and adoption of technology in terms of real time banking and its compatibilit y with all phases of banking is not yet adequately perceived. Further more the security risk involved in computerization is directly related to the size of the network. For PSBs, the major problems are in the form of security risks, network downtime, scarcity of trained personnel, expensive system upgrades and recurring costs given the massive scale of their current operations.

Banks rely on innovative ideas to increase their earnings. Naturally, idea generators (human capital) become an even more important resource than the physical and financial ones. The entry of new generation private sector banks and evolving technology has been changing the face of the Indian banking industry. It is necessary for PSBs to adopt a standardized customer services code to remain competitive and profitable.

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BIBLIOGRAPHY

www.rbi.org.in RBI newsletter Google search engine en.wikipedia.org Annual report 2007-2008

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