OBJECTIVES OF THE STUDY

 Challenges for public sector banks.

 Competition level with foreign and private banks.

 Customer needs and wants towards the banking.

 How technology is more important in banking sector.

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 Executive Summary

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 today’s 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 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 compatibility 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.

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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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 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.

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.

5
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
ServicesSectorduring1991.
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 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
thesystem.

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.

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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.

Banks have undergone a great transformation during the last 40 years of nationalization with large
branch network and implementation of banking sector reforms. Banks have become more
competitive, productive and profitable. The introduction of prudential norms has resulted in better
risk management and improvement in recovery performance. There is scope for further
improvement in resource mobilization, lending operations and financial inclusion.

July 2009 was a landmark month in the annals of the Indian banking system, when 14 major
banks were nationalized. The period since then can be broadly divided into three phases,
namely, Phase-I (from 1969 to 1990), Phase-II (from 1991 to 1998) and Phase-III (from 1999
to till date). This article intends to study the important features of these three phases and to
draw the lessons from the past to enhance the working of the banking system.

Phase-I (1969-1990)

Financial inclusion, which is one of the important objectives of the Eleventh Five Year Plan, in fact,
was given importance by the policy makers in the late 1960s itself. The government introduced
social control and subsequently nationalized 14 major commercial banks in 1969. These initiatives
had a positive impact on spread of bank branch network across the country. The move accelerated
the process of deposit mobilization from rural areas and improved the flow of credit to the rural
folk. During the 1980s, six more commercial banks were nationalized and the banking sector was
transformed into a system dominated by the public sector. This phase also included setting up of
Regional Rural Banks (RRBs), in the year 1975, to meet the needs of those residing in the
underdeveloped areas, where cooperatives were not strong. In the mid-1980s, some efforts were
made to liberalize and improve the profitability, health and soundness of the banking sector.
However, it was not until the end of 1990s that the real process of financial sector reforms had
begun. The phase from nationalization of banks in 1969 till end of 1990 can be considered as one
that resulted in physical achievement of targets set before the banking sector as a result of

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nationalization. The following section describes the broad quantitative trends in the first phase. The
data base used pertains to scheduled commercial banks from December 1969 to March 1991.

During this phase, of nearly 21 years, the bulk of the territorial spread of branch network took place,
particularly in rural areas and underdeveloped regions. The number of branches of scheduled
commercial banks went up significantly from 8,187 to 61,724 (10% growth per annum). The
number of rural branches commendably rose to 35,134 from 1,443 (16.4% growth per annum),
resulting in the proportion of rural branches going up from 17.6% to 56.3%. As a result of the rapid
branch expansion, the average population served by a bank branch, which was 65,000 at the time of
nationalization (88,000 for rural areas) decreased to 14,000 (17,000 for rural areas). Large scale
branch expansion also boosted deposits and credit of the banking system, especially in rural areas.
During this phase, the deposits showed a significant increase from Rs. 4,822 cr to Rs. 2,00,568 cr
(19.4% growth per annum). Rural deposits rose from Rs. 329 cr to nearly Rs. 31,010 cr (24%
growth per annum). The credit of the banking system expanded from Rs. 3,467 cr to Rs. 1,24,203 cr
(18.5% growth per annum). Rural credit went up from Rs. 115 cr to Rs. 18,539 cr (27.3% growth
per annum). But the Credit Deposit (CD) ratio for the banking industry gradually declined from
72% to 62%, whereas the CD ratio in rural areas gradually increased from 37.6% to 60%. The share
of credit to agriculture in total bank credit shot up from 2.2% to 16%.

All these quantitative achievements in the first phase did help in spreading the banking habit across
the breadth and length of the country. However, it also affected the financial health of the banking
institutions. Banks did not pay adequate attention to their profitability, asset quality and soundness.
Lack of competition and target-oriented approach resulted in a decline in productivity and efficiency
of the system. The increase in credit to the priority sector led to reduction of credit to other sectors.
Attempts were, therefore, made to bring in some financial discipline through introduction of norms
for disbursal of credit to the corporate sector. But, the norms were found to be too stringent. The
high statutory pre-emptions also eroded profitability of the banking sector. Towards the end of the
first phase, the banks had a large volume of Non-Performing Assets (NPA) and a weak capital base.

Phase-II (1991-98)

This phase began with the introduction of financial sector reforms. These reforms were introduced
keeping in view the main issues faced by the banking sector towards the end of the first phase. They
focussed on strengthening the commercial banking sector by applying prudential norms, providing

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operational flexibility and functional autonomy, apart from strengthening supervisory practices.
Entry of private sector banks was allowed into the system to infuse competition.

An analysis of the relevant parameters during this phase indicates a slowdown in the tempo of
infrastructure expansion. The number of bank branches, which were 61,724 at the beginning of this
phase, showed an insignificant growth at a rate of 0.64% per annum to reach a level of 64,939 by
March 1999. Branch expansion suffered a setback, particularly in rural areas and underdeveloped
regions. Though the reform process of the 1990s did not prevent the banks from expanding rural
branch network, and, in fact, the Narasimham Committee did specifically emphasize the importance
of rural institutions and branch banking, in reality, the opposite happened. Combined with the focus
on the bottom line and the prudential requirements, the scheduled commercial banks halted the
spread of branch offices in rural and underdeveloped regions. Consequently, the spread of bank
branches tended to be concentrated in urban and metropolitan centers. In fact, the number of rural
branches declined in absolute numbers by 2,294 from 35,134 to 32,840, while the number of urban
and metropolitan branches increased by 2,860, from 15,024 to 17,884. The aggregate bank deposits
showed a growth rate of 17% during the period. They grew from Rs. 2,00,568 cr to Rs. 7,14,025 cr.
This was mainly on account of growth of metropolitan deposits, whose share in the total deposits
increased from 33.4% to 42.3%. The credit of scheduled commercial banks during the second phase
increased at the rate of 14.6% per annum growing from Rs. 1,24,203 cr to Rs. 3,68,837 cr. This was
also on account of growth of credit in metropolitan centers, whose share in total credit went up from
39.4% to 43%. Until the early 1990s, the CD ratios for rural branches of banks have improved and
they crossed 60% in terms of sanction and 90% as per the utilization. But, both declined thereafter
and remained below 60%. In semi-urban branches, they always remained at 40% or thereabout.

A major achievement of this phase was the significant improvement in the profitability of the
banking sector. Some improvement was also observed in the asset quality, capital position and
competitive conditions, although there was still significant scope for further improvement.
However, banks, during this phase, developed risk aversion as a result of which, credit expansion
slowed down, in general, and to agriculture, in particular.

Phase-III (1998 to till date)

The thrust during the third phase was on further strengthening the prudential norms in line with
international best practices, improving credit delivery, promoting financial inclusion along with
better corporate governance and better customer service.

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Prudential norms were further strengthened in the third phase. While strengthening the prudential
norms, it was necessary to ensure that risk aversion, which had suffered a setback in the second
phase, did not aggravate further. Focussed attention was paid to put in place several appropriate
institutional measures to enable banks to recover their NPAs. Consequently, the NPAs came down
sharply. As the asset quality began to improve, banks started expanding their credit portfolio.
Capital position of the banks also improved significantly. Competition intensified during this phase
as a result of which the margins got reduced. However, despite this scenario, the banks improved
their profitability with the help of increased volumes and improved asset quality. As regards
corporate governance, two issues which needed attention were: (a) concentrated ownership and (b)
quality of management. Corporate governance practices were strengthened to address these issues.
Another major achievement was a sharp increase in flow of credit to agriculture and SME sectors.
With a view to bring a larger segment of excluded population within the banking fold, banks were
advised to introduce the facility of `no frills' account. About 13 million no frills accounts were
opened within a short span of two years. This phase also witnessed some significant changes with
the implementation of technology in banks. Increased use of technology, combined with some other
specific initiatives, helped improve operational efficiency of the banks.

As regards the quantitative dimensions of various parameters during this phase, the number of
branches increased from 64,939 in March 1999 to 71,839 by March 2007. This period witnessed a
decrease in rural branches by 2,306 and an increase in semi-urban branches by 2,193, in urban
branches by 3,072 and in metropolitan branches by 3,914. Thus, during this phase, all segments of
the Public Sector Banks (PSBs) (SBI and subsidiaries, nationalized banks and RRBs) reduced the
absolute number of bank branches in rural areas and sought to expand in other areas. During the
eight year period, the deposits rose from Rs. 7,14,025 cr Rs. 26,08,309 cr at an average annual
growth rate of 17.6%. The major growth was in metropolitan deposits, which grew at 21% per
annum. Analysis of the ownership of deposits suggest that the share of institutional deposits, as
distinguished from that of individuals and other segments of the household sector, has been on the
rise in recent years. Apart from the growth in the shares of the private corporate sector, the
government sector share also showed a steep rise. The credit of scheduled commercial banks grew
from Rs. 3,68,837 cr to Rs. 19,28,913 cr over the eight year period, with the share of metropolitan
branches going up significantly from 43% to more than 50%. This concentration of banking
activities reflects another dimension, namely, that the banks' lending increasingly shifted in favor of

10
retail activities in metropolitan and some important urban centers. Although the credit to agricultural
sector showed some improvement in the volume on account of efforts made by the government, the
outreach of agricultural credit, in terms of retail outlets and in terms of number of farmers serviced,
declined in the recent past. Most of the banks did not achieve the target of 18% stipulated for
agriculture lending. Thus, basically large corporates and retail sector benefited from credit
expansion during phase III.

BANK NATIONALIZATION & PUBLIC SECTOR BANKING

Organized banking in India is more than two centuries old. Till 1935 all the banks were in private

11
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.

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 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 day’s 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.

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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%.

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

Nationalized Banks in India

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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 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.

Banking Sectors in India

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PUBLIC 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, 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- Private banks where the ownership is not with the government hands. 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 sole-proprietor's/general-partners' assets.

FOREIGN 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.

Structure of Banking in India

15
 Reserve Bank of India

Scheduled Non-Scheduled
Banks Banks

Scheduled Scheduled
Commercial Banks Cooperative Banks

Public Private Regional Scheduled Scheduled

Foreign
sector Sector Rural Urban State
Banks
banks Banks Banks Cooperative Cooperative
Banks Banks

Nationalized SBI & its Old Private New Private

Banks Associates Sector Banks Sector Banks

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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.

(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 thepublic.

17
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.
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
• Indian bank
• Oriental bank of commerce
• Punjab National bank
• Punjab and Sind bank
• Syndicate bank
• Union bank of India
• United bank of India
• Vijya bank

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

• IDBI bank
• Axis bank
• Bank of Punjab
• Bank of Rajasthan
• Catholic Syrian bank
• Centurion bank
• City Union bank
• Dhanalakshni bank
• Devolvement credit bank
• Federal bank
• HDFC bank
• ICICI bank
• Induslnd bank
• ING Vysya bank
• Jammu & Kashmir bank
• Karnataka bank

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 • Karur Vysya bank
• Laxmi Vilas bank
• South Indian bank
• United Western bank
The following are the Foreign Banks in India

• ABN – AMRO bank

• Abu Dhabi commercial bank
• Bank of Cevion
• BNP Paribas bank
• Citi bank
• China Trust Commercial bank
• Deutsche bank
• HSB bank
• JP Morgan chase bank
• Standard Charted bank
• Scotia bank
• Taib bank

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.

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.

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 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 India’s (RBI's) latest report, Trend and Progress of Banking in India,
public sector banks rule the roost in customer satisfaction.

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 1.39—more than 10 times that of SBI.Citi bank 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

20
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 sbi’s profit-complaint ratio of 4.1 for
example is much higher than ICICI and Citibank

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 branch—more 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 thelist.

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.

At Citibank’s 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 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
nextworkingday.”

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

21
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.

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

22
 Supervision of Bank’s Activity By:
RBI

RBI does the currency management that's not only the talent, it also regulate and supervise the
monetary system which is done by banks and other institution.

On the establishment of RBI was the main object credit control and currency management, RBI
issue the notes on the basis of Minimum reserve system there is Gandhiji's portrait on the note as an
emblem.

Notes are printed by RBI and coins are minted by GOI, but distribution is done by RBI of both.

Notes are printed at its presses and then sent to RBI offices, RBI gives it direct to the public and by
currency chest (cc) and the cc also gives it to other bank branches.

The consignment of notes is received.by two joint custodians from press representative, and then
kept in vault after weighting where security with cc camera is performing.

Notes and coins on counters are exchanged by the public and bank claim, in banking hall working
two coin vending machine from which coins can be taken in working time.

If the excess money goes into circulation It causes the inflation, To control this situation RBI takes
action and suck out the money by banking & other transaction

23
 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.

24
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 two-fifths 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

25
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.

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.

26
 FUNCTIONS OF RBI

ISSUER OF RELATED
MONETARY REGULATOR & MANAGER OF FUNCTION
CURRENCY
AUTHORITY SUPERVISOR FOREIGN S
Y
EXCHANGE

BANKER BANKER TO
TO BANKS GOVERNMENT

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:

27
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 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.

28
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)

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.

29
 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, 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. 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 C-up, CAPITAL
issuance ADEQUACY
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 :

A-ASSET OR CREDIT QUALITY

M-MANAGEMENT

E-EARNINGS

30
L-LQUIDITY

S-SOLVENCY
 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. Transparency and disclosures
9. Challenges in banking security
10.Competition with private sector banks
11.Growth in business
12.Enhancing customer service

31
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 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.

Globalization – a challenge as well as an opportunity

The benefits of globalization have been well documented and are being increasingly recognized.
Globalization of domestic banks has also been facilitated by tremendous advancement in
information and communications technology. Globalization has thrown up lot of opportunities but
accompanied by concomitant risks. There is a growing realization 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.

32
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.

What Does a Customer of Today Want?

Before understanding that what are the challenges for public sector banks in india, it
is important to understand first that what are exactly customer needs, wants and
expectations towards the banking activities

The customer of today is wise, rational, intelligent and also choosy. The major deciding factor for
the class customer is value for money and for the masses, it is the return on money. In case of the
first category clients, there are new age banks which believe in offering best value for money by
offering quick and efficient services, such as fast remittances, wealth management, advisory,
transaction banking, private equity syndication, loan syndication, mergers and acquisition and so on,
apart from offering normal banking services.

For the second type of customers, there are banks that have specialized in offering personal banking
services. These banks offer services, such as mutual funds, bancassurance, demat services, tax
payments, etc. It is a fact that customers look for convenience when banking. These banks, on their
part, are bringing convenience to them by offering various services, such as recharging of the
mobile phones through ATMs, making tax payments through ATMs, allowing money transfer
through ATMs and Internet banking.

There is one more important factor, which has emerged out for the masses and that is providing
return for the masses residing in the six lakh plus villages of the country. Of late, the potential of
this rural market has been recognized by the big corporates. The data collected by NSSO shows that
45.9 million farmer households in the country (51.4%), out of a total of 89.3 million households do
not have access to credit, either from institutional or non-institutional sources. Only 27% of total
farm households are indebted to formal sources (of which one-third also borrow from informal
sources). In other words, 73% of farmer households do not have access to formal credit sources and
there are still many areas, which are totally unbanked. Even after 40 years of nationalization, India

33
could set up only about 30,000 odd rural branches, and these are catering to about 6,00,000 villages,
i.e., approximately there is one branch for every 20 villages.

This fact has created huge opportunities for the banks to fulfill their social obligations. The
branchless banking model is a step towards taking the banking actually to the masses. Banks are
now coming up with different models of business to meet the needs of the corporate customers on
the one hand and rural masses on the other.

What we understand is that the banks are in the process of getting themselves classified as financial
supermarkets, and not just banks. The banking industry would never have thought of such range of
products being sold from their counters, as well as beyond the counters, at the doorstep of the
customers

34
 1) Implementation of Basel II

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.

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. 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

• 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.
• 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 bank’s risk profile and
control environment.
• 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.
• 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.

35
 2) 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
bank’s branch for any sort of transaction. You can simply login with the internet-banking 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
private banks. Technology helps in having a huge branch network easily and also it reduces the
operational cost this may be clarified by an example as:-
Operational cost per transaction of an account via different type is-
 Via computers on counter- 40 Rs.
 Via ATM - 16-17 Rs.
 Via online - 10 Rs

So it is cleared that manually/direct transaction cost comes very high and electronically and online it
is very low. So that’s 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

36
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 bank’s 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 banking systems have sophisticated
tools that provide effective management of the users’ assets.

Customer Expectations and Service Level in E-Banking Era

It is almost 15 years since the Indian banking sector was liberalized and paradigm shift happened in
the Indian banking services. All banks have either totally implemented `core banking systems' or
halfway through. The results of a survey were obtained from 292 respondents about their views on
electronic banking channels, indicate that the banks are exceeding the expectations in technology
based services; and their perceived service level on branch network is below the expected levels of
the respondents. This result is in tune with the respondents' opinion on the perceived `gap' with the
bank because of the introduction of technology, and on the necessity of human contact with the
clients by the banks. This throws up a challenge to banks. Technology alone cannot give a
sustainable competitive advantage for the banks. When all banks introduce IT, it will lose its
position as a differentiator. Beyond a point, IT along with `personal touch' will be necessary for the
banks to retain existing clients and to attract new ones. Banks have to incorporate this in their
operational strategy.

Introduction

Technological leap

37
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.

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

3) 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.
The chart below shows data for NPA going back to 2.3-1.0. The two lines plotted are non-
performing 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 don’t 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.

38
The position of classification of NPA is summarized below:

Categories of NPAs

Standard Assets These are loans which do not have any

problem are less risk
Sub-standard Assets These are assets which come under the
category of NPA for a period of less
then 12 months.
Doubtful Assets These are NPA exceeding 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.

39
 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 Provision requirements

Classification
• Standard Assets 5%

• Sub-standard 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 and net NPA of different sector of bank

Table 1
(Year ending 31st March gross and net NPA in %)

category Net NPA / Net Advance

2001 2002 2003 2004

40
Public sector bank 6.74 5.82 4.53 2.98
Private sector 2.27 2.49 2.32 1.32
Foreign bank 1.82 1.89 1.76 1.49

Table 2
(Year ending 31st March gross and net NPA in %)

Category Gross NPA/ Gross Advance

2005 2006 2007 2008
Public sector bank 12.37 11.09 9.36 7.79

41
 Private sector 8.37 9.64 8.07 5.84
Foreign bank 6.84 5.38 5.25 4.62

Management of NPA

The table I&II shows that during initial stage the percentage of NPA was higher. This was due to
show ineffective recovery of bank credit, problems 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

42
3. Debt Recovery Tribunals
4. Credit information on defaulters and role of credit information bureaus

FURTHER RECOMMENDATIONS:

The Indian banking sector is facing a serious problem of NPA. The extent of NPA is comparatively
higher in public sectors banks. (Table I&II). 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.

4) 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.

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.

43
  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.
 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.
 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.
 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 .So corporate governance is
a key challenge for Public Sector Banks in the era of Globalization.

5) MAN-POWER PLANNIG
 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 8 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

44
 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 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.. The
financial sector services are undergoing a rapid change in terms of the demographics,
regulatory requirements and technology because of the high revenues generated.
 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.

6) TALENT MANAGEMENT

 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

45
 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.

7) LOAN WAIVER: A NEW CHALLENGE

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 :

46
 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 installments 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.
 Other farmers, i.e. owning more than 5 acres or more than 2 hectares, will get one-time
settlement (OTS) relief.
 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 non-
performing assets in agriculture loans.
 But the biggest drawback of the scheme is its impact on the credit culture in the banking
system.
 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.
 There will be nothing to prevent governments from writing off farm loans every five years,
just ahead of general elections.

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 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

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.

8) 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.

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 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
 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 bank’s 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.

9) 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.
 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.
 Against this backdrop, the security requirements of the banking sector need to be assigned
high levels of priority.
 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.
 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 computerized 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.

 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.
 Banks need to put in place measures which conform to there is policies and ensure the
regular, periodical audit.

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  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.
 It is absolutely essential that passwords lapse after certain periods of time – generally not
exceeding a month at the latest.
 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.
 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.
 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.

10) COMPETITION WITH PRIVATE SECTOR BANK

As we all know that in this new era more and more private and foreign banks are spreading
their banking facilities by providing various kind of attractive services like:
 they also provide service to collect the cheques from home.

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  their technology facilities is also high-tech.
 customer handling process is also just like of friendly.
 Any service request and then particular feedback is also fast.
 All service time is so much less than the public banks.

11) 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 SBI’s assets of $91 billion.
 Therefore, our banks are not equipped enough to compete in the international arena.
 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.

12) ENHANCING CUSTOMER SERVICE

Mahatma Gandhi’s perception of a customer was as follows:

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“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 increase 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.
 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

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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 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

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 • 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;
• 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 bank’s 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.

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  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 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.
 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

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 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
5- Customers want friendly welcome and reception
6- Customers want to know what’s 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
RBI’s 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.

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In sum and substance a good customer service means a broad smile on customer’s face as they
leave the bank after finishing their business.

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. 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 bank’s 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.
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 that’s why any policy takes time in being implemented. This is
the main reason of delayed progress of PSBS.
• 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.

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 • 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.

Overall Scenario and the Future Prospects

Currently, banking in India is fairly mature in terms of product range. As far as the reach in rural
India is concerned, it still remains a challenge for the private and foreign banks. PSBs including
RRBs have also started reducing their presence in rural areas. The Reserve Bank of India has
recently given permission to commercial banks to utilize services of NGOs/ Farmers' Clubs,
cooperatives, community-based organizations, IT-enabled rural outlets of corporate entities, Post
Offices, insurance agents and micro-finance institutions to work as bank correspondents (BCs) for
spread of banking services to unbanked areas. The BCs are allowed to conduct banking business as
agents of the banks at places other than the bank premises. BCs should, not just be used for opening
and servicing no-frills accounts, but for the full range of financial activities. Banks are also
permitted to collect reasonable service charges from the customers in a transparent manner for
delivering the services through the BCs. This would make banking services to customers in
unbanked areas more expensive, as compared to customers in other areas. In terms of quality of
assets and capital adequacy, Indian banks are considered to have clean, strong and transparent
balance sheets, relative to the banks in comparable economies in its region.

However, there is ample scope for improvement in several areas including resource mobilization,
lending operations, financial inclusion, efficiency, productivity and soundness. As regards resource
mobilization, banks have a major role to play in conversion of unproductive physical savings into
financial savings to meet the resource requirements of India's fast growing economy. Banks also
need to explore new ways of broadening their depositor base by providing new financial products
demanded by relatively younger working population in urban and metropolitan areas and by
offering customized products and features suitable to individual risk return requirements of rural
and semi-urban areas.

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Although there was some improvement in credit growth to agriculture and SME sectors in the third
phase, there is need for more concerted efforts to increase the flow of credit to these sectors in view
of their importance in the economy. Moreover, the growth should, not be only in terms of volume of
credit, but also in terms of number of farmers/units serviced. It is also necessary for the government
to create an enabling environment by augmenting credit absorption capacity of these areas through
measures, such as improving irrigation facilities, creating rural roads and other infrastructure. There
is also a need to introduce a proper policy on risk management in agriculture. Credit assessment
capabilities of banks need improvement to ensure a steady flow of credit to SMEs. Cluster-based
lending and credit scoring, which has proved quite effective in many countries, may also be
introduced.

While there has been a significant improvement in financial inclusion in recent years, several
challenges still need to be addressed. Financial exclusion is not confined to rural areas alone. It
exists in huge parts of urban and metropolitan areas too. It is necessary to do a proper assessment of
the problem of financial exclusion. There is a need to design appropriate products to suit the precise
requirement of low income earners supported by financial literacy and credit counseling and also
investment in human development such as health and education to improve absorption capacity.

Various factors, which contributed to improved efficiency and productivity of banks, in the recent
past, are: advancement in technology, reduction in statutory pre-emption and NPAs and
improvement in capital adequacy ratio. However, there are some areas which need urgent attention.
The intermediation cost in India, driven largely by high operating costs, is still steep by global
standards. As competition intensifies, the net interest margins of banks are likely to come under
pressure. Banks, therefore, need to focus on non-interest sources of income to sustain their
profitability. One of the areas of concern for PSBs is the low volume of business per employee. This
is almost one half of that of the new private sector banks. PSBs, therefore, need to strive further to
improve their manpower productivity and bring it on par with that of the new private sector banks.
Similarly, there is a need for increased absorption of technological innovations by several banks to
further augment the productivity of the banking sector through changes in processes and
improvement in human resource skills. These measures are also expected to help in further
improving customer service in the banks. The banking system should continue to focus on

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strengthening the safety and soundness on a long-term basis so that the benefits of increased
competition and greater efficiency can be fully realized.

REFRENCES

WEB_SITE
• www.rbi.org.in
• www.finance.indiamart.com

SEARCH ENGINE
• Google
• Wikipedia

NEWS PAPERS
• RBI newsletter

REPORTS
• RBI Annual report 2007-2008

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