PERCEPTION OF EMPLOYEES AT BANKS TOWARDS

USAGE OF BANKING SERVICES BY CUSTOMERS

Dissertation Submitted to the

Padmashree Dr. D.Y. Patil University
in partial fulfillment of the requirements for the award of the
Degree of
MASTERS IN BUSINESS ADMINISTRATION
Submitted by:
Ankit Parekh
(Roll No. 15)

Research Guide:
Prof. Vani Kamath
Department of Business Management
Padmashree Dr. D.Y. Patil University
CBD Belapur, Navi Mumbai
February 2010

1
 DECLARATION:

I hereby declare that the dissertation “PERCEPTION OF

EMPLOYEES AT BANKS TOWARDS USAGE OF BANKING
SERVICES BY CUSTOMERS” submitted for the M.B.A.
degree at Padmashree Dr. D.Y.Patil University’s Department
Of Business management is my original work and the
dissertation has not formed the basis for the award of any
degree, associate ship, fellowship or any other similar titles.

Place: Navi Mumbai Signature of the student:

Date:

2
 CERTIFICATE
This is a certify that the dissertation titled “PERCEPTION OF
EMPLOYEES AT BANKS TOWARDS USAGE OF BANKING
SERVICES BY CUSTOMERS” is the bonafide research work
carried out by Ankit Parekh of M.B.A at Padmashree Dr.
D.Y.Patil University Department Of Business Management
during the year 2008-2010, in partial fulfillment of the
requirements for the award of degree of Master In Business
Administration and that the dissertation has not formed the
basis for the award previously of any degree, diploma,
associate ship, Fellowship or any other similar title.

(Prof. Vani Kamath)

DR. R. Gopal,

Director,

Padmashree Dr.D.Y.Patil University

Department of Business Mgt.

Place: Navi Mumbai

Date:

3
 ACKNOWLEDGEMENTS

In the first place, I thank the Padmashree Dr. D. Y. Patil University,

Department of Business Management, Navi Mumbai for giving me an
opportunity to work on this project. I would also like to thank Prof.
Vani Kamath, Lecturer, Department of Business Management,
Padmashree Dr. D.Y. Patil University, Navi Mumbai for having given
me her valuable guidance for the project. Without her help it would
have been impossible for me to complete the project.

I would also like to thank various people who have provided me with a
lot of information and in fact even sharing some of the confidential
company documents and data – many of which I have used in this
report and without which this project could not have been completed.

I would be failing in my duty if I do not acknowledge with a deep

sense of gratitude the sacrifices made by my parents and thus have
helped me in completing the project work successfully.

Place: Mumbai

Date: Signature of the student.

4
 Index

SR. NO. CONTENT PAGE NO

1. Declaration 2

2. Certificate 3

3. Acknowledgements 4

4. List of Tables and Figures 7

5. Executive Summary 8

6. Objectives of the study 10

7. Problem Definition 11

8. Research Methodology 12

9. Literature Review 13

10. Introduction of Banking in India 26

11. Banking services in India 39

12. Financial and Banking Sector Reforms 58

13. Public Sector Banks V/S Private Banks 79

14. Indian Overseas Bank 86

15. Axis Bank 104

5
16. SWOT Analysis of Indian Banks 128

17. Challenges Facing Banking Industry in 133

India
18. Case Study 147

19. Analysis of Indian Overseas Banks 152

20. Major Findings of the study 159

21. Recommendations and Conclusion 160

22. Recent trends in Banking Sector and 161

Conclusion

23. Annexure - Questionnaire 170

24. Bibliography 172

6
LIST OF TABLES AND FIGURES

Content Page No
Major Banks in India 37
Fact Files of banks in India 77
Net Interest Margins 82
Cost to income ratios 83
Other income to total income 84
Business Growth of IOB 95
Yield on earning assets and cost of 97
deposit movement
Enhancing fee income contribution to 98
total income
Outstanding return ratios 99
Price, Earnings and Dividend of IOB 101
IOB – Report Card 103
Expanding reach of Axis bank 115
Incremental Assets 116
Comparison on the basis of 7 p’s 119
SWOT analysis of IOB 102
SWOT analysis of IOB (in HR context) 138
Analysis 152 - 158

7
Executive Summary

Without a sound and effective banking system in India it cannot have a

healthy economy. The banking system of India should not only be hassle
free but it should be able to meet new challenges posed by the technology
and any other external and internal factors.

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

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

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

The first bank in India, though conservative, was established in 1786. From
1786 till today, the journey of Indian Banking System can be segregated
into three distinct phases. They are as mentioned below:

Early phase from 1786 to 1969 of Indian Banks

Nationalization of Indian Banks and up to 1991 prior to Indian banking
sector Reforms.

New phase of Indian Banking System with the advent of Indian
Financial & Banking Sector Reforms after 1991.

In India the banks are being segregated in different groups. Each group
has their own benefits and limitations in operating in India. Each has their
own dedicated target market. Few of them only work in rural sector while
others in both rural as well as urban. Many even are only catering in cities.
Some are of Indian origin and some are foreign players.

8
With years, banks are also adding services to their customers. The Indian
banking industry is passing through a phase of customers market. The
customers have more choices in choosing their banks. A competition has
been established within the banks operating in India.

With stiff competition and advancement of technology, the services

provided by banks have become more easy and convenient. The past days
are witness to an hour wait before withdrawing cash from accounts or a
cheque from north of the country being cleared in one month in the south.

9
Objectives of the Study:

1. To study the 7 p’s of banking sector.

2. To understand various challenges of banking sector

3. To study the various services offered by banks

4. To analyze Indian Overseas bank and other banks

6. To understand the recent trends in banking sector

10
Problem Definition:

To study the challenges faced by the banking sector like technology up

gradation, customer centric, response to competition,
transparency/accountability, skilled workforce and overcome it.

11
Research Methodology

PRIMARY DATA:-

Data is collected by survey method through filled questionnaire.

RESEARCH INSTRUMENTS:-

Questionnaire design to gather the information from respondents having

multiple choice questions, open-ended questions.

SAMPLING SIZE: 30

SELECTING OF SAMPLING SIZE: -

All sampling units are chosen randomly. These are mainly banks.

Secondary Data

1. Articles collected through business journals & magazines,

periodicals, abstracts

2. Articles on current issues on banking sector

3. Internet

12
 Literature Review

1. “Theory and Practice of Banking”, K.K. Upadhyay, Pearl Books,

First Published – 2008

Although ‘banking’ is an old activity and has its roots in economics, finance
and commerce, the word ‘banking technology’ is of recent origin. The book
offers much broader meaning and more realistic and operationally sufficient
perspective on ‘banking technology’. Conducting efficient banking
operations and associated business involves managing

A) The information and communications technology that drives the

banks’ core business
B) The customer relationships and
C) Risks associated with conducting its business with customers and
other banks and financial institutions.

The book focuses on three major aspects:

a) Services Management
b) Business Management
c) Risk Management

The book throws light on how banking system is essential to an understand

how money works. A good way to understand how banks work is to
imagine starting your own bank. The first thing is put up some of your own
money. You won’t receive a banking license unless you have your own
capital at risk.

Since bankers have no resources initially, they have to raise them from
investors. Deposit financing introduces rigidity into the bank’s required
repayments. This enables the banker to commit to repay if he can. All
banks face a perfectly competitive deposit market where deposits flow
freely to any bank that can credibly repay the market clearing rate of return.

13
 2. “MICROFINANCE for BANKERS and INVESTORS”, Elisabeth
Rhyne, Tata McGraw-Hill Edition 2009

The book argues that through inclusive finance, companies can make
money and help solve the global problem of poverty. By inclusive finance
we mean opening access to high-quality financial services to everyone who
needs them, especially low-income and previously excluded people. The
book provides a road map for business executives and investors thinking
about greater involvement in inclusive finance. The book is divided into 4
parts.

Part 1 is related to the market, beginning up close with portraits of three

clients from different continents and then stepping back to the scale and
purchasing power of the global market. It describes who is serving the
market today and who is not. It examines the unique challenges of
providing financial services for low-income people and how companies can
solve these challenges in designing products like housing finance,
microinsurance and remittances.

Part 2 asks about strategic entry points. Three main business models that
companies are using to get involved: banks launching their own
microfinance operations, partnerships between banks and retail networks
to get services closer to customers and investors putting debt and equity
into microfinance institutions.

Part 3 discusses the building blocks of an inclusive financial system, where

some of the most exciting new developments are taking place, like the
penetration of card – based payments, mobile phone banking, and credit
scoring.

Part 4 talks about social responsibility. Inclusive finance gives companies

a great opportunity to align social value with long-run business success if
they incorporate social issues creatively into strategy.

14
 3. “BANKING AND ITS CREDIT CREATION”, C.N. Reddy, Pearl
Books, First Published 2008

The book talks about how the lending and borrowing was mainly between
individuals, and what was meant by usuary in these transactions. People
borrowed and returned implements, animals, foodstuff, etc from their
friends, neighbours and relations. When money came into being people
borrowed that too and returned. It was all on the basis of mutual help – the
borrower today may be the lender tomorrow and vice versa. As time went
by professional moneylenders appeared on the scene, and they demanded
a fee for the use of their money. This fee is now called interest, but till a few
countries ago it was called usury.

Finance is the key to investment and hence to the process of growth.

Providing saved resources to others with more productive uses for them,
raises the income of saver and borrower alike. Without an efficient financial
system lending can be both costly and equally risky. The first concern in
any developing economy is lack of efficient mechanism of mediation
between highly organized financial institutions and highly unorganized
private savers whose savings constitute the foundation of the financial
market. The constraints and loopholes have to be dully addressed and
plugged promptly.

Currently, banks seem to be the prime targets of the government’s

reforming zeal. Having encourages foreign acquisition, consolidation and
universalization in the banking system, the Finance Ministry’s current thrust
seems to be to find a host of new areas of activity for these institutions.
According to the unconfirmed reports, the Reserve Bank of India has
approved a proposal from the government to amend the Banking
Regulation Act to permit banks to trade in commodities and commodity
derivatives.

15
 4. “Analyzing and Managing Banking Risk”, Hennie van Greuning,
Sonja Brajovic Bratanovic, World Bank 2nd Edition, April 2003

The book includes new chapters on the management of the treasury

function and management of the stable liquidity investment portfolio. In
addition the book incorporates the advances made by the Basel Committee
on Banking Supervision, as reflected in the chapters on capital adequacy,
transparency and banking supervision.

Banks are exposed to financial, operational, business and event risks. A

series of key players are accountable for corporate governance and various
dimensions of financial risk management. The book discusses the
assessment, analysis, and management of financial risks. Analytical tools
provided in the book consist of a risk management questionnaire and
access to a web-site containing data input tables that can be processed
using spreadsheet software. Ratios and graphs provide high level
management information.

Banks are key players of financial information of the economy. The analysis
of banks must take place in the context of the current status of a country’s
financial system. Financial sector development encompasses several steps
that must be taken to ensure that institutions operate in a stable and viable
macropolicy environment with a solid legal, regulatory, and financial
infrastructure. Risk based financial analysis requires a framework for
transparent disclosure.

Financial statements should have an objective the achievement of

transparency through the fair presentation of useful information.
Transparency refers to the principle of creating an environment where
information on existing conditions, decisions, and actions is made
accessible, visible, and understandable to all market participants.
Disclosure refers more specifically to the process and methodology of
providing the information and of making policy decisions known through
timely dissemination and openness.

16
5.”Banking-The Changing Landscape” Katuri Nageswara Rao, The
ICFAI university edited team, Year 2005.

Banks, being highly levered institutions that thrive on public trust, evidently
need the best form of corporate governance. Organization of Economic
Cooperation and Development (OECD), way back in 1999 prescribed
corporate governance guidelines, which have relevance for banks as well.
For the banking industry in India, an advisory group on corporate
governance headed by Dr. R H Patil submitted its report in 2001. Ganguly
committee, appointed by RBI has prescribed “fit and proper norms” for the
directors. It is also recommended that the board’s focus should be on
strategy, risk management, internal control systems, overall performance
etc. Boards have to monitor the bank’s exposure to the sensitive sectors.
RBI has implemented most of the recommendations. Banks need to have
performance based incentive structures, professional members in the
board, freedom from the clutches of the vigilance commission for corporate
governance to be effective.

Indian banks also have been experiencing convergence: HDFC Bank, ICICI
Bank, SBI may be described as universal banks. ING Vysya and HSBC are
also financial conglomerates in the making. The success story of
investment strategy in retailing and software is helping ICICI Bank to make
bold expansion plans. It has plans to make a whopping investment in real
estate, management buyout and mezzanine funding. While these are
popular areas and provide good returns, there are international institutions
like Warburg and Temasek, who already have big plans in these areas and
can make the competition tough for ICICI banks.

The presence of foreign banks in various economies, differ in size, say

from 6 percent to 60 percent. Host nation regulators need to put in place
norms for effective cross border prudential supervision.

17
6.”Banking Products and Services”, Taxmann Publications Pvt Ltd,
Second Edition 2007

The development of banking is evolutionary in nature. A bank performs a

multitude of functions and services which cannot be crunched into a single
definition. A bank may mean different things to different people. For some it
is a store house of money, for other an institution of funding or finance and
yet to many others a bank is a depository for their savings. The origin of the
word “bank” can be traced back to German word banck which translated
means heap or mound or joint stock fund. The Italian word banco was
derived from this to mean heap or money. From this book we get to know
about how banking has evolved in India in its present form. It also explain
the features of banking. It gives classification of Indian banks. We get a
prospective of universal banks. We also get to know more about central
banking. We get to know the role of Reserve bank of India.

Banking products and services are quite distinct from other financial
products available in the market place. Marketing and selling of different
types of bank products are significantly different from marketing of other
financial products. The book attempts to distinguish between bank charges
and pricing. This has been covered to some extent in the retail banking
wherein we brought out the fees and charges on various loan products as
different from interest rate applicable on the loan.

In the fifties and sixties marketing in banking meant friendly staff at the
banks branches. Advertising and promotion emerged in the marketing of
the banking product and services only towards the later sixties. The
emphasis was on the following four aspects:

a) Appreciation of changing environment

b) Fulfilling the needs and aspirations of customers.

c) Alertness to opportunities and

d) Effective communication with existing and potential customer.

18
7. “Banking in the New Millennium- Issues, Challenges and
Strategies”, R.K. Uppal, Rimpi Kaur, Mahamaya Publishing House,
Edition 2007

The challenges of liberalization and globalization process instated since

1991 significant impact on the financial system particularly on the banking
industry. The IT revolution is of entirely changing the way banking business
is done and has considerably widened the range of product and increase
the expected demand of bank customers.

In order to the global challenges of new economic environment and explore

the emerging opportunities, an organization has to reset constantly its
structure to make it compatible and adoptable. In the backdrop of
transformed face of banking and financial sector reforms, Indian banks
spread across the country with cultural diversity and demographic
variations.

Banking sector reforms is the part and parcel of financial sectors reforms,
which initiated in 1991 to remove the deficiencies in financial sector,
particularly in the banking sector to strengthen the economic reforms. One
and half decade is enough to evaluate and assess the performance of
banking sector reforms.

The Indian financial system comprising the commercial banks, other non
banking financial institutions and the capital market, has undergone a very
rapid transformation in the past three decades. Before 1991, Indian banks
were not properly responding, there were frauds, corruptions and miss-
utilization of public money.

Many economics warned if that trend would continue without any change,
the banking industry might become a white elephant. Hence, the
government of India set up the Narasimaham Committee in august 1991,
which submitted its report within 3 months.

19
8. “Indian Commercial banking The New Dynamics”, Katuri
Nageswara Rao, The Icfai University Press, First Edition: 2007

Indian banking has become strong, stable and vibrant in the post-economic
reforms phase. Its disintermediation role has become more important, in a
competitive environment. Its social relevance has further improved and its
efforts to augment retail credit and particularly housing finance have
provided the necessary impetus for the economy to grow faster. Indian
banking has gradually been transforming into a high degree of automation
mode, with willingness to acquire international standards and embrace
global best practices.

The book has four sections and it takes us through the fascinating story of
Indian banking in recent times. While the first section deals with issues and
perspectives, the second one is on Micro Finance and SME Lending. The
third is on cross selling. The fourth section covers four cases relating to
United Bank of India, Karur Vysya Bank, Bank of Baroda and ICICI Bank.

While Indian banks continue to be aggressive in expanding retail credit,

RBI, on its part, has been cautioning them about the need for sharpening
their risk assessment techniques. In fact, the central bank has recently
increased the risk weights in the case of housing loans, personal loans and
credit cards.

The year 2004-05 was significant for the banking system in India, as it
weathered the storm of rising interest rates and falling bond values, by
strategically augmenting bank credit, in an environment conducive for
economic growth. The year also saw the birth of a new private sector bank,
namely Yes Bank. During the year 2005, two mergers, the first one
between IDBI Bank Ltd, and IDBI Ltd, and the second one between Bank of
Punjab and Centurion Bank took place.

Indian banking system has augmented credit quite substantially during the
year 2004-05 and even subsequently. Credit extension has been diversified
into important sectors like retail credit, agriculture and industry.

20
9. “General Bank Management”, Macmillan, Macmillan India Ltd, First
Published 2005

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.

Foreign exchange markets comprise individuals, business entities, banks,

investors, users and arbitrageurs, across the globe, who buy or sell
currencies. The world currency markets are a very large market, with a
large number of participants. Major participants of forex markets are:

A) Central Banks – managing their reserves and using currency markets

to smoothen out the value of their home currency.

B) Commercial Banks – offering exchange of currencies to their retail

clients and hedging and investing their own assets and liabilities as
also on behalf of their clients, as also speculating on the movements
in the markets.

C) Corporations – moving funds between different countries and

currencies for investment or trade transactions.

D) Individual – ordinary or high net worth individuals using markets for

their investment, trade, personal, and travel and tourism needs.

The book also focuses on the concept of correspondent banking, the

electronic modes of transmission, which facilitate fast and reliable
communication, and transmission of secured financial messages
throughout the globe.

21
 10. “Bank Management: Vasant Desai, Published Date: 2009

Banks are in the forefront of economic development. They are the heart of
Indian financial system. Banks in India have been playing a unique role in
mobilizing saving credit disbursement, investment and providing other
services. The ability of the banking system to perform its tasks efficiently
and in harmony with our needs and economic goals depends in a large
number on its efficient management. In fact, bank management by itself is
a multidisciplinary subject, cutting across many recognized disciplines.

In India, however, the subject has yet to get recognition as a discipline in its
own right. The subject, therefore, merits recognition and study, so as to run
the financial system in consonance with our objectives as well as to
accelerate economic growth. The banking system must be managed
prudently, safely and profitably if we are to have a strong, growing and
adaptable banking system capable of meeting the demands of society.

Globalization, financial deregulation, accelerating economic growth and

improvement have had a profound effect on the bank management in
recent years. The main challenge for the banking sector would be to
expand while maintaining sound financial health. Banks, therefore, would
need to focus on sound management.

22
 11. Credit risk management in banks

European banks will have to struggle and face competition from the US
banks .The reasons for European Bank's decline is high costs, minimal
price competition or innovation, and mediocre customer service.

European banks have to face declining economy. This has led banks to try
to boost their performance by cutting costs. But they have to set up long
term survival in the market.

Also, the banks cannot become efficient without implementation of

technology .But neither technology, nor cost-cutting, nor the disposal of
surplus assets will be sufficient to drive long-term growth. The banks need
to renew their strategies. And they must start by focusing on organic
growth, as opposed to growth through acquisitions.

Buying other banks is a passport to instant growth. But many acquisitions

take up too much of top management's time for too long. Customer service
tends to be neglected. And so does innovation, although innovation is
precisely what is needed for organic growth: new products, new marketing
capabilities and customer service skills, etc.

Renewing a strategy also means redesigning it at the international level. In

Europe, with a few exceptions, banking is still a national industry. Even
banks with a strong foreign presence are hampered by the lack of a clear
international strategy. They tend merely to wait for the right moment and
seize any opportunity that arises, neglecting strictly strategic
considerations. European banks should be asking themselves what

23
countries they can compete in best, what competitive advantages they
might have in each country, and how resources and skills can best be
transferred from the corporate center to their foreign subsidiaries.

Another key question is how much diversification a bank can tolerate.

Currently, the trend is toward universal banks that offer every kind of
service to every kind of customer. Yet there are limits to the range of
services a single bank can provide efficiently. To date, the performance of
some universal banks has been disappointing. Exactly what advantage
they have over more specialized banks remains unclear.

The banks need to have a proper structure in their firm but some banks,
retain structures that are at odds with their strategy. Their international
activities are not consistently integrated. Many banks, for example, are still
divided into business units such as "retail banking," "corporate banking,"
"advisory services," etc., along with an "international division."

Outsourcing and off shoring will play an important role in determining the
form banks take in the future. Corporate governance issues pose another
serious challenge. The many changes the industry has undergone make it
imperative that banks executive committees be equal to that challenge.

There are certain aspects of the business that make banks special. Risk
management is one of them. There is great complexity involved in
operating in a regulated industry without any protection against
competition. Market pressure is a clear threat to established banks. The
need to make a profit may drive some of them to pursue unacceptably risky
transactions. Banks need executive committees that understand this
danger and have the necessary prudence and skill to deal with it.

24
The bank's progress also depends on decision like , how much risk should
a bank take when lending money to a customer in the hope of earning
substantial advisory fees.

Banks also need qualified staff who can handle sophisticated financial
tools, concepts and valuation techniques accessible only to the initiated,
and directors must have a very solid background in the business.

25
Introduction of Banking in India

A bank is a financial institution that accepts deposits and channels those

deposits into lending activities. Banks primarily provide financial services to
customers while enriching investors. Government restrictions on financial
activities by banks vary over time and location. Banks are important players
in financial markets and offer services such as investment funds and loans.
In some countries such as Germany, banks have historically owned major
stakes in industrial corporations while in other countries such as the United
States banks are prohibited from owning non-financial companies. In
Japan, banks are usually the nexus of a cross-share holding entity known
as the keiretsu. In France, bancassurance is prevalent, as most banks offer
insurance services (and now real estate services) to their clients.

The level of government regulation of the banking industry varies widely,

with countries such as Iceland, having relatively light regulation of the
banking sector, and countries such as China having a wide variety of
regulations but no systematic process that can be followed typical of a
communist system.

The name bank derives from the Italian word banco "desk/bench", used
during the Renaissance by Jewish Florentine bankers, who used to make
their transactions above a desk covered by a green tablecloth. However,
there are traces of banking activity even in ancient times.

In fact, the word traces its origins back to the Ancient Roman Empire,
where moneylenders would set up their stalls in the middle of enclosed
courtyards called macella on a long bench called a bancu, from which the

26
words banco and bank are derived. As a moneychanger, the merchant at
the bancu did not so much invest money as merely convert the foreign
currency into the only legal tender in Rome—that of the Imperial Mint.

The earliest evidence of money-changing activity is depicted on a silver

drachm coin from ancient Hellenic colony Trapezus on the Black Sea,
modern Trabzon, c. 350–325 BC, presented in the British Museum in
London. The coin shows a banker's table (trapeza) laden with coins, a pun
on the name of the city.

In fact, even today in Modern Greek the word Trapeza (Τράπεζα) means
both a table and a bank.

The definition of a bank varies from country to country.

Under English common law, a banker is defined as a person who carries

on the business of banking, which is specified as:

• conducting current accounts for his customers

• paying cheques drawn on him, and
• Collecting cheques for his customers.

In most English common law jurisdictions there is a Bills of Exchange Act

that codifies the law in relation to negotiable instruments, including
cheques, and this Act contains a statutory definition of the term banker:
banker includes a body of persons, whether incorporated or not, who carry
on the business of banking' (Section 2, Interpretation). Although this
definition seems circular, it is actually functional, because it ensures that

27
the legal basis for bank transactions such as cheques do not depend on
how the bank is organized or regulated.

The business of banking is in many English common law countries not

defined by statute but by common law, the definition above. In other
English common law jurisdictions there are statutory definitions of the
business of banking or banking business. When looking at these definitions
it is important to keep in mind that they are defining the business of banking
for the purposes of the legislation, and not necessarily in general. In
particular, most of the definitions are from legislation that has the purposes
of entry regulating and supervising banks rather than regulating the actual
business of banking. However, in many cases the statutory definition
closely mirrors the common law one. Examples of statutory definitions:

• "banking business" means the business of receiving money on

current or deposit account, paying and collecting cheques drawn by
or paid in by customers, the making of advances to customers, and
includes such other business as the Authority may prescribe for the
purposes of this Act; (Banking Act (Singapore), Section 2,
Interpretation).

• "banking business" means the business of either or both of the

following:

1. receiving from the general public money on current, deposit, savings

or other similar account repayable on demand or within less than [3
months] ... or with a period of call or notice of less than that period;
2. Paying or collecting cheques drawn by or paid in by customers.

28
Since the advent of EFTPOS (Electronic Funds Transfer at Point Of Sale),
direct credit, direct debit and internet banking, the cheque has lost its
primacy in most banking systems as a payment instrument. This has led
legal theorists to suggest that the cheque based definition should be
broadened to include financial institutions that conduct current accounts for
customers and enable customers to pay and be paid by third parties, even
if they do not pay and collect cheques.

Banking in India originated in the last decades of the 18th century. The
oldest bank in existence in India is the State Bank of India, a government-
owned bank that traces its origins back to June 1806 and that is the largest
commercial bank in the country. Central banking is the responsibility of the
Reserve Bank of India, which in 1935 formally took over these
responsibilities from the then Imperial Bank of India, relegating it to
commercial banking functions. After India's independence in 1947, the
Reserve Bank was nationalized and given broader powers. In 1969 the
government nationalized the 14 largest commercial banks; the government
nationalized the six next largest in 1980.

Currently, India has 96 scheduled commercial banks (SCBs) - 27 public

sector banks (that is with the Government of India holding a stake), 31
private banks (these do not have government stake; they may be publicly
listed and traded on stock exchanges) and 38 foreign banks. They have a
combined network of over 53,000 branches and 17,000 ATMs. According
to a report by ICRA Limited, a rating agency, the public sector banks hold
over 75 percent of total assets of the banking industry, with the private and
foreign banks holding 18.2% and 6.5% respectively.

29
Without a sound and effective banking system in India it cannot have a
healthy economy. The banking system of India should not only be hassle
free but it should be able to meet new challenges posed by the technology
and any other external and internal factors.

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

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

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

The first bank in India, though conservative, was established in 1786. From
1786 till today, the journey of Indian Banking System can be segregated
into three distinct phases. They are as mentioned below:

• Early phase from 1786 to 1969 of Indian Banks

• Nationalization of Indian Banks and up to 1991 prior to Indian banking
sector Reforms.

30
 • New phase of Indian Banking System with the advent of Indian
Financial & Banking Sector Reforms after 1991.

To make this write-up more explanatory, I prefix the scenario as Phase I,

Phase II and Phase III.

Phase I

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 shareholders.

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. To streamline the functioning and
activities of commercial banks, the Government of India came up with The
Banking Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).

31
Reserve Bank of India was vested with extensive powers for the
supervision of banking in India as the Central Banking Authority.

During those days public has lesser confidence in the banks. As an

aftermath deposit mobilization was slow. Abreast of it the savings bank
facility provided by the Postal department was comparatively safer.
Moreover, funds were largely given to traders.

Phase II

Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale specially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to
handle banking transactions of the Union and State Governments all over
the country.

Seven banks forming subsidiary of State Bank of India was nationalized in

1960 on 19th July, 1969, major process of nationalization was carried out.
It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14
major commercial banks in the country was nationalized.

Second phase of nationalisation Indian Banking Sector Reform was carried

out in 1980 with seven more banks. This step brought 80% of the banking
segment in India under Government ownership.

32
The following are the steps 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 huge
jump by 11,000%.

Banking in the sunshine of Government ownership gave the public implicit

faith and immense confidence about the sustainability of these institutions.

Phase III

This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the
liberalization of banking practices.

The country is flooded with foreign banks and their ATM stations. Efforts
are being put to give a satisfactory service to customers. Phone banking
33
and net banking is introduced. The entire system became more convenient
and swift. Time is given more importance than money.

The financial system of India has shown a great deal of resilience. It is

sheltered from any crisis triggered by any external macroeconomics shock
as other East Asian Countries suffered. This is all due to a flexible
exchange rate regime, the foreign reserves are high, the capital account is
not yet fully convertible, and banks and their customers have limited foreign
exchange exposure.

Wider commercial role

The commercial role of banks is not limited to banking, and includes:

• issue of banknotes (promissory notes issued by a banker and

payable to bearer on demand)
• processing of payments by way of telegraphic transfer, EFTPOS,
internet banking or other means
• issuing bank drafts and bank cheques
• accepting money on term deposit
• lending money by way of overdraft, installment loan or otherwise
• providing documentary and standby letters of credit (trade finance),
guarantees, performance bonds, securities underwriting
commitments and other forms of off-balance sheet exposures
• safekeeping of documents and other items in safe deposit boxes
• currency exchange

34
 • acting as a 'financial supermarket' for the sale, distribution or
brokerage, with or without advice, of insurance, unit trusts and similar
financial products

Economic functions

The economic functions of banks include:

1. Issue of money, in the form of banknotes and current accounts

subject to cheque or payment at the customer's order. These claims
on banks can act as money because they are negotiable and/or
repayable on demand, and hence valued at par. They are effectively
transferable by mere delivery, in the case of banknotes, or by drawing
a cheque that the payee may bank or cash.
2. Netting and settlement of payments – banks act as both collection
and paying agents for customers, participating in interbank clearing
and settlement systems to collect, present, be presented with, and
pay payment instruments. This enables banks to economize on
reserves held for settlement of payments, since inward and outward
payments offset each other. It also enables the offsetting of payment
flows between geographical areas, reducing the cost of settlement
between them.
3. Credit intermediation – banks borrow and lend back-to-back on their
own account as middle men.
4. Credit quality improvement – banks lend money to ordinary
commercial and personal borrowers (ordinary credit quality), but are

35
 high quality borrowers. The improvement comes from diversification
of the bank's assets and capital which provides a buffer to absorb
losses without defaulting on its obligations. However, banknotes and
deposits are generally unsecured; if the bank gets into difficulty and
pledges assets as security, to raise the funding it needs to continue to
operate, this puts the note holders and depositors in an economically
subordinated position.
5. maturity transformation – banks borrow more on demand debt and
short term debt, but provide more long term loans. In other words,
they borrow short and lend long. With a stronger credit quality than
most other borrowers, banks can do this by aggregating issues (e.g.
accepting deposits and issuing banknotes) and redemptions (e.g.
withdrawals and redemptions of banknotes), maintaining reserves of
cash, investing in marketable securities that can be readily converted
to cash if needed, and raising replacement funding as needed from
various sources (e.g. wholesale cash markets and securities
markets).

Types of banks

Banks' activities can be divided into retail banking, dealing directly with
individuals and small businesses; business banking, providing services to
mid-market business; corporate banking, directed at large business
entities; private banking, providing wealth management services to high net
worth individuals and families; and investment banking, relating to activities

36
on the financial markets. Most banks are profit-making, private enterprises.
However, some are owned by government, or are non-profit organizations.

Central banks are normally government-owned and charged with quasi-

regulatory responsibilities, such as supervising commercial banks, or
controlling the cash interest rate. They generally provide liquidity to the
banking system and act as the lender of last resort in event of a crisis.

Major Banks in India

• ABN-AMRO Bank • Indian Bank

• Abu Dhabi Commercial
• Indian Overseas Bank
Bank
• IndusInd Bank
• American Express Bank
• ING Vysya Bank
• Andhra Bank
• Jammu & Kashmir
• Allahabad Bank
Bank
• Axis Bank (Earlier UTI
• JPMorgan Chase Bank
Bank)
• Karnataka Bank
• Bank of Baroda
• Karur Vysya Bank
• Bank of India
• Laxmi Vilas Bank
• Bank of Maharashtra
• Oriental Bank of
• Bank of Punjab
Commerce
• Bank of Rajasthan
• Punjab National Bank

37
• Bank of Ceylon • Punjab & Sind Bank
• BNP Paribas Bank • Scotia Bank
• Canara Bank • South Indian Bank
• Catholic Syrian Bank • Standard Chartered
• Central Bank of India Bank
• Centurion Bank • State Bank of India
• China Trust Commercial (SBI)
Bank • State Bank of Bikaner
• Citi Bank & Jaipur
• City Union Bank • State Bank of
• Corporation Bank Hyderabad
• Dena Bank • State Bank of Indore
• Deutsche Bank • State Bank of Mysore
• Development Credit • State Bank of
Bank Saurastra
• Dhanalakshmi Bank • State Bank of
• Federal Bank Travancore
• HDFC Bank • Syndicate Bank
• HSBC • Taib Bank
• ICICI Bank • UCO Bank
• IDBI Bank • Union Bank of India
• United Bank of India
• United Western Bank
• Vijaya Bank

38
Banking services in India

Open bank account

- the most common and first service of the banking sector. There are
different types of bank account in Indian banking sector. The bank
accounts are as follows:

• Bank Savings Account

- Bank Savings Account can be opened for eligible person / persons and
certain organizations / agencies (as advised by Reserve Bank of India
(RBI) from time to time)

• Bank Current Account

- Bank Current Account can be opened by individuals / partnership firms

/ Private and Public Limited Companies / HUFs / Specified Associates /
Societies / Trusts, etc.

• Bank Term Deposits Account

- Bank Term Deposits Account can be opened by individuals /

partnership firms / Private and Public Limited Companies / HUFs/
Specified Associates / Societies / Trusts, etc.

• Bank Account Online

- With the advancement of technology, the major banks in the public

and private sector has facilitated their customer to open bank account

39
 online. Bank account online is registered through a PC with an internet
connection. The advent of bank account online has saved both the cost
of operation for banks as well as the time taken in opening an account.

Note: - A minor account can be opened but jointly with a guardian and only
the guardian would is allowed to operate the account.

General procedure to open an account

• The Bank will provide you with details of various types of accounts
that you may open with the Bank.

• You can have your choice on what type of account would best suit
you, based on your needs and requirements

• The Bank will, prior to opening an account, require documentation

and information as prescribed by the "Know Your Customer" (KYC)
guidelines issued by RBI and or such other norms or procedures
adopted by the Bank prior to opening the account.

• The due diligence process that the Bank would follow, will involve
providing documentation verifying your identity, verifying your
address, and information on your occupation or business and source
of funds. As part of the due diligence process the Bank may also
require an introduction from a person acceptable to the Bank if they
so deem necessary and will need your recent photographs.

• The Bank is required by law to obtain Permanent Account Number

(PAN) or General Index Register (GIR) Number or, where you do not

40
 possess such registration, declaration in Form No. 60 or 61 as
specified under the Income Tax Rules.

• In the event that the account opening process is likely to take longer
than normal, the Bank will inform you of the revised timeline.

• You can also call your branch or the executive for any queries that
you may have and the branch / executive will revert on the query at
the earliest.

• The Bank will provide you with the account opening forms and other
relevant material to enable you open the account. Bank personnel will
advise you on the complete details of information that would be
required by the Bank for the verification process.

• The Bank reserves the right, at its sole discretion, to open any
account and at such terms as the Bank may prescribe from time to
time

Plastic Money

Credit Card

Credit cards in India are gaining ground. A number of banks in India are
encouraging people to use credit card. The concept of credit card was used
in 1950 with the launch of charge cards in USA by Diners Club and
American Express. Credit card however became more popular with use of
magnetic strip in 1970.

41
Credit card in India became popular with the introduction of foreign banks
in the country.

Credit cards are financial instruments, which can be used more than once
to borrow money or buy products and services on credit. Basically banks,
retail stores and other businesses issue these.

Major Banks issuing Credit Card in India

• State Bank of India credit card (SBI credit card)

• Bank of Baroda credit card or BoB credit card
• ICICI credit card
• HDFC credit card
• IDBI credit card
• ABN AMRO credit card
• Standard Chartered credit card
• HSBC credit card
• Citibank Credit Card

Precautions taken after receiving credit card

To Avoid:

• Bending the Card.

• Exposure to electronic devices and gadgets.

• Direct exposure to sunlight.

42
• Be cautious about disclosing your account number over the phone
unless you know you're dealing with a reputable company.

• Never put your account number on the outside of an envelope or on a

postcard.

• Draw a line through blank spaces on charge or debit slips above the
total so the amount cannot be changed.

• Don't sign a blank charge or debit slip.

• Tear up carbons and save your receipts to check against your

monthly statements.

• Cut up old cards - cutting through the account number - before

disposing of them.

• Open monthly statements promptly and compare them with your

receipts. Report mistakes or discrepancies as soon as possible to the
special address listed on your statement for inquiries. Under the
FCBA (credit cards) and the EFTA (ATM or debit cards), the card
issuer must investigate errors reported to them within 60 days of the
date your statement was mailed to you.

• Keep a record - in a safe place separate from your cards - of your

account numbers, expiration dates, and the telephone numbers of
each card issuer so you can report a loss quickly.

• Carry only those cards that you anticipate you'll need.

43
To Do:

• Please sign on the signature panel on the reverse of the Card

immediately with a non-erasable ball-point pen (preferably in black
ink). This will ensure that the benefits of membership are yours and
yours alone.

• Keep the Card in a prominent place in your wallet. You will notice if it
is missing.

Reasons credit card being rejected at retail outlet:

• One may have exceeded the borrowing limit or defaulted (constantly)

on minimum payment due.

• The Card is hot listed.

• The card has crossed its expiration date.

• Non-receipt of dues of one-card blocks future transactions on any

other card(s) held of the same card-issuing bank.

• The magnetic stripe on the reverse of the card is damaged i.e. has
been scratched or exposed to continuous heat/direct sunlight or
magnetic field-like card kept near a TV set / other electronic
appliances.

• Systems or technology failures have in rare instances also led to non

acceptance of cards when swiped through an Electronic Terminal.

44
Global player in credit card market

MasterCard

MasterCard is a product of MasterCard International and along with VISA

are distributed by financial institutions around the world. Cardholders
borrow money against a line of credit and pay it back with interest if the
balance is carried over from month to month. Its products are issued by
23,000 financial institutions in 220 countries and territories. In 1998, it had
almost 700 million cards in circulation, whose users spent $650 billion in
more than 16.2 million locations.

VISA Card

VISA cards is a product of VISA USA and along with MasterCard is

distributed by financial institutions around the world. A VISA cardholder
borrows money against a credit line and repays the money with interest if
the balance is carried over from month to month in a revolving line of credit.
Nearly 600 million cards carry one of the VISA brands and more than 14
million locations accept VISA cards.

American Express

The world's favorite card is American Express Credit Card. More than 57
million cards are in circulation and growing and it is still growing further.
Around US $ 123 billion was spent last year through American Express
Cards and it is poised to be the world's No. 1 card in the near future. In a

45
regressive US economy last year, the total amount spent on American
Express cards rose by 4 percent. American Express cards are very popular
in the U.S., Canada, Europe and Asia and are used widely in the retail and
everyday expenses segment.

Diners Club International

Diners Club is the world's No. 1 Charge Card. Diners Club cardholders
reside all over the world and the Diners Card is an all time favorite for
corporate. There are more than 8 million Diners Club cardholders. They are
affluent and are frequent travelers in premier businesses and institutions,
including Fortune 500 companies and leading global corporations.

JCB Cards

The JCB Card has a merchant network of 10.93 million in approximately

189 countries. It is supported by over 320 financial institutions worldwide
and serves more than 48 million cardholders in eighteen countries
worldwide. The JCB philosophy of "identify the customer's needs and
please the customer with Service from the Heart" is paying rich dividends
as their customers spend US$43 billion annually on their JCB cards.

Grace / Interest Free Period

The number of days you have on a card before a card issuer starts
charging you interest is called grace period. Usually this period is the
number of days between the statement date and the due date of payment.

46
Grace periods on credit cards are usually 2-3 weeks. However, there is
likely to be no grace for balances carried forward from previous month and
fresh purchases thereafter if any.

The following are some of the varieties of credit cards in India

• ANZ - Gold
• ANZ - Silver
• Bank Of India - Indiacard
• Bol - Taj Premium
• Bol - Gold
• BoB - Exclusive
• BoB - Premium
• Canara Bank - Cancard
• Citibank - Gold
• Citibank - Silver
• Citibank WWF Card
• Citibank Visa Card for Women
• Citibank Cry Card
• Citibank Silver International Credit Card
• Citibank Women's International Credit Card
• Citibank Gold International Credit Card
• Citibank Electronic Credit Card
• Citibank Maruti International Credit Card
• Citibank Times Card
• Citibank Indian Oil International Credit Card
• Citibank Citi Diners Club Card

47
 • HSBC - Gold
• HSBC - Classic
• ICICI Sterling Silver Credit Card
• ICICI Solid Gold Credit Card
• ICICI True Blue Credit Card
• SBI Card
• Stanchart - Gold
• Stanchart - Executive
• Stanchart - Classic
• Thomas Cook Standard Chartered Global Credit Card

Standard segregation of credit cards

• Standard Card - It is the most basic card (sans all frills) offered by
issuers.

• Classic Card - Brand name for the standard card issued by VISA.

• Gold Card/Executive Card - A credit card that offers a higher line of

credit than a standard card. Income eligibility is also higher. In
addition, issuers provide extra perks or incentives to cardholders.

• Platinum Card - A credit card with a higher limit and additional perks
than a gold card.

• Titanium Card - A card with an even higher limit than a platinum card.

48
The following are some of the plus features of credit card in India

• Hotel discounts
• Travel fare discounts
• Free global calling card
• Lost baggage insurance
• Accident insurance
• Insurance on goods purchased
• Waiver of payment in case of accidental death
• Household insurance

Some facts of credit cards

• The first card was issued in India by Visa in 1981.

• The country's first Gold Card was also issued from Visa in 1986.

• The first international credit card was issued to a restricted number of

customers by Andhra Bank in 1987 through the Visa program, after
getting special permission from the Reserve Bank of India.

• The credit cards are shape and size, as specified by the ISO 7810
standard. It is generally of plastic quality. It is also sometimes known
as Plastic Money.

49
Debit Card

Debit cards, also known as check cards look like credit cards or ATM cards
(automated teller machine card). It operate like cash or a personal check.
Debit cards are different from credit cards. Credit card is a way to "pay
later," whereas debit card is a way to "pay now." When we use a debit card,
our money is quickly deducted from the bank account.

Debit cards are accepted at many locations, including grocery stores, retail
stores, gasoline stations, and restaurants. Its an alternative to carrying a
checkbook or cash.

With debit card, we use our own money and not the issuer's money.

In India almost all the banks issue debit card to its account holders.

Features of Debit Card

• Obtaining a debit card is often easier than obtaining a credit card.

• Using a debit card instead of writing checks saves you from showing
identification or giving out personal information at the time of the
transaction.

• Using a debit card frees you from carrying cash or a checkbook.

• Using a debit card means you no longer have to stock up on

traveler's checks or cash when you travel.

50
 • Debit cards may be more readily accepted by merchants than
checks, especially in other states or countries wherever your card
brand is accepted.

• The debit card is a quick, "pay now" product, giving you no grace
period.

• Using a debit card may mean you have less protection than with a
credit card purchase for items which are never delivered, are
defective, or were misrepresented. But, as with credit cards, you may
dispute unauthorized charges or other mistakes within 60 days. You
should contact the card issuer if a problem cannot be resolved with
the merchant.

• Returning goods or canceling services purchased with a debit card is

treated as if the purchase were made with cash or a check.

Tips for responsible use of Debit Card

• If your card is lost or stolen, report the loss immediately to your

financial institution.

• If you suspect your card is being fraudulently used, report it

immediately to your financial institution.

• Hold on to your receipts from your debit card transactions. A thief

may get your name and debit card number from a receipt and order
goods by mail or over the telephone. Your card does not have to be
missing in order for it to be misused.

51
 • If you have a PIN number, memorize it. Do not keep your PIN number
with your card. Also, don't choose a PIN number that a smart thief
could figure out, such as your phone number or birthday.

• Never give your PIN number to anyone. Keep your PIN private.

• Always know how much money you have available in your account.
Don't forget that your debit card may allow you to access money that
you have set aside to cover a check which has not cleared your bank
yet.

• Keep your receipts in one place -- for easy retrieval and better
oversight of your bank account.

Loans

Banks in India with the way of development have become easy to apply in
loan market. The following loans are given by almost all the banks in the
country:

• Personal Loan
• Car Loan or Auto Loan
• Home Loan
• Education Loan or Student Loan
• Loan against Shares

In Personal Loan, one can get a sanctioned loan amount between Rs

25,000 to 10, 00,000 depending upon the profile of person applying for the
loan. SBI, ICICI, HDFC, HSBC are some of the leading banks which deals
in Personal Loan.

52
Almost all the banks have jumped into the market of car loan which is also
sometimes termed as auto loan. It is one of the fast moving financial
product of banks. Car loan / auto loan are sanctioned to the extent of 85%
upon the ex-showroom price of the car with some simple paper works and
a small amount of processing fee.

Loan against shares is very easy to get because liquid guarantee is

involved in it.

Home loan is the latest craze in the banking sector with the development of
the infrastructure. Now people are moving to township outside the city.
More number of townships are coming up to meet the demand of 'house for
all'. The RBI has also liberalized the interest rates of home loan in order to
match the repayment capability of even middle class people. Almost all
banks are dealing in home loan. Again SBI, ICICI, HDFC, HSBC are
leading.

The educational loan, rather to be termed as student loan, is a good

banking product for the mass. Students with certain academic brilliance,
studying at recognized colleges/universities in India and abroad are
generally given education loan / student loan so as to meet the expenses
on tuition fee/ maintenance cost/books and other equipment.

Money Transfer

Beside lending and depositing money, banks also carry money from one
corner of the globe to another. This act of banks is known as transfer of

53
money. This activity is termed as remittance business. Banks generally
issue Demand Drafts, Banker's Cheques, Money Orders or other such
instruments for transferring the money. This is a type of Telegraphic
Transfer or Tele Cash Orders.

It has been only a couple of years that banks have jumped into the money
transfer businesses in India. The international money transfer market grew
9.3% from 2003 to 2004 i.e. from US$213 bn. to US$233 bn. in 2004.
Economists say that the market of money transfer will further grow at a
cumulative 10.1% average growth rate through 2008.

With the use of high technology and varieties of product it seems that
"Free" money transfers will become commonplace. We will see more
bundling of tailored money services by banks and non-traditional entrants
that will include "free" money transfers. Many banks will even use money
transfer services as loss-leaders in order to generate account openings and
cross-sell opportunities. The price evolution of money transfer products for
banks will be similar to that of consumer bill pay-the product is worth giving
away as an account acquisition tool to win overall market share and
establish banking relationships.

ATM money transfer card products have had terrible bank adoption rates
since being introduced in the last three to four years. Remittees who are
highly educated and have been already been exposed to ATM technology
in receiving countries tend to have an interest in this product. Money
transfer to India is one of the most important part played by the banks. This
service provide peace of mind to either the NRIs or to the visitors to India.

54
Many Indian banks have ATM'S (automatic teller machine); enable to draw
foreign currency in India.

By 2007, we will see a good percent of all foreign-born households doing

some level of online banking. First-mover banks will start having a window
of opportunity to include online transfer functionality within the next couple
of years, which currently frequents traditional money transmitters such as
Western Union. There is a terrific opportunity for banks and non-banks to
offer more robust global inter-institutional funds transfer services online.
More than half of Western Union's customers today are already banked,
and most do not have an alternative product marketed by their bank that is
painless, quick, and cost-effective. That will change as banks offer transfer
services through their online channel.

Money Transfer to India

Apart from banks few financial institutions and online portals gives services
of money transfer to India. Some of them are as under:

• Western Union Money Transfer

• Union Money Transfer
• IKobo Money Transfer
• Cash2india.com
• Remit2india
• Samachar Money Transfer
• Timesofmoney.com

55
 • Wells Fergo International Money Transfer
• Travellers Express
• Money Gram International

Visa Money Transfer

Visa has recently introduced the 'Visa Money Transfer' option for its
savings and current account holder of any bank with a visa debit card. This
facility helps its customer to transfer funds from his bank account to any
visa card, either debit or credit within India.

A Visa Money Transfer is of similar kind, in many respects, to the third-

party fund transfer option given by some banks to its account holders
through e-cheque, but this is restricted to only visa cardholders.

How to transfer money?

• Log on to your bank account through your respective bank websites.

• Fill the beneficiary details like visa card numbers, name, address and
then specify the amount that needs to be transferred. For bank
account specify the visa card number and credit card number for
paying credit card bill.

• Click on to VISA Transfer Payments button.

• Transfer immediately or on schedule date. Your account will be

debited according to the date mentioned.

56
Notable points of Visa Money Transfer

• The time taken for money transfers could be the same or even more
than that of a demand draft i.e. two or three days or even more.

• Currently there are no charges but limits has been set by certain
banks on the current transfers.

• It is available in 150 cities across the country now.

• The transferred amount can neither be changed nor stopped once it

is initiated.

57
Financial and Banking Sector Reforms

The last decade witnessed the maturity of India's financial markets

Since 1991, every governments of India took major steps in reforming the
financial sector of the country. The important achievements in the following
fields is discussed under separate heads:

• Financial markets
• Regulators
• The banking system
• Non-banking finance companies
• The capital market
• Mutual funds
• Overall approach to reforms
• Deregulation of banking system
• Capital market developments
• Consolidation imperative

Now let us discuss each segment separately.

Financial Markets

In the last decade, Private Sector Institutions played an important role.

They grew rapidly in commercial banking and asset management business.
With the openings in the insurance sector for these institutions, they started
making debt in the market.

Competition among financial intermediaries gradually helped the interest

58
rates to decline. Deregulation added to it. The real interest rate was
maintained. The borrowers did not pay high price while depositors had
incentives to save. It was something between the nominal rate of interest
and the expected rate of inflation.

Regulators

The Finance Ministry continuously formulated major policies in the field of

financial sector of the country. The Government accepted the important
role of regulators. The Reserve Bank of India (RBI) has become more
independent. Securities and Exchange Board of India (SEBI) and the
Insurance Regulatory and Development Authority (IRDA) became
important institutions. Opinions are also there that there should be a super-
regulator for the financial services sector instead of multiplicity of
regulators.

The banking system

Almost 80% of the businesses are still controlled by Public Sector Banks
(PSBs). PSBs are still dominating the commercial banking system. Shares
of the leading PSBs are already listed on the stock exchanges.

The RBI has given licenses to new private sector banks as part of the
liberalization process. The RBI has also been granting licenses to industrial
houses. Many banks are successfully running in the retail and consumer
segments but are yet to deliver services to industrial finance, retail trade,
small business and agricultural finance.

59
The PSBs will play an important role in the industry due to its number of
branches and foreign banks facing the constraint of limited number of
branches. Hence, in order to achieve an efficient banking system, the onus
is on the Government to encourage the PSBs to be run on professional
lines.

Development finance institutions

FIs's access to SLR funds reduced. Now they have to approach the capital
market for debt and equity funds.

Convertibility clause is no longer obligatory for assistance to corporate

sanctioned by term-lending institutions.

Capital adequacy norms extended to financial institutions.

DFIs such as IDBI and ICICI have entered other segments of financial
services such as commercial banking, asset management and insurance
through separate ventures. The move to universal banking has started.

Non-banking finance companies

In the case of new NBFCs seeking registration with the RBI, the
requirement of minimum net owned funds, has been raised to Rs.2 crores.

60
Until recently, the money market in India was narrow and circumscribed by
tight regulations over interest rates and participants. The secondary market
was underdeveloped and lacked liquidity. Several measures have been
initiated and include new money market instruments, strengthening of
existing instruments and setting up of the Discount and Finance House of
India (DFHI).

The RBI conducts its sales of dated securities and treasury bills through its
open market operations (OMO) window. Primary dealers bid for these
securities and also trade in them. The DFHI is the principal agency for
developing a secondary market for money market instruments and
Government of India treasury bills. The RBI has introduced a liquidity
adjustment facility (LAF) in which liquidity is injected through reverse repo
auctions and liquidity is sucked out through repo auctions.

On account of the substantial issue of government debt, the gilt- edged

market occupies an important position in the financial set- up. The
Securities Trading Corporation of India (STCI), which started operations in
June 1994, has a mandate to develop the secondary market in government
securities.

Long-term debt market: The development of a long-term debt market is

crucial to the financing of infrastructure. After bringing some order to the
equity market, the SEBI has now decided to concentrate on the
development of the debt market. Stamp duty is being withdrawn at the time
of dematerialization of debt instruments in order to encourage paperless
trading.

61
The capital market

The number of shareholders in India is estimated at 25 million. However,

only an estimated two lakh persons actively trade in stocks. There has
been a dramatic improvement in the country's stock market trading
infrastructure during the last few years. Expectations are that India will be
an attractive emerging market with tremendous potential. Unfortunately,
during recent times the stock markets have been constrained by some
unsavoury developments, which have led to retail investors deserting the
stock markets.

Mutual funds

The mutual funds industry is now regulated under the SEBI (Mutual Funds)
Regulations, 1996 and amendments thereto. With the issuance of SEBI
guidelines, the industry had a framework for the establishment of many
more players, both Indian and foreign players.

The Unit Trust of India remains easily the biggest mutual fund controlling a
corpus of nearly Rs.70, 000 crores, but its share is going down. The
biggest shock to the mutual fund industry during recent times was the
insecurity generated in the minds of investors regarding the US 64 scheme.
With the growth in the securities markets and tax advantages granted for
investment in mutual fund units, mutual funds started becoming popular.

The foreign owned AMCs are the ones which are now setting the pace for

62
the industry. They are introducing new products, setting new standards of
customer service, improving disclosure standards and experimenting with
new types of distribution.

The insurance industry is the latest to be thrown open to competition from

the private sector including foreign players. Foreign companies can only
enter joint ventures with Indian companies, with participation restricted to
26 per cent of equity. It is too early to conclude whether the erstwhile public
sector monopolies will successfully be able to face up to the competition
posed by the new players, but it can be expected that the customer will
gain from improved service.

The new players will need to bring in innovative products as well as fresh
ideas on marketing and distribution, in order to improve the low per capita
insurance coverage. Good regulation will, of course, be essential.

Overall approach to reforms

The last ten years have seen major improvements in the working of various
financial market participants. The government and the regulatory
authorities have followed a step-by-step approach, not a big bang one. The
entry of foreign players has assisted in the introduction of international
practices and systems. Technology developments have improved customer
service. Some gaps however remain (for example: lack of an inter-bank
interest rate benchmark, an active corporate debt market and a developed
derivatives market). On the whole, the cumulative effect of the
developments since 1991 has been quite encouraging. An indication of the

63
strength of the reformed Indian financial system can be seen from the way
India was not affected by the Southeast Asian crisis.

However, financial liberalization alone will not ensure stable economic

growth. Some tough decisions still need to be taken. Without fiscal control,
financial stability cannot be ensured. The fate of the Fiscal Responsibility
Bill remains unknown and high fiscal deficits continue. In the case of
financial institutions, the political and legal structures have to ensure that
borrowers repay on time the loans they have taken. The phenomenon of
rich industrialists and bankrupt companies continues. Further, frauds
cannot be totally prevented, even with the best of regulation. However,
punishment has to follow crime, which is often not the case in India.

Deregulation of banking system

Prudential norms were introduced for income recognition, asset

classification, provisioning for delinquent loans and for capital adequacy. In
order to reach the stipulated capital adequacy norms, substantial capital
were provided by the Government to PSBs.

Government pre-emption of banks' resources through statutory liquidity

ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest
rates on the deposits and lending sides almost entirely were deregulated.

New private sector banks allowed to promote and encourage competition.

PSBs were encouraged to approach the public for raising resources.
Recovery of debts due to banks and the Financial Institutions Act, 1993

64
was passed, and special recovery tribunals set up to facilitate quicker
recovery of loan arrears.

Bank lending norms liberalized and a loan system to ensure better control
over credit introduced. Banks asked to set up asset liability management
(ALM) systems. RBI guidelines issued for risk management systems in
banks encompassing credit, market and operational risks.

A credit information bureau being established to identify bad risks.

Derivative products such as forward rate agreements (FRAs) and interest
rate swaps (IRSs) introduced.

Capital market developments

The Capital Issues (Control) Act, 1947, repealed, office of the Controller of
Capital Issues were abolished and the initial share pricing were
decontrolled. SEBI, the capital market regulator was established in 1992.

Foreign institutional investors (FIIs) were allowed to invest in Indian capital

markets after registration with the SEBI. Indian companies were permitted
to access international capital markets through euro issues.

The National Stock Exchange (NSE), with nationwide stock trading and
electronic display, clearing and settlement facilities was established.
Several local stock exchanges changed over from floor based trading to
screen based trading.

65
Private mutual funds permitted

The Depositories Act had given a legal framework for the establishment of
depositories to record ownership deals in book entry form.
Dematerialization of stocks encouraged paperless trading. Companies
were required to disclose all material facts and specific risk factors
associated with their projects while making public issues.

To reduce the cost of issue, underwriting by the issuer were made optional,
subject to conditions. The practice of making preferential allotment of
shares at prices unrelated to the prevailing market prices stopped and fresh
guidelines were issued by SEBI.

SEBI reconstituted governing boards of the stock exchanges, introduced

capital adequacy norms for brokers, and made rules for making client or
broker relationship more transparent which included separation of client
and broker accounts.

Buy back of shares allowed

The SEBI started insisting on greater corporate disclosures. Steps were

taken to improve corporate governance based on the report of a
committee.

SEBI issued detailed employee stock option scheme and employee stock
purchase scheme for listed companies.

66
Standard denomination for equity shares of Rs. 10 and Rs. 100 were
abolished. Companies given the freedom to issue dematerialized shares in
any denomination.

Derivatives trading starts with index options and futures. A system of rolling
settlements introduced. SEBI empowered to register and regulate venture
capital funds.

The SEBI (Credit Rating Agencies) Regulations, 1999 issued for regulating
new credit rating agencies as well as introducing a code of conduct for all
credit rating agencies operating in India.

Consolidation imperative

Another aspect of the financial sector reforms in India is the consolidation

of existing institutions which is especially applicable to the commercial
banks. In India the banks are in huge quantity. First, there is no need for 27
PSBs with branches all over India. A number of them can be merged. The
merger of Punjab National Bank and New Bank of India was a difficult one,
but the situation is different now. No one expected so many employees to
take voluntary retirement from PSBs, which at one time were much sought
after jobs. Private sector banks will be self consolidated while co-operative
and rural banks will be encouraged for consolidation, and anyway play only
a niche role.

In the case of insurance, the Life Insurance Corporation of India is a

67
behemoth, while the four public sector general insurance companies will
probably move towards consolidation with a bit of nudging. The UTI is yet
again a big institution, even though facing difficult times, and most other
public sector players are already exiting the mutual fund business. There
are a number of small mutual fund players in the private sector, but the
business being comparatively new for the private players, it will take some
time.

We finally come to convergence in the financial sector, the new buzzword

internationally. Hi-tech and the need to meet increasing consumer needs is
encouraging convergence, even though it has not always been a success
till date. In India organizations such as IDBI, ICICI, HDFC and SBI are
already trying to offer various services to the customer under one umbrella.
This phenomenon is expected to grow rapidly in the coming years. Where
mergers may not be possible, alliances between organizations may be
effective. Various forms of banc assurance are being introduced, with the
RBI having already come out with detailed guidelines for entry of banks into
insurance. The LIC has bought into Corporation Bank in order to spread its
insurance distribution network. Both banks and insurance companies have
started entering the asset management business, as there is a great deal
of synergy among these businesses. The pensions market is expected to
open up fresh opportunities for insurance companies and mutual funds.

It is not possible to play the role of the Oracle of Delphi when a vast nation
like India is involved. However, a few trends are evident, and the coming
decade should be as interesting as the last one.

68
Reserve Bank of India (RBI)

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.

Reserve Bank of India was nationalized in the year 1949. 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.

69
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.

Functions of Reserve Bank of India

The Reserve Bank of India Act of 1934 entrust all the important functions of
a central bank the Reserve Bank of India.

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
70
the Second World War and the post-was period, these provisions were
considerably modified. Since 1957, the Reserve Bank of India is required to
maintain gold and foreign exchange reserves of Ra. 200 crores, of which at
least Rs. 115 crores should be in gold. The system as it exists today is
known as the minimum reserve system.

Banker to Government

The second important function of the Reserve Bank of India is to act as

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

Bankers' Bank and Lender of the Last Resort

The Reserve Bank of India acts as the bankers' bank. According to the
provisions of the Banking Companies Act of 1949, every scheduled bank
was required to maintain with the Reserve Bank a cash balance equivalent
to 5% of its demand liabilities and 2 per cent of its time liabilities in India. By

71
an amendment of 1962, the distinction between demand and time liabilities
was abolished and banks have been asked to keep cash reserves equal to
3 per cent of their aggregate deposit liabilities. The minimum cash
requirements can be changed by the Reserve Bank of India.

The scheduled banks can borrow from the Reserve Bank of India on the
basis of eligible securities or get financial accommodation in times of need
or stringency by rediscounting bills of exchange. Since commercial banks
can always expect the Reserve Bank of India to come to their help in times
of banking crisis the Reserve Bank becomes not only the banker's bank but
also the lender of the last resort.

Controller of Credit

The Reserve Bank of India is the controller of credit i.e. it has the power to
influence the volume of credit created by banks in India. It can do so
through changing the Bank rate or through open market operations.
According to the Banking Regulation Act of 1949, the Reserve Bank of
India can ask any particular bank or the whole banking system not to lend
to particular groups or persons on the basis of certain types of securities.
Since 1956, selective controls of credit are increasingly being used by the
Reserve Bank.

The Reserve Bank of India is armed with many more powers to control the
Indian money market. Every bank has to get a license from the Reserve
Bank of India to do banking business within India, the license can be
cancelled by the Reserve Bank of certain stipulated conditions are not

72
fulfilled. Every bank will have to get the permission of the Reserve Bank
before it can open a new branch. Each scheduled bank must send a
weekly return to the Reserve Bank showing, in detail, its assets and
liabilities. This power of the Bank to call for information is also intended to
give it effective control of the credit system. The Reserve Bank has also the
power to inspect the accounts of any commercial bank.

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

The Reserve Bank of India has the responsibility to maintain the official rate
of exchange. According to the Reserve Bank of India Act of 1934, the Bank
was required to buy and sell at fixed rates any amount of sterling in lots of

73
not less than Rs. 10,000. The rate of exchange fixed was Re. 1 = sh. 6d.
Since 1935 the Bank was able to maintain the exchange rate fixed at
lsh.6d. though there were periods of extreme pressure in favor of or
against.

the rupee. After India became a member of the International Monetary

Fund in 1946, the Reserve Bank has the responsibility of maintaining fixed
exchange rates with all other member countries of the I.M.F.

Besides maintaining the rate of exchange of the rupee, the Reserve Bank
has to act as the custodian of India's reserve of international currencies.
The vast sterling balances were acquired and managed by the Bank.
Further, the RBI has the responsibility of administering the exchange
controls of the country.

Supervisory functions

In addition to its traditional central banking functions, the Reserve bank has
certain non-monetary functions of the nature of supervision of banks and
promotion of sound banking in India. The Reserve Bank Act, 1934, and the
Banking Regulation Act, 1949 have given the RBI wide powers of
supervision and control over commercial and co-operative banks, relating
to licensing and establishments, branch expansion, liquidity of their assets,
management and methods of working, amalgamation, reconstruction, and
liquidation. The RBI is authorized to carry out periodical inspections of the
banks and to call for returns and necessary information from them. The
nationalization of 14 major Indian scheduled banks in July 1969 has

74
imposed new responsibilities on the RBI for directing the growth of banking
and credit policies towards more rapid development of the economy and
realization of certain desired social objectives. The supervisory functions of
the RBI have helped a great deal in improving the standard of banking in
India to develop on sound lines and to improve the methods of their
operation.

Promotional functions

With economic growth assuming a new urgency since Independence, the

range of the Reserve Bank's functions has steadily widened. The Bank now
performs a variety of developmental and promotional functions, which, at
one time, were regarded as outside the normal scope of central banking.
The Reserve Bank was asked to promote banking habit, extend banking
facilities to rural and semi-urban areas, and establish and promote new
specialized financing agencies. Accordingly, the Reserve Bank has helped
in the setting up of the IFCI and the SFC; it set up the Deposit Insurance
Corporation in 1962, the Unit Trust of India in 1964, the Industrial
Development Bank of India also in 1964, the Agricultural Refinance
Corporation of India in 1963 and the Industrial Reconstruction Corporation
of India in 1972. These institutions were set up directly or indirectly by the
Reserve Bank to promote saving habit and to mobilize savings, and to
provide industrial finance as well as agricultural finance. As far back as
1935, the Reserve Bank of India set up the Agricultural Credit Department
to provide agricultural credit. But only since 1951 the Bank's role in this
field has become extremely important. The Bank has developed the co-
operative credit movement to encourage saving, to eliminate moneylenders

75
from the villages and to route its short term credit to agriculture. The RBI
has set up the Agricultural Refinance and Development Corporation to
provide long-term finance to farmers.

Classification of RBIs functions

The monetary functions also known as the central banking functions of the
RBI are related to control and regulation of money and credit, i.e., issue of
currency, control of bank credit, control of foreign exchange operations,
banker to the Government and to the money market. Monetary functions of
the RBI are significant as they control and regulate the volume of money
and credit in the country.

Equally important, however, are the non-monetary functions of the RBI in

the context of India's economic backwardness. The supervisory function of
the RBI may be regarded as a non-monetary function (though many
consider this a monetary function). The promotion of sound banking in India
is an important goal of the RBI, the RBI has been given wide and drastic
powers, under the Banking Regulation Act of 1949 - these powers relate to
licensing of banks, branch expansion, liquidity of their assets, management
and methods of working, inspection, amalgamation, reconstruction and
liquidation. Under the RBI's supervision and inspection, the working of
banks has greatly improved. Commercial banks have developed into
financially and operationally sound and viable units. The RBI's powers of
supervision have now been extended to non-banking financial
intermediaries. Since independence, particularly after its nationalization
1949, the RBI has followed the promotional functions vigorously and has

76
been responsible for strong financial support to industrial and agricultural
development in the country.

Fact Files of Banks in India

The first, the oldest, the largest, the biggest, get all such types of
information about Banking in India in this section.

The first bank in India to be given an ISO Certification Canara Bank

The first bank in Northern India to get ISO 9002 Punjab and Sind
certification for their selected branches Bank

The first Indian bank to have been started solely with Punjab National
Indian capital Bank

The first among the private sector banks in Kerala to South Indian
become a scheduled bank in 1946 under the RBI Act Bank

India's oldest, largest and most successful commercial

bank, offering the widest possible range of domestic, State Bank of
international and NRI products and services, through its India
vast network in India and overseas

India's second largest private sector bank and is now the The Federal
largest scheduled commercial bank in India Bank Limited

Bank which started as private shareholders banks, Imperial Bank of

mostly Europeans shareholders India

77
The first Indian bank to open a branch outside India in Bank of India,
London in 1946 and the first to open a branch in founded in 1906
continental Europe at Paris in 1974 in Mumbai

The oldest Public Sector Bank in India having branches

all over India and serving the customers for the last 132 Allahabad Bank
years

The first Indian commercial bank which was wholly Central Bank of
owned and managed by Indians India

78
Public Sector Banks V/S Private Banks

With Reserve Bank of India slashing the key interest rates on home loan
borrowers have got a sigh of relief. In the last four years, interest rates
have gone from around 7 per cent to over 14 per cent. There is no getting
away from higher equated monthly installments. Most home loan
borrowers had opted for floating rate loans in the past five years.
Unfortunately, banks increased the rate on these loans three to four times
in the one and a half years. Now, the borrowers are feeling the heat of
increased rate of interest.

With the rising financial crisis, the banks have cut key rates over the last
few months. The expectation is that interest rates will fall further and at
present, only a few banks, mostly the public sector banks, have slashed
their rates and are offering floating interest rate ranging form 8% to 9.25%
(loan below 20 lacs for 20yrs).

On other hand, private sector banks, are offering loans at 9.75% to 10.75%
interest rate for the same tenure. Obviously, there is a good .50%-1.75%
percentage point differential between the private sector and public sector
banks. So, that brings us to the key question: does it make sense to borrow
from public sector or private sector banks? Here is some of the difference

Loan Eligibility Criteria: The rate difference is also because the two
compete on different grounds for business. Public sector banks keep the
rate of interest lower, but the eligibility norms are stringent such as the
funding is restricted up to 70% of the total cost of property and while
calculating income the net take home is considered where as Private

79
Banks and housing finance companies, on the other hand, offer loan up to
85% of the total cost and gross monthly income is considered for
calculating the loan eligibility.

Rate Revision: Whenever there is an interest rate revision public sector

banks are the first to lower their rates. However, private banks have
different rates for existing borrowers and new customers. Existing
borrowers are charged 25-50 basis point higher interest rates. Public sector
banks have common rake rate for its existing as well as new borrowers.
Hence many current borrowers are also looking at transferring their loans
to public sector banks. However, public sector bank are not too comfortable
in doing a balance transfer from other banks. They ask for NOC no
objection certificate for transferring the loan from the existing lender which
very difficult to get for borrowers

Door Step Service: From the processing of application form for loan to the
sanctioning, private sector banks and housing finance company score over
public sector banks. This is one of the major reasons for borrowers opting
for private banks. They offer door step service to their borrowers where a
customer can avail the loan at his convenient time and place. Where ells in
public sector bank borrowers has to visits the bank for each and every
procedure right from submitting application form till the time of
disbursement.

The entire process of loan in private sector banks takes about 10 to 15

working days. However in Public sector banks the branch has to send
documents to the regional headquarters or hub for approval. In case of
private bank, most of the process is outsourced. Public sector bank sends

80
their own staff for evaluation of property and verifying the customers
disclosed asset. This becomes a time consuming process and hence the
disbursement is delayed in most of the cases

Though private banks charge higher interest rates, public sector banks
cannot match their service levels yet. If your loan component is less than
75-80 per cent, it may make sense to try a public sector bank. While public
sector banks offer cheaper home loan rates, private banks score on
efficiency.

Key banking ratios: PSUs versus private

Some of the ratios are as follows:

Net interest margin (NIM)

Cost to income ratio

Other income to total income ratio

We thought it would be an interesting idea to look and compare these

numbers for the leading private and public sector banks. In addition, we will
also see how the same ratios have changed over the past few years.

Net interest margins (NIMs): The difference between interest income and
interest expense is known as net interest income. It is the income, which
the bank earns from its core business of lending. As such, NIM is the net
margin earned by the bank on its average earning assets. These assets
comprises of advances, investments, balance with the RBI and money at
call.

81
The proportion of low costs deposits (on which the bank pays interest) has
a lot to do with this ratio. Particularly because banks that have been able to
sustain or improve the proportion of low costs deposits would be able to
garner higher NIMs. Low costs deposits are deposits in the form of current
accounts and savings accounts (CASA).

<>

Source Data: Equity master research

From the above chart we can see that the NIMs of leading public sector
banks, namely State Bank of India (SBI), Punjab National Bank (PNB) and
Bank of Baroda (BoB), have been historically higher than two of the leading
private sector banks- ICICI Bank (ICICI) and Axis Bank (Axis). However,
the NIMs of HDFC Bank (HDFC) are relatively much higher as compared to
its peer group. This is due to the fact that HDFC Bank has sustained one of
the highest proportions of CASA deposits in India.

Another trend we can notice is that the NIMs of private sector banks have
been either improving or were quite stable. However, the story is not the
same for the public sector banks. NIMs of the three leading banks have

82
been either on a decline year after another or have been quite volatile. One
of the possible reasons for the same would be of customers shifting to
private banks for banking services.

Cost to income ratio: This ratio is calculated by dividing the operating

expenses by the total income generated i.e.net interest income plus the
other income. The lower the ratio, the better it is for a bank as it would help
prop up its profit and return ratios.

From the following chart we can see that the public sector banks have done
well to reduce their costs (as a percentage of total income) over the past
three to four years. However, the same cannot be said about all the private
sector banks. While ICICI and Axis Bank have managed to bring down their
expenses in recent times, HDFC Bank’s costs have risen due to the higher
expense ratio of Centurion Bank of Punjab that HDFC Bank acquired in
FY08.

<>

Source Data: Equity master research

83
Further, for private sector banks, salaries have incrementally formed a
larger part of operating expenses. If we compare similar data for a PSU
bank such as SBI, the situation is different. Salary expenses stood at an
average of 65% of operating costs during this period. This is no doubt a
high number. But as we are comparing cost to income ratio, the same has
improved on account of lower salary costs as a percentage of total
operating costs. During FY05, salary costs formed about 68% of costs. This
same stood at about 62% during FY09.

Other income to total income ratio: Other income largely constitutes of

fee income such as commission, exchanges and brokerage fees. Banks in
developed countries derive nearly 50% of revenues from this stream. For
Indian banks, such fees contribute only about 15% -25% of the overall
revenues.

Other income also includes profit on exchange transactions, profit from sale
of investments, and other miscellaneous income, amongst others.

<>

Source Data: Equity master research

84
ICICI Bank clearly takes the cake in this one amongst private sector
entities. On the other hand, public sector banks have done well to improve
their other income to total income ratios in recent times.

However, it must be noted that fee income (and not total other income) of
the public sector banks are relatively quite low. For instance, fee income for
the three public sector banks stood at an average of about 15% (as a
percentage of total income) during FY09. The same ratio for these three
private banks stood at about 32% during FY09.

Conclusion
Looking at the above mentioned parameters, it does get a bit difficult to
conclude whether public sector or private sector banks have performed
better on an overall basis. In selected parameters –such as other income to
total income ratio - private sectors are the clear winners. As for the cost to
income ratios, the large public banks have done well to bring down
expenses (as a percentage of total income) over the past few years. The
same is not the case for all the private banks.

It is recommended that you must not be prejudiced towards investing in

stocks of only public or only private sector banks. It is important to study
these parameters, compare them to the peer group and also make sure
that the stocks you pick meet your valuation criteria.

85
Indian Overseas Bank

Indian Overseas Bank (IOB; established 1937) is a major bank based in

Chennai (Madras), with 1950 domestic branches and six branches
overseas. Indian Overseas Bank has an ISO certified in house Information
Technology department, which has developed the software that 900
branches use to provide online banking to customers; the bank has a target
to expand online banking to 1200 branches by the end of financial year
2007-08. IOB also has a network of about 600 ATMs all over India and
IOB's International VISA Debit Card is accepted at all ATMs belonging to
the Cash Tree and NFS networks. IOB offers internet Banking (E-See
Banking) and is one of the banks that the Govt. of India has approved for
online payment of taxes.

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History

• 1937: Shri.M.Ct.M. Chidambaram Chettyar establishes the Indian

Overseas Bank (IOB) to encourage overseas banking and foreign
exchange operations. IOB started up simultaneously at three
branches, one each in Karaikudi, Madras (Chennai) and Rangoon
(Yangon). It then quickly opened a branch in Penang and another in
Singapore. The bank served the Nattukottai Chettiars, who were a
mercantile class that at the time had spread from Chettinad in Tamil
Nadu state to Ceylon (Sri Lanka), Burma (Myanmar), Malaya,
Singapore, Java, Sumatra, and Saigon. As a result, from the
beginning IOB specialized in foreign exchange and overseas banking
(see below).
• 1960s: The banking sector in India was consolidating by the merger
of weak private sector banks with the stronger ones; IOB absorbed
five banks, including Kulitali Bank (est. 1933).
• 1969: The Government of India nationalized IOB. At one point,
probably before nationalization, IOB had twenty of its eighty branches
located overseas. After nationalization it, like all the nationalized
banks, turned inward, emphasizing the opening of branches in rural
India.
• 1988-89: IOB acquired Bank of Tamil Nadu in a rescue.
• 2000: IOB engaged in an initial public offering (IPO) that brought the
government's share in the bank's equity down to 75%.

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International expansion

• 1937-38: As mentioned above, IOB was international from its

inception with branches in Rangoon, Penang, and Singapore.
• 1941: IOB opened a branch in Malaya that presumably closed almost
immediately because of the war.
• 1946: IOB opened a branch in Ceylon.
• 1947: IOB opened a branch in Bangkok and re-opened others.
• 1948: United Commercial Bank (see below) opened a branch in
Malaya.
• 1949: IOB opened a branch in Bangkok.
• 1963: The Burmese government nationalized IOB’s branch in
Rangoon.
• 1973: IOB, Indian Bank and United Commercial Bank established
United Asian Bank Berhad in Malaysia. (Indian Bank had been
operating in Malaysia since 1941 and United Commercial Bank
Limited had been operating there since 1948.) The banks set up
United Asian to comply with the Banking Law in Malaysia, which
prohibited foreign government banks from operating in the country.
Also, IOB and six Indian private banks established Bharat Overseas
Bank as a Chennai-based private bank to take over IOB's Bangkok
branch.
• 1977: IOB opened a branch in Seoul.
• 1979: IOB opened a Foreign Currency Banking Unit in Colombo, Sri
Lanka.
• 1992: Bank of Commerce (BOC), a Malaysian bank, acquired United
Asian Bank (UAB).

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 • 1999: Bank of Commerce (BOC) merged with Bank Bumiputra
Malaysia to form Bumiputra-Commerce Bank (BCB) Berhad.
• 2005: BCB integrates with CIMB which the company is own by the
Datuk Seri Nazir Razak who is the youngest son of Malaysia's
second (former) Prime Minister Tun Abdul Razak from 1970 - 1976
and youngest brother of today's (2005) deputy prime minister Dato
Seri Najib Tun Razak.
• 2007: IOB takes over Bharat Overseas Bank.
• 2009: IOB takes over Shree Suvarna Sahakari Bank Limited.

Corporate Vision: To emerge as the most competitive bank in the industry

Corporate Mission: To become the most competitive bank in the industry

in the country during the next two years. For being competitive, the Bank
would need to be responsive to the challenges of the market force. In this
process, it would also emerge as the most profitable bank by cutting the
cost and increasing the revenue.

Corporate Focus: The Corporate focus of the Bank is maximization of

shareholders wealth, corporate excellence through sound corporate
governance and achievement of Rs. 3 lacs profit per employee.

Competitive Strengths: Many new generation banks, both private and

foreign, have entered the banking industry and offer new products at
competitive rates. In this scenario, the Bank has defined its competitive
advantage as:

89

Vast branch network spread all over India and in certain overseas
trading business centres to enable resources mobilization at Low cost

Advancement in technological up gradation

Well trained personnel in key fields to handle specialized products

Corporate Strategy: In the years to come the profit margins would be

under increasing pressure. To overcome such a trend the Bank’s corporate
strategy is:

To build business volume through penetrating retail segments with
innovative products

To use technology for better customer comfort and satisfaction
coupled with reduction in operating expenses
1. To provide most efficient and speedy customer service
2. Increased emphasis for fee and commission based products

Indian Overseas Bank Services

Indian Overseas Bank currently provides specialized banking services to its
retail customers that include Any Branch Banking (ABB), ATM Banking,
IOB STARS (Indian Overseas Bank - Speedy Transfer And Realization
Service) and the most popular and latest one is the 8% Saving (Taxable)
Bond Scheme.

The usual banking services by Indian Overseas Bank are mentioned below:

DEPOSITS:

Saving Bank Deposits

No Frills SB Accounts

Current Account

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Fixed Deposit

Reinvestment Deposit

Recurring Deposit Account

Annuity Deposit Plan

Multiple Investment Scheme

Cumulative Benefit Deposit

Multiple Deposit Account

LOANS:

Personal Loan

Car Loan

Commercial Vehicle Loan

Corporate Loans

Housing Loan

Home Improvement Loan

Educational Loan

NRI Home Loans

Agricultural Loans

Finance For Small, Medium And Large Enterprises

NRI SERVICES:

NRE Accounts

NRO Savings Account

RFC Accounts

FCNR Account

Remittance Services

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OTHER SERVICES AND PRODUCTS:

VISA International Credit Cards

VISA Debit Card

IOB Fine Gold

Real Time Gross Settlement (RGTS)

Forex Collection Services

Agriculture and Business Consultancy Service

Investment options like Mutual Funds and Shares

Besides these products and services, any info on the current interest rates,
news on shares and Forex rates, address and phone number of your
nearest Indian Overseas Bank Branch or ATM is all available on the official
website of Indian Overseas Bank. The site also provides recruitment news
and the jobs vacancy in IOB. Indian Overseas Bank provides Internet
Banking Services to its customers that is an easy and time saving access
to your bank account right to your tabletop. Just login to your net banking
account available online on the home page of IOB website and get the
banking service you desire instantly. Besides this, several customer care
helpdesks are also provided in the IOB branches.

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Risks associated with the bank:

Forex risk

Exchange Rate fluctuations may have an impact on the Bank’s financial

performance. As per RBI guidelines, banks are not allowed to keep open
position on their foreign exchange transactions beyond prescribed limits on
a daily basis. Foreign exchange transactions beyond such limits, if any,
must be squared off at the end of each day. Hence, the risk from exchange
rate fluctuations is minimized. The Board of Directors of the Bank has also
prescribed limits for gaps or mismatches in maturities of Bank’s foreign
currency assets and liabilities and forward transactions in foreign
exchange. The Bank operates within the limits fixed for gaps or
mismatches in maturities of Bank’s foreign currency assets and liabilities
and forward transactions in foreign exchange, thus minimizing the risks of
mismatches in maturities and interest rates.

Interest rate risk

Interest rate volatility exposes the Bank to an interest rate risk or market
risk. Such interest rate risk has a potential impact on net interest income or
net interest margin as well as on the market value of the fixed income
securities held by the Bank in its investment portfolio. These risks are
inherent in the banking business. However, the Bank has put in place a
system of regular review of lending and deposit rates in order to minimize

93
the interest rate risk. The Asset Liability Management Committees of the
Bank reviews the risk on a regular basis. Continuous Risk Management
measures are initiated depending upon the movement in the market
interest rates. The movement in the interest rates is closely monitored for
appropriate action.

Operational Risk

Operational risk is a result of failure of operating system in a bank due to

certain reasons like computer break-downs, power disruptions, fraudulent
activities, natural disaster, human error or omission or sabotage. For
managing operational risk, the Bank has laid down well-defined systems
and procedures. The Bank has set up a separate department to improve
the systems and procedures to suit the changing environment. The Bank
has also in place a strong internal inspection and audit system. For
managing IT related risks, the Information Systems Security Policy is in
place. The Bank has an effective HRD department, which formulates and
monitors delegation of duties and responsibilities at different levels.

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Source: Company, Angel Research

Advances book to grow at 20% CAGR

The Bank’s growth strategy hinges on the high-yield segments of

Infrastructure, SME, Agriculture and Retail lending. Over FY2002-07, IOB's
Advances book grew at a CAGR of 25% to Rs47,060cr. The growth in
Advances is taken care of by the excess SLR in the investment book and
core deposits. The share of Retail Advances to Total Advances stood at
23% at Rs10,880cr in FY2007. IOB management expects to further
increase the share of Retail Advances to 26% over FY2009E. The key
focus areas to improve the share of retail loans would be education loans,
personal and trade finance segment. We expect IOB's Advance portfolio to
grow at a CAGR of 20% over FY2007-09E.

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Deposits to grow at 18.1% CAGR

Over FY2002-07, IOB's Deposits grew at a CAGR of 17% to Rs68,704cr.

The share of low-cost current and saving accounts deposits or CASA
improved from 30% in FY2002 to 35% in FY2007. However, during
FY2007, IOB's CASA ratio actually slipped by a significant 506bp to 35%
(41%). This was mainly on account of a shift from current and savings
account deposits to term deposits. Considering the high interest rate
scenario, we expect the Bank to maintain CASA ratio at around 34%. Over
FY2007-09E, we expect IOB's deposits to grow at a CAGR of 18.1% to
Rs95,813cr.

At the end of FY2007, to fund the high growth in Advances, IOB added
certain short-term bulk deposits, which account for around 18% of total
deposits carrying an interest rate of 9.5%. Faster maturity of these high-
cost deposits will help the Bank in keeping a check on the cost of funds. On
the other hand, with the recent reduction in the cost of funds, IOB has been
able to reduce its reliance on bulk deposits and increase its focus on low-
cost retail deposits. This helped it contain the cost of funds. Besides, the
Bank also has access to low-cost NRI deposits, which account for around
9% of its deposits. All these factors are expected to help the Bank maintain
its cost of funds at around 5.5% levels.

96
Yield on Earning Assets & Cost of Deposit movement

Robust non-interest income backed by strong recoveries and treasury

gains

IOB has initiated various measures to increase the share of fee-based

income in its total income. As a result, IOB's core fee-based income to total
income increased from 18% in FY2002 to 21% in FY2007. Non-interest
income contribution to total income were off their highs of 36% in FY2002
to 13% in FY2007 due largely to the hit on amortization in its investment
portfolio and reduced treasury gains following hardening of interest rates
since 2004. IOB has now started focusing on the Retail segment apart from
the traditional fee income generating sources from corporate. IOB has
entered into tie-ups with nine asset management companies for the
distribution of their mutual fund products, has tied-up with LIC for
distribution of its life insurance products and United India for its general
insurance products. IOB has also started selling gold coins to its

97
customers. Due to its dominance in South India and its overseas branches,
the Bank is leveraging on its NRI customers to increase its fee-based
income by way of remittances. IOB has also entered into MoUs in a five
way tie-up with Allahabad Bank, Dabur India, Karnataka Bank and Sampo
Japan for its non-life insurance foray. IOB holds 19% in the venture.
Recently, the Bank also started a syndication desk to arrange loans for
corporate and derivative products for its corporate customers.

Enhancing Fee Income contribution to Total income

Improving operating efficiencies

Skilled staff has been a crucial factor in IOB's success story. Beefed up
with a skilled set of employees, the Bank has been able to develop its in-
house technology platform, which has resulted in substantial cost savings.
Going ahead, IOB has guided for rationalization of employees with the
number of employees reducing by 400 every year. In FY2007, IOB had one

98
of the best operating ratios with its cost to income ratio at 47% compared to
58.9% in FY2002. IOB's operating cost to average assets ratio at 1.96%
was also below the industry average of over 2%. Over FY2002-07, the
Bank's balance sheet has increased in size from Rs35,441cr to Rs82,257cr
growing at a CAGR of 18.3%. Operating expenses also grew at a CAGR of
9.4% during the same period. Over FY2007-09E, we expect the employee
cost to grow by 17.8% mainly due to the provision for employee benefits as
per AS-15. Accordingly, IOB expects to account for Rs180cr annually over
the next five years towards AS 15. Overall the Bank's operating costs are
expected to grow at a CAGR of 17.4% over FY2007-09E. By FY2009E,
operating expenses, as a percentage of average assets, is expected to be
1.86%.

Outstanding Return Ratios

Outstanding Return Ratios despite aggressive write-off of bad loans

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Steady core operating income and strong balance sheet growth helped IOB
maintain its RoAA. Higher RoAA has also been supported by recoveries
and treasury gains. However, going ahead we do not expect contribution
from these segments to continue to be high but, the Bank’s core operating
performance is expected to remain strong. Over FY2003-07, IOB
constantly delivered good return ratios. RoAA was constantly above 1%
and due to the higher leverage on balance sheet, the Bank’s RoNW
remained between 28-32% in the mentioned period. IOB was among the
first banks to raise Perpetual bonds. On the back of addition of Tier I
Perpetual bonds, the Bank could leverage its Balance Sheet by about 20x.
Over FY2002-07, IOB’s core Operating profit and Net profit grew at a
CAGR of 38% and 34% respectively, whereas the Balance Sheet size grew
by 18%. In FY2007, IOB reported RoA of 1.42% and RoNW of 28%. For
FY2008E and FY2009E, we expect IOB to report RoAA of 1.14% and with
an effective leverage of around 20x and RoNW is expected to be 23% and
22%, respectively. Going forward,
in 50% of the targeted recoveries from written off accounts. Hence, higher
recoveries for FY2008 from these accounts would be a positive trigger for
the stock.

Capital Adequacy Ratio (CAR) remains comfortable

IOB is well placed on the capital adequacy ratio (CAR) front. For FY2007,
the Bank reported CAR of 13.27% of which Tier I comprised 8.2%. In
FY2007, the Bank had raised innovative perpetual debt instruments (IPDI)
of Rs280cr totaling Rs480cr. Upper Tier II subordinated bonds of

100
Rs1,000cr while bonds worth Rs257.8cr were redeemed during FY2007. At
the end of FY2007, IOB held bonds worth Rs2,683cr. Post implementing
Basel II, management expects CAR would stand at 12%. IOB has to
comply with Basel II guidelines by FY2008 due to its overseas branch
network. We do not expect the Bank to dilute its equity in the near term.

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SWOT Analysis of Indian Overseas Bank

Valuation

We prefer IOB for its consistent performance over the years despite
progressive write off of sticky assets. The Bank will continue to be in ‘sweet
spot’ with its superior return ratios, consistently high net interest margins,
better operating efficiency and higher leverage. Going ahead too, we
expect IOB to deliver robust performance with RoNW estimated at 23%
over FY2008 and FY2009E. For the purpose of our valuation, we have
given equal weight to the Residual Income and Gordon Growth

102
Methodology. Based on this, we have arrived at a fair price of Rs167.
Nonetheless, we have attached a 10% discount to our Target Price due to
IOB's geographical concentration. Post its public issue in FY2001 and
FY2003, the government’s holding in IOB stood at 61%. On account of this,
we expect IOB to be an active participant in the consolidation process. We
initiate coverage on the Bank with a Buy recommendation and Target Price
of Rs150. At the CMP, the stock trades at 5.9x and 1.3x FY2009E EPS of
Rs21.5 and ABV of Rs96.6, respectively. At the Target Price of Rs150, IOB
would trade at a P/E of 7.0x and P/ABV of 1.6x EPS and ABV of Rs21.5
and Rs96.6, respectively. Based on our Target Price, the stock offers a
potential upside of 20.7% including a dividend yield of 2.8% over a period
of 12 months.

Indian Overseas Bank

Report card

Attribute Value Date

PE ratio 3.89 28/01/10
EPS (Rs) 24.34 Mar, 09
Sales (Rs crore) 2,570.13 Dec, 09
Face Value (Rs) 10
Net profit margin (%) 11.87 Mar, 09
Last dividend (%) 45 04/05/09
Return on average equity 22.31 Mar, 09

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AXIS BANK

AXIS Bank is one of the fastest growing banks in the country and has an
extremely competitive and profitable banking franchise evidenced by:
Comprehensive portfolio of banking services including Corporate Credit,
Retail Banking, Business Banking, Capital Markets, Treasury and
International Banking. Private players such as Axis Bank that offer a
multitude of delivery channels and have an integrated technology platform
could potentially achieve comparable distribution reach in the top 200 cities
to government banks with substantially fewer branches. With a presence in
the top 150 cities, Axis Bank is very well positioned to rapidly reap the
benefits of the expanded reach by scaling up its retail foray. Axis Bank is
India’s third-largest private-sector bank after the significantly larger ICICI
Bank. The Bank's Registered Office is at Ahmedabad & its Central Office is
located at Mumbai. Presently, the Bank has a very wide network of more
than 853 branch offices and Extension Counters. The Bank has a network
of over 3,723 ATMs providing 24 hrs a day banking convenience to its
customers. This is one of the largest ATM networks in the country. The
Bank has strengths in both retail and corporate banking and is committed
to adopting the best industry practices internationally in order to achieve
104
excellence. The bank has won 'Outstanding Achievement Award' for the
year 2005 from Indian Banks Association for IT Infrastructure, delivery
Capabilities and innovative solutions. As on the year ended March 31, 2009
the Bank had a total income of Rs. 13,745.04 crores and a net profit of Rs
1,812.93 crores. The Bank today is capitalized to the extent of Rs. 359.00
crores with the public holding (other than promoters) at 57.60%. The
Position as on 31st March 2008 was as under

Balance Sheet Size – Rs 1,9577.85 Crores

Total Deposits – Rs 87,626.22 Crores

Net Advances – Rs 59,661 Crores

Investments – Rs 33,705Crores

Network of Branches &

Extension Counters – 853

Foreign Offices – 4

Number of ATMs – 3723

Net NPA – 0.36%

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History of the Axis Bank

Axis Bank, previously called UTI Bank, was the first of the new private
banks to have begun operations in 1994, after the Government of India
allowed new private banks to be established. The Bank was promoted
jointly by the Administrator of the Specified Undertaking of the Unit Trust of
India (UTI-I), Life Insurance Corporation of India (LIC), General Insurance
Corporation Ltd., National Insurance Company Ltd., The New India
Assurance Company, The Oriental Insurance Corporation and United
Insurance Company Ltd. UTI-I holds a special position in the Indian capital
markets and has promoted many leading financial institutions in the
country. The bank changed its name to Axis Bank in April 2007 to avoid
confusion with other unrelated entities with similar name. Shikha Sharma
was named as the bank's managing director and CEO on 20 April 2009.

PRODUCTS AND SERVICES

Retail Banking
The Retail Banking business of the Bank is divided into following subunits:

 Retail Liabilities
 Retail Assets
 Cards
 Wealth Management
 Corporate Communications and Market Research
 Bulk Retail Acquisition /Payroll Accounts
 Alternate Channels

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The focus of the Retail Banking Department is to:

1. Increase share of Retail Deposits

2. Increase share of Retail Assets
3. Increase Fee Based Income

In order to achieve the above mentioned, the following strategies are used:

1. Introduce New Products based on Customer Need and to address

targeted segments.
2. A strong Sales Focus.
3. An extensive network and effective utilization of the banking channels.

RETAIL LIABILITES – An overview of the products

Retail Liabilities business includes deposits collected from Retail
Customers. These are of two types
1. Savings deposits
2. Term deposits (fixed deposits)

Savings deposits are important as these are low cost deposits and are
critical to keep the cost of funds low for the bank. A savings account is also
the cornerstone of relationship that the customer has with the bank in
majority of the cases. Selling a savings account therefore is akin to
acquiring a customer for the bank who can then be cross-sold other

107
products. The Bank has launched customized savings account products for
various categories of customers – Mass affluent, Senior Citizens, Students
& Trusts/NGOs besides a very competitive offering in the Salary Accounts
category.

Segmentation of Savings Bank business

Saving bank:-

 Easy Access
 Senior Privilege
 Trust & NGOs
 Smart Privilege
 Priority Banking
 Salary
 NRI Services

Deposit types:

 NRE (Non Resident External Accounts) Any person resident outside

India may open NRE account. This Account permits a NRI to hold
and maintain foreign currency earnings in Indian rupee. The principal
and interest earned on these balances are freely repatriable. The
account can be funded by the following source of funds:
 Foreign inward remittance by way of TT / DD cheque, Travelers
cheque, foreign currency, etc., or transfer from existing NRE / FCNR

108
 accounts. It can be in the form of Savings, Current or fixed deposits in
Indian rupees. The funds in this account are fully repatriable.

NRO (Non Resident Ordinary Accounts)

Any person resident outside India may open NRO account, for putting
through bonafide transactions in Rupees on account of monies originating
in India. The account can be funded by the following source of funds:

 By transfer of existing domestic accounts, by fresh inward remittance

by way of TT, DD, Cheque, TC, Foreign currency, by transfer from
existing NRE / FCNR accounts, legitimate dues in India of the
account holder
 It can be in the form of Savings, Current or Fixed Deposits in Indian
Rupees. The funds in this account are conditionally repatriable.

FCNR (Foreign Currency Non Resident Accounts)

It can be in the form of fixed Deposits only, in the five major currencies,
namely US Dollars, GBP, Euro, Canadian Dollar and Japanese Yen. The
funds in this account are fully repatriable.

RETAIL ASSETS
Retail Credit is emerging as one of the focus areas of most of the banks in
the country. The retail credit business here is still very small compared to
some of the developed countries of the world. The business is also in a
nascent stage if compared to the corporate loans in the country and
comprises of around 25 % of the total commercial bank loans.

109
Infrastructure Creation:
The growth envisaged in retail assets has been achieved by putting in
place:
Centralized cells for PDC management, recovery and collections,
document storage and MIS. It was deemed necessary to set up this
infrastructure before embarking on a countrywide marketing programme.

Software:
Given the changes in volumes, the Bank has implemented new software to
take care of it s loan originations and maintenance. This software is called
FINNONE and from the stable of Nucleus Software. This system also
supplements the new collection system, which went live in 06- 07.

Organizational Structure:
The Retail Assets team at the Central Office is reoriented at a product
driven and customer centric approach to provide better control, design and
management of retail assets.

Distribution:
The distribution arm of Retail Asset business happen through:
1. Sales subsidiary AXIS Sales ltd.
2. Already existing DSA network

Card Power
We extend finance to the traders/ merchants on the basis of the goods sold
through credit cards.

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Consumer Power
Purpose: Purchase of new consumer durable item

Loan Amount:
Minimum Loan amount Rs.25, 000,
Maximum Loan amount Rs.2, 00,000

Two Wheeler Loan Purpose

To purchase a two wheeler

Quantum of Loan
Minimum Rs.20, 000/-
Maximum Rs.70, 000/-.

Loan to Value
We finance 80-85% of the on road price (Cost of Vehicle + registration+
insurance) of the vehicle.

WEALTH MANAGEMENT

The Wealth Management Group has been one of the fastest growing
divisions of Axis Bank. The tremendous year-on-year growth has been the
result of the teamwork and coordination within the group. The following
revenue figures only highlight the individual as well as collective abilities
and dedication of the Group.

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Axis Wealth
Axis Wealth is an advisory service offered by the Bank exclusively for the
privileged HNI. Axis Wealth goes beyond banking and encompasses
solutions for a lifetime. Beginning from investments up to tax planning, we
are here with a wide range of services, where the client experiences a
specialized and personalized treatment.
The aim of Axis Wealth is to understand the clients’ needs and tailor
solutions to meet them. Dedicated and experienced Wealth Managers help
the clients and manage their all wealth- related activities. The professional
management of these experts pursues the objective of delivering consistent
long-term performance while controlling the associated risk.

Wealth Manager-
Wealth Managers are the most sought after individuals in the team. They
are a disciplined group of individuals, who adhere to the ethical and
regulatory standards while delivering of services in an integrated mix of tax-
efficient solutions, legal counsel and accounting advice on top of financial
planning and investment management. Wealth Managers are a single point
contact for the client for their all investments need. They constantly monitor
and rebalance the portfolio to optimize the return. They take care of all the
administrative aspects of the portfolio with the monthly reporting on the
overall status of the portfolio and its performance.

Product Team-
Product team takes the ownership of the Axis Wealth product. The team
offers a wide spectrum of products, banking services & tailor made financial
advices to suit investment needs. All products are researched and

112
revalidated by our Investment research team on the parameters of risk,
return, future potential, transparency in offering, diversification objective,
regulatory aspects and other portfolio related parameters. The final product
recommendation is guided by systemic approach and in-depth research.

General Insurance In early 2005, Axis Bank entered into a corporate

agency tie up with the leading private sector insurance player, Bajaj Allianz
General Insurance Company Ltd, for sales of non-life insurance products
through all its branches. The formal launch and announcement of the tie up
took place during May 2005.

Bajaj Allianz General Insurance Company Ltd

Bajaj Allianz General Insurance Company Limited is a joint venture
between Bajaj Auto Limited and Allianz AG of Germany. Both enjoy a
reputation of expertise, stability and strength. Apart from selling standard
Bajaj Allianz policies, Axis Bank has also launched for special co- branded
general insurance products in association with Bajaj Allianz. These
products are exclusively sold to Axis Bank’s large retail customer base and
shall be available only through Axis Bank. These policies offer the
customers greater benefits, more competitive pricing and ease of purchase
as compared to the regular insurance policies offered by Bajaj Allianz.

Bundled Insurance:
The concept is to bundle health insurance with Savings account and Salary
account and Credit Card customers. Apart from the regular benefits of a
Health Insurance, the key benefit to the Customer in this type of format is
that he gets to pay the premium in monthly installment mode.

113
Corporate Products

We also cater to our Corporate & SME segment by offering the following
types of policies:
• Fire and allied perils
• Money Insurance
• Fidelity Insurance
• Employee Benefit Policies
• Workmen Compensation
• Marine Insurance
• Specialty products
• Office Insurance

Rapidly expanding distribution reach

Extended reach would also help the Bank to reach out to a large cross-
section of customers with an array of products and services catering to
both the retail and the corporate segment & hence generate significant
amount of fee income as well as strengthen its liabilities profile.

114
Assets growth to remain strong

Assets size to expand at ~25% CAGR during FY08-11E

Axis Bank, over the past couple of years, has been aggressively pursuing
growth and is expected to continue to deliver strong growth going ahead.
The Assets size has expanded at a robust rate of 41% CAGR during the
past 5 years. While we expect the assets size to expand at a lower rate of
25% CAGR during FY08-11E, we have assumed a similar increase in
assets size during the next 3 years as has been witnessed in FY08. We
expect Axis Bank to achieve substantial assets base of over Rs. 2 trillion by
FY11.

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Key Risks

Higher than expected delinquencies - Key Risk: Given the uncertain

and difficult macro-economic environment and bank’s exposure towards
mid-corporate and SMEs, we have built-in higher delinquencies for Axis
Bank in our projections. We expect specific LLP to increase from 71bps in
FY08 to 108 bps FY11. Higher than expected slippages remains the key
risk to our expectations.
Slower than expected assets growth: Axis Bank, over the past couple of
years, has been aggressively pursuing growth. We have build-in slower

116
assets growth going ahead at 29% in FY09 (vs. 50% in FY08). Slower than
expected assets
growth is a risk to our projections.

Succession plans: Dr Nayak would retire in Jul’09. While the bank has a
strong second rung management team, uncertainty with regard to
succession of Dr. Nayak may continue to linger at the top of investors’
mind.

COMPARATIVE ANALYSIS OF AXIS BANK WITH OTHER BANKS

1. AXIS bank is a fast growing in TASC (Trust, associations, societies,

corporations) Segment comparative to other banks, like ICICI, HDFC,
CANARA Bank, Yes bank etc.

2. AXIS Bank provides anywhere banking at free of cost, on the other

hand other banks takes charge on this facility.

3. AXIS bank provides free Demand draft, pay order facility free of cost
in all AXIS Bank branches but Yes bank provides this facility in only
selected branches not in all branches.

4. AXIS bank provides free monthly statements to all TASC segment

customers in comparison to other banks, other banks send the
quarterly statements of account.

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5. AXIS bank provides international debit card, in case of other banks
they do not provide international debit card to TASC Segment
customers.

6. AXIS Bank provides free DMAT account to TASC Customers, others

bank do not provide this facility free of cost.

7. AXIS Bank have great share in TASC segment in Ambala Cantt

comparison to ICICI, HDFC Bank.

8. AXIS Bank deals in other products like mutual fund, life insurance,
credit card, debit card, gold card, platinum card, general insurance,
loans etc.

9. AXIS Bank provides better service to their customers comparison to

other banks like ICICI, HDFC etc.

10. AXIS Banks have best staff in their branches in comparison to

other banks.

11. Customer problems are very less in AXIS Bank comparison to

other banks.

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COMPARISON ON THE BASIS OF 7Ps

PRODUCT

AXIS BANK YES BANK KOTAK BANK

Banking and Savings Banking and Savings Banking and Savings

• Banking and • Banking and • Banking and

Accounts Accounts Accounts
• Convenience • Convenience • Convenience
Banking Banking Banking
• Credit Cards • Credit Cards • Credit Cards
• NRI Services • NRI Services • NRI Services
• Demat • Demat • Demat
• Deposits • Deposits • Deposits

Corporate and Corporate and Corporate and

Institutional Institutional Institutional

• Corporate • Corporate • Corporate

Finance Finance Finance
• Treasury • Treasury • Treasury
• Investment • Investment • Investment
Banking Banking Banking
• Institutional • Institutional • Institutional

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 Equities Equities Equities

Investments and Investments and Investments and

Insurance Insurance Insurance

• Life Insurance • Life Insurance • Life Insurance

• Mutual Funds • Mutual Funds • Estate Planning
• Gold • Gold • Mutual Funds
• Share Trading • Share Trading • Gold
• Share Trading

Loans and Borrowings

Loans and Borrowings Loans and Borrowings
• Car Finance
• Car Finance • Car Finance • Commercial
• Commercial • Commercial Loans
Loans Loans • Home Loans
• Home Loans • Home Loans • Personal Loans
• Personal Loans • Personal Loans • Loans Against
• Loans Against • Loans Against Property
Property Property
• Agriculture Loan

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 PRICE

AXIS BANK YES BANK KOTAK BANK

The pricing decisions or the decisions related to interest and fee or

commission charged by banks are found instrumental in motivating or
influencing the target market.

The RBI and the IBA are concerned with regulations. The rate of interest is
regulated by the RBI and other charges are controlled by IBA.

PLACE

AXIS BANK YES BANK KOTAK BANK

123 Branch Spread In 126 Cities

827 Branch
In India
Future Target 2015 Is
3595 ATM
3000 ATM Across 217 Branches Spread
17 State In India
Country Across

Over 800 ATM

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 PROMOTION

AXIS BANK YES BANK KOTAK BANK

Advertising: Advertising: Advertising:

Television Television Television

Radio Radio Radio

Movies Movies

Theatres

Print Media: Print Media: Print Media:

Hoardings Newspaper Hoardings

Newspaper Magazines Newspaper

Magazines Magazines

Publicity: Publicity: Publicity:

Campus Visits Campus Visits Campus Visits

Sponsorship Sponsorship Sponsorship

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 Sales Promotion: Sales Promotion: Sales Promotion:

Gifts Gifts Gifts

Personal Selling: Personal Selling: Personal Selling:

Cross-Sale (Selling Cross-Sale (Selling Cross-Sale (Selling

At Competitors At Competitors At Competitors
Place) Place) Place)

Personalized Personalized Service Personalized Service

Service

PEOPLE

AXIS BANK YES BANK KOTAK BANK

14000 Employee base 3150 Employee Base 9800 Employee Base

PROCESS

AXIS BANK YES BANK KOTAK BANK

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Standardization: Bank has got standardized procedures got typical
transactions. In fact not only all the branches of a single-bank, but all the banks
have some standardization in them. This is because of the rules they are
subject to. Besides this, each of the banks has its standard forms,
documentations etc. Standardization saves a lot of time behind individual
transaction.

Customization: There are specialty counters at each branch to deal with

customers of a particular scheme. Besides this the customers can select their
deposit period among the available alternatives.

Number of steps: numbers of steps are usually specified and a specific

pattern is followed to minimize time taken.

Simplicity: Banks various functions are segregated. Separate counters exist

with clear indication. Thus a customer wanting to deposit money goes to
‘deposits’ counter and does not mingle elsewhere. This makes procedures not
only simple but consume less time. Besides instruction boards in national
boards in national and regional language help the customers further.

Customer involvement: ATM does not involve any bank employees. Besides,
during usual bank transactions, there is definite customer involvement at some
or the other place because of the money matters and signature requires.

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 PHYSICAL EVIDANCE

AXIS BANK YES BANK KOTAK BANK

• Internet/Web • Internet/Web Pages • Internet/Web

Pages • Paperwork Pages
• Paperwork • Brochures • Paperwork
• Brochures • Furnishings • Brochures
• Furnishings • Business Cards • Furnishings
• Business Cards • Building • Business Cards
• Building • Signage • Building
• Signage • Financial Reports • Signage
• Financial Reports • Tangibles • Financial Reports
• Tangibles • Punch Lines • Tangibles
• Punch Lines • Employee’s Dress • Punch Lines
• Employee’s Dress Code • Employee’s Dress
Code Code

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SWOT ANALYSIS OF AXIS BANK

1. STRENGTH

• Extremely Competitive And Profitable Banking Franchise

• Banking Services Include Corporate Credit, Retail Banking, Business

Banking, Capital Markets, Treasury And International Banking.

• Sound Technological Platform With Centralized Database And

Operations

• Retail Banking Savings Bank Deposits Grew To Rs. 25,822 Cr. On

31st March 2009 From Rs. 19,982 Cr. As On 31st March 2008
Showing A Year On Year Growth Of 29%.

• Support of various Promoters

• Strong technology

• Total Deposits Rs 1,17,374 crore

• Net Advances Rs 81,557 crore

• Net NPA 0.35%

• Capital Adequacy Ratio 13.69%

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2. WEAKNESS

• Not having Image UTI (fraud)

• Higher cost

• Customer service

• Market Capitalization Very Low

3. OPPORTUNITY

• Large retail and corporate market

• Wide scope in rural India

• Other Activity (Non Banking Activity)
• People are become more service oriented

4. THREAT

• Other better Saving, investment option available (like Insurance,

Mutualfund, Real-estate, Gold)

• Government Rules And Regulation

• Very high competition with Private sector (ICICI Bank, HDFC bank) or
public sector (BOB, PNB) Bank.

• Capital Market slow-down

• Rising Rates
• Future Market Trends

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SWOT ANALYSIS OF INDIAN BANKS

STRENGTH

• Indian banks have compared favorably on growth, asset quality and

profitability with other regional banks over the last few years. The
banking index has grown at a compounded annual rate of over 51 per
cent since April 2001 as compared to a 27 per cent growth in the
market index for the same period.

• Policy makers have made some notable changes in policy and

regulation to help strengthen the sector. These changes include
strengthening prudential norms, enhancing the payments system and
integrating regulations between commercial and co-operative banks.

• Bank lending has been a significant driver of GDP growth and

employment.

• Extensive reach: the vast networking & growing number of branches

& ATMs. Indian banking system has reached even to the remote
corners of the country.

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

• In terms of quality of assets and capital adequacy, Indian banks are

considered to have clean, strong and transparent balance sheets
relative to other banks in comparable economies in its region.

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 • India has 88 scheduled commercial banks (SCBs) - 27 public sector
banks (that is with the Government of India holding a stake)after
merger of New Bank of India in Punjab National Bank in 1993, 29
private banks (these do not have government stake; they may be
publicly listed and traded on stock exchanges) and 31 foreign banks.
They have a combined network of over 53,000 branches and 17,000
ATMs. According to a report by ICRA Limited, a rating agency, the
public sector banks hold over 75 percent of total assets of the
banking industry, with the private and foreign banks holding 18.2%
and 6.5% respectively.

• Foreign banks will have the opportunity to own up to 74 per cent of

Indian private sector banks and 20 per cent of government owned
banks.

WEAKNESS

• PSBs need to fundamentally strengthen institutional skill levels

especially in sales and marketing, service operations, risk
management and the overall organizational performance ethic &
strengthen human capital.
• Old private sector banks also have the need to fundamentally
strengthen skill levels.
• The cost of intermediation remains high and bank penetration is
limited to only a few customer segments and geographies.
• Structural weaknesses such as a fragmented industry structure,
restrictions on capital availability and deployment, lack of institutional

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 support infrastructure, restrictive labor laws, weak corporate
governance and ineffective regulations beyond Scheduled
Commercial Banks (SCBs), unless industry utilities and service
bureaus.
• Refusal to dilute stake in PSU banks: The government has refused to
dilute its stake in PSU banks below 51% thus choking the headroom
available to these banks for raining equity capital.
• Impediments in sectoral reforms: Opposition from Left and resultant
cautious approach from the North Block in terms of approving merger
of PSU banks may hamper their growth prospects in the medium
term.

OPPORTUNITY

• The market is seeing discontinuous growth driven by new products

and services that include opportunities in credit cards, consumer
finance and wealth management on the retail side, and in fee-based
income and investment banking on the wholesale banking side.
These require new skills in sales & marketing, credit and operations.

• Banks will no longer enjoy windfall treasury gains that the decade-
long secular decline in interest rates provided. This will expose the
weaker banks.

• With increased interest in India, competition from foreign banks will

only intensify.

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• Given the demographic shifts resulting from changes in age profile
and household income, consumers will increasingly demand
enhanced institutional capabilities and service levels from banks.
• New private banks could reach the next level of their growth in the
Indian banking sector by continuing to innovate and develop
differentiated business models to profitably serve segments like the
rural/low income and affluent/HNI segments; actively adopting
acquisitions as a means to grow and reaching the next level of
performance in their service platforms. Attracting, developing and
retaining more leadership capacity
• Foreign banks committed to making a play in India will need to adopt
alternative approaches to win the “race for the customer” and build a
value-creating customer franchise in advance of regulations
potentially opening up post 2009. At the same time, they should stay
in the game for potential acquisition opportunities as and when they
appear in the near term. Maintaining a fundamentally long-term
value-creation mindset.
• reach in rural India for the private sector and foreign banks.
• With the growth in the Indian economy expected to be strong for quite
some time-especially in its services sector-the demand for banking
services, especially retail banking, mortgages and investment
services are expected to be strong.
• the Reserve Bank of India (RBI) has approved a proposal from the
government to amend the Banking Regulation Act to permit banks to
trade in commodities and commodity derivatives.

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 • Liberalization of ECB norms: The government also liberalized the
ECB norms to permit financial sector entities engaged in
infrastructure funding to raise ECBs. This enabled banks and
financial institutions, which were earlier not permitted to raise such
funds, explore this route for raising cheaper funds in the overseas
markets.
• Hybrid capital: In an attempt to relieve banks of their capital crunch,
the RBI has allowed them to raise perpetual bonds and other hybrid
capital securities to shore up their capital. If the new instruments find
takers, it would help PSU banks, left with little headroom for raising
equity. Significantly, FII and NRI investment limits in these securities
have been fixed at 49%, compared to 20% foreign equity holding
allowed in PSU banks.

THREATS

• Threat of stability of the system: failure of some weak banks has

often threatened the stability of the system.
• Rise in inflation figures which would lead to increase in interest rates.
• Increase in the number of foreign players would pose a threat to the
PSB as well as the private players.

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Challenges Facing Banking Industry in India

The banking industry has already begun the process of redefining its
boundaries, refining its products and services, providing alternate delivery
channels and improving the flexibility of such delivery to cater to all the
financial intermediation requirements of the customers. The success of the
banking industry will lie broadly on how it responds to the following
challenges:-

• Technology up gradation

• Customer centric

• Response to competition

• Transparency/Accountability

• Skilled workforce

Technology up gradation: Technology brings in fundamental changes not

just in product differentiation and delivery but also influences productivity,
efficiency and profitability. Technology enables banks to provide better
services to the customers where the branch is not necessarily the delivery
point of banking services.

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Customer Centric: Customers are no longer investors or buyers of
financial solutions. As service that requires high level of customer interface,
understanding customer requirements and evolving customer-centric
business strategies is the prime focus area for banks.

Response to competition: Competition is inevitable as more number of

banks aim for their share of the market pie. Most banks eye the corporate
sector and the metro and the urban markets for business. Technology is
today the differentiating factor. But as more and more banks come under
the Core Banking solutions umbrella, with little to distinguish between the
products and services offered by various banks, service and cost alone will
be the determining factors in ensuring the profitability and success of the
bank.

Transparency/Accountability:
With the introduction of financial reforms, the Indian Banking Industry has
been pushed into the open to achieve international standards of prudential
accounting norms for classification of assets, income recognition and loss
provisioning. The scope for ensuring openness and transparency in bank
management has also been ushered in. corporate governance will
determine the way the Board of Directors manage their banks. This will
mean that the management will be accountable to the Board and the Board
to the stakeholders. Banks will have to adopt the best global practices of
accounting norms and reporting. More transparent disclosure norms will
ensure that banks resort to self regulation rather than base their working on
regulatory requirements.

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Skilled workforce:
HR practices and training is engaging the immediate attention of banks
these days. HRM strategies include managing change, building up a team
of committed human capital and improving team work. Knowledge levels
are very important and sufficient training should be afforded to the staff.
The existing staff will have to upgrade their skills to keep pace with the
sweeping changes that are taking place on the technology front in Indian
banks. Only this will help in improving the quality of service to the
customers as well as justify the investments made in technology and the
salaries paid. In this back ground the present paper attempts to explore the
HR challenges facing the banking scenario and strategies to deal with
them. The human resources of an organization constitutes its entire
workforce. Human resource management (HRM) is responsible for
selecting and inducting competent people, training them facilitating and
motivating them to perform at high levels of efficiency, and providing
mechanisms to ensure that they maintain their affiliation with the
organization. Human resource management is also an art of developing
people and their potentialities for their personal growth and for the growth
of the organization. It is a process of bringing people and organizations
together to ensure that individual and collective goals are closely aligned.
People have always been considered as critical in an organizational set-up.
Unlike other resources, such as technology, finance, and materials, which
can be purchased human resource is a critical and sensitive element, and it
needs to be handled with care. Often, organizations are concerned not only
about employee productivity but also about employee commitment and
harnessing their potentialities for maximum growth Since people constitute
the cornerstone of any organization, HRM assumes central importance in

135
most organizqatio0ns. Any decision or process in an organization must be
implemented through its people. In a competitive situation, it is the
ingenuity, zeal, enthusiasm, and commitment of its people that makes all
the difference for an organization.

HR Issues/Challenges in Banking:

According to the Hudson report (2008) the critical HR challenges are hiring
right staff, retaining talent, cutting staff, staff development, salary inflation,
external threats, etc.the
other challenges are Changing working conditions, re-skilling,
compensation etc. Coping with the massive technology adoption
programme – change management from employees’ as well as customers’

perspectives. Some of the management concerns are:

• Marketing HR services

• Human assets

• Man-power planning

• Talent management

• New approach to performance management

• How HR can act as the ‘corporate glue’ or ‘organizational conscience’

136
• Making the most of human capital

• Customers- who are they, and what do they want?

• Towards a framework for continuous development and learning

• Challenges facing HR today – attracting, retaining and motivating

talent

• Implementing recruitment and resource-based strategies

• Where HR fits in the modern central bank

• Managing people and linking with technology in banking operations

needs to be prioritized.

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SWOT ANALYSIS OF INDIAN BANKS (IN HR CONTEXT)

SWOT analysis indicates number of strengths and opportunities to grow in

the competitive direction. However, the weakness and threats are also
serious and need attention immediately. While there is presence of
intellectual capital, there is also a threat of increasing the cost of human
capital.
Talent management has been neglected over the years. The compensation
systems need to be given a fresh look. Technology upgradation and
interaction needs to be brought to international standards. The presence of
competitions from public and private sphere proves to be a serious threat to
138
performance in banks. Talent acquisition and retention of skilled workforce
is posing as a biggest challenge.

Some of the suggestions in realigning human resource in the organization

may be as
follows:

Positioning a HR policy

The quality of human asset present is the prevailing problem. Very little
initiatives have been taken in the last few years. In this crucial but
significant area. as the demands on the banking system are increasing and
its priorities are refocused to create sustainability and profitability, it is time
to restructure and position the HR policies in place. This may be achieved
by starting with A HR vision, HR goals and aligning these goals with the
banks goals and vision. Involvement of the senior level hr personnel in
formulation will benefit that process.

HR planning

Human Resource planning is a process by which the management of an

organization determines its future human resources requirements and how
the existing human resource can be effectively utilize to fulfill these
requirements. It is a system of matching the supply of existing people with
opening or opportunities the organization expects over a given period of
time. Banks have to suitably realign their existing human resources from

139
surplus to deficit pockets and readjust staffing pattern in a computerized
environment. Surplus staff needs to be relocated or reassigned in their job
duties. Mobility of the staff is recommended and this may be attained by
negotiating with employees’ organizational efficiency and productivity.
About 70% staff in each bank constitutes clerical and subordinates staff
institute of many charges that the industry has faced over the years,
essentially the role of this category of staff has remained unchanged. Job
redesigning and role restructuring is recommended at this level in the
banking system.

Talent Management:

Human Resource undoubtedly plays the most important part in the

functioning of an organization. The term ‘resource’ or ‘human resource’
signifies potentials, abilities, capacities, and skills, which can be developed
through continuous interaction in an organizational setting. The
interactions, interrelationships, and activities performed all contribute in
some way or other to the development of human potential. Organizational
productivity, growth of companies, and economic development are to a
large extent contingent upon the effective utilization of human capacities.
Hence, it is essential for an organizational to take steps for effective
utilization of these resources. 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.

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Training and Development:

Dynamic and growth-oriented organizations recognize training as an

important aspect of the managerial function in a rapidly changing economic
and social environment. Training is a continuous and incessant learning
process in human resource managerial and interpersonal skills, increase
motivation, and improve the effectiveness of people
employed in an organization. It also helps to achieve congruence between
corporate and personal goals. As the strength of any organization lies in
the strength of its people, training is undoubtedly the most important part of
organizational renewal as an ongoing process. The Reserve Bank of India
has established a number of epics level training centers to cater to the
needs of its employees. The focus of the training programmes is on IT
adaptation and IT skills. The private sectors banks have also been very
receptive and have augmented their training programme and culture. There
is a need to address the various issues and concerns in the security need
in order to sustain in the techno driven competitive advantage.

Performance Assessment:

To assess the contribution of training systems and learning infrastructure to

the bottom line of the bank, the new generation banks are depending upon
competency assessment, performance evaluation and skills rating. The
traditional banks may also reorient themselves in the above direction.

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Transforming the mindset:

These changes are creating challenges, as employees are made to adapt

to changing conditions. There is resistance to change from employees and
the Seller market mindset is yet to be changed coupled with Fear of
uncertainty and Control orientation. Acceptance of technology is slow but
the utilization is not maximized.

Facing Competition:

Leading players in the industry have embarked on a series of strategic and

tactical initiatives to sustain leadership. The major initiatives include:
Investing in state of the art technology as the back bone to ensure reliable
service delivery, Leveraging the branch network and sales structure to
mobilize low cost current and savings deposits, implementing organization
wide initiatives involving people, process and technology to reduce the
fixed costs and the cost per transaction are some of the steps in this
direction.

Increasing efficiency:

Deregulation has made the banking sector more competitive with greater
autonomy operational flexibility and decontrolled interest rate and
liberalized norms for foreign exchange. Increased competitiveness has
made it necessary to look for efficiencies in the business. Hence, banks are

142
facing pricing pressure squeeze on spending and pressure to give thrust on
retail assets.

Retaining customer loyalty:

Customers are reacting to favorably to the value added ofference.

Customers have also
become more demanding and their loyalties are diffused. Employees need
to operate with a more customer centric in their operations.

Conclusion:

Banks in near future will have to address compensation issues, flexible

work schedules, outsourcing and retaining talent. To face the challenge,
bank requires enhanced skills, new knowledge and behavioral adjustments
of human resources.

Here are some of the other suggestions to face the challenges of

banking sector

Necessary Reforms:

The recent upgrade by Fitch on the credit ratings of the bigger commercial
banks in the country from ‘negative’ to ‘stable’ is a welcome development
for the financial sector. It must be noted, however, that the upgrade was
due to the upgrade in the credit rating of the Philippines’ sovereign

143
borrowings. Banks must still contend with their inherent problems. Banks
have to clean up their balance sheets and find ways to best facilitate the
absorption of losses involved in NPL sales. The key is for banks to manage
the risks properly while still being able to serve the credit needs of the
economy. Weak bank lending has undesirable consequences for the
economy. If financing will be limited to only a few large corporations, this
would negatively affect investment growth, thereby limiting output growth
and employment. The following reforms are therefore necessary to ensure
that the banking system is profitable, stable and is growing at a sustainable
rate.

Capitalize:

When the Philippine banks adopt the Basel II framework as embraced by

banks in other countries, they will have to increase their capital if their CAR
falls below the minimum standard. Individual banks may face difficulties in
meeting the new requirements.13 To prepare banks for this eventuality,
stronger pressure on raising new capital must be applied to ensure stability
in the future. Otherwise, banks may have to merge and
consolidate.

Improve Corporate Governance:

The institutional aspects of banking operations must be strengthened to

enhance efficiency, transparency, and accountability. As earlier noted,
banks have taken strides in implementing sound corporate governance
practices. Similar efforts should then be undertaken to enhance

144
transparency, which include, among others, the shift to international
standards of financial accounting to align our policies with global
conventions as already observed in other jurisdictions. Another corollary
effort to promote corporate governance is the proposed amendments to the
New Central Bank Act, which also include reforms that address corporate
governance issues. The bill strengthens BSP’s supervisory authority with
respect to control ownership of banks. Under the bill, BSP is empowered to
screen incoming substantial stockholders of banks and direct capital
infusion. Likewise, the proposed amendments waive the rights on secrecy
of bank deposits on Directors, Officers, Stockholders and their Related
Interest (DOSRI) loans and extend BSP’s supervision to include trust
entities, quasi-banks, affiliates and subsidiaries of banks. The
establishment of credit information and credit ratings agencies will also be
beneficial to promote responsible borrowing and strengthen market
discipline and social responsibility. To improve the standards for
accountability, setting up compliance systems and the appointment of
compliance officers will be beneficial to ensure banks’ conformity with
corporate governance practices. And lastly, stakeholders such as
accountants, auditors, compliance officers, financial analysts, corporations,
business media, and minority shareholders must be engaged in the cause
for good corporate governance.

Fill Gaps in the Regulatory Framework

One of the important lessons from the financial restructuring experience in

developing Asia is the need for strong legal and institutional support,
accompanied by government resolve to improve the financial system.14

145
Improved insolvency laws and enhanced efficiency of judicial systems are
needed. Consolidating the financial supervision and regulations must
likewise be encouraged to complement the emergence of different financial
instruments available in the market. This should also boost the confidence
of the public in the capital markets and unload the burden from banks in
financial intermediation. Meanwhile, reforms geared to strengthen the
regulatory powers of the BSP can be pursued. These include providing
adequate protection from lawsuits for bank examiners, empowering BSP to
impose administrative sanctions on subsidiaries and affiliates of banks and
quasi-banks, and increasing the maximum amount of administrative fines
the BSP can administer on erring banks to serve as deterrent for any
violation of regulations. These reforms are included in the proposed
amendments to the New Central Bank Act under Senate Bill 1943.

146
Case Study: The Collapse of Lehman Brothers

On September 15, 2008, Lehman Brothers filed for bankruptcy. With $639
billion in assets and $619 billion in debt, Lehman's bankruptcy filing was
the largest in history, as its assets far surpassed those of previous bankrupt
giants such as WorldCom and Enron. Lehman was the fourth-largest U.S.
investment bank at the time of its collapse, with 25,000 employees
worldwide. Lehman's demise also made it the largest victim, of the U.S.
subprime mortgage-induced financial crisis that swept through global
financial markets in 2008. Lehman's collapse was a seminal event that
greatly intensified the 2008 crisis and contributed to the erosion of close to
$10 trillion in market capitalization from global equity markets in October
2008, the biggest monthly decline on record at the time.

The History of Lehman Brothers had humble origins, tracing its roots back
to a small general store that was founded by German immigrant Henry
Lehman in Montgomery, Alabama, in 1844. In 1850, Henry Lehman and his
brothers, Emanuel and Mayer, founded Lehman Brothers.

While the firm prospered over the following decades as the U.S. economy
grew into an international powerhouse, Lehman had to contend with plenty
of challenges over the years. Lehman survived them all – the railroad
bankruptcies of the 1800s, the Great Depression of the 1930s, two world
wars, a capital shortage when it was spun off by American Express in
1994, and the Long Term Capital Management collapse and Russian debt
default of 1998. However, despite its ability to survive past disasters, the
collapse of the U.S. housing market ultimately brought Lehman Brothers to

147
its knees, as its headlong rush into the subprime mortgage market proved
to be a disastrous step.

The Prime Culprit

In 2003 and 2004, with the U.S. housing boom (read, bubble) well under
way, Lehman acquired five mortgage lenders, including subprime lender
BNC Mortgage and Aurora Loan Services, which specialized in Alt-A loans
(made to borrowers without full documentation). Lehman's acquisitions at
first seemed prescient; record revenues from Lehman's real estate
businesses enabled revenues in the capital markets unit to surge 56% from
2004 to 2006, a faster rate of growth than other businesses in investment
banking or asset management. The firm securitized $146 billion of
mortgages in 2006, a 10% increase from 2005. Lehman reported record
profits every year from 2005 to 2007. In 2007, the firm reported net income
of a record $4.2 billion on revenue of $19.3 billion.

Lehman's Colossal Miscalculation

In February 2007, the stock reached a record $86.18, giving Lehman a

market capitalization of close to $60 billion. However, by the first quarter of
2007, cracks in the U.S. housing market were already becoming apparent
as defaults on subprime mortgages rose to a seven-year high. On March
14, 2007, a day after the stock had its biggest one-day drop in five years on
concerns that rising defaults would affect Lehman's profitability, the firm
reported record revenues and profit for its fiscal first quarter. In the post-
earnings conference call, Lehman's chief financial officer (CFO) said that
the risks posed by rising home delinquencies were well contained and

148
would have little impact on the firm's earnings. He also said that he did not
foresee problems in the subprime market spreading to the rest of the
housing market or hurting the U.S economy. market or hurting the U.S.
economy.

The Beginning of the End

As the credit crisis erupted in August 2007 with the failure of two Bear
Stearns hedge funds, Lehman's stock fell sharply. During that month, the
company eliminated 2,500 mortgage-related jobs and shut down its BNC
unit. In addition, it also closed offices of Alt-A lender Aurora in three states.
Even as the correction in the U.S. housing market gained momentum,
Lehman continued to be a major player in the mortgage market. In 2007,
Lehman underwrote more mortgage-backed securities than any other firm,
accumulating an $85-billion portfolio, or four times its shareholders' equity.
In the fourth quarter of 2007, Lehman's stock rebounded, as global equity
markets reached new highs and prices for fixed-income assets staged a
temporary rebound. However, the firm did not take the opportunity to trim
its massive mortgage portfolio, which in retrospect, would turn out to be its
last chance.

Hurtling Toward Failure

Lehman's high degree of leverage - the ratio of total assets to shareholders
equity - was 31 in 2007, and its huge portfolio of mortgage securities made
it increasingly vulnerable to deteriorating market conditions. On March 17,
2008, following the near-collapse of Bear Stearns - the second-largest
underwriter of mortgage-backed securities - Lehman shares fell as much as
48% on concern it would be the next Wall Street firm to fail. Confidence in

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the company returned to some extent in April, after it raised $4 billion
through an issue of preferred stock that was convertible into Lehman
shares at a 32% premium to its price at the time. However, the stock
resumed its decline as hedge fund managers began questioning the
valuation of Lehman’s mortgage portfolio.

On June 9, Lehman announced a second-quarter loss of $2.8 billion, its

first loss since being spun off by American Express, and reported that it
had raised another $6 billion from investors. The firm also said that it had
boosted its liquidity pool to an estimated $45 billion, decreased gross
assets by $147 billion, reduced its exposure to residential and commercial
mortgages by 20%, and cut down leverage from a factor of 32 to about 25.

Too Little, Too Late

However, these measures were perceived as being too little, too late. Over
the summer, Lehman's management made unsuccessful overtures to a
number of potential partners. The stock plunged 77% in the first week of
September 2008, amid plummeting equity markets worldwide, as investors
questioned CEO Richard Fuld's plan to keep the firm independent by
selling part of its asset management unit and spinning off commercial real
estate assets. Hopes that the Korea Development Bank would take a stake
in Lehman were dashed on September 9, as the state-owned South
Korean bank put talks on hold.

The news was a deathblow to Lehman, leading to a 45% plunge in the

stock and a 66% spike in credit-default swaps on the company's debt. The
company's hedge fund clients began pulling out, while its short-term

150
creditors cut credit lines. On September 10, Lehman pre-announced dismal
fiscal third-quarter results that underscored the fragility of its financial
position. The firm reported a loss of $3.9 billion, including a write-down of
$5.6 billion, and also announced a sweeping strategic restructuring of its
businesses. The same day, Moody's Investor Service announced that it
was reviewing Lehman's credit ratings, and also said that Lehman would
have to sell a majority stake to a strategic partner in order to avoid a rating
downgrade. These developments led to a 42% plunge in the stock on
September 11. .

With only $1 billion left in cash by the end of that week, Lehman was
quickly running out of time. Last-ditch efforts over the weekend of
September 13 between Lehman, Barclays PLC and Bank of America,
aimed at facilitating a takeover of Lehman, were unsuccessful. On Monday
September 15, Lehman declared bankruptcy, resulting in the stock
plunging 93% from its previous close on September 12.

Conclusion
Lehman's collapse roiled global financial markets for weeks, given the size
of the company and its status as a major player in the U.S. and
internationally. Many questioned the U.S. government's decision to let
Lehman fail, as compared to its tacit support for Bear Stearns (which was
acquired by JPMorgan Chase) in March 2008. Lehman's bankruptcy led to
more than $46 billion of its market value being wiped out. Its collapse also
served as the catalyst for the purchase of Merrill Lynch by Bank of America
in an emergency deal that was also announced on September 15.

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 Analysis of Indian Overseas Banks

Q:1 How do the customers come to know about Indian Overseas

bank?

1. Marketing

2. Ad’s

3. Exhibition

4. Word of mouth

5. Other

Result: It is seen employees feel that 35% of customers come to know

about IOB through word of mouth and other, while 26% come to know
through Ad’s.

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Q:2 Which factors play an important role for a customer while
opening an account?

1. Ad’s

2. Special offer

3. Operational staff

4. Convincing power

5. Credibility of bank

Result: 58% of the employees feel that credibility of bank plays a vital role
in while opening an account.

153
Q:3 Which product do your organization use most?

1. Saving A/c

2. Current A/c

3. FD

4. Mutual Fund

5. Insurance policy

Result: 50% of the customers use savings a/c while 30% use FD.

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Q:4 Which facilities are provided by Indian Overseas Bank free of
cost?

a. DD, Pay order fee b. Monthly statements of A/C c. Internet

banking d. Free mobile banking

Options

1. All of these

2. A, b,c

3. None of these

4. Only D

Result: 50% employees feel that DD, Pay order fee, Monthly statements
of A/C and Internet banking are provided free of cost.

155
Q:5 Do another bank provides these services faster than Indian
Overseas Bank?

1. Yes

2. No

Result: 90% employees feel that no other bank provides the services
faster than IOB.

156
Q:6 Which of the direct banking channel your customer use the most?

1. ATM

2. Net banking

3. Phone banking

4. Mobile banking

Result: 63% of the employees feel that the customers use ATM the most.

157
Q:7 Do you think private sector banks are better than public banks?

1. Yes

2. No

Result: 90% employees feel that private sector banks are not better than
public sector banks.

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Major Findings of the study

Based on the quantitative analysis the major findings of the study have
been highlighted below:

1. Most of the people are satisfied with savings accounts and they
do not want to invest in any other products like mutual funds
and insurance.

2. Maximum people want to invest in Indian Overseas bank.

3. Bank provides faster service than other private and public

sector banks.

4. Most preferred type of product is savings account.

5. Credibility of bank plays a vital role in opening an account.

6. Out of all the direct banking channels ATM is most widely used.

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Recommendations and Conclusion

1. Indian Overseas bank should open new branches in rural areas.

2. Extra charges should reduce.

3. Staff should more cooperative than before.

4. Force on selling other products like fixed deposit, insurance policy to

their customers.

5. More emphasis should be given on technology up gradation.

6. Old banks to strengthen the skill levels.

160
Recent trends in Banking Sector and Conclusion

2009 is a year to remember for many private banking professionals. Hedge

funds failed, Bernard Madoff convicted, clients withdrew assets from private
banks. The global financial crisis has fundamentally changed how the
HNWI clients invest and the wealth management business itself. As part of
an original research, we study financial data and key events in 2009 to
identify the emerging trends in private banking 2010. They include:

Trend 1: Growing Chinese Market

Many “new money” acquire their wealth through IPO. According to Ernst &
Young’s recently published Global IPO Update, Brazil and China accounted
for two-thirds of global capital raised in Q2 2009. This not only means that
the economy is growing rapidly in these countries, more importantly it
shows that there is a growing demand for private banking and wealth
management services in the region.

Warren Buffet, who has successfully navigated through many market

cycles, predicted that China’s growth will outstrip US. While this may be
good news for private banks who have a strong APAC presence, wealth
management professionals should understand that the Chinese market is
not easy to penetrate. First of all, client advisors need to be fluent in
Mandarin and have local connections. Secondly, guanxi (relationships) still
plays an extremely important role in the modern Chinese business
community, private bankers without access to key relationship brokers as

161
references will find it very difficult to convince Chinese HNWIs to open
accounts. Private banks that hire locals will have a definite advantage over
expats trying to cover Chinese clients.

Private bankers should also note that the growth of the Chinese market is
not uniform across all Chinese cities. While Beijing, Shanghai and
Shenzhen will spearhead growth, Hong Kong, on the other hand, will likely
to have a tough 2010. Hong Kong actually suffered a huge reduction in
HNWIs of 61% in 2009, because of the near 50% drop in market
capitalization.

Trend 2: Rising compliance cost and lower profit margin.

The Bernard Madoff $65 billion Ponzi scheme, among other scams
exposed in 2009, alerted regulators in many countries. In order to crack
down on false trading activities and tax evasions, governments worldwide
demand more oversight of banking operations. This affects not only the
investment banking business but also the private banking side. The
account opening process, KYC and offshore banking activities are under
tighter scrutiny than ever before. As a direct result, banks have to spend
more money on compliance and risk management. With advocates such as
Alan Greenspan proposing higher capital ratio for banks, the cost of doing
business is bound to increase. With a stagnant market in most countries it
is almost impossible to increase fees and banks are likely to have to absorb
the rising cost. This means lower margin for private banks and flat
compensation for bankers.

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Trend 3: Diversifying clientele

As the society progresses and becomes more diversified, so is the wealth

management market. Customers today are more fragmented than ever
before, and banks which are quick to respond benefit from the changing
demographics. Islamic private banking, for example, is gaining momentum.
HSBC Amanah is promoting Shariah compliant portfolios. In June 09,
Morgan Stanley Wealth Management hosted a wealth planning seminar for
same sex couples in Beverly Hills. It is likely that other private banks will
become more aggressive in targeting demographic segments that have
previously been ignored.

Trend 4: Rebuilding client trust will remain a top priority for bankers

The 2009 Capgemini Wealth Report found that more than a quarter of
HNWI clients withdrew assets from their firms due to a loss of trust and
confidence. There are several high profile client-advisor fallouts in the past
6 months, such as Singaporean tycoon Oei Hong Leong suing Citigroup
private bank for a $684 million loss, and US investor Andrea Barron suing
UBP for negligence. In Hong Kong, entrepreneur Joyce Tsang (founder of
listed beauty salon group Modern Beauty) sued Goldman Sachs advisor for
her $2 million loss, which she claimed the investment was made without
her consent. The Securities and Futures Commission in Hong Kong later
barred the ex-Goldman advisor from the financial services industry for 2
years. All these lawsuits inevitably make people question the ethical
standard of private banking professionals.

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HNWI clients are likely to remain extremely skeptical of private bankers and
advisors in the midst of financial turmoil. How to rebuild trust remains a top
priority for private bankers. Proper disclosure of conflicts of interests can
address some concerns. True private bankers are professionals who
should act like doctors, who can be relied on to give impartial expert
advice. Private bankers who can instill confidence are likely to remain top
performers.

Trend 5: E-trading and online customer service will become key

differentiators

While some of HNWIs prefer to deal with their advisors face to face and
seldom use email, it is easy to see why the “new money” group, often in
their mid thirties and forties, are increasingly turning to online self service.
Many mid tier Swiss based private banking firms, especially boutiques, are
not up to speed in this area. Their e-trading capabilities and the online
statement functionalities cannot be compared to more established private
banks. It is logical to predict that private banks that provide comprehensive
and user friendly online services will continue to stand out, while those that
are ill-equipped will find themselves having difficulty to attract and retain
clients.

164
Trend 6: Singapore will remain a key player in the private banking
industry

Singapore is known as “Switzerland of the East”. There are many reasons

why it will stay this way for at least another three years. On top of the
excellent international reputation and the $300 billion private banking
assets the region currently manages, the Singaporean government is
aggressive in making the country more attractive to private banks and
HNWIs worldwide. Singapore officials are planning to amend the Income
Tax Act, which is likely to help the country to make Organization for
Economic Cooperation and Development’s “white list”, further establishing
itself as Asia’s private banking stronghold.

Future challenges of banks in India

The Indian banks are hopeful of becoming a global brand as they are the
major source of financial sector revenue and profit growth. The financial
services penetration in India continues to be healthy, thus the banking
industry is also not far behind. As a result of this, the profit for the Indian
banking industry will surely surge ahead. The profit pool of the Indian
banking industry is probable to augment from US$ 4.8 billion in 2005 to
US$ 20 billion in 2010 and further to US$ 40 billion by 2015. This growth
and expansion pace would be driven by the chunk of middle class
population. The increase in the number of private banks, the domestic
credit market of India is estimated to grow from US$ 0.4 trillion in 2004 to
US$ 23 trillion by 2050. Third largest banking hub of the globe by 2040 - is
that vision too far away?

165
What will be the face of Indian banking after 2009?

Stark changes are expected in Indian Banking Industry in 2009 when

Government and RBI will provide level playing field to foreign banks vis-a-
vis to domestic banks. What are the challenges ahead for PSU Banks of
India?

RBI DEPUTY Governor V. Leeladhar has said that two of domestic banks
in India have turned like Foreign Banks. Approximately 74 per cent of
holdings of ICICI and HDFC bank are in the hands of foreigners. As per
RBI released roadmap for foreign banks, which is in line with WTO
commitments given by India in 2005, the phase II of the roadmap has to
start from April2009. As per Phase II of roadmap foreign banks may be
permitted to have overall investment of 74 per cent in the private banks of
India. But ahead of the deadline by more than 1year RBI has allowed
investment by foreigners in the two banks to nearly 74 per cent. This
reflects that RBI is moving fast on the adoption of its declared roadmap for
foreign banks in India.

Post 2009 banking sector scenario will implies new threats as well as
opportunities. Capital is going to play a crucial role in the banking sector.
Since by then bank need to grow in size of global standard, need to have
robust risk management practices, advanced technology, skilled manpower
and very sound marketing practices. All these require huge capital
investment by Bank.

As per RBI PSU banks in India will require an amount of Rs 2980 billion of
additional capital to maintain a CRAR of 12 per cent by March 2010. Basel
II implementation will attract a huge investment. By concentrating on high

166
profit areas like trade finance, institutional banking, corporate and
investment banking, foreign banks have proved that they are more
profitable than their counterpart domestic banks. Post 2009 entry of new
players will intense the competition for domestic banks.

Domestic PSU banks are least active in FDI and FII areas and foreign
banks are attracting huge foreign investment coming to India. Post 2009
entry of new foreign bank will further reduce the slice of such investment for
domestic bank. So post 2009 Indian domestic PSU banks have to improve
their brand image so that foreign funds coming to India will be routed
through them only. Brand image up gradation will require improvements in
several parameters including capital.

With the opening of economy the importance of risk management in

Banking has become of paramount importance. To handle risk of business
domestic banks will require management lot of human capital investment
as well as funds. In the areas of derivatives the human expertise is
minimum in India. Lot of things has to be done by Domestic PSU banks in
risk and derivatives handling.

Post 2009 in the areas of retail banking also the PSU banks will face great
hurdle. In retail, Private banks like ICICI have developed leadership. It may
be very likely that post 2009 the small efficient private sectors banks be
acquired by foreign banks like HSBC and these foreign banks will acquire
expertise of these Private banks in the areas of retail.

A lot of challenges are waiting for PSU bank ahead of 2009. Survival of
tech savvy, good global sized, with huge capital and smart skilled

167
manpower bank is guaranteed while a bank having characteristic contrary
to this will be acquired by big banks.

Attrition in banking industry may rise in future: Reserve Bank of India

Reserve Bank of India (RBI) deputy governor, KC Chakrabarty today said

Indian banking system may increasingly face the problem of staff- attrition
in the period ahead and banks will have to gear up to tackle the issue.

"We are going to see rise in attrition rate. There is a need for adequate
focus on HR management… banks need to take adequate care of their
manpower,” Chakrabarty said at Bancon conference here.

Banks did not put adequate attention to improve their human resource
talent, Chakrabarty said, for better efficiency, banks need to educate their
staff to enhance their skills.

McKinsey associate partner, Supriyo Sinha said that nearly 63,000

employees of public-sector banks will retire from the service over the next
three years and banks will have to devise ways to overcome this challenge.

India's banking sector will see the onset of a process of churning, mergers,
acquisitions and consolidation. The banking sector has got multifaceted
dimensions. The project analyses the banking industry in a comprehensive
manner still the study is able to enumerate only the broad aspects of the
enormous investment opportunities available in the overall banking sector.
It can be concluded that this sector have full of unlimited opportunities for
those who are interested in safe and regular income on their investments.
The deregulation of banking industry and the entry of private entrants have

168
made this sector an attractive field of investment for the investors. The
sector has performed well even in times when the sensex was dipping and
there was a bearish sentiment in the overall stock market. The passage of
asset securitization bill has given more nails to the banks enabling them to
recover with their NPA’s in a more efficient manner and thereby enhancing
their profitability position. With the technology drive large branch networks
customized services and more efficient professional staff, the sector is in
no way lagging behind the other sectors.

169
 Annexure

QUESTIONNAIRE

Name: Place:

Q:1 How do the customers come to know about Indian Overseas

bank?

1. Marketing 2. Ad’s 3. Exhibition 4.Word of mouth

5. Other

Q:2 Which factors play an important role for a customer while

opening an account?

1. Ad’s 2. Special offer 3. Operational staff

4. Convincing power 5. Credibility of bank

Q:3 Which product do your organization use most?

1. Saving A/c 2. Current A/c 3. FD 4. Mutual Fund

5. Insurance policy

Q:4 Which facilities are provided by Indian Overseas Bank free of

cost?

a. DD, Pay order fee b. Monthly statements of A/C c. Internet

banking d. Free mobile banking

Options

1. All of these

170
 2. A, b,c

3. None of these

4. Only D

Q:5 Do another bank provides these services faster than Indian

Overseas Bank?

1. Yes 2. No

Q:6 Which of the direct banking channel your customer use the most?

1. ATM 2. Net banking 3. Phone banking 4. Mobile

banking

Q:7 Do you think private sector banks are better than public banks?

1. Yes 2. No

171
Bibliography

www.financialexpress.com

www.finance.indiamart.com

www.wikipedia.com

www.iob.in

www.sbi.co.in

www.scribd.com

www.moneycontrol.com

www.google.com

J.M. Financials

Angel Research

Religare Technova

“Theory and Practice of Banking” - K.K. Upadhyay

“BANKING AND ITS CREDIT CREATION” - C.N. Reddy,

172