MERGER MANIA VI

BY S.SRINIVASAN PRESIDENT

NATIONAL UNION OF BANK EMPLOYEES

(NUBE)

Now Once again Consolidation Rhetoric: Some consolidation in banking space inevitable: FM
Consolidation alone will give banks the muscle, size and scale to act like world class banks. We have to think global and act local and seek new markets, new classes of borrowers. P. Chidabaram Pitching for consolidation in the banking industry, Finance Minister P Chidambaram said India would need one or two global-size banks as it marches ahead to become the world's third largest economy. at the Bancon-2012 recently Pune on 24 November 2014

"Finding new business models will inevitably lead to some consolidation ... We must create at least 2 or 3 world size banks. China has done it.
"And if India wants to be ... and it will be the third largest economy in the world ... we must also have one or two world size banks and some consolidation is inevitable," he said at Bancon-2012 meet here. Unions have been opposing mergers and consolidations in the banking space. "We should not fear consolidation. I know there is pride and identity, but ultimately some consolidation would have to take place in the banking system in this country," he said. He further said that while consolidation takes place among top banks, there would be room for local area banks as well. "In fact, I regret that the idea of the local area bank which was started in 1996 stopped after first three licences were given. I think there is place for a local area bank for serving people of the region, local area, drawing strength from those people and serving those people," he added.
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There are 19 nationalised banks and scores of private and foreign banks in the country. In addition there is State Bank of India, which is the largest lender in the country. It has also five associate banks. SBI has acquired board approval for the merger of the its remaining five associates with itself. It has already amalgamated two of its subsidiaries. The Finance Ministry had recently asked large public sector banks to hand-hold smaller counterparts to improve the latter's functioning. Hence it has become imperative for us to understand macro & micro economic indicators of China and India and in all aspects as well as important banking indicators to expose the bankruptcy & hollowness of these rhetoric and grind to dust these spurious logics peddled blitzkrieg in electronic and media by the Finance Minster.

Comparison of India and China

The Stalwart of Indian Financial community nodded there heads sagaciously when Prime Minster Mr.Manmohan Singh said in his speech If there is one aspect in which we can confidentially assert that India is ahead of China it is the robustness and soundness of banking system. Indian banks have been rated higher than Chinese banks by the international rating agency Standards & Poors Therefore the analogy of the FM comparing Indian banks with Chinese with regard to scale an size only is akin to seeing the part but not the whole, seeing the trees but not the forest. In the under mentioned tables A to D and the tables E, 1.1 the annexure to 2.2 under the heads in

A) Indias recent performance and forecasts B) India Size of the economy C) Chinas recent performance and forecasts D) Chinas Size of the economy E) China and India Comparison In 2001-02
1.1 Overview 2010

1.2 1.3 1.4 1.5 1.6

Land Use in2008 Growth Rate of Gross Domestic Product Gross Domestic Investment and Savings Sectoral Share in GDP Rank on Global Competitiveness Index (GCI), 2010-11 1.7 Population and Demographic Profile of BRICS 1.8 Social Sector Indicators, 2007 1.9 Fiscal Defi it of General Government 1.10 Fiscal Balance of General Government 1.11 Gross Debt of General Government
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1.12 1.13 1.14 1.15 1.16 1.17 1.18 1.19 1.20 1.21 1.22 1.23 1.24 1.25 1.26 1.27 1.28 1.29 1.30 1.31 1.32 1.33 1.34 1.35 1.36 1.37 1.38 1.39

Fiscal Consolidation Policy Composition of Fiscal Adjustment Plans Monetary Frameworks Inflation: Average Consumer Prices Global Integration Economies BRICS Share of Global Trade BRICS Exports of Goods and Services BRICS Share in World Exports BRICS Exports Profile 2009 High-technology Exports BRICS Share of World Exports of Services Imports of Goods and Services BRICS Imports Profile, 2009 BRICS Share of World Imports of Services Export Linkages of BRICS BRICS Share in Global Remittance Inflows Trade Balance and Current Account Balance Share of Global FDI Inflows Cross-country Movement of FDI Flows Cross-country Movement of Portfolio Flows BRICS and Foreign Exchange Reserves External Debt Stocks, Total BRICS Exchange Rate Regime Stock Market Performance Total Listed Domestic Companies Market Capitalization of Listed Companies Stocks Traded, Turnover Ratio Equity Valuation Measures: Dividend Yield Ratios 1.40 Emerging Market External Financing: Total Bonds, Equities, and Loans 1.41 Insurance Sector in Economies 1.42 Prudential Indicators of the Banking Sector in BRICS 1.43 Bank Profitably Indicators 1.44 Financial Services Accessibility 1.45 Credit Depth of Information Index 1.46 Domestic Credit Provided by Banking Sector 2.1 Global Financial Crisis 2.2 Size of Discretionary Measures in Financial Crisis We have highlighted the indicators where India is ahead of china. If one only counts the number of highlights fonts with those regular fonts it will amply convince even a laity that India lags behind in all most of the economic indicators when compared with China. The different growth stages of India and China have been linked to different internal political changes. India continues to be an open, participatory, multiparty democracy, with power at the centre being counterbalanced by that of the states in a federal system. China has an authoritarian, albeit liberalising, ne-party regime, where structural economic reforms have been associated with important political changes in
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the Communist Party highly centralised power has been associated with the progressive inclusion of a new middle class. In terms of per capita GDP (expressed as purchasing power parity, PPP), China made impressive gains on the US, starting from 1978. India, in contrast, has succeeded in accelerating economic growth mainly since 1992. That only exposes the policies in place propounded and practiced by the policymaker of this country, taking into consideration both the countries attended independence around the same era

A)

Indias recent performance and forecasts

2010 8.7 4.9 9.2 9.5 2011e 7.3 4.7 4.7 8.7 2012f 7.5 3.5 7.0 8.5 2013f 8.1 4.0 8.0 9.0

Real growth (annual % change) GDP# Agriculture Industry Services Contribution to growth (%) Agriculture Industry Services Economic Structure (% of GDP)* Agriculture Industry Services Inflation WPI (annual % change, average)
B)

0.7 1.8 6.2

0.7 0.9 5.7

0.5 1.4 5.6

0.5 1.6 6.0

14.4 20.2 65.4 9.6

14.1 19.7 66.3 9.4

13.5 19.6 66.9 7.0

13.0 19.6 67.4 5.8

Indias Size of the economy

2010 2011e 1,207 1,843 4,470 1,527 3,703 Share of 2011 world total 17.6% 2.6% 5.7%

Population (millions) GDP, market rates (US$ billions) GDP, PPP rates (International $ billions) GDP per capita, market rates (US$) GDP per capita, PPP rates (International $)

1,191 1,632 4,058 1,371 3,408

C) Chinas recent performance and forecasts

2010 2011e 2012f 2013f
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Real growth (annual % change) GDP# Agriculture Industry Services Contribution to growth (%) Agriculture Industry Services Economic Structure (% of GDP)* Agriculture Industry Services Inflation CPI (annual % change, average)

10.3 4.3 12.2 9.5 0.4 6.7 3.4 9.0 55.6 35.4 3.3

9.2 4.5 10.6 8.9 0.4 5.9 3.2 8.6 56.2 35.2 5.4

8.6 4.0 9.0 9.2 0.3 5.0 3.3 8.2 56.2 35.6 3.9

8.7 4.0 8.7 9.7 0.3 4.9 3.5 7.8 56.3 35.9 3.9

D) Chinas Size of the economy

2010 Population (millions) GDP, current prices (US$ billions) GDP, PPP rates (International $ billions) GDP, current prices (US$ billions) GDP per capita, PPP terms (International $) 1,341 5,878 10,120 4,382 7,544 2011e 1,348 6,988 11,316 5,184 8,394 Share of 2011 world total 19.6% 10.0% 14.4%

Source IMF

Consumer Price Indexes

Difference Consumer Prices in China are 110.05% higher than in India Consumer Prices Including Rent in China are 137.37% higher than in India Rent Prices in China are 261.49% higher than in India Restaurant Prices in China are 110.78% higher than in India Groceries Prices in China are 116.26% higher than in India Local Purchasing Power in China is 32.35% lower than in India

Minimum Wage Comparisons Between China and India

China two to three times more expensive than India for skilled labor Comparing labor costs is always a difficult art, not least because different countries have different ways and mechanisms of measuring these. China, for example, levies a minimum wage across the board irrespective of employment type, whereas India imposes different minimum levels dependent upon specific types of work. However, as the population demographics are now shifting to a younger workforce in India from China, such comparisons, while not exact, provide some clues about the nature of costs associated within the labor pools of each. This example, comparison of seven cities in both China and India is made, to try and provide a general geographic spread in both countries. The minimum wage levels in each are set by the respective state and provincial governments. In the case of India, we have taken skilled construction workers as the base target. The results are as follows:

It should be noted that in China, a mandatory welfare payment is added to the minimum wage as paid by the employer and this typically adds an average 40 percent to 50 percent on top of the minimum wage identified above. India does not levy a uniform welfare payment upon salaries, and this can either be discounted completely or is a typical maximum of 10 percent of wages.

The figures adequately demonstrate that Chinese minimum wages are two or three times the level of their Indian counterparts, and even higher when welfare payments are added on top. This bears out our previous findings that China now has the third highest employment costs in emerging Asia and that the population demographics now favor India. In India, the development of a large, yet young labor force with an average age of 23 is showing itself in lower minimum salary levels, whereas in China, where the average age of a worker is now 37, the higher minimum wage and more expensive welfare to cater for that age is now having a significant effect in demonstrating the labor cost gap. The message for labor intensive industries is clear India is now a key market for establishing operations. Using a national sample of Urban Household Surveys, the above document indicates several profound changes in China's wage structure during a period of rapid economic growth. Between 1992 and 2007, the average real wage increased by 202 percent, accompanied by a sharp rise in wage inequality. Decomposition analysis reveals 80 percent of this wage growth to be attributable to higher pay for basic labor, rising returns to human capital, and increases in the state-sector wage premium. Employing an aggregate production function framework, it accounts for the sources of wage growth and wage inequality in the face of globalization and economic transition. One finds capital accumulation, skill-biased technological change, and export expansion to be the major forces behind the evolving wage structure in China

Inference:
It can be inferred from the above data and reports highlights the simple facts of the two fastest growing economies of the world The Chinese dragon is way ahead of Indian elephant in terms of their respective future economic growth. India can only compete with China after decades and not as of now even if all the banks are to merged exposing the puerile logic of consolidation.

China and India Banking Comparison

A comparison of China and India banking system is both exciting and challenging .Let us analyze the same under the following heads so that comparison becomes objective and meaningful, to expos and explode the myths of consolidation and comparison with china as being attempted by the Finance Minister.

Evolution of banking China

The history of the Chinese banking system has been somewhat checkered. Nationalization and consolidation of the country's banks received the highest priority in the earliest years of the People's Republic, and banking was the first sector to be completely socialized. In the period of recovery after the Chinese civil war (1949-52), the People's Bank of China moved very effectively to halt raging inflation and bring the nation's finances under central control. Over the course of time, the banking organization was modified repeatedly to suit changing conditions and new policies. Throughout the history of the People's Republic, the banking system has exerted close control over financial transactions and the money supply. All
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government departments, publicly and collectively owned economic units, and social, political, military, and educational organizations were required to hold their financial balances as bank deposits. They were also instructed to keep on hand only enough cash to meet daily expenses; all major financial transactions were to be conducted through banks. Payment for goods and services exchanged by economic units was accomplished by debiting the account of the purchasing unit and crediting that of the selling unit by the appropriate amount. This practice effectively helped to minimize the need for currency. Chinas banking sector was previously dominated by four wholly state-owned policy banks the Agricultural Bank of China (ABC), the Bank of China (BOC), China Construction Bank (CCB), and the Industrial and Commercial Bank of China (ICBC). Agricultural Bank of China Limited (ABC), is one of the "Big Four" banks in the People's Republic of China. It was founded in 1951, and has its headquarters in BeijingIn 1951, two banks of the Republic of China, Farmers Bank of China and Cooperation Bank, merged to form Agricultural Cooperation Bank, which ABC regards as its ancestor. However, the bank was merged into People's Bank of China, the central bank in 1952. The first bank bearing the name Agricultural Bank of China was founded in 1955, but it was merged into the central bank in 1957. In 1963 the Chinese government formed another agricultural bank, and it was also merged into the central bank two years later. Today's Agricultural Bank of China was founded in February 1979. It was restructured to form a holding company called Agricultural Bank of China Limited It was listed on the Shanghai and Hong Kong stock exchanges in July 2010 Bank of China's history goes back to 1905, when the Qing government established Daqing Hubu Bank in Beijing, which was in 1908 renamed to Daqing Bank When the Republic of China was established in 1912, it was further renamed as Bank of China by President Sun Yatsen's government, adding a new role of the central bank

China Construction Bank

CCB was founded on 1 October 1954 under the name of "People's Construction Bank of China and later changed to "China Construction Bank" on 26 March 1996. n 2005, Bank of America acquired a 9% stake in China Construction Bank for US$3 billion. It represented the company's largest foray into China's growing banking sector. China Construction Bank Corporation was formed as a joint-stock commercial bank in September 2004 as a result of a separation procedure undertaken by its predecessor, China Construction Bank, under the PRC Company Law. Following the China Banking Regulatory Committee's approval on 14 September 2004, the next day the bank (Jianyin) became a separate legal entity, owned by the Chinese government holding company, Central Huijin Investment Company or simply Huijin. Industrial and Commercial Bank of China Ltd. (ICBC) more commonly just Gnghng) is the largest bank in the world by profit and market capitalization. It is one of China's 'Big Four' state-owned commercial banks (the other three being the Bank of China, Agricultural Bank of China, and China Construction Bank). It was founded as a limited company on January 1, 1984. The bank's Hong Kong operations are listed under the name ICBC Asia. It has purchased the Hong Kong subsidiary of Fortis Bank and rebranded it under its own name on 10 October 2005. From the above it becomes evidently clear that Nationalization and consolidation of the country's banks received the highest priority in the earliest years of the People's

Republic, and banking was the first sector to be completely socialized which differentiates evolution of banking itself in China From India In addition, there were several other smaller wholly state-owned policy banks, such as Bank of Communications, China Development Bank (also known as the State Development Bank of China), the Export Import Bank of China(China Exim Bank), and Huaxia Bank. Starting in 2005, China began transforming the whollystate-owned banks into joint-stock corporations, a process it calls equitization), that were to operate as commercial banks. As a result, only three whollystate owned banks remain in Chinathe Agricultural Development Bank of China, China Development Bank and China Exim Bank.

India Towards Nationalization: objective ground realties Pre-Independence Scenario of Commercial Banks in India
Banking in India originated in the last decades of the 18th century. The first bankswere The General Bank of India which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as quasi-central banks, as did their successors. In 1806, the Bank of Calcutta was established as a joint stock bank with limited liability, which was brought under the Royal Charter in 1809 and renamed as Bank of Bengal. Subsequently, the Bank of Bombay and the Bank of Madras were established by the East India Company in 1840 and 1843 respectively. The business of these. Presidency banks were initially confined to discounting of bills or other negotiable private securities, keeping cash accounts, receiving deposits, and issuing and circulating cash notes. The Royal Charter governed the three Presidency banks, which was revised from time to time. There were no legally recognized commercial banks with special right within India other than the Presidency banks. The East India Company's government reserved the right to regulate the monetary and credit system to itself The three banks merged in 1921 to form the Imperial Bank of India, which, upon Indias independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.(Joint Stock Bank : A company that issues stock and requires shareholders to be held liable for the company's debt) It was not the first though. That honor belongs to the Bank of Upper India, which was established in 1863, and which survived until 1913, when it failed, with some of its assets and liabilities being transferred to the Alliance Bank of Simla.When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed.The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of
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the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoired'Escompte de Paris opened a branch in Calcutta in 1860 and another in Bombay in 1862; branches in Madras and Pondichery, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. The Bank of Bengal, which later merged with the Bank of Bombay and the Bank of Madras to form the Imperial Bank of India in 1921.The first entirely Indian joint stock bank was the Oudh Commercial Bank, established in1881 in Faizabad. It failed in 1958. The next was the Punjab National Bank, established in Lahore in 1895, which has survived to the present and is now one of the largest banks in India. Around the turn of the 20th Century, the Indian economy was passing through a relative period of stability. Around five decades had elapsed since the Indian Mutiny, and the social, industrial and other infrastructure had improved. Indians had established small banks, most of which served particular ethnic and religious communities. The presidency banks dominated banking in India but there were also some exchange banks and a number of Indian joint stock banks. All these banks operated in different segments of the economy. The exchange banks, mostly owned by Europeans, concentrated on financing foreign trade. Indian joint stock banks were generally under capitalized and lacked the experience and maturity to compete with the presidency and exchange banks. The major innovations in banking method and organization came with the establishment of Bank of Bengal. These included the following.

1. Use of joint stock system for raising capital. 2. Conferring of limited liability on shareholders by means of a charter. 3. Provision for the note issue which could be accepted for public revenue payments. 4. General provision for acceptance of deposits from the general public. Imposition of explicit limit on credit and the kind of securities it could accept. 5. Provision for regulatory changes in the board of directors.
With the passing of the Paper Currency Act, 1861, the right to issue currency notes by the Presidency banks was abolished and the same function was entrusted to the Government. With the collapse of the Bank of Bombay, the New Bank of Bombay was established in January 1868. A banking crisis that occurred during 1913 Revealed weaknesses of the banking system such as the maintenance of an unduly proportion of cash and other liquid assets, the grant of large unsecured advances to the directors of banks and to the companies in which the directors were interested. Some of the banks seem to have resorted to certain undesirable Activities and practices. The period between 1906 and 1911, saw the establishment of banks inspired by theSwadeshi movement. The Swadeshi movement inspired local businessmen and political figuresto found banks of and for the Indian community. A number of banks established then havesurvived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda,Canara Bank and Central Bank of India. The fervour of Swadeshi movement lead to establishing of many private banks inDakshina Kannada and Udupi district which were unified earlier and known by the name SouthCanara ( South Kanara ) district. Four nationalised banks started in this district and also a leading private sector bank. Hence undivided Dakshina Kannada district is known as "Cradle of Indian Banking". At least 94 banks in India failed between 1913 and 1918 as indicated in thefollowing table
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Year 1913 1914 1915 1916 1917 1918 Total

Number of banks that failed 12 42 11 13 09 07 94

The Central Banking Enquiry Committee which was constituted by GOI in 1929 to examine the issue of establishing a central banking authority for India mentioned in the course of discussion some important reasons for failure of banks. They were insufficient capital, poor liquidity of assets, combination of non-banking activities with banking activities, irrational credit policy and incompetent and inexperienced directors. Finally Reserve Bank of India Act was passed in 1934 and finally in 1935, the Central Bank was created and christened as Reserve Bank of India When the Reserve Bank of India Act. 1934 came into effect; an important function of the RBI was to hold the custody of the cash reserves of banks and regulating their operations in accordance with the needs of the economy through instruments of credit control. The primary role of the RBI was conceived as that of the lender-of-last-resort for the purpose of ensuring the liquidity of the short-term assets of banks. The failure of the Travancore National and Quilon Bank (TNQ Bank) in the middle of 1938 created a public scare. The role of the RBI in this episode came under public and media gaze, the banking crisis of 1938 was largely a localized affair confined to South India. The RBI submitted to the Central Board, in October 1939, a Report on the non-scheduled banks, with special reference to the distribution of their assets and liabilities. The Report mentioned that several of these banks had poor cash reserves, low investment ratio, over extension of the advances portfolio and a large proportion of bad and doubtful debts.

Post independence
There had been a mushroom growth of banks whose financial position was suspect and all this information was given only on the basis of dressed-up balance sheets, which did not disclose many of the more unsatisfactory features. The regulatory measures taken on an interim basis included the Banking Companies (Inspection) Ordinance, 1946 and the Banking Companies (Restriction of Branches) Act, 1946. The Bill as amended by the Select Committee was introduced in the Legislative Assembly on February 8, 1949 and was passed on February 17, 1949 as the Banking Regulation Act. The partition of India in 1947 adversely impacted the economies of Punjab and West Bengal, paralyzing banking activities for months. India's independence marked the end of a regime of the Laissez-faire for the Indian banking. The Government of India initiated measures to play an active role in the economic life of the nation, and the Industrial Policy Resolution adopted
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by the government in 1948 envisaged a mixed economy. This resulted into greater involvement of the state in different segments of the economy In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India." The Banking Regulation Act also provided that no new bank or branch of an existing bank could be opened without a license from the RBI, and no two banks could have common directors. However, despite these provisions, control and regulations, banks in India except the State Bank of India, continued to be owned and operated by private persons. This changed with the nationalization of major banks in India on 19 July 1969. The RBI was nationalized on January 1, 1949 in terms of the Reserve Bank of India

Towards Nationalisation: objective realities

By the 1960s, the Indian banking industry had become an important tool to facilitate the development of the Indian economy. At the same time, it had emerged as a large employer, and a debate had ensued about the possibility to nationalise the banking industry. Indira Gandhi, the-then Prime Minister of India expressed the intention of the GOI in the annual conference of theAll India Congress Meeting in a paper entitled Stray thoughts on Bank Nationalisation The paper was received with positive enthusiasm. Thereafter, her move was swift and sudden, and the GOI issued an ordinance and nationalised the 14 largest commercial banks with effect from the midnight of July 19, 1969. Jayaprakash Narayan, a national leader of India, described the step as a "masterstroke of political sagacity. Within two weeks of the issue of the ordinance, theParliament passed the Banking Companies (Acquisition and Transfer of Undertaking) Bill, and itreceived the presidential approval on 9 August 1969 The year 1969 was a landmark in the history of commercial banking in India. In July of that year, the government nationalized 14 major commercial banks of the country. In April 1980, Government nationalized 6 more commercial banks. A disturbing feature of the prenationalization banking policy was the negligible share of agricultural sector in bank credit. This share hovered around 2 per cent of total commercial bank credit. The privately-owned commercial banks were neither interested nor geared to meet the risky and small credit requirements of the farmers. Similarly, the share of other non-industrial sectors in bank credit was also low. The State Bank of India was constituted on July1,1955. Later, the State Bank of India (Subsidiary Banks) Act was passed in 1959 enabling the State Bank of India to take over eight former State-associated banks as its subsidiaries A second dose of nationalization of 6 more commercial banks followed in 1980. The stated reason for the nationalization was to give the government more control of credit delivery. With the second dose of nationalization, the GOI controlled around 91% of the banking business of India. Later on, in the year 1993, the government merged New Bank of India with Punjab National Bank. It was the only merger between nationalized banks and resulted in the reduction of the number of nationalized banks from 20 to 19. After this, until the 1990s, the nationalized banks grew at a pace of around 4%, closer to the average growth rate of the Indian economy The following steps were taken by the Government of India to Regulate Banking Institutions in the Country:

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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. On the eve of the independence 1947 there were 648 commercial banks comprising of 97 scheduled and 551 non scheduled banks. The Imperial Bank was taken over by the State Bank of India (SBI), by the State Bank of India Act 1952. In 1953 the Palai Central bank collapsed. A similar fate faced most of the banks run by the erstwhile maharajas, due to the large funds siphoned off. Most of these banks that had existed were the offshoots of local landlords/Maharajas or big traders and moneylenders who sought to extend the scope of their financial activities. Most were in a state of collapse, due to irregularities To save these banks from default and to bail out the maharajas, 10 banks belonging to the princely state were taken over by SBI in 1956 these included the State Bank of Patiala, Saurashtra, Bikaner, Jaipur, Indore, Baroda, Mysore, Hyderabad, Travancore and a number of smaller ones like Sangli, manipur, Mayurbanj, etc. In 1959 Palai Central Bank Ltd, Kerala which had reportedly financed some assembly / parliament elections went into liquidation. It was followed by failure of Lakshmi Bank Ltd Akola, in the next year .The list of such banks before Nationalization will be to big too be named here. In the late 1950s the government appointed the Mahalanobis Committee to look into the precarious conditions of the private Banks.The Mahalanobis Report, recommended besides handing out the standard formulae to reduce flab, trim size, etc.,This period witnessed consolidation of banking it suggested the amalgamation of the less profit making banks with the others. The Reserve Bank of India thus made it compulsory for reconstruction and / or merger of the weak units with the sound ones as per the Banking Companies Act of 1960.This resulted in the number of banks being reduced from 605 in 1950; to 423 in 1956; to 292 in 1961, to 102 in 1966 and on the eve of nationalization in 1969, to just 86.out of which 72 were scheduled and 14 nationalized. Following the recommendations of the Rural Banking Enquiry Committee, the then Imperial Bank of India was asked to open 114 new branches in rural and semi-urban areas within a period of 5 years from 1.7.1951 to 30.5.1955. Only 63 branches were opened by it. Credit disbursed to the rural areas was practically nil.In the aforesaid background and on the recommendations of All India Rural Credit Survey Committee, State Bank of India Act was enacted in 1955, transferring the Imperial Bank of India to State Bank of India. Reserve Bank of India contributed nearly 97% of the equity of SBI.within a period of 5 years from its inception; SBI opened 415 branches as against a target of 400 branches given to it. Pursuant to the same objective SBI (Subsidiary Banks) Act was passed in 1959, which enabled the SBI to take over associate banks as its subsidiaries. The conversion of the Imperial bank of India into
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State bank of India and the constitution of Associate banks accelerated the pace of extending banking facilities all over the country. Thus, the period of 1955 to 1959 marked the beginning of public sector banking. The aforesaid steps provided a fillip to provisions of credit to rural sector and also the expansion of bank branches. The need to bring about wider diffusion of baking facilities and to change the uneven distributive pattern of bank lending was realized by the Govt. This forced the Government to introduce the scheme of social control in 1968.with a view to ensuring an equitable and purposeful distribution of credit within the available resources and keeping in view the relative priorities of developmental needs the National Credit Council was set up in 1968 to assess the demand for bank credit from various sectors of the economy and to determine their respective priorities in allocation. Unlike China only on July 19, 1969, (22 years after independence) fourteen major banks of the country were nationalized despite Banking determining the backbone of the economy. Big business required massive investments in infrastructure if it was to grow. Lack of infrastructure and capital was leading to stagnation and decline. Nationalisation and the expansion of banking, was a necessary factor, to systematically tap the peoples savings in order to generate the necessary capital. The rural sector faced an agrarian crisis. The widespread famine in 1967 found the rulers panic-stricken The PL-480 grain doles, had, by now got thoroughly discredited An alternative had to be found. The Green Revolution was their answer to stem off peasant uprisings which gained acceptance and momentum among the progressive sections of the population. There were three basic elements in the method of the Green Revolution:

1. 2. 3.

Continued expansion of farming areas; Double-cropping existing farmland; Using seeds with improved genetic

The initiation of the Green Revolution required certain amounts of seed capital, given on a concessional (even free) basis to farmers, to encourage them to turn to the HYV varieties. Such capital and widespread disbursement could best be achieved through nationalized banking. A vast network of rural banking was needed to be set up, first to promote the green revolution; second to tap the surplus created to channel it into savings for use by government/big business for infrastructural development. Besides, linked to this, the focus for rural development changed.... from asset generation to poverty alleviation. This coincided with Indira Gandhis slogan of Garibi Hatao. While in the first two decades focus was on irrigation, land development etc; now the focus changed to poverty alleviation schemes like IRDP, Jawahar Rojgar Yojna, Indira Vikas Yojna etc, etc. All these schemes were intricately linked with bank lending and finance, necessitating a wide network of branches. Both the Green revolution and so-called poverty alleviation schemes (employment generation) were geared to extending the market for commodities. Hence nationalization of banks was also an instant solution for immediate infusion of funds into the rural populace in pursuance of the above goals By the mid-1970s, there were 196 RRBs, 24,000 cooperative banks, 92,000 Primary Agricultural Credit Societies, 2966 lending units for longterm credit and a host of other financial institutions for rural banking like NABARD, etc. And on April 15, 1980 six more commercial private banks were taken over by the Indian government. It is easy now to take for granted, or even dismiss or disparage, what an extraordinary and important step that was. It was not step at random or because of the whims of the leadership of the time, but reflected a process of struggle and political change which had made this an important demand of the people. In the struggles for nationalization, hundreds of people even lost their lives, giving the idea of the intensity of the demand and the violence of

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the opposition. . The need for nationalization was felt mainly because private commercial banks were not fulfilling the social and developmental goals of banking which are so essential for any industialising country. The developmental goals of financial intermediation were not being achieved other than for some favoured large industries and established business houses. Whereas the industrys share in credit disbursed by commercial banks almost doubled between 1951 and 1968, from 34% to 68%, agriculture received les than 2% of the total credit. Other key areas such as credit to exports and small industries were also neglected .the expansion of commercial baking had largely excluded rural areas and small borrowers. The stated purpose of nationalization was to ensure that credit allocation occur in accordance with plan priorities. Thus Bank nationalization in India was also necessary to bail out the collapsing private banks; it was a key necessity to give the necessary fiscal push to an economy that had reached the end of its tether. Public Sector Banking in India has grown stupendously in the last 43years. It has benefited the common man in no small measure. Green revolution, white revolution, etc. are all attributable to the contributions of our public sector banks. So, nationalization of banks, was eminently successful in tapping peoples saving to create the capital for big business, to usher in the green revolution for agri-business, to extend the market; and to set up a vast network for poverty alleviation.

Towards Nationalization: Subjective compulsions

India held general elections to the 4th Lok Sabha. The country had its fourth outing at the hustings since Independence in August 1947. This fourth general elections, which were conducted for 520 seats from 520 constituencies, represented 27 Indian states and union territories. For the second time, there were only one-seat, constituencies and two-seat constituency were abolished in 1962 elections. Congress which till now had never won less than 73 per cent of the seats in Parliament, it was more bad news ahead It was more bad news ahead. It's internal crisis stared at its face in the results of the 1967 elections. For the first time, it lost nearly 60 seats in the Lower House, managing to win 283 seats. Until 1967, the grand old party had also never won less than 60 per cent of all seats in Assembly elections. It also suffered a major setback as non-Congress ministries were established in Bihar, Kerala, Orissa, Madras, the Punjab and West Bengal. Among all this, Indira Gandhi, elected to the Lok Sabha from Rai Bareili constituency, was sworn in as the Prime Minister on March 13, 1967. In order to keep dissident voices at bay, she appointed Morarji Desai, who had opposed her candidature as PM after Lal Bahudur Shastri's death, as Deputy Prime Minister of India and Finance Minister of India. Some reasons for the dismal performance were that both popular prime ministers Jawaharul Nehru and Lal Bahudur Shastri had died, since then the Congress had been in crisis with Indira Gandhi and Moraji Desai both wanting the position of Prime Minister. In the end Indira was chosen, mostly because of the support of Senior Congress leader Kumararasami Kamaraj who was also the chief minister of madras (Now Tamil Nadu). The Congress' dismal electoral performance forced her to become assertive and opt for a series pro people policy measures and one such measure of, devaluation (June 1966) Nationalisation of Banks and abolition of privy purses in tune with her slogn Garibi Hatao (Meaning "Abolish Poverty" in Hindi). and the proposed anti-poverty programs that came with it which were designed to give Gandhi an independent national support, based on rural and urban poor. On June 23-25, 1967, the All India Congress Committee issued a ten-point programme, in which the social control of the banking institutions was declared the first point, with the

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nationalisation of general insurance and the state takeover commodity-wise of trading in imports, exports and foodgrains as the second, third and fourth points. In a memorandum submitted by 118 Congress MPs to the then Congress president K. Kamraj, it was pointed out that the banking institutions were to be so organised that th e vested interests were not allowed to appropriate all the benefits ``...We have to ensure that these institutions are managed by such persons who are motivated for the development of the socialist society''. The leader of the young Turks, Mr. Chandra Shekhar had appointed a committee of four economists to report to him on bank nationalisation. The Committee made a strong plea for bank nationalisation on the following grounds: -- The nationalised banking set-up would vigorously pursue expansion programmes to cover rural areas, smaller towns and lower income groups. -- Preempt credit for priority industries. -- Pay special attention to inter-sectoral balances and balanced regional development. -- Take away the stranglehold of the few industrial houses on credit and reduce their control over the community's resources. -- Co-ordinate all the activities of the credit institutions. -- Ensure stability in the functioning of the credit institutions and inspire more confidence among the depositors. -- Encourage healthy competition between large and small industrial house. The Committee argued that the RBI's control over banks had ensured proper planned development. Social control over banks would not succeed. The Committee pleaded for a complete takeover of the banking system. The Committee pleaded for a complete takeover of the banking system. This report, which must have been handed over to the then Prime Minister, Indira Gandhi, was kept confidential and published in October 1969, only after the banks were nationalised. In July 1969, the leaders of the young Turks submitted a memorandum to Kamaraj, asking for nationalisation of privat e commercial banks and general insurance companies. The same month, Indira Gandhi submitted a note to the AICC meeting in Bangalore. She stated that the Congress had always favoured the nationalisation of financial institutions. She criticised the banks post-social control, for having industrialists as chairmen. Thus, social control could not reduce the concentration of power. She pointed out that with nationalisation the proportion of bank investments in Government securities would go up. She believed the Government could command more banks' assets only through nationalization. Major banks should be not only socially controlled, but publicly owned, Indira Gandhi, the then prime minister, announced on All India Radio in 1969. Nationalisation followed.

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Thus we could see bank nationalization as a powerful weapon in the factional fight against the powerful emergence of Syndicates at that time .There were also reports in 1968 news papers that then, RBI Governor, L. K. Jha was against bank nationalization, and a similarly strong view was been held by Prof. J. J. Anjaria, the then Deputy Governor. A number of questions arise regarding the procedure adopted by the then government in suddenly switching from social control to bank Nationalisation. There was no official report, which had gathered expert opinions and evidence, on the need either for social control or for Bank Nationalisation. The chiefs of private banks had not been consulted as to the need and implications of the proposed measure. There is no record of any written memoranda by top government officials, which examined the implications of either social control or Bank Nationalization. As in the case of the devaluation decision, some economist argue that that everything was done in an ad hoc and arbitrary manner to suit political exigencies as being continued by governments in power even today whether it is re-privatizations moves of banks through serious amendments such as Banking Laws (Amendment) Bill to raise the voting rights in private sector banks progressively from the present 10% to 26% and now Consolidation Of Banks.

Chinas banking system is not a good model for India Degree of State Ownership
The state role is particularly strong in China, and India, where the state controls the majority of the banking sector i.e., 80%, and 68%, respectively. The high degree of state ownership of commercial banks has traditionally been accompanied by a strong emphasis on lending to state-owned enterprises (SOEs) in China. The large statecontrolled banks are heavily concentrated in lending to SOEs whereas the second- and thirdtier, joint stock, and city commercial banks are somewhat more oriented toward non- state enterprises. The Indian banking system can be characterized by a large number of banks with mixed ownership. However, 27 public sector banksnamely, banks owned and controlled by the statecontinue to dominate the Indian commercial banking landscape. Together, these banks account for three quarters of the market share. Even though these public sector banks have access to capital markets, government policy is to ensure that its equity interest does not, as a result of public issues by banks, go below 51 percent. The government owns 75% of banking assets in India while the private sector holds around 18% and the rest foreign ownership. In China, the public sector owns 51% of assets and the private sector 48%, with negligible foreign ownership.

The Robustness of the Banking Sector The strength of Indian banks is still better in comparison to China banking System. as reflected in the table below

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TABLE SHOWING COMPARATIVE BANKING SYSTEM OF CHINA AND INDIA China Year Share of global financial stock (in $ trillions) Financial Depth (financial stock as %age of GDP) Growth of Financial Stock CAGR(1993-2000)
(Source: Global Financial Stock Database) According to Standard & Poors, the Indian banking sector is fundamentally stronger than Chinas, at least for now. Indian banks ratio of gross nonperforming assets including NPLs, parts of restructured assets, and foreclosed propertiesstood at 810 percent as of March 2005 compared with 3135 percent for the Chinese banks as of December 31, 2004. According to the CBRC, the NPL ratio for major commercial banks in China stood at 10 percent by the end of August 2005. The difference in asset quality can be explained by a number of factors, according to Standard & Poors. For example, there are structural differences in the economic development models. Indian banks play an indirect role in the government fiscal operations, providing funds to the central government through their subscription to government bonds in line with statutory liquidity ratio requirements. In contrast, Chinese banks, the state-owned banks in particular, are directly used as fiscal instruments to fund state-owned enterprises. Further, Indian banks credit risk management systems are comparatively more advanced than Chinas, mainly because Chinese banks spent decades under policy lending regulations that placed very low priority on developing a credit risk management platform. In terms of capital adequacy, with relatively better interest margins (the benign interest rate regime continued to favor the Indian banking sector, with net interest margin for the public sector banks inching up from 2.98 percent in 200304 to 3.03 percent in 200405), low provisioning needs, and stronger net profitability, Indian banks have been able to build a stronger capital base than Chinese banks.

2003 5.1

2010 13.7

India 2003 2010 0.9 1.9

323% (2003) 14.5% (2003)

137% (2003) 11.9% (2003)

The Robustness of the Banking Supervisory System

Overall, a cursory review of public information would suggest that the Indian banking supervisory system is also, to some extent, stronger than that in China. Two indicators are quite meaningful. Basically, a large part of Chinas banking sector is insolvent and the priority is to restore the banking sector to normal. Therefore, China cannot afford to introduce a deposit insurance scheme quickly, because the fund would not be enough to absorb the stock problem. Similarly, China cannot adopt Basel II because it asks for not 8 percent of capital requirement but more likely 1012 percent at a minimum. However, India has moved quite a

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long way in these two areas, which is a sign of a strong supervisory system and a strong banking system as well. Neither the existence of deposit insurance nor preparations for Basel II are particularly meaningful indicators of the strength of the supervisory system; the issues are much more basic, including sound rules for asset classification, risk management, measuring capital adequacy at full provisioning, and rules enforcement. First, India has already set up a deposit insurance scheme to provide a degree of cover for both depositors and lenders. The Deposit Insurance and Credit Guarantee Corp. is wholly owned by the Reserve Bank of India, operating separate insurance funds to protect bank depositors and banks with exposures to priority sectors identified and supported by the government. The Deposit Insurance Scheme covers all classes of banks in India, including cooperative banks. Deposit insurance is compulsory and the cover per depositor per bank account is Rs. 100,000 and covers about 75 percent of total banking system deposits. The premium payable under the scheme by insured banks is equal to five basis points of total deposits and will increase to 10 basis points from 2005 onward. In clear contrast, despite the government-orchestrated financial restructuring of banks in general, 30 percent of Chinas banking sector, measured in terms of assets, is still undercapitalized. These include many small city commercial banks, not to mention credit cooperatives, where efforts to restore their solvency are still under way. In full recognition of the benefits of a deposit insurance system, the central bank in China has started to formulate the detailed arrangements for such a system. However, a number of risks inherent in the deposit insurance system need to be addressed, such as moral hazard (particularly following the full liberalization of interest rates), potential cross subsidy to the disadvantage of large and well-capitalized banks, and practical difficulty in assigning a riskadjusted premium. Therefore, a deposit insurance system for China can only be expected to become a reality after a few more years. And this is most likely to happen when the entire banking sector has been made sounder. Further evidence for the argument is Indias readiness to adopt Basel II, a set of more demanding capital standards, designed originally for internationally active banks in G-10 countries only. As complex as Basel II is, India is determined to implement it effective March 31, 2007. They will initially adopt the standardized approach for credit risk and the basic indicator approach for operational risk. After adequate skills are developed, both by the banks and also by the supervisor, some banks may be allowed to migrate to the internal ratings-based approach (IRB). Despite the benefit of a favorable perception overseas that India is conforming to best international standards, it is estimated that the banking sector may see a net depletion of 200 basis points in capital adequacy following the adoption of Basel II, as it asks for more capital for emerging markets. For one thing, operational risk is just an add-on. Of course, this may entail raising fresh capital. And in the case of public sector banks, the room for raising further capital would be constrained by the policy requirement to keep the governments shareholding at 51 percent or more. It is important to note that in March 2001, the Reserve Bank of India required all banks to meet a higher minimum capital requirement of 9 percent, up from the previous 8 percent.

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China, on the other hand, does not have the luxury to shift to Basel II so soon, because many banks are now trying hard to come to grips with Basel I. In light of market conditions, the Chinese supervisor intends to mandate the IRB approach only for large Chinese banks in perhaps five years time, while continuing to adopt Basel I for the rest of the banking industry.

Other Head-To-Head Comparison Of The Banking Sectors Of The World's Fastest Growing Major Economies.

Size Stack
Chinese banks trump Indian counterparts in number and scale. China had 3,769 banking institutions in 2010, with more than 250 commercial banks, 196,000 business outlets and 2.991 million employees. India pales in comparison, with 167 commercial banks, 87,768 business offices and 0.8 million employees.

It's the same story in asset size. At least 11 Chinese banks are perched in the top 100 category based in terms of market size while only three Indian banks make the cut here. To get an idea of the scale difference, consider this: Industrial and Commercial Bank of China, the largest Chinese bank, boasts of a market size of $201 billion while its Indian counterpart SBI's market size is only a fifth at $40 billion. But against the backdrop of a challenging environment, SBI Chairman announced that Net Profit of the Bank increased by 41.66% from Rs8,265 crores in FY''11 to Rs 11,707 crores in FY''12, one of the highest net profits earned by any corporate in the country. Operating Profit for your Bank crossed Rs30,000 crores mark, rising by 24.62% to Rs31,574 crores in FY''12 from Rs25,336 crores in FY''11, indicating that core operations remain robust. But is also a fact that Indian banking system still ahs not provided loans to company and farmers as an estimate Indias Bank loan to GDP ratio (around 37%) is far lower than that of China where according to IMF it has 136% loans to GDP ratios. According a recent study by Mckinsey Global Institute (MGI), Indias financial depth (financial stock as a % of GDP) is 137% where as in china it is 323%. Also Chinas saving rate is twice to that of Indias. Now Indias saving rate is also on an increase. The credit GDP ratio is first 45% in India where as in Korea is 107%, in Taiwan 126% and much more in China
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Not-so Sweeping Coverage

China may have larger and richer banks, but is surprisingly almost at a par with India in terms of coverage, or rather lack of coverage, of population that uses formal or semi-formal financial services. A McKinsey study shows that in India and China, the percentage of adult population that doesn't use formal or semi-formal financial services is 51-75%.

Power Performance
Banks from both sides have recorded high revenue growth, unlike counterparts of developed countries. For instance, McKinsey data show revenues of Indian and Chinese banks grew 19.8% and 13.7% in 2007-10, respectively. The non-performing asset ratio of the countries' banks too is comparable. NPAs of Indian banks stood at 2.5% in 2010 while those of the Chinese were 1.7%. Likewise, the cost to income ratio, another measure of banking efficiency, is only a tad different. Indian banks: 42% and Chinese banks: 39%. An important indicator of the banking industry's health and efficiency is its non-performing assets. On this count too, Indian banks are way ahead of their Chinese counterparts and on par with the global giants. The banking sectors of the two countries are also strikingly similar in the huge public ownership of assets, unlike in developed nations. The government owns 75% of banking assets in India while the private sector holds around 18% and the rest foreign ownership. In China, the public sector owns 51% of assets and the private sector 48%, with negligible foreign ownership.

Measure of Woes
Most experts agree that the woes of China's banking sector are bigger than India's, thanks to the huge fiscal stimulus package the Chinese government handed to banks during the 2008 recession to overcome a slowdown in exports. Up to $2.5 trillion of new loans was disbursed, accounting for 30% of GDP in 2009. China's banks became a vehicle for the government to provide cheap credit to projects by government enterprises. To make matters worse, there was growing pressure on banks to achieve growth targets through lending in housing and infrastructure. The credit was provided at concessional rates to finance some unviable projects. The upshot was an increase in non22

performing loans ( NPL) of Chinese banks. Analysts at Fitch Credit Ratings predict that the ratio of total credit/GDP in China is likely to reach 185% of GDP by the year end from 124% of GDP in 2007. Such high credit/GDP ratios have led to banking crises. Japan in the late 1980s is a notable example. An S &P report says Credit penetration in China is by far the highest in BRIC. The ratio of private sector loans to GDP was 131% in December 2011, a level which would leave China's banking system vulnerable to an unexpected hard landing. LGFPs (local government financing platforms) represen20% of total loans in China. It could also be a weak spot because they have generally weak financial profiles marked by high leverage, poor debt service capacity, and significant asset-liability mismatch. It is estimated that about 30% of LGFP loans could turn sour in the next three years if local governments don't extend any support. Chinese banks' credit performance would worsen if restrictive government policies induce a liquidity squeeze in these vulnerable segments under their regulatory forbearance exercise taken up by the Government this year.

Cyclical vs Structural
In contrast, Indian banks are far more conservative than their Chinese counterparts, even more so during global crises. Not surprisingly, the scale of credit expansion in India was much smaller. Yet the balance sheet of Indian banks' is weaker than in 2008 as "the impaired loan ratio is closer to 6% as against 3.5% in 2008", according to Morgan Stanley analysts. The gross NPA ratio of scheduled commercial banks in India increased marginally to 2.52% in June 2011 from 2.35% in March 2011. The reasons for this are more cyclical than systemic; Indian banks face pressures from weak global and domestic macroeconomic conditions. Slowing growth, rising interest rates and weaker asset quality have cast a shadow on sectors such as real estate, infrastructure and aviation, which together constitute up to a third of total loans. Anxieties in performance due to infrastructural lending are a common thread running through Indian and Chinese banks. Still, the problem is inherent to mainly PSU lenders in India. Bank analysts say the asset quality of private banks in India has improved, with declining credit costs over the last two years. So while a cyclical slowdown will escalate NPAs, the profitability of Indian banks remains healthy. But Loans are only about a third of India's GDP compared with over 100% in China. Nor can India seal off its financial system to the same extent as China.An S&P report states Credit growth in India is relatively moderate 16%-17% in fiscal 2013, compared to the nominal GDP growth of 14.5%. A slowdown in the economy, policy paralysis, has been delaying approval of new projects particularly in the infrastructure sector, low business confidence, which is affecting new investments in the country, high domestic interest rates, and inflation are likely to limit credit growth. The asset quality of Indian banks deteriorated due to the moderation in economic activity, high inflation, high interest rates, and rupee depreciation. Small and midsize companies are particularly vulnerable. Stress is also mounting on some highly leveraged large companies. Sectors under stress include airlines, state electricity utilities, micro finance institutions, some aggressively bid road projects, smaller steel and textiles companies, private electricity producers that are facing a fuel shortage, and construction and real estate. The sharp depreciation of the rupee against the U.S. dollar, about 24% year on year as of July 20, 2012, has adversely affected corporate borrowers that have not hedged their foreign currency debt. Foreign currency loans constitute over 10% of total loans. But retail loans continue to perform well because a slowdown in economic growth hasn't lowered the

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employment rate, and wages are still rising. We expect retail loans performance to sustain in the short-term. A large proportion of problem loans in India will be restructured. This, and the improved monitoring and recovery of nonperforming loans (NPLs) by government-owned banks, is likely to moderate the increase in such loans. Government-owned banks had seen a large one-off upsurge in NPLs due to the introduction of automated (system-based) NPL recognition in 2011. The stress is rising and the credit costs of banks is expected to be high in the next few years. There are also indicators that Nonperforming assets as a percentage of total loans could more than double by the first quarter of 2013, from 5% in March 2011if one defines nonperforming assets as NPLs, restructured loans, and foreclosed loans. The SACP of some of these banks could deteriorate, although the ratings may not be affected due to expectation of continued government support for these banks.

Return on assets
But there's an interesting twist to the story. Despite being small in terms of capital base and assets, Indian banks are way ahead of their global counterparts when it comes to return on assets, a parameter which denotes efficiency. Indian banks fare well against global peers as performance indicators foretell. Despite being small in terms of capital base and assets, Indian banks are way ahead of their global counterparts when it comes to return on assets, a parameter which denotes efficiency. Except for Bank of America and Citigroup, not too many of the global giants can match Indian banks in terms of ROA. Among the top four Chinese banks only China Construction Bank had an ROA of 1.29 per cent. The other three bank's ROA varied between 0.05 and 0.81 per cent. Among the top 10 global giants, JP Morgan Chase, Credit Agricole, Mitsubishi Tokyo, Mizo Financial and BNP Paribas had an ROA of less than 1 per cent. (Data of International Monetary Fund, for the year 2005) The exhibits 1, 2 & 3 will provide growth in Banking Industry in the form of Return on Assets and financial metrics from the year 2000. And also highlights that Indian Banking sector is showing all the positive signs in the form of financial performance.

Exhibit 1. Return on Assets For 2011 Country

France Germany Greece Italy Japan Portugal

ROA For 2011

0.6. 0.2 -0.3 0.2 0.4 . 0.5

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Country
Spain United Kingdom United States Russia China Malaysia India Brazil Mexico

ROA For 2011

0.5 0.2 1.2 2.3 1.0... 1.8 1.1 3.3 1.6

Source: Compiled from Financial Soundness Indicators, IMF, Report On Trend And Progress Of Banking In India 2010-11

Exhibit 2. Indian Banking Industry- Growth with rising Profitability

Source: The Boston Consulting Group, September 2010

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Exhibit 3 Financial metrics- Improvements in quality of assets, operating efficiency, stable margins

Source: The Boston September 2010

Consulting

Group,

Banking Sector Performance: Selected Indicators 2005

Country Japan Taiwan China India Korea ROA ROE 0. 0. 0. 5 1. 2 0. 0 5 -16.0 6.5 4.9 18.5 10.9 Cost/ Income Ratio 10 9 9 7 7 7 5 7 2 8 NPL/Asset ratio 34 10 43 11 20

(Source: Ernst & young)

If one compares with the latest data Except for Bank of America and Citigroup, not too many of the global giants can match Indian banks in terms of RoA. Last year, Bank of America's RoA was 1.91 per cent, while that of Citigroup's was 1.63 per cent. Andhra Banks RoA was not far behind at 1.59 per cent. In fact, its RoA was the highest among all Asian banks. Among other Indian banks, Oriental Bank of Commerce's RoA was 1.41 per cent, HDFC Bank's] 1.29 per cent, ICICI Bank and Allahabad Bank's 1.20 per cent, Punjab National Bank's 1.12 per cent and Canara Bank's 1.01 per cent. Last year, SBI's RoA was 0.94 per cent.

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Among the top four Chinese banks only China Construction Bank had an RoA of 1.29 per cent. The other three bank's RoAs varied between 0.05 and 0.81 per cent. Among the top 10 global giants, JP Morgan Chase, Credit Agricole, Mitsubishi Tokyo, Mizo Financial and BNP Paribas had an RoA of less than 1 per cent.

Payment systems
Though opening a chequing account is still a novel idea for many Chinese individuals, China now is still in the transitional period to introduce personal cheques Cheques in China, though widely used in the corporate world, have been long kept away from common consumers. Although some big cities such as Shanghai and Guangzhou have gradually allowed the applications of personal cheques, people do not take to the new payment option due to the inconvenience and relatively high threshold for applications. Banks also appear hesitant to promote personal cheques because of the higher risks in transactions resulted from the lack of personal credit systems throughout the country. In Beijing alone, the clearing centre handles more than 140,000 cheques daily, and in Guangzhou, about 130,000 cheques per day. A bank such as Industrial and Commercial Bank of China in Shanghai handles around 40,000 cheques on a daily basis. If personal cheques are widely used in China, a much higher volume of cheques will be processed daily. There are 860 Bankers clearing houses in India, of which 840 are managed by State Bank of India and its Associates, 14 by Reserve Bank of India, and the rest 6 by nationalised banks The cheques cleared in the clearing houses managed by Reserve Bank of India account for 62% in terms of volume and 86% in terms of value of the total cheques cleared in the country. Despite the widely touted explosion in online banking, clearing houses in India country processed during the year 2003-2004 as per RBI statistics 1,022.80 million cheqeus amounting toRs. 115,959 billion were cleared which included both MICR & non MICR instruments . During 2011-2012 the umber of cheques cleared stood at 1341.87 million amounting to Rs.99,012.14 billion. Under the retail electronic payment system the ntotla number of inssrumed procedd during 2003-2004 stood at 166.94 million amounting toRs. 521.43million and in 2011-12, 1159.84 million amounting toRs. 22,075.33billion. Under large value clearing and settlement thenumber of instrument sprocessed in 2011-12 stod at 55.04 million amounting Rs.10, 79,790.59billion Source: Reports on Currency and Finance, Reserve Bank of India. Needless to underscore here that this herculean task is done by miniscule portion of the 0.8 million bank employees India as against 2.8 million employees in China , where volume of cheque transactions in clearing house pales into insignificance when compared with India, which bespeaks the mettle and efficiency of Indian bank employee.

Indian, Chinese banks plunge at different rates

What's the difference between falling 20 meters and falling 60 meters? Well, in the first instance you go "thud, aaaaaarrrggghhh", and in the second you go "aaaaaarrrggghhh, thud". That crude comparison could well illustrate the difference between the Indian and Chinese banking systems
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In the long run, experts believe the Chinese banking system poses greater dangers and is more likely to collapse from the sheer weight of its problem loans. Foreign banks looking to enter both markets must do so with eyes wide open. Legend has it that Chinese bankers keep a shredder handy in their office for the express purpose of destroying business cards of their borrowers. You see, they never intend to call them back about the loans, as that's the responsibility of a different department. The latest gross domestic product (GDP) figures from China should make the People's Bank of China nervous, as indeed it has. (The central bank announced further restrictions to lending on July 21, 2012.) While export-oriented growth remains high on the back of Americans being too lazy to manufacture anything themselves, the sector's profitability continues to decline. Using official data from both the United States and China, it is easy to calculate that the average price of Chinese goods sold in the US has been falling the past few years, despite rising input costs (copper, for example). That puts manufacturers in a quandary, as the good old Chinese maxim of "work hard, be successful" simply doesn't work in practice. So they do the next best thing - ie, borrow from banks and speculate in the local asset markets, particularly property and stocks. Walk around the Pudong district of Shanghai and you can see the impact of a building boom, with great monuments to corporate success all around you. More troubling, you will see the same sights greeting you in downtown Guangzhou, Shenzhen, Chengdu and, of course, Beijing. India's banks are smaller, more conservative and potentially in much less trouble than China's. China is a manufacturing economy, and the proportion of Grade A office space thus appears far higher than is economically warranted. This is, however, also the reason for the Chinese GDP to ramp up nicely, as all the infrastructure and building activity adds to recorded economic growth. Banks, trying to recover their money from companies' manufacturing operations, find themselves having to support such speculation to improve their chances, echoing the "evergreening" scandal of Japanese banks in the 1980s and 1990s. The party comes to an abrupt halt once liquidity is drained away from the system. This is precisely what the central bank is now doing with hikes in lending rates and, more important, by issuing policy diktats aimed at removing bankers' temptations to lend. A continuation of restrictive banking policies reduces the country's ability to absorb the people being thrown off by public-sector companies, as the sector aims to achieve profitability. With profits unlikely to improve any time soon, as the export sector remains fiercely competitive, this means further job losses are unavoidable. When economic growth slows, China's government will have much to worry about, and will likely instruct the central bank to reduce or withdraw its restrictions. In effect, this would push the resolution of any asset bubble to the longer term, which would obviously also cause a manifold increase in the costs of dealing with the problems. Some experts believe that rather than the end game being forced on the Chinese banks by their own central bank, extraneous forces are more likely to cause the adjustment. Some possible examples include a recession in the US and Europe, uncovering of other banking scandals in China and, of course, internal disquiet in the country. When the reckoning does come, expect also to see a large-scale increase in problem loans from the retail sector, as was observed in the case of the various international trust and investment corporations that were shuttered in the

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late 1990s. Chinese people will take every opportunity to avoid paying back their loans, and a bank failure presents the perfect opportunity to do so. The resulting avalanche of bad loans will cost the country about 20% of its GDP, in my opinion. Meanwhile, legend has it that becoming an Indian banker is the cherished dream of the middle classes, but defaulting to banks is the path to riches for India's upper classes. The Indian banking system is a relatively small part of the economy, with banking assets to GDP barely crossing a third, and with nationalized banks such as the State Bank of India group making up a large portion. That said, private and foreign banks have an increasing role to play in the system, far higher than their command of banking assets would suggest. India's banks face losses on so-called priority loans as well as the long workout process that problem loans are subject to. However, these loans are isolated, with a few leading public-sector banks absorbing a bulk of these exposures. Also, and quite unlike in China, India's political establishment is not very sensitive to the level of interest rates, and is therefore unlikely to oppose the Reserve Bank of India's judgment in the matter. Indian banks have been profitably lending to the middle classes for centuries now, as banking goes back a few generations, particularly in the richer parts of the country such as the north and the west. The explosive growth rate in personal and mortgage finance in recent years, however, bears close watching. A number of Indian middle-class borrowers have tapped the willingness of commercial banks to lend money, a development over the past 10 years that destroyed the dominance of the Housing Development Finance Corp in the sector. With new private-sector and foreign banks leading the charge in innovation, even the moribund public sector has had to catch up. By and large, even with large economic risks looming - for example, borrowing by individuals working in call centers and information technology - companies could become substantially more risky if a downturn hits these sectors. Similarly, the central bank is worried about inflation causing further rate hikes, which I believe will pressure quite a few of these young borrowers and lead to bad debts climbing above 5%. In terms of skill sets, though, unlike in China, Indian bankers go through years of credit training, with cross-department exposure available to all officers in nationalized banks. This has allowed the nationalized banks to dominate the market for large corporate lending. Changes in the mid-1990s allowed for specific banks to assume the lead position in banking consortiums, thereby reducing the ability of large corporate borrowers to "borrow from Peter to pay Paul". Larger consortiums, particularly those comprising non-nationalized banks, have been shown to have lower loan losses. This experience is vastly different from that of China. This leads us to the main causes of banking losses in India, namely corruption, a slow legal process and government meddling. The ruling Congress party started the fashion for open house loans (known locally as loan mela), wherein banks tend to lend small amounts of money to a large number of poor peasants. Most of these loans have led to losses. The second area of losses is due to the prevalence of corruption, particularly at the heart of the second-tier nationalized banks such as Indian Bank. These losses have usually revolved around single banks taking on the total exposure of politically connected corporates that find themselves in dire financial straits for various reasons. The process of declaring bankruptcy and imposing financial restructuring is overly long, and usually contributes to higher losses given default.

29

The worst-case scenario comes about if the Reserve Bank of India hikes rates even as a slowdown bites into the export-oriented sectors. Resulting losses from this scenario would cross 5% of GDP in my opinion, even after considering the lower severity of default. On the other hand Despite threat of bad loans, steady growth to keep Indian banking sector afloat So there is very little in common between Indian and Chinese economies, barring the love of international investors, who are enamoured by the economic growth rate. But there's growing noise about the health of the banking system in both the countries. In fact, China's banking regulators and heads of top banks had to address the media last Sunday to calm the fears that the banking system is in the middle of a bad loans storm. It is anybody's guess whether it convinced investors or not. The fear about the Indian banking system is almost similar, thanks to the scores of defaults and restructuring of loans to prevent a loan from getting classified as bad. Are the bad loans in the Indian banking system so bad that it can wreck the economy? If history is any indicator, they are not. Think of the fact that bad loans were almost a quarter of the total banking system before the Bretton Woods twins forced economic reforms on the nation. The thousands of crores of defaults, be it Kingfisher Airlines or Deccan Chronicle Holdings, that make headlines are certainly worrying. But all these are a tiny sum compared to the total size of the banking industry. These are just about less than 5% of advances and can go up by a few percentage points even if 20% of the restructured loans turn bad. Even if they double in the next few years, the sheer pace of growth of the industry's profits is enough to take care of the bad loans, say bankers. "I think it is exaggerated," says Aditya Puri, chief executive and managing director at HDFC Bank. "That is not a catastrophic situation. Banks can absorb this loss through their profitability." The situation may have deteriorated compared with the best of the days before the 2008 credit crisis. But both the regulator and banks have woken up to the damage that bad loans can cause if left unattended. Doubts about bad loan numbers from both India and China remain and are not taken at face value. There is always a tendency to sweep them under the carpet. But if market valuations are an indicator, Indian banks are faring better than their Chinese counterparts in the eyes of the investors. Industrial and Commercial Bank of China, the world's largest, trades at a price to book value of 1.3 times, compared with State Bank of India's 1.4. The average industry valuation for Chinese banks is at 1.1 times the book value, while for Indian banks it is at 1.9, data from Bloomberg shows. "All I want to say is that it is not an alarming thing," the Reserve Bank of India governor Duvvuri Subbarao said on bad loans. "Our banks are resilient, they can withstand NPAs of this level." Skeptics can ignore the assurance, given that any regulator's job is to protect the industry that he is regulating. But when it comes to Subbarao, probably a higher weighting could be given to his words than any other as his past deeds have shown that he means what he says. In 2008 and 2009 foreign banks, burned by bad consumer loans and shaken by events elsewhere, withdrew credit. Some private Indian banks slammed the brakes on, too, including the largest, ICICI, which faced rumours of insolvencyscurrilous, as it turned out, but gleefully repeated by at least one state-bank boss at the time. The public banks, meanwhile, and in particular State Bank of India (SBI), which has a fifth of the market, had an influx of deposits and undertook a lending splurge. SBI's balance-sheet doubled between March 2007 and March 2011.

30

Wage gap rises ever higher at China's banks

The high profits and high salaries on offer at Chinese banks have been brought into question as the country's economy begins to slow, with senior executives now earning as much as 80 times the salary of a general employee. The flawed management structure and limited power of stockholders to constrain the board and senior executives of banks have led to the unfair wage policy, said analysts, adding that the high salaries and bonuses enjoyed by senior executives should be linked to the operational risks of their banks. SBI insists that its expansion did not reflect a Chinese-style, government-directed effort to offset the global slump. Yet although they remain tiny compared with Chinese giants like ICBC and China Construction Bank, there is often more than a whiff of Beijing about the Indian state lenders. Their loan books are skewed towards more socially worthy projects; their bosses' pay is modest; and they have a hybrid status as firms that are listed but have the state as a majority shareholder. Whereas the annual salaries for the president and vice president of Ping An Bank were the highest in the country at 8.69 million yuan (US$1.4 million) and 5.79 million yuan (US$917,000) respectively. The highest and lowest average monthly salary of executives at banks came to 33,500 yuan (US$5,300) for Agricultural Bank of China and 15,400 yuan (US$2,440) at Bank of Ningbo, respectively. The flawed management structure and limited power of stockholders to constrain the board and senior executives of banks have led to the unfair wage policy, said analysts, adding that the high salaries and bonuses enjoyed by senior executives should be linked to the operational risks of their banks. Concerned over low salary structure in PSU banks, the Reserve Bank on Tuesday said that in the absence of suitable compensation package they would lose talent to private sector lenders. The executive compensation in the public sector, as is well known, is lower than that in the private sector...If public sector banks are required to compete with private sector banks on a level playing field, there is a good case for compensating them too on a competitive base", RBI Governor D Subbarao said a conference organized by IBA and FICCI. While endorsing the suggestion the governor whole heartedly. a logical corollary one can draw is that Bank employees can legitimately expect the same concerns to bestowed on them in the 10 bipartite when talks are afloat of in making Indian banks competitive globally in pursuit of its ranking with in the first 100 banks.

Bank staff salaries in China

A Chinese daily reported that despite the economic downturn, but the Bank staff pay growth remains strong. Reported from the agencies has just been published, joint-stock banks grew the most eye-catching. Increase meter, eight of the top 10 joint-stock banks. Industrial Bank Ping An Bank ranked first with an increase of 62.03%, but excluding its integration factors, an increase of 51.87% is the king of salary increases. The top 10 banks, city commercial banks occupy two seats, five-line is extremely low-key the four growth barely more than 10%, even as little as 5.04% of the salary increases in the Bank of China, ranked second to last. From the employees' salary per capita in absolute terms, China Merchants Bank topped 260,700 yuan, Minsheng Bank 220,700 yuan followed the Bank of Nanjing finished third to 220,500 yuan.

31

It is worth noting that the dispatch system staff to control costs, the joint-stock banks and the five largest row scale enabled. The dispatch system of the China Merchants Bank staff and official staff ratio of up to 32% up to 31% of the Bank of China. Industrial Bank fastest increase As usual, the strong performance of the joint-stock banks. 10 banks before pay increases, shares the line accounted for eight seats. Which staff expenses grew up Ping An Bank to 62.03%. Their salaries and bonuses expenditure increased from 19.9 billion to 3.222 billion yuan, an increase of 62%. However, the Ping An Bank. Ping An Bank's explanation for this is that the investment in staff and scale of business growth as well as the two lines merge systems, processes, and systems integration. In August 2012 the original Shenzhen Development Bank and Ping An Bank to complete the integration and renamed. It is because of integration makes data soared. From the number of employees, Ping An Bank's total number of employees in the first half of last year to 12,525 people this year from about 21,417 people, an increase of 71%. Ping An Bank of salary increases is "unrealistically high", Industrial Bank is real. In the first half of 2012, the Industrial Bank staff costs increased by 51.87%. Employee expenses from 41.2 billion to 6.257 billion yuan, an increase of 52%. Industrial Bank has not announced specific remuneration structure. At the same time, the Industrial Bank last year, the number of employees to 31,286 people this year, an increase of 37,390 people, an increase of 20%, an increase far less than the salaries of magnitude. Absolute terms, the Industrial Bank salary of 167,300 yuan per capita, ranked fifth. $ Page $ These banks, an increase of at least the Shanghai Pudong Development Bank, the increase is 4.32%. From a specific distribution, their wages and salaries, bonuses, allowances, subsidies increased from 6.31 billion yuan to 6.49 billion yuan, an increase of only 2.85%; housing accumulation fund from last year's 210 million to 250 million. Absolute terms, shares the line is still leader, the most staff expenses 10 banks, shares of Bank of the same account for 8 seats. China Merchants Bank topped the 260,700 yuan, Minsheng Bank, Bank of Nanjing finished third with 220,500 yuan to 220,700 yuan in second place. Shanghai Pudong Development Bank Staff costs 197,500 yuan, ranked fourth in the listed banks. The remuneration of the five state-owned banks at the same level. ICBC, 10.43 million, Bank of Communications to 103,800 yuan, the Agricultural Bank of China, China Construction Bank, respectively, for 103,200 yuan, 102,900 yuan, 101,400 yuan. This is per capita remuneration in absolute terms the lowest of the five banks. Proportion of dispatch workers climbing Staff expenses from banks, including wages, bonuses, allowances and subsidies, housing provident fund and social insurance, supplementary insurance and employee benefits. Such as the Industrial Bank, said the next phase will be to continue to control costs, in the case of business growth, the cost to income ratio at a reasonable level. Banks to control costs means vary, but the trend is the large-scale personnel outsourcing. The dispatch system employees of the joint-stock banks and formal staff ratios tend to be higher.

32

Introduced a joint-stock bank employees, to enable dispatch system employees to tremendous cost savings for the bank. Merchants Bank, for example, enable a large number of dispatch system employees to the operating room to handle the credit card business. Such employees' salaries are generally in the 2000-3000 yuan, relative to regular employees, the bank's expenses are greatly reduced. Moreover, some banks also began new students staged dispatch system, and that the dispatch system in 1-3 years after the examination, during which the permanent payroll. Type of dispatch system employees pay slightly higher than the general dispatch system employees, but can not enjoy regular employees of the enterprise annuities, bonuses and other benefits.

ANNEXURE I E) China And India Comparison as of 2001-02

No. Economic or Social factor Unit of measurement
1. Total Area (out of which water) 2. Arable Land 3. Irrigated Land 4. Railways - length 5. Roadways - paved - length 6. Waterways - length 7. Natural Gas - Proved Reserves 8. Oil - Proved Reserves 9. Airports Total/paved/unpaved 10. Coastline 11. Steel Production 12. Food grain production 13. Cement Production 14. Crude Oil production 15. Coal Production 16. Electricity generated 17. Transmission & distribution losses 18. Electricity tariff 19. Cost of commercial borrowing 20. Telephone lines connected millions of sq km millions of sq km millions of sq km in km '000 in km '000 in km '000 in billion cu m billion bbl numbers in km million tons/year million tons/year million tons/year million tons/year million tons/year Billions of Kilowatts as % of total power US$ / 100 KW as % interest/ year millions

China
9.60 (2.8%) 1.48 0.53 71.90 1,447 123 2,530 18.60 489/389/89 14,500 280 418 650 180 1,300 2,190 6.8 4 to 5 6-7 311

India
3.29 (9.5%) 1.79 0.61 63.23 2,411 14.5 854 5.70 334/239/995 7,000 45 210 150 40 300 557 23.4 8 to 10 8 - 16 67
33

No. Economic or Social factor Unit of measurement

21. TV sets in households 22. Mobile/cellular phones 23. Internet users 24. Foreign trade (China+HongKong) 25. External debt (China+Hong Kong) 26. Exports (China+HongKong) 28. Tourist Arrivals 29. TV broadcast stations 30. Radio broadcast stations 31. FDI inflow (China + Hong Kong) millions millions millions US$ billions/year US$ billions US$ billions/year millions/year numbers AM/FM/short wave US$ billions/year

China
500 400 111 1038+923=1961 242+416= 658 752+286= 1038 632+291= 923 87 3240 369/259/49 106 1017+122= 1,139 2102+179= 2,281 9.3 49/22/29 1,314 7.2 13 1,498 74 44 10/131 1.9 33 0.59 23 8,182 6,300 1.73

India
85 100 51 260 120 120 138 4 562 153/91/68 8 175 750 7.9 60/17/23 1,095 15.3 22 658 64 25 25/273 4.6 25 1.38 55 3,699 3,400 2.73

27. Imports (China + HongKong) US$ billions/year

32. Forex Reserves (China+Hong US$ billions Kong) 33. GDP (China+Hong Kong) 34. GDP Growth (2006) 35. Labour Composition 36. Population 37. Population increase per year 38. Birth rate 39. Per Capita income 40. Life expectancy 41. Investment 42. Poverty line - numbers 43. Inflation Rate 44. Median age 45. Population Growth Rate 46. Infant mortality rate 47. GDP (PPP) 48. GDP (PPP) per person 49. Fertility Rate US$ billions in % rate over last year Agriculture %/Industry %/ Services % millions millions Numbers per 1000 US$ per year/person Years % of GDP %/Numbers in millions % Numbar of years % of population Death Rate per 1,000 US$ billions US$ per person/year children born/woman

34

No. Economic or Social factor Unit of measurement

50. Literacy Rate - Definied as age 15 and over 51. Death Rate 52. Public Debt 53. Unemployment rate 54. Labour force 56. Government budget Revenues/Expenditure can read & write - % of Pop Rate per 1,000 pop % of GDP % of workforce in millions US$ billions

China
91 6.97 29 20 797 840 392/424

India
60 8.18 82 30 496 5110 111/126

55. People living with HIV/AIDS '000 (2003)

1 billion = 1000 million, 1 million = 10 lacs, 1 crore = 100 lacs = 10 million **As per official figures

35

36

Table 1.1 Overview of BRICS, 2010

GDP in PPP (in US$ billion) _____________ __________ Rank in World GDP In dia Ch ina 4 2 4,060 10,086 GDP (US$ billion) ______________ ___________ 1990 2010 326 390 1,538 5,878 Share in World GDP (in per cent) ______________ ___________ 1990 2010 3.1 3.9 5.4 13.6 Per Capita GDP (US$) ______________ ___________ 1990 2010 378 341 1,265 4,382

Source IMF Table 1.2 Land Use in BRICS, 2008

Country Land Area (1,000 ha) 1 India China 2 297,319 932,749 Arable Land (1,000 ha) 3 158,145 108,642 Area Harvested for Cereals (1,000 ha) 4 99,880 88,593 Production of Cereals (1,000 tonne) 5 246,774 483,680 Irrigated Land (1,000 ha) 6 62,286 64,141 Irrigated Land (per cent of arable land) 7 36.8 52.3

Source: FAO Statistical Year Book, 2010.

Table 1.3 Growth Rate of Gross Domestic Product

37

1991 1 India China 2002 2 5.7 10.3

2002 3 4.6 9.1

2005 4 9.2 10.4

2006 5 9.8 11.6

2007 6 9.4 13.0

2008 7 7.3 9.6

2009 8 5.7 8.7

2010 9 10.4 10.3

Source: World Economic Outlook, IMF (2011). Table 1.4 Gross Domestic Investment and Savings
Country 1 India China 1990 1995 2000 2006 2007 2008 2009 2 3 4 5 6 7 8 Investment 24.2 26.6 24.2 36 37.6 35.6 34.5 Saving 22.7 25.4 23.2 32.9 33.5 30.2 29.8 Investment 36.1 41.9 35.1 43.6 41.7 42.5 44.8 Saving 39.6 44.1 37.5 51.3 50.5 50.2 54.2 2010 9 37.9 34.7 48.8 54.0

Source: World Bank Database.

Table 1.5 Sectoral Share in GDP

Country 1 India China Sectors 2 Agriculture Industry Services Agriculture Industry Services 1990 3 30.0 22.3 47.7 26.0 35.5 38.5 1995 4 26.8 23.2 50.0 19.7 40.6 39.7 2000 5 23.2 20.7 56.1 15.2 40.7 44.1 2005 6 18.9 21.0 60.0 12.2 42.2 45.6 2008 7 19.0 21.0 60.0 11.6 42.8 45.7 2009 8 17.1 28.2 54.6 11.0 48.0 41.1

Source: United Nations System of National Accounts.

38

Table 1.6 Rank on Global Competitiveness Index (GCI), 2010 11 Coun try Global Compet itive Index Infrastru cture Macroeco Higher Mar nomic Environme nt Educat ion and Traini 1 India Chin a 2 51 27 3 86 50 4 73 4 ng 5 85 60 6 4 2 7 44 41 8 39 26 ket Size Business Sophistic ation Innova tion

Source: Global Competitiveness Report 201011, World Economic Forum. Table 1.7 Population and Demographic Profile of BRICS
Total Population (million) _____________________ _ 1990 2010 2 3 862.2 1214.5 1142.1 1354.1 Urban Population (per cent of total) ________________________ _ 1990 2010 4 5 25.6 30.0 26.4 47.0 Dependency Ratio ______________________ 1990 2010 6 71.5 51.2 7 55.6 39.1

Total Fertility Rate (births per wo _______________ 1990-5 8 3.9 2.0

Source: Human Development Report, UNDP.

39

Table 1.8 Social Sector Indicators, 2007

1 Human Development Index (HDI, 2007) HDI Rank Adult Literacy (per cent of 15 yrs and above during 19992007) Male Female Child-related Indicators Gross Enrolment Ratio (2007) Children under Age 05 yrs (during 20006) Population below Income National Poverty Line Population not Using Improved Water Supply (2006) Life Expectancy (yrs) Male Female 68.7 46 28.6 11 62.0 64.9 61.0 7 2.8 12 71.3 74.7 India 2 134 76.9 54.5 China 3 92 96.5 90

40

Inequality Measures Richest 10 per cent to Poorest 10 per cent Gini Index* 8.6 36.8 13.2 41.5

Source: UNDP, Human Development Report, 2010. *Gini index measures the extent to which the distribution of income or consumption expenditure among individuals or households within an economy deviates from a perfectly equal distribution Thus a Gini index of 0 represents perfect equality, while an index of 100 implies perfect inequality. Table 1.9 Fiscal Deficit of General Government Country India China 1998 7.8 2.8 2000 9.3 3.3 2006 5.3 0.7 2007 4.0 0.9 2008 8.0 0.4 2009 10.0 3.1 2010 9.4 2.6

Source: IMF Database.

41

Table 1.10 Fiscal Balance of General Government

India Revenue Expenditure 1998 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 16.1 16.6 16.6 17.1 17.5 18.2 18.4 19.4 21.0 19.7 18.9 17.5 23.9 26.0 26.1 26.4 26.1 25.4 24.8 24.7 25.0 27.2 28.5 26.5 12.1 13.8 15.1 15.9 16.2 16.6 17.2 18.2 19.8 19.7 20.0 20.4 China Revenue Expenditure 14.9 17.1 17.9 18.9 18.6 18.1 18.6 18.9 18.9 20.0 23.0 22.9

Source: IMF Database.

Table 1.11 Gross Debt of General Government

1 India China 1998 2 65.4 11.4 2000 2006 2007 3 4 5 71.4 76 72.9 16.4 16.5 19.8 Source: IMF Database. 2008 6 72.6 16.8 2009 7 74.2 18.6 2010 8 69.2 17.7

Table 1.13 Composition of Fiscal Adjustment Plans

Fiscal Adjustment Need Mostly Revenue Revenue and Expenditure Mostly Expenditure Detailed Plans in Preparation

42

HIGH (> 6 per cent) MEDIUM & (3 6 per cent) LOW l (< 3 per cent)

India

China

None

None

None

None

Source: World Economic and Financial Survey,

Table 1.14 Monetary Frameworks in BRICS

Country Monetary Policy Framework Key Monetary Policy Tools Key policy rate: India Multiple Indicators Approach Repo/reverse repo rate and reserve requirements, CRR and SLR China Multiple Indicators Approach Reserve requirement ratio, central bank base interest rate, rediscounting, central bank relending, open market operation, and other policy instruments specified Objectives Maintain price stability, financial stability, and ensure appropriate flow of credit to productive sectors Maintain the stability of the value of the currency and thereby promote economic growth

43

by the State Council Source: BRICS Report

Table 1.15 Inflation: Average Consumer Prices

Country India China 2000 4.0 0.4 2005 2006 4.2 6.2 1.8 1.5 Source: IMF 2007 6.4 4.8 2008 8.3 5.9 2009 10.9 0.7 2010 13.2 3.3

Table 1.16 Global Integration of Economies

Share in World Trade __________ 1990 2010 2 0.5 1.6 3 1.8 9.2 Trade Openness _____________ 1990 2010 4 6.9 17.4 5 21.7 29.5 Current Account Balance (per cent of GDP) ______________ 1990 2010 6 7 1.2 3.2 1.3 5.2 Forex Reserves (per cent of GDP) _______________ 1990 2010 8 0.5 7.6 9 18.0 48.8 External Debt (US$ billion) ______________ 1990 2009 10 85.7 55.3 11 237.7 428.4

Debt Serv Ratio __________ 1990 12 34.9 11.7

Source: IMF, UNCTAD, and World Bank.

Table 1.17 Share of Global Trade

Country India China 1990 0.5 1.6 1995 2000 0.6 0.7 2.6 3.5 Source: UNCTAD. 2005 1.2 6.4 2008 1.5 7.9 2009 1.6 8.3 2010 1.8 9.2

44

Country India China

Table 1.18 Exports of Goods and Services 1990 1995 2000 2005 2008 6.9 10.2 12.3 18.8 23.7 17.4 23.1 23.3 37.1 34.9 Source: UNCTAD. Table 1.19 Share in World Exports

2009 20.1 26.7

2010 21.7 29.5

Country India China

1990 1995 2000 0.5 0.6 0.7 1.8 2.9 3.9 Source: UNCTAD.

2005 0.9 7.3

2008 1.2 8.9

2009 1.3 9.6

2010 1.4 10.4

Table 1.20 Exports Profile, 2009

Share by Merchandis Countr y e Exports (US$ billion) Share in World Total Export s 3 1.3 Commodity 4)Agricultural 5)Fuels and Mining 6)Manufacturin g Products 4 5 10. 20. 2 6 6 66. 0 (20.5 ) (14.4 ) (10.8 ) (5.9) 7 EU 8 UAE 9 US 10 Chin a 11 Hong Kong SAR, China Share by Destination

1 India

2 164.9

45

(4.0) Hong EU China 1,201.6 9.6 3.4 2.9 93. 6 (19.7 ) (18.4 ) US Kong SAR, Japan Chin a (13.8 ) (8.1) (4.5) Rep. Kore a

Source of statistics: WTO.

Table 1.21 High-technology Exports (per cent of Manufacturing Exports)

Country India China 1990 1995 2000 2005 2.4 4.3 4.8 4.7 17.2 8.1 Source: World Bank Database. 2007 5.3 6.9 2008 5.7 6.5 2009 8.6 9.3

Table 1.22 Share of World Exports of Services

Country India China 1990 1995 2000 2005 0.6 0.6 1.1 2.0 0.7 1.6 2.0 2.9 Source: World Bank Database. 2008 2.7 3.7 2009 2.6 3.7 2010 3.1 4.2

Table 1.23 Imports of Goods and Services

Country India China India 1990 8.5 13.7 0.7 1995 2000 2005 2008 11.5 13.9 22.1 30.5 20.2 20.3 30.6 26.5 Share in World Imports 0.7 0.8 1.3 2.0 2009 25.0 21.7 2.0 2010 26.4 24.9 2.1
46

China

1.5 2.5 3.4 Source: UNCTAD.

6.1

6.9

8.0

9.1

Table 1.24 Imports Profile, 2009 Merchandise Share in Imports (US$ billion) 2 257.2 World Total Imports 3 2.0 4 5.6 Share by Commodity 4)Agricultural 5)Fuels and Mining 6) Manufacaturing Products 5 37.6 6 46.6 7 EU (14.4) 8 China (11.5) 9 UAE (7.4) 10 US (6.0) Hong 1,005.9 7.9 7.6 24.9 67.1 Japan (13.0) EU (12.7) Rep. of Korea (10.2) Kong SAR, China (8.6) Source of statistics: WTO Share by Origin

untry

11 Saud

dia

Arab

(5.4

Taiw

ina

Provin

of Ch

(8.5

Table 1.25 Share of World Imports of Services Country 1990 1995 2000 2005 2008 2009 2010

47

India China

0.7 0.8 1.2 0.5 2.0 2.3 Source: UNCTAD.

1.9 3.4

2.4 4.3

2.5 4.8

3.1 5.1

Table 1.26 Export Linkages

Exports from Russia 1990 2000 2009 Exports from India 1990 2000 2009 Exports from China 1990 2000 2009 Exports from Brazil 1990 2000 2009 Exports from South Africa 1990 2000 2009 China 0.4 1.1 21.0 China 0.3 5.6 China 5.2 16.1 China 0.0 0.8 10.2 India 0.2 1.6 29.7 India 0.2 0.38 3.4 India 0.4 2.0 India 1.1 4.8

Source: Directory of Trade Statistics, IMF. Table 1.27 Share in Global Remittance Inflows

48

Country India China

1990 3.5 0.3

1995 6.1 0.9

2000

2005

2007 9.7 10.1

2008 11.3 10.9

2009 11.9 11.5

Remittances to GDP Ratio 3.9 1.0

9.8 8.1 4.0 8.8 Source: World Bank.

Table 1.28 Trade Balance and Current Account Balance

Trade Balance* Current Account Balance Country 1990 2000 2008 2009 2010 1990 2000 2008 2009 2010 1 2 3 4 5 6 7 8 9 10 11 India 1.6 1.6 6.7 4.9 4.8 2.4 1.0 2.0 2.8 3.2 China 3.7 3.1 8.3 5.0 4.6 3.1 1.7 9.6 6.0 5.2 Source: UNCTAD and IMF.

Table 1.29 Share of Global FDI Inflows

Country India China 1990 0.1 1.7 1995 2000 0.6 0.3 11.0 2.9 Source: UNCTAD. 2005 0.8 7.4 2008 2.4 6.2 2009 3.0 8.0 2010 2.0 8.5

Table 1.30 Cross-country Movement of FDI Flows

Cou ntry 19 1 90 2 20 00 3 FDI Inflows 20 05 4 20 20 20 20 19 90 9 20 00 10 FDI Outflows 20 05 11 20 20 20 20

India 0.2 3.6 7.6

07 08 09 10 5 6 7 8 25. 42. 35. 24. 5 10 6 95. 6 10

3 Chin 3.5 40. 72. 83.

0.0 0.5 3.0

07 08 09 10 12 13 14 15 17. 19. 15. 14.

2 4 9 6 0.8 0.9 12. 22. 52. 56. 68.

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4 5 8.3 0 5.7 Source: UNCTAD.

Table 1.31 Cross-country Movement of Portfolio Flows

Count ry 0 2 0.0

Portfolio Investment Inflows

Portfolio Investment Outflows

199 200 200 200 200 200 199 200 200 200 200 200 1 India 0 3 2.5 5 4 12. 2 21. 2 7 5 35. 0 21. 0 8 6 15. 0 9.9 9 7 0 8 0.0 0 9 0.1 11. 3 5 10 0.0 26. 2 7 11 0.2 2.3 8 12 0.0 32. 7 9 13

China

0.0

7.3

0.2

Source: IMF/International Financial Statistics. Table 1.32 Foreign Exchange Reserves

Country India China India China 1990 2.1 30.2 0.2 3.1 1995 2000 2005 2008 18.6 38.4 132.5 248.0 76.0 168.9 822.5 1950.3 Share in Total Global Reserves 1.2 1.9 3.0 3.3 5.0 8.3 18.5 25.9 Source: UNCTAD. 2009 266.2 2417.9 3.1 28.0 2010 276.2 2867.9 2.8 29.4

Table 1.33 External Debt Stocks, Total (DOD, current US$)

Country 1990 1995 2000 2005 2007 2008 2009
50

1 India China India China

2 85.7 55.3 26.3 14.2

3 95.2 118.1 25.9 16.2

4 100.2 145.7 20.9 12.2

5 120.2 284.0 14.8 12.6

6 202.8 373.8 17.6 10.7

7 224.7 378.2 17.8 8.4

8 237.7 428.4 18.7 8.6

External Debt-to-GDP Ratio Source: World Bank, Global Development Finance, and IMF, WEO, October 2010. Table 1.34 Exchange Rate Regime
Exchange Country Currency Rate Structure Current Exchange Rate System Managed floating with no India Rupee Unitary predetermined path for the exchange rate to floating Managed floating exchange rate regime based on China Renminbi Unitary market supply and demand with reference to a basket of currencies Increasing de facto openness of the capital account Easing of controls Recent Developments in Capital Account

Source: BRICS report Table 1.35 Stock Market Performance

Count ry 199 Index 200 PE Ratio change) 200 201 199 200 200 201 199 200 200 201 Movement (per cent

51

India

9 5 9 209. 382. 468. 5 9 5

0 -

9 89. 1 10.

5 9 40. 100. 2 15. 5

0 -

9 5 9 22. 20.1 21. 8 7 8 15.7 15.

0 22. 4 14.

China 33.5 29.3 64.8

58.8 2 6 8 6 6 Source: Bloomberg and Morgan Stanley Capital International.

Table 1.36 Total Listed Domestic Companies

Country 1 India China 1990 1995 2000 2005 2006 2007 2008 2009 2010 2 3 4 5 6 7 8 9 10 2435 5398 5937 4763 4796 4887 4921 4955 4987 0 323 1086 1387 1440 1530 1604 1700 2063 Source: Standard & Poors, Emerging Stock Markets Factbook

and supplemental S&P data. Table 1.37 Market Capitalization of Listed Companies
Country 1990 1 2 India 12.2 China 0 1995 3 35.7 5.8 2000 4 32.2 48.5 2005 5 68.3 34.9 2006 6 89.5 91.3 2007 7 46.4 178.2 2008 8 53.2 61.8 2009 9 85.4 100.3 2010 10 93.4 81

Source: Standard & Poors, Emerging Stock Markets Factbook and supplemental S&P data, and World Bank and OECD GDP estimates. Note: Market capitalization (also known as market value) is the share price times the number of shares outstanding. Listed domestic companies are domestically incorporated companies listed on the countrys stock exchanges at the end of the year. Listed companies does not include investment companies, mutual funds, or other collective investment vehicles

Table 1.38 Stocks Traded, Turnover Ratio

Country 1990 1 2 India 65.9 1995 3 10.5 2000 4 133.6 2005 5 94.2 2006 6 93.1 2007 7 84 2008 8 85.2 2009 9 119.3 2010 10 75.6
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China

0 115.9 158.3 82.5 102 180.1 121.3 229.6 164.4 Source: Standard & Poors, Emerging Stock Markets Factbook and supplemental S&P data. Notes: Turnover ratio is the total value of shares traded during the period divided by the average market capitalization for the period. Average market capitalization is calculated as the average of the end-of-period values for the current and the previous period

Table 1.39 Equity Valuation Measures: DividendYield Ratios

Coun try 1 India China 19 98 2 2 3.7 1 19 99 3 1.2 5 3.1 20 00 4 1.5 9 0.9 20 01 5 2.0 3 1.9 20 02 6 1.8 1 2.4 20 03 7 1.4 7 2.1 20 04 8 1.5 3 2.2 20 05 9 1.3 20 06 10 1 20 07 11 0.7 20 08 12 1.8 20 09 13 0.9 201 0 14 0.9 2.2

2.7 1.5 1.2 3.1 1.9 4 5 5 1 9 6 Source: Data from Morgan Stanley Capital International.

Table 1.40 Emerging Market External Financing: Total Bonds, Equities, and Loans
Cou 19 19 20 20 20 200 200 200 200 200 200 200 3 7 3,7 76 12, 4 8 13, 5 9 21, 6 10 29, 7 11 60, 8 12 37, 9 13 58, 201 0 14 115, ntry 98 99 00 01 02 1 2 3 4 5 6 Indi 1,4 2,3 3,4 2,0 1,3 a Chi na 34 76 28 66 60 6,9 3,4 9,2 4,2 4,2 75

060 660 534 513 561 320 929 22, 38, 50, 75, 28, 66, 79,8

62 27 55 56 843 850 805 040 677 261 829 79 Source: Data provided by the Bond, Equity, and Loan Database of the International Monetary Fund sourced from Capital Data.
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Table 1.41 Insurance Sector in BRICS Economies

Country 1 India China India China 1995 2000 2005 2006 2007 3 4 5 6 7 Life Insurance Premium Volume/GDP 0.010 0.012 0.017 0.026 0.041 0.040 0.002 0.003 0.010 0.018 Non-Life Insurance Premium Volume/GDP 0.00 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 0.01 Source: World Bank. 1990 2 2008 8 0.039 0.01 -

Table 1.42 Prudential Indicators of the Banking Sector

Regulatory Capital to Risk

Bank Capital to Assets Country 1 India China 1999 2 5.9 5.2

Weighted Assets 2005 2009 2010 1999 2005 2009 2010 3 4 5 6 7 8 9 9.8 10.3 11.2 12.8 13.2 4.4 5.6 11.2 2.5 11.4 Sources: National authorities; IMF staff estimates.

Table 1.43 Bank Profitably Indicators

/ Total Loan Countri 199 200 200 201 199 200 200 201 199 200 200 201 es 1 India 9 2 5.9 5 3 0.9 9 4 1 0 5 9 6 5 7 13. 9 8 12. 0 9 9 10 14. 5 11 5.2 9 12 2.3 0 13 Return on Assets Return on Equity Non-performing Loan

54

China

5.2

0.6

8.6 1.6 1 1 5 Source: Global Financial Stability Report, IMF.

0.8

3 15.

3 15.

7 28.

Table 1.44 Financial Services Accessibility

India 2009 27.86 China 2009 -

Indicator Number of commercial bank branches per 1,000 sq. km Number of commercial bank branches per 100,000 adults Outstanding deposits with commercial banks (per cent of GDP) Outstanding loans from commercial banks (per cent

2005 23.86

2010 29.14

2005 -

2010 -

9.69

10.43

10.91

47.31

60.11

123.21

137.11

31.21

43.62

85.33

107.62

55

of GDP)

Source: IMF. Table 1.45 Credit Depth of Information Index (0 = low to 6 = high) Country India China 2005 2006 2007 2008 2009 2010 2 3 4 4 4 4 2 4 4 4 4 4 Source: World Bank, Doing Business Project (http://www.doingbusiness.org/). Note: The credit depth of information index measures rules affecting the scope, accessibility, and quality of credit information available through public or private credit registries. The index ranges from 0 to 6, with higher values indicating the availability of more credit information, from either a public registry or a private bureau, to facilitate lending decisions Table 1.46 Domestic Credit Provided by Banking Sector
Country 1 India China 1990 2 51.4 89.4 1995 3 44.1 87.7 2000 4 53 119.7 2005 5 60.1 135.6 2006 6 60.9 133.5 2007 7 60.8 127.8 2008 8 68.2 120.8 2009 9 69.4 145.2

Source: IMF, International Financial Statistics and data fi les, and World Bank and OECD GDP estimates. Note: Domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. Th e banking sector includes monetary authorities and deposit money banks, as well as other banking institutions where data are available (including institutions that do not accept transferable deposits but do incur such liabilities as time and savings deposits). Examples of other banking institutions are savings and mortgage loan institutions and building and loan associations.
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Table 2.1 Global Financial Crisis: Summary Indicators

Indicators/Country 1 GDP Growth Investment Rate/GDP CPI Inflation Fiscal Deficit/GDP Gross Debt/GDP CAD/GDP Exports Growth Imports Growth Exchange Rate* Equity Market Indices (percentage change) Market Capitalization (%GDP) PE Ratio** NPA/Total Loan 2008 2 7.3 35.6 8.3 7.4 72.6 2.2 29.7 40.3 22.9 65.1 53.2 10.5 2.3 India 2009 3 5.7 34.5 10.9 9.6 74.2 2.1 15.2 20.1 3.7 100.5 85.4 21.8 2.3 2008 4 9.6 42.5 5.9 0.4 16.8 9.4 17.3 18.3 6.4 74.2 61.8 10.3 2.4 China 2009 5 8.7 44.8 0.7 3 18.6 5.8 15.9 11.3 0.1 100.3 100.3 21.1 1.58

Source: IFS and World Bank database. means depreciation.

Table 2.2 Size of Discretionary Measures in Financial Crisis

Country 1 India China 2008 2 0.6 0.4 2009 3 0.6 3.1 2010 4 0.6 2.7

57

Source: IMF Staff Position Note, Fiscal Affairs Department, International Monetary Fund, July 2009

58