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Banking operations started in India as early as 1870 with the establishment of the Bank of
Hindustan, considered as the first bank in India.
The second development in the banking sector happened with the incorporation of the Bank of
Calcutta, the Bank of Bombay and the Bank of Bombay in accordance with the Presidency Bank's Act,
1876. All these banks joined hands to form the Imperial Bank of India. The reserve Bank of India was
engaged in the performance of central banking activities before the establishment of the Reserve Bank of
India.
Public sector is the part of economic and administrative life that deals with the delivery of goods
and services by and for the government, whether national, regional or local/municipal.
Private Banks are banks that are not incorporated. A non-incorporated bank is owned by either
an individual or a general partner(s) with limited partner(s). In any such case, the creditors can look to
both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/general-partners'
assets.
Foreign banks organised under foreign laws and located outside the United States.
Scheduled Banks in India constitute those banks which have been included in the Second Schedule of
Reserve Bank of India(RBI) Act, 1934. RBI in turn includes only those banks in this schedule which satisfy the
criteria laid down vide section 42 (6) (a) of the Act.
As on 30th June, 1999, there were 300 scheduled banks in India having a total network of 64,918
branches. The scheduled commercial banks in India comprise of State bank of India and its associates (8),
nationalized banks (19), foreign banks (45), private sector banks (32), co-operative banks and regional rural
banks.
"Scheduled banks in India" means the State Bank of India constituted under the State Bank of India Act,
1955 (23 of 1955), a subsidiary bank as defined in the State Bank of India (Subsidiary Banks) Act, 1959 (38 of
1959), a corresponding new bank constituted under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1970 (5 of 1970), or under section 3 of the Banking Companies (Acquisition and
Transfer of Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included in the Second
Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but does not include a co-operative bank".
"Non-scheduled bank in India" means a banking company as defined in clause (c) of section 5 of the
Banking Regulation Act, 1949 (10 of 1949), which is not a scheduled bank".
i) Primary functions:
The primary functions of a commercial bank include:
a) Accepting deposits-The most important activity of a commercial bank is to mobilize deposits from the
public. People who have surplus income and savings find it convenient to deposit the amounts with banks.
Depending upon the nature of deposits, funds deposited with bank also earn interest. Thus, deposits with the
bank grow along with the interest earned. If the rate of interest is higher, public are motivated to deposit more
funds with the bank. There is also safety of funds deposited with the bank.
b) Grant of loans and advances-The second important function of a commercial bank is to grant loans
and advances. Such loans and advances are given to members of the public and to the business community at a
higher rate of interest than allowed by banks on various deposit accounts. The rate of interest charged on loans
and advances varies depending upon the purpose, period and the mode of repayment. The difference between
the rate of interest allowed on deposits and the rate charged on the Loans is the main source of a bank’s income.
i) Loans-A loan is granted for a specific time period. Generally, commercial banks grant short-term loans.
But term loans, that is, loan for more than a year, may also be granted. The borrower may withdraw the entire
amount in lumpsum or in instalments. However, interest is charged on the full amount of loan. Loans are generally
granted against the security of certain assets. A loan may be repaid either in lumpsum or in instalments.
ii) Advances-An advance is a credit facility provided by the bank to its customers. It differs from loan in
the sense that loans may be granted for longer period, but advances are normally granted for a short period of
time. Further the purpose of granting advances is to meet the day to day requirements of business. The rate of
interest charged on advances varies from bank to bank. Interest is charged only on the amount withdrawn and not
on the sanctioned amount.
c) Discounting of Bills-Banks provide short-term finance by discounting bills, that is,making payment of
the amount before the due date of the bills after deducting a certain rate of discount. The party gets the funds
without waiting for the date of maturity of the bills. In case any bill is dishonoured on the due date, the bank can
recover the amount from the customer.
ii) Secondary functions:-Besides the primary functions of accepting deposits and lending money, banks
perform a number of other functions which are called secondary functions. These are as follows –
a) Issuing letters of credit, travellers cheques, circular notes etc.
b) Undertaking safe custody of valuables, important documents, and securities by providing safe deposit
vaults or lockers;
c) Providing customers with facilities of foreign exchange.
d) Transferring money from one place to another; and from one branch to another branch of the bank.
e) Standing guarantee on behalf of its customers, for making payments for purchase of goods, Machinery,
vehicles etc.
f) Collecting and supplying business information;
g) Issuing demand drafts and pay orders; and,
h) Providing reports on the credit worthiness of customers.
Analysis of Data-
NATIONALIZED 66702
FOREIGN BANKS -
• The government could aid private sector participation in PPPs through expeditious awarding of
contracts, facilitating land acquisition and ensuring better coordination between the centre and states. In
particular, large size PPP projects may be put out for bidding after obtaining mandatory clearances and approvals
— say, through a Shell Company/Special Purpose Vehicle (SPV) as was recently done in the case of the Ultra
Mega Power Projects;
• Information on the development of PPPs, prior to their being bid out, would be appreciated by the
private sector, perhaps as part of a national database;
• The tax regime applicable to dividends paid out by SPVs needs to be rationalized; currently, in cases
where a holding company is implementing multiple projects through SPVs, dividends are being taxed twice, first at
the level of project-specific SPVs and then at the holding company level;
• The entry of financial investors will introduce a longer-term perspective than construction-oriented
concessionaires, and this can be encouraged by allowing concessions to be more tradeable;
• The government should take measures to deepen debt markets and encourage insurance funds to
invest in infrastructure projects.
Findings-
The present study examines the link between the revenue portfolio and risk- adjusted
performance of banks in Indian context. The comprehensive results are presented both at aggregate level
and at the bank level using the data of the year 2004 through 2008. Traditionally, it is believed that
earnings from non-interest generating revenues are more stable than loan based earnings and the
increase focus on these activities overall revenue and profitability volatility is reduced via diversification
effects. Our results don't support the traditional thinking. On an average it is found that non-interest
income is more volatile than interest income. The greater reliance on non-interest income lowers risk-
adjusted performance of a typical bank. Further, the comparison of domestic and foreign banks reveals
that domestic banks have relatively lower revenue and profitability volatility.
• Financially repressive monetary regulations affect the portfolio management of the scheduled
commercial banks adversely;
• The scheduled commercial banks in India act as a channel for transmission of monetary policy, which
impinge on aggregate macroeconomic activity and
• Efficient monetary policy is a prime mover in stabilizing the economy and the banking system.
Significant policy implications emerge from the study.
• The group of New Private Sector banks, (refer to annexure) dominated the league tables of growth, as
against the average of other bank groups, with an average y-o-y growth in Assets at 38.7%, for Deposits at
38.8%, Advances at 39.9% and Operating Profit at 46.7%.
• The group of Old Private Sector banks (refer to annexure) showed relatively lower growth in business.
The annual growth rate for this group for FY07 stood at 7.1% in Assets, 6% in Deposits and 12% in Advances.
However, this group fared better in Net profit, which grew by 30%. All bank groups reported a capital adequacy
ratio of more than 12%.
• The ratio of standard assets was highest in the case of Foreign Banks and New Private Sector banks at
98.1% each, followed by 97.3% in Public Sector banks and 96.9% in Old Private Sector banks. The ratio of Net
NPAs to Total Assets was 0.6% in public sector and Old Private Sector banks, 0.5% in New Private Sector banks
and 0.3% in Foreign banks.
• Public sector banks accounted for 74% of the total deposits, 73% of total advances and 64% of the
aggregate net profits, amongst SCBs. The share of the New Private Sector banks in these three areas was in the
range of 15-17%. Credit Deposit Ratio of these bank groups was between 67-84%.
• There has been a sizeable increase in the banking infrastructure. Banks in India together have 56,640
branches/offices, 893,356 employees and 27,088 ATMs. Public sector banks accounted for a large part of the
infrastructure, with 87.7% of all offices, 82% of the staff and 60.3% of all ATMs.
Conclusion-
The main theme of this is to present a systematic analysis of the impact of Banking Sector Reforms in the
areas of efficiency and profitability of commercial banks, both in public and private sector over a period of 11
years since the initiation of reforms measures in 1992-93. It starts with a historical review of the development of
Indian Commercial Banking in the pre-reform period and the circumstances and conditions necessitated initiation
of reforms. It also reviews the main recommendations of the 'Committee on the Financial System' (1991) and the
'Committee on the Banking Sector Reforms' (1998), both presided over by Shri M. Narasimham and their
implications for the banking sector. The focus of the analysis is on the evaluation of response of banks in public
and private sector individually and as a group to reform measures in the areas of efficiency and profitability during
the study period. It also makes a study of comparative performance of public and private sector banks as a group
in each area of indicators selected relating to the areas of efficiency and profitability. The implementation of
Prudential Norms relating to Asset Classification and Capital Adequacy by banks is assessed. In addition to
quantitative analysis, the study examines the customers' perceptions regarding Service Quality of Public and
Private Sector Banks. The performance of banks groups are analyzed in two ways: (i) Time-Series, and (ii)
Period-wise using principal component analysis.This topic thus provides a comprehensive review of banking
reforms and shifts that have taken place in the perceptions, policies and practices of commercial banks. It
concludes with major findings of the study and the suggestions that emanate to improve operational and financial
performance of commercial banks.
New Delhi, Aug 9: Commercial banks have witnessed 40% growth in net profits during the first quarter of
the current fiscal. This is primarily due to a surge in commercial credit and about 300 basis points increase in
interest rates, an Assocham Eco Pulse study stated. Interestingly, this is despite the State Bank of India's (SBI)
bottomline plunging by 35%. According to the industry body, the drop was more than made up by other peers
whose profitability chart showed an increase between 16% and 163%.The banks whose performance was
measured in the study included Vijaya Bank, which registered the highest net profit growth of 163%, Centurion
Bank of Punjab, recording a growth of 160%, and ING Vysysa with a growth of 62%.
In addition, Yes Bank recorded 50% growth, Andhra Bank 37%, HDFC 30%, UTI Bank 30%, J&K Bank
29%, Bank of India 21%, and ICICI Bank and Corporation Bank both registering 17% growth.
State Bank of India: Competitive Strategies of a Market Leader
State Bank of India (SBI) is the largest nationalized commercial bank in India in terms of assets, number
of branches, deposits, profits and workforce. With the liberalization of the Indian banking industry in the mid-
1990s, SBI faced stiff competition from the private sector and foreign banks which resulted in significant loss of its
market share. The case describes the efforts of SBI to regain its lost market share by undergoing a major
restructuring exercise which involved redesigning its branch network, providing alternate banking channels,
emphasis on lean structure and technology up gradation. The case also discusses how SBI is building its image
as a customer friendly bank by launching innovative products & services and promoting its brand.
Finally, it discusses the challenges faced by SBI in 2004 and its plans in the future. The case includes a
note on the recent trends in the Indian banking industry.
In early 2007, in India, the inflation rate, as measured by the wholesale price index (WPI)5, hovered
around 6-6.8%, well above the level of 5-5.5% that would have been acceptable to the Reserve Bank of India
(RBI), the country's central bank. On February 15, 2007, the inflation rate reached a two-year high of 6.73%. In
the past7, the main cause of high inflation in India used to be rises in global oil prices. However, in early 2007, the
chief component of the inflation was the increase in the prices of food articles - caused by increased demand as
well as supply constraints. According to analysts, the increased demand was due to high economic growth and
increased money supply, while stagnant agricultural productivity was behind the supply constraints.
Apart from the rise in prices of food articles, fuel and cement prices too recorded high increases. The
Government of India (GoI), together with the RBI, took several measures to contain inflation. For example, the
RBI increased the Cash Reserve Ratio (CRR) and repo rates in an effort to check money supply; the GoI reduced
import duties on several food products and cut the price of diesel and petrol.