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Banking industry

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2011

   Banking Industry:
   A case of India




                     S. Kushwaha
                             1/3/2011

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Banking Industry: A case of India



                                CONTENTS
S. No                              Topic    ...

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Banking Industry: A case of India



1. Introduction
The Indian Banking industry, which is governed by the Banking Regulat...

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Banking industry

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The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 84,000 branches spread across the country

The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 84,000 branches spread across the country

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  1. 1. 2011 Banking Industry: A case of India S. Kushwaha 1/3/2011
  2. 2. Banking Industry: A case of India CONTENTS S. No Topic Page No 1 Introduction 3 2 Financial Structure 3 3 Structure of the Indian banking system 3 4 Reserve Bank of India and Banking System 3 5 Magnitude of Bank 4 6 Employment in Banks 5 7 Saving with Banks 5 8 Market share of Bank 6 9 Rural and Social Banking 6 10 Policy Regarding FDI in Banking Sector 7 11 Performance of the Banking Industry 8 12 Regulations governing the sector 8 13 Technology in Banking 9 14 Sub Prime crises and Indian Bank 9 15 Opportunity in Indian Banking Sector 10 16 Conclusion 10 17 Reference 11 18 Annexure 12 List of Table S. No Table Page No 1 Population group wise number of branch of schedule Bank 4 2 Bank Group-Wise Distribution of Employees of Schedule Banks 5 3 Saving Deposits with Commercial Bank 5 4 Share in Assets of Scheduled Commercial Banks 6 5 The Outstanding Credit to the MSE Sector 6 6 Self-Help Group- Bank Linkage Programme 7 7 Non-Performing Assets as percentage of Commercial Advances 8 2
  3. 3. Banking Industry: A case of India 1. Introduction The Indian Banking industry, which is governed by the Banking Regulation Act of India, 1949 can be broadly classified into two major categories, non-scheduled banks and scheduled banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of ownership, commercial banks can be further grouped into nationalized banks, the State Bank of India and its group banks, regional rural banks and private sector banks (the old/ new domestic and foreign). These banks have over 84,000 branches spread across the country. 2. Financial Structure The Indian financial system comprises the following institutions: 1. Commercial banks 2. Financial institutions a. Public sector a. All-India financial institutions (AIFIs) b. Private sector b. State financial corporation’s (SFCs) c. Foreign banks c. State industrial development corporations d. Cooperative institutions (SIDCs) (i) Urban cooperative banks 3. Nonbanking financial companies (NBFCs) (ii) State cooperative banks 4. Capital market intermediaries (iii) Central cooperative banks 3. Structure of the Indian banking system RBI Financial Banks Institutions Scheduled Co-operative All-India financial State-level Other Commercial credit institutions institutions institutions Banks (SCBs) institutions Urban Rural co- Public sector Private sector Regional rural Foreign banks cooperative operative credit banks banks banks (RRB) banks institutions 4. Reserve Bank of India and Banking System RBI is the banker to banks—whether commercial, cooperative, or rural. The relationship is established once the name of a bank is included in the Second Schedule to the Reserve Bank of India Act, 1934. Such bank, called a scheduled bank, is entitled to facilities of refinance from RBI, subject to fulfilment of the following conditions laid down in Section 42 (6) of the Act, as follows: 3
  4. 4. Banking Industry: A case of India  It must have paid-up capital and reserves of an aggregate value of not less than an amount specified from time to time; and  It must satisfy RBI that its affairs are not being conducted in a manner detrimental to the interests of its depositors. The classification of commercial banks into scheduled and non-scheduled categories that was introduced at the time of establishment of RBI in 1935 has been extended during the last two or three decades to include state cooperative banks, primary urban cooperative banks, and RRBs. RBI is authorized to exclude the name of any bank from the Second Schedule if the bank, having been given suitable opportunity to increase the value of paid-up capital and improve deficiencies, goes into liquidation or ceases to carry on banking activities. 5. Magnitude of Bank In the year 2010 total bank branches are 84,604 in compare to 10131 in the year 1970. Rural branches were 3063 in 1970 which is increased by 32494 in the year 2010. Rural area branches increased by 10 fold and metropolitan branches increase by more than 14 fold. Indian Banks spreading their branches speedily after liberalization of Indian economy. (See table 1) Table 1: Population group wise number of branch of schedule Bank Source: www.rbi.org.in 4
  5. 5. Banking Industry: A case of India 6. Employment in Banks In 2008-09 All schedule bank have total employ of 8, 69,412 in which 3, 51,841 employ are in officer rank and 3, 42,930 employ are at clear level and remain are subordinates. State bank of India and its associates is leading bank in providing employment in India banking. (See Table 2) Table 2: Bank Group-Wise Distribution of Employees of Schedule Banks Source: www.rbi.org.in 7. Saving with Banks Indian bank had 98.1 percent of total saving with bank while foreign bank have only 1.9 percent of saving in the year 1990-91. In the year 2009-10 saving with foreign bank reached only by 3.2 percent of total saving with bank. (See Table 3) Table 3: Saving Deposits with Commercial Bank Source: www.rbi.org.in 5
  6. 6. Banking Industry: A case of India 8. Market share of Bank In the year 1990-91 share of public bank was 90.05 percent which is come down by 70.5 percent in the year 2006-07. At the same time market share of private bank increased to 29.5 percent in the year 2006-07 from 9.95 in 1990-91. Table 4: Share in Assets of Scheduled Commercial Banks (at the end of the Financial Year) 9. Rural and Social Banking The banking system is expected to reorient its approach to rural lending. “Going Rural” could be the new market mantra. Rural market comprises 74% of the population, 41% of Middle class and 58% of disposable income. Consumer growth is taking place at a fast pace in 17113 villages with a population of more than 5000. Of these, 9989 villages are in 7 States, namely Andhra Pradesh, Bihar, Kerala, Maharashtra, Tamilnadu, Uttar Pradesh and West Bengal. Banks’ approach to the rural lending will be guided mainly by commercial considerations in future. Table: 5 The Outstanding Credit to the MSE Sector 6
  7. 7. Banking Industry: A case of India Table: 6 Self-Help Group- Bank Linkage Programme Source: www.rbi.org.in After liberalization banks started to finance the SHG through bank linkage programme. Bank lent Rs 2620 cr. 10. Policy Regarding FDI in Banking Sector The RBI is the sole regulator for the industry while the Ministry of Finance (MoF) is responsible for forming the enabling legislative framework. Up to 74 per cent of the total aggregate foreign investment is allowed in private banks from all sources (FDI, FII and NRI), subject to the following conditions:  There is a limit of 10 per cent for individual FII investment with the aggregate limit for all FIIs restricted to 24 per cent, which can be raised to 49 per cent with the approval of the board or general body.  There is a limit of 5 per cent for individual NRI portfolio investment with the aggregate limit for all NRIs restricted to 10 per cent, which can be raised to 24 per cent with the approval of the board or general body. Banking Regulation Act, 1949, states that no person holding shares in private banks is entitled to exercise voting rights in excess of 10 per cent of the total voting rights of all the shareholders of the bank. All entities investing in private sector banks through FDI will be mandatorily required to have a credit rating. The FDI norms are not applicable to public sector banks where the FDI ceiling is still capped at 20 per cent. 7
  8. 8. Banking Industry: A case of India 11. Performance of the Banking Industry Public sector Net NPA reduces to 1.05 in the year 2006-07 from 9.18 in the year 1996-97. At the same time Net NPA of foreign banks reduces to 0.73 in the year 2006-07 to 1.82 in the year 1996-97. Table: 7 Non-Performing Assets as percentage of Commercial Advances – (Position at the end of March) Scheduled Commercial Banks Source: www.rbi.org.in 12. Regulations governing the sector 1. Reserve Bank of India Act, 1934, governs the RBI functions. 2. Banking Regulation Act, 1949, governs the financial sector. 3. Acts governing specific functions a. Public Debt Act, 1944/Government Securities Act (proposed) governs government debt market. b. Securities Contract (Regulation) Act,1956, regulates government securities market. c. Indian Coinage Act, 1906, governs currency and coins. d. Foreign Exchange Management Act, 1999, governs trade and foreign exchange market. 4. Acts governing banking operations Companies Act, 1956, governs banks as companies. a. Banking Companies (Acquisition and Transfer of Undertakings) Act, 1970/1980, refers to nationalization of banks b. Bankers' Books Evidence Act c. Banking Secrecy Act d. Negotiable Instruments Act, 1881 8
  9. 9. Banking Industry: A case of India 13. Technology in Banking Technologies has brought fundamental shift in the functioning of banks as well as improvements in their internal functioning but also enable them to provide better customer service. Technology has broken all boundaries and encourage cross border banking business. Banks have undertaken extensive Business Process Re-Engineering and tackle issues like a) how best to deliver products and services to customers. b) Designing an appropriate organizational model to fully capture the benefits of technology and business process changes brought about. c) How to exploit technology for deriving economies of scale and how to create cost efficiencies, and d) how to create a customer - centric operation model. Entry of ATMs has changed the profile of front offices in bank branches. Customers no longer need to visit branches for their day to day banking transactions like cash deposits, withdrawals, cheque collection, balance enquiry etc. E-banking and Internet banking have opened new avenues in “convenience banking”. Internet banking has also led to reduction in transaction costs for banks to about a tenth of branch banking. 14. Sub Prime crises and Indian Bank In India, the excess liquidity conditions created by an easy monetary policy during the crisis, continued to prevail till May 2010, despite the tightening by RBI since October 2009. The situation changed in June when banks at the margin began borrowing at the repo window from the RBI. With the reversal in liquidity conditions, overnight interest rates also reverted to levels that have approached and even exceeded the upper end of the interest rate corridor i.e., the repo rate. To that extent liquidity conditions are taut enough for monetary policy signals to be appropriately transmitted to the financial sector. Credit off-take has picked up since the second half of 2009/10 and displayed a strong growth rate in the first quarter of 2010/11 especially to the commercial sector. In line with this bank holding of government securities (adjusted for repo/reverse repo transactions) has risen much less in the first quarter of 2010/11 as compared to the first quarter of last year. Funds flow from the capital market into the commercial sector has also been quite strong. Corporate bond issuance is estimated at Rs. 60,000 crore in the first quarter of 2010/11 which is much higher than the issuance in the corresponding period of the previous three years. In the case of equity, though the issuance has increased it has not increased to the pre crisis levels. Evidence on funds flow and output indicate a strong economic recovery but with inflation rates that are more than twice the comfort-zone, it is important that monetary policy completes the process of exit and moves towards a bias on tightening. This is essential to preserve price stability and create conducive conditions for sustainable growth in the medium term. 9
  10. 10. Banking Industry: A case of India 15. Opportunity in Indian Banking Sector The future forecast discusses the future prospects of different arms of banking industry including rural banking, financial cards, mobile banking, role of technology in rural banking, pension funds, and the future course of action and strategies for pension fund industry to be taken at macro level.  Pension fund industry in India grew at a CAGR of 122.44% from 1999-00 to 2006-07.  Rural and semi-urban India is expected to account for 58.33% of the insurance sector by 2010.  In terms of ownership, debit cards are more in number than credit cards but in terms of transactions, credit cards are used more than debit cards.  The ATM outlets in India increased at a CAGR of 28.09% from March 2006 to March 2007.  Rural and semi-urban centers account for 66% of total bank branches.  Indian Mutual Fund industry witnessed a growth of 49.88% from May 2006 to May 2007, and higher  Growth is recorded in closed ended schemes at 215.61%.  Increasing number of millionaires in India is increasing the scope of Wealth Management Services.  Bankable households in India are anticipated to grow at a CAGR of 28.10% during 2007- 2011.  Investment by banking sector in Information Technology is expected to increase at 18% in 2007 from last year. 16. Conclusion After independence Indian banking sector grow consistently. After the nationalization 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%. According to IBM’s strategic research unit, the Institute for Business Value recently released a study called Banking 2015: Defining the Future of Banking. Worldwide, total financial services revenue is predicted to experience compound annual growth of 7.1 percent between 2000 and 2015, from $2 trillion to $5.6 trillion. In the Asia-Pacific region, IBM predicts a growth rate of about 7.6 percent. According to ICICI Bank CEO and Managing Director Chanda Kochhar, "The Indian banking sector can grow at least twice the GDP growth rate". Based on above analysis I can say that Indian banking sector have the bright future with double rate of growth of Indian economy. 10
  11. 11. Banking Industry: A case of India Reference http://planningcommission.nic.in/data/datatable/index.php?data=datatab access on 3 Jan 2011. http://www.mckinsey.com/locations/india/mckinseyonindia/pdf/india_banking_2010.pdf access on 3 Jan 2011. http://www.ecslimited.com/download/Challenges%20facing%20Banking%20Industry%20in %20India.pdf access on 3 Jan 2011. http://www.iba.org.in/ access on 3 Jan 2011. http://www.finmin.nic.in/the_ministry/dept_fin_services/banking/list%20of%20PSBs.pdf access on 3 Jan 2011. http://rbi.org.in/scripts/AnnualPublications.aspx?fromdate=05/21/1998&todate=05/22/1998& head=banking%20statistics access on 3 Jan 2011. http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics% 20on%20Indian%20Economy access on 3 Jan 2011. http://bankingfrontiers.com/2010/nov/benchingmarking.pdf access on 3 Jan 2011. http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Handbook%20of%20Statistics% 20on%20Indian%20Economy access on 3 Jan 2011. http://www.adb.org/Documents/Books/Rising_to_the_Challenge/India/india_bnk.pdf access on 3 Jan 2011. http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/banking/ICICI- other-Indian-banks-may-see-growth-of-20-Kochhar/articleshow/6178249.cms access on 3 Jan 2011. http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/RTP0809PRD_Full.pdf access on 3 Jan 2011. 11
  12. 12. Banking Industry: A case of India Annexure Key Player in Indian Banking Sector S. No Public sector banks Private banks Foreign banks 1 Allahabad Bank Axis Bank The Royal Bank of Scotland 2 Andhra Bank Bank of Rajasthan Abu Dhabi Commercial Bank Bank of Baroda Catholic Syrian Bank American Express Banking Corporation 3 4 Bank of India City Union Bank Antwerp Diamond Bank 5 Bank of Maharashtra Development Credit Bank AB Bank 6 Canara Bank Dhanalakshmi Bank Bank International Indonesia 7 Central Bank of India Federal Bank Bank of America 8 Corporation Bank HDFC Bank Bank of Bahrain & Kuwait 9 Dena Bank ICICI Bank Bank of Ceylon 10 IDBI Bank Ltd IndusInd Bank Bank of Nova Scotia 11 Indian Bank ING Vysya Bank Bank of Tokyo Mitsubishi UFJ 12 Indian Overseas bank Jammu & Kashmir Bank Barclays Bank 13 Oriental Bank of Commerce Karnataka Bank BNP Paribas 14 Punjab & Sindh Bank Karur Vysya Bank Calyon Bank 15 Punjab National Bank Kotak Mahindra Bank Chinatrust Commercial Bank 16 State Bank of India Lakshmi Vilas Bank Citibank State Bank of Bikaner & Nainital Bank DBS Bank 17 Jaipur 18 State Bank of Hyderabad Ratnakar Bank Deutsche Bank State Bank of Indore SBI Comm& Intl Bank Hongkong & Shanghai Banking Corpn 19 20 State Bank of Mysore South Indian Bank JP Morgan Chase Bank 21 State Bank of Patiala Tamil Nadu Mercantile Bank JSC VTB Bank 22 State Bank of Travancore Yes Bank Krung Thai Bank 23 UCO Bank Mizuho Corporate Bank 24 Syndicate Bank Mashreq Bank 12

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