Modern Banking · 2019. 1. 1. · 3.7 Appraisal and Monitoring of MSME Units 4. Developments in Corporate Banking 167 – 186 4.1 Objectives 4.2 Consortium Finance, Advantages, Consortium

Modern Bankingof

India(For Students of Management Studies and Commerce Postgraduation)

O.P. AgarwalM.Com., LL.B. (Hons.), C.A.I.I.B., C.A.I.B. (London),

Diplomas in Cooperation and Industrial Finance,Chief Manager (Retired), Bank of Maharashtra,

General Manager’s Office, Mumbai.

ISO 9001:2015 CERTIFIED

© AuthorNo part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by anymeans, electronic, mechanical, photocopying, recording and/or otherwise without the prior written permission of theauthor and the publisher.

First Edition : 2008Second Revised and Enlarged Edition : 2012

Third Revised and Enlarged Edition : 2019

Published by : Mrs. Meena Pandey for Himalaya Publishing House Pvt. Ltd.,“Ramdoot”, Dr. Bhalerao Marg, Girgaon, Mumbai - 400 004.Phone: 022-23860170, 23863863; Fax: 022-23877178E-mail: [email protected]; Website: www.himpub.com

Branch Offices :New Delhi : “Pooja Apartments”, 4-B, Murari Lal Street, Ansari Road, Darya Ganj,

New Delhi - 110 002. Phon e: 011-23270392, 23278631; Fax: 011-23256286Nagpur : Kundanlal Chandak Industrial Estate, Ghat Road, Nagpur - 440 018.

Phone: 0712-2738731, 3296733; Telefax: 0712-2721216Bengaluru : Plot No. 91-33, 2nd Main Road Seshadripuram, Behind Nataraja Theatre,

Bengaluru-560020. Phone: 08041138821, 9379847017, 9379847005Hyderabad : No. 3-4-184, Lingampally, Besides Raghavendra Swamy Matham, Kachiguda,

Hyderabad - 500 027. Phone: 040-27560041, 27550139Chennai : New-20, Old-59, Thirumalai Pillai Road, T. Nagar, Chennai - 600 017.

Mobile: 9380460419Pune : First Floor, "Laksha" Apartment, No. 527, Mehunpura, Shaniwarpeth

(Near Prabhat Theatre), Pune - 411 030. Phone: 020-24496323, 24496333;Mobile: 09370579333

Lucknow : House No. 731, Shekhupura Colony, Near B.D. Convent School, Aliganj,Lucknow - 226 022. Phone: 0522-4012353; Mobile: 09307501549

Ahmedabad : 114, “SHAIL”, 1st Floor, Opp. Madhu Sudan House, C.G. Road, Navrang Pura,Ahmedabad - 380 009. Phone: 079-26560126; Mobile: 09377088847

Ernakulam : 39/176 (New No. 60/251), 1st Floor, Karikkamuri Road, Ernakulam,Kochi - 682011. Phone: 0484-2378012, 2378016; Mobile: 09387122121

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DTP by : SunandaPrinted at : M/s. Seven Hills Printers, Hyderabad. On behalf of HPH.

DEDICATIONThis book is dedicated to Late Prof. (Dr.) K.M. Bhattacharya,

M.A., Ph.D., D. Litt., C.A.I.I.B., Former Managing Director, Bank of

Rajasthan Ltd., Jaipur, and ex-Professor and Former Head of Centre

for Advanced Banking of Finance Studies, Mumbai, ICFAI – Business

School, who inspired me to present this book for banking

professionals.

O.P. Agarwal, Mumbai

PREFACE TO THIRD EDITIONBanking is changing very fast especially in the last 5 years. Banking is now less

manually operated but more of data operative. For better customer service,digitization/mechanisation is playing an important part, for the better of 29 croredepositors and 4 crore borrowers of the commercial banks. Such banks are publicsector banks (21), private sector banks (22), foreign banks (43), Regional Rural andCooperative banks (Non-scheduled banks) (3), and now Small Finance Bank andpayment banks.

Capital adequacy of banks has been essential aspect for the last 20 years. Withthe adoption of BASEL-III by Reserve Bank of India, it has been compulsory forbanks to have adequate Tier-I and Tier-II type capital reduction or curtailment ofnon-performing assets has been the hard task for banks to face and endeavourtheir best. The list of intentional defaulters in banks, is on increase, resultantlycompelling banks to register F.I.Rs against 1,624 defaulters out of 7,265 till Sept.2015. The total amount involved in such intentional defaulters were ` 16,601.90crores. The gross NPAs and net NPAs of all commercial banks were 7.1% and 8%respectively till March 2017 involving amount of ` 5.71 lakh crores.

In the computer and online banking, the cyber crimes have also increased inthe last 5 years. In 2015 (till Oct. 2015), the total number of such crime cases werefor credit card frauds (157), pornographic SMS/MMS (152), threatening e-mail/SMS (08), hacking (09), Nigerian frauds (01), sweeping evidences (11) and others(164), complaints numbering 9,508, against commercial banks/RRBs andscheduled primary cooperative banks were pending before Banking Ombudsman atthe end of Nov. 2015. The largest number or debit cards of Rupay cards were issuedunder Prime Minister Jan Dhan Yojana. The total daily transaction average during2015 has been ` 27 lakhs. All these new things have been dealt with in this book.

It will be improper to pay my gratitude to my wife Mrs. Veena O. Agarwal, M.A.(Eco.) for her encouragement and also to my daughter Prof. (Mrs.) Shubha S. GovilM.Sc. (Micro) for her support in completion of this edition.

I also express thanks to Shri K.N. Pandey, Director, Himalaya Publishing HousePvt. Ltd., Mumbai for timely publication and endeavour of their sales team.

Suggestions from readers/students/bankers and critics are always welcomed.

Date: 09.10.2018 O.P. Agarwal704/11-D, Springleaf Building,

Lokhandwala Complex,Kandivli (East), Mumbai-400 101.

CONTENTSNo. Chapter Name Page No.

1. An Overview of History of Banking 1 – 961.1 Objective1.2 Evolution of Commercial Banking in India1.3 Era of Nationalisation and after (1969 to 1991)1.4 Era of Economic Reforms (1992-2003)1.5 Cooperative Banking System1.6 Progress of Commercial Banking1.7 Challenges and Trends in Banking1.8 New Challenges in Bank Mergers and Acquisitions

2. Functions of Commercial Banks 97 – 1472.1 Retail Banking – Concept2.2 Models for Implementing the Retail Assets and

Liabilities2.3 Pricing of Products and Services2.4 Priority Sector Advances2.5 Common Guidelines for Priority Sector Advances2.6 Finance to Micro, Small and Medium Enterprises

(MSMEs)2.7 Corporate Banking and Personal Banking2.8 Payment Services2.9 Deposit Services2.10 Advantages of Retail Banking2.11 Bancassurance Opportunities in Non-life and Life2.12 Pricing Deposit Service2.13 Loan Pricing Principles

2.13.1 Factors for Loan Pricing2.13.2 Methods of Loan Pricing

2.14 Components for Benchmarking Base Rate2.15 Loan Pricing Models

3. Financing Micro, Small and Medium Enterprises (MSMEs) 148 – 1663.1 Definition of MSMEs3.2 Major Issues to Institutional Credit3.3 Suggestions for SMEs Financing3.4 SMEs Development — Reports of Various

Committees3.5 Developments in MSME Sector3.6 Impact of WTO on SMEs3.7 Appraisal and Monitoring of MSME Units

4. Developments in Corporate Banking 167 – 1864.1 Objectives4.2 Consortium Finance, Advantages, Consortium with

Financial Institutions4.3 Multiple Banking Arrangements4.4 Loan Syndication Arrangement4.5 Project Financing4.6 Bridge Financing4.7 Role of ECGC4.8 Bill Financing — Bills Purchased/Discounted4.9 Advance against Bills for Collection4.10 Preconception/Guidelines for Advance against Trade

Bills4.11 Banks to Funds Infra Projects

5. Credit Management – Fund-based 187 – 2705.1 Introduction – Credit Assistance Types5.2 Supervision and Follow-up5.3 Credit Administration5.4 Monitoring of Advances5.5 Warning Signals5.6 Tools for Credit Monitoring5.7 Ratio Analysis and Financial Appraisal5.8 Various Ratio Analysis, Other Important Ratios5.9 Funds Flow Statement and Its Preparation5.10 Cash Flow Statement and Its Preparation5.11 Working Capital Finance and Its Net Working Capital

5.12 Assessment of Working Capital Needs5.13 Methods for Computation of Working Capital and

Adequacy of Working Capital

6. Credit Management — Non-fund-based 271 – 2836.1 Objectives6.2 Non-fund-based Limits6.3 Types of Letters of Credit6.4 Credit Issuance6.5 Assessment of L/C Limit6.6 Issuance of Bank Guarantees6.7 Regulation of Bank Finance6.8 Risks in Banks

7. Non-fund-based Services 284 – 3097.1 Introduction7.2 Leasing Concept7.3 Banks and Lease Financing7.4 Hire Purchase Concept7.5 Factoring7.6 Different Types of Factoring7.7 Forfaiting7.8 Agency Functions7.9 Demat Services — Advantages and Role of DP7.10 Merchant Banking

8. Non-performing Assets, Classification and RecoveryMeasures

310 – 392

8.1 Non-performing Assets (NPAs) – Concept8.2 Income Recognition8.3 Temporary Deficiencies in the Accounts8.4 Asset Classification8.5 Treatment of Restructured Standard Accounts8.6 Revitalising Distress Assets from Dec. 2013 by RBI8.7 Capital Adequacy Ratio (CAR)8.8 NPA-Recovery Measures8.9 NPAs of Financial Institutions8.10 Gross NPA Ratio of Public and Private Sector Banks

8.11 Reasons for NPAs8.12 RBI Tightens Norms for Bank’s Non-performing Lease

Assets8.13 NPA Norms8.14 Updating of Guidelines on NPA8.15 The NPA Problem and SARFAESI Act, 20028.16 One Time Settlement (OTS) Policy of Reserve Bank of

India as Rehabilitation Strategy8.17 Performance of Lok Adalats8.18 Ombudsman Scheme, 20098.19 Concept of Securitisation Act, 20028.20 Enforcement of Security Interest and Recovery of

Debts Law (Amendment) Act, 2004 (29-12-2004)

9. Non-resident Indians (NRIs) Deposit Schemes 393 – 4049.1 Deposit Schemes for Non-resident Indians9.2 FCNR (Banks) and Loans against FCNR (B)9.3 Non-resident (External) Rupee Account Scheme9.4 Repatriation of Funds to Non-resident Nominees9.5 Non-Resident (Ordinary) Account, Opening of

Account/Operation etc.9.6 Premature Withdrawals and Other Regulations9.7 Incentives to NRIs for Investments in India

10. Micro, Small and Medium Enterprises (MSMEs) AppraisalMethods

405 – 414

10.1 Micro, Small and Medium-scale Industries10.2 Credit Flow to the Sector10.3 Appraisal and Monitoring of MSME Advances10.4 Major Problems/Challenges Faced by the Sector10.5 MSMEs and Credit Guarantee10.6 Utility of Cluster Model in MSMEs’ Development

11. Capital Management in Banks and InformationTechnology

415 – 440

11.1 Narasimham Committee on Banking SectorReforms-II

11.2 Capital Adequacy under BASEL-II and BASEL-III

11.3 Indian Approach to Basel-II and Basel-III11.4 Basel-III11.5 BASEL-III How Far Suitable for Emerging World

Banking11.6 What is Cyber Law of India?11.7 Impact on Service Quality11.8 Customers’ Aspirations and IT11.9 Impact on Human Resource11.10 Impact on Privacy and Confidentiality of Data11.11 Outsourcing – An Option for Customer Service11.12 Cloud Computing

12. Electronic Business and Electronic Banking 441 – 47012.1 e-Business12.2 e-Commerce12.3 e-Banking12.4 Electronic Money (e-Money)12.5 Online Banking12.6 Electronic Data Interchange (EDI)12.7 Mobile Banking

12.7.1 Mobile Banking Services12.7.2 Technologies behind Mobile Banking12.7.3 Advantages of Mobile Banking12.7.4 Solutions for Challenges in Mobile Banking12.7.5 m-Commerce12.7.6 e-Business12.7.7 e-Commerce12.7.8 Telebanking12.7.9 ATM Banking

12.7.10 Home Banking (Corporate and Personal)

13. e-Payments, Settlements and Data Communication 471 – 48413.1 Real Time Gross Settlement (RTGS) and NEFT13.2 Structured Financial Messaging System (SFMS)13.3 Society for Worldwide Interbank Financial

Telecommunication (SWIFT)13.4 Clearing House Interbank Payment System (CHIPS)

13.5 Clearing House Automated Payment System (CHAPS)13.6 Clearing House Automated Transfer System (CHATS)13.7 Cheque Truncation13.8 Major Private Networks for Data Communication13.9 VSAT Network in India13.10 Digital Signatures13.11 e-Purse

14. Alternative Delivery Channels and Cyber Law 485 – 50014.1 Telebanking/Call Centre14.2 Anytime Banking (ATM)14.3 Anywhere Banking14.4 Home Banking (Corporate and Personal)14.5 Cyber Law – IT Act, 2000 and Cyber Crimes14.6 The Indian Evidence Act, 187214.7 Banker’s Book Evidence Act, 189114.8 Prevention of Money Laundering Act, 2002

15. ECGC – Export Credit Insurance 501 – 51815.1 Export Credit Insurance15.2 Risks Covered and Uncovered under Standard Policy15.3 How are the Risks Covered?15.4 Specific Policy/Service Policy/Works Policy15.5 Financial Guarantees15.6 Special Schemes

15.6.1 Transfer Guarantee15.6.2 Exchange Fluctuation Risk Cover15.6.3 Whole Turnover Guarantee Cover15.6.4 ECGC Claims Lodging15.6.5 Writing Off Bad Debts

16. Import/Export Control 519 – 54616.1 Trade Under Deficit16.2 Import Trade Control16.3 Import Licence16.4 Types of Import Licence16.5 Imports without Licence16.6 Evidence of Import

16.7 Import of Gold, Silver Platinum Jewellery, ForeignExchange and Indian Currency

16.8 Import of Bills/Documents Received Directly16.9 Imports under Foreign Currency Loan/Credit16.10 Acquisition of Foreign Currency/Exchange16.11 Opening of L/C16.12 Restrictions on L/C16.13 Differred Payment L/C16.14 Export Control16.15 Export of Gold, Securities, etc.16.16 Exporters’ Code Number16.17 Methods of Payment16.18 Period for Realisation of Exports16.19 Despatch of Shipping Documents16.20 Exempted Categories of Export16.21 Declaration Forms16.22 Regulations in Case of Short Shipment16.23 GR/PP Procedure16.24 Disposal by Banks16.25 Utility of GR Procedure16.26 Countersignature on PP Form16.27 Exchange Control Regulations vis-à-vis Nepal and

Bhutan

17. Treasury and Funds Management in Banks 547 – 56317.1 Role of Treasury17.2 Emergence of Unified Financial Market17.3 Functions of Treasury Management17.4 Organisational Structure of Treasury in Banks17.5 Pricing of Assets and Liabilities of Bank17.6 Capital Allocation and Optimisation Business for

Banks Through RAROC17.7 SLR Investment17.8 Non-fund-based Income17.9 Structured Business of the Bank17.10 Off-balance Sheet Transactions17.11 Treasury Income Source of Income

18. Wealth Management 564 – 57718.1 Financial Reforms and Banking Delegation18.2 Financial Disintermediation18.3 Households Emerging on the Asset Side18.4 What is Wealth Management18.5 Wealth Management vs Financial Planning18.6 Who offers Wealth Management Services?18.7 What is the State of Wealth Management Industry?18.8 Wealth Creation Strategy18.9 Towards Finance Efficient Global Economy18.10 True Potential in Lower Segments18.11 All Inclusive Wealth Management18.12 New Financial Revolution18.13 Wealth Management: Nuts and Bolts18.14 Mutual Funds – Vehicle for Wealth Creation and

Accumulation18.15 Future Growth

19. Role of RBI in Risk - based Supervision of Banks 578 – 60319.1 Need for RBS19.2 Objectives of RBS19.3 Process for Risk based Supervision19.4 Bank Level Preparations19.5 Risk-based Supervision of Banks vis-à-vis Current

CAMELS Approach19.6 Risk Profiling Technique for RBS Developed by RBI19.7 Risk focused Internal Audit

Appendix I: Uniform Customs and Practice forDocumentary Credits-600

604 – 624

Appendix II: Documentary Credits for ElectronicPresentation e-UCPDC-600

625 – 629

Bibliography 630 – 630

1.1 Objective

1.2 Evolution of Commercial Banking in India

1.3 Era of Nationalisation and after (1969 to 1991)

1.4 Era of Economic Reforms (1992-2003)

1.5 Cooperative Banking System

1.6 Progress of Commercial Banking

1.7 Challenges and Trends in Banking

1.8 New Challenges in Bank Mergers and Acquisitions

1

An Overviewof History

of Banking

Modern Banking of India2

1.1 OBJECTIVE

The reader should be able to understand the evolution of commercial banking in India, the periodof development after nationalisation, the era of economic reforms. Not only this, but the reader couldbe able to understand the development of regional rural banks, cooperative banks, land developmentbanks and local area banks. If development banks’ name is not mentioned then the evolution of bankscould be incomplete, such development banks are IFCI/SIDBI/NABARD/EXIM Bank, etc.

1.2 EVOLUTION OF COMMERCIAL BANKING IN INDIA

In India, the ancient Hindu Scriptures refer to the moneylending activities in the Vedic period.During the Ramayana and Mahabharat eras, banking had become full-fledged business activity andduring the Manu Smriti period which followed the Vedic period and Epic age, the business of bankingwas carried on by the members of the Vaish Community.

Banking is different from moneylending, but two terms have in practice been taken to convey thesame meaning. Banking has four important functions to perform, accepting deposits, other of lendingmonies, investment of funds and providing remittance facilities.

During the Moghul period, metallic money was issued and the indigenous bankers added onemore line of money changing to their already profitable business. They started exchanging moneycirculating in one part of the country, with the money current in another part of the country makinggood margin for themselves. The indigenous bankers could not however, develop to any considerableextent the systems of obtaining deposits from the public, which today is an important function of abanker.

The English traders, who come to India in the 17th century, established some contracts with theindigenous bankers by borrowing founds from them. In 1786, the English Agency Houses hadestablished the Bank of Bengal at Calcutta. With the advent of modern banking conducted on Westernlines, the indigeneous bankers lost further importance. The English Agency Houses in Calcutta andBombay were the bankers to the East India Company and the European merchants in India. They hadno capital of their own and depended mainly on deposits from the public, for finance. These agencyhouses failed as they combined banking with trading.

Among the earliest banks established in India, were the Banks of Bengal (1806), Bombay (1840)and Madras (1843). These banks were also known as “presidency banks”. In 1860, the concept oflimited liability was introduced in banking. These banks (presidency banks) were allowed to issuenotes to a limited extent, but this right was takenover by the government in 1862. In view of limitedliability, several Joint Stock banks were floated. Some of important banks were established during1860 to 1900, were:

Allahabad Bank Ltd. established on 24.4.1865 at Allahabad city The Alliance Bank of Simla Ltd. The Oundh Bank Ltd. The Punjab National Bank Ltd. established in 1895.

An Overview of History of Banking 3

Thus, by the end of year 1900, there were three classes of banks in India, viz.,

1. Presidency Banks, numbering 3, viz., Bank of Calcutta (1806) Bank of Bombay (1840) Bankof Madras (1843).

2. Joint stock banks, numbering 93. Exchange banks or foreign banks, numbering 8The Swadeshi movement, which started in the early 1900s, gave stimulus to the growth of

indigenous joint stock banks. Some of the banks established during the 1900 to 1910 period were:

1. The People’s Bank of India Ltd.2. The Bank of India Ltd. (established in 1906)3. The Bank of Baroda Ltd. (established in 1908)4. The Central Bank of India Ltd. (established in 1911)In 1921, the 3 presidency banks were merged, to form the Imperial Bank of India. On the eve of

independence in Aug. 1947, there were 648 commercial banks, comprising 97 scheduled and 551 non-scheduled banks. The number of offices of banks stood at 2,987, with total deposits at ` 1,000 croreand advances at ` 475 crore.

During 1900 and 1950, the Indian joint stock banks specialized in providing short- term credit,for trade in the form of cash-credit and overdraft facilities, foreign exchange business, remained themonopoly of foreign banks. Between 1900 and 1925, many banks failed. The Central BankingEnquiry Committee was constituted in 1929, it gave reasons for the failure of banks such as:

1. Insufficient capital2. Poor liquidity of assets3. Combination of non-banking activities with banking activities4. Irrational credit policy, and5. Incompetent and inexperienced directorsOn the basis of major recommendations of the Central Banking Enquiry Committee, the RBI Act

was passed in 1934. While in 1949, the Banking Regulation Act was passed, for regulation andsupervision of banks. It gave wide powers to RBI to regulate, supervise and develop the banking systems.

During 1950 to 1969, two important developments took place, first, the all India Rural CreditSurvey Committee, which examined the issue of credit availability at the rural areas, recommended thecreation or a State partnered/sponsored bank entrusted with the task of opening branches in the ruralareas. Accepting this recommendation, the State Bank of India Act, 1955 was passed and the ImperialBank of India was renamed State Bank of India. Later in 1959, the State Bank of India (SubsidiaryBank) Act was passed enabling SBI, to takeover 8 princely state associated banks, as the subsidiaries.

Such banks were:

State Bank of Bikaner*

State Bank of Hyderabad

State Bank of Indore

State Bank of Jaipur*


State Bank of MysoreState Bank of PatialaState Bank of SaurashtraState Bank of Travancore(*These two banks merged into one bank) (all 5 associates have been merged with S.B. India

from 01-04-2017)

Secondly, the need about wider diffusion of banking facilities and to change the unevendistributive pattern of bank lending was realised. The scheme of social control, over banks, wasannounced in the Parliament in December 1967. The National Credit Control Council was set up in1968 to assesses the demand for bank credit, from various sectors of the economy and to determinetheir respective priorities in allocation.

At the launch of the First Five Year Plan in 1951, there were 566 commercial banks consisting of92 scheduled and 474 non-scheduled banks. In 1969, total number of banks declined to 89 out ofwhich 73 were scheduled and 16 were non-scheduled.

1.3 ERA OF NATIONALISATION AND AFTER (1969 TO 1991)The Indian banking scene underwent significant changes, during the period 1969 to 1990. The

social control measures of not less than 51% of the directors of the board of a banking company had toconsists of persons with special knowledge or practical experiences in respect of accountancy,agriculture, rural economy; banking, cooperation, economics, finance, law and SSIs, were notconsidered adequate to achieve the desired social and economic objectives. The Government of India,therefore on 19th July, 1969 nationalised, 14 major Indian commercial banks, by an ordinance, havingdeposits of ` 50 crore and above. The objectives of nationalisation were:

An institution such as the banking system, which touches and should touch lives of millions, hasto be inspired by a larger social purpose and has to subserve national priorities and objectives, such asrapid growth in agriculture, small industry and exports, raising employment levels, encouragement ofnew entrepreneur, and the development of the backward areas. The acquisition of ownership of bankswas, thus, to enable banks to play more efficiently the role of a catalytic agent for the economicgrowth by extending banking facilities to the most deserving classes.

Limitations of Branching OverseasDuring the early years it was not very easy for an Indian bank to open overseas branches, though

the Reserve Bank of India was vested with the powers to allow them to open overseas branches.Policymakers took into account a number of factors and not all of which are purely commercial. Theprocess required RBI to consult a number of departments within its own organisation and otherministries through the nodal finance ministry. Given the multiple considerations, RBI did not attemptto frame any definitive policy or guidelines in regard to the opening of branches or offices abroad byIndian banks till almost the onset of the 1980s, according to the nothings in the third volume of theReserve Bank’s history.

Many banks which attempted to open offices overseas did not get the regulator’s nod. In 1963-64,Punjab National Bank as well as Bank of India applied for opening offices in the United States but


RBI did not grant them permission on the ground that requests could in turn come from US banks toopen offices in India. In 1964, Bank of India sought permission to open offices at Hamburg,Dusseldorf and Milan but these requests too were turned down on the ground of possible applicationof the reciprocity principle, which, at that time, was considered undesirable from the exchange controlangle, i.e., having to permit remittance of profits by branches of foreign banks as well as from thepoint of view of its adverse effect on the expansion of business of Indian banks within India.

Three major elements influenced the Reserve Bank’s policy towards Indian banks openingoffices abroad till the early 1970s. First, there was the Question of foreign exchange for meeting thecapital requirements and other expenses connected with the setting up of an overseas offices. Giventhe scarcity of foreign exchange reserves, RBI and the government were concerned about the foreigncosts. Second, there was the issue of business potential. This was related to the number of personsof Indian origin residing in the country in question. The perception was that the branch or officeabroad would grow in size if it was supported by large number of ethnic Indians. Third, there was theprinciple of ‘reciprocity’.

Again in 1980, the Government of India had nationalised other 6 banks, each having deposits of` 200 crore or above. The banks nationalised in 1969 and 1980 were as below:

1. Central Bank of India (estd. 1911)2. Bank of India (estd. 1906)3. Punjab National Bank (estd. 1895)4. Bank of Baroda (estd. 1908)5. United Commercial Bank (estd. 1943)6. Canara Bank (estd. 1906)7. United Bank of India (estd. 1950)8. Dena Bank9. Syndicate Bank (estd. 1925)

10. Union Bank of India (estd. 1919)11. Allahabad Bank (estd. 1895)12. Indian Overseas Bank (estd. 1936)13. Indian Bank (estd. 1907)14. Bank of Maharashtra (estd. 1935)

Banks Nationalised in 198015. Andhra Bank (estd. 1923)16. Corporation Bank17. Oriental Bank of Commerce18. Punjab and Sindh Bank19. Vijaya Bank20. New Bank of India*

*this bank was merged with PNB in 1990


Another important structural development was the formation of the Regional Rural Banks (RRBs)which were started in 1976. Their ownership vests with the sponsoring commercial bank, the CentralGovernment and the State Government of the area. Under this approach, 196 RRBs were set up.

Major developments in banking in 1970 and 1991 were:

1973-74 Setting targets for priority sector lending.1974-75 Prescription of norms for lending and working capital limits by Tandon Committee.1982-83 Prof. Chakrabarty’s report on monitoring system in India Establishment of National

Bank for Agriculture and Rural Development (NABARD)1985-86 Introduction of MICR Technology

Introduction of Health Code system for bank loans.1985-86 Permission to banks to float mutual funds.1988-89 Vaghul Working Group on Money Market.

Establishment of Discount and Finance House of India (DFHI) and the NationalHousing Bank (NHB) — Adoption of Service Area Approach.

1989-90 Enhancement of access to call money market, in terms of number of participants.Establishment of the Small Industries Development Bank of India (SIDBI)

During nationalisation and thereafter, there was wide branch expansion in rural and semi-urbanareas, backward regions and underbanked states so that inter regional disparities could be reduced. Thedetails of the programme of branch network were as follows:

Year Total branches Ruralbranches

Semi-urbanbranches

1969 8262 1833 33421980 32419 15105 81221991 60220 35206 11344

(Source: Bank Quest Oct-Dec. 2002 of IIBF)The total number of bank branches increased eight-fold between 1969 and 1991 and the bulk of

the increase was on account of rural branches, which increased from less than 1,900 in 1969 to over 35thousands in 1991.

One of the objectives of branch expansion was to mop-up national savings, both actual andpotential and to channel them into investments according to Five Year Plan priorities.

(` in crore)

Year Deposits Total Term Deposits SavingsDeposits

1969 5173 3280 15241980 37988 19253 109371991 230758 128768 56902

The RBI’s credit policy over the years, laid increasing emphasis on channeling of bank credit topreferred sectors and borrowers of small means. The credit operations of banks were:


(` in crore)1969 1980 1991

Bank Credit 3729 25371 125592Priority Sector 659 8501 45425%age of which 18 33 36Agriculture 258 3584 18157% 39 42 42SSI Sector 347 3229 18150% 52 37 42

Note: Figures are in percentages to vertical totals.

1.4 ERA OF ECONOMIC REFORMS (1992-2003)The period 1992-2003 may be regarded as the present or the current phase in the evolution of

Indian Banking. Like the phase of 1969-1991, began with a bang, i.e., nationalisation of banks, thecurrent phase also began towards market-oriented banking, as a result of the introduction of financialreforms, especially banking reforms, India’s economic reforms programme began as a response to themacroeconomic crisis that developed in early 1991. The crisis manifested itself in rising inflation, highlevel fiscal deficit, low growth and unsustainable current account deficit, and the Gulf War of 1990precipitated, the balance of payments crisis.

The main plank of economic reforms comprised:

1. Stabilisation of the economy so as to keep under control inflationary and balance of paymentspressures.

2. Deregulation of the real and financial sectors and removal of licence and permit system fromall spheres.

3. Liberalisation of international trade in various sectors to promote competition and efficiencyby removing the high degree of protection enjoyed by the domestic industry, and

4. Integration with world economy, to attract capital and modern technology.The banking reforms have the specific task of achieving:

1. A suitable modification in the policy framework within which banks operate,2. Improvement in the financial health and competitive capabilities of banks.3. Building financial infrastructure relating to supervision, audit and technology, and4. Upgradation of the level of managerial competence and the quality of human resources.The basis for banking reforms was proved by the Committee on Financial System (Narasimham

Committee) which made recommendations in November, 1991, for transforming highly regulatedpolicy to a more market-oriented system.

Such various measures were:

1. Reduction in the pre-emption of funds through lowering of the CRR and SLR from 63.5% to31.5% (CRR 6.5% and SLR 25%) in Oct. 2001.


2. Redefining and redesigning directed credit programmes.3. Dismantling administered interests.4. Establishment of Discount and Finance House of India, Securities Trading Corporation of

India and Negotiated Payment Settlement System.5. Improving financial health of banks through prescription of risk weighted capital adequacy

ratios, recapitalisation and restructuring of weak banks.6. Amendment to the bank branch licensing policy to deal effectively with the loss making

branches.7. Withdrawing the concept of MPBF and increasing the share of loan segment in banks credit.8. Setting up of special Debt Recovery Tribunals (DRTs) for improving recovery of bank loans.9. Norms for floating new private sector banks.

10. Deregulation of interest rates on loans over ` 2 lakh.Various measure were taken by RBI and Government for economic reforms such as:1. Introduction of Banking Ombudsman Scheme in 1995.2. Freedom to banks to decide their Prime Lending Rates (PLR).3. Introduction of the concept of Local Area Banks.4. Granting of conditional autonomy to the public sector banks.5. Revision of capital adequacy norms in 1998-99.6. Deregulation of interest rates on term deposits.7. Introduction of Voluntary Retirement Scheme (VRS) in Public Sector Banks resulting in

about 11% reduction of employees in 2001.There has been a growing presence of private sector banks, more so, after the introduction of

financial sector reforms from 1992. Six new private banks, listed as under, were issued licenses in1994-95 and 3 more licences in 1995-96 and commenced operations during the same year. Minimumnet owned funds of private banks is ` 300 crore w.e.f. July 2004.

1. UTI Bank Ltd. (Now called Axis Bank)2. IndusInd. Bank Ltd.3. ICICI Banking Corporation Ltd.4. Global Trust Bank Ltd.5. Centurion Bank Ltd.6. HDFC Bank Ltd.7. Times Bank Ltd.8. Bank of Punjab Ltd.9. IDBI Bank Ltd.

10. Kotak Mahindra Bank Ltd.Out of these banks, following banks merged and/or acquired with other banks:

1. Merger of Times Bank with HDFC Bank Ltd., in 1999-2000.2. Bank of Madura merged with the ICICI Bank in 2000-01.


3. Centurion acquired Bank of Punjab Ltd., in Oct. 2005 and merged with HDFC.4. Global Trust Bank Ltd., merged with Oriental Bank of Commerce in 2004.Private sector banks have been rapidly increasing their presence in the recent times and offering

a variety of newer services to the customers and posing a stiff competition to the group of publicsector banks.

The response of the banks to the reforms has been impressive. The following position was ofpublic sector banks at the end of March 2001:

1. Capital adequacy 9% required; actual was in excess of 10% in March 2001.2. Ratio of gross NPAs to gross advances in 1992-93 was 23% reduced to 12.4%.3. Net Profit of PSB in 1993-94 Loss of ` 4,705 crore while Profit of ` 2,095 crore in

March 2001.4. Total branches at the end of March 2001, was 65,901.

1.4.1 Period from Year 2004 to Date 2017, New Challenges:The first phase of financial reforms laid the basis for a sound banking system. Considerable

progress has been made in implementing the reforms and the banking system is now moving towardsthe second phase. Nevertheless, the Indian banking system faces several difficult challenges; therefore,the banks have to reorient their strategies in the light of their own strengths and the kind of market inwhich they are likely to operate. Some of the challenges are home-grown, e.g., high cost of doingbusiness; level of non-performing assets; and low levels of customer satisfaction. Some of thechallenges are external, e.g., phenomenal growth in the volume of capital inflows; integration offinancial markets across the globe. In view of these domestic and international developments, it isnecessary to chart out a path for the development of efficient banking in the new century. There areseveral areas of concern which need to be addressed. RBI released only two bank licences during 2004to 2010 to Kotak Mahindra Bank and Yes Bank and two more licences to IDFC Bank and BandhanBank Ltd. in 2015.

New DimensionIndian banks operate in a deregulated competitive financial sector. Competitive pressure is

building up for Indian banks both from within and from outside. Competition is likely to intensify inthe coming years within the industry, from NBFCs and from foreign entities. Competition is not just interms of number of competitors but in terms of proliferation of innovations, specialised markets, cross-border trade in financial services and capital flows. Our reforms have made progress but we have notbecome competitive internationally. We cannot lag behind other countries and we have to transformthe Indian banking system from being a largely domestic one to a truly international one; and thisshould enable India to emerge as an international banking centre.

The worldwide revolution in information andcommunication technology (ICT) has become the biggestforce of change in banking. It is a source of productivitygrowth and facilitates effective competition. ICT reducescosts, increases volumes and facilitates customised products.It plays an important role in the payments and settlement

“The worldwide revolution ininformation and communicationtechnology (ICT) has become thebiggest force of change inbanking.”


system. Technology has opened up new avenues in banking for discharging the same functions in acost-effective manner: 24-hour banking, telebanking; internet banking; e-banking. The process oftechnological change is just beginning in Indian banking. Even the use of existing technology is atlow levels.

Though RBI and the banks have been taking steps in the last few years, computerisation has beenmostly directed towards accounting and related activities, without emphasis on critical areas relevantto management and customer-service and customised products. The Indian banking system will haveto redouble its efforts to build the technological infrastructure not only to provide cost-effective andcompetitive customer-service but also to achieve international recognition and status.

The level of non-performing assets (NPAs), continues to be high by international standards.NPAs have become a first charge on banks funds for provisioning and these affect banks performanceby eating into their profitability. The most important condition for improvement in the profitability ofbanks is a reduction in the level of NPAs. In fact, it is a precondition for the stability of the bankingsystem. The response to the efforts at debt recovery and restructuring of assets and other methods hasbeen slow. The strategies for containing the problem of NPAs should emphasise the strict enforcementof prudential norms and requirements, transparency and disclosure and the need for legislation whichwill make the recovery process smoother. Reforms have to be supported by legal changes forenforceability of contracts. In any effort to build a banking system of international stature, reduction inNPAs should be the priority target.

Features: Fourth Phase (2004 to Date)In tense competition with other Banks/NBFCs and with foreign banks.

Worldwide revolution in information and communication technology, is the biggest force inbanking like 24-hour banking/telebanking/internet banking and e-banking.

Total bank deposits on 31.3.2017 was ` 108.0 lakh crores and total advances was ` 78.75 lakhcrores and total number of branches 129673 and 219688 ATMs at the end of Sept. 2016.

Asset liability mismatches expose the banks to various types of risks, viz., risk of illiquidityand insolvency, deregulation and globalisation.

Development of relationship banking. Human resource development most important. Training to employees from generalist orientation to specialist orientation Need for ‘economic capital’ rather than the minimum regulatory capital. Corporate governance, accountability at all levels/transparency and enhancement of image

of the organisation/ethics New capital adequacy norms, as per BASEL-III, implemented from 0.1.04.2013. . Banking reforms or the minimum capital requirements of 11.5% is all about wearing the

seat belt (in an aeroplane) as that can minimise the damage. Financial crises have become regular occurrence. The 2008 credit crises in the US and

Europe and experiences of a crises every 5 to 7 years, the next crash came in 2015,(Economic Times Mumbai).


Three private banks via HDFC/ICICI Bank and Axis Bank Ltd. were charged withconverting black money into white money and also non-complinces of KYC Norms inMarch 2013.

Total business correspondents was one lakhThe latest details of commercial branches are (in 2017)

Total number of branches at the end of 31.3.2017 129683

Total mobile holders in India at the end of Dec. 16 103.09 crores

Total mobile banking transactions at the end of 2013-14 were ` 5741 crores

Total deposits/advances at the end of 31.03.2017

Deposits ` 108.23 lakh crores

Advances ` 78.82 lakh crores

New capital adequacy for banks as per BASEL-III from 01st April 2013 11.50%

New bank licences issued in Feb. 2015 Bandhan Bank andIDFC Bank

First Mahila Bank was opened on 19.11.2013 with ` 1000 crore capital and subsequently, mergedwith SBI 31.3.2017

` 1900 crores daily withdrawal and ` 1850 crores daily deposit in banking during Sept. 2013 to28th Feb. 2014.

More than 84.12 lakh persons have got more than one account in banks during Sept 2013 to Feb.2014.

Cyber cases – Phising cases were with 3.96 crores customer during 2012-13 in India while in2013-14 it was 2.32% higher.

Total number of accounts opened under Prime Minister Jan Dhan Yojna were 28.23 crores at theend of 31.3.2017 with credit balance of ` 63,971.38 crores.

Credit information companies to have the membership of all credit institutions as per RBI (aswell as NBFCs TIMES 10.2.2015)

Total Internet users at the end of Dec. 2016 were 28.2 crores.

First video conferencing bank branch has been opened by IndusInd. Bank in May 2014. Thisfacility is available 24 hours through their Desk Top/Tablet/Smart phones.

All days open banks in Maharashtra State has been allowed to HDFC Bank/City Bank and Bankof Japan, to open their branches for all 7 days with the condition that they would remain open in -between 9 AM to 10 PM. and employees would not be required to work more than 8 hours per day.

RBI has allowed banks to grant advance of ` 1 lakh against gold jewellery from 30.12.2013except for agricultural activities. The repayment of such advance would be through bullet system andNOT BY EMIs

All Stake run banks (PSBs) to raise equity capital from the market subject to the condition thatgovernment stake should not fall below 52% (10.12.2014, ET). The commercial banks need ` 4.6 lakh


crore - ` 2.4 lakh crore common equity, ` 1.56 lakh crore additional Tier-I and ` 64,500 crore Tier-IIby March 2019.

The RBI has allowed banks to take management control of a defaulting company by convertingtheir loans into equity through the Strategic Debt Restructuring (SDR) scheme introduced in 2015.

In 2016, the scheme for sustainable structuring of stressed assets also involving conversion ofloans into equity was announced.

Aug. 2016 Insolvency and Bankruptcy code was implemented and NCLT was made asadjudicating body.

As per suggestion of Banks Board Bureau, the finance ministry has accepted proposal foroffering stock options to their employees, from April 2017. This option can be given by those bankswhich have earned substantial profit and have made remarkable progress in managing NPAs.

Total outstanding plastic cards (debit/credit) were 25943784 at the end of Sept. 2016. TotalATMs at the end of Sept. 2016 were 2,19,688 on 8.11.2016. Demonetisation of higher denominationof currency notes of ` 1000 and ` 500 in order to control black money and fake currency and to curbthe extremist’s activities with the help of fake currencies, coming from Pakistan.

Ordinance issued in May 2017 empowering the RBI in directing the banks in NPA recoveries andfor faster action in cases of accounts becoming NPA.

New Bank Licenses in Private SectorRBI has approved a limited number of banking licenses and plans to give licenses from the year

April 2014 to two private parties with regulations.

A probable list of such parties in the above lists those could be parties are excluded which arehaving exposure to real estate business. The entry level capital could be with ` 500 crore and to go upto ` 1,000 crore in 3 years.

Union Finance Minister in 2010-11 budget declared about issuing new bank licences. Thereafterbank received 25 application out of which 2 applicants withdraw their applications. In February 2014,RBI issued 2 licences to IDFC Ltd. Mumbai and Bandan (a NBFC) Financial Services Pvt. Ltd.Kolkata.

In the Union Budget of 2013-14, the then finance minister declared opening of first Ladies bank,Bhartiya Mahila Bank Ltd., for economic strongness of women in India. As such first such bank wasopened on 19-11-2013 with ` 1000 crore capital and merged with State Bank of India on 31.3.2017.

Asset-liability mismatches expose the banks to varioustypes of risks, i.e., risks of illiquidity and insolvency; risksarising from globalisation and deregulation. Riskmanagement is a continuous process of controlling assetsand liabilities in terms of size, maturities and yields. Asoperations in the financial market become varied and

complex, banks have to equip themselves with a variety of skills and appropriate technology. The RBIhas issued guidelines to banks in April 1999, for asset-liability management which would help thebank management to meet the challenges. Banks are encouraged to prescribe risk parameters andestablish effective control systems. Now the action lies entirely with banks. The general complaint thatcustomer satisfaction is at low levels needs to be addressed in all seriousness. The effort should be not

“Banks need to develop customerrelationship, which has come to beknown as “relationship banking”.This is CRM.”


only to preserve the existing circle of clients, both corporate and individual, but also to enlarge theclient base. Banks need to develop customer relationship, which has come to be known as“Relationship Banking”. It is concerned essentially with maintaining relations with customers on acontinuing basis. This is CRM and it is not just the relationship built around raising deposits andmaking loans, though that is important. CRM goes well beyond that.

Two important aspects of CRM are: One that it does not view customers in totality or in theaggregate and two the devising of banking products. Regarding the first, customers’ needs and demandsand business styles vary; and it is necessary to consider segments of customers and build customerprofiles to evolve strategies. As banking products are intangible, CRM involves personal selling. As forthe second, once the need for segment approach is recognised, product differentiation becomesimportant. The present methods of evolving banking products and then looking around for customersfor those products would not yield the desired results. In short, banking products should be customer-based. Besides, the method of pricing products should also change from cost plus to product quality. Toraise the level of customer satisfaction, banks will have to set up CRM groups or CRM departments.

HRD: RigiditiesHuman resource development (HRD) is the most important need for a service industry like

banking. The banking industry being largely in the public sector, certain rigidities developed in HRDwithin the banking system. Apart from being the preferred employer for the educated manpower,public sector banks followed a hierarchical structure, which gives preference to seniority overperformance. Besides, the banks continued, until recently, their generalist orientation in the matter ofrecruitment. In the result, the best talent especially specialist, could not be attracted. The approach tohuman resources management in banks will have to change in tune with the fast-changing bankingenvironment at home and abroad. While it is difficult to bring about radical changes in the staffstructure in the near future, public sector banks can effect improvements in the existing practices ofrecruitment, training and redeployment. The focus must shift from generalist orientation of the staff tospecialist orientation, i.e., the ability to imbibe and absorb technology. Information technology is anarea where HRD is now critical. There is also the urgent need for training for upgradration of differenttypes of skills, for redeployment, for changing the mindset and attitudes. It is time that banks revamptheir HRD departments and evolve appropriate policies to make the best use of their primary asset, i.e.,human resources.

There are issues in supervision and regulation withwhich the banks will have to be very much concerned in thedays ahead. The banks should have to prepare for tighteningof prudential norms as the new Basel Accord becomeseffective. The earlier Basel Accord (1988) gave recognition

mainly to credit or the principal risk. Since then a number of events have taken place including theEast Asian crisis, which brought to light the inadequacy of the 1988 arrangement, as it did notrecognise market risks and operational risks. It also did not distinguish between different types ofexposures with different dimensions of risk. According, to the new capital accord, banks would haveto provide capital in terms of “economic capital” rather than the minimum regulatory capital. Theconcept of economic capital covers all risks embedded in the banks’ balance sheet. Again in terms ofthe accord, supervision involves moving from the transaction-based approach to a risk-based approach,to determine the level of risk that each bank is exposed to. Bank managements will therefore have to

“The focus must shift fromgeneralist orientation of the staff tospecialist orientation, i.e., the abilityto imbibe and absorb technology.”


develop internal capital evaluation according to their risk profile. Risk weights are being constantlyrevised to take into consideration additional sources of risk.

Corporate GovernanceCorporate governance is assuming greater importance in the banking sector today as a result of

certain unhealthy developments. The main focus in corporate governance is how to enhanceshareholder value; and this needs to be achieved in a legal and ethical manner leading to contributionto business prosperity. The major ingredients of good corporate governance would be accountability atall levels, transparency and enhancing the image of the organisation in the eyes of the public.Corporate governance underlines the belief that the public good should be placed above the privategood and that corporate resources cannot be used for personal benefit. Ethics is a part of goodgovernance. Ethics apart, good governance is concerned with observing rules and regulations,guidelines and clean corporate practices. Public sector banks (Now 21 since 01.04.2017 after themerger of SBI associates into SBI) have to pay considerable attention to corporate governance in thecontext of deregulation, prudential norms, risk-based supervision and globalisation. As part of theongoing reforms, bank managements and their boards have been given greater autonomy. It is veryimportant that greater vigilance over adherence to prescribed rules, norms and regulations is exercised.It is only then that autonomy for banks would be meaningful.

The response groups in the banking system are banks, RBI, the government and the customers,and the onus is on them to raise Indian banking to international standards.

1.4.2 Towards Building High Performing OrganisationsHigh performing organisations (HPO) are organisations that produce extraordinary results which

extend beyond customer-service and shareholders’ gains. These are the centres of constructiveinnovation where people learn, achieve and grow to commit themselves for the excellence inperformance of the organisation. In the pursuit of excellence, they invariably experience varioussetbacks at different points of time. They do consistently display the ability to sustain performanceovertime and over changing market circumstances. Their record of achievements will have a positiveslope over decades and even more significantly, they produce benefits for all stakeholders inclusively–not for the benefit of management at the expense of employees and shareholders or for employees andshareholders at the expense of suppliers and the clientele they serve.

The right people are the origin and the end of the HPO. This means that aligned, teamed,energised, capable and pioneering people create HPO and reciprocally these organisations attract,nurture and develop these people. This inter-relationship is circular and self-sustaining. An HPO neveracts in a way that compromises this relationship and that essentially is the secret of success of an HPO.Their planning in terms of structure, strategy, systems, procedures and facilities are well directedtowards enhancement of customers ‘delight, which automatically takes care of organisations’ growthin volume, enhancement in productivity and accomplishment of the desired goals and milestones. AnHPO is an efficient organisation of efficient persons which is decisive, dynamic, resilient andresponsive to people’s aspirations and expectations.

What makes a bank a high performing bank? What needs to be done to turn an efficient bank intoa high performing bank? How to overcome the constraints and convert them into businessopportunities? What set of concerted efforts are needed to address and redress the multifarious issues


that operate within the organisations? What is expected from the government and the regulators thatdecide the external environment within which they operate? In order to seek answers to thesequestions, this paper makes an attempt to take stock of the macroenvironment in which Indian banksoperate and to make a brief strengths, weaknesses, opportunities and threats (SWOT) analysis ofpublic sector banks (PSBs) that would give an insight into their working and put forth a set ofpragmatic broad strategies that might lead them to become more efficient and march towardsbecoming HPO.

Regulatory Framework and BanksThe regulatory framework in which commercial banks operate strongly influences their standalone

financial strength which often improves when there is a bank regulator with credible and demonstratedenforcement powers and this appears to hold good in case of India. Indian banking sector operatesmainly under the regulatory and supervisory framework of the Government of India and the ReserveBank of India (RBI). It is significant to note that the government and the regulators in India are focusedand committed to establish a strong, robust and efficient banking sector that should subserve thenational objective of higher productivity, inclusive growth, equal distribution of wealth and greaterredistributive justice. The contours of reforms in banking are the testimony to this commitment.

Reform measures came in small quantum each time and never hurried to implement in one go.It was a ‘gradualist approach’ to liberalisation.

Reform policies are being implemented as a continuous ‘ongoing process’ and not as a ‘one-time event’.

Banking reforms were never done in isolation but were introduced in tandem with the overallreform process encompassing reforms in fiscal, trade and industrial sector.

Regulators focused on creating enabling environment to banks to overcome the externalconstraints and operate more flexibly.

Only after having dismanded the operational barriers facing the banks, efforts were made tomove over to the phase of institutional strengthening.

Only after having confirmed that banks had gained strength, measures were initiated to giveoperational independence to banks to manage their internal affairs including that of raisingcapital from the public to augment capital base.

The efficiency bar was raised upwards for banks and they were asked to upgrade theirprocedures, practices and disclosure norms to match with the best global banking standardsand practices.

Now banks are being prepared to take up much higher challenges in the impending era of fullconvertibility of rupee and face up global risks as well.

The modality of opening up of domestic banking sector to foreign banks has been finalised.The process of globalisation of Indian banking and integration of Indian banks with the worldeconomy is being envisaged during this phase. This would be the crucial and challengingperiod for banks.

In the coming decade, the size of operation of a bank will be an important criterion to reap thebenefits of economies of scale and face the vicissitudes of global banking. One can visualse a


series of mergers, acquisitions and takeovers in the entire gamut of Indian banking leadingtowards convergence and consolidation of business.

It is crucial to notice that in the entire reforms agenda, regulators have not lost sight of thesignificance of the social commitments of banks and their role in bringing the redistributivejustice. The guidelines on inclusive growth and financial inclusion and the thrust on MicroAugust, sector and loan availability between ` 1000 to ` 5000 to poors under P.M. Jan DhanYojna August, 2014 are testimony to the unstinted commitment of the government to the poorand ‘have-nots’ and the need to bring them in the mainstream economy.

The PSBs have remained as the catalysts of the financial sector and efforts are made tonurture and promote them to become still stronger. PSBs would continue to play a dominantrole in the whole edifice of banking and act as significant players in India’s growth story.

The RBI as the bankers’ bank has borne the onerous task of providing the requisite protectivecover and insulating the Indian banks from the global economic shocks. This is evident fromthe RBI’s contextual strategies during the Asian Currency/Credit Crises that had ransackedthe South-East Asian economies over a decade ago and also during the recent US subprimemortgage crises that led to global liquidity and credit crises.

The crux of the matter is that banks owe a great deal of their success to the protectiveumbrella and the safety canopy that the government and RBI have provided to them. It is thissafety net that has acted as the underlying strength of Indian banks. The environment in whichbanks have prospered is progressive yet conservative, stable, resilient and compatible with thedomestic and global economic compulsions.

The regulators have not only played the role of prudential regulators but also that of theguardian of the financial sector, the major component of which is the banking sector.

Going forward, RBI endeavours to strengthen the regulatory and supervisory framework. RBI iscontinuously reviewing and refining the prudential requirements for banks keeping in view thedevelopments of financial institutions, international practices and experience gained. Progressivestrengthening of the regulatory and supervisory framework has been the key element in promoting thefinancial viability and stability of the Indian banking sector.

1.4.3 SWOT Analysis of Public Sector BanksA brief analysis of swot of PSBs as detailed below will give an insight into their strong areas and

the opportunities that are open to them to become stronger in future. Simultaneously, efforts have to bemade to address their weaknesses and threats they face and plug them to enable them to emerge stronger.

Strengths A strong domestic banking sector that has withstood various financial crises and wide range

of reforms and restructuring. Excellent institutional superstructure comprising extensive branch network and decentralised

controlling offices. Highly effective outreached infrastructure that can reach up to even the remotest beneficiaries

with population of 2000 persons in villages of the country, belonging to all income classesand social status.