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MAJOR PROJECT ONPERFORMANCE EVALUATION OF PUBLIC AND PRIVATE SECTOR BANKS IN BATHINDA REGION A STUDY DURING RECESSION PERIOD

(For the partial fulfillment of Degree of Master of Business Administrative)Session 2008-2010

Under the guidance of: MR. AMANDEEP SINGH (SR.LECTURER)

Submitted by: ANKUSH MAHAJAN ROLL-NO.-2105 CLASS- MBA-2ND(MARKETING)

Submitted to:

PUNJABI UNIVERSITY SCHOOL OF BUSINESS STUDIES GURU KASHI CAMPUS, TALWANDI SABO BATHINDAPage 2

ACKNOWLEDGEMENTwith deep sense of gratitude I would like to take this opportunities thank to my honorable Project Guide, Mr. Amandeep Singh (senior lecturer), USBS

Talwandi Sabo who always a sincere advisor and inspiring force behind this report . He has been extremely generous with his time and rendered me all possible help to see this work complete .I could not have asked more cooperating guide her invaluable and unstinted support has always given me the confidence to do the work without his guidance this project report would not be the light of the day. In addition to them I would also I like to thanks my friends and various private and public sector banks that were of immense help to me for data collection. I would also like to thanks to my honorable H.O.D. to giving me opportunity to work on this project. Last but not least I like to thanks my parents, their support thought the making of this project.

DATE : .

ANKUSH MAHAJAN ROLL- NO. - 2105 MBA-II (MARKETING)

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STUDENT DECLARATIONWe hereby declare that the project report entitled performance evaluation of public and private sector banks in Bathinda region- A study during recession period submitted in partial fulfillment of the requirements for the degree of masters of business Administration to Punjabi University School of Business Studies India, are our original work and not submitted for the award of any other degree, diploma, fellowship, or any other similar title or prizes.

(Signature of student) Ankush Mahajan Roll-No.-2105

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PUNJABI UNIVERSITY SCHOOL OF BUSINESS STUDIES GURU KASHI CAMPUS, TALWANDI SABO (BATHINDA)

TO WHOMSOEVER IT MAY CONCERN

This is to certified that the project work entitled PERFORMANCE EVALUATION OF PUBLIC AND PRIVATE SECTOR BANKS IN BATHINDA REGION-A STUDY DURING RECESSION PERIOD done by ANKUSH MAHAJAN (ROLL NO.- 2105, MARKETING) to be submitted to PUSBS TALWANDI SABO in year 2010 for partial fulfillment of the degree of MBA (MARKETING) has been carried out under the guidance and supervision. This is an original piece and no part of this work has been submitted for any other degree.

DATE: .

AMANDEEP SINGH (SENIOR LECTURER) University School of Business Studies Talwandi Sabo (Bathinda)

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CONTENTSAbstract Chapter 1: Introduction Chapter 2: Review of literature Chapter 3: Need of the study Chapter 4: Design of the Study 4.1 Statement of the Problem 4.2 Objective of the Research 4.3 Scope of the Research 4.4 Research Methodology 4.5 Plan of Analysis 4.6 Limitations of Study Chapter 5: Data Analysis and Interpretation 5.1 Data Analysis 5.2 Interpretation Chapter 6: Conclusion Bibliography Annexure 1. Results of HSc10 ...V ..1-12 ...13-17 .18-19 .20-23 .21 22 . ..22 22 ..22-23 23 ..23-35 .....24 ..34-35 .36-37 .. 38-39 .. .40-44

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INDEX OF TABLES

Table 5.1: NPA s of public bank Table 5.2: NPA s of private banks Table 5.3: Loan disbursed by public bank Table 5.4: Loan disbursed by private banks Table5.5: Trend in saving in public banks Table 5.6: Trend in saving in private saving Table 5.7: Table showing variable number

....................................25 .25 26 .26 27 .27 ...28 .30 ...32

Table 5.8: Table showing values after applying t- test Table 5.9: Table showing trend function

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ABSTRACTA strong and efficient financial system is critical to the attainment of the objectives of creating a market-driven, productive and competitive economy and to support higher investment levels and accentuate growth. Banking by far is the most dominant segment of the financial system and plays a pivotal role in the development of an economy. A healthy banking system, besides providing necessary architecture for facilitating economic growth, also serves as a strong repository of liquidity. The Indian banking system has traversed a long journey to come to this phase where the health and quality of the banking system and the contribution made by it in the economic development can be comparable to the International standards. But there are certain stages in the business cycle which affect the business it may be recession which shake the whole economy or a system that prevails in the country. The current recession starts from the banking industry and it affect the whole economy of USA and those which are somewhere related with the USA. This project is an outcome of the research on the performance evaluation of the banks both public and private sector banks in Bathinda region during the recession period. The project contains the brief description of the recession, main cause of recession and its impact. A survey was conducted to get the data to judge the impact of recession on banks of Bathinda and thus the first part of the paper scrutinizes the recession its impact on economy. Second part related to the banking system in India. Third part related to the data related to the research. It concerns with the NPA (non-performing assets) of banks, total loan disbursed by the banks trend in saving in banks. We require this data because it helps in judgment of the performance of the

banks as recession leads to the financial crises. So this helps in finding of performance of the banks both public and private sector banks. The last part of the report includes analysis of related data which envisage the performance of the private and public sector banks in Bathinda region during recession period. Although the research reports shows that commercial banks do better than the private sector banks during this period. So whole report is shows how the banking system of Bathinda is affected by the recession.Page 8

CHAPTER-I INTRODUCTION

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RECESSIONIn economics, a recession is a business cycle contraction, a general slowdown in economic activity over a period of time. During recessions, many macroeconomic indicators vary in a similar way. Production as measured by Gross Domestic Product (GDP), employment, investment spending, capacity utilization, household incomes, business profits and inflation all fall during recessions; while bankruptcies and the unemployment rate rise .Recessions are generally believed to be caused by a drop in spending. Governments usually respond to recessions by adopting expansionary macroeconomic policies, such as increasing money supply, increasing government spending and decreasing taxation. Most mainstream economists believe that recessions are caused by inadequate aggregate demand in the economy, and favor the use of expansionary macroeconomic policy during recessions. Strategies favored for moving an economy out of a recession vary depending on which economic school the policymakers follow. Monetarists would favor the use of expansionary monetary policy, while Keynesian economists may advocate increased government spending to spark economic growth. Supply-side economists may suggest tax cuts to promote business capital investment. Laissez-faire minded economists may simply recommend that the government not interfere with natural market forces.

ATTRIBUTES OF RECESSIONA recession has many attributes that can occur simultaneously and includes declines in coincident measures of activity such as employment, investment, and corporate profits. A severe (GDP down by 10%) or prolonged (three or four years) recession is referred to as an economic depression, although some argue that their causes and cures can be different. As an informal shorthand, economists sometimes refer to different recession shapes, such as V-shaped, U-shaped, L-shaped and W-shaped recessions.

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PREDICTORS OF A RECESSIONAlthough there are no completely reliable predictors, the following are regarded to be possible predictors:y

In the US a significant stock market drop has often preceded the beginning of a recession. However about half of the declines of 10% or more since 1946 have not been followed by recessions. In about 50% of the cases a significant stock market decline came only after the recessions had already begun.

y

Inverted yield curve, the model developed by economist Jonathan H. Wright, uses yields on 10-year and three-month Treasury securities as well as the Fed's overnight funds rate. Another model developed by Federal Reserve Bank of New York economists uses only the 10-year/three-month spread. It is, however, not a definite indicator;.

y y y

The three-month change in the unemployment rate and initial jobless claims. Index of Leading (Economic) Indicators (includes some of the above indicators). Lowering of Home Prices. Lowering of home prices or value, too much personal debts.

CAUSES OF RECESSIONA recession is primarily caused by the actions taken to control the money supply in the economy. The Federal Reserve is responsible for maintaining an ideal balance between money supply, interest rates, and inflation. When The Federal Reserve loses balance in this equation, the economy is forced to correct itself. The various causes for the economic recession are:

1. Subprime lending as a cause:Official economic data shows that a substantial number of nations are in recession as of early 2009. The US entered a recession at the end of 2007, and 2008 saw many other nations follow suit. United States. The United States housing market correction (aPage 11

consequence of United States housing bubbles) and subprime mortgage crisis has significantly contributed to a recession. The 2008/2009 recession is seeing private consumption fall for the first time in nearly 20 years. This indicates the depth and severity of the current recession. With consumer confidence so low, recovery will take a long time. Consumers in the U.S. have been hard hit by the current recession, with the value of their houses dropping and their pension savings decimated on the stock market. Not only have consumers watched their wealth being eroded they are now fearing for their jobs a sun employment rises. It is the main reason of recession of2008 due to which the global economy suffers. Based on the assumption that subprime lending precipitated the crisis, the general economic slowdown that ensued in the later stages of the crisis, in particular after the global crisis of confidence in September and October 2008, meant that bank losses became more closely connected to macroeconomic performance. In this period, the majority of write downs were more directly linked to a surge in borrower defaults and to anticipated defaults as evidenced by the increase in the amount and relative importance of provisioning expenses.

IMPACT OF RECESSIONSImpact of recession was observed in India in 2008, October due to global financial crises. The major impact of recession are :

UnemploymentThe full impact of a recession on employment may not be felt for several quarters. Research in Britain shows that low-skilled, low-educated workers and the young are most vulnerable to unemployment in a downturn.

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BusinessProductivity tends to fall in the early stages of a recession, and then rises again as weaker firms close. The variation in profitability between firms rises sharply. Recessions have also provided opportunities for anti-competitive mergers, with a negative impact on the wider economy.

Social effectsThe living standards of people dependent on wages and salaries are more affected by recessions than those who rely on fixed incomes or welfare benefits. The loss of a job is known to have a negative impact on the stability of families, and individuals' health and well-being.

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AN OVERVIEW OF INDIAN BANKING SYSTEM:In India, the ancient Hindi Scripture refers to money lending activities in the Vedic period. During the Ramayana and Mahabharata eras , banking has become full fledge business activity and during Manu Smriti period which followed the Vedic period Epic age, the business of banking was carried on by the members of vaish community. Banking plays two different functions, one is accepting deposits sand other of lending monies and investment and/ funds. The word bank is said to be derived from French word Bancus or Banque that is a bench. It is believed that the early bankers, Jews of Lombardy, transect their business on benches in the marketplace. Other believes it is derived from German word Back meaning a joint stock fund. So banks are the commercials concerns that collect money from those who have it to spare or who are saving it out of their income, and lend to those who require it. In other word a bank is a financial institution that accepts deposits and channels those deposits into lending activities. Banks primarily provide financial services to customers while enriching investors. Government restrictions on financial activities by banks vary over time and location. Banks are important players in financial markets and offer services such as investment funds and loans. In some countries such as Germany, banks have historically owned major stakes in industrial corporations while in other countries such as the United States banks are prohibited from owning non-financial companies. In Japan, banks are usually the nexus of a cross-share holding entity known as the keiretsu. In France, bancassurance is prevalent, as most banks offer insurance services (and now real estate services) to their clients. Banks act as payment agents by conducting checking or current accounts for customers, paying cheques drawn by customers on the bank, and collecting cheques deposited to customers' current accounts. Banks also enable customer payments via other payment methods such as telegraphic transfer, and ATM .Banks borrow money by accepting funds deposited on current accounts, by accepting term deposits, and by issuing debt securities such as banknotes and bonds. Banks lend money by making advances to customers on current accounts, by making installment loans, and by investingPage 14

in marketable debt securities and other forms of money lending. Banks provide almost all payment services, and a bank account is considered indispensable by most businesses, individuals and governments. Non-banks that provide payment services such as remittance companies are not normally considered an adequate substitute for having a bank count. Banks borrow most funds from households and non-financial businesses, and lend most funds to households and non-financial businesses, but non-bank lenders provide a significant and in many cases adequate substitute for bank loans, and money market funds, cash management trusts and other non-bank financial institutions in many cases provide an adequate substitute to banks for lending savings to. The level of government regulation of the banking industry varies widely, with countries such as Iceland, having relatively light regulation of the banking sector, and countries such as China having a wide variety of regulations but no systematic process that can be followed typical of a communist system. The modern banking system began with the opening of bank of englandin1694. Bank of Hindustan was first bank to be established in India, in 1970. Banking system in India is dominated by nationalized banks. The nationalization of the banks took place in the time of late Mrs. Indira Gandhi in 1969with another installment in of 6 Banks on 15April 1980, the main objective is of nationalization was to insure mass banking as against class banking with bank infrastructure aimed at hilly tracts and terrains of the country .prior to 1969, State bank of India (SBI) was the only public sector bank in India. SBI was nationalized in 1955 under the SBI act of 1955. In the early 1990s, the then Narsimha Rao government embarked on a policy of liberalization, licensing a small number of private banks. These came to be known as New Generation tech-savvy banks, and included Global Trust Bank (the first of such new generation banks to be set up), which later amalgamated with Oriental Bank of Commerce, Axis Bank(earlier as UTI Bank), ICICI Bank and HDFC Bank. This move, along with the rapid growth in the economy of India, revitalized the banking sector in India, which has seen rapid growth with strong contribution from all the three sectors ofPage 15

banks, namely, government banks, private banks and foreign banks. The next stage for the Indian banking has been setup with the proposed relaxation in the norms for Foreign Direct Investment, where all Foreign Investors in banks may be given voting rights which could exceed the present cap of 10%, at present it has gone up to 74% with some restrictions. The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. The new wave ushered in a modern outlook and tech-savvy methods of working for traditional banks. All this led to the retail boom in India. People not just demanded more from their banks but also received more. Currently (2008), banking in India is generally fairly mature in terms of supply, product range and reach-even though reach in rural India still remains a challenge for the private sector and foreign banks. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. The Reserve Bank of India is an autonomous body, with minimal pressure from the government. The stated policy of the Bank on the Indian Rupee is to manage volatility but without any fixed exchange rate-and this has mostly been true. With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. One may also expect M&As, takeovers, and asset sales. In March 2006, the Reserve Bank of India allowed Warburg Pincus to increase its stake in Kotak Mahindra Bank (a private sector bank) to 10%. This is the first time an investor has been allowed to hold more than 5% in a private sector bank since the RBI announced norms in 2005 that any stake exceeding 5% in the private sector banks would need to be vetted by them. In recent years critics have charged that the non-government owned banks are too aggressive in their loan recovery efforts in connection with housing, vehicle and personal loans. There are press reports that the banks' loan recovery efforts have driven defaulting borrowers to suicide. The banking system in India is broadly divided in to two groups:Page 16

1. Commercial banks 2. Cooperative banks On the basis of ownership hold commercial banks are group under three categories. These are: (1) State owned or public sector banks (PSBs) (2) Private bank under Indian ownership (3) Foreign banks There are PSBs which all account for 80% of the commercial banks .at the top of banking system is RBI. RBI is the central bank of the country entrusted with monetary stability, management of the currency.

SIZE OF GLOBAL BANKING INDUSTRYWorldwide assets of the largest 1,000 banks grew 16.3% in 2006/2007 to reach a record $74.2 trillion. This follows a 5.4%1 increase in the previous year. EU banks held the largest share, 53%, up from 43% a decade earlier. The growth in Europes share was mostly at the expense of Japanese banks, whose share more than halved during this period from 21% to 10%. The share of US banks remained relatively stable at around 14%. Most of the remainder was from other Asian and European countries. The United States has the most banks in the world in terms of institutions (7,540 at the end of 2005) and possibly branches (75,000). This is an indicator of the geography and regulatory structure of the USA, resulting in a large number of small to medium-sized institutions in its banking system. As of Nov 2009, China's top 4 banks have in excess of 67,000 branches with an additional 140 smaller banks with an undetermined number of branches. Japan had 129 banks and 12,000 branches.

The structure of the Indian banking sectors characterized by five categories of commercial banks. There are two types of public bankseight state banks (SBI andPage 17

seven associates) and 19nationalized banks. The classification of private banks into "old private" and "new private" is based on the timing of market entry. Following the RBI guidelines of 1993 to promote competition in the banking sector, nine new private banks entered the market in 1994 and 1995. A number of foreign banks were allowed entry into the Indian banking system between 1991 and 1998, and consequently, the total number of foreign banks increased from 24 in 1991/92 to 42 in 2000-2001.

The percentage shares of the five categories of banks in 2008-09 as follows:Table 1. Market Share by Bank Category in 2008/09

Bank Category

Market Share (In percent)

State Nationalized Old private New private Foreign

10 25 09 18 38

Table 1.1 showing market share by bank in2008-09(source: www.rbi.com) Currently, following are the few public sector banks in India: i. ii. iii. iv. v. vi. vii. viii. ix. State bank of India State bank of Patiala Oriental bank of commerce Bank of Baroda Bank of India Punjab and Sind bank Syndicate bank Vijaya bank Allahabad bankPage 18

x. xi. xii. xiii. xiv. xv. xvi. xvii. xviii. xix.

Andhra bank Union bank of India Corporation bank UCO bank Dena bank Indian overseas bank State bank of Bikaner and Jaipur State bank of Travancore United bank of India Canara bank etc.

The govt. of India relaxing the condition for opening of private sector bank in the year 1994, as a part of their liberalization program me.Housing Development Finance Corporation Limited (HDFC) was amongst the first to receive on