Slide 1:Bank Sector Reform By Prajakta Dandavte – 12 Anuradha Gaidhani – 17 Divya Ghole – 21 Amol Hasan


History :History Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out.


Continue… :Continue… Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. In third phase in 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalization of banking practices.


: Indian Banking Sector: Overview The Indian Banking industry is governed by the Banking Rugulation Act in India,1949. Banks in India are broadly classified into Non- scheduled banks and scheduled banks(commercial banks & co-operative banks). 222 commercial banks in India (of which 133 RRBs) Operating with 68,681 branches (March 06) Nearly 70% of branches are in rural/semi-urban areas Banks are supporting growth in the economy by financing productive sectors Due to growing competition, market share of various groups of banks has changed, though public sector banks still dominate the market


All Scheduled Commercial Banks :All Scheduled Commercial Banks


Reforms in the Banking Sector :Reforms in the Banking Sector The 1st phase of Financial reforms resulted in the nationalisation of 14 major banks in 1969. This was followed by another rounds of reform. In 1980,commercial banks were functioning in a highly regulated environment,administrated interest rate structure. Next phase started in 1991.The rule regarding Foreign Direct Investment(FDI) were further rationalised in 2002.


Banking Sector after reforms :Banking Sector after reforms 13 years of economic and financial sector reforms have strengthened the banking sector: Widespread branch network, varied client base Recapitalisation has bolstered bank balance sheets Public confidence in PSBs Risk averseness: limited exposure to risky sectors Investment in retail branches in an earlier era has given PSBs competitive advantage of access to stable, low cost deposits But the large staff strength, age profile, Government regulations (on loss making branches, CVC) and slow pace of change in PSBs could be a hindrance to dynamic growth in today’s fast paced world.


New Initiatives by PSBs :New Initiatives by PSBs Technology savvy: SBG daily 11 lakh ATM transactions amounting to Rs 140 crore per day Specialised branches New products targeted at specific groups Change in structure, systems and procedures involving quick turnaround time to meet world standards


New Initiatives by PSBs Continue.. :New Initiatives by PSBs Continue.. Marketing orientation Change in ambience Recruitment of specialists Tie-ups, sharing networks, and strategic alliances


Product Innovation :Product Innovation Banks moving away from plain vanilla lending to commerce and industry. More options for customers: cash management, channel financing, foreign currency loans. New innovative products being introduced and fee based income increased to meet the challenges ahead. Bancassurance and other products, outsourcing of some products, technology-based payment systems. Product innovations and process re-engineering to meet customer requirements, reduce cost, improve efficiency.


Technology in Banking :Technology in Banking IT spend by banking and financial services industry in USA is 7% of the revenue as against around 1% by Indian Banks. Shared ATM network to reduce costs, increase reach. SBI: Branch networking (CBS), ATM network, Internet banking and other facilities introduced in shortest time frame (Hewlett Packard)


Technology in Banking :Technology in Banking Cheque truncation system to change the speed of banking transactions. Real Time Gross Settlement (RTGS) system running since 2004 and covers 15,000 branches. Adoption of Technology to lead to business transformation and cost advantage in the long term.


Human Resources :Human Resources In order to meet the global standards and to remain competitive, banks are recruiting more specialists in various fields such as Treasury Management, Credit, Risk Management, IT related services, HRM. Fast track merit and performance based promotion from within would have to be institutionalized to inject dynamism and youthfulness in the workforce. SBG treasury is as sophisticated and modern as that of Barclays and Natwest


Scenario Beyond 2009 :Scenario Beyond 2009 Foreign Banks allowed to set up fully owned subsidiaries Foreign banks to be treated on par with Indian banks after 2009 to the extent appropriate Competition to intensify To achieve critical mass and long term profitability consolidation will be the trend


Impact of Reforms in Banking Sector :Impact of Reforms in Banking Sector Banking sector have increased the profitability , productivity and efficiency of banks. Most significant achievement of financial sector reforms has been marked improvement in the financial health of commercial banks in terms of capital adequacy, profitability and assets quality as also greater attention to risk management. Deregulation has opened up new opportunities for banks to increase revenues by diversifying into investment banking, incurance, creditcards, depository services, mortgage financing, securitisation etc.


Impact of Reforms in Banking Sector Continue… :Impact of Reforms in Banking Sector Continue… Liberalisation has brought greater competition among banks both domestic and foreign, competition from mutual funds, NBCs,post office etc.. Indian banks have become competent at the global level and have increasingly integrated with the rest of the world


Challenges Ahead :Challenges Ahead Competition and Improving Profitability Deploying Latest Technology Risk Management Customer Relations Corporate Governance International Standards Social Responsobility.


Performance Analysis –Banking – Capital Structure :Performance Analysis –Banking – Capital Structure Distinct improvement in CRAR of banks In public sector banks recapitalisation by government initially (about 1% of GDP)


Performance Analysis –Banking –Capital Structure :Performance Analysis –Banking –Capital Structure 20 out of 27 public sector banks raised capital from market


Performance Analysis –Banking –Capital Structure :Performance Analysis –Banking –Capital Structure Asset shares of public sector banks have fallen after reforms and those of Indian private sector banks have increased. Public sector banks still dominant accounting for three-fourths of industry assets In recent years, considerable increase in the share of public sector banks in the industry-wide profit


Performance Analysis –Banking – Efficiency :Performance Analysis –Banking – Efficiency Clear improvement in profitability in the post-reform period Reduction in spread and operating expenditure Improvement in efficiency across the bank groups


Role of Private and Nationalised banks :Role of Private and Nationalised banks Core Banking Retail Banking Basel-II Norms


Core Banking :Core Banking Core banking is a general term used to describe the services provided by a group of networked bank branches. Bank customers may access their funds and other simple transactions from any of the member branch offices. Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers, and have a separate line of business to manage small businesses Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, Internet banking and branches.


Retail Banking :Retail Banking The year 2001 saw a slow down in the industrial sector. The growth in GDP was 6% as against previous year 6.4%. So bank started focusing on the retail segment by offering a variety of financial products. Retail banking refers to banking in which banking institutions execute transactions directly with consumers, rather than corporations or other banks. Services offered include: savings and checking accounts , mortgages, personal loans, debit cards, credit cards.


Continue.. :Continue.. The growth of retail banking in the country would be driven mostly by: Retail loan Housing loan. Home loan alone account for nearly two-thirds of the total retail portfolio of the banks.


Continue… :Continue… The potential for retail banking is increasing because of following factors : The profile of Indian consumers is changing. This is reflected in the urban household income pattern. Compared to developed countries, India lags far behind in spending patters and also in use of credit cards. The “credit culture” is picking up early.


Basel II :Basel II Basel II ,formulated by the Basel Committee on Banking Supervision is an international accord to regulate capital adequacy and manage various risks for banks having commercial activities outside their own countries. The purpose of Basel II, which was initially published in June 2004, is to create an international standard that banking regulators can use when creating regulations about how much capital banks need to put aside to guard against the types of financial and operational risks banks face.


Continue.. :Continue.. Advocates of Basel II believe that such an international standard can help protect the international financial system from the types of problems that might arise should a major bank or a series of banks collapse. In practice, Basel II attempts to accomplish this by setting up rigorous risk and capital management requirements designed to ensure that a bank holds capital reserves appropriate to the risk the bank exposes itself to through its lending and investment practices.


Slide 29:Thank you