CHAPTER 3

CONCEPTUAL
FRAMEWORK
Chapter 3 Conceptual Framework

CHAPTER 3
CONCEPTUAL FRAMEWORK

3.1 OVERVIEW
This chapter attempts to study the impact of financial reforms on the Indian
banking sector. It has been almost two decades since the start of economic
reforms in India and financial sector reforms formed an important part of this
process. With the institution of financial sector reforms, competition among banks
has increased while the barriers to entry have been sharply reduced. Post reform
period has witnessed the entry of foreign and private banks in India. The high
quality of services provided by these banks has attracted funds away from the
public sector banks. The slowdown in the economy coupled with a sluggish
industrial sector has also contributed to the decline in bank‘s deposits.

In the present chapter the genesis of the banking sector has been discussed
with a view to explain the evolution of banking in India. Details have been
included as regards the structure and constituents of the banking sector. In
addition to this, the history and developments in the selected PSBs has also
been presented. Banking sector reforms form an important part of the
process of liberalization. A section in this chapter has been devoted to the
discussion of the reforms process and its impact on asset quality and Capital
Adequacy Ratio. An analysis of the trends in NPAs in terms of values, gross
and net NPAs as a percentage of gross advances and net advances has
been done1. Also, the study provides details about the status wise and
sector-wise classification of NPAs, effects of NPAs on banks, and frequency
distribution of public sector banks by ratio of net NPAs to net advances.

Introduction of Information Technology in the banking sector was aimed at

increasing the efficiency and productivity of banking operations. The last
section of the chapter discusses the transformation of the banking sector from
being a traditional set up to the present IT enabled structure. It provides
details on innovative payment mechanisms and adoption of Core Banking
Solutions Mechanisms.

34
Chapter 3 Conceptual Framework

3.2 GENESIS OF BANKING IN INDIA

The concept of banking in India dates back to the ancient Vedic period.
During the British regime, the English Agency House established the first
modern bank known as The Bank of Hindustan at Calcutta in 1770. The
Bengal Bank was started in the year 1784 and in 1786 the General Bank of
India was established. However, these banks could not provide satisfactory
services due to their own crises.

Banking in its modern sense came to be established in India with the setting up
of three Presidency Banks namely, the Bank of Bengal (1806), the Bank of
Bombay (1840) and the Bank of Madras (1843). These were successor to
agency houses, which invariably combined banking with their commercial and
trading activities, and were floated by the East India Company to facilitate the
borrowings of the government and maintenance of credit. These presidency
banks were merged in 1921 and the ‗Imperial Bank of India‘ was formed. The
intention was to create a Central Bank in country with the monopoly of note
issue and serve as bankers‘ bank and a government bank. By this time, a
number of joint stock company banks had come to be established after the
acceptance of the principle of limited liability in 1860. The year 1860 is,
therefore , considered to be a landmark in the banking history of India, as it was
afterwards that some of well- known banks were formed- the ‗Bank of Upper
India‘(1863),the ‗Allahabad Bank‘(1865), the ‗Bangalore Bank‘(1868),the
‗Alliance Bank of Simla‘(1874),etc. Indian managed joint stock banks also
began to be floated; the first being the ‗Oudh Commercial Bank‘
in1881,followed by the ‗Punjab National Bank‘ in 1894.Then the Swedish
movement of 1905 gave rise to the ‗Bank of India‘ , the ‗Indian Bank‘ at Madras,
the ‗ Central Bank of India‘, the ‗ Bank of Baroda‘ and the like.

The major banking events during the period (1918-39) were the amalgamation
of the three Presidency Banks into the Imperial Bank of India in 1921.Though
Imperial Bank of India was a commercial entity; it performed the functions for
the Government and acted as an agent of the Government. It acted as
banker‘s bank and was the sole note issuing authority. It also managed the

35
Chapter 3 Conceptual Framework

Government debt and also maintained the Government balances. The

Reserve Bank of India (RBI) was established on April1, 1935, and started
acting as a banker‘s bank and an agent of the Government.

India‘s current financial system comprises a variety of banks, financial

institutions (FIs), capital market institutions, NBFCs and numerous indigenous
banks. Within this set up, banks assume the role of significant financial
Intermediaries so much so that financial inter-mediation has become
synonymous with the term ‗banking‘.

When India became independent in 1947, it inherited an extremely weak

banking structure with 640 banks, out of which 96 were scheduled banks and
the rest belonged to the small non-scheduled category. The banking facilities
were heavily concentrated in metropolitan cities and port towns with a very
high proportion of total advances going to trade2. Prior to nationalization of
banking sector, certain important socio-economic objectives like upliftment of
weaker and neglected sections of the society; reduction in interpersonal
/interregional inequalities did not get any attention. Most of the bank credit
was enjoyed by the richer and privileged classes of the society.

The Social Control Act of 1968 brought banking industry under the purview of
social lending and the nationalization of banks marked a phase of Government
control and domination3. The ordinance to nationalize the fourteen major banks
having deposits of Rs. 50 crores or more was issued on 19th July 1969 to serve
better the needs of development of the economy in conformity with the national
priorities and objectives. This brought approximately 85 percent of all the banks
deposits, advances and investment under the control of the Government. These
14 banks with 4135 branches had a total paid up capital of Rs. 285 crores, their
deposits and credit stood at Rs. 2714.80 crores and Rs. 1683.66 crores
respectively4.

Eleven years after the nationalization of 14 commercial banks, the

Government on 15th April 1980 took over six more scheduled commercial
banks (Andhra Bank Ltd., Corporation Bank Ltd., New Bank of India Ltd.,

36
Chapter 3 Conceptual Framework

Oriental Bank of Commerce Ltd., Punjab and Sindh Bank Ltd., and Vijaya
Bank Ltd) through an ordinance issued by the President.

There were three stages in the evolution of the Indian Banking sector, the
conversion of the ‗Imperial Bank of India‘ into State Bank of India‘ in 1955 and
subsequent establishment of seven subsidiary banks; nationalization of 14
major commercial banks in July 1969 and; finally, the nationalization of 6
more commercial banks on April 15, 1980.

The six fold objectives as set out by the Government of India for nationalized
banks have been removal of control by few, the elimination of the use of bank
credit for speculative and unproductive purposes, extension of credit to priority
sectors, giving a professional bent to bank management, the encouragement
of new classes of entrepreneurs and provision of adequate training as well as
reasonable terms of service to bank staff.

Promotion of balanced economic development through the removal of

regional imbalances was one of the aims set for the nationalised banks.
Therefore, in the post-nationalization era a significant move took place from
‗class‘ banking to ‗mass‘ banking .The main thrust of the commercial banks
was on social lending in order to fulfill the objectives of growth, equity, social
justice and self-reliance.

3.2.1 Structure of the Banking Sector

The Indian banking system comprises of a number of institutions like Reserve
Bank of India as the central bank of the economy, public sector banks, private
sector banks, foreign banks, regional rural banks and cooperative banks.

Reserve Bank of India occupies the pivotal position in the Indian banking
system. It is the apex institution having wide powers to control and regulate
the banking system of the economy.

State Bank of India occupies a special status in the Indian banking system.
It was established basically with the objective of providing banking facilities
in the neglected and rural areas. There are 26 public sector banks, which

37
 Chapter 3 Conceptual Framework

include 19 nationalised banks and 6 banks of the State bank group. There
are many private sector banks; prominent among them are AXIS Bank,
IDBI Bank, and HDFC Bank.

The Regional Rural Banks are sponsored by the Scheduled Banks. These
have been established in the identified districts for supplying credit for the
rural sector of the economy.

The scheduled commercial banking structure in India can be depicted

as follows:
Figure: 3.1
Scheduled Banking Structure in India

Scheduled banks in India

Scheduled Commercial Banks Scheduled co-operative Banks

Public Private Foreign Regional Urban Co-Operative State Co-Operative

Sector Sector Banks in Rural Banks Banks Banks
Banks Banks India

Nationalised SBI and its Old Private New Private

Banks Associates Sector Banks Sector Banks

There are many foreign banks offices in the metropolitan cities and port town.
It may be mentioned in this context that a number of banks from developing
countries including banks from Japan, Singapore, Korea, Indonesia, Sri Lanka
and Mauritius have opened branches in India.

The commercial banking structure in India consists of: Scheduled

Commercial Banks and Unscheduled Banks. Scheduled commercial Banks
constitute those banks, which have been included in the Second Schedule
of Reserve Bank of India (RBI) Act, 1934 as per the criteria laid down vide
section 42 (6) (a) of the Act.

38
Chapter 3 Conceptual Framework

3.2.1.1 Nationalised Banks in India

Banking System in India is dominated by nationalised banks. The
nationalisation in banking sector took place in 1969. The major objective of
nationalisation was to expand banking infrastructure to rural and unbanked
areas and make available low cost finance to common people.

Before 1969, the only public sector bank in India was SBI which was
nationalised under the SBI Act of 1955. The next phase of nationalisation
occurred in 1980 when seven more banks were nationalised with deposits of
more than 200 crores.

List of Public Sector Banks in India is as follows:

Allahabad Bank
Andhra Bank
Bank of Baroda
Bank of India
Bank of Maharashtra
Canara Bank
Central Bank of India
Corporation Bank
Dena Bank
Indian Bank
Indian Overseas Bank
Oriental Bank of Commerce
Punjab and Sind Bank
Punjab National Bank
State Bank of Bikaner & Jaipur
State Bank of Hyderabad
State Bank of India (SBI)
State Bank of Indore *

39
Chapter 3 Conceptual Framework

State Bank of Mysore

State Bank of Patiala
State Bank of Saurashtra *
State Bank of Travancore
Syndicate Bank
UCO Bank
Union Bank of India
United Bank of India
Vijaya Bank
IDBI Bank
* State bank of Saurashtra and Indore have been merged with SBI

3.2.1.2 Private Banks in India

All the banks founded in the pre-independence era were private banks which
were formed to cater to the banking needs of the elite people. After the first
phase of nationalisation, public sector banks assumed a dominant role in the
banking structure. Private sector banking in India got a boost in 1994 when RBI
as part of its policy of liberalization encouraged setting up of private banks.

Private Banks since then contributed to have played a major role in the
development of Indian banking industry. They have made banking more
efficient and customer friendly. This process has also brought the public
sector banks out of their complacency and forced them to become proactive
in their approach.

List of Private Sector Banks in India:-

Catholic Syrian Bank
City Union Bank
Dhanlaxmi Bank
Federal Bank
Jammu & Kashmir Bank

40
Chapter 3 Conceptual Framework

Karnataka Bank
Karur Vysya Bank
Lakshmi Vilas Bank
Nainital Bank
South Indian Bank
Tamilnad Mercantile Bank
Bank of Rajasthan merged with ICICI Bank in 2010
Development Credit Bank
Ratnakar Bank
HDFC Bank
ICICI Bank
Axis Bank
IndusInd Bank
ING Vysya Bank
Kotak Mahindra Bank
Yes Bank
3.2.1.3 Foreign Banks in India
Foreign banks have brought latest technology and innovative banking
practices to India. The Indian banking system has become more competitive
and efficient in the wake of these developments. The Government designed a
policy framework for expansion of foreign banks in India.

It has been done in two phases. During the first phase between March
2005 and March 2009, foreign banks may establish a presence by way of
setting up a wholly owned subsidiary (WOS) or conversion of existing
branches into a WOS. The second phase has commenced in April 2009
after due consultation with all the stake holders in the banking sector. The
review would examine issues concerning extension of national treatment to
WOS, dilution of stake and permitting mergers/acquisitions of any private
sector banks in India by a foreign bank5.

41
Chapter 3 Conceptual Framework

Major foreign banks in India are:

AB Bank Ltd

Abu Dhabi Commercial Bank

American Express Bank

Australia and New Zealand Bank

Bank Internasional Indonesia

Bank of America

Bank of Bahrain and Kuwait

Bank of Ceylon

Bank of Nova Scotia (Scotia Bank)

Bank of Tokyo Mitsubishi UFJ

Barclays Bank PLC

BNP Paribas

China trust Commercial Bank

Citibank.

Credit Suisse AG

DBS Bank

Deutsche Bank

FirstRand Bank

HSBC

JPMorgan Chase Bank

Krung Thai Bank

Mashreq Bank

42
Chapter 3 Conceptual Framework

Mizuho Corporate Bank

Royal Bank of Scotland

Shinhan Bank

Societe Generale

Sonali Bank

Standard Chartered Bank

State Bank of Mauritius

UBS

JSC VTB Bank

Woori Bank

3.3 BACKGROUND OF SELECTED BANKS

3.3.1 STATE BANK OF INDIA

3.3.1.1 History and Development

State bank of India is the biggest commercial bank in whole of Asia. It has
a unique place in the Indian money market, as it commands more than
one-fifth of India‘s banking resources6.

The origins of State Bank of India date back to 1806 when the Bank of
Calcutta (later called the Bank of Bengal) was established. In 1921, the
Bank of Bengal and two other Presidency banks (Bank of Madras and Bank
of Bombay) were amalgamated to form the Imperial Bank of India. In 1955,
the controlling interest in the Imperial Bank of India was acquired by the
Reserve Bank of India and the State Bank of India (SBI) came into
existence by an act of Parliament as successor to the Imperial Bank of
India7.

43
Chapter 3 Conceptual Framework

Associates of SBI
The Government of India passed the SBI (Subsidiary Banks) Act on
September 10th 1959, enabling the SBI to take over eight former state
associated banks, to function with the SBI, as its subsidiaries. This was done
to achieve the objectives of providing banking facilities to the neglected areas
and reorganization of princely states. The State Bank of Hyderabad was the
first to become the subsidiary of SBI. The State Bank of Bikaner and the State
Bank of Jaipur were merged and the amalgamated bank came to be known
as the State Bank of Bikaner and Jaipur. As a result, the number of
subsidiaries went down to seven from eight. These banks came to be known
as the associated banks of SBI. SBI and its associates were titled as the
―State Bank Group‖. The subsidiary banks, being autonomous ,continued to
maintain their individual identity and independence in their functioning while
the SBI is vested with the general power of control, supervision and direction.

The seven subsidiaries of the SBI along with their date of amalgamation are
presented in Table 3.1

Table: 3.1
Subsidiary Banks of the State Bank of India with Year of Amalgamation

S. NO. NAME OF THE BANK DATE OF AMALGAMATION

1. The Bank of Hyderabad 01-10-1959
2. The Bank of Indore 01-01-1960
3. The Bank of Bikaner and Jaipur 01-01-1960
4. The Travancore Bank 01-01-1960
5. The Bank of Mysore 01-03-1960
6. The Bank of Patiala 01-04-1960
7. The Bank of Saurashtra 01-05-1960

To create a "mega bank" and to streamline operations it was proposed to

merge all the associate banks into SBI. On 13th August 2008 the State Bank
of Saurashtra was merged with SBI and on 19th June 2009, the SBI board
approved the merger of State Bank of Indore, with itself. SBI holds 98.3% in
State Bank of Indore. (Individuals who held the shares prior to its takeover by
the government hold the balance of 1.7 %)8

44
Chapter 3 Conceptual Framework

The result of acquisition of State Bank of Indore to SBI is that such

consolidation has added 470 branches to SBI's existing network of branches.
Also, following the acquisition, SBI's total assets inched very close to the 10
trillion marks. The total assets of SBI and the State Bank of Indore stood at
9,981,190 million as of March 2009. The process of merging of State Bank of
Indore was completed by April 2010, and the SBI Indore branches started
functioning as SBI branches on 26 August 20109.

State Bank of India (SBI) is the largest banking and financial services
company in India by revenue, assets and market capitalisation. It has its
headquarters in Mumbai, as of March 2013, it has assets of Rs 2133158
crores and 14,816 branches and over 196 foreign offices in 36 countries
across the globe. Including the branches that belong to its associate banks,
SBI has 21,500 branches. SBI also has the following non-banking
subsidiaries:

SBI Capital Markets Ltd

SBI Funds Management Pvt Ltd

SBI Factors & Commercial Services Pvt Ltd

SBI Cards & Payments Services Pvt. Ltd. (SBICPSL)

SBI DFHI Ltd

SBI Life Insurance Co. Ltd.

SBI General Insurance

Today, State Bank of India (SBI) has spread its business across the globe
and has an extensive network of branches spanning all time zones. SBI's
International Banking Group delivers the full range of cross-border finance
solutions through its four wings - the Domestic division, the Foreign Offices
division, the Foreign Department and the International Services Division.

45
Chapter 3 Conceptual Framework

3.3.1.2 Mission, Vision and Value Statement of SBI

Taking into account the various environmental changes, the emergence of the
new stakeholders, the deregulated environment and the threats and
opportunities that are associated with it, the senior management of the bank
has formulated the broad Vision, Mission and Values statement of the bank as
under10:

VISION

My SBI.

My Customer first.

My SBI: First in customer satisfaction

MISSION

We will be prompt, polite and proactive with our customers.

We will speak the language of young India.

We will create products and services that help our customers achieve their
goals.

We will go beyond the call of duty to make our customers feel valued.

We will be of service even in the remotest part of our country.

We will offer excellence in services to those abroad as much as we do to

those in India.

We will imbibe state of the art technology to drive excellence.

VALUES

We will always be honest, transparent and ethical.

We will respect our customers and fellow associates.

We will be knowledge driven.

We will learn and we will share our learning.

We will never take the easy way out.

46
Chapter 3 Conceptual Framework

We will do everything we can to contribute to the community we work in.

We will nurture pride in India

Keeping in line with its Vision statement SBI uses the following Symbol and
slogan:

The circle in the symbol of the State Bank of India is not a key hole. The circle
depicts perfection and the small man the common man - being the Centre of
the bank's business.

Slogans: "PURE BANKING, NOTHING ELSE", "WITH YOU - ALL THE

WAY", "A BANK OF THE COMMON MAN", "THE BANKER TO EVERY
INDIAN", "THE NATION BANKS ON US".

Recent Awards and Recognitions

Best Domestic provider of FX services, ASIAMONEY Polls 2012.

Best Online Banking Award, Best Customer Initiative Award & Best Risk
Management Award (Runner Up) by IBA Banking Technology Awards 2010

The Bank of the year 2009, India (won the second year in a row) by The
Banker Magazine

Best Bank – Large and Most Socially Responsible Bank by the Business
Bank Awards 2009

Best Bank 2009 by Business India

The Most Trusted Brand 2009 by The Economic Times

Most Preferred Bank & Most preferred Home loan provider by CNBC

Visionaries of Financial Inclusion By FINO

Technology Bank of the Year by IBA Banking Technology Awards

SKOCH Award 2010 for Virtual corporation Category for its e-payment solution

The Brand Trust Report: 11th most trusted brand in India.11

47
Chapter 3 Conceptual Framework

3.3.2 PUNJAB NATIONAL BANK

3.3.2.1 History and Development
Punjab National Bank was registered on 19 May 1894 under the Indian
Companies Act with its office in Anarkali Bazaar Lahore. The founding board
was drawn from different parts of India professing different faiths and a
varied back-ground, the common objective was to provide a truly national
bank which would further the economic interest of the country. PNB's
founders included several leaders of the Swadeshi Movement such as Dyal
Singh Majithia,who was also the founder of Dyal singh college and The
tribune, and Lala Harkishan Lal, Lala Lalchand, Shri Kali Prosanna Roy, Shri
E.C. Jessawala, Shri Prabhu Dayal, Bakshi Jaishi Ram, and Lala Dholan
Dass12,13.Lala Lajpat Rai was actively associated with the management of
the Bank in its early years. PNB had the privilege of maintaining accounts of
many national leaders such as Mahatma Gandhi, Shri Jawahar Lal Nehru,
Shri Lal Bahadur Shastri, as well as the account of the famous Jalianwala
Bagh Committee.

Punjab National Bank (PNB) was opened for business on 12 th April, 1895
at Lahore. PNB was the first Indian bank to have been formed exclusively
with Indian capital. Punjab National Bank was nationalized in 1969 along
with 13 other banks. PNB is the third largest bank in India by assets and is
currently the second largest state-owned commercial bank in India ahead
of Bank of Baroda with over 6000 and 5 overseas branches and 2165 ultra
small branches. It serves over 82 million customers. Apart from having
banking subsidiaries in UK, Bhutan and Kazakhstan, PNB have branches
in Hong Kong, Dubai and Afghanistan and representative offices in Almaty,
Dubai, Oslo, and Shanghai and Sydney (Australia).

Punjab National Bank serves over 82 million customers and has one of the
largest branch network in India – 5697 domestic branches and many
extension counters spread all over the country.

48
Chapter 3 Conceptual Framework

PNB has its presence virtually at all the important centres of the country. It
offers a wide variety of banking services which include corporate and
personal banking, industrial finance, agricultural finance, financing of trade
and international banking. The clients of PNB include Indian conglomerates,
SMEs, export houses, NRIs and MNCs. Apart from offering banking
products, the bank has also ventured into bullion business; life and non-life
insurance; gold coins & asset management business. PNB has earned many
awards and accolades for excellence in services, Corporate Social
Responsibility (CSR) practices, transparency in governance, best use of
technology and good human resource management. PNB has more than
520 specialized branches that include micro finance branches, retail asset
branches, agricultural branches, small and medium enterprise branches,
international banking branches and asset recovery management branches.

Globally, ‗The Banker Magazine‘, London has ranked PNB at 170th position
amongst World‘s top 1000 Banks in 2013, up from 175th position in 2012.Forbes
Magazine has placed PNB at 668th place amongst 2000 global giants. PNB has
also been ranked at 26 amongst FE 500 India‘s finest Companies. The bank has
been focusing on expanding its operations outside India and has identified some
of the emerging economies which offer large business potential Like Bangladesh,
Canada, Maldives, Mozambique and Pakistan 14.

Punjab National Bank maintains banking relationships with over 200 leading
international banks all over the world. Besides, it has Rupee Drawing
Arrangements with 15 exchange companies in the Gulf and one in
Singapore. It is a member of the SWIFT and over 150 branches of the bank
are connected through its computer-based terminal at Mumbai. With its
state-of-art dealing rooms and well-trained dealers, the bank offers efficient
forex dealing operations in India.

The Bank has adopted the concept of "Any Time, Any Where Banking"
through the introduction of Centralized Banking Solution (CBS) over all its
branches. PNB also offers Internet Banking services in the country for

49
Chapter 3 Conceptual Framework

corporates as well as individuals. PNB provides Online Payment Facility for

railway reservation through IRCTC Payment Gateway Project and Online
Utility Bill Payment Services which allows Internet banking account holders
to pay their telephone, mobile, electricity, insurance and other bills anytime
from anywhere from their IT enabled devices.

3.3.2.2 Mission and Vision of PNB15

PNB‘s Corporate Vision is ―To be a Leading Global Bank with Pan India
Footprints and become a Household brand in the Indo- Gangetic Plains
providing entire range of Financial products and services under one roof‖.

―To Promote Fair banking practices by maintaining transparency in various

products and services offered to make banking an enriching experience‖

PNB's Mission is "To provide excellent professional services and improve its
position as a leader in the field of financial and related services ;build and
maintain the team of motivated and committed workforce with high work
ethos; use latest technology aimed at customer satisfaction and act as an
effective catalyst for socio-economic development‖

Symbol and slogan

Slogan: "Banking for the unbanked"

From its modest beginning, the bank has grown in size and stature to become
a front-line banking institution in India at present.

A professionally managed bank with a successful track record of over 119

years.

One of the largest branch networks in India - 5697 branches and more than
447 Extension Counters spread throughout the country.

50
Chapter 3 Conceptual Framework

Strategic business area covers the large Indo-Gangetic belt and the
metropolitan centres.

Asia‘s Best CSR Practices Awards,2013

Golden Peacock Business Excellence Award,2013

IDBRT Banking Technology Excellence Award ,2012-13

Ranked as 323rd biggest bank in the world by Bankers Almanac

(January 2006), London.

Punjab National Bank was ranked #26 in the Fortune India 500 ranking of
2011.

Punjab National Bank was ranked #1243 in the Forbes Global 2000

Punjab National Bank bagged Golden Peacock National Training Award

2011.

PNB awarded Overall Best Corporate Social Responsibility Award, 2012.

PNB receives Best Bank Award, 2011.

CSR Excellence Award 2010 by ASSOCHAM

Strong correspondent banking relationships with more than 217 international

banks of the world.

More than 50 renowned international banks maintain their Rupee

Accounts with PNB.

Well-equipped dealing rooms; 20 different foreign currency accounts are

maintained at major centres all over the globe.

Rupee drawing arrangements with various Exchange Houses ,to name a few-
M/s UAE Exchange Centre, UAE, M/s Al Fardan Exchange Co. Doha, Qatar,
M/s Bahrain Exchange Co, Kuwait, M/s Bahrain Finance Co, Bahrain, Al
Rostamani Exchange Co. Dubai, UAE.

51
Chapter 3 Conceptual Framework

3.3.3 CENTRAL BANK OF INDIA

3.3.3.1 History and Development16
Central Bank of India was established in 1911 by Sir Sorabji
Pochkhanawala. It was the first Indian commercial bank, which was wholly
owned and managed by Indians. In 1969, Central Bank of India was
nationalized along with 13 other banks.

The establishment of the Bank was the ultimate realisation of the dream of Sir
Sorabji Pochkhanawala, founder of the Bank. Sir Pherozeshah Mehta was the
first Chairman of a truly 'Swadeshi Bank'. In fact, such was the extent of pride
felt by Sir Sorabji Pochkhanawala that he proclaimed Central Bank as the
'property of the nation and the country's asset'. He also added that 'Central
Bank lives on people's faith and regards itself as the people's own bank'.

During the past 102 years of history the Bank has weathered many storms
and faced many challenges. The Bank has successfully transformed every
threat into business opportunity and excelled over its peers in the Banking
industry.

A number of innovative and unique banking activities have been launched by

Central Bank of India and a brief mention of some of its pioneering services
are as under:

1921: Introduction to the Home Savings Safe Deposit Scheme to build

saving/thrift habits in all sections of the society.

1924: An Exclusive Ladies Department to cater to the Bank's women

clientele.

1926: Safe Deposit Locker facility and Rupee Travellers' Cheques.

1929: Setting up of the Executor and Trustee Department.

1932: Deposit Insurance Benefit Scheme.

1962: Recurring Deposit Scheme

52
Chapter 3 Conceptual Framework

Subsequently, even after the nationalisation of the Bank in the year 1969,
Central Bank continued to introduce a number of innovative banking services
as under:

1976: The Merchant Banking Cell was established.

1980: Central card, the credit card of the Bank was introduced.

1986: 'Platinum Jubilee Money Back Deposit Scheme' was launched.

1989: The housing subsidiary Cent Bank Home Finance Ltd. was started
with its headquarters at Bhopal in Madhya Pradesh.

1994: Quick Cheques Collection Service (QCC) & Express Service was
set up to enable speedy collection of outstation Cheques.

CBI also has the following non-banking subsidiaries:

Centbank Financial Services Limited –incorporated in the year 1929.it is
being created to provide investment banking services in the areas of
corporate finance, advisory and capital markets and trusteeship services.

Centbank Home Finance Limited-incorporated in the year 1991 with the

objective of promoting housing finance activities. The Company is having
12 branches all over India

Further in line with the guidelines from Reserve Bank of India as also the
Government of India, Central Bank has been playing an increasingly active
role in promoting the key thrust areas of agriculture, small scale industries
as also medium and large industries. The Bank has also introduced a
number of Self Employment Schemes to promote employment among the
educated youth.

Among the Public Sector Banks, Central Bank of India can be truly
described as an All India Bank, due to distribution of its large network in 27
out of 29 States as also in 3 out of 7 Union Territories in India. Central Bank
of India holds a very prominent place among the Public Sector Banks on
account of its network of 4336 branches, Nine Asset Recovery Branches
(ARB), 21 Retail Asset Branches (RAB) and 26 extension counters at
various centres throughout the country. As on 31 March 2013, the bank's

53
Chapter 3 Conceptual Framework

reserves and surplus stood at Rs. 26513 crores and its total business as at
the end of the fiscal amounted to Rs. 402272 crores.

In view of its large network of branches as also number of savings and other
innovative services offered, the total customer base of the Bank at over 25
million account holders is one of the largest in the banking industry.

Customers' confidence in Central Bank of India's wide ranging services can

very well be judged from the list of major corporate clients such as ICICI, IDBI,
UTI, LIC, HDFC and almost all major corporate houses in the country.

3.3.3.2 Vision and Mission of CBI17

CBI's Vision is "To emerge as a strong, vibrant and pro-active Bank/Financial
Super Market and to positively contribute to the emerging needs of the economy
through consistent harmonization of human, financial and technological
resources and effective risk control systems‖.

CBI's Mission is to;

To transform the customer banking experience into a fruitful and enjoyable

one.

To leverage technology for efficient and effective delivery of all banking

services.

To have bouquet of product and services tailor-made to meet customers

aspirations.

The pan-India spread of branches across all the state of the country will be
utilized to further the socio economic objective of the Government of India
with emphasis on Financial Inclusion.

Symbol and Slogan

Slogan: Central to you since 1911

54
Chapter 3 Conceptual Framework

Major Awards and Recognitions

Central Bank of India received ―Financial Advisor Award – Best PSU Bank‖,
National Category for the year 2012-13, by CNBC TV 18, UTI MF.

Bank has been awarded with two prestigious Skoch Gold Awards during
2012-13

i. Innovative Urban Financial Inclusion

ii. Reaching Last Mile

―Golden Peacock HR Excellence Award-2012‖ for best HR practices

Central Bank of India has been awarded 2010 IMM Award for Excellence
as Eminent Organization at the 37th World Marketing Congress
organized at India Habitat Centre at-Delhi on Feb, 2010

Central Bank of India received the Golden Peacock Award for innovative
product/service for its retail product Cent Sahayog launched in October 2011.

Central Bank of India has won the prestigious 'GOLDEN PEACOCK HR

EXCELLENCE AWARD' for the year 2012 instituted by Institute of
Directors (IOD), a non-profit professional Organization. (This award has
been bestowed on the Bank for achieving overall effectiveness in its HR
and People Management practices, thereby contributing to the needs of
the businesses, profession, employees, Industry and the Nation).

3.4 TREND ANALYSIS

3.4.1 State Bank of India

One of the main objectives of the State Bank of India as set out in the
preamble to the act was ―extension of banking facility on a large scale, more
particularly in the rural and semi-urban areas‖. To achieve this objective, the
SBI launched branch expansion program and opened nearly 400 branches
during the first five years of its inception.

55
Chapter 3 Conceptual Framework

Table: 3.2
Significant Growth Variables of SBI

Year Number Number of Interest Non-Interest Interest Deposits

of Staff Branches Income Income paid

1991-92 224110 8627 9536 1396 6089 60192

1992-93 226209 8736 9697 1459 6727 66317

1993-94 230086 8812 9180 1567 6264 76406

1994-95 230086 8839 10652 2023 6688 85122

1995-96 233000 8885 12959 2757 8226 96395

1996-97 236204 8888 14950 2643 9591 110701

1997-98 239649 8925 15879 2820 10473 131091

1998-99 237504 8982 19107 3285 13044 169042

1999-00 233433 9043 22201 3569 15273 196821

2000-01 214845 9078 26139 3883 17756 242828

2001-02 209462 9085 29810 4174 20729 270560

2002-03 208998 9039 31087.46 5740 21109.46 296123

2003-04 207039 9087 30460.17 7612 19274.17 318619

2004-05 205515 9156 32428.38 7120 18483.38 367048

2005-06 198774 9143 35794.93 7389 20159.29 380046.1

2006-07 185388 9270 37242.33 6765 22184.13 435521.1

2007-08 179205 10183 48950.31 8695 31929.08 537404

2008-09 205896 11472 63788.43 12691 42915.29 742073

2009-10 200299 12437 70993.44 14968 47322 804116

2010-11 222933 13435 81394 15825 48868 933933

2011-12 215481 13862 106521 14351 63230 1043647

Source: Compiled from Performance Highlights of Public Sector Banks, IBA, Various Issues.
Statistical Tables relating to Banks in India, Various Issues RBI

It becomes evident from Table 3.2 that the number of branches as well as
resources mobilization of SBI exhibit a rising trend during the period of

56
Chapter 3 Conceptual Framework

study. The number of branches of SBI increased from 8627 in 1991 to

13862 in 2011-12.During the same period ,the resources mobilized by SBI
spurted from Rs.60192 crore to Rs. 1043647 crores. Moreover, the
resource mobilization of SBI increased at a much faster rate as compared
to the number of branches. As a result, the resource mobilization per
branch of SBI increased from Rs 6.98 crore per branch in 1991-92 to 75.29
crore in 2011-12. This shows the good performance of SBI during the
period 1991-92 to 2011-12 with regard to resources mobilization in relation
to branch expansion. Interest income and Non-interest income have also
shown a positive trend over the period of study. Interest earned on
advances has increased substantially in the post-reforms period .The total
income of a bank consists of interest income and non-interest income.
Non-interest income is earned in the form of commission, exchange and
brokerages and income from profit on sale of investments and non-banking
assets. A decline in the interest income in later years is due to the
deregulation of interest rates which forced the banks to reduce their
interest rates to be in the market. An upward trend in non-interest income
shows that SBI is increasingly focusing on non- interest income. The Net
interest income (spread) of SBI has increased over the period of study
which indicates efficiency of SBI in mobilisation of resources. The data on
interest paid exhibits an increasing trend as higher amount of deposits
have been generated by State Bank of India over the years.

3.4.2 Punjab National Bank

It is evident from Table 3.3 that the number of branches as well as resources
mobilization of PNB exhibits an increasing trend during the period of study.
The number of branches of PNB increased from 3054 in 1991-92 to 5340 in
2011-12. During this period, the resource mobilisation by PNB spurted from
Rs.16231 crore to Rs.379588 crores. Moreover, the resource mobilization of
the bank increased much faster than its number of branches.

57
Chapter 3 Conceptual Framework

Table: 3.3
Significant Growth variables of PNB

Number Number of Interest Non-Interest Interest

Year Deposits
of Staff Branches Income Income paid

1991-92 59613 3054 1939 94 1280 16231

1992-93 59976 3091 2140 169 1536 18241

1993-94 72723 3676 2267 345 1585 21931

1994-95 72154 3700 2555 345 1741 24708

1995-96 71263 3734 3168 365 2089 27123

1996-97 67616 3765 3654 469 2439 30806

1997-98 65705 3793 3992 637 2699 35174

1998-99 65705 3822 4448 545 2795 40777

1999-00 64733 3853 5154 728 3538 47483

2000-01 58309 3879 5863 778 3825 56131

2001-02 57859 3857 6648 978 4353 64123

2002-03 58981 4037 7485.29 1250 4361.29 75814

2003-04 58839 4022 7780 1867 4155 87916

2004-05 58329 4043 8460 1676 4453 103167

2005-06 58047 4028 9584.15 1231 4917.39 119684.9

2006-07 57316 4039 11236.14 1730 6022.91 139859.7

2007-08 56025 4178 14265.16 1998 8731 166457

2008-09 54780 4327 19325.86 3065 12295 209760

2009-10 53417 4713 21466.89 3610 12944 249330

2010-11 53114 5036 26986 3613 15179 312899

2011-12 57997 5340 36428 4203 23014 379588

Source: Compiled from Performance Highlights of Public Sector Banks, IBA, Various Issues
Statistical Tables relating to Banks in India, Various Issues, RBI

As a result, the resource mobilization per branch of PNB increased from Rs

5.3 crore per branch in 1991-92 to 71.08 crore in 2011-12, this indicates good
performance of PNB during the selected period, with regard to resources
mobilisation in relation to branch expansion. Interest income and Non-interest

58
Chapter 3 Conceptual Framework

income has shown positive trend over the entire period of study. Interest
earned on advances has also shown substantial increase in the post-reform
period. A decline in the interest income in later years is due to the
deregulation of interest rates which forced the banks to reduce their interest
rates in the market. An upward trend in non-interest income shows that PNB
is focusing more on non- interest income apart from interest income. The data
on Net interest income (spread) of PNB shows an increasing trend over the
period of study which can be attributed to efficiency of PNB in mobilisation of
resources. The interest paid depicts an increasing trend over the period of
study which may be due to higher amount of deposits generated by Punjab
National Bank of India.

3.4.3 Central Bank of India

It is evident from Table 3.4 that the number of branches as well as resources
mobilization of CBI shows a rising trend during the period of study .The number
of branches of CBI increased from 3007 in 1991-92 to 4016 in 2011-12.

Table: 3.4
Significant Growth variables of CBI

Number Number of Interest Non-Interest Interest

Year Deposits
of Staff Branches Income Income paid

1991-92 51642 3007 1438 145 1035 13029

1992-93 51838 3042 1511 142 1222 13825

1993-94 54595 3062 1443 151 1179 15969

1994-95 51546 3077 1669 222 1161 17655

1995-96 51156 3084 2153 270 1423 19751

1996-97 50372 3087 2531 305 1695 23051

1997-98 48933 3088 2842 342 1892 26373

1998-99 48933 3093 3282 349 2233 30649

1999-00 48260 3102 3748 437 2522 35872

2000-01 47474 3109 4265 469 2816 41518

2001-02 39631 3115 4658 601 3123 47137

59
Chapter 3 Conceptual Framework

Number Number of Interest Non-Interest Interest

Year Deposits
of Staff Branches Income Income paid

2002-03 39330 3117 5072.57 554 3175.57 51165

2003-04 38933 3130 5063.53 517 2941.53 55909

2004-05 38303 3146 5205 565 2830 60752

2005-06 37241 3143 5386.07 571 3006 66482.65

2006-07 39055 3184 6234.21 476 3759.79 82776.28

2007-08 37488 3324 7883.79 791 5772 110320

2008-09 35543 3533 10455.47 1070 8227 131272

2009-10 32140 3585 12064.29 1735 9519 162107

2010-11 34015 3740 15221 1265 9895 179356

2011-12 35901 4016 19149 1395 13981 196173

Source: Compiled from Performance Highlights of Public Sector Banks, IBA, Various Issues
Statistical Tables relating to Banks in India, Various Issues, RBI

During this period, the resources mobilized by CBI spurted from Rs.13029
crore to Rs. 196173 crores. Moreover, the resource mobilization of CBI
increased at a much faster rate as compared to its number of branches. As
a result, the resource mobilization per branch of CBI increased from Rs 4.3
crore per branch in 1991-92 to 48.85 crores in 2011-12. This indicates
good performance of CBI during the period 1991-92 to 2011-12 with regard
to resources mobilisation in relation to branch expansion. Interest income
and Non-interest income have shown a positive trend over the entire period
of study. Interest earned on advances increased substantially during this
period. A decline in the interest income in later years is due to the
deregulation of interest rates which forced the banks to reduce their
interest rates to be in the market. An upward trend in non-interest income
shows that CBI shifted focus to non- interest income apart from interest
income. The data indicates that Net interest income (spread) of CBI
increased over the period of study which shows the efficiency of the bank
in mobilising the resources. Interest paid shows an increasing trend over
this period which can be attributed to higher amount of deposits being
generated by Central Bank of India.

60
Chapter 3 Conceptual Framework

3.5 REFORMS IN THE BANKING SECTOR

India faced a grave macroeconomic crisis in 1991.This paved the way for
extensive financial sector reforms which were aimed at the improvement in
the overall monetary policy framework of the economy. It propagated
strengthening of banks with a special focus on enhancing profitability and
integration of the domestic financial system with the global economy. Before
liberalization, the banking sector was plagued with vices like copious
directed investments, excessive statutory preemptions, lax accounting and
prudential norms, inadequate capital base, low operational efficiency,
unsatisfactory customer service, low productivity and declining profitability.
To deal with this crisis, the government declared a host of structural reforms,
and financial sector reforms to induce greater efficiency into the banking
sector. The reforms included progressive reduction in CRR and SLR rates,
deregulation of interest rates, and stronger prudential norms. In the period
since liberalization, significant changes in the structure and character of the
Indian banking sector have taken place. The decade after the year 1992 will
always be regarded as the phase of intense reforms in Indian Banking. This
phase began with drastic changes with a view to shift from regulated
banking towards market-oriented banking. The most observable change
being the emergence of new private sector banks as well as the opening up
of the banking sector for foreign banks.

The reforms in Indian banking were initiated by the Narasimham Committee,

appointed by the RBI under the chairmanship of M. Narasimham, the former
Governor of RBI. The committee evaluated the aspects relating to the
structure, organization, functions and procedures of the financial system as a
whole and Banking sector in particular and suggested remedial measures.
The Committee submitted its first report in November 1991 which included
norms for income recognition, classification and provisioning of assets
besides capital adequacy. These reforms were introduced in Indian banking in
a phased manner. The first phase of reforms was made in 1991 and the
second phase of reforms was made in 1998.

61
Chapter 3 Conceptual Framework

During the first phase numerous of reform initiatives were initiated to minimize
the distortions affecting the efficient and profitable functioning of banks. These
reforms metamorphosed the Indian banking industry and instilled features like
openness, competition, prudential and supervisory discipline. By the year
1997, RBI reported that the reform process had started to fructify. The second
report submitted on 23rd April, 1998, set the pace for the second generation
of banking sector reforms. The Narasimham Committee observed that the
reforms had slackened the deterioration in the system; there existed several
pitfalls which marred the progress of the banking sector. These included
unsatisfactory customer service, insufficient technological up gradation, lax in
housekeeping services in terms of reconciliation of entries and balancing of
books. The recommendations of the Narasimham Committee report focused
on the following aspects:

1. Improving the financial viability of the banks;

2. Improving the macroeconomic policy framework for banks;

3. Increasing their autonomy from government directions;

4. Allowing a greater entry to the private sector in banking;

5. Liberalizing the capital markets;

6. Improvement in the financial health and competitive position of the banks;

7. Furthering operational flexibility and competition among the financial

institutions

8. Increase Capital Adequacy to match enhanced banking risk

3.5.1 Overview of Reforms

Indian banking has come a long way since India embarked on the reforms
path since the liberalization of economy. The reforms have brought about
tremendous changes in the banking sector. Indian banks have become
technology-savvy as their counterparts in developed countries. On the
networking front, branch banking coupled with ATM networks and online fund
transfers have evolved to place the banking services on a new trajectory. The

62
Chapter 3 Conceptual Framework

competitive forces have compelled the evolution of Internet and mobile

banking and banks now attract and retain customers to a greater extent.

A new range of innovative products, which could not be imagined a couple of

years back, have become a reality. Even simple products like Saving Account,
Personal Loans and Home Loans have been innovated to give them a boost
and to attain customer satisfaction. The major banking and financial reform
measures are outlined below:

Customer Service
Banking Ombudsman Scheme 1995 was introduced in June 1995 which was
duly revised by RBI and came into force from 1st January 2006. The new
scheme has a wider scope and provides for online submission of complaints.
The new scheme additionally advocated the institution of an appellate
authority to create a provision for appeal against an award passed by
Ombudsman both by the bank as well as the complainant. Banks are advised
to frame their KYC policies with the approvals of their Boards by incorporating
the following four key elements (i) Customer Acceptance Policy, (ii) Customer
Identification Procedures, (iii) Monitoring of Transaction and (iv) Risk
Management as required by the Prevention of Money Laundering Act.

New Private Banks

Before the introduction of reforms, there was little effective competition in the
Indian banking sector. The lack of competitive environment can be attributed
to the detailed prescriptions of the RBI concerning (for example the setting of
interest rates) left the banks with limited degrees of freedom to differentiate
themselves in the marketplace and strict entry restrictions for new banks,
which effectively shielded the incumbents from competition. After the lowering
of entry barriers and deregulation of the banking sector, seven new private
banks entered the market between 1994 and 2000. In addition, over 20
foreign banks have commenced operations in India since 1994. By March
2004, the new private sector banks and the foreign banks had a combined
share of almost 20% of total assets.

63
Chapter 3 Conceptual Framework

New generation private sector banks have brought an era of bank automation,
improved technology, specialized skills, better risk management practices,
greater portfolio diversification and the culture of remunerative banking business.

Deregulation Of Interest Rates

The financial sector reforms brought about the deregulation of the complex
structure of deposit and lending interest rates. The administered interest rate
structure had become inefficient. It therefore, became imperative to revamp the
interest rate structure. Deregulation of interest rates was aimed at strengthening
the competitive forces by improvement of allocative efficiency of resources and
strengthening of the transmission of monetary policy. Deregulation of the interest
rate on savings deposit has made it flexible along with other interest rates in
direct relation to the market conditions. Since saving bank deposits in rural, semi-
urban and urban areas are held largely for the purpose of saving, deregulation of
interest rate is aimed at enhancement of its attractiveness. Banks are now free to
determine the interest rates on their savings accounts. Before deregulation,
banks were compulsorily required to allow a flat four percent per annum on
saving account balance. Interest rate deregulation has resulted in the integration
of interest rates across the spectrum. The prime lending rate (PLR) of each bank
is now synchronized with the bank rate.

Phased Reduction of Statutory Pre-Emptions

The financial sector liberalization brought about a reduction in the statutory limits
on the share of banks‘ assets that they are required to hold in cash, liquid
instruments and government securities through the CRR and SLR regulations. In
1991,the statutory preemptions, on an incremental basis had reached a peak
level of 63.5%, the balance 36.5% was covered by pre-emptions under the
priority sector to the extent of 40% (export credit, food credit etc.) which lead to
the lack of availability of credit for productive sectors.

Government‘s decision to reduce the fiscal deficit to a level consistent with

macro-economic stability prompted RBI to reduce Cash reserve ratio (CRR) and
Statutory Liquidity Ratio (SLR) in a phased manner. The CRR was reduced from

64
Chapter 3 Conceptual Framework

a peak level of 15 percent in the first half of 1990s to a low of 5 percent with
progress of liberalization. In view of this decline, public and private banks cut
down on their actual cash holdings as a percentage of assets. The SLR was
brought down well, with the main reductions coming between 1992 and 1998.
SLR was progressively reduced from 38.5 percent to 25 percent, the level at
which it remained until November 2008. The Reserve Bank of India (RBI) on
24,Jan 2012 cut the cash reserve ratio(CRR) by 50 basis points from 6 per cent
to 5.5 per cent, which released Rs.32,000 crore into the financial system. CRR
and SLR ratios reached a level of 4.50% and 24% in 2012.

Table: 3.5
Prevailing CRR, SLR and Bank Rate
Interest Rate Deregulation (in percent)
Year Bank Rate CRR SLR
Effective Rate Effective Rate Effective Rate
1991-92 12 15 38.5
1992-93 12 15 38.5,38.25,38,37.75
1993-94 12 14.50,14 37.5,37.25,34.75
1994-95 12 14.5, 14.75,15 34.25,33.75,31.5
1995-96 12 14.5,14 31.5
1996-97 12 13.5,13,12,11.5,11,10.5,10 31.5
1997-98 11,10,9,11,10.5 9.75,9.5,10,10.5,10.25 25
1998-99 10,9,8 10,11,10.5 25
1999-00 8 10,9.5,9 25
2000-01 7,8,7.5,7 8.5,8,8.25,8.5,8.25,8 25
2001-02 6.5 7.5,5.75,5.5 25
2002-03 6.25 5,4.75 25
2003-04 6 4.5 25
2004-05 6 4.75,5 25
2005-06 6 5 25
2006-07 6 5.25,5.5,5.75,6.0 25
2007-08 6 6.25,6.5,7,7.5 25
2008-09 6 7.75,8,8.25,8.5,8.75,9,6.50,6,5.50,5 24
2009-10 6 5.50,5.75,6.0 25
2010-11 6 6,5.5,5.75 24
2011 in 12 6,9.50,9 6,5.5,4.75,4.50 23

65
Chapter 3 Conceptual Framework

The RBI has effectively used the instrument of CRR to deal with liquidity
management in the economy taking into account the liquidity requirements,
inflationary trends and other macro-economic developments. The reduction of
CRR and SLR has increased the flexibility for banks to determine the volume
as well as terms of lending.

Directed Credit
Directed credit policies have always been a significant part of the Indian
financial sector reforms. Under this policy commercial banks are required to
provide 40 percent of their commercial loans to priority sectors which comprise
agriculture, small scale industries and other developing sectors. The governing
considerations behind PSL were economic as well as developmental. The
objective of aligning credit flows with Plan priorities was done to ensure growth
in employment and equitable distribution of credit especially for the small and
vulnerable groups of population. According to the RBI mandate, domestic
banks must lend at least 40 per cent of their total loans to the priority sector.
For foreign banks, this target has been set at 32 per cent of net bank credit.

The PSL norms were aimed at compensating for inadequacy of budgetary

resources to finance such activities by the government. Therefore, PSL also
represents a form of quasi-fiscal operations of the government. The PSL can
be traced back to the era of social control of banks in 1968 with amendments
in banking laws, which culminated in to the crucial political decision of
nationalisation of major commercial banks by July 1969.

The Narasimham Committee 1991 recommended reduction of directed credit

to 10 percent from 40 percent, but the policy of 40 percent of loans to priority
sector has not been abolished by the government. A similar approach for
redefining the sub-targets was made by the recent Nair committee, stressing
the need for flow of credit to small and marginal farmers and micro enterprises
which was also not heeded by the RBI or the government.

In July 2012, RBI held discussions with CMD/CEOs of certain banks and
officers in-charge of PSL regarding revision of priority sector lending norms. In

66
Chapter 3 Conceptual Framework

Oct, 2012 RBI eased the norms for priority sector lending by banks and also
expanded the scope for distributing loans for agriculture and weaker sections
of the society. These revised guidelines are based on the MV Nair committee
recommendations to recast priority sector lending. RBI has set the overall
target for priority sector lending at 40 per cent as suggested by the Nair
Committee and the targets under both direct and indirect agriculture at 13.5
per cent and 4.5 per cent respectively. RBI has refocused the direct
agricultural lending to individuals, self-help groups and joint liability groups
directly through banks. This will increase the list of activities under the priority
sector credit and also improve the quality of the portfolio of banks.

RBI has also allowed banks to include loans to corporates, including farmers'
producer companies of individual farmers, partnership firms and co-operatives
of farmers directly engaged in agriculture and allied activities-dairy, fishery,
animal husbandry, poultry, bee-keeping and sericulture (up to cocoon stage)-
up to an aggregate limit of Rs.2 crore per borrower, to be considered as a
priority sector lending.

Further short-term loans for raising crops, which include traditional/non-

traditional plantations, horticulture and allied activities, would be included in
the priority sector. Loans for pre-harvest and post-harvest activities, spraying,
weeding, harvesting, grading and sorting will be included in the priority sector.
Now priority sector lending would also include export credit for exporting own
farm produce. In the housing sector, bank loans to any governmental agency
for construction of dwelling units or for slum clearance and rehabilitation of
slum dwellers (subject to a ceiling of Rs.10 lakh per dwelling unit) would be
considered as priority sector lending18. As per RBI, advances of up to Rs 25
lakh in cities with population of over 10 lakh, and Rs 15 lakh in other towns,
will be treated as priority sector lending. Earlier, all loans up to Rs 25 lakh for
purchase and construction of dwelling units constituted priority sector lending.
The changes aim to make banks more competitive against the non-banking
finance companies and housing finance companies. Also, overdrafts up to Rs
50,000 in no-frills account, loans to individuals (other than farmers) up to Rs

67
Chapter 3 Conceptual Framework

50,000 to prepay their debt to non-institutional lenders, and advances

provided to state - sponsored organisations for scheduled castes and
scheduled tribes also constitute priority sector lending.

While issuing the revised guidelines on priority sector lending targets, the
Reserve Bank requires foreign banks with a branch network of 20 and above
to abide by the priority sector lending target, which has been retained at 40
per cent of their total advances19. Foreign banks with more than 20 branches
will be brought at par with domestic banks for the purpose of priority sector
lending in a phased manner over a maximum period of 5 years starting April
1, 2013. RBI also requires the banks to ensure that loans extended under the
priority sector are for approved purposes and the end use must continuously
be monitored by them.

Prudential Norms
Capital Adequacy has become one of the major barometer of the financial
health of a banking entity. The Capital to Risk Weighted Asset Ratio (CRAR),
(also known as Capital Adequacy Ratio (CAR) system) was introduced by RBI
in April, 1992 on the recommendation of the Narasimham Committee (1992),
it was to be achieved in a phased manner by Scheduled Commercial banks
operating in India.

CRAR is the measure of the amount of a bank's capital expressed as a

percentage of its risk weighted credit exposures. The ratio determines the
capacity of the bank to meet the time liabilities and other risk such as credit
risk and operational risk. A bank's capital is the cushion for potential losses,
which protect the bank's depositors or other lenders. Banking regulators in
most countries define and monitor CRAR to protect depositors, thereby
maintaining confidence in the banking system20.

As per the guidelines issued by RBI, foreign banks were required to

maintain a minimum Capital to Risk Weighted assets (CRAR) norm of 8%
in conformity with international standards by the end of March 1993; Indian
banks which had a foreign presence were given time till 31st March

68
Chapter 3 Conceptual Framework

1994(subsequently extended to March 31, 1995) to achieve the norm of 8

percent CRAR on an ongoing basis up to the year ending 31-03-1999.
While banks having only domestic operations had to implement CRAR by
the end of March 1996. With effect from the year ending 31-03-2000, banks
will be required to maintain a minimum CRAR of 9 percent on an on going
basis. With the adoption of CRAR norms an improvement has been
observed in the capital position of commercial banks such that almost all
the banks in India has reached the Capital Adequacy Ratio (CAR) above
the statutory level of 9% .

Basel II norms were implemented in India with effect from March 31, 2008
for foreign banks and Indian banks having operational presence outside
India. All other scheduled commercial banks (except Local Area Banks and
RRBs) were required to adhere to Basel II guidelines by March 31, 2009.
The minimum capital to risk-weighted asset ratio (CRAR) in India is placed
at 9%, which is one percentage point above the Basel II requirement for
public sector banks. All the banks have achieved their Capital to Risk
Weighted Assets Ratio (CRAR) above the stipulated requirement of Basel
guidelines (8%) and RBI guidelines (9%) 21. Basel II is based on 3 pillars
that allow banks and supervisors to evaluate properly the various risks that
are being faced by the banks. These three pillars are:

(i) Minimum capital requirements: -The first pillar of Basel II deals with
maintenance of regulatory capital, i.e. minimum capital required by banks
as per their risk profile. As in Basel I, Basel II also has same provisions
relating to regulatory capital requirement i.e. 8 percent Capital Adequacy
Ratio (CAR) but Indian banks are required to maintain a CRAR of 9 % as
prescribed by RBI.CAR under Basel II is the ratio of regulatory capital to
risk weighted assets which signifies the amount of regulatory capital to be
maintained by banks to guard against various risks inherent in banking
system.

69
Chapter 3 Conceptual Framework

Basel II includes three risks now, operational risk + credit risk + market risk.
Keeping in view RBI's goal to have consistency and harmony with international
standards, it has been decided that all commercial banks in India shall adopt
Standardized Approach (SA) for credit risk and Basic Indicator Approach (BIA)
for operational risk. Banks are required to apply the Standardized Duration
Approach (SDA) for computing capital requirement for market risks.

Under the SDA, the rating assigned by the eligible external credit rating
agencies (as specified by RBI) will largely support the measure of credit risk.
Banks may rely upon the ratings assigned by these rating agencies for
assigning risk weights for capital adequacy.

RBI has identified the following domestic credit rating agencies for the purpose of
risk weighting the banks claims for capital adequacy purposes: a) Credit Analysis
and Research Ltd. b) CRISIL Ltd. c) FITCH Ltd. and d) ICRA Ltd. Banks may
use the ratings of the following international credit rating agencies for the
purposes of risk weighting their claims for capital adequacy purposes a) Fitch; b)
Moody's; and c) Standard & Poor's. Banks are required to choose the specified
credit rating agencies and their ratings consistently for each type of claim, that is
risk weighting as well as risk management. They must disclose the names of the
credit rating agencies that are used for the risk weighting of their assets, the risk
weights associated with the particular rating grades as determined by RBI for
each eligible credit rating agency as well as the aggregated risk weighted assets.

(ii) Supervisory review of an institution's capital adequacy and internal

assessment process: - Pillar 2 requirements give supervisors, i.e RBI, the
discretion to increase regulatory capital requirements. The RBI may administer
and enforce minimum capital requirements that can even be higher than those
specified as per Basel II. This can be done based on the risk management skills
of the bank. RBI will consider prescribing a higher level of minimum capital ratio
as per the Pillar 2 framework on the basis of their respective risk profiles and risk
management systems. Further, as per the Pillar 2 requirements, banks must
operate at a level well above the minimum requirement.

70
Chapter 3 Conceptual Framework

(iii) Market discipline through effective disclosure to encourage safe and

sound banking practices- Pillar III relates to periodical disclosures to
regulators, board of the bank and market about various parameters which
indicate the risk profile of the bank. It introduces substantial new public
disclosure requirements so as to enable the interested parties to make
informed decision about the bank.

While the Basel I framework focused on the minimum capital requirements for
banks and credit risk, the Basel II framework, has expanded this approach to
include, a new, risk-adequate calculation of capital requirements which is
inclusive of operational risk in addition to market and credit risk. Basel I
prescribed that lenders must calculate a minimum level of capital based on a
single risk weight for each of the limited number of asset classes, however
under Basel II, the capital requirements are more risk sensitive.

Basel II capital adequacy rules are based on a ‗menu‘ approach that allows
for difference in approach with respect to the nature of banks and the nature
of markets in which they operate. Thus, Basel II norms have helped to usher
in a transition from capital adequacy towards capital efficiency. This implies
that banks now adopt a more dynamic use of capital, in which capital will flow
quickly to its most efficient use. These elements of Basel II take the regulatory
framework closer to the business models employed in several large banks.

Table: 3.6
Difference between BASEL I and BASEL II

BASEL I BASEL II

It concentrates on a single risk component It includes Credit-Risk, Market-Risk and

i.e. Credit Risk Operational Risk

It uses arbitrary risk categories and risk Risk weights are linked to external ratings
weights

BASEL I accord mainly focussed on capital Basel II adds supervision and market
requirement of banks discipline to these capital requirements
through the "Three Pillar" concept.
The first pillar is about capital requirement.
The second pillar is about regulation and
supervision. The third pillar describes
market discipline.

71
Chapter 3 Conceptual Framework

The ideology of Basel II norms is to help Indian banks comply with

international standards. These international standards can help protect the
international financial system from problems that may arise from the collapse
of a major bank.

The overall capital position of commercial sector banks has witnessed a

marked improvement during the reform period. The capital to risk-weighted
assets ratio (CRAR) was above the stipulated percentage of 9 per cent for the
banking sector as well as for all bank groups during 2011-12.This indicates
that Indian banks were well-capitalised during this period. At the end of March
2009, all the commercial banks in India maintained a CRAR of at least 12
percent. Table 3.7 shows the corresponding figure for 1995-96 was 75 out of
a total of 92 banks.

Table: 3.7
Distribution of Commercial Banks according to the CRAR
Below 4 9 to 10 Above 10
Year 4 to 8 percent Total
percent percent percent
1995-96 8 9 33 42 92
1996-97 5 1 30 64 100
1997-98 3 2 27 71 103
1998-99 4 2 23 76 105
1999-00 3 2 12 84 101
2000-01 3 2 11 84 100
2001-02 1 2 7 81 91
2002-03 2 0 3 88 93
2003-04 1 1 1 87 90
2004-05 1 1 8 78 88
2005-06 3 — 4 78 85
2006-07 1 — 2 76 79
2007-08 — — 2 77 79
2008-09 — — 1 78 79

Source: Report on Trend and Progress of Banking in India, Various issues, RBI
Nationalised banks includes IDBI Bank from 2004-05

72
Chapter 3 Conceptual Framework

Table 3.7 shows that majority of the banks in all bank categories have
achieved a CRAR level of more than 10 percent by March, 2009, indicating
good financial health of the banking industry, in terms of capital adequacy
norms, over the recent years.

The CRAR level across the various groups of banks has been continuously
improving over the reform period. The new private sector banks and foreign
banks have the highest level of CRAR in 2011-12 with 17.31, 16.74(Under
Basel I, II) followed by new private sector banks at 14.90, 16.66 percent
(under Basel I, II) respectively. The overall CRAR of all scheduled commercial
banks was 12.94, 14.24 percent in 2011-12.

Table: 3.8
Capital Adequacy Ratio-Bank Group-wise (in Percent)

Year SCBs PSBs NBs SBI Group Old Pvt. New FBs
SBs Pvt.SB
1997-98 11.5 11.6 10.5 12.2 12.3 13.2 10.3
1998-99 11.3 11.3 10.6 12.3 12.1 11.8 10.8
1999-00 11.1 10.7 10.1 11.6 12.4 13.4 11.9
2000-01 11.4 11.2 10.2 12.7 11.9 11.5 12.6
2001-02 12 11.8 10.9 13.3 12.5 12.3 12.9
2002-03 12.7 12.6 12.2 13.4 12.8 11.3 15.2
2003-04 12.9 13.2 13.1 13.4 13.7 10.2 15
2004-05 12.8 12.9 13.2 12.4 12.5 12.1 14
2005-06 12.3 12.2 12.3 11.9 11.7 12.6 13
2006-07 12.3 12.4 12.4 12.3 12.1 12 12.4
2007-08 13 12.5 12.1 13.2 14.1 14.4 13.1
BASEL I 2008-09 13.2 12.3 12.1 12.7 14.3 15.1 15
BASEL II 2008-09 14 13.5 13.2 14 14.8 15.3 14.3
BASEL I 2009-10 13.6 12.1 12.1 12.1 13.8 17.3 18.1
BASEL II 2009-10 14.5 13.3 13.2 13.5 14.9 18 17.3
BASEL I 2010-11 13.02 11.78 12.15 11.01 13.29 15.55 17.71
BASEL II 2010-11 14.19 13.08 13.47 12.25 14.55 16.87 16.97
BASEL I 2011-12 12.94 11.88 11.84 11.97 12.47 14.9 17.31
BASEL II 2011-12 14.24 13.23 13.03 13.7 14.12 16.66 16.74
Source: Report on Trend and Progress of Banking in India, Various issues, RBI

73
Chapter 3 Conceptual Framework

The capital to risk-weighted assets ratio (CRAR) remained well above the
stipulated 9 per cent for the system as a whole as well as for all bank groups
during 2011-12, indicating that Indian banks remained well-capitalised.

The CRAR exhibited a decline in 2010-11 owing to a reduction in Tier II CRAR

ratio. Foreign banks registered the highest CRAR, followed by private sector
banks and PSBs in 2010-11. Under Basel II, the CRAR of SCBs remained
above the prescribed limit in 2010-11. Thus, it can be said that in the short to
medium term, SCBs are not constrained by capital in extending credit.

The CRAR of Indian banks under Basel I framework, which had been on a
steady rise since 2007, posted a marginal increase during the crisis year, from
13.0 per cent at end-March 2008 to 13.2 per cent at end-March 2009. At end-
March 2010, there was a further rise in the CRAR to 13.6 per cent, which
shows that Indian banking system has withstood the pressures of the global
financial crisis and a factor that facilitated the normal functioning of the
banking system even in the face of one of the largest global financial crisis
was its robust capital adequacy.

All commercial banks in India excluding RRBs and LABs became Basel II
compliant as on March 31, 2009.Under Basel II, CRAR of Indian banks as at
end-March 2009 stood at 14.0 per cent, far above the stipulated minimum
ratio prescribed by the RBI. This indicated that Indian banks had managed to
meet with the increase in the capital requirement under the new framework.
Moreover, between end-March 2009 and 2010, there was a rise of 0.5 percent
points in the CRAR of SCBs confirming the strengthening of their capital
adequacy under the new framework.

During 2008-09, the CRAR of major bank groups either remained static or
improved, however, a marginal deterioration was observed in case of public
sector banks. The decline in CRAR of PSBs was mainly due to SBI Group
and associates. In fact the CRAR of public sector banks group alone was
below the industry average, while that of old private sector banks, new private
sector banks and foreign banks was above the industry average.

74
Chapter 3 Conceptual Framework

The overall CRAR of all SCBs improved to 13.0 per cent at end-March 2008
from 12.3 per cent a year ago, reflecting a relatively higher growth rate in
capital funds maintained by banks as compared to the risk-weighted assets.
While the growth in risk-weighted assets moderated in line with overall
deceleration in credit growth during 2007-08, capital funds increased at a
higher rate on account of raising of resources by banks from the capital market
and increase in resources required for ensuing implementation of Basel II
norms. Thus, the CRAR of the banking system at 13.0 per cent was
significantly above the stipulated minimum of 9.0 per cent. During 2007-08, the
improvement in CRAR was observed across all bank groups. The improvement
was, however, more pronounced in respect of new and old private sector
banks, followed by SBI and associates. As at end-March 2008, the CRAR of
nationalised banks was 12.5 per cent which was below the industry average
(13.0 per cent), while that of all other groups was above this level.

The overall CRAR of all SCBs remained same as on end March, 2007 at the
previous year‘s level of 12.3 per cent, suggesting that the increase in capital kept
pace with the sharp increase in risk-weighted assets. The rise in the level of risk-
weighted assets was attributed to the rapid growth of credit. The increase in risk-
weighted assets also occurred due to increase in the risk weights by the RBI on
certain categories of advances to protect the balance sheets of banks during this
phase of rapid credit expansion. The CRAR at 12.3 per cent was placed
significantly above the stipulated minimum of 9.0 per cent. The CRAR of PSBs
and old private sector banks improved, while that of new private sector banks
and foreign banks showed a decline. The CRAR of new private sector banks had
improved in the previous year but declined below the industry average at end-
March 2007. The CRAR of new private sector banks and foreign banks declined
due to high growth of risk-weighted assets reason being larger exposure to the
sensitive sectors to which higher risk weights are applied.

A significant decline of 1 percent was been observed in the year 2006 in case of
foreign banks, followed by a decline of 0.9 and 0.8 percentage points for
nationalised and old private banks, of 0.7 percentage points for PSBs and a

75
Chapter 3 Conceptual Framework

decline of 0.5 percentage points for the SBI group. During this period new private
banks showed a rise of 0.5 percentage point in CRAR. The resultant change in
CRAR for the banking system as a whole was a decline of 0.5 percentage points.
This overall decline in CRAR could be attributed to three factors-

(i) Higher growth in loan portfolio of banks as compared to investment in

government securities,
(ii) Increase in risk weights for personal loans, real estate and capital market
exposure, and
(iii) Application of capital charge for market risk for investment held under
held for trade and available for sale portfolios 22

The overall CRAR of SCBs stood at 12.8 per cent on end-March 2005 which was
more or less at the previous year‘s level (12.9 per cent). The ratio continued to be
significantly above the stipulated minimum even after satisfying the new
requirements pertaining to the capital charge for market risk. The average
CRAR level for the banking industry has stood consistently between 11 and 15
percent during the period 1997-98 and 2011-12, which is much higher than the
minimum regulatory requirement prescribed by Reserve Bank of India, indicating
good financial health of the banking industry.

The component-wise breakup of capital funds shows that Tier I capital

accounted for more than 70 per cent of the total capital of Indian banks both
under Basel I and II, reflecting the robust capital position of banks. As at
end-March 2012, the core CRAR stood well above the stipulated minimum of
6 per cent. Core CRAR ratio of SCBs at end-March 2010 stood at 9.4 per
cent and 10.1 per cent under Basel I and II frameworks, respectively, which
is much above the Reserve Bank‘s stipulation of 6 per cent as under the
Basel II framework, underlining the core capital strength of the Indian
banking system.

The overall CRAR of all SCBs improved to 13.2 per cent as at end-March
2009 from 13.0 per cent in 2008 indicating that the Indian banking system has
withstood the pressure of global financial turmoil.

76
 Chapter 3 Conceptual Framework

Table:3.9
Component -Wise Capital Adequacy Ratio of SCBs (As at end march)
(in Crores)
2003 2004 2005 2006 2007 2008 2009 2009 2010 2010 2011 2011 2012 2012
ITEM/YEAR
BASEL I BASEL II BASEL I BASEL II BASEL I BASEL II BASEL I BASEL II

Capital
A. 107058 125249 165928 221363 296191 406835 488563 487826 572582 567381 674662 670389 781000 778000
Funds (i+ii)
Tier I
i) 71416 78550 108949 166538 200386 283339 331422 333810 397666 395100 476615 474581 568500 567200
Capital
Tier-II
ii) 35643 46699 56979 54825 95794 123496 157141 154016 174916 172281 198047 195808 212400 210900
Capital

Risk-
B. Weighted 844402 969886 1296223 1797207 2412236 3128093 3704372 3488303 4216565 3901395 5181583 4724933 6037500 5462300
Assets
CRAR (A
C. as percent 12.7 12.9 12.8 12.3 12.3 13 13.2 14 13.6 14.5 13 14.2 12.9 14.2
of B)
of Which

Tier I 8.5 8.1 8.4 9.3 8.3 9.1 9 9.6 9.4 10.1 9.2 10 9.4 10.4

Tier II 4.2 4.8 4.4 3.1 4.0 3.9 4.2 4.4 4.1 4.4 3.8 4.1 3.5 3.9

Source: Report on Trend and Progress of Banking in India, Various Issues, RBI

77
Chapter 3 Conceptual Framework

Above table 3.9 shows that, as on March, 2007, overall CRAR of all SCBs
remained at the previous year level of 12.3%, suggesting that increase in
capital kept pace with sharp increase in risk weighted assets. This increase
in risk –weighted assets was mainly due to the rapid growth of credit. To an
extent, the increase in risk – weighted assets was due to increase in the
risk weights by the RBI on certain categories of advances as a prudential
measure to protect the balance sheets of banks during the phase of rapid
credit expansion. The CRAR at 12.3 percent was placed significantly above
the stipulated minimum of 9 percent. Tier I capital declined to 8.3 percent
at end -March 2007 from 9.3 percent in 2006.This was mainly due to
relatively slower growth of reserves and surplus, while paid-up capital
increased significantly, however Tier II capital increased significantly in
contrast to decline in the last year. As a result, the Tier II CRAR increased
to 4.0 percent from 3.1 percent last year. Despite the decline during the
year, Tier I CRAR at 8.3 percent was more than the prescribed requirement
of 4.5 percent and also above the 6.0 percent norm prescribed in the final
guidelines for implementation of BASEL II released by the Reserve Bank of
India in April 27, 2007.

The following Table 3.10 shows the Capitalization Profile of SBI, PNB and CBI
as on March, 2010

Table: 3.10
Capitalization Profile of SBI, PNB and CBI

Core Tier-1(net Core Tier-1 (net of Tier-1(net of Tier-2 (net of CRAR %

of deductions) deductions)% deductions)% deductions)%
SBI 75295 8.60 9.28 4.21 13.49
PNB 15207 8.04 9.11 5.04 14.16
CBI 4341 4.71 6.83 5.40 12.23

RBI has issued new BASEL III norms in 2012 which mandate Indian banks to
maintain a minimum capital adequacy ratio (CAR) of nine per cent, in addition
to a capital conservation buffer, which will be in the form of common equity at
2.5 per cent of the risk weighted assets. In other words, banks‘ minimum CAR

78
Chapter 3 Conceptual Framework

must be 11.5 per cent. . The new rules will come into effect from January
2013, and banks will have to implement these by March 2018.

Major features of BASEL III23

a) Better Capital Quality: One of the key elements of Basel III is the
introduction of much stricter definition of capital. Better quality capital means
the higher loss-absorbing capacity. This in turn will mean that banks will be
stronger, allowing them to better withstand periods of stress.

(b) Capital Conservation Buffer: Banks will be required to hold a capital

conservation buffer of 2.5%. The aim is to build a conservation buffer is to
ensure that banks maintain a cushion of capital that can be used to absorb
losses during periods of financial and economic stress.

(c) Countercyclical Buffer: The countercyclical buffer has been introduced with
the objective to increase capital requirements in good times and decrease the
same in bad times. The buffer will slow banking activity when it overheats and
will encourage lending when times are tough i.e. in bad times. The buffer will
range from 0% to 2.5%, consisting of common equity or other fully loss-
absorbing capital.

(d) Minimum Common Equity and Tier 1 Capital Requirements: The minimum
requirement for common equity, the highest form of loss-absorbing capital,
has been raised under Basel III from 2% to 4.5% of total risk-weighted assets.
The overall Tier 1 capital requirement, consisting of not only common equity
but also other qualifying financial instruments, will also increase from the
current minimum of 4% to 6%. Although the minimum total capital requirement
will remain at the current 8% level, yet the required total capital will increase
to 10.5% when combined with the conservation buffer.

(e) Leverage Ratio: A review of the financial crisis of 2008 has indicted that
the value of many assets fell quicker than assumed from historical
experience. Thus, now Basel III rules include a leverage ratio to serve as a
safety net. A leverage ratio is the relative amount of capital to total assets (not

79
Chapter 3 Conceptual Framework

risk-weighted). This aims to put a cap on swelling of leverage in the banking

sector on a global basis. 3% leverage ratio of Tier 1 will be tested before a
mandatory leverage ratio is introduced in January 2018.

(f) Liquidity Ratios: Under Basel III, a framework for liquidity risk management
will be created. A new Liquidity Coverage Ratio (LCR) and Net Stable
Funding Ratio (NSFR) are to be introduced in 2015 and 2018, respectively.

(g) Systemically Important Financial Institutions (SIFI): As part of the macro-

prudential framework, systemically important banks will be expected to have
loss-absorbing capability beyond the Basel III requirements. Options for
implementation include capital surcharges, contingent capital and bail-in-debt.

Comparison of Capital Requirements under Basel II and Basel III:

Table: 3.11

Requirements Under Basel II Under Basel III

Minimum Ratio of Total Capital To RWAs 8% 10.50%
Minimum Ratio of Common Equity to RWAs 2% 4.50% to 7.00%
Tier I capital to RWAs 4% 6.00%
Core Tier I capital to RWAs 2% 5.00%
Capital Conservation Buffers to RWAs None 2.50%
Leverage Ratio None 3.00%
Countercyclical Buffer None 0% to 2.50%
Minimum Liquidity Coverage Ratio None TBD (2015)
Minimum Net Stable Funding Ratio None TBD (2018)
Systemically important Financial Institutions None TBD (2011)
Charge

80
Chapter 3 Conceptual Framework

Table: 3.12
Time Line for Implementation of BASEL III
Phase-in arrangements (shading indicates transition periods)
(all dates are as of 1 January)

81
Chapter 3 Conceptual Framework

Basel III guidelines seek to improve the ability of banks to withstand periods of
economic and financial stress by prescribing stringent capital and liquidity
requirements. The suggested capital requirement is a positive for banks as it
raises the minimum core capital stipulation, introduces counter –cyclical
measures, and enhances banks‘ ability to conserve core capital in the event
of stress through a capital conservation capital buffer. The prescribed liquidity
requirements aim at ensuring uniformity in the liquidity standards followed by
banks globally.

ICRA opines that Indian banks will be able to make an easier transition to a
stricter capital requirement regime, than some of their international
counterparts This is attributed to the regulatory norms on capital adequacy in
India which are already more stringent, and also because most Indian banks
have historically maintained their core and overall capital well in excess of the
regulatory minimum.

3.6 NON-PERFORMING ASSETS

The concept of NPAs was originated when Reserve Bank of India introduced
‗prudential norms, on the recommendations of the Narashimam Committee in
the year 1992-93. As per the prudential norms laid down by RBI,‖ An asset is
considered as ― non-performing‖ if interest on installments of principal due
remain unpaid for more than180 days (from March31,2004, it has been
decided to adopt the ,90 days, overdue norm for identification of NPAs).

In simple words, as long as the expected income is realized from the asset, it
is treated as performing asset but when it fails to generate income or deliver
value on due date it is treated as non-performing asset. Growth of non-
performing assets on the balance sheet of banks erodes the solvency,
profitability and financial health of banks24.

With a view to moving towards international best practices and to ensure

greater transparency, 90 days overdue norm for identification of NPAs instead
of 180 days has been adopted from the year ending March 31st 2004.

82
Chapter 3 Conceptual Framework

Accordingly, a non-performing asset would be a loan or an advance where:

I. Interest and /or installment of principal remain overdue for a period of

more than 90 days, in respect of a term loan;

II. The account remain ¸out of order, in respect of overdraft/cash credit;

III. The bill remain overdue for a period of more than 90 days in case of bill
purchased and discounted;

IV. Interest and or installment of principal remains overdue for two harvest
seasons but for a period not exceeding two half years in the case of an
advance granted for agricultural purposes; and

V. Any amount to be received remains overdue for a period of more than 90

days in respect of other accounts.

(Any amount due to the bank under any credit facility is ―Overdue‖ if it is not
paid on the due date fixed by the bank).

Banks have been advised by the RBI that they should identify the non-
performing assets and ensure that interest on such assets is not
recognized as income and taken to the profit and loss account. Banks are
to recognize their income on accrual basis in respect of income on
performing assets and on cash basis in respect of income on non-
performing assets. Any interest accrued and credited to income account
must be cancelled by a reserve entry once the credit facility comes under
the category of non-performing assets 25.

3.6.1 Assets Classification and Provisions

Banks are required to classify the loan assets (advances) into four categories viz.

I. Standard assets
II. Sub-standard assets
III. Doubtful assets; and
IV. Loss assets

83
Chapter 3 Conceptual Framework

Standard Advances/Assets: are those, which do not disclose any

problem and do not carry more than normal risk attached to the business.
Such assets are considered as performing assets. A general provision of
0.25% has to be provided on global loan portfolio basis.

Sub-Standard Advances: With effect from 31 March 2005, a substandard

asset is identified as an asset, which has remained NPA for a period less
than or equal to 12 months. Such an asset will have well defined credit
weaknesses that jeopardize liquidation of the debt and are characterized
by distinct possibility that bank will sustain some loss. Accordingly a
general provision of 10% on outstanding has to be provided on sub-
standard assets.

Doubtful Assets- Such assets which have remained NPAs for a period
exceeding 12 months but are not considered as a loss advance are
identified as doubtful assets. Banks have to provide 100 percent of the
unsecured portion of the outstanding advance after netting realized amount
in respect of DICGC scheme (Deposit Insurance and Credit Guarantee
Corporation) and realized/realizable amount of guarantee cover under
ECGC (Export Credit Guarantee Corporation) schemes.

Table: 3.13
Classification of Doubtful Assets

Period for which the advance has Provision requirements (%)

remained in Doubtful category

Up to one year 20

One to three years 30

More than three years -60 percent with effect from March31,2005
I. Outstanding stock of NPAs as on -75 percent with effect from March 31, 2006.
March31,2004 -100 percent with effect from March31,2007

II. Advances classified as doubtful for more 100 percent with effect from March 31,2005
than three years on or after April1,2004

84
Chapter 3 Conceptual Framework

Loss Assets – Loss assets are those where loss has been identified by the bank
or internal /external auditors or RBI inspectors but the amount has not been written
off, wholly or partially. Any NPAs which are irrecoverable or marginally collectible
and cannot be classified as bankable asset would be defined as a loss asset.
Companies have to provide 100% of these outstanding advances.

Note: Provision towards standard assets should not be deducted from

advances but shown separately as contingent provisions against standard
assets under ―Other liabilities and provisions‖ others in schedule V of the
balance sheet.

3.6.2 Reasons for NPAs in Banks

An account does not get converted into an NPA overnight. It signals well in
advance and steps can be taken to prevent the account from slipping in to
the NPA category. An account may become an NPA due to causes
attributable to the borrower, the lender and for reasons beyond the control
of both. A study by RBI reveals that in the order of prominence, the
following factors contribute to NPAs 26.

Internal Factors

Diversion of funds for

- Expansion/diversification/modernization
- Taking up new projects
- Helping/promoting associate concerns

Time/cost overrun during the project implementation

Inefficient management

Strained labour relations

Inappropriate technology/technical problems

Product obsolescence, etc

Poor credit Appraisals, monitoring and follow up, improper SWOT analysis
on the part of banks

85
Chapter 3 Conceptual Framework

External Factors

Recession

Input or power shortage

Price escalation

Exchange rate fluctuation

Accidents and natural calamities

Changes in government policy such as excise, import and export duties,

pollution control order etc

Wilful defaulters exist as they know that legal recourse available to the
lenders is time consuming and sluggish

Sickness of the industry leads to gradual erosion of liquidity and units fail
to honour their obligations towards loan repayment

Political tool-Directed credit to SSI and Rural sectors has been there

Manipulation by the debtors using political influence has been a cause for
high industrial bad debts

The Economic Survey, 2012-13(paragraph 5.32) identifies the following as the

―main‖ reasons for the growing NPAs in recent times:

a) Switchover to a system- based identification of NPAs by PSBs

b) prevailing macro-economic situation in the country;
c) Increased interest rates in the recent past;
d) Lower economic growth; and
e) Aggressive lending by banks in the past, especially during good times.

3.6.3 NPAs: Effect on the Performance of banks

The large percentages of NPAs have a deleterious impact on a bank‘s profit in
a number of ways:

They result in reduced interest income

They erode (eat into) current profits through provisioning requirements

86
Chapter 3 Conceptual Framework

It leads into erosion of capital base and reduction in their competitiveness

Through creation of reserves and provisions that come from profits, to act
as cushions for loan losses

Decline in profit has its bearing on variables like Capital to Risk Weighted
Assets Ratio (CRAR and cost)

To quote the committee on banking sector reforms (Narasimham Committee

II, 1998) ―NPAs constitute a real economic cost to the nation is that they
reflect the application of scarce capital & credit funds to unproductive uses.
The money locked up in NPAs is not available for productive uses to the
extent that bank seek to make provisions for NPAs or write them off. It is a
charge on their profits, NPAs, in short, is not just a problem for banks; they
are bad for the economy‖.

3.7 ANALYSIS OF PERFORMANCE WITH REFERENCE TO NPAs

Non-performing assets are one of the important parameters of analyzing
financial performance of banks. This section undertakes trend analysis of
NPAs and critically appraises the financial health of commercial banks.

3.7.1 Gross NPAs/Gross Advances

Gross NPAs is an advance which is considered irrecoverable, for bank has
made provisions, and which is still held in banks books of account.Net NPAs
are obtained from gross NPAs after deduction of the following:

Interest due but not received: i.e. balances in interest suspense account

Claims received from credit guarantors and kept in suspense accounts

pending final settlement

Part payment received and kept in suspensions; and

Total provisions held

Similarly gross advances consists of bills purchased and discounted, cash

credits, overdrafts and loans and term loans, whereas net advance is
calculated by netting out bills discounted, DICGC claims etc., from gross
advances. Gross NPA is a better indicator than net NPAs since the former

87
Chapter 3 Conceptual Framework

does not incorporate the endogenous provisioning process; this is

because banks make provisioning for NPAs according to their
capacities.Net NPAs does not present a true picture of NPAs so they will
have to be supplemented by gross NPAs figures.

Gross and Net NPAs of public sector banks, private sector banks and foreign
banks as a percentage of advances during 1996-97 to 2011-2012 are shown
in following tables

Table: 3.14
Gross NPAs to Gross Advances Ratio

Banks Public Sector Banks Private Sector Banks Foreign Sector Banks

1996-1997 17.80 8.49 4.3

1997-1998 16.00 8.67 6.38

1998-1999 15.90 10.81 7.60
1999-2000 13.98 8.17 6.99

2000-2001 12.37 8.37 6.84

2001-2002 11.09 9.65 5.38

2002-2003 9.36 8.08 5.22

2003-2004 7.8 5.85 4.8

2004-2005 5.51 3.84 2.8

2005-2006 3.64 2.56 1.9
2006-2007 2.66 2.2 1.8

2007-2008 2.2 2.5 1.8

2008-2009 2.0 2.9 4.0
2009-2010 2.27 2.97 4.26

2010-2011 2.4 2.5 2.5

2011-2012 3.3 2.1 2.6
Source: IBA Bulletin, Various Issues

Over the years, this ratio has declined considerably in the banking sector.
The share of gross NPAs to gross advances was 14% in PSBs for the year
1999-2000 and close to 9% in 2002-2003; it declined a low of 2.27% by
the year 2009-10. This can be attributed to increase in bank advances at a

88
Chapter 3 Conceptual Framework

much faster pace than that of growth in NPAs .Thus, the asset quality in
the Indian banking sector appears to have improved significantly over the
period of study.

The comparison between the various sectors of banks shows that this ratio
has been the lowest in foreign banks followed by private sector banks.
This may be attributed to the fact that foreign banks are already abiding
the NPA norms in their parent country.

High level of NPAs in PSBs can be attributed to the following possible

factors:

1. Various credit related welfare programs are carried out through public
sector banks as they have a widespread network in the rural areas.

2. The problem of high gross NPAs is one of inheritance as historically,

Indian public sector banks have fared poorly on credit recovery. It is
due to weak legal provisions governing foreclosure and bankruptcy,
lengthy legal battles, sticky loans made to PSUs, loan waivers and
priority sector lending.

3. Public Sector Banks also suffer due to lax system of granting

advances, insufficient credit appraisals, poor post-loan monitoring as
well as follow up, and politically motivated policy framework.

The public sector banks have experienced a steady decline over the period of
study. Interestingly, this decline has been much more significant in their case in
comparison to other banks. In case of public sector banks there was a
declining trend except in the year 2008-09 and 2011-2012.Debt Recovery
Tribunals (DRTs) and SARFAESI Act have been most effective in terms of
amount recoveries. The setting of the Asset reconstruction Company Limited
(ARCIL) has also helped to a great extent in recovery of dues.

The improvement in asset quality is evident in private sector banks as well

as foreign banks in later years. Public sector banks, however, suffered

89
Chapter 3 Conceptual Framework

deterioration in asset quality during 2010-11. This can be attributed to

deterioration in asset quality of the SBI group. Among the bank groups,
SBI group reported the highest GNPA ratio followed by foreign banks in
2010-11. Foreign banks, however, registered a decline in gross non-
performing loans in 2010-11 over the previous year.

All banks made concerted efforts to contain the level of NPAs to reduce the
drag on their profitability. Even as individual banks devised specific policies
for mitigation of NPAs, the problem of performing assets slipping into the
NPAs category has increasingly been a permanent concern for banks.

3.7.2 Net NPAs/ Net Advances

Table 3.15 shows the analysis of NPAs in Public Sector Banks, Private Sector
Banks and Foreign Banks with respect to the ratio of Net NPAs/Net Advances

Table: 3.15
Net NPAs to Net Advances Ratio

Banks Public Sector Private Sector Foreign Sector

Banks Banks Banks
1996-1997 9.18 5.37 1.92
1997-1998 8.20 5.26 2.25
1998-1999 8.15 5.26 2.25
1999-2000 7.42 5.41 2.41
2000-2001 6.74 5.44 1.82
2001-2002 5.82 5.72 1.89
2002-2003 4.54 4.95 1.76
2003-2004 3.00 2.84 1.49
2004-2005 2.00 1.9 0.8
2005-2006 1.3 1.0 0.8
2006-2007 1.1 1.0 0.7
2007-2008 1.0 1.2 0.8
2008-2009 1.1 1.5 1.8
2009-2010 1.10 1.03 1.82
2010-2011 1.2 0.6 0.6
2011-2012 1.7 0.5 0.6
Source: IBA Bulletin, Various Issues

90
Chapter 3 Conceptual Framework

Over the period after liberalization till the end of decade and few years after,
the ratio declined gradually, but now ratio has declined to 1 in case of public
sector banks and their performance has been improving over the period.
Almost same trends had been exhibited in case of private sector and foreign
banks. The comparison between these banks shows that the ratio is lowest
for foreign banks followed by private sector banks. It was highest in case of
public sector banks over the large period of study.

The asset quality of banks in India has improved over the past few years and it is
evident in the form of declining NPA to Advances ratio. It may be noted that
notwithstanding the pressures of a slowdown, sluggish growth in the economy, the
Net NPA to Net Advances ratio had increased marginally to 1.1per cent as at end
March 2009 from its earlier level of 1.0 per cent as at end March 2008.

3.7.3 Asset wise Classification of Banks

3.7.3.1 Asset-wise classification of NPAs in PSBs

NPAs can be classified into three groups

Substandard Assets

Doubtful Assets

Loss Assets
Advances in each of the four asset categories (i.e., standard, substandard,
doubtful and loss) of the PSBs during 1996-97 to 2011-12 have been
analysed in the Table 3.16. There has been a marginal reduction in the
quantum of Doubtful assets over the period however in relative terms, there
has been a significant reduction in Doubtful assets as the percentage of
doubtful assets to the total advances came down to 1.3 percent from 10
percent for the same period. There has been an increase in the share of
Standard assets to Gross Advances from 82.2 percent with the value in
rupees 200637 crores at the start of the period, it rose to 97.7 percent and
96.8 percent with the increased amount of Rs. 2988790 crores & 3437900
crores as at the end March 2011 and 2012, it implies increased efficiency of
the PSBs as regards grant of loans as well as collection of advances.

91
Chapter 3 Conceptual Framework

Sub-standard assets decreased to 1.1 percent and 1.7 percent as at the end
March 2011, 2012 from 5.1 percent at the end March 1997, substandard
assets remained stagnant for the years 1996-97 and 1997-98.From the year
1998-99, there has been a continuous decline in the ratio till the year 2005,
and has remained almost stable till the end of the period of study. The trends
in Doubtful assets and loss assets were quite opposite to that of the standard
assets throughout the period of study. It is also observed that throughout the
study period doubtful assets had a major share in contributing to gross NPAs,
only in the year 2010, 2011 and 2012 the major portion of Gross NPAs was
contributed by substandard assets followed by doubtful assets and loss
assets. Coefficient of Correlation and Coefficient of Determination between
the performing (Standard) and Non standard Assets has recorded a positive
Correlation in PSBs i.e., r = 0.62 and R2 = 0.39

92
Chapter 3 Conceptual Framework

Table: 3.16

Asset-Wise Classification of Public Sector Bank (Amt in Rs. Crores)

Standard Assets Sub-standard Assets Doubtful Assets Loss Assets Gross NPAs Total Advances
percent percent percent percent percent percent
Year Amount Amount Amount Amount Amount Amount
share share share share share share
1996-97 200637 82.2 12472 5.1 26015 10.7 5090 2.1 43577 17.8 244214 100
1997-98 239318 84.0 14463 5.1 25819 9.1 5371 1.9 45653 16 284971 100
1998-99 273618 84.1 16033 4.9 29252 9.0 6425 2.0 51710 15.9 325328 100
1999-00 326783 86.0 16361 4.3 30535 8.0 6398 1.7 53294 14 380077 100
2000-01 387360 87.6 14745 3.3 33485 7.6 6544 1.5 54774 12.4 442134 100
2001-02 452862 88.9 15788 3.1 33658 6.6 7061 1.4 56507 11.1 509369 100
2002-03 523724 90.6 14909 2.6 32340 5.6 6840 1.2 54089 9.4 577813 100
2003-04 610435 92.2 16909 2.6 28756 4.3 5876 0.9 51541 7.8 661975 100
2004-05 830029 94.6 11068 1.3 30799 3.5 5929 0.7 47796 5.4 877825 100
2005-06 1029493 96.1 11394 1.1 24804 2.3 5180 0.5 41378 3.9 1070872 100
2006-07 1335175 97.2 14147 1.0 19944 1.5 4510 0.3 38601 2.8 1373777 100
2007-08 1656585 97.7 16870 1.0 19167 1.1 3712 0.2 39749 2.3 1696333 100
2008-09 2059725 97.9 19521 0.9 20715 1.0 3803 0.2 44039 2.1 2103763 100
2009-10 2462030 97.7 27688 1.1 24685 1.0 4928 0.2 57301 2.3 2519331 100
2010-11 2988790 97.7 33612 1.1 31955 1.0 5514 0.2 71081 2.3 3059870 100
2011-12 3437900 96.8 60376 1.7 47075 1.3 5037 0.1 112488 3.2 3550389 100
CAGR (in %) 20.85 11.09 4.03 -0.07 6.53 19.54
r 0.62
R-sq. 0.39
Source: Report on Trend and Progress of Banking in India, Various issues, RBI
Statistical Tables Relating to Banks in India ,Various issues, RBI

93
Chapter 3 Conceptual Framework

3.7.3.2 Asset-wise classification of NPAs in Private Sector Banks

Table 3.17 shows the asset classification of Private Sector Banks.
Standard Assets to total advances ratio of Private Sector Banks reflect an
erratic trend with the ratio fluctuating over the study period. The proportion
of substandard assets was also observed to be fluctuating during the study
period. In case of doubtful assets, there has been a continuous decline in
the ratio from the year 2003 to 2007; before this period there were
fluctuations in the trend. The percent share of loss assets in the first three
years of the study period remained stable; from 2000 to 2002 it exhibited a
declining trend. In the year 2003, there was a slight increase in this trend,
but again from the year 2004 to 2009 there was a consistent decline in the
proportion of loss assets. Further, it is noted that during the period from
1997 to 1999 and 2007 to 2010 substandard assets contributed to a large
extent to the NPAs.

3.7.3.3 Asset-wise classification of NPAs in Foreign Sector Banks

In case of foreign banks, the share of standard assets to total advances
touched a low of 92.4% in 1998-99 while reached its peak of 98.1 percent
in 2006-07 and 2007-08 .There has been a marked improvement in the
asset profile of foreign banks, with the category of standard asset
registering an increase in absolute values. The movement of substandard
assets was quite opposite to the standard assets from the year 1997 to
1999 .The share of sub-standard assets to total advances declined from
4.0 percent in 1998-99 to 1.6 percent in 2003-04, in the year 2005 and
2006 it remained constant at 1 percent then again there was a continuous
increasing trend in the ratio from 2007 to 2009. In case of doubtful assets
and loss assets the trend was fluctuating during the study period. Further, it
is observed from the above data that out of the total gross NPA ratio, the
major share was contributed by substandard from 1997 to 2000 later on
there were fluctuations in share of assets.

94
 Chapter 3 Conceptual Framework

Table: 3.17
Asset-Wise Classification of Private Sector Bank (Amt in Rs. Crores)
Standard Assets Sub-standard Assets Doubtful Assets Loss Assets Gross NPAs Total Advances
Year Amount percent Amount percent Amount percent Amount percent Amount percent Amount percent
share share share share share share
1996-97 27417 91.5 1370 4.6 889 3.0 283 0.9 2542 8.5 29959 100
1997-98 33567 91.3 1766 4.8 1077 2.9 343 0.9 3186 8.7 36753 100
1998-99 38394 89.2 2657 6.2 1591 3.7 407 0.9 4655 10.8 43049 100
1999-00 53317 91.5 2137 3.7 2355 4.0 439 0.8 4931 8.5 58248 100
2000-01 65071 91.5 2585 3.6 3069 4.3 424 0.6 6078 8.5 71149 100
2001-02 109272 90.4 4738 3.9 6539 5.4 389 0.3 11666 9.6 120938 100
2002-03 134248 91.9 4174 2.9 6447 4.4 1177 0.8 11798 8.1 146046 100
2003-04 167076 94.2 3127 1.8 6392 3.6 825 0.5 10344 5.8 177420 100
2004-05 221781 96.2 2270 1.0 5671 2.5 910 0.4 8851 3.8 230632 100
2005-06 296020 97.4 2396 0.8 4438 1.5 940 0.3 7774 2.6 303793 100
2006-07 382630 97.6 4368 1.1 3930 1.0 941 0.2 9239 2.4 391869 100
2007-08 459369 97.3 7280 1.5 4452 0.9 1244 0.3 12976 2.7 472345 100
2008-09 502768 96.8 10526 2.0 5017 1.0 1345 0.3 16888 3.2 519655 100
2009-10 567207 97.0 8676 1.5 6542 1.1 2166 0.4 17384 3.0 584591 100
2010-11 714338 97.5 4398 0.6 10735 1.5 2839 0.4 17970 2.5 732310 100
2011-12 862131 97.9 5128 0.6 10314 1.2 2872 0.3 18320 2.1 880445 100
CAGR (in %) 25.85 9.20 17.75 16.71 14.07 25.28
r 0.88
R-sq 0.78
r=Coefficient of Correlation between Performing (Standard assets) and Nonperforming assets (Sub Standard+ Doubtful and Loss assets).
Source: Report on Trend and Progress of Banking in India, Various issues, RBI
Statistical Tables Relation to Banks in India, Various issues, RBI

95
Chapter 3 Conceptual Framework

Table: 3.18
Asset-Wise Classification of Foreign Sector Banks (Amt in Rs. Crores)
Standard Assets Sub-standard Assets Doubtful Assets Loss Assets Gross NPAs Total Advances
percent percent percent percent percent percent
Year Amount Amount Amount Amount Amount Amount
share share share share share share
1996-97 26392 95.9 658 2.4 261 0.9 261 0.9 1181 4.3 27525 100
1997-98 28996 93.6 1198 3.9 250 0.8 528 1.7 1976 6.4 30972 100
1998-99 28702 92.4 1238 4.0 507 1.6 612 2.0 2357 7.6 31059 100
1999-00 34817 93.0 1096 2.9 798 2.1 721 1.9 2615 7.0 37432 100
2000-01 42285 93.1 876 1.9 1202 2.6 1033 2.3 3111 6.9 45396 100
2001-02 47838 94.5 856 1.7 1004 2.0 920 1.8 2780 5.5 50618 100
2002-03 51288 94.7 995 1.8 944 1.7 954 1.8 2893 5.3 54181 100
2003-04 59619 95.2 990 1.6 1099 1.8 924 1.5 3013 4.8 62632 100
2004-05 74705 97.0 715 0.9 1035 1.3 570 0.7 2320 3.0 77025 100
2005-06 96772 97.9 946 1.0 698 0.7 446 0.5 2090 2.1 98862 100
2006-07 125415 98.1 1367 1.1 631 0.5 454 0.4 2452 1.9 127867 100
2007-08 159882 98.1 1963 1.2 768 0.5 387 0.2 3118 1.9 162999 100
2008-09 162420 95.7 5874 3.5 1004 0.6 416 0.2 7294 4.3 169714 100
2009-10 160311 95.7 4930 2.9 1441 0.9 757 0.5 7128 4.3 167439 100
2010-11 194257 97.5 1865 0.9 2113 1.1 1087 0.5 5065 2.5 199320 100
2011-12 228417 97.3 2079 0.9 2230 1.0 1982 0.8 6292 2.7 234710 100
CAGR (in %) 15.47 7.97 15.37 14.47 11.80 15.36
r 0.78
R-sq 0.60
Source: Report on Trend and Progress of Banking in India, Various issues, RBI
Statistical Tables Relation to Banks in India, Various issues, RBI

96
Chapter 3 Conceptual Framework

Among all the banks, private sector banks had the highest CAGR at 25.85
percent followed by public sector banks and foreign banks in case of Standard
assets. In absolute terms, the amount of standard assets were increasing
year by year during the period of study in public sector and private sector
banks .However, in the case of foreign banks standard assets were
increasing except in the year 1998-99.

CAGR of substandard assets was lowest in case of foreign sector banks

followed by private sector and public sector banks. In terms of absolute
values, substandard assets of public sector banks was increasing every year
from 1997 to 2000 and between 2000 to 2005 it was fluctuating while
between 2006 to 2012 it showed an increasing trend. In case of Private
sector and Foreign banks the substandard assets were fluctuating during the
study period. CAGR of doubtful assets was highest at 17.75 in case of Private
sector banks followed by foreign banks .In absolute terms the doubtful assets
and loss assets of all the banks were fluctuating during the period of study.

3.8 SECTOR –WISE NPAS OF BANKS

The total NPAs of banks are classified into three categories viz. Priority
Sector, Public Sector and Non priority Sector.

3.8.1 Public Sector Banks

The proportion of NPAs in Priority Sector to the total NPAs of the PSBs has
significantly increased from 45.43 percent to 63.62 percent as at end March,
2008 whereas the Public and Non-Priority Sector amounts decreased from
Rs. 1710.87 crores and Rs.27307.01 crores in 2000-01 to Rs.298.69 crores
and Rs.14163.14 crores in 2007-08. The sectoral distribution of NPAs reveals
an increase in the proportion of priority sector NPAs in 2009 - 2010. Priority
sector NPAs, constituted nearly half of the total NPAs of domestic banks up to
2008. There was a steep decline in 2009 due to the Agricultural Debt Waiver
and Debt Relief Scheme of 2008. In 2009-10, the share of priority sector
NPAs for domestic banks increased, it was a reflection of the recent financial
crisis and the consequent economic slowdown. At end-March 2010, the

97
 Chapter 3 Conceptual Framework

percentage of priority sector NPAs in total NPAs was 53.8 per cent for public
sector banks as against 27.6 per cent for private sector banks. The sudden
spike in NPAs of non-priority sector was attributable to the slowdown in the
economy and stressed financial conditions of corporates. The NPAs in the
priority sector increased by 10.7 per cent during 2007-08 which was mainly
due to increase in NPAs in the agriculture sector.

Table: 3.19

Sector-Wise Classification of NPAs of PSBs (Amt in Rs. Crores)

Public
Priority Non Priority Total
Year % Sector % % %
Sector Sector NPAs NPAs
NPAs

(i) (ii) (iii) (i+ii+iii)

2000-01 24156.24 45.43 1710.87 3.22 27307.01 51.35 53174.12 100.00

2001-02 25139.34 44.49 1115.85 1.97 30251.15 53.54 56506.34 100.00

2002-03 24939 47.23 1087 2.06 26781 50.71 52807 100.00

2003-04 23841 47.54 610 1.22 25698 51.24 50149 100.00

2004-05 23397 49.05 451 0.95 23849 50.00 47697 100.00

2005-06 22373.74 54.07 340.5 0.82 18663.99 45.11 41378.23 100.00

2006-07 22953.62 59.46 490.18 1.27 15157.99 39.27 38601.79 100.00

2007-08 25286.67 63.62 298.69 0.75 14163.14 35.63 39748.5 100.00

2008-09 24168 54.88 474 1.08 19394 44.04 44036 100.00

2009-10 30848 53.84 524 0.91 25923 45.24 57295 100.00

2010-11 41288 58.09 279 0.39 29514 41.52 71081 100.00

2011-12 56201 50.33 217 0.19 55246 49.48 111664 100.00

r* 0.96 -0.18 0.97

r** -0.23 -0.34 0.30

r* =Coefficient of Correlation between the amounts of different sectors to the total amounts.
r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.
Source: Report on Trend and Progress of Banking in India, Various issues, RBI
Statistical Tables Relation to Banks in India, Various issues, RBI

98
Chapter 3 Conceptual Framework

The calculated value of coefficient of correlation, r, of the different sectors to

the total amounts of sector wise NPAs observed a high degree of positive
correlation except public sector, but the proportionate NPA recovery in the
Priority Sector has recorded a negative correlation, r = - 0.23 which shows
menace of NPAs in the priority Sector.

3.8.2 Private Sector Banks

The proportion of NPAs in Priority Sector to the total NPAs of the Private
Sector banks has significantly increased from 1834.71 crores to 5100 crores
as at end March, 2012 whereas the Non-Priority Sector amounts also
increased from Rs. 4452.26 crores in 2000-01 to Rs.13200 crores in 2011-12.
Public sector NPAs show a declining trend over the period of study and
become nil from the year 2009-10 and onwards.

Table: 3.20

Sector-Wise Classification of NPAs of Private Sector Banks

Non
Public
Priority Priority Total
Year % Sector % % %
Sector Sector NPAs
NPAs
NPAs
(i) (ii) (iii) (i+ii+iii)
2000-01 1834.71 28.62 123.37 1.92 4452.26 69.45 6410.34 100.00
2001-02 2546.35 21.82 31.18 0.27 9089.77 77.91 11667.3 100.00
2002-03 2445.4 20.61 94.51 0.80 9326.52 78.60 11866.43 100.00
2003-04 2481.93 23.97 74.58 0.72 7795.81 75.30 10352.32 100.00
2004-05 2188.47 24.87 42.34 0.48 6569.03 74.65 8799.84 100.00
2005-06 2284.03 29.17 4.02 0.05 5541.37 70.78 7829.42 100.00
2006-07 2884.18 31.22 2.79 0.03 6352.51 68.75 9239.48 100.00
2007-08 3418.53 26.34 0.01 0.00 9557.52 73.66 12976.06 100.00
2008-09 3641 21.56 75 0.44 13172 78.00 16888 100.00
2009-10 4792 27.57 - - 12592 72.43 17384 100.00
2010-11 4800 26.67 - - 13200 73.33 18000 100.00
2011-12 5100 27.87 - - 13200 72.13 18300 100.00
r* 0.94 -0.03 0.99
r** -0.08 0.19 0.12
r* =Coefficient of Correlation between the amounts of different sectors to the total
amounts.
r** =Coefficient of Correlation between the proportion of different sectors to the total amounts.
Source: Report on Trend and Progress of Banking in India, Various issues, RBI
Statistical Tables Relation to Banks in India, Various issues, RBI

99
Chapter 3 Conceptual Framework

The calculated value of coefficient of correlation, r, for the different sectors to

the total amounts of sector wise NPAs observed a positive correlation in
case of priority sector NPAs and non-priority sector NPAs but negative
correlation of -0.03 has been observed in case of public sector to the total
NPAs amount, also the proportionate NPA recovery in the Priority Sector
has recorded a negative correlation, r = - 0.08 which shows increase in
NPAs in the priority Sector .

3.8.3 Distribution of PSBs by Ratio of Net NPAs to Net Advances

The distribution of PSBs using the ratio of net NPAs to net Advances is used
to examine the performance of banks in improving the recovery of mounting
NPAs, This ratio has been divided into 4 categories i.e. Up to 2%, 2-5%, 5-
10% and above 10%.Table reveals that all the PSBs were under the category
of below 2% of net NPAs at the end March 2009.This shows that there is an
effective recovery of mounting NPAs in all the PSBs and improvement in the
financial health of Indian banks in recent years.

Table: 3.21

Distribution of PSBs by Ratio of Net NPAs to Net Advances

Year No. of PSBs lie under the rate of NPA Total PSBs

Below 2% 2%-5% 5%-10% Above 10%

1999-00 0 22 5 0 27

2000-01 1 5 16 5 27

2001-02 0 11 13 3 27

2002-03 4 14 7 2 27

2003-04 11 13 3 0 27

2004-05 19 7 2 0 28

2005-06 23 5 0 0 28

2006-07 27 1 0 0 28

2007-08 28 0 0 0 28

2008-09 27 0 0 0 27

100
Chapter 3 Conceptual Framework

From the above analysis, following suggestions emerge which may contribute
towards reduction in the mounting non-performing assets in banks;

Improving the recovery management-Sound functioning of banks

depends on timely recovery of credit, hence, banks should develop
suitable recovery programs for assessing and classifying the over dues,
monitoring accounts ,keeping regular contact with borrowers ,fixing
recovery targets, arranging recovery camps, training the personnel and
linking marketing of produce and recovery.

Improving the corporate governance practices- Government of India had

initiated many economic reforms in the financial sectors but inadequate
attention has been devoted to the issues of corporate governance in
banks .BOD are the key players in the management of banks but they are
granted little autonomy. The nominees of Government /RBI dominate the
banks boards due to their vast powers. Hence, there is an urgent need to
remove the dominance in order to take appropriate decision to improve
their financial health.

Upgrading Technology- Computer based banking system has helped the

bank management to solve some of the inherent problems.
Computerization can further help the management in getting required
information in order to take proper decisions while granting
loans/advances.

Inculcating ethics in borrowers- Ethics in borrowers is necessary to make

the banking sector more efficient. However, many borrowers are
defaulters not because of low income but due to lack of ethics .Hence,
banks should use NGO‘s and other voluntary organizations to educate the
borrowers regarding the importance of timely repayment of credit.

Improving the credit Management- Management of credit is essential for

proper functioning of banks. Creation of credit plans, evaluation of credit
proposals, timely sanction and disbursements, post sanction follow-up

101
Chapter 3 Conceptual Framework

and need based credit are the aspects of credit management that need to
be revamped improvement to reduce NPAs.

Effective legal system - Government of India/RBI had initiated many legal

measures to bring down NPA in banks. However, there are some flaws in
each legal measure which need improvement in order to bring down NPA
in banks.

When the RBI grants new banking license, there should be a condition
that for the first 10 years there cannot be any loan write-offs. Later, write-
off amounts must be borne by the shareholders, which is to be certified by
external auditors. A separate statement should be made so that all
stakeholders are aware to what extent their profits were affected due to
the write-off 27.

Banks should reduce dependence on interest income- Indian banks are

largely dependent on the lending and investment as in comparison to
developed countries. Indian banks should look for sources (income) from
fee based services and products.

Credit Information Bureau- The institutionalization of information sharing

arrangement is now possible through the Credit information Bureau of
India Limited (CIBIL). It was set up in the year 2001, by SBI, HDFC, and
two foreign technology partners. This will prevent the lack of system of
information sharing amongst leading institutions to become a weak point
where parties borrow large amount against same assets and property,
which has contributed to the incremental of NPAs of banks.

Circulation of Information of Defaulters- RBI has instituted a system

where periodical circulation of the details of willful defaulters of banks and
financial institutions is done. RBI also publishes a list of borrowers (with
outstanding aggregate rupees one crore and above) who face litigation
due to non- recovery of funds as on 31 st March every year. It is like a
caution list to those considering a request for new or additional credit

102
Chapter 3 Conceptual Framework

limits from such defaulting borrowing units and also from the stakeholders
of these entities.

Debt Recovery Tribunals (DRTs) – For the purpose of recovery of NPAs,

banks and FIs relied heavily on DRTs. These tribunals had been set up
for suits where value of recovery is above Rs. 10 lakhs, while High Courts
and District Courts would take up cases of lesser values. The government
has amended the Debt Recovery Tribunal (procedures) rules, 2003 to
facilitate better administration of the act including plural remedies for
banks like power to attach defendant‘s property before judgment etc.
They have a huge task to recover NPAs in their hands.

(DRTs were set up under the recovery of debts due to banks and financial
institution act, 1993).

Using the newly set up institutions and alternate legal options, banks and
financial institutions paced up their recovery of NPAs. In 2002, SARFAESI
Act (Securitisation and Reconstruction of Financial Assets and Enforcement
of Security Interest) was passed and it empowered the creditors to foreclose
non-performing loans and the underlying collateral without going through a
lengthy judicial or tribunal process. This act was passed with the aim of
enabling banks and financial institutions to realize long-term assets, manage
the problem of liquidity, reduce asset liability mismatches and improve
recovery by taking possession of securities, selling them and reducing NPAs.

The ordinance allows banks and financial institutions to use the services of
ARCs/SCs for accelerated recovery of dues from defaulters to reduce their
NPAs. The ordinance contains provides that ARCs/SCs may take up the
possession of the secured assets and/or the management of the defaulting
borrower companies without resorting to the long and strenuous process of
litigation and without allowing the borrowers to take advantage of the
provisions of SICA/BIFR. All these efforts have resulted in improvement of the
recovery of NPAs by commercial banks.

Table 3.22 depicts the NPAs recovered through various channels by SCBs.

103
Chapter 3 Conceptual Framework

Table: 3.22

NPAs recovered by SCBs through Various Channels( in Rs. Crores)

One-time
Lok SARFAESI
Settlement/compromise DRTs
Adalats Act
Scheme
No. of Cases
139562 186100 7544 2661#
referred
2003-04
Amount Involved 1510 1063 12305 7847
Amount Recovered 617 149 2117 1156
No. of Cases
132781 185395 4744 39288#
referred
2004-05
Amount Involved 1332 801 14317 13244
Amount Recovered 880 113 2688 2391
No. of Cases
10262 268090 3534 41180#
referred
2005-06
Amount Involved 772 2144 6273 8517
Amount Recovered 608 265 4735 3363
No. of Cases
- 160368 4028 60178#
referred
2006-07
Amount Involved - 758 9156 8517
Amount Recovered - 106 3463 3363
No. of Cases
- 186535 3728 83942#
referred
2007-08
Amount Involved - 2142 5819 7263
Amount Recovered - 176 3020 4429
No. of Cases
- 548308 2004 61760#
referred
2008-09 Amount Involved - 2142 5819 7263
Amount
- 176 3020 4429
Recovered**
No. of Cases
- 778833 6019 78366#
referred
2009-10 Amount Involved - 7235 9797 14249
Amount
- 112 3133 4269
Recovered**
No. of Cases
- 616018 12872 118642#
referred
2010-11 Amount Involved - 5300 14100 30600
Amount
200 3900 11600
Recovered**
No. of Cases
- 476073 13365 140991#
referred
2011-12 Amount Involved - 1700 24100 35300
Amount
- 200 4100 10100
Recovered**
# Number of notices issued under section 13(2) of the SARFAESI Act.
Source: Report on Trend and Progress of Banking in India, Various issues, RBI.
**Refers to amount recovered during the given year which could be with reference to cases referred
during the given year as well as during the earlier years.

104
Chapter 3 Conceptual Framework

During 2011-12, total amount of NPAs recovered through the Securitisation

and Reconstruction of Financial Assets and Enforcement of Security Interest
Act (SARFAESI Act), Debt Recovery Tribunals (DRTs) and Lok Adalats
registered a decline compared with the previous year. Of the total amount
recovered through these channels, recoveries under the SARFAESI Act
constituted almost 70 per cent. At present, there are 33 DRTs and five Debt
Recovery Appellate Tribunals across the country.

SARFAESI Act and DRTs proved to be most effective in terms of amount

recovered among the various channels of recovery for dealing with the bad
loans. In terms of cases, the highest numbers were referred to the lok
adalats and the lowest to the DRTs over the period 2003-2012. In terms of
the amount involved, the DRTs recovered the highest amount of around
Rs. 30504 crores out of Rs 99997 crores and Lok Adalats the least, Rs.
1497 crores out of Rs.25166 crores for the period 2003-12. In terms of the
recovery, 58 percent of the amount involved was recovered through one –
time settlement/Compromise schemes. DRTs recovered around 30.5
percent and lok Adalats recovered around 5.63 percent, while 35.71
percent of the amount was recovered under the SARFAESI Act for the
period 2003-2012.

3.9 INFORMATION TECHNOLOGY IN BANKING

One of the key elements of the financial sector reforms in India has been
building the appropriate technological infrastructure for the smooth functioning
of the financial system. Banks in India utilised IT to improve their internal
processes and to increase the facilities and services made available to the
customers. Furthermore, the rise in the number of transactions handled by
banks has increased the dependence of banking sector on modern
technologies.

Over the last two decades Reserve Bank has introduced a bouquet of
payment platforms to meet the requirements of the various bank

105
Chapter 3 Conceptual Framework

customers. For enabling this RBI, has implemented Electronic Clearing

Service (ECS)-Credit/Debit, Electronic Fund Transfer (EFT) and Real Time
Gross Settlement (RTGS) system. The latest innovation in the arena of
technology is ‗Core Banking Solutions‘ combined with ATMs, Internet
Banking, Telephone and Mobile Banking, Customer Relationship Solutions,
Risk Management as well as Management Information System.

Technology has brought a paradigm shift in the functioning of banks. Banks

now efficiently deliver products and services to customers while achieving
economies of scale and cost efficiencies. Apart from reducing transaction
cost, the use of technology has also provided new avenues to banks to
expand their outreach, especially in the remote and rural areas. Banks
have now positioned themselves as a one stop shop for financial services
having an exhaustive range of products.

The process of computerisation, which marked the starting point of all

technological initiatives, is reaching near completion for most of the banks.
While new private sector banks and foreign banks have an edge in this
regard, public sector banks have also been investing to upgrade their
operations. Of the total number of public sector bank branches, 97.8 per
cent were fully computerised at end-March 2010. All branches of the SBI
group were fully computerised. The cumulative expenditure on
‗computerisation and development of communication networks‘ by public
sector banks from September 1999 to March 2010 aggregated to 22,052
crore .

The number of branches providing Core banking Solutions (CBS) in India

has increased significantly in recent years. CBS provides a host of benefits
such as, anywhere banking, anywhere access and quick fund movement at
optimal cost. The percentage of branches to total bank branches under
CBS increased from 11 percent in 2004-05 to 90 percent in 2009-10. The
number of fully computerised branches reached 97.8 percent as against 71
percent at the end of March 2005 as shown in Table 3.23

106
Chapter 3 Conceptual Framework

Table: 3.23
Computerisation in Public Sector Banks

Year Branches Already Branches Fully Partially

Fully Computerised# under Core
Computerised Computerised
Banking
Branches Branches
Solution
2004-05 60.00 11.00 71.00 21.80
2005-06 48.50 28.90 77.50 18.20

2006-07 41.20 44.40 85.60 13.40

2007-08 26.60 67.00 93.60 6.30
2008-09 14.3 81.4 95.7 4.3

2009-10 7.8 90.00 97.8 2.2

# Other than branches under Core Banking Solution

Technology has played a major role in upgrading the payment and settlement
systems, which acts as the spinal cord of the banking system .Transfer from
paper based transactions to electronic means, which includes Real Time
Gross Settlement System (RTGS), National Electronic Fund Transfer (NEFT)
and other modes have intensified the working of banks. Quicker fund
settlement has a direct impact on better management of liquidity by banks. It
has provided for better asset-liability management and an increasing number
of branches all over the country. This has further led to better fund
management, thereby improving profitability for banks. RTGS was
operationalized on March 26, 2004, NEFT system in November, 2005 and
Cheque Truncation System (CTS) in February, 2008.

In recent years, increase in the number of off-site ATMs at various locations and
use of mobile phones to deliver banking services has further enhanced outreach
to banking services in remote areas. A robust network of ATM has been created
to provide greater flexibility and convenience to the banking customers as well as
reduced the servicing cost to the banks. The customers are no longer dependent
on the brick and mortar branch of a bank. The advent of the ATM has made the
concept of ―24x7-365 Days banking‖ a reality. Banks are investing large amounts
to maintain and expand their network of ATMs, upgrading their virtual networks
like Internet Banking, Mobile-Banking and phone banking services. The total

107
Chapter 3 Conceptual Framework

number of ATMs installed in the country was 95686 at the end of March 2012.
During 2011-12, 21,000 new ATMs were installed by the banks. Public sector
banks accounted for more than 60 per cent of the total number of ATMs as at
end-March 2012, while close to one-third of the total ATMs were attributable to
new private sector banks

Table: 3.24
ATMs of Scheduled Commercial Banks

(As at end-March 2012)

Sr. No Bank group On-site ATMs Off-site ATMs Total number of ATMs
1 2 3 4 5

1 Public sector banks 34,012 24,181 58,193

1.1 Nationalised banks* 18,277 12,773 31,050

1.2 SBI group 15,735 11,408 27,143

2 Private sector banks 13,249 22,830 36,079

2.1 Old private sector banks 3,342 2,429 5,771

2.2 New private sector banks 9,907 20,401 30,308

3 Foreign banks 284 1,130 1,414

All SCBs (1+2+3) 47,545 48,141 95,686

Note: *: Excluding IDBI Bank Ltd.

Source: Report on Trend and Progress of Banking in India,2011-12

Table: 3.25
Number of ATMs of SCBs at Various Locations

(At end-March 2012)

Semi– Metro-
Bank group Rural Urban Total
urban politan
1 2 3 4 5 6
Public sector banks 6,673 15,135 19,213 17,172 58,193
Nationalised Banks 3,383 6,800 10,186 10,681 31,050
State Bank Group 3,290 8,335 9,027 6,491 27,143
Private sector banks 1,937 7,520 11,525 15,097 36,079
Old Private Sector Banks 523 2,025 1,876 1,347 5,771
New Private Sector Banks 1414 5,495 9,649 13,750 30,308
Foreign Banks 29 22 268 1,095 1,414
Total 8,639 22,677 31,006 33,364 95,686
Source: Report on Trend and Progress of Banking in India,2011-12

108
Chapter 3 Conceptual Framework

It can be inferred from the above table that there was greater concentration of
ATMs in urban areas than in rural areas and that maximum number of ATMs
have been established in rural areas by public sector banks.

3.9.1 Growth of Electronic Payments (E-Payments)

Although cash continues to be used heavily in retail transactions in India, the
policy initiatives and the regulatory stance of the Reserve Bank has continued
to focus on increasing the acceptance and penetration of safe, secure and
efficient non-cash payment modes comprising Cheques, credit/debit cards,
and transactions through ECS/RTGS/NEFT. As a result of sharp increase in
RTGS and other electronic transactions, the proportion of electronic
transactions both in volume and value has increased sharply. The increased
use of electronic payments has enhanced the efficiency of the payment
system reason being the lower cost and faster settlement in comparison to
paper-based transactions. A brief snapshot of the various large and retail
payment mechanisms is presented in table 3.26.

109
Chapter 3 Conceptual Framework

Table: 3.26
Indian Payments System
Name Description Restriction on amounts Geographic Spread Service Charges
Large value Payment System
paper based debt instruments,
Inter-Bank Clearing No restrictions All 16 RBI Centers No service charge
Deferred Net Settlement(DNS)
All members of local
Paper based Debt instruments,
High Value Clearing INR 10 lakhs and above clearing houses, cleared No Service charge
discontinued from 1st April,2010
on inter-city basis
Inward transactions – Free, no charge
Electronic Credits, interbank or to be levied.
customer transactions, near real
time, maximum 2 hours. RTGS b) Outward transactions –
service window for customer's RTGS is enabled at
Real Time Gross
transactions is available from 9.00 INR 2 lakhs and above 84638 bank branches as -Rs. 2 lakh to Rs. 5 lakh - not
Settlement (RTGS)
hours to 16.30 hours on week on may,2012 exceeding Rs. 30 per transaction.
days and from 9.00 hours to
13.30 hours on Saturdays for
settlement at the RBI end. -Above Rs. 5 lakh - not exceeding Rs.
55 per transaction.
RETAIL PAYMENT SYSTEMS
66 MICR processing Varies from bank to bank, no charges
MICR clearing (Cheques) paper based debt instruments No limits
centres from RBI is levied
paper based debt instruments,
express cheque clearing systems
(ECCS), with an in-built speed
1093 centres across the Varies from bank to bank ,no charges
Non-MICR (Cheques) clearing facility was introduced in No limits
country from RBI is levied
2011 in non-MICR clearing
houses now available at over
12oo non-micr houses
Electronic bulk transfer also
There is no value limit on
Electronic Clearing Service known as many to one(payment over 81 centres across
the amount of individual No Service charge
(Credit) of utility bills, insurance premium, the country
transactions
card payment ,etc.

110
Chapter 3 Conceptual Framework

Name Description Restriction on amounts Geographic Spread Service Charges

Electronic bulk transfer also There is no value limit on
Electronic Clearing Service known as many to one(payment the amount of individual over 81 centres across
No Service charge
(Debit) of utility bills, insurance premium, transactions that can be the country
card payment, etc. collected by ECS Debit.
Inward Transactions: free(no charges
to be levied from beneficiaries)
Outward transactions at originating
bank branches – charges applicable for
the remitter
NEFT operates in hourly batches
No minimum or maximum
on Deferred Net Settlement - For transactions up to Rs 10,000: not
stipulation has been fixed.
National Electronic Fund basis(DNS) generating twelve 86449 branches as on exceeding Rs 2.50 (+ Service Tax).
Cash remittances will be
Transfer(NEFT) settlements from 8 A.M to 7 P.M end may ,2012 - For transactions above Rs 10,000 up
restricted to a maximum of
on week days and six settlements to Rs 1 lakh: not exceeding Rs 5 (+
Rs. 50000 per transaction
from 8.A.M to 1 P.M on Saturday Service Tax).
- For transactions above Rs 1 lakh and
up to Rs 2 lakhs: not exceeding Rs 15
(+ Service Tax).
- For transactions above Rs 2 lakhs:
not exceeding Rs 25 (+ Service Tax).
Source: Compiled from RBI website: www.rbi.org.in

With the computerisation and adoption of Core Banking Solutions in banks almost reaching the final stage of completion,
the focus has now shifted to adoption of more advanced technologies in banking, which would use analytics and business
intelligence to enhance their Customer Relationship Management (CRM) and improve internal effectiveness including
Management Information Systems (MIS) and managing risks arising out of IT implementation. The IT Vision Document,
2011-17 of the Reserve Bank sets out the roadmap for implementation of key IT applications in banking with special
emphasis on seamless delivery of banking services through effective implementation of Business Continuity Management
(BCM), Information Security Policy, and Business Process Re-engineering (BPR).

111
Chapter 3 Conceptual Framework

3.10 SUMMARY
The Banking sector reforms implemented as a part of economic reforms,
initiated the most significant and swift changes resulting in improvements in
the functioning of the banking industry. The banking system, which was over-
protected and strictly regulated, was freed from all restrictions and entered
into an era of competition since 1992.Stringent prudential norms relating to
income recognition, asset classification, provisioning and capital adequacy
have led to the improvement of financial health of banks.

The progress of banking sector reforms since liberalization has been quite
impressive. The RBI has made substantial efforts towards modifying the
policy framework regarding reforms. The proportion of bank resources pre-
empted has been reduced gradually, the SLR, which was 38.5 percent in
March 1992, was brought down to 23 percent in 2012. Similarly, the CRR,
which was 15 percent in January 1992, was brought down to 4.50 percent in
2012. The Bank rate was reduced from 12 percent in October 1991 to 6
percent in 2012. Interest rate regime has been relaxed and banks have been
given operational flexibility and autonomy in determining the rate of interest.

We find that the reforms implemented since 1991 have brought about
significant improvements in India‘s highly regulated banking sector. Opening
up of the banking sector for the private players, for both domestic and foreign
players and easing the barriers to entry have resulted in the reduction in
concentration of power and improvement in the performance of the banking
sector. The profitability and efficiency of the public sector has steadily been
improving over the reform period.

Despite the gradual tightening of prudential norms, the ratio of non-performing

loans (NPL) to total advances has been continuously declining, Gross NPAs
as a percentage of Gross Advances, which was at a high in 1996-1997 has
declined significantly by March end, 2010. Net NPLs have also witnessed a
significant decline, driven by the improvements in loan loss provisioning and
improved recovery management, which comprises over half of the total

112
Chapter 3 Conceptual Framework

provisions and contingencies. Capital adequacy of the banking sector as a

whole has registered a marked improvement and remains above the
stipulated level of 9 percent. Banks have also become sensitized towards
developing robust risk management systems to tackle credit and operational
risks. Banks are increasingly and focusing on their asset-liability maturity
profile to withstand adverse movements in market risk parameters such as
interest rates and take appropriate corrective measures.

Major improvements can be observed in the working of various financial

market participants. Allowing banks to engage in non-traditional activities has
also contributed to improved profitability and cost - earnings efficiency of the
banking sector, including public-sector banks.

The government and the regulatory authorities have followed a step-by-step

approach, not a big bang one. The entry of foreign players has assisted in the
introduction of international practices and systems. Technology developments
have improved customer service. On the whole, the cumulative effect of the
developments since 1991 has been quite encouraging. An indication of the
strength of the reformed Indian financial system can be seen from the way
India was not affected by the Southeast Asian crisis

113
Chapter 3 Conceptual Framework

Endnotes

1. Samir and Kamra, Deepa. (2013). ―A Comparative Analysis of Non- Performing

Assets (NPAs) of Selected Commercial Banks in India‖, Opinion: International
Journal of Management, Vol. 3, No. 1, pp. 68-80.

2. Gupta, Suraj B., (1990): ―Monetary Economics‖, S. Chand and Company Ltd.,
New Delhi, pp. 109.

3. Jain, J.L. and K. Balachandera. (1997, August). ―Managing Financial Risks in

Banking‖, The Banker, pp. 23.

4. Singh, Sultan. (2001). ―An Appraisal of the Banking Sector Reforms in India‖,
Ph.D. Thesis, Guru Jambheshwar University, Hisar, pp.9.

5. ―RBI unveils Roadmap for presence of Foreign Banks in India and Guidelines on
Ownership and Governance in Private Banks‖, http://www.rbi.org.in/scripts/BS_
Press Release Display. aspx? prid =11256.

6. "SBI accounts for one-fifth of country's loans". Livemint.com. 25 January 2009.,

http://www.livemint.com/2009/01/25230613/SBI-ICICI-Bank-profits-rise-o.html.

7. ―Privacy Statement -State bank of India‖., http://www.onlinesbi. com/sbijava/ privacy_

statement.html.

8. Business Standard (21 June 2010). "Approvals for State Bank of Indore merger
by July: SBI"

9. Economic Times (26 August 2010). "State Bank of Indore branches to become
SBI units from Aug 26 : SBI"

10. http://www.sbi.co.in/user.htm.

11. The Brand Trust Report, India Study, 2011 (ISBN 978-81-920823-0-1)
published by Trust Research Advisory (TRA).

12. Gopal, Madan (1994). "The Nation's Bankers". Dyal Singh Majithia. New Delhi:
Publ. Div., Ministry of Information and Broadcasting, Gov. of India. ISBN 81-
230-0119-3.

114
Chapter 3 Conceptual Framework

13. Tandon, Prakash (1989). Banking century: a short history of banking in India & the
pioneer, Punjab National Bank. New Delhi, India: Viking. ISBN 978-0-670-82853-1.

14. https://www.pnbindia.in/en/ui/profile.aspx

15. https://www.pnbindia.in/En/ui/CitizensCharter2.aspx

16. https://www.centralbankofindia.co.in/site/MainSite.aspx?status=2&menu_id=128

17. https://www.centralbankofindia.co.in/site/MainSite.aspx?status=2&menu_id=148

18. ―Scope of priority Sector lending extended‖-The Hindu, www.thehindu.com/todays-

paper/tp-business/article4007541.ece.

19. ―Priority Sector Lending Target for Foreign Banks raised‖,news.outlookindia.

com/items.aspx?artid=769466

20. ―Capital Adequacy Ratio of Commercial Banks rises to 13%‖, http://articles.

economictimes.indiatimes.com/2008-10-20/news/28422215_1_ crar-state-bank-
group-foreign-banks

21. ―Basel II Norms for Indian Banks-stockMarketsReview.com‖. http://www.

stockmarketsreview.com/news/basel_II_norms_for_indian_banks_20090312/

22. http://rbidocs.rbi.org.in/rdocs/AnnualReport/PDFs/72286.pdf [RBI ANNUAL

REPORT 2005- 2006]

23. http://www.allbankingsolutions.com/Banking-Tutor/Basel-iii-Accord-Basel-3-
Norms.shtml

24. Samir and Kamra, Deepa. (2013). ―A Comparative Analysis of Non- Performing
Assets (NPAs) of Selected Commercial Banks in India‖, Opinion: International
Journal of Management, Vol. 3, No. 1, pp. 68-80

25. Ibid

26. ―The NPA Overhang – Magnitude, Solutions, Legal Reforms‖, http:// rbidocs.rbi.
org.in/rdocs/Speeches/PDFs/27663.Pdf.

27. http://www.thehindubusinessline.com/opinion/how-to-swat-the-npa-bug/article
4585226.ece.

115