A SYNOPSIS

ON

“Schedule Commercial Banks Business Composition”

Under The Guidance of: Submitted by:

MR. RAVI ARORA Mohan
Faculty Prakash
SGIIT, Hisser Enrollment No. 07061107085
MBA (Finance)
Remarks of Evaluator

Approved/ Disapproved Approved/Disapproved

(1 Evaluation) (II Evaluation)

Session:-2007-09
Specialization – Finance

DIRECTORATE OF DISTANCE EDUCATION

GURU JAMBHESHWAR UNIVERSITY OF SCIENCE AND
TECHNOLOGY
HISAR - 125001
 Declaration

I Dipika Rani Roll No 0610405 Class MBA Finance 2nd Year (4th semester)
“Haryana School of Business” hereby declare that the project entitled
“Business Composition of Scheduled Commercial Banks” is my original
work and
has

[Signature of the Candidate]

Acknowledgement

No task is a single man’s effort. Cooperation and coordination of various

people at various places go into the successful implementation. It is a great
pleasure to have the opportunity to extend my heart–felt thanks to everybody
who helped me through the progress of this project.

It would be prudent to commence this report with a sincere tribute to all those
who played an indispensable role in the accomplishment of this work and
obliged whenever and wherever their able guidance was required.
I would like to pay my gratitude to my college mentor Professor M.S.Turan (Professor at H.S.B.) for providing his timely, expert
and valuable suggestions as and when required.

Thanking you,

Signature of supervisor DIPIKA

RANI

ROLL NO. – 0610405

Contents

• Title Page
• Declaration
• Certificate From Guide
• Acknowledgement
• Contents
• List of tabels
• List of figures
• Chapter 1 - Introduction
• Chapter 2- Review of literature
• Chapter 3
1. Problem statement
2. Research Objective
3. Source & nature of Data
4. Analysis of Data
5. Plan of study
6. Limitation of study
7. Utility of Study
8. Conclusion
9. Bibliography
 CHAPTER 1

(A) INTRODUCTION TO BANKING

(1.1) INTRODUCTION TO BANKS

Finance occupies an important place as input in every economic activity. It is

rightly termed as “Science of Money”. The word ‘Banking’ as being

defined by Sec.5 (b) of the Banking Regulation Act, 1949, as: 'Banking'
means accepting, for the purpose of lending or investment, of deposits of
money from the public repayable on demand or otherwise and withdrawal
by cheques, draft, order or otherwise." Banks are business institutes with the
undoubted objective of earning profit. Project funding and Credit Risk
management depends upon bank’s ability in generating any type of Volume
and Mix of loans depending on two factors – bank’s strength and

Credit requirement in operational area. Presently due to competition and

meeting the demanding standards of customers has made lending a tough job
for bankers.

Banks deploy a major portion of fund by way of loan and advances. The term
CREDIT comes from Latin word ‘CREDO’ meaning ‘I TRUST’. Lending
Business provides a major part of the total income of the bank. Given these,
and the fact that the bulk of funds lent belong to depositors, it is necessary that
funds be deployed on a sound and realizable basis, ensuring optimum return.
Different methods of assessment of project financing are carried out by Credit
Department of a bank. While lending banks also keep into account the wider
national objectives of economic and social development.

The art of managing risk is more challenging then ever now a days. Risk
managers face a wide range of demands from working with multiple variables
to funding technology.

Banks are institutions that channelise the savings of individuals and entities
into investment in productive assets in the economy. The accumulate the
savings in the form of demand and time deposits, which are then deployed in
financing agriculture, industry, trade and services.

Banks have the advantage of low cost funding as they have access to the retail
fund base. The access to retail funds is on account of the cheque facility that
permits an account-holder to transmit funds at will. This convenience of easy
transmission of funds has led to accumulation of funds at relatively low interest
rates across numerous retail accounts thereby providing the bank with
enormous resources at low cost of funds.

1.2 INDIAN BANKING SYSTEM – THE HISTORY

Banking in India has its origin as early as the Vedic period. It is believed that
the transition from money lending to banking must have occurred even before
Manu, the great Hindu Jurist, who has devoted a section of his work to deposits
and advances and laid down rules relating to rates of interest. During the Mogul
period, the indigenous bankers played a very important role in lending money
and financing foreign trade and commerce. During the days of the East India
Company, it was the turn of the agency houses to carry on the banking
business. The General Bank of India was the first Joint Stock Bank to be
established in the year 1786. The others, which followed, were the Bank of
Hindustan and the Bengal Bank. The Bank of Hindustan is reported to have
continued till 1906 while the other two failed in the meantime.

In the first half of the 19th century the East India Company established three
banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bank
of Madras in 1843. These three banks also known as Presidency Banks were
independent units and functioned well. These three banks were amalgamated in
1920 and a new bank, the ‘Imperial Bank of India’ was established on 27th
January 1921. With the passing of the State Bank of India Act in 1955 the
undertaking of the Imperial Bank of India was taken over by the newly
constituted State Bank of India.

PRE-INDEPENDENCE PHASE :

Although, money lending and indigenous banking, in some form or the other,
was in operation in ancient India Modern banking has been legacy of the
British rule. The first Joint Stock bank was established in Calcutta in 1870 by
one of the Agency House. The joint stock banks were followed by three
Presidency Banks, the first among them being the Bank of Bengal, which
received its charter in 1809. The Bank of Bombay and Bank of Madras were
established in 1840 and 1843 respectively. As these banks do not conduct
exchange and remittance between Indian banks and other countries, this
situation lead to the entry of Exchange Banks (Foreign banks) towards later
half of the nineteenth century.

In January 1921, the Imperial bank of India commenced its operations after
taking over the businesses of all three presidency banks. The Reserve Bank of
India was constituted in January 1935 and it commenced its business in April
1935. The World War II period saw the proliferation of banking institutions in
country and by 1947 there were 558 commercial banks operating in India of
which 99 were scheduled banks and 459 were non-scheduled banks. The first
comprehensive legislation relating to banking in country came with the
adoption of the Banking Companies Act, 1949.

POST-INDEPENDENCE PHASE:

In the five decades since independence, banking in India has evolved through
four distinct phases:

• Foundation Phase can be considered to cover 1950s and 1960s till the
nationalization of banks in 1969. The focus during this period was to lay
the foundation for a sound banking system in the country. As a result the
phase witnessed the development of necessary legislative framework for
facilitating re-organization and consolidation of the banking system, for
meeting the requirements of Indian economy. A major development was
transformation of Imperial Bank of India into State Bank of India in
1955. RBI tightened its control over the Commercial banks due to failure
of Pallai Central Bank in August 1960. The Deposit Insurance
Corporation was established in January 1962 as a wholly owned
 subsidiary of RBI. Due to amalgamation and liquidation in 1967 the
members of commercial banks declined to 91 of which 71 were
scheduled banks and 20 were non-scheduled banks. The most
memorable event relating to banking industry, an event that was to
transform the banking industry beyond recognition, was the
nationalization of 14 major banks in July 1969. Based on the
recommendations of the Gadgil Study Group and the Narasimhan
Committee, Reserve Bank of India introduced the Head Bank Scheme
towards end of 1969. The banking commission headed by R.S. Sarauja
gave report on structure and functioning of banks in feb.1972. According
to recommendations of Narasimhan Committee, the regional rural banks
came to be established in 1975. The National Bank of Agriculture and
Rural Development was established in 1982 to organize the industrial
support to agriculture and rural development. In 1980 six larger private
sector banks were nationalized bringing the number of nationalized
banks to 20.
• Expansion Phase had begun in mid 60s but gained momentum after
nationalization of banks and continued till 1984. A determined effort
was made to make banking facilities available to the masses. Branch
network of the banks was widened at a very fast pace covering the rural
and the semi-urban population, which had no access to banking hitherto.
Most importantly, credit flows were guided towards the priority sectors.
However this weakened the lines of supervision and affected the quality
of assets of the banks and pressurized their profitability and brought
competitive efficiency of the system at low ebb.
• Consolidation Phase, the phase started in 1985 when a series of policy
initiatives were taken by RBI which saw market slowdown in the branch
expansion. Attention was paid to improving housekeeping, customer-
service, credit management, staff productivity and profitability of banks.
Measures were also taken to reduce the structural constraints that
obstructed the growth of money market.
• Reform Phase, the macro economic crisis faced by the company in
1991 paved the way for extensive financial sector reforms which brought
deregulation of interest rates, more competition, technological changes,
prudential guidelines on asset classification and income recognition,
capital adequacy, autonomy packages, etc.

1.3 INDIAN BANKING SYSTEM – THE CURRENT SCENARIO

Banking Industry in India has always revolved around the traditional function
of deposits and credit. Their role had been defined as to assist the overall
economic growth with majority of share being controlled by the Government of
India in most of the banks. But with the process of liberalization, the banking
industry has also undergone tremendous change in the last 5 years. The market,
which was largely controlled by the public sector banks, has now been facing
stiff competition not only from foreign players but also from the new
generation private sector banks. The rules of the game have been changing with
the RBI introducing new norms to make banks more accountable and to adopt
the practices followed worldwide.

Most of the banks have now been trying to function on the concept of a
Universal Bank. Apart from the traditional functions of a commercial bank,
they are taking steps to build themselves into a one stop financial center
wherein all the financial products would be available. Banks have started
catering to the retail segment to improve their deposit portfolio. In order to
have a maximum share in this segment; most of the banks have been
introducing new products. The delivery channels have also been shifted from
branches to ATMs, phone banking, net banking etc.

Technology has become an important medium of not only attracting new

customers but also in retaining them. The new generation private sector banks
have made a strong presence in the most lucrative business areas in the country
because of technology upgradation. While, their operating expenses have been
falling as compared to the PSU banks, their efficiency ratios (employee’s
productivity and profitability ratios) have also improved significantly.

Mergers and Acquisitions have also started playing their role in the banking
industry where lots of players are trying to consolidate their position. The
recent merger of Times Bank with HDFC Bank was an important step in this
direction. In recent times, most of the new private sector banks have shown
interest in inducting a foreign partner in their operations.

The government is planning to bring down its stake in the public sector banks
from 51% to 33%. This move will enable these banks to raise further capital to
adhere to the CAR requirements and will also help in changing their perception
in the market vis-à-vis the private sector banks. Most of the banks are also
planning to enter the insurance business and are in the process of identifying
their strategic partners. Since most of the banks already have an extensive
distribution network, this new business should result in substantial revenues.
But with most of the top league players planning to enter this business, the
more efficient and pro active players would be able to take a lead.

INDIAN BANKING STRUCTURE

The structure of the banking industry affects its performance and efficiency
which, in turn, affects the banks’ ability to collect savings and channel them
into productive investment. The success of banking sector very much depends
on the ownership of banks-whether private or public or mixed-whether the
industry is competitive or oligopolistic and the extent of entry restrictions on
new banks; how far it is regulated in terms of interest rates, spreads between
lending and deposit rates etc.

For the first time, most of the major commercial banks were nationalized in
India in 1969. With the nationalization, restriction on entry and expansion of
private and foreign banks increased. The reserve bank of INDIA also began
enforcing uniform interest rates and service charges among nationalized. This
caused a lack of competition among public banks or between the public and
private banks. This combined with the labour policies of the public sector
where employees ‘ salaries promotions are not linked with their job
performance, has led to steady decline efficiency, quality of customer service
and work culture in the banks. Another effect of the lack of competition is that
most banking operations have not computerized as workers oppose it fearing
job losses, while the management has felt no pressure to improve efficiency or
banking services.

Of the funds left with banks, 40 per cent must be lent to priority sectors at
concessional rates and further requirements of loan to the exporting industries,
food procurement programmes, etc. again at concessional rates, left 25 per cent
of bank deposits to meet the financial rates, left 25 per cent of bank deposits to
meet the financial needs of all the remaining sectors. The purpose of priority
sector lending was to increase the proportion of credit to those sectors
important to the national economy in terms of their contribution to growth,
employment generation, or more equal income distribution, which may not
receive adequate credit otherwise.

Some of the priority sector loans were given without adequate safeguards
against default. A significant proportion of loans were shared by those for
whom it was never intended. It is estimated that twenty one percent of the loan
advanced by the public sector banks are non-performing. Concessional priority
sector lending imposes a burden on the rest of the economy which must
subsidize the cost of such loans and is faced with r3educed credit availability to
the more productive investment. Thus the social benefits of priority sector
lending have proved to be smaller and cost higher than originally expected.
Since bank nationalization in 1969, the RBI has usually set interest rate. While
the RBI followed a low interest rate policy until the mid 1970 the interest rates
have been fairly since then. However a large fraction of loans were subsidized
including loans for the public sector, priority sector, exporters etc,

Most of these categories attracted nominal annual interest rate of 13%.

CENTRAL BANK

A bank which is entrusted with the functions of guiding and regulating the
banking system of a Country is known as its Central bank. Such a bank does
not deal with the general public. It acts essentially as Government’s banker,
maintain deposit accounts of all other banks and advances money to other
banks, when needed. The Central Bank provides guidance to other banks
whenever they face any problem. It is therefore known as the banker’s bank.
The Reserve Bank of India is the central bank of our country. The Central Bank
maintains record of Government revenue and expenditure under various heads.

Important Functions of RBI

Monetary Authority: Formulates implements and monitors the monetary policy.

Objective: maintaining price stability and ensuring adequate flow of credit to
productive sectors.

Regulator and supervisor of the financial system:

• Prescribes broad parameters of banking operations within which the

country's banking and financial system functions.
• Objective: maintain public confidence in the system, protect depositors'
interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange

• Manages the Foreign Exchange Management Act, 1999.

• Objective: to facilitate external trade and payment and promote orderly
development and maintenance of foreign exchange market in India.

Issuer of currency:

• Issues and exchanges or destroys currency and coins not fit for
circulation.
 • Objective: to give the public adequate quantity of supplies of currency
notes and coins and in good quality.

Developmental role

• Performs a wide range of promotional functions to support national

objectives.

Related Functions

• Banker to the Government: performs merchant banking function for the

central and the state governments; also acts as their banker.
• Banker to banks: maintains banking accounts of all scheduled banks.

Internal organization & management of RBI

The chairman of the central board of directors of the bank and its chief
executive authority is the governor. He has the powers of general super
intendance and direction of the affairs and business of the bank. The governor
is assisted at present in the performance of his duties by four DEPUTY
GOVERNORS and four EXECUTIVE DIRECTORS. The EXECUTIVE
DIRECTOR comes in between the DEPUTY GOVERNOR and the CHIEF
MANAGER

The primary functions of the bank are exercised through two separate
departments- the banking and issue departments. These two departments
constitute what are known as “local” offices/branches of the bank & are located
at sixteen major cities of the country. In place where there is no office of the
bank, it is represented by agents & sub agents, the SBI &its subsidiaries.
Formulation of policies and rendering of advice to government on economic
and financial matters etc. are mainly attended at headquarters or the central
office of the bank located in BOMBAY. The department of non-banking
companies located in CALCUTTA. For a satisfactory performance of the
vastly increased volume of work some of the central office department has
established regional offices at various centers.

1.4CLASSIFICATION OF BANKS:

1.4.1 SCHEDULED COMMERCIAL BANKS

Scheduled Banks in India constitute those banks which have been included in
the Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn
includes only those banks in this schedule which satisfy the criteria laid down
in section 42(6)(a) of the act. There are more than 300 scheduled banks in
India having a total network of 64,918 branches. The scheduled commercial
banks in India comprise of State bank of India and its associates (8),
nationalized banks (19), foreign banks (45), private sector banks (32).

"Scheduled banks in India" means the State Bank of India constituted under the
State Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in the
State Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), a
corresponding new bank constituted under section 3 of the Banking Companies
(Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or under
section 3 of the Banking Companies (Acquisition and Transfer of
Undertakings) Act, 1980 (40 of 1980), or any other bank being a bank included
in the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), but
does not include a co-operative bank".

COMMERCIAL BANK:

Banks in India were started on the British Pattern in the beginning of the 19th
century. In those days, all the banks were joint stock banks and a large number
of them were small and weak. At the time of the second world war, about 1500
joint stock banks were operating in undivided India, out of which over 1400
were non-scheduled banks. A quiet few of them were managed by bad and
dishonest management and naturally there wer6e a number of bank failures.
Hence the Government has to step in and the Banking Companies Act, 1949
(which was subsequently renamed as Banking Regulation Act) was enacted
which led to gradual elimination of weak banks who were not in a position to
fulfill the various requirements of the Act. In order to strengthen the weak units
and revive public confidence in the banking system, a new section 45 was
inserted in the Banking regulation Act in September, 1960, empowering the
Government of India to compulsorily amalgamate weak units with stronger
ones on the recommendations of RBI. Today banks are broadly classified into
two - Scheduled Banks and Non-scheduled Banks.

Scheduled banks are those banks which are included in the second schedule of
the Reserve Bank Act, 1934. In terms of Sec. 42(6) (a) of the Reserve Bank of
India Act, a bank should fulfill the following conditions:

1. It must have a paid-up capital and reserves of an aggregate value of not

less than Rs 5 lakhs;
2. It must satisfy RBI that its affairs are not conducted in a manner
detrimental to the depositors;
3. It must be a state co-operative bank or a company under companies act,
1956 or an institution notified by the Central Government in this behalf
or a corporation or a company incorporated by or under any law in force
in any place outside India.

The scheduled banks enjoys certain privileges like approaching RBI for
financial assistance, refinance etc and correspondingly, they have certain
obligations like maintaining certain cash reserves as prescribed the RBI,
submission of returns etc. The scheduled commercial banks in India comprise
of, State bank of India and its associates (8), the other nationalised banks (19),
foreign banks, private sector banks, co-operative banks and regional rural
banks. As at the end of 30th June, 1999, there were 300 scheduled banks in
India having a total network of 64,918 branches among them.

Non-scheduled banks are those joint stock banks, which are not included in
the second schedule of the RBI act on account of the failure to comply with the
minimum requirements for being scheduled. As on 30th June, 1997, there are
only 3 non-scheduled commercial banks operating in the country with a total of
9 branches.

TYPES OF COMMERCIAL BANKS

• Public Sector Banks

• Private Sector Banks
• Foreign Banks
Public Sector Banks

Among the Public Sector Banks in India, United Bank of India is one of the 14
major banks which were nationalized on July 19, 1969. Its predecessor, in the
Public Sector Banks, the United Bank of India Ltd., was formed in 1950 with
the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914),
Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) and
Hooghly Bank Ltd. (1932).These are banks where majority stake is held by the
Government of India or Reserve Bank of India. Examples of public sector
banks are: State Bank of India, Corporation Bank, Bank of Baroda and Dena
Bank, etc.

The Public Sector in India banking emerged to its present position in three
stages. First, the conversion of the exiting imperial Bank of India into the State
Bank of India in1955, followed by the taking over of the 7 state associated
banks as its subsidiary banks; Second the nationalization of 14major
commercial banks on July 17, 1969 and last, the nationalization of 6 more
commercial banks on April 15, 1980. Thus 27, banks constitute the Public
sector in the Indian commercial Banking.

Private Sector Banks

Private banking in India was practiced since the beginning of banking system in
India. The first private bank in India to be set up in Private Sector Banks in
India was IndusInd Bank. It is one of the fastest growing Bank Private Sector
Banks in India The first Private Bank in India to receive an in principle
approval from the Reserve Bank of India was Housing Development Finance
Corporation Limited, to set up a bank in the private sector banks in India as part
of the RBI's liberalization of the Indian Banking Industry. It was incorporated
in August 1994 as HDFC Bank Limited with registered office in Mumbai and
commenced operations as Scheduled Commercial Bank in January 1995

FOREIGN BANKS:

Foreign banks have been doing the normal banking business in the country.
During the period of nationalization, the entry of new foreign banks and
expansion by existing foreign banks were prohibited. Even, when the norms
were relaxed later on, RBI was very slow in granting any further approvals to
these banks. But most of these banks have concentrated on the metropolitan
cities of the country and have been able to do reasonably well. These banks
have used the latest technology to compensate for the limited number of
branches they have.

In the post liberalization period, there has been a sharp increase in the total
business done by the foreign banks. A number of new players have entered and
the existing players have consolidated their position in the market. In the last
couple of years, some of the foreign banks have entered the retail segment and
introduced a number of new products in the market. This has intensified the
competition in the banking sector and has made most of the old players rethink
their strategy.

Looking at the potential of the Indian markets, some of the foreign banks in
recent times have expressed their plans of acquiring few Indian banks for
further expansion. The current RBI norm does not allow an Indian Bank to
place equity with a foreign bank carrying branch transaction in the country.
These bank norms are however expected to be eased.

Most of the developments in the last couple of years have been in favor of the
new generation private sector banks that have equipped themselves with latest
technology and have also focussed more on fee-based revenues.

1.4.2 DEVELOPMENT BANK

Business often requires medium and long-term capital for purchase of

machinery and equipment, for using latest technology, or for expansion and
modernization. Such financial assistance is provided by Development Banks.
They also undertake other development measures like subscribing to the shares
and debentures issued by companies, in case of under subscription of the issue
by the public. Industrial Finance Corporation of India (IFCI) and State
Financial Corporation (SFC) are examples of development banks of India.

1.4.3 CO-OPERATIVE BANK

People who come together to jointly serve their common interest often form a
co-operative society under the Co-operative Societies Act. When a co-operative
society engages itself in banking business it is called a Co-operative Bank. The
society has to obtain a license from the Reserve Bank of India before starting
banking business. Any co-operative bank as a society is to function under the
overall supervision of the Registrar, Co-operative Societies of the State. As
regards banking business, the society must follow the guidelines set and issued
by the Reserve Bank of India.
1.4.3.1 TYPES OF CO –OPERATIVE BANKS

There are three types of co-operative banks operating in our country. They are
primary credit societies, central co-operative banks and state co-operative
banks. These banks are organized at three levels, village or town level, district
level and state level.

Primary Credit Societies: These are formed at the village or town level with
borrower and non-borrower members residing in one locality. The operations
of each society are restricted to a small area so that the members know each
other and are able to watch over the activities of all members to prevent frauds.

Central Co-operative Banks: These banks operate at the district level having
some of the primary credit societies belonging to the same district as their
members. These banks provide loans to their members (i.e., primary credit
societies) and function as a link between the primary credit societies and state
co-operative banks.

State Co-operative Banks: These are the apex (highest level) co-operative
banks in all the states of the country. They mobilize funds and help in its proper
channelisation among various sectors. The money reaches the individual
borrowers from the state co-operative banks through the central co-operative
banks and the primary credit societies.

1.4.4 SPECIALIZED BANKS

There are some banks, which cater to the requirements and provide overall
support for setting up business in specific areas of activity. EXIM Bank, SIDBI
and NABARD are examples of such banks. They engage themselves in some
specific area or activity and thus, are called specialized banks.

Export Import Bank of India (EXIM Bank):

If person wants to set up a business for exporting products abroad or importing

products from foreign countries for sale in our country, EXIM bank can
provide you the required support and assistance. The bank grants loans to
exporters and importers and also provides information about the international
market. It gives guidance about the opportunities for export or import, the risks
involved in it and the competition to be faced, etc.

Small Industries Development Bank of India (SIDBI):

If person wants to establish a small-scale business unit or industry, loan on easy
terms can be available through SIDBI. It also finances modernization of small-
scale industrial units, use of new technology and market activities. The aim and
focus of SIDBI is to promote, finance and develop small-scale industries.

National Bank for Agricultural and Rural Development (NABARD):

It is a central or apex institution for financing agricultural and rural sectors. If a

person is engaged in agriculture or other activities like handloom weaving,
fishing, etc. NABARD can provide credit, both short-term and long-term,
through regional rural banks. It provides financial assistance, especially, to co-
operative credit, in the field of agriculture, small-scale industries, cottage and
village industries handicrafts and allied economic activities in rural areas.

NATURE OF BANKING

In India around 73% of the bank branches are located in rural and semi-urban
areas. In the country as a whole only 10% of the branches of the public sector
banks are fully computerized and 22% are partially computerized. But on the
other hand some new private sector banks are fully computerized and they are
launching a gateway to facilitate intra-bank transfer of funds through Internet.
They are bringing banking services to the very door step. Especially HDFC
Bank Ltd, ICICI Bank Ltd, Citibank are very active on this front and
concentrating on Internet and e-commerce to offer their clientele a whole range
of products under one roof. Their net profits are much more than other rival
banks.

Some new private sector banks like Bank of Punjab LTD, IDBI Ltd, UTI Ltd
are fully computerized and they are providing services like ATMs, online
services and they are not lagging behind in any way. Recently, they have
started to penetrate in semi-urban and rural sector of India. Their profits, branch
network is on increasing trend.

Most public sector banks have hundreds of branches without computers and
inter bank connectivity is a distant possibility. But some have started moving in
this direction. SBI plans to invest $200 millions on technology over the next
two years. Other public sector banks too have started spending on Information
Technology. According to ways India, a software company with core strengths
in internet banking products, each public sector bank will spend about $50
million over the next five years. But these are the plans and no public sector
bank seems to be in a position right now to make a serious Foray into internet
banking. The gap regarding the productivity Information technology has made
the banking services sector faster, more efficient and more economical. Its
impact can be seen on the efficiency of banks, productivity, profitability,
employment, psychology of customers. The internet is taking banks in the
directions other than loans and deposits. With the introduction of Information
Technology, banking in India will never be the same again.

NEEDS FOR THE BANKING

The fast expansion and spread of the banking sector in India after 1969 have
resulted in surfacing of several internal deficiencies in the system. Due to these
deficiencies, customer service was affected badly, work technology remained
stagnant and the transaction cost kept on increasing over the years. In spite of
positive achievements and meeting various socio-economic goals, the Banking
system in India during 1980s, has experienced several problems mainly of the
profitability and viability of the Banks. The Narasimham Committee observed
that gross profits before provisions were no more than 1.10 per cent of working
Funds. This clearly indicates the low profitability of Indian Banks.

The major factors affecting the profitability of Indian Banks include higher
SLR and CRR requirements, sick industrial advances, deterioration in the
quality of assets, priority sector advances, export credit, food credit, political
and administrative interference, etc. These factors contributed for less income
realization by Public sector Banks. Similarly, the expenditure by banks kept a
higher pace of increase particularly administrative costs, branch expansion of
public sector banks into Rural and semi-urban areas, lack of improvement in
operational methods leading to higher transaction costs, etc. contributed to the
lower profitability of public sector Banks

BENEFITS OF BANKS

Benefits of Banks to Large Corporate

1. The large corporate is able to offer an attractive financing option to its

buyers and thus capture ‘channel loyalty.
2. If the large corporate is an MNC, it is no longer constrained by its global
credit policies.
3. The large corporate is able to pursue its aggressive sales plan.
4. The large corporate is able to save on the cash discounts which it offers
to the buyers for early realization of the receivables.
 5. The large corporate is freed from the cost arising out of the requirement
of placing advance with the supplier and can ask for better pricing from
the supplier on account of the finance made available through the bank.
6. The large corporate payable cycle is increased.
7. The large corporate may be able to avail cash discount which is offered
by its suppliers.
8. The large corporate is freed from the administrative hassles of
receivables management.

FUNCTION OF BANKS

PRIMARY FUNCTION

• Accepting of deposits
• Fixed or time Deposit Account
• Current or Demand Deposit Account
• Saving Deposit Account
• Home safe Saving Account
• Recurring Deposit Account
• Advancing of loans
• Cash credit
• Loans and Advances
• Discounting of the Bill of Exchange
• Investment in Government Securities
• Credit Creation

SECONDRY FUNCTION

• Agency or Representative Functions

• Collection and Payment of Various Items
• Purchase and sale of Securities
• Trustee and Executor
• Remitting of Money
• Purchase and Sale of Foreign Exchange
• Letter of References
• Other Agency Functions
GENERAL UTILITY SERVICES

• Locker Facilities
• Business Information and Statistics
• Help in Transportation of Goods
• Acting as a Referee
• Issuing letters of credit
• Acting as underwriters
• Issuing of travelers cheques and credit cards
• Issuing of Gift cheques
• Merchant Banking Services
• Dealing in Foreign Exchange

SOCIAL FUNCTION

• Capital Formation
• Inducement to Innovations
• Impact on the rate of Interest
• Role in the Development of Rural sector
• Helpful in pushing-up the Demand
• Monetary policy
• Employment

BANKING REGULATION ACT, 1949

The banking regulation act was passed and consolidates and amends the law
relating to banking companies. It come into effect from 16 March 1949 &
applies to the whole of india.

The banking regulations act, 1949, has been divided into the following five
parts:

Part 1: Preliminary (sec 1to 5A)

Part2: Business of banking co. (sec 6 to 36A)

Part 2A: Control over management (sec 36AA to 36AC)

Part 2B: Prohibition of certain activities in relation to banking companies (sec
36AD)

Part 2C: Acquisition of the undertakings of banking company in certain cases

(sec 36AE to 36AZ)

Part 3: Suspension of business & winding up of banking co. (sec 36 Bto45)

Part3A: Special provisions for speedy disposal of winding up proceeding

(sec45A to 45X)

Part3B: Nomination of deposit accounts & ledgers.

Part4: Miscellaneous (sec 46 to 55A)

Part5: Application of the act to co-operative banks (sec 56 effective from 1st
march 1966)

The B.R.A. was further amended by banking laws (amend) act 1983 (effective
from 15-2-1984). The banking public financial institutions & negotiable
instrument laws (amended) act 1988 and the banking regulation (amended)act
1994.

The following are the Scheduled Banks in India (Public Sector):

• State Bank of India

• State Bank of Bikaner and Jaipur
• State Bank of Hyderabad
• State Bank of Indore
• State Bank of Mysore
• State Bank of Patiala
• State Bank of Saurashtra
• State Bank of Travancore
• Andhra Bank
• Allahabad Bank
• Bank of Baroda
• Bank of India
• Bank of Maharashtra
• Canara Bank
• Central Bank of India
• Corporation Bank
• Dena Bank
 • Indian Overseas Bank
• Indian Bank
• Oriental Bank of Commerce
• Punjab National Bank
• Punjab and Sind Bank
• Syndicate Bank
• Union Bank of India
• United Bank of India
• UCO Bank
• Vijaya Bank

The following are the Scheduled Banks in India (Private Sector):

• Vysya Bank Ltd

• Axis Bank Ltd
• Indusind Bank Ltd
• ICICI Banking Corporation Bank Ltd
• Global Trust Bank Ltd
• HDFC Bank Ltd
• Centurion Bank Ltd
• Bank of Punjab Ltd
• IDBI Bank Ltd

The following are the Scheduled Foreign Banks in India:

• American Express Bank Ltd.

• ANZ Gridlays Bank Plc.
• Bank of America NT & SA
• Bank of Tokyo Ltd.
• Banquc Nationale de Paris
• Barclays Bank Plc
• Citi Bank N.C.
• Deutsche Bank A.G.
• Hongkong and Shanghai Banking Corporation
• Standard Chartered Bank.
• The Chase Manhattan Bank Ltd.
• Dresdner Bank AG
RBI expects banks to adopt the Standardized Approach for the measurement of
Credit Risk and the Basic Indicator Approach for the assessment of Operational
Risk. RBI has also specified that the migration to Basel II will be effective
March 31, 2007 and has suggested that banks should adopt the new capital
adequacy guidelines and parallel run effective April 1, 2006.

Indian Banks Association (IBA)

The Indian Banks Association (IBA) was formed on the 26th September, 1946
with 22 members. Today IBA has more than 156 members comprising of
Public Sector banks, Private Sector banks, Foreign banks having offices in
India, Urban Co-operative banks, Developmental financial institutions,
Federations, merchant banks, mutual funds, housing finance corporations, etc.

The functioning of IBA

1. To promote sound and progressive banking principles and practices

2. To render assistance and to provide common services to members.
3. To organise co-ordination and co-operation on procedural, legal,
technical, administrative and professional matters.
4. To collect, classify and circulate statistical and other information.
5. To pool together expertise towards common purposes such as reduction
in costs, increase in efficiency, productivity and improve systems,
procedures and banking practices
6. To project good public image of banking through publicity and public
relations.
7. To encourage sports and cultural activities among bank employees.

need for financial reforms

Financial sector reforms are most essential not only to ensure the efficient
allocation of funds available for investment but also to strengthen the
implementation of both fiscal and monetary policies and preserve macro
economic stability. However, most of financial reforms proposed in INDIA
can only be implemented if fiscal consolidations can be achieved. This is
because further liberalization in the presence of large public sector borrowing
requirement and consequently high interest rates cold weaken the financial
system as banks non- performing assets will increase it is essential to take up
the priority financial sector reform. The comprehensive restructuring of the
public sector banks needs to be completed. This means the bank will have
more managerial autonomy over branch networks, employments and
compensation issues, and portfolio decision. At the same time, the
government’s equity share in these banks needs to be reduced below to fifty
percent so as to create incentives for improved bank and management t and
profitability.

It is clear that the phase in which the development of India’s financial sector
could benefit from direct government ownership is long over and that in third
new phase the government’s most important and challenging role is full filling
its overall responsibilities and in strengthening the institutional base of
financial market.

Capital markets were under control of the government until 1991. Foreigners
were not permitted to invest in the Indian share or bond market, nor were
Indian firms allowed to tap the international capital for productive investment,
thus retarding growth. On the other hand, excessive external borrowing by the
government to finance current account deficits and low return public sector
investments over the 1980 led to build up of a foreign debt and balance of
payment crisis in 1991.

There are some points which reflect the need of banking sector reforms:

1. Inadequate accounting, auditing and disclosure practices in the banking

sector weakened the market discipline in INDIA
2. Implicit government guarantees encourage excessive, unsustainable
capital inflows.
3. Inadequate prudential supervision and regulation of domestic financial
institutions and markets, which open the way for corruption, connected
lending and gambling for redemption, namely, the pursuit of high return
but low probability investment by institution with low or negative net
worth.

Thus, banking sector reforms have been concerned with improving the
following areas:

1. The policy frame work

2. The financial health
3. The institutional infrastructure

Banking Reforms
The Indian Financial system comprising the commercial banks, the financial
institutions and the capital markets, has undergone a very special
transformation in the past three decades. The committee on Financial system
well known as the Narsimham Committee, set up in 1991, to recommend
measures for bringing about necessary reforms in the financial sector, did
acknowledge the spectacular success of the public sector banks since the major
banks were nationalized on 19 July, 1969. But for twenty years after the
nationalization, such spectacular development was witnessed in the spread of
branch network of banks, mobilization of savings and in creating employment
opportunities for half a million persons, rather than in the improvement of the
services to the customers. Frauds, corruption and misutilization of public
money were discovered and as many economists warned, in that trend would
continue without any change, the banking industry might become a white
elephant by the turn of the present century.

In order to support the major changes that took place in trade and industrial
policies the depositors and the investors, a thorough review of the financial
system was felt necessary. Hence, the Narasimham Committee was set by the
Government of India in August 1991 which submitted its report within three
months i.e. in November.

Reforms of Banking SectoR

A number of reform initiatives have been taken to remove or minimize the

distortions that affect the efficient and profitable functioning of banks. These
include the following:

1. Reduction in SLR committee has been, by and large, achieved. The

medium target of 10% in CRR has also been achieved through the
committee recommended that it should be reduced by 3 to 5 percent of
the total deposits of the banks.
2. The nationalized banks have been allowed direct access to capital
markets to mobilize funds from the public although they will continue to
remain in the control of the Government which will retain 51 percent of
the equity.
3. Accounting and prudential norms related to income recognition,
provisioning and capital adequacy, in line with the accepted international
standards, have been implemented since 1992-93 to ensure safety of the
financial system.
4. The regulated interest rate has been rationalized and simplified. The
number of lending rates has been reduced from six to three rates with
 two concessional rates and a floor rate for all advances above rupees two
lakhs.
5. Movement of interest yield on Government securities towards market
related rates has been allowed subject to prudential guidelines.
6. Transparent guidelines or norms for entry and exit of private sector
banks have been stipulated.
7. A board for financial bank supervision has been established to strengthen
the supervisory system of the BBI.
8. The implementation of the new norms under the reform measures will
lead to considerable impairment of capital in some of the nationalized
banks which have to recapitalize.
9. The recovery of debts due to banks and financial institutions act, 1993
was enacted for setting up of dedicated tribunals for expeditious
adjudication and recovery of debt.

IMPACT ON BANKING SECTOR

Indian banks would need additional capital to the extent of Rs. 120 billion to
meet the capital charge requirement for operational risk under Basel II. Most of
this capital would be required by the public sector banks (Rs. 90 billion),
followed by the new generation private sector banks (Rs. 11 billion), and the
old generation private sector bank (Rs. 7.5 billion). If the asset growth
witnessed in the past and the expected growth trends will continue, the capital
charge requirement for operational risk would grow 15-20% annually over the
next three years, which implies that the banks would need to raise Rs. 180-200
billion over the medium term.

Implementation of Basel II is likely to improve the risk management systems of

banks as the banks aim for adequate capitalization to meet the underlying credit
risks and strengthen the overall financial system of the country. In India, over
the short term, commercial banks may need to augment their regulatory
capitalization levels in order to comply with Basel II. However, over the long
term, they would derive benefits from improved operational and credit risk
management practices.
 CHAPTER -2

REVIEW OF LITERATURE

Basel II accord is already in vogue implementation by March, 2007. The

Accord stands on three pillars: (a) Risk Management, (b) Supervisory Function
and (c) Discipline. The supervisory strategy in India at present comprises both
off-site surveillance and on-site inspection and control system internal to banks.

The present chapter incorporates review of relevant literature the scholars have
produced since 1995. The period for this purpose is purposively selected
because a research work bearing relevance to present study can be expected to
justify its findings only when sufficient time has elapsed after the
implementation of the reforms. Though in brief, the succeeding review is
helpful in crystallising the research objectives of the present study.

Padmanabhan Working Group (1995), in its Report on On-Site Supervision,

recommended for supervisory interventions and introduction of a rating
methodology for banks on the lines of CAMEL model with appropriate
modification to suit Indian conditions. The Working Group has recommended
six rating factors i.e. CAMELS, and for Foreign Banks four ratings factors,
namely- Capital Adequacy, Assets Quality, Compliance, System and Controls
(i.e., CACS).

Collazos Paul (1995) analyzed how liquidity shocks would affect the strategies
followed by the bankers, in particular their probability of exit. He suggested a
new channel (different to bank runs) between liquidity risk and banking sector
instability.

Barr and Siems (1996) presented new failure-prediction models for detecting a
bank’s troubled status up to two years prior to insolvency using publicly
available data and a new category of explanatory variable to capture the
elusive, yet crucial, element of institutional success: management quality.
Quality is assessed using data envelopment analysis (DEA), which views a
bank as transforming multiple inputs into multiple outputs.

Peek and Rosengren (1996) established that the derivatives have become an
essential instrument for hedging risks, yet moral hazard can lead to their misuse
by problem banks. . The study observed that the role of banks supervisors
should be to limit the opportunity through more comprehensive data reporting
requirements and closer supervisory scrutiny of derivatives activity at problem
banks. Because a relatively large number of banks

active in the derivatives market have low capital ratios and are considered
institutions with a significant risk of failure by bank supervisors, the possible
misuse of derivatives by troubled banks should be of concern to regulators.

Persons (1999) presented the combined qualitative and quantitative

information from financial statements and auditors’ reports with logistic
models to differentiate failed from surviving finance companies in Thailand.
These models have relatively high predictive ability for failed finance
companies and low expected costs of misclassification.

Dabos and Escudero (2000) studied the role played by several financial and
economic indicators in determining the process of bank failure in Argentina
after the Maxican crisis known as the “tequila effect”. This study prioritizes the
use of semi parametric and non-parametric methods which allow us to measure
the effect of explanatory variables in the process of bank failure together with
duration dependence effects.

Gilbert, Meyer and Vaughan (2000) examined the potential contribution to

bank supervision of a model designed to predict which banks will have their
supervisory ratings downgraded in future periods. They compared the ability of
two models to predict downgrades of supervisory rating to problem status: the
Board staff model, which was estimated to predict bank failures, and a model
estimated to predict downgrades of supervisory ratings

Evanoff and Wall (2001) observed that there have been a number of
recommendations to increase the role of subordinated debt (SND) in satisfying
bank capital requirements as a preferred means to discipline the risk-taking
behavior of systemically important banks. One such proposal recommended
using SND yield spreads as the triggers for mandatory supervisory action under
prompt corrective action guidelines introduced in U.S. banking legislation in
the early 1990s. Currently such action is prompted by bank capital ratios.

Kroszner (2001) examined the private interest theory of regulation can for the
pattern of bank branching deregulation during the last 30 years. Beneficiaries of
branching regulation have supported a coalition favoring geographical
restriction despite their costs to consumers. While some of the results also are
consistent with the public interest theory.
Shirai (2001) focused on India’s banking sector which has been attracting and
increasing attention since 1991 when a financial reform programme was
launched. This paper assessed whether the reform programme has been
successful so far in restructuring public sector banks and what elements of the
programme have contributed and tackles some fundamental questions.

Shirai (2002) examined India and China both carried out banking sector
reforms in the 1990s. He observed that there are three good lessons to be
learned from India’s reforms. First, the entry of new banks should be promoted
provided that they are sufficiently capitalized and technology- oriented.
Second, diversification of banks’ business should accompany interest rate
liberalization in order to compensate for the expected decline in net interest
income and prevent banks from taking excessive risks. Third, strict regulations
should be introduced to prevent connected lending.

Vensal and Vensel (2003) presented some historical notes on the development
of the Estonian banking system and the capital structure of banks.Trehan and
Soni (2003) analyzed the operating efficiency and its relationship with
profitability, in the profitability, in the public sector banking industry in India.
Geyer and Steyrer (2003) examined the relation between performance
indicators of 20 different banks and transformational/ transactional leadership,
using a sample of some 400 observations. Mastrone and Piper (2003)
examined that market forces might be used to influence the direction of bank
regulation. They observed that investors’ views on the financial condition and
prospects of banking organizations can be distilled from stock prices.

Mor and Sharma (2003) attempted to provide a more comprehensive

approach to management of NPAs in banks. It is argued that if the goal is to
deal with NPAs (and more generally the health of the financial system) in a
definitive manner and root them out, then it is necessary to first deal with the
micro level issues at the level of each individual intermediary. Batra and Dass
(2003) concluded that NPA has affected the profitability, liquidity and
competitive functioning of public and private sector banks and finally the
psychology of the bankers in respect of their disposition towards credit delivery
and credit expansion.

Kantawala (2004) examined the impact of the reforms on Credit Deposit ratio,
Credit to GDP ratio, Investment in Government securities to deposits, share of
business of public sector banks, the proportion of various types of advances etc.
She examined the difference in various aspects of the working results of the
public sector banks and private banks when compared with foreign banks.
Reddy (2004) examined the competitiveness of Indian commercial banks in the
deregulated period from 1996-2002.

Banerjee and Duflo (2004) observed that NPAs are indeed a serious problem
for banks in India and it is easy to see why a bank might hesitate to lend if the
loan has a high risk of going bad.

Kumar and Dennis (2005) examined the importance of a financial system in

the development process of an economy. Kapil and Kapil (2005) examined the
relationship between the CAMEL ratings and the bank stock performance.
Shajahan (2005) studied 100 account holders of ICICI Bank in Chennai for
portraying their varying levels of satisfaction. Chakrabarti and Chawla
(2005) studied the performance and efficiency of commercial banks, which are
the key elements of the efficiency and efficacy of a country’s financial sector.
Mohan (2005) focused on the efficiency and productivity changes in the Indian
Banking. Ramudu and Rao (2006) established that the profitability of Indian
banking sector is inevitable. The study attempts to analyze the profitability of
the three major banks in India: SBI, ICICI, and HDFC.

Singh and Singh (2006) estimated the impact of the identified variables on the
financial margin of the Central Cooperative Banks in Punjab with the help of
correlation and multiple stepwise regression approach. Maji and Dey (2006)
presented how strongly the process of globalization and liberalization has
influenced the Indian banking sector. Chatterjee and Sinha (2006) made a
comparative assessment of the public ad private sector bank intermediation cost
efficiency during the reform period Mansor, Radam and Habibullah (2006)
attempted to measure the productivity of the banking industry by employing the
nonparametric malmquist index approach. He concludes that there is decline in
productivity growth in the banking industry. Bodla and Verma (2006)
presented that supervisory system in banking sector is a substantial
improvement over the earlier system in terms of frequency, coverage and focus
as also the tools employed.

Sharma and Kawadia (2006) examined the relationship between size and
efficiency of Cubes. Ramshastri and Samuel (2006) analyzed the trends in
important banking indicator from 1980 to 2005, covering both pre and post
reforms period. A comparative analysis of various bank groups with respect to
different variables has also identified certain specific problem areas of the
respective groups. Singh and Kohli (2006) undertook the study with the
objectives: benchmark the Indian listed banks for the future, assess the
performance of Indian banks on the basis of CAMEL model, give rating to top
five and bottom five banks on the basis of their performance, to know the status
 of technological advancement in private sector banks, to measure the growth of
private sector banking in India. Rao (2007) measured the performance of the
banks before and after administration of VRS. For this purpose, CAMEL
analysis has been comprehensively used in following order for all the sample
units. Sharma (2007) conducted a study with the objectives: to study the
relationship between assets and liabilities of Indian banks in terms of nature
and strength, to determine the components of assets explaining variance in
liability and vice versa, to study the impact of ownership over asset liability
management in banks.

Hyde (2007) conducted a study with the objectives: to study and compare
learned optimism of the employees of nationalized and private banks, and to
recommend the areas where learned optimism is found to be weak. EPW
Research Foundation (2007) focused on the professed diversification taking
place in the banking sector. Bhatt (2007) analyzed the banking industry
journey from post independence to date. Janakiraman (2007) examined the
capital adequacy guidelines under Basel II Accord. It introduces the concept of
operational risk, reviews the quantitative framework for operational risk and
outlined the key challenges and the varying practices in the development of an
operational risk framework. Sinha (2007) evaluated the impact of factors like
banks operating efficiency, capital adequacy ownership and bank size on the
asset quality for the reforms period.

BRIEF DESCRIPTION OF BALANCE SHEET, PROFIT & LOSS

ACCOUNT ITEMS:

A. Balance Sheet
Item Schedule Coverage Notes and Instructions for compilation
Capital 1. Nationalised The Capital owned by Central Government as on the date of the balance
Reserves Banks sheet should be shown. In the case of other Indian banks, Authorised,
& Capital (Fully Issued, Subscribed, Called up capital should be given separately. Calls-in-
Surplus owned arrears will be deducted from the called-up capital while the paid-up value
By Central of forfeited shares should be added thus arriving at the paid-up capital.
Government) Where necessary, items which can be combined should be shown under
Other Banks one head for instance ‘Issued and Subscribed Capital’.
(Indian)
Authorised In the case of Banking Companies incorporated outside India, the amount
Capital of deposit kept with Reserve Bank of India, under sub-section 2 of section
(…..shares of Rs. 11 of the Banking Regulation Act, 1949 should be shown under the head
….. ‘capital’; the amount, however, should not be extended to the outer
each) column.
Issued Capital
(…..shares Notes – General The changes in the above items, if any, during the year,
 of Rs. ….. each)
Subscribed say, fresh contribution made by the Government, fresh issue of capital,
Capital capitalisation of reserves, etc. may be explained in the notes.
(…..shares of Rs.
…..
each)
Called up Capital
(…..shares of Rs.
…..
each)
Less : Calls
unpaid
Add : forfeited
shares
Paid up Capital
Banking
Companies
incorporated
outside India
2 I) Statutory Reserve created in terms of section 17 or any other section of Banking
Reserves Regulation Act must be separately disclosed.
II) Capital The expression ‘capital reserves’ shall not include any amount regarded as
Reserves free for distribution through the profit & loss account. Surplus on
revaluation or sale of fixed assets should be treated as capital reserves.
III) Share Premium on issue of share capital may be shown
Premium separately under this head.
IV) Revenue and The expression ‘Revenue Reserves’ shall mean any
other Reserves reserve other than capital reserve. This item will include
a) Investment all reserves, other than those separately classified. The expression
Fluctuation ‘reserve’ shall not include any amount written off or retained by way of
Reserve providing for depreciation, renewals or dimunition in value of assets or
retained by
V) way of providing for any known liability. Includes balance of profit after
Balance of Profit appropriations. In case of loss the balance may be shown as a deduction.
Notes – General

i) Movements in various categories of reserves should be shown as

indicated in the schedule.
Deposits 3. A.I. Demand Includes all banks deposits repayable on demand. Includes all demand
Deposits deposits of the non-bank sectors. Credit balances in overdrafts, cash credit
accounts deposits payable at call, overdue deposits, inoperative current
i) from banks accounts, matured time deposits and cash certificates, etc. are to be included
ii) from others under this category. Includes all savings bank deposits (including
inoperative savings bank accounts).Includes all types of banks deposits
II. Savings repayable after a specified term. Includes all types of deposits of the non-
Bank bank sector repayable after a specified term. Fixed deposits, cumulative and
 recurring deposits, cash certificates, annuity deposits, deposits mobilised
Deposits under various schemes, ordinary staff deposits, foreign currency non-
resident deposits accounts, etc. are to be included under this category. The
III. Term total of these two items will agree with the total deposits.
Deposits
Notes – General
i) from banks
ii) from others a) Interest payable on deposits (whether accrued and due and accrued but
not due) should not be included but shown under other liabilities. Deposits,
B. i) Deposits of repayment of which is subject to restrictions by its very nature, like margin
branches in deposits, security deposits from staff, etc. also should not be included under
India. deposits but shown under ‘other liabilities.’

ii) Deposits of b) Matured time deposits and cash certificates, etc. should be treated as
branches outside demand deposits
India.
c) Deposits under special schemes should be included under term deposits if
they are not payable on demand. When such deposits have matured for
payment they should be shown under demand deposits

d) Deposits from banks will include deposits from the banking system in
India, co-operative banks, foreign banks which may or may not have a
presence in India.
Borro- 4. I. Borrowings in Includes borrowings/refinance and rediscount obtained from Reserve Bank
wings India of India. Includes borrowings/refinance and rediscount obtained from
i) Reserve Bank commercial banks (including co operative banks)
of
India Includes borrowings/refinance and rediscount from Industrial Development
ii) Other Bank of India, Export-Import Bank of India, National Bank for Agricultural
banks and Rural Development and other institutions, agencies (including liability
against participation certificates, if any)

Includes borrowings and rediscounts of Indian branches

II. Borrowings abroad as well as borrowings of foreign branches.
outside This item will be shown separately: Includes secured
India borrowings/refinance in India and outside India.
Secured
borrowings Notes – General
included above
i) The total of I & II will agree with the total borrowings
shown in the balance sheet.

ii) Inter-office transactions should not be shown as

borrowings.

iii) Funds raised by foreign branches by way of

 certificates of deposits, notes, bonds, etc. should be
classified, depending upon documentation, as
‘deposits’, ‘borrowings’ etc.

iv) Refinance obtained by banks from Reserve Bank of India and various
institutions are being brought under the head ‘Borrowings’. Hence advances
will be shown at the gross amount on the asset side.
Other 5 I. Bills Payable Includes drafts, telegraphic transfers, mail transfers payable, pay slip,
Liabilities II. Inter-Office bankers cheques, other miscellaneous items, etc.
and III. Interest
provisions Accrued The inter-office adjustments balance, if in credit, should be shown under
IV. Deferred this head. Only net position of inter- office accounts, inland as well as
Tax foreign should be shown here.
V. Others
Includes interest due and payable and interest accrued but not due on
deposits and borrowings Includes net provision for income tax and other
taxes like interest tax(less advance payment, tax deducted at source, etc.),
surplus provisions in bad debts provision account, surplus provisions for
depreciation in securities, contingency funds which are not disclosed as
reserves but are actually in the nature of reserves, proposed
dividend/transfer to Government, other liabilities which are not disclosed
under any of the major heads such as unclaimed dividend, provisions and
funds kept for specific purposes, unexpired discount, outstanding charges
like rent, conveyance, etc. certain types of deposits like staff security
deposits, margin deposits, etc. where the repayment is not free, should also
be included under this head.

Notes – General

i) For arriving at the net balance of inter-office adjustments all connected

inter-office accounts should be aggregated and the net balance only will be
shown, representing mostly items in transit and unadjusted items.

ii) The interest accruing on all deposits, whether the payment is due or not,
should be treated as a liability.

iii) It is proposed to show only pure deposits under the head ‘deposits’ and
hence all surplus provisions for bad and doubtful debts contingency funds,
secret reserves, etc. which are not netted off against the relative assets
should be brought under the head ‘Others’ (including provisions).
Cash and 6 I. Cash in hand Includes cash in hand including foreign currency notes
balances (including and also of foreign branches in the case of banks having
with the foreign such branches.
Reserve currency notes)
Bank of Includes the balance maintained with the Reserve Bank
 India
II. In Current of India in Current Account.
Account
with Reserve
Bank
of India.
Balances 7 I) In India Includes balances held with the Reserve Bank of India other than in
with current accounts, if any. Includes all balances with banks in India
banks i) Balances with Reserve (including co-operative banks). Balances in current accounts and deposit
and Bank of India (other accounts should be shown separately. Includes deposits repayable within
money than in current 15 days or less than 15 days’ notice lent in the inter-bank call money
at call account) market.
and ii) Balances with other
short banks in India Current Includes balances held by foreign branches and balances held by Indian
notice accounts Deposit branches of the banks outside India. Balances held with foreign branches
accounts by other branches of the bank should not be shown under this head but
should be included in inter branch accounts. The amounts held in ‘current
iii) Money at call and accounts’ and ‘deposit accounts’ should be shown separately. Includes
short notice with banks deposits
and other institutions. and short notice.
II) Outside India
usually classified in
foreign countries as
money at call
i) Current accounts
ii) Deposit accounts
Investments 8 I. Investments in India Includes Central and State Government securities and Government
treasury bills. Securities other than Government securities, which
i) Government securities according to the Statutes are treated as approved securities, should be
included here.
ii) Other approved
Securities Investments in shares of companies and corporations not included in item
(ii) should be included here. Investments in debentures and bonds of
iii) Shares companies and corporations not included in item (ii) should be included
here.
iv) Debentures and
Bonds Investments in subsidiaries/associate companies should be included here.
A company will be considered as an associate company for the purpose of
v) Investments in this classification if more than 25% of the share capital of that company is
subsidiaries/ Associate held by the bank. Includes residual investments, if any, like gold.
companies.
All foreign Government securities including securities issued by local
vi) Others authorities may be classified under this head. All other investments
outside India may be shown under this head.
II. Investments outside
 India

i) Government securities
(including local
authorities)

ii) Others
Advances 9 A. In classification under Section ‘A’, all outstandings – in India as well as
i) outside – less provisions made, will be classified under three heads as
Bills purchased indicated and both secured and unsecured advances will be included
and Discounted under these heads.
ii)
Cash credits, All advances or part of advances which are secured by tangible assets
overdrafts and may be shown here. The item will include advances in India and outside
loans repayable India.
on demand
iii) Advances in India and outside India to the extent they are covered by
Term loans guarantees of Indian and foreign governments and Indian and foreign
B. banks are to be included. All advances not classified under (i) and (ii) will
i) Secured by tangible be included here.
assets
Advances should be broadly classified into ‘Advances in India’ and
ii) Covered by Bank/ ‘Advances outside India’. Advances in India will be further classified on
Government Guarantee the sectoral basis as indicated. Advances to sectors which for the time
being are classified as priority sectors according to the instructions of the
iii) Unsecured C.I. Reserve Bank are to be classified under the head ‘Priority sectors’.
Advances in India Advances to Central and State Governments and other Government
undertakings including Government companies and corporations which
i) Priority sectors are, according to the statutes, to be treated as ‘public sector’. All advances
to the banking sector including co-operative banks will come under the
ii) Public sector head ‘Banks’. All the remaining advances will be included under this
head ‘Others’ and typically this category will include non-priority
iii) Banks advances to the private, joint and co-operative sectors.

iv) Others Notes – General

II. Advances outside i) The gross amount of advances including refinance but excluding
India provisions made to the satisfaction of auditors should be shown as
advances.
i) Due from banks
ii) Term loans will be loans not repayable on demand.
ii) Due from others
iii) Consortium advances would be shown net of recoveries from other
participating banks/ institutions.
Fixed 10 I. Premises Premises wholly or partly owned by the banking company for the purpose
Assets of business including residential premises should be shown against
II. Other Fixed Assets ‘Premises’. In the case of premises and other fixed assets, the previous
(including furniture and balance, additions thereto and deductions there from during the year as
fixtures) also the total depreciation written off should be shown. Where sums have
been written off on reduction of capital or revaluation of assets, every
III. Capital work-in- balance sheet after the first balance sheet subsequent to the reduction or
progress or premises revaluation should show the revised figures with the date and amount of
under construction revision made.

Motor vehicles and all other fixed assets other than premises but including
furniture and fixtures should be shown under this head.
Other 11 I. Inter-office The inter-office adjustments balance, if in debt, should be shown under
assets adjustments (net) this head. Only net position of inter- office accounts, inland as well as
foreign, should be shown here. For arriving at the net balance of inter-
II. Interest accrued office adjustment accounts, all connected inter-office accounts should be
aggregated and the net balances, if in debit, only should be shown
III. Tax paid in representing mostly items in transit and unadjusted items.
advance/
tax deducted at source. Interest accrued but not due on investments and advances and interest due
but not collected on investments will be the main components of this
IV. Stationery and item. As banks normally debit the borrowers’ account with interest due
stamps on the balance sheet date, usually there may not be any amount of interest
due on advances. Only such interest as can be realized in the ordinary
V. Others course should be shown under this head.

The amount of tax deducted at source on securities, advance tax paid, etc.
to the extent that these items are not set off against relative tax provisions
should be shown against this item.

Only exceptional items of expenditure on stationery like bulk purchase of

security paper, loose leaf or other ledgers, etc. which are shown as quasi-
asset to be written off over a period of time should be shown here. The
value should be on a realistic basis and cost escalation should not be taken
into account, as these items are for internal use.

This will include non-banking assets and items like claims which have not
been met, for instance, clearing items, debit items representing addition to
assets or reduction in liabilities which have not been adjusted for technical
reasons, want of particulars, etc. advances given to staff by a bank as
employer and not as a banker, etc. Items, which are in the nature of
expenses, which are pending adjustments, should be provided for and the
provision netted against this item so that only realisable value is shown
under this head. Accrued income other than interest may also be included
here.
Contin- 12 I. Claims against the Liability on partly paid shares, debentures, etc. will be
gent bank not acknowledged included in this head.
 liabilities as debts.
Outstanding forward exchange contracts may be
II. Liability for partly included here.
paid investments.
Guarantees given for constituents in India and outside
III. Liability on account India may be shown separately.
of outstanding forward
exchange contracts This item will include letters of credit and bills accepted
by the bank on behalf of its customers.
IV. Guarantee given on
behalf of constituents. Arrears of cumulative dividends, commitments under underwriting
contracts, estimated amount of contracts remaining to be executed on
a) In India capital account and not provided for etc. are to be included here.
b) Outside India

V. Acceptances,
endorsements and other
obligations

VI. Other items for

which the bank is
contingently liable
Bills for Bills and other items in the course of collection and not
collection adjusted will be shown against this item in the summary
version only. Not separate schedule is proposed.

B. Profit & Loss Accounts

sItem Schedule Coverage Notes and Instructions for compilation

Contin- 12 I. Claims against the Liability on partly paid shares, debentures, etc.
gent bank not acknowledged as debts. will be
liabilities included in this head.
II. Liability for partly
paid investments. Outstanding forward exchange contracts may
be
III. Liability on account included here.
of outstanding forward exchange contracts
Guarantees given for constituents in India and
IV. Guarantee given outside
on behalf of constituents. India may be shown separately.

a) In India This item will include letters of credit and bills

accepted
b) Outside India by the bank on behalf of its customers.

V. Acceptances, endorsements and other Arrears of cumulative dividends, commitments

 obligations under
underwriting contracts, estimated amount of
VI. Other items for which the bank is contracts
contingently liable remaining to be executed on capital account and
not
provided for etc. are to be included here.
Bills for Bills and other items in the course of collection
collection and not
adjusted will be shown against this item in the
summary
version only. Not separate schedule is proposed.

B. Profit & Loss Accounts

Item Schedule Coverage Notes and Instructions for compilation
Interest 13 I. Interest /discount on Includes interest and discount on all types of loans and
earned advances/bills. advances like cash credit, demand loans, overdrafts,
export loans, term loans, domestic and foreign bills
II. Income on investments purchased and discounted (including those rediscounted),
overdue interest and also interest subsidy, if any, relating
III. Interest on balances to such advances/bills. Includes all income derived from
with Reserve Bank of India the investment portfolio by way of interest and dividend.
and other inter bank funds Includes interest on balances with Reserve Bank and other
banks, call loans, money market placement, etc.

Includes any other interest/discount income not

Others included in the above heads.
Other 14 I. Commission, Exchange Net profit on sale of Investments = Profit on sale of
Income & brokerage Investments – Loss on revaluation of investments
Net profit on revaluation of investments = Profit on
II. Net Profit on sale of revaluation of investments – Loss
Investments Net profit on sale of land, building & other assets
= profit on sale of land, building & other assets
III. Net Profit on – Loss on sale of land, building & other assets
revaluation of investments

IV. Net Profit on sale of

land, building & other
assets

V. Profit (net of loss) on

exchange transactions
 VI. Income earned by way
of dividends, etc. from
subsidiaries/ companies
and/or joint ventures
abroad/in India

VII. Miscellaneous Income

Interest 15 I. Interest on deposits
Expended
II. Interest on RBI/ Inter-
Bank borrowings

III. Others
Operating 16 I. Payments to and
Expenses provisions for employees

Provisions II. Rent, Taxes & Lighting

& Contingencies
III. Printing & Stationery
Appropriation
of Profit IV. Advertisement and
Publicity

V. Depreciation on
Banks’ property

VI. Directors’ fees,

allowances and
Expenses

VII. Auditors’ fees &

expenses (including
branch auditors)

VIII. Law charges

IX. PB Legal and other

expenses debited
in respect of PB
Accounts

X. Postage, Telegram, Telephones, etc.

XI. Repairs and Maintenance

 XII. Insurance

XIII. Other Expenditure

Provisions & Contingencies
made for
i) Income Tax
ii) Other Taxes
iii) NPA’s
iv) Investments
v) Others

I. Transfer to Statutory
Reserves

II. Transfer to Capital

Reserves

III. Transfer to Investment

Fluctuation Reserves

IV. Transfer to Debenture

redemption reserves

V. Transfer to Other
Reserves

VI. Transfer to Proposed

Dividend

VII. Transfer to Tax on

Dividend

VIII. Balance carried over

to Balance Sheet
C. Notes on Accounts
Item Schedule Coverage Notes and Instructions for
compilation
Movement 17 I) Gross NPA’s
of NPA’s II) Net NPA’s
Lending to Sensitive 17 I) Advances to Capital Market
Sectors Sector

II) Advances to Real Estate

Sector
 III) Advances to Commodity
Sector
Maturity 17 I) Deposits
Profile of II) Borowings
Selected III) Loans & Advances
items of IV) Investments
Liabilities V) Foreign Currency
& Assets Assets and
VI) Foreign Currency
Liabilities
Loans 17 I) Standard Assets during the
subjected year
to Restructuring
and II) Sub Standard Assets during
Corporate the year
Debt Re-
structured III) Doubtful Assets
during the year
Capital 17 I) Capital Adequacy
adequacy Ratio
Ratios
II) Capital Adequacy
Ratio – Tier I and

III) Capital Adequacy

Ratio – Tier II
Business 17 I) Return on Assets
Ratios
II) Business (Deposits+
Advances) per employee

III) Profit per employee

 CHAPTER -3

3.1 PROBLEM STATEMENT

As discussed before Banks carry the business of lending & borrowing. Lending
and Risk go hand to hand. Risk is exposure to uncertainty. Risk has two
components: Uncertainty and Exposure to that uncertainty. Credit risk is most
simply defined as potential that a borrower or counter party will fail to meet its
obligation in accordance to agreed terms. Risk Management is continuously
evolving mix of science and art. Risk itself is not bad, but risk that is
misplaced, mismanaged, misunderstood or unintended is bad. Each banking
institution needs to assess, which method best suits its objective, its business,
its view and its pocket. Risk management oversees and ensures that integrity of
process with which risks are taken.

The art of managing risk is more challenging than ever now-a-days. Risk
managers face a wide range of demands from working with multiple variables
to funding technology.

So, they need to know the way through which they come to know what is their
business composition? Apart from this one year data’s do-not tell whole of the
trend. In this project I have studied the business composition of Schedule
Commercial Banks so through which I acquainted with how much percent of
their total earnings is through interest income? How much is from non-interest
income

Banks have now entered in service sector for diversifying risk &earning more
profits.

3.2 RESEARCH OBJECTIVE

The objective of the research project is:

• To gain an insight to the Indian Banking Sector.

• To know about the business composition of Schedule Commercial
Banks.
• Studying Fundamental analysis and its application as a tool for analysis
of stocks.
 • Finding out the counter which is profitable and having maximum return
in Banking sector.
• To know about the banking industry, Banking reforms and Banking in
India as a Introduction part.

Limitations

1. The main limitation of the project is Time Constraint as I had only 3

month to complete the project.
2. Changing data of banks due to new policy.
3. The data collection for banking will be mainly of secondary.
4. The data available for research may be manipulated.
5. Internet Fluctuation.

Research Methodology

Research methology is the way to systematically solve the research problem. It

may be understood as the science of study how research is done systematically.
In it we study the various steps that are generally adopted by the research
methods or techniques and also the methodology.

Research Design
The research design is the conceptual structure within which research is
conducted. It contains the blue print for the collection, measurement and the
analysis. The proposed study is the exploratory cum descriptive. Researcher has
used the questionnaire method for collecting the data from the employees of the
selected banks.

Collection of Data
The present study is based on the secondary
data.

To add the information, the secondary data have been obtained from
following sources:

o Source from internet.

o Journals, magazines and books.
 o Published and unpublished research works of the various eminent
scholars in the field.

Research process
• Review of literature; earlier studies
• Designing of Research instrument
• Secondary Data Collection
• analysis and interpretation of Data
• Report writing &discussion of major finding with the guide
• Submission of Report

ANALYTICAL TOOLS

Table 3.06

Growth Rate of Income and Expenditure of Indian commercial Banks in India

1985- 1985- 1992- 1992- 1999-05

2005 91 2005 98
Interest Earned SBI 15.7 22.31 12.49 11.77 9.52
NB 14.33 21.09 12.36 13.31 8.54
FB 18.19 36.25 10.24 15.12 2.16
OSCB 26.98 16.31 27.46 36.4 19.26
AB 16.42 23.08 13.61 14.41 9.82
Interest/discount on advances/bills SBI 9.21 22.31 8.83 9.14 7.3
NB 9.24 21.09 11.08 10.6 9.56
FB 14.13 36.25 10.11 17.74 3.89
OSCB 22.38 16.31 26.94 38.44 23.48
AB 11.13 23.08 11.96 12.64 10.66
Income on Investments SBI 17.79 21.06 13.44

NB 15.61 20.44 8.75

FB 12.02 15.14 0.56

OSCB 30.21 39.71 15.11

AB 17.2 21.3 10.4

Interest on balances with RBI and other SBI 8.98 -7.54 9.65
inter-bank funds
NB 1.87 -0.07 -6.08

FB 4.76 0.56 -6.73

OSCB 16.07 11.15 0.74

AB 6.09 -1.57 0.43

 Other income SBI 18.75 19.75 15.56 16.09 17.26
NB 20.48 28.47 18.04 15.96 21.68
FB 23.02 35.65 17.88 23.36 13.88
OSCB 34.59 21.2 36.05 49.06 33.38
AB 22.08 27 18.88 18.81 21.1
Commission, exchange and brokerage SBI 14.16 19.09 11.37 16.52 6.81
NB 12.47 24.49 10.08 15.07 7.12
FB 17.88 31.56 15.75 24.05 10.08
OSCB 28.52 19.51 30.99 36.96 33.52
AB 15.71 24.16 13.32 17.96 11.05
Total Income SBI 16.14 22.01 12.97 12.36 10.76
NB 14.86 21.63 12.82 13.58 9.26
FB 19.18 36.17 11.7 16.09 4.93
OSCB 28.03 16.76 28.79 37.95 21.58
AB 17.08 23.44 14.27 14.95 11.08
Interest Expended SBI 14.5 23.29 11.91 11.42 6.11
NB 13.03 22.76 10.56 11.48 4.73
FB 16.98 41.7 7.98 13.93 -4.18
OSCB 27.57 17.02 28.41 40.63 15.65
AB 15.27 24.42 12.48 13.43 6.22
Interest on deposits SBI 14.33 23.29 13.62 14.04 6.71
NB 12.42 22.76 10.7 13.51 2.05
FB 14.35 41.7 8.36 21.5 -6.08
OSCB 25.62 17.02 26.13 40.36 9.77
AB 14.5 24.42 12.86 15.91 4.14
Interest on RBI/inter-bank borrowings SBI -7.67 -11.28 -11.51

NB -3.03 -13.38 1.27

FB 8.9 0.2 -0.57

OSCB 24.37 38.58 12.84

AB 2.33 -6.99 0.46

Table 3.06 A

Growth Rate of Income and Expenditure of Indian commercial Banks in India

1985- 1985- 1992- 1992- 1999-05

2005 91 05 98
Operating Expenses SBI 13.85 18.82 12.35 15.23 8.92
NB 13.7 18.09 12.2 15.03 8.77
FB 17.18 24.34 16.26 21.26 8.9
OSCB 24.34 25.16 26.9 28.68 28.32
AB 15.37 20.29 13.91 16.38 11.12
Payments to and provisions for employees SBI 13.91 17.39 12.15 16.55 7.89
NB 13.78 17.54 12.1 16.19 5.95
FB 18.23 13.36 16.63 24.6 8.88
 OSCB 18.81 22.74 19.42 20.37 19.81
AB 14.62 18.28 12.81 16.84 7.81
Provisions and contingencies SBI 12.41 2.19 23.85

NB 14.33 1.47 32.55

FB 9.69 9.15 11.5

OSCB 30.68 31.78 34.61

AB 13.93 3.58 27.9

Total Expenses (Excluding Provisions and SBI 14.35 21.79 12.16 12.56 7.4
contingencies)
NB 12.99 21.37 10.58 12.48 4.29
FB 17.14 35.47 10.87 15.86 1.05
OSCB 26.19 16.32 28.02 37.2 18.95
AB 15.2 23.04 12.73 14.27 7.08
Profit / Loss SBI 33.06 38.42 28.07 49.34 25.02
NB 43.72 53.05

FB 43.72 20.86

OSCB 41.97 37.93 35.13 60.54 32.38

AB 47.74 38.51

Total Expenditure (Including Provisions and SBI 16.14 22.01 12.97 12.36 10.76
contingencies and Profit / Loss)
NB 15.23 21.63 13.55 13.58 11.92
FB 19.19 36.19 11.7 16.09 4.93
OSCB 28.02 16.79 28.79 37.95 21.58
AB 17.26 23.44 14.62 14.95 12.36
Net Profit( Total Income-Total expenditure) SBI 33.4 38.42 28.74 49.34 27.48
NB 43.72 119.87

FB 43.42 20.86

OSCB 42.91 35.29 35.13 60.54 32.38

AB 47.65 14.85

Operating Profit( net profit+ provision) SBI 39.12 38.42 16.17 12.15 25.02
NB 37.87 43.72 24.72 27.26 25.54
FB 28.38 43.42 14.16 18.75 15.19
OSCB 49.92 35.29 32 42.01 33.59
AB 39.05 47.65 20.48 20 25.32
Total Expenditure including Provisions SBI 15.43 21.79 12.12 10.87 9.36
NB 14.46 21.37 11.56 11.03 9.6
FB 18.77 35.47 10.58 14.28 3
OSCB 27.34 16.32 28.36 36.5 20.62
AB 16.5 23.04 13.13 12.76 10.54

Table 3.07 Ratios of Income and Expenditure of Indian Commercial Banks

1985 1990 1992 1995 1998 2000 2004 2005 1985-05 1985-91 1992-05 1992-98 1999-05

Interest Income SBI 88.17 89.14 87.69 86.85 85.28 85.81 78.93 82.31 86.02 88.31 85.04 85.90 84.18
NB 93.64 91.85 90.29 88.83 88.40 88.38 79.97 91.98 89.31 92.38 87.99 89.20 86.79
FB 83.83 82.75 77.62 80.12 77.99 79.16 69.09 70.36 80.06 83.41 78.63 81.86 75.40
 OSCB 91.77 90.24 90.35 85.95 83.42 83.85 77.04 80.49 86.23 90.61 84.36 86.90 81.81
AB 91.42 90.34 88.21 87.22 85.89 86.24 78.38 85.43 87.27 90.76 85.78 87.26 84.30
Income on Advances SBI 88.17 89.14 53.34 41.17 43.46 38.02 31.32 35.36 55.44 88.31 41.35 47.05 35.64
NB 93.64 91.85 55.01 44.06 43.90 42.71 39.30 47.61 59.65 92.38 45.62 48.32 42.92
FB 83.83 82.75 47.42 42.29 48.99 41.26 38.77 42.47 56.95 83.41 45.61 48.84 42.39
OSCB 91.77 90.24 51.24 48.89 49.04 42.61 45.46 51.09 60.96 90.61 48.26 51.99 44.53
AB 91.42 90.34 53.58 43.32 44.85 41.19 38.12 44.20 58.50 90.76 44.67 48.31 41.04
Income on Investments SBI 19.71 38.27 33.95 37.21 40.28 39.85 34.39 34.39 29.99 38.80

NB 25.29 37.44 38.98 40.58 37.65 40.79 36.43 36.43 33.59 39.28

FB 16.71 33.28 22.80 31.93 26.16 22.61 26.81 26.81 26.01 27.61

OSCB 25.01 30.92 30.12 35.28 27.82 25.80 29.86 29.86 27.55 32.16

AB 22.58 36.88 34.91 38.17 35.80 36.47 34.11 34.11 31.20 37.03

Non interest Income SBI 11.83 10.86 12.31 13.14 14.72 14.19 21.07 17.69 13.98 11.69 14.96 14.10 15.82
NB 6.36 8.15 9.71 11.17 11.60 11.62 20.03 17.36 11.16 7.62 12.67 10.80 14.54
FB 16.17 17.25 22.38 19.88 22.01 20.84 30.91 29.64 19.94 16.59 21.37 18.14 24.60
OSCB 8.23 9.76 9.65 14.05 16.58 16.15 22.96 19.51 13.77 9.39 15.64 13.10 18.19
AB 8.58 9.66 11.79 12.78 14.11 13.76 21.62 18.75 12.94 9.24 14.52 12.74 16.30
Commission, Exchange and Brokerage SBI 11.73 10.54 8.09 11.63 10.64 10.04 8.10 8.96 10.21 11.52 9.64 10.29 9.00
NB 5.74 6.50 5.20 6.58 5.43 5.03 4.21 5.11 5.62 6.44 5.26 5.84 4.69
FB 15.56 14.78 8.38 9.92 11.75 11.37 12.54 16.42 12.20 15.28 10.87 9.78 11.97
OSCB 5.90 6.69 6.16 6.20 5.50 5.66 7.19 11.16 6.46 6.57 6.42 6.13 6.70
AB 8.05 8.31 6.52 8.44 7.59 7.15 6.43 8.18 7.58 8.34 7.26 7.64 6.88

1985 1990 1992 1995 1998 2000 2004 2005 1985-05 1985-91 1992-05 1992-98 1999-05

Interest Expended SBI 64.87 68.95 56.07 57.90 61.91 63.49 54.88 50.77 61.52 66.92 59.21 58.80 59.62
NB 68.63 71.42 66.63 60.83 65.23 65.16 53.98 48.77 63.63 70.59 60.64 61.64 59.64
FB 53.69 64.57 57.57 53.65 52.34 53.65 39.67 36.62 54.25 59.14 52.16 55.39 48.93
OSCB 61.14 62.80 56.03 63.08 68.60 69.25 59.08 56.01 64.03 62.84 64.54 63.93 65.15
AB 66.49 69.91 61.82 59.48 63.34 64.17 54.22 49.74 62.67 68.96 59.97 60.32 59.61
Interest on Deposits SBI 64.87 68.95 42.40 49.69 57.18 59.96 51.93 49.83 57.52 66.92 53.49 50.35 56.63
NB 68.63 71.42 55.90 55.90 62.31 61.99 51.06 36.93 60.05 70.59 55.53 55.66 55.40
FB 53.69 64.57 29.50 40.07 41.34 37.63 26.89 23.52 42.96 59.14 36.02 38.61 33.43
OSCB 61.14 62.80 51.29 56.70 64.03 62.79 42.12 41.51 58.19 62.84 56.19 58.15 54.23
AB 66.49 69.91 48.77 52.74 58.91 59.40 48.05 40.32 57.87 68.96 53.12 52.57 53.67
Interest on Borrowings SBI 11.34 3.05 2.35 2.04 0.44 1.11 2.97 2.97 4.69 1.26

NB 6.81 2.44 1.12 1.31 0.73 1.01 2.09 2.09 3.13 1.05

FB 19.89 11.01 8.88 13.29 10.15 9.67 12.80 12.80 12.67 12.93

OSCB 2.64 3.96 2.22 3.27 2.18 2.24 2.89 2.89 3.30 2.49

AB 9.36 3.42 2.37 2.79 1.54 1.80 3.39 3.39 4.53 2.25

Operating Expenses SBI 35.13 31.05 21.72 30.52 27.76 26.42 26.22 28.71 28.58 33.08 26.65 26.95 26.34
NB 31.37 28.58 24.53 29.19 27.41 26.05 27.05 24.89 26.99 29.41 25.96 25.73 26.18
FB 46.31 35.43 16.95 25.96 23.93 27.85 34.84 39.86 31.68 42.29 27.13 22.71 31.55
 OSCB 29.07 37.20 29.31 25.87 20.07 19.56 24.99 29.79 26.28 33.11 23.35 24.58 22.12
AB 33.06 30.09 23.08 29.13 26.36 25.53 26.95 27.69 27.37 30.96 25.83 25.59 26.06
Payments To Empl.& Provision SBI 25.46 21.04 15.26 22.10 20.82 18.91 18.05 19.36 20.22 23.05 19.01 19.42 18.60
NB 22.37 19.70 16.93 19.59 19.75 19.17 18.81 15.21 18.96 20.37 18.35 18.08 18.62
FB 14.49 9.18 5.52 8.50 7.66 9.28 11.14 12.19 9.84 12.55 8.68 7.34 10.02
OSCB 27.99 27.33 20.81 16.27 9.87 9.61 8.68 10.05 15.80 24.47 12.08 15.30 8.86
AB 23.27 19.77 15.50 19.26 17.75 17.10 16.22 15.28 18.11 21.08 16.83 17.17 16.49
Provision & Contingencies SBI 22.21 11.57 10.33 10.09 18.90 20.52 14.15 14.15 14.25 14.04

NB 8.84 9.98 7.36 8.79 18.97 26.34 13.40 13.40 12.63 14.18

FB 25.48 20.39 23.73 18.49 25.48 23.52 20.71 20.71 21.90 19.52

OSCB 14.66 11.05 11.32 11.20 15.93 14.20 12.11 12.11 11.49 12.73

AB 15.10 11.39 10.30 10.29 18.82 22.57 14.20 14.20 14.08 14.33

Table 3.07 A Ratios of Income and Expenditure of Indian Commercial Banks

ANALYSIS & INTERPRETATION

Income and Expenditure: Structure and Growth of Indian Commercial Banks.

A bank’s income statement indicates the amount of revenue received and
expenses incurred over a specified period. It is also an indication of the
performance of the balance sheet of a bank in existing environment. Usually a
close association exists between size of the principal items on banks balance
sheet and its income statement. The income statement is also a major source of
information of bank’s business orientation as well as the sources of a bank’s
earnings and their quantity along with its expenditure. In recent years all over
the world and also in India, with the liberalisation of financial system,
traditional financial intermediation role of banking, whereby banks make loans
that are funded by deposit is showing the declining trend. Presently banks are
entering into non-traditional sources of funding of the resources and
diversifying their activities into different areas. This trend is considered the
outcome of competitive environment. To know, how Indian banks are
responding to newly deregulated environment, the structure and growth of
major components of income statements of Indian commercial banks is
presented in Table 3.06, Table 3.06A, Table 3.07 and Table 3.07A, and
discussed as given below.

Interest Income

The principal source of bank revenue is the interest income generated by the
bank’s earning assets comprising of loans and investments. The interest
received on bank deposits kept with other financial intermediaries is also part
of it. In India interest income has been a major source of earning for all SCBs.
Its average share in total income had remained more than 75% for the period
1985-05. However in recent years, it has been showing the sign of decline and
share in total income had decreased from 85.43% in 2005 compared to 91.42%
in 1985. This trend was visible for economic liberalisation era (1991-05) where
on the average its share became 85.78% in relation of 90.76% in pre-
liberalisation period 1985-91. This decline in interest income has become more
pronounced in the post-financial liberalisation period with its share reduced to
84.30%. The sustainability of this trend is also revealed from the growth of
interest income as shown in Table 3.06. It shows that the growth of interest
income had decreased significantly during liberalisation period and it had
become 13.61% in 1992-05 compared to 23.08% in 1985-91. Interest income is
further divided into its sources- interest income accrued from advances and
from investment. Interest income derived from advances is continuously
decreasing in case of India. Besides, major part of investment in government
securities by the banks indicates that they are interested in deploying their
funds in safe investment rather than advances and loans where more risk is
involved. In banking sector interest income generated through investment had
recorded for rising trend for the period 1992-05. The average share of
investment income in total income had increased from 31.20% during 1992-98
to 37.03% during post financial liberalisation period implying the allocation of
the assets by all SCBs to marketable financial assets which serve the purpose
liquidity and returns both.

3.4.2 Non Interest Income

Income earned through sources other than earnings from loans and investments
is accounted under non-interest income and usually includes fees earned from
providing fiduciary services, commission, exchange and brokerage etc.
Recently in bank management, non-interest income is targeted as a key source
of future income. With liberalisation and softening of interest rates banks are
finding it difficult to earn steady income from interest income. The trend of
non-interest income in case of Indian scheduled banks showed the movement
towards diversification of activities. As shown in the Table 3.06 the non-
interest income registered the average growth rate of 18.88% during 1992-05,
compared to 14.27% average growth in total income for the same period.
Similarly, during the post-financial liberalistion period, the non-interest income
of all SCBs had increased by 21.1% which is more than 10% of the average
growth of total income (11.08%). This trend in growth rate was also reflected
in the share of non-interest income which increased to 14.52% of the total
income in the period 1992-05 in relation to 9.24% in the period 1985-91. It is
observed that income earned in the form of commission, exchange and
brokerage that formed major portion of non-interest of banks declined from
average share of 8.34% of total income during 1985-91 to 7.64% in the period
1992-98. Therefore it decreased to 6.88% during the post-financial
liberalisation period.

Group-wise, status of interest income and non-interest income showed that

private banks and foreign banks are more dependent on non-interest income in
comparison to public sector banks. The private banks in particular are showing
relatively higher growth in the non-interest income during post-liberalisation
period. It indicates that private banks and foreign banks are more capable in
diversification of their funds.

3.4.3 Interest Expenses

It forms the largest expense for most of the commercial banks. It comprises
interest paid on deposits and borrowings and is the aggregation of interest paid
on interest bearing liabilities. The interest expenses of all SCBs reported
average growth of 15.27% during 1985-05. All SCBs exhibited maximum
increase in interest expenditure in pre-liberalization period with average growth
rate of 24.42% against the 12.48% growth in post-liberalisation period. This
expenditure registered further deceleratation during post financial liberalisation
period and reported average growth rate of 6.22%. This decline in growth rate
was also reflected in the share of interest expenditure in relation to total
expenditure which reduced to 49.74% in 2005 from 66.49% and 69.91 in 1985
and 1990 respectively. Among bank group, foreign banks witnessed the
maximum decline in both growth rate and share of interest expenditure
followed by other bank groups. The fall in the interest expenses across all
categories of banks was in tandem with fall in the interest rates across the board
and the introduction of floating rate deposits by RBI. It resulted into fall in
share of interest on deposits in total expenditure from 66.49% in 1985 and
69.91% in 1992 to 40.32% in 2005. In case of post liberalisation period, on an
average deposit expenses shrank to 53.12% compared to 68.96% in the pre-
liberalisation period. Similar trend is observed for interest on borrowing for all
SCBs and its share decreases from 9.36% in 1992 to 1.80% in 2005.

3.3.4 Operating Expenses

Operating expenses comprise wage expenses and non-wage expenses such as

rent, taxes and lighting, advertisement, legal charges and expenses related to
the running and maintenance of bank’s computer and information technology
system etc. The operating expenses are also called cost of intermediation and it
is the major item focused by bank management for cost control. In case of India
the operating expenditure of all SCBs had increased with 15.37% growth rate
during 1985-05 and it reduced and recorded an average growth rate of 13.91%
in post-liberalization period against 20.29% in the pre-liberalization period.
This reflects that the Indian banks had been able to contain their operating
expenses in new economic environment. The decrease in the growth was more
pronounced during 1999-05, when the growth in operating expenses had
reached to an average growth rate of 11.12% per annum. The major chunk of
operating expenses came from wage bills and provisions for employees. All
groups of banks except foreign banks had registered a significant decline in
wage bill growth in post liberalization period and in recent years during post
financial liberalization period this growth rate is reduced to single digit for all
groups of banks except private banks. Consequent of decrease in growth of
expenditure, the share of operating expenses and wage bills in relation to total
expenditure decreased to average share of 25.83% and 16.83% during post-
liberalization period against the average share 30.96% and 21.08% in pre-
liberalization period, respectively.

3.3.5 Provision for Loss and Contingencies

The major items on provision and contingencies consist of provision for loan
losses, provision for depreciation in value of investment and provision for
taxes. Loan loss includes the impaired value of the loan provision and interest
due. The impaired loans are also termed as non-performing assets. As per the
guidelines of RBI, presently every commercial bank is required to make
provision to compensate the loss due to non-performing assets, losses due to
change in market value of assets etc. In case of Indian banking sector, major
portion of provision are made to compensate the loan losses, and in aggregate
the item of provision and contingencies constitute more than 10% of total
expenses. From Table 3.06A and 3.07A it is clear that all the bank groups and
public banks in particular registered sharp increases in provisions and both in
percentage term and also as ratio to total expenses.

3.4 Financial Performance of Scheduled Commercial Banks in India

A commercial bank is viewed as efficient when it has been able to meet its
objectives in competing environment and offering competing services at
relatively lower prices, without exposing it to higher level of risks. The
government of India has undertaken numbers of reform in the banking sector
since early 1990 for introducing the efficiency and enhancing the productivity
of the banks.
As the present study is focussed on bank’s productivity and efficiency, we
selected only those financial ratios for measure of financial performance of the
banks which are related to profitability and efficiency. To examine the
performance of banks at individual level, we have taken the sample of sixty-
three schedule commercial banks which remained in existence during the
period 1996-05. These banks include all the public sector banks which have
been in business in the period 1985-05. The period of the study is divided into
two sub periods for the purpose of analysis. The sub period 1985-95 includes
the public sector banks only and other sector banks are excluded from this
period due to non availability of data on the income and expenses statements
for the period 1985-91. The sub period 1996-05 include all the sampled sixty-
three banks. The financial performance measures based on ratio analysis
require benchmarks to understand the comparative performance of banks. To
identify the benchmark we have considered the period of 1996-05 as
representative of Indian banking sector and accordingly we have used the
quartile figure of average of financial ratios of sixty-three banks for the period
1996-05 to get the representative benchmark for analysing the performance of
commercial banks in India.

Table 3.08, 3.08A and 3.08B, present the results of the aggregate performance
of commercial banks along with group performance and the Table 3.09 to
Table 3.09, provide the results of financial performance of 63 sampled
scheduled commercial banks of India.

3.4.1 Intermediation Cost

The cutting of cost is the immediate strategy the banks adopt in competitive
environment for maintaining their profitability levels. The initial cost arises
from mobilising funds and subsequently allocation of these funds in different
assets is called intermediate cost. It is also known as operating expenses. In
competitive environment for greater efficiency in their operation, the bank
management focuses on reducing operating expenses and increasing the
productivity of their employees through use of automated equipment and
improved employee training. Besides, the present financial reforms also
encourage the banks to reduce their non-interest expenses especially salaries,
other employer’s benefits and overhead costs. In case of India, all the SCBs at
aggregate level are able to contain the intermediation cost and average
intermediate cost in terms of total assets was hovering around 2.50% during the
period 1985-05. In the post liberalisation period, the competitiveness
environment in banking sector has forced the commercial banks to adopt the
cost cutting methods to reduce the operating expenses. The result of this
measure is also reflected in the form of substantial decline in intermediation
cost across all categories of banks. This decline was more evident in private
banks despite their entry into retail banking and it may be the outcome of their
aggressive introduction to information technology and recruiting only trained
manpower. The major components of intermediation cost are wages and
salaries that constitute more than 60% share in major groups of banking sector.
This component had showed decline in its share of intermediation cost from
average share of 68.02% during 1985-91 to 65.20% in the period 1992-05.
Among bank groups more technology intensive private and foreign banks had
exhibited a substantial lower proportion of wage bills during post financial
liberalisation period. The public sector banks had been struggling to reduce the
wage bills indicating overstaffing had reported its average share of more than
70% of intermediation cost for the period 1992-05. Thus as a group the private
banks and foreign banks were better managed to control their operating
expenses. The high proportion of operating expenses in case of public banks
might be also due to spreadness of their branches in remote areas.

At individual level (Table-3.09), the majority of public sector banks suffered

from higher intermediation cost 81% of these banks had reported it more than
2.668% of total assets for the period 1985-05. After nationalisation and before
the liberalisation of the Indian economy, 67% public banks had shown the
operating expenses in relation to total assets more than 3.941%. One of the
factors said to be responsible for this higher figure is expenditure incurred by
public banks on expansion of their branches in the remote areas to meet the
social objectives. However, the other inefficiencies also got enveloped in this
process. If we compare the operating expenses of banks before and after the
financial liberalisation the majority of banks of all groups have been able to
contain this expenditure. During 1996-98, the share of 65% banks was above
2.668% and in the period 1999-05, this position reversed and the 65% of banks
were observed for share less than 2.668% of operating expenses. In relation to
total assets, the wage bills which are the major proportion of intermediation
cost showed large divergence among the bank groups. It was noticed highest in
the case of nationalised banks and no public banks were able to reduce its share
below 37.09% during the period 1985-05. If we leave one to three public banks,
the remaining all public banks including SBI group, fail to reduce its wage bills
less than 62.527%. On the other had majority of private banks and of foreign
banks had shown their share below 62.527% reflecting the impact of
computerisation of their branches along with their concentration in urban areas.
It may be noted that all the sampled six new private sector banks recorded for
share of wages and salaries less than 37.09% of operating expenses.
3.4.2 Earnable Assets

The ratio of earning assets in proportion to total assets indicates the allocation
of funds by commercial banks in revenue generating activities. It also shows
the capability of the banks to earn. This ratio has increased to 86.34% in 2005
against 68.97% in 1985 for all commercial banks, which reflects the improved
health of the banks. The relative position of earning assets of commercial banks
during the pre and post liberalisation period indicates that the competitive
pressure is forcing the banks to deploy their funds in more earnable assets
resulting this ratio to increase from 68.28% during 1985-91 to 77.69% in the
period 1992-05. This trend was observed across all the group of banks. The
foreign banks recorded highest improvement followed by the private banks and
public banks. During the post financial liberalisation period, with the
decontrolling of interest rate, entry norms and investment avenues, the
commercial banks has now more options to park their assets. It is also reflected
in their earning assets ratio which increased substantially during this period and
touched the average ratio of 80.11% against 74.54% in the period 1992-98.
Among bank groups, the nationalised banks had reported the maximum
improvement in this ratio during the period 1999-05 with average figure of
81.56%.

At individual level (Table 3.11), all the public sector banks reported the earning
ratio below 79.699% for the period 1985-91 and in the period of economic
liberalisation (1992-05) the percentage of public banks below this ratio reduced
to 73.7%. This ratio shows the further significant improvement for the public
sector banks in the period of post financial liberalisation when nineteen banks
of this group were bracketed for earning ratio than 80.054%.In case of other
banks, majority of private banks had exhibited higher earning asset ratio in the
period of post financial liberalisation period in comparison to foreign banks.

3.4.3 Net Interest Income

Net interest income is the one of the most important indicator of efficiency of
banks and computed by dividing the excess of interest income over interest
expense by total assets. This ratio also reflects the allocative efficiency of
banks since it derives a wedge between interest paid to the depositors and the
interest charged to borrowers on their loans. In case of India, during pre-
liberalisation, the commercial banks on the average experienced a lower net
interest income having meagre figure of 1.80%. Here it is to be noted that this
lower figure was not the result competitive environment, during this period,
rather it was the outcome of higher cost of administrative interest rate on
deposits and accompanied by lower ratio of earning assets. In the post
liberalisation period 1992-05, the net interest income has improved on the
average and recorded as 2.87% for all commercial banks. This improved spread
is the outcome of fall in the cost of funds due to the softer rate of interest and
improved earning assets ratio of the banks and relatively higher returns on
lended funds which are sticky downwards.

The yield on earning assets registered improvement with ratio of 11.44 for all
SCBs during post liberalisation period against 10.46% in pre-liberalisation
period. The cost of funds moved in opposite direction and reduced marginally
to 6.64% against 6.75 for the above periods. The above difference along with
improved earning assets ratio leads to the improvement in the spread of the
banks. But during the post financial liberalisation period, with the deregulation
of interest rates and along with other decontrol on banking activities, the
competition among banks has hot up and in this process they are forced to cut
the lending rates which is also resulted in the fall in interest income and
ultimately fall in the net interest margin to 2.81% despite the fall in the cost of
funds. The falling net interest income in recent years, in the age of softer
interest rate, is the strongest evidence that competition in Indian banking sector
has become reality. Across different banking groups, the foreign sector banks
have recorded the highest net interest margin, may be due to their access to
funds of lower cost.

At individual level, in the sample of 63 banks has shown divergent

performance, in the period falling before 1992, most of public sector banks
were registered for lowered spread and in post liberalisation period, within this
group, the position marginally improved with 11 public banks are observed for
more than 3.1223% net interest margin. In recent years, during the post
financial liberalisation period 1999-05, 67% SCBs have recorded the net
interest income ratio less than 3.223% against 31% in the period 1996-98
reflecting the effect of competitiveness on the individual banks performance.
This effect is more substantial in case of private banks, which has to mobilise
the funds at higher costs in relation to other banks and all the six sampled new
private banks were observed for net interest margin less than 3.223%.

3.4.4 Asset Utilization

Another ratio which is used for measuring the performance of bank is the asset
utilization. It is a productivity measure focusing on the firm’s ability to
generate revenue compared to the asset base on which revenue can be earned.
In India, assets utilisation ratios have improved significantly after liberalisation
and it becomes 10.30% on the average for all SCBs against 7.78% in the period
1985-05. The total income has two major components interest income and non-
interest income. The interest income which includes more than 80% of total
income has increased from on the average of 7.13% of total assets in pre-
liberalisation period to 8.82% in post liberalisation period. The major growth in
this component of income derived during the period 1992-98 when it touched
to 9.41% on the average for all SCBs. The return on advances and investment
which are main sources of interest income observed similar the trend.

After 1991 the financial reforms led to the diversification of bank’s portfolio
and business activities. It is evident from the rising share of non-interest
income which has become on the average 1.45% of total assets during 1992-05,
against 0.73% in pre-liberalisation period. During the post-financial
liberalisation period which is also characterized by softer interest rate regime,
the interest income of SCBs declined but the asset utilisation ratio remained
stable due to increase to touch the share of other income which increased up to
on the average figure of 1.53% of total assets during 1998-05 against 1.37% in
1992-98.

At individual level, the public sector banks had shown significant increase in
asset utilisation during the post economic liberalisation period and 25.7% banks
of public sector banks are observed for more than 11.438% ratio against 7.4%
banks of the group in the pre liberlisation period for the same ratio. Majority of
private sector banks had emerged as more capable in utilising their resources
with the reporting of highest asset utilisation ratio for all the sub period
covering 1996-05, whereas the national banks were observed for the opposite
side. For interest income ratio and non interest income ratio we found similar
behaviour. It is noted that in the recent years the private banks were able to
generate more non interest income in relation to other banks so stabilising their
total income.

3.4.5 Financial Efficiency

Another measure of efficiency is efficiency ratio computed by taking the ratio

of non-interest expense to the sum of net interest income and non-interest
income. This ratio is considered as the most popular ratio to evaluate a bank’s
performance in the past because it reflects both on as well as off the balance
sheet operations. Smaller value of efficiency ratio denotes greater efficiency,
which is often assumed to be desirable because a given level of services is
being provided at lower cost (supply side efficiencies) or because the services
are of higher quality and therefore, command a higher price in the market place
(demand side efficiencies). Table 3.16 reports the ratios of banking sector for
the period 1985-05. During this period, the average efficiency of SCBs was
computed as 69.68% and in the economic liberalisation period, SCBs
experienced the improved efficiency level with average 59% against 94.34% in
the pre-liberalisation (1985-91). This level is further improved in the era of
post-financial liberalisation with the value of 55.10%. Several reasons can be
mentioned to explain this trend in efficiency. Firstly Indian commercial banks
were able to contain the operating expenses in spite of huge spending on the
computerisation in the banking sector. Secondly, due to better product mix in
the liberalisation period, as evidenced by the increase in the share of other
income.These reasons may be supported by the facts of falling of burden ratio
in Indian banking sector. This ratio on the average decreased to 0.83% in the
period 1999-05 from 1.35% for 1992-098.

Among bank groups, the foreign banks and private banks outperformed other
banks on the basis of efficiency criteria. The foreign banks have advantage of
access to funds at lower cost along with a significant portion of non-interest
income. The private banks are more efficient in cutting their operating expenses
and have employed information technology for the purpose.

Table 3.16 exhibits the individual performance of banks in the form of

efficiency measure. The public banks average efficiency for the periods 1985-
05, 1985-91 remained above 56.50%. In the liberalisation period, 30% public
sector banks registered for improved efficiency score and achieved the value
less than 56.50%. In case of all the sampled 63 banks, 64% banks have
recorded efficiency score of less than 456.50% in post-financial liberalisation
period against 53% banks in 1996-98. The efficiency of foreign banks reduced
during 1999-05, which may be due to falling net interest income and increase in
overhead cost in post-liberalisation period.

3.4.6 Return on Assets

Return on assets reflects the efficiency with which banks deploy their assets. It
means how bank resources are being used to generate net income. The ROA
shows significant improvement in Indian commercial banks and it increased
from the level of 0.09% in 1985 to 1.13% and 1.15% in 2004 and 2005
respectively. The shift in ROA is notable during the post-liberalisation period
when it increased on the average to 0.47% in the period 1992-05 in comparison
to 0.14% in the pre-liberalisation period 1985-91. Thus the financial reforms
resulted in the improvement in the ROA. These reforms focused on improving
the operational environment of banking sectors. During the period 1992-98, the
ROA of SCBs declined significantly in comparison to 1999-05, caused by
making provisions for NPA under the guidelines of BASEL Committee Report.
Among bank group, the foreign banks outperformed other banks in extracting
returns on their assets reflecting their superior management approach in
existing operational environment. With offloading of non-performing assets,
public sector banks have registered a significant improvement in ROA.
Particularly in case of nationalised banks ROA increased up to 0.84% in the
period 1999-05, against -0.38% in 1992-98. The individual performance of
banks on the basis of ROA is depicted in Table 3.17 It shows that after
liberalisation majority of commercial banks from across the all groups, are
moving towards high rate returns as is evident from the results that 61% banks
recorded ROA more than 0.844% in 1999-05, against 49% for the same figure
in 1996-98.

3.4.7 Equity Base

The equity base of the commercial banks is one of the determinants of

soundness of bank’s balance sheet. It shows a significant improvement in SCBs
over the period, and increased to 6.26% in 2005 from 1.33% in 1985 and 1.68%
in 1990, which reflect the risk bearing capacity of the banks. The CRAR of
SCBs has shown significant improvement and in recent years all banks on the
average has more than 12% of CRAR. The foreign bank has highest capital
adequacy ratio with more than 41% CRAR on the average for the period 1998-
05.

3.4.8 Other Performance Measures

Another parameter of the soundness of banking institution is the asset quality of

assets which is measured by the level of NPA. With offloading of past legacy
GNPA of past loans and introduction of better appraisal and screening
mechanism of financing the credit, the public sector has recorded significant in
NPA ratio and it reduced to 5.51% in 1999-05 in comparison to 8.83% in 1992-
98, and the respective figure for nationalised banks are recorded as 6.33%
against 9.81%.Business per employees had shown tremendous increase during
the post liberalisation period in all the categories of banks in relation to its
performance in pre liberalisation period.
 1985- 1985- 1992- 1992- 1999-
2005 91 2005 98 05
Interest SBI 15.7 22.31 12.49 11.77 9.52
Earned
NB 14.33 21.09 12.36 13.31 8.54
FB 18.19 36.25 10.24 15.12 2.16
OSCB 26.98 16.31 27.46 36.4 19.26
AB 16.42 23.08 13.61 14.41 9.82

1985- 1985- 1992- 1992- 1999-

2005 91 2005 98 05
Interest/discount on SBI 9.21 22.31 8.83 9.14 7.3
advances/bills NB 9.24 21.09 11.08 10.6 9.56
 FB 14.13 36.25 10.11 17.74 3.89
OSCB 22.38 16.31 26.94 38.44 23.48
AB 11.13 23.08 11.96 12.64 10.66

1992- 1992- 1999-

2005 98 05
Income on SBI 17.79 21.06 13.44
Investments NB 15.61 20.44 8.75
FB 12.02 15.14 0.56
OSCB 30.21 39.71 15.11
AB 17.2 21.3 10.4

1992- 1992- 1999-

2005 98 05
Interest on SBI 8.98 -7.54 9.65
balances with RBI NB 1.87 -0.07 -6.08
 FB 4.76 0.56 -6.73
OSCB 16.07 11.15 0.74
and other inter-
AB 6.09 -1.57 0.43
bank funds

1985- 1985- 1992- 1992- 1999-

2005 91 2005 98 05
Other SBI 18.75 19.75 15.56 16.09 17.26
income NB 20.48 28.47 18.04 15.96 21.68
FB 23.02 35.65 17.88 23.36 13.88
OSCB 34.59 21.2 36.05 49.06 33.38
AB 22.08 27 18.88 18.81 21.1

1985- 1985- 1992- 1992- 1999-

2005 91 2005 98 05
Commission, SBI 14.16 19.09 11.37 16.52 6.81
exchange and NB 12.47 24.49 10.08 15.07 7.12
brokerage FB 17.88 31.56 15.75 24.05 10.08
OSCB 28.52 19.51 30.99 36.96 33.52
AB 15.71 24.16 13.32 17.96 11.05
 1985- 1985- 1992- 1992- 1999-
2005 91 2005 98 05
Total SBI 16.14 22.01 12.97 12.36 10.76
Income NB 14.86 21.63 12.82 13.58 9.26
FB 19.18 36.17 11.7 16.09 4.93
OSCB 28.03 16.76 28.79 37.95 21.58
AB 17.08 23.44 14.27 14.95 11.08

1985- 1985- 1992- 1992- 1999-

2005 91 2005 98 05
Interest SBI 14.5 23.29 11.91 11.42 6.11
Expended NB 13.03 22.76 10.56 11.48 4.73
FB 16.98 41.7 7.98 13.93 -4.18
OSCB 27.57 17.02 28.41 40.63 15.65
AB 15.27 24.42 12.48 13.43 6.22
 1985- 1985- 1992- 1992- 1999-
2005 91 2005 98 05
Interest on SBI 14.33 23.29 13.62 14.04 6.71
deposits NB 12.42 22.76 10.7 13.51 2.05
FB 14.35 41.7 8.36 21.5 -6.08
OSCB 25.62 17.02 26.13 40.36 9.77
AB 14.5 24.42 12.86 15.91 4.14

1992- 1992- 1999-

2005 98 05
Interest on SBI -7.67 -11.28 -11.51
RBI/inter-bank NB -3.03 -13.38 1.27
borrowings FB 8.9 0.2 -0.57
OSCB 24.37 38.58 12.84
AB 2.33 -6.99 0.46
SUGGESTIONS

1. As the income proportion of interest income has been decreased and the
proportion of non- interest income has been increased the banks must
enter into other new fields. Due to this banking growth has reached to
this point. If they start more involved in these services banks will grow
more.
2. A good portion of banks expenses is on interest expense. So the banks
should control these. As the business earning from non interest income
is decreasing. Banks should spend more on other services to let them
grow.
3. Foreign banks have recorded reduction in wage bills and other operating
expenses that has been result in their high growth. Other banks should
also follow their policy.
4. As the all sectors have increased the provision for loan losses this is a
bad outcome. Banks must take steps so that NPA’s could be reduced.
Banks should provide loan after deeply checking the creditability of
person.
5. Earnable asset ratio shows the capability of the banks to earn. This has
been increased. It should be increased further. As Foreign banks have
shown more growth other banks should follow their footprints or take
some new steps to improve this.
6. Indian commercial banks were able to contain the operating expenses in
spite of huge spending on the computerization in the banking sector. Due
to better product mix in the liberalisation period, as evidenced by the
increase in the share of other income. These reasons may be supported
by the facts of falling of burden ratio in Indian banking sector. That is a
good sign. So banks may follow the same policy regarding it.
CONCLUSION

Every country’s growth depends on the strength of her economy. And

economy depends vastly on various developing industries of the country. The
banking sector is the core contributor of any country’s economy. The Indian
banking has shown tremendous growth, which was once only a sleepy business.
The opening up of our economy, free trade, extensive flow of foreign money
and business and liberal policies have improved our economic condition
exemplarily. The banking sector in India is growing at a faster pace to match
the growth of the Indian economy, which is growing by leaps and bounds.

Indian Banking can be categorized into nationalized banks, private banks

&specialized banking institutions. Reserve Bank of India is the regulating
body for all the banks in India. The banking in India is highly fragmented with
30 banking units contributing to almost 50% of deposits & 60% of advances.
Since the nationalization of Indian banks in Indian banks in 1969, the public
sector banks have acquired a place of prominence. They continue to be the
major lenders in the economy due to their sheer size and penetrative networks
which assures them of high deposits mobilization.

Industry estimates indicate that out of 274 commercial banks operating in India,
223 banks are in the public sector and 51 are in the private sector. The private
sector banks include 24 foreign banks that have started their operations here.

The nationalized banks in their umbrella also include the co-operative banks
focusing on the areas of agriculture, rural development, etc. currently in India
there are 88 schedule commercial banks out of which government has a stake in
28 public sector banks. There are 29 private banks and 31 foreign banks. They
have a combined network of 53000 branches &17000 ATMs. The rating
agency ICRS Ltd. Note that the public sector banks hold over 75% of total
assets of the banking industry with the private & foreign banks holdings 18.2%
& 6.5% respectively.

Banking in India today is doing fairly well in its services, quality of work and
reach. Only the foreign and few private banks haven’t touched rural grounds.
The nationalized banks and cooperative are performing an exceptional job in
the rural sections. In terms of quality of assets and capital adequacy, Indian
banks are said to have transparent functioning and brilliant records of the
balance sheets relative to other banks in comparable economies in its region.
In the past few years, the RBI has evolved guidelines for greater financial gain
to attain a sustainable growth rate of 10% GDP p.a. This can also be an
opportunity to restructure policies for a new vision based on faster and broader
based growth.

With the growth in the Indian economy expected to be strong for quite some
time – especially in its services sector, the demand for banking services like the
retail banking, mortgage, and investment services are expected to be strong.

The Indian economy has recorded a robust growth for the 4th successive year
during 2006-07 with the real GDP growth for touching 9.4%. RBI in its Annual
Policy Statement has placed the real GDP growth for 2007-08 at around 8.5%.
At the start of the 3rd quarter of the financial year, we see a significant change
in this direction. Banks have already goes ahead and reduced the interest rates
on home loans and other retail assets. It is also expected that there will be cut in
the deposit rates by 50 to 100 basis points across maturities.

Since April 2007, bank credit grew only 5% with just Rs. 96486 crores added
to advances against Rs. 154000 crores a year earlier. This sharp slow down of
credit growth will require banks to cut the deposit costs to sustain profit
growth.