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The enhanced role of the banking sector in the Indian economy, the
increasing levels of deregulation along with the increasing levels of
competition have facilitated globalisation of the India banking system and
placed numerous demands on banks. Operating in this demanding
environment has exposed banks to various challenges. The last decade
has witnessed major changes in the financial sector - new banks, new
financial institutions, new instruments, new windows, and new opportunities
- and, along with all this, new challenges. While deregulation has opened
up new vistas for banks to augment revenues, it has entailed greater
competition and consequently greater risks. Demand for new products,
particularly derivatives, has required banks to diversify their product mix
and also effect rapid changes in their processes and operations in order to
remain competitive in the globalised environment.
HISTORY:
The General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks .
PHASE II :- Nationalization of Imperial Bank of India with extensive
banking facilities on a large scale specially in rural and semi-urban areas. It
formed State Bank of India to act as the principal agent of RBI and to
handle banking transactions of the Union and State Governments all over
the country. Seven banks forming subsidiary of State Bank of India was
nationalized in 1960 on 19th July, 1969, major process of nationalization
was carried out. 14 major commercial banks in the country was
nationalized .
PHASE III:- This phase has introduced many more products and facilities
in the banking sector in its reforms measure. In 1991, under the
chairmanship of M Narasimhama, a committee was set up by his name
which worked for the liberalization of banking practices.
Without a sound and effective banking system in India it cannot have a
healthy economy. The banking system of India should not only be hassle
free but it should be able to meet new challenges posed by the technology
and any other external and internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no
longer confined to only metropolitans or cosmopolitans in India. In fact,
Indian banking system has reached even to the remote corners of the
country. This is one of the main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich
divedend With the nationalization of 14 major private banks of India.
The Bank of Bengal which later became the State Bank of India
Phase-I
the General Bank of India was set up in the year 1786. Next came Bank of
Hindustan and Bengal Bank. The East India Company established Bank of
Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843) as
independent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which
started as private shareholders banks, mostly Europeans shareholders
Phase II
Government took major steps in this Indian Banking Sector Reform after
independence. In 1955, it nationalized Imperial Bank of India with extensive
banking facilities on a large scale especially in rural and semi-urban areas.
It formed State Bank of India to act as the principal agent of RBI and to
handle banking transactions of the Union and State Governments all over
the country.
Second phase of nationalization Indian Banking Sector Reform was carried
out in 1980 with seven more banks. This step brought 80% of the banking
segment
in
India
under
Government
ownership.
The following are the steps taken by the Government of India to Regulate
Banking Institutions in the Country:
1949: Enactment of Banking Regulation Act.
1955: Nationalization of State Bank of India.
1959: Nationalization of SBI subsidiaries.
1961: Insurance cover extended to deposits.
1969: Nationalization of 14 major banks.
1971: Creation of credit guarantee corporation.
1975: Creation of regional rural banks.
1980: Nationalization of seven banks with deposits over 200 crore.
After the nationalization of banks, the branches of the public sector bank
India rose to approximately 800% in deposits and advances took a huge
jump by 11,000%.
Phase -III
This phase has introduced many more products and facilities in the banking
sector in its reforms measure. In 1991, under the chairmanship of M
Narasimham, a committee was set up by his name which worked for the
liberalization of banking practices.
KISHINCHAND CHELLARAM COLLEGEPage 4
INTRODUCTION:
THE MEANING OF BANK
From the Italian banca meaning 'bench', the table at which a dealer in
money worked. A bank is now a financial institution which offers savings
and cheque accounts, makes loans and provides other financial services,
making profits mainly from the difference between interest paid on deposits
and charged for loans, plus fees for accepting bills and other services.
Other relevant legislation includes the Banks (Shareholdings) Act and the
Reserve Bank Act. The Reserve Bank Act gives the Reserve Bank of
Australia (the central bank) a wide range of powers over the banking
sector.
Bank is an institution which trades in money, an establishment for the
deposits, custody and issue of money, as also for making loans and
discounts and facilitating the transmission of remittances from one place to
another.
Savings Bank: Running account for saving with restriction in number of
withdrawal
Current Account: Running account without restriction on number of
withdrawals
Term Deposit: Deposit of an amount for a fixed period where interest is
paid monthly/Quarterly.
Special Term Deposit: Deposit of an amount for a fixed period where
interest is compounded (Capitalized) and paid on maturity.
Recurring Deposit : Regular (Monthly) deposit of a fixed amount for a
fixed period
The Reserve Bank of India is the central Bank that is fully owned by the
Government. It is governed by a central board (headed by a Governor)
appointed by the Central Government. It issues guidelines for the
functioning of all banks operating within the country.
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).
State Bank of India and its associate banks called the State Bank Group 20
nationalized banks Regional rural banks mainly sponsored by public sector
banks
KISHINCHAND CHELLARAM COLLEGEPage 6
NABARD
IDBI
ICICI
IIBI
IDBISCICI
ICICI Bank
Andhra Bank
SBI Bank
Corporation Bank
AXIS Bank
Allahabad Bank
Yes Bank
Canara Bank
2010 2011
Aug.
26
Cash
Reserve
6.00
Ratio (per
cent)(1)
6.00
6.00
6.00
6.00
6.00
6.00
Bank
Rate
6.00
6.00
6.00
6.00
6.00
6.00
6.00
Base
Rate
Deposit
Rate
.75
Call
Money
Rate(Wei
6.10
ghted
Average)
50
50
50
25
25
7.98
7.96
8.01
7.93
8.03
8.25
(4)
2006-07
2007-08
12.2
12.27
12.05
II
11.71
12.98
15.37
III
41.84
39.25
44.1
22.27
22.03
24.38
http://en.wikipedia.org/wiki/Capital_adequacy_ratio
10%
The percent threshold varies from bank to bank (10% in this case, a
common requirement for regulators conforming to the Basel Accords) is set
by the national banking regulator of different countries.
Two types of capital are measured: tier one capital (T1 above), which can
absorb losses without a bank being required to cease trading, andtier two
capital (T2 above), which can absorb losses in the event of a winding-up
and so provides a lesser degree of protection to depositors.
Capital adequacy ratio is the ratio which determines the bank's capacity to
meet the time liabilities and other risks such as credit risk, operational risk,
etc. In the most simple formulation, a bank's capital is the "cushion" for
potential losses, and protects the bank's depositors and other
lenders. Banking regulators in most countries define and monitor CAR to
protect depositors, thereby maintaining confidence in the banking system.
CAR is similar to leverage; in the most basic formulation, it is comparable
to the inverse of debt-to-equity leverage formulations (although CAR uses
equity over assets instead of debt-to-equity; since assets are by definition
equal to debt plus equity, a transformation is required). Unlike
traditional leverage, however, CAR recognizes that assets can have
different levels of risk.
Since different types of assets have different risk profiles, CAR primarily
adjusts for assets that are less risky by allowing banks to "discount" lowerrisk assets. The specifics of CAR calculation vary from country to country,
but general approaches tend to be similar for countries that apply the Basel
Accords. In the most basic application, government debt is allowed a 0%
"risk weighting" - that is, they are subtracted from total assets for purposes
of calculating the CAR.
Tier 1 capital is the core measure of a bank's financial strength from
a regulator's point of view. It is composed of core capital, which consists
Background
Since the mid-1990s, the topics of market risk and credit risk have been the
subject of much debate and research, with the result that financial
institutions have made significant progress in the identification,
measurement and management of both these forms of risk. However, it is
worth mentioning that the near collapse of the U.S. financial system in
September 2008 is a clear indication that our ability to measure market and
credit risk is far from perfect.
Globalization and deregulation in financial markets, combined with
increased sophistication in financial technology, have introduced more
complexities into the activities of banks and therefore their risk profiles.
These reasons underscore banks' and supervisors' growing focus upon the
identification and measurement of operational risk.
Events such as the September 11 terrorist attacks, rogue trading losses
at Socit Gnrale, Barings, AIB and National Australia Bank serve to
highlight the fact that the scope of risk management extends beyond
merely market and credit risk.
The list of risks (and, more importantly, the scale of these risks) faced by
banks today includes fraud, system failures, terrorism and employee
compensation claims. These types of risk are generally classified under the
term 'operational risk'.
Definition
The Basel Committee defines operational risk as:
"The risk of loss resulting from inadequate or failed internal processes,
people and systems or from external events."
However, the Basel Committee recognizes that operational risk is a term
that has a variety of meanings and therefore, for internal purposes, banks
are permitted to adopt their own definitions of operational risk, provided that
the minimum elements in the Committee's definition are included.
Scope exclusions
The Basel II definition of operational risk excludes, for example, strategic
risk - the risk of a loss arising from a poor strategic business decision.
Other risk terms are seen as potential consequences of operational risk
events. For example, reputational risk (damage to an organization through
loss of its reputation or standing) can arise as a consequence (or impact) of
operational failures - as well as from other events.
Basel II event type categories
The following lists the official Basel II defined event types with some
examples for each category:
banks, including the federal development bank (BNDES), held about 1/3 of
bank assets and dominate lending for agriculture, housing and longer term
projects
1.4) Fresh Capital for Private Banks
The standardized requirements in place for banks and other depository
institutions, which determines how much capital is required to be held for a
certain level of assets through regulatory agencies such as the Bank for
International Settlements,Federal Deposit Insurance Corporation or Federal
Reserve Board. These requirements are put into place to ensure that these
institutions are not participating or holding investments that increase the
risk of default and that they have enough capital to sustain operating losses
while still honoring withdrawals. Also known as "regulatory capital".
The Basel Accords, published by the Basel Committee on Banking
Supervision housed at the Bank for International Settlements, sets a
framework on how banks and depository institutions must calculate
their capital. In 1988, the Committee decided to introduce a capital
measurement system commonly referred to as Basel I. This framework has
been replaced by a significantly more complex capital adequacy framework
commonly known as Basel II. After 2012 it will be replaced by Basel
III Another term commonly used in the context of the frameworks
is Economic Capital, which can be thought of as the capital level bank
shareholders would choose in absence of capital regulation. For a detailed
study on the differences between these two definitions of capital, refer to
The capital ratio is the percentage of a bank's capital to its riskweighted assets. Weights are defined by risk-sensitivity ratios whose
calculation is dictated under the relevant Accord. Basel II requires that the
total capital ratio must be no lower than 8%.
The 5 Cs of Credit - Character, Cash Flow, Collateral, Conditions and
Capital- have been replaced by one single criterion. While the international
standards of bank capital were laid down in the 1988 Basel I accord, Basel
II makes significant alterations to the interpretation, if not the calculation, of
the capital requirement.
sharply once a Lower Tier 2 issue matures and, for example, not be
replaced, the regulator demands that the amount that is qualifiable as Tier
2 capital amortises (i.e. reduces) on a straight line basis from maturity
minus 5 years (e.g. a 1bn issue would only count as worth 800m in capital
4years before maturity). The remainder qualifies as senior issuance. For
this reason many Lower Tier 2 instruments were issued as 10yr non-call 5
year issues (i.e. final maturity after 10yrs but callable after 5yrs). If not
called, issue has a large step - similar to Tier 1 - thereby making the call
more likely.
Different International Implementations
Regulators in each country have some discretion on how they implement
capital requirements in their jurisdiction.
For example, it has been reported[6] that Australia's Commonwealth Bank is
measured as having 7.6% Tier 1 capital under the rules of theAustralian
Prudential Regulation Authority, but this would be measured as 10.1% if the
bank was under the jurisdiction of the UK's Financial Services Authority.
This demonstrates that international differences in implementation of the
rule can vary considerably in their level of strictness.
A business does not make a payment due on a mortgage, credit card, line
of credit, or other loan
A business or consumer does not pay a trade invoice when due
A business does not pay an employee's earned wages when due
A business or government bond issuer does not make a payment on
a coupon or principal payment when due
Types of credit risk
There are three primary types of credit riskDefault risk - when the borrower
fails to make contractual payments
Credit spread risk - risk due to volatility in the difference between interest
rates on investments and the risk-free rate of return
Credit analysis and consumer credit risk
Significant resources and sophisticated programs are used to analyze and
manage riskSome companies run a credit risk department whose job is to
assess the financial health of their customers, and extend credit (or not)
accordingly. They may use in house programs to advise on avoiding,
reducing and transferring risk. They also use third party provided
intelligence. Companies like Standard & Poor's, Moody's Analytics, Fitch
Ratings, and Dun and Bradstreet provide such information for a fee.
Most lenders employ their own models (credit scorecards) to rank potential
and existing customers according to risk, and then apply appropriate
strategies. With products such as unsecured personal loans or mortgages,
lenders charge a higher price for higher risk customers and vice versa.
With revolving products such as credit cards and overdrafts, risk is
controlled through the setting of credit limits. Some products also
require security, most commonly in the form of property.
Credit scoring models also form part of the framework used by banks or
lending institutions grant credit to clients. For corporate and commercial
borrowers, these models generally have qualitative and quantitative
sections outlining various aspects of the risk including, but not limited to,
operating experience, management expertise, asset quality, and leverage
and liquidity ratios, respectively. Once this information has been fully
reviewed by credit officers and credit committees, the lender provides the
funds subject to the terms and conditions presented within the contract (as
outlined above).
Credit risk has been shown to be particularly large and particularly
damaging for very large investment projects, so-called megaprojects. This
is because such projects are especially prone to end up in what has been
called the "debt trap," i.e., a situation where due to cost overruns,
schedule delays, etc. the costs of servicing debt becomes larger than the
revenues available to pay interest on and bring down the debt.
Sovereign risk
Sovereign risk is the risk of a government becoming unwilling or unable to
meet its loan obligations, or reneging on loans it guarantees. [9] The
existence of sovereign risk means that creditors should take a two-stage
decision process when deciding to lend to a firm based in a foreign country.
Firstly one should consider the sovereign risk quality of the country and
then consider the firm's credit quality.[10]
Five macroeconomic variables that affect the probability of sovereign
debt rescheduling are: Debt service ratio
Import ratio
Investment ratio
Variance of export revenue
Domestic money supply growth
on
the
borrower,
1912
1928
1938
1956
Milestones
in India
in
the
general
insurance
business
1907
1957
1972
4.Training the HR
Human resource training and development (HR T&D) in manufacturing
firms is a
critical aspect of the development of a knowledge-workforce in Malaysia.
The objective of this study is to examine challenges to the effective
management of HR T&D activities in manufacturing firms in Malaysia. In
order to achieve this objective, in-depth interviews were conducted with 58
HR managers managing employees training and development, employing
a purposive or judgmental sampling technique. The study revealed three
major challenges to the effective management of HR T&D. These include a
shortage of intellectual HRD professionals to manage HR T&D ctivities,
coping with the demand for knowledge workers and fostering learning and
development in the workplace. It is hoped that the findings of this study will
off from the central bank to avoid perceived conflict of interest with
monetary policy. In response to blurring of distinctions among providers of
financial services and emergence of financial conglomerates, a single
regulator approach has been adopted in some countries. The fast evolving
financial sector and the ever expanding rule books of the regulatory bodies
have made some countries such as UK to adopt principles-based
supervision.
The Indian banking sector is faced with multiple and concurrent challenges
such as increased competition, rising customer expectations, and
diminishing customer loyalty. The banking industry is also changing at a
phenomenal speed. While at the one end, we have millions of savers and
investors who still do not use a bank, another segment continues to bank
with a physical branch and at the other end of the spectrum,
of
Experience has shown us that the worst loans are often made in the
best of times. Compensation through trading gains is not going to support
the banks forever. Large-scale efforts are needed to upgrade skills in credit
risk measuring, controlling and monitoring as also revamp operating
procedures.
FUTURE CHALLENGES :
THE FOLLOWING ARE MAJOR CHALLENGES THAT ARE LIKELY TO
BE FACED BY INDIAN BANKING INDUSTRY IN COMING FEW YEARS:Managing Resource Mobilization :
Growth of Deposits Till now: The deposit growth of SCBs in the postnationalization period could be analysed broadly in four phases. In the first
phase (1969-84) beginning immediately after nationalization of banks in
July 1969, deposit growth accelerated sharply as the rapid branch
expansion. enabled banks to tap savings from the rural areas. In the
second phase (1985-95), deposit growth decelerated as banks faced
increased competition from alternative savings instruments, especially
capital market instruments (shares/debentures/units of mutual funds) and
there is need for more concerted efforts to increase the flow of credit to
these sectors given their significance to the economy. Creating enabling
conditions, i.e., providing irrigation facilities, rural roads and other
infrastructure in rural areas, is necessary to augment the credit absorptive
capacity. Devising products to suit the specific needs of the farmers is
critical. There is also a need for comprehensive public policy on risk
management in agriculture. Computerisation of land records can go a long
way in smoothening the flow of credit to agriculture. Similarly the credit
assessment capabilities of banks need improvement to ensure flow of
credit to SMEs. There is need to increase the use of cluster based lending
and credit scoring, which has proved quite effective in many countries as
also in India. In view of the increased exposure of banks to infrastructure
and retail credit segments, banks need to guard against exposures to
attendant risks. The corporate sector needs to gradually reduce its
dependence on the banking sector and move towards tapping the capital
market so as to enable the banking sector to meet the growing
requirements of agriculture, SMEs and other small and tiny enterprises,
which are unable to tap funds from other sources
CHALLENGES FOR FINANCIAL INCLUSION: While there has been a
significant improvement in financial inclusion in recent years, moving ahead
several challenges remain to be addressed. A proper assessment of the
problem of financial exclusion is necessary. There is, therefore, a need to
conduct specific survey for gathering information relating to financial
inclusion/exclusion. There is need to reduce the transaction cost for which
technology can be very helpful. RRBs and co-operative banks, are
expected to play a greater role in financial inclusion in future. There would
be need to design appropriate products tailor made to suit the requirements
of the people with low income supported by financial literacy and credit
counselling. There is also a need to improve the absorptive capacity of
financial services by providing the basic infrastructure. Investment in
human development such as health, water sanitation, and education, in
particular, would be very helpful.
The roadmap of foreign banks is due for review in 2009. This would involve
several issues. The increased presence of foreign banks, by intensifying
competition, may accelerate the consolidation process that is underway.
However, at the same time, this may also raise the risk of concentration if
mergers/amalgamations involve large banks. The experience of some other
countries also suggests that the emergence of large banks due to
consolidation has resulted in reduced lending to small enterprises
significantly. All these issues would need to be carefully weighed at the time
of review. The policy relating to ownership of banks by commercial interests
may have to take full account of international practices, given the issues
relating to potential conflict of interests, increased potential of contagion
effects and increased concentration.
EFFICIENCY, PRODUCTIVITY AND SOUNDNESS OF THE BANKING
SECTOR IN INDIA:8.1 PAST TRENDS : The efficiency and productivity of
scheduled commercial banks (SCBs) in India was analysed empirically,
using both the accounting and economic measures.. The most significant
improvement has occurred in the performance of public sector banks and
has converged with those of the foreign banks and new private sector
banks. Intermediation cost as also the net interest margin declined across
the bank groups. Despite this, however, profitability of the banking sector
improved. Business per employee and per branch also increased
significantly across the bank groups.
The improvement of various accounting measures, however, varied across
the bank groups. In terms of cost ratios (operating cost to income) foreign
banks, and with regard to labour productivity, foreign and new private
banks were ahead of their peer groups. In terms of net interest margins and
intermediation cost, new private sector banks and public sector banks,
respectively, were more efficient than the other bank groups. The cost of
deposits of foreign banks was the lowest in the industry. However, this was
not passed on to the borrowers, leading to higher net interest spread. The
empirical exercise suggested that the operating cost was the main factor
affecting the net interest margin. Non-interest income and the asset quality
were the other determinants of net interest margin.
CHALLENGES: . Similarly, there is a need for increased absorption of
enhanced technological capability (innovation) by several banks to further
CONCLUSION
A robust banking and financial sector is critical for facilitating higher
economic growth Kainth (2008). The analysis of the Indian Banking
Industry shows stability and growth.
The Government of India and the RBI have attempted to implement a
proactive and responsive monetary policy and fiscal policy with timely,
targeted, and temporary measures. While the RBI has reversed its earlier
stance of a tight monetary policy, the government recently announced a
fiscal stimulus package to push overall economic activity. Indian Banks
have put in place a constellation of measures both on interest rates and
liquidity to ward off the impending crisis.
As a result Indian Banks have been able to perform well globally. Certain
aspects and learnings from the Indian Banking Industry can be adopted as
best practices by other financial crisis affected countries.
The global challenges which banks face are not confined only to the global
banks. These aspects are also highly relevant for banks which are part of a
BIBLIOGRAPHY
Basel II norms for Indian Banks, accessed May 3th, 2009, [available at
http://www.stockmarketsreview.com/news/
basel_II_norms_for_indian_banks_20090312/]
Data from the official website of Indian Bankers Association, accessed May
6th, 2009, [available at http://www.iba.org.in]
Definition of financial terms, accessed May 7th, 2009, [available a
http://www.investopedia.com/terms/c/ capitaladequacyratio.asp]
Financial Newspapers/Websites, accessed April-May , 2010.available at
EconomicTimes.com,BusinessStandard.com,Reuters.com,Samachar.co
Kainth, G S (2008). Financial Performance of Non-Banking Financial
Institutions in India ICFAI Journal of Financial Economics Vol. 6, No. 1, pp.
56-76. Nayak, S. S. (2008). Managing US financial crisis, need for
adequate supervisory framework. The Indian Banker Vol.III No.12, P30-32.
Nishank, D. S. (2008). Subprime crisis, a primer. The Indian Banker Vol.III