PUNJAB NATIONAL BANK

STRATEGIC
MANAGEMENT OF PNB
A PROJECT REPORT
GROUP 12, MBA (F& B), TERM VI, NIIT UNIVERSITY

2015
Submitted By:
Sudershan Kumar (373)
Sumedh Shringarpure (375)
Neha Singh (328)
Sonam Sharma (369)
Vaibhav V Soni (380)
Sujatha B R (374)
Submitted To:
Prof. Jayant Bose
7, PNB House, Bhikaji Cama Place, Delhi - 110066

Disclaimer
This report has been prepared by the author as a student under the NU-MBA Program for
academic purposes only. The views expressed in the report are personal to the student and
do not necessarily reflect the views of Regulators or its Honble Members/Chairperson in
any manner. The material used in the report is taken from the RBI website and Punjab
National Bank website. The material, facts and figures should not be used by any means to
anywhere, otherwise than the academic purpose.

Acknowledgement
This dissertation is an effort made by me with the astute guidance of my mentor, Prof.
Jayant Bose. His valuable inputs and constant encouragement has inspired me to carry out
this research fruitfully. He gave me his valuable time to discuss the facets of this topic and
guided me towards an enlightening and holistic research. I also put on record my gratitude
towards the library staff, which has provided me the help and access to all the resourceful
material for my report.

Contents
Contents.................................................................................................................................................. 4
Executive Summary ................................................................................................................................. 6
1.

Introduction ............................................................................................................................... 7

2. Strategic Management in Punjab National Bank ............................................................ 7

2.1 Vision: ...................................................................................................................................... 7

2.2 MISSION .................................................................................................................................. 7
2.3 PROFILE ................................................................................................................................... 7
3. Environmental Analysis in Punjab National Bank .......................................................... 8

3.1 Porters Five Forces Analysis in Banking .................................................................... 8

4. PEST Analysis .............................................................................................................................. 9

4.1 Political Scenario ................................................................................................................. 9

4.2 Economic Scenario .............................................................................................................. 9
4.3 Social Scenario ................................................................................................................... 10
4.3 Technological Scenario.................................................................................................... 10
5. SWOT to TOWS...................................................................................................................... 10

5.1 External factor analysis (EFAS) .................................................................................... 10

5.2 Internal Factor Analysis Scheme (IFAS) .................................................................... 12
5.3 TOWS Matrix ........................................................................................................................ 13
6. The Delta model Analysis-PNB ........................................................................................... 14

6.1 Best Product ........................................................................................................................ 15

6.2 Total Customer Solutions ............................................................................................... 16
6.3 System Lock-In ................................................................................................................... 16
7. Punjab National Banks Growth Strategies ................................................................ 16

7.1 Centralization of system ................................................................................................. 16

7.3 Risk Management .............................................................................................................. 17

7.4 NPA Management .............................................................................................................. 17

7.5 Financial Inclusion ............................................................................................................. 19
4

7.6 Reduction in cost of deposit .......................................................................................... 19

_Toc4154468927.7 Expansion of credit................................................................................... 19

7.8 Improvement in asset-liability management ........................................................... 19

8. BASEL III Accords compliance of PNB ............................................................................. 19

8.1 Capital Adequacy of PNB................................................................................................ 19

8.2 The capital adequacy ratio (Basel II and Basel III) of the bank group ............ 20
8.3 BASEL III challenges faced by Indian banks in general, PNB in particular .. 20
8.4 Potential Challenges of Basel III Implementation in PNB ................................... 22
8.4.1 Functional ......................................................................................................................... 22
8.4.2 Technical ........................................................................................................................... 22
8.4.3 Organizational ................................................................................................................. 22
9. Future Roadmap- Scenario Planning ............................................................................. 24

9.1

MANAGING UNDER UNCERTAINITY- SCENARIO PLANNING ....................... 24

9.1.1 Credit Risk ..................................................................................................................... 24

9.1.1a. Credit Risk Management: ........................................................................................ 25
9.1.2

Market Risk................................................................................................................... 25

9.1.2a. Market Risk Management: ...................................................................................... 25

9.1.3

Funding and Liquidity Risk ..................................................................................... 25

9.1.3a. Funding and Liquidity Risk Management: ......................................................... 26

9.1.4

Price Risk....................................................................................................................... 26

9.1.4a. Price Risk Management: .......................................................................................... 26

9.1.5

Operational Risk ......................................................................................................... 26

9.1.6

Country Risk ................................................................................................................. 28

9.1.6a. Country Risk Management: ................................................................................ 28

Conclusion ....................................................................................................................................... 29
Bibliography .................................................................................................................................... 30

Executive Summary
This report gives the comprehensive view of the Punjab National Bank. Punjab National

Bank (PNB or the group) offers a range of services such as corporate and personal
banking, industrial finance, agricultural finance, financing of trade and international
banking services. It also offers credit card and debit cards; life and non-life insurance;
gold coins and asset management services. We broadly bring into notice the
environmental factors which majorly impact the banking industry in general and PNB in
particular under the jurisdiction of the regulatory guidelines i.e. Reserve Bank of India. These
days external environment and the regulatory changes bring a lot of drastic changes in
banking in the country. Frequently change in repo rates, bank rates; reverse repo rates and
marginal Standing facility etc. bring a lot of liquidity fluctuations in the industry. Every
quarter RBI review the monetary policy and make changes in the policy parameters in order
to calibrate the liquidity in the banking system in India. Then we have done the SWOT
analysis of PNB which broadly tells us about the Strengths, Weaknesses, Opportunities and
Threats faced by the bank. Then we have shown them with the help of matrix SWOT and
TOWS.TOWS matrix indicated the correlation amongst the various parameters of the matrix.
Delta Model tells us the quality service to its customers and the various valuable offering of
the bank which differentiate PNB from other banks across the industry.
Customers are God in banking and to serve better to get business better. Bank time to time
has brought up various business models in order to bring a fastest growth in its asset
business such as SME financing, Corporate financing, Micro financing, Retail lending.
Moreover in liability business as well bank is very robust in CASA acquisition, CASA growth,
High CASA ratio, Deposits of government institutions etc.Also bank generated fee income
by selling insurance, Mutual funds, processing fee, sale of gold coins and bars, trade
products income, forex income etc. Then we described the CRAR under BASEL III norms
and various challenges faced by the bank in order to implement the BASEL III accords. Just
as the banking sector seemed to be recovering from the global financial crisis, the industry
was rocked again. In many developed nations, economic growth is sluggish.

Introduction
The banking sector in India is on a growing trend. It has vastly benefitted from the surge in
disposable income of individuals in the country. There has also been a noticeable upsurge
in transactions through ATMs, and also internet and mobile banking. Consequently, the
different banks, viz public, private and foreign banks have invested considerably to increase
their banking network and thus, their customer reach.
The banking industry in India has the potential to become the fifth largest banking industry
in the world by 2020 and third largest by 2025 according to a KPMG-CII report. Over the next
decade, the banking sector is projected to create up to two million new jobs, driven by the
efforts of the RBI and the Government of India to integrate financial services into rural areas.
Also, the traditional way of operations will slowly give way to modern technology.
The Indian banking sector is fragmented, with 46 commercial banks jostling for business
with dozens of foreign banks as well as rural and co-operative lenders. State banks control
80 percent of the market, leaving relatively small shares for private rivals.
Increase in working population and growing disposable incomes will raise demand for
banking and related services. Housing and personal finance are expected to remain key
demand drivers. Rural banking is expected to witness growth in the future. Mobile, Internet
banking and extension of facilities at ATM stations to improve operational efficiency. Vast
un-banked population highlights scope for innovation in delivery
Total banking sector credit is anticipated to grow at a CAGR of 18.1% to reach US$ 2.4
trillion by 2017. The total banking assets in India touched US$ 1.8 trillion in FY13 and is
expected to cross US$ 28.5 trillion in FY25
2. Strategic Management in Punjab National Bank

2.1 Vision:
"To be a Leading Global Bank with Pan India footprints and become a household brand in
the Indo-Genetic Plains providing entire range of financial products and services under one
roof"

2.2 MISSION
"Banking for the unbanked"

2.3 PROFILE
With more than 120 years of strong existence and 6081 total branches including 5 foreign
branches, 6940 ATMs as on Mar14, Punjab National Bank is serving more than 8.9 crore
esteemed customers. PNB, being one of the largest nationalized banks, has continued to
provide prudent and trustworthy banking services to its customers. The Bank enjoys strong
fundamentals, large franchise value and good brand image. To meet the growing
7

aspirations of the people and compete in these tough conditions, the Bank offers wide range
of products and services.
3. Environmental Analysis in Punjab National Bank

3.1 Porters Five Forces Analysis in Banking

Porter five forces analysis is a framework to analyze level of competition within an industry
and business strategy development. It draws upon industrial organization (IO) economics to
derive five forces that determine the competitive intensity and therefore attractiveness of an
Industry. Attractiveness in this context refers to the overall industry profitability.
Porter referred to these forces as the micro environment, to contrast it with the more
general term macro environment. They consist of those forces close to a company that
affect its ability to serve its customers and make a profit. A change in any of the forces
normally requires a business unit to re-assess the marketplace given the overall change
in industry information. The overall industry attractiveness does not imply that every firm in
the industry will return the same profitability. Firms are able to apply their core
competencies, business model or network to achieve a profit above the industry average.
As an industry, profitability is low and yet individual companies, by applying unique
business models, have been able to make a return in excess of the industry average.

Threat of
New Entrant
(Medium)

Bargaining
Power of
Customers
(Medium)

Competition
(Medium)

Bargaining
Power of
Suppliers
(Low)

Substitute
Products
(Medium)

Competitive Rivalry
- At present public sector banks, led by SBI & associates, control 77.3% of the banking
sector
- Rivalry is much aggressive in metropolitan areas
- Issuing of new licenses will increase competitive rivalry in rural areas over medium to
long term1
Threat of New
Entrants

Substitute
Products

- High entry
barriers, as RBI and
Central Bank control
the issuance of
licenses
- New licenses may
reduce market-share
of public banks

- For deposit
substitutes include
investment in gold,
real estate, equity
etc.
- For advances
substitutes include,
bonds, IPO/FPO, etc

Bargaining Power
of Suppliers

Bargaining Power
of Customers

- Largely,
customers prefer
banks for its
reliability
- Gradually,
customers have
hedged inflation by
investing in other
riskier avenues

- Nascent debt
market and volatile
stock market, are
less opted
- Banks are an
indispensible source
of fund in India

4. PEST Analysis
PEST analysis is concerned with the environmental influences on a business. The acronym
stands
for
the Political,
Economic,
Social
and
Technological
issues
that
could affect the strategic development of a business
Identifying PEST influences
is a useful way of summarizing the external environment in which a business
operates. However, it must be followed up by consideration of how a business should
respond to these influences.

4.1 Political Scenario

Extension of interest subsidy to low cost home buyers

Simplification of KYC norms, introduction of no-frills accounts and Kisan Credit Cards
to increase rural banking penetration
RBI is considering giving more licenses to private sector players to increase banking
penetration
PM Narendra Modi introduced Pradhan Mantri Jan Dhan Yojana on August 15, 2014.
By the end of January 2015, 125.8 million accounts were opened, with around Rs.106
billion (US$1.7 billion) were deposited under the scheme.

4.2 Economic Scenario

Strong GDP growth (CAGR of 7.0% expected over 201217)

9

Rising per capita income will lead to increase in the fraction of the Indian population
that uses banking services
Total banking sector credit is expected to increase at a CAGR of 18.1% to US$2.4
trillion by 2017
The sector will benefit from structural economic stability and continued credibility of
Monetary Policy

4.3 Social Scenario

Rapid urbanization, decreasing household size and easier availability of home loans
has been driving demand for housing
Demand in the low- and mid-income segments exceeds supply three- to four-fold
Growth in disposable income has been encouraging households to raise their
standard of living and boost demand for personal credit
Population in 25-60 age group is expected to grow strongly going ahead, giving
further push to the number of customers in banking sector
The real annual disposable household income in rural India is forecasted to grow at
CAGR of 3.6% over the next 15 years

4.3 Technological Scenario

Technological innovation will not only help to improve products and services but
also to reach out to the masses in cost effective way
Use of alternate channels like ATM, internet and mobile hold significant potential in
India
Tele-density in rural India soared to nearly 43.7% in February 2014 from less than 1%
in 2007 Banks, telecom providers and RBI are making efforts to make inroads into the
un-banked rural India through mobile banking solutions
RBI has taken several steps to enable mobile payments, which forms an important
part of mobile banking; the central bank has recently removed the transaction limit of
Rs.50,000 and allowed banks to set their own limits
Mobile banking transactions in India will cross 340 million by 2015 and would result
in cost savings of approximately Rs.11 billion (US$230 million)

5. SWOT to TOWS

5.1 External factor analysis (EFAS)

External Factor Evaluation (EFE) matrix method is a strategic-management tool often used
for assessment of current business conditions. The EFE matrix is a good tool to visualize
and prioritize the opportunities and threats that a business is facing.The EFAS matrix of PNB
is shown below;

10

Key External Factors

Weight

Rating Weighted
Score

Growing Middle Class Income

0.09

0.36

Domestic Market Potential

0.09

0.36

Focusing on building relationship with customers

0.07

0.21

Government business

0.07

0.21

Growing innovations

0.08

0.16

Expanding credit portfolio

0.06

0.18

Emerging markets

0.06

0.24

SME business and rural credit

0.05

0.15

Domestic Competition

0.09

0.24

Slowing Economy Gross Domestic Product (GDP)

Trend

0.07

0.28

Inflation Trends

0.07

0.14

Monetary policy changes on interest rates

0.07

0.14

Regulatory restrictions and controls

0.05

0.15

Fiscal policy changes

0.05

0.1

Private banks presence in rural credit and their financial 0.02

inclusion

0.04

Legal Barriers

0.02

0.08

Totals

1.00

Opportunities

Threats

11

3.04

5.2 Internal Factor Analysis Scheme (IFAS)

Internal
Factor

Strategic Weig
ht

Ratin
g

Weighted
score

Comments

Diversified operations with 0.05

large number of branches

3.0

0.15

Retail and corporate operations

Strong IT support with best 0.03

fit approach

2.0

0.06

Contemporary software
business processes

Schemes for small and 0.05

medium scale businesses

4.0

0.20

Focus on innovation

It is the second largest 0.10

state owned commercial
bank in India

2.0

0.20

Efficient system

It
has
70,000
plus 0.10
employees with more than
50 million customer base

3.5

0.35

Skilled and experienced workforce

with opportunities to the younger
generation

Active in rural credit and 0.15

financial inclusion

3.5

0.52

Access of CASA products and

credit products in the rural areas

Work culture

0.13

3.5

0.45

Leadership creates culture

Less penetration in Urban 0.15

Areas

5.0

0.75

Not very strong

Inadequate Branding and 0.10

advertising as compared to
other banks

3.0

0.30

Lack of synergies due to low

marketing efforts

Legal issues
employees

4.0

0.56

Most employees caught during

audit issues

Strengths

and

Weaknesses

regarding 0.14

12

Total

1.00

3.54

5.3 TOWS Matrix

Internal Factors
Factors

External Factors
Factors

Opportunities
1. Growing Middle
Class Income
2. Domestic Market
Potential
3. Focusing
on
building
relationship with
customers
4. Growing
innovations
5. Expanding credit
portfolio
6. Emerging
markets

Strengths

Weaknesses

1. Diversified operations
with large number of
branches
2. Strong IT support
3. SME
business
schemes
4. Second largest state
owned
commercial
Bank in India
5. Active in rural credit

SO Strategy

1. Less
penetration
in
urban areas
2. Inadequate
marketing
activities
3. Legal issues regarding
employees

WO Strategy

1. Cater
to
the
growing
demand.
2. Introduction of
contemporary
product
and
processes
3. Focus on net
interest income
and
granular
business
4. Low
cost
products in rural
areas
5. Wide coverage
through market
share

13

1. By utilizing its
potential in the
urban area by
catering them
2. Creation
of
Customer
relationship
Management
software in order
to dealt with the
urban and semi
urban
branchs
customers
3. Expenditure
on
the
marketing
activities. Branding
awareness

Threats
1. Domestic
Competition
2. Slowing
Economy Gross
Domestic
Product
(GDP)
Trend
3. Inflation Trends
4. Monetary policy
changes
on
interest rates
5. Regulatory
restrictions and
controls
6. Legal Barriers

ST Strategy

WT Strategy

1. Using
its
portfolio
of
products across
all the branches
and beat the
competition
2. It
should
be
more aggressive
in
government
banking business
as
well
as
corporate
funding.
3. Internal
audit
and various risk
management
policies
may
bring
a
breakthrough
changes in the
processes.

1. Branch awareness
and more focus on
marketing
activities
2. Strengthen
product & service
quality
by
continuing
improvement
to
capitalise
brand
value.
3. Breakthrough
changes required
in order to cater
the
urban
customers.

6. The Delta model Analysis-PNB

The Delta Model was developed by Dean & Company co-founder Dean Wilde, and Arnoldo
Hax of the MIT/Sloan School of Management, to help managers formulate and implement
effective corporate and business strategies. It grew from a conviction that the world of
business had been experiencing transformations of such magnitude that existing managerial
frameworks were either invalid or incomplete. Moreover, the emergence of the Internet,
with the previously unimagined potential for communication, and the technologies
surrounding e-business and e-commerce, made available powerful new tools that allowed
the feasibility of completely different business approaches.
In response to these new challenges, the Delta Model provides an integrated strategy
development process that offers a new approach to strategic management. It moves
beyond a product-centric view focused on creating sustainable competitive advantage to
one aimed at building long-term relationships with customers and results in a new set of
strategic positioning options that revolve around the concept of "customer bonding". The
Delta Model also addresses the critical issue of linking strategy with execution through the

14

use of Adaptive Processes, Aggregate and Granular Metrics, and Experimentation and
Feedback.

As shown in the above delta model, the business strategies could evolve over the period of
time from BP (Best Product) to TCS (Total Customer Solutions) to SLI (System Lock-in) or
from BP to SLI directly

6.1 Best Product

Competing as a Best Product is achieved through Low Cost or Differentiation, the traditional
options in strategy. This position, however, is limited. There is typically only one "winner" in
the Low Cost position per market i.e. Punjab National Bank, and the first mover advantage in
15

the Differentiation position can be fleeting. Nonetheless, because it is the most widely
adopted strategy, this product-centric mindset is embedded in each process, activity and
metric for most businesses, and thus the legacy that can be the biggest hurdle to changing
strategic positions.

6.2 Total Customer Solutions

There are three ways to achieve Total Customer Solutions. The first is by Redefining the
Customer Experience in a way that considers the full experience of the customer from the
point of acquisition through to the complete life cycle of ownership of the product Saturn
used a unique "offer" to separate itself from the traditional car buying process, centered
around the promise, "Satisfaction guaranteed or your money back, no questions asked." The
second way is Customer Integration, where the firm effectively substitutes for and/or
leverages activities currently performed by the customer. The third way is by offering
Horizontal Breadth providing the full set of products and services that fulfills the
customer's entire needs (often through a combination of internal products and external
complement or offerings, as Fidelity does in the financial services industry). The bonding
results from a single invoice; single point of contact, learning the breadth of customers'
needs, and, most importantly, through customization of this bundle by the customer.PNB
adopted a Total Customer Solutions through CBS banking

6.3 System Lock-In

There also three ways to achieve System Lock-in. The first is referred to as Restricted
Access, where potential new suppliers are denied access to an incumbent firm's customers
because the channel has limited capacity to handle multiple vendors, and/or other
constraints. Strength of PNB in Rural area is the best example of this. Establishing a
Dominant Exchange is another potential route to System Lock-In.
The most extreme form of customer bonding is Proprietary Standard, where the customer is
attracted to the product because of the extensive network of third-party complimentary that
develop adjacent products and services designed to work with the company's product like
Dominant Exchange, this position has a self-reinforcing feedback loop, that allows the
incumbent to strengthen overtime .
7. Punjab National Banks Growth Strategies
Punjab National Bank (PNB) has embarked on its essentially a four-pronged strategy to
make it strong enough to counter competition.

7.1 Centralization of system

"The strategy involves centralization of the back office, a hub-and-spoke set-up, where all
16

data operations would be centralized at a single centre. This would reduce cost of
operations. The centralized system would be responsible for processing of CASA forms and
Credit management forms and formats. This unit will act as a central processing unit where
the storage of data and MIS of all the business units will be available.

7.2 Profitability
The second step would be to do a detailed study of the profitability of all products on the
shelves, which would be followed by corrective actions to align them with the market
scenario," he added
In terms of profitability ratios, the Bank recorded one of the highest Net Interest Margin of
3.44% during FY'14. Further, the capital adequacy ratio of the Bank stood at 12.29% as per
Basel II and 11.52% as per Basel III as at 31st March14. The Book value per share increased
from ` 884.03 in FY13 to ` 952.50 in FY14. In this backdrop, your Directors take pleasure in
placing the Banks Annual Report for 2013-14 along with its audited annual financial
statements.
With 38.30% share of CASA Deposits to Total Deposits, PNB maintained its Number one
position amongst peers. Further in terms of Bottom line performance, the Bank achieved
highest Operating Profit of Rs 11,384 crore during FY14. Net Interest Margin (NIM) at 3.44%
remained one of the highest amongst peer banks.
The Bank has a strong capital base with capital adequacy ratio of 12.29% as per Basel II and
11.52% as per Basel III as on Mar14. The Bank has maintained its number one position with
highest Book value per share of Rs.952.50 as at the end Mar14 amongst peers.
7.3 Risk Management
"The third strategy would be to undertake an integrated risk management system . The bank
believes in the policy of total risk management. The bank views the risk management
function as a holistic approach. Bank believes that the risk management is the prime
responsibility of the top management. The BoDs decide the overall risk management
policies and approve them. The various policies are Risk management policy, investment
policy, ALM policy, and operation risk management policy, policy for internal capital
adequacy assessment process, Credit risk mitigation policy, and stress testing policy. The
meeting of RMC is once in a quarter. The management thinks that this is the essential part of
risk management.

7.4 NPA Management

17

We did not find anything like a concentration or something that has been hitting us from any
one particular segment. So I would say, that it is a well spread amount. Infact, if you look at
the current quarter delinquencies, almost 25 percent of it, Rs 1,171 crore, has come from
agriculture; Rs 900 crore has come from MSME; Rs 347 crore has come from retail and
around Rs 1,786 crore has come from the industry.
So to that extent, I would not say that the delinquencies are not coming from any particular
segment or any particular geography, it is uniformly coming from every side.
It has got an impact of what is happening in the economy to an extent, but I would not like
to blame the economy for this purpose or the slowdown of the economy. As the
management we would definitely like to own this up and then try to work on improving this.
There is an impact of what's happening in and around us on the asset quality. If the
economy takes a U-turn in terms of growth teamed with some good initiatives taken now
and then, we can say we had the worse of it. I am a little guarded in saying that everything is
over. I will definitely watch what's happening in the economy and then comment upon this.
It is quite clear, that in case the units for which you have lent are not in a position to
generate revenues or service the loans, then that is going to be an impact on the asset
quality of the banks. It has been our effort to see that wherever the investments have gone
and they arent in a position to generate sufficient income, all of us have to work together to
see that the bottlenecks are taken care of. It needs to start generating income. If it does not
happen, then obviously either there should be a regulatory forbearance which is given,
which does not appear to be a possibility or the banks may have to take a hit on these
accounts.
If the banking secretary has mentioned that asset quality is getting into a stress, I would
probably say that I have a larger view on what can happen from their side. In most of these
places, if things have to reverse, there should be an intervention from the Government. For
example, incase somewhere a fuel supply is the issue and the investment has happened,
now the fuel supply either in the form of the coal or the gas has to happen with the
Government intervention.
If somewhere somebody had said that it will not happen, probably I think they may have a
much better sight into these things. But investments have happened based on certain
commitments and if these commitments are met in terms of fuel supply, probably this
investment will start earning. Larger economic issues need to be addressed.
We have sustained net interest margin at 3.5 percent. I have been giving guidance on this at
3.5 percent for the last three years. So, looking at the stress, maybe it may go down by 10
bps or so. But our efforts will be to hold it on the committed level of 3.5 percent. The credit
18

growth per se is slowing down. We would look for a credit growth of about 17-18 percent
looking at the banking sector growing at about 16-17 percent and with more focus on their
retail book. The retail is growing and we have taken steps to grow in the retail mode.

7.5 Financial Inclusion

Financial inclusion has been priority area for the Bank as reflected in its mission
"Banking for the unbanked. To provide Business Correspondents (BC) services
online, the Bank has put in place Kiosk Banking Solution (KBS). With this new
technology the Financial Inclusion customers can access all the banking services
(Account opening, cash withdrawal, cash deposit, mini statement, balance enquiry
and fund transfer, etc.) required by them at BC location in real time.
For an efficient use of BC network, The Bank has adopted a mix of BC models using
KBS technology for each Sub Service area (SSA) or Urban Ward (UW) within service
area of each base branch. The Bank has 8490 SSAs across the country.
7.6 Reduction in cost of deposit

The first priority of the bank will be to reduce its cost of funds to 4 per cent from the
present 4.6 per cent. Though the mix of deposit is good, we want to increase the
share of demand deposit from 46 to 48 per cent and reduce the proportion of time
deposit from 54 to 52 per cent," chairman said, adding that PNB will focus on semiurban and rural areas for growth in time deposits and improve its net interest
margins.
7.7 Expansion of credit
PNB is also aiming to expand credit especially to retail, agriculture, trade and corporate
sectors. The bank intends to allocate more funds for retail lending rather than give short
term commercial loans at sub-PLR rates

7.8 Improvement in asset-liability management

With these measures, PNB will improve its asset-liability management and aim to attain 50
per cent of budgeted goals in the first half of the fiscal year so that the pressure in meeting
the targets is less in the latter half.
8. BASEL III Accords compliance of PNB

8.1 Capital Adequacy of PNB

The bank believes in the policy of total risk management. The bank views the risk
management function as a holistic approach. Bank believes that the risk management is the
19

prime responsibility of the top management. The BoDs decide the overall risk management
policies and approve them. The various policies are Risk management policy, investment
policy, ALM policy, and operation risk management policy, policy for internal capital
adequacy assessment process, Credit risk mitigation policy, and stress testing policy. The
meeting of RMC is once in a quarter. The management thinks that this is the essential part of
risk management.

8.2 The capital adequacy ratio (Basel II and Basel III) of the bank group
Basel II
Particulars
CRAR %
CRAR-Tier I capital %
CRAR-Tier II capital %

31.3.2014
12.69%
9.50%
3.19%

Basel III
Particulars
31.3.2014
Common equity Tier-I capital ratio (%)
Basel III
12.69%
Tier I capital Ratio % (BAEL III)
9.32%
Tier II capital Ratio % (BAEL III)
2.79%
Total CRAR Ratio % (Bael III)
12.11%

31.3.2013
13.16%
10.00%
3.16%

31.3.2013
NA
NA
NA
NA

8.3 BASEL III challenges faced by Indian banks in general, PNB in particular

0-2.5%

4.0%
2.0%
2.0%
-2012

1.3%

1.9%

2.5%

1.5%

2.0%
1.5%

0.6%
2.0%
1.5%

2.0%
1.5%

2.0%
1.5%

2.0%
1.5%

3.5%

4.0%

4.5%

4.5%

4.5%

4.5%

4.5%

2013

2014

2015

2016 2017

2018

2019

3.5%
1.0%

2.5%

Core Tier 1 Capital

Non-core Tier 1 Capital
Tier 2 Capital
Capital Conservation Buffer
Countercyclical Buffer

20

Stricter capital definition

Increased quality of Tier 1 Capital (going concern)

Simplification and reduction of Tier 2 Capital (gone concern)
Elimination of Tier 3 Capital
New eligibility criteria and limits for capital components

Increased RWAs

Higher risk weights for (re-)securitizations

Higher capital requirements for trading book positions (Stressed-VaR, Incremental
Risk Charge)

Higher capital requirements for counterparty credit risk exposures arising from
derivatives, repo-style transactions and securities financing activities (CVA risk,
Wrong Way risk)

Basel III will undoubtedly hit banks hard through its range of new and stricter regulations,
whether because of higher capital requirements, the new liquidity standard, the increased
risk coverage, the new leverage ratio or a combination of the different requirements. The
aggregate effect of the requirements both those that are imminent and those that are still
in discussion will vary from bank to bank, and among large banks almost all will have to
deal with its far-reaching implications.
Taking a closer look at the changes in the capital requirements, we see a number of
negative effects whose interplay can stress banks capital base significantly. On the one
hand the stricter capital definition lowers banks available capital. At the same time the risk
weighted assets (RWA) for securitizations, trading book positions and certain counterparty
credit risk exposures are significantly increased. Both effects decrease banks realized
capital ratios enormously. On the other hand the required capital ratio is increased over
the next few years till 2019. These two counterbalancing effects will pose a major problem
for some banks to meet the required capital ratio, making corresponding measures
inevitable
In addition to the stricter capital requirements, the introduction of the LCR and NSFR will
force banks to rethink their liquidity position, and potentially require banks to increase
their stock of high-quality liquid assets and to use more stable sources of funding.
Generally, banks will experience increased pressure on their Return on Equity (RoE) due to
21

increased capital and liquidity costs, which along with increased RWAs will put pressure on
margins across all segments. In order to become compliant with the different new Basel III
requirements and, at the same time, to restore the profitability of their businesses, banks
have a variety of potential measures they can take. Furthermore, there will be higher
regulatory costs for banks due to ongoing changes in regulatory requirements, which can
be quite meaningful depending upon the size of the bank and the complexity of its
business. The Basel III landscape is changing rapidly, with new regulations and
requirements published by the corresponding national authorities almost every week;
merely keeping up poses a strain on bank resources.

8.4 Potential Challenges of Basel III Implementation in PNB

8.4.1 Functional

Functional specification of new regulatory requirements (e.g. stress testing, limit

system, risk quantification)
Functional integration of new regulatory requirements into existing capital and risk
management

8.4.2 Technical

Technical implementation of new regulatory requirements

Data availability and quality
Technical integration into existing risk management systems

8.4.3 Organizational

Coordination of different units as well as within the group

Responsibilities within implementation beyond
Availability of resources

Basel III, with its comprehensive requirements, forces banks to take a number of actions to
meet the various new regulatory ratios and to restore, at least partially, their profitability.
Before undertaking such actions, banks must be able to calculate and report the new
ratios, requiring a huge implementation effort. Since Basel III covers a large number of
areas, a thorough review of respective data and IT architecture, risk methodologies,
governance structure, reporting systems, as well as the corresponding processes is
needed to accomplish a successful implementation. Banks should be fully aware of these
22

challenges as early as possible before starting their Basel III implementation. To get a
better picture of the potential pitfalls we have categorized the issues as functional,
technical and organizational implementation challenges. The functional challenges include
developing specifications for the new regulatory requirements, such as the mapping of
positions (assets and liabilities) to the new liquidity and funding categories in the LCR and
NSFR calculation as well as to the stricter defined capital categories. Within the LCR the
stress testing methodologies need to be specified taking into account the characteristics
of the bank. Further functional challenges refer to the specification of the new
requirements for trading book positions and within the CCR framework (e.g. CVA) as well
as adjustments of the limit systems with regard to the new capital and liquidity ratios.
Crucial is the integration of new regulatory requirements into existing capital and risk
management as some measures to improve new ratios (e.g. liquidity ratios) might have a
negative effect on existing figures.
The technical challenges of Basel III implementation include data availability, data
completeness, and data quality and data consistency to calculate the new ratios. Our
experience indicates that in some cases highlighting data availability as the key criteria for
calculating liquidity ratios and analyzing the completeness of the data in the different
enterprise systems and data pools can be beneficial. Further technical challenges result
from the adjustments of the financial reporting system with regard to the new ratios and
the creation of effective interfaces with the existing risk management systems.
Compared to Basel II with its major focus on credit and operational risks, the Basel III
requirements cover a wider range of topic areas including the banks capital, liquidity and
risk management. In Accentures view, the key to a successful Basel III implementation is
to set-up a Basel III project team that will consider the dependencies between the different
topic areas and that will coordinate the different functional, technical and operating units
and departments such as risk and finance as well as IT and business departments. Close
cooperation will be inevitable to keep implementation costs down while providing
necessary resources for compliance and for subsequent efforts to rebuild profitability.
These organizational changes need to be managed to develop a group-wide response and
also include the assignment of responsibilities both within the framework of
implementation, and beyond into efforts to rebuild profitability and to allow for an
integrated capital, liquidity and risk management. To achieve these objectives,
identification and securing of the resources must be conducted to accomplish the full
range of required initiatives.
Banks that deal with Basel III effectively will establish a transparent, structured
organization with clear responsibilities at all levels, with comprehensive governance for
newly created models, processes, and data. They will make available sufficient resources
23

throughout the implementation to allow for a concerted and efficient execution, and will, if
necessary, create new functions to deal with matters such as asset disposal.
9. Future Roadmap- Scenario Planning
Effective scenario modelling is vitally important in todays tentative economic recovery, as
the level of uncertainty surrounding key business drivers is higher than ever before.
Scenario planning is not a new concept, yet very few financial institutions have taken the
strategic step of implementing sophisticated scenario planning into their strategic
planning initiatives, preferring instead to simply budget or forecast with only one
economic scenario in mind.
The reality is that while having a strong general understanding of the institutions
anticipated revenue or earnings per-share is important, deeper insight into what factors
actually drive the business and then modelling the cause and effect of certain situations
on the institutions financial drivers will provide more meaningful insight into the
institutions expected performance. While many financial institutions understand the
importance of modelling multiple scenarios, they lack the technology needed to do so,
Punjab National Banking bandwidth constraints and lack of institutional knowledge as
additional barriers to implementing a more insightful, sophisticated scenario-modelling
process.
The bank has identified five areas viz reduction in cost of deposit, credit expansion, cut
gross NPAs, improve asset-liability management and create more promotional
opportunities for the staff in coming years. The companyy has tries to achieve these five
areas through a risk management system. The scenario planning of the same is as
follows:

9.1

MANAGING UNDER UNCERTAINITY- SCENARIO PLANNING

9.1.1 Credit Risk

Credit risk is the potential for financial loss resulting from the failure of a borrower or
counterparty to honour its financial or contractual obligations. Credit risk arises in many of
Punjab National Bank groups business activities, including:

Wholesale and retail lending

Capital markets derivative transactions
Structured finance
Repurchase agreements and reverse repurchase transactions.

Credit risk also arises from settlement and clearing activities, when Punjab National Bank
transfers an asset in advance of receiving its counter-value or advances funds to settle a
transaction on behalf of a client. Concentration risk, within credit risk, is the risk associated

24

with having credit exposure concentrated within a specific client, industry, region or other
category.

9.1.1a. Credit Risk Management:

Credit risk is one of the most significant risks Punjab National Bank faces as an institution. As
a result, Punjab National Bank has a well established framework in place for managing credit
risk across all businesses. This includes a defined risk appetite, credit limits and credit
policies, both at the business level as well as at the firm-wide level. Punjab National Bank
Banks credit risk management also includes processes and policies with respect to problem
recognition, including watch lists, portfolio review, updated risk ratings and classification
triggers.
With respect to Punjab National Bank Banks settlement and clearing activities, intra-day
client usage of lines is closely monitored against limits, as well as against normal usage
patterns. To the extent a problem develops, Punjab National Bank typically moves the client
to a secured (collateralized) operating model. Generally, Punjab National Banks intra-day
settlement and clearing lines are uncommitted and cancellable at any time.
To manage concentration of risk within credit risk, Punjab National Bank has in place a
concentration management framework consisting of industry limits, obligor limits and
single-name triggers. In addition, as noted under Managing Global RiskRisk Aggregation
and Stress Testing above, independent risk management reviews concentration of risk
across Punjab National Banks regions and businesses to assist in managing this type of risk.

9.1.2 Market Risk

Market risk encompasses funding and liquidity risk and price risk, each of which arises in the
normal course of business of a global financial intermediary such as Punjab National Bank.

9.1.2a. Market Risk Management:

Each business is required to establish, with approval from Punjab National Banks market
risk management, a market risk limit framework for identified risk factors that clearly defines
approved risk profiles and is within the parameters of Punjab National Banks overall risk
tolerance. These limits are monitored by independent market risk, Punjab National Banks
country and business Asset and Liability Committees and the Punjab National Bank group
Asset and Liability Committee. In all cases, the businesses are ultimately responsible for the
market risks taken and for remaining within their defined limits.

9.1.3 Funding and Liquidity Risk

25

Adequate liquidity and sources of funding are essential to Punjab National Banks
businesses. Funding and liquidity risks arise from several factors, many of which Punjab
National Bank cannot control, such as disruptions in the financial markets, changes in key
funding sources, credit spreads, changes in Punjab National Banks credit ratings and
political and economic conditions in certain countries.

9.1.3a. Funding and Liquidity Risk Management:

Punjab National Banks aggregate liquidity resources are managed by the Punjab National
Bank Treasurer. Liquidity is managed via a centralized treasury model by Corporate
Treasury and by in-country treasurers. Pursuant to this structure, Punjab National Banks
liquidity resources are managed with a goal of ensuring the asset/liability match and that
liquidity positions are appropriate in every entity and throughout Punjab National Bank.
Punjab National Banks Chief Risk Officer is responsible for the overall risk profile of Punjab
National Banks aggregate liquidity resources. The Chief Risk Officer and Punjab National
Banks Chief Financial Officer co-chair Punjab National Banks Asset Liability Management
Committee (ALCO), which includes Punjab National Banks Treasurer and senior executives.
ALCO sets the strategy of the liquidity portfolio and monitors its performance. Significant
changes to portfolio asset allocations need to be approved by ALCO.

9.1.4 Price Risk

Price risk losses arise from fluctuations in the market value of trading and non-trading
positions resulting from changes in interest rates, credit spreads, foreign exchange rates,
equity and commodity prices, and in their implied volatilities.

9.1.4a. Price Risk Management:

Price risk in Punjab National Banks trading portfolios is monitored using a series of
measures, including but not limited to:
Value at risk (VAR)
Stress
testing
Factor sensitivity
Each trading portfolio across Punjab National Banks business segments (Punjab National
Bank corp., Punjab National Bank Holdings and Corporate/Other) has its own market risk
limit framework encompassing these measures and other controls, including trading
mandates, permitted product lists and a new product approval process for complex
products. All trading positions are marked to market, with the results reflected in earnings.

9.1.5 Operational Risk

26

Operational risk is the risk of loss resulting from inadequate or failed internal processes,
systems or human factors, or from external events. It includes the reputation and franchise
risk associated with business practices or market conduct in which Punjab National Bank is
involved. Operational risk is inherent in Punjab National Bank groups global business
activities, as well as the internal processes that support those business activities, and can
result in losses arising from events related to the following, among others:

Fraud, theft and unauthorized activities

Employment practices and workplace environment
Clients, products and business practices
Physical assets and infrastructure
Execution, delivery and process management.

9.1.5a.Operational Risk Management:

Punjab National Banks operational risk is managed through an overall framework designed
to
balance strong corporate oversight with well defined independent risk management.
This framework includes:

Recognized ownership of the risk by the businesses

Oversight by Punjab National Banks independent control functions
Independent assessment by Punjab National Banks Internal Audit function.

The goal is to keep operational risk at appropriate levels relative to the characteristics of
Punjab National Bank groups businesses, the markets in which it operates its capital and
liquidity, and the competitive, economic and regulatory environment.
To anticipate, mitigate and control operational risk, Punjab National Bank group maintains a
system of policies and has established a consistent framework for monitoring, assessing
and communicating operational risks and the overall effectiveness of the internal control
environment across Punjab National Bank group. As part of this framework, Punjab National
Bank has established a Managers Control Assessment program to help managers selfassess key operational risks and controls and identify and address weaknesses in the design
and/or effectiveness of internal controls that mitigate significant operational risks.
Each major business segment must implement an operational risk process consistent with
the requirements of this framework. The process for operational risk management includes
the following steps:

Identify and assess key operational risks

Design controls to mitigate identified risks
Establish key risk and control indicators
Implement a process for early problem recognition and timely escalation
Produce a comprehensive operational risk report
27

Ensure that sufficient resources are available to actively improve the operational risk
environment and mitigate emerging risks.

9.1.6 Country Risk

Country risk is the risk that an event in a country (precipitated by developments internal or
external to a country) could directly or indirectly impair the value of Punjab National Banks
franchise or adversely affect the ability of obligors within that country to honour their
obligations to Punjab National Bank, any of which could negatively impact Punjab National
Banks results of operations or financial condition. Country risk events could include
sovereign volatility or defaults, banking failures or defaults, redenomination events (which
could be accompanied by a revaluation (either devaluation or appreciation) of the affected
currency), currency crises, foreign exchange and/or capital controls and/or political events
and instability.

9.1.6a. Country Risk Management:

Punjab National Bank has instituted a risk management process to monitor, evaluate and
manage the principal risks it assumes in conducting its activities, including risks associated
with Punjab National Banks country risk exposures. As part of this risk management
process, Punjab National Bank has a dedicated country risk unit that assesses and manages
its country risk exposures. Punjab National Banks independent risk management, working
with input from the businesses and finance, provides periodic updates to senior
management on significant potential areas of concern across Punjab National Bank that can
arise from risk concentrations, financial market participants and other systemic issues.
These areas of focus are intended to be forward-looking assessments of the potential
economic impacts to Punjab National Bank that may arise from these exposures.

28

Conclusion
Since inception in 1895, PNB has always been a "People's bank" serving millions of people
throughout the country and also had the proud distinction of serving great national leaders
like Sarvshri Jawahar Lal Nehru, Gobind Ballabh Pant, Lal Bahadur Shastri, Rafi Ahmed
Kidwai, Smt. Indira Gandhi etc. amongst other who banked with us. Punjab National Bank is
serving more than 8.9 crore esteemed customers. PNB, being one of the largest nationalized
banks, has continued to provide prudent and trustworthy banking services to its customers.
The Bank enjoys strong fundamentals, large franchise value and good brand image. To meet
the growing aspirations of the people and compete in these tough conditions, the Bank
offers wide range of products and services. In terms of accolades, PNB has been adjudged
as the Most profitable Bank amongst Public sector banks by Financial Express and Ernst &
young survey on Indias Best Bank. During FY14, Punjab National Bank maintained it
NUMBER ONE position in Domestic Business, Domestic Deposits, Domestic Advances,
CASA Deposits and Operating Profit amongst nationalized bank. With 38.30% share of
CASA Deposits to Total Deposits, PNB maintained its Number one position amongst peers.
Further in terms of Bottom line performance, the Bank achieved highest Operating Profit of
Rs 11,384 crore during FY14. Net Interest Margin (NIM) at 3.44% remained one of the
highest amongst peer banks. Or an efficient use of BC network, The Bank has adopted a mix
of BC models using KBS technology for each Sub Service area (SSA) or Urban Ward (UW)
within service area of each base branch. The Bank has 8490 SSAs across the country.
Moving forward, Bank will keep on dedicating itself for fulfilling the financial needs of the
masses making them financially empowered. The Bank will continue to compete to be the
leading financial service provider for valuable customers creating exceptional value for its
shareholders and people.

29

Bibliography

http://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=33532
https://www.pnbindia.in/En/ui/Profile.aspx?LId=1&PId=2
http://www.business-standard.com/
http://www.iibf.org.in/documents/form_jaiib.pdf
http://www.crisil.com/index.jsp

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