201

Management of Commercial Banks

Evolution,
Structure and
Career
Opportunities in
the Indian
Banking sector
Submitted to: Prof.Vinay Dutta

Prepared By:
Management of Commercial Banks[Type text]
Swati Khurana(91164)
Page 1
Ujjwal Dogra(91166)
Gunashrit Nag(91168)
7/8/2010
 Management of Commercial Banks

Contents
Contents..................................................................................................................... 2
Evolution of Banking...................................................................................................3
Disadvantages of Universal Banking.......................................................................5
Advantages of Universal Banking ...........................................................................8
Structure of banking in India....................................................................................10
Scheduled Banks in India.......................................................................................11
Public Sector Banks...............................................................................................12
Regional Rural Banks.............................................................................................13
Private Sector Banks.............................................................................................14
Foreign Banks........................................................................................................14
Co-operative Banks...............................................................................................15
Role of Reserve Bank of India vis-à-vis Commercial Banks...................................16
RBI as Bankers' Bank.............................................................................................16
RBI as supervisor...................................................................................................17
Organizational Structure at RBI................................................................................18
Establishment........................................................................................................18
Central Board ....................................................................................................... 19
Local Boards.......................................................................................................... 19
The Banking System of United States.......................................................................24
Federal Reserve ....................................................................................................24
Member Banks.......................................................................................................25
Comparative Analysis of the Indian and U.S. banking structure...............................26
Unit banking.......................................................................................................... 26
Branch Banking Concept.......................................................................................28
Career Opportunities................................................................................................32
Questionnaire........................................................................................................... 34
References................................................................................................................36

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Evolution of Banking

The British bought the modern concept of banking to India. But, the concept of banking was
known to us way before that. Banking was used in synonymous with money lending. Our Vedic
literature records the details of banking transactions. In the year 1886, Alexander and company
(a leading agency house) started managing the Bank of Hindustan. Bank of Calcutta was
established in 1806, and renamed as Bank of Bengal in 1809. Bank of Bombay came up in 1840,
while Bank of Madars came up in 1843. The concept of ‘limited liability’ was not known until
1860, hence, prior to that the banks had to either obtain a special charter from the crown or had
to operate under ‘unlimited liability’. Foreign banks like HSBC and Credit Lyonnais started their
Calcutta operations in the 1850’s. Allahabad Bank was established in 1865, which was the first
fully Indian owned Bank. In the year 1921, Imperial Bank of India was established by merging 3
Presidency Banks –Bank of Bengal, Bank of Bombay and Bank of Madras.

Reserve Bank of India was established in 1934, to act as ‘banker’s bank’. It was given the right
of note issue. However, Imperial Bank was allowed to operate as the agent of RBI, especially in
those places where RBI had no branches. The RBI was initially a shareholder’s bank – but was
nationalized in 1948.

State Bank of India was formed by replacing Imperial Bank of India. It was the first Bank in
India to be nationalized. State Bank of India (Subsidiary Banks) Act was passed in 1959,
enabling State Bank of India to take over 8 former State associated banks as its subsidiaries.

Nationalization was perceived as a major step in achieving the socialistic pattern of society. 14
major banks were nationalised in 1969, followed by 6 others in 1980. A detailed scheme of
objectives, regulations, management etc., was drawn-up for these banks. With this Government
of India owned banking in the country rose to 91%. After this, until the 1990’s, the nationalised
banks grew at a moderate pace of around 4% p.a., closer to the average growth rate of the Indian
economy.

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In the early 1990’s, the government came out with liberalisation, and gave licenses to a few
private banks like ICIC Bank, and HDFC Bank, known as Generation tech-savvy banks. The
banking sector displayed huge growth with the Indian economy, with a strong contribution from
government, private and foreign banks.

Thereafter, the relaxation in norms was proposed for Foreign Direct Investment. Accordingly, all
foreign investor banks were allowed voting rights which could exceed the present cap of 10%.
Finally, in 2007, Government of India acquired the entire Reserve Bank of India shareholding in
State Bank of India, consisting of over 314 million equity shares at a total amount of over 355
billion rupees

Since the time of World War II, many economists and historians have argued that German style
universal banks offer advantages for Industrial development and economic growth. A universal
bank is a one-stop supplier for all financial products and activities, like deposits, short-term and
long-term loans, insurance, investment banking etc. Global experience with universal banking
has been varied. After the stock market crash of 1929 and banking crisis of the 1930s, the US
banned all forms of universal banking through what is known as the Glass-Steagall Act of 1933.
This prohibited commercial banks from investment banking activities, taking equity positions in
borrowing firms, selling insurance products etc. The idea was to mitigate risky behaviour by
restricting commercial banks to their traditional activity of accepting deposits and lending.
Nevertheless, the United States has once again started moving cautiously towards universal
banking through the Gramm-Leach-Bliley Act of 1999 which rolled back many of the earlier
restrictions. For example, the merger between Citicorp (banking group) and Travelers (insurance
group) confirmed the fact that universal banking is here to stay. Despite all the pros and cons of
universal banking, Indian Banks and financial institutions have shown a lot of interest in
Universal Banking. The advantages and disadvantages are discussed below.

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Disadvantages of Universal Banking

1. To meet with the increasing demands of customers:

The consumer banking scenario has been changing increasingly due to the establishment
of private sector and foreign banks. The consumers expect a wide variety of services
(efficient in terms of cost, time and convenience), to be offered by the banks. This has led
to greater pressures on the banks to meet the demands of their consumers. For eg.: Today
there is a lot of burden on staff members, who are given less number of bank holidays,
along with the time limit being is 8-8.

2. Merger with DFI will be the Biggest Challenge

Development Financial Institutions (DFIs) opting for conversion into Universal Banks
by merger/reverse merger routes may also face certain difficult situations on account of
Asset Liability Mismatches, burden of mounting NPAs and differences in regulatory
prescriptions applicable to FIs and banks such as CRR and SLR requirements and priority
sector lending. The asset profile of DFIs in India is predominately of long-term nature,
which also includes a very high level of non-performing assets.

E.g.: NPAs of ICICI and IDBI were transferred to ICICI Bank and IDBI Bank
respectively after their merger.

3. Statutory Liquid Ratio {SLR} and Cash Reserve Ratio {CRR} requirements of DFI

DFI’s are currently free of the burden of keeping reserves in the form of SLR and CRR.
But, if a DFI merges with any bank, DFI along with all liabilities issued in the past,
would be subject to reserve requirements. Also, it would be difficult for them to maintain
the stipulated level of reserves due to long term nature of their asset structure.

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4. High cost of funds for DFI

Fixed deposits have a higher rate of interest than CASA (Current account Savings
account). Since, the only source of funds of DFI’s is through FD’s, the cost of deposits is
high.

DFI’s have been raising resources at higher cost in the past, as compared to banks.
Maintenance of CLR/SLR of such liabilities that may earn lower returns, would lead to a
negative effect on the profitability of Universal Banks.

DFI’s will have to comply with the priority sector lending norms that earn lower returns.

5. Improving risk management systems

With the increasing degree of deregulation and exposure of banks to various types of
risks, efficient risk management systems have become essential. The various risks carried
out by any financial activity need to be identified, measured, monitored and controlled.
Since the nature of risks would be different for different products, Universal Banks would
require a comprehensive system for each kind of risk. This would lead to higher costs.

6. Supervisory and regulatory infrastructure

The regulatory framework would need to be strengthened for Universal Banking, in order
to cover all aspects that would protect the interest of the customer, Universal Banking
Institution, and the financial system of the country. This could be either under the control
of one regulator, or a co-ordinating mechanism between various regulators like Reserve
Bank of India, SEBI, etc.

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7. Supervisory of financial conglomerates

The components of consolidated supervision include, consolidated financial statements

intended for public disclosure, consolidated prudential reports intended or supervisory
assessment of risk and application of certain prudential regulations on group basis. In due
course, consolidated supervision as introduced above would evolve to cover.

8. Technology improvement and compensation and incentive systems for employees

Universal banking needs better technology in order to provide a wide variety of services.
The employees need to be given appropriate compensation and incentives due to increase
in the burden of work.

9. Sharpening skills

A large number of changes in the banking and financial sector demands an equal amount
of change in the required skill set for banking. The banks need to focus on their HR and
IT functions, in order to meet the demand for specialized banking functions, and skills in
retail banking, treasury, risk management, foreign exchange, development banking, etc.

10. Competition

Monopolistic competition among universal banks will decrease their profit margin.

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Advantages of Universal Banking

1. Economies of scale

Universal Banking leads to better economic efficiency due to lower cost, higher output
and better products. A bank can reduce average costs and thereby improve spreads if it
expands its scale of operations and diversifies its activities.

2. Profitable Diversions

The existing expertise in one type of financial services can be used in providing other
types of services. This entails lower cost, since all the functions are performed by one
entity, in place of separate bodies.

3. Resource Utilization

Bank possesses information on the risk characteristics of its clients, which can be used to
pursue other activities with the same client. This saves cost compared to the case of
different entities catering to the different needs of the same clients.

4. One-stop shopping

The idea of 'one-stop shopping' saves a lot of transaction costs and increases the speed of
economic activities. It is beneficial for the bank as well as its customers.

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5. Easy Marketing on the Foundation of a Brand Name

A bank’s existing branches can act as a parent company or source, and help sell financial
products without much efforts in marketing. In this way, a bank can reach the client even
in the remotest area without having to take resource to an agent.

6. Investor Friendly Activities

Another manifestation of Universal Banking is bank holding stakes in a firm: a bank's

equity holding in a borrower firm, acts as a signal for other investor on to the health of
the firm since the lending bank is in a better position to monitor the firm's activities.

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Structure of banking in India

Source: Wikipedia

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Banking Structure

Banking Regulator

The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also
acts as the regulator and supervisor of commercial banks.

Scheduled Banks in India

Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks.
Scheduled commercial banks form the bedrock of the Indian financial system, currently
accounting for more than three-fourths of all financial institutions' assets. SCBs are present
throughout India, and their branches, having grown more than four-fold in the last 40 years now
number more than 80,500 across the country (see Table 2.1). Our focus in this module will be
only on the scheduled commercial banks. A pictorial representation of the structure of SCBs in
India is given in figure 1.

:Figure1

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Public Sector Banks

Public sector banks are those in which the majority stake is held by the Government of India
(GoI). Public sector banks together make up the largest category in the Indian banking system.
There are currently 27 public sector banks in India. They include the SBI and its 6 associate
banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalised
banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd.
Public sector banks have taken the lead role in branch expansion, particularly in the rural
areas. From Table 1, it can also be seen that:
• Public sector banks account for bulk of the branches in India (88 percent in 2009).
• In the rural areas, the presence of the public sector banks is overwhelming; in 2009,
96 percent of the rural bank branches belonged to the public sector. The private sector
banks and foreign banks have limited presence in the rural areas.

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Regional Rural Banks

Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the
rural economy. Each RRB is owned jointly by the Central Government, concerned State
Government and a sponsoring public sector commercial bank. RRBs provide credit to small
farmers, artisans, small entrepreneurs and agricultural labourers. Over the years, the
Government has introduced a number of measures of improve viability and profitability of
RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a
State. This process of consolidation has resulted in a steep decline in the total number of RRBs
to 86 as on March 31, 2009, as compared to 196 at the end of March 2005.

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Private Sector Banks

In this type of banks, the majority of share capital is held by private individuals and corporates.
Not all private sector banks were nationalized in in 1969, and 1980. The private banks which
were not nationalized are collectively known as the old private sector banks and include banks
such as The Jammu and Kashmir Bank Ltd., Lord Krishna Bank Ltd etc. Entry of private sector
banks was however prohibited during the post-nationalisation period. In July 1993, as part of
the banking reform process and as a measure to induce competition in the banking sector, RBI
permitted the private sector to enter into the banking system. This resulted in the creation of
a new set of private sector banks, which are collectively known as the new private sector
banks. As at end March, 2009 there were 7 new private sector banks and 15 old private sector
banks operating in India.

Foreign Banks

Foreign banks have their registered and head offices in a foreign country but operate their
branches in India. The RBI permits these banks to operate either through branches; or through
wholly-owned subsidiaries. The primary activity of most foreign banks in India has been in
the corporate segment. However, some of the larger foreign banks have also made consumer
financing a significant part of their portfolios. These banks offer products such as automobile
finance, home loans, credit cards, household consumer finance etc. Foreign banks in India are
required to adhere to all banking regulations, including priority-sector lending norms as
applicable to domestic banks.8 In addition to the entry of the new private banks in the mid-
90s, the increased presence of foreign banks in India has also contributed to boosting
competition in the banking sector.
At the end of June 2009, there were 32 foreign banks with 293 branches operating in India.
Besides, 43 foreign banks were operating in India through representative offices. Under the
World Trade Organisation (WTO) Agreement, RBI allows a minimum 12 branches of all
foreign banks to be opened in a year.
Source: Report on Trend and Progress of Banking in India 2008-09, RBI.

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Co-operative Banks

Co-operative banks cater to the financing needs of agriculture, retail trade, small industry and
self-employed businessmen in urban, semi-urban and rural areas of India. A distinctive feature
of the co-operative credit structure in India is its heterogeneity. The structure differs across
urban and rural areas, across states and loan maturities. Urban areas are served by urban
cooperative banks (UCBs), whose operations are either limited to one state or stretch across
states. The rural co-operative banks comprise State co-operative banks, district central
cooperative banks, SCARDBs and PCARDBs.
The co-operative banking sector is the oldest segment of the Indian banking system. The
network of UCBs in India consisted of 1721 banks as at end-March 2009, while the number of
rural co-operative banks was 1119 as at end-March 2008. Owing to their widespread
geographical penetration, cooperative banks have the potential to become an important
instrument for large-scale financial inclusion, provided they are financially strengthened.
The RBI and the National Agriculture and Rural Development Bank (NABARD) have taken a
number of measures in recent years to improve financial soundness of co-operative banks.

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Role of Reserve Bank of India vis-à-vis Commercial Banks

The Reserve Bank of India (RBI) is the central bank of the country. It was established on
April 1, 1935 under the Reserve Bank of India Act, 1934, which provides the statutory basis for
its functioning. When the RBI was established, it took over the functions of currency issue
from the Government of India and the power of credit control from the then Imperial Bank of
India.
As the central bank of the country, the RBI performs a wide range of functions; particularly, it:
• Acts as the currency authority
• Controls money supply and credit
• Manages foreign exchange
• Serves as a banker to the government
• Builds up and strengthens the country's financial infrastructure
• Acts as the banker of banks
• Supervises banks

As regards the commercial banks, the RBI's role mainly relates to the last two points stated
above.

RBI as Bankers' Bank

As the bankers' bank, RBI holds a part of the cash reserves of banks,; lends the banks funds
for short periods, and provides them with centralised clearing and cheap and quick remittance
facilities.
Banks are supposed to meet their shortfalls of cash from sources other than RBI and approach
RBI only as a matter of last resort, because RBI as the central bank is supposed to function as
only the 'lender of last resort'.

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To ensure liquidity and solvency of individual commercial banks and of the banking system as
a whole, the RBI has stipulated that banks maintain a Cash Reserve Ratio (CRR). The CRR
refers to the share of liquid cash that banks have to maintain with RBI of their net demand and
time liabilities (NDTL).13 CRR is one of the key instruments of controlling money supply. By
increasing CRR, the RBI can reduce the funds available with the banks for lending and thereby
tighten liquidity in the system; conversely reducing the CRR increases the funds available with
the banks and thereby raises liquidity in the financial system.

RBI as supervisor

To ensure a sound banking system in the country, the RBI exercises powers of supervision,
regulation and control over commercial banks. The bank's regulatory functions relating to
banks cover their establishment (i.e. licensing), branch expansion, liquidity of their assets,
management and methods of working, amalgamation, reconstruction and liquidation. RBI
controls the commercial banks through periodic inspection of banks and follow-up action and
by calling for returns and other information from them, besides holding periodic meetings with
the top management of the banks.
While RBI is directly involved with commercial banks in carrying out these two roles, the
commercial banks help RBI indirectly to carry out some of its other roles as well. For example,
commercial banks are required by law to invest a prescribed minimum percentage of their
respective net demand and time liabilities (NDTL) in prescribed securities, which are mostly
government securities.14 This helps the RBI to perform its role as the banker to the Government,
under which the RBI conducts the Government's market borrowing program.

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Organizational Structure at RBI

Establishment

The Reserve Bank of India was established on April 1, 1935 in accordance with the provisions of
the Reserve Bank of India Act, 1934. The Central Office of the Reserve Bank was initially
established in Calcutta but was permanently moved to Mumbai in 1937. The Central Office is
where the Governor sits and where policies are formulated. Though originally privately owned,
since nationalisation in 1949, the Reserve Bank is fully owned by the Government of India.

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Central Board

The Reserve Bank's affairs are governed by a central board of directors. The board is
appointed by the Government of India in keeping with the Reserve Bank of India Act.

• Appointed/nominated for a period of four years

• Constitution:
o Official Directors
 Full-time : Governor and not more than four Deputy Governors
o Non-Official Directors
 Nominated by Government: ten Directors from various fields and one
government Official
 Others: four Directors - one each from four local boards

Functions : General superintendence and direction of the Bank's affairs

Local Boards

• One each for the four regions of the country in Mumbai, Calcutta, Chennai and New
Delhi
• Membership:
• consist of five members each
• appointed by the Central Government
• for a term of four years

Functions : To advise the Central Board on local matters and to represent territorial and
economic interests of local cooperative and indigenous banks; to perform such other functions
as delegated by Central Board from time to time.

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Structure of PSU Bank

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The Banking System of United States

Federal Reserve

The Federal Reserve System is the central bank of the United States. It was founded by Congress
in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial
system. Over the years, its role in banking and the economy has expanded. Today, the Federal
Reserve’s duties fall into four general areas: - conducting the nation’s monetary policy by
influencing the monetary and credit conditions in the economy in pursuit of maximum
employment, stable prices, and moderate long-term interest rates; - supervising and regulating
banking institutions to ensure the safety and soundness of the nation’s banking and financial
system and to protect the credit rights of consumers; - maintaining the stability of the financial
system and containing systemic risk that may arise in financial markets; - providing financial
services to depository institutions, the U.S. government, and foreign official institutions,
including playing a major role in operating the nation’s payments system. A network of twelve
Federal Reserve Banks and their Branches (twenty¬ five as of 2004) carries out a variety of
System functions, including operating a nationwide payments system, distributing the nation’s
currency and coin, supervising and regulating member banks and bank holding companies, and

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serving as banker for the U.S. Treasury. The twelve Reserve Banks are each responsible for a
particular geographic area or district of the United States. Each Reserve District is identified by a
number and a letter. Besides carrying out functions for the System as a whole, such as
administering nationwide banking and credit policies, each Reserve Bank acts as a depository for
the banks in its own District and fulfills other District responsibilities.

Member Banks

The nation’s commercial banks can be divided into three types according to which governmental
body charters them and whether or not they are members of the Federal Reserve System. Those
chartered by the federal government (through the Office of the Controller of the Currency in the
Department of the Treasury) are national banks; by law, they are members of the Federal Reserve
System. Banks chartered by the states are divided into those that are members of the Federal
Reserve System (state member banks) and those that are not (state nonmember banks). State
banks are not required to join the Federal Reserve System, but they may elect to become
members if they meet the standards set by the Board of Governors. As of March 2004, of the
nation’s approximately 7,700 commercial banks approximately 2,900 were members of the
Federal Reserve System - approximately 2,000 national banks and 900 state banks. Member
banks must subscribe to stock in their regional Federal Reserve Bank in an amount equal to 6
percent of their capital and surplus, half of which must be paid in while the other half is subject
to call by the Board of Governors. The holding of this stock, however, does not carry with it the
control and financial interest conveyed to holders of common stock in for-profit organizations. It
is merely a legal obligation of Federal Reserve membership, and the stock may not be sold or
pledged as collateral for loans. Member banks receive a 6 percent dividend annually on their
stock, as specified by law, and vote for the Class A and Class B directors of the Reserve Bank.
Stock in Federal Reserve Banks is not available for purchase by individuals or entities other than
member banks.

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Comparative Analysis of the Indian and U.S. banking

structure
Unit banking

Unit banking refers to a single bank which renders services and operates without any branches
anywhere. This kind of banking system is common in the USA. Restrictive branching laws
encourage large numbers of small, independently owned state banks, and large multibank
holding companies owning numerous unit banks. Branching laws in most states have been eased
in the last several years, permitting geographic expansion and branch banking .Unit banking
operate one full banking services.

Banking organization whereby all services of banks are offered from one office. Such office may
have offer facilities such as, drive-in windows, automated teller machines, retail store point-of-
sale terminals that are linked to the banks' computer system and Internet website. The size and
the area of operation of a unit bank are much smaller than the branch banking system. Unit bank
system originated and grew in the United States Of America. Different unit banks in America are
linked with each other and with other financial centers in the country through correspondent
banks. The main reason for the development of unit banking system in America is the fear of
emergence of monopoly in banking business.

Following are the main advantages of unit banking system.

1. Easy Management
The management and supervision of unit bank is much easier and more effective than that
underbranch banking system.So, there are fewer chances of irregularities and fraud.

2. Less operational costs

Unit banking are generally in small size. Thus, there are fewer costs in the operations. Unit
banking usually enjoy lower operating costs than branch banks of comparable size.

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3. Little capital and staffs

Unit banking is small in size; so capital and staff requirement in the bank is also small.

4. Efficiency
Unit banking increases the efficiency of bank because it provides prompt services to customers
due to competition from other unit banks.

5. Local development
Collected deposits from the local areas are utilized for the development of the same locality.So,
unit banking helps in local development.

Followings are the main disadvantages of unit banking

1. Prone to risk and failure

Limited resources of the unit bank restrict their ability to face financial crisis. Unit banks are
not in a position to stand a sudden rush of withdrawals.

2. No risk diversification
Under the unit banking, the bank operations are highly localized.So, there is less possibility of
diversification of risk in various areas.

3. Costly remittance of funds

Unit banking has no branches at other place. Thus, it has to depend upon the correspondent
banks for transfer of funds which is very expensive.

4. Unhealthy competition
Unit banks are independently run by different managements. This results in unhealthy
competition among different unit banks.

5. Local pressure

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Since, unit banking are highly localized in their business, local pressure and interferences
generally disrupt their normal functioning.

Branch Banking Concept

Branch is considered as one of the most important channel of the bank and is generally the most
preferred channel from the customer's point of view. The branch is referred to as the face of the
bank since the customer can visit personally and meet and interact with the branch officials and
avail the various services offered by the bank.

Branch banking is a system where full range banking services are offered from several locations,
including a head office and other one or more full-service branch offices. To start with, branch
banking developed in England, later on, it also become popular in other countries like Canada,
India, Australia etc. In England, most of the banking business is in the hands of five big banks.
Now most of the banks are operating in branch banking system. Branch banking system is very
widely spread in the comparison to unit banking system.

Branch banking center or financial center refers to a single bank which operates through various
branches in a city or in different locations or out of the cities. This kind of banking system is
common in India. e.g. State Bank of India. It offers a wide array of face to face service to its
customers. Historically, branches were housed in imposing buildings, often in a neoclassical
architecture style. Today, branches may also take the form of smaller offices within a larger
complex, such as a shopping mall. Services provided by a branch include cash withdrawals and
deposits from a demand account with a bank teller, financial advice through a
specialist, safe deposit box rentals, bureau de change, insurance sales (where it is allowed by
law), etc. Other financial institutions reduce their costs by having no branches and are sometimes
known as virtual banks.

Followings are the main advantages of branch banking

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1. Less Costly
Larger banks have the resources and system to deliver low cost, broadly based services.

2. Diversification
A branch banking organization can diversify its sources and uses of funds among various users.
It can direct funds into a market requiring financing.Deposits are received from the areas where
lots of savings and loans are extended in those areas where funds are scarce and interest rates are
high.

3. Greater efficiency
Under branch banking system, the bank with a number of branches processes huge financial
resources and enjoys the benefits of large-scale operations. Highly trained and experienced staff
is appointed which increases the efficiency of the management.

4. More Safer
A large banking system is generally safer. Fewer bank failures have occurred among large banks.

5. Variety of services and low transaction costs

A greater variety of services and products become available to a broader banking public. Since
the bank branches are spread over the whole country, it is easier and cheaper to transfer funds
from one place to another.

6. Security against the risk of failure

The branch banking is less risky and greater capacity to handle risks. The losses incurred by
some branches may be offset by the profits earned by other branches.

Followings are the main disadvantages of branch banking system.

1. Chances of failure
Larger banks are not immune to failure. Although there fewer large bank failures, the impact of a
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large bank failure presents great loss in amount and type of banking services.

2. Monopolistic tendencies
Branch banking encourages monopolistic tendencies in banking system. A few big banks
dominate and control the whole banking system of the country through their branches. This
limits competition and leads the monopolistic tendencies.

3. Lack of flexibility and delay in decision-making

Since the branch manager has to seek permission from the head office on each and every matter,
this results in unnecessary delay in the banking.So, the branch managers are unable to make
quick decisions and they may lose profitable opportunities.

4. Difficulty in supervision
Since the branches are spread over the country, so there is difficulty in efficient supervision and
control of the all branches.This reduces the performance of the bank.

Criteria
Branch Banking Unit Banking

Proper checks are taken

Exists as improper use of
Mismanagement: up.no misuse of
power and authority exist
Mismanagement
Concentration of power in the
Yes No
hand of few people:
Division of labour is possibleSpecialisation not possible
Specialisation: and hence specialisationdue to lack of trained staff
possible and knowledge
High competiton with theLess competition within the
Competition:
branches bank
Shared by the bank with itsUsed for the development
Locality/Resources/Funds/Profits:
branches of the bank
Specialised knowledge of the localNot possible and hence badPossible and less risk of bad
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Criteria
Branch Banking Unit Banking

borrowers: debits are high debts

Proper distribution of capitalNo proper distribution of
Distribution of Capital:
and power. capital and power.
Rate of interest is uniformed
Rate of interest is not
and specified by the head
Rate of interest: uniformed as the bank has
office or based on instructions
own policies and rates.
from RBI.
Deposits and assets are nt
Deposits and assets are
diversified and are at one
Deposits and assets: diversified,scattered and hence
place,hence risk is not
risk is spead at various places.
spread.
Operational freedom: Less Operational freedom. More Operational freedom.
Loans and advances are basedLoans and advances can be
Loans and advances: on merit,irrespective of theinfluenced by authority and
status . power.
Efficient,trained andLess trained skilled and
Staffing:
supervised. supervised.
Larger financial resources inLarger financial resources
Financial resources:
each branch. in one branch
Delay in Decision-making asTime is saved as Decision-
Decision-making: they have to depend on themaking is in the same
head office. branch.
Funds are allocated in one
Funds are transferred from onebranch and no support of
branch toother branches.During
Funds: another.Underutilisation offinancial crisis,unit bank
funds by a branch would leadhas to close down.hence
to regional imbalances lead to regional imbalances
or no balance growth
Cost of supervision: High Less

FMG 18 Page 31
 Management of Commercial Banks

On the basis of the above comparisons that we have carried out we can see that the drawbacks of
the unit banking structure outweigh the advantages thus leading us to the inference that for the
benefit of the banks to overcome the crisis situation it is mostly better to consider branch
banking. Thus we can see that most of the American banks are moving towards branch banking.

Career Opportunities
In my interaction with Mr. Omar Azami, Manager at Axis Bank branch, I got to know that that
particular branch of Axis bank comprised of people belonging to varied backgrounds. Most of
the employees there were MBAs from various institutes across the country and out of them many
were B.Tech graduates or people with science background, in fact, Mr. Omar Azami himself is a
person with an engineering background and rest of them were people belonging to commerce
background.

So, with this information I can strongly state that contrary to the common perception that banks
recruit people or have people belonging to commerce backgrounds only, banks try and actually
have employees belonging to diverse backgrounds. This can be explained further below:

Human Resources of Axis Bank

The Human Resources (HR) agenda of the Bank aims to create a team of empowered employees
oriented to realization of the Bank's Vision. During the year, the key HR issues that were
addressed related to learning and skill development, management of performance, ensuring an
enhanced work-life balance and attrition management.

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 Management of Commercial Banks

The employee engagement initiatives focused on providing opportunities to staff to seek

aspirational roles through internal job postings and periodic job rotations, making the
compensation structure more competitive, streamlining the performance-linked rewards and
incentives, and generally sending a clear message of meritocracy.
The Bank has also built training infrastructure, which seeks to upgrade skill levels across grades
and functions through a combination of in-house and external programmes. The flagship in-
house programmes include the Induction Programme for new entrants and Credit and Foreign
Exchange Programmes for building up a pool of specialists in the respective domains.
External Programmes encompass value-added programmes on Team Building and Leadership,
Organizational Development, Management Development Programmes, People Management
Programmes, all conducted by premier institutes like the IIMs, Administrative Staff College of
India (ASCI) and ISB Hyderabad.

FMG 18 Page 33
 Management of Commercial Banks

34

Questionnaire

Question 1) Brief history of the bank.

Axis Bank was the first of the new private banks to have begun operations in 1994, after the
Government of India allowed new private banks to be established. The Bank was promoted
jointly by the Administrator of the specified undertaking of the Unit Trust of India (UTI - I), Life
Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC) and
other four PSU insurance companies, i.e. National Insurance Company Ltd., The New India
Assurance Company Ltd., The Oriental Insurance Company Ltd. and United India Insurance
Company Ltd.

The Bank's Registered Office is at Ahmedabad and its Central Office is located at Mumbai. The
Bank has a very wide network of more than 1000 branches and Extension Counters (as on 31st
May 2010). The Bank has a network of over 4397 ATMs (as on 31st May 2010) providing 24 hrs
a day banking convenience to its customers. This is one of the largest ATM networks in the
country.

The Bank has strengths in both retail and corporate banking and is committed to adopting the
best industry practices internationally in order to achieve excellence.

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 Management of Commercial Banks

Question 2) Structure of the bank (the departments and the hierarchy of the departments
and posts of the same)

Erstwhile Unit Trust of India was set up as a body corporate under the UTI Act, 1963, with a
view to encourage savings and investment. In December 2002, the UTI Act, 1963 was repealed
with the passage of Unit Trust of India (Transfer of Undertaking and Repeal) Act, 2002 by the
Parliament, paving the way for the bifurcation of UTI into 2 entities, UTI-I and UTI-II with
effect from 1st February 2003. In accordance with the Act, the Undertaking specified as UTI I
has been transferred and vested in the Administrator of the Specified Undertaking of the Unit
Trust of India (SUUTI), who manages assured return schemes along with 6.75% US-64 Bonds,
6.60% ARS Bonds with a Unit Capital of over Rs. 14167.59 crores.

Question 3) Functions Performed by different departments

Branch/Retail banking

Large & Mid Corporate Banking

SME & Agri Business

Business Banking

Treasury

Third Party Products Business

Retail Assets

Cards Business

ATM Channel

International Banking

FMG 18 Page 35
 Management of Commercial Banks

Question 4) Career Opportunities available at the bank.

Bank provides opportunities at various level (i.e. Junior Executive/Executive/Assistant

Manager/Deputy Manager/Manager/Asst Vice President/Vice President/Sr. Vice President) in
departments as follows:

Retail/Branch Banking (Operation/Marketing)

Business Banking (Operation/Marketing)

Treasury (Operation/Marketing)

Question 5) Skill Sets required for the various opportunities available

Analytical Skills

Communication Skills

Leadership Skills

References
1. Unit Banking, http://bankingmanagementstudies.blogspot.com/2010/05/unit-
banking.html, visited on 07.07.2010

2. Economic markets ,
http://www.britannica.com/EBchecked/topic/615265/unit-banking, visited on
07.07.2010

3. Federal Reserve system,

http://en.wikipedia.org/wiki/Federal_Reserve_System, visited on 03.07.2010

FMG 18 Page 36
 Management of Commercial Banks

4. Banking in the
U.S.A,http://www.rapidimmigration.com/usa/1_eng_coming_banking.html,
visited on 02.07.2010

5. National stock exchange of India limited http://www.nse-

india.com/content/ncfm/ncfm_CBBM_workbook.pdf, visited on 02.07.2010

6. Banking law,http://www.nls.ac.in/distanceeducationnotes/MBLI/Microsoft
%20PowerPoint%20-%20bankinglaw-mbl.pdf, visited on 05.07.2010

7. Universal banking,http://www.indianmba.com/Occasional_Papers/OP157/op157.html,
visited on 05.07.2010

8. Banking,http://wiki.answers.com/Q/What_are_advantages_of_universal_banking,
visited on 05.07.2010

9. Universalbanking,http://wiki.answers.com/Q/What_are_advantages_and_disadvantage
s_of_universal_banking, visited on 06.07.2010

10. Universal Banking- The road

ahead,http://www.freelists.org/post/sbinews/Universal-Banking-The-Road-Ahead-
From-Indiainfolinecom ,visited on 06.07.2010

11. Axis bank, http://www.axisbank.com/ , visited on 06.07.2010

12. Reserve Bank of India, www.rbi.org.in , visited on 06.07.2010

FMG 18 Page 37