Shahajan Begam (Repaired) BR

INDEX
SR.
CHAPTERS PG. NO.
NO.
Executive summary
1. Indian Banking System
2. Banking sector reforms
3. Indian Banking and Finance: Managing New Challenges
4. Challenges Before Indian banking system in structure
5. Challenges Before Indian banking system in technology
6. Challenges Before Indian banking system in services
Challenges before Indian banking system in Human

7.
resource management
8. Corporate Social Responsibility
9.
10.
1 |Challenges Before Indian Banking System

ACKNOWLEDGMENT
I am extremely thankful to University of Mumbai; who gave us the

opportunity to present myself through this project. This was one of a
challenge, to know and prepare us before graduating & stepping foots in
the world to make a difference in our own minuscule way. By accepting
this, I got a chance not only to present but also improve my qualities. The
project, which I am honored, to present also provides suggestions. This
project gave me lots of knowledge about Indian Banking System. I am
also grateful to our chief-coordinator Ghantwala Sir and coordinator of
our course Mrs. Meghana Paranjape Mam who provided me their
esteemed guidance throughout this project. I am also grateful to my guide
Gandhe mam. She assisted me in preparing the project & solved many of
my queries, which I encountered during this venture. I am also thankful
to our college library staff that helped me in providing useful books,
which I required from time to time while compiling the project. I am also
grateful to my friends, my colleagues, and my ex-professors who taught
us during this Vth Semester. I am thankful to Mr. Yashwant Patil who is
working for IDBI Bank. He has been helpful in assisting to know the
current scenarios prevailing in the Banking Sector. I am very thankful to
my parents / friends & relatives who helped my project right from the
nascent stage till it completed by various ways.

Executive Summary
The challenges were come in front of Indian banks after

banking reforms introduced. According to narasiham committee
recommendations banking sector opened up to the global world, and in
result it leads various challenges in confront of Indian banking system, to
survive and make growth in this competitive arena.
Indian banks facing challenges since last decade, from the year 1991-
92.Still there are lots of challenges to tackle. Challenges faced by Indian
banks are mainly in four segments. And these four segments are in
structure, Information Technology (I.T.), Services, & Human Resources
(H.R). Banks have implemented some of the challenges occurred in the
year 1991-92 up to a certain phase.
Challenges in structure involves Banks structure, which was
drastically changed after liberalization. The challenges faced by Indian
Banks in structure are NPA (Non-Performing Assets), Prudential Norms,
Additional Disclosure, and Mergers & Acquisition, Bankable
Outsourcing, corporate governance, Bank Branch Network etc.
Challenges in I.T relate to computerized branch, Digital Divide, Security,
Improve internal process, Need for standardization, awareness of
utilization of computer knowledge of the employees etc.
Challenges before Indian banks in Services are Customer
retention, Quality services, CRM concept, KYC concept, Value added
service etc. these are the challenges faced by the Indian banks.
Challenges tackled by the Indian banks in Human Resources are
experienced personnel, Highly educated, value added professionals VRS
system in banks etc. One of the challenge faced by banks due to Basel
accord norms, which were discussed below in deep.

OBJECTIVE AND SCOPE
• Purpose of the Project:-

The purpose of the project is to have the insight of the evolution of the
Banking Industry & how it grew in leaps & bounds during all these years under
the beginning direction of apex bank in India (RBI). How this industry is
performing in the current scenario & how it will be preparing itself to face the
tough competition in future presented not only from the domestic forces but
also from the overseas player in the industry. This is the major issue in all
Indian banks and also in current scenario of the whole banking sector where
merger and acquisition becomes necessary. As a banking student, it is
necessary to me to increase basic knowledge of Indian Banking Industry.
Because this topic covers the significant issues of banking sector on which I
can get ample information and articles to assist me in my project. To know the
opportunities available to the banking sector for growth I selected this topic.
Challenges involve wide scope, but I mainly focused on main crux of

the Indian banks. The key issues are in Structure,InformationTechnology,
Services, Human Resources etc. I also given focus to challenges enforced by
Basel Norms. The Intention Behind this is to grasp more knowledge and more
familiar with the scenario of the banking sector.

1.Indian Banking System
1.1 Indian Banking - Introduction
The Indian banking can be broadly categorized into nationalized

(government owned), private banks and specialized banking institutions. The
Reserve Bank of India acts a centralized body monitoring any discrepancies
and shortcoming in the system. Since the nationalization of banks in 1969, the
public sector banks or the nationalized banks have acquired a place of
prominence and has since then seen tremendous progress. The need to
become highly customer focused has forced the slow-moving public sector
banks to adopt a fast track approach. The unleashing of products and
services through the net has galvanized players at all levels of the banking
and financial institutions market grid to look anew at their existing portfolio
offering. Conservative banking practices allowed Indian banks to be insulated
partially from the Asian currency crisis. Indian banks are now quoting at
higher valuation when compared to banks in other Asian countries (viz. Hong
Kong, Singapore, Philippines etc.) that have major problems linked to huge
Non Performing Assets (NPAs) and payment defaults. Co-operative banks are
nimble footed in approach and armed with efficient branch networks focus
primarily on the ‘high revenue’ niche retail segments.
The Indian banking has finally worked up to the competitive dynamics

of the ‘new’ Indian market and is addressing the relevant issues to take on
the multifarious challenges of globalization. Banks that employ IT solutions
are perceived to be ‘futuristic’ and proactive players capable of meeting the
multifarious requirements of the large customer’s base. Private Banks have
been fast on the uptake and are reorienting their strategies using the internet
as a medium The Internet has emerged as the new and challenging frontier
of marketing with the conventional physical world tenets being just as
applicable like in any other marketing medium.
The Indian banking has come from a long way from being a sleepy
business institution to a highly proactive and dynamic entity. This
transformation has been largely brought about by the large dose of

liberalization and economic reforms that allowed banks to explore new
business opportunities rather than generating revenues from conventional
streams (i.e. borrowing and lending). The banking in India is highly
fragmented with 30 banking units contributing to almost 50% of deposits and
60% of advances. Indian nationalized banks (banks owned by the
government) continue to be the major lenders in the economy due to their
sheer size and penetrative networks which assures them high deposit
mobilization. The Indian banking can be broadly categorized into
nationalized, private banks and specialized banking institutions.
The Reserve Bank of India acts as a centralized body monitoring any

discrepancies and shortcoming in the system. It is the foremost monitoring
body in the Indian financial sector. The nationalized banks (i.e. government-
owned banks) continue to dominate the Indian banking arena. Industry
estimates indicate that out of 274 commercial banks operating in India, 223
banks are in the public sector and 51 are in the private sector. The private
sector bank grid also includes 24 foreign banks that have started their
operations here. Under the ambit of the nationalized banks come the
specialized banking institutions. These co-operatives, rural banks focus on
areas of agriculture, rural development etc.
Unlike commercial banks these co-operative banks do not lend on the

basis of a prime lending rate. They also have various tax sops because of
their holding pattern and lending structure and hence have lower overheads.
This enables them to give a marginally higher percentage on savings
deposits. Many of these cooperative banks diversified into specialized areas
(catering to the vast retail audience) like car finance, housing loans, truck
finance etc. In order to keep pace with their public sector and private
counterparts, the co-operative banks too have invested heavily in
information technology to offer high-end computerized banking services to
its clients.

Histor y of Banking in India
Without a sound and effective banking system in India it cannot have a

healthy economy. The banking system of India should not only be hassle free
but it should be able to meet new challenges posed by the technology and
any other external and internal factors.
For the past three decades India's banking system has several outstanding
achievements to its credit. The most striking is its extensive reach. It is no
longer confined to only metropolitans or cosmopolitans in India. In fact, Indian
banking system has reached even to the remote corners of the country. This
is one of the main reasons of India's growth process.
The government's regular policy for Indian bank since 1969 has paid rich
dividends with the nationalization of 14 major private banks of India.
Not long ago, an account holder had to wait for hours at the bank counters for
getting a draft or for withdrawing his own money. Today, he has a choice.
Gone are days when the most efficient bank transferred money from one
branch to other in two days. Now it is simple as instant messaging or dials a
pizza. Money has become the order of the day.
The first bank in India, though conservative, was established in 1786. From
1786 till today, the journey of Indian Banking System can be segregated into
three distinct phases. They are as mentioned below:
• Early phase from 1786 to 1969 of Indian Banks

• Nationalization of Indian Banks and up to 1991 prior to Indian banking
sector Reforms.
• New phase of Indian Banking System with the advent of Indian
Financial & Banking Sector Reforms after 1991.
To make this write-up more explanatory, I prefix the scenario as Phase I,

Phase II and Phase III.
Phase I
The General Bank of India was set up in the year 1786. Next came
Bank of Hindustan and Bengal Bank. The East India Company established
Bank of Bengal (1809), Bank of Bombay (1840) and Bank of Madras (1843)

as independent units and called it Presidency Banks. These three banks were
amalgamated in 1920 and Imperial Bank of India was established which
started as private shareholders banks, mostly Europeans shareholders.
In 1865 Allahabad Bank was established and first time exclusively by
Indians, Punjab National Bank Ltd. was set up in 1894 with headquarters at
Lahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank
of Baroda, Canara Bank, Indian Bank, and Bank of Mysore were set up.
Reserve Bank of India came in 1935.
During the first phase the growth was very slow and banks also
experienced periodic failures between 1913 and 1948. There were
approximately 1100 banks, mostly small. To streamline the functioning and
activities of commercial banks, the Government of India came up with The
Banking Companies Act, 1949 which was later changed to Banking
Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965).
Reserve Bank of India was vested with extensive powers for the supervision
of banking in India as the Central Banking Authority.
During those day’s public has lesser confidence in the banks. As an
aftermath deposit mobilization was slow. Abreast of it the savings bank facility
provided by the Postal department was comparatively safer. Moreover, funds
were largely given to traders.
Phase II
Government took major steps in this Indian Banking Sector Reform
after independence. In 1955, it nationalized Imperial Bank of India with
extensive banking facilities on a large scale specially in rural and semi-urban
areas. It formed State Bank of India to act as the principal agent of RBI and to
handle banking transactions of the Union and State Governments all over the
country.
Seven banks forming subsidiary of State Bank of India was
nationalized in 1960 on 19th July, 1969, major process of nationalization was
carried out. It was the effort of the then Prime Minister of India, Mrs. Indira
Gandhi. 14 major commercial banks in the country were nationalized.
Second phase of nationalization Indian Banking Sector Reform was
carried out in 1980 with seven more banks. This step brought 80% of the
banking segment in India under Government ownership.

The following are the steps taken by the Government of India to
Regulate Banking Institutions in the Country:
• 1949: Enactment of Banking Regulation Act.

• 1955: Nationalization of State Bank of India.
• 1959: Nationalization of SBI subsidiaries.
• 1961: Insurance cover extended to deposits.
• 1969: Nationalization of 14 major banks.
• 1971: Creation of credit guarantee corporation.
• 1975: Creation of regional rural banks.
• 1980: Nationalization of seven banks with deposits over 200
crore.
After the nationalization of banks, the branches of the public sector

bank India rose to approximately 800% in deposits and advances took a huge
jump by 11,000%.
Banking in the sunshine of Government ownership gave the public
implicit faith and immense confidence about the sustainability of these
institutions.
Phase III
This phase has introduced many more products and facilities in the
banking sector in its reforms measure. In 1991, under the chairmanship of M
Narasimha, a committee was set up by his name which worked for the
liberalization of banking practices.
The country is flooded with foreign banks and their ATM stations.
Efforts are being put to give a satisfactory service to customers. Phone
banking and net banking is introduced. The entire system became more
convenient and swift. Time is given more importance than money.
The financial system of India has shown a great deal of resilience. It is
sheltered from any crisis triggered by any external macroeconomics shock as
other East Asian Countries suffered. This is all due to a flexible exchange rate
regime, the foreign reserves are high, the capital account is not yet fully
convertible, and banks and their customers have limited foreign exchange
exposure.

1.2 Structure of Indian banking System
Banking in India originated in the last decades of the 18th century. The
oldest bank in existence in India is the State Bank of India, a government-
owned bank that traces its origins back to June 1806 and that is the largest
commercial bank in the country. Central banking is the responsibility of the
Reserve Bank of India, which in 1935 formally took over these responsibilities
from the then Imperial Bank of India, relegating it to commercial banking
functions. After India's independence in 1947, the Reserve Bank was
nationalized and given broader powers. In 1969 the government nationalized
the 14 largest commercial banks; the government nationalized the six next
largest in 1980.
Currently, India has 88 scheduled commercial banks (SCBs) - 27

public sector banks (that is with the Government of India holding a stake), 31
private banks (these do not have government stake; they may be publicly
10 | C h a l l e n g e s B e f o r e I n d i a n B a n k i n g S y s t e m
listed and traded on stock exchanges) and 38 foreign banks. They have a
combined network of over 53,000 branches and 17,000 ATMs. According to a
report by ICRA Limited, a rating agency, the public sector banks hold over 75
percent of total assets of the banking industry, with the private and foreign
banks holding 18.2% and 6.5% respectively.
Top Banks in India

With the advancement of technology and the birth of competition, banks are in
the race of becoming the best in the country. With an eye upon customer
satisfaction policy they are providing best of the best services with the
minimum hazards.
Banks like ABN AMRO introduced banking with a coffee. It made a tie-up with
one of the best coffee bar in the country, Barista and remained open till late
evening for customers with a setup of a coffee bar in the premises.
Few banks have introduced world ATM card to make travelers across the
globe more safe and secure. What else. Internet and Phone Banking is the
call of the day for banks.
Top 20 banks in the country from all segments. It is not the ranking of banks
but only for general information about the top banks in India. Those are as
follows:
Abn Amro Bank HDFC Bank

Allahabad Bank HSBC Bank
American Express Bank ICICI Bank
Andhra Bank IDBI Bank
Axis Bank Indian Overseas Bank
Bank Of India Oriental Bank Of Commerce
Canara Bank Punjab National Bank
Central Bank Of India State Bank Of India (SBI)
Citibank Standard Chartered Bank
Corporation Bank United Bank Of India
2. Banking sector reforms
2.1 Introduction
In the early 1950s, there were only a few banks operating in the
country and their branches were largely located at Mumbai, Delhi, Kolkata,
Chennai etc.
The banking culture then prevailing was essentially different. There
remained an aura around the branches and the banks. The customer would
consider it a unique distinction if he could get an account opened with any one
of the branches of any bank.
The Rules Governing the deposits, advances, withdrawals, opening
and closing of accounts, business timings and holidays were all well spelt out
and were religiously followed. No relaxation thereto was permitted either with
intent to attract further deposits or to improve neither their budgetary position
nor any laxity was allowed to facilitate any customer or to attract any
business.
The total number of Branches of all Banks in the country was less than
1000. Advances were largely on pledge basis security oriented. They
consisted of rice, paddy, cotton, sugar etc., industrial products were not
common. Agriculture lending and lending to other priority sectors was
practically nil, and was not heard of by many.
The above scenario is just five decades back and would be disbelieved
to have existed in the present situation and context.
Sea change
Banking industries underwent dramatic changes in style, functioning,

operation and system. As of now we have commercial banks in public and
private sector, foreign banks primary (urban), co-operative banks and
specialized rural banks namely RRBs, State Co-operative Banks and District
Central Co-operative Banks.
2.2 OVER VIEW OF BANKING SECTOR REFORMS
In the context of industrial Trade & Exchange Rate Policy reforms initiated by
the government of India as a part of the macro economics adjustments, the
question of financial sector reforms which is also an essential adjunct to
economic reforms came up for consideration during 1991. The government of
India therefore constituted a high level committee to review the financial
system and to pave the way for the liberalization of banking practices under
the chairmanship of Shri M.Narasimham (former RBI Governor).
The committee reviewed the entire gamut of Banking Systems and

development Financing Institutions (DFI) and submitted its report to
Government of India in November 1991. The report has diagnosed the
weakness of the banking system and DFIs and made far-reaching
recommendations with a view to removing/ remedying the weaknesses as
also for initiating reforms.
The committee identified the following weaknesses in the banking

system:
a) Although the bank nationalization has achieved a geographical spread

and functional outreach to millions of borrowers in the agricultural and
SSI sector, the banks have suffered in the process resulting in erosion
in profits, low productivity and low efficiency.
b) The banking system had to undertake directed credit under

administered interest rates which has led to poor quality of loans
portfolio and poor income generation on its business (i.e., low Return
on Assets-ROA).
c) The banking system is also subjected to direct investment in respect of

CRR & SLR. In this process the banks were not able to earn the
market related returns on the investments which led to poor income
generation.
d) On account of poor income generation banks were unable to take care

of capital adequacy and make adequate provisions for loan losses.
2.3 IMPORTANT RECOMMENDATIONS OF THE NARASIMHAM
COMMITTEE-PHASE-1
After identifying the weakness, the Narasimham committee has made far-
reaching recommendations to improve the financial health of the banking
system.
Some of the important recommendations are under:
a) It is necessary that the financial system should operate on the basis of

operational flexibility and functional authority in order to enhance
efficiency, productivity and profitability.
b) The high level of Statutory Liquid ratio stipulated for the banks should
be brought down in a phased manner in order to release bank funds
for deployment in profitable avenues.
c) The Cash Reserve Ratio should also be progressively reduced from its
present high level. RBI should use CRR more flexibly for monetary
policy objectives and occasions for using it to control secondary
expansion of credit should be less.
d) Interest rates on CRR & SLR amounts over and above the base level
may be increased to be in tune with market related rates. The interest
rates should also ensure coverage of the average cost of deposits
raised by the banks.
e) Administered interest rate is very complex. Interest rates should be

deregulated so as to reflect emerging market conditions. Bank Rate
should be used as an anchor to signal RBI Monetary Policy. Prime
lending rates should also be provided for, to indicate the floor lending
rates of banks. Concessional interest rates should be phased out.
f) All the banks 8% as a ratio in relation to risk weighted assets should

achieve capital adequacy norm within 3 years and latest by March
1996.
g) Banks with good market reputation and having profitable operations
may be permitted to approach the capital market for enhancement of
the capital.
h) Before arriving at the capital adequacy ratio the assets of banks should
be evaluated on the basis of their realizable values by adopting
uniform accounting practices in regard to income recognition and
provisioning for bad and doubtful debts.
i) No income should be recognized on a non performing asset. Further

provisioning should be done for doubtful and bad debts, after
classifying the assets into four categories viz., standard, sub-standard,
doubtful and loss assets.
j) The balance sheet of banks should be made more transparent by full

disclosure as per the International Accounting Standard Committee
recommendations.
k) For speedy recovery of the bank’s dues special tribunals may be set up
to facilitate quick decisions because the ordinary courts take a long
time for awarding decrees.
l) An Asset Reconstruction Fund (ARF) may be established to take over

part of the bad and doubtful debts of banks for final disposal by way of
recovery/write-off by a special treatment. This method is suggested as
a part of the exercise for cleansing the balance sheet of banks.
m) The entire Commercial Banking System may be restructured to

constitute a four-tier banking system comprising of International
Banks, National Level Banks, Local Banks and Rural Banks.
n) The branch licensing of RBI may be abolished and the banks may be
permitted to decide for themselves on the opening of new branches.
o) There should be no bar on the opening of new bank in the private

sector.
p) RBI may adopt a more liberal approach towards foreign banks in the
matter of opening new branches.
q) Millions of borrowers in the agriculture and SSI sector have been

benefited from the priority sector lending. In view of this the priority
sector needs to be redefined to restrict the priority to small and
marginal farmers and tiny industries as also self-employed persons.
The priority sector lending may be brought down to 10% of the
aggregate credit from the present 40%.
2.4 NARASIMHAM COMMITTEE RECOMMENDATIONS -PHASE-2
Mergers and closures of Banks:
1. Strong banks are to be merged with other strong for creation of Global
Banks.
2. Allow closure of chronically weak banks.
3. Introduce narrow banking concept, where weak banks specialize in

selected areas of banking operations say deposits mobilization and
depend on other banks for advance.
Three-Tier banking structure:
1. Create 2 or 3 internationally oriented Banks.
2. 8 to 10 National Banks to cater to domestic credit needs of the Indian

Corporate Sector (Large and Medium Sized Industries).
3. Small Local banks need to confine to state or cluster of districts.
Role of RBI and Government of India:
1. Regulatory functions of RBI need to be separated from supervisory

role.
2. Equity holding of Government and RBI to be reduced to 33%.5% to
10% of the equity may be offered to Bank employees under stock
option.
3. Board for financial supervision (BFS) need to be given autonomous

status.
Revamp Bank Functioning:
1. Professionals need to be inducted into Bank Boards.
2. Bank Chief Executive Officer Posts need to be de-politicized.
3. State Bank subsidiaries should be reconstituted to have Chairman and

Managing Director (CMD) and two whole- time Directors.
4. To review recruitment procedures, training and remuneration policies of

Public Sector Banks.
5. Wage settlement should be made Bank wise. Right sizing and re-
deployment of surplus staff either by retaining or Voluntary Retirement
Scheme (VRS) with appropriate incentives.
6. Give more thrust to technological up-gradation.
7. Reduction in priority sector lending targets.
Strengthening Bank Balance Sheets:
1. Capital Adequacy Ratio (CAR) should be increased to 9% by 2000 AD

and to 10% by 2001 AD by all banks. Accrual of interest for income
recognition should be reduced to 90 days from 180 days.
2. One percent provision should be made on Standard Assets too.
3. Government and approved securities should be provided with 6%

weight risk. Government guaranteed advances are also to be treated
as NPAs.
4. ARC could be set up by 2 or 3 banks or in private sector. ARC should

be allowed to file suits in Debt Recovery Tribunals.
5. Existing bank laws especially RBI Act, Banking Regulation Act are to
be revamped.
Segment-wise status of the reforms:
1. Capital Adequacy and provisioning
 Banks to voluntarily build in the risk-weighted component6s of their

subsidiaries into own Balance Sheet on national basis and assign
additional in phases for 2000-2001 onwards.
 A risk-weighted of 100% was assigned for state government

guaranteed securities issued by defaulting entities and to the
deposits placed with NABARD/SIDBI in view of shortfall on
advances to priority sector.
 The general provision of 0.25% on standard Assets was allowed to

be included in Tier II capital along with the general provisions and
loss reserves up to a maximum of 1.25% of the total risk weighted
assets.
 In general, banks were encouraged to make provisions in excess of

the stipulations, based on their own risk perception.
2. Prudential Accounting Norms
 Valuations norms for bank’s investment were modified to reflect

market movements. The bank’s investment portfolio are classified
into 3 categories:
a) Held to maturity
b) Held for trading
c) Available for sale
 Classifications of loans as per NPA when the interest and/or

principal remains overdue for a period of more than 90 days as
against the earlier 180 days from the year ending 31 March 2004.
3. Exposure Norms: Ceiling for Commercial Banks
 For individual borrowers -15% of capital funds in March 31,

2002(reduced from 20%).
 The non-fund exposure to be reckoned at 100% and banks are

required to include forward contracts and other derivatives in
determining individual/group exposure.
 Within the overall exposure, a bank’s exposure to the capital market

in all was set at 5% of its outstanding advances (including
commercial papers) as on march 31, of the previous year.
4. Entry Norms for New Private Sector Banks
 Minimum capital for entry was set at Rs. 200 crores which will be
raised to Rs. 300 crores within 3 years from commencement of
business.
 A minimum CAR of 10% was prescribed for new private sector

banks.
5. Norms for banks and NBFCs Entering Insurance
 Certain eligibility criteria have been prescribed for entering for

banks and NBFCs into insurance business.
6. Technologies Development
 The INFINET (Indian Financial Network) which initially comprised
only the PSBs was opened up for participation by other categories
of members. 26 PSBs have achieved the level of 70% of business
captured through computerization by June 2001. Further, the
information technology Act, 2000 has given legal recognition to
creation, transmission and retention of an electronic data to be
treated as valid proof in a court of law.
Conclusion: The banking sector reforms force the challenges towards the
Indian banking system with Liberalization, Privatization & Globalization.
Globalization has but lead to the liberalization of the Indian Banking sector;
like the other sectors opened up, today, the Indian banks need to learn much
more from competition; customers and not advances and customer service is
the call for the day.
About universal banking, due to increasing competition banks need to strive for
customers, thus, offering all at the same desks for corporate as well as individuals
i.e. retail banking is required; public sector needs to have a pace in this arena. A
merger to improve the overall health, reach and customer base, has given a rise to
the trend of mergers globally. The recent merger of ICICI and BOM proves that
customer base has to develop for sustainability. Mergers constitute as a cheaper and
a quicker form of expansion and Indian banks should explore such an opportunity.
As far as rural banks are concerned, GOI has to give personnel better career
prospects in order to get them working, better products and convenience and
safety has to be guaranteed by the bank. Personalized service in a crude form
will help.
Lastly, technological up-gradation will be what will lead to customer retention

on the grounds of accessibility and convenience.
3 Indian Banking and Finance: Managing New
Challenges
The last decade has witnessed major changes in the financial

sector --
 New banks,
 New financial institutions,
 New instruments,
 New windows,
 New markets & market players,
 New competition,
 New opportunities along with all this,
 New challenges also came into existence.
While deregulation has opened up new vistas for banks to augment revenues,
it has entailed greater competition and consequently greater risks. Cross-
border flows and entry of new products, particularly derivative instruments,
have impacted significantly on the domestic banking sector, forcing banks to
adjust the product mix. The effect of rapid changes in their processes and
operations are in demand to remain competitive in the globalised
environment. These developments have facilitated greater choice for
consumers, who have become more judicious and demanding compelling
banks to offer a broader range of products through delivery distribution
channels. The traditional face of banks as mere financial intermediaries has
since altered and risk management has emerged as their defining attribute.
It is clear that we are at the beginning of this new phase in the Indian
Banking. The recent measures announced by the Government and the
Reserve Bank of India for opening up India’s banking sector to international
investors will further increase the pressure of competition. At the same time
there is renewed emphasis by the Government on the social sector together
with thrust on rural and agricultural lending caught between the competitive
pressure, both domestic and external, and the politics of development, banks
will have to be on their toes, become even more efficient in managing the
funds and in meeting the needs and demands of customers.
Today, the underlining thing is the role, which the banks will play in the
years to come. If more & more multinational banks start operating in India,
what will happen with the Indian banks?
With all of this there are many more things which are forcing the
challenges towards Indian Banking System.
The players in the Indian banking sector can broadly be classified into
three distinct groups, who although face common issues, are subject to
specific issues pertaining to their sector. The three main segments are the
public sector banks, private sector banks and foreign banks.
3.1 Public Sector Banks
It is evident from the table below that the public sector banks constitute
the majority of the Indian banking system, be it by geographical reach or
deposit and credit volumes. The public sector banks which, although in theory
are independent, take strategic direction from their majority shareholders.
They have historically been and continue to be, important mechanisms by
which the government delivers policy promises and maintains confidence in
the banking system.
Indian Banking System

No. of banks No. of Branches
Public Sector Banks 27 46,316
Private Sector Banks 32 5,290
Foreign Banks 42 184
Regional Rural Bank 196 14,486

% share in Deposits % share in bank Credit
Public Sector Banks 77.20% 72.50%
Private Sector Banks 13.70% 17.50%
Foreign Banks 5.00% 7.30%
Regional Rural Bank 4.00% 2.70%
As a result of the design of government policies to extend credit to the
rural population and the accidents of failed banks in the Indian system, the
public sector banks have grown to establish a formidable network of
branches. The largest of these is the State Bank of India (SBI), which is the
largest bank in India as measured by the number of branches (over 9,000
branches and 15,000 branches including its affiliated banks) and asset base
(Rs407, 815 cores or $88bn). The large branch networks that are owned by
some of the public sector banks, and particularly SBI, have a significant
advantage over the private and foreign banks, who, although they have well
established operations in the metro cities need to establish better distribution
capabilities in the semi urban and rural areas.
Despite owning these impressive networks, the lack of investment in

technology leads to inefficiencies in processes and restricts the bank's ability
to equal customer promises made by private sector and foreign banks. The
need for more sophisticated technology has also become more relevant as
the public sector banks start to tap foreign capital markets to raise funds to
meet their expansion plans. The exposure to foreign markets will require
them, among other things, to raise the bar with regard to customer service,
efficiency and producing timely, auditable financial and non-financial
information. Although the banks in this sector have embarked on modernising
their technology infrastructure and streamlining their internal processes, this
will absorb both time and resources.
The public sector banks have not traditionally been regarded as very
customer-centric organizations but the advent of private sector banks and
market-savvy foreign banks has changed the competitive landscape in the
Indian consumer banking industry. Although the customer service levels of
public sector banks are now growing to meet the complex needs of
customers, some suggest that there is still a long way to go. Indian banks are
regulated by the Reserve Bank of India (RBI), an autonomous organisation
set up under a specific legislation of the parliament with limited government
control, as per provisions of Banking Regulation Act. The RBI regulates all
banking sector aspects, such as cash reserve ratio, statutory liquidity ratio
and capital adequacy. No one can carry on the business of banking in India
without a license granted by the RBI and all banks have to adhere to a
transparent reporting system of the RBI.
3.2 Private Sector Banks
The private sector banks in India have really established themselves

over the last 10 years and with aggressive marketing and, focus on customer
care, have begun to take the market share away from the public sector banks.
Most notable amongst the private sector banks are ICICI and HDFC Bank,
which have introduced a level of sophistication in the banking sector that has
not been apparent in India before. Apart from adoption of relatively
sophisticated technology, these banks have been quick to grasp the
consumers' psyche of 'time is money'. Another advantage of large private
banks in the country is that they are 'universal banks' which cross-sell a host
of financial services and offer all solutions to customers' financial needs under
one roof. Some of the smaller private sector banks have not yet employed the
use of sophisticated customer relationship management systems.
Management of the banks in this sector is largely Indian, by people

who understand the Indian market and the Indian consumer and are able to
successfully compete with the larger public sector banks in the metro cities
where they have appeal to the more urban customer. As they continue to
grow and the urban markets become saturated, they, like the foreign banks,
need to establish an operational network that will reach the wider population.
Also, an emerging trend with the private banks is that they are seeking to
establish a presence in global markets with the aim of attracting lucrative NRI
business.
3.3 Foreign Banks
The third sector is the foreign banks of which there are 42 currently
operating through more than 184 branches in India (see graph below). The
larger foreign banks enjoy strong franchises, both in corporate banking as well
as in retail savings products, among high net worth individuals. That said they
have an increasing market share in retail lending including auto loans, credit
cards and personal loans. Growing acceptance of foreign banks is partly as a
result of the high 'aspirational value' attached by consumers to banking with a
foreign brand. Robust systems, well-defined processes of their global network
and an attractive market have enabled these banks to move from a 'dipping
the toe' strategy to establishing and cementing their foothold in the Indian
market.
Foreign Banks
Whereas the state and private banks are largely locally incorporated
banks, it is important to note that most of the foreign banks operate as
branches of the parent bank which, due to regulatory considerations, puts a
constraint on the number of branches they can open. In the retail space, if
foreign banks are to participate in the growth of the Indian banking sector on a
footing equal to their Indian counterparts, they would need to establish a wider
distribution network than is currently allowed under the foreign branch
structure.
Although the central bank is meeting and exceeding its WTO commitments
with regard to allowing the branches of foreign banks to be set up, foreign
banks would need to wait for some time before they have flexibility on their
distribution network.
This presents an interesting conundrum for the foreign banks that

recognize the need to establish a distribution network but is limited due to
their current structure and by the government's ceiling on foreign ownership of
private banks.
An alternative that foreign banks are increasingly pursuing is the

creation of non-banking financial companies (NBFC). Although there are
various restrictions on resource mobilization and certain restrictions on
foreclosure rights otherwise available to banks, NBFCs are subject to
relatively less stringent regulatory requirements than banking subsidiaries. For
example NBFCs are not required to comply with certain prudential measures
such as the statutory liquidity and cash reserve ratios or provide, at RBI's
behest, priority sector lending (NBFCs are, however subject to almost
identical capital adequacy requirements as banks).
Although many internationally active banks have an 'India strategy', in

order to succeed, it is imperative that foreign banks understand the culture
within each state they wish to operate in. This alone is a significant challenge
that should not be underestimated.
3.4 Foreign Ownership
Ownership and governance of banks (private banks and foreign banks
as discussed previously) is high on RBI's agenda. The RBI is committed to
strengthening the domestic banking sector before allowing further room for
foreign investment and the recent announcement limiting foreign banks from
owning controllership rights of more than 5 per cent in private sector banks is
evidence of this. This presents the foreign banks with a significant challenge
in the race for customer acquisition. In the meantime however, consolidation
among public sector banks, which will seek to merge themselves based on
operational, geographical and asset synergies, is widely believed to be
imminent.
3.5 Credit Growth and Basel
The RBI has issued guidelines recently for the adoption of elements of
the Basel II framework (the Standardized Approach for credit risk and Basic
Indicator Approach for operational risk) with effect from 31 March 2007.
Following the sharp credit growth and in order to comply with Basel II
norms, it is widely believed that Indian banks will need significant capital
infusion over the coming few years. A recent study conducted by a leading
credit rating company in India reveals that if Basel II norms were applied to
Indian banks' portfolio (as at March 2004), capital adequacy would have been
160 basis points (bp) lower than reported. This 160bp decline is a function of
a 70bp gain on credit risk and a loss of 120bp on market risk and 120bp
operational risk. This reinforces the view that although Indian banks have
begun integrating effective credit risk management systems into their
operations, adequate progress needs to be made for the assessment and
monitoring of market and operational risk.
One obvious area for these banks to consider when looking at their
market/operational risk framework is derivative trading which is a relatively
new area for Indian banks (particularly in the more structured products) and is
set to grow further. It is widely accepted that as the volume of transactions
increases, they need to upgrade their current internal control environment and
their middle and back offices.
Transparency and disclosure standards are also important constituents
of a sound corporate governance mechanism. Although transparency and
accounting standards in India have been enhanced to align in many ways with
international best practices, there are still many gaps in the areas of risk
management strategies and practices, risk parameters, risk concentrations,
performance measures and components of capital structure. Hence, the
disclosure standards need to be further broad-based along with improvements
in the capability of market players to analyse the information objectively. This
will help in their efforts to comply with Pillar III requirements of Basel II.
Apart from the challenge of managing capital adequacy by

establishing/enhancing operational and market risk management frameworks,
Indian banks will need to establish capital raising programmes.
3.6 Securitization
Securitization and loan sales have made a slow beginning in India.

With higher growth rates now being witnessed in loan assets as compared
with deposits, securitisation will be a key area for banks to maintain adequate
short-term liquidity in order to capitalise on the expected growth. Lack of legal
clarity and high transaction costs (stamp duties) are acting as impediments to
the securitisation market. Although recently passed legislation does address
these issues, continued commitment from the regulators is required to
develop these markets.
Bankruptcy laws in India have traditionally favoured borrowers, which

has in the past resulted in a large amount of assets becoming distressed,
since the powers of lenders were limited. Recent legislation empowers banks
to take action against defaulters without resorting to the painfully slow
traditional recovery methods like those accessed through the Debt Recovery
Tribunals. However, this legislation needs to be further refined and may take
some time before it is practically implemented and the benefits realized.
3.7 Market Discipline
Processes of transparency and market disclosure of critical information

describing the risk profile, capital structure and capital adequacy are
assuming increasing importance in the emerging environment. Besides
making banks more accountable and responsive to better-informed investors,
these processes enable banks to strike the right balance between risks and
rewards and to improve the access to markets. Improvements in market
discipline also call for greater coordination between banks and regulators.
Banks are currently required to disclose in their balance sheets

information on maturity profiles of assets and liabilities, lending to sensitive
sectors, movements in NPAs, besides providing information on capital,
provisions, shareholdings of the government, value of investments in India
and abroad, and other operating and profitability indicators. Banks also have
to disclose their total investments made in equity shares, units of mutual
funds, bonds and debentures, and aggregate advances against shares in their
notes to balance sheets.
3.8 Universal Banking
Since the early 1990s, banking systems worldwide have been going through a
rapid transformation. Mergers, amalgamations and acquisitions have been
undertaken on a large scale in order to gain size and to focus more sharply on
competitive strengths. When banks were allowed to undertake leasing,
investment banking, mutual funds, factoring, hire-purchase activities through
separate subsidiaries. By the mid-1990s, all restrictions on project financing
were removed and banks were allowed to undertake several activities in-
house. In the recent period, the focus is on Development Financial Institutions
(DFIs), which have been allowed to set up banking subsidiaries and to enter
the insurance business along with banks. DFIs were also allowed to
undertake working capital financing and to raise short-term funds within limits.
It was the Narasimham Committee II Report (1998) which suggested that the
DFIs should convert themselves into banks or non-bank financial companies,
and this conversion was endorsed by the Khan Working Group (1998). The
Reserve Bank’s Discussion Paper (1999) and the feedback thereon indicated
the desirability of universal banking from the point of view of efficiency of
resource use, but it also emphasized the need to take into account factors
such as the status of reforms, the state of preparedness of the institutions,
and a viable transition path while moving in the desired direction.
The need to proceed with planning and foresight is necessary for several
reasons. The move towards universal banking would not provide a panacea
for the endemic weaknesses of a DFI or its liquidity and solvency problems
and/or operational difficulties arising from under capitalization, non-performing
assets, and asset liability mismatches, etc. From the point of view of the
regulatory framework, the movement towards universal banking should
entrench stability of the financial system, preserve the safety of public
deposits, improve efficiency in financial intermediation, ensure healthy
competition, and impart transparent and equitable regulation.
3.9 Issues in Supervision and Regulation
Progressive strengthening, deepening and refinement of the regulatory and

supervisory system for the financial sector have been important elements of
financial sector reforms. In the long run, it is the supervision and regulation
function that is critical in safeguarding financial stability. This will entail
procedures for sound internal evaluation of risk for banks. As mentioned
earlier, bank managements will have to develop internal capital assessment
processes in accordance with their risk profile and control environment. The
emphasis will be on evaluating the quality of risk management and the
adequacy of risk containment. In certain areas, as for instance, in the urban
cooperative banking segment, the regulatory requirements leave considerable
scope for regulatory arbitrage and even circumvention. The problem is
rendered more complex by the existence of regulatory overlap between the
Central Government, the State Governments and the Reserve Bank.
Regulatory overlap has impeded the speed of regulatory response to
emerging problems. The need for removing multiple regulatory jurisdictions
over the cooperative banking sector has been reiterated on several
occasions. In this regard, the Reserve Bank has proposed the setting up of an
apex supervisory body for urban cooperative banks under the control of a
high-level supervisory board consisting of representatives of the Central
governments, the State governments, the Reserve Bank and experts. The
apex body is expected to ensure compliance with prudential requirements and
also supervise on-site inspections and off-site surveillance.
Recent developments in certain segments of the financial sector have also

brought to the fore issues relating to corporate governance in banks. As part
of on-going reforms, boards have been given greater autonomy to prescribe
internal control guidelines, risk management and procedures for market
discipline and accountability. It is extremely important that greater vigilance
over adherence to these norms goes hand-in-hand with greater autonomy.
Recent evidence of transgression of prudential guidelines by a few banks has
raised the issue of the audit and supervisory functions of boards. As we move
towards a more deregulated financial regime, these functions have to be
transferred from either the Government or the Reserve Bank to bank boards.
This imposes a greater responsibility and accountability on the bank
management. It is in this context that a consultative group of directors of
select banks and other experts has been set up to recommend measures to
strengthen the internal supervisory ro le of boards. The objective is to obtain a
feedback on how boards function vis-à-vis compliance with prudential norms,
transparency and disclosure, functioning of the audit committee, etc., and to
devise effective mechanisms for ensuring management discipline.
3.10 Technology in Banking
Computers are seen everywhere excepting in productivity statistics. More

recent developments have shown how far this state of affairs has changed.
Innovation in technology and worldwide revolution in information and
communication technology (ICT) have emerged as dynamic sources of
productivity growth. The relationship between IT and banking is fundamentally
symbiotic. In the banking sector, IT can reduce costs, increase volumes, and
facilitate customised products; similarly, IT requires banking and financial
services to facilitate its growth. As far as the banking system is concerned, the
payment system is perhaps the most important mechanism through which
such interactive dynamics gets manifested.
Recognising the importance of payments and settlement systems in the
economy, we have embarked on technology based solutions for the
improvement of the payment and settlement system infrastructure, coupled
with the introduction of new payment products such as the computerised
settlement of clearing transactions, use of Magnetic Ink Character
Recognition (MICR) technology for cheque clearing which currently accounts
for 65 per cent of the value of cheques processed in the country, the
computerization of Government Accounts and Currency Chest transactions,
operationalisation of Delivery versus Payment (DvP) for Government
securities transactions.. The coverage of Electronic Clearing Service (Debit
and Credit) has been significantly expanded to encourage non-paper based
funds movement and develop the provision of a centralised facility for
effecting payments.
Information technology has immense untapped potential in banking.

Strengthening of information technology in banks could improve the
effectiveness of asset-liability management in banks. Building up of a related
data-base on a real time basis would enhance the forecasting of liquidity
greatly even at the branch level. This could contribute to enhancing the risk
management capabilities of banks.
3.11 Human Resource Development in Banking
A recurring theme in the annual BECON Conference has been the need to
focus on developing human resources to cope with the rapidly changing
scenario. The core function of HRD in the banking industry is to facilitate
performance improvement, measured not only in terms of financial indicators
of operational efficiency but also in terms of the quality of financial services
provided. Factors such as skills, attitudes and knowledge of personnel play a
critical role in determining the competitiveness of the financial sector. The
quality of human resources indicates the ability of banks to deliver value to
customers. Capital and technology are replicable, but not human capital which
needs to be viewed as a valuable resource for the achievement of competitive
advantage. The primary emphasis needs to be on integrating human resource
management (HRM) strategies with the business strategy. HRM strategies
include managing change, creating commitment, achieving flexibility and
improving teamwork. These processes underlie the complementary processes
that represent the overt aspects of HRM, such as recruitment, placement,
performance management, reward management, and employee relations. A
forward looking approach would involve moving towards self-assessment of
competency and developmental needs as a part of a continuous learning
cycle.
The Indian banking industry has been an important driving force behind the
nation’s economic development. The emerging environment poses both
opportunities and threats, in particular, to the public sector banks. How well
these are met will mainly depend on the extent to which the bank’s leverage
their primary assets i.e., human resources in the context of the changing
economic and business environment. It is obvious that the public sector
banks’ hierarchical structure, which gives preference to seniority over
performance, is not the best environment for attracting the best talent from
among the young in a competitive environment. A radical transformation of
the existing personnel structure in public sector banks is unlikely to be
practical, at least in the foreseeable future. However, certain improvements
can be made in the recruitment practices as well as in on-the-job training and
redeployment of those who are already employed. There are several
institutions in the country which cater exclusively to the needs of human
resource development in the banking industry.
Financial products are becoming increasingly complex and diverse, while the
markets in which they trade get progressively deregulated. The need to adopt
global best practices in financial sector regulation and supervision, and adapt
them to the domestic environment, places a premium on the skills and
expertise of the Bank’s human resources.
3.12 The Role of Economists
Economists have to be more ‘mainstreamed’ within the operational structure

of commercial banks. Apart from the traditional functioning of macro-scanning,
the inter-linkages between treasuries, dealing rooms and trading rooms of
banks need to be viewed not only with the day-to-day needs of operational
necessity, but also with analytical content and policy foresight.
Today, operational aspects of the functioning of banks are attracting intensive

research by professional economists. In particular, measuring and modeling
different kinds of risks faced by banks, the behaviour of risk-return
relationships associated with different portfolio mixes and the impact of
fluctuations in financial markets on the financial performance of banks are
areas which lend themselves to analytical and empirical appraisal by
economists and econometricians. They, in turn, are discovering the degrees
of freedom and room for analytical maneuver in high frequency information
generated by the day-to-day functioning of banks. It is vital that we develop an
environment where these synergies are nurtured so as to serve the longer-
term strategic interests of banks. Even in real time trading and portfolio
decisions, the fundamental analysis of economists provides an independent
assessment of market behavior, reinforcing technical analysis.
A serious limitation of the applicability of standard economic analysis to

banking relates to the inadequacies of the data-base. Absence of long time
series data storage in the banking industry often poses serious problems to
the quest for the formal analytical relationships between variables. Even if
such data exist, the presence of structural breaks may blur meaningful
analysis based on traditional formulation. Economists need to think
innovatively to overcome this problem. Use of panel regression, non-
parametric methods and multivariate analyses could go a long way in
understanding and validating behavioral relationships in banking.
Another important challenge for the economics profession is to develop

proper models for measurement of various risks in Indian conditions. This is a
necessity in view of the move towards risk-based supervision. Quantification
of operational risks and calibration of Value at Risk (VaR) models pose major
computational challenge to bankers and policy makers alike, particularly in
India.
Conclusion
There is no doubt that India presents a huge opportunity for the banking
sector but, as outlined above, there are various hurdles that need to be
overcome before the true potential can be realized. Further we will learn the
major hurdles in Structure, Technology, Security and Human Resource
Management that forcing challenges towards Indian banking system.
4 Challenges Before Indian banking system in

structure
4.1 INTRODUCTION
The whole banking sector affected after the Liberalization,

Privatization & Globalization came in to the picture. It affected primarily on the
structure of the Indian banks. The banks were semi / ill modernized during
that time. The Indian Banks were not strong enough to face the global
competition effectively. The Indian Banking structure was very poor, and
Narishman Committee had pointed this out and made significant changes in
the structure of Indian Banking Sector, which were accepted by RBI and
instructed the banks to follow the same. The changes indicated are those
highlighted above in the Report of Narisimhan Committee. The Banks in
general have yet to fulfill the directives from RBI. The challenges lying before
banks are as discussed below -
The aftermath of the Nationalization of Banks, increased use of

technology, continuous mergers / acquisitions, modernizing backroom
operation and energetic competition paved the growth of the Indian Banking
System. By 90’s, the near monopoly of public sector banks faced competition
from the more customer focused private sector entrants. This competition
demanded the older and nationalized banks to revitalize their operations.
The year 1992 proved calamitous to the Indian Banking System owing
to the scam-tainted stock market. Large proportion of household saving
moved in to the banking system, which recorded an annual growth of 20% in
deposits. But along with the continuous growth and modernization, several
challenges still confronted the banking sector.
But along with the continuous growth and modernization, several
challenges still confront the banking sector. The main challenges are the
deployment of funds in quality assets and the management of revenues and
costs. The problem of NPA’s (Non-Performing Assets) and the overall credit
recovery system exist too.
The path of liberalization however have posed more questions which

remains to be answered.
Considering these developments, the Reserve Bank of India came up with

a number of measures to control the situation thereby reducing the
percentage of non-performing assets against advances and leading to better
management of banks. The following steps were taken to reform bank
operations. We have made considerable progress in implementing banking
and financial sector reforms. There is also some improvement in the financial
performance of the banking system in terms of various indicators of operating
efficiency. Still there are several areas regarding the efficiency of Indian
banking system – rather than its stability – that raise concerns, especially
during a period of generalized uncertainty. The level of non-performing assets
(NPAs) continues be high by international standards, preempting funds for
provisioning and eating into the performance and profitability of financial
intermediaries. The response to the debt recovery and asset restructuring
initiatives undertaken as part of financial sector reforms has also been slow.
4.2 Prudential Norms:-
Major challenges before Indian Banks are to implement the prudential

norms prescribed by Regulators to make effective growth.
In the period ahead, our financial system will also have to prepare for
the tightening of prudential norms as the new Basel Accord becomes effective
and a fuller response to the current financial environment emerges. Following
are the challenges before Indian banking i.e.
• Upgrading technical skills,
• Technology,
• Research and human capital,
• Developing effective ‘front-office’ strategies
• Fortifying internal rules of governance and
• Responsibility assumes a renewed priority in the fast changing

scenario.
Prudential Norms were introduced to strengthen the banks balance

sheet and enhance transparency. These prudential norms encompassed –
 Income recognition,
 Assets classification, provision for bad and doubtful debts and
 Capital adequacy
First, the income recognition norms reflect a true picture of the income
and expenditure of the bank. Earlier to these norms, banks used to book
profits even though the income was receivable, however after these norms it
is mandatory for the income to be realized rather than hope of receiving
income.
Secondly, the asset classification and provisioning norms help in

assessing the quality of the asset portfolio of the bank. The banks did not
provide anything for the Standard assets as well as those loans which were
backed by the State / Central Government. However as per new prudential
norms, banks have started providing on the loans advanced even where
Governments have provided guarantees.
Finally, the capital adequacy is based on the classification of asset. It

suggests whether the bank is in a viable position to meet any adverse
situations due to a decline in the quality of its assets. The banks have to
maintain a particular percentage of assets for the loans advanced. So that in
case of exigency, the banks must be able to satisfy the liabilities raised.
Guidelines have been issued to identify non-performing assets and

classify them, so that room for subjectivity is eliminated. A timeframe was
provided to implement the same and ensure that the systems become
compliant to the precise guidelines. The solution on this was, supported by
capitalization of the public sector banks to ensure that over a given timeframe,
they could comply with the norms. However, in reality the banks in general
had to struggle to march with same speed in the future which highlighted the
situations in which the banks were functioning. These norms were gradually
tightened and beginning with the April 1998 Monetary Policy, they were made
applicable to the government guaranteed advances as well. Provisioning will
also have to be made for advances which are both non performing and
performing.
Asset portfolio had to be concentrated / bifurcated based on the risks

carried by them. As per the Narasimhan Committee Report-I, except for Cash
and Bank balance and SLR investments, all other assets were assigned risk
weights. However, with the committee’s second report, came the guidelines to
assign risk weight to the government approved securities.
4.3 Capital Adequacy Requirements:
Based on the risk-weighted assets of the banks, the prudential norms

also prescribe the minimum capital to be maintained. Initially, the international
standard of 8% capital adequacy laid down by the Basel Committee was
accepted. However, a capital adequacy of 9 % is to be maintained by all the
Indian Banks with effect from 31 March 2000. These high standards are
expected to strengthen the financial soundness of the banks, while continuing
to keep them in line with international standards. It is aimed to persuade
financial discipline into the operations of the banks through these regulations.
These regulations enhance transparency and accountability in the operations
of the banks thereby compelling them to pay greater attention to the quality of
lending. In addition, these regulations be conventional to the international
accounting standards and would enable the guidelines would enhance the
sustainability of banks and make them competitive.
The reforms measures were aimed at not only liberalizing the regulatory
framework, but also to keep them in tune with the international standards. And
since the banks had to move from a highly regulated environment to a
deregulated environment, some of the public sector banks had to bear the trial
of reformation. In an attempt to stabilize the bank position during the transition
phase, the Government contributed capital to a few among the week-
nationalized banks to set off their accumulated losses against their capital. All
these measures were taken in order to ensure that the Indian banking system
reaches the global standards.
4.4 Non-Performing Assets: -
One area that has been a constant source of concerns for Banks and the RBI
alike is the menace of Non – Performing Assets (NPA) or the bad and
doubtful debts of the banking system. The NPAs levels are more in India as
compare to the other advanced countries. The gross NPA is still over around
Rs. 83,000 cr. The government and RBI have taken several initiatives toward
managing NPA. In this regard, a new ordinance on Securitization and
Financial Asset Reconstruction and enforcement of security interest has been
created in the year 2002, which would help in speedy recovery of bad loans.
Many Asset Reconstruction Company’s (ARC) have been floated to

address to this issue. The ARC’s have been successful enough to some
extent to recover and settle the long outstanding and sticky loans by entering
into One Time Settlement (OTS) options. Thus there is some success in
achieving the target for which these committees were formed.
Net Non Performing Assets (08-09)
3.8
4 PUBLIC SECTOR
3.5 BANK
2.9 NEW PRIVATE
3 SECTOR BANK
2.5
2
RATIO
1.5
1
0.5
0
SCHEDULE OLD PRIVATE FOREIGN BANK
COMMERCIAL BANK SECTOR BANK
4.5 Mergers & Acquisition: -
It is perceived that too many banks are operating in the same area, many of
them being small in size of assets, and due to its low asset size in its portfolio
these small banks not play their role efficiently. The smallest of the older
private sector banks, The Ganesh Bank of Kurundwad had an advance
portfolio of Rs. 98 crore as at the end of the March 2003 and five others had
advances less than Rs. 1,000 crore. Such a low assets base is not good
enough to withstand any stock that may arise in the normal course of
business. In Banking, size does matter. The main question is raised whether
they can really compete and is their size comparable to internationals Banks.
One of the solutions on this problem is to consolidate and merge with the
bigger banks, which can compete effectively in the International arena.
The increasing competition and shrinking profit margins have also led to
the voluntary merger of the banks for gaining competitive edge, such as –
 Merger of Bank of Madura (BOM) with ICICI Bank – BOM had good
presence in the Southern parts of India, and ICICI wanted such exposure,
therefore the mutual agreements led to the voluntary merger,
 Times Bank merged with HDFC Bank – this was to optimize the presence
in India as well as the global presence. As HDFC was only known to the
housing sector earlier, therefore merger gave them the foundation for entering
into the markets,
 ICICI Bank merged with ICICI Ltd – It was foreseen that the existence as
only the financial institution is not feasible in the current market scenario
where “One stop policy” is the commonly understood. There is no
demarcation of some banks providing only Project / green field loans & some
meeting short & medium term loans. Therefore there two have to merge to
form one formidable entity to face the competition collectively.
The proposed merger of Industrial Finance Corp of India (IFCI) and

Industrial Development Bank of India (IDBI) with some nationalized banks is
being actively discussed in the financial circles.
4.6 Strengthening the legal framework: -
For effective functioning of banks, there is need of strengthen of the

banking system. Our banking systems especially the public sector are the
legacy of the vestibules of the policies followed ion the past. And here is the
time comes to legacy by making our banks operate in conditions similar to the
global environment.
4.7 Benchmarking against International Standards: -
Further to the above-mentioned steps taken in response to the

challenges posed by liberalization, steps were also taken to benchmark the
Indian banking practices with the international standards. For this purpose,
efforts are being made to ensure that the universally accepted standards and
codes are practiced. The leading international agencies like the World Bank
and IMF are emphasizing on following the global standards. In India the
process has begun with the regulators and government concentrating on
universally acceptable standards and codes for benchmarking domestic
financial systems.
With this private sector can also bring into the purview issues relating to: -
• Market Discipline,
• Corporate Governance,
• Insolvency procedures and
• Credit rights
The new standards and codes are not final goals but instruments to
enhance efficiency in the financial intermediation while ensuring financial
stability as well.
There are three levels at which action is necessary viz-
(a) Legal,
(b) Policy and Procedures and
(c) Market Practices by participants.
In several areas, fundamental changes in the legal and institutional

infrastructure are pre-requisites. Since these changes can influence the socio-
cultural as well as political, economic culture to a great extent, appropriate
adoption and some prioritization in implementation are unavoidable. In several
areas, the issues are of a technical nature.
Accordingly, the Standing Committee on International Standards and

Codes, set-up in December 1999, constituted ten Advisory Groups comprising
eminent experts, generally non-official, to bring objectivity and experiences
into studying the applicability of relevant international codes and standards to
each areas of competence. The Advisory Groups have submitted their
reports. They have set out a roadmap to implement appropriate standards
and codes in the light of existing levels of compliance, the cross-country
experience and the existing legal and institutional infrastructure.
4.8 Corporate Governance in the banking industry:-
Banks the highly leveraged entities that flourish on public confidence

have to maintain the highest standards of corporate governance. Corporate
governance is not all about diversified ownership. It has more to do with
sound and prudent management policies and objective. The Banking Industry
is at the heat of economic change. The Indians banks are now required to
disclosure accounting ratio relating to operating profit, return on asset,
business per employee etc. Maturity profile loans, advances, investment,
borrowings and deposits are also taking into consideration. To catch the
public confidence about their Banks, Banks should disclose their significant
aspects like Balance sheet, their NPAs position, Capital etc. It is important
from the point of view of the customer to be familiar with how their banks are
functioning. This is one of the challenges faced by Indian Banking.
4.9 Bankable Outsourcing: -
The next decade will be challenging for banks in terms of outsourcing.

The concept of outsourcing has taken firm roots in the financial sector. The
term ‘Outsourcing’ means the activities performed by third parties instead of
them doing it themselves. A number of new private bank and foreign banks
with large volumes of business have started outsourcing, some of their
activities like - Clearing operation and ATM maintenance are handed over to
outsourcing agencies, where as market functions for Deposit mobilization,
Retail loan and Credit card business are done through Direct Selling Agent
(DSAs). Routine back office jobs are either centralized or completely
outsourced, leading to branch staff taking up more market functions with a
customer centric approach at the branch level. Because of the Outsourcing,
about 25,000 jobs in the financial sector have moved up into the country for
the last two years. The numbers will go on increasing. According to a Deloitte
study on the subject, it is estimated that $ 400 billion worth of financial
services will be outsourced to offshore location by 2010. The argument in
favor of outsourcing is to cut costs, especially of manpower, and transfer the
responsibility of compliance with the associated risk to a willing third party.
This would entail banks, sticking to the business of taking risk, addressing
assets-liability mismatches, managing cash-flows for clients and providing a
one-stop shop for all financial services to a cross-section of users.
The Private sector banks have achieved a great degree of success in their
experiments with this concept. Banks should not fully rely on the bankable
outsourcing. There is a danger of over-reliance on such parties, which may at
a later date place the institution at risk. For instance, privacy laws that may be
on the anvil to protect confidential information of clients can set severe
penalties for any slippages or disclosure of information to unauthorized
persons. Banks have to take proper precautions with this new concept while
giving the work to them. The board of directors must be held accountable for
the outsourcing policy as well as the activities undertaken under them.
The outsourcing guidelines that are being worked on are quite timely.
Perhaps, the RBI ought to persist that outsourcing of activities should not be
treated as an abdication of responsibility.
In future the banks will be slim & trim in their physical size & structure
and not in the business volume, with the emphasis on automation and
outsourcing of different services (some discussed above) so that they can
tackle the increasing volumes of business efficiently and effectively and
become competitive in relation to foreign and private sector banks.
4.10 Interest Rate Risk:-
Interest Rate Risk is also a major challenge before Indian banks to

protect them. Interest rate risk can be defined as exposure of bank's net
interest income to adverse movements in interest rates. A bank's balance
sheet consists mainly of rupee assets and liabilities. Any movement in
domestic interest rate is the main source of interest rate risk.
Over the last few years the treasury departments of banks have been
responsible for a substantial part of profits made by banks. Between July
1997 and Oct 2003, as interest rates fell, the yield on 10-year government
bonds (a barometer for domestic interest rates) fell, from 13 per cent to 4.9
per cent. With yields falling the banks made huge profits on their bond
portfolios. Now as yields go up (with the rise in inflation, bond yields go up
and bond prices fall as the debt market starts factoring a possible interest rate
hike), the banks will have to set aside funds to mark to market their
investment. This will make it difficult to show huge profits from treasury
operations. This concern becomes much stronger because a substantial
percentage of bank deposits remain invested in government bonds.
4.11 Bank branches in terms of population: -
Bank branches is still pretty poor in India compared to advanced countries

The coverage was 15,000 per branch in India, whereas in the USA it was
4,960, in the UK-5, 272 and in Germany – 1,832; this despite the extensive
use of ATMs in those countries. Banks should innovatively look at the areas
as potential for resource mobilization.
4.12 Total bank assets to GDP ratio:- banks in India, the scope of expanding
their loan portfolio is, really, vast. The total bank assets to GDP ratio for
India and a few other countries was-
Country Total Bank assets to GDP ratio

 India 48
 Indonesia 101
 South Korea 98
 Thailand 112
 Malaysia 166
 Canada 154
 UK 311
 Germany 313
 USA 66
On the basis of above data, we can infer that Indian Banks are still not
contributing their part significantly in the GDPs as compared to the other
countries. Banks have to capture the major part of GDP by enhancing their
operational role. This is one of the challenges before Indians banks to
increase the ratio of advances to GDP, and the solution of this is to increase
the resources. And the resources can be raised from two segments: -
4.12.1 Banks have to invest less in the government securities, which are risk
free investment in credit, but not market risk; in the same way, banks should
lend more and more to infrastructure, industry, agribusiness, commerce and
individuals. Banks invest in government securities because of the miniscule
growth in the industrial sector for the past 5 years. Both the central and state
governments seem to have an inexhaustible appetite for borrowings to meet
current revenues expenditure in the form of interests payments and salaries.
4.12.2 Indian Banks should also tap resources abroad and lend in India. But it
is possible if banks are permitted to lend to Indian borrowers in US dollars,
euro and other major currencies by borrowing in the foreign financial markets.
But there are attendant problems in the form of fluctuation risks, which banks
will pass on to the borrowers. But, if there is systematic onslaught like, the
one-faced by Southeast Asia in 1997, the entire edifice may collapse. To
effectively tackle these issues, the RBI should guide banks to adopt scientific
risk management techniques. Recently, many of the Indian companies /
Banks have entered the foreign markets to tap the cheaply available dollars in
USA and the Japanese Yen and also the Euro dollar which is growing in
stature to compete with the US dollar.
Analysis
Challenges before Indian banks are of wide range. But one of that is in
the structure. The changes have been made in structure of Indian banks due
to Liberalization, Privatization, & Globalization mainly. To face the global
competition effectively, structure has been changed. But still it is in the way.
What are the challenges in structure, which we have discussed above? But
here is the question raised that some private banks & nationalized banks are
confront them, but how weak public sector banks and small banks tackle this
situation. There are not only challenges in structure but also in I.T, H.R
(Human Resources), Services. They are not able to tackle these challenges
as effectively in compare to Private Banks & foreign Banks. Banks have to
solve the problems in Non Performing Assets. And for that, the Indian Banks
have to measure the risk involved in lending advances. To meet capital
adequacy requirement in balances sheet, the banks reduce their liability in
compare to assets. The major question is raised how weak banks survive in
this global competitive world.
Because of the traditional background, the Indian banks are not able to
implement the prudential norms. Foreign Banks and Private sector Banks are
financially strong therefore they used outsourcing in most of their operations,
and reduce the costs at the same time. Nationalized banks are not applying
these techniques to make the growth. They are not that much familiar with this
concept. Banks participation in G.D.P. is very low in compare to the other
countries. Banks have to prevent themselves in relate to interest rate risk
which affect the bank’s balance sheet significantly. In India, significant parts of
the total advances are non-performing. Market share of the bank.
Suggestions:-
1. Banks have to manage to bring down bad loans through a combination

of measures. These include aggressive provisioning, corporate debt
restructuring, write-offs and recoveries.
2. Corporate Debt Restructuring (CDR) mechanism has been introduced
which is aimed at restructuring the debt of viable corporate entities,
outside the purview of BIFR, DRT, etc. Efforts are being made to make
CDR mechanism.
3. Another major step in this direction has been the introduction of One
Time Settlement Scheme (OTS). The success of OTS has been
modest. Under both the OTS schemes, i.e. up to Rs. 5 crore and up to
Rs. 25,000 banks could recover only around Rs. 3000 crore.
4. The Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Ordinance, 2000 has been another
major initiative from the legal side. This legislation would provide a
comfort level to banks in tackling the problems of NPAs.
5. The creation of Asset Reconstruction Company provided banks a route
to dump their bad loans at market value after writing them off.
6. Non Performing Assets can be effectively brought down if there is
greater transparency in the system.
7. Universal Banking is one of the solutions on lot of problems. Now it is
the need of the banking sector to set up Universal Banking. Universal
banking on the one hand to cover a wide range of risks and at the
same time reducing the wage bill.
technology
The device of change as far as banking in India is poised for greater

leaps in the near future. Banks require being ready to take the
challenges unleashed by various external forces such as - competition,
globalization, shrinking margins, and internal forces relating to human
resources need for changes in procedures etc. A substantial portion of these
challenges can be technology.
Banks in India need to be complimented on the inculcation of

technology in a large way in their day-to-day operations. Technology is being
made revolution in Indian banking industry, and after revolution Indian
Banking face various new challenges raised by technology. Indian banking is
trying to go ahead with technology.
The most important challenge that the Indian banks will have to face
will be the challenge aided by Information Technology (I.T). The degree of
computerization and the consequent benefits in efficiency, which the banks
derive, is not comparable to foreign banks, which will perhaps be playing an
increasingly important role in domestic market. Private sector banks and even
co-operative banks are seems to have taken computerization more effectively
other than Nationalized Banks. Credit must be given to Indian Banks who
have brought on the new wave of techno-banking in the country. Integration of
domestic markets with international financial markets has been facilitated by
tremendous advancement in information and communication technology.
The future of banking is poised for reaping the full benefits of the
developments in the field of knowledge and information technology. The
knowledge oriented and technology driven banking may metamorphosed the
entire Indian Banking scenario.
5.1 Technology aspects implementation comes with its attendant

requirement too. A few major aspects that need to be reckoned relating to the
effective utilization of Information Technology may be as highlighted below :
 Need for standardization – across hardware, operating system,
system software, application software to facilitate inter connectivity
of system across branches.
 Need for high levels of security – In an environment, which
requires high level of confidentiality, security is an important
requirement. This also has to be addressed while entering into BPO
activities.
 The next logical approach would be towards communication
and networking- use of networks would facilitate centralized
database and the distributed pricing. Exploitation of computer
network by banks would result in saving in cost and would increase
its efficiency. The networking would increase the transmission and
dissemination of required information within short time, which will in
turn help in taking timely decisions.
 Need for a technology plan which will have to be periodically
monitored and also to be upgraded consequent to changes in
technology itself?
 Need for business process re-engineering with the large-scale
usage of computers- the objective is not to merely mechanize
activities but to result in holistic benefits of computerization for both
the customer and the staff at branches.
 Need to address the issue of human relations in a computerized
environment especially from the point of Human Resource
Development.
 Sharing of technology experience so as to reap the benefits of
technology implementation across a wider community.
5.2 Challenges in Security: -
Various concepts such as digital signatures, certification, storage of

information in a secure and taper-proof manner all assume significance and
have to be part of the practices and procedures in the day to day functioning
of banks of tomorrow. All these would be added requirements and the well-
established practices of today may also have to not only continue but also co-
exist along with the new requirements.
Security requirements have to be provided from a two-pronged

perspective –
 For the internal requirements of the banks themselves and

 Secondly relating to the legal precincts of the laws of the land.
It will be a matter of satisfaction to note that the INFINET (Indian
Financial Network) is a safe, secure and efficient communications network for
the exclusive use of the banking sector, which provides for inter-bank
communications- which implies that banks have to now function as a group
and at the same time compete with each other. The key advantage of the
INFINET is its own security framework in the form of the Public key
infrastructure- PKI, which is in conformity to the provisions of the Information
Technology Act, 2000.
An effective security policy which would offer a shared vision of how

the controls in the workplace should be implemented with the objective of
protecting data, information and eventually, the economic value of the
organization. This has to be supplemented by education and training in these
areas and reinforced by the actions and concerns of the top management so
that a culture of security can be created. These controls have to be
supplemented by surveillance, monitoring and auditing to detect unusual
usage patterns and deficiencies. Banks have to put in place such policies and
ensure that it is being implemented effectively, and then audit the IT related
functions so as to ensure that there are no lapses or deviations from the
approval information Security Policy.
5.3 Another major challenge relates to the bridging of the divide caused by
distances. Today, banking has broken all geographical barriers and demand
from customers relating to ‘Anywhere and Anytime Banking’, which is also
expressed as “365 Days 24 Hours anywhere banking”, has helped to meet its
requirement to a great extent. Currently, IT based offerings such as –
Electronic Banking, Internet Banking, Phone Banking and Card Banking have
provided customers with the means for meeting the requirement of being able
to perform banking transactions from anywhere.
The death of distance have also necessitated that banks in India do

not merely look inward. Developments elsewhere in the world have also a
strong impact on the efforts of Indian banks and these have to be factored in
an always-vibrant world of technology-based banking. Added to this is the fact
that markets have shrunk digitally and this gap would reduce further in the
morrow.
It would be necessary to prepare ourselves functioning in a very

small knit shrunk world information availability, across a large section of
people will bring in the challenge of being able to process such large masses
of information. Banks, will therefore brace themselves for co-operation and
co-existence and geographical boundaries may move away into oblivion just
as sharing of resources (such as ATMs) has already commenced
propagation.
5.4 One of the challenges that are overcome by banking industry is digital
divide while the average Indian customer may not be a technology savvy.
All technology-based offerings by banks are biased towards the major
towns and cities and the need for reaching the mid size cities as well as
the large rural population assumes insignificance. However, these pockets
promises substantial growth prospects and today with networking
capabilities available at much higher and reliable levels than before at
affordable costs, banks will have to pay attention to these segments of the
country as well. The banks will have to create more user friendly software
programmes which would provide banking services with the help of audio-
visual techniques to help consumers / investors so that the less educated
people can also avail the benefits of banking.
5.5 Banks will also have to re-orient their internal processes and
procedures. Just as mechanization of processes in a manufacturing
company required changes in the steps involved in the production cycle,
suitable changes in the job processes within banks will also have to be
made. No technology implementation is complete without the attendant
changes in the basic way of process functions at the organization where
such implementation shave been made, and if technology implementation
have to be successful, then they have to be accompanied by suitable
changes in the process flows across all sectors of economy, which is at
the base of Business Processing Re-engineering (BPR). It is essential that
banks embark upon Business Process Re-engineering in a large scale and
prefer even for the large-scale implementation of technology. The BPR will
no doubt take some time in finalizing its utility in the current set-up of the
banking industry, but it will definitely in the longer run to otpimise its cost
and increase efficiency.
As to provide holistic service offerings to the discerning customer, and banks

would be the prime targets by customers if they have to provide service levels
to match their expectation.
ANALYSIS
Technology is obtaining lion share in this new era of the operations of
the Indian banking industry. It plays a key role to expand the business in the
significant way. The concept of technology is better knowned by the Private
banks and foreign banks. The deployment of technology is very less in Public
Sector Banks because it require huge capital source. Private banks and
foreign banks are already technology initiative. Whereas public sector banks
and old private banks are having less capital compare to private and foreign
banks. Technology also provides help to various services like ATMs, credit
cards, and debit cards. Technology also reduces the cost, manpower. In
implementing technology the security is also important, to manage the
security. Security is very important in relate to customers. Banks have to
manage this challenge for implementation of technology effectively and
efficiently. The one of the challenge before Indian banks is to give knowledge
to the banks employees. In old private banks and public sector banks have
the old generation working in their banks, who does not have any computer
background. This is challenging task for banks. The delivery of products and
services need extensive use of information technology necessitating high
magnitude of investment. However, with a view to enhance the quality of
customer service as also to enhance the quality of control one of the prime
thrust areas for the future would be completion of branch computerization and
networking of banks. This would also necessitate putting in place of
appropriate legal and security system.
Suggestions
1. For a good security policy, the role that the human beings have in a
secure computerized environment.
2. It would be advisable to build security at the application level in respect
of banking oriented products.
3. There are present a number of security standards available for different
financial applications; most of them are international standards should
be examined and adopted keeping in a view the re2quiremnet of the
banking industry.
4. There is an imperative need to imbibe a culture of security among all
operative functionaries-whether officers or other staff.
5. Security requirements have to be provided from a two-pronged
perspective- first for the internal requirements of the banks themselves
and second relating to the legal precincts of the laws of the land. It will
be a matter of satisfaction to note that the INFINET (Indian Financial
Network) is a safe, secure and efficient communications network for
the exclusive use of the banking sector.
6. Effective security policy supplemented by education and training in
these areas and reinforced by the actions and concerns of the top
management so that a culture of security can be created.
7. It would necessitate that banks operate in an environment, which will
facilitate ease of inter- operability. Just as inter- operable IT systems
and Straight through Processing (STP) will become order of the day,
inter-operable business domains will also prevail banks to overcome
this challenge to their stride.

services
The main function of Banking is to accept the deposits from customer
and lend it to the needy sectors. Banks bridge the gap created in between the
surplus sectors and deficit sectors. Banks mainly provide services to the
various sectors by providing them different kinds of Services. This is the
fundamental function of every bank. Bank is nothing but a Financial Institution,
which deals in various kinds of services by playing major role in the Economy.
After Liberalization, Privatization, Globalization i.e. (LPG) came into the

picture, and after new entries of Private Banks and Foreign Banks the
competition in the market increased manifolds.
The banks provide lot of services to attract customers to increase its

deposit base, and at the same time lend at customer friendly rates. To survive
and attain constant growth Indian Banks, will have to introduce customer
friendly services to attract the new customers and retain existing one. To
name a few, some banks have started to submit the Electricity bills,
Telephone bills, Rents etc. as an added service that occur periodically. Some
banks have also gone one step further to fill up the tax bills and file return
electronically. Still, Indian Banks are in an initial stage when compared to
Foreign Banks. Indian Banks have to make progress to compete with global
world effectively and efficiently. New banking environment has emerged
compelling banks to stay –
 LEAN,
 MEAN, and
 HUNGRY.
In this new environment of technology, providing of Value Added Services

has become an underlining differentiation in between the banks. It is just not
related to cement and concrete branches following mindless 10 a.m to 2 p.m.
Commercial Banks. Thus banks will have to redefine their position within the
financial industry. In this chapter we discuss, the various challenges in
services before Indian Banks.
6.2
6.2 Retention of customers: -
Retention of customers is going to be a major challenge before Indian
Banks. According to a research by Reichheld and Sasser in the Harved
Business Review, 5% increase in customer retention can increase profitability
by 35% in banking business, and 125% in consumer credit card market. Thus
banks need to emphasize retaining customers and increasing market share.
And for this, Indian Banks have to provide them various types of services as
per their suitability. Banks should build long-term relationship with the
customer by giving them extra attention & extra facility. Personal touch is an
essential element in building a long-standing relationship with customer,
which has mutual trusts as the basic foundation. Retaining the existing
customer is more cost effective than adding a new customer to our portfolio.
6.3 Testing the manpower: - (CRM) Concept
Banking in coming decade, promises to be very exciting to the Indian

customers, Challenging to the bank management and Test to manpower in
the banking industry. The major challenge before Indian banks is to apply
Customer Relationship Management (CRM) concept in banks. CRM is the
strategy used to attract new customers and preserve the existing customers.
CRM is the new buzzword in business circle.
Characteristics of Customer Relationship Management (CRM) could be –
 To Establishment,
 To Development,
 To Maintenance and
 To Optimise
The long-term mutually valuable relationship between customers and

organization.
The survey has been made to know, how far Indian Banks familiar with CRM
concept. The aim was to identify the scope of CRM in the Indian Business
Scenario.
Some Banks were selected from different category of Banks classification
for survey. The survey was made through questionnaires
Struc
ture of the
Questionnaires
Section Issue Covered
1 Organizational Information
2 CRM strategy
3 Strategic Changes
4 CRM implement priorities
5 Performance
‘The Banks selected for Survey’
Foreign Banks Private Banks Public Banks
i) Standard Chartered i) ICICI Bank i) State Bank of India

Bank
ii) HDFC Bank ii) Central Bank
ii) American Express
iii) Centurion Bank iii) Punjab National
iii) City Bank Bank
iv) IDBI Bank
iv) ABN Amro Bank v) Bank of Baroda
vi) Syndicate Bank
v) Bank of America vi) Allahabad Bank
vi) Deutsche Bank viii) Canara Bank
The results from the survey are as produced below: -
Method of keeping Customer Information’
Degree of Interest
Based on above Data, we may notice that the Indian banks are still in
the initial phase of CRM implementation while some foreign and private sector
banks already taken huge strides in implementing the technology. Public
Sector Bank still has a long way to go in adopting the new technology and
effectively implementing it to provide world-class service to the customer.
The strategy point for developing CRM must be determined from
the strategic review of the organizations current position.
In India, the Public Sector Bank are not yet fully computerized.
Therefore 50% of the jobs are still done manually and the other 50% is
computerized. This yawning gap between the public sector banks & private/
foreign banks is due to the way in which these banks have utilised the more
innovative & technology into use to attract new customers / investors. The
utilization of modern techniques has provided the manpower in these banks to
concentrate on expansion / attractive techniques rather than doing the routine
internal jobs. Indian Banks will have to take suitable steps and make progress
to sustain the competition as early as possible.
The computerization in Foreign and private Banks, have significantly
reduced the cost in their business. Whereas Public Sector Banks have failed
to reduce their cost. The benefits arising from the computerization on one
hand is to attract the customers while on the other hand is to reduce the cost
of the business. Public Sector Banks have to enhance the percentage of
using computerized techniques in their day-to-day business activities. CRM
strategy increases the quality of the banks. CRM reduce the cost and conduct
functions efficiently.
6.4 Know Your Customer (KYC): -
Know Your Customer (KYC) is a new concept introduced in the business

recently. However, competition for clients may also lead to KYC procedures
being waived in the bid for new business. This is the challenge before Indian
Banks to adopt this technique to attract the customer. The Reserve Bank has
issued details guidelines on application of KYC norms in November 2004.
KYC also aims at knowing your investor fully. The simple message that
flows from KYC information is that – if you are knowing your investor /
customer thoroughly & the activities he is performing or desires to perform in
future, then as a banker, you will be able to satisfy his needs more effectively.
Knowing the customer helps in satisfying his requirements more aptly, thus
helping the customer would also in turn help the bank by selling their
products.
6.5 Impact of I.T on banking services: -
Information technology poses both opportunities and challenges. Even

with ATM machines and Internet Banking, many consumers still prefer the
personal touch of their neighborhood branch bank. Technology has made it
possible to deliver services throughout the branch bank network, providing
instant updates to checking accounts and rapid movement of money for stock
transfers. However, this dependency on the network has brought IT
department’s additional responsibilities and challenges in managing,
maintaining and optimizing the performance of retail banking networks.
Illustratively, ensuring that all bank products and services are available, at all
times, and across the entire organization is essential for today’s retails banks
to generate revenues and remain competitive.
6.6 Network management challenges: -
Whereby keeping these complex distributed networks and applications

operating properly in support of business objectives become essential.
Specific challenges include ensuring that account transaction applications run
efficiently between the branch offices and data centers.
6.7 Credit Card/ Debit card users: -
In India only 14% people use credit card as compared to the population. In a
country 49 million debit cards and 20 million credit cards in circulation: India
has around five different acquiring networks for around 18,000 ATMs
available. The total number of transactions that occur on these ATMs per day
is around 190, 00,000. Banks have to enhance the vast volume of cards. The
bilateral of sharing arrangement is towards processing these transactions of
around 200,000 that occur on various consortiums of ATM networks. There
are two types of networks present in the country. Banks should enhance in
the number of credit card users in coming year by providing different services
with credit card. Many debit cards have also entered into market providing
additional services like – Petro cards by HDFC Bank / ICICI Bank etc.
ANALYSIS
Banks is mainly based upon services. Banks provided services to their

customers. It is the function of the banks. Service is the pulse of the banks.
Because of the Liberalization, Privatization, and Globalization, the new entries
come in to the banking sector. And because of these new entrants, the
existing banks face lot of competition in the global level. The impact of LPG
brings tough competition in the India’s banking sector. The new private banks
and foreign banks come out with various services. They provide services like
Merchant Banking, Investment & Counseling, Insurance, Depository services,
debit cards, credit cards etc. In compare to private banks and foreign banks
fails to provide these services to their customers because of the scarce of
funds.
Private Banks and foreign banks apply the new techniques in

their services like Customer Relationship Management (CRM), know Your
Customer (KYC). To face the global competition public sector banks and old
private sector banks have to compete with them effectively and efficiently.
These banks still apply the traditional approach towards services. Public
sector banks and foreign banks are not customer oriented, they are mostly
profit oriented. Indian banks have to change their mind set to meet the
competition in the global level. Indian Banks have a lot or challenge in
services. Indian banks have to apply different techniques of providing various
services to the customers.
Suggestions:-
1. Indian banks should improve their internal management, which provide

important services to their customers.
2. Banks should train the staff, to enhance the efficiency.
3. Banks can overcome this challenge by providing refinance to the
retailer who would be in requirement of funds for improving his
business turnover portfolio.
4. Banks should enhance the capabilities of providing effective services
by arranging seminars, workshops.
5. Indian Banks have to left their traditional approach towards services.
They have to adopt new techniques like Know Your Customer,
Customer Relationship Management. Which enhance their reputation
and make extra profit.
6. To remain in global competitive era Indian banks have to take efforts
towards building long customer relationship.
7. Banks have to make constantly research in applying of new
technologies.
8. Banks have to take expert advice of the expert persons while
introducing of the new service.
9. Banks should provide extra attention to their customers.
10. They also have to provide extra leverage.
11. Banks should give attentions to the quires of customers. Most of the
banks just neglect them.
12. Banks should make whom to tom relationship with their customer,
which gives the bank long-term profit.
7 Challenges before Indian banking system in
Human resource management
HRM in Indian Banking Industry
7.1 Current challenges
The qualitative changes in staff composition, skills required, absorption of

functionally skilled personnel, retaining staff in the face of competition, and in
dealing with a host of problems arising out of massive and sudden expansion
in the years 1971 to 1977 have not been given the attention they deserve.
There is a move afoot to entrust some of the banks with the entire
responsibility for personnel functions, such as wage negotiations and
recruitment. As of now, these tasks are undertaken either by the Indian
Banks’ Association or the recruitment boards set up for the purpose. Sudden
transfer of these functions may find these banks woefully ill-equipped to
handle them. It is, therefore, necessary to begin with listing out the problems
involved before looking for solutions
The last few years witnessed an exodus of qualified and experienced staff.
The environment of vigilance inquiries and the problems on account of
frequent transfers might have led these qualified and experienced staff to
decide to opt out with the introduction of pension schemes. The introduction of
Golden Handshake voluntary retirement scheme in the year 2000 has made
the public sector banks virtually bleed a very sizeable portion of their
performing personnel. Even after the introduction of golden handshake
voluntary retirement scheme the problem of overstaffing has not been totally
solved. The overstaffed cadres still remain with the banks and the areas
where there is further requirement have been further depleted in strength due
to this scheme.
The introduction of new technology and absorption of its various dimensions

as part of a new work culture has brought in its wake new problems. The need
for a total change in the mindset to deal with the transition from a cocoon
existence to one of considerable freedom has to be fully appreciated.
Training institutions are trying desperately to make things happen. But they
themselves lack the much needed support and clarity in approach. Some may
condemn these prime bodies as a resort for non-performers and for those
who want to escape from rough and tough routines of an active bank branch
life with constant interaction with the customers. Naturally the deeply
committed and devoted may be overlooked in selection to these training
institutions. The result: poor performance by these trend setting and concept
building institutions. The list can be expanded but that will make the picture
much bleaker. The task before the personnel departments is to reorient
themselves quickly and to get on with work immediately
7.2 Changing role
The personnel departments, which are firefighters in some banks, are

charged with duties of putting out industrial relations fires and to ensure that
industrial relations problems do not otherwise compromise the position of
management. Personnel departments - a major resource supplier – may be
thus operating at the fringe of corporate activities. Part of the present
problems crippling our personnel departments can be traced to the personnel
departments themselves. They lack essential skills in developing manpower
plans, building up appraisal systems, etc. Nor is staff, competent enough to
handle such tasks, readily available. An innate belief that availability of
manpower in a country with growing unemployment should not pose any
problems is the basis for the neglect.
The emphasis has to shift from industrial relations to manpower planning and
development. The personnel departments must be involved in various
activities, be looked on as an integral part of management and be equally
responsible for business results. In these charged competitive days Personnel
departments must be actively involved in the process and preparation of
business plans and strategies. They must be thoroughly committed to the
fulfillment of such plans. Compared to business planning, manpower planning
takes much longer to become operational. Therefore departments should
rightly be working on plans for two years ahead. In any case, for some of the
banks the prime necessity is to retain their separate existence and survive in
the face of emerging challenges. A live recent example in comparison is the
position of Global Trust Bank.
7.3 Changing practice
The next priority would be to deal with some of the archaic arrangements.
Many of them stem from a basic distrust and mutual suspicion. There are a
number of rules governing transfers. The hardships involved on account of
two income families becoming the norm, and diverse educational standards
and systems are innumerable. Banks really should ask the question as to the
purpose for such transfer. It is a naïve belief that a person becomes prone to
corrupt practices after a lapse of time.
Bank officers and staff oppose such changes when they appear to be
divorced from any of the above aspects. Further, the moment transfers /
placements / vigilance cases are used to punish, chastise, or discipline
officials they lead to a total functional disruption and amount to an
organization punishing itself. The costs incurred on account of transfers of
officers are also significant and the bank managements may have to reckon
them correctly and properly. Perhaps the banks can begin to analyze what
they expect to achieve by undertaking such transfers.
7.4 Changing mindset
The personnel functionaries need to break out of the present mentality and
acknowledge that dogmatic adherence to the rules and their implementation is
the key to their success. The banks can ill afford adherence to irrelevant rules.
Personnel departments need to introduce technology in their working.
Computers have far better uses than mere salary sheet preparation.
Emphasis has to shift from fire dousing to developing executives for
tomorrow. There could be no doubt on suitable alternatives. A number of
banks have started with the help of consultants, the process of reorganization
and restructuring. One thing, however, stands out. World wide experience has
shown that organizations are in a flux. Considerable changes through process
re-engineering, etc., are going on with the avowed intention of meeting the
new challenges. Organizations are becoming flatter and leaner. It does not
follow and mean that we should also go the same way. But the status quo
cannot be continued
In the changed content and context, bank managements may have to adopt
an objective, transparent policy even in routine personnel functions such as
transfers and placements. Increasingly, organizations have started to focus on
and strive to retain staff. An essential pre-requisite for the successful
implementation of these policies is the belief amongst the staff that there is
objectivity and fair play. Managements may sometimes be unwilling to give up
what they treat as their prerogative or patronage.
Conclusion
According to Dr. Bimal Jalan, former Reserve Bank of India Governor "capital
and technology are replicable but not human capital which needs to be
viewed as a valuable resource for the achievement of competitive advantage."
Jack Welch, former CEO of General Electric, has commented "outside of the
CEO, HR is the most critical function in any company. Development of leaders
is the ultimate responsibility of every CEO and thus is an integral part of HR. I
saw my job as allocating people and dollars to opportunities. I wasn't
designing products. I was putting people where I thought they were right for
the job. I did that with my partners in HR." According to Wharton Management
Professor Nancy Rothbard "If top management doesn't see value in
having HR as a strategic partner -- and if HR can't think out of the box in
that role -- then the partnership is probably not going to happen."
Analysis
Human Resources is the main power of any bank. Banks functioning

due to manpower. Manpower is one kind of weapon, used by the bank.
Sometimes bank functioning well but because of deficient manpower banks
cannot function effectively. Banks also faces challenges in Human Resources.
One of the reasons behind failure of Indian banks is inefficient

manpower, which affect significantly banks image. in past also Indian banks
faced challenges in Human Resources, but after reforms introduced banks
realize that to improve manpower efficiency.
Private sector banks and foreign banks came out with efficient
manpower in their initial stage, but old private banks and public sector banks
faces lot of challenges in Human Resources. These banks have old
generation employees who are experienced personnel even though they are
not knowledge based personnel.
` Most of the employees are not having computer-based

knowledge, and in their era all work on computer basically. For this efficient
personnel are necessary to implement technology effectively.
After reform, many of the banks introduce VRS scheme. This
scheme also arises many challenges before Indian banking.
To faces cut throat competition effectively banks increase the

talent in the manpower.
Suggestions:-
1. Bank should conduct various seminars, workshop to improve

employee’s ability to tackle the problem effectively.
2. Banks should train their employees for effectively work
3. Banks should create a centralized personnel database covering age

profile,traing profile, job profile of all categories or the employee and
determine the skill and training gap
4. A scientific job and analysis should be undertaken to redefine various

posts in all cadres in order to achieve improvement in efficiency and
utilization of manpower.
5. Strategic manpower may be done as an integral part of re-organization

planning.
6. Bank should immediately start re-organization with the concerned

unions whenever required for effective redeployment of the workmen.
7. The bank should immediately formulate proactive and transparent

policy by discussing with reorganize unions, where necessary in order
to have smooth mobility of staff to meet the organizational needs,
optimize the utilization of HR to achieve cost effectivement and
minimize hardship of employees.
8. The banks should immediately formulate and proactive HRD policy and
plan on the basis of conducting a study about the present and future
skill needed and the availability of present skills.
8 Corporate Social Responsibilities In Indian
Banking: An Indian Perspective
Corporate social responsibility
CSR is a concept whereby financial institutions not only consider their

profitability and growth, but also the interests of society and the environment
by taking responsibility for the impact of their activities ion stakeholders,
employees, shareholders, customers, suppliers and civil society represented
by the NGOs. The economic globalization resulted in a demand for
corporations to play central role efforts to eliminate poverty, achieve equitable
and accountable systems of governance and ensure environmental security.
There was a need to make business a part of the society and to maximize the
positive benefits that the business endeavor can bring to the human and
environmental well being and to minimize the harmful effects of the
irresponsible behavior. The scheme which was developed for this concern
was known as “corporate social responsibility”.
Introduction:-
CSR is also known as corporate responsibility, corporate citizenship,
responsibility business, sustainable responsible business (SRB) or corporate
social performance is a form of corporate self regulation integrated into a
business model.
CSR policy basically works as a standard of built in, self regulating

mechanism and ensures their harmony with law, ethical standards and
international norms. The three keys to an effective CSR policy are
commitment, clarity and congruence with corporate values. Clarity is all
important because social responsibility is a broad term, and it needs to be
debated and hammered out to meet each circumstance. Congruence is about
ensuring that the company’s attitude towards its responsibilities towards the
society is consistent with the way in which it runs the whole business, i.e. its
values and culture.
An important concept of CSR is sustainable development. It is broadly

defined as the advancement of economic development while maintaining the
quality of environmental and social systems. Incorporating environmental
resources provide a basis for social and economic development. The
principles of sustainable development are important in all industrial; and
commercial sectors, as all activities have the potential to influence social and
environmental welfare quality. The financial sector is of particular importance,
as the sector is able to affect many projects and the development trends that
result from them.
There is much that the financial sector can do to assist efforts to

achieve sustainability; internal efforts to make day-to-day operations cleaner,
more efficient and supportive of social structures can help. Integrating various
issues into strategic operations is also important. In this way financial
institutions not only ensure that the internal activity is sustainable, but they
can also help financing itself to have more sustainable development.
RBI Guidelines on CSR:-
To highlight the role of banks in CSR, the RBI circulated a notice on
December 20, 2007 for all the scheduled commercial banks with the title
“corporate social responsibility, sustainable development and non financial
reporting – Role of Banks”.
Major issues discussed in the notice were regarding:-
1) Corporate Social Responsibility
2) Sustainable Development
3) Non Financial Reporting
Briefing about the corporate social responsibility program to other

member commercial banks RBI followed Many international initiatives to
highlight the importance of this notice like…………
1. United nations Environment Program Finance initiative (UNEP FI)

2. Global Reparting initiative (GRI)
3. International Finance Corporation
4. The equator Principles
5. Declaration on Financial Institution
Apart from these international initiatives, RBI report also talked about other
important & urgent issues regarding:
1. Global warming & extent of problem,

2. Stern Review – the economics of climate change
3. The happy planet index
4. The Kyoto protocol
The concern of RBI is also inclined to other activities like:
• Ft sustainable Banking Awards:

The FT sustainable Banking Awards to acknowledge the progress that banks
have made in integrating social, environmental and corporate governance
objectives into their operations while maximizing shareholder value. The goal
is to highlight initiatives that work & to reward progress on the journey towards
sustainability.
• The world in 2050- A report by pricewaterhouse coopers- March,2006.

A Report by Jhon Hawksworth (Head Of Macro Economics at
pricewaterhousrcoopers” UK Firm) ‘the world in 2050
Implications global growth for carbon missions and climate change policy
states that the rapid economic growth of emerging countries such as China &
India – together with continued and more moderate growth in advanced
economies – could have serious long term consequences for global energy
consumptions and carbon emissions.
Environmental Degradation:
Edward Luce, the author of the book titled ‘ in spite of the Gods’ which deals
with the rise of Modern India, has referred to ‘ wholesale environmental
degradation’ as the second large challenge facing India. According to him
whole India accounts for 4% of the global carbon – dioxide emissions, its
share of the responsibility for global warming will escalate rapidly as the
economy is improving (without being factored in the sake of both its
environment and its economy.
Carbon Trade:
The concept of carbon credit come into vogue as a part of an international

agreement popularly known as of an Kyoto Protocol (KP). The KP aims to
tackle global warming by setting target levels for nations to reduce green
house gas emissions worldwide. The scheme allows developed nation
polluters to fund emissions acts in developing countries which is cheaper than
cutting emissions at home.
There are three flexibility mechanisms under the KP, as-
1. Joint implementation (JI):- A developed country with relatively high

costs of domestic greenhouse reduction would set up a project in
another developed country.
2. Clean Development Mechanism (CDM):-A developed country can
sponsor a greenhouse gas reduction project in a developing country.
The CDM is designed to meet objectives to address the sustainable
development needs of the host country.
3. International Emission Trading/Carbon Trading (IET):-Countries

can trade in the international carbon credit market to cover their
shortfall in allowances. Countries with surplus credits can sell
commitments under the Kyoto Protocol.
Indian Scenario:-
India acceded to the KP in August, 2002. India is in a position to reap

maximum benefits from the global carbon trade. India, being a developing
country, is exempted from the requirements of adherence to the Kyoto
Protocol. However, it can sell the carbon credit to the developed countries.
RBI Focus on CSR:-
RBI assistance to Mahindra & Mahindra Financial Service Ltd. for the
year 2008 the company has complied with all the applicable regulations of the
Reserve Bank Of India. RBI then assisted it by providing additional
provisioning for NPAs at a faster rate than that prescribed by RBI for NBFCs.
In the earlier years also the company continued to involve itself in social
welfare initiatives by contributing to recognised charitable institutions, which
specifically benefit the economically disadvantaged & socially weaker sections
of the society.
During the year 2008, the company contributed Rs.82.2 lacs towards
Corporate Social Responsibility to various institutions for charitable purposes.
Use Multiple Channels To Expand Outreach:-
Banks do not exist in a vacuum. They make a large contribution to the

country’s GDP growth, meet the demand of the growing middle class,
contribute to infrastructure spending, & reach out to the semi-urban & rural
areas so; when it comes to social responsibility banks need to move beyond a
straitjacketed understanding of the corporate social responsibility. The
mindset RBI follow is that a deposit account is the gateway to financial
inclusion & its approach is to connect people & use multiple channels to
expand outreach.
Launch of comic book “Raju & Money Tree”:-
Disha financial counseling, a trust under the aegis of ICICI Bank & the
Reserve Bank of India (RBI). On Wednesday jointly unveiled the first comic
book on basis of banking, as part of RBI’s strategy to promote financial
literacy in the country. The comic aims to educate the school children on
importance of saving the future.
Responsible corporate citizens: - The RBI view
Taking in consideration wide concerns on climate change & global

warming Reserve Bank of India (RBI) asked banks to go green by taking
effective steps to further the cause on sustainable development. The banks
are advised to implement suitable & appropriate plan of action towards
helping the cause of sustainable development. RBI also asked banks to place
the information about their efforts toward corporate social responsibility (CSR)
& sustainable development in the public domain along with their annual
accounts.
The Equator Principles:-
In December 2007, The Reserve Bank advised banks to put in place a

suitable & appropriate plan of action to raise the level of awareness & focus
the attention of banks in India on issue of ‘Corporate Social Responsibility’,
with the approval of their goals.
RBI helps ICICI Bank gets back to school:-
ICICI Bank wanted to teach Banking to school children and its main muse for
this cause was the Reserve Bank of India which has been exhorting banks to
educate the public about the basics of banking. When ICIC asked for help RBI
was more than willing to the role of publisher & teacher for the cause.
Debt management & counseling:-
RBI also assists to the lay man in debt management & counseling. RBI allows
people to walk in to the Disha (The NGO Front of RBI) offices where they are
provided counsel on managing their debts. If someone has Rs. 20 Lakh loan
and he is overwhelmed, we try to help him by talking to his bank &
rescheduling his installments.
Human Resource Development and Organizational matters:-
The goal is to enhance the efficiency of the organization by nurturing a

motivated staff in an organizational culture that facilitates congruence
between personal goals with those of the institutions.
Discharging Social Role:-
The integration of social and environmental concerns by companies in their

business operations and interactions with stakeholders.
Subsidiaries:-
Fully owned, subsidiaries are National Housing Bank (NHB), Deposit

Insurance and Credit Guarantee Corporation of India (DICGC), Bhartiya
Reserve Bank Note Mudran Private Ltd. (BRBNMPL) and also have majority
stake in National Bank of Agriculture & Rural Development (NABARD) all
these units following RBI guidelines on CSR and getting assistance as well.
Implementation of CSR by Indian Financial Institutions:-
In the Indian context, very little systematic documentation of CSR initiatives is

available so far. According to study done by Business community Foundation
for TERI (The Energy and Resources Institute).Some of the findings of the
study are as follows –
(1) Serious and committed approach to CSR is increasing its reach, but
there is vast ground yet to be covered.
(2) Collaboration work between companies & NGOs is increasing
(3) Corporate are realizing that “Good for business is good business”.
(4) Most interventions so far philanthropic in nature, rather than strategic.
Constraints of CSR:-
Shareholders put their risk capital in a joint stock company (or

business) and therefore, companies should be managed in the interest
of the owners or the shareholders. This primacy of treatment given to
the shareholders is being justified on the ground of ownership and
share holding. It is felt that maximization of profits or the bottom line
should be the ultimate objective of the management. Developing
corporation argue that practicing and following CSR is matter of
concern for companies having big business with lot of resources at
their disposal it is argued that CSR is the responsibility of the
politicians. It’s not business role to get involved. Business has
traditionally been beyond morality and public policy. Sometimes CSR is
also attached with the ulterior motive of the company.
Recommendations on CSR implementation:-
Some guidelines as plan of action are proposed by the Reserve Bank

of India in this act. The financial institutions have to see the
environmental and social sustainability of the projects of the company,
coming for financing. Social Responsibility of the companies and firms
should be acknowledged. In the financial sector too there is a visible
trend to promote environmentally and socially responsible lending and
investment in emerging markets. Therefore, financial institutions that
implements strategies incorporating environmental and social issues in
lending and investment should be able to better assess, mitigate,
document and monitor risks associated with financing and investment.
Bank should make sure that the companies for which they are
financing or investing incur the risks that the impacts due to their anti-
environmental and special issues include:
• Pollution cleanup costs
• Fines
• Increased waste handling costs
• Costs from damaged assets with reduced value
• Legal claims
• Regulatory delays
• Reduced public regard, and reduced sales
As an important player in the Indian economy, the Banks realize

that its role should extend beyond the commercial sector to include the
social sector as well. The group can achieve its mission by supporting
initiatives that are –
(1) Cost effective;
(2) Measurable;
(3) Capable of large-scale replication and
(4) Have the potential for both near and long-term impact.
Conclusion
Banks are beginning to recognize that they have a social responsibility to

fulfill as they emerge from the shadow of traditional banking. As per relatively
indirect nature of their environmental and social impacts, banks need to
examine the effect of their lending and investment decisions. Incorporating
environmental and social criteria into business decision-making can reduce
the impacts of operating activities.
Financial institutions can do a lot to assist efforts for corporate social
responsibility and achieve sustainability. Financial institutions not only ensure
that internal activity is sustainable, but they can also help financing itself
become more sustainable.
Sustainable finance should be promoted.SRI (sustainable and responsible

investment /socially responsible investment) is an investment strategy that
identifies investment targets that carry net E&S benefits, or no net E&S
detriment, as well as provide financial growth. Sound financing of sustainable
economy can be promoted by the banks itself. A lot more can be done by
bank so as to practice the corporate social responsibility.
The follow up of the equator Principles and other CSR supporting measures
shall be strictly dealt and implemented. Until and unless environmental
authorities are serious ans stricter about this, the financial institution will face
a lot of problems.
There would be general social and economic benefits that would accrue to
society, if business recognized broader social goals in its decisions.
• Findings from the Questionnaire

State Bank Of India
State Bank of India's new chairman G. G. Vaidya will be taking the
bank into the new millennium. One of his main concerns is the quality of the
bank's assets. The NPAs are a little over 6%. He elaborated on the bank's
focus on the retail sector, new forays into the gold deposit scheme (through
which he expects to mobilize 100 tons of gold in the first year itself) and
insurance, and the challenges facing SBI.
SBI is pioneers in IT. They started deploying technology sometime in
the mid 60s. That was the time when they first had the punch card system of
computers. In the mid 80s, they started an experimentation of sorts where
they selected about five solutions to be deployed in branches as a full branch
computerization. That is what it used to be called in those days. There was
nothing known as core banking at that point of time. These solutions they
implemented in some 8-10 branches as a back office system, where their
branch was functioning as a regular branch, but day-end vouchers used to be
posted in that system. In 1991 they entered into a contract with Kindle, an
Irish company. There was a global tendering process before the Bank master
application was selected. They went for an application that could be deployed
not only in SBI and all its group branches across the country, but also in their
offices abroad. they gradually started implementing Bank master in a few
selected branches during the initial years. During the mid-90s they started
deploying this application in around 600 branches in India. By 2003, all
branches had been computerized using Bank master application.
The challenge faced by SBI during the transition from the manual
system to computerized one is that people were not comfortable with the
keyboards. Secondly, computerization also resulted in some process
changes, and change management. This was the biggest challenge.
Structure:-Their IT infrastructure is spread over the country. They have their
main servers in Belapur, and an equivalent set up at their DR site in Chennai.
For connectivity, routers are placed at various places in the country. their
assets are spread over the country, but their major assets are in this office
because the main servers is in Belapur. Today they are running a network
which is probably bigger than some network service providers. they already
have nearly 11,000 offices which are connected there. They also have IP
telephony which operates on their internal network and not any telecom
service provider's network. Every branch which is on core banking necessarily
has this too.
Presently, there are 4,750 branches which have migrated from Bank
master to the core banking solution. In February and March, when their
annual closing exercise begins, they generally stop migration and
recommence it from April 15 onwards. Next year there is hope that they will
complete core banking in all their banks. they have around 9,500 branches in
SBI. They also have seven subsidiary banks. All those banks, around 4,700
branches, have been put on core banking. they don't open any branches now
without the core banking facility. Now they are in the process of converting all
those branches computerized on the Bank master system to core banking.
They expect that in due course of time they will have a customer base of 150
million.
Technology:-When it comes to the technology, SBI is having 6,000 ATMs
spread across more than 1,600 centers across the country. There is no any
district which is not covered by SBIs ATMs. Today SBI have the largest ATM
network in the country, and they are in the process of installing 2,000 more
ATMs. Further the SBI bank took the measures to overcome connectivity
problems to roll out core banking. The kind of infrastructure that is required for
connectivity is not uniform throughout the country. They still have branches in
remote locations of this country where infrastructure is very poor. They are
forced to adopt the wireless route as no other mode of connectivity is
available. Presently they are using landlines, leased lines. There are also the
difficulties associated with badly regulated power supply.
A lot of their overseas branches are controlled from their data center.
They put the sensitivity of the transactions in their foreign offices at a slightly
higher level, During the Mumbai deluge on 26th July, 2005, every SBI branch
abroad functioned without any hitch. All ATMs, barring those which were
flooded, were working smoothly. In some cases water had entered some ATM
machines rendering them non-functional. On that day around 600-700 ATMs
country-wide were down, the rest were fully functional. Contrary to perception,
there was no large-scale breakdown of their ATM network; only in some
pockets ATMs were affected. But they kept providing the basic services from
their DR site in Chennai. they have now got ISO certification-which is
considered the highest certification for data center activities-for both their data
center and their DR center. This proves that SBIs system is robust enough to
handle any exigencies.
Security:-Further there is the information about security measures taken by
SBI for their network system. SBI was the first bank in this country to come
out with a documented information security policy. They have a full-fledged
department with a chief information security officer (CISO) designated to look
at all security matters. Not only networking, all aspects of security in
information technology-even outsourcing-are covered in this security policy.
they ensure that we don't deviate from it. As far as networking is concerned,
they have gone to the extent of even defining what kind of
compression/encryption should be done. They have got an antivirus, firewall
and IDS in place. Their network is impregnable. However, they are still looking
at various solutions to further improve security.
Challenges:-
• SBI is planning to set up 6,000 rural kiosks all over the country.
This is one of the challenge before SBI to install and manage
these kiosks:-
Their main challenge, whether in rural or urban areas, is basically

infrastructure. But they are exploring every possible avenue available,
including wireless technology. SBI is a very strong votary of wireless
technology because they cannot afford to have an exchange going down.
In a lot of rural areas the exchanges don't have the required level of
automation. they cannot get a dedicated line; ISDN facilities are also not
available. With wireless they are in a position to overcome a lot of
limitations. Moreover, it is much cheaper than VSAT. The only
apprehension that they have is the level of infrastructure available. Some
areas may have very bad infrastructure with no service providers
available. In such areas they will have a serious problem. The second
challenge will be finding people for its maintenance. We have a separate
banking unit (SBU) which is being set up for this purpose.
• SBI's role in the new millennium and their major challenges:-
SBI aims to enter the millennium as a world-class bank with enhanced

market share, sound profitability and financials, and customers who are
not only satisfied but delighted with their services. All parameters will be in
line with international standards.
 There are three main challenges:-

First, Improvement in customer service: - For this purpose they are
setting up the personal branches. All deficiencies in service will be taken
care of. They have exhorted their staff at every level to improve service
and there are continuous training programmes for staff. they are already
seeing definite improvement.
Second, the ROA for Mar.'98 was 1.09. Excluding the write-back of
depreciation which was a one-time gain, ROA stood at 0.67. This has to
be taken to 1.25 by 2001.
Third, SBI need to improve the quality of their assets and bring down
NPAs to 5%. They are confident of enhancing their position as the
country's premier commercial bank in the new millennium.
• Questionnaire
Q.1; Can you briefly talk about the evolution of the IT infrastructure at SBI?
Q.2; What were the challenges you faced during the transition from the manual
system to the computerized one?
Q.3; What is the current status of core banking?
Q.4; How many ATMs do you have and what is their spread across the country?
Q.5; How do you manage to overcome connectivity problems to roll out core
banking?
Q.6; How prepared is your ATM switch infrastructure to handle natural or

man-made disasters, and what about your data backup and DR plans?
Q.7; What are the security measures that you have taken and how secure is your
SBI network?
Q.8; How do you perceive SBI's role in the new millennium? What are your
major challenges?
Q.9; As the health of the banking sector is vital to the economy, are mergers a
solution to strengthen weak banks?
Yes: OR No:
Q.10; Now that the Reserve Bank of India has cut the bank rate, CRR and repo
rates by 1% after the budget, do you see demand for credit rising?
Yes: OR No:
References:-
• Indian banking system-ICFAI
• (Magazine) Banking Finance.
• Professional Banker-ICFAI(sep.2009) - www.iupindia.org

• Challenges before Indian Banking - Narendra Jadhav
• http://www.banknetindia.com/banking/boverview.html
• http://www.rbi.org.in/scripts/NotificationUser.aspx?
Mode=0&ID=3987
• http://en.wikipedia.org/wiki/Corporate_social_responsiblity
• http://en.wikipedia.org/wiki/Reserve_Bank_of_India
• http://www.theasianbanker.com/ind/award.nsf/leadershipAwa
rds_Winners2008?OpenForm
• http://www.moneycontrol.com/india/news/pressnews/disha-
financial-counselling-rbi-launches-comic-book/307414/1
• http://timesofindia.indiatimes.com/Business/India_Business/
Disha_and_RBI_launch_comic_book_Raju_and_the_Money
_Tree/articleshow/2447522.cms
• http://www.iba.com
• http://www.iib.com
• http://www.sify.com
• http://www.srribd.com
• http://www.financialexpress.com
• http://www.bimaljalan.com/speech140102.html

Shahajan Begam (Repaired) BR

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INDEX

1. Indian Banking System

2. Banking sector reforms

3. Indian Banking and Finance: Managing New Challenges

4. Challenges Before Indian banking system in structure

5. Challenges Before Indian banking system in technology

6. Challenges Before Indian banking system in services

Challenges before Indian banking system in Human

1 |Challenges Before Indian Banking System

I am extremely thankful to University of Mumbai; who gave us the

2 |Challenges Before Indian Banking System

The challenges were come in front of Indian banks after

3 |Challenges Before Indian Banking System

• Purpose of the Project:-

Challenges involve wide scope, but I mainly focused on main crux of

4 |Challenges Before Indian Banking System

1.1 Indian Banking - Introduction

The Indian banking can be broadly categorized into nationalized

The Indian banking has finally worked up to the competitive dynamics

5 |Challenges Before Indian Banking System

The Reserve Bank of India acts as a centralized body monitoring any

Unlike commercial banks these co-operative banks do not lend on the

6 |Challenges Before Indian Banking System

Without a sound and effective banking system in India it cannot have a

• Early phase from 1786 to 1969 of Indian Banks

To make this write-up more explanatory, I prefix the scenario as Phase I,

7 |Challenges Before Indian Banking System

8 |Challenges Before Indian Banking System

• 1949: Enactment of Banking Regulation Act.

After the nationalization of banks, the branches of the public sector

9 |Challenges Before Indian Banking System

Currently, India has 88 scheduled commercial banks (SCBs) - 27

Top Banks in India

Abn Amro Bank HDFC Bank

Banking industries underwent dramatic changes in style, functioning,

2.2 OVER VIEW OF BANKING SECTOR REFORMS

The committee reviewed the entire gamut of Banking Systems and

The committee identified the following weaknesses in the banking

a) Although the bank nationalization has achieved a geographical spread

b) The banking system had to undertake directed credit under

c) The banking system is also subjected to direct investment in respect of

d) On account of poor income generation banks were unable to take care

Some of the important recommendations are under:

a) It is necessary that the financial system should operate on the basis of

e) Administered interest rate is very complex. Interest rates should be

f) All the banks 8% as a ratio in relation to risk weighted assets should

i) No income should be recognized on a non performing asset. Further

j) The balance sheet of banks should be made more transparent by full

l) An Asset Reconstruction Fund (ARF) may be established to take over

m) The entire Commercial Banking System may be restructured to

o) There should be no bar on the opening of new bank in the private

q) Millions of borrowers in the agriculture and SSI sector have been

2.4 NARASIMHAM COMMITTEE RECOMMENDATIONS -PHASE-2

Mergers and closures of Banks:

2. Allow closure of chronically weak banks.

3. Introduce narrow banking concept, where weak banks specialize in

Three-Tier banking structure:

1. Create 2 or 3 internationally oriented Banks.

2. 8 to 10 National Banks to cater to domestic credit needs of the Indian

3. Small Local banks need to confine to state or cluster of districts.

Role of RBI and Government of India:

1. Regulatory functions of RBI need to be separated from supervisory