A

RESEARCH REPORT

ON

“IMPACT OF FINANCIAL SECTOR REFORMS ON

PUBLIC SECTOR BANKS IN INDIA”
(Pre & Post Reform Analysis)

SUBMITTED TO:
KURUKSHETRA UNIVERSITY, KURUKSHETRA
IN THE PARTIAL FULFILLMENT FOR THE DEGREE OF
Masters in Business Administration
(Session 2006 – 2008) – M.B.A. 4th Semester

Under supervision of: Submitted by:

Ms. Reena Aggarwal Naveen Kalra

Faculty S/o Sh. R.S.Kalra
Univ. Regn.No.03-cjh-970
Univ. Roll. No.:__________
Institute Roll No. 1155/06

Tilak Raj Chadha Institute of Management & Technology (TIMT)

(Affiliated to Kurukshetra University, Kurukshetra & Approved by AICTE)
M.L.N. College Educational Complex, Yamuna Nagar-135001 (Haryana)
Ph. 01732 – 220103, 234110. Fax: +91-1732 – 220103
E-mail: info@timt.ac.in; Website: www.timt.ac.in
INTRODUCTION
OBJECTIVES
OF
THE STUDY
LITERATUR
E REVIEW
 RESEARCH
METHODOLOG
Y
LIMITATIONS
OF THE
STUDY

FINDINGS
BIBLIOGRAPHY
ANNEXURES
 //DECLARATION//

I hereby certify that the work which is presented in this project report entitled
“IMPACT OF FINANCIAL SECTOR REFORMS ON PUBLIC SECTOR
BANKS IN INDIA”(Pre & Post Reform Analysis) in partial fulfillment of the
requirement for the award of the degree of Masters in Business
Administration (MBA), Kurukshetra University, Kurukshetra, is an authentic
record of my original work carried out during the 4th semester.

I have not submitted the matter embodied in the project report for the award
of any other degree.

Place: Yamuna Nagar Name: Naveen Kalra

Date: / / S/o: Sh. R.S. Kalra
Univ. Reg. No. 03-cjh-970
Univ.Roll No.: ________
Class Roll No. 1155/06
 ACKNOWLEDGEMENT

“Gratitude is not a thing of expression; it is more a matter of

feeling.”

There is always a sense of gratitude which one express for others for their help and
supervision in achieving the goals. I too express my deep gratitude to each and everyone
who has been helpful to me in completing the project report successfully.

I would also like to thank almighty God for blessing showered on me during the
completion of Dissertation Report.

First of all, I am highly thankful to Dr. Vikas Daryal(Director, TIMT-YNR) for

allowing me to pursue my Dissertation Report on ”Impact of Financial sector Reforms
On Public sector Banks in India”(Pre & Post Reform Analysis).

I give my regards and sincere thanks to Ms.Reena Aggarwal (Project guide) who has
devoted her precious time in guiding me & helping me complete it within time.

I feel self-short of words to thanks my parents and friends who had directly or
indirectly instrumental in the completion of the project. I am indebted to all respondents
for their time passion during the long conversations.

(NAVEEN KALRA)
 EXECUTIVE SUMMARY

The core processes of a company may change over time in accordance with the shifting
requirements of business competitiveness.

The financial development was given impetus with the adoption of social control over
banks in 1967 and subsequently nationalization of 14major scheduled banks in July in 1969.
Since then the banking system has formed the core of the Indian financial system. In the three
decades following the first round of nationalization, aggregate deposits of scheduled banks have
increased at a compound annual growth rate of 17.8%durin the period of (1969-99) while bank
credit expanded at the rate of 16.3% PA. with the branches of more than 67000 of which 48.7%
being rural, touching the lives of millions of people everyday, the Indian banking sector
constitutes the most significant segment of the financial system of India.
It is against the background of these circumstances, that the development of a sound
banking system was considered essential for the future growth of the financial system. Financial
sector reforms were initiated in the country in 1992 with a view to improving the efficiency in
the process of financial intermediation, enhancing the effectiveness in the conduct of monetary
policy and creating conductive environment for the integration of domestic financial sector with
the global system.
The banking system is, by far, the most dominant segment of the financial sector,
accounting as it does, for over 80 per cent of the funds flowing through the financial sector. The
aggregate deposits of the scheduled commercial banks (SCBs) rose from Rs.5,05,599 crore in
March 1997 to Rs.11,03,360 crore in March 2002 representing a rise of 17 per cent. During the
same period, the credit portfolio (food and non-food) of SCBs grew from Rs.2,78,401 crore to
Rs. 5,89,723 crore, i.e. by 16 per cent. The net profits of SCBs witnessed a noticeable upturn
from Rs.6,403 crore in 2000-01 to Rs.11, 572 crore in 2001- 02. The extent and coverage of the
banking system can be gauged from the fact that the number of branches of SCBs grew from
8045 in 1969 to 66,186 in June 2002. While rural branches constituted 49 per cent of the total in
2002, semi-urban branches accounted for 22 per cent, urban branches accounted for 16 per cent
and metropolitan branches accounted for 13 per cent.
 Financial sector reforms introduced in the early 1990s as a part of the structural reforms
have touched upon almost all aspects of banking operations. For a few decades preceding the
onset of banking and financial sector reforms in India, banks operated in an environment that
was heavily regulated and characterised by sufficient barriers to entry, which protected them
against too much competition. This regulated environment set in complacency in the manner in
which banks operated and responded to the customer needs. The administered interest rate
structure, both on the liability and the assets sides, allowed banks to earn reasonable spread
without much efforts. Despite this, however, banks’ profitability was low and NPLs level was
high, reflecting lack of efficiency. Although banks operated under regulatory constraints in the
form of statutory holding of Government securities (statutory liquidity ratio or SLR) and the cash
reserve ratio (CRR) and lacked functional autonomy and operational efficiency, the fact was that
most banks did not operate efficiently.
While the broad objectives of the financial sector reforms, thus, were to enhance
efficiency and productivity, the process of reforms were initiated in a gradual and properly
sequenced manner so as to have a reinforcing effect. The approach has been to consistently
upgrade the financial sector by adopting the international best practices through a consultative
process. Financial sector reforms were carried out in two phases. The first phase of reforms was
aimed at creating productive and profitable financial institutions operating within the
environment of operational flexibility and functional autonomy. The focus of the second phase of
financial sector reforms starting from the second-half of 1990s has been on strengthening of the
financial system consistent with the movement towards global integration of financial services.
 CONTENTS

 INTRODUCTION
 PROFILE OF STUDY
 JUSTIFICATION OF STUDY
 OBJECTIVE OF THE STUDY
 LITERATURE REVIEW
 RESEARCH METHODOLOGY & ANALYTICAL TOOLS
 SAMPLING AND SAMPLING DESIGN
 ANALYTICAL TOOLS
 STATISTICAL TOOLS

 DATA COLLECTION
 HYPOTHESIS TESTING
 LIMITATIONS OF THE STUDY
 RESULTS AND DISCUSSIONS/FINDINGS
 RECOMMENDATIONS
 BIBLIOGRAPHY
 ANNEXURES
 “Theory without practice is
sterile,
Practice without theory is blind”

INTRODUCTION

Financial sector reforms introduced in the early 1990s as a part of the structural
reforms have touched upon almost all aspects of banking operations. For a few decades
preceding the onset of banking and financial sector reforms in India, banks operated in an
environment that was heavily regulated and characterised by sufficient barriers to entry,
which protected them against too much competition. This regulated environment set in
complacency in the manner in which banks operated and responded to the customer
needs. The administered interest rate structure, both on the liability and the assets sides,
allowed banks to earn reasonable spread without much efforts. Despite this, however,
banks’ profitability was low and NPLs level was high, reflecting lack of efficiency.
Although banks operated under regulatory constraints in the form of statutory holding of
Government securities (statutory liquidity ratio or SLR) and the cash reserve ratio (CRR)
and lacked functional autonomy and operational efficiency, the fact was that most banks
did not operate efficiently.
Indian banking system operated for a long time with high reserve requirements
both in the form of Cash Reserve Ratio (CRR) and Statutory Liquidity Ratio (SLR). This
was mainly to accommodate the high fiscal deficit and its monetisation. The efforts in the
recent period have been to lower both the CRR and SLR. The SLR has been gradually
reduced from a peak of 38.5 per cent to 25 per cent. The CRR was reduced from its peak
level of 15.0 per cent maintained during 1989 to 1992 to 4.5 per cent of NDTL in June
2003. Although the Reserve Bank continues to pursue its medium-term objective of
reducing the CRR, in recent years, on a review of macroeconomic and monetary
conditions, the CRR has been revised upwards to 6.0 per cent (to be effective from March
3, 2007).

PROFILE OF THE STUDY

As the economy grows and becomes more sophisticated, the banking sector has to
develop pari pasu in a manner that it supports and stimulates such growth. With
increasing global integration, the Indian banking system and financial system has as a
whole had to be strengthened so as to be able to compete. India has had more than a
decade of financial sector reforms during which there has been substantial
transformation and liberalization of the whole financial system. It is, therefore, an
appropriate time to take stock and assess the efficacy of our approach. It is useful to
evaluate how the financial system has performed in an objective quantitative manner.
This is important because India’s path of reforms has been different from most other
emerging market economies: it has been a measured, gradual, cautious, and steady
Process, devoid of many flourishes that could be observed in other countries.

The phase of nationalisation and ‘social control’ of financial intermediaries,

however, was not without considerable positive implications as well. The sharp
increase in rural branches of banks increased deposit and savings growth considerably.
There was a marked rise in credit flow towards economically important but hitherto
neglected activities, most notably agriculture and small-scale industries. The urban-bias
and marked preference of banks to lend to the industrial sector, especially large
industrial houses, was contained. The implicit guarantee emanating from public
ownership created an impression of infallibility of these institutions and the expectation
was self-fulfilling - there was no major episode of failure of financial intermediaries
in this period.

Starting from such a position, it is widely recognised that the Indian financial
sector over the last decade has been transformed into a reasonably sophisticated, diverse
and resilient system. However, this transformation has been the culmination of extensive,
well-sequenced and coordinated policy measures aimed at making the Indian
Financial sector efficient, competitive and stable.

The main objectives, therefore, of the financial sector reform process in India
initiated in the early 1990s have been to:
• Remove financial repression that existed earlier;
• Create an efficient, productive and profitable financial sector industry;
• Enable price discovery, particularly, by the market determination of interest rates
that then helps in efficient allocation of resources;
• Provide operational and functional autonomy to institutions;
• Prepare the financial system for increasing international competition;
• Open the external sector in a calibrated fashion;
• Promote the maintenance of financial stability even in the face of domestic and
external shocks.

India’s pre-reform period and financial reform

Since 1991, India has been engaged in banking sector reforms aimed at increasing
the profitability and efficiency of the then 27 public-sector banks that controlled about 90
per cent of all deposits, assets and credit. The reforms were initiated in the middle of a
“current account” crisis that occurred in early 1991. The crisis was caused by poor
macroeconomic performance, characterized by a public deficit of 10 per cent of GDP, a
current account deficit of 3 per cent of GDP, an inflation rate of 10 per cent, and growing
domestic and foreign debt, and was triggered by a temporary oil price boom following
the Iraqi invasion of Kuwait in 1990.
Prior to the reforms, India’s financial sector had long been characterized as highly
regulated and financially repressed. The prevalence of reserve requirements, interest rate
controls, and allocation of financial resources to priority sectors increased the degree of
financial repression and adversely affected the country’s financial resource mobilization
and allocation. Moreover, it was perceived that banks should be utilized to assist India’s
planned development strategy by mobilizing financial resources to strategically important
sectors.
In the period 1969-1991, the number of banks increased slightly, but savings were
successfully mobilized in part because relatively low inflation kept negative real interest
rates at a mild level and in part because the number of branches was encouraged to
expand rapidly. Nevertheless, many banks remained unprofitable, inefficient, and
unsound owing to their poor lending strategy and lack of internal risk management under
government ownership. Joshi and Little (1996) have reported that the average return on
assets in the second half of the 1980s was only about 0.15 per cent, while capital and
reserves averaged about 1.5 per cent of assets.Given that global accounting standards
were not applied, even these indicators are likely to have exaggerated the banks’ true
performance. Further, in 1992/93, non-performing assets (NPAs) of 27 public-sector
banks amounted to 24 per cent of total credit, only 15 public-sector banks achieved a net
profit, and half of the public-sector banks faced negative net worth.
Against this background, the first wave of financial liberalization took place in the
second half of the 1980s, mainly taking the form of interest rate deregulation. Prior to
this period, almost all interest rates were administered and influenced by budgetary
concerns and the degree of concessionality of directed loans. To preserve some
profitability, interest rate margins were kept sufficiently large by keeping deposit rates
low and non-concessional lending rates high.
Following the 1991 report of the Narasimham Committee, more comprehensive
reforms took place that same year. The reforms consisted of (a) a shift of banking
sector supervision from intrusive micro-level intervention over credit decisions toward
prudential regulations and supervision; (b) a reduction of the CRR and SLR; (c) interest
rate and entry deregulation; and (d) adoption of prudential norms.
Further, in 1992, the Reserve Bank of India issued guidelines for income
recognition, asset classification and provisioning, and also adopted the Basle Accord
capital adequacy standards. The government also established the Board of Financial
Supervision in the Reserve Bank of India and recapitalized public-sector banks in order
to give banks sufficient financial strength and to enable them to gain access to capital
markets.

In 1993, the Reserve Bank of India permitted private entry into the banking
sector, provided that new banks were well capitalized and technologically advanced, and
at the same time prohibited cross-holding practices with industrial groups. The Reserve
Bank of India also imposed some restrictions on new banks with respect to opening
branches, with a view to maintaining the franchise value of existing banks. As a result
of the reforms, the number of banks increased rapidly.
In 1991, there were 27 public-sector banks and 26 domestic private banks
with 60,000 branches, 24 foreign banks with 140 branches, and 20 foreign banks with a
representative office. Between January 1993 and March 1998, 24 new private banks
(nine domestic and 15 foreign) entered the market; the total number of scheduled
commercial banks, excluding specialized banks such as the Regional Rural Banks rose
from 75 in 1991/92 to 99 in 1997/98. Entry deregulation was accompanied by
progressive deregulation of interest rates on deposits and advances. From October
1994, interest rates were deregulated in a phased manner and by October 1997,
banks were allowed to set interest rates on all term deposits of maturity of more than
30 days and on all advances exceeding Rs 200,000. While the CRR and SLR, interest
rate policy, and prudential norms have always been applied uniformly to all commercial
banks, the Reserve Bank of India treated foreign banks differently with respect to the
regulation that requires a portion of credit to be allocated to priority sectors. In 1993,
foreign banks – which used to be exempt from this requirement while all other
commercial banks were required to earmark 40 per cent of credit - were required to
allocate 32 per cent of credit to priority sectors.
POLICY REFORMS IN THE FINANCIAL SECTOR BANKING
REFORMS

Commercial banking constitutes the largest segment of the Indian financial

system. Despite the general approach of the financial sector reform process to establish
regulatory convergence among institutions involved in broadly similar activities,
given the large systemic implications of the commercial banks, many of the
regulatory and supervisory norms were initiated first for commercial banks and were later
extended to other types of financial intermediaries. After the nationalisation of major
banks in two waves, starting in 1969, the Indian banking system became
predominantly government owned by the early 1990s. Banking sector reform
essentially consisted of a two pronged approach. While nudging the Indian banking
system to better health through the introduction of international best practices in
prudential regulation and supervision early in the reform cycle, the idea was to increase
competition in the system gradually. The implementation periods for such norms
were, however, chosen to suit the Indian situation. Special emphasis was placed on
building up the risk management capabilities of the Indian banks. Measures were also
initiated to ensure flexibility, operational autonomy and competition in the banking
sector. Active steps have been taken to improve the institutional arrangements
including the legal framework and technological system within which the financial
institutions and markets operate. Keeping in view the crucial role of effective supervision
in the creation of an efficient and stable banking system, the supervisory system has been
revamped.
Special features of the reforms in the financial sector

 The reforms were not driven by any banking crisis nor were they an outcome of
any external support package. They were undertaken much before the importance
of the financial sector to prevent crisis was recognized by international agencies
and other countries in early 1990s before the Asian financial crisis.

 The reforms were carefully sequenced in terms of instruments and objectives.

Thus, prudential norms and supervisory strengthening were introduced early in
the reform cycle, followed by interest rate deregulation and gradually lowering of
statutory preemptions. The more complex aspects of legal and accounting
measures were ushered in subsequently when the basic tenets of the reforms were
already in place. More recently, the regulatory framework has also focused on
ensuring good governance through “fit and proper” owners, directors and senior
managers of the banks. The preference has been for diversified ownership.
 While the focus of the first generation of reforms was to create an efficient,
productive and profitable financial services industry, the second phase of
financial sector reforms, beginning from the second-half of the 1990s, was aimed
at strengthening of the financial system and introduction of structural
improvements.
 The need to prepare the financial system in a more globalised environment
and to promote financial stability in the face of domestic and external shocks was
on top of agenda of reforms. With increasing globalisation of the Indian economy,
the reform process witnessed a significant move towards adoption of international
best practices in several crucial areas of importance such as prudential norms,
banking supervision, data dissemination and corporate governance.
 With a view to increasing competition in the banking sector new private sector
banks were licensed. A prerequisite for grant of the licence was that these banks
had to be fully automated from day one. The results are self-evident as these
banks have become high-tech banks. This has had a “demonstration” effect on the
entire system. The Government ownership in nationalized and State Bank of India
 was brought down by allowing them to raise capital from the equity market up to
49/45 per cent of paid-up capital.
 A unique feature of the reform of public sector banks, which dominated the Indian
banking sector, was the process of financial restructuring. Banks were
recapitalised by the government to meet prudential norms through recapitalisation
bonds. The mechanism of hiving off bad loans to a separate government asset
management company was not considered appropriate in view of the moral
hazard. The overhang of non-performing loans had to be managed by the banks
themselves.
 The subsequent divestment of equity and offer to private shareholders was
undertaken through a public offer and not by sale to strategic investors.
Consequently, all the public sector banks, which issued shares to private
shareholders, have been listed on the exchanges and are subject to the same
disclosure and market discipline standards as other listed entities.
 The cost of recapitalization to GDP has been low relative to experience in other
countries. On a cumulative basis it worked out to about one percent of the GDP.
Furthermore, the market value of equity held by Government now far exceeds the
recapitalization cost. With a view to carry the reform process further, as
announced in the Budget last year the Government decided to convert the recap
bonds issued as special securities (basically non-negotiable) to marketable
securities indistinguishable from other Government securities . The process has
already started and in 2006-07 the Government converted nearly Rs 80 billion to
SLR securities. The balance special securities will be phased out over a period.
 Banks were also allowed to diversify into various financial services and are now
offering a whole range of financial products like universal banks.
 MAJOR REFORMS IN THE BANKING SECTOR

A. Prudential Measures
• Introduction and phased implementation of international best practices
and norms on risk-weighted capital adequacy requirement, accounting, income
recognition, provisioning and exposure.
• Measures to strengthen risk management through recognition of different
components of risk , assignment of risk-weights to various asset classes, norms
on connected lending , risk concentration , application of marked -to -market
principle for investment portfolio and limits on deployment of fund in sensitive
activities.
B. Competition Enhancing Measures
• Granting of operational autonomy to public sector Banks, reduction of public
ownership in public sector Banks by allowing them to raise capital from equity
Market up to 49 per cent of paid-up capital.
• Transparent norms for entry of Indian private sector, foreign and joint -venture
banks and insurance companies, permission for foreign investment in the
financial sector in the form of Foreign Direct Investment (FDI) as well as
portfolio investment, permission to banks to diversify product portfolio and
business activities.
C. Measures Enhancing Role of Market Forces
• Sharp reduction in pre -emption through reserve requirement, market
determined pricing for government securities, disbanding of administered interest
rates with a few exceptions and enhanced transparency and disclosure norms to
facilitate market discipline.
• Introduction of pure inter-bank call money market, auction -based repos
-reverse repos for short -term liquidity management , facilitation of improved
payments and settlement mechanism.
D.Institutional and Legal Measures
• Settling up of Lok Adalats (people’s courts), debt recovery tribunals, asset
reconstruction companies, settlement advisory committees , corporate debt
restructuring mechanism, etc . For quicker recovery/ restructuring. Promulgation
of Securitisation and Reconstruction of Financial Assets and Enforcement of
Securities Interest (SARFAESI ) , Act and its subsequent amendment to ensure
creditor rights.
• Setting up of Credit Information Bureau for information sharing on defaulters as
also other borrowers.
• Setting up of Clearing Corporation of India Limited (CCIL) to act as central
counter party for facilitating payments and settlement system relating to fixed
income securities and money market instruments.
E. Supervisory Measures
• Establishment of the Board for Financial Supervision as the apex supervisory
authority for commercial banks, financial institutions and non-banking financial
companies.
• Introduction of CAMELS supervisory rating system, move towards risk-based
supervision, consolidated supervision of financial conglomerates, strengthening of
off-site surveillance through control returns.
• Recasting of the role of statutory auditors, increased internal control through
strengthening of internal audit.
• Strengthening corporate governance, enhanced due diligence on important
shareholders, fit and proper tests for directors.
Technology Related Measures
• Setting up of INFINET as the communication backbone for the financial
sector, introduction of Negotiated Dealing System (NDS) for screen-based
trading in government securities and Real Time Gross Settlement (RTGS)
System.
 JUSTIFICATION OF THE STUDY

The Reforms in the Indian Banking system have assumed large proportions and
are a continuing deterrent to the smooth flow of credit to the productive sector of industry
and agriculture.
The high level committee on financial system constituted by RBI to make
recommendation on financial sector reforms also observed that serious problem are
plaguing the financial sector which is reflected in decline in productivity and efficiency
and erosion of profitability due to deterioration in the quality of loan portfolio restricting
income generation and enhancement of capital funds, accompanied by inadequate loan
loss provisions.
A high figure of loan defaults put question marks on the credit appraisal. Along
with other causes, improper evaluation of the credit requirements or repaying capacity of
the borrowers results in under financing or over financing and affects the cost and
revenue structure of the activity and may render the activity unviable. Non-recovery
affect the profitability of banks.
 OBJECTIVES OF THE STUDY

PRIMARY OBJECTIVE
 The major objective of the study is to assess the
impact of reform measures on the efficiency, profitability and overall
performance of banks vis-à-vis bank groups in public and private sector.

SECONDARY OBJECTIVE

 To evaluate the relative changes in the performance of various banks and bank
groups within the public and public and private sector in selected aspects as a
result of implementation of reform measures.

 To make a comparative analysis of the performance of public and private sector

commercial banks during the course of implementation of banking sector reforms.

 To examine the customer’s perception towards the services offered by banks and
compare public and private bank’s service quality.
 LITERATURE REVIEW

Literature Review is the way to express background of ideas that come to mind
during the research formulation. I asked various employees of the bank about the new
technological initiative taken by the banks.
The research being conducted was "to evaluate the impact of financial reforms on
public sector & commercial banks."
Once the problem is formulated, the researcher undertakes an extensive literature review
connected with the problem.

BOOKS

1) “C.R Kothari 4: The information regarding the basics of research and research
methodology, what are the different types of research designs, problem statement,
sources of data collection and methods of data collection are given in this
section.6
2) “S.P Gupta 6: The information regarding the statistical tools and their limitations
in different fields the research is given in this section. This section explains, why
to use correlation and the situations in which correlation can be used, and
meaning of correlation . This section also explains the Trend Analysis Technique..
3) S.C. Gupta3: Information regarding various statistical & analytical tools is given
in this section.
4) Wilkinson & Bhandarkar5: In this section various parts of research and research
methodology is given which tells about the techniques of doing research.
5) Tripathi P.C1: this book helped me in knowing about the change.
6) Gupta C.B.-7, "Management theory and practice”: this book helped me in
finding the factors affecting the organization’s change.
JOURNALS

7) Finance India15, September 2005 pp-957-961:- Impact of NPAs on strategic

banking variables i.e. impact on profitability, Productivity, Capital Adequacy, Credit
Deployment and Mobilisation.
8) Chartered Financial Analysis17, December 2005 pp-52:- Concept of SARFAESI
Act.
9) Southern Economist20, February 2006 pp-15:- Details of Corporate Debt
Restructuring Scheme.
10) Management Accountant24, May 2006 pp- 359:- Early Warning System
11) Chartered Financial Analysis29, October 2005 pp-64 :-Types of banking risk
12) Chartered Financial Analysis32, October 2007 pp-31-31:-Growth and structural
change in banking sector
13) Chartered Financial Analysis34, November 2007 pp-8-9:-Concept of
Borrower’s Special Investigation Audits
14) Economic and political weekly30, October 16, 2004 pp-10:-Meaning and
concept of financial reforms.
15) Chartered Secretary24, Feburary 2003, V.S.Datey pp-22-24 :- Importance of
credit rating
16) Treasury Management , December 2004, MPM Vinay Kumar pp-14-1610 :-
Adverse effect of Financial norms.
17) Chartered Financial Analysis, August 2004, B.P.Dhaka pp-47-5211 :- Reason
behind huge level of NPAs in the Indian Banking System
18) Paradigm, July 2005 pp-12-1412 :- Indian economy and Banking
19) Management Accountant, September 2007 pp-48-5013 :- Accounts which need
not be classified as NPAs
20) Business Today, May 2006 pp-3414 :- Measures in case of non payment of NPAs
21) Chartered Financial Analysis-29, December 2005 pp-25-28 :- Norms for
treating various advances as NPAs
22) Financial Risk Management, February 2006 pp-50-55:- Narsimhan
Committee’s recommendation
23) Data quest , April 2005 pp-19 Gross NPAs expressed as % of gross advances
24) RBI Bulletin, July 1999 pp-34-36 :- RBI guidelines on income generation
25) IBA Bulletin, January 2004 pp-17-19:- Magnitude of gross NPAs post and prior
to the reforms.
26) Chartered Financial Analysis, February 2004 pp-12-140 :-Qualitative aspects
of the micro level impact of reforms.

Websites
27) www.centurionbop.co.in/news/press_190505.html1 :- Summarized RBI
guidelines for reforms classification and provisioning.
28) www.domain-b.com/management/m_a/20060904_vijay_kalantri.html2 :- RBI
guidelines for recognition.
29) www.twincitiesbbs.com/php/subra/corporat.htm3 :- Non Performing Assets of
Public Sector Banks.
30) www.blonnet.com/2002/08/07/stories/2002080700050800.htm4 :- NPAs and
recoveries of Public Sector Banks
31) www.adroitquest.com/mgmt_team.htm5 :- Estimates of erosion of profits of
Public Sector Banks
32) www.rbi.org/guidelines/speeches.php :- various guidelines regarding the
financial reforms.
33) www.ibef.org :- various information regarding the financial sector reforms and its
impact on banking in India.
34) www.financialexpress.com/news/Financial-reforms-unlikely-to-take-place-
before-LS-polls/273055: Pending reforms in the financial sectors such as
banking, insurance and ... India Inc has shown its discomfort over this
uncertainty.
35) www.findarticles.com/p/articles/mi_m0254/is_n1_v56/ai_19266182: India Reforms Its
Economy: 1991-1994 ... and Chief Minister and Governor of the state of Andhra
Pradesh in south India before moving on to represent his performance...
36) www.financialexpress.com/news/Pending-financial-reforms-spooks-India: Pending
reforms in the financial sector including pension, ... which got going with the
boards of the State Bank of India and State Bank of ...
37) www.banknetindia.com/banking/rbip3.htm: scheduled commercial banks
(excluding regional rural banks), PDs and all-India financial institutions were
allowed to undertake forward rate
 IMPACT OF REFORMS ON THE BANKING SECTOR

These reform measures have had major impact on the overall efficiency and
stability of the banking system in India. The present capital adequacy of Indian banks is
comparable to those at international level. There has been a marked improvement in the
asset quality with the percentage of gross non-performing assets (NPAs) to gross
advances for the banking system reduced from 14.4 per cent in 1998 to 7.2 per cent in
2004.
With the commencement of the New Economic Policy, a few new generation
techno-savvy banks such as ICICI bank and HDFC bank came into operation and
changed the whole banking concept in India was considered fairly mature in terms of
variety of services provided assets quality.. We can measure the performance of Indian
public sector banks by using the some significant indicators such as Non-performing
assets, profitability, capital position and assets quality.
It is difficult to obtain permissions to start a bank. Foreign banks are practically banned
from opening new branches. Even domestic banks have to take permission from the RBI,
to open one branch at a time. Many rules have been designed to favour public sector
banks. These weaknesses in policy have led to poor competition in banking. Table 6
compares the biggest 10 banks in the country in 2004-05 against the situation 13 years
earlier, in 1991-92. The 10-firm concentration ratio did drop significantly, from 92.86%
to 62.99%. This suggests high growth on the part of smaller banks. However, the names
of the biggest banks are remarkably alike. The new names of 2004-05 are shown in
boldface. Of these, ICICI was always a big bank, and is not in the list for 1991-92 purely
on account of not being classified as a bank. Apart from this, there are only two new
names in 2004-05. The domination of the public sector is also highly visible. There are
no private or foreign banks in the 2004-05 list, other than ICICI Bank.
ASSETS GROWTH AND QUALITY
Bank credit of scheduled commercial banks registered a growth of 30.2%as on January 5,
2007 as compared with 29.7% a year ago. Also one of the most visible developments is
the declining NPA ratio in the industry. The NPAs of all SCBs which stood at 15.7% of
gross advances and 7.0%of total assets in 1995-96, declined to 3.3% of gross advances
and 1.9% of total assets in 2005-06, reflecting the better recoveries and better allocation
of funds.

Year Non-Performing Assets

Gross Net

As %of Gross As % of total As % of As % Of

Advances Assets NA TA
1996-97 15.7 7.0 8.1 3.3
1999-00 12.7 5.5 6.8 2.7
2002-03 8.8 4.0 4.4 1.9
2005-06 3.3 1.9 1.2 0.7
Financial indicators
The financial performance pf SCBs has improved in recent years, especially in
terms of their profitability. The operating profit to assets ratio of SCBs remained in the
range of 0.47t0 1.13 during the period 1995-96 to 2005-06 the improved performance is
mainly the result of greater competition and improved efficiency of the Indian banking
system.

i)Enhance efficiency and profitability: one of the major objectives of banking sector
reforms was to enhance efficiency and productivity through increased competition. That
the competition has intensified could be gauged from the decline in the share of the
public sector banks in the total income, expenditure and assets to the commercial banking
system since the mid 1990s, and increase in the share of new private sector banks.

ii) Resolution of NPAs: the Narsimah Committee had recommended the setting up of the
asset creation fund to which the public sector banks would transfer their NPA with
certain safeguards.

iii) Ownership Structure: the government holding in these banks range from 51%
(OBC, Dena) to 76% (BoM). Of the privately held equity, significant portion (15-20%)
was held by foreign investors in quite a few public sector banks as on sep.30, 2006. all
new private banks are listed and there is considerable foreign investment both (FDI &
FII) in these banks. Even among the private banks, all significant banks are listed.

IV) Reform Coverage: the reform process was extended to other institutions such as
regional rural banks, cooperative banks, all India financial institutions and non banking
financial companies. The strategy has started showing results which is crucial for
sustaining their role in financial intermediation among the rural and urban poor and small
savers.
 Important Financial indicators-SCBs

Years Operating net income Exp. To Operating Prov. Spread

Prft.to asts prft. To to assets Assets Exp To & (NII)
Assets Assets Cont. to asset

1995-96 1.69 0.68 - - 2.94 1.54 3.13

1999-00 1.66 0.66 10.4 9.74 2.50 1.00 2.73
2002-03 2.39 1.01 10.14 9.14 2.24 1.39 2.77
2005-06 2.03 0.88 7.97 7.09 2.11 1.15 2.73

Source: Reserve Bank Of India

This table shows the data regarding the important financial Indicators of Scheduled
Commercial Banks according to the operating profit assets, net profit to assets, income to
assets etc. it signifies about the important indicators that effect the efficiency of banking
in India.

Bank group wise shares: selected indicators %

Year 1995-96 1999-00 2002-03 2005-06

PuSB Prsb FB PuSB PrSB FB PuSB PrSB FB Pusb Prsb FB

Income 82.5 8.2 9.4 78.8 12.3 9.0 74.5 18.5 7.0 72.4 19.7 7.8
Expenditure 84.2 7.4 8.3 79.4 12.0 8.7 74.8 18.6 6.6 73.1 19.7 7.3
Total Assets 84.4 7.7 7.9 80.2 12.3 7.5 75.7 17.5 6.9 72.3 20.5 7.2
Net Profit -39.1 59.3 79.8 70.0 16.8 13.2 64.8 15.6 19.6 67.3 20.3 12.3
Gross Profit 74.3 10.1 15.6 70.9 14.5 14.6 76.6 18.7 4.7 69.2 19.0 11.8

Note:PuSB: Public sector Banks,PrsB:Private sector Banks, FB: Foreign Banks.

Source: Reserve Bank Of India

 Further Reform Areas

 Extension of Risk management practices: Banks use statistical models to

measure and manage the financial risks to which they are exposed. Since models
cannot incorporate all possible risk outcomes and generally are not capable of
capturing event risks and sudden/dramatic changes, banks need to supplement
models with stress test.
 Basel II implementation: The RBI intended to implement Basel II
recommendations with effect from march31, 2008. All SCBs are encouraged to
adopt it not later than March 31, 2009. The Basel committee on Banking
Supervision had undertaken the fifth quantitative impact study to assess the
impact of adoption of the revised framework.
 Mortgage Guarantee Companies: As amounted in the budget, the RBI has now
placed in public domain draft guidelines on mortgage guarantee companies. This
will be a new category under the NBFC sector and the activities will ne in
thenature of mortgage guarantees and not mortgage insurance. Mortgage
insurance falls with in the jurisdiction of the insurance regulator.
 FSAP-Self Assesment: a commitment on financial sector assessment to
undertake a self-assesment of financial sector stability and development has been
constituted. For the purpose of carrying out the task under the terms of reference,
the committee has decided to set up four advisory panels which will be assisting
the committee in its assessment exercise and will be drawn from non official
experts relevant areas related to financial stability assessment and stress testing
transparency standards, financial regulation and supervision and institutions and
market structure respectively.
 Draft Guidelines on Accounting Aspects: Recognizing the importance of a
robust accounting framework in the banking sector, the RBI had undertaken an
exercise a few years back to assess the gaps in compliance by banks with the
accounting standards issued by the Institute of Chartered Accountants Of India.
 PERFORMANCE OF THE FINANCIAL SECTOR UNDER
THE REFORM PROCESS

BANKING SECTOR
Banking sector reform has established a competitive system driven by market
forces. The process, however, has not resulted in disregard of social objectives such as
maintenance of the wide reach of the banking system or channelisation of credit towards
disadvantaged but socially important sectors. At the same time, the reform period
experienced strong balance sheet growth of the banks in an environment of operational
flexibility. A key achievement of the banking sector reform has been the sharp
improvement in the financial health of banks, reflected in significant improvement in
capital adequacy and improved asset quality. This has been achieved despite
convergence of the prudential norms with the international best practices. 2 There have
also been substantial improvements in the competitiveness of the Indian banking
sector reflected in the changing composition of assets and liabilities of the banking sector
across bank groups. In line with increased competitiveness, there has been improvement
in efficiency of the banking system reflected inter alias in the reduction in interest
spread, operating expenditure and cost of intermediation in general .
Contemporaneously there have been improvements in other areas as well
including technological deepening and flexible human resource management . A
more detailed discussion on the performance analysis of the banking sector under
the reform process is given below.
 Social Objectives and Balance Sheet Management

The Indian banking system has acquired a wide reach, judged in terms of
expansion of branches and the growth of credit and deposits (Tables 1 and 2). The
expansion of branch network peaked in the phase of social banking during the
1970s and 1980s. Despite the slowdown in branch expansion since the 1990s, the
population per bank branch, however, has not changed much since the 1980s, and has
remained at around 15,000. It is often asserted that the Indian banking sector is saddled
with too many branches, adding to its high intermediation costs. In fact, at about 8-
10,000, the population per branch in developed countries is lower than that in India.
Therefore, the reform process has maintained the gains in terms of the outreach of bank
branches achieved in the phase of social banking.

Table 1: Progress of Commercial Banking in India

Indicators June June March March March March

1991 1993 1995 1997 2002 2005
1. No. of Commercial Banks 73 154 272 284 298 292
2. No. of Bank Offices 8,262 34,594 60,570 64,234 67,868 68,561
Of which
Rural and semi-urban bank offices 5,172 23,227 46,550 46,602 47,693 47,496
3. Population per Office (’000s) 64 16 14 15 15 16
4. Per capita Deposit (Rs.) 88 738 2,368 4,242 8,542 12,253
5. Per capita Credit (Rs.) 68 457 1,434 2,320 4,555 7,275
6. Priority Sector Advances@ (per cent) 15.0 37.0 39.2 33.7 35.4 33.7 *
7. Deposits (per cent of National Income) 15.5 36.0 48.1 48.0 53.5 51.8

Source: Reserve Bank Of India

Capital Position and Asset Quality

 A set of micro-prudential measures have been stipulated since the onset of
reforms aimed at imparting strength to the banking system as well as ensuring safety
and soundness in order to fix ‘the true position of bank’s balance sheet and…to arrest its
deterioration’ (Rangarajan, 1998). With regard to prudential requirements, norms for
income recognition and asset classification (IRAC), introduced in 1992, have been
strengthened over the years in line with international best practices. A strategy to
attain CRAR of 8 per cent in a phased manner was put in place and subsequently the
level was raised to 9 per cent with effect from 1999-2000.
The overall capital position of commercial sector banks has witnessed a marked
improvement during the reform period (Table 3). Illustratively, as at end-March 2003, 91
out of the 93 commercial banks operating in India maintained CRAR at or above 9
per cent. The corresponding figure for 1995-96 was 54 out of 92
banks.

Table 3: Distribution of Commercial Banks According to

Risk-weighted Capital Adequacy
Year Below 4 Between Between Above Total
per cent 4-9 9-10 10
per cent* per cent@ per cent
1995-96 8 9 33 42 92
1996-97 5 1 30 64 100
1997-98 3 2 27 71 103
1998-99 4 2 23 76 105
1999-00 3 2 12 84 101
2000-01 3 2 11 84 100
2001-02 1 2 7 81 91
2002-03 2 0 4 87 93
*: Relates to 4-8 per cent before 1999-2000, @: Relates to 8-10 per cent before 1999-
2000.

Note: According to supervisory returns, only 2 banks failed to maintain statutory minimum
CRAR of 9 per cent as at end-March 2004. Out of these two, one is scheduled to achieve the
minimum CRAR level by September 2004 and other has since been placed under moratorium and
merged with another bank.
Source: Reserve Bank of India.
The reform period also witnessed considerable improvements in the asset
quality of banks. Non- performing loans (NPLs) as ratios of both total advances and
assets declined substantially and consistently since the mid-1990s. Moreover, for the
first time since the initiation of reforms, in 2002-03, the absolute amount of NPLs in
both gross and net terms witnessed declines. This improved recovery performance
raises a Few interesting issues.
• First, from the pattern of NPLs over the years, it can be argued that to a large
extent the NPL problems faced by Indian banks are legacy problems emanating
from credit decisions taken before the full implementation of the banking
sector reforms.
• Second, there has been a distinct improvement in the credit appraisal
process in the Indian banking system under the reform process whereby
incremental NPLs have been low despite the fact that Indian industry has gone
through a relatively low-growth phase since the mid-1990s.
• Finally, in recent years, the recovery performance of public sector banks has been
better than private sector banks - both old and new - in terms of net NPL (i.e.
net of provisioning).

Foreign banks, however, exhibited the best recovery performance and lowest NPL levels
among the reflects the success of new initiatives for resolution of NPLs including
promulgation of the SARFAESI5 Act in containing NPLs. Greater provisioning and
write-off of NPLs in the face of greater profitability also helped keeping the NPLs
low during 2003-04.
 Gross NPL/ Gross NPL/ Net NPL/ Net NPL/
advances Assets advances Assets
Scheduled commercial banks
1996-97 15.7 7.0 8.1 3.3
1997-98 14.4 6.4 7.3 3.0
1998-99 14.7 6.2 7.6 2.9
1999-00 12.7 5.5 6.8 2.7
2000-01 11.4 4.9 6.2 2.5
2001-02 10.4 4.6 5.5 2.3
2002-03 8.8 4.0 4.4 1.9
2003-04* 7.3 .. 3.0 ..
Public sector banks
1996-97 17.8 7.8 9.2 3.6
1997-98 16.0 7.0 8.2 3.3
1998-99 15.9 6.7 8.1 3.1
1999-00 14.0 6.0 7.4 2.9
2000-01 12.4 5.3 6.7 2.7
2001-02 11.1 4.9 5.8 2.4
2002-03 9.4 4.2 4.5 1.9
Old private sector banks
1996-97 10.7 5.2 6.6 3.1
1997-98 10.9 5.1 6.5 2.9
1998-99 13.1 5.8 9.0 3.6
1999-00 10.8 5.2 7.1 3.3
2000-01 10.9 5.1 7.3 3.3
2001-02 11.0 5.2 7.1 3.2
2002-03 8.9 4.3 5.5 2.6
New private sector banks
1996-97 2.6 1.3 2.0 1.0
1997-98 3.5 1.5 2.6 1.1
1998-99 6.2 2.3 4.5 1.6
1999-00 4.1 1.6 2.9 1.1
2000-01 5.1 2.1 3.1 1.2
2001-02 8.9 3.9 4.9 2.1
2002-03 7.6 3.8 4.6 2.2
Foreign banks in India
1996-97 4.3 2.1 1.9 0.9
1997-98 6.4 3.0 2.2 1.0
1998-99 7.6 3.1 2.9 1.1
1999-00 7.0 3.2 2.4 1.0
2000-01 6.8 3.0 1.8 0.8
2001-02 5.4 2.4 1.9 0.8
2002-03 5.2 2.4 1.8 0.8

Table 5: NPL of Scheduled Commercial Banks

NPL: Non-performing loans, *: Based on supervisory returns, ..: not available.

Competition and Efficiency

 One of the major objectives of banking sector reforms has been to enhance
efficiency and productivity through enhanced competition . Such policies have led to
considerable and consistent reduction in the shares of public sector banks in the total
income, expenditure and assets of the commercial banking system (Table 6). Shares of
Indian private sector banks, especially new private sector banks established in the
1990s, in the total income and assets of the banking system have improved
considerably since the mid-1990s. A number of new private sector banks have
emerged as dynamic
components of the Indian banking system, reducing not only the market share of public
sector banks but also those of foreign banks. The reduction in the asset share of foreign
banks, however, is partially due to their increased focus on off-balance sheet non-
fund based business.
Notwithstanding such transformation, the position of public sector banks in the Indian
banking system continues to be predominant as these banks account for all bank-groups.
This raises a question mark on the applicability of the argument that links erformance
of banks with ownership pattern in the context of Indian banking.
Table 6: Bank Group-wise Shares: Select Indicators
1995-96 2000-01 2002-03
Public Sector Banks
Income 82.5 78.4 74.5
Expenditure 84.2 78.9 74.8
Total Assets 84.4 79.5 75.7
Net Profit -39.1 67.4 64.8
Gross Profit 74.3 69.9 76.6
Private Sector Banks
Income 8.2 12.6 18.5
Expenditure 7.4 12.3 18.6
Total Assets 7.7 12.6 17.5
Net Profit 59.3 17.8 15.6
Gross Profit 10.1 14.4 18.7
Foreign Banks
Income 9.4 9.1 7.0
Expenditure 8.3 8.8 6.6
Total Assets 7.9 7.9 6.9
Net Profit 79.8 14.8 19.6
Gross Profit 15.6 15.7 4.7
 Table 7: Earnings and Expenses of Scheduled Commercial Banks
(Rs. billion)
Year Total Total Interest Total Interest Establishme Net
Assets Earnings Earnings Expenses Expenses nt Interest
Expenses Earning
1955 12 1 0 0 0 0 0
(3.8) (3.1) (2.6) (0.9) (1.3) (2.2)
1975 68 4 4 4 2 1 2
(6.2) (5.3) (5.5) (2.8) (2.1) (2.5)
1990 582 42 38 42 27 10 10
(7.3) (6.4) (7.2) (4.7) (1.7) (1.8)
1995 3,275 304 275 297 190 76 86
(9.3) (8.4) (9.1) (5.8) (2.3) (2.6)
2000 11,055 1,149 992 1,077 690 276 301
(10.4) (9.0) (9.7) (6.2) (2.5) (2.7)
2002 15,355 1,510 1,270 1,395 875 337 395
(9.8) (8.3) (9.1) (5.7) (2.2) (2.6)
2003 16,989 1,724 1,407 1,553 936 3,809 471
(10.2) (8.3) (9.1) (5.5) (2.2) (2.8)
Note : Figures in brackets are ratios to total assets. Source : Reserve Bank of India.

Table 8: Important Parameters for Indian Banking Sector

(Per cent)
Bank Group 1996-97 2001-02 2002-03
Operating Expenses/Total Assets
Scheduled Commercial Banks 2.9 2.2 2.2
Public Sector Banks 2.9 2.3 2.3
Old Private Sector Banks 2.5 2.1 2.0
New Private Sector Banks 1.9 1.1 2.0
Foreign Banks 3.0 3.0 2.8
Spread/Total Assets
Scheduled Commercial Banks 3.2 2.6 2.8
Public Sector Banks 3.2 2.7 2.9
Old Private Sector Banks 2.9 2.4 2.5
New Private Sector Banks 2.9 1.2 1.7
Foreign Banks 4.1 3.2 3.4
Net Profit/Total Assets
Scheduled Commercial Banks 0.7 0.8 1.0
Public Sector Banks 0.6 0.7 1.0
Old Private Sector Banks 0.9 1.1 1.2
New Private Sector Banks 1.7 0.4 0.9
Foreign Banks 1.2 1.3 1.6
Note : Spread = interest income-interest expenditure. Source : Reserve Bank of India

Table: Cross-Country Performance Analysis of Banks

 (Per cent)
Country 200 2002 200 Latest
1 3
Gross Non-Performing Loans to Total
Loans
Latin Argentina1 13.2 17.5 22.7 November
America
Brazil 5.7 5.3 5.7 June
Mexico 5.1 4.6 3.7 September
Asia China 29.8 25.5 22.0 June
India 11.410.4 8.8 March
Indonesia 11.9 5.8 ..
Malaysia 17.8 15.9 14.8 June
Philippines 16.9 15.4 15.2 September
Singapore 3.6 3.4 3.5 September
Thailand 10.5 15.8 15.5 August
Memo US3 1.4 1.6 1.3 September
UK 2.6 2.6 2.2 June
Japan 6.6 8.9 7.2 September
Profitability of Major Banks
Latin Argentina -0.2 -9.7 -2.5 August
America
Brazil 0.2 1.9 1.9 June
Mexico 0.8 -1.1 1.6 September
Asia China 0.1 0.1 ..
India 0.5 0.8 1.0 March
Indonesia 0.8 1.3 ..
Malaysia 1.0 1.3 ..
Philippines 0.4 0.8 1.0 September
Singapore 0.8 0.8 0.8 September
Thailand -0.1 0.4 1.1 August
Memo US 1 1.1 1.4 1.4 September
UK 2,3 0.5 0.9 0.5 June
Japan 2 0.1 0.0 .. September
.. Not available.
1. With asset exceeding US $ 1 billion,
2. Before tax,
3. Includes mortgage banks
Source : Global Financial Stability Report, April 2004
The following are the figures of gross and net NPAs of public sector banks
from the period 1993 – 2002
(Table – 1)
NPAs in Public Sector Banks
End March Gross NPAs %of Gross % to Total Net NPAs % of Net % of Total
Advances Assets Advances Assets
1993 39,253 23.2 11.8 18,077 11.3 4.6
1994 41,041 24.8 10.8 18,903 12.87 5.1
1995 38,385 19.5 8.7 17,567 10.7 4.0
1996 41,661 18.0 8.2 18,297 8.9 3.6
1997 43,577 17.8 7.8 20,285 9.2 3.6
1998 45,653 16.0 7.0 21,232 8.2 3.3
1999 58,554 15.6 6.8 24,211 8.85 3.1
2000 59,952 14.0 6.6 26,188 7.97 3.0
2001 68,238 13.1 6.4 28,032 6.8 2.6
2002 81,889 12.8 6.0 29,874 6.1 2.2

A distinction is often made between Gross NPA and Net NPA. Net NPA is obtained by
deducting items like interest due but not recovered, part payment received and kept in
suspense account etc., from Gross NPA.

As shown in the above

table –1 over the years the NPAs as a percentage of net advances and total assets have
been declining but actual numbers is increasing.

Dealing with NPAs involves two sets of policies

1.Relating to existing NPAs

2. To reduce fresh NPA generation.

As far as old NPAs are concerned, a bank can remove it on its own or sell the assets to
AMCs to clean up its balance sheet. For preventing fresh NPAs, the bank itself should
adopt proper policies.

Causes for Non Performing Assets

A strong banking sector is important for a flourishing economy. The failure of the
banking sector may have an adverse impact on other sectors. The Indian banking system,
which was operating in a closed economy, now faces the challenges of an open economy.
On one hand a protected environment ensured that banks never needed to develop
sophisticated treasury operations and Asset Liability Management skills.

On the other hand a combination of directed lending and social banking relegated
profitability and competitiveness to the background. The net result was unsustainable
NPAs and consequently a higher effective cost of banking services.

One of the main causes of NPAs into banking sector is the directed loans system under
which commercial banks are required a prescribed percentage of their credit (40%) to
priority sectors. As of today nearly 7 percent of Gross NPAs are locked up in 'hard-core'
doubtful and loss assets, accumulated over the years.

The problem India Faces is not lack of strict prudential norms but

i. The legal impediments and time consuming nature of asset disposal proposal.

ii. Postponement of problem in order to show higher earnings.

iii. Manipulation of debtors using political influence.

There are several reasons for an account becoming NPA.

* Internal factors

* External factors

Internal factors:

1. Funds borrowed for a particular purpose but not use for the said purpose.

2. Project not completed in time.

3. Poor recovery of receivables.

4. Excess capacities created on non-economic costs.

5. In-ability of the corporate to raise capital through the issue of equity or other debt
instrument from capital markets.
6. Business failures.

7. Diversion of funds for expansion\modernization\setting up new projects\ helping or

promoting sister concerns.

8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, mis-

appropriation etc.,

9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-
ups, delay in settlement of payments\ subsidiaries by government bodies etc.,

External factors:

1. Sluggish legal system -

• Long legal tangles

• Changes that had taken place in labour laws
• Lack of sincere effort.

2. Scarcity of raw material, power and other resources.

3. Industrial recession.

4. Shortage of raw material, raw material\input price escalation, power shortage,

industrial recession, excess capacity, natural calamities like floods, accidents.

5. Failures, non payment\ over dues in other countries, recession in other countries,
externalization problems, adverse exchange rates etc.

6. Government policies like excise duty changes, Import duty changes etc.,
 APPRAISAL OF THE PERFORMANCE
OF THE BANKING SECTOR
India’s financial market has been gradually developing, but still remains bank-
dominated in the reform period. The extent of financial deepening measured by total
deposits in GDP has risen only modestly from 30 per cent in 1991 to 38 per cent in 1999.
Capital market development has also been quite sluggish. Outstanding government and
corporate bonds as a share of GDP rose from 14 per cent in 1991 to 18 per cent in 1999
and from only 0.7 per cent in 1996 to 2 per cent in 1998, respectively, while equity
market capitalization dropped from 37 per cent in 1995 to 28 per cent in 1999.

Nevertheless, the government’s commitment on restructuring the highly regulated

banking sector appears strong. Since financial reforms were launched in 1991 and
particularly when the entry of new banks was permitted in 1993, public-sector banks
appear to have become more conscious of the need for greater profitability and
efficiency, suggesting that the reform has had a favourable impact on India’s financial
market.

According to an analysis of the overall performance of state-owned, domestic and

foreign banks based on trend patterns in 1993-2000, the overall performance of
publicsector banks appears comparable with foreign and private domestic banks (table
1). In general, foreign banks performed better than domestic banks (public-sector
and private domestic banks) in terms of cost, earnings efficiency and soundness.
However, domestic banks overtook foreign banks in terms of profitability in 1999-2000.
Moreover, all banks are comparable in terms of the scale of medium- to long-term credit
and liquidity.
 Performance Analysis –Banking
(a) Reach & Deepening

 Wide reach of banking system maintained

after reforms,
 Despite slight decline share of direct flow
towards disadvantaged sectors continued
 Considerable increase in per branch business
since the initiation of reforms
 Substantial deepening of financial sector
 Performance Analysis –Banking –
(b) Balance Sheet

• Deposits remained stable and predominant source of funds.

• Share of loans in total liabilities declined in mid-1990s, but revived in recent
years
• Strong increase in investment activities
• Despite sharp decline in SLR large Gilt holdings
• Despite some increase non-SLR investment remains low
 Performance Analysis –Banking –
(c) Capital Structure (1)

RESEARCH
METHODOLOGY

• Distinct improvement in CRAR of banks

• In public sector banks recapitalisation by government initially (about 1% of GDP)
Capital Structure (2)
 (d) Asset Quality

• Marked improvements in asset quality

• Public sector banks showed more credible performance in NPL management than
private sector banks

(e) Competition
 (f) Efficiency

• Clear improvement in profitability in the post-reform period

• Reduction in spread and operating expenditure
• Improvement in efficiency across the bank groups
 RESEARCH METHODOLOGY

What is Research?

Research is an organized and systematic way of finding answers to the questions.

SYSTEMATIC because there is a definite set of procedures and steps which you will
follow. There are certain things in the research process which are always done in order to
get the most accurate results.

ORGANIZED in that there is a structure or method in going about doing research. It is a

planned procedure, not a spontaneous one. It is focused and limited to a specific scope.

FINDING ANSWERS is the end of all research. Whether it is the answer to a hypothesis
or even a simple question, research is successful when we find answers. Sometimes the
answer is no, but it is still an answer.

QUESTIONS are central to research. If there is no question, then the answer is of no use.
Research is focused on relevant, useful, and important questions. Without a question,
research has no focus, drive, or purpose.

“Research is common parlance refers to search for a knowledge.”

Research can also be defined as a scientific & systematic search for pertinent information
on specific topic.Then research methods which mean all those methods which are used by
the researcher during the course of studying his research problem.

Research methodology is a way to systematically solve the research problem. It may be

understood as science of studying how research is done scientifically. In this we study the
various steps that are generally adopted by the researcher in studying his research
problem along with the logic behind them.
Sampling and sample design

Sampling involves any procedure using a small number of items or part of the whole
population to make conclusion regarding the whole population. A sample, is a subset or
some part of a larger population.

Sample Design

A sample design is a definite plan for obtaining a sample from the sampling frame. It
refers to the technique or the procedure that is adopted in selecting the sampling units
from which inferences about the population is drawn. Sampling design is determined
before the collection of the data.

The sample size of 2003-2007 is taken for present study due to time limitation

RESEARCH DESIGN

A research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in
procedure.

The research design with help to answer the following questions:

 Why the study is being made?

 From where the data needed can be collected?
 What time is required for the study to be competed & how much material is
needed.
 What will be the technique for data collections?
 How the data can be analyzed?
 TYPES OF RESEARCH
DESIGN

EXPLORATORY DESCREPTIVE EXPERIMENTAL

RESEARCH RESEARCH RESEARCH
DESIGN
DESIGN DESIGN

 Exploratory Research Design: The main purpose of such studies is that of

formulating a problem for more precise investigation. The major emphasis in such
studies is on the discovery of ideas and insights. As such the research design
appropriate for such studies must be flexible enough to provide opportunity for
considering different aspects of a problem under study.

 Descriptive Research Design: Descriptive Research studies are those which are
concerned with describing the characteristics of a particular individual, or of a
group. In descriptive studies the researcher must be able to define clearly, what he
wants to measure and must find adequate methods for measuring it along with a
clear cut definition of ‘population’ he wants to study.

Research design in this case is Descriptive Research

DATA COLLECTION

TYPES OF DATA

PRIMARY SECONDRY
DATA DATA
PRIMARY DATA

METHODS OF PRIMARY DATA

OBSERVATION INTERVIEW QUETIONAIRE SCHEDULE

METHOD METHIOD METHOD METHOD

SECONDARY DATA

The secondary data on the other hand, are those which have already been collected by
someone else and which have already been passed through the statistical processes. When
the researcher utilizes secondary data then he has to look into various sources from where
he can obtain them. For e.g. Books, magazine, newspaper, Internet, publications and
reports. In the present study I have made use of secondary data collected from various
websites, Journals & Various RBI’s Bulletins etc...
 LIMITATIONS OF THE STUDY
As we all know that every work that has to be performed by someone includes some
hurdles or says limitation. There are always some problems in each and every work. If
there were no problems the performing each task is so easy that everyone that does not
have any knowledge about the can also performs that work without and hurdle.
So the following are the some limitations or problems that are faced during the
dissertation report.

1. Lack of knowledge:- about conducting the research makes it very difficult for
us to perform out task. As it was our first time that we indulge in dissertation
report. The lack of experience made the task difficult.
2. Shortage of time:-As the time period that is given to us for doing dissertation
study was also too less. In a short time period that is very difficult that we can
get the knowledge about each and everything related to our project.
3. Secondary data:-I used secondary data in my study that is not a reliable
source of information for doing research work.
4. Limited Area:- The study is restricted to the limited areas of search.
5. Nature:- The study is suggestive in nature and not much conclusive.
6. Unavailability of information:- Some of the information in banks is not to
be disclosed to any resource of information. Even I was unable to access that
information.
 STATISTICAL TOOLS

Introduction:-
An educated citizen needs an understanding of basic statistical tool to
function in a world that is becoming increasingly dependant on quantitative
information. Statistics means numerical description to most people. In fact the term
statistics is generally used to mean numerical facts and figures such as agriculture
production during a year, rate of inflation and so on. However as a subject of study,
statistics refers to the body of principles and procedures developed for the collection,
classification, summarization and interpretation of numerical data and for the use of
such data.

MEANING:-

Broadly speaking, the term statistics has been generally used in two senses:-

 Plural Sense
 Singular Sense

Plural sense refers to the numerical data. Singular Sense refers to a Science in
which we deals with the techniques of collecting, classifying, presenting, analyzing
and interpreting the data, the concept in its singular sense, refers to Statistical
Method.

PURPOSE:-

Without the assistance of Statistical Method, an organization would find it

impossible to make sense of the huge data. The purpose of statistics is to:-
• Manipulate
• Summarize
 • investigate

the data so that useful decision making information results could be found out. In fact,
every business manager needs a sound background of statistics. Statistics is a set of
Decision Making techniques which aids businessman in drawing inferences from the
available data.

STATISTICAL TOOLS:-

Statistical tools are the basic measures, which helps in defining the relation
between different items, present, past and future trend of the future trend of the
particular business etc. A wide variety of statistical tools are available and any of
them can be used by any businessman depending upon the nature of his trade.
Various statistical tools are:-

1. Correlation
2. Regression
3. Index Numbers
4. Probability Distribution
5. Hypothesis Testing
Regression

Linear regression is without doubt the most frequently used statistical method. A
distinction is usually made between simple regression (with only one explanatory
variable) and multiple regression (several explanatory variables) although the overall
concept and calculation methods are identical.
The principle of linear regression is to model a quantitative dependent variable Y though
a linear combination of p quantitative explanatory variables, X1, X2, …, Xp. The
determinist model (not taking randomness into account) is written for observation i as
follows:

Non-SLR Loans and

Deposits TotalINVESTMENT INVESTMENT ADVANCES
1991-92 77.7 28.9 .. 46.8
1992-93 78.4 30.5 .. 45
1993-94 80.3 35.4 5 38.7
1994-95 78.9 33.6 4.6 40.5
1995-96 76.4 31 3.5 42.1
1996-97 79.9 33.3 5 41
1997-98 81 34.2 7.1 40.8
1998-99 81.1 35.7 8.6 38.8
1999-00 81.1 37.3 9.1 40.2
2000-01 81.5 38 8.9 40.6
2001-02 78.5 38.2 8.7 42
2002-03 79.8 40.8 8.1 43.6
2003-
04* 80.5 41.7 7.2 45

Here in this table deposits are independent variables and Investment and Loans and
advances are dependant on deposits therefore we can use Regression analysis for this data
with the help of XLSTAT.
 TotalINVESTMENT Deposits
1991-92 28.9 77.7
1992-93 30.5 78.4
1993-94 35.4 80.3
1994-95 33.6 78.9
1995-96 31 76.4
1996-97 33.3 79.9
1997-98 34.2 81
1998-99 35.7 81.1
1999-00 37.3 81.1
2000-01 38 81.5
2001-02 38.2 78.5
2002-03 40.8 79.8
2003-
04* 41.7 80.5

Evaluating
the
information
brought by
the
variables
(H0 =
Y=Moy(Y)):

Sum of Mean Fisher's

Source DF squares square F Pr > F
Model 1 65.542 65.542 6.209 0.030
Residuals 11 116.121 10.556
Total 12 181.663

Data and regression line S ta nda rdize d re s idua ls

50 Obs 13

45 Obs 12

40 Obs11
Obs 10
35
Obs9
30
Obs8
25
Obs7
20
Obs6
15
Obs5
10
Obs4
5
Obs3
0
Obs2
76 77 78 79 80 81 82
Obs1
Depo sits

-2 -1.5 -1 -0.5 0 0.5 1 1.5 2

Observations P redictions
S tandardized res iduals
Conf. on pred (95.00%) Conf. on mean (95.00%)
 Loans and
ADVANCES Deposits
1991-92 46.8 77.7
1992-93 45 78.4
1993-94 38.7 80.3
1994-95 40.5 78.9
1995-96 42.1 76.4
1996-97 41 79.9
1997-98 40.8 81
1998-99 38.8 81.1
1999-00 40.2 81.1
2000-01 40.6 81.5
2001-02 42 78.5
2002-03 43.6 79.8
2003-
04* 45 80.5

Evaluating
the
information
brought by
the
variables
(H0 =
Y=Moy(Y)):

Sum of Mean Fisher's

Source DF squares square F Pr > F
Model 1 19.223 19.223 3.821 0.077
Residuals 11 55.345 5.031
Total 12 74.568

Data and regression line Standardized residuals

60 Obs13

Obs12

50 Obs11
Obs10
40 Obs9

Obs8
30 Obs7

Obs6
20
Obs5

Obs4
10
Obs3

Obs2
0
76 77 78 79 80 81 82 Obs1

Deposits -2 -1.5 -1 -0.5 0 0.5 1 1.5 2

Standardized residuals
Observations P redictions
Conf. on pred (95.00%) Conf. on mean (95.00%)
 Trend Analysis Of NPA’s in Public Sector Banks During Period
(1992-02)

1:Gross NPAs to Gross Advances:

Year Gross NPAs / Gross Trend Line
Advances
1. 1992-93 23.2 -
2. 1993-94 24.8 22.5
3. 1994-95 19.5 20.8
4. 1995-96 18.0 18.43
5. 1996-97 17.8 17.26
6. 1997-98 16.0 16.56
7. 1998-99 15.9 15.33
8. 1999-00 14.0 14.1
9. 2000-01 12.4 12.5
10. 2001-02 11.1 -

Note: Series – 1: Gross NPAs to Gross Advances

Series – 2: Trend Line

ANALYSIS

During the year 1992-93 to 2001-02, there has been a sharp decline in Gross NPAs to
Gross Advances. The Trend Line also shows a continues decreasing trend. From this, it
can be concluded that over the next three years (i.e 2002-03 to 2004-05), Gross NPAs to
Gross Advances of public sector banks would decrease.

2. Gross NPAs to Total Advances:

 Year Gross NPAs / Total Trend Line
Advances
1. 1992-93 11.8 -
2. 1993-94 10.8 10.43
3. 1994-95 8.7 9.23
4. 1995-96 8.2 8.23
5. 1996-97 7.8 7.66
6. 1997-98 7.0 7.16
7. 1998-99 6.7 6.56
8. 1999-00 6.0 6.00
9. 2000-01 5.3 5.4
10. 2001-02 4.9 -

FINDI

Note: Series – 1: Gross NPAs to Total Advances

Series – 2: Trend Line

ANALYSIS
During the year 1992-93 to 2001-02 , there has been considerable decline in GNPAs to
Total Assets. The Trend Line too says the same story. Therefore the GNPAs to Total
Assets of public sector banks will decline in the next three years to come (i.e 2002-03 to
2004-05).

3. Net NPAs to Net Advances:

Year Net NPAs / Net Trend Line

Advances
 1. 1992-93 11.3 -
2. 1993-94 12.87 11.62
3. 1994-95 10.7 10.82
4. 1995-96 8.9 9.6
5. 1996-97 9.2 8.76
6. 1997-98 8.2 8.5
7. 1998-99 8.1 7.9
8. 1999-00 7.4 7.4
9. 2000-01 6.7 6.63
10. 2001-02 5.8 -

Note: Series - 1: Net NPAs to Net Advances

Series – 2: Trend Line

ANALYSIS
During the year 1992-93 to 2001-02, there has been a steady and considerable decrease in
percentage of Net NPAs to Net Advances. The Trend Line also shows that there is a
decreasing trend and Net NPAs over next three years (i.e 2002-03 to 2004-05) would
decrease considerably.

4. Net NPAs to Total Assets:

Year Net NPAs / Total Trend Line
Assets
1. 1992-93 4.6 -
2. 1993-94 5.1 4.56
3. 1994-95 4 4.23
 4. 1995-96 3.6 3.76
5. 1996-97 3.7 3.53
6. 1997-98 3.3 3.36
7. 1998-99 3.1 3.1
8. 1999-00 2.9 2.9
9. 2000-01 2.7 2.66
10. 2001-02 2.4 -

Note: Series -1: Net NPAs to Total Assets

Series – 2: Trend Line
Analysis
During the year 1992-93 to 2001-02, there has been a marginal decline in Net NPAs to
Total Assets. The Trend Line shows that there has been a steady decline and it can be
inferred that over next three years (i.e 2002-03 to 2004-05), Net NPAs to Total Assets of
public sector banks would decrease but at a marginal rate.
FINAL ANALYSIS
The future picture of Commercial banks more so the public sector banks seem to be rosy.
As the Trend Line suggests that the NPAs of public sector banks will decline marginally
both in terms of Gross and Net figures over next three years. This may be due to higher
provisions, which the public sector banks have been providing. The real issue to be
identified is though the NPAs, as a percentage seems to be declining over the years but
the absolute figures seems to be increasing. In this vein it would be interesting to see the
NPAs both in terms of absolute figures and in terms of percentage of public sector banks
in the coming three years.
ANCOVA
ANCOVA (ANalysis of COVAriance) can be seen as a mix of ANOVA and linear
regression as the dependent variable is of the same type, the model is linear and the
hypotheses are identical. In reality it is more correct to consider ANOVA and linear
regression as special cases of ANCOVA.
Interactions between quantitative variables and factors
One of the features of ANCOVA is to enable interactions between quantitative variables
and factors to be taken into account. The main application is to test if the level of a factor
(a qualitative variable) has an influence on the coefficient (often called slope in this
context) of a quantitative variable. Comparison tests are used to test if the slopes
corresponding to the various levels of a factor differ significantly or not.

Loans and
ADVANCES Deposits
1991-92 46.8 77.7
1992-93 45 78.4
1993-94 38.7 80.3
1994-95 40.5 78.9
1995-96 42.1 76.4
1996-97 41 79.9
1997-98 40.8 81
1998-99 38.8 81.1
1999-00 40.2 81.1
2000-01 40.6 81.5
2001-02 42 78.5
2002-03 43.6 79.8
2003-
04* 45 80.5
Summary for
the dependent
variable:

No. of
Total no. of values No. of values Sum of Standard
Variable values used ignored weights Mean deviation
Loans and
ADVANCES 13 13 0 13 41.931 2.493

Evaluating the information brought by the variables (H0 =

Y=Moy(Y)):

Source DF Sum of Mean Fisher's Pr >

 squares square F F
Model 11 73.588 6.690 6.826 0.291
Residuals 1 0.980 0.980
Total 12 74.568

L o a n s a n d A D V A N C ES / S ta n d a r d iz e d r e s id u a ls
Fa c tor De pos its
0.8

47
0.6
46
45 0.4
44
43 0.2

42
0
41 38 40 42 44 46
40 -0.2
39
38 -0.4

-0.6

D epo s its -0.8

L o a ns a nd A D V A N C E S
CORRELATION
Three correlation coefficients are proposed to compute the correlation between a set of
quantitative variables, whether continuous, discrete or ordinal (in the latter case, the
classes must be represented by values that respect the order):

Pearson correlation coefficient: this coefficient corresponds to the classical linear

correlation coefficient. This coefficient is well suited for continuous data. Its value ranges
from -1 to 1, and it measure the degree of linear correlation between two variables. Note:
the squared Pearson correlation coefficient gives an idea of how much of the variability
of a variable is explained by the other variable. The p-values that are computed for each
coefficient allow testing the null hypothesis that the coefficients are not significantly
different from 0. However, one needs to be cautions when interpreting these results, as if
two variables are independent, their correlation coefficient is zero, but the reciprocal is
not true.

Spearman correlation coefficient (rho): this coefficient is based on the ranks of the
observations and not on their value. This coefficient is adapted to ordinal data. As for the
Pearson correlation, one can interpret this coefficient in terms of variability explained,
but here we mean the variability of the ranks.

Kendall correlation coefficient (tau): as for the Spearman coefficient, it is well suited for
ordinal variables as it is also based on ranks. However, this coefficient is conceptually
very different. It can be interpreted in terms of probability: it is the difference between
the probabilities that the variables vary in the same direction and the probabilities that the
variables vary in the opposite direction.
Correlation between Earnings & Expenses of Public Sector Banks

Year Total
Scattergram of the data
Earnings Total
Expenses 2000

1800

1955 1 1600
0
1975 4 1400
4
1990 42 1200
42
1000
1995 304
297 800
2000 1,149
1077 600
2002 1,510
1395 400
2003 1,724
200
1553
2004 2,345 0
1895 0 500 1000 1500 2000 2500
T o tal E arnings

Pearson's correlation coefficient test (parametric test):

Observed value 0.996

Two-tailed p-value < 0.0001
Alpha 0.05

Decision:
At the level of significance Alpha=0.050 the decision is to reject the
null hypothesis of absence of correlation. Result of correlation is high
Degree Positive Correlation
In other words, the correlation is significant.
 FINDINGS&DISCUSSIONS
 Since the financial reforms of 1991, there have been significant favourable
changes in India’s highly regulated banking sector. This study has
assessed the impact of the reforms by examining seven hypotheses.
 It concludes that the financial reforms have had a moderately positive impact on
reducing the concentration of the banking sector (at the lower end) and improving
performance.
 The empirical estimation showed that regulation lowered the profitability and cost
efficiency of public-sector banks at the initial stage of the reforms, but such a
negative impact disappeared once they adjusted to the new environment.
 Moreover, allowing banks to engage in non-traditional activities has contributed
to improved profitability and cost and earnings efficiency of the whole banking
sector, including public-sector banks.
 Lending to priority sectors and the public-sector has not had a negative effect on
profitability and cost efficiency, contrary to our expectations.
 Further, foreign banks (and private domestic banks in some cases) have generally
performed better than other banks in terms of profitability and income efficiency.
This suggests that ownership matters and foreign entry has a positive impact on
banking sector restructuring.
 A further reduction of SLR and more encouragement for non-traditional activities
(under the bank subsidiary form) may also make the banking sector more resilient
to various adverse shocks.
 For the continuous growth of the Indian economy, continuation of the banking
and financial reforms will always be a critical issue.
 It boosts investment and growth throughout the economy.
 The response of the banks to the reforms has been impressive. The banks have
been adjusting very well to the new environment.
  The level of NPA of public sector banks remained high; a noteworthy
development has been their significant reduction in relation to net advances in
recent years.
BIBLIOGRAPHY
BOOKS
 “C.R Kothari 4: The information regarding the basics of research and
research methodology, what are the different types of research designs,
problem statement, sources of data collection and methods of data
collection are given in this section.6
 “S.P Gupta 6: The information regarding the statistical tools and their
limitations in different fields the research is given in this section. This
section explains, why to use correlation and the situations in which
correlation can be used, and meaning of correlation . This section also
explains the Trend Analysis Technique..
 S.C. Gupta3: Information regarding various statistical & analytical tools is
given in this section.
 Wilkinson & Bhandarkar5: In this section various parts of research and
research methodology is given which tells about the techniques of doing
research.
 Tripathi P.C1: this book helped me in knowing about the change.
 Gupta C.B.-7, "Management theory and practice”: this book
helped me in finding the factors affecting the organization’s change.

JOURNALS
 Finance India15, September 2005 pp-957-961:- Impact of NPAs on strategic
banking variables i.e. impact on profitability, Productivity, Capital Adequacy,
Credit Deployment and Mobilisation.
 Chartered Financial Analysis17, December 2005 pp-52:- Concept of
SARFAESI Act.
 Southern Economist20, February 2006 pp-15:- Details of Corporate Debt
Restructuring Scheme.
 Management Accountant24, May 2006 pp- 359:- Early Warning System
 Chartered Financial Analysis29, October 2005 pp-64 :-Types of banking risk
 Chartered Financial Analysis32, October 2007 pp-31-31:-Growth and structural
change in banking sector
 Chartered Financial Analysis34, November 2007 pp-8-9:-Concept of
Borrower’s Special Investigation Audits
 Economic and political weekly30, October 16, 2004 pp-10:-Meaning and
concept of financial reforms.
 Chartered Secretary24, Feburary 2003, V.S.Datey pp-22-24 :- Importance of
credit rating
 Treasury Management , December 2004, MPM Vinay Kumar pp-14-1610 :-
Adverse effect of Financial norms.
 Chartered Financial Analysis, August 2004, B.P.Dhaka pp-47-5211 :- Reason
behind huge level of NPAs in the Indian Banking System
 Paradigm, July 2005 pp-12-1412 :- Indian economy and Banking
 Management Accountant, September 2007 pp-48-5013 :- Accounts which need
not be classified as NPAs
 Business Today, May 2006 pp-3414 :- Measures in case of non payment of NPAs
 Chartered Financial Analysis-29, December 2005 pp-25-28 :- Norms for
treating various advances as NPAs
 Financial Risk Management, February 2006 pp-50-55:- Narsimhan
Committee’s recommendation
 Data quest35 , April 2005 pp-19 Gross NPAs expressed as % of gross advances
 RBI Bulletin, July 1999 pp-34-36 :- RBI guidelines on income generation
 IBA Bulletin, January 2004 pp-17-19:- Magnitude of gross NPAs post and prior
to the reforms.
 Chartered Financial Analysis, February 2004 pp-12-140 :-Qualitative aspects
of the micro level impact of reforms.

 Websites
 www.centurionbop.co.in/news/press_190505.html1 :- Summarized RBI
guidelines for reforms classification and provisioning.
 www.domain-b.com/management/m_a/20060904_vijay_kalantri.html2 :- RBI
guidelines for recognition.
 www.twincitiesbbs.com/php/subra/corporat.htm3 :- Non Performing Assets of
Public Sector Banks.
 www.blonnet.com/2002/08/07/stories/2002080700050800.htm4 :- NPAs and
recoveries of Public Sector Banks
 www.adroitquest.com/mgmt_team.htm5 :- Estimates of erosion of profits of
Public Sector Banks
 www.rbi.org/guidelines/speeches.php :- various guidelines regarding the
financial reforms.
 www.ibef.org :- various information regarding the financial sector reforms and its
impact on banking in India.
 www.financialexpress.com/news/Financial-reforms-unlikely-to-take-place-
before-LS-polls/273055: Pending reforms in the financial sectors such as
banking, insurance and ... India Inc has shown its discomfort over this
uncertainty.
 www.findarticles.com/p/articles/mi_m0254/is_n1_v56/ai_19266182: India Reforms Its
Economy: 1991-1994 ... and Chief Minister and Governor of the state of Andhra
Pradesh in south India before moving on to represent his performance...
 www.financialexpress.com/news/Pending-financial-reforms-spooks-India: Pending
reforms in the financial sector including pension, ... which got going with the
boards of the State Bank of India and State Bank of ...
 www.banknetindia.com/banking/rbip3.htm: scheduled commercial banks
(excluding regional rural banks), PDs and all-India financial institutions were
allowed to undertake forward rate
 ANNEXURES

Regression Analysis
Modeling variable
TotalINVESTMENT:

Summary for the

dependent variable:

No. of No. of
Total no. values values Sum of Standard
Variable of values used ignored weights Mean deviation
35.27
TotalINVESTMENT 13 13 0 13 7 3.891

Summary
for the
quantitative
variables:

Standard
Variable Mean deviation
Deposits 79.623 1.541

Goodness of fit coefficients:

R (coefficient of correlation) 0.601

R² (coefficient of determination) 0.361
R²adj. (adjusted coefficient of
determination) 0.303
SSR 116.121

Evaluating
the
information
brought by
the
variables
(H0 =
Y=Moy(Y)):

Sum of Mean Fisher's

Source DF squares square F Pr > F
Model 1 65.542 65.542 6.209 0.030
Residuals 11 116.121 10.556
Total 12 181.663
 Data and regression line Deposits / Standa rdize d res idua ls

50 2

45
1.5
40

35 1
30
0.5
25

20
0
15 76 77 78 79 80 81 82

10 -0.5

5
-1
0
76 77 78 79 80 81 82 -1.5
Depo sits

-2
Observations P redictions
D epo s its
C onf. on pred (95.00%) C onf. on mean (95.00%)

TotalINVESTMENT / Standardized re siduals Standardized residuals

2 Obs13

Obs12
1.5
Obs11

Obs10
1
Obs9
0.5 Obs8
Obs7
0
Obs6
20 25 30 35 40 45 50
Obs5
-0.5
Obs4
-1 Obs3

Obs2
-1.5
Obs1

-2 -2 -1.5 -1 -0.5 0 0.5 1 1.5 2

T o talIN V E S T M E N T Standardized residuals
Summary
statistics:

Obs. with Std.

Observatio missing Obs. without Minimu Maximu deviati
Variable ns data missing data m m Mean on
Loans and 41.93
ADVANCES 13 0 13 38.700 46.800 1 2.493
79.62
Deposits 13 0 13 76.400 81.500 3 1.541

Regression of
variable Loans and
ADVANCES:

Goodness of fit
statistics:

Observations 13.000
Sum of weights 13.000
DF 11.000
R² 0.258
Adjusted R² 0.190
MSE 5.031
RMSE 2.243
MAPE 4.038
DW 0.841
Cp 2.000
AIC 22.832
SBC 23.962
PC 1.012

Analysis of variance:

Sum of Mean
Source DF squares squares F Pr > F
Model 1 19.223 19.223 3.821 0.077
Error 11 55.345 5.031
Corrected Total 12 74.568
Computed against model Y=Mean(Y)

Model parameters:

Standard Lower bound Upper bound

Source Value error t Pr > |t| (95%) (95%)
Intercept 107.342 33.471 3.207 0.008 33.674 181.010
Deposits -0.822 0.420 -1.955 0.077 -1.747 0.104
 Regression of Loans and ADVANCES by Deposits Standardized residuals / Deposits
(R²=0.258)
2
55
1.5
Loans and ADVANCES

50

Standardized residuals
45

0.5
40

0
35 76 77 78 79 80 81 82

-0.5
30
76 77 78 79 80 81 82
-1
Deposits

-1.5
Active Model
Deposits
Conf. interval (Mean 95%) Conf. interval (Obs. 95%)

Pred(Loa ns a nd ADV ANCES) / Sta nda rdize d P r e d(Loa ns a nd ADV ANCES ) / Loa ns a nd ADV AN
re s idua ls
47
2
46

1.5 45

1 44
Loans and ADVANCES
Standardized residuals

43
0.5
42
0
40 41 42 43 44 45 41

-0.5 40

-1 39

38
-1.5
38 39 40 41 42 43 44 45 46 47
Pr e d (Loans an d ADV A NC ES)
P r e d ( L o a n s an d A DV A NC ES )
 Table 2: Select Balance Sheet Indicators of Commercial Banks
Operating in India

As a Ratio of Total Assets/Liabilities

Deposits Total Non-SLR Loans and
Investments Investment Advances
1991-92 77.7 28.9 .. 46.8
(17.1) (28.4) .. (13.7)
1992-93 78.4 30.5 .. 45.0
(13.9) (19.0) .. (8.6)
1993-94 80.3 35.4 5.0 38.7
(15.5) (31.1) .. -(3.0)
1994-95 78.9 33.6 4.6 40.5
(16.3) (12.2) (9.4) (24.0)
1995-96 76.4 31.0 3.5 42.1
(12.7) (7.4) -(11.7) (20.9)
1996-97 79.9 33.3 5.0 41.0
(17.5) (20.6) (60.2) (9.2)
1997-98 81.0 34.2 7.1 40.8
(19.8) (21.5) (69.3) (17.6)
1998-99 81.1 35.7 8.6 38.8
(19.7) (24.9) (45.3) (13.9)
1999-00 81.1 37.3 9.1 40.2
(16.3) (21.3) (22.4) (20.3)
2000-01 81.5 38.0 8.9 40.6
(17.7) (19.3) (14.2) (18.5)
2001-02 78.5 38.2 8.7 42.0
(14.3) (19.4) (16.5) (22.7)
2002-03 79.8 40.8 8.1 43.6
(12.4) (18.1) (3.3) (14.7)
2003-04* 80.5 41.7 7.2 45.0
(17.5) (19.7) (2.9) (15.3)

Source: Reserve Bank Of India

 Table 4: Ownership Structure of Public Sector Banks
(as at end-March 2004, Per cent)
Government/ Share of Others
RBI Share
Nationalised Banks
Vijaya Bank 53.9 46.1
Corporation Bank 57.2 42.8
Union Bank of India 60.9 39.2
Indian Overseas Bank 61.2 38.8
Andhra Bank 62.5 37.5
Oriental Bank of Commerce 66.5 33.5
Bank of Baroda 66.8 33.2
Bank of India 69.5 30.5
Dena Bank 71.0 29.0
Allahabad Bank 71.2 28.8
Canara Bank 73.2 26.8
Syndicate Bank 73.5 26.5
UCO Bank 75.0 25.0
Bank of Maharashtra 76.8 23.2
Punjab National Bank 80.0 20.0
Central Bank of India 100.0 0.0
Indian Bank 100.0 0.0
Punjab & Sind Bank 100.0 0.0
United Bank of India 100.0 0.0
State Bank Group
State Bank of India 59.7 40.3
State Bank of Bikaner & Jaipur 75.0 25.0
State Bank of Travancore 75.0 25.0
State Bank of Mysore 92.3 7.7
State Bank of Indore 98.1 2.0
State Bank of Hyderabad 100.0 0.0
State Bank of Patiala 100.0 0.0
State Bank of Saurashtra 100.0 0.0

This table indicates about the ownership structure of public sector banks as per govt. /
RBI share & Share of others with Nationalized Banks and State Bank Group this table
shows that State Bank Group Holds Maximum share with Govt. & RBI. Apart from That
United Bank Of India & Indian Bank Holds maximum Share with Govt..