OBJECTIVES AND SCOPE OF THE PROJECT

The banking industry is one of the fastest growing industry in

India. It is a mirror image of the economy of the country. With the liberalization
of the economy, India has become the playground of major global banking
majors.

The major objectives of the study are as below:

To analyse how political, economical, socio-cultural, technological factors affect

this industry by PEST analysis.
To find out level of competition in Indian banking industry through using porter’s
five force model.
To find out driving forces and key success factors of the industry
• To analyze various threats and opportunities for the industry
• To focus on current trends and future of the industry.

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 RESEARCH METHODOLOGY

We have done exploratory research and for that purpose we had

used secondary data.

We had collected this secondary data from various published

materials like newspapers, magazines, books etc and from Internet web sites.
From these various information and data we had done qualitative and
quantitative analysis to find out impact of various forces, effect of macro
environmental factors, major trends and future of the industry.

1.1: History of Indian banking

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 A bank is a financial institution that provides banking and other
financial services. By the term bank is generally understood an institution that
holds a Banking Licenses. Banking licenses are granted by financial supervision
authorities and provide rights to conduct the most fundamental banking services
such as accepting deposits and making loans. There are also financial institutions
that provide certain banking services without meeting the legal definition of a
bank, a so-called Non-bank. Banks are a subset of the financial services industry.

The word bank is derived from the Italian banca, which is

derived from German and means bench. The terms bankrupt and "broke" are
similarly derived from banca rotta, which refers to an out of business bank,
having its bench physically broken. Moneylenders in Northern Italy originally
did business in open areas, or big open rooms, with each lender working from
his own bench or table.

Typically, a bank generates profits from transaction fees on

financial services or the interest spread on resources it holds in trust for clients
while paying them interest on the asset. Development of banking industry in
India followed below stated steps.

 Banking in India has its origin as early as the Vedic period. It is believed
that the transistion from money lending to banking must have occurred
even before Manu, the great Hindu Jurist, who has devoted a section of his
work to deposits and advances and laid down rules relating to rates of
interest.

 Banking in India has an early origin where the indigenous bankers played a
very important role in lending money and financing foreign trade and
commerce. During the days of the East India Company, was the turn of the
agency houses to carry on the banking business. The General Bank of India
was first Joint Stock Bank to be established in the year 1786. The others
which followed were the Bank Hindustan and the Bengal Bank.
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 In the first half of the 19th century the East India Company established
three banks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and
the Bank of Madras in 1843. These three banks also known as Presidency
banks were amalgamated in 1920 and a new bank, the Imperial Bank of
India was established in 1921. With the passing of the State Bank of India
Act in 1955 the undertaking of the Imperial Bank of India was taken by the
newly constituted State Bank of India.

 The Reserve Bank of India which is the Central Bank was created in 1935
by passing Reserve Bank of India Act, 1934 which was followed up with
the Banking Regulations in 1949. These acts bestowed Reserve Bank of
India (RBI) with wide ranging powers for licensing, supervision and
control of banks. Considering the proliferation of weak banks, RBI
compulsorily merged many of them with stronger banks in 1969.

 The three decades after nationalization saw a phenomenal expansion in the

geographical coverage and financial spread of the banking system in the
country. As certain rigidities and weaknesses were found to have developed
in the system, during the late eighties the Government of India felt that
these had to be addressed to enable the financial system to play its role in
ushering in a more efficient and competitive economy. Accordingly, a high-
level committee was set up on 14 August 1991 to examine all aspects
relating to the structure, organization, functions and procedures of the
financial system. Based on the recommendations of the Committee
(Chairman: Shri M. Narasimham), a comprehensive reform of the banking
system was introduced in 1992-93. The objective of the reform measures
was to ensure that the balance sheets of banks reflected their actual
financial health. One of the important measures related to income
recognition, asset classification and provisioning by banks, on the basis of

4
 objective criteria was laid down by the Reserve Bank. The introduction of
capital adequacy norms in line with international standards has been
another important measure of the reforms process.

1.Comprises balance of expired loans, compensation and other bonds such

as National Rural Development Bonds and Capital Investment Bonds.
Annuity certificates are excluded.

2. These represent mainly non- negotiable non- interest bearing securities

issued to International Financial Institutions like International Monetary
Fund, International Bank for Reconstruction and Development and Asian
Development Bank.

3. At book value.

4.Comprises accruals under Small Savings Scheme, Provident Funds,

Special Deposits of Non- Government

 In the post-nationalization era, no new private sector banks were allowed

to be set up. However, in 1993, in recognition of the need to introduce
greater competition which could lead to higher productivity and efficiency
of the banking system, new private sector banks were allowed to be set up
in the Indian banking system. These new banks had to satisfy among
others, the following minimum requirements:

(i) It should be registered as a public limited company;

(ii) The minimum paid-up capital should be Rs 100 crore;
(iii) The shares should be listed on the stock exchange;
(iv) The headquarters of the bank should be preferably located in a
centre which does not have the headquarters of any other bank; and

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(v) The bank will be subject to prudential norms in respect of banking
operations, accounting and other policies as laid down by the RBI. It will have to
achieve capital adequacy of eight per cent from the very beginning.

 A high level Committee, under the Chairmanship of Shri M.

Narasimham, was constituted by the Government of India in December
1997 to review the record of implementation of financial system reforms
recommended by the CFS in 1991 and chart the reforms necessary in the
years ahead to make the banking system stronger and better equipped to
compete effectively in international economic environment. The Committee
has submitted its report to the Government in April 1998. Some of the
recommendations of the Committee, on prudential accounting norms,
particularly in the areas of Capital Adequacy Ratio, Classification of
Government guaranteed advances, provisioning requirements on standard
advances and more disclosures in the Balance Sheets of banks have been
accepted and implemented. The other recommendations are under
consideration.

 The banking industry in India is in a midst of transformation,

thanks to the economic liberalization of the country, which has changed
business environment in the country. During the pre-liberalization period,
the industry was merely focusing on deposit mobilization and branch
expansion. But with liberalization, it found many of its advances under the
non-performing assets (NPA) list. More importantly, the sector has become
very competitive with the entry of many foreign and private sector banks.
The face of banking is changing rapidly. There is no doubt that banking
sector reforms have improved the profitability, productivity and efficiency
of banks, but in the days ahead banks will have to prepare themselves to
face new challenges.

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Indian Banking: Key Developments
1969  Government acquires ownership in major banks
 Almost all banking operations in manual mode
 Some banks had Unit record Machines of IBM for IBR &
Pay roll
1970- 1980  Unprecedented expansion in geographical coverage, staff,
business & transaction volumes and directed lending to
agriculture, SSI & SB sector
 Manual systems struggle to handle exponential rise in
transaction volumes --
 Outsourcing of data processing to service bureaux begins
 Back office systems only in Multinational (MNC) banks'
offices
1981- 1990  Regulator (read RBI) led IT introduction in Banks
 Product level automation on stand alone PCs at branches

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 (ALPMs)
 In-house EDP infrastructure with Unix boxes, batch
processing in Cobol for MIS.
 Mainframes in corporate office

1991-1995  Expansion slows down

 Banking sector reforms resulting in progressive de-
regulation of banking, introduction of prudential banking
norms entry of new private sector banks
 Total Branch Automation (TBA) in Govt. owned and old
private banks begins
 New private banks are set up with CBS/TBA form the start

1996-2000  New delivery channels like ATM, Phone banking and

Internet banking and convenience of any branch banking and
auto sweep products introduced by new private and MNC
banks
 Retail banking in focus, proliferation of credit cards
 Communication infrastructure improves and becomes cheap.
IDRBT sets up VSAT network for Banks
 Govt. owned banks feel the heat and attempt to respond
using intermediary technology, TBA implementation surges
ahead under fiat from Central Vigilance
 Commission (CVC), Y2K threat consumes last two years

2000-2003  Alternate delivery channels find wide consumer acceptance

 IT Bill passed lending legal validity to electronic
transactions
 Govt. owned banks and old private banks start implementing
CBSs, but initial attempts face problems
 Banks enter insurance business launch debit cards

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 1.2: CURRENT SCENARIO

The banking industry in India is in a midst of transformation,

thanks to the economic liberalization of the country, which has changed business
environment in the country. During the pre-liberalization period, the industry
was merely focusing on deposit mobilization and branch expansion. But with
liberalization, it found many of its advances under the non-performing assets
(NPA) list. More importantly, the sector has become very competitive with the
entry of many foreign and private sector banks. The face of banking is changing
rapidly. There is no doubt that banking sector reforms have improved the
profitability, productivity and efficiency of banks, but in the days ahead banks
will have to prepare themselves to face new challenges.

 For the first quarter ended June 2004, the banking sector recorded a bottom
line growth of 18% to Rs 4852.50 crore. Higher net interest income and
lower provisioning were the main reasons for the profit growth during the
quarter. However, the above results were achieved despite higher operating
expenses and a lower rise in non-interest income.

 Among banks, public sector banks outperformed private sector banks by

registering a 20% rise in the net profit compared to an 11% growth reported
by private sector banks. This was mainly due to a higher rise in other
income (OI) and a lower increase in operating expenses by public sector
banks compared to a fall in OI and higher operating expenses by private
sector banks. However, at the net interest level, private sector banks
outperformed public sector banks by registering a growth of 36% compared
to a 14% rise reported by public sector banks. .

 The net interest income of the overall banking sector during the quarter rose
17% to Rs 11962.53 crore, mainly due to low cost of funds. The interest
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 earned rose 4% to Rs 29747.88 crore, contributed mainly by interest
income from core operations (i.e., lending). The interest expenses decreased
by 4% to Rs 17785.35 crore. The interest spread of most banks witnessed
an increase over the corresponding previous quarter, as the decline of yield
on lending was lower than the cost of funds. In the falling interest rate
scenario, the rate on deposits for most banks fell faster than advances. Thus,
interest expenses came down faster to protect profit.

 The sound economic growth, soft interest rate regime, upward migration of
incomes and wider distribution to cover a larger proportion of the
population are expected to increase the demand for retail loans in a
significant manner. The retail credit as a percentage of GDP in India is only
around 5% as compared to levels of 30 - 50% in other Asian economies
and, therefore, offers significant growth opportunities. Also, favourable
demographic profile like 69% of the population estimated to be under 35
years and an increase in upper middle/high income households are to be the
main drivers for retail credit. In the medium term, stronger demand for
credit from the corporate sector is also expected consequent to the
resurgence of this sector. Earlier, banks were seeing lower credit offtake
from corporates because of weak business sentiments and lower credit
requirement due to improved operational efficiency

 Also, most banks are aggressively augmenting their fee incomes and have
embarked upon cross selling of products. They are also focusing on fuller
utilization of their IT investments such as ATMs by entering into sharing
arrangement with other banks to earn extra OI. Many banks are hopeful of
effecting significant NPA recoveries due to the Securitisation Act.
Recoveries from NPAs, which have been provided for, add to OI.

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  The banking sector is poised to grow in line with the growth of the
economy. However, there are concerns that directed focus on lending to
agriculture and SSI sector may increase NPAs of banks. Further, volatility
and a sharp fall in g-sec prices may lead to trading losses or even
depreciation provision for some banks, going forward.

1.3: PROSPECTS

The prospect of Indian banking sector is very good. It is going to

be flourished in years to come. As India is going to become outsourcing hub for
foreign companies. Some of the factors which has contributed to good prospects
of banks are as under:

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 RBI's soft interest rate policy has helped increase the liquidity in the
market, however credit offtake has not exactly been robust. Going forward,
the scenario is set to change in favour of higher credit offtake due to expected
improvement in agricultural output on the back of good monsoons as well as
revival in the Indian industry. However the same cannot be said for the
interest rate regime. Higher inflation and the prospect of the US raising
interest rates may necessitate a hike in interest rates in the domestic markets
also. This may in turn curb the growth of the credit in the economy. Hence
while the growth in credit may still be robust, a higher interest rate scenario
may however limit the potential.

 While the new law regarding securitisation and foreclosure of assets

may take a while to bear any large benefits, currently the benefits of
increased power in the hands of the lender are making the borrowers to
come to the negotiating table. FY04 saw a scenario where the
borrowers were forced to negotiate with the lenders, which
consequently led to the borrowers returning some of the dues to the
lenders. Going forward the new law will bring about greater
accountability within the system and ensure that borrowers do not take
undue advantage of the system. Already an asset reconstruction
company has been set up by SBI in partnership with other institutions
like ICICI Bank and IDBI. If properly implemented, this new law may
lead to significant benefits for the banking sector as a whole.

 Currently the banking sector in the country is strongly fragmented and

hence with further policy changes taking place in the sector,
consolidation is likely to take place at a faster rate. However this is
subject to the removal of the ceiling on voting rights will ensure that
private sector and foreign banks will be in a much better position to
carry out acquisitions in the banking sector. A hike in FDI capital limits
in the sector would further go a long way in the process of
consolidation.

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  In terms of credit growth, going forward. India's core sector is
witnessing a revival of sorts. The manufacturing sector especially led
by steel and cement industries has shown significant improvement in
FY04. We expect the trend to continue. Hence as corporate growth
picks up lending too is likely to see an up tick. Retail credit off-take is
expected to remain strong going forward with the housing finance
industry, the main contributor to credit off-take from this segment,
expected to grow between 20%-25% in the next 3-4 years.

2: STRUCTURE OF INDIAN BANKING INDUSTRY

Organized banking was active in India since the

establishment of the General Bank of India in 1786. After independence, the
Reserve Bank of India (RBI) was established as the central bank and in 1955, the
Imperial Bank of India, the biggest bank at the time, was taken over by the
government to form state-owned State Bank of India (SBI). RBI had undertaken
an exercise to merge weak banks to strong banks and the total number of banks
thus reduced from 566 in 1951 to 85 in 1969.

With the objective of reaching out to masses and meeting

the credit needs of all sections of people, the government nationalized 14 large
banks in 1969 followed by another 6 banks in 1980. This period saw enormous
growth in the number of branches and the banks’ branch network became wide
enough to reach the weakest sections of the society in a vast country like India.

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 Sib’s network of 9033 domestic branches and 48 overseas offices is considered
to be one of the largest for any bank in the world.

The economic reforms unleashed by the government in early

nineties included banking sector too, to a significant extent. Entry of new private
sector banks was permitted under specific guidelines issued by RBI. A number
of liberalisation and de-regulation measures aimed at consolidation, efficiency,
productivity, asset quality, capital adequacy and profitability have been
introduced by the RBI to bring Indian banks in line with International best
practices. With a view to giving the state-owned banks operational flexibility and
functional autonomy, partial privatisation has been authorised as a first step,
enabling them to dilute the stake of the government to 51 per cent. The
government further proposed, in the Union Budget for the financial year 2000-
01, to reduce its holding in nationalised banks to a minimum of 33 per cent on a
case by case basis.

The banking system can be broadly classified as organized and

unorganized banking system. The unorganised banking system comprises of
moneylenders, indigenous bankers, lending pawnbrokers, landlords, traders, etc.
Whereas the organised banking system comprises of Scheduled Banks and Non-
Scheduled Banks that are permitted by RBI to undertake banking business.

Types of Banks

A. Scheduled Banks

Scheduled commercial banks are those that come under the purview of the
Second Schedule of Reserve Bank of India (RBI) Act, 1934. The banks that are

14
 included under this schedule are those that satisfy the criteria laid down vide
section 42 (6 of the Act).

1. The bank is dealing in banking business in India only.

2. The paid up capital and total funds of the bank should not be less than five
lakhs rupees.
3. It should convince RBI that its activities would not be against the interest of
investors.
4. The bank must be:
(a) State cooperative bank, or
(b) A company according to the definition of the companies Act1956, or
(c) An institution notified by the central government, or
(d) A corporation or a company incorporated by or under any law in
force in any place outside India.
Thus,
(I) Indian Commercial Banks
(II) Foreign Commercial Banks, and
(iii) State Cooperative Banks fulfilling the above condition are
considered as scheduled banks.

Moreover under the RBI Act section 42, the Central Government
has declared the following banks as scheduled banks.

(i) State Bank of India and its seven subsidiary banks,

(ii) Twenty nationalized banks, and
(iii) Urban Banks.

In June 1980 there were 149 scheduled banks which included

(i) Public Sector Banks
(ii) Private sector Banks,

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 (iii) Foreign Exchange Banks and
(iv) State Cooperative Banks.

A bank which wants to register its name as scheduled bank has to

apply to the Central Government. On receiving such application, the central
government orders RBI to investigate the banks’ accounts. If RBI gives
favorable reports, the central government sanctions its proposal, and the bank is
listed under schedule annexure II and is considered as a scheduled bank.
Some co-operative banks come under the category of scheduled
commercial banks though not all co-operative banks.

 PUBLIC SECTOR BANKS

Public sector banks are those in which the Government of India or the RBI
is a majority shareholder. These banks include the State Bank of India
(SBI) and its subsidiaries, other nationalized banks, and Regional Rural
Banks (RRBs). Over 70% of the aggregate branches in India are those of
the public sector banks. Some of the leading banks in this segment include
Allahabad Bank, Canara Bank, Bank of Maharashtra, Central Bank of
India, Indian Overseas Bank, State Bank of India, State Bank of Patiala,
State Bank of Bikaner and Jaipur, State Bank of Travancore, Bank of
Baroda, Bank of India, Oriental Bank of Commerce, UCO Bank, Union
Bank of India, Dena Bank and Corporation Bank.

 PRIVATE SECTOR BANKS

Private Banks are essentially comprised of two types: OLD AND THE
NEW.

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 The OLD PRIVATE sector banks comprise those, which were operating
before Banking Nationalization Act was passed in 1969. On account of
their small size, and regional operations, these banks were not nationalized.
These banks face intense rivalry from the new private banks and the foreign
banks. The banks that are included in this segment include: Bank of Madura
Ltd. (now a part of ICICI Bank), Bharat Overseas Bank Ltd., Bank of
Rajasthan, Karnataka Bank Ltd., Lord Krishna Bank Ltd., The Catholic
Syrian Bank Ltd., The Dhanalakshmi Bank Ltd., The Federal Bank Ltd.,
The Jammu & Kashmir Bank Ltd., The Karur Vysya Bank Ltd., The
Lakshmi Vilas Bank Ltd., The Nedungadi Bank Ltd. and Vysya Bank.

The new private sector banks were established when the Banking
Regulation Act was amended in 1993. Financial institutions promoted
several of these banks. After the initial licenses, the RBI has granted no
more licenses. These banks are gearing up to face the foreign banks by
focusing on service and technology. Currently, these banks are on an
expansion spree, spreading into semi-urban areas and satellite towns. The
leading banks that are included in this segment include Bank of Punjab
Ltd., Centurion Bank Ltd., Global Trust Bank Ltd., HDFC Bank Ltd.,
ICICI Banking Corporation Ltd., IDBI Bank Ltd., IndusInd Bank Ltd. and
UTI Bank Ltd.

 CO-OPERATIVE BANKS

Co-operative banks act as substitutes for moneylenders, and offer timely

and adequate short-term and long-term institutional credit at reasonable
rates of interest. Co-operative banks are relatively similar in terms of
functions to the other banks except for the following:

(a)They are organized and managed on the principal of co-operation, self-

help, and mutual help.

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 (b)They operate under the rule of "one member, one vote".
(c) Operate on "no profit, no loss" basis.

(d) Co-operative bank conducts all the main banking functions of deposit
mobilization, supply of credit and provision of remittance facilities. Co-
operative banks offer limited banking products and are functionally
specialists in agriculture-related products, and even in providing
housing loans of late. Urban Co-operative Banks offer working capital
loans and term loans as well.

(e) Co-operative banks primarily operate in the agriculture and rural sector.
However, UCBs, SCBs, and CCBs function in semi urban, urban, and
metropolitan areas too
.
(f) Co-operative banks are probably the first government sponsored,
government-supported, and government-subsidized financial
agency in India. They get financial and other aid from the
Reserve Bank of India NABARD, central government and state
governments. They are the "most favored" banking sector with
risk of nationalization.

(g) Co-operative banks normally concentrate on "high revenue" niche retail

segments.

 DEVELOPMENT BANKS

Development banks are primarily intended to encourage industrial

development by providing adequate flow of funds to industrial projects. In
other words, these institutions undertake the responsibility of aiding all-
round development in the country’s economy by promoting new industrial

18
 projects, and providing financial assistance for the expansion,
diversification, and up gradation of the existing units. Development Banks
may be classified as All India development banks and Regional
development banks. While All India development banks include Industrial
Development Bank of India and Industrial Finance Corporation of India,
examples of Regional development banks include State Financial
Corporation and State Industrial Development Corporation.

B. NON-SCHEDULED BANKS:
The banks, which are not included in the second schedule of RBI Act,
1934, are known as non-scheduled banks. Such banks total share capital is
less than five lakhs. These banks are not governed according to the RBI Act
and they receive no benefits from the RBI. These banks have no place in
the list of recognized banks of the RBI. These banks are not much trusted
by the people and they do not get handsome deposits. Since 1951 the
numbers of such banks have been gradually decreasing. In 1979 there were
only five non-scheduled banks.

Generally now days we found many cooperative banks which are

belongs to the non-schedule co-operative banks. Following are the types of
non-schedule banks they are work like the schedule banks but here
difference in its status and it not having the status of the schedule banks.

a. Deposits Banks
b. Cooperative Banks
c. Central Banks
d. Exchange Banks
e. Investment or Industrial Banks
f. Land Development Banks
g. Savings Banks

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(a) Deposits Banks:
Generally, banks which provide short-term loans to business and industrial
units and which mobilize savings of people as deposits are called deposit
banks. Deposit banks accept deposits from people, and provide short-term
advances. They provide overdraft and cash credit facilities to merchants. To
meet the long-term requirement of industrial units is not possible for these
banks. They accept three types of deposits- saving bank deposits, fixed
deposits and current account deposits. They accept these deposits which are
payable on demand or on short notice, and provide funds to trading and
commercial units for short durations.

(b) Cooperative Banks

Cooperative banks meet the short-term financial needs of farmers.
Agriculturists, petty farmers and artisans organize themselves on cooperative
principles and form cooperative societies and banks. Cooperative banks raise
funds through various means, besides receiving all kinds of deposits to make
them available as lendable funds to its members. In India developed
cooperative banks supply finance for agriculture and non-agriculture activities.

(c) Central Banks

A central bank is a special institution which controls and regulates the entire
banking structure of country. It also strives to maintain monetary stability of
the country. Central bank is also known as the apex bank of a country. Since it
functions in the best interest of the country and making profits is unknown to
it, it is entrusted the right it issue currency notes. No other bank is allowed this
right. It operates in close cooperation with the government of implementing
economic policies, thereby promoting economic development.

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(d) Exchange Banks:
There is a difference in financing of foreign trade and financing of internal
trade. Generally a person carrying on international trade requires foreign
currencies to meet his obligation. It is here that exchange banks play the role of
financing the dealer for setting transactions involved in foreign trade, there are
specialized banks for exchange business. In India, there is an Export-Import
Bank (EXIM).

(e) Investment or Industrial Banks:

Investment banks provide long-term credit to industries. They raise their funds
by way of share capital, debentures, and long-term deposits from the public.
They also raise funds by the issue of bonds for business operations and
government agencies. Usually they underwrite fresh issue of shares and
debentures of companies. Such banks also buy the entire issue of new
securities of public limited companies and try to get them subscribed at a
higher price by the public.

(f) Land Development Banks:

Land development banks were earlier known as land mortgage banks. In India,
there is limited number of such banks. There are special institutions providing
long-term loans to agricultures and farmers. They provide loans on security of
land and other immovable properties. They supply long-term funds for periods
exceeding six years. Agriculturists and farmers need such funds for making
permanent improvements to land and for buying farming machinery and
equipment.

(g) Savings Banks:

Savings Banks are specialized institutions, which encourage general public to
save something from their earnings. In other words such banks pool the small
savings of middle and lower income sections of society. They are the banks in
the true sense of the term and their main aim is to promote and collect of the

21
public. Not only the depositors are given interest, but also they are allowed to
withdraw in times of need. The numbers of withdrawal are, however,
restricted. Separate savings banks are organized in various nations. The
government can also run a savings bank. In India the postal department runs
the postal saving bank all over the country. It is very popular in rural areas
where no branches where no branches of established commercial bank operate.
In urban areas, commercial bank handles savings business

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 Table-1:
Structure of the Indian banking industry, March 31, 2004
Sr. Bank Group No. Of Deposits Loans & Net Profit
No. Banks Advances
1. Public Sector Banks 27 10796 5493 123
Share Percentage 7.6 % 76.8 % 72.1 % 69.8 %
1. a State Bank Group 8 3910 1892 45
Share (per cent) 2.2 % 27.8 % 24.8 % 25.6 %
1. b Nationalised Banks 19 6886 3604 78
Share (per cent) 5.3 % 49 % 47.2 % 44.2 %
2. Private Sector Banks 30 2072 1389 30
Share (per cent) 8.4 % 14.8 % 18.2 % 16.8 %
2.a Old Private Sector Banks 21 914 494 12
Share (per cent) 5.9 % 6.5 % 5.3 % 7%
2.b New Private Sector Banks 9 1158 895 17
Share (per cent) 2.5 % 8.3 % 11.9 % 9.8 %
3. Foreign Banks 36 693 522 18
Share (per cent) 10 % 4.3 % 6.8 % 10.4 %
4. Total Pvt Sector Banks 66 2765 1911 48
Share (per cent) {2+3} 18.5 % 19.7 % 25.1 % 27.2 %
5. Total Comm. Banks 93 13559 7405 171
Share (per cent) {1+4} 26 % 96.6 % 97.1 % 97 %
6. Regional Rural Banks 264 483 218 5
Share (per cent) 74 % 3.4 % 2.9 % 3%
7. Total of Banks 357 14042 7623 76
Share (per cent) 100 % 100 % 100 % 100 %

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DIFFERENT SERVICES PROVIDED BY BANKS IN INDIA

Account types & other Services

Personal Banking: Other Different Services

 Deposit Scheme Gold Banking
___ Current Account NRI Banking
___ Saving Account International banking
___ Term Deposit Corporate Banking
(Other Deposit Scheme as per the cust. convince) SSI Banking

 Personal Finance Small Business Finance

___ Housing Loan Development Banking
___ Car Loan Other Services
___ Educational Loan
___ Personal Loan
___ Festival Loan
___ Property Loan
___ Other Loans
(As per banks and its customer base)

 Services
ATM Services
Credit Card Services
Internet Banking Services
Phone Banking Services
Locker Services
PPF Services

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Deposit Scheme:

Current Account
Current Account is the accounts which useful to business, a transparent and
efficient banking services support to meet its day-to-day financial requirements.
It offers to serve businesses financial requirements and giving maximum
financial leverage and save time and cost.

Saving Accounts:
Saving bank accounts is for the people who want to save for something in the
future. So its necessity characteristics are safe and accessible anytime, anyplace
to help meet their needs. So banks are those who help them in planning and
saving their future financial requirements. Here, savings are completely liquid,
and earn competitive interest in our safety.

Term Deposit Accounts:

With the help of the term deposit one can earn a higher income on their surplus
cash by investing this money in this type of accounts. Scheduled bank gives
promise of security and trust and help you to earn extra income with your hard
earned money.

Wide Choice in Period of Deposit

 Flexibility in period of term deposit from 15 days to 10 years
 It gives the benefits of Safety, Liquidity, Transferability and Flexible and
Timely payment of Interest

Personal Finance:
Banks second function is to give finance and through it banks can earn hand
some return and generate the profits for from it. Now day’s banks are giving
finance on following different ways to satisfy the financial needs of the
customers.
25
 Following are the different ways through the bank give finance to its customers:

-Housing Loan, Car Loan, Personal Loan, Educational Loan, Festival Loan,
Property Loan and etc,

SERVICES:
In the globally competition time service is quite important for the any sector and
having in nature of service sector the services of the banking sector is also most
important part following are the services that providing by the banking sectors
various banks but it differ from the bank to banks.
ATM Services
Credit Card Services
Internet Banking Services
Phone Banking Services
Locker Services
PPF Services

OTHER DIFFERENT SERVICES (CORPORATE)

Large foreign banks, Public and Private sector banks provide
different services to their corporate customers. For carrying out their business
activity and through that services they provide financial support and facility also.

3: CUSTOMER RELATIONSHIP IN BANKING INDUSTRY

(Through new technology and product development)

Liberalisation and de-regulation process initiated by the Indian

Government in early nineties has completely changed the face of the Indian
banking industry. The entry of new private sector banks with the state-of-the-art
26
technology and lean structures has forced the old private-sector and public
sector banks to respond to the new challenges with aggressive restructuring
measures. The past five years have seen the public sector banks rapidly
introducing new products and services, computerising and networking key
branches, rationalising manpower and launch a number of initiatives to improve
operating efficiencies. Are they on the right track? Are these strategies to
become leaner and meaner sufficient to gain a competitive advantage to survive
and grow in the long run? This article argues that while all the above measures
are no doubt necessary to survive, they are by no means sufficient. To survive
and thrive in the long run, banks need to pursue strategies that enable them to
develop resources that are inimitable, rare, durable and superior to competitors.

Current development in the banking industry which make it more

attractive and it push this Industry in the market place

Introduction of new products and services:

Many of the public sector banks launched an array of products and services,
especially on the retail front, to match the competition. Some of the new
products include debit cards, credit cards, international cards, special deposits,
sweep-in accounts, and demat accounts and any-where-banking. Some of the
new services include round-the-clock phone banking, Automated Teller
Machines (ATMs), inter-city, inter-branch banking, net-banking and bill
payment services. Many public sector banks have even launched their own asset
management companies to offer mutual fund services to their customers.

Computerisation and networking of branches:

Banks invested aggressively in computerisation and networking of branches.

The oldest and the biggest bank, SBI, had computerised 3701 branches by
27
 March 2004, constituting nearly 41 per cent of its total branches. Many of these
branches were also networked so that their customers could be offered ‘any-
time, any-where’ banking services. The other public sector banks too embarked
on a similar computerisation drive.

Installation of ATM networks

All banks have made heavy investments in the installation of large networks of
ATMs. As of March 2004, SBI had a network of 1305 ATMs, Canara Bank had
282 ATMs, Corporation Bank had 475 ATMs to match the ATM network of
private sector banks such as HDFC Bank and ICICI Bank. ATMs proved a
tremendous success by reducing the load on branches significantly as, apart
from carrying out routine transactions such as cash withdrawal etc, customers
can avail such services as transfer of funds and payment of utility bills by
visiting any of the ATMs located conveniently.

4: OUTLOOK MONEY SURVEY

CUSTOMER FRIENDLY BANKS WITH DIFFERENT PARAMETER

Service with a smile: today’s finicky banking customer will settle for
nothing less. He’s come to realize, somewhat belatedly, that he is king: he
demands that banks roll out not just world-class products and services, but a red
carpet as well. His choice of one entity over another as his principal bank is
determined by considerations of service quality rather than any other factor. He
wants competitive loan rates, yes, but he also wants his loan or credit card
application processed in double-quick time. He cherishes the convenience of
impersonal Net banking, yes, but during his occasional visits to the branch, he also
wants the comfort of personalised, human interactions and facilities that make his
banking experience pleasurable. In short, he wants a financial house that will more
28
than just clear his cheques and update his passbook: he wants a bank that cares–
and for more than just his custom. He wants a customer-friendly bank.
So, do banks meet these heightened expectations? And
which are India’s most customer-friendly banks?

To find answers to these questions, Outlook Money commissioned

market research agency C fore to carry out a survey of bank customers in five
cities–Delhi, Mumbai, Chennai, Kolkata and Bangalore. The exhaustive survey,
carried out in early August, covered 5,127 customers of 24 short listed banks:
the 10 biggest nationalised banks and the 10 biggest Indian private banks (in
terms of deposit base) and the only four multinational banks that offer retail
banking services. For all the differences in their ownership, these 24 banks are
all competing in the metros for your custom, so it’s only fair to compare them
within a unified cluster; yet, when comparisons within their respective peer sets
throw up interesting patterns, we’ll take note of them.

These, then, are the significant findings of the survey:

• India’s most customer-friendly bank is ICICI Bank, which outperforms

even multinational banks on this count (‘Overall Rankings’)
• Ranking a close second is Citibank, which also tops the ranking of MNC
banks on the overall score
• For an entity that’s not highly visible, seventh-ranked UTI Bank fares
surprisingly well, breaking into the top 10 in all the six parameters on
which the banks were rated
• Strikingly, but not surprisingly, no nationalised bank figures in the top 10
banks, ranked on the overall score; the most customer-friendly PSU bank,
Bank of Baroda, kicks in at No. 12; even the two banks (ING Vysya
Bank and The South Indian Bank) that rank a joint 6th in the smaller
universe of private banks score more overall than the top-ranked PSU bank
• State Bank of India, by far India’s largest bank, comes in a lowly 16th in
the overall rankings; even among the smaller universe of PSU banks, it

29
 ranks only 5th, despite the fact that the survey methodology assigns some
weightage to size to acknowledge big banks’ problems in servicing a large
customer base.
• It isn’t as if the entire universe of PSU banks is uniformly insensitive to
customers’ expectations on service quality. Bank of Baroda aside, Indian
Overseas Bank, Syndicate Bank and, to a lesser extent, Canara Bank
give some of the pretentious private sector banks a run for their money.
• Likewise, all MNCs are not all there in keeping their customers happy:
Standard Chartered not only lags its MNC peers on most counts, it ranks
16th on ‘service quality’ in the overall rankings.

A more rigorous analysis of the banks’ ratings on some of these

parameters throws up interesting findings about how customer-friendly these
banks are.

Service Quality

This is an index of the core of what makes a bank customer-friendly: its overall
service standards, rated for ease of opening an account; how courteous,
accessible and knowledgeable its staff are; transaction time for services; how
innovative the bank is in introducing products and services; how proactively the
bank informs customers of changes in deposit rates or service charges; how
quickly it redresses grievances; how likely it is to retain customers; and how
probable it is that its customers will recommend the bank to others.

On this count, HSBC tops the 24-bank ranking, followed closely

by ABN Amro. In third place here is a dark horse, The South Indian Bank.
HSBC scores fairly well on most of the sub-parameters–except product and
service innovation. ABN Amro tops the MNC banks’ cluster on such customer-
friendly features as ease of opening account, transaction time for services,
product and service innovation (such as its attractive home loan product All
Smiles, which comes at 6.5 per cent fixed rate for the first two years, after which
the then-prevailing floating rate applies), promptness in keeping customers
30
 informed, and its banking hours (10 am to 7 pm; no weekly holiday). The South
Indian Bank’s good showing here is a reflection of its capacity to own up to its
customers, small though that base is, and service them well. Much the same can
be said of Federal Bank, IndusInd Bank, Karur Vysya Bank and ING Vysya
Bank, all of which break into the Top 10.

Strikingly, ICICI Bank fares poorly on service quality, coming in

joint 12th (along with Bank of Rajasthan). Within its peer set of private banks, it
falters on such sub-parameters as ease of opening account, transaction time for
cash withdrawal, and promptness in keeping customers informed.

No nationalised bank makes it to the Top 10 on service quality,

but given the wide variance within this grouping, it seems unfair to hang all
PSU banks together. IOB and Syndicate Bank, for instance, fare well among
peer PSUs on all the sub-parameters. On the other hand, Union Bank of India,
Bank of India, UCO Bank and SBI run each other close for the bottom rank. SBI
is last in line in respect of customer retention and customer recommendation. In
fact, SBI’s abysmal scores on all service standard sub-parameters weigh down
its overall customer-friendliness ranking.

Branch facilities

Walk into any branch of a multinational or leading Indian private bank, and
you’ll believe you’re in a plush country club. Many other banks, of course, have
miles to go in this sphere, but there’s a growing realisation among them that
offering a pleasant banking ambience–with comfortable seating, air-
conditioning, restroom and drinking water facilities–and easy, uncluttered
access to bank stationery makes for good business.

The rankings here hold no surprise: MNCs HSBC, Citibank, and

ABN Amro take the top three slots, and IndusInd Bank, the first Indian
commercial bank to secure ISO 9002 certification for all its branches, comes in
at No. 4. House-proud PSU banks IOB and Syndicate Bank top the rankings
31
 within their peer set, but fail to make it to the Top 10 overall. SBI scrapes the
bottom at rank 23.

ATM service

By automating the most common day-to-day banking transactions–cash

withdrawal, cheque deposits and statement generation–ATMs have, in a sense,
liberated customers from time-wasting branch visits and surly staff. But how
often have you faced automated chaos: an ATM that whimsically rejects your
card or runs out of cash? How often have you felt an overwhelming urge to cut
up your ATM card into tiny slivers and post it along with a cheery letter that
says ‘no, thank you’.

Increasingly, however, banks are waking up to the merits of an

expansive, glitch-free ATM network. They’re investing in technology (read
newer machines), so they’ll be fewer card rejects. And they’re entering into tie-
ups with one another to share their ATM network (for a nominal fee, to be paid
by customers); which means you no longer have to bear the agony of having to
stand in overlong queues at your bank’s ATMs and gape at a state-of-the-art SBI
ATM nearby that forever seems empty.

ICICI Bank’s wide network of ATMs (1,790) gives it top

ranking among all 24 banks; likewise, SBI’s ATM penetration (including many
in some of the remotest corners of India–and India’s first ‘floating ATM’, on a
Kerala backwater ferry!) gives it second rank on this parameter. And MNC
banks, which have far fewer ATMs, targeted sharply at their metropolitan
customers, slip to the bottom. But remove the survey’s weightage for ATM
reach, and judge banks only on how glitch-free their ATM service is, and a
vastly different picture emerges.

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Cards Grievance redress

A lost credit card, a debit card billing for a transaction you never made: on
occasions like these, you’re hurriedly working your bank’s helpline numbers–
and want a sympathetic hearing, and a prompt response. These are also the times
when a bank’s grievance redress mechanism is tested. How quickly and well a
bank responds, and whether you’re subject to an elaborate runaround and
paperwork are critical determinants of how customer-friendly it is.

Here too, the methodology assigns weightage to card

penetration. Consequently, ICICI Bank (2.4 million credit cards; 6 million debit
cards) is No. 1, followed by SBI and HDFC Bank–even though within the
universe of private banks HDFC Bank scores rather dismally on grievance
redress. Next in line are Bank of Baroda and Canara Bank, their high rankings
(even higher than Citibank, for instance) a testimony to the mass popularity of
Bobcards and Cancards. But when the weightage is removed, the rankings
change dramatically.

Loans Speed of disbursal

When you’ve identified your dream home and can’t wait to move in, or when
you’re eager to cash in on an early bird discount on new bookings, you want a
lender who cuts through the paperwork and processes your home loan in a trice.
This sub-parameter is a measure of how quickly a bank processes loan
applications and disburses funds.

Here too, assigning weightage for the number of loan

accounts, the rankings hold few surprises: SBI tops, followed by Bank of
Baroda, ICICI Bank and HDFC Bank. Among MNC banks, ABN Amro
emerges on top, matching product innovation in this space with speedy
33
 disbursal; among private Indian banks, HDFC Bank is No. 2, perhaps having
learnt a thing or two from HDFC, India’s largest home loan provider.

Phone/Net banking

It’s somewhat ironic that a technology-driven service that has made banking far
more ‘impersonal’ should now be seen as a pillar of customer-friendliness. But
with phone/Net banking, geography is well and truly history. True, it hasn’t
acquired a critical mass of adherents: only 4 per cent of our survey respondents
avail of phone/Net banking services, against 80 per cent who avail of over-the-
counter banking services, and 63 per cent who use ATMs. Even so, 21 banks in
our survey–all but Karur Vysya Bank, Bank of Rajasthan and Karnataka Bank–
offer these services: it’s a symptom of the fact that these are no longer
considered ‘premium’ services, but are percolating down and becoming a must-
have, pretty much like what happened to ATMs some years ago.

Predictably, new-age MNC and Indian private banks, whose

young, upwardly mobile customers are typical users of phone/Net banking,
claim this service space for themselves. Among private banks, HDFC Bank
leads its bigger rival ICICI Bank in this space. And among PSU banks, IOB,
Syndicate Bank and Bank of Baroda are streets ahead of the others. IOB even
breaks into the Top 10 across all 24 banks on this parameter, ahead of new-age
banks like ING Vysya Bank and IndusInd Bank.

34
 5: NEW MARKETING CHANNEL

New marketing channel is creating strong base for the banking

industry and it will help banks to push their products in the market places. New
private sector banks are used DSA level for pushing their products in the market
place so they appoint different team for different territory and those teams are
works for that area and make strong position in marketing of that banks.

Here, in this channel the cost of employee is variable because

generally appointment of team is based on their works. This team is work for
only marketing so it will help the bank in creating the strong position in the
market place also.

Banks are also involved in inventing new marketing and

distribution channels like E-banking, net banking and tele-banking. The next era
would be of all these. Now customers want services to be delivered at their
convenience. The first mover advantages will surely going to work. About 25%
of transactions are projected to be carried on through E-Banking by 2008

6: BANKING INDUSTRTY DOMINANT ECONOMIC FEATURES

35
Market size: Banking industry market size is around Rs.14, 04,341 crore
deposits by 357 commercial banks.

Scope of competitive There are 357 commercial banks in banking sector, which
rivalry: includes domestic and foreign banks, and finance sector
also provides strong fight to the banking sector companies.

Market life cycle: In India it is in secondary stage and more and more chance
for growth

Market growth rate: The Indian government adopted the policy of liberalization
and it is since then that this sector has shown high annual
growth through various in various services like ATM, Net
Banking, Phone Banking and its growth rate is also
increasing from heavily from last 4-5year.

Number of companies Now a day around 357 commercial banks; among them 27
in industry: public sector banks, 30 private sector banks then 36 foreign
banks and remaining are co-operative banks, they
providing their service in this industry.

Customers: Entrepreneurs those who willing to invest in businesses

especially young and mature people and layman, those use
different banking services, are customers of banks.

Ease of entry/exit: Entry in Indian banking sector has become easy. Now
foreign banks are also allowed to carry on their business.
But exit is difficult due to large investment and government
rules & regulation. All players fight desperately to survive.

Technology/innovation: Technology is main issue in global era and changes are

fast; biggest changes are occurring in products innovation

36
 and new era technology like net-banking mobile banking or
ATM banking. Now a days all banks are concentrating on
technology related innovative products.

Degree of vertical Here no question of degree of vertical integration but some

integration: large banks provides different services so in those case the
degree of integration come in to light but it not effect so
much in this industry’s basic service.

Product Characteristics: Homogeneous services by all banks little difference in

services offered.

Economies of scale: Moderate all companies have virtually equal

service cost due to rules and regulation of RBI but scale of
economies exists in new era services and marketing and
other integration work.
Learning and Quite important factor because it decides various skills and
experience effects: operational works also.
Capacity Utilization: Service efficiency is highest in private and in foreign banks
its around 70 to 80 percent but in public sector it is quite
low.
7: Porter's Five Forces Model of Competition

The nature of competition in an industry in large part determines

the content of strategy, especially business-level strategy. Based as it is on the
fundamental economics of the industry, the very profit potential of an industry is
determined by competitive interactions. Where these interactions are intense,
profits tend to be whittled away by the activities of competing. Where they are
mild and competitors appear docile, profit potential tends to be high. Yet a full
understanding of the elements of competition within an industry is easy to
overlook and often difficult to comprehend.

37
 Porter has identified five basic forces that collectively describe
the state of competition in an industry:

1. The intensity of rivalry among competitors

2. The threat of new entrants to the market
3. The amount of bargaining power possessed by the firm's/industry's
suppliers
4. The amount of bargaining power possessed by the firm's/industry's
customers
5. The extent that substitute products present a threat to a
firm's/industry's products

These forces assist in identifying the presence or absence of

potential high returns. The weaker are Porter's five forces, the greater is the
opportunity for firms in an industry to experience superior profitability. More
generally, understanding how these forces affect competition within an industry
allows the strategist to identify the most advantageous strategic position.

The actors within an industry on whom these forces exert

pressure are, respectively, the industry's competing firms themselves, potential
new entrants to the industry's markets, suppliers (vendors), customers, and
makers of substitute products.

Obviously, the starting point for conducting an analysis of the

five forces of competition is to identify all the competitors, potential new
entrants, major suppliers, the demographics of customers, and makers of and
nature of substitute products. Competitors would not only have to be identified,
but various distinguishing data about the industry would also have to be
specified. For each competitor this data would include market share, product line
differences/similarities, market segments served, price/quality relationships
represented by products, growth/decline trends, financial strength differences,
and any other information that will help describe the industry.
38
 Porter’s FIVE-FORCE analysis for Indian banking industry

BARGAINING POWER OF
SUPPLIERS
-Low supplier bargaining power
-Few alternatives available
-Subject to RBI Rules and Regulations
-Not concentrated
-Forward integration
-Nature of suppliers

THREAT OF
THREAT OF NEW
ENTRANT SUBSTITUTES
INDUSTRY RIVARLY
-Low barriers to entry Intense competition High threat from substitutes
-Government policies are Many private, public, Like
supportive Mutual funds,
-Globalization and Co-operative, foreign banks T-bills,
liberalisation policy Government securities
-High exit barriers .

BARGAINING POWER OF
CUSTOMERS
-High bargaining power
-Low switching cost
-Large no. of alternatives
-Homogeneous
39 service by banks
-Full information available with customers
 RIVALRY AMONG THE INDUSTRY

Rivalry in banking industry is very high. There are so many

private, public, co-operative and non-financial institutions operating in the
industry. They are fighting for same customers. Due to government liberalisation
and globalization policy, banking sector became open for everybody. So, newer
and newer private and foreign firms are opening their branches in India. This has
intensified the competition. The no. of factors have contributed to increase
rivalry those are:

1.A large no. Of banks

There are so many banks and non-financial institutions fighting for same pie,
which has intensified competition.

2.High market growth rate

India is seen as one of the biggest market place and growth rate in Indian
banking industry is also very high. This has ignited the competition.

3.low switching cost

Customer switching cost is very low. They can easily switch from one bank to
another bank and very little loyalty exists.

4.indifferentiate services

40
 Almost every bank provides similar services. No differentiation exists. Every
bank tries to copy each other services and technology, which increases the level
of competition.

5.high fixed cost

6.High exit barrier

High exist barriers humiliate banks to earn profit and retain customers by
providing world-class services.

7. Low government regulations:

There are low regulation exist to start a new business due LPG policy adopted
by India. So, sector is open for everybody.

BARGAINING POWER OF SUPPLIERS

Suppliers of banks are depositors. These are those people who

have excess money and prefer regular income and safety. In banking industry
Suppliers have low bargaining power. Following are the reasons for low
bargaining power of suppliers.

1.Nature of suppliers
Suppliers of banks are generally those people who prefer low risk and those who
need regular income and safety as well. Bank is best place for them to deposit
their surplus money. They believe that banks are very safe than other investment
alternatives. So, they do not consider other alternatives very seriously, which
lower their bargaining power.

41
2.few alternatives
Suppliers are risk averters and want regular income. So, they have few
alternatives available with them to invest like Treasury bills, government bonds.
So, few alternatives lower their bargaining power.
3.RBI Rules and Regulations
Banks are subject to RBI rules and regulations. Banks have to behave in the way
that RBI wants. So, RBI takes all decisions relating to interest rates. This reduces
suppliers bargaining power.

4. Suppliers are not concentrated

Banking industry’s suppliers are not concentrated. There are numerous suppliers
with negligible portion to offer. So, this reduces their bargaining power. If they
were concentrated then they can bargain with banks or can collectively invest in
other no-risky projects.

5.Forward integration
Forward integration is possible like mutual funds, but only few people now
about this. Only educated people can forwardly integrate where as large no. Of
suppliers are unaware about these alternatives.

BARGAINING POWER OF CUSTOMERS

Customers of the banks are those who take loans, advances and
use services of banks. Customers have high bargaining power. Following are the
reasons for high bargaining power of customers.

1. Large no. Of alternatives

Customers have very large no. of alternatives. There are so many banks, which
fight for same pie. There are many non-financial institutions like ICICI, HDFC,

42
 IFCI etc., which has also jumped into these business. There are foreign banks,
private banks, cooperative banks and development banks together with the
specialized financial companies that provide finance to customers. These all
increase preferences for customers.

2.low switching cost

Cost of switching from one bank to another is low. Banks are also providing zero
balance account and other types of facilities. They are free to select any bank‘s
service. Switching costs are becoming lower with Internet Banking gaining
momentum and as a result consumers’ loyalties are harder to retain.

3.undiffernciated service
Banks provide merely similar services. There is no much difference in services
provided by different banks. So, bargaining power of customers increases. They
cannot be charged for differentiation.

4.Full information about the market

Customers have full information about the market due to globalization and
digitization consumers have become advance and sophisticated. They are aware
with each market conditions. So, banks have to be more competitive and
customer friendly to serve them.

THREAT OF NEW ENTRANT

Barriers to an entry in banking industry no longer exist. So, lots

of private and foreign banks are entering in the market. Competitors can come
from any industry to “ disintermediate” banks. Product differentiation is very
difficult for banks and exit is difficult. So, every bank strives to survive in highly
competitive market. So, we see intense competition and mergers and acquisition.

43
 Government policies are supportive to start a new bank. There
are less statutory requirements needed to start a new venture. Every bank tries to
achieve economies of scale through use of technology and selecting and training
manpower.

THREAT OF SUBSTITUTES

Competition from the non-banking financial sector is increasing

rapidly. Sony and Software giants such as Microsoft are attempting to replace
the banks as intermediaries. The threat of substitute products is very high. These
new products include credit unions and investment houses. One feature of using
an investment house is that the fees that the investment house charges are tax
deductible, where as a bank it is considered a personal expense, which are not
tax deductible. The rate of return with using investment houses is greater than a
bank. There are other substitutes as well for banks like mutual funds, stocks
(shares), government securities, debentures, gold, real estate etc. so, there is a
high threat fro substitute.

Conclusion:

Indian banking sector is one of the highly competitive sectors where high growth
rate and high degree of competition exist. Low entry barriers and high exit
barriers ignites competition in this industry. Every bank strives to survive in the
shadow of these barriers. There are so many substitutes available with customers
and they have high bargaining power where as suppliers i.e. depositors have low
power in their hands.

8: KEY SUCCESS FACTORS

44
 An industry’s key success factors are those things that most
affect industry members ability to prosper, competencies, competitive
capabilities and business outcomes that spell the difference between profit and
loss and ultimately, between competitive success or failure.

With increasing number of players in the banking industry, the

following are some of the key success factors. .

1. Access to technology
2. Computerization
3. Low employee cost
4. Management of NPAs
5. Transparency of public disclosure and best practices
6. Diversified products

1. COMPUTERISATION AND ACCESS TO NEW TECHNOLOGY

A sound and effective banking system is the backbone of an economy. The

economy of a country can function smoothly and without many hassles if the
banking system backing it is not only flexible but also capable of meeting the
new challenges posed by the technology and other external as well as internal
factors. The importance and role of information technology for achieving this
benign objective cannot be undermined. There is an urgent need for not only
technology up gradation but also its integration with the general way of
functioning of banks to give them an rim in respect of services provided to
the customers, better housekeeping, optimizing the use of funds and building
up of management information system for decision making. The technology
has the potential to change methods of marketing, advertising, designing,
pricing and distributing financial products and services and cost savings in
the form of an electronic, self-service product-delivery channel. The

45
technology holds the key to the future success of Indian Banks. Thus,
“Internet Banking” is the need of the hour, which cannot be lost sight of
except at the cost of elimination from the competition. The existence of
Internet banking also becomes inevitable due to the standards required to be
matched at the international level. Thus, the domestic as well as the
international standards mandates the adoption of Internet banking at the
earliest possible moment

Within the banks, their IT strategy has taken different forms.

While quite a few banks have moved towards core banking, other banks have
adopted different models. However, there seems to convergence on the type
of services which are offered - like internet banking, anytime, anywhere
banking, telebanking, remote access, multi city chequing facilities etc. Some
of the banks have scaled up further by setting up call center facilities. Banks
have also gone for sharing of their technological infrastructure, as in the case
of ATM networks. With gradual scaling up, public sector banks are expected
to gain competitive advantages arising out of their vast branch network and
large customer base.

2. GREATEST ASSETS HUMAN RESOURCE (low cost per employee)

To achieve the service excellence and in order to succeed in a market place
where competition is fierce, banks need to focus on yet another area - People.
Bank is harnessing its human resources to keep up the efficiency levels by
adopting people-centric policies. It is well realized that human assets are
hidden assets and we are nurturing this capital to maximize the competency
levels. The Bank has created enabling environment to bring out the best from
its people through a process of strong training system to hone the skills in the
areas of marketing and technology.

Strategies to make the employee more productive

46
• Reward, recognition and incentives to employee who perform will send the
right signal, ensuring job satisfaction, boosting and employee morale and
building employee commitment.
• Identify and outsource non-strategic work, leaving employees free to
concentrate on core banking activities especially high value added
activities.
• To keep employee skills updated the training systems of banks need to be
revamped to train employees at every level as well as location of branch.
• Raising the skill bar at entry level to ensure that people with requisite skills
get into banks.
• Actively encourage physical fitness in employees banks can organize on-
going basis stress management programmes, yoga etc.

To make people grow and realize their productivity, therefore a

big push is needed to unleash their potential. Past efforts to measure
employee productivity have focused on business narrowly defined as deposits
plus advances. However, the parameters need to be expanded to reflect the
contribution of non-fund based activities also. But ultimately, employee
motivation is critical because a committed employee is a productive
employee

3. MANAGEMENT OF NPAS
Non Performing Assets are disease for Indian banks. The size of the NPA
portfolio in the Indian Banking industry is around Rs.1,00,000 crore which is
nearly 6% of India’s GDP. However due to the active steps taken by the
regulatory authorities and the banks, the gross NPA level has been reduced.
To ensure long-term profitability, banks have to manage NPAs effectively by
adopting the many techniques.

47
4. TRANSPARENCY OF PUBLIC DISCLOSURE AND BEST PRACTICES

There is an increasing movement worldwide towards building a safe and

sound banking system backed by a strong supervisory/regulatory regime in
accordance with the core principles for effective banking supervision. The
banking industry in the new millennium will also have to ensure greater
transparency and disclosure in their financial statements for the information
of market players, investors, depositors and rating agencies. Such disclosures
would enable the users of that information to accurately assess the bank's
financial condition, performance, and business activities, risk profile and
management practices. 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 market. Improvements in
market discipline also call for greater coordination between banks and
regulators. Efforts have also been made to set up a Credit Information Bureau
to collect and share information on borrowers and improve the credit
appraisal of banks and financial institutions within the ambit of the existing
legislation.

5. DIVERSIFIED PRODUCTS (The innovation imperative)

Successful innovation is crucial to the competitive edge of all businesses. But

it is particularly important for banking and finance companies. Innovation,
which transcends invention, represents the point of convergence of invention
and insight. Strategic factors to devise effective responses to innovation
challenges include quick response to identified customer needs, product
quality, short cycle times for product development, developing marketing and
technical capabilities, extensive training, rewards and recognition of
performance.

48
 Innovation is a key driver of growth that surprises and delights
the customer with new, differentiated and relevant benefits. This is not a
cliché but a defining characteristic of the modern corporate saga.

This can be substantiated by innovation within a global

framework. Indian banks will be able to weather the competition provided
they are relevant to consumers in terms of technology, quality, reliability,
pricing, performance and support. As the convergence of the ICE
(information, communication) technologies, "technological evangelization"
and narrowing of the "digital gap" are significant instruments of the growth
escalation process; integration of technology and business is required.

49
 PEST ANALYSIS

9: PEST ANALYSIS

The PEST analysis considers the broad external environment

facing the business organization. It is an outward looking analysis. The PEST
analysis attempts to answer the question: What broad determinants are going to
affect the macro environment in which the firm will be competing, over the next
five (or more) years? The PEST analysis is so-called, because it is an acronym
for the four categories into which the analyst will try and include all of the
relevant factors and trends: Political, Economic, Social, and Technological.

Like any model, the PEST model is a simplification; the choice

of Political, Economic, Social, and Technological factors may strike you as
arbitrary. You may be right. However, these categories are as adequate as any in
attempting to put a form to the myriad trends, developments, events and
causations that will assist or hinder the firm as it attempts to breach the Gap
between where its is now, and where it ultimately wants to be.

50
 .

9.1 : Political-legal factors

1.Government policy and budget:

Government affects the performance of banking sector most by legislature and

framing policies. Government through its budget affects the banking activities.
The much-needed reforms in the banking sector have transformed the sector
drastically in the last few years. Falling interest rates as well as strengthening of
the hands of banks (Securitisation Act) have changed the dynamics of the Indian
banking sector itself. The new Securitisation Act has given more power to the
banking sector against defaulting borrowers. Further, changes to be implemented
on the issue of voting rights among private sector banks is likely to speed up the
consolidation process. The impact that budget 2004-05 will have on banking has
been analysed below:

Budget measures:

1. The government has proposed to double credit to the agriculture sector in

the next three years.
2. There has been a significant emphasis on making credit available towards
51
 infrastructure development.
3. Inter-institutional group comprising select banks and financial institutions
incorporated to ensure speedy conclusion of loan agreements for
infrastructure projects. Nearly Rs 400 bn will be kept aside by this
consortium for infrastructure support.

4. Task force to be set up to explore reforms in the cooperative banking

sector.
5. Securitisation Act to be amended.
6. FDI in the insurance sector to be hiked from 26% to 49%.
7. Abolition of tax deducted at source on bank fixed deposits.
8. Increase in the foreign investment limit in Private sector banks to 74%
and state run banks to 49%.
9. The Indian Banking Association (IBA) has suggested the relaxation for
listed banks and financial institutions from adhering to accounting
standards not synchronous with banking operations. (Globally there is
separate set of accounting standards for banks under IAS - 42).
10. Tax benefits allowed to individuals in respect of housing loans may be
continued.

BUDGET IMPACT:

1. As per the common minimum program (CMP), the budget has focused a
lot on the need to improve credit to the agriculture sector and banks will
be at the forefront of disbursing credit. Vagaries of monsoons impact the
agriculture sector heavily and banks are vulnerable if monsoon fails. Also,
the RBI has released new guidelines for banks with regards to agricultural
lending. However, it is too early to ascertain the impact. The impact of
these initiatives by the government will only be apparent over the long-
term.
2. Banks are likely to benefit from increased lending to the infrastructure
sector. This will come about in two ways i.e. direct equity participation

52
 and indirectly (corporates borrowing for expanding capacity). While this
would provide an impetus to core advances of banks, the quality of such
advances is likely to be better. In this light, there is relatively less NPA
risk.
3. Reforms in the banking sector in the form of amendments to the
Securitisation Act may strengthen the backbone of the financial sector.
4. A hike in the FDI in the insurance sector is likely to significantly raise
investments in the nascent insurance sector. Domestic banks like ICICI
Bank, ING Vysya, Kotak Bank and SBI who have joint ventures with
international insurance majors will be able to infuse more capital into their
insurance business. In the future, there may be an opportunity for these
domestic banks to unlock value from such investments as well.

BUDGET OVER THE YEARS:

BUDGET 2001-02:
 Reduction in dividend tax to 10% from 20%.
 Cut in small savings rates 1-1.5%
 Limit for TDS on deposits reduced to Rs 2,500 from the current Rs
10,000.
 Abolishment of banking service recruitment board

BUDGET 2002-03:
 Cut in most administered interest rates by 0.5% (by 50 basis points)
from March 1, 2002.
 Setting up of Asset Reconstruction Company by June 2002.
 Banks are now allowed to deduct 7.5% of their total income against
provisions made by them for bad and doubtful debts.
 Banks are given option to deduct up to 10% of their non-performing
assets (NPAs) falling in the category of loss or doubtful assets from
total income.

53
  Bill on the banking sector reforms is to be introduced in Parliament.
 Foreign banks permitted to operate in India with fully owned branches
after the specific permission of RBI.

BUDGET 2004-05:
 The FDI limit in private sector banks has been raised to 74% from the
existing 49%.
 The SBI will have to lend at lower rates to the agricultural sector as
well as SSIs. SBI will now offer loans in the range 2% above its Prime
Lending Rate (PLR) or 2% below its PLR.
 Tax exemption on interest on housing loans maintained at Rs 150,000
per year.
 The government has agreed to buy back older government borrowing
with high interest rates from banks.

 Reduction in the interest rates on all small savings schemes by 1%.

POSITIVE IMPACT OF BUDGET ON BANKING INDUSTRY:

1. Securitisation Act fillip - Improved asset quality

2. VRS push - PSU banks like SBI, BOB and BOI after having successfully
implementing VRS schemes, have become much more streamlined and
efficient. This is likely to result not only in higher cash flow in the future, but
also long term benefits like improvement in efficiency levels.
3. Retail segment driver - Low interest rates have led to a dramatic growth in
credit off take from the retail segment. And this has helped banks to weather a
weak industrial credit offtake scenario. Going forward, with the revival in the
industrial sector ands robust volumes in the retail segment, banks are in a good
position to tap this expected demand.
4. Government proactive ness - The government may take a second look at the
issue of FDI limits and voting right limits in the private sector banks. If the
policy is further amended in the form of higher FSDI limits and a removal of
54
 voting right ceiling of 10%, then we may see further consolidation among
private sector banks.
5. Improved asset quality - Most of the public sector banks that have been ridden
by huge NPAs in the past have been able to restructure and provides
aggressively for their NPAs in the last 2-3 years. This has helped these banks
to significantly improve their asset quality and they are now in a much better
position to tap the emerging opportunities in the domestic market.

NEGATIVE IMPACT OF BUDGET ON BANKING INDUSTRY:

1. Agri lending concerns - The government has announced measures to boost

lending to the agricultural sector and banks will have to be at the forefront of
this scheme and this means that they will have to significantly increase their
exposure to this segment. With the unpredictability of the monsoons a reality
in the country and lack of proper irrigation facilities, lending to the agri sector
is fraught with risks and going forwards banks may witness a higher rate of
defaults in this sector.
2. Lack of policy clarity - Although the government has increased the FDI limit
to 49%, it is not yet clear that whether FDI limit includes FII limit also. Also
the limit for state run banks still stands at 20%. This will limit the scope of
consolidation in this sector and consequently the benefits of scale to the
various participants. Also the new government has indicated that there will be
no sell off of stake in public sector banks in the country. Thus further limiting
the scope of consolidation in the sector.
3. Interest rate dampener - The Indian economy is witnessing rising inflationary
pressure and this has the potential to curtail the credit growth in the economy.
As inflation inches close to the 6% mark, the Reserve Bank of India (RBI)
may be forced to hike interest rates and this may prohibit potential borrowers
from borrowing. A hike in interest rates may have a bigger impact on the high
growth retail segment, which has a higher sensitivity to rising interest rates.
Thus to that extent banks may witness a slowdown in credit offtake.

55
2.GOVERNMENT LAWS AND REGULATIONS:

There are so many laws enacted by government of India to regulate banking

activity. The RBI was established under Reserve Bank Of India Act 1934. RBI
regulates the banking activities in India. Other than this there are other laws like

 Reserve Bank of India Act, 1934.

 National Bank for Agriculture and Rural Development (NABARD) Act

1981
 Securitisation and Reconstruction of Financial Assets and Enforcement of
Security Interest (SARFAESI) Act 2002 (for management of NPA).
 Banking Regulation Act, 1949
 The Recovery of Debts Due to Banks and Financial Institutions Act was
enacted in 1993 to provide for the establishment of Tribunals for
expeditious adjudication and recovery of debts due to banks and Fis
 Deposit Insurance and Credit Guarantee Corporation (DICGC) Act, 1961
 Draft Bill on Credit Information Bureau Regulation.
 Bank Deposit Insurance Corporation Bill.
 Draft Bill on Government Securities.

Bills under Consideration of the Parliament

• Financial Companies Regulations Bill, 2000.

• Banking Regulation (Amendment) Bill, 2003.
• Banking Regulation (Amendment) and Miscellaneous Provisions Bill,
2003.

3.MONETARY POLICY

Another policy that impact most is RBI’s monetary policy. This policy is meant
to regulate activities of banking in India. It controls the flow of money in the

56
country. In its recent policy RBI has retained its stance regarding interest rates
and the broader economy in its monetary policy for 2004-05. The central bank
has left the bank rate and the repo rate untouched at 6% and 4.5% respectively.
The overall stance of the monetary policy 2004-05 as stated by the RBI is as
follows:

 Provision of adequate liquidity to meet credit growth and support

investment demand in the economy while continuing a vigil on
movements in the price level.

 In line with the above, to continue with the present stance of preference
for a soft and flexible interest rate environment within the framework of
macroeconomic stability.

As expected, while the monetary policy did not have any major
announcements, the key highlights include:

1. Bank Rate kept stable at 6.0 per cent.

2. Repo Rate unchanged at 4.5 per cent.

3. Banks are encouraged to align the pricing of credit to assessment of
credit risk to improve credit delivery and credit culture.

4. As far as the outlook for the Indian economy in 2004-2005 is concerned,

the RBI has stated that India’s GDP is expected to grow between 6.5%
to 7.0% in FY05. The RBI’s forecast is based on sustained growth in
industrial sector, normal monsoons and good performance of exports.

5. In FY04, the RBI’s inflation target was 4.0% to 4.5%. However, firm
crude prices resulted in average inflation hovering at around 5.4%. RBI
expects inflation at 5% levels for 2004-05.
57
 6. The RBI has also forecasted an increase in non-food credit in the range
between 16.0%-16.5% in FY05.

7. Expansion in money supply in FY05 has been pegged at 14% indicating

that the central bank is forecasting a scenario of ample liquidity in the
market. Fiscal deficit as indicated by the Union Budget is pegged at
4.4% of GDP in FY05.

8. The RTGS (Real Time Gross Settlement) system is expected to be

implemented by June 2004, thus paving way for the stock markets
migrating into the T+1 system.

9. The RBI has also proposed the reintroduction of the Capital Indexed
bonds (CIBs), wherein the returns will be linked to the inflation in the
economy. Instruments like CIBs are very popular in the global markets
and offer an option for investors to mitigate risk of higher inflation and
the consequent impact of the same on returns.

10. Revised LAF scheme operationalised.

11. Almost all banks have adopted the new system of BPLR and the rates
are lower from their earlier PLRs.

A lot of emphasis has been placed on the agricultural sector,

considering the high dependence of the country on the same. RBI has provided
further sops in the form of concessions in credit delivery. Banks may waive
margin/security requirements for agricultural loans up to Rs 50,000. Apart from
this, concessions have been made towards NPA recognition for the agricultural
sector.

The RBI has also proposed to expand the scope of the

infrastructure sector to include sectors like (i) construction relating to projects
involving agro-processing and supply of inputs to agriculture; (ii) construction

58
 for preservation and storage of processed agro-products and (iii) construction of
educational institutions and hospitals. Measures to increase credit availability to
the infrastructure sector have also been proposed. Overall, these measures could
enable better access of credit for these sectors in the long-term.

4. FDI LIMIT
Government has decided to increase the foreign investment limit in Private
sector banks to 74% and state run banks to 49%. This will affect the banking
sector performance. Newer and newer foreign banks will come to India with
their advanced technology and there will be intense competition in the market.
Every bank will try to survive by building competitive advantages in different
areas and will introduce new technology and distribution channel. This step also
presents opportunity for Indian banks to become globally competitive and
compete better in foreign markets.

59
 9.2: ECONOMIC FACTORS

Economic factors show the way in which economy is moving.

How these all affect the industry should be analyzed. Economic factors such as
Interest rates, inflation rates, unemployment rates, gross national product,
sectoral growth rate of agriculture, industry infrastructure, level of disposable
income, availability of credits affect each industry.

1.GDP:
Gross domestic product (GDP) is the measure of national income. Its trend
shows the actual picture of country’s economy. It is a measure of wealth and
health of economy. India is one of the fastest growing economies in world today.
Everybody is looking at India. It’s GDP is higher than most countries in the
world.
60
 Source: CMIE
In the FY 2004 GDP grew at 8%. This affect positively on
banking sector. Overall economy boosted. There was increase in transactions
and increase in investment. Demand for money increased and good sign for
economy. GDP is expected to grow at 7% in FY2005. Which is good sign for
economy.

There is consistent increase in growth rate of GDP. The

Goldman Sachs has projected long term trend in GDP, which is expected to be
higher than other developing countries like china and Brazil.

61
 Above is the long term forecast of GDP we can see that GDP
of India is expected to grow at a consistent rate where as mighty Chinese GDP is
expected to fall in coming years and will remain around 2%.

2.MONSOON:
India is an agriculturist country. More than 70% of population of India depends
on agriculture for their livelihood. And Indian agriculture depends mainly on
monsoon because there is no proper irrigation infrastructure. If monsoon is
below average it can negatively affect Indian economy at large. So, monsoon has
direct impact on performance of any industry, too with banking sector. The trend
of monsoon over the years and it’s relationship with GDP has been given below:

62
 There is also a direct correlation between monsoon and the
overall GDP.A good monsoon has always preceded a year of good GDP growth.
This is accentuated by the GDP growth data for the last 10 years. If one
compares the percentage of areas receiving normal or excess rainfall in a
calendar year with the overall GDP growth rate of that financial year one can
find that whenever the monsoon has been good, the GDP growth for that year
has been good.

This year monsoon is below average. And in FY 2004-05

monsoon is estimated to remain below average.

TABLE: Monsoon Versus GDP growth

Year % Of area receiving normal/excess rainfall GDP growth
1998-99 81 6.5
1999-00 67 6.1
2000-01 66 4.4
2001-02 68 5.6
2002-03 44 4.3
2003-04 76 8.0
2004-05 80 7.0
Source: IMD, CMIE estimates

So, there will be decrease in GDP. It directly affects the

agricultural production. Purchasing power of farmers has reduced which in turn
affected the performance of banks in India. Due to poor monsoon, the housing
63
 segment (most booming sector in the banking) can take a hit. Reduction in
housing loans may adversely affect margins. Due to poor monsoon other sectors
like auto, FMCG etc. would also be hurt, leading to more chances of defaults.

3.INFLATON
High inflation can adversely affect Indian economy. It is a high inflation period
in India due to increase in crude oil prices in international market and below
average monsoon in India this year.
Exhibit: inflation during July-August 2004

inflation (WPI) in july-August 2004

8.5 8.17
7.96 7.94
percent

8 7.61
7.5
7
31-Jul 07-Aug 14-Aug 21-Aug
week ended

Source: RBI
Inflation, measured in movement in wholesale price index (WPI),
has increased from 7.61% during week ended 31 July to 8.17% during week
ended 21. August 2004.rising crude oil price in the international market is the
min reason behind the recent spurt in inflation. In the mean time government has
shown its sincerity in containing inflation within manageable limit.

It is the joint responsibility of RBI and Government to bring

down inflation. RBI through some measures like change in interest rate cut in
CRR and SLR and open market operations control the inflation. This will
directly have a impact on banking sector if there is rise in CRR ratio, the banks
will left with less amount to offer to public and can affect their profitability.
Interest rate changes can affect banks as well.

High inflation discourages deposits especially long term.

Because the real increase in deposit will be negligible if there is high inflation.
64
 So, people invest their money in mutual funds and stock market to earn higher
return.

4.SAVINGS AND INVESTMENT

The main activity of banking sector is to provide link between those who have
surplus money and those who have deficit. It takes money from savers and
distribute to investors. The amount of savings can affect the performance of
banking sector. There can be positive and negative impact of savings on banking
sector as well on economy also. If there are enough savings, then entrepreneurs
will get loans at cheaper rates and encourage them to take risk and start new
venture and this will boost overall economy. It has negative side also. High
savings shows that people are not spending money. There expenditure is less and
not making demand. So, if there is less demand which in turn affect the
investment, employment and economy negatively.
Exhibit: Sector wise saving Rates

Source: RBI

The rate of financial savings of the household sector, as per the

annual report 2003-04 of the Reserve Bank of India, has increased in 2003-04 to
11.8 per cent of the gross domestic product (GDP) at current market prices
compared with the revised estimate of 10.7 per cent in 2002-03. The household
sector reflected its keenness for saving in the form of deposits, claims on
65
 government, currency and contractual schemes (life insurance, provident and
pension funds)

5.AGRICULTURE CREDIT:
As per the agenda of its Common Minimum Program (CMP), the UPA
government plans to double agricultural credit by 2007. This means a CAGR of
25% over the next three years. The agricultural credit has been growing at a
healthy 17-18% in the last three years. At a more realistic 20% CAGR too, the
agricultural credit would touch around Rs1500bn by 2007. This means a
bonanza for farmers, as it will put more money in their hands.

Exhibit: Expected growth in agricultural credit

1600
1400
1200
1000
Rs.bn

800
600
400
200
0
2001 2002 2003 2004 2005E 2006E 2007E

Source: RBI, IIL Estimates

A look at the composition of total agricultural credit shows some

interesting details. The exposure of commercial banks in total agricultural credit
has declined over the last few years from 53% in 2001 to 50% in 2004, while on
the other hand the share of Co-op banks have shown a corresponding increase.
Banks will be asked to directly lend to the farmers instead of following the usual
indirect lending practice of subscribing to NABARD bonds.

EXHIBIT: Flow of Agricultural Credit

66
 100%
90%
80%
50 50 53 53 50 50 50 53
70% Commercial
60% Banks
50% 6 7 8 7 6
40% 7 8 8 RRBs
30%
20% 44 43 40 39 42 43 44 39 Co-op banks
10%
0%

E
98

99

00

01

02

03

04

05
19

20

20
19

20

20

20
20
Source: Economic Survey, IIL Estimates
6.STOCK MARKET
Recently there is a bullish trend in stock market. Sensex is going to touch 6000
points. Most of the shares are at their historic high positions. Investors’
confidence in stock market has increased. They expect this trend to persist for a
long time. This has affected negatively on banking industry. People has attracted
toward direct investment in shares as they are giving higher return than banks.
Mutual funds are performing best, so all these factors have contributed toward
fall in deposits. But on the other economy flourishes, demand for money for
investment is increasing.

7.INTEREST RATE
By monetary policy 2004-05 RBI kept interest rate unchanged at 6%. Before that
Interest rate was decreasing. This will lead to increase in demand for loans
because if the loans are available at cheaper rate then people will ask for more
loans to make investments.

67
 9.3: SOCIO-CULTURAL FACTORS

Socio-cultural factors also affect the business. They show way in

which people behave in country. Socio-cultural factors like taboos, customs,
traditions, tastes, preferences, buying and consumption habit of the people, their
language, beliefs and values affect the business. Banking industry is also
operates under these social environment and it is also affected by this factors.
These factors are changing continuously. People’s life style, their behaviour,
consumption pattern etc. is changing and also creating opportunities and threat
for banking industry. There are some socio-cultural factors that affect banking in
India have been analyzed below:

1.TRADITIONAL MAHAJAN PRATHA

Before the birth of the banks, people of India were used to borrow money from
local moneylenders, shahukars, mahajan and shroffs. They were used to charge
higher interest and also mortgage land and house. Farmers were exploited by
these shahukars. But farmers need money. So, they did not have any choice other
than going to shahukars and borrow money from them in spite of exploitation by
these people. But after emergence of banks attitude of people was changed.

Traditional mahajan pratha still exist in India especially in rural

areas. This affects the banking sector. Rural people afraid to go to banks to

68
 borrow money instead they prefer to borrow from shahukars with whom they
have relationships from the time of their fore fathers. Banking infrastructure is
also week in some interior areas of India. So, this is reason it still exist.

2.SHIFT TOWARDS NUCLEAR FAMILY

Attitude of people of India is changing. Now, younger generation wants to
remain separate from their parents after they get married. Joint families are
breaking-up. There are many reasons behind that. But banking sector is
positively affected by this trend. A family need home, consumer durables like
freeze, washing machine, television, bike, car etc. so, they demand for these
products and borrow from banks. Recently there is a boost in housing finance
and vehicle loans. As they do not have money they go for installments. So, banks
satisfy nuclear families wants.

3.CHANGE IN LIFE STYLE

Life style of people of India is changing rapidly. They are demanding high-class
products. They have become more advanced. People want everything car, mobile
etc. what their forefather had dreamed of. Now teenagers also have mobile and
vehicle. Even middle class people also want to have well furnished home,
television, mobile, vehicle and this has opened opportunities for banking sector
to tap this change. Every thing is available on installment so it has become easy
to purchase anything even if you do not have lump sum.

4.LITERACY RATE
Literacy rate in India is very low compared to developed countries. Illiterate
people hesitate to transact with banks. So, this impacts negatively on banks. But
there is positive side of this as well i.e. illiterate people trust more on banks to
deposit their money, they do not have market information. Opportunities in

69
 stocks or mutual funds. So, they look bank as their sole and safe alternative.
Literacy rate of India is around 65%.

TABLE: literacy rate in India

Year Persons Male Female

1951 18.3 27.2 8.9
1961 28.3 40.4 15.3
1971 34.5 46.0 22.0
1981 41.4 53.4 28.5
1991 52.2 64.1 39.3
2001 65.4 75.8 52.1
Source: census of India 2001, series 1 India, paper 1 of 2001.

5.DEMOGRAPHIC OF LARGE POPULATION:

About 60% of Indian population composed of youth. And these people do not
have enough savings, as their expenditure is large because they have to settle in
life. Even if they have savings, they do not prefer to deposit in banks rather they
prefer to invest in share market and mutual funds.

TABLE: Percentage distribution of India’s population by age group

Year 0-14 15-60 age 60 and

(Age) above age
1931 38.3 60.2 1.5
1961 41.0 53.3 5.7
1971 41.4 53.4 5.2
1981 39.7 54.1 6.2
1991 36.5 57.1 6.4
2001 35.7 57.6 6.7
Source: census of India 2001, series 1 India, paper 1 of 2001.
Young people take high risk expecting high return. Bank’s
interest rate does not attract them. But it has positive side also. These people use
different facilities of banks maximum. And are of entrepreneur nature so, take
loans to start new business.

70
 9.4: TECHNOLOGICAL FACTORS

Technology in Banks:

Both public and private banks are spending large amounts of

money on technology to provide innovative products and services to their
customers with more convenience and satisfaction. Technology is reducing the
71
 cost of transaction and helping to increase customer base and enable wider reach.
These innovations are happening not only in the retail-banking segment but also
in the corporate segment.

Today, banks are able to provide products, which were a distant

dream in the past. For example, RBI declared that it is going to start an
innovative payment and settlement system named Real Time Gross Settlement,
which will make the banking, services faster and more efficient for the
customers. Funds transfer between banks under the system will be on real time
basis.

Technology is changing the way banks interface with their

customers, resulting in increased customer base for the banks. The customer
need not go to a branch for a transaction; he can do it via Internet, mobile phone
or even the landline.

Core Banking Solution

Core banking solution is the buzzword today and every bank is trying to
adopt it. It is a centralized banking platform through which a bank can
control its entire operation. The adoption of core banking solution will help
banks to roll out new products and services.
 ATMs
China has around 65,000 installed ATMs and the global average is of two
or three ATMs per branch. Compared to these figures, India is far behind
with an installed ATMs base of around 10,000. Though banks plan to invest
heavily in new ATMs in the coming two to three years, it is expected that
there will be only around 17,000 ATMs by the end of 2004.
Cost per transaction at an ATM is much less than a transaction at the
branch and it can be reduced by as much as 50% of the cost at a branch.

72
  Internet
While Internet banking is in place for the last four years in India, it has just
started showing signs of picking up. Today, banks in India are in the
process of Web-enabling their services in order to offer Internet banking to
their customers. Through Internet, banks can provide their services in a
cost-effective manner. Internet Banking has numerous benefits like greater
reach to customers, quicker time to market, ability to introduce new
products and services quickly and successfully, ability to understand its
customer’s needs, greater customer loyalty etc.

10: CHALLENGES BEFORE THE INDIAN BANKING INDUSTRY

The second phase of financial sector reforms has provided the

necessary architecture for strengthening the Indian banking system and the banks
have a vital role to play as the repository of liquidity, as an important channel for
flow of funds from the surplus sectors to the deficit sectors and as the backbone
of the payment and settlement systems. Increasing deregulation and
globalization, greater competition from within the country and cross-border
dealings has exposed banks to greater risk. Diversification into non-traditional
products like insurance, derivatives etc., has added to the complexity of banking
business.
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 Further, Internet banking, e-commerce, e-money and other
information technology related innovations are adding new dimensions to risks
faced by the banking sector. Mergers and acquisitions as well as outsourcing of
some non-core activities are undertaken by the banks with some strategic
objectives – they also enhance the risks in banking. Considering the speed with
which banking is changing, it is recognized that there is a need to enlarge the
focus and thrust of Risk-Based Supervision (RBS) so as to be able to improve
the risk sensitivity of the supervisory approach Following are the recent
developments and challenges before the banking sector and the strategies and
initiatives undertaken to meet them.

1.Competition and Consolidation

The deregulation in interest rates, grant of functional autonomy to banks in the

area of credit, entry of foreign banks and emergence of new private banks has
made the banking environment more competitive. While the total share in bank
credit continues to be dominated by public sector banks, the share of foreign
banks is showing an increasing trend. As announced in the Union Budget for
2002-2003, it has been decided to give an option to foreign banks to either
operate as branches of their parent banks or to set up subsidiaries. As per the
recent RBI guidelines, the overall ceiling for foreign direct investment in private
sector banks has also been enhanced. In the changed scenario, it has now become
extremely important for Indian banks to remain competitive for surviving.

Universally there is a move towards consolidation and

convergence. It has been our contention that the Government and supervisory

74
 authorities should only provide a conducive environment for consolidation and
convergence through appropriate fiscal and monetary policies supported by a
sound regulatory and supervisory framework. Hence, bank consolidation/ merger
process should be primarily market driven and such proposals should come
voluntarily from the banks themselves depending on the organizational synergy
and the market share.

2.MANAGEMENT OF NPAS
Management of NPAs continues to be the foremost challenge of the Indian
banking System. In the recent past there has been a conscious and persistent
effort through the prescription of strict objective norms for the identification and
classification of NPAs. This was also supplemented by the sustained efforts both
by the Government and the RBI for setting up the requisite infrastructure as also
systems/ procedures for effecting recoveries/ reduction of NPAs. The result has
been encouraging. However, realizing the rigidities in the legal system, Govt. of
India/ RBI have taken several special steps to ensure that legal inadequacies do
not thwart the resolve to reduce the NPAs of banks. In addition, banks have been
advised to strengthen their credit administration machinery and put in place
effective credit risk management systems to reduce the fresh incidence of NPAs.

The less strong banks, which suffered capital erosion due to

rising levels of non-performing assets were recapitalised. Secondly, capital to
risk-weighted assets ratio of 8 percent was introduced. This is now at 9 percent.
Thirdly, prudential norms for income recognition, classification of assets and
provisioning for bad debts were introduced. The management of NPAs has been
fortified by the enactment of the Securitisation & Reconstruction of Financial
Assets and Enforcement of Securities Interest (SARFAESI) Act, 2002 which
provides statutory support for the enforcement of creditors’ rights and inter alia,
paved the way for the establishment of Asset Reconstruction Companies.
Fourthly, Debt Recovery Tribunals were set up to assist the banks in the
recovery of loans. Fifthly, the Scheme of Ombudsman was introduced in 1995,
75
 to look into and resolve customer grievances. Sixthly, the State Bank of India
Act, 1955 and the Bank Nationalisation Act of 1970 were amended to enable the
banks to access the capital market for debt and equity.

3.TIGHTENING OF PRUDENTIAL STANDARDS

The prudential standards need to be enhanced to fall in line with the international
best practices. In this direction, Reserve Bank of India has introduced the 90
days delinquency norm for identification of NPAs with effect from the year
ending March 2004 and reduced the timeframe for classification of a sub-
standard asset as a doubtful asset from 18 months to 12 months with effect from
the year ending March 2005. In some countries, doubtful assets, irrespective of
their status i.e. secured or unsecured, are required to be classified as loss assets
and fully provided for. However, in India, doubtful assets backed by collateral,
are provided for only up to 50% of the outstanding balances, irrespective of the
number of years in which the accounts remain in this category. Given the delay
in recovery of dues through the legal process, the current provisioning norms
followed in India do not entirely cover the latent losses inherent in such
advances. The existing provisioning requirements would have to be enhanced in
line with the international best practices.

4.THE PROPOSED BASEL CAPITAL ACCORD

The Basel Committee recognises that the New Accord is more extensive and
complex than the 1988 Accord. The New Accord is more risk sensitive and it
contains a range of new options for measuring both credit and operational risks.
The New Accord is likely to be finalised next year and would be implemented in
member jurisdictions in 2006. The adoption of the New Basel Capital Adequacy
Framework, relating to assigning capital on a consolidated basis, use of external
credit assessments as a means for assigning preferential risk weights,
sophisticated techniques for estimating economic capital, etc., may need suitable
modifications to adequately reflect the institutional realities and macro-economic
76
 factors specific to emerging market economies including India. Recognising
these implications, RBI has been impressing on the Basel Committee that some
of these proposals may require modification / flexibility to fully reflect the
concerns of the emerging market economies. Notwithstanding the above, it is
imperative that the banks in India study the proposed Capital adequacy
framework, identify their Transition path and initiate steps to be fully prepared
for adoption of the new standards when introduced.
5.RISK MANAGEMENT SYSTEMS
In view of the diverse financial and non financial risks confronted by banks in
the wake of the financial sector deregulation, the risk management practices of
banks have to be upgraded by adopting sophisticated techniques like VaR,
Duration and Simulation and adopting internal model-based approaches as also
credit risk modeling techniques, at least by top banks. Banks need to evolve an
integrated risk management system depending on their size, complexity and the
risk appetite. As a step towards enhancing and fine-tuning the existing risk
management practices in banks RBI has recently issued the draft guidance notes
on credit and market risks.

6.RISK BASED SUPERVISION

Financial sector supervision is expected to become increasingly risk oriented and
Concerned more with validation of systems. Bank managements will have to
develop internal capital assessment processes in accordance with their risk
profile and control environment. These internal processes would then be
subjected to review and supervisory intervention if necessary. The emphasis will
be on evaluating the quality of risk management and the adequacy of risk
containment. The transaction based internal /external audit would have to give
way to risk based audit system. As banks are computerizing more areas of their
operations, they would be required to introduce information system audit also.

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7.Corporate Governance
An adequate institutional and legal framework is in place in India for effectively
implementing a code of sound corporate governance in banks. The statutes have
built-in legal provisions that prohibit or strongly limit activities and relationships
that diminish the quality of corporate governance in banks. As a major step
towards strengthening corporate governance in banks, they have been advised to
place before their Board of Directors the Report of the Consultative Group of
Directors of banks and FIs (Dr Ganguly Group) set up to review the supervisory
role of Boards of banks. The recommendations include the responsibility of the
Board of Directors, role and responsibility of independent and non-executive
directors, fit and proper norms for nomination of directors in private sector
banks, etc. The banks were advised to adopt and implement the
recommendations on the basis of the decision taken by their Board.

Transparency and disclosure standards are also important

constituents of a sound corporate governance mechanism. Transparency and
accounting standards in India have been enhanced to align with international best
practices. However, there are many gaps in the disclosures in India vis-à-vis the
international standards, particularly in the areas of risk management strategies
and practices, risk parameters, risk concentrations, performance measures,
components of capital structure, etc. Hence, the disclosure standards need to be
further broad-based in consonance with improvements in the capability of
market players to analyse the information objectively.

8.Technology Issues
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 systems.

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 Nobel Laureate Robert Solow had once remarked that 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, banks 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 computerized
settlement of clearing transactions, use of Magnetic Ink Character Recognition
(MICR) technology for cheques clearing which currently accounts for 65 per
cent of the value of cheques processed in the country, the computerisation of
Government Accounts and Currency Chest transactions, operationalisation of
Delivery versus Payment (DvP) for Government securities transactions. Two-
way inter-city cheques collection and imaging have been operationalisation at
the four metros. 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 e-payments. The
scheme for Electronic Funds Transfer operated by the Reserve Bank has been
significantly augmented and is now available across major cities. The scheme,
which was originally intended for small value transactions, is processing high
value.

The Centralised Funds Management System (CFMS), which

would enable banks to obtain consolidated account-wise and centre-wise
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 positions of their balances with all offices of the Deposits Accounts Departments
of the Reserve Bank has begun to be implemented in a phased manner. A holistic
approach has been adopted towards designing and development of a modern,
robust, efficient, secure and integrated payment and settlement system taking
into account certain aspects relating to potential risks, legal framework and the
impact on the operational framework of monetary policy.

The approach to the modernization of the payment and settlement

system in India has been three-pronged:

(a) Consolidation,
(b) Development,
(c) Integration.

The consolidation of the existing payment systems revolves

around strengthening Computerised Cheque clearing, expanding the reach of
Electronic Clearing Services and Electronic Funds Transfer by providing for
systems with the latest levels of technology. The critical elements in the
developmental strategy are the opening of new clearinghouses, interconnection
of clearing houses through the INFINET; optimizing the deployment of
resources by banks through Real Time Gross Settlement System, Centralised
Funds Management System (CFMS); Negotiated Dealing System (NDS) and the
Structured Financial Messaging Solution (SFMS). While integration of the
various payment products with the systems of individual banks is the thrust area,
it requires a high degree of standardisation within a bank and seamless interfaces
across banks.
.
The setting up of the apex-level National Payments Council in
May 1999 and the operationalisation of the INFINET by the Institute for
Development and Research in Banking Technology (IDRBT), Hyderabad have

80
 been some important developments in the direction of providing a
communication network for the exclusive use of banks and financial institutions.
Membership in the INFINET has been opened up to all banks in addition to
those in the public sector. At the base of all inter-bank message transfers using
the INFINET is the Structured Financial Messaging System (SFMS). It would
serve as a secure communication carrier with templates for intra- and inter-bank
messages in fixed message formats that will facilitate ‘straight through
processing’. All inter-bank transactions would be stored and switched at the
central hub at Hyderabad while intra-bank messages will be switched and stored
by the bank gateway. Security features of the SFMS would match international
standards.

In order to maximise the benefits of such efforts, banks have to

take pro-active measures to:

 Further strengthen their infrastructure in respect of standardisation, high

levels of security and communication and networking;
 Achieve inter-branch connectivity early;
 Popularize the usage of the scheme of electronic funds transfer (EFT); and
 Institute arrangements for an RTGS environment online with a view to
integrating into a secure and consolidated payment system.

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
database 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.

9.Cross-border Supervision

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 Due to globalization many Indian banks are now operating in many countries.
Because they should render services where their customers want. Indians have
reached everywhere and banks too. So, This would involve a greater focus on
overseas operations of Indian banks and in having information sharing
arrangements with overseas supervisors on a firmer and more formal footing. In
the context of money laundering concerns raised by some of the supervisors, it
needs to be ensured that some of the branches, especially those which are not
compliant with the anti-money laundering principles of the Financial Action
Task Force (FATF), are not causes of serious operational and reputational risks
to their parent banks in India.

10.Money Laundering

Post September 11, the issue that bank supervisors the world over is grappling
with is "How to root out the menace of money laundering?" Until recently, the
governments talked tough about the problem, but did little about it. All that
changed three years ago. The FATF was conceived by G-7 countries as a helpful
mechanism to persuade governments to combat money laundering and offer
them technical assistance to do so. The laws being enacted typically require a
bank to "know the customer" to be confident that his money is obtained by
legitimate means, and to report any suspicious activity. This involves a
Herculean effort, thanks in part, to the growth of "Correspondent banking
relationships." In effect, this means banks must know their customers’ customers
as well.

Banking supervision all over the world has to achieve the

delicate balance between respect for customer privacy and making banks report
suspicious transactions. This raised the toughest question: What exactly are
efforts against money laundering trying to achieve? So far, countries have been
free to define what they regard as illegal sources of money. Some include drugs,
racketeering and other dark crimes in their definition of illegal money. Some,
such as France, consider tax evasion to be money laundering. Others like

82
Switzerland have more flexible laws. However, as recently as last week,
Switzerland has agreed in principle to dismantle the veil of secrecy governing its
banking activity in order to comply with anti-money laundering requirements.
This is a landmark development.

It is fair to say that despite many challenges, Indian banks have

made some progress towards their goals. There has been progressive
intensification of financial sector reforms, and the financial sector as a whole is
more sensitized than before to the need for internal strength and effective
Management as well as to the overall concerns for financial stability. At the
same time, in view of greater disclosure and tougher prudential norms, the
weaknesses in our financial system are more apparent than before. There is
greater awareness now of the need to prepare the banking system for the
technical and capital requirements of the emerging prudential regime and a
greater focus on core strengths and niche strategies. Banks have also made some
progress in assessing financial system against international best practices and in
benchmarking the future directions of progress. Several contemplated changes in
the surrounding legal and institutional environment have been proposed for
legislation.
Nevertheless, several sources of vulnerability persist. The NPA
levels remain too large by international standards and concerns relating to
management and supervision within the ambit of corporate governance are being
tested during the period of downturn of economic activity. There is also a sense
Those banks have a lot to acquire and adapt in terms of the technical expertise
necessary to measure and manage risks better. The structure of the financial
system is changing and supervisory and regulatory regimes are experiencing the
strains of accommodating these changes. Certain weak links in the decentralized
banking and non-bank financial sectors have also come to notice. In a
fundamental sense, regulators and supervisors are under the greatest pressures of

83
 change and bear the larger responsibility for the future. For both the regulators
and the regulated, eternal vigilance is the price of growth with financial stability.

11.1: OPPORTUNITIES

1.UNIVERSAL BANKING:
Universal Banking includes not only services related to savings and loans but
also investments. However in practice the term 'universal banks' refers to those
banks that offer a wide range of financial services, beyond commercial banking
and investment banking, insurance etc. Universal banking is a combination of
commercial banking, investment banking and various other activities including
insurance. If specialized banking is the one end universal banking is the other.
This is most common in European countries. .
Universal banking has some advantages as well as

84
disadvantages. The main advantage of universal banking is that it results in
greater economic efficiency in the form of lower cost, higher output and better
products. However larger the banks, the greater the effects of their failure on the
system. Also there is the fear that such institutions, by virtue of their sheer size,
would gain monopoly power in the market, which can have significant
undesirable consequences for economic efficiency. Also combining commercial
and investment banking can gives rise to conflict of interests. Conflict of
interests was one of the major reasons for introduction of Glass-Steagall Act in
US.

Universal banking in India

In India Development financial institutions (DFIs) and refinancing institutions

(RFIs) were meeting specific sectoral needs and also providing long-term
resources at confessional terms, while the commercial banks in general, by and
large, confined themselves to the core banking functions of accepting deposits
and providing working capital finance to industry, trade and agriculture.
Consequent to the liberalisation and deregulation of financial sector, there has
been blurring of distinction between the commercial banking and investment
banking.

Reserve Bank of India constituted on December 8, 1997, a

Working Group under the Chairmanship of Shri S.H. Khan to bring about
greater clarity in the respective roles of banks and financial institutions for
greater harmonisation of facilities and obligations. Also report of the Committee
on Banking Sector Reforms or Narasimham Committee (NC) has major bearing
on the issues considered by the Khan Working Group. .

The issue of universal banking resurfaced in Year 2000, when

ICICI gave a presentation to RBI to discuss the time frame and possible options
for transforming itself into an universal bank. Reserve Bank of India also spelt

85
 out to Parliamentary Standing Committee on Finance, its proposed policy for
universal banking, including a case-by-case approach towards allowing domestic
financial institutions to become universal banks. .

Now RBI has asked FIs, which are interested to convert itself into
a universal bank, to submit their plans for transition to a universal bank for
consideration and further discussions. FIs need to formulate a road map for the
transition path and strategy for smooth conversion into an universal bank over a
specified time frame.

2. E- BANKING

Competition and the constant changes in technology and lifestyles have changed
the face of banking. Nowadays, banks are seeking alternative ways to provide
and differentiate amongst their varied services. Customers, both corporate as
well as retail, are no longer willing to queue in banks, or wait on the phone, for
the most basic of services. They demand and expect to be able to transact their
financial dealings where and when they wish to. With the number of computers
increase in every year, the electronic delivery of banking services is becoming
the ideal way for banks to meet their clients’ expectations.

Online banking or e-banking can be defined as online systems

which allow customers to plug into a host of banking services from a personal
computer by connecting with the bank’s computer over the telephone wires.
Technology continues to make online banking easier for the average consumer.
Banks are using a variety of names for online banking services, such as PC
banking, home banking, electronic banking or Internet banking. Regardless of
the given name, these systems certainly offer specific advantages over the
traditional banking methods.

Why banks adopt E-banking?

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 COMPETITION: there is intense competition in the market. Every bank
strives hard to survive in this highly competitive market. Exit is not easy
and due to low entry barriers newer and newer private and foreign banks
are entering in the market. Banks feel the need to offer e-banking services
today just to keep up with the competitors and to be able to retain their
existing customers.
 EXPLORING NEW MARKETS: The Internet is not only a low cost
approach to determine new distribution channels but also to establish a
presence in new and up coming markets.

 COST REDUCTION: E-banking is an opportunity for banks to reduce

their overhead costs as the need for physical branches is drastically cut
down. The running cost of an ordinary bank account for 50-60 per cent of
their revenues, whereas the running cost of Internet banking are a mere 15-
20 per cent of revenues. For example, in India, Net banking is estimated to
cost just INR 2 per transaction compared to the INR 43 incurred while
banking at the branch.

 CUSTOMER SERVICE: E-banking offers banks an opportunity to

improve on their customer service by collecting and managing information
pertaining to their customers and their individualistic preferences.

 REVENUE POTENTIAL: E-banking also provides an opportunity to build

on their relationships with their existing customers. For Example, bank
Web portals could offer purchasing services for business travel or
insurance to generate more revenue.

CUSTOMER BENEFITS FROM E-BANKING

 Check Account’s Information,

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  Receive airlines mileage for banking with certain banks – co
promotion
 Receive and pay e-bills online
 Download account information to the personal finance management
software viz., Quicken or MS-Money
 Deposit Products online including Checking Savings, Money
Market and Certificate of Deposits

 Access financial planning tools to calculate loan payments/ tax

burden
 View time-trend of various financial indicators, including interest
rates
 Transfer funds between accounts
 Interactive tools to help customers find an account that best suits
their needs
 Single login provides access to multiple accounts held at a Bank
 Internal transfers from deposit A/c to loan A/c, Including Credit
Cards
 Online mortgaging
 View a/c balances and transfer money through Web-enabled Cell
Phones or PDA’s.

E-banking in India

In India, the Internet banking market is in the earliest stages of

development. Only 51 banks are currently offering any kind of Internet banking
services. Out of which 55% are “Entry Level” sites, offering little more than
company information and basic marketing materials. Only 8% offer “advanced”
transactional services, such as online fund transfer, transactions and cash
management services. In general, the foreign and private banks are far ahead of

88
 the Public Sector or Cooperative Banks in terms of the number of sites and their
level of development.

3.M-Banking

The revolution in banking sector through M-banking is coming. There is

burgeoning growth in mobile phone users in India and this opens gate for m-
banking. Customers can transact with their banks through mobile, no need to go
to bank. They can deposit, pay bills, check balances by their cell phones. The
scene is set for an eruption of m-Banking services during the years to come. The
time is right and the only remaining question is, which banks and financial will
place itself in a position to benefit from this revolutionary new distribution
channel. There are several reasons dictating why the time is right to enter this
market, including:

• Mobile penetration is rising quickly and approaching what surely must be

the peak of its growth curve;
• The penetration of m-Banking-enabled phones is also paving the way for a
revolution in the way consumers access their finances;
• Internet banking is well on its way to becoming a mainstream banking
service;
• Regulatory structures are evolving to reduce uncertainty surrounding issues
such as transaction security;
• The infrastructure required for the development of m-Banking services is in
place: it could even be argued that content providers are struggling to keep
pace with technological advancement in the mobile communications
industry;

The high level of commitment from powerful industry players, both in the
financial service industry and the mobile communications industry.

4.Plastic Money

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 With the help of plastic money instruments like credit card, debit card, ATM
cards etc. banks reduces the risk of carrying high value of money. It is more
convenient instrument, which is getting popularity day by day and is capturing
major part of the market. It is a deemed opportunity to expand business of banks.

5.Bank Assurance
It is a new concept according to which the banks and insurance companies join
hands. The insurance companies use banks’ established network of branches to
distribute and market their products. By using this concept banks can attract
more customers and can add one more facility

6.RETAIL BANKING

Now a days bank are focusing more on retail banking. Retail Banking is the new
mantra in the banking sector. The home loans alone account for nearly two-third
of the total retail portfolio of the bank. According to one estimate, the retail
segment is expected to grow at 30-40% in the coming years. Banks have become
more customers centric and are providing more and more facilities to individual
customer. Retail banking, which is designed to meet the requirements of
individual customers and encourage their savings, includes payment of utility
bills, consumer loans, credit cards, checking account balances, ATMs,
transferring funds between accounts and the like. With spreads shrinking, Indian
banks are following their global counterparts and focusing on increasing the
share of their fee- based income. ``Fee-based income'' may increase marginally
in future. The ratio of non-interest income to total funds has increased for some
banks. A rising ratio is expected in the future.

The main advantage of getting into retail banking is that the risks
involved are lesser in this segment. There are lower Non Performing Assets
(NPAs) in retail banking. This is one of the reasons why loans such as those for
housing, automotive, etc are being touted by banks like never before. Credit
cards and debit cards is another focus area for banks.
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6. Differentiation

The customer is interested in how he/she can benefit from the bank and its
products. That's why it becomes necessary for a bank to differentiate its products
from the others. Some of the ways in which differentiation can be introduced are
through specialization, new products, and increasing the added value.

Specialization basically means that the bank gets involved only

in selected areas. For example, the bank might be getting involved only in
housing finance. Or, it could be limiting its services just for corporate banking
clients. Another way to specialize could be by handling just specific sets of
portfolios.

Banks can differentiate themselves by adding new products to

their range of services. This will provide the bank with better yields per contact.
Increasing the added value of products is another way of differentiation for
banks. Operational excellence is also a key factor in effective differentiation
from the competition.

7.Non-bank activities
These include underwriting stocks and providing insurance. Also Banks can
merger or buy smaller investment houses to become an investing bank as well as
a commercial bank.

11.2: THREATS

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1.FOREIGN BANKS

The biggest threats against Indian banks are foreign banks. The government is
planning to remove barriers in FDI flow in banking sector. It means 100% FDI
will be allowed in banks. Foreign banks are much more ahead in technology than
Indian banks and they have experience, economies of scale and are more
customer friendliness than Indian banks. This will produce greatest threat against
domestic banks. But this also brings an opportunity i.e. Indian banks will
become more tougher and will adopt advanced technology, focus more on
efficiencies and this will help them to compete in global market also.

2. INTEREST RATE
The interest rates are decreasing day by day. Because of it the group of
customers who want fixed income are dissatisfied and so, they will look for new
sources of income like mutual fund, insurance policies government securities
that give them higher return and this is the reason deposits with banks are
decreasing.

3.FAILURE OF CO-OPERATIVE BANKS

Failure of co-operative banks also produces threat for banking sector. Co-
operative banks have significance proportion in total banking activities and their
contribution in overall contribution of banking sector cannot be denied. But due
to bankruptcy of some of co-operative banks, people’s trust has been lost. Now
they are attracted towards other sources of investment.

4.SUBSTITUTE BANKING
These include credit unions and other companies that provide banking services,
for example Merrill Lynch.

BIBLIOGRAPHY

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 BOOKS

• Jha, Bank Marketing, New Delhi: HPH Publications,2002 120 pp

• Prasad, Banking Finance System, New Delhi:HPH Publications,2003

• Reddy, Theory & Practice of Banking, New Delhi : HPH Publications,2002

• Gordon, Banking Theory & Practices, New Delhi: HPH Publications, 2004

• Singh, Indian Banking Industry, Deep Publications, 2004

• Chawla, Indian Banking Towards, Deep Publications,2003

• Khan,M.Y Indian Financial System, PHI Publications,2004

WEBSITES

1. www.banknetindia.com
2. www.capitalmarket.com
3. www.equitymaster.com
4. www.ficci.com
5. www.financianexpress.com
6. www.hindu.com
7. www.imf.org
8. www.ibspublishung.com
9. www.indiainfoline.com
10. www.indianbanksassociation.org
11. www.rbi.org
12. www.sify.com
13. www.moneycontro.com
14. www.worldbank.org
15. www.valuenotes.com

NEWSPAPERS

1. Economic Times
2. Times of India
3. Financial Express
4. Business Standard

MEGAZINES:

1. Capitamarket
2. Business today
3. Charted Secretary: Banking Special Edition

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