RESERVE BANK OF INDIA

PATNA

PROJECT REPORT CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA: A BRIEF SKETCH

PREPARED BYABHISHEK KUMAR SINGH (YOUNG SCHOLAR) RBI YOUNG SCHOLARSHIP SCHEME 2011

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PREFACE
Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dials a pizza. Money has become the order of the day. Banking in India originated in the last decades of the 18th century. The oldest bank in existence in India is the state bank of India, a government-owned bank that traces its origins back to June 1806 and that is the largest commercial bank in the country. Central banking is the responsibility of the Reserve bank of India, whichin 1935 formally took over these responsibilities from the then Imperial Bank of India, relegating it to commercial banking functions. After India's independence in 1947, the Reserve Bank was nationalized and given broader powers. In 1969 the government nationalized the 14 largest commercial banks; the government nationalized the six next largest in 1980.

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ACKNOWLEDGEMENT
First of all I would like to thank to Reserve bank of India to allow me to be a part of such a reputed institution, the Central Bank of India, who gave me the chance to work on the project titled CHALLENGES FOR PUBLIC SECTOR BANKS IN INDIA in Patna city. I sincerely thank the Governor, Reserve Bank of India and Shri Mohit kumar Singh Regional Director Patna office for facilitating and providing an opportunity to learn in the form of a training programme. I further thank Shri S.Maurya, D.G.M for helping me in the project along with RBI. A special thanks to Mr. Kshitiz Raj singh Manager (D.A.D) for helping me to understand all important vital aspect relating to banking system and providing data and & structure. As a part of DBS , I owe my thanks to all other persons working in DBS for providing me information, support and understanding related to different aspects of banking system. Lastly and significantly I am grateful to Mr K.S.Gauri sir Assistant Manager of DAPM for providing great support and also for making me feel comfortable with the homely interaction with all the other staff and the entire staff of RBI. I am also thankful to Mr Pravin kumar sir Manager, DAPM, (personnel) for providing me support and solving my problem during my tenure in RBI Patna office. He stood besides us whenever we needed him in the whole course. Without whos friendly and loving attitude, the project would not have been such a joyful learning and a memorable experience forever

ABHISHEK KUMAR SINGH

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C0NTENTS
Subject. Page no 5 6-8

1. Synopsis..... 2. Introduction of .. y RBI y DBS 3. Banking sectors in India . y Public sector y Private sector y Co-operative, RRBs 4. Challenges.. 01. 02. 03. 04. 05. 06. 07. 08. 09. 10. 11. 12. 13. 14. How to reduce NPA Implementation of Basel II Risk management Corporate governance Customer service Latest Technology Human Resource Management Talent Management Interest rate risk Transparency and disclosure Competition Challenges in banking security Know your customer guidelines(Anti money laundering) Grow in size

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12-33

5. Recommendations.. 6. Conclusion 7. Bibliography..

34-35 36-37 38

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SYNOPSIS
The enhanced role of the banking sector in the Indian economy, the increasing levels of deregulation along with the increasing levels of competition have facilitated globalisation of the India banking system and placed numerous demands on banks. The last decade has witnessed major changes in the financial sector - new banks, new financial institutions, new instruments, new windows, and new opportunities - and, along with all this, new challenges. Indian banks are facing innumerable challenges such as worrying level of NPAs, deteriorating asset quality, increasing pressures on profitability, asset-liability management, liquidity risk management, market risk management and ever tightening prudential norms. Besides this, the disclosure requirements are alsoincreasing. However, it must be recognised that there is little to celebrate, as the banking system in India has to remain on toes to face myriad changes and to deliver banking of international standards and quality. The greatest challenge that the PSBs are today facing is the Asset Management, both financial and human. Global challenges in banking A new broad challenges faced by the Indian banks in the following areas, viz., enhancement of customerservice; application of technology; implementation of Basel II&III; improvement of risk management systems; implementation of new accounting standards; enhancement of transparency & disclosures.

Over the last few years, the falling interest rates, gave banks very little incentive to lend to projects, as the return did not compensate them for the risk involved. This led to the banks getting into the retail segment big time. It also led to a lot of banks playing it safe and putting in most of the deposits they collected into government bonds. Now with the bond party over and the bond yields starting to go up, the banks will have to concentrate on their core function of lending. Furthermore, the interference of the central government with the functioning of PSBs should stop. A fresh autonomy package for public sector banks is in offing. The package seeks to provide a high degree of freedom to PSBs on operational matters. This seems to be the right way to go for PSBs.
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INTRODUCTION OF RBI
(THE CENTRAL BANK OF INDIA) The central bank of the country is the Reserve Bank of India(RBI). The Reserve Bank of india was established on April 1, 1935 in accordance with the provisions of THE RESERVE BANK OF INDIA ACT, 1934. Though originally privately owned, since nationalization in 1949, the Reserve Bank is fully owned by the Government of India. The Central Office of the Reserve Bank has been in Mumbai since inception. The Central Office is where the Governor sits and is where policies are formulated. Now it has 22 regional offices, most of them in state capitals. The Act, 1934 (II of 1934) provides the statutory basis of the functioning of the Bank. The Bank was constituted for the need of following: y y y To regulate the issue of banknotes To maintain reserves with a view to securing monetary stability and To operate the credit and currency system of the country to its advantage.

FUNCTIONS OF RBI Monetary Authority:

y y

Formulates, implements and monitors the monetary policy. Objective: maintaining price stability and ensuring adequate flow of credit to productive sectors.

Regulator and supervisor of the financial system:

y y

Prescribes broad parameters of banking operations within which the country's banking and financial system functions. Objective: maintain public confidence in the system, protect depositors' interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange

y y

Manages the Foreign Exchange Management Act, 1999. Objective: to facilitate external trade and payment and promote orderly development and maintenance of foreign exchange market in India.

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Issuer of currency:
y y

Issues and exchanges or destroys currency and coins not fit for circulation. Objective: to give the public adequate quantity of supplies of currency notes and coins and in good quality.

Developmental role
y

Performs a wide range of promotional functions to support national objectives.

Related Functions
y y

Banker to the Government: performs merchant banking function for the central and the state governments; also acts as their banker. Banker to banks: maintains banking accounts of all scheduled banks.

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DEPARTMENT OF BANKING SUPERVISION

The Department of Banking Supervision has its Central Office in Mumbai and 16 regional offices at various centres in the country.In December 1993 the Department of Supervision was carved out of the DBOD with the objective of segregating the supervisory role from the regulatory function of RBI. The Department of Banking Supervision at present exercises the supervisory role relating to commercial banks in the following forms: Preparing of independent inspection programmes for different institutions. Inspection evaluates financial condition and performance of the bank which includes judging asset quality, solvency and capital adequacy earning performance and liquidity of the bank. Then seeing management and perating condition and compliance of the bank which includes Regulatory compliance and Guidance compliance and finally doing summary assessment of the bank .Undertaking scheduled and special on-site inspections, off-site surveillance, ensuring follow-up and compliance. Determining the criteria for the appointment of statutory auditors and special auditors and assessing audit performance and disclosure standards. Exercising supervisory intervention in the implementation of regulations which includes-recommendation for removal of managerial and other persons, suspension of business, amalgamation, merger/winding up, issuance of directives and imposition of penalties.The Department of Banking Supervision follow CAMELS approach during its inspection of commercial banks. It judges banks on the basis of the following six parameters : C- CREDIT ADEQUACY A- ASSET OR CREDIT QUALITY M- MANAGEMENT E- EARNINGS L-LIQUIDITY S-SOLVENCY

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BANKING SECTOR IN INDIA

PUBLIC SECTOR BANKS(25)-The public sector is the one whose working is in the hands of the government. The government holds a majority stake in public sector industries. Their activities are mostly influenced by the government. It may be defined as "an enterprise where there is no private ownership but its activities are not mainly confined to the maximization of profits and private interests of the enterprise but it is influenced by social. (Including SBI &its associate) PRIVATE BANK(30)- A private bank is owned by either an individual or a general partner(s) with limited partner(s). In any such case, the creditors can look to both the "entirety of the bank's assets" as well as the entirety of the sole-proprietor's/generalpartners' assets. FOREIGN SECTOR BANK(40)- Foreign sector bank are those bank which have their head office in other countries outside India and branch is working in India. CO-OPERATIVE BANK(68)-The co-operative bank is very much useful for rural people. The co-operative banking sector is divided into the following categories. a. State co-operative bank b. Central co-operative bank. c.Primary Agriculture Credit Societies  RRBs(196) A rural bank is a financial institution that helps rationalize the developing regions or developing country to finance their needs specially the projects regarding agricultural progress.

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HISTORY OF BANKING
Indian banking system, over the years has gone through various phases after establishment of Reserve Bank of India in 1935 during the British rule, to function as Central Bank of the country. Earlier to creation of RBI, the central bank functions were being looked after by the Imperial Bank of India. With the 5-year plan having acquired an important place after the independence, the Govt. felt that the private bank may not extend the kind of cooperation in providing credit support, the economy may need. In 1954 the All India Rural Credit Survey Committee submitted its report recommending creation of a strong, integrated, State-sponsored, State-partnered commercial banking institution with an effective machinery of branches spread all over the country. The recommendations of this committee led to establishment of first public sector Bank in the name of State Bank of India on July 01, 1955 by acquiring the substantial part of share capital by RBI, of the then Imperial Bank of India. Similarly during 1956-59, as a result of re-organisation of princely States, the associate bank came in to fold of public sector banking. In these five decades since independence, banking in India has evolved through four distinct phases: FOUNDATION PHASE:- can be considered to cover 1950s and 1960s till the nationalisation of banks in 1969. The focus during this period was to lay the foundation for a sound banking system in the country. As a result the phase witnessed the development of necessary legislative framework for facilitating re-organisation and consolidation of the banking system, for meeting the requirement of Indian economy. A major development was transformation of Imperial Bank of India into State Bank of India in 1955 and nationalisation of 14 major private banks during 1969. EXPANSION PHASE:- had begun in mid-60s but gained momentum after nationalisation of banks and continued till 1984. A determined effort was made to make banking facilities available to the masses. Branch network of the banks was widened at a very fast pace covering the rural and semi-urban population, which had no access to banking hitherto. Most importantly, credit flows were guided towards the priority sectors. However this weakened the lines of supervision and affected the quality of assets of banks and pressurized their profitability and brought competitive efficiency of the system. CONSOLIDATION PHASE:- The phase started in 1985 when a series of policy initiatives were taken by RBI which saw marked slowdown in the branch expansion. Attention was paid to improving house-keeping, customer service, credit management,
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staff productivity and profitability of banks . Measures were also taken to reduce the structural constraints that obstructed the growth of money market. REFORMS PHASE:-The macro-economic crisis faced by the country in 1991 paved the way for extensive financial sector reforms which brought deregulation of interest rates, more competition, technological changes, prudential guidelines on asset classification and income recognition, capital adequacy, autonomy packages etc.

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Challenges Facing Banking Industry In India

The banking industry in India has undergone a major transformation due to changes in economic conditions and continuous deregulation. These multiple changes happening one after other has a ripple effect on a bank to graduate from completely regulated seller market to completed deregulated customers market.

Figure: Challenges Facing Banking Industry In India

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Deregulation: This continuous deregulation has made the Banking market extremely competitive with greater autonomy, operational flexibility and decontrolled interest rate and liberalized norms for foreign exchange. The deregulation of the industry coupled with decontrol in interest rates has led to entry of a number of players in the banking industry. At the same time reduced corporate credit off take (thanks to sluggish economy) has resulted in large number of competitors batting for the same pie. New rules: Changed environment has redefined new rules of the game. Banks are transforming to universal banking, adding new channels with lucrative pricing and freebees to offer. Natural fall out of this has led to a series of innovative product offerings catering to various customer segments, specifically retail credit. Efficiency: This in turn has made it necessary to look for efficiencies in the business. Banks need to access low cost funds and simultaneously improve the efficiency. The banks are facing pricing pressure, squeeze on spread and have to give thrust on retail assets. Diffused Customer loyalty: This will definitely impact Customer preferences, as they are bound to react to the value added offerings. Customers have become demanding and the loyalties are diffused. There are multiple choices, the wallet share is reduced per bank with demand on flexibility and customization. Given the relatively low switching costs; customer retention calls for customized service and hassle free, flawless service delivery. Misaligned mindset: These changes are creating challenges, as employees are made to adapt to changing conditions. There is resistance to change from employees and the Seller market mindset is yet to be changed coupled with Fear of uncertainty and Control orientation. Acceptance of technology is slowly creeping in but the utilization is not maximized. Competency Gap: Placing the right skill at the right place will determine success. The competency gap needs to be addressed simultaneously otherwise there will be missed opportunities. The focus of people will be on doing work but not providing solutions, on escalating problems rather than solving them and on disposing customers instead of using the opportunity to cross sell.

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Challenges For Public Sector Banks In India

01. 02. 03. 04. 05. 06. 07. 08. 09. 10. 11. 12. 13. 14.

How to reduce NPA Implementation of Basel II Risk management Corporate governance Customer service Latest Technology Human Resource Management Talent Management Interest rate risk Transparency and disclosure Competition Challenges in banking security Know your customer guidelines(Anti money laundering) Grow in size

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1.HOW TO REDUCE NPA

Non Performing Asset means an asset or account of borrower, which has been classified by a bank or financial institution as sub-standard, doubtful or loss asset, in accordance with the directions or guidelines relating to asset classification issued by The Reserve Bank of India. 1.1Categories of NPAs  Sub-standard Assets - which has remained NPA for a period of 90 days to less than or equal to 12 months.  Doubtful Assets - has remained in the sub-standard category for a period of 12 months upto 3 years depending upon availability of security.  Loss Assets - loss has been identified by the bank or internal or external auditors or the RBI inspection but the amount has not been written off wholly.

(Amount in Rs crore) As on March 31 2011 Standard Sub-standard Doubtful Assets Assets Assets Amount % Amount % Amount % share share share Years (1) (2) (3) (4) (5) (6) Public Sector Banks 2005 770431 94.27 11084 1.35 30218 3.69 2006 1029493 96.14 11394 1.06 24804 2.32 2007 1335175 97.19 14147 1.03 19944 1.45 2008 1656585 97.66 16870 0.99 19167 1.13 2009 2059725 97.91 19521 0.93 20715 0.98 2010 2462030 97.73 27688 1.10 24685 0.98

The problem India Faces is not lack of strict prudential norms but i. The legal impediments and time consuming nature of asset disposal proposal. ii. Postponement of problem in order to show higher earnings. iii.Manipulation of debtors using political influence.

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1.2 Several Reasons For An Account Becoming NPA Internal factors: 1. Funds borrowed for a particular purpose but not use for the said purpose. 2. Project not completed in time. 3. Poor recovery of receivables. 4. Excess capacities created on non-economic costs. 5. In-ability of the corporate to raise capital through the issue of equity or otherdebt instrument from capital markets. 6. Business failures. 7. Diversion of funds for expansion \ modernisation \setting up new projects \ heling or promoting sister concerns. 8. Willful defaults, siphoning of funds, fraud, disputes, management disputes, misappropriation etc. 9. Deficiencies on the part of the banks viz. in credit appraisal, monitoring and follow-ups, delay insettlement of payments\ subsidiaries by government bodies etc. External factors: 1. Sluggish legal system Long legal tangles Changes that had taken place in labour laws, Lack of sincere effort. 2. Scarcity of raw material, power and other resources. 3. Industrial recession. 4. Shortage of raw material, raw material\input price escalation, power shortage, industrial recession, excess capacity, naturalcalamities like floods, accidents. 5. Failures, non payment\ over dues in othercountries, recession in other countries, externalization problems, adverse exchange rates etc. 6. Government policies like excise duty changes, Import duty changes etc. 1.3 Suggestions Through RBI has introduced number of measures to reduce the problem of increasing NPAs of the banks such as CDR mechanism. One time settlement schemes, enactment of SRFAESI act, etc. A lot of measures are desired in terms of effectiveness of these measures. What I would like to suggest for reducing the evolutions of the NPAs of Public Sector Banks are as under. (1) Each bank should have its own independent credit rating agency which should evaluate the financial capacity of the borrower before than credit facility.
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(2) The credit rating agency should regularly evaluate the financial condition of the clients. (3) Special accounts should be made of the clients where monthly loan concentration reports should be made. (4) It is also wise for the banks to carryout special investigative audit of all financial and business transactions and books of accounts of the borrower company when there is possibility of the diversion of the funds and mismanagement. (5) The banks before providing the credit facilities to the borrower company should analyse the major heads of the income and expenditure based on the financial performance of the comparable companies in the industry to identify significant variances and seek explanation for the same from the company management. They should also analyse the current financial position of the major assets and liabilities. (6) Banks should evaluate the SWOT analysis of the borrowing companies i.e. how they would face the environmental threats and opportunities with the use of their strength and weakness, and what will be their possible future growth in concerned to financial and operational performance. (7) Independent settlement procedure should be more strict and faster and the decision made by the settlement committee should be binding both borrowers and lenders and any one of them failing to follow the decision of the settlement committee should be punished severely. (8) There should be proper monitoring of the restructured accounts because there is every possibility of the loans slipping into NPAs category again. (9) Proper training is important to the staff of the banks at the appropriate level with on going process. That how they should deal the problem of NPAs, and what continues steps they should take to reduce the NPAs. (10) Willful Default of Bank loans should be made a Criminal Offence. (11) No loan is to be given to a Group whose one or the other undertaking has become a Defaulter.

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2.0 IMPLEMENTATION OF BASEL II

Implementation of Basel II is seen as one of the significant challenges for Public Sector Banks. WHAT IS BASEL II? Basel II is the second of the Basel Accords which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision.

It has following 3 pillars -The first pillar The first pillar deals with maintenance of regulatory capital calculated for three major components of risk that a bank faces: credit risk, operational risk and market risk. Other risks are not consideredfully quantifiable at this stage. The Second Pillar - Supervisory Review Process Supervisory review process has been introduced to ensure not only that bank have adequate capital to support all the risks, but also to encourage them to develop and use better risk management techniques in monitoring and managing their risks. The third pillar The third pillar greatly increases the disclosures that the bank must make. This is designed to allow the market to have a better picture of the overall risk position of the bank and to allow the counterparties of the bank to price and deal appropriately.

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3.0 Risk management

Risk management is relatively new and emerging practice as far as Indian banks are concerned and has been proved that its a mirror of efficient corporate governance of a financial institution. Globalisation and significant competition between foreign and domestic banks, survival and optimizing returns are very crucial for banks and financial institutions. In a volatile and dynamic market place for achieving sustainable business growth and shareholders value, it is essential to develop a link between risks and rewards of all products and services of the bank. Hence, the banks should have efficient risk management framework to mitigate all internal and external risks.

The Risk Has Increased Substantially Due To Various Factors As Below  Globalization: Despite opposition to it, globalization has come to stay. Trade barriers have reduced considerably. Capital movement has also been liberalized to a large extent.  Deregulation: Interest rates have been deregulated. Exchange rate of rupee is market determined though RBI often intervenes to keep its value low.  Competition: Competition has multiplied. The new generation private sector banks are giving a stiff competition to public sector banks. Moreover, the process of disintermediation has also affected the public sector banks adversely.

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 Technology: Rapid growth of technology has many benefits. Unfortunately, public sector banks are yet to leverage their recently acquired strength in this area. In the meanwhile, risk relating to technology has increased substantially.  Manpower: Public sector banks are handicapped by age profile and low technical skills of their employees. There are three main categories of Risks Credit Risks: The Risk that the borrower will not able to repay the debt (loan) under the terms of the origional agreement. Credit risk includes new dimensions with crossborder transactions. Some times, transfer risk will arise when currency of obligation becomes unavailable to borrowers.  It is most critical risk in public sector banks.  It required most subjective judgement .  It must be managed carefully. Market Risks : Changes in market rates and prices will impair a borrowers ability to perform under the contract negotiated between the parties. Market risks such as interest rate and foreign exchange risks become more complex as financial institutions and corporates gain access to new securities and markets, and foreign participation changes the dynamics of domestic markets. For instance, banks will have to quote rates and take unhedged open positions in new and possibly more volatile currencies. Similarly, changes in foreign interest rates will affect banks.  It need monitoring of changes in prices of commodities , real estate, etc. Liquidity risk : The risk that a bank will be unable to accommodate decreases in liabilities or to fund increases in assets. such risks arise when the rrrepricing of assets do not match those of liabilities. It includes the risk from positions in foreign currency denominated assets and liabilities. Potentially large and uneven flows of funds, in different currencies,will expose the banks to greater fluctuations in their liquidity position and complicate their asset-liability management as banks can find it difficult to fund an increase in assets or accommodate decreases in liabilities at a reasonable price and in a timely fashion.

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4.0 Corporate governance

For strengthening financial sector and to maintain financial stability, various measures were taken by the Reserve Bank of India. First, the Board for Financial Supervision stressed the importance of good corporate governance in financial institutions. In the year 2005-2006, Reserve Banks Board for Financial Supervision suggested to the Government to extend the fit and proper status guidelines prescribed for private sector banks to the public sector banks, with a view to attaining higher standards of corporate governance. The Reserve Banks policy objective is to ensure high-quality corporate governance in banks. It has issued guidelines stipulating fit and proper criteria for directors of banks. In terms of the guidelines, a majority of the directors of banks are required to have special knowledge or practical experience in various relevant areas. The Reserve Bank also has powers to appoint additional directors on the board of a banking company. Currently in India, about four-fifths of the banking business is under the control of public sector banks (PSBs), comprising the SBI and its subsidiaries and the nationalised banks. Corporate governance in PSBs is complicated by the fact that effective management of these banks vests with the government and the top managements and the boards of banks operate merely as functionaries. The ground reality is such that the Government performs simultaneously multiple functions vis--vis the PSBs, such as the owner, manager, quasi-regulator, and sometimes even as the super-regulator. Unless the issues connected with these multiple, and sometimes conflicting, functions are resolved and the boards of banks are given the desired level of autonomy it would be difficult to improve the quality of corporate governance in PSBs. It is desirable that all the banks are brought under a single Act so that the corporate governance regimes do not have to be different just because the entities are covered under multiple Acts of the Parliament or that their ownership is in the private or public sector

5.0 Customer service

Banking being service industry, customer service is backbone. Customer service in Public Sector Banks is very complex issue because customers of Public sector banks come from all walks of life. 1. From poorest to richest. 2. Youngest to oldest.
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3. Illiterate to highly educated. 4. Sweeper to Chief Executive. 5. Individuals to Corporate. 6. People from all regions, religion, caste, age, service, profession etc. 7. People from different backgrounds, culture, temperament and ego levels. .Mahatma Gandhis perception of a customer was as follows: He is not dependent on us. We are dependent on him. He is not an interruption on our work. He is the purpose of it. He is not an outsider on our premises. He is part of it. We are not doing him a favor by serving him. He is doing us a favor by giving us an opportunity to do so. As far as the customer I concerned, he is the pivot of all activities in the era of consumerism. Customer is god in the UK and USA. Customer is the king in Japan. But, the customer is the Boss in India and the Boss is always right. The Public Sector Banks may need to include customer oriented approach or customer focus in their five areas of businesses such as cash accessibility, asset security, money transfer, deferred payment and financial advices. There are four strategies available to customer relations' managers:     To win back or save customers. To attract new and potential customers. To create loyalty among existing customers and. To up sell or offer cross services.

In order to develop close relationship with the customers the Public SectorBanks have to focus on the technology oriented innovations that offer convenience to the customers. Today customers are offered ATM services, access to internet banking and phone banking facilities and credit cards. These have elevated banking beyond the barriers of time and space. So providing better services than Private Sector Banks to customer is a challenge for Public Sector Banks. Because a satisfied customer brings in more customers and he is the best advertisement for the bank.

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6.0 Latest technology

An online banking facility enables you to handle your finances efficiently. Online banking uses modern computer technologies to offer the users convenient banking facilities. If you have access to such a facility, there is absolutely no need for you to personally visit your banks branch for any sort of transaction. You can simply login with the internet-banking password that your banker has given you, and carry all the necessary work online. It also eliminates the necessity of doing any paperbased work and saves considerable time for the users. Private sector and foreign banks were using technology and computerized system since its beginning while PSBs were not. So they found difficulty in managing all these things. Many of Indian PSBs ignored technological change and had lost market share to foreign banks and new private banks. Technology helps in having a huge branch network easily and also it reduces the operational cost this may b clarified by an example as:Operational cost per transaction of an account via different type isy Via computers on counter- 40 Rs y Via ATM -16-17 Rs y Via online -46 Paise So it is cleared that manually/direct transaction cost comes very high and electronically and online it is very low. So thats why public sector banks should improve their working system and should make it totally online but challenge is before PSBs. The users can do variety of work using your online banking pin code. The bankers benefit equally from the online banking facilities. Besides offering their users the convenience of banking, the online banking system means significant cost savings for the bankers themselves. With such an automatic system in place, the bankers need not to hire employees specialized in handling paper work and teller interactions. This reduces the bankers operating costs considerably, translating into significant cost savings over the long-term.

6.1 V ARIOUS ADVANTAGES OF BANKING ONLINE: The biggest advantage of online banking is its convenience. Unlike a banks branches, online banking facilities are open 24/7. This offers you banking from the comfort of your home with just a click. You can access such a facility from anywhere in the world. This could be great advantage if you need to address urgent monetary
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concerns while away from home. Transactions online are fast and mostly quicker than ATM transactions. Moreover, online banking systems have sophisticated tools that provide effective management of the users assets. Initially the online banking security system was quiet simple, a id and a password and you are done. It was quiet risky then anyone who gets access to these two can empty your account. Many people at that time will do setting with the courier people and got access to this details. But now even the card and the id password as sent thru separate courier. So its now more secure. Most banks now hassms verification, you are sent a code that you need to add when you are adding a new account for transfer, its simple and logical. Thou sometimes the sms takes too much time to be received. Stanchart is fast the minute you press add the sms is in your inbox, may be because of lesser traffic. Icici has also an extra transaction password plus you need to have a debit card and have to use the grid at the back of card to validate it. This three way verification is quiet robust and thus youdont getphis ing emails these days. Becausephis e rs know that having an id andpas s word is notenough.

 INTERNET BANKING
The Internet banking portal of the bank enables its retail banking customers to operate their accounts from anywhere anytime, removing the restrictions imposed by geography and time. It's a platform that enables the customers to carry out their banking activities from their desktop, aided by the power and convenience of the Internet. Using Internet banking services, customer can do the following normal banking transactions online:  Funds transfer between own accounts.  Third party transfers to accounts maintained at any branch of SBI  Group Transfers to accounts in State Bank Group  Inter Bank Transfers to accounts with other Banks  Online standing instructions for periodical transfer for the above  Credit PPF accounts across branches  Request for Issue of Demand Draft  Request for opening of new accounts  Request for closure of Loan Accounts  Request for Issue of Cheque Book

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6.2 T ECHNOLOGICAL LEAP The banks realised that if they have to survive, they will have to adopt moderntechnology. State Bank of India was amongst the first to focus on technology and a team is constantly at work to innovate in an attempt to lower costs. So, the bank has now introduced two-faced ATMs, which will increase efficiency. Technology will not just help them reach out to young customers better but also help them cut costs and improve efficiency. Heres how the economics work. While a transaction at a branch costs around Rs 50, one at an ATM works out to Rs 18, a senior State Bank of India executive said. Transactions through the Internet are even cheaper at around Rs 10 each. As a result, banks like State Bank of India want 50 per cent of the transactions from non-branch channels such as ATMs, net banking and mobile phones.

7.0 Human Resource Management

Manpower Planning which is also called as Human Resource Planning consists of putting right number of people, right kind of people at the right place, right time, doing the right things for which they are suited for the achievement of goals of the organization. Human Resource Planning has got an important place in the arena of industrialization. Human Resource Planning has to be a systems approach and is carried out in a set procedure. The procedure is as follows: 1. 2. 3. 4. Analysing the current manpower inventory Making future manpower forecasts Developing employment programmes Design training programmes

Importance of Manpower Planning 1. Key to managerial functions- The four managerial functions, i.e., planning, organizing, directing and controlling are based upon the manpower. Human resources help in the implementation of all these managerial activities. Therefore, staffing becomes a key to all managerial functions. 2. Efficient utilization- Efficient management of personnels becomes an important function in the industrialization world of today. Seting of large scale enterprises
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require management of large scale manpower. It can be effectively done through staffing function. 3. Motivation- Staffing function not only includes putting right men on right job, but it also comprises of motivational programmes, i.e., incentive plans to be framed for further participation and employment of employees in a concern. Therefore, all types of incentive plans becomes an integral part of staffing function. 4. Better human relations- A concern can stabilize itself if human relations develop and are strong. Human relations become strong trough effective control, clear communication, effective supervision and leadership in a concern. Staffing function also looks after training and development of the work force which leads to co-operation and better human relations. 5. Higher productivity- Productivity level increases when resources are utilized in best possible manner. higher productivity is a result of minimum wastage of time, money, efforts and energies.This is possible through the staffing and it's related activities ( Performance appraisal, training and development, remuneration) Need of Manpower Planning Manpower Planning is a two-phased process because manpower planning not only analyses the current human resources but also makes manpower forecasts and thereby draw employment programmes. Manpower Planning is advantageous to firm in following manner: 1. Shortages and surpluses can be identified so that quick action can be taken wherever required. 2. All the recruitment and selection programmes are based on manpower planning. 3. It also helps to reduce the labour cost as excess staff can be identified and thereby overstaffing can be avoided. 4. It also helps to identify the available talents in a concern and accordingly training programmes can be chalked out to develop those talents. 5. It helps in growth and diversification of business. Through manpower planning, human resources can be readily available and they can be utilized in best manner. It helps the organization to realize the importance of manpower management which ultimately helps in the stability of a concern.

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8.0 Talent Management

 Such personnel need to be identified, nurtured and motivated through a systematic organizational plan to enable them to accept challenging roles early in the career. Suitable changes in the promotion policies should take care of aspirations of such extra ordinary and talented manpower.  Banks will also have to pay increasing attention to education and training including sponsorship of identified persons to MBA programmes, Phd programmes and other long duration programmes in technology and financial management to develop a wider managerial pool of competent people who can be developed fast to play the role of modern banker in ever difficult and turbulent times.  Banks will have to introduce innovative mechanism and process to respond to the aspirations of such talented people by providing them sabbatical leave for professional growth by sponsorship in seminars and conferences, both nationally and internationally, to present papers and encouraging them to join professional organisations to develop appropriate competencies and network with fellow professionals.  There is also need to develop organisation-wide awareness about banks keybusiness problems including stagnant business units, strain on profitability, cost of operations, unexplored business opportunities, manpower costs, NPAS etc. The preconditions for an effective talent management is clarity of where the organisation is, i.e., the starting point and where it wishes to reach in a given time horizon, i.e., the destination

9.0 Interest Rate Risk

Interest rate risk can be defined as exposure of bank's net interest income to adverse movements in interest rates. A bank's balance sheet consists mainly of rupee assets and liabilities. Any movement in domestic interest rate is the main source of interest rate risk. Over the last few years the treasury departments of banks have been responsible for a substantial part of profits made by banks. Between July 1997 and Oct 2003, as interest rates fell, the yield on 10-year government bonds (a barometer for domestic interest rates) fell, from 13 per cent to 4.9 per cent. With yields falling the banks made huge profits on their bond portfolios.
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Now as yields go up (with the rise in inflation, bond yields go up and bond prices fall as the debt market starts factoring a possible interest rate hike), the banks will have to set aside funds to mark to market their investment. This will make it difficult to show huge profits from treasury operations. This concern becomes much stronger because a substantial percentage of bank deposits remain invested in government bonds. Banking in the recent years had been reduced to a trading operation in government securities. Recent months have shown a rise in the bond yields has led to the profit from treasury operations falling. The latest quarterly reports of banks clearly show several banks making losses on their treasury operations. If the rise in yields continues the banks might end up posting huge losses on their trading books. Given these facts, banks will have to look at alternative sources of investment.

The Base Rate System With effect from 1st July 2010, Base rate shall include all those elements of the
lending rates that are common across all categories of borrowers. Banks may choose any benchmark to arrive at the base rate for a specific tenor that may be disclosed transparently. Banks will determine their actual lending rates on loans with reference to the base rate and by including such other customer specific charges as considered appropriate.  With the introduction of the base rate system, all categories of loans will be priced only with reference to the base rate with a few exceptions. The base rate can also serve as the reference benchmark rate for floating rate loan products, apart from other external market benchmark rates. The floating interest rate based on external benchmarks should, however, be equal to or above the base rate at the time of sanction or renewal.  Since the base rate will be the minimum rate for all loans, the current stipulation of BPLR as the ceiling rate for loans up to Rs.200,000 is withdrawn. It is expected that this will increase the credit flow to small borrowers at reasonable rates and direct bank finance will provide effective competition to other forms of high cost credit.  In wholesale fund- based banking systems, the London Interbank Offered Rate (LIBOR) is widely used as a benchmark which is essentially an interbank deposit rate.

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10.0 Transparency and disclosure

In pursuance of the Financial Sector Reforms introduced since 1991 and in order to bring about meaningful disclosure of the true financial position of banks to enable the users of financial statements to study and have a meaningful comparison of their positions, a series of measures were initiated.  Transparency and disclosure norms are assuming greater importance in the emerging environment. Banks are now required to be more responsive and accountable to the investors.

 Banks move to disclose in their balance sheets information on maturity profiles of assets and liabilities, lending to sensitive sectors, movements in NPAs, besides providing information on capital, provisions, shareholdings of the government, value of investment in India and abroad, and other operating and profitability indicators.  The disclosure requirements broadly covered the following aspects: y y y y y y y y Capital adequacy Asset quality Maturity distribution of select items of assets and liabilities Profitability Country risk exposure Risk exposures in derivatives Segment reporting Related Party disclosures

Transparency and disclosure standards are also recognised as important constituents of a sound corporate governance mechanism. Banks are required to formulate a formal disclosure policy approved by the Board of directors that addresses the banks approach for determining what disclosures it will make and the internal controls over the disclosure process. It is a huge challenge for Public Sector Banks to implement a process for assessing the appropriateness of their disclosures, including validation and frequency.

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11.0 Competition
Beginning from 1992, Indian banks were gradually exposed to the rigours of domestic and international competition. Newly opened banks from the private sector and entry and expansion of several foreign banks resulted in greater competition in both deposit and credit markets. Consequent to these developments, there has been a consistent decline in the share of public sector banks in total assets of commercial banks. From the position of net loss in the mid-1990s, in recent years the share of public sector banks in the profit of the commercial banking system has become broadly commensurate with their share in assets, indicating a broad convergence of profitability across various bank groups. This suggests that, with operational flexibility, public sector banks are competing relatively effectively with private sector and foreign banks. Public sector bank managements are now probably more attuned to the market consequences of their activities.

12.0 Challenges in banking security

Banks are the cornerstone of Indian economy and are continuously increasing its reach and striving to excel in their services through extensive use of Information technology. Technology, with its innovative solutions and tools, creates immense possibilities for banking industry to grow and bring the customers under the fold of technology driven transformation. However, the technology transformation, characterized by wide spread use of the Internet, with the new impetus for mobile, for financial transactions and gradual evolution of underlying and backend infrastructure, becomes a reason for concern also. It exposes a banking organization to a newer set of security threats; some of them are heavily concentrated towards the industry, aiming for financial gain. The security threats are becoming more organized and sophisticated in their intent, tactics and style of execution, posing serious threats to the banking industry. Managing security in banking industry is a complex challenge requiring in-depth analysis of how security impacts the banking operations, identification of security threat vector pertaining to banking industry and the evolution of it, review of the security initiatives undertaken by the industry and evaluation of different approaches, trends and technologies that have been emerging to address the specific challenges. Banking as a business involves the management of risks. While much has been said about the
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financial risks, the risks arising out of the large scale implementation of technology is of recent origin, with banks having taken to large scale use of technology for their normal day-to-day business. Security in banks has thus assumed significant proportions, comprising both physical aspects in addition to those relating to Information, Information Systems and Information Technology, all of which have an impact on the reputational risk of a financial organisation. The largest set of functions in the banking sector which has benefited from the advances in IT relate to payment systems since quick, safe and efficient transfer of funds across the length and breadth of the country is the requirement of the day. Security in Payment Systems cannot be addressed in isolation. It requires the integration of work processes, communication linkages and integrated delivery systems and should focus on stability, efficiency and risk control. Yet another prime aspect of concern in a good security policy is the role that the human beings have in a secure computerised environment. It would be advisable to build security features at the application level in respect of banking oriented products, because of the critical nature of financial data transfer. The financial messages should have the under noted features: The receipt of the message at the intended destination The content of the message should be the same as the transmitted one The Sender of information should be able to verify its receipt by the recipient The Recipient of the message could verify that the sender is indeed the person Information in transit should not be observed, altered or extracted Any attempt to tamper with the data in transit will need to be revealed Non-repudiation These features boil down essentially to authentication (to verify the identity of the sender of the message to the intended recipient to prevent spoofing or impersonation), authorisation (to control the access to specific resources for unauthorised persons), confidentiality (to maintain the secrecy of the content of transmission between the authorised parties), integrity (to ensure that no changes/errors are introduced in the messages during transmission) and nonrepudiation (to ensure that an entity cannot later deny the origin and receipt and contents of the communication

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13.0 KNOW YOUR CUSTOMER GUIDELINES(ANTI MONEY LAUNDERING )

Know your customer (KYC) is the due diligence and bank regulation that financial institutions and other regulated companies must perform to identify their clients and ascertain relevant information pertinent to doing financial business with them. Know your customer policies are becoming increasingly important globally to prevent identity theft fraud, money laundering and terrorist financing. One aspect of KYC checking is to verify that the customer is not on any list of known fraudsters, terrorists or money launderers, such as the Office of Foreign Assets Controls Specially Designated Nationals list. As well as sanctions lists, there are lists of third party vendors that track links between persons regarded as high-risk owing to negative reports in the media about them or in public records. Banks doing KYC monitoring for anti-money laundering (AML) and checks relating to combating the financing of terrorism (CFT) increasingly use specialized transaction monitoring software, particularly names analysis software and trend monitoring software. The RBI had come up with more specific guidelines regarding KYC. These were divided into four parts: y Customer Acceptance Policy: All banks shall develop criteria for accepting any person as their customer to restrict any anonymous accounts and ensure documentation mentioned in KYC. Customer Identification Procedures: Customer to be identified not only while opening the account, but also at the time when the bank has a doubt about his transactions. Monitoring of Transactions: KYC can be effective by regular monitoring of transactions. Identifying an abnormal or unusual transaction and keeping a watch on higher risk group of the account is essential in monitoring transactions. Risk management: This is about managing internal work to reduce the risk of any unwanted activity. Managing responsibilities, duties and various audits plus regular employee training for KYC procedures.

Other aspects of KYC

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 To prevent the possible misuse of banking activities for anti-national or illegal activities, the RBI has given various directives to banks:  Strengthening the banks' 'Internal Control System' by allocating duties and responsibilities clearly, and periodically monitoring them.  Before giving any finance at branch level, making sure that the person has no links with notified terrorist entities and reporting any such 'suspect;' accounts to the government.  Regular 'Internal Audit' by internal and concurrent auditors to check if the KYC guidelines are being properly adhered to or not by banks.  Most important, banks must keep an eye out for all banking transactions and identify suspicious ones. Such transactions will be immediately reported to the bank's head office and authorities and norms shall also be laid down for freezing of such accounts.

14.0 Grow in size

 Public Sector Banks should now go global in search of new markets, customers and profits.  Some of the Public Sector Banks have their presence in overseas to a limited extent.  The State Bank of India, the largest bank in India, ranks only 57th amongst the top global banks.It is 10th largest in size , SBIs assets base of $352 billion and $285 deposits.  Therefore, our banks are not equipped enough to compete in the international arena.  Realising the need to grow in size, the Indian banking system today is moving from a regime of large number of small banks to small number of large banks.  Mergers and acquisitions in the banking sector are the order of the day.  This trend may lead logically to promote the concept of financial super market chain, making available all types of credit and non-fund facilities under one roof which is challenge for public sectors bank and demand of time.

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Recommendations
 FOR NPA
y This would require managerial efficiency on the part of PSBs to not only reduce the average level of net NPA but also to prevent the recurrence of this problem by ensuring addition of fresh NPA to bare minimum. Banks should have framework for acceptable compromise proposals and supportive recovery policy directed towards out-of-court settlements. Appointment of recovery agents, utilizing services of private security agencies of ascertaining means of NPA borrowers etc. are the other areas, which require fresh review. Quality asset building will also require up-to-date market information on various industries, a deeper and penetrating insight about the financial transactions of large borrowal groups, economic trends in a globalised environment and industry knowledge about new areas for financing like software, infrastructure, service sector and other IT based industries etc.

 FOR CORPORATE GOVERNANCE

y It is desirable that all the banks are brought under a single Act so that the corporate governance regimes do not have to be different just because the entities are covered under multiple Acts of the Parliament . Although the Reserve Bank maintains a tight vigil and inspects these entities thoroughly at regular time intervals, the quality of corporate level governance mechanism does not appear to be satisfactory. Oversight by the board of directors or supervisory board; Oversight by individuals not involved in the day-to-day running of the various business areas; Direct line supervision of different business areas; and Independent risk management, compliance and audit functions. Banks need to develop mechanisms, which can help them ensure percolation of their strategic objectives and corporate values throughout the organisation.

 FOR MAN POWER PLANNING y would need to hire people in large numbers over next few years to maintain growth and stay competitive. y The entire HR framework needs to be revamped and the skill sets of existing staff needs to be strengthened. The banks have to suitably realign their existing human resources from surplus to deficit pockets Surplus staffs and readjust staffing pattern in a computerised environment.

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 FOR TALENT MANAGEMENT

y Public Sector Banks should not only take care of the sum total of its individual human capital, but also how effectively it draws out the best from its talent Banks have an excellent pool of competent personnel at any point of time . motivated through a systematic organizational plan to enable them to accept Suitable changes in the promotion, challenging roles early in the career.

y Personnel in all the cadres. Such personnel need to be identified, nurtured and  Loops in customer services
 Facts about customers Ninety five percents of customers do not complain even if they are dissatisfied bcoz of indifferent attitude of not to bother unnecessarily and accept such bad service as part of human nature.  Because do customers want 1-Customers want control over their decisions 2- Customers want to achieve their goals 3- Customers want to preserve their self respect. 4- Customers want to be treated fairly 5- Customers want friendly welcome and reception 6- Customers want to know whats going on 7- Customers want a feeling of security and safety 8- Customers want to feel like VIPs 9- Customers want honesty y The may I help you counter could not come up to the level of expectation as there is a lack of spirit in implementing it. This can be a vital customer care capsule in the panacea kit of the bank to heal al wounds. y Many times the complaints could relate to discourteous behavior of counter staffthis should be handled carefully. If the customer is correct and has too many such complaints against the staff, a stern action is called for and client must be advised. In sum and substance a good customer service means a broad smile on customers face as they leave the bank after finishing their business.  For PSBs, the major problems are in the form of security risks, network downtime, scarcity of trained personnel, expensive system upgrades and recurring costs given the massive scale of their current operations. Banks rely on innovative ideas to increase their earnings.  Naturally, idea generators (human capital) become an even more important resource than the physical and financial ones. The entry of new generation private sector banks and evolving technology has been changing the face of the Indian banking industry. It is necessary for PSBs to adopt a standardized customer services code to remain competitive and profitable.
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Conclusion
The growth of the banking sector will be one of the most important inputs that shall go into making sure that India progresses and becomes a global economic super power. With the collapse of Lehman Brothers and other Wall Street icons, there was growing recession which affected the US, the European Union (EU) and Japan. This was the result of large scale defaults in the US housing market as the banks went on providing risky loans without adequate security and the repaying capacity of the borrower. The industries most affected by weakening demand were airlines, hotels, real estate. Besides this, Indian exports suffered a setback and there was a setback in the production of export-oriented sectors. The boom in the field of retail banking and the intense competition among the banks to increase the customer base has resulted in the large disbursement of consumer loans, home loans, loans on credit cards, auto loans, educational loans etc. on easy terms without much scrutiny. This has brought with it an increase in the no. of cases of default in loan repayment thus increasing the banks NPAs. Managing customers is one of the main issues faced by banks. The demands and expectations of the customers grow at a much faster rate than the banks can equip themselves to be with them. If the service levels of the product levels are not up to the 60 customer satisfaction, there is always a danger that the customer might shift his transactions elsewhere. So always give customers more than they expect to get. Multiple regulations are the main weakness for PSBs. It has not the single controlling system while private banks have. PSBs are also guided by govt. and controlled by RBI and it has also their union. So there is trice controlling system thats why any policy takes time in being implemented. This is the main reason of delayed progress of PSBS.

But in this critical situation the Indian public sector banks handled that problem. Banks act as important players in the financial markets. They play a vital role in the economy of a country. Indian public sector banks have not only been able to weather the storm of global recession but have been able to moderate its impact on the Indian economy as well, compared to its peers among the foreign and private banks. The banking sector faces profitability pressures due to higher funding costs, mark-to-market requirements on investment portfolios, and asset quality pressures due to a slowing economy. But Indian banks global exposure is relatively small, with international assets at about 6 per cent of the total assets. The strong economic growth in the past, low
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defaulter ratio, absence of complex financial products, regular intervention by central bank, proactive adjustment of monetary policy and so called close banking culture has favored the banking industry in India in recent global financial turmoil.  There is need for continuous improvement in asset quality by strengthening skill at the grass root level, adopting regular inter-face with borrowers, ascertaining periodical operating performance of the firm etc.  Assessment of technology to choose the most appropriate model should be taken up.  Technology strengthening should be done to provide a reliable backbone for delivery of products and services and to get business intelligence data. Public sector banks were more likely to be seen as an older generation organisation where the average age group would be 50 years, somebody said, Public sector banks therefore need to implement right strategies to woo young techno-savvy customers that prefer alternative channels to traditional banking methods. the financial sector services is undergoing a rapid change in terms of the demographics, regulatory requirements and technology because of the high revenues generated.  Training of identified staff in these services should be done in the right earnest.  The requirements of the customers should be recorded and the existing product modified and enhanced.  Teams of experts should be organized to develop models of asset allocation to suit the requirements of customers belonging to different life-stages, risk tolerances etc.  Systems and procedures are being toned up to ensure standardization of products and services so that the customer has a uniformly good experience throughout the bank.  Customers are being made aware of the enhanced offerings through multi-media advertisements.  Above all, large-scale and concerted efforts are on to bring about the mind set in the frontline staff desirable for delivery of the Financial Planning service. Furthermore, the interference of the central government with the functioning of PSBs should stop.  Public Sector Banks in India needs to tackle these challenges successfully to keep growing and strengthen the Indian financial system. With all these steps the success of PSBs should be assured.

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BIBLIOGRAPHY
1. 2. 3. 4. 5. 6. 7. 8. 9. A Profile of Banks : 2010-11, by Reserve bank of India Economic & Political Weekly. Principles of Banking (MC Million). RBIs Annual Report for the year 2010-11. The Financial Express Trend and Progress of Banking in India 2008-2009, published by R.B.I. www.rbi.org.in www.theeconomictimes.com www.thehindubusinessline.com www.wikipedia.com

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