INDEX

Chapter Topic No. 1. Introduction Function of bank

Page no. 1 2-3

2.

History of banking in India 2.1 Pre- nationalization era 2.2 nationalisation stage 2.2 (a) Private ownership of Commercial banks 2.2(b) Needs/objective and arguments for nationalisation 2.3 impact of nationalisation of banks 2..3(a) Changing profile of banking service 2.3(b) Progress of commercial banks after nationalization 2.3( c) Growth of Indian commercial banking systems 2.3(d) Progress of commercial banks branches 2.3(e) Market share in business 2.3(f) Growth of deposits and advances 48 9 10-11 12-14 14 15-17 17-19 20 21 22 23

3.

Post liberalization

3.1 New generation banks 3.2 Guidelines for entry of new generation private sector banks 3.3 Commencement of new private sector banks 3.4 Financial performance of new generation banks 3.5 Capital adequacy ratio of new generation banks 4. 4.1Failure / merger of new generation banks 4.2 Merger in banking sector during 1992-94 4.3 Merger in banking during 1995 2000 4.4 Merger in banking during 2000-04 4.5 Merger in banking during 2005 4.6 Merger in banking during 2006 4.7 Merger in banking during 2007 4.8 Merger in banking during 2008 4.9 List of bank merger/amalgamated in Indian banking industry 5. Banking structure in india 5.1 Major player in public sector banks 5.2 Major player in private sector banks

25 26-27

28-29 30-31 32 33 34 34 35-37 37 38 38 39 40-41

43-46 48-51

6.

6.1 Performance highlight of public sector banks in 2006-07 52-56 6.2 Performance highlight of private sector banks in 200607 57-61

7. 8 9

Ratio analysis of commercial banks Comparison between SBI and ICICI bank Ltd. Conclusion

62-65 66-70 71

10

Annexure

72

EXECUTIVE SUMMARY

Banks are the most significant players in the Indian financial market. They are the biggest purveyors of credit, and they also attract most of the savings from the population. Banks contributes a great deal to the GDP of our country. This project includes the history of commercial banks i.e. pre nationalisation, nationalisation and new generation banks. It also includes progress of branches of Indian commercial banks, their advances and deposits, banking regulation acts and market share of banking business. Lastly it also comprises of some ratio analysis of the 19 nationalisation banks and 27 private sector banks. There is also a comparison done between SBI and ICICI bank based on their financial statements.

AN INTRODUCTION TO THE BANKING SECTOR IN INDIA

Banking sector in India has undergone remarkable changes since the natiolisation of 14 major commercial bank in 1969. The geographical and functional coverage of banks has surged at a rate that is unprecedent in the world. Similarly , services rendered by banks witnessed major changes after liberalization of the financial sector carried out from the early 199.s. banking system has now transformed itself into a vibrant financial services sector with many innovative and technology driven services at their end.

Nationalisation of commercial banks in 1969 and 1980 was a mixed blessing. After nationalisation there was a shift of emphasis from industry to agriculture. The country witnessed rapid expansion in bank branches, even in rural areas. However, bank nationalisation created its own problems like excessive bureaucratization, red- tapism and distruptive tactics of trade unions of bank employees. At the present time in India banks all classified in to two category i.e. public sector banks and private sector banks. The Indian banking has come from a long way from being a sleepy business institution to a highly proactive and dynamic entity. This transformation has been largely brought about by the large dose of liberalization and economic reforms that allowed banks to explore new business opportunities rather than generating revenues from conventional streams (i.e. borrowing and lending). The banking in India is highly fragmented with 30 banking units contributing to almost 50% of deposits and 60% of advances. Indian nationalized banks (banks owned by the government) continue to be the major lenders in the economy due to their sheer size and penetrative networks which assures them high deposit mobilization. The Indian banking can be broadly categorized into nationalized, private banks and specialized banking institutions.

FUNCTIONS OF A BANK
1. RECEIPTS OF DEPOSITS: A bank receives deposits from Individuals, firms, and other institutions. Deposits constitute the main resource of a bank. Such deposits may be different types. Deposits which are withdrawal on demand called Demand or Current Deposits, others are called Times Deposits. Savings deposits are those from which withdrawals are not restricted as regards the amount and the periods. Deposits withdrawal after the expiry of an agreed period is known as fixed deposits. Interest paid by banks is different for each kind of deposits higher for fixed deposits and lower or even nil for current deposits.

2. LENDING OF MONEY

Banks lend money mainly for industrial and commercial purposes. This lending may take the form of cash credits, overdrafts, loan and advance, or discounting of bills of exchange. Interest charged by banks on such lending varies according to the amount and period involved, social priority nature of security offered, the standing of the borrowers, etc.

3. AGENCY SERVICES: A bank renders various services to consumers, such as Collection of bills, promissory notes and cheques. Collection of dividends, interest, premium etc. Purchase and sales of shares and securities. Acting as trustee or executor when so nominated and Making regular payments such as insurance premiums .

4. GENERAL SERVICES: A Modern bank perform many services of general nature to the Public, Example Issue of letter of credit, travelers cheque, bank drafts, circular notes etc Safekeeping of valuable in safe deposits vaults Supplying trade information and statistics, conducting economic surveys and Preparation of feasibility studies, project reports etc. Banks in some foreign countries also underwrite issue of shares and make loans for long term purposes.

5. MODERN SERVICES: Modern Services include internet banking, transfer of funds through internet banking from one account to another account, payment of bills (electricity, telephone etc), payment of insurance premium, reservation of railway tickets and air flight, withdrawal of money from our account through ATM (Automatic Teller Machine) (24*7 hr). For Example-

Citibank Suvidha launches online utility services:

Citibank Suvidha announced Indias first online utility services payment through its network. Customer can settle their telephone, electricity and water bills through its scheme. Customers can call 24 hour Citibank banking, Dial in to P.C. banking / Internet banking or use their ATM card which doubles as debit card in Bangalore to settle their utility bills

HISTORY OF BANKING IN INDIA

There are three different phases in the history of banking in India. 1) Pre-Nationalization Era. 2) Nationalization Stage. 3) Post Liberalization Era.

2.1 PRE-NATIONALIZATION ERA:

In India the business of banking and credit was practices even in very early times. The remittance of money through Hundies, an Indigenous credit instrument, was very popular. The Hundies were issued by bankers known as Shroffs, Sahukars, Shahus or Mahajans in different parts of the country.

ORIGIN

The history of Commercial banking in India had its origin in the Seventeenth Century with the Establishment of trading centres by the East India Company. Unable to depend on Indigenous bankers for trading and banking purposes, the East India Company encouraged the Establishment of agency house, which carried on trading and banking operations. Western Style banking in India began with the launching of banking operation by Calcutta agency houses and trading firms for the benefit of their business. Both Messers Alexander & co. and Ferguson & co. combined their banking with other kinds of business. The history of commercial banking in India dates back to the Establishments of Bank of Hindoostan, in 1770, which was a mere appendage of the former, and it was under the directions of the Europeans. However, this bank could not survive for long because of the failure of the parents firm in 1832.the Sholapur bank. Ltd. Started by trading houses also went into liquidation in 1818 due to the unwise combination of banking business with trading operation by them.

PRESIDENCY BANKS: The bank of Culcutta began its banking business in the year June 1806. The government of India did not realize the need for banks till 1809 and in that year, a Royal Charter re-designated the the bank of Culcutta as the the Bank of Bengal. It was the first joint stock bank of British India sponsored by the government of Bengal. It was established with a capital of Rs.50 lakhs, one fifth of which was contributed by the government, which shared the privilege of voting and directions. However, the power to issue currency notes was not given to the bank till 1823. In 1939, the bank was given the power to open branches and to deal in inland exchange. Two others Presidency banks namely Bank of Bombay and bank of Madras were formed in April 1840 and July 1843 with a capital outlay of Rs. 52.25 and Rs. 30 lakhs respectively. The government had subscribed Rs. 3 lakhs as capital in each of these banks. These three banks were called the Presidency banks, because they were partly financed by the East India Company.

SWADESHI MOVEMENT: A MOMENTUM FOR NEW BANKS:

Following the Swadeshi Movement of 1905, many Indian Entrepreneurs banking institutions. Later many more banks sprung up like mushrooms. The number of Indian joint stock banks also

increased remarkably during the period of 1906 -21. Important banking ventures started during these periods were: No. 1 2 3 4 5 6 7 8 9 10 Name of the bank Bank of India Ltd The Corporation bank Ltd The Indian bank Ltd The bank of Baroda Ltd The Canara bank Ltd The Central bank of India Ltd The South Indian bank Ltd The Karur Vysya bank Ltd The Union bank of India Ltd The Tamil Nadu Mercantile bank Ltd. Year 1906 1906 1907 1908 1910 1911 1911 1916 1920 1921

IMPERIAL BANK OF INDIA:

The bank of Bengal, the bank of Bombay and the bank of Madras referred as Presidency banks got amalgamated in to the Imperial bank of India, which came into existence on January 27, 1921 by the Imperial bank of India was created by the special act (XLVII OF 1920), the liability of its shareholders was limited as that of shareholders of all other banks registered under the Indian companies act. The only difference that the word limited does not form parts of its name, as it does in the case of banks constituted under the latter act. This act, however did not give the bank power to issue notes and thus it was left without any control over currency of the country. However, it was allowed to hold government balances and to manage public debt and clearinghouses till the Establishment of the Reserve bank of India in 1935.the Reserve bank of India was established as a body corporate under the Reserve bank of India, which came in to effect on April 1, 1935 with a paid up capital of Rs.5 crore. The RBI was nationalized in 1948 soon after the countrys independence. Though originally privately owned, after nationalization the RBI is fully owned by the government of India. The RBI took over all the functions of the Imperial bank of India, but the later was given the privilege of acting as agents of the former in places in which it had no branches.

BANKING REGULATION ACT:

After independence of the country in 1947, keeping in view the necessity of regulating rapidly growing business of banking institutions and their organizational problems, a separate act known as The Banking Companies Act was enacted. Following which a bill was introduced in Parliament in March 1948 and was passed in February 1949. It came into force on March 19, 1949. The Act was then called the Banking Companies Act, 1949 , now known as the Banking Regulations Act 1949. The provision of this act is in addition to the provision of the Indian Companies act of 1956, which are also applicable to banking companies. The banking regulations act was amended many times keeping in view the new roles, which the banks were expected to play in accordance the economic development of the country.

FORMATION OF THE STATE BANK OF INDIA:

After independence, there was a concerted demand for the nationalization of the Imperial bank of India. However, the government was not in favors of nationalization because of two reasons. First, the bank has branches outside of India, which may create political problem and consequences of great magnitude. Secondly, it was thought that nationalization would devoid the banks of their useful commercial operations and functions. The Rural banking Enquiry Committee (1950) also recommended against nationalization. The State bank of India came into being as result of the implementation of the recommendation of the Committee of Director of all all India rural credit survey appointed by the RBI in 1951. Between October 1959 and May 1960, seven banks of the erstwhile princely states were also brought under the control and full or near full ownership of state bank of India. In accordance with the provision of the SBI act of 1959, state bank of India establish its seven subsidiaries viz. Name of the Bank 1. State Bank of Hyderabad 2. State Bank of Bikaner and Jaipur 3. State Bank of Saurashtra 4. State Bank of Patiala 5. State Bank of Mysore 6. State Bank of Indore 7. State Bank of Travancore Subsidiary with effect from 1st October 1959 1st January 1960 1st May 1960 1st April 1960 1st March 1960 1st January 1968 1st January 1960

The State bank of India together with its subsidiaries is popularly known as the state bank group. SBI is the largest commercial bank in India, in terms of branch network, resources and work force. Based on number of its branches it has the largest office network of its kind in the whole world. State bank of India has 100% stake in state bank of Hyderabad and state bank of Patiala, 98& in state bank of Indore and 92% in state bank of Mysore. In the world setting, state bank of India is the only Indian bank, which is placed 82nd position among the hundred big banks of the world having big assets.

SHORTCOMINGS OF INDIAN COMMERCIAL BANKS AFTER

INDEPENDENCE:
Commercial banks can play an important role in directing the affairs of the economy in various ways. There were persistent complaints that banks in India were not discharging their functions in consonance with the objective of our socialist democracy. The commercial banks in India during the 1960s merely acted as financial agencies and failed to give any lead to the nations developments. The economic history of many countries that both economic development and growth of financial infrastructure go hand in hand. One peculiarity of the banking developments in India is that majority of the banks were launched by business houses and were closely associated with such houses, for example. Central bank of India was associated with the house of Tatas; United Commercial bank was associated with house of Birlas, Indian bank with the Rajas of Chettinad, and Punjab national bank with Janis. They were formed with the objective of profit Maximization and were guided by their business houses. Their area of operation was confined to urban center and port towns. Rural and interior areas totally neglected by these institutions. In banking development while states like Assam, Jammu Kashmir, Uttar Pradesh, Bihar, Orissa and Madhya Pradesh were totally neglected, state like Maharashtra, Gujarat and Tamil Nadu were adequately banked. In 1969, it was observed that in 13 districts of India there were no commercial bank offices at all. There were also regional disparities in the distribution of bank credit. The distribution of bank credit in 1967 indicates that the three states of Maharashtra (32.4 %), West Bengal (27.5%) and Tamil Nadu (10.2%) accounted for two thirds of the total bank credit disbursed in the country.

Banks neglected for a long period of time the credit needs of several priority sectors of the economy such as, agriculture, small scale industry and cottage industry, retail trade and exports.

2.2

NATIONALIZATION STAGE.
Sr. no. Name of Banks Amount of Compensation 1 2 3 4 5 6 7 8 9 10 11 12 13 14 Central bank of India Ltd Bank of India Ltd Punjab National bank Ltd Bank of Baroda Ltd United Commercial bank Ltd Canara bank Ltd United bank of India Ltd Dena bank Ltd Syndicate bank Ltd Union bank of India Ltd Allahabad bank Ltd Indian bank Ltd Bank of Maharashtra Ltd Indian overseas bank Ltd 1,750 1,450 1,020 840 830 360 420 360 360 310 310 230 230 250

Name of banks Nationalized and the Amount of Compensation paid (Rs. Lakhs)

Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale especially in rural and semi-urban areas. It formed State Bank of India to act as the principal agent of RBI and to handle banking transactions of the Union and State Governments all over the country. Seven banks forming subsidiary of State Bank of India was nationalized in 1960 on 19th July, 1969, major process of nationalization was carried out. It was the effort of the then

Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country were nationalized.

Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Governmentownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country:

1949 : Enactment of Banking Regulation Act. 1955 : Nationalisation of State Bank of India. 1959 : Nationalisation of SBI Subsidiaries. 1961 : Insurance cover extended to Deposits. 1969 : Nationalisation of 14 major banks. 1971 : Creation of credit Guarantee Corporation. 1975: Creation of regional rural banks. 1980: Nationalisation of seven banks with deposits over 200 crore. After the nationalisation of banks, the branches of the public sector bank India rose to approximately 800% in deposits and advances took a huge jump by 11,000%. Banking in the sunshine of Government ownership gave the public implicit faith and immense confidence about the sustainability of these institutions.

The Following factors were Responsible for Nationalization Commercial Banks in 1969.

2.2(a) PRIVATE OWNERSHIP OF COMMERCIAL BANKS AND CONCENTRATION OF ECONOMIC POWER:

Until nationalization, all major banks were controlled by one or more business houses.thses business used the resources contributed by the mass of the people for their own personal benefit.

They financed those projects which ultimately enhanced their own financial resources. Thus, private ownership of banks resulted in concentration of income and wealth in few hands. 1) URBAN BIAS: Prior to nationalization, Commercial banks had shown no interest in establishing offices in semi urban and rural areas. More and more branches were opened in cities resulting in concentration of banking facilities in urban areas. For example, out of about 5.6 lakhs villages in India, only 5000 were being served by commercial banks and five major cities (Ahmadabad, Mumbai, Delhi, Kolkata and Madras (Chennai). Together had one-sevenths share in the number of bank offices and about fifty percentage shares of banks deposits and bank credit. This urban biased nature of commercial banks led to slow rate of growth in the rural areas.

2) NEGLECT OF AGRICULTURE SECTOR : There was a total neglect of the agriculture sector and its finance prior to nationalization of banks. The banks increasingly advanced finance to commerce and industry with the result their share in the scheduled banks advances increased from 70 % in 1951 to 87 % in 1968.agriculture accounted for only 2.2 % of total advances.

3) VIOLATION OF NORMS: Commercial banks often violated the norms and priorities laid down in the plans and granted loans to even those industries which figured nowhere in the priority list.

4) SPECULATIVE ACTIVITIES: Private commercial banks earned large profits and indulged in speculative activities. They even extended advance to hoarders and black marketers against high rate of interest.

5) NEGLECT OF PRIORITY SECTORS: Not only there was a complete neglect of agriculture sectors, other sectors such as Export, Small scale sectors etc. were also completely neglected.

In order to discipline the commercial banks so that they do not over look the nationalize priorities, nationalization of banks was undertaken first in 1969 and then in 1980.

2.2(b) NEEDS/OBJECTIVE AND ARGUMENTS OF NATIONALISATIONA OF BANKS

A. NEED FOR NATIONALISATION OF BANKS: The long title of the ordinance promulgated on July 19, 1969 explained that the fourteen banks taken over by the government in order to serve better the needs of developments of the economy in conformity with the national policy and objectives. The board objective of the government decision to nationalize 14 banks in 1969 were summed up by the then Prime Minister Mrs. Indira Gandhi in Parliament on July 21, 1969, as follows: While the nations is committed to establish a Socialistic pattern of the society, the government felt that the public ownership and control of the commanding heights of the national economy and of its strategic sector were essential and an important aspect of the new social order which we are trying to build. As the financial institutions are amongst most important levers of the achievements of its social objectives, the nationalization of banks was felt that as a significant step in the process of public ownership over the principle institutions for the mobilization of peoples savings and canalizing them towards productive purposes. The government felt that the public ownership of majority banks will help in the most effective mobilization and development of national resources so that our objective can be realized with a great degree of assurance. At the time of nationalization of banks, Smt. Indira Gandhi in her broadcast to the nation (on July 19, 1969) announced the broad objective of nationalization and special task assigned to the nationalized banks.

OBJECTIVE OF NATIONLISATION: Nationalization was meant for an early realization of the objective of social control which was as follows: 1) Removal of control by a few 2) Provisions of adequate credit for agriculture and small industry and export. 3) Giving a professional bent to management

4) Encouragement of a new class of entrepreneurs and 5) The provision of adequate training as well as terms of services for bank staff.

B. ARGUMENTS FOR NATIONALIZATION OF 14 MAJOR COMMERCIAL BANKS: Eminent persons argued that the restrictions imposed by social control measures were capable of being flouted in spirit though observer in form. For instance, the restrains on advances to directors and their interested concerns could be mutually adjusted amongst bankers in such a way as to defeat the very purpose of such restrain. It was stated that it would take a long time for the banks to throw away their traditional outlook; indirect control, howsoever stringent the laws for that may be, will not achieve the purpose. Compared to indirect control, direct control would be more effective to meet the pressing needs of the time. The country could not afford the trial and error method and an element of dynamism and new vigor into the process of our developments was necessary. One further argument was that the major banks were operating mostly with other peoples money. against a total deposit of Rs. 2,750 crore at the end of December, 1968, the paid up

capital was only Rs.28.5 crore or just a little over one percent. It was stated that in nationalizing the 14 Commercial banks , the governments was merely putting into effects its own long decided programmed for achieving the socialist pattern of society.

C.ARGUMENT AGAINST NATIONALISATION: Several eminent persons opposed the measure. They argued that 168 days i.e. from February 1,1969 the day of imposition of social control to July 19,1969 the day of nationalization was too short a period to judge the results of social control and there was no reason to conclude that it had failed. There were on the contrary ample indication that the banks welcomed the spirit of Co-operation and willingness. For instance, from June 1968 to March 1969 credit given by 20 major banks to agriculture increased from Rs.30 crore to Rs.97 crore and to small industries from Rs.167 crore to Rs.222 crore. The floating of the agricultural finance corporation by the Scheduled banks was also a very significant step. The opponents further argued that there was no such pressing need for nationalization as was made out by the government. The timing of the step was determined by political tussles and it was the result of inter-party struggle for power. They argued that a switch over to the public

sector is not the only remedy for the evils present in the private sector; the process merely results in substitution of one set of evils with another. The internal control of the banks by government will lead to more harmful evils; public sector institutions are generally notorious for their lack of dynamism and competitiveness.

2.3 IMPACT OF NATIONALISATION OF COMMERCIAL BANKS

INTRODUCTION (next 6 banks)

After Eleven years of the first phase of banks nationalization an ordinance was promulgated on April 15, 1980, by the president of India for acquisition and transfer of undertaking of six more private banking companies. In the second phase of nationalization, Private Banks having time and demand liabilities of not less than Rs.200 crore each were nationalized. This further extended the area of public control over the countrys banking system. Compares to the first phase of nationalization only banks having deposits exceeding Rs 50 crore each alone were nationalized. The objective of the second nationalization was to enhance the capacity of the banking system to meet more effectively the needs of the developing economy and to promote the welfare of the people in conformity with the national policy. There undertakings of six private banks were transferred to six corresponding banks under the banking companies act of 1980. The list of the banks nationalized and the amount of compensation paid is given in table.

(Rs. Crore) Sr no. Name of the bank Amount of

compensation 1 2 3 Andhra bank Ltd New bank of India Ltd Vijaya bank Ltd 6.10 5.10 2.40

4 5 6

Punjab and Sindh bank Ltd Corporation bank ltd Oriental bank of commerce

2.10 1.80 1.00

Names of banks Nationalized and the amount of Compensation paid

The total amount of compensation paid in respect of the transfer of undertakings of the above six banks was Rs. 18.50 crores. The compensation was paid in the form of cash and government securities. Each of the corresponding new banks bears the same name of the old bank except that the words the and limited were deleted. Thus from April 15,1980, the number of public sector banks increased to 28, including the State bank of India and its 7 Subsidiaries and excluding regional rural banks. With the nationalization of six more banks in 1980, 91 percent of the entire banking system was brought under the public sector. The total deposits of six newly banks at the end of the June 1980 were Rs. 2,773 crore and those of twenty nationalized banks were Rs. 22,854 crore. The total deposits of all Scheduled Commercial banks during this period stood at Rs. 33,377 crore. The new bank of India got merged with the Punjab National bank in 1993, and this reduced the number of nationalized banks to 19.

2.3(a) CHANGING PROFILE OF BANKING SERVICES:

Prior to nationalization, Indian banks used to concentrate mainly on their traditional functions like accepting of deposits and lending of money. Receiving deposits and lending of funds were the traditional functions and the core of banking activity. After the nationalization, Indian banks began providing customer friendly services and function to their customers. Realizing the importance of savings in Indias developing economy, several deposit schemes were evolved. To attract from all sorts of people banks began to offer innovative deposit schemes with wide range of options to suit the requirements of the customers. Deposits were accepted

under various types of accounts namely Savings bank, fixed bank, Recurring deposit current and home Safe accounts. The second important function of a bank is to advance loans to their customers. Banks offer different kinds of borrowing facilities to their customers. Various types of credit facilities are term loans, and discounting of negotiable instruments. They also provided packing credit , export credit , housing , educational, consumer and vehicle loan, loan for self employment, agricultural loan etc. loans are also granted against approved securities such as gold , silver, government securities, shares, stocks, national saving certificates, marketable goods etc. Besides those main functions, banks have expanded their activities to cater to the varied needs of their customers. Banks perform certain agency functions for their customer namely: Collection of cheques, bills, interest, dividend, rent, subscription etc. Purchase and sale of various types of securities such as shares, stocks, bonds and debentures. To act as executors, trustee and attorney for the customer will. To remit funds on behalf of the clients by cheque, draft, mail transfer or telegraphic transfer etc. To make payments on behalf of their customers in accordance with the execution of standing instructions. Acting as agents for any government, local authority or any other customer etc. In addition to agency functions, banks also provide many general utility services such as: Providing locker facility to their customers for keeping their valuables. Issuing of bank drafts, gift cheques and travelers cheques. Issuing of letter of credit for foreign trade. Underwriting securities issued by government, corporations, public and private bodies. Acting as referee with respect to the financial standing, business reputation and responsibility of the customers. Dealing in foreign currency. Managing issue of shares or debentures etc.

Banking sector services undergone major changes only after the liberalization, globalization and economic reforms. The economic reforms in 1991 unleash fierce competition among banks. Banking system has now turned into dynamic financial services sector with many innovative and technology driven services. Deregulation has opened up new opportunities for banks to diversify

into investment banking, insurance, and mortgage financing, depository services etc. with the introduction of the new technology in banking sector , customers are fast moving away from the traditional branch banking system to the convenient and comfortable electronic banking services or virtual banking. The banks are now competing with one another to offer value-added services to their customers. Several banks have been positioning themselves as a one Stop Shop for all financial services with a comprehensive range of products.

2.3(b) PROGRESS OF COMMERCIAL BANKS AFTER NATIONALISATION:

After the nationalization of banks in 1969, commercial banking operations have become an integral parts of Indias economic policy. Following development have taken place since nationalization in 1969. 1. EXPANSION OF BRANCHS: There has been an unprecedented growth in the branch network since nationalization. Compared to just 8262 branch offices in 1969, the number of branch office in 2005 has increased to 68500 indicating a greater access to banking facilities to the common man. As a result, the population per bank office has reduced from 55000 in 1969 to 16000 in 2005.

2. BRANCH OPENING IN RURAL AND UNBANKED AREA: There has been a qualitative change in branch expansion Programme ever since the nationalization of banks. Before nationalization, there was a clear urban bias in the operations of banks. But after nationalization they have started moving towards rural and less developed areas. This will clear from the fact that compared to just 22 percent bank offices in rural areas in 1969, the percentage of rural branches bank improved to about 47 percent in june,2005.this has helped in checking imbalance in disbursement of banking finance in India.

3. DEPOSIT MOBILIZATION: There has been a substantial rise in the rate of deposit mobilization since nationalization. The aggregate deposits of commercial banks have increased from Rs. 4,665 crore in 1969 to around Rs.17, 57,846 crore in June, 2005 forming almost 50 percent of the national income. Considering

state wise deposit mobilization, we find Maharashtra leads all other states and accounts for more than one fifth of the aggregate deposits received by the banks. It is followed by Delhi, Uttar Pradesh, West Bengal, Tamil Nadu, Karnataka and Andhra Pradesh. These all together account for 67 per cent of the aggregate deposits of the banks.

4. BANK LENDING: There has been a spectacular rise in the banks lending since nationalization of banks in 1969. It has gone up from Rs.3399 crore in June, 1969 to more than 11, 69,090 crore in March, 2005. The banks have taken special care of the priority sectors in their lending operations. In 1969, agriculture, small scale industries and small retail trade accounted for about 40 percent in March, 2004.

5. PROMOTION OF NEW ENTREPRENEURSHIP: Banks, of late, have been financing the scheme which promotes entrepreneurship. For example, they have been activity participating in scheme such as IRDP, TRYSEM, JRY, NRY etc. moreover; in their lending operations they now give high priority to the relevance of the project for the economy as a whole along with genuine business productive requirements of the borrowers.

SHORTCOMINGS OF COMMERCIAL BANKING IN INDIA:

1. Although the commercial banks have spread their wings to every corner of the country, but considering the huge population of India, their growth in numerical terms in insufficient. This is especially so with regards to rural areas that has about 50 percent of the banks branches but where 75 percent of the population of the country resides. 2. There are regional imbalances in the coverage of bank office. Only few states have well developed banking facilities: Assam, Bihar, Arunchal Pradesh and Madhya Pradesh, on an average have lesser number of banks compared to others states. Even from the states which are well banked like Maharashtra, West Bengal and Tamil Nadu. If big metropolitan cities are excluded the population per bank office is larger than the average for these states. 3. As a result of increasing advances and loans to unemployed and weaker sections the Commercial banks are facing the problem of bad debts, doubtful debts and over dues. As much as 50 percent

of the loans advanced by these banks have not been recovered. This seriously affects the process of recycling of funds by the commercial banks. 4. The quality of services rendered by Commercial banks has deteriorated overtime. This has happened because of staff indiscipline and absent of the system of accountability. There is a problem of effective management and control especially over the branches which are located in

remote areas. This has hampered the overall efficiency of the commercial banks. 5. The absolute profits of the banks are rising but the Profitability ratio (in terms of return on investment, return on equity) has been declining. Six factors have been identified for declining trends in profitability: these are Lower interest on government borrowings from banks Subsidization of credit to priority sectors Rapid branch expansion Locking up of funds in low term low yielding securities resulting from directed credit programmers of banks Lack of Competition Increasing expenditure resulting from over staffing and mushrooming some of which are nonviable. 6. The public sector banks although entered in to Merchant banking and agriculture banking and agriculture financing, yet they lack expertise in these areas. There is a need for professional touch in these areas. To sum up, although after nationalization the Commercial banks have played an important role in achieving national goals of the economy yet these is a need for: Spreading their activities to the untouched remote corners of the country. Keeping up their profitability Looking after the growing needs of the priority sectors of the economy. Improving the performance of rural / semi urban branches. Improving the quality of loan portfolio.

2.3(c) GROWTH OF THE INDIAN COMMERCIAL BANKING SYSTEM

This table shows the progress of Commercial banking system in India. Since the nationalization of banks in 1969, there had been tremendous growth in the number of Commercial banks. The number of Commercial banks increased from 89 in 1969 to 305 in March 1999. As result of reorganization and merger of weak with strong banks, the number of Commercial banks dwindled to 290 at the end of the March 2004. Due to reorganization and amalgamation of RRBs, the number of Commercial banks further reduced to 222 at the end of the march 2006. As on March 2006, Commercial banking system consist 28 public Sector banks, 199 regional rural banks and 4 non-Scheduled Commercial banks. Private sector banks including foreign banks in the commercial banking system from 78 in march 1999 to 57 at the end of March 2006. Number of RRBs as on June 30, 2006 was further reduced to 109, after amalgamation of 36 RRBs into 12 RRBs between April 1 and June 30, 2006. Branches Growth of the Indian Commercial Banking System. Public Sector Banks Private Sector Banks Regional Rural Banks Non Scheduled Banks Total Jun 1974 22 43 9 74 Jun 1979 22 53 56 5 136 Jun 1984 28 53 162 4 247 Jun 1989 28 50 196 4 278 Mar 1994 27 49 196 4 276 Mar 1999 27 78 196 4 305 Mar 2004 27 62 196 5 290 Mar 2006 28 57 133 4 222

2.3(d)

PROGRESS OF COMMERCIAL BANK BRANCHES IN INDIA (1969 TO 2006)

Year No. of Commercial Population Per Credit-deposit banks Branches Jun 1969 Jun 1974 Jun 1979 Jun 1984 Jun 1989 Mar 1994 8262 16,936 30,202 45,332 57,698 61,803 Office (000) 64 35 21 16 14 15 Ratio (percent) 77.5 73.1 66.6 67.5 60.3 51.6

Mar 1999 Mar 2004 Table shows Mar 2006

64,939 67,118 69,306

15 16 16

51.7 55.9 70.1

that the Commercial banks in India have achieved tremendous progress in which expansion during the last four decades. The number of bank offices in India increased from 8262 at the end of the year 1969 to 69,306 at the end of the year 2006, registering the Compound growth rate of 5.91 percent per annum. This progress indicates a more than 8.4 fold increase in number of branches during 37 year period The pace of branch expansion has been high during the 10- year period since nationalization, which showed a compound growth rate 13.8 percent. During this period, the average rate of growth of new offices was 2,195 a year. Above table further shows that pace of branch expansion of Commercial banks was relatively slow after 1989, which showed a Compound growth rate of 10.21 percent, and the average rate of growth of new branches per year was 2472 a year. The compound growth rate for branch expansion during a period of 30 years was further reduced to 7.1 percent and average rate of new offices per year was reduced to 1889. The average population coverage by bank office in India was 64,000 persons in June 1969. It reduced from 64,000 to 35,000 during 1969-1974 and 21,000 by the end of June 1979. It slid down to 14,000 by the end of June 1989 and further increased to 16,000 in 2004.

2.3(e) MARKET SHARE IN BUSINESS

Asset base of scheduled commercial banks was Rs. 19, 75,020 crores as 31st March 2004. Their aggregate deposits were Rs. 15, 75,143 crores and aggregate advance were Rs. 8, 64,000 crores. Market share in the business is one good indicator in assessing trends and growth rate of the banks. The following table gives the market chare in assets, deposits, advance and investment according to ownership. GROUP Assets March 2004 March 2004 (Percentage figure) Deposits Advances Investments March 2004 March 2004 March 2004

Scheduled commercial 100 banks (SCB) Public sector banks (PS) 80.6 Private sector banks(PSB) -Old private sector banks -New private sector banks Foreign banks 11.9 6.7 5.2 7.5

100 74.5 18.6 6.1 12.5 6.5

100 77.9 17 6.7 10.4 5.1

100 73.2 19.8 6.5 13.3 7

100 78 16.8 5.9 10.9 5.2

(Sources: Monthly Economic digest, May 2005, page no. 21) It will be observed from the above that there has been increase in the share of assets of private sectors banks from 11.9% in 2000 to 18.6% in 2004 at the cost of public sector banks, which showed decline in share from 80.6% to 74.4%. apart from higher rate of growth of business of private sector banks, merger of industrial credit and investment corporation of India (ICICI) a term lending institutions with ICICI bank ltd. In the year 2002 has contributed to increase in market share.

2.3(f) GROWTH OF DEPOSITS AND ADVANBCES

Below the table gives an idea of the progress recorded by Commercial banks in Mobilization of deposits and outstanding credit since 1969 to 2006. The growth of bank deposit since nationalization of major commercial banks in July 1969 has been amazing. Deposits of commercial banks aggregating to Rs.21, 64,477 crore at the end of the march 2006 represented a spectacular increase over that of Rs. 4646 crore as on June 30, 1969. This shows a compound growth rate of 18.6 percent. The bank deposit from 1969 to 2006 recorded a 466 fold increase.

(Rs. In crore) Year June 1969 June 1974 No. of bank branches 8262 16936 Deposits 4646 10756 Advances 3599 7858

June1979 June 1984 June1989 March1994 March1999 M arch2004 March2006

30202 45332 57698 61803 64939 67118 69417

28671 64620 147854 323632 722203 1504416 2164477

19116 43613 89080 166844 368837 840785 1516557

Growth of deposits and outstanding advances in commercial banks (1969-2006)

The total outstanding credit of commercial banks in the country increased substantially and

steadily from Rs.3599 crore in June 1969 to Rs. 1516557 crore in March 2006 registering a 421 fold increase with a compound growth rate of 18.3 per annum. The compound growth rate on deposits (18.6%) and advances (18.3%) of commercial banks for a period of thirty seven years were almost same percentage.

POST LIBERALIZATION ERA.

3.1 NEW GENERATION BANKS:

The post independence era witnessed banking industry attaining several milestones. The late sixties were marked by fundamental changes in commercial banking in India. After nationalization, banks effected several diversifications, modifications and innovations in their structure and functioning. Theses innovation was with a view to expand and extend the reach and range of commercial banks in accordance with the changing of the economy. Banks were nationalized with the aim to usher in social changes by improving the material life of the downtrodden people and through removal of regional economic imbalances and disparities. Nationalization paved the way for extension of retail banking to the rural and semi urban areas. It brought about a spectacular expansion of bank branches especially in the rural and semi-urban areas. There was also noticeable increase in bank deposit, credit disbursement and generation of employment. The growth in bank deposits and advance is an indication of the improvement in the banking habits of the people in the rural, semi-urban and unbanked areas. The incredible growth in credit also indicates the realization of the goals of nationalization. But these objectives were achieved by sacrificing the profitability and operational efficiency of the public sector banks. The quality of services and that of loan assets decreased as a result of the liberal and tax credit extension policies. The banking sector in India remained regulated even after the nationalization of major commercial banks in 1969. The most important regulation imposed was the restriction on establishing new private sector banks was restricted to prevent destructive competition among them and excessive concentration of their branches in urban and metropolitan cities.

3.2 GUIDELINES FOR ENTRY OF NEW PRIVATE SECTOR BANKS

For a quarter century (1969-1993), no Private bank was allowed to set their business in the private sector. The necessary guidelines were issued by RBI in this connection on January 22, 1993. The important guidelines in respect of the commencement of new banks were; 1. The bank shall be registered as a Public Limited Company under the Companies Act 1956. The bank will be governed under the provision of RBI act of 1934 and banking regulations Act of 1949 and other relevant status. These new banks shall be subject to the directives, instructions, guidelines and advices given by RBI from time to time.

2. The initial minimum paid up capital for a new bank shall be Rs 100 crore and the Promoters contribution shall be 25 percent or 20 percent where the capital exceeds Rs. 100 crores.NRI participation in primary equity of a new bank shall be to the extent of 40percent. In the case of foreign banking company or a finance company as a technical collaborator or a co-promoter, equity participation shall be restricted to 20 percent. The shares of the bank should be listed in Stock Exchange. 3. The new bank shall not be allowed to set up the Subsidiary or Mutual fund until the completion of three years from the date of commencement. 4. While granting licenses the RBI will give preference to those banks that set up their Headquarter in a centre, which does not have the head office of any other bank. 5. Such bank shall be subject of prudential norms in respect of banking operations, accounting policies as RBI lays them down. The bank will have to achieve capital adequacy 8 percent of the risk weighted assets from the very beginning. 6. Voting rights of an individual shareholder shall be governed by the ceiling of one percent. Banking regulations Act of 1949 was amended in February 1994 for raising the ceiling of voting rights of an individual Shareholder in a Private bank from one percent to ten percent. 7. A large Industrial house should not promote any new bank. Individual Companies , directly or indirectly connected with large industrial houses any however, but permitted to participate in equity of a new private sector bank up to a maximum of 10 percent, but would not having controlling interest in the bank. The bank shall not extent any credit facilities to the promoters and companies investing up to 10 percent of the equity. 8. The new bank shall not be allowed to have as director any person who is a director of any other banking company and not more than three directors from companies which among themselves are entitled to exercise voting rights of all shareholders of the banking as laid down in the banking regulation act 1949. 9. The bank shall have to observe priority sector loan lending target as applicable to other domestic banks. However, some relaxation in the composition of the priority sector lending may be considered for an initial period of three years. 10. New bank will have to comply with the RBI instructions in respect of export credit and may be issued an authorized dealer license when applied for it.

11. The new banks shall make full use of modern infrastructural facilities and office equipment, computer, telecommunication etc. in order to provide good customer services. Theses bank should also constitute a high power grievances cell to handle customer complaints. They are also expected to concentrate on core banking activities individually. 12. New banks were have to lay down their loan policy with ion the overall policy guidelines of the RBI and shall specifically provide prudential norms covering related party transaction. 13. Branch licensing shall be governed by the existing policy whereby banks are free to open branches at various centers including urban / metropolitan centres with out the prior approval of the RBI once they satisfy the capital adequacy ratio and prudential accounting standards. However, a bank will be required to open rural and semi-urban branches also as laid down by the RBI.

3.3 COMMENCEMENT OF NEW PRIVATE SECTOR BANKS

During the year 1992-93, RBI granted in principle approval for setting up of nine private sector banks. All these banks will be required to raise 60 percent of their equity capital from the market. In principle, approvals were given to the following institutions. ICICI UTI HDFC Jayanta Madhab & Association THE 20TH Century Finance Corporation Bebett Colman &Co. Ltd. Indus Ind. Enterprises &Finance Ltd

Gujarat State Fertilizer Corporation IDBI Bank. During the year 1993-94, ten banks were given in principle approval and six banks commenced their operations. Viz. UTI bank Ltd Indus India bank Ltd ICICI banking corporation Ltd Global trust bank Ltd Centurion bank Ltd HDFC bank Ltd Housing and developments Finance Corporation (HDFC) was among the first to receive an in Principle approval from RBI to set up a bank in the Private Sector. It was incorporated in august 1994 in the name of HDFC bank Ltd. However, UTI bank was the first of the new generation banks that commenced its operation in 1994. Unit trust of India, L.I.C., General Insurance Corporation of India(GIC) and its four associates promoted it jointly.ICICI bank was also promoted in the year 1994, and was promoted by ICICI Ltd. ICICI Ltd was an Indian financial institution established in 1955 at the initiatives of world bank, government of Indian and representative of Indian industry. The RBI approved the merger of ICICI Ltd with ICICI bank Ltd in the year 2002. During the year, 1994-95 eight private sector banks out of twelve received principle approval, commenced business. During the year 1995-96 four more banks viz. Times bank Ltd Bank of Punjab Ltd Development credit bank ltd (conversion of development co-operative bank Ltd Mumbai) IDBI bank Ltd become operational taking the total of ten.

3.4 FINANCIAL PERFORMANCE OF NEW GENERATION PRIVATE SECTOR BANKS

The financial performance of the new Indian private sector banks based on some indicator like operating profit, operating profit as a percentage to total assets, net profit and net profit as a percentage to total assets deposits and advances are depicted in below table.

Financial performance of new generation private sector banks: Selected Indicator: 2006) (Rs. Crore) Year Number of banks 1996-97 10 Operating Profit 481.02 (2.98) 280.08 (1.73) NA Net profit Deposit

(1996-

Advances

7,814

1998-99

09

684.28 (1.78)

397.05 (1.03) 639.4 (0.81) 1,725.98 (0.90)

30,813

13,714

2000-01

08

1,368.97 (1.74)

62,920

30,086

2002-03

09

4,432.13 (2.31)

1,15,742

89,515

2004-05

09

5,442.75 (1.85)

3,097.57 (1.05)

1,97,693

1,23,655

2005-06

08

8388.25 (1.99)

4,108.85 (0.97)

2,97,999

2,30,005

Figures in brackets are percentage to total assets

The operating profit which is the structural measure of Profitability, of new Indian Private Sector banks increased substantially from Rs. 481.02 crore in 1996-97 to Rs.8, 388.25 crore in 2005-06. It shows a 17 fold increases with a Compound growth rate of 37.38 percent over a

period of nine years. The table further shows that the new private sector banks continued to maintain a robust rate in their operating profits. Even though the number of new Private Banks got reduced to eight from nine, the operating profit, increased by 54 percent in the year 2005-06 as against an increase of only 8.6 percent which was recorded in the year 2004-05. Net profit of new Private Sector banks also more steadily from Rs.280.08 crore in 1996-97 to Rs.4, 108.85 in 2005-06. During the period of review, net profit of new Private Sector banks registered an upward trend with an increase of 14-fold increase with a compound growth rate of 34.76 percent. All new Private Sector banks began to earn profits right from the first year of its operations. The net profits of new private sector banks increased by 32.6 percent in the year 2005-06, as against a rise of 52.2 percent in 2004-05.

In tune with the trends in the ration of operating profits to total assets, there was a reduction in the ratio of net profit to total assets. As a percent of total assets, the operating profits came down from 2.98 in 1996-97 to 1.99 in 2005-06. The net profit as a percentage to total assets also declined from 1.73 percent in 1996-97 to 0.97 percent in 2005-06. Above table also gives the idea about the progress in mobilizing deposits by the new private sector banks since 1998-99 to 2005-06. It can be seen from the table that the deposit increased substantially and steadily from Rs. 30,813 crore in 1997-98 to Rs. 2, 97,999 crore in 2005-06 recording a 9.6 percent 9.6 fold increase with a compound growth rate of 38.2 percent. The total advances by new private sector banks markedly increased from Rs. 7,814 crore in 1996-97 to Rs.2, 30,005 crore in 2005-06, registering a 29 fold increase with a compound growth rate of 45.6 percent.

3.5 CAPITAL ADEQUACY RATIO OF NEW PREIVATE SECTOR BANKS:

The capital adequacy ratio of new private sector banks from the year 2001 to 2006 was given in below. Name of the bank 2001 2002 4.16 2003 1.95 2004 4.41 2005 2006

Centurion bank of Punjab Ltd. 9.61 Development Credit bank Ltd. 11.28 HDFC bank Ltd. 11.09

21.42 12.52 9.88 9.66

11.49 10.08 14.14 13.93 11.12 11.66

12.16 11.41

ICICI bank Ltd Capital adequacy ratio of new private sector banks (2001-2006) Indusland. Bank Ltd Kotak Mahindra bank Ltd UTI bank Ltd Yes bank Ltd. Total

11.57 15.00 9.00 11.50

11.44 11.10 10.36 12.51 12.13 12.75 25.97 15.25

11.78 13.35 11.62 10.54 12.80 11.27 12.66 11.08 18.81 16.43 12.10 12.60

10.65 10.90 11.21 -

12.30 11.30 10.20

Above table shows that Tier 1 capital adequacy ratio increased significantly to 11.50 percent in 201 and to 12.60 percent at the end of the march 2006. It also shows that CAR of centurion bank of Punjab Ltd (12.52), ICICI bank (13.35), and yes bank Ltd (16.43) were above the stipulated limit of 12.6 percent. The CAR of new private sector banks as a whole remains at the stipulated limit of 12.60 percent. The CAR of development credit bank Ltd. Decreased from the 14.14 percent in the year 2004 to an all time low of 9.66 percent in the year 2006 and it is only a one private sector bank to show a ratio which is below 10 percent. The table further reveals that the CAR of all new private sector banks decreased in the year 2006 compared to 2005, except ICICI bank Ltd which showed an improvement of 1.57 percent over that of the previous year.

FAILURE / MERGER OF NEW GENERATION PRIVATE SECTOR BANKS

The 20th century finance corporation Ltd got merged with the centurial bank ltd on January 1998. Times bank ltd with a CRAR of 8.45 percent got merged with HDFC bank on February 2000. The new generations Private Sector bank the Global Trust bank Ltd.(GTB), which was granted license in September 1994, began showing adverse future in 2002. The RBI instructed the GTB to adopt prudential norms against its adverse future like high growth of risk weighted assets, high NPA, high exposure to capital market etc. the bank reported some progress in making recoveries and also in attempts to have equity infusion.

The voluntary amalgamation of the bank of Punjab Ltd with the Centurion bank Ltd. Was approved by the RBI in terms of section 44A of the B.R. act, and become effective from October 1, 2005. The centurion bank subsequently changed its name to centurion bank of Punjab Ltd. The numbers of new Private Sector banks in 1993-94, 1994-95 and 1995-96 were 6, 8 and 10 respectively. The number of new private sector banks in 1989-99 was 9 and for the years 19992000, 2000-2001 and 2001-2002 were 8 in each year. The number of new private banks in 200203, 2003-04, 2004-05 and 2005-06 was 9, 10, 9 and 8 respectively. The following are the new private banks functioning as on march 31, 2006. Centurion bank of Punjab Ltd Development credit bank Ltd HDFC bank Ltd ICICI bank Ltd Induslan bank Ltd Kotak Mahindra bank Ltd UTI bank Ltd Yes bank

3.1MERGER IN BANKING SECTOR IN I9NDIA:1992-94

During the year 1991-92, 28 banks placed under the liquidation were treated as dissolved and 2 banks were placed under liquidation. On 31st march of 1992, 96 banks were under liquidation. During the year under review, 2 banks namely the bank of credit and Commerce International, (Overseas) Ltd. Bombay (BCCI) and the bank of Karad Ltd got liquidated. On July 6, 1991, RBI suspended all payments and other truncation of BCCI (O) ltd and State bank of India was appointed as the provisional liquidator of BCCI. In February 1993, the grand court of Cayman islands approved the terms and conditions for the sale of BCCI (O) Ltd, to the SBI. The SBI offered to purchase the business of Bombay branch for a consideration of Rs. 40 crore. Following a promoters agreements a wholly owned subsidiary of SBI viz. SBI Commercial and International bank Ltd (SBICI is incorporated on October 1993. After obtaining

the license from RBI on nonmember 1993, SBICI commenced its business from January 31, 1994. Due to large scale irregularities in the transaction relating to certain stockbrokers, the bank of Karad ltd. fell into financial crisis was likely to affect the survival of the bank and the interest of the depositors and the public. Then RBI took over the matter an issued an interim order for

liquidation order of the bank on may 27, 1992. The scheme of amalgamation with bank of India into force on July 20, 1994.

3.2BANK MERGERS: 1995 TO 2000

An important bank merger of the early Nineties was that of nationalized bank viz. new bank of India (NBI) with another nationalized bank (Punjab National bank). The new bank of India had incurred losses during the last four preceding years. With the introduction of prudential accounting standards and new NPA norms, the financial position of the new bank of India worsened further. The Cumulative losses and the erosion of deposit weakened the liquidity and financial position of the bank of India and threatened its existence. In order to protect the interest of the depositors and to convey greater strength to the banking system RBI took a decision in September 1993 for merging the weak new bank of India with a strong nationalized bank viz. Punjab National bank Ltd. Kashinath Seth bank ltd a Non-Scheduled bank was placed under Moratorium in June 1994 and was amalgamated with SBI in January 1996. Private Sector small banks like the Punjab Cooperative bank Ltd and Doab bank Ltd were placed under moratorium initially for a period of three month with a Subsequent of extension in the same period by an order of the government of India on 30th September 1996. These two banks were amalgamated with the Oriental bank of Commerce ltd on April 8, 1997. The number of banks under liquidation as on June 30, 1997 was 88. The 20th Century finance Corporation ltd was merged with new Private Sector bank viz. Centurion bank with effect from January 1998. Bareilly Corporation bank Ltd merger with Bank of Baroda in June 1999 and Sikkim bank with Union bank of India on December 1999. The new generation private sector banks, the Times bank merged with another new generation private sector bank viz. HDFC bank on February 2000.

3.3BANK MERGERS: 2000 TO 2004

The year 2001 Witnessed the merger of the 57 year old Tamil Nadu based Private Sector commercial bank bank of Madura Ltd. With a new generation Private Sector bank viz, ICICI bank. The bank with a net work of 264 branches on March 31, 2000 had assets worth Rs. 3,988 crore and deposits of Rs. 3395 crore. The Board of director of ICICI bank Ltd and Bank of Madura Ltd approved the scheme of merger on December 11, 2000 and its share holders subsequently approved the same in its extraordinary meeting on January 19, 2001. The RBI approved the merger of Bank of Madura with ICICI bank Ltd with effect from March 10, 2001. As per the scheme of amalgamation, the swap was fixed at two equity shares of ICICI bank for every one equity share of bank of Madura Ltd. The RBI accorded approval for merger of ICICI Ltd with ICICI bank Ltd on April 26, 2002 subject to the following conditions: ICICI bank Ltd would have to maintain SLR/CRR as prescribed on the net demand and time liabilities of the bank on the post merger liabilities even though the liabilities of ICICI Ltd. Existing prior to do not attract the reserve requirements. The assets and liabilities of ICICI bank Ltd would be taken over by ICICI bank Ltd through the process of merger. In the post merger period ICICI bank Ltd would have to comply with all prudential requirements, guidelines and other instructions concerning Capital adequacy, asset classification, Income recognition and provisioning requirements as applicable to other banks. ICICI bank Ltd. would have to deploy an additional 10.0 percent, over and above the requirements of 40.0 percent, on the residual portion of its advances after the merger till such time as the aggregate priority sector advances reach a level of 40.0 percent of the total net bank credit of the bank. A notable instance of bank collapse during the year 2002-03 was that of the Nedungadi bank of Kerla, which reported a loss of Rs. 67.8 crore for the first time for the year ended in March 2001.the financial position of the bank was progressively getting Weakened and the banks Capital got fully eroded in the year ended March 2003.the capital to risk weighted assets ratio recorded an alarming level of -1.9 percent as against the statutory minimum requirement of 9 percent, the net worth of the bank amounting to Rs.60.4 crore got fully eroded due to accumulated losses. The bank required approximately Rs 125 crore to achieve the CRAR of 9

percent. Because the financial position and solvency of the bank got fully worsened the RBI had no alternative other than to consider the amalgamation of Nedungadi bank with a nationalized bank. For the purpose of amalgamation, Nedungadi bank was placed under moratorium for a period of three months from November 2nd, 2002. During the interim period, the RBI prepared a draft scheme for the amalgamation of the Nedungadi bank Ltd. with Punjab National bank and it was forwarded to both the banks on November 30, 2002 for their comments and suggestions. The Global Trust bank Ltd (GTB) one of the new generation Private Banks, which was granted License in September 1994, began showing adverse growth in 2002. The RBI instructed the GTB to adopt the prudential norms for reducing its adverse future like high growth of risk weighted assets, high NPA, high exposure to Capital Market etc. the bank reported some progress in making recoveries and also the efforts underway to have equity infusion. However, the bank

was not able to finalize to the programme of capital expansion from domestic sources as advised by RBI. In July 2004, the GTB submitted a proposal from an overseas equity investor for capital augmentation to RBI for its consideration and the proposal was as not feasible from the point of view of prudential norms and other consideration. As the financial condition of the bank was steadily deteriorating and its solvency getting seriously affected, the RBI had placed the bank under the moratorium on July 24, 2004 to protect the interest of its small depositors and that of the banking systems. Of the various merger proposals, the one proposed by the OBC was found acceptable by the RBI and was forwarded it to the central government for approval. Before finalizing the proposal for merger RBI evaluated the strategic advantages, branch network, interest of depositors of GTB and strengths and weakness of both banks. As per government notification, the GTB got merged with OBC on august 14, 2004.

3.4BANK MERGERS: 2005

An important event related to the proposal for voluntary during the year 2005 was the proposal for voluntary amalgamation submitted by two new generation Private Sector banks. The scheme of amalgamation of Bank of Punjab Ltd with the centurion bank Ltd was approved by the RBI in terms of section 44A of the B.R. act, and became effective from October 1, 2005. The Centurion bank subsequently changed its name to Centurion bank of Punjab Ltd.

GAINS FROM THE MERGER:

Combined entity the Punjab-Centurion bank would be the among the top 10 private sector banks in the country. Merged entity would benefit from the fact that centurion bank had recently written of its bad loans against equity. Branch network of the two banks will complement each other. The combined entity will have a nationwide reach Centurion Bank is strong in South India, Maharashtra and Goa whereas Bank of Punjab is strong in Punjab, Haryana and Delhi. While Centurion Bank has 82 per cent of its business coming from retail, Bank of Punjab is strong in the Small and Medium Enterprises (SMEs) segment and agricultural sector. The combined bank will be full-service commercial bank with a strong presence in the Retail, SME and Agricultural segments.

3.5 BANK MERGERS DURING THE YEAR 2006

During the year 2005-06 two domestic banks and one foreign bank were amalgamated and the business of another foreign bank was closed. Among foreign bank ING bank closed its business in india.the number of scheduled commercial banks thus got reduced from 88 at the end of the year march 2005 to 84 at the end of March 31, 2006

3.6 BANK MERGERS DURING THE YEAR 2007:

The year 2007 Witnessed the merger of an Old Private Sector bank Bharat Overseas bank Ltd with a nationalized bank viz. Indian Overseas bank. The bank was Established in the year 1974 was originally owned by the Indian Overseas bank and other six private sector banks in India viz. bank of Rajasthan Ltd, South Indian bank Ltd, Karnataka bank Ltd, Vysya bank Ltd, Karur Vysya banks Ltd and Federal bank Ltd. the bank with a net work of 103 branches was taken over by the Indian Overseas bank in April 3, 2007. With effect of this merger, the number of old private banks in India reduced from 19 to 18. Scheduled Commercial banks comprises 28 public sector banks (State bank of India and its 7

Subsidiaries, 19 nationalized banks and the Industrial bank of India Ltd), 8 new private sector banks, 18 old private sector banks and 29 foreign banks.

MERGER OF SUBSIDIRIES WITH PARENT BANK:

The bank of Rajasthan Ltd was given the approval to merge with itself its wholly subsidiary viz., Rajasthan bank financial services Ltd with itself. Andhra bank was given in principle approval to merge its housing finance subsidiary i.e. Andhra bank housing finance ltd with itself. Bank of India was given approval to merge its wholly owned subsidiary viz., Bank of India Finance Ltd. And bank of India Asset Management Company ltd with itself.

3.8 BANK MERGER DURING THE YAER 2008

In the year 2008 Centurion bank of Punjab was merged with HDFC. This is the biggest merger in Indian banking. The deal was settled on two billion US dollars. (Economic Times: 22nd FEB, 08) Country's largest lender State Bank of India on Thursday said the Finance Ministry has approved the merger of State Bank of Saurashtra with itself. The Ministry of Finance has passed an order for acquiring of State Bank of Saurashtra. (Financial Express14th August, 2008)