International Journal of Management and Social Sciences Research (IJMSSR) Volume 2, No.

6, June 2013

ISSN: 2319-4421

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Fundamental Analysis of Public Sector Banks

Deepika Dhingra, Research Scholar, Faculty of Management Studies-University of Delhi

ABSTRACT
The study represents the brief idea about Indian banking sector and fundamental analysis of public sector banks. In fundamental analysis an attempt is made to analyze various fundamental or basic factors that affect the riskreturn of the securities. The analysis of economy, industry and company fundamental is the main ingredient of the fundamental approach. The analyst should take into account the entire three constituent that form different but special steps in making various decisions. Fundamental analysis helps to analyze the strength of basics of Indian banking sector. It provides the information on the long term stability of banking sector and future growth prospects in banking sector. Fundamental analysis can help the various interested parties by providing relevant information to them, which can help them to take informed decision. Investors can find out the past performance of the banking sector, recent changes and their impact on this sector, and future prospects of higher return and stability in this sector. Banks can find out the opportunities available in the market, perception of customers, weaknesses and ways to improve in future, It focuses on the emergence of Indian banking sector, its reform over the period, its connection with the world economic conditions, banking sector analysis, environmental analysis and the analysis of performance of the top public sector banks. Economic analysis covers the recent changes in the world economy and its impact on Indian banking sector. It includes macro economic analysis and micro economic analysis (fiscal and monetary policy changes). Banking sector analysis involves the stage of banking sector life cycle, banking sector performance. Environmental analysis includes attitude of government towards public banks, competitors and technology progress and SWOT analysis of public sector banks Performance of the top public sector banks is analyzed on the basis of ratio analysis, non performing assets, profits and capital adequacy ratio etc. The performance of public sector banks is also compared with the private sector banks to understand the perception of customers and to measure the competitiveness of public sector banks. It can help to understand the shortcomings of public sector banks and find out the ways to improve performance.

INTRODUCTION OF BANKING SECTOR

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 reason of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft or for withdrawing his own money. Today, he has a choice. Gone are days when the most efficient bank transferred money from one branch to other in two days. Now it is simple as instant messaging or dial a pizza. Money has become the order of the day. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases. They are as mentioned below: Early phase from 1786 to 1969 of Indian Banks Nationalization of Indian Banks and up to 1991 prior to Indian banking sector Reforms. New phase of Indian Banking System with the advent of Indian Financial & Banking Sector Reforms after 1991. To make this write-up more explanatory, I prefix the scenario as Phase I, Phase II and Phase-in. Phase I Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct. The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company. For many years the Presidency banks acted as

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quasi-central banks, as did their successors. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 as a consequence of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India. When the American Civil War stopped the supply of cotton to Lancashire from the Confederate States, promoters opened banks to finance trading in Indian cotton. With large exposure to speculative ventures, most of the banks opened in India during that period failed. The depositors lost money and lost interest in keeping deposits with banks. Subsequently, banking in India remained the exclusive domain of Europeans for next several decades until the beginning of the 20th century. Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The Comptoire d'Escompte de Paris opened a branch in Calcutta in 1860, and another in Bombay in 1862; branches in Madras and Pondicherry, then a French colony, followed. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center. During the first phase the growth was very slow and banks also experienced periodic failures between 1913 and 1948. There were approximately 1100 banks, mostly small. To streamline the functioning and activities of commercial banks, the Government of India came up with The Banking Companies Act, 1949 which was later changed to Banking Regulation Act 1949 as per amending Act of 1965 (Act No. 23 of 1965). Reserve Bank of India was vested with extensive powers for the supervision of banking in India as the Central Banking Authority. During those days public has lesser confidence in the banks. As an aftermath deposit mobilization was slow. Abreast of it the savings bank facility provided by the Postal department was comparatively safer. Moreover, funds were largely given to traders.

process of nationalisation was carried out. It was the effort of the then Prime Minister of India, Mrs. Indira Gandhi. 14 major commercial banks in the country was nationalized. Second phase of nationalization Indian Banking Sector Reform was carried out in 1980 with seven more banks. This step brought 80% of the banking segment in India under Government ownership. The following are the steps taken by the Government of India to Regulate Banking Institutions in the Country: 1949: Enactment of Banking Regulation Act. 1955: Nationalization of State Bank of India. 1959: 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. Phase III This phase has introduced many more products and facilities in the banking sector in its reforms measure. In 1991, under the chairmanship of M Narasimham, a committee was set up by his name which worked for the liberalisation of banking practices. The country is flooded with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service to customers. Phone banking and net banking is introduced. The entire system became more convenient and swift. Time is given more importance than money. The financial system of India has shown a great deal of resilience. It is sheltered from any crisis triggered by any external macroeconomics shock as other East Asian Countries suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the capital account is not yet fully convertible, and banks and their customers have limited foreign exchange exposure. The Bank of Bengal, which later became the State Bank of India. The amendment of Banking Regulation Act in 1993 saw the entry of new private sector banks.Banking Segment in India functions under the umbrella of Reserve Bank of India - the regulatory, central bank. This segment broadly consists of:

Phase II Government took major steps in this Indian Banking Sector Reform after independence. In 1955, it nationalized Imperial Bank of India with extensive banking facilities on a large scale 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 nationalised in 1960 on 19th July, 1969, major

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Regulatory framework for banks was one area which has seen a sea-change after the financial sector reforms and economic liberalisation and globalisation measures were introduced in 1992-93. Most of the recommendations made by the two Expert Committees which continued to be subject matter of close monitoring by the Government of India as well as RBI have been implemented. Governments of India and RBI have taken several steps to: (a) Strengthen the banking sector. (b) Provide more operational flexibility to banks. (c) Enhance the competitive efficiency of banks, and (d) Strengthen the legal framework governing operations of banks.

Development banks a) Industrial finance corporation of India b) Industrial development bank of India( c) Industrial credit and investment corporation of India(ICICI) d) Industrial investment bank of India(IIBI) e) Small industries development bank of India(SIDBI) f) SCICI ltd. g) National bank for agriculture and rural development h) Export import bank of India i) National housing bank

ECONOMIC ANALYSIS
Economic analysis will help to understand the relationship between the economic conditions and banking sector. Economic analysis is done to analyze the impact of various economic changes on the performance of the banking sector. Economic analysis can be further subdivided into two main categories: Macro economic analysis Micro economic analysis These two categories can explain the impact of global economic changes and the changes in national economic environment more effectively and clearly.

CONSOLIDATION OF INDIAN BANKING SECTOR

As mentioned by Governor Jalan in his address to this forum in 2002, "In financial systems worldwide, todays buzzwords are competition, consolidation and stability". There has been impressive stability and considerable competition in India but the process of consolidation in banking industry has just commenced. The issue of consolidation has been addressed by the Narasimham Committee Report on Banking Sector Reforms (1998) but the issue in regard to policy is yet to be pursued vigorously. There are three aspects to consolidation viz. clear cut legal and regulatory regime governing consolidation, enabling policy framework especially where several banks are owned by Government, and market conditions that facilitate such consolidation, Recognizing that all mergers and acquisitions may not necessarily be in the interests of either the parties concerned or the system as a whole. RBI's stated policy currently would permit acquisitions of any Indian private sector bank after 2009. As per the policy in 2009, a determined foreign player could acquire any Indian private sector bank, the best assets in the market place. Current banking sector can be divided in the following categories

Macro economic analysis

Macro economic analysis is done to find out the correlation between global economic scenario and its impact on Indian banking sector. Banking sector reforms in India are aimed at induction of best international practices and technological changes for competing globally. The reserve bank of India has time and again emphasized transparency, diversification of ownership and strong corporate governance to mitigate the prospects of systematic risk in the banking sector. Banking sector reforms have supported the transition of the Indian economy to a higher growth path, while significantly improving the stability of the financial system. In comparison with the pre-reform period, the Indian banking system today is more stable and efficient. However the gains of the past decade need to be consolidated, so that these could be translated to derive the institutions, market and practices into a mature financial system that can meet the challenges of globalisation. The banking system would, therefore, not only need to be stable, but also supportive of still higher levels of planned investments by channeling financial resources more efficiently from surplus to deficit sectors. Basel II and India RBIs association with the Basel Committee on Banking Supervision dates back to 1997 as India was among the 16

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non-member countries that were consulted in the drafting of the Basel Core Principles. Reserve Bank of India became a member of the Core Principles Liaison Group in 1998 and subsequently became a member of the Core Principles Working Group on Capital. Within the Working Group, RBI has been actively participating in the deliberations on the New Accord and had the privilege to lead a group of six major non-G-10 supervisors which presented a proposal on a simplified approach for Basel II to the Committee. Commercial banks in India started implementing Basel II with effect from March 31, 2007. They adopted Standardized Approach for credit risk and Basic Indicator Approach for operational risk, initially. After adequate skills are developed, both at the banks and also at supervisory levels, some banks may be allowed to migrate to the Internal Rating Based (IRB) Approach. The steps were taken for implementation of Basel II and the emerging issues. The RBI had announced in its annual policy statement in May 2004 that banks in India should examine in depth the options available under Basel II and draw a road-map by end-December 2004 for migration to Basel II and review the progress made at quarterly intervals. The Reserve Bank organized a two-day seminar in July 2004 mainly to sensitize the Chief Executive Officers of banks to the opportunities and challenges emerging from the Basel II norms. Soon thereafter all banks were advised in August 2004 to undertake a selfassessment of the various risk management systems in place, with specific reference to the three major risks covered under the Basel II and initiate necessary remedial measures to update the systems to match up to the minimum standards prescribed under the New Framework. Banks have also been advised to formulate and operationalise the Capital Adequacy Assessment Process (CAAP) within the banks as required under Pillar II of the New Framework. It is appropriate to list some of the other regulatory initiatives taken by the Reserve Bank of India, relevant for Basel II. First, RBI has tried to ensure that the banks have suitable risk management framework oriented towards their requirements dictated by the size and complexity of business, risk philosophy, market perceptions and the expected level of capital. Second, Risk Based Supervision (RBS) in 23 banks has been introduced on a pilot basis. Third, RBI has been encouraging banks to formalize their capital adequacy assessment process (CAAP) in alignment with their business plan and performance budgeting system. This, together with the adoption of RBS would aid in factoring the Pillar II requirements under Basel II. Fourth, RBI has been expanding the area of disclosures (Pillar III), so as to have greater transparency in the financial position and risk profile of banks. Finally, RBI

has tried to build capacity for ensuring the regulators ability for identifying and permitting eligible banks to adopt IRB / Advanced Measurement approaches. As per normal practice, and with a view to ensuring migration to Basel II in a non-disruptive manner, a consultative and participative approach has been adopted for both designing and implementing Basel II. A Steering Committee comprising senior officials from 14 banks (public, private and foreign) has been constituted wherein representation from the Indian Banks Association and the RBI has also been ensured. The Steering Committee had formed sub-groups to address specific issues. On the basis of recommendations of the Steering Committee, draft guidelines to the banks on implementation of the New Capital Adequacy Framework have been issued. Implementation of Basel II will require more capital for banks in India due to the fact that operational risk is not captured under Basel I, and the capital charge for market risk was not prescribed until recently. Though last year has not been a very good year for banks, they are exploring all avenues for meeting the capital requirements under Basel II. The cushion available in the system, which has a CRAR of over 12 per cent now, is, however, comforting. Basel II provides some scope to extend the rating of issues to issuers, this would only be an approximation and it would be necessary for the system to move to rating of issuers. Encouraging rating of issuers would be essential in this regard. In this context, current non-availability of acceptable and qualitative historical data relevant to ratings, along with the related costs involved in building up and maintaining the requisite database, does influence the pace of migration to the advanced approaches available under Basel II. Above all, capacity building, both in banks and the regulatory bodies is a serious challenge, especially with regard to adoption of the advanced approaches. RBI in India has initiated supervisory capacity-building measures to identify the gaps and to assess as well as quantify the extent of additional capital which may be required to be maintained by such banks. Current global economic conditions In the current scenario, banks are constantly pushing the frontiers of risk management. Compulsions arising out of increasing competition, as well as agency problems between management, owners and other stakeholders are inducing banks to look at newer avenues to augment revenues, while trimming costs. Consolidation, competition and risk management are no doubt critical to the future of banking but it is believed that governance and financial inclusion would also emerge as the key

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issues for a country like India, at this stage of socioeconomic development. The global economic outlook deteriorated sharply over the last one year. In a sign of the ferocity of the down turn, the IMF made a marked downward revision of its estimate: In market exchange rate terms, the downturn is sharper global GDP is projected to actually shrink by 0.6 per cent. With all the advanced economies the United States, Europe and Japan - having firmly gone into recession, the contagion of the crisis from the financial sector to the real sector has been unforgiving and total. Due to the slump in demand the output growth in the whole world has reduced especially in developed countries. The output growth in the world has reduced from 5.1 to 3 percent over the last four years (2006 to 2009). Impact on Indian financial market India's financial markets - equity markets, money markets, forex markets and credit markets - had all come under pressure from a number of directions. As a consequence of the global liquidity squeeze, Indian banks and corporates found their overseas financing drying up, forcing corporates to shift their credit demand to the domestic banking sector. Also, in their frantic search for substitute financing, corporates withdrew their investments from domestic money market mutual funds putting redemption pressure on the mutual funds and down the line on non-banking financial companies (NBFCs) where the MFs had invested a significant portion of their funds. This substitution of overseas financing by domestic financing brought both money markets and credit markets under pressure. The forex market came under pressure because of reversal of capital flows as part of the global deleveraging process. Simultaneously, corporates were converting the funds raised locally into foreign currency to meet their external obligations. Both these factors put downward pressure on the rupee. The Reserve Bank's intervention in the forex market to manage the volatility in the rupee further added to liquidity tightening. India's integration into the world economy over the last decade has been remarkably rapid. Integration into the world implies more than just exports. Going by the common measure of globalization, India's two-way trade (merchandize exports plus imports), as a proportion of GDP, grew from 21.2 per cent in 1997-98, the year of the Asian crisis, to 34.7 per cent in 2008-09.

India's financial integration with the world has been as deep as India's trade globalization, if not deeper. If we take an expanded measure of globalization, that is the ratio of total external transactions (gross current account flows plus gross capital flows) to GDP, this ratio has more than doubled from 46.8 per cent in 1997-98 to 117.4 per cent in 2008-09.

Micro economic analysis

Micro economic analysis reflects the changes in the national economic policies and role of public sector banks in the implementation of those changes effectively. Major micro economic policies are: Monetary policy Fiscal policy

a)

Monetary policy

The Reserve Bank's policy response is aimed at containing the contagion from the outside - to keep the domestic money and credit markets functioning normally and see that the liquidity stress did not trigger solvency cascades. In particular, RBI targeted three objectives: 1. To maintain a comfortable rupee liquidity position; 2. To augment foreign exchange liquidity; and 3. To maintain a policy framework that would keep credit delivery on track so as to arrest the moderation in growth. This marked a reversal of Reserve Bank's policy stance from monetary tightening in response to heightened inflationary pressures of the previous period to monetary easing in response to easing inflationary pressures and moderation in growth in the current cycle. RBIs measures to meet the above objectives came in several policy packages starting mid-September 2009, on occasion in response to unanticipated global developments and at other times in anticipation of the impact of potential global developments on the Indian markets. RBIs policy packages included, like in the case of other central banks, both conventional and unconventional measures. On the conventional side, RBI reduced the policy interest rates aggressively and rapidly, reduced the quantum of bank reserves impounded by the central bank and expanded and liberalized the refinance facilities for export credit. Measures aimed at managing forex liquidity included an upward adjustment of the interest rate ceiling on the foreign currency deposits by non-resident Indians, substantially relaxing the external commercial borrowings (ECB) regime for corporates, and allowing non-banking financial companies and housing finance companies access to foreign borrowing.

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The important among the many unconventional measures taken by the Reserve Bank of India are a rupeedollar swap facility for Indian banks to give them comfort in managing their short-term foreign funding requirements, an exclusive refinance window as also a special purpose vehicle for supporting non-banking financial companies, and expanding the lendable resources available to apex finance institutions for refinancing credit extended to small industries, housing and exports. The Union government, in its recent decision, has announced capital infusion in three public sector banks namely UCO Bank, Central Bank of India and Vijaya Bank. The Kolkata based UCO bank would get capital worth Rs 1,200 crore, through UCO's non-convertible preference shares, from center government in two installments, Rs 450 crore immediately and the balance Rs 750 crore in 2009-10. It may be noted that almost all bank loans are linked to the PLR, and every rate fall would really affect the interest rate, which consumer is paying However, at present, prime lending rates (PLR) of most of the banks are in the range of 11.5% and 12.5% while the same was between 10.25% and 11.50% as on April 1, 2006. It be noted that Last fiscal in September, the rate of interest on home loans was in the range of 9.25% to 12%, but due to RBI's smart move for rate reduction and lower demand has caused the rate to drop to 8-11%. Impact of monetary measures Taken together, the measures put in place since midSeptember 2008 have ensured that the Indian financial markets continue to function in an orderly manner. The cumulative amount of primary liquidity potentially available to the financial system through these measures is over US$ 75 billion or 7 per cent of GDP. This sizeable easing has ensured a comfortable liquidity position starting mid-November 2009 as evidenced by a number of indicators including the weighted-average call money rate, the overnight money market rate and the yield on the 10year benchmark government security. Taking the signal from the policy rate cut, many of the big banks have reduced their benchmark prime lending rates. Bank credit has expanded too, faster than it did last year. However, Reserve Banks rough calculations show that the overall flow of resources to the commercial sector is less than what it was last year. This is because, even though bank credit has expanded, it has not fully offset the decline in non-bank flow of resources to the commercial sector. b) Fiscal policy Fiscal policy measures can be defined as the use of tax and expenditure powers by a government. Government all

over the world, are vested with the task of creating infrastructure (e.g., roads, ports, power plants, etc.) and are also required to ensure internal and external security. These responsibilities entail government expenditures on various fronts capital outlays, the defense forces, police, the administrative services and others. Taxes are a major source of revenue to meet these outflows. Thus, the Union Government collects income tax, excise duty, customs duty, etc., through its different arms. An increase in government spending without a matching increase in inflows may cause or exacerbate a DEFICIT. But, government spending also contributes to aggregate demand for goods and services directly, and indirectly by increasing private incomes which stimulates private demand. Over the last five years, both the central and state governments in India have made a serious effort to reverse the fiscal excesses of the past. At the heart of these efforts was the Fiscal Responsibility and Budget Management (FRBM) Act which mandated a calibrated road map to fiscal sustainability. However, recognizing the depth and extraordinary impact of this crisis, the central government invoked the emergency provisions of the FRBM Act to seek relaxation from the fiscal targets and launched two fiscal stimulus packages in December 2008 and January 2009. These fiscal stimulus packages, together amounting to about 3 per cent of GDP, included additional public spending, particularly capital expenditure, government guaranteed funds for infrastructure spending, cuts in indirect taxes, expanded guarantee cover for credit to micro and small enterprises, and additional support to exporters. These stimulus packages came on top of an already announced expanded safety-net for rural poor, a farm loan waiver package and salary increases for government staff, all of which too should stimulate demand. The Interim Budget did not have any proposal for revision in tax rates, direct or indirect. The revised estimate for tax collections forecast a Rs 60,000 crore (Rs 600 billion) shortfall in the estimated tax collection targets, primarily on account of the government's pro-active fiscal measures initiated to counter the impact of the global slowdown on the Indian economy. A substantial relief of about Rs 40,000 crore (Rs 400 billion) has been extended through tax cuts, including a fairly steep, across-the-board reduction in central excise rates in December, 2009. Public sector banks help government to channelize the expenditure of the government for the development and maintenance of the equilibrium in the economy.

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PERFORMANCE OF PUBLIC SECTOR BANKS

Brand Finance PLC, UK based brand Valuation Company has released the BrandFinance Global Ranking 500. This list gives a comprehensive list of all the banks across the world with the rankings based on their methodology. The methodology is more toward brand related and is not based on market valuations alone. Only HSBC and American Express received a AAA credit rating. The AAA (triple A) credit rating is the highest rating any bank or a company can receive. It indicates the companys credit worthiness which is almost synonymous to doing business with that company or predicting the future business. Very few companies achieve that rating. The highest rating an Indian bank got in the list is AA for State Bank of India. HSBC, Bank of America and Wells Fargo topped the list. The top Indian bank in the list is State Bank of India ranked at 69. It is ranked at 60 in 2008 because the valuation was done for the group of all the State Banks. Valuation for 2009 is done for SBI alone. The next bank in the list is ICICI Bank which is the largest private sector lender. ICICI bank has witnessed a steep decline in its rankings. It was ranked 64 in 2008 and now it is ranked 104. HDFC bank is the 3rd Indian bank in the list. Canara Bank and Oriental bank of Commerce made their first entry into the list indicating the growing presence of Indian banks in the global scenario. List of 17 Indian banks in the global 500: 1. State Bank of India 2. ICICI Bank 3. HDFC Bank 4. Punjab National Bank 5. Bank of India 6. Canara Bank 7. Bank of Baroda 8. Axis Bank 9. Kotak Bank 10. Union Bank of India 11. Indian Overseas Bank 12. IDBI Bank Limited 13. State Bank of Patiala 14. Indian Bank 15. Power Finance Corp 16. Oriental Bank of Commerce 17. Syndicate Bank

OTHER ENVIRONMENTAL FACTORS

Legal environment As regards the legal framework, the Reserve Bank is not very comfortable with lack of clear statutory provision regarding takeover of management of banks. In 1970, the Reserve Bank had issued directions to the banks requiring them to seek the Reserve Banks permission or acknowledgement before effecting any transfer of shares in favour of any person which would take the holding of shares to more than one per cent (subsequently raised to five per cent) of the total paid up capital of such banking company. Since shares are acquired first and then lodged for registration, the Reserve Banks directions create a somewhat piquant situation. To plug the gap, a Bill has now been introduced in the Parliament relating to banking regulation. The RBIs proposals in this regard should reasonably take care of takeover of the management by one from another and Reserve Bank will have appropriate regulatory power to satisfy itself that persons proposing to acquire such shares are fit and proper persons. The State Bank of India Act, 1955, empowers the State Bank of India with the consent of the management of any banking institution (which would also include a banking company) to acquire the business, including the assets and liabilities of any bank. Under this provision, what is required is the consent of the concerned bank and the approval of the Reserve Bank and the sanction of such acquisition by the Central Government. Several banks were acquired by the State Bank of India by invoking this section. Section 23A of the Regional Rural Banks Act, 1976 (RRBs Act), empowers the Central Government, in consultation with the NABARD, concerned State Government and sponsored bank, to amalgamate two RRBs, by issue of notification in the official gazette, with such liabilities, duties and obligations as may be specified in the notification. As in the case of amalgamation of a nationalised bank under Section 9(2) of the Nationalisation Act, every notification under this section is also required to be laid before both the Houses of Parliament. Political environment The government has told public sector banks (PSBs) to extend credit to fund-starved Indian industry, especially exporters and small and medium sector enterprises to address their credit needs. SIDBI would be lending US$ 1.33 billion out of US$ 1.47 billion credit from RBI to public sector banks. This is being provided to the PSBs at 6.5 per cent (SIDBI is getting the credit at 5.5 per cent) under the condition that the banks will have to lend this credit to the medium and small-scale industry units at an interest rate of 10 per cent before March 31, 2010.

The list is dominated by the public sector banks punctuated by a few known private sector banks. IT majors and other companies have made it clear that they trust the PSUs over private banks for their savings.

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Technical environment Technological upgradation in working of rural regional banks (RRBs) is being implemented. As a first step, RRBs which have either 100 per cent computerization or are being opened from September 2009 need to be CBS compliant. The number of automated teller machines (ATMs) has risen and the usage of ATMs has gone up substantially during the last few years. Use of other banks ATMs would also not attract any fee except when used for cash withdrawal for which the maximum charge levied was brought down to US$ .409 per withdrawal by March 31, 2008. Further, all cash withdrawals from all ATMs would be free with effect from April 1, 2009.

Porters Five Force Model

Threat of New Entrants. The average person can't come along and start up a bank, but there are services, such as internet bill payment, on which entrepreneurs can capitalize. Banks are fearful of being squeezed out of the payments business, because it is a good source of fee-based revenue. Another trend that poses a threat is companies offering other financial services. What would it take for an insurance company to start offering mortgage and loan services? Not much. Also, when analyzing a regional bank, remember that the possibility of a mega bank entering into the market poses a real threat. Power of Suppliers. The suppliers of capital might not pose a big threat, but the threat of suppliers luring away human capital does. If a talented individual is working in a smaller regional bank, there is the chance that person will be enticed away by bigger banks, investment firms, etc. Power of Buyers. The individual doesn't pose much of a threat to the banking industry, but one major factor affecting the power of buyers is relatively high switching costs. If a person has a mortgage, car loan, credit card, checking account and mutual funds with one particular bank, it can be extremely tough for that person to switch to another bank. In an attempt to lure in customers, banks try to lower the price of switching, but many people would still rather stick with their current

bank. On the other hand, large corporate clients have banks wrapped around their little fingers. Financial institutions - by offering better exchange rates, more services, and exposure to foreign capital markets - work extremely hard to get high-margin corporate clients. Availability of Substitutes. As you can probably imagine, there are plenty of substitutes in the banking industry. Banks offer a suite of services over and above taking deposits and lending money, but whether it is insurance, mutual funds or fixed income securities, chances are there is a non-banking financial services company that can offer similar services. On the lending side of the business, banks are seeing competition rise from unconventional companies. Sony (NYSE: SNE), General Motors (NYSE:GM) and Microsoft (NASDAQ:MSFT) all offer preferred financing to customers who buy big ticket items. If car companies are offering 0% financing, why would anyone want to get a car loan from the bank and pay 5-10% interest? Competitive Rivalry. The banking industry is highly competitive. The financial services industry has been around for hundreds of years, and just about everyone who needs banking services already has them. Because of this, banks must attempt to lure clients away from competitor banks. They do this by offering lower financing, preferred rates and investment services. The banking sector is in a race to see who can offer both the best and fastest services, but this also causes banks to experience a lower ROA. They then have an incentive to take on high-risk projects. In the long run, we're likely to see more consolidation in the banking industry. Larger banks would prefer to take over or merge with another bank rather than spend the money to market and advertise to people.

CONCLUSION
The Indian banking sector is connected to the world economy but the Indian banking system has had no direct exposure to the sub-prime mortgage assets or to the failed institutions. It has very limited off-balance sheet activities or securitized assets. In fact, our banks continue to remain safe and healthy. The Indian banking sector has been well shielded by the central bank and has managed to sail through most of the crisis with relative ease. Improvements in the regulatory and supervisory framework encompassed a greater degree of compliance with Basel Core Principles. Some recent initiatives in this regard include consolidated accounting for banks along with a system of Risk-Based Supervision (RBS) for intensified monitoring of vulnerabilities. With most private sector banks and the PSU ones that have complied with Basel II having sufficient capital in their books; it will be a challenge to deploy the same safely and profitably in the event of economic slowdown.

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ISSN: 2319-4421

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Banks are likely to concentrate more on non funded income in this scenario. Public sector banks help the government to implement monetary and fiscal policies by modifying their policies and priorities. Public sector banks have been very proactive in their restructuring initiatives be it in technology implementation or pruning their loss assets. While the likes of SBI have made already attempts towards consolidation, others are keen to take off in that direction. RBIs roadmap for the entry of foreign banks and the acquisition of stake by the foreign entities in Indian private banks seems to be a step towards facilitating entry of foreign banks into India. However, the same is set to aggravate the tussle for market share in the already fragmented sector. The private sector banks have made tremendous strides in the last few years. It was in mid 1990's when Indian banking scenario witnessed the entry of some new private sector banks and in the period between 2002 -2009 these banks have grown by leaps and bounds. They have increased their incomes, asset sizes and outperformed their public sector counterparts in many areas. This growth was accompanied by a rapid branch expansion. The network of private sector bank grew at almost three times of all scheduled commercial banks and more than four times that of public sector banks. In the current scenario, banks are constantly pushing the frontiers of risk management. Compulsions arising out of increasing competition, as well as agency problems between management, owners and other stakeholders are inducing banks to look at newer avenues to augment revenues, while trimming costs. Consolidation, competition and risk management are no doubt critical to the future of banking but I believe that governance and financial inclusion would also emerge as the key issues for a country like India, at this stage of socio-economic development. The NPA growth involves the necessity of provisions, which reduces the overall profits and shareholders value. The issue of Non Performing Assets has been discussed at length for financial system all over the world. The problem of NPAs is not only affecting the banks but also the whole economy. In fact high level of NPAs in Indian banks is nothing but a reflection of the state of health of the industry and trade.

conglomerates that are engaged in cross-border transactions. The banks which are diversified into areas other than conventional banking, are parts of a large group/conglomerate, undertake significant cross-border transactions, act as market makers, and are counter-parties to complex transactions. Since these banks would be exposed to the complexities of various risks. The RBI may consider prescribing a higher minimum capital ratio for these banks. It has also stressed the need to raise corporate governance standard in public sector banks with the aim of ensuring operational autonomy and equipping them to compete with other banks as equals.

BIBLIOGRAPHY
Economic times Competition refresher Webliography http://pnbindia.in/financial_results_sep_08.pdf http://crpd.sbi.co.in/uploads/forms/Consolidated_Account _20080610.pdf http://www.sbi.co.in/result/SBI2007-Annexures.pdf http://www.sbi.co.in/result/SBI2007-StateBankofIndia.pdf http://www.sbi.co.in/result/SBI2007StateBankGroup(Consolidated).pdf

RECOMMENDATIONS Recommending a change in capital adequacy

framework, it has suggested that the banking system should move towards differential capital regime for complex banks from the current practice of having a 9% CAR requirement for all banks. The banks like State Bank of India, ICICI Bank, HDFC Bank among others to maintain higher CAR as they are

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