CHAPTER-1 1.1 INTRODUCTION TO INDUSTRY:Indian banking is the lifeline of the nation and its people.

Banking has helped in developing the vital sectors of the economy and usher in a new dawn of progress on the Indian horizon. The sector has translated the hopes and aspirations of millions of people into reality. But to do so, it has had to control miles and miles of difficult terrain, suffer the indignities of foreign rule and the pangs of partition. Today, Indian banks can confidently compete with modern banks of the world.

Before the 20th century, using or lending money at a high rate of interest, was widely prevalent in rural India. Entry of Joint stock banks and development of Cooperative movement have taken over a good deal of business from the hands of the Indian money lender, who although still exist, have lost his menacing teeth.

In the Indian Banking System, Cooperative banks exist side by side with commercial banks and play a supplementary role in providing need-based finance, especially for agricultural and agriculture-based operations including farming, cattle, milk, hatchery, personal finance etc. along with some small industries and self-employment driven activities.

Generally, co-operative banks are governed by the respective co-operative acts of state governments. But, since banks began to be regulated by the RBI after 1st March 1966, these banks are also regulated by the RBI after amendment to the Banking Regulation Act 1949. The Reserve Bank is responsible for licensing of banks and branches, and it also regulates credit limits to state co-operative banks on behalf of primary co-operative banks for financing SSI units.

Banking in India originated in the first decade of 18th century with The General Bank of India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks are now defunct. After this, the Indian government established three presidency banks in India. The first of three was the Bank of Bengal, which obtains charter in 1809, the other two presidency bank, viz., the Bank of Bombay and the Bank of Madras, were established in
1|Page

1840 and 1843, respectively. The three presidency banks were subsequently amalgamated into the Imperial Bank of India (IBI) under the Imperial Bank of India Act, 1920 which is now known as the State Bank of India.

Cooperative banks are an important part of many financial systems. In a number of countries, they are among the largest financial institutions when considered as a group. Moreover, the share of cooperative banks has been increasing in recent years; in the sample of banks in advanced economies and emerging markets analyzed in this paper, the market share of cooperative banks in terms of total banking sector assets increased from about 9 percent in mid- 1990s to about 14 percent in 2004.

1.1.1 Structure Of Indian Banking Industry:Banking Industry in India functions under the sunshade of Reserve Bank of India - the regulatory, central bank. Banking Industry mainly consists of: Commercial Banks Co-operative Banks The commercial banking structure in India consists of: Scheduled Commercial Banks Unscheduled Bank. Scheduled commercial Banks constitute those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934.

RBI in turn includes only those banks in this schedule which satisfy the criteria laid down vide section 42 (60) of the Act. Some co-operative banks are scheduled commercial banks although not all co-operative banks are. Being a part of the second schedule confers some benefits to the bank in terms of access to accommodation by RBI during the times of liquidity constraints. At the same time, however, this status also subjects the bank certain conditions and obligation towards the reserve regulations of RBI.

For the purpose of assessment of performance of banks, the Reserve Bank of India categorise them as public sector banks, old private sector banks, new private sector banks and foreign banks.

2|Page

Reserve Bank Of India

Bank

Financial Institution

Scheduled Commercial Banks

Cooperative Credit Institutions

All India Financial Institution Rural Cooperative Credit Institutions

State Level Institution

Other Institution

Public Sector Banks

Private Sector Banks

Foreign Banks

Regional Rural Banks

Urban Cooperative

Fig.1.1

1.1.2 History Of Banking Sector: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 from1786 to 1969 of Indian banks. Nationalisation 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 and banking sector reforms after 1991.

1.1.3 Role of banks: Capital formation Monetization Innovations Finance for priority sector Provision for medium and long term finance Cheap money policy Need for a sound banking system

3|Page

1.1.4 SWOT ANALYSIS:-

Fig.1.2

Advantages of swot analysis:SWOT Analysis is instrumental in strategy formulation and selection. It is a strong tool, but it involves a great subjective element. It is best when used as a guide, and not as a prescription. Successful businesses build on their strengths, correct their weakness and protect against internal weaknesses and external threats. They also keep a watch on their overall business environment and recognize and exploit new opportunities faster than its competitors.

SWOT Analysis helps in strategic planning in following manner It is a source of information for strategic planning. Builds organizations strengths. Reverse its weaknesses. Maximize its response to opportunities. Overcome organizations threats. It helps in identifying core competencies of the firm. It helps in setting of objectives for strategic planning. It helps in knowing past, present and future so that by using past and current data, future plans can be chalked out

4|Page

Swot Analysis Of Banking Sector:Strength: Indian banks have compared favourably on growth, asset quality and profitability with other emerging economies banks over the last few years. Policy makers have made some notable changes in policy and regulation to help strengthen the sector. These changes include strengthening prudential norms, enhancing the payments system and integrating regulations between commercial and co-operative banks. Bank lending has been a significant driver of GDP growth and employment. Extensive reach: the vast networking & growing number of branches & ATMs. Indian banking system has reached even to the remote corners of the country. In terms of quality of assets and capital adequacy, Indian banks are considered to have clean, strong and transparent balance sheets relative to other banks in comparable economies in its region. Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks.

Weakness: PSUs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organisational performance ethic & strengthen human capital. Old private sector banks also have the need to fundamentally strengthen skill levels. The cost of intermediation remains high and bank penetration is limited to only a few customer segments and geographies. Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, restrictive labour laws, weak corporate governance and ineffective regulations beyond Scheduled Commercial Banks (SCBs), unless industry utilities and service bureaus. Refusal to dilute stake in PSU banks: The government has refused to dilute its stake in PSU banks below 51% thus choking the headroom available to these banks for raining equity capital.
5|Page

Opportunity: The market is seeing discontinuous growth driven by new products and services that include opportunities in credit cards, consumer finance and wealth management on the retail side, and in fee-based income and investment banking on the wholesale banking side. These require new skills in sales & marketing, credit and operations. With increased interest in India, competition from foreign banks will only intensify. Given the demographic shifts resulting from changes in age profile and household income, consumers will increasingly demand enhanced institutional capabilities and service levels from banks. New private banks could reach the next level of their growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity Foreign banks committed to making a play in India will need to adopt alternative approaches to win the race for the customer and build a value-creating customer franchise in advance of regulations potentially opening up post 2009. At the same time, they should stay in the game for potential acquisition opportunities as and when they appear in the near term. Maintaining a fundamentally long-term value-creation mindset. Reach in rural India for the private sector and foreign banks. With the growth in the Indian economy expected to be strong for quite some timeespecially in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong. Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and commodity derivatives. Hybrid capital: In an attempt to relieve banks of their capital crunch, the RBI has allowed them to raise perpetual bonds and other hybrid capital securities to shore up their capital. If the new instruments find takers, it would help PSU banks, left with little headroom for raising equity.

6|Page

Threats: Threat of stability of the system: failure of some weak banks has often threatened the stability of the system. Rise in inflation figures which would lead to increase in interest rates.

Increase in the number of foreign players would pose a threat to the PSB as well as the private players.

1.2 INTRODUCTION TO BANKS:The public sector banks that will be covered under the study will be: State Bank Of India Punjab National Bank Oriental Bank Of Commerce IDBI Syndicate Bank

1.2.1 STATE BANK OF INDIA:State Bank of India (SBI) is a banking and financial services company based in India. It is a state-owned corporation with its headquarters in Mumbai, Maharashtra. As of March 2012, it had assets of US$360 billion and 14,119 branches, including 173 foreign offices in 37 countries across the globe making it the largest banking and financial services company in India. The bank traces its ancestry to British India, through the Imperial Bank of India, to the founding in 1806 of the Bank of Calcutta, making it the oldest commercial bank in the Indian Subcontinent. Bank of Madras merged into the other two presidencies banksBank of Calcutta and Bank of Bombayto form the Imperial Bank of India, which in turn became the State Bank of India. The Government of India nationalised the Imperial Bank of India in 1955, with the Reserve Bank of India taking a 60% stake, and renamed it the State Bank of India. In 2008, the government took over the stake held by the Reserve Bank of India. SBI has been ranked 285th in the Fortune Global 500 rankings of the world's biggest corporations

7|Page

for the year 2012. SBI provides a range of banking products through its network of branches in India and overseas, including products aimed at non-resident Indians (NRIs). SBI has 14 regional hubs and 57 Zonal Offices that are located at important cities throughout the country. SBI is a regional banking behemoth and has 20% market share in deposits and loans among Indian commercial banks. The State Bank of India was named the 29th most reputed company in the world according to Forbes 2009 ranking and was the only bank featured in the "top 10 brands of India" list in an annual survey conducted by Brand Finance and The Economic Times in 2010.

1.2.2 History Of Indian Banking:-

Fig.1.3 The roots of the State Bank of India lie in the first decade of 19th century, when the Bank of Calcutta, later renamed the Bank of Bengal, was established on 2 June 1806. The Bank of Bengal was one of three Presidency banks, the other two being the Bank of Bombay (incorporated on 15 April 1840) and the Bank of Madras (incorporated on 1 July 1843). All three Presidency banks were incorporated as joint stock companies and were the result of the royal charters. These three banks received the exclusive right to issue paper currency in 1861

8|Page

with the Paper Currency Act, a right they retained until the formation of the Reserve Bank of India. The Presidency banks amalgamated on 27 January 1921, and the re-organized banking entity took as its name Imperial Bank of India. The Imperial Bank of India remained a joint stock company. Pursuant to the provisions of the State Bank of India Act of 1955, the Reserve Bank of India, which is India's central bank, acquired a controlling interest in the Imperial Bank of India. On 30 April 1955, the Imperial Bank of India became the State Bank of India. The government of India recently acquired the Reserve Bank of India's stake in SBI so as to remove any conflict of interest because the RBI is the country's banking regulatory authority. In 1959, the government passed the State Bank of India (Subsidiary Banks) Act, which made eight state banks associates of SBI. A process of consolidation began on 13 September 2008, when the State Bank of Saurashtra merged with SBI. SBI has acquired local banks in rescues. The first was the Bank of Behar (est. 1911), which SBI acquired in 1969, together with its 28 branches. The next year SBI acquired National Bank of Lahore (est. 1942), which had 24 branches. Five years later, in 1975, SBI acquired Krishnaram Baldeo Bank, which had been established in 1916 in Gwalior State, under the patronage of Maharaja Madho Rao Scindia. The bank had been the Dukan Pichadi, a small moneylender, owned by the Maharaja. The new banks first manager was Jall N. Broacha, a Parsi. In 1985, SBI acquired the Bank of Cochin in Kerala, which had 120 branches. SBI was the acquirer as its affiliate, the State Bank of Travancore, already had an extensive network in Kerala. International presence:-

fig.1.4

9|Page

The Israeli branch of the State Bank of India located in Ramat Gan. As of 31 March 2012, the bank had 173 overseas offices spread over 34 countries. It has branches of the parent in Moscow, Colombo, Dhaka, Frankfurt, Hong Kong, Tehran, Johannesburg, London, Los Angeles, Male in the Maldives, Muscat, Dubai, New York, Osaka, Sydney, and Tokyo. It has offshore banking units in the Bahamas, Bahrain, and Singapore, and representative offices in Bhutan and Cape Town. It also has an ADB in Boston, USA. SBI operates several foreign subsidiaries or affiliates. In 1990, it established an offshore bank: State Bank of India (Mauritius). In 1982, the bank established a subsidiary, State Bank of India (California), which now has ten branches nine branches in the state of California and one in Washington, D.C. The 10th branch was opened in Fremont, California on 28 March 2011. The other eight branches in California are located in Los Angeles, Artesia, San Jose, Canoga Park, Fresno, San Diego, Tustin and Bakersfield. The Canadian subsidiary, State Bank of India (Canada) also dates to 1982. It has seven branches, four in the Toronto area and three in British Columbia. In Nigeria, SBI operates as INMB Bank. This bank began in 1981 as the Indo-Nigerian Merchant Bank and received permission in 2002 to commence retail banking. It now has five branches in Nigeria. In Nepal, SBI owns 55% of Nepal SBI Bank, which has branches throughout the country. In Moscow, SBI owns 60% of Commercial Bank of India, with Canara Bank owning the rest. In Indonesia, it owns 76% of PT Bank Indo Monex. The State Bank of India already has a branch in Shanghai and plans to open one in Tianjin. In Kenya, State Bank of India owns 76% of Giro Commercial Bank, which it acquired for US$8 million in October 2005. Associate Banks

10 | P a g e

fig.1.5

Main Branch of SBI in Mumbai. SBI has five associate banks; all use the State Bank of India logo, which is a blue circle, and all use the "State Bank of" name, followed by the regional headquarters' name:

State Bank of Bikaner & Jaipur State Bank of Hyderabad State Bank of Mysore State Bank of Patiala State Bank of Travancore

Earlier SBI had seven associate banks, all of which had belonged to princely states until the government nationalised them between October 1959 and May 1960. In tune with the first Five Year Plan, which prioritized the development of rural India, the government integrated these banks into State Bank of India system to expand its rural outreach. There has been a proposal to merge all the associate banks into SBI to create a "mega bank" and streamline the group's operations. The first step towards unification occurred on 13 August 2008 when State Bank of Saurashtra merged with SBI, reducing the number of associate state banks from seven to six. Then on 19 June 2009 the SBI board approved the absorption of State Bank of Indore. SBI holds 98.3% in State Bank of Indore. (Individuals who held the shares prior to its takeover by the government hold the balance of 1.77 %.) The acquisition of State Bank of Indore added 470 branches to SBI's existing network of branches. Also, following the acquisition, SBI's total assets will inch very close to the 10 trillion marks. The total assets of SBI and the State Bank of Indore stood at 9,981,190
11 | P a g e

million as of March 2009. The process of merging of State Bank of Indore was completed by April 2010, and the SBI Indore branches started functioning as SBI branches on 26 August 2010.

Fig.1.6

State Bank of India Mumbai LHO.

Non-Banking Subsidiaries
Apart from its five associate banks, SBI also has the following non-banking subsidiaries:

SBI Capital Markets Ltd SBI Funds Management Pvt. Ltd SBI Factors & Commercial Services Pvt. Ltd SBI Cards & Payments Services Pvt. Ltd. (SBICPSL) SBI DFHI Ltd SBI Life Insurance Co. Ltd. SBI General Insurance

In March 2001, SBI (with 74% of the total capital), joined with BNP Paribas (with 26% of the remaining capital), to form a joint venture life insurance company named SBI Life Insurance company Ltd. Nowadays, SBI Life Insurance Co. Ltd ranks among the top and most trusted Life Insurance Companies in India and also abroad. In 2004, SBI DFHI Ltd. (DISCOUNT AND FINANCE HOUSE OF INDIA) was founded with its headquarters in MUMBAI, MAHARASHTRA. SBIDFHI Ltd. is a primary dealer that trades in Fixed income securities (treasury bills, state development loans, government securities, non SLR bonds, corporate bonds) and Short Term Money Market instruments (certificates of deposit,

12 | P a g e

commercial papers, inter-corporate deposits, call and money notice deposits). It is an institution formed by RBI to support the book building process in primary auctions of Government securities and to provide necessary depth and liquidity to the secondary market in Government securities.

Other SBI service points:SBI has 27,000+ ATMs (25,000th ATM was inaugurated by the then Chairman of State Bank Shri O.P. Bhatt on 31 March 2011, the day of his retirement); and SBI group (including associate banks) has about 45,000 ATMs. SBI has become the first bank to install an ATM at Drass in the Jammu & Kashmir Kargil region. This was the Bank's 27,032nd ATM on 27 July 2012.

Logo and slogan:

The logo of the State Bank of India is a blue circle with a small cut in the bottom that depicts perfection and the small man the common man - being the centre of the bank's business.

Slogans: "Pure Banking, Nothing Else", "With You - All The Way", "A Bank Of The Common Man", "The Banker To Every Indian", "The Nation Banks On Us".

13 | P a g e

Fig.1.7

1.2.3 Punjab National Bank:The Punjab National Bank was established on 12 April, 1895 with the ambition of having a Swadeshi Bank with Indian capital. It started functioning in Lahore and with the permission of Lahore High Court, the officials shifted the registered office to Delhi, and by July 1969 Punjab National Bank was nationalized. PNB, known as the "People's bank" now ranked as the 2nd largest bank in the country after SBI in terms of branch network, business and many other parameters. Today PNB has more than 5100 offices including 5 overseas branches, maintaining its leading position in the banking sector.

1.2.4 Oriental bank of commerce:Oriental Bank of Commerce is among the leading nationalized public sector banks in India
14 | P a g e

with its head office in New Delhi. Formed in February 1943, oriental bank of commerce has now grown up significantly to a workforce of over 15000 employees. Oriental Bank of Commerce has been opting for many technological enhancements and Recruitment process in recent past to meet increasing requirements of its Clientele. The vacancies are announced for both experienced and Freshers profiles depending on requirements and vacancies.

1.2.5 IDBI:IDBI Bank Ltd. is a Universal Bank with its operations driven by a cutting edge core Banking IT platform. The Bank offers personalized banking and financial solutions to its clients in the retail and corporate banking arena through its large network of Branches and ATMs, spread across length and breadth of India. We have also set up an overseas branch at Dubai and have plans to open representative offices in various other parts of the Globe, for encashing emerging global opportunities. Our experience of financial markets will help us to effectively cope with challenges and capitalize on the emerging opportunities by participating effectively in our countrys growth process.

As on March 31, 2012, the Bank had a network of 973 Branches and 1542 ATMs. The Bank's total business, during Fy 2011-12, reached Rs. 3,91,651 Crore, Balance sheet reached Rs. 2,90,837 Crore while it earned a net profit of Rs. 2032 Crore (up by 23.15 %). Our vision for the Bank is TO BE THE MOST PREFERRED AND TRUSTED BANK ENHANCING VALUE FOR ALL STAKEHOLDERS.

1.2.6 Syndicate bank:Syndicate Bank was established in 1925 in Udupi, the abode of Lord Krishna in coastal Karnataka with a capital of Rs.8000/- by three visionaries - Sri Upendra Ananth Pai, a businessman, Sri Vaman Kudva, an engineer and Dr.TMA Pai, a physician - who shared a strong commitment to social welfare. Their objective was primarily to extend financial assistance to the local weavers who were crippled by a crisis in the handloom industry through mobilising small savings from the community. The bank collected as low as 2 annas
15 | P a g e

daily at the doorsteps of the depositors through its Agents under its Pigmy Deposit Scheme started in 1928. This scheme is the Bank's brand equity today and the Bank collects around Rs. 2 crore per day under the scheme. The progress of Syndicate Bank has been synonymous with the phase of progressive banking in India. Spanning over 80 years of pioneering expertise, the Bank has created for itself a solid customer base comprising customers of two or three generations. Being firmly rooted in rural India and understanding the grass root realities, the Bank's perception had vision of future India. It has been propagating innovations in Banking and also has been receptive to new ideas, without however getting uprooted from its distinctive socio-economic and cultural ethos. Its philosophy of growth by mutual sustenance of both the Bank and the people has paid rich dividends. The Bank has been operating as a catalyst of development across the country with particular reference to the common man at the individual level and in rural/semi urban centres at the area level. The Bank is well equipped to meet the challenges of the 21st century in the areas of information technology, knowledge and competition. A comprehensive IT plan is being put in place and the skills and knowledge of the Bank's personnel are being upgraded through a variety of training programmes to promote customer delight in every sphere of its activity. The Bank has launched an ambitious technology plan called Centralised Banking Solution (CBS) whereby 500 of our strategic branches with their ATMs are being networked nationwide over a 4 year period. The Bank is pioneer among Public Sector Banks on launching CBS. Our bank has already achieved CBS implementation among all its branches. Thus, the bank is 100% CBS enabled.

1.3 INTRODUCTION TO TOPIC:-

Evidence from across the world suggests that a sound and evolved banking system is required for sustained economic development. India has a better banking system in place vis a vis other developing countries, but there are several issues that need to be ironed out.

16 | P a g e

1.3.1 Problems Requiring Recovery Measures:Interest rate risk:Interest rate risk can be defined as exposure of bank's net interest income to adverse movements in interest rates. A bank's balance sheet consists mainly of rupee assets and liabilities. Any movement in domestic interest rate is the main source of interest rate risk. Over the last few years the treasury departments of banks have been responsible for a substantial part of profits made by banks. Between July 1997 and Oct 2003, as interest rates fell, the yield on 10-year government bonds (a barometer for domestic interest rates) fell, from 13 per cent to 4.9 per cent. Now as yields go up (with the rise in inflation, bond yields go up and bond prices fall as the debt market starts factoring a possible interest rate hike), the banks will have to set aside funds to mark to market their investment. This will make it difficult to show huge profits from treasury operations. This concern becomes much stronger because a substantial percentage of bank deposits remain invested in government bonds. Banking in the recent years had been reduced to a trading operation in government securities. Recent months have shown a rise in the bond yields has led to the profit from treasury operations falling. The latest quarterly reports of banks clearly show several banks making losses on their treasury operations. If the rise in yields continues the banks might end up posting huge losses on their trading books. Given these facts, banks will have to look at alternative sources of investment. Interest rates and non-performing assets:The best indicator of the health of the banking industry in a country is its level of NPAs. Given this fact, Indian banks seem to be better placed than they were in the past. A few banks have even managed to reduce their net NPAs to less than one percent (before the merger of Global Trust Bank into Oriental Bank of Commerce, OBC was a zero NPA bank). But as the bond yields start to rise the chances are the net NPAs will also start to go up. This will happen because the banks have been making huge provisions against the money they made on their bond portfolios in a scenario where bond yields were falling. Reduced NPAs generally gives the impression that banks have strengthened their credit

17 | P a g e

appraisal processes over the years. This does not seem to be the case. With increasing bond yields, treasury income will come down and if the banks wish to make large provisions, the money will have to come from their interest income, and this in turn, shall bring down the profitability of banks. Causes of rising NPAS:The RBI attributes rise in the NPAS of both public and private sector banks to diversion of funds away from the original purpose for which they were granted, as well as wilful default by borrowers. That apart, adverse economic and market factors, ranging from recessionary conditions, regulatory changes and resource shortages to inefficient management and strained labour relations have impacted the health of businesses, and driven them to default on their loan repayments. Impact of rising NPAS:The health of a bank is reflected not only by the size of its balance sheet but also the return on its assets. NPAS generate no interest income for the bank; the bank is required by law to provide for future loan losses arising from its bad assets, out of current profits. Measures to control NPAS:RBI mandates that banks must follow an objective policy of income recognition, based on actual delivery, i.e. They must recognize income when it is received as payment from the customer, and conversely, must reverse any entries that are not backed by actual payment. Banks are also advised to fix realistic repayment schedules- based on the borrowers actual cash flow- at the time of sanctioning loans. Banks must establish an appropriate credit assessment and risk management mechanism to ensure proper assessment of credit prior to the sanctioning of loans. The role of technology in NPAS management:The use of technology will bring about a fundamental shift in the way Indian banks manage their NPAS. Implementing automated solutions not just helps in finer analysis of data but more importantly enables early warning indicators before the situation worsens, thus giving banks more time to take appropriate measures.

18 | P a g e

Competition in retail banking:The entry of new generation private sector banks has changed the entire scenario. Earlier the household savings went into banks and the banks then lent out money to corporate. Now they need to sell banking. The retail segment, which was earlier ignored, is now the most important of the lot, with the banks jumping over one another to give out loans. The consumer has never been so lucky with so many banks offering so many products to choose from. With supply far exceeding demand it has been a race to the bottom, with the banks undercutting one another. A lot of foreign banks have already burnt their fingers in the retail game and have now decided to get out of a few retail segments completely. The nimble footed new generation private sector banks have taken a lead on this front and the public sector banks are trying to play catch up. The PSBs have been losing business to the private sector banks in this segment. PSBs need to figure out the means to generate profitable business from this segment in the days to come.

The urge to merge:In the recent past there has been a lot of talk about Indian Banks lacking in scale and size. The State Bank of India is the only bank from India to make it to the list of Top 100 banks, globally. Most of the PSBs are either looking to pick up a smaller bank or waiting to be picked up by a larger bank. The central government also seems to be game about the issue and is seen to be encouraging PSBs to merge or acquire other banks. Global evidence seems to suggest that even though there is great enthusiasm when companies merge or get acquired, majority of the mergers/acquisitions do not really work. So in the zeal to merge with or acquire another bank the PSBs should not let their common sense take a back seat. Before a merger is carried out cultural issues should be looked into. A bank based primarily out of North India might want to acquire a bank based primarily out of South India to increase its geographical presence but their cultures might be very different. So the integration process might become very difficult. Technological compatibility is another issue that needs to be looked into in details before any merger or acquisition is carried out.

19 | P a g e

The banks must not just merge because everybody around them is merging. As Keynes wrote, "Worldly wisdom teaches us that it's better for reputation to fail conventionally than succeed unconventionally". Banks should avoid falling into this trap. Impact of BASEL-II norms:Banking is a commodity business. The margins on the products that banks offer to its customers are extremely thin vis a vis other businesses. As a result, for banks to earn an adequate return of equity and compete for capital along with other industries, they need to be highly leveraged. The primary function of the bank's capital is to absorb any losses a bank suffers (which can be written off against bank's capital). Norms set in the Swiss town of Basel determine the ground rules for the way banks around the world account for loans they give out. These rules were formulated by the Bank for International Settlements in 1988. Essentially, these rules tell the banks how much capital the banks should have to cover up for the risk that their loans might go bad. The rules set in 1988 led the banks to differentiate among the customers it lent out money to. Different weight age was given to various forms of assets, with zero percentage weightings being given to cash, deposits with the central bank/govt etc, and 100 per cent weighting to claims on private sector, fixed assets, real estate etc. The summation of these assets gave us the risk-weighted assets. Against these risk weighted assets the banks had to maintain a (Tier I + Tier II) capital of 9 per cent i.e. every Rs100 of risk assets had to be backed by Rs 9 of Tier I + Tier II capital. To put it simply the banks had to maintain a capital adequacy ratio of 9 per cent. The problem with these rules is that they do not distinguish within a category i.e. all lending to private sector is assigned a 100 per cent risk weighting, be it a company with the best credit rating or company which is in the doldrums and has a very low credit rating. This is not an efficient use of capital. The company with the best credit rating is more likely to repay the loan vis a vis the company with a low credit rating. So the bank should be setting aside a far lesser amount of capital against the risk of a company with the best credit rating defaulting vis a vis the company with a low credit rating. With the BASEL-II norms the bank can decide on the amount of capital to set aside depending on the credit rating of the
20 | P a g e

company. Credit risk is not the only type of risk that banks face. These days the operational risks that banks face are huge. The various risks that come under operational risk are competition risk, technology risk, casualty risk, crime risk etc. The original BASEL rules did not take into account the operational risks. As per the BASEL-II norms, banks will have to set aside 15 per cent of net income to protect themselves against operational risks. So to be ready for the new BASEL rules the banks will have to set aside more capital because the new rules could lead to capital adequacy ratios of the banks falling. How the banks plan to go about meeting these requirements is something that remains to be seen. A few banks are planning initial public offerings to have enough capital on their books to meet these new norms.

In closing:Over the last few years, the falling interest rates, gave banks very little incentive to lend to projects, as the return did not compensate them for the risk involved. This led to the banks getting into the retail segment big time. It also led to a lot of banks playing it safe and putting in most of the deposits they collected into government bonds. Now with the bond party over and the bond yields starting to go up, the banks will have to concentrate on their core function of lending. The banking sector in India needs to tackle these challenges successfully to keep growing and strengthen the Indian financial system. Furthermore, the interference of the central government with the functioning of PSBs should stop. A fresh autonomy package for public sector banks is in offing. The package seeks to provide a high degree of freedom to PSBs on operational matters. This seems to be the right way to go for PSBs. The growth of the banking sector will be one of the most important inputs that shall go into making sure that India progresses and becomes a global economic super power.

1.3.2 RECENT TRENDS:India's economic development and financial sector liberalization have led to a transformation
21 | P a g e

of the Indian banking sector over the past two decades. Asset quality and profitability have improved significantly and the system has become more commercially oriented.

Indian banks were not much impacted by the financial crisis, helped by their relative isolation and some counter-cyclical measures implemented by the Reserve Bank of India in the mid2000s, but asset quality deterioration led to some proactive loan restructuring Over the past year Indian banks have encountered more headwinds as high inflation led to tightening monetary policy, putting pressure on borrowers, especially in weaker sectors.

Funding and liquidity are relatively strong features of the Indian banking system as the Loans/Deposits ratio is under 80% and the banks are required to hold large amounts of Indian government bonds. Their access to offshore funding is constrained by India's just investment grade sovereign rating. Capital is also adequate in aggregate but some banks, including large Public Sector banks, are in need of core capital. Upcoming Basel lll norms:Basel III or Basel 3 released in December, 2010 is the third in the series of Basel Accords. These accords deal with risk management aspects for the banking sector. In a nut shell we can say that Basel iii is the global regulatory standard (agreed upon by the members of the Basel Committee on Banking Supervision) on bank capital adequacy, stress testing and market liquidity risk. (Basel I and Basel II are the earlier versions of the same, and were less stringent). According to Basel Committee on Banking Supervision "Basel III is a comprehensive set of reform measures, developed by the Basel Committee on Banking Supervision, to strengthen the regulation, supervision and risk management of the banking sector". Thus, we can say that Basel 3 is only a continuation of effort initiated by the Basel Committee on Banking Supervision to enhance the banking regulatory framework under Basel I and Basel II. This latest Accord now seeks to improve the banking sector's ability to deal with financial and economic stress, improve risk management and strengthen the banks' transparency.

22 | P a g e

Basel 3 measures aim to:

improve the banking sector's ability to absorb shocks arising from financial and economic stress, whatever the source

improve risk management and governance Strengthen banks' transparency and disclosures.

Thus we can say that Basel III guidelines are aimed at to improve the ability of banks to withstand periods of economic and financial stress as the new guidelines are more stringent than the earlier requirements for capital and liquidity in the banking sector. Comparison Of Capital Requirements Under Basel 11 And Basel 111:Table 1.1
REQUIREMENTS UNDER BASEL 11 UNDER BASEL 111

Minimum Ratio Of Total Capital To RWA Minimum Ratio Of Common Equity To RWA Tier1 Capital To RWA Core Tier 1 Capital To RWA Capital Conservation Buffers To RWA Leverage Ratio Counter cycle Buffer Minimum Liquidity Coverage Ratio Minimum Net Stable Funding Ratio

8%

10.50%

2%

4.5-7%

4% 2%

6% 5%

None

2.5%

None None None

3% 0-2.5% TBD (2015)

None

TBD (2018)

(source: allindiabankingsolutions.com)

23 | P a g e

Performance of Banks in 1HFYE2012 (The first half financial year 2012):Asset quality deteriorating, especially for the Public Sector Banks, notably State Bank of India, due to its more extensive lending to small businesses and farmers. Impairment charges up YoY for the larger Public Sector banks; more stable or even lower for the leading Private banks.

Some slippage seen as Restructured Loans become NPAs but most still classified as performing. Profitability remains good at the Private banks and moderate at the PSB's, despite the impairment charges. The slowing Indian economy with still high inflation and interest rates suggests credit quality will continue to weaken.

Deposit funding strong at most banks but borrowings inside and outside India still relatively high at ICICI. Capital ratios look adequate overall, but some banks need more common equity to keep their Tier 1 ratios above 8% and potentially comply with Basel 3. The need for the government to invest to maintain its shareholding in Public Sector Banks is a constraining factor.

1.3.3 Measures taken for recovery:-

Financial Markets

Regulators

The Banking System

Non-banking Finance Companies

The Capital Market

24 | P a g e

Mutual Funds

Overall Approach To Recovery

Deregulation Of Banking System

Capital Market Developments

Consolidation Imperative

Fig.1.8
Financial Markets In the last decade, Private Sector Institutions played an important role. They grew rapidly in commercial banking and asset management business. Competition among financial

intermediaries gradually helped the interest rates to decline. Deregulation added to it. The real interest rate was maintained. The borrowers did not pay high price while depositors had incentives to save. It was something between the nominal rate of interest and the expected rate of inflation. Regulators The Finance Ministry continuously formulated major policies in the field of financial sector of the country. The Government accepted the important role of regulators. The Reserve Bank of India (RBI) has become more independent. Securities and Exchange Board of India (SEBI) and the Insurance Regulatory and Development Authority (IRDA) became important institutions. Opinions are also there that there should be a super-regulator for the financial services sector instead of multiplicity of regulators. The Banking System Almost 80% of the businesses are still controlled by Public Sector Banks (PSBs). PSBs are still dominating the commercial banking system. Shares of the leading PSBs are already listed on the stock exchanges. The RBI has given licenses to new private sector banks as part of the liberalization process. The RBI has also been granting licenses to industrial houses. Many banks are successfully running in the retail and consumer segments but are yet to deliver services to
25 | P a g e

industrial finance, retail trade, small business and agricultural finance. The PSBs will play an important role in the industry due to its number of branches and foreign banks facing the constraint of limited number of branches. Hence, in order to achieve an efficient banking system, the onus is on the Government to encourage the PSBs to be run on professional lines. Development of Financial Institutions FIs's access to SLR funds reduced. Now they have to approach the capital market for debt and equity funds. Convertibility clause no longer obligatory for assistance to corporate sanctioned by termlending institutions. Capital adequacy norms extended to financial institutions. DFIs such as IDBI and ICICI have entered other segments of financial services such as commercial banking, asset management and insurance through separate ventures. The move to universal banking has started. Non-Banking Finance Companies In the case of new NBFCs seeking registration with the RBI, the requirement of minimum net owned funds, has been raised to Rs.2 crores. Until recently, the money market in India was narrow and circumscribed by tight regulations over interest rates and participants. The secondary market was underdeveloped and lacked liquidity. Several measures have been initiated and include new money market instruments, strengthening of existing instruments and setting up of the Discount and Finance House of India (DFHI). The RBI conducts its sales of dated securities and treasury bills through its open market operations (OMO) window. Primary dealers bid for these securities and also trade in them. The DFHI is the principal agency for developing a secondary market for money market instruments and Government of India treasury bills. The RBI has introduced a liquidity adjustment facility (LAF) in which liquidity is injected through reverse repo auctions and liquidity is sucked out through repo auctions. On account of the substantial issue of government debt, the gilt- edged market occupies an important position in the financial set- up. The Securities Trading Corporation of India (STCI), which started operations in June 1994, has a mandate to develop the secondary market in government securities. Long-term debt market: The development of a long-term debt market is crucial to the financing of infrastructure. After bringing some order to the equity market, the SEBI has now decided to concentrate on the development of the debt market. Stamp duty is being withdrawn at the time of dematerialization of debt instruments in order to encourage paperless trading.

26 | P a g e

 The Capital Market

The number of shareholders in India is estimated at 25 million. However, only an estimated two lakh persons actively trade in stocks. There has been a dramatic improvement in the country's stock market trading infrastructure during the last few years. Expectations are that India will be an attractive emerging market with tremendous potential. Unfortunately, during recent times the stock markets have been constrained by some unsavoury developments, which have led to retail investors deserting the stock markets. Mutual Funds The mutual funds industry is now regulated under the SEBI (Mutual Funds) Regulations, 1996 and amendments thereto. With the issuance of SEBI guidelines, the industry had a framework for the establishment of many more players, both Indian and foreign players. The Unit Trust of India remains easily the biggest mutual fund controlling a corpus of nearly Rs.70, 000 crores, but its share is going down. The biggest shock to the mutual fund industry during recent times was the insecurity generated in the minds of investors regarding the US 64 schemes. With the growth in the securities markets and tax advantages granted for investment in mutual fund units, mutual funds started becoming popular. The foreign owned AMCs are the ones which are now setting the pace for the industry. They are introducing new products, setting new standards of customer service, improving disclosure standards and experimenting with new types of distribution. The insurance industry is the latest to be thrown open to competition from the private sector including foreign players. Foreign companies can only enter joint ventures with Indian companies, with participation restricted to 26 per cent of equity. It is too early to conclude whether the erstwhile public sector monopolies will successfully be able to face up to the competition posed by the new players, but it can be expected that the customer will gain from improved service. The new players will need to bring in innovative products as well as fresh ideas on marketing and distribution, in order to improve the low per capita insurance coverage. Good regulation will, of course, be essential.

Overall Approach To Reforms

The last ten years have seen major improvements in the working of various financial market participants. The government and the regulatory authorities have followed a step-by-step approach, not a big bang one. The entry of foreign players has assisted in the introduction of international practices and systems. Technology developments have improved customer service. Some gaps however remain (for example: lack of an inter-bank interest rate benchmark, an active

27 | P a g e

corporate debt market and a developed derivatives market). On the whole, the cumulative effect of the developments since 1991 has been quite encouraging. An indication of the strength of the Reformed Indian financial system can be seen from the way India was not affected by the Southeast Asian crisis. However, financial liberalization alone will not ensure stable economic Growth. Some tough decisions still need to be taken. Without fiscal control, financial stability cannot be ensured. The fate of the Fiscal Responsibility Bill remains unknown and high fiscal deficits continue. In the case of financial institutions, the political and legal structures have to ensure that borrowers repay on time the loans they have taken. The phenomenon of rich industrialists and bankrupt companies continues. Further, frauds cannot be totally prevented, even with the best of regulation. However, punishment has to follow crime, which is often not the case in India.

Deregulation Of Banking System

Prudential norms were introduced for income recognition, asset classification, provisioning for delinquent loans and for capital adequacy. In order to reach the stipulated capital adequacy norms, substantial capital were provided by the Government to PSBs. Government pre-emption of banks' resources through statutory liquidity ratio (SLR) and cash reserve ratio (CRR) brought down in steps. Interest rates on the deposits and lending sides almost entirely were deregulated. New private sector banks are allowed to promote and encourage competition. PSBs were encouraged to approach the public for raising resources. Recovery of debts due to banks and the Financial Institutions Act, 1993 was passed, and special recovery tribunals set up to facilitate quicker recovery of loan arrears. Bank lending norms liberalized and a loan system to ensure better control over credit introduced. Banks asked to set up asset liability management (ALM) systems. RBI guidelines issued for risk management systems in banks encompassing credit, market and operational risks. A credit information bureau is being established to identify bad risks. Derivative products such as forward rate agreements (FRAs) and interest rate swaps (IRSs) introduced.

Capital Market Developments

The Capital Issues (Control) Act, 1947, repealed, office of the Controller of Capital Issues was abolished and the initial share pricing were decontrolled. SEBI, the capital market regulator was established in 1992. Foreign institutional investors (FIIs) were allowed to invest in Indian capital markets after registration with the SEBI. Indian companies were permitted to access international capital markets through euro issues. The National Stock Exchange (NSE), with nationwide stock trading and electronic display, clearing and settlement facilities was established. Several local
28 | P a g e

stock exchanges changed over from floor based trading to screen based trading.

29 | P a g e

CHAPTER-2
This chapter discusses the literature about the recovery measures taken by public sector banks .This literature was obtained from textbooks, and publication, periodicals research reports, the company financial documents and Internet among others. It has been examined that how financial management plays a crucial role in the growth of banking. It is concerned with examining the profitability position of the selected sixteen banks of banker index for a period of six years (2001-06). The study reveals that the profitability position was reasonable during the period of study when compared with the previous years. Strong capital position and balance sheet place, Banks in better position to deal with and absorb the economic constant over a period of time ( Singla HK (2008), in his paper, financial performance of banks in India, in ICFAI Journal of Bank Management No 7).

It has been observed that high level of NPAs, large number of un-remunerative branches, low productivity, overstaff and archaic methods of operations have affected the profitability of public sector banks. It was felt that the whole banking sector in India is to be revolutionized to cope with the changing dimensions of the satellite one world. Further, it was felt that the backward areas should be given more funds for investment in priority sectors and more and more people should be brought under its coverage and the procedures of extending credit should be simplified and there should be least hassle cost (Das and Uday kumar Lal (2002), in his book Banking Reforms in Lead Bank Scheme, (Deep and Deep Publication, new Delhi)).

It has been analyzed and compared the efficiency in six public sector banks, four private sector and three foreign banks for the year 1996-97. Operational efficiency is calculated in terms of total business and salary expenditure per employee .The analysis revealed that higher per employee salary level need not result in poor efficiency and business per employee efficiency co-efficient was also calculated. Among the PSBs, Bank of Baroda registered the high efficiency and operating profit per employee. Among the private sector banks Indus Bank followed by Citibank Registered highest and second highest operating profit per employee respectively. However, among the Nationalized Banks there existed wide
30 | P a g e

variations in efficiency (Subramanian and Swami (1994) in their paper, Comparative performance of public sector banks in India Prjanan, Vol. XXII).

It is to analyze the Performance of the 27 Public Sector Banks for the year 1999-2000 vis-avis the preceding year. Selecting four different categories of indicators-Business Performance, Efficiency, Vulnerability and labor productivity indicators, carried out the analysis. Altogether, 39 indicators were selected for this purpose. For the purpose of analysis, 27 PSBs disaggregated into four groups, namely, the SBI, ABs (7),the SBGs(8), the NBs (19). During 1999-2000, the PSBs exhibited betters how in terms of several parameters studied above. Nevertheless, the problems of NPAs and capital adequacy remain to be taken care of. Researchers opinioned that greater operational flexibility and functional autonomy should be given to PSBs especially to strengthen their capital base. Further, it was felt that since net interest margin will continue to remain compressed in a deregulated interest rate regime, a lot of effect would have to be made to mitigate this through generation of noninterest income .As far as NPAs are concerned, they believe' that, the outdated laws and regulations that pose hindrance to banks in getting back their dues need to be suitably amended (SBI Research Department in 2000, through its paper Performance analysis of 27 Public sector banks published in SBI monthly review performance, Vol XXXIX, was prepared by Economic Research Department of State Bank of India).

It has been doing for several years through its annual exercise to evaluate and rate Indian banks. It was claimed that the survey is a comprehensive one, which evaluates the performance of private, public, Indian, and foreign Banks operating in India. With the objective of making the comparison more meaningful, Banks were categorized into Public Sector Banks, New Private Sector Banks and Foreign Banks. Financial information for the year ending March 31st, 2002 and March 31, 2003 relating to each of the banks falling into the aforesaid categories was collected from the data available from RBI. Five major criteria were identified against which the banks were ranked. 'These criteria are (1) Strength and soundness (ii) Growth, (iii) Profitability, (iv) Efficiency/Productivity, and (v) Credit quality. Considering the current banking, industrial and over-all economic scenario, pertinent weights were assigned to each of the major criteria. In the first category of "State-Run" or Public Sector Banks, State Bank of Patiala and Andhra Bank is the top two. In the category of best old private sector banks, the magazine ranks the Jammu and Kashmir Bank and Karur Vysya Bank as the first best and second best. In the category of 'New' Private Banks, HDFC as
31 | P a g e

number one and ICICI Bank at number two. Finally, in the category of Foreign Banks, the magazine ranks Standard Chartered Bank and Citi Bank at the top two slots (In a paper published in the Financial Express in 2004, titled Indias Best Banks).

With an intention to honour excellence, announcing annual awards for the best performers in the personal finance universe in the best bank award category, the magazine selected Corporation Bank among public sector banks and HDFC Bank among private sector banks and presented outlook money award 2004 to these two banks. A rigorous selection process was devised in consultation with Earnest and Young. The short listed contenders were mailed questionnaires seeking information on operational aspects like Number of Branches, Number of ATMs, Deposits, NPAs, CAR, and Return on Assets. They have taken two categories of Banks Public and Private Sector. All Public Sector Banks (except SB!, nominated for Hall of Fame Award), and Private Banks with deposit base of more than Rs. 2,000 Cr as on 31 March 2003 were selected. The jury-A.K. Purwar, Anu Aga, Shitin Desai, Uma Shashikanth and Sandipan Debo-assigned weights to various parameters and choose the winner for 2004 (Outlook Money (2004), titled The best in the business cover story, (March 2004).

An attempt has been made to compare the three categories of banks-Public, Private and Foreign-using Physical quantities of inputs and outputs, and comparing the revenue maximization efficiency of banks during 1992-2000. The findings show that PSBs performed significantly better than private sector banks but not differently from foreign banks. The conclusion points to a convergence in performance between public and private sector banks in the post-reform era, using financial measures of performance (Ram Mohan TT(2003) , in his paper Long run performance of public and private sector bank stocks Vol 37).

The efficiency of the banking system was measured in terms of spread/working funds ratio and turnover / employees ratio. With reference to the spread working funds ratio, the efficiency of the commercial banks as a whole has declined in the post-reform period. The Public Sector Banks have been responsible for this decline in efficiency, as the efficiency of the private and foreign banks has improved over the course of 1990s. Through the turnover/employee ratio has risen in the public sector banks, the turnover per employee in the private and foreign banks doubled relative to the ratio for public sector banks during this decade. However, the analysis revealed that the profitability of the public sector banks in late
32 | P a g e

nineties improved relatively to that of private and foreign banks (D'souza in his study evaluated the performance of Public sector, private sector and foreign banks during the period 1991 to 1999-2000). Due to data availability problems at the individual bank level, the study includes only 39 banks. Several conclusions stand out. First, for the sample, the overall technical inefficiency is about 31 per cent and has remained stable over the examined period. Second, foreign banks showed the highest level of efficiency. Third, between 1990 and 1995, state and private banks experienced a reduction in pure technical efficiency, while for the nationalized and the foreign banks, it remained the same. Further, the size has found to be positively related to pure technical efficiency and to the number of branches negatively. Fifth, fewer branches and metropolitan location of foreign banks, perhaps partially explains their efficiency over domestic banks. This paper finally concludes that Indian domestic banks need to greatly improve their efficiency through introduction of computer technology, improved management skills and through consolidation and merger of banks (Kusum W. Ketkar examined the efficiency and productivity growth in the Indian Banking Sector from 1990 to 1995 using the Data Envelopment Analysis methodology).

The scholar analyzed and compared the performance of public and private sector bank on profitability angle. It was found that all the private sector banks have been registered both high profits and high rate of growth. Better customer service, technology, innovative products, good marketing strategies, proper monitoring of advances, regional orientation are some of factors responsible for the success of private sector banks in India (Alamelu and Chidambaram emphasized the profiti1bility aspect in commercial banks).

It has been argued that with the introduction of international norms of Income Recognition, Asset Classification and Provisioning in the banking Sector, managing NPAs has emerged as one of the major challenges facing the Public Sector Banks. It was felt that total elimination of NPAs is not possible in the banking business owing to externalities but their incidence can be minimized. To reduce the seriousness of the problem, it was suggested that the banks should adopt proper policy for appraisal, supervision and follow-up of advances; special recovery cells may be set-up at regional! zonal levels; Recovery Officers should be appointed at making necessary provisions and contingencies). Seven banks were operating in 'B' category (those banks, which after operating profits have not sufficient funds to provide for
33 | P a g e

the provisions, thereby incurring net losses. And the remaining was placed in the 'e' category (those banks, which were unable to earn significant income to enjoy sufficient operating profits). Apart from studying the profitability of above-mentioned groups of banks, capital adequacy position and other balance sheet trends were also discussed. Moreover, same shortterm and long-term strategies for enhancing the profitability level were suggested (Ramachandra Reddyfocused their attention on the seriousness of NPAs in public sector banks).

It has been examined whether non-interest income has helped in stabilizing the total income of schedule commercial banks in the country. The major findings of the study are: (a) The average net interest income of SCBs. declined during the period 1997-2003, (b) The non-interest income of all SCBs exhibited an increase over a period of 7 years. It was also observed that interest income was more stable than that of non-interest income, and (c) In regard to the question about whether non-interest income has helped in stabilizing the total income of banks, it was seen that with respect to the State Bank Group, foreign banks and old private sector banks, non-interest income helped to stabilize total operating income. However, in the case of nationalized bank and new private sector banks, it was seen that noninterest income has not helped in stabilizing their income appreciably (Ramasastri, A.S., Achamma Samuel and Gangadaram, made an attempt to compare the behavior of interest and non interest income of scheduled commercial banks in India for the period from 19972003).

It has been emphasized in the article that other income of the banks has been receiving focused attention mainly for two reasons. First, Banks are being urged to increase this source of income. Second, there was a spurt in other income of banks during 2001-02. Main conclusions of this study are: (i) Since 1993-94, banks other income has been increasing at a faster pace compared with interest earnings, (ii) Component-wise, income from commission, exchange and brokerage is most important, (iii) Income from exchange transactions is also relatively steady, (iv) Private sector banks have logged rapid rate of growth, which may be attributed to the entry of new banks, (v) Foreign banks have retained their share, (vi) e cost of the public sector 'banks, and
34 | P a g e

(vii) There is unusual increasing in 2001-02 in other income of Banks (Nagarajan focused his attention on 'Other income of the banks' and analyzed the trend from 1993-94 onwards in a wider perspective).

An exercise has been conducted for identifying Best Bank among the Scheduled Commercial Banks operating in India, for over 5 years now. Business India adopted the Internationally renowned CRAMEL Model (with minor modifications) for evaluating banks. Basing on CRAMEL, Business India group constituted a panel of experts. After a thorough discussion, the panel came to a conclusion that ICICI was the best bank for the year 2003-04. ICICI Bank drew all round appreciation for its aggressive market and customer acquisition strategy (Business India, 2003). A Decomposition model, have tried to make all attempts to compare the interbank performance of public sector banks during the reforms: period. This study was carried out for a period of three years, i.e. 1992, 1995 and 1998. Das in his paper found a certain convergence-taking place in the performance of the public sector banks during the years of study. He further found that there is growing emphasis on other income and a peculiar tendency to go for risk-free rather than risky loans (Das, Abhiman (1999), Profitability in public sector banks).

The objective is to review and analyze the current financial health of the Indian Public Sector Commercial Banks in the light of banking reforms and predict the future and scope of the same. The viability of the 27 public sector banks has been analyzed on the basis of offsite supervisory exam model i.e., CAMEL Model (C for capital adequacy, A for Asset quality, E for Earnings and L for Liquidity). These four components of each bank have been analyzed and rated on a scale to judge the composite rating of the same. The paper finds that the offsite supervisory exam model (CAMEL) has' rated majority of PSBs as non-viable and they require immediate attention and government support. After 19 years of economic and banking reforms, the Indian Banking Sector has still miles to go. Low Profitability, Liquidity, Capital adequacy and high none'-performing assets will definitely make the majority of Indian PSBs a bad bargain in near future (Sheeba Kapils, 2007).

The deregulated environment with some financial parameters of the major four bank groups i.e. public sector banks, old private sector banks, new private sector banks and foreign banks,
35 | P a g e

profitability has declined in the deregulated environment. He emphasized to make the banking sector competitive in the deregulated environment. They should prefer non-interest income sources (Singh (2003) analyzed profitability management of banks).

It has been examined that how financial management plays a crucial role industrialists growth of banking. It is concerned with examining the profitability position of the selected sixteen banks of banker index for a period of six years (2001-06). It was revealed that the profitability position was reasonable during the period of study when compared with the previous years. Strong capital position and balance sheet place. Banks are in better position to deal with and absorb the economic constant over a period of time (Singla (2008).

The performance of the commercial banks under reforms has been analysed. He also highlighted the major issues need to be considered for further improvement. He concluded that reforms have produced favourable effects on performance of commercial banks in general but still there are some distortions like low priority sector advances, low profitability etc. that needs to be reformed again (Wahab (2001).

For analytical examination of the impact of reforms on the banks' performance, the very performance of a bank has to be evaluated as per appropriate criteria by choosing selected parameters like share of different bank-groups in total assets, share of rural branches, Average branch size, trends in banks' profitability, share of priority sector advances, share of wages in expenditure, provision and contingencies as percentage to total assets, ratio of NPAs to Net advances, ratio of contingent liabilities to total liabilities, spread as a percentage to total assets, Intermediation costs, etc By using these parameters, Swami made an in-depth analysis and came out with interesting conclusion like: (i) The setting up of a new competitive environment has resulted in new challenges for the PSBs and the share of PSBs in the total assets of the banking sector has shown a steady decline while new private sector banks have succeeded in enhancing their position, (ii) it was further observed that foreign banks too have been facing stiff competition from the new private banks, (iii) The profit performance has been quite varied among different bank groups and within each group in respect of individual banks as well,

36 | P a g e

(iv) In the face of new competition and recognizing the need to undertake cost reduction, PSBs have brought about reduction in the wage bill component while this has shown an increase in the case of foreign banks and ne\v private sector banks during the period of study, (v) Foreign banks as well as the new private banks had the advantage of large-sized branches when compared to public sector and old private banks, (vi) Level of NPAs of PSBs remain high, a noteworthy development has been their significant reduction in relation to net advances in recent years (Anantha Swami made an attempt in his paper, in the context of financial sector reforms, to identify the factors which could have led to changes in the position of four bank groups, i.e. Public Sector Banks, Old Private Sector Banks, New Private Sector Banks and Foreign Banks in term of their share in the overall banking industry during the period 1995-96 to 1999-2000).

It has been published in Bank net India; it discussed the future challenges of technology in banking. The author also point out how IT poses a bright future in rural banking, but is neglected as it is traditionally considered unviable in the rural segment. A successful bank has to be nimble and agile enough to respond to the new market paradigm and ineffectively controlling risks. Innovation will be the key extending the banking services to the untapped vast potential at the bottom of the pyramid (Nair KNC (2006) in his paper Banking and Technology to meet 21st Century challenges).

Bank net Publications have given a summary of how Indian banking system has evolved over the year. The paper discusses some issues face by these systems. The examples of comparable banking system for other countries and the lesson learnt are also given. Indian banking is at the threshold of the paradigm shift. The application of technology and product innovations is bringing about structure change in the Indian banking system (Shroff FT (2007) in his paper, Modern Banking Technology). A study has been carried out to benchmark the strengths and weaknesses of Indian Banks against those of select international banks. The scope of work for the study is to benchmark the performance of Indian Banks vis-a-vis select global banks along three dimensionsstructural factors, operational factors and efficiency factors. As suggested by IBA, 21 Indian Banks (those with asset over Rs. 20,000 crore as on 31st March, 2003) and Seven International Banks have been selected for the study. The parameters, which have been used for benchmarking, are Risk weighted capital norms, Income Recognition norms, asset
37 | P a g e

classification norms, provisioning norms, which come under "Structural Parameters". Return on Assets, Return on Equity, Net interest margin, Operating expense ratio and Asset quality are concerned with "Operational Parameters". Business per employee, Business per branch, Operating expenses per Branch, Establishment expenses per employee, profitability per employee, profitability per Branch are 'Efficient Parameters'. ICRA Limited, in this study, found that the profitability of Indian Banks in recent years compares well with that of the global benchmark banks primarily because of the higher share of profit on the sale of investments, higher leverage and higher net interest margins. However, many of these drivers of higher profits of Indian Banks may not be sustainable. To ensure long-term profitability, ICRA Ltd. suggest that Indian Banks should diversify their loans across several customer segments; they should introduce robust risk scoring techniques to ensure better quality of loans; they should reduce their operating expenses by upgrading banking technology and they should improve the management of market risk (ICRA (2003),In a the paper titled comparative study on Indian banking, tried to analyse the fast-changing environment, the Indian Bank's Association (IBA) has Commissioned ICRA Advisory Services (ICRA).

It was observed that it is important for the banks and' supervisory authorities to adopt more effective lending practices. At the same time, it was also emphasized that corporate entities should be made more accountable through following more stringent disclosure and transparency practices and corporate governance principles. Efficient legal machinery, the larger number of Debt Recovery Tribunals and Settlement Advisory Committees and Credit Information Bureau in banks can prove effective in quick recovers of dues (Patel has highlighted the problem of bad loans and growing level of Non-Performing Assets in commercial banks in the post-reform period).

An examination of the main arguments usually extended to build a case for privatization of Public Sector Banks (PSBs) in India reveals that the arguments are based on (a) perceptions, rather than factual analysis, (b) the use of partial information, (c) evidence on international experience which is not unambiguous. Broadly, four main arguments are made by the proponents of privatization of PSBs in India: (a) frequent recapitalization of state owned banks is a huge burden on the government budget; (b) state ownership of banks reduces competition and thus breeds inefficiency, (c) there is no evidence that state Ownership lowers the profitability of banking crisis; and
38 | P a g e

(d) private and foreign banks stimulate efficiency, innovation and economic growth. Examination of these arguments reveals that the case for privatization of PSBs in India is not strong enough at least on the grounds usually proposed by the advocates of privatization. Private Sector Banking would have a larger probability of crisis if the' supporting legal and regulatory framework were not sound enough to insulate the systems from extraneous pressures. It may, therefore, be safe to maintain the public sector characters of the banks for privatization are conducive enough (Mathur's paper examines the arguments usually extended to build a case for privatization of public sector banks in India).

An attempt has been made to identify the factors influencing spread of SCBs in India. The study is carried out for the period 1995-96 to 1999-2000 by covering 27 PSBs, 31 PBs and 28 FBs. Pooled data lode and Generalized Least Square approach was used for carrying the analysis. It was found that size of the bank does not necessarily imply higher spreads. Further, they found that noninterest income as a share of total assets enable banks to tolerate low spread. With regard to regulatory requirements variables, it was found that capital plays an important role in affecting spreads of PSBs (Nagarajan and Khannan).

Indian Banking system is passing through a metamorphosis due to the impact of the revolutionary reform process initiated since 1992. It was felt that PSBs today have already started feeling the pinch and are definitely going to confront for stiffer challenges in the next millennium. Challenges like competition especially from the new private sector banks and foreign banks, low staff productivity, changing life styles of the customers; technological progress, non-performing assets, etc. definitely put the PSBs in a very tight position. So, it is up to the PSBs to welcome them or choose for extinction (Mukhopadhyay, K.K. threw light on the challenges that the public sector bank has to face on the initiation of reform measures).

With globalization and changes in technology, financial markets, world over, have become closely integrated. For the survival of the banks, they should adopt new policies/strategies according to the changing environment (Ballabh (2001) analyzed challenges in the postbanking sector reforms).

Some issues faced by these systems have been discussed. Indian banking is at the threshold of the paradigm shift. The application of technology and product innovations is bringing about
39 | P a g e

structure change in the Indian banking system (Shroff (2007) gives a summary of how Indian banking system has evolved over the year).

The focus of banking as it was intended to shift the focus from class banking to mass banking. Internationally also efforts are being made to study causes of financial inclusion and designing strategies to ensure financial inclusion of the poor disadvantaged. The banks also need to redesign their business strategies to incorporate specific plans to promote financial inclusion of low income group treating it both a business opportunity as well as a corporate social responsibilities. Financial inclusion can emerge as commercial profitable business (Kumar (2006) studied the bank nationalization in India marked a paradigm shift).

40 | P a g e

CHAPTER: 3 3.1 RESEARCH METHODOLOGY:-

Fig.3.1 If you dont know where you want to go, any road will get you there Every project work is based on certain methodology, which is a way to systematically solve the problem or attain its objectives. It is very important guideline and lead to completion of any project work through observation, data collection and data analysis.

3.2 RESEARCH
Acc. To advanced learners dictionary of current English Research is search for knowledge Or Research is systematic efforts to gain knowledge. A careful investigation or inquiry specially through search for new facts in any branch of knowledge. Research is Scientific and systematic search for gaining information and knowledge on a specific topic or phenomena.
41 | P a g e

Research refers to the systematic method consisting of: Enunciating the problem, Formulating a hypothesis, Collecting the fact or data, Analyzing the facts and reaching certain conclusions either in the form of solutions towards the concerned problem or in certain generals for some theoretical formulation Research methodology is a way to systematically solve the research problem. It may be understood as the science of studying how research is done. Research in the common parlance refers to a search for knowledge.

Fig.3.2

3.3 JUSTIFICATION OF THE STUDY:This study helps in deciding the measures which must be taken by public sector banks for their recovery and for their come back on right track. This study also describes certain factors that explain problems and the challenges being faced by these banks. A right recovery decision reduces the cost and increases the efficiency of performance while a wrong decision can adversely affect the performance of the bank. These all practical points are very difficult to be understood through books therefore this study provides a practical knowledge on the recovery measured being initiated.

42 | P a g e

3.4 SIGNIFICANCE OF THE STUDY:-

The efficient performance of public sector banks is essential to maintain a healthy environment in the company. The public sector banks constitute a major portion of the overall banking system of the country; hence their efficient performance is necessary to ensure their proper working and their large share to the financial development in particular and economic development in general. Though they are facing a great number of problems in the present era, but they can take steps to overcome them. Surveys on the recovery measures keep banks on the right track so that they can appropriately respond to the changing customers and economic concerns.

3.5 RESEARCH DESIGN:Exploratory research design Exploratory research seeks to discover new relationship, emphasis on discovery of ideas. Marketing researchers devote a significant portion of their work on exploratory studies when very little is known about the problem being examined.

Descriptive research design Descriptive research studies are those which are concerned with describing the characteristics of a particular individual, or for a group. The studies concerns whether with the specific predictions with narration of facts and characteristics concerning individual, group or situation are all examples of descriptive research design.

Descriptive research design has been used by the researcher because researcher was well aware about the problem.

43 | P a g e

3.6 OBJECTIVES OF THE STUDY:Main objective:The main objective is To study the recovery measures initiated by selected public sector banks.

Sub objectives: To study the performance pattern and management practices in these banks in terms of financial indicators on the basis of the latest available data. To analyze the financial position of selected public sector banks. To study the reforms undertaken in these banks by State Governments. To offer suggestions for improving the performance of the banks.

3.7 SCOPE OF THE STUDY: The present study can be extended to access the present working condition of the banks. The study can be used to know the steps taken by public sector banks to improve their performance. From the present study the areas of challenge for the banks can be known. The study can be extended to compare the past and the present performance of the public sector banks. The study can be used to design a plan for short-term borrowings from the bank. From the present study we can know the areas of short-term capital utilisation. The result of marketing success can be interpreted to assess the credit paying capacity of the company.

44 | P a g e

3.8 DATA COLLECTION

Methods of Data Collection

PRIMARY

SECONDARY

Public Records

Books & Magazines

Journals
Fig.3.3

Reports

To determine the appropriate data for research mainly two kinds of data was collected namely primary & secondary data as explained below:-

Primary data Primary data are those, which were collected afresh & for the first time and thus happen to be original in character. However, there are many methods of collecting the primary data project. Secondary data Secondary data is collected from previous researchers and literature to fill in the respective project. Secondary data are those which have already been collected by someone else and which have already been passed through the statistical process. The Secondary data consist of reality available compendices already complied statistical statements. Secondary data consists of not only published records and reports but also unpublished records. The secondary data was collected through: Text books Journals and Articles
45 | P a g e

 Reports Websites

Statistical tools used The main statistical tools used for the collection and analyses of data in this project are: Pie charts Tables Bars Column

3.9 LIMITATIONS OF THE STUDY

Efforts had been made to collect the relevant information through the sources available; still some relevant information could not be gathered.

The study was completed within limited time period.

Limited information was made available. which cant be ruled out.

The study has not been intended on a very large scale, have the possibility of errors,
Sources were confounded some time to give proper information.

The study may not cover each & every amenity provided by the banks. The major limitation of the study was time constraint as only few days were available for the study. Proper information and knowledge are basis of any research but there was lack of information. It was not possible to approach the primary sources hence the study is confined to the secondary sources. It was not possible to cover all the banks hence data is collected for selected public sector banks.

46 | P a g e

CHAPTER-4 DATA ANALYSIS AND INTERPRETATION

Fig.4.1 The purpose of the data analysis and interpretation phase is to transform the data collected into credible evidence about the development of the intervention and its performance. 4.1 NPA Of Public Sector Banks: NPAs are common to all the banks. It is the burden for the banks. Though it is not desired but still is a part of the functioning of almost all the banks. Every banks NPAs constitutes the NPAs of different sectors. It will be clear from the following table:Table 4.1 NPA Of Public Sector Banks Sr. No. Name Of The Bank Priority Sector NPAS Of Which, Of Which Of Which Others NonPriority Sector NPAS 1630 12592 17384 Total NPAS

Agriculture Small Scale Industries

1.

Public sector banks

4792

2023

1139

2.

Old public sector banks

1613

269

475

869

1999

3612

3.

Bank Of Rajasthan ltd.

61

42

12

232

294

47 | P a g e

4.

Catholic Syrian bank Ltd.

62

32

23

87

149

5.

City Union Bank Ltd.

41

16

16

52

94

6.

DhanaLakshmi Bank Ltd.

35

26

42

78

7.

Federal Bank Ltd.

440

65

18

356

381

821

8.

ING Vysya Bank Ltd.

65

36

23

159

224

9.

J&K Bank Ltd.

286

32

54

199

176

462

10.

Karnataka Bank Ltd.

324

51

172

102

225

550

11.

Karur Vysya Bank Ltd.

68

53

176

235

12.

Lakshmi Vilas Bank Ltd.

58

10

15

33

267

325

13.

Nainital Bank Ltd.

17

23

14.

Ratnakar Bank Ltd.

18

10

10

28

48 | P a g e

15.

SBI Commercial and International

Bank Ltd. 16. South Indian Bank Ltd. 17. Tamilnadu Mercantile Bank Ltd. 18. New Private 3179 Sector Banks 19. Axis Bank Ltd. 20. Developme nt Credit Bank Ltd. 21. HDFC Bank 400 Ltd. 22. ICICI Bank Ltd. 23. Indusland Bank Ltd. 24. Kotak Mahindra Bank Ltd. 152 49 100 2 616 767 84 31 46 8 171 255 1946 1303 50 593 7321 9267 110 276 14 1407 1807 68 14 52 3 251 319 528 248 140 141 767 1295 1754 664 760 10594 13772 46 10 12 24 69 115 88 12 27 49 123 211

49 | P a g e

25.

Yes Bank Ltd.

60

60

(source: - www.ijimt.org/paper/140-m582.com) 4.2 NPAS of public sector banks period-wise: The progress regarding the NPAS of the public sector banks will be clearer by understanding the NPAS for different time periods. Table 4.2 NPAS of public sector banks period - wise (Rs. in Crores) NPAS Of Nationalised Banks 1 2 3 4 5 6 7 8 9 10 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 37453 37128 36378 33591 28165 26412 24529 26165 35470 42907 19055 16958 15159 14808 13193 12556 15220 17874 21831 28140 56507 54086 51537 48399 41358 38968 39749 44039 57301 71047 NPAS Of SBI Group

Sr. No.

Year

Total

(Source: www.rbi.org.in)

INTERPRETATION:The amount of NPAs in SBI has decreased from Rs.19, 055 crores in 2001-2002 to Rs.12, 556 crores in 2006-2007 and thereafter it has increased. Similarly, the NPAs of nationalized banks has decreased from Rs.37,453 crores in 2001-2002 to Rs.24,529 crores in 2007-2008 and thereafter it has increased slowly. Regarding the percentage of NPAs to total, the percentage of NPAs of SBI Group to total NPAs, varied between 29 per cent and 40 per cent. The percentage of NPAs of nationalized banks occupied the major proportion than the SBI
50 | P a g e

Group because, the number of banks in nationalized banks comprises more than the SBI Group.

4.3 Non-performing Assets of Public Sector Banks from Mar 31, 2001 to Mar 31, 2010 The following figure shows the NPAS of public sector banks from mar31, 2001 to mar31, and 2010. It will give a clearer picture of the position of NPAS in public sector banks.

Fig. 4.2

(source: - www.internationalconference.com)

INTERPRETATION:When we look into the composition of NPAs from FY 2001 to FY 2010 (as shown in Chart 2), we find that proportion of priority sector NPAs is almost consistent throughout the years except for a rise in FY 2010. On the other hand non-priority sector NPAs have shown a consistent decline from a high of Rs. 283707.1 millions in the FY 2002 to a low of Rs.141631.6 millions in the FY 2008.However, it has steadily increased to Rs.192511.5 millions in the FY 2009 and jumped to Rs. 259291.7 millions in the FY 2010. The contribution of non-priority sector in the total NPAs in the FY 2010 (as shown in Chart 3) is almost 45 per cent compared to 54 per cent contribution of the priority sector. Public sector contributes only 1 per cent of the total NPAs in FY 2010. The sectoral NPA ratio of public sector banks in FY 2010 also indicates a rise in NPA ratio for priority sector; though it was lower compared to the rise in non priority sector.

51 | P a g e

4.4 Composition of non-performing of Public Sector Banks from Mar 31, 2001 to Mar 31, 2010 The following figure shows the composition of public sector banks with respect to priority sector and non-priority sector.

Fig. 4.3 4.5 Growth of NPAs in Public Sector Banks

NPA is the burden to the banks for which the banks try to reduce it. Table 2 portrays the growth rate of NPAs of the nationalized banks and SBI and its associates. Table 4.3 Growth Of NPAS In Public Sector Banks NPAS of Growth rate NPAS (%) SBI group of Growth rate (%)

Sr. no.

Year

nationalised banks 1 2 3 4
52 | P a g e

2001-02 2002-03 2003-04 2004-05

37453 37128 36378 33591

---0.87 -2.02 -7.66

19055 16958 15159 14808

---11.0 -10.6 -2.37

5 6 7 8 9 10

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

28165 26412 24529 26165 35470 42907

-16.15 -6.22 -7.13 6.67 35.56 20.97

13193 12556 15220 17874 21831 28140

-10.91 -4.83 21.21 17.44 22.14 28.90

(Source: www.rbi.org.in)

INTERPRETATION:It could be seen from above Table that in both nationalized bank and SBI and its group, there were negative growth initially whereas there was positive growth in the last three years in the SBI and its group. Banks should control NPAs negative growth rate is good to the banks.

4.6 Sector-Wise Classification of NPAs in PSBs:-

Banks use to lend money to both priority sector and non-priority sectors. The priority sectors comprise the agricultural and allied activities, small scale industries, self help groups and so on. Banks initially hesitate to lend money to these sectors. But the RBI by knowing the importance of this sector, asking the banks to lend. Table exhibits the sector-wise classification of NPAs in Nationalised Banks. TABLE 4.4: Sector-Wise Classification Of NPAS In Nationalized Banks (Rs. In Crores)
NPAS Priority Sector In NPAS In Non- Total Priority Sector

Sr. No.

Year

1 2 3 4 5 6 7
53 | P a g e

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08

16173 16886 16705 16381 15124 15779 16385

21288 20242 19673 17210 13041 10663 8144

37453 37128 37378 33591 28165 26412 24529

8 9 10

2008-09 2009-10 2010-11

15871 19908 25678

10294 15562 16929

26165 35470 42907 (Source: www.rbi.org.in)

INTERPRETATION:The NPAs of the priority sector in nationalized banks ranged between 44 per cent and 61 per cent. The highest percentage of non-priority sector was 56 per cent in 2001-2002 and the lowest was 33 per cent in 2007-2008. It is however noted that the nationalized banks lend to priority sector at less than 50 per cent only during the first four years of the study and thereafter they have given importance.

4.7 Non-performing Assets of Public Sector Banks: Sector-wise as on Mar 31, 2010 The following figure shows the composition of NPAS of public sector banks in different sectors namely agriculture sector, SSI sector and others.

Fig. 4.4 INTERPRETATION:If we analyze the movement of Gross non-performing assets (GNPA) to Gross Advances ratio from FY 2005 to FY 2010 (as shown in Table 2), we will find significant improvement in the ratio for Indian public sector banks. The gross NPAs ratio of public sector banks placed
54 | P a g e

at 5.35 per cent at end-March 2005 had declined steadily to 2.23 per cent at end-March 2008. During the crisis year of FY 2009, the gross NPA ratio declined slightly to 2.01 per cent. However, during FY 2010, the gross NPA ratio of public sector banks increased to 2.27 per cent proving deterioration in the quality of advances in the previous years.

4.8 Growth of NPAs in Priority and Non-Priority Sector of the Nationalized Banks

RBI asked all the banks to lend money liberally to the priority sector. The growth rate of NPAs of both the priority and non-priority sector advances of the nationalized banks is presented in the given table. TABLE 4.5: Growth Of NPAS In Priority And Non-Priority Sector Of The Nationalized Banks Sr. no. Years NPAs Priority Sector in Growth Rate (%) NPAs in Growth

Non-priority Rate (%) Sector

1 2 3 4 5 6 7 8 9 10

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

16173 16886 16705 16381 15124 15779 16385 15871 19908 25678

--4.41 -1.07 -1.94 -7.67 4.33 3.84 -3.31 25.43 23.98

21288 20242 19673 17210 13041 10633 8144 10294 15562 16929

---4.88 -2.81 -12.52 -24.22 -18.46 -23.41 26.46 51.17 8.78

(Source: www.rbi.org.in)

INTERPRETATION:-

55 | P a g e

Above table shows that the growth rate of NPAs of priority and non-priority sectors advances were flexible in trend. The growth rate of NPAs of the priority sector was positive in five years and non-priority sector advances were in three years.

4.9 Sector-Wise Classification of NPAs in the SBI

The State Bank of India is the good old bank. It lends money both to the priority and nonpriority sectors. Table 4.6 explicates the sector-wise classification of NPAs in the bank of SBI.

TABLE 4.6: Sector-Wise Classification Of Npas In Sbi (Rs. In Crores)

Sr. No.

Years

NPAS

In NPAS In Non- Total Priority Sector

Priority Sector

1 2 3 4 5 6 7 8 9 10

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

8977 8053 7136 7017 7250 7175 8902 8447 10940 15567

10118 8907 8023 7792 5944 5381 6319 9427 10890 12573

19095 16958 15159 14808 13193 12556 15220 17874 21831 28140 (Source: www.rbi.org.in)

INTERPRETATION:The NPAs of priority sector varied between 46 per cent in 2001-2002 and 67 per cent in 2007-2008. Similarly the NPAs of non-priority sector ranged between 39 per cent in 2008-

56 | P a g e

2009 and 54 per cent in 2001-2002. It is however concluded that the NPAs aroused out of priority sector slowly moved upward trend which is not good for the bank.

4.10 Growth Rate of NPAs in Priority and Non-Priority Sector of the SBI

Advances are offered based on the condition of the Government, in order to know the trend over the previous year, the growth rate has been computed and presented in Table 4.7

TABLE 4.7: Growth Rate Of NPAS In Priority And Non-Priority Sectors Of The Sbi
(Rs. In Crores)

Sr. No.

Years

NPAS Priority Sector

In Growth Rate (%)

NPAS

In Growth

Non-Priority Rate (%) Sector

1 2 3 4 5 6 7 8 9 10

2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 2010-11

16173 16886 16705 16381 15124 15779 16385 15871 19908 25678

---10.29 -11.39 -1.67 3.32 -1.03 24.07 -5.11 29.51 42.29

21288 20242 19673 17210 13041 10633 8144 10294 15562 16929

---11.97 -9.92 -2.88 -23.72 -9.47 17.43 49.18 15.52 15.45

(Source: www.rbi.org.in)

INTERPRETATION:The growth rate of NPAs in the priority sector was fluctuating trend. The NPAs in nonpriority sector are concerned; there were negative trend in five years and positive trend in
57 | P a g e

four years. Negative NPAs growth rate is good to the bank, hence, it is inferred that the SBI tried to reduce the NPAs. 4.11 Comparison of NPAs of Nationalised Banks and SBI and its Group

MANN WHITNEY U TEST

The nationalized banks and SBI and its group are owned by the Govt. of India. They render good service to the public. They also face the problems of NPAs. They try to reduce the problems of NPAs and their growth rate of NPAs are fluctuating is trend. In order to know the movement of NPAs of these banks, the Mann Whitney U test has been applied (MW Test). The MW Test is a non-parametric test. It is possible to work for small sample. It requires less assumption. It is used to determine whether there is any significant difference between the two independent samples. The following are the formula used to compute the U Value:

The null hypothesis is that there is no significant difference between the growth rate of NPAs of the nationalized bank and SBI and its group. 4.12 Comparison Of Growth Rate Of NPAS Of Nationalized And Sbi And Its Group From the given table one can easily understand the growth rate of NPAS of national ized banks and SBI and its group and make comparison among the figures in order to draw conclusion. TABLE 4.8: Comparison Of Growth Rate Of NPAS Of Nationalized And SBI And Its Group

Years

Public sector banks Growth rate Rank 8 9 14

SBI and its group Growth rate -11.0 -10.60 -2.37 Rank 17 15 10

2002-03 2003-04 2004-05

58 | P a g e

-0.87 -2.02 -7.66

2005-06 2006-07 2007-08 2008-09 2009-10 2010-11 Total

-16.15 -6.22 -7.13 6.67 35.56 20.97

18 12 13 7 1 5 87

-10.91 -4.83 21.21 17.44 28.90 28.90

16 11 4 6 2 2 83 (Source: www.rbi.org.in)

=39
The n1 and n2 each equal to 9 and for 5 per cent level of significance is 17. Since the critical value of 17 is less than the calculated value of 39, the null hypothesis is rejected. That is, there is some significant difference between the growth rates of NPAs of these banks.

4.13 Gross NPAs to Gross Advances Ratio from March 31, 2005 to March 31, 2010

TABLE 4.9: Gross NPAs to Gross Advances Ratio from March 31, 2005 to March 31, 2010 (in per cent)

Gross NPAs to Gross Advances Ratio (as on Mar 31) BANKS SBI & Its Associates Other Nationalized Banks Public Sector Banks
59 | P a g e

2005 5.32

2006 1.04

2007 2.59

2008 2.58

2009 2.55

2010 2.82

5.36

3.81

2.69

2.06

1.75

2.03

5.35

2.89

2.66

2.23

2.01

2.27

(Source: www.rbi.org.in) INTERPRETATION:It is important to note that the growth in NPAs of banks has largely followed a lagged cyclical pattern with regard to credit growth. De Lis et al. (2001) refer to a strong positive impact of credit growth on problem loans with a lag of three years. According to B.M.Mishra and S.Dhal (2010) the credit risk as reflected in non-performing loans could be influenced by the business cycle. This underlines the pro-cyclical nature of the banking system, wherein asset quality can get compromised during periods of high credit growth ( i.e. before FY 2009) and this can result in the creation of non-performing assets for banks in the following years. Chart 4 reflects the Gross NPA and Gross Advances of public sector banks as on Mar31, 2010. The significant increase in NPAs during FY 2010 by the priority and nonpriority sectors can be contributed to the worldwide economic recession period in FY 2008 and its after effects.

4.14 Gross Non-performing Assets and Gross Advances of public sector banks as on Mar 31, 2010

Fig. 4.5 INTERPRETATION:Chart 4.4 shows the movement of NPAs in public sector banks from the end of March 2009 to the end of March 2010. From the chart we find that Gross NPAs has increased by almost

60 | P a g e

33.3 per cent from end- March of 2009 to end- March of 2010. After netting out provisions, there was an also significant rise of Net NPA of public sector banks from end- March of 2009 to end-March of 2010 by 40.1 per cent.

4.15 Movement of Non-performing Assets in Public Sector Banks The following graph clears the movement of non-performing assets in public sector banks in our country thus making clear about their progress or regress.

Fig.4.6 INTERPRETATION:Poor lending policies taken by the bank in the pre-recession years and ineffective monitoring and recovery procedures in the post-lending years. Inability of the banks to monitor and control the NPAs in the post-recession years proves the absence of proper pre-sanctioning appraisal and post-disbursement control within the public sector banks in India.

CRAR ( Capital To Risk Assets Ratio) OF PUBLIC SECTOR BANKS

The average CRAR of public sector banks under Basel-I and Basel-II framework, at the end of March 2009 and March 2010, has been adequate as can be seen from Table 1. State bank of India and its associate banks have shown an increase in average CRAR of 0.24 per cent under Basel-I norms i.e. from 12.0728 per cent at the end of March 2009 to 12.3128 per cent at the end of March 2010. The group has also shown a marginal increase in average CRAR of
61 | P a g e

0.1657 per cent under Basel-II norms during the same period. Other nationalized banks have also improved their CRAR requirement by 0.0125 per cent under Basel-I norms and by 0.0495 per cent under Basel-II norms in the same period. This signified that Indian banks successfully managed to meet the increased capital requirement under the changed framework.

TABLE 4.9: Average CRAR Of Public Sector Banks Under Basel-I & Basel-II (As On

31.03.09 & 31.03.10) (In Percent)

Banks SBI & Its Associates Other Nationalized Banks

Basel-1 (2009) 12.0728

Basel-11(2009) 13.3400

Basel-I (2010) 12.3128

Basel-II (2010) 13.5057

12.0255

13.1380

12.0380

13.1875

(source: -www.internationalconference.com) INTERPRETATION:The increase in CRAR, however, cannot undermine the fact that quality of advances has deteriorated as can been seen through increased NPAs of public sector banks in India in recent years (as shown in Chart 1). NPAs of public sector banks in India has shown a steady decline from the high of Rs. 544234.4 millions in the financial year (FY) ending on Mar 31, 2002 to a low of Rs. 386018 millions in the FY 2007. It increased marginally in the FY 2008 to Rs. 397485.2 millions. After 2008 it increased to a higher level of Rs. 440424.8 million in the FY 2009 and jumped to a new high of Rs. 573008.8 million in the FY 2010. The trend has been shown in Chart 1. Within the public sector banks, SBI & its Associate banks have shown the same trend in NPAs as other nationalized banks. It suggests that the trend in NPAs through the years was not bank specific but external factors were into play.

ANALYSIS ON RECOVERY MEASURES:Various steps have been taken by the government and RBI to recover and reduce NPAs. These strategies are necessary to control NPAs:62 | P a g e

1. Preventive management and 2. Curative management A. Preventive Management:

Preventive measures are to prevent the asset from becoming a non performing asset. Banks has to concentrate on the following to minimize the level of NPAs:-

1. Early Warning Signals

The origin of the flourishing NPAs lies in the quality of managing credit assessment, risk management by the banks concerned. Banks should have adequate preventive measures, fixing presanctioning appraisal responsibility and having an effective post-disbursement supervision. Banks should continuously monitor loans to identify accounts that have potential to become non-performing.

It is important in any early warning system, to be sensitive to signals of credit deterioration. A host of early warning signals are used by different banks for identification of potential NPAs. Most banks in India have laid down a series of operational, financial, transactional indicators that could serve to identify emerging problems in credit exposures at an early stage. Further, it is revealed that the indicators which may trigger early warning system depend not only on default in payment of installment and interest but also other factors such as deterioration in operating and financial performance of the borrower, weakening industry characteristics, regulatory changes, and general economic conditions. Early warning signals can be classified into five broad categories viz. (a) Financial (b) Management (c) Banking (d) operational and (e) External factors.

63 | P a g e

Financial related warning signals generally emanate from the borrowers balance sheet, income expenditure statement, statement of cash flows, statement of receivables etc.

A. Financial warning signals Persistent irregularity in the account Default in repayment obligation Devolvement of LC/invocation of guarantees Deterioration in liquidity/working capital position Substantial increase in long term debts in relation to equity Declining sales Operating losses/net losses Rising sales and falling profits Disproportionate increase in overheads relative to sales Rising level of bad debt losses Operational warning signals Low activity level in plant Disorderly diversification/frequent changes in plan Non-payment of wages/power bills Loss of critical customer/s Frequent labor problems Evidence of aged inventory/large level of inventory B. Management related warning signals Lack of co-operation from key personnel Change in management, ownership, or key personnel Desire to take undue risks Family disputes Poor financial controls Fudging of financial statements Diversion of funds C. Banking related signals Declining bank balances/declining operations in the account
64 | P a g e

 Opening of account with other bank Return of outward bills/dishonoured cheques Sales transactions not routed through the account Frequent requests for loan Frequent delays in submitting stock statements, financial data, etc. Signals relating to external factors Economic recession Emergence of new competition Emergence of new technology Changes in government / regulatory policies Natural calamities 2. Watch-list/Special Mention Category The grading of the banks risk assets is an important internal control tool. It serves the need of the Management to identify and monitor potential risks of a loan asset. The purpose of identification of potential NPAs is to ensure that appropriate preventive / corrective steps could be initiated by the bank to protect against the loan asset becoming non-performing. Most of the banks have a system to put certain borrowable accounts under watch list or special mention category if performing advances operating under adverse business or economic conditions are exhibiting certain distress signals. These accounts generally exhibit weaknesses which are correctable but warrant banks closer attention. The categorization of such accounts in watch list or special mention category provides early warning signals enabling Relationship Manager or Credit Officer to anticipate credit deterioration and take necessary preventive steps to avoid their slippage into non performing advances.

3. Wilful Defaulters

RBI has issued revised guidelines in respect of detection of wilful default and diversion and siphoning of funds. As per these guidelines a wilful default occurs when a borrower defaults in meeting its obligations to the lender when it has capacity to honour the obligations or when funds have been utilized for purposes other than those for which finance was granted. The list of willful defaulters is required to be submitted to SEBI and RBI to prevent their access to capital markets. Sharing of information of this nature helps banks in their due diligence
65 | P a g e

exercise and helps in avoiding financing unscrupulous elements. RBI has advised lenders to initiate legal measures including criminal actions, wherever required, and undertake a proactive approach in change in management.

Most of the bankers feel that genuine viability problem of the borrowing units, weakness incredit appraisal system, absence of effective monitoring and supervision of loan account, absence of credit information sharing among the banks etc. are some of the significant causative factors of high level of NPAs internal to the banks. So for preventive the fresh inflow of funds into the non-performing category, banks should reformulate their credit appraisal techniques. Proper evaluation of the loan application may help in detecting the unviable projects at the first instance. Full information about unit, industry, its financial stake, management etc. should be collected. Industrial cell should be established at the bank level, which would have complete information about the industry and its prospects in future. Proper credit monitoring should be equally emphasized. There should be proper flow of information from the units regarding their financial area, annual accounts, stock reports etc., which would enable the banker to know the need based credit requirement of borrower and warning signals for taking quick remedial action. Banks should inspect the progress of the project or the business. Separate monitoring department should be established in large branches for periodical review of accounts, comparative risk analysis and compliance of terms and conditions of sanction. Equal emphasis should be given for monitoring of standard assets also. Banks should be equipped with latest credit risk management techniques to protect the bank funds and minimize insolvency risks. Banks should develop credit derivatives markets to avoid these risks. There should be regular outflow of senior bank officers from all public sector banks for specialized training in training institute to equip them with latest procedures and practices.

B. Curative Management

66 | P a g e

The curative measures are designed to maximize recoveries so that banks funds locked up in NPAs are released for recycling. The Central government and RBI have taken steps for controlling incidence of fresh NPAs and creating legal and regulatory environment to facilitate the recovery of existing NPAs of banks. They are:

1. One Time Settlement Schemes: This scheme covers all sectors sub standard assets, doubtful or loss assets as on 31st March 2000 However cases of willful default, fraud and malfeasance are not covered. As per the OTS scheme, for NPAs up to Rs. 10crores, the minimum amount that should be recovered should be 100% of the outstanding balance in the account.

2. Lok adalat: Lok Adalat institutions help banks to settle disputes involving account in doubtful and loss category, with outstanding balance of Rs. 5 lakh for compromise settlement under Lok Adalat. Debt recovery tribunals have been empowered to organize Lok Adalat to decide on cases of NPAs of Rs. 10 lakh and above. This mechanism has proved to be quite effective for speedy justice and recovery of small loans. The progress through this channel is expected to pick up in the coming years. 3. Debt Recovery Tribunals (DRTs):

The Debt Recovery Tribunals have been established by the Government of India under an Act of Parliament (Act 51 of 1993) for expeditious adjudication and recovery of debts Due to banks and financial institutions. The Debt Recovery Tribunal is also the appellate authority for appeals filed against the proceedings initiated by secured creditors under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act. Despite most of their loans being backed by security, banks are unable to enforce their claims on the collateral, when the loans turn non-performing and therefore loan recoveries have been insignificant.

67 | P a g e

 The Narshimham Committee on financial system (1991) has recommended the establishment of Debt Recovery Tribunals (DRT) for the speedy recovery of the assets from NPAs category. On the basis of recommendations 22 DRTs were established by passing the bill on Recovery of Debt due to Banks and Financial Institutions Act 1993. But the performance of DTRs for the past years has not been found satisfactory or up to the mark. The Act has some limitations, which must be removed to make its effective implementation. At present one presiding officer is handling at least 80-90 cases per day. It is suggested that DRT Act may be amended to enable the central government to appoint additional presiding officers for speedy disposal of recovery cases. One of the major factors accounting for delay in disposing of application by DRT is the delay caused due to refusal by defendants to accept the summons, and at times due to change in address too. DRT may be empowered to order service of summons by hand, registered post and by publications simultaneously. Attachment of immovable property of borrower is not admitted due to service of summons. Enforcement of security and obtaining court decree take unduly long time, it encourages willful default and ultimately the banks may be compelled to write off loans. Willful default should be declared a criminal offence. Government should not go for mass waiver of interest/ installments as it sends unhealthy signals to the borrower. During 1990-91 there was a massive waiver of rural debt amounting to over Rs. 15000 crore and Rs. 65000 crore in 2008. These types of activities put a premium on willful default and dishonesty. It lowers the repayment ethics. In case of government sponsored schemes government should assist in recovery. It may be noted that suggestions enumerated will go a long way in reducing the NPAs. This will only considerably improve the profitability of the banks, improve the quality of assets, but also make the Indian "Banking system stringent, resilient and geared to meet the challenges of globalisation.

68 | P a g e

RECENT TREND:The government has advised public sector banks to take a number of new initiatives to increase the pace of recovery and manage NPAs which include appointment of nodal officers for recovery of loss assets, to put in place early warning system and to constitute a board level committee for monitoring of recovery, he said. Besides, the RBI has issued instruction which stipulate that each bank is required to have a robust mechanism for early detection of signs of distress, including prompt restructuring in the case of all viable accounts; to have a loan recovery policy which sets down the manner of recovery dues and targeted level of reduction. (SOURCE: Business Standard, Feb.27, 2013) The finance ministry has directed banks to take proactive steps in curbing the growth of nonperforming assets (NPAs). In a recent directing to banks, the ministry said steps should be taken early on to ensure that irregular accounts do not turn into NPAs. "The government is saying that banks give more emphasis earlier when repayments in an account start becoming irregular, rather than waiting for 90 days when an account becomes NPA," SIDBI CMD S Muhnot said. Following government's missive, SIDBI has started the process of "intensive monitoring" of accounts where repayments start becoming irregular. Indian banks have now moved to a system-driven recognition of NPAs, instead of manual reporting done earlier. This has led to a spike in NPAs, especially at the public sector banks. Slowdown in the economy and stress in certain sectors such as power, telecom, infrastructure and aviation have added to the NPA build up. "NPA build up has increased for loans of less than R10 lakh. Earlier, NPAs in this segment were typically recognised by the bank branch officers, who used their discretion depending upon the credit profile and history of the customer. Now this leeway is gone with introduction of system-driven NPAs," a senior public sector banker said, asking not is named.Gross NPAs of nationalised banks increased by 50 bps as on March 31, 2011, to 2.4% as on December 31, 2011, while those of SBI Group increased sharply by 130 basis points to 4.3% from 3.0% during this period, Icra said in a recent report. (SOURCE: www.financialexpress.com)

69 | P a g e

CHAPTER: - 5 RECOMMENDATIONS
Since the banking sector reforms have been set in motion, the profitability became the buzzword, and the prime mover of the financial strength and performance of banks. Unlike in the past, all banking operations gradually came to be measured in terms of their ability to generate possibilities of social banking for their meaningful survival and growth. Therefore, there should be a shift in the banks objective from bank growth. The following important steps must be taken by the sample banks for overall real growth: Introducing Modern Marketing Strategies Improving Credit-Deposit Proportion Generating Non-Interest Income Introducing Innovative Branch Administration Monitoring the Controlling Mechanism on Important Ratios Prudential Disclosure of Financial Information

70 | P a g e

CONCLUSIONS
The performance of the selected public sector banks is analyzed using different parameters. The selected public sector banks that are state bank of India, Punjab national bank, oriental bank of commerce, IDBI, syndicate bank are in a position to follow the rules of the Government for the social and economic development of the country. The selected public sector banks have performed well on the sources of growth rate and financial efficiency during the study period. The old private sector banks and new private sector banks play a vital role in marketing of new type of deposits and advances schemes. However, these banks, by earning at least a nominal profit, have to serve the economy through extension of advances and safeguard the interest of their investors by providing the expected return on their investment in banks. These forces the public sector banks not only to increase their earnings but also to create surplus out of their banking activities. The Indian banking system faces several difficult challenges. Therefore, the banks have to re-orient their strategies in the light of their own strengths and the kind of market in which they are likely to operate on. In the perspective of this domestic and international development, the banking sector has to chart out a perfect path for the development in its own. The NPAs level in India is not so high as compared to China and other countries. This problem is seriously discussed in the context of public sector banks, but it is now evident, that even private banks are not in a better position either to avoid or curtail NPAs growth. Recovery performance is better with respect to individual small borrowers but it is slow in case of corporations and institutional borrowers. When over 5,000 units involving Rs.30, 000 crores are pending in courts with respect to bad loans of Rs.100,0000 crores and above, the ARCs may not be in a position to expedite recoveries.

71 | P a g e

CHAPTER:-6 REFERENCES
Following are the referrals used for the collection of data: IBA Bulletins published by Indian Banks Association (various issues). Statistical tables relating to banks in India available at the website of Reserve Bank of India (www.rbi.org.in) Various journals and magazines issued by the banks from time to time. Trends and Progress Reports of Reserve Bank of India, RBI Bulletin (various issues). Reports on Currency and Finance, annual publication of RBI (various issues). gVarious speeches delivered by RBI governor from time to time on E-payment system. Other sources to have an updating of electronic banking transactions and services: Annual reports of banks (2001-11). Professional Banker, The Management Accountant and other banking update journals. Journal of Internet Banking and Commerce, Indian Journals and other publications.

BOOKS:-

Ahmed, Khan Masood, (1992): Banking in India, Anmol publications, New Delhi. Bilgrami.S.A.R (1982): Growth of Public Sector Banks A Regional Growth Analysis, Deep and Deep publication, New Delhi. Chakrabarthy.K.C (1990): Banking in 1990, Himalaya Publishing House, Bombay. Dep, Kalpada (1998): Indian Banking since Independence. Ashish Publishing House, New Delhi. Gupta.S.P (2000): Statistical Methods, Sultan Chand & Sons, New Delhi. Kothari.C.R (1991): Investment Banking an\d Customer Service, Vol. II, Arihant publishers, Jaipur.
72 | P a g e

WEBSITES: www.businessstandard.com www.financialexpress.com www.rbi.org.in www.internationalconference.com www.ijimt.com

73 | P a g e