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PROJECT TITLE: EVOLUTION OF BANKING SYSTEM SPECIAL EMPHASIS ON

BANK CRISIS
NATIONAL LAW UNIVERSITY, JODHPUR
(The project is submitted for the partial fulfilment of Banking Law)
(Summer Seme!er: Ju"# $%&' ( N)*em+er $%&',
Su+m-!!e. B#:
Kritika Gupta
LL.M.(st !emester)
Banking and "inance
#ational Law $ni%ersit&
'odhpur
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CONTENTS
COVER PAGE
LIST OF CONTENTS
LISTOF ABBREVIATIONS
ABSTRACT
CHAPTER & : INTRODUCTION
////////BACKGROUND
//////////AIMS AND SIGNIFICANCE
//////00 HISTORICAL BACKGROUND
//////////0GENERAL BANKING SCENARIO
CHAPTER $ : BANKING CRISIS DEFINITION AND ITS CAUSES
CHAPTER 1: CHALLENGES IN FRONT OF BANK
CHAPTER ' : MEASURES TO BE TAKEN FOR RESOLUTION
CHAPTER 2 : CURRENT DEVELOPMENTS AND STATUS
CHAPTER 3 : CONCLUSION AND SUGGESTIONS
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ABBREVI ATI ONS
() (ll ndia )eport
(rt. (rticle
B*(+ Test Brain *lectrical (cti%ation +rofile Test
,(T ,ommittee (gainst Torture
,B ,entral Bureau -f n%estigation
,' ,hief 'ustice
,+, The ,ode of ,i%il +rocedure ./01
,r.+., The ,ode of ,riminal +rocedure ./23
,ri L' ,riminal Law 'ournal
44T 4eception 4etection Test
4#( 4eo5&ribonucleic (cid
4r. 4octor
*)+ *%ent )elated +otentials
!T ndian !tandard Time
)+" )ailwa& +olice "orce
!, !upreme ,ourt
!,) !upreme ,ourt )eports
T## Times #ews #etwork
$! $nited !tate
ABSTRACT:
This project e5plores whether the le%el of financial integration of banks in a countr& increases the incidence of
s&stemic banking crises. -ne hand the world is concerned for the stabilit& of the banking sector and on the
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other world seems to be continuall& beset of banking crisis. The structural e%olution of the banking sector ma&
ha%e a significant bearing on 6uestions of sol%enc& and stabilit&. Banking s&stems ha%e de%eloped in different
wa&s in different countries7 for a %ariet& of reasons7 but the trend has been towards an increasingl& liberal
stance b& the authorities as regards allowing banks to di%ersif& their acti%ities. This should be welcomed7 but
onl& on two conditions8 4-r!7 that the management of indi%idual banks is sufficientl& capable9 and e5)6."#
that e%er& bank can be effecti%el& super%ised b& the central bank (or other responsible regulator& bod&). The
causes of banking crises can be categori:ed under se%eral headings8 Macroeconomic instabilit&7 4eficient
super%ision7 +oor strategies7;eak management7 nade6uate control s&stems7 -perational failures7"raud .
n this project an attempt has been made to identif& the general sentiments7 challenges and opportunities for
the ndian Banking ndustr&. This is di%ided in si5 parts. "irst part includes the introduction 7 general scenario
of ndian banking industr&7 historical background and aims and significance. The second part discusses that
what can be the definition of banking crisis and also the causes of it7 third part discusses the %arious challenges
and opportunities faced b& ndian banking industr&. "ourth part talks about the measures to be taken as for the
resolution 7 fifth part talks about the current de%elopments and lastl& the si5th part concludes the research on <
banking crisis= with %arious suggestions
OBJECTIVES:
To highlight the majo ta!"#omatio!al $oi!t" i! the I!%ia! Ba!&i!g I!%'"t()
To a!al(*e the +'e!t le,el o# -a!&i!g i! I!%ia
To a!al(*e that .hat le% to -a!& +i"i" a!% .hat .ee the o't+ome o# tho"e +i"i")
To #om'late the i%ea ega%i!g $e"e!t -a!&i!g "("tem)
> To ha%e a deep insight on the impact of the crisis on ndian banks? performance
CHAPTER(&: INTRODUCTION:
BRIEF OVERVIEW:
The histor& of banking sector is ironic basicall& which co%ers the traditional banking practices from the time of
Britishers to the reforms period7 nationali:ation to pri%ati:ation of banks and now increasing numbers of
foreign banks in ndia. Banking industr& in ndia has also achie%ed a new height with the changing times.
#e%ertheless7 the fundamental aspects of banking i.e. trust and the confidence of the people on the institution
remain the same. The majorit& of the banks are still successful in keeping with the confidence of the
shareholders as well as other stakeholders. @owe%er7 with the changing d&namics of banking business brings
new kind of risk e5posure.
The banking histor& is interesting and reflects e%olution in trade and commerce. t also throws light on li%ing
st&le7 political and cultural aspects of ci%ili:ed mankind. The fact that most temples were also the financial
centers of their cities and this is the major reason that the& were ransacked during wars. The practice of
depositing personal %aluables at these places which were also functioning as the treasuries in ancient Bab&lon
against a receipt was perhaps the earliest form of <Banking=.
;ith the e5pansion of trade the concept of banking gained greater ground. The handling of <banking=
transcended from indi%idual to groups to companies. ssuing currenc& was one of the major functions of the
banks. The earliest from of mone& A coins7 were a certificate of %alue stamped on a metal7 usuall& gold7 sil%er7
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and bron:e or an& other metal7 b& an authorit&7 usuall& the king. ;ith the increasing belief and faith in such
authorit& of their %aluation and the necessities of wider trade a substitute to metal was found in paper. The
%agaries of monarchial rule led to the issues of currenc& being %ested with the banks since the& enjo&ed faith7
controlled credit and trading. (ll forms of mone& were a unit of %alue and promised to pa& the bearer of
specified %alue. 4ue to failure on account of unwise loans7 to rule and organi:e7 a stable banking s&stem arose.
The word?s earliest bank currenc& notes were issued in !weden b& stock holms Banco in 'ul& .BB..
#otwithstanding the remarkable progress made b& the ndian banking s&stem in achie%ing social goals during
the ./10s7 it e5perienced certain problems that led to decline in efficienc& and producti%it&7 the erosion of
profitabilit&. "actors such as directed in%estment and directed credit programs affected the operational
efficienc& of the banking s&stem. The 6ualit& of loan portfolio also deteriorated. The functional efficienc& was
affected due to o%er staffing7 inade6uate progress in inducting technolog& and weaknesses in internal
organi:ational structure of the banks. These factors necessitated urgent reforms in the financial s&stem.
"ollowing the report of the #arasimham ,ommittee7 the )B adopted a comprehensi%e approach on the
reforms of the financial sector. Measures such as deregulation of interest rates7 reduction of statutor& preC
emption such as ,)) and !L)7 and pro%ision of operational autonom& to the banks were taken to strengthen
the banks. "urther %arious prudential measures that conformed to the global best practices were also
implemented. Guidelines to facilitate entr& of the pri%ate sector were issued in .//3 to foster greater
competition with a %iew of achie%e higher producti%it&.
AIMS AND SIGNIFICANCE:
Banking is toda& an integral part of our e%er&da& life8 (t home7 at school7 at office7 at business7 on tra%el
e%er&where we counter some aspect of banking. The significance of banking in our da& to da& life is being felt
increasingl&. ;hat are the institutions7 so ine%itable in the present da& set upD @ow do the& transactD @ow did
the concept emergeD These are some of the simple 6ueries that do not surface in our minds but are lurking deep
down. Mone& pla&s a dominant role in toda&?s life. "orms of mone& ha%e e%ol%ed from coin to paper currenc&
notes to credit cards. ,ommercial transactions ha%e increased in content and 6uantit& from simple banker to
speculati%e international trading. @ence the need arose for a third part& who will assist smooth banding of
transaction7 mediate between the seller and bu&er7 hold custod& of mone& and goods7 remit funds and also to
collect proceeds. @e was the <banker=. (s the number of such mediators grew there is need to control. !uch
mediating agencies ga%e birth to the concept of <banks= and <banking=. ;ith the e5ception of the e5tremel&
wealth&7 %er& few people bu& their homes in allCcash transactions. Most of us need a credit in form of loans7 to
make such a large purchase. n fact7 man& people need financial support from Bank to fulfil the financial
re6uirement. The world as we know it wouldnEt run smoothl& without credit and banks to issue it.
Toda&7 ,entral banks perform a wide range of speciali:ed acti%ities. These generall& include conducting
banking operations for national go%ernments7 super%ising and regulating banking institutions7 managing the
pa&ments and settlement s&stem and formulating monetar& polic& for the econom&. @owe%er the earl& central
banks founded in *urope C !7e S8e.-7 R-9+:69 -6 &33; :6. !7e B:69 )4 E6<":6. -6 &3=' ( were not
intended to undertake these functions of a modern central bank.nstead7 the initial impetus for these
Ego%ernmentCsponsoredE banks was much more basic7 relating generall& to the financial ad%antages that
go%ernments felt the& would obtain from the support of such banks. This in%ol%ed some fa%ored treatment7
often supported b& legislation7 especiall& granting monopol& rights o%er the note issue.
HISTORICAL BACKGROUND:
Bank of @industan was set up in .1209 it was the earliest ndian Bank. Later7 three presidenc& banks under
+residenc& BankEs act .12B i.e. Bank of ,alcutta7 Bank of Bomba& and Bank of Madras were set up7 which laid
foundation for modern banking in ndia. n ./F.7 all presidenc& banks were amalgamated to form the mperial
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Bank of ndia. mperial bank carried out limited number of central banking functions prior to establishment of
)B. t engaged in all t&pes of commercial banking business e5cept dealing in foreign e5change. )eser%e Bank
of ndia (ct was passed in ./3G H )eser%e Bank of ndia ()B) was constituted as an ape5 bod& without major
go%ernment ownership. Banking )egulations (ct was passed in ./G/. This regulation brought )B under
go%ernment control. $nder the act7 )B got wide ranging powers for super%ision H control of banks. The (ct
also %ested licensing powers H the authorit& to conduct inspections in )B.
n ./II7 )B ac6uired control of the mperial Bank of ndia7 which was renamed as !tate Bank of ndia. n
./I/7 !B took o%er control of eight pri%ate banks floated in the erstwhile princel& states7 making them as its
.00J subsidiaries. t was ./B07 when )B was empowered to force compulsor& merger of weak banks with the
strong ones. t significantl& reduced the total number of banks from IBB in ./I. to 1I in ./B/. n 'ul& ./B/7
go%ernment nationalised .G banks ha%ing deposits of )s. I0 crores H abo%e. n ./107 go%ernment ac6uired B
more banks with deposits of more than )s.F00 crores. #ationalisation of banks was to make them pla& the role
of catal&tic agents for economic growth. The #arasimha ,ommittee report suggested wide ranging reforms for
the banking sector in .//F to introduce internationall& accepted banking practices. The amendment of Banking
)egulation (ct in .//3 saw the entr& of new pri%ate sector banks.
Banking industr& is the back bone for growth of an& econom&. The journe& of ndian Banking ndustr& has
faced man& wa%es of economic crisis.
GENERAL BANKING SCENARIO IN INDIA:
The general banking scenario in ndia has become %er& d&namic nowCaCda&s. Before preCliberali:ation era7 the
picture of ndian Banking was completel& different as the Go%ernment of ndia initiated measures to pla& an
acti%e role in the economic life of the nation7 and the ndustrial +olic& )esolution adopted b& the go%ernment
in ./G1 en%isaged a mi5ed econom&. This resulted into greater in%ol%ement of the state in different segments of
the econom& including banking and finance.
The )eser%e Bank of ndia was nationali:ed on 'anuar& .7 ./G/ under the terms of the )eser%e Bank of ndia
(Transfer to +ublic -wnership) (ct7 ./G1. n ./G/7 the Banking )egulation (ct was enacted which empowered
the )eser%e Bank of ndia ()B) Kto regulate7 control7 and inspect the banks in ndia.K The Banking )egulation
(ct also pro%ided that no new bank or branch of an e5isting bank could be opened without a license from the
)B7 and no two banks could ha%e common directors. B& the ./B0s7 the ndian banking industr& had become
an important tool to facilitate the speed of de%elopment of the ndian econom&. The Go%ernment of ndia
issued an ordinance and nationalised the .G largest commercial banks with effect from the midnight of 'ul& ./7
./B/. ( second dose of nationali:ation of B more commercial banks followed in ./10. The stated reason for the
nationali:ation was to gi%e the go%ernment more control of credit deli%er&. ;ith the second dose of
nationali:ation7 the Go%ernment of ndia controlled around /.J of the banking business of ndia. Later on7 in
the &ear .//37 the go%ernment merged #ew Bank of ndia with +unjab #ational Bank. t was the onl& merger
between nationali:ed banks and resulted in the reduction of the number of nationalised banks from F0 to ./.
(fter this7 until the .//0s7 the nationalised banks grew at a pace of around GJ7 closer to the a%erage growth
rate of the ndian econom&.
n the earl& .//0s7 the then Narasimha Rao go%ernment embarked on a polic& of liberali:ation7 licensing a
small number of pri%ate banks. The ne5t stage for the ndian banking has been set up with the proposed
rela5ation in the norms for "oreign 4irect n%estment7 where all "oreign n%estors in banks ma& be gi%en
%oting rights which could e5ceed the present cap of .0J7 at present it has gone up to 2GJ with some
restrictions. The new polic& shook the Banking sector in ndia completel&. Bankers7 till this time7 were used to
the GCBCG method (Borrow at GJ9 Lend at BJ9 Go home at G) of functioning. The new wa%e ushered in a
modern outlook and techCsa%%& methods of working for traditional banks. (ll this led to the retail boom in
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ndia. +eople not just demanded more from their banks but also recei%ed more.
CHAPTER $ : BANK CRISIS AND ITS CAUSES:
WHAT CAN BE THE DEFINITION OF BANKING CRISIS D ( banking crisis is a s&stemic inabilit& of a
banking s&stem to perform all or part of its basic functions A accumulation of temporaril& free cash assets in the
econom&9 pro%ision of loans9 carr&ing out of pa&ments7 if one of the following conditions applies8
.. .4ecline in gi%ing loans on FIC30J to the respecti%e period of the pre%ious &ear o%er the period of 3CG
months or if the le%el of nonCperforming loans e5ceeded .0J of a loan portfolio (credit crisis) for a
t&pical banking crisis and around 30J for a s&stemic crisis9
F. )eduction of the deposits? %olume IJ as a minimum in a month (<bank run=)9
3. *5tensi%e li6uidit& support b& monetar& authorities andLor the go%ernment accounted toIJ of deposits
as a minimum or doubled as a minimum compared to the pre%ious &ear (<li6uidit& crisis=).
.
Moreo%er7an& financial ,risis( w.r.t Bank crisis) is caused at two le%els8 b& global macro policies affecting
li6uidit& and b& a poor regulator& framework that7 The financial crisis affects banking acti%it& depending upon
the scale of its spread. !ome of the categories are8
B:69 Ru6 8 t is a situation in which a large number of bank or other financial institution?s customer withdraws
their deposits simultaneousl& due to concerns about the bankEs sol%enc&. (s more people withdraw their funds7
the probabilit& of default increases7 thereb& prompting more people to withdraw their deposits. n e5treme
cases7 the bankEs reser%es ma& not be sufficient to co%er the withdrawals.
B:69-6< P:6-58 t is the higher le%el of financial ,risis that occurs when man& bank suffers run at the same
time 7 as people suddenl& tr& to con%ert their threatened deposits into cash or tr& to get out of their domestic
banking s&stem altogether.
S#!em-5 +:69-6< Cr--8 t is one where all or almost all of the banking capital in a countr& is wiped out. The
resulting chain of bankruptcies can cause a long economic recession as domestic businesses and consumers are
star%ed of capital as the domestic banking s&stem shuts down.
THE REPRESSED FINANCIAL SYSTEM 8 This also leads to the banking crisis. This is the major
feature in the de%eloping countries where go%ernment controls all the banking s&stem. n this s&stem
go%ernment implements policies to channel themsel%es funds that in a deregulated market en%ironment would
go elsewhere. +olicies include direct lending to the go%ernment b& capti%e domestic audiences (such as pension
funds or domestic banks)7 e5plicit or implicit caps on interest rates7 regulation of crossCborder capital
mo%ements7 and (generall&) a tighter connection between go%ernment and banks7 either e5plicitl& through
public ownership of some of the banks or through hea%& <moral suasion.= This inter%ention keeps the interest
rates that domestic bank can offer to a lower le%el and this leads to creation of e5cess demand for credit. t then
re6uires the banking s&stem to set a fi5ed fraction of the credit a%ailable to priorit& sector. Be&ond the pain of
low real returns imposed on sa%ers and in%estors7 there are other costs and risks associated with financial
repression. t can inhibit growth o%er the medium to longer term because it tends to promote %er& inefficient
capital allocation and to crowd out more producti%e in%estment. n addition7 repression can potentiall& lead the
econom& toward significant (unintended) market distortions8 asset boomsLbusts7 uncontrollable bouts of
1
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inflation7 and sudden stops in economic acti%it& from loss of confidence7 or capital flight leading to crisis
situation and loss of confidence of in%estors in the financial market.
PROCESS OF BANKING CRISIS CAN BE E>PLAINED IN FOLLOWING STEPS:
Trigger A an& e5ogenous e%ent like new technolog&7 financial market inno%ation
Boom A #ew -pportunities for in%esting let profits rise
Credit Expansion C Banks are transforming short term deposits into long term credit
Destabilizing speculation C +rice bubbles7 herding7 o%er in%estment
Crash C +rofits do not li%e up to pre%ious e5pectations7 banks write off part of the outstanding debt
Reversal of Capital Flow C 4epositors tr& to withdraw
anic C t cause rapid decline in asset prices
!i"uidit# s"ueeze A Banks compete for scarce li6uidit&7 Banks in need of refinancingH e%entual illi6uidit&
!i"uidit# spirals C Banks sell longCterm assets. n which asset prices ma& fall below fundamental %alue and
more banks go bust.
CAUSES OF BANKING CRISIS
S?e5u":!-*e C:ue (L-@u-.-!# Cr--, :This can be for single bank or widespread for man& banks together.
The depositors taking awa& their funds in e5cess of reser%e re6uirement which ma& be result of mob
ps&cholog& or mass panic. n case of s&stemic banking crisis there is widespread speculation with contagion
effects. There is imperfect information about health of banks and results in aggregate li6uidit& shocks
throughout the countr&.
Fu6.:me6!:" C:ue (S)"*e65# Cr--,: nsol%enc& occurs due to high le%el of non Aperforming loans
associated to lending booms followed b& li6uidit& crisis. t occurs for single bank or s&stemic in which there is
countr& wide economic recession leading to high le%el of #+L. +oor macro policies leading to internal and
e5ternal instabilit&. nternational effects related to this are current account deficits7 unstable international
capital flows and foreign e5change rate crisis.
M-m:6:<eme6! C:ue :"or single bank the "raudLlootingLcorruption b& bank managers7 emplo&ees and bad
lending are due to inappropriate regulations and super%ision. +oor banking regulations in the face of
inappropriate financial liberali:ation can lead to widespread banking crisis.
Gre:! .e?re-)6 : n the earlier time The stock market which had appeared to be surest wa& to become rich9
6uickl& became the path to bankruptc&. Man& banks had also in%ested large portions of their clientsE sa%ings in
the stock market9 these banks were forced to close when the stock market crashed. !eeing a few banks close
caused another panic across the countr&. (fraid the& would lose their own sa%ings7 people rushed to banks that
were still open to withdraw their mone&. This massi%e withdrawal of cash caused additional banks to close.
!ince there was no wa& for a bankEs clients to reco%er an& of their sa%ings once the bank had closed7 those who
didnEt reach the bank in time also became bankrupt.
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,auses of Great depression are8 There were multiple causes for the first downturn in ./F/8 $ne6ual distribution
of wealth 7 @igh tariffs H ;ar debts7 -%erproduction in ndustr& H (griculture8 Mismatch of production and
consumption7 "arm crisis H 4ust bowl8 4rought conditions in Mississippi Malle& which destro&ed man&
farmer?s crop7 "ederal )eser%e Monetar& +olic&8 )aising the "ederal )eser%e fund rate and "ed raised interest
rate again to tr& and preser%e the %alue of dollar. This further restricted the a%ailabilit& of mone& for business
causing more bankruptcies. (bout 3F000 businesses went bankrupt8 Greater fall in net worth of business7
profits7 reduction in output. More than I000 Banks failed leading to Bank )un8 n%estor withdrew all their
mone& from the bank causing more financial panic.
CHAPTER 1 : CHALLENGES AND PROBLEMS:
(fter anal&sis of aforesaid histor& and background there comes the 6ueries i.e. ;hat is the problem with banksD ;h& do
the& seem to be at the centre of economic and financial turmoil down through the agesD (nd was there an&thing different
about the most recent banking crisisD These are the 6uestions which has to be focused. n order to understand banks one
must understand their link with states and how this has changed o%er time but at the initials it was seen that banks ha%e
been both deepl& implicated in their emergence and also strongl& %ulnerable to their occurrence. These are some of the
basis of the problems8
INTEREST RATE RISK
nterest rate risk can be defined as e5posure of bankEs net interest income to ad%erse mo%ements in interest
rates. ( bankEs balance sheet consists mainl& of rupee assets and liabilities. (n& mo%ement in domestic interest
rate is the main source of interest rate risk. -%er the last few &ears the treasur& departments of banks ha%e been
responsible for a substantial part of profits made b& banks. Between 'ul& .//2 and -ct F0037 as interest rates
fell7 the &ield on .0C&ear go%ernment bonds (a barometer for domestic interest rates) fell7 from .3 per cent to
G./ per cent. ;ith &ields falling the banks made huge profits on their bond portfolios.
#ow as &ields go up (with the rise in inflation7 bond &ields go up and bond prices fall as the debt market starts
factoring a possible interest rate hike)7 the banks will ha%e to set aside funds to mark to market their
in%estment. This will make it difficult to show huge profits from treasur& operations. This concern becomes
much stronger because a substantial percentage of bank deposits remain in%ested in go%ernment bonds.
Banking in the recent &ears had been reduced to a trading operation in go%ernment securities. )ecent months
ha%e shown a rise in the bond &ields has led to the profit from treasur& operations falling. The latest 6uarterl&
reports of banks clearl& show se%eral banks making losses on their treasur& operations. f the rise in &ields
continues the banks might end up posting huge losses on their trading books. Gi%en these facts7 banks will ha%e
to look at alternati%e sources of in%estment.
I6!ere! r:!e :6. 6)6(?er4)rm-6< :e!
The best indicator of the health of the banking industr& in a countr& is its le%el of #+(s. Gi%en this fact7 ndian
banks seem to be better placed than the& were in the past. ( few banks ha%e e%en managed to reduce their net
#+(s to less than one percent (before the merger of Global Trust Bank into -riental Bank of ,ommerce7 -B,
was a :ero #+( bank). But as the bond &ields start to rise the chances are the net #+(s will also start to go up.
This will happen because the banks ha%e been making huge pro%isions against the mone& the& made on their
bond portfolios in a scenario where bond &ields were falling.
)educed #+(s generall& gi%es the impression that banks ha%e strengthened their credit appraisal processes
o%er the &ears. This does not seem to be the case. ;ith increasing bond &ields7 treasur& income will come down
and if the banks wish to make large pro%isions7 the mone& will ha%e to come from their interest income7 and
this in turn7 shall bring down the profitabilit& of banks.
COMPETETION IN RETAIL BANKING
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The entr& of new generation pri%ate sector banks has changed the entire scenario. *arlier the household sa%ings
went into banks and the banks then lent out mone& to corporates. #ow the& need to sell banking. The retail
segment7 which was earlier ignored7 is now the most important of the lot7 with the banks jumping o%er one
another to gi%e out loans. The consumer has ne%er been so luck& with so man& banks offering so man&
products to choose from. ;ith suppl& far e5ceeding demand it has been a race to the bottom7 with the banks
undercutting one another. ( lot of foreign banks ha%e alread& burnt their fingers in the retail game and ha%e
now decided to get out of a few retail segments completel&.
The nimble footed new generation pri%ate sector banks ha%e taken a lead on this front and the public sector
banks are tr&ing to pla& catch up. The +!Bs ha%e been losing business to the pri%ate sector banks in this
segment. +!Bs need to figure out the means to generate profitable business from this segment in the da&s to
come.
THE URGE TO MERGE
n the recent past there has been a lot of talk about ndian Banks lacking in scale and si:e. The !tate Bank of
ndia is the onl& bank from ndia to make it to the list of Top .00 banks7 globall&. Most of the +!Bs are either
looking to pick up a smaller bank or waiting to be picked up b& a larger bank. The central go%ernment also
seems to be game about the issue and is seen to be encouraging +!Bs to merge or ac6uire other banks. Global
e%idence seems to suggest that e%en though there is great enthusiasm when companies merge or get ac6uired7
majorit& of the mergersLac6uisitions do not reall& work.
!o in the :eal to merge with or ac6uire another bank the +!Bs should not let their common sense take a back
seat. Before a merger is carried out cultural issues should be looked into. ( bank based primaril& out of #orth
ndia might want to ac6uire a bank based primaril& out of !outh ndia to increase its geographical presence but
their cultures might be %er& different. !o the integration process might become %er& difficult. Technological
compatibilit& is another issue that needs to be looked into in details before an& merger or ac6uisition is carried
out. The banks must not just merge because e%er&bod& around them is merging. (s Ke#6e wrote7 KWorldly
wisdom teaches us that it's better for reputation to fail conventionally than succeed unconventionallyK.
IMPACT OF BASEL(II NORMS
Banking is a commodit& business. The margins on the products that banks offer to its customers are e5tremel&
thin %is a %is other businesses. (s a result7 for banks to earn an ade6uate return of e6uit& and compete for
capital along with other industries7 the& need to be highl& le%eraged. The primar& function of the bankEs capital
is to absorb an& losses a bank suffers (which can be written off against bankEs capital). *ssentiall&7 rules tell the
banks how much capital the banks should ha%e to co%er up for the risk that their loans might go bad. The rules
set in ./11 led the banks to differentiate among the customers it lent out mone& to different weightage was
gi%en to %arious forms of assets7 with :ero perC centage weightings being gi%en to cash7 deposits with the
central bankLgo%t etc7 and .00 per cent weighting to claims on pri%ate sector7 fi5ed assets7 real estate etc.
The summation of these assets ga%e us the riskCweighted assets. (gainst these risk weighted assets the banks
had to maintain a (Tier N Tier ) capital of / per cent i.e. e%er& )s.00 of risk assets had to be backed b& )s /
of Tier N Tier capital. To put it simpl& the banks had to maintain a capital ade6uac& ratio of / per cent. The
problem with these rules is that the& do not distinguish within a categor& i.e. all lending to pri%ate sector is
assigned a .00 per cent risk weighting7 be it a compan& with the best credit rating or compan& which is in the
doldrums and has a %er& low credit rating. This is not an efficient use of capital. The compan& with the best
credit rating is more likel& to repa& the loan %is a %is the compan& with a low credit rating. !o the bank should
be setting aside a far lesser amount of capital against the risk of a compan& with the best credit rating
defaulting %is a %is the compan& with a low credit rating. ;ith the B(!*LC norms the bank can decide on the
amount of capital to set aside depending on the credit rating of the compan&.
11 | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
,redit risk is not the onl& t&pe of risk that banks face. These da&s the operational risks that banks face are huge.
The %arious risks that come under operational risk are competition risk7 technolog& risk7 casualt& risk7 crime
risk etc. The original B(!*L rules did not take into account the operational risks. (s per the B(!*LC norms7
banks will ha%e to set aside .I per cent of net income to protect themsel%es against operational risks. !o to be
read& for the new B(!*L rules the banks will ha%e to set aside more capital because the new rules could lead
to capital ade6uac& ratios of the banks falling. @ow the banks plan to go about meeting these re6uirements is
something that remains to be seen. ( few banks are planning initial public offerings to ha%e enough capital on
their books to meet these new norms.
IN CLOSING
-%er the last few &ears7 the falling interest rates7 ga%e banks %er& little incenti%e to lend to projects7 as the
return did not compensate them for the risk in%ol%ed. This led to the banks getting into the retail segment big
time. t also led to a lot of banks pla&ing it safe and putting in most of the deposits the& collected into
go%ernment bonds. #ow with the bond part& o%er and the bond &ields starting to go up7 the banks will ha%e to
concentrate on their core function of lending. The banking sector in ndia needs to tackle these challenges
successfull& to keep growing and strengthen the ndian financial s&stem.
"urthermore7 the interference of the central go%ernment with the functioning of +!Bs should stop. The package
seeks to pro%ide a high degree of freedom to +!Bs on operational matters. This seems to be the right wa& to go
for +!Bs. The growth of the banking sector will be one of the most important inputs that shall go into making
sure that ndia progresses and becomes a global economic super power.
F
RURAL MARKET
Banking in ndia is generall& fairl& mature in terms of suppl&7 product range and reach7 e%en though reach in
rural ndia still remains a challenge for the pri%ate sector and foreign banks. n terms of 6ualit& of assets and
capital ade6uac&7 ndian banks are considered to ha%e clean7 strong and transparent balance sheets relati%e to
other banks in comparable economies in its region.
,onse6uentl&7 we ha%e seen some e5amples of inorganic growth strateg& adopted b& some nationali:ed and
pri%ate sector banks to face upcoming challenges in banking industr& of ndia. "or e5ample recentl&7 ,,
Bank Ltd. merged the Bank of )ajasthan Ltd. in order to increase its reach in rural market and market share
significantl&. !tate Bank of ndia (!B)7 the largest public sector bank in ndia has also adopted the same
strateg& to retain its position. t is in the process of ac6uiring its associates. )ecentl&7 !B has merged !tate
Bank of ndore in F0.0
MANAGEMENT OF RISKS
The growing competition increases the competiti%eness among banks. But7 e5isting global banking scenario is
seriousl& posing threats for ndian banking industr&. ;e ha%e alread& witnessed the bankruptc& of some foreign
banks.
(ccording to !hrie%es (.//F)7 there is a positi%e association between changes in risk and capital. )esearch
studied the large sample of banks and results re%eal that regulation was partiall& effecti%e during the period
co%ered. Moreo%er7 it was concluded that changes in bank capital o%er the period studied was riskCbased
3
.
;olgast7 (F00.) studied the Merger and ac6uisition acti%it& among financial firms. The author focused bank
2
!hrie%es7 ). *. <The relationship between risk and capital in commercial banks=. 'ournal of Banking H "inance7 .B(F)8 G3/AGI27
.//F.
3
!upra (.)
12 | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
super%isors in conte5t with success of mergers7 risk management7 financial s&stem stabilit& and market
li6uidit&. The stud& concluded that large institutions are able to maintain a superior le%el of risk management
G
.
(lCTamimi and (lCMa:rooei (F002) e5amined the risk management practices and techni6ues in dealing with
different t&pes of risk. Moreo%er7 the& compared risk management practices between the two sets of banks. The
stud& found the three most important t&pes of risk i.e. commercial banks foreign e5change risk7 followed b&
credit risk7 and operating risk
I
.
!ensarma and 'a&ade% (F00/) used selected accounting ratios as risk management %ariables and attempted to
gauge the o%erall risk management capabilit& of banks. The& used multi%ariate statistical techni6ues to
summari:e these accounting ratios. Moreo%er7 the paper also anal&:ed the impact of these risk management
scores on stock returns through regression anal&sis. )esearchers found that ndian banksE risk management
capabilities ha%e been impro%ing o%er time. )eturns on the banksE stocks appeared to be sensiti%e to risk
management capabilit& of banks. The stud& suggest that banks want to enhance shareholder wealth will ha%e to
focus on successfull& managing %arious risks
B
.
GROWTH OF BANKING
Ohao7 ,asu and "errari (F001) used a balanced panel data set co%ering the period of .//FCF00G and emplo&ing
a 4ata *n%elopment (nal&sis (4*()Cbased Malm6uist Total "actor +roducti%it& (T"+) inde5. The empirical
stud& indicated that7 after an initial adjustment phase7 the ndian banking industr& e5perienced sustained
producti%it& growth7 which was dri%en mainl& b& technological progress. BanksE ownership structure does not
seem to matter as much as increased competition in T"+ growth. "oreign banks appear to ha%e acted as
technological inno%ators when competition increased7 which added to the competiti%e pressure in the banking
market. "inall&7 our results also indicate an increase in riskCtaking beha%iour7 along with the whole deregulation
process
2
.
t was found in the stud& of Go&al and 'oshi (F0..a) that small and local banks face difficult& in bearing the
impact of global econom& therefore7 the& need support and it is one of the reasons for merger. !ome pri%ate
banks used mergers as a strategic tool for e5panding their hori:ons. There is huge potential in rural markets of
ndia7 which is not &et e5plored b& the major banks. Therefore ,, Bank Ltd. has used mergers as their
e5pansion strateg& in rural market. The& are successful in making their presence in rural ndia. t strengthens
their network across geographical boundar&7 impro%es customer base and market share
1
.
HUMAN RESOURCE MANAGEMENT
Gelade and %er& (F003) e5amined relationships between human resource management (@)M)7 work climate7
and organi:ational performance in the branch network of a retail bank. !ignificant correlations were found
between work climate7 human resource practices7 and business performance. The results showed that the
correlations between climate and performance cannot be e5plained b& their common dependence on @)M
4
;olgast7 M. <MH(s in the financial industr&8 ( matter of concern for bank super%isorsD= 'ournal of "inancial )egulation and
,ompliance7 /(3)8 FFICF3B7 F00..
/
(lCTamimi7 @. (. @ and (lCMa:rooei7 ". M. <Banks' risk management: A comparison study of UAE national and foreign banks=.
'ournal of )isk "inance7 1(G)8 3/GCG0/7 F002.
0
!ensarma7 ). and 'a&ade%7 <Are bank stocks sensitive to risk managementD= 'ournal of )isk "inance7 .0(.)8 2CFF7 M. F00/
1
Ohao7 T.7 ,asu7 B. and "errari7 (. <eregulation and !roductivity "rowth: A #tudy of The $ndian %ommercial Banking $ndustry=.
nternational 'ournal of Business +erformance Management7 .0(G)8 3.1C3G37 F001 )
;
Go&al7 K. (. and 'oshi7 M. <Mergers in Banking ndustr& of ndia8 !ome *merging ssues=. (sian 'ournal of Business and
Management !ciences7 .(F)8 .I2C.BI7 F0..a.
13 | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
factors7 and that the data are consistent with a mediation model in which the effects of @)M practices on
business performance are partiall& mediated b& work climate
/
.
Bartel (F00G) studied the relationship between human resource management and establishment performance of
emplo&ees on the manufacturing sector. $sing a uni6ue longitudinal dataset collected through site %isits to
branch operations of a large bank7 the author e5tends his research to the ser%ice sector. Because branch
managers had considerable discretion in managing their operations and emplo&ees7 the @)M en%ironment
could %ar& across branches. !ite %isits pro%ided specific e5amples of managerial practices that affected branch
performance. (n anal&sis of responses to the bank?s emplo&ee attitude sur%e& that controls for unobser%ed
branch and manager characteristics shows a positi%e relationship between branch performance and emplo&ees?
satisfaction with the 6ualit& of performance e%aluation7 feedback7 and recognition at the branchPthe
<incenti%es= dimension of a highCperformance work s&stem. n some fi5ed effects specifications7 satisfaction
with the 6ualit& of communications at the branch was also important
.0
.
GLOBAL BANKING
t is practicall& and fundamentall& impossible for an& nation to e5clude itself from world econom&. Therefore7
for sustainable de%elopment7 one has to adopt integration process in the form of liberali:ation and globali:ation
as ndia spread the red carpet for foreign firms in .//.. The impact of globali:ation becomes challenges for the
domestic enterprises as the& are bound to compete with global pla&ers.
f we look at the ndian Banking ndustr&7 then we find that there are 3B foreign banks operating in ndia7
which becomes a major challenge for #ationali:ed and pri%ate sector banks. These foreign banks are large in
si:e7 technicall& ad%anced and ha%ing presence in global market7 which gi%es more and better options and
ser%ices to ndian traders.
FINANCIAL INCLUSION
"inancial inclusion has become a necessit& in toda&?s business en%ironment. ;hate%er is produced b& business
houses7 that has to be under the check from %arious perspecti%es like en%ironmental concerns7 corporate
go%ernance7 social and ethical issues. (part from it to bridge the gap between rich and poor7 the poor people of
the countr& should be gi%en proper attention to impro%e their economic condition.
4e% (F00B) stated that financial inclusion is significant from the point of %iew of li%ing conditions of poor
people7 farmers7 rural nonCfarm enterprises and other %ulnerable groups. "inancial inclusion7 in terms of access
to credit from formal institutions to %arious social groups. (part from formal banking institutions7 which should
look at inclusion both as a business opportunit& and social responsibilit&7 the author conclude that role of the
selfChelp group mo%ement and microfinance institutions is important to impro%e financial inclusion. The stud&
stud& suggested that this re6uires new regulator& procedures and deCpoliticisation of the financial s&stem
..
.
EMPLOYEESA RETENTION
The banking industr& has transformed rapidl& in the last ten &ears7 shifting from transactional and customer
:
Gelade7 G. (. and %er&7 M. <The mpact of @uman )esource Management and ;ork ,limate on -rgani:ational +erformance=.
+ersonnel +s&cholog&7 IB(F)8 313CG0G7 F003.
19
Bartel, A. P. Human Resource Management and Organizational Performance: Evidence from Retail Banking.
Industrial and Labor Relations Review, 57(2): 181-203, 2004.
11
4e%7 !. M. <"inancial nclusion8 ssues and ,hallenges=. *conomic H +olitical ;eekl&7 G.(G.)8 F00B.
14 | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
ser%iceCoriented to an increasingl& aggressi%e en%ironment7 where competition for re%enue is on top priorit&.
LongCtime banking emplo&ees are becoming disenchanted with the industr& and are often resistant to perform
up to new e5pectations. The diminishing emplo&ee morale results in decreased re%enue. 4ue to the intrinsicall&
close ties between staff and clients7 losing those emplo&ees completel& can mean the loss of %aluable customer
relationships. The retail banking industr& is concerned about emplo&ee retention from all le%els8 from tellers to
e5ecuti%es to customer ser%ice representati%es because competition is alwa&s mo%ing in to hire them awa&.The
competition to retain ke& emplo&ees is intense. TopCle%el e5ecuti%es and @) departments spend large amounts
of time7 effort7 and mone& tr&ing to figure out how to keep their people from lea%ing.
!ekaran7 $. (./1/) studied a sample of FB2 bank emplo&ees7 this stud& traced the paths to the job satisfaction
of emplo&ees at the workplace through the 6ualit& of life factors of job in%ol%ement and sense of competence.
)esults indicated that personal7 job7 and organi:ational climate factors influenced the ego in%estment or job
in%ol%ement of people in their jobs7 which in turn influenced the intraCps&chic reward of sense of competence
that the& e5perienced7 which then directl& influenced emplo&eesE job satisfaction
.F
.
Mitchell7 @oltom7 Lee and Graske (F00.) asserted in their stud& that people often lea%e for reasons unrelated to
their jobs. n man& cases7 une5pected e%ents or shocks are the cause. *mplo&ees also often sta& because of
attachments and their sense of fit7 both on the job and in their communit&
.3
.
!a5ena and Monika (F0.0) studied a case of I companies out of .000 organi:ations and 12IF respondents
sur%e&ed across 100 cities in ndia b& Business Toda&. The sur%e& was on nine basic parameters like career and
personal growth7 compan& prestige7 training7 financial compensation and benefits and merit based performance
e%aluation. t was concluded that the biggest challenge for organi:ations is that when new emplo&ees
appointed7 it is difficult to merge them in organi:ational culture. *ach organi:ation has its own uni6ue culture
and most often7 when brought together7 these cultures clash. ;hen there is no retention7 emplo&ees point to
issues such as identit&7 communication problems7 human resources problems7 ego clashes7 and intergroup
conflicts7 which all fall under the categor& of <cultural differences=
.G
.
CUSTOMER RETENTION
Le%es6ue and Mc4ougall (.//B) in%estigated the major determinants of customer satisfaction and future
intentions in the retail bank sector. The& identified the determinants which include ser%ice 6ualit& dimensions
(e.g. getting it right the first time)7 ser%ice features (e.g. competiti%e interest rates)7 ser%ice problems7 ser%ice
reco%er& and products used. t was found7 in particular7 that ser%ice problems and the bank?s ser%ice reco%er&
abilit& ha%e a major impact on customer satisfaction and intentions to switch
.I
.
,lark (.//2) studied the impact of customerCemplo&ee relationships on customer retention rates in a major $K
retail bank. @e re%ealed that emplo&ee and customer perceptions of ser%ice 6ualit& are related to customer
retention rates and that emplo&ee and customer perceptions of ser%ice 6ualit& are related to each other
.B
12
!ekaran7 $. <+aths to the job satisfaction of bank emplo&ees=. 'ournal of -rgani:ational Beha%ior7 .0(G)8 3G2C3I/7 ./1/.
13
Mitchell7 T ).7 @oltom7 B. ,.7 Lee7 T. ;. and Graske7 T. <@ow to Keep Qour Best *mplo&ees8 4e%eloping an *ffecti%e )etention
+olic&=. The (cadem& of Management *5ecuti%e7 .I(G)8 /BC.0/7 F00..
14
!a5ena7 #. and Monika7 K. <-rgani:ational ,ulture and its mpact on *mplo&ee )etention=. +acific Business )e%iew7 F(3)8 .0FC
..07 F0.0
1/
Le%es6ue7 T. and Mc4ougall7 G.@.G. <4eterminants of ,ustomer !atisfaction in )etail Banking=. nternational 'ournal of Bank
Marketing7 .G(2)8 .F A F07 .//B.
10
Clark7 M. <Modelling the mpact of ,ustomerC*mplo&ee )elationships on ,ustomer )etention )ates in a Major $K )etail Bank=.
Management 4ecision7 3I(G)8 F/3C30.7 .//2.
1/ | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
,lark (F00F) e5amined the relationship between emplo&ees? perceptions of organi:ational climate and
customer retention in a specific ser%ice setting7 %i:. a major $K retail bank. *mplo&ees? perceptions of the
practices and procedures in relation to customer care at their branch were in%estigated using a case stud&
approach. The findings re%ealed that there is a relationship between emplo&ees? perceptions of organi:ational
climate and customer retention at a microCorgani:ational le%el. @e suggested that organi:ational climate can be
subdi%ided into fi%e climate themes and that7 within each climate theme7 there are se%eral dimensions that are
critical to customer retention
.2
.
SOCIAL AND ETHICAL ASPECTS
There are some banks7 which proacti%el& undertake the responsibilit& to bear the social and ethical aspects of
banking. This is a challenge for commercial banks to consider the these aspects in their working. (part from
profit ma5imi:ation7 commercial banks are supposed to support those organi:ations7 which ha%e some social
concerns.
Benedikter (F0..) defines !ocial Banks as <banks with a conscience=. The& focus on in%esting in communit&7
pro%iding opportunities to the disad%antaged7 and supporting social7 en%ironmental7 and ethical agendas. !ocial
banks tr& to in%est their mone& onl& in endea%ours that promote the greater good of societ&7 instead of those7
which generate pri%ate profit just for a few. @e has also e5plained the main difference between mainstream
banks and social banks that mainstream banks are in most cases focused solel& on the principle of profit
ma5imi:ation whereas7 social banking implements the triple principle of profitCpeopleCplanet
.1
.
Go&al and 'oshi (F0..b) ha%e concluded in their stud& on social and ethical aspects of Banking ndustr& that
Banks can project themsel%es as a sociall& and ethicall& oriented organi:ation b& disbursement of loans merel&
to those organi:ations7 which has social7 ethical and en%ironmental concerns Banking and financial crises ha%e
been a regular feature of modern economic histor&. (ccording to one estimate7 there ha%e been 1B banking
crises since the Great 4epression that ha%e spread be&ond national borders. (ccording to a ;orld Bank stud&
in F00.7F the world has witnessed as man& as ..F s&stemic banking crises from the late ./20s to earl& F00..
CHAPTER ': CRISIS MANAGEMENT MEASURES
$peculative%t#pe ,rises should be dealt with li6uidit& support pro%ided b& the ,entral Bank. There should be
introduction deposit insurance C but onl& for small depositors. The information and its a%ailabilit& to the
general in%estor should be readil& a%ailable. This better disclosure of information and transparenc& will
decrease the speculati%e panic created in the in%estor due to lack of information.
Fundamental%t#pe ,rises should be dealt with significant financial assistance in foreign e5change. ;ith this
the Macroeconomic Measures to deal with *conomic nstabilit& and re%i%e economic growth should be
taken .Go%ernment nter%ention in Troubled Banks7 including )estructuring +rograms for (ffected Borrowers
should be initiated in the preliminar& stage.
&ismanagement%t#pe ,rises (fraudLlooting and poor financial Banking regulation) should be dealt with
impro%ed Legal !tructure and ,orruption +re%ention act which are stringent and effecti%e .mpro%ement of
11
,lark7 M. <The )elationship between *mplo&ees? +erceptions of -rgani:ational ,limate and ,ustomer )etention )ates in a Major
$K )etail Bank=. 'ournal of !trategic Marketing7 .0(F)8 /3C..37 F00F
1;
Benedikter7 ). <(nswers to the *conomic ,risis8 !ocial Banking and !ocial "inance=. !pice 4igest7 #ew Qork8 !pringer. (F0..).
10 | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
banking regulations and super%ision and 6uick inter%ention in troubled Banks should be taken to a%oid the
panic.
'mprove &obilization of Resources8 This is the liabilit& side of the s&stem. ( major purpose of the reform of a
financial s&stem should be to increase its si:e b& mobili:ing increasing amounts of pri%ate resources through
the financial s&stem. To increase the flow of pri%ate sa%ings to the formal financial s&stem7 the following
measures are needed8
(a) Liberali:e 4eposit interest rates
(b) *5pand ,ompetition H Banking ,o%erage
(c) 4i%ersif& !a%ings nstruments
'mprove Resource (llocation )the asset side of the s#stem* : (nother major objecti%e of financial sector reform
is to encourage the allocation of resources to the most economicall& %iable in%estment opportunities. This will
impro%e economic efficienc& and accelerate economic growth. "or this purpose the following measures are
normall& included in financial sector reforms8
(a) Liberali:e nterest )ates on Lending
(b) *liminate +referential and 4irected ,redits
(c) )educe ntermediation ,ost
'mprove rudential $upervision of Financial 'nstitution: The core The <,ore +rinciples for *ffecti%e
Banking !uper%ision and )egulation= of the Basel ,ommittee on Banking !uper%ision (composed of GC.0
!enior Bank !uper%isors)7 pro%ides a good assessment of the components of an effecti%e s&stem. ts fi%e
elements include organi:ation of the banking super%isor& authorit&7 Bank licensing7 prudential norms7
(ccounting and information re6uirements7 *5it procedures for bank failure.
$trengthen Financial Competition8 ( degree of competition in the financial sector is needed to bring
competition to financial ser%ices and impro%e ser%ice 6ualit&.
'nternational Financial !iberalization8 ,ompetition can be brought b& opening of the financial sector to
foreign banks and liberali:ing the flow of international capital. @owe%er7 liberali:ation of nternational ,apital
should be preceded b& the de%elopment of strong prudential regulations and super%ision7 as well as a <stable=
foreign e5change rate s&stem. -therwise7 it would lead to Moral @a:ard problems.
Domestic Capital &ar+ets Development8 ( second wa& to bring competition in the financial sector is b&
de%eloping alternati%e mechanisms for firms to get financing. "or this7 the de%elopment of domestic capital
markets is essential.
CHAPTER 2 : CURRENT STATUS OF THE BANKING SYSTEM INTEGRATED WITH LATEST
DEVELOPMENTS :
$nder the regime of banking sector reforms7 T (ct of ./// ga%e new dimensions to the ndian Banking sector
. 4uring three decades since independences in the countr& and two decades since nationali:ation of B banks 7
the face of ndian banking has undergone a basic change and the process of change will still continue in the
coming decades.The ndian banking has undergone transformation itself from domestic baking to international
11 | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
banking. )ecent 4e%elopments are8
./
.) Retail Ban+ing Concept8 -ne of the major de%elopments in the banking !ector is the introduction of
the )etail Banking in the countr&. 4uring recent past 7 there is clear change in philosoph& and
techni6ues especiall& in field of lending from wholesale nature to retail character of banking acti%ities.
)etail banking or mobili:ing deposits from indi%iduals and pro%iding loan facilities to them in home
loans7 auto loans7 credit cards etc. s becoming popular with the financial sector reforms gathering
momentum. (utomatic teller machines telebanking network e5tended banking time courier pick up for
che6ues and documents etc are some of the pri%ileges e5tended to the customers b& the banks in their
eagerness to culti%ate the retail market.
F) 'nternet Ban+ing8 The trend in Banking is changing from computeri:ation of branches to la&ing a
uniform platform b& ha%ing coreC banking solution in all the branches. ;hile a start has been made in
the nternet Banking in ndia7 The number of transactions through this mode is e5tremel& negligible
(less than . percent).
3) $hared (T&s8 Till the &ear F0037 each bank was interested in opening its own (TMs to pro%ide access
and an&time banking to its customers. ,ost of nstallation of (TM is about )s. .I lakh with an
additional maintenance cost of )s. ..I lakh per month. The cost of transaction in the branch of the Bank
is appro5imatel& )s. B0 while it is )s. .0 if carried out through an (TM. To take ad%antage of this
lower transaction cost7 there is need for banks to induce customers to use more and more (TMs.
G) Customer Relationship &anagement : (ll along the word <,ustomer= used to denote an& person who
is ha%ing an account with a branch of a Bank or using the ser%ices of a Branch. #ow7 we are seeing a
new definition for customer. ( customer is no more a customer of the Branch 9 he is the ,ustomer of the
Bank. ;ith the ad%ent of R((( Banking?((n&time7 (n&where7 (n&how Banking) the new definition of
customer has become rele%ant. Technolog& enables the customer to < help himself= through nternet
Banking. (TM Banking 7 Telephone Banking 7-nline Banking7 Mobile Banking7 or eC Banking7 etc.
I) $egement Focus8 Banks are ob%iousl& for customerser%ice. But Banks are finding that the& too need to
segment and target @igh#et wirth ndi%iduals (@#s) and companies if the& ha%e to satisf& the needs of
their stakeholders. Therefore7 Banks are generall& mo%ing towardsproducts that are focused on their
targeted end customers. (nd this target is specificall& the high Aend customer9 as the& do not find an&
le%erage from the small accounts. (n anal&sis of the current scenario indicates that in future7 each bank
will decide on its core competenc& and cater onl& to selected segments. "or e5ample7 the 4ecember
Bank in ndia operates onl& in the corporate banking and it has turned as a market leader in this
segment.
B) roduct Focus: Banks ha%e been offering %arious asset products( Loans) and liabilit& products
( 4eposits)7 taking the customers? general needs like fi5ed amount loans or running ,ash ,reditL
-%erdraft accounts or "i5ed 4eposit or ,umulati%e 4eposit or )ecurring 4eposit as liabilit& products.
#ow7 the time has come for the customer to demand a product that is not currentl& a%ailable in the
Banker?s kitt& and the Bank has to literall& create customerCspecific products and then the Banker
adopts the role of a "inancial *ngineer.
CHAPTER 3: CONCLUSION AND SUGGESTIONS :
The crisis situation clearl& demonstrated that when problem hit one bank the& can spread to the whole financial
sector and well be&ond the border of an& countr&. t also showed that s&stems are not in place to manage
1:
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+e!t'( P'-li+atio!"4299:>
1; | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
financial institutions facing difficulties. Mer& few rules e5ist which determine what action should be taken b&
the authorities in the bank crisis. The financial crisis ultimatel& leading to banking crisis pro%ided clear
e%idence of the need of robust crisis management arrangement at national le%el as well as the need to put in
place arrangements better able to cater cross border banking failures.
Greater transparenc& and disclosure of bank acti%ities will not pre%ent future banking crises unless appropriate
monetar&7 fiscal7 and regulator& are also adopted. #onetheless7 greater disclosure of banking problems can
reduce the costs of banking crises7 e%en if transparenc& is not a panacea for pre%enting banking crises.
The Ke& to success in the competiti%e en%ironment is increased producti%it& and profitabilit&. ndian banks
especiall& the public sector banks and the old pri%ate sector banks are lagging far behind their competitors in
terms of both producti%it& and profitabilit& with the e5ception of the !tate bank of ndia and its associates. The
other public sector banks and old pri%ate sector banks need to to go for the major transformation program for
increase their producti%it& and profitabilit&.
F0
SUGGESTIONS
(s per the abo%e material7 we can sa& that the biggest challenge for banking industr& is to ser%e the mass
market of ndia. ,ompanies ha%e shifted their focus from product to customer. The better we understand our
customers7 the more successful we will be in meeting their needs. n order to mitigate abo%e mentioned
challenges ndian banks must cut their cost of their ser%ices. (nother aspect to encounter the challenges is
product differentiation. (part from traditional banking ser%ices7 ndian banks must adopt some product
inno%ation so that the& can compete in game of competition. Technolog& up gradation is an ine%itable aspect to
face challenges. The le%el of consumer awareness is significantl& higher as compared to pre%ious &ears. #owC
aCda&s the& need internet banking7 mobile banking and (TM ser%ices. *5pansion of branch si:e in order to
increase market share is another tool to combat competitors. Therefore7 ndian nationali:ed and pri%ate sector
banks must spread their wings towards global markets as some of them ha%e alread& done it. ndian banks are
trustworth& brands in ndian market9 therefore7 these banks must utili:e their brand e6uit& as it is an %aluable
asset for them.
METHODOLOGY
D:!: C)""e5!-)6
(nal&sis in this paper will be done on the basis of secondar& data collection. Major sources of secondar& data
will further include periodic publications and research reports from international and national financial
regulator& bodies like ;orld Bank7 )eser%e Bank of ndia7 ndian Bank (ssociation and leading research
agencies. #ewspapers were also consulted for the data. The data so collected will be helpful in understanding
the influence of the crisis on the operational performance of the ndian banks.
.
LITERATURE REVIEW:
Mohanlal !harma (./2/) K!tructural changes in ndian commercial banking s&stem since ./B/8 ( stud& of
portfolio profits and polic&K anal&:ed the effects of nationali:ation on the banking industr& in ndia and its
%arious objecti%es such as social welfare7 controlling pri%ate monopolies7 e5pansion of banking etc. (nd also
demerits and limitation such as inade6uate banking facilities7 limited resources mobili:ed and allocated etc.
T. )adha (F003)7 impact of Banking sector reforms on the +erformance of commercial banks in ndia ./1/C /0
to .//1C//Cstudied the effects of the #arasimham committee recommendation on the banking industr& and
29
R)3) <$$al4 2o%e! Ba!&i!g i! I!%ia4= Ne. 5elhi4 Ne. Ce!t'( P'-li+atio!"4299:>
1: | P a g e B A N K I N G P R O J E C T D AT E D 2 9 S E P T E MB E R 2 0 1 4
their recommendation such as autonom& in banking7 reform in the role of )B 7 stronger banking s&stem 7 non
performing assets7 capital ade6uac& and tightening of pro%isioning norms and entr& of foreign banks and also
their criticism.
4r. #. Bharathi (F002) in her article ndian Banking and "inance C ( +aradigm !hiftC wrote that the banking
industr& is currentl& in a transition phase. @ow banking s&stem e%ol%es and the emphasis upon The Banking
)egulation (ct 7 ./G/ .
4un H Bradstreet (F001) (an international research bod&)K ndiaEs Top Banks F001KCthere has been a significant
growth in the banking infrastructure of ndia. Taking into account all 1F banks in ndia7 there are o%erall IB7BG0
branches or offices7 The total assets of all scheduled commercial banks b& endCMarch F0.0 is appro5imatel&
)s G07 /07000 crore.
MM Kumbhar (F00/) K(lternati%e banking8 ( modern practice in ndiaK the ndian banking sector has
witnessed major transformation during the last G0 &ear. t has passed through %arious phases. n the process7 it
has embraced superior technolog&7 new products and ser%ices that are customer centric.
ndian Bankers (ssociation H McKinse& ( F0.0)C ndian Banking F0.0C Towards @igh +erforming !ectorC
(nal&sis the state of ndian Banking ndustr& in the "inancial &ear F0.0 and talks about the current functioning
of the banks .
,)( (F0..) ndian Banking !ector8 ,hallenges $nlikel& to 4erail the +rogress MadeC (nal&sis the %arious
challenges H opportunities that stand in front of the ndian Banking ndustr& . ts main focus is upon the bank
crisis and how societ& dealt with these stipulated crisis and what were the outcomes.
UTILITY OF RESEARCH: This research work is mainl& based on doctrinal research method. The researcher
peruses the rele%ant literature a%ailable in the librar& and the material found in public domain on the internet.
The research has taken the e5planator&7 anal&tical and critical approach in completing the research work.
Pr-m:r# )ur5e: ,ourt decisions7 statutes7 regulations7 municipal ordinances and court rules.
Se5)6.:r# S)ur5e:
Background information.
,itations to rele%ant primar& authorities.
(%oid o%erlooking pertinent issues or authorities.
MODE OF CITATION:
;orks cited *ntries
Books
'ournals and Maga:ines
#ewspapers
-ther !ources
-nline +ublication !ources
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