Indian banking sector review:

Financial sector reforms were initiated as part of overall economic reforms in the country and wide ranging reforms covering industry, trade, taxation, external sector, banking and financial markets have been carried out since mid 1991. A decade of economic and financial sector reforms has strengthened the fundamentals of the Indian economy and transformed the operating environment for banks and financial institutions in the country. The most significant achievement of the financial sector reforms has been the marked improvement in the financial health of commercial banks in terms of capital adequacy, profitability and asset quality as also greater attention to risk management. Further, deregulation has opened up new opportunities for banks to increase revenues by diversifying into investment banking, insurance, credit cards, depository services, mortgage financing, securitisation, etc. At the same time, liberalization has brought greater competition among banks, both domestic and foreign, as well as competition from mutual funds, NBFCs, post office, etc. Post-WTO, competition will only get intensified, as large global players emerge on the scene. Increasing competition is squeezing profitability and forcing banks to work efficiently on shrinking spreads. A positive fallout of competition is the greater choice available to consumers, and the increased level of sophistication and technology in banks. As banks benchmark themselves against global standards, there has been a marked increase in disclosures and transparency in bank balance sheets as also greater focus on corporate governance. Indias banking sector, currently ranked among the most preferred banking destinations in the world. a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal factors. For the past three decades India's banking system has several outstanding achievements to its credit. It is no longer confined to only metro politansor cosmopolitans in India; in fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reasons of India's growth process. The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. Not long ago, an account holder had to wait for hours at the bank counters for getting a draft orfor withdrawing his own money. Today, he has a choice. Gone are days when the most efficient banktransferred Without a sound and effective banking system in India it cannot have

money from one branch to other in two days. Now it is simple as instant messaging or dial apizza. Money has become the order of the day. Post independence: In 1948, the Reserve Bank of India, India's central banking authority, was nationalized, and it became an institution owned by the Government of India .In 1949, the Banking Regulation Act was enacted which empowered the Reserve Bank of India (RBI) "to regulate, control, and inspect the banks in India."The Banking Regulation Act also provided that no new bank or branch of an existing bank may be opened without a license from the RBI, and no two banks could have common directors. Liberalization : The new policy shook the Banking sector in India completely. Bankers, till this time, were used to the 4-6-4 method (Borrow at 4%; Lend at 6%; Go home at 4) of functioning. In the early1990s the then Narsimha Rao government embarked on a policy of liberalization and gave licenses to a small number of private banks, which came to be known as New Generation tech-savvy banks, whichincluded banks such as Global Trust Bank (the first of such new generation banks to be set up)whichlater amalgamated with Oriental Bank of Commerce, UTI Bank(now re-named as Axis Bank), ICICI Bankand HDFC Bank. Current situation Currently, India has 88 scheduled commercial banks (SCBs) - 28 public sector banks (that is with the Government of India holding a stake), 29 private banks (these do not have government stake; they maybe publicly listed and traded on stock exchanges) and 31 foreign banks. They have a combined network of over 53,000 branches and 17,000 ATMs . According to a report by ICRA Limited, a rating agency, the public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and 6.5% respectively. Over the last four years, India economy has been on a high growth trajectory, creating unprecedented opportunities for its banking sector. Most banks have enjoyed high growth and their valuations have appreciated significantly during this period. Looking ahead, the most pertinent issue is how well the banking sector is positioned to cater to continued growth. A holistic assessment of the banking sector is possible only by looking at the roles and actions of banks, their core capabilities and their ability to meet systemic objectives, which include increasing shareholder

value,

fostering

financial

inclusion,

contributing

to

GDP

growth,

efficiently

managingintermediation cost, and effectively allocating capital and maintaining system stability

Major Reform Initiatives:

Followings are the initiatives over last decade that have changed the face of the Indian banking and financial sector are:
1. Interest rate deregulation: Interest rates on deposits and lending have been deregulated

with banks enjoying greater freedom to determine their rates. 2. Adoption of prudential norms in terms of capital adequacy, asset classification, income recognition, provisioning, exposure limits, investment fluctuation reserve, etc.
3. Reduction in pre-emptions : lowering of reserve requirements (SLR and CRR), thus

releasing more lendable resources which banks can deploy profitably. 4. Government equity in banks has been reduced and strong banks have been allowed to access the capital market for raising additional capital. 5. Banks now enjoy greater operational freedom in terms of opening and swapping of branches, and banks with a good track record of profitability have greater flexibility in recruitment.
6. New private sector banks have been set up and foreign banks permitted to expand their

operations in India including through subsidiaries. Banks have also been allowed to set up. Offshore Banking Units in Special Economic Zones.
7.

New areas have been opened up for bank financing: insurance, credit cards, infrastructure financing, leasing, gold banking, besides of course investment banking, asset management, factoring, etc.

8. New instruments have been introduced for greater flexibility and better risk management:

e.g. interest rate swaps, forward rate agreements, cross currency forward contracts,

forward cover to hedge inflows under foreign direct investment, liquidity adjustment facility for meeting day-to-day liquidity mismatch.
9. Several new institutions have been set up including the National Securities Depositories

Ltd., Central Depositories Services Ltd., Clearing Corporation of India Ltd., Credit Information Bureau India Ltd.
10. Limits for investment in overseas markets by banks, mutual funds and corporate have

been liberalized. The overseas investment limit for corporate has been raised to 100% of net worth and the ceiling of $100 million on prepayment of external commercial borrowings has been removed. MFs and corporate can now undertake FRAs with banks. Indians allowed to maintain resident foreign currency (domestic) accounts. Full convertibility for deposit schemes of NRIs introduced.
11. Universal Banking has been introduced. With banks permitted to diversify into long-term

finance and DFIs into working capital, guidelines have been put in place for the evolution of universal banks in an orderly fashion.
12. Technology infrastructure for the payments and settlement system in the country has been

strengthened with electronic funds transfer, Centralized Funds Management System, Structured Financial Messaging Solution, Negotiated Dealing System and move towards Real Time Gross Settlement.
13. Adoption of global standards. Prudential norms for capital adequacy, asset classification,

income recognition and provisioning are now close to global standards. RBI has introduced Risk Based Supervision of banks (against the traditional transaction based approach). Best international practices in accounting systems, corporate governance, payment and settlement systems, etc. are being adopted. The countrys middle class accounts for over 320 million people. In correlation with the growth of the economy, rising income levels, increased standard of living, and affordability of banking products are promising factors for continued expansion. The Indian banking Industry is in the middle of an IT revolution, focusing on the expansion of retail and rural banking. Players are becoming increasingly customer centric in their A approach, which has resulted in innovative

methods of offering new banking products and services. Banks are now realizing the importance of being a big player and are beginning to focus their attention on mergers and acquisitions to take advantage of economies of scale and/or comply with Basel II regulation.

Banking structure in India :

Origination of banking in India dates to the last decades of the 18th century with the General Bank of India, which started in 1786, and the Bank of Hindustan (both of which are now defunct.) The oldest bank in existence in India is the State Bank of India (SBI), the largest commercial bank in the country that traces its origins back to June 1806.

Classification of banks into various groups:

SBI and Associate

1) SBI 5) State Bank of Mysore

2) State Bank of Bikaner and 6) State Bank of Patiala Jaipur 3) State Bank of Hyderabad 7) State Bank of Travancore

4) State Bank of Indore

Nationalised Banks
1) Punjab National Bank 3) Allahabad Bank 5) Indian Bank 7) United Bank of India 9) Dena Bank 11) Syndicate Bank 13) Corporation Bank 15) Central Bank of India 17) Indian Overseas Bank 19) IDBI Bank Ltd. 2) Bank of India 4) Canara Bank 6) Andhra Bank 8) UCO Bank 10) Bank of India 12) Union Bank of India 14) Punjab & Sind Bank 16) Bank of Maharashtra 18) Bank of Baroda 20) Vijaya Bank

Private Sector Banks

1) Axis Bank 2) ICICI Bank 3) HDFC Bank 4) Catholic Syrian Bank 5) ING Vysya Bank 6) IndusInd Bank 12) Bank Of Rajasthan 13) Karnataka Bank 14) Karur Vysya Bank 15) Yes Bank 16) Dhanalakshmi Bank 17) South Indian Bank

7) Ratnakar Bank 8) Development Credit Bank 9) TamilnadMercantile Bank

18) Kotak Mahindra Bank 19) Federal Bank 20) SBI Commercial & International Bank

10) Nainital Bank 11) Lakshmi Vilas Bank

21) Ratnakar Bank 22) City Union Bank

Foreign Banks
1) ABN AMRO Bank 2) Abu Dhabi Commercial Bank 3) Antwerp Diamond Bank 4) Bank Of America 5) Standard Chartered Bank 13) Deutsche Bank 14) HSBC 15) JP Morgan Chase Bank 16) State Bank of Mauritius 17) Krung Thai Bank

6)Bank Of Tokyo-Mitsubishi-UFI 7) Chinatrust Commercial Bank 8) Bank Of Bahrain & Kuwait 9) Oman International Bank 10) Shinhan Bank

18) Citibank 19) Societe Generale 20) Mizuho Corporate Bank 21) Sonali Bank 22) Calyon Bank

11)BNP Paribas 12)Mashreq Bank

23) Barclays Bank 24) Bank Of Ceylon

S.W.O.T ANALYSIS OF BANKING INDUSTRY The banking system in India is significantly different from that of the other Asian nations, because of the countrys unique geographic, social, and economic characteristics. Though the sector opened up quite late in India compared to other developed nations, like the US and the UK, the profitability of Indian banking sector is at par with that of the developed countries and at times even better on some parameters. For instance, return on equity and assets of the Indian banks are on par with Asian banks, and higher when compared to that of the US and the UK.

STRENGTH:

Indian banks have compared favourably on growth, asset quality and profitability with other regional 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.

The government's regular policy for Indian bank since 1969 has paid rich dividends with the nationalisation of 14 major private banks of India. 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

PSBs need to fundamentally strengthen institutional skill levels especially in sales and marketing, service operations, risk management and the overall organizational 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.

Impediments in sectoral reforms: Opposition from Left and resultant cautious approach from the North Block in terms of approving merger of PSU banks may hamper their growth prospects in the medium term.

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.

Banks will no longer enjoy windfall treasury gains that the decade-long secular decline in interest rates provided. This will expose the weaker banks.

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 timeespeciallym in its services sector-the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong.

Liberalisation of ECB norms: The government also liberalised the ECB norms to permit financial sector entities engaged in infrastructure funding to raise ECBs. This enabled banks and financial institutions, which were earlier not permitted to raise such funds, explore this route for raising cheaper funds in the overseas markets.

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. Significantly, FII and NRI investment limits in these securities have been fixed at 49%, compared to 20% foreign equity holding allowed in PSU banks.

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

PEST ANALYSIS
PEST analysis of any industry investigates the important factors that affect the industry and influence the companies operating in the sector. PEST stands for Political, Economic, Social and Technological analysis. The PEST Analysis is a tool to analyze the forces that drive the industry and how those factors can influence the industry.

ECONOMICAL

POLITICAL

GDP MONSOON INFLATION SAVINGS & ACCOUNTS AGRICULTURE CREDIT INTEREST RATES RAISING LIVING STANDRED DISPOSABLE INCOME

GOVERNMENT POLICY & BUDGECT BUDJECT MEASURES MONATORY POLICY FDI LIMIT

Organizatio n LEGAL TECHNICAL RESERVE BANK OF INDIA ACT BANKING REGULATION ACT

TECHNOLOGY IN BANKS CORE BANKING SOLUTIONS(CBS) ATM INTERNATE I.T SERVES AND MOBILE BANKING

SOCIOCULTURAL

CHANGES IN LIFE STYLE LITERACY RATE DEMOGRAPHIC OF LARGE POPULATION SHIFT TOWARDS THE NUCLEAR FAMILY

POLITICAL FACTORS
Government and RBI policies affect the banking sector. Sometimes looking into the political advantage of a particular party, the Government declares some measures to their benefits like waiver of short-term agricultural loans, to attract the farmers votes. By doing so the profits of the bank get affected. Various banks in the cooperative sector are open and run by the politicians. They exploit these banks for their benefits. Sometimes the government appoints various chairmen of the banks. Various policies are framed by the RBI looking at the present situation of the country for better control over the banks.

FOCUS ON REGULATIONS OF GOVERNMENT

Indian Banking is least affected as compare to other developed economy which is attributed to Reserve Bank of India for its robust policy framework, stricter prudential regulations with respect to capital and liquidity. This gives India an advantage in terms of credibility over other countries.

Government affects the performance of banking sector most by legislature and framing policy .government through its budget affects the banking activities securitization act has given more power to banking sector against defaulting borrowers.

MONETARY POLICY

Monetary Policy 2009-2010

Bank Rate: The Bank Rate has been retained unchanged at 6.0%. Repo Rate It has been reduced under the Liquidity Adjustment Facility (LAF) by 25 basis points from 5.0% to 4.75% with immediate effect. Reverse Repo Rate : It has been reduced under LAF by 25 basis points from 3.5% to 3.25% with immediate effect. RBI has retained the option to conduct overnight or longer term repo/reverse repo under the LAF depending on market conditions and other relevant factors. Cash Reserve Ratio: CRR has been retained unchanged at 5.0% of NDTL.

FDI LIMIT

The move to increase Foreign Direct Investment FDI limits to 49 percent from 20 percent during the first quarter of this fiscal came as a welcome announcement to foreign players wanting to get a foot hold in the Indian Markets by investing in willing Indian partners who are starved of net worth to meet CAR norms. Ceiling for FII investment in companies was also increased from 24.0 percent to 49.0 percent and have been included within the ambit of FDI investment

BUDGET MEASURES

BUDGET PROVISIONS Increase Farm Credit: The FM has further increase the farm credit target for 2009-10 at Rs 325000 crore compared to Rs 287000 crore targeted in 2008-09. Subvention of 1% to be paid as incentive to farmers: The Budget continued the Interest subvention scheme for short-term crop loans up to Rs 300000 per farmer at the interest rate of 7% per annum. Also additional subvention of 1% to be paid from this year, as incentive to those farmers who repay short-term crop loans on schedule. Also additional allocation of Rs 411 crore over Interim Budget 2009-10 was made for the same. Debt Waiver for Farmers: The Union Budget 2009-10 extended the debt waiver scheme by six more months for farmers owing more than 2 hectare of land. The Union Budget 2008-09 allowed these farmers 25% rebate on loan if they repay 75% of their overdue within stipulated period of 30th June 2009. Currently this facility has been extended from 30th June, 2009 to 31st December, 2009.

Setting up of separate task force for those not covered under the debt waiver scheme: The government also announced that it will set up a task force to examine the issue of debt taken by a large number of farmers in some regions of Maharashtra from private money lenders who were not covered by the loan waiver scheme announced last year.

OTHER PROVISIONS

The threshold for non-promoter public shareholding for all listed companies to be raised in a phased manner. To allow scheduled commercial banks setting up off-site ATMs without prior approval subject to reporting. To provide banking facilities in under-banked/un-banked areas in the next three years. A sub-committee of State level Bankers Committee (SLBC) would identify and formulate an action plan for the same.

The Ministry has also granted Rs 100 crore of grants in aid to ensure provision of at least one Centre/Point of Sales (POS) for banking services in each of the un-banked blocks. BUDGET IMPACT The Union Budget 2008-09 has focused on farm credit. The agriculture sector has

recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. The one-time bank loan waiver of nearly Rs 71000 crore (Rs 710 billion) to cover an estimated 40 million farmers was one of the major highlights of the last Budget. This Union Budget has provided further six months extension of 25% rebate on loan for farmers owing more than 2 hectare of land. With Government bearing this burden, banks would not be affected much. It will only help banks to clear their most stubborn NPA accounts on banks book. Moreover the emphasize on hiking promoter shareholding in Public sector banks, expanding network with ATM's, opening of banking centre in un-banked blocks are some of the positive moves for the sector. On the flipside, the spike in government borrowings is set to adversely affect the treasury income of banks in general and public sector banks in particular, through rise in yields on government securities.

OUTLOOK The Union Budget 2009-10 has not granted much of new grants/stimulus to the banking sector as a whole. However it has increased the Government borrowing to Rs 451093 crore (Rs 4510.93 billion) compared to Rs 361782 crore (Rs 3617.82 billion) targeted in the Interim Budget 2009-10. This is likely to push the Bond yields high moving forward. Despite ample liquidity in the system, the 10 year benchmark yield has zoomed above 7% levels owing to rise in borrowing target. Hardening of yields is likely to affect treasury profits of banks in general and Public sector banks in particular.

BUDGET PROPOSALS
1. IIFCL to refinance 60% of loans given by commercial banks for PPP-based projects in critical sectors. IIFCL and banks together will be able to support infrastructure projects involving total investment of Rs 1,000 bn. 2. Target for agriculture credit flow set at Rs.3250 bn for the year 2009-10. Interest subvention scheme at the interest rate of 7% will be continued. Additional subvention of 1% for the farmers who repay their debt on time. 3. Farm debt waiver scheme extended to 31st December 2009 from 30th June 2009. 4. Interest subvention scheme to exporters extended to 31st March 2010. 5. Special fund of Rs.40 bn out of Rural Infrastructure Development Fund (RIDF) to provide refinance to banks and State Finance Corporation for incremental lending to Micro and Small Enterprises (MSEs). 6. Rs.1 bn to ensure provision of at least one centre/Point of Sales (POS) for banking services in each of the unbanked blocks. 7. Interest subsidy to poor households for loans up to Rs.1,00,000 from banks. 8. Rs.20 bn earmarked for Rural Housing Fund in National Housing Bank (NHB) 9. Recapitalization of public sector banks and insurance companies.

10. Exemption of income of New Pension System (NPS) trust from income tax and dividend paid to NPS trust from dividend distribution tax. Sale and purchase of equity shares and derivatives by NPS trust will be exempt from the securities transaction tax.

BUDGET IMPACT: INDUSTRY

1. Long-term refinancing from IIFCL for infrastructure projects will ensure better asset-liability match for banks. 2. Debt waiver and interest subvention schemes will not have much impact on banks. 3. Recapitalization will ensure adequate capital for the growth of the public sector banks and insurance companies. 4. Rural Housing fund will boost the resource base of NHB for their refinance operation in rural housing sector. 5. Tax break for NPS trust will have positive impact on the same.

ECONOMIC FACTORS
Banking is as old as authentic history and the modern commercial banking are traceable to ancient times. In India, banking has existed in one form or the other from time to time. The present era in banking may be taken to have commenced with establishment of bank of Bengal in 1809 under the government charter and with government participation in share capital. Allahabad bank was started in the year 1865 and Punjab national bank in 1895, and thus, others followed. Every year RBI declares its 6 monthly policy and accordingly the various measures and rates are implemented which has an impact on the banking sector. Also the Union budget affects the banking sector to boost the economy by giving certain concessions or facilities. If in the Budget savings are encouraged, then more deposits will be attracted towards the banks and in turn they can lend more money to the agricultural sector and industrial sector, therefore, booming the economy. If the FDI limits are relaxed, then more FDI are brought in India through banking channels

GROWING ECONOMY / GDP

Indian economy has registered a growth of more that 9 per cent for last three year and is expected to maintain robust growth rate as compare to other developed and developing countries. Banking Industry is directly related to the growth of the economy.

The contributions of various sectors in the Indian GDP for 2007-2008 are as follows: Agriculture:17% Industry:29% ServiceSector:54% It is great news that today the service sector is contributing more than half of the Indian GDP. It takes India one step closer to the developed economies of the world. Earlier it was agriculture which mainly contributed to the Indian GDP.

The Indian government is still looking up to improve the GDP of the country and so several steps have been taken to boost the economy. Policies of FDI, SEZs and NRI investment have been framed to give a push to the economy and hence the GDP.

MONSOON

The cumulative seasonal rainfall (1st June -30th September 2009) for the country as a whole is 23 per cent below the Long Period Average (LPA). The year 2009 is the most deficient year after 1972.

LOW INTEREST RATES

Reserve Bank of India controls the Interest rate, which is based on several monetary policies. Recently RBI has reduced the interest rate which stimulates the growth rate of banking industry. As on September 11, 2009 Bank Rate was 6.00 per cent, the same as on the corresponding date of last year. Call money rates (borrowing & lending) were in the range of 1.50/3.47 per cent as compared with 5.25/11.00 per cent on the corresponding date of last year.

INFLATION RATES
Inflation represents a rise in general level of prices of goods and services over a period of time. It leads to an erosion in the purchasing power of money. Resultantly, each unit of currency buys fewer goods and services Different fiscal and monetary policies have curbed the Inflation rate from the high of 12.63 per cent to 3.92 per cent. To fight against the slowdown of the Economy, Government of India & Reserve Bank of India took many fiscal as well as monetary actions. Clubbed with fiscal & monetary actions, decreasing commodity prices, decreasing crude prices and lowering interest rate, we expect that Indian Economy could again register a robust growth rate in the year 2009-10. Inflation stands at 3.92 per cent on 7th February 2009 against a high of 12.63 per cent on 9th August 2008.

SAVINGS AND ACCOUNTS

As stated earlier, India continues to remain one of the high savings economies among the emerging market economies. Gross Domestic Savings (GDS) of the Indian economy constitutes savings of public, private corporate and household sectors. In the recent period the high growth performance of the Indian economy is driven by rise in savings

AGRICULTURE CREDIT

Agriculture has been the mainstay of our economy with 60% of our population deriving their sustenance from it. In the recent past, the sector has recorded a growth of about 4% per annum with substantial increase in plan allocations and capital formation in the sector. Agriculture credit flow was Rs 2,87,000 crore in 2008-09. The target for agriculture credit flow for the year 2009-10 is being set at Rs.3,25,000 crore. To achieve this, I propose to continue the interest subvention scheme for short term crop loans to farmers for loans upto Rs.3 lakh per farmer at the interest rate of 7% per annum. For this year, the government shall pay an additional subvention of 1% as an incentive to those farmers who repay their short term crop loans on schedule. Thus, the interest rate for these farmers will come down to 6% per annum. For this, I am making an additional Budget provision of Rs 411 crore over Interim BE.

DEBT RELIEF FOR FARMERS

The one-time bank loan waiver of nearly Rs 71,000 crore to cover an estimated 40 million farmers was one of the major highlights of the last Budget. Under the Agricultural Debt Waiver and Debt Relief Scheme (2008), farmers having more than two hectares of land were given time upto 30th June, 2009 to pay 75% of their overdues. Due to the late arrival of monsoon, I propose to extend this period by six months upto 31st December, 2009 .

SOCIO CULTUREAL FACTORS

Socio culture factors also affect the business. They show in which people behave in country. Socio-cultural factors like taboos, customs, traditions, tastes, preferences, buying and consumption habit of people, their language, beliefs and values affect the business. Banking industry is also operates under this social environment and it is also affect by this factor.

These factor are changing continuously peoples life style, their behavior, consumption pattern etc. is changing and also creating opportunities and threat for banking industry. There are some socio-culture factors that affect banking in India have been analyzed below.

TRADITIONAL MAHAJAN PRATHA

Before the birth of the banks, people of India were used to borrow money local moneylenders, shahukars, shroffs. They were used to charge higher interest and also mortgage land and house. Farmers were exploited by these shahukars. But farmers need money. So, they did not have any choice other than going to shahukar and borrowing money from them in spite of exploitation by these people. But after emergence of banks attitude of people was changed. Traditional mahajan pratha still exist in India specially in rural areas. This affects the banking sector. Rural people afraid to go to bank to borrow money instead they prefer to borrow from shahukar whith whom they have relationships from the time of their fore fathers. Banking infrastructure is also week in some interior areas of India. So, this is reason it still exist.

SHIFT TOWARDS NUCLEAR FAMILY

Attitude of people of India is changing. Now, younger generation wants to remain separate from their parents after they get married. Joint families are breaking up. There are many reasons behind that. But banking sector is positively affected by this trend. A family need home consumer durables like freeze, washing machine, television, bike, car, etc.. so, they demand for these products and borrow from banks. Recently there is boost in housing finance and vehicle loans. As they do not have money they go for installments. So, banks satisfy nuclear families wants.

CHANGE IN LIFE STYLE Life style of India is changing rapidly. They are demanding high class products. They have become more advanced. People want everything car, mobile, etc.. what their fore father had dreamed for. Now teenagers also have mobile and vehicle. Even middle class people also want to have well furnished home, television, mobile, vehicle and this has opened opportunities for banking secter to tap this change. Every thing is available so it has become easy to purchase anything if you do not have lump sum.

POPULATION

Increase in population is one of he important factor, which affect the private sector banks. Banks would open their branches after looking into the population demographics of the area. Percentage of deposit in any branches of banks depends upon the population demographic of that area. The population of India is about 102.90 is expected to reach about 119.70 cores in 2011. About 70% of population is below 35years of age. They are in the prime earning stage and this increase the earning of the banks. Total Deposits mobilized by the Private Sector Banks increased from Rs, 2,52,335 crore as on 31st March 2004 to Rs. 3,12,645 crore as on 31st March 2005. Deposits showed a subdued growth during 2004-05.Income distributions also affects the operations and overall business of private sector banks.

LITERACY RATE
Literacy rate in India is very low compared to developed countries. Illiterate people hesitate to transact with banks. So, this impacts negatively on banks. But there is positive side of this as well i.e. illiterate people trust more on banks to deposit their money, they do not have market information. Opportunities in stocks or mutual funds. So, they look bank as their sole and safe alternative. Literacy rate of India is around 65%

LITERACY RATE IN INDIA

year 1951 1961 1971

Persons 18.3 28.3 34.5

male 27.2 40.4 46.0

female 8.9 15.3 22.0

1981 1991 2001

41.4 52.2 65.4

53.4 64.1 75.8

28.5 39.3 52.1

TECHNOLOGICAL FACTORS

TECHNOLOGY IN BANKS
Technology plays a very important role in banks internal control mechanisms as well as services offered by them. It has in fact given new dimensions to the banks as well as services that they cater to and the banks are enthusiastically adopting new technological innovations for devising new products and services.

ATM

The latest developments in terms of technology in computer and telecommunication have encouraged the bankers to change the concept of branch banking to anywhere banking. The use of ATM and Internet banking has allowed anytime, anywhere banking facilities. Automatic voice recorders now answer simple queries, currency accounting machines makes the job easier and self-service counters are now encouraged. Credit card facility has encouraged an era of cashless society. Today MasterCard and Visa card are the two most popular cards used world over. The banks have now started issuing smartcards or debit cards to be used for making payments. These are also called as electronic purse. Some of the banks have also started home banking through telecommunication facilities and computer technology by using terminals installed at customers home and they can make the balance inquiry, get the statement of accounts, give instructions for fund transfers, etc. Through ECS we can receive the dividends and interest directly to our account avoiding the delay or chance of loosing the post.

IT SERVICES & MOBILE BANKING

Today banks are also using SMS and Internet as major tool of promotions and giving great utility to its customers. For example SMS functions through simple text messages sent from your mobile. The messages are then recognized by the bank to provide you with the required information. All these technological changes have forced the bankers to adopt customer-based approach instead of product-based approach Technology advancement has changed the face of traditional banking systems. Technology advancement has offer 24X7 banking even giving faster and secured service.

CORE BANKING SOLUTIONS

It is the buzzword today and every bank is trying to adopt it is the centralize banking platform through which a bank can control its entire operation the adoption of core banking solution will help bank to roll out new product and services.

Economy analysis:
1. GDP(Gross Domestic Product) GDP - composition by sector: agriculture: 18.5% industry: 26.3% services: 55.2% (2010 est.)

GDP can be defined in three ways, all of which are conceptually identical. First, it is equal to the total expenditures for all final goods and services produced within the country in a stipulated period of time (usually a 365-day year). Second, it is equal to the sum of the value added at every stage of production (the intermediate stages) by all the industries within a country, plus taxes less subsidies on products, in the period. Third, it is equal to the sum of the income generated by production in the country in the periodthat is, compensation of employees, taxes on production and imports less subsidies, and gross operating surplus (or profits). India Gross Domestic Product is worth 1729 billion dollars or 2.79% of the world economy, according to the World Bank. Historically, from 1960 until 2010, India's average Gross Domestic Product was 339.84 billion dollars reaching an historical high of 1729.01 billion dollars in

December of 2010 and a record low of 36.61 billion dollars in December of 1960. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points.

GDP Growth Rate:

The Gross Domestic Product (GDP) in India expanded 7.7 percent in the second quarter of 2011 over the previous quarter. Historically, from 2000 until 2011, India's average quarterly GDP Growth was 7.45 percent reaching an historical high of 11.80 percent in December of 2003 and a record low of 1.60 percent in December of 2002. India's diverse economy encompasses traditional village farming, modern agriculture, handicrafts, a wide range of modern industries, and a multitude of services. Services

are the major source of economic growth, accounting for more than half of India's output with less than one third of its labor force. The economy has posted an average growth rate of more than 7% in the decade since 1997, reducing poverty by about 10 percentage points

Gdp annual growth rate: The Gross Domestic Product (GDP) in India expanded 7.70 percent in the second quarter of 2011 over the same quarter, previous year. Unlike the commonly used quarterly GDP growth rate the annual GDP growth rate takes into account a full year of economic activity, thus avoiding the need to make any type of seasonal adjustment. Historically, from 2004 until 2011, India's average annual GDP Growth was 8.45 percent reaching an historical high of 10.10 percent in September of 2006 and a record low of 5.50 percent in December of 2004.

GDP per capita PPP India GDP Per Capita, when adjusted by purchasing power parity, stands at 2946 US dollars, according to the World Bank. The GDP per capita is obtained by dividing the countrys gross domestic product, adjusted by purchasing power parity, by the total population. From 1980 until 2008, India's GDP Per Capita adjusted by Purchasing Power Parity averaged 1254.03 dollars, reaching an historical high of 2946.00 dollars in December of 2008 and a record low of 415.00 dollars in December of 1980 GDP per capita The gross domestic product per capita is the value of all final goods and services produced within a nation in a given year divided by the average (or mid-year) population for the same year. The gross domestic product (GDP) is one of the measures of national income and output for a given country's economy. India GDP Per Capita stands at 718 US dollars, according to the World Bank. The GDP per capita is obtained by dividing the countrys gross domestic product, adjusted by inflation, by the total population. Historically, from 1960 until 2008, India's

average GDP Per Capita was 316.47 dollars reaching an historical high of 718.00 dollars in December of 2008 and a record low of 181.00 dollars in December of 1960.

Government Debt To GDP The Government Debt in India was last reported at 69.2 percent of the countrys GDP. From 1991 until 2010, India's average Government Debt to GDP was 72.60 percent reaching an historical high of 81.20 percent in December of 2003 and a record low of 64.10 percent in December of 1996. Generally, Government debt as a percent of GDP is used by investors to measure India's ability to make future payments on its debt, thus affecting India's borrowing costs and government bond yields

Inflation Rate The inflation rate in India was last reported at 10.1 percent in September of 2011. From 1969 until 2010, the average inflation rate in India was 7.99 percent reaching an historical high of 34.68 percent in September of 1974 and a record low of -11.31 percent in May of 1976. Inflation rate refers to a general rise in prices measured against a standard level of purchasing power. The most well known measures of Inflation are the CPI which measures consumer prices, and the GDP deflator, which measures inflation in the whole of the domestic economy.

Interest Rate: The benchmark interest rate (reverse repo) in India was last reported at 7.5 percent. In India, interest rate decisions are taken by the Reserve Bank of India's Central Board of Directors. The official interest rate is the benchmark repurchase rate. From 2000 until 2010, India's average interest rate was 5.82 percent reaching an historical high of 14.50 percent in August of 2000 and a record low of 3.25 percent in April of 2009.

Currency:

USDINR - Indian Rupee Exchange rate The Indian Rupee exchange rate depreciated 10.21 percent against the US Dollar during the last 12 months. Historically, from 1973 until 2011 the USDINR exchange averaged 30.26 reaching an historical high of 51.97 in March of 2009 and a record low of 7.19 in March of 1973. The Indian Rupee spot exchange rate specifies how much one currency, the USD, is currently worth in terms of the other, the INR. While the Indian Rupee spot exchange rate is quoted and exchanged in the same day, the

Indian Rupee forward rate is quoted today but for delivery and payment on a specific future date.

Balance of Trade : India reported a trade deficit equivalent to 9767 Million USD in September of 2011. India is leading exporter of gems and jewelry, textiles, engineering goods, chemicals, leather manufactures and services. India is poor in oil resources and is currently heavily dependent on coal and foreign oil imports for its energy needs. Other imported products are: machinery, gems, fertilizers and chemicals. Main trading partners are European Union, The United States, China and UAE

Bank capital to assets ratio (%) in India Bank capital to assets is the ratio of bank capital and reserves to total assets. Capital and reserves include funds contributed by owners, retained earnings, general and special reserves, provisions, and valuation adjustments. Capital includes tier 1 capital (paid-up shares and common stock), which is a common feature in all countries' banking systems, and total regulatory capital, which includes several specified types of subordinated debt instruments that need not be repaid if the funds are required to maintain minimum capital levels (these comprise tier 2 and tier 3 capital). Total assets include all nonfinancial and financial assets.

Bank nonperforming loans to total gross loans (%) The Bank nonperforming loans to total gross loans (%) in India were reported at 2.30 in 2008, according to the World Bank. Bank nonperforming loans to total gross loans are the value of nonperforming loans divided by the total value of the loan portfolio (including nonperforming loans before the deduction of specific loan-loss provisions). The loan amount recorded as nonperforming should be the gross value of the loan as recorded on the balance sheet, not just the amount that is overdue.

Domestic credit provided by banking sector (% of GDP) The Domestic credit provided by banking sector (% of GDP) in India was reported at 71.59 in 2008, according to the World Bank. Domestic credit provided by the banking sector includes all credit to various sectors on a gross basis, with the exception of credit to the central government, which is net. The banking sector includes monetary authorities and deposit money banks, as well as other banking institutions where data are available (including institutions that do not accept transferable deposits but do incur such liabilities as time and savings deposits.

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