Business Composition

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Declaration

I Dipika Rani Roll No0610405 Class MBA Finance 2nd Year (4th semester)Haryana School of Businesshereby declare that the project entitledBusiness Composition of Scheduled Commercial Banksis my originalwork andhas

[Signature of the Candidate]

Acknowledgement

No task is a single mans effort. Cooperation and coordination of various

people at various places go into the successful implementation. It is a greatpleasure to have the opportunity to extend my heartfelt thanks to everybodywho helped me through the progress of this project.

It would be prudent to commence this report with a sincere tribute to all thosewho played an indispensable role in the accomplishment of this work andobliged whenever and wherever their able guidance was required.


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I would like to pay my gratitude to my college mentorProfessor M.S.Turan (Professor at H.S.B.) for providing his timely, expert

and valuable suggestions as and when required.

Thanking you,

Signature of supervisor DIPIKA

RANI

ROLL NO. 0610405


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Contents

Title Page

Declaration

Certificate From Guide

Acknowledgement

Contents

List of tabels

List of figures

Chapter 1 - Introduction

Chapter 2- Review of literature

Chapter 3

1.Problem statement

2. Research Objective

3. Source & nature of Data

4. Analysis of Data

5. Plan of study

6. Limitation of study

7. Utility of Study

8. Conclusion

9. Bibliography


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CHAPTER 1

(A) INTRODUCTION TO BANKING

(1.1) INTRODUCTION TO BANKS

Finance occupies an important place as input in every economic activity. It isrightly termed as Science of Money. The word Banking as being

defined by Sec.5 (b) of the Banking Regulation Act, 1949, as: 'Banking'means accepting, for the purpose of lending or investment, of deposits of

money from the public repayable on demand or otherwise and withdrawal

by cheques, draft, order or otherwise." Banks are business institutes with theundoubted objective of earning profit. Project funding and Credit Riskmanagement depends upon banks ability in generating any type of Volume

and Mix of loans depending on two factors banks strength and

Credit requirement in operational area. Presently due to competition andmeeting the demanding standards of customers has made lending a tough jobfor bankers.

Banks deploy a major portion of fund by way of loan and advances. The termCREDIT comes from Latin word CREDO meaning I TRUST. LendingBusiness provides a major part of the total income of the bank. Given these,and the fact that the bulk of funds lent belong to depositors, it is necessary that

funds be deployed on a sound and realizable basis, ensuring optimum return.Different methods of assessment of project financing are carried out by CreditDepartment of a bank. While lending banks also keep into account the widernational objectives of economic and social development.

The art of managing risk is more challenging then ever now a days. Riskmanagers face a wide range of demands from working with multiple variablesto funding technology.

Banks are institutions that channelise the savings of individuals and entities

into investment in productive assets in the economy. The accumulate thesavings in the form of demand and time deposits, which are then deployed infinancing agriculture, industry, trade and services.

Banks have the advantage of low cost funding as they have access to the retailfund base. The access to retail funds is on account of the cheque facility that

permits an account-holder to transmit funds at will. This convenience of easy


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transmission of funds has led to accumulation of funds at relatively low interestrates across numerous retail accounts thereby providing the bank withenormous resources at low cost of funds.

1.2 INDIAN BANKING SYSTEM THE HISTORY

Banking in India has its origin as early as the Vedic period. It is believed thatthe transition from money lending to banking must have occurred even beforeManu, the great Hindu Jurist, who has devoted a section of his work to depositsand advances and laid down rules relating to rates of interest. During the Mogul

period, the indigenous bankers played a very important role in lending moneyand financing foreign trade and commerce. During the days of the East IndiaCompany, it was the turn of the agency houses to carry on the banking

business. The General Bank of India was the first Joint Stock Bank to beestablished in the year 1786. The others, which followed, were the Bank of

Hindustan and the Bengal Bank. The Bank of Hindustan is reported to havecontinued till 1906 while the other two failed in the meantime.

In the first half of the 19th century the East India Company established threebanks; the Bank of Bengal in 1809, the Bank of Bombay in 1840 and the Bankof Madras in 1843. These three banks also known as Presidency Banks wereindependent units and functioned well. These three banks were amalgamated in


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1920 and a new bank, the Imperial Bank of India was established on 27th

January 1921. With the passing of the State Bank of India Act in 1955 theundertaking of the Imperial Bank of India was taken over by the newlyconstituted State Bank of India.

PRE-INDEPENDENCE PHASE :

Although, money lending and indigenous banking, in some form or the other,was in operation in ancient India Modern banking has been legacy of theBritish rule. The first Joint Stock bank was established in Calcutta in 1870 byone of the Agency House. The joint stock banks were followed by threePresidency Banks, the first among them being the Bank of Bengal, whichreceived its charter in 1809. The Bank of Bombay and Bank of Madras wereestablished in 1840 and 1843 respectively. As these banks do not conductexchange and remittance between Indian banks and other countries, this

situation lead to the entry of Exchange Banks (Foreign banks) towards laterhalf of the nineteenth century.

In January 1921, the Imperial bank of India commenced its operations aftertaking over the businesses of all three presidency banks. The Reserve Bank ofIndia was constituted in January 1935 and it commenced its business in April1935. The World War II period saw the proliferation of banking institutions incountry and by 1947 there were 558 commercial banks operating in India ofwhich 99 were scheduled banks and 459 were non-scheduled banks. The firstcomprehensive legislation relating to banking in country came with theadoption of the Banking Companies Act, 1949.

POST-INDEPENDENCE PHASE:

In the five decades since independence, banking in India has evolved throughfour distinct phases:

Foundation Phase can be considered to cover 1950s and 1960s till thenationalization of banks in 1969. The focus during this period was to laythe foundation for a sound banking system in the country. As a result the

phase witnessed the development of necessary legislative framework forfacilitating re-organization and consolidation of the banking system, formeeting the requirements of Indian economy. A major development wastransformation of Imperial Bank of India into State Bank of India in1955. RBI tightened its control over the Commercial banks due to failureof Pallai Central Bank in August 1960. The Deposit InsuranceCorporation was established in January 1962 as a wholly owned


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subsidiary of RBI. Due to amalgamation and liquidation in 1967 themembers of commercial banks declined to 91 of which 71 werescheduled banks and 20 were non-scheduled banks. The mostmemorable event relating to banking industry, an event that was totransform the banking industry beyond recognition, was thenationalization of 14 major banks in July 1969. Based on therecommendations of the Gadgil Study Group and the NarasimhanCommittee, Reserve Bank of India introduced the Head Bank Schemetowards end of 1969. The banking commission headed by R.S. Saraujagave report on structure and functioning of banks in feb.1972. Accordingto recommendations of Narasimhan Committee, the regional rural bankscame to be established in 1975. The National Bank of Agriculture andRural Development was established in 1982 to organize the industrialsupport to agriculture and rural development. In 1980 six larger privatesector banks were nationalized bringing the number of nationalized

banks to 20. Expansion Phase had begun in mid 60s but gained momentum after

nationalization of banks and continued till 1984. A determined effortwas made to make banking facilities available to the masses. Branchnetwork of the banks was widened at a very fast pace covering the ruraland the semi-urban population, which had no access to banking hitherto.Most importantly, credit flows were guided towards the priority sectors.However this weakened the lines of supervision and affected the qualityof assets of the banks and pressurized their profitability and brought

competitive efficiency of the system at low ebb. Consolidation Phase, the phase started in 1985 when a series of policy

initiatives were taken by RBI which saw market slowdown in the branchexpansion. Attention was paid to improving housekeeping, customer-service, credit management, staff productivity and profitability of banks.Measures were also taken to reduce the structural constraints thatobstructed the growth of money market.

Reform Phase, the macro economic crisis faced by the company in1991 paved the way for extensive financial sector reforms which broughtderegulation of interest rates, more competition, technological changes,

prudential guidelines on asset classification and income recognition,capital adequacy, autonomy packages, etc.

1.3 INDIAN BANKING SYSTEM THE CURRENT SCENARIO

Banking Industry in India has always revolved around the traditional functionof deposits and credit. Their role had been defined as to assist the overall


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economic growth with majority of share being controlled by the Government ofIndia in most of the banks. But with the process of liberalization, the bankingindustry has also undergone tremendous change in the last 5 years. The market,which was largely controlled by the public sector banks, has now been facingstiff competition not only from foreign players but also from the newgeneration private sector banks. The rules of the game have been changing withthe RBI introducing new norms to make banks more accountable and to adoptthe practices followed worldwide.

Most of the banks have now been trying to function on the concept of aUniversal Bank. Apart from the traditional functions of a commercial bank,they are taking steps to build themselves into a one stop financial centerwherein all the financial products would be available. Banks have startedcatering to the retail segment to improve their deposit portfolio. In order tohave a maximum share in this segment; most of the banks have beenintroducing new products. The delivery channels have also been shifted from

branches to ATMs, phone banking, net banking etc.

Technology has become an important medium of not only attracting newcustomers but also in retaining them. The new generation private sector bankshave made a strong presence in the most lucrative business areas in the country

because of technology upgradation. While, their operating expenses have beenfalling as compared to the PSU banks, their efficiency ratios (employees

productivity and profitability ratios) have also improved significantly.

Mergers and Acquisitions have also started playing their role in the bankingindustry where lots of players are trying to consolidate their position. Therecent merger of Times Bank with HDFC Bank was an important step in thisdirection. In recent times, most of the new private sector banks have showninterest in inducting a foreign partner in their operations.

The government is planning to bring down its stake in the public sector banksfrom 51% to 33%. This move will enable these banks to raise further capital toadhere to the CAR requirements and will also help in changing their perceptionin the market vis--vis the private sector banks. Most of the banks are also

planning to enter the insurance business and are in the process of identifyingtheir strategic partners. Since most of the banks already have an extensivedistribution network, this new business should result in substantial revenues.But with most of the top league players planning to enter this business, themore efficient and pro active players would be able to take a lead.

INDIAN BANKING STRUCTURE


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The structure of the banking industry affects its performance and efficiencywhich, in turn, affects the banks ability to collect savings and channel theminto productive investment. The success of banking sector very much dependson the ownership of banks-whether private or public or mixed-whether theindustry is competitive or oligopolistic and the extent of entry restrictions onnew banks; how far it is regulated in terms of interest rates, spreads betweenlending and deposit rates etc.

For the first time, most of the major commercial banks were nationalized inIndia in 1969. With the nationalization, restriction on entry and expansion of

private and foreign banks increased. The reserve bank of INDIA also beganenforcing uniform interest rates and service charges among nationalized. Thiscaused a lack of competition among public banks or between the public and

private banks. This combined with the labour policies of the public sectorwhere employees salaries promotions are not linked with their job

performance, has led to steady decline efficiency, quality of customer serviceand work culture in the banks. Another effect of the lack of competition is thatmost banking operations have not computerized as workers oppose it fearing

job losses, while the management has felt no pressure to improve efficiency orbanking services.

Of the funds left with banks, 40 per cent must be lent to priority sectors atconcessional rates and further requirements of loan to the exporting industries,food procurement programmes, etc. again at concessional rates, left 25 per centof bank deposits to meet the financial rates, left 25 per cent of bank deposits tomeet the financial needs of all the remaining sectors. The purpose of prioritysector lending was to increase the proportion of credit to those sectorsimportant to the national economy in terms of their contribution to growth,employment generation, or more equal income distribution, which may notreceive adequate credit otherwise.

Some of the priority sector loans were given without adequate safeguardsagainst default. A significant proportion of loans were shared by those forwhom it was never intended. It is estimated that twenty one percent of the loanadvanced by the public sector banks are non-performing. Concessional prioritysector lending imposes a burden on the rest of the economy which mustsubsidize the cost of such loans and is faced with r3educed credit availability tothe more productive investment. Thus the social benefits of priority sectorlending have proved to be smaller and cost higher than originally expected.


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Since bank nationalization in 1969, the RBI has usually set interest rate. Whilethe RBI followed a low interest rate policy until the mid 1970 the interest rateshave been fairly since then. However a large fraction of loans were subsidizedincluding loans for the public sector, priority sector, exporters etc,

Most of these categories attracted nominal annual interest rate of 13%.

CENTRAL BANK

A bank which is entrusted with the functions of guiding and regulating thebanking system of a Country is known as its Central bank. Such a bank doesnot deal with the general public. It acts essentially as Governments banker,maintain deposit accounts of all other banks and advances money to other

banks, when needed. The Central Bank provides guidance to other bankswhenever they face any problem. It is therefore known as the bankers bank.

The Reserve Bank of India is the central bank of our country. The Central Bankmaintains record of Government revenue and expenditure under various heads.

Important Functions of RBI

Monetary Authority: Formulates implements and monitors the monetary policy.Objective: maintaining price stability and ensuring adequate flow of credit to

productive sectors.

Regulator and supervisor of the financial system:

Prescribes broad parameters of banking operations within which thecountry's banking and financial system functions.

Objective: maintain public confidence in the system, protect depositors'interest and provide cost-effective banking services to the public.

Manager of Foreign Exchange

Manages the Foreign Exchange Management Act, 1999.

Objective: to facilitate external trade and payment and promote orderlydevelopment and maintenance of foreign exchange market in India.

Issuer of currency:

Issues and exchanges or destroys currency and coins not fit forcirculation.


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Objective: to give the public adequate quantity of supplies of currencynotes and coins and in good quality.

Developmental role

Performs a wide range of promotional functions to support nationalobjectives.

Related Functions

Banker to the Government: performs merchant banking function for thecentral and the state governments; also acts as their banker.

Banker to banks: maintains banking accounts of all scheduled banks.

Internal organization & management of RBI

The chairman of the central board of directors of the bank and its chiefexecutive authority is the governor. He has the powers of general superintendance and direction of the affairs and business of the bank. The governoris assisted at present in the performance of his duties by four DEPUTYGOVERNORS and four EXECUTIVE DIRECTORS. The EXECUTIVEDIRECTOR comes in between the DEPUTY GOVERNOR and the CHIEFMANAGER

The primary functions of the bank are exercised through two separate

departments- the banking and issue departments. These two departmentsconstitute what are known as local offices/branches of the bank & are locatedat sixteen major cities of the country. In place where there is no office of the

bank, it is represented by agents & sub agents, the SBI &its subsidiaries.Formulation of policies and rendering of advice to government on economicand financial matters etc. are mainly attended at headquarters or the centraloffice of the bank located in BOMBAY. The department of non-bankingcompanies located in CALCUTTA. For a satisfactory performance of thevastly increased volume of work some of the central office department hasestablished regional offices at various centers.

1.4CLASSIFICATION OF BANKS:

1.4.1 SCHEDULED COMMERCIAL BANKS

Scheduled Banks in India constitute those banks which have been included inthe Second Schedule of Reserve Bank of India (RBI) Act, 1934. RBI in turn


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includes only those banks in this schedule which satisfy the criteria laid downin section 42(6)(a) of the act. There are more than 300 scheduled banks in

India having a total network of 64,918 branches. The scheduled commercialbanks in India comprise of State bank of India and its associates (8),nationalized banks (19), foreign banks (45), private sector banks (32).

"Scheduled banks in India" means the State Bank of India constituted under theState Bank of India Act, 1955 (23 of 1955), a subsidiary bank as defined in theState Bank of India (Subsidiary Banks) Act, 1959 (38 of 1959), acorresponding new bank constituted under section 3 of the Banking Companies(Acquisition and Transfer of Undertakings) Act, 1970 (5 of 1970), or undersection 3 of the Banking Companies (Acquisition and Transfer ofUndertakings) Act, 1980 (40 of 1980), or any other bank being a bank includedin the Second Schedule to the Reserve Bank of India Act, 1934 (2 of 1934), butdoes not include a co-operative bank".

COMMERCIAL BANK:

Banks in India were started on the British Pattern in the beginning of the 19thcentury. In those days, all the banks were joint stock banks and a large numberof them were small and weak. At the time of the second world war, about 1500

joint stock banks were operating in undivided India, out of which over 1400were non-scheduled banks. A quiet few of them were managed by bad anddishonest management and naturally there wer6e a number of bank failures.Hence the Government has to step in and the Banking Companies Act, 1949


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(which was subsequently renamed as Banking Regulation Act) was enactedwhich led to gradual elimination of weak banks who were not in a position tofulfill the various requirements of the Act. In order to strengthen the weak unitsand revive public confidence in the banking system, a new section 45 wasinserted in the Banking regulation Act in September, 1960, empowering theGovernment of India to compulsorily amalgamate weak units with strongerones on the recommendations of RBI. Today banks are broadly classified intotwo - Scheduled Banks and Non-scheduled Banks.

Scheduled banks are those banks which are included in the second schedule ofthe Reserve Bank Act, 1934. In terms of Sec. 42(6) (a) of the Reserve Bank ofIndia Act, a bank should fulfill the following conditions:

1. It must have a paid-up capital and reserves of an aggregate value of notless than Rs 5 lakhs;

2. It must satisfy RBI that its affairs are not conducted in a mannerdetrimental to the depositors;

3. It must be a state co-operative bank or a company under companies act,1956 or an institution notified by the Central Government in this behalfor a corporation or a company incorporated by or under any law in forcein any place outside India.

The scheduled banks enjoys certain privileges like approaching RBI forfinancial assistance, refinance etc and correspondingly, they have certainobligations like maintaining certain cash reserves as prescribed the RBI,submission of returns etc. The scheduled commercial banks in India compriseof, State bank of India and its associates (8), the other nationalised banks (19),foreign banks, private sector banks, co-operative banks and regional rural

banks. As at the end of 30th June, 1999, there were 300 scheduled banks inIndia having a total network of 64,918 branches among them.

Non-scheduled banks are those joint stock banks, which are not included inthe second schedule of the RBI act on account of the failure to comply with theminimum requirements for being scheduled. As on 30th June, 1997, there areonly 3 non-scheduled commercial banks operating in the country with a total of9 branches.

TYPES OF COMMERCIAL BANKS

Public Sector Banks Private Sector Banks Foreign Banks


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Public Sector Banks

Among the Public Sector Banks in India, United Bank of India is one of the 14major banks which were nationalized on July 19, 1969. Its predecessor, in thePublic Sector Banks, the United Bank of India Ltd., was formed in 1950 with

the amalgamation of four banks viz. Comilla Banking Corporation Ltd. (1914),Bengal Central Bank Ltd. (1918), Comilla Union Bank Ltd. (1922) andHooghly Bank Ltd. (1932).These are banks where majority stake is held by theGovernment of India or Reserve Bank of India. Examples of public sector

banks are: State Bank of India, Corporation Bank, Bank of Baroda and DenaBank, etc.

The Public Sector in India banking emerged to its present position in threestages. First, the conversion of the exiting imperial Bank of India into the StateBank of India in1955, followed by the taking over of the 7 state associated

banks as its subsidiary banks; Second the nationalization of 14majorcommercial banks on July 17, 1969 and last, the nationalization of 6 morecommercial banks on April 15, 1980. Thus 27, banks constitute the Publicsector in the Indian commercial Banking.

Private Sector Banks

Private banking in India was practiced since the beginning of banking system in

India. The first private bank in India to be set up in Private Sector Banks inIndia was IndusInd Bank. It is one of the fastest growing Bank Private SectorBanks in India The first Private Bank in India to receive an in principleapproval from the Reserve Bank of India was Housing Development FinanceCorporation Limited, to set up a bank in the private sector banks in India as partof the RBI's liberalization of the Indian Banking Industry. It was incorporatedin August 1994 as HDFC Bank Limited with registered office in Mumbai andcommenced operations as Scheduled Commercial Bank in January 1995

FOREIGN BANKS:

Foreign banks have been doing the normal banking business in the country.During the period of nationalization, the entry of new foreign banks andexpansion by existing foreign banks were prohibited. Even, when the normswere relaxed later on, RBI was very slow in granting any further approvals tothese banks. But most of these banks have concentrated on the metropolitancities of the country and have been able to do reasonably well. These banks


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have used the latest technology to compensate for the limited number ofbranches they have.

In the post liberalization period, there has been a sharp increase in the totalbusiness done by the foreign banks. A number of new players have entered and

the existing players have consolidated their position in the market. In the lastcouple of years, some of the foreign banks have entered the retail segment andintroduced a number of new products in the market. This has intensified thecompetition in the banking sector and has made most of the old players rethinktheir strategy.

Looking at the potential of the Indian markets, some of the foreign banks inrecent times have expressed their plans of acquiring few Indian banks forfurther expansion. The current RBI norm does not allow an Indian Bank to

place equity with a foreign bank carrying branch transaction in the country.

These bank norms are however expected to be eased.

Most of the developments in the last couple of years have been in favor of thenew generation private sector banks that have equipped themselves with latesttechnology and have also focussed more on fee-based revenues.

1.4.2 DEVELOPMENT BANK

Business often requires medium and long-term capital for purchase ofmachinery and equipment, for using latest technology, or for expansion and

modernization. Such financial assistance is provided by Development Banks.They also undertake other development measures like subscribing to the sharesand debentures issued by companies, in case of under subscription of the issue

by the public. Industrial Finance Corporation of India (IFCI) and StateFinancial Corporation (SFC) are examples of development banks of India.

1.4.3 CO-OPERATIVE BANK

People who come together to jointly serve their common interest often form aco-operative society under the Co-operative Societies Act. When a co-operative

society engages itself in banking business it is called a Co-operative Bank. Thesociety has to obtain a license from the Reserve Bank of India before starting

banking business. Any co-operative bank as a society is to function under theoverall supervision of the Registrar, Co-operative Societies of the State. Asregards banking business, the society must follow the guidelines set and issued

by the Reserve Bank of India.


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1.4.3.1 TYPES OF CO OPERATIVE BANKS

There are three types of co-operative banks operating in our country. They areprimary credit societies, central co-operative banks and state co-operativebanks. These banks are organized at three levels, village or town level, district

level and state level.

Primary Credit Societies: These are formed at the village or town level withborrower and non-borrower members residing in one locality. The operationsof each society are restricted to a small area so that the members know eachother and are able to watch over the activities of all members to prevent frauds.

Central Co-operative Banks: These banks operate at the district level havingsome of the primary credit societies belonging to the same district as theirmembers. These banks provide loans to their members (i.e., primary credit

societies) and function as a link between the primary credit societies and stateco-operative banks.

State Co-operative Banks: These are the apex (highest level) co-operativebanks in all the states of the country. They mobilize funds and help in its properchannelisation among various sectors. The money reaches the individual

borrowers from the state co-operative banks through the central co-operativebanks and the primary credit societies.

1.4.4 SPECIALIZED BANKS

There are some banks, which cater to the requirements and provide overallsupport for setting up business in specific areas of activity. EXIM Bank, SIDBIand NABARD are examples of such banks. They engage themselves in somespecific area or activity and thus, are called specialized banks.

Export Import Bank of India (EXIM Bank):

If person wants to set up a business for exporting products abroad or importingproducts from foreign countries for sale in our country, EXIM bank can

provide you the required support and assistance. The bank grants loans toexporters and importers and also provides information about the internationalmarket. It gives guidance about the opportunities for export or import, the risksinvolved in it and the competition to be faced, etc.

Small Industries Development Bank of India (SIDBI):


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If person wants to establish a small-scale business unit or industry, loan on easyterms can be available through SIDBI. It also finances modernization of small-scale industrial units, use of new technology and market activities. The aim andfocus of SIDBI is to promote, finance and develop small-scale industries.

National Bank for Agricultural and Rural Development (NABARD):

It is a central or apex institution for financing agricultural and rural sectors. If aperson is engaged in agriculture or other activities like handloom weaving,fishing, etc. NABARD can provide credit, both short-term and long-term,through regional rural banks. It provides financial assistance, especially, to co-operative credit, in the field of agriculture, small-scale industries, cottage andvillage industries handicrafts and allied economic activities in rural areas.

NATURE OF BANKING

In India around 73% of the bank branches are located in rural and semi-urbanareas. In the country as a whole only 10% of the branches of the public sector

banks are fully computerized and 22% are partially computerized. But on theother hand some new private sector banks are fully computerized and they arelaunching a gateway to facilitate intra-bank transfer of funds through Internet.They are bringing banking services to the very door step. Especially HDFCBank Ltd, ICICI Bank Ltd, Citibank are very active on this front andconcentrating on Internet and e-commerce to offer their clientele a whole rangeof products under one roof. Their net profits are much more than other rival

banks.

Some new private sector banks like Bank of Punjab LTD, IDBI Ltd, UTI Ltdare fully computerized and they are providing services like ATMs, onlineservices and they are not lagging behind in any way. Recently, they havestarted to penetrate in semi-urban and rural sector of India. Their profits, branchnetwork is on increasing trend.

Most public sector banks have hundreds of branches without computers andinter bank connectivity is a distant possibility. But some have started moving in

this direction. SBI plans to invest $200 millions on technology over the nexttwo years. Other public sector banks too have started spending on InformationTechnology. According to ways India, a software company with core strengthsin internet banking products, each public sector bank will spend about $50million over the next five years. But these are the plans and no public sector

bank seems to be in a position right now to make a serious Foray into internetbanking. The gap regarding the productivity Information technology has made


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the banking services sector faster, more efficient and more economical. Itsimpact can be seen on the efficiency of banks, productivity, profitability,employment, psychology of customers. The internet is taking banks in thedirections other than loans and deposits. With the introduction of InformationTechnology, banking in India will never be the same again.

NEEDS FOR THE BANKING

The fast expansion and spread of the banking sector in India after 1969 haveresulted in surfacing of several internal deficiencies in the system. Due to thesedeficiencies, customer service was affected badly, work technology remainedstagnant and the transaction cost kept on increasing over the years. In spite of

positive achievements and meeting various socio-economic goals, the Bankingsystem in India during 1980s, has experienced several problems mainly of the

profitability and viability of the Banks. The Narasimham Committee observed

that gross profits before provisions were no more than 1.10 per cent of workingFunds. This clearly indicates the low profitability of Indian Banks.

The major factors affecting the profitability of Indian Banks include higherSLR and CRR requirements, sick industrial advances, deterioration in thequality of assets, priority sector advances, export credit, food credit, politicaland administrative interference, etc. These factors contributed for less incomerealization by Public sector Banks. Similarly, the expenditure by banks kept a

higher pace of increase particularly administrative costs, branch expansion ofpublic sector banks into Rural and semi-urban areas, lack of improvement inoperational methods leading to higher transaction costs, etc. contributed to thelower profitability of public sector Banks

BENEFITS OF BANKS

Benefits of Banks to Large Corporate

1. The large corporate is able to offer an attractive financing option to its

buyers and thus capture channel loyalty.2. If the large corporate is an MNC, it is no longer constrained by its global

credit policies.3. The large corporate is able to pursue its aggressive sales plan.4. The large corporate is able to save on the cash discounts which it offers

to the buyers for early realization of the receivables.


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5. The large corporate is freed from the cost arising out of the requirementof placing advance with the supplier and can ask for better pricing fromthe supplier on account of the finance made available through the bank.

6. The large corporate payable cycle is increased.7. The large corporate may be able to avail cash discount which is offered

by its suppliers.8. The large corporate is freed from the administrative hassles of

receivables management.

FUNCTION OF BANKS

PRIMARY FUNCTION

Accepting of deposits Fixed or time Deposit Account Current or Demand Deposit Account Saving Deposit Account Home safe Saving Account Recurring Deposit Account Advancing of loans Cash credit

Loans and Advances Discounting of the Bill of Exchange Investment in Government Securities Credit Creation

SECONDRY FUNCTION

Agency or Representative Functions Collection and Payment of Various Items Purchase and sale of Securities

Trustee and Executor Remitting of Money

Purchase and Sale of Foreign Exchange Letter of References Other Agency Functions


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GENERAL UTILITY SERVICES

Locker Facilities Business Information and Statistics Help in Transportation of Goods Acting as a Referee Issuing letters of credit Acting as underwriters Issuing of travelers cheques and credit cards Issuing of Gift cheques Merchant Banking Services Dealing in Foreign Exchange

SOCIAL FUNCTION

Capital Formation Inducement to Innovations Impact on the rate of Interest Role in the Development of Rural sector Helpful in pushing-up the Demand Monetary policy Employment

BANKING REGULATION ACT, 1949

The banking regulation act was passed and consolidates and amends the lawrelating to banking companies. It come into effect from 16 March 1949 &applies to the whole of india.

The banking regulations act, 1949, has been divided into the following five

parts:

Part 1: Preliminary (sec 1to 5A)

Part2: Business of banking co. (sec 6 to 36A)

Part 2A: Control over management (sec 36AA to 36AC)


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Part 2B: Prohibition of certain activities in relation to banking companies (sec36AD)

Part 2C: Acquisition of the undertakings of banking company in certain cases(sec 36AE to 36AZ)

Part 3: Suspension of business & winding up of banking co. (sec 36 Bto45)

Part3A: Special provisions for speedy disposal of winding up proceeding(sec45A to 45X)

Part3B: Nomination of deposit accounts & ledgers.

Part4: Miscellaneous (sec 46 to 55A)

Part5: Application of the act to co-operative banks (sec 56 effective from 1st

march 1966)

The B.R.A. was further amended by banking laws (amend) act 1983 (effectivefrom 15-2-1984). The banking public financial institutions & negotiableinstrument laws (amended) act 1988 and the banking regulation (amended)act1994.

The following are the Scheduled Banks in India (Public Sector):

State Bank of India State Bank of Bikaner and Jaipur State Bank of Hyderabad State Bank of Indore State Bank of Mysore State Bank of Patiala State Bank of Saurashtra State Bank of Travancore Andhra Bank Allahabad Bank

Bank of Baroda Bank of India Bank of Maharashtra Canara Bank Central Bank of India Corporation Bank Dena Bank


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Indian Overseas Bank Indian Bank Oriental Bank of Commerce Punjab National Bank Punjab and Sind Bank Syndicate Bank Union Bank of India United Bank of India UCO Bank Vijaya Bank

The following are the Scheduled Banks in India (Private Sector):

Vysya Bank Ltd Axis Bank Ltd Indusind Bank Ltd ICICI Banking Corporation Bank Ltd Global Trust Bank Ltd HDFC Bank Ltd Centurion Bank Ltd Bank of Punjab Ltd IDBI Bank Ltd

The following are the Scheduled Foreign Banks in India:

American Express Bank Ltd. ANZ Gridlays Bank Plc. Bank of America NT & SA Bank of Tokyo Ltd. Banquc Nationale de Paris Barclays Bank Plc

Citi Bank N.C. Deutsche Bank A.G. Hongkong and Shanghai Banking Corporation Standard Chartered Bank. The Chase Manhattan Bank Ltd. Dresdner Bank AG


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RBI expects banks to adopt the Standardized Approach for the measurement ofCredit Risk and the Basic Indicator Approach for the assessment of OperationalRisk. RBI has also specified that the migration to Basel II will be effectiveMarch 31, 2007 and has suggested that banks should adopt the new capitaladequacy guidelines and parallel run effective April 1, 2006.

Indian Banks Association (IBA)

The Indian Banks Association (IBA) was formed on the 26th September, 1946with 22 members. Today IBA has more than 156 members comprising ofPublic Sector banks, Private Sector banks, Foreign banks having offices inIndia, Urban Co-operative banks, Developmental financial institutions,Federations, merchant banks, mutual funds, housing finance corporations, etc.

The functioning of IBA

1. To promote sound and progressive banking principles and practices2. To render assistance and to provide common services to members.3. To organise co-ordination and co-operation on procedural, legal,

technical, administrative and professional matters.4. To collect, classify and circulate statistical and other information.5. To pool together expertise towards common purposes such as reduction

in costs, increase in efficiency, productivity and improve systems,procedures and banking practices

6. To project good public image of banking through publicity and public

relations.7. To encourage sports and cultural activities among bank employees.

need for financial reforms

Financial sector reforms are most essential not only to ensure the efficientallocation of funds available for investment but also to strengthen theimplementation of both fiscal and monetary policies and preserve macro

economic stability. However, most of financial reforms proposed in INDIAcan only be implemented if fiscal consolidations can be achieved. This is

because further liberalization in the presence of large public sector borrowingrequirement and consequently high interest rates cold weaken the financialsystem as banks non- performing assets will increase it is essential to take upthe priority financial sector reform. The comprehensive restructuring of the

public sector banks needs to be completed. This means the bank will have


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more managerial autonomy over branch networks, employments andcompensation issues, and portfolio decision. At the same time, thegovernments equity share in these banks needs to be reduced below to fifty

percent so as to create incentives for improved bank and management t andprofitability.

It is clear that the phase in which the development of Indias financial sectorcould benefit from direct government ownership is long over and that in thirdnew phase the governments most important and challenging role is full fillingits overall responsibilities and in strengthening the institutional base offinancial market.

Capital markets were under control of the government until 1991. Foreignerswere not permitted to invest in the Indian share or bond market, nor wereIndian firms allowed to tap the international capital for productive investment,

thus retarding growth. On the other hand, excessive external borrowing by thegovernment to finance current account deficits and low return public sectorinvestments over the 1980 led to build up of a foreign debt and balance of

payment crisis in 1991.

There are some points which reflect the need of banking sector reforms:

1. Inadequate accounting, auditing and disclosure practices in the bankingsector weakened the market discipline in INDIA

2. Implicit government guarantees encourage excessive, unsustainable

capital inflows.3. Inadequate prudential supervision and regulation of domestic financial

institutions and markets, which open the way for corruption, connectedlending and gambling for redemption, namely, the pursuit of high return

but low probability investment by institution with low or negative networth.

Thus, banking sector reforms have been concerned with improving thefollowing areas:

1. The policy frame work2. The financial health3. The institutional infrastructure

Banking Reforms


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two concessional rates and a floor rate for all advances above rupees twolakhs.

5. Movement of interest yield on Government securities towards marketrelated rates has been allowed subject to prudential guidelines.

6. Transparent guidelines or norms for entry and exit of private sectorbanks have been stipulated.

7. A board for financial bank supervision has been established to strengthenthe supervisory system of the BBI.

8. The implementation of the new norms under the reform measures willlead to considerable impairment of capital in some of the nationalized

banks which have to recapitalize.9. The recovery of debts due to banks and financial institutions act, 1993

was enacted for setting up of dedicated tribunals for expeditiousadjudication and recovery of debt.

IMPACT ON BANKING SECTOR

Indian banks would need additional capital to the extent of Rs. 120 billion tomeet the capital charge requirement for operational risk under Basel II. Most ofthis capital would be required by the public sector banks (Rs. 90 billion),followed by the new generation private sector banks (Rs. 11 billion), and theold generation private sector bank (Rs. 7.5 billion). If the asset growthwitnessed in the past and the expected growth trends will continue, the capital

charge requirement for operational risk would grow 15-20% annually over thenext three years, which implies that the banks would need to raise Rs. 180-200

billion over the medium term.

Implementation of Basel II is likely to improve the risk management systems ofbanks as the banks aim for adequate capitalization to meet the underlying creditrisks and strengthen the overall financial system of the country. In India, overthe short term, commercial banks may need to augment their regulatorycapitalization levels in order to comply with Basel II. However, over the longterm, they would derive benefits from improved operational and credit riskmanagement practices.


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CHAPTER -2

REVIEW OF LITERATURE

Basel II accord is already in vogue implementation by March, 2007. TheAccord stands on three pillars: (a) Risk Management, (b) Supervisory Functionand (c) Discipline. The supervisory strategy in India at present comprises bothoff-site surveillance and on-site inspection and control system internal to banks.

The present chapter incorporates review of relevant literature the scholars haveproduced since 1995. The period for this purpose is purposively selectedbecause a research work bearing relevance to present study can be expected to

justify its findings only when sufficient time has elapsed after theimplementation of the reforms. Though in brief, the succeeding review ishelpful in crystallising the research objectives of the present study.

Padmanabhan Working Group (1995), in its Report on On-Site Supervision,recommended for supervisory interventions and introduction of a ratingmethodology for banks on the lines of CAMEL model with appropriatemodification to suit Indian conditions. The Working Group has recommendedsix rating factors i.e. CAMELS, and for Foreign Banks four ratings factors,namely- Capital Adequacy, Assets Quality, Compliance, System and Controls

(i.e., CACS).

Collazos Paul(1995) analyzed how liquidity shocks would affect the strategiesfollowed by the bankers, in particular their probability of exit. He suggested anew channel (different to bank runs) between liquidity risk and banking sectorinstability.

Barr and Siems (1996) presented new failure-prediction models for detecting abanks troubled status up to two years prior to insolvency using publiclyavailable data and a new category of explanatory variable to capture the

elusive, yet crucial, element of institutional success: management quality.Quality is assessed using data envelopment analysis (DEA), which views a

bank as transforming multiple inputs into multiple outputs.

Peek and Rosengren (1996) established that the derivatives have become anessential instrument for hedging risks, yet moral hazard can lead to their misuse

by problem banks. . The study observed that the role of banks supervisors


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should be to limit the opportunity through more comprehensive data reportingrequirements and closer supervisory scrutiny of derivatives activity at problem

banks. Because a relatively large number of banks

active in the derivatives market have low capital ratios and are considered

institutions with a significant risk of failure by bank supervisors, the possiblemisuse of derivatives by troubled banks should be of concern to regulators.

Persons (1999) presented the combined qualitative and quantitativeinformation from financial statements and auditors reports with logisticmodels to differentiate failed from surviving finance companies in Thailand.These models have relatively high predictive ability for failed financecompanies and low expected costs of misclassification.

Dabos and Escudero (2000) studied the role played by several financial and

economic indicators in determining the process of bank failure in Argentinaafter the Maxican crisis known as the tequila effect. This study prioritizes theuse of semi parametric and non-parametric methods which allow us to measurethe effect of explanatory variables in the process of bank failure together withduration dependence effects.

Gilbert, Meyer and Vaughan (2000) examined the potential contribution tobank supervision of a model designed to predict which banks will have theirsupervisory ratings downgraded in future periods. They compared the ability oftwo models to predict downgrades of supervisory rating to problem status: the

Board staff model, which was estimated to predict bank failures, and a modelestimated to predict downgrades of supervisory ratings

Evanoff and Wall (2001) observed that there have been a number ofrecommendations to increase the role of subordinated debt (SND) in satisfying

bank capital requirements as a preferred means to discipline the risk-takingbehavior of systemically important banks. One such proposal recommendedusing SND yield spreads as the triggers for mandatory supervisory action under

prompt corrective action guidelines introduced in U.S. banking legislation inthe early 1990s. Currently such action is prompted by bank capital ratios.

Kroszner (2001) examined the private interest theory of regulation can for thepattern of bank branching deregulation during the last 30 years. Beneficiaries ofbranching regulation have supported a coalition favoring geographicalrestriction despite their costs to consumers. While some of the results also areconsistent with the public interest theory.


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Shirai (2001) focused on Indias banking sector which has been attracting andincreasing attention since 1991 when a financial reform programme waslaunched. This paper assessed whether the reform programme has beensuccessful so far in restructuring public sector banks and what elements of the

programme have contributed and tackles some fundamental questions.

Shirai (2002) examined India and China both carried out banking sectorreforms in the 1990s. He observed that there are three good lessons to belearned from Indias reforms. First, the entry of new banks should be promoted

provided that they are sufficiently capitalized and technology- oriented.Second, diversification of banks business should accompany interest rateliberalization in order to compensate for the expected decline in net interestincome and prevent banks from taking excessive risks. Third, strict regulationsshould be introduced to prevent connected lending.

Vensal and Vensel (2003) presented some historical notes on the developmentof the Estonian banking system and the capital structure of banks.Trehan andSoni (2003) analyzed the operating efficiency and its relationship with

profitability, in the profitability, in the public sector banking industry in India.Geyer and Steyrer (2003) examined the relation between performanceindicators of 20 different banks and transformational/ transactional leadership,using a sample of some 400 observations. Mastrone and Piper (2003)examined that market forces might be used to influence the direction of bankregulation. They observed that investors views on the financial condition and

prospects of banking organizations can be distilled from stock prices.

Mor and Sharma (2003) attempted to provide a more comprehensiveapproach to management of NPAs in banks. It is argued that if the goal is todeal with NPAs (and more generally the health of the financial system) in adefinitive manner and root them out, then it is necessary to first deal with themicro level issues at the level of each individual intermediary. Batra and Dass(2003) concluded thatNPA has affected the profitability, liquidity andcompetitive functioning of public and private sector banks and finally the

psychology of the bankers in respect of their disposition towards credit delivery

and credit expansion.

Kantawala (2004) examined the impact of the reforms on Credit Deposit ratio,Credit to GDP ratio, Investment in Government securities to deposits, share of

business of public sector banks, the proportion of various types of advances etc.She examined the difference in various aspects of the working results of the

public sector banks and private banks when compared with foreign banks.


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Reddy (2004) examined the competitiveness of Indian commercial banks in thederegulated period from 1996-2002.

Banerjee and Duflo (2004) observed that NPAs are indeed a serious problemfor banks in India and it is easy to see why a bank might hesitate to lend if the

loan has a high risk of going bad.

Kumar and Dennis (2005) examined the importance of a financial system inthe development process of an economy. Kapil and Kapil (2005) examined therelationship between the CAMEL ratings and the bank stock performance.Shajahan (2005) studied 100 account holders of ICICI Bank in Chennai for

portraying their varying levels of satisfaction. Chakrabarti and Chawla(2005) studied the performance and efficiency of commercial banks, which arethe key elements of the efficiency and efficacy of a countrys financial sector.Mohan (2005) focused on the efficiency and productivity changes in the Indian

Banking. Ramudu and Rao (2006) established that the profitability of Indianbanking sector is inevitable. The study attempts to analyze the profitability ofthe three major banks in India: SBI, ICICI, and HDFC.

Singh and Singh (2006) estimated the impact of the identified variables on thefinancial margin of the Central Cooperative Banks in Punjab with the help ofcorrelation and multiple stepwise regression approach. Maji and Dey (2006)

presented how strongly the process of globalization and liberalization hasinfluenced the Indian banking sector. Chatterjee and Sinha (2006) made acomparative assessment of the public ad private sector bank intermediation costefficiency during the reform period Mansor, Radam and Habibullah (2006)attempted to measure the productivity of the banking industry by employing thenonparametric malmquist index approach. He concludes that there is decline in

productivity growth in the banking industry. Bodla and Verma (2006)presented that supervisory system in banking sector is a substantialimprovement over the earlier system in terms of frequency, coverage and focusas also the tools employed.

Sharma and Kawadia (2006) examined the relationship between size andefficiency of Cubes. Ramshastri and Samuel (2006) analyzed the trends inimportant banking indicator from 1980 to 2005, covering both pre and postreforms period. A comparative analysis of various bank groups with respect todifferent variables has also identified certain specific problem areas of therespective groups. Singh and Kohli (2006) undertook the study with theobjectives: benchmark the Indian listed banks for the future, assess the

performance of Indian banks on the basis of CAMEL model, give rating to topfive and bottom five banks on the basis of their performance, to know the status


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of technological advancement in private sector banks, to measure the growth ofprivate sector banking in India. Rao (2007) measured the performance of thebanks before and after administration of VRS. For this purpose, CAMELanalysis has been comprehensively used in following order for all the sampleunits. Sharma (2007) conducted a study with the objectives: to study therelationship between assets and liabilities of Indian banks in terms of natureand strength, to determine the components of assets explaining variance inliability and vice versa, to study the impact of ownership over asset liabilitymanagement in banks.

Hyde (2007) conducted a study with the objectives:to study and comparelearned optimism of the employees of nationalized and private banks, and torecommend the areas where learned optimism is found to be weak. EPWResearch Foundation (2007) focused on the professed diversification taking

place in the banking sector. Bhatt (2007) analyzed the banking industryjourney from post independence to date. Janakiraman(2007) examined thecapital adequacy guidelines under Basel II Accord. It introduces the concept ofoperational risk, reviews the quantitative framework for operational risk andoutlined the key challenges and the varying practices in the development of anoperational risk framework. Sinha (2007) evaluated the impact of factors like

banks operating efficiency, capital adequacy ownership and bank size on theasset quality for the reforms period.

BRIEF DESCRIPTION OF BALANCE SHEET, PROFIT & LOSS

ACCOUNT ITEMS:

A. Balance Sheet

Item Schedule Coverage Notes and Instructions for compilation

CapitalReserves&Surplus

1. NationalisedBanksCapital (FullyownedBy CentralGovernment)Other Banks

(Indian)AuthorisedCapital(..shares of Rs...each)Issued Capital(..shares

The Capital owned by Central Government as on the date of the balancesheet should be shown. In the case of other Indian banks, Authorised,Issued, Subscribed, Called up capital should be given separately. Calls-in-arrears will be deducted from the called-up capital while the paid-up valueof forfeited shares should be added thus arriving at the paid-up capital.Where necessary, items which can be combined should be shown underone head for instance Issued and Subscribed Capital.

In the case of Banking Companies incorporated outside India, the amountof deposit kept with Reserve Bank of India, under sub-section 2 of section11 of the Banking Regulation Act, 1949 should be shown under the headcapital; the amount, however, should not be extended to the outercolumn.

Notes General The changes in the above items, if any, during the year,


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of Rs. .. each)SubscribedCapital(..shares of Rs...

each)Called up Capital(..shares of Rs...each)Less : CallsunpaidAdd : forfeitedsharesPaid up CapitalBanking

Companiesincorporatedoutside India

say, fresh contribution made by the Government, fresh issue of capital,capitalisation of reserves, etc. may be explained in the notes.

2 I) StatutoryReserves

Reserve created in terms of section 17 or any other section of BankingRegulation Act must be separately disclosed.

II) CapitalReserves

The expression capital reserves shall not include any amount regarded afree for distribution through the profit & loss account. Surplus onrevaluation or sale of fixed assets should be treated as capital reserves.

III) SharePremium

Premium on issue of share capital may be shownseparately under this head.

IV) Revenue and

other Reserves

The expression Revenue Reserves shall mean any

reserve other than capital reserve. This item will includea) InvestmentFluctuationReserve

all reserves, other than those separately classified. The expressionreserve shall not include any amount written off or retained by way ofproviding for depreciation, renewals or dimunition in value of assets orretained by

V)Balance of Profit

way of providing for any known liability. Includes balance of profit afterappropriations. In case of loss the balance may be shown as a deduction.Notes General

i) Movements in various categories of reserves should be shown asindicated in the schedule.

Deposits 3. A.I. DemandDeposits

i) from banksii) from others

II. SavingsBank

Includes all banks deposits repayable on demand. Includes all demanddeposits of the non-bank sectors. Credit balances in overdrafts, cash creditaccounts deposits payable at call, overdue deposits, inoperative currentaccounts, matured time deposits and cash certificates, etc. are to be includedunder this category. Includes all savings bank deposits (includinginoperative savings bank accounts).Includes all types of banks depositsrepayable after a specified term. Includes all types of deposits of the non-bank sector repayable after a specified term. Fixed deposits, cumulative and


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Deposits

III. TermDeposits

i) from banksii) from others

B. i) Deposits ofbranches inIndia.

ii) Deposits ofbranches outsideIndia.

recurring deposits, cash certificates, annuity deposits, deposits mobilisedunder various schemes, ordinary staff deposits, foreign currency non-resident deposits accounts, etc. are to be included under this category. Thetotal of these two items will agree with the total deposits.

Notes General

a) Interest payable on deposits (whether accrued and due and accrued butnot due) should not be included but shown under other liabilities. Deposits,repayment of which is subject to restrictions by its very nature, like margindeposits, security deposits from staff, etc. also should not be included underdeposits but shown under other liabilities.

b) Matured time deposits and cash certificates, etc. should be treated asdemand deposits

c) Deposits under special schemes should be included under term deposits ifthey are not payable on demand. When such deposits have matured forpayment they should be shown under demand deposits

d) Deposits from banks will include deposits from the banking system inIndia, co-operative banks, foreign banks which may or may not have apresence in India.

Borro-wings

4. I. Borrowings inIndiai) Reserve Bankof

Indiaii) Otherbanks

II. BorrowingsoutsideIndiaSecuredborrowings

included above

Includes borrowings/refinance and rediscount obtained from Reserve Bankof India. Includes borrowings/refinance and rediscount obtained fromcommercial banks (including co operative banks)

Includes borrowings/refinance and rediscount from Industrial DevelopmentBank of India, Export-Import Bank of India, National Bank for Agriculturaland Rural Development and other institutions, agencies (including liabilityagainst participation certificates, if any)

Includes borrowings and rediscounts of Indian branchesabroad as well as borrowings of foreign branches.This item will be shown separately: Includes securedborrowings/refinance in India and outside India.

Notes General

i) The total of I & II will agree with the total borrowingsshown in the balance sheet.

ii) Inter-office transactions should not be shown asborrowings.

iii) Funds raised by foreign branches by way of


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certificates of deposits, notes, bonds, etc. should beclassified, depending upon documentation, asdeposits, borrowings etc.

iv) Refinance obtained by banks from Reserve Bank of India and variousinstitutions are being brought under the head Borrowings. Hence advanceswill be shown at the gross amount on the asset side.

OtherLiabilitiesandprovisions

5 I. Bills PayableII. Inter-OfficeIII. InterestAccruedIV. DeferredTaxV. Others

Includes drafts, telegraphic transfers, mail transfers payable, pay slip,bankers cheques, other miscellaneous items, etc.

The inter-office adjustments balance, if in credit, should be shown underthis head. Only net position of inter- office accounts, inland as well asforeign should be shown here.

Includes interest due and payable and interest accrued but not due on

deposits and borrowings Includes net provision for income tax and othertaxes like interest tax(less advance payment, tax deducted at source, etc.),surplus provisions in bad debts provision account, surplus provisions fordepreciation in securities, contingency funds which are not disclosed asreserves but are actually in the nature of reserves, proposeddividend/transfer to Government, other liabilities which are not disclosedunder any of the major heads such as unclaimed dividend, provisions andfunds kept for specific purposes, unexpired discount, outstanding chargeslike rent, conveyance, etc. certain types of deposits like staff securitydeposits, margin deposits, etc. where the repayment is not free, should alsobe included under this head.

Notes General

i) For arriving at the net balance of inter-office adjustments all connectedinter-office accounts should be aggregated and the net balance only will beshown, representing mostly items in transit and unadjusted items.

ii) The interest accruing on all deposits, whether the payment is due or not,should be treated as a liability.

iii) It is proposed to show only pure deposits under the head deposits and

hence all surplus provisions for bad and doubtful debts contingency funds,secret reserves, etc. which are not netted off against the relative assetsshould be brought under the head Others (including provisions).

Cash andbalanceswith theReserveBank of

6 I. Cash in hand(includingforeigncurrency notes)

Includes cash in hand including foreign currency notesand also of foreign branches in the case of banks havingsuch branches.

Includes the balance maintained with the Reserve Bank


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IndiaII. In CurrentAccountwith ReserveBank

of India.

of India in Current Account.

Balanceswithbanksandmoneyat callandshortnotice

7 I) In India

i) Balances with ReserveBank of India (otherthan in currentaccount)ii) Balances with otherbanks in India Currentaccounts Depositaccounts

iii) Money at call andshort notice with banksand other institutions.II) Outside Indiausually classified inforeign countries asmoney at calli) Current accountsii) Deposit accounts

Includes balances held with the Reserve Bank of India other than incurrent accounts, if any. Includes all balances with banks in India(including co-operative banks). Balances in current accounts and deposiaccounts should be shown separately. Includes deposits repayable within15 days or less than 15 days notice lent in the inter-bank call moneymarket.

Includes balances held by foreign branches and balances held by Indianbranches of the banks outside India. Balances held with foreign brancheby other branches of the bank should not be shown under this head but

should be included in inter branch accounts. The amounts held in currenaccounts and deposit accounts should be shown separately. Includesdepositsand short notice.

Investments 8 I. Investments in India

i) Government securities

ii) Other approvedSecurities

iii) Shares

iv) Debentures andBonds

v) Investments insubsidiaries/ Associatecompanies.

vi) Others

II. Investments outside

Includes Central and State Government securities and Government

treasury bills. Securities other than Government securities, whichaccording to the Statutes are treated as approved securities, should beincluded here.

Investments in shares of companies and corporations not included in item(ii) should be included here. Investments in debentures and bonds ofcompanies and corporations not included in item (ii) should be includedhere.

Investments in subsidiaries/associate companies should be included hereA company will be considered as an associate company for the purpose

this classification if more than 25% of the share capital of that company held by the bank. Includes residual investments, if any, like gold.

All foreign Government securities including securities issued by localauthorities may be classified under this head. All other investmentsoutside India may be shown under this head.


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India

i) Government securities(including local

authorities)

ii) Others

Advances 9 A.i)Bills purchasedand Discountedii)Cash credits,overdrafts andloans repayable

on demandiii)Term loansB.i) Secured by tangibleassets

ii) Covered by Bank/Government Guarantee

iii) Unsecured C.I.

Advances in India

i) Priority sectors

ii) Public sector

iii) Banks

iv) Others

II. Advances outside

India

i) Due from banks

ii) Due from others

In classification under Section A, all outstandings in India as well asoutside less provisions made, will be classified under three heads asindicated and both secured and unsecured advances will be includedunder these heads.

All advances or part of advances which are secured by tangible assetsmay be shown here. The item will include advances in India and outsideIndia.

Advances in India and outside India to the extent they are covered byguarantees of Indian and foreign governments and Indian and foreignbanks are to be included. All advances not classified under (i) and (ii) wbe included here.

Advances should be broadly classified into Advances in India andAdvances outside India. Advances in India will be further classified onthe sectoral basis as indicated. Advances to sectors which for the timebeing are classified as priority sectors according to the instructions of thReserve Bank are to be classified under the head Priority sectors.

Advances to Central and State Governments and other Governmentundertakings including Government companies and corporations whichare, according to the statutes, to be treated as public sector. All advancto the banking sector including co-operative banks will come under thehead Banks. All the remaining advances will be included under thishead Others and typically this category will include non-priorityadvances to the private, joint and co-operative sectors.

Notes General

i) The gross amount of advances including refinance but excluding

provisions made to the satisfaction of auditors should be shown asadvances.

ii) Term loans will be loans not repayable on demand.

iii) Consortium advances would be shown net of recoveries from otherparticipating banks/ institutions.

Fixed 10 I. Premises Premises wholly or partly owned by the banking company for the purpos


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AssetsII. Other Fixed Assets(including furniture andfixtures)

III. Capital work-in-progress or premisesunder construction

of business including residential premises should be shown againstPremises. In the case of premises and other fixed assets, the previousbalance, additions thereto and deductions there from during the year asalso the total depreciation written off should be shown. Where sums havebeen written off on reduction of capital or revaluation of assets, every

balance sheet after the first balance sheet subsequent to the reduction orrevaluation should show the revised figures with the date and amount ofrevision made.

Motor vehicles and all other fixed assets other than premises but includinfurniture and fixtures should be shown under this head.

Otherassets

11 I. Inter-officeadjustments (net)

II. Interest accrued

III. Tax paid inadvance/tax deducted at source.

IV. Stationery andstamps

V. Others

The inter-office adjustments balance, if in debt, should be shown underthis head. Only net position of inter- office accounts, inland as well asforeign, should be shown here. For arriving at the net balance of inter-office adjustment accounts, all connected inter-office accounts should beaggregated and the net balances, if in debit, only should be shown

representing mostly items in transit and unadjusted items.

Interest accrued but not due on investments and advances and interest dubut not collected on investments will be the main components of thisitem. As banks normally debit the borrowers account with interest dueon the balance sheet date, usually there may not be any amount of interesdue on advances. Only such interest as can be realized in the ordinarycourse should be shown under this head.

The amount of tax deducted at source on securities, advance tax paid, etcto the extent that these items are not set off against relative tax provision

should be shown against this item.

Only exceptional items of expenditure on stationery like bulk purchase osecurity paper, loose leaf or other ledgers, etc. which are shown as quasi-asset to be written off over a period of time should be shown here. Thevalue should be on a realistic basis and cost escalation should not be takeinto account, as these items are for internal use.

This will include non-banking assets and items like claims which have nobeen met, for instance, clearing items, debit items representing addition tassets or reduction in liabilities which have not been adjusted for technic

reasons, want of particulars, etc. advances given to staff by a bank asemployer and not as a banker, etc. Items, which are in the nature ofexpenses, which are pending adjustments, should be provided for and theprovision netted against this item so that only realisable value is shownunder this head. Accrued income other than interest may also be includedhere.

Contin-gent

12 I. Claims against thebank not acknowledged

Liability on partly paid shares, debentures, etc. will beincluded in this head.


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liabilities as debts.

II. Liability for partlypaid investments.

III. Liability on accountof outstanding forwardexchange contracts

IV. Guarantee given onbehalf of constituents.

a) In Indiab) Outside India

V. Acceptances,

endorsements and otherobligations

VI. Other items forwhich the bank iscontingently liable

Outstanding forward exchange contracts may beincluded here.

Guarantees given for constituents in India and outside

India may be shown separately.

This item will include letters of credit and bills acceptedby the bank on behalf of its customers.

Arrears of cumulative dividends, commitments under underwritingcontracts, estimated amount of contracts remaining to be executed oncapital account and not provided for etc. are to be included here.

Bills forcollection

Bills and other items in the course of collection and notadjusted will be shown against this item in the summaryversion only. Not separate schedule is proposed.

B. Profit & Loss Accounts

sItem Schedule Coverage Notes and Instructions for compilation

Contin-gentliabilities

12 I. Claims against thebank not acknowledged as debts.

II. Liability for partlypaid investments.

III. Liability on accountof outstanding forward exchange contracts

IV. Guarantee givenon behalf of constituents.

a) In India

b) Outside India

V. Acceptances, endorsements and other

Liability on partly paid shares, debentures, etwill beincluded in this head.

Outstanding forward exchange contracts maybeincluded here.

Guarantees given for constituents in India and

outsideIndia may be shown separately.

This item will include letters of credit and bilacceptedby the bank on behalf of its customers.

Arrears of cumulative dividends, commitmen


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obligations

VI. Other items for which the bank iscontingently liable

underunderwriting contracts, estimated amount ofcontractsremaining to be executed on capital account a

notprovided for etc. are to be included here.

Bills forcollection

Bills and other items in the course of collectioand notadjusted will be shown against this item in thsummaryversion only. Not separate schedule is propos

B. Profit & Loss AccountsItem Schedule Coverage Notes and Instructions for compilation

Interestearned

13 I. Interest /discount onadvances/bills.

II. Income on investments

III. Interest on balanceswith Reserve Bank of Indiaand other inter bank funds

Others

Includes interest and discount on all types of loans andadvances like cash credit, demand loans, overdrafts,export loans, term loans, domestic and foreign billspurchased and discounted (including those rediscounted),overdue interest and also interest subsidy, if any, relatingto such advances/bills. Includes all income derived fromthe investment portfolio by way of interest and dividend.Includes interest on balances with Reserve Bank and otherbanks, call loans, money market placement, etc.

Includes any other interest/discount income notincluded in the above heads.

OtherIncome

14 I. Commission, Exchange& brokerage

II. Net Profit on sale ofInvestments

III. Net Profit onrevaluation of investments

IV. Net Profit on sale ofland, building & otherassets

V. Profit (net of loss) onexchange transactions

Net profit on sale of Investments = Profit on sale ofInvestments Loss on revaluation of investmentsNet profit on revaluation of investments = Profit onrevaluation of investments LossNet profit on sale of land, building & other assets= profit on sale of land, building & other assets Loss on sale of land, building & other assets


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VI. Income earned by wayof dividends, etc. fromsubsidiaries/ companiesand/or joint ventures

abroad/in India

VII. Miscellaneous Income

InterestExpended

15 I. Interest on deposits

II. Interest on RBI/ Inter-Bank borrowings

III. Others

OperatingExpenses

Provisions& Contingencies

Appropriationof Profit

16 I. Payments to andprovisions for employees

II. Rent, Taxes & Lighting

III. Printing & Stationery

IV. Advertisement andPublicity

V. Depreciation onBanks property

VI. Directors fees,allowances andExpenses

VII. Auditors fees &expenses (includingbranch auditors)

VIII. Law charges

IX. PB Legal and other

expenses debitedin respect of PBAccounts

X. Postage, Telegram, Telephones, etc.

XI. Repairs and Maintenance


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XII. Insurance

XIII. Other ExpenditureProvisions & Contingencies

made fori) Income Taxii) Other Taxesiii) NPAsiv) Investmentsv) Others

I. Transfer to StatutoryReserves

II. Transfer to Capital

Reserves

III. Transfer to InvestmentFluctuation Reserves

IV. Transfer to Debentureredemption reserves

V. Transfer to OtherReserves

VI. Transfer to ProposedDividend

VII. Transfer to Tax onDividend

VIII. Balance carried overto Balance Sheet

C. Notes on Accounts

Item Schedule Coverage Notes and Instructions for

compilation

Movement 17 I) Gross NPAsof NPAs II) Net NPAs

Lending to SensitiveSectors

17 I) Advances to Capital MarketSector

II) Advances to Real EstateSector


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III) Advances to CommoditySector

MaturityProfile of

Selecteditems ofLiabilities& Assets

17 I) DepositsII) Borowings

III) Loans & AdvancesIV) InvestmentsV) Foreign CurrencyAssets andVI) Foreign CurrencyLiabilities

Loanssubjectedto RestructuringandCorporate

Debt Re-structured

17 I) Standard Assets during theyear

II) Sub Standard Assets duringthe year

III) Doubtful Assetsduring the year

CapitaladequacyRatios

17 I) Capital AdequacyRatio

II) Capital AdequacyRatio Tier I and

III) Capital AdequacyRatio Tier II

BusinessRatios

17 I) Return on Assets

II) Business (Deposits+Advances) per employee

III) Profit per employee


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CHAPTER -3

3.1 PROBLEM STATEMENT

As discussed before Banks carry the business of lending & borrowing. Lendingand Risk go hand to hand. Risk is exposure to uncertainty. Risk has twocomponents: Uncertainty and Exposure to that uncertainty. Credit risk is mostsimply defined as potential that a borrower or counter party will fail to meet itsobligation in accordance to agreed terms. Risk Management is continuouslyevolving mix of science and art. Risk itself is not bad, but risk that ismisplaced, mismanaged, misunderstood or unintended is bad. Each banking

institution needs to assess, which method best suits its objective, its business,its view and its pocket. Risk management oversees and ensures that integrity of

process with which risks are taken.

The art of managing risk is more challenging than ever now-a-days. Riskmanagers face a wide range of demands from working with multiple variablesto funding technology.

So, they need to know the way through which they come to know what is theirbusiness composition? Apart from this one year datas do-not tell whole of the

trend. In this project I have studied the business composition of ScheduleCommercial Banks so through which I acquainted with how much percent oftheir total earnings is through interest income? How much is from non-interestincome

Banks have now entered in service sector for diversifying risk &earning moreprofits.

3.2 RESEARCH OBJECTIVE

The objective of the research project is:

To gain an insight to the Indian Banking Sector. To know about the business composition of Schedule Commercial

Banks. Studying Fundamental analysis and its application as a tool for analysis

of stocks.


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Finding out the counter which is profitable and having maximum returnin Banking sector.

To know about the banking industry, Banking reforms and Banking inIndia as a Introduction part.

Limitations

1. The main limitation of the project is Time Constraint as I had only 3month to complete the project.

2. Changing data of banks due to new policy.3. The data collection for banking will be mainly of secondary.4. The data available for research may be manipulated.5. Internet Fluctuation.

Research Methodology

Research methology is the way to systematically solve the research problem. Itmay be understood as the science of study how research is done systematically.In it we study the various steps that are generally adopted by the researchmethods or techniques and also the methodology.

Research Design

The research design is the conceptual structure within which research isconducted. It contains the blue print for the collection, measurement and theanalysis. The proposed study is the exploratory cum descriptive. Researcher hasused the questionnaire method for collecting the data from the employees of theselected banks.

Collection of Data

The present study is based on the secondary

data.

To add the information, the secondary data have been obtained fromfollowing sources:

o Source from internet.o Journals, magazines and books.


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o Published and unpublished research works of the various eminentscholars in the field.

Research process

Review of literature; earlier studies Designing of Research instrument Secondary Data Collection analysis and interpretation of Data Report writing &discussion of major finding with the guide Submission of Report

ANALYTICAL TOOLS

Table 3.06

Growth Rate of Income and Expenditure of Indian commercial Banks in India

1985-2005

1985-91

1992-2005

1992-98

1999-05

Interest Earned SBI 15.7 22.31 12.49 11.77 9 .52

NB 14.33 21.09 12.36 13.31 8.54

FB 18.19 36.25 10.24 15.12 2.16

OSCB 26.98 16.31 27.46 36.4 19.26

AB 16.42 23.08 13.61 14.41 9.82

Interest/discount on advances/bills SBI 9.21 22.31 8.83 9.14 7.3

NB 9.24 21.09 11.08 10.6 9.56

FB 14.13 36.25 10.11 17.74 3.89

OSCB 22.38 16.31 26.94 38.44 23.48

AB 11.13 23.08 11.96 12.64 10.66

Income on Investments SBI 17.79 21.06 13.44

NB 15.61 20.44 8.75

FB 12.02 15.14 0.56

OSCB 30.21 39.71 15.11

AB 17.2 21.3 10.4

Interest on balances with RBI and otherinter-bank funds

SBI 8.98 -7.54 9.65

NB 1.87 -0.07 -6.08

FB 4.76 0.56 -6.73

OSCB 16.07 11.15 0.74

AB 6.09 -1.57 0.43


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Other income SBI 18.75 19.75 15.56 16.09 17.26

NB 20.48 28.47 18.04 15.96 21.68

FB 23.02 35.65 17.88 23.36 13.88

OSCB 34.59 21.2 36.05 49.06 33.38

AB 22.08 27 18.88 18.81 21.1

Commission, exchange and brokerage SBI 14.16 19.09 11.37 16.52 6.81

NB 12.47 24.49 10.08 15.07 7.12

FB 17.88 31.56 15.75 24.05 10.08

OSCB 28.52 19.51 30.99 36.96 33.52

AB 15.71 24.16 13.32 17.96 11.05

Total Income SBI 16.14 22.01 12.97 12.36 10.76

NB 14.86 21.63 12.82 13.58 9.26

FB 19.18 36.17 11.7 16.09 4 .93

OSCB 28.03 16.76 28.79 37.95 21.58

AB 17.08 23.44 14.27 14.95 11.08

Interest Expended SBI 14.5 23.29 11.91 11.42 6 .11

NB 13.03 22.76 10.56 11.48 4.73

FB 16.98 41.7 7.98 13.93 -4.18

OSCB 27.57 17.02 28.41 40.63 15.65

AB 15.27 24.42 12.48 13.43 6.22

Interest on deposits SBI 14.33 23.29 13.62 14.04 6.71

NB 12.42 22.76 10.7 13.51 2 .05

FB 14.35 41.7 8.36 21.5 -6.08

OSCB 25.62 17.02 26.13 40.36 9.77

AB 14.5 24.42 12.86 15.91 4 .14

Interest on RBI/inter-bank borrowings SBI -7.67 -11.28 -11.51

NB -3.03 -13.38 1.27

FB 8.9 0.2 -0.57

OSCB

24.37 38.58 12.84

AB 2.33 -6.99 0.46

Table 3.06 A

Growth Rate of Income and Expenditure of Indian commercial Banks in India

1985-2005

1985-

91

1992-

05

1992-

98

1999-05

Operating Expenses SBI 13.85 18.82 12.35 15.23 8.92

NB 13.7 18.09 12.2 15.03 8 .77

FB 17.18 24.34 16.26 21.26 8.9

OSCB 24.34 25.16 26.9 28.68 28.32

AB 15.37 20.29 13.91 16.38 11.12

Payments to and provisions for employees SBI 13.91 17.39 12.15 16.55 7.89

NB 13.78 17.54 12.1 16.19 5.95

FB 18.23 13.36 16.63 24.6 8.88


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OSCB 18.81 22.74 19.42 20.37 19.81

AB 14.62 18.28 12.81 16.84 7.81

Provisions and contingencies SBI 12.41 2.19 23.85

NB 14.33 1.47 32.55

FB 9.69 9.15 11.5

OSCB 30.68 31.78 34.61

AB 13.93 3.58 27.9

Total Expenses (Excluding Provisions andcontingencies)

SBI 14.35 21.79 12.16 12.56 7.4

NB 12.99 21.37 10.58 12.48 4.29

FB 17.14 35.47 10.87 15.86 1.05

OSCB 26.19 16.32 28.02 37.2 18.95

AB 15.2 23.04 12.73 14.27 7.08

Profit / Loss SBI 33.06 38.42 28.07 49.34 25.02

NB 43.72 53.05

FB 43.72 20.86

OSCB 41.97 37.93 35.13 60.54 32.38

AB 47.74 38.51

Total Expenditure (Including Provisions andcontingencies and Profit / Loss)

SBI 16.14 22.01 12.97 12.36 10.76

NB 15.23 21.63 13.55 13.58 11.92

FB 19.19 36.19 11.7 16.09 4.93

OSCB 28.02 16.79 28.79 37.95 21.58

AB 17.26 23.44 14.62 14.95 12.36

Net Profit( Total Income-Total expenditure) SBI 33.4 38.42 28.74 49.34 27.48

NB 43.72 119.87

FB 43.42 20.86

OSCB 42.91 35.29 35.13 60.54 32.38

AB 47.65 14.85

Business Composition

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