EXECUTIVE SUMMARY

A retrospect of the events clearly indicates that the Indian banking

sector has come far away from the days of nationalization. The

Narasimham Committee laid the foundation for the reformation of the

Indian banking sector. Constituted in 1991, the Committee submitted

two reports, in 1992 and 1998, which laid significant thrust on enhancing

the efficiency and viability of the banking sector. As the international

standards became prevalent, banks had to unlearn their traditional

operational methods of directed credit, directed investments and fixed

interest rates, all of which led to deterioration in the quality of loan

portfolios, inadequacy of capital and the erosion of profitability.

The recent international consensus on preserving the soundness of the

banking system has veered around certain core themes. These are:

effective risk management systems, adequate capital provision, sound

practices of supervision and regulation, transparency of operation,

conducive public policy intervention and maintenance of macroeconomic

stability in the economy.

Until recently, the lack of competitiveness vis-à-vis global standards, low

technological level in operations, over staffing, high NPAs and low levels

of motivation had shackled the performance of the banking industry. 

However, the banking sector reforms have provided the necessary

platform for the Indian banks to operate on the basis of operational

flexibility and functional autonomy, thereby enhancing efficiency,

productivity and profitability. The reforms also brought about structural

changes in the financial sector and succeeded in easing external

constraints on its operation, i.e. reduction in CRR and SLR reserves,

capital adequacy norms, restructuring and recapitulating banks and

enhancing the competitive element in the market through the entry of

new banks.

1

The reforms also include increase in the number of banks due to the

entry of new private and foreign banks, increase in the transparency of

the banks’ balance sheets through the introduction of prudential norms

and increase in the role of the market forces due to the deregulated

interest rates. These have significantly affected the operational

environment of the Indian banking sector.

To encourage speedy recovery of Non-performing assets, the

Narasimham committee laid directions to introduce Special Tribunals

and also lead to the creation of an Asset Reconstruction Fund. For

revival of weak banks, the Verma Committee recommendations have laid

the foundation. Lastly, to maintain macroeconomic stability, RBI has

introduced the Asset Liability Management System.

The East-Asian crisis has demonstrated the vital importance of financial

institutions in sustaining the momentum of growth and development. It is

no longer possible for developing countries like India to delay the

introduction of these reforms of strong prudential and supervisory

norms, in order to make the financial system more competitive, more

transparent and more accountable.

The competitive environment created by financial sector reforms has

nonetheless compelled the banks to gradually adopt modern technology

to maintain their market share. Thus, the declaration of the Voluntary

Retirement Scheme accounts for a positive development reducing the

administrative costs of Public Sector banks. The developments, in

general, have an emphasis on service and technology; for the first time

that Indian public sector banks are being challenged by the foreign

banks and private sector banks. Branch size has been reduced

considerably by using technology thus saving manpower.

2

The deregulation process has resulted in delivery of innovative financial

products at competitive rates; this has been proved by the increasing

divergence of banks in retail banking for their development and survival.

In order to survive and maintain strong presence, mergers and

acquisitions has been the most common development all around the

world. In order to ensure healthy competition, giving customer the best

of the services, the banking sector reforms have lead to the development

of a diversifying portfolio in retail banking, and insurance, trend of

mergers for better stability and also the concept of virtual banking.

The Narasimham Committee has presented a detailed analysis of various

problems and challenges facing the Indian banking system and made

wide-ranging recommendations for improving and strengthening its

functions.

TABLE OF CONTENTS

CH.NO. TITLE

PAGE NO

CHAPTER - 1 REFORMS IN THE INDIAN BANKING SECTOR

1.1 Introduction 01

1.2 Reduction of SLR and CRR 04

1.3 Minimum Capital Adequacy Ratio 07

1.4 Prudential Norms 11

1.5 Disclosure Norms 17

1.6 Rationalisation of Foreign Operations in India

19

3

1.7 Special Tribunals and Asset Reconstruction Fund

23

1.8 Restructuring of Weak Banks 26

1.9 Asset Liability Management System

29

1.10 Reduction of Government Stake in PSBs

32

1.11 Deregulation of Interest Rate

39

CHAPTER - 2 DEVELOPMENTS IN THE INDIAN BANKING

SECTOR

2.1 Introduction 42

2.2 Voluntary Retirement Scheme 43

2.3 Universal Banking 52

2.4 Mergers and Acquisition 56

2.5 Banking and Insurance 62

2.6 Rural Banking 65

2.7 Virtual Banking 71

2.8 Retail Banking 73

CHAPTER – 3

3.1 The SCAM Story 74

3.2 Public Sector OR Private Sector – Point of

Views 76 3.3 And today... the

news say. . . 83

4

CH.NO. TITLE

PAGE NO

3.4 Future … what’s ahead 86

3.5 Conclusion 88

List of Illustrations and Visual Aids

Illustration

No.

Title Page no.

12

345678910

Trends in CRR and SLRGrowth In Investments In Government Securities by BanksClassification of Loan Assets of SCBsIndian Banks: Trend in ROECapital Contributed by Government Income and Expenses Profile of banksVRS trends in BanksICICI pre merger and post merger scenarioComparison of classes of banksLendings in Rural India

610

1522374150606170

List of Annexures

Annexure 1: List of banks 90

Annexure 2: Questionnaire 93

5

As the real sector reforms began in 1992, the need was felt to

restructure the Indian banking industry. The reform measures

necessitated the deregulation of the financial sector, particularly the

banking sector. The initiation of the financial sector reforms brought

about a paradigm shift in the banking industry. In 1991, the RBI had

proposed to from the committee chaired by M. Narasimham, former RBI

Governor in order to review the Financial System viz. aspects relating to

the Structure, Organisations and Functioning of the financial system. The

Narasimham Committee report, submitted to the then finance minister,

Manmohan Singh, on the banking sector reforms highlighted the

weaknesses in the Indian banking system and suggested reform

measures based on the Basle norms. The guidelines that were issued

subsequently laid the foundation for the reformation of Indian banking

sector.

The main recommendations of the Committee were: -

i. Reduction of Statutory Liquidity Ratio (SLR) to 25 per cent over a

period of five years

ii. Progressive reduction in Cash Reserve Ratio (CRR)

iii. Phasing out of directed credit programmes and redefinition of the

priority sector

iv. Deregulation of interest rates so as to reflect emerging market

conditions

v. Stipulation of minimum capital adequacy ratio of 4 per cent to risk

weighted assets by March 1993, 8 per cent by March 1996, and 8

per cent by those banks having international operations by March

1994

6

1.1 Introduction

vi. Adoption of uniform accounting practices in regard to income

recognition, asset classification and provisioning against bad and

doubtful debts

vii. Imparting transparency to bank balance sheets and making more

disclosures

viii. Setting up of special tribunals to speed up the process of recovery

of loans

ix. Setting up of Asset Reconstruction Funds (ARFs) to take over from

banks a portion of their bad and doubtful advances at a discount

x. Restructuring of the banking system, so as to have 3 or 4 large

banks, which could become international in character, 8 to 10

national banks and local banks confined to specific regions. Rural

banks, including RRBs, confined to rural areas

xi. Abolition of branch licensing

xii. Liberalising the policy with regard to allowing foreign banks to

open offices in India

xiii. Rationalisation of foreign operations of Indian banks

xiv. Giving freedom to individual banks to recruit officers

xv. Inspection by supervisory authorities based essentially on the

internal audit and inspection reports

xvi. Ending duality of control over banking system by Banking Division

and RBI

xvii. A separate authority for supervision of banks and financial

institutions which would be a semi-autonomous body under RBI

xviii. Revised procedure for selection of Chief Executives and Directors

of Boards of public sector banks

xix. Obtaining resources from the market on competitive terms by DFIs

xx. Speedy liberalisation of capital market

xxi. Supervision of merchant banks, mutual funds, leasing companies

etc., by a separate agency to be set up by RBI and enactment of a

separate legislation providing appropriate legal framework for

7

mutual funds and laying down prudential norms for such

institutions, etc.

Several recommendations have been accepted and are being

implemented in a phased manner. Among these are the reductions in

SLR/CRR, adoption of prudential norms for asset classification and

provisions, introduction of capital adequacy norms, and deregulation of

most of the interest rates, allowing entry to new entrants in private

sector banking sector, etc.

Keeping in view the need of further liberalisation the

Narasimham Committee II on Banking Sector reform was set up in 1997.

This committee’s terms of reference included review of progress in

reforms in the banking sector over the past six years, charting of a

programme of banking sector reforms required to make the Indian

banking system more robust and internationally competitive and framing

of detailed recommendations in regard to make the Indian banking

system more robust and internationally competitive.

This committee constituted submitted its report in April 1998. The major

recommendations are :

i. Capital adequacy requirements should take into account market

risks also

ii. In the next three years, entire portfolio of Govt. securities should

be marked to market

iii. Risk weight for a Govt. guaranteed account must be 100 percent

iv. CAR to be raised to 10% from the present 8%; 9% by 2000 and

10% by 2002

v. An asset should be classified as doubtful if it is in the sub-standard

category for 18 months instead of the present 24 months

8

vi. Banks should avoid ever greening of their advances

vii. There should be no further re-capitalization by the Govt.

viii. NPA level should be brought down to 5% by 2000 and 3% by

2002.

ix. Banks having high NPA should transfer their doubtful and loss

categories to ARCs which would issue Govt. bonds representing the

realisable value of the assets.

x. International practice of income recognition by introduction of the

90-day norm instead of the present 180 days.

xi. A provision of 1% on standard assets is required.

xii. Govt. guaranteed accounts must also be categorized as NPAs

under the usual norms

xiii. There is need to institute an independent loan review

mechanism especially for large borrowal accounts to identify

potential NPAs.

xiv. Recruitment of skilled manpower directly from the market be

given urgent consideration

xv.To rationalize staff strengths, an appropriate VRS must be

introduced.

xvi. A weak bank should be one whose accumulated losses and net

NPAs exceed its net worth or one whose operating profits less its

income on recap bonds is negative for 3 consecutive years.

To start with, it has assigned a 2.5 per cent risk-weightage on gilts by

March 31, 2000 and laid down rules for provisioning; shortened the life

of sub-standard assets from 24 months to 18 months (by March 31,

2001); called for 0.25 per cent provisioning on standard assets (from

fiscal 2000); 100 per cent risk weightage on foreign exchange (March 31,

1999) and a minimum capital adequacy ratio of 9 per cent as on March

31, 2000.

9

Only a few of these mainly constitute to the reforms in the banking

sector.

10

REFORMS

The South East Asian countries introduced banking reforms wherein

bank CRR and SLR was reduced, this increased the lending capacity of

banks. The markets fell precipitously because banks and corporates did

not accurately measure the risk spread that should have been reflected

in their lending activities. Nor did they manage such risks or provide for

them in their balance sheets. And followed the South East Asian Crisis.

The monetary policy perspective essentially looks at SLR and CRR

requirements (especially CRR) in the light of several other roles they

play in the economy.  The CRR is considered an effective instrument for

monetary regulation and inflation control.  The SLR is used to impose

financial discipline on the banks, provide protection to deposit-holders,

allocate bank credit between the government and the private sectors,

and also help in monetary regulation. However bankers strongly feel that

these along with high non-performing assets (on which banks do not earn

any return) 10 percent CRR and 25 percent SLR (most banks have SLR

investments way above the stipulation) are affecting banks' bottomlines.

With an effective return of a mere 2.8 per cent, CRR is a major drag on

banks' profitability.

The Narasimham Committee had argued for reductions in SLR on the

grounds that the stated government objective of reducing the fiscal

deficits will obviate the need for a large portion of the current SLR. 

Similarly, the need for the use of CRR to control secondary expansion of

credit would be lesser in a regime of smaller fiscal deficits.  The

committee offered the route of Open Market Operations (OMO) to the

Reserve Bank of India for further monetary control beyond that provided

by the (lowered) SLR and CRR reserves. Ultimately, the rule was

Reduction in the reserve requirements of banks, with the Statutory

11

1.2 Reduction of SLR and CRR

Liquidity Ratio (SLR) being brought down to 25 per cent by 1996-97 in a

period of 5 years.

The recent trend in several developed countries (US, Switzerland,

Australia, Canada, and Germany) towards drastic lowering of reserve

requirements is often used to support the argument for reduced reserve

levels in India.

The arguments for higher or lower SLR and CRR ratios stem from two

different perspectives one which favours the banks, and the other which

favours the bank reserves as a monetary policy instrument.  The bank

perspective seeks to maximise "lendable" resources, the banks' control

over resource deployment, and returns to the banks from the

"preempted" funds.  It is also claimed that the low returns from the

forced investments in government securities adversely affect the bank

profitability - the cost of deposits for banks, which averages at 15-16 per

cent, was much greater than the (earlier) returns on the government

securities.  This argument is sometimes carried further to state that RBI

makes profits on impounded money, at the cost of bank profitability.  To

some extent, this argument has been weakened by the increase in

interest on government securities to 13.5 per cent.

Some problems with the stated aim of reducing SLR and CRR are:

1. The supporting condition of smaller fiscal deficits is not

happening in reality

2. Open market operations have not been used to any significant

extent in India for monetary control.  The time required for

gaining experience with the use of such operations would be

much more than 5-6 years.

12

3. A commitment to a unidirectional movement of these vital

controls irrespective of the effects on, and the response of, other

economic factors (such as inflation), would be unwise.

This scenario thus indicates that despite the stated aim of reductions in

SLR and CRR, RBI may be forced to revert to higher reserve levels, if the

economic indicators become unfavourable, and RBI has already indicated

as much.  Bank investment are, therefore, not likely to stabilize in the

near future.

The RBI had announced an increase in interest rate on CRR balance to

6% from the present 4%. This will certainly boost the profits of banks, as

they have to maintain a minimum balance of 8% with the RBI.

13

Trends in CRR and SLR 1993 – 2001

14

Illustration 1

The committee recommended a Stipulation of minimum capital adequacy

ratio of 4 per cent to risk weighted assets by March 1993, 8 per cent by

March 1996, and 8 per cent by those banks having international

operations by March 1994. Later, all banks required attaining the capital

adequacy norm of 8 per cent, as per the Basle Committee

Recommendations, by March 31, 1996.  

Capital Adequacy

The growing concern of commercial banks regarding international

competitiveness and capital ratios led to the Basle Capital Accord 1988.

The accord sets down the agreement to apply common minimum capital

standards to their banking industries, to be achieved by year-end 1992.

Based on the Basle norms, the RBI also issued similar capital adequacy

norms for the Indian banks. According to these guidelines, the banks will

have to identify their Tier-I and Tier-II capital and assign risk weights to

the assets. Having done this they will have to assess the Capital to Risk

Weighted Assets Ratio (CRAR). The minimum CAR that the Indian banks

are required to meet is set at 9 percent.

• Tier-I Capital, comprising of

Paid-up capital

Statutory Reserves

Disclosed free reserves

Capital reserves representing surplus arising out of sale

proceeds of assets

• Tier-II Capital, comprising of

Undisclosed Reserves and Cumulative Perpetual Preference Shares

15

1.3 Minimum Capital Adequacy Ratio

Revaluation Reserves

General Provisions and Loss Reserves

The Narasimham Committee had recommended that the capital

adequacy norms set by the Bank of International Settlements (BIS) be

followed by the Indian banks also.  The BIS norm for capital adequacy is

8 per cent of risk-weighted assets. 

Inadequacy?

The structural inadequacy that is said to be responsible for the stock

scam was the compartmentalisation of the capital and money markets;

and the availability of "illegal" arbitrage opportunities. Such

interconnections between various parts of the financial system will

continue to develop as the demands made by the rest of the economy on

the financial system increase in the next two decades. Also, a short-term

danger of the new provisioning and capital adequacy norms arises from

the inefficiency of the Asset Reconstruction Fund (ARF), or some

alternative arrangement.  The need to make massive provisions obviously

results in a depletion of capital. But the capital adequacy norm means

the banks have to find additional, costly money to refurbish the capital

base.  In this situation, the banks are being forced to accept the

minimum possible amounts from sub-standard and bad loans.  Where

time and legal efforts might have forced them to pay more, errant

loanees are now getting away with token payments which the funds

starved banks are only too willing to accept.  Thus, the need for ARF is

now paramount. 

The banking sector specialists have traditionally claimed that capital

plays several roles in all "depository institutions", such as banks. 

However, these roles can vary significantly between the public sector

16

banks and those in the private sector.  The justification for capital

adequacy norms

for banks is brought out by the following arguments:

Capital lowers the probability of bank failure more capital

means added ability to withstand unexpected losses, and more

time for the bank to work through potentially fatal problems.  At

the same time, the Indian public sector banks may attract more

"punishments" in the form of politically motivated "loan

waivers", "loan melas", and non-performing assets.

Capital increases the disincentive for the bank management to

take excessive risk: If significant amount of their own funds are

at stake, the equity-owners have a powerful incentive to control

the amount of risk the bank incurs.  This may remain true for

the public sector banks only if the government acts as a vigilant

shareholder.  However, the government's ability to play such a

role effectively is suspect.  The Indian banks have traditionally

shown risk-aversion, but the recent stock scam showed that the

banks are perhaps being forced to take excessive risks to

improve the profitability.  Since management control will

remain with bureaucrats - banking or government - the source

of capital would not make much difference in the Indian

scenario.

Capital acts as a buffer between the bank and the deposit

guarantee corporation (funded by the tax-payer): while this is

true for the private banks, the government-owned capital in the

public sector banks is itself taxpayer money.

Capital helps avoid "credit crunches": a well-capitalized bank

can continue to lend in the face of losses.  Similar losses might

force a poorly capitalized bank to restrict credit (to increase

17

capital ratios).  In an economic downturn, well-capitalized banks

may provide a vital source of continuing credit.

Capital increases the long-term competitiveness: more capital

allows a bank to build long-term customer relationships, and

respond to positive as well as negative changes in the economic

environment.  New opportunities can be quickly made use of by

lending appropriately.  If the bank is not constrained by capital,

it can give valuable time to customers with temporary

repayment problems.  It can thereby recover more from the

loans, which would otherwise have to be called in.

The Dilemma

The foregoing discussion clearly brings out two conclusions: (a)

increasing the capital base of the nationalised banks is necessary,

especially in view of the large quantities of non-performing assets; and

(b) however, increase in capital owned directly by the government has

several attendant problems' The situation is complicated by the fact that

" private management" does not provide an answer in India, because of

the size of the institutions involved.  Also, talent and expertise in bank

management is available mainly in the existing nationalised banks.

One short-term fallout of the capital adequacy norms has been the

massive increases in investments by the banks in government securities. 

Since the risk-weight of government securities is zero, investments in

them do not add to the capital requirements.  The banks are therefore

choosing to deploy funds mobilised through deposits in these long-term

gilts. 

18

In the first ten months of 1993-94, for example, the investments in

government securities shot up by 18.8 per cent while bank credit grew at

only 6.6 per cent.  Despite a strong growth in aggregate deposits of 13.8

per cent, credit grew by only 6.65 per cent, while investments surged by

18.8 per cent.  The problem with this practice of the banks is that it can

upset the balance of maturity patterns between deposits (many of ' which

are short-term) and investments (which have 10 year maturities).  Now,

banks would have to develop much better investment management skills,

especially when interest rates are deregulated, and significant open

market operations are started.

 Growth In Investments In Government Securities by Banks

 

1991-

92

1992-

93

1992-93

[Up to Jan

93]

1993-94

[Up to Jan

94]

Aggregate deposits growth

36441 

[19.6

%]

32364 

[14.0 %]

37187 

[13.8 %]

Bank credit growth9291 

[8.0 %]

26390 

[21.0

%]

20966 

[16.7 %]

9999 

[6.6 %]

Investments 15131 1546011042 

[12.2 %]

19857 

[18.8 %]

Source: Reserve Bank of India Bulletin [1994]

Supplement - Report on Trends and Progress of Banking in India 1991-92

[July - June]; Jan 1993.

19

The Narasimham Committee II, 1998, suggested further revision i.e. CAR

to be raised to 10% from the present 8%(1998); 9% by 2000 and 10% by

2002

Illustration 2

20

To get a true picture of the profitability and efficiency of the Indian

Banks, a code stating adoption of uniform accounting practices in regard

to income recognition, asset classification and provisioning against bad

and doubtful debts has been laid down by the Central Bank. Close to 16

per cent of loans made by Indian banks were NPAs - very high compared

to say 5 per cent in banking systems in advanced countries.

Magnitude of the problem

According to the latest RBI figures, gross NPAs in the banking sector

stands at Rs 45,563 crore which is about 16 per cent of the total loan

assets of the banks. The net NPAs (gross NPAs minus provisioning)

stands at Rs 21,232 crore which is about 7 per cent of loans advanced by

the banking sector. Though in percentage terms, the NPAs have come

down over the last 5-6 years, in absolute terms they have grown,

signifying that while new NPAs are being added to banks' operations

every year, recovery of older dues is also taking too long.

What is ever greening or rescheduling of loans?

Sometimes, to avoid classifying problem assets as NPAs, banks give

another loan to the company with the help of which it can pay the due

interest on the original loan. While this allows the bank to project a

healthy image, it actually makes the problems worse, and creates more

NPAs in the long run. RBI discourages such practices.

Asset Quality - Increased Transparency

Apart from the interest rate structure, the net interest income is also

affected by the asset quality of the bank. Asset quality is reflected by the

quantum of non-performing assets (NPAs) – the higher the level of NPAs,

the lower will be the asset quality and vice versa. Courtesy the

21

1.4 Prudential Norms

nationalization agenda and the directed credit, most of the public sector

banks were burdened with huge NPAs. While the government did

contribute to write-off these bad loans, the problem still remains. NPAs

expose the banks to not just credit risk but also to liquidity risk.

Considering the implications of the NPAs and also for imparting greater

transparency and accountability in banks operations and restoring the

credibility of confidence in the Indian financial system, the RBI

introduced prudential norms and regulations. The prudential norms

which relate to income recognition, asset classification and provisioning

for bad and doubtful debts serve two primary purposes – firstly, they

bring out the true position of a Bank’s loan portfolio, and

secondly, they help in arresting its deterioration.

The asset quality of the bank and its capital are closely associated. If the

assets of the bank go bad it is the capital that comes to its rescue.

Implies that the bank should have adequate capital to face the likely

losses that may arise from its risky assets. In the changed business

environment, where banks are exposed to greater and different types of

risk, it becomes essential to have a good capital base, which can help it

sustain unforeseen losses. As stated earlier, the one major move in this

direction was brought about by the Basle Committee, which laid the

capital standards that banks have to maintain. This became imperative,

as banks began to cross over their national boundaries and begin to

operate in international markets. Following the Basle Committee

measures, RBI also issued the Capital Adequacy Norms for the Indian

banks also.

INCOME RECOGNITION

The regulation for income recognition states that the Income on NPAs

cannot be booked.

22

Interest income should not be recognized until it is realized. An NPA is

one where interest is overdue for two quarters or more. In

respect of NPAs, interest is not to be recognized on accrual basis, but is

to be treated as income only when actually received. Income in respect

of accounts coming under Health Code 5 to 8 should not be recognized

until it is realized. As regards to accounts classified in Health Code 4,

RBI has advised the banks to evolve a realistic system for income

recognition based on the prospect of realisability of the security. On non-

performing accounts the banks should not charge or take into account

the interest.

Income-recognition norms have been tightened for consortium banking

too. Member banks have to intimate the lead-bank to arrange for their

share of recovery. They will no more have the privilege of stating that

the borrower has parked funds with the lead-bank or with a member-

bank and that their share is due for receipt. The new notifications

emanated after deliberations held between the RBI and a cross-section of

banks after a working group headed by chartered accountant, PR

Khanna, submitted its report. The working group was set after the RBI’s

Board for Financial Supervision (BFS) wanted divergences in NPA

accounting norms by banks from central bank guidelines to be

addressed. The working group had identified three areas of divergence:

non-compliance with RBI norms; subjectivity arising out of the flexibility

in norms; and differences in the valuation of securities by banks, auditors

and RBI.

As of now, for income recognition norms, the RBI has suggested that the

international norm of 90 days be implemented in a phased manner by

2002. The current norm is 180 days.

23

ASSET CLASSIFICATION

While new private banks are careful about their asset quality and

consequently have low non-performing assets (NPAs), public sector

banks have large NPAs due to wrong lending policies followed earlier

and also due to government regulations that require them to lend to

sectors where potential of default is high. Allaying the fears that bulk of

the Non-Performing Assets (NPAs) was from priority sector, NPA from

priority sector constituted was lower at 46 per cent than that of the

corporate sector at 48 per cent.

Loans and advances account for around 40 per cent of the assets of

SCBs. However, delay/default in payment of interest and/or repayment of

principal has rendered a significant proportion of the loan assets non-

performing. As per RBI’s prudential norms, a Non-Performing Asset

(NPA) is a credit facility in respect of which interest/installment has

remained unpaid for more than two quarters after it has become past

due. “Past due” denotes grace period of one month after it has become

due for payment by the borrower. The Mid-Term Review of Monetary and

Credit Policy for 2000-01 has proposed to discontinue this concept with

effect from March 31, 2001.

Regulations for asset classification

Assets should be classified into four classes - Standard, Sub-standard,

Doubtful, and Loss assets. NPAs are loans on which the dues are not

received for two quarters. NPAs consist of assets under three categories:

sub-standard, doubtful and loss. RBI for these classes of assets should

evolve clear, uniform, and consistent definitions.  The health code system

earlier in use would have to be replaced. The banks should classify their

assets based on weaknesses and dependency on collateral securities into

four categories:

24

Standard Assets: It carries not more than the normal risk attached to

the business and is not an NPA.

Sub-standard Asset: An asset which remains as NPA for a period

exceeding 24 months, where the current net worth of the borrower,

guarantor or the current market value of the security charged to the

bank is not enough to ensure recovery of the debt due to the bank in full.

Doubtful Assets: An NPA which continued to be so for a period

exceeding two years (18 months, with effect from March, 2001, as

recommended by Narasimham Committee II, 1998).

Loss Assets: An asset identified by the bank or internal/ external

auditors or RBI inspection as loss asset, but the amount has not yet been

written off wholly or partly.

The banking industry has significant market inefficiencies caused by the

large amounts of Non Performing Assets (NPAs) in bank portfolios,

accumulated over several years.  Discussions on non-performing assets

have been going on for several years now.  One of the earliest writings

on NPAs defined them as "assets which cannot be recycled or disposed

off immediately, and which do not yield returns to the bank, examples of

which are: Overdue and stagnant accounts, suit filed accounts, suspense

accounts and miscellaneous assets, cash and bank balances with other

banks, and amounts locked up in frauds".

The following Table shows the distribution of total loan assets of banks in

the public private sectors and foreign banks for 1997-98 through 1999-

2000. It is worth noting that the ratio of incremental standard assets of

SCBs to their total loan assets increased from 83.1 per cent in 1998-99 to

97.2 percent in 1999-2000. In other words, the ratio of incremental NPAs

25

of SCBs to their total loan assets declined significantly from 16.9 per

cent in 1998-99 to 2.8 percent in 1999-2000.  

Classification of Loan Assets of SCBs

(Percentage distribution of total loan assets)

Assets Public Private Foreign SCBs

A. Standard

1997-98 84.0 91.3 93.6 85.6

1998-99 86.1 91.2 92.4 85.3

1999-2000 86.0 91.5 93.0 87.2

B. Sub-standard

1997-98 5.0 5.8 3.9 4.9

1998-99 4.9 6.2 4.0 5.0

1999-2000 4.3 3.7 2.9 5.1

C. Doubtful

1997-98 9.1 0.9 1.7 1.8

1998-99 4.0 0.9 2.0 1.9

1999-2000 1.7 0.8 1.9 1.6

D. Loss

1997-98 1.9 0.9 1.2 1.8

26

1998-99 2.0 0.9 2.0 1.9

1999-2000 1.7 0.8 1.9 1.6

E. Total Assets (Rs. Crore)

1997-98 284971 36753 30972 352696

1998-99 325328 43049 31059 399436

1999-2000 380077 58249 37432 475758

Note: Addition of percentages for B to D may not add up to 100 minus

the percentage share of standard assets (A) due to rounding.

The asset classification norms have resulted in a huge quantity of assets

being classified into the sub-standard, doubtful, and loss assets.  As at 31

March 1993, the total of Non-Performing Assets (NPAs) for the public

sector banks (SBI, its seven associates, and 20 nationalised banks) stood

at Rs 36,588 crores. Of these, the sub-standard assets account for Rs

12,552 crores, doubtful assets Rs 20,106 crores, and loss assets Rs 3,930

crores (RBI Bulletin, 1994). For the future, the banks will have to tighten

their credit evaluation process to prevent this scale of sub-standard and

loss assets.  The present evaluation process in several banks is burdened

with a bureaucratic exercise, sometimes involving up to 18 different

officials, most of whom do not add any value (information or judgment) to

the evaluation.  

PROVISIONING NORMS

Banks will be required to make provisions for bad and doubtful debts on

a uniform and consistent basis so that the balance sheets reflect a true

picture of the financial status of the bank.  The Narasimham Committee

has recommended the following provisioning norms

27

Illustration 3

(i) 100 per cent of loss assets or 100 per cent of out standings for loss

assets;

(ii) 100 per cent of security shortfall for doubtful assets and 20 per cent

to 50 per cent of the secured portion; and

(iii) 10 per cent of the total out standings for substandard assets. 

A provision of 1% on standard assets is required as suggested by

Narasimham Committee II 1998. Banks need to have better credit

appraisal systems so as to prevent NPAs from occurring. The most

important relaxation is that the banks have been allowed to make

provisions for only 30 per cent of the "provisioning requirements" as

calculated using the Narasimham Committee recommendations on

provisioning (but with the diluted asset classification).  The nationalised

banks have been asked to provide for the remaining 70 per cent of the

"provisioning requirements" by 31 March 1994.  The encouraging profits

recently declared by several banks have to be seen in the light of

provisions made by them - Rs 10,390 crores pertaining to 1992-93, and

the additional provisions for 1993-94.  To the extent that provisions have

not been made, the profits would be fictitious.

Banks should disclose in balance sheets maturity pattern of advances,

deposits, investments and borrowings. Apart from this, banks are also

required to give details of their exposure to foreign currency assets and

liabilities and movement of bad loans. These disclosures were to be made

for the year ending March 2000

In fact, the banks must be forced to make public the nature of NPAs

being written off.  This should be done to ensure that the taxpayer’s

money given to the banks as capital is not used to write off private loans

without adequate efforts and punishment of defaulters.

28

1.5 Disclosure Norms

# A Close look : For the future, the banks will have to tighten their

credit evaluation process to prevent this scale of sub-standard and loss

assets.  The present evaluation process in several banks is burdened with

a bureaucratic exercise, sometimes involving up to 18 different officials,

most of whom do not add any value (information or judgment) to the

evaluation.  But whether this government and its successors will

continue to play with bank funds remains to be seen.  Perhaps even the

loan waivers and loan "melas" which are often decried by bankers form

only a small portion of the total NPAs.  As mentioned above, much

more stringent disclosure norms are the only way to increase

the accountability of bank management to the taxpayers .  A lot

therefore depends upon the seriousness with which a new regime of

regulation is pursued by RBI and the newly formed Board for Financial

Supervision.

RBI norms for consolidated PSU bank accounts

The Reserve Bank of India (RBI) has moved to get public sector banks to

consolidate their accounts with those of their subsidiaries and other

outfits where they hold substantial stakes.

Towards this end, RBI has set up a working group recently under its

Department of Banking Operations and Development to come out with

necessary guidelines on consolidated accounts for banks. The move is

aimed at providing the investor with a better insight into viewing a

bank's performance in totality, including all its branches and

subsidiaries, and not as isolated entities. According to a banker, earlier

subsidiaries were floated as external independent entities wherein the

accounting details were not incorporated in the parent bank's balance

sheet, but at the same time it was assumed that the problems will be

dealt with by the parent.

29

This will be a path-breaking change to the existing norms wherein each

bank conducts its accounts without taking into consideration the

disclosures of its subsidiaries and other divisions for disclosure. As per

the proposed new policy guidelines, the banks will be required to

consolidate their accounts including all its subsidiaries and other holding

companies for better transparency.

# Result: This will require the banks to have a stricter monitoring

system of not only their own bank, but also the other subsidiaries in

other sectors like mutual funds, merchant banking, housing finance and

others. This is all the more important in the context of the recent

announcements made by some major public sector banks where they

have said they would hive off or close down some of their under

performing subsidiaries.

The Investors Advantage

Getting all these accounts consolidated with that of the parent bank will

provide the investor a better understanding of the banks' performances

while deciding on their exposures. More so, since a number of public

sector banks are now listed entities whose stocks are traded on the stock

exchanges. Some public sector banks are even preparing their accounts

in line with US GAAP norms in anticipation of a US listing. These norms

will therefore be in line with the future plans of these banks as well. The

working group was set up following the need to bring about

transparency on the lines of international norms through better

disclosures.

These new norms will necessitate not only that the problems are handled

by the parent, but investors are also aware of what exactly the problems

are and how they affect the bottomlines of the parent banks. Now, under

30

the new guidelines, this will no longer be an external disclosure to the

parent banks' books of accounts.

Rather, point out bankers, this will very much form an integral part of

the parent's balance sheet.

For instance, if a subsidiary is not performing well or making losses, this

will reflect in the parent's balance sheet.

Liberalising the policy with regard to allowing foreign banks to open

offices in India or rather Deregulation of the entry norms for private

sector banks and foreign sector.

Entry of New Banks in the Private Sector

As per the guidelines for licensing of new banks in the private sector

issued in January 1993, RBI had granted licenses to 10 banks. Based on a

review of experience gained on the functioning of new private sector

banks, revised guidelines were issued in January 2001. The main

provisions/requirements are listed below : -

Initial minimum paid-up capital shall be Rs. 200 crore; this will be

raised to Rs. 300 crore within three years of commencement of

business.

Promoters’ contribution shall be a minimum of 40 per cent of the paid-

up capital of the bank at any point of time; their contribution of 40 per

cent shall be locked in for 5 years from the date of licensing of the

bank and excess stake above 40 per cent shall be diluted after one

year of bank’s operations.

31

1.6 Rationalisation of Foreign Operations in India

Initial capital other than promoters’ contribution could be raised

through public issue or private placement.

While augmenting capital to Rs. 300 crore within three years,

promoters need to bring in at least 40 percent of the fresh capital,

which will also be locked in for 5 years. The remaining portion of

fresh capital could be raised through public issue or private

placement.

NRI participation in the primary equity of the new bank shall be to the

maximum extent of 40 per cent. In the case of a foreign banking

company or finance company (including multilateral institutions) as a

technical collaborator or a co-promoter, equity participation shall be

limited to 20 per cent within the 40 per cent ceiling. Shortfall in NRI

contribution to foreign equity can be met through contribution by

designated multilateral institutions.

No large industrial house can promote a new bank. Individual

companies connected with large industrial houses can, however,

contribute up to 10 per cent of the equity of a new bank, which will

maintain an arms length relationship with companies in the promoter

group and the individual company/ies investing in equity. No credit

facilities shall be extended to them.

NBFCs with good track record can become banks, subject to specified

criteria

A minimum capital adequacy ratio of 10 per cent shall be maintained

on a continuous basis from commencement of operations.

Priority sector lending target is 40 per cent of net bank credit, as in

the case of other domestic banks; it is also necessary to open 25 per

cent of the branches in rural/semi-urban areas.

"Our industry did not oppose the entry of private bankers because we

knew they will not be able to reach out to the rural markets” states, G.M.

Bhakey, president of the State Bank of India Officers Association. "Even

32

after privatisation not more than 10 per cent of the Indian population can

afford to open accounts in private banks."

Can the keenly supported private and foreign banks cater to the banking

needs of the people in India fairly? Takeover and merger dramas are in

progress in the world of private sector banks now and time only can tell

how many will live to render safe banking services in the days to come.

The bad debt figures even in the two to three year old new private sector

banks have crossed over 6% to the total advances, while the trends in the

old private banks are still higher, despite the fact that they have no

social commitment lendings in their portfolios.

In any case, the private banks, in the Indian context, cannot be the

alternative to our well-developed public sector banks. They are there in

the country to fill the private pockets with their typical selectivity of

business and costly operations. All those who beat their drums for the

privatisation parade, which is much on the move after globalisation, to

denationalise our public sector banks, do so with vested interests.

ICICI bank, HDFC bank, GTB, IndusInd, BOP and UTI Bank have come

out with IPOs as per licensing requirement. Their technological edge and

product innovation has seen them gaining market share from the slower,

less efficient older banks. These banks have targeted non-fund based

income as major source of revenue, with their level of contingent

liabilities being much higher then their other counterparts viz. PSU and

old private sector banks. The new private banks have been consistently

gaining market shares from the public sector banks. The major

beneficiary of this has been corporate clients who are most sought after

now.

The new generation private sector banks have made a strong presence in

the most lucrative business areas in the country because of technology

33

upgradation. While, their operating expenses have been falling as

compared to the PSU banks, their efficiency ratios (employee’s

productivity and profitability ratios) have also improved significantly.

The new private sector banks have performed very well in the FY2000.

Most of these banks have registered an increase in net profits of over

50%. They have been able to make significant inroads in the retail

market of the public sector and the old private sector banks. During the

year, the two leading banks in this sector had set a new trend in the

Indian banking sector. HDFC Bank, as a part of its expansion plans had

taken over Times Bank. ICICI Bank became the first bank in the country

to list its shares on NYSE.

The Reserve Bank of India had advised the promoters of these banks to

bring their stake to 40% over a time period. As a result, most of these

banks had a foreign capital infusion and some of the other banks have

already initiated talks about a strategic alliance with a foreign partner.

The main problems concerning the nationalized / state sector banks are

as follows:

A. Large number of unprofitable branches

B. Excess staffing of serious magnitude

C. Non Performing Assets on account of politically directed lending

and industrial recession in last few years

D. Lack of computerization leading to low service delivery levels, non-

reconciliation of accounts, inability to control, misuse and fraud etc

E. Inability to introduce profitable new consumer oriented products

like credit cards, ATMs etc

The private’ edge

34

Technology- The private banks have used technology to provide

quality service through lower cost delivery mechanisms. The

implementation of new technology has been going on at very rapid

pace in the private sector, while PSU banks are lagging behind in

the race.

Declining interest rates- in the present scenario of declining

interest rates, some of the new private banks are better able to

manage the maturity mix. PSU Banks by and large take relatively

long-term deposits at fixed rates to lend for working capital

purposes at variable rates. It therefore is negatively affected when

interest rates decline as it takes time to reduce interest rates on

deposits when lending has to be done at lower interest rates due to

competitive pressures.

NPAs- The new banks are growing faster, are more profitable and

have cleaner loans. Reforms among public sector banks are slow, as

politicians are reluctant to surrender their grip over the deployment

of huge amounts of public money.

Convergence-

The new private banks are

able to provide a range

of financial services under

one roof, thus increasing

their fee based revenues.

35

Illustration 4

Annexure 1

List of Banks operating in India.

Setting up of special tribunals to speed up the process of recovery of

loans and setting up of Asset Reconstruction Funds (ARFs) to take over

from banks a portion of their bad and doubtful advances at a discount

was one of the crucial recommendations of the Narasimham Committee.

To expedite adjudication and recovery of debts due to banks and

financial institutions (FIs) at the instance of the Tiwari Committee

(1984), appointed by the Reserve Bank of India (RBI), the government

enacted the Debt Recovery Tribunal Act, 1993 (DRT). Accordingly, DRTs

and Appellate DRTs have been established at different places in the

country. The act was amended in January 2000 to tackle some problems

with the old act.

DRTs, a compulsion!

36

1.7 Special Tribunals and Asset Reconstruction Fund

One of the main factors responsible for mounting non-performing assets

(NPAs) in the financial sector has been the inability of banks/FIs to

enforce the security held by them on loans gone sour. Prior to the

passage of the DRT Act, the only recourse available to banks/FIs to cover

their dues from recalcitrant borrowers, when all else failed, was to file a

suit in a civil court. The result was that by the late ’80s, banks had a

huge portfolio of accounts where cases were pending in civil courts. It

was quite common for cases to drag on interminably. In the interim,

borrowers, more often than not, stripped their premises of all assets so

that that by the time the final verdict came, there was nothing left of the

security that had been pledged to the bank.

The Advantage

DRTs, it was felt, would do away with the costly, time-consuming civil

court procedures that stymied recovery procedures since they follow a

summary procedure that expedites disposal of suits filed by banks/FIs.

Following the passage of the Act in August 1993, DRTs were set up at

Calcutta, Delhi, Bangalore, Jaipur and Ahmedabad along with an

Appellate Tribunal at Mumbai.

However, DRTs soon ran into rough weather. The constitutional validity

of the Act itself was questioned. It was only in March 1996, that the

Supreme court modified its earlier order — staying the operation of the

Delhi High Court order quashing the constitution of the DRT for Delhi —

to allow the setting up of three more DRTs in Chennai, Guwahati and

Patna. Subsequently, many more DRTs and ADRTs have been set up.

The truth undiscovered, CURRENT STATUS AND

BANKERS COMPLAINS !

37

Unfortunately, as a consequence of the numerous lacunae in the act and

the huge backlog of past cases where suits had been filed, DRTs failed to

make a significant dent. For instance, the tribunals did not have powers

of attachment before judgment, for appointment of receivers or for

ordering preservation of property.

Thus, legal infrastructure for the recovery of non-performing loans still

does not exist. The functioning of debt recovery tribunals has been

hampered considerably by litigation in various high courts. Complains

Bank of Baroda's Kannan: "Of the Rs 45,000-crore worth of gross NPAs,

over Rs 12,000 crore is locked up in the courts." So, the only solution to

the problem of high NPAs is ruthless provisioning. Till date, the banking

system has provided for about Rs 20,000 crore, which means it is still

stuck with net NPAs worth Rs 25,000 crore. Even that is an under

estimate as it does not include advances covered by government

guarantees, which have turned sticky. Nor does it include allowances for

"ever greening"--the practice of extending fresh advances to defaulting

corporates so that the prospective defaulter can make interest payments,

thus enabling the asset to escape the non-performing loan tag. Warns

K.R. Maheshwari, 60, Managing Director, IndusInd Bank: "NPA levels

are going to go up for all the banks." And so too will provisions.

Recent Developments

The recent amendment (Jan 2000) to the DRT Act addresses many of the

lacunae in the original act. It empowers DRTs to attach the property on

the borrower filing a complaint of default. It also empowers the presiding

officer to execute the decree of the official receiver based on the

certificate issued by the DRT. Transfer of cases from one DRT to another

has also been made easier. More recently, the Supreme Court has ruled

that the DRT Act will take precedence over the Companies Act in the

38

recovery of debt, putting to rest all doubts on that score.

SOME MORE ISSUES

As things stand, the DRT Act supersedes all acts other than The Sick

Industrial Companies Act (SICA). This means that recovery procedures

can still be stalled by companies declaring themselves sick under SICA.

Once the fact of their sickness has prima facie been accepted by the

Board for Industrial and Financial Reconstruction (BIFR), there is

nothing a DRT can do till such time as the case is disposed of by the

BIFR. This lacuna too must be addressed if DRTs are to live up to their

promise.

The amendments would ensure speedy recovery of dues, iron out delays

at the DRT end, as well as ensure that promoters do not have the time

and opportunity to bleed their companies before they go into winding up.

Yet the number of cases pending before DRTs and courts make a telling

commentary on the inability of lenders to make good their threat. They

also reflect the ability of borrowers to dodge the lenders.

The main culprit for all this is the law. Existing recovery processes in the

country are aimed at recovering lenders' dues after a company has gone

sick and not nipping sickness in the bud. Since sickness is defined in law

as the erosion of capital of a company for three consecutive years, there

is little to recover from a sick company after it has been referred to the

Board of Industrial and Financial Revival (BIFR).

39

What's hurting banks now is the fact that these new issues have cropped

up even as they have been (unsuccessfully) wrestling with their NPAs

which, together, tot up to a staggering Rs 60,000 crore. The stratagem of

using Debt Recovery Tribunals has failed. Now these banks have to

explore the option of liquidating the assets of defaulting companies (a

litigitinous route), or writing off these debts altogether (which may not

find favour with shareholders). The solution could lie in better risk

management

40

How to deal with the weak Public Sector Banks is a major problem for

the next stage of banking sector reforms. It is particularly difficult

because the poor financial position of many of these banks is often

blamed on the fact that the regulatory regime in earlier years did not

place sufficient emphasis on sound banking, and the weak Banks are,

therefore, not responsible for their current predicament. This perception

often leads to an expectation that all weak Banks must be helped to

restructure after which they would be able to survive in the new

environment.

Keeping in view the urgent need to revive the weak banks, the Reserve

Bank of India set up a Working Group in February, 1999 under the

Chairmanship of Shri M.S. Verma to suggest measures for the revival of

weak public sector banks in India.

THE VERMA PRESCRIPTION…a brief

Identification of weak banks by using benchmarks for 7 critical ratios

Recapitalisation of 3 weak banks conditional on their

achieving specified milestones

Five-year freeze on all wage-increases, including the 12.25% increase negotiated by the IBA

A 25% reduction in staff-strength, either through VRSs or through wage-cuts

Branch rationalisation, including the closure of loss-making foreign branches

Transfer of non-performing assets to an Asset

Reconstruction Fund

41

1.8 Restructuring of Weak Banks

Reconstitution of bank boards to include professionals, industrialists and financial experts

Independent Financial Restructuring Authority to monitor implementation of revival package

The major recommendations/points of the Working Group, which

submitted its Report in October, 1999, are listed below:-  

Seven parameters covering three areas have been identified;

these are (i) Solvency (capital adequacy ratio and coverage

ratio), (ii) Earning Capacity (return on assets and net interest

margin) and (iii) Profitability (ratio of operating profit to

average working funds, ratio of cost to income and ratio of staff

cost to net interest + income all other income).  

Restructuring of weak banks should be a two-stage operation;

stage one involves operational, organisational and financial

restructuring aimed at restoring competitive efficiency; stage

two covers options of privatisation and/or merger.  

Operational restructuring essentially involves building up

capabilities to launch new products, attract new customers,

improve credit culture, secure higher fee-based earnings, sell

foreign branches (Indian Bank and UCO Bank) to prospective

buyers including other public sector banks, and pull out from

the subsidiaries (Indian Bank), establish a common networking

and processing facility in the field of technology, etc.  

42

The action programme for handling of NPAs should cover

honouring of Government guarantees, better use of

compromises for reduction of NPAs based on recommendations

of the Settlement Advisory Committees, transfer of NPAs to ARF

managed by an independent AMC,etc.  

To begin with, ARF may restrict itself to the NPAs of the three

identified weak banks; the fund needed for ARF is to be

provided by the Government; ARF should focus on relatively

larger NPAs (Rs. 50 lakh and above).  

A 30-35 percent reduction in staff cost required in the three

identified weak banks to enable them to reach the median level

of ratio of staff cost to operating income.  

In order to control staff cost, the three identified weak banks

should adopt a VRS covering at least 25 percent of the staff

strength; for the three banks taken together, the estimated cost

of VRS ranges from Rs. 1100 to Rs. 1200 crore.  

The organisational restructuring includes delayering of the

decision making process relating to credit, rationalisation of

branch network, etc.  

Experts have also suggested the concept of narrow banking,

where only strong and efficient banks will be allowed to give

commercial loans, while the weak banks will take positions in

less risky assets such as government securities and inter-bank

lending.

43

The three identified banks on committee recommendations were UCO

bank, United Bank of India and Indian Bank.

In August 2001, the government of India directed UCO Bank to shut

down 800 branches and also 4 international operations in line with the

Verma committee recommendation on sick banks. Three more PSBs

declared sick are Dena Bank, Allahabad Bank and Punjab and Sindh

Bank. UCO bank had been posting losses for the past eleven years.

44

The critical role of managing risks has now come into the open,

especially against the experience of the recent East Asian crisis, where

markets fell precipitously because banks and corporates did not

accurately measure the risk spread that should have been reflected in

their lending activities. Nor did they manage such risks or provide for

them in their balance sheets. In India, the Reserve Bank has recently

issued comprehensive guidelines to banks for putting in place an asset-

liability management system. The emergence of this concept can be

traced to the mid 1970s in the US when deregulation of the interest rates

compelled the banks to undertake active planning for the structure of the

balance sheet. The uncertainty of interest rate movements gave rise to

interest rate risk thereby causing banks to look for processes to manage

their risk. In the wake of interest rate risk came liquidity risk and credit

risk as inherent components of risk for banks. The recognition of these

risks brought Asset Liability Management to the centre-stage of financial

intermediation.

The necessity

The asset-liability management in the Indian banks is still in its nascent

stage. With the freedom obtained through reform process, the Indian

banks have reached greater horizons by exploring new avenues. The

government ownership of most banks resulted in a carefree attitude

towards risk management. This complacent behavior of banks forced the

Reserve Bank to use regulatory tactics to ensure the implementation of

the ALM. Also, the post-reform banking scenario is marked by interest

rate deregulation, entry of new private banks, gamut of new products

and greater use of information technology. To cope with these pressures

banks were required to evolve strategies rather than ad hoc fire fighting

solutions. Imprudent liquidity management can put banks' earnings and

45

1.9 Asset Liability Management System

reputation at great risk. These pressures call for structured and

comprehensive measures and not just ad hoc action. The Management

of banks has to base their business decisions on a dynamic and

integrated risk management system and process, driven by corporate

strategy. Banks are exposed to several major risks in the course of their

business - credit risk, interest rate risk, foreign exchange risk, equity /

commodity price risk, liquidity risk and operational risk. It is, therefore,

important that banks introduce effective risk management systems that

address the issues related to interest rate, currency and liquidity risks.

Implementation of asset liability management (ALM) system

RBI has issued guidelines regarding ALM by which the banks have to

ensure coverage of at least 60% of their assets and liabilities by Apr ’99.

This will provide information on bank’s position as to whether the bank is

long or short. The banks are expected to cover fully their assets and

liabilities by April 2000.

ALM framework rests on three pillars

ALM Organisation:

The ALCO consisting of the banks senior management including CEO

should be responsible for adhering to the limits set by the board as well

as for deciding the business strategy of the bank in line with the banks

budget and decided risk management objectives. ALCO is a decision-

making unit responsible for balance sheet planning from a risk return

perspective including strategic management of interest and liquidity risk.

Consider the procedure for sanctioning a loan. The borrower who

approaches the bank, is appraised by the credit department on various

parameters like industry prospects, operational efficiency, financial

efficiency, management evaluation and others which influence the

46

working of the client company. On the basis of this appraisal the

borrower is charged certain rate of interest to cover the credit risk. For

example, a client with credit appraisal AAA will be charged PLR. While

somebody with BBB rating will be charged PLR + 2.5 %, say. Naturally,

there will be certain cut-off for credit appraisal, below which the bank

will not lend e.g. Bank will not like to lend to D rated client even at a

higher rate of interest. The guidelines for the loan sanctioning procedure

are decided in the ALCO meetings with targets set and goals established

ALM Information System

ALM Information System for the collection of information accurately,

adequately and expeditiously. Information is the key to the ALM process.

A good information system gives the bank management a complete

picture of the bank's balance sheet.

ALM Process

The basic ALM process involves identification, measurement and

management of risk parameters. The RBI in its guidelines has asked

Indian banks to use traditional techniques like Gap Analysis for

monitoring interest rate and liquidity risk. However RBI is expecting

Indian banks to move towards sophisticated techniques like Duration,

Simulation, VaR in the future.

Is it possible ?

Keeping in view the level of computerisation and the current MIS in

banks, adoption of a uniform ALM System for all banks may not be

feasible. The final guidelines have been formulated to serve as a

benchmark for those banks which lack a formal ALM System. Banks that

have already adopted more sophisticated systems may continue their

existing systems but they should ensure to fine-tune their current

information and reporting system so as to be in line with the ALM

System suggested in the Guidelines. Other banks should examine their

existing MIS and arrange to have an information system to meet the

47

prescriptions of the new ALM System. In the normal course, banks are

exposed to credit and market risks in view of the asset-liability

transformation. Banks need to address these risks in a structured

manner by upgrading their risk management and adopting more

comprehensive Asset-Liability Management (ALM) practices than has

been done hitherto

But, ultimately risk management is a culture that has to develop

from within the internal management systems of the banks. Its

critical importance will come into sharp focus once current restrictions

on banks’ portfolios are further liberalised and are subjected to the

pressure of macro economic fluctuations.

48

This is what the finance minister said in his budget speech on February

29, 2000;

"In recent years, RBI has been prescribing prudential norms

for banks broadly consistent with international practice. To

meet the minimum capital adequacy norms set by the RBI and

to enable the banks to expand their operations, public-sector

banks will need more capital. With the Government budget

under severe strain, such capital has to be raised from the

public which will result in reduction in government

shareholding. To facilitate this process, the Government has

decided to accept the recommendations of the Narasimham

Committee on Banking Sector Reforms for reducing the

requirement of minimum shareholding by government in

nationalised banks to 33 per cent. This will be done without

changing the public-sector character of banks and while

ensuring that fresh issue of shares is widely held by the

public."

Banking is a business and not an extension of government. Banks must

be self-reliant, lean and competitive. The best way to achieve this is to

privatise the banks and make the managements accountable to real

shareholders. If "privatisation" is a still a dirty word, a good starting

point for us is to restrict government stake to 33 per cent.

During the winter session of the Parliament, on 16 November 2000, the

Union Cabinet has taken certain decisions, which have far reaching

consequences for the future of the Indian banking sector cleared

amendment of the Banking Companies (Acquisitions and Transfer of

Undertakings) Act 1970/1980 for facilitating the dilution of government’s

49

1.10 Reduction of Government Stake in PSBs

equity to 33 per cent

Government’s action programme has expressed clearly its programme

for the dilution of its stake in bank equity. The Cabinet had taken this

decision, immediately on the next day after the bank employees went on

strike, is a clear indication of Government of India’s determination to

amend the concerned Acts, to pave the way for the reduction in its stake.

The proposal had been to reduce the minimum shareholding from 51 per

cent to 33 per cent, with adequate safeguards for ensuring its control on

the operations of the banks. However, it is not willing to give away the

management control in the nationalised banks. As a result public sector

banks may find it very difficult to attract strategic investors.

SALIENT FEATURES of the proposed amendments

Government would retain its control over the banks by stipulating

that the voting rights of any investor would be restricted to one per

cent, irrespective of the equity holdings.

The government would continue to have the prerogative of the

appointment of the chief executives and the directors of the

nationalised banks. There has been considerable delay in the past in

filling up the posts of the chairman and executive director of some banks.

It is not clear as to how this aspect would be taken care of in future. It is

said that the proposed amendment to the Act would also give the board

of banks greater autonomy and flexibility.

It has been decided to discontinue the mandatory practice of

nominating the representatives of the government of India and

the Reserve Bank in the boards of nationalised banks. This decision

is in tune with the recommendation of Narasimham committee. However,

the government would retain the right to nominate its representative in

50

the boards and strangely a nominee of the government can be in

more than one bank after the amendment.

The number of whole time directors would be raised to four

as against the present position of two, the chairman and

managing director and the executive director. While conceptually it

is desirable to decentralise power, operationally it may be difficult to

share power at peer level. In quite a few cases, it was observed that inter

personal relations were not cordial among the two at the top. It has to be

seen as to how the four full time directors would function in unison.

It is proposed to amend the provisions in the Banking Companies

(Acquisition and Transfer of Undertakings) Act to enable the bank

shareholders to discuss, adopt and approve the annual accounts

and adopt the same at the annual general meetings.

Paid-up capital of nationalised banks can now fall below 25 per

cent of the authorised capital.

Amendment will also enable the setting up of bank-specific

Financial Restructuring Authority (FRA). Authority will be empowered to

take over the management of the weak banks. Members of FRA will

comprise of experts from various fields & will be appointed by the

government, on the advice of Reserve Bank of India.

The government has been maintaining that the nationalised

banks would continue to retain public sector character even

after the reduction in equity.

This is the reason why the banks would continue to be statutory bodies

even after the reduction in government equity below 51 per cent and the

banks would not become companies. This implies that they would

continue to be subject to parliamentary and other scrutiny despite

proposed relaxations.

The measures seen in totality are clearly aimed at enabling banks to

51

access the capital markets and raise funds for their operations. The

Government seems to have no plans to reduce its control over these

banks. The Act will also permit it to transfer its stake if the need arises,

apart from granting banks the freedom to restructure their equity.

Reserve Bank’s perception; the Reserve Bank has been emphatic in its

views on lowering the stake of the government in the equity of

nationalized banks:

The panel wants government stake to be diluted to less than 50 per

cent in order to make banks' decision-making more autonomous. It

has said, “in view of the severe budgetary strain of the government, the

capital has to be raised from the public, which leads to a reduction in

government shareholding.” The process of the transition from public

sector to the joint sector has already been initiated with 7 of the public

sector banks accessing the capital market for expanding their capital

base. Since total privatization is not contemplated, the banks in the joint

sector are expected to control the commanding heights of the banking

business in the years to come.

In the domestic context, the idea behind a reduction in government

stake is to free bank employees from being treated as "public

servants." Instead, by directly reducing the government stake below 50

per cent, the banks will be free from the shackles of the central vigilance

commission.

Official sources explained that this has been done to enable banks to

clean up their balance sheets so that they can access the capital market

easily. In terms of transferring equity, the government is arming itself

with powers to sell its stake if it so desires at a later date.

52

A LOOK AT PAST

The Indira Gandhi government had nationalised 14 commercial banks

through the Banking Companies (Acquisitions and Transfer of

Undertakings) Ordinance in 1969. The 1970 and 1980 Acts brought

about after the nationalisation of 14 and 6 banks respectively were first

amended in 1994 to allow government to reduce its equity in them to up

to 49 per cent. The 20 nationalised banks became 19 subsequently after

New Bank of India merged with Punjab National Bank. Only six of these

19 banks have so far accessed the market and to gone for public issues

meet its additional capital needs. The government holds majority or

entire equity of 19 nationalised banks currently.

Till now, banks could reduce equity only up to 25 per cent of the paid up

capital on the date of nationalisation. Some banks like the Bank of

Baroda have returned equity to the government in the past, but that has

been within the prescribed 25 per cent cap.

The Nationalisation Act provides that the PSU banks cannot sell a single

share. This is the reason why banks have been tapping the market to

fund their expansion plans. Also the Act originally provided that the

government must mandatorily hold 100 per cent stake in banks. The

1994 amendments brought it down to 51 per cent, to help induction of

public as shareholders.

At this stage, the government provided that all shares, excluding

government shares could be transferred. This was necessary to permit

the transfer of shares when public shareholders sold their stake in banks.

The amendments remove restrictions on the transfer of government

shareholding.

What did they have to say ?

53

Union parliamentary affairs minister Pramod Mahajan said:

“The amendment is an enabling provision. We are only making it

easier for banks to access funds from the market...It is not the

intention of the government to privatise these banks or enter into

strategic alliances with private sector.”

Why should the taxpayers’ money be used repeatedly for

improving the capital base of the public sector banks?

The Indian Banks' Association had, in its memo to the committee, called

for 100 per cent divestment of the government stake. “Banks should be

allowed to access 100 per cent capital from public, either from the

domestic or international capital markets. This will increase the

accountability of banks to shareholders”.

Employees of the public sector banks went on a token strike on 15

November, protesting against the government’s policy of privatisation of

public sector banks. It was as usual, reported that the strike was total

and successful. The inconveniences caused to millions of customers,

unconnected with the issues involved, went unnoticed, though one or two

TV channels interviewed a couple of people, who could not articulate

their views properly.

This is an expedient decision contributing to the process of liberalisation

of the economy.

As for current status, Union bank will issue an IPO next year, in order to

reduce the 100 percent government stake to 70 percent and then

gradually to 33 percent.

54

Who is afraid of

From 1992-93 to 1998-99, the government has injected into the 19 public

sector banks, an amount of Rs.20,446 crore as additional capital. Of this,

three banks-UCO Bank, Indian Bank and United Bank of India, have

received Rs.5729 crore

Capital Contributed by Government

BankCapital Added [Rs in

Crores]

Allahabad Bank 90

Andhra Bank 150

Bank of Baroda 400

Bank of India 635

Bank of Maharashtra 150

Canara Bank 365

Central Bank of India 490

Corporation Bank 45

Dena Bank 130

Indian Bank 220

Indian Overseas Bank 705

Oriental Bank of

Commerce50

Punjab National Bank 415

Punjab & Sind Bank 160

Syndicate Bank 680

UCO Bank 535

Union Bank of India 200

United Bank of India 215

Vijaya Bank 65

Total 5700

55

Source: Reserve Bank of India Bulletin [1994].

Illustration 5

THE STATE BANK STORY

The demand for funds by the SBI is even more acute than even the

Corporation Bank since the SBI Act provides for a minimum 55 per cent

RBI holding in SBI, and the bank is already close to breaching this

threshold. The immediate beneficiary of this move would be Corporation

Bank where government equity is down to 66 per cent. The bank would

be able to access funds from the market without being hampered by the

51 per cent minimum government holding threshold, which currently

limits the ability of banks to expand beyond a certain level. Since a

decision on the new threshold has been taken in the case of the

nationalised banks, the government is expected to follow suit by moving

an ordinance to reduce the RBI stake in the SBI to 33 %

The issue of reducing government stake in the nationalised banks has

come about on account of demand from the SBI which had demanded

that either RBI as the stakeholder pump in funds for the SBI’s massive

expansion plans or permit it to issue shares to the public to raise the

necessary funds.

Both the Banking Regulation Act and the SBI Act provide that

government shares cannot be divested and since the government has

decided that it would no longer support banks through budgetary

support, they have no option but to go to the market to meet their fund

requirements.

Though there is no special significance attached to the 33 per cent

threshold in the Company Law — which recognised only 26 per cent and

56

74 per cent as two major thresholds for management and ownership

control — the government has opted for 33 per cent on the basis of the

recommendations of the Narasimham Committee. The committee had felt

that this threshold would provide comfort to the employees. The banks,

like insurance companies, have strong unions and, hence, a phased

reduction in government equity was recommended.

The State would continue to be the single largest shareholder in banks

even after its stake had been brought down to 33 per cent.

The government is also proposing to move an ordinance for demerger of

four subsidiaries of GIC. The law ministry has already cleared both

proposals of the finance ministry. In the case of GIC, the ordinance

would amend the GIC Act, 1972, and demerge its four subsidiaries -

National Insurance Corp, Oriental Insurance, United Insurance and New

India Assurance.

The interest rate regime has also undergone a significant change. For

long, an administered structure of interest rate has been in vogue in

India. The 1998 Narasimham Reforms suggested deregulation of interest

rates on term deposits beyond a period of 15 days. At present, the

Reserve Bank prescribes only two lending rates for small borrowers.

Banks are free to determine the interest rate on deposits and lending

rates on all lendings above Rs. 200,000.

In the last couple of years there has been a clear downward trend in

interest rates. Initially lending rates came down, leading to a decline in

yields on advances and investments.

Interest rates in the banking system have been liberalised very

substantially compared to the situation prevailing before 1991, when the

57

1.11 Deregulation on Interest Rates

Reserve Bank of India controlled the rates payable on deposits of

different maturities. The rationale for liberalising interest rates in the

banking system was to allow banks greater flexibility and encourage

competition. Banks were able to vary rates charged to borrowers

according to their cost of funds and also to reflect the credit worthiness

of different borrowers.

With effect from October 97 interest rates on all time deposits, including

15-day deposits, have been freed. Only the rate on savings deposits

remains controlled by RBI. Lending rates were similarly freed in a series

of steps. The Reserve Bank now directly controls only the interest rate

charged for export credit, which accounts for about 10% of commercial

advances. Interest rates on time deposits were decontrolled in a

sequence of steps beginning with longer-term deposits and the

liberalisation was progressively extended to deposits of shorter maturity.

Interest rates on loans upto Rs 2,00,000, which account for 25% of total

advances, is not fixed at a level set by the RBI, but is now aligned with

the Prime Lending Rate (PLR) which is determined by the boards of

individual Banks.

Earlier interest rates on loans below Rs 2,00,000 were fixed at a highly

concessional level. The new arrangement sets a ceiling on these rates at

the PLR, which reduces the degree of concessionality but does not

eliminate it.

Cooperative Banks were freed from all controls on lending rates in 1996

and this freedom was extended to Regional Rural Banks and private local

area banks in 1997. RBI also considers removal of existing controls on

lending rates in other Commercial Banks as the Indian economy gets

used to higher interest rate regime on shorter loan duration.

58

The line to control is the cost of funds, since the markets determine asset

yields. The opportunity to improve yields on the corporate side tends to

be limited if banks don’t want to increase the risk profile of the portfolio.

Banks’ income will depend on the interest rate structure and the pricing

policy for the deposits and the credit. With the deregulation of the

interest rates banks are given the freedom to price their assets and

liabilities effectively and also plan for a proper maturity pattern to avoid

asset-liability mismatches. Nevertheless, with the increase in the number

of players, competition for the funds and the other banking services rose.

The consequential impact is being felt on the income profile of the banks

especially due to the fact that the interest income component of the total

income is significantly larger than the non-interest income component.

As far as the interest costs are concerned, the prevailing interest rate

structure will be a major deciding factor for the rates. But what influence

both the interest costs and the intermediation costs is the time factor as

it is directly related to costs. The solution for these two influencing

factors lies predominantly on technology. In this regard, the new private

banks and the foreign banks, which are equipped with the latest

technology, have a better edge over the nationalized banks, which are

yet to be automated at the branch level.

59

Income and Expenses Profile of Banks

Interest Income Interest Expenses

• Interest/discount on advances/bills• Interest on investments• Interest on balances with RBI and other interbank funds• Others

• Interest on deposits• Interest on Refinance/interbank borrowings• Others

Other Income Operating Expenses

• Commission, Exchange and Brokerage• Profit on sale of investments• Profit on revaluation of investments• Profit on sale of land, building and other assets• Profit on exchange transactions• Income earned by way of dividends, etc.• Miscellaneous

Payments to and provisions for employees• Rent, taxes and lighting• Printing and stationery• Advertisement and publicity• Depreciation on Bank’s property• Director’/Auditor’s fees and expenses• Law charges, Postage, etc.• Repairs and Maintenance, Insurance. • Other expenses

60

Illustration 6

61

The financial sector reforms have brought about significant

improvements in the financial strength and the competitiveness of the

Indian banking system. The efforts on the part of the Reserve Bank of

India to adopt and refine regulatory and supervisory standards on a par

with international best practices, competition from new players, gradual

disinvestments of government equity in state banks coupled with

functional autonomy, adoption of modern technology, etc are expected to

serve as the major forces for change. New businesses, new customers,

and new products beckon, but bring increased risks and competition.

How might that change banks? To attract and retain customers, the

banks need to optimise their networks, speed up decision-making, cut

down on bureaucratic layers, and sharpen response times.

The reform has lead to new trends of being ahead and being with, by and

for the customer. While the private sector banks are on the threshold of

improvement, the Public Sector Banks (PSBs) are slowly contemplating

automation to accelerate and cover the lost ground. VRS introduced to

bring up the productivity, the concept of universal competition set in just

to ensure customer convenience all the time.

Also, the strength factor has lead to mergers and Indian banks will

explore this opportunity.

62

2.1 Introduction

DEVELOPMENTS

The following will state the development in Indian banking sector.

Public Sector Banks which together (there are 27 of them) account for

77.34 per cent of the bank deposits in India. The most ambitious

downsizing exercise undertaken by the PSBs has set them back by close

to Rs 7,490 crore.

Voluntary Retirement Scheme in Banks was formally taken up by the

Government in November 1999. According to Finance Ministry on the

basis of business per employee (BPE) of Rs. 100 lakhs, there were 59,338

excess employees in 12 nationalised banks, while based on a BPE of Rs.

125 lakhs, the number shot up to 1,77,405.

Government had cleared a uniform VRS for the banking sector, giving

public sector banks a seven-month time frame. The IBA has been allowed

to circulate the scheme among the public sector banks for adoption. The

scheme was to remain open till March 31, 2001. It would become

operational after adoption by the respective bank board of directors. No

concession had been made to weak banks under the scheme. The scheme

is envisaged to assist banks in their efforts to optimise use of human

resource and achieve a balanced age and skills profile in tune with their

business

strategies.

63

2.2 Voluntary Retirement Schemes … Please leave ?

As per estimates the average outgo per employee under the banking VRS

scheme would range between Rs. 3 lakhs and Rs. 4

lakhs. However, the aggregate burden on the banking

industry is difficult to work out. To minimise the

immediate impact on banks, the scheme has allowed

them the stagger the payments in two installments,

with a minimum of 50 per cent of the amount to be

paid in cash immediately. The remaining payment can

be paid within six months either in cash or in the form

of bonds. The total burden of the VRS on the banking

industry is about Rs 8,000 crore, and union activists

feel that it will adversely affect the profitability and capital adequacy of

the banks. In fact, out of this Rs 8,000 crore, nearly Rs 2,200 crore will

be borne by State Bank of India, the largest public sector bank.

64

Salient Features of Voluntary Retirement Scheme of Banks

Eligibility – All permanent employees with 15 years of service or 40

years of age are eligible. Employees not eligible for this scheme

include:

• Specialists officers/employees, who have executed service

bonds and have not completed it, employees/officers serving

abroad under special arrangements/bonds, will not be eligible

for VRS. The Directors may however waive this, subject to

fulfillment of the bond & other requirements.

• Employees against whom Disciplinary Proceedings are

contemplated/pending or are under suspension.

• Employees appointed on contract basis.

• Any other category of employees as may be specified by the

Board.

Amount of Ex-gratia – 60 days salary (pay plus stagnation

increments plus special allowance plus dearness relief) for each

completed year of service or the salary for the number of months

service is left, whichever is less.

Other Benefits

• Gratuity as per Gratuity Act/Service Gratuity, as the case

maybe.

• Pensions (including commuted value of pension)/bank’s

contribution towards PF, as the case may be.

• Leave encashment as per rules.

Other Features

• It will be the prerogative of the bank’s management either to

accept a request for VRS or to reject the same depending upon

the requirement of the bank.

• Care will have to be taken to ensure that highly skilled and

65

qualified workers and staff are not given the option.

• There will be no recruitment against vacancies arising due to

VRS.

• Before introducing VRS banks must complete their manpower

planning and identify the number of officers/employees who can

be considered under the scheme.

• Sanction of VRS and any new recruitment should only be in

accordance with the manpower plan.

Funding of the Scheme

• Coinciding with their financial position and cash flow, banks

may decide payment partly in cash and partly in bonds or in

installments, but minimum 50 percent of the cash instantly and

in remaining 50 percent after a stipulated period.

• Funding of the scheme will be made by the banks themselves

either from their own funds or by taking loans from other

banks/financial institutions or any other source.

Periodicity – The scheme may be kept open up to 31.3.2001

Sabbatical – An employee/officer who may not be interested to take

voluntary retirement immediately can avail the facility of sabbatical

for five years, which can be further extended by another term of five

year. After the period of sabbatical is over he may re-join the bank on

the same post and at the same stage of pay where he was at the time

of taking sabbatical. The period of sabbatical will not be considered

for increments or qualifying service for person, leave, etc.

While the right of refusal to give voluntary retirement has been

granted to the bank management, recruitment against vacancies

arising through the VRS route has been disallowed.

66

Nearly half the VRS benefits are by way of an ex-gratia ‘golden

handshake’ payment to the employees to encourage them to leave. Banks

have been allowed to amortise half the retirement benefits provided to

those opting for VRS over a period of five years.

VRS and its effect on Capital Adequacy norms

There are immediate concerns for PSBs. The weaker among them may

not be able to maintain the Reserve Bank of India stipulated capital

adequacy ratio of 9 per cent, primarily because of the huge outflow of

funds for the VRS. UCO Bank, for instance, ended up with a bill for Rs

360 crore; Union Bank, Rs 292 crore, and United Bank, Rs 150 crore.

The obvious way out is to tap the capital market, but PSBs are

constrained as they cannot reduce their stake below 50 per cent. The

result? ''If these banks cannot meet the capital adequacy norms, their

ability to do incremental business will be curtailed,'' explains Rohit

Sarkar, a Consultant with the Planning Commission. ''... irrespective of

their deposits.'' The Finance Ministry, with one VRS bullet, aims to

achieve, at least, three objectives immediately viz. the privatisation of

banks at any cost, bailing out of the favoured willful defaulters, and

shielding of the corrupt bureaucrats. These are the measures what

exactly the IMF and World Bank have been urging upon the government,

without which the support of U.S. is not certain.

VRS now best walk out too!

There's the issue of the VRS weeding out non-targets like investment

bankers and treasury managers, leaving most PSBs short of the very

people they'll need to implement any services-initiative. ''Recruiting the

right kind of people will be difficult for these banks, given the poor work

culture and uncompetitive salaries,'' says Ravi Trivedy, a Partner at

Pricewaterhouse Coopers. A mid-level treasury manager, for instance,

67

comes with a tag of between Rs 15 lakh and Rs 20 lakh; few PSBs can

pay that kind of money.

Why did he opt for VRS?

"It is because opportunities outside the banking sector are more in the

western zone," says a union activist. Apart from the lure of money, bad

working conditions also contributed to this deluge," says Bhakey. "They

are transferred anywhere, are held accountable in case of problems in

rural areas and don't get residential accommodation. "Apart from all the

VRS benefits, they will be entitled to pension as well. So they have a

continuous source of income even if they don't work," said a director of

Bank of Maharashtra.

What did they say last !

V. V. Phatak, 55, is special assistant in Punjab National Bank who opted

for VRS after 32 years' service. With the Rs 16 lakh severance package

that he received, he sees deliverance from the dreary chawl-life in

Mumbai. He has spent all his earnings on a flat in Vile Parle.

On Sabbatical.......S.Balachandran

Sabbatical as a measure for reducing surplus staff will not be cost

effective in the long run for the following reasons: Even though the

banks can save on the salaries & allowances during the leave period, but

once the employee returns, he will have to be absorbed and as such

redundancy or surplus cannot be cut totally. Retraining cost for the

returning staff that are 45 plus, in a totally changed banking

environment will be much higher than the cost bank saves during their

leave. Hence it would be better to offer the sabbatical to junior level

employees for whom the retraining cost will be much lower.

R. Krishnamurthy

68

An employee should be free to exercise Sabbatical option at any point of

time in his career, rather than a specific period. It should be an open

option and should normally be granted by the Bank Management

provided the employee does not have any disciplinary proceedings

against him. The option may also be a one-time option during his/her

(employees) service. Banks should not insist that the employees should

close the loan accounts, but can take an undertaking that the employees

should service their loans during the sabbatical period. This will help

employees to search for a suitable job and then exercise the Sabbatical

option. He can service the loans from his new employment.

ARE EMPLOYEES A PROBLEM OR NPAs ?

They are in the fools' paradise. The policy-makers, RBI, IBA and the

bankers, who schemed unilaterally the VRS, think that by removing

massively thousands of able and experienced bankmen from services in

their middle age, they could boost profits in the nationalised banks.

Is it the 10 to 12 percent wage factor that affects adversely the

profitability in the nationalised banks? Certainly not. Then what is

the truth? At least the apex bank in the country has all the latest figures

of the banks and as such, would agree honestly that it is the unrecovered

and unchecked cancerous growth of over Rs.100000 crore of the bad

debts, called as NPA in the international terms, piled up in the PSBs with

the blessings of the new regime, that eroded profits and made one or two

banks less profitable. Added to this, when large numbers of employees of

all stages are shunted away, a number of branches of these banks will

come to a grinding halt.

Amidst the disastrous Asian contagion, the Indian economy survived,

mainly because of the strength and stability of our public sector banks.

69

The correct remedial measure is not demolishing them by sending home

several thousand employees enmass, but change the policy to preserve

and develop them, said a member of IBA.

THE EFFECTS

N e g a t i v e s

Banks had approached the government and warned that only efficient

people will leave by way of VRS. It will take away most of the staff from

more than 22,000 rural branches of public sector banks. "They will have

to be merged or closed down in favour of a satellite branch which will

operate just once a week", says G.M. Bhakey, president of the State Bank

of India Officers Association. If these fears come true, rural India may be

the biggest victim of VRS. In fact the United Federation of Bank Unions

has decided to oppose the whimsical closure of branches in the post-VRS

scenario. "The management will have to discuss the post VRS merger of

branches with the unions first," says P Jayaraman, the general secretary

of the State Bank's union. "It is true that more than 90,000 employees

will be relieved, but what about the remaining 8.1 lakh?" asks a union

activist. The unions will still have to fight for them. The way the VRS

contagion is spreading at the instance of the government, it is imminent

that a chaotic situation with grave consequences will emerge soon,

causing irreparable losses to the clients of all types and great hardships

to the remaining work force. Also, large number of staff might be

transferred and more and more branches might be closed.

P o s i t i v e s

As part of the banking sector reforms, public sector banks are trimming

the staff strength by launching VRS. This is likely to bring not only

higher cash flows to banks in future but also long term benefits like

improvement in efficiency level.

70

Bank of Maharashtra will be accepting applications of 2,000 VRS

optees 800 officers and 1,200 class III and IV employees. Reduce the

annual wage bill by about Rs 56 crore.

Andhra Bank Substantial reduction in overheads and significant

improvement in per employee productivity.

Bank of India (BoI) has embarked on a major organisational recast

exercise. After the launch of the voluntary retirement scheme (VRS)

which was opted by 7,780 employees , the bank is set to abolish one tier

(zonal offices) from its four-tier organisational structure. The bank will

now have three tiers -- branch offices, regional offices and head office.

T h e h u m a n s i d e…

He still went by the same train, he sat on the same place, he admired the

same table, that’s all he did there and came back home in the evening.

VRS has disturbed the comfort zone of many, when he is back at home,

children are to be disciplined the whole day, as they come back home,

they are told to be studying, not playing much, etc; wife cant visit her

neighbour at the afternoon, her TV serials alls is gone; clashes and

arguments arise, families breaking, the comfort zone is shaken up. A

dissatisfied issue arises out of VRS, a person working for 15 to 20 years,

is now to do nothing? All are seeking physiatrists’ help now. What about

this? Social activities for these people, some kind of work, tie up with

service organisation, keeping them busy may be the only way out!

Close on the heels of public sector banks implementing Voluntary

Retirement Scheme, public sector giant, SAIL has launched VRS. SAIL

71

Newly-formed association of VRS optees of Punjab National Bank (PNB) --

the PNB Voluntarily Retired Staff Association (PNBVRSA) -- has

filed a case against the bank for settling outstanding issues arising out of

aims to cut down its personnel by 60,000 over the next 3 years.

ANOTHER OPTION could have been!!!

“They could have developed business by expanding into sectors like

insurance which relies heavily on the expertise of the banking industry.”

Mr. Sanghavi, senior manager of Canara Bank states, “It would have

been much sensible to invest and divert these funds in Tech banking and

installation of new systems. These firstly, retain the existing functions,

also in the long run there would be a good payback, after this if the VRS

was declared then may be it would have been a wise decision”.

And the numbers say . . .

The VRS, as on July 2001, which bankers rushed to grab, has become a

drag on the bottomline of the State-owned banking segment.

Heavy provisioning made towards VRS has pushed the combined

net profit of PSU banks down 16 per cent to Rs 4,315.70 crore in

2000-01, from Rs 5,116 crore in the previous year.

In the banking sector close to 1,26,000 employees opted for the

VRS in ‘00-01.

The total benefits received by these employees has been close to

Rs 15,000 crore.

72

73

Gone for GOOD !

Illustration 7

VRS – The SBI Way

State Bank of India's VRS, which closed on January 31, has attracted

35,380 applications. I.e.15 per cent of the bank's employee base of

233,000. Of the 35,380 applications, 54 per cent are from officers, 36 per

cent from clerical staffs, and 3,137 are from the sub-staff category.

STATE Bank of India has kick started its post-VRS restructuring

programme, with plans to merge 440 loss making branches and virtually

eliminate its network of regional offices across the country. The bank is

also working to redeploy additional administrative manpower to frontline

banking jobs. This is in line with practices followed by private sector

banks and is meant to enhance the overall productivity. One of the major

tasks for SBI in its restructuring programme is merger of loss making

branches. SBI has identified 440 branches out of 8,000 as weak

branches. The bank management has asked all its 13 circle offices to

initiate the process and start merger of loss making branches in their

respective areas. SBI has also decided to reduce its regional office

network as a part of its downsizing programme. The bank is planning to

reduce its regional offices from 10 to 1/2 in each circle.

The unions had earlier expressed the view that the bank management

should not merge loss making branches but should shift them to other

areas with profit potential, in order to retain branch license.

For example, in the Gujarat circle, SBI has four regional offices in

Gandhinagar and three each in Ahmedabad and Baroda. Plans are to

shut all these down and have a single regional office in Ahmedabad. The

excess administrative manpower will be utilised at branch level. Post

VRS, in some branches of the bank, important posts are lying vacant and

74

at some places shortage of staff is also being felt. SBI has appointed

National Institute of Bank Management as consultant for manpower

planning. The final decisions on redeployment of administrative staff and

reduction in regional offices will be taken only after NIBM report.

75

RBI states: "The emerging scenario in the Indian banking

system points to the likelihood of the provision of multifarious

financial services under one roof. This will present

opportunities to banks to explore territories in the field of

credit/debit cards, mortgage financing, infrastructure lending,

asset securitisation, leasing and factoring. At the same time it

will throw challenges in the form of increased competition and

place strain on the profit margins of banks"

The evolving scenario in the Indian banking system points to the

emergence of universal banking. The traditional working capital

financing is no longer the banks major lending area while FIs are no

longer dominant in term lending. The motive of universal banking is to

fulfill all the financial needs of the customer under one roof. The leaders

in the financial sector will be aiming to become a one-stop financial shop.

In recent times, ICICI group has expressed their aim to function on the

concept of the Universal Bank and was willing to go for a reverse merger

of ICICI ltd. with ICICI Bank. But due to some regulatory constraints, the

matter seems to have been delayed. Sooner or later, the group would be

working towards its aim. Even some of the other groups in the financial

sector like HDFC, IDBI have started functioning on the same concept.

An Overview

Universal Banking includes not only services related to savings and loans

but also investments. However in practice the term 'universal banks'

refers to those banks that offer a wide range of financial services, beyond

commercial banking and investment banking, insurance etc. Universal

banking is a combination of commercial banking, investment banking

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2.3 Universal Banking … just one stop ahead !

and various other activities including insurance. If specialised banking is

the one end universal banking is the other. This is most common in

European countries.

The main advantage of universal banking is that it results in

greater economic efficiency in the form of lower cost, higher output

and better products. The spread of universal banking ideas will bring

to the fore issues such as mergers, capital adequacy and risk

management of banks. Universal banks may be comparatively better

placed to overcome such problems of asset-liability mismatches (for

banks). However, larger the banks, the greater the effects of their

failure on the system. Also there is the fear that such institutions, by

virtue of their sheer size, would gain monopoly power in the market,

which can have significant undesirable consequences for economic

efficiency. Also combining commercial and investment banking can

gives rise to conflict of interests.

Banks v/s DFIs

India Development financial institutions (DFIs) and refinancing

institutions (RFIs) were meeting specific sectoral needs and also

providing long-term resources at concessional terms, while the

commercial banks in general, by and large, confined themselves to the

core banking functions of accepting deposits and providing working

capital finance to industry, trade and agriculture. Consequent to the

liberalisation and deregulation of financial sector, there has been

blurring of distinction between the commercial banking and investment

banking.

77

The comparative advantage or disadvantage of DFIs vis-a-vis banks in

this regard depends to a large extent on the quality of their portfolios,

the accounting policies that are practiced and personnel management.

The banks, on the other hand, have a competitive edge in resource

mobilisation through the route of retail deposits. The RBI has identified

certain regulatory issues that need to be addressed to make

harmonisation of the needs of commercial banking with institutional

banking successful.

First, banks are subject to CRR stipulations on their liabilities. DFIs

face no such pre-emptions on their funds.

Secondly, DFIs do not enjoy the advantage of branch network for

resource mobilisation. This in effect curtails DFIs' ability to raise low-

cost deposits.

Thirdly, with the larger part of new loans going to capital-intensive

projects like power, telecom, etc., the DFIs would need to extend

loans with longer maturities. On the other hand, due to interest rate

uncertainties, DFIs are finding it attractive to raise more of short-term

resources. Due to their past borrowings of long-term nature, the

mismatch is still in their favour. This, however, raises a challenge for

the DFIs to manage the maturity match of their assets and liabilities

on an ongoing basis.

In India

The issue of universal banking resurfaced in Year 2000, when ICICI gave

a presentation to RBI to discuss the time frame and possible options for

transforming itself into an universal bank. Reserve Bank of India also

spelt out to Parliamentary Standing Committee on Finance, its proposed

policy for universal banking, including a case-by-case approach towards

78

allowing domestic financial institutions to become universal banks.

Now RBI has asked FIs, which are interested to convert itself into a

universal bank, to submit their plans for transition to a universal bank for

consideration and further discussions. FIs need to formulate a road map

for the transition path and strategy for smooth conversion into an

universal bank over a specified time frame. The plan should specifically

provide for full compliance with prudential norms as applicable to banks

over the proposed period.

The Narsimham Committee II suggested that DFIs should convert

ultimately into either commercial banks or non-bank finance companies.

The Khan Working Group held the view that DFIs should be allowed to

become banks at the earliest. The RBI released a 'Discussion Paper' (DP)

in January 1999 for wider public debate. The feedback indicated that

while the universal banking is desirable from the point of view of

efficiency of resource use, there is need for caution in moving towards

such a system. Major areas requiring attention are the status of financial

sector reforms, the state of preparedness of the concerned institutions,

the evolution of the regulatory regime and above all a viable transition

path for institutions which are desirous of moving in the direction of

universal banking.

ICICI gearing to become a universal bank

ICICI envisages a timeframe of 12 to 18 months in converting itself into

an universal bank. ICICI has received favourable response from Indian

investors and FIIs on its move to merge with ICICI Bank and become a

universal bank. ICICI was the first one to propagate universal banking as

an ideal concept for the DFIs to support industries with low cost funds.

In August, ICICI executive director Kalpana Morparia said that ICICI has

79

to obtain a separate banking licence from RBI for becoming a universal

bank. It can avoid the stamp duty burden by first converting ICICI into

bank, instead of going for a direct merger of ICICI into ICICI Bank.

“We have created fire walls and functioning as

separate legal entities only for complying with

statutory obligations,” she noted. There is clear

demarcation in the operation of ICICI and the bank. The bank takes care

of liabilities of less than one year by offering short-term loans to

corporates and personal loans. Medium to long-term products like home

loans, auto loans are handled by the parent; absolute coordination

between them while marketing the products exist.

Crisil has reaffirmed its triple A rating for ICICI and FIIs also expects its

profit margins to improve after the merger due to the access to low cost

deposits & the scope to increase income from fee-based activities.

She said ICICI has started increasing its international presence and

associating closely with NRI community in various countries. ICICI

InfoTech is based in US & has an office in Singapore. ICICI Securities

has been registered as a broking firm in the US.

ICICI Bank is leveraging on strong network of 400 branches and

extension counters & 600 ATMs for offering products to NRIs; NRIs can

transfer their money to 200 locations in India by internet. The payment

will be made within 72 hours. It also offers loan products for helping

their relatives in India. Besides, the Visa card helps them to withdraw

cash through the ATM network.

Morparia said NPA of banks in India are < 10 per cent of GDP when

compared to emerging economies like China, Korea & Thailand. It should

not be compared with developed countries like Europe and US. ICICI’s

gross NPA comes to Rs 6,000 crore. Asked about a approach to resolve

80

Because of law, once the units are referred to BIFR, the lenders were

unable to enforce securities, she pointed out

the problem, she said if the units are viable, it supported financial

restructuring, mergers. If these options arent possible and the units are

not viable, it will go in for one time settlement.

For the irresistible compulsions of competitiveness have created a

situation where the only route for survival for many a bank in India may

be to merger with another. With the Union Finance Ministry thinking

along the same lines, it may not be long before mega-mergers between

banks materialise. World over banks have been merging at a furious

pace, driven by an urge to gain synergies in their operation, derive

economies of scale and offer one stop facilities to a more aware and

demanding consumer. In the eighties and nineties mergers were used as

means to strengthen the banking sector. Small, weak and inefficient non-

scheduled banks were merged with scheduled banks when the running of

such banks becomes non-viable. However, mergers in the current era

will be driven by the motive of establishing a bigger market share in the

industry and to improve the profitability. Mergers may prove to be an

effective remedial measure in a competitive environment where

margins/spreads are under pressure for the banking sector. Though

Indian systems were not keen on the mergers and acquisitions in the

banking sector, of late the systems have started encouraging the global

trends of M&A's.

Why the urge to merge?

The big question is why is there a sudden urge to merge? The answer is

simple as it is obvious. To beat competition for which suddenly size has

become an important matter. Mergers will help banks with added money

power, extended geographical reach with diversified branch networks,

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2.4 Mergers & Acquisitions…

Divided they fall, united they may strive !

improved product-mix, and economies of scale of operations. Mergers

will also help the banks to reduce their borrowing cost and to spread

total risk associated with the individual banks over the combined entity.

Revenues of the combined entity are likely to shoot up due to more

effective allocation of bank funds. One such big merger between banks

globally was that of Industrial Bank of Japan, Fuji and Dai-Ichi-Kangyo

bank, all of which were merged to be nicknamed as Godzilla Bank,

implying the size of the post merged entity. Another instance that comes

to mind is that of Bank of America's merger with that of Nation's Bank.

Financial consolidation was becoming necessary for the growth of the

bank.

Do you consider the reasons why one does not need banks in large

numbers any more ?

? A depositor today can open an account with a money market mutual

fund and obtain both higher returns and greater flexibility. Indian MF is

queuing up to offer this facility.

? A draft can be drawn or a telephone bill paid easily through credit

cards.

? Even if a bank is just a safe place to put away your savings, you need

not go to it. There is always an ATM you can do business with.

? If you are solvent and want to borrow money, you can do so on your

credit card- with far fewer hassles.

? An 'AAA' corporate can directly borrow from the market through

commercial papers and get better rates in the bargain. Infact the banks

may indeed be left with bad credit risk or those that cannot access the

capital market. This once again makes a shift to non-fund based activities

all the more important.

82

Of course, one would still need a bank to open letters of credit, offer

guarantees, handle documentation, and maintain current account

facilities etc. So banks will not suddenly become superfluous. But nobody

needs so many of them any more !

83

That’s why!

Rigid Distinction

Volatabil

Disintermediation

Globalisati

Custome

Capital A/c Convertibility

CUSTOMER may also want from a bank efficient cash management,

advisory services and market research on his product. Thus the

importance of fee based is increasing in comparison with the fund-based

income.

The once RIGID DISTINCTION between the providers of term-finance

and the providers of working-capital finance is blurring, leading to an

increasing convergence in the asset-liability structure of the banks and

the FIs. Mergers would position the combined entity for rapid growth not

only in the working capital and term-lending segments, but also in the

growing fee-income business. And that would be in consonance with the

global trend towards universal banking.

GLOBALISATION. Competition from abroad is also set to intensify. The

foreign banks are looking to expand beyond their narrow niches to

acquire retail reach. Restrictions on branch expansion of the foreign

banks are being relaxed in line with the commitments made to the World

Trade Organisation, under the Financial Services Agreement, by India.

The archaic restriction on the number of Automated Teller Machines has

gone. Already, the number of foreign banks operating in the country has

jumped to 41, and 28 more have set up representative offices.

CAPITAL ACCOUNT CONVERTABILTY will grant Indian corporates

access to capital markets abroad as well as provide foreign banks access

to Indian firms and investors. Given their undoubted financial muscle and

technical expertise, the foreign banks are likely to dominate the new

markets.

DISINTERMEDIATION As capital markets deepen and widen, the core

banking functions--deposit taking and lending--come under attack. And

the number of alternative savings vehicles multiply, limiting bank

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deposits growth. Mutual funds, in particular, are a potent long-term

threat because they appropriate what was once the USP of bank

deposits.

VOLATILITY A large capital-base provides the necessary cushion to

withstand nasty shocks. The classic illustration of the absorptive capacity

of capital is, of course, the deeply divergent fates of Barings Bank and

Daiwa Bank. Both banks chalked up huge derivatives-trading losses. But

while losses of $1.20 billion were enough to topple a 233-year-old British

institution, Daiwa Bank managed to survive losses of a similar magnitude

simply because of its abundant capital reserves.

THE SCENARIO TODAY

It began with HDFC Bank and Times Bank last year, which took

everyone by surprise. However, the latest merger of ICICI Bank

with Bank of Madura is even more astonishing as well as

surprising, though a welcome change. ICICI Bank had also initiated

merger talks with Centurion Bank, but due to differences arising

over swap ratio the merger didn't materialized.

And INTERNATIONALLY

The merger of the Citibank with Travelers Group and the merger of Bank

of America with NationsBank have triggered the mergers and acquisition

market in the banking sector worldwide. Europe and Japan are also on

their way to restructure their financial sector through M&A's.

The merger of Malaysia's 58 domestic banks into six anchor groups is

part of a global trend that will strengthen the financial sector and enable

it to compete internationally, Second Finance Minister Mustapa

Mohamed says. In a seminar on Malaysia's recovery efforts, organized by

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the World Bank in Washington, Mustapa said it was important for the

government to ''move aggressively'' in strengthening the banking system

because ''the WTO (World Trade Organization) is knocking on our doors

and asking us to liberalize our financial sector.

When asked why the government intervened in bank mergers rather then

letting the markets decide for themselves, Mustapa said the banks were

urged to merge in the 1980s, ''but our advice fell on deaf ears. We spent

no less than RM60 billion ($15.78 billion) in those days to bail them out

and frankly we're fed up and tired of bailing them out.'' After the

mergers, he added, the government hoped to divert those resources to

building schools and hospitals.

At the height of the crisis, depositors of the ''smaller banks'' themselves

felt unsafe and moved their savings to the bigger banks.

Witness the alliance between Chase Manhattan and Chemical Bank in

the US, the fusion of two Japanese monoliths, Bank of Tokyo and

Mitsubishi Bank, and, more recently, the mega-merger of the Swiss

giants, United Bank of Switzerland and Switzerland Banking

Corporation.

In Europe, the prospect of a single currency system has sparked off a

merger mania among banks.

The post merger scenario at ICICI

Take a look at what happens post merger to ICICI Bank. The bank will

have shot up to the number one position among new private sector

banks.

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Elements Pre-merger Post-

merger

%

Change

AssetsNo of branchesDepositsCustomersEmployeesEquityEPS

12063 crores

1069728

15 lakhs1700

197 croresRs 7.10 /

share

16051 crores

36013123

27 lakhs4300

220 croresRs 8.70 /

share

33.06239.6234.90

80152.94

10.523

Illustration 8

Will mergers be the norm in the industry?

What about the future? Will

mergers stop here or will

they speed up? Analysts and

bank observers feel that

merger acquisition activity

will speed up in times

ahead. It is a fact that

growth through acquisitions

and mergers is cheaper and

quicker in comparison to

setting up new units. What will acquiring banks look for while choosing

their targets? One, financial viability and two strong geographical reach

and large asset base. However staffing/employee costs and technological

infrastructure will also play an important role in acquiring target banks.

For example, Karnataka Bank has employee strength of over 4,200 and

business per employee of just Rs 1.80 crore. Compare this with Indusind

Bank, which, with only 510 employees commands a business per

employee of Rs 20 crore. Banks which boast of high business per

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THE STRATEGY MERGERUNIVERSAL BANKS The AssetsEnables rapid growth in new markets and new productsCombats the trend towards disintermediation

The LiabilitiesIncreases risks of mismatch between assets and liabilitiesMultiple focus could lead to conflicts of interest

employee include names such as Bank of Punjab Rs 7.10 crore,

Centurion Bank Rs 6.90 crore and Global Trust Bank Rs 8.60 crore.

The following table shows a general comparison of three main classes of

banks.

Particulars PSU Banks Pvt. Banks

(Old)

Pvt.

Banks(New)

Cost of funds Low     Moderate          High

Branch network Wide

Spread    

Regional Low

Level of Automation      Low     Moderate High

NPAs High Low Low

Capital Adequacy Moderate Low High

Employee Productivity   Low Moderate High

Focus on  Non- interest 

Income

Low High High

Illustration 9

Mergers for private banks will be much smoother and easier as against

that of PSBs. To survive, banks need to diversify into non-fund-based

activities (investment banking) and new fund-based activities (mutual

funds, leasing, housing finance, infrastructure finance, or, maybe, even

insurance). M&As offer a cheaper and, certainly, quicker diversification

option than organic growth. Indeed, for activities like infrastructure

finance, which require a huge critical mass, mergers may well be the

only option. Only a large, strong entity with deep reservoirs of capital

will be able to provide funds without bumping against prudential

exposure limits, and have the

requisite skills to evaluate mega-projects

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89

THE RESCUE MERGER BANK BAILOUTS The AssetsProvides the stronger bank with a relatively cheap deposit networkMinimises the likelihood of systemic failure

The LiabilitiesSaddles the stronger bank with huge NPAsErodes the profitability of the stronger bank

What will the future of Indian banking and insurance look like? Will the

reform in these sectors face the same fate as in power? It is increasingly

evident that the economy offers opportunities but no security.  The future

will belong to those who develop good internal controls, checks and

balances and a sound market strategy.

The latest to be opened up for private investment, including foreign

direct investment, is the insurance sector. On a rough reckoning,

commercial bank deposits account for 25 per cent of GDP and credit

extended by banks may be 15 per cent of GDP. Thus, regular bank credit

transactions alone account for a substantial percentage of GDP by way of

servicing economic activities. A gradual convergence is taking place in

the banking and insurance sectors. Several major banks are floating

subsidiaries to enter both life and non-life insurance businesses. Some of

them are looking at niche markets such as corporate insurance.

Reform of the insurance sector began with the decision to open up this

sector for private participation with foreign insurance companies being

allowed entry with a maximum of 26 per cent capital investment? The

Insurance Regulatory and Development Authority (IRDA), in its

guidelines for the new private sector insurance companies, has

stipulated that at least 20 per cent of the total premium revenue of these

companies should come from rural India. The government permits

banks to distribute or market insurance products. It is amending

the Banking Regulation Act to this effect. Only banks with a three-year

track record of positive growth as well as with a strong financial

background will be entitled to do insurance business. In anticipation of

the government move, some banks have begun talking of alliances with

foreign insurance players.

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2.5 Banking and Insurance … much more to service !

Keeping in view the limited actuarial and technical expertise of Indian

banks in undertaking insurance business. RBI has found it necessary to

restrict entry into insurance to financially sound banks. Permission to

undertake insurance business through joint ventures on risk

participation basis will therefore be restricted to those banks which

(I) have a minimum net worth of Rs. 500 crore and

(ii) satisfy other criteria in regard to capital adequacy, profitability, etc.

Banks which do not satisfy these criteria will be allowed as strategic

investors (without risk participation) up to 10 per cent of their net worth

or  Rs. 50 crore, whichever is lower. However, any bank or its subsidiary

can take up distribution of insurance products on fee basis as an agent of

insurance company. In all cases, banks need prior approval of RBI for

undertaking insurance business.

Insuring the SBI way !

State Bank of India (SBI) has identified Cardif, a wholly owned subsidiary

of BNP Paribas, to enter into a joint venture for life insurance with an

equity stake of 26 per cent. SBI has incorporated a wholly owned

subsidiary SBI Life Insurance Company Ltd with an authorised capital of

Rs 250 crore.

Cardif SA and its sister company Natio-Vie together rank as the third-

largest French insurers with a premium income of $9 billion and assets

under management of over $59 billion. Although Cardif is a lesser known

name in the life insurance business, compared to some of the global

giants present in India, the French insurer has expertise in

bancassurance. The company has pioneered the concept of

bancassurance in France by selling insurance products through branches

of commercial banks and non-banking finance companies. The joint

venture plans to bring into India a number of products, which would suit

91

different segments of the market. SBI intends to fully integrate the

insurance business into its banking activities with appropriate sales

support and marketing.

SBI will become the largest insurance outfit in terms of

distribution with its network of around 13,000 branches. The

key to success will be the ability to integrate the savings

products of the bank, insurance product line of the Joint

Venture Company & network of branches.

Insuring it the Private way !

Explains Sugata Gupta, vice-president-marketing, ICICI Prudential: "We

have unit managers and agents to cater to the rural market. These field

staffs are linked to the city offices and keep on visiting the rural areas."

ICICI Prudential keeps on sending regular vans with doctors to

underwrite the policies. Additionally, the company has tied up with NGOs

to sell social sector policies, like SEWA in Gujarat. ICICI Prudential Life

Insurance, also, has tied up with two Chennai-based corporate houses,

Madras Cements Ltd and Lucas TVS, to serve underprivileged children.

ICICI Prudential has also come out with its social sector policy, Salam

Zindagi, which is aimed at the economically weaker sections.

HDFC Standard Life is customising its approach to cater to the rural

markets so as to address the special needs of these areas. The life

insurance company has tied up with NGOs and self help groups. One

such NGO is LEAD (League for Education and Development) and the

insurance company covers the members of the SHGs associated with the

NGO.

All this is being done to cater to the IRDA norms. As per norms, two per

cent of insurance premia of the new age insurance companies have to

come from rural areas. In addition, the insurance watchdog has put in

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some policy stipulation on insurance companies to cover life in the social

sector for the under-privileged.

Dabur CGU Life Insurance - in which Dabur holds the majority 74

percent stake while the remaining 26 percent is owned by CGU - has

recently forged a marketing alliance with the Lakshmi Vilas Bank.

Lakshmi Vilas Bank -- with 208 branches and 800,000 customers -- has a

strong regional presence in the southern part of the country.

"Typically we are looking to tie up with banks with strong regional

presence and knowledge of both rural and urban segments of

their markets. We feel that banks have got the expertise to give

financial advice to its customers, helping them make right

decision," he said.

"For selling specialised financial products such as life insurance policies

a lot depends on the distributor's relationship with its customer and in

India, customers share a strong and long-term relationship with banking

institutions," he added.

Quite a few banks are desirous of undertaking life insurance or general

insurance business. State Bank of India, Bank of Baroda, Bank of

India, Global Trust Bank, Vysya Bank, Centurion Bank, Oriental

Bank of Commerce, ICICI Bank and HDFC Bank have or are

intending to enter insurance business after various procedural

formalities have been clearly defined in Insurance Regulatory Authority

Bill. From the NBFC sector Alphic Finance and Kotak Mahindra will be

entering this sector. Also a few industrial house like Bombay Dyeing,

Aditya Birla, Tata Group, Godrej Group are in the picture.

ECONOMICALLY empowering, i.e. access to inexpensive credit and

other micro-finance services, including savings and insurance, India's

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2.6 Rural Banking … Indigenous Route to Convenient Credit ?

It is felt that volume of new business in the insurance sector could touch $25 billion.

rural population will have a significant impact on India's economic

growth. Economic empowerment is defined here as. The modern

banking system has failed to deliver inexpensive credit to India’s 600,000

villages - despite several expensive attempts to do so. Do we need to

rethink the appropriate institutional structure for rural banking in India?

The problems of widespread poverty, growing inequality, rapid

population growth and rising unemployment all find their origins in the

stagnation of economic life in rural areas.

Since the days of the Rural Credit Survey Committee (1954), India has

come a long way in its search for an appropriate rural banking set-up.

Though there has been some improvement, the problem remains. There

has been tremendous progress in quantitative terms but quality has

suffered, progress has been slow and halting and significant regional

disparities persist. Stagnation in rural banking is noticed in the north

and northeastern regions. The focus should be on assisting and guiding

small farmers. It is in this context that the role of rural banking

institutions has to be reconsidered.

The development strategy adopted and the increasing diversification

and commercialisation of agriculture underline the need for the rapid

development of rural infrastructure and a larger flow of credit. Activities

allied to agriculture – livestock breeding, dairy farming, sericulture etc

are being taken up on commercial lines. Further, hi-tech agriculture with

an export orientation has brought about higher productivity in cotton,

oilseeds, etc.

Progressive and not-so-small farmers have no difficulty in obtaining

credit from the commercial banks. Credit for the poorer households is

the real problem.

The Narasimham Committee observed that the manning of

rural branches “has posed problems for banks owing to the

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reluctance of urban-oriented staff to work in the rural

branches and the lack of motivation to do so. More local

recruitment and improved working conditions in rural areas

should help to meet this problem.”

Experience of RRBs that have locally-recruited employees; the

employees are unhappy in view of the lack of adequate career

prospects. Apart from having a basic knowledge of agriculture and rural

development, a rural banker is required to handle credit extension work,

scheme appraisal work in connection with farm and non-farm

investments and the production of different crops, the

monitoring/supervision and recovery of loans spread over villages which

are not even connected by all-weather roads and in an environment in

which vested interests are quite powerful. A person who says he has

been in bank service for more than 25 years writes: “That rural credit

has become unfashionable is evident from the fact that the subject is

accorded only residual focus in the various congregations of our bankers.

The placement policy in vogue in our banks is such that exposures in

rural credit or agro-financing rarely count for promotions.

Unfortunately a uniform standardized approach to lending has led

to rigidities as a result of which a farmer-borrower becomes a defaulter

for no fault of his. Also, the agricultural sector is beset with considerable

uncertainties – the weather and rainfall problem, the pest problem and

the market and price problem.

Government interference that leaves no scope for these apex bodies to

show initiative and work out action plans for development on their own is

partly responsible for this situation. Another reason for such a state of

affairs is that the apex bodies have expanded and prospered at the cost

of primary bodies by taking over functions like deposit mobilisation even

at the rural level. By way of liberalisation of the federal structure’s

95

working, societies that want to work independently of the federal system

should be allowed to exit.

WORKING OF RRBs and Rural Cadre

It is the view that rural banking is simple that has landed the RRBs in a

mess. The poor performance of the RRB personnel is largely due to the

fact that the personnel hurriedly recruited and trained in a routine way

have been given the difficult task of dealing with a large number of

small-term/composite loans advanced to small farmers and other poor

rural families who, not knowing how to deal with banks, require

assistance and guidance at each stage – from loan application to loan

recovery.

Neither the cooperative channel nor public sector one is able to meet

local needs in regard to savings and loans due to a rigid all-India

approach and lack of flexibility in their operations. This in fact is one of

the reasons for informal banking surviving and for the emergence of non-

banking financial companies (NBFCs) in rural districts. Though there is a

multi-agency set-up for rural banking, nearly 45 per cent of rural credit

is from cooperatives. But the commercial banks are a more important

source of credit as can be seen from Table 1.

What did the RBI do?

Reserve Bank appointed the R V Gupta Committee in 1997. The

committee was asked to identify the constraints faced by banks in

augmenting the flow of credit and simplifying the procedures for

agricultural credit. New institutions were over-administered, and

bureaucratic regimentation was the result. It is along such lines that the

rural credit co-operatives came up followed by the commercial banks’

diversification into rural banking after the nationalisation of 14 big

96

banks. Since the commercial banks, too, did not perform as expected, the

regional rural banks (RRBs) were formed. At the national level NABARD

was established. Even then, banking progress in the rural sector was not

able to take care of the growing credit needs of agriculture.

Think about it !

There should be credit societies at the village level. Such societies,

however, tend to become weak. A strong society at the tehsil

level would serve the farmers in a better, more effective and

efficient manner. After all, a farmer has to deal with a credit

society only a few times in a year; he can go up to the tehsil

headquarters for the purpose.

Advance a tailor-made package of credit with a consumption

component and closely supervise its disbursement to a large

number of farmers in far-flung villages and provide technical

guidance and marketing links. Such an approach would ensure that

scarce resources have properly utilised and that small producers

can reach a higher plane of technology and earn enough extra

income to improve their standard of living after repaying the loan.

Since the merger of the RRBs in their respective sponsor banks has

been ruled out, the RRBs should atleast be made fully owned

subsidiaries of the sponsor banks so that the banks can develop

for both their rural branches and their RRBs in a unified way.

Besides placing all the RRB employees in the rural banking cadre,

the sponsor bank should throw this cadre open and give its own

staff, including those not working in the rural branches, the option

of joining the cadre. The best option seems to be to have

managerial cadre at the district level and at the same time, each

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primary should have the choice to choose its manager from the

panel of managers given by the district union district central

cooperation bank (DCCB). At the district and state levels,

managerial cadres can be created as a collaborative effort of

DCCBs, state cooperative banks (SCBs) and state and all-India

cooperative Unions.

Decentralised banking and giving branch managers

sufficient powers are a must. The Gupta Committee’s

recommendation that at least 90 per cent of loan applications

“should be decided at the branch level”, though desirable in itself,

does not go far enough. It does not take care of the need for giving

the branch manager the power to reschedule loan installments on

the merits of each case. Without such empowerment the spectre of

non-performing assets (NPAs) would harass the farmers.

Recent Developments

The second Narasimham Committee (Committee on Banking Sector

Reforms) has suggested de-layering of the cooperative credit system with

a view to reducing the costs of intermediation and making NABARD

credit cheaper for ultimate borrowers [Government of India 1998:61].

One recent development under the leadership of NABARD and non-

government organisations (NGOs) is the formation of informal, self-help

groups (SHGs) broadly on the model of the ‘grameen banks’ of

Bangladesh. The mutual trust reflected in the SHGs working is in tune

with the true spirit of cooperation. The creditworthiness of an SHG is

linked to the amount of saving brought about by the group. The SHG

promotes thrift and savings, howsoever temporary and small they are,

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thereby to a great extent weaning the poor away from moneylenders.

The number of SHGs linked to banks is now around 33,000.

The makers of banking policy are now focusing on technology-led

banking in the rural sector. This requires a restructuring of cooperatives

to enable them to meet the challenges of competition. It also requires a

change in mindset. While the government should promote the

restructuring and modernisation of cooperatives through an

incentive/disincentive package and by providing adequate infrastructure

in the rural areas, the actual task should be left to the cooperative

leadership and the apex bodies of cooperatives.

If and when rural banking becomes a separate entity in each bank, that

would ensure full attention for the rural sector and motivate personnel

who opt for this cadre, besides providing them with career prospects.

The staff requirement of the rural banking cadre (RBC) will be on a big

scale.

One objective of policy-makers is to subject the banking system to

greater competition and for this purpose introduce new players in the

market. This objective is expected to be achieved by permitting the

establishment of large private banks and by encouraging the setting up

of small private local area banks (LABs) in the rural areas. LABs are

envisaged as private enterprises in rural localities for mobilizing rural

savings and making them available for investment locally. The LAB policy

gives agriculturists an opportunity to form self-help groups in the form of

LABs for their banking needs and to look after the development of their

respective areas. This is in line with the multi-agency approach to rural

credit. Each banking channel has to meet competition, and together they

are to meet the growing banking needs of rural India.

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What did they have to say?

According to bank unions the aim of local area banks will be to snatch a

share of the savings and divert them into profitable investment in cities.

The weaker sections of society living in rural areas will be starved of

bank credit in consequence” Another argument against LABs is that “any

small-time trader can come into banking”.

If this were true, the Reserve Bank would by now have been flooded with

applications for starting LABs. The fact is that the mobilisation of even

Rs 5 crore by way of promoters’ contribution is very difficult for a small

trader or even for large farmers. The bank employees’ unions refuse to

appreciate the logic behind the establishment of LABs. The logical

follow-up of the new economic policy is to encourage private enterprise

in all fields, including banking. In the rural sector, such private banking

really means self-help efforts.

Yet another point raised is that as there are already a large number of

branches of banks and RRBs, and cooperative credit institutions too,

there is no need for LABs. The trade unions did not object when the

public sector banks started competing with the cooperative credit

institutions, including urban banks. They do not even mind the banks

competing with the RRBs, which they have sponsored. They only fear

that when the LABs come up they will compete with the public sector

banks and take away their deposit business.

Commercial Bank v/s RRB

There are 28 PSB with 19423 branches and 196 RRBs with 12311

branches. This means that there is a public sector bank branch for every

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20 villages. In addition, there are 12,357 semi urban branches (10,535 of

public sector banks and 1,822 of RRBs), which also mainly serve the

rural hinterland. This spectacular spread in the villages is a significant

achievement of banks in India. The banks’ achievement in respect of

mobilisation of rural deposits and advancement of loans to rural families

is equally commendable.

Lendings in Rural India, 1999 2000

Source Direct Indirect Total

Amount

(Rs

Crore)

Percen

t

Amount

(Rs Crore)

Percen

t

Amount

(Rs

Crore)

Primary co-

operative credit

society

8,218 15.9 NA 12.9 8,218

Land development

banks

12,940 25.2 NA 20.3 12,940

Commercial banks 26,327 51.1 4,986 49.2 31,313

RRBs 4,044 7.8 NA 8.3 4,044

Total 51,529 100.0 12,137 100.0 63,666

Illustration 10

The new context compels us to think on new lines and, instead of

approaching the issue in a routine way, to work out the restructuring of

selected branches to suit the needs of specialised banking for

agriculture, bank managements being left free to work out programmes

for this task. As regards co-operative rural banking, the primary credit

societies hold the key to success. Banking policy should aim at

encouraging the viable ones through incentives, including direct access

to NABARD finance, and letting them function without government

interference.

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2.7 Virtual Banking … the transformation !

The practice of banking has undergone a significant transformation in

the nineties. While banks are striving to strengthen customer

relationship and move towards 'relationship banking', customers are

increasingly moving away from the confines of traditional branch-

banking and are seeking the convenience of remote electronic banking

services. And even within the broad spectrum of electronic banking, the

aspect of banking that has gained currency is virtual banking. Increase

in the functional and geographical spread of banks has necessitated the

switchover from hard cash to paper based instruments and now to

electronic instruments. Broadly speaking, virtual banking denotes the

provision of banking and related services through extensive use of

information technology without direct recourse to the bank by the

customer. The origin of virtual banking in the developed countries can be

traced back to the seventies with the installation of Automated Teller

Machines (ATMs). It is possible to delineate the principal types of virtual

banking services. These include Shared ATM networks, Electronic Funds

Transfer at Point of Sale (EFTPoS), Smart Cards, Stored-Value Cards,

phone banking, and more recently, internet and intranet banking. The

salient features of these services are the overwhelming reliance on

information technology and the absence of physical bank branches to

deliver these services to the customers.

The financial benefits of virtual banking services are manifold.

Lower cost of handling a transaction and of operating branch

network along with reduced staff costs via the virtual resource

compared to the cost of handling the transaction via the branch.

The increased speed of response to customer requirements;

enhance customer satisfaction and, ceteris paribus, can lead to

higher profits via handling a larger number of customer accounts.

It also implies the possibility of access to a greater number of

potential customers

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Manipulation of books by unscrupulous staff, frauds relating to

local clearing operations will be prevented if computerisation in

banks takes place.

On the flip side of the coin, however, it needs to be recognized that

such high-cost technological initiatives need to be undertaken only

after the viability and feasibility of the technology and its associated

applications have been thoroughly examined.

Virtual banking has made some beginning in the Indian banking system.

ATMs have been installed by almost all the major banks in major

metropolitan cities, the Shared Payment Network System (SPNS) has

already been installed in Mumbai and the Electronic Funds Transfer

(EFT) mechanism by major banks has also been initiated. The

operationalisation of the Very Small Aperture Terminal (VSAT) is

expected to provide a significant thrust to the development of INdian

FInancial NETwork (INFINET) which will further facilitate

connectivity within the financial sector.

The popularity which virtual banking services have won among

customers, owing to the speed, convenience and round-the clock access

they offer, is likely to increase in the future. However, several issues of

concern would need to be pro-actively attended. While most of electronic

banking have built-in security features such as encryption. Prescriptions

of maximum monetary limits and authorizations, the system operators

have to be extremely vigilant and provide clear-cut guidelines for

operations. On the large issue of electronically initiated funds transfer,

issues like authentication of payments instructions, the responsibility of

the customer for secrecy of the security procedure would also need to be

addressed.

# The INFINET is a Closed User Group (CUG) Network for the exclusive

use of Member Banks and Financial Institutions. It uses a blend of

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communication technologies such as VSATs and Terrestrial Leased

Lines. Presently, the network consists of over 689 VSATs located in 127

cities of the country and utilises one full transponder on INSAT 3B.

Inaugurated on June 19, 1999, various inter-bank and intra-bank

applications ranging from simple messaging, MIS, EFT (Retail, RTGS),

ECS, Electronic Debit, online processing and trading in Government

securities, dematerialisation, centralized funds querying for Banks and

FIs, Anywhere/Anytime Banking, Inter-Branch Reconciliation are being

implemented using the INFINET. The INFINET will be the

communication backbone for the National Payments System, which will

cater mainly to inter-bank applications like RTGS, Delivery Vs Payment

(DVP), Government Transactions, Automatic Clearing House (ACH) etc.

Major issues plaguing the banking industry are the lack of

standardisation of operating systems, systems software and

application software throughout the banking industry. In a tight

competitive environment where banks are making a thrust towards

technology to provide superior services to its customers, customers

stand to gain the most.

With increased competition, spreads in corporate lending have

decreased significantly. Banks are thus moving into the retail mode to

tide over the global slowdown and boost the bottomline.

Retail banking had been a neglected segment accounting to 10.5 percent

of all banks loans of India. The main advantages of retail banking are

assured spread, widely distributed risks and lower NPAs due to limited

risk associated with the salaried class. However, transactions cost are

higher as compared to of corporate lendings. Thus. The target clientele

is consumers and mid size companies.

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The Customer is now in an enviable position where he can demand superior services at competitive prices.

2.8 Retail Banking …the ‘in’ thing !

The product offerings include home loans, car loans, credit cards,

personal loans and also customized loans like equipment loan for

doctors.

In India, out of 100 houses sold, 30 are bought by housing loans and out

of 100 cars sold, 28 are brought by car loans.

In India today …

Among PSBs, SBI, Bank of Baroda, Union Bank of India and Bank of India

have diverged into the retail segment, whereas in the private sector,

opportunity seekers like ICICI and HDFC have focused on retail lendings.

Banks have a stronger influence on profits due to individual customers.

This is best proved by the success of HDFC which has achieved

breakeven on its operations in the fiscal year 2001. Even though retail

loans account for 18 percent of total loans, these account for 40 percent

of bank revenues.

“In retail banking, you need a higher physical presence, in the form of

ATMs as well as branches. State-of-art technology has to be used to

enable convenient customer transactions.” States, Mr.Swaroop of HDFC

Bank.

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3.1 The SCAM Story … !

Ahmedabad-based Madhavpura Mercantile Cooperative Bank was

established on October 10, 1968 to cater to the varied financial needs of

wholesale grocery traders in the Madhavpura. It had 12 directors on its

board that included its chairman, Ramesh Parikh and its CEO and MD

Devendra Pandya.

The bank received a scheduled bank status from the RBI just a couple of

years ago, which allowed the bank to expand its banking operations and

start lending to stock brokers. The scheduled bank status also allowed

the bank to invest 10% of its net worth in the capital markets.

Until recently, the bank had managed to resist the allure and glamour of

investing heavily in the capital market. But, the relation between the

bank's chairman Ramesh Parikh and big bull Ketan Parekh did the trick

and the bank is reported to have made huge advances in the last couple

of months. The advance made by the bank to Ketan Parekh are pegged at

around Rs2bn.

However, the bank faced its worst crisis on the 8th of March when

depositors panicked and started withdrawing money from the bank. This

was following reports that the bank had given a huge bank guarantee to

Ketan Parekh. The result, the bank was left with very little cash. The

problems of the bank were further compounded when it had to down its

shutters in Ahmedabad and Mumbai. Many cooperative banks also faced

payment problems. Those who resorted to the call money market found

no lenders as commercial banks kept away from them.

The crisis forced the RBI to step in and take some action to limit the

damage. A preliminary inquiry by the central bank showed that the bank

had a very bad liquidity position after it issued pay-orders worth

Rs650mn to the depositors. The RBI was left with no other option but to

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recommend the Central Registrar of Co-operative Banks to supercede

the board of the bank.

Several public sector banks have been hit very hard by the Madhavpura

Bank's misdemeanor. The banks include such big names as the State

Bank of India, Bank of India and the Punjab National Bank, all of which

have lost hefty sum of money in the Madhavpura scam. Bank of India lost

about Rs1.2bn as pay orders issued by Madhavpura Bank to Ketan

Parekh bounced. This was because the bank was unable to honor its

commitment. Ketan Parekh reportedly used his seven Bank of India

accounts to discount 248 payorders worth about Rs24bn in nine weeks

between January 3 and March 9. Out of this, Rs11.95bn were routed to

three of his shell companies, namely, Nakshatra Software, Chitrakoot

Computer and Goldfish Computer.

These payorders were reportedly issued by the Mandvi branch of

Madhavpura Bank, Fort branch of Standard Chartered Bank, UTI Bank

and GTB. Parekh had several accounts in all these branches. The banks

in question were, the SBI, Bank of India, Punjab National Bank and

Standard Chartered Bank. RBI said their exposure was to the tune of

Rs696mn. Ketan Parekh's pay orders, which were drawn on Madhavpura

and discounted by various banks, including Bank of India, Punjab

National Bank, Standard Chartered Bank and Global Trust Bank,

bounced.

Meanwhile, the scam has also brought to light the fact that

loopholes within the banking system exist and the RBI as a

banking regulator failed to respond quickly to the challenge

posed by the recent scam.

However, the central bank seems to have learnt its lessons, albeit a little

too late, and has decided to plug the loopholes that allowed Madhavpura

Bank and stock brokers  to play havoc with the market. The RBI has

reportedly drawn plans to revise payorder and demand draft discounting

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norms; stock lending norms; banks capital market exposure norms and

gold lending norms. Taking into consideration the enormity of the crisis,

calls have increased for a greater role for the RBI as a regulator of the

cooperative banking sector. At present, cooperative societies are under

the dual control of the RBI and the Registrar of Cooperative Societies.

Under this system, the RBI only has jurisdiction over the banking

operations of the cooperative society while the registrar looks after the

managerial and administrative functions.

A high power committee of the RBI set up in 1999 and headed by K

Madhav Rao, said it was "absolutely necessary that the RBI should be the

sole regulator of the banking business carried on by the Urban

Cooperative Banks." The committee also added that it was "convinced

that the dual control must end, and end soon."However, the greatest

challenge in cleansing the system would be the state governments and

the domestic industries, both of which enjoy a tremendous amount of

influence on the cooperative banks. The High Power Committee on

Urban Cooperative Banks noted RBI's attempts to get even model bye-

laws adopted by state governments had drawn blank.

With big banks and small banks caught in a trap, who can the customer

bank on?

About REFORMS in the Indian banking sector

The legal infrastructure for the recovery of non-performing loans still

does not exist. The functioning of debt recovery tribunals has been

hampered considerably by litigation in various high courts. This

ultimately leads to one solution i.e. ruthless provisioning, any better

ways; it is a major drawback of this ruling.

# What is the procedure being a private player (ICICI) in this industry, is

it different and more effective as far as recoveries are concerned?

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3.2 Public sector OR Private Sector – the point of views

At ICICI

Considering the effect of high level of NPAs on the efficiency of banks,

ICICI follows a certain procedure as far as loan advancements are

concerned. Unlike most of the PSBs, the root cause for a high NPA level

is considered; being solvency of the borrower.

The procedure differs as per the amount of loan; for loan amount of Rs

500000/- and below, the customer profile is scrutanised at the branch

level. The Branch Manager and the Assistant Branch Manager evaluate

the solvency of the borrower, individually and then approval for the same

is forwarded to the concerned department. In cases where the loan

amount exceeds Rs 500000/-, the customer profile is further forwarded

to the corporate level. After evaluation at this level a confirmation is sent

to the respective branch, and then the borrowers offer is confirmed. This

system has ensured the low level of NPAs in this private sector bank.

At PSBs

Today, PSBs need to be given more power to enforce their security

rights; the banks cannot sell any collateral of a borrower without the

court intervention. Even as far as DRT working is concerned, an issue is

resolved in a year and a half inspite of stipulated norms of 6 months.

The need to make massive provisions obviously results in a depletion

of capital.  But the capital adequacy norm means the banks have to find

additional, costly money to refurbish the capital base.  In this situation,

the banks are being forced to accept the minimum possible amounts

from sub-standard and bad loans.  Thus, the need for ARF is now

paramount. 

# Is the transfers on NPAs to state owned ARF, just about shifting the

responsibility to the ARF? What’s the whole point of having something

like that, it’s like a better way of declaring losses and turning away from

efficiencies?

109

At ICICI

Banks should be able to account for it independently.

At PSBs

Frankly, ARFs seem to be like pointless transfers, its just another

committee with more heads made by GOI.

Reforms among public sector banks are slow, as politicians are

reluctant to surrender their grip over the deployment of huge amounts of

public money.

# As a private player what are the problems that you face while

communicating with the government?

At ICICI

The government imposes a lot of restrictions on the private players. A

PSB anyway needs to open a branch in rural areas; but for private banks

need to have branches in certain areas like Amravati or Ratnagiri, the

cost of these is not really feasible to these banks but they have no

alternative.

At PSBs

Government does co-operate; the GOI is good, this is no form of defence,

please note the following:

- Consider the number of customers in private as compared to public

sector banks

- PSBs have a definite priority sector lending

- Maintenance of PPF accounts, taxes, etc

- Minimum deposit for credit cards and FD

Take the case of UTI returns when all others were down, that’s a

government cost.

Government intends to reduce its stake to 33% in nationalized banks,

please comment on this reform, its positive and negative effects on

private players.

110

At ICICI

As far as an effect of reducing government stake is concerned, the

competition to private players will increase. The ownership pattern and

capital structure will change and this will lead to better efficiencies and

customer service level; the management approach will be by

professionalism. However, being a government rule, it will be gradually

implemented so no immediate impact on private players.

Introduction of prudential norms, Income Recognition, Asset

Classification and compulsory disclosure of accounts has lead to

transparency in the working of banks. Any other recommendations as a

private bank.

At ICICI

Besides, banking regulation norms, the government needs to make a

certain service level mandatory. This could be:

- Customer service increase, i.e. basic training to employees

- Decrease NPA level by better evaluation of customer profile

- Technological upgradation, this has been implemented in PSBs

- Diversified portfolio, not just traditional ‘Banking’ functions

At PSBs

Any PSB is answerable at the Parliament level to the GOI; thus,

disclosure should be higher in PSBs.

Consolidation of the Banking industry by merging strong banks is the

latest development in the Indian Banking Sector. ICICI has had a recent

merger with BoM, ANZ and Stanchart, etc. Please state your views on

the overall development of India with this major development in the

financial system.

At ICICI

In a competitive scenario, banks need to increase their emphasis on

customer service; the customers have a lot of choices to make. As per

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Relationship Manager, ICICI, a bank with large network of branches and

diversified portfolio will stand in the market. Ultimately, a branch that

gives all in ‘one-stop’ will survive. For ICICI and BoM merger, BoM has

277 branches in South India, thus ICICI now stands to create regional

balance of branches and high connectivity throughout the country.

At PSBs

A merger should consider the human aspect, initially Balance Sheets will

look good, but then working of two different human cultures, one may

look down upon the other. Such trivial issues hamper the working.

About DEVELOPMENTS in the Indian Banking Sector

About VRS …At PSBs

The good people are out, so the existing people work like good soldiers

without any increase in pay. One issue is, after 1985, the recruitment in

the banking sector has been negligible; many employees would retire in

a few years, may be after that VRS could have been introduced.

The 1992 reforms gave scope for diversified product profile. New

products and new operating styles exposed the banks to newer and

greater risks.

# ICICI, as a company holds a diversified portfolio, is the main aim to

increase the non-fund based revenue due the trend of falling interest

rates?

At ICICI

The basic aim is to retain customers. A bank needs to push its products

in the market and establish a strong presence for survival. The measure

to increase revenues is by increasing customer base by increasing

portfolio aided with aggressive marketing. For each and every sector,

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ICICI has ‘n’ number of brokers and agents appointed which are well

connected throughout a majority of the country.

The issue of universal banking resurfaced in Year 2000, when ICICI

gave a presentation to RBI to discuss the time frame and possible options

for transforming itself into an universal bank.

# Can you please state the benefits of universal banking, may be in

terms of revenue or utilisation of resources or others?

At PSBs

Anyways PSBs have multifunction, its old wine in a new bottle.

Banks and Insurance.

SBI Insurance – just confusing customers by lot of Insurance companies.

Your comments on distinguishing factor from a public sector bank which

has a low reputation as compared to private sector.

# What is the viability of “Insurance & Banking” in India, how would you

rate the success of ICICI Prudential – Joy Hope Freedom Life, on a scale

of 1 to 10 (10 being highest), do you think PSBs should also go for

insurance and why?

At ICICI

The general attitude of employees in PSBs is laid back. The average

employee age at private sector is 24 to 29 years as compared to 35+ at

PSBs. The enthusiasm and efficiency level differs and so does the

productivity. Thus, with the existing workload and VRS, it will be very

difficult for PSBs to work. The concept of PSBs and insurance may not

work unless supported by better employee productivity.

At PSBsInsurance would be better utilisation of existing resources e.g. SBI has

13000 branches. The viability may term at 6 as of now mainly due to long

paybacks. Also, for PSBs you can exploit the strength of reputation of

trust and safety.

113

Due to increasing competition all banks are now heading towards

developing areas or rather towns in the country. Especially ICICI, it is

known for its network in rural areas, please comment on the potentials in

the rural area.

At ICICI

RBI norms state that for every 5 urban branches, 1 rural branch needs to

be introduced. Considering the increasing importance of education in

rural market and their literacy w.r.t banking, rural India has a

considerable scope. There is a section of people which wants to know

what are the services banks can offer, this itself proves that banks need

to come up with better schemes in customized to rural requirements.

At PSBsPrivate players have been operating at in urban areas, adjusting with

rural India will take time.

How do you see the scope of Internet banking in India, well / bad and

why? How much revenue do you see from this business as a percentage

of the total business, in the future 5 years down the line? What is the

current revenue from this business?

At ICICI

The trend today is to ape the West. People look forward and inquire for

new technologies because they offer convenience. At ICICI, they have a

Demo service with a personnel explaining what are the e-banking

services available how are they used etc. In 5 years, the usage of e-

banking technology is expected to double.

At PSBs

Internet has a future in India, people adjust to technology very fast; take

the case when STD booths were introduced in India. Anyways, the

Internet is not a form of direct revenue, it’s just an additional service of

convenience given to customers.

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Canara Bank – Interview of Mr. Sanghavi – Senior

Manager – Andheri (W)

On VRS

In the long run, it will be fruitful, salary expenditure will drop, and also

cost of related perks would reduce. But they lay an immediate

disadvantage; the VRS was introduced in a very disorganized manner,

there was no provision made for the payment of VRS dues earlier. The

cost at Canara Bank is around Rs 139 Crores; if these funds were used to

make public sector banks technology savvy then VRS could have been

introduced after a period of 5 years. The banks would also have the

power to retain clients, currently, the clients who can pay more for

better services are moving away.

On diversifying portfolio

The private players have limited clients to cater; hence they can manage

a varied portfolio easily. Canara Bank had introduced single window

system for their clients; when you have a large database of customers,

service quality deproves.

On ECS – tech banking

UTI is the largest user of ECS credit, and BSES and MTNL are one of the

greatest beneficiaries, a problem here is when a cheque is bounced on

account of inadequate cash. The government needs to make clear laws

on use of ECS.

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Debt Recovery TribunalsInterview of Mrs Rama Pendharkar - Advocate

Mr R S Chehel – AdvocateCHURCHGATE

In Maharashtra, there are around 5 DRT, 3 in Mumbai. These have a

specific area of jurisdiction. DRT are authorised to handle DRT, the

profile amount exceeding Rs 10 Crores, all below Rs 10 crores need to

approach the civil courts.

The procedure

Banks send a notice to their client and if they don’t give a reply; the bank

i.e. applicant files a suit in the DRT. Section 19 of DRT Act states the

banks permitted to be an applicant, only scheduled banks and

nationalised banks are permitted. DRTs have their own procedure

distinct from the civil courts; and are headed by the Presiding Officer

who is said to be equivalent to the District Judge.

Within a month of filing a suit, the defaulted borrower i.e. the defendant

requires to reply back. No oral evidence is permitted, the defendant has

to file an affidavit. The issue is resolved only by affidavits. Within 6

month, the presiding officer resolves to the issue.

Issues Resolved

The number of issues resolved is not disclosed on account of disclosure

regulations with respect to the same.

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The following states recent status of the Indian Banking sector.

Foreign allies can hold up to 49% in private banks

The RBI-SEBI panel has decided that a foreign collaborator can hold up

to 49 per cent in a private bank as against 20 per cent allowed earlier. As

per earlier norms, a foreign bank or financial institution stepping in as a

technical collaborator can pick up a maximum 20 per cent stake directly,

while another 20 per cent can come as direct investments by NRIs.

Life after VRS: Nationalised banks facing shortage of staff

Shedding flab was fine till, of course, shortage of right man for the right

job started surfacing.

A voluntary retirement scheme, leaner, smarter, and manageable

workforce, lower overheads may all have been relevant reasons to get

onto best business practices. But what many of these nationalised banks

did not consider was acute shortage of manpower (read officers) for

supervisory banking functions. Outsourcing administrative services has

arrived in the banks. But this is not proving to be a catch-all-solution

either. Most banks are rushing in officers to branches where senior

officers have left. “Reducing workforce is fine. But post-VRS manning

structures had obviously not been clearly forecast. As a fall-out, daily

operations that are being affected, will have to be outsourced in the long

run,” the sources said.

IDBI to focus more on retail banking

IDBI is to focus more on retail banking as part of its revised functional

strategy for future growth, bank's managing director Gunit Chadha said.

He said the rolling out of the bank's RPU underlined the increased focus

the bank had placed on retail banking. The RPU has armed the bank with

the necessary systems and structure to roll out new products in retail

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3.3 And today…the news says …

banking and will greatly reduce time to market the new products," he

said.

A sharp rise

A study of the performance of banking sector stocks over the past one

year has shown that while several public sector banks have shown a

sharp rise in prices, many of their private counterparts are high on the

losers list. Leading the gainers list is Corporation bank whose scrip has

nearly doubled in the last one year. It is followed by Bank of India with a

gain of 75 per cent, and Jammu & Kashmir Bank which, despite a

majority holding by the J&K government, is classified as a private bank.

"Corporation bank takes only select clients and a lot of effort goes into

this selection," says a merchant banker explaining the low NPA levels in

the bank.

Bankers jittery over proposed laws

Rattled by scams, bankers are now jittery that new laws could push them

further towards the edge. The financial regulators are now pitching for a

change in the statutes that would put the responsibility on banks,

financial institutions and other intermediaries to first prove themselves

innocent when a `serious fraud’ hits the system.

So it didn’t come as a surprise when bankers were visibly upset and later

voiced their protest last week after the committee on fraud made a final

presentation before submitting its report to the government. In its final

recommendations the panel headed by Prof N L Mitra has said that when

a fraud over Rs 10 crore is committed, the onus will be on banks and FIs

to prove themselves innocent, failing which the law will take its own

course. Understandably, it didn’t go down well among the bankers who

fear that the proposed law could terrorise bank officials to such an extent

that business would suffer.

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The central bank, which took the initiative to form the committee, is

understood to be supportive of the different changes that the panel has

prescribed. For instance, the committee has asked for changes in the

Indian Penal Code to enable the legal system handle `financial fraud’.

Currently, Indian laws with provisions for crimes like cheating, forgery

and criminal breach of trust, are vague about financial frauds. The

committee aims to make it more difficult for scamsters to take refuge in

legal loopholes by making financial frauds a crime.

The recommendations, which assume a special significance after the

string of scams that have rocked the Indian markets and institutions, will

be submitted to the finance ministry in the first week of September. The

committee on fraud has further recommended a special investigative

agency for the purpose. This will require professionals from different

fields and could be in line with the Serious Fraud Office, UK, which has

teams comprising lawyers, accountants, bankers, software experts etc —

all of whom give their inputs so that the case can be presented in a

comprehensive way before the court of law.

Allahabad Bank gets a sock for hiking CAR

The Governement on Wednesday pulled up the CMD of Allahabad Bank,

B Samal, and his management team for falsely reporting the bank’s

capital adequacy at 11.51 per cent against the actual 8.61 per cent. At a

review presided by finance secretary Ajit Kumar here, the bank was

asked to turn around or close down 136 loss-making branches. The

ministry team also criticised the management for letting standard assets

turn NPAs again. On Tuesday, the government had asked UCO Bank to

shut down 800 of its loss-making domestic branches besides four

international ones. The government is meeting all the weak banks to take

stock of their operations, indicating a change in the mindset and a

resolve to chide shoddy performers. Indian Bank, however, was the odd

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man out. Although the government did not promise capital, it

complimented the bank for its improved performance in recent months.

On sabbatical

The scheme launched by PSBs along with VRS, sabbatical has got around

200 optees as of August 2001, comparing this to the VRS response of

11% of the employees in the industry; an observation was that only

highly qualified employees opted for this scheme.

ATMs in India

The BoI is planning to install 225 ATMs in nine major cities. The growth

of ATMs in India has been exponential; currently there are over one lakh

ATMs in India and the growth rate is 40 %. As far as cost are concerned,

Mr. Loney Antony, NCR Corporation India, Country Manager, states that

cost of branch transaction is Rs 50 to Rs 100 whereas cost on an ATM is

not more than Rs 25.

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3.4 THE FUTURE . . . what’s ahead !

The Indian Banks even after a decade full of reforms for the sector have

a long way to go. Product innovations, better information technology and

operating mechanisms not only enhance the income and reduce expenses

but also act as a catalyst to retain customers. The question is will this

suffice for the future? With the continued integration of the Indian

markets with the global markets, the volatility is rising. To survive this

dynamism and the risks arising from the same, banks need to have

resources in place to understand and manage them on a regular basis.

Markets, which have so far witnessed a deluge in the number of banks,

will now witness consolidation.

With the onset of globalisation in each and every sector, Indian Banks

need to be much more sustainable, efficient, transparent in working and

also competitive. Now the bank mergers will not be a new phenomenon

since synergies are derived from the alliances in the recent mergers. The

following seem to be what the Indian Banking sector is heading for:

As the economy revives fee based activities and asset quality of banks

could improve.

After adjusting for Non Performing Loans some public sector banks

may have to go in for fresh capital infusion.

Banks will have to compete with mutual funds as an alternative to bank

deposits.

As public sector banks find their margins squeezed, they may become

more active in trading to make up for the margin squeeze. The risk

profile of these public sector banks may increase as their trading in

money and forex markets increase. Thus, a sound risk management i.e.

the ALMs need to be in place.

As competition compress spreads earned on lending business, banks

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will have to focus on fee income. Private banks are likely to generate

better fee income due to their focus on having adequate technology and

having skilled personnel to generate such business.

RBI is examining the feasibility of introduction of half yearly audit of

accounts by external auditors towards improving the quality of auditing

standards further.

New arenas for advancing may be surveyed, the housing loan sector

has gained a considerable boosts as per the recent budgetary measures;

banks are allowed to lend 3 per cent of their advances to this sector, also

infrastructure and film financing remain untapped.

With the opening of the insurance sector and recent relaxation of

regulation by RBI for entry of banks in this area of business, some of the

big banks are expected to enter this business in a big way. Public sector

banks with their wide reach and higher confidence levels can take the

lead.

All banks will have to adapt to new emerging technologies in order to

exploit the new business opportunities it offers. It will be a new challenge

and will require investment in technology and new systems. Some value-

added services may also need to be provided, which will call for

innovation standardisation. Virtual Banking will set in as a trend

successfully.

Today, the banks have to compete with their peers as well as with other

financial companies. But tomorrow, competitors might zoom in from

completely unexpected industries, as deregulation and new technology

blur old boundaries, these rewrites the conventional definition of a bank.

Those forces offer as many opportunities as threats.

A reinvention or a renewal or a rediscovery, the way you

term it, shall root the structural changes in the Indian

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Banking Sector.

3.5 CONCLUSION

A personal view on reforms and developments in the Indian Banking Sector is stated below.

The reduction in SLR and CRR has been effective in the sense that the

lendable resources of banks have increased. The anticlimax is about the

current recession in the economy and decreasing need of investments by

the corporate sector. The CRAR requirements are necessary for financial

soundness of Indian banks; also; a need to assign risk weightage to

government securities seems to be coming up due to increasing

investments of banks portfolios.

The NPA trend has been fortunately declining in the recent years,

initially the NPAs were amounting to total of 16 %, and however banks

should note that ever greening of loans would deprove the circumstances

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in the long run; the asset quality is the determinance of banks

profitability today. The present evaluation process of banks states

requires around 18 officials for quality inspection, the bureaucracy

involved can reduced only by way of better bank supervision. The

Disclosure norms shall avoid situations like in case of South East Asian

Crisis; with this respect, RBI proves to be a quite proactive institution.

Globalisation has but lead to the liberalisation of the Indian Banking

sector; like the other sectors opened up, today, the Indian banks need to

learn much more from competition; customers and not advances and

customer service is the call for the day.

The DRT Act supersedes all acts but the SICA which clearly states that

companies can very easily stall recovery procedures. It’s a fact in our

country that for every law made there is one more to escape from it.

However, the conceptualization of this structure needs to be

acknowledged.

Increasing risks and imprudent liability management constitute to asset

liability mismatch. Complacent behaviour of Indian banks with this

context has lead to ALM reforms. This shall positively improve and get

bankers alert. The ALM framework if correctly implemented shall prove

useful.

Reduction of government stake seems to be a good decision of RBI, but

on deeper analysis, the control strongly remains with the government

and it is a truth that bureaucracy has become a side business. We still

need to see what happens next !

The corporates can now have a good deal with loans and advances; the

interest rate deregulation has been in line with the international

standards. The current trend of falling rates shall indeed give the

corporate customers fair access with better services.

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VRS was a government decision and about 11 % of the employees

retired. It was no form of a structural change but is a very effective tool

to improve efficiency of the Indian PSBs. I think a better plan would have

been of investments in technology partially and then a VRS. Currently,

lots of banks are facing problems of inadequate staffing; a good

manpower planning in advance would not have lead to the current

problem.

About universal banking, due to increasing competition banks need to

strive for customers, thus, offering all at the same desks for corporates

as well as individuals i.e. retail banking is required; public sector needs

to have a pace in this arena. A merger to improve the overall health,

reach and customer base, has given a rise to the trend of mergers

globally. The recent merger of ICICI and BoM proves that customer base

has to develop for sustainability. Mergers constitute as a cheaper and a

quicker form of expansion and Indian banks should explore such an

opportunity.

The opening of insurance has given banks a new opportunity to make the

best out of their resources; how much advantage do our PSBs make is

yet to see.

As far as rural banks are concerned, GOI has to give personnel better

career prospects in order to get them working, better products and

convenience and safety has to be guaranteed by the bank. Personalized

service in a crude form will help.

Lastly, technological upgradation will be what will lead to customer

retention on the grounds of accessibility and convenience.

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Annexure 1

LIST OF PUBLIC SECTOR BANKS

State Bank of India and its subsidiaries are :

State Bank of India State Bank of Bikaner & 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

Other nationalized banks are: Allahabad Bank Andhra Bank Bank of Baroda Bank of India Bank of Maharastra Canara Bank Central Bank of India Corporation Bank Dena Bank Indian Bank Indian Overseas Bank Oriental Bank of Commerce Punjab & Sind Bank Punjab National Bank Syndicate Bank UCO Bank Union Bank of India United Bank of India Vijaya Bank

Some of Public Sector banks have issued equity shares for general public and are listed on various stock exchanges. The listed public sector banks are

State Bank of India State Bank of Bikaner and Jaipur

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State Bank of Travancore Bank of Baroda Bank of India Oriental Bank of Commerce Dena bank Corporation bank

LIST OF PRIVATE SECTOR BANKS:

Old private sector banks

**Bank of Madurai Ltd Bank of Rajasthan Ltd

Bareilly Corporation Bank Ltd

Bharat Overseas Bank Ltd

City Union Bank Ltd

Development Credit Bank Ltd

Ganesh Bank of Kurundwad Ltd

Karnataka Bank Ltd

Lord Krishna Bank Ltd

Nainital Bank Ltd

SBI Comm & Int Bank Ltd

Tamilnad Mercantile Bank Ltd

The Benares State Bank Ltd

The Catholic Syrian Bank Ltd

The Dhanalakshmi Bank Ltd

The Federal Bank Ltd

The Jammu & Kashmir Bank Ltd

The Karur Vysya Bank Ltd

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The Lakshmi Vilas Bank Ltd

The Nedungadi Bank Ltd

The Ratnakar Bank Ltd

The Sangli Bank Ltd

The South Indian Bank Ltd

The United Western Bank Ltd

The Vysya Bank Ltd

New private sector banks

Bank of Punjab Ltd Centurion Bank Ltd

Global Trust Bank Ltd

HDFC Bank Ltd

ICICI Banking Corporation Ltd

IDBI Bank Ltd

IndusInd Bank Ltd

*Times Bank Ltd

UTI Bank Ltd

*since merged with HDFC Bank **since merged with ICICI Bank

LIST OF FOREIGN BANKS:

ABN-AMRO Bank N.V. Abu Dhabi Commercial Bank Ltd.

American Express Bank Ltd.

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Arab Bangladesh Bank Ltd.

ANZ Stanchart Bank

Bank International Indonesia

Bank of America NT&SA

Bank of Bahrain and Kuwait BSC

Bank of Ceylon

Banque Nationale De Paris

Barclays Bank PLC

Chase Manhattan Bank

Chinatrust Commercial Bank

Cho Hung Bank

Citibank N.A.

Commercial Bank of Korea, **

Commerzbank AG

Credit Agricole Indosuez

Credit Lyonnais

Deutsche Bank AG

Dresdner Bank AG

Fuji Bank Ltd.

Hanil Bank **

Hongkong Bank

ING Barrings Bank N.V.

Krung Thai Bank

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Mashreq Bank

Oman International Bank S.A.O.G.

Overseas Chinese Banking Corp. Ltd.

Siam Commercial Bank

Societe Generale

Sonali Bank

State Bank of Mauritius Ltd.

Sumitomo Bank Ltd.

The Bank of Nova Scotia

The Bank of Tokyo-Mitsubishi Ltd.

The British Bank of Middle East

The Development Bank of Singapore Ltd.

The Sakura Bank Ltd.

The Sanwa Bank Ltd.

Toronto-Domonion Bank

Bank Muscat International SAOG,

Morgan Guaranty Trust company of New York

KBC Bank, NV

** CLOSED INDIAN OPERATION Annexure 2

The personnel in public sector and the private sector bank were

interviewed on basis of the following questionnaire (this is customized

for ICICI Bank):

About REFORMS in the Indian banking sector

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The legal infrastructure for the recovery of non-performing loans still

does not exist. The functioning of debt recovery tribunals has been

hampered considerably by litigation in various high courts. This

ultimately leads to one solution i.e. ruthless provisioning, any better

ways; it is a major drawback of this ruling.

# What is the procedure being a private player (ICICI) in this industry, is

it different and more effective as far as recoveries are concerned?

The need to make massive provisions obviously results in a depletion

of capital.  But the capital adequacy norm means the banks have to find

additional, costly money to refurbish the capital base.  In this situation,

the banks are being forced to accept the minimum possible amounts

from sub-standard and bad loans.  Thus, the need for ARF is now

paramount. 

# Is the transfers on NPAs to state owned ARF, just about shifting the

responsibility to the ARF? What’s the whole point of having something

like that, it’s like a better way of declaring losses and turning away from

efficiencies?

Reforms among public sector banks are slow, as politicians are

reluctant to surrender their grip over the deployment of huge amounts of

public money.

# As a private player what are the problems that you face while

communicating with the government?

Government intends to reduce its stake to 33% in nationalized banks,

please comment on this reform, its positive and negative effects on

private players.

Introduction of prudential norms, Income Recognition & Asset

Classification and compulsory disclosure of accounts has lead to

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transparency in the working of banks. Any other recommendations as a

private bank.

Consolidation of the Banking industry by merging strong banks is the

latest development in the Indian Banking Sector. ICICI has had a recent

merger with BoM, ANZ and Stanchart, etc. Please state your views on

the overall development of India with this major development in the

financial system.

About DEVELOPMENTS in the Indian Banking Sector

The 1992 reforms gave scope for diversified product profile. New

products and new operating styles exposed the banks to newer and

greater risks.

# ICICI, as a company holds a diversified portfolio, is the main aim to

increase the non-fund based revenue due the trend of falling interest

rates?

The issue of universal banking resurfaced in Year 2000, when ICICI

gave a presentation to RBI to discuss the time frame and possible options

for transforming itself into an universal bank.

# Can you please state the benefits of universal banking, may be in

terms of revenue or utilisation of resources or others?

SBI Insurance – just confusing customers by lot of Insurance

companies. Your comments on distinguishing factor from a public sector

bank which has a low reputation as compared to private sector.

# What is the viability of “Insurance & Banking” in India, how would you

rate the success of ICICI Prudential – Joy Hope Freedom Life, on a scale

of 1 to 10 (10 being highest), do you think PSBs should also go for

insurance and why?

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Due to increasing competition all banks are now heading towards

developing areas or rather towns in the country. Especially ICICI, it is

known for its network in rural areas, please comment on the potentials in

the rural area.

How do you see the scope of Internet banking in India, well / bad and

why? How much revenue do you see from this business as a percentage

of the total business, in the future 5 years down the line? What is the

current revenue from this business?

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