Retail Banking - A Strategic Response to Changing Banking Market

1. Financial and Macroeconomic environment

In 1991, India faced a balance of payments crisis IMF bailed out on condition that India required to undertake a series of structural economic reforms Indian rupee was devalued. The currency lost 18% relative to the US dollar, Two expert Committees were set up under the chairmanship of M. Narasimham. They submitted their recommendations in the 1990s in reports widely known as the Narasimham Committee-I (1991) report and the Narasimham Committee-II (1998) Report. Reforms included opening for international trade and investment, deregulation, initiation of privatization, tax reforms, and inflation-controlling measures. In 2007, when India recorded its highest GDP growth rate of 9%

2. Issues with Banking sector Directed Investment Programme : o SLR: SLR was as high as 38.5 percent. System of maintaining high liquid assets by commercial banks in the form of cash, gold and unencumbered government securitie o Cash Reserve Ratio- (CRR) was as high as 15 percent o Together, banks needed to maintain 53.5 percent of their resources idle with the RBI. Directed Credit Programme : o Financial support to agriculture and small-scale industries at a confessional rate of interest since nationalization o Affected the quality of loan, resulted in a shift from the security oriented loan to purpose oriented. o Priority sector lending led to erosion of profits Interest Rate Structure : o The interest rate structure and rate of interest in India are highly regulated and controlled by the government. o Government used bank funds at a cheap rate under the SLR. o Government advocated the philosophy of subsidized lending to certain sectors.

3. Changes in banking Sector Reduced CRR and SLR : o o The Cash Reserve Ratio (CRR): Reduced from the earlier high level of 15% plus incremental CRR of 10% to current 4% level. Similarly, Statutory Liquidity Ratio (SLR): SLR reduced from early 38.5% to current minimum of 25% level. This has left more loan able funds with commercial banks, solving the liquidity problem.

Deregulation of Interest Rate : o o Interest rates of commercial banks were deregulated. Interest rates on the bank loans above Rs.2 lakhs are full decontrolled. Regime.

Fixing prudential Norms : o o This was done to induce professionalism in its operations, Regulation includes recognition of income sources, classification of assets, provisions for bad debts, maintaining international standards in accounting practices It helped banks in reducing and restructuring Non-performing assets (NPAs)

Operational Autonomy : o On satisfaction of CAR it gets freedom in opening new branches, upgrading the extension counters, closing down existing branches and they get liberal lending norms. Banking Diversification : o o To diversified, banks started new services and new products. Established subsidiaries in merchant banking, mutual funds, insurance, venture capital, etc which has led to diversified sources of income of them.

New Generation Banks : o o During the reforms period many new generation banks have successfully emerged on the financial horizon. Banks such as ICICI Bank, HDFC Bank, UTI Bank have given a big challenge to the public sector banks leading to a greater degree of competition.

4.Results:

Increased Competition: Reforms led to coming up of new generation banks such as ICICI, HDFC which led to increased competition Improved Profitability and Efficiency o o o o Operation cost to total assets declined from 2.59% in 2001 to 1.91% in 2006 Cost to income ratio declined 55.5 to 50.15 Labor cost per unit of earning asset declined from 2.3 %in 1991 to 1.23 in 2006 Business per employee increased by 11 times