BANKING INDUSTRY IN INDIA TODAY AN OVERVIEW AND A SWOT ANALYSIS

Banks have played a critical role in the economic development of some developed countries and most of the emerging economies including India. Banks essentially contribute to economic growth and financial stability. . Banks take a leading role in developing other financial intermediaries and markets. Due to the absence of welldeveloped equity and bond markets, the corporate sector depends heavily on banks to meet its financing needs.

Forms of banking have evolved with the needs of the economy. The transformation of the banking system has been brought about by deregulation, technological iimprovement and globalization. While banks have been expanding into areas which were traditionally out of bounds for them, non-bank intermediaries have begun to perform many of the functions of banks. Banks thus compete not only among themselves, but also with nonbank financial intermediaries, and over the years, this competition has only grown in intensity. Globally, this has forced the banks to introduce innovative products, seek newer sources of income and diversify into non-traditional activities. Definition of Banking In India, the definition of the business of banking has been given in the Banking Regulation Act, (BR Act), 1949. According to Section 5(c) of the BR Act, 'a banking company is a company which transacts the business of banking in India.' Further, Section 5(b) of the BR Act defines banking as, 'accepting, for the purpose of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable, by cheque, draft, order or otherwise.' The three primary activities of a commercial bank which distinguish it from the other financial institutions. These are: maintaining deposit accounts including current accounts issue and pay cheques collect cheques for the bank's customers.

Banking Structure in India The Reserve Bank of India (RBI) is the central banking and monetary authority of India, and also acts as the regulator and supervisor of commercial banks. Scheduled banks comprise scheduled commercial banks and scheduled co-operative banks. Scheduled commercial banks form the bedrock of the Indian financial system, currently accounting for more than threefourths of all financial institutions' assets. SCBs are present throughout India. Scheduled banks in India are those that are listed in the Second Schedule of the Reserve Bank of India Act, 1934. Scheduled Banking Structure in India

Scheduled Banks in India

Scheduled Commercial Banks

Scheduled Co-operative Banks

Public Sector Banks

Private Sector Banks

Foreign Banks in India

Regional Rural Banks

Nationalized Banks

State Bank of India and its Associates

Old Private Sector Banks

New Private Sector Banks

Public Sector Banks Public sector banks are those in which the majority stake is held by the Government of India (GoI). Public sector banks together make up the largest category in the Indian banking system. They include the SBI and its 6 associate banks (such as State Bank of Indore, State Bank of Bikaner and Jaipur etc), 19 nationalised banks (such as Allahabad Bank, Canara Bank etc) and IDBI Bank Ltd. 1 Regional Rural Banks Regional Rural Banks (RRBs) were established during 1976-1987 with a view to develop the rural economy. Each RRB is owned jointly by the Central Government, concerned State Government and a sponsoring public sector commercial bank. RRBs provide credit to small farmers, artisans, small entrepreneurs and agricultural labourers. Over the years, the Government has introduced a number of measures of improve viability and profitability of RRBs, one of them being the amalgamation of the RRBs of the same sponsored bank within a State. Private Sector Banks In this type of banks, the majority of share capital is held by private individuals and corporates. Not all private sector banks were nationalized in in 1969, and 1980. The private banks which were not nationalized are collectively known as the old private sector banks. Entry of private sector banks was however prohibited during the post-nationalisation period. In July 1993, as part of the banking reform process and as a measure to induce competition in the banking sector, RBI permitted the private sector to enter into the banking system. This

Retrieved on 1 June 2012 from www.google.com/ structure of banks in India

st

resulted in the creation of a new set of private sector banks, which are collectively known as the new private sector banks. Foreign Banks Foreign banks have their registered and head offices in a foreign country but operate their branches in India. The RBI permits these banks to operate either through branches; or through wholly-owned subsidiaries. The primary activity of most foreign banks in India has been in the corporate segment. However, some of the larger foreign banks have also made consumer financing a significant part of their portfolios. Foreign banks in India are required to adhere to all banking regulations, including priority-sector lending norms as applicable to domestic banks. Co-operative Banks Co-operative banks cater to the financing needs of agriculture, retail trade, small industry and self-employed businessmen in urban, semi-urban and rural areas of India. A distinctive feature of the co-operative credit structure in India is its heterogeneity. The structure differs across urban and rural areas, across states and loan maturities. Urban areas are served by urban cooperative banks (UCBs), whose operations are either limited to one state or stretch across states. The RBI and the National Agriculture and Rural Development Bank (NABARD) have taken a number of measures in recent years to improve financial soundness of co-operative banks. Core Banking and other services Core Banking is normally defined as the business conducted by a banking institution with its retail and small business customers. Many banks treat the retail customers as their core banking customers, and have a separate line of business to manage small businesses. Larger businesses are managed via the corporate banking division of the institution. Core banking basically is depositing and lending of money. Nowadays, most banks use core banking applications to support their operations where CORE stands for "centralized online real-time environment". This basically means that all the bank's branches access applications from centralized datacenters. This means that the deposits made are reflected immediately on the bank's servers and the customer can withdraw the deposited money from any of the bank's branches throughout the world. These applications now also have the capability to address the needs of corporate customers, providing a comprehensive banking solution. Normal core banking functions will include deposit accounts, loans, mortgages and payments. Banks make these services available across multiple channels like ATMs, Internet banking and branches. Core banking allow banks to improve operations, reduce costs, and be prepared for growth. Service-oriented-architecture (SOA) helps banks reduce the risk that can result from manual data entry and out-of-date information, increases

management information and review, and avoids the potential disruption to business caused by replacing entire systems. Banks with the help of technology have come up with various services like internet banking, mobile banking, insurance services, providing demat accounts, online trading, etc. Current Scenario Indian banks, the dominant financial intermediaries in India, have made good progress over the last five years, as is evident from several parameters, including annual credit growth, profitability, and trend in gross nonperforming assets (NPAs). While the annual rate of credit growth clocked 23% during the last five years, profitability (average Return on Net Worth) was maintained at around 15% during the same period, and gross NPAs fell from 3.3% as on March 31, 2006 to 2.3% as on March 31, 2011. Good internal capital generation, reasonably active capital markets, and governmental support ensured good capitalisation for most banks during the period under study, with overall capital adequacy touching 14% as on March 31, 2011. At the same time, high levels of public deposit ensured most banks had a comfortable liquidity profile.2 While banks have benefited from an overall good economic growth over the last decade, implementation of SARFAESI, setting up of credit information bureaus, internal improvements such as upgrade of technology infrastructure, tightening of the appraisal and monitoring processes, and strengthening of the risk management platform have also contributed to the improvement. Significantly, the improvement in performance has been achieved despite several hurdles appearing on the way, such as temporary slowdown in economic activity (in the second half of 2008-09), a tightening liquidity situation, increases in wages following revision, and changes in regulations by the Reserve Bank of India (RBI), some of which prescribed higher credit provisions or higher capital allocations. Currently, Indian banks face several challenges, such as increase in interest rates on saving deposits, possible deregulation of interest rates on saving deposits, a tighter monetary policy, a large government deficit, increased stress in some sectors (such as, State utilities, airlines, and microfinance), restructured loan accounts, unamortised pension/gratuity liabilities, increasing infrastructure loans, and implementation of Basel III norms. At the technological end- Banks are beginning to treat digital channels as mainstream options rather than alternative mechanisms for customer service. IT heads at banks are focusing on strengthening these channels to sell financial products and acquire customers. The digital era is here where banks are investing in technologies

Batra ,V, Srinivasan,.K, Maheshwari,P (2011). Indian Banking Sector: Challenges unlikely to derail the progress

Retrieved June 14, 2012, from http://www.icra.in/Files/ticker/Banking%20note-final.pdf

to reach out to customers through a variety of digital channels including ATMs, kiosks, online portals and mobile apps and sites. As per a BCG study, by 2015, $350 billion in payment and banking transactions in India could flow through mobile phones, compared with about $235 billion of total credit-and debit-card transactions today. Digitization will lead to an overall reduction of operational costs and transactional overheads. Front-end transformation solutions ranging from customer interaction management right up to channel innovation, put the customer in the drivers seat, enabling the bank to grow its customer base and offer an enhanced portfolio of tailored services. Technology results in sustainability and continuity in the progressive amelioration of service quality, anytime and anywhere banking, focused product delivery, cross-selling and multi-channel touch points. ATMs are ready for the leap to a new form of Video Teller Machine where these systems integrate videoconferencing technology, document scanners, card readers and printers to support rich communication between the customer and the specialist.3 Mobile usage has also boomed in the last few years and the bank expected that the penetration of data plans would drive usage further. As the banking sector is still growing in India, service providers have a role to play in this space. They can empower banks with the latest tools and technology infrastructure to improve reach, build cost-efficiencies and deliver the convenience of on-the-go banking services. Banking executives can use advanced CRM tools and SQL platforms to analyze data from the profile of customers social networking sites for better decision-making during portfolio management, as well as while handling priority accounts. Besides, they can also study customer searches and purchase decisions to deliver better service and ensure loyalty. The implementation of these tools can be instrumental in updating the information available with the bank and also streamlining information flow across departments. Cloud-based platforms now make scalability far easier for banks. Banks are also gearing up to empower mobile phone users by developing services around Near Field Communication, a short range, wireless technology. Basel III norms The Reserve Bank of India (RBI) in June 2012 released the final guidelines of the Basel III norms aimed at toughening up the banking system in the country to withstand all kinds of risk and financial shocks. The guidelines framed by a committee of central banks of various countries, to which RBI is also a member, based in Basel, Switzerland, seek to fortify banking systems across the world after the massive banking crisis in 2008 and in 2009.

The existing norms stipulate that banks maintain Tier-I capital or core capital and Tier-II comprising

Jhingan, Heena (June 5, 2012) Digital Channels enter banking mainstream. Retrieved June14 2012 from http://www.expresscomputeronline.com/index.php/features/611-digital-channels-enter-banking-mainstream

instruments with debt-like features, whereas Basel III has introduced many elements of capital like a clearly defined common capital that measures core equity in relation to its total risk weighted assets. Simply put, they asses the banks financial strength and capital conservation buffers (CCB) at various levels.

The new norms will be made effective in a phased manner from January 1, 2013 and fully implemented by March 31, 2018. The key point is that banks need to achieve a minimum Core Equity Tier-I (CETI) capital adequacy of 5 per cent by FY14 and then, in a staggered manner, increase it to 8 per cent by FY18.

By and large, bankers concede that the Indian banking system is already stable, far less complex and wellcapitalised as compared to banks across the globe. Still, they believe that Basel III is a step in the right direction in terms of preparing the domestic banks to address or prevent some of those challenges faced by their global counterparts.

The immediate impact of the Basel III capital regime will be begin as the CETI ratio of many domestic banks is already close to 8 per cent or higher. However, the shortfall will be likely between FY16 and FY18, mostly for government banks with loan growth outpacing internal capital generation and the minimum capital ratios stepping up. The additional equity will be needed for business growth and for creating a buffer above the regulatory minimum.4

Reports of many rating agencies suggest that banks in India will require Rs 3.9 to R5 trillion as capital over the next six years to comply with Basel III norms. This requirement can turn out to be higher (by another Rs 1.3 trillion) in case the investor appetite is low for non-equity tier-I capital instruments. PSBs will account for bulk (80 per cent) of the requirement and need regular infusion from the government. The largest of them is the State Bank of India and its associate banks, reflecting their significant share in the banking system.

Basel III also hiked the minimum overall capital adequacy to 11.5 per cent by March 31, 2018 as against the current 9 per cent. Over 80 per cent of common equity need relates to public sector banks (PSBs) and the government share would be Rs 0.3 to Rs 0.8 trillion in the total equity need of PSBs as per the government average stake in PSBs at around 58 per cent.

When it comes to private players, most of them are already well-capitalised, so transition to Basel III may not impact their earnings significantly.Fitch Ratings, however, points out that domestic banks raised only about

Nandi,Suresh (May 14, 2012) Banks going to gear up for Basel III norms, DHNS Retrieved on June 14 2012 from http://www.deccanherald.com/content/249225/banks-going-gear-up-basel

$2.5 billion of common equity from the markets in FY11 and FY12 combined. Unless planned, PSBs may face risks of a sudden shortfall in capital during FY16, requiring additional support by from the government.

SWOT ANALYSIS:
Strengthes: Indian Banks has been a significant driver of the economies GDP growth and employment. Indian banking system has reached even to the remote corners of the country. The number of ATM and local branches are increasing year by year The banking sector have seen rich dividends due to all the government policies that was implemented from 1969 after the nationalisation of the 14 banks. As compared to other economies also Indian banks have excelled in profits asset quality and growth. The government every year makes various policies and changes to make the sector more and more strong. Foreign banks will have the opportunity to own up to 74 per cent of Indian private sector banks and 20 per cent of government owned banks. India has 88 scheduled commercial banks (SCBs) - 27 public sector banks (that is with the Government of India holding a stake)after merger of New Bank of India in Punjab National Bank in 1993, 29 private banks (these do not have government stake; they may b e publicly listed and traded on stock exchanges) and 31 foreign banks. They h a v e a combined network of over 53,000 branches and 17,000 ATMs. According to a report by ICRA Limited, a rating agency, th e public sector banks hold over 75 percent of total assets of the banking industry, with the private and foreign banks holding 18.2% and6.5% respectively.
The banking index has grown at a compounded annual rate of over 51 percent since April 2001 as compared to a 27 percent growth in the market index for the same period Liquidity position has been quite comfortable during the recent times. The strong capital market coupled with an appreciating rupee has been attracting large foreign institutional inflows during the last two years

WEAKNESS:

Many banks are still following the age old banking systems. Public sector Banks need to fundamentally strengthen their institutional skill levels especially in sales and marketing in risk management, services, and their overall performance, they may also need to strengthen their performance ethics and human capital..

Still now bank penetration is limited to a few customers and geography. Government is holding 51% capital in many of the PSU and they are not ready to change it also this is creating a hindrance for the sectors to raise more of equity Structural weaknesses such as a fragmented industry structure, restrictions on capital availability and deployment, lack of institutional support infrastructure, the restrictive laws weak corporate governance and also ineffective regulations are all making the sector weak

All the political and geographical powers are creating a hindrance for the growth Another major weakness is the lesser house hold savings in the country .According to a McKinsey report, even though Indian households save 28% of their disposable income, they invest only half their savings in financial assets. The rest goes towards buying gold, housing, and buying/maintenance of equipment for the various small Indian enterprises.

OPPURTUNITIES: The increasing interest rates are seeing more competition from foreign competitors The demographic shift that has been happening due to changes in age, income etc of consumers are increasingly demand institutional capabilities and service level from banks. New private banks could reach the next level of growth in the Indian banking sector by continuing to innovate and develop differentiated business models to profitably serve segments like the rural/low income and affluent/HNI segments; actively adopting acquisitions as a means to grow and reaching the next level of performance in their service platforms. Attracting, developing and retaining more leadership capacity.

The rural sector is much vast in India so it is a good opportunity for the banks to expand their services Reserve Bank of India (RBI) has approved a proposal from the government to amend the Banking Regulation Act to permit banks to trade in commodities and With the growth in the Indian economy expected to be strong for quite some time especially in its services sector the demand for banking services, especially retail banking, mortgages and investment services are expected to be strong

THREATS:
The there is threat of the stability of the system and threat from existing players , over the course of the years the number of market player has significantly increased. This Intense competition could adversely affect the margins of the bank.

failure of many banks have reduced the confidence of customers in many banks.

Rise in inflation figures which would lead to an increase in interest rates.

The global banking Industry have faced many downfalls especially in 2007-08.