Public sector banks in India

Public Sector Banks (PSBs) are banks where a

majority stake (i.e. more than 50%) is held by a
government. The shares of these banks are listed
on stock exchanges. There are a total of 21 PSBs
in India.

Emergence of public sector banks
The Central Government entered the banking
business with the nationalization of the Imperial
Bank Of India in 1955. A 60% stake was taken by
the Reserve Bank of India and the new bank was
named as the State Bank of India. The seven other
state banks became the subsidiaries of the new
bank when nationalised on 19 July 1960. The next
major nationalisation of banks took place in 1969
when the government of India, under prime
minister Indira Gandhi, nationalised an additional
14 major banks. The total deposits in the banks
nationalised in 1969 amounted to 50 crores. This
move increased the presence of nationalised
banks in India, with 84% of the total branches
coming under government control.
The next round of nationalisation took place in
April 1980. The government nationalised six
banks. The total deposits of these banks
amounted to around 200 crores. This move led to
a further increase in the number of branches in
the market, increasing to 91% of the total branch
network of the country. The objectives behind
nationalisation where:
To break the ownership and control of banks
by a few business families,
To prevent the concentration of wealth and
economic power,
To mobilize savings from masses from all
parts of the country,
To cater to the needs of the priority sectors.


Public sector banks before the economic
liberalisation
The share of the banking sector held by the public
banks continued to grow through the 1980s, and
by 1991 the public sector banks accounted for
90% of the banking sector. A year later, in March,
1992, the combined total of branches held by
public sector banks was 60,646 across India, and
deposits accounted for Rs. 1,10,000 crore. The
majority of these banks were profitable, with only
one out of the 27 public sector banks reporting a
loss.
Problem, with nationalised banks reporting a
combined loss of Rs. 1160 crores. However, the
early 2000s saw a reversal of this trend, such that
in 2002-03 a profit of Rs. 7780 crores by the public
sector banks: a trend that continued throughout
the decade, with a Rs. 16856 crore profit in 2008-
2009.


FINANCIAL HEALTH
Over a period of time, the financial health of PSBs
continually to deteriorate resulting in decline in
their efficiency. Since so many obligations,
economic and social, are imposed on PSBs, it was
thought, that their performance should not be
judged merely in terms of profits. Since 1969,
PSBs began to playa large and dominant
supplementary role to the government
programmes in alleviating poverty, employment
creation and generation of fresh resources for
development.
They have been highly successful in achieving
their principal objective of deposit and loan
expansion. Their participation in priority sector
lending is highly commendable: In June 1969, on
the eve of nationalization the share of priority
sector in total credit of SCBs was mere 14 per cent
(Rs. 504 crore). By March 2002, with the massive
involvement of PSBs their outstanding lending to
priority sector had climbed up to Rs. 1,71,185.26
crore. As a per cent of net bank credit the same
was 43.1 per cent as against the mandated 40 per
cent In terms of profitability, the SBI group has
recorded a steady rise in net profits from Rs. 244
crore in 1991-92 to Rs. 2,222 crore in 200001 and
Rs. 4,512 crore in 200203. In the case of 19
nationalized banks, profitability has always been
low.
During 1992-93 and 1993-94 these banks actually
posted huge losses to the tune of Rs. 3,513 crore
and Rs. 4,705 crore :respectively. It is possible to
defend the low profitability by 'referring to their
commitment to social obligations imposed by the
Government: as for instance opening rural
branches in large numbers, financing poverty
alleviation programmes at concessional rates of
interest, priority sector lending to the extent of
40% huge NPAs, etc. As a result of their
involvement in social banking and other factors
such as directed investment, the state of health of
these banks left much to be desired. The net
profit as a per cent of Total assets became 0.99%
in 1992-93 and 1.1% in 1993-94. Similarly, the net
profit as a per cent of Total assets of 19
nationalized banks was 1.71% in 1992-93 and
9.8% in 1993- 94. Prior to reform period,
profitability was not considered as the million
objectives of PSBs. The return on assets of PSBs
does not compare unfavourably with that of
banks elsewhere. As per data provided by the
Bank for International Settlements (BIS) 1999,
return on assets, defined as profit before tax
moved from 0.08 to 1.07 in Euro area in 1998 with
most countries covering around the 0.5 mark
even on free tax basis.








Private-sector banks in India
The private-sector banks in India represent part of
the indian banking sector that is made up of both
private and public sector banks. The "private-
sector banks" are banks where greater parts of
stake or equity are held by the private
shareholders and not by government.
Banking in India has been dominated by public
sector banks since the 1969 when all major banks
were nationalised by the Indian government.
However since liberalisation in government
banking policy in 1990s, old and new private
sector banks have re-emerged. They have grown
faster and bigger over the two decades since
liberalisation using the latest technology,
providing contemporary innovations and
monetary tools and techniques.The private sector
banks are split into two groups by financial
regulators in India, old and new. The old private
sector banks existed prior to the nationalisation in
1969 and kept their independence because they
were either too small or specialist to be included
in nationalisation. The new private sector banks
are those that have gained their banking license
since the liberalisation in the 1990s.

History and evolution
Private-sector banks have been functioning in
India since the very beginning of the banking
system. Initially, during 1921, the private banks
like bank of Bengal, bank of Bombay and bank of
Madras were in service, which all together formed
Imperial Bank of India.
Reserve Bank of India(RBI) came in picture in 1935
and became the centre of every other bank taking
away all the responsibilities and functions of
Imperial bank. Between 1969 and 1980 there was
rapid increase in the number of branches of the
private banks. In April 1980, they accounted for
nearly 17.5 percent of bank branches in India. In
1980, after 6 more banks were nationalised,
about 10 percent of the bank branches were
those of private-sector banks. The share of the
private bank branches stayed nearly same
between 1980 and 2000.
Then from the early 1990s, RBI's liberalisation
policy came in picture and with this the
government gave licences to a few private banks,
which came to be known as new private-sector
banks.
There are two categories of the private-sector
banks: "old" and "new".
The old private-sector banks have been operating
since a long time and may be referred to those
banks, which are in operation from before 1991
and all those banks that have commenced their
business after 1991 are called as new private-
sector banks.
Housing Development Finance Corporation
Limited was the first private bank in India to
receive license from RBI as a part of the RBI's
liberalization policy of the banking sector, to set
up a bank in the private-sector banks in India.

Old private-sector banks
The banks, which were not nationalized at the
time of bank nationalization that took place
during 1969 and 1980 are known to be the old
private-sector banks. These were not
nationalized, because of their small size and
regional focus. Most of the old private-sector
banks are closely held by certain communities
their operations are mostly restricted to the areas
in and around their place of origin. Their Board of
directors mainly consist of locally prominent
personalities from trade and business circles. One
of the positive points of these banks is that, they
lean heavily on service and technology and as
such, they are likely to attract more business in
days to come with the restructuring of the
industry round the corner.




New private-sector banks
The banks, which came in operation after 1991,
with the introduction of economic reforms and
financial sector reforms are called "new private-
sector banks". Banking regulation act was then
amended in 1993, which permitted the entry of
new private-sector banks in the Indian banking s
sector. However, there were certain criteria set
for the establishment of the new private-sector
banks, some of those criteria being: The bank
should have a minimum net worth of Rs. 200
crores.
The promoters holding should be a minimum of
25% of the paid-up capital. Within 3 years of the
starting of the operations, the bank should offer
shares to publicand their net worth must increase
to 300 crores.



Difference between public sector and private
sector
In recent years, many private banks in India have
opened in India, promising better service levels to
customers. In terms of nature of job, it is quite
similar in private sector as well as public sector
banks. You have to deal with customers and make
sure you make a contribution to the growth of the
bank. However, there are slight differences in
public sector and private sector bank jobs.
1.Difference of recruitment
Public sector banks recruit mainly through bank
exams and public notices. Private banks, on the
other hand, prefer campus placements and
referrals. For entry level jobs too, private banks
usually go through campus placements. You
would seldom find a public notice issued by a
private bank for recruitments.
2.Difference of Vacancies
Public sector banks go by the vacancy rules laid by
the government. There is a certain portion of
vacancies reserved for OBCs and SC/STs. There
are no reservations in private sector banks. The
reservations make it harder to find a job in a
public sector bank.
3.Difference in Growth
One of the banes of public sector banks is slow
growth. If you get recruited at the entry level in a
public sector bank, you would take forever to
reach the higher levels. There are certain rules for
promotion and salary is fixed according the level
you are working at. Promotions in public sector
banks are usually not done on merit, but other
criteria laid down by the government.
On the other hand, growth can be fast and robust
in a private sector bank job. In the private sector,
you get promotions on merit, and if you are good,
sky is the limit for you.
4.Difference in Working Enviroment
Largely, the working environment of private and
public sector banks is the same. However, private
sector banks are largely more competitive than
the public sector banks, although that situation is
changing fast. In a private sector bank, you usually
have to meet tough targets, and adhere to the
deadlines. You could be working longer hours very
often in private sector banks in order to meet
your targets and deadlines.
The environment is more relaxed in a public
sector bank, but that by no means implies you do
not have work in the public sector.
5.Difference in Pay Scale
Largely, the pay scale in private and public sector
banks is the same. However, according to recent
studies done on the field, it has been seen that
public sector banks pay more compared to private
sector banks, when the working hours are taken
into consideration.
However, since the growth in public sector banks
can be slow, the advantage of higher pay scale is
usually negated.
As for the question, whether to work in a private
sector or a public sector bank, the difference
between both the sectors is fast diminishing. If
you have a choice, go for a bank that offers
opportunities for growth, which could be a public
sector bank or a private sector bank too.


COMPARISON OF PUBLIC AND PRIVATE SECTORS
BANKS
The private sector banks of India have made
significant progress in the last few years. It was in
mid 90's when some new private sector banks
entered into the foray and in the period between
2002 -2007 these banks have grown by leaps and
bounds. They have increased their incomes,
margins, asset sizes and outperformed their
public sector counterparts in many areas. The
new private sector banks include Axis,
Development Credit, HDFC, ICICI, Indusind, Kotak
Mahindra and Yes Bank whereas the public sector
banks consists of 19 nationalized banks, IDBI bank
and State Bank group. The performance of the
two sectors is being judged on eight key
parameters that enable banks to achieve better
bottom line and remain competitive in a highly
volatile and regulatory environment.
Parameter1: Banks Network
Today banks follow a wilful strategy of building a
network of branches and ATMs with effective
penetration so that they can continue to enlarge
their geographical coverage of centres with
potential for growth. The banks try to deeply
entrench across the country with significant
density in areas conducive to the growth of their
businesses.
The private sector banks are spreading its wings at
a much faster rate than public sector banks. The
customer base of these banks has grown manifold
since they are able to provide innovative services
to the customers at a much faster pace. This is
leading them to capture more market share and
eating up some of the share of their public sector
counterparts.
Parameter2: Banks Growth
Every bank aspires to grow and its growth can be
judged by various parameters like growth in
balance sheet size i.e. asset base, improvement in
the bottom line and many others.
The public sector banks asset base and income
grew at a decent rate in the last 2 years whereas
there was a great fluctuation in case of new
private sector banks mainly due to recession. But
the growth of these banks was phenomenal
during 2010-11 that shows their ability to recover
fast after such a catastrophe.
Parameter3: Productivity
Productivity can be considered as one measure of
efficiency of banks. Productivity growth is
important to the banks because it means that the
firm can meet its obligations to employees,
shareholders, and governments (taxes and
regulation), and still remain competitive in the
market place. It is a ratio of what is produced to
what is required to produce. In the banking
scenario productivity can be measured by profit
per employee, business per employee.
Parameter4: Capital Adequacy
Capital Adequacy signals the banks ability to
maintain capital commensurate with the nature
and extent of all types of risk and the ability of
management to identify, measure, monitor and
control these risks. It also tells about the ability of
bank to absorb a reasonable amount of loss and
still complies with statutory Capital requirements.
Currently Reserve Bank of India (RBI) prescribes
banks to maintain Capital Adequacy Ratio (CAR) of
9% with regard to credit risk, market risk and
operational risk on an ongoing basis, as against
8% prescribed in BASEL framework.
The Capital Adequacy ratio (BASEL-II) of new
private sector banks is way above RBIs minimum
requirement of 9%. This shows that these banks
are in comfortable position to absorb losses since
they have more capital to cover for their risk
weighted assets. Or on the other hand they have
less risky assets in their portfolio for a fixed capital
base.
Parameter5: Asset Quality
Asset Quality reflects the amount of existing
credit risk associated with the loan and
investment portfolio as well as off-balance sheet
activities.
Loan & Investment Portfolio: The asset quality of
banks can be judged by the non-performing assets
(NPA) ratio. Non-performing assets (NPA) are
assets which fail to make either interest or
principal payments for more than 90 days. RBI has
set guidelines to classify NPA into different
categories like sub-standard, doubtful or loss
assets.
There are two effects of NPA on bank financial
statements:
1) Loss incurred due to non-payment of
principal and interest by borrowers
2) Reduction of capital base due to its
allocation to provision for doubtful assets.
It is mandatory for all banks to have their asset
base well diversified so that risk can be mitigated.
It has been seen that this practice has been
followed by both private and public sector banks
meticulously.
However there is huge difference in asset
qualities of public & new private sector banks. The
main reason being that public sector banks have
higher NPAs in services sector. The NPAs in other
sectors like Agriculture, Industry and Personal
Loans are almost similar for these banks. The
asset quality of a bank directly affects its credit
rating for example recently Moody downgraded
State Bank of India (SBI) credit rating due to its
low asset quality.
Parameter6: Management Efficiency
Sound management is a key element to bank
performance but is very difficult to measure since
it is primarily a qualitative factor. However several
indicators can be used to measure the efficiency
for example ratio of non-interest exp to total
assets which explains the management controls
on operating expenses. Similarly efficiency ratios
like Asset Turnover ratio can be used to assess
how efficiently company is using its assets to earn
the revenue.
The efficiency ratios of new private sector banks
are better than public sector banks which
eventually lead to enhanced bottom line. The
asset turnover of both sectors banks is decreasing
over the last 3 years which is mainly due to a
combination of decrease in non-interest income
and increase in asset base.
Parameter7: Earnings Quality
This parameter reflects not only the quantity and
trend in earnings but also the factors that may
affect the sustainability or quality or earning. The
earning quality of the private banks is more as
compared to public banks in Indian economy.
Parameter8: Liquidity
Liquidity reflects the adequacy of the institutions
current and prospective sources of liquidity and
funds management practices. The inadequacy of
liquidity in a bank causes liquidity risk which is the
risk of inability to meet financial commitments as
they fall due, through available cash flows or
through sale of assets at fair market value.
Liquidity risk is two-dimensional: risk of being
unable to fund portfolio of assets at appropriate
maturity and rates (liability dimension) and the
risk of being unable to liquidate assets in a timely
manner at a reasonable price (asset dimension).
The credit deposit (C-D) ratio of any bank signifies
the proportion of loan-assets created by banks
from the deposits received. The higher this ratio
good it is for the banks since they earn more on
interest income but higher ratio also indicates
that the bank doesnt hold cash with itself which
may create liquidity problems.
Similarly the investment deposit (I-D) ratio
signifies the amount of investment bank has done
from the deposits received. The higher this ratio
good it is as it increases the opportunity of
earning but on the other hand may also create
liquidity problems. Therefore it is essential for the
banks to have a pool of short-term investments
which have higher liquidity.












REFERENCE :-
www.wikipedia.org
www.rbi.org.in
www.recritment4u.net