CAPSTONE PROJECT

Topic- ROLE OF PRIVATE SECTOR BANKS IN

DEVELOPMENT OF INDIAN ECONOMY

Submitted In partial fulfillment of the requirements for the award of degree of

MASTER OF BUSINESS ADMINISTRATION

Submitted by:
Supervisor:
Group No_060
Mr. Rajesh

DEPARTMENT OF MANAGEMENT
(2010)

EXECUTIVE SUMMARY OF THE PROJECT

Indian Banking Sector
The Indian Banking Sector is quite different from the banking system in the rest
of Asia, because of the distinctive geographic, social and economic characteris
tics of the country. India is the second most populated nation in the world; it
has marked economic disparities and high levels of illiteracy.
The country followed a socialist approach for well over 4 decades after independ
ence till the government initiated the economic reforms through the policy of li
beralization. The banking structure in India is therefore a reflection of the co
untries socialistic set up. It had to meet the goals set by the five year plans,
especially with regard to equitable distribution of wealth, balanced regional e
conomic growth and removing private sector monopolies in trade and industry.
The government nationalized the banks in 2 different phases (1969 and 1980). On
July 19, 1969, 14 major banks of the country were nationalized and on 15th April
1980, six more commercial private sector banks were taken over by the governmen
t. As a consequence the banking system in India concentrated on the domestic sec
tor; very few banks in India had a presence internationally. The nationalized ba
nks had a social obligation of taking the banking sector to the people by expand
ing the branches and by getting more people to open an account. It also had to p
lay a supportive role to other sectors of the economy like agriculture, small sc
ale industries and exports.

THE INDIAN FINANCIAL SYSTEM CONSISTS OF:

PRIVATE SECTOR BANKS

• Private banking in India was practiced since the begining of banking sys
tem in India. The first private bank in India to be set up in Private Sector Ban
ks in India was Indus Ind Bank. It is one of the fastest growing Private Sector
Banks in India. IDBI ranks the tenth largest development bank in the world as Pr
ivate Banks in India and has promoted world class institutions in India.
The first Private Bank in India to receive an in principle approval from the Res
erve Bank of India was Housing Development Finance Corporation Limited, to set u
p a bank in the private sector banks in India as part of the RBI's liberalizatio
n of the Indian Banking Industry. It was incorporated in August 1994 as HDFC Ban
k Limited with registered office in Mumbai and commenced operations as Scheduled
Commercial Bank in January 1995.
ING Vysya, yet another Private Bank of India was incorporated in the year 1930.
Bangalore has a pride of place for having the first branch inception in the year
1934. With successive years of patronage and constantly setting new standards i
n banking, ING Vysya Bank has many credits to its account.

STRATEGIES AND CHALLENGES

There are two types of private sector banks, the old and the new. As far as the
old (mostly regional banks) are concerned, inadequacy of capital will lead to th
eir mergers sooner rather than later. Private sector banks have good technology
for handling transactions and also offer attractive products, but it cannot be s
aid that corporate governance and risk management are far superior to that of th
e Public Sector Banks. Some of the most important challenges for private sector
banks are:
• Priority sector credit: Generally, private sector banks lend money to in
dividuals and corporate sector whereas sectors like agriculture, small-scale ind
ustries and retail trade small business is neglected.
OBJECTIVE OF THE STUDY:
To study the private banking and its growth in India.
To know why customers switched from nationalized banks to private banks.
To know the contribution level of private banks in development of Indian
economy.
To analyze the satisfaction level of customers by private sector banks s
ervices.
To analyze the expectations of private banking customers.
RESEARCH DESIGN AND METHODOLOGY
The method used for data collection is:
Secondary data:
Secondary data are data, which has been collected and compiled in advance for an
other needed purpose. Secondary data is important method to know the development
of private sector banks. Newspaper, articles, books, magazines etc. have been u
sed to accomplish this project.
Primary data:
We used the primary data for preparing the questionnaire.
TOOLS FOR DATA COLLECTION
The tool used for data collection is primarily “questionnaire method”. The quest
ions contained:
• Scaling: Where the respondent was given a chance to reply or give sugge
stions to the company.
• Close-ended questions
Where the respondent have a less chance to reply. This includes mult
iple choice questions where the respondents were given a number of alternativ
es.
Area of survey
The area selected to find the satisfactory level was in and around Jalandhar.
Sample unit
The sample was considered to be the customers of private sector banks.
Sampling
Convenient sampling method is to select a sample of 50 customers of private bank
s.
REVIEW OF LITERATURE
1. Financial Performance of Private Sector Banks in India - An Evaluation
B. Sathish kumar, has said as private sector banks play an important role in dev
elopment of Indian economy. After liberalization the banking industry under went
major changes. The economic reforms totally have changed the banking sector. RB
I permitted new banks to be started in the private sector as per the recommendat
ion of Narashiman committee. The Indian banking industry was dominated by public
sector banks. But now the situations have changed new generation banks with use
d of technology and professional management has gained a reasonable position in
the banking industry. The main idea of this article is to make an evaluation of
the financial performance of Indian private sector banks.
2. Banking on Development: Private Banks and Aid Donors in Developing Countries
R. Javier has defined that the over the past decade we have witnessed a double c
onvergence. Aid donors have developed a growing interest in the privatesector wh
ile private banks have set about creating corporate social responsibility progra
ms, sustainable lending and microfinance programmes. As a consequence, the dialo
gue between private banks and aid donors has been intensifying, opening new aven
ues for collaboration. The aim of this paper is to map the potential synergies b
etween private banks and aid donors. A survey of private bank lending towards de
veloping countries is undertaken in order to identify the privatebanks most acti
ve in those economies and provide an analytical tool to help identify the scope
for public and privatepartnerships. We find an international division of labour
in bank lending: within the developing world, banks from OECD countries tend to
focus their credit on specific regions and countries. This mapping of private ba
nk lending also allows us to pinpoint concrete examples of best practices in pri
vate bank and financial actors/aid donors collaborations. We follow by discussin
g some of the more important cases in the field, and conclude with the potential
implications for improved partnerships between private banks and donor organisa
tions.
3. Are Private Banks More Efficient than Public Banks?
W. Laurent had studied whether bank efficiency is related to bank ownership in R
ussia. We find that foreign banks are more efficient than domestic private banks
and - surprisingly - that domestic private banks are not more efficient than do
mestic public banks. These results are not driven by the choice of production pr
ocess, the bank's environment, management's risk preferences, the bank's activit
y mix or size, or the econometric approach. The evidence in fact suggests that d
omestic public banks are more efficient than domestic private banks and that the
efficiency gap between these two ownership types did not narrow after the intro
duction of deposit insurance in 2004. This may be due to increased switching cos
ts or to the moral hazard effects of deposit insurance. The policy conclusion is
that the efficiency of the Russian banking system may benefit more from increas
ed levels of competition and greater access of foreign banks than from bank priv
atization.
4. Private Sector Banks in India - A SWOT Analysis
P. Chowdari has his views as the financial reforms launched during the early 19
90s have dramatically changed the banking scenario in the country. New prudentia
l norms, such as capital adequacy prescriptions, identification of bad debts, pr
ovision requirements, etc., were enforced; and interest rates were deregulated.
As a sequel to these reforms, new private sector banks were allowed entry into t
he market. Many of these new private sector banks have brought with them state-o
f-art technology for business processing and service delivery, besides being eff
icient in catering to the customers demands. Yet, the failure of Global Trust Ba
nk made Indian depositors to question the sustainability of private banks. Again
st this backdrop, this article attempts to undertake SWOT analysis and other app
ropriate statistical techniques, to rank 30 private sector banks from the financ
ial data collected for the three years - 2002, 2003 and 2004. The study has, usi
ng four parameters - efficiency, financial strength, profitability, and size and
scale, ranked the banks independently for each year.
5. Re-engineering of banking sector through merger & acquisition (with reference
to selected new private sector banks in Chennai)
Dr. P. Murthy, has stated that the merger and acquisition of Indian banking has
occupied an important place amongst the personnel and policy-makers of banking s
ystem in recent years, as a sequel to economic reforms to bring in equilibrium a
nd stability in the banking industry. Whether it is merger and acquisition in th
e free markets or consolidation in the international markets, the underlying obj
ective is similar. Mergers have been considered as a possible avenue for improvi
ng the structure and efficiency of the banking industry.
Merger is that the value of the combined entities is expected to be greater than
the sum of the independent values of the merging entities to reap the following
benefits, cost benefits economies of scale, organizational efficiency, funding,
costs and risks diversification, revenue benefits - economies of scale, enhanci
ng monopoly rents, and economic conditions - mergers after business crisis or af
ter the upswing of the business cycle to initiate strategies. Survival is the ul
timate objective of any organization and Mergers and Acquisitions is one form of
survival strategy the predominant factors which create target and source banks
for the M&A, were also not discussed in the literature works.
6. ICICI Bank to see more growth in private banking
A. Arpit, has said that the country's largest private sector bank, ICICI Bank, i
s planning to extend its private banking (targeting high net worth clients) serv
ices to more cities and is also looking at doubling its assets under management,
said senior officials of the bank. At present, the bank offers the facility in
175 cities and has Rs 25,000-crore assets under management under the private ban
king portfolio. The bank has tied up with 26 management colleges to train lectur
ers on private banking, which is being offered as a subject. The bank also condu
cts about 100-150 knowledge seminars across the country annually. There is plent
y of scope for the private banking business in India as the country is likely to
see a GDP growth of over 6 per cent and ranks fourth in purchasing power parity
, worldwide. The bank offers a three-tier service in private banking. The cut-of
f limits are liquid financial assets of Rs 5 lakh, Rs 25 lakh and Rs 50 lakh.

7. Private Banks’ share of AP Credit Plan outlay at 3%

G. sudhanshu, Private Banks seem to continue to keep the priority sector off the
ir focus in Andhra Pradesh. With 621 branches in the State, they took a share of
just 3 per cent in the State’s annual Credit Plan outlay of Rs 55,000 crore for
the financial year 2009-10. While ING Vysya Bank, with 198 branches, offered to
contribute 1.48 per cent, ICICI Bank with 93 branches would contribute 1.19 per
cent and Karur Vysya Bank 0.51 per cent. All the private banks put together wou
ld contribute 3.33 per cent in the Plan target (for this segment) of Rs 32,500 c
rore.
8. IndusInd Bank net soars on rise in interest income
Romesh Sobti, IndusInd Bank reported a 95 per cent jump in net profit, to Rs 88
crore, in the third quarter ended December 31, aided by a robust increase in net
interest income.
Growth in loan book has led to increased interest income. Total advances of the
private sector bank increased by 33 per cent, with robust growth in the corporat
e and vehicle finance segments.
9. NPAs of pvt banks rise, public sector banks witness decline
M.V.S. Santosh Kumar concerns about rising bad loans have weighed on the stocks
of most banks in recent months. While new private banks have reported higher non
-performing assets, PSU banks have actually seen a reduction in NPAs. In 2008-09
, ICICI Bank, HDFC Bank, Axis Bank and YES Bank have seen their gross non-perfor
ming assets as a proportion to their gross advances going up by 21-100 basis poi
nts. A higher exposure to corporate credit and more conservative lending during
a booming economy may have aided lower NPAs for some of these banks. The Most of
the banks have enhanced their provision coverage to shield their balance sheets
from future adversities and have shown strong net NPA proportion.

10. SKS Microfinance ties up with private banks

S. Dilliraj, SKS Microfinance has tied up with three private banks for implement
ing an integrated cash management system (CMS) for 575 of its rural branches. Th
e microfinance institution, which has about 1,700 branches, would partner with A
xis Bank (300 branches), ICICI Bank (175 branches) and HDFC Bank (100 branches).
Besides, push and pull-back of funds would also be enabled through the new syst
em. “Earlier, funds’ transfer from the head office to the branches was a weekly
exercise, but now it is possible on a daily basis. This would ensure higher amou
nt of cash availability in the feed.
11. Stan Chart Private Bank on expansion mode
F. Peter, said that the Standard Chartered Private Bank, which is seeking to del
iver private banking serices at local level, plans to open two more offices in I
ndia. The two dedicated private banking centres will be opened during this year
at Chandigarh and Hyderabad. The bank, which started operations in India in 2007
, already has a presence in Delhi, Mumbai, Chennai, Bangalore and Kolkata. It is
also looking to double its asset under management (about $1.7 billion as on end
December 2009) in India in next two years. This can give you an idea of our gro
wth expectations here in India. We are bullish about our growth prospects in Ind
ia. The private banking market in India is set for double digit growth.
12. Old private banks begin raising deposit rates
R. Nagammal has said that the private banks have begun hiking their deposit rate
s. The hiked deposit rate by 25 basis points for maturity period of up to one ye
ar and by 50 bps for tenure between three and five years. On credit offtake, “gr
owth has been good, around 16 per cent.
13. HDFC Bank net grows 30% on ‘other income’
S. Paresh, has said that the HDFC Bank’s net profit grew by 30 per cent to Rs 68
7 crore. The rise in profit was on account of strong ‘other income’ and lower co
sts of funds. Net interest margin was unchanged because the 0.5 per cent decline
in loan yields was offset by a similar decline in cost of deposits. The bank’s
auto loans portfolio increased to Rs 17,000 crore in the second quarter, against
Rs 13,500.
14. India among most preferred private banking destinations
D. Abizer, had a research that the India is one of the most preferred private ba
nking destinations as its economy is not only growing at 8 per cent annually, bu
t is also going through a transformation to the next level of maturity. Acquisit
ions and strategy in the global private banking and wealth management industry,
points out that M&A activity in the global private banking and wealth managemen
t industry is booming with 258 deals completed in 2005, up 80 per cent over the
previous year, which is a record. Indian private banking capital will soon fund
deployments to a significant part of our capital needs. The globally, this lev
el of activity is likely to persist as it also found that over 90 per cent of pr
ivate banks believe that there are good growth prospects for the industry over t
he next three years and 89 per cent are either actively seeking acquisition targ
ets or would consider acquiring if the right opportunity arose.
15. Strategic Legacy Creation: Toward a Novel Private Banking Value Proposition
M. Maximilian has its view points that over the past centuries, private banks ha
ve developed stable and highly lucrative value propositions to serve their clien
ts. They were built on an integrated value chain comprising administration, asse
t management and advice. Long-term demographic, political, and fiscal trends sug
gest that private banking will remain an attractive business in the foreseeable
future. After an overshooting of returns during the nineties, traditional value
propositions came under pressure. Extraordinary rates of return triggered substa
ntial entry from banking, near- and non-banking actors. Three trends were partic
ularly salient: lower financial returns, commoditization and rising complexity.
Combined, these trends threaten the core asset that lies at the heart of private
banks ability to create value for their owners: a deep client relationship wit
h extremely wealthy individuals. In response to these trends, private banks made
adjustments: creating adequate market structures, where wealth managers no long
er operate according to office location.
16. Govt banks struggle, but private banks credit growth picks up
M.V. Nair has said that after losing customer accounts to public sector banks at
the height of the downturn, private sector banks seem to be on their way back.
While public sector and foreign banks’ credit growth is still slowing down, priv
ate sector banks have seen a rise, according to data released by the Reserve Ban
k of India (RBI) in its Macroeconomic and Monetary Developments Third Quarter Re
view. The pace of credit growth for private sector banks increased to 9.8 per ce
nt for 12 months up to January 15, compared to 8.9 per cent a year earlier. Publ
ic sector banks saw their credit growth slow to 16.8 per cent for 12 months up t
o January 15, 2010, compared to 27 per cent a year earlier. From January 16, 200
9, to January 15, 2010, they disbursed Rs 322,500 crore loans, compared to Rs 40
8,390 crore in the previous 12 months. Most public sector banks have almost give
n up any hope of meeting the 20 per cent credit growth target they had set at th
e start of the financial year.
17. The chase is on for India s new wealthy: India s private banking industry is
booming.
K. Shastri, has said that the private banking and wealth management might seem i
ncongruous in a poor country such as India, where only 70,000 out of a populatio
n of more than 1 billion have financial assets in excess of $1 million. Yet many
banks are rushing to capture what seems like a thin sliver of an already slim o
pportunity. In fact, the market has been growing at an explosive rate in recent
years. India s booming economy has led to rising levels of income and wealth, es
pecially in urban areas. Traditionally, it was only the business class that coul
d hope to accumulate the sort of wealth that private bankers are interested in m
anaging. But this is changing rapidly. India s technology companies have rewarde
d their employees with stock options that have soared in value.
18. Private banking: the myth and the reality
W. Merryn Somerset has said that the there is apparently a “great private banki
ng myth” out there. These days pretty much every financial institution out there
offers some kind of private banking service and they certainly aren’t shy about
offering it to members of the mass affluent: if you’re a target household you’l
l be as used to getting offers to join one ‘exclusive’ banking service or the ot
her as you are to getting ‘pre-approved’ credit card offers. Then you can get pr
ivate banking from most of the big players in the market from NatWest to HSBC. Y
ou can still get private banking from HSBC as long as you have £50,000 worth of
savings or a £250,000 mortgage.
19. New private sector banks clock highest income growth
Dr. V. Manoj, has studied that the Dun & Bradstreet, the world s leading provide
r of global business information, knowledge and insight, today, released its stu
dy on India s Top Banks 2008 . The study profiles 80 scheduled commercial banks
, comprising of 28 public sector banks, 23 private and 29 foreign banks, listed
on parameters such as Total Income, Net Profit, Branches, Employees, Assets and
ATMs. The income of the New Private Sector banks grew at 55%, the highest among
the bank-groups. Further, the New Private Sector banks reported higher growth as
against other bank groups, with an average y-o-y growth in assets at 38.7% and
Operating Profit at 46.7%."
20. HSBC to expand private banking
G. Naga Sridhar had said that the HSBC Private Banking will be expanding its ope
rations to five new cities this year. “India is only second to Singapore in grow
th of private banking. The private banking operations would be expanded to Kochi
, Coimbatore, Ahmedabad, Jaipur and Ludhiana. At present, HSBC is operating priv
ate banking centres at New Delhi, Mumbai, Chennai, Kolkata, Bangalore and Pune.
The focus of the bank is on people with disposable income of Rs 4 crore and abov
e. “While the conventional wealth management caters to the lower-end of high inc
ome groups for private banking, our focus is on clients in the High Net worth In
dividuals (HNIs) bracket. As part of its efforts to provide credible information
, advice and efficient delivery platform, the bank has recently strengthened its
70-member strong research group that constantly monitors over 110 leading stock
s in different sectors.
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